At the end of July we highlighted the bearish odds aligning against further rallies in Wheat. We noted however, not to short into the extreme price strength, but instead to wait for a reversal back through 540.
10 days later, we see more of the same with Wheat moving another 30 cents higher, while Commercial traders added another 26k shorts through last Tuesday and likely another 20k as of yesterday.
As you can see that is 3 consecutive weeks of sub 10% scores for 18month Relative Positioning, with a fourth most certainly on the way this Friday. This will likely also be accompanied by a sub 10% score on 4week change, as the cumulative shorting by commercials over the past 4weeks becomes evident.
Now accompanying this we are seeing some negative tape action.
1) Today will be the third day out of the last 6 where we see a long tailed candle with a close towards the low of the day - This aggressive shorting is occurring at the 580 level, and the 4day adaptive channel high - Price is stalling here.
2) This distribution is leading to a rollover of the 4 Day channel which appears poised to move lower to the 23 day channel price range. The fast channel will run away from the slow channel in strongly trending moves, but reversion always occurs, even during strong uptrends.
3) Price oscillator overbot and about to cross-over into a sell signal.
Short Dec Wheat right here at the 590 level, and hedge this with a ATM 44day call, which will cost you approx 24cents.
There has been extreme price strength, and whether it is the current heat wave impacting crops, or threat of NeoCon Congress' Russia sanctions threat impacting supplies, we do not want to be exposed to tail risk here.
We have plenty of odds in our favor to short, but are buying insurance in the event this rally continues.
Look to ring the register on a drop towards 530.