Kansas City/Chicago Wheat Spread: The December Spread Hit New Lows. Still a Buying Opportunity?

Back Under Water

The blog initiated a hypothetical long position in the December KC/Chicago wheat spread at +7 cents (premium KC wheat) on September 4th. The position was then liquidated at -15 cents (premium CBOT wheat) on October 23rd. This resulted in a loss of -$1,100, not including commissions.

KC Wheat Chicago Wheat spread (nearest-futures) daily

KC Wheat Chicago Wheat spread (nearest-futures) daily

The December KC/Chicago wheat spread continues to set new contract lows this morning. It appears to be headed to the double bottom that was made on the nearest-futures chart this summer between the July low of -28 3/4 cents and the August low of -29 cents. If the bear market does not end either side of this area, price support may not be found again until the spread plunges to the September 2007 capitulation low of -61 1/2 cents.

KC Wheat Chicago Wheat ratio (nearest-futures) daily

KC Wheat Chicago Wheat ratio (nearest-futures) daily

Basis the nearest-futures, the Kansas City wheat has been priced at a discount to the Chicago wheat for four consecutive months now. Stated another way, the December Chicago wheat has a premium of 3.65% over the December Kansas City wheat this afternoon and the nearest-futures premium reached a 6% premium two months ago. This is something that rarely occurs. Even during that historic move in September of ’07, the Chicago wheat made it to a premium of not quite 8% before the spread made a violent reversal. Therefore, we are going to reload, get right back in the saddle, and set the parameters for the next shot at the long side of the KC/Chicago wheat spread.

Re-Calibrating the Moving Average

Using the breakout above the declining 50-day Moving Average resulted in a false trend change signal and a losing trade. So we are going to slow things down and, therefore, desensitize the entry signal by employing slower moving average this time around. Bumping the parameters up to a 75-day Moving Average might do the trick.

December KC Wheat Chicago Wheat spread daily (75-day MA)

December KC Wheat Chicago Wheat spread daily (75-day MA)

The early September bounce stayed below the 75-day MA, which kept the downtrend intact. Therefore, the blog will go back in on the long side if the December KC/Chicago wheat spread closes above the 75-day MA for the first time since May.

Trade Strategy:

For a reentry trade, work a hypothetical order to buy one December Kansas City wheat contract and simultaneously sell one December Chicago wheat contract if the spread closes above the declining 75-day Moving Average. If filled, risk a two-day close of three cents below the contract low that precedes the entry.

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