Kansas City/Chicago Wheat Spread: New Lows. What to Do?!

Down & Out

The IMC blog was holding a long position in the July KC/Chicago wheat spread that was entered at the equivalent of at + 4 cents (premium KC wheat) on November 30th.

The position was liquidated on May 3rd at -15 cents (premium CBOT wheat) because the spread had closed below -13 cents for two days in a row.  This resulted in a loss of -$950 per spread.

Despite the stop-out, the KC/Chicago wheat spread is still a great candidate for a trade on the long side.  This is because the higher-quality KC wheat never stays priced at a discount to Chicago wheat.

Therefore, we are going to issue criteria to get back in the saddle.

Support Becomes Resistance

The July KC/Chicago wheat spread had important price support at the similar lows from November and February at -6 1/4 cents and -7 cents, respectively.  The break below these lows was the reason we got out.

July Kansas City Chicago Wheat spread daily

July Kansas City Chicago Wheat spread daily

Now that these old lows have been breached, this support level changed into a resistance level.  Therefore, a close back above the November and February lows could indicate that capitulation has occurred.  If so, we’d have a good reason to get back in.

In addition, a close above these lows would mean that the spread is also closing back above the declining 20-day Moving Average for the first time since late March.  This should confirm that the down trend has ended.

Trade Strategy:

Work a hypothetical order to buy one July Kansas City wheat contract and simultaneously sell one July Chicago wheat contract if the spread closes above -7 cents (premium CBOT wheat).  If filled, we will initially risk a two-day close of three cents below the contract low that precedes the entry.

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