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.
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.
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.