Kansas City/Chicago Wheat Spread: Downward Adjustment For the Entry Point

Lower the Bar

The IMC blog has been working a hypothetical order to buy the September Kansas City/Chicago wheat spread on a close above price resistance between the similar May high and February low.  Based on the path that the spread has followed for the last few weeks, we now have a chance to lower the bar and get in at an even better price.

The September spread closed at a new contract low of -25 cents (premium CBOT wheat) on June 13th.  It then powered higher for two days and peaked just below resistance at the declining 30-day Moving Average on June 15th.  Here we are just over a week later and the spread is just a penny shy of the contract low again.

The 30-day MA is currently working as a technical resistance level for the September Kansas City/Chicago wheat spread.  First of all, it stopped the last bear market rally.  Secondly, the spread has closed below the 30-day MA every single day for nearly one-quarter of a year.

September Kansas City Chicago Wheat spread daily

September Kansas City Chicago Wheat spread daily

After establishing the current 2016 high in mid-March, the spread has progressively made a series of lower lows and lower highs.  This is a well-defined downtrend.  Therefore, the most recent bounce high at -15 cents (premium CBOT wheat) is an important line in the sand for this bear market.

Remember, the Kansas City wheat does not normally stay priced at a discount to the Chicago wheat.  So a bullish trend change that puts you long the spread while it’s still inverted is a high-probability trade.  You’d already have an open profit when the spread crosses the ‘even money’ level.  This could provide enough cushion to allow for pyramiding just as the spread is righting itself.  That’s the sort of thing we look for.

Trade Strategy:

Change the hypothetical order to buy one September Kansas City wheat contract and simultaneously sell one September Chicago wheat contract from a close above -3 cents (premium CBOT wheat) to a two-day close above the 30-day MA (currently at -17 cents) or a one-day close above -15 cents (premium CBOT wheat), whichever occurs first.  If filled, risk a two-day close of three cents below the contract low that precedes the entry.

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