Minneapolis/Kansas City Wheat Spread: Reset For the July Spread

Waiting for a Reversal

The IMC blog is holding a short position in the May Minneapolis/Kansas City wheat spread that was entered at +97 cents on February 10th.

The spread has rebounded sharply over the last two weeks and is testing the contract highs.  Therefore, we are going to liquidate the May spread and set parameters to short the July spread if it backs off.

July Minneapolis Kansas City Wheat spread daily

July Minneapolis Kansas City Wheat spread daily

We’ve established before that the Minneapolis hard red spring wheat is currently too pricey in comparison to the Kansas City hard red winter wheat.  It’s been this way for months, though.  While we still intend to be short, a breakout to new contract highs could keep it running indefinitely.  Hence, the strategy of waiting for the July spread to start back down before getting short again.

Trade Strategy:

Exit the hypothetical short position in the May Minneapolis/Kansas City wheat spread at the market-on-close on Tuesday, April 25th. 

Place a new order sell one July Minneapolis wheat contract and simultaneously buy one July Kansas City wheat contract if the spread closes below +$1.10.  If filled, risk a two-day close of three cents above the spread contract high that precedes the entry (currently at +$1.20 cents). 

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Kansas City/Chicago Wheat Spread: Roll to the December Contracts

Goodbye Labor Day, Hello Christmas!

The IMC blog is holding a long position in the September Kansas City/Chicago wheat spread.  It was entered at -13 3/4 cents (premium CBOT wheat) on July 6th.  An ‘add-on’ position was entered at +6 1/4 cents (premium KC wheat) on August 26th.

With the First Notice Day for the September grain contracts hitting on Wednesday, it’s time to roll the position to the December contracts.  Fortunately, the December spread is only a couple of pennies higher than the September spread.  Based on what has transpired in history, there should be at least another 20 or 30 cents of upside from the current levels.

December Kansas City Chicago Wheat spread daily (30-day MA)

December Kansas City Chicago Wheat spread daily (30-day MA)

The December KC/Chicago wheat spread signaled a bullish trend change in early July.  Since then it has made a series of higher highs and higher lows.  In addition, the spread has closed above the rising 30-day Moving Average every day for the last several weeks.  Therefore, we will continue to hold the initial position and the pyramid position as long as it continues to hold above the 30-day MA.

Trade Strategy:

On the long September KC/Chicago wheat spread that was entered at -13 3/4 cents (premium CBOT wheat) and the long September KC/Chicago wheat spread that was entered at +6 1/4 cents (premium KC wheat), roll to the December contracts at the market-on-close on Monday, August 29th.  Risk the two December spreads to a two-day close below the rising 30-day Moving Average.

Kansas City/Chicago Wheat Spread: A Setup To Pyramid

On a Tear

The IMC blog entered a long position in the September Kansas City/Chicago wheat spread at -13 3/4 cents (premium CBOT wheat) on July 6th.  The spread reached a three and a half month high just this week before pulling back.

The current pullback gives us the setup we need to add to the position.  Quite simply, traders can add on a close above the August 2nd watermark high of +5 1/4 cents (premium KC wheat) and risk to just below the current pullback low.  Nice and neat.

September Kansas City Chicago Wheat spread daily

September Kansas City Chicago Wheat spread daily

Historically, inversions in the KC/Chicago wheat spread were followed by reversals where the KC wheat would go back to a premium of 35 to 40 cents or more over the Chicago wheat.  So buying a close above +5 1/4 cents (premium KC wheat) should leave plenty of profit potential for this ‘add-on’ trade.

‘Add-On’ Trade Strategy:

Place a hypothetical order to buy one September Kansas City wheat contract and simultaneously sell one September Chicago wheat contract on a close above +5 1/4 cents (premium KC wheat).  If filled, risk a two-day close of three cents below the pullback low that precedes the entry (currently at -4 1/4 cents).

Kansas City/Chicago Wheat Spread: Return of the Bull

Trend Change

For the first time in over three months, the September Kansas City/Chicago wheat spread made a two-day close above the declining 30-day Moving Average.  This triggered the blog’s buy signal.  In addition, the spread cleared near-term price resistance at the mid-June bounce high.  This altered the previously bearish pattern of lower lows and lower bounce highs.  It appears that the bottom is finally in.

September Kansas City Chicago Wheat spread daily

September Kansas City Chicago Wheat spread daily

The IMC blog initiated a hypothetical long position in the September Kansas City/Chicago wheat spread at yesterday’s closing price of -13 3/4 cents (premium CBOT wheat).  Initially, it is being risked to a two-day close below -32 cents (premium CBOT wheat).

If this really is the trend change we were hoping for, we would like to increase the position size.  However, we will wait for the spread to confirm our opinion.  To do so, it would provide buy setups at higher levels than where we just entered.  This is because it will take a pattern of higher highs and higher lows to define the spread as being in a new uptrend.  So be patient and wait for confirmation before pyramiding your position.

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.

Kansas City/Chicago Wheat Spread: Follow the September Spread

We’d Like More Time

Last week the July Kansas City/Chicago wheat spread hit a new contract low of -24 cents (premium CBOT wheat).  The ‘cheap’ got even cheaper.

And on the nearest-futures monthly chart, the KC/Chicago wheat spread is even lower at -31 1/2 cents.  This is only the sixth time in forty-five years that KC wheat has been priced at a discount this big!  Profit opportunity is a brewin’ here, folks.

Kansas City Chicago Wheat spread (nearest-futures) monthly

Kansas City Chicago Wheat spread (nearest-futures) monthly

The blog currently has an outstanding order to buy the July KC/Chicago wheat spread on a recovery of the similar lows established back in November and February.  But the thing is, July grain contracts will have to be rolled in about five weeks and we don’t even have a position in it yet!  So we’re gonna start stalking the September spread for a trade setup instead.

The September Kansas City/Chicago wheat spread bottomed at -3 cents (premium CBOT wheat) on February 17th and bounced.  After breaching this support level at the end of April, the spread failed to recover.  Now that this prior support level has been broken, it turns into a resistance level.

Coincidentally, the May 9th bounce high –which also marks the current high for the month-is located at -3 3/4 cents.  This is just three-quarters of a cent below the February low of -3 cents so it acts as a reinforcement of the resistance level.  Therefore, we can use a close above this level as our trigger to get positioned on the long side of the September Kansas City/Chicago wheat spread.

September Kansas City Chicago Wheat spread daily

September Kansas City Chicago Wheat spread daily

Also, note that the declining 30-day Moving Average is currently located near -6 cents.  To trip the wire on our entry criteria, the spread will have to close above the 30-day MA for the first time since late March.  This could serve as good confirmation.

Trade Strategy:

Cancel the hypothetical order to buy one July Kansas City/Chicago wheat spread.  Work a new hypothetical order to buy one September Kansas City wheat contract and simultaneously sell one September Chicago wheat contract if the spread closes above -3 cents (premium CBOT wheat).  If filled, risk a two-day close of three cents below the contract low that precedes the entry.

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.

Kansas City/Chicago Wheat Spread: Roll to July

Thinking of Summer

Well, boys and girls, next week is the First Notice Day for the May grain contracts.  Unless you actually want to take delivery of this stuff, it’s time to roll out to the summer contracts.

The blog is holding a hypothetical long position in the May KC/Chicago wheat spread that was entered at the equivalent of at -3/4 cents (premium CBOT wheat) on November 30th.

Several months into this trade, the Kansas City wheat is still priced at a discount to the Chicago wheat.  This is unusual because the KC wheat is a better grade than the CBOT wheat.  Therefore, we will side with history and continue to favor a return to the KC wheat having the premium.

May Kansas City Chicago Wheat spread daily

May Kansas City/Chicago Wheat spread daily

In the past, inversions in the KC/Chicago wheat spread have been followed by the KC wheat reaching a 35-40 cent premium over CBOT wheat.  So if the July KC/Chicago wheat clears the March high we may look to increase the size of the long position.

Conversely, the July spread just fractionally broke the similar lows from November and February.  If the July spread continues to edge lower, it could have a clean shot at a return to the nearest-futures November low of -40 1/4 cents (premium CBOT wheat).  In light of this, we’re going to use a short leash on the July spread.  If we get knocked out, we can simply watch for a setup to reenter.

Trade Strategy:

On the long May KC/Chicago wheat spread that was entered at the equivalent of at -3/4 cents (premium CBOT wheat), roll to the July contracts at the market-on-close on Friday, April 22nd.  Risk the July spread to a two-day close below -13 cents (premium CBOT wheat).

Kansas City/Chicago Wheat Spread: Roll to May Contracts

Patience Is a Virtue

Historically, Kansas City wheat usually trades at a good premium over Chicago wheat. There’s no mystery to it: KC wheat is a better grade than the CBOT wheat. Therefore, it should be reflected in the price.

Once in a while, though, the KC wheat will get priced at a discount to CBOT wheat. It has always been a buying opportunity, so we watch for it.

The spread inverted last year. So we started looking for a place to buy. And on November 30th, the blog bought the KC/Chicago wheat spread at -2 3/4 cents (premium CBOT wheat).

Here we are nearly three months later, and the spread is priced only a couple of pennies different from where we got in! Granted, that’s still better than where it was priced just a couple of weeks ago.

But you’d think that, after a nearly eight months of a discounted price on the nearest-futures spread, that it would be well on its way back to normal by now. Based on history, we’re looking for the KC wheat to reach a premium of 35 to 40 cents or more over the Chicago wheat.

Hasn’t happened yet. Nonetheless, we soldier on.

Pass the Wheat Rolls, Please

Monday is First Notice Day for the March grain contracts. That means we need to get out of the March contracts by tomorrow…or risk getting delivery notices on the long contracts. That’s not my idea of fun. The thought of getting 5,000 bushels of wheat for every long contract I have makes me very gluten intolerant!

May KC wheat CBOT wheat spread daily (200-day MA)

May KC wheat CBOT wheat spread daily (200-day MA)

We are going to stay the course with the long position in the KC/Chicago wheat spread, but we need to rollover and buy some more time. Therefore, we’ll liquidate the March contracts and immediately get into the May spread.

Trade Strategy:

At today’s market-on-close, sell the long March Kansas City wheat contract and simultaneously buy one May Kansas City wheat contract. Also, buy back the short March Chicago wheat contract and simultaneously sell one May Chicago wheat contract. This will liquidate the March spread and open a long position in the May spread.

Risk the May KC/Chicago wheat spread to a two-day close below -20 cents (premium CBOT wheat).

Kansas City/Chicago Wheat Spread: Reentry Parameters Were Elected

Jumping Back In

After the last attempt at the long side of the KC/Chicago wheat spread failed, the blog issued a setup to reenter if the March spread made a close above the declining 75-day Moving Average. This happened today.

The hypothetical long spread position was entered at -2 3/4 cents (premium CBOT wheat) by purchasing the March Kansas City wheat contract at $4.72 3/4 and selling one March Chicago wheat contract at $4.75 1/2. Initially, we are going to risk a two-day close below -29 cents (three cents below the contract low). Coincidentally, this is near the July and August lows on the nearest-futures chart.

March 2016 KC Wheat Chicago Wheat spread daily (75-day MA)

March 2016 KC Wheat Chicago Wheat spread daily (75-day MA)

The close above the 75-day MA for the first time since May signaled a bullish trend change. If the nearest-futures KC/Chicago wheat spread can now close back above the ‘even money’ mark for the first time since late June, it should confirm that the bottom is finally in.