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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Minneapolis/KC Wheat Spread: Trade Parameter Revision

Making a Play For May

The IMC blog has been working an order to short the March Minneapolis/Kansas City wheat spread.  Since the March grain contracts will have their First Notice Day in just another three weeks, however, it may be a prudent time to shift our focus over to the May spread.

may-minneapolis-kansas-city-wheat-spread-daily

May Minneapolis Kansas City wheat spread daily

Over the past year, the May spread has made several pullbacks during the overall run higher.  Each pullback bottomed out above the rising 100-day Moving Average.  Therefore, we are going to keep things simple and use a close below the 100-day MA as a green light to go short.

Trade Strategy:

Cancel the hypothetical order to short the March Minneapolis/Kansas City wheat spread.  Place a new order sell one May Minneapolis wheat contract and simultaneously buy one May Kansas City wheat contract if the spread closes below the rising 100-day MA (currently at +96 1/2 cents).  If filled, risk a two-day close of three cents above the spread contract high that precedes the entry (currently at +$1.25 3/4 cents). 

Minneapolis/KC Wheat Spread: Use the Ratio for Timing the Entry

Spring Forward

Just a week ago, it was time for us to ‘fall back’ here in the US.  And now we’re less than two weeks out from Thanksgiving!  This brings the Christmas delivery contracts right into view.

Since the futures markets are pricing in the future, we think it’s now time to move our recommendation for a December spread trade into the future as well.  Always good to stay a step ahead of the crowd.

The blog is currently working an order to short the December Minneapolis/Kansas City wheat spread.  We are simply going to move the recommendation over to the March 2017 spread now.

march-minneapolis-kansas-city-wheat-ratio-daily

March Minneapolis Kansas City Wheat ratio daily

The entry parameters for this trade are going to be tweaked slightly.  Initially, we were going to short the December spread once it cracked support at the rising 75-day Moving Average.  The December spread has not done this yet, but the March spread already did this and recovered.  So that’s a failure.

However, the March Minneapolis/Kansas City wheat ratio has held above the 75-day MA this entire time.  It’s been eight months since the ratio last closed below the 75-day MA.  Therefore, we are going to wait for the ratio to break support before initiating a short position in the March Minneapolis/Kansas City wheat spread.

Trade Strategy:

Cancel the hypothetical order to short the December Minneapolis/Kansas City wheat spread.  Place a new order sell one March Minneapolis wheat contract and simultaneously buy one March Kansas City wheat contract if the ratio between the two contracts closes below the rising 75-day MA (currently near 1.19:1).  If filled, risk a two-day close of three cents above the spread contract high that precedes the entry (currently at +$1.07 1/4 cents). 

Kansas City/Chicago Wheat Spread: Bag the Profits!

A Change of Trend

The IMC blog is holding a long position in the December Kansas City/Chicago wheat spread that was entered at the equivalent of -12 1/4 cents (premium CBOT wheat) on July 6th.  An ‘add-on’ position was entered at the equivalent of +7 3/4 cents (premium KC wheat) on August 26th.

Initially, we proposed the thesis that Kansas City wheat would not stay at a discounted price to the Chicago wheat.  Once a technical trend change signal occurred, we initiated a long position.  As the move higher confirmed our outlook, another setup occurred that allowed us to add to the position.

Based on the history of the KC/Chicago wheat spread, we expected a minimum return to where the KC wheat would trade at a premium of 35 to 40 cents or more over the Chicago wheat.  That may still be the case.  However, the price action of the last several days indicates that the spread is back on the defensive.

The Magic of Thirteen

The nearest-futures KC/Chicago wheat spread has found an important inflection point around +13 cents (premium KC wheat).  There’s just something about how this Lucky 13 level that has determined the fate of this spread for nearly two years.  It’s almost spooky.  And we’re not pointing it out just because it’s getting close to Halloween, either!

Just take a look at how it has played out and judge it yourself:

After a five and a half month bear market decline of nearly $1.33, the KC/Chicago wheat spread bottomed at +13 1/4 cents in December 2014.  A sizable bounce followed, indicating that the December low was major support.

The spread then retreated again and bottomed out at +13 cents in March of 2015.  This created a potential double bottom on the chart.  This was confirmed as the spread than rocketed 33-cents higher over the next month.

The KC/Chicago wheat spread reversed in April 2015 and bottomed once more at +13 cents in the second half of the month.  The nearly 23-cent rally that unfolded over the next month then created a potential triple bottom on the chart.

The third time was not the charm for this spread!  In the second half of June 2015, the nearest-futures KC/Chicago wheat spread made a two-day close below +13 cents.  This was a major support breach and things unraveled quickly.  The spread inverted before the month was out.

Now that the +13-cent support level had been broken, it became a major resistance level.  This is an important charting principle.

kansas-city-chicago-wheat-spread-nearest-futures-daily

Kansas City Chicago Wheat spread (nearest-futures) daily

The point was proven when the spread bottomed at an eight-year low of -40 1/4 cents (premium CBOT wheat) in early November 2015 and then started on the road to recovery.  A couple of weeks after the new year started, Kansas City wheat finally closed with a premium over the Chicago wheat for the first time in nearly seven months.  After a correction into early February, the bull run resumed.  This multi-month climb finally stopped on March 16th at a price of…+13 cents (premium KC wheat)!

The mid-March high marked a major turning point.  The nearest-futures KC/Chicago wheat spread was inverted again by early April.  The decline lasted for nearly three and a half months.  By the time it bottomed again at the end of June, the spread was only a nickel away from the multi-year low that it had hit in 2015.

Just like a pendulum, commodity spreads have a tendency to swing from one extreme to the other.  So it’s no surprise that from the depths of the Q2 lows, the KC/Chicago wheat spread turned back up.

A couple of months into the rally and the KC/Chicago wheat spread had made it all the way back up to +13 1/4 cents (premium KC wheat).  This occurred on September 2nd.  The spread closed at +13 cents the next day and then backed off the following day.  It looked like the spread may have once again crested at +13 cents and was ready to start another decline.

Then something interesting happened…

The KC/Chicago wheat spread recovered and made a two-day close above +13 cents on September 8th and 9th.  This hadn’t happened since the summer of 2015.  Now that the +13-cent resistance level had been broken, it once again became a major support level.

Furthermore, this put it above the prior top at the mid-March high.  The bulls were firmly in control now.

However…

This week the December KC/Chicago wheat spread –which is currently the nearest-futures spread-  kicked off the new month and the new quarter with a close back below +13 cents.  With just a few hours of trading left to go for the week, it appears that the spread will have spent the entire week below +13 cents.

By clearing the mid-March high and then dropping back under it, the nearest-futures KC/Chicago wheat spread triggered a Wash & Rinse sell signal.  This is a good reason to bag the profits on the long spread position and get to the sidelines.

Moving Average Confirmation

In addition to the Wash & Rinse sell signal, the December KC/Chicago wheat spread triggered a bearish trend change when it closed below the rising 30-day Moving Average for the first time in several months.

Recall that we initiated the long position in early July when the spread had made a two-day close above the declining 30-day MA for the first time in over three months.

december-kansas-city-chicago-wheat-spread-daily-30-day-ma

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

Now that the spread is closing back below the 30-day MA –especially since it will close below the 30-day MA every single day this week- it takes away our reason to be long.  For the last year, the 30-day MA has been a highly-accurate indicator for which side of the December KC/Chicago wheat spread to be positioned on.  Don’t ignore it.

Furthermore, look how things turned out when the spread closed below the 30-day MA six months ago at the end of March.  The sell-off continued for another three months.  If we’re lucky, perhaps we can book some profits here and then get a reentry signal after a sizable decline gives us another setup at much lower levels.

Trade Strategy:

On the December Kansas City/Chicago wheat spread that was entered at the equivalent of -12 1/4 cents (premium CBOT wheat) and the long ‘add-on’ position was entered at the equivalent of +7 3/4 cents (premium KC wheat), exit at +8 1/4 cents or better. 

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.