Technically Speaking

Bullish Turn in KC Chi July Wheat Spread

By Darin Newsom , DTN Senior Analyst
Source: DTN ProphetX

This post is a follow-up to Monday's discussion of the July Kansas City wheat contract. After that post went up I was for my thoughts on the Kansas City versus Chicago spread. A quick look at the weekly chart showed a few interesting technical points.

First, the spread appears to have reestablished an uptrend. Recently the Kansas City July contract has lost ground to the Chicago July contract, falling from its peak (weekly close only) of a 64 cent premium to a low of 28 1/2 cents. Notice that this was a test of the 50% retracement level of the previous uptrend from the low of a 10 1/4 cent discount (Kansas City lower than Chicago) from the week of June 13, 2011 through the previously mentioned high.

Secondly, notice that weekly stochastics (bottom study) have established a bullish crossover below the oversold level of 20% that coincides with the test of support the 50% retracement level. From a technical point of view, this would confirm the idea that the spread is moving into an uptrend. Note that it offsets the bearish crossover established in conjunction with the peak of 64 cents in early February 2013.

From a technical point of view, this would confirm that the spread has moved into an uptrend with an initial target price near 40 1/4 cents premium the Kansas City July. Not only is this price near the previous short-term double-top, but it is also the 33% retracement level of the downtrend from the 64 cent peak through the recent low. Beyond that is the 50% retracement level of 46 1/4 cents, then near 52 1/4 cents.

The fundamentals behind an uptrend in this spread lie with weather developments. HRW wheat (Kansas City) is grown in the Southern and Western Plains, an area vulnerable to a freeze as far south as the Texas Panhandle. The US grows more HRW than any other wheat variety, so another threatened crop could push its price in relation to the lower quality SRW wheat crop.

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