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Bellwether: An Indication of a Trend.
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The dramatic rally in the wheat market, which started in the middle of 2007 and ended in February 2008 with all time highs, has been in a corrective phase since the dramatic monthly reversal this past February.

In looking at the monthly continuation chart of the nearby contract, the structure of this correction has been a 3-legged move down with the first leg ending at 731 in May of 2008 from the high made at 1318. The second leg of the correction, or the up leg, started in May of 2008 at 731 and culminated in August of 2008 at 931. The third and most likely the last leg of the correction started in August 2008 at 931 and in nearing its completion. The recent low made on the monthly continuation chart of the nearby contract has, thus far, been 503.

In looking at the same monthly continuation chart of the nearby contract, it would appear that the multi-year rally started with the low made in June of 2001 at 242.5. The entire rally from the low at 242.5 to the high at 1318 was a rally of 1075.5. A 75 percent retracement of this rally would be a move of 806.5. Subtracting this amount from the high at 1318 a target of 511.5 is obtained. Keep in mind the recent low on the monthly continuation chart of the nearby contract has, thus far, been 503.

Another relationship between the legs of this correction is this: the first leg down from 1318 to 731 was 587.0. In keeping with the perceived market's 75 percent relationship between moves, 75 percent of this 587.0 move is 440.0. Taking this 75 percent value from the previous high at 931 a target of 491 is derived. Keep in mind the recent low on the monthly continuation chart of the nearby contract has, thus far, been 503.

In keeping with this monthly continuation chart of the nearby contract, the real breakout to the upside occurred in May of 2007 when the market, on a closing basis, closed above 500 settling at 518. Prior to May of 2007, the market attempted to breach the 500 level, and did so a number of times, only to settle below this crucial 500 level until the May 2007 settlement.

ALL markets retest breakout levels, whether the market has broken out to the upside or downside. This is true across all market arenas and this test is inevitable. These tests are generally easier to see when looking at years of historical data plotted on a monthly time frame.

In looking at various relationships in the wheat market, a case can be made that the 500 level in the wheat market is very important. This case can be made when looking at a test of breakout levels (the 518 close above 500 in May of 2007). This case can be made when looking at retracement levels from the low in June of 2001 at 242.5 to the high at 1318 in February 2208 (a 75 percent retracement of this entire move is 511.5). This case can also be made when looking at the relationship between the two down legs of the correction from the high at 1318 (75 percent of the first correction from 1318 to 731, or 440.0, when subtracted from the up leg of the correction at 931 yields a target of 491).

What about the time function of the monthly chart? If one labels the low made in November of 2007, just prior to the final run up, as the previous monthly cycle low, the window of opportunity for the next monthly cycle low starts in December 2008. At this point in the market both price and time are nearing coincidence.

A close on the month in the nearby contract starting with the November 2008 bar and continuing for the next number of months above resistance on the monthly continuation chart of the nearby contract at 580 will be the first clue the monthly cycle has transitioned to its up phase and a rally should be expected, or at the very least the lack of any kind of dramatic move to the downside.

What would the nature of this expected move to the upside, given a monthly close above 580 in the nearby contract be?

At the very least the expectation would be to see the completed correction from 1318 to the recent low at 503 (making the assumption that the 503 is the completed correction or very nearly the completed correction) to itself be retraced or corrected. This entire move down, or 815.0, should be retraced in either a 50 percent move or a 75 percent (the market has demonstrated the 75 percent level as being germane in previous relationships) move to the upside. These levels would be 910.5 and 1114 respectively. 

The last two rallies on the monthly continuation chart of the nearby contract have lasted 4 months and 6 months respectively. Given the monthly cycle makes its low in November or December 2008 this would provide a time target of April through June of 2009.

The May 2009 and July 2009 calls with 900, 1000, and 1100 strikes would be a good way, at this moment in time, to establish a long position. Additionally, vertical call spreads with the long anchor leg being the 900 strike or even the 800 strike and the short leg being the upper target of 1100 would also be attractive. Of course, your own personal assessment of risk tolerance and capital would also have to be factored into the acceptability of the trade.

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