Wheat; True Bottom or False Breakout?

Hao Sun

A regular challenge for traders is the need to reconcile conflicting information. We each have our own view on where the market is heading. But we still need to base our trading plan on what the charts are telling us. Sometimes our view conflicts with what the charts seem to be telling us, which makes flexibility a key characteristic in a good trader.

In today’s example, we really are trying to sort the wheat from the chaff and are using the wheat position to illustrate one approach to solving the dilemma of seemingly conflicting information.

I will trade wheat when the daily, weekly and monthly charts are trending in the similar fashion.  But sometimes even these three high time frames charts provide conflicting information. Take the following example. My personal view - or trade bias - is based on the monthly chart, where wheat is in a nice downtrend. The price has pulled back into the moving average sell zone. I am waiting for a small bearish candle to form inside the sell zone for a longer-term shorting opportunity.

When we check wheat on the weekly chart, we can see an uptrend at an early stage with the next major support level at around 457, which is quite a large potential profit window to the upside.Compared to the monthly wheat chart, the daily chart is in a well-established uptrend. Moving averages are fanning with a convergence of indicators, all of which point to a higher price. Price action yesterday also confirmed the upward momentum, with a small bullish candle formed at a strong support level, clustered with a 61.8% Fibonacci retracement level. If price starts to break yesterday’s high, I anticipate that in the near term, price will retest the old high.

So what is my trade plan on wheat? I will continue to look for long trade opportunities because there is no sign of a weakness in the daily uptrend. But I will also bear in mind that the longer-term monthly chart is still trending down. Price may start to turn south at the next major resistance. If I am in long position and price goes in my favour, I will ensure that I take most of the profit out at the next major resistance level, of around 457.

So is wheat truly bottomed out, or is it just making a false breakout? In fact, it doesn’t really matter. The important thing is to read the charts, plan your trade, then trade your plan.