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Larry’s note: Welcome to Trading with Larry Benedict, my free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us. My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. And, I’m featured in the book Market Wizards, alongside investors like Paul Tudor Jones. But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it… |
Even before the Ukraine invasion, CPI data released for February showed annual food inflation raging at 7.9%.
But it wasn’t just one segment responsible for the massive rise…
All six of the major food groups tracked in the data saw rises across the board. Some – like fruit and vegetables – saw their biggest monthly rise since March 2010. Dairy had its biggest monthly rise since April 2011.
So, it’s no wonder so many consumers are really feeling the pinch.
One commodity I follow that has a major influence on one of those food groups (cereal and bakery) is wheat.
When we last checked in on the Teucrium Wheat Fund (WEAT) in December (first red arrow in the chart below), it had already rallied over 70% in the preceding 18 months.
At that time, it had recently gone into overbought territory on the Relative Strength Index (RSI) – that is, above the upper grey line…
Teucrium Wheat Fund (WEAT)
Source: eSignal
After tracking sideways from December, WEAT began to rally strongly around mid-February in the lead-up to the Ukraine invasion. (Note: Russia and Ukraine combined comprise around one-quarter of global wheat exports).
The thing that caught my eye was the price action around the time…
While WEAT opened up higher on the day of invasion (February 24), it closed out the day below its opening price.
On the following trading day, WEAT opened lower and kept on falling – right back to where it was prior to the invasion.
The action in WEAT didn’t really get underway until the following week.
WEAT rallied a massive 57% from Friday’s close at $8.11 on February 25 to the following Friday’s high of $12.75 (‘A’).
You can see just how strong that rally was by our two moving averages (MA).
The 10-day MA (red line) went nearly vertical as it accelerated above the longer-term 50-day MA (blue line).
The peak at ‘A’ coincided with the RSI forming an inverse ‘V’ at ‘1’ in the lower half of the chart – well inside overbought territory.
However, a lot of the heat came out of the WEAT share price. Within just a few days of making that high, WEAT was trading back around $10 – a drop of over 20%.
So, what am I expecting from here?
Again, I’m watching the daily price action closely. Let’s take another look at the chart…
Teucrium Wheat Fund (WEAT)
Source: eSignal
After that 20% fall, WEAT tried to rally again. This time, that rally petered out at ‘B.’
While the 10-day MA is still well above the 50-day MA, right now the chart shows that they are converging. If the 10-day MA crosses down over the 50-day MA, it would mean this current rally is over for now.
I’m also watching the RSI…
After inverting at ‘1,’ the RSI is now testing support (green line). After the pullback from its highs, the RSI will need to stay in the top half of its band for WEAT to return to an uptrend.
If the RSI holds support and subsequently moves higher, then WEAT could quickly rally back up around $11. And that would provide an opportunity to go long.
However, should the RSI break below support – and the MAs cross over (10-day down over the 50-day MA) – then we know that this recent rally in WEAT has halted for now.
Meaning that WEAT could still fall 10-15% from where it is currently…
After such a violent move higher it’s going to take some time for that volatility to wash out of WEAT. So, there should be plenty of trading opportunities ahead.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reader Mailbag
I always appreciate the kind words from my readers…
Hi Larry, great eletter! Simple and complete.
I like the charts and how there isn’t any “Blah blah I know it all now buy something from me.” I particularly liked this line and I quote, “However, we need to remember not to get too far ahead of ourselves.”
Thanks Larry, great concise information with no scare tactics and “Chicken Little the sky is falling” stuff!
– Michael H.
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