Expectations of fresh buying by index funds in early 2006 fuelled the bullish sentiment.
"It's more of a technical trend than anything really new fundamentally, because we don't really have a lot new from that side of things," one cash-connected trader said.
"Are we going to see more allocations, or more money coming to the market? That is generating the short covering we need," the source said.
CBOT March wheat closed up 5-1/2 cents at $3.40 per bushel, just off its high of $3.40-1/2. Buy-stops were hit above $3.38 and selling emerged at $3.40, traders said.
Deferred months closed up 3 to 6 cents.
Volume was estimated by the exchange at 24,358 futures and 7,851 options.
Funds bought at least 5,000 contracts, traders said, with O'Connor and Co a featured buyer of about 1,500 lots.
Wheat futures opened lower but soon bounced higher. Funds remain heavily net short in CBOT wheat, leaving the market open to short-covering rallies.
The CFTC's Commitments of Traders report showed that as of December 20, funds had trimmed their net short position in CBOT wheat but were still net short by 46,284 contracts for combined futures and options.
Tuesday's rally swept wheat futures farther into technically overbought territory. The nine-day relative strength index for the March contract closed at 77, above the benchmark of 70 that technical traders view as one sign of an overbought market.
There was little fundamental news to support prices, and exports were quiet over the long holiday weekend. US markets were closed on Monday in observance of the Christmas holiday.
The US Department of Agriculture reported weekly export inspections of US wheat at 24.4 million bushels.
Traders were monitoring a dry and unseasonably warm weather pattern in the US Plains hard red winter wheat belt. The mild temperatures could stimulate growth, leaving the crop vulnerable to further damage.
"It's certainly warm enough to bring this crop out of dormancy," Meteorlogix forecaster Mike Palmerino said. "It's going to stay quite warm, and this is not all that favourable to the crop, with the moisture levels as low as they are."
Cash basis bids for soft red winter wheat were steady in the US Midwest.