For much of last week, November soybeans consolidated within the previous week's trading range. This following the establishment of a bearish reversal, what now looks to be a bearish key reversal, on the contract's weekly chart. Last Friday's somewhat bearish close opened the door for a possible extended selloff early Sunday evening, a projection that held true as the contract quickly traded 50 cents lower as traders reacted to weekend rain.
But the weekly chart wasn't the only signal that November soybeans were growing increasingly vulnerable. To begin with, the downturn coincides with the continued reduction of the noncommercial long-futures position (bottom histogram), with last Friday's CFTC report showing just over 308,000 contracts. This is 11,100 contracts less than the previous week. Some of this is due to continued high market volatility (third study, red line). Investment traders don't like high volatility in markets as it makes it more expensive to hold positions. Therefore as volatility increases so too does the likelihood of long-liquidation activity.
This activity becomes a stronger possibility if the commercial side of the market is showing concern. Recent weeks have seen the inverse in the November 2012 to January 2013 futures spread (second study, green line) weaken meaning this group has also been selling. The fact that it remains in an inverse (November about 2.5 cents above the January contract) shows the outlook is still bullish, just not as strong as it was when the spread peaked at 23 cents (weekly close only).
The combination of selling from both sides of the market, though predominantly noncommercial traders, has also led to a bearish crossover by stochastics (fourth study). There the faster blue line (82.4%) has moved below the slower red line (84.7%) indicating a downtrend in price could gain momentum, short-term.
Given the scenario of a still bullish fundamentals and increased noncommercial liquidation, the price target area is between $14.39 3/4 and $13.08 1/2, roughly the 33% and 50% retracement levels of the previous uptrend from $9.25 1/2 through the high of $16.91 1/2 (the week the bearish reversal was posted). A market that has a bullish commercial outlook (inverted futures spread) normally finds renewed buying interest in the 33% to 50% retracement area.
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Commodity trading is very complicated and the risk of loss is substantial. The author does not engage in any commodity trading activity for his own account or for others. The information provided is general, and is NOT a substitute for your own independent business judgment or the advice of a registered Commodity Trading Adviser.