Technically Speaking
Darin Newsom DTN Senior Analyst

Thursday 09/27/12

Soybeans: A Market On the Edge

As the soybean market gains bearish momentum Thursday morning, the November contract is pulled ever closer to the edge of establishing a key bearish reversal on the market's monthly chart. The overnight low (at this point) is $15.57 3/4, mere pennies away from the August low of $15.55 1/4 (dashed red line, top chart).

Source: DTN ProphetX

Why is the August low so important? Look at the action this month. The contract posted a new all-time high of $17.89 early in September before selling started to take the market lower. As the month nears its end, a lower close is almost guaranteed compared to the August settlement of $17.56 1/2. If the contract also takes out the previous month's low it would establish a bearish key reversal indicating the long-term trend has turned down.

Monthly stochastics (second study) seem to be confirming this move to a downtrend. The faster moving blue line has crossed below the slower moving red line, creating a bearish crossover that usually marks a change in trend. But take a closer look and you'll see it isn't as bearish as it could be.

If both lines were still above 80% a bearish crossover would indicate a more substantial change in trend. The fact that the faster moving blue line has already fallen below the 80% level during its crossover indicates the possible change in trend could be to sideways to down rather than just down. This is a significant difference because of the possible long-term outlook prospects of the market. A full-fledged downtrend could take years to complete. A sideways to down trend leaves open the possibility of retracing some of this month's selloff in the near future.

Why are we talking about a downtrend in soybeans when the whole world is aware of tight global supplies? Because the market has changed its opinion on supply and demand, as indicated by the trend in the futures spread (bottom study). In July, the nearby futures spread close at an inverse of 64 1/4 cents. As September gets ready to end the nearby futures spread is trading at a small carry, a change of about 65 cents in two cents. Such a downtrend in a futures spread is a solid indicator of a far less bullish commercial outlook than it once was.

Given the fact that the carry is weak at best, a possible downtrend should be limited to between $14.94 and $13.41. These prices mark the 33% and 50% retracement levels of the previous uptrend from $8.94 through this month's high of $17.89. And yes, that is a wide target range but keep in mind that we are looking at a long-term monthly chart.

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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.

Posted at 6:59AM CDT 09/27/12 by Darin Newsom
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