Technically Speaking
Darin Newsom DTN Senior Analyst

Tuesday 07/08/14

Nov Beans: The Gap

Source: DTN ProphetX

A price gap is defined as an area on a bar chart where no trade has occurred. If you look closely at the attached November soybean weekly chart, the red circle shows that such an area exists between last week's low of $11.32 and this past Monday's high of $11.29 1/2. The question market bulls and bears must now debate is what type of gap is it?

Gaps are classified into four different types.

The first, a common gap, is inconsequential and usually ignored by chart analysts due to their tendency to occur during low volume trade. Initial analysis would show this type to be a possibility as the contract's trade volume increased dramatically last week 491,077 contracts before dropping significantly early this week. Of course, the latter can be explained by another monthly USDA Crop Production report looming this coming Friday. Activity following the report should see a spike in volume, keeping the weekly level close to what was seen last week.

The second type of gap is a breakaway gap, usually occurring as one trend comes to an end another IS BEGINNING. I capitalize that last part, because market bulls will be hitting the bottle early this morning if the conclusion is the downtrend in November beans is just getting under way, $1.50 below the recent high of $12.79 (week of May 19).

The third type of gap, the runaway or measuring gap, is also frightening for market bulls as it would imply the downtrend is only at its midpoint. Measuring from the bearish breakout from the approximate triple-bottom near $12.01 to the top of the price gap ($11.32), and subtracting from the bottom of the gap ($11.29 1/2) creates a possible downside target near $10.60. A look at the long-term monthly shows this would put the market in a pocket of trade dating back to between December 2009 and April 2010.

If this week's pattern is the fourth type of gap, an exhaustion gap, it offers market bulls hope that the end of the sell-off is near. Exhaustion gaps, as their name suggests, come near the end of a price move as the last round of enthusiasm is exhausted. Exhaustion gaps also open the door for an interesting little pattern called an "Island Reversal", where a breakaway gap soon follows leaving the short-term price range surrounded on either side by space (water). If such a pattern emerges it would indicate the trend of the contract has turned up again.

But what are the other technical indicators saying about the market? First, the trend is decidedly down reflecting solid selling by the noncommercial side of the market. Recent weekly CFTC Commitments of Traders reports confirm this, with the noncommercial net-long futures position falling from 211,816 contracts (week of February 23, 2014) to this past week's low of 17,121 contracts.

Additional pressure has come from the commercial side of the market, as indicated by the downtrend in the November to January futures spread (second chart, green line). This downtrend reflects a strengthening carry in the spread, with Tuesday morning's 9 cents amounting to roughly 56% of full commercial carry (total cost to hold cash supplies in commercial storage). Keep in mind that my analysis breaks cost of carry into thirds, with 66% or higher considered bearish. Therefore, the 56% would be classified as a neutral to bearish indicator toward new-crop supply and demand.

Weekly stochastics (third chart) are approaching the oversold 20% level, but are not there yet. This would imply that the November contract has more room to the downside before this momentum indicator can create a bullish crossover (faster moving blue line crossing above the slower moving red line, with both below the 20% level).

Disregarding the question of price gap type, technical analysis would indicate that the November contract could see a full retracement back to its previous low of $10.88 1/4 (week of January 27, 2014). Market action the balance of this week could go a long way to determining what type of price gap was left Monday, with all four still possible.

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 8:27AM CDT 07/08/14 by Darin Newsom
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