* During the US government shutdown, the soybean futures market posted a strong rally driven by what looked to be buying from both commercial and noncommercial interests.
* On the noncommercial side, this led to a record large noncommercial long futures positing the week of November 18, oddly enough the week the US government reopened.
* Since then, the market has seen renewed selling from both sides (commercial and noncommercial), putting the market in a downtrend.
This past weekend, I stumbled across a discussion of if it was time to get bullish US soybeans again. On the nay side the point was made the market was free falling despite record crush and export shipment numbers for US soybean meal. On the yay side someone argued that Watson – funds, the noncommercial side – were likely done selling so now was the time to buy. To the latter point let me add: Train, meet pedestrian caught on tracks.
But what is the market telling us? Let’s start with basic technical analysis of trend, or price direction over time. A look at the weekly chart for the March soybean futures contract, the issue with the most open interest at this time, and we see a few interesting developments:
More News from Barchart
* Mar26 (ZSH26) posted a key bearish reversal the week of November 17. In other words, the contract extended the previous intermediate-term uptrend to a high of $11.7250 before taking out the previous week’s low of $11.2725 and closing Friday, November 21 at $11.3425, down 1.75 cents for the week. This reversal pattern confirmed a move to a new secondary downtrend, signaled the week before with a bearish crossover by weekly stochastics (momentum indicator) above the overbought level of 80%.
* The secondary downtrend gained momentum last week as Mar26 took out its previous 4-week low (another momentum indicator) of $11.1525 as it dropped to a low of $10.86 before closing Friday (December 12) at $10.8675, down 29.25 cents for the week.
* It’s interesting to note Mar26 then opened Sunday night (December 16) at $10.85, leaving a downside price gap that created a potential island top with the upside pride gap from the week of October 27, before rallying to a Monday morning high of $10.87.
The bottom line is the secondary (intermediate-term) trend has turned down. What does this tell us? If we apply Newton’s First Law of Motion to market analysis we have, “A trending market will stay in that trend, until acted upon by an outside force”. My addition to this has long been the outside force is a change in noncommercial (fund, Watson) activity. Therefore, when a market is trending up funds are buying; covering short futures, adding long futures, or possibly both. When a market is trending down funds are liquidating longs, adding shorts, or again, possibly both.
