Soybean Reversal on Technical Target and Commercial Selling

Soybean farmers are now the most short they’ve been since October of 2012. This means that U.S. farmers who are able to take advantage of South American misfortune stand to have their best year in quite awhile. There’s no question that South American production is not going to pass muster. However, in an interesting twist of fate, the same weather that kept us out of the fields this spring is going to be a boon to late planted soybeans heading into a La Nina fall growing season. Therefore, we view this last leg up in the soybean market as a selling opportunity rather than the emergence of a new trend.

While the growing indication of a La Nina fall adds to the fundamental resolution of the South American supply issues, the recent technical action in the soybean market also points towards market exhaustion. The soybean market fought hard to climb above the overhead resistance that had built up between August and April. This is classic soybean seasonal behavior, as the spring planting concerns tend to chase the market higher through May. This rally brought on significant short covering as the grain markets had been in a downward trend since at least, last summer’s highs near $10.50 if not since the 2014 high at $13.50. We pointed out that the consolidation near the old high at $10.50 was beginning to look more and more like a bull flag formation. We further pointed out here at Equities.com that this bull flag had a measured objective around $11.25. It’s not too surprising that the market would overshoot given the speculative position and the normal skew (fear premium) of the soybean options.

Farmers are the most short they've been since 2012 as they contract for all the beans they can grow ahead of South American misfortune and an opportunistic La Nina U.S. fall forecast.
Farmers are the most short they’ve been since 2012 as they contract for all the beans they can grow ahead of South American misfortune and an opportunistic La Nina U.S. fall forecast.

The large speculator short covering, think large hedge funds and the successful CTA’s, created a huge shift to the net long side of the underlying speculative position as you can see in the chart above, beginning mid-April. We think a close below $11.25 sets off a round of profit taking by the bottom picking long speculators as well as increasing the urgency of forward sales by U.S. farmers. We use their actions as a proxy for fundamental information as the collective wisdom of the U.S. farmers has fed the world for the last 50 years. Clearly, they’ll contract for all the November soybeans they can get grown at these prices. Our mechanical cot signals have already calculated this information and spit out a COT Sell Signal. We’ll be placing a protective buy stop tonight around $11.42. Those not following along may wish to use the provided Fibonacci levels and the July contract for a short-term swing trade. We view the farmers’ actions as the growing storm on the horizon, cresting the seasonal peak and ready rain on the speculators’ parade.

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