November Soybeans To Bounce Back?
After weeks of significant gains (near 20% in a month), the soybean market has taken a breather. We feel this “breather” will be a wave 4 retracement within a larger 5-wave structure to the upside.
In other words, there is a buying opportunity developing.
Below is our wave count on the daily period timeframe. You can see the clearly defined wave 3 with accompanying momentum. Expectations are for Nov. soybeans to zig-zag lower in a-b-c fashion back to the 50% retracement level. A zig-zag is expected because wave 2 is defined as a flat pattern and using the guide of alteration, we can expect wave 4 to be a sharp correction (zig-zag).
This move should also receive support from the upper boundary line of the dotted price channel shown. As for timing, we can expect wave 4 to last 4-5 weeks because that would be equivalent to the duration of wave 2.
This lines up nicely with fundamentals because the soybean market is currently going through harvest and typically bottoms the first or second week of October.
The chart suggests another new high in a modest move; however, it is our experience that commodity markets often experience more parabolic moves to the upside (due to “fear of running out”). Therefore, $12/bushel cannot be ruled out as a potential target in 2021.
Zooming in on the hourly chart, you can see the nice substructure of wave 3. Recent bullish divergence on the hourly chart may be signaling the wave b pullback is on the horizon.
Taking a long-term view, you can notice the slope of the current up trend is sharper than the preceding downtrend, suggesting a new uptrend is formed.
Using Other Forms of Technical Analysis
Price is above the positively-sloped long-term moving averages. Price retracements into these positively sloped moving averages can be seen as buying opportunities. This may coincide with the termination of our projected wave 4, adding confidence.
The relative strength index has moved well above the 60-level (up to 83). The conquering of the bear-market resistance level, suggest a new trend (higher) is intact.
The price rally expanded the Donchian channel to the upside. As a minor indicator, we can look at the midpoint of this channel to act as support on the wave 4 price retracement.
The Traders’ Perspective
The market is within a wave 4 pullback within a larger 5-wave rally. Exercising patience and buying the 38-50% retracement of wave 3 can be seen as a good area to try and join the uptrend. For risk management purposes, we can use the extreme of wave 1 ($9.1250) as the stop-loss level. This is because within an impulse wave, wave 4 cannot enter the territory of wave 1. Weighing the risk-reward in getting long near $9.60ish. You can see risking 50 cents is worth it when your target upside is a gain of $1.50 and potentially more.
The Buyers’ Perspective
As a buyer, you do not necessarily need to buy the bottoms and sell the tops in a market. Once in a while, if you practice good risk management, you get lucky and actually do that. But that should be seen as a gift from the market you are properly trying to reduce your risk from. That being said, you want (and can accomplish), being on the right side of the trend nearly all the time. The tools and techniques used above suggest that the trend has turned higher.
Thus, a buyer needs to look for pullbacks to join and be on the “right side” of that trend. For those still wanting to jump in, understand that purchasing soybeans at the $9.60, and watching the market go to $9.00 is a much easier conversation with your CEO than not purchasing soybeans at $9.60 and watching the market go to $11.00 and perhaps $12.00 in 2021.
Pertinent Soybean Fundamental News
- Fueled by the plunging palm oil market, which has also now closed lower for the sixth time in seven days, soybeans are responding to a rapidly advancing harvest and the still bearish impact of COVID-19 worldwide. Some EU countries have begun a return to restrictions.
- Wednesday’s quarterly Grain Stocks report from USDA is not expected to reveal any surprises. But, the USDA has a knack for surprise. Another sale of 8 mb was announced to unknown on Monday, but that is not thought to be China.
- Soybean inspections last week of 44.5 mb were above the weekly average needed, and total inspections are 53% higher than last year. Last week’s inspections included 16 cargoes headed to China — 10 from the Gulf and the remainder from the PNW.
- Soybean harvest is now 20% done compared to an average of 15%; expectations are such that we could reach the 50% mark at the end of the second week of October.
- Anecdotal yields are showing some possible frost damage for the Northern Plains due to the early September freeze event.
- November soybeans have now fallen 57 cents from the high set just eight days ago. Meanwhile, Brazilian bean prices in their real currency suggest hefty planting advances in Brazil, dryness in both Brazil and Argentina will begin to take on more importance in the weeks to come.
- Funds are now holding the largest net-long position in agriculture commodities in two years.