COT Report Shows Major Selling ahead of USDA Reports

Andy Waldock |

The grain markets finally got moving this year once the crops got in the ground. Since March, the soybean market has seen four moves of more than 7.5%, all of which were completed in three weeks or less. Soybeans have increased their volatility substantially while remaining range bound between $9.20 and $10.60 per bushel. With both the USDA's Crop Production and the World Agriculture Supply and Demand report coming out Wednesday at noon, we'll take a look at who is in control of the soybean futures market and how their actions in the market telegraph their expectations of tomorrow's crucial reports.

It's no secret that we base our fundamental thesis for any given commodity market on the actions of the commercial traders as detailed in the weekly Commitments of Traders Report. Theoretically, no one knows any single market better than those whose livelihoods are directly impacted by their successful analysis of that market. Quantitatively, the buy and sell signals generated by their actions, which you can see on the chart below, prove this point over and over again across multiple markets. Their recent actions in the soybean futures strongly suggest that Monday's rally was primarily short covering by speculative traders.

Commercial hedgers have successfully traded the soybean range from $9.20 - $10.60 multiple times. Their recent actions suggest favoring the sell side heading into Wednesdays WASD report.

Commercial hedgers have successfully traded the soybean range from $9.20 - $$10.60 multiple times. Their recent actions suggest favoring the sell side heading into Wednesdays WASD report.

Soybean growers are short hedgers. Their business is to sell the grain they're growing this year at the best possible price while not overselling their harvest and ending up short when delivery time comes. Commercial short hedgers were sellers for eight straight weeks, totaling more than 200,000 contracts. Soybean futures are a 5,000 bushel contract. Therefore, soybean growers have sold more than 1 billion bushels of forward production in an eight week period. This roughly equivalent to 25% of the anticipated United State's soybean production for 2015.

Their selling has clearly shifted the commercial traders' momentum to the short side. We used yesterday's rally to get short this market heading into tomorrow's reports. Typically, we'd place a protective buy stop at the swing high being established between yesterday and today, however the potential for increased volatility upon the reports' release suggests we use a more statistically based stop loss level. Therefore, we'll defer to our mechanical Commitments of Traders models that suggest a protective buy stop be placed at $10.22. This is less than risking the market all the way to the $10.60 resistance while still allowing the market a bit of breathing room beyond Monday's high print of $9.965 per bushel.

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