The grain markets may finally be perking up in spite of declining energy costs and record harvests. We’ve previously mentioned the oat futures as the first of the grain markets to budge in, “Combining Buy Signals in the Oat Futures.” Today, we’re looking at soybean meal and the set of indicators we use to drown out the voices of hyperbole both in print and on TV. Quantitatively speaking, the soybean meal futures have triggered a COT Buy Signal. More importantly, you can see the consistency and magnitude of these plays on the chart below.
We follow the commercial trader category as our first screen in the market for a couple of reasons. First of all, translating global supply, demand and storage data in the grain markets is nearly impossible for the individual trader. Therefore, we rely on the commercial traders’ actions within the futures market as tracked by the Commodity Futures Trading Commission’s (CFTC) Commitment of Traders report. It is our belief that this group of traders, as measured by their actions, base their trading decisions on the deepest analysis and models available. Very simply, we want to be on the same side of the market as the commercial traders for swing trading.
We use this as preliminary screen by qualifying their momentum as either positive or, negative as you can see in the bottom pane of the provided chart. In this case, commercial trader momentum is positive. This puts us on the lookout for buying opportunities.
The second key to this is our proprietary short-term market momentum indicator in he second pane of the chart. We use this as the trigger for our COT trades. Individual traders must attempt to capture the biggest bang for the buck in the shortest amount of time. Our research has shown that a market that has positive commercial momentum in conjunction with a short-term oversold condition is primed to rebound. That is exactly what we have here.
Yesterday’s bounce would’ve been filled by speculative short covering as commercial traders fully expect the market to return to the value area around $360. Furthermore, yesterday’s bounce also pushed our short-term market momentum indicator back above the oversold threshold thus, generating both the COT Buy Signal and our protective stop point at Thursday’s low of $324.1 in the May futures contract.
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