Soybean Short Trap

Andy Waldock |

The soybean forecasts this year should set another global production record. This comes on the heels of last year's record harvest which has left many of the domestic bins full. Obviously, supplies have pushed this market justifiably lower since last year's domestic harvest numbers were confirmed. This leaves soybeans in the same condition as many of physical commodity markets; facing a supply overhang in a world of declining demand. However, those of you looking for a contrarian point of view may want to look at the substantial actions being taken by the commercial traders who are rapidly approaching their record net long position from last fall.

Commercial traders have become much more active in all of the commodity markets over the last ten years and their participation in the soybean futures is very similar having set both their record net long and record net short positions within the last few years.

Commercial traders have become much more active in the soybean futures market having set new record long and short positions within the last three years.

The chart also illustrates just how important the support around the $9 per bushel level is. This level was heavily bought in 2009 and 2010, both of which saw rallies of more than 20%. The recent net long record was set in September of last year and marked to a low of $9.09 per bushel.

Moving to a short-term chart shows how this methodology sets up as well as the Commitment of Traders trading signals it has generated over the last year. Most of the market swings that met the criteria were profitable over the last year. However, as a veteran trader, it always worries me when I get that uneasy feeling about a current trade I'm in.

This short-term chart shows the Commitment of Traders trading signals generated by our methodology over the last year in the soybean futures market.

This is the case with the recent buy signal we sent. the market has continued to sit near support without stopping us out or moving in our favor. It's been my experience that, "consolidation means continuation." In this case, I believe the market may spike lower, under the recent support at $9.20 per bushel prior to reversing course. I believe that this would lead to a bullish divergence between the market action and our short-term market momentum indicator causing the market to shift its perspective to the long side in the near future on any subsequent rally.

The alternative way to play this tight formation is to use a buy stop to get into the market once it rises above the $9.375 high. This would invalidate the chart's consolidation currently favoring the shorts and should lead to a short covering rally. Either way, the huge interest in the long side of this market on the commercial traders' behalf should not be ignored. When Commitment of Traders analysis can be overlaid with seasonal research like that provided by Moore Research in the July soybean futures chart below, it should not be ignored.

July soybean seasonal analysis as supplied by Moore Research.

Understanding that the fundamental factors are bearish. The technical action is bearish and the weather is bearish makes it hard to step up and buy the soybean market. I suppose that's why the commercial traders have had such good fortune in this market over the last year as they appear to be able to stand up and take action at the market's most opportune moments. Therefore, we'll continue to throw ours in with theirs. Let them blaze the trail. We'll just quietly follow along behind.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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