A Technical Indicator for Soybeans May Suggest Lower Prices Ahead

What’s happened…

Analyzing a market can come in many forms. Some look at supply and demand numbers and attempt to forecast future prices based on expected supply and expected demand. This is called fundamental analysis. Others may look at price charts which could provide a picture of where a market may go, based on where the market has been and where it is now. This is called technical analysis. On the current daily soybean chart, futures are posting what is known as a head-and-shoulders formation. As with any analysis, there is not a fool-proof way to forecast prices. Still, when a chart formation begins to form, often the market reaction can become self-fulfilling.

In a head-and-shoulders formation, the chart formation mimics the silhouette of a person’s upper torso. Future price movement, should the market break to the downside, is the estimated distance from the top of the head to the neckline. In the case of March soybean futures, the top of the head is $14.10 (rounding to the nearest penny) and the neckline is at $13.14 (as of this writing). The difference is 96 cents. Should prices drop below the neckline, the downside objective is $12.18. What is meant by self-fulfilling technical analysis is that traders may be willing to sell beans at current prices because they are anticipating the market could drop to $12.18. On the other hand, buyers may wait until March soybean futures drop to $12.18 before they buy.

Why this is important…

Technical analysis is more of an art than a science. Traders will often combine both fundamental and technical analysis to try and determine price direction. Currently, soybean prices have been, in part, supported by adverse weather in South America. Yet, it is early enough in the growing season that it is challenging to peg yield loss of significance. Therefore, fundamentally, there could be quite an argument for increased supplies if the weather takes a turn for the better. Knowing this and knowing that there is a technical objective based on the current head-and-shoulders formation, you may gain a better observation as to how you might view the market and implement strategy.

What can you do?

A strategy to consider this year might be selling more aggressively in the cash market, anticipating prices could break support. Or it could be purchasing a put to defend prices and leave the top side open for cash price advances. The bottom line is that there are multiple strategies. Have an in-depth conversation with your advisor as to which may be best suited for you. Predicting prices is a very difficult endeavor. Knowledge of fundamentals, technical indicators, and an understanding of tools used to manage potential price moves can be powerful.

About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.

The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition.  Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation.

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Bryan Doherty