Bye-Bye Beans?

07/28/05 01:37:29 PM

by David Penn

Deep MACDH histogram troughs suggest that the soybean correction has more room to run.

Security: SU5
Position: N/A

It's been almost two years since I last wrote about soybeans ("Grains Gone Wild," August 15, 2003; Traders.com Advantage). From some perspectives, it was a good time to shut up--and start buying. I noted in "Grains Gone Wild" that the upside for grains in general was promising, pointing out that all of the grains where moving from historically oversold conditions. But there's "promising" and then there's promising. And it was the latter that characterized what happened to grains beginning in the late summer of 2003.

Basis continuous futures, soybeans rallied from a little over $5.52 in August 2003, to a closing high of $10.52 in March 2004.

Figure 1: A slipping September soybean contract finds support at the precise level of the May 2005 highs.

Graphic provided by: Prophet Financial, Inc.

Unfortunately for bean bulls, what the market gave it swiftly took away as soybean futures plummeted in the spring and summer of 2004. The velocity of the crash was overwhelming: from a late March 2004 peak north of $10.62, soybean futures fell to $5.59 by mid-August. And it is in the wake of that crash that soybean futures--and those who would buy them--find themselves looking for reason to head higher once again.

True enough, soybeans have moved up since their lows during the fall of 2004, recently moving as high as $7.50 in June. And the trendline from the late 2004 lows remains largely--if not completely--intact. But beans have been under pressure since the second half of that month, losing a full dollar in a few weeks to find support around the $6.50 level. And part of that pressure has continued into late July, where September soybeans have closed four consecutive trading days below the aforementioned trendline.

Given the relative mildness of the trendline break, the most bearish sign in soybeans is the relative depth of its late June/early July MACD histogram. The low reading on this histogram represents a low for the entire life of the September soybean contract--it has never been lower. As such, it suggests strongly that the price lows accompanying that histogram extreme are vulnerable to being exceeded. The stochastic is very much "in gear" with price action, meaning that there is not yet the sort of positive divergence that would suggest the current, short-term downleg--which began in mid-July--has or is close to having reached a true bottom.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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Bye-Bye Beans?

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