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The Triangle Breakout in Beans

05/02/03 08:07:43 AM
by David Penn

Now that they've broken out, how far will they move up?

Security:   @S
Position:   N/A

Back in February, I suggested that while wheat and corn were in an agonizing bottoming process, soybeans were not only ascendant, but also appeared to be on the verge of breaking free from a consolidation that had taken on the form of an ascending triangle. Most evident on a weekly chart of continuous futures, soybeans have been trending upward since the beginning of 2002 when they were priced at about 401. Peaking in August at 598, soybeans then slipped into a consolidation range that lasted from the late summer of 2002 until April 2003, when they broke out of the consolidation in fairly dramatic fashion.

The August 2002-April 2003 consolidation, as I mentioned, took on the form of an ascending triangle, with its horizontal resistance at the top and an upwardly sloping support trendline below. On the charts of some contract months, particularly daily charts of contracts such as July, soybeans appear to have made a premature breakout in late February. But the longer-term view shows a clear break from the triangle consolidation before prices reach the convergence point of the horizontal and upwardly sloping trendlines.

Figure 1: Post-breakout, soybeans struggle to maintain higher ground.
Graphic provided by: TradeStation.
 
The measurement rule for ascending triangles subtracts the value from the lowest point in the formation from the value at the horizontal resistance line, and then adds that amount to the value at resistance. In the case of soybean continuous futures shown here, a formation size of about 69 added to a resistance level of about 589 gives a minimum ascending triangle breakout upside target of about 658, some 36 points from soybeans' current levels.

However, there could be even more upside in store for soybeans, particularly if a Fibonacci projection from soybeans first leg up is taken into account. In this instance, I am applying an Elliott wave count to soybean futures that looks as follows:




Using the methods described by Robert Fischer (see his book "Fibonacci Applications and Strategies for Traders" or my Traders.com Advantage piece, "Fibonacci and Fifth Waves," February 11, 2003), a wave 5 peak can be projected somewhere around 720. This projection is based on an average of the two projections provided by waves 1 and 3. In short, by multiplying the length of wave 1 times 1.618 and adding that number to the value at the top of wave 1, we get one projection of a wave 5 peak. To get another projection of a possible wave 5 peak, I multiply the length of wave 3 times 0.618 and add that number to the value at the top of wave 3. The two projections are 718.26 and 722.68, respectively, thus pointing to likely follow-through to the upside in soybeans over the coming months.



David Penn

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

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Date: 05/06/03Rank: 4Comment: 
Date: 05/13/03Rank: 4Comment: nice followup
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