March 4, 2004
 
 
Technicals Suggest Soybean Bulls Are Tiring

Tuesday's explosive move in the Chicago Board of Trade May soybean contract flashed red flag warning signals on the technical charts. The rally to a new contract high at $9.76 a bushel early was followed by a collapse to a sharply lower close, with a settlement near the day's lows. This all adds up to a classic textbook example of a "key reversal day."
 
A key reversal day often occurs at the end of a trend and signals a buying climax. Tuesday's potential reversal signal was strengthened by the fact that it was a very wide range day, leaving a large outside session on the daily chart. However, calling tops and bottoms is very dangerous business and traders are usually best served to go with the current trend, until proven otherwise. The very long-term trend for soybean futures is solidly bullish, as prices have been charging higher for months now, with a clear pattern of higher highs and higher lows seen on the daily chart.
 
But, from a technical perspective, the action early this week suggests the bulls are at a minimum tiring for the short-term.
 
"We do have a reversal day on the daily chart," said Paul Hare, executive vice president at the Linn Group in Chicago. "For the moment, it indicates a short-term high, but doesn't confirm a top." The action on Tuesday suggests to Hare that the market is shifting into a short-term corrective mode, with potential to test the $9.00 area.
 
More substantial losses in the days ahead would be needed to confirm that an important top had actually been etched on the daily charts.
 
Another analyst, Peter DeSario, senior commodity analyst at Elliott Wave International, also agreed that a potential turning point is possible. Looking at the daily May chart, he said, "one could make a case that a very important high has been set on the chart." He said Tuesday's high could have marked the end of a major five-wave rally move up from the 2003 low. Elliott wave theory says that trends move in five waves. Waves one, three and five move with the trend, while waves two and four are corrective.
 
What's it going to take to confirm that Tuesday's high was more than just a short-term temporary high and perhaps the start of a more substantial corrective move on the downside?
 
The Linn Group's Hare pointed to a gap on the May soybean chart from Feb. 20-23 at $8.96-$8.92. The May soybean contract would need to close beneath that gap to confirm that a short-term top had been confirmed on the daily chart.
 
After consolidating for much of the morning, May soybeans have edged below Tuesday's low at $9.26. A settlement below Tuesday's low on Wednesday would be considered a negative technical factor and would be additional "confirmation" that Tuesday's peak marked a short-term high for the market.
 
For now, traders can also keep an eye on the 10-day moving average at $9.19. If the May contract pushed below that minor moving average, Linn said "the selling pressure should pick up." Below there, $9.00 will offer key psychological and technical support, with the all-important gap to $8.92 below there.
 
Looking at the momentum picture, a bearish crossover has formed on daily slow stochastics and a weaker close Wednesday would most likely tug that indicator lower from overbought territory, another negative technical sign. That would add to downside selling momentum over the near term. The daily 9- day relative strength index has already turned lower from above 80.00, which is considered to be a negative signal.
 
The weekly momentum picture reveals a potential bearish divergence. While the soybean futures hit a new high this week, weekly stochastics have not reached a new momentum high, a potentially worrisome sign for the bulls. Those tools would need to turn lower from their current overbought reading, in order to "confirm" that potential bearish divergence.
 
A gap on the weekly continuation chart for soybeans is also evident from Feb. 20-27. If prices do indeed follow-through to the downside, that could be considered an "exhaustion" gap off the sharp rally in prices seen since August 2003.
 
DeSario will also be watching action in the products closely in the days ahead, for clues to the technical health of the May soybean market. He highlighted the 30.19 cent-per-pound level as the line in the sand for May soyoil. "If it goes below that, the chances are we've seen a major top." Looking at the May soymeal chart, he highlighted the $255.00-a-short-ton level as critical. "If we take out those numbers, we'll forget about seeing another high in the beans."