Chart of the Day: Here’s How To Trade The Depressed Soybean Market

U.S. Soybeans Futures Monthly Chart

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The fallout from the escalation of the U.S.-China trade talks has pushed the price of to just a cent over $8 a bushel, the lowest since December 2008. However, China stopped buying U.S. soybeans when the trade war started, and has been turning to Brazil instead.

The Chinese are playing a discreet, sophisticated game, with a potentially long-term strategy. In halting purchases of U.S. soybeans, the second largest economy in the world is attacking President Donald Trump’s soft underbelly. The American heartland is where the farm belt is located — Trump’s base. In the meantime, markets across the world watch the trade negotiations anxiously and try to work out what may happen next.

Of course, it’s impossible to guarantee which way things will turn from here. But a technical analysis of the charts does give some idea of what may lie ahead.

U.S. Soybeans Futures Monthly Chart

Chart powered by TradingView

The price of U.S. soy beans completed a macro descending triangle, whose lower boundary started November 2015 and whose upper boundary started June 2016. The triangle’s significance is reinforced with the 100 month MA providing resistance above it and an extremely rare death cross, as the 50 month MA crossed below the 200 month MA amid the pattern’s development.

Moreover, the price just fell, albeit slightly and the monthly candle is not complete, below the secular uptrend line since the December 2001 bottom, at the $400 level. Are prices heading back there, halving in value?

While we can’t answer that definitively, risk is certainly to the downside. The RSI, above 36, is pointing sharply downward, potentially toward the September 2014 momentum indicator’s bottom.

The fact that the price at $8.01 is significantly lower than the $9.12 closing price at that September 2014 bottom, while the momentum, via the MACD, is at 36.20, is a good way above the 32 momentum of that same month, allowing sufficient elasticity for the price to keep falling before it reaches a macro oversold condition.

The weekly RSI is nearing the July 2016 bottom, while the price has already fallen below those levels of $8.19. And the daily RSI reached the extreme oversold level of 15.30, the lowest since June 20. Both the weekly and the daily RSI predicted the near 15% jump to the mid $9.30’s by February 2019.

Therefore, we caution investors to remain patient with any shorts, as we wait for the monthly descending triangle to complete on a monthly closing basis, along with an appropriate filter to avoid a macro bear trap. Also, we’d like for the oversold conditions to return at least to equilibrium, if not to less oversold conditions. Contrarian traders might even go long, counting on a sharp pullback.

Trading Strategies

Conservative traders should wait for the monthly descending channel to complete on a monthly-closing basis, with an appropriate filter that could be hard to gauge considering the vast amount of time covered. Since a conservative filter according to the daily chart calls for a three-day period in which the price remains – in this case – below the resistance, and since we are using a monthly chart here, we could employ an equivalent three-month filter, in which the price remains below the $8.44 level.

Moderate traders could wait for a three-week period for the price to remain below the $8.44 level, before entering a short trade.

Aggressive traders might enter a contrarian long position, counting on the overextended selloff. Any positive trade news would compound the pullback.

Trade Sample

  • Entry: $8.01
  • Stop-Loss: $7.99
  • Risk: $0.02
  • Target: $8.14, July and September lows might form a resistance
  • Reward: $0.13
  • Risk-Reward Ratio: 1:6

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