Technically Speaking

Blame it on too much eggnog the last couple of weeks, but it seems I misread the daily chart for the March soybean contract. If you were to take a quick look at the chart, you would likely jump to the same conclusion that the minor (short-term) trend is down. Like me though, you would be incorrect. For what looks like a downtrend actually isn't, since none of the key technical factors I look for indicating a change in trend has occurred was established.

Those familiar with this blog know that one of the few technical patterns I look for is key reversals, both bullish and bearish. In other words, a contract needs to move to a new high before falling back below the previous timeframe's (daily, weekly, monthly) low before closing lower to establish a key bearish reversal. This usually signals the contract/market has moved into a downtrend. Just the opposite for a bullish key reversal (new low, a move above the previous period's high, higher close) indicating the start of an uptrend.

The importance I place on this particular technical signal varies by chart I'm looking at. For instance, a key reversal posted on a long-term monthly chart carries a great deal of weight. A working example remains the soybean market, where a bullish key reversal was established in August 2013. The market has not seen a huge follow-through on this bullish signal, consolidating within that month's range to close out the year.

A key reversal on the secondary (intermediate-term) weekly chart is important, but not as much as one established on the long-term monthly chart. One of the reasons soybeans have sagged of late is that the March contract posted a bearish key reversal the week of December 22, leading to a secondary downtrend. With this pattern now in effect the contract could look to test secondary support between $12.86 1/4 and $12.68 1/2.

Last but not least is the minor (short-term) daily chart. Given the higher volatility of grain markets the last number of years, and the seasonal drawdown in trade volume, key reversals can show up on a chart like pimples on a teenager. They don't carry much weight and are easily trumped by patterns on both the weekly and monthly charts.

The other technical indicator I look at is crossovers by stochastics. A bullish crossover by this momentum study is when the faster moving line crosses above the slower moving line below the oversold level of 20%, indicating momentum (and likely the trend) has turned up. Conversely, if the faster moving line crosses below the slower moving line with both above the overbought level of 80% a bearish crossover has been established. Again, the longer-term the chart, the more weight this signal is given. Comparing the three charts in soybeans (monthly, weekly, daily) we see that monthly stochastics posted a bullish crossover in August, confirming the bullish key reversal on the price chart. The weekly chart for March soybeans shows stochastics stuck in neutral, in step with the sideways trading pattern the contract has seen for weeks.

But it is the daily chart that threw me a curve ball as I came out of holiday hibernation this week. Without giving it a close study, it looked to me like March soybeans' daily stochastics had established a bearish crossover sometime between late-November and mid-December. In reality though, each of the crossovers that looked suspect occurred below the overbought level of 80%. Instead of indicating the contract has moved into a downtrend, by definition it is only in a sideways trend.

Given that the end result is the contract continues to move lower, the discussion of what to call the trend may be nothing more than a lesson in semantics. However, I do think that because the contract appears to be in a sideways trend on both the daily and weekly charts (and some could argue the monthly chart), March soybeans could soon find support near $12.86 1/4. This price marks the 50% retracement level of the previous uptrend from the low of $12.33 1/4 through the high of $13.39 1/4.

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