Todd's Take

Soybeans Hint at Support

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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Last week, November soybeans produced their 37th bullish outside weekly reversal since 2000. The previous 36 suggest this technical signal deserves respect (Source: DTN's ProphetX).

Just a couple of weeks ago, I wrote about how the trend in May soybeans turned lower on Feb. 23 and followed with a series of lower prices throughout the month of March, which coincided with Brazil's record crop estimates and USDA's record high U.S. planting estimate of 89.5 million acres.

If all that wasn't bearish enough, spot palm oil futures fell to a new five-month low last week with recent rains in southeastern Asia enhancing prospects for palm oil production in 2017. Falling palm oil prices are a bearish drag on soybean oil prices and also play a part in reducing crush incentive for soybeans.

So, there is little disagreement at this point that the fundamental outlook for soybeans looks bearish, and in spite of last week's technical bounce in prices, the five-week trend remains down. I have to say, however, if anything bothers me about the bearish scenario, it is that last week's technical bounce wasn't a typical rebound. On the weekly chart, last week's prices showed a bullish outside weekly reversal.

For those not impressed by technical mumbo jumbo -- and I encourage healthy skepticism -- a bullish outside weekly reversal (OWR) is defined as a week where prices trade both lower and higher than the previous week and close above the previous week's high. For November soybeans, OWRs have happened 58 times since 2000, or a little more than three times a year. Given last week's action, I thought it would be interesting to find out more about just how reliable that technical pattern has been.

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After counting and identifying 58 OWRs, the next challenge was to define success and failure. I decided a successful bullish reversal would show prices move obviously higher four weeks later without taking out the low of the reversing week. If prices did not move much in four weeks, a successful result could still occur if prices eventually went higher. But, under no circumstance could the low of the reversal be exceeded. I admit the definition is not scientifically tight, but it is good enough for practical purposes.

The results were especially interesting after I divided the reversals into bullish and bearish camps. Since 2000, there have been 37 bullish OWRs; 28 of them turned out profitably for a success rate of 76%. Not bad, as it would be difficult to find many indicators, either technical or fundamental, that could boast a 76% success rate.

The results were not as impressive for bearish reversals. Of the 21 bearish OWRs, only seven followed through lower for a success rate of 33%. It was not the first time market tops proved more difficult to identify than bottoms, and I suspect the increase in emotions that goes with rising prices is largely to blame.

Since last week's bullish OWR also happened near soybeans' lowest prices in a year, I decided to go back and check similar occurrences. Again, the results split along bullish and bearish lines. In the 11 times since 2000 that November soybean prices showed a bullish OWR near a one-year low, nine of them turned out to be profitable bullish signals. Conversely, seven of the eight bearish OWRs near one-year highs saw prices keep trading higher.

In the current situation for November soybeans, I have to say the weight of the evidence still tilts bearish. It is difficult to imagine a bullish scenario this year without help from adverse weather.

However, we need to consider to all market clues, and I have to admit, last week's bullish reversal at the least may have staked out early support until we know more about this year's U.S. crop. It also helps that Friday's CFTC data showed commercials net long 64,173 contracts in soybeans as of April 11, the most since February 2016. Among grain and oilseed prices, soybeans continue to be the most interesting and challenging to track in 2017.

Todd Hultman can be reached at Todd.Hultman@dtn.com

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Todd Hultman