Technically Speaking

Another Look at the May July Bean Spread

Source: DTN ProphetX

Wednesday morning, before the release of USDA's April Supply and Demand report, I posted a blog discussing the trend in the May to July soybean futures spread. At the time, it was challenging its recent high of 26 1/2 cents (inverse), threatening a bullish breakout that would imply a tightening supply and demand situation.

Since Wednesday morning the spread has gained significant strength. So much so that it blew past its recent high and is now in position to test its all-time high of a 39 cent inverse established on September 4, 2012. Thursday's close was at 34 3/4 cents, only 1/4 cent off its session high.

Given that daily stochastics for the spread are fast approaching the overbought level of 80%. This could set up a situation where the spread is overbought just as it tests the previous high, setting the stage for a possible bearish reversal.

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There are at least two different schools of thought explaining the sharp rally in the spread. First, it is nothing more than rolling short May futures positions to the July, meaning the May is being bought back and the July sold as the May approaches delivery at the end of this month. Second, the strength of the spread reflects the market's idea that real supply and demand is far tighter than what USDA estimated in its April report with an ending stocks figure of 124 mb.

Those familiar with my analysis and this blog know I fall into the second camp. The reason being that in the case of soybeans, national average basis (the price relationship between the cash and futures markets) is much stronger than normal. Late Wednesday the DTN National Soybean Index (national average cash price) was only 4 cents under the close of the May futures contract. On average this week, the price difference has cash 56 cents under the futures contract. In fact, the strongest basis has been in mid-April for the last five years is 42 cents under. The fact basis is this strong confirms the idea that commercial traders are pushing the market to source supplies to meet demand.

The next hurdle for the spread is the high weekly close of 33 1/2 cents. If it settles above that mark on Friday, April 12 it would indicate a possible continued uptrend. On the other hand, a weekly close at or below this level creates a possible double-top formation meaning the uptrend is likely coming to an end.

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Commodity trading is very complicated and the risk of loss is substantial. The author does not engage in any commodity trading activity for his own account or for others. The information provided is general, and is NOT a substitute for your own independent business judgment or the advice of a registered Commodity Trading Adviser.

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