Keeping with our CRB theme--Monthly Soybean Oil is
in a bottoming zone
geocities.com
this will take time to turn around.
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SOYBEAN OIL: Closing In On A Cycle
Low
James Nason, New York
In July 1999, soybean oil prices traded down to 14.66¢ and thus
reached the top end of what has been an important historical price
band. The dashed lines on the monthly chart (page, 2) show a pivotal
area between 12.95¢ and 15.00¢. In the 40 years of history shown,
cyclical highs prior to the 1973-74 super-bull market were mostly in
that zone. Subsequently, the 1975 and 1986 cyclical lows also fell in
that area. Therefore, purely from a price standpoint, the cyclical
decline from 1994's high has reached a potential bottoming range.
The monthly chart stochastic indicator is currently declining, but well
above its 1999 low. If prices move below 15.06¢, basis a monthly close, as we consider below, that momentum
indicator will almost surely display a bullish divergence. For trading purposes, such divergences lack the
significance of those on daily and weekly charts. Nonetheless, a bullish monthly divergence later this year or in
early 2001 would mimic behavior that occurred in bottom areas of 1967-68, 1991-92 and 1996-97.
The weekly chart (page 3, top) shows an annotated decline from the 1994 high. Four waves are shown in an
anticipated five-wave move. Ongoing April-July weakness represents the fifth wave. Depending upon
interpretation, the entire decline may or may not be a terminal wave in a larger sequence that began in 1988.
We do not consider that subject to be pertinent here, but there are price and time relationships that we want
to consider. The price distance covered in wave 1 was 957 points, while that in wave 3 was 1,480 points.
This is a ratio of 1.5. We do not expect a potential #5 wave to show equality with wave 1, but we think that
it could approximate a Fibonacci-related 61.8%. In that case, a fifth wave low would be 12.79¢. If wave 5
approximated 38.2% of wave 3, it would reach 13.05¢. Those levels bracket 12.95¢, the extreme low of the
long-term pivot range mentioned above.
In the context of time, wave 1 is large relative to all subsequent swings. It is about 2.66 times that of wave 3,
or, if the relationship is inverted, approximately a Fibonacci 38%. Waves 2 and 4 are approximately equal. If
2
we relate the time in wave 1 to the total time in waves 2, 3, 4 and a potentially developing wave 5, then the
sum of the time in waves 2 through 5 would equal wave 1 in October 2000. Interestingly, that coincides with
the market's seasonal tendency in the 1990s (shown in the Seasonal Analysis on page 7), where a preliminary
low occurs in July and is followed by a primary low in October.
Another point to consider is the position of the weekly stochastic indicator. Although it has yet to show a
flattening tendency, its values are below 12 and at a level that usually results in, at least, an interim price low/
rally attempt. Open interest at 135,000 contracts is below the all-time high of April 1998 (168,749), but, in
absolute terms, is high. Despite the substantial price washout since 1998, the open commitment has not
liquidated. Since a significant speculative net position does not exist, we interpret the large total open interest
number to mean that commercial interests have established a huge hedge position. Further, we think that, if
the position begins to unwind, it will have a positive, or higher, impact on prices.
In summary, when considering the absolute level of soybean oil prices, the position of intermediate- and long-term
momentum indicators, various price and time relationships and the makeup of the open commitment, we
conclude that a major price low is pending. A worst-case scenario would have it occur in a fourth-quarter
washout that features the nearby futures trading into the 13.05-12.79¢ area. A best case alternative would
be what wave analysts term a "failure," where the illustrated weekly chart wave 5 terminates above 14.66¢.
Reality could be somewhere in between. We are buy oriented toward soybean oil long term, but think the
market should be given latitude on the downside. We would like to see the December soybean oil prices
below 15¢, more than 1¢ below current levels, before attempting the long side. However, if the nearby
futures were to trade below 14.66¢ and the December futures were to settle at 17.06¢ (dashed line on the
daily chart at bottom of page 3), then we would consider that a signal to attempt long positions.
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I love the type of momentum divergences that we have been getting for the past several weeks as we have grinded lower in the bean oil. this can be seen on the 1 yr daily
dec soybean oil chart (boz0)
geocities.com
you can see how we are breaking the blue downtrend line, and are in a descending
wedge (in red) those are the types of formations where we have lower lows in
price and higher lows in the MACD and RSI.
the dec bean oil could have a rally all the way to the 1750 area based on a
retracement of the descending wedge, especially considering how we
are in the zone on the monthly chart were longer term bottoms are put in.
one additional item, the seasonal tendencies support a rally
phase into late aug but we could see one more wash out low
into late sept or early oct.
geocities.com
John |
