Soybeans Set To Test Highs - And Fail

Includes: SOYB
by: COT Signals

Soybeans have been historically strong following the April USDA Crop Production and Supply and Demand reports.

Speculators are the most bullish they've been since July of 2016.

Commercial selling, overhead resistance and global supplies will conspire to cap prices under $11.25 per bushel.

Our seasonal analysis is currently pointing towards a strong period for soybeans, lasting through the end of the month. Typically, the April USDA reports provide the catalyst. Both USDA Crop production and the Supply and Demand reports will be released Tuesday at noon EST. While I think the model described below will hold up, I think the bigger trade will be a long decline.

Notice the multi-year sideways action on the weekly soybean chart below. Most importantly, notice that the commercial traders have been massive sellers on this rally. This makes perfect sense as the commercial total position has grown commensurately with a crop that is being planted on more US acres than corn for the first time in 35 years. Finally, don't forget that we are the hedging market of choice for the world's soybean supply. Therefore, the commercial traders' analysis reflects their outlook on global supply and demand.

weekly soybean with commitment of traders positions Secondly, let's look at the change in basis over the last couple of weeks via the Kansas State AgManager interactive basis tool.

032218 soybean basis 040418 bean basis Clearly, there is little happening in the fields to justify anything other than the sideways action we've been trading for years. This is a great (free) tool for watching weather sentiment, by the way.

Now, let's move to the seasonally forecasted rally potential before it all craps out.

The Details:

May soybean futures margin – $1,705.

Risk – We’ll be using a dynamic stop set to twice the average true range. The six-month average for this calculation is $.35, or $1,750 per contract. The six-month range for this calculation has been $.16 – $1.00, or $800 – $5,000. The May soybean average true range is currently $.01325, or $662.5 per contract. Twice this value yields a current risk of $1,325 per contract.

Reward – The average return for this strategy is just under $1,800 for the three weeks we plan to hold the position. This is inclusive of wins/losses and $100 in slippage and commissions.

See the Tradestation report below for full out of sample performance.

Out of sample walk forward results for the eleven-year, dynamic model we

Out of sample walk forward results for the eleven-year, dynamic model we’ll be employing.

The equity curve is plotted below. Two things to notice. First, it wasn’t able to avoid taking a loss during soybeans’ decline in 2015. Secondly, the optimization windows are farther apart than we just saw with the British Pound. Usually, this means the soybean trade has been more consistent, historically. Therefore, the model is slower to adjust than the British pound model, which recalculated approximately one-third more frequently. Ultimately, model selection comes from finding the best performance balance within a repeatable range.

The soybean model recalculates less frequently due to the stability of its historical premise.

The soybean model recalculates less frequently due to the stability of its historical premise.

Finally, we’ll close with the Monte Carlo statistics. The results below are the composite results of 1,000 walk-forward runs based on a $100k account size. This provides a more representative sample of trade expectations. Once again, the drawdown/return metrics coupled with the expected winning percentage meets the edge necessary to put my dollars at risk. Remember, I developed this to trade my account as well.

*Past performance is no guarantee of future profits.

*Past performance is no guarantee of future profits.

Final Notes:

The soybean market was able to reverse higher on the Prospective Plantings report. This triggered a pattern-based rally and breakout higher of a bull flag formation. Ideally, we’ll get a brief pullback off the reactionary move higher before resuming the 2018 rally. Extrapolating the strategies’ move into the future, we expect May soybeans to eclipse the early March high at $10.825. However, we do not expect the rally to continue overall or for soybean prices to have a strong year barring weather concerns.

Disclosure: I am/we are long MAY SOYBEAN FUTURES. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.