Wednesday Evening 11 May 2011
One of the better ways to approach a trade is to look for a set-up,
one that may offer a higher degree of reliability in obtaining a
positive outcome. Soybeans may be such a situation, and here is
why. It was the weekly chart which caught our attention.
Anytime there is a trading range, price is in a process of
preparation to move. When, is not always certain, but there can be
some important clues along the way. What is most obvious about
the range that began on the last half of December 2010 to present
is that it takes place well above 50% of the 2010 lows to 2011 highs.
Anytime a correction can stay above a half-way retracement, it is an
indication of strength. The trading range "correction" or "resting
spell" is only about 25%, showing a lot of strength.
The weekly chart is a larger time frame than most traders consider.
The larger the time frame, the more reliable the information, for it
takes a lot more time and effort to educe change. By looking at the
internal character of the trading range, we can learn more if it is one
of accumulation to go higher, or one of distribution to go lower.
What stands out are the large range bars that penetrated below
1300, twice, but managed to close on the top of the range. What
the market is telling us is when sellers push price lower, buyers step
up and drives price back up near the highs. Logic says that only a
superior force of buying could overcome a weaker selling effort to
make that happen. The gathering of information and a story has
The most important information is the strength of the range staying
so high, so we would expect to see the character of the range be
positive. Five weeks ago, price closed low but there was no more
downside. Then, last week, second bar from the end was a wide
range down with a poor close. That typically shows weakness.
When a larger time frame can hold a market this well, we want to
then look at the lower time frames to find a potential trade.
In mid-March, price broke and closed under 1300. Breaking of
support invites new selling, especially from commodity funds, in
addition to weak-handed sellers, those getting stopped out of longs
and new shorts. Now, they are trapped and will have to pay up to
get out. Of concern is the area noted, the poor close from the
weekly chart, and now how price is holding near support on the daily.
What barely shows on the chart is the small lower low, 4th bar from
the end, with a close that held above support. It may be too soon to
know for certain, but we know for a fact that when price made a lower
low that day, it did not find any stops or additional selling to take it lower.
Next is an intra day chart. Let's see exactly how "poor" the weekly
bar really was, if at all.
We are using a 20 minute time frame to show each day. The lows
of the week occurred on the 5th and 6th. The highest volume in
months, the first high bar and the two more that followed were at
the lows. As we often say, smart money sells high and buys low.
Logically, smart money is not going to be selling 80 cents lower
when it could have been selling at the $14 level, so they must
have been buying. Who was selling? Weak hands, a transfer
of risk from weak hands to strong as strong buyers continue to
absorb all that sellers offer.
Next day, price made two probes lower but found no more stops
and no additional selling. Selling is drying up, after five months
of in a trading range. It certainly looks like accumulation, as just
described. The further along price moves on the right hand of the
developing trading range, the closer it comes to reaching a resolve.
Is price ready to move out? We do not know. What we do know
from the factual observations is that beans are likely being
accumulated , to eventually undergo mark-up, so we want to look
for opportunities to buy. 1308 to 1330 is a support area.
After a grain report, price opened sharply lower. The first 60 minute
range was the second highest volume, and the range was upper end.
[Not shown due to 20 minute chart, but results same]. Once we
observe buyers again coming in when price nears support, it is worth
going long, so an order to buy at 1321 was entered, looking to buy a
break after the initial rally. The chart below shows what we saw, early
in the developing day's activity.
This chart shows the purchase was in an area of support, and if it
held, a higher swing high would tell us buyers are eager to buy what
they can at available prices. By the end of the day, price rallied to
close on the high and ABOVE all the "selling" volume earlier in the
day. Once again, weak hands were selling, and strong hands were
buying, showing the same kind ability to absorb all that is being sold
and have enough buying power and interest to take price still higher.
There was a perceived opportunity, and we acted, based on the
facts and logic applied to them. There are never any guarantees,
but odds favor a favorable outcome, and the risk factor is reasonable.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.