The soybean market has been under considerable pressure. The weakness started after a head-and-shoulders top developed on June 30, 2014. This classic reversal pattern was featured in my August 2014 column and I’ve also illustrated it in the accompanying chart.
What a difference a year makes! The daily soybean futures contracts are trading at new lows and the soybean market is $3 per bushel lower.
The November 2015 futures contract is entrenched in a downtrending channel. This is identified by lower highs and lower lows. When an emerging trend can be identified and followed to its conclusion, it translates into opportunity. The use of trendlines is a valuable tool for accomplishing this.
During a period of falling prices, a straight sloping path is determined by a line (A) drawn across the rally highs. In a declining market, for a trendline to be both valid and reliable, there should be at least three points of price contact, each of which coincides with the rally highs, and each topping out at a progressively lower level.
After a trend is established and a trendline constructed, a line (B) may be drawn that is parallel to the trendline depicting the corridor within which prices will fluctuate as the trend proceeds. This is called the trend channel and it is extremely helpful for studying the trend and determining market trading tactics.
In a downtrend, the channel’s upper boundary (A) is the downtrend line and it is constructed first. The lower boundary (B) is the return line, which is parallel and drawn across the lows of each progressively lower decline. This line is where reactions to the downtrend are most likely to develop, but it should not be considered support.
In a downtrend, the market will decline and then have an upward reaction to uncover overhead resistance. This process, once set in motion, develops a momentum which strengthens the trend and makes it persist.
Sell orders materialize as a new downtrend begins to emerge, but many are at a limit price above the market. Some of this selling is satisfied on price rallies, but a portion of it is not, so when prices again begin to move down, some of these sellers jump in for fear of missing the move. The balance of unfilled sell orders will continue to trail the market in hopes of catching a bounce in price, with most of these sellers gradually lowering their offers as the market declines.
Some profit taking and fresh buying emerges when prices drop, which significantly results in an increase of potential sellers because sold-out shorts do not merely take profits and walk away. Having realized gains, they seldom exercise much patience in waiting to re-enter the market. Their selling, as well as that of longs eager to take profits during price rallies, prevents remaining sell orders that are too far above the market from being satisfied.
There will come a point during a bear move when the decline begins to accelerate sharply. This is when much of the patience of those waiting for a big break will have worn thin, and an increase in selling hits the market at the prevailing price level.
After a period of downward movement, one must be on the alert for any subtle changes in this repetitive process as they will show up clearly on the price charts. Watch for price declines that begin to fall short of the channel’s lower boundary, as this is a clue that the existing price trend may be waning or at least getting ready to consolidate.
When the market finally does turn up, busting through the upper boundary of the downtrending channel, it will be because the selling has either been totally satisfied or the volume of buying simply overpowers what little selling remains.
Send your questions or comments about this article and chart to [email protected].