So y b e a n prices have rallied $1.50 per bushel on speculative buying over the last two months. Cash prices in the Red River Valley have risen to $9.50 per bushel and this year’s crop is in relatively good condition.
The U. S. soybean crop is also in very good shape with the U. S. Department of Agriculture estimating U. S. farmers are on track to harvest a record 3.483 billion-bushel crop, based on a record yield of 44.7 bushels an acre.
As you can see in the accompanying chart, this is not the first time soybean prices on the November 2010 futures contract have challenged the $10.50 area. In fact, this market has been unable to push above this level of resistance, since prices first found support and attempted to exceed $10.50, 20 months ago.
SUPPORT AND RESISTANCE
Supportandresistanceare terms to describe a price level where the buying or selling of futures contracts is expected to at least temporarily halt the current direction of the market. On daily line charts, these areas will appear as well defined price ranges within the market. The greater the amount of time spent and the number of contracts bought and sold in this range, which is commonly referred to as acongestionarea, the greater will be the potential for these areas to offer support or resistance in the future.
Another characteristic which helps to gauge the relative support or resistance of a price area is the vertical distance the market must rise or fall prior to reaching the area in question. The greater the upward price move prior to reaching a resistance level, the greater the resistance will be. Conversely, the greater the market decline prior to reaching a support level, the greater the support should be at that area.
Prices will trade within the lines of support and resistance until the equilibrium shifts between buyers and sellers. Rallies tend to continue once prices decisively exceed a line of resistance because sellers are buying back their losing positions and new longs are entering the market.
Conversely, once prices definitively penetrate a line of support, the market usually declines, as buyers who are losing money, sell in order to cut their losses. Additional selling occurs, as new shorts enter the market.
Marketpsychology:Support and resistance areas evolve because equilibrium is reached between buyers and sellers. Trading in a horizontal congestion area, the market attracts buying around the bottom of the range and selling in the top portion.
This is important to know because it can help one formulate expectations of future price action. Examples of prices rallying into resistance appear at points A, B, and C. Examples of prices declining into areas of support, only to turn around and proceed higher appear at points 1, 2, 3, 4 and 5. Occurrences such as these are commonplace on futures charts, but are extremely important, as they illustrate where future rallies and declines are likely to fail. Support and resistance levels define the parameters of the major trend.
Successful farmers will often target areas of resistance to make incremental grain sales. For example, farmers who practice this discipline heeded the opportunity to lock in a portion of their 2010 soybean crop in December 2009 (B) and in September 2010 (C).
On the flipside, farmers with livestock operations can also benefit from this technique by securing their feed grain and meal needs when prices drop down to test a line of support. For example, this strategy alerted savvy livestock producers to secure their meal needs when soybean prices tested the line of support in early June 2010 (4).
Join me online at www.Ag-Chieve.ca/cooperator/for an audiovisual presentation about this article and chart.
– David Drozd is president and senior market analyst for
Winnipeg based Ag-Chieve Corp. The opinions expressed
are those of the writer and are solely intended to assist readers
with a better understanding of technical analysis in the
markets influencing agriculture. The information contained herein is deemed to be from
sources that are reliable, but its accuracy cannot be guaranteed. Visit us online at www.ag-chieve.ca/cooperator/for more grain marketing ideas
and educational tools, or call us toll free at 1-888-274-3138 for a free consultation.