From the Desk of Tom Bruni
Commodity strength has been a clear theme over the intermediate term, with the energy complex and base metals doing a majority of the heavy lifting in helping the CRB Index break out of its 2+ year range. The 41% of the index made up of Agricultural commodities has seen mixed performance, with Cotton and Cocoa leading and Sugar and Coffee struggling to put in any sort of meaningful bottom. However, there has been some improvement in the action in Soybeans and Soybean Meal, as well as Corn and Wheat which should support the CRB Index in moving higher. With that being said, this post is going to focus on the three Soy related commodities.
First off, not all Soy products are created equal as indicated below by the 15 year weekly chart of Soybean Oil. The downward sloping 200-week moving average and lower highs and lower lows indicate that prices are in a downtrend. Additionally, prices are about to test a key long-term support level near 29.50 again after breaking down below it for a short period in late 2015. Additionally, momentum could not hit overbought conditions during this 2 year counter-trend rally. All signs point to sellers being in control of this market and a break of 29.50 would suggest a retest of the 2015 lows near 26. If we’re playing the commodity theme on the long side, Soybean Oil is not where we want to be.
Soybean Meal on the other hand is the clear out-performer as of late, and the 3.5 year chart of Soybean Meal relative to Soybeans shown below suggests that should continue. As we can see, this ratio’s formed a massive base and prices are now attempting to break out above the top of that range. Momentum remains in a bullish range and the 200-day moving average is rising, suggesting buyers remain in control of this market. If the ratio gets decisively above 0.38, there’s a confluence of resistance near 0.45 that prices are likely to be drawn to. Not only is that level the 2004 and 2014 highs, but it’s also the 161.8% extension of the massive base this ratio has formed.
On an absolute basis, the risk is equally well defined. Prices are testing prior support turned resistance at the top of their 3.5 year base with support from a rising 200-day moving average and momentum in a bullish range. If prices can get decisively above 400, the next levels of resistance are at the 2016 highs near 420 and the 2014 highs and 161.8% extension of this 3.5 year base near 500. We know Soybean Meal has been the out-performer of this group and the risk looks as well defined on an absolute basis as it does on a relative basis. One risk that’s worth mentioning is the fact that the smart-money commercial hedgers have their largest net short position in history which suggests some caution is warranted despite the possibility of continued out-performance.
Lastly we’re looking at a 5.5 year daily chart of Soybeans. Prices have been in a long-term downtrend since peaking in late 2012, but have been consolidating in a relatively tight range since 2014 with both a failed breakdown and breakout attempt over the years. Prices are now back at the top of the range and are supported by a rising 200-day moving average and momentum in a bullish range.
With the strength we’re seeing in Soybean Meal, I think the higher probability outcome is a breakout above this confluence of resistance and a swift move toward the 2016 highs and 38.2% retracement of the entire 2012-2016 decline near 1200. If prices can close decisively above 1070, we want to be buying Soybeans. The risk is very well-defined and the breakout from this multi-year base would likely be the start of a new intermediate and long-term uptrend. It’s also important to note that commercial hedgers are net short Soybeans as well, but not nearly as much as they were in 2012 or 2016 when we last saw significant spikes in prices.
The Bottom Line: The breakout in the CRB Index suggests we’re likely to see continued strength in commodities. Energy and base metals have been driving the index higher, but evidence is suggesting that several Agricultural commodities that have been range-bound for many years are beginning to participate and may be starting new intermediate or long-term uptrends.
Soybean Oil is the clear under-performer and Soybean Meal is the clear out-performer of the three Soy commodities. The risk in both Soybean Meal and Soybeans on an absolute basis is very well-defined and both offer asymmetrical risk/reward opportunities on the long side if/when they break above the levels discussed above.
Whether you trade these commodities directly or use these data points to inform your decision making process, the weight of the evidence continues to suggest higher commodity prices are ahead.