Soybeans Look Poised to Continue Runup

Soybean Futures

Technical analyst Andrew Addison tends to look far back into the past for his analyses, which can be pretty wayward, but his bullish view of soybeans looks solid.

Andrew Addison of The Institutional View is an interesting sort, a technical analyst who has a particular preoccupation with long-term charts. He certainly takes a lot wider perspective than those who study commodity markets do, like the 25-year soybean charts that he’s now showing us to help form his bullish view of soybeans in 2021.

Hardly anyone looks at futures contracts over 25 years or anything remotely close to this, as the great majority of the contracts themselves only run for 3 months, but you can also get charts that use continuous contracts and display data over time like something that does trade continuously like stocks allow us to chart.

Futures traders rarely pay much attention to continuous contract charts, but those who are looking to position trade these contracts, holding them in the way that Addison is suggesting, into 2021, definitely need to be looking at continuous contracts, because otherwise they won’t even be able to gain any meaningful perspective. You can see the trend within the contract by looking at a chart of the particular contract that you are trading, but you won’t be able to even see the longer trends that you are looking to trade.

While it does not make sense to invest in commodities over the longer-term like people do with stocks, commodities do move in ways that can be captured by using a strategy we call position trading, staying in a position for months or even a couple of years if the trend warrants it. What separates position traders from investors is that position traders only stick around for the good times, and don’t want to be in positions that are running against them on the scale they use, where the trend that they are riding reverses.

Soybeans have been on a nice trend since April, where its price has been rising ever since, to the tune of 13% so far. Soybeans bounced off a longer-term support level, which Addison points out, and this is the sort of thing that you do need a longer-term chart to even see.

We also want to add to Addison’s analysis that soybeans have also just broke though a resistance level that it spent all last year trying to get past, with 3 failed attempts, and this fourth attempt last month finally made it above this level and this move is continuing.

No one that does not have a crystal ball can ever capture the full amount of any move, but with this support level being bounced off in April and the commodity moving back up in May would be enough reason for a trader like this to feel comfortable enough to jump on. While you can’t use anywhere near as much leverage in these longer-term futures trades, the nominal 10% that these traders could have taken out of this move so far can be multiplied a few times anyway, where this now becomes 30% instead of just 10%.

The reason why we would not ever want to leverage a trade like this any more than three times is that we need to set a lot looser stops, because we don’t want every zig and zag getting us out of the trade. If we want to do that, we need to trade it on an appropriately short time frame, and the more our leverage, the tighter our stops need to be, because a certain magnitude against us gets magnified by the leverage we use.

There’s a reason why ETFs only go to three times leverage, as these are designed to be held for a while and the fund itself has to hang with it regardless, and does not want to go broke. Some leveraged ETFs do go under, especially the ones on the short side which can see the bulls take them out. If you are leveraged three times and you go through a 33% move against you, you are sunk.

You can trade soybeans straight up with the Teucrium Soybean ETF (SOYB), but this is far too tame for anyone to ever want to hold. Even when this rallies like it has over the last few months, unless you are really good, the opportunity here is just too muted, and if you are good, you will want to trade this with leverage.

An ETF like this can provide someone with some real practice on position trading soybeans though, and even though you can do this on a simulator, you can’t simulate the pressure of real money. The usual rule of needing to prove that you have a trading advantage before you ever want to leverage it applies to commodities such as soybeans as well, and particularly so since this commodities other than stock indexes have no real upward bias and how you do with these trades comes down to purely a matter of skill.

This is the part that casual traders of commodities don’t fully understand, thinking that these things are like stocks, where you just have to join the party and get all these gifts bestowed upon you over time. It’s not like that at all with commodities and they are a lot like a bucking bronco than a horse that you ride around a track and look to hang on. Even if you get thrown off such a horse, you’ve made it quite a ways around the track, but with bronco riding, only the skilled cowboys can ride these for money and those without skills will get dirt in their face too often to make this a worthwhile venture for them.

This does not mean that budding cowboys should not be looking to hone their skills and get good enough at this game to do comparatively well, but the most important thing to realize is that comparatively well means how they could do riding the tamer horses, provided that the track is dry and the horses are willing to run.

It’s the Current Move That Has Soybeans Bullish, Not Because of Moves from the Past

Addison uses monthly bars in his charts, which is way too long really other than to take a very high level look at a commodity like soybeans, although whether or not a resistance line in 1996 becoming a support line 24 years later is quite a stretch. It sure looks like this played out on the chart, after the fact that is, but soybean traders simply do not look at or care about charts this wide, as these commodities are significantly influenced by fundamentals, and whatever they were in 1996 is completely different than what is going on today and it’s only the current fundamentals that are ever relevant.

Unlike stocks, soybeans and other soft commodities are mostly traded as a hedge, with speculators just along for the ride the same way as a fly might ride on a cow. We then look to see how the cow may be expected to move, in what direction and for how far, and then decide whether to ride it for a bit.

Trading this shorter term, we don’t need to know or care what these fundamentals might be, the supply and demand for the asset itself, in this case the soybean market. The futures market with soybeans involves speculating on the future value of soybeans themselves, where with stocks, we’re just dealing with the future value of the stock itself which does not get the monthly reality check that soybeans do, where these contracts collapse at the current spot price of the commodity.

When investing in stocks, we don’t even have to worry about fundamentals even if we are investing fairly long term, as we can just trade the price action on a longer-term scale, where if we’re looking to ride an upward move, we set our charts to keep us in as these longer-term upward waves continue, and look to jump off when they start to fail.

We can do the same thing with soybeans using these longer bars, such as the weekly bars that we are looking at soybeans with in this article, a bar length that would have been sufficient enough to keep us in soybeans since it really started to break out and still keep us in this move as it continues to materialize. Using daily bars over this time would have us being whipsawed too much, in and out of this move too many times and requiring greater levels of skill to time these entries and exits, and not in a way that traders would find all that suitable.

With weekly bars though, we can look to ride not technical changes in the market but longer-term trends in the soybean market itself, where demand for soybeans has been increasing over the last 5 months and may continue. This is not due to increasing demand by speculators, it is more demand for the asset itself, improving fundamentals in other words, but these changing fundamentals can be tracked on a chart as well, with this weekly bar chart of soybeans for instance.

If we are trying to trade trends in fundamentals, we should also be paying attention to the soybean market itself though, and in this case, the indications are that demand for soybeans will continue to rise, at least according to Addison. He points to things such as the dry weather in the U.S. Midwest, the increasing demand for China, and the reduced exports from Brazil as reasons he thinks that fundamental demand for soybeans will continue to strengthen. This looks reasonable enough.

Trading Soybeans Does Require Real Skill

Looking at this with monthly bars as Addison does is still a good idea even though we should never want to trade soybeans on a chart like this, because the trends simply are not that long generally and this can have us spotting trends from a higher altitude, like the 5 year consolidation pattern that Addison points out.

He is hoping for a breakout, but we can’t really say too much about this other than to be pointed to this move staying within this range for 5 years and this is a limiting rather than enabling factor, where the odds of continuing to stay in the range may serve to give us pause, rather than our getting too excited about a breakout before it happens or even before the market shows us that it is ready.

When you are in a range, you need to calculate how much room there is to the top of the range first before you get too excited about it breaking out, and soybeans still have 9% to go before we get to the top of this range. We do need to be aware that we are comparing two different situations here, as the market for soybeans in 2016 and the market for it in 2020 are completely different things, and this is not something that the market participants in soybean futures trade on very much, as the soybean market itself trades based upon the supply and demand for soybeans in 2020 and what this market may have looked like in 2016 just isn’t pertinent.

With stocks, the increasing demand for a stock by speculators can drive it through past resistance points, when traders choose to no longer resist this price and go through it. With soybeans, the price may be limited by waning demand after a certain run up period, where the opportunity for commodity prices going up much more becomes limited.

Using past benchmarks like Addison seeks to do just isn’t a relevant enough approach to work very well, and that’s the case generally when tracking assets but much more so with commodities that are driven primarily by market fundamentals and not market speculation. This does not mean that we cannot use technical analysis to guide us with these commodities, but we need to confine ourselves to measuring changes in these fundamental markets, seeking out what the current trend is and then deciding whether or not it has enough momentum behind it to ride this cow for a while.

It’s not the breakout over resistance that is noteworthy about the recent move up in soybeans futures, it is the move itself that matters, the fact that we have built some momentum and the fundamentals suggest that there may be more in store for us.

Trading commodities, either on the futures market or by way of an unleveraged ETF, does require that we have a plan to manage the risk of the trade, and trading with weekly bars does require that we give this trade a fair bit of room, of the sort that would have kept us in this trade since May but gets us out when the party is winding down.

Something as simple as a standard MACD indicator works well enough for this market, where it turned negative in January, provided a gain of about 10% as it dropped, reversed in May, and has given us another 10% on the upside so far. If we are on this ride or want to jump on it now, we’re looking for the MACD to stay positive, otherwise it is time to go.

Addison’s call to soybeans is actually a pretty decent one at this point in time, although it would have been better for him to share this with people a few months ago, earlier in the move. His fascination with the past and his worrying about support and resistance levels of past contracts and ones well past has served to get him to this party late, but perhaps not too late.

We never need to worry much about being late to a party as long as we stay close to the door, so we can be among the first out the door when the music stops. Soybeans are still playing a nice tune but we can’t say too much about where it will be in 2021. With commodities like this, we always need to update our analysis on the fly, and be ready to act as situations change and our predictions become subject to more verification.

This is just one of several ways to trade soybeans, and we like the idea of pointing investors who don’t do this for a living and are far away from those who do in terms of skill towards these position trading type trades, but needing less skill doesn’t mean you don’t need any, that you can just take a view of the market at one point in time and assume we’re right, and not act when the evidence turns against us.

Trading soybeans on a shorter term timeframe than this takes a lot of effort, attention, and skill, and all investors need to do is to view the chart of the continuous contract for soybeans on a daily chart to see how many trades they would have to engage in to play all the ups and downs that we run into on this scale.

This is not to say that people don’t make a lot of money trading this on daily bars, or even bars of a shorter duration such as the hourly or 15 min, but there’s nothing more important than staying within our abilities. If you are not confident about trading daily bars, if you haven’t shown that you can do this with real trades and not just looking back and thinking you could have done this if you could go back in time, you are not ready to do this with a meaningful amount of money.

Commodity ETFs do provide a great way to practice this though, where we can keep our risk very low by only trading very small positions until we get our bearings enough, and then look to gradually ramp up our size as we gain more experience and confidence. Trading this with a futures contract requires us to commit much larger amounts to meet the trading minimums, and this is only a place that we should go if we have both the skill and the funds to manage the greater risks that this trading involves as we shoot for bigger potential profits by using leverage.

It’s not that looking back upon the distant past has soybeans looking bullish, as these things really don’t matter at the level of position trading, the longest timeframe it ever makes sense to trade soybeans on, and these things really don’t matter to the soybean market itself, who only care about what is going on right now. If we can limit our concerns to that as well, we’ll at least be looking at what matters.

Eric Baker

Editor, MarketReview.com

Eric has a deep understanding of what moves prices and how we can predict them to take advantage. He also understands why so many traders fail and how they may help themselves.

Contact Eric: eric@marketreview.com

Areas of interest: News & updates from the Commodity Futures Trading Commission, Banking, Futures, Derivatives & more.