Soybean Oil: Dead Cat Bounce or Resting Bull?

A little over one month ago I wrote about the potential end of the Soybean Oil bear market due to the price turn at the weekly 61.8% retrace (click here to re-read). Since that post, the higher volume futures contracts have bounced over 20% from their lows:

Daily charts of March, May, July, and December 2014 Soybean Oil Futures 

Generally, a 20+% movement would define the beginning of a bull market. In hindsight, it appears that enough large traders used the weekly 61.8% retrace to turn the trend. Of course, market economics such as grain and crush worldwide supply and demand should influence the futures price, but in the absence of such facts, traders will trade and we saw that Fibonacci ratios appear to be the methodology used by those traders large enough to change the daily/weekly trend.

What's done is done, so where does soybean oil go from here? Let's delve into some weekly statistics to get a sense of the "uniqueness" of this recent upward movement.

The week ending March 14, 2013 was the first down week since the January 2014 weekly low. This down week, was preceded by six positive weeks. 

• Since January 2001, there have been only four runs of seven or more positive weeks, with the maximum positive streak at nine weeks. 
• There have been four stretches of six positive weeks (including 2014's bounce).
• In total, since January 2001, there have been eight instances of six or more positive weeks in a row. 

So a move of this duration is unique and this bull market was due for a rest. Was last week that rest? In no instance did a run of 6+ up weeks define a meaningful swing high in price - in all instances the following weeks were defined by a period of market consolidation (both up and down weeks). In six of the seven previous streaks, price was higher 10 weeks later. To summarize, the upward pause is not unexpected.

Let's take a look at the daily, continuous Soybean Oil chart to attempt to explain the recent swing high:

Daily, Continuous Soybean Oil Futures

There are three price extremes marked by yellow ovals; two swing highs and one swing low. 

The green Fibonacci retrace shows the key prices on the return to the highest price set in the last three years, set on April 11, 2011. Price has not yet approached the lowest retrace (38.2%) so this swing range is not yet relevant.

The orange Fibonacci retrace shows the key prices on the return to the recent high set on September 4, 2012. You can see that last week's high was a 38.2% retrace from the swing high labelled as point 2. 38.2% retraces, if they hold, are considered momentum continuation. Since the trend from point 2 is down, you might expect prices to continue down.

Also on the chart is a grey horizontal box, that represents an area that support/resistance or supply/demand traders may consider appropriate for a short, the August 26, 2013 was a very visible swing high. 

Two different trading styles aligned at a very similar prices. Once again, this change in price direction/pause is not unexpected. Let's zoom into the daily continuous chart from August 2013 to today to analyze the Fibonacci patterns:

Daily, Continuous Soybean Oil Since August 2013

There are two meaningful price swings, one defined by the red Fibonacci tool and one defined by the purple Fibonacci tool. Depending upon which swing you select, the low at 36.80 is either a 161.8A "inverse head and shoulders pattern" or a 224A "V pattern." In both cases the target for "B" is marked on the chart, the recent swing high exceeds both these points so we can consider the high at 45.05 to be the "B" point for either structure. If the low is a 161A then we would expect price to retrace to the 38.2-61.8% area to set the C point at which point price will turn back up. If the low is a 224A then we would expect price to only go to the 38.2% price to set the C point and then turn back up.

One complexity with agricultural futures is that several different contracts trade simultaneously. The first chart in this post shows that March, May, June, and December 2014 contracts are trading and each set its swing low on the same day, but at a different price. The most recent two daily charts in this post used the "continuous" chart which represents the price of the front month. Since March was the front month for the low on January 31 and May the front month for the recent high, the continuous charts generate different C points than a chart using only the May contract. The following daily chart is the May 2014 Soybean Oil futures contract:

Daily, May 2014 Soybean Oil Since August 2013

There are meaningful differences on this May 2014 contract chart. First, the price of the X, Y, and A points differ so the low becomes a 261.8A "V pattern" or a 200A "inverse head & shoulders pattern." The difference in X, Y, and A generate different targets for B, C, and the pattern destination too. I have left off the destination, but for each pattern, the destination is the 161.8 - 224% extension of the XY leg.

Clearly, if price breaks 40.16 (the lowest C target) then the bull is dead and the recent high was the 38.2% momentum continuation. If the C area holds then be prepared for more upside in Soybean Oil.

Aside from the 38.2% retrace on the daily continuous and the duration of the bounce, were there any hints that price might stop where it did? Of course there were. Let's review the 60 minute May 2014 contract:

60 Minute, May 2014 Soybean Oil Contract

As you can see, there was a textbook 224A "V pattern" short on the sixty minute chart. This "smaller" time frame "A" short, aligned with the 38.2% retrace on the daily chart. Notice that the 78.6B, 50C and pattern destination were all achieved. Based on the daily chart, the 38.2C at 42.03 is a confluence price area. Only time will tell which way soybean oil will go. Some traders are long, some are short and many are on the sidelines. As for me ...

See the trade. Take the trade.

Why A Fibonacci Trader Bought ES At Today's Lows

The current bull market is one of the longest in the history of the US market. However, since late December 2013 the market has traded in a fairly narrow range, if you exclude the "dump" that occurred in the last week of January and first week of February 2014. This range is visible on the 240 minute chart of ESH14 (the current SP500 e-mini futures contract), the trading range has been between 1809.50 and 1856.75:

Since a trader has to trade to earn a paycheck in any market, the remainder of this post describes why a trader who uses Fibonacci ratios and patterns may have bought ESH14 (click for contract specifications) at this morning's lows (the yellow circle on the 240min chart), or several locations after. The following is a 30 minute chart where several visible swing points (see those yellow circles) are used to generate the prices of typical Fibonacci ratios that could serve as reversals:

What should be visible immediately is that 1832.3x is a price generated by two different swings at two different, typical Fibonacci ratios. Since ES futures trade in 0.25 point increments, you can round up or down, so 1832.25-1832.50 is the area of "confluence." As you can see, the candle that closed at 5:00a CT hit a low of 1832.75 (green box), which is close enough for me. Unfortunately, I was still asleep, so I needed to find a low risk entry into the trade. To find this entry, I opened smaller time frame charts, 987 and 144 ticks (987 and 144 are Fibonacci numbers, nothing magic about them, you would see a similar picture if you used 1000 and 250 ticks). The 144 tick chart is:

You can see price crossed the 50 period simple moving average (magenta line), the end points of that swing are labelled X and Y, the low at 1832.75 is one tick further than an exact 161.8A. This is a head and shoulders pattern where B will be between 78.6 and 112.8% (or more), C will range between 38.2 and 50% and the pattern will complete at the 161.8-224% extension of the XY swing. Those points are marked, the target of the 144 tick head and shoulders is in the yellow box. So, while missing the absolute low at 4:49am, a low risk C entry at a 50% retrace and equal in price to X (perfect for a head and shoulders) provided another entry at at 6:45am. Perhaps you still were not ready to trade or preferred to wait for the economic reports due at 8:30am CT, so the 987 tick chart provided another opportunity after the news:

The yellow box is the destination of the 144 tick chart, 161.8A pattern. Use the same idea on 987 tick chart as with the 144 tick chart. Find a swing across the 50MA, label the points XX and YY (these are different swings/prices than on 144 tick chart), then find that the low was also a 161.8 (more confluence). On the 987 tick chart, the points are labelled XX, YY, AA, BB, CC. Here too, a 50% CC was a potential trade opportunity at 8:53am and occurred after the 8:30am news releases. The destination of this 987 tick, 161A pattern is the 161.8 - 224 extension of the XX YY swing at 1852.5 - 1858.25. You can see that price hit the destination range and reversed.

Keeping in mind that this is a range bound market, let's zoom out to a 4181 tick chart and place a Fibonacci retrace from the all time high at 1856.75 and today's low as follows:

The bottom of the destination of the AA=161.8 pattern (1852.56) straddles the 78.6-88.7% retrace to the all time high. This is possibly a location for shorts to enter the market to keep it range bound. If they do not, or if they fail, then a 112.8% retrace, up to 1859.75 is possible.

If trading by pure Fibonacci ratios and patterns seems odd or magical, then consider looking at "off chart" indicators or other products that are somewhat correlated. Other products such as USDJPY (foreign exchange) or TY/ZN (ten year notes) are examples. Perhaps coincidence/correlation with those products making key swings will enhance your comfort in trading "the fibs."

See the trade, take the trade. I leave you with the following thought:

Is the Soybean Oil Bear Market Over?

Soybean Oil is one of the many agricultural futures traded on the Chicago Board of Trade (click for contract specs). After peaking at over $72 in March 2008, BO (the symbol for soybean oil futures) dropped hard and then recovered to about $60 in April 2011. Since then, the price dropped to a recent low of $26.80 in January. Today, the front month contract closed today at $38.99.

Like all agricultural commodities, many Soybean oil futures contracts with different expiration months trade simultaneously. The following table shows the volume, 20 day average volume, and closing price of 13 of these contracts. The highest volume contracts currently trading are BOH14, BOK14, BON14, and BOZ14. 

The following daily charts show the price of the four highest volume contracts over the last six months and how price adhered to a clear downward channel (until recently).

Click to enlarge

The red downward channel is nothing more than a line drawn through two "lower highs" (LH), extended in time. A parallel of the upper channel was created and placed at, or near, a "lower low" (LL) swing point. The drawing of the channels is more art than science. Additionally, you see some contracts also include a black downsloping trendline. That line was added to highlight an acceleration in the decrease of price. The thought being, that when price violates that line then the market's view on price has changed so the commodity warrants consideration.

With this in mind, one has to ask "Why did price turn where it did?" Every trader will come up with a different idea. The commodity producers may have an idea as well as the commodity consumers. The truth is, no one knows. But, we can all guess.

My guess is Fibonacci!! While there are numerous Fibonacci ratios that traders use, there is one that is unquestionably in every Fibonacci trader's toolbox. That ratio is 61.8%. Could it be that BO hit a magic 61.8% Fibonacci ratio where BO traders, investors, and hedgers all changed their outlook on price and decided to buy? The following is the weekly continuous chart for BO:

Click to enlarge

As you can see the recent low was an exact 61.8% retracement of the 2001 low to 208 high weekly range (I'm not going to quarrel over $0.08 on the March 2014 contract). Is this a mechanical bounce at an expected area? Or, is this the end of the bull market? I'm not calling for you. Price action when/if it reaches the upper line of the downsloping channel will clarify the outlook for those who did not participate in the initial Fibonacci bounce. Some traders may attempt to sell/short, others may wait for an obvious trend break for a breakout long. Who will win? The shorts or the breakout long traders and for how long? Only the market knows. Time will tell.

Déjà vu All Over Again

I began to follow the 10 year Treasury Notes after they formed the head of an inverse head and shoulders in early September. I missed the formation of the head, so I waited for the right neckline then right shoulder to be created. As I wrote in a previous blog post,  the right shoulder was a 38.2 retrace of the AB leg on the daily chart, coincident with an 88.7 reversal on a 610 tick chart. A perfect set up to enter the trade long as seen on the following daily chart:

Click to enlarge

It is easy to see the pattern in hindsight. If you trade measured Fibonacci patterns, it may have been obvious while it was forming. Should this pattern complete as expected, the 10 year Treasury Notes should hit 129-130 (the pattern destination zone, 161-224 extension of the XY leg).

A word about patterns: The XY, YA, AB, and BC legs are usually obvious and clear (straight line-like). The CD leg can be, and generally is, messy (squiggly line). 

Last week on Wednesday November 20, the FOMC meeting minutes were distributed at 1pm CT. This non-news event (the minutes contained nothing materially new), caused a great deal of volatility in the markets. The ten year notes were not immune. So rather than price migrating to the daily destination zone "straight line-like" it became squiggly/messy. As can be seen on the following 1597 tick chart (arbitrarily large Fibonacci number that shows the zig of price):

Click to enlarge

You see that price bottomed in the morning session of the following day in an area of confluence. As with the Daily "C" this confluence was both larger time frame reversals and shorter time frame reversals. Specifically, (1) 88.7 retrace across the 200MA (blue fib measurement), (2) inside the destination of a 88.7 short pattern (green fib measurement, green hashed box), and (3) fractal A =161 reversal structure (red fib measurement). Price has exceeded the bounds of the fractal A=161 destination (red hashed box) so the next area would be the B target in the 127'10-127'16 area. Expect a 38.2-61.8 retrace then reverse to complete in the 128'02-128'31 area which is close to the bottom of the daily target at 129'04.

As long as another FOMC/central bank event (such as the December 17-18 FOMC meeting) does not change market conditions, I continue to believe that 10 year notes will increase in value and 10 year rates will decrease.

Long At The Low With Proper Set Up

Today was an historical day as the Dow 30 cash index cracked 16,000 and the S&P 500 cash index cracked 1,800. A full blown market correction is just waiting for the NASDAQ composite to break 4,000 (only kidding).

In my earlier blog today, I discussed the rationale for the early long trade and marked the chart with the notation "Obvious area for day trader short". Sometimes the market acts as you expect and sometimes it doesn't. Today was a case where it behaved as expected. Since the market remains in a longer term uptrend, my plan is to buy retraces, even when "perfect" shorts set up.

I captured the entirety of today's ESZ13 (December E-mini S&P500) price action in the following 1597 (arbitrary large Fibonacci number) tick chart:

Click to enlarge

A couple of key points regarding the market today:

• If a larger time frame fib measurement worked, then keep it on the chart as the traders who used that swing measurement may use it again. That's why the blue Fibonacci retrace remained on the chart.
• When a pattern completes into its destination zone (cross-hashed gray box), in this case from the 78.6 short, look for reversal and continuation patterns.
• Regardless of the time of day, if a pattern sets up, then trade it. 
• Although not proper swings on this 1597 tick chart (no 50MA cross, but they are proper on smaller time frames), the 161.8 inverse head and shoulders (brownish fib retraces/lines) formed a perfect pattern that aligned with the blue Fibonacci measurements at 127.2% and the destination zone of the 78.6 double top (aka confluences).
• While the "X" point of the 161.8 inverse head & shoulders aligned with the 112.8 larger time frame retrace (blue lines) and the destination zone for the 78.6 short, it was not sufficient to turn price on a dime. Not a problem, it was a valid trade entry and it failed, but it set up a better trade opportunity at a lower price.
• Think of a head & shoulders pattern like anti-lock brakes. Sometimes the speed of price movement needs the brakes pumped before a full-stop/turn can occur. 

The RTH session is closed at this moment. ETH has not yet opened. Closing values for $ADD, $TRIN, $TICK, $VOLDC, A/D Line, don't necessarily suggest a melt up during ETH. Nonetheless, the destination of the late day inverse head and shoulders is within reach.

When Many Ideas Align

The the market is in an uptrend. For a technical trader, the reason is irrelevant, the chart says it is so. As a result, my day trading plan is to buy retraces until that strategy fails two days in a row.

Trading is an art form, rather than a science, but a rigorous plan is essential to find high probability trade ideas. There are as many trading plans/styles as there are traders. While I rely on Fibonacci structures, I am cognizant of several other trading methodologies and attempt to understand where/how those traders might participate in the market. The following chart is the E-mini SP500 December futures contract on a 987 tick time frame and shows that today was a great day to have that awareness of other trading styles. Find the label "LONG HERE" as I will discuss why this was a high probability long trade entry:

Click to enlarge

"LONG HERE" represents the confluence of six different trading ideas.

1. Today's high measured as a 161.8A (head and shoulders pattern, green fib retracement tool). When the 161.8A is achieved, we expect B to be a 78.6, 100, 112.8 retrace of YA (black fib retracement tool). Since my plan is to buy retraces, I did not consider the short at the high. But the 78.6 retrace of YA could be a B or an A. In either case, this suggested a turn up in price.
2. While I don't trade 200 A patterns, the red fib measurement shows the top as a 200 fractal A (fractal, because on this time frame the XY leg did not cross the 50MA). As with most patterns, the destination is the 161-224 extension of the XY leg (X fr, Y fr in this case) and represented by the purple hashed box. When patterns complete, price either consolidates, continues, or reverses. Nothing earth-shattering here, other than the awareness that a reversal could occur and chart out the destination of all patterns.
3. As mentioned the market is in an uptrend, there are traders who sell to or buy at "gap fills." A gap is the price space created by traders during ETH (extended trading hours). The Previous Day Close is the purple dashed horizontal line. The Previous Day High is the red dashed horizontal line. Some traders consider gaps to range (red line) or gaps to close (purple line). The price vibration at yesterday's high suggested that short-term visual traders in were control and that gap on close may be their next short target, or the location that others may step in to turn price up.
4. Some traders use pivot points based on RTH (regular trading hours range) range. The Pivot Point calculation is based on the previous day: (High+Low+Close)/3 and is represented by the pink horizontal line. Pivot points (PP) may be considered support or resistance so the inability to break the PP would influence those traders to initiate a long.
5. Some traders use market profile. Yesterday's Value Area high is represented by the green dashed horizontal line. The inability to break into yesterday's value area would be considered strength, so traders who lean on market profile might have initiated a long trade.
6. Finally, larger time frame Fibonacci style traders may have measured yesterday's RTH low to today's RTH swing and considered the 61.8% retrace (light blue Fibonacci tool) a sufficient momentum retrace to initiate a long position.

Six reasons. You could ask for more, but you will not get many trades if you do.

That said, notice that price stopped at the 78.6 retrace of the recent swing (dark gray Fibonacci tool). This is a typical location for day time frame traders to change the direction of price. 

If the market closes without making a higher high then I might consider shorts tomorrow.

Trade what you see, but keep in mind what others see too.

Eating The Dog Food

When I read a recommendation about a stock or a product from a so-called expert, I am usually a skeptic. Does the individual believe what was said/written? Does the individual really intend to do what was said/written? If you remember back to my "US 10 Year Notes, What's Next?" blog post, I summarized the situation as follows:

"If I had to bet, I would bet that 10 year note prices will continue to increase, rates will decrease, for the foreseeable future."

The question remains; did I eat my own dog food? Did I take my recommendation/opinion and act upon it? Yes. Returning back to the original 10 year notes post, you will see that price had not retraced into a "C zone" (the turquoise boxes in the second chart of that post which is a 38.2-61.8% retrace of the AB leg).  As I was not sure whether the inverse head and shoulders pattern on the daily chart had put in the B point (a.k.a. right neckline). My only trade option was to wait for the right shoulder/C zone to be hit. And that's what I did.

Looking at the following weekly chart, you will see that price did retrace into the C zone, this week.

Click to enlarge

I don't trade directly from weekly/daily charts, but they serve to find the trade locations of interest. The next step is to watch price on a trading time frame chart and wait for a reversal entry that would initiate the long trade. A trade that may move price into the destination area of this pattern which is the 161.8-224% extension of the XY leg to 129'04.5 - 130'31.0.

The following chart is the December 10 year note on a 610 tick time frame, with the 8, 50, and 200MA, as well as a volume histogram below price.
 

Click to enlarge

The 38.2% retrace that would set the minimum potential right shoulder was 125'26.5 and is drawn on this chart. The swing low was put in yesterday, during extended trading hours and represents point X, during the early morning a swing hi (across 50 & 200MA) was set, then price retraced 88.7% of that swing. Perfect. Here is a reversal pattern, that would take the trade into the direction of the CD leg (long). While the elapsed time to create the XY leg was about 4.5 hours, the retrace took only 2 hours (much faster than XY), and the swing low that created the A point corresponded with a volume spike. Moving averages were in proper location, so a high probability trade set up was available.

The following Tradestation positions window, shows I am long 3 contracts at an average price of 125.83 (125'26.5).

My trade intention is to hold two contracts to the 129 area (minimum target for the pattern). CD legs are generally sloppy, but I have no desire to turn this trade into a loser. My stop is currently break even and will be adjusted upwards with price. Tomorrow, Federal Reserve Chairperson-Designate Janet Yellen testifies on monetary policy before the Senate Banking Committee in Washington DC. This may generate some chaos in Treasury prices. Should ten year notes continue to increase in price, they may not get to the target price before the contract expires. If it does not then I will close this position during the rollover period.

As always, trade what you see.