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.