The oilseed complex has been well supported by the strong vegetable oil market. This is evidenced by the steep uptrending channel illustrated on the monthly soybean oil chart. This rally began with the development of a “two-month reversal” back in July 2010.
This particular “two-month reversal” is seen at the bottom of a downtrend and indicates the market is about to turn back up. This reversal pattern began when the market declined and closed lower for the month. The next month, prices opened slightly lower, but failed to make additional downside progress. Then, buying increased early in the month and prices began to turn back up. By the end of the month, the market rallied above the preceding month’s high and closed well above that level.
Higher prices attract more willing buyers on each setback and cause higher lows and higher highs, with the ensuing price action evolving into an uptrending channel.
In an uptrend, the uptrend line is the channel’s lower boundary. The upper boundary is the return line and is parallel and drawn across the highs of each progressively higher advance. The return line points out the areas where reactions to the trend are likely to begin. The uptrend line is constructed first.
One should be on the alert, studying the price activity during the course of a trend. If prices start to display an inability to reach the return line, this could prove to be an important first indication that the current trend is running out of steam.
Market psychology: As a new uptrend begins to emerge, buy orders materialize but many are at a limit price under the market. Some of this buying is satisfied on price declines. A portion of the demand, however, is not satisfied and when prices again begin to move up, some of these buyers jump in for fear of missing the move. The balance of unfilled buying will continue to trail the market in hopes of catching a price reaction. Most of these buyers will gradually increase their bids as the market advances.
Some profit-taking and short selling emerge when prices rally to new highs. This results in an increase of potential buyers. This occurs because sold-out longs do not merely take profits and walk away. They are quick to get back in when the market settles back down.
Their buying, as well as that of shorts eager to take profits during periods of price retrenchment, prevents remaining buy orders that are too far under the market being satisfied. Often, there will come a point during a bull move when the advance begins to accelerate sharply.
Much of the patience of those waiting for a big break will have worn thin by this time, so more buying is gradually thrown into the market at the prevailing price level. It is important to note that as this occurs, the demand which had trailed the market is being absorbed.
After a period of upward movement, one must be on the alert for any subtle changes in this repetitive process, as they will show up clearly on the price charts. When rallies begin to fall short of the upper channel boundary, it is a clue that the existing price trend may be waning.
When the price does turn down for real, trendlines will be quickly broken because the demand has either been totally satisfied or the volume of selling simply overpowers what little buying remains.
The oilseed markets lost 40 per cent of their value in in March 2008 due to long liquidation. So, let’s be careful out there: it’s not a matter of “if” this maturing bull market runs out of steam, but “when.” Farmers should be prepared to take advantage of this rally and manage their price risk accordingly.
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— 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. Visit Ag-Chieve online for information about grain marketing advisory services, or call us toll-free at 1-888-274-3138 for a free consultation.