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Were the technicals wrong?

Agriculture.com Staff 02/10/2016 @ 6:55am

It has been a frustrating week. I have been trading a small position in soybean futures for ten years. For the past few months, it has been on the wrong side of the market most of the time. I use my seasonal price charts to trigger positions. On June 5 my system was to change from short to long. The market closed sharply higher on the day.

I did not feel too bad, even if the move did take away some of my playing money. I know that the history of the system shows that being on the wrong side of a trade is usually followed by a big profit the next time around. I felt pretty good when the market opened higher on Wednesday. The feeling didn’t last very long. By the end of trading that day, futures were sharply lower. Not only did I end the day with a losing position, technical traders pointed out that action on Wednesday formed a key reversal on the November soybean chart.

Key reversals are one of the most easily understood and reliable technical signals. When they take place at contract highs or lows with high trading volume, as the one Wednesday did, they are usually good indicator of an imminent trend change. By the end of trading Thursday, however, it appeared that the technical traders were wrong this time. November soybean futures blew through Wednesday's highs and ended up closing again on new contract highs.

So much for the reliability of key reversals! Like any other system, including my seasonal charts, key reversals work correctly only a percentage of the time. This time the positive psychology of the markets overwhelmed a usually reliable indicator. By the close of night trading Friday morning, prices indicated that the key reversal indeed might have been signaling a trend change. As I am writing this Friday morning, soybean futures are sharply lower. Sometimes it just takes a while for a technical signal to be proven accurate.

Another indicator of future price direction is cash basis. The basis for cash corn in my locale Thursday was -12 cents. That is the best it has been in several years. While charts of futures do not look all that impressive, the good basis has taken cash quotes back to where they were in March. I sold another fourth of my old crop corn yesterday. It is still early in the summer so there is plenty of time for prices to go either way. It is difficult for me to think that the corn crop is in as good condition as the crop conditions report says. For now I have to assume that government estimates are accurate. If the crop continues to progress as is, with the increase in acres supplies will be huge this fall. I do not want to be stuck with last year's crop when I need the bins for the new crop.

My crop was planted timely and is doing well. With almost double normal rainfall this spring, harvest prospects are very good. Dryland farmers in Nebraska know that soil moisture in early June does not always mean a good crop if the summer weather turns out to be hot and dry. I am going to have an opportunity to see crop conditions in some other places later this month. Seeing crops outside my local area should give me a better perspective on this year's yield potential.

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