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Is it 'dead cat bounce' time?

With the drop of $3.25 per bushel in the cash soybean market during the month of September, farmers are understandably watching the markets very closely to detect any sign of a rebound. Most hope they will get another chance to sell beans close to the August high. Some are looking for a harvest low to buy back beans sold at a better price a few weeks ago.

Farmers who are familiar with the dead cat bounce are anxious to see prices recover so that they can complete their strategy of selling cash soybeans on that move. This week’s action has those individuals chomping at the bit to do something.

I have been tracking the elusive cat every harvest for roughly 25 years. Nothing guarantees that it has to work this year. Price action this week indicates that 2011 is probably going to be a good year to implement the bounce strategy.

What appears to have been the harvest low took place on Monday, October10.  The March futures contract, which I track in this case, that day closed at 11.79. By Thursday, October 13, it closed at $12.71 ½. That is a rally of $.92 ½ cents. The rule for a complete bounce is $.50 price improvement. So, the price of the futures improvement has reached the necessary criterion for a normal bounce. In a year like this, with futures over $10, I would be more comfortable with a ounce of a dollar or more.

There is still time for prices to improve because the elapsed time so far has been only 4 days. The minimum time for the bounce is ten trading days. Fifteen trading days is more common. It has been as long as 60 trading days, or 3 months.

One reader questioned whether it was necessary to wait for the 10-day rule. My opinion is that you can sell any time the price meets your expectations. Nothing says you have to wait ten days. Something I gleaned from years of experience and studying previous year’s charts is that in 2 prior years, there was a move similar to what happened this week in that the price goal was reached before the ten trading days rule was complete. In 1997 and 1998 there was a sharp rally of seven days, followed by a pull back. The market then went back higher and made a new high a few weeks later. Those who waited for the ten day rule to be complete were rewarded.  It doesn’t have to happen that way this year. However, I think it probably will. In both 1997 and 1998 the high of the dead cat bounce was the high for the marketing year.

As of the close of the cash market on Thursday the rally had reached $1.01. That means that only the criterion of ten trading days is necessary to complete the bounce. One of the factors making that price possible was an improvement in basis. It is about time! Farmers hauling into processing plants comment that the waiting time to unload is much less than normal this year. This could mean that the yields are not as good as earlier anticipated.

I will have the chart on my website updated tomorrow night.


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