Gann Global Financial

The soybean complex is in a very interesting position.  We expected that this market had the potential to establish a final low and experience a trend to the upside. We did not have that forecast in either the corn or the wheat, two markets that are languishing. So, lets look the dynamics playing out in the Soybeans.

* Please comment on the video at the bottom of the page *

The soybean oil nearest futures chart shows a recent advance  into the April 16th high of 37.37. This advance fell just short of the January 7th high of 37.55.

One of the observations that we’ve had with this market is that the ideal was that we would follow this 1976 precedent, and if so, the market would experience a very dramatic advance. In this case, in 1976 it was a 57% advance in one month and 22 days.

The DNA in our market is startling in how close it is to this particular precedent, but the 1978 precedent must also be given weight as a possibility.

Subscribers Participating in Profitable Options Positions

You can see that the angle of ascent is much less in 1978. Our subscribers have long call option positions in the July soybean call options which have more than doubled, they’re up about 150% from where we entered back in late March.

However, in terms of risk/reward, if we were to replicate this 1976 advance and basing it on the recent highs we experienced about halfway to that destination site, then those options are going to result in risk/rewards of at least 10:1 to 11:1 and that is, needless to say, the type of option play, I hope as a listener that that is the type of option play that really makes sense when you have that kind of a prospect for that kind of return.

We did have that going in, so the market has been following this 1976 ideally precedent, or 1978, but we have yet to see what the tail of the tape is going to be in the end.

Current observation here: in looking at this prospective leg up, we have what we believe is a first leg up into the January high, a correction, and this has started a second leg up in a bull market.

As I’ve mentioned in previous reports, we have all ready exceeded this January high in the soybeans so we are anticipating that the soybeans are going to follow suit.

In looking at legs up in the history if the soybeans, this is what we observe. If this is a second leg up in a bull market, a current advance into the April 16th high is very young.

At one month, zero days, it ranks as the 45th shortest out of 47 legs up since futures trading began in 1951. In other words, there have only been two legs; only four percent of the time have there ever been legs that are shorter than this. The probability is greatly in favor that we have not run out time to the upside and that we are going to continue higher if this is a second leg up.

In looking at the 1976 precedent, the actual chart of the 1976 July soybean oil (see video) the contract move was 54% in one month and 21 days. You can see what the angle of ascent was when it finally topped out on July 15th.

This represents the angle of ascent on our chart, so we move from this chart and actually go ahead and put it right on our daily chart (see video).

The contract move was 53%. The nearest futures move 57%, and the contract 53%.

You can see that the market, at times, was above the angle of ascent and dipped below it, rallied to it, significant dip below it, stayed under it, but then finally did culminate on July 15th (see the chart in the video).

We are beneath this angle of ascent right now and it remains to be seen whether we are going to play catch up and move up to this angle.

You can see (in the video) the ascent is very steep so we would have to play some significant catch up here, and when you have a move up of 57% one month, 22 days, that lends itself perfectly to call option positions which are a wasting asset because of the time frame.

We have our expiration dates on this July option out to June 26th so we have plenty of time for this particular scenario to play out.

Patterns of Bull Market Corrections

The other thing that I’ll just point out quickly on this chart is you can see there were minor corrections. This was a very aggressive move but very significant minor corrections, and that is even in the most aggressive bull markets in any commodity. These are really pretty standard type moves.

The first minor decline was 7.9% in four days. We had a 12% decline in three days and that is a little more significant than is typical during aggressive moves like that, like this particular move.

In June to July 1st we had a three day move, and then a single day move before the push to final tops. The reason I bring that out is in runaway configurations markets, and we’ve looked at every runaway in history in the soybeans, and what we do know is that approximately 95% of the minor corrections during runaway advances, and I believe there has been about 36 minor corrections since 1936, 95% of them do not exceed 8%.

This is actually an aberration to have 12%, but typically they run between five and eight percent. That would be very typical. That would set some kind of expectation for us in our market.

Will Soybean Oil Low Hold?

In looking at the May soybean oil, during this run up we did experience a 204 point correction which was six percent, and into today, Tuesday, we declined 214 points on the electronic session which is 5.8% so we have a couple of minor corrections here.

Is this low in the bean oil going to hold? That’s going to be what we are going to find out in the next couple of days. Actually, this is the 3rd day off the high so the 4th day would be Wednesday and that would be the limit of what one would expect if we were going to be in a very aggressive position.

In terms of at least a minor signal, I’d have to say that if we drop below the day’s lows, drop into the 34 range after the 4th day, then evidence is going to start to weigh that we may be following the 1978 precedent in that angle of ascent.

Here are a couple of the observations that I want to make. Unlike the May soybeans, we did not exceed the January 7th high.

I don’t view this bearish divergence as negative over the intermediate term, although over the next several trading days it could indicate that we will see a continued minor correction of approximately 6%.

That was on the 18th, so we were expecting the possibility of replicating this 6% correction, and in fact, we almost did that, 5.8%.

If this takes place there will be even more buy stops building above what would then be even greater overhead resistance above the highs at 37.81 and 37.37, we’ll have a “double-top” and there are going to be stops building above that level.

Over this last week the crude oil during this move down has declined 20% since March 26th. In the face of this the soybean complex has been holding up remarkably well so I do view that as a positive.

New Highs Breaking Out Above Double Top Would Signal Confirmation of Bull Market

The 1976 I mentioned, longest minor correction was four trading days so we’ll see if we hold to that pattern and not exceed four days from any high for the move.

Given the current minor correction off the 37.37 high, there will be a greater number of buy stops building above the “double-top.”

I believe an advance above these highs will result in a dramatic confirmation we are in a second leg up in an overall bull market. Let me add, I believe that that would indicate that the probabilities would increase even more that we are in a very strong position in this market.

If all we are able to muster is a minor correction followed by a push into new highs above this “double-top,” I believe that that is going to indicate that the market is in a very strong position.

Now, in the soybeans – this is the May contract – we exceeded the January high at 1069 rallying to 1073 so we ran buy stops above the highs. Those would have been those that were short the market and obviously, when you see old highs exceeded on the order of this January 2nd high you can always be assured that there is a significant number of buy stops for those that are on the short side and are losing money and cover their short positions on the rally to new highs.

Also, there are those that buy breakouts into new highs, this would be technicians, and in this case this was a bull trap by pushing into new highs and then immediately reversing lower.

As of today’s trade we did decline on the evening session to 1012 to the downside. If we reassert ourselves and press above the 1073 having all ready exceeded the January 12th high one time, a second time into new highs is going to be a very favorable indication for more upside.

We should, in the next several days, see whatever evidence we need as to whether this is going to continue to conform to 1976 or a more modest 1978.

If the 1978 precedent plays out, then in our options positions we’re going to see maybe about 2 ½ times on our initial premium that we had purchased on the options. That’s not a bad return. It’s not a homerun situation like an 11:1 that I’m hoping will take place.

I’d say we probably have a 50/50 probability either way. Fifty percent probability to be either following the 1976, or 50% following the 1978. Frankly, I just don’t know which one it is going to follow but the prospect of following 1976 is very exciting.