Gann Global Financial

The market that I’ve said is most intriguing at this point in time is the soybean oil.

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1976 Precedent Appears to be the Closest Fit to Our Market

The decline which we experienced in our market between June 16th of last year and the low on December 5th was the greatest leg down in history in the soybean oil. That’s going back to 1949. Futures actually started in 1950. That particular leg was a 59% decline in five months and 19 days.

It’s a very unique situation as far as a very elite move to the downside; in tandem, of course, with the huge deflation in the energy complex, the stock market, and everything across the market.

In looking at the other precedents in history, the second greatest decline in history was the decline in 1976, where the market declined 55%, also in five months and 19 days. In terms of the time period of the decline, our decline was exactly the same as the 1976 precedent.

Once the low was in place, specifically in 1973, 1977, and 1976 – as the three greatest legs to the downside, along with our leg which would make the four greatest legs down in approximately 60 years of trade.

In looking at our final low on December 5th, we experienced a one-month-and-two-day advance of 33% into the January 7th high. In 1976, we advanced 17% – a much more modest advance – in one month and 12 days; within two days of the advance that we saw into January 7th.

In the aftermath of that, we’d expected that if the market experienced a decline and ideally held the December 5th low – and it could very well be a final low, a bear market low – then it would be conforming to the pattern in both 1976 and 1977, and that could set the stage for a trade action.

That’s exactly what occurred as the market off the January 7th high…. We show this decline here: minus 21% in two months and nine days. In 1976 the decline was 12% in two months and 12 days. Therefore, we are very close to replicating within a couple of days what was that decline in 1976.

July of 1976 contract: This was the historic leg down basis the actual contract. We saw this rally made a high on March 9th and then retrace to 1568 on May 24th. It established a higher bottom.

Then, very volatile, choppy trade to the upside, but basis the contract, up 53% in one month and 21 days. It was a very significant rally, but it was quite a wild ride. You can see it running up to 1931, down to 17, back to 2040, down to 1915. This would have been during the growing season, which can be a day-to-day type of situation.

At any rate, we’ve hit our target zone at 2966, which is a slightly higher bottom above the December 5th low. As a result of that, we’ve entered long call-option positions.

We also have the 1978 precedent, which wasn’t as bullish in terms of the velocity of the advance; but did experience a 48% advance, which was a greater length in terms of the time period of the advance. We’ll see if our market follows two of the three precedents in the aftermath of the greatest legs down in history. I really like how this is set up.

I do note here, though, the differences between our market and what occurred, for example, in 1976. One is the seasonal: that the advance occurred closer to the July time-frame, which is really when weather considerations are much more acute. We are earlier in the season, so I need to make a mental note on that.

Additionally, we did not experience the kind of deflation that we’ve experienced in our market. We were not going through this financial conflagration that we have experienced.

That was one of the concerns I had with expecting this forecast to play out. It was the question as to whether the stock market would continue to deflate, which would reflect negatively on commodities.

However, I was able to dismiss that possibility, based upon how resilient the soybean oil was during this last leg down in the S&P 500. We declined 29% in the S&P. As a result, we did experience a deflationary move in the soybean oil, but we actually made a higher bottom.

Everything has really come into play very nicely, I believe: the psychology of the market, the historic precedents, and geometry based upon the 1976 market, if it were to play out like 1976, again, the options that we’re looking at would be up 10:1 to 12:1. I’m not saying that that’s going to happen, but that would be the prospect.

July soybean oil : This is the contract on which we have the call-option positions. We have moved to 150% long; in other words, 150% of which you would normally risk on a trade. The average prices that we have bought in on the July 34s, approximately 127; on the 36s, 85; and on the 38s, 59.

As of Friday, as a result of the strength that we’ve experienced over the last number of days, this option closed at 171½, 115½, and 75; so we’ve got a start. Of course, this is just going to be dependent upon whether this market continues higher; but I like our chances.

Here’s the other comment with regard to the technical position of the market. We did get a pivot reversal signal – a bi-signal – on the break as the market put this 30.26 low in. Then we saw a few weeks of a trading range activity, and then ran those lows the last week and a half.

We can assure that there were sell stops underneath there. They broke the lows by 26 points, but have immediately reversed to the upside. That is a bi-signal that’s been generated.

Now, if we break the recent low at 30, we would experience a price failure – basically, a bi-signal failure – in addition to the market potentially divorcing itself from the 1976-1977 historic precedent.

If this happens, I will be recommending exiting at least partial positions and likely all of the call-option positions. However, I view this as an ideal option scenario. It’s now or never. If I’m wrong, we should be able to exit the options at a point where they still have value.

In recommending the 150% longs in anticipation, the options would likely decline in value no more than 66% from our average entry prices. In other words, we have, in my estimation – or the ideal, I should say, in expectation because it is an expectation. You don’t know because of the volatility. One hundred percent would have been where we risked the maximum amount that we do on a trade, except under unusual situations.