03-07-2008: July Soybean Oil: Profit Taking and Fund Selling Don't Spell End of Surge
After a huge runnup in the soy complex, we have now had four straight days of down (as of this writing.) Many analysts feel the runnup was too far, too fast, and cannot sustain itself. Buyers are confused, readjusting their strategies and staying away temporarily. Is this the end of the surge in soy products, in this case, soy oil? Soy oil is the weakest of the soy complex members, facing competition from other oils and having been run up percentagewise probably the most.
When you have this great a move in commodities, it is only natural for traders to take profits. As Cramer says, bulls make money, bears make money, but pigs get slaughtered. There has been a lot of fund selling of late. But the fundamentals, as far as we can tell, remain relatively unchanged. Projections for next season continue to show shortages, and China is the big player declaring it will be importing a lot of soy products for the foresseable future.
Our conclusion based upon technicals and other factors is that, no, the run is not over. But is getting difficult to call, because soy oil prices are awfully high. Nonetheless, we still have the weak U.S. Dollar, a key factor causing inflation in almost all commodities.
July Soybean Oil:
July Soybean Oil:
Malaysian palm oil is sharply down about 10% from a record high hit a few days ago. Buyers are said to be absent in both Malaysia and Indonesia on the break. This was said to be spillover from heavy selling pressure in the soy complex on U.S. exchanges. In China, edible oil futures hit limit down. Volatility in both U.S. and Asian markets have left buyers trying to adjust basis levels and buying strategies. Brazil's agricultural ministry has raised its estimate of Brazilian soybean production, which estimate is still below the USDA's. China officially extended its reduction of import duties on soy products as expected. Policy meetings underway in China this week indicate that China will remain committed to large scale long term imports of soybeans and soy oil. Officials conceded they simply do not have enough available land to meet domestic needs for soy. Crop weather in South America is favorable to crop development there. In Brazil, there are showers but mainly dry weather favorable to both crop development and harvest. India is tendering to buy 30-40,000 metric tonnes of soybean oil. India February soyoil and meal exports were at 759,275 tons, up 28% from a year ago. Funds have been recent sellers of soybean oil contracts. There were so many big gains in trading in the soy complex, that investors may now be taking profits regardless of fundamentals. In general, recent strength in the soy complex is due to a weak U.S. Dollar causing inflation, a reduction in soybean acres due to competing corn used for ethanol, and concerns about dry weather in South America. Many analysts think these trends have overshot and gone too far and will be impossible to maintain. In February, the USDA reduced its estimate of soybean ending stocks from 175 to 160 million bushels, down from 574 million bushels in 2006-2007. The ending stocks to use ratio would be 5%, the lowest in four years. Worldwide, the USDA estimated that 2007-2008 endings stocks will drop from 62 to 46 million tons, or 19% of annual use. Brazil's and Argentina's soybean crops are expected to increase only 1% in 2008. Exports are down 5% from a year ago from the U.S., despite a USDA projection twice that decline. On February 22nd, the USDA said it expects the U.S. to produce 2.95 billion bushels of soybeans in 2008-2009,ending the season with 169 million bushels or 6% of annual use.
79.0I T 3/ 6
I CBT - Jul-08 Soybean Oil, 60000lbs, $/clb Cm.=0.05 Lim.= 2.8
I
I
I
74.0I_________________________________________________________________________
I
I
I
I X
69.0I____________XO___________________________________________________________
I XO
I XO
I X
I X
64.0I____________X____________________________________________________________
I X
I X
I X
I X
59.0I____________X____________________________________________________________
I X
I X
I X
I X
54.0I__________X_X____________________________________________________________
I XOX
I XOX
I XO
I X
49.0I__________X______________________________________________________________
I X
I X
I X
I X
44.0I__________X______________________________________________________________
I X
I X
I X
I X
39.0I________X_X______________________________________________________________
I XOX
I XOX
I XO
I X
34.0IX_______X________________________________________________________________
I O X
I OX X X
I OXOXOX X
I OXOXOXOX
29.0I_OXOXOXOX________________________________________________________________
I OXOXOXOX
I O OXOXO
I OXO
I O
24.0I_________________________________________________________________________
I
I
I
I
19.0I----I----I----I----I----I----I----I----I----I----I----I----I----I----I---
1
55892849089123
12212021211200
37568949662316
The above point-and-figure chart is giving a conventional buy signal.
We are headed toward a cyclical low and a seasonal up period.
Our best-performing internal program is "Project." It is giving a buy signal.
Results of "Project" for Soybean Oil (blue lines = successful trades, red, unsuccessful): (Not always in the market.)
Our third system has just triggered a sell signal. (Note, disregard the year date on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)
The point value is $600. Initial margin on a single contract was $810, last time we checked. Use of options is not recommended.
Scale trade sellers are entering the market for the long term in this price range.
In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Red is small speculators. Green is large speculators. Blue is commercials. Large speculators with the best track record are getting increasingly-short.
The average volatility shown below suggests that the up trend direction remains intact from a volatility low point.
Our option trade recommendation is to buy the Soybean Oil July 63 Call @ 6.25 or less.
Here's an intraday chart for the previous day ( 3/6 ).
Risk Versus Opportunity Report
________________________________
BON8 July Soybean Oil
High Price: 73.79
Current Price: 66.05
Low Price: 62.69
Risk: 0.098
Opportunity: 0.227
(O/R) Ratio = 2.304
Level Table:
| Factors | Weighted Points |
|---|---|
| Parabolic Chart | - 1 |
| Nirvana Chart | - 1 |
| News | + 1 |
| Point & Figure | + 1 |
| Cyclicals | - 1 |
| Seasonals | + 1 |
| Internal System 1 | + 1 |
| Internal System 2 | 0 |
| Third System | - 1 |
| Commitment of Traders | - 1 |
| Historic Range | - 1 |
| Range/Volatility | + 1 |
| Level Table | + 1 |
| Other Factors | + 1 |
| Total | + 1 |
Place 18 July Soybean Oil on a Buy Watch with stoploss @ -2.24 below the get-in point.________________________________________________________________________________________________________W.G.
