There is a seasonal tendency for grain prices to come under pressure during harvest, as increased deliveries weigh on futures prices and basis levels deteriorate as merchants are offered more grain for sale than they require at that time. Although delayed, the advancing U.S. soybean harvest is expected to weigh on prices.
The two-week reversal indicates a change in price direction. On the first week (at a high for the move) the market advances and closes near the high of the week. Prices open unchanged to slightly higher the following week, but fail to make additional upside progress. The advance stalls and prices begin to erode, as selling picks up early in the week. By the end of the week, the market drops to around the preceding week’s lows and closes at or near that level.
Follow through weakness the following week helps to confirm the pattern’s validity. This two-week reversal indicates the recent rally has run out of steam and prices are about to erode lower.
The two-week reversal signifies a turn in sentiment. On the first week, the longs are comfortable and confident. The market’s performance provides encouragement and reinforces the expectation of greater profits.
The second week’s activity is psychologically damaging. It is a complete turnaround from the preceding week and serves to shake the confidence of those who are long the market. The immediate outlook for prices is abruptly put in question. Longs respond to weakening prices by selling in order to exit the market. Some longs sell to take profit and others sell to limit losses.
During the course of a trend and all the fluctuations which compose it, there’s a tendency for prices to follow a sloping or horizontal straight line path.
A line of support is determined by drawing a line across the lows. For a trend line to be both valid and reliable there should be at least three points of price contact as illustrated as A, B and C in the accompanying chart. Each point coincides with the low of a market reaction.
A trend line may be challenged several times by the fluctuating market without being penetrated. The longer the trend line remains intact, the more significant the eventual penetration becomes as an indicator of trend change. However, a price violation of the line is not enough bases to conclude that the trend has turned. At the very least, the market must close decisively beyond the line.
Once penetrated, this line of support will often prove to be a line of resistance when prices bounce back up. This is illustrated as D in the accompanying chart. This is the area where you would expect selling to increase and the buying to dry up.
Support and resistance areas materialize when equilibrium is reached between buyers and sellers. The market attracts buying down at the line of support.
When prices break down through the line of support, then all recent buyers end up holding losing positions. Consequently, the offering of contracts for sale increases as longs liquidate and shorts, who sold at higher levels, add to their profitable positions.
The concept of support and resistance are among the most interesting facets of chart study because it can help one formulate expectations of future price action.
This analysis indicates the three-week rally in the soybean market is over. It appears to have been a case of “buy the rumour, sell the fact.” Now that the crop has had a killing frost and harvest delays are ending, prices are expected to resume the downtrend.
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David Drozd is President and Senior Market Analyst for Winnipeg based Ag-Chieve Corporation. The opinions expressed are those of the writer and are solely intended to assist readers with a better understanding of technical analysis in the markets influencing agriculture. The information contained herein is deemed to be from sources that are reliable, but its accuracy cannot be guaranteed. Visit us online atwww.ag-chieve.ca/cooperator/for more grain marketing ideas and educational tools, or call us toll free at 1-888-274-3138 for a free consultation.