Are Beans Overextended?
Fundamentals
Soybean futures gave back much of yesterday’s gains, as many traders have become somewhat skeptical of the recent surge in prices. The price of the oilseed had risen to 16-month highs after last Friday’s USDA report indicated that ending stocks for the 2010/2011 crop year could fall well short of previous estimates. Bean output is now pegged at 3.408 billion bushels, versus last month’s estimate of 3.483 billion bushels. Also, yields were expected to rise, but instead fell to 44.4 bushels per acre, which is down from last month’s estimate of 44.7 bushels per acre. While these numbers may be considered bullish, they are not staggering by any means. Much of the sharp rise in prices on Friday and Monday could be seen as spillover from the Corn market, which many considered to have a much more bullish report than Beans. The current supply of Soybeans is likely more than ample, but many traders are betting on demand from China to increase, stretching inventories down the road. South American production are expected to remain steady, and there are no foreseeable setbacks at the present moment. The soft US Dollar has been a driving force behind the rise in commodity prices and uptick in demand for US grains. Despite all of the bullish forces behind the grain markets, many traders seem to wonder whether the rally may be overdone at the present time.
Trading Ideas
Given the fact that the market appears to be a bit overbought at the moment, fundamentally, many traders may be inclined to have a somewhat negative bias. Technically, it appears as though the market may turn in the short-term, but the chart has not yet confirmed a bearish reversal. For these reasons, some traders may wish to be a bit more cautious and possibly consider entering into a fixed risk trade, such as a bear put spread. Some traders may wish to explore buying the November Bean 1160 puts (SX01160P) and selling the November 1140 puts (SX01140P), for a debit of 8 cents, or $400. The trade risks its initial cost for a potential profit of $600 if the November contract closes below 1140 at expiration.
Technicals
Turning to the chart, we see a gap-up yesterday to form a gravestone doji. This can be seen as a possible indication that the market may reverse in the near-term. Some traders may be looking for a down day today to offer confirmation of a short-term reversal, preferably with a close below the relative high of 1128.50. Despite the two consecutive strong up-days, the RSI has not yet moved into overbought territory.
Rob Kurzatkowski, Senior Commodity Analyst
