Are Soybeans Parabolic, or Simply a Regression To The Mean?

On Monday, I suggested rather strongly that we were in the throws of a parabolic move.   If you look at the small picture, it certainly is behaving as such.  I had a few things to consider while studying how this phenomenon behaves that I wanted to share with you, and then follow that up with a larger picture view to show how I believe this will play out.

Cycle theory dictates that commodities and grains in particular run on 3 year cycles.  The chart below shows that there have been what I would consider 6 parabolas since 2003.  Two of the parabolas occurred at basically the same time back in 2008.  That anomaly is rare, so I would consider for this arguments sake that they were both part of the same parabola.  This would mean that out of a 3 year cycle low, you should expect to see a very strong rally.  This has happened pretty much every three years. 

The daily soybean chart below shows the various parabolas which occurred during that time.  What I want you to see is that a typical move for a parabola in soybeans is 30% above the 200 day moving average.  Today, we are at 30% above the average.

The next thing I want to do is to step back and see if there is something the larger picture can tell us.  In looking at the weekly soybean chart with the 200 week moving average, the one thing which is very different is that price has traded significantly below average now since early 2014.  This is the first time in the past 15 years that this has happened.  With some significance, the 200 week moving average is only one days trade away from being touched for the first time in two years. 

You have probably heard me say this before and I will say it again.  The bread and butter of all professional traders is the regression to the mean trade.  It is a principal.  Just like a rubber band, the more the price gets stretched, the more powerful the counter trend move will be.  This is what has happened.  It has not so much been the creation of a parabola as it has been price finally moving back to its average.

Now today, the November Soybean contract touched its June 2014 peak.  (see below chart)  That is probably the last significant point of resistance on the bean chart.  It does not mean beans cannot go higher, but I believe we should be safe to sell enough soybeans to get to 100% of what you expect to grow.  When this move is complete, expect to see a sell off just as brutal as the rally has been.  I believe Friday's WASDE report will probably trigger an end to this rally.  Mark your calendar....noon Friday.

"But Mr. Wade, can't prices move even higher if we get weather that hurts the crop?"   The answer could be yes.  If we have genuine weather scare like we did back in 2008 (see above chart), you could get one more run at these prices.  If not, this could be your last chance.   A 50% retracement of this rally would bring prices back down to the $10 area.  Are you that greedy to risk $1.50? 

Corn today did not look so bullish.  After gapping higher at the open and trading to just within a penny of the $4.45 target I mentioned Monday, corn fell back and closed at the lows.

Check back late tonight or tomorrow for an additional post about the 2017 crop.