Option Play: How do soybeans look ahead of today’s USDA report?

Soybean fundamentals

Fundamentally, the soybeans (CBOT:SNN14) are no doubt in a weather market in my view. Will the report on Monday the 30 come in line with the expectations off estimates thrown out there by all the analysts.

According to a Bloomberg article today, soybean futures fell the most this month as warm, wet weather improved growing conditions amid the outlook for a record crop in the U.S., the world's biggest grower." Those are the facts of the soybean crop this year. A record crop! So sure there has been talk of too much rain and flooding in some areas, but to me that was offset by other areas getting ideal warmth and rain that were not prior to the precipitation.

More on the Bloomberg report read, "Domestic farmers will harvest 3.635 billion bushels of soybeans this year, the most ever, the United States Department Of Agriculture predicts." Further on it reads, "As of June 22, 72 percent of crops were in good to excellent condition, the most for the date in records going back to 1986, USDA data show." That to me is about as bearish as it gets from a fundamental point of view.

However, as they say on LaSalle Street in Chicago where the CME pit is located, "Rain Makes Grain." So I'm in the bear camp. If expectations are not met and we get a much lower acreage number for soybeans on this USDA report on the 30, I would expect further declines in prices or maybe sideways action at best for the bulls.

 

Soybean technicals

Technically, I have added my favorite technical indicators to this chart below. They are the 9- (red line), 20- (green line), and the 50- (blue line) day Simple Moving Averages (SMA). I have also added Bollinger Bands or BB's (yellow lines) and Candlesticks (the red and green bars with the wicks, on this daily chart each bar represents a day of trading). These few technical indicators tell me 8-10 different characteristics about the market at a quick glance so I have them saved on my charts in MARKETHEAD, so they can populate a chart at the click of a mouse.

My favorite technical indicators show me that soybeans are in an upward trend. The soybeans were in what I have coined a "SUPER-TREND" down that started on June 9 when the 9-day simple moving average (red line) crossed down and under the 20-day SMA (green line) as both indicators pointed sharply lower and the market traded below the 9-day SMA. Ever since about June 23, the first day that the soybeans traded above the 9 day SMA (red line) there has been a change in trend on and off. Not a trend change from down to up, as we are a long way away from that in my view, but a change in trends from a "Super Trend" down to a downward trend.

 

 Chart by eSIGNAL

 

What I liked very much, as a bear, was that when the market broke through the resistance of the 9-day SMA (red line) on the 23rd it closed below or right on the 9-day leaving the market in a "Super Trend" down. Then on June 24 and 25 we had a close right at or below the 9-day simple moving average, holding the "Super Trend" down. That lasted until yesterday and today, when on June 25 the soybeans rallied about 22 cents yesterday and bursted through the 9-day SMA.

However, the market stopped cold in its tracks at the 20-day SMA (green line) which is the second area of technical support, in my technical view. That left the market yesterday in a change of trend from a "Super Trend" down to a downward trend. Then today, we got another burst as the market rallied through the 20-day SMA (green line) to a high of about $13.92/bushel, only to collapse and close under the 20-day SMA at $13.78/bushel. As of right now according to my technical indicators and the action of the last few days the August soybeans are in a downward trend.

Now let's look at the big picture of this soybean chart which is that we are on our way to completing a "double top" formation. The first top came on April 30 when the market closed at about $14.40/bushel fell and then made the second or "double top" on May 23 when the market closed at about $14.45/bushel. So in my technical point of view to complete this "double top" which I believe we will, we have to back to the low before the market made the first top at $14.40/bushel on April 30. That price was a low of about $12.78/bushel on February 3. That is where the market will have to go in the next several weeks to complete our "double-top", so look out below, in my opinion. 

I figured this out by going back and forth from a daily to a weekly chart by the click of a mouse which I found here, which is a web application that we have developed for our clients called MARKETHEAD where I get about 80-85% of all my research from. That means I get both technical and fundamental research from this web app and I am a veteran series 3 Broker of 15 years. So if I'm using it then maybe my reader's should check it out.
 

Option Play

Some good plays I think could be to buy puts or put spreads with a call for a hedge or "insurance" in case the trend changes to up dramatically. I would recommend this a 3 to 1 ratio as always. Puts or put spreads give a limited risk and an in the case of outright put options, unlimited profit potential to zero for the price of the underlying future or commodity.

I believe this could be an opportunity, of course not without commensurate risk, to sell deep out of the money call options and collect premium. This is due to the current downward action or maybe the potential for future consolidation.

It is also important to note that I am not married to a market, but to trends. So I make recommendations with options on futures and commodities like the energies, metals, currencies, softs, financials and more.

About the Author

Matt McKinney is a full-service options broker at Zaner Group both buying and selling energies, metals, grains, softs, currencies and the 30-year bond market. My strategies include time frames of 45-120 days with the ability to liquidate at any time. I can be reached at mmckinney@zaner.com.