Soy Meal/Bean Oil Spread: A Failed Summer Bullish Breakout Attempt and a Bearish Breakdown Last Week. Is This the Start Of an Overdue Bear Market?!

The Soy Meal/Bean Oil Flip-Flop

At the midpoint of 2015, the IMC blog initiated a reversal strategy in the December soy meal/bean oil spread. The idea behind the strategy is that a breakout to new contract highs could clear the way for the spread return to the 2014 summer high of +$24,726 (basis the weekly nearest-futures) or else it should finally roll over and return to the ‘even money’ level. Either way, a move of several thousand dollars is expected.

The strategy calls for always being short on a close below +$13,500 and always being long on a close above +$15,500. So far, we’ve been whipsawed. The blog shorted the December soy meal/bean oil spread at approximately +$13,664 on June 30th, reversed and went long at +$15,818 on July 15th, and once again reversed and went short at +$13,284 on October 2nd. After taking two losses in a row, we hope that this third time will be the charm.

December Soy Meal Bean Oil spread daily

December Soy Meal Bean Oil spread daily

Technically, we have a couple of things in favor of the new short position. First of all, the December soy meal/bean oil spread broke out into new contract highs back in July. After no follow-through and a couple of months in a trading range, the recent decline is indicative of a failed breakout attempt.

Secondly, the spread closed below the August 12th correction low last week. This was the lower boundary of the trading range. This pattern is considered a bearish breakout.

Review the Big Picture

When we step back and look at where the soy meal/bean oil spread has been over the last 45 years, it gives us a clear indication that the current price is both an infrequent and expensive occurrence. Previous excursions to these highs have been followed by a return to ‘even money’ where the soy meal surrenders its entire premium.

Soy Meal Bean Oil spread monthly

Soy Meal Bean Oil spread monthly

After two years at the high end of the price range, it seems that a reversion is due. Let’s see if the recent price break is the start of it. If not, we will not fight the price. A breakout to new contract highs would be a bullish event and give us a good reason to get back on the long side of the soy meal/bean oil spread.

Slight Parameter Change

Due to an increase in volatility and the July, August, and September price peak levels for the December soy meal/bean oil spread, we think it would be prudent to raise the level for the buy side of the reversal system.

The spread peaked at +$15,890 in July, +$15,842 in August, and +$15,744 in September. Therefore, buying a close above +$15,500 would be inside the recent trading range. We are going to raise the buy level $500 to account for this.

Trade Strategy:

The blog is holding a hypothetical short position in the December soy meal/bean oil spread that was entered at approximately +$13,284 on October 2nd.

Continue to run the reversal system to initiate a long position (long meal and short oil) on a close above +$16k and a short position (short meal and long oil) on a close below +$13,500. Each price level will act as a stop and reverse point.

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