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.
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.
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.
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.