בס״ד

A Commodity Oddity – if We Ever Saw One… (SOYB)

Posted on July 8, 2020

This week’s trade seeks to leverage a budding breakout in the soybean field.

Soy is in the midst of a bullish move that we believe could carry significantly.

Why?

  1. 2020 planting estimates came in below expectations (to be exact, analysts overestimated totals by some 900,000 acres),
  2. Current hot, dry weather – and forecasts for more – are weighing on production prospects,
  3. New Chinese commitments to purchase U.S. soy (some 264,000 tons by August 31st), and
  4. Confidence among market players that deals reached thus far with China (and others) will put a floor under the bean going forward.

Then there’s the technical picture, which is also strong.

To wit –

This is chartage for the last half year of the Teucrium Soybean Fund ETF (NYSE:SOYB), and it clearly shows a commodity in early breakout motion.

Consider

  • First, the early March RSI oversold read (in red, at bottom), is generally a reliable indicator of a bottom, and
  • The subsequent positive divergence from price on both RSI and MACD charts (in green) foretells a change in trend,
  • A break above a five month down-sloping trendline (in red, top) marked the start of the lift (in mid-May), then
  • A textbook, four month head and shoulders bottom (in blue) that late last week broke above its neckline (black line),
  • Not to mention the tremendous volume accompanying the right shoulder of the H&S formation (black box).

It all spells breakout from our point of view.

And that, despite the fact that the commodities have been gut-punched by ongoing trade wars and the current, global corona-inspired economic slump.

We Sow the Soy…

With all the foregoing in mind, we’re going to make a fairly straightforward call on today’s soy crop by buying a synthetic long position.

Like this –

A Jew and His Gold recommends you consider the purchase of a SOYB February 19th 14 CALL for $1.35 and sale of the SOYB Februry 19th 14 PUT for $0.70.  Total debit on the trade is $0.65.

Rationale: The bullish nature of the set-up justifies the synthetic long position.  As constituted, the upside profit potential is unlimited.

So, too, though, is the downside.

We take comfort, though, from both the above fundamental/technical picture, and the fact that, when trending, SOYB moves in increments of roughly $0.10 a day, on average, meaning the options barely budge.

That said, you’ll have to figure your personal pain threshold, and set an appropriate STOP, say, when the spread between the options widens to _________ (fill in your “UNCLE” here).

According to our read of the charts, we feel confident holding the trade until SOYB $13.85.  Below that, we’re out.

Many happy returns,

Matt McAbby

 

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