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Soybean Opportunity After Strong Rally and Deep Pullback


Soybeans (ZS) had an awesome run higher between March and early June. The November soybean contract advanced from 868 on March 2 to 1186.25 on June 13. Since the high the price has been in an aggressive pullback.

The original trade idea (published July 13) was to buy when the price consolidated for at least three days in the 1027 to 989 region (50% to 60% retracement of the rally). A trade would be taken when the price rallied above the high of the three day consolidation, with a stop loss below the consolidation.  The initial target price for the trade was 1160, with a longer-term target at 1250. These targets remain valid.

Now in August, the price fell through the likely trade area, but didn't consolidate and thus didn't provide a trade based on the original trade idea. Falling through the trade area isn't a bad thing. It just means we are seeing a bit deeper pullback than normal--currently it has retraced about 75% of the advance.

Figure 1. November Soybean Futures, Daily Chart

A long trade is still preferred based on the big rally, so wait for a three day consolidation near the 955 level. This is where the selling has stalled in early August.

August 2 and August 3 have stayed in roughly the same spot, so if the price stays in that region on August 4, look to go long if the price breaks above the intraday high of those three days (currently 968, but that could change before the close on August 4). A stop loss is placed just below the low of the consolidation, currently at about 940 (also could change). 

If the price continues to drop without providing the three day consolidation, let the trade pass, but continue to watch for the signal as the price moves lower. If the price drops below 868 though, then all the gains have been erased, the trend isn't up, and the market needs to be re-assessed before a trade is taken.

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