by Jason Thomas, President of Healthy Brand Oil
***NOT A TRADE RECOMMENDATION***
The soybean oil futures market has been on fire. As of last Friday’s close (AUG 2023 Futures), the market was up 31.29% from its bottom in 12 trading days. The last twelve trading days are about as strong a technical move as you will see. Underneath the technical move is a solid fundamental supply/demand story and the current deterioration of N.A. crop conditions because of a lack of moisture.
As you can see from the below set of charts, the market is trading the highest percentage above the 20-day moving average in the August 2023 contract ever. In addition, the second chart shows that we have only been this far above the 20-day moving average (aka 4-week moving average) three times since 1971. Or said another way, the previous 12 trading days have provided one of the three strongest moves versus soybean oil’s 20-day moving average going back to 1971.
From a short-term perspective getting long after this type of move in the futures is terrifying to me. In simple terms the odds heavily favor the fact you have missed the move.
As I put my finishing touches on this post (8:30 pm Tuesday), rumors of a disappointing EPA biofuels announcement (more below) coming tomorrow have the soybean oil market limit down. With the market having been so strong in recent days I think its likely that traders knew they were leaning too far bullish and used the EPA news to dump their long positions. Let’s see how the market responds once the EPA recommendation sees the light of day and the market has a couple of days to digest it.
I regret that this note didn’t hit your inbox Tuesday morning before tonight’s limit-down move. It certainly would have been more helpful then. I still wanted to send it along to show how we can use price action extremes over different time frames to help inform us on when moves in either direction may be a bit overdone.
While some of our previous work using the 150-day moving average has been geared more to hedgers today’s analysis is more short term based and I’m hopeful those buying oil without the ability to hedge and for delivery in the coming days will find it helpful. With EPA news, weather issues, and extreme price swings, this market can move quickly, so having a plan and assessing things from a risk first perspective is the way to go.
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