Magic Lines & Tea Leaves

There was a lot happening in the various markets at the end of July, with much of it focused on the technical side of analysis. What do I mean by that? Technical analysis is based on price charts for the purpose of understanding trend, which, at its core, is nothing more than price direction over time. Analysts that fall into this category believe they can see the future, so to speak, and have a variety of gadgets and gizmos (also known as “indicators”) that they use to make their case.

Opponents of technical analysis usually base their argument on two points: 1) If enough traders are using the same technical analysis indicators, then patterns are simply self-fulfilling rather than forward looking, and 2) technical analysis is based on nothing more than “magic lines,” as a friend of mine once put it. These include support and resistance lines, trend lines, and the somewhat mysterious retracement lines associated with Dow Theory (33%, 50% and 67%) or Fibonacci (38.2%, 50%, 61.8%).

My initial training as an analyst was on the technical side, and over the past 30-plus years I’ve thrown out nearly all the different indicators and formulas associated with the business.

But not all of it.

This is why I have focused much of my attention on the National Soybean Index (NSI). This index, as well as those for the other major grain markets, is the national average cash price calculated daily with a track record going back at least a couple decades. I consider these indexes the intrinsic value of their various markets as they take into account both futures market prices and national average basis. In fact, it is these indexes that I use to calculate monthly available stocks-to-use based on the idea there should be a strong correlation between the national average cash price and national supply and demand — the real kind, as opposed to USDA’s imaginary version.

At the end of July, we saw the five major indexes (Soybean, Corn, the three wheats) all hit multi-year lows, telling us that available supplies continue to grow in relation to demand. This is pure fundamental analysis — supply and demand — so what does it have to do with this month’s discussion of technical analysis?

The National Soybean Index was calculated at $10.00 the evening of July 31. This alone isn’t overly meaningful other than to say it held at a big round number as the month came to an end. What stood out to me, though, was the fact the NSI, our best read on real FUNDAMENTALS, completed a TECHNICAL pattern that had been in place since the end of April 2023. Based on what the NSI’s monthly close-only chart showed, the index was calculated that month at $14.02, just below one of those magical trend lines and establishing a bearish head and shoulder top pattern (think of it as the Holy Grail of technical patterns analysts look for). Based on measurements and calculations, the monthly close for April 2023 put the long-term downside target (monthly close-only) near $10.26, a price that seemed improbable at the time. Improbable, but not impossible.

As the months progressed, we saw the NSI ebb and flow, though generally sticking with the long-term downtrend spawned by the head and shoulder technical pattern. At the end of February 2024, the NSI was calculated at $10.80, raising the question of if we should employ the horseshoe proximity (in market analysis, close is close enough). I thought about it, but chose instead to rely on Newsom’s market rule No. 1: Don’t get crossways with the trend. And the long-term trend of the NSI was still down.

Until I saw something indicating otherwise, I’d stay with the idea the NSI could continue to work lower. The chart shows the index was choppy this past spring and early summer, before the bottom fell out during July.

For the record, the NSI priced at $10 put U.S. available stocks-to-use at 15.2%, the largest month-end figure since 16.3% at the end of September 2020.

What stands out to me about how the NSI played out over the past 15 months is that it blew up the two major arguments against technical analysis. Those “magic lines” played out, from the original breaking of the trendline to the long-term downside target, throwing in the psychological line at the big round number of $10.00 for good measure. But more importantly, there was nothing “self-fulfilling” about the head and shoulder pattern and the NSI falling to its long-term target. Why? Because the Index isn’t traded. (Yes, I know it is set up to be traded, but there hasn’t been any volume in the contracts associated with the indexes since Day 1.)

This means there was something else at play, or as Buffalo Springfield sang, “There’s something happening here. But what it is ain’t exactly clear.” As Newsom’s Rule No. 5 says: “It’s the what, not the why.” I don’t care “why” it worked, just that it worked.

Where does this leave the NSI? As we move forward into August, things should stay interesting for the soybean market. Recall the old mantra “soybeans are made in August,” and weather forecasts for the early part of the month could still be viewed as favorable. Weather forecasts change, though, often quickly. And with most ag production markets viewed as weather derivatives at heart, the spotlight will be burning even brighter on the National Soybean Index as the U.S. moves closer to the 2024 harvest.