Consensus National Futures and Financial On Line Index
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SIEGEL
TECHNICAL MARKET UPDATE
FOCUS ON THE SOYBEANS: The fallout from the Asian financial crisis continues to leave traders increasingly sensitive to news emanating out of the Far East. Concern over a further slowdown in Asian import demand and recent sales cancellations from Thailand and South Korea continues to cast a dark cloud over the bulls who were depending upon strong global demand to spur prices higher into the spring. According to recent data, demand from Asian countries such as Taiwan, Japan and South Korea amounted to 267 million bushels of U.S. soybeans, or 30% of U.S. exports last year. The latest USDA supply demand estimate puts exports at a record 980 million bushels, up 98 million bu. from last year. Obviously, a major dent in foreign import demand would force “Uncle Sam” to re- evaluate their optimistic projection. Should the export number be adjusted downward, ending stocks could jump above the current 255 million bushels now projected, which in turn could significantly improve the low stocks-to-usage ratio of 9.7%. This week, the announcement of Japan's new fiscal stimulus package came as a pleasant surprise to bullish traders, who favor anything that could help avert a potential slowdown in Japanese imports. However, news on Thursday that Toshoku Ltd. Trading Company, a key Japanese buyer of U.S. agricultural products had filed for bankruptcy served to cancel out any encouragement. Indeed, there are many economists who still feel that the longer-term impact of Asia's financial woes on the U.S. are yet to be felt. Should the demand side of the U.S. soy balance sheet soften, the sharp jump in world supplies could weigh significantly on the market. This weeks sharp break stands as testimony to this growing concern.
Look at supply prospects, ideal growing conditions in Brazil continues to increase the odds of seeing another flood of South American soybeans this spring. Brazil's minister of agriculture has already raised the official government estimate of 1997-98 soybean production to 30.5-31.0 million metric tons, which is a whopping 16.5 to 18.6 percent above last year's record output. Brazilian soybean plantings are now 93% complete with heavy rain forecast for the weekend. In the products, soy oil continues to gain on meal, as the monthly NOPA crush data showed oil stocks at 1.216 billion pounds versus 1.261 last month and 1.630 last year. Besides beans, cancellations of meal purchases are also worrisome, as Asian buyers who have not hedged their currency risk continue to cut usage to the absolute minimum. Considering, that in many cases, soybean, meal and oil prices, in terms of the local currency have, in many cases, more than doubled since last summer, this is quite understandable.
On the bar chart, we find March soybeans falling back through the chart gap left at $6.85/bu. Prices continue to trade within the boundaries of a negatively sloping channel and are approaching the Fibonacci 50% retracement band near $6.70/bu. Should the market collapse beneath this band, the next stop would be the trend line support another 10¢/bu. lower.
Recommendation–Look to buy near $6.60/bu. Sell Stop–$6.50/bu., close only. Objective–$7.00/bu.
FOCUS ON CORN: Similar to the reaction in the soybean market, news that a major Japanese trade house had filed for bankruptcy also served to exacerbated the growing concern over the Asian crisis and its potential negative impact on U.S. export demand. Rumors that additional Japanese companies and financial institutions could soon fall by the wayside has also helped to fuel bearish trader sentiment and collapse corn prices to a 2½-month low. Reports that bidding for cash corn in the Gulf of Mexico has dropped significantly in the past few days were viewed by some as signs of weakening Asian demand. However, at this point in time, we feel that this conclusion is premature. Nevertheless, with cumulative export sales now at 36.5% of the projected USDA estimate, and running 16% under the norm, the early complacency surrounding the Asian financial crisis is quickly changing. Financially strapped South Korea is already seeking U.S. agricultural credits and canceling earlier sales from China, who apparently has much more product to sell. Here at home, farmers are increasing sales, now fearing that a major price collapse is just around the corner. The bulls hope that the lower prices could eventually rekindle strong demand. However, with Asia tightening its collective belt, only time will tell.
Technically, prices continue to slide down a well-defined channel, and are now nearing the September low near $2.64/bu. The slow stochastic, now reading in single digits, indicates a highly oversold market. Should the bears continue to rule and collapse prices below the September low, the next stop could be the chart gap left just under $2.50/bu. Upside resistance comes into play above $2.70/bu. and extends to the upper channel boundary near $2.80/bu.
Recommendation–Aggressive–Look to sell on a rally back to $2.73/bu. Buy Stop–$2.80/bu., close only. Objective–$2.50/bu.
FOCUS ON CRUDE OIL: The highly oversold crude oil market finally found a reason to advance this week, as news that Saadam Hussain was once again butting heads with U.N. weapons inspectors, and reports of some minor refinery problems was enough to send the weaker shorts to the sidelines. With prices under substantial pressure over the past few weeks, the excessive buildup in the long trader commitment and proximity to year-end made this market especially vulnerable to a short covering rally. Nevertheless, considering that energy fundamentals remain quite negative, we consider recent price action as nothing more than a bear market correction. A further advance from current price levels would not be too surprising. However, should prices reach the Fibonacci 38.2% retracement band near $19.75/bbl., a selling opportunity may be presented.
Recommendation–Look to sell near $19.75/bbl. Buy Stop–$20.25/bbl, close only. Objective–$18.00/bbl.
FOCUS ON LIVE CATTLE: The prospects of yet another bearish monthly Cattle on Feed report, combined with lackluster cash trade and further Asian financial woes, continues to depress trader sentiment, keeping “fat cattle” prices on the defensive. Estimates for the next COF report show on-feed numbers at 107% of last year, placements at 91.6% and marketing at 101.3%. While most analysts feel that the report will be construed as neutral, the poor packer demand and soft cash markets are expected to dominate the near-term trade. However, with another storm forming next week in the western plains, and cold winter temperatures fast approaching, we feel that the stage is now being set for a correction that may help recover a good part of the losses incurred since late November. If so, a move back to the 61.8% retracement band at 68¢/lb. would not be too surprising. Should the bulls get a further boost, a test of 70¢/lb. is not out the question. The oversold stochastic and pivot point low posted at 65¢/lb. are promising technical signs that enhance the odds for a rebound. Conversely, a solid close under 65¢/lb. would lower sights at least another 200 points.
Recommendation–Aggressive: Look to buy near 65¢/lb. Sell Stop–64.50¢/lb., close only. Objective–68¢/lb.
FOCUS ON COFFEE: An initial surge in the nearby March contract on reports of freezing temperatures in Mexico's major coffee growing areas proved to be short lived this week, as the speculative fervor that drove prices to a 6-month high fizzled as quickly as it began. With meteorologists now seeing little frost damage done to Mexican coffee trees, and prospects of a large Brazilian crop steadily increasing, it took very little time for commodity fund selling to erase more than 50% of the sharp gains posted throughout November and December. Moreover, with the Coffee and Sugar Exchange warehouse stocks reported at 70,270 bags, up 10,250, and signs that the Brazilian supply tightness is beginning to ease, it appears that further liquidation may still be in the cards. If so, support at the key $1.50/lb. level eventually could be tested. Should the commodity funds decide to reverse positions, a drop back to $1.40/lb. is quite conceivable.
Recommendation–The extreme volatility in this market demands a limited risk position. Consider purchasing puts should futures rally back above $1.70/lb. Objective–$1.40/lb.
December 19, 1997 Siegel Trading Company, Inc.
549 Randolph, Chicago, Illinois
Consensus National Futures and Financial On Line Index
Hosted by:
One Crossroads Place
610 West Maple Ave, Suite WWW
Independence, MO 64050
(816) 252-4080
sysop@kcmo.com
