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SIEGEL
TECHNICAL MARKET UPDATE
FOCUS ON THE SOYBEAN MARKET: The prospect of strong domestic and foreign demand continues to keep soybean prices relatively firm and moving counter seasonally. Although the recent sharp rally stalled over the past week, the bulls remain optimistic and see increasing world consumption of soybeans and meal offsetting the record U.S. new crop now being harvested. However, with bean prices having climbed back above $7.00/bu., it appears that export cancellations are becoming more prevalent, as users feel they can now afford to wait for the pipeline to refill. This week, cancellations totaled 398,400 tons, believed to be from Brazil, China, Taiwan and Germany. Export sales were also lower than expected. Continuing to hear reports of a record U.S. harvest and yields higher than USDA estimates, and with the Brazilian Agricultural Ministry claiming that new-crop soybean production could jump by as much as 16% over last year, it appears that buyers no longer see the urgency to step up and extend coverage. Talk that adverse weather in South American growing regions has slowed the pace of planting also has lost some of its impact, especially since their new-crop seeding can continue well into the month of December. Nevertheless, should southern hemisphere soybean production suffer a shortfall, the market could easily skyrocket to an all-time high. Concern over the long-term effect of El Nino still remains apparent. However, many analysts claim that this weather phenomenon, while still a threat to world agriculture, has yet to live up to most of its negative press. Once again, a change for the worse would most likely have a dramatic impact on the world's grain and soybean markets.
At the moment, farmer intentions concerning selling or storing remains the critical question. While the bears counter that storing a record crop would have negative implications down the line, the very heavy usage pace seen early this season creates its own bullish scenario. Thus far, prices have weathered a considerable amount of bearish supply news. Although domestic ending stocks are projected to more than double this year, given the pace of consumption, a 270- million-bushel carryover is not considered excessive. Demand will remain the key to the near-term direction of prices, especially since the world will be forced into the U.S. market pending the South American harvests in the spring. Should U.S. farmers heed bearish warnings and begin to hedge their production, selling could intensify and prices fall sharply. Conversely, further confirmation of the increasing global appetite for beans and meal would keep the emphasis on usage and counter concerns of oversupply. It's quite obvious that the soybean market is currently reflecting an optimistic supply and demand balance. The glaring fact is that if world demand continues to grow, large crops will be needed in 1998. However, continued record production is not guaranteed, even without El Nino. This uncertainty is already being reflected in the marketplace, and very early in the current crop year. Accordingly, we expect prices will remain quite volatile in the months ahead, as traders react to the ever tightening global supply/demand scenario.
Technically, we see prices on a corrective path and headed toward the chart gap left near $6.75. This gap equates to a 50% retracement of the October rally. The slow stochastic continues to head lower, but has now dropped back into neutral territory. The intermediate support slope comes into play at $6.32/bu. However, lacking a bearish fundamental development, we doubt that prices will decline this far.
Recommendation–Look to buy near $6.75/bu. Sell Stop–$6.50/bu., close only. Objective–$7.50/bu.
FOCUS ON THE S&P 500 STOCK INDEX: Shock waves were sent throughout the world's financial markets this week as investors reacted to growing concern that Asia's currency crisis would spread to venerable Hong Kong. Long believed to be one of the most stable currencies on earth, and tied closely to the U.S. Dollar, efforts to support the HK Dollar, including raising short- term interest rates to 300%, generated a classic flight to quality and underscored how highly priced many world markets have become after a lengthy bull market. Here in the U.S., investors and traders also appeared to find merit in shifting some of their stock portfolio to the safe haven of U.S. Treasuries. However, though the Dow Industrials plunged by 186.88 points (2.33%) and the S&P 500 by 18.80 points, the overall sell off was not seen as significant. Indeed, thus far, the technical damage done to the S&P charts have been minor. Nevertheless, should the recent pivot point at 935.50 give way, a more serious correction could ensue, perhaps back to the 900 level. Of course, considering the stock market's well- recognized resiliency, many traders and investors simply see the Hong Kong debacle as a short-term phenomenon and one generating another good opportunity to buy stocks. Whether this strategy proves rewarding remains to be seen. However, if the world's financial markets fail to shrug off concerns over higher interest rates and global economic destabilization (especially in Europe), the sanguine attitude toward investing in the U.S. stock market could begin to suffer. In the S&Ps, a close under 900 would suggest a very serious correction was underway, leading to a drop to the 61.8% Fibonacci retracement band near 844. The next few days should provide a clue as to the severity of the Asian currency problems. Last week we advised considering new short near 965. Those taking this recommendation are already short and should remain so. The Hong Kong problems only provide investors with a further incentive to stand aside from further stock purchases. All things considered, further deterioration would not be surprising.
Recommendation–Maintain short positions. Buy Stop–982, close only. Objective–Conservative: 935.50; aggressive: 900.
DECEMBER LEAN HOGS: Support developing near 60¢/lb. along with a highly oversold stochastic have increased the odds of seeing a technical rebound in this beleaguered market. The opening of a seasonal buy window for the December contract on October 27th is also a promising sign. Fundamentally, diminishing hog runs and firming cash could provide the buying incentive for the packers. As it now appears that a nominal correction is in store, we've decided that it's time to do a little bottom fishing.
Recommendation–Maintain long positions. Sell Stop–59¢/lb., close only. Objective–Conservative: 63¢/lb; aggressive: 65–/lb.
DECEMBER COCOA: Accelerating arrivals of new-crop cocoa at Ivory Coast ports along with concern over the increasing usage of cocoa substitutes in European chocolate products appears to be unnerved the bulls. Prices closing below the September low also cast a pall on this market and point to a test of the trend line support now at $1535/mt. As prices near this slope, we'll be looking for signs of bottoming and reconsider new long positions as conditions dictate.
Recommendation–Temporarily stand aside.
DECEMBER SILVER: Although the recent sharp draw down in silver stocks and the collapse of the Hong Kong stock market have failed to reignite bullish interest in the precious metals, we continue to have faith in silver's upside potential. A 50% retracement of the July/October runup would see futures back near $4.75/oz. and on top of trend line support. We'll anticipate a rebound from this level, but maintain stop loss protection, just in case.
Recommendation–Look to buy near $4.75/oz. Sell Stop–$4.60/oz., close only. Objective–$5.50/oz.
DECEMBER CRUDE OIL: In the wake of the Hong Kong stock market debacle, the fear of deflation spreading from Asia to other regions of the world is keeping the energy markets on the defensive. Seasonally, crude tends to top in October and move lower through January and February. If this trend reasserts itself this year, we already may have seen a top posted near $23/bbl. Nevertheless, as long as prices hold up above $20.50/bbl., the bulls can make a case for further strength. A low stochastic reading also compliments bullish ideas. We'll look for a short-term rebound back above $22/bbl. before considering taking advantage of the bearish seasonal potential.
Recommendation–Look to buy near $21/bbl. Sell Stop–$20.50, close only. Objective–$22/bbl, or look to sell near $22/bbl. Buy Stop–$23/bbl., close only. Objective–$20/bbl.
DECEMBER WHEAT: The perception that U.S. wheat demand is suffering against other world competitors continues to confound the food grain bulls. The unresolved dispute over TCK smut in wheat exports to China and indications that the U.S. winter wheat crop is off to a good start is also keeping the buyers tentative. Indeed, lacking the spillover strength from corn and beans, we feel that this market would probably be facing a new contract low. Technically, the down turn in the overbought stochastic suggests more near-term pressure and a possible test of the trend line support near $3.50/bu. Prices must hold the October low at $3.48/bu. or face a sell off back to $3.36/bu.
Recommendation–Look to sell near $3.75/bu. Buy Stop–$3.80/bu, close only. Objective–$3.50/bu.
DECEMBER U.S. TREASURY BONDS: Reacting to a collapse in the Hang Seng Index, investors flocked to U.S. Treasury securities as a safe haven. In a classic “flight to quality,” strong demand for T-bonds forced yields to 6.304% and prices upward by 1½ points. With outside forces now determining movement in U.S. stocks and government securities, traders were quick to rationalize that the Fed would be reluctant to aggravate the tenuous situation in the world FOREX markets. By itself, this should provide further incentive for buyers who have apparently reaped a windfall. Similar to the S&Ps, a few days will be needed to access the ramifications of Asia's currency woes and the impact on Treasurys. In the current environment, a move back to 118-00 is a distinct possibility.
Recommendation–Maintain long positions. Sell Stop–113-00, close only. Objective–Aggressive: 118- 00.
October 23, 1997 Siegel Trading Company, Inc.
549 Randolph, Chicago, Illinois
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