(S)S-T Divergence, Sentiment Plunge Warn of Soybean Base, Reversal; Establish Pure Risk/Reward Longs at $11.81

Trade Strategies, October 10, 2011; 8:00am

In last Wed's Technical Blog we introduced some developing factors that may contribute to a base/reversal environment that could present a tremendous buying opportunity for weeks or even months ahead. The weekly log chart below shows the market thus far holding at the 11.50-area defined by a pair of Fibonacci progression and retracement relationships while market sentiment has eroded to levels that, in the past, have accompanied base/reversal environments.

Indeed, our MRT Bullish Sentiment Index of "hot" Managed Money positions, while still arguably high at 78%, has eroded to a 73% reading that is one of its least bullish levels in the past 15 months. Additionally, the Bullish Consensus measure of market sentiment (www.marketvane.net) has dropped to its lowest level (46%) since that that accompanied Jun'10's major base and reversal.

Another factor that adds to a compelling base/reversal threat is that the decline from 27-Sep's 12.79 high detailed in the hourly chart below has spanned a length exactly 61.8% (i.e. 0.618 progression) of the preceding 14.65 - 12.38 decline. We believe this Fibonacci fact contributes to an Elliott Wave count that contends that 04-Oct's 11.52 low completed a 5-wave sequence down from 31-Aug's 14.65 high. If correct and especially combined with the longer-term factors discussed above, the market may be in the embryonic stage of a reversal higher that could produce significant gains.

To be sure, relative to the magnitude of Sep-Oct's 21% collapse shown in the daily log scale chart below, the factors cited above and even overnight's gains above Thur's 11.81 high are grossly insufficient to conclude a larger-degree reversal higher. On this scale, proof of strength above 29-Sep's 12.37 corrective high remains required to break the broader downtrend. But for traders willing to acknowledge this lack of sufficient bullish proof in exchange for a lower nominal risk to a bullish play, we believe a pure risk/reward trade is currently being presented following overnight's break above Thur's 11.81 high. For if correct, this technical assessment would expose at least a larger-degree correction of a more than $2.00 plunge, and quite possibly a resumption of the secular bull to levels above 14.65!

These issues considered, traders are advised to establish bullish exposure at 11.81 with tight but objective sell-stops just below Fri's 11.55 low as this would confirm the recovery attempt from 11.52 as a 3-wave and thus corrective affair consistent with Sep-Oct's ongoing broader bear trend. In lieu of such sub-11.55 weakness, the base/reversal factors discussed above could produce surprising gains in the days/weeks immediately ahead.

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