For technical traders one of the key price patterns that we always focus on is when markets are in congestion, and the question, of course, is why? Many traders find these extended periods frustrating, believing incorrectly, that they are missing trading opportunities with a market or instrument that is failing to trend, and ultimately get whip sawed in and out of trades as they lose patience.
Patience is the key, and if you are prepared to wait, then the trend will follow. Indeed as I have explained in my forthcoming book on volume price analysis, congestion phases are the spawning ground of trends.
The daily chart for the soybean July contract is a classic example of this tenet. The commodity was in a prolonged congestion phase from February 2012 until early May, constantly testing the 1420 cents per bushel price region before pulling back and building a platform of support in the 1320 cents per bushel area. The last of these was triggered at the end of March following a USDA report which was generally unfavorable to soft commodities.
The breakout to this congestion phase finally occurred in mid May when the commodity broke above the 1420 cents per bushel area to move firmly higher in a series of stages and beyond 1500 cents, supported by rising volume, classic signs of price validation and strength. However, it is interesting to note the shooting star candle of 23rd May associated with ultra high volume giving an early signal of potential weakness ahead. Whilst the commodity did indeed continue to move higher, despite the initial early warning of a shooting star candle with ultra high volume, yesterday’s price action delivered a further sign of weakness with a second and subsequent shooting star on high volume.
Both of these candles topped out at the 1550 cents per bushel price point. This is yet another feature of market reversals. They rarely turn on a dime, and will take time to reverse, but the shooting star candle with high or ultra high volume is often the pre-cursor to a potential reversal. Time will tell for soybeans, and as always the technical picture has to be read in conjunction with the USDA reports and associated data from both the old and new crops.
By Anna Coulling