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Taming the Bulls & Bears Evaluating Market Trends By Betsy Jensen, Ag Commodity Instructor, Northland Community and Technical College,
The markets often don’t appear to make sense. We can be in the middle of a drought, and the market goes down. We can harvest a record crop, and prices go up. This can make predicting short term market movements based on market fundamentals frustrating. So for short term decisions, I often rely on technical indicators. A disclaimer: I’m not a big fan of technical trading. To me, a drought is a drought, and prices will rally, regardless of what a technical indicator says. But when it’s difficult to make a marketing decision, when I have that “deer in the headlights” look, I often turn to a technical indicator. There are many technical indicators to choose from, but I’m only familiar with a few. I use the interactive charts on www.agnewsonline.com and there is a long list of technical indicators. Most of them I cannot even pronounce, much less understand. I’ll give you my humble opinion on how I use technical indicators, but I will admit that I am still a fundamental trader at heart. I’m certain you have been in this situation before: The market is rallying, but you have already sold a lot of your crop
. The price is good, but what if it goes higher? Now it is time to pull out the technical indicators, and my favorite for
this scenario is the oscillator, which measures moving averages. Moving averages are the average price for the past
few days. A five day moving average is the average price for the past five days, and it is the same for the three, or ten, or even one hundred day moving averages.
An oscillator tracks the difference between two different moving averages, such as the five and ten day. When the market is rallying, the oscillator is above zero (the five day moving average is higher than the 10 day). When the market begins to trade lower, the oscillator will go below zero, which means the 10 day moving averages is now higher than the 5 day, and the uptrend is over. There are a few words of caution when it comes to oscillators. The first warning is that using an oscillator guarantees you will never sell at the high. It takes a few days before the oscillator recognizes that the trend has turned, and how much damage can be done in a few days? Since rallying markets are often known for their “spike tops,” you can easily give up 30 to 40 cents from the highs, if not more. Another word of warning is that there must be a trend in the market. If prices are flat, you will get buy and sell signals every few days. Prices must either be going up, or down, in order for the oscillator to work. What days to use and how far should they cross is debatable. Should you use a 5 and 10 day, or how about 4 and 9 ? Should you sell if they cross by just a penny, or should you wait for at least 3 or 4 cents to make sure it’s not a false signal? You’ll get a different opinion from every technical trader. Another technical indicator I often use is the Fibonacci Retracement. The bottom line is that every major market move will retrace itself. When the market is crashing, there will be a bounce. When the market is rallying, there has to be some sort of setback. A retracement will not tell you where the market will bottom or top, but it will tell you how far it will bounce. So picture the middle of harvest, and prices have made their usual harvest lows. You delivered grain right to the elevator, and are now paying storage, so you would like to get rid of it in the next two to three months. By using a retracement from the middle of summer price peak, to the harvest low, you can figure out how far the market might bounce, and where to place the sell order for your elevator bushels. You can always pick a random number, but I like to use a retracement to make a more educated guess. There are three levels of retracement, and generally I use the 50% retracement level. That means if the market has dropped a dollar, we should see a fifty cent bounce. When you select Fibonacci Retracement, you will see all three levels, but try to focus in the middle 50% level. The problem with the retracement is that there has to be a market top, and bottom. The market may have dropped a dollar already, and you are waiting for a fifty cent bounce, but what if it drops another dollar? My best advice to technical trading is to play with the interactive charts on www.agnewsonline.com. On the web site I have created a tip sheet (“Tips for Interactive Charts”) which you can print off to walk you through the basics of charting. The USDA Risk Management Agency is providing funding for the charts through October 2007, so please utilize the charts while they are available. I am still a fundamental trader at heart, but I like to keep a few technical tools up my sleeve to keep me a well rounded crop marketer. Jensen puts her marketing strategies to work farming with husband Brian near Stephen, Minn. Her market education activities including this column are supported in part by the Minnesota wheat checkoff, directed by the Minnesota Wheat Research and Promotion Council. More Resources for Technical Analysis http://stockcharts.com/education/IndicatorAnalysis/indicators1.html http://web.extension.uiuc.edu/grainmarketing/basics_techincal_analysis.html http://www.futuresfacts.com/QuotesAndCharts/indicators.asp http://www.ag.ndsu.nodak.edu/aginfo/cropmkt/cropmkt.htm (click on ‘analysis’ then see Powerpoint presentation – ‘Technical Analysis (2004)’ http://www.agrisk.umn.edu (click on ‘Ag Risk Library’ then ‘Price’ and scroll down to ‘technical analysis’) |
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When it’s difficult to make a marketing decision, when I have that
