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Analysis of commodity markets is generally broken into two schools, fundamental and technical. Fundamental analysis looks at all the issues that make up supply and demand:
weather, government policy, government estimates, the occasional news headline, etc. Technical analysis looks at the trend (price direction) of a market as it is plotted on a chart. From these charts a wide array of
analytical studies evolved from Charles Dow’s original theory for studying the stock index named after him.
Another way of looking at these two different types of analysis is as cause and effect, with fundamental
studying cause and technical effect. However, it is important to note that when it comes to the markets we often see the effect well before we know the cause. In other words, charts can give indications about
changes in market direction before the general public hears of the news that could be associated with such a price change.
Take for example the recent $1.50 downturn in the new-crop corn market that many blame on the June 30 USDA crop
acreage update. Corn acreage increased 2 million acres to 87 million from the March 31 Prospective Plantings report seemingly driving the market lower in response. However, a close look at the December corn weekly
chart (a chart that plots a market’s/contract’s weekly high to low price range and close) shows the contract gave a simple signal that the trend had changed as early as the week of June 15, two weeks before the
report was released.
In my case, I prefer to use elementary technical analysis to look for price patterns that indicate future
direction for the reason indicated in the above example. In other words, it isn’t as important for me to know why a market changes direction for the different reasons can be as varied as the number of traders in a
market. What is more important to me is when the market changes course. And charts remain a better timing device than news headlines.
I say “elementary technical analysis” because over time I have looked at, tested, and tried most of the
technical analysis tools ranging from simple volume and open interest to more mathematical moving averages and stochastics. Along the way I found that one market variable negated most technical tools, that being
volatility. The more volatile a market became (e.g. in grains, usually during a weather market) the greater the lag in time when a clear technical signal was given in these indicators.
Therefore, I prefer to keep my analysis of trend as simple as possible. I continue to use the four-week rule (a
move above or below the previous four-week high or low) or reversals (weeks/months when a market/contract trades both above and below the previous week’s/month’s price range) to indicate a possible change in
direction. After that it is simply a matter of calculating retracement levels of 33 percent, 50 percent, and 67 percent (and counting the number of “waves” (moves) the market has created. In other words, I still
find the elements of the original Dow Theory the most useful in projecting price movements over time.
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