Charts Offer Quick Read of Market Trends

January 30, 2013 04:36 AM

Charting can help producers make decisions ahead of time and with less emotion.

The philosophy behind chart reading or technical analysis is simply this: Past price trends are indicative of the future. However, it’s not that fundamentals don’t matter, says Ashley Gulke Leavitt, market analyst and legal counsel for The Gulke Group.

"USDA reports inevitably move the market," she said at Tomorrow’s Top Producer Seminar in Chicago. "But when you look at a chart, it paints the picture of 1,000 pages. It means less reading."

Furthermore, you can choose any time frame to create charts, such as daily or weekly. Another advantage to using technical charts: "You can make (marketing) decisions ahead of time with less emotion," Leavitt says.

To begin charting, Leavitt suggests connecting the highs for a downtrend and connecting the lows for an uptrend. "The more points that touch a line, the better it is," she explains. Wait for two consecutive closes on the opposite side of a trend line to confirm a change in trend, she says.

Another reason to use charting in addition to fundamental analysis, Leavitt says, is the wild volatility in the market. Looking at December 2012 corn futures, the low was hit on May 11, 2012, of $4.99/bu., with the high of $8.49 on Aug. 10. For a farm with 600 acres of corn with only 100-bu. yields because of the drought, that’s a difference of $210,000. For comparison, she notes that an average doctor’s annual income is $161,000.

In technical analysis, "you look for support and resistance," Leavitt says. That said, "reading charts is more of an art than a science." Some of the formations she looks at signaling price changes are "flags" and "double bottoms."

Other important movements Leavitt pays close attention to and charts regularly include the positions of large speculators. When they start either buying or selling contracts, it portends market movements, she says, although they change their positions at a relatively slow pace.

"They don’t get out of their positions all at once. It’s more like turning a large ship," Leavitt says. She understands the criticism of speculators because they add market volatility, but they also add liquidity and make it possible for grain farmers to sell contracts even at high price levels when some users, such as cattle feeders or ethanol plants, won’t be in the market. What to specifically look for, she says, is the net position/open interest of large speculative traders.

Last February, Leavitt notes, large speculators were beginning to build their positions on corn. "They were starting to get more long. In May, large speculators decided to own wheat, and prices went higher. I like to follow large speculators," she says. "It really works."


See full coverage of the 2013 Tomorrow’s Top Producer event.



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