Learn charts to read between the lines of fundamentals
Fundamentals of supply and demand are an important piece of the marketing puzzle, but technicals are equally critical. The very act of reading a commodity price chart, though, can be stressful and confusing.
That’s why understanding the basics of technical analysis can be helpful for producers who want to double down on marketing education this year. You won’t base every decision off of what you see, but keeping an eye on price movement and historical data can yield clues that help you think about the big picture and ask better questions of your marketing advisers.
“As a risk manager, you can take advantage of the news discovery or discount process by improving your marketing strategies and timing,” explains Chip Flory, editorial director of Pro Farmer, part of the Farm Journal Media family. “You don’t have to be a full-time news hound since a quick look at any price chart tells you what the market thinks of all the news.”
Find Charts. Free and paid commodity price charts are available from a variety of sources, explains Michael Kahn, a chartered market technician at ChartIQ, a company that specializes in creation and analysis of stock and forex charts.
“If I wanted to look at corn [prices], there is an equity-traded product with a symbol of CORN that is really just a fund based on corn,” Kahn says. “You get an idea based on what’s going on with the trend, even though you’re not looking at futures or cash prices.”
Other options include Reuters, ESignal, Futuresource and Pro Farmer, which has some analytical tools on its website. Pair that information with the advice and insights you are receiving from your marketing adviser.
What To Watch. Approach any chart from a mindset of simplicity, Kahn recommends. Although there are four key indicators to monitor in any chart, he says, three of them will tell you most of what you need to know as you investigate price direction in agricultural commodities, equities or other markets.
The first indicator measures momentum, a reflection of underlying strength in a market. Think of it this way: When you throw a ball into the air, the ball continues to rise even as gravity starts to pull it down. At some point, gravity wins and the ball starts to fall back. The same is true in markets as selling takes over.
“These indicators are trying to assess if the market is moving too fast or if it’s starting to roll over and lose its power,” Kahn says. “It’s only based on price.”
Momentum indicators can also be used to determine whether a market is overbought or oversold.
“An ‘overbought’ market implies that all of the market participants who want to buy have likely done so. There is no one left to buy, and the market will fall for lack of new buyers,” Flory says. “The opposite is true for an ‘oversold’ market—the market has run out of new sellers.”
Volume And Prices. The second indicator you should use is one that measures volume, either raw or cumulative, Kahn says. That refers to how much of a particular commodity or stock is being traded in the marketplace. Volume reveals how active market participants have become. In a rising market, if enthusiasm does not increase, prices usually cannot continue higher.
“For example, if soybean futures trade sideways for several days following a downtrend and then surge sharply based on high volume and a rise in open interest, it would suggest more traders are entering the market and are willing to pay up for soybeans,” Flory explains. “That could be a signal that the market is about to move higher.”
The third indicator to watch is price structure. This indicator shows up in the form of chart patterns, which show whether a market is moving up or down in price on any given day, and moving averages, which show market direction over a longer period of time.
“They smooth out the wiggles and give you an idea of what the major trend is,” Kahn explains. “The key for anybody is to first know what the trend is so you can operate based on that. You don’t want to try to buy a dip in a market that’s going down.”
Trickier is the fourth and final indicator of sentiment. Kahn says farmers new to charting don’t need to worry about this one right away, though he offers a broad overview. “If everybody thinks the same way, chances are everybody has already acted and the market has nowhere to go but the other way,” Kahn says.
Recall the mood of investors at the top of the technology bubble in 2000, he says. Many stocks had no earnings, yet everyone wanted more. And in 2005, everyone seemed to be in the house-flipping business just before the real estate bubble burst.
Budget Time. Charting doesn’t have to take over your life, but it can complement your marketing strategy. “Glance at a chart at the end of the day,” Kahn says. “If the chart moves quickly, it will show you right away that you should do further investigation. I’m certainly not saying you should trade the chart every day. I would sit down at the end of the week with a longer-term chart and see if anything has changed.”
Be aware that while reading charts can improve your decision-making ability, it also requires patience and reliance on hard numbers as well as a little intuition.
“It’s your attitude and ability to judge market psychology that will determine your success at analyzing charts,” Flory cautions. “Because of the human element, chart and technical analysis is more of an art than a science.”
This chart showing December 2016 corn futures shows a downtrend in prices that began in October this past year. “When you analyze a chart, approach it as a study of human psychology,” notes Chip Flory, editorial director, Pro Farmer. “Charts reflect the crowd’s idea of where prices are headed.”
For links to the charting websites and videos mentioned in this article, visit agweb.com/commodity-charting-for-beginners.
10 Fundamental Steps To follow For Technicals
An expert in technical charting, John Murphy knows the value of spotting trends in the marketplace. Murphy, chief technical analyst at stockcharts.com, has summarized the essential elements of the craft in his Ten Laws of Technical Trading. Read his full essay at stockcharts.com.
1. Map the trends.
2. Spot the trend and go with it.
3. Find the low and high of it.
4. Know how far to backtrack.
5. Draw the line.
6. Follow that average.
7. Learn the turns.
8. Know the warning signs.
9. Trend or not a trend.
10. Know the confirming signs.