You aren’t the only one to ever feel this way. You push your chair away from the computer and mutter to yourself, “Marketing, it’s just a giant puzzle at times.” You feel both a little intimidated by markets and a little frustrated as well. Whenever you price your grain, sure enough, the market continues to rise. And whenever you decide to buy back commodities to replace your cash sales, it’s just Murphy’s Law. Had you waited, you could have bought the paper even lower.
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When assessing market direction, there are two key types of market analysis. Fundamental analysis follows the law of supply and demand. At first sight, you would think that fundamental analysis would be enough to make a timely marketing decision, but it isn’t. Even though the fundamentals of supply and demand point to prices being bullish or bearish, sometimes it just doesn’t work out that way. Markets — whether in equities or commodities — often have a mind of their own outside their fundamental world.
In other words, sometimes when you look only at the fundamentals, price direction simply doesn’t make sense at all. So the other type of market assessment, called technical analysis, is based on chart movement.
If we were analyzing a price road map, the fundamentals (i. e. the law of supply and demand) suggest where prices are heading eventually. But the technicals determine what roads the market will take to get there.
That makes technical analysis a much better analytical tool to assess near-term price direction. And for the producer, the use of technicals helps the timing of a grain sale.
Marketing strength lies in your ability to assess pricing decisions from both a fundamental and technical viewpoint, yet the tools needed for your charting purposes can be as simple as a transparent ruler and pen. It doesn’t need to be difficult. Here are some chart signals that may be useful in timing your pricing decision. They aren’t foolproof. Technical analysis isn’t a guarantee of better prices, but it can be used to increase the odds of making a timely pricing decision.
Technical analysis shouldn’t be complicated. It is built on
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Fundamental And Technical Analysis Aren’t As Complicated As They Sound, And May Be Your Best Step To Higher Prices
the assumptions that prices trend, and that the trend line is an extremely useful tool in spotting changes in price trend. In a rising market, as long as prices remain above the trend line, the uptrend is considered solid and intact. A “sell” signal is generated when the market closes below the uptrend line. In a declining market, the reverse holds true. As long as prices remain below the downtrend line, the lower price trend is considered solid and intact. A “buy” signal is generated when the market closes above the downward trend line.
Another key chart indicator for producers is support and resistance. Chart support is the price level at which demand is thought to be strong enough to prevent the price dropping further. As prices fall and get cheaper, buyers become inclined to buy and sellers become less inclined to sell. Chart support holds.
Chart resistance is the price level at which supply is thought to be large enough to prevent prices from rising further. As prices get more expensive, sellers become more inclined to sell and buyers become less inclined to buy. By the time the price tests technical resistance, supply overtakes demand. Chart resistance holds.
Identifying key support and resistance levels is a powerful tool, and being aware of their existence and location can greatly enhance timing of cash grain sales. If a commodity price is approaching an important support level, producers should be on alert that prices are nearing a price bounce. A market approaching support may indicate an opportunity for growers to replace their cash grain sales with long futures or call options. But it may also suggest keeping their unpriced grain in the bin, especially if basis levels are weak and wide.
If prices are nearing key chart resistance, this can offer several signals. For the holder of unpriced grain, this is an opportunity to scale in cash sales. For grain not yet produced, this can offer a new crop short (sell) hedging opportunity.
Chart resistance often signals a toppy cash market. Futures markets tend to have a difficult time breaking above areas of price congestion. A horizontal line is drawn across the top of the plateau of market tops. Unless fresh bullish fundamental news emerges, prices respect this line of resistance as the top of the market. Life of contract highs is considered heavy technical resistance.
Conversely, chart support may signal a bottoming cash market. Markets have a difficult time breaking below areas of price congestion. A horizontal line is drawn across the bottom of price bottoms. Unless fresh bearish news emerges, prices will rebound off this line of technical support. Support lines tend to signify long (buy) hedging opportunities for the producer. Life of contract lows are considered heavy technical support.
Chart gaps can also act as price targets. A chart gap can occur when the market collapses or rallies so quickly, there is no trade within a price range. As a rule of thumb, such gaps in charts occur when a new piece of market information shocks the market. The market typically comes back and tries to fill the gap in the following days or weeks. Gaps can also be used as targets to place or lift hedges. The chance price direction will reverse once the gap has been filled is high.
Moving averages are one of the most popular and easy-to-use tools to spot trends. The most common is the “simple moving average.” The simple moving average is formed by computing the average (mean) price of a commodity over a specified number of trading sessions. Typically moving averages are based on the closing price for a specified number of days. The longer the moving average, the more significant it becomes as a technical indicator of price trend change. For instance, a 40-day moving average is more significant that a 10-day average, and a 100-or 200-day moving average is highly respected. In a
rising market, a 100-day moving average breaking below the closing price may trigger aggressive selling. The odds prices will break is high in this situation.
Keeping an eye on those charts and adding a dose of technical analysis to your market plan is just another tool to help price production profitably. It may be the added market radar needed to eke out those business profits especially in our uncertain global environment.
Errol Anderson is located in Calgary and author of “ProMarket Wire,” a daily grain and livestock risk management report. He can be reached at 403-275-5555, email: [email protected].
