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Two strategies to analyze commodity markets

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Are you a follower of fundamental or technical grain market analysis?

We all wish we could find the “holy grail” of predicting what grain prices will do. There is only one thing that is 100% accurate in predicting grain prices and it is nothing. Nothing is 100% in this business when it comes to predicting prices.

There are two methods of market analysis, namely fundamental and technical.

Fundamental grain market analysis

Anything which directly or indirectly affects the supply or the demand of a commodity is a fundamental factor.

Most of these factors are obvious. On the supply side, factors include acres planted, yield, acres harvested, weather, etc. On the demand side, we also have the obvious factors like livestock numbers, exports, commercial use, etc.

Some of the not so obvious fundamental factors are exchange rate of the dollar, price ratios of the various commodities, government programs, tariffs, government subsidies, and economies of the primary trading countries.

The quest of a fundamental analyst is to obtain perfect knowledge, which is knowing every last tidbit of all supply and demand factors up to the present moment. It is absolutely impossible. Thus, all fundamentalists do their best to predict market action with imperfect knowledge. 

Without a doubt, the internet has done more to improve the overall ability for everyone to vastly improve their degree of imperfect knowledge. Not only because of the vast information on the internet, but the timeliness with which it can be delivered to the ordinary person.

The largest source of fundamental agricultural commodity market information in all the world is the United States Department of Agriculture followed by the Central Intelligence Agency. Surprised? Food supplies, or a lack of them, have caused more governments to be overthrown and wars throughout history than anything else except religion!

Technical grain market analysis

Technical analysis is a method of forecasting the prices using only non-fundamental information. Technical analysis does not explain why prices behave the way they do as fundamental analysis does; technical analysis simply predicts the future price action.

The working principle behind technical analysis is all fundamental factors (perfect knowledge) influencing the market are already reflected (discounted) in the current price. Thus, the price action of that commodity is the best indicator of the summation of all known fundamental information. 

Followers of technical analysis believe that:

  • All prices move in trends (up, sideways or down)
  • History does repeat itself over and over (cycles)
  • The market discounts (prices-in) every bit of news immediately

Technical analysis involves the use of charts of price, trading volume and open interest just to name a few. Chart data is supplemented by mathematical indicators such as moving averages, relative strength and stochastic processes. There are more than 660 technical analysis systems. Some of the more common are Elliot Wave, Fibonacci, Gann’s Cycles, Wyckoff Technique, Bullish Consensus and Moving Average. There are dozens of technical indicators some of which are trend lines, trading volume, relative strength index, head and shoulders, hook reversal, key reversal, open interest and speculative fund traders’ position.

Before 2019, I thought the hundreds of technical analysis systems tended to cancel each other out. I pretty much ignored them unless several systems were predicting the same thing. I missed the corn market high so badly in 2019 while technicians were pretty much dead-on. Mark Davis of Crop-Side Marketing in Fairbury, Illinois showed me how he saw the high was made June 17, 2019. Once he explained his analysis, it was crystal clear to me when the high was made just by looking at the December 2019 corn daily price bar chart.  

I have come to understand technical analysis is the language the market uses to tell us what it thinks the price will do. Many old duffers say the market is always right. It is more right than any of us. Technical analysis will allow you to understand what the market is saying about short and long term price direction.  

Wright is an Ohio-based grain marketing consultant. Contact him at (937) 605-1061 or rjw1249@wrightonthemarket.com. Read more insights at www.wrightonthemarket.com.

No one associated with Wright on the Market is a cash grain broker nor a futures market broker. All information presented is researched and believed to be true and correct, but nothing is 100% in this business.

The opinions of the author are not necessarily those of Farm Futures or Farm Progress. 

 

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