The act of charting prices is often considered more of an art than a science.
Many traders find chart analysis helpful to seek out conditions in a market such as overbought or oversold to decide when to enter or exit a trade. Some use only charts to make decisions. They are often referred to as technicians.
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Technicians argue that any fundamental news (supply and demand) is factored into prices almost immediately. Therefore, the fundamental news has little value. Chart activity, therefore, encapsulates fundamentals, and is more reflective of the sentiment of price direction.
Fundamentalists might argue that supply and demand ultimately determine a price level (equilibrium where buyers and sellers settle on a price at a given time). Therefore, fundamentalists suggest that chart activity is merely a reflection of where buyers and sellers meet.
In reality, the futures market is made up of both fundamentalists and technicians. Being aware of the fundamentals in combination with chart signals is likely a good combination for farmers to understand and utilize. Fundamentals might suggest tight supply and justify high prices. At some point, markets turn. Awareness of sell signals may help in determining when to pull the trigger.
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A few items to watch for are overbought and oversold conditions. These can be reflected in a chart study such as Relative Strength Index and stochastics. These charts measure many details, and are good barometers when prices have sustained a move in one direction to the point of being seen as “overdone.”
Signals within an overbought or oversold condition that may have merit are chart price reversals.
On daily price charts, a bearish key reversal at the top of a trend (or perhaps new contract high) is when the market has a range of prices where the high exceeds the previous day’s high, low exceeds the previous day’s low, and the close is also lower than the previous day’s close. A bullish key reversal is the opposite, and may signal when a price bottom is near.
Often, bullish and bearish key reversals stand out on price charts and are easy to recognize.
Charting signals can get very complicated, and many people develop their own set of signals or rules to follow. A suggestion is to keep it simple and don’t get overwhelmed with the thought of needing lots of information and signals.
If everyone can see a bearish key reversal at the top of a chart that is considered overbought, there is a good chance people will act. Those who are long may use this as a signal to exit, and perhaps even switch to being a seller. Those who were waiting for a signal may now decide to enter the market from the short (sell) side.
If you have corn in the bin, a farmer may decide to pull the trigger and sell. Obvious chart signals should not be ignored.
Have a thorough conversation with you advisor and ask for his/her help to keep you aware when chart signals should be considered in marketing decisions. As always, be sure you understand the risks involved, as well as the opportunities, before entering into any position.
Editor’s Note: If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.
About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.
