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Agribusiness Library Lesson 060098 Fundamental Analysis and Technical Analysis 1 Objectives 1. Compare and contrast fundamental analysis and technical analysis. 2. Identify supply-and-demand factors that may affect the price of agricultural commodities. 3. Determine how price, volume, and open interest are used by technical analysts to predict price movements. 4. Predict price movements by analyzing charts. 2 Terms bear market bearish key reversal breakaway gap bull market bullish key reversal closing price demand double bottom double top downtrend exhaustion gap fundamental analysis head-and-shoulders formation highest price lowest price 3 Terms (cont’d) open interest price resistance line runaway gap sideways trend supply support line technical analysis uptrend volume 4 What are fundamental analysis and technical analysis? Being able to predict what markets will do in the future is essential for producers and others. One way to do this is by projecting prices. But how? There are two key approaches to price expectation. 5 What are fundamental analysis and technical analysis? A. Fundamental analysis is the approach that uses information derived from supply -and-demand factors to anticipate price movements. Fundamental analysts use monthly reports provided by the USDA that project supply-and-demand factors for a particular commodity, along with information from various associations. 6 What are fundamental analysis and technical analysis? 1. The USDA reports project several different factors, such as the supply and use of U.S. soybeans for an upcoming year, the estimated final numbers for the current crop year, and crop progress. 2. Other reports indicate export sales and grain stocks. 3. Traders who use fundamental analysis review and study these reports to anticipate where the price of a commodity will go. 7 What are fundamental analysis and technical analysis? B. Technical analysis is the approach that uses futures price charts to anticipate price movements. Technical analysts use bar charts of market trends and turning points to develop price forecasts. They also use price movements from past days, weeks, months, and years to research price trends. 8 What are fundamental analysis and technical analysis? 1. Many technical analysts use only bar charts and make no use of fundamental commodity data. 2. Other traders and individuals in the futures market use both approaches in developing price projections. 9 What supply-and-demand factors may influence the price of agricultural commodities? The price of an item is usually determined by supply and demand. Supply is the quantity of a product or service that sellers are willing and able to provide to the market at a given price. Demand is the quantity of a product or service that buyers are willing and able to purchase from the market at a given price. Many different things affect both supply and demand. 10 What supply-and-demand factors may influence the price of agricultural commodities? A. Among the supply factors that can influence agricultural commodities are: 1. Weather 2. Yields 3. Carryover stocks 4. Exports and imports 5. Costs of production 6. Market price 7. Government programs 8. Prices of comparable commodities 9. Number of sellers in the market 10. Expectation of future prices 11 What supply-and-demand factors may influence the price of agricultural commodities? B. Among the demand factors that can influence agricultural commodities are: 1. 2. 3. 4. 5. Market price Change in personal preference Change in personal income Prices of comparable commodities Number of buyers in the market 12 How are price, volume, and open interest used to predict price movements? A technical analyst uses price, volume, and open interest to predict price movements. Price is a factor that consists of the high, low, and close of the day. Volume is a factor that consists of the number of contracts traded during the day. Open interest is a factor that consists of the number of outstanding contacts or the number of contracts that have not been offset. 13 How are price, volume, and open interest used to predict price movements? A. The bar chart is designed with the vertical axis representing the price of the commodity and the horizontal axis representing time. A vertical line is drawn to show the range of price for the day. The highest price traded (often simply called the high) is represented by the highest point on the bar chart. The lowest price traded (the low) is represented by the lowest point on the bar chart. 14 How are price, volume, and open interest used to predict price movements? A. The closing price (the close) is represented by a horizontal dash on the high-low bar. With the bar chart, the technical analyst is recording history, or what has happened. He or she will then use this information to draw patterns of price movement and make conclusions about the market’s future direction. 15 How are price, volume, and open interest used to predict price movements? B. The relationship between price, volume, and open interest can tell a technical analyst much about what can happen next. An uptrend in price may be shown by a rise in price, volume, and open interest. A current uptrend may be ending when price is rising but volume and open interest are falling. A downtrend may be established when price is falling but volume and open interest are rising. 16 How are price, volume, and open interest used to predict price movements? B. Finally, a falling of all three factors indicates that price will reach bottom and soon rise again. The relationship links to the terms bull and bear. A rising market is called a bull market. A falling market is called a bear market. 17 How are price movements predicted by analyzing charts? Price movements can be predicted by analyzing charts for specific trends. The most common price trends are the following: A. Sideways trend—The trend in which prices are flat and show no movement, either high or low. As a sideways trend is established, prices will typically stay within the resistance and support lines. 18 How are price movements predicted by analyzing charts? B. Resistance line—The line where prices are turned back by selling pressure. The selling pressure stops the market from advancing. C. Support line—The line that indicates where the buying pressure stops a market decline. D. Uptrend—The trend shown by a series of higher highs and higher lows. An upward price movement will validate an uptrend. 19 How are price movements predicted by analyzing charts? E. Downtrend—The trend shown by a series of lower highs and lower lows. A downtrend is validated by two declining tops. F. Bullish key reversal—A reversal in a downtrend market where the high is higher than the previous day’s high, the low is lower than the previous day’s low, and the close is above the previous day’s close. 20 How are price movements predicted by analyzing charts? G. Bearish key reversal—A reversal in an uptrend market where the high is higher than the previous day’s high, the low is lower than the previous day’s low, and the close is below the previous day’s close. 21 How are price movements predicted by analyzing charts? H. Breakaway gap—A gap that indicates the end of a price pattern and the start of an important market move. I. Runaway gap—A gap that occurs only after a trend has begun and is often shown as the halfway point of the market move. J. Exhaustion gap—A gap that occurs at the top or bottom of a move. This exhibits that the top or bottom of the market will soon be reached. 22 How are price movements predicted by analyzing charts? K. Head-and-shoulders formation—A pattern that can occur at the top of an uptrend or at the bottom of a downtrend. It shows a period of the market changing from up to sideways and then from sideways to down (uptrend) or of the market changing from down to sideways and then from sideways to up (downtrend). It is one of the most reliable patterns. 23 How are price movements predicted by analyzing charts? L. Double top—A chart formation showing a trend reversal but in a lesser time frame than the headand-shoulders formation. It is indicated by two equal price peaks, after which prices hit the resistance level, dip, and hit the resistance level again before turning down. 24 How are price movements predicted by analyzing charts? M. Double bottom—A chart formation showing a trend reversal but in a lesser time frame than the head-and-shoulders formation. It is indicated by two equal price slumps, after which prices hit the resistance level, rise, and hit the resistance level again before turning up. 25 Review What is the difference between fundamental analysis and technical analysis? Discuss some supply and demand factors that affect agricultural commodities. Why does a technical analyst study to determine what might happen next? Which trend have prices that are flat and show no movement, either high or low? Name three other trends. 26