Analyzing futures and price action is not a simple proposition. It is more than knowing supply and demand data. I have been a licensed floor trader for over 20 years, trading part-time on the floor of the Chicago Board of Trade. During that period, I would travel to Chicago 6 to 10 times a year to trade for a week at a time on the floor. That gives me both views on trading on and off the floor. One of the things I learned early was how information was closely guarded. In fact, even I had to be extremely careful of tipping my hand on what positions I was trying to put on in the rice market. You can imagine what a large exporter has to do to keep its position a mystery.
The bottom line is that I believe the technical action tells us about market direction and that large export companies will do a lot of trading before the information they are basing their action on is known. As a result, I believe the technical price action is what one should analyze, not just the information you read at the end of the day. This is why I talk in technical terms, not on some little news article which probably had nothing to do with what is really happening.
You need to know very few technical terms, actually. First and foremost, understand that technical analysis is an art not a science. It is not foolproof but can give us an edge in looking for market direction. Here are the main things we use and you should have a general knowledge about:
1) The Major Trend
There are three types of trends:
- Uptrend
- Downtrend
- Sideways Trend
It helps to know that a trend is defined as a directional bias of prices over a period of time. An uptrend is where prices have a tendency to show higher highs and higher lows. A downtrend shows lower highs and lower lows. Sideways shows no tendency in direction. We use different lengths of time when considering a "period of time." We will look at 30 minute, 1 hour and 2 hour periods, along with daily and weekly periods of time. We use the daily (this is the major trend) coupled with a 30 minute chart for price placement in trades and watch the others only as a reference. Always know what the major trend is.
2) Percent Bullish or PB
You do not need to know how it's figured, but you need to know that it immediately tells us if the market is in a bullish or bearish setup. It is a mathematical formula that indicates what percentage of the trading is bullish. If its 20%, then we know 80% of the trade is bearish or selling and vice versa.
3) Trend Indicator
Here is another term we will use that you do not need to know how it is figured, but you need to know what it means and how it's used. The trend indicator does just that. It indicates that a trend is under way. It does so by giving us strength of the "total" move. Over 20 years of history shows us that major trends begin when the indicator is over 20%. While the trend can end at any time, when the trend indicator is over 40, it is likely to end in the next 10 periods. If it's over 50, it is imminent. In order for us to use the indicator to trade, the trend MUST have stopped or signaled that the trend is over. While it works for bear markets and bull markets alike, it works best on bull markets.
4) Volatility
This is a simple term indicating how much the market is moving back and forth from the high of the day to the low of the day. For instance, let us assume on day 1 that the December Corn futures trades 100,000 contracts and that the high for the day is $3.40 and the low is $3.35. We have traded a range of 5 cents on 100,000 contracts. Now let's assume Day 2 has 100,000 contracts trade, but the high is $3.50 and the low is $3.30. Notice we have traded 20 cents on the very same volume as we had on Day 1. This indicates an unstable volatility with a large range needed to trade the same volume. We would say that the volatility is going up from day 1 to day 2. We will use volatility to tell us if the market is changing its dynamics. Large volatility usually occurs near highs and lows.
5) Standard Deviation
This is a statistical measure and tells us that the market will trade 99% of the time between two prices. If the markets trade out of that range, the market will usually pause or reverse. We use the SD on 30 minute and 60 minute charts to help pick entry points.
There are so many technical indicators that a person could easily get information overload. What we use builds on each other so the technical picture is as clear as possible. It will say Bullish...Bearish...or Neutral.
Anyone who reads our comments for very long will realize we use a lot of fundamental analysis. We study Supply and Demand tables constantly, and every month, we make a video to walk through the Fundamentals as issued by the USDA in their monthly WASDE report. It is not that we don't like fundamental analysis; it is that we see the fundamental information as dated when we hear it unless it is a USDA report. If I know what the corn fundamentals are in Houston, Texas, what do you think the major traders know in Chicago? You are right...a lot more than I. Even so, we study to see what impact that market "ideas" will have on current fundamentals like a drought or a frost's effects on supply.
One thing you should always know is what cycle the market is in. Just as there are 4 weather seasons; there are 4 market cycles. They are as follows:
- Supply
- Supply-Demand
- Demand
- Demand-Supply
Supply-Demand is when we are moving from a supply-driven market to a demand-driven market. Think of the hyphen as if it were the word "to." The Supply (to) - Demand cycle occurs just as we enter harvest and runs until a few weeks after the harvest is complete. The Demand-Supply cycle is as we move from the demand phase into the time where are looking forward to next year's available supply and goes from just before planting to when the crop is emerging.
The Demand-Supply cycle and the Supply cycle are usually the most volatile - not always but usually. It is also when most highs are made. The Supply-Demand cycle and Demand cycle see less volatility and are usually when the most lows are made.
Always know which cycle we are in.
Great question! I think this is a hard concept to nail down for everyone so in order to give you our concept of timing terms, we need to use an analogy.
Think about driving through a hilly countryside. As you drive along, you can see from one hill to the next; but as you drop down in a valley, you can't see past the next hilltop ahead. Here is the thing - as you get closer to the next hilltop, the time it will take to get there is changing. Then once you cross the next hilltop, your eyes now can see several hill tops. One hilltop might be 1 minute away. One might be 5 minutes in the future, but then, far in the distance is even a higher hilltop. This is a top that you can see every time you cross the next hill, but it is a long way away. Eventually, however, it becomes the next hilltop, and what was a longer term event is now very much in the short term. That is our approach to short-term and long-term. Short term is the next hill, and long term is that hill in the distance. The thing is that the time left before getting to each hill is constantly changing.
So... In general, short term is usually 1 day to 8 weeks. Long-term is 9 to 24 weeks, but there is a lot of difference between those time periods. We usually will identify where we think the next hilltop is and when it is going to be crossed. We also will identify that higher hilltop in the distance.
One thing to always remember is that commodities are always traded in the future and not in present time. The eyes of all traders are always on a hill in the distance and trying to determine what the market conditions will be when they get there. Markets move on what may be the situation in the future, not on what is currently occuring.
Absolutely!!! It might be better to say that we know them and realize that farmers should be looking to sell summer crops in the March - June in most years. One thing that is very important to know is the trend of supply during those time periods. If we are seeing a growing supply trend, then the March to June time frame is critical for sales. If on the other hand, supply is declining on a trend basis, selling in March to June may be great, but it could be better if you hold it into the NEXT March to June time frame. Thus, knowing how to hold a crop for the long term is important.
The bottom line on seasonal tendencies is to know them but not to blindly sell crops just because last year, it was the best time to sell.
The "Sell Zone" is probably one of the oldest selling techniques using any form of technical indicators. The indicator you are referring to is the Stochastic Indicator and is usually what we refer to as the slow-stochastic system. First, it looks good because you are only selling when the indicator is in the sell zone; and as you look at the chart, you can see over and over again that the indicator drops out of the sell zone and looks like the market just craters, leaving the impression that it is almost foolproof. It's not cratering, but it is a decent indicator to watch, especially if the trend is up for ending supplies from one year to the next. We use a modified system that looks similar but smooths action. It is called the Del-Model.
2008 and 2009 were really great years for this system as ending stocks began to increase for corn and wheat. If you used the system in 2009 for soybeans, the current price of $9.22 is higher than the average using the "sell-zone" approach. That compares to where we sold the market at over $10.00.
The bottom line is that we certainly know this approach and follow it as one of our indicators, especially in years of rising carryover. In general, we look to other indicators for pricing. If, over the next few years, we start to see an increase in the carry-over numbers for corn and wheat, the "sell-zone" approach will see extended periods where no selling opportunity exists. Even so, we will keep you posted as to what it is saying as even in those times. Sell opportunities are usually very good when they occur.