Technical analysis is the study of the market itself
rather than an evaluation of the factors affecting the supply of, and demand
for, a commodity. The important components of technical analysis are prices,
market volume and open interest. As this technical approach only considers the
market, it must take into account fluctuations that reflect traders' actions and
that are not necessarily associated with supply-and-demand cycles. The basic
assumption of all technical analyses is that the market in the future can be
forecast merely by analyzing the past behaviour of the market (although many in
the coffee trade find this hard to accept).
Detailed technical analysis is not possible for all
or even most traders. The most important elements for accurate decision-making
are close contacts with the markets and with knowledgeable individuals in the
trade. However, if charting specialists supply the analysis within a usable
period of time, technical analysis can provide useful additional information,
particularly for medium-term forecasts.
The main tools of
analysis are past price patterns that are shown in various forms of charts or
graphs. The changes in the volume of open positions (i.e. the number of
futures or option contracts outstanding on a given commodity) and the total
volume of operations in the market are also examined.Charts often use a moving
average to record and interpret price trends. In most charts, an average moves
with time as the newest price information is incorporated into the average and
the oldest price is discarded. For example, a simple three-day moving average of
the daily closing price of a commodity changes as follows: on Wednesday, the sum
of closing prices on Monday, Tuesday and Wednesday is divided by three; on
Thursday, the sum of closing prices for Tuesday, Wednesday and Thursday is
divided by three; and so on. Analysts can average prices over a period of hours,
days, months or even years, depending on their needs.
The value of the moving average always lags behind
the current market price. When prices are rising in bull markets, the moving
average will fall below the current price.
However, the moving average in a bear market will be
higher than the current price. When the trend in prices is reversed, the moving
average and the current price cross each other.
While advocates of charting accept that fundamental
factors are the prime determinants of commodity prices, they point out that
these factors cannot predict prices. They argue that the graphs incorporate all
the fundamental factors that shape prices and also reflect the subjective market
reaction to these factors. The alternative argument holds that although the
price curve and other elements of the graph are real and objective, the
interpretation is necessarily subjective. Thus the same graph can give
contradictory signals to different readers.
In reality there is likely to be substantial overlap
between the fundamental approach and the charting approach. It is common for
operators to determine the market trend by studying fundamental factors and to
then select the right time to enter the market by referring to the charts.
Similarly, chart advocates also study other factors beyond the limit of
technical analysis. They may consider the number of marketing days left before a
position expires, the amounts notified for delivery on the exchange, the
situation of the longs, and the possibility of accepting deliveries on the
exchange without adverse results.
Many companies specialize in producing charts for
various commodities and most have their own websites where it is possible to
access charting information such as price history, volumes, open interest and
technical studies. In addition all of the Internet coffee information sites,
such as www.theice.com , www.liffe.com , www.coffeenetwork.com , www.tradingcharts.com and www.futures.tradingcharts.com have charting
ability and analysis. Most of these websites carry not only price, but also
volume and open interest, all of which are discussed in other parts of