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  • Technical analysis of futures markets - an overview

     
     

    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.comwww.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 09.07

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