Getting Started in Commodities

Chapter 6

Technical Analysis of the Commodity Markets

As discussed in the previous chapter, fundamental analysis involves the analysis of all factors that might impact the supply and demand associated with a given commodity. If there are ideal growing conditions in Colombia for coffee beans, then there would likely be an expectation of an abundant supply of coffee beans. As a result, one might rightly expect coffee futures prices to fall. Likewise, a hurricane in Florida that wipes out much of the orange crop or a drought in the Midwest that devastates the soybean crop would result in higher prices for those commodities, as traders anticipate a steep reduction in the supply of those physical commodities.

technical analysis

the study of the price action of a security based on the theory that market prices display repetitive patterns that can be tracked and used to forecast future price movement. Technical analysis evaluates price movement by analyzing statistics generated by market activity—such as past prices and volume—to study market performance.

In a nutshell, fundamental analysis deals with the supply and demand factors that can cause changes to the commodity price. In contrast, technical analysis pays virtually no attention to the supply and demand for a given commodity. Instead, technical analysis deals with the market performance of the price of the commodity. So while ...