Commodity Price ReversalsThe ability to predict commodity price reversals can provide substantial profits and help avoid damaging losses both in day trading and for long term traders in commodities. Traders in commodity trading trade futures. When expectations are that market supply will tend to be insufficient for demand, commodity prices will rise. When the commodities markets expect that supply will exceed demand there will typically be a downward trend in a commodity price. Commodity price reversals occur when there is new news affecting supply and demand. Commodity price reversals also occur when the market has overextended itself in either the upward or downward direction. Longer term fundamental changes in commodity price are best anticipated using fundamental analysis and shorter term commodity price changes are tracked with technical analysis tools such as Candlestick charting techniques to analyze Candlestick pattern formations. A good place for the beginner to start in understanding a commodity market is with Commodity and Futures Training.
An example of a commodity price reversal lies in the grain markets during the last decade. Wheat futures, especially, rose substantially and then fell again but so did corn futures, and soybean futures. During the first decade of the century most of the press went to gold futures as gold prices nearly quadrupled, but in many cases the commodity price movements, and commodity price reversals, of the several varieties of wheat were more dramatic. In 2000 the average farm price paid in Illinois for a cross section of wheat varieties dipped briefly below $2.00 a bushel and prices where steady for most of the year. However, buying pressure (demand) slowly drove the average wheat price up over the next years so that in 2006 at fall harvest the price was $4.00 for the same cross section of wheat.
Then, after three years of poor harvests, the same wheat cross section rose to nearly $11.00 a bushel by April of 2008. The key to this peak in prices was that wheat stockpiles were at their lowest in 60 years, since the aftermath of WWII when American farmers were sending wheat to a recovering Europe. Those who were trading supply and demand got it right. Buying futures in wheat, as well as corn and soybeans, was profitable in trading commodities.
There were those who felt that they could ignore centuries of trading experience. Those who knew that markets repeat themselves were able to benefit from the commodity price reversals in wheat, corn, and soybeans that began in 2008. Those who followed the market with tools such as Candlestick analysis were able to anticipate the reversal and begin selling futures at the top of the market. A profitable alternative was selling puts on options contracts on wheat futures. When prices dropped the traders were able to sell contracts at the higher price and buy at the lower.When prices go up farmers plant what pays. When wheat was high farmers from Australia to the Ukraine planted more wheat. A combination of more wheat planted and better harvests solved the problem of the low supply and drove wheat back down to the $3.00 to $4.00 a bushel range where it remains today. Commodity price reversals such as the 2008 turnaround in wheat prices are not uncommon. Recognizing commodity trading signals on commodity trading software is important but so is an overall sense of any commodity market. In the case of wheat and other grains people need to eat but when prices get too high producers tend to ramp up production causing commodity price reversals. Being current on both fundamental and technical analysis of commodities is essential if traders would like to routinely profit from commodity price reversals.
Market Direction: How do you analyze the markets or a trend when it is in a whipsaw mode? You can't, other than identifying the trend is in a whipsaw mode. This is apt to cause portfolio positioning that has to be reversed very quickly. This reversal of positioning may occur a couple times before the trend actually reveals which direction it plans to go. How does candlestick analysis help in this type of situation? First, it allows you to identify the whipsaw motion of the market. The direction of the trend should have confirmation one way or the other. When that confirmation fails to appear the next trading day, positions that are opposite the price trend need to be closed immediately. This will create small losses. However, the whole point of investing is to get out of positions you know are not positioned correctly and get into positions that are being confirmed as the correct trade direction.
The Dow and the NASDAQ are both forming Jay hook patterns. The Dow still has the 200 day moving average to contend with as well as the NASDAQ. A Jay hook pattern will obviously have strong upside characteristics. But knowing that the 200 day moving average may still produce possible resistance, the candlestick investor at least has a potential game plan. If bullish trading tomorrow appears to have trouble getting through the 200 day moving average, profit protection strategies can immediately be put into place. If the 200 day moving average does not act as resistance, additional long exposure can be put into the portfolio.
There has been broad evidence, especially in today's trading, that revealed individual stock prices having very strong bullish support. IDT is an example of witnessing potential short trading just a few days ago but needed to be immediately reversed when the signals indicated the Bulls had stepped back into the trade. Knowing what a Jay hook pattern consists of allows for much quicker reaction. The purpose of investing does not necessarily mean that you see where the trend or the price move is going to all the time. The purpose of investing successfully is analyzing what the market is doing even though it may be doing something that does not make for profitable trading.
Private training sessions on Keuka lake - There is tentatively one spot open for the August 28 trading weekend. Unfortunately, due to logistics and timing, not everybody was able to be scheduled for the training. The sleeping arrangements might have had to be much more friendly than what they should be. There is a possibility that another private training session can be scheduled for Pittsburgh during the first week of September. Anybody interested in partaking in a private training during September, please e-mail Steve@CandlestickForum.com for more details.
Chat session tonight at 8 PM ET - Analysis of setting stops when the market might be in a choppy situation. Open to everybody, even your brother-in-law.
Private Training Sessions with Stephen Bigalow
now scheduling for August 27, 28, and 29 in New York!!!
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