Technical Analysis 

vs. 

Fundamental Analysis
 

Before you begin trading the commodity markets, you must make several decisions

  • How you are going to anticipate the next market move (will it be up, down, or sideways)?
  • Which techniques are you going to use to analyze the markets?
  • Which markets will you attempt to analyze?

Below is a description of two approaches you can use in analyzing commodity markets.
 

Fundamental Approach
 

Fundamental analysis is based on the theory that the price of a commodity at any given time is the equilibrium between supply and demand.  This equilibrium is found by adding what is left over from last year (carryover) to this year's production (supply) and subtracting this year's usage (demand).

Much of the supply and demand information can be summarized into a table as shown below.

U.S. Wheat Supply/Demand

Item

 1997/98 1998/99 199/00 2000/01
Million Bushels
Beginning Stocks 444 722 946 997
Production 2,481 2,547 2,302 2,172
Total Supply 3,020 3,373 3,348 3,169
Food Use 914 908 905 920
Feed & Residual 251 397 300 300
Exports 1,040 1,042 1,050 1,125
Total Demand 2,298 2,427 2,255 2,345
Ending Stocks 722 946 1,093 824
 

There are many factors that can change either the demand or supply of a commodity.  Any change in the factors listed below can change the demand or supply of a commodity.

 

Factors the Change Demand

Income of Consumers

Population

Tastes & Preferences of Consumers

Related Product Prices

Expectations of Consumers

Factors that Change Supply

Technology

Government Programs

Input Costs

Related Product Prices

Weather

 
Fundamental analysis takes all of these factors into consideration when making decisions about the long term trend of the market. 

Typically, government reports and market outlooks provide you with much of this information.

 

The information provided by fundamental analysis is extremely valuable to hedge or position traders as it gives an overall understanding of what the long term market trend is.

 

 

 

 

Technical Approach
 

According to the National Futures Association's "Glossary of Futures Terms":

Technical Analysis is an approach to analysis of futures markets which examines patterns of price change, rates of change and changes in volume of trading, open interest and other statistical indicators.  This data is often charted.

As mentioned above, fundamental analysis provides information about the long term market trend.  However, many market participants need information on a more timely basis to make short term market decisions.  Because some items used in fundamental analysis are hard to measure in a timely fashion (supply and demand reports or the changes in them are not available on a daily basis), market participants turn to technical analysis.

Technical analysis attempts to measure the flow of money in the market, believing it to show trader intentions and knowledge in advance of the release of news.  In other words, participants in the market show you with their pocketbook before they tell you with words.

Technical analysis is:

  • Good for timing and placing hedges
  • Less useful in judging the magnitude of a price move that is driven by a change in the fundamentals.

 

Therefore, producers looking to hedge should use both technical and fundamental analysis together.

 
 

 

Types of Charts  Chart Analysis on the Web   Technical Analysis Links  

Technical Analysis Publications   Glossary

Technical Analysis Home

 

Hit Counter