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What is technical analysis?

Agriculture.com Staff 07/06/2010 @ 5:17pm

The last few columns in this series have focused on a concept called Market Scenario Planning (sm). I've talked about the fundamental analysis, cash marketing, and discipline needed. The last component I'd like to address with regard to scenario planning is learning how to read a chart or technical analysis, and the importance of it for understanding where prices can potentially go.

Recall the simple adage, "In order to know where you're going, you've got to know where you've been." Technical analysis is the forecasting of potential future price movements based on an assessment of historical price movements and patterns. Like weather forecasting, technical analysis does not result in perfect, complete predictions about the future. It does, however provide producers ideas of what is "likely" to happen to prices over time.

Reading and learning how to interpret technical charts takes much time. In fact, entire courses at college have been devoted to the subject. For our purposes today, I'll show you two of the many basic chart movements, including a potential price move higher, as well as a potential price move lower. Hopefully, by showing you this, I will inspire you to continue the quest for knowledge, which will help you, implement a market scenario plan for your farm.

Bullish chart pattern

Bearish chart pattern

To measure the potential breakout move in the chart above:

  • Measure the price difference between the peak price of the "head" ($7.50) to the neckline support area ($5.00). The difference is $2.50.
  • Then, should the $5.00 neckline support be taken out to the downside, you can figure out the potential move lower this way: Subtract $2.50 (the difference between the head and neckline support) from the $5.00 neckline support area, which equates to an estimate of $2.50 futures price.
  • As you recall, at the end of 2008 and early 2009, many price forecasters were calling for low $2.00 corn. In the end, $3.00 price support held, with the final $2.50 price potential not being met. Yet, overall, the final price did come close to the technical analysis estimate.

Remember, Market Scenario Planning is about analyzing and creating different scenarios about where the market might go. But these "predictions" are worthless if you do not know what you are going to do in each situation -- "If the market goes up, I'll do x. If it goes down, I'll do y."

Remember that when you are done looking at charts and scenarios, you need to apply your knowledge of how hedging tools work, strategic thinking, and discipline to your marketing. All these things together make up great marketing. I'll continue to break down these elements of great marketing for you in future columns.

If you have questions, you can e-mail Naomi, or post a marketing question on the Women in Ag discussion page.

Graphics courtesy of www.chartpatterns.com and www.trending123.com. Market Scenario Planning (sm) is a service mark of Stewart-Peterson, Inc.

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