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Key reversal or not?

Agriculture.com Staff 02/08/2008 @ 12:38pm

I was tempted to start my column by saying "In times like these…". Then I realized there have never been times like these! Suffice it to say "In volatile times, technical indicators are a useful tool in predicting price direction."

When prices are making new highs daily and fundamental factors are extremely bullish, traders look for something to tell them when to sell.

One of the most reliable and easily understood indicators is the key reversal. I have been watching charts since I took the first charting class back in the 1970's. In that time I discovered that there are true key reversals and other chart formations look like key reversals but have only some of the characteristics. The more characteristics of a true key reversal a chart formation has, the more accurately it predicts price direction.

A key reversal takes place when a market makes a new contract high during the trading day but closes below the previous day's low. If it makes a new high and closes lower for the day, but does not close before the previous days low, it is a reversal but not a true key reversal. That happened in the soybean market on Wednesday of this week.

It also happened on January16. The reversal on January 16 proved to be only a short term high which was exceeded this week. I made sales of small quantities of both corn and beans following that move, knowing that the reversal did not meet all of the criteria of a true reversal. Nonetheless, the prices were good and I do not second guess a profitable sale.

Big trading volume adds credibility to a reversal. When the market participants who are short finally give up and buy out of their positions it causes increased trading volume. Many times it is the largest trading volume of the move. In recent trading, March soybean futures had record volume on December 12. May futures had the biggest volume so far on January 16. Open interest in March futures has been dropping as May was increasing. Volume in May futures was not extreme on January 16, so it would not be unexpected to see a bigger day yet if prices continue higher.

I look for soybean futures to make a key reversal one of these days when prices open limit up. There have been several instances of beans trading limit up. So far, no true key reversal! I will be watching again next week. However, in my marketing experience the yearly high has never been in February. In 2007 it looked like that rule was going to be broken. Eventually prices for both soybeans and corn rebounded in the summer, exceeding the February high. All of my marketing experience tells me to never say never!

I was tempted to start my column by saying "In times like these…". Then I realized there have never been times like these! Suffice it to say "In volatile times, technical indicators are a useful tool in predicting price direction."

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