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Trust the charts

01/17/2013 @ 4:51pm

There are supposedly two kinds of market analysts, fundamental and technical. Fundamental analysts evaluate supply and demand and base their actions on the conclusion drawn from that analysis. Technical traders look at lines and numbers on a graph and predict where they think prices are headed. As much as anything else a person’s experience with these approaches determines the success or failure of the system. Good luck also helps!

I have a problem categorizing what I do into either of these categories. I look at charts to see what the predominant trend is. However, I seldom take action based solely on a graph. What I do instead is check the supply and demand to understand what prices have done in the past. Chances are by the time the fundamentals are known the move is probably well underway if not already past.

I base my market analysis on historic factors that have a tendency to repeat to some degree. I fine-tune that approach by watching the difference between the cash price and the future price. If the future price is far above the cash bid, chances are the demand for the grain is weak. If the cash price is very near the future price, it is a sign that the demand for the grain is strong. The latter has been the case since the end of the 2012 harvest. Both soybeans and corn have enjoyed abnormally good time. Having such a good basis is unusual at a time when futures are also very good compared to recent history.

Basis on both corn and soybeans was very good prior to the release of the report on January 11. After a near free fall in prices in the previous month, it was easy to be pessimistic about the direction of prices following the report. However, the strong basis during the time prior to the report was signaling that the commercial traders were buying. That being the case, patience was a virtue in waiting for the release of the report. The signal proved to be correct. Prices responded in a positive direction in the week following the report. March corn futures are 33 cents higher than a week earlier. March soybean futures are 63 cents higher.

Not all of my signals are as successful as the recent example of trusting a good basis. However, if I am looking for an indication of what direction the market might go to make or avoid making a sale, basis moves and spreads can be helpful as they were in this case. The next calendar strategy deals with soybean sales in February. Stay tuned.

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