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Understanding chart analysis

For this special marketing issue, I will explain key concepts that I use to analyze commodity markets. When I first started trading over 35 years ago, I used three basic tools:

  1. Time Cycle Analysis. This method studies time, which really is long-term and short-term cycle analysis.
  2. Trend Analysis. This method studies price and charts when the price trends change.
  3. Motion Analysis. This method studies seasonal odds patterns and uses the more complex tools like Elliott Wave, relative strength index, and oscillators. This can now include a huge group of other new computer-driven programs that generate buy and sell signals.

My goal here is to explain my three basic analysis methods so you can understand them and then apply them to the markets to help you make better decisions.

I have intentionally started this article by explaining the study of time and the long-term and short-term cycles that I apply to the markets. The long-term patterns have been very reliable, while some of the shorter term patterns are worth watching but are not always as reliable. The seasonal price patterns have worked very well the last two years, as farmers who sold cash grain and put on new crop corn and soybean sales in the May-June time period came out with a great average.

The long-term price cycle that works for all of the agricultural commodity markets averages 29 to 30 years low to low. Since the early 1900s, we've seen three major lows in the commodity markets. Most of the major lows have come in with one year of the dates that I have noted below.

  • 1939 after the Great Depression farm prices hit the lowest lows. This was followed by a major rally that peaked during World War II.
  • 1969 was a major low that came in as improved technology created larger yields and huge surpluses. Then came the great Russian grain sales and the OPEC oil embargo. Grain and energy prices exploded higher into 1973 as inflation rates and interest rates soared. The government put on price controls. Eventually the Fed raised short-term interest rates up to 21%. This finally lowered inflation, dropped commodity prices, and created the Farm Crisis that bottomed in 1986.
  • 1999 was a cyclical low. This low was followed by a huge rally in the commodity markets that peaked when grain and commodity prices peaked in late June of 2008. Commodities are now viewed as an asset class, and when all of the Wall Street money started chasing grain futures, the result was $8 corn, $16 soybeans, and $25 wheat. When Wall Street retreated, most of the commodity markets dropped by 54% to 60% in less than nine months.

Looking ahead 20 years to 2029, I plan to still be trading and farming but will make sure I am very liquid by 2027.

I work with a lot of other monthly and weekly cycles that are all the way from 68 months low to low to 10 trading days low to low. The shorter the cycle, the less reliable it is. For this article, I am providing the most reliable cycles and the ones that can help you do a better job of pricing your crop.

The Monthly CBOT Continuation Corn chart shows the 30-year and 68-month low that came into the corn market in August 2000 at $1.74. Prices rallied for about 3 1/2 years before dropping down to the December 2005 low at $1.86. From that important 68-month low, prices exploded higher to the June 2008 high at $7.62. The long-term projections now suggest the next major low for corn prices is due in the fall of 2011. It is worth noting that the fall low in 2008 was lower on a dollar-adjusted basis than the low in November 2005. However, in 2008 you had higher production costs and no LDP payments. I do not see the 2008 high taken out until after the 2011 lows are posted.

The Monthly CBOT Continuation Soybean chart shows the major 30-year and 68-month low in July 1999 at $4.01 per bushel. From that low, prices exploded higher into the April 2004 high at $10.64, with prices bottoming just 10 months later in February 2005 at $4.98 when the next 68-month low was put in.

On the next rally, the soybean market rallied to new all-time highs, taking out the 1973 high in June 2008 as prices surged to the ultimate high of $16.60. The next 68-month low is due in late summer or fall of 2011. If you review the previous highs in soybeans that are running about 15 to 16 years apart, the highs came in 1973, 1988, and 2004. The next time to watch for a major high is in 2018-2020.

I started out as a skeptic of these projections, but as I learned more and saw timing work, I now use them as one of my best analytical methods. The projections don't work all the time, but they do provide me with the ability to get bearish at predetermined times when prices are high and to get bullish when prices are at the major lows.

For this special marketing issue, I will explain key concepts that I use to analyze commodity markets. When I first started trading over 35 years ago, I used three basic tools:

  1. Time Cycle Analysis. This method studies time, which really is long-term and short-term cycle analysis.
  2. Trend Analysis. This method studies price and charts when the price trends change.
  3. Motion Analysis. This method studies seasonal odds patterns and uses the more complex tools like Elliott Wave, relative strength index, and oscillators. This can now include a huge group of other new computer-driven programs that generate buy and sell signals.

The base concept of chart analysis is understanding the price trend in the market. Basically, prices can only do one of three things. Prices can trend higher, lower, or be in a sideways trend. The key to making better decisions is to try to understand which way the trend is and when the trend changes.

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