Technical Analysis

Bar ChartsPoint and Figure ChartsMoving Averages

Bar Chart Information High Open Close Low

Daily Weekly Monthly

Chart formations

Trends Planes

Other top and bottom formations Key Reversals Flags, Triangles and Pennants Gaps

Up Trend

Connect two or more daily price lows Preferably 10 days apart

When market closes below an uptrend line, a sell signal is generated

Computer trading vs fundamental Computers may drive prices lower for a

few days If fundamentals don’t support this, then

prices will rally

Up Trend

Sell Signal

Down Trend

Connect two or more daily price highs Preferably 10 days apart

When market closes above a down- trend line, a buy signal is generated

Computer trading vs fundamental Computers may drive prices higher for a

few days If fundamentals don’t support this, then

prices will decline

Down Trend

False BuySignal

Trend line market signals

Speculators Buy and sell based on signals

Hedgers – Short Place on sell signal May choose to offset on buy signal

Hedgers – Long Place on buy signal May choose to offset on sell signal

Trend Line reliability

A close above a major down trend or below a major up trend will lead to a significant price move about 75% of the time

Resistant Planes

Life-of-contract highs can be very difficult for market to penetrate

Strong Fundamental conditions needed to move market above resistance

Sell signal if market fails to take out resistance

Buy signal if market closes above resistance (particularly 2 closes above)

Resistant Planes

There are also intermediate resistance planes

These are not as hard to penetrate as life-of-contract highs are

Resistance plane

Sell Signal

Resistance plane

Sell SignalBuy Signal

Support Planes

The mirror image of Resistance Planes Life-of-contract lows Buy signal if market fails to penetrate Sell signal if low is taken out

Support Planes

Sell Signal

Hedgers and Technical Analysis

If understand trends and support and resistance planes: Time placement of hedge Set realistic market targets Perhaps minimize margin calls

Other Bar Chart Formations

Double Top or Double Bottom Head and Shoulders Key Reversal Flags, Triangles and Pennants Gaps

Common, break away, measuring, exhaustion

Double Top (triple top)

Head and Shoulders

Shoulder Shoulder

Head

Neck line

Key Reversal Higher high Lower low Close below prior

day close Sell signal

Close above prior day close Buy signal

Flag

Decline

Project =Decline

Triangle or Pennant Buy Signal if

market breaks out to the top

Sell signal if market breaks out to the bottom

Gaps

Common

Break away

Measuring

Exhaustion

Complements to Chart Patterns

Trading Volume Open Interest Relative Strength Index (RSI)

Trading Volume

Barometer of level of intensity in the market

If buy/sell signal occurs on a relatively high volume day, then it is more reliable

High/low volume is relative to past trading and relative to specific contract

Guidelines for trading volume

Look at all months being traded for a particular commodity

Interpret volume on limit up/down days very carefully

Usually low prior to holiday, 3 day weekend, or major report

Open Interest

# of contracts that are outstanding Have not been offset

No binding relationship between Open Interest and Trading Volume Day traders create volume, don’t change

open interest Open Interest tends to peak and then

decline prior to an uptrend reversal Less reliable on downtrend reversal

Relative Strength Index

Widely used measure of momentum in the market

14 day RSI is the most common To calculate

Record last 14 day price changes (closes) Sum the negative changes and positive

changes and divide each by 14 to create (D) down average and (U) up average

RSI=U/(U+D) * 100

RSI Market Indicator

RSI > 70 Market is thought to be over bought

RSI < 30 Market is thought to be over sold

Numbers vary by commodity Major change in Supply or Demand

may keep RSI above 70 or below 30 for an extended period of time

RSI example calculations

Close 2.40, 2.38, 2.36, 2.38, 2.36, 2.40, 2.44, 2.42, 2.44, 2.48, 2.56, 2.48, 2.52, 2.50, 2.46

Up .02 .04 .04 .02 .04 .08 .04 Up sum = 28/14 =2

Down .02 .02 .02 .02 .08 .02 .04 Down sum = 22/14=1.57

RSI = 2/(2+1.57) * 100 = 56

Point and Figure Charts

2 CRITICAL parameters The cell size The reversal requirement

Cell size – The value in terms of price increment for each cell

Reversal requirement – Magnitude of price change required for a reversal

Point and Figure Charts

There is no time on chart X use to plot uptrending prices O use to plot downtrending prices Only use daily high or low, close

doesn’t matter Buy/Sell signal generated when new

Higher/Lower X/O is plotted

Moving Averages May be a compliment to bar chart

Single Moving Average 40-day Help signal turning points in market

May be an alternative to bar chart Two moving averages employed Example 3-day and 10-day Example 9-day and 18-day Sell signal when shorter cuts longer from top Buy signal when shorter cuts longer from

bottom

Buy B and Sell SSignals using the 4-day & 9-dayMoving Average

B

B B

BB

S S

S

S

S

B

Moving Averages

Advantages Provide clear market signals No guessing as to chart formation Good if there are trends in the data

Disadvantage May generate multiple trades Don’t perform well in choppy (sideways)

markets

Moving Average

Short Hedgers Place on Sell signals Lift (offset) on Buy signals

Long Hedgers Place on Buy signals Lift (offset) on Sell signals

Speculators Buy and Sell and Offset on all signals

Technical Analysis Summary

Technical Analysis does work It requires Work to make it work Need to study past technical analysis

for several years worth of data on a particularly commodity before trading

For hedgers Trends and Support/Resistance Planes Moving Averages