Various analysis tools used to predict the price movements in
commodity futures trading
In order to predict the future price of a commodity, the various
analyses, tools are used. In order to make the daily or regular predictions,
two important analyses made are:
Technical Analysis
Fundamental Analysis
TECHNICAL ANALYSIS
Technical analysis refers to the process of analyzing the market
with the help of technical tools, which includes charts, and henceforth makes
future predictions of the prices. The only important factor for analyzing the
market is price action.
Bar Chart
A Bar Chart is one of the most widely used charts. The market
movement is reduced on a daily basis as a vertical line between the high and
low; the opening level being indicated as a ‘horizontal dash to the left’, the
closing level being indicated as a ‘horizontal dash to the right’. As well as a
daily record, similar charts can be drawn for weekly or monthly price ranges.
Although bar charts are the most popular for technical analysts, their minor
limitation is that they do not show how the market acted during the trading
day.
A line chart is the simplest chart, and generally drawn by the non
technical investor interested in getting quick visual impression of the general
movement of the market. Normally closing prices are used and joined to form a
line chart. They are not really adequate for market movement interpretation,
but can give a very good indication as to what the market has been doing over a
longer time scale, up to 10 to 20 years.
Moving averages
Moving averages are used to iron out some of the more volatile
short-term movements, and can give better buy and sell signals, than just by
looking at a daily high-low-close pattern. For instance, a 20-day moving average
refers to the average price, of the previous 20 days. In the above chart the
red line is the 20-day average. The green line is the 50-day average and the
yellow line is the 100 day average.
Gaps
A Gap is formed when one day’s trading movement does not overlap
the range of the previous day. This may be caused by the market opening sharply
highly or lower than the previous days close, as a result of important overnight
news. Strong movements in overseas markets influencing our market or interest,
or quite simply because the market has started to develop a strong momentum of
its own.
Break away gap
This usually occurs soon after a new trend has been established as
large numbers of new trend has been established, as large numbers of new
investors suddenly want to join the action. It is often regarded as a confirmation
that a new trend is well established.
FUNDAMENTAL ANALYSIS
Fundamental analysis is the study of supply and demand. The cause
and effect of price movement is explained by supply and demand. A good
fundamentalist will be able to forecast a major price move well in advance of
the technician.
E.g. if there is a drought in Brazil during the flowering phase of
soybean plant one can rationally explain why bean prices are rising.
There are various factors affecting the fundamentals of different
commodities.
They are
Fundamentals affecting Agriculture
Commodities
a) Supply
The supply of a grain will depend on
i) Beginning stocks
This is what the government
says, it will carryover from the previous year
ii) Production
This is the crop estimate for the current year.
iii) Imports
This includes the commodities imported from different countries.
iv) Total supply
This is the beginning stocks+production+imports
b) Demand
i) Crush
This is the domestic demand by the crushers who buy new soybeans.
And crush them into the products, meal and oil.
ii) Exports
This refers to the quantity of different commodities demanded by
foreign countries.
c) Ending carryover stocks
Total supply minus total demand= the carryover, ending stocks
d) Weather
Weather is the single most important factor, which affects the
process of all types of grains. If there is flood drought, it will shoot up the
price, due to increase in demand.
e) Seasonality
All other factors remaining equal, the grains and oil seeds do
exhibit certain seasonal tendencies.
Metals fundamentals
Metals include
Precious metals
Industrial metals
Precious metals
The precious metals include gold, silver, and platinum. Their
fundamentals are
i) Silver
Since much of the new production of silver comes as a by-product of
the 3 metals (copper, zinc, lead), if the price of the 3 is depressed and
production is curtailed, silver output will suffer as well. The reverse is also
true.
ii) Platinum
The demand for platinum is somewhat dependent on the health of the
automotive, electrical, dental, medical, chemical, and petroleum industries
(where it is used as a catalyst.)
Industrial metals
These include copper, palladium. Their fundamentals are
i) Economic activity
For any metal, industrialized demand is the key. If there is the
threat of an economic slow down, this will be reflected in lower prices.
ii) LME stocks
Everyday the London Metal Exchange releases its widely watched
stocks report, where, it lists the stocks in the exchange approved warehouses
for aluminum, copper, zinc, tin, lead.
iii) Mining strikes and production
problems
iv) War
Copper in particular has been called the ‘war’ metal. Demand
traditionally soars for all the industry al metals in times of increased
defense spending.
v) Inflation
The industrial metals have been at times been called the ‘poor
man’s gold’ and will heat up in an inflationary environment.
Analysis
Predictions in the commodity futures trading can be made through 2
tools i.e. fundamental analysis and technical analysis. Fundamental
analysis seeks to protect the market by making use of the demand and supply
factors. It helps to explain what the general tendency in the market is. Technical
analysis is the process of using all kinds of tools and charts, in order to
make predictions, it helps to explain exactly at which point to enter a
position or helps to explain at what point will be the trend reversal.
Interpretation
From the above analysis, it can be concluded that, by making use
of both the fundamental and technical analysis efficiently, and henceforth take
a favorable position in the market and thus benefit from the price movements.
