Which argument makes more sense:
Fundamental: Corn prices will rise because demand from the ethanol industry is leaping and corn supplies are running short.
Technical: Corn prices will plunge because after a five-wave upward move corn prices have moved down in a leading diagonal triangle followed by a flat correction, which suggests a move toward the terminus of the previous upward wave four.
Or what about these:
Fundamental: Wheat prices will move up sharply in coming months because stocks are tight and surging corn prices will drag other cereals along for the ride.
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Technical: Wheat prices could hit $7 US per bushel because that is the measured move level that will result from the recent bull flag formation that appeared after a wheat price pole developed.
Most producers would find the fundamental arguments more convincing in both the corn and wheat scenarios – the ones that involve supply and demand and real-world grain stocks.
And few farmers would understand the technical arguments.
But while most farmers and small investors who attempt to guess which way the market is going rely upon fundamental analysis, a gigantic industry exists and has greatly expanded in recent years that relies almost entirely upon technical analysis.
The biggest development in the investing world since the dot.com bubble burst in the late 1990s has been the creation of thousands of hedge funds, many relying upon arcane, technical trading formulas that see them act
in ways that no one would if relying upon fundamental analysis.
And in the commodities world, where farmers’ grain is bought and sold, the boom of commodity funds has had an immense impact, driving prices much higher and lower than they would have otherwise, with almost all the non-index funds relying entirely upon technical analysis for their buying and selling decisions.
Technical analysis can be a valuable addition to a farmer’s information toolbox when he is considering how to sell his crop. Even if a farmer is uncomfortable adopting or accepting technical analysis conclusions, they’re at least worth keeping in mind.
Both the technical arguments mentioned earlier are real ones that were recently made. The argument that wheat could reach $7 per bushel following the ending of a bull flag was made by Winnipeg analyst David Drozd of Ag-Chieve, based on his interpretation of wheat futures price charts.
The argument about corn falling significantly was made by Jeffrey Kennedy of Elliott Wave International, a Georgia-based market analysis firm that prowls through the murky depths of Elliott wave theory, a semi-mystical realm of analysis that goes far beyond simple chart formation identification, which is the basis of other forms of technical analysis, and purports to reveal the underlying pattern of markets, life, the universe and everything else.
Technical analysis often produces wacky recommendations.
Drozd said his analysis of Kansas City Board of Trade wheat prices in September 2005 led him to recommend that all of his clients sign Canadian Wheat Board basis payment contracts for their entire wheat crop on Oct. 31, wait for seven months and then lock in the market price within the contract on May 23. In October, the outlook for wheat was grim and hardly anyone was recommending a coming wheat bull market.
Waiting until May to lock in the wheat price at the end of a rally, but then getting out of the market entirely, had big results, he said. His clients received $4.75 Cdn per bushel for No. 1, 13.5 percent protein wheat through the board contract, compared to an eventual net pool price of $3.84.
“Our clients got 90 cents a bushel, seven months sooner, just based on that one chart,” Drozd said.
Technical analysts need to be bold, to go where other analysts won’t dare tread, which can be a lonely existence. It seems to attract a certain kind of person, known within the investment community as a “contrarian,” who doesn’t mind running against the crowd.
Kennedy is pretty much alone in his recent forecast that corn could soon fall to $3.53 US per bu., as long as a number of conditions are met, such as staying beneath $4.09.25 for enough time. He’s sure corn can fall back about 25 cents now.
“Simply put, in corn I like the downside, and if we can keep beneath $4.09.25, I think we have a good shot of selling off to $3.72.”
Technical analysis relies upon the belief that the prices in the market reveal far more about what’s happening in the real world than any fundamental analysis could possibly provide.
And it is based on the belief that, as Drozd said, “the price action brings out the news. Most people believe it’s the other way around.”
Many famous investors, such as Warren Buffett, have treated technical analysis with derision, scoffing at its counterintuitive basis and mocking those who practice its dark arts.
But thanks to the boldness of many of its practitioners, such as Drozd and Kennedy, and their willingness to lay out their forecasts, farmers can put their analysis to the b.s. test: just see what happens.
It may seem weird. It may seem flaky. But it may work.
