Chapter 3 Technical and fundamental analysis Flashcards
What are the two important tools used to forecast prices?
Technical analysis and fundamental analysis
Fundamental analysis
forecasts prices by studying the influences of supply and demand for a particular commodity.
What influences supply and demand for a commodity (fundamental analysis) 4
Inventories
imports and exports
government programs
weather
What helps fundamental analysts shape their opinions
Economic forces such as
Producers
consumers
supply and demand
Technical analysis
bases on commodity price patterns and trading volume. Technical analysts use charts and computer programs to identify and forecast price changes and trends.
How does demand effect price
price moves directly with demand. Higher demand = higher prices
How does supply effect price
Prices move inversely from supply. higher supply = lower prices
What are the 2 supply rules that affect price
- An increase in supply puts selling pressure on a commoditiys price
- A decrease in supply puts buying pressure on a commoditys price.
What affects the quantity of goods available for consumption (supply)? 7
- Producers expectations
- Number of producers
- Technological advances
- Resources
- Inventories
- Imports
- Exchange rates
How does technological advances affect prices
technology affects production costs and, therefore, supply. Improvements in production technology reduce production cost. In turn, decreased production costs motivate producers to supply increasted quantities, which puts downward pressure on prices.
What factors influence consumer demand for a commodity? 10
- Domestic use
- Consumer expectations
- Number of consumers
- Consumer preference
- Disposable income
- Exports
- Exchange Rates.
- Inflation and interest rates.
- Substitution
- Elasticity
What is elasticity?
Measures the effect of changing prices of a commodity on its supply and demand.
Demand Elasticity
The effect of price movement on the demand.
Elastic demand
changes significantly in response to price changes.
What often determines price elasticity
number and nature of substitute commodities.
Supply Elasticity
Elasticity of supply is affected by the number of suppliers.
When can supply be inelastic
When there are few producers and many obstacles for new suppliers to enter the market
4 examples of government influences
- The commodity credit corporation
- Acreage control programs
- Tariffs
- Commodity reports
What is the Commodity Credit Corporation (CCC?)
Operated by the U.S. Department of Agriculture to help stabilize farm prices by administering a loan program. FArmers may pledge harvested, stored, and inspected grains as collateral against a loan from the CCC.
How long are CCC Loans good for
renewable each year for up to three years
The CCC loans are nonrecourse loans, what does that mean
if the farmer defaults, the loan and interest are forgiven, but the farmer must forfeit the collateral-the crop- to the CCC.
Acreage Control Programs (ACPs)
reduce supplies of certain commodities to support price levels. The government agrees to pay farmers (in cash or in kind) not to cultivate all acreage. If supply is indeed reduced, prices move higher.
Tariffs
a tax on goods sold from businesses in one country to buyers in another.
How do import tariffs effect domestic prices
increase the cost of imported good, which makes domestically produced goods more price competitive. if tariffs are reduced or eliminated, domestic producers face tougher price competition from foreign suppliers, which will depress the prices of domestic goods.
Commodity reports
commodity reports provide the fundamental analyst with useful statistics for forecasting prices.
2 examples of commodity reports
USDA report
Commitment of traders (COT reports)
USDA report
United States Department of Agriculture releases the USDA report monthly. The report includes the governments estimate of the supply and demand of various agricultural commodities.
The commitments of traders
COT reports provide a breakdown of open interest for market reports in which 20 or more traders hold positions matching or exceeding reporting levels established by the CFTC. Released report each friday at 3:30 ET and reflects commitment of traders on the prior tuesday
Open Interest
the current total number of futures contracts for which delivery is obligated and expected. Large open interest points to plenty of activity and liquidity for a contract.
Moving average chart
plots average settlement prices over a defined time period, such as three days, 10 days, or 30 days, as points on a chart.
Point and figure charts (X-O) charts
Reveal the effects of price reversals over time. P&F charts ignore small price fluctuations, trading volume, and time
3 respected chart patterns
- head and shoulders formation
- triangles
- double (triple) tops and bottoms.
Rounded tops
possible reversal of the current uptrend. It is a gradual indicator sometimes referred to as an inverted bowl or saucer top.
Triangles
(Pennants) chart patterns indicating the range of prices is narrowing over time. The look like triangular flags, with the posle at the left.
Ascending triangle
usually appears after a drop in prices. The market trades back and forth through this range, not exceeding recent highs (resistance) but with lows gradually moving somewhat higher. The long side of the triangle slopes upward. An ascending triangle is a bullish indicator.
Symmetrical triangle
neutral indicator
Support area
A price range in which one can expect a possible increase in the demand for a commodity futures contract
Resistance area
A price range in which one can expect a possible increase in the selling of a commodity futures contract.
Breakout
When a price moves below a support level or above a resistance level.
Congestion
a pattern without strong indications of a direction or trend. Under congestion, a market trades in a fairly narrow range of prices, perhaps limited by support and resistance.
Overbought/oversold
occurs witha large increase/decrease in price over a short time.
Key reversal
occurs when the days price range remains above or below the previous trading days trading session and is accompanied by heavy volume. The indicates a reversal from the prior trend.
Open Interest
the number of contracts that have not been offset either by delivery or liquidation. Defined as the number of open long positions.
Short Covering
a short who is buying the contract to remove himself from the market.
Liquidating market
indicates a drop in open interest because more investors offset their positions. Usually occurs as the contract becomes deliverable at the same time as an increase in trading volume.
