Intro
As fundamental analysts, we believe prices are primarily driven by #supply and #demand. However, we also recognize the significant influence of crowd #psychology on market dynamics.
History is filled with examples of periods when price action was dominated by market psychology rather than fundamental factors.
While we focus on fundamental analysis in our premium reports and articles, we also closely track trends using #technicalanalysis. This analysis forms an essential role in providing objective information on how #markets are behaving and the timing of entry points.
To assist our friends and clients in the softs (#Coffee, #Cotton, #Cocoa and #Sugar), we have created a technical analysis report that provides a unique take on technical analysis.
We have customized this report for each of the softs and included easy to read key data and even past performance of each indicator. This report is available on our LinkedIn page for our followers and also as a free report for anyone who signs up for a free subscription.
In this article, we will explain why you should use a technical analysis report (even if you trade fundamentals). We will give a brief overview of our methodology, and also how you can specifically use and understand our new report.
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Why You Need a Technical Analysis Report
You need a technical analysis report for one very simple reason: so that you don’t miss trends.
A trend is the trader's best friend or worst enemy (depending on your position and the trend's direction), and it is essential that we are at least aware of them, and if possible, we want to anticipate them.
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Trend following indicators also make sure that you do not become fixated on any one factor in the fundamentals.
What's in the Report:
Technicals Summary
At the top of our report we provide a one word summary of the indicators (Bullish/Bearish) and also a a brief written interpretation of the technicals. This Small paragraph summarizes the market trends and signals into a short overview and forecast.
This allows you to quickly understand the conclusion of the technical view before examining the deeper details. However, the details also provide useful context and specific tools to assist in your trading such as support and resistance levels. In the last section, we will go over how to use these signals and others, more specifically.
Technicals Overview Table
Our technicals table displays the status of several key technical indicators as bullish or bearish, and it also shows how those signals have evolved over time. This provides a quick historical overview of the signals in the market.
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In general, tech indicators are mathematical calculations based on historical price data, volume, or other market variables. A wide array of technical indicators exists, but we have selected 5 that we think are an optimal mix to identify short- and long-term trends in the market.
These indicators are Price vs Moving Averages, Moving Average Cross, the RSI and the MACD. Aggregated together, these can provide a comprehensive view of technical market momentum, or to put it simply, whether or not a market is trending.
For example, #Robusta and #Cocoa have both been trending upwards lately. Looking at the report, we can see that the Robusta techs have been mostly positive over the last 3 months, but a bit more mixed in the 6-month to 1 year time frame. Therefore, we can very quickly get a good sense of the duration and strength of the trend and also some early warning that it could be shifting.
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Similarly, the cocoa market has demonstrated positive momentum over the past month, while its technical studies share a positive consensus.
A wide agreement among various indicators signals trend strength and clarity of direction. Conversely, divergences and flips can indicate declining momentum, which often precedes reversals in the market. Yet, that they can also signify a market that is choppy and lacking a clear direction.
Visual Representations
Beyond the numerical representation of technical indicators, we provide visual representations that further add to the analysis. This approach allows for a deeper analysis of how technical indicators align with historical price action.
Simple Moving Averages & Cross
Simple averages of past prices (of a determined time frame) are trend-following indicators displayed as lines that smooth out prices.
They serve as key references for determining support and resistance levels, as they often form price congestions. Furthermore, they also aid in identifying direction and strength of market trends, as well as potential shifts that may occur.
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One effective approach is to utilize prices and compare them to their SMAs to generate signals. When prices are higher than the SMA, it indicates positive price action, since quotations are gradually increasing. Conversely, when prices are lower than the SMA, it implies a downtrend.
The point at which prices cross above or below the SMA can serve as signals for potential shifts in the trend. Therefore, for momentum traders, the precise moment when the price crosses the SMA can be used as buy or sell signals.
Different time frames offer varying signals. Smaller time frames, such as the 20-SMA, provide more rapid, frequent, and short-term focused signals. Although they may be less reliable, they offer early entry opportunities. On the other hand, broader intervals, like the 200-SMA, serve as better proxies for long-term price action. While they generate slower signals that result in late entry, they are often more reliable indicators.
We can further enhance our analysis by comparing the two SMAs to gain insights into long-term momentum: the SMA cross, whether it is bullish or bearish, serves as a valuable proxy for trend-following momentum hedge funds.
This makes it a useful tool for anticipating the actions and positions of such funds. As in a trending market, it often implies potential long-term reversals in price direction.
Additionally, another visual representation we provide includes the Moving Average Convergence Divergence (MACD) and Relative Strength Index (RSI).
Relative Strength Index (RSI)
The RSI is an oscilator. Which means that it is a calculation done on price action that converts price into a number between 0 and 100. This is often displayed below the price chart so that you can compare when the indicator is weak or strong with the price action.
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The RSI can give multiple indications. We can see whether the RSI is near the top or bottom of the range to give an impression of whether prices are overbought or oversold. The RSI is overbought when above 70, and oversold when below 30.
However, it’s important to note that being overbought or oversold is not a signal itself that the market will shift direction. Typically, we wait for when the market is ob/os and then crosses out of the range to indicate a trend shift.
Furthermore, we can apply a Moving Average (MA) to the RSI and utilize it in a similar manner as comparing price to a moving average. By analyzing the crosses of the RSI with the MA (displayed in blue), we can potentially identify trend reversals. Crosses of the RSI below or above the MA can act as signals for potential shifts in market trends.
MACD
Is a technical study that Measures market momentum and can generate buy and sell signals. Essentially, it takes 2 SMAs and analyzes the differences between them. So, in other words, MACD shows us how short-term momentum is compared to long-term momentum.
This can be used as an early warning indicator of price shifts (e.g., the July 2021 frost was caught by the MACD). We take the analysis of the MACD and display as a histogram (red bars), which can either be positive (bullish) or negative (bearish). This simplifies much of the analysis into a binary signal.
The histogram can be used as a tool to identify when bullish or bearish momentum is high (e.g., gradual increases on the histogram bars indicate bullish momentum strength). Similarly, we can also analyze its peaks and troughs to monitor changes in the underlying momentum (e.g., a peak in the histogram bar would signal upwards momentum losing steam).
The same logic applies to reversals in the histogram (from positive to negative and vice versa), which represent bullish/bearish signals.
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Supports & Resistances
Support and Resistance levels are crucial tools in our report, providing potential price levels where markets may encounter pauses, reversals, or changes in trend. These levels are visually displayed as colored lines in our price charts, with red representing resistance and green representing support. In the report, we present these levels near the top, ordered by their proximity to current prices.
These support and resistance levels are derived from maximum and minimum levels within specific timeframes, as well as from the levels of Simple Moving Averages (SMAs). They are significant because they indicate areas where market participants are likely to place buy or sell orders and set stop-losses.
Support levels suggest strong buying interest that can prevent further declines, while resistance levels indicate sufficient selling pressure to limit further upside movement. However, it is essential to recognize that these levels are not absolute barriers, but rather points where the market may pause or reverse.
To interpret this information in our reports, we observe the concentration of congestion (upside or downside) around these levels. For example, if there is a fair amount of resistance close to current prices in the Arabica market, it suggests strong upside congestion. If a breakout occurs in this scenario, it could be a precursor of sustained upward movements. Conversely, well-spaced support levels indicate fewer technical obstacles to the downside, making it easier for the market to move in that direction.
Accuracy & Long-Term
To vastly oversimplify, technical analysis tends to work very well in trending markets, and poorly in sideways markets.
Additionally, some signals and parameters work better in some commodities or markets than others. This can have to do with the timeframes that are relevant to those particular markets or the participants that make up the traders.
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We believe that accountability and transparency are important, so we show a simple P&L table at the end of our report that shows the performance of each indicator for that market. These calculations are assuming trades done solely by following the tech signals.
How to Use the Report
It’s important to note that technical signals can be wrong. One of the dangers of using technicals to trade is that in sideways markets these indicators can produce conflicting of inaccurate signals. It's also possible that any given signal can be just plain wrong.
However, one way to mitigate this risk, is to combine technicals with fundamentals. If you hold a fundamental view that the market will rally, technicals can be used to signal when the rally is starting, and when the trend is reaching full strength. Similarly, if you believe that a market is fundamentally overextended or overvalued, technicals can be used to provide an early warning of the trend reversal.
Another great way to use this report is to use support and resistance levels to inform trading entry and exit points. Moreover, since the specs are necessarily trend followers, we can use our 20/200 SMA cross as an indicator of when funds will be getting in or out and therefore anticipate positioning changes.
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Finally, we advise looking at the P&L page of the reports to get an idea of the performance of these indicators over time. Past performance is no guarantee of future performance, but this does also provide some sobering warnings of the dangers of relying solely on technical indicators.
These systems can be very effective, and many traders and hedge funds have become rich using them. However, there have also been a great number of traders who lost money using these.
Our suggestion would be to use the technical indicators in conjunction with your own research to help with the timing of entry and exit, and the placing of trading orders. However, we would not recommend using technical analysis as your sole form of market analysis.
Conclusion
Monitoring the technical landscape of the commodity markets yields crucial insights into price phycology. However, maintaining consistency in your analysis can be challenging. Thus, having a reliable resource like our comprehensive technical analysis reports, equipped with a consistent methodology, becomes an indispensable tool to help understand price behavior.
If you're interested in receiving our FREE technical analysis reports on the global commodities markets, we invite you to sign up here.
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Disclaimer: Please note that we are not responsible for any trading losses incurred while utilizing our free technical analysis report.
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