The Japanese are true pioneers of technical analysis of the markets.
You may remember last month’s column where I illustrated the weekly canola chart and identified the two-week reversal that materialized at the height of the rally in early January.
Similarly, another reversal pattern known as a harami also developed at the end of the first week in January in this weekly oat chart. When corresponding reversal indicators develop in more than one commodity in the same sector, they add further verification of an anticipated change in direction.
When multiple reversal indicators such as these are combined with a strong seasonal tendency for grain and oilseed prices to peak in January before moving lower into February, farmers had all the more reason to take advantage of the strength in prices by selling their grain in early January 2010.
The Japanese are true pioneers of technical analysis of the markets. Their techniques have evolved from fairly simple beginnings, trading forward rice contracts (futures) in the 17th century to now include many sophisticated ways to analyze the markets including the amazingly powerful modern-day charting method called “candlestick.”
Virtually all modern-day technical analysis used in conjunction with bar charting (e. g. trendline analysis, pattern recognition, etc.) can be applied in the exact same way using candlesticks. While candlestick charts use the exact same data as traditional bar charts, (open, high, low, close) they can present a powerful picture of market activity to even an untrained eye.
Candlestick charting provides an insight into market activity that is not readily apparent with the conventional bar-type charts. When you see a black bar in a candlestick chart you know the sent iment is bear ish, and when the bar is white it’s bullish. These patterns provide a very useful tool in predicting market changes and direction. By using these methods, the masterminds of the Orient have attained wealth in their markets and in ours.
BASIC CONSTRUCTION OF A CANDLESTICK LINE
The daily line shows the open, high, low and close. The thick part or candle is called the “real body.” It highlights the range between the open and close. If the close is above the open then the body will be white. When the real body is black this simply means the close was below the open.
The lines above and below the real body represent the high and low ranges for the period and are called “shadows.”
A long black body il lustrates a bearish period in the market with an opening near the day’s high and close near the day’s low. This long dark body is evident when prices broke below the lower boundary “A” (line of support) of the up trending channel in the accompanying chart. Selling quickly increased as longs sold to take profits or cut losses. Oat prices collapsed 60 cents per bushel on long liquidation in the seven days that followed the emergence of the harami.
A long white body is the opposite of a long black body and shows technical strength with an opening near the low and a close near the high in a wide range period.
The harami is similar to an inside day used in bar chart analysis. These patterns indicate the market has entered a point of indecision and a trend change is possible. As illustrated in the oval, the small black body of this harami had to be contained by the long white body preceding it.
Harami in Japanese means pregnant and suggests a waning in momentum and a possible change in trend. Candlestick charting offers farmers a reliable forecasting tool for knowing when to sell their grain and for purchasing their feed grain requirements.
Join me online at www.agchieve.ca/cooperator/for an audiovisual presentation about this article and chart.
David Drozd is president and senior market analyst for
Winnipeg based Ag-Chieve Corporation. The opinions
expressed are those of the writer and are solely intended
to assist readers with a better understanding of technical
analysis in the markets influencing agriculture.
The information contained herein is deemed to be from
sources that are reliable, but its accuracy cannot be
guaranteed. Visit us online at www.ag-chieve.ca/cooperator/formore grain-marketing ideas and educational
tools, or call us toll free at 1-888-274-3138 for a free consultation.