Wheat prices at the Chicago Board of Trade (CBOT) have dropped more than $3 per bushel since peaking in February 2011. A two-week reversal signaled a change in trend on Feb. 18.
Chart analysis is not only useful for determining the market’s turns, but it can also be used to determine the price trend, and where support and resistance to a trend may be anticipated.
Prices over a period of several months are typically either moving up or down. This direction is the major or long-term trend of the market. Within the major trend are a series of highs and lows that can be of several weeks’ duration; these are the intermediate trends.
There are also small fluctuations within the intermediate moves that are the minor trends. Therefore, it should be recognized that a trend may be interpreted in several ways, depending on whether someone has a short, intermediate or longer-term outlook.
The major trend for wheat is down, as defined by the parameters of the downtrending channel and illustrated by the lower highs (A) and lower lows (B) in the accompanying chart. Farmers can use the short term swings within the long-term perspective to determine when to make a sale.
For example, on Sept. 2, another two-week reversal provided a sell signal at resistance, which was the upper boundary of the downtrending channel. This will be increasingly important for farmers to know when marketing wheat in an open market system.
Trendlines and channels
During the course of a trend and all the fluctuations which compose it, there is a characteristic for prices to follow a sloping straight line path. In the case of falling prices, the line is drawn across the rally highs, which serves as a point of resistance.
For a trendline to be both valid and reliable there should be at least three points of price contact. In a declining market the three points of contact correspond to the rally highs, each topping out at a lower level.
When an emerging trend can be identified and followed to its conclusion, it translates into opportunity. The use of trendlines is a valuable tool for accomplishing this. Once a trend begins in earnest, it has a high tendency to persist.
After a trendline is constructed and a trend is established, a line may be drawn that is parallel to the trendline, depicting the channel within which prices will fluctuate as the trend proceeds. This is extremely helpful for studying the trend and determining when to hedge.
In a downtrend, the channel’s upper boundary is the downtrend line. The lower boundary is the return line and is drawn parallel across the lows of each progressively lower decline.
Market psychology: As a new downtrend begins to emerge, sell orders materialize, but many are at a limit price above the market.
Some of this selling is satisfied on price rallies, but a portion of the selling is not. When prices again begin to move down, some of these sellers jump in for fear of missing the move. The balance of unfilled selling will continue to trail the market in hopes of catching a bounce in price. Most of these sellers will gradually lower their offers as the market declines.
Their selling, as well as that of longs eager to take profits during periods of price rallies, prevents remaining sell orders that are too far above the market from being filled. Eventually, there will come a point during a bear move when the decline begins to accelerate. This occurs as the patience of those waiting for a big rally will have worn thin and selling picks up at the prevailing price level.
Perhaps the single most important idea we can relate is to study the charts to identify a trend, particularly as it emerges. Doing this will maximize your opportunities.
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— David Drozd is president and senior market analyst for Winnipeg-based Ag-Chieve Corp. The opinions expressed are those of the writer and are solely intended to assist readers with a better understanding of technical analysis. Visit Ag-Chieve online for information about grain marketing advisory services, or call us toll-free at 1-888-274-3138 for a free consultation.