Resistance is a term used to describe a price level where the selling of futures contracts is expected to halt the current upward move in market price.
On the daily charts, these areas will appear as well-defined price ranges within which the market previously traded essentially sideways (A), prior to making a decisive move down. This area of resistance tends to be where the next advance will fail.
Another characteristic which helps to gauge the relative resistance of a price area is the vertical distance the market must rise prior to reaching the area in question. The greater the upward price move prior to reaching a resistance level (B), the greater will be the resistance.
Resistance areas evolve because equilibrium is reached between buyers and sellers. The market attracts selling around the upper portion of the range, as the buyers are unwilling to pay more and the sellers are more willing to sell. When prices move back down, then all recent buyers are caught with losing positions. Any return move back to this zone subsequently represents an area in which to liquidate a long position at break-even or with a reduced loss. Consequently, the offering of contracts for sale, also known as, resistance – increases.
A specific example of prices rallying into a resistance area (A), only to turn around and proceed lower, appears in the accompanying chart. Occurrences such as these are commonplace on futures charts, but are extremely important, as they illustrate where future rallies (B), are likely to fail.
Knowledgeable farmers capitalized on the recent upward movement in the market by making a sale. This area is identified by the targeted pricing zone.
All too often, farmers aim to sell grain when prices get back to an old high, and miss their opportunity by only a few dollars per tonne. Prices frequently fail to get back to the exact high of a previous area of resistance. Successful farmers make incremental sales within a defined pricing zone, just under the upper end of an area of resistance, rather than stubbornly holding out for a magical number like $10 per bushel.
Channels are useful in determining trends and for identifying a change in direction. An uptrend channel is illustrated in this chart.
In an uptrend, the channel’s lower boundary is the uptrend line and it is drawn first. The upper boundary is the return line. It is drawn parallel across the highs of each progressively higher advance. The return line points out the areas where reactions to the trend are likely to begin.
As a new uptrend begins to emerge, buy orders materialize just under the market. Some of this buying is satisfied on price declines. However, when the market stops going down other buyers jump in for fear of missing the move and this causes prices to move back up. Most of these buyers will gradually increase their bids as the market advances.
Some profit-taking emerges as prices rally to new highs. This results in an increase of potential buyers getting back in when prices move back down. Their buying, as well as that of shorts eager to take profits during periods of price corrections, prevents remaining buy orders that are too far under the market being satisfied.
When prices break down below the lower boundary of the channel, all recent buyers are caught with losing positions, and selling increases. This is referred to as long liquidation. Additional selling occurs, as farmers reacting to the price decline, sell before prices decline further.
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– 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/for more educational tools and ideas about grain marketing, or call toll free 1-888-274-3138.