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Agribusiness Library
Lesson 060098
Fundamental Analysis and Technical Analysis
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Objectives
1. Compare and contrast fundamental analysis
and technical analysis.
2. Identify supply-and-demand factors that may
affect the price of agricultural commodities.
3. Determine how price, volume, and open
interest are used by technical analysts to
predict price movements.
4. Predict price movements by analyzing charts.
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Terms
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bear market
bearish key reversal
breakaway gap
bull market
bullish key reversal
closing price
demand
double bottom
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double top
downtrend
exhaustion gap
fundamental analysis
head-and-shoulders
formation
highest price
lowest price
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Terms (cont’d)
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open interest
price
resistance line
runaway gap
sideways trend
supply
support line
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technical analysis
uptrend
volume
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What are fundamental analysis
and technical analysis?
Being able to predict what markets will do in the
future is essential for producers and others. One
way to do this is by projecting prices. But how?
There are two key approaches to price
expectation.
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What are fundamental analysis
and technical analysis?
A. Fundamental analysis is the approach
that uses information derived from supply
-and-demand factors to anticipate price
movements. Fundamental analysts use
monthly reports provided by the USDA that project
supply-and-demand factors for a particular
commodity, along with information from various
associations.
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What are fundamental analysis
and technical analysis?
1. The USDA reports project several different factors, such
as the supply and use of U.S. soybeans for an
upcoming year, the estimated final numbers for the
current crop year, and crop progress.
2. Other reports indicate export sales and grain stocks.
3. Traders who use fundamental analysis review and study
these reports to anticipate where the price of a
commodity will go.
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What are fundamental analysis
and technical analysis?
B. Technical analysis is the approach that uses
futures price charts to anticipate price movements.
Technical analysts use bar charts of market trends and
turning points to develop price forecasts. They also
use price movements from past days, weeks, months,
and years to research price trends.
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What are fundamental analysis
and technical analysis?
1. Many technical analysts use only bar charts and make
no use of fundamental commodity data.
2. Other traders and individuals in the futures market use
both approaches in developing price projections.
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What supply-and-demand
factors may influence the price of
agricultural commodities?
The price of an item is usually determined by
supply and demand. Supply is the quantity of a
product or service that sellers are willing and able
to provide to the market at a given price.
Demand is the quantity of a product or service
that buyers are willing and able to purchase from
the market at a given price. Many different things
affect both supply and demand.
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What supply-and-demand
factors may influence the price of
agricultural commodities?
A. Among the supply factors that can influence
agricultural commodities are:
1. Weather
2. Yields
3. Carryover stocks
4. Exports and imports
5. Costs of production
6. Market price
7. Government programs
8. Prices of comparable commodities
9. Number of sellers in the market
10. Expectation of future prices
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What supply-and-demand
factors may influence the price of
agricultural commodities?
B. Among the demand factors that can influence
agricultural commodities are:
1.
2.
3.
4.
5.
Market price
Change in personal preference
Change in personal income
Prices of comparable commodities
Number of buyers in the market
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How are price, volume, and open
interest used to predict price
movements?
A technical analyst uses price, volume, and open
interest to predict price movements. Price is a
factor that consists of the high, low, and close of
the day. Volume is a factor that consists of the
number of contracts traded during the day.
Open interest is a factor that consists of
the number of outstanding contacts or the
number of contracts that have not been
offset.
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How are price, volume, and open
interest used to predict price
movements?
A. The bar chart is designed with the vertical axis
representing the price of the commodity and the
horizontal axis representing time. A vertical line is
drawn to show the range of price for the day. The
highest price traded (often simply called the
high) is represented by the highest point on the bar
chart. The lowest price traded (the low) is
represented by the lowest point on the bar
chart.
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How are price, volume, and open
interest used to predict price
movements?
A. The closing price (the close) is represented by a
horizontal dash on the high-low bar. With the bar
chart, the technical analyst is recording history, or
what has happened. He or she will then use this
information to draw patterns of price movement
and make conclusions about the market’s future
direction.
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How are price, volume, and open
interest used to predict price
movements?
B. The relationship between price, volume, and open
interest can tell a technical analyst much about
what can happen next. An uptrend in price may be
shown by a rise in price, volume, and open
interest. A current uptrend may be ending when
price is rising but volume and open interest are
falling. A downtrend may be established when
price is falling but volume and open interest are
rising.
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How are price, volume, and open
interest used to predict price
movements?
B. Finally, a falling of all three factors indicates that
price will reach bottom and soon rise again. The
relationship links to the terms bull and bear. A
rising market is called a bull market. A falling
market is called a bear market.
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How are price movements
predicted by analyzing charts?
Price movements can be predicted by analyzing
charts for specific trends. The most common price
trends are the following:
A. Sideways trend—The trend in which prices are
flat and show no movement, either high or low.
As a sideways trend is established, prices will
typically stay within the resistance and support
lines.
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How are price movements
predicted by analyzing charts?
B. Resistance line—The line where prices are turned
back by selling pressure. The selling pressure stops
the market from advancing.
C. Support line—The line that indicates where the
buying pressure stops a market decline.
D. Uptrend—The trend shown by a series of higher
highs and higher lows. An upward price movement
will validate an uptrend.
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How are price movements
predicted by analyzing charts?
E. Downtrend—The trend shown by a series of lower
highs and lower lows. A downtrend is validated by
two declining tops.
F. Bullish key reversal—A reversal in a downtrend
market where the high is higher than the previous
day’s high, the low is lower than the
previous day’s low, and the close is above
the previous day’s close.
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How are price movements
predicted by analyzing charts?
G. Bearish key reversal—A reversal in an uptrend
market where the high is higher than the previous
day’s high, the low is lower than the previous day’s
low, and the close is below the previous day’s
close.
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How are price movements
predicted by analyzing charts?
H. Breakaway gap—A gap that indicates the end of
a price pattern and the start of an important
market move.
I. Runaway gap—A gap that occurs only after a
trend has begun and is often shown as the halfway
point of the market move.
J. Exhaustion gap—A gap that occurs at the top or
bottom of a move. This exhibits that the top or
bottom of the market will soon be reached.
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How are price movements
predicted by analyzing charts?
K. Head-and-shoulders formation—A pattern
that can occur at the top of an uptrend or at the
bottom of a downtrend. It shows a period of the
market changing from up to sideways and then
from sideways to down (uptrend) or of the market
changing from down to sideways and then from
sideways to up (downtrend). It is one of the most
reliable patterns.
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How are price movements
predicted by analyzing charts?
L. Double top—A chart formation showing a trend
reversal but in a lesser time frame than the headand-shoulders formation. It is indicated by two
equal price peaks, after which prices hit the
resistance level, dip, and hit the resistance level
again before turning down.
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How are price movements
predicted by analyzing charts?
M. Double bottom—A chart formation showing a
trend reversal but in a lesser time frame than the
head-and-shoulders formation. It is indicated by
two equal price slumps, after which prices hit the
resistance level, rise, and hit the resistance level
again before turning up.
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Review
What is the difference between fundamental
analysis and technical analysis?
 Discuss some supply and demand factors that
affect agricultural commodities.
 Why does a technical analyst study to determine
what might happen next?
 Which trend have prices that are flat and show no
movement, either high or low? Name three other
trends.
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