I have been told, and I sort of believe, that most of my readers know little – and don’t care for – technical analysis. What can I say? More fool you; sharpen up, because you can do a lot better. If you want to do something well, like investing your money carefully and profitably, why not take a tip from the pros? They use all sorts of tools, including insider knowledge, hunches, ratios, comparisons – and have, front and centre of their screens, charts.
Either as a short-cut aide memoire, or to spot market extremes, their next area of research is technical analysis itself. Today I will look at one commodity, in four different time frames, to help you take your first steps in this direction. Note: no previous experience necessary.
I’ve deliberately picked out one commodity derivative which you know well, but may not remember: lean hog futures prices on the Chicago Mercantile Exchange. You’ve probably not bought or sold these – and remember, with derivatives you make money on the way up and on the way down – but you have some idea of pig farming. Picked as today’s example because African swine fever has decimated Asia’s pigs since August’s first outbreak.
We kick off with a quarterly chart, one whose history goes back at least to the mid-1970s. Look for the absolute and percentage drops from peak to trough prices, and then the other way around: these are not the same. Calculate the mean regression, plus one and two standard deviations from here. Consider whether you can afford these swings. So far, just maths. Then try to spot any seasonal and cyclical trends in this market. There should be as a sow’s gestation period is three months, three weeks and three days – and can have two litters a year. So far, just common sense.
Now drill down to a weekly chart, trying to work out where in the scheme of things one stands. Buy, sell, or do nothing? Or is this market simply not for me – something your stockbroker will rarely admit to. In the second half of 2018 it took a while for prices to base just above two standard deviations below the mean regression. It was not until March this year that investors, processors and Joe Public cottoned on to the shortages’ effect of a key Asian foodstuff. Bursting above the mean, last week’s huge bullish candle suggests a total change in tone. The 50 per cent retracement resistance area has capped on the last four attempts. It could cap again.
Looking at a daily chart, in late March it was already more overbought than at any time in the last five years, and last week’s gap through the mean hints at a major change of heart – and fear – momentum clearly bullish again after dipping since late March. Onwards and upwards, it seems.
My final chart is an hourly one, although I prefer a four-hourly period which enables one to see the intra-day ins and outs while keeping a sense of the bigger picture. Here I know we’re set for a change in the front month contract, where a market in contango means we’ll roll over to a higher price. It suggests problems with supply have been building, and are likely to get worse; pencil in a bigger rally.
