By Brian Hoops –
The great debate: technicals vs. fundamentals
What really determines price direction for the markets, fundamentals or technicals?
When commodity futures markets were first developed, fundamentals seemed to be the primary component behind price discovery, with supply and demand controlling the underlying price mechanism. Even today, the market widely anticipates both public and private fundamental reports in nearly all sectors of the industry.
These reports have become the cornerstone of many traders’ bias in the marketplace and are generally the catalyst for major market moves and changing trends.
Yet, as most traders realize, the market is difficult to trade from a strictly fundamental perspective. If it were as easy as reading the latest USDA report, then grain traders should be able to take a position in the market and make money with little to no effort. Obviously the market is much more complex than simple fundamental analysis, yet it remains a primary component in price discovery.
Each futures market is different, and yet the fundamental reports traders use to help form their bias are generally the same. For example, agricultural commodity reports are generally focused on pure supply and demand. Therefore, the reports that focus on cyclical production are extremely important, verses a report that may simply show stagnant demand.
Energy and precious metal reports are still focused on supply and demand. However, these commodities do not replenish their supply every season. Therefore, as a trader, one must become familiar with the reports viewed most significant to the marketplace and then be able to determine what the general public is anticipating the report to say. The numbers themselves are not generally what determines whether a market reacts bullish or bearish; rather, it is the underlying bias that helps determine how the report will be viewed.
As the commodity markets have matured and technology has become more accepted by traders, technicals have taken over a large portion of market analysis. Commodity markets, more so than any other financial instrument, attempt to achieve price discovery by not only digesting the current underlying fundamentals, but also the potential unknown in the world.
As a result, technical analysis has become extremely popular. Technical analysis sometimes can be as much an art as purely mathematical, with no single program or system accurate 100 percent of the time. Yet there are tremendous amount of hours spent each day applying technical indicators to markets and on the creation of new indicators.
Technical analysis, in general, should help traders become more confident in their trading decisions to not only enter the market but also exit their position. Institutional traders have largely incorporated the use of moving averages in their trading systems, as these traders are able to absorb the ebb and flow of the markets better than their smaller (individual trader) counterparts due to their higher capitalization level.
Therefore trends and moving averages tend to be more significant for larger traders. Intermediate term traders are generally swing traders and tend to look at one to three week trends rather than the long-term moving averages. This also allows intermediate traders to ignore the back-and-forth action of a daily chart.
Finally, short-term traders are those individuals that watch not only the daily charts but may also watch intra-day chart formations. Short-term traders will many times attempt to apply the same technical analysis on a short-term period as a long-term trader may apply on a weekly or monthly chart, but will then also be forced to accept smaller profits with the shorter trading spans.
Some of the best traders are those that incorporate both fundamental and technical analysis in their trading approach. I am a firm believer that traders should not only become familiar with the chart formation that a particular market may have, but also what the underlying fundamentals of the marketplace are. It is my opinion that an underlying bias developed by the fundamentals of a market will help traders in their technical analysis and trading success.
Try to incorporate both fundamentals and technicals in your marketing and trading strategies and watch your profits soar.
Brian Hoops is president and senior market analyst of Midwest Market Solutions, Inc., a full-service commodity brokerage and marketing advisory service. Daily market commentary and trade recommendations are available on the Internet at www.midwestmarketsolutions.com or subscribe by e-mail at email@example.com, call toll free at (866) 203-9655, or write to Midwest Market Solutions, 1028 Broadway Ave., Yankton, SD 57078.
Source: AG Weekly