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Technical analysis

On the other hand, a technician is concerned with market action only. The basic issue here is not that fundamentals are what ultimately moves price—the technician concedes this point. The technician believes it is virtually impossible for most of us to know all the fundamentals that affect price at any given time. By the time the news reaches most of us, it has been disseminated so widely that it has been discounted in price. Because a trader makes or loses money via price movements, the technician believes this is what should be studied. In other words, the technician believes price is the ultimate fundamental.

In early 1997, corn had retreated back to the 1995 lows—in the mid-two-dollar-and-fifty-cent per bushel range. The price was that low because the fundamentals were decidedly bearish. Supply was dramatically up, with an excess of a 1-billion bushel carryover supply projected. The livestock numbers were way down. Exports were falling, and China had once again turned into a corn exporter. However, the market traced out a technical “bottom formation,” and the commodity funds bought and then bought more. One day in February, they bought 100 million bushels. Many of the commodity funds trade technically. It seemed they all saw the same price action at the same time, and they acted on it. The 100-million bushel purchase pushed prices higher, despite the bearish fundamentals. The higher prices attracted more technical buying, and this new buying hit price stops above the market. Undercapitalized shorts could not meet margin calls and had to cover their positions, and this meant more buying. The commercials were selling into the market, but the funds bought more as additional price objectives were hit. In a four-day period, the funds added another 150 million bushels to their initial purchases. Prices soared by 50¢ per bushel, more than 20%. Farmers started to notice prices were rising and started to hold back on their cash corn sales as they became bullish and waited for higher prices. In this case, a technical move actually resulted in the fundamentals changing (that is, a restriction of supply due to less farmer selling). Eventually, the market fell of its own weight, but there is no denying you could have made a nice profit in a case like this by ignoring the fundamentals and just listening to the sounds of the market.


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