You d be hard pressed to find anyone this summer whowasn t aware of the United States escalating debt, increasing unemployment and home foreclosures that produced the current economic slowdown.
All summer, as the news grew increasingly bearish, with newspaper headlines suggesting the greenback was about to crash and burn, more market analysts began saying that the United States was at risk of another recession. Many economists concluded this was more than enough reason to send the U.S. dollar into a tailspin.
All the while, charting and technical analysis, was telling an entirely different tale.
On August 31, a harami materialized on the monthly nearby candlestick chart.
A harami is a chart pattern that indicates a change in the market s direction. This harami was quickly followed by a two-week reversal on the weekly nearby bar chart of Sept. 2.
Both these technical analysis signals indicated, independent of the news of the day, that the U.S. dollar was about to turn back up, rather than heading into a tailspin.
The ensuing breakout beyond the upper boundary of the down-trending channel, which is illustrated as (A) in the accompanying chart, is an example of how charting and technical analysis can successfully cut through the news, often referred to as noise in charting circles.
The Japanese, who many regard as the true pioneers of technical analysis, developed a method of charting called candlesticks. This method of charting uses individual lines that resemble candles, displaying the exact same data as is used in traditional bar charts (open, high, low, close), but allowing the viewer to spot technical strength and/or weakness at a glance by highlighting the relationship between the open and the close for each line.
A candlestick s long black body illustrates a bearish period in the market with an opening near the month s high and close near the month s low. The long white body is the opposite of a long black body and shows technical strength with an opening near the low and a close near the high in a wide-range period.
Candlestick charts are used by technical analysts to cut through the news in the marketplace, and can give viewers a timely advantage in spotting key market turning points for all time frames, as was the case this summer when looking at the U.S. dollar.
The harami, another technical indicator used to cut through the news in the marketplace is similar to an inside day used in bar chart analysis, which indicates a change in trend. The small body of the harami must be contained by the large body preceding it.
Similarly, a harami (buy signal) also developed just prior to the U.S. dollar turning up off its 2008 low. This led to an abrupt change in trend and subsequent rally in the U.S. dollar, which in turn caused commodity markets to drop like a rock.
This was when corn peaked at a high of $7.65 in June 2008 and then quickly collapsed to $2.90 in December. At the same time, canola dropped from $693 to $353 per tonne.
One of the clear advantages of charting and technical analysis is that it can help eliminate the emotion often associated with analyzing the markets through what is being reported in the news media.
Even someone like me, with 30 years of experience studying these markets, can on occasion be swayed by the news. It is, however, my personal experience that sell signals generated by the price action frequently occur at market tops, when the news is the most bullish. And conversely, buy signals often appear at market bottoms, when the news is extremely bearish.
Not to oversimplify the multitude of variables that determine commodity prices, but this summer a harami in the U.S. dollar monthly chart was definitely a clear indicator the U.S. dollar was about to strengthen, which in turn has weighed on grain prices, even though stocks are tight.
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