Commodity Fundamentals: How to Trade the Precious Metals, Energy, Grain, and Tropical Commodity Markets

CHAPTER 4

Technical Analysis

Technical analysis deals exclusively with market activity to develop a price forecast. As an investor, you are looking for a way to make a prediction about the future price of a commodity. Technical analysts look at prices, trading volume, and open interest to determine price forecasts.

The oldest method of technical market analysis has to do with interpreting the patterns of investment on price charts. The two most common charts are “bar” and “point and figure.” Bar charts illustrate the range and close of prices during a fixed time period (weekly). Point and figure charts use a figured amount of price change to illustrate forward and backward pattern investments.

A typical bar chart is shown in Figure 4.1. This chart shows a clear downtrend in the June 1982 gold contract traded on the Commodity Exchange Index (COMEX) in New York. Gold trading has enjoyed tremen-dous growth since it began in the United States in 1975. From January to December of 1981, 10.3 million contracts have traded on the COMEX. This compares to 8 million for all of 1980, 6.5 million for 1979, 3.7 million for 1978, 1 million in 1977, and 0.5 million in 1976. The bull market in gold began in the early 1970s with prices at about $25 per ounce. As world inflation accelerated, gold moved to $200 per ounce by December 1974. At this point, gold became available to Americans; but instead of the instant bull market many people anticipated, prices fell to $100 by mid-1976. Then the real ...