When one studies many weekly bar charts, it becomes evident that prices over a period of several months are typically moving up or down. This direction is the long term or major trend of the market. Within the major trend are a series of fluctuating price movements that can be of several weeks’ duration. The lesser swings are the intermediate trends. Finally, there are small fluctuations within the intermediate moves that are the minor trends.
Therefore, it’s apparent that a trend may be interpreted in various ways. Our focus here is on the intermediate and long-term perspectives.
During the course of a trend and all the fluctuations which compose it, there’s a tendency for prices to follow a sloping straight-line path. During a period of rising prices, this path is determined by a line drawn across the lows of the reactions.
In a rising market, for a trendline to be both valid and reliable, there should be at least three points of price contact, which we’ve illustrated as A, B and C in the accompanying chart. Each point coincides with the low of a market reaction and must occur at progressively higher levels.
Beyond the minimum of three contact points, the more times a trendline supports a temporary price decline in a bull market, the more valuable it becomes as a trend indicator. Similarly, the longer the trendline continues without being penetrated, the greater its technical significance.
In the late stages of dynamic bull moves, prices are likely to have accelerated up and away from the trendline, taking on a very steep slope.
Once an uptrend evolves, it has a high tendency to persist. Thus, a properly constructed trendline may be challenged several times by the fluctuating market during the course of a big move without being penetrated. The longer the trendline remains intact, the more significant the eventual penetration becomes as an indicator of trend change. Once the market closes decisively below the line, it will sometimes turn back up to approach the trendline. This is often a selling opportunity.
Channels are useful in determining trends and for identifying a change in direction. We’ve illustrated an uptrend channel in this chart. In an uptrend, the channel’s lower boundary is the uptrend line, and it is drawn first. The upper boundary is the return line. It’s drawn parallel across the highs of each progressively higher advance.
As a new uptrend begins to emerge, buy orders materialize just under the market. Some of this buying is satisfied on price declines. However, when the market stops going down, remaining buy orders that are too far under the market are prevented from being filled. This causes buyers to jump in and increase their bids for fear of missing the move. Their buying, as well as that of shorts eager to take profits, causes the market to advance.
Some profit-taking emerges as prices rally to new highs. This results in an increase of potential buyers willing to get back in when prices move back down again.
However, when prices break down below the lower boundary of the channel, all recent buyers are caught with losing positions, and selling increases. This is referred to as long liquidation. Additional selling occurs, as participants reacting to the price decline sell before prices decline further, resulting in a change in trend as demonstrated here in the meal market.
The daily charts are technically oversold, so meal prices could see a bounce at any time, but rallies aren’t expected to last since the major trend has turned down.
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— David Drozd is president and senior market analyst for Winnipeg-based Ag-Chieve Corp. The opinions expressed are those of the writer and are solely intended to assist readers with a better understanding of technical analysis in the markets influencing agriculture. The information contained herein is deemed to be from sources that are reliable, but its accuracy cannot be guaranteed. Visit us online for more grain marketing ideas and educational tools, or call us toll-free at 1-888-274-3138 for a free consultation.