Bearish Key Reversals
What’s Happened….
Market analysis generally falls within two categories. The first is fundamental analysis, the study of supply and demand. Fundamental analysis considers such things as acreage, exports, yield, usage, etc. You get the picture. These variables are continuously changing. Many believe the market (which is all market participants) will pay attention to fundamentals for a big picture perspective of the variables in both supply and demand.
The second is technical analysis, the study of price charts. There are likely hundreds of books that have been written on various technical studies, which try to predict future price movement. Technicians might argue that fundaments are “baked” into price and, therefore, it is the charts that matter.
In the end, neither fundamental nor technical analysis is 100% accurate. Markets are dynamic and made up of many participants. However, occasionally there are technical signals that loom large and should be monitored by producers and buyers of commodities in order to identify a potential signal to act.
Why this is important…..
For this perspective article, we’ll look at daily chart analysis in two markets: the September milk class III contract and the Dow Jones index futures. Recently, both charts exhibited strong uptrends. At the very peak, each had a day where the high for the session was higher than the previous day, and the low was lower than the previous day. The key is that the close was also lower than the prior day. This signal is called a bearish key reversal. At the very top of a trend, a key reversal may signal prices are about to change. For both markets, the bearish key reversal also occurred at the highest price of the contract.
September milk posted a bearish key reversal on July 31, peaking at $21.83. In a matter of 4 days, the market lost $2.13, dropping to $19.70 – a loss of 9.75%. The Dow Jones Index peaked at 41,673 on July 18 to a recent low of 38,540, a drop of 3,133 points – or 7.5%.
It’s also important to know that the same can be said for low prices. The corn market has been in a downtrend since the beginning of 2024. On August 5, the market posted the opposite of a bearish key reversal, called a bullish key reversal. Does this mean the low price is in? Maybe. Time will tell. This could be a signal to end users to buy (perhaps aggressively) and that sellers should be less aggressive.
From a marketing perspective, you can see where being on your toes can be beneficial.
What can you do about it?
Stay vigilant. As a farmer, you wear two hats. One hat is production, and the other is marketing. Stay on top of markets, especially when they offer historically high prices like the milk market has recently. Not all signals are accurate or correct, however, at the top of a strong uptrend, erring on the side of technical signals can pay off.
As always, communicate with your advisor to help guide you to make informed decisions.
Find out what works for you….
Work with a professional to find the strategy or strategies that are best suited for your operation. Communication is important. Ask critical questions and garner a full comprehension of consequences and potential rewards before executing. The idea is to make good decisions for the operation and less emotionally charged responses to market moves, which are always dynamic.
About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.
The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation.
Author
Bryan Doherty