Series 3 - National Commodities Futures

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Orders And Price Analysis - Technical Analysis And Volume

Volume
Price is just one component of technical analysis.
Volume is also important because, according to technicians, changes in volume precede changes in price. Right before a security's price gains, history shows, there is often a period of increased volume. Trading signals in periods of heavy volume are more significant than in periods of light volume.

Volume is the total amount of contracts that have changed hands in a given commodity market in a specific period (e.g. one day, one week, one month). Volume, then, measures the intensity of a price trend. The higher the volume, the less likely a trend is to reverse.

A series of trading days in which no significant change in price occurs is called "congestion" (consolidation). It allows market participants to re-evaluate the market and the environment which leads market price. When a security breaks out of congestion, a buildup of orders may fuel a run-up in price. According to technicians, the longer the period of congestion, the larger the build-up and thus, generally, the greater the surge.

The terms overbought and oversold refer to excessive purchases and sales, respectively, rather than to supply and demand trends. When either of these occurrences take place in a short time frame, they signal to technicians to buy (in an oversold market) or sell (in an overbought market) as these activities indicate a bottom and top, respectively.

Tracking volume is also a useful exercise for spotting such bullish, bearish and neutral signals as ascending, descending and symmetrical triangles. The following bar chart illustrates the first indicator.



The key elements of an ascending triangle are a flat top line and an upward-slanting bottom line. (The third line is simply a vertical line representing the point in time initiating the period under consideration.)

"The ascending triangle" is telling us the nature of the uptrend and predicts when it will break through in search of a higher trading range.

Although the resistance level is intact, the support level appears to be gaining. The difference between the resistance and support levels, then, is narrowing; this means that buyers are entering the market and sellers are standing pat. Initially, this means that demand is catching up with supply but, in the long run, it suggests that demand will soon surpass supply and the price could break out to the upside.

In the example above, the breakout came a little earlier than the ascending triangle would suggest. That's not unusual. All the technicians in the market are capable of identifying these, and try to get their clients who invest in the market to get ahead of the trend.

Data presented in the volume chart at bottom seems to confirm that this is indeed the dynamic pushing up these feeder cattle prices. See how volume falls off initially, but then picks up in advance of the breakout.

The opposite of an ascending triangle is, of course, a "descending triangle." As you probably suspect, a descending triangle is a bearish indicator.

A "symmetrical triangle" indicates trades that stay within a range such as double or triple tops and bottoms. It is generally regarded as a period of consolidation before the price moves beyond one of the identified trendlines. A break below the lower trendline is used by technical traders to signal a move lower, while a break above the upper trendline signals the beginning of a move upward. As you can see from the chart above, technical traders use a sharp increase in volume, or any other available technical indicator, to confirm a breakout beyond one of the trendlines.

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