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  • QA 054
    Question:
    In market analysis, what is the difference between 'fundamentals' and 'technicals'?
    Background:
    In our efforts to understand the international coffee market, we are reading as many reports as are available in our country. Often these reports refer to aspects which some times are called "fundamentals" while on other occasions they talk about "technicals". What are these concepts? If they are not the same, what is the difference between them?
    Asked by:
    Grower-exporter, Honduras
     
    Answer:

    There are two major types of analysis generally used to predict the price performance of commodity futures: Fundamental Analysis and  Technical Analysis. 

    Since the price of a commodity represents the consensus between buyers and sellers, the price at which a trader is willing to buy or sell depends primarily on his expectations. If the trader expects coffee prices to rise, he will buy; on the other hand if the trader expects prices to fall, he will sell. Such transactions are, usually, carried out on the futures markets of New York and London - see chapter 08 for more on these.

    To arrive at their conclusions, traders are often guided by either or both, Fundamental and Technical analysis.

    Fundamental analysis examines the physical aspects of a particular commodity, in this case coffee, such as supply and demand factors. But also everything else that influences this equation including weather patterns, farming, transportation, social and economical factors in both consuming and producing regions, and other elements that can or might affect the availability and disposability of coffee. To note though that sometimes the market reacts to fundamentals that are occurring in the short term (for example low deliveries, tight physical/cash market) and at other times is factoring in or is responding to expectations of an increase or decrease in supplies at a later date. Since coffee is a global market, at times prices might seem to move opposite to or at odds with what is happening in your local market, something that can be confusing

    While there are many fundamental studies published regularly by several private companies, and independent researchers, mostly against a subscription fee, some government agencies and official coffee organizations also provide fundamental information. An overall review of factors determining supply and demand is found in chapters 01 and 02 of the Guide.

    Technical analysis is the study of price and price behavior. Today the world of technical analysis is huge and includes patterns and indicators that "technicians" (technical analysts) claim to be helpful in predicting price trends. In essence, technical analysis reflects on coffee's historical prices in an effort to determine future prices. This is done by matching current price actions or expectations against  comparable historical price actions in an effort to predict a reasonable outcome. Technical analysts argue that because human behavior repeats itself, so will price behavior.

    Speculative funds traditionally used technical analysis as a parameter for when to  enter or exit positions. One should remember that a pure speculative commodity fund is a pool of investor money aimed at seeking profits by trading markets. They do not care if the price of a particular commodity rises or falls, but just that they can accurately predict the direction in which that market will move. However, today many funds no longer trade in such narrow confines and also pay close attention to fundamental analysis.

    Tools used to evaluate prices from a technical point of view are: charts, indicators, volume and open interest analysis, where one can look for peaks, bottoms, trends and patterns to detect when a particular movement took place and when it might be reversed.  There are literally hundreds of other measures used to identify trends such as moving averages, and theories that detect support (low) levels and resistance (high) levels that technicians will consider safe enough to arrive at a buy or sell decision.

    For more on technical analysis, see 09.07 Visit www.theice.com for coffee market reports and price information, www.futures.tradingcharts.com for more on charting and chart analysis, whereas www.jganesconsulting.com is a good example of a commodity analysis service.

    Posted 27 October 2005

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    QA 051