Technical Analysis and Commodity Trading
Take a moment to familiarize yourself with this market. Typical commentary might run as follows:
The market has managed to make a series of higher highs and higher lows, demonstrating a strong trend accentuated by several gaps to the upside. Breakouts have been on days with big ranges. However, in the last few weeks the market has consolidated, appearing to complete a five wave Elliott sequence. We can see the market has made a lower low and a possible head and shoulder formation, with the right shoulder drooping down. Up to this point each wave was making standard fibonacci retracements, but with the recent move down we have broken through short term resistance and appear to be correcting a larger wave structure - we seem to be set up for a new downtrend. Much of the advance was made without volume confirming price, which makes us somewhat suspect of the move, and if there is a breakout to the downside with higher volume, we would consider the head and shoulder formation complete and would short the market just below the recent low of 3 days ago. We would not consider buying this market until we made a successful test of this recent low, and we'd like to see an increase in volume and a breakout above the recent high before we would go long this market.
Sounds reasonable, right? Like something you might hear from John Murphy on CNBC? Well, it is a reasonable reading of the "market" in that sense, but it is entirely unreasonable for the simple fact that it is a random series. (Technically speaking, for both the price and volume numbers, a series of random changes with a gaussian (i.e. normal, bell shaped) distribution of zero mean and unit (1.0) variance were added to a starting number of 100. In order to generate high-low-close bars, with each three sequential numbers, the highest and lowest were chosen to be the high and low, and the remaining number represented the close.)
In other words, there is absolutely no basis for any commentary about what this series has done, or will do - it is random. At any point, it is exactly as likely to go up as go down. Any trends, waves, support, resistance, fibonacci retracements, etc., that you may see in this data are products of your imagination.
The reason I bring this up, of course, is to get any "believers" out there to rethink what's going on. The distribution of daily changes in the commodities markets is very nearly a random gaussian distribution.
Bottom line is that people see patterns where they want to see patterns.
Now, in defense of the other side, I would point out that these charts may look at least slightly odd to a skilled technician. For one thing, the closes are occurring fairly randomly within the high-low range, and this is not typical of markets. Closes occur near one end of the range much more frequently than would be expected by chance.
Try your hand at picking Commodities Markets versus Random Data