Basically there are two schools of price-forecasting methods in the commodity markets: fundamental analysis and technical analysis. Fundamentalists are oriented toward forecasting the market in terms of supply-and-demand factors.
Technicians stress price behavior and the movement of such tech indicators as open interest, volume, moving averages.
The fundamentalist says that the key to the direction of prices rests with understanding the supply/demand forces in the market. In pursuit of this knowledge, the funnymentalist will read crop reports, cold storage reports, US weather reports, and a host of other infornation that may shed some light on the supply/demand situation.
But the technician, who takes the opposite viewpoint, ignores the fundamental info in favor of watching price behavior. The technician maintains that whatever is taking place in the commodity will be reflected in price action.
Paradoxically, the two approaches do not invalidate one another. Rather, they complement one anorther. But the key difference is TIME. The fundamentalist, given sufficient opportunity to analyze the market properly, will inevitably come up with the correct answer as to the future direction of prices.
But it takes TIME to figure the market out, and it takes TIME for the market to prove one correct. In either instance, the technician may readily see the coming move by analyzing price behavior.
And more important, the technician not being married to a particular market interpretation, IS MUCH MORE FLEXIBLE to move in and out of the market as he sees fit.
The fundamentalist, on the other hand, is apt to stay with a market, despite adverse price action, because he *knows* that a given supply/demand situation must ultimately be reflected in price.
Ask yourself which kind of trader you want to be. One who will let his interpretation, based on a haphazard analysis of limited resources, dictate his choices? Or one who lets the market decide what action to take? For traders with limited resources, which includes just about everybody, the latter approach seems more reasonable.
I dare to say that technical analysis is presently the best method we have for deciphering what the markets will do tomorrow.
Because technical analysis is an art, rather than a science, no single theory or interpretation is correct all the time. To make up for this margin of error, the technician looks for a variety of indicators to pinpoint critical areas of the market. Technical analysis can show when a market is weak or strong and when it is likely to reverse itself.
Similarly, the fundamental analyst can tell you when a market is strong or weak, and he can also tell you the reason why. But due to the difference in the two techniques, the fundamentalist will generally lag behind the technician in making his predictions.
As a result, the two will rarely agree on the same course of action at the same time. Whereas the fundamentalist is looking at a supply/demand situation that exists today, the technician is busy analyzing the price action that is saying something about tomorrow.
After all, the futures market is, quite literally, a game of futures. The market is always anticipating, never looking back. It is learning to read the language of the market that will enable you to win profits. Technical analysis is a guide to learning that language.