(Q)
Since speculators are often looking for the same chart patterns, and act on them, therefore causing and validating the patterns almost simultaneously, it follows that most short term movement is technical, not fundamentally related? Further, if this is true, then most short term movement may not be caused by or predictive of the actual dollar value of the commodity itself? However, the trader who wants to benefit from a longer term trend MUST trade based on the value of the underlying commodity…
(A)
It is quite true that most short term price fluctuations have absolutely nothing to do with fundamentals.
If the fundamentals were the only thing that counts, the price of a commodity would be at a rather fixed levels.
But then, we are not trading fundamentals, we are not even trading the actual commodity. What we are doing is matching wits with other traders, all of whom have an oppinion on the future price movement.
It is also true that some chart patterns are self-fullfilling, but others are not. For example, an uptrend line or down trend line only works, because every chartist sees it and acts upon it. Otherwise, it couldnt exist.
On the other hand, other chart patterns are not of self-fullfilling nature, but rather represent an illustration of what the masses of speculators do under similar conditions, over and over again.
For example, horizontal resistance and support lines work because the market has a memory where it came from. At such a resistance level many position traders, after having been in a loss, will try to get out at break even, therefore an abundance of resting orders. And still… the support/resistance works – I would kill for this true!
Those who work with cycle analysis (careful…the term cycle analysis is used in conjuntion with various, quite different principles) would tell you about recurring short term cycles in many commoidities and stocks. And cycles, of course, are not self-fullfilling and also have nothing to do with fundamentals.
Long term traders, on the other hand, often rely on a study of fundamentals, but they dont have to. You may not know this, but about 99% of all commodity funds are run by computers, and of these, about 99% again use trend-following systems, all with total disregards to fundamentals…
Sorry for a long rumble.
Good trades.
Tom