Price: The Ultimate Indicator?
by Roger Altman
What does it take to make consistent profits trading commodities? Roger Altman theorizes that like
support and resistance levels in stock charts, historical floor and ceiling prices in commodities can be
used to gauge relative cheapness and richness of prices and whether a price decline or increase is likely.
Despite the use of an array of sophisticated and esoteric indicators, most commodity newsletter trade
recommendations lose money. According to Commodity Trader's Consumer Report, which tracks the
performance of 26 commodity newsletter writers, the average return for 1989 was -14.9%, -5.4% for
1990 and -27.7% for 1991. In fact, only three of 26 newsletter writers made more than 10% for their
subscribers last year. Since the vast majority of these newsletter writers are trend followers, just what
does it take to make consistent profits trading commodities?
A basic course in economics can tell you that a relationship exists between supply and demand. If farmers
reap a bumper crop, oversupply swamps demand and prices plummet. Conversely, when drought or
insects decimate crops, demand overpowers limited supply and prices rise dramatically. So how can
traders use this fundamental economic truism to decide when to buy and sell? The answer is simple. You
simply wait until prices reach such historic extremes that commodity producers as well as consumers are forced to make significant adjustments to future production and consumption. Very low prices tend to
diminish future supply because marginal producers begin to lose money and cease operation. As prices
continue to decline, future supply begins to dry up and consumers switch to a less expensive commodity,
increasing demand, so that ultimately, prices stop declining and begin to rise. In other words, with each
price decline to new extremes, the probability of a price rise increases .