V.10:6 (272-274): Price: The Ultimate Indicator? by Roger Altman

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?

ECONOMICS 101

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 .