Chapter 3 Technical and fundamental analysis

Question 1

What are the two important tools used to forecast prices?

Answer 1

Technical analysis and fundamental analysis

Question 2

Fundamental analysis

Answer 2

forecasts prices by studying the influences of supply and demand for a particular commodity.

Question 3

What influences supply and demand for a commodity (fundamental analysis) 4

Answer 3

Inventories
imports and exports
government programs
weather

Question 4

What helps fundamental analysts shape their opinions

Answer 4

Economic forces such as
Producers
consumers
supply and demand

Question 5

Technical analysis

Answer 5

bases on commodity price patterns and trading volume. Technical analysts use charts and computer programs to identify and forecast price changes and trends.

Question 6

How does demand effect price

Answer 6

price moves directly with demand. Higher demand = higher prices

Question 7

How does supply effect price

Answer 7

Prices move inversely from supply. higher supply = lower prices

Question 8

What are the 2 supply rules that affect price

Answer 8

1. An increase in supply puts selling pressure on a commoditiys price
2. A decrease in supply puts buying pressure on a commoditys price.

Question 9

What affects the quantity of goods available for consumption (supply)? 7

Answer 9

1. Producers expectations
2. Number of producers
3. Technological advances
4. Resources
5. Inventories
6. Imports
7. Exchange rates

Question 10

How does technological advances affect prices

Answer 10

technology affects production costs and, therefore, supply. Improvements in production technology reduce production cost. In turn, decreased production costs motivate producers to supply increasted quantities, which puts downward pressure on prices.

Question 11

What factors influence consumer demand for a commodity? 10

Answer 11

1. Domestic use
2. Consumer expectations
3. Number of consumers
4. Consumer preference
5. Disposable income
6. Exports
7. Exchange Rates.
8. Inflation and interest rates.
9. Substitution
10. Elasticity

Question 12

What is elasticity?

Answer 12

Measures the effect of changing prices of a commodity on its supply and demand.

Question 13

Demand Elasticity

Answer 13

The effect of price movement on the demand.

Question 14

Elastic demand

Answer 14

changes significantly in response to price changes.

Question 15

What often determines price elasticity

Answer 15

number and nature of substitute commodities.

Question 16

Supply Elasticity

Answer 16

Elasticity of supply is affected by the number of suppliers.

Question 17

When can supply be inelastic

Answer 17

When there are few producers and many obstacles for new suppliers to enter the market

Question 18

4 examples of government influences

Answer 18

1. The commodity credit corporation
2. Acreage control programs
3. Tariffs
4. Commodity reports

Question 19

What is the Commodity Credit Corporation (CCC?)

Answer 19

Operated by the U.S. Department of Agriculture to help stabilize farm prices by administering a loan program. FArmers may pledge harvested, stored, and inspected grains as collateral against a loan from the CCC.

Question 20

How long are CCC Loans good for

Answer 20

renewable each year for up to three years

Question 21

The CCC loans are nonrecourse loans, what does that mean

Answer 21

if the farmer defaults, the loan and interest are forgiven, but the farmer must forfeit the collateral-the crop- to the CCC.

Question 22

Acreage Control Programs (ACPs)

Answer 22

reduce supplies of certain commodities to support price levels. The government agrees to pay farmers (in cash or in kind) not to cultivate all acreage. If supply is indeed reduced, prices move higher.

Question 23

Tariffs

Answer 23

a tax on goods sold from businesses in one country to buyers in another.

Question 24

How do import tariffs effect domestic prices

Answer 24

increase the cost of imported good, which makes domestically produced goods more price competitive. if tariffs are reduced or eliminated, domestic producers face tougher price competition from foreign suppliers, which will depress the prices of domestic goods.

Question 25

Commodity reports

Answer 25

commodity reports provide the fundamental analyst with useful statistics for forecasting prices.

Question 26

2 examples of commodity reports

Answer 26

USDA report

Commitment of traders (COT reports)

Question 27

USDA report

Answer 27

United States Department of Agriculture releases the USDA report monthly. The report includes the governments estimate of the supply and demand of various agricultural commodities.

Question 28

The commitments of traders

Answer 28

COT reports provide a breakdown of open interest for market reports in which 20 or more traders hold positions matching or exceeding reporting levels established by the CFTC. Released report each friday at 3:30 ET and reflects commitment of traders on the prior tuesday

Question 29

Open Interest

Answer 29

the current total number of futures contracts for which delivery is obligated and expected. Large open interest points to plenty of activity and liquidity for a contract.

Question 30

Moving average chart

Answer 30

plots average settlement prices over a defined time period, such as three days, 10 days, or 30 days, as points on a chart.

Question 31

Point and figure charts (X-O) charts

Answer 31

Reveal the effects of price reversals over time. P&F charts ignore small price fluctuations, trading volume, and time

Question 32

3 respected chart patterns

Answer 32

1. head and shoulders formation
2. triangles
3. double (triple) tops and bottoms.

Question 33

Rounded tops

Answer 33

possible reversal of the current uptrend. It is a gradual indicator sometimes referred to as an inverted bowl or saucer top.

Question 34

Triangles

Answer 34

(Pennants) chart patterns indicating the range of prices is narrowing over time. The look like triangular flags, with the posle at the left.

Question 35

Ascending triangle

Answer 35

usually appears after a drop in prices. The market trades back and forth through this range, not exceeding recent highs (resistance) but with lows gradually moving somewhat higher. The long side of the triangle slopes upward. An ascending triangle is a bullish indicator.

Question 36

Symmetrical triangle

Answer 36

neutral indicator

Question 37

Support area

Answer 37

A price range in which one can expect a possible increase in the demand for a commodity futures contract

Question 38

Resistance area

Answer 38

A price range in which one can expect a possible increase in the selling of a commodity futures contract.

Question 39

Breakout

Answer 39

When a price moves below a support level or above a resistance level.

Question 40

Congestion

Answer 40

a pattern without strong indications of a direction or trend. Under congestion, a market trades in a fairly narrow range of prices, perhaps limited by support and resistance.

Question 41

Overbought/oversold

Answer 41

occurs witha large increase/decrease in price over a short time.

Question 42

Key reversal

Answer 42

occurs when the days price range remains above or below the previous trading days trading session and is accompanied by heavy volume. The indicates a reversal from the prior trend.

Question 43

Open Interest

Answer 43

the number of contracts that have not been offset either by delivery or liquidation. Defined as the number of open long positions.

Question 44

Short Covering

Answer 44

a short who is buying the contract to remove himself from the market.

Question 45

Liquidating market

Answer 45

indicates a drop in open interest because more investors offset their positions. Usually occurs as the contract becomes deliverable at the same time as an increase in trading volume.