January 31, 2017
For physical and futures market traders alike, identifying the directional bias of the freight market early is one of the hardest things to do. Judging at what point is a market move in freight is considered bullish or bearish combines multiple inputs which go beyond the instinct for timing that many owners say is all they need.
Market trends only have one top and one bottom, so the probability of picking a market high or low is in practice, pretty unlikely. However there are some simple visual rules that can help avoid selling into strength, or buying into weakness; but first the trend needs to be established.
Higher volatility in shipping means that trends often move harder and faster than in other products, but they are still trends nonetheless, and fit into one of the theories of Charles Dow, relating to peak and trough analysis.
Markets that are making fresh lows are bearish, and should never be bought. A market that is going up has to make higher highs as well as higher lows (peaks and troughs), and this is the quickest way to establish if the directional momentum in a market is changing.
After a market hits the bottom and begins a move up, the price will pull back and if the low is higher than the previous low we are half way to bullish momentum. Once the index has then traded (and closed) above the previous high, the probability of an upward trend move has greatly increased.
The Chart 1 illustrates what a strengthening trend looks like in the Capesize index, showing both higher highs and higher lows.
Having illustrated a strengthening trend it is equally important to be able to identify when the trend is starting to weaken. For this, the same rules apply – a failure to make a new high within a trend is a warning that the upside momentum is weakening. If the price then trades back below the most recent market low (and closes below it) it would signal that a bullish trend is becoming bearish.
Chart 2 is an illustration of the Capesize index switching from a bullish trend to a bearish trend.
These simple rules greatly improve the probability of identifying a directional change in the trend. It is important to note that this however is not guaranteed and any technical analysis should be used in conjunction with fundamental analysis.
One tip that can be remembered is that a market that has made a directional trade following the trend should not then trade back above/below the recent high or low (known as an overlap) as this would suggest that the index is entering into a consolidation stage and is likely to eventually continue in the direction of the original trend.
Using the above analysis technique to examine the position of the Capesize index at the end of January 2017, it is apparent that the index has failed to make a new high, and is now below the previous low of US$ 9,468.
Based on Dow’s theory this means the trend is now technically bearish. However, a close above the low of US$ 9,468 would be a signal that the index is entering a consolidation phase which could negate the technically bearish market. Statistically a consolidation within the market trend would suggest continuation to the upside. However, a close above US$ 12,540 is needed to confirm the continuation of a bullish trend.