ances from day to day, margin calls do not occur when marketsare orderly.In addition to variation margin rules, exchanges limit the degree of movement allowed in any one futures contract during asingle trading day. This prevents wild speculation and day tradingin futures to excessive levels. The limit varies based on the priorday’s settlement and applies in both up and down movements.In addition to order placement, you need to know how to analyze the fundamental and technical aspects of futures. Simplyknowing whether a market is strong or weak requires in-depth understanding of economic forces, interest in a particular commodity,the effect geopolitical events have on price levels, and factors thatcome into play. The next chapter introduces the various methodsof fundamental analysis of futures, followed by a chapter concerning the technical side.
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FUNDAMENTAL ANALYSISOF FUTURES
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n the stock market, ‘‘fundamental analysis’’ refers to the ﬁnancialposition and history of a company. So the ﬁnancial statements deﬁne strength or weakness, and the trend in revenue and net earnings demonstrates whether a company’s situation is getting strongeror weaker. Long-term trends dominate fundamental analysis,where tests of capital strength, proﬁtability, and closely relatedtrends (price/earnings, dividend yield, competitive position, qualityof management) also come into play.In the futures market, the analysis has to be done quite differently. There is no company to analyze, but a range of products.These include energy, grains and oilseeds, livestock, lumber, precious metals, imports or tropical products, and ﬁnancial futures.Each futures contract has a limited life, and today’s range of delivery months will be replaced as later ones come on the scene and ascurrent contracts expire. Because of this, futures are always a passing matter. However, the entire range of products should be quantiﬁed properly in terms of strength or weakness and price trends,using a fundamental approach. Because there is no speciﬁc corporate structure, fundamental analysis in the futures market has to be
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developed using national and international economics and economic trends.
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Supply and Demand: An Economic BasicAlthough the economic principle of ‘‘supply and demand’’ is widelydiscussed and known (especially among investors and traders), itsattributes are mysterious. For example, the truth is that many traders fall into the trap of believing that their entry price—whether instock, futures, or any other product—is the starting point, and thatfrom there forward, value is going to build. In other words, tradersoften understand the theory of supply and demand, but they do notact as though it applies. When traders assume that their entry priceis ‘‘zero’’ in terms of pending change, they are acting as thoughmarkets operate in a linear fashion, moving in a single line basedprimarily on the timing of their own decisions. This is irrational,but quite common.Supply and demand define how and why prices change. In anyinvestment or trading market, growing demand drives priceshigher, and growing supply drives them lower. It makes sense.Price is going to change based on the scarcity (or lack of scarcity)of the product. Demand increases as prices fall, making it act opposite of the supply influence. Supply and demand are constantly in abattle for dominance.There is really nothing mysterious about supply and demand atall, and prices change for good reasons. However, if you focus onvery short-term price trends, the reasoning is more elusive. Markets invariably overreact to news, both true and false. So everyprice movement on a daily basis is the result of new information,overreaction, and correction. This is why, when a lot of informationis available, prices tend to be more volatile than when all is quiet.Price movement confuses traders because they focus on the shortterm chaotic movement of price, and on the reaction and overreaction to each and every change. In the futures market, change is notonly specific to the industry in which a futures contract resides;geopolitical events also affect prices directly, with short-term overreaction followed by corrections in prices.What this means for futures traders is that economic events—
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the fundamentals of the market—are known to be all-important.But focus invariably goes to the price movement itself, which istechnical in nature (see Chapter 7). However, if you understandthe battle between supply and demand, you can better appreciatehow and why prices change as they do. First, it makes sense to stepback and look at the longer-term trends covering a month or more;or to look at futures price trends over a full year to understand howmarkets evolve and change. The day-to-day information is entirelytechnical and chaotic and cannot be used reliably to anticipatewhere prices are going next.Second, if you understand how supply and demand works,your analysis of price trends will be more sensible. For example,one technical trend occurs when a price gaps, meaning that theopening price in today’s session is higher or lower than the tradingrange of the previous session. A series of gaps usually leads to aretracement in price; this is a technical reality, but the law of supplyand demand explains why it occurs.The number of traders on both the long and the short side limitboth supply and demand. So a sudden and unexpected movementin price occurs due to some change or perception of change, followed by a correcting movement in the opposite direction. For example, the March 2008 contract for coffee exhibited several gapsduring the months of September and October, as highlighted inFigure 6-1.Notice the prominent price gaps on the way up. Also notice thatprices then retreat to fill in those gaps. This common pattern isnormally thought of as a technical trend, but in fact it is caused bythe law of supply and demand. In this situation, price rose on theperception among traders that coffee prices were at bargain levels.As a result, buying activity accelerated, creating the price gaps. Butas the trend topped out, all of the traders who were going into thecoffee futures contract were already in. There were no more buyersto continue driving the price higher. So price retreated to fill inthose gaps. This is an illustration of the finite nature of supply anddemand. Traders tend to believe that trends are potentially infiniteand may continue without regard to supply and demand. But realitydoes not work in this way.Later in the coffee contract, notice how prices begin edging
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FIGURE 6.1. COFFEE—MARCH CONTRACT
Source: Charts provided courtesy of TradingCharts.com: http//futures.tradingcharts.com; created with SuperCharts by Omega Research 䉷 1997.
upward (November and December), accompanied by a spike involume. This is a different trend, reflecting the rolling of previouscontracts into the March contract. This is a ‘‘normal’’ trend because older contracts are replaced as a matter of course severaltimes per year. So a distinction has to be made between pricemovement caused by aberrations in supply and demand (such asthe price peak and retreat in October) versus the trend created bythe predictable rolling out of older contracts into newer ones (asseen in November and December).Futures markets are very much affected by market-level supplyand demand, and this is very directly reflected in price. Beyond theaction and overreaction of traders within the market, productionlevels, imports and exports, and changes in the basic market itselfaffect prices. For example, as interest has grown in ethanol fuel,the price of corn has risen. As a consequence, this affected bothcattle and energy prices. Trends in agriculture, mining, housing,
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and even weather further affect futures prices. The national debt ofmany countries, inflation, and inventories of many products alsoaffect the broad range of financial futures.
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Essential Economic DataSupply and demand serves as a basic principle of how markets operate. The price movement of any product is a direct result ofchanges in supply and demand. However, many additional marketindices based on economic trends also affect futures prices. Theseinclude:Consumer Price Index (CPI), the index of prices used by thefederal government and tracked by the Bureau of LaborStatistics (www.bls.gov). CPI is calculated using a weightedvariety of goods and services, including food, energy, apparel, housing, transportation, and medical care. The ‘‘coreCPI’’ includes necessities only, such as food and energy, afurther distinction of the cost of living and its trend. Virtually all of the CPI components involve and rely upon commodities of one or more kinds.Gross Domestic Product (GDP), which is the total value of allgoods and services produced in the United States. It is usually expressed on a per capita basis, and implies changesin demand for commodities and their price changes. TheBureau of Economic Analysis tracks and reports on GDPand many other economic trends (www.bea.gov/national/index.htmgdp).Balance of trade, or the net difference between goods exportedfrom the United States and goods imported from othercountries. In the past, exports outpaced imports; but beginning in the 1970s, the balance of trade changed and sincethen, imports have outpaced exports. The U.S. Census Bureau tracks balance of trade by country (www.census.gov/foreign-trade/balance). To view annual trade balances on adetailed chart, go to www.census.gov/foreign-trade/statistics/historical/gands.txt.
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Federal Funds Interest Rate, the interest rate set by the FederalOpen Market Committee (www.federalreserve.gov/FOMC),the arm of the Federal Reserve System established to regulate or change interest rates. The Federal Funds rate is therate banks charge one another. The Fed raises or lowersrates based on economic trends. For example, at the end of2000, the rate was at 6.5%. However, after 9/11, the Fedlowered the rate to 1.75%, and two years later lowered itdown to 1.00%. The rate then rose for several years, andwas reduced once again in 2007. A summary of the FederalFunds rate for 10 years is shown in Figure 6-2.EIA Inventory Level, the level of oil reserves in the UnitedStates. The Energy Information Administration (www.eia.doe.gov), part of the Department of Energy, releases weeklyFIGURE 6.2. FEDERAL FUNDS RATE, YEAR-END LEVEL
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summaries of crude oil supply levels, including production,refining, and changes in current inventory levels. These reports affect the price of oil sector futures. A reduced inventory represents lower supply levels and creates upwardpressure on petroleum product prices.Non-Farm Payrolls, a summary of employment trends. It excludes agricultural, government, household employees, andworkers in the not-for-profit industry. It includes salariedemployees in U.S.-based businesses, or about 80% of totalemployment. The Bureau of Labor Statistics compiles thestatistics as CES—current employment statistics—(www.bls.gov/ces). Information comes out on the first Friday ofeach month, reflecting changes in employment levels.Higher employment levels are positive economic trends,and the increases in the futures market from 2003 through2007 reflect employment increases every month. By the endof 2007, employment was at 95%, considered ‘‘full employment’’ by most economists.U.S. Dollar Value, or the value relative to other currencies.While U.S. dollar futures trade as a separate futures contract, the dollar has more significance than its relative value.The dollar is an international currency in many respects,and directly affects commodity prices, notably imports suchas oil, coffee, cocoa, and metals like copper. Changes in thedollar’s exchange rate have ramifications for many otherfutures trends. To view the relative value of the U.S. dollarthroughout its history, go to www.measuringworth.com/calculators/compare.WTI Crude Oil Price, the West Texas Intermediate benchmark.This widely followed price level for crude oil, traded onNYMEX, is described by the Department of Energy athttp://tonto.eia.doe.gov/ask/crude_types1.html. It is ahigh-quality crude oil, also called Texas Light Sweet crudeoil. Its price trend often is compared to North Sea BrentCrude.Reuters/Jeffries CRB Index, the longest established commodityindex, used as a benchmark for the entire industry as well
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as an important economic indicator. The index (www.crbtrader.com/crbindex) began in 1957 and was given its current name in 2005 (also see www.jefferies.com/cositemgr.pl/html/ProductsServices/SalesTrading/Commodities/ReutersJefferiesCRB/index.shtml). Many market watchers consider this index the industry benchmark, similar to the viewheld among stock market analysts of the DJIA or the S&P500.Purchasing Managers’ Index (PMI), a composite index of U.S.manufacturing activity. The Institute for Supply Management (www.ism.ws—click on the link ‘‘ISM Report onBusiness’’) publishes the PMI on the first business day ofeach month, and it is important because many commoditiesare used in manufacturing activities, notably energy.London Gold Fixing, a measurement of the only commoditywith monetary value and a monetary role (thus crucial tothe financial futures sector as well as to a broad range ofcommodities). London Fixing (www.goldfixing.com) reflects spot gold prices and serves as a benchmark. The London Fixing sets a single gold price internationally, with anew fix set twice per business day. Metals dealers and goldfutures traders track the trends in this benchmark veryclosely.Many additional economic indicators provide data for specificsegments of the economy or for focused commodity trading. Theprevious selection represents a broad overview of essential economic reports and data available nationally.
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Fundamentals of Other CountriesUnderstanding the basic economic fundamentals for the UnitedStates is a requirement for futures trading. However, in the globaleconomy that continues to emerge, it is becoming increasingly necessary to also track economic indicators for other countries, regions, and even globally. However, this is a problem becausereporting standards are not always the same as those well-knownstandards in the United States.
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As a starting point, track basic economic indicators for themajor economic forces in the world. This is valuable because itallows you to compare U.S. levels of indicators to those of tradepartners and rivals. Check www.allcountries.org/uscensus/1367_selected_international_economic_indicators_by_country.html toview some basic country-by-country comparisons of economicdata, such as the ratio of gross fixed capital formation to GDP, andthe rate of savings to personal disposable income. These data provide some level of comparison and provide trend lines for development of international comparisons. That is quite useful if you wantto invest in futures that emphasize or focus on a particular countryor region, or that dominate a specific futures product.To view economic data for specific countries, check the Website for the CIA’s World Factbook, at https://www.cia.gov/library/publications/the-world-factbook/index.html. By selecting a country at the top of the page, you are able to go to a specific link.For example, if you enter ‘‘China’’ and then click on the link for‘‘Economy,’’ an overview is provided along with the key economicdata. The information is quite extensive. You can repeat the samesteps for any country.Another valuable site for worldwide economic data is the WorldBank, an agency with 185 member countries providing financialsupport to developing nations. On its Web site, it links to economicdata, at www.worldbank.org/data/countrydata/countrydata.html.Note the selection box, defaulting to ‘‘world.’’ You can enter anycountry in this selection box and find economic data immediately.Profiles of countries and regions are also provided just below thatfirst section. On the left, you can link to ‘‘key statistics’’ and locatea variety of information in greater detail. For anyone who wants toresearch global economic trends, this is a valuable site.The online version of The Economist is a great source for indepth descriptions of economic conditions in various countries.Link to www.economist.com/countries/China/profile.cfm?folder⳱Profile-Economic%20 to see a report about China, for example. Ifyou replace the area of the address /China/ with the name of anothercountry—for example, /India/—you can get additional reports. Especially valuable are the many links this site provides. For example,it gives you Web site links to Chinese government links, the Xinhua
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News Agency, the People’s Daily newspaper, China Daily, ChinaPerspectives, and the Web site for China Today, an online news,travel, and information service. Related links include one to manyChinese Web sites, and the Brookings Institution’s collection ofChina-related articles. These links can make anyone an expert onChina, or any other country, without needing to search far andwide. The link for India provides a range of Web links as well, including a directory of Indian government Web sites, HindustanTimes, The Times of India, The Telegraph, the National Stock Exchange, the Securities and Exchange Board of India, Reserve Bank,Centre for Monitoring the Indian Economy, All Indian Radio, andConfederation of Indian Industry (CII)—a nongovernment organization (NGO) representing Indian business interest abroad. Youcan find similar pages and links for many countries on this site,providing you with a vast range of economic research.The sites listed previously all help to round out your ability todevelop independent research; and your own online searches formore specific information can add to the list.
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Problems with International Economic DataThe basic assumption made about virtually all forms of data is thatthe information is reliable. This is not always the case. In the UnitedStates, stock investors have relied on the independence of the financial audit to ensure that companies were telling the truth tostockholders. As the experience of Enron and many other companies has demonstrated, this basic assumption may be flawed. Eventoday, with significant legislative reforms at the federal level andincreased regulatory oversight, the question of auditing objectivityis unresolved. Auditing firms continue to perform billions of dollarsworth of non-audit work, often for the same clients they audit. Thisglaring conflict of interest makes the point: You cannot rely on information provided by SEC filings, audited financial statements, orannual reports.Now consider how more complex this issue is when you aredealing with foreign countries and with companies based in those
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countries. In order to invest in futures, you should be able to relyon international economic information. But in so many cases, youhave to take such information with a bit of suspicion. The case ofthe biggest economic rival to the United States, which is China,demonstrates this point.China’s economic reports leave out a lot of important information. For example, the overall government debt of China does notinclude non-performing loans (NPLs). These are debts of stateowned enterprises (SOEs), which are hybrid organizations combining some features of free-market capitalism and some of Communist state-run business. The official Chinese state banking systemstates NPLs at 25% of Chinese GDP; but the real number could beas high as 40%.1The rate of future defaults on these kinds of loans may be quitehigh, so overall the degree of Chinese state-level debt is probablyunderstated, and if the uncollectible loans were reported by Western standards, Chinese budget deficits may be far higher than reported as well. Even though the official reporting of these loans isseparate from government debt, these loans really are a form ofwhat would be the equivalent of Western-style national debt; if thatwere underreported in the United States, it would severely affecteconomic reporting.Economic reporting from China is also not on the same levelwith U.S. indicators due to the problems of unemployment. In theUnited States, unemployment is subdivided by industry and economic sector, and economic reporting reports unemployment on anational basis. But in China, there are three unemployment-related‘‘sectors’’ or types:Urban unemployment, which has run at an average of 3% to4%.Rural unemployment, which also includes underemploymentbecause so many agricultural workers and farmers are unemployed for a substantial portion of the year. This makesrural unemployment far higher than any reported totals, because the partial-year unemployment (underemployment)is not included. About 75% of rural families own land, butmost of those are extremely small plots, and in fact, they
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are too small to sustain the needs of the owner’s familyyear-round.Unemployed former state workers, a large segment and an agingportion of the workforce; this is especially problematicalbecause, under the old Communist-led system, state workers were guaranteed work. Today, work is simply not available for all. From 1997 through 2001, 24 million stateworkers were laid off, part of a massive transition in theChinese economy to a free-market model. This has drainedthe Chinese welfare system and increased the growing debtas well as the unemployment numbers.Even employed Chinese workers have problems if they areworking in the SOE sector. Many are not paid regularly, with delayed paychecks extending out to nearly a full year in some instances. Meanwhile, the newer non-SOE sector is creating manynew jobs and offering better wages as well. The government isgoing through a multiyear effort to move SOE employees into nonstate jobs through its Urban Reemployment Center (URC) program. But progress is slow, and urban unemployment is profound.Another confusing economic statistic from China involvestrends in average income. In fact, income varies considerably byregion within China. Slow growth in predominantly rural parts ofthe country have been caused partly by massive industrialization incoastal and southern regions. But adding to the income disparity isa concentration of SOEs in those rural areas under the old-stylesystem. Thus, current employment numbers are quite weak in ruralregions compared to those in the urban and industrialized areas.To look at the economic trends including GDP, employmentand income, it appears that the Chinese economy is moving upwardat breathtaking speed. But this does not fully account for the largeproblems of rural poverty in northern provinces, which has remained unchanged for many years. A long-term migration awayfrom these rural areas and into industrialized regions has createdadditional problems of growing urban unemployment (especiallyamong unskilled and undereducated rural transplants), congestion,pollution, and the replacement of rural poverty with urban poverty.A final consideration in any comparative economic analysis is
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corruption. While this is slowly improving, traditionally corrupttraditions in both government and private companies have been ahuge problem, more so in SOEs than elsewhere. The slow replacement of SOEs with a free-market economy is predicted as a majorforce that will eventually do away with much of the corruption inChinese business, as one observer noted:A great part of the problem of corruption is tied to the existence ofbig state-owned economic sectors, not only the government bureaucracy and political structure. Therefore, the privatization of the SOEsand reforms of other state-owned institutions will be one of the keyfactors in reducing corruption.2
The disparity between regions further complicates long-termanalysis of China. China has a two-pronged problem: There aremany mouths to feed, and a vast migration into the urban areas isoccurring without pause. This trend may add to employment andGDP while reducing overall poverty, assuming that the Chineseeconomy can continue to produce enough jobs. But at the sametime, unemployment is rising among unskilled urban workers whileshortages are found among trained and skilled ones.This is seen in the fact that low-wage factory and manufacturing workers are abundant; but Chinese government and industryhas not invested in skilled employment training, such as technologyand technological manufacturing.As far as a study of the futures market is concerned, rememberthat China is the second largest energy consumer in the world, afterthe United States. But China already is experiencing power shortages. Blackouts and brownouts occur in the large cities on a regularbasis, and sections of industrial cities close early several times permonth because energy reserves are simply not available. This trendpoints to a limiting factor on growth of the Chinese economy. Ifenergy resources cannot keep up with expanded industrial activityin China, that alone could cause the Chinese economy to flattenout. Much research is being conducted on alternative fuels likeclean-burning coal, liquefaction, nuclear, and hydrogen-basedfuels. Many of these are less polluting than coal and oil, and poten-
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tially more affordable. The trend may point the way to great potential in futures trading, although new technology invariably takeslonger than anyone would like.The examination of China and its unique problems is an example of how and why you have to make comparisons cautiously. Inthe futures market, all economies are distinct and separate, so likekind comparisons are elusive. The same warning applies to thestudy of any country. If you focus on the futures market prominentin a particular kind of commodity, remember that the numbersshould not be assumed to be comparable to the reports from theU.S. government.Fundamental analysis of futures trading is complex becauseeconomic data can be conflicting and unclear. You cannot alwaysknow how developing economic trends are going to affect the specific value of a futures contract. One solution to this is to makeregular comparisons between economic data and trading trends.You may also find additional confirming information by combiningfundamental analysis with technical analysis. This is the study ofprice trends and ranges. Chapter 7 deals with the subject of technical analysis of the futures market.
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Notes1. Nicholas R. Lardy, China’s Unfinished Economic Revolution (Washington,DC: Brookings Institute, 1998).2. Fan Gang, ‘‘Reform and Development: The Dual-Transformation of China,’’in China: Enabling a New Era of Changes ed. Pamela C. M. Mar and FrankJürgen Richter (Singapore: John Wiley—Asia, 2003).
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TECHNICAL ANALYSISOF FUTURES
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n all forms of investing, you may adopt either a fundamental or atechnical approach. The fundamental approach relies on the hardnumbers. In the stock market, that means tracking a company’sﬁnancial statements and looking for trends. Those trends reﬂectquality of management, competition within a sector, and marketdemand. In the futures market, the fundamental approach reliesmore on economic trends, and is somewhat removed from actualprice action. The difﬁculty in the futures market is equating fundamental trends to speciﬁc price movement. Furthermore, the trendsin one area affect prices in another; for example, as energy pricesrise, the prices of agricultural commodities are affected directly.The technical approach focuses primarily on price action. Inevaluating supply and demand, you need to be aware of two different and dissimilar aspects of that basic economic theory. First isthe economic supply and demand. Markets drive the cost of anyproduct, and that is reﬂected in trading interest and price directionof the underlying commodity. This is the fundamental version. Butthere is also a technical version of the supply and demand interaction. Economic trends affect prices, but they also vary by marketsupply and demand, which is based more on perception than on103
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any economic reality. For example, if the belief dominates that energy prices are going to rise next year, you will see speculationdriving up the price of energy futures contracts. When you watchﬁnancial news programs and see the current ‘‘price of oil,’’ that isnot what you are paying at the pump. It is what the price tradersare currently trading for oil futures contracts. So any unrest in theMiddle East is going to drive prices up; and as those prices rise,other commodities follow suit. The technical supply and demand isa forward-looking phenomenon whereas the fundamental versionis based on past and current economic fact.In the technical analysis of futures, the concept on contrariantrading is often very popular. In this theory, you go against themajority, because you believe that the majority is usually wrong,acting too late, or overreacting to current information. A contrarianbuys when everyone else is selling, and sells when everyone else isbuying. It is usually more complex than simply tracking rising orfalling prices. Contrarians are likely to also track advancing anddeclining trends, volume and open interest, and market trends inrelated commodities.The smart way to analyze futures trading is by combining bothfundamental and technical approaches, using all the useful indicators you can ﬁnd to conﬁrm, contradict, or add to the body of information. The following are some of the essential technical pointsworth remembering.
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Charting Basics: Tracking Price BehaviorThe chart is the essential visual tool of the technician. Charts showthe trading pattern at once. The difficult part is interpreting thechart and deciding what it means. Depending on how the patternis evolving, you can interpret a price chart in many possible ways.For example, Figure 7-1 shows the April contract for lean hogsfor the first few trading days of January 2008.Note the strong downward price trend, marked with thestraight lines. How do you interpret this? For the technician, thispattern presents a problem of interpretation. One explanation isthat the price trend is clearly downward and is likely to continue inthat direction. However, note that after the bottom of the down
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FIGURE 7.1. LEAN HOGS—APRIL CONTRACT DAILY CHART
Source: Charts provided courtesy of TradingCharts.com: http://futures.tradingcharts.com; created with SuperCharts by Omega Research 䉷 1997.
trend, price pauses and is followed by periods of very narrow trading. Then the price begins rising. This could mean that price hasreached the bottom of the short-term trend and is about to beginrising again.Among the charting techniques you can use, one is the trackingof trends by size, shape, and duration of movement in one direction. Using the technique known as swing trading, traders like tomove in and out of positions in a two- to five-day sequence. Usingchart patterns to identify tops and bottoms, a combination of trendduration and reversal signals sets the buy and sell timing.Swing traders identify uptrends as a series of trading periodsconsisting of consecutive higher highs, offset by higher lows. Adowntrend consists of a consecutive series of lower lows offset bylower highs. In the figure, swing traders will recognize a likely bottom in the price trend based on the downward movement towardthe end of the visible pattern. As the price levels begin to rise follow-
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ing this, swing traders would signal a setup to go long in the contract, or to close out their shorts.However, another interpretation may observe that the upwardoffset at the end of the chart is nothing more than a correctingmovement filling in a strong decline; and that the overall downwardtrend is likely to resume.You can argue both points of view in this case. The solutionin determining which version makes more sense is to look to thefundamentals. An fxstreet.com Dow Jones newswire story explaining the activity on this market analyzed the trend, stating in part,‘‘Despite continued negative subsequent cash news, futures gradually floated up from session bottoms with the help of short covering.’’1 This was a reference to several factors affecting lean hogprices. The cash trend was notably weak and it appeared at the timeof the news story that short covering caused the short-term uptickin the price levels. So many traders who had opened short positionsat the top of the trend wanted to take profits at the bottom, meaning they needed to enter ‘‘buy to close’’ orders. In all markets, shortcovering is a closing of positions, but it often has the effect of looking and acting the same as buying pressure. You might concludefrom this that the apparent upward move is a momentary effect