Business English: Day Traders Create Commodities Bubble in a Post Crisis Environment

Written by Chris Titus, CFA

Language: English (business)

Level: Intermediate and above

Warm Up Discussion:

• Read the headline above and describe what is happening.  
• Can you guess why a bubble is forming while we are in the middle of a global recession?

Vocabulary (Dictionary: Merriam-Webster)

• day trading - often buying and selling shares of a stock within the same day
• commodities - a product of agriculture or mining (grains, metals, etc.)
• spike - to rise very quickly, almost instantaneously
• overheating - to grow too quickly, creating inflation or an abnormal rise in prices
• cite - to use as support in an argument
• resurgence - renewed growth or interest in something
• sophisticated - complex or having a high level of knowledge
• scarce - not many, not plentiful

Article

Chicago, IL - Nov 16 - Despite a weak economic outlook, the recent spike in commodity prices would lead you to believe that the global economy is overheating. Prices for many commodities are back to pre-crisis levels. Many analysts cite an increasingly volatile U.S. dollar. However, a recent report suggests that a resurgence in day trading activity has given fuel to this rebound. Individual investors have been enrolling to day trading courses to learn the art of day trading. Some trade online from work, while others have left their job to day trade for a living.

Most day traders begin by learning how to day trade stocks. In recent years, individual investors have moved into day trading commodities because there is less risk of corporate fraud, a problem in recent years.  The skills required for day trading commodities are the same as those needed for day trading stocks - technical analysis. Using technical analysis, the trader develops a psychological profile of a stock or commodity by observing its price and volume patterns. As more sophisticated investors have entered the market, trading profits have become scarce with the wild swings in the market. Many investors have lost all of their saving, prompting the government to take action.

Questions

• If you play the stock market, do you prefer day trading or long-term investing?
• If you trade/invest in stocks, how do you decide which stocks to purchase?
  If not, how would you decide?
  Describe your logic when deciding. Do you consider the company's products, sales growth, earnings, management, price charts, etc? If so, what do you look for?
• Why do you think most people begin with trading stocks?
  Stock brokers are easier to find and most people have contact with others who trade stocks.  And, it requires less capital.
• Do you know how commodity prices are related to the U.S. dollar?
  It is an international standard to quote commodities in U.S. dollars (see example above). If the U.S. dollar is weak relative to other currencies, it costs more to buy imported commodities, such as oil.
• Had you heard of technical analysis before? Can you think of other factors a day trader should consider when trading?
  Stocks: Company, industry, and economic news - earnings releases, new product launches, etc.
  Commodities: Economic news and weather forecasts.
• Why is it becoming more difficult to earn profits trading?
  More sophisticated people are trading. Many use computer algorithms to trade.

Activity

Present the student with the following stock chart:

This is a three month chart for Yahoo!'s stock.  Each bar represents one day.

• In one week, where to you think the stock will be, higher or lower?  And, why?
  
  
• Place up/down arrows next to large areas (> 1 week) where many people purchased/sold the stock. 
  How do you know many people were purchasing it?
  - The price was rising. Only Demand > Supply can move the stock higher.
  What happened to the volume?
  - Typically, the volume increases as the price increases
  
  
• Do you see any spikes in volume or price?
  Circle them.
  Do you think it is more important to have spikes in volume on the way up or down?
  
  
• Circle the areas where the stock has difficulty penetrating or pauses?  
  Often the stock moves sideways in these areas.
  Draw a line across the chart at these levels. ($15.50 & $18.00)
  What was the relationship between supply and demand?
   - Supply = Demand
  Stocks have memories...well, the people who trade them have memories and view these levels as significant.
  
  
• With this knowledge, at which prices should I should consider buying or selling YHOO?

View My Other Lessons

LingoPass! LLC

http://www.lingopass.com