30/06/2008

Futures analysis

Still no signs of pulling back, at least in the daily timeframe. The futures have gained so much momentum and are entering the most crucial long term support area already. Crude oil hit the record today, but reversed, causing the stock markets to rebound a little. There might be some evidence of buying, as you can see on the intraday chart, but unfortunately for the bulls, it is not going to last longer than a single day or two. Tomorrow will probably bring more volatility to the global markets, as there is going to be a whole lot of macroeconomical announcements throughout all timezones. Although every single one will affect the overnight Dollar (O/N from american perspective), the one we should pay attention to is coming from the America itself - ISM manufacturing index. As it is expected to be lower than previous reading, I assume, that american stock market has already discounted what is about to happen. If you look at the chart of Dow Jones Industrial Average, the trend changed to downside again before the close (analysing chart from right to left), though all of the indices rallied in the morning.

Volatility came back and has driven the futures market throughout the last three trading sessions. Every single day, price posted sharp corrective moves to the upside, but that eventually showed no sustained evidence of buying with little odds for changing even short term market sentiment. After breaking down through 2605 support area, the futures found it a resistance already on Friday. It did not take long for the market to reach new lows after that, which were not able to hold back the price and prevent from reaching further downwards. Today's new minimum has been established at 2555 and will naturally act as a 'support of last resort' at least tomorrow. As you can see on the intraday chart, the futures managed to bounce back from 2555, retraced all the way to Friday's close, but showed not enough buying, that would force the price further. I only marked the most significant intraday resistance and support zones on the chart, because there are numerous levels, that emerge just from previous price swings. And in this current case, when there has been a lot of volatility lately, the futures will probably retest each one of these areas, which are of similar significance. Means, you have to watch the tape closely, in order to anticipate, which one of these levels will appear as the most important.

25/06/2008

Futures analysis

The market continues to decline and does not show any early signs of pulling back, judging by the daily chart. Moreover, it is gaining momentum, by pulling away even from the shortest, 10-day moving average. Also, expected Fed's decision did not affect even short term market sentiment. Daily downside price target lies near 2450 area and will remain there unless the futures make a short term low with a corrective move. Such price action could give some room for the market at least to retest nearest levels, making the selling more gradual, not sharp and panicky. That is just a hypotesis, which I will start considering, when the market actually makes a short term low. Given quite large momentum, that lasts from at least 3000 level, continuous action here could look just like previous sharp decline, which led to a retest of January low. As you can see, longer term sentiment comes to markets in cycles. Firstly, we had subprime bubble nearly year ago, then came concerns on banks' earnings along with global inflation, then came the Fed and hopes of avoiding recession in America and finally, when it appears, that there is no way to avoid it - inflationary concerns came back again (this time with little 'support' of poor earnings). In extreme long term (weekly and monthly timeframe) the Dollar managed to reverse only in relation to Japanese Yen. European major currencies (Euro, Pound and Swiss Frank) are still in a deep uptrends, backed by strong momentum. My bet is that, the Dollar and stock market trend will reverse only if something serious happens to commodities. If commodities bubble becomes little too optimistic at last, then it would be a good time to start looking for bottoms in stock markets.

Today's session proved me wrong at least on the open. The futures gapped up, opened just below previous day's high and managed to break above 2650 level, which I did not expect. As it turned out, it was an exhaustion rally, which allowed new shorts to come into the market. Tuesday's last hour high quickly became retested support area and when it was finally rejected, the futures retraced back to yesterday's close. 2650 became a pivotal point for today's session, as it was tested a couple of times and finally determined intraday trend. Reversal came in late in the day, just hour and a half before the close. Technically, this market was not weak enough to retest 2605 in a single session, so my bet is that it is probably going to happen tomorrow. If you look at today's chart of Dow Jones Industrial Average, you will see, that Fed's action had already been discounted ealier and what happened after the announcement was basically a bull trap, that set the trend for the next day. According to my rules, this downtrend is likely to be continued tomorrow, so my stance for WIG20 futures is also bearish (in terms of trend, not the close). Still, the market has to move out of 2625-30 area to even reach and retest 2605, which could even happen in the morning right away.

24/06/2008

Futures analysis

Previously mentioned flag pattern managed to evolve little sideways and has been broken lately, which indicates that the market continues the long term downtrend. I thought, that price action, that took place inside the flag would extend to at least short term bottom, but the futures only managed to retest flag's upper band and declined from there. In this case, downside price target for the daily timeframe appears to be near 2450, which corresponds with a low of May 2006. Important thing to note here is that this point is also aligned with 61,8% absolute retracement taken from the all-time high of 3970 (3970 times 0,618). Needless to say, inflationary concerns are back, thus making traders actively bet on interest rates again, which is about time, because tomorrow Fed announces its policy statement. Current sentiment, according to Cleveland Fed indicates that, there is nearly 90% probability, that Fed Funds will remain unchanged at 2,00%. Side or downtrend in american interest rates means further weakness in Dollar, which preceeds bonds and stock market.

The last two sessions after changing of the contract series were only different in terms of intraday volatility, which was significantly higher today, than on Monday. The futures only managed to post two bull traps above 100-period moving average (5-minute timeframe) and barely changed the trend after noon. Two most important intraday resistance levels are 2650 and 2625-30 zone. Given today's sentiment in the States, I do not think, that the futures will be able to reach back to 2650. As the market cleared any short term price levels to the downside, the only significant support area is naturally 2605, because similar level was reached all the way back in 2006 and thus applies to longer timeframes. 2625-30 will be a pivotal area, as it has already been tested multiple times. So, if the market manages to bounce from 2605, then the key uptrend/downtrend decisive factor will be this area. As I said earlier, the States changed trend to bearish before the close, so it is likely to be continued on the next day (stance is bearish/neutral). Nevertheless, Fed policy statement always causes volatility, so I do not recommend taking any positions before the announcement.

19/06/2008

Futures analysis

The flag pattern, that I previously outlined was broken on Wednesday, but the market did not manage to breach the most important support area, marked by January low. Now, that the futures bounced back off this zone, we have two interesting candle patterns in the daily timeframe, which form a short term double bottom. The double bottom consists firstly of a piercing pattern (completed on 12th of June) and outside bar bullish engulfing pattern (completed today). Such alignment confirms a short term trend reversal and could evolve into a long term signal. That is because current formation corresponds with January low and in conjunction with it, might be viewed as a triple bottom. But that is a very far fetched picture and cannot be dwelled on, unless it is close to be confirmed. Right now, the futures retraced back a little after reaching quite oversold state, by pulling away even from the quickest moving averages. So far, previously mentioned news catalysts (housing and inflation data) have not proved to be significant in the longer run. Overall market sentiment only might influence daytraders.

On Wednesday, the futures declined and managed to exceed initial price target of 2680 to the downside (I mentioned it in my previous analysis). The bottom started to form, when the market reached 2670 area and was confirmed after reaching 2655-60. Just minutes after the open today, there were couple of bear traps posted, which sucked in remaining sidelined money and finally confirmed a reversal. Remember, that June contracts expire tomorrow, so current euphorical buying could be artificial, not actual event driven. Friday's session thus might also be bullish all the way, considering that american stock market indexes are behaving in similar way. My bet for Friday is that the futures will probably reach 2740-50 resistance area, which is the closest level, that consists of the most recent price highs and lows. This is just initial upside target, because it is hard to judge, how volatile the market may become, when most of price action is caused by switching to another series.

17/06/2008

Futures analysis

Although the market managed to post third consecutive higher low, today's daily candle appears to be an inside bar inverted hammer with strong selling, that came late in the day. As you can see on the daily chart, the futures have formed a flag pattern already, which is just next to main psychological support area marked by January low. Flags or pennants usually indicate continuation as they are considered flat corrective patterns, meaning that markets either gain strength (bullish) or become weaker (bearish). If you want to get involved in the daily timeframe, wait for the closing price to confirm breakout either way. The best situation, would be if this flag pattern was breached by a single wide-ranging bar, as it would give a clear signal of continuation or reversal here.

As I expected, today's session showed some volatility, which was caused by constant betting on macroeconomical data from the U.S. The market closed positively, though did not show a clear uptrend for the most part of the day. As I said earlier, important thing to notice here is that selling came in right before the close and finished forming of an inverted hammer, that appeared in the daily timeframe. Such occurrence leads me to a simple conclusion, that the odds are greater for continuation of this latest decline, especially when american indexes behaved pretty much the same way before closing. Downtrend, that lasted there for the most part of the day did not change, so this will be our reference point for tomorrow's action, which is likely to be continued. Moreover, weak housing and industrial production data combined with higher inflation brought more concerns about America going into stagflation. Thus my stance for tomorrow is bearish, so I marked potential support areas on the intraday chart, which may hold the declining market. Technically, the futures are still above the most important short term reference point, which is 2710, so it will be the first area to overcome (possibly with an overnight gap). Then comes the last swing low of 2680 and 2657-70 critical area.

16/06/2008

Futures analysis

"Calls for anticipation", that is what the technical analysis bases on and that is exactly what traders actually did today. Yesterday, in the wake of an uptrend, which had established in american stock market I expected an uptrend here in WIG20 futures. But what good is a positive close in S&P500 or NASDAQ if most of trading happened overnight (looking from american time zone point of view)? Eurozone's higher-than-expected inflation rate acted as a catalyst, that fueled currency market's sentiment for the whole day basically. Probably, it would have changed, if american macroeconomical news was better. So a declining Dollar encouraged european stock traders to make calls for anticipation, that there will be selling in America, which occurred, but only in the morning and for a really short period of time. WIG20 futures posted two higher lows in a row, accompanied with two higher highs, but as you can see on the daily chart, this does not confirm any sustained upside action, as today's session brought mostly selling.

The only upside action for today occurred in the morning, as the futures posted a gap and reached 2745-55 resistance, that I pointed out yesterday (exact peak is marked on the intraday chart here). As the market opened above previous day's last hour high, sellers came in and managed to reverse short term trend. As you can see, the most important factor to confirm any bullish action here, was violated to the downside (yesterday I stated, that if we were to witness a sustained uptrend, the futures had to stay above at least 2710). Now, 2710 has become a potential resistance level. The situation is two-fold. A pullback as short as three days will show, that the market is very weak, which means quicker breakdown of January low level. On the other hand, according to my trend continuation rule, if WIG20 futures remain in alignment with american indexes, then the market will probably enter more of a sideway trend, giving some room to bottom out and maybe to post little larger pullback (thus delaying possible breakdown in time, so it will gain momentum). Tomorrow there is going to be a lot of data announced, which are expected to be rather bad, so I will not make any predictions based on technical indications, as they do not work when volatility comes into place. The only thing, that may matter in this case are potential resistance and support areas: 2710 and 2745-55 resistance and 2656, which is the low of Thursday. Breaking and staying below 2656 confirms long-term downtrend continuation.

15/06/2008

Futures analysis

I had a lot of work last month, so I could not post on a regular basis. I will try to keep up with my analysis from now on, as I have more time to do so. Since my last post, the futures have managed to retest the declining 100-day moving average, pulled back from there and retested January lows, finally breaking the symmetrical triangle pattern to the downside. So now, we have come to witness consequences of lowering the interest rates in America. Crude Oil has hit new all time highs and is only 10 Dollars away from reaching 150$/barrel objective, which was widely talked about recently. The credit crunch may be over, but now comes inflation. But let's focus on WIG20 futures now. The market managed to bounce from January low level on Thursday and Friday mainly because of simple selling exhaustion. Earlier 4-day decline ended up showing a candle, that exceeded Wednesday's low with its opening price. It is a typical price pattern, especially in a daily timeframe, where it can be clearly seen, that the last traders capitulate by closing their long positions. Such activity leaves everybody on supply side of the market and causes a reversal, because there is no one left to sell and thus, to drive the market lower. Watch Crude Oil now, as more upside action there will punish global stock markets. Breaking the January low level to the downside will set a new price target near 2500 area, as it corresponds with a low of May 2006.

Intraday chart shows how sharp was the last 4-day decline before Thursday, as the futures moved mostly by posting downside gaps, which make a hard time for traders and analysts to pick potential support and resistance areas. Friday's session confirmed actually a 1-2-3 bottom reversal, showing that buyers went more aggressive and are willing to drive this market more to the upside. Short term uptrend has been established, so the odds are obviously greater for its continuation than reversal. Judging by price action in american stock market, I would expect Monday to be an uptrend session too. The nearest intraday resistance level appears to be the area between 2745 and 2755. If the market manages to break through this level, then the next resistance will probably correspond with the last downside gap level of 2785. But remember one important thing when considering getting involved on the long side. Condition for this market to remain in uptrend is that it has to remain above 2710 level (marked on the chart). It has to have enough room, especially near recently established support/resistance levels to form a higher low, so it can bounce back from there and continue to rally. As I said earlier, american indexes managed to post an uptrend late in the day, so the odds are greater for a continuation on Monday. I expect the markets to reach their nearest significant resistance levels until Tuesday, because there is going to be a lot of macroeconomical data announced (including PPI, industrial production and housing market data), that often cause volatility and reversals.