04/10/2008

Futures analysis

The market has broken through major long term areas of 2450-500 and we are back retesting 2005's October low, which lies near 2215. If you look at the daily chart, you will see, that the volume has been significantly higher recently, which could indicate a potential bottom forming. That would be reasonable, because retest of 2215 posted actually the same pattern as in January, when first pullback occurred. The pattern consists of two candles, where the latter one exceeds previous day's low and ends up indicating a rally. It is a typical price exhaustion formation, when the last of the bulls give up their positions, by closing stop loss orders. Massive selling causes exhaustion, because it leads to a situation where ther is no one left to sell and market reverses. Volatility Index has reached previous historical levels of year 2000, when the dotcom bear market had started. Also, Dollar yield curve has maintained its normal shape, which is good for the currency and economy in the longer term. Short term interest rates are expected to be lower again, which suggests, that the market does not fear higher inflation anymore. Every single one of these mentioned factors is a good reason to believe, that we might have another bottom in the global stock markets. One reason, that would support opposite situation is that WIG20 futures fell 'only' 36%, in comparison to 50% after the dotcom bubble.

As for intraday timeframe, the futures posted a sharp bottom after two-day decline. This reaction was after the Non farm payrolls data, which caused euphorical buying of the Dollar (though the stock market slumped afterwards). I would expect even another downside gap on Monday, but the question is: how far can the futures open to the downside after such unexpected decline in America? The first potential support area appears to be 2330, which is Friday's intraday swing low. If the price breaks through this level, then the nearest target would lie around 2300, which is the latest low after downside window (30th of September). Upcoming week will bring us usual data on crude inventories and initial claims, which cause minor volatility and act as catalysts only for intraday moves. Unless some unexpected news come out, we can focus on pure technical factors. My stance for Monday is bearish. Firstly, because WIG20 futures are in clear downtrend and secondly, because american stock market has not changed its intraday trend to the upside (greater odds for continuation than reversal).