31/01/2008

Futures analysis

Today's session posted a bearish engulfing pattern in the daily timeframe, confirmed by a large candle, that exceeded previous two lows. The futures market decided to double test resistance zone, which eventually spread from 3030-50 to 3070, so only managed to fill the gap of 16th January. As it can be seen on the daily chart, the market has not enough strength to extend current corrective wave, so yesterday's session proved to be just another bull trap - false breakout signal. For the last six trading sessions, the futures have been consolidating and it can still remain this way unless monday's low is broken (2920). The declining 20-day moving average approaches this 3030-70 resistance area, consistently shrinking potential room for any upside action. If the downtrend continues, then the nearest short term target appears to be the low of 2680, as for the daily timeframe.

5-minute chart shows in detail the range of recent consolidation. Today, the futures retraced back to 2930, which is prior support/resistance area. As the market moves sideways, the open interest has been constantly rising, which means that more money is coming in, thus increasing strength of a potential breakout either way. Yesterday I stated, that if the futures post an upside gap in the morning, then it would probably be a candidate for a short, rather than long position. As the States erased their gains in the end of the day, WIG20 futures opened actually with a downside gap in area of yesterday's highs. Sellers stepped right in from the beginning, which eventually caused short term trend reversal (multiple short term MAs crossover). As long as the price remains below the moving averages, odds for a potential breakout from the range will favor downside. Tommorrow's news covers the most important macroeconomical factor, on which the global markets will gauge condition of american economy - the Nonfarm Payrolls. This is always the most volatility-causing announcement, no matter whether it meets the expectations or not, so judge your risk carefully before entering either side.

30/01/2008

Futures analysis

Fed, as expected, cut the benchmark interest rate by 50 basis points to 3% today. As you can see on the charts, this spurred more euphorical buying, which resulted in breaking through 3030-50 resistance zone, here in WIG20 futures. The volume is still diminishing and open interest has flattened, so that may indicate, we could be entering a period of indecision. Conservative upside price target appears to be the March low of 3125 points as it corresponds with another potential resistance, which is the declining 20-day moving average. Again, this is a potential resistance, which does not mean, that the sellers will immediately return when price hits the exact level. Total extent of current pullback will be confirmed by a candle pattern in the daily timeframe and eventual selling evidence in lower timeframes. Fundamental factors remain the same: rate cuts with fiscal stimulus policy increase inflationary pressures, which will mean further weakening of the Dollar and rising commodity prices - alternatively to stock markets.

In the 5-minute timeframe, today's session was basically a sideway price action, which was a sign of indecision - the markets waited for the Federal Reserve. Consolidation took place still below the resistance zone of 3030-50 with double test, but actual breakthrough occurred right before the close. Moreover, this whole action took place on lighter volume, than previous breakthroughs i.e. in the last couple of days, if you look at the intraday data. In other words, it was to weak, to qualify it as a move with sustained price momentum, but until trend does not change to the downside, what I am doing is picking a top. American indexes erased whole 'Fed move' gains at the end of the day, so there is not much left to judge eventual overnight action in WIG20 futures. Eventual upside gap could exceed 3125, but that definitely would be a fade candidate, as it lies in a deeply overbought range. Tommorrow's announcements cover mostly labour market data, so that would be a good short term catalyst to gauge condition of american economy.

29/01/2008

Futures analysis

Yesterday I stated, that the futures returned to the downtrend, as daily candle exceeded two previous lows, indicating that more sellers are coming back. Today, the market gapped up in the morning, which shifted the short term trend to the upside and resulted in full retracement of the whole recent downside move from 3030 (including gap fill). Basically we are now having a retest of crucial resistance area, preceeded by a higher low. If the price breaks through this area and maintains its strength, then we would probably have extended pullback towards the declining 20-day moving average, which is nearing another key resistance - March low, 3125. I was recently pointing out, that the whole rally is taking place on light volume, which rather does not indicate any relative strength here (theoretically). However, price is the ultimate indicator, so that higher low may prove to be a good point to initiate more upside action. Again, everything depends on the close of american indexes, as it did especially today. When futures test important price levels, psychology means the most, even when it comes to neglect technical factors.

Yesterday's +1% close of american indexes resulted in an upside gap here in WIG20 futures, which confirmed short term trend change. The global markets are still betting, that expected rate cut by the Fed will spur growth in american economy. This may be a short term catalyst, that may cause stock markets to post longer rallies and it probably will act as such. The question remains: how the interbank rates are going to behave in relation to their nominal counterparts? Because, higher market borrowing cost may slow down economic growth anyway, so I would rather look at the results of recent fiscal stimulus policy. As you can see, the second rate cut may finally be 'noticed' by the markets, resulting in further upside action. As for WIG20 futures, looking at the intraday timeframe, the closest price target appears to be previously mentioned 3030-50 resistance zone. Price showed some buying evidence today, as it remained above the short term moving averages for the whole session. As I said earlier - there has to be a sustained move above this resistance area, if we are to see intermediate trend reversal.

28/01/2008

Futures analysis

Back to the downtrend. The futures did not manage to break through declining 10-day moving average and additionally confirmed previous hammer candle, thus indicating the end of the long-awaited pullback. Today's price close has broken two previous days' lows, which implies more selling again. The whole daily pattern, that began to form after gap from 3070 has not turned in a sharp bottom so far and will remain unconfirmed until the price breaches through 3030 with no bull traps. Now, the most significant price target in the daily timeframe appears to be 2700 again. Apparently, recent rate cut by the Fed was barely noticed by the global markets, as well as by WIG20 here. Sharp correction, that we recently witnessed, developed on diminishing volume, which is still declining, so that would be another sign of weakness driving this market more to the downside.

The futures posted a 70-point downside gap on the open and basically remained in a sidetrend for the whole trading session. As the crucial swing high of 2950 was breached to the upside by an overnight gap, it failed today in exactly the same way and its level will be acting as a resistance from now as it did today. Lower band of the price channel lies near 2925, which is prior level of support, that has been established throughout the recent emotional mayhem in the markets (volatile days). Buying evidence, that I was recently pointing out, turned into selling evidence, as the moving averages crossed to the downside, causing failure of a triangle, that I indicated in my previous analysis. Still, the States are trading for rate cut again, resulting in nearly 1% gain by the major indexes so far. Now, we have to wait, in order to know the market's opinion on the second cut. Fundamentally, more rate cuts mean more inflationary pressures, but psychologically, the markets may shift in the short term.

25/01/2008

Futures analysis

Today's candle in the daily timeframe is not actually a hammer, due to its body size in relation to shadow, but as it is posted just next to the key resistance level, it could mean, that the pullback may be getting exhausted. The reason for pullback extension is that the whole retracement took place in the same time as the last leg, which was posted after gap from 3070. The futures also made another higher low today, contracting the price near key turning point for a potential breakout. On the other hand, we have more reasons to see continuation of current mid term decline. Firstly, today's high reached for the declining 10-day moving average, which acted as a resistance already. Secondly, this moving average corresponds with geometrical resistance, that is: 38,2% Fibonacci retracement. Thirdly, american stock indexes are in the negative territory at the time of writing, so that would be another catalyst for bear market to continue. Bouncing of this current resistance would mean further market weakness and will probably lead to retest the low of 22nd January.

The whole two-day contraction range has established between previous swing high of 2950 and resistance level near 3030. Recently I was expecting, that if the price breaks through the last swing high, it would go back up to 3050, thus increasing probability of entirely filling a gap (15th January). As you can see on the 5-minute chart, there is still some buying evidence, which keeps the price above the 100-period moving average (somewhat dynamic trendline). The futures formed a pattern of a symmetrical triangle, which in the wake of prior swing being made to the upside, indicates possibility of going higher. Though, open interest and volume have been constantly declining throughout the last days, during pullback. This is the last reason for decline continuation. Typically, when markets rally or decline, they are supported with incoming new money. Low volume corrections indicate only profit taking and set up possible entry points for those who anticipate next move in the same direction. If the 100-period moving average gets tested again and again, it is more likely to fail, than to act as support.

24/01/2008

Futures analysis

After two wide ranging days, volatility suddenly stepped off the market and as a result, we have a small doji candle, barely touching 10-day moving average, which is lined up with 38,2% Fibonacci retracement of the whole decline. The futures gapped up in the morning, influenced by american indexes' yesterday close. Today's better-than-expected job data in the U.S. definitely works as a catalyst now, which could extend this developing short term pullback. Though we are still below more significant geometrical levels, so that does not necessarily mean buyside comeback anyhow. As long as the futures stay below even this closest retracement level of 38,2%, it would rather indicate, that the market is weakening, thus causing this long-anticipated pullback to fail (unless price forms a flag or consecutive higher lows pattern before breaking 38,2%). The situation might get worse in terms of macroeconomical factors, as Cleveland Fed gathered new data from the Chicago Board Of Trade, covering implied probability of further rate cuts in America (link). Option traders are betting, that Fed will reduce the funds rate to 3.00, thus by 50 basis points.

Yesterday I stated, that if the price manages to get above its last swing high (2950), then it would reach back to 3050, which is the nearest most significant level of short term resistance. That did not obviously happen, as we had an upside gap in the morning (open above the last swing high), which apparently exhausted the buyers, also causing volatility to drop for this session. As a result, the price remained range-bound for the whole day between 2950 and 3005 with little trading activity. As the main resistance zone, that I pointed out in my yesterday analysis was totally skipped by the gap, it now may be considered as the first potential support zone, in case of pulling back again (range between 2890 and 2950). There is a chance, that if the States close positively today, this prior resistance area might not be tested tommorrow yet, but later in the upcoming days, as stock markets abroad drive higher and higher (pure psychological factor).

23/01/2008

Futures analysis

Volatility is the main part of the bottoming process, so we had another wide ranging day today in WIG20 futures. Although daily candle is not a typical hammer, this long downside spike was a result of buying, which took place late in the session (explained in intraday section of the post). Also we have short term trend reversals in major pairs with the Japanese Yen, indicating return of the appetite for risk, driving stock markets to the upside again. Daily chart shows short and mid term potential resistance areas/upside targets, that are previous important turning points additionally corresponding with Fibonacci retracements (plotted on the chart). As it appears, if the price goes back above the 38,2% retracement, there would be two resistance zones remaining, until it returns to the downtrend. 50% and 61,8% retracements are swing trader's potential reversal points, as often market's opinion changes when approaching these key geometrical levels. 'Potential' means, that there is no 100% probability, that the price will bounce off of one of them, with no looking back or failure, but these are rather zones to pay attention to.

Intraday chart shows how the buyers came back late in the day, which was caused by the open in America. As the price continues to form a bottom, recent intraday action also lines up properly with Fibonacci retracements, while the buyers consistently try to regain the lost ground. Buying evidence, that I was recently looking for was tested yet again today, as the futures fell below 100-period moving average to eventually find support at 61,8% Fibonacci retracement of the latest upswing, which started the whole bottoming process. Now, as the global markets finally retrace back to previously broken support levels, I am expecting a pullback at least to 3050, if price breaches the swing high of 2950, then come the daily targets. Tommorrow's macroeconomical announcements from the States cover Initial Claims, New Home Sales and Crude Inventories, always acting as catalysts, causing volatility and determining the market's opinion on condition of american economy. Although fundamental factors are known for the long term, I always mention upcoming news, because it influences short term emotional state of the markets, which determines potential range of such pullbacks, as we are recently witnessing.