09/12/2007

Futures analysis

After a huge rally, that confirmed double bottom pattern in daily timeframe, the futures posted two hammer candles, indicating a stall, caused by profit taking (declining open interest). As for now, I consider this latest rally as a three-leg typical correction of a downtrend. The price retraced back to declining 100-day moving average and stalled there, indicating that further upside movement may occur only if the bulls manage to drive it above 3700, which is the main level of resistance currently. Depending on the market's reaction on Fed's decision, this whole price pattern, that is below 100-day moving average may eventually develop into a rounded bottom, indicating a major, more significant reversal and return to the uptrend. Not only it depends on the interest rates in America, but in Poland there are recently expectations that Rada Polityki Pieniężnej will increase the rates three times until February. These are the two most important factors for the long term now.

15-minute timeframe shows a different short term picture, than daily chart. Here, these two hammers are shown as a narrowing triangle, which is of course a corrective pattern, but indicating trend continuation. Moreover, this pattern formed just under this major resistance, that is 3700, so I consider this situation as somewhat a turning point for this market in the upcoming week. This recent rally consists of four waves, considering that this triangle pattern will not be violated to the downside (will remain as a continuation pattern, which it is currently). If I am correct and the price goes above 3700, there would be only one more wave left to put an end to this rally (based on Elliott wave theory). If the futures fail to go back above 3700, there is still a chance to retrace back to 3610 and confirm former resistance as a support there. The most crucial reason, to put this market back to uptrend is that it must remain in this current pattern of higher lows at least. Breaking below the lower band of narrowing triangle will eventually lead to retest 3610 and breaking below there will lead to retest 3520 and then 3440.