23/02/2008

Futures analysis

Back with another analysis after a short break. Throughout the last three sessions, the futures have confirmed formation of a price pattern, which is commonly known as pennant. When this occurs, it usually indicates continuation of previous swing (upswing in this case). Moreover, it has formed just under a major resistance area around 3195, which corresponds with last year's January and March lows. Also, the declining 50-day moving average is now below the August low and with 3195 level it forms heavy resistance for the futures to break through. The market has been showing strength so far, but we still need a confirmation, whether current pullback is going to be extended or not. As you can see on the daily chart, the last candle is an inverted hammer, which suggests that more selling pressure came into the market late during friday's session. At first, it would indicate a downside breakthrough of the pennant pattern, but not if we take into account american session, that always acts as a psychological catalyst, causing overnight action in the global markets. S&P and DJ erased all the morning losses and went back to close nearly 1% in the positive territory. What I expect here is that the WIG20 futures will probably stay inside the pennant for little longer, before breaking through to either side.

5-minute timeframe shows, that although the last three sessions held price inside the pennant, the whole action did not take place without significant increase in short term volatility. Basically, we had three sessions and three gaps to either side. All of these are filled, but as you can see from the chart, the futures did not trend much during the last three days. If we take only friday into account, selling took over late in the day, as I pointed out earlier, but the close remained above lower band of the pennant. As the futures are constantly contracting inside pennant's range, potential pattern breakthrough levels are the last two swing points plotted on the intraday chart: 3160 resistance and 3045 support. These two levels are in such alignment, that touching them will equal beginning of potential pennant violation (their position exceeds contracting triangle bands, as shown on the chart). As to make a final forecast, daily candle alignment still works for uptrend continuation (bullish stance, but unconfirmed), unless the futures fail to break the 3195 resistance or violate current pennant pattern to the downside.