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.