24/07/2008

Futures analysis

The futures slowed down today, one day after posting continuation gap. Two last candles align in a pattern, which is called 'dark cloud cover' and is commonly known as a stall/reversal formation, suggesting a possibility to close overnight window from Wednesday. Such occurrence should not surprise anyone. The futures managed to post a five-day rally after downside exhaustion, and now there is room to resolve current situation without sharp, emotional and volatile moves. Yesterday I feared, that housing data from the States might act as a short term bearish catalyst, but I did not expect it to break current price formation. This brings up important points to note: Friday will be crucial, because the market is going to penetrate Wednesday's gap level A sustained move below the gap area will indicate, that retest of 2680 will be much delayed in time and if the market becomes weaker after that, then we will see retest of 2450 first Tomorrow will only bring us data covering new home sales in the U.S., but the news comes out at 16:00 CET, so it will be near the end of trading session (sentiment for Monday).

Intraday chart shows, that the futures broke rising trendline, that I plotted yesterday. We are out of the main short term trend, so from now on we have to pay attention to support areas, which are certainly going to be retested. Outcome of these retests will tell us, if current pullback in daily timeframe is going to extend or reverse early. Firstly, the gap level between 2580 and 2600 will definitely play a crucial role tomorrow, as it has already been touched by the market minutes before the close. Below this area, there could be a potential support near 2550, which is represented by intraday swing lows (emergency short term support). If the daily pullback is ought to continue, I would like to see the market not testing 2580 from the downside with confirmation. This is because such occurrence would lead to a trend change, meaning early termination of our current correction. In the wake of american stock market's close, it will be really hard task for the futures to remain above the whole window level, unless something happens overnight. The States posted a decline backed by momentum, which did not change even late in the day. According to my rules, if there is a trend before the closing bell, it is likely to continue on the next day and in this particular case (given the magnitude of downtrend), there is possibility of a downside gap in the morning. Resistance levels for tomorrow are: 2620 and 2645, gap level is the main support and emergency area lies near 2550.