03/08/2008

Futures analysis

The futures posted an inside bar doji on Friday, which in conjunction with previous patterns indicates, that our pullback encountered heavy resistance and is about to reverse. If price forms an inside bar, that usually means trend reversal, so the odds of the futures getting back to major downtrend have significantly increased. Moreover, we had a volume climax on Thursday (highest since April), after U.S. GDP data, which happened to come along with declining open interest (position closing). I fear, that the most recent price action, that took place above January low level (2680) is going to evolve into a bull trap. Although the market found resistance between two declining long term moving averages, it did not fill Wednesday's upside window from the last week, so technically there is still some room to find support above 2680 and extend the pullback a little bit. As for our short and mid term catalysts, the U.S. labor market data along with GDP advance appeared to be worse than expected, which again brought concerns on contracting economy and inflation. Judging recent price action in the futures and adding the news, I can say, that it is a good time for returning to bear market.

If you look at the intraday chart, you will see that, Thursday's resistance has extended to a 10-point area between 2750 and 2760. Nonfarm payrolls did not cause usual volatility this time and the market moved sideways for pretty much the whole session (one of potential scenarios from Thursday's analysis). Current price range between 2710 and 2750-60 will now act as pivotal area for the upcoming week. Thus, now we should start looking for potential breakouts either way, which will confirm future movement. Breaking below the range will mean retesting Wednesday's window, that is our emergency support. On the other hand, if we are yet to see any upside action, then the market has to make a sustained move above 2750-60 area and possibly confirm it as a support immediately. We have one more day to see about that, because on Tuesday, the Fed will decide what to do with interest rates. The highest odds are for leaving Fed Funds at current level of 2%, which means that there are still inflationary concerns and no one wants to hurt already slowing economy further. Judging by the most recent price action in the futures, we can assume, that interest rate sentiment has been already discounted by the markets. Meaning, that sharp Thursday top, along with range contraction on Friday have already shown whole anticipation. American indexes also moved sideways before weekend, so my stance for Monday is neutral, as the markets will probably wait on the next significant catalyst.