23/12/2007

Futures analysis

After posting a double hammer pattern, on thursday and friday the futures formed a double inverted hammer pattern, which eventually generated a small pullback towards declining 10-day moving average (daily chart). Friday was the derivatives expiration day, so from now on, we will be looking at march series. Last week brought us some important news, that was considered as stronger catalyst for the global markets. Firstly, consumer spending in the United States rose more than expected, decreasing odds for recession. Secondly, European Central Bank injected 500 bln USD into the interbank market, which fueled short term rallies in the global markets. My stance remains unchanged. For the first time in history, central banks try to save the economies from the results of credit crunch by increasing money supply, thus generating inflationary pressures. These are short term activities, which are to cool market psychology, preventing rapid declines or even crashes of the stock markets. Fundamental factors are still supporting longer term downtrends.

Looking at the intraday chart, we can see, that WIG20 futures posted a 4-wave pullback, which ended up finding resistance at 23,6% Fibonacci retracement of the whole mid term decline, corresponding with 38,2% level of the last sharp, downside move. We are currently entering holiday period, so I do not expect much of volatility in the global markets. Breaking above 3500 will mean, that current pullback is going to be extended at least to 50% Fibonacci retracement, which appears to be the nearest upside target. 3510 is a former support level and it lies just before this retracement, creating a potential resistance area. On the intraday chart I also plotted a downtrend line, which is also acting as a resistance in the short term, so if current pullback is meant to be extended, the price must break through these levels on heavy volume, in order to confirm a reversal.

19/12/2007

Futures analysis

Another hammer was developed today in the daily timeframe, which indicates a potential short term reversal in the futures market. Two long downside shadows, combined with sharply declining open interest are a sign, that the remaining buyside traders have been stopped out and the supply is getting exhausted after four straight days of decline. 3440-50 still remains as major resistance zone for the short term price action. 10- and 20-day moving averages crossed over again, but considering how far are they from the price, it is quite fair to anticipate a greater pullback as the market entered deeply oversold range. 3440-50 area also corresponds with 23,6% Fibonacci retracement, which will make this level more significant (today's high established exactly at this retracement).

Intraday timeframe shows, that the futures did not actually retrace back to yesterday's low and made a higher low, implying quicker reversal. 3440-50 resistance is now the nearest upside price target. Returning above this area will trigger next most probable resistance point, which corresponds with 38,2% Fibonacci retracement of current decline. If the price does not return above 3440-50, then I would expect much quicker retest of the august lows. Combined with increasing open interest, such situation would definitely imply, that new money is coming into the market, supporting the short side, eventually extending downtrend in the longer term.

18/12/2007

Futures analysis

Yesterday I anticipated a corrective wave, that would hold the price above 3440 before returning into downtrend. Today, the market proved me wrong and decided to violate this significant support area. Daily candle formed a hammer at the end of the day, so that long downside shadow (see the chart) indicates a potential slowdown in this declining market. The problem is, that price remained below prior lows (double bottom) and 3440-50 area should be considered as a potential resistance zone now. The open interest declined the most in the last four days, which in this case implies massive long exiting or rather stopping out of the buyside traders. Unless the futures stay below 3440-50, this whole situation could develop into a bear trap as the market entered deeply oversold range, but this is an optimistic short term scenario. More probable in my opinion is a retest of the august lows.

In the 15-minute timeframe we can see that today's downside price target was actually a 161,8% Fibonacci projection of October rally, which ended up with a double top reversal pattern. Here, it can be seen more clearly, that what we had today, was a complete sell-off, finally exhausting downside price action. Now, that the States have closed in positive territory, the price is more likely to stall in currrent range between 161,8% projection and 3440-50 resistance area. Depending on overnight action in the far east markets, it may even retrace back above this level, delaying further declines. The key factor is now the macroeconomics. European Central Bank injected money again into the interbank market, cooling panicy selloffs, that took place lately. But now, what matters most, is a moment, in which the market's opinion on situation of lending institutions (subprime crisis results) will change to such extent, that it will sustain in the bear mode for longer period of time.

17/12/2007

Futures analysis

The futures retraced back to 3450 support level, which previously was the foundation of double bottom pattern. Last time I stated, that breaking confirmation level for this double bottom will indicate more selling pressure, alerting that return to bear market is possible. Of course, retest does not mean immediate breakdown, especially after such extended downside move. As the market closed near to the key psychological level, everything will now depend on overnight action, fueled by stock market in America, which is again in deeply negative territory. Secondly, such move could have already been priced in advance, so there is still a chance to see WIG20 oscillating around this key support level tommorrow.

As we can see on the intraday chart, the head and shoulders pattern, that I pointed out a couple of days ago, was confirmed, but market action got so extended, that the price greatly exceeded its estimated target. Eventually, this led to a full retracement of prior 5-wave rally. Today's high and low marked again important previous support and resistance levels. The price is now in a contraction zone between 3450 and 3540. This contraction range happens to be the same size as the nearest corrective wave in this decline (marked by rectangles), which will work as a breaking force of further downside action in the short term. If the market stays on tommorrow's open in this zone, my bet would be for a correction, at least to retrace back to the upper band of this range. Breaking below 3450 and then 3440 will signal that the bear market is gaining strength.

13/12/2007

Futures analysis

Returning back into the bear market. The futures did not manage to get above 50- and 100-day moving average, in spite of lower interest rates in America, which are supposed to save the global markets too. Double bottom pattern will be tested yet again. Firstly, getting below 3610-15 area, will put this market into alert mode, and then getting below 3440 will indicate definitive continuation of a downtrend. Now, it appears, that Fed's decision did not help at all, because interbank market has already discounted borrowing rates as higher than their nominal value, so the market cost of money is still rising. As for the daily timeframe, if the market stays above its nearest short term support (which is plotted on the chart) near 3610, then there would be a chance to defend the uptrend. Otherwise the bears will be back in control.

Intraday data puts on a very interesting short term picture of the futures market. The latest price action looks exactly as it comes from Elliott wave principles. The initial rally consisted of five waves, ended up on monday and today, we saw the final leg of three-wave correction, which found support at 38,2% retracement of the whole rally. This retracement happened to come along with 50% Fibonacci level of a move, that was taken after the first wave, as it can be seen on the 15-minute chart. Another thing worth noticing is a potential head and shoulders pattern, which has developed in the area between 3640 and 3760. The neckline was violated today and the futures pulled back to it, confirming, that it is a level of resistance now. If the market continues to decline, downside target appears to be near 3540 area.

11/12/2007

Futures analysis

Today's session in the daily timeframe ended up putting the price in a congestion zone between two longer term moving averages - 50- and 100-day. This is a natural reaction to an extended rally, that took place lately and lasted for almost two weeks. Those last two daily candles are lined up in a pattern, that is called a dark cloud cover and indicates price stall or reversal. In this case, I am only talking about a short term reversal, because of major catalyst, driving this market up, which was the Fed anticipation of course (to this day). Now, that the market indicates a potential correction, there are two significant support levels, that can hold the price in bullish mode, depending on the size of eventual pullback. First is the most recent 3670, which is now alligned with 100-day moving average, second is of course 3610-15 area, alligned with the latest double bottom pattern.

As I am writing this, the Fed cut benchmark interest rate by a quarter point, which immediately caused speculation, that it will not improve economical situation. This is a good example on how the market can turn on just one catalyst, which I expected quite some time ago. The inflationary pressures are too high and Federal Reserve has little room to maneuver left. But let's look at the 15-minute chart. Here we can see, that the rally has finally ended, finishing a three-leg corrective wave, which brought the price back to crucial 3700. As this was a five-wave short term uptrend, now in the wake of a catalyst (Fed's decision) I expect to see a failure of this rally and probably retracement to previously mentioned support levels in the daily timeframe. Only returning back above 3700 will open a chance for the bulls to step back in.

10/12/2007

Futures analysis

Scenario for the daily timeframe did not work for today and the futures rallied up to 50-day moving average, rejecting this double hammer pattern, which I described yesterday. There was not any particular news during the day, so nothing was holding back the bulls while driving up the price. Now, the daily timeframe looks good in one way. After a double top, that caused sharp decline from historical highs to 3440, the futures posted a rounded bottom pattern, which of course means returning to the uptrend, at least in short term. The key is, that the markets have already discounted tommorrow's decision of Fed to lower the interest rates and now it is time to judge, what is going to happen next. WIG20 futures approached significant geometrical turning points. Firstly, the price remains in somewhat a congestion area between the moving averages. Secondly, it is about to approach a major long term resistance, which is a significant psychological turning point (as seen in the past, on daily chart). Moreover it is close to 61,8% Fibonacci retracement of the recent decline, which will be definitely supportive for the selling force. The final point to make is my overall bias is for the bulls in the short term, because the last thing that matters here is the rounded bottom pattern, which determined current rally until the market posts another reversal formation.

15-minute chart shows exactly, why the daily scenario (double hammer reversal) did not work. As I wrote yesterday, the futures formed a narrowing triangle pattern, which indicated, that current rally will continue. The price did not fall back to 3610, as I was pointing that as a possibility, in case of fulfilling the daily scenario. As I pointed out, we are currently in the stage of developing the fifth wave in this rally. Although the selling took place late in the day, this last correction is not yet considered as a failure. The price must retrace back below 3700 at least to indicate, that the whole upward move is over. In the intraday chart, it can be seen, that there is another congestion zone in the futures, that is little narrower, than primary area in daily timeframe and has clearly defined support and resistance levels. Tommorrow is the FOMC policy announcement, so if there is going to be a 25bp cut, nothing would really happen as such move has already been priced. The most crucial question is: how far can american economy go, inflating its way out of the mortgage crisis.