12/10/2008

Futures analysis

The futures have finally reached a 50% decline, equaling the bear market from early 2000s after dotcom bubble. Price retested the peak of year 2001 on Friday, where another massive selloff took place, driving the index almost 12% to the downside. The volume has reached its peak also, which shows us similar situation, when January lows were formed. As you can see, nobody believes in any rescue plans or lower interest rates anymore. Credit market remains completely frozen, because banks and other financial institutions do not trust each other, which is caused by high risk of insolvencies or even further bancrupcies. As for intermarket factors, 30-, 10- and 5-year U.S. T-Notes have posted double tops, indicating that yields will not pay off anymore. Commodities are also declining sharply, meaning that the markets do not fear inflation. The last thing to move upwards right now are the stock indices. It is hard to judge now, how strong our current support will be (1980 area), but I would rather expect some sharp bull traps first, than a clean bounce, if we are to see another corrective wave here.

As for 5-minute timeframe, we do not have any solid short term levels to stop potential downside action. There is this only one swing low from Friday, which will probably be retested on Monday. One single level is not much, considering current market volatility. But if we look at the american stock market Friday close, we would see that prices posted rounded bottom patterns with sharp rallies shortly afterwards. Main indices managed to retest Thursday's closes, which resulted in huge downside spikes, shown in the daily timeframe (after closing bell). This may not indicate buying just yet, rather short covering, but technicals are technicals and if price posts sharp rallies near the end of the day, it might signal, that short term trend is changing. From now on, the most important level will be 2105, which marks recent downside gap. Gap resistances are the most wide and solid areas to overcome for markets, so any action above it will suggest, that price is capable of forming at least short term bottom, which could then evolve to a reversal pattern later. Tommorrow banks in Japan, Canada and the United States will be closed, because of holidays, which is going to influence foreign exchange markets, causing low liquidity and volatility. Let's see if it works for the stock traders.

04/10/2008

Futures analysis

The market has broken through major long term areas of 2450-500 and we are back retesting 2005's October low, which lies near 2215. If you look at the daily chart, you will see, that the volume has been significantly higher recently, which could indicate a potential bottom forming. That would be reasonable, because retest of 2215 posted actually the same pattern as in January, when first pullback occurred. The pattern consists of two candles, where the latter one exceeds previous day's low and ends up indicating a rally. It is a typical price exhaustion formation, when the last of the bulls give up their positions, by closing stop loss orders. Massive selling causes exhaustion, because it leads to a situation where ther is no one left to sell and market reverses. Volatility Index has reached previous historical levels of year 2000, when the dotcom bear market had started. Also, Dollar yield curve has maintained its normal shape, which is good for the currency and economy in the longer term. Short term interest rates are expected to be lower again, which suggests, that the market does not fear higher inflation anymore. Every single one of these mentioned factors is a good reason to believe, that we might have another bottom in the global stock markets. One reason, that would support opposite situation is that WIG20 futures fell 'only' 36%, in comparison to 50% after the dotcom bubble.

As for intraday timeframe, the futures posted a sharp bottom after two-day decline. This reaction was after the Non farm payrolls data, which caused euphorical buying of the Dollar (though the stock market slumped afterwards). I would expect even another downside gap on Monday, but the question is: how far can the futures open to the downside after such unexpected decline in America? The first potential support area appears to be 2330, which is Friday's intraday swing low. If the price breaks through this level, then the nearest target would lie around 2300, which is the latest low after downside window (30th of September). Upcoming week will bring us usual data on crude inventories and initial claims, which cause minor volatility and act as catalysts only for intraday moves. Unless some unexpected news come out, we can focus on pure technical factors. My stance for Monday is bearish. Firstly, because WIG20 futures are in clear downtrend and secondly, because american stock market has not changed its intraday trend to the upside (greater odds for continuation than reversal).

21/09/2008

Futures analysis

We have broken the May 2006 low, which was retested back in July this year, but the futures managed to find another significant support area to bounce from, defined by levels reached in 2005 (marked as 2220 zone). Recent action in daily timeframe was a typical price exhaustion, just as we saw back in January. Thursday's open exceeded previous day's low by almost 30 points, which marked capitulation of the last bulls here and caused prices to rally. Volume reached its highest value since April and that would be a textbook sign of another bottom forming. Moreover, price levels and recent news came along with contract expiration. Rallies are usually caused by traders, that switch contract series to another. Speaking of the news, we had more rescuing by the Fed along with ban on short selling 800 stocks. This whole bank rescue plan was the main cause of current rallies in global stock markets. As for technicals only, the market has become range-bound again, this time between 2220 and 2450 (both bands already tested), so upcoming mid term price action is probably going to be sideways, which does not indicate a bottom just yet. We must either wait for a retest of 2220, or a sustained move above 2450, to see whether this market has already ended its decline or not.

Friday's gap exceeded Thursday's high by 50 points, as shown on intraday chart. The futures have entered heavy intraday resistance area between 2425 and 2445. This is a window area from 15th of September, which is yet to be filled, if we want to think of any bottoms in this market. The nearest support level is of course upper band of Friday's window near 2360. This will be our emergency level, that protects from retesting Thursday's low. The market has gained a lot of momentum, so there are no technical factors, that would already indicate any weakness in current trend. Upcoming week will bring us less info, than usually. News from America will cover data on durable goods orders housing market and crude inventories, but we will also listen to Chairman Bernanke, as he will testify before the Congress (could cause volatility in currencies, which can result in overnight gaps in stock markets). According to Cleveland Fed, there have been some changes in short term interest rates. Expectations are higher for lowering Fed Funds rate by 25 basis points at the end of October and even by 75 points in December (sic!). This is going to be bearish for Dollar at least in the short term, but these interest rate fluctuations did not influence overall yield curve (rather it was a result of the rescue plan). We might see moving out of the money market and into the stock market in the nearest future.

15/09/2008

Futures analysis

We have broken 2405-50 May 2006 area, which was caused by negative sentiment spurred by Lehman Brothers' bankruptcy (the whole yesterday neutrality concept went out of the window). The futures sold off today with heavy volume and set a new downside target, which is at a high of August 2005 (later confirmed as support in November that year). Merrill has been bought by Bank Of America and next in line is AIG, that seeks capital. I do not know if anyone else is still waiting to be bailed out, but taking over usually serves as an early signal of bottoming. This would be a rather mild bear market this time in comparison for example to 2000 Internet bubble, which drove the markets 50% to the downside. Here, we have declined 30%, but currencies, commodities and american money market already show signs of a sound economy (normal yield curve for Dollar). It is a matter of time, when the stock market should start to reverse its main trend, as every other factors, that I mentioned before are giving earlier signals, especially when it comes to major turning points.

It is hard to point out any potential support and resistance levels, judging by the intraday chart, except for today's swing low, which is at 2340 and broken July low, which is going to act as resistance from now on. Any other rapid selloffs, that might occur this week would rather signal, that exhaustion level is near. I will be more concerned, when the futures start to decline at a slower pace and with little pullbacks along the way. That would definitely extend the main trend even below the next daily target. As for macroeconomical situation, tomorrow is the CPI day, which means that we are going to have inflation data from UK, Euroland and the States (the most important). The Fed is even expected to lower the benchmark rate by 25 basis points, which may act later as a longer term factor. Sentiment from the States is of course very bearish and the indexes did not show any sign of reversing intraday trends, so the odds are in favor of continuation. Any further gaps to the downside will also signal exhaustion.

13/09/2008

Futures analysis

I have been busy lately and I could not update my blog regularly. As it appears, there has been little of unexpected activity in WIG20 futures. In one of my last posts I stated, that we are probably going to see a retest of May 2006 low, which is about to happen anytime now. The market was not strong enough to break above January low level and found resistance at declining short term moving averages. Now, the most awaited thing is the actual retest, especially in the wake of current market situation. Yield curve for Dollar is normal, which means, that currencies and money markets have already discounted a slowdown in american economy, which does not have to go into recession anymore (it will not change anything). The last thing we are waiting for are stock markets. That is why retesting 2405-50 is so important, because it will serve as a major timing factor. Rules are very simple. Bouncing off May 2006 low will indicate a potential double bottom pattern forming in daily timeframe. And if that occurs, then it will mean, that shares have finally put an end to the subprime crisis. Then we would probably see some sidetrend, because yields in money market need time to inverse. But if price falls below 2405, then it will take more time for WIG20 to recover and the nearest downside target would appear to be around 2230 zone.

Intraday chart shows, that the futures have become range-bound again and will trend sideways between 2480-95 resistance and 2440, which is the main intraday pivotal area now. Sentiment from the States is negative, judging by the daily timeframe. The stock market has retested the most recent swing lows, bounced off, but did not actually change the main trend yet. Intraday sentiment after Friday's close would be rather neutral, because the makret was able to form in a pattern of consecutive higher lows, but ended up finding resistance at previous day's close. Such price action does not forecast much, except that there is some heavy selling coming in just above key intraday levels. Combining situations in America and here in WIG20 futures, Monday is probably going to be just as neutral, as it has been lately, unless we hear unexpected news from Lehman again for example. Upcoming week is going to bring us some important news covering industrial production, CPI, housing market data and of course FOMC policy statement. All of these combined would serve as a perfect catalyst, to determine further movement in the stock market. As for interest rates, options on CBOE have discounted over 80% probability, that the Fed will leave benchmark at 2,00%.

21/08/2008

Futures analysis

Inflation hit the markets again and we had a breakdown after a one-week consolidation in WIG20 futures. Although the Dollar has reversed trend along with Crude Oil, we still have to wait through all these negative macroeconomical reports, that are actually delayed results of what happened beforehand. 2600 support area did not hold, so we are back in the main downtrend. Retesting 2450 is unavoidable, as there are no significant price swing lows or highs along the way in daily timeframe. Commodities are currently recovering after hitting important support levels, so there we have some writedown-recession sentiment fueling these markets. It is a typical situation, when technicals discount things before they actually happen. After reaching support in Crude and resistance in Dollar, a couple days later Poland agrees to sign a missile-shield agreement with USA and suddenly we are seeing market's concern on Georgia's situation. So far, technicals say, that WIG20 futures are going to retest 2450 area first, before the price would bounce back to its recent daily swing high. Sentiment for the Dollar did not change - 2% Fed Funds throughout September and October (highest implied probability). The only thing, that would influence people betting for recession is increasing interest for Japanese Yen (I will try to post its forward curve soon).

Intraday chart shows, that the futures have managed to rebound from 2537-42 area, after making a 1:1 measured move from 2780 highs. Now, the price is forming a rounded bottom pattern accompanied with higher volume and stalled (but rebounding) open interest. The States formed an uptrend today, which did not change its direction, so the odds for a continuation are grater than for reversal. As you can see, the price of WIG20 future has already discounted some positive sentiment, so we are probably about to enter 2575-600 area. This is the most important level now, as it has a 'pivotal' status, meaning that if the price goes either way from there, it will indicate which way is the actual short term trend going. The rules are simple now. Watch the price action inside 2575-600 area and look for particular patterns, in order to spot weakness or strength in this market. If it touches the upper band of 2600 and forms a flag just below, that would indicate, that there is potential to go further upwards. One-time retests with sharp or double tops will not forecast anything good for the bulls. My stance for tomorrow is neutral/bullish. Neutral, because we are range-bound again (between 2537-42 and 2575-600) and bullish is due to slight positive sentiment coming from the U.S.

17/08/2008

Futures analysis

The market is struggling to get above the January low near 2680. Also, price is currently between shorter term moving averages, which indicates indecision. On the other hand, two last daily candles have already found resistance at declining 10-day moving averages, which is not a good sign for the bulls. The only thing, that would work for the upside is obviously rising demand for higher yielding assets. The Dollar has changed mid term trend on rate hike speculation. According to Cleveland Fed, options indicate over 70% probability, that the Fed funds will remain at 2% (still supportive for USD). In current situation, this positive sentiment for currency has to overlap any negative catalysts related to recession or inflationary factors, if the stock markets are to move higher. As for technicals, there is little support left, except for 2600 level and January low acts as the main resistance, so it is fairly simple now. A sustained move above 2680 will increase the odds for trend change and falling below 2600 means retest of 2450.

On the intraday chart, you can see, that actual support is the area between 2575 and 2600 (little more insurance). The futures have become range-bound, just as I said in my previous analysis. January low lies in upper band of current price range (2665-90 area), so you can see how close we are to resolving this situation either way. Upcoming week will bring us monthly PPI data from the U.S. (Tuesday), along with crude oil inventories (Wednesday) and speech of Fed Chairman Ben Bernanke (Friday), which are the most significant of all potential sentiment catalysts. As for Monday only, my stance is rather bullish/neutral, because of positive close of american stock market, which ended up posting an uptrend late in the day. According to my rules, when a trend is posted before the close, it is likely to continue the next day, so WIG20 futures usually discount such action throughout trading session in advance (unless something changes overnight).