FuturesTechs Blog

2012 has started well for equity investors as January has seen gains across the board. A standout performer is the Dax which has gained 10.9% YTD as of the close on the 26^th January. Mainstream financial media would have you believe that the ESM, EFSF, ECB’s SMP, QE 1 and 2 (3? around the corner) and various other three letter acronyms (TLAs) created by the establishment have rescued capitalism and the financial system from sure disaster. Undoubtedly an exceptional amount of liquidity has been made available to financial markets and as a result asset classes have been boosted, but as a Technical Analyst there are signs that particular markets may be due for a pause.

Yesterdays blog post included the FTSE Index approaching a significant Fibonacci retracement and testing a trend resistance line as shown below (Click on the picture to enlarge it)

Today we highlight a similar situation in the DAX (Click on picture to enlarge it)

The chart shown is the Dax Future and highlights the recent rally approaching resistance. An old trend line which has proven both resistance and support, and the 61.8% Fibonacci Retracement level of the July ’11 to September ’11 bear move are both being tested during this weeks price action.

The Dax has a particular relationship with the 61.8% retracement and often provides critical points of consolidation and often reversals. In September ’11 the Dax consolidated around the 61.8% retracement of the 2009 -2011 bull market and whilst the popular press and general consensus continued to call for lower prices the Technicals indicated a reversal was due, which I highlighted vehemently in our reports and in a special webcast. Another worrying sign is the lack of volume attributable to the gains seen so far this year suggesting the weight of ‘Real Money’ is unwilling to partake in higher prices, making them less sustainable.

So while the general consensus is for higher prices supported by unlimited liquidity from Central Banks worldwide, the Technical Outlook suggests the bigger picture Risk/Reward doesn’t favour the bulls.

Please navigate to the relevent buttons above to request a Free Trial of our reports, which cover all the major Equity Indices as well as Bonds, Commodities and Forex.

Liam Roberts MSTA

One of our services offered to clients is providing trade recommendations in UK equities. After taking a step back from the market last July – October when Risk Reward opportunities weren’t viable given the intraday volatility, our service has resumed and run consistently since December. Capitalising on the year end rally and move so far this year recent recommendations report solid returns. (For a spreadheet of our Trade Recs please contact us)

Our current outlook for the FTSE itself remains bullish in line with the recent trend higher although a lack of volume is worrying as we approach significant resistance as shown by the FTSE chart below.

As such, the Risk Reward for further upside in the FTSE isn’t particularly favourable so our recent recommendations have focused on short opportunities. Obviously such action is risky given the trend of the market which is why we’ve looked into stocks that have recently released fundamental news and reacted with a large increase in volume. Two such instances are Tullow Oil and Morrisons Supermarkets.

Tullow Oil has been trading within a broad sideways consolidation since September but continues to fail around 1470. After releasing an update the stock gapped lower to post an ‘Abandoned Baby’ candlestick reversal. Additionally a failure at the underside of a broken up trend line has provided an opportunity for a short trade running a stop above the recent gap lower.

Morrisons Supermarkets posted a massive reversal candle at the start of the year and hasn’t looked back since. After selling off significantly Morrisons lost further ground and gapped lower following comments from rival Tesco. A counter trend rally has returned to the 38.2% retracement and a break above short term swing highs at 298 was rejected yesterday to post a Bearish Engulfing Candle on good volume. Trade below yesterdays low begins to confirm the Bearish Engulfing candle providing an entry for a short trade whilst running a stop above the Gap.

Both these trades have been sent to our clients and although against the trend of the market their relative underperformance, fundamental news flow, and increased volume increases the probability of the trade. This is why stock selection is key.

Liam Roberts MSTA

We appear to have piqued the interest of a few of you this week by adding the Market Profile charts to our reports. Market Profile is a charting method owned and copyrighted by the CME Group and developed in the 1980s by a chap called Peter Steidlmayer.

Steidlmayer was a trader in the Grains Pits and realised that the market was an ordered “auction” process made up of a number of different players, all of whom had various levels of interest in the short or long term direction of the market. The “Locals” like himself weren’t too bothered by long term moves and merely traded “in and out” over the course of the day. It was the “Commercials” or long term players such as Banks, Funds and (in the case of commodities) End Users, who had an interest in moving markets, and keeping these moves going in their favour!

Market Profile attempts to track this auction process on a daily basis to discover which group is running the market at any moment, and therefore whether price moves are likely to be sustained or reacted against with opposite trade. It is a popular tool with day traders in Chicago, and increasingly well utilised by London’s Prop trading community.

We have long used Market Profile as an additional tool to our daily, weekly and intra-day Candlestick analysis, but have steered away from talking about it for the sake of keeping the reports simple.

Now let’s look at a Profile and some of the terminology:

The Profile (see the graphic below) is made up of a series of letters, each letter representing a half an hour period over the course of the day. Instead of spreading across the chart from left to right like a traditional (30 minute) Bar or Candle chart the letters, known as “TPOs” are pushed as far to the left hand side as they will go, and this produces a distribution curve, effectively showing what price most trade has gone through at.

The longest line of letters closest to the centre of the day’s range is known as the “Point of Control” (D on the chart below) and is, effectively, the “mean” average price, sometimes known as the volume node.

If you move 1 standard deviation either side of this price you get the “Value Area”, so we’re not just talking about a price at that the market gravitated towards, but a “comfort zone” for price. Traders watch the previous day’s value area extremes (C and E on the chart below) carefully and this is one of the reasons we are now going to post the previous day’s Market Profile in our reports.

This means there are three more levels (on top of the previous day’s high, low and close) that active day traders will watch out for.

Another thing to watch for on Profile charts is occurrences of “Single Prints”. The chart below shows a “Single Print vacuum” in yesterday’s “K” period, when the market spiked higher and sustained the bid. This gave us support at 111.58 today in the Feb ‘12 Brent Crude, and as it turned out we spent very little time below here before rallying smartly.

The market tried unsuccessfully to “raid” yesterday’s Value Area, but this was rejected and we “accepted” the new higher valuation.

We did write a Blog about this a few years back. Here is the link:  

http://www.futurestechs.co.uk/blog/2010/01/06/technical-analysis-tutorial-market-profile-1/

We will also expand upon our interpretation of the Market Profile in our daily reports from now on, as we have the charts to illustrate what the heck we’re on about!

In the meantime please do drop us an e-mail if you have any questions (if you’re a client, of course!!).