The vast majority of professional day traders use technical analysis in some way shape or form during their trading day. They are aware what the important technical levels are for the markets that they trade. some do this work themselves, some rely upon services like FuturesTechs, knowing that we’ve got an 8 year track record of providing this information to the bulk of the UK Pro trading community.

Many newbies to trading struggle with how to “structure” a trade. Hopefully we’ll shed some light on this with today’s blog post.

It’s all about the levels, and that’s what we do here at FuturesTechs each day: We look at the levels that the market may be looking at, where things may change, where the buyers may return after a sell-off, where the sellers may wake up if the market starts to rise. These are commonly known as support and resistance.

Support is the name given to downside levels; prices below here the buyers may have returned previously, or where they may return today. If we fail to hold support levels the bears are obviously dominating; not giving the buyers the chance to defend these key price levels.

Resistance is the name given to price levels above the market where there may be some”action”. Either we’re going to get to these levels and fall over, or the market should see a strong reaction if we break above them.

These levels are quite often something as simple as old highs and lows, however old they are. We have found markets reacting to levels from over 20 years ago. The market has a long memory, and with charts readily available to all and sundry there’s no excuse not to be armed with the important lines in the sand as you head into each trading day.

The best traders in the world react to a bunch of different things to put on their trades: They wait patiently for a piece of news to come out, or for a technical level to break or hold, or for the market to do a certain thing that they’ve been expecting. They wait patiently. Lots of money can be lost doing trades for the sake of it. Boredom or the need to be involved is a dangerous emotion that a trader has to deal with.

There is little point in trading in between technical levels. The levels are created because they are the prices where things changed previously. They are the “action areas”. Why mess around trying to put trades on in “no mans land”? If you want to buy the market, chose a support level and put your buy order at or above there.

If you need somewhere to put a stop order you can again use a technical level.

Here’s an example: We were bearish of the Eurostoxx 50 Futures today despite Friday’s gains. We had a bold resistance level at 2704. Our bold levels are the important ones. So if we’re bearish and the market rallies to a bold resistance we would suggest selling before the level with a stop above it. The high this morning was 2698….

If you had sold at 2690 with a stop ay 2710 (or our next resistance level at 2728, if you want to give it a bit more “breathing space”) you would have got short and never been far offside.

On the same report we have bold supports at 2640 (the overnight gap) then right down at 2467 and 2418.

So this is the bit that isn’t “harry hindsdight”, just in case you want to jump on the idea that I’m writing this after the event: I will look to cover the short trade at 2470, but if we hold 2640 today I would just get out and cover the trade for either a small profit or at worse nothing. I think we need to break 2640 today to give this trade credibility. In other words we are using another bold level (this time a support) to add weight to our trade. If we don’t break below 2640 then maybe the bears aren’t ready to push us lower just now.

IT’S ALL ABOUT THE LEVELS.

So If you’re just starting out trading, whether it be with a Spread bet account, or CFD’s, or DMA (Direct market access) I would urge you to make technical analysis part of your daily process, AND TO TRADE THE LEVELS.

Be Careful!

Here’s something else: The market will only bottom out once all of these people STOP calling it. When the towel is thrown in by the majority, and most commentators start talking about doom and gloom downside targets, is when we’ll get a bottom. Maybe that’s why Hugh Hendry was given an entire hour on Channel 4 last night to pick over the wreckage of the sub-prime crisis. It was a great bit of TV and you can’t but love the man!

As per last week’s Blog on the sentiment cycle, the bottom will most likely come when people give up trying to call it, and when the market resigns itself to a future of pain and misery. So we’re probably not quite there yet…

I looked back at our analysis in 2003 and saw that we were around 400 points off the low before we called started saying bullish things.

The DAX is certainly well off the lows over the past two sessions, on the back of the world’s most spectacular short squeeze. VW shares jumped from 200 Euros to 1000 Euros in two days. I don’t even want to start to explain the ins and outs so here’s a link to the story on Bloomberg’s website.

http://www.bloomberg.com/apps/news?pid=20601085&sid=aWeWGIPhKfnk&refer=europe

The upshot is that Volkswagen has now become the world’s largest company by market cap on the back of a short squeeze. This story will only get bigger (although I don’t think VW’s market cap will!) and we’re bound to hear some fallout in coming days or weeks.

One wry (and somewhat tongue in cheek) observation on this shenanigans: We won’t see a financial stock reacting higher like this in the coming months, because the shorts have been banned…

Finally, In my spare moments right now I am doing something that I force myself to do once a year: I am re-reading “Reminiscences of a Stock Operator” by Edwin Lefevre. THE BEST BOOK EVER ABOUT THE MARKETS. i only got to chapter 1 when I read this quote:

“Another lesson I learned early is that there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market to-day has happened before and will happen again”.

Say no more…

As always my best advice if you’re trading these markets is “stay safe”.

Cheers,

Clive.

Cheers,

Clive.

______________________________________

Earlier this year I completed my Society of Technical Analysts (STA) diploma and one of the first aspects introduced to me was the idea of Market Sentiment and in particular the Sentiment Cycle, a theory developed by Justin Mamis (author of The Nature of Risk, Stock Market Survival and The Meaning of life).

Someone once said to me, “The Market is a mechanism for messing as many people about as it can, as often as possible”. Sounds a bit cynical, but I believe a firm knowledge of the sentiment cycle and an understanding of where we are within the cycle could help us guard against being messed about and give us a clue as to where we’re heading (like a ‘roadmap’)

This prompted me to have a look at a historical chart for the FTSE, to try and glean where we’re at, and if this could give me an indication as to what the future has in store for UK stock markets.

Justin Mamis sums up nicely what the Sentiment Cycle represents “What we have is essentially a graphical representation of the manic depressive moods typically experienced by market participants as a function of time and price in one complete sentiment loop.”

See the chart below, taken from Mamis’ “The Nature of Risk” book.

Before we go any further, let’s take a quick glance at the different phases and the market psychology behind them.

Returning Confidence

By the time confidence is fully restored the markets have been rallying for some time. They start to get choppy and retracement moves get consecutively more fierce, each one more intimidating than the last.

Buying the Dip (the big dip)

A huge pullback now gets underway, even larger than the scary one you may have witnessed last month or so. After such a dynamic bull run, investors are willing to take on a phenomenal amount of risk and the smart money buys the big dip. Also, money is still flooding in from the general public, who likely read in The Sun that stock markets will remain strong for all eternity.

Enthusiasm

At this stage all economic data still supports the idea of higher prices. Traders that didn’t get involved in the last dip-buying opportunity now have hard evidence that it worked before. All of the traders that wanted to be long, are long (there are no more buyers), causing prices to decelerate. Distribution starts to take place, i.e. stock transfers hands, from smart money to stupid money…. Strong to weak.

Disbelief

Traders start to get that gut wrenching feeling that something may be changing but the fundamentals still don’t back this up, and people cling onto hope alone. Analysts start to get subtle warnings. Maybe previous market leaders start to break below important support levels or Moving Averages.

Overt Warning/Panic

Typically there’d be a catalyst here (i.e. big banks like Lehman brothers start to file for bankruptcy… sound familiar?). The index will break below a previous reaction low or maybe the 200 day Moving Average. News readers will be telling the world that the fun is now over. Intelligent investors start to sell rallies, giving stock prices little/no chance of any recovery.

Discouragement and Aversion

Prices have been rattling off for some time now, as the general public start shedding stock and the short sellers are stronger than ever. There’s no good economic news flow and everyone thinks that stock markets will go down forever.

Wall of Worry

Certain market sectors will now start to bottom out as everyone that wanted to sell has done so. The smart money now starts to move in slowly, resulting in the market pausing for breath or drifting along sideways for a few months. There are no sellers left, so despite the bad news flow markets start to creep higher. Short sellers start to cover their positions, adding fuel to the fire.

Aversion to Denial

Markets start to trend upwards. Short sellers start to get concerned that sentiment has changed. With no sellers above the market, these sorts of moves can be fast and sharp and tend to leave people behind.

This brings us back to ‘Returning Confidence’.

So where are we now?

Below is a weekly chart of the FTSE Futures (Dec’08). I have labelled the chart accordingly with respect to the different phases.

So the chart is suggesting that we’re in ‘panic mode’ just now approaching the “discouragement” phase.

What does this mean for the UK stock market?

Well, it means that the pain is not yet over, and that we’ll make another new low before a bottom is in place.

This would be followed by a sideways period and a slow grind higher, before we can start to truly think Bullish thoughts once again.

Let’s see how it all pans out. In the meantime one thing this does suggest to us is that there’s light at the end of the tunnel in the long-term, but in the short-term as we said all along, this is not the time to be picking a bottom.

Bradley Jordan.

]]> http://www.futurestechs.co.uk/blog/2008/10/17/the-sentiment-cycle-an-interesting-perspective-from-bradley-jordan/feed/ http://www.futurestechs.co.uk/blog/2008/09/30/dow-down-777-unprecedented-markets/ http://www.futurestechs.co.uk/blog/2008/09/30/dow-down-777-unprecedented-markets/#comments Tue, 30 Sep 2008 12:15:58 +0000 Clive http://www.futurestechs.co.uk/blog/?p=46 Apologies for not posting any Blogs of late. The current market conditions have made for a busy time at FuturesTechs towers!

I’ve said a few things on today’s reports that don’t usually appear in our comments. Things like this from the Bund report:

Data Explorers is a fine company that I came across a few years back thanks to an introduction from a good friend of mine in the Stock Loan industry. In simple terms they track percentage of stock that is “on loan”, which gives an indication of the amount of shorting happening in any particular stock. They do a lovely job of collating all the data from the various firms who are involved in this industry, then redistributing it to give everyone a “bigger picture” view (this info doesn’t come cheap, mind!).

Their figures show that there wasn’t any extraordinary shorting going on in many financial stocks in recent weeks, and therefore the banning of short selling is probably a complete waste of time, and is a knee jerk reaction to uninformed people’s ranting on about city fat cats.

Now let’s look at the share prices of our high street banks. Let’s pluck RBS out of the air as an example. The ban on short selling, designed to stop large downward movement in the share price, was announced last Friday morning, and RBS traded up to a high of 263. Where is it now, without the evil fat cats able to short it? 164 is the answer. So has it helped? You be the judge.

Also now bear (no pun intended) this in mind: Today the market has recovered some of yesterday’s drubbing after a bad start. FTSE Futures are up 233 points from last night’s late close as I write this at 12.30 on September 30th. This sort of recovery sometimes has shorts running for cover, and their buying can exacerbate the up-move, except the shorts have been banned from their trading activities, so they haven’t got anything to cover, and it could be argued that this has created a false market that’s actually stopping or at least stalling the recovery, by taking out an entire potential stream of buyers “on the bounce”…

What a mess we’ve got oursleves into…

And now for something I said in my Dow report today, and I quote:

Why have I started today’s blog posting along this line? Because it’s the beginning of September, and we’ve just come out of a tough month. August can often be a tough month for traders, as I suggest in the “PS” from my last blog posting. The other reason I’m talking about this is because we’ve lost a few of our newer “individual” customers this month (which is unusual), and the main theme seems to be that they have lost money in August.

Why is August such a tough month? Because half the market participants go on holiday, and the lack of volume can wreak havoc. There are two very different conditions that can ensue:

The market can suddenly become extremely volatile, with moves making little sense. Moves also tend not to last too long, which can be a real problem for analysts like us and traders like you, who rely on sustainable trends unfolding.

Or the market can just go very very quiet and crab sideways with very little interest shown either way. Again this is problematical for many traders, as there are no big moves to get on.

We find it frustrating to talk about these sort of markets as we feel people don’t want to hear “the market not really going anywhere”. But if that’s what’s happening, then that’s what’s happening! This introduces a use for the FuturesTechs service that I’m not sure our newer customers are fully utilising. We will do our best to get you on the right trends at the right time and keep you in a solid move by sticking with the trend, but if things become messy and confused then we will tell you, and if you’re looking for a solid trend it’s time to step away from the screen. Either look at a different market, or catch up with that pile of paperwork that you’ve been meaning to deal with.

The best traders in the world abide by one word more than anything; and I’ve already mentioned it once today: DISCIPLINE. One very important discipline is to make sure you don’t over-trade, you don’t trade because you’re bored, you don’t trade because you need to make X amount by the end of the month. If there’s no clear trend then you are only going to give your money to the market, and there’s plenty of willing takers of your hard earned lolly.

So always be aware of market conditions, and on this note be aware that we are now entering a very interesting period of the year. The run it to Christmas is usually a time when there are strong moves in the market. Between now and November I’m sure we’ll identify plenty of big moves that can be jumped upon and provide profitable trading opportunities.

We may already have the first of these, with Oil selling off through key support (around $110 in Brent Crude) first thing this morning, and Gold Futures failing at key resistance (850) towards the end of last week.

We’ve been in these markets for years, and been analysing them for professional traders since 2000. We’re giving you the chance to share this wisdom on a daily basis, for just 50 quid a month. Can you afford to pass up this opportunity? Do you want to make money trading, or become another one of the 80% who fail?

You decide.

www.futurestechs.co.uk/subscribe/

Cheers,

Clive.

Does anyone think this (whatever it is) is going down any time soon?

Hopefully we’re all thinking the same thing: That it looks very much like something that’s got a bright future, something that’s going up in the world. There doesn’t seem to be too much evidence that it is topping out, would you agree? In fact if this was a stock and you owned it you’d probably be more than happy to hold onto it, yes? And if you felt the market was going to head lower and you wanted to find a short trade to put on you probably wouldn’t chose something as strong as this, agreed?

It was Charles Dow almost 100 years ago who suggested we can define an uptrend as a series of higher highs and higher lows. In contrast a downtrend is defined as lower highs and lower lows, which brings me on to the next chart.

As you can see this is a chart for Royal Bank of Scotland between October 2006 and the present (August 2008 in case you’re reading this in retrospect). Now I’d like to point out straight away that I could have chosen any number of bank stocks from any number of countries for the purpose of posting this blog. I used RBOS because I’ve got a couple of mates who work there and I’ve got a sadistic streak. Sorry fellas.

Because I think it’s fair to say this chart is quite a bit different to our first chart, wouldn’t you say?

Well the eagle eyed amongst you may actually have noticed that it is actually THE SAME CHART, but “flipped”. We have effectively put a mirror below the real chart to create our “mystery chart”. So the mystery chart is RBOS with 7 quid at the bottom and £1.50 at the top.

Now think about the paragraph above, and think about your reactions when you read it. I would imagine it was something like this:

“… it looks very much like something that’s got a bright future (I agree!), something that’s going up in the world (yes indeed). There doesn’t seem to be too much evidence that it is topping out (too right, it’s a stonker!) , would you agree? (yes) In fact if this was a stock and you owned it you’d probably be more than happy to hold onto it, yes? (yes please, love it!!). And if you felt the market was going to head lower and you wanted to find a short trade to put on you probably wouldn’t chose something as strong as this, agreed? (agreed, let’s short something else, surely).

Which brings us to the title of this Blog: “The most common question of 2008″. Which is, of course “Should I buy Bank Stocks?”. I reckon you just answered your own question!!

NOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO!!!

If you want to gamble go to a casino. If you want to play the stock market or make money spread betting follow some simple rules and don’t just put on stupid high risk trades. I’m sick of being asked this question. It’s a joke. It’s simple: Don’t buy things that are still going down.

Let the pros tell you when to buy, ie let the market tell you when enough professional buying has happened in a Stock that it is now in an uptrend.

If you “flip” the chart and there’s no way in the world you would SELL our mystery chart, then what the heck are you doing even thinking about BUYING it when we put it the right way round?

The point I’m making isn’t that Bank stocks haven’t bottomed out. They might have done, but there isn’t enough weight of evidence yet. It’s a dangerous trade, and there’s no need to rush in. These stocks could go sideways for years now, or even keep heading lower, after all we haven’t broken our series of lower highs and lower lows yet, have we?!

Can I finish by saying that we have the chappies at Updata to thank for making “flip” a standard part of many charting systems these days. I’m pretty certain it wasn’t until they started to expound exactly what I’ve done above.

Cheers,

Clive.

PS. August is turning out to be a bit of a damp squib in Equity markets so far, and the best advice I can give is to suggest you don’t get too carried away if you’re trading Equity Indices like the Dow and the FTSE. The market has a habit of taking money off of you in quiet periods. There could be some really solid trends to trade between now and the end of the year. Don’t take yourself out of the game trading during low volume quiet periods like now.

http://www.cnbc.com/id/15840232?video=820121614

To summarise I said that 850 is a MASSIVE support level, and that the weakness to here is a buying opportunity, although if 850 breaks you don’t want to be long, and a “stop and reverse” (see below) strategy might be advisable.

We get “proper” confirmation of a bounce happening if resistance levels like 872.6 and 900 are retaken.

In Brent Crude Oil I mooted the idea that we might be due a bounce some time soon as we’re getting close to some important supports.

And in the Bund Futures I talked about a Double Bottom formation which gave us a buy signal last week.

I steered clear of talking about Equity markets because the short term outlook is a tad confusing, and we haven’t had the best of time calling these of late, if the truth be known.

“Stop and Reverse” is where you have a position and you get out of it with a stop order, but at the same time you do the same trade to create an opposite position.

For example say you were long five lots of Gold at 870 with a stop order at 845, that means you want to get out and take the loss on your trade if the market goes down as far as 845. A stop order is defined as a market order that’s triggered if your loss reaches a certain level or price. You should always have a stop order on any trade that you put on, and technical levels can be the best way of deciding where to place these orders.

Many people place their stop orders below important support levels (like 850 in Gold) and sometimes, if you think the move below this key level is going to trigger a wave of selling, you may want to initiate a short position at the same time. If you put in an order to sell 10 lots at 845, to continue using our example, you would take the loss on your 5 lot long, then create a 5 lot short position at 845. If the market then went to 775, as we expect, you will offset the 25 point loss on the original buy order with a 70 point gain on the short trade.

Have a good week.

Cheers,

Clive.

So what’s it all about? FuturesTechs members have a couple of articles I wrote a few years back that they can access in our Members’ area that explain things (I hope) quite well.

Take a look at the number sequence below:

1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144.

The eagle eyed amongst you would have spotted how this sequence (called the Golden Sequence) comes about:

1+1 = 2

1+2 = 3

2+3 = 5

3+5 = 8

etc etc

Now divide the numbers in the sequence by the number preceding it. You will find that it comes out at a constant 1.618. This is known in mathematics as “Phi” (with a big “P”).

Now divide 1 by 1.618. What do you get ? 0.618.

Some pretty amazing symmetry, eh?! This number is called “phi” (with a small “p”).

Now look at your body. You have 5 fingers with 3 bendy bits on the end of your arms, that also have three bendy bits, that are stuck to your body that has 5 things sticking out of it (arms, legs and head just in case!!). All numbers in the Golden Sequence. There are plenty of occurrences in Nature as well (see the aforementioned articles in our Members area for more).

The most common usage of Fibonacci numbers in the financial markets is when things are retracing a big move, and this is what I thought I’d talk about today, because we’ve just busted through one such level in the Bund Futures.

You see between March 17th and June 19th this year (2008 in case you are reading this in years to come!) the Bund has sold off from 118.51 to 109.65 (using the adjusted continuation charts that we favour for Bond contracts). The market then started to rally, and once this got going we started to target 113.03, because at this level the market would have taken back 38.2% (100-61.8, in case you’re wondering!) of the weakness. This is the first big Fibonacci retracement line. On July 15th we got to a high of 112.88, so just 15 ticks away from our Fibonacci level, and the market promptly fell over. We posted a Shooting Star on that day , a strong reversal pattern in Candlestick analysis (highlighted on the chart below, which you can click on to enlarge). We sold off after this and within a week or so we were back testing the lows from mid June.

The rally that we’ve seen since July 23rd has seen us back testing this key 113.03 level once more, and today we’ve broken above here, on Trichet, and we’ve posted a strong reaction higher to boot.

The way we work here is to look for the 50% and 61.8% retracements as the next targets above once the 38.2% retrace is out of the way, so in the Bund our targets are now 114.08 then 115.13.

Finally I’ve been on the box again, so if you fancy listening to me blabbing on about Brent Crude and the Bund Futures then Click here.

What are they? A large bodied candlestick on a Daily chart is the result of a big one way push over the course of a day. In the example of large red real bodies the market often wakes up the next day sure in the knowledge that yesterday’s bout of selling should be good enough to guarantee further losses today. But sometimes things feel a bit overdone and there can be a reaction higher the next day. The big question then is whether this is a short term gains that deserves to be sold into, or if the market is going to continue to rally and take back the losses of the previous day?

The Marabuzo line is the halfway point of the real body (ie halfway between the open and close) of any large bodied candlestick, and we’ve found them to be excellent reference levels in the days after this “big event” Candles.

This week’s ICE Brent Crude Oil Chart is no exception. Last Thursday we saw a big down day.

The Marabuzo line of this session’s Candlestick was 133.78.

The high last Friday was 133.69

The high on Monday was 133.57

The high on Tuesday was 133.75.

Close enough?!

Tuesday turned out to be a pretty Bearish day, as was Wednesday. The Marabuzo line of Wednesday’s big red candle was 127.36, and Thursday’s high/failure was 127.25. Close enough?!

Which prompted our Brent Comment today, as per below. You can click on the image to see it in full size.

All very interesting, I’m sure you’ll agree.

Have a good weekend, and be sure to subscribe to our members area so you don’t miss out on these sort of calls. Click here.

Come on Essex in the Twenty20 tomorrow! And a Happy Birthday to my old mate Mickey. How old?! OUCH!!!