FuturesTechs Blog

Recent Candlesticks suggest Gold may be on the turn, at least temporarily, and momentum studies back up the idea. Let’s dig a bit further.

Figure 1: Gold Daily Candlestick Chart - September - November 2010

Figure 1 is a Daily Candlestick Chart for Comex Gold (all sessions). Last week we got up to a high of 1424.3 on Tuesday, but we came back to post a close at 1410.1, right on the opening price. This combination of a wide range with an open and close at more or less the same price gives us a candlestick pattern known as a “Doji”. This is a reversal pattern, as the buyers and sellers matched each other out if we take the day as a whole. We weren’t too concerned by this as we said in our daily commentary on Wednesday:

“So could that be it? Is this great run over? Not yet is the simple answer. We would want to see a few bold support levels taken out before calling it a day on such a strong move, not just one day of (albeit major) uncertainty/nerves”.

Tuesday’s low was 1382.2, a level that held firm on Wednesday and Thursday, keeping 1366, one of our “bold” supports protected. On our reports we post important support or resistance levels in bold type, hence the reference above. On Friday things started to creak, and as we were writing the reports (early on in European trade) 1382.2 was coming under fire. Here’s what we said at this time:

“If we break 1382.2 I’m going to turn my back on the bulls. If we then go on to break 1366 I’m going to turn bearish in the short term and look for a move to 1321.7″.

1382.2 broke that afternoon, and we sold off to 1359.6, ending the session at 1368.3.

Friday’s candle was large and filled/red and it’s real body totally surrounded/engulfed Thursday’s real body (the real body is the difference between the open and the close, and is “filled” (red) or “open” (green) depending on whether the market closed below it’s open, or closed above it’s open respectively.

This left us with another strong reversal pattern called a Bearish Engulfing Pattern.

It also left us with a large red candle, which prompts us to add a “Marabuzo line” to the chart, measuring from open to close on any session with a large move. This can often be a good support or (in this case) resistance level afterwards. In this instance it suggests that 1387 will cap any advances by the bulls, if indeed the bears are now in control of this market.

The old support at 1382.2 is also now a resistance level as this sort of thing often occurs.

So as long as we stay below 1387 we’re now going to look for the move to 1321.7 that we mentioned in  last Friday’s comment, and if this level fails to hold up as support we can think about a deeper setback to 1258.2, or even long term trend support, at 1231.

Many Technical Analysts look at momentum studies with names like MACD (nothing to do with Hamburgers), Stochastics, and RSI (not repetitive strain injury, although sometimes it feels like it!). I don’t weigh on these Indicators heavily, but they can do a great job of adding weight to your thinking at times (or negating it, which can be just as useful). Right now we have a down-sloping RSI, and we have had since the start of October. What this suggests is that since the start of October the upside momentum has been on the wane. We may be making new highs, but the enthusiasm isn’t there to sustain the move at these current levels. This is known as a “Bearish Divergence”.

Obviously this idea will be helped if the Dollar sees further strength. EUR/USD has moved from 1.42 to 1.36 in around 2 weeks as Europe’s problems increase. The Dollar Index is a better barometer, and is the chart below (Figure 2). This shows we are nudging up against resistance at 78.61, where we fell over on October 20th, and again found resistance on October 27th. We want to see this level taken out to encourage this one to head to the next big resistance at 80.17-80.41. This sort of move will likely see further unwinding of Dollar denominated Commodity prices, like Gold!

Figure 2: Dollar Index Daily Candlestick Chart since July.

One final thing to note about this chart is how the RSI has been going up since the middle of October, even though we recnetly made a new low. This is the opposite situation to the Gold chart, and is known as a Bullish Divergence, suggesting that higher prices are around the corner.

Our clients benefit from this sort of analysis on an ongoing basis in our Daily Reports, which cover a wide range of products. To request a free trial please click here.

We cover Bonds, Equities, Commodities and Forex.

FuturesTechs’ award winning analysis has been helping the Trading Industry for 10 years now. Our chief analyst, Clive Lambert, is the author of “Candlestick Charts” a book introducing the basics of Candlestick Charting; and their Construction, and Psychology.

Last week’s big highlight was meant to be the US Employment Report. As it turned out all the action was before this, and the numbers were a bit of a damp squib (like the topical analogy there?).

Equity markets have caught a fresh bid, and we were early to catch this as there were several reversal patterns on major indices at the start of last week. We were bullish from Wednesday onwards, so have reaped some firm rewards on the back of that timely change of sides.

Most of our readers are short term traders so they benefit from these timely “calls”. Longer term traders and Investors may be on the sidelines waiting for an opportunity to get in, and coming out of a dip or retracement is an ideal opportunity. Often, as was the case last week, our charts can tell us nice and early if it’s likely that a pullback has come to an end.

We are now looking to see if resistance at 5300 in the FTSE Index will be seen off. If this  happens the next upside target is 5650, a failure high from last August.

Gold is on another big run at the moment and has traded up to a high of $1111 as of yesterday morning. Yesterday’s candlestick (A “Shooting Star”) gave a warning that things may be getting toppy at these levels but so far we haven’t seen any downside moves to confirm this, so we’re sticking to the idea of higher prices going forward, targeting $1192 next, then $1250.

Oil is stuck in a range for now. Brent Crude has traded between $75 and $80 for weeks now. We expect this range to get broken with a move higher, and we would then target $90 and beyond. We have been suggesting to our clients to buy the dips to $75, and whatever their timeframe this has worked out well. Longer term holders would never have been offside, whereas those who trade in and out should have been able to jump out at $78 to $80 on several occasions then buy again at £75 next time it comes off.

If you are uncertain of any of the terminology used or methodologies discussed in this report you could swot up on our website. Feel free to ask for a Free Trial by clicking here.

Yours,

The FuturesTechs Team

“Candlestick Charts - An introduction to candlestick charts”, Clive Lambert’s first (maybe not last!) book has recently been released, and you can get your copy now.

Early feedback has been positive. Thank you to those who have already got their copy, and thank you to those who have offered their thoughts

To order your copy we have set up a link (Click here) via the FuturesTechs website to the Global Investor bookshop; the easiest way to get hold of the book, with a decent discount to boot! There are plenty of other titles to peruse as well, so feel free to bookmark the page once you’ve ordered!

Alternatively we are giving away signed copies of the book to new subscribers to the FuturesTechs website when you sign up for 6 or 12 months. As well as the book there are discounts offered for these extended subscription periods. Please Click here to join up and secure your signed copy!

If you are tired of listening to bottom pickers telling you that Bank and Mining Stocks are cheap, then maybe it’s time to subscribe to FuturesTechs and get some real, useful advice, without the bias attached to fundamentals. For example we’ve been very bearish of the Equity markets since Monday morning, and our readers are making money on the short side! Even prior to Monday’s technical sell signal we had been warning that the recovery trade was on a rocky footing.

We are beta testing several new additions to the website at present and will keep you posted as and when these become available.

Cheers,

Clive.

We were asked by a trader today (like we often get asked with respect to Banking Stocks) where a good place to buy Barclays would be? For those looking at this after the event let me briefly set the scene:

Barclays topped out just shy of £8 in February 2007. Last week we hit 47p, and have since bounced, failing at 117.50 yesterday (28th January). Interestingly, this was the low/bounce back in November, so we have seen an old support level turning into resistance, something us Technical Analysts always look out for, and place importance upon.

All the way down we have been asked if it is a good time to buy banks, and all the way down we’ve said “No”.

Our clients who have access to all of the media appearances and magazine articles featuring our Analysts will be well versed with our thinking, and our standard response to these sort of questions, but the reply I crafted to today’s chap caused a bit of a chuckle around the office, as well as clearly illustrating our thoughts on this question.

So I thought I’d share it with you! Here it is:

_________________________

1p is the only safe place to buy BARC!!!

Yesterday’s failure at old support at 117.50 is a clear signal that the road to higher prices is going to be a tough one in this stock.

Failing to hold £1 today is bad news, surely?!

85p-88p might act as support.

This isn’t catching a falling knife, it’s catching a falling FRIDGE.

You don’t need Technical Analysis for this sort of trade; just jump in and cross your fingers…

Casinos give you free tea/coffee/lemonade, and in Las Vegas you can even get free beer… much more fun than “trading” Barclays.

__________________________

Good luck today with whatever you decide to do, be it in the markets or down the Casino!!

Cheers,

Clive.

PS. We are currently offering significant discounts on website membership if you join for 6 or 12 months. Click here for details!

I, like many technical analysts, place quite a heavy reliance on Fibonacci levels, especially for “bigger picture” calls and direction.

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.

We are watching these markets very carefully right now as there is a confluence of events that suggest things may be changing. We don;t often start talking the funny-mentals, and we don’t often worry about relationships between markets, however close they may be. But I’m going to make an exception in this instance.

Price action in Oil is probably tantamount to the whole thing. Western economies are on the brink of recession, triggered by the Credit Crunch, but exacerbated by the soaring price of Oil. The Central Banks are meant to raise rates in response to rising inflation, but the current rise in inflation is nothing to do with people over-spending. Far from it. If Central Banks raise rates on this basis it will be disastrous.

We need Food and Energy prices to come down to take the inflationary pressure off.

So now we turn to our charts:

Just looking at the contracts we cover here at FuturesTechs we see the following:

Corn is well off it’s highs. We topped out at 799.2 in June. As I write this we’re trading 625. Pressure off.

Wheat’s all time high was set back in February. The recent high/failure was bang on a Fibonacci retracement level. So that’s going down as well.

Soybeans only topped out in early July and so far haven’t taken out any really big supports on the way back down, although price action in recent days has totally favoured the Bears.

Brent Crude Oil has dropped from a high of $147.50 on July 11th to 129.66 on Friday. We have posted a “Three Black Crows” Candlestick reversal pattern; a significant reversal. That was last Tuesday, Wednesday and Thursday (15th, 16th, 17th July). On Friday (18th July) and so far today (21st July) price action has favoured the Bears (Dolly could spoil the party, though).

So Ags are well off their highs and Oil has had a reaction lower that’s like nothing we’ve ever seen before. At the same time Bond prices are selling off hard (the “flight to quality” trade unwinding) and Equities are staging a recovery.

Most are calling this a “Dead Cat Bounce” (a rally in a Bear market that doesn’t last long!), but when you factor in everything else we’ve just highlighted you start to at least ponder this: Is the worst of the bad news over? Are we “all done” with this sell-off? One thing that favours this is the negativity of the popular press. You know things are about to turn when you can’t find a single bit of good news in the press, and I put the business pages down yesterday morning because it was putting me off my breakfast!!

We have had our web offering up and running for a few months now and we’ve been speaking with plenty of private traders of all different levels of experience. We have heard a few stories of people losing lots of money, and still not really feeling that they’re swimming above water.

Many of these people got signed up to training seminars that are advertised with lines like “make £50,000 a year for just 10 minutes work a day”. And there’s our first “tip”: Does that sound too good to be true? What do they say: “If it sounds too good to be true, it probably is!”. Come on! You’re intelligent people. Also if you see someone trading a “live” trading system, make sure it is live. And think about this: If I had a trading system that was whiz-bang nailed on money making and amazing, would I tell anyone about it?

Now consider this: There is a school of thought that 80% of traders who Spread Bet lose money. There is another school of thought that Spread Bet firms move the market to where your stop is and knock you out of trades. Are you sure? Most spread bet quotes are based on the underlying index. The spread bet firms’ highs and lows are matched to the underlying almost to the tick. So they’re not moving the market up and down to try and trigger your £2 stop. Please!

There are some very important disciplines you need to exercise before you start trading. Here are just a few that I can think of off the top of my head.

Start off small. Why give away all your money while you are learning to trade.

Understand and utilise Risk/Reward. Whenever you put a trade on make sure you’re aiming to make more money that you’re prepared to lose. If you always do this then you can lose as many time as you win, but you’ll still make money. If you try and make three times what you’re prepared to lose (known as a 3;1 Risk/Reward ratio) then you can have 7 losing trades out of 10 and STILL make money. Technical Analysis is the best tool for working out when you are putting on a trade with favourable Risk/Reward.

Never bat against a strong trend. Why do people feel the need to try and buy something that’s falling like a stone, or sell something because it’s really strong? This is one of the biggest mistakes new traders make. Don’t try and trade against a strong trend. We look for Candlestick patterns to suggest trend changes, then wait for confirmation. We saw a Hammer on the FTSE Futures chart last Wednesday, but it wasn’t until Friday that we started believing there was more upside to come. Even now we’re not getting too carried away, and have reasonable upside targets, because the Bears could wake up at any minute.

We are currently looking for the recent pullback in Oil to do a bit more. But we’ll soon change our minds if the positive candles start to appear, and the smart money will be made by getting long once this happens and riding it back to $147.

Find one thing to trade (at a time) and learn it’s personality. Different markets behave in different ways, and you may need to spend the early months discovering a market that suits you. You will all have different approaches to risk, volatility and the like. You will also have to skew the type of product you’re looking for towards how much time you can devote to it. I would suggest that something like the DAX Future or the S&P 500 would require a lot of attention, whereas something slightly less volatile may suit those who don’t have time to watch it’s every move. Yuo may need to try a few different things before you find something that appears to work for you.

Be well capitalised, and don’t risk it all on one trade. There is no point trying to turn £200 into £2000. You have a much better chance of turning £2000 into £20000. With £200 in your account you run a good chance of doing your dough in the first few trades. Many firms offer a dummy account or a “training account”. Good idea. Take advantage. Press buttons. Make mistakes. Then start risking your own money once you’ve got a few of these mistakes under your belt. Once you do start trading don’t risk all your capital on one trade. This isn’t the Casino where you get your pile of chips and stick it all on red because you fancy a Gin and Tonic. This is a business (well it could be if you take it seriously).

Manage your emotions. Trading can be an emotional business, and you need to make sure you can manage or control this, otherwise you will make decisions with your heart and not your head. Many professional traders spend lots of time making sure they’re in the right frame of mind to trade. A good way of doing this is by putting together a plan at the start of each day; collating your ideas. Then you have something to refer to. You can “keep it sensible” and not allow yourself to start making baseless emotionally-driven decisions.

This is just a few thoughts that may help you along the way. I’m sure future blog posts will expand on this theme as I think it’s extremely important.

I’ll sign off with one more thought, which kind of follows on from the previous point: Have a strategy. If you’re trading is based on “I bought it ‘cos I thought it was going up” then you shouldn’t be trading. Again this is where Technical Analysis can serve a trade so well. It gives then something to reference off in the decision making process. This is what Futurestechs does for many professional traders, and what we hope to become for many more of you; a useful reference point and a good building block towards a successful trading career.