FuturesTechs Blog

Below are some “general thoughts” on the FTSE that I sent out to our “Pro” client base this morning:

I was sticking with the trend until yesterday, and looking for levels like 5400 in FTSE Futures and 1127 in the S&P Futures to hold firm. Alas they didn’t.

Obama changed all that.

At the same time as being bullish at the start of this year, I have mentioned to many of you that I’m looking for a pullback some time this year that will take us back to somewhere like 4750 or even 4250.

Is this it? Let’s look at the last two sell offs; the 23^rd October – 3^rd November move, and the 23^rd-27^th November sell off. The first of these shed 317 points on the Futures, the latter 299.

So far from high to low this time we’ve lost 314 points - very similar, suggesting we could be in dip buying territory.

We won’t need to wait long to find out, and for now I would be getting defensively positioned because the risk of a swift move is with the bears. In the coming sessions we will likely either grind higher (and the bear threat alert will lessen considerably once 5341 is retaken) or we will sell off through 5245 which will make this move bigger than anything we’ve seen so far, and therefore “the real deal”…

If you came to see us at the World Money Show the other week then this is the moment you’ve been waiting for!

We are pleased to announce the winner of our “Witch Way for the FTSE” competition is Lukhvinder Binning, who guessed at 5143. Well done Sir!

Special mention really should go to O Y Tsang who plumbed for 5142, you will receive a copy of Clive’s book along with 9 others who were there or there abouts. It could not have been closer, so well done to all of you, especially considering how bearish things were looking on the Friday afternoon of the show!

Winners will be contacted over the coming days as we need your address to send you your prize!

We hope you will all take advantage of the free trial of our service, and realise the benefit of using Technical Analysis like ours as part of your daily trading routine.

Have a good week.

One of the premises of tecnical analysis is that price patterns tend to repeat themselves. But what are these patterns? Today, we’re going to lookat reversal patterns, i.e. where a change of trend is indicated.

Perhaps the most famous of these is the Head and Shoulders pattern.

Here is the Dow weekly candlestick chart, showing how this topped out in 2007.

The general picture behind the Head and Shoulders is as follows: we start off with an uptrend, which proceeds as normal creating higher highs and higher lows.

The initial warning sign is a failure to create a higher high. This is the top of the “Right Shoulder” on the above chart.

Our technique then is to connect the two most recent lows. This isn’t a proper trendline (which should really connect three points) but instead is the “Neckline” of what is still only a potential Head and Shoulders pattern.

The Head and Shoulders pattern is completed by the break through the Neckline. Sometimes, the bulls will have a go at recapturing it, just as they did in the case of the Dow. What really strengthens the bear story, and is something you can look for, is if the broken Neckline then turns resistance. This happened with the Dow, making this a textbook case of the Head and Shoulders pattern.

Note that the Neckline was broken briefly on the retest; the danger of getting a false signal in this way is limited by placing certain conditions on what sort of a break is required. For example, demanding two consecutive closes above the Neckline (the “Two Day Rule”) would have prevented us from getting whipsawed by thinking that the Head and Shoulders pattern was being negated.

The above chart shows the standard method for constructing measuring targets with the Head and Shoulders pattern. Find the height of the head and then target that distance below the Neckline, measuring from where it broke (so we would target the red horizantal line in the above case).

The Inverse Head and Shoulders is based on the same idea, reversing a downtrend. Here’s Light Sweet Crude Oil changing direction in this way in 2007. Observe the broken Neckline providing support twice:

Now let’s look at Double Tops and Double Bottoms. The Double Top is formed when, in an uptrend, we run into resistance twice at the same level. We then fall through the intermediate low, completing the pattern and providing a sell signal. The broken Neckline can turn resistance, as it did with the DAX futures between 2007 and 2008; see the weekly candles chart below

Here’s an example of a Double Bottom, this time on a bar chart. It’s Vodafone at the bottom of the bear market in 2009, finding support at the same level twice, then beating the intermediate high and continuing the move.

In this case, our measuring target would be similarly calculated as with the Head and Shoulders patterns, i.e. the height of the pattern projected from the breakdown point. In this case, it’s 123.60 plus 12.40, i.e. 136.00.

Here’s an example of a Spike, or V-Reversal.

The Spike is really just the name for a market which reverses direction without giving any proper clue in tertms of hte preceding pattern that this was likely. This is the market turning “on a dime”, and the most difficult to trade.

The only clue at the top of the above chart that Wheat was turning was the “Harami Cross” candlestick pattern at the top (that’s the Doji contained within the range of the long green candle). When a Spike happens, our only recourse is to short-term signals such as candlesticks.

Finally, here’s a Saucer Bottom in Corn futures (the Saucer Top is the equivalent reversal of an uptrend). This is the opposite to the Spike, the price very gradually changing direction.

As technicians we much prefer to see a Saucer Bottom or Top than a V Reversal, with the slow move giving us lots of time to change skew.

Volume

One thing we haven’t mentioned much so far in this article is the role of volume in all of these patterns. Volume - the level of trading activity taking place over any period - is an essential component of technical analysis and an important part of pattern recognition.

The general principle is that volume accompanies movements with the trend. In terms of trend reversals, then, we should see the volume faltering during those final movements with the old trend, and eventually picking up as the new trend takes over.

In the case of the Head and Shoulders pattern, for example, volume should be weakest during the Third Shoulder, as enthusiasm for the dying bull market begins to evaporate.

A distinction can be made here between tops and bottoms. It is generally recognised that volume is not so important for tops as it for bottoms: at tops, market can “fall of their own weight” with buyers simply failing to show up, and volume not increasing.

Bottoms, on the other hand, generally involve mass participation, with active buyer enthusiasm being the main driving force behind the move.

Variations

There are several variations on the patterns mentioned here, in particular the Complex Head and Shoulders, the Triple Top and Triple Bottom. The Triple Top and Triple Bottom are fairly self-explanatory, while the Complex Head and Shoulders generally involves multiple shoulders on one or both sides of the Head.

The principles of volume analysis and the measuring techniques for these patterns are much the same as for the patterns already described here.

Conclusion

These patterns, without being infallible, help us to map out major changes in trend. They are generally medium and long-term patterns, with their significance and measuring targets in proportion to their size.

We incorporate these patterns into our daily analysis of the futures and FX markets. If you would like to sign up for a trial of our services, click here. For a free trial, click here.

Graham Neary MSTA (graham@futurestechs.co.uk)

Whether you are Spread Betting, trading CFD’s, or trading DMA Futures, you need an edge.

Trading is tough, and managing your emotions is one of the toughest things you will have to learn in order to make a success of trading for a living.

The human brain is wired up all wrong for trading, in fact.

By nature we will take a profit too early (GREED kicks in and we snaffle up the winnings on the table), whereas if a trade goes into the red we won’t get out. Instead we’ll start to cross our fingers and hope that it comes back. As the trade goes further into the red pride gets in the way even more, and we allow the situation to get even worse. We FEAR booking a loss, and seeing that loss crystallise on our account, so we sit tight even more (or even worse we add to the losing position), waiting for it to come back (actually HOPING it will come back), except it probably won’t.

“The first cut is the cheapest” is a phrase commonly used by Professional Traders. When I go into my professional clients’ trading rooms I see stickers on traders’ screens with phrases like “get out of bad trades” and “run the winners”.

To become a successful trader you need to rewire your brain almost, and teach yourself to have the DISCIPLINE to get out of bad trades early on, and run the good trades as long as possible.

How can you do this? By using the charts.

You can use Technical Analysis to:

• Trade in the direction of the trend.
• Look for buying or selling opportunities
• Set clear targets and stops, preferably with a decent risk/reward (ie put on trades knowing where you’re going to get out, and knowing that the possible loss will always be much less than the potential profit)
• Trade at the important technical levels, and not in “no mans land”.

All of this will help you to manage your emotions. Only the very best traders in the world can ELIMINATE emotion. Most of us will have to content ourselves with finding a way of REDUCING the emotional side of things in order to help us make better trading decisions.

If you’re a novice at trading and/or technical analysis you will need some help with this, and FuturesTechs can provide you with the levels to trade around, as well as offering market leading guidance and analysis on a daily basis.

Professional Traders have been using our service for years as an essential part of their daily routine.

YOU now have the chance to enjoy the same advice on a daily basis.

Click here to subscribe (your maximum commitment only has to be 1 month, or £57.50)

Or if you’ve never seen our service before, click here to request a no obligation Free Trial.

Have a good week,

Yours,

The FuturesTechs Team

We always welcome feedback from clients and free trialists here at FuturesTechs, so we can strive to provide the best possible service to aid your trading decisions.

I thought I’d use the Blog to answer publicly a few questions we have been asked of late, so here goes with one:

Dear Clive,

Re buying Technical Analysis, I always find myself thinking the same question: “If it were that easy/obvious……’we’ve been bullish almost right from the start of the recovery’……….’gearing up for a sell-off’…… why do analysts like yourself not just make loads of money trading futures or spreadbetting?

If I found it that easy/made so much money I wouldn’t bother selling my levels…

Regards,

RJ

This is a question I’m often asked, especially at Seminars. People are, quite rightly, confused that I appear to be so well equipped to trade the markets, yet I don’t.

I think there are several reasons why I don’t trade, so let’s try and go through a couple.

1. It could be argued that YOU wouldn’t want me trading, because then I would be skewing my comments and ideas around my own position. If the market was clearly going down but I’d been caught with a long position I might be trying to talk it up, convinced that my position was right, and the market was wrong. The problem with this is that the market’s never wrong! But I am a human being, so I am subject to emotions just like you, and fear of cutting a wrong or losing position is one of the most powerful (negative) emotions in trading. The flip side to this argument is also pretty valid, though. The idea that an analyst should be able to trade their views put their money where their mouth is has merit, sure. The problem I’ve found with this is that good analysts generally don’t make good traders. I’ll come back to this notion in point 4.

2. I don’t have time. I run a growing company that’s trying to reach out to all sorts of traders, through seminars, increasing product breadth, and finding new delivery methods to take the product to a wider audience. Not only that but the day-to-day analysis takes a good chunk of time each day as well, starting nice and early at 5.30am each morning (although I’m not on my own, it must be said!). So I don’t feel I have the proper amount of time to devote to trading. I don’t think this is something you can do properly with 20 minutes work a day, and if you believe in those ads that tell you this then maybe you should think about the old “if it sounds too good to be true, then it probably is” rule.

3. I haven’t made (consistent) money before as a trader. I have had a go at trading a few times. In 2001 I worked in a Trading Room in the City for a year. It was a “Prop” room with a bunch of short term traders doing “high frequency” trading. These guys were happy to make a tick on a trade, and did at least 50 trades a day. Whenever I had a position on in the Bund Futures that was more than 5 ticks onside the rest of the guys couldn’t believe I was still in the trade. I wanted to run it for another 10 or 20 ticks, but found myself taking the smaller profit. In other words I allowed what was going on around me to affect my trading decisions - Bad mistake. The other problem was that my trading was fitted around writing the analysis. I would write the analysis from 5.30am to 8am, then trade until 10.30am, the write the analysis from 10.30am ‘til midday, then start trading again. - Oh dear! The result? I broke even, so lost money over the course of a year, when taking into account expenses like the cost of the desk and the professional trading software.

Then in 2005 I put some money into an account to have a go at trading UK Equity CFDs, all the while continuing with my daily analysis, as well as providing stock tips for a CFD firm. I lost most of my stake because I was long of a bunch of stocks one week in a nasty bear move, when my FuturesTechs FTSE report was as bearish as it could be… So I was bearish in my view, but bullish in my positions. Pretty dumb, huh?!

I closed this account down, deciding that trading wasn’t for me, which brings me on to my final point, because so far, re-reading what I’ve wrote, it sounds like a bunch of lame excuses. There is a much more important reason why I’m not a trader.

The main reason I don’t trade?

4. I don’t enjoy it, or maybe I’m just not cut out for it. I am an emotionally highly charged person. I am extremely passionate about what I do. I am also extremely self-critical. I hate it when I get the market wrong when I’m writing about them, and I’m 10 times worse when I’m trading. I turn into a total pain in the butt, and my wife likes me even less than usual! During the two stints when I was trading I found my mood swings to be unpredictable, I found my home life was affected; snapping at the kids, and finding a quiet corner of the house to have a sulk when my P&L wasn’t going the way I wanted to. I don’t like being this person. While I care passionately about the markets, about Technical Analysis, and the FuturesTechs product, I don’t wish to jeopardise things that are far more important.

So my own personal journey of discovery has led me to make the firm decision that trading’s not for me, and that I am far better cut out to analyse the markets, and continue to aid real traders (who can manage their emotions!!) to trade the markets using Technical Analysis, one of the most powerful tools available to anyone who wishes to make a success of trading.

I’m happy to admit that I’m not a good trader then, which is possibly why I’m doing okay as an analyst, because there is a school of thought that a good trader will never be a good analyst, and vice-versa, just because we’re all “wired up” differently.

Next time I’m going to talk about some more technical stuff; we’ve had a few questions from readers about gaps, and how to trade them.

In the meantime if you are a FuturesTechs member and have any questions that you think would be suitable for a “public” answer then feel free to ask away!! (Click here).

If you wish to have a look at our service please click here to request a free trial.

We included the RSI and Parabolic SAR indicators in the new levels sheet available in our Members Area, so thought that it would be worthwhile to briefly introduce them to anyone who might not be familiar with how they worked or how to use them.

Fig 1: The New Levels Sheet. (Click to enlarge)

RSI (Relative Strength Index)

One of the most popular oscillators, the Relative Strength Index was first introduced by J. Welles Wilder in his popular, now-classic book, “New Concepts in Technical Trading Systems” (Trend Research, 1978).

The calculation might not look intuitive, but it really isn’t too complicated:

where RS is the “Relative Strength” of up days versus down days over the period being used (typically fourteen).

As originally calculated by Welles Wilder, the strength of up days is calculated as follows: for each day, “Up” is recorded as: the difference between the close and the prior close if there was on increase, or as zero if there wasn’t. “Down” is recorded similarly: the size of the difference between the close and prior close (always a positive number) if it decreased, or zero if it didn’t. The exponential moving averages of “Up” and “Down” are calculated, with the EMA of “Up” then divided by EMA of “Down” to give us the Relative Strength.

RSI is bounded in the range 0-100, and the use of the exponential moving averages makes it reasonably smooth, solving two issues which often arise with oscillators (for example: the simple Momentum indicator - the difference between latest close price and the price n periods ago - is neither smooth nor bounded, making for volatile swings which can’t be compared across markets).

The key takeaways from RSI are:

The ideas that hold true for oscillators in general hold true with the RSI. The oscillator will frequently turn around before the price does – for example, a price still rising that is accompanied by a falling RSI produces a bearish divergence between price and oscillator, a major warning that the up trend is running out of steam (see Fig 2 below).

Fig 2: NASDAQ Futures, September 1999 – May 2000. Divergence between price and RSI at the height of the bubble. (Click to enlarge)

It’s worth reinforcing that extreme RSI readings do not by themselves constitute buy or sell signals. For example, the most that a high RSI, even one above 70, can indicate is that if the market is ranging, it is now due for a correction. The sell signal won’t actually be produced until RSI starts declining back toward neutral levels, and if the market is trending instead of ranging, then it could stay at elevated levels for extended periods of time. As with any indicator, trader discretion is advised.

When looking at our levels sheets, simply checking whether the RSI is above or below 50 tells you something about the internal strength of that market. Additionally, we highlight the figure in yellow if it is in one of the extreme overbought/ oversold zones. A cluster of extreme overbought/oversold markets in the same sector of our equities, commodities or Forex sheets provides interesting information about general market trends, while also helping us to identify specific opportunities.

Parabolic SAR

Another invention by Welles Wilder, the Parabolic Stop-and-Reverse is designed as a trailing stop system with a difference. Originally called the Parabolic Time/Price System, the stop is calculated as function of price and time.

The SAR alternates between providing stops for shorts and longs, switching as soon as a stop is activated. In the chart above, the blue marks are the stops for shorts, with the red marks the stops for longs. As you can see, this system is “always in”, meaning that it always indicates an uptrend or a downtrend (depending on which type of stop was the last one to be activated), so that somebody who focused exclusively on it would always have a position in the market. This makes it unsuitable for ranging markets, where a trader using it would be constantly whipsawed (see Fig 3 below).

Figure 3: NASDAQ Futures, January - May 2009. Whipsawed until mid-February, and then helpfully following the trends. (Click to enlarge)

The stop is calculated by:

Today’s SAR = (Yesterday’s SAR) + (Acceleration Factor)*(Yesterday’s Extreme Price – Yesterday’s SAR),

where yesterday’s extreme price is the high in a downtrend, or the low in an uptrend, and the Acceleration Factor is a fraction which increases incrementally each day up to a maximum value, providing the distinctive parabolic shape (this is the part of the formula incorporating time).

The recommended use of the Parabolic SAR is as a stop in a trending market where other, primary tools of analysis have originally motivated the trade. The stops which it provides won’t rush to the price action too quickly at the start of a serious move, thus giving it some initial time in which to develop. However, the increasing “Acceleration Factor” means that it will pick up speed when it isn’t activated, until it races quickly towards the price. This means that when the trend does eventually lose momentum, it will quickly catch up with the price and close out the trade.

Our levels sheets provide the SAR stop in green if it’s the stop in an uptrend, or in red if it’s the stop in a downtrend. Again, simply browsing which sectors are predominantly in uptrends or downtrends according to the SAR provides useful information, even if you aren’t using the stops in trading a specific market.

A Note on Parameters

Note that as with all indicators, the parameters of the RSI and the Parabolic SAR can be tailored to suit the individual markets under consideration. Our levels sheets use the most commonly used parameters for each indicator (14 periods for the RSI, an acceleration factor of .02*(t) up to a maximum of .2 for the Para SAR), for the same reason that we look at 10, 20 and 50-day moving averages: besides being reasonable parameters to use most of the time in their own right, they are the parameters that a majority of people automatically use anyway, and therefore gain technical significance purely on that basis.

Other Indicators, Other Markets?

The levels sheets are there to assist our members and if there are particular indicators and/or markets which you would like to receive automated levels for, please let us know and we’ll do our best to include them. While automated indicators and levels are never going to be a trader’s panacea, when incorporated into an overall strategy they are a key ingredient of successful trading.

Graham Neary (graham@futurestechs.co.uk)

Neither, I suspect, is the answer to the above question, at least not as far as where we are at this very moment is concerned:

We have been bullish since early March, and have seen the market “climbing the wall of worry” as we predicted, with no-one quite believing the rally. We are not doing the “Harry Hindsight/told you so” bit here. Just ask one of our clients, or feel free to check our “Media” page on our website and listen to what we’ve said on CNBC in recent months.

But just now everyone (else) we seem to see and hear on CNBC and Bloomberg TV is getting bullish. So we’re starting to think we’re near a top for now on that basis (when too many people are getting bullish it’s time to find the exit!), and the last few days have seen some pretty uncertain price action to back this up.

When I say “starting to think we’re near a top” I don’t mean the top of a bear market rally, though. We think there will be a pullback some time soon, which may well last the whole summer (“Sell in May and go Away” is a pretty watertight strategy if you don’t take it completely literally, and if you exercise some finesse or process re timing your “sell”!). During this time you will see many commentators saying “told you so” with respect to the bear market rally story (probably the same guys who this week have been saying we’re going up; Hmmm…).

But we will not make a new low. In fact we don’t think the S&P will drop below 766, or the Dow below 7240 , and we will look for the FTSE 100 to hold above 4000 or at worse 3850 on any retracement move. The sell off will only go on long enough to get the weak longs panicking out, and only long enough to have the “bear market rally” camp saying “told you so”. THEN we will start to rally again, and we will end 2009 in fine fettle.

Our customers will benefit from knowing if and when our views change, because we WILL happily change our skew if we are proved wrong, such is the flexibility of a short term approach utilising Technical Analysis.

For now I am preparing to “Sell in May…” and it will be interesting to see what happens this week, prior to my appearance on CNBC on Thursday evening (May 14th). For now key supports are holding and we’re still short term Bullish, but this could change very quickly, and evidence is mounting in favour of a pullback.

We are often asked how we use Fibonacci retracements, and what time frames they are best used on.

Let’s look at the FTSE Futures chart right now to try and give a flavour of how they can help us.

Since last Tuesday (as we suspected, and as was flagged to our clients) we have seen a recovery rally in the FTSE from the lows just above 3450 set at the start of March.

There have been many commentators who are calling this a “bear market rally”, and are waiting for the first signs of weakness to pounce upon and use as a selling opportunity. As our customers know we’re not quite in this camp, but there you go. We have an article recently written in our members area that expands on our thoughts as to whether this is a market bottom or not.

Anyway, back to our magic Fibonacci numbers.

The Fibonacci retracements commonly watched are 38.2% and 61.8%. If a market has been selling off then we always call off the hounds on the down-leg if we can retake the 38.2% level, at which point we target a move to the 61.8% level. In this instance, as the market started rallying off the lows we looked up to see where the market would have taken back 38.2% of the weakness seen since the start of the year (see chart 1). This level was 3904. We got to here this morning… and promptly fell over.

Chart 1: FTSE Futures Daily Candlestick chart since the start of 2009

So does that mean we’re right back in bed with the bears and looking for a fresh test of the lows? It could well be, but the slightly more cautious can use Fibonacci levels on a shorter term chart to help them with that one as well, because it could be argued that unless we give back 38.2% of the recovery, then maybe the recovery is still going on!

So we start at the low and measure up to the high and find the 38.2% retrace of that move. This is 3738 (and coincides with Friday’s low) so we are using this level as a reference now to see what the market wants to do next. A break below here and sure, the bears are back in charge, and we’ll look to head back down, targeting 3625 (the short term 61.8% retracement) first, then 3443 (the year’s lows), as per the second chart, below.

Chart 2: FTSE Futures, Hourly Candlestick Chart, 9th - 18th March

So you can see we use Fibonacci levels on lots of different time-scales, and they can all have a use in telling us where we are, and what the market’s thinking.

Be safe,

Cheers,

Clive.

I have been bearish of this market for a good while now and it’s proved fruitful, but today I am thinking that shorts should be covered.

Why, when the Dow has just printed it’s lowest price since 1997, would I suddenly start to think bullish thoughts?

Because I read the papers and listen to the financial news channels, and upon making this new multi-year low the world seemed to collectively shrug it’s shoulders. Ambivalence is the order of the day? Dow to 6000? Yeah, why not (you hear people say in a resigned tone).

(The FTSE is faring slightly better, holding above last years low for now, and when I trawl through the FTSE 100 stocks I see many stocks that are nowhere near making new lows compared to last years)

If you are regular readers of this Blog you’ll recall the “Sentiment Cycle” chart we posted back in October. Here it is again.

This was first published in a book called “The Nature of Markets” by a New York based Technical Analyst, Justin Mamis, back in 1991.

Note that the bottom of the cycle, when markets ultimately bottoms out, is “Discouragement” - -I think that’s what it feels like now…. and I think we’re hitting bottom.

Remember, when everyone’s sold who’s gonna sell, when everyone’s short who can be short, there’s no one left to sell it, and the market cannot go down any more if there aren’t any sellers left!

Have we got the banner headlines of doom, gloom and despair on the front cover of things like Newsweek and the like? Are Taxi drivers telling you that the Stock Market is finished? Let me know!!!

Be Safe,

Cheers,

Clive.

“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.