The last few days have seen some big swings either way in Equity markets.
“Where next?” I hear you ask! Our chief market analyst Clive Lambert was on CNBC last night trying to pick the bones out of this price action, looking at the S&P 500 Futures, FTSE Futures, and suggesting Fresnillo as a Stock to buy.
See it on our media page by clicking here.
This morning’s reports on Silver and the FTSE would have reaped dividends for our clients, for different reasons.
Here’s the text of the FTSE Futures report:
We have posted the “all sessions” chart today because it’s actually a bit cleaner, and also shows what we’ve seen overnight; selling.
Selling to the 200 day MA as well, this well watched proxy sitting at 5771.5 today.
Yesterday’s low was 5827 in day session trade so this is a bold resistance above, and if the bulls don’t quickly retake this mark we will likely break through 5771.5 and head to 5615.5 then 5584.
If the bulls can dust themselves down from this weak open and get us back through 5816 and 5827 we then need to retake 5869.5 then fill the gap to 5912.
My gut tells me this weak open is a buying opportunity. The chart tells me otherwise…
Nice “gut feeling”!
Our Silver commentary was a bit more “nailed on”, and since we sent it out first thing this morning in the UK it traded up to 37.330 (as we tuck into our lunch in the UK, awaiting the open in the US):
Lunchtime (in the UK!) Update: We now have day session gap support at 36.400, protected by the broken resistance at 37.020, the latter having done a job in the last hour or so “on the retest”.
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Last week we posted a Blog about the potential Head and Shoulders pattern forming in the FTSE Futures. Things got interesting with respect to this yesterday, which was the crux of our morning report, reproduced below.
The fact that we’re not breaking this line PROPERLY does suggest the market’s ambilvalence is set to continue.
Towards the European close yesterday we were selling off, and we’d got through 5858, the Neckline of the Head and Shoulders pattern that we’ve been watching of late. So on the “Day only” chart that we prefer, as above, we have a slight closing break of this Neckline, and a sell signal.
Except we’re called 50 higher this morning and this will instantly tell us that the sell signal is a false one.
It looks like the market is happy in it’s current moribund range-bound confused stupor, and we’ve got to put up with this situation for a bit longer.
We’re not getting any firm signals at the moment, then, and this counts for the Individual stocks as well, making our (and your) job a rather tough one.
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Below is the Comment and Chart from today’s FuturesTechs report. As well as this we provide Support and Resistance levels from our own analysis, as well as “Automated” levels referencing Market Profile, Pivot Points and Moving Averages.
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From yesterday: “Backing either camp is proving difficult in this volatile environment so our Skew turns neutral’
Sideways consolidation at multi month highs remains the story, albeit in a volatile environment. The dip below the previous days low found buyers at 1328.75 who rallied the market up to 1348.75, the previous breakdown level, on good volume.
Yesterdays low validates an up trend line from the low on the 14th March. Today this trend line provides support at 1330.50. Yesterdays downside rejection in conjunction with the validation of the up trend line means our Skew switches to tentatively bullish above 1330.50.
We have sent an extra report to our customers this morning, outlining the POTENTIAL sell signal that’s looming in the FTSE Futures. Here is the text and accompanying chart:
We have a potential “Head and Shoulders” pattern forming in the FTSE, although the sell signal has not been given yet.
The sell signal comes if we break the “Neckline” which is at 5851, and probably on a closing basis as well (although a “clean” break on high volume would convince me enough to take the signal “intra-day”).
The target, using the traditional measuring technique for this pattern, would be 5600.
Of course this also comes off the back of the recent failure at 6095, which was very similar to the February high/failure (6086.5). The “Double Top” sell signal from this situation would only be triggered on a move through 5584.5, so a long way off yet….
5851 is on the radar, however, so “Watch this space!”
If you would like a free trial of our daily technical analysis reports please click on one of the links below:
“Professional Trial”, for Traders, Fund Managers, Brokers etc click HERE.
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FuturesTechs has delivered seminars for 7 City Learning for many years, and their latest public course is on October 14th 2010.
This is a full days training with FuturesTechs’ Director Clive Lambert, introducing a wide range of Technical Analysis methods on a 1 day course at 7 City’s HQ in the City of London.
The day will give the delegate an overview of the Technical approach, different chart types (Candlestick charts in particular), support and resistance, chart patterns, gaps, Fibonacci analysis, Moving Averages, Momentum Indicators, and Market Profile.
A free copy of Clive’s book “Candlestick Charts” is included, as well as full colour course notes.
Please Click here for further details, and to book your place.
Market Profile (c) is a distinct way of charting and analysing price action. It has a very different feel to normal methods of charting, so be prepared to look at markets in a very different way after reading this tutorial! Hopefully you’ll see why there are so many traders who swear by it.
Let’s jump straight in and have a look at one of these creatures:
The above represents a single day’s trading in FTSE futures. It could equally be represented by 30-minute candlesticks like this:
So what’s going on here?
Each letter corresponds to a 30-minute period. “m” is 8:00-8:30, “n” is 8:30-9:00, etc. The m’s are drawn in each price interval where this contract traded during the first half hour of trading, the n’s for the second half hour, etc.
Each letter is called a Time Price Opportunity (TPO). These form the building blocks of Market Profile.
Looking at the FTSE Profile above, we can see that the letters are sat next to each other from left to right, forming a “heap” . Where the price bulges out the most tells us where the price traded in the most time intervals, giving a sense of “value” for the day.
With that said, let’s introduce some more terminology.
Initial Balance Period (IBP): this is the range of the first hour’s trading. In the FTSE, then, it is represented by the price range covered by the m’s and n’s. CQG draws a blue line to the left of the Profile to highlight this, and we’ll put it in bold below:
The IBP is often important, depending on which market you’re trading, since volatility on the open can sometimes bring about a “Comfort Zone” within which people will trade with a sense of safety for the rest of the day. Breaking out of the IBP then, is something that Profile watchers will keep an eye on.
Point of Control (POC): This is the price region with the most TPO’s, i.e. which has been traded during the most time periods. If there is a tie for which price has the most TPO’s then we choose the one closest to the middle of the day’s range.
In the above Profile, we see that 5220 and 5190 both have eight TPO’s. But 5190 is closest to the centre of the range, so it is the Point of Control.
This is a useful price because it tells us quite precisely where the market traded most frequently. Above there could be considered poor value for the day, while below there could be considered good value for the day.
This notion of “value” is expanded with the concept of the Value Area. This is the price range containing 70% of the TPO’s, split evenly around the Point of Control. (The reasoning behind this is that in the “Normal” distribution, around 70% of observations are contained within one standard deviation of the mean.)
This gives us a wider range of value for the day. This range can then be overlaid onto a candle or bar chart; we can use it to provide suggestions for support and resistance levels, or just to see how the market’s perception of value is evolving. Here’s an example:
In the above chart, we have the folowing key:
Green: High of Value Area
Blue: Point of Control
Brown: Low of Value Area
That completes our discussion of Profile construction. Now let’s consider some of the ways to intepret what’s happening (this will involve some extra terminology!)
Initiative and Responsive Price Action: we can classifying buying and selling as “Initiative” or “Responsive” depending on whether it takes place above or below the previous day’s value area.
So if the price is expanding above the previous day’s value area, then we can call that “Initiative” buying. And if those gains are being sold back down, that selling can be described as “responsive”.
Similary, selling down below the previous day’s value area is called “initiative” selling. As you might guess, gains back through those levels would be called “responsive” buying.
Much of the philosophy behind Market Profile is to do with the fact that different types of market participant move the market in different ways. On the one hand, there are “liquidity providers”, the local or proprietary traders, who profit by making small gains on lots of trades every day. Their purpose is to facilitate the actions of the institutional traders.
The institutions are the ones who, thanks to their size, are truly capable of moving markets. In the context of commodity futures, these would be the commercial hedgers.
For example, the below chart shows a market which was fairly stable on the first day, and then made a big shift on the second:
Without looking at the volume figures, we could surmise that much of the action in the first day took place with traders and a relatively small number of evenly matched institutions. The second day, though, took us out of that day’s range, with the gains being accepted by the market. That makes it Initiative Buying, and we can surmise that it was institutional demand which created it.
Single Print Tails: time periods with just a single TPO, mostly at the extremes of the Profile.
In the above Profile, we can see that this market had two such tails: for period “D” at 5300, and period “E” at 5440. The price moved into those regions, but the move was rejected. The move back from 5300 is probably “responsive buying”, while the move back from 5440 is probably “responsive selling”.
In the next article on this topic, we’ll categorise different types of trading day according to their Market Profile. There’s lots more to be covered here, so stay tuned!
Graham Neary MSTA (graham@futurestechs.co.uk)
This is a quick summary of important candlestick patterns. It’s presumed that you know the basics of candles: if you don’t, see the article links in our Members Area.
Without further ado, let’s begin.
1. Bullish Marabuzo
Number of candles: 1.
Description: long green candle which opens near its low, and closes near its high.
Implications: BULLISH.
2. Bearish Marabuzo
Number of candles: 1.
Description: long red candle which opens near its high, and closes near its close.
Implications: BEARISH.
3. Doji
Number of candles: 1.
Description: candle which closes near where it opened.
Implications: REVERSAL.
4. Shooting Star
Number of candles: 1.
Description: candle which closes near where it opened, at the bottom of the period’s range.
Implications: BEARISH REVERSAL (in an uptrend).
5. Hammer
Number of candles: 1.
Description: candle which closes near where it opened, at the top of the period’s range.
Implications: BULLISH REVERSAL (in a downtrend).
6. Hanging Man
Number of candles: 1.
Description: candle which closes near where it opened, at the top of the period’s range.
Implications: BEARISH REVERSAL (in an uptrend) (only weak effectiveness)
7. Inverted Hammer
Number of candles: 1.
Description: candle which closes near where it opened, at the bottom of the period’s range.
Implications: BULLISH REVERSAL (in a downtrend) (only weak effectiveness)
8. Bullish Engulfing Pattern
Number of candles: 2.
Description: green candle with a lower open and a higher close than the previous candle.
Implications: BULLISH REVERSAL (in a downtrend)
9. Bearish Engulfing Pattern
Number of candles: 2.
Description: red candle with a higher open and a lower close than the previous candle.
Implications: BEARISH REVERSAL (in an uptrend)
10. Harami
Number of candles: 2.
Description: candle with a real body contained within the range of the prior real body (which must have moved in the direction of the prior trend).
Implications: REVERSAL (only weak effectiveness)
11. Dark Cloud Cover
Number of candles: 2.
Description: red candle with a higher open than the previous candle, but a close in the bottom half of that prior candle.
Implications: BEARISH REVERSAL (in an uptrend)
12. Piercing Pattern
Number of candles: 2.
Description: green candle with a lower open than the previous candle, but a close in the top half of that prior candle.
Implications: BULLISH REVERSAL (in a downtrend)
13. Morning Star
Number of candles: 3.
Description: long red candle followed by a small-bodied candle which gaps lower. The third candle closes in the top half of the first candle.
Implications: BULLISH REVERSAL (in a downtrend)
14. Evening Star
Number of candles: 3.
Description: long green candle followed by a small-bodied candle which gaps higher. The third candle closes in the bottom half of the first candle.
Implications: BEARISH REVERSAL (in a downtrend)
Graham Neary MSTA (graham@futurestechs.co.uk)
Bar charts were the most popular way of depicting price movements until Japanese candlestick charts invaded Western technical analysis during the 1970s, but are still as useful as they’ve ever been.
They depict the same information as candlesticks, merely presented in a different way. They have their own terminology, and are most commonly used in conjunction with classical chart patterns like the Head and Shoulders and Triangle (though candlesticks are equally adept at displaying these).
In this article we’ll take a look at some bar patterns and see how they compare to the candlestick patterns you’ll find in our daily reports.
First, the basics: what do they look like? The show the day’s range with a vertical line connecting the high and the low. A little bar to the left of this line is shows where we opened, and another little bar to the right shows the close. Graphically:
With this understood, let’s compare how the same information looks in bars and candlesticks:
It should be clear that the only difference is in the presentation. Any pattern in bars or candlesticks can be expressed equivalently in the other format. Now for some patterns:
Ringed Highs and Lows
These are simple reversal patterns used to identify entry points. The Ringed High is formed when a sequence of higher lows is broken with a lower low, whilen the Ringed Low is the converse: a sequence of lower highs is broken with a higher high. They work across any timeframe.
Example of a Ringed Low:
We buy when the latest “lower high” is broken to the upside.
Example of a Ringed High:
We sell when the latest “higher low” is broken to the downside.
Note that the open and close (little bars on either side of the vertical line) are irrelevant when it comes to this pattern. We’re only looking at the highs or lows.
Reversal Day
There are competing definitions for this term, but we’ll accept the one found in Technical Analysis of the Financial Markets by John J. Murphy (New York Institute of Finance). A top reversal day is formed in an uptrend when we get a bar with a higher high but a lower close. The bottom reversal day is formed in a downtrend when we get a lower low but a higher close.
Here’s an example of top Reversal Days in Bobl futures. The first one wasn’t followed by an immediate change in trend, only a day of weakness. The second one, though, was fully confirmed (demonstrating this this pattern, like all others, is not infallible!)
The pyschology behind this pattern is fairly simple: market participants saw the trend continuing intraday with an expansion of the range in the direction of that range. This wasn’t followed through, though, and the close was actually lower than the previous day’s (or higher, in a downtrend).
Key Reversal Day
This is a more extreme version of the Reversal Day mentioned above.
In passing, let’s say what the Outside Day is. This is a session whose range completely surrounds the range of the previous day, i.e. we have a higher high and a lower low. Similarly, the Inside Day has a range entirely within the previous one.
The Key Reversal Day is an Outside Day with a lower close when we’re in an uptrend, or a higher close when we’re in a downtrend.
Equivalently for a downtrend: the open is lower than the previous day’s close, but the close is higher than the previous day’s high.
(Note: some sources have slightly different requirements for the Key Reversal Day, but let’s leave this confusion to one side!)
The following 2-bar pattern would a be a Key Reversal bottom in a downtrend:
The idea is that the market started out in line with the prevailing trend (the above second candle even gapped lower than the first one). This early positivity is reversed, though, and we end up closing the day in the opposite direction, finishing past the extremes of the previous session.
The Key Reversal Day is related to the Bearish Engulfing candlestick pattern and it wouldn’t be very far wrong to say that the Engulfing Pattern was the candlestick analysis equivalent of the Key Reversal Day.
This market topped out with a Bearish Engulfing Pattern that also qualifies as a Key Reversal Top.
Summary
Let’s summarise all of the patterns explained in this article:
Ringed High: sequence of higher lows, broken by a lower low.
Ringed Low: sequence of lower highs, broken by a higher high.
Reversal Day (Top): day with a higher high but a lower close (in an uptrend).
Reversal Day (Bottom): day with a lower low but a higher close (in a downtrend).
Outside Day: a higher high and a lower low than the previous day.
Inside Day: a lower high and a higher low than the previous day.
Key Reversal Day (Top): Outside day that closes lower (in an uptrend).
Key Reversal Day (Bottom): Outside day that closes higher (in an uptrend).
We mostly focus on candlestick analysis in our research, but also try to take note of significant bar chart patterns formed in the markets we cover. As with all techniques, bar charts are not infallible but, with some experience, domake it easier to read the markets To read our daily research of the futures and FX markets, please sign up for a free trial.
Graham Neary MSTA (graham@futurestechs.co.uk)
Here at FuturesTechs we are constantly evolving our product, and in recent years we have added a merry band of private customers and ‘at home’ traders to our following via our website members area.
One request from a good few of our less experienced members is for a bit more clarity as to our current thinking about short term trend, and preferably something visual. So we have devised the coloured bar that you can see next to our levels on the left. We will release this new innovation on Monday 16th November.
You can see there are three colours on display: Green, Grey and Red.
If we are in the green zone the market is bullish technically. In the grey zone the technical outlook for the markets is neutral or uncertain. In the red zone the technicals are bearish.
These “skews” are short term outlooks. The medium and long term pictures may differ. We have decided that the profile of our average customer is short term, so this is the most useful timeframe for a tool of this type.
So let’s think about how different looking SkewBars should be treated.
To the left is an example of a SkewBar that’s more or less all green, with only a dash of red at the bottom. This means that the market is very bullish, and that you probably want to be buying it! We suggest that you trade “to the long side”, looking to try and buy dips to support levels, or buy breakouts through resistance levels. If you were scanning through each of our reports looking for something that might be worth a buy this is the sort of SkewBar you’d be looking for.
Stops can be placed below any support level, of course, but it’s only when we move out of the Green area that the short term skew changes from bullish.
In this case there is no Neutral Zone, the market flips straight to bearish below 120.98.
In this SkewBar the market is pretty neutral, only turning bearish if we break below bold support at 121.63. The neutral skew stays in place until we get all the way up to 123.04. It is only above here that the bulls regain control of things.
In Neutral markets you should can trade in either direction but don’t hold too much conviction. Many traders like neutral conditions as they can do plenty of lower risk “range” trades, trying to do more trades but take smaller amounts of money each time.
You may want to try and “play the range” by buying at the bottom end of the grey band, selling if and when the market gets near the top.
If we then break out of the range by moving into the red or green zones then things have changed and playing the range is no longer the game in town.
Our last example SkewBar is a bear market, and this doesn’t change unless we get above 123.04. Even above here the market only turns neutral. There is no green portion on our SkewBar at all, which means the bulls don’t even get as look in!
We hope this new innovation is a helpful visual addition to our reports. It has been suggested to us that sometimes the reports can be a little ambiguous, and while we try not to send mixed messages sometimes that’s just what the market conditions are. Hopefully the SkewBars will give a little more clarity.
To all our long term readers we’d like to point out that nothing’s changed with this innovation with respect to how we analyse the markets, we’ve just added a bit of colour, if you like!
As always your feedback would be most welcome. info@futurestechs.co.uk