FuturesTechs Blog

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

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

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

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

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

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

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Liam Roberts MSTA

After a strong session on Thursday that saw us back into positive territory we had a weak day on Friday, but we held above the 130.67 level that has now become our reference point to stay with the bulls.

So this looks like a buying opportunity in a market that is embarking on a resumption of an uptrend, a market that has just seen a pullback within the uptrend, and a market that should now be thinking about retesting the highs at 133.26.

If 130.65 fails to hold the bulls have one more opportunity to salvage things, a gap at 130.25.

Below are the short term support and resistance levels, the important ones highlighted in bold type.

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Fibonacci retracements have worked like a dream of late in the Dow, and they’re currently causing our recent bullishness a bit of trouble. Let’s first of all reproduce the commentary we’ve put out today for the Dow:

Now lets go through that and work out what Fibonacci has got to do with it. We have several articles on this blog and in our Website members area concerning Fibonacci so this time round I’ll just assume that you’re happy with the idea that when a market is in recovery mode it quite often recovers 38.2% or 61.8% of the previous move. The sell off from January 6th to March 6th took us from 9048 to 6460. The 38.2% retrace of this move is 7450. See how this featured as a target once we started rallying. The 61.8% retrace of this same move is 8060. This, again referencing back to our commentary, was the next target once 7450 was seen off. We hit this level today. In fact it’s the high of the day. This is a slight worry. This may be just a temporary “blip”, and this is how we’ll treat it for now. But there is now a chance we can move back to 7450, and if this level were to break we’d have to forget being bullish and look for further weakness, back to 7071. We don’t expect any selling from here to get below 7450, let alone 7071 (for lots of other reasons besides the Fibonacci work). But If it did we’re totally wrong about the March low being THE low. You can see the symmetry of these numbers in harmony from the charts we’ve posted. Because today’s high is BANG ON the 61.8% retracement of the Jan-Mar sell-off, the 38.2% retrace of the recovery is EXACTLY THE SAME as the old 38.2% retrace (of the Jan-March selling): 7449. One last interesting thing that will shape the bigger picture outlook: The 38.2% retrace of the selling seen between May 2008 and March 9th is up at 9012. And what is the year’s high from January, the start of the last big down-leg? 9048… Making for a pretty important area of resistance, wouldn’t you say? Have a good week.

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.