FuturesTechs Blog

Our clients who trade Spread Bet and CFDs often seem rather perplexed around this time because the Futures are rolling over and all the talk is of “expiry”, “triple witching”, “quadruple witching”, “roll-over”, “new front month”, “rolling off the board”, “options expiry” and the like.

The Spread betting firms have simplified things over the years so you can trade something like the FTSE on a “rolling” basis; basically replicating the Index, or the “Cash” as it’s known in market parlance. So why do the Pro traders all trade the March, June, September or December Futures? What’s that all about?

By definition “Futures” are trade-able instruments that are priced depending on where the market thinks an instrument will be at some time in the future. The traditional set of expiry months for these sort of contracts has been March, June, September and December. You will find that Commodity markets are different. This is mainly to do with seasonal differences, so people can trade the crops that are about to be harvested or have just been harvested.  Saying that I’ve never understood the logic behind the Precious Metals expiry cycle so if anyone ever wants to enlighten me please feel free!

Anyway, as we write the March FTSE Futures are very close to expiring, getting to the end of their life. Futures traders who want to bet on or hedge future price movement therefore need to “move down the curve” and trade the June expiry, which is a bet on where the FTSE Index will be in mid June. The March contract is therefore “rolling off the board” and anyone who wants to keep their exposure to the market has to get out of the March position and move their interest into June. They are “rolling over” their position.

If you were to hold your Futures position into the expiry the exchange will demand that you do something to settle your contract. Many Financial Futures instruments are cash settled, so you just pay an amount of money, or (hopefully) receive an amount of money, depending on where you got in versus where the contract settled on the Expiry day. This is why there can be a big mash up in the minutes before the settlement of any contract. Futures exchanges have taken several measures over the years to calm the volatility at these times, as there have been lots of incidences of what could be described as market abuse during Futures expiries in the past.

So much so that the expiry days have taken on an almost mystical aura amongst market participants. The hour when everything expires has become known as the “Witching hour” and when you get expiry of more than one instrument it is called “Triple Witching” or even “Quadruple Witching”.

Triple Witching is when the Futures, Options, and the Single Stock Options all expire on the same day. It can cause havoc, but as I mentioned the exchanges have worked hard over the years to iron out any foibles thrown up, all in the name of keeping an orderly market. With the increased use of Single Stock Futures these can also be thrown into the equation to give you a “Quadruple Witching”.

Anyway I digress. Let’s get back to settlement of these instruments. As mentioned many contracts are “cash” settled, but some are settled with physical delivery. In Bond markets a holder of a Long Position in the Futures has to pay up the full price (forget margin at this point!!) to receive a lump of Bonds. In Commodity markets a holder of a short position in, say, Corn, would have to delivery a set number of bushells of Corn to a specified warehouse on a specified date in a certain condition. So speculators are usually pretty keen to “roll-over” their interest and not end up in this situation! I always remember working for a Broker on LIFFE and they were always very concerned on Expiry day that we didn’t have any errors that might result in having to physically delivery something they physically didn’t have!

So around mid morning on Friday if you see the markets wobble, pick up in volatility, or make a sudden unsuspected move, you now know why: Roll-over. The Witches at play!!! From this moment on the Futures traders are all looking at a new instrument; trading the June Futures, until the next roll-over.

We always suggest to our Spread Bet or CFD clients that they trade the market that tracks the Futures. for starters this is what we are analysing on a daily basis, so it is the truest reflection of what’s actually going on. Also the Futures are open (in the case of the FTSE) from 8am til 9pm every day, so you always have a “real” market price to reference off.

If you haven’t had a Free Trial of our reports before why don’t you try us out? We have been used by Professional traders for 10 years now, having first started writing our reports when the LIFFE Floor closed its doors in 2000. In fact FuturesTechs is celebrating it’s 10th birthday at the start of April.

Click here to request a free trial.

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”…

WHAT DO WE THINK NOW?

At FuturesTechs we analyse 28 different markets each day and give our trading clients regular up to date analysis on the current thinking and market’s state of mind. We look at Bonds, Forex, Commodities and Equities. At the moment Stock Markets are the most interesting, providing the biggest conundrum for traders and operators.

We believe that Fundamental analysis is flawed (by not taking into account sentimenrt), and that most Economists get it wrong. A far more sensible way to look at the markets is to work out what the trend is, and stick with the trend, then do your best to spot (as early as possible!) any changes in trend.

One thing we’ve learnt over the years is that the market usually tops out when most people are getting bullish, and dashing in to get long, afraid to miss out. In other words when people are getting greedy. This could definitely be applied to Gold at present, and probably also to Equities!

The opposite situation creates bottoms and emerged in March when Equities bottomed out  -

Fear gripped the market and everyone ran for the door. We didn’t. We took a step back, and realised that many in the market had given up, that there were plenty of doomsayers talking the FTSE down to 2500. Our analysts said at the time that the market was nearing a bottom. In fact we said it on CNBC, so if you don’t believe us click below link to have a look.

There is a saying that “Harry Hindsight is the best trader in the world”, and we would suggest that if anyone says “I got long back in March” ask them to prove it!

In recent weeks we have been concerned that this up move is coming to an end, and despite the fact there is usually a “Santa Claus rally” we are still erring on the side of worrying about downside risk. We really haven’t gone very far since September, if you take a step back and look at things.

I used a Warren Buffett line last week in one of our reports and it sums up quite well everything I’ve said above.

“Be fearful when others are greedy and be greedy when others are fearful”.

He’s done quite well out of it!

We follow the trend, but are always looking out for when the market’s psychology gets to an extreme.

Feel free to ask for a Free Trial by clicking the link below. Don’t forget to click below as well to view our comment on CNBC back in March.

Trial FuturesTechs here.

Check out Clive Lambert’s March 4th CNBC appearance here.

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

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.

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.

We often get asked “How can I use your product?”

FuturesTechs provides support and resistance levels to professional traders across a range of different Futures markets. They use our levels as the basis of their day trading.

Unfortunately I often come across traders using them in different ways, so it’s tough to give a definitive answer to that question. We are all different, and do things in different ways, and the individual’s interpretation of the levels we produce is no exception.

Let me make something clear right now. A lot of what we do here at FuturesTechs is basic common sense. We are almost “reporting” the technical news.

Take today’s FTSE Futures price action as an example. In our report this morning we talked about how important resistance at 4220 was, and we made this a bold level to make sure our readers got the message!

It was a VERY obvious level, being Friday’s high: Quite simple, unless you decided to ignore the simple and obvious.

It gave us the high this morning, not once but twice.

The low between these two highs was 4174, so we got a sell signal (Double Top) on the short term (eg 10 minute) charts once this gave way. We had 4163 posted as our first support, so on the way back down (if you hadn’t sold at the bold resistance at 4220) there were two more opportunities to sell; once we broke 4174, or even safer once we sold off through 4163.

Where to get out? We had a bold “area” of support at S5 in today’s report, between 4051.5 and 4064.5. The lunchtime low was 4066.5, where we suddenly started posting reversal candlestick on our trusty 10 minute chart - time to cash in.

Hopefully this gives some insight into how one can use technical levels to help decide where you put on trades, and where you get out.

Ideally you should aim to create trades with a basic set of criteria.

• Trade in the direction of the overall trend.

In other words In a downtrend sell ahead of an important resistance with a tight stop if it breaks.

Buy ahead of a key support level in a rising market.

• Targets should be acheivable, especially considering the current market conditions. It is Martin Luther King Day in the US today, so large swings of volatility are unlikely.

• Targets should also not be “blocked” by large resistance or support levels. For example if you decide to buy a Stock at £1.03 with a stop at 99p then you want to have a target of at least £1.11, to give a 2:1 reward to risk ratio: You are planning to make twice as much as you’re willing to lose - the way it should always be.

But if £1.10 is an old high on several occasions it is hopeful at best to ask the market to trade £1.11, so you have set a target that’s going to be tough to achieve.

Whenever you’re looking for trades to put on you want to try and skew things so that it’s going to be tough to get stopped out, but much easier to head to your target.

This doesn’t mean you’re not ever going to get stopped out, it just means you’re stacking the odds in your favour. This is what Technical Analysis does, and what we hope to help YOU to do when you use our service for YOUR trading decisions.

And one last thing while we’re talking about stops. RESPECT YOUR STOP. It is very easy to move a stop further away if a market’s getting near to triggering your loss. If you have set a stop, then LEAVE IT WHERE IT IS!

So far 2009 has been a tough year to call. Volatility has dropped, but we haven’t gained any firm directional traction yet in most anything. Although it goes against our usual mode of operation to give longer term calls we are still happy with our overall view for Equity markets for 2009; that we will make a new low in the early part of this year, but end the year quite a bit higher than where we are now…

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The first speaker on the  Society of Technical Analysts (STA) annual diploma course, at least for the last few years, has been Julian McCree, who always extolls 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.

Have a look at this “mystery” chart and tell me what you think?

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.

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!!