FuturesTechs Blog

This week’s blog is written by Bradley Jordan, who has been ably assisting me here at FuturesTechs for over a year now. I hope you enjoy his first effort, based upon his observations of the current price action in the FTSE futures.

Cheers,

Clive.

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Earlier this year I completed my Society of Technical Analysts (STA) diploma and one of the first aspects introduced to me was 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.

Bradley Jordan.

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.

The heroics from Ben and Hank that I spoke about in yesterday morning’s Blog were squarely ignored by the markets. Despite the rescue of Fannie and Freddie we sold off harder than any day we’ve seen of late, just from a higher base.

We’re going to start the US session from a low base today, so will we recover? I wouldn’t bet on it, but George Bush and Ben Bernanke will do their best to say the right things again.

The FTSE 100 Future has been down to 5150 today, the lowest price printed since October 2005.

It doesn’t look like the selling is over, but we are starting to get that “capitulation” feel about things, aren’t we?

Right now it’s worth remembering two really naff phrases that often get rolled out, and in my opinion should be rolled out more often:

Naff catch phrase number 1: “The Trend is your Friend”

Naff catchphrase number 2: “Bottom pickers get dirt…” I don’t think I need finish that one.

Lastly, another one that I think is quite relevant right now:

“Denial is not just a river in Egypt”.

Have a good day and be careful.

Cheers,

Clive.

We spent Friday at the IX Investor show where there were many people that were looking into the idea of trading the markets using Spread Betting.

A question that often comes up is what to actually trade, when it comes to Indices like the FTSE and the Dow, because on most Spread betting platforms there are several choices of product.

The FTSE 100 Index (aka “the Footsie”)  tracks the country’s top 100 companies. As many of you may be aware this list changes depending on who’s doing well and who isn’t. This week Alliance and Leicester, Persimmon, Tate and Lyle and Home Retail Group all fell out of the FTSE 100. This is a reflection on how tough Banks, House Builders, Retailers and Food companies (respectively) are doing it right now.

So who replaced them? Fine British names like Petrofac and Ferrexpo joined Drax Power and Invensys.

Petro-who? I think I know what it does based on the name; and it sounds like it likes Oil at £139 a barrel! Petrofec is an Oil service company; a truly worldwide operation.

Ferrexpo is a Ukrainian mining company.

The FTSE 100 reads like a who’s who of international powerhouses these days, whereas 10 or 20 years ago it read like a who’s who of the British High Street.

Now here’s one thing to think about while we ponder the make-up of the Index: It always champions the strong and weeds out the weak.  If a company performs badly, or if they are in a struggling sector,  they can fall out of the Index.

It’s the mining companies that have been the stellar performers in recent years, and the FTSE is now chocker-block with them.  As the Banking Stocks continue to fall like lead balloons their effect on the overall index decreases. So what you’re trading when you buy and sell the FTSE 100 is very different to what you were trading even a couple of years ago.

But back to our initial concern: The different products on offer on the Spread Betters platforms.

Most firms seem to offer at least two choices, the main two being a rolling “Cash” product or the “Quarterly/Forward” contract.

The rolling/cash merely tracks the underlying Index and settles against where that finishes each night.

The “Quarterly” or “Forward”  is based on the FTSE 100 Futures and is, in my humble opinion, the best one to trade, especially if you want to use our daily reports!  We write our reports on the Futures contract, currently for expiry in September (it trades for delivery in September, December, March and June, by the way), and this is what most Spread Bet firms will be referencing their quotes from.

If you want to trade the daily rolling contracts you  would need to work out the difference between it and the Futures before you can make firm use of our levels. The Futures should trade at a premium to the underlying, and at the moment in the FTSE that’s about 28 points.

If you have any further questions feel free to contact us via the button in the Member’s Area. We always aim to help our Members get the most out of the service.

Happy trading.

Cheers,

Clive.

There’s plenty going on around the traps this week. Let’s just go through a few highlights:

Oil is the one getting the headlines, with ICE Brent Crude getting up to $135 before selling off hard today. The NYMEX WTI* has done a similar thing; selling off $5 from a high just above $135 over the course of today.

As of this moment we wouldn’t be calling a top in this one despite this volatility. As we said last week, one swallow doesn’t make a summer. The lack of reaction to last week’s Doji Candlestick pattern proved that!

Saying that we might not be far away from a capitulation (it’s certainly starting to feel that way), but trying to pick the top of a market like this is a dangerous and foolish game.

Equities looked toppy last week, as we flagged in the Blog, but it took a few days before we turned over, although the DAX Future held key psychological support at 7000 today, and the FTSE Future is holding support at 6139.5, the last higher low.

But it’s Debt markets that are catching my eye this week. We have seen a sell off of 90 ticks in December ‘08 Short Sterling Futures. In simple terms that means a swing of rate expectations for December of almost a full percentage point. In other words this week the market has decided that there’s little chance of more rate cuts from the MPC, a sign that maybe things are settling down a bit. This is a quite spectacular move for a contract that is usually pretty “steady as she goes!”

For those of you who are finding trading things like the DAX and Oil a little precarious and volatile you can often put good directional trades on in these Interest Rate Futures, as the Central Banks try not to cause too many surprises; flagging their intentions with their rhetoric as they go along, and guiding the market if expectations are going awry.

Many professional traders trade huge amounts of size in these contracts every day. The equivalent in Europe is the Euribor, and in the US it’s the 3 month Eurodollar Futures. They are among the most actively traded Futures contracts in the world.

Check with your Spread Bet provider how wide their spreads are on these products. They should be quite tight, because they don’t move about quite as much as things like Equity Indices, Gold and Oil.

Let’s finish up by clearing up some confusion: We produce a report each day on NYMEX WTI.

NYMEX is the name of the Exchange where it is traded; the New York Mercantile Exchange, one of the few remaining “open outcry” Futures Floors (due to be taken over by the CME Group). WTI stands for West Texas Intermediate. This is the Benchmark Crude Oil in the US, and is also known as “Light Sweet Crude”.

Happy Trading,

Cheers,

Clive.