Creating Structure Around Technical Analysis

[Shaun Downey 10]

Markets reverse or accelerate around holidays

 

This statement is one of the key mantras and components of I-Traders philosophies as many years experience has shown how often pivotal moments around such times occur. Of course not all markets will do this around every holiday, but with this being the first of the calendar year, it is one of the most important, as strategic players look to allocate the first substantial positions of the year.

 

The period of Xmas and the New Years as shown in the video blog of Jan 3 highlighted some potential areas of interest and some conclusions can already be made. The rally in stocks lasted just two days in what was a failed attempt to build a higher trend. For bulls, the extinguishing of optimism and the theory that a wall of money was ready to coming off the sidelines being proved false is very disappointing. The market is obviously is still happy to get almost no yield. Fridays decoupling of gold from the stock market was also a sign of nervousness. Most Index’s are close to or below there December lows and as it stands, the S*P would need to rise more than 100 points from its current value to signal that an uptrend was sustainable.

 

This has been a common pattern as most of the trends mentioned were short lived, although in contrast to Index’s, Bond markets (especially Uk Gilts) provided a swift opportunity and have still to make new highs. Underperformance of Gilts looks to remain a common theme.

 

Therefore, it is to the commodities that focus concentrates and especially grains and softs. Much has been said about how tracker funds will have to rebalance and what impact that would have into the months end. For a pure Technical Analyst that news is already in the price and largely irrelevant. For me I traded fundamentals and core price action long before technical’s and therefore find it impossible to ignore what is the supposed justification for market behaviour. Therefore, it is worth noting via Open Interest and the Commitment of Traders how the former on some grains are as much as 50% lower than a year ago, and on the latter, how funds are short coffee. Both facts mean that whilst the level of participation is unlikely to reach the heady levels seen previously, there is still plenty of fuel, if strategic players deem baskets of commodities as an attractive asset class.

 

Soybeans appear to be the most interesting from both a fundamental and technical viewpoint. Monday Jan 12th saw an overnight rally on poor weather in Argentina, dramatically put in its place by a bearish monthly and quarterly USDA report which saw a move to limit down, with the spot month showing even larger falls. The subsequent price action through the rest of the week is highly instructive.

 

The first is the lack of follow-through on the subsequent days, with an inability to even post a lower close than Monday. By Friday the market has almost erased all of the losses. This is a classic example of bad news good action, and is a phenomenon I am constantly on the look out for in all markets. For the trader, the first sign that the long side could be reengaged on a somewhat crude basis was Thursdays break above the post breakdown weeks high at 992 in the March contract, as fears of poor weather and continued unprecedented demand from China resurfaced. A private report questioning Brazil’s crop size also set off a swift rally, which highlights the markets sensitivity to bullish stories. The wide ranging day of the USDA report has left behind what is called an Inside Bar pattern, or for Drummond’s geometry users, a blocking bar. However, both patterns from a classical analysis viewpoint require a close outside of the range that has been created since Jan 12.

 

Looking in closer detail and by manipulating the historical data to the pit only highs (essential if you are to understand where the concentration of volume and price activity lies), reveals that a negative Island Reversal has been quickly erased as the gap has been filled. It is worth noting that the rally began on December 5th with the opposite pattern (see Fig1).

 

This leads me into methods of qualifying classic patterns. Figure 2 shows two such confirmation tools on the all session chart. The first is the black arrow which signifies divergence on the Rsi. The proper quantification of divergence is a vast subject and one that has taken me decades to even come some way to doing so in a practical and useful manner. Without going in depth the signal is derived by taking different relationships between price action and the indicator so that absolute highs or lows that would traditionally be referenced in divergence, are ignored and new relationships that are far more accurate and rare are created. This is evident by the Rsi itself appearing to have no divergence at all. (See chapter 4 of Trading Time for more detail). The horizontal lines on the chart are another study called Range Deviation Pivots (see chapter 1 Trading Time), and whilst there are many uses and methods for this indicator, one of the core ones is when price closes beyond the 3rd Deviation Pivot. This combination of an Island, divergence and then expansion of range beyond its current statistical norm confirm a powerful reversal in trend. Another crucial element that Cqg allows for in the area of data manipulation is the ability to create continuations based on one contract month. This particularly applies to seasonal markets, so that proper relationships can be analysed. A common one is new crop/old crop and figure 2 is a continuation of the new crop which is November. The chart plots the whole year of November before rolling.

 

Figure 1

 

 

Figure 2

 

 

Returning to the recent price action, of far more significance is the fact that Wednesday the control point moved from the low of the trend to the top of the trend (see fig 3). That moment is often the trigger for a fresh trend, which began the following day. Effectively the point of most time is the point of fair value and when this shifts the markets perception of value does the same. In the absence of being overbought, the bias is that the trend will continue, providing price stays above that fair value point or for the more aggressive player, above a closing low of the blocking/inside bar.

 

With the holiday now coinciding with this shift in momentum, the opportunity to rally sharply is in place. Whilst the supports, break out points and momentum are clear (as this involves analysis of the current trend), a key component of my analysis when the current trend is unbalanced, is to use the previous trend as the basis of all potential resistance points.

 

That trend began in July last year. This is where good technical analysis software and deep accurate databases become critical in your ability to decipher the markets road map so that good sound structured trades can be implemented. Cqg is the best in the market at doing so.

 

Figure 4 shows the previous trend and what is clear is the fact that once price in the current trend held above 985, it opened up what I refer to as a vacuum. This is an area where the previous trend spent little time. Little time equals little resistance as price is free to move quickly up the vacuum to where a previous distribution low (more time) began. This remains a considerably distance away at 1182. A minor level appears at a gap at 1121 and what the first point of reference.

 

Figure 3. Wednesday sees control move higher. Fair value is at the top of the trend.

 

 

Figure 4. The previous trend. Note how it only uses the pit only data

 

 

In conclusion, the opportunity for a trend has many of the classic ingredients which makes early this week a crucial time. If you have any comments or questions they can be posted on the I-Traders comment section within the Blog page or on the forum of Traders laboratory.

[Russ12 10]

Shaun

 

where can I find a auto program for TS for a MA crossover.

 

thanks

Russ Yates

RYates6690@aol.com

[smwinc 20]

Nice post Shaun.

 

As we have just gone through Chinese New Year, Hong Kong has been closed for 3 days - China (Shanghai) has been closed for 5 days. Taiwan & Kospi also taking holidays.

 

23rd January was the last trading day where all the Asian markets were open.

29th January was the first trading day where all the Asian markets (excl. Taiwan) re-opened.

 

On the 23rd January S&P 500 closed at 823.5 and rallied to it's swing high on the 29th January to open at 871.5

 

What fuels these large moves?

 

Large institutions took large LONG positions in the Asian markets on the 23rd.

 

They continue their buying in the European & US markets the following days.

 

As the European & US markets rally, there will be plenty of partipants in the Kospi / Hang Seng / China H-Shares / Taiwan who are SHORT and are going to be BUYING the correlated European & US markets as a hedge to cover the expected loss they will incur once the market re-opens.

 

The combination of Asian - Longs with vested interests buying the Euro / US indexes & Asian- Shorts attempting to hedge their exposure tends to compound and exagerated moves are created as other neutral partipants (traders, etc.) join the move.

 

As we can see the S&P 500 managed to rally roughly 50 points over this period.

 

Knowing this, expecting a reversal on the 29th (re-open of Asian markets) is fairly simple. Two of the largest order-flow partipants STOP contributing to the rally - Asian-shorts UNWIND their hedges (i.e. Selling pressure), and Asian-longs previously with vested interest stop buying, and are likely to unwind their longs (more selling-pressure).

 

Understanding this simple process can be the fundemental structure which gives that extra weight to any technical bias for taking these two highly profitable swing trades.

[Shaun Downey 10]

Shaun

 

where can I find a auto program for TS for a MA crossover.

 

thanks

Russ Yates

RYates6690@aol.com

 

If you gp to http://www.strategyrunner.com they should have some systems and means to transmit automatically.

 

 

Shaun

[Shaun Downey 10]

Nice post Shaun.

 

As we have just gone through Chinese New Year, Hong Kong has been closed for 3 days - China (Shanghai) has been closed for 5 days. Taiwan & Kospi also taking holidays.

 

23rd January was the last trading day where all the Asian markets were open.

29th January was the first trading day where all the Asian markets (excl. Taiwan) re-opened.

 

On the 23rd January S&P 500 closed at 823.5 and rallied to it's swing high on the 29th January to open at 871.5

 

What fuels these large moves?

 

Large institutions took large LONG positions in the Asian markets on the 23rd.

 

They continue their buying in the European & US markets the following days.

 

As the European & US markets rally, there will be plenty of partipants in the Kospi / Hang Seng / China H-Shares / Taiwan who are SHORT and are going to be BUYING the correlated European & US markets as a hedge to cover the expected loss they will incur once the market re-opens.

 

The combination of Asian - Longs with vested interests buying the Euro / US indexes & Asian- Shorts attempting to hedge their exposure tends to compound and exagerated moves are created as other neutral partipants (traders, etc.) join the move.

 

As we can see the S&P 500 managed to rally roughly 50 points over this period.

 

Knowing this, expecting a reversal on the 29th (re-open of Asian markets) is fairly simple. Two of the largest order-flow partipants STOP contributing to the rally - Asian-shorts UNWIND their hedges (i.e. Selling pressure), and Asian-longs previously with vested interest stop buying, and are likely to unwind their longs (more selling-pressure).

 

Understanding this simple process can be the fundemental structure which gives that extra weight to any technical bias for taking these two highly profitable swing trades.

 

 

I'm sure its valid, especially after such a long holiday. I write a daily commenatry on Taiwan so am very familar with how the influence of the S*P can be. It will be very instructive to see Mondays price action. For the S*P 807 and 866 is the range so closes outside that dictate the next trend. With the S*P having its worst January performance ever the bias is definetly down.

 

cheers

 

Shaun

 

Shaun

[bundrider 10]

Hi Shaun, I was speaking to anthony cohen the other day in Singapore who told me of your Asian market analysis, where do you distribute these reports from and do you have a trial available? Thanks

[Shaun Downey 10]

The only specific Asian stuff is on the taiwan market. Anthony could send you that. I do a spot Fx one on the 6 majors and there is also bonds/indexes availible on http://www.i-traders.com. If you contact them vai there contact us tab and say you have emailed me and I've said you can have a trail for a couple of weeks, they will email them direct to you. The cost is 50 pound per asset class per month

 

The site has only been up a couple of weeks so we will be expanding coverage into different areas so if you tell me what Asian markets you are interested in, I can get in touch when the time comes.

 

Regards

 

Shaun