Technical analysis does not have to be overly complicated. There are many quick and easy-to-learn tools at your disposal. The key is to identify a pattern that has worked in the past and has the potential to continue. A good place to start is with trendlines, moving averages and Fibonacci levels.
When drawing trendlines it is important to use significant lows or highs, and for the trendline to have been touched three or more times. When looking at trendlines, view hourly, daily and weekly charts for correlations. A good hourly trendline can indicate a key intraday move, especially when an economic report is due, and can impact price quickly. Usually when looking at longer-term trendlines, you can see an area instead of one level to key. When a trendline in more than one time frame is broken, it tends to have more impact and helps avoid being whipsawed.
It also is important to look at related markets to confirm a trend. For example, a trendline in the S&P 500 Index may have broken, but a similar trendline in the Dow Jones Index remained intact. This could mean a weaker signal.
Also, when trading futures, keep in mind that there are several different ways to view the same product. For commodities such as crude oil, which have an expiring contract every month, we can look at the near deferred contract for additional confirmation. For contracts that trade in serial months, such as the S&P and U.S. Treasuries, there can be tricky times when the expiring contract still has volume and important price levels to watch.
During the roll period when liquidity begins to shift from the front month contract, it is worthwhile to keep an eye on the next active contract. If we view only the new active month contract, the data may not be reflective of price action for an extended time frame. Looking at the continuation charts gives a better picture, but what type of continuation should you use? Standard charting shows prices after expiration and keeps the same chart until expiration. Active only jumps right to prices in the new most active contract and can leave gaps. Equalizing the closes in active charts uses a theoretical price depending on the spread during the period, but does not reflect real prices in some instances. All should be viewed because what we are looking for is a pattern that is working during our trade.
Traders generally remember prices when they either caught the move or lost money. Buying the high or selling the low tends to leave a price imprint in a trader’s mind. In this way a pivotal price level in the March contract still can be pivotal in the June contract, especially when there is another technical indicator close.
On Dec. 23 the 38.2% Fibonacci retracement was broken in the front month 30-year Treasury continuation chart, yet held on the March contract.
Moving averages are simple and used by many technical as well as fundamental traders. Traders can test various spreads of moving averages, but the 21-, 50-, 100- and 200-day moving averages tend to work well, especially the 200-day. However, some contracts can key another time frame for extended periods. It also is important to note that just because the 21-day average has been working in the 10-year Treasury note future doesn’t mean it will work as well in the 30-year Treasury bond.
We also should view moving averages using line charts. Line charts connect closing prices and don’t give intraday highs and lows. Many large institutional traders, including pension funds, trade at end of day, which makes closing levels very important. Closing keys can be found in moving averages, trendlines and Fibonacci levels. Many times it can be to your advantage to stay in a position until the closing chart dictates an exit. It often is difficult to find a good technical pattern in a chart until viewing the closing chart. In “Toeing the line” (below), we can see some short covering in December as gold climbed back above its 200-day moving average intraday, but settled back below it that same day. Knowing the pattern in the closing chart would have kept the short trade on for another 100 pts. until front-month gold held a three-year trendline support.
Fibonacci levels don’t signal a trade every time one is hit, but can be very explosive when they are working. It is helpful to start your analysis using Fibonacci levels because it is easy to see if there has been a pattern within the levels (see “Fibonacci: Trading the numbers game” by Jeff Greenblatt,
page 26). The most common Fibonacci levels are 38.2%, 50% and 61.8%, and can be used as retracements or extensions (technically 50% is not a fib level, but is a key technical benchmark). If Fibonacci levels seem to highlight key inflection points in the specific contract, check to see if there are trendlines or moving averages that also hit at these levels. This can give added significance to the level. A 61.8% retracement that matches a 200-day moving average will have many eyes on it and should be viewed with greater significance (see “Confirmation,” below). Notice how support was formed at the 38.2% level after the rally failed to take out the 61.8% fib/200-day level and resistance at 61.8% failed after the 200-day was breached.
Finally, when trading markets with related contracts or equivalent cash markets, keep an eye on the underlying contract. For example, when analyzing the E-mini S&P look at the S&P cash SPX. And while you’re at it, see if the big S&P has a pattern not noticed in the E-mini. Many times the E-mini can break a key support or resistance level only to see it work nicely during the day session when more traders are on it. The same goes for Treasury futures. Keep up on the yield charts and the curve for added emphasis. It may keep you from getting stopped out at inflection points.
David Wienke is a technical analyst with more than 25 years of experience. He contributes to futuresmag.com and runs Trequetra Resources Ltd (www.triquetraresources.com).