From the March 01, 2012 issue of Futures Magazine • Subscribe!

Demystifying technical trading

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.

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