Sandy Jadeja explores upcoming trading opportunities. Market Snapshot turned bearish, as indicated by the red bars. The shift in momentum indicates that the index is likely to continue to trade lower.
ince the highs in March, stock indices have declined steadily. There have been trend reversals in terms of momentum, which have also supported the case for lower prices. However, the decline
Support at 5580 had provided a move higher, and there is minor resistance at 5783, which, if cleared, could help lift the S FIGURE 1: FTSE 100 (DAILY)
has not been as steep as expected, which has surprised many traders.
As April comes close to rolling into May, the question is whether a summer rally will develop, or if the decline will continue. Much depends on how chart patterns develop.
Using classical technical analysis, traders can see that lower highs and lower lows have developed. It is to be expected that the bearish trend should lead to lower prices. However, confirmation from longerterm charts, such as the monthly charts, is required to establish that a major downturn is developing.
Analysis of multiple timeframes is necessary for a long-term view. The daily charts will be first to show signs of reversal, followed by the weekly and then the monthly charts.
Technical indicators such as momentum, Stochastic and other ‘over-bought’ and ‘over-sold’ tools are unlikely to be useful in the current environment. It is better to use the classic patterns, trading above key highs and below key lows, which can be triggers to capture trades.
Some traders use moving averages as a trend tool and others approach the market with Elliott Wave patterns. Whichever tools a trader uses, risk control is most important. As the markets become bullish or bearish, traders should let the markets dictate when to trade, and decide on where to trade, risk control, and position sizing.
As we enter summer, it would be nice to see bullish moves on the monthly charts continue, but the weekly and daily charts suggest that the downside might not be over just yet.
The FTSE 100 has struggled to break past 6000, although the index has attempted to break past the key resistance barrier on several occasions.
At the time of writing, the index is trading below the secondary resistance level of 5820. More importantly, the trend has
FIGURE 2: GOLD (DAILY)
MAY/JUN 2012 Market Snapshot
Although a decline in stock indices can invoke the element of fear to take gold prices higher, this has not been the case. Gold has taken a tumble and created a trend reversal, which was not expected by many traders.
FTSE 100 to 5820. If the index breaks below 5690, it is likely to retest 5580. After this support level has been tested, the index could fall as low as 5250.
For now, however, focus is on the daily chart to see how the pattern develops. Towards the end of the month, there should be further clues from the monthly chart.
Although a decline in stock indices can invoke the element of fear to take gold prices higher, this has not been the case. Gold has taken a tumble and created a trend reversal, which was not expected by many traders. However, longer-term charts for gold remain firmly bullish at present.
We expected a pullback to $1630 after gold broke below initial support of $1660. So far, this level has provided a base for the metal.
If gold fails to hold at $1630, it might move down to $1585 in the weeks ahead. The trend on the daily chart is still bearish, so pressure is likely to remain on the downside.
Once gold has found support, there could be a reversal, lifting prices back towards the $1800 level, and eventually reaching the anticipated $2000. However, for now, the safest way to trade is with the trend. That remains bearish until proven otherwise.
Sandy Jadeja is the Chief Technical Analyst for City Index, a leading provider for spread betting, CFDs and foreign exchange. Sandy has been involved with the financial markets for more than 23 years and is a respected and widely recognised analyst and trainer in technical analysis and trading strategies. He appears weekly in the media and financial press and can be reached at email@example.com
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