18th April 2011
Equity Overview
Focus on Dax Futures

A strong bounce since the lows made last Monday have seen the Dax gain nearly 500 points and finally broke the yearly highs last night after Fed Chairman Ben Bernanke’s first interest rate press conference provided a further boost to equities and piled more pressure on the dollar.

Thoughts from the trading floor

After making yearly highs in mid February the German Dax had the biggest pullback of the major indices in the aftermath of the Japan Earthquake, making a low on 16th March of 6436. Since then the market has had an incredibly strong bounce. This morning the Dax Future is trading around 7480, an impressive 1000 point bounce in just six weeks. Previous yearly highs of 7450 were broken last night on the back of a doveish Bernanke press conference, which saw big moves in the dollar, commodity and equity markets.

Technically the Dax looks strong and has the potential for another big move up over the long term. Having broken the daily reverse head and shoulders pattern on 20th April the Dax has surged higher and yesterday provided confirmation of the move with a break above the highs of the year. If the market can close above the highs today, the long term pattern is for a another leg up in equities.

This is not to say that it will be one way traffic. After such a quick move to the highs, a pullback of some sorts cannot be ruled out especially as we approach the end of the month and long weekend in both the UK and Europe. There may be some traders and institutions looking to take profits at this level. As long as the market stays above the neckline though, the market remains bullish. For reference, the long term technical target of this move is 8125, just 125 points away from the all time highs made in December ‘07.

In the short term the outlook is less clear. We are wary of such a strong run up in equity prices over the last few weeks and days especially. We will look to see if the market makes a strong break of the highs or if indeed there is some resistance at these levels. Short term support in the Dax June contract lies at 7355 and further at 7265.

Bull View
After breaking the daily reverse head and shoulders pattern the market is long term bullish. If the bulls can keep the market above the recent highs for a few sessions, the short term target will then be 7770.

Bear View
The bears have struggled recently and will have to defend these recent highs if they are to gain any momentum back. If they can get the market back below 7400 they will look to test 7265 initially. A break back below the neckline of the head and shoulder would be a meaningful downward move.

Futex View

We have been long term bullish equities for a while and now and continue to be so. With the weakness in the dollar across the board, and the reactions to bad news often proving only temporary stumbling blocks, the market has shown remarkable strength. Though there may be some small pullbacks from the current levels we expect the Dax future to break higher in the coming months.

Equities were generally subdued on Friday.... (more...)

Overview

This week’s Strategy Session focused on the identification of specific price patterns in the market, how to avoid enduring big losses and the importance of having a big picture view of markets you trade.

Thoughts from the Trader

Last week, as global equity markets generally sold off, the Euro Stoxx 50 remained relatively bullish as the peripheral sovereign debt crisis stabilised. The stabilisation was as a result of the introduction this week of the European Financial Stability Facility (EFSF) Euro Bond and the expected demand from Japan and China for the new asset. Their support of the bond led to a positive expectation surrounding this week’s auction. Highlighting this strength was an atypical correlation between the Euro Stoxx 50 and both the Dax and FTSE 100. As and when selling pressure dried up in these two markets, the Euro Stoxx 50 strengthened immediately, sparking the rally we saw throughout the week.

The opposite was witnessed in the Bund market which sold-off last week, putting the Bund under further pressure going into this week. Yield spreads in the Eurozone continued to tighten aggressively and even the political unrest in Ireland failed to trigger any further widening. Credit Default Swaps (CDS) also shrugged off the news and appear to have fully priced-in the whole Eurozone crisis. With regards to the state of the Eurozone, the EUR/CHF is a key market that traders should be well aware of. This currency pair acts very much as a lead indicator and its recent rally indicates a level of stability and certainty regarding the Eurozone. Interestingly, the Bund witnessed increased volumes last week after the quiet conditions over the Christmas period.

Looking forward to this week, our Senior Traders emphasised particular strategies/patterns that all of our traders should be paying attention to. They also reiterated the importance of remaining patient in the market. They reminded the forum that being able to consistently extract 2 ticks/hour from the market would be enough to enable you to grow your account over time. The forum was also reminded of the importance of having a sound understanding of the big picture of the markets. It is a trader’s responsibility to gauge the big picture and how it changes over time in order to spot cross market correlations and lead indicators. For example, the behavior of both the Dax and FTSE 100 Index last week aided our Senior Euro Stoxx traders.  The associated strength in the EUR/CHF along with the tightening of European yield spreads were sound primary indicators of an increased desire for European risk assets and the diminishing appeal of Bunds as a safe-haven.

Further to the Bund’s weakness, both the Schatz (German 2-year Bond) and Bobl (German 5-year Bond) sold-off throughout the week on heightened fears of impending interest rate hikes. These fears triggered a flattening of the yield curve. The sustained selloff in the Bund was interspersed with strong blips as a result of aggressive buying as traders executed spread trades, selling particularly the Schatz and buying Bunds. It is imperative that Bond traders are aware of these sorts of price patterns and the accompanying logic behind them. With knowledge of such patterns, traders should exercise caution when selling into aggressive breakouts due to the recent trend of the Bund retracing strongly back into its previous ranges.

The increased volatility in the Bund market provides both opportunity and risk. As a result, ensuring stops are effective and kept relatively tight is of paramount importance. Slack stop management and a lack of discipline to take effective losers can quickly result large losses and being stopped out for the day. As a trader you must live to fight another trade and must continuously ask yourself “is the reason I entered this trade still valid?” If this is not the case, you should immediately exit your position.

In terms of fundamentals, this week we have the FOMC meeting on Tuesday evening with no action expected to be taken by the Federal Open Market Committee. As a result, this increases the chance of a significant price shift if any action were to be taken, as it will not be priced-in to the market. Sound preparation is thus vital to seizing such rare opportunities. On Friday the US GDP report will be released and the market reaction to both a strong or weak figure will be fascinating for traders. A weak figure will be linked with the high possibility of the introduction of more Quantitative Easing.  A strong figure, even though positive, could be associated with the market’s current inflation fears and increase the chance of interest rate hikes. In the UK we see the release of the Bank of England Minutes on Wednesday which will be of particular interest due to the current elevated level of inflation. The Minutes may reveal whether the Monetary Policy Committee has become more hawkish and when the expected future rate hikes can be expected.

Summary

Once more Futex traders have had their attention focused on the importance of “the big picture”. Going into this week’s trading their ability to spot those markets which are lead indicators and are going to present them with opportunities is of key importance. With the FOMC meeting, BOE minutes and the US GDP figures being announced this week, opportunities are expected to come thick and fast which means all round knowledge and thorough preparation will be essential in the quest for profitability.

The Dax continued to push higher yesterday.... (more...)

The Dax traded marginally lower yesterday.... (more...)

The Dax future closed lower on the day..... (more...)

The Dax railied strongly yesterday....... (more...)

The Dax pushed higher yesterday..... (more...)

The Dax traded lower yesterday..... (more...)

The Dax saw mainly sideways trade on Friday.... (more...)