Financial Futures: Technical and Fundamental Analysis

Name: Alan Bush Company: Archer Financial Services

Years Trading: 32 Favorite Movie: Tombstone

S&P 500 - Weekly

Technical

A major uptrend line was broken in early January with follow through to the downside. There was heavy volume on this sell signal, which confirmed the validity of the indication. Since then, there has been recovery, but on relatively light volume. A downtrend line has been broken on the upside recently, but without much conviction. On the recovery, prices moved to just a little above the half way back natural resistance area. Technical indicators remain bearish.


S&P 500 - Monthly

Technical

This longer-term chart shows a major trend line, dating back to 2003, was broken on the downside. Currently, a double bottom pattern is holding at the 125300 level, which may be giving the longs a false sense of security. The major trend line breakout to the downside remains the dominant feature. In spite of recent recovery gains, technical indications remain bearish on this chart, as well.

Fundamental

Selling pressure developed after the Federal Reserve Bank of Kansas City President, Thomas Hoenig, made hawkish interest rate comments. He said, “There is a significant risk that higher inflation will become embedded in the economy and require significant monetary policy tightening to reduce it.”

Currently, there is an unusually large premium priced into the S&P put options, compared to the call options, which is the largest price differential in almost three years.  This suggests that traders are willing to pay a premium to protect against a possible price decline and it may be a precursor to lower futures prices. In addition, traders are paying the highest prices, relative to earnings, since the first quarter of 2004. From a technical and fundamental point of view, expect lower prices, which will probably continue through the summer months.

Euro Currency - Weekly

Technical

Based on the measured move technique, which takes the price difference from point A to point B and is added to point C, we have calculated a price objective at point D. This objective of 1.5972 was slightly surpassed before the recent price correction. A penetration of the double bottom at the 1.5273 could mark the end of the current price correction.

Euro currency - Monthly

Technical

The longer-term chart looks more constructive than the weekly chart. A major uptrend line remains in tact as does the trend line that was previously broken to the upside in March. Expect support to develop at the 1.5100 trend line up to just under the 1.5273 double bottom.

Fundamental

Selling pressure continued to take the euro lower after euro zone retail sales fell 1.6% from a year earlier. This was the largest decline since the series began in 1995. A drop of only .7% had been forecast.  The European Central Bank is widely expected to leave credit policies unchanged at least until late this summer. The central bank’s benchmark interest rate currently stands at 4%.

Interest rate differential expectations are becoming mildly U.S. dollar friendly, at least for the short term. However, this situation will probably reverse soon, as additional subprime problems in the U.S. are revealed and as the U.S. economy continues to weaken.

British Pound - Weekly

 
Technical

A long-term trend line that dates back to March of 2006 was decisively penetrated on the downside in December of last year. Since then, there was limited recovery that was not able to test the original trend line. A more recent trend line has been broken on the downside with limited follow through. Futures, most likely, will test the January low of 1.9280.

British Pound - Monthly

Technical

The longer-term view is not giving much encouragement either. Since the January breakout to the downside, there has been limited recovery. Major support comes in at the 1.9183 to the 1.9280 area, which may only provide a temporary bounce. Technically, this market appears to be among the weakest of the Group of Seven major currencies.

Fundamental

The British pound fell to a 2-½ month low against the U.S. dollar after a report showed U.K. consumer confidence dropped to its weakest level in four years. U.K. manufacturing unexpectedly fell in March, which added to the pressure in the pound. Also, the Bank of England’s Monetary Policy Committee has lowered interest rates recently and it appears that there will be additional rate cuts from the U.K. central bank. Although the pound may hold up relatively well against the U.S. dollar, it is likely to continue to lose ground to the euro currency.

U.S. Treasury  bond - Weekly
 

Technical

A broad double top formation was penetrated on the upside last September. There was a false sell signal later, when prices temporarily rolled under the breakout point. More recently, an uptrend line was penetrated on the downside, but with limited follow through and on limited volume. Most likely, the major support area that is just below current levels will hold.  

Fundamental

The large amount of Treasuries offered in the recent refunding operation has been a drag on prices.  Until just recently, the bearish influence of U.S. dollar weakness was offset by the usually bullish influence of an accommodative Federal Reserve policy. Based on what we are seeing from a technical and fundamental basis, it is likely that futures will continue to trade within the range of 11313 to the 11429 area on the downside to the 12000 to the 12117 level on the upside.

Eurodollars -Weekly

 
All charts provided by APEX

Technical

A major bull market that began in September of 2007 appears to be intact. Prices were able to break out above a triangle congestion pattern in February of this year. One important rule of thumb worth remembering is prices breakout of a congestion pattern in the same direction that they came into the pattern about 60% to 65% of the time. A steep downtrend line has recently been broken on the upside suggesting further gains are likely.

Fundamental

The short end of the curve is holding up very well, in spite of the Fed’s recent hawkish interest rate comments. We can expect a weakening economy to continue to support the short end of the curve, while the anticipated return of U.S. dollar weakness will limit gains for the longer dated maturities. Expect the Eurodollars to continue to gain on the10 year notes and the 30-year bonds. Technical and fundamental analysis suggests the bull market remains intact for Eurodollar futures.

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff.  The information provided is designed to assist in your analysis and evaluation of the futures and options markets.  However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright © ADM Investor Services, Inc.

About the Author

Alan Bush has been a commodity analyst since 1976 focusing on the fundamental and technical aspects of stock index, interest rate and foreign currency markets. He has authored several articles for Stocks Futures and Options magazine and produced the “Futures Tech Focus” program, which is a technically based market outlook.

Alan served on the faculty of Oakton College as instructor of a course entitled, “Principles of Technical Analysis.” He has been interviewed on many national television programs, appearing on the Nightly Business Report, CNBC, CNN Moneyline, Reuters Television and Web FN. In addition, he has been frequently quoted in The Wall Street Journal, USA Today, The Bond Buyer and the Chicago Tribune and has been regularly interviewed on Chicago’s WMAQ radio business reports.

Alan can be reached at (312) 242-7911, or via email at alan.bush@archerfinancials.com.