STOCK INDEX FUTURES BREAKAWAY GAPS AND DOUBLE TOPS
By Alan Bush, Archer Financial Services
The technical aspects of this market have improved dramatically since the near term lows were made in early July. S&P 500 futures have advanced nearly 11% since that low was registered. The breakaway gap to the upside that took place on September 13 was one indication that prices would likely follow through to the upside. First, we have to determine what kind of gap we are actually seeing. A breakaway gap is a continuation pattern and an exhaustion gap often takes place at the end of a longer-term price move. It was only after the subsequent price gains took place that we could determine whether that gap was a continuation gap or an exhaustion (reversal) gap. In this case, the gap was of the breakaway variety, which signaled further price gains. It is usually very difficult to determine if a gap in prices is a breakaway gap or an exhaustion gap at the time of occurrence. However, it was logical that this gap would prove to be a breakaway gap and not an exhaustion gap, since our fundamental analysis at the time of the gap was giving us bullish signals.
Chart Provided by APEX
In addition to the continuation breakaway gap, there was the double top pattern that was ominously lurking above the market; ominous at least for the bears. This double top formation was at the 1122.50-1125.00 level. There is a rule of thumb that the market often goes to where the stops are likely to have been placed. This obvious technical resistance area was probably attracting buy stops, which were activated when this area of resistance was penetrated late last week. Although there was limited follow through to the upside on the day of the breakout, there were decent follow through gains early in the following week.
Once it is established that a gap is a continuation gap and not an exhaustion gap, a technique can be employed that will project an upside price objective. For the record, there is another kind of gap that can occur within a congestion pattern. This variety of gap is called an area gap, which usually has no predictive value. However, the continuation gap can have very important directional implications. For example, a continuation gap can occur at the midway point of a longer-term price move. The daily December S&P 500 futures chart has all the makings of an example of this. If we take the price distance from the August 27 low of 1032.50 to middle of the 1107.00 gap area and add it to the midpoint of the gap we can calculate an upside price objective of 1181.50.
Another technical indicator that is relevant now is the contrarian point of view signal. Currently, the consensus view for stock index futures remains very bearish. Taking a “fade the crowd” point of view, this has to be viewed as a bullish indication.
In addition to our bullish technical outlook, the fundamental analysis that we have done continues to give us bullish readings. The probability of trading success is greatly enhanced when the fundamentals and the technical aspects of any market are giving the same signals. I believe that has been and currently is the case for stock index futures. The fundamentals that we focus on have been telling us that there will not be a double dip recession. It is our opinion that the Federal Reserve does not need to initiate any new quantitative easing plan, since the economy will be able to continue to recover on its own. With or without a QE 2 plan, expect further recovery in the economy. In addition, as the front end of the yield curve becomes steeper in 2011, we can expect the economic recovery to accelerate.
The fundamental and technical indicators that carry the most weight tell us to expect stock index futures prices to continue to advance.
For more information regarding this article, please call Alan at 877.690.7303 or send an email to alan.bush@archerfinancials.com.
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.
