Index Futures Trading: Possible Reversal, Gold, Silver, US Dollar Index for February 10, 2012

Index futures trading commentary for February 10, 2012. Stock indices run in cycles. In the past few months, we have observed steady upwards movement in the US S&P; 500, the Nasdaq, and the Dow Jones Industrial Average (DJIA). Over the past six weeks or so, we have seen the same in both Silver and Gold COMEX futures. Inversely, during the last month we have seen a steady decline in the value of the US Dollar INDEX(USDX). It looks like we may be at an inversion point in these markets. Following are some examples demonstrating that a cautionary stance should be taken because a correction or trend change may be coming soon. All of the charts below are of futures contracts and are depicted in the daily (1 day) time frame.

First, we will look at the S&P; 500 March futures contract.

We can clearly see a steady uptrend lasting since mid-November, perhaps even early October. This is indicated by a green arrow. In the lower half of the graphic we are seeing a steady decline created by the peaks of the MACD histogram. This is pointed out by the red arrow. This is telling us that the momentum that has been fueling the steady rise in the S&P; is running out. When we look at the MACD moving averages (the blue and red lines) we can also see that, although S&P; prices made new highs this week, the MACD did not correspond. This is a warning sign that steam may have run out for this upwards price dynamic.

Second, we will look at the Nasdaq March futures contract.

We are seeing something very similar here. The Nasdaq has been in a steady upward move since the new year. However, for the last month, the MACD histogram has been in steady decline. This is a clue that the upward drive may be running out of steam. Notice the last bar on the histogram has ticked down lower than any other bar in the last week.

Third, let us look at the chart for March Dow Jones Industrial Average futures.

Once again, we are seeing the same pattern. We observe steadily increasing price values, corresponding inversely to a steadily declining MACD histogram. To further corroborate this loss of upward momentum, we can see that the MACD moving averages have failed to make higher highs while the DJIA futures price went into new high territory, as indicated by the yellow arrow. Not only that, but while the DJIA was making new highs this last week, the MACD histogram was barely keeping its head above water and closed today in red territory.

These three major indices are all showing the same symptoms of dwindling upwards momentum. Now is a time to be very wary of what may lie ahead. Now, let us look at Gold and Silver, the two most prominent precious metals.

As our fourth example, we will observe April COMEX Gold futures.

We can clearly see a strong upwards dynamic since the new year. However, we also see that the MACD histogram is declining fast. In this case, this is not a particularly strong signal. However, we must keep in mind that the indices and the USDX (we’ll look at that soon) are giving us cautionary clues.

As our fifth example, let us look at March COMEX Silver futures.

Here, we can see the very same situation as with Gold. Prices have been steadily rising for silver futures since the new year, but for the last month the MACD histogram has been in a sharp decline. Is this a signal that indicates a bear market? No. However, it is a signal that warrants caution and careful vigilance of the markets in the next few days and weeks.

As our sixth, and last example, we will look at March US Dollar Index futures.

We can see a steady decline is USDX values since mid-January. However, as prices made new lows this week, the MACD histogram was steadily rising and approaching positive territory. The last bar of this chart (Friday, February-10-12) was up substantially.

What can we conclude from the six charts that we have looked at? We saw three major indices, the two most prominent precious metals, and the US Dollar index. The first five markets are showing signs of distress, while the USDX is showing signs of a possible reversal into an upward dynamic. Does this mean the stock markets and gold are going to crash, I doubt it. It does mean that we need to be careful until either the upward trend is re-confirmed, or until a corrective downward movement is identified. As with all businesses caution and planning are crucial to success, and trading is no different.

All of the above charts were interpreted using a technique called “MACD divergence”. For those of you looking to learn about trading strategies, I highly recommend learning about MACD-Price divergences. MACD divergences can be applied in a variety of time frames. I like to use the technique on 60 minute charts for my personal trading, but I find it very useful to apply to daily charts while trying to gain a perspective on larger economic trends, such as I have done today.

This commentary for February 10, 2012 has dealt primarily with US stock index futures trading and US dollar index futures trading. Index futures trading is an incredibly huge market on the US exchanges, both in full contract and E mini index futures trading. US dollar index futures trading is also a lucrative market, although the volume traded in US dollar index futures contracts pales in comparison to that of US stock index futures trading.

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