Volatile commodity prices are great news for traders

On Wednesday, I explained how I found excellent – and very profitable – swing trades in the GBP/USD market using simple Elliott wave and Fibonacci concepts. The market gave textbook turns at highly accurate and forecastable price points.

Today, I want to cover the FTSE 100 index, which is a market that I follow avidly, though I do not trade it quite as often as the Dow. Nevertheless, the FTSE has offered – and still offers – some excellent swing trades.

About 20% of the market cap is made up of commodity companies, which  means the index is somewhat aligned with commodity prices. Of course, those prices have taken a hammering in recent months. But a relief rally in copper, aluminium and other metals – as well as a staggering rally in crude oil – has lent support to the FTSE in recent days.

Knowing a market’s history is crucial for traders

To analyse a market, I always start with the long range chart to put the current market into perspective. Below is the weekly chart going back to 2007. And there are several features that stand out.

The rally off the 2009 low has flowed within a lovely wedge (blue lines) that has multiple pretty accurate touch points. And the entire bull market is in a clear A-B-C form, which is counter-trend – meaning that when the main trend resumes, it will be down.

The final thrust into new highs occurred on a momentum divergence, indicating the rally was running out of steam from 2013. I was therefore prepared for a major turn down at some point.

And when the market broke below the lower blue line, that was my confirmation that the bear market was in force and my first major target is at the lower tramline (tan line) in the 5,400 region. I drew this line equidistant from the upper blue line.

FTSE 100 spread betting chart

This is a very important rule concerning wedges: when a wedge is broken, it is normal for the market to move in the opposite direction the same distance as it moved up or down from the start of the wedge. That places my other target near the 2009 lows in the 3,500 region. Of course, that may not be the end of the story and lower targets are possible, depending on the chart patterns that are to be traced out.

So, that is my long-term roadmap.

What’s next for the FTSE 100?

Let’s now get to the short-term picture. On the daily chart, the break of the lower wedge line last month took the market to my green support zone. This green zone was resistance from 2011 to 2013 where all attempts to push above it were resisted. Then from 2013, it was a zone of support where breaks below were prevented.

FTSE 100 spread betting chart

That zone is therefore a very important area for the market. Since 2011, it has considered that zone critical, and I shall do likewise.

However, the August plunge broke that support and the market rapidly moved down to the Fibonacci 38% support level. That support was sufficient to reverse the decline and currently, the market is back up testing the green zone resistance.

Let’s take a closer look. Below is the daily chart from 2014. From last year, the market has traced out another wedge (this market is full of them). And when the market broke below the lower line, that was the ideal signal to short this market.

But note the market reached my wedge target – at the start of the wedge at the 6,200 region – and demonstrated the validity of the wedge target rule very quickly. Refer back to my main forecast above, where I call for a decline to the 3,500 area – at the start of the large scale wedge.

FTSE 100 spread betting chart

Of course, that target was an opportunity to take profits if so desired – and that would be a gain of around 700 points, or a profit of £7,000 on just a £1 spread bet.

So now, we have a new bear trend operating and in the last few days, the market has rallied in a relief swing right into the green resistance zone (see second chart).

My short position was a trader’s dream

Let’s now zoom in even closer. Below is the hourly chart showing the sharp decline off the August 10 high and the subsequent relief rally. The pattern is clear: it is an A-B-C, and that is the signature of a counter-trend bounce. Not only that, but the C wave carried to the Fibonacci 50% retrace of the wave down – a typical turning point:

FTSE 100 spread betting chart

Confirmation of my analysis will come if/when the market breaks the B wave low at 6,000. Until then, the relief rally could develop into something a little more complex. But the short trade at the C wave high was the textbook play – and it could have been placed at low risk by entering your protective stop just above entry.

So just by following simple tramline trading concepts, it has been possible to identify some great low-risk trades, and with the bonus of being able to forecast price targets well in advance.

What more could a trader want?