Chart Analysis

Please show an example of how you use Chart Analysis.

Here is a Chart Analysis lesson using the 2005 December Eurodollar contract as an example. First of all, establish what the markets contract specifications or specs are.

EDZ5 Exchange: CME Contract Size: $1,000,000 Point Value: $25 FND 12/19/05 LTD 12/19/05 Options Expire 12/19/05 Trading Hours 8:20 am – 3:00 pm EST

We had the right idea with selling the Eurodollar last week, unfortunately the market ranged a little more than expected and stopped us our for a small loss. By the end of the week we got the reaction to resistance we were looking for as prices retreated to familiar support at 9624.

This Week: The ED is likely going to continue lower this week; the big question is how low can it go? I would love to sell it back to the support at 9603; however there is some very nasty support at 9617 which could cause us some problems on the way down. Even so, I would consider selling the ED below the 9624 support from last week and use the 9627 resistance to cover the trade for an approximate risk of $145 per contact. If the market did trade back to 9603 this would give us a potential profit of $475 per contract for a decent 3:1 reward vs. risk.

RSI has made a nice bounce off the trendline and is still far enough from the oversold region that I'm thinking the market has some room to move. I'm hoping that by entering earlier we will have an opportunity to get stops to breakeven before encountering the 9617 area, so worst case we get stopped out without a loss, but we'll have to see what the market gives us. Chart analysis tell us that certainly this would be a much less risky trade if the 9617 area didn't exist.

Trade Summary SELL December Eurodollar at 96.225 Exit Order: 96.2825 Approximate Risk Exposure: $145 per contract Profit Target: 9603 (watch out for 9617) Approximate Potential Profit: $475 RRR: 3:1 Degree of Risk: Moderate to HIGH