| The relative position of the futures prices compared to the price of the underlying cash price provides insight into the sentiment of the market players. If a futures contract is trading above the cash price, the contract is trading at a premium. This premium can be interpreted as a bullish sign. When the contract is trading below the cash price, we say the contract is trading at a discount. Discount represents a sign of a bearish sentiment. Should the contract and the cash price be trading at an equal then we have the market at par.
Last week we looked at the Dow Jones contract focusing on a clustering of price pressure points recently intercepted by the market. Chart 1 shows a more microscopic view of the daily market action leading into the recent top. The daily bar chart of the futures contract has a 'close' line chart of the cash price overlaid. The green circles on the chart highlight days where the contract was trading at a premium or par to the cash price. Red circles show where the futures contract is trading at a discount to the cash price. Leading into the top we see majority green circles. Just two days before the top the contract began trading at a discount to the cash price. Futures contracts, by their nature, lead the physical market, with this proving to be a classic example.
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