Hello and welcome to Cantos Masterclass. I'm Sandy Jadeja, Chief Market Strategist for CMS FX.

We're going to cover a series of lessons in how to combine indicators. This is essentially what we've learnt in the last few lessons, but as always, this is simply for information and educational purposes only.

Today we'll take a look at combining indicators and the two areas we're going to cover is the moving average combined with the RIS indicator.

Now, in this particular chart over here, this is cocoa, the May contract, we'll look at these two indicators as we've learnt about in the previous lessons. What is the chart telling us and what exactly are we looking for in this particular chart here? The most obvious point that really stands out straight away is the three peaks labelled 1, 2 and 3 and those occurred at the 3,514 area. Well straight away we have a triple top pattern and of course the market failed to climb any higher and then started to break down at the channel just around the 3,150 area. Once the market had broken below that low we accelerated towards the downside, but the moving average had also given us an indication by pointing towards the downside.

Now, in the previous lessons we discussed the technical indicator called the RSI (the Relative Strength Index). What information had that been giving us? The two blue lines on the upside and the downside are referred to as the overbought and the oversold area and these are marked off at +30 and +70.

When cocoa had reached, on the RSI, the +70 mark, the market continued to go higher. In other words, as far as cocoa was concerned, it was not overbought. But recently, we've seen the RSI just come down towards the 30 area suggesting that we might start to see a move towards the upside. In actual fact, we did see a small move. That actually turned out to be a bear flag and then of course the market continued towards the downside. Now at 2,754 we had the market consolidating here in a sideways channel and of course, the RSI itself is also moving sideways after reaching the 30 area.

So is this a buy signal? Straight away what we can say is that the short-term trend has been towards the downside. We would look for a continuation if cocoa drops below 2,754 for further selling pressure and lower prices. Cocoa would need to take out the 2,900 area - just a little bit above this consolidation area - and we would need to see a rise in the RSI and the moving average turn towards the upside if we are going to see higher prices.

Now if we move to the weekly chart, it's a slightly different picture here because what we've seen, again we've seen the triple top at the 3,514 area. Now, as the market declined it took out the 3,120 area and we have a lower high at 3,175. Notice that on the weekly chart the moving average is pointing towards a downside, so it's suggesting that at least intermediate to the longer term trend for right now is still bearish.

But look at the RSI. The green line is actually telling us there is a divergence. So in other words, as cocoa prices continue to go higher, the RSI was diverging and pointing towards lower prices and that of course was followed by the price of cocoa declining.

Also notice that the RSI is still not in the oversold area. That would also suggest that we are not extremely oversold. So if we take out the 2,754 that would allow more room towards the downside for lower cocoa prices.

Now in this chart here, (this is Palladium), what is the thing that stands out the most? Well, we have a double top pattern on a larger degree and also a smaller degree at 4,853 have a double top pattern there as well. You can consider this as a triple top pattern.

Now, again, here it appears, at the moment, that Palladium prices are struggling just around the 483, 472 area. Look at the RSI. We also had a double top pattern on the RSI. It had reached the overbought area, but right now, as the Palladium prices are starting to come off a little bit, we still have not reached the lower price zone in the RSI. In fact, we had never reached the 30 area at all. So that would suggest that the price of Palladium is still quite strong and we should technically expect higher prices if we can get above the 483 area. Otherwise, we may still see some sideways action. Of course, if we take out the 382, that would indicate that we have a complete change in trend.

Now in this chart here we're looking at crude oil, the June contract. Slightly different picture. Crude oil has been trading sideways. It's trading between $70 to $85 and we haven't really seen any major price breakthroughs and we really do need to get out of this channel here. Notice the moving average hadn't really given us great signals because if you had bought whilst it was above, sure there would have been some nice trades, but on the downside, we hadn't had very, very good trades. But also, the RSI had behaved much more nicely and that's what these oscillators do. When you get a sideways market, once the oscillator reaches the overbought area, prices tend to drop off. Once it reaches the oversold area, the markets tend to rally back up again. So in a sideways market the oscillators can be utilised and they actually serve as a much better purpose.

So, notice how the indicators can be useful in a sideways market, but the main tool that we always look at is price. If we get a divergence with price and indicator, that's where we start to see something is on the horizon that is telling us that these two tools are not in tandem and we should be looking for a move either on the upside or the downside. I would always follow the price action; primarily, the indicators as a secondary tool.

So I hope this lesson has been useful to you. In the next lesson we'll talk about how to combine indicators by looking at slightly different indicators as well.

So in the meantime, have a great trading week. This is Sandy Jadeja for Cantos Charts Masterclass.