Archive for October, 2009

The purpose of this blog entry is to assess the performance of the MIDAS tools which have been used since this blog began by examining several markets which have been related through risk appetite in recent months at the expense of US dollar weakness.

Intermarket relationships examined

As Howard Simons pointed out in a recent article on crude oil in Active Trader (September 09), intermarket relationships are often transient; markets run in fashions. Which means that Murphy-style intermarket generalizations are often here today gone tomorrow. The current view is that a weak US dollar has become a carry vehicle to finance risk expansion in the US stockmarket, commodities, and other higher yielding currencies. In the case of crude oil, this assumption is given added support by the fact that there is no current supply/demand imbalance in the US; stockpiles are well above the five year average and close to 18 year highs. As a Rice University report recently argued, the increase in the long non-commercials has fuelled the rise in crude prices; thus crude is either being viewed as an inflation hedge against devaluation of the US dollar or it is an out-and-out investment vehicle fuelled by a more general expansion of risk appetite. This week however has seen a consistent halt in this expansion of negatively correlated markets to the detriment of EUR/USD, which was our primary interest.

Assessment: data and reflections

Let’s take a look at how the MIDAS Topfinder curve performed in its application to EUR/USD, US stocks (S&P 500), crude futures and gold futures. Here are the data.

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We have the following implications from the above table:

• S&P 500: the TB-F caught the end of the accelerated trend within two daily bars.
• Euro FX futures: the TB-F caught the end of the accelerated trend within three daily bars.
• Crude oil futures: the TB-F caught the end of the accelerated trend within three daily bars.
• Gold futures: this TB-F was the least impressive, since its 4% of cumulative volume remaining means that it is out by about 14 daily bars, albeit – and this is important – the accelerated trend completed when TB-F was 96% done. Thus, the trend completed within the predictive percentage of the TB-F not outside of it. In retrospect – and this underlines the subjective component to fitting to TB-F correctly – the TB-F curve on gold was launched (a) too early, and (b) was overfitted. These two factors had a negative impact on its functioning.

Where now?

As indicated before in these blog posts, the MIDAS system doesn’t tell us where the markets are going next, only that proximate and less proximate price targets are to be worked out according to fractally dispersed MIDAS S/R curves and, where applicable, TB-F curves. What we do know is that the accelerated portion of three markets has terminated within 2-3 daily bars of where the TB-F curves said it would.

It’s extremely early days to make forecasting predictions about any of these markets. However, a supposition or two here or there is to do nothing more than to recap on suppositions made in earlier blog entries.

As far as crude is concerned, the termination of the accelerated portion of the trend on the 100 week MA is plausibly coinciding with the end of a wave B. If this is the case (and there is also forthcoming parity between wave A and C) we can expect lower crude prices for the next 6 months with a price target being the lows of the 1990s (though again, the MIDAS system isn’t telling us this, a putative Elliott Wave count is).

As far as the S&P 500 is concerned, much depends again from the Elliott Wave perspective on where we begin wave counting this correction. A putative ABC from the 2000 highs put the bottom of this correction in March 2009 with a new impulse currently terminating at a sub-fourth. Alternatively, counting a putative ABC correction from the late 2007 highs implies that the market is currently in (or completing) a wave B, with a large C still to make an appearance. The third alternative, that this putative ABC began at the 2000 top and is now in a large wave 2 of wave C, is to my mind implausible due to the implied disproportionality between putative wave C and wave A, even in an expanded flat scenario. In any case, the following chart, which is a forward/yield curve of S&P futures for the next year and three quarters tells its own story, with an implied support in S&P futures at around 101600, which currently gives credence to the first EW count outlined above based on near-term expectations of implied levels at a sub-fourth wave.

Figure 1: Forward/yield curve for S&P 500 futures, 18 months

For EUR/USD, the sudden turnabout in the US dollar’s fortunes may mean the end of this putative ABC correction in the Euro beginning at the October low. Putative wave A rose in three subwaves, which means that the overall pattern must be a flat, an expanded flat, or a triangle. The triangle option is no longer a possibility, though it could be argued that the overall pattern does have the Fibonacci properties to be regarded as a flat (albeit with a mild expansion of wave C above the high of A). As can be seen below, the forward/yield curve of the Euro FX futures for the next year and three quarters is also bearish, though this near-term bearish sentiment is still above a proximate trendline coming in at around 145000, above proximate daily moving averages, and above displaced Midas support curves, which may in the end not be telling us very much.

Figure 2: Forward/yield curve for CME Euro FX futures, 18 months

Analysing going forward

There isn’t the time currently to utilize more tools to follow the fortunes of these intermarket relationships. Instead, the proposal will be to continue using the same MIDAS tools to analyze these ongoing relationships, starting in the next blog entry.

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- A Coles Oct 09

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This is to update my blog post of Oct. 8th. This chart is the same as was posted then, but updated through yesterday.

See my Oct. 8th post for explanations of what’s in this chart.

Although on an daily basis price has started to turn down, overall it is still in an uptrend since it is still showing higher highs and higher lows. But now, the MPVT is showing flat highs and flat lows, and the MACD is clearly showing lower highs and lower lows. So, these two indicators are negatively diverging from the price, showing underlying weakness in the market. In the upper pane, we see that the average volume on down days is opening up an even wider gap above the average volume on up days, telling us that the “smart money” is in a major retreat from the market.

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In the entry of 19^th October current uncertainty over a likely near-term top in EUR/USD was chosen as a catalyst for two MIDAS applications to Euro FX futures and gold futures. The present blog extends this analysis by doing two things:

1. Update the TopFinder (TB-F) cumulative volume readings in these two futures markets; and
2. Pursue the suggestion at the end of the 19^th October blog and see if it’s possible to apply MIDAS to other intermarket relations currently impacting the EUR/USD issue.
   

Updating the cumulative volume readings in the Euro FX futures and gold futures

The cumulative volume prediction for the Euro FX trend last weekend was 88.5% completed while for the gold trend it was 83% completed.

This Sunday, the Euro FX is standing at 93.2% completed and for gold it is 89.6% completed.

The Long Term Delta and the Fibonacci sequence applied to the Euro FX futures gave a compelling date of 9th November, which is possibly too far beyond the cumulative volume prediction. This date, with a linear regression extrapolation from the cumulative volume reading, gave a price target of 1.52 in EUR/USD.

Recent discussions of US stocks, oil, and US Treasury yields

In two recent articles, Ashraf Laidi has (with certain provisos) made three points.

1. The recent oil price break above $75 accelerated the fall of the US dollar against the Euro beyond $1.50. However, oil is now hitting the 100 week moving average.
2. The S&P 500 is also hitting the same moving average and reaching a Fibonacci 50% retracement of the October 2007 high-March 2009 low. These levels may turn out to be barriers to further risk appetite, offsetting continuous carry-trade selling of USD to finance this risk expansion in the stock market, commodities, and other currencies.
3. The yield curve (10 year-2 year US government securities) is now poised at 2.60%, which is of significance given its peak in the same 2.60%-2.70% area when the Fed was at the end of its previous easing cycles in the 1991 and 2001 recessions. Deficit implications and continued debt issuance indicate that this peak could be surpassed, but we’ll look below at Delta implications as applied to CME 2 year Treasury note futures.

MIDAS implications in NYMEX continuous crude oil futures

Oil analysts are in agreement that there is no current supply/demand imabalance in crude in the US: stockpiles are well above the five year average and close to 18 year highs. A Rice University study has recently argued that the increase in the long non-commercials has fueled a rise in crude prices, in turn impacting on dollar weakness. Crude is therefore being used as an investment tool, a hedge against devaluation of the US dollar.

Figure 1 is a weekly chart of the NYMEX continous crude oil futures. Besides the 100 week MA, we see a near-term Elliott Wave count which, with familiar Fibonacci ratios, suggests that this countertrend rally is a wave B terminating on the 100 week moving average.

Figure 1: crude with 100 week moving average and near-term Elliott Wave count

Importantly (because there’s no guarantee that a trend will be accelerating sufficiently to apply a TB-F) we are able to apply a TB-F to this trend at a cumulative volume of 6,899,999 and it is indicating that it is 92.4% done. This is shown in figure 2 and is broadly supportive of the Elliott Wave count.

Figure 2: TB-F applied to what may be the final thrust in oil to the 100 week MA (92.4% done)

Implications in natural gas futures

Back in July, gas inventories were also at record levels. Crude oil normally trades six times higher than natural gas, but by late July crude oil was trading at a ratio of 25:1. Since natural gas futures bottomed in early August, they’ve already retraced a Fibo 25% of the sharp downtrend from July 08 to August 09, thus reducing the trading ratio significantly.

Figure 3: natural gas at a Fibonacci 25% already since the ratio peaked at 25:1

MIDAS implications in the S&P 500

Richard Russell (Dow Theory Letters) warned on Friday that the secondary trend may now be turning down. At the same time, the Daily Sentiment Index (www.trade-futures.com) reports optimism from 2% bulls in March to 92% bulls in September. Currently it is on 90%.

David’s MIDAS analysis has been well on top of the S&P 500, stressing two factors in earlier blogs:

1. The recently established inverse relationship between up -volume and down-volume in the S&P 500. This pattern embodies a strong negative divergence from the trend.
2. The MPVT indicator and the Volume-Weighted MACD histogram also started negatively diverging from price around the same time. (For readers not familiar with the MPTV it is David’s reworking of Joseph Granville’s classic On Balance Volume (OBV) indicator currently with Technical Analysis of STOCKS & COMMODITIES; his article on the Volume-Weighted MACD has just been published in the same journal.) These volume-based studies are strongly supportive of the assumption that risk appetite in US stocks is weakening markedly.

In his blog entry of 19^th October, David also noted that a recently fitted TopFinder (TB-F) to the accelerated portion of the trend had expired. The index duly stopped trending on the bar on which TB-F expired. Since then, the market has drifted sideways for six days. One of the candlesticks was a Doji, so there is still a large question over whether this market has now reached the end of the trend since early July on an expired TB-F, a 100 week moving average, and a Fibonacci ratio.

David has now updated these blogs with additional data of interest, including a new TopFinder for the entire trend and an overhead Midas resistance curve. I’ll leave the rest to readers of David’s recent blog entries.

If the S&P 500 has topped out, the flight from equities is potentially a leading indicator of what may well transpire to be a flight from commodities (oil and gold at least) at the benefit of the US dollar amidst a rapid diminishing of risk appetite.

Midas implications for the yield curve in CME 2 year Treasury note futures

It is not currently possible to apply a TopFinder to the 2 year Treasury note futures because they’ve already topped out. However, it is possible to solve (a highly provisional) Super Long Term Delta on the notes. This is provisional because we need more data we don’t have for 2 year note futures. However, extrapolation from the 1993-1997 period (provided there isn’t an inversion) points to lower futures prices.

There is also a six year cycle evident on this chart from 1995, with the current six year cycle peaking after three years.

Figure 4: Super Long Term Delta plus six year cycle on 2 year Treasury note futures

Summary

• The Topfinder cumulative volume updated readings this week for Euro FX futures and gold futures respectively are now standing at 93.2% done and 89.6% done.

• The Topfinder for crude, meanwhile, is providing a cumulative volume reading of 92.4% done while the trading ratio with natural gas is rebounding rapidly from its 25:1 trading ratio.

• The S&P 500 has either topped or is very close to topping out.

- Andrew Coles Oct 25th 09

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Here’s the long term view of the U. S. stock market as shown on a monthly bars chart of the Spiders, ticker SPY, the etf that tracks the S&P 500.

The strong retracement, the uptrend coming up from the low of March of this year, has a well fit TopFinder on it which is now 80% done. The dotted vertical line is placed horizontally at the position of 100% completion of the TopFinder, the projected location of the end of this uptrend. The red resistance curve was chosen because it already captured the pull-up in price in May of ‘08, so it’s a very significant curve. It’s now horizontal at a price of 115. And if you extrapolate the current price trend, it looks like it will also be at about 115 when it hits the dotted vertical line.

So, we’re near the end of this robust retracement from the low of the crash. This monthly bars view shows there’s room for one or two more bars (months) before the end. Now, looking at my previous blog post, the intermediate timeframe, it’s projecting an end to that uptrend in about the same time at about the same price target. This is a powerful confluence of projections, telling us there’s a very significant top to the market, that’ll be here in a month or two.

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Definitions of Timeframes

In this series of posts I’m running about the U. S. stock market, I’m defining my timeframes this way:

Short Term – Daily bars chart, Intermediate Term – Weekly bars chart, Long Term - Monthly bars chart, Very Long Term – Quarterly bars chart.

Current Intermediate Term

Here’s the weekly bars chart of the so-called “Spiders”, ticker SPY, the exchange traded fund that tracks the S&P 500 index, for the last 13 months.

First, we see the crash in late ‘08, then the descent to the low in March of this year, followed by the robust retracement that we are still in. This retracement suffered a correction in July, which got stopped exactly at the Midas resistance curve that was launched from the local high in January.

Next, notice that there are three TopFinders fit to this chart. The first, the dotted curve, started from the low in March, and ended exactly at the end of that accelerated uptrend. This was followed by a sideways consolidation for several weeks, until, in early July, price launched into a new accelerated uptrend which is still going on.

The second TopFinder is fit to this current uptrend, and as of now, it is 73% done. Since this is an equivolume chart, where the horizontal axis is proportional to cumulative volume, I measured the horizontal length of this trend, from July 10th to yesterday, divided that distance by 0.73, which gives me the total distance from July 10th to the projected end of this uptrend, and that’s where the dotted red vertical line is located. So, that’s the location of the projected end to this trend. When the price bars get to this vertical line, the TopFinder will end, and we’ll know we’re at the end of this uptrend.

The upper red curve is a very significant Midas resistance curve that started in 2007. If you extrapolate that curve to the vertical line, and if you extrapolated the current price uptrend to the vertical line, they arrive at the same place, a price of about 114. So, that’s an approximate price target for this uptrend.

The third TopFinder shown here starts from the March low and is fitted to the July pullback. This one is 51% done. This illustrates the nested, fractal nature of TopFinders. This is a longer term TopFinder, and is not in conflict with the other one that’s running. The shorter term one that’s 73% complete could end, and price could pull back a bit, and then price could move on upwards to complete this longer term TopFinder.

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Bob English of Precision Capital Management has been in touch this week to inform us that he uses MIDAS extensively in his analytics. We wish him the best with MIDAS and in his various development projects.

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Here I’m updating my blog entry of Oct. 8th, which showed the U. S. stock market having broken out above resistance into a robust new short term uptrend. Now, let’s see what has happened to this trend.

Here’s the daily chart of ticker SPY, the etf that tracks the S&P 500 index, updated to mid morning of Oct. 19th. We see that a TopFinder was fit to this uptrend early last week, and on Thursday of last week, it ended. So, now we can expect some kind of “response”, a pause, pullback or consolidation, to go on for awhile before the market decides what it will do next.

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In this post, I’m going to take a look at a MIDAS application in the foreign exchange futures and gold futures in relation to current uncertainty over a top that is likely to be fairly near in EUR/USD.

Continued US dollar weakness

The US dollar further weakened against other major currencies last week, resulting in more consternation to many Elliotticians, who in the past two months have seen EUR/USD break above the 61.8% retracement level and significantly above the 50% level which statistically would be a more typical retracement zone for Elliotticians looking at the rally in the Euro from October 2008 as a probable ABC correction. Besides the breaking of Fibonacci levels, bullish sentiment in the dollar remains low in a recent poll (17%) while headline news has been far more alarmist.

Contrary sentiment readings

Other indicators, however, are beginning to show extremes in current Euro strength. In the futures markets, the Commitment of Traders report for the CME-traded Euro futures shows the Net Open Interest Positioning of Large Speculators at 53,597. This is not as extreme as it has been over the past two years, though it is getting pretty close. More significantly, the Open Interest positioning of the Commercials at approximately -70,000 is now rapidly moving towards the extreme levels last seen in mid-2007 in the long anticipation of EUR/USD weakness. The FX options markets too are indicating that daily, monthly, and yearly implied volatility levels are also very close to the extremes when Euro strength was at its peak between March and July 2008.

The problem of timing the top and the role of MIDAS

With continued Euro strength, however, the problem lies in timing this top, as a number of FX commentators have repeatedly emphasized recently. Forecasting precise reversals in implied volatility levels is always a challenge and the same goes for COT data. For example, net Large Speculator positioning kept diverging from a rallying Euro for at least 7 months before the first sign of a top appeared in May 2008.

I believe the MIDAS approach has a significant role to play in this current dilemma and the purpose of this blog entry is to highlight what that role is.

Figure 1: continuous CME Euro FX futures with a critical five MIDAS support curves

Figure 1 is a continuous chart of the CME Euro FX futures. It shows five MIDAS support curves launched from significant portions of the trend beginning in early March 2009.

As pointed out in the MIDAS essay on this site, a significant feature of MIDAS curves is that a trend is capable of only supporting four to five of them before it is due for a reversal or a significant breather. This has been shown statistically many times over. In Figure 1, with S5 being the small dark grey curve launched at the beginning of October, we see this rally now supporting five curves and very likely close to its end.

The role of the MIDAS Topfinder (TB-F) curve

Again however the devil of the detail lies in precise timing. Can the MIDAS system allow us more precision? Yes, it can.

Attention should now focus in Figure 1 on S2 (the red MIDAS support curve), which supports the correction in mid-June but then diverges from the trend. The situation is not perfect for the launch of a TB-F curve, but the fact that there is actual divergence indicates that the trend has started to accelerate and that a TB-F curve has a role to play.

Figure 2: A Topfinder curve on continuous CME Euro FX futures

With this acceleration of the latter part of the trend in evidence, a TopFinder curve was launched from the late April low and fitted to a number of pullbacks in the accelerated portion of the trend (mid-June, mid-July, and mid-August). The cumulative volume (duration) required for this fitting was 29,999,000.

What the chart shows is that the TopFinder curve has a remaining cumulative volume of 3,453,919, meaning that the trend is 88.5% done in cumulative volume terms with 11.5% of the trend still to run. Each day of trading will run the remaining cumulative volume down to zero. When zero is reached, this portion of the trend will be over.

In Equivolume charting, cumulative volume and not time runs along the horizontal x axis, meaning that we can actually see on the chart where price will terminate by the intersection of a vertical line up from the x axis and an extended linear regression line through price. The current chart is using conventional candlestick charting, though we can still get a reasonably accurate projection. This projection is around the 1.52 level at the upper side of the regression channel shown on the chart intersecting the vertical line. 1.52 however is an extrapolation — only the cumulative volume is a truly accurate figure.

What the MIDAS system does not do is tell us what price is going to do next, only that there will be a price response when the duration of this accelerated trend expires (= cumulative volume at zero). With this in mind, Figure 2 also shows a significant negative divergence in the MACD, which so far has been in existence for four months — exactly the time of the last positive divergence also highlighted on the chart. A rule of thumb I have found in MACD projections is that the MACD-measured length of the move is usually the same to double the length of the divergence. This can be seen in the case of the positive divergence, where the market has rallied for 8 months since the 4 month positive divergence. The negative divergence before that signalled a move of roughly the same duration. While therefore the TB-F curve cannot supply a forecast as to what will happen next, other indicators — and certain Elliott Wave counts — indicate a likely end of the trend.

We can also gain support for this view using certain market timing techniques — in this case, the Delta system.

Further timing considerations and the Delta system

Leaving aside other sophisticated market timing techniques such as Christopher Carolan’s Spiral Calendar, one system that is central to my timing work is Welles Wilder’s Delta system. This is illustrated in the chart below.

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Figure 3: Long Term Delta on continuous CME Euro FX futures

Figure 3 shows a weekly continuous futures chart with the Long Term Delta for the Euro FX futures. Hidden is a multi-week negative divergence in the MACD.

One significant feature of Delta time series is that markets tend to be extremely volatile, often producing significant trends, at the end/beginning of new Delta cycles. In Figure 3, this can be seen in what is likely an inverted (1) in my current solution to the Long Term Delta in the Euro FX futures. More to the point, as an be seen from years 2001 and 2005, pivot 6 is due some time between the end of 2009 and early 2010. There is a degree of standard deviation in Delta pivots, which is why it’s helpful to use a more precise indicator such as the MIDAS Topfinder/Bottomfinder. However, when pivot 6 does print, years 2002 and 2006 indicate that pivot 7 isn’t due until midway through 2010, which would be consistent with the MACD readings and the extremes of the recent COT reports.

The variance issue in Delta timeframes such as the Long Term Delta can be ameliorated to some degree by using a Fibonacci timing technique such as Fibonacci ratios or the Fibonacci number sequence. Using the latter, a date of November 9^th for a projected top occurs three times: first, from the April 21^st low at 144 days; second, from the July 8^th low at 89 days; and third from the September 29^th swing high at 21 days. In my opinion, November 9^th is an important time period within the variance allowed by the Long Term Delta. At the same time, we also have a recent vertical count on a Point and Figure chart (3 box reversal x 0.0025 box size) of the same continuous futures indicating a price target of 1.50.

Price and time projections, then, are supportive of the Topfinder cumulative volume readings.

Gold futures and the MIDAS Topfinder curve

A full report on the Euro isn’t possible without a corresponding look at gold futures, since a multi-month turnaround in the US dollar should be consistent with bearish gold projections. In Elliott Wave terms, it’s possible that the move above the February 2009 high is a wave B of an expanded flat, since a possible wave A declined in three (a three wave A decline = flat, expanded flat, or triangle). This putative wave B is now in an acceptable Fibonacci expansion range for the completion of a wave B of an expanded flat.

Figure 4: Topfinder applied to continuous gold futures

As can be seen from Figure 4, we have also been fortunate enough to launch a Topfinder curve from an accelerated portion of the current trend in gold futures beginning in early July. This curve has been fitted twice (in mid-August and late-September) at a duration (= cumulative volume) of 9,000,000. It is now revealing that this accelerated portion of the trend is 83% done. This figure for the remainder of the accelerated portion of the trend is therefore pretty close to the result obtained from analysing the accelerated portion of the Euro FX trend with Topfinder. It should also be borne in mind that the MACD has been diverging negatively for a significant period of time. While this negative divergence doesn’t carry the same weight as it would in a self-contained trend, it should be borne in mind.

Any turnabout in the Euro’s fortunes will face a wall of support, not only from weekly and daily moving averages but also from five MIDAS support curves.

Appendix: the US dollar, short term rates, and US stocks

Arthur Hill has recently drawn attention to the fact that while the US dollar has been negatively correlated with stocks this year, it is positively correlated with short-term interest rates.

Figure 5: 1 Year Treasury Yield and the S&P 500

Gold was recently amenable to MIDAS analysis and if I have time this week I’ll look at the MIDAS implications in the S&P 500 and US short term interest rates.

Summary

The presence of five MIDAS curves in Figure 1 supports the findings of other indicators that current strength in EUR/USD is reaching its limit. At the same time, the possibility of launching a Topfinder curve to the accelerated phase of this current trend indicates a firm cumulative volume prediction.

While the Topfinder component of the MIDAS system doesn’t provide a longer term view, other price and time indicators — including Elliott Wave counts — indicate the likelihood of a trend reversal.

– Andrew Coles, 19 Oct 2009

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This is a daily bars chart of SPY, the etf that tracks the S&P 500 index, since late Dec.

This is a daily bars chart of SPY, the etf that tracks the S&P 500 index, since late Dec. ‘08, overlaid with several volume indicators.

In my previous blog post, I showed that in the short term SPY has broken above resistance and appears to be in a strong uptrend, likely to exceed its previous high of 108. But now let’s look a little longer term since the March low and see what some volume indicators are telling us about the behind-the-scenes strength of this uptrend.

Volume up and down days

In the top pane we plot a pair of indicators that show volume on up days as compared to volume on down days. These curves are trailing 22-day moving averages of volume on up or down days, so there is some lag in them. Typically, the red curve is above the green during downtrends and the green is above the red in uptrends. But when the reverse happens that’s a leading indicator that the “smart money” is fading the trend, going the opposite way from the crowd, a leading indicator of future price movement. The red curve was strongly above the green during the steep down trend prior to March, and it persisted above green for the first month of the new uptrend, but that persistence was due only to the lag in the indicators. During March, you see the red curve was flat, while the green was rising, and by the end of March, they were positioned as expected in a strong uptrend.

But, from June through August, the two curves meandered across each other, instead of the green being clearly above red. This indicates that the “smart money” people may be loosing some conviction.

Starting in September, the red has opened a large gap above the green. This is very significant, showing that the “smart money” is strongly heading for the exits, a leading indicator that this uptrend is coming to an end.

MPVT indicator

In the middle pane, overlaid on the price, is the purple curve, the Modified Price-Trend (MPVT) indicator, which is an improved version of the On-Balance Volume (OBV) indicator, which has much less noise in it than the OBV. When the “smart money” people are going with the price trend, this curve will also follow the price, but when this curve diverges from the price, it’s saying the the “smart money” is heading the other way, a leading indicator of the end of the trend.

After following the price closely from March through June, notice how, in early July, the MPVT held significantly above the price. That showed that the “smart money” wasn’t as pessimistic as the crowd was, and indeed, a new uptrend started in mid month. Since then, though, the MPVT curve has been drooping below the price curve. This is not a true divergence (yet), since it is still making higher highs as the price is, but it is a soft indication that some some strength may be ebbing away from this uptrend. Although the MPVT is still making higher highs, it is making lower lows while the price is still making higher lows, and that is a kind of downward divergence.

I’m expecting that, over the next few days, price will go on to a new high; it will be very important to watch to see if the MPVT also makes a new high, or if it’s peak is below the mid-September peak, which would be a true negative divergence, a strong leading indicator of the end of the uptrend.

Volume-weighted MACD and histogram

In the lower pane are the volume weighted MACD (black curve) and the volume weighted MACD histogram (green). Notice how the MACD followed the price up through early May, but from early May to mid June it formed a significant downward divergence from the price. That was the leading indicator of the brief downtrend from mid June through early July. Now, from early August

through mid September, we’re seeing another significant downward divergence from price, most likely a leading indicator of a new downtrend.

Bottom line

In summary, all of these volume indicators are pointing to an end of the current price uptrend, sometime in the next few weeks to month or two.

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Daily bars chart of SPY, the etf tracking the S&P 500 Index.

Here is a daily bars chart of SPY, the exchange traded fund that tracks the S&P 500 Index of large cap U. S. stocks, updated to October 8, 2009.

We see an accelerated uptrend that started on July 8th, where price strongly diverged upwards from S1, the lower green MIDAS support curve.  This uptrend was tracked by a TopFinder (TF), dotted green curve, that was fit to the bar marked “Fit point”.  That TF ended exactly at the last bar of that accelerated uptrend.  Typically, when a TF ends, it consolidates back down to the closest in support curve.  But this uptrend was almost linear, with virtually no pullback along the way from which to launch another S curve.  The fit point bar is the only one that might be considered such a pullback, so we launched S2 from there.  Price did correct down, breaking below S2 and supporting at the the gap above the fit point bar.

From there, it’s gone into a very irregular up move.  On Oct. 2nd, price dropped down and supported at S2 and that horizontal support line defined by the peak on Aug. 7th.  And since then, it has been moving strongly upwards.

Today, price has broken above the red MIDAS resistance, which is a significant event, indicating great strength to this new uptrend.  The fact that it has bounced off S2, after having drooped twice below S2, shows that it’s gathering strength.  This all means price is likely to go on to new highs above 108.

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