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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