Archive for November, 2009

The U. S. equities market is, right now, at the same crucial turning point that it was at in the week of April 18, 1930, when the retracement from the crash ended, and the long, two year bear market began.

In the first chart here, you see the Dow from 1929 – 1933 (the time labels on the horizontal axis have 50 years added to them due to an odd Y2K-related quirk in my software).  At The Crucial Turning Point, price touched the major resistance curve that was launched from the 1929 top, and rolled over, just as that TopFinder ended.

The second chart here is the Dow from 2007 up to yesterday.  The same comments hold – price is touching the major resistance curve, just as the TopFinder is ending.  If price turns down from here, we’re repeating the scenario of the 1930s.  If price breaks up through this resistance, then the massive liquidity that the Fed has pumped into the market will have put us on a different course from the 1930s.

Which way will it go?  I don’t know.  We should see the answer in the next few days!

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The theme of last Friday’s blog was that the recent declines of between 3% and 6% in gold futures, Euro futures, and crude (plus the S&P 500) after the four Topfinders expired had not yet produced a conclusive change of trend, despite the S&P 500 running into a 50% Fibonacci retracement and crude meeting its 100 week moving average.

However, I ended the blog with reference to some important results from two fractally positioned Bottomfinders in the US dollar index and, as promised, I want to round this discussion off in the present blog.

In Figure 1 below we have the two Bottomfinfers in question. The first larger one was launched from 21^st April 2009 when a standard MIDAS resistance curve (dotted green line) begins to displace from the swing high in mid-June. The second was launched from 15^th June 2009 when a second standard MIDAS resistance curve (dotted grey line) also displaced from the price trend (note how the recent attempt to break the Bottomfinders was halted by the second Midas curve). As can be seen from the chart, both Bottomfinders have gradually coalesced as the downtrend has progressed so that they’re now coextensive. Significantly, the longer Bottomfinder is 96.3% done while the shorter Bottomfinder is 97.7% done.

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Figure 1 above

This is very significant because the fractal volume characteristics are both producing coextensive readings. This is much like a weekly and a daily stochastic reaching an overbought/oversold condition at the same time.

There are two further points worth stressing. First, while the TB-F algorithm itself relies on a purely objective extraction of price and volume data from the markets, it’s still up to the user where he or she fits the TB-F. Different predictive messages can emerge from the TB-Fs in terms of the cumulative volume left to expire if, say, the TB-F is fitted to the very tip of a pullback as opposed to a slighter deeper fitting. When therefore two TB-Fs can be fitted from different portions of the same trend and they have extremely similar cumulative volume readings, it’s time to take notice.

The second point to stress is this. People sometimes ask about the implications of a price reaction once a TB-F has terminated. The answer depends in part on the size of the TB-F, because a TB-F curve, like an ordinary MIDAS S/R curve, is a nonlinear trendline. Thus, if this question were being asked about a linear trendline, the answer would be that it would depend on the size of the trendline – and thus the trend itself – from which price is breaking out. The Short Term trend is approximately 2-4 weeks, the Intermediate trend is 2-9 months, and the Primary trend is 9 months to two years. In the case of Figure 1, both Bottomfinders are measuring the cumulative volume and price characteristics of an Intermediate trend. Therefore the price and time consequences of a break of this curve or its termination are just that – Intermediate.

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I want to end this blog by looking for additional technical data that support these Bottomfinder cumulative volume readings.

(1) The first is a five and a half month positive divergence in the MACD. As stated in a previous blog, very often the length of the divergence in the MACD is at least proportional, temporally speaking, to the length of the ensuing price swing. Currently, this proportionality is consistent with an Intermediate level price move. See Figure 2.

Figure 2 above

(2) The second piece of supportive data is record 15 year volume at the recent bottom in the US dollar index futures, which is thus demonstrating all the hallmarks of a selling climax. Following a selling climax, price is expected to rise and the low in question is usually not violated for a considerable time. See Figure 3.

Figure 3 above

(3) Also of significance on Figure 3 is that when the US dollar index attempted to test this low it did so on much lighter selling volume. This is also a hallmarket of a selling climax. It should be noted too that the corresponding high in the Euro (which has a weighting in the US dollar index of 57.6% (yen 13.6%, GBP 11.9%, CAD, 9.1%, Swedish krona 4.2%, and CHF 3.6%)) was a lower high, thus not confirming the lower low in the dollar index.

(4) An oversold reading on the weekly RSI for the first time since the US dollar index bottomed in April 2008 (not shown in this blog post).

(5) A reading of 15 on Wilder’s ADX on the daily chart which, as Figure 4 shows, has consistently resulted in a new trend dynamic over the seven year period covered on the chart. (The ADX combines +DI with -DI and then smooths the data to provide a measurement of trend strength. The ADX does not offer any indication of trend direction, just strength. While however it is not an overbought/oversold momentum indicator, its historical volatility levels can be assessed visually and drawn around the indicator as horizontal lines. Low volatility levels of 15 and high ones of around 42 on the US dollar index have produced excellent change-of-trend signals over the past seven 7 years on the daily chart.

Figure 4 above

(6) The next chart, Figure 5, is my solution of Wilder’s/Sloman’s Long Term Delta on the US dollar index with a recent Delta inversion. The Delta system is a vast improvement on standard cycle analysis. For assessment, we go back to 2006. Pivot 5 is due in mid-2010, which is again consistent with an Intermediate term trend change. (The only way this Delta count could be incorrect is if the inversion hasn’t been correctly identified.)

Figure 5 above

(7) A final chart worth including contains a closer image of the condition on the ADX but, more to the point, a very recent signal from a variation of Tom DeMark’s TD Sequential suite. This particular variation is not as profligate with its signals as more straightforward variations such as the basic TD Sequential indicator. See the vertical red flash in Figure 6 below.

Figure 6 above

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- AColes 16th Nov 09

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I should also have confirmed in the previous blog post David mentioning in his that we now have several versions of the Topfinder/Bottomfinder curves working in Metastock.

No decision has yet been taken as to their availability.

– Acoles 13th Nov 09

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An apology is in order for the delay between the last blog post of 31st October 09 and this one, but writing has had to take precedence over all else at the present time. I really would like to write more about the MIDAS system here but it simply isn’t possible right now.

The main point of my last blog entry of 31^st October 09 was to draw attention to the results of the Topfinder curves which had been launched on accelerated portions of the trends of a number of key markets linked in recent months to the expansion of risk appetite with the US dollar as a funding (carry) vehicle for this expansion. Very quickly, the results were as follows:

S&P 500: Topfinder launched October 2^nd 09 and terminated within two daily bars of the end of the accelerated trend.

Euro futures: Topfinder launched April 2st 09 and terminated within three daily bars of the end of the accelerated trend.

Crude futures: Topfinder launched September 28^th 09 and terminated within three daily bars of the end of the accelerated trend.

Gold futures: Topfinder launched 6^th July 2009 and, at the time of writing on 31^st October (the last blog entry), still had 4% cumulative volume remaining when the accelerated trend had all but completed.

Further update

Now that the corrections from these accelerated trends have ended, I can add a little more detail:-

S&P 500: after the Topfinder signal, the S&P futures fell by 6%.

Crude futures: after the Topfinder signal, crude futures also fell by 6%.

Euro futures: after the Topfinder signal, Euro futures fell by 3%.

Gold futures: the Topfinder exhausted its remaining 4% cumulative volume exactly halfway through the subsequent pullback, which resulted in gold futures falling by 4%.

Immediate aftermath following these declines

Since these declines after the accelerated portions of the trend completed, some analysts have been pointing to a significant decline in global risk appetite. My own view is that this is far from conclusive at the present time, although the main point of a second blog to follow this one over the weekend is to draw attention to several factors in the US dollar index and the Euro which are hinting at this turnabout in mood rather than conclusively proving it.

When it comes to trend reversals, one of my favourite tools is Victor Sperandeo’s “1-2-3 Reversal” as described in his book Trader Vic: Methods of a Wall Street Master. Here graphically is that rule as it pertains to the completion of an uptrend, which is of concern to us here in all four markets under consideration:

Thus, the first criterion is the breaking by price of the uptrend.

The second criterion is price rallying from the low that had been created as a result of the breaking of the trendline to a lower high, ie, a high that didn’t take out the previous one.

The third criterion is price reversing from this lower high and breaking the previous low that had been part of the trendline break.

Let’s move on …

S&P 500: with positive ISM data, pending home sales, and construction spending recently, the S&P 500 futures have so far only satisfied criterion (1). When the Topfinder expired, the resulting 6% decline broke the March 09 trendline but rallied immediately back up to break the previous high caught by the Topfinder very marginally. Therefore (by a tiny margin) we do not have Sperandeo’s second criterion in place and nor by a longshot currently do we have his third criterion in place. See Figure 1 below. As can be seen in Figure 1, a new Topfinder was launched on 2^nd November 09 when this new accelerated uptrend began and it has now just expired on a duration (cumulative volume) of 200,000. It remains now to be seen whether we’ll get another trendline break, thus ushering in the possibility of Sperandeo’s other two criteria being met.

Figure 1 above

Gold futures: as stressed before, if this is the end of global risk expansion for the foreseeable future, we must have an Elliott Wave count in gold consistent with this change of mood. At the present time, and as also stressed in a previous blog, it’s essential to see the current trend to a new high as a wave B of an expanded flat. Expanded B waves normally expand above (or below) wave As by a maximum Fibonacci ratio of 38% and the gold futures are currently at 25%. The implications can be seen in Figure 2, with sub-wave b of this large putative B completing as a symmetrical triangle (though it must be said that the prior “flagpole” measuring implications of this pattern project the top of putative wave B far above the 38% Fibonacci level).

Figure 2 above

Figure 3 below reveals that a Topfinder was also launched at the same bottom as the S&P 500 recently, albeit a few days before in the gold futures on 29^th October. This Topfinder expired yesterday and, as readers can see, the futures have just produced a “bearish engulfing” candlestick pattern. Still, however, Sperandeo’s criteria are nowhere to be seen yet in gold futures, despite the recent termination of the new Topfinder.

Figure 3 above

Crude futures: Figure 4 below shows in fairly close detail what has happened since the Topfinder terminated. How are we situated vis-à-vis Sperandeo’s criteria? The situation in crude futures is much weaker. Sincer the Topfinder completed, price has broken the Short Term early October trendline and has since rallied to create a lower high, thus satisfying Sperandeo’s second criterion. His third criterion is about to be tested as I write. However, before readers get too carried away by this implication, it should be borne in mind that this is only a Short Term trendline break. The Intermediate trend is defined in terms of a 6 week to 9 month time period, which is what the mid-February 2009 trendline covers. This is the trendline that needs to be broken for us to have an Intermediate trend change on our hands, though as stated before in this blog, crude stockpiles in the US are reaching record levels and, according to a recent DoE assessment, fuel consumption in the US is significantly lower than in recent months. This has led US refineries to reduce capacity.

Figure 4 above

Euro futures: finally, let’s take a look at the Euro futures in Figure 5 below. When the Topfinder expired and the Euro futures fell by 3%, they tested the Intermediate trendline created in February 09 with a sharp piercing before closing a fraction above it. This arguably is a satisfaction of Sperandeo’s first criterion. Since then it has rallied up to a lower high and started to fall again, thus satisfying the second criterion. The third criterion lies at a fraction above 1460 on the futures. Time will soon tell whether we have an Intermediate trend change on our hands.

Figure 5 above

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Note on a related blog post to follow

The US dollar index has created some very interesting results in relation to two fractally related Bottomfinders launched from different segments of the Intermediate trend. I want to add a second blog entry related to this one over the coming weekend.

– A Coles 13th Nov 09

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The long term monthly bars chart in my Nov. 9th post shows a TopFinder (TF) fitted to an uptrend that has only nine price bars in it.  The software that generated this, StockShare V2, when displaying EquiVolume or CandleVolume charts, references all indicators to the center of each price bar.  Also, the TF plug-in only allows increments in the duration, D, in amounts equal to the volume of each bar that the user drags the mouse over while adjusting the curve.  The combination of these two things means that one may not be able to accurately fit a TF when there are only a small number of price bars, as in the Nov. 9th chart.  The chart shown here in today’s post corrects both of those problems, and results in a significantly different projection to the end of this uptrend.

This chart, updated through Nov. 11th, is generated in MetaStock, which references everything to the right side of each price bar when in EquiVolume or CandleVolume display, which properly takes into account the width of each bar.  More importantly, the TopFinder/BottomFinder (TB-F) plug-in we’ve created for MetaStock allows the user to input any value for D.  So, in this chart, I’ve chosen EquiVolume display instead of CandleVolume so that the lower right corner of each bar is clearly visible.  Then, I carefully adjusted D in the TF so that the curve exactly matches the lower right corner of the July 2009 price bar; and I didn’t do this just visually, I did it so that the value of the TF curve at that month is the value of the low of that month to four significant figures.  You can see the TF curve here in purple.

Doing this, I found that the TF is actually only 68% complete, not 94% as shown in my Nov. 9th post.  On this chart here, I’ve positioned the dotted vertical purple line at the correct place horizontally where the TF will be complete.  Everything else in this chart is the same as in the Nov. 9th chart, q.v. for descriptions.

The conclusion to draw from this corrected chart is that we’re not close to the end of this TF.  It looks like we could easily have one or two more monthly bars before getting there, which puts the end into December, or maybe even January; assuming price does not break down through the TF curve before it ends.

As for price projections, we still see massive overhead resistance with those three green curves and the 50% Fib retracement level.  Price could honor those resistances and just sort of wallow around until the TF ends, or price could keep right on going up through those levels.  If it does go up, the straight line projection would put it about at the red resistance curve at about 1150 when the TF ends.  I’ll update this weekly.

My disclaimer, which appears under this blog tab, applies here, especially the part which says, “I can be wrong”!

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This post updates my Nov. 2nd post, which you should read for a description of the items being displayed in today’s chart, which is updated through the end of last week.

I’m adding a couple of things to the chart this time.  First, there’s one more well calibrated green support curve from the previous uptrend.  And second, there are the Fibonacci retracement levels defined by the 2007 high and the March 2009 low.

The current accelerated uptrend, as traced by its TopFinder, is now about 94% complete, meaning it’s within the region of volatility that often accompanies the end of a TopFinder.  The theoretical end would be when the center of  this month’s price bar reaches the dotted vertical red line, which it is very likely to do well before this month is over.  So, for all intents and purposes, this long term uptrend is essentially over.

Apart from TopFinder theory, we see the massive resistance arrayed just above last month’s high – those three green curves all clustering around the 50% Fib retracement level, around 1125.  This adds credence to the conclusion that this uptrend is just about done.

What’s next?  When a TopFinder ends, we expect price to respond by testing the nearest support level, and that’s shown by the purple support curve launched from the minor low in July.  On the upside, we expect price to test the aforementioned massive resistance just above where it is now.  After consolidating between these support and resistance levels for awhile, the market will decide what it wants to do next.

So, right now we’re seeing an powerful confluence on three timeframes:  Short term (daily bars) an unaccelerated uptrend continues but weakens, Intermediate term (weekly bars) the accelerated uptrend has ended, and long term (monthly bars, this chart) the accelerated uptrend is essentially over.  Having such a simultaneous occurrence on three timeframes, along with hitting massive upside resistance, is a powerful indication that the market is now at major inflection point.

As always, my disclaimer applies here; see it under this blog tab.

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This post updates my Oct. 24th post regarding the intermediate term U. S. stock market.  See that post for a description of what is being displayed here in today’s chart, which is current through the end of last week.

We see that the TopFinder that was running was broken through on the week before last, and is now shown here dotted.  Had it not been broken, it would be 84% done now, and we’d be still expecting the uptrend to continue until the price bars reached the dotted red vertical line.  But it’s over.  This means we expect, at the least, price will respond by pulling back to a near support level, and it appears that it has already done that.  Last week, price came down and supported at that purple support curve that was launched from the minor low in the week of Aug. 21st.

So, on this timeframe (weekly bars chart), we are now in the indecisive consolidation that follows the end of a TopFinder, before the market decides what it is going to do next.  See my next blog post here, which updates the long term timeframe, and gives us a wider perspective as to what’s happening.

As always, my disclaimer applies to this post.  See it under this blog tab.

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This updates my blog post of Oct. 28th, showing that chart updated through the end of last week.  See the Oct. 28th and 8th posts for descriptions of what is being displayed here.

We now see that the MPVT has put in a lower low.  And, the MACD is showing a very deep lower low.  In the top pane, the volume on down days continues to dominate over up days, even as the daily price trend continues upward.  So, the strength is still draining from the U. S. stock market, as the “smart money” people continue their exiting.

Please read my disclaimer, under this blog tab.  It applies to all of my posts.

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This post updates my post here of Oct. 24th, the monthly bars chart of SPY, the etf tracking the S&P 500. But this time, instead of plotting SPY, I’m plotting the S&P 500 index itself, with price and volume data from Yahoo Finance. The previous SPY chart went back to times when the trading volume in the SPY was low and accelerating, behaving rather differently from the trading volume of the underlying index, the S&P 500. So, for long term charts, it is better to use the index itself.

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The TopFinder to the market’s retracement, light green curve, is now 91% complete. The dotted red vertical line marks the horizontal location of 100% completion (as measured at the center of the price bars).

The two green curves that originate in the left half of this chart are two primary support curves launched from major pullbacks during the huge market uptrend that went from 2003 through 2007. Each of these has supported a subsequent price pullback, so these two curves are very significant. Price broke below these curves during the crash and now price is approaching them, so now they are resistance curves, which have coalesced into a level of about 1115. Price is now very close to this level.

It’s typical that when price gets to within the last 10% of a TopFinder’s duration, volatility can increase, making for a rather sloppy ending to the accelerated trend. The long term S&P 500 is now in that range. During this month of November, we should expect to see the TopFinder end, and price to respond by behaving distinctly differently than it has since March of this year.

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