Archive for February, 2010

This is an update of my Feb. 13th post, q.v.

What a difference a week makes!  A strong rally has most likely ended the downtrend that was in effect, since price has broken (just barely) the R1 curve governing it.  The break was only intra-day, and price didn’t close above the R1 curve, so I can’t say for sure that this is over, but it probably is.  So, for now, all we can say is that it’s in a trading range.

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Post summary

This post is a fairly detailed analysis of the main price and time targets on the euro futures for this year, though it also updates my post of November 16th 2009 warning on a change of trend in the US dollar index on the immanent termination of two fractally positioned Bottomfinders. There also seems to be an important unity between the reading of David’s Bottomfinder launched from the start of the S&P 500 downtrend in his weekend post of Feb 13th 2010 and my Bottomfinder launched from the start of the euro downtrend which I’ll discuss today. This apparent unity is discussed briefly at the end of the post.

Brief updating and summaries

After the warning in the November 16th post, the following day the euro created a large daily bearish engulfing candlestick and on November 27th the downtrend began.

In the same post, I emphasized several aspects of the trend change likely to impact the size of the move.

1. The MACD had been positively diverging for 6 months (temporally, a subsequent move is at least the size of the time of the divergence and often twice to three times its size (rarely larger)).

2. There was record 15 year volume at the recent bottom in the dollar index futures, suggesting a selling climax. Following climaxes, the lows in question aren’t usually violated for a considerable time.

3. I pointed out that the dollar index had not only broken above the expired Bottomfinder running from April and but also the one from February 2009. This was intermediate in proportion. In his book Technical Analysis Explained (a book that is on the international IFTA curriculum for the diploma in technical analysis), Marting Pring cites the following convention for trend lengths:

a. Short term trend = 2 weeks to 4 months

b. Intermediate trend = 6 weeks to 9 months

c. Primary trend = 9 months to 2 years

d. Secular trend = beyond 2 years up to 10 years and even 25.

Thus, the breaking of an intermdiate Bottomfinder curve would have implications for at least a move of intermediate duration.

4. I showed the Long Term Delta on the dollar index which was pointing to the first significant pullback (or end of trend) in mid-2010. More on this below.

Current background

The euro’s woes are being blamed primarily on concern over the ability of Greece to service its debt, though the currency is hardly being helped by recent eurozone GDP data (growth of a mere 0.1 percent in the fourth quarter). Greece is a minor member of the eurozone, accounting for a mere 3 percent of GDP, so why the fuss? It depends on who you read: the contagion factor, Greece being a test case for euroland’s Stability and Growth Pact requiring limited interference with other member states’ budgetary and fiscal disciplines, and the potential vulnerability of Germany’s historically hardline stance on monetary and fiscal probity in its relations with other member states. The fact is, however, that the distribution phases of the two Bottomfinders on the dollar index had ended in the period around June to July of 2009 — see too the start of the momentum divergence in the MACD — providing a firm prediction for a change in sentiment towards the US dollar long before Greece (and even Dubai) had become sovereign concerns and when risk appetite was marking a zenith. The Elliott wave count was likewise predicting a bottom months ahead and so too was the Long Term Delta (years ahead in fact). One day we’re all going to catch on to the idea that markets move endogenously, as Benoit Mandelbrot again reiterated in his recent book The (Mis)Behaviour of Markets.

Let’s take a closer look at the euro and establish some firm price and time targets, beginning with a look at the recent data on the Commitments of Traders (COT) report.

The euro and the COT report

Chart 1 below is a weekly chart of the CME euro globex continuous futures. The middle pane shows total open interest and the upper pane the net positioning of the commercials. The vertical blue lines reveal an interesting statistic: when net commercial positioning reaches around -600 to -700, the market usually turns down. Notice this too on the recent high in late 2009. This is probably a useful marker for the gold market. Unfortunately since the euro has been in an uptrend since 2001, we don’t on this chart have a basis for establishing an upper level, although we should probably watch the +700 level carefully when it’s reached.

Chart 1

As stated in previous posts, the commercials separate into the commercial producers and commercial consumers. The former in sectors like agricultural commodities are always net short, selling forward in the futures markets while hedging against falling prices, whereas the latter are always hedging by buying forward against higher prices impacting inventories. How does this apply to the FX markets? An exporter (FX producer) to euroland would be hedging short against a falling euro. His opposite number, the importer (consumer), would be doing the opposite. If we go back to Chart 1, we see the commercial producers heavily net short in anticipation of a lower euro exchange rate in the run up to the 2009 high. Much of the net shorting in the lead up to the 2009 top was probably due to China, which in 2008 exported three times as many goods to euroland as it imported from it. Now that the euro is in freefall, it’ll be interesting to see how China will be affected this year.

Chart 2 is another weekly chart of the CME euro globex continuous futures, this time with the COT Index. As my previous posts have indicated, the COT index is often used by experts on the COT report such as Larry Williams and Stephen Briese. Here it is the total open interest (not net commercial positioning) run through a stochastic formula to give normalized overbought and oversold levels at around the 85 and 15 levels respectively. It combines orthodox with unorthodox view on open interest. The orthodox view is that low open interest levels are associated with the ends of trends. We see this on the chart highlighted by the black vertical lines. The unorthodox view is that high (overbought) levels of OI are also associated with the ends of trends (unorthodox because orthodoxy associates increasing levels of OI with healthy trends). Here we see this highlighed by the vertical blue lines. As I write, total OI has moved parabolically into overbought territory. However, the problem with OI oscillators is that they’re afflicted by the same timing problems as when they’re plotted on price: they can become overbought or oversold and stay there while the trend continues. Let’s try and get more accurate price and time targets (with the COT Index certainly warning in the background).

Chart 2

Chart 3 below is a likely Elliott wave count on the euro, with waves A and B done and wave C in progress. Normally in Elliott ABC corrections, wave C = wave A, which gives a target of 1.14 on the futures. This is an interesting target. Not only is it very near major support from the late 2005 bottom, but 1.13 is also the 61.8% retracement from the move between the 2001 bottom and the 2008 high. Finally, the theoretical Purchasing Power Parity calculation stands at 1.15.

Chart 3

Can we get additional price and time targets? Yes, by using the Midas Bottomfinder and the Long Term Delta on the euro. First, Chart 4 shows that all of the Midas support curves (in their reverse roles now as resistance curves) have been broken, with price initially stopping at R1 and pulling back to R3 before resuming the downtrend. (Incidentally, a trend rarely accommodates more than five Midas curves before ending. Here in the uptrend we see it supporting precisely this number before turning over.)

Chart 4

Chart 5 below has two Bottomfinders launched from two stages of this trend. I could launch them at all because price displaced from the standard Midas resistance curve immediately, thus indicating that the trend was accelerating because a smaller cumulative volume displacement is required. The first Bottomfinder is launched from the start of the trend and is currently only 51.2 percent done; the second launched from 13th January 2010 is 72.9% done. I suspect that the latter is merely measuring this current stage of the parabolic move, probably an Elliott wave 3.

Chart 5

My penultimate chart, Chart 6, is the same as the previous one, only this time with equivolume. I’m using this chart format because volume runs along the lower axis and not conventional time. The cumulative volume prediction by the Bottomfinder is set to around the first week of May (though this could be the termination of a segment of a move rather than its entirety). If we linearly extrapolate price to this vertical line we get a price target of around 1.25, which is significantly higher than the other price targets earlier. As noted, however, this could be a price target for a segment of the trend rather than its full completion.

Chart 6

The final chart is Chart 7. This is the Long Term Delta for the euro and years 2002 and 2006 should be noted. There’s bound to be some variance on the LTD (as there is on all Delta timeframes), but in 2002 pivot 7 printed in July while in 2006 it was in June. The LTD essentially measures intermediate moves and the June/July time axis could be for the termination of this down move rather than its entirety. Because the move to pivot 8 tends to be relatively small, a viable overall time target could be pivot 9 in early 2011.

Chart 7

A negative melding of the US dollar and stocks again?

Briefly, during the equities crisis between 2008 and 2009 (earlier and later in some market indices), there was a well-known negative correlation between US dollar strength and equity weakness. In his current post of 13th February, David has a Bottomfinder launched from the beginning of the downtrend in the S&P 500 at 52 percent complete. Readers will note that I have a Bottomfinder launched from the beginning of the euro down move at 51.2% complete. At the moment, this is being treated with some significance.

Price and time summary

1. The first compelling price target is around 1.25, created by linearly extrapolating from the euro Bottomfinder which is 51.2% complete.

2. The second compelling price target is the 1.13-1.15 area based on (i) an ABC Elliott wave pattern, (ii) the 61.8% retracement of the uptrend between 2001 and 2009, (iii) the 2005 support, and (iv) Purchasing Power Parity.

3. The first time target is the first week of May, based on the linear extrapolation mentioned above.

4. The second time target is June/July, based on the Long Term Delta. According to the LTD, pivot 8 follows and is relatively small, leading to another significant pivot (9) in early 2011. Both pivots 8 and 9 are therefore highly significant too.

5. As mentioned twice (and here again for emphasis), the fact that David has a Bottomfinder in equities with the same cumulative volume as the one here in the euro is being treated as highly significant, given the current negative correlation between equities and the US dollar.

AColes 15th Feb 2010

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This is an update of my Feb. 6th post on the status of the S&P 500 in what I call the short term timeframe, as viewed on a daily bars chart.  The chart here is shown on a somewhat expanded scale compared to last week, to better see the recent price movements.  See the Feb. 6th post for background.

We see that price has bounced up this past week, consistent with my expectations, as expressed last week.  It’s still in a downtrend on this timeframe as long as it remains below R1.

Since the price peak on Feb. 2nd was far below the primary resistance curve, R1, this identifies this downtrend as an accelerated one.  Therefore, I’ve been able to fit a BottomFinder to this trend, BF1 on this chart.  It is currently 52% complete, with the projected horizontal location of the end of the trend at that dashed vertical line.  We’ll keep watching this, with the expectation being that the price at the end of the trend will probably be at one of the support levels that’s laddered below the price here.  I’ve added to this daily bars chart those four horizontal line segments at the levels of the ladder of supports from the weekly bars chart, as shown in my Feb. 7th blog post.  Those levels have not changed since last week.

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This is the fourth and last in this series of blog posts that analyze the trending nature of the S&P 500 on four different timeframes.  See the previous posts.  This one is of the Very Long Term, which is viewed on quarterly bars.

Charting

As we get into very long term timeframes, hitherto unseen distortions come into the Midas curves, both the S/R curves and the TB-Fs, due to the huge monotonic increase in trading volume that appears over the decades.  I’m devoting a whole chapter to this in our forthcoming book, so I’m not going to repeat it all here.  I’ll just state and demonstrate the result, which is that we have to go back to traditional time based charts, and we need to calculate the Midas curves with no volume.  This chart is of quarterly bars, time based, from 1968 to the present, with price on a log scale.

The Baby Boomers’ Bull Market et Sequa

The huge secular bull market that is associated with the baby boomer generation started in 1982 with a steeply accelerated uptrend, so S1 is started from there.  The TopFinder, which is fit to the latest pullback, the Asian currency crisis of 1998, exactly called the top in 2000.  After price crashed to about the 50% retracement level in 2002, it went back up, tested the 2000 high, and rolled down again.

The Post-2002 Behavior

Retrospectively, I have fit that dotted green Midas S curve to the 2002 low as a test of subsequent action.  If, during the decline of the last two years, price had supported and turned up from that curve, that would’ve supported the concept that a new uptrend started in 2002.  However, price broke straight through that level, went on down and turned around exactly at S1, which is a major, very significant support curve.

There certainly was a lot of angst among market participants in early 2009.  But on March 6th, price abruptly stopped declining and turned up. . . right at S1.  Anyone who was watching THIS chart at this time would’ve been very pleased, and during the following weeks probably would’ve piled into the long side of the market big time.  I’m chagrined to have to admit that I was not watching this chart then, and thus missed this huge opportunity.  One of the main reasons I’m now doing these blog posts is to force myself to pay better attention in the future!

To help understand what’s going on now in this timeframe, look at the upper pane, the standard RSI indicator.  The RSI has the unique property that trendline analysis can often be profitably applied directly to the indicator itself, as I’ve done with that trendline from the 1974 low to the 2000 high.  That trendline tracked this monstrous bull market from the depths of the mid ’70s recession until it broke at the manic dot com peak.  Now, in recent years, the RSI is behaving as a classic oscillator, not a trend indicator, going from somewhat overbought in 2007 to somewhat oversold in 2009, and now rising from there.

Combining the RSI’s behavior with the actual price moves, what I’m seeing here is that price is stuck in a very wide trading range between the 2000 high on the top and S1 on the bottom.  On this timeframe, there currently is no trend.  There won’t be a new trend until price breaks out of this range.

Longer Timeframes?

This is the end of my four-part series of blog entries.  There actually could be a fifth part, the analysis of the next longer timeframe, which I call the Mulit-Generational Timeframe, using both quarterly and yearly price bars, and going back well over a hundred years.  I’m doing that analysis in our forthcoming book.  For now, I’ll just give you a very brief statement of the conclusion of that analysis:  We’re now in a huge bear market that will last at least another ten years.

Summary – The Trending Status of the S&P 500

Short Term                      Down
Intermediate Term           Down
Long Term                       Up
Very Long Term               No Trend – in a trading range
Mulit-Generational           Down.

Updates

I’ll update these analyses here on this blog on the following schedule:  Short Term every week, Intermediate Term every 2 or 3 weeks, Long Term every 2 or 3 months, and Very Long Term once or twice a year.  And Multi-Generational?  Maybe once more in my lifetime!

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This is the third in a four part series of blog posts here addressing the current trend status of the S&P 500 on four different timeframes.  See the previous three.  This one addresses the long term timeframe, as displayed on a monthly bars chart.

The Chart

This is an EquiVolume chart, meaning each price bar is a rectangle, or “box”, whose top is at the high price of the month, bottom at the low, and whose width is proportional to the volume traded during that month.  Thus, the horizontal axis is linear in cumulative volume, not time.  This type of charting was first popularized by Richard W. Arms Jr. in his 1971 book, “Profits in Volume”.  The Midas methodology is best viewed on this kind of chart.  This chart is of monthly boxes from 1994 to the end of last week.  The price data are from Reuters and the volume data from Yahoo Finance.

Two Symmetric Manias

This chart shows the two recent market manias, the dot com boom peaking in 2000 and the credit crisis bubble topping in ‘07.  Notice the symmetry of each bubble – the horizontal width of the rise into the top is about equal to that of the fall from it.  You wouldn’t see this on a traditional time-based chart.  This tells us that about the same amount of trading volume happened on the crashing downside as there was on the manic build-up side.  And it makes sense when you think about it; all of those manic momentum players who chased each bubble to its top have to get washed out of the market on the downside before the market can stop falling.  And once they’re gone, the market can recover.  An EquiVolume chart is a quick and easy way to keep track of these kinds of things.

The Retracements After The Crashes

In 2003, after the dot com crash ended, price launched into an accelerated uptrend traced by that TopFinder, marked TF1.  One month after that ended, at the red arrow, price banged up into ‘Old R1″, the Primary R1 Midas resistance curve launched from the 2000 top, and then price went into an 8-month long bull flag consolidation, after which a new uptrend took it to the top of the next mania.

Now, onto the next mania.  In March of 2009, the crash from the bursting of the credit bubble ended, having been perfectly tracked down by that BottomFinder, BF.  Then, a robust retracement uptrend started, being tracked by the TopFinder TF2, which is now 85% complete.  But this time, price has hit R1 before the TopFinder has ended.  And so far, price has not broken above that level.  The dotted vertical line on the right is the projected horizontal location of the end of TF2.

The Current Status

TF2 is telling us that this uptrend still has 15% more to go (in cumulative volume, not price).  Another indication that we’re not at the end of this uptrend comes from the top pane, the MFI index (see my Feb. 6th blog post for description of this oscillator).  At each of the two mania peaks, the MFI was diverging down after having become strongly overbought.  And in 2003, when TF1 ended, the MFI was strongly overbought.  But as of now, MFI is not yet overbought, an indication that this current strong uptrend may not be at its top.

The current uptrend has spawned a two-fold hierarchy of Midas support curves, green, S1 and S2.  We can’t say for certain that the current uptrend has ended unless and until price breaks down below S2 (or below a new S3 if there is another leg up to this uptrend).

What Next?

The current uptrend on this timeframe is not over.  The only question is whether price will break up above R1 before the uptrend ends.  If it does, a reasonable upside target would be the Old R1 curve, at the horizontal location of the dotted vertical line.  Another scenario is that price will meander around just under R1 until the TF2 runs out.  In either case, there is no predictability as to what happens after the trend ends.

Will we go on to another mania peak, or have we, as a society, finally learned our lesson?  Such a question is beyond the scope of this blog post.

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This is the second in a series of four blog posts on the current trend status of the S&P 500, using the Midas S/R curves for analysis.  See previous post for definitions of timeframes.

Different on Different Timeframes

Having read my previous blog post here, you may wonder why I’m going through all this discussion again about whether or not this is a new downtrend; after all, didn’t I already establish in the last post that this is indeed a downtrend?  That last post was all about the short term timeframe, a chart of daily price bars.  The market is fractal in nature, and can and often does go in different directions on different timeframes, simultaneously.  The fact that the market is down on a daily bars chart means nothing about what it’s doing on a weekly, monthly or quarterly bars chart.  Each one must be analyzed separately.  And that’s the program of this series for four blog posts that I’m now half way through.

Which one of these timeframe charts should you “believe”, and follow for your trading?  That depends entirely upon your typical holding time for a trade.  If your trades typically last anywhere from a few months to several quarters or so, then this weekly bars chart is your primary chart.

New Downtrend

In this weekly bars chart of the S&P 500, from July 2008 to the present, we see that this past week was a strong continuation of the breakdown below S3, the highest support curve in the hierarchy of Midas curves that tracked the uptrend from last March.  Usually, I wouldn’t declare that such a breakdown alone defines a new downtrend until a pullback in price stays below the new R1 curve.  And indeed, such a test may come and invalidate the claim that this is a true downtrend instead of just a consolidation after a long uptrend.  But, price motion has been so strong over the past three weeks that I’d say this probably is a new downtrend.

In the upper pane, I’m showing the Ease of Movement (EOM) indicator, which was developed by Richard W. Arms Jr., the same fellow who created the Arms Index.  The EOM is his trend direction indicator, positive being uptrend and negative, down.  The crash of ‘08 so severely depressed the value of this indicator, exceptionally deeply into negative territory, that it wasn’t until last July that it finally read positive for the uptrend that actually started in March.  Usually, this indicator hardly lags at all.  So, look at it now; it has gone negative already, which I think justifies calling the present situation the beginning of a new downtrend.

Of course, if price goes up and breaks above the New R1 curve, then this has not been a downtrend, but just a consolidation.  And if it breaks above the January high, then a new uptrend has started.

Supports to Watch

The uptrend from last March spawned a three-fold hierarchy of Midas support curves – S1, S2 and S3 – shown here.  S3 has already been penetrated, so we should watch for possible support at S2 and S1.

The downtrend before last March, which extended from ‘07 to ‘09, spawned a four-fold hierarchy of resistance curves, the last two of which are shown here.  The significance of these two old R curves is reinforced by the fact that each one provided support or resistance during the recent uptrend, at the points marked with those red and green arrows.  So, these are not only primary curves but they are also what I call “calibrated” curves, by virtue of their subsequent captures of price extrema.  Thus, they are very significant curves going forward.  Since price has gone above both of these old R curves, they will act as support if and when price comes down to them.  This is why they are included in this ladder of support levels that sits below the current price.  Any one or more of these four levels is a likely place for a pullback from this downtrend to start.

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This week, instead of discussing the TopFinders, I’m reviewing the status of the market, the S&P 500, using standard Midas Support/Resistance curves and one other corroborating indicator.  The Midas curves are robust, easy to interpret, and are applicable to any market condition.

Definitions of Timeframes

I define short term to be the timeframe that is comfortably viewed on a chart of daily bars, intermediate term is a weekly bars chart, long term is monthly bars and very long term is quarterly bars.  This blog entry will be for the short term, with blog posts on the others coming soon.

Current Short Term Status – see chart

In January, price came up against the primary resistance curve that was launched from the 2007 high on the monthly bars chart, consolidated there, then on Jan. 21st, price fell sharply, breaking below the closest-in support curve (dotted green).  This means the previous uptrend has ended.  Then, price went on to break through the next support curve while at the same time remaining below the new resistance curve (the upper red one).  On Feb. 5th there was a minor price pullback, a local high, which didn’t get up to the primary resistance curve.  This behavior – breaking supports while holding below resistance – defines a downtrend.  So, on this short term timeframe, the S&P 500 is in a downtrend.

The Bouncing Hammer

Yesterday, price fell sharply during the day, then reversed all of its loss, closing slightly above its open, forming the classic Hammer candle.  During the decline in the first half of the day, it seemed like there was no bottom in sight, and the sudden reversal came as a surprise to most observers.  Yet, look at what happened on this chart.  Price did not mysteriously stop falling in the middle of nowhere.  The reversal came at the major support curve launched from the correction low of early last July.  The market has, at least temporarily, found support there.

What’s Coming Next?

A Hammer candle in a downtrend often indicates at least a temporary bottom.  Furthermore, the bounce up we had during yesterday from this major support curve both confirms the strength of this support level, and is consistent with some upward motion at least for the next few days.

Now, look at the upper pane, an oscillator commonly known as the Money Flow Index (MFI), which is actually a misnomer.  In reality, this oscillator is the volume weighted version of the RSI, a very appropriate oscillator to use on these Midas charts since the Midas curves are volume weighted and the charting is cumulative volume based instead of time based.  The MFI is now significantly oversold; the last time it was this strongly oversold was at the March 6th bottom last year.  The last time the MFI was this oversold during a downtrend was on October 10, 2008, in the midst of the great crash, after which price bounced up for two days, and then the crash resumed.  So, this oversold condition also supports a bounce up in price from where we are now, at least temporarily.

As long as an up move from here does not go above the primary resistance curve, the upper red one, the downtrend on this timeframe is still in effect.  If it does break above that curve, I’d say we’re in a consolidation, and if it goes further up and breaks the January high, then we would be in a new uptrend.

But, if price definitively breaks below yesterday’s low, that would indicate that the current downtrend is very strong, and likely to go much lower.

Laddered below yesterday’s low are four other support levels; one is a traditional horizontal line defined by the early August high and the early October low, and the others are three more Midas support curves, the lowest of which is the primary support curve launched from the 3/6/09 low, and the other two are curves which have provided significant support already.  Assuming the current downtrend on this timeframe continues, you should watch for support at these levels, and thereby not be surprised when it happens.

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Summary: across the board warning on base industrial metals and silver with strong implications for equities.

This post was not intended but it has been written up quickly as a result of what is now becoming apparent in industrial metals such as copper and precious metals such as silver, platinum, and palladium. Before producing the evidence, let’s quickly review the vital intermarket relationships which have emerged at a pretty elementary level in the past two years:

During the equities crisis between 2008 and 2009 (earlier and later in some equity market indices), there were savage parabolic declines in copper, platinum, palladium, silver, and other base metals (gold held its ground more firmly). Thus, equity indices and the base and precious metals were positively correlated during this period, as indeed they both were with the commodity currencies and sterling and the euro.

Now let’s add to this two more recent observations:

1. Several indices, including the S&P 500, have broken their Intermediate March 09 trendlines on extremely negative volume readings (as David pointed out in his weekend posts) and on extremely odd COT report open interest and net positioning readings (as I pointed out in my post of February 1st).

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2. Copper has fallen 8.7 percent since the Midas Topfinder warning, along with declines in zinc, lead and aluminum, as I pointed out in the same Feb 1st post. Various reasons have been given for this, particularly tightening of monetary policy in China and a strengthening of the US dollar, but we’ll leave the speculation aside.

These two facts, plus the elementary intermarket observation, are pointing strongly to the resumption of the equities crisis. The current Elliott Wave International wavecount puts us at the start of wave 3 of the ongoing C wave. The evidence here is now consistent with this assumption.

These are the facts. Now lets’s look at the detail, beginning with silver and then moving to platinum and palladium (copper was updated in the previous post).

Silver

Figure 1 is the weekly chart of silver. Notice first that the secular (= 2 to 10+ years) trendline (red) was well and truly broken during the equities crisis. Since then, this trendline has acted as a wall of resistance as the market has flipped and long-term support has become resistance. The market is now at key support at 16,000 with two Midas support curves at 15,000 (= Fib 23.6%) and 14,000 (= Fib 50%). As far as Elliott Wave is concerned, the pattern is drawing out a classic ABC correction.

Figure 1

Most importantly, however, we have the indicator at the top, which is the COT Index set to a three year lookback. For those who missed the copper posts, the COT Index is normalized by running the stochastic formula through the net positions of the Commercials in the COT report. The indicator is used extensively by experts on the COT report such as Larry Williams and Stephen Briese. Because the indicator follows the Commercials, it works inversely to a normal stochastic. Thus, its present position is a sell signal, not a buy, because Commercial net positioning moves inversely to price. Only on a few occasions does this indicator reach such extreme levels, including at the 2008 top. As pointed out in the first copper report, the Commercials are divided into Commercial producer hedgers and Commercial consumer hedgers. Commercial producers always hedge by going short to protect against falling prices, whereas Commercial consumers always hedge long to protect against rising prices. Here, then, the COT Index is warning that Commercial producers are again at record normalized levels, thus warning over an over-supply in the market.

Palladium

Let’s look at palladium in Figure 2.

Figure 2, www.timingcharts.com

Straightaway we can see a very similar COT report situation to silver, with a near record level of open interest in the lower pane and extreme net positioning in the Commercials and NonCommercials (funds and large speculators). Let’s look at the data in Figure 2 in Figure 3 also.

Figure 3

The chart above contains two COT Indexes, one for the same Commercial net positioning data (top pane) and the other for total open interest (middle pane). We can see that total open interest is falling sharply, meaning that someone is leaving this market rapidly. Since it isn’t the Commercial producers, who are again hedging at record levels, it’s probably the funds and speculators.

Platinum

Here we have the same story in Figure 4.

Figure 4, www.timingcharts.com

Figure 5 (the next chart below) is much the same chart as Figure 3.

Figure 5

Here in the middle pane we see total open interest again at an extreme normalized level and in an inverse position to the Commercial net positioning in the top pane, where again Commercial producer hedgers in platinum are at extreme short levels in expectation of a severe drop in demand.

Topfinders on platinum and palladium

Figures 6 and 7 are merely the same charts of palladium and platinum respectively with the Topfinders fitted. The palladium Topfinder is 98.9% done on a cumulative volume fitting (D) of 350,000. The platinum Topfinder is 100% done on a cumulative volume fitting (D) of 700,000.

Figure 6, palladium

Figure 7, platinum

COT report observation on equities

In the post updating copper on February 1st I drew attention to the extraordinary absence of interest in the equity index futures markets (S&P 500 and Dow) by the large funds and speculators, who have had net positioning virtually at zero (with almost zero percent open interest also) throughout the uptrend since March 2009. This is in stark contrast to fund and large speculator commitments in the base and precious metals markets. In the futures markets, at least, this is where the bulk of the cash has been going, not in equity futures.

Gold

Gold held up during the previous crisis in equities even while the US dollar rallied. If we do get the scenario discussed in this post, gold looks set to do so again, with the downside target being 10,000.

AColes 2nd Feb 2010

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In this post I want to update briefly the previous warning on copper, followed by some observations on the Commitments of Traders (COT) report for the S&P 500 and Dow Industrials. Finally, I want to return to a pattern in the European indices which, according to the previous post, was reflected in China’s Shanghai Composite.

Update on copper

Those who read my previous post warning on copper will know again how accurate this most recent Topfinder warning was. The key is in fitting TB-Fs correctly. When it warned, the indicator was 99.2 percent done and there was some very noteworthy data too on total open interest readings and normalized Commercial net positioning values from the Commitments of Traders report. Copper began its decline the following day and has fallen 8.7 percent to $6,750 a tonne since. The COT report was warning that copper had run well ahead of market fundamentals and we’ve seen similar declines since in other industrial metals such as zinc, lead and aluminium. As ever, however, timing is fundamental and the Topfinder/Bottomfinder’s signals are often astonishingly accurate.

The common view now is that there’s very little technical support for copper falling at least another 8-9 per cent should the downtrend gain momentum. However, Figure 1 is an updated chart of copper showing several displaced Midas support curves, with the heavy magenta curve the expired Topfinder, the blue line the November 09 trendline (broken), and the light red line the 200 day moving average. True, there’s a lot of support here, but that Topfinder and the November trendline were Intermediate trend breaks (the Intermediate trend = 2-9 months), so we should at least expect a contrary Intermediate size move as a result.

Figure 1

In the last post on copper, it was suggested that the likely top in copper was probably coinciding with down moves in China’s SE Composite. In fact, Asian equities have been falling consistently over this period, with the MSCI Asia ex-Japan reaching a two month low. China increased its bank ratios as expected and its increasingly tougher stance on monetary policy has shouldered much of the blame for this decline in equities along with the carry unwinding implications of a strengthening US dollar.

The S&P 500 and the Commitments of Traders report

In a couple of posts over the weekend, David drew attention to several volume-based indicators which were warning of heavy distribution and that even though the Intermediate term Topfinder was 83 per cent done, other Midas-based and trendline-based analyses were indicating that the trend could well be over.

In Figures 2 and 3 I’ve included COT report data showing that total open interest in both the Dow and the S&P futures is at its lowest since 2000 levels (just off the chart) when we were last approaching a Secular term top in equities. What’s fascinating about current net positioning data in these two equity index futures markets is that total open interest being virtually at zero (!) is reflected in the net positioning of the Commercials (hedgers) and NonCommercials (large funds and speculators) also having virtually no commitment in this market.

In contexts such as this, especially at an Intermediate term top, we’d expect to see the funds net long and the hedgers net short (take a look, for example, at their positions in early 2008), but the funds have had virtually no long positions in either market since last March and they actually started shorting it during its first significant pullback — a strong indication of how edgy the funds were at this time, even on limited market commitments. This actual level of low-lying risk appetite in the large funds and speculators is in stark contrast to other fundamental indicators such as the VIX and the narrowing credit spreads as a result of the take-up of high yield (junk) bond issuance. At one stage not so long ago the fortunes of the US dollar were also heavily linked to increasing risk appetite in equities. The COT report since March 2009 emphatically shows that large funds were not net long US equities, since there has been virtually no reflection of risk appetite in these futures markets.

Figure 2 above, www.timingcharts.com

Figure 3, www.timingcharts.com

Figure 4 below is the total open interest data from the COT report normalized. I normalized last time in my blog on copper and I’m doing it again here, this time with equities. Here I’m using the same formula as last time, on this occasion however with a lookback of 3 years and not 1 year. Here’s the same formula:

((current week value – lowest value of lookback period) / (highest high of lookback period – lowest low of lookback period)) * 100

I mentioned last time that this indicator is known as the COT Index and is used extensively by experts on the COT report such as Larry Williams and Stephen Briese. Williams spends a fair bit of time in his 2005 book Trading Stocks & Commodities with the Insiders attacking conventional wisdom on volume and open interest, and argues that record low levels of open interest are as much of a warning as record high levels. Here we have the total open interest data normalized over a three year lookback period using an excellent market timing tool based on COT data — like copper, these extreme levels speak for themselves.

Figure 4

The Danish pattern, redux

In the last copper post, I also linked the pattern in China’s Shanghai Composite to one of two large- scale patterns in European equity indices out of a total of 14 indices examined. I want to return to that pattern and home in on it a little, because although the March 09 Intermediate trendline has been broken on the S&P, it looks as though we have a little further to go on this pattern. Figure 5 is a closeup of the March uptrend. The Intermediate size Topfinder launched from the low is 92 percent done and in terms of Elliott Wave we appear to be in the final subfifth of the final fifth. Wave 1 was the longest wave and we know that wave 3s can’t be the shortest. Therefore, the price target for wave 5 = wave 3, which is putting the top at around 430 on this index.

Figure 5

Longer-term Elliott Wave count

At the end of the previous blog post, I also posted a longer-term Elliott Wave pattern that I thought was a plausible alternative to the current wavecount of Elliott Wave International, which assumes we’re now starting wave 3 of wave C. On the putative count offered here, wave A completed in March 2009 and we’re now in the large B, with C expected to begin in 2011. I’m not dogmatically insisting on this count, just offering it here as a plausible alternative which should be considered (pending further analysis of much longer term historical wavecounts).

At the time of writing, there’s a lot of bullishness among equities analysts that the recent Secular bear market is over. Some argue that we’re experiencing the start of a 10 percent sell off, which is said to be normal in the first year of a recovery; others are maintaining that coming out of a Secular bear market there’s always an equity market correction just before the start of the tightening cycle. US political commentary, especially from the Republican side, on the recent round of fundamental data (including last week’s GDP figures) is more muted, especially on the jobs implications. In any case, I offer this wavecount as a plausible alternative to bullish sentiment as well as to the official line from Elliott Wave International.

Figure 6

AColes Feb 1st 2010

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