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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