Archive for March, 2011

Andrew Coles, March 31, 2011

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Summary of today’s post

Like Charles Dickens’ A Tale of Two Cities, wherein a given circumstance is perceived as good or bad depending on the point of view, the markets are currently exhibiting wave patterns amenable to two quite distinct Elliott Wave counts that have radically different implications for the intermediate and possibly primary degree trend. These two wavecounts are being exhibited on a range of US, European, and international indices.

In this post, I want to highlight these two wavecounts before turning to some bigger-picture data on the VIX and the COT Report. First, I’ll recap on the main themes of the thread running through my entries since February 22.

Recap of the ongoing thread in previous posts since Feb 22

In my post of February 22, I warned of a likely top in the markets based on several price-time parameters (namely, Bob English’s detrended MIDAS curve, a completed five wave Elliott count, a MACD histogram divergence, and the Long Term Delta). In my follow-up post of March 17, I also noted that the above price-time parameters could be supplemented with the following:

• The VIX breaking several key MIDAS volatility curves, including the main S1 curve from the March 2009 subprime low.
• The MACD breaking a key MIDAS momentum curve that had been launched from the last major correction between April and July 2010.

In my subsequent post of March 23, I drew attention to the fact that many international indices, and several European ones, were either testing the March 2009 subprime trendline or the main price-based S1 MIDAS curve from the subprime low. I also drew attention to major weakness in the Baltic Dry Index in relation to an additional MIDAS subprime S1 curve on this dataset. Numerous studies of the Baltic Dry index, particularly one recent paper by the Smith School of Business (University of Maryland) and McDonough School of Business (Georgetown University), have shown that the growth and decline rate of the Baltic Dry Index has a strong predictive ability for stock markets and commodities and thus the corresponding growth in global market activity. This very significant negative divergence in the Baltic Dry Index should therefore be taken seriously, particularly when so many international indices either tested the subprime trendline, subprime MIDAS S1, or indeed both.

Two Elliott Wave counts

The major problem is that the recent decline on the international indices between mid-February and mid-March can be interpreted in two very important but different ways: either as a conventional ABC correction or as a five wave downside impulse. If the ABC correction count is correct, we can expect the mid-February high to be taken out and thus for the impulse from the May-July 2010 low to continue sub-dividing until a top is finally in place. On the other hand, if the downside impulse is correct, the current upside since mid-March is merely correcting. As a result, we’ll see a successful retest of the subprime trendline and/or MIDAS subprime S1 curve.

The ABC corrective count can clearly be made on several US indices plus several European ones. Here’s the ABC count on the S&P 500 June futures, with putative wave B as a perfectly formed symmetrical triangle. We’ll see the impulse count below on the Euro Stoxx 50 June futures. As noted, in Chart 1 wave B is a triangle, with waves A and C clearly subdividing into five waves. The upside since mid-March too has all the hallmarks of a new impulse.

Chart 1: S&P 500 with ABC correction

On the other hand, Chart 2 below is the impulse wavecount on the Euro Stoxx 50. Here we see two things: first, no large wave B symmetrical triangle; and second, a larger putative fourth wave. Chart 3 below provides the current MIDAS support levels on the Euro Stoxx 50.

Chart 2: five wave downside impulse wavecount on the Euro Stoxx 50

As noted, these two radically different wavecounts are possible on a variety of US, European, and international indices. This is not a localized squabble between the S&P 500 and the Euro Stoxx 50.

Implications of the two wavecounts

There are three possible implications arising from these two wavecounts:

1. All putative five wave declines are actually ABC corrections. If this is the case, we’ll see a uniform move to new highs above the mid-February top.

2. All putative ABC declines are actually five wave declines. If this is the case, we’ll see a uniform down move after the current correction that will successfully test the subprime trendline and/or subprime MIDAS S1 curve.

3. Some indices really have declined in ABCs, while others really have declined in five wave impulses. If this is the case, the former will move to new highs, while the latter will successfully test the subprime trendline and/or subprime MIDAS S1 curve. This scenario is quite conceivable, with the ongoing debt crisis in the eurozone already evident in the Greek market breaking the major 2009 subprime support and thus breaking to new multi-year lows. Moreover, at the major 2003 bottom, indices such as the S&P 500 turned 7-8 months before indices such as the Euro Stoxx 50 (June 2002 and February 2003 respectively). Major turning points in the primary degree trend, then, can and do decouple in the international stock markets.

Before moving on, Chart 3 below is a 60m chart of the June Euro Stoxx 50 with key near-term MIDAS support levels that must be taken out in the next few days of trading if scenarios (2) or (3) above are to come to pass. In MIDAS theory, a trend will support four to six MIDAS S/R curves before either ending or correcting much more deeply. In Chart 3 below we have five curves. As I write, S5 has been broken after having held the market as key support in the early hours of this morning’s trading, followed by a current test of the S4 curve, as the market has responded to eurozone March inflation data (2.6%), its highest for 29 months.

Chart 3: 60m June Euro Stoxx 50 with key near-term MIDAS support curves

Chart 4 below is the same Euro Stoxx 50 chart with the MACD added. As we can see, the S1 momentum support on the MACD has been broken (blue arrow). Since this is a new MIDAS curve as part of ongoing research, I don’t know whether this is warning of a break of the price-based S1 curve. On the far left (red arrows), we also have a new type of MIDAS trade setup I identified in the book and which I called the Dipper Setup. I’ll cover this setup in a different post.

Chart 4: MIDAS momentum S1 broken on the MACD

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Update on MIDAS VIX curves plus large MACD divergence on the VIX

Chart 5 below is an update of my previous VIX chart, this time on the weekly timeframe instead of daily. Here we see a large positive divergence on the MACD, which coincides with the negative divergence on the Baltic Dry Index. A positive MACD divergence in complacency implies a sharp reduction in the momentum of call buying and hence a warning of a dramatic increase in put buying and increased volatility. A divergence of this size on the weekly chart is significant, though it’s unclear how much weight to give it because, as far as I know, there’s no history of momentum studies on the VIX, albeit the previous negative divergence highlighted the move up to the 2008 high. (As part of the introduction to new MIDAS curves, I’ve also plotted a support curve on the MACD. This too provides an excellent example of the Dipper Setup (see my Chapter 16 of book and a forthcoming Active Trader article, April).)

Chart 5: MIDAS VIX curves and large positive divergence against call buying and complacency

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COT Report open interest on the S&P 500

As far as COT Report open interest is concerned, Chart 6 below indicates that total open interest (lower pane) has been declining steadily in the S&P 500 for two years (since in effect the subprime bottom). The middle pane, showing the net positioning, indicates that both the Commercials and Noncommercials (hedge funds) are net short, while only the Small Speculators are net long.

Chart 6: total open interest and net positioning

Since only the Small Speculators (rudely: dumb money) are net long on declining open interest, we can drill down into these figures further by asking how much of this declining open interest is the result of the Small Speculators adding to their longs or adding to their shorts. We do this by dividing the total open interest by the net long and net short position respectively. The results are in the final two charts, Chart 7 and 8.

As Chart 7 shows, the open interest of Small Speculators long futures has been declining for the past year but has suddenly risen from the start of 2011, even though total open interest is declining.

Chart 7

As Chart 8 shows, the open interest of Small Speculators short futures has also been declining since the July bottom of 2010 but it has recently started to increase.

Chart 8

The increase in open interest by those long futures has been roughly twice that of those short futures. Still, though, the total open interest is remarkably low, and the open interest of those Small Speculators long futures is very small in comparison with the overall net short positions of the Commercials and Noncommercials (funds) and Small Speculators increasing their open interest in shorting the S&P 500.

In other words, at least as far as the futures are concerned, there is very little holding this market up in terms of net positioning and open interest allocations amidst declining overall open interest.

Conclusion

1. The short-term trend has a highly ambiguous wavecount, with radically different implications for the intermediate degree trend and possibly the primary degree trend.

2. The longer-term picture is still weak:

• with the recent break of the MIDAS MACD curve and MIDAS VIX curve
• with negative data in the VIX weekly momentum on US call options
• with negative data in the important Baltic Dry Index
• with very low open interest in the S&P 500 futures

3. If all or some of the indices do move down following the crisis situation in the Greek stockmarket, the key proximate support level is the MIDAS S1 subprime curve.

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This is to clarify for readers of the greyna17 email feed that the weekend announcement concerning the newly-scheduled bi-monthly updates of the S&P 500 MIDAS market commentary was made by David. It doesn’t apply to me and it doesn’t apply to contexts outside of David’s commitment to the S&P 500.

Receivers of this email subscription also please note that the email address, greyna17@gmail.com, is never monitored by David or myself. It was generated by the Google feedburner system automatically to send out blog updates.  It has no further communication purpose.

A.Coles, March 28, 2011

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I have been doing weekly updates on the S&P 500, but from now on, I’ll be doing updates twice a month, just after the beginning and the middle of each month.  My next update will be a week from today.

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This is an update of my March 17 post. It contains new ongoing research on MIDAS curves on independent fractal datasets (including in this post the Baltic Dry Index) and will therefore also be stored in the folder “Ongoing MIDAS Research”.

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A.Coles, March 23 2011

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Summary and Recap

One of several purposes of my last post of 17 March was to illustrate a new use of MIDAS curves on the VIX (ie, MIDAS volatility curves) and the MACD (ie, MIDAS momentum curves). I also raised the question whether there was another new use of the curves in this application, namely:

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Whether breaks of MIDAS support/resistance curves on independent datasets are actually advance warnings of breaks of price-based MIDAS support/resistance curves.

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I’ll further recap on this idea here before expanding it a little for purposes of ongoing monitoring. Later, I’ll also highlight very similar “advance warning” curve behaviour on the Baltic Dry Index to the behaviour on the VIX curves.

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First, let’s recap. Focusing on the VIX in my previous post, I noted in Chart 1 below that the VIX had last week crucially broken two MIDAS resistance curves that had been launched from the March 2009 subprime bottom while also breaking the more recent September 2010 curve.

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Chart 1: VIX with major break of complacency resistance into greater upside volatility (”fear”)

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The obvious question this raised was whether it should be taken as a warning that the corresponding MIDAS support curve (S1) from the same March 2009 subprime bottom would also be tested successfully on US indices (in particular, the S&P 500, DJIA, and Nasdaq 100). If the warning turned out to be correct, this would be another interesting new role for MIDAS curves when they could be plotted in these atypical contexts.

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Subprime S1 on the VIX, the S&P 500, and European indices

As for the S&P 500 itself, we can see from Chart 2 below that at the present time price is some way above the March 2009 subprime trendline as well as the S1 subprime support curve, while (as noted) the corresponding S1 curve on the VIX has been broken.

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Chart 2: S&P 500 with March 2009 subprime trendline and March 2009 subprime S1 MIDAS support curve

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However, support for the idea that the break of the subprime curves on the VIX may be forewarning of the break of subprime S1 on the US indices comes, interestingly enough, from several European indices, where the March 2009 trendline has been broken as well as the subprime S1 MIDAS support curve. For example, the March 2009 trendline has been broken on the DAX and I drew attention to it in my March 17 post (see here).

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However, if we look at Charts 3 and 4 below we can see that the MIDAS 2009 subprime curve corresponding to the VIX has either been well and truly broken or is currently being tested.

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Chart 3: Swiss Market Index continuous futures

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Chart 3 above is of the Swiss Market index futures, where we see the March 2009 subprime trendline broken as well as subprime S1 (last week). Chart 4 below is the futures on the Euro Stoxx 50. Most of our non-European readers will know that the Euro Stoxx 50 is Europe’s leading Blue-chip index for the eurozone, providing full representation of the supersector leaders. Consequently, it’s an important European bellwether complement to the S&P 500. As I write, the March 2009 subprime trendline and subprime S1 have become coextensive on the chart, and the index is testing both simultaneously, albeit S1 has already been broken some months before.

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Chart 4: Euro Stoxx 50 continuous futures

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Space prevents further charts here in relation to the March 2009 subprime trendline and the MIDAS subprime S1 curve, but here’s a summary below in Table 1 of what is currently taking place. As we can see, there’s been some substantial testing of the March 2009 subprime trendline and MIDAS subprime S1 curve.

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Table 1

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Comparison between Europe and US

What Table 1 demonstrates is the relative strength in the US markets as compared to Europe. Measured in relation to the March subprime 2009 trendline and the subprime MIDAS S1 curve, the only European markets to match the  strength of US markets are the DAX and the FTSE 100. Indeed, if we look at the DJ Global Stock Index/Excluding the USA, we see that this index too has tested the March 2009 subprime trendline along with most of Europe.

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*The DJ Greece index has not only broken the March 09 subprime trendline and the subprime S1 curve, it has also broken the actual March 09 subprime support. In doing so, the market has declined in a five wave Elliott impulse and is currently correcting this completed impulse.

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Chart 5: DJ Global Stock Index, Excluding the USA

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Conclusions

1. Volatility in the US options market as measured by the VIX vis-a-vis subprime VIX S1 has been much closer to sentiment in European and other world markets in comparison with the strength displayed in the S&P 500 and isolated European indexes such as the DAX and FTSE 100.

2. In the British financial press over the weekend, much emphasis was placed on the rebounding of global stocks towards the end of last week, with many commentators struggling to explain it. One intermarket explanation for improving risk-appetite was the first coordinated G7 intervention in the currency markets in 10 years to support the yen. Perhaps this did play some part, but it’s clear from the charts, both globally and European, that the brunt of the explanation stems technically from price testing the March 2009 subprime trendline and, in several indices, the MIDAS subprime 2009 S1 curve.

3. Will the breaking of the MIDAS subprime 2009 S1 curve on the VIX provide a genuine warning for what’s to come with regard to the same price-based curve on US indices such s the S&P 500? Time will tell, but as we’ve seen this curve has already been tested on several European indices.

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SHORT ADDENDUM: MIDAS curves on the Baltic Dry Index

If we look at Chart 6 below of the Baltic Dry Index (upper pane) and the S&P 500, we’ll see another application of MIDAS curves to economic time series, this time the Baltic Dry Index (BDI). However, we’ll also see similar MIDAS curve behaviour on the Baltic Dry Index to what we’ve seen on the VIX.

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Chart 6: the Baltic Dry Index (upper pane) and the S&P 500

I’ll write a separate post on the Baltic Dry Index later because its weakness makes interesting reading in relation to open interest on the Commitments of Traders (COT) Report. For now, however, we can see the same phenomenon in relation to the March 2009 subprime low on the Baltic Dry Index as we’ve seen on the VIX.

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The key on this chart is what’s being highlighted by the large blue and red curves on the right of the chart in relation to S1 and R1 on the S&P 500 (green) and the Baltic Dry Index. Notice that at the blue arrows the S&P 500 breaks above R1 but that the Baltic Dry Index fails to do so, with the result that R1 has been a strong resistance curve on the Baltic Dry Index since November 2009. Moreover, at the red arrows S1 acts as critical support for the S&P 500 in the rectangle, but the same S1 from the subprime low on the Baltic Dry Index is broken in March 2010. Since then, (second arrow) it too has become resistance, along with R1 further above it.

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Thus, the question again arises: Is the breaking of S1 from the March 2009 subprime low on the Baltic Dry Index (= the breaking of the same S1 March 2009 subprime curve on the VIX) warning of a similar breakdown of the price-based S1 on the S&P 500? This is a compelling question, because we now have two independent time series (volatility and economic) breaking the subprime S1 curve alongside several European indices.

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This is ongoing work and I’ll update the corresponding ongoing thread in these posts periodically.

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In a recent post, I mentioned that a new blog category folder had been created to house ongoing MIDAS research.

Today I’ve also now created two further categories, namely “MIDAS tutorials” and “MIDAS Trade Setups and Trade-Management”.

The purpose of these additional categories is to allow extra dimensions to the blog aside from its obvious role in market commentary. These extra dimensions will create further interest to visitors to the site as well as to us and hence broaden the site’s scope.

The “MIDAS tutorials” category is self-explanatory. Here, we’ll occasionally draw attention to more advanced areas of MIDAS application. The first post in this category folder is David’s recent one on adjusting D appropriately in the Topfinder/Bottomfinder in relation to a strong trend. Shortly, I’ll be posting a tutorial on how to understand the volume component in the VWAP formula upon which MIDAS curves are traditionally based. Appreciating this component is vitally important in understanding the displacement of MIDAS curves from price and represents the second, more advanced, stage in the regular use of standard MIDAS support/resistance curves.  This is not a part of Paul Levine’s original work and goes far beyond it.

The other category, “MIDAS Trade Setups and Trade-Management”, is again self-explanatory and will provide illustrations in accordance with Coles’ Chapter 3 in the book and Hawkins’ Chapter 8.

A.Coles, March 23, 2011

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Last week, in reference to the intermediate term chart (weekly bars), I said, “If price goes on to break and close below S3, that would be the signal of the start of a new downtrend.”  As you can see from the update, the first chart here, price most certainly did break and close below S3, so we’re definitely in a downtrend on this timeframe.  Price went on down to S2, and seems to have found support there, at least for the moment.  However, even if price bounces a bit from here, it’s still in a downtrend unless and until it breaks above R1, the new resistance curve.

I didn’t update the short term chart (daily bars) last week, so  here it is, the second chart.  Certainly, this is a downtrend, with a strong bounce up on the last two days.  It’s interesting to note what price did on Friday.  It came up, but hit the S4 calibrated curve and retreated down to the day’s close.  That curve, S4 calibrated, is a very important and strong curve since it successfully supported price on four different occasions during January.  This past week, price blew straight on down through that curve, which means the price move is very strong.  Now, that curve is acting as a resistance curve, and on Friday is held firm against rising price.  So, this downtrend is still very much alive, and will remain so even if price breaks above S4 calibrated, as long as it hold below the new red resistance curve.

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This is an update of my post of 22 February 2011. The second half of this post also contains new material related to an Active Trader (April 2011) article and will be stored in the new folder “Ongoing MIDAS Research” along with Bob English’s chart.

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A.Coles, 17 March 2011

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Summary and update

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The purpose of my Feb 22 post was to warn readers that an important price/time inflection was clearly visible on a number of European and US stock indices and hence to warn of a possible top.

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Prices were rallying hard on Feb 22 when the post was made. Since then, however, the major indices have broken both the 20 day and 40 day moving averages as well as the September 2010 intermedediate degree trendline (ie, 6 weeks to 9 months), indicating that a correction of at least this magnitude is now underway.

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However, on Tuesday of this week the DAX also ominously broke its March 2009 primary degree trendline. Since this trendline originates at the subprime low, this is now of considerable significance and points to the correction being possibly of primary degree proportion (ie, 9 months to two years). However, since a correction of this degree is highly unlikely so soon after a major market bottom in March 2009, the real possibility that must be considered now is that the market is beginning the putative wave C which, according to conventional Elliott Wave theory, has long been predicted on the basis of the relatively clear wavecount on a number of international indices, including China’s Shanghai index. My next post will cover this large topic.

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It’s clear in any case that this was indeed a major inflection point in light of the data that were confirming big related intermarket moves last week. The Reuters Jefferies CRB index was down 2.9 percent over the week, its largest fall since last November, and copper and iron ore were also down 8.6 percent and 6.2 percent respectively. I’ll return to these data too in the next post in relation to some recent MIDAS work on the Baltic Dry Index, which had been warning of the implications of China’s troubles for some time. The flipside of these large moves was haven movement in US Treasuries, gold, and the US dollar.

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The inflection point in price and time

Before saying more about the implications of these major technical breaks on the indices, I’ll quickly recap on why this major inflection point stood out so much on February 22.

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The price aspect of the inflection point was identified by several indicators.First, price was about to test the major downside trendline on Bob English’s long-term detrended MIDAS curve on the DJIA (www.precisioncapmgt.com), which he drew attention to in a privately circulated email. Courtesy of Bob I’m posting the chart here as Chart 1.

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Chart 1

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Second, there was a clear  five wave Elliott Wave impulse completing from the July 2010 bottom accompanied by a very significant negative divergence on the weekly MACD histogram. I posted this chart in my February 22 post and readers can see it here .

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The time aspect of the inflection was identified by the Long Term Delta. For readers not familiar with Delta time analysis, it’s an extremely accurate, almost clock-like, fractal system discovered by the Chicago commodities trader Jim Sloman and then adopted by Welles Wilder, who discreetly publicized it to the fund-management community before later writing a book. It’s vastly superior to standard cycle analysis. The Long Term Delta (LTD), one of several fractal time levels the system identifies, is roughly equivalent to the intermediate-term trend. My solution to the LTD on the S&P 500 was signalling the start of a new cycle barring an inversion. It’s clear now that an inversion did not occur. I can therefore update the LTD by stating that the next LTD pivot is due between early May and mid-June. See Chart 2.

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Chart 2

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It’s not possible to be more precise than this due to the small amount of variance in the system. Readers note: I’m not claiming that a major bottom will be in place between these dates, merely that this is the next significant time juncture on the LTD and that it will affect the market by at least three to four weeks.

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As for price targets, it’s possible right now to launch a bottomfinder on the DAX (as on many other indices) because the displaced move is parabolic. However, I suspect that this will only forecast to the current end of this parabolic move, which I doubt will coincide with the time period forecast by the LTD. The DAX futures are currently being supported at the 6,400 area, because this related to the swing highs created during the March-July 2010 correction. However, this support area won’t last long and I suspect that S1 is a more realistic target. See Chart 3 below. However, note that S1 on the VIX has already been taken out (see below). This might be forewarning of what’s to come with regard to the S1 subprime curve on the indexes.

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Chart 3

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Additional MIDAS tools recently applied to the uptrend between March 2009 and the recent February 2011 top

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I flagged this post as containing new MIDAS work insofar as I have been following this uptrend with several additional MIDAS indicators that don’t contain the VWAP formula upon which MIDAS curves are based. For interested readers, I have an article appearing on this topic in the April edition of Active Trader. The material came too late for the book.

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MIDAS volatility curves on the VIX

First, if we look at Chart 4 below we’ll see three MIDAS volatility curves on the VIX. The VIX is one of the most widely quoted indicators in the popular financial press but it’s hard to understand why technicians haven’t used the volatility data to create more accurate signals. One obvious thing to do would be to run a momentum formula through it to get consistent signals that can measure trends of various durations depending on the lookback period, much like Larry Williams did with the Stochastic to create the COT Index from COT Report data. In any case, creating MIDAS curves from VIX data is one way of creating novel support and resistance fear/complacency signals from the VIX.

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Chart 4

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As we can see if we look at the blue arrow and the large red one on the right, a MIDAS curve has been resisting pullbacks in falling complacency all the way up this uptrend since September 2010 and even before it, since the blue arrow below the large red one highlights that it was possible to launch the MIDAS resistance curve on the VIX in late May, a good month before the S&P 500 bottomed. Indeed, with some porosity the VIX even resisted the volatility (“fear”) associated with this bottom.

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Moving to the far right of the chart, we see that the pullbacks in the recent uptrend since September have been timed extremely well by the VIX MIDAS curves, as they resist pullbacks in ongoing complacency. However, the current February-March decline was resisted on the VIX initially by three MIDAS resistance curves, two coming all the way back from the March 2009 subprime bottom. Again, the fact that this major resistance area in downwards complacency has been taken out has to be taken very seriously.

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Importantly, I notice that the same price-based curves on the S&P 500 are a long way from being tested. Does the breaking of the VIX curves from the same subprime 2009 bottom imply an early warning that the price-based curves will also fail to hold price? Only time will tell. In any case, early warnings of price moves on MIDAS curves plotted on time series other than price would be yet another new use of MIDAS curves. I’ll watch this chart with interest. In due course, I’ll also start plotting MIDAS support curves on the new volatility uptrend on the VIX. See Chart 5.

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Chart 5

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MIDAS Momentum Curves on the MACD

Another chart of interest in relation to the recent Febuary-March top is Chart 6. This chart is also of interest in so far as it’s another example of MIDAS curves being applied to new time series and thus of not containing the VWAP content. The use of the MIDAS curves on the MACD is restricted to times when the MACD opens out and starts trending. It doesn’t always do this, since it will often oscillate fairly rapidly back and forth like a bounded oscillator. See Chart 6.

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Chart 6

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In Chart 6 we see the MACD in relation to the S&P 500. For the purpose of this blog entry, our interest is in the momentum MIDAS curve launched from point (3) on the right. Notice that, like the VIX MIDAS curves, it too was launched a month or so before the actual price low, thus supporting it definitively when it did come. In Chapter 16 of the book I worked with On Balance Volume as the independent time series and called this phenomenon the Dipper Setup, meaning that in divergences you can launch MIDAS curves from time series tops or bottoms to catch the actual price highs or lows rspectively. For decades traders have celebrated the power of divergences to warn of the ends of trends, but have grown weary of trying to time them. This particular application of MIDAS curves is a genuine solution to this intractable problem.

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In any case, the blue arrows reveal how powerfully the MIDAS momentum curve has supported the September intermediate uptrend. However, it too has now been tested successfully in this February-March downtrend, and this too must be regarded as another indication of some significance, since we now have breaks in price, momentum, and volatility. This indeed was an important price/time inflection point.

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MIDAS Curves on Economic Datasets: the Baltic Dry Index

I’ll write a separate post on this.

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A.Coles, March 15 2011

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This entry pertains to the new category “Ongoing MIDAS Research” and will be stored in the new folder on the right bearing this name.

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One of the aims of this site has been to use it as a storehouse for new and ongoing MIDAS research. However, since the site was created, new work on MIDAS has either appeared in articles or more recently in the book. With the book’s completion, we’ve now decided that there’s a need once again to use some area of the site to store new MIDAS work.

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The problem is that the site’s design is based around the blog, which in turn was developed for market commentary. Consequently, there isn’t a facility on the site ideally suited to store accessible research. Storing the information in the blog archives is a problem in so far as anything worth saying in a single blog entry (or as part of a blog incorporating ongoing market commentary) will be quickly submerged in the many other entries that make up the blog. As a result, interested readers – us included – will find it extremely difficult to reference this material later.

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As the design of the site stands, the best way of getting around this problem is to store ongoing MIDAS work in a separate blog category I’ve just created called “Ongoing MIDAS Research”, which readers can see on the right. Accordingly, any new work will be stored in this folder as well as under our own respective names.

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What do I mean by “ongoing MIDAS research”? I mean anything that might fall under the following categories:

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1. Genuinely new MIDAS applications to new datasets. For example, I (Andrew Coles) have an article forthcoming in Active Trader where I’ve created new MIDAS curves based on momentum and volatility data and other fractal datasets such as the Baltic Dry Index and Relative Strength ratios. This goes beyond the book. Work of this nature would be highly relevant.

2. New variations of MIDAS curves as a result of any manipulation of mathematical procedures involving MIDAS.

3. New uses of MIDAS curves. For example, on one particular dataset MIDAS curves have been used as disconfirmatory curves in relation to price-based curves and we’ll be watching the possible significance of this in the coming months.

4. Atypical contexts where for whatever reason MIDAS indicators fail unexpectedly. If they do, we’ll want to know why and we’ll want to explain it thoroughly.

5. Any technical contexts that produce unusual behaviour in MIDAS curves or, on the flipside, appear to work particularly well with the MIDAS approach, resulting in interesting creative and technical synergies.

6. Spectacular successes and spectacular failures involving the curves.

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When we identify one or more of these conditions, we’ll either write a separate blog entry on it, or we’ll incorporate it into one of the market commentary blogs. However, at the beginning we’ll flag the blog entry as involving new MIDAS research and store in the new blog category, “Ongoing MIDAS Research”.

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Finally, there’s a brief apology over the relative infrequency of blog entries here plus on occasion the absence of the richness of MIDAS analysis that can be found in the book and articles. The reason essentially is time. I learned this lesson quickly when I first started frequently posting longer commentaries on here. Extensions of the MIDAS tools unfortunately require a great deal of data- mining and data-manipulation in Metastock, particularly when focusing on areas such as open interest and the creation therefrom of various indicators I discussed in Chapter 12 of the book and of evolved curves such as those that use, say, Open Interest Weighted Price (OIWAP) instead of VWAP. David too has his own time limitations that prevent him from developing many of his own interests to the extent that he’d like to. With this proviso, we’ll do our best to keep the site updated as frequently as we can, both with market commentary and with new MIDAS-based research.

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Tutorial #1: Flagged under “MIDAS tutorials”. This is being flagged as a tutorial because as well as market commentary it includes discussion of how to adjust D in the Topfinder/Bottomfinder as a trend develops. See also my discussion in the book.

D. G.Hawkins, March 14, 2011

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For many weeks now, we’ve been watching the TopFinder (TF) on the weekly bars chart that is fit to the mid November 2010 pullback – see last week’s weekly bars chart.  That TF has been projected to run for several more weeks.  Now, I’m going to demonstrate a procedure that I explore fully in our upcoming book, which is the way to adjust a TF as the move progresses.  Since the November pullback, there has been one more pullback, at the end of January.  The question I discuss in the book is, should a new TF be fit to a later pullback?  What I advise is first try to adjust the D, duration, of the first TF to see if it could be reasonably fit to both pullbacks with not much error.  Often that can be done.  And that’s what I’m showing here in the first chart, the weekly bars chart updated to the end of last week.  It turns out that by reducing D from 61 million to 54 million, the TF slightly overshoots the low of the first pullback while slightly undershooting the low of the second.  These overshoots are quite small; the November low is at 1173.6 and the adjusted TF there is at 1176.3, an overshoot of only 0.2%; at the January pullback, the low is 1173.6 and the adjusted TF is 1176.3, an undershoot of only 0.1%.

This adjusted TF ended over a week ago, just as the current price consolidation started.  I think it’s safe to say that this intermediate term uptrend, which started late last summer, is now over.

The expectation in Midas theory is that once a TF ends, a consolidation begins, and we’re now in that.  However, this gives us no prediction as to the direction of the next trend.  Right now, price has consolidated down to S3.  If price goes on to break and close below S3, that would be the signal of the start of a new downtrend.  But if price holds above S3 and goes on to break above the high of mid February, then that would be the start of a new uptrend.

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In the first chart here, daily bars, we see that during this past week price has recovered somewhat, while showing a lot of volatility, but not giving us much insight into what’s going on.  So let’s go to the weekly bars chart, the second chart.  Here we see that the intermediate term uptrend that started last August is still progressing, now about 87% complete, and looking like it still has several more weeks to go.

Some people think that oil price concerns have ended this uptrend.   So, I’ve looked at my accumulation/distribution indicators to see if any weakness has come into the market.  See the third chart here, daily bars, with my two favorite accum/dist indicators on it, which I have described in earlier posts.  Here we see that the initial shock of the problems in the mideast in mid February did bring the average daily volume on down days above that on up days, but only briefly.  Since then, up days volume has resumed being robustly above down days, an indication of underlying strength in the market.  This is further supported by the MVPT now being significantly above the price.

My conclusion from all this is that the intermediate term uptrend will progress to its projected end, undeterred by mideast problems.

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