Archive for July, 2011

by David G. Hawkins

Here we are, on the eve of the U. S.’s self inflicted financial crisis of failing to raise the debt ceiling, likely to cause at least a credit downgrade and its accompanying negative sequela.  I don’t know what’s going to happen, except to say it’s unlikely to be good.  All I can do now is review how the charts are behaving through to the present, and set up S/R levels to watch as the craziness unfolds next week.

Long Term – Monthly bars chart

The first chart here is the long term monthly bars chart, updated through to the end of July.  You’ll notice that I have removed the latest TopFinder, TF4, that showed on previous posts.  This TF is now 88% done, but the behavior of the chart now is showing that the uptrend that that TF was following has clearly ended, the peak being at the May price bar.  Notice that the new R1 launched from that May bar is now holding price down, while the S2 of the latest trend is being broken.  ”Holding resistance while breaking support” is the definition of a downtrend in Midas theory.  So, I have to conclude that a new downtrend on this long term timeframe started at the beginning of June, and that TF4 failed, something that sometimes happens.

Intermediate Term – Weekly bars chart

The second chart here is the intermediate term weekly bars chart, on which I have carried over the level of the new monthly R1 curve.  What we see here is continuing consolidation with increased volatility.  Temporarily at least, price is confined between the new S1 and the new R1, but with volatility increasing, I doubt that that confinement will hold long, especially with next week’s crisis looming.  Volume has been increasing, and this latest week had the largest volume since the middle of 2010.

Short Term, Daily bars chart

On the third chart here, daily bars, I’ve copied over the levels of the new monthly and weekly R1 curves, which shows clearly how well price has been honoring these levels on the up moves.  On the downside, we see that price has been turning at previously defined S levels.  As volatility increases next week, I expect that we’ll see more turning points emerge, most likely at these curve levels already established here.  Unfortunately, I don’t know in advance at which ones price will turn!  Fasten your seat belts, we’re in for a rough ride ahead!

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by David G. Hawkins

Short Term – Daily bars chart

Comparing the first chart here with the daily bars chart I posted two weeks ago, we see that price strongly broke above both R1 and the Weekly R1 levels, but a few days later abruptly reversed direction and headed down.  Such volatility is not surprising, given the current turmoil in the world markets and the uncertainty regarding the U.S. raising its debt ceiling.  What’s interesting to note here is that in the last two days price halted right at the support curve that was launched in late January, a curve that had been confirmed by its support action in late May, so this is a very significant curve.

With all the uncertainty in the markets now, I wouldn’t dare to guess what price will do next on this short term timescale.  All I can do is position the support and resistance levels on the chart and watch what happens.

Intermediate Term – Weekly bars chart

On the second chart here, it’s now obvious that, since the end of the first quarter of this year, price has been in a wide sideways consolidation, bounded on the top by the Fib retracement level from the monthly bars chart and on the bottom by the S1 cal curve.  The Money Flow Index (top pane, the volume weighted RSI) and the Volume Weighted MACD (bottom pane) continue to show strong negative divergence with price, showing weakness behind the scenes in the market, implying that the breakout from this consolidation will eventually be to the downside.

Long Term – Monthly bars chart

On the third chart here, we see that the currently running TopFinder, TF4, is now about 85% done, with its projected completion somewhere between those two dashed vertical lines; the chart plotting software won’t allow me to position the vertical line at the exact location.  On this timeframe as well as the shorter one, the Money Flow Index continues to show negative divergence, suggesting that the move after the TF ends will be on the downside.

When I next post, at the end of this month, we’ll be only two days away from the deadline for the U.S. to raise its debt limit.  This is an unprecedented situation, and I have no idea what’s going to happen, other than to expect extreme volatility in the markets.

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Summary of post and preliminary remarks

This fairly long post follows the previous 13th June post on EUR/USD, the aim of which was to identify secular, primary and intermediate support and resistance levels using second generation nominal curves, the MIDAS Displacement Channel, and third generation MIDAS curves.

In Figure 2 of the EUR/USD post I also expressed MIDAS caution on gold insofar as a Topfinder of primary degree launched from the October 2008 low had recently completed four weekly bars from the May 2 top. Adjusting the indicator slightly to the only other fitting possible, it was also noted that the resulting second Topfinder only had 10 percent remaining cumulative volume. This implied a cumulative volume “window” of between the completion of the first Topfinder and the remaining 10 percent for the primary degree trend in gold.

In this post, I’ll elaborate on the gold component of the previous post, while two appendices on the Swiss franc and Japanese yen futures also broadly support the MIDAS implications for gold. (The third appendix provides the most likely wavecount on the S&P 500, while the fourth is a unique euro-gold ratio with third generation curves.)

I’ll avoid discussing fundamentals here because of the degree of technical detail to get through (much of it instructional as well as forecast-based). Briefly, however, for those who read the previous post I’ll add the following observations before the main discussion:

1. Euro and the Gartley 222 pattern: the bullish wave out of the Gartley 222 pattern had completed by the time of the last post. However, a symmetrical triangle appears to have been forming since early May at the first price objective of the Gartley 222 (see blue arrow), the penultimate upside wave of which has been forming during the recent economic and political responses to the Greek crisis. The implications for a short-term upside breakout in the euro would be consistent, in risk terms, with the second Topfinder readings discussed below. The price targets would follow the Gartley 222/Fibonacci extensions highlighted in my previous post. Here’s a near-term updated chart with a putative intermediate degree symmetrical triangle forming on the first Gartley price target:

Chart 1 – putative intermediate degree symmetrical triangle forming on first Gartley 222 price objective

1. German bunds: since early April, haven buying of German bunds as peripheral yields continue to widen alongside CDS insurance costs has fuelled an intermediate trend that ended on 27 June after the recent ECB agreement. This is a likely presage to further likely short-term euro strength once the final downside wave (wave e) of the triangle completes.
2. US dollar index: as suggested in the last post, an intermediate to primary degree decline in risk appetite will be the most likely driver of the US dollar, since, as the recent FOMC rate decision highlights, the end of QE2 hardly implies the end of the US dollar as cheap carry, especially when the inflationary implications of a QE3 have been subtly addressed by the decision last week by the Strategic Petroleum Reserve (coordinated by the Internal Energy Agency) to release 60m barrels of oil and petroleum products from their emergency reserves. Moreover, risk aversion is not hard to justify in the present climate: weak Chinese PMI data last week is only the latest indication of a significant hiatus in China’s growth, while EU periphery bond and credit insurance markets – and the growing debt burdens in Italy and Spain – are compounded by core eurozone PMI at 22 month lows. At the same time, the Federal Reserve’s recent downgraded projection for US economic growth and unemployment requires no further emphasis here. So far, the impact on risk appetite is only being moderately reflected in indicators (the VIX bottomed in mid-April and the Put/Call Ratio has recently been jittery) and the S&P 500 appears to be in its final fifth wave. But if the gold Topfinder cumulative volume “window” is correct for the end of this primary trend, the deleveraging of the dollar will have an unimpeded effect on gold, regardless of its frequently cited haven appeal and regardless too of the emerging market obsession with gold (see below).

g A.Coles July 5th 2011

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MAIN POST: MIDAS ASSESSMENT OF THE PRIMARY TREND IN GOLD k

I. A primary degree MIDAS Topfinder on gold and MIDAS third generation curves on the MACD

Briefly, for readers unfamiliar with the MIDAS Topfinder/Bottomfinder (TB-F), the indicator has a restrictive application to trends that are accelerating. In MIDAS terms, the latter condition holds if and only if a standard MIDAS support/resistance curve launched from the start of a trend immediately displaces (ie, moves away) from it.

As Chart 2 below indicates, this essential MIDAS requirement has been in place from the start of the primary trend in gold since the October 2008 low when S1 (green), the standard curve, immediately displaced.

Chart 2 – primary degree Topfinder (red) expiring 4 weekly bars before the May 2nd all time high in gold

The Topfinder (red) was fitted at the pullbacks highlighted by the four black arrows and produced a cumulative volume of 79,999,990 contracts. It recently terminated four weekly bars prior to the early May decline of 6.85%, a30.47% decline in silver and a significant decline in the Reuters/Jeffries CRB index.

Gold has since rallied back to 15,550 on 6th June before falling again and then rallying back to move a few ticks higher to 15,593. This created a modest double top below the all-time high of May 2nd. In the past week gold has also rapidly broken the intermediate degree trendline launched from the low of January 28th 2011. Ignoring other features on the chart temporarily, Chart 3 highlights this most recent price action.

Chart 3 – recent double top in gold and break of intermediate degree trendline

For MIDAS readers who have expressed an interest in third generation curves (ie, curves that remove the “AP” in the VWAP and replace it with other fractal data sets), I illustrated their effectiveness in the previous EUR/USD post when analysing the spread between the 3 month Euribor and Eurodollar futures. My articles in the June and July issues of Active Trader are also devoted to third generation curves. In this post, Chart 4 reveals how a momentum-based curve plotted on the MACD proved to be critical resistance to the double top highlighted in Chart 3.

Chart 4 – third generation MIDAS curves on the MACD

As we see, the third generation MACD curve was launched from the momentum high associated with the price-based high of May 2nd. Subsequently, it acted as key resistance for the first lower high of the double top and also for the second. The second setup is an example of what I call the Dipper Setup, because while price rallies back to create the double top, the MACD dips below the price level to create a negative divergence alongside another MIDAS resistance curve. For decades traders have celebrated the power of momentum divergences but have been unable to time them effectively. This combination of momentum oscillators, such as the MACD, and third generation MIDAS curves finally solves this problem.

However, while the MACD curves are resistance and the intermediate degree trendline has been broken, there’s no definitive proof yet of the end of the primary degree trend in gold until the break of the primary degree trendline from the October 2008 low. See Chart 5.

Chart 5 – Primary degree linear trendline (purple) still intact

This justifies the launch of a second TF. The question is where to fit it. The logical choice, as in Chart 6, is the bottom of the pullback highlighted by the black arrow, since this is the only pullback now that provides a larger cumulative volume prediction than the first TF in Chart 2. As I write (July 5th), this Topfinder is 91.6% done, and crucially gold is finding support on it, which might indicate a new rallying point. Beneath this Topfinder, we see the actual linear trendline defining the primary trend from the same October 2008 low.

Note in Chart 6 that the Topfinder is now critical nonlinear primary degree support for gold. If this Topfinder is significant, it must hold price, otherwise (if it is broken) we revert to the first TF that completed.

Chart 6 – new TF 91.6% done and currently critical support for gold kk

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II. The secular degree trend in gold and why the secular degree Topfinder is inapplicable

It may not have escaped the noticed of some readers that the secular degree trend (10 to 25 years) in gold from the 2001 bottom also appears to be accelerating. Indeed, as in Chart 7, we have the same setup for a TF (red), since S1 (green) displaced immediately from the trend when it was launched from the March 2001 bottom. This enormous secular-degree TF is 56.9% done, suggesting – on an extrapolation of a price/time reading from the cumulative volume prediction – that we could see another decade of rising gold prices.

Chart 7 – secular degree trend in gold from 2001 – is it really accelerating despite the displacement of the standard curve?

However, the implication for endless USD debasement makes nonsense of this prediction. So what has gone wrong? Why if this trend is accelerating according to the standard MIDAS definition shouldn’t we take the prediction seriously?

The answer is that the area highlighted between the blue support and resistance lines is where the trend decelerates far too much and for far too long for the entire secular move to be regarded as one unified accelerated trend.

This can be seen with the Fractal Dimension Index (FDI) in the lower pane breaking deeply above the 1.5 (Hurst, 0.5) level. Readers of the book will recall my discussing this indicator and its synergy with the TB-F both in Chapters 1 and 4.

The 1.5 level on the indicator (ie, the thick blue horizontal line on the indicator in Chart 7) signifies a random walk and (above it) anti-persistence. As I showed in the Dietmar Shaupe images in the book (p16), a market Hurst reading below 0.4 to 0.5 (fractal dimension, 1.6 to 1.5) is useless for MIDAS applications, especially the TB-F. The only MIDAS tool that works in random and anti-persistent markets is the MIDAS Displacement Channel (Chapter 14) and Bob English’s Reverse VWAP/MIDAS (Chapter 17).

In contrast to Chart 7, Chart 8 correctly fits TF-1 to the n-1th degree pullbacks at the three arrows and it accurately captures the first accelerated phase of this secular degree trend.

Chart 8 – correctly fitting the TF to the n-1th degree pullbacks that are still integral to the accelerating trend

S2 in this chart was labelled S1 in Chart 2, and above S2 there is the original TF in Chart 6, here labelled TF-2.

Since 2011 the FDI is showing the highest fractal dimension (persistence) since 1997, and we now know that the higher the FDI reading, the more accurate a TB-F becomes. Contrast this period, for example, with the period covering TF-1, where the FDI briefly crossed over the 1.5 level three times and almost a fourth time. Consequently, confidence is higher that the combination of very high fractal readings in the FDI plus a newly fitted Topfinder in gold in Chart 6 will yield an accurate forecast (or has yielded an accurate forecast in the case of the first (expired) TF in Chart 2). jj

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III. The importance of supporting data

Since the extrapolation of a TB-F’s cumulative volume prediction to price represents the biggest variable in MIDAS analysis, it’s important when using the TB-F to look for price-based (and/or other) supporting readings when relying on it. After all, the TB-F is most accurate in calling market tops or bottoms just at the point when its user is expected to take the most deeply contrarian trading/investment stance possible. Indeed, the price-based environment will display very high fractal persistence in indicators such as the FDI and it will probably be a wave 3 in Elliott Wave terms.

In the present case, I’ll merely discuss declining open interest, though there are now also sharply declining momentum readings of intermediate degree (at least) on gold futures.

In October 2010, Bob English (www.precisioncapmgt.com) warned of the completion of a TB-F on Zero Hedge here, which I’ve duplicated in Chart 9. English’s TF was measuring the intermediate trend (6 weeks to 9 months) from the late July 2010 low, and while obviously the end of an intermediate trend could coincide with the end of a primary trend (9 months to 2 years), it’s not guaranteed. In any case, English’s forecast for the end of the accelerated portion of the trend was accurate, with price thereafter climbing unsteadily as the slightly lagging FDI gradually moved back to random and then anti-persistent readings.

Chart 9 – an accurate TB-F prediction by Bob English amidst a classic MIDAS setup

The correction back to S1 (green) should be noted on this chart. First, of course, the displacement of this curve from the start of the intermediate trend warned that an accelerated trend was starting. Thereafter, price’s pullback to it was textbook MIDAS behaviour. However, price penetrated S1 with a fair amount of porosity. We understand why when we plot the volume histogram with a 10 period MA in Chart 10.

Bearing in mind Rule #1 in my Chapter 11 of the book, we know that sharply increasing volume will pull a MIDAS curve sharply up towards an upwardly moving price trend. Consequently, if price pulls back by 38% or more, there will be porosity unless we launch a nominal (second generation) MIDAS curve. In Chart 10 below, we see that upwardly trending volume in segment (1) pulls the curve up and that the downwardly trending volume in segment (2) starts to push it down. However, the lag is too great to push the curve down far enough. As a result, the nominal (green) curve is a far better price target.

The volume-based rules of Chapter 11 of the book, and the application of standard versus nominal curves, are vital to any enlightened use of MIDAS curves.

Chart 10 – advanced rule-based application of MIDAS curves in the interaction between standard (first generation) and nominal (second generation) curves

In any case, I also call attention to English’s analysis in Chart 9 because the end of the English Topfinder coincided with sharply declining total open interest in gold futures, as can be seen in Chart 11 (black arrows).

Chart 11 – Sharply declining open interest in gold coinciding with the accurate termination of Bob English’s intermediate degree Topfinder

The middle pane shows the conventional positioning of the funds/speculators and commercials. The funds are still net long but open interest has been declining since English’s TF, while the commercials (here commercial producers (mining companies)) are net short, as they are negative feedback sellers (averaging up) all the way up a rising market, to protect against falling commodity prices. The producers too have been reducing their open interest since the expiry of the same Topfinder.

It was reported that the first decline in gold after the May 2nd top was regarded as a buying opportunity in India, the world’s largest gold-buying country (a fifth of all global demand and a tenth in the case of silver), as indicated by activity in Mumbai’s Zaveri market and disclosed by large bullion dealers such as UBS and Standard Bank. It was expected that India could well provide a floor at the 14,625 level (futures) after the May 2nd decline, with low interest rates in China also playing their part in a surge in gold buying due to the cost of carry (the difference between interest on deposits and non-interest bearing gold) incentivizing interest in risk assets (a motivation that applies just as obviously to gold ETFs and US investors). However, the SEC’s disclosure that back in March George Soros, along with several other large funds, had sold most of his holdings in the SPDR Gold Trust and IShares Gold Trust, has been well publicized.

In addition, the primary degree trend in speculative gold open interest isn’t supporting emerging market interest in gold, while the commercials too have stopped averaging down.

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Appendix I: A Topfinder on Swiss franc continuous futures

The Swiss franc has an obvious relevance in this overview (80 percent correlation with gold, a haven asset, and the franc backed by a 40 percent holding of gold reserves), not least because in MIDAS terms it’s one of the few currencies in the US dollar index that’s accelerating. Moreover, the remaining cumulative volume reading on the Topfinder is virtually coextensive with TF-2 on gold (ie, 90.5% done, or 9.5% cumulative volume left to expire). As Chart 12 highlights, the slightly lagging FDI is also indicating the increasingly strong fractal persistence in this trend, meaning again that the higher the fractal reading, the more seriously we can take the Topfinder cumulative volume data.

Chart 12 – TF on CHF futures with 9.5% remaining cumulative volume and an extremely strong fractal persistence in the FDI

In recent weeks, the Swiss franc has been making a series of all time highs against the euro, resulting in the Swiss government downgrading its economic forecast while blaming the franc. While much of the franc’s strength has been explained in terms of its haven appeal vis-à-vis the euro and the peripheral debt issue, there comes a point – especially during an accelerated trend – when the appeal to haven purchasing arguably gives way to (or is at least bolstered by) heavy speculative demand, and hence a replacement – or bolstering – of risk aversion with risk appetite, in the same way as the basic dynamic of the primary trend in gold is bolstered by risk appetite, the inflationary implications of a falling US dollar, and the conventional assumption that gold too is a haven asset.

Update: A fractionally reduced D (duration, cumulative volume) input in the Topfinder results in a variation of the TF that completed Thursday 30th June. During the US trading session, the franc fell by 6% in a bearish Dark Cloud Cover and is now finding support on the completed Topfinder.

Chart 13 – A marginally adjusted Topfinder completing on Thursday 30^th with a 6% decline during the US trading session

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Appendix II: primary and intermediate degree momentum divergences on Japanese yen futures

Yen futures aren’t accelerating, as can be seen in Chart 14 by the slightly lagging FDI highlighting that the yen has been losing its persistence since early 2009 (vertical line) before becoming random and even anti-persistent.

However, it’s noteworthy that even in random markets standard MIDAS S/R curves are still highly effective, as the three support curves on this chart illustrate and as I stressed in discussing the Saupe diagram in Chapter 1 of the book. However, the yen is exhibiting sharply declining momentum of primary degree alongside other risk (commodity) currencies (ie, Australian dollar, NZ dollar, and Canadian dollar). This can be seen in the middle pane, where the weekly MACD is diverging negatively at primary and intermediate degree (sharply in the latter case).

Chart 14 – random and anti-persistent readings in the FDI aren’t compatible with TB-F applications but still support standard S/R curves effectively

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Appendix III: competing wavecounts on the S&P 500

Chart 15 – corrective or impulsive?

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Appendix IV: the Gold-Euro Ratio and third generation MIDAS curves

As I discussed in the Active Trader articles, ratio analysis provides outstanding contexts for third generation MIDAS curves, giving rise to extensive Dipper and Inversion setups. (An Inversion setup occurs when a curve on the ratio captures a high in a price uptrend or a low in a price downtrend. This is beyond the scope of price-based curves, albeit the MIDAS Displacement Channel also has a reasonable tract record of capturing some of these hidden inversion points.)

I’ve added this fourth appendix to highlight an excellent chart full of Dipper and Inversion Setups as the euro declines in a secular degree trend against gold.

Chart 16 – Euro/Gold ratio in secular decline with extensive Dipper and Inversion setups kk kk

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by David G. Hawkins

A lot has happened since my last post, a month ago.  This time let’s begin with the longest term chart and work our way down to shortest.

Long Term, Monthly Bars Chart

The first chart here is the long term monthly bars chart.  Please compare this with the similar chart in my last month’s post.  We see that the currently running TopFinder, TF4, is now about 82% done, with its projected end at the dashed vertical line, so it looks like we have only a month or so to go to its end.  Things can and often do get a bit volatile around the late stage of a TF.  For instance, see how TF2 ended.  They don’t all end as perfectly as BF and TF3 did.  So at this point, on this timescale, almost anything could happen in the next month or so.  After this TF ends, we’ll have to watch to see what comes next, as the ending of a TF does not in and of its self predict the next move.

Intermediate Term, Weekly Bars Chart

The second chart here is the weekly bars chart, which you should compare to the one last month.  June has seen a sharp price pullback, with a dramatic halt to the decline, in those two doji bars.  The thick green curve is S1 cal, the curve that is calibrated to the pullback of last November, marked by the green arrow.  As I’ve said before, calibrated curves are very significant, and we see here that this month’s price decline halted exactly at this curve, and price has bounced sharply up from there.  This action is consistent with this being the end of the decline that started in early May.  If price goes on to break above R1, that will confirm this view, and would likely lead to price going on significantly above May’s high.  But if price turns down from R1, we’re not out of the woods yet, and may see a retest and even breaking of S1 cal.

Short Term, Daily Bars Chart

The last chart here is the short term daily bars chart, which you should compare to the one shown in my last month’s post.  The green and red horizontal line segments are at the levels of the weekly S1 cal and R1 curves respectively.  Notice how “nicely behaved” price has been on this chart w.r.t. R1, turning down every time it has hit R1.  Over the last four days, price has been in a very strong up move, but today it closed right at R1 for the third time since R1 began.  The next day or two will be very interesting.  Will price again turn down from R1?  If so, then the down trend that R1 is tracking will still be intact.  If not, if price breaks above R1, then the next important place to watch is what it does upon reaching the Weekly R1 level, as discussed above.

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