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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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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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In my last main blog post a few weeks before Christmas I drew attention to a very strong MIDAS warning on the US dollar index based on two very powerful fractal Bottomfinder signals. Within a week we saw the turn predicted by the Bottomfinders in the dollar index and a precipitate collapse in gold futures. This was an excellent signal.

In this blog post (a fairly long one with at times a fair amount of technical detail) I want to draw attention to a similar Topfinder warning in the copper market. Having presented the evidence, I could leave things there, but I also want to take this opportunity to discuss China’s stock market, because I believe it has extremely important implications for my Elliott wave count on the European stock indexes. Although I have yet to extend these implications to the US markets (the subject is a large one and deserves a detailed post of its own), I believe the implications for the US markets will be the same. First, I’ll discuss copper and then turn to the Shanghai SE Composite.

Comex copper futures

On New Year’s Eve 2009/2010 copper hit a 15 month high at $7,420 per tonne, taking copper up a massive 140.2 per cent since its bottom roughly coinciding with the bottoming out of the stock markets. Some commentators have blamed the recent parabolic rise in copper to concerns about supply disruptions as strikes threatened Chilean production.

Figure 1 below shows a daily chart of copper futures bottoming in December 2008. This was approximately a month after China’s stockmarket bottomed in late October 2008 and a good three months before Germany’s DAX and the S&P 500. The relationship here between China’s growth and its inexorable demand for industrial metals such as copper is clear.

A Topfinder was launched from the very start of this turnabout in copper futures and fitted to two main junctures of this trend at a cumulative volume (D) of 5,000,000. At the time of this blog entry the Topfinder is now 99.2% done, with remaining volume of a mere 39,159. If this Topfinder reading proves to be anything like as good as the recent Bottomfinder readings on the US dollar index, it’s time again to take note.

Figure 1. Copper with Topfinder at 99.2%

The temptation to see China as the main cause of the parabolic rise in copper futures is obvious, given the lag between copper bottoming and the slower reactivation in European and US stocks. There’ll be more on this below. In the meantime, the Topfinder implications in Figure 1 are supported by the data in Figure 2. Figure 2 is a weekly chart of copper futures with total open interest in the middle pane derived from the CFTC’s weekly Commitments of Traders report.

Figure 2: copper futures with total open interest and normalized stochastic

Aficiandos of the COT report such as Larry Williams will often normalize data such as total open interest by creating a stochastic-like indicator (sometimes called the COT Index among other names) with a lookback period varying between 1 and 3 years (here it is 1 year). The calculation for the indicator is this:

((current week value – Lowest value of lookback period) / (Highest high of lookback period – Lowest low of lookback period)) * 100

This indicator can be programmed into Metsastock, as I have done here, with 50 as the average normalization and the 80 and 20 levels representing significant overextended areas. As the total open interest data in the middle pane show, total open interest in copper is even higher now than it was at the 2006 and 2008 tops. Note too that the current reading of the indicator is also as high (normalized) as it was at the 2008 top.

Experts who prefer working with net positioning of the Commercials will similarly identify an extreme low offsetting the extreme long position of the NonCommercials (funds) in Figure 3 below. Experts in the net positioning of the Commericals also often separate the data into the producers and the consumers. Producers should always be net short whereas consumers should always be net long. In Figure 3, then, it is the commerical producers of copper (the exporting countries like Chile) who are net short; producers go net short because this reduces their exposure to the risk of falling commodity prices. We’ll note this for now and return to it a little later when discussing China. Here we’ll merely note that while total open interest is at an extreme not seen for a decade, commercial producer hedgers are as net short as they can be. The Topfinder is 99.2 per cent done. I’d call this a very strong signal.

Figure 3: net positioning of the commercials in blue in middle pane, www.timingcharts.com

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Intermarket reflections

In the first edition of his book on intermarket analysis John Murphy argued that copper is so highly correlated with the stockmarkets because it’s a key industrial commodity, being used in the automotives, housing, and electronics industries. Thus, demand for copper during increased industrial production explains the high correlation.

In the last couple of years, Murphy has been forced to write a new edition of his original book in light of a number of changes in the intermarket alignments he identified in his first study. I suspect that with the emergence of the BRIC economies as well as with lesser countries such as Chile in direct service to these economies we’ll require a third rewriting of many of these intermarket relationships. This is well illustrated by the Chilean peso having risen 25.6 per cent against the US dollar as a direct result of copper exports to China. Moreover, recent rises in copper prices were attributed directly not merely to an accelerating Chinese market but to supply disruptions in Chile as a result of industrial strikes.

Implications for China

So far, we have volume data in the Topfinder and extreme readings in the weekly COT report total open interest and net Commercial positioning data all warning on copper. Why? The weekend financial papers were full of interest in China, particularly in the idea that China is a high-risk play right now. Here are a few facts:

1. China’s foreign exchange reserves rose again in the fourth quarter to hit $2,399bn, in part due to a flow of foreign speculative capital into its asset markets.

2. Due in large part to a collapse in China’s exports in 2008, China’s state-sponsored banks made double the amount of bank loans in 2008 as a result of government orders, flooding the economy with cheap credit. In January alone of this year the banks lent $50bn. This lending helped China beat the 8 per cent annual GDP target set by the government at the start of the year, but it is also highly inflationary and has already started creating rapid asset bubbles, particularly in the property market (copper?).

3. In a sobering article in the weekend FT, Merryn Somerset Webb made several additional points:

• China has been growing at a rate of 10 per cent a year for 30 years — Pivot Asset Management notes that China’s capital spending boom has now outstripped all other post-war country transformations, including Japan’s and Germany’s. China’s growth cycle is mature not emerging.
• This is reflected in a variety of facts and statistics, including: a newly built city called Ordos, purportedly home to 1m people, yet lying empty, with only property speculation driving up prices at 50 per cent a year. The huge number of ports, offices, airports and steel plants in China, suggesting a surplus to requirements, plus rental yields in Shanghai as high as 50 per cent — yet China is still trying to press ahead with its building work.
• A recent National Bureau of Economic Research report that cited China as a potential beneficiary of an indicator common to every financial crisis going back 140 years: rapid credit growth leading to disastrous deflationary implications.
• A Graham and Dodd p/e ratio (using a 10 year average) of around 50 times earnings for the Shanghai SE Composite — not a good value investment in anyone’s book.

The People’s Bank of China has responded by tightening liquidity recently, especially by increasing the bank reserve requirement ratio. It has also raised the yield on 1 year central bank bills and did the same with 3 month bills last week. An additional measure would be to allow the renminbi to appreciate within looser settings. As some analysts have pointed out, the latter is looking likely in view of a rapid recovery in exports and increasing CPI-related inflation data. The COT net positioning data reflects the view strongly that the PBoC moves could stifle demand for copper, as commercial producers are hedging by shorting futures heavily against this eventuality at near record levels of total open interest.

Longer-term implications

My own longer-term Elliott wave count on China is provided below in Figure 4. The most salient part of this count is that the second deflation wave (wave C) is expected to begin in 2011, with a fairly quiet 2010 as wave B of this massive ABC corrective cycle completes on its two subwaves, b and c. The bearish implications of China’s credit overextension are consistent with this count. So far, since rallying from its late October 2008 low, The Shanghai SE Composite terminated on a putative wave A of a larger wave B at a Fibonacci level of 0.382. According to this count, subwave b of B is now in progress before 2011. The middle pane contains an indicator known as the Elliott Wave Oscillator, which was developed by the engineer and trader Tom Joseph, who developed Advanced GET. The EW Oscillator is a version of the MACD with specialized settings. Here it’s programmed in Metastock. Notice that wave 3 of the large wave A decline produced the deepest low (highlighted by the vertical blue line, which is precisely what the indicator is supposed to do on wave 3s). Thereafter it positively diverged by several months, forewarning of the upside. Now it is starting to diverge heavily again (negatively). This is consistent with the 2011 wavecount for a large credit deflation in wave C.

Figure 4: wavecount on Shanghai SE Composite

Implications for European markets

I’ve included this putative wavecount on the Shanghai SE Composite here because it’s identical to one of the two Elliott wave patterns I’m seeing in Europe at the present time.

The same one of these patterns is identical to the pattern exhibited by the S&P 500. Having recently viewed 14 European stock indices, two patterns stand out — one I’m calling the Austrian/Danish pattern and the other the Finnish/German pattern. The latter differs in certain respects from the former and is deserving of a separate blog post, because it’s far too much to include in a single post. However, the Austrian/Danish pattern (which is also on the UK’s FTSE 100) is exemplified in Figure 5. Figure 5 is the Danish index and we can see straightaway the similarities with the Chinese stock market. As such, the wavecount is the same and the implications are also the same as regards price and time. The timing is set for early 2011 and the price target follows the Fibonacci proportions of a typical ABC zigzag pattern, which is that wave C will be proportionate to wave A which terminated in 2008.

Figure 5: the Austrian/Danish pattern also in the FTSE 100, the S&P 500, and the Shanghai SE Composite

In Figure 5 notice as the market reaches the Fibonacci 50% level that we have the same negative divergence brewing in the EW Oscillator. Also the weekly RSI is now approaching overbought for the first time since the 2007 top (note too the oversold reading in late 2008). Finally, Figure 6 has a Topfinder launched since the bottom in early 2009 and it too has just expired on what is the final putative 5th subwave before we see the expected market turn in this ongoing waveount.

Figure 6: expired Topfinder in the final 5th subwave

Final note on the Elliott wave count

Readers who follow Elliott wave counts closely on the world indices will know that this wavecount and its projection for the start of wave C in 2011 is in direct opposition to the current wavecount on Robert Prechter’s site, www.elliottwave.com. According to the Prechter count, wave C is already in progress, with the current upside being a wave 2 correction of this massive deflation C wave. This count depends on reading the decline between 2000 and 2003 as wave A, whereas the present count offered here depends on taking the collapse from the 2008 high as wave A. It must be acknowledged that this is a massive topic which requires looking at wave patterns in other markets such as the Nasdaq as well as the long-term historical wavecount. Such a topic is the subject of an entirely separate blog. For now I merely post this putative count.

Whichever wavecount proves to be correct, I close this blog post with the following data, which offer a sober indication of how close we are to a market correction, irrespective of whether the market will turn down in a continuing wave C immanently or whether 2010 will prove to be a quiet year before the next deflation wave (wave C) in 2011.

• The risk appetite for high yield (junk) bonds is now at pre-financial crisis levels, as high yield bond issuance is surging and credit spreads are narrowing alarmingly.
• As noted by the FT over the weekend, the cost to insure junk bonds against default — a good gauge of market sentiment — has fallen to its lowest level since the market highs of 2008. The iTraxx Crossover index is trading at 407 basis points and has fallen over 100 basis points since peaking at 1,142bp at the market low.
• An alarming interest too in emerging market bond issuance, where yields have also narrowed dramatically with US Treasuries.
• The VIX (the so-called fear index) has now fallen to levels last seen in the 2008 top (now at 18.47), which means that traders think there is less chance of future volatility and less risk of losing money in stockmarkets.
• Sovereign credit default swaps have rapidly risen in recent weeks as part of a trend that has been in place since early autumn. These swaps measure the risk of government default and their cost has continued to rise, especially with regard to Greece, Spain, and the UK.

A. Coles 18th Jan ‘10

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

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

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

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Figure 1 above

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

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

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

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

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

Figure 2 above

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

Figure 3 above

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

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

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

Figure 4 above

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

Figure 5 above

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

Figure 6 above

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- AColes 16th Nov 09

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

No decision has yet been taken as to their availability.

– Acoles 13th Nov 09

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

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

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

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

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

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

Further update

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

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

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

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

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

Immediate aftermath following these declines

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

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

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

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

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

Let’s move on …

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

Figure 1 above

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

Figure 2 above

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

Figure 3 above

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

Figure 4 above

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

Figure 5 above

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Note on a related blog post to follow

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

– A Coles 13th Nov 09

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The purpose of this blog entry is to assess the performance of the MIDAS tools which have been used since this blog began by examining several markets which have been related through risk appetite in recent months at the expense of US dollar weakness.

Intermarket relationships examined

As Howard Simons pointed out in a recent article on crude oil in Active Trader (September 09), intermarket relationships are often transient; markets run in fashions. Which means that Murphy-style intermarket generalizations are often here today gone tomorrow. The current view is that a weak US dollar has become a carry vehicle to finance risk expansion in the US stockmarket, commodities, and other higher yielding currencies. In the case of crude oil, this assumption is given added support by the fact that there is no current supply/demand imbalance in the US; stockpiles are well above the five year average and close to 18 year highs. As a Rice University report recently argued, the increase in the long non-commercials has fuelled the rise in crude prices; thus crude is either being viewed as an inflation hedge against devaluation of the US dollar or it is an out-and-out investment vehicle fuelled by a more general expansion of risk appetite. This week however has seen a consistent halt in this expansion of negatively correlated markets to the detriment of EUR/USD, which was our primary interest.

Assessment: data and reflections

Let’s take a look at how the MIDAS Topfinder curve performed in its application to EUR/USD, US stocks (S&P 500), crude futures and gold futures. Here are the data.

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We have the following implications from the above table:

• S&P 500: the TB-F caught the end of the accelerated trend within two daily bars.
• Euro FX futures: the TB-F caught the end of the accelerated trend within three daily bars.
• Crude oil futures: the TB-F caught the end of the accelerated trend within three daily bars.
• Gold futures: this TB-F was the least impressive, since its 4% of cumulative volume remaining means that it is out by about 14 daily bars, albeit – and this is important – the accelerated trend completed when TB-F was 96% done. Thus, the trend completed within the predictive percentage of the TB-F not outside of it. In retrospect – and this underlines the subjective component to fitting to TB-F correctly – the TB-F curve on gold was launched (a) too early, and (b) was overfitted. These two factors had a negative impact on its functioning.

Where now?

As indicated before in these blog posts, the MIDAS system doesn’t tell us where the markets are going next, only that proximate and less proximate price targets are to be worked out according to fractally dispersed MIDAS S/R curves and, where applicable, TB-F curves. What we do know is that the accelerated portion of three markets has terminated within 2-3 daily bars of where the TB-F curves said it would.

It’s extremely early days to make forecasting predictions about any of these markets. However, a supposition or two here or there is to do nothing more than to recap on suppositions made in earlier blog entries.

As far as crude is concerned, the termination of the accelerated portion of the trend on the 100 week MA is plausibly coinciding with the end of a wave B. If this is the case (and there is also forthcoming parity between wave A and C) we can expect lower crude prices for the next 6 months with a price target being the lows of the 1990s (though again, the MIDAS system isn’t telling us this, a putative Elliott Wave count is).

As far as the S&P 500 is concerned, much depends again from the Elliott Wave perspective on where we begin wave counting this correction. A putative ABC from the 2000 highs put the bottom of this correction in March 2009 with a new impulse currently terminating at a sub-fourth. Alternatively, counting a putative ABC correction from the late 2007 highs implies that the market is currently in (or completing) a wave B, with a large C still to make an appearance. The third alternative, that this putative ABC began at the 2000 top and is now in a large wave 2 of wave C, is to my mind implausible due to the implied disproportionality between putative wave C and wave A, even in an expanded flat scenario. In any case, the following chart, which is a forward/yield curve of S&P futures for the next year and three quarters tells its own story, with an implied support in S&P futures at around 101600, which currently gives credence to the first EW count outlined above based on near-term expectations of implied levels at a sub-fourth wave.

Figure 1: Forward/yield curve for S&P 500 futures, 18 months

For EUR/USD, the sudden turnabout in the US dollar’s fortunes may mean the end of this putative ABC correction in the Euro beginning at the October low. Putative wave A rose in three subwaves, which means that the overall pattern must be a flat, an expanded flat, or a triangle. The triangle option is no longer a possibility, though it could be argued that the overall pattern does have the Fibonacci properties to be regarded as a flat (albeit with a mild expansion of wave C above the high of A). As can be seen below, the forward/yield curve of the Euro FX futures for the next year and three quarters is also bearish, though this near-term bearish sentiment is still above a proximate trendline coming in at around 145000, above proximate daily moving averages, and above displaced Midas support curves, which may in the end not be telling us very much.

Figure 2: Forward/yield curve for CME Euro FX futures, 18 months

Analysing going forward

There isn’t the time currently to utilize more tools to follow the fortunes of these intermarket relationships. Instead, the proposal will be to continue using the same MIDAS tools to analyze these ongoing relationships, starting in the next blog entry.

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- A Coles Oct 09

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In the entry of 19^th October current uncertainty over a likely near-term top in EUR/USD was chosen as a catalyst for two MIDAS applications to Euro FX futures and gold futures. The present blog extends this analysis by doing two things:

1. Update the TopFinder (TB-F) cumulative volume readings in these two futures markets; and
2. Pursue the suggestion at the end of the 19^th October blog and see if it’s possible to apply MIDAS to other intermarket relations currently impacting the EUR/USD issue.
   

Updating the cumulative volume readings in the Euro FX futures and gold futures

The cumulative volume prediction for the Euro FX trend last weekend was 88.5% completed while for the gold trend it was 83% completed.

This Sunday, the Euro FX is standing at 93.2% completed and for gold it is 89.6% completed.

The Long Term Delta and the Fibonacci sequence applied to the Euro FX futures gave a compelling date of 9th November, which is possibly too far beyond the cumulative volume prediction. This date, with a linear regression extrapolation from the cumulative volume reading, gave a price target of 1.52 in EUR/USD.

Recent discussions of US stocks, oil, and US Treasury yields

In two recent articles, Ashraf Laidi has (with certain provisos) made three points.

1. The recent oil price break above $75 accelerated the fall of the US dollar against the Euro beyond $1.50. However, oil is now hitting the 100 week moving average.
2. The S&P 500 is also hitting the same moving average and reaching a Fibonacci 50% retracement of the October 2007 high-March 2009 low. These levels may turn out to be barriers to further risk appetite, offsetting continuous carry-trade selling of USD to finance this risk expansion in the stock market, commodities, and other currencies.
3. The yield curve (10 year-2 year US government securities) is now poised at 2.60%, which is of significance given its peak in the same 2.60%-2.70% area when the Fed was at the end of its previous easing cycles in the 1991 and 2001 recessions. Deficit implications and continued debt issuance indicate that this peak could be surpassed, but we’ll look below at Delta implications as applied to CME 2 year Treasury note futures.

MIDAS implications in NYMEX continuous crude oil futures

Oil analysts are in agreement that there is no current supply/demand imabalance in crude in the US: stockpiles are well above the five year average and close to 18 year highs. A Rice University study has recently argued that the increase in the long non-commercials has fueled a rise in crude prices, in turn impacting on dollar weakness. Crude is therefore being used as an investment tool, a hedge against devaluation of the US dollar.

Figure 1 is a weekly chart of the NYMEX continous crude oil futures. Besides the 100 week MA, we see a near-term Elliott Wave count which, with familiar Fibonacci ratios, suggests that this countertrend rally is a wave B terminating on the 100 week moving average.

Figure 1: crude with 100 week moving average and near-term Elliott Wave count

Importantly (because there’s no guarantee that a trend will be accelerating sufficiently to apply a TB-F) we are able to apply a TB-F to this trend at a cumulative volume of 6,899,999 and it is indicating that it is 92.4% done. This is shown in figure 2 and is broadly supportive of the Elliott Wave count.

Figure 2: TB-F applied to what may be the final thrust in oil to the 100 week MA (92.4% done)

Implications in natural gas futures

Back in July, gas inventories were also at record levels. Crude oil normally trades six times higher than natural gas, but by late July crude oil was trading at a ratio of 25:1. Since natural gas futures bottomed in early August, they’ve already retraced a Fibo 25% of the sharp downtrend from July 08 to August 09, thus reducing the trading ratio significantly.

Figure 3: natural gas at a Fibonacci 25% already since the ratio peaked at 25:1

MIDAS implications in the S&P 500

Richard Russell (Dow Theory Letters) warned on Friday that the secondary trend may now be turning down. At the same time, the Daily Sentiment Index (www.trade-futures.com) reports optimism from 2% bulls in March to 92% bulls in September. Currently it is on 90%.

David’s MIDAS analysis has been well on top of the S&P 500, stressing two factors in earlier blogs:

1. The recently established inverse relationship between up -volume and down-volume in the S&P 500. This pattern embodies a strong negative divergence from the trend.
2. The MPVT indicator and the Volume-Weighted MACD histogram also started negatively diverging from price around the same time. (For readers not familiar with the MPTV it is David’s reworking of Joseph Granville’s classic On Balance Volume (OBV) indicator currently with Technical Analysis of STOCKS & COMMODITIES; his article on the Volume-Weighted MACD has just been published in the same journal.) These volume-based studies are strongly supportive of the assumption that risk appetite in US stocks is weakening markedly.

In his blog entry of 19^th October, David also noted that a recently fitted TopFinder (TB-F) to the accelerated portion of the trend had expired. The index duly stopped trending on the bar on which TB-F expired. Since then, the market has drifted sideways for six days. One of the candlesticks was a Doji, so there is still a large question over whether this market has now reached the end of the trend since early July on an expired TB-F, a 100 week moving average, and a Fibonacci ratio.

David has now updated these blogs with additional data of interest, including a new TopFinder for the entire trend and an overhead Midas resistance curve. I’ll leave the rest to readers of David’s recent blog entries.

If the S&P 500 has topped out, the flight from equities is potentially a leading indicator of what may well transpire to be a flight from commodities (oil and gold at least) at the benefit of the US dollar amidst a rapid diminishing of risk appetite.

Midas implications for the yield curve in CME 2 year Treasury note futures

It is not currently possible to apply a TopFinder to the 2 year Treasury note futures because they’ve already topped out. However, it is possible to solve (a highly provisional) Super Long Term Delta on the notes. This is provisional because we need more data we don’t have for 2 year note futures. However, extrapolation from the 1993-1997 period (provided there isn’t an inversion) points to lower futures prices.

There is also a six year cycle evident on this chart from 1995, with the current six year cycle peaking after three years.

Figure 4: Super Long Term Delta plus six year cycle on 2 year Treasury note futures

Summary

• The Topfinder cumulative volume updated readings this week for Euro FX futures and gold futures respectively are now standing at 93.2% done and 89.6% done.

• The Topfinder for crude, meanwhile, is providing a cumulative volume reading of 92.4% done while the trading ratio with natural gas is rebounding rapidly from its 25:1 trading ratio.

• The S&P 500 has either topped or is very close to topping out.

- Andrew Coles Oct 25th 09

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Bob English of Precision Capital Management has been in touch this week to inform us that he uses MIDAS extensively in his analytics. We wish him the best with MIDAS and in his various development projects.

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