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Mr Cary Ambraziunas is involved in a programming project that so far has resulted in the creation of the original S/R MIDAS curves and the MIDAS Displacement Channel. In addition, work is well-advanced on the Topfinder/Bottomfinder and its availability is immanent.

Modifications to the indicators can be made rapidly on the chart, which is obviously good news for day traders, including quick modifications to the Channel bands.

Cary has given his permission to release an email address in this post and interested parties can reach him here: MidasTraderPro@gmail.com.

A.Coles 15th August, 2011

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Presently, Mr Heckenbach hasn’t decided whether to make the code available, but interested parties can contact him via David or myself here at the site.

UPDATE

Mr Heckenbach has now created a website for the indicators:

http://www.midasexplorer.com

He plans to make the indicators available and is looking for beta testers. He can be contacted directly via the website.

A. Coles, 5th August 2011

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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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What follows is an article to appear in the July 2011 issue of Forex Journal (http://www.forexjournal.com/). As a result, this is a much longer post than usual. The Forex Journal has extremely good content for forex traders (cash and futures) and readers are highly recommended to request a trial issue at the website.

I’ve posted this discussion because a number of purchasers of the book have expressed an interest in seeing more examples of nominal/constant volume (second generation) MIDAS curves, the MIDAS Displacement Channel (MDC), and third generation curves. The following discussion mainly focuses on the cash EUR/USD charts and so contains many nominal curves. The MDC also uses nominal volume data. Third generation curves – ie, curves that remove the “AP” in the VWAP and replace it with other fractal data sets – are here plotted on the spread between Eurex 3 month EURIBOR futures and CME EURODOLLAR futures (Figure 7). For more on third generation curves see Chapter 16 and my two articles in the June and July issues of Active Trader.

Other analysts don’t seem to have picked this up, but the weekly chart of EUR/USD is sporting a large primary degree Gartley 222 pattern. Gartley 222s are rare patterns of some distinction when they form because of their exacting Fibonacci relationships (Figure 5).

There’s also a brief discussion of gold (Figure 2) but I have a separate MIDAS post on gold I’ll be posting in the next couple of days.

A.Coles, June 13th 2011

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In the December 2010 issue of this journal, I discussed one of our new innovations in the MIDAS approach that allowed it to be applied to the volumeless cash FX markets, despite the MIDAS system being rooted in the formula for the volume weighted average price (VWAP). This review of EUR/USD is possible in virtue of this innovation.

Briefly, we replace market volume in the MIDAS formula with constant volume. More precisely, one unit of cumulative volume inserted into the volumeless MIDAS algorithm ensures that there’s a nominal volume weighting in the MIDAS curves. As I demonstrated in the December article, the result is a highly effective application of MIDAS curves to the cash FX markets (see also Chapter 10), albeit advanced applications of MIDAS curves involve rule-based applications of both nominal and standard (market volume) weighted curves (Chapter 11).

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Secular degree MIDAS Support and Resistance Levels

I begin this mid-term technical review of EUR/USD by taking advantage of this innovation and applying nominal curves to the very longest secular-term trends influencing the pair in the weekly data in Figure 1.

Figure 1: weekly chart of EUR/USD with secular degree nominal (constant volume) curves

(source: eSignal and Metastock. www.esignal.com and www.equis.com)

Despite the launch of the euro in January 1999, the secular trend (10 to 25 years) can be analysed because data suppliers such as eSignal add pre-1999 data in the form of the European Currency Unit and European Unit of Account, which is based on the Deutschemark.

Moving from left to right, the only pre-1999 secular MIDAS curve of relevance to current price activity is the one launched from the secular degree 1979 top (green), which ended a 9 year uptrend in the Deutsemark. This curve was last active in mid-1997 (point (1)) and is now a major floor at the 1.10 level. R1, from another secular degree top in early 1995, played a major resistance role in mid-1998 (point (2)). Since then, it has had a highly significant role in halting the euro’s decline in the early months of the Eurozone sovereign debt crisis at the start of 2010 (point (5)).

S1 is a MIDAS indicator I developed called the MIDAS Displacement Channel (MDC, for short). The MDC can be created from nominal and standard curves. Its main role is in sideways markets, where the original MIDAS curves tend to move to the centre of price activity. However, the MDC can also perform very effectively when capturing the highs in uptrends and the lows in downtrends. The indicator consists of the original MIDAS curve plus two (or more) additional curves that are displaced from it on either side by a user-determined percentage. The percentage is calculated by fitting the channel to the first higher high or lower low beyond the original MIDAS launch point. In Figure 1 the upper band is fitted to the first significant swing high at the blue arrow at a displacement of 19%, while the lower is fitted to the Greek sovereign debt low at point (5). As we see, the standard MIDAS curve played a major support role in mid-2005 at point (3), while also dramatically halting the sharp post-Lehman decline in mid-2008 at point (4). The upper curve has been equally effective as a resistance band, halting the uptrend twice in late 2003 and late 2004 and then halting the sharp uptrends in the euro’s current congestion at points (6) and (7).

Major secular degree support levels in Figure 1 are:

• 1.28 = S1, original curve
• 1.20 = R1 (inverted from resistance to support) and the lower 6% displaced band of the MDC
• 1.10 = 1979 curve (green)

Major secular resistance level:

• 1.53 = upper band of MDC, displaced by 19%

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Primary Degree MIDAS Support and Resistance Levels

The primary trend (9 months to 2 years) is currently of keen focus for most traders of EUR/USD, with interest rate expectations on the one side evenly matched by concerns affecting broader risk sentiment.

Euro interest rate expectations in the 3 month EURIBOR are tightly correlated with movements in the euro, and the bottoming of 3m EURIBOR rates at the start of 2010 (see Figure 7) reflected core Eurozone fundamentals in Q1 of 2011 (recently confirmed at 0.8 percent GDP, seasonally-adjusted, 2.5 percent). This resulted in the first rate raise in April for three years to 1.25 percent. Today (June 9) the ECB deferred a further rise, but the post-meeting press conference strongly hinted at a further July increase and possibly beyond, reflecting ongoing inflationary concerns above the ECB target of 2 percent. These expectations have been mirrored too in the widening spread between the 3 month EURIBOR rate and USD counterparts such as the 3 month Eurodollar rate (Figure 7).

The flipside to these interest rate expectations is widening peripheral spreads in the Eurozone, exacerbated by recent market scepticism over the need to restructure Greek debt plus Moody’s latest downgrade of its credit rating and poor Greek GDP numbers. The ECB’s government debt-buying programme isn’t intended as a form of US-style quantitative easing and so isn’t so directly implicated with inflation in virtue of the ECB’s sterilization programme; in practice, however, the latter has consistently failed over the past year, so increasing peripheral spreads and the cost of insuring peripheral debt in Credit Default Swaps is impacting bond market sentiment and short-term inflationary concerns in the euro. Recent historical data have shown that the intermediate trend in the euro is positively correlated with falling peripheral Eurozone spreads and declining costs in the CDS markets. Thus, rising peripheral spreads and the cost of insuring peripheral zone debt in the CDS markets in comparison with rising 3 month EURIBOR in the futures markets creates a stand-off between normally inversely correlated markets and it has potentially powerful implications for the euro.

As far as risk appetite is concerned, up to the beginning of June the US dollar’s correlation with equities has been at its highest on record. However, this correlation has recently weakened and gold too has lost its momentum. Suddenly the relation between the dollar and risk markets has become harder to determine and various scenarios are possible.

One possibility – depending partly on the Fed extending its bias beyond June – is that loose monetary policy will reinvigorate the correlation between the dollar and risk markets, partly because assets such as gold are seen as hedges against dollar weakness, and partly because the dollar will continue its role as carry for risky assets. If, according to the current wavecount on US equities, there is soon to be a more prolonged bout of equity weakness affecting broader commodity risk (perhaps triggered by a further tipping point in US economic performance such as May’s employment report) the opposite will occur, and the deleveraging will herald a sharper and more prolonged depression in gold and other commodity prices. On this scenario, the catalyst for improving dollar fortunes won’t be yield spreads but a more prolonged interregnum in risk appetite. However, this scenario could usher in a bout of gold buying at the expense of the dollar, since gold is sometimes seen as a store of value in times of economic underperformance. It mustn’t be forgotten either that yield momentum as a result of the termination of the QE program could also invigorate the dollar, as certain proponents of the dollar/gold cost of carry argument observe.

Technically, momentum on the US dollar index is faintly supporting greater dollar upside. Moreover, I’m looking at the primary trend in gold from the October 2008 low with considerable interest insofar as a Topfinder of primary degree recently completed four weekly bars from the May 2 top. Since then, rising gold prices have slowed dramatically, suggesting that the current move up may be corrective. Alternatively, I have another Topfinder fitted fractionally below the previous one indicating that there’s a mere 10.7% cumulative volume left to run on this trend. Either way, as Figure 2 indicates, the Topfinders are suggesting extreme caution when it comes to further bets on dollar weakness.

Figure 2: Weekly chart of euro continuous futures with the MIDAS Topfinder with a mere 11.3% cumulative volume left to run.

(source: eSignal and Metastock. www.esignal.com and www.equis.com)

As regards MIDAS support and resistance levels on the primary trend, Figure 3 is another weekly chart covering the period between the 2008 top (green arrow) and the current level of 1.40 in early June 2011.

Figure 3: weekly chart involving primary degree analysis of EUR/USD with a smaller scale MIDAS Displacement Channel

(source: eSignal and Metastock. www.esignal.com and www.equis.com)

The upper band of the MDC is displaced at the black arrow at 8% and perfectly captures the 6 May 2011 high at 1.50 (point (1)). The lower band was displaced at the black arrow at 13% and again robustly captures the Greek sovereign debt low at point (2). Primary degree support and resistance levels from this indicator are:

• resistance = 1.50 = upper displaced band of MDC
• support = 1.20 = lower displaced band of MDC (see also secular degree support in Figure 1)

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Upside Price Targets on the Primary Degree Gartley 222 Pattern

Before proceeding to the intermediate trend in Figure 6, it’s worth drawing attention to the primary degree Gartley 222 pattern on the euro in Figure 5, which in Figure 3 was the subject of the primary degree MDC. Genuine Gartley patterns are rare on this scale and are a wonder to behold because of their exacting Fibonacci relationships. This pattern does not seem to have been recognized by other analysts, so I highlight it here with its forecasting implications.

As in Figure 4, the Gartley 222 pattern consists of a prior impulse move (XA) followed by a pullback in two shorter waves (AB, CD), where CD approximates AB in time as well as in a price-based “measured move”. Point D is ideally reached within a Fibonacci .62 to .79 correction of the XA move. BC approximates AB * .38 to .79, while CD approximates BC * 1.27 to 1.62. In the bullish version of the Gartley 222, D will typically terminate at a Fibonacci correction of .62 to .79 of the entire XA move.

The proximate upside price target of the bullish Gartley 222 is the length of the wave BC, which coincides with the red dotted resistance line in Figure 5. If this price objective is met, there are Fibonacci extensions of wave A-D of 1.23, 1.38, 1.50, and 1.61.

Figure 4: Bullish Gartley 222 with Fibonacci ratios

As we can see from Figure 5, the Gartley 222 on the euro has completed alongside the first upside target, the length of BC. Higher targets on the euro futures would be:

• AD * 1.23 = 1.69
• AD * 1.38 = 1.75.5
• AD * 1.50 = 1.80.5
• AD * 1.61 = 1.85

These are targets for the upside primary trend if indeed the current pullback is a paring of recent gains as opposed to a trend reversal.

Figure 5: weekly chart of continuous Globex euro futures with Gartley 222 pattern of primary degree proportions.

(source: eSignal and Metastock. www.esignal.com and www.equis.com)

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Intermediate Degree MIDAS Analysis

The intermediate trend lasts between 6 weeks to 9 months. It can be seen running in Figure 3 between the low at point (2) and the high at point (1). We’re now starting a second intermediate trend.

Figure 6 is a daily chart of EUR/USD, still using volumeless cash data and not futures. At this point, I should say that when it comes to futures FX data, a MIDAS analysis can use Globex volume or open interest to create OIWAP curves. An OIWAP curve is a second generation MIDAS curve alongside nominal curves. However, here I’ll stick with the volumeless cash FX markets.

Figure 6: weekly chart of euro continuous futures and intermediate degree curves

(source: eSignal and Metastock. www.esignal.com and www.equis.com)

From left to right, we see R1 (red) from the November 2009 top act as major resistance at the two red curves, while R2 (blue) has since August 2010 switched its role from resistance to support, and is now closely pacing S1 (green).

For the short term trend (duration of between 2 and 4 weeks) in the euro, we see that price has been critically locked between S2 (olive), launched from late December 2010, and the new R1** (orange) launched from the recent mid-April high.

At the time of writing, S2 has held sway over R1**, in which case (in MIDAS terms) we say that the uptrend is still intact. Accordingly, a new support curve, S3 (black), has just been launched. It will now offer critical support in this new intermediate degree uptrend, particularly for the resolution of the upside price targets in the Gartley 222 pattern, since the recent support at S2 is also bolstered by the extension of the AC trendline in the latter.

• Critical intermediate degree support = 1.34 to 1.35.5 = R1, R2, and S1
• Critical short term support = 1.40 = S2 and the new S3

• Critical short term resistance: none, since R1** has recently been broken and we look to the previous price high from where R1** was launched

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Non-Priced based Support and Resistance with Third Generation MIDAS Curves

More recently, I’ve created third generation MIDAS curves, which involve replacing the average price in the original VWAP-based MIDAS formula with other time series displaying fractal trend characteristics related to, but sufficiently different from, price. This sameness and difference means that the curves identify many additional market inflection points that cannot be located with price-based curves. Although third generation curves don’t produce priced-based support and resistance, they do create robust signals that either coincide powerfully with price-based targets or expose hidden market inflection points. Consequently, they represent an important extension of MIDAS studies, giving rise in particular to two new MIDAS setups I’ve called Dipper and Inversion (for the former, see Chapter 16, p377).

I’ll complete this review of the euro by looking at EUR/USD interest rate differentials.

Interest rate differentials via yield or bond spreads tend to work best with regard to the primary and secular degree trends. However, their fractal trending means that they’re another ideal dataset for third generation curves.

Figure 7 contains a weekly plot of the euro in the lower pane and above it an inverted plot of the spread between the EUREX 3 month EURIBOR continuous futures and continuous Eurodollar futures. It’s also possible to use the inverted spread between the EUREX Schatz and US 2 year T note futures or EUREX Bund and US 10 year T note futures. However, third generation curves seem to perform best on the short end of the yield curve. The underlying of the EURIBOR futures are time deposits denominated in US dollars at banks outside of the USA, while the CME futures are determined by the market’s expectation of the 3-month USD LIBOR interest rate expected to prevail on the settlement date.

Figure 7: weekly chart of EUR/USD with an inverted spread of the 3 month Euribor and Eurodollar continuous futures in the upper pane.

(source: eSignal and Metastock. www.esignal.com and www.equis.com)

The interest rate differential in the upper pane is analysed with the MDC (upper band = 2.75%; lower = 2%) and nominal MIDAS support curves. This combination has produced seven major Inversion signals. The latter are so-called because they identify market tops in uptrends and lows in downtrends. Such inflection points are out of reach of MIDAS curves created on the price plot (albeit the MDC is also extremely good at identifying these points). The most spectacular of these inverted signals (highlighted in the green rectangle) is the 2008 secular degree top in EUR/USD caught by the upper band of the nominal version of the MDC.

Going forward, the outer extremities of the MDC will be of obvious relevance if the yield spread in EUR/USD widens and risk appetite increases correspondingly to fulfil higher price targets in the Gartley 222 pattern. Failing this, the mid-2010 low in the euro is well supported by the middle curve of the MDC plus several more recent curves that are currently supporting the widening spread between European and US yields. Pullbacks in the intermediate and primary degree trends in EUR/USD will be heavily dependent on the curves launched on the spread from the 2010 low. Any break of these third generation curves will target the aforementioned middle curve of the MDC launched from 1999 plus the two other curves clustered around it from the 2002 and 2004 highs.

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This is NOT a solicitation to purchase the book. It’s merely to say that while the three appendices in the book either advise on coding issues or contain code for the Topfinder/Bottomfinder (TradeStation) and standard MIDAS support/resistance curves (Metastock), there are additional indicators discussed in the book for which code was not supplied.

In agreement with the publisher, this code (Metastock format) is available to those who purchase the book and further details can be found here: http://midasmarketanalysis.com/a-3/b/hg/.

Retain the receipt of purchase and email a copy of it to Andrew Coles here on the site. He’ll then email you a password to download the code.

This post will be reposted periodically.

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Summary of post

One of the site’s regular readers emailed recently to ask if I could summarize the types of MIDAS curve now developed, as there was some confusion over references and terminology. The aim of this post is to cover this topic briefly. This is a MIDAS tutorial so it will also be stored in the folder ‘MIDAS tutorials’.

A final table at the end of this blog post is a concise summary of the various curves.

Two basic methods of evolving the curves

There are obviously two ways in which any formula or algorithmic procedure can be adapted. Very simply, the first would involve changing or extending the actual data input to the formula, while the second would involve either changing or adding to the basic maths. With these two ways in mind, what follows is a quick review of the recent development of MIDAS curves.

First Generation curves: Paul Levine’s original (minor) adaptation of the basic VWAP formula

First Generation curves are Levine’s modification of the basic VWAP formula upon which First Generation curves are based. He applied this basic modification (a simple subtraction procedure involving the launch bar) both to his standard MIDAS support/resistance curves and to his more complex Topfinder/Bottomfinder (TB-F) curves. This work was the subject of his original online lectures.

Second Generation curves: replacing market volume with constant volume to create “constant volume” or “nominal” curves

Second Generation (“nominal”) curves represent a vital move forward from First Generation curves in so far as they depend on an essential, more advanced, understanding of how to apply MIDAS curves. Since First Generation curves critically rely on the market-derived cumulative volume input in the volume-weighted aspect of the VWAP formula upon which they’re based, their chart positioning is heavily influenced by this market-based cumulative volume input.

This volume influence in VWAP goes back to the original VWAP formula in so far as it was always understood that the more volume traded at a certain price level, the more impact it has on the VWAP. However, beyond this insight the actual role of volume was never investigated more deeply.

When analysed more thoroughly, it emerges that various (identifiable) relationships between price trends and volume trends have a crucial role in the plotting of MIDAS curves. For example, what happens when a MIDAS curve is plotted using data from a rising price trend plus rising volume, or a rising price trend plus declining volume? A lot actually, since curves will displace (move about) quite dramatically as a result of these different relationships between uptrending and downtrending price and volume data. Readers interested in this vital area should consult Coles’ Chapter 11 and Hawkins’ Chapter 6 in the book.

To provide one instance here, Chart 1 below is a monthly chart of the DJIA from 1981 to the present with a volume histogram and a 25 month moving average of volume beneath. A volume MIDAS support curve (solid) is launched from the bottom of the 1987 stock market crash and creates a powerful support level for the major 2003 bottom. The height of this curve is explained by Rule #1, that a rising price trend plus volume trend displaces a curve upwards. After the 2007 high, the subsequent 2008 subprime collapse broke this curve and thus provoked the launch from the same 1987 bottom of a nominal curve (dotted), the rationale being that the persistent uptrend in volume would create a significant downwards displacement of a nominal curve from the volume curve with the potential to influence the 2009 bottom. This is precisely what we see in relation to these two vital market bottoms in recent stock market history.

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Chart 1

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Nominal curves are described as constant volume curves because of the way in which the artificial volume that replaces actual cumulative volume from the market is inserted into the MIDAS algorithm. This is explained thoroughly in the book.

Readers looking at Chart 1 will see straightaway that Second Generation nominal curves don’t replace First Generation curves. Both types of curve are crucially needed. It all depends on the relationship between the price-volume trends a MIDAS analyst is confronted with. It also depends crucially on a MIDAS analyst’s familiarity with these relationships and his ability to apply the rules that are derived from them correctly.

Nominal curves can also be applied to contexts where there is no market volume. An example is the volumeless higher timeframe cash FX markets. See Coles’ Chapter 10.

Second Generation curves: replacing the volume weighting in the MIDAS formula with open interest weighting (OIWAP instead of VWAP)

For longer-term futures traders who have a choice of working with volume trends or trends in open interest, it’s also possible to replace volume with open interest instead of constant volume. For example, in the case of Rule #1 above, if in a price uptrend with shallow pullbacks volume is declining but open interest is increasing, a MIDAS analyst would create more accurate MIDAS curves if he replaced volume with open interest. I’ve covered this in Chapter 12.

Third Generation (Parallel) curves: Momentum, Volume, Volatility, Relative/Strength, Econcomic

Third Generation curves have appeared very recently and I’ve used the word “parallel” as a catch-all term to describe them.

I first created them in a very late chapter for the book (Chapter 16) where I began to apply MIDAS curves to datasets other than price with the same fractal trend characteristics. The idea was that price-based MIDAS curves often miss many important price inflection points despite their being launched correctly and despite the various innovations above.

In Chapter 16 I applied the MIDAS curves to Granville’s On Balance Volume, but since the completion of the book I’ve applied them to other datasets with considerable success. In particular, two new MIDAS trading setups have emerged I’ve called the Dipper Setup and the Inversion Setup. Anyone interested in further exploring Third Generation curves will find an article in the June 2011 and July 2011 issues of Active Trader magazine. Here I create Momentum Curves (MACD), Volatility Curves (VIX), Relative Strength Curves (R/S), and Economic Curves. For the latter I chose the Baltic Dry Index. Third Generation curves produce excellent trading opportunities, and the Momentum Curves (and OBV-style curves) also remove the age-old problem of timing divergences.

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At the outset of this discussion, it was stated that there have been two ways in which the basic MIDAS formula has been manipulated. The first way has been in terms of changing the actual data input for the algorithm. As discussed above, First, Second, and Third Generation curves have all been created as a result of applying this methodology.

The second way in which the MIDAS formula has been manipulated is in terms of changing or adding to the basic maths behind the formula. In the remainder of this post I’ll discuss the innovations that have been made to Levine’s original curves with respect to this second approach.

David Hawkins’ Calibrated Curves

It’s not entirely true to say that Calibrated Curves are based on changing or adding to the basic maths in the MIDAS formula, but it’s necessary to include them here because they rely on a different launch point to standard MIDAS curves. As a result, they do process information slightly differently. These atypical launch points are calibrated to subsequent important price turning points and thus capture additional, highly relevant, market moves that standardly-launched MIDAS curves miss. See Hawkins’ Chapter 9 in the book.

Bob English’s MIDAS Average and MIDAS Delta Curves

A presentation of Bob’s ideas can be found in the second half of Chapter 17, including these curves. MIDAS Average curves (MACs) are created by taking the average of a standard MIDAS support/resistance curve, while MIDAS Delta curves (MDCs) are plotted equidistant from the standard MIDAS S/R curve on its other side. Both types of curve are important when examining longer-term datasets. MACs were developed to help cope with much deeper pullbacks, which are a problem for standard MIDAS S/R curves in so far as deep pullbacks usually break straight through them. MDCs were developed to cope with sharply trending markets that will usually pull away from standard MIDAS S/R curves quickly. As such, MDCs plot in a similar way to the Topfinder/Bottomfinder curves, but without the parabolic component in the algorithm.

Andrew Coles’ MIDAS Displacement Channel (MDC)

Initially, the MDC was developed for sideways markets, where Levine’s original curves would simply move to the middle of the trading range and become ineffective. By displacing the original curve to create one or more upper and lower boundary channels, it was possible accurately to identify support and resistance areas in sideways conditions. However, it quickly became apparent that the MDC is also very effective when trends aren’t trending up and down too sharply. In such conditions, the MDC will also catch price highs in uptrends and price lows in downtrends. This indicator is discussed by Coles in Chapter 14.

MIDAS Standard Deviation Bands

This indicator has evolved gradually. Bob English was the first to code the indicator in Tradestation while illustrating its potential on his website, wwwprecisioncapmgt.com. I was the first to code it in Metastock while replacing the VWAP formula with the MIDAS formula. Chapter 15 covers this indicator.

Non-curve based MIDAS innovations

There are various non-curve based innovations, but since the results involve various types of oscillator or other related indicators, they won’t be covered here. Chapter 17 covers many of these ideas, especially those by Bob English in the second half.

Summary of curves in table

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As emphasized in the table, all of the innovations that involve changes or additions to the formula can be created as First Generation, Second Generation, or Third Generation curves.

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summary of post

One observation in my recent posts, especially March 23, has been the relative strength of the US markets and the FTSE and DAX in comparison with the so-called PIIGS (Portugal, Italy, Ireland, Greece, Spain) indices and the Euro Stoxx 50 in relation to the main MIDAS S1 subprime curve. Recently, this theme has also been developed by Elliott Wave International in relation to their ongoing wavecounts. To the list comprising the PIIGS and the Euro Stoxx 50, we can also add the Shanghai SSE. At some stage soon, it’ll be appropriate to do a full MIDAS analysis of these indices, especially the Shanghai SSE and the Euro Stoxx 50. Today however I’ll concentrate on the FTSE 100 as a balance to David’s ongoing analysis of the S&P 500.

As always in my posts when discussing relative MIDAS curves and trend sizes, I follow Martin Pring’s conventions in Technical Analysis Explained. Since this book is on the IFTA diploma curriculum, I assume these conventions are technical analysis industry standards. At least they seemed to be when I did the diploma:

Secular trend = 10 years to as long as 25 years

Primary trend = nine months to two years (associated with unfolding fundamentals and the business cycle)

Intermediate trend = 6 weeks to 9 months, though sometimes longer

Short term trend = 2 to 4 weeks (occasionally shorter, occasionally longer)

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In Chapter 3 of the book I’ve added shorter-term trends of relevance to day trading.

In what follows, I’ll start with secular term analysis and end with a perspective on the current intermediate trend.

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Secular term curves on the FSTE 100

Chart 1 below is a monthly chart of the FTSE 100 from the beginning of 1984 with volume in the lower pane and a 25 month moving average of volume.

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Chart 1: active secular degree curves from the 1980s

The chart is a Yahoo finance cash chart, with volume not being recorded until the beginning of 2003. The only three active secular curves on this timeframe are S1, S2, and S3. S1 is a nominal curve, ie, one computed with constant volume to take account of the absence of volume prior to 2003. (I’ll write a separate tutorial post on nominal curves in the near future.) S1 is also a Hawkins calibrated curve (see Chapter 9 of the book). As we can see, S1 caught the bottom of the 1987 crash, and since then has actively supported the 2003 and 2009 lows, albeit in the latter case with some price porosity.

I’ve left S2, another nominal curve, on the chart because it too supports the 2003 and 2009 lows, albeit with deeper levels of porosity.

S3, the third nominal curve, supported the major 2001 pullback and was also active in 2010 in halting the July low.

Of course, after S3’s launch in 1993 many more secular degree curves were active on this index. However, none are presently influential so they’ve been removed.

A final feature of Chart 1 is the possibility, in Elliott terms, of a descending triangle, with a putative wave d currently in progress targeting the 6,500 level. A wave e to complete the triangle would be consistent with secular degree wavecounts on other international indices that anticipate a wave c in a standard ABC zigzag formation. I’ve sketched this tentative triangle pattern on this chart.

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The Secular Term MIDAS Displacement Channel

Chart 2 below is another Monthly chart with S2 and S3 removed. The feint lower curve from the left is the 1984 S1 calibrated curve. This chart displays my MIDAS Displacement Channel (MDC), which was the subject of an article in Stocks & Commodities magazine and is discussed in Chapter 14 of the book.

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Chart 2 with the MIDAS Displacement Channel

Here, the MDC is also a nominal (constant volume) version, and is also of secular proportions. The lower boundary of the channel fitted at the green arrow at a 34% displacement captured the 2009 bottom much more accurately than the 1984 S1 calibrated curve, and is now obviously a secular degree support area below the 1984 S1 curve. The upper boundary of the channel was fitted at a displacement of 28% at the green arrow and is a major secular resistance curve, currently at the 6,700 level. Since MIDAS curves will sometimes repel price when there’s a small amount of chart whitespace intervening (a phenomenon I call “suspension”), the 6,700 level is consistent on this secular degree scale with 6,500, which was suggested above in relation to the possibility that the FTSE 100 is charting out a secular degree descending triangle.

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Primary degree curves on the FTSE 100

Chart 3 below is a weekly chart. Starting from the bottom of the chart, the lowest feint curve is the 1984 calibrated S1 curve. Above that I have the first primary degree curve (red). This is the main subprime curve I’ve discussed in several earlier posts, notably in the March 23 entry.

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Chart 3: with Elliott Wave count and S2 MDC and S3 MDC

Primary curve S2 is actually another MIDAS Displacement Channel (MDC). The MDC was designed for sideways markets, where Levine’s original curves were ineffective; however, the MDC also works extremely well in trends that aren’t accelerating rapidly, where the upper channel will catch the highs in uptrends and the lower channel will capture the lows in downtrends. We see this here.

So far as the S2 MDC is concerned, it was fitted at the olive arrow at a 10% displacement and captured the Elliott waves 3 and 5 of the first impulse. It has had little effect in halting the new price rise since mid-March.

S3 is also another MDC, this time fitted at the blue arrow high (subwave 3 of wave 3) at a displacement of 9%. The standard S3 MIDAS curve below the upper channel caught the wave 2 and wave 4 bottoms of this second Elliott impulse, albeit with some porosity. The 9% upper channel caught the recent mid-February wave 3 top and is now proximate resistance to the upside since mid-March at the 6,200 level.

6,200, then, is the first intermediate trend target on this chart. However, 6,250 marks the first impulse (= 1.00) multiplied by .618, so the proximity of the Elliott/Fibonacci target plus the MDC target should be taken seriously.

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An intermediate degree Topfinder (TF) on the FTSE 100

Chart 4 below is a daily chart of the FTSE 100, this time in Equivolume. Equivolume charting dispenses with time along the horizontal x axis in favour of volume; as a result, it’s possible to set an extrapolated price target alongside the firm cumulative volume prediction of the Topfinder or Bottomfinder.

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Chart 4: TF measuring the intermediate trend

To get our bearings, the swing low on this chart is the mid-March low. Since then, the price upside has been fairly parabolic. This means that the new intermediate trend S1 (blue) curve has already displaced from the price uptrend, thus setting the condition for the launch of a Topfinder from the mid-March low.

David mentioned in his post of a few days back that currently it’s not easy to fit a TF to the S&P 500 because the upside since mid-March has been so relenting. I agree, but it is possible (just) to fit a TF to the lower right of the Equivolume bar highlighted by the grey arrow on this chart. This fitting is giving a D reading of 190,000,005 shares. This is the predicted amount of cumulative volume that must be entirely burned before the TF completes, and hence the firm cumulative volume prediction associated with this phase of the trend ending.

At the point of fitting, D is 53% complete, meaning that there’s another 47% of D still to run. By using Equivolume charts I can mark a vertical (dotted) line on the chart where the cumulative volume in D will expire. I can also create a linear regression slope through the price upside since mid-March in order to meet the vertical cumulative volume prediction. Where they intersect is the estimated price target. We see this in profile most clearly with the magenta backwards shaped “L”, which was an iconic feature of Levine’s original Topfinder/Bottomfinder.

Whereas the cumulative volume number is the firm prediction in MIDAS theory, the time target is only an extrapolated estimate. This is because the price trend could become more or less parabolic as the remaining cumulative volume is used up. If it becomes more parabolic, we’ll obviously get a higher price target; if it becomes less, we’ll get a lower one. At the present time, the estimated price target is 6,290, though it must be reemphasized that this is an extrapolation. The accurate aspect – provided the fitting itself is correct – is the cumulative volume prediction.

Hence, the variance around 6,290 is consistent with the upper channel of the S3 MDC and the Fibonacci projection given a zone of between 6,200 and 6,250. This of course is for the current end of the intermediate trend. However, it could mark the end of the primary trend, albeit the higher primary trend target is identified by the secular degree MIDAS Displacement Channel at around 6,700 (with the putative triangle at 6,500).

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A time target for the FTSE 100

Chart 5 is the final chart here of Wilder’s/Sloman’s Long Term Delta (LTD), which is consistent with the intermediate trend. Pivot 24 is due in June (broken line), though again there is some tim

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Summary of today’s post

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

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

Recap of the ongoing thread in previous posts since Feb 22

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

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

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

Two Elliott Wave counts

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

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

Chart 1: S&P 500 with ABC correction

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

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

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

Implications of the two wavecounts

There are three possible implications arising from these two wavecounts:

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

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

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

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

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

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

Chart 4: MIDAS momentum S1 broken on the MACD

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

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

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

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COT Report open interest on the S&P 500

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

Chart 6: total open interest and net positioning

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

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

Chart 7

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

Chart 8

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

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

Conclusion

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

2. The longer-term picture is still weak:

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

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

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