Andrew Coles

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

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

A.Coles, March 28, 2011

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

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A.Coles, March 23 2011

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Summary and Recap

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

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

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

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

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

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

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

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

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

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

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

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Chart 3: Swiss Market Index continuous futures

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

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Chart 4: Euro Stoxx 50 continuous futures

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

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Table 1

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Comparison between Europe and US

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

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

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Chart 5: DJ Global Stock Index, Excluding the USA

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Conclusions

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

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

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

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SHORT ADDENDUM: MIDAS curves on the Baltic Dry Index

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

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

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

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

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

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

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

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

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

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

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

A.Coles, March 23, 2011

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

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A.Coles, 17 March 2011

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Summary and update

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

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

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

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

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The inflection point in price and time

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

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

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Chart 1

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

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

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Chart 2

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

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

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Chart 3

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

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

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MIDAS volatility curves on the VIX

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

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Chart 4

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

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

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

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Chart 5

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MIDAS Momentum Curves on the MACD

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

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Chart 6

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

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

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MIDAS Curves on Economic Datasets: the Baltic Dry Index

I’ll write a separate post on this.

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A.Coles, March 15 2011

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

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

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

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

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

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

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

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

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

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

6. Spectacular successes and spectacular failures involving the curves.

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

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

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I don’t have time to expand on this post but David has two fractionally positioned topfinders on the S&P 500 with very advanced cumulative volume readings measuring the Short Term and Intermediate Term trends in addition to our colleague BoB English’s detrended MIDAS curve’s downward trendline about to be tested by the Dow (www.precisioncapmgt.com). Take your pick: the weekly MACD histogram has been negatively diverging since mid-2009, open interest on the major indices is producing excessive overbought readings on normative COT indicators such as Larry Williams’ COT Index, and junk bond yields have hit an all time low of 6.8 per cent. The Baltic Dry Index, an accurate forecaster of the direction of the Intermediate to Primary degree trend, has turned down since October 2010 and I have a couple of standard MIDAS resistance curves already running on it. I should expand on this post at some stage with the long-term secular degree Elliott Wave count, but for now here’s what I hope is an accurate solution to the Long Term Delta on the Dow.

A five wave Elliott Intermediate trend impulse is about to complete alongside the start of a new Delta cycle. The market is at a very important juncture: either the new Delta move is consistent with a relatively shallow correction of this five wave impulse, in which case the market will continue to strengthen in the second half of 2011 with the next price objective being the 2007 high, or this Delta move will usher in the start of a cycle degree wave C which, in terms of price and time, would be proportionate to wave A (ie, the decline from 2008 into March 2009) according to conventional Elliott Wave theory.

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Figure 1: Dow with provisional Long Term Delta solution (pending confirmation)

Figure 2: close-up of LTD (pending confirmation)

Figure 3: putative wavecount plus MIDAS Displacement Channel

A.Coles, 22nd Feb 2011

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We are now at an exquisitely important point in the market, as exemplified by the S&P 500 index, because price is up against multiple major resistance on all timeframes. This is something that is extremely rare and highly significant, so I’ll take the time here to clearly elucidate this in this blog post which is unusually long.  If you don’t want to read through this whole thing, here’s the short summary:  If price breaks up from here, we’re likely in for a major bull market on multiple timeframes; but if price breaks down, we’re probably starting a major bear market.

I’m showing four charts here, all updated through yesterday:  1)  Very Long Term – quarterly bars, 2) Long Term – monthly bars, 3) Intermediate term – weekly bars, and 4) Short Term – daily bars.  I’ll start this analysis with the very long term, then carry forward its significant resistance levels onto the next shorter term chart, and will continue that way through all of the charts.

Very Long Term – Quarterly Bars

The first chart here is the S&P 500 on quarterly bars from 1972, with price on a log scale, and the horizontal axis time based instead of my usual equivolume display.  Also, the S/R curves and the TopFinder are all calculated with the assumption that the volume is the same for all price bars.  The reason for doing this is too long and complex a subject to go into in this blog post; I devote an entire chapter to this in our forthcoming book.  For now, suffice it to say that for this timeframe, it works better this way.

Notice the two red R curves launched from the tops of the market peaks of 2000 and 2007.  They are now very close together, at 1251 and 1264, and price is very close to touching them at 1227.  So, price is encountering major resistance, meaning a break above these R curves would signify great strength and likely much higher prices.  But, a turndown from here would signify a new bear market on this timeframe.  Also, notice the upper and lower panes, where both the RSI and the MACD line are strongly diverging down from the price, implying future market weakness.

Long Term – Monthly Bars

The second chart here is the long term one with monthly bars, starting in 2002.   I’m returning now and on all subsequent charts here to equivolume charting with the Midas curves calculated with real real volume data, and price on a linear scale.  The two horizontal red lines mark the vertical levels of those two R curves on the very long term quarterly bars chart.

We see that price is now up into a cluster of three closely space resistance levels, the first being that of the Highest Resistance curve at 1217, the next being the horizontal level of the April high of 1220, and the third being the 61.8% Fibonacci retracement level at 1229.  Clearly, the Fib levels are important on this chart since the 38.2% level perfectly supported the July pullback whereas the Midas S2 curve did not.

Price is now into this cluster of resistance.  So we must say the same conclusion for this chart as we did for the very long term one:  ”a break above these R [levels] would signify great strength and likely much higher prices.  But, a turndown from here would signify a new bear market on this timeframe.”

Now, we’ll cary this cluster of R levels, along with the two R levels from the quarterly bars chart, over to the next shorter term chart.

Intermediate Term – Weekly Bars

The third chart here is of the intermediate term, with weekly price bars, starting in January of 2009.   Shown here are the five resistance levels that were identified on the longer term charts.  Obviously, the same conclusion applies to this chart as to the monthly bars chart.

Short Term – Daily Bars

We see here more clearly that price is right in the midst of that cluster of resistance levels, and yesterday started to turn down.  (So far today, Tuesday at 11:30 am, price is meandering around with little change.)

See my last several posts here for the discussion of the TopFinder on this chart.  Right now, it is 97% complete, with only a day or two more to go, so this short term uptrend is over.  This means we should expect at least a brief consolidation before price decides what to do next.

Obviously, the same conclusion applies to this chart as to the previous three.

Summary

See the first paragraph of this post.

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This is an update of my Feb. 20th blog post.

After briefly perforating the R1 curve a week ago, the S&P 500 slipped back and is hovering indecisively just under that curve.  So, it’s not in any trend at this time.

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Post summary

This post is a fairly detailed analysis of the main price and time targets on the euro futures for this year, though it also updates my post of November 16th 2009 warning on a change of trend in the US dollar index on the immanent termination of two fractally positioned Bottomfinders. There also seems to be an important unity between the reading of David’s Bottomfinder launched from the start of the S&P 500 downtrend in his weekend post of Feb 13th 2010 and my Bottomfinder launched from the start of the euro downtrend which I’ll discuss today. This apparent unity is discussed briefly at the end of the post.

Brief updating and summaries

After the warning in the November 16th post, the following day the euro created a large daily bearish engulfing candlestick and on November 27th the downtrend began.

In the same post, I emphasized several aspects of the trend change likely to impact the size of the move.

1. The MACD had been positively diverging for 6 months (temporally, a subsequent move is at least the size of the time of the divergence and often twice to three times its size (rarely larger)).

2. There was record 15 year volume at the recent bottom in the dollar index futures, suggesting a selling climax. Following climaxes, the lows in question aren’t usually violated for a considerable time.

3. I pointed out that the dollar index had not only broken above the expired Bottomfinder running from April and but also the one from February 2009. This was intermediate in proportion. In his book Technical Analysis Explained (a book that is on the international IFTA curriculum for the diploma in technical analysis), Marting Pring cites the following convention for trend lengths:

a. Short term trend = 2 weeks to 4 months

b. Intermediate trend = 6 weeks to 9 months

c. Primary trend = 9 months to 2 years

d. Secular trend = beyond 2 years up to 10 years and even 25.

Thus, the breaking of an intermdiate Bottomfinder curve would have implications for at least a move of intermediate duration.

4. I showed the Long Term Delta on the dollar index which was pointing to the first significant pullback (or end of trend) in mid-2010. More on this below.

Current background

The euro’s woes are being blamed primarily on concern over the ability of Greece to service its debt, though the currency is hardly being helped by recent eurozone GDP data (growth of a mere 0.1 percent in the fourth quarter). Greece is a minor member of the eurozone, accounting for a mere 3 percent of GDP, so why the fuss? It depends on who you read: the contagion factor, Greece being a test case for euroland’s Stability and Growth Pact requiring limited interference with other member states’ budgetary and fiscal disciplines, and the potential vulnerability of Germany’s historically hardline stance on monetary and fiscal probity in its relations with other member states. The fact is, however, that the distribution phases of the two Bottomfinders on the dollar index had ended in the period around June to July of 2009 — see too the start of the momentum divergence in the MACD — providing a firm prediction for a change in sentiment towards the US dollar long before Greece (and even Dubai) had become sovereign concerns and when risk appetite was marking a zenith. The Elliott wave count was likewise predicting a bottom months ahead and so too was the Long Term Delta (years ahead in fact). One day we’re all going to catch on to the idea that markets move endogenously, as Benoit Mandelbrot again reiterated in his recent book The (Mis)Behaviour of Markets.

Let’s take a closer look at the euro and establish some firm price and time targets, beginning with a look at the recent data on the Commitments of Traders (COT) report.

The euro and the COT report

Chart 1 below is a weekly chart of the CME euro globex continuous futures. The middle pane shows total open interest and the upper pane the net positioning of the commercials. The vertical blue lines reveal an interesting statistic: when net commercial positioning reaches around -600 to -700, the market usually turns down. Notice this too on the recent high in late 2009. This is probably a useful marker for the gold market. Unfortunately since the euro has been in an uptrend since 2001, we don’t on this chart have a basis for establishing an upper level, although we should probably watch the +700 level carefully when it’s reached.

Chart 1

As stated in previous posts, the commercials separate into the commercial producers and commercial consumers. The former in sectors like agricultural commodities are always net short, selling forward in the futures markets while hedging against falling prices, whereas the latter are always hedging by buying forward against higher prices impacting inventories. How does this apply to the FX markets? An exporter (FX producer) to euroland would be hedging short against a falling euro. His opposite number, the importer (consumer), would be doing the opposite. If we go back to Chart 1, we see the commercial producers heavily net short in anticipation of a lower euro exchange rate in the run up to the 2009 high. Much of the net shorting in the lead up to the 2009 top was probably due to China, which in 2008 exported three times as many goods to euroland as it imported from it. Now that the euro is in freefall, it’ll be interesting to see how China will be affected this year.

Chart 2 is another weekly chart of the CME euro globex continuous futures, this time with the COT Index. As my previous posts have indicated, the COT index is often used by experts on the COT report such as Larry Williams and Stephen Briese. Here it is the total open interest (not net commercial positioning) run through a stochastic formula to give normalized overbought and oversold levels at around the 85 and 15 levels respectively. It combines orthodox with unorthodox view on open interest. The orthodox view is that low open interest levels are associated with the ends of trends. We see this on the chart highlighted by the black vertical lines. The unorthodox view is that high (overbought) levels of OI are also associated with the ends of trends (unorthodox because orthodoxy associates increasing levels of OI with healthy trends). Here we see this highlighed by the vertical blue lines. As I write, total OI has moved parabolically into overbought territory. However, the problem with OI oscillators is that they’re afflicted by the same timing problems as when they’re plotted on price: they can become overbought or oversold and stay there while the trend continues. Let’s try and get more accurate price and time targets (with the COT Index certainly warning in the background).

Chart 2

Chart 3 below is a likely Elliott wave count on the euro, with waves A and B done and wave C in progress. Normally in Elliott ABC corrections, wave C = wave A, which gives a target of 1.14 on the futures. This is an interesting target. Not only is it very near major support from the late 2005 bottom, but 1.13 is also the 61.8% retracement from the move between the 2001 bottom and the 2008 high. Finally, the theoretical Purchasing Power Parity calculation stands at 1.15.

Chart 3

Can we get additional price and time targets? Yes, by using the Midas Bottomfinder and the Long Term Delta on the euro. First, Chart 4 shows that all of the Midas support curves (in their reverse roles now as resistance curves) have been broken, with price initially stopping at R1 and pulling back to R3 before resuming the downtrend. (Incidentally, a trend rarely accommodates more than five Midas curves before ending. Here in the uptrend we see it supporting precisely this number before turning over.)

Chart 4

Chart 5 below has two Bottomfinders launched from two stages of this trend. I could launch them at all because price displaced from the standard Midas resistance curve immediately, thus indicating that the trend was accelerating because a smaller cumulative volume displacement is required. The first Bottomfinder is launched from the start of the trend and is currently only 51.2 percent done; the second launched from 13th January 2010 is 72.9% done. I suspect that the latter is merely measuring this current stage of the parabolic move, probably an Elliott wave 3.

Chart 5

My penultimate chart, Chart 6, is the same as the previous one, only this time with equivolume. I’m using this chart format because volume runs along the lower axis and not conventional time. The cumulative volume prediction by the Bottomfinder is set to around the first week of May (though this could be the termination of a segment of a move rather than its entirety). If we linearly extrapolate price to this vertical line we get a price target of around 1.25, which is significantly higher than the other price targets earlier. As noted, however, this could be a price target for a segment of the trend rather than its full completion.

Chart 6

The final chart is Chart 7. This is the Long Term Delta for the euro and years 2002 and 2006 should be noted. There’s bound to be some variance on the LTD (as there is on all Delta timeframes), but in 2002 pivot 7 printed in July while in 2006 it was in June. The LTD essentially measures intermediate moves and the June/July time axis could be for the termination of this down move rather than its entirety. Because the move to pivot 8 tends to be relatively small, a viable overall time target could be pivot 9 in early 2011.

Chart 7

A negative melding of the US dollar and stocks again?

Briefly, during the equities crisis between 2008 and 2009 (earlier and later in some market indices), there was a well-known negative correlation between US dollar strength and equity weakness. In his current post of 13th February, David has a Bottomfinder launched from the beginning of the downtrend in the S&P 500 at 52 percent complete. Readers will note that I have a Bottomfinder launched from the beginning of the euro down move at 51.2% complete. At the moment, this is being treated with some significance.

Price and time summary

1. The first compelling price target is around 1.25, created by linearly extrapolating from the euro Bottomfinder which is 51.2% complete.

2. The second compelling price target is the 1.13-1.15 area based on (i) an ABC Elliott wave pattern, (ii) the 61.8% retracement of the uptrend between 2001 and 2009, (iii) the 2005 support, and (iv) Purchasing Power Parity.

3. The first time target is the first week of May, based on the linear extrapolation mentioned above.

4. The second time target is June/July, based on the Long Term Delta. According to the LTD, pivot 8 follows and is relatively small, leading to another significant pivot (9) in early 2011. Both pivots 8 and 9 are therefore highly significant too.

5. As mentioned twice (and here again for emphasis), the fact that David has a Bottomfinder in equities with the same cumulative volume as the one here in the euro is being treated as highly significant, given the current negative correlation between equities and the US dollar.

AColes 15th Feb 2010

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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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