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Cross Market Fractal Analysis Elliott Wave & S&P 500 Targets Strategy, Trends & Time Frames
Money Supply Growth M3 1
Economic & Technical Analysis for the Active Trader
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Lots to think about this month.
The Theme is Fractals, with several articles and references throughout the issue, along with all our regular segments. Our Featured Article goes back as far as the1 920's and looks at five different markets to prove its point.
The All Seeing Eye looks at the Labor Force, Employment, and the Money Supply. You can also find a special write up on the Cyclical PE 1 0 Ratio explaining what it is and how it can be of use.
Our Need To Know TA highlights upcoming S&P targets from Elliott Wave analysis, looks at the current potential Rounded Top, Fractal Analysis and a Death Cross occurs on the SPY.
The US Dollar, Treasuries, the Euro and the Continuous Silver Contract are analyzed in our Vault.
VIX continues to coil for a spring and we take a look at Margin Levels in our Risk Assessment.
A quick discussion on trading Strategy, Trends & Time Frames looks at using a KISS methodology to identifying Trends.
TRIGGER$ Publications
For all inquiries, comments and contact please feel free to email us at:
Main contributor : Gordon T. Long Market Research & Analytics Publisher & Editor : GoldenPhi Analytical Summaries: GoldenPhi
See page 36 for a complete list of our contributors. 2 Contents
Economic & Technical Analysis for the Active Trader
Mandelbrot Fractals & The All Seeing Eye Technical Analysis On Market & Economic Indicators 4 of our Current Markets 8 Labor Force Employment Divergence Cover Story Money Supply Growth M3 Cyclical PE 10 Ratio
TRIGGER The Vault Need To Know Technical Analysis Currencies & Metals 17 US Dollar US Treasuries Elliott Wave & S&P 500 Targets 21 SPX Rounded Top Continuous Silver Contract Fractal Analysis Death Cross SPY Euro
RISK Traders Mentor Assessment Technical Analysis & 34 Trading Strategy Education 25 VIX Weekly VIX Daily VXO Daily Strategy, Trends & Time Frames Margin Levels
Open Forums Letters to the editor 36 Readers Comments Discussions
Featured Article Cross Market 29 Fractal Analysis 3 Techni - Fundamentalism Economic & Technical Analysis for the Active Trader
“Techni-Fundamentalism”
TRIGGER$ publications combine both Technical Analysis and Fundamental Analysis together offering unique (and often correct) perspectives on the Global Markets. The ‘backbone’ of this research is done by “Gordon T. Long, Market Research & Analytics” which is subscribed to by Professional Managers, Private Funds, Traders and Analysts worldwide. Every month “Market Research & Analytics” publishes three reports totalling more then 380 pages of detailed Technical Analysis and in depth Fundamentals. If you don’t find our publication detailed enough, we recommend you consider theirs in addition to this one.
For the rest of us, TRIGGER$ offers a ‘distilled’ version of the 380 pages in a readable format for use in your daily due diligence. Read and understand what the professionals are reading without having to be a Professional Analyst or Technician.
Successfully navigating todays’ markets requires information from a broad variety of sources. Triggers examines it all. From Macro Geo Political to daily events; yearly cycles to break out points on a minute chart: we look at and analyze as much of the information as possible, pulling out the relevant and giving you what you need to know to make the right decisions on a daily basis.
An initial or ‘beginning’ publication occurs every month, both in a printable pdf as well as online. From there, the online version is updated daily with current events, charts, news and any relevant information pertaining to trading. The completed version of the publication isn’t actually done until the last day of updates – which occurs right up until the publication of the next issue.
As well as the Traditional Methods commonly used, “Market Research & Analytics” has developed “proprietary analytics” for both Technical and Fundamental Analysis and has designed a methodology to combine the two whereby the synthesis delivers a truly unique and forward thinking analysis that gives cutting edge insight.
“Techni-Fundamentalism” 4 Cover
Economic & Technical Analysis for the Active Trader Story Mandelbrot Fractals & Technical Analysis of our Current Markets
This issues theme deals with Fractals and their presence in the markets.
Last issues themes demonstrated some laws of nature potentially governing the markets. This months issue continues with some more Julia Set possibilities and information to think about. It gets more and more difficult to argue against In its simplest terms, fractals are repeating the appearance of correlations between the patterns that have similar forms at different markets and nature. perspectives or scales.
The exact cause of these correlations is still If you have experience with Elliott Wave then up for debate. Are they natural phenomena you are already familiar with the fractal nature due to the large input of information in the of the markets. EW theory divides the marketplace? Are the markets manipulated markets in to wave patterns that repeat to appear to behave in these manners? Is the throughout all time frames and investment whole thing just one big computer algorithm vehicles. set long ago to run the markets off of? Maybe there is a common thread of mathematics that exists between all things living or otherwise that is just the natural progression of 'stuff'?
Whatever you want to believe the cause of it is, that it does exist for some reason is readily apparent. Seeing this and understanding it is important for anyone serious about trading EW 'Fractal' Analysis the markets. These concepts add a new repeating pattern(s) different scales dimension to your technical analysis and fig.1 make forecasting mathematically achievable instead of just some 'gamblers science'. You can see three different colored waves at Fractals the start of the overall pattern in blue, pink, and red. Each of these waves have a similar Fractals appear to have been known for a five wave count. If you note, you can find little while now, supposedly having their roots these waves throughout the pattern, up and in 1 9th century mathematics. A "Julia Set" is down. These three, small, five-count waves a well known type of fractal and comes from can be found inside a larger wave marked the man of the same name, Gaston Julian, with a circled 1 . This 1 is the 1 st of another, who worked with fractals in 1 91 8. larger, five count... and so on. (cont. pg.5) 5 Cover
Story Economic & Technical Analysis for the Active Trader
Fractals (cont. from pg.4) The Bell Curve Debunked Mandelbrot We are familiar with the concept of standard Probably one of the more recognisable or normal distribution and the graph that fractals would be what is called the represents it, the bell curve. Mandelbrot Set (front cover image).
Working on the IBM fractal project, Benoit Mandelbrot became known for 'inventing' fractal geometry and has written several books on the study including The Fractal Geometry of Nature.
The Bell Curve fig.3 is not an accurate representation of reality This is in fact a man made concept. That is, it is not a true or accurate representation of what really occurs, in nature or otherwise. fig.2 Mandelbrot Set However, it is mans desire for this to be the Of particular interest to the trader is his 2004 case, and what is currently and most commonly used. Mandelbrot shows proof of publication The (Mis)Behaviour of Markets. Although the work contains no this folly in his book. practical TA methods for a trader to apply, it does provide How many analysis use the Bell Curve as information that is vital to part of the information calculated to form understanding how the conclusions? If the curve is not a real markets behave and what that representation or accurate, then what of means for its participants. This those conclusions? work ushers in a new age of market analysis and it dispels The financial markets love normal some of the current, more common methods distribution, standard deviations and used and sighted for portfolio management regression to the mean. The impact of and trading strategy, showing us how changing their effectiveness or relation to the misplaced they are. markets are far reaching.
Of the many conclusions shown and proven, The (Mis)Behaviour of Markets the 'myth' of the Bell Curve is probably the most profound. The implications to all areas In his book, Mandelbrot highlights some of of market analysis can not be ignored and the issues concerning the inappropriate use every player, professional or not, would do of the bell curve in market analysis. The well to consider what is being said before they following list is a summary of a few points make their next move. taken from his publication and we recommend the read to all. As you will see, most (if not all) of the current analytical (cont. pg. 6) 6 Cover
Economic & Technical Analysis for the Active Trader Story
The (Mis)Behaviour of Markets (cont. from pg. 5) Fractals & TA methods rely on theory derived from the bell curve in some fashion. As there are mathematical formulas for the Julia and Mandelbrot sets, so too there is Analyzing Investments: The two most potentially a formula or algorithm that could common tools for measuring risk are 'Alpha', map out a market. That is beyond the or volatility, and 'Beta', or the degree in which average trader or investor and is not a a stocks price changes correlate to those of realistic suggestion for anyone to pursue. the market overall. Both numbers are used However you can be sure that some people extensively in portfolio construction, corporate are working on, or have already developed finance and in virtually every kind of risk their own take on the situation and a set of calculation known. These numbers only have mathematical tools to take advantage as best meaning if prices vary mildly by the bell curve, they can. TRIGGER$ own analysis which they certainly do not. incorporates proprietary analytics using Mandelbrot Theory developed by The LCM Building Portfolios:Current portfolio theory Group and Gordon T. Long Market Research bases all on the conventional market & Analytics. It is one of several tools used assumptions that prices vary mildly, while formulating our analysis. (For more independently, and smoothly from one information on the techniques utilized see moment to the next. If those assumptions are pg.7 Methodology & TechniFundamental wrong, everything falls apart and your Analysis.) carefully tuned profit engine may actually be a ticking bomb. Again we see the prevalence of Elliott Wave Theory appears to be the only using 'Beta' in making a lot of calculations and common method in use that is somehow assumptions as to where an individual stock is dealing with fractals and Technical Analysis. headed. The most obvious approach would be for the Option Valuation: Multiple methods currently trader to simply look for repeating patterns compete for the best way to figure out the across different time frames. It is possible to price of an option... none are particularly find a completed pattern on a 1 or 5 min. accurate. Black Scholes, the most common chart that shows you where the same pattern, method, has been known to be wrong for incomplete, and currently unfolding on a 1 5 years, but is still widely used. Of course it min. or hourly chart, will end up. Add to this uses the Bell curve as the bases for its some basic EW and Fib theory and you may assumptions. start to have some truly predictive analysis.
We certainly are not suggesting or advocating See our Feature Article this issue, Cross that you no longer use any methods Market Fractal Analysis, for some more commonly employed because they are insight and thoughts on how to use fractal derived somehow from the Bell Curve. Be theory in your own analysis. aware of the limitations and potential outcomes. It is equally important to keep on -Conclusion- top of what everyone else is looking at and We have another methodology that is derived thinking too. Researching the flaws of the from nature as we try and understand what common analysis, you can take them in to the markets are doing. Like other techniques, consideration and potentially be ahead of the this one would not be apparent if the markets herd. were random.
GoldenPhi END 7 Methodology Economic & Technical Analysis for the Active Trader
TRIGGER$, in collaberation with "Gordon T. Long - Market Research & Analytics", have thier own unique approach to Techni-Fundamental Analysis. The material found in TRIGGER$ is the conclusions of a multi-perspective methodology boiled down to its final essence. This methodology includes the following analytical approach:
Time Frame Duration Approach Key Tools short - term less than 90 days Technical Analysis Elliott Wave Principal, WD Gann, JD Hurst, Bradley Model, Proprietary Mandelbrot Fractal Gen. intermediate 1 2 months Risk Analysis Global-Macro Analysis Tipping Ponts - Pivots longer term 1 8 months + Fundamental Analysis Financial Metrics
The Global-Macro Analysis which is so prevalent in our articles and on our Tipping Points site, plays the critical role of bridging our highly analytic Technical Analysis with our detailed Fundamental Analysis.
We have found that in the short term the markets are driven by emotion and sentiment. In the longer term, they are driven by financial fundamentals. As Warren Buffett is often quoted as saying: “In the short term the market is a slot machine but in the long term it is a weighing machine.” We have found that the transition shows a lagging correlation between changes in the Global Macro, followed by Corporate Earnings, then followed by the sell side analyst community estimates.
If you are looking for more detail than is provided in TRIGGER$, consider looking at our primary inspiration: "Gordon T. Long Research & Analytics". We do our best to summarize this information and deliver it in an easy to read format. This by its very nature doesn't allow us to include all the very detailed analysis that takes place in order to deliver us its conclusions.
All information and conclusions delivered in TRIGGER$ articles are a product of the methodology outlined above. 8
Economic & Technical Analysis for the Active Trader
The All Seeing Eye On Market & Economic Indicators
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Participation Rate
Mainstream would have you believe that all is well and the 'recovery' is right on course from the little setback that occurred in 2008.
We have presented evidence in earlier issues that argues we are currently in a bear market that started in 2000.
Steady decline in Labor Participation since 2000 helps demonstrate yet another factor that is suggesting this.
Any notion that we are, or have been in a recovery since '08-'09 looses some validity if the Labor Force has any bearing in that conclusion.
chart 1 9
Economic & Technical Analysis for the Active Trader
Labor Force (cont)
Leaving the Labor Force
chart 2
Time On Unemployment Benefits
(Before being forced off and joining the graph above)
chart 3
Consequences
chart 4 1 0
Economic & Technical Analysis for the Active Trader
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Initial claims for jobless insurance increased to 429,000 during the June 1 8th week from 420,000 during the week prior, initially reported as 41 4,000.
The latest compared to Consensus expectations for 41 5,000 claims. The four-week moving average of claims held steady at 426,250. During the last ten years there has been a 77% correlation between the level of claims and the m/m change in nonfarm payrolls. chart 5 The latest figure covers the survey period for June nonfarm payrolls and claims rose 1 5,000 (3.6%) from the May period. During the last ten years there has been a 76% correlation between the level of claims and the m/m change in nonfarm payrolls.
Continuing claims for unemployment insurance held roughly steady at 3.697M, about where they've been since mid-April.
chart 6 11
Economic & Technical Analysis for the Active Trader
MMoonneeyy SSuuppppllyy GGrroowwtthh -- MM33
chart 7
Though the government no longer releases the M3 money supply statistics, they are put together by such organizations as ShadowStats.com.
The massive efforts by the US Federal Reserve on the overall money supply as represented by this broadest measure of US money and credit appears to have finally begun to work.
What is worrying however, is it is based on programs such as QEII which has now ended! What will stop it from rolling over as we are seeing in Housing and the Economy overall?
Another thing to consider along with the chart above is the actual move(s) of the markets and how they correspond. Note that we have a large sell off and market decline in 2008 - start of 2009 and at the same time we had a tightening of the money supply. If you have read through some of our previous publications, you will note that this supports some of what has been said with respect to the Fed, printing (borrowing) of money, and manipulation of the markets. There are many economists, politicians and historians who have all come to the same conclusions: that the periods of economic strife, depressions, and recessions have been (are) mathematically orchestrated and managed by those who profit from such occurrences. See our past featured articles. 1 2
Economic & Technical Analysis for the Active Trader
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Here is a new update of a popular market valuation method using the most recent Standard & Poor's "as reported" earnings and earnings estimates and the index monthly averages of daily closes for May 2011 , which is 1 287.29. The ratios in parentheses use the monthly close of 1 320.64. For the latest earnings, see the table below created from Standard & Poor's latest earnings spreadsheet.
● TTM P/E ratio = 1 5.0 (1 5.4) ● P/E1 0 ratio = 22.0 (22.5)
The Valuation Thesis A standard way to investigate market valuation is to study the historic Price-to-Earnings (P/E) ratio using reported earnings for the trailing twelve months (TTM). Proponents of this approach ignore forward estimates because they are often based on wishful thinking, erroneous assumptions, and analyst bias.
TTM P/E Ratio The "price" part of the P/E calculation is available in real time on TV and the Internet. The "earnings" part, however, is more difficult to find. The authoritative source is the Standard & Poor's chart 7 website, where the latest numbers are posted on the earnings page. (See the footnote below for instructions on accessing the file).
The table here shows the TTM earnings based on "as reported" earnings and a combination of "as reported" earnings and Standard & Poor's estimates for "as reported" earnings for the next few quarters. The values for the months between are linear interpolations from the quarterly numbers.
The average P/E ratio since the 1 870's has been about 1 5. But the disconnect between price and TTM earnings during much of 2009 was so extreme that the P/E ratio was in triple digits — as high as the 1 20s — in the Spring of 2009. In 1 999, a few months before the top of the Tech Bubble, the conventional P/E ratio hit 34. It peaked close to 47 two years after the market topped out.
As these examples illustrate, in times of critical importance, the conventional P/E ratio often lags the index to the point of being useless as a value indicator. "Why the lag?" you may wonder. "How can the P/E be at a record high after the price has fallen so far?" The explanation is simple. Earnings fell faster than price. In fact, the negative earnings of 2008 Q4 (-$23.25) is something that has never happened before in the history of the S&P 500.
Let's look at a chart to illustrate the unsuitability of the TTM P/E as a consistent indicator of market valuation. (cont. pg.13) 1 3
Economic & Technical Analysis for the Active Trader
Cyclical PE 10 Ratio (cont. from pg.12)
chart 8 The P/E1 0 Ratio Legendary economist and value investor Benjamin Graham noticed the same bizarre P/E behavior during the Roaring Twenties and subsequent market crash. Graham collaborated with David Dodd to devise a more accurate way to calculate the market's value, which they discussed in their 1 934 classic book, Security Analysis. They attributed the illogical P/E ratios to temporary and sometimes extreme fluctuations in the business cycle. Their solution was to divide the price by a multi-year average of earnings and suggested 5, 7 or 1 0-years. In recent years, Yale professor Robert Shiller, the author of Irrational Exuberance, has reintroduced the concept to a wider audience of investors and has selected 1 0 years as the earnings denominator. As the accompanying chart illustrates, this ratio closely tracks the real (inflation-adjusted) price of the S&P Composite. The historic average is 1 6.4. Shiller refers to this ratio as the Cyclically Adjusted Price Earnings Ratio, abbreviated as CAPE, or the more precise P/E1 0, which is my preferred abbreviation.
The Current P/E1 0 After dropping to 1 3.3 in March 2009, the P/E1 0 has rebounded to the vacinity of 22. The chart below gives us a historical context for these numbers. The ratio in this chart is doubly smoothed (1 0-year average of earnings and monthly averages of daily closing prices). Thus the fluctuations during the month aren't especially relevant (e.g., the difference between the monthly average and monthly close P/E1 0). (cont. pg.14) 1 4
Economic & Technical Analysis for the Active Trader
Cyclical PE 10 Ratio (cont. from pg. 13)
chart 9
Of course, the historic P/E1 0 has never flat-lined on the average. On the contrary, over the long haul it swings dramatically between the over- and under-valued ranges. If we look at the major peaks and troughs in the P/E1 0, we see that the high during the Tech Bubble was the all-time high of 44 in December 1 999. The 1 929 high of 32 comes in at a distant second. The secular bottoms in 1 921 , 1 932, 1 942 and 1 982 saw P/E1 0 ratios in the single digits.
Where does the current valuation put us?
For a more precise view of how today's P/E1 0 relates to the past, our chart includes horizontal bands to divide the monthly valuations into quintiles — five groups, each with 20% of the total. Ratios in the top 20% suggest a highly overvalued market, the bottom 20% a highly undervalued market. What can we learn from this analysis? The Financial Crisis of 2008 triggered an accelerated decline toward value territory, with the ratio dropping to the upper second quintile in March 2009. The price rebound since the 2009 low pushed the ratio back into the top quintile. By this historic measure, the market is expensive, with the ratio approximately 34% above its average (arithmetic mean) of 1 6.4. We can also use a percentile analysis to put today's market valuation in the historical context. As the chart below illustrates, latest P/E1 0 ratio is approximately at the 85th percentile. If we leave out the Tech Bubble, the current P/E1 0 would be at 87.5%.
(cont. pg.15) 1 5
Economic & Technical Analysis for the Active Trader
Cyclical PE 10 ratio (cont. from pg.14)
chart 10
A more cautionary observation is that every time the P/E1 0 has fallen from the top to the second quintile, it has ultimately declined to the first quintile and bottomed in single digits. Based on the latest 1 0-year earnings average, to reach a P/E1 0 in the high single digits would require an S&P 500 price decline below 540. Of course, a happier alternative would be for corporate earnings to make a strong and prolonged surge. When might we see the P/E1 0 bottom? These secular declines have ranged in length from over 1 9 years to as few as three. The current decline is now in its eleventh year.
Or was March 2009 the beginning of a secular bull market? Perhaps, but the history of market valuations suggests a cautious perspective. 1 6
Economic & Technical Analysis for the Active Trader
Something To Think About 1 7
Economic & Technical Analysis for the Active Trader
Look for our Feature Article: Cross Market Fractal Analysis (pg 29) Need To Know Technical Analysis for more Need to Know TA
EElllliiootttt WWaavvee && SS&&PP 550000 TTaarrggeettss Short Term Rounded Top The short term will be marked by sudden and abrupt changes in trend as part of an extended rounded topping pattern. This is not a pattern to trade, but a pattern to prove that the big move is ahead and to prepare accordingly. Our discussions on the Megaphone Pattern suggests this is normal at times of major market reversals.
Intermediate Term Top Our target for an Intermediate top is 1 372 on the S&P 500 with the possibility of a short term throw over to 1 41 0.
Time Frame We presently see this Bear Market counter rally which started in March 2009 having ended 2011 .45. This approximates to June 1 3th, 2011 . This does not mean that the S&P has necessarily topped but rather the global financial market has. The S&P will follow.
chart 11 1 8
Economic & Technical Analysis for the Active Trader
SSPPXX - Rounded Top
We have been predicting the end of the cyclical bull market with the June 2011 quadruple witch since early 201 0.
It appears the rounded top formation pattern we have also been predicting is unfolding with the rounded top pattern being centered as labeled below on the June quadruple witch.
chart 12
A bounce off the 200 DMA was long overdue. A strong Bear Market counter rally is too be expected as the Rounded Top is retested.
The S&P bounced heavily off its 200 day moving average but the Nasdaq has not yet been able to break back above its 40 year trend line - suggesting this is still just a technical bounce and not to be trusted, which in the context of near record divergence between data and sentiment & expectations is not good. 1 9
Economic & Technical Analysis for the Active Trader
Fractal Analysis
Markets demonstrate "Fractals" at all levels. It is highly likely the rounded top formation will demonstrate a 'mirrored' fractal of the initial half of the rounded top giving us some gauge of its duration.
chart 13
Bear Market counter rallies look like this.
Panic buying occurs as shorts are forced to cover.
chart 14 20
Economic & Technical Analysis for the Active Trader
Death Cross - Spy Watch for a DEATH CROSS of the 50 DMA and the 1 00 DMA for confirmation of the Secular Bear Markets resumption. (Look for the Death Cross in other markets too.)
chart 15
UPDATE
Last months issue took a stab at some possible moves as we head through our potential rounded top formation. As Warren Buffet is known to have said "Markets in the long term are a weighing machine, in the short term, a slot machine."
Our overall thoughts on more up to come seem to have been correct and the initial target of the channels and 200ma bounced as expected.
When the 89ma was broken with force, it ended any potential of the second part of our analysis following through from that point. The expanded flat pattern still has a low possibility, but it is only an intermediary potential inside our larger picture of a rounded top formation.
Our current analysis has us watching for more lift to the May 2nd high, as our chart on the opposite chart 14 page (pg.1 9) shows. Potential Elliott Wave counts (pg.1 7) allow for this as well as for more lift to the 2007 highs and beyond. This would be one reason to start to consider Economic and Fundamental Analysis to add to your Technical Analysis as it can give you some insight in to the more probable outcomes. 21
Economic & Technical Analysis for the Active Trader
The Vault Currencies & Metals
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chart 16
The US dollar has decisively broken through support levels.
The dollar however is still above its long term neckline within a major head and shoulders topping formation pattern. When the neckline is broken we can expect the US dollar to plummet to below 40. 22
Economic & Technical Analysis for the Active Trader
US Dollar (cont.)
As the US dollar weakens it will give a boost to the US Equity markets fundamentally because stocks are priced in 'smaller' American dollars. Additionally, Global Corporations listed on US exchanges receive more than 50% of their revenues outside of the US which will help with US earnings reporting.
With out-of-control US deficit spending pushing up US Treasury Supply, and QE II stopping and thereby reducing US Treasury Demand (in addition to a flight to quality reversal), we can expect bond prices to fall and interest rates to climb. Initially the increasing cost of money will be over ridden by the weaker US dollar. chart 17 Eventually increasing cost push will drive inflation in basic needs such as food, energy and consumables. However, as disposable income continues to fall the US Economy will begin an acceleration into a severe Bear Market and economic slowdown. The Bear Market which began in December 1 999 will resume with full force.
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Note the 50 DMA cross of the 200 DMA Further Treasury Weakness Ahead with Rising Yield
chart 18 23
Economic & Technical Analysis for the Active Trader
UUSS TTrreeaassuurriieess (cont.) 1 0yr Bond
chart 19
A critical driver of the US dollar index is US interest rate differentials. The difference between the rate on the US 1 0 year treasury and other sovereign treasuries is a critical element in determining the direction of the US dollar.
Presently, all indications are that though near term rates have weakened to below 3.00%, interest rates for the US treasury are headed higher. Higher rates IF they create a differential and are not simply reflected in other global sovereign rates will affect the dollar.
The differential in sovereign bonds yield is determined by a number of factors, but risk of default, government fiscal policy and central bank monetary policy are critical drivers. Presently, all these factors are considered poor in the US relative to other sovereign nations. The downgrading of the US AAA US treasury to "Negative Watch' recently is indicative of this. 24
Economic & Technical Analysis for the Active Trader
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The chart below of the continuous Silver contract would indicate the recent move has moved too far, too fast and now requires a further consolidation/ correction.
Both the upward moves in Gold and Silver correlate with the continuing breakdown in the US dollar index.
chart 20
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The Euro will break out of this consolidation pattern and put in a final, marginally higher high - A Double Top.
chart 21 25
Economic & Technical Analysis for the Active Trader
RISK Assessment
VIX Weekly
chart 22
The Weekly VIX chart above show a wedge with the slopes of the sudden change in volatility getting steeper but shorter in duration. If they were to be getting shorter but not as steep we could see this as good news with the system becoming more stable as it decayed. Instead we have 'shock' reactions. This is a bad omen for stability - whether an up market or down market follows.
VIX Daily
The daily VIX shows the banding of the 50, 1 00 and 1 00 day VIX moving averages. Tightening bands are an indication of a pending break in pattern, whether up or down. (see chart next page, pg.26) 26
Economic & Technical Analysis for the Active Trader
VIX Daily (cont.)
chart 23 We have a 100 DMA cross of the 200 DMA which is a sign of a potential trend VXO Daily The daily VXO shows that we have Divergence between the VXO and the S&P500 Index. This is negative but more telling is the pronounced wedge. Again, this doesn't tell us what direction the market is going to head but rather there is RISK that a strong move will occur.
chart 24 27
Economic & Technical Analysis for the Active Trader
Margin Levels Below is a chart of margin debt (debit balance in margin accounts) versus the SPX from January 1 997 to present as reported by FINRA. AAII and other sentiment readings may say this market is tilted to the bearish camp but sorry this market is clearly betting overly bullish.
Total margin debt is now at 2007 levels and above the tech boom and those before Lehman Brother’s failed. Probably the most interesting takeaway from current margin levels is the simple truth below. (macrostory.com) Margin debt Explodes : Sign of a Speculative Market
chart 25
In 2011 it takes $360 billion in margin to get the SPX to the 1,300 level, whereas in 2006 it took only $260 billion.
Margin debt is one measure of the amount of optimisim or pessimism in the stock market. Rising margin debt generally correlates to a rising stock market.
In Mays issue we discussed margin levels and investors lossing confidence as they percieved the market advance as nothimg more than Fed QEII induced through money pumping.
There was more to go and this pulled some of these 'exited' investors back into the market as they are afraid to miss a continuing rise in the market. Rounded tops 'whip-shaw' people, afraid to be out but equally afraid to be in. This reminds us of the fall of the dot.com bubble in 1 999 prior to the final high in April 2000. Everyone felt the market just couldn't go higher, it did and many were forced back into the market at the wrong time because they couldn't afford lower relative gains compared to competitive funds. (cont. pg.28) 28
Economic & Technical Analysis for the Active Trader
Margin Levels (cont. from pg. 27)
As well, sentiment indicators have been adjusting to allow the final rise to climb a 'wall of worry'. JP Morgan's Thomas Lee, argues that the economic data has been so consistently disappointing, that a rebound in the Citi Economic Surprise Index (which measures the data against expectations) is practically guaranteed. Again, it's not that the economy will rebound, but the economy will rebound vs. expectations, which is actually what matters to markets.
Citi Economic Suprise Index : looks ready for another lift... chart 26 29 Feature Article: Cross Market Fractal Analysis Economic & Technical Analysis for the Active Trader Cross Market Fractal Analysis
For an introduction to Fractals and their skewed or misrepresented. Similar to if you relationship to the markets see our cover took a round globe and then flattened it out story: Mandelbrot Fractals & Technical on to a tabletop, or started with a flat map Analysis of our Current Markets. and attempted to fold it in to a ball (globe) -- you can't really do either of these very well as If you are trading using any pattern analysis, the image distorts from the attempt. you could be said to already be doing fractal analysis. As you look for certain patterns to So too then is the price-time graph distorted, repeat themselves or develop, like an ABC for which can make accurate technical analysis example, you are employing fractal strategies. (of any kind) difficult to accomplish. If you can manage to shift your perspective away from That there are noticeable repeating patterns to the standard 2-D representation, more look for in itself demonstrates the fractal instances of fractals are readily apparent. nature of the markets. Even still, we can find many examples of Another consideration when looking to employ fractals throughout time frames and markets. fractal analysis is your perspective. As We will start with the DOW and show a discussed in past issues, the price-time graph fractal relationship with itself, then we will that is commonly used to display market move on to other markets and see if we can information is a two dimensional also find similar instances. representation of a much more complex system. The markets themselves are said to The pattern or fractal we will be looking for is move in 3 or even 4-D. The standard 2-D what is known as a 'Megaphone Top'. representation we are all used to is actually
Megaphone Top Broadening Top Fractal Pattern
The following few charts were put together to show a common topping formation that has occurred numerous times. This is also demonstrating fractals.
chart 27
(cont. pg.30) 30 Feature Article: Cross Market Fractal Analysis Economic & Technical Analysis for the Active Trader
Cross Market Fractal Analysis (cont.)
chart 28 Commentary on the charts themselves goes to show that these are all the same pattern. We would encourage our readers to look for the original analysis online. For our purposes, it is the formation of the general pattern we are interested in.
chart 29
(cont. pg.31) 31 Feature Article: Cross Market Fractal Analysis Economic & Technical Analysis for the Active Trader
Cross Market Fractal Analysis (cont.)
chart 30
While these may not all be exact matches in regards to duration or amplitudes, they are most definitely all the same general pattern.
chart 31
(cont. pg.32) 32 Feature Article: Cross Market Fractal Analysis Economic & Technical Analysis for the Active Trader
Cross Market Fractal Analysis (cont.)
chart 32 Chart can be seen inside blue box in next chart Our final chart brings us to the current situation. Again we can see a Megaphone Top formation. The chart above demonstrates the pattern within the pattern as a larger displayed time frame for the chart below shows it included as part of a larger, similar formation.
chart 33 (cont. pg.33) 33 Feature Article: Cross Market Fractal Analysis Economic & Technical Analysis for the Active Trader
Cross Market Fractal Analysis (cont.)
We have now shown seven instances, If you were to also go looking across several including our current situation, that different time frames, as well as markets, you demonstrate the same pattern, going back as would continue to find the Broadening far as 1 929. These however were all in the pattern. same market, the DOW Industrials. By now you should have a good idea as to Below you can find four more examples of our what fractals are and how they can present Broadening, or Megaphone pattern. These themselves in the markets. Looking at the are current examples in four other markets; analysis going back far in time as well across Russ2000, SPY, NASDAQ, and the U.S. several instruments, you will have to decide Dollar showing the fractal nature of the for yourself the usefulness of the technique. It pattern. does appear, however, to be very clear where we are headed, given the evidence provided These are all examples demonstrating our as to where the Broadening pattern finally pattern in a large time frame, across several ends up taking us. markets. GoldenPhi END
Russel 2000 SPY
chart 34 chart 35 Four More Megaphones (currently)
NASDAQ Composite U.S. Dollar
chart 36 chart 37 34
Economic & Technical Analysis for the Active Trader
Traders Mentor Technical Analysis & Trading Strategy Education
SSttrraatteeggyy,, TTrreennddss && TTiimmee FFrraammeess
If you are serious about trading and desire to With that in mind, the trader also needs to make it more than just a hobby or some game take in to account the vast complexity of the to match your wits, if you want to consider markets. Understand that a workable, yourself a 'professional' trader and make your profitable trading strategy is not going to just living by it, then we suggest that you view the fall out of the sky. Many try and find that whole experience as you would any other trading is not for them, not because they business venture. don't enjoy it, but because they are out of funds. One of the more important aspects of any business is the Product or Service they are The best way to secure your funds is to do as going to provide in order to make their profit. It much due diligence as possible prior to is the product or service which the whole actually putting any money in the market. I.e. business revolves around that provides the develop a profitable strategy first, and then revenues that make the business worthwhile start to trade it. While this may appear or not. painfully obvious, the excitement of the markets and the desire to 'win it big' can Using this analogy, the trader's product (or sometimes override common sense. service) would be the Trading Strategy used to make gains. Given this, the job of a trader You can have excellent analytical skills and then is to develop a successful trading call the market moves correctly every time, strategy, not just the buying and selling of but this does not guarantee profits. You also securities. need to have a strategy that trades these moves profitably. It is possible to have the The better the product/trading strategy, the market figured out technically, call the next more profit is made by the business/trader. moves accurately, and still loose money. Your U.S. Dollar strategy needs to take advantage of and work This does not mean that the strategy needs to with your technical analysis. be overly complex and 'sophisticated'. Matter of fact, the simpler a profitable strategy can be A common mistake can be trying to have one developed, the better it is for the trader. strategy that is supposed to be a "one size Having two or three indicators, set-ups or fits all". At the very least we know that the trading rules to follow allows for better markets can be in two different states: concentration and fewer opportunities for trending and non-trending. Consider that one mistakes than having to follow fifteen strategy to fit both states may be more indicators and dozens of patterns. Keep It difficult to develop than a separate strategy Simple Stupid (KISS) comes to mind when for each state. That is a trading strategy for trying to put together a profitable trading trending markets and a different strategy for strategy. non-trending markets. (cont. pg.35) 35
Economic & Technical Analysis for the Active Trader
Strategy, Trends & Time Frames (cont)
The issue then arises as to how you determine higher time frame, you can determine the what is trending and what is not. Some may next most likely areas of resistance, targets tell you that this can be as difficult as and where we are in relation to these. If your developing the trading strategy itself. While in 1 5min chart shows you to be trending up and hindsight, looking at a chart it may be easy to the next area of resistance is a few bars and identify periods of trending and areas of points away, you can drop down to the lower consolidation; this is not always the case when time frame and trade with the trend. trying to determine the location in real time. Regardless of what the lower scale looks like, More specifically, when the trend is in the you know on the higher frame you are process of changing or has just changed to trending to a target area. You expect the non-trending and vice-versa. This point can be higher frame to remain in the current trend difficult to locate with accuracy and the trader until the target area is reached, therefore you can be easily fooled one way or the other. can trade the lower frame with confidence you are in a trending market. There are a multitude of indicators and technical methods that can be used to help the The same would hold true for non-trending trader make these determinations. Something markets. If on the higher time frame you are to consider that keeps the whole process in obviously in a consolidation pattern, no longer the realm of 'KISS' is using different time trending and just bouncing back and forth, frames. you know what strategy to be trading with now on the lower scale. As we already mentioned, it is fairly easy to look at a chart after the fact to see what areas If it is not obvious on the higher time frame were trending and what areas were in what is currently going on, i.e. trending or not, consolidation. It is fairly easy to determine the have patience and wait until it is and the most likely location of the market currently, it is exact state is known for certain. You know the change-over that causes the real issues. what the next target is, or know it needs to bounce some more to finish the consolidation Look to a higher time frame than what you are or you do not trade. trading on to determine your current location and if you are in a trending or non-trending If you start to work with various time scales, market. If you usually trade on the 5 or 3min you will note an interesting occurrence that time scale, look to the 1 5min or hourly chart to helps add more perspective to your trading. tell you what the current state you will be Like a clock, the price-time graph and even trading in is. the moving averages, seem to unwind in to the next higher level scale. This continues up There are several good reasons for the trader through the time frames, revealing more to start to employ the use of different time relationships and connections between scales in trading. This would be one of them. various moves. Although initially it may be a By using several time frames of the same bit confusing trying to keep track of multiple security you can get a better perspective of time frames, if you start slow and add with a where you currently are and where you are logical system and methodology, you will find headed with relative ease. it well worth the effort in the long run.
Employing some technical analysis on the GoldenPhi END 36
Economic & Technical Analysis for the Active Trader
Open Forums Letters to the Editor Readers Comments Discussions
We'd like to take this opportunity to thank our component. The point of this will be to have readers for the interest they have shown, as more updated information on day to day well as the patience they have exhibited while bases for those who are actively trading. We we try and make a go of this publication. We are aiming for this fall, and failing that, apologize profusely for the lateness of the sometime before the New Year. issue - while all the information is still relevant, we were/are aiming for more middle of the If there is anything you would like to be month release date, as opposed to near the seeing in our issues, please send us an end of the month. August release is looking like email and let us know. it too, will most likely be closer to the end rather than middle. If there is an analysis or article you would like to comment on or add to, we are open to Looking to the future, we hope to continue to your thoughts. build from here by adding a web site
Contact TRIGGER$ : [email protected]
We would like to acknowledge and thank the following for their contributions:
Business Insider Macrostory.com chart 6 chart 25
DSshort.com Robert D. McHugh PhD chart 8, 9, 10 chart 27, 28, 29, 30, 31, 32
Elliott Wave International Shadowstats.com fig.1 chart 7
FreeStockCharts.com Stockcharts.com chart 34, 35, 36, 37 chart 12, 13, 14, 17, 18, 21, 22, 23, 3
HaysAdvisory.com chart 24 Economic & Technical Analysis for the Active Trader www.GordonTLong.com
Gordon T. Long has been publically offering his financial and economic writing since 201 0, following a career internationally in technology, senior management & investment finance. He brings a unique perspective to macroeconomic analysis because of his broad background, which is not typically found or available to the public.
Mr. Long was a senior group executive with IBM and Motorola for over 20 years. Earlier in his career he was involved in Sales, Marketing & Service of computing and network communications solutions across an extensive array of industries. He subsequently held senior positions, which included: VP & General Manager, Four Phase (Canada); Vice President Operations, Motorola (MISL - Canada); Vice President Engineering & Officer, Motorola (Codex - USA).
After a career with Fortune 500 corporations, he became a senior officer of Cambex, a highly successful high tech start-up and public company (Nasdaq: CBEX), where he spearheaded global expansion as Executive VP & General Manager.
In 1 995, he founded the LCM Groupe in Paris, France to specialize in the rapidly emerging Internet Venture Capital and Private Equity industry. A focus in the technology research field of Chaos Theory and Mandelbrot Generators lead in the early 2000's to the development of advanced Technical Analysis and Market Analytics platforms. The LCM Groupe is a recognized source for the most advanced technical analysis techniques employed in market trading pattern recognition.
Mr. Long presently resides in Boston, Massachusetts, continuing the expansion of the LCM Groupe's International Private Equity opportunities in addition to their core financial market trading platforms expertise. GordonTLong.com is a wholly owned operating unit of the LCM Groupe.
Gordon T. Long is a graduate Engineer, University of Waterloo (Canada) in Thermodynamics-Fluid Mechanics (Aerodynamics). On graduation from an intensive 5 year specialized Co-operative Engineering program he pursued graduate business studies at the prestigious Ivy Business School, University of Western Ontario (Canada) on a Northern & Central Gas Corporation Scholarship. He was subsequently selected to attend advanced one year training with the IBM Corporation in New York prior to starting his career with IBM.