the ratio of STAPLES to the S&P ($XLP / $SPX) – trust me, it’s important

if you have the time, please read this post: http://allstarcharts.com/are-staples-the-key-to-this-market/ .  You’ll note that I incorrectly saw a triangle and expected the market to roll over once the break out occurred.  that analysis was wrong … however, the market went UP when the ratio went down — exactly like it’s used to.  We are now approaching another pattern point here … the chart below shows how critical the time component has been w/ these corrective moves and also the beautiful BUY pattern we have approaching — If this pattern works then we should see the equities go down as this pattern works … if not, then the trend UP in equities will continue.  To review, here is the pattern we are watching:

BUY pattern on the ratio
BUY pattern on the ratio

 

since a picture paints a thousand words and, quite frankly, I’m beat tonight I’ll SHOW you why this ratio has proven to be so accurate in the past.  bottom line, every MAJOR MOVE since 2000 has been inverse to the move of this ratio.  it’s almost EXACT ….I’m just going back to a weekly chart.  see the above link for the monthly look.

ratio w/ the SPX overlaid on top off it as the line
ratio w/ the SPX overlaid on top off it as the line

as a advanced pattern recognition trader dealing w/ probabilities I think this level on the ratio will tell us EXACTLY where we are …. stay tuned and monitor closely.

 

B

 

GOOGLE – a classic head and shoulders top?

first off, I love the company GOOG.  what amazing innovation, passion, creativity and, most importantly, the ability to create a word into a lexicon like Seinfeld – yada yada blah blah blah.  so, before I show the SELL pattern that has appeared, let’s go back in time (remember this is no “could of, would of, should of) to show the BUY recommendation.  here it is w/ all of it’s geometry.  note, there was a 20 point difference in the two levels I was hawking (a Naval Aviation term — HAWK TANKER was when someone was boltering all night (couldn’t land) and the hawking tanker would (very stealthfully) hawk the poor bastard who couldn’t land to save his life. ) Anyway, 20 dollars is a pretty big margin of error, but here’s what I saw coming into the low ….

GOOG geometry and the BUY recommendation when the sh*! was hitting the fan
GOOG geometry and the BUY recommendation when the sh*! was hitting the fan

 

hit the target and off we went …. recent action (say the past 5 months) has been stopped by the 925 target.  here’s a quick look at the potentiality of the 925 area being significant:

Square of Nine and the targets it has produced ....
Square of Nine and the targets it has produced ….

A short was and still is being worked w/in the levels depicted and as we approached the potential area here’s the projections:

Targets on a MONTHLY pattern recognition potentiality
Targets on a MONTHLY pattern recognition potentiality

here’s the “real time” intraday look at the fill and, also, the BEFORE THE MARKET OPENED gun shot up to the 925 area and then the retreat …. interesting, to say the least. (sorry about the black background — again, this was real time)

GOOGLE intraday
GOOGLE intraday

here’s the picture as of today …. looks like 850 is going to be the line in the sand …..

"classic" head and shoulders appearing or not?
“classic” head and shoulders appearing or not?

the upcoming week of 9/22 for the S&P

our S&P post last week of parts I-V spelled out the overall look and feel for the S&P as we approached and eclipsed new highs … we took a look at technology, financials and energy.  additionally, throughout the past weeks, we have walked thru the circle of life for fixed income, the dollar and certain commodities.  Additionally, we looked – globally – at the current state of affairs for the other equity indexes. this blog post will be a quick update to where I “think” we are and some key levels to watch over the next week …

  • Financials: a pattern did complete at the high for XLF at 20.92.  Higher targets also remain from 21.50-22.20.  Would really like those “higher” targets to be attacked to get a true feel of the market but, for now, realize 20.92 could be it on the financials.  if this is complete, then it does not spell “good” for the overall index.
  • Energy: as we showed in the last post a potential terminal target remains higher in around 97 on the XLE.  However, we also showed at pattern completing in/around 85.20.  that has hit and a break below 80 (weekly close below) would not spell “good” for the overall index. Crude sold off on Friday and the real test will be it’s “return to the top of the triangle trendline” to see if it bounces for the higher target shown in the past.  the $XOI and $OSX are also showing weakness at targets described in the past.
  • Technology: I am breaking down the overall technology look into the NASDAQ index (NAZZIE).  if  you look back at the “technology” post from last weekend you’ll see that we still have some higher targets 30+ points away.  Too early to tell if Friday was a high but would, again, certainly like the upper targets to get hit and for all three of the major components of the S&P to go down together.
  • I still feel that the “big guys” are going to “tip” their hand and “try” to rotate out of the high flyers and into the staples (deodorant, tooth paste, water, etc.).  I am watching this ratio like a hawk.  This is a perfect set-up for a BUY of the ratio which sets up a (HISTORICALLY) SELL on the S&P.  That target is a little lower and, again, would really like to see that level hit/targeted.

    XLP / $SPX ratio analysis
    XLP / $SPX ratio analysis

 

  • Last, I had the WONDERFUL chance to train w/ Joe Dinnapoli of http://www.fibtrader.com a couple years ago. Wonderful training and very very important information on the “internals” of the market and it’s structure and the importance of liquidity in the world of program trading, micro trading, the bid-ask and the false injections of cash that has occurred w/in the house of cards this market has produced.  Take the time to watch this series of videos: http://www.youtube.com/watch?v=MQed-Aqay5w  I also ask you to take a look at the picture/explanation in part 2 of 5 and in/around 10:38 and 13:01 for part 4 of 5.  The series is a couple years old, but still so extremely valid and important.  If you read my post a couple hours prior to the FED announcement you’ll find that I correctly surmised that the QE would continue … believe it or not, sooner or later, the illiquid nature of todays market will, ultimately, put us at risk for a potentially major move.  This is ONLY a probability and one that has, more than likely, a low chance of ever happening.  But education around potentialities isn’t so bad, is it?

I AM NOT DESIRING OR CALLING FOR A CRASH OR ANYTHING LIKE THAT …however, the market has been propped up by trillions of dollars and, therefore, liquidity is an issue.  If this is an issue then why not put some of the profits in the bank and let some or a little ride?

What if this DJIA chart is correct …. ?

DJIA SELL pattern completed/completing w/ potential targets depicted base on the lack of liquidity present in the market
DJIA SELL pattern completed/completing w/ potential targets depicted base on the lack of liquidity present in the market

 

Bruce Buffer of UFC and the FED …

my buddies and I enjoy buffalo wild wings and the UFC night …. the energy is amazing, the beer is cold and the wings aren’t bad …. everyone gets fired up as Bruce Buffer does his amazing introductions and then, at the last minute bellows “IT’S TIME!”  Well, folks “IT’S TIME” to see what “the Creature from Jekyll Island” has in store …not knowing a thing about the fundamental theory of economics (is the ramifications of printing trillions of dollars in ECON 101?) I ALWAYS go to the charts …

again, trying to give some background on the PATTERNS and the charts I have included the chart of short term interest rates below.  If you remember, there was a time when they were RAISING INTEREST RATES … at the time I was asked to start “charting them” so I did and as we came into a very important FOMC meeting just like today I said, “nope, they are done raising interest rates.”  Why?  Well, to me it was a simple as our .786 retracement level ….

charting short term interest rates
charting short term interest rates

I actually have a chart as the interest rates hit the .786 level and I’ve spent the past half hour searching “interest rates” thru folders and can’t seem to find it …bummer. note on the chart above the divergence present and the patterns that existed.  bearish divergence into a .786 retracement is “usually” a sign of resistance.  Plainly there for us all to see ….

 

showing more patterns
showing more patterns

I also like to track the “30 day Fed Futures”

interesting ... they haven't budged
interesting … they haven’t budged

 

30 day FED FUNDS rate
30 day FED FUNDS rate

 

note, not sure if that pattern can every complete because to go above 100 would mean interest rates are (-) so … consider this pattern complete (?)

It’s time … interest rates are at zero, IMHO we have a “house of cards” recovery and the ONLY direction we can go is UP w/ regard to yield/rates.  HOWEVER, in the context of an amazing 30+ year bull market in the fixed income world we have reached the “normal” and “standard” correction that has existed since the beginning of this bull market in the 80’s.  We do have one more correction low that “could” happen so perhaps a little lower is in the cards.  what’s really fascinating to me w/ regard to the FED FUND futures chart is it hasn’t budged.  the traders of the world don’t think anything is going to happen …

Per my post a week or so ago on bonds the BUY of BONDS (sell YIELD) is the side of the market I want to be on ….

https://www.youtube.com/watch?v=ilpiYHKbSAw

for information on the FED FUNDS futures see: www.cmegroup.com/trading/interest-rates/files/IR-143_30_Day_Fed_Funds_Futures_and_Options_Fact_Card.pdf

B

The Great British Pound Update

in my last post for the pound at: http://bartscharts.com/2013/09/12/the-great-british-pound/ I laid out the case for my analysis pointing to a wave 2 top followed by lower prices.  I had the C? put in around this area.  Well, believe w/ FOMC meeting today that we’ll see this area attacked and the nature of the move to come will become apparent.  I have not entered, yet as I watched most if not all the targets get hit.  The final ones are in the 1.600-1.6046.  Here’s the updated chart:

Great British Pound Updated
Great British Pound Updated

 

revised, and final, count.  IF this count is wrong then the triangle thesis is wrong
revised, and final, count. IF this count is wrong then the triangle thesis is wrong

 

Soup is good food … Campbell Soup at key level ($CPB)

swings on this puppy have been extremely nice ….charts below.

just follow the bouncing ball …

nice BUY pattern emerged at level forecast ...
nice BUY pattern emerged at level forecast …
long term pattern came into play.  good pattern/good defined risk ...
long term pattern came into play. good pattern/good defined risk …

 

level being hit ....
level being hit ….

 

note, now we have completed the equality of swings and the level held at/around 41.

watch the lower level on CPB ... if we break it, selling could really come in ....
watch the lower level on CPB … if we break it, selling could really come in ….

 

Loonie, Confluence, Musical Theory and the Oil Services Index

UPDATE: picture paints a thousand words.  NOTE THE HUGE AMOUNT OF THRUST THAT CAME INTO OUR LEVEL.  Even w/ that much thrust it only went thru 15 pips.  current consolidation needs to get going higher OR pull back a little for this level to be key. Lastly, take a peak at the oil services index below.  it has not broken and is holding up nicely. per original thesis below, believe one of them is going to ‘break the pattern’ and move rather strongly .. need to sit tight and watch the show unfold but it’s coming…

Level held ... watch for pullback potential
Level held … watch for pullback potential
holding nicely
holding nicely

 

quite the amazing jigsaw puzzle playing out  now w/in the Loonie  …I’m just trying to put some of the pieces together to manage risk.

one of my mentors and friend is an individual named Mike Jenkins of http://www.stockcyclesforecast.com.  he introduced me to many many techniques but what has been most important is why square roots and their inverses are so important …. in his amazing book, the secret science of the stock market, he spends a chapter on Musical Theory.  Much more could be said and I’ve gone down that enjoyable tunnel but here’s the basics:

  • the frequency of a string is inversely proportional to the square root of its weight/length
  • directly proportional to the square root of it’s tension.
  • the equal octave scale ratio used is the 12th root of 2 (2^.0833) = 1.05946
  • 1.05946 is used as the primary tonal increment and give us numbers that march us UP and DOWN the equal octave scale

so, there’s our musical theory.  here’s a chart taking the low (2003) of the SPX cash market and simply multiplying by 1.05946 12 times and that 12th note EXACTLY nailed the top. study the chart and enjoy

tonal increments from the 2003 low and the top in 2007 for the S&P cash
tonal increments from the 2003 low and the top in 2007 for the S&P cash

here is some more math to noodle on:

1.618

square root of 1.618 = 1.27

1/1.27 = .786

square root of .786 = .886

1/.886 = 1.128

here is the current chart of the loonie (4 hour) and the ratio’s that it’s bouncing around:

note all the different ratio's that are based on square roots and their inverses
note all the different ratio’s that are based on square roots and their inverses

in one of my last posts we discussed the confluence level that was broken at the 3600 handle on the NAZZIE.  Today we are going to look at a “daily” chart of the Loonie and note w/in a 20-30 pip window we have .382/.447/.5/.577/.618/.786 retracements all coming in w/ 1.0210-1.0240.  additionally, we have a measured move (or ab-cd) coming in w/in those levels and the extension (1.1286) is right along w/ the above discussion (diatribe?) on music.  additionally, look at the “time” component of the corrections that have occurred for the past year – they have been pretty symmetrical and we are basically “there” w/ regard to this correction in the Loonie vs the USD being complete. for those wondering where the .577/.447 came from see above … take the numbers 1-5, their square roots and the inverse of those square roots …. anyway, here’s the picture of the confluence level on the LOONIE vs the USD

September 17 2013 CAD

so, this is an interesting set up … but if you have been following my posts (or, hint hint, go back and read em’) you’ll see that we are watching the “energy” complex for hints of a directional move and have related that to the SPX because energy (right now) is 10% of the index.  well, take a look at the relationship between the LOONIE and the Oil Services Index (the $OIX) is pretty much the same relationship.

first off, in order to synchronize the “picture” I have inverted the normal picture of the LOONIE and we plotted the USDCAD versus the “normal” CADUSD.  that will give us the picture that syncs w/ the oil services index.  below is a daily and monthly chart — the daily is showing a divergence that usually doesn’t happen.  note how the oil services index has trended higher while the loonie has weakened.  that usually doesn’t happen and I have noted where the divergence occurred w/ the blue shaded oval.  The other chart is a very long term chart showing how synced these two SEPARATE markets have been.

September 17 2013 LOONIE vs OSX daily Setember 17 2013 LOONIE and OSX

Now, here’s the interesting part of the crossword puzzle:

Oil Services SELL pattern here or a little higher
Oil Services SELL pattern here or a little higher

as you can see, we are at a very crucial level w/ the $OSX.

my puzzle fits together IF this happens – the LOW we are looking at w/ our confluence levels (BUY USD vs LOONIE  = USD strength) holds AND we have current or higher levels hold on the Oil Services Index work as  SELL and the two markets have synced and away we go …

this is the power of intermarket analysis using pattern recognition. we know, beforehand EXACTLY what our risk is going to be, we have a script to follow and can WAIT and see how this plays out … as an intermarket pattern recognition trader I love when separate markets that are usually synced come together at “PATTERN TIME” (note: not hammer time) and give us a nice clue.  Seldom do they continue to diverge….

waiting, patiently –

Part VI: the S&P 500 conclusion

CONCLUSION

part 1 – we went around the world and, objectively, noted that the rest of the world had not made new highs and that some of them were in downtrends confirmed by lower tops and lower lows.

part 2 – I took my son to get his haircut yesterday and, after I posted the “too big to fail” there was Barney Frank on the talk shows talking about how strong the banks were and blah blah blah.  I couldn’t help but laugh at the irony.  Anyway, the XLF ETF (being used as a proxy for the banks) has either completed or about to complete a major sell signal.  the “banks lead us up and lead us down”  …..the continuation of this move in equities will be, almost directly, related to this level …WATCH IT LIKE A HAWK.

part 3 – technology is doing very well right now and, w/ as the largest weight w/in the S&P 500, it is continuing to have positive energy on the index. The move thru 3600 was a big deal on the NAZZIE.  however, targets are just a little higher.  the NAZZIE needs to weaken to start the flow of funds out of tech/banks/energy into the staples.

part 4 – energy (XLE), crude and oil services index were all shown to be coming close to sell patterns being complete.

part 5 sector rotation model was shown and the importance of the staples sector relative strength was shown.

Summary: banks tag SELL target, NAZZIE tags SELL target a little higher, ENERGY rolls over and the staples ration takes off.  TOP IS COMING, CAVEAT EMPTOR. CONSIDER THIS ANALYSIS WRONG W/ A WEEKLY CLOSE above the target zone on the XLF.

Final worlds — I was asked, by multiple people to do an analysis of the S&P 500.  I did that by never showing a chart for the S&P 500.  I tried to work my way thru the largest sectors of the S&P, use commodities (Palladium), intermarket analysis and ratio analysis.  I have found when I work in isolation I become blinded.  Keeping a big picture is what helps.  Why did I get it so wrong for the past 1-1.5 years? a debrief of my analysis didn’t take into an account of the importance of the banking sector longer term pattern completing….that’s the biggest one, IMHO.  Additionally, I underestimated the importance and strength of the technology sector.

all that being said, I remain a bear … the unbelievable and non-stop basket buy programs fueled by cheap money has caused an “appearance” of strength.  I think it’s all a house of cards, most everyone knows it and when it comes time to go out the exit there’s not going to be enough room and this puppy is going to go down, hard.

don’t be asleep at the wheel and just did a quick look at bloomberg.com and this was the headline: http://www.bloomberg.com/news/2013-09-13/eu-nations-fight-barnier-plan-for-bank-failure-authority.html

ENJOY ….

Part V: S&P and Sector Rotation

before I started this blog I was afforded the opportunity to post w/ JC  Parets (allstarcharts.com) from time to time.  back in March I posted some thoughts on the importance of the Staples vs the S&P in ratio analysis form.  here is the link to the post:  http://allstarcharts.com/are-staples-the-key-to-this-market/  I recommend you read it.

this analysis was based on the following sector rotation flow:

sector rotation model
sector rotation model

if we plot (using ETF’s) the relative strength of each of these sectors vs the S&P, then they can give us an early cue of when the institutions are moving “offensively” or “defensively” and we adjust accordingly.  Note, at the top and per this model when “energy” is leading the way this should allow us pause and prepare for a correction or a resumption of the trend.  As the flow of funds shifts out of energy, the next sector — STAPLES – starts to outperform and the cycle starts rolling.

How accurate is this model?  Well, if you go back and read thru the post on JC site you will see this ratio NAILED the highs and lows in the market since 2000. I imagine it could go back longer, however, the XLP ETF didn’t exist farther back so that will remain a subjective opinion.  Here’s what the ratio is doing now:

XLP / S&P ratio for relative strength analysis
XLP / S&P ratio for relative strength analysis

some observations – the pattern shown certainly could be complete in/around here or just a little lower.  If that is the case, we can start searching for signs of a top w/ in the context of the S&P.  second – one would think the ratio would have gone down significantly during this 4+ year run.  it didn’t … for me, that makes me pause.

keep an eye out for “strength” in this ratio, as I’m still i the mindset that it will give early indications of a top once it starts to outperform.

Bart

 

 

 

 

Part IV: S&P and Energy

Below is one of my all time favorite charts … it’s a real time chart of the EXACT top in Crude Oil using a bunch of geometry, music and numbers.

Exact high on crude oil ...
Exact high on crude oil …

in this chart we see the square root of 12 (3.464), natural squares 121*121, geometrical arcs, 2.424 (12*2/12*2), square of nine targets, square root of 2 (1.4142) and an Adams Pitchfork expansion. Even w/ all of the math coming out, you can still see by commentary that it still could have blown thru …remember it was parabolic.

after the high was in place it fell like a stone to this level:

FEB 21 CRUDE OIL Exhibit 5

FEB 02 CRUDE OIL BUY - Copy

here’s the possible count and notice the 36 area was being targeted. that was basically since it had gone parabolic it would “probably” go down to the beginning of wave 1. Also, talk about cool and synchronicity – the exact high was on my birthday.  How ’bout them apples?

I still like this count and believe it's valid.  Note, the pullback never came -- fell like a stone to expected level
I still like this count and believe it’s valid. Note, the pullback never came — fell like a stone to expected level

take a look at the above – note, it is a log chart and the two blue arrows will show the same correction in terms of percentage …hence, this is a very powerful way to look for targets as the move is working …just an fyi.  try it, you might like it ….Mikey sure did!

below is the Oil Services Index and note the last wave (e) forecasted to complete and then higher.

Oil Services Index Before ...
Oil Services Index Before …

 

AMEX OIL index after ...
AMEX OIL index after …

remember the AMEX OIL INDEX ($XOI) is is a price-weighted index of the leading companies involved in the exploration, production, and development of petroleum. It measures the performance of the oil industry.

here’s the Oil Services index ($OSX)

note the pattern that has completed and is being tested, again.  this will be key, IMHO
note the pattern that has completed and is being tested, again. this will be key, IMHO

 

and, finally, a picture of crude oil and the XLE (energy sector ETF)

Crude sure looks like it wants to go to the .786 to complete our pattern and the XLE should attack the highs and targets depicted
Crude sure looks like it wants to go to the .786 to complete our pattern and the XLE should attack the highs and targets depicted

September 15 2013 XLE

 

So, in summary, looks like we have “another” piece of the S&P 500 jig saw puzzle that wants to go a little higher before major patterns should be complete.  Stay tuned ….

BART