BART is a CMT and an expert a "advanced" pattern recognition used w/in the intermarket analysis discipline. He's also an accomplished Business Development Executive providing solutions to a myriad of business markets.
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 ….
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 ….
I also like to track the “30 day Fed Futures”
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 ….
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:
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…
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
here is some more math to noodle on:
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:
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
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.
Now, here’s the interesting part of the crossword puzzle:
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….
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.
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:
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:
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.
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.
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:
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?
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.
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)
and, finally, a picture of crude oil and the XLE (energy sector ETF)
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 ….
As we discussed in our last post, technology has the biggest weight in the S&P 500, coming in around 17%. So, naturally, a quick look at the NASDAQ will give us a good feel of the technology sector and it’s importance to the S&P 500.
In the world of retracement work/theory we like to look for overlapping or confluence levels to give us a higher probability of potential resistance/support and/or major inflections. Additionally, the longer the time frame, the more serious we need to take levels when they all add up. One of my favorite confluence levels is when .618 and .786 retracements come together. W/in the context of the NASDAQ this level was at 3600 and is where a short was attempted. I was stopped out.
The strength of the NASDAQ is real and still running. However,once we enter the 3850-4100 level we will have another test of this strength. Again, refer back to Part II banks — it certainly would tell us a TON if the banks could go up a little more and complete their pattern while the NASDAQ goes up into the 3850-4100 level.
If you study the charts below, you’ll see that a minor pattern is completing around current levels so we could find some resistance, but higher levels certainly look achievable.
The other thing I want to point out is the very real correlation of Palladium to the NASDAQ and how a very important divergence is appearing between the price of Palladium and the strength of the NASDAQ. Pay attention … if you think about our smart phones and tablets, the Palladium metals is in almost all of them. It’s an interesting way to look at the market and also look for synergies that others might not be paying attention to ….
Additionally, you’ll see a logarithmic look at the NASDAQ from it’s all time low of 54 (yes, 54) and how these long term trend lines are important when they are placed on a log scale. While geometric lines are straight lines that bisect shapes, logs are able to show the power of trend and also a good way to measure accelerating rates of increase and emotional manias. Long term log trend lines need to be reckoned with and, as you can see below, we are coming right into the bottom half of the trend line from 54. Again, stay tuned.
Lastly, I’ve tried to break up the NASDAQ into multiple charts to show the work being done instead of one chart w/ a bunch of lines. Hope it helps …
Conclusion: the move above 3600 broke thru, with very little effort, a major retracement confluence. I’m expecting a little higher on the NASDAQ and therefore I expect this largest sector of the S&P 500 will continue to provide some pressure up or sideways on the overall S&P 500.
Just like rotation w/in the circle of life (fixed income, FX, commodities and equities) it also occurs w/in the context of our markets. The S&P 500 has different weights given to different sectors. Take for instance, the financials (and of course the topic of this post) – in 2009 they made up only 8% of the index. Now, in 2013 they are almost 17% of the index. Technology, is the largest component of the index at 17-18% and it has stayed that way from 2009-2013. So, the banks have, essentially, doubled their exposure w/in this index and are, pretty much, the largest portion of the S&P. So … what have we been following w/ this sector over the past years ….?
in 2007, as the market was exploding higher, I again started to see some disturbing signs. The parabolic move in housing, the corresponding parabolic move in oil (which as the time made up 15% of the index and is now around 10) all showed that the sector rotation playbook was in full affect. That is, the banks will, historically lead us UP and start us DOWN – BUT – ENERGY will be the last to go. So, our first chart shows the sell pattern completing in the banks as the we came into the historical 2007 time frame. Couple things to take away — 1) the sell pattern worked but in the context of the S&P, which continued to go higher, we had to shift our focus to energy and look for that top to come in before the general market would start down.I presented this analysis to the multiple institutions that I was working w/ and for at the time and nobody wanted to hear it or pay attention to it.
The rest is, of course, history ….that pattern was extremely powerful and the financial industry collapsed.
One of my favorite gigs was working w/ the When2Trade Group and putting out institutional ideas around potential investments. We did it really really simply — as you can see below we gave a ticker, a price and a risk and some targets. So, mind you, at the “height” of the crisis I said “well, it’s time to BUY the BANKS.” And according to the now defunct, CNBC segment “trading blind” put out the following across the wires (went out to 100’s if not 1000’s of institutional desks)
Looks like a “blind squirrel found an acorn” again ….well, here’s what I saw and why the BUY PATTERN was so powerful. Spend some time studying if you want, or not, but the pattern was there and as a pattern recognition trader — what the heck, had to give it a shot.
Fast forward to the present and we can see a couple things: 1) a major sell pattern is close w/ in the 20-22 range AND the banking index isn’t even CLOSE to new highs. Hmmmmm
Since I’ve started a financial blog a couple weeks ago the response has been wonderful. THANKS … I have had multiple inquiries into doing an analysis of the equity market in the US. What I’ve tried to do is go thru 3 out of the 4 components of the circle of life (fixed income, commodities, FX) and show the larger macro view has played to a pretty well defined script. I have held off doing the equities because I’m trying to put the pieces of this puzzle together.
WITH FULL DISCLOSURE, and you will expect nothing but that from me, I HAVE TRIED MULTIPLE TIMES TO SHORT THIS MARKET AND HAVE BEEN DEAD WRONG ON THE DIRECTIONAL MOVE OF THE US STOCK MARKET. I STILL REMAIN A BEAR, BUT MY WOUNDS ARE NOT DEEP ENOUGH TO THROW IN THE TOWEL. So, unfortunately, I might bring some bias to the following couple of posts, however, I have spent the past couple days bringing out my eraser, licked my wounds and pride, and have methodically worked my way thru a ton of charts…trying to withhold a bearish bias I am objectively just looking and explaining what the charts are telling me.
The charts below are ETF’s of some of the worlds largest and, some could argue, important exchanges out there …the cliff notes of these charts is as follows:
CONCLUSION: since the top in 2007, none of them have made new highs, unlike the US Equity Market. Why?