Update: looks like the level has held so pay attention to FXI in the coming days.
DEFINITION (BART’s) for the circle of life – fixed income, FX, equities (global and conus) and commodities and their symbiotic relationship.
in this case, we have a BUY pattern coming in a little lower on the AUSSIE vs the USD. The following three charts show how you can diligently walk thru finding a pattern by projection, extension and retracement. Here’s the flow in chart form:
as you can see above, after a rather strong move up – after quite the beating – we have a normal/controlled and pretty unremarkable pull back in the AUSSIE vs the USD. I say all that because this can sometimes be a rare occurrence. My specialty is the SPOT FX market … I like to call it the wild wild west. That being said, the patterns do work in this 3-4 Trillion Dollar/Day market.
An opportunity is simply presenting itself to manage risk. NOTHING more and/or nothing less. The pattern works or it doesn’t. Our job is to find these type of patterns and determine, beforehand, how much we are willing to risk. Because, in this world of investing/trading the ONLY thing we can control is how much risk capital to deploy. After we have entered the market, we are playing w/ dynamite being thrown by caged gorilla’s and, guess what, we are in the cage…
now, seeing this very nice level, we can now put this into the context of the intermarket world … perhaps you are aware and/or perhaps not but the AUSSIE’s do a lot (OK, probably a majority) of their trade w/ CHINA. Now, take a look at the correlation of FXI (ETF for CHINA LARGE CAP) and AUSSIE vs USD. Pretty nice and, it’s safe to say, by looking at the chart below that nice swings occur when both of them find inflection points.
so, what can we surmise …
IF AUSSIE level holds and the AUSSIE goes UP vs the USD then the Chinese market should follow higher …
IF AUSSIE level FAILS and the AUSSIE goes DOWN vs the USD then the Chinese market should follow lower …
advanced pattern recognition in the intermarket circle of life ….
rock on, always
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:
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.
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.
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 ….
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:
A short was and still is being worked w/in the levels depicted and as we approached the potential area here’s the projections:
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)
here’s the picture as of today …. looks like 850 is going to be the line in the sand …..
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.
- Last, I had the WONDERFUL chance to train w/ Joe Dinnapoli of 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 …. ?
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 ….
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
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:
swings on this puppy have been extremely nice ….charts below.
just follow the bouncing ball …
note, now we have completed the equality of swings and the level held at/around 41.
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 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….
waiting, patiently –
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
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.