Fractal Alert!

Gold is keeping us in suspense as it continues its own 100-day SMA sprint – recently added as an Olympic discipline. I still maintain that we’ll may need the help of Usain Bolt here to keep up with this thing once it picks a direction. Always remember the old adage ‘the bus moves fastest once everyone got off’.

Right before the NYSE opened this morning I sent out an email to my subs advising them to keep an eye on this thing. We did get a quick dip below the Maginot line but it has since recovered. Unfortunately I think it’ll keep playing with us until the big day – which may be tomorrow or in a week or two from now. My general approach to not getting whipsawed to pieces at inflection points is to take on only a small position initially and to then pyramid up as it breaks out. If you suck at math then Bernie’s Pyramid Calculator will be an invaluable tool to help you manage your positions.

ZN – the 10-year treasury futures contract gave us a great inside day entry on Monday. Seems to be well on its way right now and I am holding for a push into 133’025 – mas o menos.

If equities are testing your patience today then you’re not alone. We saw a lot of gap & camp sessions lately and tape like that is generally frustrating to retail traders. However there are good news – below the surface I actually see some interesting formations – namely the appearance of an old fractal we used to follow back in the days. I’m talking about the ‘Gothic Church Tower’ fractal and it’s back with a vengeance!
More charts and cynical commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero or Geronimo subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.

If you are a senior steel rat then you may actually remember this one – as you recall I am plotting both the A/D and D/A TICK ratios here. Truth be told – the GTC has been showing up in the recent past but the old Mole wasn’t always paying attention. The idea here is that this pattern often (not always) precedes reversals to the downside. We also have seen it on the D/A panel but it only seems to pan out if the pattern is very pronounced – meaning a very high steeple and a proportionally small roof indicating a lack of downside momentum.

What makes the current GTC fractal even more interesting is the next chart:

Inside day on the spoos – that’s right. So as you can imagine what I want to see happen here is a breach of today’s lows sometime tomorrow – preferably overnight after the NYSE close. The one fly in the ointment is that NLBL which is still valid tomorrow and may act as support.

And in case you are wondering – yes a long breach is absolutely a trading opportunity. The only remaining question is how much upside potential is left here given the spoos volume profile I reported on yesterday.

CAD/JPY – mark your calendars as this one is approaching both its 25-day and 100-day SMAs. Should be good for a reversal play. If it happens to bust through then I expect quite a bit of acceleration as this one has been coiling up for a while now. So be ready to flip this trade if your stop is hit.

Finally copper is painting an inside day + NR4. Assuming how you are positioned here this give you two approaches:

You are in cash: Wait for a breach of either direction – simply take entries according to the ID rules.

You are already long after the NLSL reversal: If it breaches the long entry then you can either hold or add additional positions. If it breaches the low entry then consider this your stop out. If stopped out and it turns into a fake out then it’s permissible to enter back into your long position if she reverses back above the short entry.


Bottom Line: I’m actually rather excited today as we are seeing a reasonable setup in what I otherwise consider technical limbo. Given the tape of late I think we have been keeping up extremely well and although it hasn’t been easy it’s been productive and an opportunity to work on our discipline, exercise no-bias, and of course bank some coin in the process. Again, be careful about being drawn into overtrading – don’t bend your rules and keep it frosty.

Public Service Announcement: I am seeing very interesting formations on the new Mole indicator – and I am actually referring to the false positives we have been seeing in the past two days. Of course the positives are what we usually want to see but it seems that the false positives hold their own potential. I will explore this further over the weekend and report back next week.



Maginot Line

As I’m watching the spoos here on Sunday night I am seeing an nice setup which I would like to pass on to you guys before I move on to the more long term stuff:

It’s a long weekend and so this may have changed considerably by the time you catch up with this post, but as long as we remain where we are the spoos may be worth a short trade. Has the Mole completely lost his mind? Indubitably, but that’s a different matter altogether – so let me explain the setup:

I mentioned the SPX equivalent of 1370.25 on the prior chart, which of course accounts for fair value – in other words the SPX usually trades at a premium (PREM) in comparison with the futures contract. There a several sources out there reporting what’s called the ‘fair value’ and it’s currently near -2.25, depending on who you ask. So you deduct that from the spoos and you get your SPX equivalent.

If you look at my SPX chart then you may recognize that 1370.58 Maginot Line, which when breached would probably trigger an acceleration higher – maybe after some hemming and hawing due to the thin volume profile right now – see my recent posts on that. Anyway, since Monday is a holiday the current high on the spoos may just be good for a few swing trades, as long as we do not breach 1368.25. Your stop should be one tick above that and you’re good to go.

Alright, on to the long term stuff – I dug up quite some interesting material:

We are revisiting my 2011 A/D ratio fractal chart, which lies at the core of this post. My proposition (which thus far has been correct) was that the December 2010 to March/April 2011 time period very much resembles that of December 2011 to right now. Before we get to the current pattern please take a few minutes to observe the slowly support line on the A/D panel (the D/A panel is plotted below).

I have also highlighted what I consider early warning signs that preceded the eventual correction which came long after any bear shorting that rally had expected. When a reversal finally took place I am sure that very few bears were on the bus riding it down – and that’s how it usually works.

Now let’s look at the 2012 analog – we are seeing an almost identical pattern here. Just like in 2011 it starts at the end of the prior year and thus far has managed to hold that support line. We did get a slight breach a week ago but when you look at the D/A ratio below then we see a signal that barely scraped 3:1 – a bit weaker than that first spike on the 2011 analog (don’t let the scale fool you as we got a big outlier last year – I actually already normalized the chart a little).

That bearish spike could be a first warning signal but if the pattern continues in a similar fashion we should see a more pronounced signal above at least a 4:1 ratio before anticipating a major reversal. Well, as the old saying goes – history does not repeat itself, but it rhymes. Accordingly I decided to spend a bit of time looking at my other momentum measures and to compare the winter 2011 period with the current one:

More charts and cynical commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero or Geronimo subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.

NYSE Advancing/Declining Volume Ratio: We are admittedly in an overbought range but this could play out for a while longer. Last time around a touch of 1.2 was needed to open the door to a more meaningful correction. And even then it took weeks for prices to form a topping pattern.

Now here’s again the ratio between advancing and declining issues – exactly what’s shown on those two ratio charts presented above. By showing it as a left line chart against the SPX we are looking for momentum patterns less clear on those previous panels.

Now, this looks a bit more bearish in that we did drop quite a bit lower than in 2011 (remember, history never exactly repeats itself) and we are also painting what seems to me a slight upside divergence. BUT, it’s still a bit short and prior patterns suggest that this could play out a while longer.

Believe it or not, the CPCE was quite a bit more extreme back in early 2011. This chart at least still offers us room to run. Again, observe the pattern ahead of the final highs in 2011 – a more pronounced divergence would make a better case for an impending reversal.

This is a long term ratio of the SPX50R versus the SPX200R – obviously we are plotting the quality of any extended rallies or sell offs. This remains to be one of my most bearish charts and the divergence we see is quite pronounced at this point.

However the SPXA200R on its own was plotting near the 90 percentile last year before we got a turn. And maybe that is what we’ll need to see before we should even think about getting into long term short positions.

Bottom Line:

Nobody has a crystal ball and it’s always possible that we turn right now and right here – only a few ticks away from an important resistance line (i.e. SPX 1370.58). And I do recall reversals happen only ticks away, which is why I am not completely discounting the possibility despite those bullish looking ES futures. However, should we breach above 1368.25 sometime this weekend then odds support a continuation higher. The purpose of this post was to give you guys an idea of how ridiculously overbought conditions can become before gravity finally sets in. Just because the market has been pumping higher does not mean it’s going to stop.

Remember my post on when not to be bearish – and accordingly I see very few reasons if any to look down right now. As long as things continue to bubble higher I plan to just go with the flow. YES – equities are extremely overbought right now but I personally remain uninterested in taking on any long positions. Most likely I’ll just watch dirty voyeur style and focus on my naughty FX or commodities trades. But if you happen to be a trend trader on the equities side then you just got to love this market.



Take A Deep Breadth

I had to write myself a little fix for my NYSE breadth chart as at least the D/A panel promised to remain pretty much unusable after last Friday’s signal spike. Let me show you what I’m talking about:

There you have it – a major outlier which completely flattens everything preceding it. As 50+ signals are obviously a rare exception I resorted to truncating any spikes after 22 and painting the real value above, as such:

So much better, isn’t it? Now we have a functioning breadth chart again – I think that’s a rather simple but elegant solution. Anyway, the real reason for this after market post is the A/D panel which first painted a divergent signal and now what appears to be Gothic Church Tower fractal pattern.

Well, we used that one quite effectively back in the day, more specifically before the onset of Bernanke’s two rounds of quantitative easing, which rendered it pretty useless, plus we did not see many occurrences. And yes, it’s a bearish signal which if the tape had stayed put today would mean that a sell off was looming. Now that it has already happened I’m less excited about it and I’m not going to jump to conclusions and suggest that the current drop must continue. But it’s worth noting and I want to put it on the map for everyone.



P.S.: Seems disqus is broken (again) – I already filed a support request. Let’s hope those guys get around fixing it in the near future.

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