Triangles Galore

I’m again strapped for time this weekend, but somehow managed to dig up some kick ass charts for you guys. So, let’s dispense with the platitudes and jump right in. First let’s get in the mood though:

Now you guys know what keeps me so busy during weekends 😉

As you all know by now my general effort is bring EWT to where it should have been for over a decade now. Explanation: EWT without a meaningful sense of time and momentum is only useful after the fact. Without these measures it can at most only be used to estimate the length/strength of a particular move. Or it may be used to draw exact inflection points at which either the probabilities strongly favor an alternate scenario or where a scenario is completely disqualified. A good example of that was the demise of Soylent Green on Thursday.

Now the chart above shows one of my now long term favorites – the NYSE Adv./Decl. index. Although at first it looks pretty messy we have already been able to find many interpretations that will be helpful in the future (see last Sunday’s post). This week I am presenting a symmetrical triangle which I believe should be a good long term indicator as to when we will EVER see a meaningful retracement.

Annotated above you see an approximation of what I expect this signal to trace out in the next two months. First a bit more sideways movement as we keep crawling higher (this is counter intuitive, I know, but fits the recent pattern) – then a rip higher as everyone starts chasing an exponential curve in equities – finally, a reversal which should get us an under throw out of this triangle. It won’t be as easy though – not on this chart is a ‘trend change spike’ which should accompany a final spike up in equities – you can call it the C wave of the current Minor wave pattern on the SPX.

I think you are going to really really like this chart – it’s actually a longer term version of the first one – BUT, it actually offers very important clues as to where reversals of trend retracements will occur. I know that sounds pretty technical – let me explain.

Assuming a down trend has been established (i.e. 2008) what quite apparent are the distinct divergences right before the highs of long reversals. To illustrate this phenomenon I have highlighted major occurrences in orange above.

Assuming an up trend has been established (i.e. 2009 until now) I see distinct divergences whenever we finally (ain’t I biased ;-)) painted a retracement to the downside. In typical a-b-c fashion we usually dropped – then reversed a little to shake out the hobby bears, and then dropped the final low. That however was accompanied with a divergence on the 10-day MA of the NYSE Adv./Decl. ratio index. Pretty much every single time – so it’s something that seems to be working well on the way down as well as on the way up.

I only kick myself for not having seen this a year ago – the meat, ladies and leeches, is in the divergences. The market keeps giving us important clues, but we either don’t see them – or we choose to ignore them at our own peril. Quite frankly – the more I look, the more I find. So, the current cry of the bears that TA is dead appears to be completely wrong. Maybe the old school of TA is dead – and I’m determined to continue to break new ground. All it takes is some patience and a bit of imagination. The latter is the only thing the machines haven’t beat us humans at just yet – give it another 25 years according to Ray Kurzweil.

Anyway, I encourage to recreate this chart in stockcharts.com and to hang on to it – trust me – it will pay for your subscription several times over. Of course I will continue to monitor for these signals and my subs will be the first to know about it when it happens.

This is the BDI against the I have not talked about the BDI much in the past year, but it’s time to start looking at it again as I see a nice pattern forming. And it’s yet another triangle – this seems to become a theme these days. But first, for the noobs, a quick intro into what the BDI represents:

The BDI is one of the purest leading indicators of economic activity. It measures the demand to move raw materials and precursors to production, as well as the supply of ships available to move this cargo. Consumer spending and other economic indicators are backward looking, meaning they examine what has already occurred. The BDI offers a real time glimpse at global raw material and infrastructure demand. Unlike stock and commodities markets, the Baltic Dry Index is totally devoid of speculative players. The trading is limited only to the member companies, and the only relevant parties securing contracts are those who have actual cargo to move and those who have the ships to move it.

There you have it – and the pattern that seems to be unfolding is not exactly bullish on a fundamental basis. Technically that doesn’t mean all that much, however I do give it credence as a purveyor of long term trend changes. Just look at that textbook divergence as the bottom of Primary {1} in early 2009 – another indicator I should have looked at back then.

Yes, another triangle. This time it’s the gold/silver ratio against the SPX. Investors traditionally view a drop in the gold/silver ratio as bullish (i.e. silver is gaining against the ‘bad economy/government hedge’ gold) while a rallying gold/silver ratio is considered a sign that dark clouds may be on the horizon economically.

So, although equities have gone gang busters for a year now the gold/siver ratio has painted a sideways triangle. So, I’m asking you – is this the wall of worry? Or is this the slope of hope?

Again, there was a beautiful divergence in March 2009 – let’s not talk about that okay? 😉

Last but not least – the Investors Intelligence Bull/Bear Ratio. We have again pushed above 3.0 – the second time now this year. The first time we saw a pretty meaningful retracement, but let’s get not too excited yet. I believe we will actually see a reading above the prior 3.3 high before this thing turns. Bulls gone wild – indeed.

And that’s all I have for my stainless steel rats. All in all I must say that I really enjoy the more limited but more productive format we have going for ourselves now. There is a lot less bitching and moaning going on and I think we are among the few trading blogs out there that manages to tame this beast of a market. We may not be making fortunes right now but at least we are not getting killed trying to outsmart this steamroller. Let’s keep up the good work and let’s never forget: Even this crazy Primary wave shall eventually pass 😉

BTW, my Friday wave count remains valid – nothing to add.

Cheers,

Mole