The Precise Take – Equities still consolidating near highs

Leaders Analysis:  The leaders are mostly quiet overnight, and are equities neutral.  Focus will remain on the US Dollar Index’s consolidating wedge. 

Medium Term Analysis:  Yesterday, the ES tested to the tick the January 1148.00 high.  If we were to compare the current rally to that of July 2009, yesterday would be Tuesday, July 21 and today would be the July 22 inside day, with tomorrow the strong break up through resistance.  We note this because of…

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The Precise Take – Markets quiet as the S&P 500 tests the January high

Leaders Analysis:  30 Year T-Bond futures are down to moving average support, and the US Dollar Index is mostly flat.  The 10 Year Treasury auction is today and the 30 Year tomorrow, so long term rates will be reactionary instead of predictive.  The EuroYen and gold are slightly bullish, so the leaders for today are slightly equities bullish.

Medium Term Analysis:  The ES is accepting near the January high.  We remain bullish this week, but it’s difficult to predict when and how the breakout will occur.  If there is a retracement, any venture below the current value area that extends down to 1126.50 should be met with…

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10:46 am EDT:  Equity futures are stronger today than we anticipated with the Nasdaq and Russell 2000 strongly outperforming, faciliated by the Dollar selling off before reaching our projected target.  While the ES has encountered some resistance at the daily R1’s from 1139.75 to 1140.00, it could later hit the daily R1’s  from 1142.25 to 1143.00.  1135.25 to 1136.00 is our preferred buy zone, but the ES may only manage a milder retracement to 1137.00 to 1138.00.

The Precise Take – Equity futures correcting mildly overnight into news vacuum

Leaders Analysis:  Our focus is on the US Dollar, as it appears to be making a consolidating wedge formation on the daily rather than extending the down move initiated last week.  Under the consolidation scenario, it should sell off when the index hits 81.00 to 81.25 by tomorrow, then find support between 80.00 to 80.25.  If it breaks through these levels on a closing basis, a large move could get underway again, with equities following inversely.  With the EuroYen down overnight and not quite yet to support, for today, the leaders are slightly equities bearish.

Medium Term Analysis:  The ES is down overnight for the first time since late February, so it looks like equities will correct a bit before attempting to head higher.  We mentioned the weekly pivot at 1126.50 as the likely target yesterday and stand by it.  The rally is not in jeopardy, however, unless the value area centered around the 1118.00 high volume level gives way.  With no scheduled news, traders will become introspective and question whether we have a double top on the weekly, which should turn sentiment bearish over the next few days unless the rally resumes.  It is exactly this bearish sentiment that…

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The Precise Take – Markets quiet ahead of slow news week

Leaders Analysis:  The divergences in leaders correlation that we noted shortly after the report Friday was quickly resolved intraday.  The US Dollar retraced all of its early gains and closed on its low, and is down further overnight.  The EuroYen finally got the breakout we were looking for and is up nominally overnight.  The 30 Year T-Bond yield broke above its long term trendline but, with the futures having traded down to support, may continue to oscillate around the trendline.  Until it breaks definitively away from it, this market will not provide much predictive value.  The leaders look as though they will consolidate their moves and are, therefore, equities neutral.

Medium Term Analysis:  On Friday, equities showed great strength and should be able to capitalize by extending gains this week.  The ES is within striking distance of the January 11 high of 1148.00 which, interestingly, was posted the day after the month’s Employment Situation report.  The fact that market internals calculated by a variety of methods are making new highs suggests they should avoid a similar fate this time.  If not, there should at least be warning.  Having said all that, there is not scheduled news of note over the next two days, and little else until Friday.  It would be normal in this situation to see a…

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Accelerated/Decelerated Midas (ADM) Fan ™ / Accelerated/Decelerated VWAP (ADV) Fan ™

Most have at least heard of VWAP, or volume weighted average price.  It is a measure of the average price paid over a period of time, and can be implemented a number of ways.  Often, the calculation is reset daily, though in the MIDAS Method that was created by Paul Levine it is launched from important reference points in time and allowed to continue (called a Midas curve). 

The original formula is simple.  For each price bar, the following is applied:

PV = PV + (Price * Volume)
 CumeVolume = CumeVolume + Volume
 VWAP = PV / CumeVolume

where Priceis usually (High + Low + Close) / 3.  Coles and Hawkins of MIDAS Market Analysis have also discovered it is permissible to use just the High in a downtrend, and the Low in an uptrend, which will cause the Midas curve to follow price a bit more closely.  They will reveal additional insights and modifications in their upcoming book. 

For now, we have modified the formula to accelerate or decelerate the curve above/below the main Midas curve by incrementally increasing/decreasing each new bar’s contribution as follows:

PV = PV + (Price * Volume * Factor * Count)
CumeVolume = CumeVolume + Volume
VWAP = PV / CumeVolume
Count = Count + 1

By including a range of values for Factor, such as 1.00005, 1.000010, 1.000015, …, 1.000100, we can establish an entire Accelerated/Decelerated Midas support and resistance fan (ADM Fan).  One could think of it loosely as a volume-based Gann fan.  While this works with time charts, it has empirically been found to work best with volume charts, wherein each bar represents a fixed number of shares/contracts.  A good rule of thumb for the Factor range is that the minimum should be within an order of magnitude of 1 / ContractsPerBar, which depends on how the chart is set up.  The maximum can be three orders of magnitude (x 1000) higher and will depend on the steepness of the trend.  It is usually not necessary to curve-fit the increment and range as long as the launch point is correctly chosen.

Above shows the ES with an ADM Fan launched from 11:56 am EDT on February 25, 2010.  We chose this time, and not the time corresponding with the actual low, because it was from here that the market launched higher.  The blue line is the original Midas/VWAP curve, which captured price early.  As price displaced from the Midas curve, Accelerated Midas curves took over and became both support and resistance.  None of the Decelerated Midas curves was reached.  However, for a good example of what this looks like, we will show the ADM Fan launched from the actual aforementioned low at 9:45 am the same day.

Above, the third Decelerated Midas curve captured the 11:56 am retest of the low, which was the launching point for the ADM Fan in the first chart.  This Fan also captured highs and lows fairly well. 

Because the ADM formula weights bars increasingly more as time progresses, the fan, as its name implies, spreads out.  By decreasing the increment amount by which the Factor is increased, we can generate more support and resistance lines that become relevant over time.

Below shows an even lower Factor increment amount that produces yet more levels, along with a new ADM Fan launched on the overnight low of March 4, 2010.  When confluence occurs in curves from different launch times, support/resistance is more powerful.

It would be easy for a chart to get cluttered (if it is not already), so selection of launch points is of great importance and an area of current development.  In general, important highs and lows work well, but sometimes it is best to launch, not from the actual low, but the point at which price takes off (as demonstrated earlier).  Launch points from areas that are important support and resistance levels based on other methods also work well.

Below is another example, where an ADM Fan is launched in the EuroFX futures contract near the 4:20 am low on March 2, 2010, which was a new yearly low. 

Below shows a reduced Factor increment that in turn produces a greater number of relevant support and resistance levels.

Reverse Midas ™ / Reverse VWAP ™

The indicator at the bottom of the above picture is Reverse Midas/VWAP, and is calculated as its name implies.  For each given bar, iterate backwards, calculating VWAP until zero is reached.  Buyers or sellers at this bar were at break even when the subsequent bar from which the backwards iteration began was reached.  Once the first equilibrium/breakeven point is reached, we continue to iterate backwards until the next is encountered, and repeat the procedure for a total of 5 (arbitrarily chosen) times.  The volume levels between the points are then plotted below price.  Also important (not shown), is the maximum average profit and loss achieved over these intervals, which is akin to the Active Boundaries ™ method described by Pascal Willain in his book Value in Time. 

Often, as a trend progresses, equilibrium points will build and be revealed as clusters by the indicator, which will eventually tend to stop the move.  When the clusters disappear, there are fewer traders fighting price and a new trend can emerge.  A similar phenomenon occurs when there is a cluster reached of extreme average profit/loss.  Again, this is not shown, but will be demonstrated in future posts as we further elaborate on these concepts.  Also to be explored is the importance of certain volume levels that emerge repeatedly over time from these calculations, which can be relevant to other parts of the Midas Method, such as with Top/Bottom Finder curves.

10:39 am EDT:  It looks like the Employment Situation seasonality will not hold today, as the gap did not fill and R1’s held as support, which is an early warning of a trend day up.  All the major US equity indexes are now trading above daily R3.  Next week, the ES should be able to test the 1147 January high, but without any major news until Friday, there will probably be some back and fill.  An (unlikely) close today below 1125 would negate this scenario and set up the possibility of a downwards correction instead.

The Precise Take – Will Employment Situation gains hold?

Leaders Analysis:  After a volatile reaction to the report, it is too early to tell what the leaders are saying.  However, the US Dollar Index is up, along with the EuroYen and equities.  It is unlikely that correlations that have persisted for greater than a year have broken, and it may take a day or two for them to get back in line.

Medium Term Analysis:  The move of the ES into the 1127 to 1147 January high range is good for equity longs, but there is a historical tendency for gaps on the Employment Situation report to not only be filled intraday, but also get continuation in the direction of the gap fill.  For the medium term, the report can mark interim highs and lows.  The December 2009 report precipitated a mild two day correction.  The January 2010 report precipitated a seven day consolidation that became the 2009 rally highs.  We should note that this is only a seasonality, and…

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10:43 am EDT:  After a test of yesterday’s high, the ES failed on a disappointing Pending Home Sales two points below at 1123.00 and has now broken the lower end of the projected range.  It will probably find some support in the 1113.00 to 1116.00 area, but we made the lower end of the projected range higher than usual because of the risk of a larger selloff.  Indeed, there is a head and shoulders developing on the 60 minute with 1113 to 1116 as the neckline depending on whether day-session-only or combined session data are used.  The daily pivots at ~1119 should now act as resistance.  A break above keeps the medium term rally in tact.