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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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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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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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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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.

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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Leaders Analysis:  As we noted intraday yesterday, the US Dollar Index broke major support and sold off sharply.  The bottom coincided with the end of the equities rally yesterday.  Overnight, the 20 day moving average, which prior served as support, became resistance.  The Dollar tends to consolidate after important moves, so we don’t expect another major move until tomorrow’s Employment Situation.  The other leaders are not making any moves of note, so the leaders are equities neutral today.

Medium Term Analysis:  Not much to add from prior day’s commentary.  Focus will be on tomorrow’s Employment Situation report, which is expected to be bad because of the February blizzards.  The ES is at a precarious point.  It needs to soon…

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Click for larger image.

Leaders Analysis:  The EuroYen is on the verge of breaking to the upside after basing for several days.  Gold closed over its 50% retracement of its down leg and is up nominally overnight.  The 30 Year T-Bond yield is still hugging its long term trendline support, but has been spending more time below it than above, thus not confirming the other leaders.  The US Dollar Index is at the bottom of its trading range, which could be equities bearish, because it has rallied the prior times it hit this support level.  However, and very importantly, it is below its 20 day moving average, which has acted as strong support since the January 20, 2010 breakout.  A close below should finally facilitate a larger retracement downwards and help equities break through resistance.  If it closes above, it could move up to the upper end of its range again, which would probably be concurrent with a correction in equities.   For today, the leaders are slightly equities bullish.

Medium Term Analysis:  Today should be relatively quiet, but the action will pick up a bit tomorrow and get going Friday with the Employment Situation.  An expected poor headline statistic due to the harsh winter is now being widely discussed.  Regardless, poor readings that cause equities to gap down tend to get reversed intraday, and vice versa for good readings that cause gap ups.  Next week will be relatively quiet with some long term Treasury auctions, then Retail Sales on Friday.  Lack of news after Friday could cause some back and fill in equities if they have not cleared major resistance.  For now, that number is…

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Leaders Analysis:  Overnight, the US Dollar Index rejected the same resistance area as the previous day and is back in the middle of its trading range.  We probably won’t mention it again until it breaks its range is it has not been predictive lately.  The EuroYen is basing and looks poised to rally.  Though the 30 Year T-Bond yield broke strong trendline resistance last week, it may be a false breakdown because it is up over the trendline again this morning.  All in all, the leaders are slightly equities bullish.

Medium Term Analysis:  What is notable about the level reached overnight in the ES (1122.75) is that it is the 76.4% retracement of the entire down leg, which would make the second such retracement in a row.  The February 5 low was a 76.4% retracement from the October low to the January high.  This pattern, which occurs intraday, is more rare on the daily, but can perform four or five such retracements in a row.  If the ES closes over 1123, the pattern is negated but, if not, 1060 is the next downside target.  Given the strength of yesterday’s rally, we expect follow through by tomorrow.  But amidst all the bullishness, we also feel compelled to…

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Leaders Analysis:  After selling off to its 20 day moving average Friday, the US Dollar Index rallied strongly overnight on British Pound weakness to the upper end of its two week range.  The EuroYen traded first up, then down, and is at Friday’s low.  The 30 Year T-Bond yield closed decisively below long term trend line support Friday and is up marginally on the open.  A continuation of the trend down in yield (and up in the futures) does not preclude equities gains, but a concurrent US Dollar rally would make any equities gains more difficult to come by.  With ISM Manufacturing today, the direction could be set into Friday’s Employment Situation report.  For now (at least until 10:00 am), the leaders are slightly equities bearish.

Medium Term Analysis:  The ES was strong enough overnight to test the most recent swing high at 1112.75 and subsequently traded down on the US Dollar rally.  However, it is accepting in the green value area (below).  If it continues to accept here or rally after ISM today, the next…

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Looking farther back to 2001, we can see glean some interesting information.  The first hour of trading was consistently profitable beginning late 2003 during the last bull market.  It posted its high in July 2007, three months before equities actually topped.  It also bottomed concurrently with the markets in March 2009.  Similar to 2003, it was unable to trend up for most of 2010, but took off late in the year.  As previously noted, it has since retreated and we believe will need to start turning profitable if the January highs are to be taken out.

The only other time period that was consistently profitable during the 2003 to 2007 bull run was the overnight gap.  If it were to break its current trend line, that would be a very bearish sign.  What also emerges is that, contrary to popular believe, a profitable closing hour is not necessary to sustain a bull market, but may be necessary to start one.  The closing hour’s high was put in January 2004 and trended down thereafter.  The closing hour’s high in the current 2009 rally was established in September.  It may well be that smart money now trades at the open.

Accordingly, if we start seeing overnight gap-ups and profitable first hours, things may have turned around for equities.  If not, we’ll probably see lower prices in March.

Leaders Analysis:  Most of the leaders reversed yesterday in line with the afternoon equities rally.  The US Dollar Index is forming a consolidating wedge and is one to watch.  If it were to top this week, we thought it would have done so more convincingly by now; however, as long as it is consolidating, it can still do so, but needs to do so soon.  The 30 Year yield is trading at long term trendline support that has three points of contact since late September, having bounced most recently earlier in the month.  A break down should lead to a test of at least the 200 day moving average, currently at 4.40%.  A concurrent Dollar decline and equities rally is not out of the question, but would be slightly unusual, so this will be an important leader to watch.  A bounce would lead to a retest of the 4.75% level and possible break.

Medium Term Analysis:  Yesterday proved to be a difficult day to predict, as the 1082 to 1085 support level in the ES that we had dismissed the day before indeed proved to be strong support.  Overnight, the ES rallied but rejected the 1107.50 high volume level we have been watching.  Until the ES accepts around this area, it will not be able to move higher.  With three reports today between 9:42 and 10:00 am and rumors regarding Greek debt, there should be…

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