Two Lessons from History

Larry Pesavento: ‘Bernard Baruch, the famous speculator from the 1920’s had several investment rules that he relied on throughout his career that are now famous quotes and basic tenets for thousands of investors today. These three charts exemplify some of the most noted of these rules. The first chart shows the Greek Markit manufacturing index in a very steep downtrend.

Since rates on Treasuries have reached essentially zero, it is unlikely this divergence can continue and either Treasuries or equities (and quite possibly both) could be headed for a potential collapse. Either way, this illustrates another rule: do not be concerned on the return ON your money, be concerned with the return OF your money.

This week, the stock market has reached the three-year anniversary of the major low dating back from March of 2009. Incredibly, nothing in the underlying economy has really changed since. More importantly, all of the AB=CD patterns that I have been looking at on a worldwide basis still remain intact. While I know this may sound like a broken record each week, the record is still playing and has not changed its tune. My bearishness remains intact, and I am awaiting a suitable entrance into the expected reversal.’

Dangerous Divergence

Larry Pesavento: ‘Pattern recognition is a viable method of determining the direction of the market within limits. It is far from an exact science but it does put the odds heavily in the favor of the pattern recognition trader. The work from Dr. Andrew Lo at the Massachusetts Institute of Technology proved this validity without a shadow of a doubt that eventually led to his book “The Non-Random Walk Down Wall Street“. 

In addition to pattern recognition there are other tools that the technician can use to help determine unusual trading opportunities. It is my opinion, we are at one of these significant points in the stock market. There are two charts accompanying this dialogue that deserve your attention. The first chart shows of the divergence between the NASDAQ market and the New York Stock Exchange index at the top of the market in 2007.

In 2007, the NASDAQ was making substantially higher highs whereas the New York Stock Exchange index was making a classical double top. Presently, we have a similar situation with the NASDAQ screaming into new high ground whereas the New York Stock Exchange index is barely making a 786 retracement of last year’s high. I will leave it up to the readers to determine if this is worthy of your attention, but patterns do repeat and it’s something to keep in the back of your mind.

So many things are coming together at present that it is hard to believe that the market could go higher from these current levels.  But the one thing we have learned from decades of experience is that market trends can last longer than your equity if you do not plan for risk and watch out for the safety of your capital.’

Dow Jones at 15,000

Larry Pesavento: ‘Past experience indicates that bold predictions on the front page of financial publications usually indicate a major shift in market direction, albeit in the opposite direction. This week’s cover of Barron’s magazine features Dow 15,000. This number may indeed come to pass, but with so many patterns that are still showing signs of the market topping in the near term, it is difficult for me to believe this will happen before a major correction takes place.

With this article is a chart of the McClellan oscillator, which points to the breadth of the market deteriorating badly. The market has been losing considerable breadth since late December. For those unfamiliar with the McClellan oscillator, it is a market breadth indicator derived through analysis of the New York Stock Exchange index and evaluates the rate of money entering or leaving the market. In other words, it can be interpreted as an indicator for overbought or oversold conditions in the market. The index was developed by Sherman McClellan back in the late 60’s and relies on an exponential moving average of the difference between advancing issues (stocks gaining in value) and declining issues (those that are falling) over 39- and 19-day periods.

Also, I have featured a chart from Doug Katz. It points out that two of the big “Perma Bears” (Drs. David Rosenberg and Nouriel Roubini) tend to make incorrect assessments of the market at critical turning points in the market. Incidentally, we now have both of these gentlemen capitulating to the bullish camp. Meanwhile, the NYSE index has also just completed a bearish Gartley pattern at the 786 retracement. The Nasdaq, which has been the market leader by far, has completed a bearish butterfly pattern. The VIX volatility index is still very oversold as it drifts back into the area of support from many months ago.

Thus, the market is showing just about every possible signal to move down that I can see. But I have also been saying this since late January. However, although the Nasdaq has motored into higher territory, the major market hasn’t gone up much during this time. Moreover, these bearish markets continue to be seen in the foreign markets e.g. Germany, U.K., and Asia.’

Gold and Silver Index $XAU

Larry Pesavento:  ‘Since December 2010 when the Gold and Silver index $XAU made a 3 drive to a top pattern, an interesting set of patterns has unfolded.   One of the most popular and accurate of all the patterns is the AB=CD pattern, also know as the Thunderbolt.  Three times this pattern has indicted a lower top in the downtrend of 2011.  It is now at the 4th lower top as we enter the last week of January 2012.   Remember that pattern recognition is not an exact methodology, but is a probability based approach that must be used with sound money management techniques and risk control measures.’

Gann 2-Bar Swings

Choong: ‘The simplicity of Gann x-bar Swings as a trend line indicator works much better with products that trend such as the spot forex or futures currency in spotting 1~3 day/bar corrections. When the market is not trending (ie. going sideways) we see the swing line/counts dancing to the tune with 1 upswing, 1 downswing, 1,2 upswings, 1 downswing… back and forth. This is totally different from the percentage zigzag line because x-bar swings track price movement direction and market trends so closely.

(Click on any chart image to show enlarged).

Gann 2-bar Swings work extremely well with EUR.   Here is the EUR H2 5-min chart.

Once again, a big thank you for implementing Gann x-bar swings in Ensign Windows and Ensign 10.’

Euro at a Critical Level

Larry Pesavento: ‘The Euro is at a critical level as we come into trading on January 23. As you can see by the hourly chart of the EUR/USD has reached the 0.618 retracement of the longer price swings in the 0.786 retracement of the smaller price swing. Both of these levels come in at the price of 129.80.

Should the Euro exceed the 130 level it would assume that the trend has changed and the Euro is getting ready to rally for longer-term time, which would not be unexpected as the market has been incredibly oversold over the past weeks and months. By using the drawing tools and isolating the price swings, the Fibonacci numbers can be calculated with the Fibonacci retracement tool or use the Pesavento Patterns tool to give exact numbers for where the Euro might react. As always you must use good money management and stop placement to adequately make your risk control the strongest part of your trading model.

The daily chart for the Euro shows several equals moves that are highlighted in pink rectangles. What this is telling you is that the market is at a critical level and is repeating previous price action. This is valuable information as it tells you when the trend is changing, i.e. breaking out of the previous price range.’

Treasure Bond Butterfly Pattern

Larry Pesavento: ‘Treasury bonds are forming a butterfly pattern along with a three drive pattern at the 149-150 level basis in March treasury bonds. This pattern is easily identified by looking at the formations tool that gives you the AB equal CD pattern. In addition, the Gartley tool allows you to see the expansion pattern forming the butterfly which also comes in at the 1.27 level. The cycle tool illustrates the 24 day cycle that is repeated twice and is due to crest in the middle of the cycle around January 23 which is the new moon and the start of the Chinese new year the year of the Dragon. Should treasury bonds get above the 152 level this trade would most probably be wrong and the loss taken.  There is also an ETF for the 30 year treasury bond that has good liquidity, symbol TBT, and it could be bought at $16.80 per share with a stop of $14.80.’

Market Trends from 2-Bar Swings

2-bar swings require 2 higher highs or 2 lower lows without an interrupting counter move.  They are an indication that the underlying trend may change or simply a correction swing (between 1-period and 3-period) and the trend will continue when price breaks the nearest peak or valley.  With more than 3 consecutive sets of swing periods, either up swings or down swings, a high probability trade change has evolved at least temporarily.

Trend Change Swings

Up Trend and Down Trend

US Dollar Index

Larry Pesavento: ‘The US Dollar Index (USDX) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies.  It is a weighted geometric mean of the dollar’s value compared only with:

  • Euro (EUR), 58.6% weight
  • Japanese Yen (JPY), 12.6% weight
  • Pound sterling (GBP), 11.9% weight
  • Canadian dollar (CAD), 9.1% weight
  • Swedish krona (SEK), 4.2% weight
  • Swiss franc (CHF), 3.6% weight

This description of the US dollar index from Wikipedia shows the tremendous weight of the Euro versus the US dollar. There is virtually no one willing to take a position on the long side of the Euro versus US Dollar at this point. The past 10 weeks has been a steady downward movement and we’re getting very close to the first target at 125 in the Euro versus the Dollar. As you can see from the long-term weekly chart the Dollar Index is completing a head and shoulders pattern.  A rally can not be ruled out. The US dollar index is making a retracement in a bear market and is due for a correction.’

Bradley Stock Market Model 2012

Larry Pesavento: ‘Donald Bradley published a book in 1946 titled Stock Market Prediction!  The science behind this book was the premise that planetary pairs such as Venus and Uranus have a positive or negative bias in the market. By assigning points to these biases he was able to produce a graph that gave a prediction for what the stock market would do for the coming year. Originally the booklet sold for four dollars and was almost impossible to find until 1987 when I published my first book Astro Cycles, the Traders Viewpoint. Shortly thereafter many people began to publish the Bradley model.  Some made changes in how the planets should be calculated as to their being positive or negative weighting and by how much. I have always used the method described by Bradley.  

I discovered the book through my mentor Dr. Ruth Miller in 1986. With the help of Jim Twentyman and Dr. Miller we ran the Bradley model on every year of the stock market from 1876 to the present. 1876 was 10 years after the Civil War in the first year that accurate stock market data was published in newspapers primarily in New York and Chicago. The Bradley model is based on combinations of planetary cycles. Bradley composed a matrix with all of the planets on the X-axis and all of the planets on the Y-axis. When these planetary pairs combined in a positive mode it was given a positive energy number. The opposite was true for negative planetary number. For example, Venus makes a conjunction, i.e. 0°, every 255 days with the planet Uranus. When it is in opposition, i.e. 180°, it is half way through the cycle. Bradley used commonly known positive or negative effects from traditional astrology to build a chart of what the stock market should do for the coming year. This model can be drawn hundreds of years in advance. It is useful as a training tool for two particular technical aspects. First, the Bradley dates themselves show when terms are due for trend changes. The Bradley model is also good for short-term indications of trend. This is probably an oversimplification of how it works but the key thing to remember is it is based on nothing but numbers. There are no zodiac signs or interpretations involved, just numbers.

As you can see from the first chart I inverted the Bradley model to give an indication of what is happening now as we start the new year. The second chart shows the forecast

Today’s chart gives an idea of what the stock market is supposed to do for 2012.  Realize that this is just a prediction based in planetary positions and not a certainty.  I’ve also included the year 2009 to show you how accurate the market was in predicting the down move in the stock market and the exact day of the bottom March 5, 2009.

Bradley’s model is best used as a guideline for trend analysis. For example, the stock market is supposed to be in an uptrend for several months starting in January based on the Bradley model. As long as it is continuing along this path the model has a great deal of value. However, if the market continues downward, the model has less influence as a trading vehicle. The overall trend for 2012 looks to be to the downside, especially after the spring rally if a spring rally occurs. Money management and risk control take precedent over any prediction made by anyone, including and especially the author.’

Bradley Stock Market Model 2009

Bradley Stock Market Model 2012