Le Tour - Future Directions for the S&P
by John Needham, The Daniel Code Report | July 8, 2008
PrintLe tour
While watching Le tour de France weaving its annual magic through Brittany this week before heading for the heights of the Pyrenees, on its way to Paris, I was reminded of the delight that I have had over many years watching this spectacular event. Lance Armstrong of course lives in our memories for the awesome precision and courage he bought to his fabled assaults on the Maillot Jaune, the coveted tour leader’s yellow jersey. Like markets, le tour is replete with characters, conspiracies and a peculiar charm. Like markets also it takes study, experience and knowledge to understand what that mass of multi colored jerseys thundering down the roads on two skinny wheels at speeds in excess of 50mph is all about. It looks chaotic but to the aficionado the subtleties of time on distance and the equations of energy applied to mass on a variable plane are fascinating.
In the same way that order usually prevails at the end of each tour stage, we can bring order to apparently haphazard financial markets with the same measurements that apply to a challenger for le tour. Our measurements too are time on distance and the affects of energy on mass. For le tour we know where it will finish; it always finishes on the Champs Elysees in Paris. For traders the hottest question is where does the bear market finish. My directions on this tour map are usually right but forecasting is a dangerous business. The odds of success are about as good as Cadel Evans becoming the first Australian rider to win le tour. At the moment he is the bookies favourite, but even good things get beaten. Nonetheless we do need to start with a map that is something more than gazing at chicken gizzard or cries that the sky is falling.
I think this one will surprise you.
What the Markets Say
While internal market sectors are mixed, the broad indices of major markets from the Dow and S&P, to India’s NIFTY 50, the Australian SPI 200 and London’s FTSE are saying the same thing. They are all at break point!
On the five following charts you will observe a black line just at or below the markets’ current lows. That line denotes the last level of Danielcode support for the current major swing which started in mid 2006 for all these markets except the NIFTY which made its run from March 2007. Because the Daniel number sequence uses each market’s own prices to create its numeric sequence, we are not forced into labeling market performance by percentages but by using this constant measurement tool we can identify precise price levels that will constitute significant failure. The constant metric against different markets gives us a valuable tool for measuring precisely the strength of different markets which spread traders use to great effect.
For all of these major indices a weekly close below the black numbers implies that the major swing will be broken and much lower prices will follow. This week will likely provide that signal.
Given the significantly differing construction of these indices, The synchronicity at these strategic price levels tells us that these markets at least are more inter related than is generally recognised. US and UK have so far had largely bank/monoline/credit enhancement failures as their headline problems. Australia has had no disclosed banking problems other than a failure of risk management at ANZ in regard to some highly publicised margin lending stock schemes, whilst India is battling with headline inflation of 8%, massive loan failures to farmers and the cost of fuel subsidies and other social related fiscal programs. So different symptoms but identical market medicine.
S&P 500
As the broadest and more representative of the US indices commonly traded, the S&P has most to tell us. Its present position is no surprise. In my Financial Sense article of 02/08/2008, “What the Big Boys Know” I gave you the following advice:
To give you a modern version of the current market’s probabilities we can re-create the linear scattergram but this time using the price structures around the 2007 high. From the chart below we see that the probabilities are against the January low being a seminal event. The odds favour a number lower down at one of our aggregated pressure points.
You can see the strong blue bands at around 1230 and 1240. Right where we are now! Below that we have more pressure points at 1190 and 1150. On a macro level let’s zoom out and see how we got here. Looking at the quarterly chart below, we can see that from a more distant perspective, the run down from 2000 to the end of 2002 was merely a normal correction. Given the levels of engineering that go into the construction of stock indices it is something of a miracle that they correct at all. The very existence of stock exchanges and the mutual fund industry relies on this engineering which is achieved by constant replacement of fallen heroes with the hot new thing. Nonetheless, corrections even in indices do occur and they are reasonably predictable.
The 2000-2002 correction (that’s all it really was) went to within 8 points of its Danielcode target at 760. That level is the 4th iteration of DC retracement levels. A similar degree of correction from the current top takes us to 1097, a level favoured by stock market pundits. The recent global crash warning by The Royal Bank of Scotland’s strategist Bob Janjuah, identifies a target of 1050 for the S&P.
I think we can do a little better. Firstly consider the December 2007 high. For this market to achieve new all time highs in the December quarter is just a little too convenient. “What do we covet?” asks Dr Hannibal Lecter of Clarice in Silence of the Lambs. “What we see every day.” For stock marketers and promoters, which is really what these markets are about, what they saw every day was the old 2000 highs.
But it is not real!
The problem with the engineering of indices is that the Streakers defense, “It seemed like a good idea at the time, Your Honour;” has after effects. Once a stock is added to an index it is hard to get it out absent a significant corporate failure. This index is built on the big cap banks which seemed like a very good idea for a long time! Here are the after effects. This is the S&P Banking index which is now back at 1996 levels wiping out over a decade of growth in stock value, all of which we now know was gained by the funny money games. This too was not real, and this index now only has the fateful Daniel number at 138 as its last level of support within this 14 year chart. If that doesn’t hold, expect La Deluge!
Going forward the issues around recapitalization of banks and other lending institutions are not without their problems, about which I will offer more next week, but the short version is that they are not going to be able to earn the returns in the real world of banking that came from the mark to model fantasies that they will seek to replace. Ergo the balloon of bank stock prices is likely to be a lead weight for a long time.
The high for this index came in February 2007 whilst the high in S&P came in October. This divergence against its most influential sector tells us to be a bit more skeptical than usual. We know with the laxity of regulation and accounting standards it is impossible to accurately value banking stocks as the propensity of these vermin to shuttle off balance sheet transactions and related entities is purposely designed to thwart anything like full disclosure. Remember that Bear Stearns was worth $70, $50, $2 and finally $10 all in the same fortnight and neither we nor regulators know what its assets are really worth today, so the present prices for stocks of banks and other lending institutions are at best an educated guess!
One of the more interesting characteristics of the Danielcode sequences is that they often give us the crucial target areas in reverse. That is, when placing the DC retracements or targets on a chart they will often highlight a previously important target. The reason for this is that all market swings are fractals of previous swings. This theory has been around for a while, but could never be proven because the appropriate tools were not available. With the advent of the Danielcode, we now have a consistent means of measuring markets which automatically compensates for the expansionary and contractionary cycles that are endemic to all markets. If we revisit our quarterly S&P chart and now add the reversed retracement we can see that to comply with the DC sequence the 2002 low should have been 769.83. It was 768.83. Amazing!
By completing this matrix we now have a new DC target at 971 which reinforces our existing targets at 965 and 976. Actually the average of our previous two levels is 970.50. Close enough. So look for 1097 on the S&Ps trip to 971. Despite the inevitable hysteria from the long only brigade, that is only one degree past a normal correction, not Armageddon.
Road maps do change over time so we will update this course for you periodically.
I invite you to visit the Danielcode Online to learn more about this unique market definer. The Daniel number sequence has an uncanny record of picking market turns in all markets and in all time frames. The latest trading report available for all to see at the Danielcode website features last week’s trading in the forex markets. Of 15 pairs covered with DC target numbers posted for members well in advance, every forex pair turned within a few ticks (pips) of its DC number.
Unusually the Daniel sequences are equally adept in all markets and allow me to cover a large range from Gold to forex and from equity indices to commodities. A new member from New York who has done his research was impelled to write yesterday:
Do you realize that you picked the top in the crude oil,, the bottom in the dollar, the top in Gold and the top in bonds. Its truly amazing how accurate the DC# are. So I started reading the book of Daniel and various articles on Google. I never even realized that Isaac Newton started studying Daniel from the early age of 13 up until his death at age 85. Gold dropped $25 from the entry price, Crude dropped $3, Dollar is up 112 points, Corn dropped 34 cents, Beans dropped 18 cents, Silver dropped 58 cents and Bonds are losing 15/32, this is an incredible performance. Steve S. NY.
For Gold traders our new Gold trend charts based on an unusual binomial identifier is causing interest and brings rigor to an otherwise sometimes emotional and haphazard process. They are free for Financial Sense readers.
Like the Book of Daniel, we are open whenever you seek knowledge.
Copyright © 2008 John Needham
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John Needham is a Sydney Lawyer and Financial Consultant. He publishes The Danielcode Report and writes occasionally on other markets. He lives with his family in Australia and New Zealand.
“The fox knows many things, but the hedgehog knows one big thing. A Hedgehog Concept is not a goal, intention or strategy to be the best. It is an understanding of what you can be best at. The distinction is absolutely crucial”. ~ Isaiah Berlin, The Hedgehog and the Fox
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John Needham | The Danielcode Report | Taupo, New Zealand | Email | Website
The opinions of FSU contributors do not necessarily reflect those of Financial Sense.
