Mariners and Markets - S&P

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Things Past

When I wrote for you last I was preparing to embark on a speaking tour to the Southwest of the United States.  I duly commenced that trip with visits to San Francisco, Redding CA, Omaha and Colorado Springs CO. The final leg of my planned trip was scheduled to finish in San Diego where I was looking forward to meeting many of you, giving a Danielcode Seminar and culminating in a spot of sailing with Jim Puplava on San Diego Bay. 

Unfortunately, I contracted a nasty bug during my trip and by the time I had finished the Omaha visit, where I gave a free seminar to an enthusiastic audience, I simply couldn’t face another plane trip, so I hired a car which turned out to be a very large Ford SUV, and together with my friend David from Blair, Nebraska, we drove down to Colorado Springs, which was a truly sensational trip.  I say sensational because it gave me a chance to see the depth and power of the agricultural machine in the Midwest states.  The corn belt of Nebraska is something to behold and something quite foreign to all, other than US citizens, who have the chance not only to see the marvel of the US agricultural centre but perhaps also to take it for granted.  The trip reminded me again of the massive power and economic muscle that the US wields.

By the time I had finished a seminar and an intensive two day tutorial in Colorado Springs, that was it; with a temperature of 102 I had to get myself home as quickly as possible which I have now done.

To those who were planning on meeting me in San Diego, I again offer my apologies.  Sometimes the spirit is willing but the flesh is weak and it was just a step too far.  I will be sure to catch you on my next trip to the States, but who knows when. For those who were anticipating the free Seminar that I had planned for San Diego, there is a 3.5 hour audio of the Colorado Springs Seminar, available to all at the DC website, http://www.thedanielcode.com/ , now under the “Articles” tab. When you have digested that morsel, be sure and register for the September “Harness the Storm” series of 5 webinars that I am doing for Genesis every week in September, starting on Tuesday 09/01. Details at the DC website.

Jim Puplava is a keen mariner and yachtie and my passion for more years than I care to recount has been the scary sport of offshore racing.  It is some years now since those days, but here is picture of my old IOR yacht, the Dubois 50’, “Sidewinder” (nearest camera), originally built to contest New Zealand’s “Big Boat” entry in the Admiral’s Cup, heading out of Sydney Harbour at the start of another offshore ocean race.

The connection between mariners and markets may escape you, but the varieties I have in mind have a highly correlated rhythm. I am thinking here of the trading of financial markets and the wonderful sport of offshore yacht racing.

As an avid offshore racer, I can tell you that the anatomy of offshore racing and trading markets is identical: 80% boredom, 10% anxiety and 10% sheer terror or exhilaration. Sometimes both simultaneously! Age and decades of experience enhance the ennui, but the terror is always lurking over the horizon and strikes suddenly. These thoughts came to me as Jim, I believe, sails a J-105, a lovely modern boat that is uncommon Down Under where the tyrannies of transport and tariffs make an already expensive sport prohibitive, but they are  apparently abundant in San Diego and the US West Coast. They are the epitome of modern design and yacht design thinking with a retractable “prod” or bowsprit that flies a mean gennaker, (variant of spinnaker) the colored sail you see in this picture.

Being a primarily light air boat, they have a nasty habit of sliding through the fleet when there is not much wind and they are very quick down wind. Modern, light, easily handled and tractable. All the comforts of home and a handsome boat to boot. Yacht racing is the most social of sports at the civilized end of it’s range and starts with such fun club events as “Twilight Racing” which is an after work event, always run in sheltered or at least reasonably flat waters like Sydney Harbour, and lasting just 2-3 hours. Then back to the dock for drinks and tall stories. Lots of ladies decorate these events, and the greatest danger to the fleet, was being skewered by an amateur skipper who either doesn’t know the right-of way rules or is too drunk to care. Modern boats, like the J-105, offer such options as “double stainless bowls” in the kitchen and a bathroom that would not be out of place at the Ritz. Options such as “two tone decks” and “Swimming and boarding platform sculptured into aft face of full height transom with integral ladder” are boosted by the builders as desirable attributes. Fun and forgiving performance are highlighted as its winning characteristics.

So that’s the social and polite end of town. Usually conducted in warmer climes, this is gentle and usually well mannered stuff, where the only likely damage of significance is to your liver. Smart dress is desirable and I would equate this to trading commodities, particularly the grains. Traders will know what I mean.

Of course, this has only a passing significance for your humble scribe. I have done hundreds of twilight races, but only to keep my crew amused and to boost the shares of the old Carlton & United Brewing, the makers of Victoria Bitter, Australia’s favorite booze. Where I lived for a decade was at the opposite end of the spectrum for the yachting world. In the dark, tumultuous and altogether exhilarating game of offshore racing where races range from the 2 day beat from Sydney up the coast to the fabled Gold Coast in warm breezes and usually safe enough weather to  the ominous right turn out of the Sydney Harbour Heads which sets you on course for the legendary Sydney to Hobart race, a 630 mile monster that has been run since 1945 and is one of the top 3 ocean races in the world, and certainly the toughest. The race always starts on Boxing Day in Sydney harbour and traditionally, crews of yachts celebrate on New Year's Eve at Constitution Dock in Hobart. But some don’t make it for many days after. Or make it at all!

The fastest boats, the now “Super Maxis” with hydraulic canting keels and some with water ballast can make the trip in about 40 hours with a strong tail wind. Modern planing hulls are quite capable of sitting on 20 knots, almost 30mph, but that’s downwind. If they have a headwind and have to tack into big winds and large ocean seas, it’s a different matter entirely. With the optimisation of racing yachts to be ever lighter and faster, breakages are common. Masts come down, sails are shredded almost routinely and damage to boats and their crews are a common event in ocean racing.

Bass Strait is an evil and haunted stretch of water. Sailors and ships die down there. The ghosts of mariners lost is palpable. And the waters of the Pacific Ocean immediately to its east, are renowned for their schizophrenic moods. Even though the race is held in the Australian summer, "Southerly Buster" storms often make the Sydney-Hobart race cold, bumpy, and very challenging for the crew. It is typical for a considerable number of yachts to retire, often at Eden, on the New South Wales South coast, the last sheltered harbour before the Bass Strait crossing.

The 1998 Sydney to Hobart Yacht Race was marred by tragedy when, during an exceptionally strong storm (which had similar strength winds to a lower-category hurricane), five boats sank and six people died. Of the 115 boats that started, only 44 made it to Hobart.

I have done this race and it’s scary. In daylight most situations can be handled well enough by a well found boat and an experienced crew, but at night that all changes. You can’t see the waves coming and in a head sea with a 40 knot Southerly, which is practically guaranteed when going South in Summer, the seas smash and break over the boat and it’s dangerous. Crews and helmsmen are lashed to the boat with safety harnesses, but even this may not be enough if the boat rolls over, which is not unknown. In my old boat “Sidewinder”, a Dubois 50’, Sydney to Hobart in a normal year, usually sees an arrival in Hobart on the 3rd day. That’s 3 days of being wet, bashed, dirty and tired. Not for ocean racers are the niceties of bathrooms and scheduled hot meals. Often it is too rough and the boat is moving too violently to contemplate cooking food. So the arrival at Constitution Dock in Hobart is sweet indeed.

Traditionally (this is a few years ago now) the big boats were lined up bow in, to the huge international shipping terminal at Hobart in finishing order. The smaller boats were parked in the enclosed, man made boat harbour. And the party on arrival is something to behold. The traditional “QLD” or Quiet Little Drink is neither quiet or little, and if you haven’t celebrated a New Years Eve on a race yacht in Hobart, then you really don’t know what a serious party is. Mo would be in his element.

Sir Robert Crichton-Brown, a famous Australian yachtie and then Chairman of the Lloyds house, Lumleys, once told me that the definition of an offshore racer is someone who enjoys burning $100 bills while taking a cold shower in winter. And that indeed is part of the game for owners. In the last Sydney to Gold Coast race that I did, we shredded 3 spinnakers and a near new headsail. At a cost of about $15,000 each that’s sometimes what it takes!

For the crew who get to race these monsters but who get off after the race with nary a care, it’s a different scenario. For them it’s race and drink and party. Then do it all over again. Consider the planning that’s required to campaign these boats. After the race the boats have to come home with a delivery crew, be refurbished and made ready to go again. It’s a never ending story. For many big boats, this has become a business with professional crews and paid skippers and navigators. The point of paying others to do the fun stuff was ever lost on me.

Here is the mighty “Sidewinder” close hauled and beating to windward on Sydney Harbour. This recycled photo loses the lovely transverse transom so characteristic of these old IOR boats, but you can just make it out if you look carefully (it’s the back end sport). Fat and heavy and immensely strong, they struggle downwind but the best of them are a terror close hauled in a big blow. Not many can stay with them. Gnostics will notice her sail number made up from the Amos numbers that I wrote about in the “Master Class” articles and some other powerful fractals.

On these big, majestic race yachts, preparation is everything. The huge racing masts are held up by a spider web of wires or extruded steel rigging. Sails are hoisted, lowered and trimmed with halyards and sheets, sailing language for ropes. Everything is operating under enormous loads and constant changes in stress as wind gusts and waves, change and accelerate the loadings. If you are going to survive offshore, you must be prepared for every eventuality. What happens if your rudder (steering) breaks 50 miles offshore in the middle of the night; what happens if the mast comes down; what happens if you hit some floating debris at speed and hole the boat?

These and 100 other nightmare scenarios must be considered, anticipated and prepared for. The only help if all else fails is your fellow competitors and the nearest may be many miles away. If crews get sick as most do as soon as the waters of Sydney Harbour give way to the rolling swells of the Pacific Ocean, then they suffer. Hopefully in silence. In the bowels of a race boat where wet sails are stored, packed and repacked, a few violently ill crew at the start of the race can trigger mass mal de mer! Bear in mind that a headsail, the smaller sail you see in the picture above will need 3 men to carry it. And there are 4 of these in addition to the much lighter ballooning sail, called a spinnaker, that you will see further down. For the ill (and I have seen them bunk ridden for days), the Master must minister. He is doctor, tactician, driver, confidante and sometimes the slave driver on these big boats which typically run with a race crew of from 14 to 22. Always, a sense of humor is the best salve.

Precision in the S&P-Time

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In this battle to beat the elements, the clock and your competitors, precision is everything. You need to allow for time on distance as you make the run to the starting line. Small boats can lie head to wind and accelerate quickly off a start line. Big boats like “Sidewinder” built of triple skins of New Zealand’s famous Kauri tree, take time to build momentum. Time on distance in a yacht race is the equivalent of time and price in markets. Get the combination right and you are famous. Be too bold or too cautious and you may not recover. Downwind starts where the big spinnaker sail is flown are the most hazardous. If you are early to the start, and have to drop this sail and get a headsail up it takes a while. And it is a lonely trip back through the fleet always accompanied by guffaws of mockery and derision from your mates as you tack back to the starting line to acknowledge your Mea Culpa.

So with big boats, it pays to be cautious at downwind starts. For investors early starts too can be dangerous. WD Gann said that the first and last eighth of a move were the most expensive. By this he meant that picking tops and bottoms is a chancy business for most, but that was before the Danielcode where picking and trading turns is our bread and butter.

In yacht racing, particularly offshore racing, we are trying to anticipate weather systems, combat or take advantage of prevailing offshore currents and maximize our performance. And we are doing the same in markets. We are identifying the likely pressures on time and price which are bound by Newton’s first Principle of Motion, and then we position ourselves to surf those market waves.

From the time cycle analysis that I showed you in “Master Class” we had the key cycles in the S&P nicely dialed in and had enjoyed finding the March low to the day and a few ticks. With this market up 55% from its March lows or almost $100,000 per 1 S&P futures contract, that was knowledge worth having. The Danielcode called the low in writing and in the public domain in the week before the low was in. You can read all about that drama in my FSO archives.  

Things Present

We had an expiring cycle in S&P on 05/13 which just gave us a minor but tradable countertrend. The next major cycle expiry was for the DC week (6 trading days don’t forget) ending 06/09/09. Getting up to date, when I wrote for you last I left you with the imprecation that:

 “Note that we now have 2 degrees of DC time cycles expiring on 06/09, that is next Tuesday, so watch for a significant sell signal in S&P during this window”.

Under our time cycle rules which I laid out for you in some detail in previous articles, a high can be either the trading high or the closing high. The DC “week” of 06/09 was the closing high for the first leg of the rally.

For traders as opposed to investors, the 06/09 time turn gave a highly tradable 5 week pullback with the daily T.03 signals marking almost every turn. This is what transpired:

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Our proprietary T.03 signals posted for members, daily, defined every turn in the pullback from 06/11 to 07/08. Note that the major US indices, and Germany’s DAX are highly correlated and a T.03 signal in any one, can be executed in any other of the indices, so long as the signal is elected.

Things to Be

Below is an update of the S&P Time Cycle chart published in the “Master Class” articles.

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We have seen the 06/09 time turn that ran down to the week of 07/14, at which time the market encountered the first full iteration of the DC 62 “week” cycle, whose efficacy had been asserted at the half cycle low of 10/15 which held the market for a month. That DC time cycle caused a 149 point rally into the singleton 44 time cycle expiring 08/07 which gave us our cherished meeting of time and price, or as WD Gann would have it, “Time and Price were squared”. That is price was at a recognizable Danielcode price level whilst “time” was at a recognizable cycle, as was also the case at the 06/09 high.  In this case, DC target price recognition was achieved on a closing basis, about which, more later. From this minor turn we got 6 days or a full DC “week” and just 87 points down, highlighting the fact that nothing in these cycles speaks to quantum. Only price action will reveal that in most instances.

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From that adjustment, another 62 cycle provided the counterpunch to get the rally back on track:
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Let’s clear the decks and get a sharper view of the Danielcode time cycles since the now historic March low. The chart below brings the 06/09 minor top into focus. S&P then ran down into its 07/14 time turn, which produced a low, right on schedule.  From the singleton 44 cycle on 08/07 we got just 1 week down as animal spirits, so remembered from the remorseless grind into the 2007 top again took hold, with every dip being bought and every sad corporate result being hailed as a miracle of “outperform” and here we are at another singleton time cycle which will likely give this tired rally pause.

BUT..look at what lies around the corner in the DC week of 10/06. A multiple Amos cluster of no less than 4 separate time cycles will expire together. And that will likely set off a feeding frenzy, or rather than mix my metaphors, we may need a trysail and storm jib with the washboards in and harnesses locked and tightened. These cycles are what sets off the Southern Ocean “bombs” as the barometer plunges.

 

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Price

The past fortnight has been full of luminaries declaring that the rally is over, based on various readings of chicken entrails, a practice as much in vogue with today’s pundits, as it was in Roman times, when the fates of Caesars often turned on such complex considerations. Today’s assertions are mainly of the “indicators show overbought readings” variety, but as others have averred, markets can stay overbought much longer than you can stay financially solvent. The key here is to have both an expectation and a realization. Expectation alone is dangerous to your wealth as this cautionary tale from David W, a Danielcode client from Philadelphia, PA recounts:

Hi John.. we met in Omaha and shared a beer (actually, several) after your free tutorial. I have written several times and you have posted some of my emails on the DC site. I know you like hearing from DC members.

I am writing again to express my amazement at the DC numbers. Here is what happened to me and I will leave it up to you whether or not you want to share it with others:

Back in August of 08 I paid a highly respected fund manager a considerable amount of money to manage my money. He was gloom and doom and was shorting financial and builder stocks with almost 100% of the money in his managed accounts in the equities market. My investment quadrupled in  value, as you can imagine, thru Feb of 09, from about 120k to over 400k. Somewhere in the middle of that time period I stumbled on the DC site and watched carefully. By the time March rolled around I realize the whole DC thing was no fluke. Although my money manager insisted we were headed for a crash and was "100 percent sure" , I made him take half my profits off the table after you published your call for the March low. He wanted to drop me as a client if I didn't "trust him", and I wish I had let him. At any rate I convinced him to halve my account. Within a few months that half went almost to zero, and the other half would have almost certainly disappeared also.

So I know you like to hear from people who have made money using the DC. In my case you preserved a good deal of my modest nest egg which I have set aside to put my daughter through college. I am not yet a good trader,  but I am a believer. I will never again trust anybody with my money, no matter how confident they are about the direction of the markets.

Again, thanks for all the hard work. I know you don't have to do it. To the extent that gratitude keeps you going..add this to the pile.

David

Realization only comes with price action, but we can define the probabilities much more closely with some basic logic. Having a “feel” just doesn’t cut it. To determine our likely price targets for this rally, we use the Danielcode retracements, which are a marvel in themselves. They are not fib ratios but discrete fractals create from the DC matrix. If you would like to know more about the retracements, or indeed any aspect of the what and why of the Danielcode, you will find it in the free audio of my July seminar “Live at the Springs” available now at the DC website. First we identify the 4 major swings apparent in the 2007-2009 run down. They are marked in blue on the chart below.

At this stage we have no foreknowledge of which swing is being corrected, but odds favor the smallest 2 swings, so first we add the DC retracements for the minor swings. All swings occur at fractals of previous ranges. Hence we see the phenomenon of fixed retracements of different degrees of swings matching or creating a horizontal Amos cluster (see Amos 3:3) in exactly the same way as time cycles create Amos clusters on the vertical axis. Remember that time and price are the same thing. They are just on a different axis.

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Now we can add the likely outliers.

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Let’s go down to the 3 day chart. This is valid as 3 represents “an half time”, 6 trading days being “time”, see my FSO archives or the Danielcode website for the “Master Class” articles. The DC retracements are incredibly accurate if we have the correct sequence. You may find this concept hard to believe, but markets are constantly struggling to tell us what they are doing. Because most don’t understand the market’s language we fail to hear the message. The Danielcode is progressively teaching me more of that language and I am trying to impart it to you.

Here is a blow up of the normal bar chart. We get the June high with a variance of 6 ticks on the group of retracements that are now shown in larger figures (the futures trades in tenths).

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One of the quirks of the Danielcode, as I have written about on numerous occasions, is that occasionally it will complete its target recognition on a close only basis rather than the more normal bar high/low. And that’s what happened at the August high, this time with just 5 ticks variance at the next number in the same DC sequence. Ticks not points. Precision indeed.

So we can see that for now at any rate, S&P is closely tracking the DC retracements from the group with the now enlarged numbers, and that sets up the next 2 numbers in the sequence, 1053 and 1125 as high probability targets.

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From this little discourse we can say that the S&P is correcting the May 2008 swing. And that’s rare market knowledge that we have discovered today. Think about the implications of that discovery. Think long and hard. The market is telling us something important; in fact it is answering the central question of whether the lows are in.

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So we now have 2 high probability time targets and we know with certainty which swing is being corrected. What we don’t know is whether the S&P will stick to this particular retracement sequence or switch to another. Or it could morph from being a retracement to become an extension in which case it would begin tracking the DC blue line numbers. And that would tell us even more about the nature of this current move.

sailBut for now we are armed with some high probabilities both for time and price, and we have insights that others do not see. And that’s always worth while. Markets know and recognize these Danielcode numbers that others do not see. Always.

Here is “Sidewinder” all alone offshore, and 90 miles South-East of Eden, charging South in the Sydney-Hobart race, taken from the Chanel 7 News helicopter. And yes, I know the spinnaker halyard is not at full hoist. That’s embarrassing! But embarrassment is nothing new for big boat skippers.

And being alone and embarrassed is ideal training for those who proffer opinions on future market moves, as embarrassment often follows. Be sure that you understand that we are always dealing in probabilities when casting the bones for the future. We have no foreknowledge, though some pretend otherwise. Only market price action can confirm or deny both time cycles and price targets.

And the wind can and does change. Suddenly. As I never tire of telling my students, markets fluctuate. Sometimes violently.

I trust you have enjoyed learning something of the outputs that the Danielcode creates. If you would like to learn more about the Danielcode and what it can teach us, I invite you to come along to the 5 September webinars that Genesis, whose charts I use exclusively, are hosting. The first is on Tuesday, and they are all free for Financial Sense readers. You can register at the Danielcode website or at Genesis.

Luke 17:20  And when he was demanded of the Pharisees, when the kingdom of God should come, he answered them and said, The kingdom of God cometh not with observation:
Luke 17:21  Neither shall they say, Lo here! or, lo there! for, behold, the kingdom of God is within you.

Copyright © 2009 John Needham

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