March Madness

Cry Havoc!

Fri, Mar 19, 2010 - 12:00am

S&P

The trend on the S&P 500 index, our Equities benchmark remains UP. For reasons unknown to me, this trend, now a little more than a year old, continues to cause rage, apoplexy and likely angina in a wide range of commentators and writers who insist that it is a junk rally on low volume with a host of non confirming indicators. Bear capes are in ever increasing demand at local costume shops, and those who missed this now 500 point move, continue to fulminate at the perceived injustice of this historic rally.

The bearish sentiment amongst traders is testimony to the ascendancy of marketing over simple observation, coupled with a longing for S&P 400! It’s not going to happen guys.

Those who follow the Danielcode are well aware of its now historic call for the 666 bottom in this market in March last year. If not, you can read about it in my FSO archives.

More importantly in an attempt to bring some rational thought to those in the Armageddon camp, I have been publishing the DC trend charts each Friday on the DC website. They are free to all. You will see from the following 6 day chart that this market created an intermediate top near its 01/12 DC time cycle that gave us a nice tradeable pullback;

And that has been the only elected Sell signal on this time series since the March 2009 lows. On the more important 12 and 24 day charts the trend has remained stubbornly UP.

In previous discussions of this form of analysis, I have averred that markets cannot change trend without creating a signal that we can identify. We look for those signals to be created first on the 6 day chart and then to morph into the longer term charts. If you follow the Danielcode trend analysis you will save yourselves a deal of angst, brokerage and wealth. This today from David W of Philadelphia after a discussion on the DC Forum of time and price:

“Thanks guys.. I need this kind of discussion to keep me sane and my money safe. I wake up everyday wondering why we (ie, the equity markets) haven't crashed yet. And the only thing that keeps me from betting on it is this website and John's constant reminder that, regardless of what you think should happen, it's the charts that.. well... chart price movements.”

March Madness

For those looking for an Equity market top, don’t be lulled into a false sense of security just yet. The Ides of March and the anniversary of Caesar’s appointment with fate are passed, but not forgotten.

Julius Caesar paid the ultimate price for his mistaken trust in Brutus, But the rage of Roman Senators, like their modern counterparts, pretending to act on behalf of the people extant to the Roman motto Senātus Populusque Rōmānus (SPQR), is nothing to the rage that Bears will display if ever they emerge from hibernation. March madness is always a probability. Let me show you why:

From 2000, every March except 2006 has given us a market turn of greater or less importance. March is the dominant month for intermediate trend changes.

As you can see from the first chart in this series, we have a minor DC time cycle at work right now, but the highest probabilities for a significant market turn lies with the 59 DC week counts. The next expires in the week ending 04/08 followed by another on 06/07. We can also see that the DC price retracements from the March 09 low to the 08/08 corrective high, stopped this long running rally for a few weeks in January at 1149. That implies that the next retracement in the DC price series at 1242 will also be valid.

That price will be inside the present upper regression channel in April and 10 points above the median by early June.

I have had a number of letters from Financial Sense readers proclaiming me the only surviving Bull on this august portal. Strangely I am not a Bull by nature, but even an aged Attorney, such as myself can draw a regression channel and figure out which way it is sloping. And the trend remains until it ends. Trite but true.

Trends, once established, last much longer than you can possibly imagine. Rather than fish for a turning point with the unavoidable damage to psyche, self and the trading account balance, let me suggest that following charts is a far more rational approach. The matters invigorating economists and others of the chicken gizzard gazing fraternity, may even be true for all that I know, but that condescension requires an extraordinary leap of faith, including the assumption that government statistics are neither skewed or tinted with rose coloured glasses, and other assumptions far more bizarre.

In truth, it matters not if this has been a junk rally. It matters not if other technical indicators, particularly volume, are not confirming price moves. These are just inbuilt assumptions of what should be. The market pays just the same for a non-confirmed 100 points as it does for a widely applauded 100 points. Price rules the trading game. And this game has given us 500 juicy points from the March 2009 low.

DX

The important US Dollar Index (DX) made at least an intermediate low in November 2009, and has tracked its upwards regression channel since that date. We got a nice tradeable pullback at the DC 59 week timeline on 02/22 and a T.03 Buy signal into Thursday’s reaction to the lower regression channel.

The next dominant 59 DC cycle expires in the week ending 04/13, and absent a longer term sell signal in the interim, price will be at or near 83.30 in that week.

Gold

Gold is at an interesting junction, with an active Sell signal on the 6 day regression chart, whilst maintaining its Buy signals on the 12 and 24 day charts.

On 12/02/09 these charts highlighted the probability of a rapid retreat for Gold from its awkward stance above the upper channel. That top came on the day that “Knowing the Trend” was published by Financial Sense, and right in the dominant 59 DC week time cycle. Since then, Gold traded to the median of the channel as an expected minimum retracement but then followed with a trip all the way to the bottom of its current regression channel, where it is now stubbornly clinging.

The divergence between the operational (6 trading day) chart and the dominant 12 day chart sets up a nice juxtaposition for Gold. Either this chart reverts to a buy signal shortly, or the 12 day chart will issue a sell signal which will have more serious consequences for Gold Bulls. The conditional sell signal on that 12 day chart already exists. A close on 04/01 below 1097 will confirm that signal.

I am particularly enjoying watching Gold’s determined struggle to hold the regression channel on the “close only” chart:

Does any of this appear random to you?

My message in today’s article is that market action, which is a trader’s lifeblood, often runs counter to commentary and popular belief. Brutus (Marcus Junius Brutus Caepio c.85-42), immortalised in Shakespeare’s Julius Caesar; “Et tu, Brute!", was just one of many who allegedly joined in the assassination of Caesar, whilst those of you who can identify him at all, likely view him as the prime mover. In fact, according to our most authoritative source Suetonius, one of the brothers Casca “stabbed him from one side just below the throat”. He adds the possible later involvement of Brutus as merely an unconfirmed report “by some”.

From this, and Plutarch’s “Caesar, Parallel Lives”, Shakespeare and his artistic successors at MGM, wove the popular story, which in today’s world, where uncritical supposition passes as authoritative fact, has seen poor Brutus damned for all history! But it has provided a great yarn of violence, love and lust; betrayal and vindication. All the elements of a market trader’s life! And a fine vehicle for Marlon Brando and later Charlton Heston.

The Roman Seer Spurinna had prophesised Caesars death to him, and named the date as the Ides of March; a feat of foresight and accuracy that modern market forecasters always hope to emulate.

As Caesar entered the Senate on that fateful day, 15 March 44 BC, he mocked Spurrina, calling him a false prophet, because the ides of March were come without bringing him harm. Spurinna replied that they had of a truth come, but they had not gone.

We too should heed Spurrina’s words. The month of March has come, but it is not yet gone!

Perhaps Marcus Antonius’ words will yet come to pass: “Cry Havoc, and let slip the dogs of war". (Julius Caesar, Act III, Scene I)

Copyright © 2010 John Needham

About the Author

Lawyer and Financial Consultant
jneedham [at] thedanielcode [dot] com ()