Archive for April, 2007

Channel Psychology - GOLD

Just like always, our brain can comprehend a Psychology Channel (Tube), but inverting it to understand Channel psychology might need Bono’s lateral thinking. Even if you are an investor, a trader or analyst, prices leave an imprint on our mind. As just like historical price highs are remembered, our brain also creates imprint of inclining, declining or inverting prices. Unknowingly even the most ardent tape reader is channeling in his mind. However, there is a limitation. The tape reader can study a few stocks, but not the big picture. Despite a keen understanding of stock prices some tape readers destroyed their fortunes. Like Jesse Livermore did. There is another reason why mental channeling can kill. The exercise is so involving that following rules might take a back seat. Even, Jesse was also known not to follow his rules strictly. Or was he barely left with time to do it? Great traders also go wrong and so rules remain the real gurus. This is reason something as basic as channel psychology with rules can work. Simpler the system, better it should work.

We have kept you on track with Gold from the May 06 top and even illustrated you to the up scenario from 575 supports back to 660. And if this was not enough, all our last few Gold reports have been taking about, “above 640 we look at 690”. We did hit our anticipated target again. But what happens from here is indeed a tricky call. The normal channel (above) has witnessed a third breach at 20 year resistance line. The more a channel psychological resistance is tested, the more likely it is to break. The rule is simple. If 690-700 breaks, channel supports should push prices to the next level at 800. But 690-700 does not seem an easy level, which prices can just break through.

First Gold historically has always moved in upmoves of an average five years, starting 1970-75, then 1976-80, 1985-88, 1993-96 and now 2000-2007. This makes the current upmove the largest in the history of Gold prices. This can be interpreted in two ways. One that we are starting a new bull market in Gold, which could leave aside breaking 1000, make the magical figure look miniscule in days to come. And second this is just another extremity, which will come to an end, as markets stabilize and the Golden Hedge loses its charm, as the crisis commodity. We belong to the first school of thought. And though we think Gold is at a short term extreme, but prices have a bullish signature to them. We are in a multi decade bull market in Gold, with a 30 year cycle. The cycle started in 2000 and should continue till 2030. Bullish markets have an extended upmove cycle and a short negative cycle. With 7 years running we have atleast 7 years more statistically for Gold to register the high of the decade. And if we add the bullish extension, we can easily see Gold headed up till about 2020.

But before our eyes start glittering, let’s understand that forecast is one thing and making money on it something else. Mastering emotion and conviction of research or belief is not easy to come. Let’s take a step at a time. Some negative reasons, First, we have a Key Reversal monthly bar at the May 06 high for Gold. Key Reversal bars signal exhaustion. Second, the move down from the top has barely finished 8 months, which keeps the character of prices of an intermediate degree. Since the start of the bull move we have not had a more than 9 month fall, which is needed to correct such a large upmove. If Gold continues to move up without a sizeable correcting in time or price, it’s prone to a price shock, which makes it tougher to handle for traders and investors alike. Third 690-700 marks a key Fibonacci confluence level. So even if don’t get a multi week move down from here, a short term dip here can not be ruled out. Fourth, Momentum on weekly basis continues to diverge from prices. And if this was all not enough, we have the host of other Gold related Indices and stocks, which are also not confirming Gold’s intentions to move up from current levels.

So as a rule we will still give the potent bar a chance before we pull off the lid from our 1000 target on Gold. We have put up the long term count on Gold, which seems to be completing the 1 primary wave up. The sharp 2 primary wave shock down should also fall at one of the channel psychological supports (illustrated), where we will be positive again. Now after our 690 target is met, we want to be a bit cautious. And as we said a host of other Gold Indices viz. MCX (India Spot), HUI (Gold Bugs), NEM (Newmont Mining Corp), GFI (Gold Fields Limited) and XAU (Gold and Silver Index) are not confirming Gold’s intentions. We have been negative on MCX all this months. And our anticipated key level at 9300 has not breached since Aug 06. So much noise, but prices continue to be sideways in the channel.

In conclusion, there was Jesse who might be constructing channels and then there is John Bollinger who went a step ahead and visualized rolling channels. His psychological bands are also saying something about Gold. For us above 690 Gold, 9600 MCX (India Spot), 360 HUI (Gold Bugs), 48 NEM (Newmont Mining Corp), 19 GFI (Gold Fields Limited) and 150 XAU (Gold and Silver Index), Gold is headed to first a new high and then 800. But till then, we sit tight and wait for it to turn.

Geopolitical OIL

If there is something that can take oil up or down, it’s the geopolitical risk. Is it? The top news now says that, “Crude oil may fall next week after Iran’s release of 15 British naval personnel eased concern that shipments from the Persian Gulf will be disrupted; 48 per cent of oil analysts said oil prices will decline, 25 per cent said prices will increase and the rest said they will be unchanged.” This means that if geopolitical risk is the biggest driver for oil then there are more reasons why the asset should fall. Well we have proved this time and again, how weather, Iran or geopolitical risk cannot really predict (accurately and consistently) where prices will go tomorrow, next week, next month or next year. We can try explaining this again.

On March 12, around 10 days before the incident, this column said, “Though we maintain our bullish view on oil, timing the purchase is what matters most. We still need more confirmation to consider the oil fall from August 2006 to January 2007 as the end of the oil bear move. We would give the commodity till the end of March to tell us if it’s done with falling.” Oil has clearly moved above a key 50-day moving average. The last time this happened was in July 2003. Oil was above this nondescript rolling line till July 2006.

This means two things, either the geopolitical risk continued to increase over the last four years, the very reason prices never actually fell, or the rolling line understands oil more then analysts do. A simple ‘Buy’ in July 2003 with a month long confirmation would have kept us away from all noise. Current prices have made a clear attempt to move above the rolling average. And it seems that apart from all the news, a support here above the average might be all that we need to take oil from 60 to 100. And as we mentioned last time, the energy asset has a four-year cycle, which bottomed out in 2006. The next cycle should move on till 2010. Our Preferred count still looks up and considers the break on 50 day moving average, momentum confirmation, log channel support (Slide 2), oil cyclicality and intermarket conformation from S&P Energy Index, as positive signs. However, on the Alternate count the bottom formation still seems to be wanting. First the fall from the top has not completed 9 months, which makes the current move intermediate and not of primary degree. This means the 4 primary (A)-(B)-(C) might continue for some time before oil actually bottoms. Second, we have the WTM (Midland), which unlike Brent has not closed above the 50 period moving average. WTM still is below key levels to call it over.

While we might still need more confirmation on oil to rule out the alternate count completely, natural gas is ready to move up. Our Nat Gas target remains above 20 for the asset. We have detailed other related Indices and ETC’s to validate our case. Energy remains poised at a significant juncture. How geopolitical situations predict oil is a tough call, but reading interpretations should be definitely interesting weekend reading.

WAVES.OIL is a perspective product published once a week. The report covers BRENT, WTM, XLE (Energy SPDR), top energy stocks, Natural Gas and related FUTURES. The product highlights Primary (Multi Month) and Intermediate (Multi Week) price trends. The report illustrates key price levels, price targets, price projections and time turn windows. The product uses Elliott waves, traditional technical analysis tools and sentiment indicators.




Funny Money

It may appear funny to use the hemline indicator to predict stock prices, but as an indicator it makes money.

When we first read about the hemline indicator, it seemed like a funny joke. A market going up and down with the length of skirts was a strange idea of an economic indicator. Ralph Rotnem was a Harvard graduate and he created the indicator after seeing an uncanny pattern, which kept reappearing.

Because skirt lengths have limits (the floor and upper high respectively), the reaching of the limit implies the concurrence of an extreme positive or negative mood. The social mood was linked with stock market expression.

Working from Europe helped us relate to this indicator with conspicuous clarity. The skirt lengths of women around have witnessed a sharp decrease over the last 24 months.

And even from an extremely open mind, December did not seem that warm, despite all the talk about warm winters. We really were sure that there was not much further north, the skirt could travel. A little more high would mean a beach like scenario. At Christmas parties the debate was hot, and speculations were ripe, and we all were waiting for the desired results.

Well fortunately for us, the stock markets turned down. This diverted our attention to more important stock portfolios away from skirt lengths. The hemline indicator had worked yet again. Strange but transcribing this social mood indicator to other emerging markets was not easy.

In India the dress sense is conservative. How could a pop culture indicator be extended to Indian markets? There must be a way to find out what women in India were expressing, as the stock markets headed up. If only they wore skirts, trading in global stock markets would be as easy as sitting in a park taking down notes, diligently for months. And when we hit an extreme, it’s ‘Sell’.

We express social moods in many ways. When we are happy, then along with skirts or business suits, we also buy cars, listen to vibrant music and see a lot of films. A social behaviour expert could have predicted the big bull market in India after seeing just a couple of Bollywood films. A majority of Indian films had themes of love, dancing around trees and were overall a celebration of life.

This was an expression of socially positive mood and consequently a positive time for stock markets. HBO’s Sex and the City got a celebrity status during such times. After all, Carrie Bradshaw, despite all her knowledge about good sex was looking for love and finally did settle down with Mr Big, a similar theme over occident and Asian cultures in similar time periods.

Human emotions are rhythmical and have wave nature. And these waves are hypothesised to govern all human activities including business, politics and pleasure. When mood trends up, people buy stocks, just like they buy clothes, film tickets, jewellery and clothes. And when the social mood trends down, the broad consumption pattern flags and people don’t buy stocks, they sell.

Robert Prechter has illustrated this concept of social behaviour in his two seminal books on ‘Socionomics’.

He talks about polarity of behaviour. And how humans oscillate between positive and negative moods i.e. between concord and discord, inclusion and exclusion, forbearance and anger, confidence and fear, embrace and avoidance of effort, practical and magical thinking, constructiveness and destructiveness, desiring power over nature and over people, all of which has a consequent effect on markets trending up or down.

Just like the hemline indicator, there is also a skyscraper effect. The higher up we go the sky, the more prosperous we are. And the more prosperous we are, the more near a top we reach. A study of the tallest buildings of the world has historically given accurate signals of intermediate and primary degree tops.

For example the World Trade Centre of 1973 marked the Dow 1000 top. You can look at the Burj Dubai skyscraper timing. The first press release on their site is dated March 2005. The Dubai stock Index peaked months after in November 2005.

The Index is down 62 per cent from the top. Some might call it strange coincidence, but this happens again and again, a historical characteristic associated with skyscrapers. “Let’s make the tallest building”, is associated with a prosperity high. And after prosperity high comes a fall.

Men desire change, or at least bring it about, even when it appears superficially. For example adversity eventually breeds a desire to take charge and responsibility, achieve and succeed, while prosperity eventually breeds irresponsibility, complacency and sloth. Events are perceived as turning points for mankind.

This is conventional, cause and effect relationship. The very reason it does not work. Turning points are generally the opposite as each positive point is a step towards negativity. And each negative point is a step towards positivity. Men produce more goods and services when the dominant social mood is positive.

The reason for the lag between the mood (tracked by stock market) and the result is that people take time to put their new found energy to work. And then reap the fruits of its employment. Plot depressions, recession and economic booms and you see the correlation work.

Prechter has even gone ahead and plotted music as a social expression. How the music we like expressed the social mood of the society. A recent work also connects our preferences for cars. As we go up in stock markets our colour preferences are black, white and red and angular straight cars, remember the white Ambassador? And as our preferences change to transition colours like grey and silver moving to brown and green and rounded cars, we as a society are becoming more negative.

So when you see a green ‘Swift’ on the road, you should be sure that an intermediate top is here. The car is less angular more rounded and it’s green, then the negative social expression has started. We humans see things more rounded as we become negative as a society.

We can afford to be sharp when we go up, but as we go down, smoothing the edges becomes imperative, be it cars or clothes or shoes, rounding just gets in. It has also to do with our ability to visualise. We can not see inversions like inverted yield curves or an inverted picture.

There are a host of trend studies about when we like ghost movies and when we appreciate animation. Why having the hamburger cheapest in Tokyo is not a coincidence? Why making more babies is a positive social mood? And being single or an ageing society comes after a society undergoes negativity in social mood?

As the future is going to be socially negative and these are times we as a society don’t enjoy celebration of love but big screen sex and sirens.

Markets lead events and events are caused by the social mood. And social mood has a mathematical Fibonacci relationship linked with it. Ask an open ended question to a group of 100 people, the answer will most likely be a 62/38 polarity.

And if this still does not hit you, remember your next boss might just be a woman. Women do better in a socially falling transition. And if she drives a green ‘Swift’ and wears a skirt, you might just have got your trade signal.