Archive for the ‘Time Triads’ category

Market Fractals

Fractal is a form, which appears everywhere in nature both at macroscopic and microscopic levels. Trees, clouds, DNA’s, atomic structures are all fractals. Physics, chemistry, biology, astronomy are full of fractal patterns. Mass psychology is also a fractal. Not very many books and articles are written about this universal truth.

A fractal means a mathematically definable structure which replicates itself across time and size scales. It’s like a building block of creation. A fractal at the heart of every natural creation. Break a Pine tree branch and you see the tree itself. Kenneth G. Libbrecht of Caltech came up with Snowflake physics identifying 35 classification of snowflake fractals. Natural patterns appearing again and again.

The first time a fractal was observed in markets was as early as 1880s, when Charles Dow constructed the DOW 30 and wrote his theory about the first economic fractal. We have to credit the man and his business acumen valued nearly $5 billion today and creating an industry worth trillions of dollars.

He said markets move in a wave like fractal, a tide, a wave and a ripple. There is an accumulation stage, a speculation stage two and greed and public participation finality. After which the form ends and corrects. And then the structure starts again. Dow was the first to see the mass psychology form in financial markets.

DOW 30 survived the centuries but somewhere we lost his fractal. It never got that well deserved attention, unlike modern accountancy, which started somewhere in 1880′s.

Dow identified the fractal and called it an economic theory. Elliott redefined Dow’s work and made an applied forecasting tool called the wave theory. The scale dramatically changed as fractals got seen not only on a multi year business cycle scale, but on every time frame. And on every broad asset and anything traded or non traded statistics with a socio economic aspect and implication. Be it Labor market parameters, macro economic parameters or simply global car sales, just anything.

The reasons which could explain everything about market and economics couldn’t explain why metals, energy, agro commodities, industrial commodities, forex etc. looked alike. And where reasons failed Fractals stood firm, inexplicably.

The wave theory is one tool that works across markets, across subjects on both economic and socioeconomic levels to forecast. This fractal can predict prices of say BRENT CRUDE for a tick, a minute, a day till multi years and decades in future without knowing about the Oil crisis, hurricanes, supply gaps and all that causes that may come in the future. The tool predicts the future without the breaking news, which may come years later.

So why did such a great tool took a back seat and never emerged? 1800′s was too early to understand mass psychology. Stock markets were fancy things. The mass psychology lacked critical mass, the speculator new little about leverage. Leverage reached world scale a century later. And something more was hot, information and its causal implications. There was an information and explanation for what markets were doing. And the great depression was long forgotten as the new generation took over. Econohistory owing to its black aspects was never interesting reading. Who wants to know how many banks failed in an era where a banker is celebrated? 125 years and we are still giving reasons, building businesses and knowledge technology systems unmindfully defining the fractal that defines us. The fractal that is larger than life and continues to move relentlessly with cyclical precision.

We have reached some conclusions, why we forgot the fractal. Human mind is the least understood part of the human body. Recent attempts to map the brains throw interesting light on the subject. Emotion is a key driver for the brain. We are brain dead without emotions. Further work has proved that the lizard brain (Reptilian Complex) rules our impulses, our herding tendencies, how we behave in the society and our stock market games. The lizard also explains why humans remain penny wise and pound foolish. Why we make things complex rather than simplifying them? Why we can’t stop or pause consuming as a society? Why panics happen? Why fear is a bigger motivator than greed? And why complacent society means low volatility? Reptiles also explain why Fractals don’t interest us?

Fractals are not stories we love to hear. The patterns are contrarian by nature looking at exits on greed tops and entry in busts. Fractals by very nature stand alone. They are unconventional. And above this they are a lot visual. People are different and so are their ways to learn.

Drucker classified them as group which learns by reading, or writing. This all leaves us with a small fractal lovers, only a few who can question the status quo standing alone uncomfortably. Fractal needs courage to stand against 200 years of economics and say there is no economics without psychology, and psychology is itself fractaled, patterned.

Everything has its limitations. Even fractals are not fool proof. But they are definitely better than fundamental ratios like Price Earning ratios which fail the back test miserably with no forecasting value whatsoever. Understanding fractals may take a few hours but integrating them in and above economics may take years and then like Eels said, “one day the world will be ready to see and wonder how they didn’t see it”


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.
ORPHEUS GLOBAL RESEARCH

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.

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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.


Breaking NEWS

The markets have consistently proved that profiting from news breaks is not an easy task.

Even in 1850 people needed faster stock news. And Reuters used carrier pigeons to do that. The birds were faster than the post train. This was the missing link to connect Berlin and Paris.

The stock news from the Paris stock exchange could reach market players in time to profit from it. That was then, now things are different. Now we have 24 hours markets, so even if London bombing news reaches you early, by the time the spot starts trading, you have futures that are moving up from extreme discount as spot moves down. The discounting mechanism works in a totally different way.

Now, not only market players know how to use leverage but also markets discount news differently each time. The relevance of the news is seen post facto. If the prices went up, the news might be good and vice versa.

Reuters did create a successful model by delivering the news on time. But he never really wanted to teach us how to interpret news. The market was left to do its interpretation.

How people saw news in 1850s is not very different from the way we see news today. We care about the news till the time we anticipate a reaction. We give the markets reaction time and then we have another news item to digest.

Cause and effect is a multi-billion dollar industry. We have the cause and we study the effect, writing tomes of news or research around it. For example we have the Budget effect in India or the US Federal Reserve meeting effect.

The events are watched and written about carefully to gauge an effect on the market. Why does a good budget take markets by surprise? We are too busy in the inertia of changing market prices that we really never bother about challenging the news effect. It does not work.

Markets lead economies. The S&P 500 is the best known forecasting indicator for the US recession. And in the same way, the Sensex or the Nikkei can tell more about local economies then macroeconomic indicators.

Markets digest and discount news much before they appear in the newspaper. And this is why the stock market news is always late. It is never in time to profit. Rather good news is used by smart investors to sell and bad news is used to buy in. One always gets a better entry or exit price.

And what about the bad news which pushes markets up? JFK’s assassination pushed the market up the next day. September 11 was not the end of the world, but a good time to buy. Wars happen at market bottoms not at tops. The Kargil war was a good time to dig in to be a contrarian. Why is it a known fact for an investment psychologist that one should sell on news or buy on rumour? Why is contrarianism so logical, so rational and still so tough to practice? How do market technicians give price targets without knowing the future or news? How do technicians have a better chance to tell you what is going to happen in the next minute than an impact analyst?

Investigative research cannot beat the accuracy of market timing. The truth is that price forecasting has nothing to do with news. Though the link works upside down, if you are using good news to exit and bad news to buy in. If timing the markets had something to do with news, why has the dollar not been dumped yet, despite all the calls from reputed media and academicians that the dollar story is over? Dear Professor, the point is that you cannot forecast the dollar’s strength and price targets from macroeconomic news.

Although the news media looks detached, it’s a part of the market events. Stock markets are news churners. We have an interest, an appeal and an audience, the right mix for a business model. The stock market also has star quality after all, the markets are the real fortune tellers, rich today, richer tomorrow.

Robert Shiller mentions in his book ‘Irrational Exuberance’ about this aspect. And he even goes ahead and mentions that it’s no accident that financial news and sports news together account for roughly half of the editorial content of many newspapers today.

He even mentions about our fancy with new highs. We made a new historical high today, on volumes or on price or the constant records that are being consistently bombarded by exchanges around the world. This only adds to the confusion people have about the economy. It makes it hard for people to recognise when something truly and importantly new really is happening.

Then we have Victor Niederhoffer, the legendary hedge fund manager who published an article that sought to establish whether days with news of significant world events corresponded to days that saw big price movements. He tabulated all very large headlines in The New York Times from 1950-1966. Out of the 432 significant world event days, 78 (18 per cent) showed big price increases and 56 (13 per cent) showed big decreases.

He concluded that many of the world events reported did not seem likely to have much impact on the fundamental value represented by the stock market. Perhaps what the media thought was big national news was not what was really important to the stock markets. And there are also statistics about absence of news on big price change days. The ‘breaking’ news is just not there.


The Prosperity Index

Daniel Kahneman, Father of behavioral finance has clearly illustrated in his life long and Nobel Prize winning work that a majority of us humans are loss averse. Even if it means making a wrong choice. If we plug his work on the Elliott fractal then we can assume that all down ending C waves will have very few people digging into stock fishing. There will be more panic, as extreme negativity involving mass psychology would mean “stay away”. Capital conservation is not a strategy for a top, it’s always been an investment strategy for the bottom. This is why Humphrey Neil said, masses generally go wrong on a turn. But as technicians, we understand that timing is the name of the game.

The prosperity index espouses the same principle of wrong choices at an extreme. We highlighted the prosperity index on 13 Nov 06 in our WAVES.METALS report. Also known as the Gold-Silver ratio, the ratio lows come near prosperity highs. As illustrated, we as a society are heading into the most prosper times of the last 25 years. And conventional wisdom and conventional research foresees prosperity as a straight line, which means the bounty and loot shoot continue. But unfortunately, life and everything in nature, like stock market is cyclical. After high prosperity it’s time for the swing to the other extreme. The ratio is near 1 and has always returned back from these levels for a quarter century. Whether the Index will turn again remains to be seen.

On the short term, the anticipated triangle resistances ahead for Gold, Silver, MCX – Gold Near, HUI – Gold Bugs, NEM Newmont Mining Corp, GFI Gold Fields Limited and XAU – Gold and Silver Index are still running at 640, 13.2, 9300, 340, 47.4, 18 and 144 respectively came in visibly and clearly. A break for Gold here will push us to our alternate interpretation of a Gold flat up to 690 and maybe to a new high with a first target to psychological 700. If prices move above 690, we will get two signals. One it’s time for Gold (tangible asset) to move to 1000 and second that the prosperity Index has turned from an extreme and it’s time to conserve capital in the paper assets (non tangible) that you might be holding.


OIL on the edge

After the confusion at 60, we threw in the towel for the alternate count looking at prices lower than 17 Nov low. This was still easy, as Nov – Dec move up was a counter trend move, which had to end and push prices lower. Now we are almost $ 10 down from 60.

Last few months we have been mentioning of a little something which OIL had left behind when it moved up in Dec 06. It was the test of psychological 50, which was not just a psychological level but also a confluence of many price objectives. We mentioned two degree of price objectives. First kind justified an upmove near 54-55 viz double top (slide 5), multi year supports and resistance reversal points, moving average penetration and retest (slide 3).

The second degree price objectives were the little something that OIL left behind. The second degree price objectives were the previous 4 wave (slide2), normal scale channels with price objectives as the width of the channel and the log scale channel (illustrated – slide 4 and 5).

Now OIL has achieved the second degree price objectives and also some FIB objectives with C=0.618*A for the ZIG ZAG internal ratio. What happens beyond current levels, is nothing short of falling over the edge for OIL. We at Or-phe-us are ENERGY BULLS and remain long term positive on OIL with future targets above $100. A clear break here does put us back on work to chalk out the counts again. At this stage we see psychological 50 and short term support come in. Beyond 50 we will have to review. We have enclosed support zones and a historical check on what we anticipated and how prices panned out.

ORPHEUS GLOBAL RESEARCH

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.

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By 2025 we will be in Stone Age

These are the famous words of Geologist Kenneth Deffeyes voiced in FEB 2006. Though the expert reiterated later saying that the words he said were a bit harsh, the quote anyway found its way to the top list of 2007 quotes. Books and cover stories highlight a mass psychology extreme. We call it a cover story indicator. Economist came up with a cover story on Dollar doldrums four times since 2004. Every time the cover page story hit the stands, dollar strengthened by 10-15%. Such inverse behavior of markets unlike what a reputed respected magazine suggests highlights how mass psychology works. If more than a million readers of Economist know that dollar is going down, most likely we will have a surprise, as a million people can not make a killing together speculating on the dollar. Same way, if the OIL expert writes a book about OIL crisis, most probably we are near an intermediate top. This is what happened, as OIL is much below the top and now other experts pen out stories about OIL.

Oil prices rest near $ 60 now. The analysts still sight continuing warm winter expectations and delayed deliveries. But how can delayed delivery push prices down? If OIL does not reach you in time, the demand should increase and take prices up. Maybe delayed delivery leads to inventory build up, which pushes prices down. This was for ‘OIL Bears’. The analysts have even conjured up new year forecasts for ‘OIL bulls’. They want to keep everybody happy. Despite warm winters, fog and delayed deliveries, OPEC is trying to reduce output to stabilize the market. Overall the outlook for the year ahead is mixed.

We at OR-PHE-US believe mixed analysis is easy analysis. If markets are moving sideways for the last one month, it’s easy to sight neutral reasons why OIL could go up and why OIL could go down and in conclusion how buying pressures match selling pressures to keep OIL where it is now, sideways. We sighted an extremity of OIL at $78. Now we see another consolidation zone, concluding in another leg up. The very fact that warm winter talk is ubiquitous is the very reason, it may fail to work. We still believe OIL remains in an OIL primary trend down to sideways, but short and intermediate term suggests a move up in Jan 07 before any real dip happens.

We gave MCX OIL buy near 2700 levels. MCX OIL moved up to 2900. Technically speaking the retracement up still looks wanting and shallow. Our target level still stands firm near 3000 levels. We will make an early review next year, if international OIL prices stay below $60. Any by the way, we partially agree with Deffeyes about a crisis, though we are not sure of the stone age. And even if we do hit stone age, we see it as a life time buy opportunity.

Have a prosperous New year.
ORPHEUS GLOBAL RESEARCH

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.

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ORPHEUS RESEARCH AT REUTERS - UNITED KINGDOM

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