Since the market topped in 2007, the McClellan Oscillator (NYMO) has undertaken a breadth thrust from beneath -100 to Friday’s closing value at 23.04 (or higher) just 15 times.

In general, these thrusts have been excellent buying opportunities.  It’s true the combination of rising volume, broad demand and durable technical bottom they’re indicative of hasn’t always delivered long, uninterrupted trend continuations.  Nevertheless, this list of NYMO breadth thrusts has signaled many of the major pullback bottoms over the last 8 years.  The latest such occurrence was on Friday.

A casual glance at these would satisfy the chartist that a durable bottom is indeed coalescing out of last week’s fits-and-starts.  But, there’s a bit more to the story.  

In fact, the previous 14 such breadth thrusts are split into two categories: those 1) with a positive divergence, and 2) those without.  Descriptions of the McClellan Oscillator treat divergences as an ancillary technical consideration: they may precede a breadth thrust (or not) and are sometimes a credible signal (but other times not).  

Looking at NYMO and its subject the NYSE Composite (NYA), however, we see a highly consistent relationship: where a positive divergence precedes a breadth thrust, a strong bullish reversal has nearly always begun. Meanwhile, where a positive divergence is absent before a breadth thrust (i.e. NYMO bottoms with NYA), the reversal is short-lived.  This isn’t an immutable law of markets or even a certainty peculiar to NYA; but the prevailing trend over the last 8 years is a powerful one.

Let’s take a (brief) look at all 15.  

November/December 2007

Late 2007′s breadth thrust is a template for those breadth thrusts without a preceding positive divergence.  In this case, NYA declined from October 2007′s high, then sprung higher 6.8%.  During this corrective rally, NYMO soars over 140 points to meet and exceed 23.04.  From this point, NYA added another 1.1% before rolling over into a -16.8% correction.

October-November 2008

Right away, here’s an example of a positive divergence that panned out in a nice trade, but did not offer a positive R from the next swing high to low. As we’ll see, this is an exception.

March 2009

This date is familiar to even the most casual market observer. 1) Positive divergence, 2) breadth thrust meeting/exceeding Friday’s close at 23.04, and in contrast to late 2008, 3) a sustained uptrend with virtually no up-front risk.

October 2009 - June 2010

This period held 3 positive divergence occurrences. The orange bubbles show the negative price move during the divergence, the green bubbles show the reward for entering after a NYMO at/above 23.04, and the red bubbles show any subsequent risk/drawdown.  The trade off the May 2010 bottom could’ve been played a variety of different ways.

March - December 2011

In 2011, the converse occurred.  Here, no positive divergence preceded the three <-100 to =/>23.04 breadth thrusts that occurred.  Across this series, the reward/risk on a short entered after a NYMO close =/>23.04 is nearly 6.6 to 1.

March-June 2012

This period held a mixed bag. The first two of three occurrences here were no positive divergence trades (bringing the running total in 2011-2012 to 5 consecutive positive breadth thrusts where a short was the right play). The R for these trades were 5 and 3.8 respectively.  

The June 2012 bottom marked a positive divergence bottom.  There was a swift 4-session, -4.2% drop after NYMO crossed 23.04 before the final bottom was in; but after that it was and away. How this “trade” is drawn is debatable.  As a position trader, your risk management protocol might have stopped them out on the Sept-Nov 2012 “QE3″ pullback.  If that were so, the R on this long is 3 - still very good.  However, if the trade were held until the high preceding the next  NYMO <-100 (just before the “Taper Tantrum” of Q2 2013), the R goes to 6.75.  

May-September 2013

Two more positive divergence occurrences, this time feature Rs of 10 and 100.  Better than any of the others, these trades illustrate what a NYMO breadth thrust preceded by a positive divergence is capable of producing.

August 2015

And last Friday, 08/28/2015.  1) Breath thrust from <-100 (-109.61 on 08/24) to 23.04 complete.  2) No positive NYMO divergence. 

 As drawn, the six positive breadth thrusts that weren’t preceded by positive divergences since late 2007 have an average R of 7.4 where a short is opened on the NYMO close =/> 23.04.  

A few stats on these six occurrences:

This study is by no means perfect.  The sample size is on the smaller side and the performance figures simulate perfect “trades”.  How money management (i.e. scaling, leverage, drawdowns, etc.) is handled inevitably varies.  

However, the overarching message is clear: where NYMO has exhibited a positive breadth thrust that is not preceded by a positive divergence, the bounce accompanying the thrust has been short-lived and dwarfed in size and length by the selloff that follows.  Against that baseline context, the day/swing/position trader is left to execute their own method/applications.

In answer to the question of whether the current rally off August 24′s opening lows is “the bottom” or a corrective rally only, the McClellan’s Oscillator’s history since NYA’s pre-GFC highs is clear.  

Beautiful Catastrophe. 

Is It Time for That Euro Long/USD Short Trade?

Godot's At the Door. He's Selling Greenbacks.

To commemorate the 6-year anniversary of the cyclical bottom in global equities on 03/06/2015, EUR/USD - or Fiber as it’s called (a too-clever sobriquet from the Dot-Com era echoing GBPUSD’s comparatively archaic “Cable”) - tagged and plunged through a significant milestone of its own.  

Since 2011′s peak just below 1.50, EURUSD has coursed through a massive, 200-week harmonic ABCD pattern with an ultimate target pegged at 1.10.  It is a “harmonic” because it’s key points adhere to specific fibonacci ratios (C is 61.8% of AB; D is 161.8% of BC). But in the simplest technical terms, this pattern is a measured move down where leg AB and leg CD are identical in length.  Check it out: 

You’ll also note the faint lines of a rising wedge between points B and C, forming a nested pattern (or “pattern within-a-pattern”) with the ABCD. These “bear” wedges tend to perform well when they articulate corrective rallies like this one. 

In retrospect, point C was a pivotal moment.  Actually, it was a pivotal moment in real-time, too:

In fact, EUR/USD wrestled with this spot near 1.40 for months.

But couldn't make it work:

-3500 pips and a €1.1 Trillion QE program later, EURUSD has formed an interesting setup at the ABCD target.  The Ides of March (for USD Bulls?) coincide with a bullish Piercing Pattern that first saw a significant plunge through 1.10 (Candle 1) followed by a strong throwback (Candles 2-4):

Too far too fast?  Did EUR bulls throw in the towel in a mini capitulation after  January/February’s 3-week Dead Cat Bounce? It’s too early to tell if this is the beginning of a reversal or simply a throwback to firm up the ABCD target at 1.10 as resistance before rolling again. 

On the positive side:

EURUSD is at major structure support.  This area between 1.04.50-1.1050 is the biggest node of fibonacci support since 1.34.  There are multiple reasons why the pair pulled the e-brake in March, summed up most simply here:

While we’re at it, there are a couple important levels below 1.0450 to consider: the 78.6% retracement to EUR/USD’s all-time low (0.8230) near parity (see above); and the 127.2% extension of the ABCD pattern near 1.02 (see below). Parity seems like a gimmick.  That said, it is the level sell-side strategists and FX-dilettante media personalities alike are focusing notes and news flow around.  And it also happens that there are some technical levels closely that make it worth watching.

On the negative side there’s a major gap below parity that opens EURUSD up to 0.87-0.92 next: a window coinciding with the Symmetrical Triangle bottoming pattern that marks EUR/USD’s all-time low back in 2000-2002:

The Eurozone has negative real (and nominal!) rates.  Deflation.  Open-ended QE.  The US, we’re reassured, is headed in a relatively hawkish direction by comparison with the FOMC still talking about embarking on rate normalization with its first 25bps hike in 9 years before the end of 2015.  In this context, who would go long EUR/USD for more than a day trade?

Ostensibly, the divergent monetary policies of the ECB and Fed support a persistent (unprecedented) EUR-negative trend.  The broad strokes of monetary policy and its expositors in the media tend to assume this will be an unbroken trend and extrapolate to parity and below with straight lines.  And on balance, the EUR/USD may get to parity and far below.  

As a risk manager, what you’ll never hear from these sources is that absorption of this macro narrative will happen in fits-and-starts and will not be efficient.  “Look at these charts again!” you might say: “That looks pretty damn efficient!”  No argument; but the Interbank market isn’t marking down the Euro to a discrete level here; Euro specs are trading a direction. The Euro short thesis is a blunt instrument (viz. ”QE = Down”) and Euro shorts are grossly extended.  

How extended?  According to Commitments of Traders, record extended. Compare the then-record net-short positioning in mid-2012. Leveraged funds are seemingly settled in for the dissolution of the Euro Area, Intermediaries have anything but a neutral book, and Hedgers (”Comm Spec”) have accumulated a record long position for which they’re nervously priming the unwind trigger. 

On the other side of this trade, you’ve got the US Dollar (DX), now about -4% off March’s 12-year highs.  This giveback comes just below major cluster resistance at 101-102 (DX’s high was 100.72) and at a 6-year Bearish Butterfly Potential Reversal Zone near 99:

The weekly chart of the Buck shows a classic rising channel breakout and failure (scarily similar to quite a few Biotech charts right now):

And the daily. Remarkable technical clarity in the apparent chaos:

How about DX CoT?  Since the Euro comprises 56% of the US Dollar’s Index’s 6-currency basket, no surprise that this looks like an inversion of the EUR CoT chart above.  Try to spot the abrupt (at least partly forced) shift after March 18th’s FOMC and subsequent grossly-underreported flash crash (around 1605ET that day):

Random acts of Central Bank and algorithmic violence notwithstanding, positioning in USD remains record net long. 

Is a face-ripping Euro-short covering rally in the offing? Further reaction to Friday’s NFP and any dovish retrenchment indicated by FOMC members in the coming days could finally push EUR/USD back through the 1.10 area it’s been struggling against for 3 weeks.  

But: one step at a time. The first target (and barrier of note) I’ll be looking for if the pair strikes out above 03/26′s 1.1051 high is the PRZ of this Bearish Gartley pattern near 1.1250, itself at the foot of January-February’s support-turned-resistance between 1.13-1.15. 

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Tiffany

QE Is Over, But The Fed Has Not Yet Been Tested.

The Federal Reserve’s “communication strategy” puts several tools at its disposal: FOMC statements, FOMC minutes/economic outlook, the Fed Chair’s Q&A, interviews, testimony, and speeches.  The techniques, personalities and even positions expressed when these tools are used vary; but the goal is the same: to manipulate the expectations channel by means of suasion. In a phrase, the Fed is in the business of perception management.  

Suasion derives from a familiar word, but carries a specialized nuance.  It doesn’t simply mean “to persuade” another party, but to set out to convince by peaceable means rather than forcibly compel.  It is the motive force of everything from parenting to propaganda - a continuum that, so named, may encompass and describe the masterwork of post-crisis Fed policy better than any other. 

The Fed provides input to the “expectations channel” to create (what it hopes will be) a positive impetus nudging the US (or global) economy in a specific direction.  The endless parade of Fedspeak is no more or less than periodic reinforcement of the Fed’s objective of sentiment engineering, using the above-listed tools to add momentum to or redirect the perceptual trajectory along which (the Fed thinks) the economy is traveling. Fed officials recognize the power of market reflexivity as well as George Soros, seeking to spin up and perpetuate virtuous feedback loops between markets and their actors.

The goal is to use suasion to create a different kind of “economy”:  The Fed seek to direct the economy toward fulfillment of its dual mandate with maximum efficiency: i.e. where necessary, the use of “tangible” tools (rates, OMOs) that are as small in size and limited in scope and duration as possible. If it had its way, the Fed would talk incessantly but never lift a finger.  

How well has their strategy (or more appropriately, succession of improvisations) worked?  Looking at measures of employment (U-3, NFP, JOLTs, etc.) the Fed seems to acquit itself well.  Measures of inflation (PCE, CPI-U and others) are all over the board; but the one place they aren’t? The Fed’s statutory mandate of 2%. 

But, these are nearly worthless as a ZIRP/QE report card.  Did 6 Years of buried rates and LSAP create the current employment situation?  It’s plausible to assume the Fed’s actions are a major input, but there is no precedent against which to measure them.  Did the Fed impede rather than help?  There’s no counterfactual scenario to run this test against, either.  And isn’t it all a bit presumptuous to even ask these questions?  We’re impatient to ask them, 6.5 years after QE1 began, but rates only now is the FOMC bandying about the topic of “not impatiently” rates.  In truth, it’s still too soon to ask the useless questions, much less the useful.  

Maybe financial markets a better assessor of the Fed’s policy efficacy. The chart above juxtaposing the Fed’s balance sheet v. the S&P 500 (SPX) since both began ballooning in early 2009 suggests they - specifically, equities - might be. 

Nevermind (as many do) for a moment that we should be assessing Fed policy effectiveness vis-a-vis the Fed’s mandates.  Did the Fed’s asset purchases cause the S&P 500′s (SPX) up-trend; or were its asset purchases simply coextensive and correlated with a highly effective communications strategy that mostly (and eventually) succeeded in buoying sentiment - or at least benign resignation - over and over again, yield chasing and the indomitable force of the Bernanke/Yellen Put reflating asset prices?

Critics of the Fed are very passionate on this topic, but in fact it’s difficult (functionally impossible) to tell where tangible policy measures end and suasion begins.  Without a doubt, the Fed has always done what it perceived it had to in  the former category, and has always sought for the latter alone to be sufficient.  With QE tapered and a second-half 2015 rate hike tentative but on the table, the FOMC hopes suasion alone will be enough.  

Whether and how the Fed “created” the S&P’s cyclical uptrend since the 2009 low is a matter of debate, but there’s no argument the Fed’s balance sheet and the S&P are highly correlated.  Between 2008 and 2012, a dip in one positively meant a dip in the other.  Now - for the first time since the advent of QE3 in September 2012, the Fed’s balance sheet is trending downward.  Perhaps coincidentally - or not? - US stocks have had been more volatile since the Taper wound down in October 2014.  

Are stocks now ready to stand on their own two feet?  Or are they slowly rolling with the LSAP tap turned off and the Fed’s balance sheet finally (modestly) contracting?  

Whether it’s a suitable proxy is mostly besides the point: A popular measure of Fed credibility and policy effectiveness is stock market performance. Judging by the past (which hasn’t been merciful to the FOMC’s several tactical missteps) the Fed’s first real post-QE test will be the measure of resilience displayed in equity markets over the coming weeks.  

Buy the Dip; or Keep Selling the Rip?

The S&P 500 (SPY) sank -3.06 or -1.47% to close Wednesday’s session at 205.76.  This value is familiar to readers of the study I put a note out on earlier today: 205.76 is (not close to, but exactly) SPY’s current 100-Day SMA.  As you can see above, the photo finish today was bolted on to 2015′s year-to-date sideways churn with machine precision.

Technically (that’s what we’re about, after all), SPY’s 100-Day lies at 205.7627, and so this close satisfies that study’s criteria. We’re now looking at 66-for-66 occurrences since the 2009 bottom in which SPY closes below it’s 100-Day SMA within 10 sessions of trading through it (the trigger day, in case you missed the previous post, was Friday, 03/13). Rounding errors are all tedium and no elegance, though. A cleaner close below the 100-Day tomorrow or Friday (9th and 10th sessions, respectively) is ideal; but the study criterion is for all intents-and-purposes achieved. A tip of the hat to those who stepped up on the data when I began sharing it again on 03/17-03/18.  

Today’s drop (i.e. it’s negative rate-of-change) has been met or exceeded on just 10 separate trading days over the past year, placing it in the 96th percentile (or 4th, depending on your POV) on the white knuckle scale of all trading days since last March.  The chart above denotes those days with gray vertical lines.  

A few facts about what follows these large down days:

So what does SPY do after closing below its 100-Day SMA?

Over the last 2 years (since March 2013):

Buy The Dip; or (Keep) Selling the Rip?

. What to conclude from these stats? No surprises: the intermediate context of a comfortably intact primary trend suggests “buying the dip” just below the 100-Day is almost sure money.  The worst case scenario and single major hiccup over the last 2 years that ruins a flawless record of closing higher 10 trading days later (October 2015) saw a drop of -5.61% from the 100-Day to the low on 10/15 in just 3.5 sessions.  That’s a relatively step decline: measuring low to low, the steepest of any 4 day period in the last 2 years.  However, even then SPY was back above the 100-Day SMA in 7 days and setting a new high 15 days later. 

With all this said, SPY’s tone is showing indications of changing. To neutral muck (to wit, SPY is +0.12% YTD) or into a substantive corrective move? That’s (always) the conundrum. Slicing this “100-Day SMA” study differently, over the last 60 trading days (3 months), we find SPY has dipped below it’s 100-Day SMA 5 times. In contrast, over the eight 60 trading day periods previous to this one in the last 2 years, SPY averaged a closed below the 100-Day SMA 1.25 times. Though it’s not readily evident on momentum oscillators such as RSI, a broader malaise has gripped US equities that’s out-of-step with the previous 24 months. Today’s installment (if counted) marks a -2.63% drop and follows the first lower high of note since mid-June 2013′s -6.06% decline.  The current pullback is modest by that standard, and even more so by the declines following the 6 major lower highs (May 2010, Mar 2011, May 2011, July 2011, May 2012, Oct 2012) of the current market cycle, with an average correction of -10.35%, median: -7.43%.

Along with a body of ancillary technical evidence (a different and larger can of worms I periodically open here), these points suggest today’s drop may be affirmation of a deeper leg down, more akin to October 2014 than any of the modest 100-Day SMA dips around it.  According to my practice of means-testing prevailing trends (also the subject of a future post), the current pullback has a heightened probability of being an exception to the rule.

Still: it bears repeating that the 100-Day SMA is a clean technical foil for “buying the dip” as illustrated by the stats above. If the last 2 years are any guide, SPY is roughly 1.54% (worst case, 5.61%) north of a bottom that will quickly give way to new all time highs.  This theme can and will be interrupted, as it was in October.  It will also flip over entirely as the cycle peaks, which may shortly be upon us.  But until does, shorts remain counter-trend and opportunistic in nature as long as SPY is in proximity to the 100-Day SMA. 

Cloudkicker - Beacons

Wednesday’s Quadruple Shot of Lunchhour Face-Melt.

On March 13, the S&P 500 (SPY) traded through it’s 100-Day Simple Moving Average (SMA) but closed above it.  In the 7 sessions following, SPY has pushed mostly higher (helped in no small part by last Wednesday’s FOMC), reaching 211.27 before fading to close at 208.81 yesterday, placing it some 1.5% above the 100-Day SMA. 

Since the March 2009 Low, SPY has traded back through it’s 100-Day SMA following at least 1 close above it on 65 previous occurrences.  In every instance, the ETF either 1) closed below the 100-Day SMA that session, or 2) was within 10 sessions of a close below it.  Put in simpler terms, SPY doesn’t touch it’s 100-Day SMA without also closing below it nearby.  At least, it hasn’t in the last 6 years.  

The previous 65 occurrences are noted below, broken out by year. Vertical white lines denote “signal days” (days on which SPY closed < 100-Day SMA), white boxes indicate occurrences with the number of sessions before/after a close < 100-Day SMA indicated.

Will SPY once again close below it’s 100-Day SMA within 10 sessions of trading through it? This study suggests it will, portending a decline of at least $3.12 or -1.49% by the close on Friday, March 27.  First mentioned on Twitter on March 17, the timeframe for this observation is now very short and its edge nearly cut in half since the FOMC day high; but stands as an example of the basic quantitative studies I commonly produce and find invaluable for short-term market direction and trading applications.  

2009

2010

2011

2012

2013

2014

Thursday’s Face-Ripping Delirium Brought to You By:

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Afternoon Chartwork brought to you by: sleepmakeswaves - Love of Cartography

Evening Chartwork: Jakob - Sines

Monday Morning: Kerretta - Pirohia

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