Gold vs Silver, the US Dollar vs Gold and the US Dollar Index

In stark contrast to the handful of “banks” (staunchly led by JPM) who continue to amass near-record short paper positions (futures), the COT (Commitment of Traders) and DSI (Daily Sentiment Index) each show that public sentiment has reached mesospheric levels; where fast-racing momentum driven meteors “burn up” and die within earth’s orbit.  The Monday evening Short-Term Update from EWI, written by Steven Hochberg said:

"…. The Daily Sentiment Index (tradefutures.com) has been at, or above 90 percent gold bulls since November 3, a string of 10 straight days. The only other comparable streak of optimism over the past 22 years of data is leading up to the December 2, 2004 gold high when the DSI was at, or above 90 percent for 20 consecutive days. At that time, prices made a high at $458.70, declined over 10 percent, and did not exceed the December 2004 high again for the next 10 months. But during this entire 20 day stretch, optimism never reached the single day extreme that today did, with fully 97 percent of traders optimistic on gold’s future prospects."

As for a quick overview of price action within the primary domestic equity and international currency markets … yesterday’s internal market readings were reflective of only one thing: HFT algos attempting to pin XOM et al. ahead of  OpEx as the DJIA takes decisive leadership across domestic equity markets while the NDX-100, SP-500 and RUSSELL 2K considerably under-perform.  For a more detailed explanation of this concept, please see “Technical Profiles of 8 Key Stocks: AIG, BIDU, CAT, CELG, DRYS, GS, IBM, SKF.”

VOLD lame … ADD weak … TICK highly erratic while the VIX continues to coil lower and register serious positive divergences on the weekly.  The $DXY US Dollar Index plotted a new swing low yesterday at 74.68 yet reversed sharply to close well over the 75 handle.   ONLY a 135 minute (1/3 the cash) or 144 minute close above 75.77 will shift the hourly profile from bearish to neutral; and until there are two consecutive closes above 76.89 there is NO uptrend to speak of.  The EURO appears to be initially confirming a possible USD bottom.  Swissie (CHF) and EuroYen (EURJPY) are the next two majors/ crosses needed to confirm any possible US Dollar bottom.  For a more detailed explanation of both the VIX and the $DXY US Dollar Index, please see “Comparing the 6 Primary US Equity Markets, VIX Fibonacci Cycles and the US Dollar at a Critical Juncture.”

After plotting a Three Inside Up candlestick pattern on Monday (11/16/09), the @ ES (S&P futures continuous contract, current basis December, ESZ09) shook off a possible Hanging Man plot yesterday at 15:54 and closed with its real body above the daily 610 EMA (1105.40).  This level had not been touched since 5/20/08 at 1412.99; just 1 day after the onset of Intermediate wave (3) of Primary wave 1 (circle) of cycle wave c (we know, it is a mouthful and does sound like gibberish).

To regurgitate our chat room thoughts from 11:17 yesterday morning:

‘… don’t be caught dead in XOM … DOW components are going to see a massive influx of interest over the next few days/ weeks as traders/ investors sell beta and move to the alleged "safety" of blue chips; can keep running into 1121 IF enough people jump on board the short train and open new put interest.  There are three singular issues that traders MUST be aware of – XOM, IBM and AAPL. 

XOM for its mkt cap weighting and its function across ETFs … IBM bc of its massively outsized weight within the Dow Divisor … and AAPL bc it is the true ringer within the NDX, the NASDAQ 100, at 17% of its weighting (thanks Allocation Committee, really cute) and the ‘Cult of Cupertino’ is THE cult du jour for everyone’s sister, neighbor and local fast food cashier.
 
As the equity markets continue their topping process, being led by currency, leading commodities, lagging the Bond markets and paying no attention at all to credit spreads or such notably leading metrics as the Ted Spread … $$$ will flow into blue chips and $$$ will come OUT of risk assets and anything beta-driven.  Therefore, for equities this means that the RUSSELL 2K and NDX-100 will decisively under-perform while the DJIA markedly leads each of its higher beta brethren into a rolling top for all of Primary wave (2) circle.’

Bottom line: it is a scalpers market, best suited for those who work across interval periods of 2-3 mins or the tick. 

Quantifiable inter-market divergences – check

Subtle hints from the VIX, $DXY, EURO, average true range, short-term volatility and extremely low volume – check

A frenetic NYSE TICK (11/17/09) yesterday, which repeatedly touched +900/ +1000 (+1051 high) before plunging to -300/ -600 (-951 low) during yesterday’s session – check

A frenetic NYSE TICK (11/18/09), which today plotted an intra-session high of +1082 at 10:31 and an intra-session low of -914 at 13:26, as of the MOC (market-on-close = the cash close from 15:30 – 16:00) where we attempt to finally put this piece to print after a hectic day – check and check

We at Fibozachi contend that during the last two cash sessions there have been blatantly obvious HFT algo trails of 20 second pulsed basket orders/ flashed futures orders, specifically surrounding non-confirmed TICK induced bear traps.  We firmly believe that this ‘market’ is NOT structurally sound and that anyone who remains an "investor" ought to weigh their effective risk/ reward at this extremely high probability juncture of time, price and sentiment.  Yesterday (11/17/09), marked the exact 50% time extension of Primary wave 1 (circle).  In addition, yesterday also marked the exact calendar day where (Y) = 1.618 the time component of (W), within the double zigzag structural composition of Primary wave 2 (circle).

Boiled down to its base elements … Predatory algos, which are distinctly different from the Pips-Hunter family/ type of EA/ strategy are basically just using what THEY know YOU are using to help screw you by forcing your "technical" trade, which is based on specific parameters.  Either click this sentence or gurgle “PrizmaL interview” to read about the the winner of the 2008 Automated Trading Championship,  in one of the most uniquely vague and oddly fascinating design developer interviews that we at Fibozachi have had the pleasure of reading.  We have provided some of the interview’s most pertinent snippets below. 

Interviewer: Vladimir Lekhovitser (PrizmaL) didn’t wish his photo to be shown now. He explains his position as follows:

"I am not superstitious, but there are certain natural laws I try to follow. For example, I think that it is really possible to manipulate or to change the fate of a person imaged in the photo". However, in case he wins, he promises to send us a picture of him holding the prize. Vladimir works in the Software House Kaful FS, a company that develops and codes AI (Artificial Intelligence) for automated trading on the markets of Forex and Futures. The company has developed over 70 profitable trading systems since 2004."

Interviewer: Hello, Vladimir. Could you tell us about yourself, please? What is your education? What do you do?

"I don’t think a formal education influences the man’s way in life. It is the society’s stereotyped world-view which just doesn’t exist for me at all. I can give you many examples that break this world-view: It’s sufficient to read the biographies of eminent persons or have a look at the statistics of the disasters the persons responsible to which were well-educated constructors or specialists in certain fields of science. There are talents and there are swots. A person who is connected to the "bank of ideas" is well aware of his or her capacity potential and goes in for learning something he or she would love to do in life. I’m an autodidact, so I make my decisions considering the voice of my soul or my intuition. Knowledge and information come to me by my request, I only should find and interpret them sometimes.

I submitted to ATC 2008 an EA I developed together with Mr. Shay S. We represent the Software House Kaful FS, a company concentrated on developing and coding AI (Artificial Intelligence) for automated trading on the markets of Forex and Futures. Our company has been existing since 2004, and today it employs 14 persons. We try to find some structures that suit us to obtain ideal results in our work. For this purpose, we use various tools, programming languages, all kinds of analyses, strategies and systems. During this time, we have accumulated in our arsenal over 70 stably profitable trading systems coded on different bases.

…. It is a normal phenomenon – the "cloud" of an idea is spread widely. Those adjusted to certain waves can get the same idea simultaneously, like it was with that of radio or telephone.

…. As to our EA, PrizmaL, it belongs to the family of PH (Pips-Hunter) strategies. Those comparing it to scalping, or pipsing, are mistaken. Perhaps, they lack information or experience in trading.

The main difference between those systems is that a quality EA based on a scalping strategy observes the price changing bar and catches price leaps up or down. Once having recognized such a leap, the EA opens a position in the direction of price changing or in the opposite direction, according to the trading idea it is based on. There is another, cruder alternative for trading by scalping: It differs from the first one by that the EA tries to open dozens of positions within a relatively short period of time. However, no broker would allow such trading. Both versions of this strategy have similar disadvantages. Testing such EAs in the Strategy Tester, you shouldn’t rely on their results. The reason is the logical code of the program, which attempts to overcome the file of historical prices, that’s all. This situation vividly shows the relationship between an EA and the Strategy Tester. The Tester doesn’t, basically, give troubles processing the requests of such an EA and allows it to open technical positions differing from those of real trading. That was many times tested by comparing the results of real trading to those obtained from the Strategy Tester for the same period of time."

Interviewer: In the description of your contest EA, you wrote that 17 external parameters had been used in it. Many people (including the well-known authors of books on technical analysis) believe that such a large amount of parameters is an evil and may result in fitting the trading system to history. How would you comment on this?

"I respect people writing books on the topics they don’t work at in their life. 17 versions of parameters were obtained during optimizations for the 10-year history, which have been bringing us profits on real accounts for a long period of time. Fitting means the setting parameters obtained within a short-term optimization on history.

…. There is no ideal trading at all. We have many strategies that hunt hens, too. I chose this strategy for the Championship just because it was the best one considering the conditions published in the Championship Rules, and because it produces stable profits without hoping for a chance.

It is impossible to give an accurate estimate of a trading system without knowing how it behaves ….

…. I never comment on people or their work – it doesn’t produce anything constructive or useful. I’m ready to use my time for enjoying the results of the work, no matter mine or others’. Radiating negative emotions always implies a destructive element. On the forums of and in discussions about the Championship, in the topics devoted to trading, traders often talk about that their EAs are good, but not often profitable: either entering was ok, but closing failed, or flat started and his EA is unlucky on flats; or something happened and the price upset all StopLosses; or today their EA shows itself in all its beauty and tomorrow it omits closing a profitable trade and takes only the rests; and those whose balance charts are moving up accurately complain of that their EAs don’t work on real accounts. A depressing picture. The vector of these traders’ intentions is initially doomed to failure. And it is not important how much time they would spend on sitting and studying speculations on markets. There are traders of two types only. Traders of the first types are those whose thoughts of their EA working on their account or of their open positions makes them feel that the ground is slipping from under their feet, which at best results in stagnation. Traders of the second type are those just enjoying the results of their work."

Interviewer: If ATC 2009 takes place, what EA would you submit: the same one or another one?

"We are developing a system now the indicator of which should be connected to ESA (European Space Agency) or, more specifically, to Kopernikus GMES. This indicator can get information at first hand. It will be connected directly to a space fleet of various sattelites informing about forthcoming crises on the Earth. This will be like getting weekly weather forecasts from meteorologists. Having such information, the indicator can inform us about forthcoming changes on the market before the crisis starts affecting it. This indicator will probably accompany other trading ideas that you may get to know on the Championship in 2009."

There is a voluminous list of burnt "strategies,” which are so glowingly radioactive that they make Derek Jeter’s ‘blazing copper’ Ford Fusion look like Sammy Sosa’s pigmentation.  A quick list of basic (read: crappy) ‘strategies,’ which kill retail traders and boutique firms alike, includes:

VWAP (lol);

TICK divergence;

ADD/ VOLD/ TICK/ VIX derivative ratios;

intra-day trendlines;

any Bill O’Neil (IBD) pattern;

intra-bar breakouts across small interval periods of either time, tick or volume, which are extremely susceptible to stop hunts when the wick of a candle triggers obvious sell/ buy stops while its real body closes well away from the assumed line of demarcation;

Elliott Wave by its lonesome;

almost any/ every standard indicator/ oscillator with default settings … and this just barely scratches the surface of basic, secondary conditional filters, which make easy fare for Predatory algos.

Low volume baby trend days, like the past two, typically crush retail speculators/ options traders who aren’t taking high probability scalps of 0.5 to 1.25 ES points or say a single dime within the Q’s (QQQQ) or CL (oil futures) but rather are looking for swing trades of 50 – 100 YM points (DJIA futures) or 2-5 points on Goldilocks (GS) and Gurgle (GOOG). 

To summarize basic price action from today’s session: 144 min $DXY showing POSSIBLE inverted H&S … after registering a Bullish Engulfing & Tweezer Bottom candlestick pattern this morning, closed 10:24 at 75.00, the very next candle, closed 12:38, plotted a Hammer with a Tweezer Bottom whose low was 75.01.  The greenback’s technical profile remains squarely bearish until 75.10, 75.23 and 75.36 are achieved on the hourly whereby those levels must then begin the process of morphing from resistance into support on either the 135 (1/3 the cash session) or 144 (Fibo) minute; those are the levels right now for the 144 minute.  A daily close OVER 75.62 and 75.77 would be a VERY, VERY strong initial signal of a POSSIBLE bottom by breaking both the latest downward sloping trendline and price channel, which, unlike either Ralph Waldo Emerson’s "Concord Hymn" (Panic of 1837) or Bobby Thomson’s pennant winning walk-off homerun from 15:58 on October 4, 1951, will NOT be a "shot heard ’round the world."  
 

Strong positive divergences within the $DXY US Dollar Index continue to abound across innumerable technical methodologies; and even if this recent bout of nimble short-covering turns out to be but a small fourth wave upward retracement before testing an extremely strong band of lateral multi-year support between 74.46 – 74.50, with an initial downside overshoot target that surrounds 73.80 … we at Fibozachi firmly believe that the $DXY is on the cusp of a 6-16 month, hellaciously impulsive jaunt higher towards a first target of 81 – 84 and an ultimate target of 93- 96 with the outside possibility of a parabolic overshoot that reaches 103-107.  Much as gold could exhibit a similar blow-off move to the upside ($1340 ish) over the next 3 to 5 weeks should it blast through a target that surrounds $1168.  As per the far-reaching ramifications of a significant US Dollar bottom across global equity, bond, currency, commodity and credit markets: consider yourself forewarned !!

As always, we hope that this quick overview is helpful and thank you for taking the time to read our thoughts.

Disclosure: no positions held overnight; anticipate becoming long the $DXY and short ESZ09 once a multiple confluence of proper trading signals confirm themselves.  

For similar technical takes, market calls and insights, please visit our brand new website, www.fibozachi.com.  There, you can view both our complete body of analytic work as well as detailed explanations of the unique design development and technical methodologies within the proprietary technical indicator packages that we use daily to perform a comprehensive technical analysis of stocks, options, ETFs, futures and FOREX across interval periods of time, tick and volume.