THE FIBONACCI FORECASTER
Markets are not easy to master, and lately I have done a good deal of research as to the reasons why. People who succeed in other areas of life find trading very difficult to master, as the skills they have used to succeed in other areas are largely useless when it comes time to pull the trigger. Tonight and Thursday I am going to review some of the best of the best materials that I have found and throw in some personal observations.
What many people who engage in financial markets fail to realize is the markets are a mechanism of quantum physics or chaos theory. Chaos theory, according to Bill Williams, is nothing more than an organization of new information at a much higher level. The random-walk crowd will have you believe there is no order to these markets and everything just happens. The Forecaster has done an excellent job over the past couple of years in demonstrating just how precise the new information gets organized on these price charts. There IS a much higher order to this seemingly disorder.
While markets have repeatable tendencies (waves and time sequences), they are just like snowflakes. As we know, snowflakes apparently look alike; but under a microscope, no two patterns are the same. Financial markets are the same way. The problem develops when people enter markets not treating every situation as a new pattern that unfolds before our eyes. People bring their own belief systems to the table. Many times these belief systems are not compatible with what we need to do in order to be successful.
People generally need to overcome two sets of ideals to succeed at financial markets. One is our urge to conform and the other is how we deal with the events that shape our lives.
The urge to conform seems wired in our brain as unconscious herding behavior. It’s part of our self-preservation instinct. Any number of studies have been done on this topic but the bottom line is our brain stem controls impulses essential to survival; the limbic system controls emotions and the neocortex controls reason (Maclean, Prechter). Our brain stem controls functions of instinct such as security, fear, pleasure, breeding, hoarding and herding (Maclean, Prechter). The limbic system guides our emotions that control behavior for self preservation. According to Maclean, the limbic system is faster than the neocortex (reason) and regulates the degree of emotions. This could be why our emotions tend to get the best of us many times.
As young people growing up we learn it is in generally in our best interests to be like our peers. We all want to be accepted. We want to be good at sports, be popular, get good grades, etc. Who really wants to be the misfit in school? Later on, this behavior spills over into financial markets, where it may not be in our best interests to conform. It would seem we cannot overcome this obstacle. But many do, and to the degree we are aware of the herding impulse of the crowd we can train to do the right thing at the right time.
Not only do we have to overcome the urge to conform or have to overcome a rough upbringing, but also the regular disappointments and adversities we all have to deal with. What can these be? Let’s look at a list of common adversities life throws at us. Each one is very high up on the stress meter.
Death of spouse, parent, child or close friend
Divorce
Loss of job
Relocation to another state
Personal illness
These are the most stressful events that can happen to an individual and, depending upon your mindset when one or more of these events happen at any particular time, will determine your ability to overcome this adversity. Some people will never be able to overcome this. It will affect your confidence and ultimately your ability to operate in a flow state of mind. We are all going to lose our parents at some point in time and grieving is just a natural part of living. The death of a spouse, child or close friend is devastating, especially if it was untimely. I will also say the death of a family pet can be more devastating to some people as research shows some people are closer with their animals than they are with any human being. While I personally have not been in this situation, I am told one never overcomes the loss of a child.
Here are some other issues many of us have had to deal with that may affect our ability to succeed as traders:
Dealing with rejection at a key point in our life
Victim of violent or even white-collar crime
Victim of molestation
Coming from background of extreme poverty
Drug or alcohol abuse
These may seem like extreme examples but they are very representative of the society we now live in. Just yesterday, the news revealed the results of a high profile case of someone who could not deal with rejection at a key point in life. Former football star Maurice Clarett was sentenced to three to seven years in prison for various skirmishes with the law only a year after he failed to make an NFL roster.
I'm not a clinical psychologist but I have read enough literature to know that many victims of molestation may go years keeping the experience at an unconscious level and repeat a self sabotage tape repeatedly without getting the proper therapy or understanding as to why the cycle can't be broken. I think this problem is more widespread in society than many people realize.
I've covered most of the adversities life throws at us short of going to war or being in a holocaust. Most of us bring these experiences to varying degree when we attempt to succeed financially. Who hasn't experienced one or more of the above? Some of these challenges seem daunting but as we know, many people do overcome them. What's the first step? Developing an awareness of the problem and we'll get into that next time.
THE STOCK MARKET
The theme for the weekly preview, which you can view at Futuresmag.com from the link in the Marketwatch box on the home page, tests of upper resistance as well as the growing MACD divergences on the hourly charts. These were bound to be cashed in sooner or later.
For my part, we have a garden-variety failure at resistance. Is all resistance created equal? I think not and as we've discussed countless times in this space over the past few months the powerful cluster of relationships that formed at this year's highs. I'm not saying they can't be taken out, but it will take a very powerful leg to do it. In the past few days, I've already heard the calls for new all time highs in the Dow as well as S&P 500 - 1400. Most don't appreciate exactly what caused these highs to form in the first place.
The other phenomena I've sat back and watched through this summer phase is a rally led by the Dow/S&P is the fact the NASDAQ/NDX were still only testing 61% retracement levels, far off their highs and the SOX was still 29 points off its 61% level of this year's high coming into the week.
So what about these cycles? It’s true, we do have a real good set lining up near the end of the week, which also lines up well with the autumnal equinox on the 23rd. However, the NASDAQ set a high on the 234th trading day off last October's low. If that is going to be our high for this month, the cycles are getting complex. We would be making a high based on a pivot from the cycle prior to everything that has gone before all of the clusters made in April and May. For it to be a bullish landmark, the pivot would have needed to be made on a low. Low to low cycles create rallies, high-to-high cycles created sell offs. This one made a low (Oct. 2005), high (April, May 2006), low (June, July 2006), high (Sept.) which implies we are in a larger degree sideways pattern. If you wanted to compare it to prior history, this progression would be more like the 70s than the 30s. Keep in mind, I'm hypothesizing on the information from the last three trading days, and all of this is subject to change within a week.
On an intraday basis, we bottomed today on the 76th (Lucas) 15-minute bar off the NQ high but stalled by the 89th bar. If you noticed, the put/call really spiked today suggesting a strong dose of fear came in.
BOTTOM LINE
The outlook for the week at the onset was a slow start with increasing volatility as the week progressed. We are seeing that now. We are now only entering the most confusing part with the Fed holiday upon us. Have we topped early? Will we turn around and test resistance again? We could have topped but it’s not confirmed and can still get another dose of resistance testing. Perhaps that might mean a choppy roller coaster ride, much as we've seen the past few days in the bond market. The waves aren't clear either as today's leg down is 1.61* yesterday's short leg down. This implies a complete potential ABC down, but it also might mean it’s only a third-wave low. Looking at this from another angle, that p/c spike means we don't have room for a leg down here until some euphoria comes into the market.
We could get more upper testing without even making new highs to rectify that. This is not an ordinary situation, not with a turn window, a change of season and solar eclipse coming by the end of the week. In the bigger picture, we are at a seasonal risk for a big sell off into the early part of October and just because September has been tame up to now, doesn't mean it won't happen. For right now, I was undecided until I saw the p/c ratio. At 1.46, quite a bit of fear came in and I don't see how we can get a meaningful leg down before we get some action to the upside to work it off. That implies a revisit to the highs just experienced in the last few days. After that, literally anything is possible.
AUSTRALIA
While I was out the All Ords held the 200-day moving average again and bounced for five days before falling back yet again, I'm sure driving everyone down under nuts. Today (Wednesday) happens to be the 11th day off the high and the open is down big. I stated last week this chart was at risk for a big drop but the second half of the week somewhat negated that potential as the body of the black candle didn't reach the potential and left a lower tail. It can now continue to drive folks crazy for the rest of the week, especially if the American markets stay up until the end of the week.
GOLD, SILVER AND THE XAU
We have a different situation here. Last week we were testing support as opposed to resistance. The low came in prior to the 89 day cycle on the 376th (Fibonacci 377-1) hour. The group bounced on that pivot but the candles are not showing a confirmed reversal. We are now at 89 days down so the turn window ends tomorrow. We are still testing these lows, still at risk to continue lower but finally conditions are ripe for a bona fide reversal.
Once again, not all the charts are equal. Silver looks like it has the best chance to hold the low while the XAU looks like it has a good chance to take out Friday's low. What that does is set up potential intermarket bullish divergences. We'll just have to see which one confirms the other.
BOTTOM LINEWe could have a situation where last Friday's lows are taken out but not the June low, which is the important support we are ultimately testing. Gold came within 60 cents. Gold could still set a new low, the XAU could take out Friday's low yet stay above the June pivot and set up a reversal. No signal yet, but tomorrow should be interesting.
US DOLLAR
We've spent the better part of the last seven trading days floating around at this resistance level and as we hit a new high on Friday at 85.80, a bearish divergence on the hourly chart came with it. The situation here is we are 31 days off a low, 87 days off a bottom and 44 days off a high leaving us mid range. That leaves two days to get to 89, 46 and 33, which is where I hope the situation crystallizes.
BONDS
We've had a textbook flat-sideways correction and are back where we started. We are once again testing upper resistance but this time off a big white candle on the 88th day of the trend. It has a chance to bust through resistance this time, strictly because it did correct near the upper end of the range. I do like the momentum it built today but that's what testing is all about. Tomorrow is the 90th day off the bottom and with a failure to go down; it can go higher by default. However, since we are also at the upper end of resistance, let’s not get carried away. That is precisely what upper testing is all about.
CRUDE OIL
It’s very interesting this chart picked day 47 to blow through important support levels in the 65 area we discussed last Tuesday night. This is another one of those turn windows, which I believe every chart we follow is in this week. At 230 hours down, we are 3 hours shy of a potential landing point again and the next real level of support comes in the 60-62 range. Throughout this collapse and really before it hit 70 I was using the Leykis show as the best contra indicator for sentiment. Recall, here is a radio guy who caters to the audience Howard Stern left behind. His show is largely about relationships with the opposite sex. Mr. Leykis spent several days bragging about all the profits he's made in oil the past couple of years and advised every one of his listeners to buy up as much oil as they can. Nothing against Mr. Leykis, but when we get a layman giving financial advice to people who know nothing about financial markets, you know its time to go the other way. It’s worked out well for anyone that has been reading this column the past few weeks. The only surprise along the way has been how we've blown through every possible support area. Too bad that poor kid who lost the $5 billion wasn't paying attention.
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The content in THE FIBONACCI FORECASTER is for educational and informational purposes only. There is no offer or recommendation to buy or sell any security and no information contained here should be interpreted or construed as investment advice. Do you own due diligence as the information is the opinion of Jeff Greenblatt and subject to change without notice. Please be advised to consult your investment advisor, attorney or tax professional before making any investment decisions. Jeff Greenblatt will not accept any responsibility or be liable for any investment decisions based on the information discussed here.
