Comparing the 6 Primary US Equity Markets, VIX Fibonacci Cycles and the US Dollar at a Critical Juncture

Fibozachi's picture

 

-    Fibozachi

Relative Performance of the 6 Primary US Equity Markets


As the print and television media continue to fall all over
themselves in the race to “report” that the “markets” are at new highs, what
they and so many others fail to understand is that the DJIA, while still
the single greatest barometer of collective social mood, is far from the best
proxy for the US equity markets.

 

And although the Wilshire 5000 comprises the most
comprehensive index across the entire universe of domestic equities, the S&P 500
effectively remains the single most representative measure of “the market” as
a whole. Moreover, while the cash session for equities (S&P 500) spans
from 9:30 am to 4:00 pm EST, the futures market (current basis December,
ESZ09) remains open for nearly 24 hours a day. Like the vast majority of
professional technicians / traders, we at Fibozachi firmly hold that
the S&P futures (@ ES, continuous contract) represents the single most
critical equity index the world-over.

 

With only the DJIA notching a new high this morning,
there remains a strong non-confirmation across the S&P 500,
NASDAQ Composite, NDX-100, Russell 2000 and
the Wilshire 5000, since none of them has plotted a new price high
that would confirm the DJ’s continued rise. The following snapshot highlights a
percent-change comparison between the six primary domestic equity indices since
their collective Primary wave 1 (circle) lows of March 9, 2009. Upon examining
the chart below, please note:

 

1) how the Russell 2K not only immediately established
itself as the veritable ‘tip of the spear’ within the very first few upwardly
unison subdivisions of their sharp 8 month corrective rally but also how it has
since remained the ‘leader of the pack;’

2) that while the Russell 2K led these six primary
equity indices up-and-away from their intermediate-term bottoms in March, we
anticipate that the concept of alternation will not necessarily witness
the ^RUT lead to the downside so much as it will see traders pile into
the last vestige of alleged ‘safety’ within the blue chips of the DJIA.
Such nuanced herding would be highly reminiscent of activity first observed
within the “Nifty-Fifty” of the early 1970’s and is exemplified best
today by the almost 17% current weighting of AAPL within the
NDX-100
. Since the closing highs of October 19, the Russell has
severely underperformed its peers.

3) that since May 27th, 2009, the respective percent
gains within these six markets have not changed position relative to each other.
In other words, the Russell 2000 has remained #1, with the NASDAQ
remaining #2, NDX-100 #3, Wilshire 5000 #4, S&P 500 #5, and the DJIA #6.

4) that today marked the very first time that the NDX-100 has outperformed the NASDAQ Composite since March 9th, 2009.

 

 

 

Since small caps typically lead large caps within the structure
of impulsive price action, we at Fibozachi will remain on the lookout for
any change within the hierarchy of these six indices. If the Russell 2K cedes its #1 spot to another index (particularly the DJIA) and begins to
underperform its peers, it may very well give up the ghost for both the
immediate and intermediate degree direction of price action. Such a change
within the underlying character of price action across these key indices would
serve as a stern warning that the scorching rally of Primary wave 2 (circle) had
ended and that a strong downward reversal lay just over the horizon.

 

VIX Double Bottom and NR-30/ID Signals:

 

Today’s early morning double-bottom and subsequent afternoon surge may have
marked an important reversal of intermediate degree within the VIX; which may
also coincide with at least short-term tops if not much more significant
multi-year highs across domestic and global equity markets alike. The snapshot
below shows a 5-minute chart of the VIX across both today and yesterday. Note
the picture-perfect Hammer candlestick pattern that plotted at 9:55 this
morning (see file attachment for a larger view), registering a double-bottom at dueling lows of 22.78. After halting its
retest of support just above 22.80, the VIX immediately plotted three
consecutive Marubozus to kick off the day’s rally.  Today also registered as an
NR-30/ID day; which, for those of you who speak English, means that today’s
daily range was the smallest of the last 30 days as well as an “Inside Day”
which was engulfed by the previous bar.

 

 

 

VIX Daily Fibonacci Cycles:

 

Over the past few months, the VIX has been a veritable seesaw of price
action. Upon closer inspection, we at Fibozachi have identified a
remarkably accurate group of cyclic Fibonacci activity across the daily profile
of the VIX that is highly noteworthy. The following charts show each Fibonacci
cycle separately and then all of them concurrently.

 

 

 

 

 

Yesterday marked the 13th trading day (TD) since the VIX set a low
on 10/21/09 … perhaps a 13-day low-to-low cycle established itself
yesterday.

 


Head & Shoulders: Quality Pattern or Technical Dandruff?

 

We would simply like to state our opinion about the Head & Shoulders
pattern.

 

1) It is a loosely quantified, basic pattern without explicit rules for its
specific constitution; whose suggested guidelines, within the daily trenches of
effective practice, are often abandoned by traders.

2) Its effective risk/reward ratio is not at all appealing.

3) The actual trading issues of timing and execution are, to borrow a phrase
from A-Rod, very “loosey-goosey
.”

4) Its high success rate may be largely due to the self-fulfilling prophecy
created by the pattern’s all-too-frequent recognition amongst not only
traders but also investors.

 

For those of the technical persuasion: please click anywhere in this sentence for a substantial, humourous rant about ... the 'fixed period drop-off effect,' the differences between moving average methodologies, the true nature of the term “fractal” as applied to the structural composition of trading systems, the 'four basic qualities of great technical indicators' and a practical nuance within stochastic calculus that can help you anticipate what others are about to think.

 

 

With that out of the way ... the following charts show how the S&P 500 cash
and the VIX have formed opposing Head & Shoulders patterns that may play out
down the line. Ideally, the necklines of each pattern should be broken to give a
multiple confluence of confirmation between them. One important point to note is
that volume has been decreasing as the H&S pattern has progressed, which
significantly raises the prospect of its validity. This is especially true of
the rally over the past week, which has occurred on significantly less volume
than that of recent sell-offs.

 

 

The US Dollar at a Critical Juncture:

 

The US Dollar took a beating yesterday and grabbed a new low at
74.93 by just a single cent. However, this was not a new closing low;
therefore, a close below 74.97 is now necessary to continue the downward slide.
In order to end the bearish series of lower highs and lower lows, the $USD must
push above the 11/03/09 high at 76.82. Ultimately, a close above the upper
trendline of its parallel channel would provide a strong initial signal that a
momentous short-covering rally could be fast approaching. This upper trendline
has already witnessed four separate touches; every single touch effectively
serves to further both its strength and importance. When this trendline is
decisively broken, it will have extraordinarily far-reaching ramifications
across not only domestic equity markets but also global bond, commodity, credit
and currency markets. Consider yourself amply warned!

 

Today’s price action within the greenback registered not only a
Doji but also a Harami Cross, Tweezer Bottom and Bullish Homing Pigeon
(one of our absolute favorites) candlestick patterns
; which, if not simply
stalling for more time within a fourth wave of very small degree, would
effectively bring about the onset of the $USD’s next impulsive leg higher. Due
to the extremely large degree of trend, we at Fibozachi maintain an
extremely bullish posture toward the US Dollar over the intermediate horizon.

 

 

 

Disclosure: no current position

 

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.

 

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Anonymous's picture

really now. If Fibozachi actually had a system that worked they wouldn't be revealing it on the web. counterintuitive. the more people that know your system the less effective it becomes. it's the old newsletter trick. send out mailings predicting the dollar higher over the next month to 10,000 people and send out mailings predicting the dollar lower to 10,000 people. (ZH has just provided Fibozachi a free mailing list so to speak since sheez, how many people visit this site a day?). 50% chance of getting someones attention. if it's higher then repeat the exercise with the 10,000 who got the dollar higher letter, repeat. make it really technical and complicated. Make it look dizzyingly profitable. don't forget the weird math relationships superimposed on charts with more superimposed relationships to other indexes. Tweezer bottom? (Sounds like I got a tick on my butt). Appeal to quants or whoever or whatever zombies that actually work at banks. get a few bank clients and really impress the remaining 10,000. money rolls in. let's see, 10,000 at $100 month is not a bad months work. another rent extraction technique veiled in psuedoscience and a command of the english language. It's kinda like the online porn industry, get 1 mil people to pay 5 bucks a month. they don't even notice the charge on their credit card. hell the monthly finance charge is 10 times that. a little charge here, a little charge there, pretty soon you're talking a billion in the bank and a 200 ft yacht. And a govt bailout to boot. Fibozachi?, they can't even get the spelling right. Cheers

Fibozachi's picture

really now "Anonymous."

 

You're dead right in your first complete sentence, not exactly so within your second and then the train just flies off the tracks.  Thank you for not only your "command of the [E]nglish language" compliment but also the masterfully inflationistic display of mathematics which followed it.

 

Look folks: if you're gonna take the time to try to disparage someone then at least come up with a joke or two, talk about someones mom or completely misquote their work.  Ya just gotta put some thought or effort into at least one and make it sexy.

 

PLEASE do NOT flag this as junk since it has immediately become our new favorite attempt to anonymously disparage us without a single mention to either our analytical work or the technical merit of our design development. 

Kudos "Anonymous", we appreciate your attempt, which might just be the lamest per word yet. 

clichy's picture

Enjoyed this thoroughly. I haven't actively traded in quite awhile but I do review market info and the dollar v other currencies to gauge the actual health of the economy against the propaganda emanating from places like CNBC anchors or that shill Cavuto.

 

I especially liked looking at your candlestick pdf. I used to use candlestick patterns back in the late 90s and I preferred them to other charts.

 

Thanks again. You have a regular follower in me.

 

Matt

Fibozachi's picture

Thank you clichy / Matt for your kind comments; we certainly do appreciate them as well as the three previous ones above it.  We do try hard to present quality work that is technically rigorous and it does mean a lot to hear that folks enjoy it.  Thank you again.

Anonymous's picture

I've only read 2 of your pieces both are first rate. Thanks for your thoughts.....

This was good enough to me to sing up here after 6+ months of lurking.

Thanks,

Mark

Anonymous's picture

I find it funny and also fascinating how the herd mentality operates time after time.

Trends just run and run until a sentiment changing event happens. This is what is happenening now. All news is good news as the anti-dollar/pro-gold fanatics keep talking up their one-way bets.

Anonymous's picture

Lovely lovely read. Comments and feedback also. Ta muchly.

Grand Supercycle's picture

 

My long term USD indicator has been giving BULLISH warnings for months.

My indicators can identify trend changes before they occur.

They warned me of an impending market crash back in early *2007*

The VIX continues to give bullish warnings as well.

We know what's ahead ....

More here:
http://www.zerohedge.com/forum/market-outlook-0

Daedal's picture

Good work, but can you try to refrain from using "Fibozachi" & "Fibonacci" in the same sentance? Also, it seems that you inadvertently linked to some dude's (Eric Schlissel) twitter account via your "@ES" reference. That guy seems like a douche, I wouldn't associate your posts with him -- unless you are him. In that case.... awkward.

Fibozachi's picture

Thank you for the kind words Daedal ... and great point there with the Fib2, shoulda snagged that one.  Friggin twitter, every continuous contract symbol is effectively hijacked from direct link; will be sure to alter that one.  Two great points and one good joke, gracias.

Anonymous's picture

If the dollar makes a new low 74.92 is the bearish dollar trade still on? I agree with hetty, put the position on if you are extremely bullish.

What is intermediate horizon? Two weeks? two months? A lot can happen in the intermediate term.

I guess with your call I should be worried about my long gold position. It has been such a fun ride.

hettygreen's picture

Agree with your dollar thesis but no current position? How can you believe what you write if you have no skin in the game? Seems to me everyone postulating and not enough positioning equals dollar keeps falling.

Fibozachi's picture

Thank you for the kind words HDillon27, ttt, maggitkd and Daedal; glad that you enjoyed our latest.

 

hettygreen: thanks for reading our work as well as for taking the time to post a constructive comment.

 

Although we applaud ZH's "(non)policy on conflicts / full disclosure," as affiliates of the MTA who are each members of the CMT Program, we are bound by the MTA's Code of Ethics; hence the inclusion of disclosure when / where appropriate.  Basically, the same thing as the Series 86/87 Exams plus a moral compass.

 

We are not only technicians but also design developers of proprietary technical indicators.  Long story short, while our professional trading 'systems' are only licensed to qualified institutions, we do offer individual user licenses for our proprietary technical indicator packages within our website.

 

If you represent a qualified institution and would like to learn more about licensing our work, please contact us through the appropriate channels within our website.  And if you are a trader / investor who enjoys our work, then please check out our newly released proprietary indicator packages, which are thoroughly detailed within our website.  Should you have any questions, after reading through their extensively detailed PDF user guides and examining their additional screenshot galleries, please contact us directly at customersupport@fibozachi.com.

 

Blatant plug aside, you raise a very valid point, hettygreen, which typically snags many technicians.  If you have yet to ascertain from my viscous writing style ... kinda have the tendency to meander, drift from thought to thought and lose sight of the fact that only I see through my own eyes.  e.g. that.

 

So, to answer your question point blank without caveat: yes, we do practice what we preach and take gross exception with technicians-turned-journalists who have a daily quota of actionable ideas or who "think xyz might ... without applying technically rigorous merit.  That said, having an opinion / outlook has effectively very little to do with the actual trading of an instrument and absolutely nothing to do with the actual employment of a systematic strategy, let alone a true 'system.'

 

In practical terms, what is even the point of 'disclosing' that we "anticipate possibly opening/closing innumerable long and short positions in xyz" or adding to this: "throughout the entire universe of stocks, options, ETFs, bonds, futures and FOREX across various interval periods of time, tick and volume."  Your question is 100% valid hettygreen, and hats off to you for raising it in such a constructive fashion without resorting to misquoting our work for simple effect.  Certainly, we hope that both the quality and substance of our analytical work within these pages will speak for itself. 

And if not: name the instrument, vehicle/issue, interval period and any other condition or conditional limitation and let's figure out how to start a true Trading Championship, craft some brackets and get it going!

 

For whatever it is worth, the MTA quite literally just began a comprehensive review of our work.  Once complete, we'll roll over to TraderPlanet, Futures, S&C etc. Any CMT or Barron's author who would like to examine a complimentary Fibozachi indicator package or two can do so by simply emailing us as well.

 

Ultimately, each and every trader must pre-emptively define his/her own strategies within an explicitly written trading plan; and each and every investor must hope their head stays warm when nuzzled between their knees whilst waiting to 'see what develops in the long-run' like Jeremy Siegel being put in charge of the re-construction of the 30th Street Bridge (I can still smell those damn donuts from 2-4 am, ridiculous).

 

Suffice to say that we run our technically-filthy mouths throughout the day and night, whether or not we are long abc instrument or short xyz vehicle when there is technical merit to be examined and/or employed for instructional purposes. 

 

Much like the amazing DARPA announced earlier today, which ought have slashed at least a point or two from McGraw-Hill and Morningstar's multiples overnight  ..  tis only a matter of time before ZH breaks further ground, yet again; whatever it takes to effectively obliterate today's hollow half-life of a Fourth Estate.


I'll email Tyler & Marla about that true Trading Championship ... would be great to make that happen one day.  As always, thanks for taking the time to read our work, we do appreciate it.

maggitkd's picture

Another good article. Interesting time work in the VIX.

Anonymous's picture

Great work mates!

I am in agreement with your calls (and puts :))

Best to you,

ttt

Anonymous's picture

Very insightful. Of course, you need to take that with a grain of salt, since you agree with my already formed opinions. As I told Chopshop on TCNet, I think your reasoning is "dead-on-balls accurate - it's an industry term", from My Cousin Vinnie.

Keep up the good work.

Thanks,
HDillon27