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MIDAS TopFinder in Gold Suggests Bernanke's Bazooka is Now Baked into Price
As the markets got their first dollop of post-roboforger risk unwind yesterday (ahead of the first POMO day in 9 days, now--careful), the barbarous relic has been relegated to second tier news status despite making new all time highs (at least versus the routed USD). We thought it would be worth reviving a once forgotten, but recently revived, method of technical analysis, especially as it is suited toward evaluating gold's parabolic rise.
In the mid-1990's Paul Levine (d. 1998) published a series of 18 articles on how investor psychology manifests itself in price-volume relationships, which can in turn be used to build a fractal hierarchy of support and resistance. Levine introduces as follows:
In this, the first of a series of columns, we will introduce to the community of technical analysts a new approach to charting the price history of a stock or commodity. I call this technique the MIDAS method, an acronym for Market Interpretation/Data Analysis System. It is designed to focus attention on the dynamic interplay of support/resistance and accumulation/distribution which are the ultimate determinants of price behavior. Indeed, a Midas chart makes immediately visually apparent an unexpected degree of orderliness in what might otherwise seem to be a random or chaotic process.
Humans and HFT algos alike will recognize the formula he used as virtually identical to that of VWAP (described in full in the Levine MIDAS manuscript posted to our website). However, rather than restarting the VWAP calculation at arbitrary intervals (such as daily or weekly), he would affix--or anchor--the beginning of the calculation to a time reflecting a key change in psychology. A prime recent example is the September 1, 2010 gap-and-go rally that left behind the bears who were holding out for a break of support. Below shows two curves launched from this date with slightly different price components to provide a support channel, along with two curves launched from the October 4 and 15 lows, all of which capture pullbacks quite well.
Levine elaborates:
The foregoing properties of self-similarity and scale independence are characteristics of fractal behavior. The fractal nature of stock price fluctuations has been recognized for some time on purely empirical grounds. What has been missing is an understanding of why markets should behave fractally (i.e. beyond the obvious fact that they are complex non-linear dynamic systems). In the Midas method, we have seen that the complex zigzags in price behavior can be (to quote article#8) "understood with respect to a single algorithmic prescription: support (or resistance) will be found at the volume-weighted average price taken over an interval subsequent to a reversal in trend". The psychological elements of greed and fear, whose quantification led to this algorithm, apply to investors/traders across all time scales. (Someone who has held a stock at a loss for three years is just as eager to "get out even" as the day trader who is holding a losing position). There is even a more remarkable method of predicting tops (and bottoms) in the Midas bag of tricks -the so-called TOPFINDER algorithm...
Levine describes this TopFinder as follows:
Since technical analysis is often referred to these days as "rocket science", we can employ this metaphor by likening a move in a stock to a rocket launch. Already we have referred to a trend reversal as the "launch point"; now we imagine that - as with a rocket - the move's duration is pre- programmed by loading a given amount of "fuel" which in our case is a fixed amount of cumulative volume. During the powered phase of the launch, the rocket's control mechanisms act to follow the nominal trajectory defined by the TOPFINDER curve. When the fuel is completely burnt, the rocket returns to the Earth's surface represented by the S/R level.
As promised, below is a chart of gold futures with a TopFinder curve launched from the start of the parabolic rise following the July 28, 2010 interim low.
The indications are confirmed in its corresponding ETF, GLD:
Once fitted to the August 11, 2010 pullback, the TopFinder's legitimacy was strengthened by subsequent retests on August 24 and September 10. As is noted in the upper right of the charts, the "fuel" is 97% and 94%, respectively, spent as of this October 15 morning.
Not that this indicator is the holy grail, as David Hawkins, one of the authors (along with Andrew Coles) of an upcoming book on the MIDAS method, describes on his blog:
What I’ve just described here may be confusing to those who are new to using TopFinders, since people are usually expecting one indicator that will clearly identify the top. It’s important to understand what a TopFinder does and does not do. It does identify an accelerated uptrend that is all “of a kind”, with price behaving in the same way all the way to its end. The end of a TopFinder does identify the end of this kind of price behavior and the beginning of a consolidation even if it’s only a brief consolidation. And the end of the TopFinder does identify the place beyond which price behavior will be distinctly different. However, in spite of the catchy phrase “Top Finder”, it does not necessarily “find the top”. After the consolidation, price may resume going up, albeit with a different pattern than before the end.
Thus, we may describe the recent "epoch" in gold ascent as one predicated on the Fed-money-printing/QEn/Dollar-debasement theme. Inasmuch as the TopFinder is telling us this theme has just about run its course with respect to inciting new gold longs and squeezing LBMA perma-shorts, absent a new theme of fiscal or monetary debauchery (TARP 2?), we would expect this parabolic rise to end shortly. In which case, we would look for a pullback to support at one of the lower MIDAS curves indicated, where we would again evaluate and entertain fresh longs.
For those interested in seeing how the TopFinder performed in previous gold rallies, below shows the run-up in November, 2009.
The top was not called perfectly, but it was close. We can see that once the Midas curve (blue) that was launched concurrently with the TopFinder was broken on December 8 after a successful test on December 7, that a more substantial correction would likely take place. Indeed, new highs would not be seen until May, 2010.
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If gold does correct from here, the levels to watch in the Dec 2010 futures contract are currently 1310 and 1270, though they will change a bit as the curves develop with price and volume. And if, as we speculated, the powers that be emerge with some bold new money printing plan to save the banks from themselves yet again, we would look to launch a new set of curves at that time.
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Daily market analysis, with projected range and support/resistance for the eMini S&P 500 is here.
All charts created with TradeStation.
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fear and uncertainty drive gold and silver. these new highs are in spite of big time criminal suppression by the usual suspects with the full support of the washington printers. new highs in spite of the banks using their own paper gold funds to drain investment dollars away from a rapidly diminishing physical product.
there is a gold war happening that you will only hear about at the ZHs of the web. in the msm they have even resorted to replacing the word gold with bullion. no mention of silver whatsoever.
if you want to vote against the international criminal banking cartel then just get physical and stay safe.
As each bubble appears and pops, gold will advance. There are many bubbles.
A ten year chart of gold is not steep enough yet to account for disappearing fiat going to zero.
Bubbles and FEAR. C'mon, J6P is looking at Mozilla Gorilla getting off with chump change (for him) and no jail time. People are seeing these asswipes make billions by defrauding and ruining people. Loss of confidence in our entire economic and financial system is gonna have more effect than anything. I am wondering how much longer people are gonna take this crap without civil unrest or a bank run or gold mania.
As has been said before here on ZH, I wake up every morning and can't believe the system is still here and "functioning".
Lets also keep in mind, Gold has to hit $1800+ if it is to get back to the inflation adjusted 1980 prices
Thanks for this. Fractals are interesting, and though I don't believe TA is predictive, this is a different way to look at things.
Like most TA, this analysis ignores the titanic fundamentals that underlie the gold market. The author mentions the new funds that gold needs. Well, there is still plenty of room to run since compared to other points in the last century, where gold investments were 25-30% of total, now gold is .8%.
Also, I think this analysis assumes an open transparent market. If the acquisition by gold (and the dumping of treasuries) by central banks is done in an opaque manner, and huge firepower sits on the side waiting to push into the relatively minute gold/silver markets, then this analysis doesnt work.
Its commodities (and King gold) or financials and govt bonds.
Quantifying greed and fear is a perilous endeavor. I've tried it and that's why I'm on my 3rd wife. Maybe I should look into some different parameters.
This is a great analysis and write-up, very clear and unbiased. Yes, it may be obvious to anyone who has been watching gold that a correction is due, but this indicates roughly when, and by how much, as much as anyone could predict the future.
My question is, can you point me to a website or tool where I can input some of my own tickers and see more historical examples. I would be interested to see AAPL and Silver using this method.
You can run the Anchored VWAP indicator for free at http://www.monest.net/charts/. This is the standard MIDAS curve.
Coles and Hawkins have indicators for MetaStock and eSignal covering the MIDAS and TopFinder/BottomFinder curves at their site.
We developed our own suite of indicators for use with TradeStation, which are not offered to the public. Case by case inquiries can be made here.
Roboforger! I like it.
Keep your coins, play with stocks, sounds like fun to me.
Do people need charts to tell them after something rises it consolidates before moving again? I don't need to look at a chart or predictions to have a clue.
If that were really the case, then wouldn't gold be approaching infinity by now?
The "bazooka" is endless currency debasement. If use of said bazooka was truly priced in, dollars wouldn't be trading anymore.
You can only get there one step at a time. This is a short term call only. Would I sell my coins...no way.
Just another top-calling moron trying to make a name for himself. (Yawn.)
More significantly, note the "swiss stair" accumulation pattern on the 120-minute chart above. I would not even begin to consider that a intermediate top is in until and unless 1340 is broken and from there 1320.