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David Knox Barker
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David Knox Barker is the founder of Market Cycle Dynamics, LLC, and the publisher and editor of The International Market Cycle Dynamics Letter. Barker is one of the world's foremost experts on market cycles and the global economic long wave. He is the author of The K Wave; Profiting from the... More
My company:
Market Cycle Dynamics, LLC
My blog:
MCD Weekly Briefing Blog
My book:
The K Wave; Profiting from the Cyclical Booms and Busts in the Global Economy - eBook
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  • Gold Market Forecasting and the Magnetic Power of the $2,298 Target Price
    The Long Wave Dynamics approach to Fibonacci drill-down price grids in any market index such as the S&P 500 and European S&P 100 generates extraordinary actionable market intelligence for investors and traders. Creation of the drill-down Fibonacci grid approach to market analysis is the result of decades of market cycle research and studying the market timing of a number of cycle masters. The goal was a formula timing plan for buying low and selling high based on cycles that works for both investors and traders.

    Fibonacci Dynamic Web methods demonstrate how every Fibonacci price grid is driven by three ranges, 1) Solitude 0%-38.2%, 2) Normal 38.2%-61.8%, and 3) the Frenzy range of 61.8%-100% of any Fibonacci price grid. Prices often turn exactly on the golden and inverse golden targets in the Fibonacci price grids.

    Working with major indexes such as the S&P 500, the 1982 intraday low and the 2007 intraday high provide the perfect Level 1 grid range to begin the Fibonacci grid drill-down process. Other major markets do not offer as much history, but they provide enough for a solid Level 1 price grid. However, the gold market has been making all time highs on a regular basis, so a clear Level 1 price high is not available.

    This is where things get interesting in terms of very recent gold market price action. In order to generate a Level 1 price high to begin the Fibonacci grid drill-down process, you have to use a past major move as a key move in a full grid move that remains in the future. Yes, what I am suggesting is that you must look into the future and see an important top in the price of gold.

    It often takes extensive price move testing to find a “hot” price grid. For the continuous gold contract, I tested a number of price moves. Matching important moves against various Fibonacci ratios allow you to check and see if recent price moves to new highs are respecting any future Level 1 drill down grid. No “hot” grid was located and efforts were getting frustrating until testing the move from the 1999 low at $252.50 and the 2008 high of $1033.90 as 38.2% of a move to come in the future. Recall that following this particular top in 2008 was the largest correction in gold since the rally began in 1999. 

    The Level 1 grid generated when this major $781.40 move in gold is used as the 38.2% of a future move produced clusters of hits from recent gold price action. In essence, a “hot” grid was discovered with $2,298.04 as the Level 1 high target in the grid. This Fibonacci drill-down grid produced in this exercise and a chart that demonstrates the move used is below.

    Note that the 50% target is not used for generation of the Level 2 grid example below. Although 50% is a Fibonacci target it comes at the beginning of the Fibonacci sequence and is not one of the sequential ratios generated from further out in the sequence. The 50% target often turns the market and tracking it is useful, but do not use it to generate the drill down grids.  

    Gold Projections $2298 II

    The Level 1 Fibonacci grid target prices often produce major resistance for markets. However, to recognize the power of this method you must drill down into Fibonacci grids to observe detailed intraday market action. Presented below are two cases of where this process is relevant to gold investors and traders.

    Why did the gold market recoil as if it touched a hot griddle at $1430 on December 9? The charts and grids below provide the answers. In fact, you could say it did touch a hot griddle in the form of the golden ratio in the Level 3 grid. Derived from a Level 1 grid where $2,298 is the top of the Fibonacci grid.

    Why did the gold turn around at the August low of 1155.90? Maybe the fact that 1155.63 is the inverse golden 38.2% in the Level 4 grid was pure coincidence. However, the gold market and every other financial market around the world are producing this sort of deep Fibonacci grid price action every trading day of the week. Such detailed market action is not necessarily relevant to all investors and traders.

    The closer you get in the Fibonacci grids to Level 1 the more powerful the Magnetic support and resistance forces the Fibonacci price targets exert on market action. The Fibonacci targets provide actionable market intelligence to investors and traders. Based on market action observed recently in these drill-down grids, the Level 1 golden ratio target of $1516.64 will prove to be major resistance. It will potentially be the most important resistance since the gold rally began at $252.50 in 1999.           

     Gold Grids 

    The $1516.64 target represents the line of demarcation between the Normal range and the Frenzy range in the Level 1 grid presented with $2298 as the Level 1 high. It will provide the most resistance for the market since $1033.89, and likely even more. That price is only $86.04 away from the intraday high on December 9, 2010.

    Of course, there are other possible Level 1 Fibonacci grids. The $781.40 move from 1999 to 2008 could be another Fibonacci percentage, so regularly checking the grids for price activity is advisable. However, to date I have not found a Fibonacci price grid that is producing more matches on recent gold market turns than the Level 1 grid presented. 

    The gold support prices are just as important as the resistance prices. Notice that the gold correction in November was stopped at $1330, just below the golden ratio in the Level 2 grid. Once the gold market reversed back over that golden ratio target, it was off to the races. The golden ratio had a double meaning on that reversal. This sort of market action is going on in every market in the world.   

    Based on subscriber feedback, investors and traders around the world are amazed, even shocked, to discover the predictable and actionable Fibonacci grid price activity that has been going on right under their noses for years. Only the Fibonacci drill-down grid method uncovers this price activity. If Fibonacci price action surprises you, just wait until you see Fibonacci grids at work in the cycles for date forecasting. Markets turning on a target price is one thing, turning on price and date targets together will change you view of market forecasting forever. 

    One subscriber wrote to say they were initially “frightened” observing the live markets results of the Long Wave Dynamics methods of tracking market cycles in price and time. Now they are simply “dazzled and amazed” at the methods that can be applied to any market in price and time.

     



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: GOLD, GLD
    Dec 12 5:17 PM | Link | Comment!
  • Stock Market Cycles, Virtuous Circles and Trillions of Dollars
    The op-ed in the Washington Post a few weeks back by Federal Reserve Chairman Bernanke contained a few interesting revelations. Bernanke came clean on what he is doing, or at least trying to do with the trillions of dollars he has been passing out to the world’s needy that show up with tin cup in hand on the steps of the Federal Reserve System. Of course, Uncle Sam is the neediest of them all. The job description for the Federal Reserve includes delivering both 1) price stability and 2) maximum employment. Based on this dual mandate, Bernanke appears to have concluded that the Federal Reserve’s current priority is to use quantitative easing to stamp out business and stock market cycles.

    Chairman Bernanke recognizes the deflationary forces at work in the global economy, so his primary interest trying to generate jobs and not worrying about the inflation side of things for now. In case you missed it, Bernanke wrote the following regarding quantitative easing in the op-ed, “This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

    The problem here is not really with the Chairman’s interpretation of the Federal Reserve’s job description, but with the knuckleheads that wrote his job description in the first place, and that would be Congress. The fact of the matter is that business cycles and stock market cycles are natural phenomena. They serve the vital function of rewarding success and punishing failure. In this natural cyclical process, prices and employment fluctuate.

    The notion of Bernanke’s goal of triggering a “virtuous circle” is intriguing. Our suspicion is that it goes a long way toward explaining the extremes of business and stock market cycles of boom and bust. It appear to be the growing suspicion of many that spending trillions in taxpayer backed funds to try to produce a “virtuous circle”, or any other kind of circle for that matter, may not be the best approach to monetary policy and taxpayer resources. Typically, once you recognize you are trapped in circular reasoning, looking for the most discreet exit is advisable. However, based on the job description given to the Federal Reserve, circular reasoning could be a justified pursuit of such a “virtuous circle” on the taxpayers’ dime.   

    Since monetary policy swings from the pursuit of price stability to maximum employment, the world gets longer recurring business cycles and stock market cycles that reach greater heights of ecstasy and plunge to greater depths of despair than they otherwise would. Invariably, by trying to keep stock markets orbiting in a “virtuous circle” around a global economy of spending, income and profits, either prices leave orbit and fly off into space, or maximum employment crashes to earth, and voila, you have the gut wrenching business cycle and stock market cycle to boot.

    The Long Wave Dynamics approach to stock market cycle and business cycle analysis views business cycles and stock market cycles as natural forces, a bit like gravity. They serve the purpose of knocking the dead and unproductive branches of business down, which serve as fuel for the fire of the next expansion. What is unnatural are the extremes to which cycles are driven by monetary and fiscal policy run amuck. When dead branches receive artificial support, they invariable fall down in time and hit someone in the head.

    Pursuit of the “virtuous circle” simply makes business cycles run longer and than they would if the Federal Reserve focused only on price stability. Stock prices also tend to swing more than they would in a business cycle that did not experience the flow of trillions of dollars in taxpayer-backstopped funds distributed at the discretion of central bankers instead of business and market participants with their own skin in the game. The chart below demonstrates the stock market cycles since the bull market began in 1982, and how the business cycles have grown due to aggressive monetary policy that is trying to stop the natural decline of the cycles.      

     

    The cycles have simply grown into longer monsters. The downside of trying to generate “virtuous circles” with monetary policy is evident with business cycles and stock market cycles, but becomes even more evident with long waves. Business cycles and the smaller stock market cycles are the building blocks of long waves. Long Wave Dynamics research has discovered that there are 16 market cycles in every long wave.

    Federal Reserve policy to stamp out the business cycle eventually accumulates with even greater cyclical consequences. Jay Forrester, who built the first super computer for the Navy and founded System Dynamics at MIT, recognized monetary policy pursuit of “virtuous circles” produces elongated business cycles. Considering what Forrester had to say about such matters in a speech in 2003, “By holding down bank interest and allowing inflation, especially inflation in asset values such as equities and real estate, the monetary authority maintains a low real interest during the long wave expansion. Low real interest encourages business to borrow and expand, encourages increase in asset prices, but also discourages household saving. As a result of more loans and less saving, the monetary authority must make available expanding credit to hold down the bank interest rate.”


    Forrester even demonstrated this building cyclical response to stimulus with a computer simulation. “Figure 7 is a computer simulation over a cycle of the long wave for a model without growth in population or technology. It shows the very low, even negative, real interest during the expansion phase of real GNP. But, as the peak is approached, debt becomes burdensome, production capacity outruns demand, and competition drives down prices. Inflation becomes deflation, meaning negative inflation, causing a rise in real interest.”

    Forrester recognizes what no central banker pursing virtuous circles can ever admit, “At the peak of the long wave, capital plant is excessive and real interest rate has risen, which together make additional investment unattractive and drive down new capital spending.” Where would we be today if the central banks of the world had paid attention to Forrester in 2003, instead of fueling the housing bubble? Now, instead of a virtuous circle, the long wave is in its vicious spiral downwards and the Federal Reserve is trying to work the magic one more time.     

    Attempting to create virtuous circles does not eliminate business cycles, but only makes them run longer, with bigger booms and bigger busts. Consider Forrester’s warning in 2003, “Peaks of the long wave are often considered to be some 50 years apart. However, about 70 years have now elapsed since the Great Depression of the 1930s. An explanation appears to lie in some simulations we have made in which an aggressively liberal monetary policy was introduced a decade before the peak would have otherwise occurred. It appears that expansive credit, as we have had in the United States, can extend the peak and delay the downturn for two decades or more.” Now here we are, sinking into the long wave abyss, just as forecasted.

    The takeaway here is that aggressive monetary policy just expands the cycles and puts off the inevitable. The global economy is now in the grips of a Kondratieff long wave winter season. Once again, the Federal Reserve is trying to create a “virtuous circle.” The housing bubble was one of those virtuous circles that became a vicious death spiral; the results this time around will not be virtuous.

    The real question here is whether the Federal Reserve should just focus on prices, or possibly only enforcing bank regulation, especially higher capital requirements, reasonable down payments, and no liar loans. Business cycles and stock market cycles are natural events that serve to reallocate capital and separate the winners from the losers. The Federal Reserve should not be messing with Mother Nature.

    How should this knowledge of cycles running longer affect the decision making of investors and traders? Long Wave Dynamics has discovered the natural lengths of stock market cycles. Research is producing actionable information for investors and traders on market cycles in price and time. The long wave contains sixteen business cycles. Every business cycle (aka Kitchin cycle) contains nine Wall cycles (aka 20-Week cycle). Cycles are rarely their natural or “ideal” lengths, like market prices they are guided by Fibonacci ratios. Cycles running longer than their natural lengths are to be expected as long as central bankers are pursing virtuous circles. Tracking the Wall cycle and the Fibonacci ratio targets to tops and bottoms is essential for all serious investors and traders.  

    Privatizing profits and socializing losses needs to be an activity that is prohibited by the Federal Reserve System. The Federal Reserve System should be insuring that free markets reward hard work, savings and success, instead of chasing “virtuous circles” that produce bubbles, punish prudence, and reward folly, when business cycles are past their prime and should be permitted a dignified death so new life can begin in the global economy. If the Federal Reserve focuses on those worthwhile goals, natural capital formation will be available for the great ideas of the coming long wave boom. Meanwhile, investors are rushing to protect their capital from the inevitable death spiral that will follow the latest “virtuous circle”.

     

     



    Disclosure: No Positions
    Tags: SPXU, SDS, SH
    Dec 04 10:58 AM | Link | Comment!
  • Benjamin Graham’s Investing Wisdom and Market Cycle Formula Timing Plans
    Most investors are aware that Benjamin Graham, author of The Intelligent Investor, the acclaimed investment book first published in 1949, is the father of value investing. The basics of value investing are that when you buy a financial asset like a stock or bond, the reason to buy is for the future cash flow that the underlying business is going to generate, and from which you will be compensated in dividends, interest or price appreciation.

    Graham’s work on value investing is of interest for a number of reasons. First, it has proven arguably to be the most successful method of investing over time since its publication. The most successful investors have been value investors, Peter Lynch, Sir John Templeton, John C. Bogle, and of course Warren Buffett, who is Graham’s most famous student.


    The goal of the value investor is to purchase future cash flows at a discount in the present. What Graham recognized is that Mr. Market occasionally offers investors great companies and their future cash flows at a bargain. What is less appreciated is that Graham recognized that for additional safety and maximized returns, identifying the right overall market time for buying such value and in turn for selling should be an objective. In order to identify the right time to buy value, Graham suggested what he called formula timing plans. A worthwhile formula timing plan should identify when you ought to be a buyer and subsequently a seller. 

    What is also of particular interest to a student of global financial markets and investing is that the first edition of Graham’s book was published in 1949. Why is this important? The year 1949 was the inflation-adjusted nadir of the last global Kondratieff long wave cycle of boom and bust. Although Graham did not fully recognize the long wave forces at work, he is one of the greatest financial and investment minds of the last century. His book was in large part a product of his experiences of surviving as an investor on the front lines of Wall Street during the volatile financial markets of the great depression. The 1949 edition captured Graham’s remarkable investment insights from his experiences as the world was turning from a long wave bust to a long wave boom.

    The global economy and financial markets are once again approaching the nadir of the global long wave cycle, making the perspective of Graham’s original work particularly interesting. The cover of the 1949 edition featuring a foreword by John C. Bogle is shown above on the right. Graham adjusted some of his views in the decades that followed, but his first edition uniquely captured his remarkably salient insights into global financial markets for investors caught between two great epochs in global financial history.

    Graham’s notion of using a formula timing plan to identify when to buy and sell value was lost over the ensuing decades to the mantra of buy and hold, and the random walk down Wall Street. Investors still smarting from the pain of the current long wave winter and business cycle rollercoaster ride likely wish they had read of Graham’s wisdom regarding formula timing plans in the 1949 edition, where he wrote, “I am more and more impressed with the possibilities of history’s repeating itself on many different counts. You don’t get very far in Wall Street with the simple, convenient conclusion that a given level of prices is not too high… In recent years certain compromise methods have been devised by which the investor can take some advantage of the stock market’s cycles without running the risk of an unduly long wait or of ‘missing the market’ altogether. These are known as formula timing plans.”

    The Wall Street financial product sales machine incorporated aspects of Graham’s value investing for decades. Those who diligently applied Graham’s value based approach knocked the socks off other investment approaches. Occasionally business cycles got in the way of returns, but for the large part the business cycle declines were short, offered buying opportunities, and the great bull market roared on for years. Then something happened along the random walk to perpetual investing nirvana. The Kondratieff long wave winter season arrived and knocked global markets and investors for a loop.

    The impact of market cycles on investment strategy is getting attention once again. A formula timing plan based on global market cycles that helps identify market cycle highs and lows for position entry, exit, and stop losses belongs in the toolbox of all serious investors and traders. Whether you are a value, growth or momentum investor, or a trader seeking to indentify market turns, a formula timing plan can be highly beneficial.       

    Another piece of Graham wisdom is the need to recognize the difference between investors and traders, specifically as it relates to formula timing plans. This is what Graham had to say, “The most realistic distinction between the investor and the speculator (trader) is found in their attitude toward stock-market movements. The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high price levels at which he certainly should refrain from buying and probably would be wise to sell.” 

    Many technical analysis methods can serve as formula timing plans to identify probable market highs for selling and lows for buying. Technical analysis can improve the returns of any investment approach, be it value, growth, momentum, or trading in any global market. Long Wave Dynamics is a formula timing plan developed after several decades of studying global market cycles, market-timing masters, and their methods.  

    Long Wave Dynamics recognizes that market cycles occur on many levels of time and price. Essentially, there are small cycles and large cycles. The smaller cycles aggregate to form the larger cycles and there are mathematical and Fibonacci relationships between cycles. Investors have more interest in the time and price targets of the larger cycles, while traders are interested in the time and price targets of the smaller cycles.

    The Kitchin cycle, aka the business cycle, which began in March 2009, has primarily been an inventory build business cycle and not a capital investment cycle. However, the cycle that is of greatest interests at Long Wave Dynamics for investors and traders is the Wall cycle, aka the 20-week cycle. There are nine Wall cycles in every Kitchin cycle. The Wall cycle resides at the intersection between the cycles of interests to investors and traders. Investors are more interested in the highs and lows of the Wall cycle and the larger cycles. Traders are interested in the Wall cycle, but also the Quarter Wall cycle, the four smaller cycles in every Wall cycle.

     

    The Long Wave Dynamics Letter tracks the Kitchin cycle, Wall cycle, Quarter Wall cycle and other cycles. Market cycle analysis combined with the right tools for Fibonacci targeting in price and time produces a cycle based formula timing plan with actionable market intelligence for investors and traders. These methods produced a target high on November 8 at 1228 in the S&P 500, and then a bottom target on November 16, which also turned the market. The November 24 high target also appears to have produced resistance in global markets.


    Tracking the ebb and flow of the Wall cycle with the Long Wave Dynamics approach to market cycle analysis is a formula timing plan for investors and traders. The Long Wave Dynamics formula timing plan allows you to identify entry and exit opportunities in price and time that will complement the other investing and trading methods you utilize.   

    When incorporating a formula timing plan with a value investing strategy, the investor has purchased shares based on their cash flow value. If the formula timing plan misses the exact bottom of the market, the investor still owns solid enterprises and their cash flows. However, most shares have been overvalued recently, based on historic norms of basic value parameters such as dividend yield. Based on analysis of the larger market cycles, greater value based opportunities may be identified ahead, as the long wave winter reaches it nadir once again, but each Wall cycle offers potential buying opportunities for investors, if they are not interested in waiting on the buying opportunities of the larger cycles.  

    The last time global markets were at such an important juncture in the long wave, Benjamin Graham was working on the first edition of his famous book. That book recognized that investors and traders would benefit from a formula timing plan that tracks market cycles.

     

     



    Disclosure: No Positions
    Tags: SDS, SH, QID
    Nov 26 11:35 PM | Link | Comment!
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