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Erik McCurdy
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Erik is the senior market technician for Prometheus Market Insight and has been performing chart analysis since 1995. The software program that he developed to monitor long-term stock market trends has correctly identified 92% of the cyclical turning points in the S&P 500 index since 1940.... More
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Prometheus Market Insight
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Prometheus Market Insight
  • Technical Analysis Discussion Blog for August 2010 17 comments
    Aug 20, 2010 4:35 PM
    A place to discuss the markets from a technical analysis (NYSE:TA) perspective.  Any market, any indicator, any internal, any signal.  It's all fair game.  Feel free to post your questions as well; one of us should be able to provide an educated answer.
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Comments (17)
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  • mattcoll
    , contributor
    Comments (13) | Send Message
     
    Hello Erik,

     

    Let me first say I am new to technical analysis but would like to learn more. I have been impressed with your work and especially your determination to keep an open mind to different possibilities. So many market "experts" tell you EXACTLY what is going to happen and wont even admit that something else COULD happen. Used car salesmen in expensive suits, the lot of them.

     

    So I have a question, you post charts with indicators and you also post those "cycle analysis" charts. How do you figure out when the next cycle is expected to start? TIA
    20 Aug 2010, 06:41 PM Reply Like
  • Erik McCurdy
    , contributor
    Comments (318) | Send Message
     
    Author’s reply » Thanks, my background is in statistics and the scientific method, so I make a concerted effort to stay objective and focused on the notion that there is always more than one possible scenario at any given point in time. As I like to say (over and over again), there are no certainties in the financial markets, only possibilities and their associated probabilities.

     

    As for your cycle analysis question, I wrote a brief primer in a recent market commentary that you might want to review:

     

    seekingalpha.com/insta...

     

    Essentially, the goal of cycle analysis (CA) is to find the internal rhythms of a given market. For the most part, they all exhibit some form of cyclic behavior across the different time frames (short, intermediate and long-term). The first step in applying CA to a specific market is identifying its cyclical properties. Every market is unique and thus has its own unique rhythms, so a large amount of historical data should be analyzed in order to accurately gauge the cyclical tendencies of a given index. Once you have established basic parameters such as the average period and the window in which the vast majority of cycle periods occur, it is possible to develop reliable forecasts of where future boundaries are likely to develop. Once you are in the window of opportunity, you can then apply technical indicators to identify the turn as it occurs. For example, price oscillators (e.g. RSI and Stochastic) and momentum (e.g. MACD) can help to confirm that a cycle low has occurred.

     

    If you are interested in delving deeper into the details, do some searches and pick-up some books on cycle analysis. There is a lot of good reference material out there.
    21 Aug 2010, 01:44 PM Reply Like
  • mattcoll
    , contributor
    Comments (13) | Send Message
     
    Thanks I'll look to pick something up from amazon. I appreciate the education.
    21 Aug 2010, 03:57 PM Reply Like
  • HHoove
    , contributor
    Comments (4) | Send Message
     
    Your cycle work has got me interested in learning more too. I have seen it in passing every now and then but never paid it much mind. I will be doing some reading myself. Thanks Eric.
    29 Aug 2010, 01:01 PM Reply Like
  • Drewskers
    , contributor
    Comments (25) | Send Message
     
    I really appreciate the opportunity to ask some questions in a venue like this!

     

    I've been studying the price action on SPY and GLD and I have noticed the charts for these ETFs often show gaps where the underlying indexes they are supposed to track do not show any gaps. I wonder if this behavior could lead one to erroneous conclusions using T/A. For instance, much is made about how gaps are eventually filled, but what if a gap only occurs on the ETF, and not on the corresponding index? Is that a real gap? Would it necessarily have to be filled? In particular, I find trying to use T/A on GLD very problematical as I find it just does not give me a good "feel" for the price action, whereas the spot index makes a lot more sense. But I don't know where to access the spot index intra-day!

     

    Another question I have relates to market breadth indicators, such as Summation Index and New Highs/New Lows. Recently I've read commentary saying these indicators are being distorted by the fact that there are so many symbols trading on the exchanges that are not really stocks (ETFs, CEFs, preferred stocks). What is your take on this?
    20 Aug 2010, 10:05 PM Reply Like
  • Erik McCurdy
    , contributor
    Comments (318) | Send Message
     
    Author’s reply » TA works the best when applied directly to the market under observation. You should absolutely avoid performing chart analysis of tracking ETFs such as SPY and GLD because they will all introduce distortions due to factors such as fees, etc. They will, of course, track the underlying market more or less, so it's not like your results will be completely invalid, but it's always best to go straight to the source. There are a number of places to get intraday quotes on gold. For example, try this link to kitco:

     

    www.kitco.com/charts/l...

     

    For daily, weekly and monthly charts, I use the composite "continuous" gold contract formulated by stockcharts.com:

     

    stockcharts.com/h-sc/u...

     

    It is their attempt to work-around the distortions created by contract expirations, and it does reasonably well. I also created my own tracking index called the Gold Currency Index (GCI):

     

    www.prometheusmi.com/p...

     

    If you truly believe that gold is a separate currency, it doesn't make much sense to price it in US dollars or euros. The GCI is a composite of gold prices in the currencies of 10 of the largest economies in the world as defined by GDP. It is therefore currency independent, reflecting the intrinsic value of gold as an international currency itself.

     

    As for your second question regarding issues that aren't stocks, it is a problem when it comes to the proper analysis of market internal data. After all, if, for example, an ETF that is composed of a basket of highly rated municipal bonds breaks out to a new 52-week high, that's not exactly a bullish signal, right? You could even make the argument that it should be treated as a new low for the purposes of categorizing its impact on overall market health. I don't really have a good answer with regard to effectively taking these distortions into account, except to understand that they exist when parsing market data. One could always maintain a separate data set in which you adjust the daily totals to reflect the nature of each security, but that work would be incredibly tedious and subjective. I have no doubt some of the big players (e.g. Goldman Sachs) do work in this area.
    21 Aug 2010, 02:07 PM Reply Like
  • mattcoll
    , contributor
    Comments (13) | Send Message
     
    Your GCI makes total sense. Anyone who insists gold is only a commodity used in jewelry hasn't been paying attention the last ten years. Thats a bull market and its rising against every fiat currency on the planet. How high do you see it getting before the bull is done?
    21 Aug 2010, 04:01 PM Reply Like
  • Erik McCurdy
    , contributor
    Comments (318) | Send Message
     
    Author’s reply » "How high do you see it getting before the bull is done?"

     

    That is incredibly difficult to forecast at the moment. We are currently in the middle of a historic conflict between deflationary and inflationary forces, and gold will likely become incredibly volatile as we move further along in the process. The central banks of the world are currently laying the groundwork for a massive tsunami of price and asset inflation later in the decade, but how we get there is hard to predict with any useful amount of statistical confidence. That having been said, I'm fairly confident gold will ultimately end up somewhere in the $5,000 to $10,000 (US) range before all is said and done. Just a WAG, of course, but that's the best anyone can do at this point.
    21 Aug 2010, 04:49 PM Reply Like
  • mrvulture2001
    , contributor
    Comments (18) | Send Message
     
    been following the gci over at jim sinclairs web site for the past few years, its been good at turns. definitely useful and should get more useful as global paper funny money goes down the toilet this decade.....
    21 Aug 2010, 05:36 PM Reply Like
  • Mark Bern, CFA
    , contributor
    Comments (4850) | Send Message
     
    Erik - Isn't GLD, as an ETF comprised primarily of derivative contracts? That is my understanding. If so, then each time the delivery month of the near-term contract nears expiration, the position must be rolled over into the next delivery month. There is always a time premium or discount built into contracts to allow for future expectations and holding costs such as physical storage and insurance. So, when the roll over happens there is always a gap in the ETF caused by the change in pricing of the underlying derivative contracts. At least that is my understanding.

     

    Therefore, it is never a good idea, as you stated, to try to use technical analysis on an ETF due to such distortions. Always use the underlying asset price movement TA. The ETFs are only a proxy, close but rarely perfect.
    22 Aug 2010, 05:20 PM Reply Like
  • mattcoll
    , contributor
    Comments (13) | Send Message
     
    I've seen $10k thrown around by gold experts here and there. Scary to think we could get there, I'm not looking forward to a world with $10k gold.
    22 Aug 2010, 07:45 PM Reply Like
  • Erik McCurdy
    , contributor
    Comments (318) | Send Message
     
    Author’s reply » Mattcoll, yes, a $10k gold world will not be a pleasant place in which to live, but we are currently on that path. Bernanke seems intent on driving the US dollar much lower. He thinks that he will be able to magically remove all of this liquidity from the financial system at precisely the right moment in order to prevent monetary inflation from driving price inflation through the proverbial roof, but he's kidding himself. That's what happens when you put a career academic in charge of the Federal Reserve.

     

    Mark, yes, that's why I'm not a big fan of the GLD ETF. I personally use SGOL as every share corresponds to an amount of physical gold in a vault in Switzerland.
    28 Aug 2010, 04:58 PM Reply Like
  • Drewskers
    , contributor
    Comments (25) | Send Message
     
    I'm reading the prospectuses for GLD and SGOL and they are both physically backed, though there are some other differences (the location of the stored gold, and transparency of accounting).

     

    Perhaps Mark Burn may have been referring to DGL, which deals only with futures contracts.
    30 Aug 2010, 07:17 PM Reply Like
  • tinshins
    , contributor
    Comments (84) | Send Message
     
    Eric.

     

    I'm reposting this on the advice of Albertarocks on the Hindenburg Omen insta. If you or anyone else can answer this, it would be appreciated.

     

    Here is a ten year chart on the CCI ( the CRB on older metrics. )

     

    jsmineset.com/wp-conte...

     

    Now compare that to the chart of the Dow from 1980 to 1990.

     

    It looks eerily similar. Is this pure happenstance, or what does it mean ? Can it mean that the whole commodity complex is going to rise while there is deflation ? Are we headed to stagflation then ?

     

    I don't understand this. Please help ?!

     

    Oh yes, for those of you that don't understand the significance of the CCI read this :

     

    www.zealllc.com/2008/c...
    7 Sep 2010, 07:44 AM Reply Like
  • Erik McCurdy
    , contributor
    Comments (318) | Send Message
     
    Author’s reply » Hi tinshins,

     

    The CCI is one piece of a big, interesting puzzle. As with oil, the monthly chart displays a secular uptrend that experienced a violent correction during the financial crisis in 2008.

     

    CCI:
    www.prometheusmi.com/p...

     

    Oil:
    www.prometheusmi.com/p...

     

    While the CCI has moved above resistance in the 50% retracement area following the 2008 correction, oil looks relatively toppy, so the jury remains out for the moment with regard to long-term direction.

     

    You see similar secular moves with gold and my Gold Currency Index (GCI), although the international currency of choice is now testing all-time highs:

     

    Gold:
    www.prometheusmi.com/p...

     

    GCI:
    www.prometheusmi.com/p...

     

    Obviously, one of the primary drivers of these secular bulls has been the aggressive policy of monetary inflation undertaken by central banks of the world since the current structural bear market in equities began in 2000. But to see the whole picture, you also have to look at debt levels, M0 through M3, the velocity of money, the money multiplier, etc. There is a massive conflict underway between the forces of deflation (excessive debt) and inflation (central bank printing presses). Central banks can inject as much liquidity as they want, but they simply cannot force monetary inflation to translate into price (asset) inflation as long as the velocity of money remains dead in the water. The nearly uninterrupted rise in gold over the past nine years is telling us that inflationary pressures are continuing to build, but the global deleveraging process has only just begun, and that is driving deflation. My own analysis suggests that inflation will become the much bigger problem at some point, but predicting the timing of the turn is difficult given the complexity of the forces at work. Until then, as a chartist, I will continue to listen to the messages of the various markets and do my best to agree with them.
    7 Sep 2010, 12:02 PM Reply Like
  • Erik McCurdy
    , contributor
    Comments (318) | Send Message
     
    Author’s reply » I've created a new blog for September 2010 discussions:

     

    seekingalpha.com/insta...
    7 Sep 2010, 12:03 PM Reply Like
  • Albertarocks
    , contributor
    Comments (2230) | Send Message
     
    Thanks for a great answer for tinshins Mr. McCurdy. I was confident his inquiring mind would find some answers and discussion here. Excellent work. And thanks for carrying this interesting ball to a fresh insta. I'm pretty sure activity is going to pick up in these 'TA specials', especially when the market takes a scary turn for the worse. Your efforts are very much appreciated.
    7 Sep 2010, 01:13 PM Reply Like
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