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S&P-Picture Perfect Despite What you Think

Markets are orderly, rational and sometimes predictable. This has been our mantra at the Danielcode for many years and that statement often comes as a shock to traders struggling with the vicissitudes of daily bars changing direction and appearing to have a mind of their own. In fact all markets do have a mind of their own but it is an intelligent mind that conforms to some standard trading rules. I am going to show you just how precise and orderly this important market is in reality which will likely conflict with your own preconceptions. And don't think you are alone. More comment is published about US Equity markets than the rest combined. Some is associated with seriously big names in the business and has the added gravitas of reputational weight. But, like much other analysis it is almost all wrong!!

I acknowledge that much of the comment from the heavyweight worthies is designed to garner attention as much of this industry at the high end is more about self-promotion than serious analysis and our constant beat since 03/09 that "the trend is up and this market is heading for X target" certainly doesn't garner the gut wrenching attention and adrenaline fuelled emotion that "S&P will crash and go to 400" excites, firstly in the media and then by osmosis in the pit of your stomach. And that's sometimes why these worthies regularly (like every day) preach Armageddon scenarios. Perhaps some even believe it, but that thought is certainly less than charitable.

Let's look at the view of this market that you probably have:

Up and down and choppy. Then up some more. Random turns and spirited runs followed by the inevitable pull back. The reason you have this view is that you are not using the correct tools to frame your view. And if you get closer, the view gets worse with apparent randomness filling your senses. In fact this market has been following a tight script as it always does, which is how the "sometimes predictable" part of our mantra remains.

For the purpose of transparency and your edification, all of the techniques I am going to show you are explained and discussed at some length at our website where you will find many of my published articles and webinar videos under the appropriate tab. Some of the more demanding and complex work is taught at periodic tutorials, usually 3 days of teaching and a quota of fun in a pleasant regime.

Let's start by converting this daily chart to our basic 6 day chart where each bar is created of 6 trading days. This is the basic Danielcode timing chart although we do not neglect the 12 day and even the 24 day chart for longer analysis. But let's for the moment focus on basic analysis and the creation of valid trade signals to get your blood pumping and keep the focus on a trader's prime task; making money. Always remember that our job as traders is not being right but making money. You will however find that getting the analysis right is the precursor to winning trades.

The chart below is our basic 6 day timing chart. You can see the symmetry as S&P went 59 DC "weeks" (of 6 trading days to a DC week) from the 05/2006 high into the closing high for the entire move from the Dotcom crash on 10/2007. DC time and price recognition is valid at either a bar high/low or on the close and the 2007 top was the latter case. From there the market started its inexorable subprime correction which despite assurances from our putative masters that subprime is contained etc continued seemingly unabated for 17 months. This correction eventually saw all sorts of financial instruments blow up and in the fullness of time became "The Global Financial Crisis", a rather cute label for an event that was neither financial or a crisis. It was in fact merely an exposition of too much debt in households, institutions and government as is still unfolding now. This time the unrestricted urges of our real masters the pollies (politicians) to kick the can down the road with bailouts, bailins, QE 1 to infinity, central bank largess on likely dud securities to the chosen and every other accounting obfuscation that you can conjure, has set the stage for a rerun of that dreaded plague reality. At all costs, we the people must be shielded from that monster!! But that's another story which is not due to play out for quite a while.

59 is the dominant time cycle for tops in the Danielcode lexicon and occasionally these time cycles (there are basically 4 of them) switch to mark other important junctures. From the 2007 top coming exactly on its DC 59 cycle (10/08/07 week gave us the closing or momentum high), the run down to the 03/2009 low took exactly 59 DC weeks. so equal time or as our hero Daniel recorded under instruction "it shall be for time, times and an half". And so it was, which enabled me to call the 2009 low to the day and a few ticks. Fortunately I was running a tutorial in New Zealand over that weekend so I had a good few witnesses to us buying the low on Monday's open. I say fortunately as although it was a singular event in the midst of real fear and loathing at the time, requiring a high degree of commitment, time has warped the memory so that every commentator on earth and a good few others claim to have had the same vision simultaneously. Such is the way of the world.

If you would like to revist those heady days (as futures traders we trade both long and short and both pay just the same) you may wish to read my article "The Number of the Beast". The number we were looking for to end this exciting plunge down? 666.

Having noted the repetition of important time cycles you will note also the red line on the chart above, which on face value is simply a line joining a high to the low of the first major rally after the top. When you look at any chart you are seeing several different types of measurement or "Degrees". The X or vertical axis measuring price is the 1st Degree; the Y or horizontal axis measuring time is the 2nd Degree; Volume is the 3rd Degree and the 4th Degree is an angle which combines time and price. Most of these angles provide mere support and resistance but the red line has another vital characteristic. It meets this market at an expiring 59 DC time cycle shown on the chart as 118 or the 2nd iteration of the initial 59 cycle, but is of course also 59 DC periods from the 2007 top. At these points where time and price sublimely meet, we say that "Time and Price are Squared". And where time and price are squared a significant turn is almost inevitable. We call this particular variation of an angle The 4th Seal.

If markets are rational and orderly as I claim, we should be able to define present and future price action in a mathematical way. To do this we use a standard regression channel, available in most charting packages but add a few fixed rules all of which are discussed in some detail in the Videos section at the Danielcode website, and in particular we substitute the most important of the DC ratios for 1 standard deviation from the mean.

Let's look at the same chart with a correctly drawn DC trading channel added:

The darker blue line is the median of the DC trading channel with the lines above and below it being respectively 1 and 2 DC standard deviations from the mean or 1.593XSD. From its 2009 low S&P index has run precisely within 1SD above and below its mean with the complex correction ending 10/2011 targeting 2SD with a degree of precision. So for the past 51 months a simple mathematical formula has defined, contained and forecast the operating range of this most complex of markets. Picture perfect.

And there is more. Much more.

The daily chart has mimicked the 6 day chart in true fractal fashion for months at a time. The propensity of markets to create fractals in price is well known. Less known is the ability of markets to create trade signals from fractals of time. This behavious is so pervasive that I have coined a new word and we have based a complete trading signal on this phenomenon which I have called Fractalian trading. More of that another day.

The final point of notice on the above chart is the expiration of the 295 DC week cycle in the 6 day period ending 05/24/2013 which caused the recent top. This is shown as 4 iterations of the DC 59 cycle from the 03/2009 low and is of course the 5th iteration of this cycle from the 2007 high. This is what I call constancy and precision.

All of these amazing numbers which control markets in all time frames and in the 1st, 2nd and 4th Degrees were first written a very long time ago by our mentor whose likeness appears above. For the Gnostics, the painting is Michaelangelo's rendering of Daniel in the Sistine Chapel. You can figure the timeline!!

Now we can add the DC price extensions in blue and the retracements in red and black and see at least a countertrend reaction from many of them. Whilst this is primarily a timing chart and the daily and weekly charts we create for members are much more precise, I suggest to you that nothing we are seeing when viewing charts through the Danielcode prism, accords with Random Walk Theory which saw its author's thesis supervised and approved by two Nobel Laureates.

Far be it for a humble country lawyer to argue with such luminaries of the financial world, but you be the judge. Here's our 4th Seal website update from 05/27:

last update : 05/27/13 06:03:12 PM EST





$SPX (S&P index)
(6day chart)


04/30/13 : 1655.557
05/08/13 : 1664.492
05/16/13 : 1673.427
05/24/13 : 1682.363
06/04/13 : 1691.298
06/12/13 : 1700.233
06/20/13 : 1709.168
06/28/13 : 1718.103
07/09/13 : 1727.039

From last week : "Next to the $DAX the $S&P is also pointing towards a top in the making. On this chart we are at 4th seal resistance and have a basket of cycles expiring ending on 05/24 +- 1 DC week. On the 12 day chart the 59 cycle from the momentum high stretches till next week which suggests it could hold up for another week but remember that the first opportunity for a high comes from a 59 cycle that originates from the closing high which was a week sooner and which expires now. As we are getting into the latter part of the time frame for the $DAX to top we should see the top in the S&P sooner rather than later."

And just to show that all markets are ruled by the Danielcode, below is a DAX chart that I showed at a webinar on 05/23 the day of the recent high although the jury was still out on that day, forecast exactly by the 5th Seal, the cousin of the red line we have discussed.

Given the fractal nature of markets, it follows that this form of analysis works much the same on daily charts. In fact our final offering for today is our proprietary FractZen chart of Natural Gas:

Using the same methodology as we have discussed this intraday chart returned $2460 per 1 contract on the run down from 06/04 and so far $1270 on the rally to 06/18 or $373 per day per 1 contract in just 1 market. This is not typical of intraday trading but does show the possibilities in moving markets.

I trust that this different take on market analysis has sparked your interest enough to cause you to ask "Why is it so?" Rational markets reward rational traders which is as it should be. The trick is to be using the right looking glass.

Our final chart for today is the intraday FractZen chart for S&P Futures which takes our journey in this market from a 6 day DC timing chart to an intraday trading chart. The winning trades are in blue and the loser in red. Ignore the brackets as that's just a function of how trade Navigator displays this feature which was likely designed for ever upward stocks rather than trade both ways futures:

Again this is just 1 contract in 1 market but the result is nice enough and supports my argument that good analysis makes good trade signals. Before you try to emulate these FractZen charts, I should tell you that they use a volatility algorithm to set the bar ranges and these change almost every day. This is the current version.

I invite you to visit us at the Danielcode website where the articles, videos and PowerPoints will take you further on this journey of discovery and hopefully allow you some insights into the orderly and purely mathematical basis of market movement.

John Needham

Sydney Australia

19 June 2013

"The fox knows many things, but the hedgehog knows one big thing. A Hedgehog Concept is not a goal, intention or strategy to be the best. It is an understanding of what you can be best at. The distinction is absolutely crucial". ~ Isaiah Berlin, The Hedgehog and the Fox

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