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Modified VWAP Methodologies

New Research: Essay Six (continued)

Essay on MIDAS/AC Fourth Generation (Gen-4) Curves (continued)

© Andrew Coles

MIDAS/AC Gen-4 RS Curves (continued)

Following conventional approaches in intermarket analysis, let’s leave sector applications to one side and apply Gen-4 curves to individual commodities measured against a broader market benchmark.

Second illustration: Applying Gen 4 curves to Individual Commodities

Figure 7 below is an RS line of the SPDR Gold Shares (GLD) ETF divided by the TR/J CRB Global Precious Metals Index, the same Index that was used in Figure 6 on the previous page. This is again a daily chart covering two Primary trends between 2009 and 2013.

Focusing on points (1) and (2), we see that a rising RS line from 2010 and into 2013 meant that GLD was outperforming the Precious Metals sector, even though after mid-2010 GLD began a rapid decline. This outperformance allowed a vital anchoring of a Gen-4 curve in mid-2010 which then captured the rapid decent of GLD, turning Gen-4 support curves into Gen-4 resistance curves at points (1) and (2). Again points (1) and (2) are entirely out-of-reach of standard MIDAS curves and other conventional technical analysis indicators.

Figure 7: Two out-of-reach inflection points (RIPs) as GLD continually outperforms the Precious Metals Index between 2010 and 2013

Figure 8 below is the SPDR Gold Shares (GLD) ETF divided by the TR/J CRB Global Commodities Index instead of the CRB Precious Metals Index. The chart is again a daily chart and highlights in the box another Primary trend between early 2006 and early 2008.

As we see, despite its uptrend, GLD still underperforms the main CRB Index during this period. The resulting inversion in the RS line again allows us to anchor the Gen-4 on an out-of-reach inflection point (RIP). Subsequently the curve resists all of the major highs of the trend, including the last one which ends the Primary trend in GLD in early 2008. Such analysis and market timing are again impossible without the combination of RS lines and Gen-4 curves.

Figure 8: Another three out-of-reach inflection points (RIPs) as GLD underperforms the CRB Commodities Index in a Primary trend between early 2006 and early 2008

Third illustration: Applying Gen 4 curves to Stocks and Bonds

As noted earlier, at the peaks and troughs of the business cycle intermarket analysts place considerable emphasis on the chronological sequence of bonds, stocks, and commodities. This sequence is vital in the process of asset allocation and group rotation. Consequently an RS line of stocks and bonds (and bonds and commodities) plays a fundamental part in analysing the economic cycle.

However, when combined with Gen-4 curves, the RS line between stocks and bonds is also extremely useful in identifying out-of-reach inflection points (RIPs), which again create excellent market timing signals not identifiable in stocks and bonds alone.

Figure 9 below is the S&P 500 (cash) index divided by the yield on the 10 year T Note. Normally intermarket analysts would divide stocks by bond prices but here I’ve used the yield instead. Because our aim is to seek out RIPs, this alternative is satisfactory.

As we see, there is an extremely robust Secular uptrend in the RS line from 1994 until the trend accelerates from mid-2009 before falling back in early 2013. Importantly, this smooth Secular uptrend between 1994 and 2009 allows the anchoring of a Gen-4 curve in mid-1996 that supports the major bottom in stocks in 2002 and in 2009. This is a remarkable curve which will probably play a major support role in relation to the next Primary degree pullback in the US stock market.

Figure 9: A Secular degree Gen-4 curve supports the two most significant lows in recent stock market history

Fourth illustration: Applying Gen-4 curves to the Gold/Silver Ratio

The Gold/Silver RS line is another well-known study in intermarket analysis. John Murphy cites it in relation to the assessment of different commodities in the same sub-index, in this case the TR/J CRB Physical Precious Metals Index.

Figure 10 below is the weekly RS line of SPDR Gold Shares (GLD) divided by continuous COMEX silver futures. As we see, silver outperforms gold until mid-2008, then gold outperforms silver until mid-2011. Since mid-2011 silver has once again outperformed gold.

The main interest in Figure 10 is the Primary trend highlighted by the box between mid-2004 and the end of 2009. Again because silver outperforms gold during this period, the anchored Gen-4 curve resists the uptrend in GLD at points 1 to 4. The Gen-4 curve then inverts its role as gold outperforms silver, creating a major point of support at point 5. Point 6 is interesting because although silver is once again outperforming gold, the same Gen-4 is in place as a Secular degree support curve, possibly mirroring its role at point 5.

Figure 10: Four out-of-reach inflection points (RIPs) in the highlighted box as silver outperforms gold plus the inversion at point 5

Overleaf I’ll discuss two more illustrations before ending this study of Gen-4 curves with a brief conclusion.

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