Markets have continued to move in line with expectations.
Most major indices remain near overhead resistance lines, but there is no breakout to the upside (yet), and meanwhile we have entered a lunar Red Period.
Here is the Nasdaq chart (click for larger image):
This market has reached our 3200 target, but seems to struggle to go higher, as we expected. I continue to look for a minor pullback in the next weeks and then another rally attempt in early March.
The Earl2 indicator is now clearly turning down. This means that any new highs we may see in the coming weeks, will be opportunities to sell and take profits. By the time the Earl2 bottoms out we will likely be able to buy at or below the current levels.
This means we should at least tighten our stops and be ready to get out as soon as a broader decline sets in.
Currently, a close below 3140 would be a strong indication to get out.
Today I also want to introduce something new, which I have been working on for a couple of months.
This is the “LT wave” chart (December through to March 2013):
The purpose of this wave chart is to spot shorter term moves (a few days) and to identify potential peaks and bottoms in advance. It also helps to estimate the strength or weakness of upcoming lunar red and green periods.
The lunar cycle is a major ingredient in this chart, but not the only ingredient. There is a “secret sauce”, so to speak.
So how to use it?
The orange line shows the daily signal, while the blue line is obtained by applying a 3 day smoothing filter, and the yellow line uses a 9 day smoothing. Values above 1 indicate strength, below 1 suggests weakness. I mostly use the blue line.
For this week the LT wave suggests weakness until Wednesday-Thursday, but Friday shows a strong upwards spike, which will be the peak value for February. In March we will get peak values on the 12th and 13th. If we get new highs on any of these days, then it are supposed to be good chances to take profits, or initiate positions to benefit from a downside move.
Let’s see how it pans out.
***
As chart of the week we take a look at the Euro vs US$ (click for larger image):
The Euro has dropped back from its recent peak, and my Earl2 indicator is turning down. The shorter Earl is well below zero, which means we are likely to get an upward bounce first, before turning down and fall further.
So, look for the Euro to hold up until well into March, then probably another leg down (and the Eurozone crisis back in the news)
Good luck,
Danny
LunaticTrader 
Danny,
You said Friday is showing a strong upward peak. What is confusing to me is that per your lunar cycle software, this is the same day the cycle is going from yellow to red. Usually that means the market will go further down when the line is turning from yellow to red in your software. Could you help reconcile these two seemingly contradictory observations?
thanks,
Krish
Hi Krish,
Good observation.
If you look into the hourly chart in the Lunatic Trader program, then you see we will move from Yellow to Red period at 3pm afternoon (EDT), which is very late in the trading day. So there is not really a contradiction here.
In a perfect world, one would look for the market to start the day with gains, then give up some of those gains in the final hour of trading today, as the Red period kicks in. Of course, the world isn’t perfect.
But remember, the red and green periods are purely based on the moon phases. The LT wave contains a lot more ingredients besides the moon phase, and thus it might disagree with what the moon phases alone forecast.
Red-Green periods and LT wave are just different systems with some overlap.
The idea is to get information from the LT wave, which the red-green periods may not give us.
For example, in the yellow period we expect at least one good up day, but the yellow period lasts 3 days, so we don’t know when that up day will come.
The LT wave showed down values for Wednesday and Thursday, and we have seen declines indeed. This leaves only today if there is to be an up day in this yellow period. Time will tell whether that pans out.
This is how the LT wave can complement the information we get from the red-green period cycle.
Danny
Thanks Danny for the detailed response. I would love to know what the other ingredients in the LT wave are if this is something you can share.
In the meantime, one more observation. As you may know mercury retrograde starts on Saturday. It has been my experience that when a mercury retrograde coincides with the red lunar period, there are wild swings in the market to the downside. This is portending a pretty bad swing downwards on the coming Monday or Tuesday or both days. But per your LT wave chart, it is not looking too bad. Any thoughts on this?
Hi Krish,
I prefer not to tell the ingredients. Goldman Sachs is also not giving us their trading algorithms, if you understand what I mean ;-)
As for combining it with other methods, that’s not such an easy question.
First, one has to be careful for the so-called “analysis paralysis”, which happens when an investor looks at too many systems/indicators, then gets so confused that doesn’t know what to do anymore.
Basically, our mind is not good at combining more than two or three systems.
The best way to combine different systems is by trading both systems with a part of your portfolio.
So, lets say you want to use your Mercury system and my LT wave for your trading next week. First you decide how many units you want to trade.
Maybe you trust Mercury more and give it 3 units, while trading the LT wave with 2 units.
This is what you would do. You expect a drop from Mercury retrograde so Monday you short 3 units on that basis. LT wave (orangel line) is neutral on Monday so you do nothing for LT wave. On Tuesday the LT wave is down, so you short 2 units for LT wave on Tuesday Open (or on Monday’s close), you are then short a total 5 units. On Thursday the LT wave is up, so then you close 2 units short and go long 2 units for the LT wave part of your portfolio… If you are still short 3 units in the Mercury system, then you would be short only 1 unit on Thursday (because LT is long 2 units)…
That’s the basic idea when you want to trade more than one system. Don’t try to mix the systems and somehow figure out whether the market will go up or down tomorrow. Just trade both systems with a part of your portfolio.
Danny
hi danny
it mentioned at the 2013 forecst euro top is in may. by chinease cycles .but this week u said march pkease can u clear it out ?? tnk u
Hi Roni,
In a new year forecast one goes by the cycles and by what is known at that point. Then, as the year goes by, one can and should fine-tune these forecasts based on the shorter time cycles that are unfolding. That’s why we keep this weekly blog as well.
In case of the Euro we see that the upward move has so far come short of our 1.40 target, and this means it may also come up short in terms of time (= turns down earlier than expected). My Earl indicator is starting to show weakness as well.
This suggests that May will probably become a secondary rebound high, not the peak of the move.
Also, there are always factors that are outside the scope of the cycles we use, and they may throw a forecast in the dust bin.
For example, next weekend there are major elections in Italy. The outcome of these elections may have a strong effect on the euro.
Using cycles doesn’t mean we have a crystal ball that shows us how these events will pan out.
When making forecasts one needs to use them flexibly, and always be ready to review them, because even in the best of cases they will be right only about 60% of the time (which is enough to book good profits).
So, we cannot make the future certain, but we can improve our estimates based on how we see things unfold along the way.
Danny
thank u !!