www. GordonTLong.

com

Cross Market Fractal Analysis Elliott Wave & S&P 500 Targets Strategy, Trends & Time Frames Money Supply Growth M3

1
Economic & Technical Analysis for the Active Trader

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Lots to think about this month. The Theme is Fractals, with several articles and references throughout the issue, along with all our regular segments. Our Featured Article goes back as far as the1 920's and looks at five different markets to prove its point. The All Seeing Eye looks at the Labor Force, Employment, and the Money Supply. You can also find a special write up on the Cyclical PE 1 0 Ratio explaining what it is and how it can be of use. Our Need To Know TA highlights upcoming S&P targets from Elliott Wave analysis, looks at the current potential Rounded Top, Fractal Analysis and a Death Cross occurs on the SPY. The US Dollar, Treasuries, the Euro and the Continuous Silver Contract are analyzed in our Vault. VIX continues to coil for a spring and we take a look at Margin Levels in our Risk Assessment. A quick discussion on trading Strategy, Trends & Time Frames looks at using a KISS methodology to identifying Trends.

TRIGGER$ Publications For all inquiries, comments and contact please feel free to email us at: triggers@GordonTLong.com Main contributor : Gordon T. Long Market Research & Analytics Publisher & Editor : GoldenPhi Analytical Summaries: GoldenPhi See page 36 for a complete list of our contributors.

Contents
Economic & Technical Analysis for the Active Trader

4 17 25 36

Mandelbrot Fractals & Technical Analysis

Cover Story

of our Current Markets

8 21 34

On Market & Economic Indicators

Labor Force Employment Divergence Money Supply Growth M3 Cyclical PE 10 Ratio

The All Seeing Eye

TRIGGER Need To Know Technical Analysis

Elliott Wave & S&P 500 Targets SPX Rounded Top Fractal Analysis Death Cross SPY

The Vault

Currencies & Metals

US Dollar US Treasuries Continuous Silver Contract Euro

RISK

Assessment

Traders Mentor

VIX Weekly VIX Daily VXO Daily Margin Levels

Technical Analysis & Trading Strategy Education

Strategy, Trends & Time Frames

Open Forums
Letters to the editor Readers Comments Discussions

29

Cross Market Fractal Analysis

Featured Article

Techni Fundamentalism

Economic & Technical Analysis for the Active Trader

Techni-Fundamentalism TRIGGER$ publications combine both Technical Analysis and Fundamental Analysis together offering unique (and often correct) perspectives on the Global Markets. The backbone of this research is done by Gordon T. Long, Market Research & Analytics which is subscribed to by Professional Managers, Private Funds, Traders and Analysts worldwide. Every month Market Research & Analytics publishes three reports totalling more then 380 pages of detailed Technical Analysis and in depth Fundamentals. If you dont find our publication detailed enough, we recommend you consider theirs in addition to this one. For the rest of us, TRIGGER$ offers a distilled version of the 380 pages in a readable format for use in your daily due diligence. Read and understand what the professionals are reading without having to be a Professional Analyst or Technician. Successfully navigating todays markets requires information from a broad variety of sources. Triggers examines it all. From Macro Geo Political to daily events; yearly cycles to break out points on a minute chart: we look at and analyze as much of the information as possible, pulling out the relevant and giving you what you need to know to make the right decisions on a daily basis. An initial or beginning publication occurs every month, both in a printable pdf as well as online. From there, the online version is updated daily with current events, charts, news and any relevant information pertaining to trading. The completed version of the publication isnt actually done until the last day of updates which occurs right up until the publication of the next issue. As well as the Traditional Methods commonly used, Market Research & Analytics has developed proprietary analytics for both Technical and Fundamental Analysis and has designed a methodology to combine the two whereby the synthesis delivers a truly unique and forward thinking analysis that gives cutting edge insight. Techni-Fundamentalism

Cover
Economic & Technical Analysis for the Active Trader

Story

Mandelbrot Fractals & Technical Analysis of our Current Markets

This issues theme deals with Fractals and their presence in the markets. Last issues themes demonstrated some laws of nature potentially governing the markets. This months issue continues with some more possibilities and information to think about. It gets more and more difficult to argue against the appearance of correlations between the markets and nature. The exact cause of these correlations is still up for debate. Are they natural phenomena due to the large input of information in the marketplace? Are the markets manipulated to appear to behave in these manners? Is the whole thing just one big computer algorithm set long ago to run the markets off of? Maybe there is a common thread of mathematics that exists between all things living or otherwise that is just the natural progression of 'stuff'? Whatever you want to believe the cause of it is, that it does exist for some reason is readily apparent. Seeing this and understanding it is important for anyone serious about trading the markets. These concepts add a new dimension to your technical analysis and make forecasting mathematically achievable instead of just some 'gamblers science'.

Julia Set
In its simplest terms, fractals are repeating patterns that have similar forms at different perspectives or scales. If you have experience with Elliott Wave then you are already familiar with the fractal nature of the markets. EW theory divides the markets in to wave patterns that repeat throughout all time frames and investment vehicles.

EW 'Fractal' Analysis
repeating pattern(s) different scales fig.1

Fractals
Fractals appear to have been known for a little while now, supposedly having their roots in 1 9th century mathematics. A "Julia Set" is a well known type of fractal and comes from the man of the same name, Gaston Julian, who worked with fractals in 1 91 8.

You can see three different colored waves at the start of the overall pattern in blue, pink, and red. Each of these waves have a similar five wave count. If you note, you can find these waves throughout the pattern, up and down. These three, small, five-count waves can be found inside a larger wave marked with a circled 1 . This 1 is the 1 st of another, larger, five count... and so on. (cont. pg.5)

Cover Story
Fractals (cont. from pg.4)

Economic & Technical Analysis for the Active Trader

Mandelbrot
Probably one of the more recognisable fractals would be what is called the Mandelbrot Set (front cover image). Working on the IBM fractal project, Benoit Mandelbrot became known for 'inventing' fractal geometry and has written several books on the study including The Fractal Geometry of Nature.

The Bell Curve Debunked

We are familiar with the concept of standard or normal distribution and the graph that represents it, the bell curve.

is not an accurate representation of reality

The Bell Curve

fig.3

Of particular interest to the trader is his 2004 publication The (Mis)Behaviour of Markets. Although the work contains no practical TA methods for a trader to apply, it does provide information that is vital to understanding how the markets behave and what that means for its participants. This work ushers in a new age of market analysis and it dispels some of the current, more common methods used and sighted for portfolio management and trading strategy, showing us how misplaced they are. Of the many conclusions shown and proven, the 'myth' of the Bell Curve is probably the most profound. The implications to all areas of market analysis can not be ignored and every player, professional or not, would do well to consider what is being said before they make their next move.

Mandelbrot Set

fig.2

This is in fact a man made concept. That is, it is not a true or accurate representation of what really occurs, in nature or otherwise. However, it is mans desire for this to be the case, and what is currently and most commonly used. Mandelbrot shows proof of this folly in his book. How many analysis use the Bell Curve as part of the information calculated to form conclusions? If the curve is not a real representation or accurate, then what of those conclusions? The financial markets love normal distribution, standard deviations and regression to the mean. The impact of changing their effectiveness or relation to the markets are far reaching.

The (Mis)Behaviour of Markets

In his book, Mandelbrot highlights some of the issues concerning the inappropriate use of the bell curve in market analysis. The following list is a summary of a few points taken from his publication and we recommend the read to all. As you will see, most (if not all) of the current analytical

(cont. pg. 6)

Cover
Economic & Technical Analysis for the Active Trader
The (Mis)Behaviour of Markets (cont. from pg. 5)

Story

methods rely on theory derived from the bell curve in some fashion.

Fractals & TA
As there are mathematical formulas for the Julia and Mandelbrot sets, so too there is potentially a formula or algorithm that could map out a market. That is beyond the average trader or investor and is not a realistic suggestion for anyone to pursue. However you can be sure that some people are working on, or have already developed their own take on the situation and a set of mathematical tools to take advantage as best they can. TRIGGER$ own analysis incorporates proprietary analytics using Mandelbrot Theory developed by The LCM Group and Gordon T. Long Market Research & Analytics. It is one of several tools used while formulating our analysis. (For more information on the techniques utilized see pg.7 Methodology & TechniFundamental Analysis.) Elliott Wave Theory appears to be the only common method in use that is somehow dealing with fractals and Technical Analysis. The most obvious approach would be for the trader to simply look for repeating patterns across different time frames. It is possible to find a completed pattern on a 1 or 5 min. chart that shows you where the same pattern, incomplete, and currently unfolding on a 1 5 min. or hourly chart, will end up. Add to this some basic EW and Fib theory and you may start to have some truly predictive analysis. See our Feature Article this issue, Cross Market Fractal Analysis, for some more insight and thoughts on how to use fractal theory in your own analysis.

Analyzing Investments: The two most common tools for measuring risk are 'Alpha', or volatility, and 'Beta', or the degree in which a stocks price changes correlate to those of the market overall. Both numbers are used extensively in portfolio construction, corporate finance and in virtually every kind of risk calculation known. These numbers only have meaning if prices vary mildly by the bell curve,
which they certainly do not.

Building Portfolios:Current portfolio theory bases all on the conventional market assumptions that prices vary mildly, independently, and smoothly from one moment to the next. If those assumptions are wrong, everything falls apart and your carefully tuned profit engine may actually be a ticking bomb. Again we see the prevalence of using 'Beta' in making a lot of calculations and assumptions as to where an individual stock is headed. Option Valuation: Multiple methods currently compete for the best way to figure out the price of an option... none are particularly accurate. Black Scholes, the most common method, has been known to be wrong for years, but is still widely used. Of course it uses the Bell curve as the bases for its assumptions.
We certainly are not suggesting or advocating that you no longer use any methods commonly employed because they are derived somehow from the Bell Curve. Be
aware of outcomes.

It is equally important to keep on top of what everyone else is looking at and thinking too. Researching the flaws of the common analysis, you can take them in to consideration and potentially be ahead of the herd.

the

limitations

and

potential

-ConclusionWe have another methodology that is derived from nature as we try and understand what the markets are doing. Like other techniques, this one would not be apparent if the markets were random.
GoldenPhi END

Methodology
Economic & Technical Analysis for the Active Trader

TRIGGER$, in collaberation with "Gordon T. Long - Market Research & Analytics", have thier own unique approach to Techni-Fundamental Analysis. The material found in TRIGGER$ is the conclusions of a multi-perspective methodology boiled down to its final essence. This methodology includes the following analytical approach: Time Frame short - term Duration less than 90 days Approach Technical Analysis Key Tools Elliott Wave Principal, WD Gann, JD Hurst, Bradley Model, Proprietary Mandelbrot Fractal Gen. Global-Macro Analysis Tipping Ponts - Pivots Financial Metrics

intermediate longer term

1 2 months 1 8 months +

Risk Analysis Fundamental Analysis

The Global-Macro Analysis which is so prevalent in our articles and on our Tipping Points site, plays the critical role of bridging our highly analytic Technical Analysis with our detailed Fundamental Analysis. We have found that in the short term the markets are driven by emotion and sentiment. In the longer term, they are driven by financial fundamentals. As Warren Buffett is often quoted as saying: In the short term the market is a slot machine but in the long term it is a weighing machine. We have found that the transition shows a lagging correlation between changes in the Global Macro, followed by Corporate Earnings, then followed by the sell side analyst community estimates. If you are looking for more detail than is provided in TRIGGER$, consider looking at our primary inspiration: "Gordon T. Long Research & Analytics". We do our best to summarize this information and deliver it in an easy to read format. This by its very nature doesn't allow us to include all the very detailed analysis that takes place in order to deliver us its conclusions. All information and conclusions delivered in TRIGGER$ articles are a product of the methodology outlined above.

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Economic & Technical Analysis for the Active Trader

The All Economic Indicators Seeing Eye On Market &

Labor F orce
Participation Rate
Mainstream would have you believe that all is well and the 'recovery' is right on course from the little setback that occurred in 2008. We have presented evidence in earlier issues that argues we are currently in a bear market that started in 2000. Steady decline in Labor Participation since 2000 helps demonstrate yet another factor that is suggesting this. Any notion that we are, or have been in a recovery since '08-'09 looses some validity if the Labor Force has any bearing in that conclusion.

chart 1

9
Economic & Technical Analysis for the Active Trader
Labor Force (cont)

Leaving the Labor Force

chart 2

Time On Unemployment Benefits

(Before being forced off and joining the graph above)

chart 3

Consequences

chart 4

10
Economic & Technical Analysis for the Active Trader

E m pl oym en t D i verg en ce
Initial claims for jobless insurance increased to 429,000 during the June 1 8th week from 420,000 during the week prior, initially reported as 41 4,000. The latest compared to Consensus expectations for 41 5,000 claims. The four-week moving average of claims held steady at 426,250. During the last ten years there has been a 77% correlation between the level of claims and the m/m change in nonfarm payrolls.

chart 5

The latest figure covers the survey period for June nonfarm payrolls and claims rose 1 5,000 (3.6%) from the May period. During the last ten years there has been a 76% correlation between the level of claims and the m/m change in nonfarm payrolls. Continuing claims for unemployment insurance held roughly steady at 3.697M, about where they've been since mid-April.

chart 6

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Economic & Technical Analysis for the Active Trader

M on ey S u ppl y G rowth - M 3

chart 7

Though the government no longer releases the M3 money supply statistics, they are put together by such organizations as ShadowStats.com. The massive efforts by the US Federal Reserve on the overall money supply as represented by this broadest measure of US money and credit appears to have finally begun to work. What is worrying however, is it is based on programs such as QEII which has now ended! What will stop it from rolling over as we are seeing in Housing and the Economy overall?

Another thing to consider along with the chart above is the actual move(s) of the markets and how they correspond. Note that we have a large sell off and market decline in 2008 - start of 2009 and at the same time we had a tightening of the money supply. If you have read through some of our previous publications, you will note that this supports some of what has been said with respect to the Fed, printing (borrowing) of money, and manipulation of the markets. There are many economists, politicians and historians who have all come to the same conclusions: that the periods of economic strife, depressions, and recessions have been (are) mathematically orchestrated and managed by those who profit from such occurrences. See our past featured articles.

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Economic & Technical Analysis for the Active Trader

C y c l i c a l P E 1 0 Ra t i o
Here is a new update of a popular market valuation method using the most recent Standard & Poor's "as reported" earnings and earnings estimates and the index monthly averages of daily closes for May 2011 , which is 1 287.29. The ratios in parentheses use the monthly close of 1 320.64. For the latest earnings, see the table below created from Standard & Poor's latest earnings spreadsheet. TTM P/E ratio = 1 5.0 (1 5.4) P/E1 0 ratio = 22.0 (22.5)

The Valuation Thesis A standard way to investigate market valuation is to study the historic Price-to-Earnings (P/E) ratio using reported earnings for the trailing twelve months (TTM). Proponents of this approach ignore forward estimates because they are often based on wishful thinking, erroneous assumptions, and analyst bias. TTM P/E Ratio The "price" part of the P/E calculation is available in real time on TV and the Internet. The "earnings" part, however, is more difficult to find. The authoritative source is the Standard & Poor's website, where the latest numbers are posted on the earnings page. (See the footnote below for instructions on accessing the file).
The table here shows the TTM earnings based on "as reported" earnings and a combination of "as reported" earnings and Standard & Poor's estimates for "as reported" earnings for the next few quarters. The values for the months between are linear interpolations from the quarterly numbers. The average P/E ratio since the 1 870's has been about 1 5. But the disconnect between price and TTM earnings during much of 2009 was so extreme that the P/E ratio was in triple digits as high as the 1 20s in the Spring of 2009. In 1 999, a few months before the top of the Tech Bubble, the conventional P/E ratio hit 34. It peaked close to 47 two years after the market topped out. As these examples illustrate, in times of critical importance, the conventional P/E ratio often lags the index to the point of being useless as a value indicator. "Why the lag?" you may wonder. "How can the P/E be at a record high after the price has fallen so far?" The explanation is simple. Earnings fell faster than price. In fact, the negative earnings of 2008 Q4 (-$23.25) is something that has never happened before in the history of the S&P 500. Let's look at a chart to illustrate the unsuitability of the TTM P/E as a consistent indicator of market valuation.
(cont. pg.13)

13
Economic & Technical Analysis for the Active Trader
Cyclical PE 10 Ratio (cont. from pg.12)

chart 8

The P/E1 0 Ratio

Legendary economist and value investor Benjamin Graham noticed the same bizarre P/E behavior during the Roaring Twenties and subsequent market crash. Graham collaborated with David Dodd to devise a more accurate way to calculate the market's value, which they discussed in their 1 934 classic book, Security Analysis. They attributed the illogical P/E ratios to temporary and sometimes extreme fluctuations in the business cycle. Their solution was to divide the price by a multi-year average of earnings and suggested 5, 7 or 1 0-years. In recent years, Yale professor Robert Shiller, the author of Irrational Exuberance, has reintroduced the concept to a wider audience of investors and has selected 1 0 years as the earnings denominator. As the accompanying chart illustrates, this ratio closely tracks the real (inflation-adjusted) price of the S&P Composite. The historic average is 1 6.4. Shiller refers to this ratio as the Cyclically Adjusted Price Earnings Ratio, abbreviated as CAPE, or the more precise P/E1 0, which is my preferred abbreviation.

The Current P/E1 0

After dropping to 1 3.3 in March 2009, the P/E1 0 has rebounded to the vacinity of 22. The chart below gives us a historical context for these numbers. The ratio in this chart is doubly smoothed (1 0-year average of earnings and monthly averages of daily closing prices). Thus the fluctuations during the month aren't especially relevant (e.g., the difference between the monthly average and monthly close P/E1 0).

(cont. pg.14)

14
Economic & Technical Analysis for the Active Trader
Cyclical PE 10 Ratio (cont. from pg. 13)

chart 9

Of course, the historic P/E1 0 has never flat-lined on the average. On the contrary, over the long haul it swings dramatically between the over- and under-valued ranges. If we look at the major peaks and troughs in the P/E1 0, we see that the high during the Tech Bubble was the all-time high of 44 in December 1 999. The 1 929 high of 32 comes in at a distant second. The secular bottoms in 1 921 , 1 932, 1 942 and 1 982 saw P/E1 0 ratios in the single digits.

Where does the current valuation put us?

For a more precise view of how today's P/E1 0 relates to the past, our chart includes horizontal bands to divide the monthly valuations into quintiles five groups, each with 20% of the total. Ratios in the top 20% suggest a highly overvalued market, the bottom 20% a highly undervalued market. What can we learn from this analysis? The Financial Crisis of 2008 triggered an accelerated decline toward value territory, with the ratio dropping to the upper second quintile in March 2009. The price rebound since the 2009 low pushed the ratio back into the top quintile. By this historic measure, the market is expensive, with the ratio approximately 34% above its average (arithmetic mean) of 1 6.4. We can also use a percentile analysis to put today's market valuation in the historical context. As the chart below illustrates, latest P/E1 0 ratio is approximately at the 85th percentile. If we leave out the Tech Bubble, the current P/E1 0 would be at 87.5%.
(cont. pg.15)

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Economic & Technical Analysis for the Active Trader
Cyclical PE 10 ratio (cont. from pg.14)

chart 10

A more cautionary observation is that every time the P/E1 0 has fallen from the top to the second quintile, it has ultimately declined to the first quintile and bottomed in single digits. Based on the latest 1 0-year earnings average, to reach a P/E1 0 in the high single digits would require an S&P 500 price decline below 540. Of course, a happier alternative would be for corporate earnings to make a strong and prolonged surge. When might we see the P/E1 0 bottom? These secular declines have ranged in length from over 1 9 years to as few as three. The current decline is now in its eleventh year. Or was March 2009 the beginning of a secular bull market? Perhaps, but the history of market valuations suggests a cautious perspective.

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Economic & Technical Analysis for the Active Trader

Something To Think About

17
Economic & Technical Analysis for the Active Trader

Need To Know Technical Analysis

Look for our Feature Article: Cross Market Fractal Analysis (pg 29 ) for more Need to Know TA

Short Term Rounded Top The short term will be marked by sudden and abrupt changes in trend as part of an extended rounded topping pattern. This is not a pattern to trade, but a pattern to prove that the big move is ahead and to prepare accordingly. Our discussions on the Megaphone Pattern suggests this is normal at times of major market reversals. Intermediate Term Top Our target for an Intermediate top is 1 372 on the S&P 500 with the possibility of a short term throw over to 1 41 0. Time Frame We presently see this Bear Market counter rally which started in March 2009 having ended 2011 .45. This approximates to June 1 3th, 2011 . This does not mean that the S&P has necessarily topped but rather the global financial market has. The S&P will follow.

E l l i ott Wave & S &P 50 0 Targ ets

chart 11

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Economic & Technical Analysis for the Active Trader

S P X - Rounded Top
We have been predicting the end of the cyclical bull market with the June 2011 quadruple witch since early 201 0. It appears the rounded top formation pattern we have also been predicting is unfolding with the rounded top pattern being centered as labeled below on the June quadruple witch.

chart 12

A bounce off the 200 DMA was long overdue. A strong Bear Market counter rally is too be expected as the Rounded Top is retested. The S&P bounced heavily off its 200 day moving average but the Nasdaq has not yet been able to break back above its 40 year trend line - suggesting this is still just a technical bounce and not to be trusted, which in the context of near record divergence between data and sentiment & expectations is not good.

19
Economic & Technical Analysis for the Active Trader

Fractal Analysis
Markets demonstrate "Fractals" at all levels. It is highly likely the rounded top formation will demonstrate a 'mirrored' fractal of the initial half of the rounded top giving us some gauge of its duration.

chart 13

Bear Market counter rallies look like this.

Panic buying occurs as shorts are forced to cover.

chart 14

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Economic & Technical Analysis for the Active Trader

Death Cross - Spy

Watch for a DEATH CROSS of the 50 DMA and the 1 00 DMA for confirmation of the Secular Bear Markets resumption. (Look for the Death Cross in other markets too.)

chart 15

UPDATE
Last months issue took a stab at some possible moves as we head through our potential rounded top formation. As Warren Buffet is known to have said "Markets in the long term are a weighing machine, in the short term, a slot machine." Our overall thoughts on more up to come seem to have been correct and the initial target of the channels and 200ma bounced as expected. When the 89ma was broken with force, it ended any potential of the second part of our analysis following through from that point. The expanded flat pattern still has a low possibility, but it is only an intermediary potential inside our larger picture of a rounded top formation. Our current analysis has us watching for more lift to the May 2nd high, as our chart on the opposite page (pg.1 9) shows. Potential Elliott Wave counts (pg.1 7) allow for this as well as for more lift to the 2007 highs and beyond. This would be one reason to start to consider Economic and Fundamental Analysis to add to your Technical Analysis as it can give you some insight in to the more probable outcomes.

21
Economic & Technical Analysis for the Active Trader

The Vault Currencies & Metals

US Dollar

chart 16

The US dollar has decisively broken through support levels. The dollar however is still above its long term neckline within a major head and shoulders topping formation pattern. When the neckline is broken we can expect the US dollar to plummet to below 40.

22
Economic & Technical Analysis for the Active Trader
US Dollar (cont.)

As the US dollar weakens it will give a boost to the US Equity markets fundamentally because stocks are priced in 'smaller' American dollars. Additionally, Global Corporations listed on US exchanges receive more than 50% of their revenues outside of the US which will help with US earnings reporting. With out-of-control US deficit spending pushing up US Treasury Supply, and QE II stopping and thereby reducing US Treasury Demand (in addition to a flight to quality reversal), we can expect bond prices to fall and interest rates to climb. Initially the increasing cost of money will be over ridden by the weaker US dollar. Eventually increasing cost push will drive inflation in basic needs such as food, energy and consumables. However, as disposable income continues to fall the US Economy will begin an acceleration into a severe Bear Market and economic slowdown. The Bear Market which began in December 1 999 will resume with full force.
chart 17

US Treasuries

Note the 50 DMA cross of the 200 DMA Further Treasury Weakness Ahead with Rising Yield

chart 18

23
Economic & Technical Analysis for the Active Trader

US Treasuries (cont.) 1 0yr Bond

chart 19

A critical driver of the US dollar index is US interest rate differentials. The difference between the rate on the US 1 0 year treasury and other sovereign treasuries is a critical element in determining the direction of the US dollar. Presently, all indications are that though near term rates have weakened to below 3.00%, interest rates for the US treasury are headed higher. Higher rates IF they create a differential and are not simply reflected in other global sovereign rates will affect the dollar. The differential in sovereign bonds yield is determined by a number of factors, but risk of default, government fiscal policy and central bank monetary policy are critical drivers. Presently, all these factors are considered poor in the US relative to other sovereign nations. The downgrading of the US AAA US treasury to "Negative Watch' recently is indicative of this.

24
Economic & Technical Analysis for the Active Trader

Continuous Silver Contract

The chart below of the continuous Silver contract would indicate the recent move has moved too far, too fast and now requires a further consolidation/ correction. Both the upward moves in Gold and Silver correlate with the continuing breakdown in the US dollar index.

chart 20

Euro
The Euro will break out of this consolidation pattern and put in a final, marginally higher high - A Double Top.

chart 21

25
Economic & Technical Analysis for the Active Trader

RISK Assessment
VIX Weekly

chart 22

The Weekly VIX chart above show a wedge with the slopes of the sudden change in volatility getting steeper but shorter in duration. If they were to be getting shorter but not as steep we could see this as good news with the system becoming more stable as it decayed. Instead we have 'shock' reactions. This is a bad omen for stability - whether an up market or down market follows.

VIX Daily
The daily VIX shows the banding of the 50, 1 00 and 1 00 day VIX moving averages. Tightening bands are an indication of a pending break in pattern, whether up or down. (see chart next page, pg.26)

26
Economic & Technical Analysis for the Active Trader

VIX Daily

(cont.)

chart 23

We have a 100 DMA cross of the 200 DMA which is a sign of a potential trend
The daily VXO shows that we have Divergence between the VXO and the S&P500 Index. This is negative but more telling is the pronounced wedge. Again, this doesn't tell us what direction the market is going to head but rather there is RISK that a strong move will occur.

VXO Daily

chart 24

27
Economic & Technical Analysis for the Active Trader

Below is a chart of margin debt (debit balance in margin accounts) versus the SPX from January 1 997 to present as reported by FINRA. AAII and other sentiment readings may say this market is tilted to the bearish camp but sorry this market is clearly betting overly bullish. Total margin debt is now at 2007 levels and above the tech boom and those before Lehman Brothers failed. Probably the most interesting takeaway from current margin levels is the simple truth below. (macrostory.com) Margin debt Explodes : Sign of a Speculative Market

Margin Levels

chart 25

In 2011 it takes $360 billion in margin to get the SPX to the 1,300 level, whereas in 2006 it took only $260 billion.
Margin debt is one measure of the amount of optimisim or pessimism in the stock market. Rising margin debt generally correlates to a rising stock market. In Mays issue we discussed margin levels and investors lossing confidence as they percieved the market advance as nothimg more than Fed QEII induced through money pumping. There was more to go and this pulled some of these 'exited' investors back into the market as they are afraid to miss a continuing rise in the market. Rounded tops 'whip-shaw' people, afraid to be out but equally afraid to be in. This reminds us of the fall of the dot.com bubble in 1 999 prior to the final high in April 2000. Everyone felt the market just couldn't go higher, it did and many were forced back into the market at the wrong time because they couldn't afford lower relative gains compared to competitive funds.

(cont. pg.28)

28
Economic & Technical Analysis for the Active Trader
Margin Levels (cont. from pg. 27)

As well, sentiment indicators have been adjusting to allow the final rise to climb a 'wall of worry'. JP Morgan's Thomas Lee, argues that the economic data has been so consistently disappointing, that a rebound in the Citi Economic Surprise Index (which measures the data against expectations) is practically guaranteed. Again, it's not that the economy will rebound, but
the economy will rebound vs. expectations, which is actually what matters to markets.

Citi Economic Suprise Index : looks ready for another lift...

chart 26

Feature Article: Cross Market Fractal Analysis

29

Economic & Technical Analysis for the Active Trader

Cross Market Fractal Analysis

For an introduction to Fractals and their relationship to the markets see our cover story: Mandelbrot Fractals & Technical
Analysis of our Current Markets.

If you are trading using any pattern analysis, you could be said to already be doing fractal analysis. As you look for certain patterns to repeat themselves or develop, like an ABC for example, you are employing fractal strategies. That there are noticeable repeating patterns to look for in itself demonstrates the fractal nature of the markets. Another consideration when looking to employ fractal analysis is your perspective. As discussed in past issues, the price-time graph that is commonly used to display market information is a two dimensional representation of a much more complex system. The markets themselves are said to move in 3 or even 4-D. The standard 2-D representation we are all used to is actually

skewed or misrepresented. Similar to if you took a round globe and then flattened it out on to a tabletop, or started with a flat map and attempted to fold it in to a ball (globe) -you can't really do either of these very well as the image distorts from the attempt. So too then is the price-time graph distorted, which can make accurate technical analysis (of any kind) difficult to accomplish. If you can manage to shift your perspective away from the standard 2-D representation, more instances of fractals are readily apparent. Even still, we can find many examples of fractals throughout time frames and markets. We will start with the DOW and show a fractal relationship with itself, then we will move on to other markets and see if we can also find similar instances. The pattern or fractal we will be looking for is what is known as a 'Megaphone Top'.

Megaphone Top Broadening Top Fractal Pattern

The following few charts were put together to show a common topping formation that has occurred numerous times. This is also demonstrating fractals.
chart 27 (cont. pg.30)

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Economic & Technical Analysis for the Active Trader
Cross Market Fractal Analysis (cont.)

Feature Article: Cross Market Fractal Analysis

chart 28

Commentary on the charts themselves goes to show that these are all the same pattern. We would encourage our readers to look for the original analysis online. For our purposes, it is the formation of the general pattern we are interested in.

chart 29 (cont. pg.31)

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Feature Article: Cross Market Fractal Analysis
Economic & Technical Analysis for the Active Trader

Cross Market Fractal Analysis (cont.)

chart 30

While these may not all be exact matches in regards to duration or amplitudes, they are most definitely all the same general pattern.

chart 31 (cont. pg.32)

Economic & Technical Analysis for the Active Trader

Cross Market Fractal Analysis (cont.)

Feature Article: Cross Market Fractal Analysis

32

Our final chart brings us to the current situation. Again we can see a Megaphone Top formation. The chart above demonstrates the pattern within the pattern as a larger displayed time frame for the chart below shows it included as part of a larger, similar formation.

Chart can be seen inside blue box in next chart

chart 32

chart 33 (cont. pg.33)

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Economic & Technical Analysis for the Active Trader

Cross Market Fractal Analysis (cont.)

We have now shown seven instances, including our current situation, that demonstrate the same pattern, going back as far as 1 929. These however were all in the same market, the DOW Industrials. Below you can find four more examples of our Broadening, or Megaphone pattern. These are current examples in four other markets; Russ2000, SPY, NASDAQ, and the U.S. Dollar showing the fractal nature of the pattern. These are all examples demonstrating our pattern in a large time frame, across several markets.
Russel 2000

If you were to also go looking across several different time frames, as well as markets, you would continue to find the Broadening pattern. By now you should have a good idea as to what fractals are and how they can present themselves in the markets. Looking at the analysis going back far in time as well across several instruments, you will have to decide for yourself the usefulness of the technique. It does appear, however, to be very clear where we are headed, given the evidence provided as to where the Broadening pattern finally ends up taking us. GoldenPhi END
SPY

Four More Megaphones

NASDAQ Composite

chart 34

chart 35

(currently)

U.S. Dollar

chart 36

chart 37

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Economic & Technical Analysis for the Active Trader

Traders Mentor

Technical Analysis & Trading Strategy Education

Strategy, Trends & Time Frames

If you are serious about trading and desire to make it more than just a hobby or some game to match your wits, if you want to consider yourself a 'professional' trader and make your living by it, then we suggest that you view the whole experience as you would any other business venture. One of the more important aspects of any business is the Product or Service they are going to provide in order to make their profit. It is the product or service which the whole business revolves around that provides the revenues that make the business worthwhile or not. Using this analogy, the trader's product (or service) would be the Trading Strategy used to make gains. Given this, the job of a trader
then is to develop a successful trading strategy, not just the buying and selling of

With that in mind, the trader also needs to take in to account the vast complexity of the markets. Understand that a workable, profitable trading strategy is not going to just fall out of the sky. Many try and find that trading is not for them, not because they don't enjoy it, but because they are out of funds. The best way to secure your funds is to do as much due diligence as possible prior to actually putting any money in the market. I.e. develop a profitable strategy first, and then start to trade it. While this may appear painfully obvious, the excitement of the markets and the desire to 'win it big' can sometimes override common sense. You can have excellent analytical skills and call the market moves correctly every time, but this does not guarantee profits. You also need to have a strategy that trades these moves profitably. It is possible to have the market figured out technically, call the next moves accurately, and still loose money. Your strategy needs to take advantage of and work with your technical analysis. A common mistake can be trying to have one strategy that is supposed to be a "one size fits all". At the very least we know that the markets can be in two different states: trending and non-trending. Consider that one strategy to fit both states may be more difficult to develop than a separate strategy for each state. That is a trading strategy for trending markets and a different strategy for non-trending markets.
(cont. pg.35)

securities.

The better the product/trading strategy, the more profit is made by the business/trader. This does not mean that the strategy needs to be overly complex and 'sophisticated'. Matter of fact, the simpler a profitable strategy can be developed, the better it is for the trader. Having two or three indicators, set-ups or trading rules to follow allows for better concentration and fewer opportunities for mistakes than having to follow fifteen indicators and dozens of patterns. Keep It Simple Stupid (KISS) comes to mind when trying to put together a profitable trading strategy.

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Economic & Technical Analysis for the Active Trader
Strategy, Trends & Time Frames (cont)

The issue then arises as to how you determine what is trending and what is not. Some may tell you that this can be as difficult as developing the trading strategy itself. While in hindsight, looking at a chart it may be easy to identify periods of trending and areas of consolidation; this is not always the case when trying to determine the location in real time. More specifically, when the trend is in the process of changing or has just changed to non-trending and vice-versa. This point can be difficult to locate with accuracy and the trader can be easily fooled one way or the other. There are a multitude of indicators and technical methods that can be used to help the trader make these determinations. Something to consider that keeps the whole process in the realm of 'KISS' is using different time frames. As we already mentioned, it is fairly easy to look at a chart after the fact to see what areas were trending and what areas were in consolidation. It is fairly easy to determine the most likely location of the market currently, it is the change-over that causes the real issues. Look to a higher time frame than what you are trading on to determine your current location and if you are in a trending or non-trending market. If you usually trade on the 5 or 3min time scale, look to the 1 5min or hourly chart to tell you what the current state you will be trading in is. There are several good reasons for the trader to start to employ the use of different time scales in trading. This would be one of them. By using several time frames of the same security you can get a better perspective of where you currently are and where you are headed with relative ease. Employing some technical analysis on the

higher time frame, you can determine the next most likely areas of resistance, targets and where we are in relation to these. If your 1 5min chart shows you to be trending up and the next area of resistance is a few bars and points away, you can drop down to the lower time frame and trade with the trend. Regardless of what the lower scale looks like, you know on the higher frame you are trending to a target area. You expect the higher frame to remain in the current trend until the target area is reached, therefore you can trade the lower frame with confidence you are in a trending market. The same would hold true for non-trending markets. If on the higher time frame you are obviously in a consolidation pattern, no longer trending and just bouncing back and forth, you know what strategy to be trading with now on the lower scale. If it is not obvious on the higher time frame what is currently going on, i.e. trending or not, have patience and wait until it is and the exact state is known for certain. You know what the next target is, or know it needs to bounce some more to finish the consolidation
or you do not trade.

If you start to work with various time scales, you will note an interesting occurrence that helps add more perspective to your trading. Like a clock, the price-time graph and even the moving averages, seem to unwind in to the next higher level scale. This continues up through the time frames, revealing more relationships and connections between various moves. Although initially it may be a bit confusing trying to keep track of multiple time frames, if you start slow and add with a logical system and methodology, you will find it well worth the effort in the long run. GoldenPhi END

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Economic & Technical Analysis for the Active Trader

Open Forums

Letters to the Editor Readers Comments Discussions

component. The point of this will be to have more updated information on day to day bases for those who are actively trading. We are aiming for this fall, and failing that, sometime before the New Year. If there is anything you would like to be seeing in our issues, please send us an email and let us know. If there is an analysis or article you would like to comment on or add to, we are open to your thoughts.

We'd like to take this opportunity to thank our readers for the interest they have shown, as well as the patience they have exhibited while we try and make a go of this publication. We apologize profusely for the lateness of the issue - while all the information is still relevant, we were/are aiming for more middle of the month release date, as opposed to near the end of the month. August release is looking like it too, will most likely be closer to the end rather than middle. Looking to the future, we hope to continue to build from here by adding a web site

Contact TRIGGER$ : triggers@GordonTLong.com

We would like to acknowledge and thank the following for their contributions:
Business Insider
chart 6

Macrostory.com
chart 25

DSshort.com
chart 8, 9, 10

Robert D. McHugh PhD

chart 27, 28, 29, 30, 31, 32

Elliott Wave International

fig.1

Shadowstats.com
chart 7

FreeStockCharts.com
chart 34, 35, 36, 37

Stockcharts.com
chart 12, 13, 14, 17, 18, 21, 22, 23, 3

HaysAdvisory.com
chart 24

Economic & Technical Analysis for the Active Trader

www.GordonTLong.com

Gordon T. Long has been publically offering his financial and economic writing since 201 0, following a career internationally in technology, senior management & investment finance. He brings a unique perspective to macroeconomic analysis because of his broad background, which is not typically found or available to the public. Mr. Long was a senior group executive with IBM and Motorola for over 20 years. Earlier in his career he was involved in Sales, Marketing & Service of computing and network communications solutions across an extensive array of industries. He subsequently held senior positions, which included: VP & General Manager, Four Phase (Canada); Vice President Operations, Motorola (MISL - Canada); Vice President Engineering & Officer, Motorola (Codex - USA). After a career with Fortune 500 corporations, he became a senior officer of Cambex, a highly successful high tech start-up and public company (Nasdaq: CBEX), where he spearheaded global expansion as Executive VP & General Manager. In 1 995, he founded the LCM Groupe in Paris, France to specialize in the rapidly emerging Internet Venture Capital and Private Equity industry. A focus in the technology research field of Chaos Theory and Mandelbrot Generators lead in the early 2000's to the development of advanced Technical Analysis and Market Analytics platforms. The LCM Groupe is a recognized source for the most advanced technical analysis techniques employed in market trading pattern recognition. Mr. Long presently resides in Boston, Massachusetts, continuing the expansion of the LCM Groupe's International Private Equity opportunities in addition to their core financial market trading platforms expertise. GordonTLong.com is a wholly owned operating unit of the LCM Groupe. Gordon T. Long is a graduate Engineer, University of Waterloo (Canada) in Thermodynamics-Fluid Mechanics (Aerodynamics). On graduation from an intensive 5 year specialized Co-operative Engineering program he pursued graduate business studies at the prestigious Ivy Business School, University of Western Ontario (Canada) on a Northern & Central Gas Corporation Scholarship. He was subsequently selected to attend advanced one year training with the IBM Corporation in New York prior to starting his career with IBM.