The Game

By: Erik Swarts | Fri, Jul 20, 2012
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"Some of us will do our jobs well and some will not, but we will be judged by only one thing - the result." - Vince Lombardi

Although I take great pride in developing my comparative work, it likely is misunderstood by many in how I apply it, benefit from it - and walk between different models. Like most things in life, it is the process that defines the form. Too abstract - and you loose perspective. Too much detail - and you loose emotion.

Image 1

For lack of a better analogy, I work with analogs much like a football coach pages through his playbook on the sidelines. I typically have a half dozen or more models at hand to guide me through each week. When an audible is recognized in a pattern, I simply reevaluate a new offense to meet the shifting defense - and vice versa.

The art, besides developing the analogs themselves - is knowing when to give your positions latitude and when to go into a more defensive stance. Like football, the playbook is crucial; however, there's more to winning the game than just reading the defense. Weather, athleticism and pragmatism in adversity - are essentials in finding yourself on the right side of the market and the game.


With that said, there are a few analogs that I have been following and utilizing for several months that appear to be pointing towards an imminent pivot down in the equity and likely commodity markets next week. And while this flies in the face of recent strength, sentiment and short-sale data points, the allignment of the respective patterns lends more credibility towards the prospects of a pivot.

In late February I published a note that essentially warned of a second wave of the credit crisis was possibly taking shape along very similar lines as the initial wave that started in 2007. The primary difference being the time frame for the second wave was transpiring over a much longer time period.

"Whether the time differential is the efforts of our monetary handlers perceived and new found dexterity in dealing with the tentacles of a global credit crunch the second time around, or just the consequence of a slowing financial contagion/universe - will be up to the academics and historians in the years to come. But I can attest to the similarities in sentiment, the charts and the degree of hubris now being dispensed from both traders, the financial media and central bankers themselves - in curtailing the effects of the crisis. " The Terrarium

This was one of the charts that expressed that comparative in February as the market was breaking out to new highs.

Waves of a Credit Crisis

We now find ourselves on the backside of the coordinate central bank rally that manifested out of the lows last fall and perhaps at the apex of a relief rally from early June. Both the proportions of the price structure, as well as the momentum signatures in the respective metrics - are quite congruent in comparison to the 2007 model.

Continued strength next week up to the previous highs would certainly weaken and possibly nullify the pattern. Interestingly, although not surprising considering the self-similarity of their form, there is a daily fractal of the current tape from the June 4th lows that has worked loosely within the August 2007 retracement rally. I have been following and updating that pattern in the Finding Bernanke series; however, recently it has started breaking pattern in both structure and momentum.

Waves of a Credit Crisis

Waves of a Credit Crisis

The next analog that has been quite useful in the past several months (see Here) in appraising risk appetites towards equities is the Aussie/SPX model. For an explanation of the rationale behind this comparison, see Here. To make a long story short, the Aussie (FXA) hit the pattern's upside target today - as defined by the SPX model. This was essentially to break the pivot high from April 27th.


2011 SPX

2012 Australian Dollar (FXA)

2011 SPX 2012 Australian Dollar (FXA)

What I find interesting, is although the Aussie has rallied over 8% in less than two months, gold and silver have declined roughly 2.5% and 4.5%, respectfully. Considering these markets typically trade in concert with one another - that is a significant divergence. Should the Aussie follow the SPX model down the rabbit hole, I would expect the precious metals sector - currently resting on precarious support, to suffer substantial losses. I would expect silver could realistically find ~$18/oz - almost overnight.

However, I temper the innuendo of the negative divergence back to the last time the Aussie outperformed gold and silver in such dramatic fashion. It was July and August of 2010 - right before QE2.

It's a dangerous game reading these tea leaves - as always - Stay Frosty.



Erik Swarts

Author: Erik Swarts

Erik Swarts
Market Anthropology

Although I am an active trader, I have always taken a broad perspective when approaching the markets. I respect the Big Picture and attempt to place each piece of information within its appropriate context and timeframe. I have found that without this approach, there is very little understanding of ones expectations in the market and an endless potential for risk.

I am not a stock picker - but trade the broader market itself in varying timeframes. I want to know which way the prevailing wind is blowing, where the doldrums can be expected and where the shoals will likely rise. I will not claim to know which vessel is the fastest or most comfortable for passage - but I can read the charts and know the risks.

I am not a salesperson for the market and its many wares. I observe it, contextualize its moving parts - both visible and discrete - and interpret.

I practice Market Anthropology - Welcome to my notes.

Erik Swarts is not a registered investment advisor. Under no circumstances should any content be used or interpreted as a recommendation for any investment, trade or approach to the markets. Trading and investing can be hazardous to your wealth. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This is strictly for educational and informational purposes only. All opinions expressed by Mr. Swarts are subject to change without notice, and the reader should always obtain current information and perform their own due diligence before making any investment or trading decision.

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