In parts 1 and 2 we discussed using a market momentum matrix to anticipate the business cycle and how the MACD oscillator is used to build the matrix. In part 3 we will illustrate the logic of placing individual auctions into their quadrants, and illustrate the distillation process.
As a reminder Individual markets and ratios are plotted in the quadrant (quad) that best describes their combination of momentum and price action. It is important to understand that the proper quad is not always obvious. Accept that its messy and use your best judgement deciding on placement. The idea is to build a general view of the market and economic cycle not to become overly mired in detail.
Recycling: It is not unusual for auctions to become overbought or oversold, lose momentum, move into a neighboring quadrant for a few months and then cycle back. When this happens, use your judgment as to which quad to place the auction in.
MACD difference bars are color coded to reflect the momentum state.
Light Green = Quad 1 (Waning Bull)
Dark Green = Quad 2 (Strong Advance)
Light Red = Quad 3 (Waning Bear)
Dark Red = Quad 4, (Strong Decline)
The position in the trend is described by its quadrant (WB, SA, WB or SD) and the position in the quadrant by the number of months spent in the quadrant. For instance, WB7 describes a market that has been in the WB quadrant for seven months while SA12 would describe a market that has been in the SA quadrant for 12 months.
SPX Monthly: A pure momentum reading would put SPX in quad 1 (note the light pink MACD difference bars), but the change in momentum state has not been confirmed by price behavior and the bear is relatively young. I would continue to place this auction into Quad 4 (strong decline) and count the number of months inside the Quad as 10. In my spreadsheet I designate it as SD10.
Gold Monthly: In momentum terms this market should register in the very lowest portion of Quad 4 and deeply oversold, but nearly three years of mostly lateral price behavior leaves it trendless. I remove rangebound auctions from the matrix until they definitively break out.
FXI (China Large Cap ETF) Monthly: Price behaviors remain clearly bearish so I continue to place the auction in Quad 4. But after 17 months in Quad 4 (SD17) it wouldn't take much to convince me to move the auction to Quad 1 (Waning Bear).
5 Year Treasury Note Futures: After 23 months spent in Quad 4 (SD14) it wouldn't take much in terms of price action to convince me to move the auction to Quad 1.
Bitcoin: Pure momentum suggests that the market has moved from Quad 3 to Quad 1, but the complete failure of price to confirm the momentum compels keeping it in Quad 3 (SD12).
This is the matrix with individual auctions plotted (plotted in mid-November). In order to better visualize the patterns, I color code by auction types. Clusters associated with equities (black and red) are clustered in the midpoint of quadrant 4, Rates inverted, (blue) rest in the depths of quadrant 4. Commodities (purple) are clustered in the bottom of quadrant 3 and the very top of quadrant 4. It also appears that international equities (gold) are moving into the lower portion of quadrant 4.
The colored clusters can be distilled into more general categories. Remember that individual auctions, sectors, etc. may be in far different positions than the bulk of the category but the distillation is a weight of the evidence process meant to identify the approximate position of the bulk of similar auctions. More detailed distillations can separate industrial and agricultural commodities, and add bond market credit spreads, hyper cyclical and financial companies.
In installment 4 we will describe how the sectors interact over the course of a typical business cycle, plot the information onto a stylized business cycle and draw conclusions about the current cycle.
And finally, many of the topics and techniques discussed in this post are part of the CMT Associations Chartered Market Technician’s curriculum.
Good Trading:
Stewart Taylor, CMT
Chartered Market Technician
Taylor Financial Communications
Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.
As a reminder Individual markets and ratios are plotted in the quadrant (quad) that best describes their combination of momentum and price action. It is important to understand that the proper quad is not always obvious. Accept that its messy and use your best judgement deciding on placement. The idea is to build a general view of the market and economic cycle not to become overly mired in detail.
Recycling: It is not unusual for auctions to become overbought or oversold, lose momentum, move into a neighboring quadrant for a few months and then cycle back. When this happens, use your judgment as to which quad to place the auction in.
MACD difference bars are color coded to reflect the momentum state.
Light Green = Quad 1 (Waning Bull)
Dark Green = Quad 2 (Strong Advance)
Light Red = Quad 3 (Waning Bear)
Dark Red = Quad 4, (Strong Decline)
The position in the trend is described by its quadrant (WB, SA, WB or SD) and the position in the quadrant by the number of months spent in the quadrant. For instance, WB7 describes a market that has been in the WB quadrant for seven months while SA12 would describe a market that has been in the SA quadrant for 12 months.
SPX Monthly: A pure momentum reading would put SPX in quad 1 (note the light pink MACD difference bars), but the change in momentum state has not been confirmed by price behavior and the bear is relatively young. I would continue to place this auction into Quad 4 (strong decline) and count the number of months inside the Quad as 10. In my spreadsheet I designate it as SD10.
Gold Monthly: In momentum terms this market should register in the very lowest portion of Quad 4 and deeply oversold, but nearly three years of mostly lateral price behavior leaves it trendless. I remove rangebound auctions from the matrix until they definitively break out.
FXI (China Large Cap ETF) Monthly: Price behaviors remain clearly bearish so I continue to place the auction in Quad 4. But after 17 months in Quad 4 (SD17) it wouldn't take much to convince me to move the auction to Quad 1 (Waning Bear).
Bitcoin: Pure momentum suggests that the market has moved from Quad 3 to Quad 1, but the complete failure of price to confirm the momentum compels keeping it in Quad 3 (SD12).
This is the matrix with individual auctions plotted (plotted in mid-November). In order to better visualize the patterns, I color code by auction types. Clusters associated with equities (black and red) are clustered in the midpoint of quadrant 4, Rates inverted, (blue) rest in the depths of quadrant 4. Commodities (purple) are clustered in the bottom of quadrant 3 and the very top of quadrant 4. It also appears that international equities (gold) are moving into the lower portion of quadrant 4.
The colored clusters can be distilled into more general categories. Remember that individual auctions, sectors, etc. may be in far different positions than the bulk of the category but the distillation is a weight of the evidence process meant to identify the approximate position of the bulk of similar auctions. More detailed distillations can separate industrial and agricultural commodities, and add bond market credit spreads, hyper cyclical and financial companies.
In installment 4 we will describe how the sectors interact over the course of a typical business cycle, plot the information onto a stylized business cycle and draw conclusions about the current cycle.
And finally, many of the topics and techniques discussed in this post are part of the CMT Associations Chartered Market Technician’s curriculum.
Good Trading:
Stewart Taylor, CMT
Chartered Market Technician
Taylor Financial Communications
Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.
CMT Association is a global non-profit credentialing body committed to advancing the discipline of Technical Analysis. Improve investment performance and career opportunities: www.cmtassociation.org
Related Ideas
MACD difference bars are color coded to reflect the momentum state.
Light Green = Quad 1 (Waning Bear)
Dark Green = Quad 2 (Strong Advance)
Light Red = Quad 3 (Waning Bull)
Dark Red = Quad 4, (Strong Decline)
I also used the wrong quad in the bitcoin example.... BTC is in Quad 4.....