NASDAQ-100 Fractal Dimension End-of-Trend Signal

In 2014, the NASAQ-100 is more likely to go sideways (or down) than it is to continue shooting upward. Here is a weekly chart from my Fractal Stock Grapher app. Look at the black arrow (click to enlarge):


The arrow points to the extremely low level of the Fractal Dimension Index indicator (red line). What does that mean? It means that the QQQ’s rally has been freakishly straight up – a phenomena that is very unlikely to continue. It’s just not natural; like a sunflower with all of its seeds arranged in rows and columns instead of a spiral.

The last time that I posted an FDI chart was on February 14th, 2012. Back then, SPY’s chart looked almost exactly like the chart of the QQQ today:


What happened next? SPY went sideways pretty much for the rest of the year. The red arrows on the next chart show where I made my call. The purple arrows show SPY at the exact same level nine months later:


The moral of the story is that the FDI is an excellent indicator. If you are a bull, chances are that you will have an excellent dip to buy in the coming months, and chasing rallies might be hazardous. If you are a bear, chances are that you will have a nice reversal pattern, or two, to play this year, such as the double top on the chart (blue lines). And 2014 might be a very good year for mean-reversion strategies, as opposed to trend-following strategies.

In the short term, it wouldn’t be impossible for the market to make a moon-shot, blow-off top before it begins to consolidate or correct. Before getting aggressive, bears should insist on a large, blatant, reversal pattern on their charts.

SPY Fractal Dimension Index End-of-Trend Signal

Those of you using my Fractal Stock Grapher app aren’t surprised that the rally has paused over the past week because the Fractal Dimension Index (FDI) has been flashing an end-of-trend signal. See the black arrow on the screen-shot (click to enlarge):

We haven’t had a signal this strong on the daily chart since last summer. Here is a chart that goes back farther using my FDI indicator for TradeStation – look at the green arrows:

Last summer’s downtrend did indeed come to an end as soon as the FDI gave the signal. But what about the fate of this year’s uptrend? It is indeed long in the tooth and overdue for a correction. However, the FDI only tells us that the trend is likely to end. The market could just as easily go sideways for a while.

I don’t want to be bearish here because the economy is improving, and federal withholding-tax collections are on fire. Yes, Europe is shaky again, but don’t forget that the Fed and the ECB have the money spigots wide open, blasting liquidity onto the fire.

And it is also an election year. The Republican candidates have vowed to chop off Ben Bernanke’s head, so he has an incentive to keep things bubbly until November. My guess is that a market plunge caused by another European crisis will be another buying opportunity, just like they all have been over the last three years.

S&P 500 Fractal End-of-Range Signal

The stock market has been range-bound for quite a while. Below is the weekly SPY chart from my Fractal Stock Grapher software. See the black arrow pointing to the “end of range” signal (click chart to enlarge):

The brown arrow points to the previous end-of-range signal, which was generated at the end of July – just one week before the market plunged in August.

However, an end-of-range signal from the Fractal Dimension Index only tells us that a new trend is likely to begin soon. It does not tell us the direction.

The market has been range-bound for this long because half of investors are thinking: “the economy is improving, so I should be buying stocks”, and the other half are thinking: “the wheels are coming off of Europe, so I should be selling stocks.”

Those two groups are balanced right now. At some point, an event will occur that convinces one side to give up. And when they liquidate their positions, the market will break out of the range and embark upon a new trend.

The moral of the story is that the FDI doesn’t tell us who will blink first, but it does say that the duel is likely to be resolved within the next few weeks.

Also, on October 26, I reported an FDI end-of-trend signal on Apple’s monthly chart. And the mighty AAPL juggernaut did indeed stall out. It was $400 on that day, and has been below that level almost every day since.

Is the Gold Bull Dead?

If so, you read it here first. Below is the weekly GLD chart from my Fractal Stock Grapher software that I posted on August 7, 2011. See the black arrow pointing to the “end of trend” signal (click chart to enlarge):

Here is what the chart looks like now:

Notice that while the red FDI line was flashing its end-of-trend signal, the green GLD line was building its top. Nice, huh?

What’s next for gold? I won’t pretend to know. However, the fractal dimension index is in a neutral position (on the weekly chart), and that means that gold’s downtrend has room to extend before another end-of-trend signal is generated. But that doesn’t mean that the current downtrend will continue. The FDI only describes what has happened during the last 30 data points. And its signals are only generated when prices have been oddly flat, or oddly stretched.

From a fractal-dimension-index perspective, the S&P’s chart is much more interesting at the moment, as we will see in the next post.

Apple Fractal Dimension Index End-of-Trend Signal

Take a look at the red line on this Apple monthly chart from my Fractal Stock Grapher app (click to enlarge):

Apple’s monthly Fractal Dimension Index indicator has been on an end-of-trend signal all year. What this tells us is that Apple’s three-year-long moonshot is overdue for at least some consolidation. The last time the FDI was this low was back in 2007, and Apple did indeed go into a trading range that lasted two years.

Of course, the economy exploded during that time, but don’t forget that the iPhone was released at the end of June 2007 when AAPL was at $122. By May of 2009, almost two years later, AAPL was only at $126. You would think that with such a phenomenal product that the stock could have done a bit better.

The economy isn’t lighting the world on fire at the moment, but it hasn’t rolled over into recession yet either. If you like Apple and want to buy it, you can probably get in at a lower price if you are patient. If you are a degenerate gambler and want to short AAPL, you might be able to survive if you put your trades on up at the top of the trading range.

Will large holders lighten-up on their AAPL holdings now that the company has lost its visionary leader? I think it would be surprising if they did not, but the company itself remains a juggernaut until proven otherwise. The power of the iPhone/iPad platform is breathtaking. Look at this French guy who has made over $200,000 with his educational apps.

Fractal End-of-Trend Signal for Gold

The Fractal Dimension Index indicator on the daily chart of the GLD gold ETF is giving an end-of-trend signal. Below is a screenshot from my Fractal Stock Grapher software (click to enlarge):

The black arrow is pointing to the current end-of-trend signal. The blue arrow is pointing to the previous such signal from late April, after which gold went sideways for two months. So that worked out well. Now lets take a look at the weekly chart:

At the black arrow, you can see that this is the lowest FDI reading in almost two years. At the blue arrow, you can see that gold made a peak that it wasn’t able to exceed for almost six months. So, the end-of-trend signal worked well there too.

Both of these examples show that an end-of-trend signal means only that: the previous trend is long in the tooth, but a reversal is not guaranteed. Consolidation is just as likely.

The Fractal Dimension Index is telling us that gold is likely to begin consolidating soon. Gold bugs who want to buy should be able to get in at better prices. Gold bears might do well shorting rallies in the near future – but very carefully because gold’s long-term uptrend is still unscathed.

Fractal Dimension Range-Breakout Approachs for Small Caps

Here is a screenshot from my Fractal Stock Grapher app showing the daily chart for the IWM small-cap ETF. Look at the black arrow (click to enlarge):

The red fractal dimension index line is very close to giving an end-of-range signal. So, it’s time to be alert for a new trend to begin.

On the next chart, using my Fractal Dimension Index indicator for TradeStation, we see three red arrows pointing to the last three high-FDI readings, each of which resulted in an upside breakout:

The blue box shows why the FDI is high now – the IWM has been range-bound since early April. Traditional technical analysis says to expect the new trend to be about the magnitude of the height of the blue box. So, don’t be surprised to see a blast up to 91, or a plunge down to 77.

The FDI only signals when a breakout is likely. It does not predict the direction of the new trend. So, you have to use your own brain for that.

Which way will it break? Well, since this is a bull market until proven otherwise, and the trend is your friend, you have to favor an upside breakout. But if it breaks to the downside, it will be important for bulls not to go into denial.

Fractal Stock Grapher – Beta 2 Release

Fractal Stock Grapher is my desktop app that plots the Fractal Dimension Index on stock charts for those of you using platforms that don’t have the FDI indicator. You can download it on the Fractal Stock Grapher home page.

This version will fetch the data from Yahoo Finance for you. Just punch in a symbol and click the Graph button. Much easier.

If you have the first version installed, you can just download the installer and run it.

Note: now is a very good time to look at the FDI on the weekly charts of the SPX, NDX, DJIA, and Russel 2000.

IWM Down, FDI Up

The IWM dropped 2.5% today, but its Fractal Dimension Index went up (red arrow on chart). Let’s see why that is (click chart to enlarge):

As you can see, the IWM fell to the bottom of a trading range (green lines) which is six weeks old now. So, the FDI went up, meaning that the trading range got longer in the tooth. The FDI doesn’t tell us which way the market will go. Rather, it tells us when prices have been making unusually long trends or ranges.

So, the IWM is likely to break out of this range soon. Could be up, could be down. Maybe it will depend on whether or not the Suez Canal is closed. Obama hasn’t given Mubarak any support, so maybe the embattled dictator will shut it down just for spite.

On the other hand, Friday’s sell-off looked contrived to me. Yes, Egypt is the center of the Arab world, but the market was not alarmed earlier in the week. On Thursday, I was surprised by how little video CNBC was showing of the rioting. It was almost as if they were downplaying it so that certain players could get short positions on. Then on Friday – BAM!!! – non-stop Egyptian riot videos all day long.

So, the question is, did the cabal take profits? Or will they keep the bull-squeeze going next week?

Fractal Stock Grapher – Beta Release

Many people have asked me for the Fractal Dimension Index indicator that I have for TradeStation. So, I wrote a desktop app that anybody can use. Here’s what it looks like (click picture to enlarge):

Notice that the IWM is approaching an end-of-range signal. The last time it gave such a signal was before it blasted out of its trading-range in early December.

You can download the program on the Fractal Stock Grapher home page.

If you have suggestions, now is the time to get them in. One of the things that I’m planning to add is automatic reformatting of Yahoo data so that you don’t have to do it in Excel. This is a very basic release with pretty much nothing more than the core functionality.

Fractal Dimension Index End-of-Range Signal

On September 4th, I posted an SPX chart showing the Fractal Dimension Index giving an “end of trend” signal. And the uptrend did indeed come to a screeching halt the next day, which so far, has been the only substantial pullback during the month of September.

And now the market has gone flat, and the Fractal Dimension Index is giving an “end of range” signal (click chart to enlarge):

The blue arrow at the bottom points to an extreme reading. No doubt, light summer volume and options-expiration on Friday are responsible for the unusually tight range. So, the market is very likely to break out of its range soon; certainly no later than Tuesday’s FOMC meeting.

The FDI “end of range” signal only tells us that the market has been freakishly flat and that such a condition cannot continue much longer. It doesn’t tell us which way prices will break out, or if the breakout will stick. The red arrow on the chart points to the last EOR signal when the market had coiled up at 1100. The market broke higher there, but notice that it had made a pretty nice bullish ascending-triangle pattern before doing so. The current pattern isn’t so well-defined, and the market just kind of flopped around last week.

However, on a larger scale, the market has formed what might be an inverted head-and-shoulders reversal pattern. This is what Kay was referring to on Friday:

A bullish resolution of this pattern would have the power to test the April peak. Also, it doesn’t have to break out right now. The market could pull back, make another higher low, and then blast higher.

We’ve seen investor sentiment get very frothy in the AAII survey last week. However, on Friday, all of CNBC’s “Fast Money” traders were bearish. So maybe that sets us up for a false breakout. If prices move higher initially, all the traders leaning short will barf up and go long. At that point, both investors and traders will be leaning in the same direction and the market will be vulnerable to a whoosh down.

Fractal Dimension Index End-of-Trend Signal

The Fractal Dimension Index (FDI) on the S&P 500’s hourly chart is flashing an end-of-trend signal (click chart to enlarge):

A low FDI reading is an end-of-trend signal, and a high FDI signals the end of a trading range.

The FDI has been working well lately. At the blue arrows, you can see it flashing an end-of-trend signal after the first leg of the July rally. At the green arrows, it flashed an end-of-trend signal at the top of the second leg.

On the way down in August, it gave an end-of-trend signal after the first leg at the black arrows, and then again just as the bottoming process began at the purple arrows.

As you can see at the red arrow, we currently have the second-lowest reading on the chart. So, the market is more likely than not to consolidate or pull-back here. However, the FDI has room to go lower, so the SPX could vault straight up to 1125 before the first leg of this rally is complete. But the current only-goes-up behavior will likely come to an end on Tuesday or Wednesday.

SPY FDI All Up in Your Eye

In Friday morning, I mentioned that SPY’s Fractal Dimension Index was giving an extreme “end of trend” signal. See the blue arrow in the lower-right corner of this chart (click to enlarge):

I also mentioned that it had not been this extreme since 1998. Here is that chart:

Once the market hit the extreme FDI reading (blue arrow and blue vertical line), it went sideways, sold off a bit and didn’t break out of the new range (blue box) until the FDI rolled up to give an “end of range” signal (green arrow).

And bears shouldn’t expect anything more than that right now. This is a very strong bull market and a 5% or so correction should be considered normal rather than the beginning of a new bear. It could be a new bear but there is no technical evidence to support such a development yet.

I also mentioned the FDI on the IWM chart on March 6th. I neglected to mention that the FDI could have gone lower since it was not at an extreme level. And so it did while the IWM moved higher. However, that was only two weeks ago, and my call that “down and sideways are more likely than up” for the IWM in the near future is coming true because the IWM will be back below that point today, and I believe that two weeks qualifies as the “near future” on a daily chart.

IWM Fractal End-of-Trend Signal #2

In the first IWM FDI episode on January 11th, I wrote: “The small caps are likely to consolidate or pullback in the near future.” And that’s exactly what happened. See the green arrows on the chart (click to enlarge):

Not bad, huh? And now the IWM’s Fractal Dimension Index is back down in end-of-trend country (purple arrow). So “down” and “sideways” are more likely than “up” in the near future. We might have another scary plunge, or just a mild pullback like we had in August (blue arrows).

IWM Fractal End-of-Trend Signal

In addition to the extreme Vix level discussed in the prior post, an additional headwind for the market here is that the IWM is in end-of-trend territory on the Fractal Dimension Index. Take a look at this daily chart (click to enlarge):

Notice that the FDI is down to a level now (black arrow) where the July rally ended (blue arrows). So, the small caps are likely to consolidate or pullback in the near future. Other sectors with similar, low FDI readings are: XME, XBI, XLE, and JNK.

SPX Record Fractal Dimension Index Signal

It’s no secret that the market has been remarkably flat for quite a while now. So, it’s no surprise that the Fractal Dimension Index is giving an “end of range” signal. But the current 1.6584 level on the daily chart is the highest for as far back as I can make charts (1960) and could well be an all time record. See the red “x” on the chart (click to enlarge):

The market made a similar “flat top” pattern in June when the FDI went above the 1.55 threshold (blue arrows on chart). And we got a correction in that instance. But the FDI doesn’t tell us which way the market will break, just that a break is as imminent as it ever will be by fractal theory.

One thing we can probably say with confidence about this current range is that it will likely prove to be nearly impenetrable support or resistance in the future. Support if the market breaks higher, or resistance if it breaks lower.

USO Fractal Dimension Index

On November 23rd, I posted a weekly gold chart with a Fractal Dimension Index showing that gold’s trend was “long in the tooth.” And the trend did indeed come to an end. Look at how low the FDI was (at the blue “X” in the lower right corner) back then (click chart to enlarge):

Parabolic Gold Update 1

And now, by contrast, oil is giving an “end of range” signal. Look at how high the FDI is (blue arrow) on this USO weekly chart:


So, from a weekly perspective, oil is primed to begin a new trend soon, and at the moment, it looks like it may be a downtrend.

On Wednesday night, I wrote: “the Fractal Dimension Index on USO’s daily chart is only down to 1.49, indicating that the trend is not yet mature.” And USO did continue to drop more on Thursday and Friday. Here is the daily chart:


The FDI has only dropped to 1.45 (blue arrow), so there is more “fractal room” on the downside. USO is testing its 200-day moving average now (green line and green arrow). If that doesn’t hold, then the September 25 swing-low (purple arrow) is the next support level. Of course, bearish action on the daily chart, doesn’t guarantee a bearish outcome on the weekly chart.

Parabolic Gold Update #1

Gold has been shooting straight up since I brought up the subject last week. But will it keep going? I reckon it’s time to dust off the old Fractal Dimension Index (FDI); don’t you agree? Here is a weekly GLD chart (click to enlarge):

Parabolic Gold Update 1

The FDI is in the red line in the lower panel. When it drops down to the purple line, that means that prices have been moving in a straight line, which our allegedly fractal markets are not supposed to do. And sure enough, low FDI readings have corresponded to peaks on the GLD chart. (Points 1, 2, 3, 5, 6). And, as you can see at point X, the FDI is very low right now.

However, that does not mean that gold will take a plunge. It might, or it might just pull back a bit and gun higher as it did at points 1, 2, and 5. A low FDI reading only tells you that the trend is long in the tooth. It doesn’t tell you what will happen next.

Now look at points 4 and 7. A high FDI reading means that prices have been consolidating and that a breakout may be imminent. Not bad, huh?

Note: I will write more about the FDI as soon as I’m done coding it. I just have to add the alarms now.