friday morning (u.s. time). friday’s price behavior may

Factor LLC ● Colorado Springs, CO 80920 Web: www.PeterLBrandt.com

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Factor Update, May 22, 2016 Administrative note: This Factor Update is being issued early on Friday morning (U.S. time). Friday’s price behavior may negate or modify some analysis herein. The picture to the right is the Old Town of Warsaw Poland. This trip has been exhausting. I look forward to a return to Colorado on Monday. The Factor will then return to a weekend publishing schedule.

Market Review Candidate Factor Moves are currently ongoing in:

British Pounds (GBP/USD) Crude Oil

Nifty 50 (SGX)

Medtronics (MDT)

Silver

Japan Mothers Index (proxy is SCJ)

Cosmo Pharmaceutical

Platinum Candidate Factor Moves are developing in Eurodollars (interest rate) and U.S. Dollar Index. This issue of the Factor also comments on EUR/USD, Soybean Meal, Soybeans, GBP/JPY, Gold, and global stock market indexes.

General market commentary There is a lack of “late-stage” developing classical chart patterns. I remain in a defensive posture in trading.

The focus of my attention This issue of the Factor Update may contain charts for some markets that are of “charting interest” only and not subject to “trading pursuit.” A trader can have all the opinions he or she wants – but what matters are the order that are entered. A trader has NO control over the outcome of a trade. A trader’s only control is over the processes of analysis and the subsequent entry of orders. A trader is nothing more than a glorified order enterer. Markets in which I am holding or considering orders include:

Existing positions

Medtronics – protective stops

Dow Jones – protective stop and target

SCJ – protective stop and target

U.S. Dollar Index – protective stop

Cosmo Pharma – protective stop

British Pounds – protective stop

New positions

Soybeans – price alert The Factor Tracking Account is currently leveraged at 3.8 to 1.


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Candidate Factor Moves in Progress Cosmo (COPN.S) – weekly and daily charts The Factor has alerted members to this stock for many weeks. This stock was my most profitable equity trade ever. Large purchases made in late 2012 under CHF30 were covered above CHF100 in Mar 2014. The wide-bodied-bar (WBB) advances on 18 May and 19 May decisively completed the 22-month symmetrical triangle on the weekly graph. COPN is traded at the Swiss Exchange and is CHF-denominated. Also, note on the daily chart that the breakout was launched by a 9-month H&S pattern. Also notice the tight and dull trading range for the 8-week period prior to this week’s breakout. Such dull periods often preceed significant moves. Long-time Factor members will recall an even more pronounced situation in the USD/CNH prior to the devaluation of the Yuan in Aug 2014. Factor established a sizable long position on Thursday. I have decided to hedge part (but not all) of the currency exposure of this trade. The risk is that the CHF will decline against the USD during the course of the trade. The next Factor Tracking Account report will show this currency hedge.

February

8 15 22 29

March

7 14 21 29 4

April

11 18 25 2

May

9 17 23 30

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Cosmo Pharm (COPN.S)

Low 162.00

h

COSMO PHARMACEUTICALS N ORD (166.900, 174.400, 166.800, 174.000, +7.39999)

Aug Sep Oct Nov Dec 2012 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2013 Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2014 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2015 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2016 Mar Apr May Jun Jul Aug

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Cosmo Pharm (COPN.S)

COSMO PHARMACEUTICALS N ORD (163.100, 174.400, 162.000, 174.000, +9.00000)


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Crude Oil (weekly and daily charts) The dominant chart construction in Crude is the 18-month fall wedge completed in early Aug 2015 on the weekly graph. The initial target of 51.42 is now within striking distance. The daily chart shows that the advance from the Jan low has taken the form of a trading channel. Prices on the daily chart (July contract) are now trading at the upper boundary of this channel. Factor is flat Crude Oil.


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GBP/USD futures (daily and intraday graphs) The Cable was reinstated as a Factor Move this past week. I had earlier purchased Cable on 27 Apr based on the completion of a 16-week H&S bottom pattern with a down-slanted neckline. I existed this long position on 4 May and 6 May. The hard retest of 13 May appears to have held. Factor members often ask me about my use of intraday charts. Normally I do not use intraday charts – especially for day or swing trading. However, there are times when intraday charts allow a trader to fine tune a trade based on the daily graph. Re-entering my long Cable position was such an example. During the process of the hard retest of the H&S bottom, the market formed a small H&S bottom on the intraday graph – as on the second graph below. I used this intraday graph to re-enter the position. As a side note for newer traders, the GBP/USD pair was named the “Cable” because many years ago a communications cable was placed under the Atlantic Ocean for connecting the U.S. and the U.K. This Cable was utilized for trading the GBP/USD exchange mechanism.


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Medtronics (MDT) – weekly and daily charts The dominant chart construction in this stock is the completed 18-month continuation H&S on the weekly graph. Note (red box) that the right shoulder of this pattern is an independent H&S configuration. I am using a split stop price and split target strategy in this trade. I have no idea if MDT will be a winner or loser. What I know is that I would trade this pattern again every time in whatever market it might appear. In my mind, there is a difference between a good trade and a profitable trade. Buying MDT was a good trade. Whether it will be profitable is another matter. I have no control over the outcome of any trade. I do have control over the trades I take – and I want to take good trades based on my use of classical charting principles.


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India SGX Nifty 50 (weekly and daily charts) The weekly chart in this Index continues to indicate higher prices based on the completion of a multi-year ascending triangle. Note that the 12-month channel has been penetrated to the upside. Factor is flat. I am monitoring the daily chart for an indication to re-establish a long position. I would view an advance above the 17 May high at 7969 to be a positive indication. A decline below 7525 would negate the channel interpretation.


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Morphology 101 Chart trading is not an art and it is not a science. Chart trading is a craft. Most often any market cannot be understood through the lenses of classical charting principles. It is my STRONGEST opinion that no single approach to understanding price behavior can always explain what is going on. I know that some Elliott Wave advocates believe every twist and turn of a market can be precisely labeled – to this claim I say, “BS.” There are selective times when a chart will form a highly recognizable chart pattern, breakout out, then trend in a sustained manner to the indicated profit target. This is the exception, not the norm. These are the trading situations the Factor attempts to identify, then trade. Often times a market appears to be forming one pattern, only to morph into a different pattern, only to morph into yet another pattern… and on and on it goes. The challenge for a chart trader is to be patient during periods of morphology until a chart shows its real hand. Patience is the real challenge. A trader’s normal way of thinking goes like this … “I am a trader, so I must trade. After all, I only make money when I trade.” This is faulty thinking. Sometime – indeed, often times – a trader must wait for a proper trade. Waiting can be challenging. Not having a position IS a position.

Japan Mothers Index (proxy is SCJ - iShares MSCI Japan Small Cap Index) The chart of the Mothers Index in Japan is among the most bullish charts I have seen during the past decade. The Index has completed a 34-month rectangle on the weekly graph. The monthly graph (top) suggests that the Mothers Index has begun a cyclic bull trend. The Mothers Index is comprised of growth and emerging companies. Not that I use fundamental factors in trading, but Japanese stocks are significantly underpriced in relationship to the U.S. stocks – the price to book value ratio for the S&P is around 2.7 to 1, while the major Japanese indexes trade at less than 1.5 to 1. Eagerly I wait for the Mothers futures contract to be introduced in Osaka. In the meanwhile, I am limited to the U.S. ETF of small cap Japanese stocks. This is not proving to be a very good proxy.

See chart of SCJ, next page.


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Silver (daily graph) Factor was stopped out of the final layer of Silver longs on 18 May. The daily chart suggests that Silver has completed a 5-week H&S top. I have no interest in trading Silver at this time. Nevertheless, the H&S bottom in Silver has not been negated, so the market still qualifies as a Factor Move.


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Platinum (daily chart) Factor was stopped out of the remaining layer of long positions at 1038 on 18 May. I believe the market is simply retesting the underlying H&S bottom. I will monitor this market for another buying opportunity.

Other Markets

GBP/JPY (daily chart) This crossrate is forming a 13-week H&S bottom pattern. I am interested in this possible trade, but would only put it on if I have a comfortable profit in GBP/USD. I am mindful of Brexit and am not willing to carry any GBP risk into the week of the actual vote.


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Gold (weekly and daily charts) Factor has expressed two themes on Gold:

1. The bear market that began at the 2011 high concluded with the “cup-and-handle” bottom (in form only) completed on 26 Jan on the daily chart and the 25-month wedge completed on the weekly graph in early Feb.

2. Due to the nature of the falling wedge pattern, the advance in Gold following the advance on 11 Feb would be choppy – the charts would be subject to morphology.

Both themes remain valid. Buying Gold on strong upward thrusts has not been profitable for those who have pursued this endeavor. In contrast, buying weakness and selling strength has been the correct strategy – this is likely to continue. The daily chart appears to be forming a 3+ month channel of some form. Factor is flat. I have no desire to trade Gold even though I believe the bottom is in place.


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Soybean Meal (daily chart) July Soybean Meal met the target of 374.4 established by the half-mast flag completed on 28 Apr. Factor took final profits at the target on Thursday and is now flat. This trades brings up a dilemma faced by most discretionary traders. There is a strong urge to get back into what was a highly profitable market just as quickly as possible – fearing one might miss a further advance. This urge must be resisted unless there are good chart reasons to regain leverage. There will always be another excellent pattern if only we are patient enough to wait. I may not trade Meal again for six months or even a year – it depends upon the chart. Soybeans (daily chart) The daily chart of Jul Soybeans appears to be forming another flag pattern. A number of upside targets are possible in this market. The flag completed on 10 May has a target of 1123. It is possible that this is just a run-away bull trend with a minimum possible profit target of 12.00 (see red arrows on inset chart). Even though I will not rebuy Meal, I might purchase a small position in Beans depending upon how this flag is completed.


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U.S. Dollar Index (monthly and daily charts) Factor currently holds two large positions. Cosmo is one – the other is long DX. The monthly chart displays a bull market that began in Sep 2014. The weekly graph shows a possible continuation rectangle dating back to Mar 2014. It is my contention that the sharp decline on the daily graph on May 2nd and 3rd was a bear trap of major magnitude, as confirmed by the CFTC COT data (not shown). The large specs (hedge funds) hold a near historical record short position in DX. The targets in DX are 109, then 120. Resistance is likely in the 100 to 101 zone.

See daily chart, next page.


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EUR/USD futures (quarterly, weekly and daily charts) For a considerable period of time I have held a very negative opinion on the EUR. The Eurocurrency has a complicated history. The Maastricht Treaty of 1992 obligated certain Euro nations to adopt a common currency – although it was not until Jan 2002 that currencies such as the D-Mark were officially replaced by the Eurocurrency mechanism. It is possible to create a proxy EUR that dates back to 1992. In fact, IMM and proxy price data exist back to the early 1970s. Several technical developments on the EUR graphs are worthy of note. A 6-1/2 year descending triangle on the quarterly graph was completed by the decline in Jan 2015. This pattern has an unmet target of 84 cents, the area of the 2001 low. The monthly graph also displays a dominant multi-decade trendline connecting back to the 1985 low. The decline in the first quarter of 2015 found support at this trendline. It is interesting to note that the price range in the first quarter 2015 has contained the market ever since. The weekly graph displays a possible 27-month congestion. It is my contention that this congestion will eventually be resolved to the downside – and that the simultaneous violation of the lower boundary of this congestion zone and the multi-decade trendline will tie into a crisis in the Euro currency mechanism.


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The daily graph displays a completed 14-week rising wedge with a target of 1.0822. I missed this breakout and am flat.

U.S. Interest Rates The price action this past week has placed the near- and intermediate-term charts in the U.S. interest rate markets into a state of confusion. I will continue to monitor these markets.


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Factor Member Q&A

Question: A recent Tweet stated that tranparency is a common trait among good traders. What exactly do you mean by this? -Dan Chesler, Florida Answer: There are two components to this idea. First, my experience is that excellent traders are extremely self aware. They are accutely aware of their strengths and their weaknesses. There is an old saying that … “If you want to really know yourself – the good, the bad and the ugly – just become a trader.” This is so true. If you are by nature a fearful person, a greedy person, a forgetful person, an impulsive person, a patient person, an undisciplined person, a calm person – you name the trait – the markets will reveal these things. People who refuse to accept themselves for who they are are destined to fail as traders. The second component is that excellent traders not only recognize their weaknesses and strengths – but they are willing to openly discuss these things among their peers. If some other trader begins a conversation with you by telling you how good they are and all about their 70% win rate, turn and run the opther way as quickly as possible.

Stock index markets (various charts) S&Ps. The weekly chart continues to develop a possible complex H&S pattern. The daily S&P chart is a textbook study in morphology. The right shoulder of the weekly pattern displays a possible independent H&S top. The decline on 19 May slightly nicked the neckline of this pattern – this slight breach of the pattern could be a bear trap, an out-of-line movement or a premature breakout. A decisive close below the 19 May low would confirm the daily chart H&S top.

See charts, next page.


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Nasdaq. The weekly chart continues to form an arguable broadening top. I have discussed the problems with this interpretation in previous updates, specifically addressing the magnitude of the advance from the Feb low. The daily graph displays a small pennant pattern. A close below the 19 May low would confirm a short-term downtrend in this index.

See charts, next page.


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DJIA. In the 17 May Factor Alert I stated my interest to find a low risk shorting opportunity in the U.S. stock indexes. I chose the Dow as the instrument to trade. I am short one layer of Dow futures from 17364. I think I got snickered into selling a false breakout and fully expect the trade to be a loser. As is my policy, I am not willing to take a loser home on Friday. So, either I will be stopped out or I will cover the trade if the Dow does not decline sharply on Friday. My initial risk was 60 BPs.

Euro Stoxx. The daily chart continues to form a 14-week symmetrical triangle I am monitoring this index for a selling opportunity. Because of the nature of the symmetrical triangle as a diagonal pattern, my risk on a short position would be a maximum of 40 BPs.


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plb ###

friday morning (u.s. time). friday’s price behavior may

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