Sornette Bubble in the Buffet Indicator

The Buffet Indicator is in Part 3 of a Classic Sornette Bubble

The Buffet Indicator is in Part 3 of a Classic Sornette Bubble

Doug Short has been keeping up a chart of the Buffet Indicator (market cap to GDP).  He points out that it shows that the market is valued at two to three standard deviations above the valuation mean.

What I see on the chart is a classic three-part Sornette bubble, which suggests that valuations have a lot further to go.

Part 1 of this Sornette bubble ended with a classic lumpy top in the 60s through early 70s.  Part II of the Sornette bubble topped in 2000 with the dot.com bubble.  Part II always completes with a classic vertical bubble melt-up.

You don’t always get a third part, but in this case there’s a classic Sornette bubble part 3 on the chart.  When there’s a Part 3, it’s always at least as big of a move as the move from the low to the high of Part 2, and usually bigger.  Part 3 also tends to take a lot less time than part 2–typically, it goes from low to peak in about 1/3 the time it takes for Part 2 to  move from low to peak.

This suggests the vertical move in the Buffet Indicator will be accelerating from here and has probably traveled only about halfway to its bubble target.

The increase in the indicator doesn’t have to come entirely from rising stock prices.  It could come from a crashing GDP as well.

Gold Price Channel Decision Point

Gold is Trying to Confirm Gray Price Channel

Gold is Trying to Confirm Gray Price Channel

Gold has formed a megaphone (pink on chart) at the top of a potential price channel (gray). Usually gold would retrace to the pink megaphone VWAP at this point, which is at the gray price channel top, before breaking out downwards from the megaphone for a trip to the bottom of the gray channel.

If this scenario plays out, the gray price channel bottom would be a critical decision point for gold. This is the point where the move will either accelerate into a steeper price channel meltdown, usually after a partial retrace into the channel (green scenario), or reverse to break out the channel top and move sideways for a while (purple scenario).

Gold has a long-term target at 1000, so there are good odds of a breakout into a melt-down channel.

10-Year T-Note Price Channel Melt-Up Set-Up

The 10-Year T-Note's Coming to the Critical Decision Point in a New Price Channel (Navy Blue on Chart)

The 10-Year T-Note’s Coming to the Critical Decision Point in a New Price Channel (Navy Blue on Chart)

The 10-year T-Note has confirmed a new price channel (navy blue on chart above) within a megaphone (pink on chart below).  The price is coming to the critical decision point within that price channel for a breakout upwards into a melt-up channel vs. a breakout downwards into a sideways move.

10-Year T-Note Megaphone Scenarios

10-Year T-Note Megaphone Scenarios

Because the pink megaphone is now legal for an upward breakout (purple scenario), there are excellent odds of seeing a melt-up. The set-up is to go long on an upwards breakout from the navy blue price channel.

The theoretical target of an upward breakout from the navy blue channel would be the top of the bright blue megaphone.  However, usually in a megaphone of this size, the price would fall a bit short (while passing the October 15th high).

Oil has Retraced to Very Long-Term Megaphone VWAP – Either Bottoms Here or Kaboom

Oil has Retraced to VWAP of 9-Year+ Megaphone

Oil has Retraced to VWAP of 9-Year+ Megaphone

Oil has retraced roughly to VWAP of a 9-year megaphone (bright blue on chart). The original VWAP is closer to 60—it would usually go all the way to there, but typically it would be in the context of forming a bottom, starting here.

What would usually happen is that oil would now form an interior megaphone across the VWAP area.  As you see the interior megaphone start to take shape with small waves, you can start playing the bigger waves.

If oil should somehow get through this VWAP area without a fight, the chart calls for $10ish. That’s very hard to believe, but would certainly be interesting.

 

Euro Long-Term Formation Sure Looks Like Gold’s Big Top

The Euro's Sideways Move Since High Looks a Lot Like Gold's Big Top (Below)

The Euro’s Sideways Move Since High Looks a Lot Like Gold’s Big Top (Below)

In case anyone hasn’t noticed, euro futures are putting in a classic long-term topping formation. The euro needs to break out downwards to confirm, of course.

It’s very similar to gold’s big top (below).

Gold Put In a Similar Top

Gold Put In a Similar Top

Lots of currency charts are suggesting a big move is coming.

SPY Price Channel Set-Ups

SPY is Moving Sideways Near Top of 3-Year Price Channel Top

SPY is Moving Sideways Near Top of 3-Year Price Channel Top

SPY is moving sideways after an exact touch on the top of its 3-year price channel (red on chart above).  The exact touch on the channel top virtually guarantees a significantly higher high to come.

SPY is also moving sideways within a smaller price channel (navy blue in chart below). That virtually guarantees a higher high to come.

A Sideways Move at This Point in the Navy Blue Channel Virtually Guarantees a Strong Move Up Back to at Least the Channel Top

A Sideways Move at This Point in the Navy Blue Channel Virtually Guarantees a Strong Move Up Back to at Least the Channel Top

Whether the sideways move turns on the navy blue channel bottom or breaks through it before turning, the next move would almost always be a strong wave up to at least the channel top.

The SPY put-call ratio had gotten down to 1.17 on Tuesday night.  On Wednesday night some of that bullishness had gotten worked off, and the ratio had risen to 1.31.  If the ratio continues up a bit today, it makes for a beautiful set-up to get long short-term near the navy channel bottom.  Your stop should definitely not be exactly at the channel bottom, however, because about half the time there’d be some amount of breakout through that bottom here.

IWM Upcoming Targets

IWM Megaphone Most Likely Scenario

IWM Megaphone Most Likely Scenario

IWM put in the max number of alternating touches on the side of a price channel that rolled up into a steeper price channel. Then it broke out into the sideways move required by those price channels—a megaphone (navy blue on chart).

It has put in a 5th wave false top within this megaphone (the November 21st high that retraced to the megaphone VWAP). That means it would almost always break out of the megaphone top on this wave to put in a topping pattern up there.

Then the price would almost always return to the navy megaphone bottom before a retrace to the megaphone VWAP to decide on longer-term direction.

The navy blue megaphone bottom will be at roughly the VWAP of the entire sideways move of 2014 by the time the price gets there, so a downward breakout from the navy blue megaphone would imply a move down to at least the bottom of this year’s trading range.