Broker to Trading

I worked on models in AI, modeling engineering systems. It is hard to model a tiny subset of a motor car for engineering design. I worked on a software program for one solid year, 100+ hour weeks, using methods at the very forefront of advanced AI.

I did it, but modeling an entire car in such a principled way would be a vast undertaking. It was not necessary to do this, a small part of it could be taken off and looked at. Obviously I am telling you all this for a reason.

I noted from day trading in 2008 that one approach away from technical analysis is to exploit a regularity until it disappears. But one can ask what would the problems with this approach be. Perhaps one is effectively modeling the market, with a tiny piece of the market's behavior.

The problem is maybe the fractal nature of the system being modeled. We have seen this on this blog on the 1 minute and 4 hour charts. No matter what information patterns may convey they do convey this, at very fine levels of detail (e.g. 1 minute) structure is remarkably similar at high levels of detail (e.g. 1 4 hour, 1 month). This suggests you cannot find a piece and cut it off to model at all.

Do you know the way a trading system may slide away from you and you try and add rules, if you have access to the system, to stabilize it, but to increasingly no avail. That is an attempt to impose structure on something which in a sense is alien to that kind of structure.

The market works to break structure and order. These structures do exist, hence arbitrage, but they disappear. Order and regularity is an apparent feature of naturalistic chaos but it is not a feature of market chaos, perhaps because the market is not truly chaotic.

Perhaps as a natural system, which it is to an extent (though this is an attempt to chop off bits of it for an explanation) it is more like the ocean than the endless shore beside it. It is dynamic but it is a program as well.

What this means is at a certain point of experience you do not make errors but you still do as the market functions correctly to take money from you, you have held the tide for only so long. That is why traders can die poor. But investors can live extremely long endlessly wealthy. This is because the regularity they exploit is set up to give you money.

Why - because it is money being created by a structure in society known as a company producing something for a cash transaction. The money is not coming from another trader in competition with you, but as a reward from society. If you get the right ones and if you do not day trade.

But this blog has been pointing out that right now money is not coming from creative productive action in this world but from $ itself, backstopped by the futures of the US government (low interest rates), to the benefit of Euro, but not really to the benefit of investors.

But if we assume that praxis still exists in this world and has not been eradicated by easy money, then we can assume the markets will and still do function correctly. That is what I mean by the real recovery.

(edited 7/6/14 9:38pm)

© 2010 Guy Barry - All Rights Reserved

I was looking through my notes from before and during the crisis. This was about green companies. The notes stated that the critical level of CO2 had already been breached and thus it is too late for carbon finance to help avoid this threshold.

But it will play a role in minimizing the ultimate cost of climate change. With complex systems (like climate systems and markets) it is again the problem of making predictions. With non-linear complex systems small inputs can have big results. But that said reversing changes in natural systems is essentially impossible due to issues in entropy.

What I mean is, if the changes in climate are structural disorders within the system, retaining the original state will be impossible. Anyway these are open questions and it is still worth reducing CO2. My criticisms at the time were that carbon finance is a sideshow distracting from the need for hard laws. I said in my notes markets create conduits which avoid structural change by moving money about, and this is their inefficiency over time.

Hard laws stop this. This is how the Enron conduit was stopped and how mortgage problems were being stopped. But another conduit was opened up to reflate assets in the wake of the crash. I have developed my ideas of conduits since then but so have those creating them.

About those companies, at the time the market was sky high and these companies were hot, thus there was no point in investing in them, if you wanted to make money from a rising share price (there are other reasons for investing). That was my opinion at the time. I had to choose companies which were constrained in some way but which could grow.

A crash came but this company was well worth watching from what its state resulted in terms of market movement (which is something you want, if you can deal with selling and buying, something in between trading and investing). As the market became like the forex market, wild valuation swings happened for some companies. They fell with the despair but rose again with the optimism.

My main pick to watch was YGE. It behaved interestingly in the crash, those constraints pushed it far down and then its strengths bounced it far up when floods of cash came back into the market where it has remained (nice profits if you invested near that bottom). Its lifetime chart is a great example of support becoming resistance, but after a double valuation probe downwards.

This is very important, again do not get caught up in technical terms look at what the market is chaotically reaching for, at the boundaries is information linear enough to understand. The reason those patterns do not work is because that information is highly non-linear, it does work, but not in the way you see it. The underlying causality is not obtainable. That is why models (and trades unfortunately) fail on a regular basis.

Can changes in the financial markets, another non-linear complex system, be reversed. That is one big question. It is why I wonder about the effects of the conduits on the market over the long term. I did research into a very subtle, similar but interesting problem, which is, is there a difference between a mis-function and a malfunction. It is like changes in brain structure and damaging brain tissue. It is an open question.

© 2010 Guy Barry - All Rights Reserved.

The scenario I am getting at in this: the cheap dollar trade is not an emergency measure to float sunken asset values. It is to resurrect the housing market. If the analysis says the problem in the economy is from collapsed house values, this analysis is wrong. Those asset values were overvalued.

Why were they. Because as must surely be well known by now, they were based on money flow, arising from a debt structure.

That debt structure were mortgaged houses, but vast numbers of them, in the great American republic, that vastness which has inspired many and has produced such wealth. That is the money flow Euro latched onto to value it. It is the source of the rise from 2001 onwards. It is that resurrection which is the present dislocation of stocks and $ and the sync of stocks and Euro.

How is it being resurrected ? Well, keep interest rates artificially low for an undefined long time and what happens - mortgages. And some data indicates this is happening. The risk of the housing bubble was taken into advanced products structured by financial engineers. This risk now is being taken into the greenback, and this risk is a valuation weighing heavily on $.

A good sense of $ value is given by USD/JPY. Both are safe haven currencies, though JPY is more purely one and both have low interest rates. Look where it is on 1 month, that breakout at 95 long forgotten. On the 1 week it has relatively wandered far from the 55 period moving average and it is feeling its pull. That MA works like a relatively precise distortion in space time, on 1 min or 1 week.

But one can measure the strength of a trend by the extent to which that pull can be counteracted. In terms of valuations we are back in 95/96. If you want to look at the long term power of a valuation spike, look at the probe in 4/95.

That is both pulling it down now and providing support. Note the three tests of that support level, a counteracting force. But what is that support level, exactly, it is the first surge up from the spike down, the surge which made this a reversal, then.

That strength in $ in the late 90s was about the weakness of Japan, yes, but it was as well about the huge surge in equities. Can one say that a long term weakness of US equities (stripping away inflated asset values) is the reason for the move back down to this level...

Let's look at the tech boom, was that bogus or not. Yes, there were so many asset inflations, but it was within companies it was contained, the bubble collapse produced a downturn, not a crisis. But the use of the housing market as an asset *creator* produced a crisis of epic proportions. This should be warning enough not to do the same thing again. The tech surge was about a future belief in money flow, but money flow from companies, from revenue. And you know what, it wasn't so far wrong.

The companies chosen may have been off, but look at the enormous revenue being produced by Internet tech companies now. They are the salvation of this recession, and the economic strength of the US. So the market made an accurate prediction, but as always with this kind of data the level of detail was what caused problems, i.e. which companies to pick.

What I am saying is, this was a real example of the markets ability to value, and it accompanied a rise in dollar, as it should. A true rise if stocks should produce a true rise in dollar. If Obama does what he says he will (which is what he has been doing), then dollar should rise, along with interest rates ending the conduit. But relying on a resurrection of a mortgage bubble will lead only one place.

© 2010 Guy Barry - All Rights Reserved.

Let's look at explanations for the forex market, given in a few words, like the dollar is down because risk is on less demand for it etc. What happens is you see-saw from risk on risk off explanations and try and make predictions which go ever so slightly wrong wrong.

The forex market explanatory process becomes like Graham's memorable description of Mr. Market. The call for $ and US equities to be in sync has long been forgotten.

But how could it be anything but while that extraordinary conduit directs money flows into Euro when $ is buried by low interest rates, even as the economy starts to rise again.

That cash coming into the market is from cheap dollars, it is not investing, it is not a risk trade, it is pure flow. The money ebbs out when it seems there is no future for it, the money comes back when it seems that business as usual will continue (that definitely includes the prospect of renewing mortgage based asset inflation). But the source is the long term destruction of the greenback.

Of course Euro rises, doing this makes the Euro seems comparatively rosy when it is fundamentally anything but. That real recovery is needed. The US plays fast and loose with its monetary policy, because it can. But why not practice sound fiscal policy, like so many other countries can and do.

The US would reap the most fantastic rewards for doing this. In many ways the US is still structurally like a developing economy, and it is already an economic superstar. I'm saying this because Obama wants to do this.

Doing this will unleash the power of the US economy, which has been in fiscal chains for decades. Not because of tight soviet style policies, but because of loose policies beginning with Volcker.

© 2010 Guy Barry - All Rights Reserved.

I would disagree with an analysis which suggests movements of stocks and currencies are a matter of confidence. That is the great illusion of the past decade and more, that the market is controlled by money flow.

It isn't and even if it works for a while, if cash to flow is created from debt, the resulting fall wipes out and more the gains made (those mechanisms have been noted they are probably structures nested in those fat tails).

As I noted, it is possible to get out on RSI, but it seems most ignored or tragically didn't even know about these indications. Trying to trade in forex on confidence is a recipe for disaster.

Those who made money from the cheap dollar carry trade of the past year or so have only partly recovered any losses and most of those assets are still worthless (let's not even mention the tech bubble). The analysis I suggest in these articles, is one which says there are computational mechanisms at work which have their own validity.

If the market could be controlled, then it would be at 18,000 right now. It isn't last time I checked. Even the great minds of Obama and his team have found the limits of exquisite structures to try and control money flow (assuming that is what they are doing).

The best one can do is look for signs of the mechanisms within the markets. And this blog tries to take a deep, and daunting effort at looking at the source and structure of money flow, forex, and one of its destinations and recursively sources and structures as well, the stock market.

But let us look at what confidence means because confidence right now means a rise in Euro and a rise in stocks. I remember months ago an analysis from a well know forex broker which said with feeling surely now the dollar will get back in sync with equities.

I have been suggesting that confidence is only the mistaken belief the market can be controlled and this state of being out of sync is a symptom of this. When a real recovery happens as I have described here, along with deficit reduction by Obama then dollar should rise and one can ask what exactly is valuing Euro. I believe Obama can do this...

Let us talk about the time element. Confidence boosts Euro boosts stocks for a while, lack of confidence brings them back down again, producing the range. The problem is it is not confidence really. It is a belief in business as usual, control of the market by money flow.

True confidence I am suggesting is what a true recovery I believe in will bring. That will be confidence. The other feeling is more like temporary relief, which quickly collapses into despair as the market does exactly what it wants. By want, I mean exactly what the market's computational mechanisms do.

Update 7/26: note how doom and gloom has turned to total optimism. But I am not without optimism, because as I said I believe the real recovery is in the market.

© 2010 Guy Barry - All Rights Reserved.

Is it important to be aware of money flow when dealing with markets, as this seems to affect value. Are there different kind of money flow. This question is raised because of the way money flow was an important factor in the aftermath of the crisis, in terms of an asset recovery. And the still unanswered question (via this update in 8/31/2014), what happens when the (constructed) flow is removed. So it can be asked, are companies inherently immunized from money flow, that is even long term exposure to it as a way of supporting value, may not really affect them.

An assumption can be made that there is a computational mechanism which a quality company will key in with and into. That needs no technical or fundamental analysis per se, it needs financial analysis.

This is a search for something for the market to catch onto into the structure of the company, to mold it over time in non-linear spurts, thus what is happening to other companies in its sector and across other sectors is significant in terms of information, to see what the market is sensitive to.

This is bottom up, comparative and referential, a search for structures in a company and the market's take on this, as it were. And perhaps money flow immune, so whether there are different kind of money flow, it is not of concern to inherent value of a company.

My comments in previous posts about money flows and conduits are about the way money flow, which lifts established shares up and down seems to have been used to support deflated asset values from the aftermath of the crisis.

My examination of markets in the blog is to see if this has affected though the computational mechanisms inherent in the Dow. That is an open question and one which reflects on the extent of immunity.

In a normal market money flow may push value up and down.

But what if share values are only being defined by a constructed money flow. Well, you get slides and ranges and gravity wells, perhaps. But a real recovery maybe perhaps is happening and this is something like an Elliott Wave, even if hidden by the effects of money flow.

This kind of data analysis may be only showing symptoms of something deeper, though. Put it this way rather, it is about that moment when a company and a market is resonating, recharging, ready to surge, despite everything.

(updated 9/1/14, 8:01pm ET)

© 2010 Guy Barry - All Rights Reserved.

The recovery does seem to be in the market, does it not. It was perhaps being masked by the floods of cheap dollar, which now must be ebbing even faster. A real company driven growth, which surely the great financial engineers in Obama's team must want, will be such a rocket.

Science is perhaps about interpreting data. One has a set of data, one looks for underlying structure and then one extracts a model. From this one can make predictions. The idea of science is this process gets more and more accurate as time goes on (or at least changes).

Let us just assume that models have issues predicting the future behavior of the Dow, for example because it may be hard to model it, or to capture what that structure is, in ways which predictions can be made.

If this is the case, how on earth do some become rich investing ? Perhaps because they do not try and predict anything.

What they may do is look at the components of the Dow, companies, and make this intriguing assumption, that the structure of a company, evidenced in certain interpretations of its financial statements over time (computational structures within statements awaiting activation, made by good management), is effectively a computer program when it interfaces with the market. This program will bring the value of the companies shares to values commensurate with this structure.

So structures again. That is what I mean by a computational structure, which I would imagine sits somewhere on the fat tails and high peaks which the graph are showing. My feeling is it is something as well to do with the way the brain makes computations (those in the market and those making the company, for example).

In all events this process is perhaps highly non-linear (like the underlying computational structure itself), thus you wait and it seems like nothing is happening or things are going down and then suddenly the rush upwards happens. It is like magic, but it is perhaps highly advanced computations, given time.

(edited 7/6/14 9:28pm)

© 2010 Guy Barry - All Rights Reserved.

So is forex like gambling. This question is really, is forex gambling.
First off, I do not like gambling, it is just how I feel, and I find forex fascinating. I do not like gambling because it is pretty much mapped out, it is usually a two or multi-player strategy game, easily modeled by AI software (which I did work on).

However forex to me is about an insight, a hardwire, like something from Neuromancer, into the financial market which is the most complex creation of human beings ever. It even looks cool, those red and green candles, in those patterns which signify the movement of vast quantities of money.

One can discern engineering constructs within it, like the conduits I have elaborated which seem to have been set up to control money flow after the collapse of the support the housing market was giving credit, a huge source of money flow itself. The collapse of this actually collapsed asset values and an emergency rescue package was set up to create in effect this conduit. So no glamorous women, no James Bond, but something amazing and center stage in the world.

Now investing is not gambling at all, you do take risks, but there are risks on anything involving a transaction. There is a long term risk, in that the market may change and may not work in the ways of equity amplification I elaborated (the computational structure expressed in the fat tails and high peaks of the Dow).

There is the fact the market reacts to removals of supporting structures in the economy by collapsing asset values, or to attempts to present future valuations as present valuations (the tech bubble).

However you generally have advance warning of this kind of event by looking at long term RSI for example, it will show you the money flow which is going to level asset values. In a way you do not have to worry about why the money flows, but really you do as it gives you information about what you are seeing on RSI. One can invest to grow money, but one should trade for other reasons than to generate cash from leverage at high speed.

If you do make cash from trading put it to productive uses. But the probability is you will lose this money. Those long term structures which cushion you in equities do not seem to exist in forex, which makes it very hard to hold on to anything. One reason I have been looking at long term charts is to see if these cushions appear there.

© 2010 Guy Barry - All Rights Reserved.

There is an interesting article in Marketwatch today about Greenspan's role in expanding the monetary base and the probability of a double dip recession, by Robert Murphy. Obviously I do agree with this to an extent, it is essentially what I have been saying since last year.

The difference is I think there is a computational structure in the market which operates outside of these inputs. This is the long suffering device which has created untold wealth for a nation, a world, companies and individuals. It still operated in the most recent bull market, despite the inflationary measures of Greenspan, ignited in recent times by Volcker.

But they are not new measures, governments have always sought to increase the monetary base to create an illusion of wealth, the easy way. At the time Greesnspan did what this paper says he did, he was applauded. So was Volcker. But easy wealth is always applauded, who cares how one gets $, as long as one gets it, this is the nature of money, it is the source of many actions in society.

But as soon as the consequences hit, as they always do (and $ disappears into the night as assets deflate), then blame gets heaped on those who did this. The problem is as I said political, the Fed essentially makes near-political decisions and politicians have a very short time-frame, because they need to be re-elected. One thing is simple in politics, increase wealth and your changes of being re-elected increases rather considerably and vice-versa.

But great wealth comes to countries and those who work hard and focus and develop good ideas (shown nationally in productivity increases). This process shows in fine balance sheets which the equity market then proceeds to grow into giants. The US seems blessed by a capacity to constantly regenerate this ability which countries like the UK had in the past. This shows in its companies which thrive *especially* in times when money is scarce (all those cheap dollars seem not to being put to productive uses, indeed the investments in equities seem more targeted towards shoring up deflated companies rather than on long term investing decisions). This is the structural dynamo I alluded to which spins faster in harder times. This is the recovery hopefully gradually growing in power and subtly for now stopping the market from crashing.

Remember what I said about gravity wells ? A major technical level like 10,000, and this one is historically huge is like a massive body in space, it distorts space time and like this asset values are pulled towards it. This is the source of the 3 touches I saw in 1 min and higher charts.

Remember the stock market is not such a pure technical device as forex, it has its own computational structure, and the conduits to contend with. Either a new inflationary method will be found (but the markets may be less responsive to these now) or a recovery will liberate asset values from this and let them soar upwards again.

© 2010 Guy Barry - All Rights Reserved.

Deterministic chaotic systems can be modeled, not that one can truly model them, i.e. get at the equations governing their behavior, but one can surf their determinism. One can assume the ability of the stock market to bring equity up commensurate to the capacity of the company to do this, is part of this.

I still think there is a real recovery in the US markets. These happen despite debt and any other counter-reality actions. It is just sloshed about by the inflationary exercises. It may be a reason why the market has not crashed (yet)...the source of the washing back and forth around 10,000.

The hints of a recovery not happening caused a reaction backwards, like the hint of a Fed funds rise I discussed. These are inputs, what are called fundamentals into this computational machine. The machine itself has its own computational structure which asserts itself. I believe this still lives.

The issue is the deflation from cheap dollars. But when I say the recovery may be a reason the market has not crashed, I mean more than a supportive belief, because when the flight to safety/risk off happens, it is like there will never be a recovery again. But the internal computational structure of the market itself supports it.

It is always worthwhile keeping an eye on the trend in EUR to see what the state of the debt relation exercises. Debt is not a bad thing, but it needs asset growth as well or else you get bubble collapses. I started this post with a comment about deterministic systems.

Well what about forex. One could model determinism introduced into it. There are regularities which appear from time to time, like certain behaviors at certain time periods, but if you find them, you will find as well they disappear and disappear in interesting ways.

© 2010 Guy Barry - All Rights Reserved.

It could be argued that the forex market is designed to ensure a systematic approach to it loses accuracy. The process by which the stock market in normal times brings share prices up may smooth this element in the stock market.

But because there is no such mechanism in forex, this smoothing does not take place here.

I have said the conduit created by EUR/USD may take some of these complex processing mechanisms of stocks into forex. I look at long term charts like 1 month because there are traders and funds there with very deep pockets who take positions which are like investing positions.

However the note I made about the technical nature of the market applies here. The evidence I have seen of 1 minute functionality carrying into longer term charts suggests this as well. Thus taking investing decisions even on 1 month is still dangerous.

In fact the technical nature of the market is a reflection of this very process, support, resistance, retracement defining the inflexion points of it. It is perhaps why the forex market is so technical, in a way the stock market is not.

The stock market is always doing something positive, investors key into this (however this may be being being distorted by the conduit and inflation/delflation of assets values).

But going with forex is like going with a direction both north and south at the same time. Perhaps only the human mind can hope to try and cope with this marvelous sensibility of causality.

(Updated 4/14/13 - 3:03pm ET)

© 2010 Guy Barry - All Rights Reserved.

What I have been suggesting is an instrument on and of itself has been created to manage money flow into assets (e.g. stocks). Keeping Fed funds near zero, keeping ECB rates low but above Fed funds does indeed create a conduit for money flow, by virtue as well of the fact this interfaces with US equities.

The problem is this conduit is unstable and seems to be veering into territory normally associated with stellar physics. The hint of a raise in Fed fund rates a few months ago triggered the collapse of EUR and the money flowed out of supported assets.

EUR went as low as it could, the point about this collapse is it breached territory associated with what might be called its true valuation aside from political considerations. It had to bounce, because there were no major fundamental which the system had not digested but from a long term view, the fact it went so low interested me.

I am reading the monthly chart thus I wonder whether that spike down is a valuation probe, suggesting EUR is seeking a true value. But because it is a monthly chart that would take time to play out.

But other considerations rule, and never has EUR found its true value for long. What do I mean by true value. Well what is EUR, it is a political invention which rose on the back of a US and euro zone housing bubble and debt splurges. The wealth of Europe has been revealed to be clouded by massive amounts of debt.

But debt economics still rule despite the crisis. Any calmness in the debt shocks is greeted by a rise in EUR because it suggests business as usual. Namely the crisis is simply an event which is over and the printing presses will keep on rolling.

Basically EUR does not have an identity to fundamentally value it, so it sinks into an identity of a kind of anti-dollar, where the US finds new ways to inflate and add to its debt mountain. This is happening because the US and only the US can do this a kind of gravity well in and of itself.

Look at EUR/USD 1 month. What is that patterns playing out. Again it is my comments about patterns are only obvious after the event. Could that be a flag or a double bottom, the problem is the trend is unclear and 1 month is heavily influenced by large structure fundmanentals. Why beat yourself up on 5 or 15 minute chart pattern choices. But fundamental analysis can give you some support in your choice (large or fine scale). BTW when you trade EUR/USD and stocks you trade the instrument created to manage money flows.

© 2010 Guy Barry - All Rights Reserved.

The stock market slide is entirely to be expected as I have been saying for ages. Inflationary measures cannot produce a surge upwards, they move like a balloon then burst. This one though did not exactly burst it did what I said a while ago, it slid back down.

The market is highly technical now, this seems to be the source of valuations. 10,000 is acting like a gravity well from above and a boost from below. Keeping dollar at extremely low interest rates, effectively removing interest rates as a monetary tool by saying this is for an extended period, and thus allowing vast sums of dollar to be borrowed and pushed into stocks, is not even an inflationary measure.

It is too direct too close to the source, it was really a rescue measure, to give some respite to asset values while a real recovery hopefully took hold. The problem is, the economy is too hooked on debt and there need to be major efforts to restructure the US economy, which haven't really happened.

What has happened have been huge spending commitments. I approve of health care, to put it mildly, but what is the point of a measure which cannot be paid for at present tax rates.

Yes, it can be funded by relying on the dollar's status as the world reserve currency and as a flight to safety instrument. All these allow it to hold some kind of value despite these interest rates. Fed funds rates are effectively a way to add value to dolar, and they have removed this value adding mechanism.

Either they can shore up the sliding floods of cash away from equities or find a new way of providing cheap funds or deal with the probably accurate equity valuations and foucs on restoring the economy.

The problem with relying on borrowing is this removes cash which could go to, yes equities. Another problem is the cheap dollar cash went to the wrong kind of companies, those which were low because they should be low and thus could be pushed up (in a way the rescue measures have worked because of the technical nature of the market).

What is needed is something solid to build on the pleasant fact it is at or above 10,000 now instead of some place a lot lower. The cheap dollars worked, but let's keep it going.

When Obama got serious about infrastructure and science and engineering (the stimulus) great companies like EME and JEC got a boost. That was a good way to go. The stock market is like that phrase from computer science garbage in, garbage out, but conversely, give it gold (or at least something halfway decent to compute on) and it will give you endless gold.

© 2010 Guy Barry - All Rights Reserved.

Just a comment on Canada and economics. The Government of Ireland found out what happens when you run a country like a company. For Ireland it gave fabulous wealth. In the 80s nobody would have believed Ireland could have become one of the wealthiest most successful economies in the world, but it did.

It is unclear how much the EU had to do with it, it seems more like a consequence of the incredibly close relationship with the US and the fact Irish government ran it like a good company.

This is what I mean by a good company, that quality which enables growth to and beyond inherent potential. Again some complex dynamics are at work, and this is what I as talking about in terms of the US itself. So where does Canada fit into all this. Well, the Government of Canada has been quietly running this country like a business.


When the crisis happened I felt Canada would be relatively fine for this reason: oil had to spike up again, it was totally undervalued, and this would pull funds into Canadian assets. But there is something more the Ireland effect, perhaps. Because the protection Canada had from what happened south of the border is more than about oil or bank rules.

There seems to be something of that dynamic being released in Canada, what Mark Carney talked about in terms of fortune favoring the bold maybe. This, in the case of both Canada and Ireland is not a commentary on social policies. My hope for the US, is Obama will do the same kind of thing, at least try and balance the budget. Sound fiscal policies have such a profound effect of the dynamics of an economy.

© 2010 Guy Barry - All Rights Reserved.

When I talk about a recovery in the US markets I mean a real recovery. By this I mean a recovery from decades of debt, based on growth from the powerful companies of the US. That is what I mean may be happening.

There are signs of this. First of all there is a forced recovery from debt, as the debt markets collapsed and are still very fragile. What you are seeing now is maybe not a kind of commentary on a recovery it is a commentary on the fading of a debt economy.

It's just the economy is so hooked on debt...but as I said maybe the crisis can be seen as a good or necessary thing (or even a deterministic thing). Look at US companies they seem to be in a stronger position now than they have been in a long time.

All that has happened is debt inflation has been sucked out of some huge companies, which so far have handles this almost effortlessly (TARP given and returned is pretty effortless).

Why is this, well because they have this amazing ability to thrive in tough times. It is like there is a structural dynamo in the US economy which works with or without sales growth, to an extent.

© 2011 Guy Barry - All Rights Reserved.

This is a quick look at AUD. This interests me because it is so volatile, trading it can seem like rolling a dice. However look at its 5 minute chart. It does conform well to RSI extremes. RSI is something I looked at closely on the 1 minute chart. RSI is not about chaos it is about computational structure, like a mirror its use reflects this structure into the market, perhaps.

USD/JPY has problems with RSI on 1 min, there is a lack of conformity to it sufficient to bring you to the card table. It becomes a matter of luck, or endless detailed analysis of why it went wrong or why it went right (this is why I combined it with Ehler Fisher in an attempt to resonate more precisely with the computational strucutre of this currency).

USD/JPY is a liquid currency a conduit I would say interfacing all sorts of structure. AUD is closer to being a pure currency referencing its internal valuations to USD. This suggests perhaps RSI captures something intrinsic to a currency valuation, rather then simply a reflective structure.

© 2010 Guy Barry - All Rights Reserved.

I thought today I would discuss a different currency. I have been discussing EUR/USD from a technical standpoint, but technical in the way computational Artificial Intelligence is technical (hence the conduits etc.). The idea is to look for a well grounded engineering approaches to forex.

In this spirit I will look at CAD, a currency which always makes me think of gold (rather than tar sands). CAD is not really a conduit, it does not interface with the chaotic dynamics of the US stock market (because it is actively shielded from it). This is reasonably clear from a cursory examination of its 1 month chart.

I suggest the stock market plunges chaos into EUR/USD, USD/JPY and hence into forex in general. But the forex market purges itself of this, if I can put it this way as it is not a deterministic system. It seems this way and there is evidence to back this up. It is a powerful computational system, but why would it not be, the reliance on computer programs there is much more intense than in the stock market.

For now I will say about CAD, it is a good example of predictive problems in forex. I remember well the predictions in 2007 at parity with USD and again recently (the certainty it would continue or at least stay above parity). The problem with parity is it is a hugely important political number - CAD above hurts important sectors.

Remember the comments and one might assume actions of governments at EUR/USD 1.5 recently. The same kind of complex maneuvering happens at parity. That said another move down to it would more or less complete the three tests on 1 month. It will be interesting to see what happens.

But then where does the determinism in the stock market come from ? Perhaps because it uses the minds of individual traders and investors in particular. What I mean by this is the stock market is more an output of the advanced and not very well understood technology of the human mind rather than the complex but well understood technology of digital computers.

Leveraged trading in forex leaves little room for long term investment decisions or much thinking in the way the brain does this (again part of the difficulty of forex).

Obviously I am suggesting the US stock market and Canadian stock market are different, but it seems the US stock market may gets its determinism partly from sheer size (the complexity).

CAD may not be a conduit but it may have some deterministic structure within it and there is a complex relationship with the vast US economy (the recent boost in Canada was from Ontario and Quebec which have strong links with the US economy, in different ways).

© 2010 Guy Barry - All Rights Reserved.

Let's look again at EUR/USD 1 month chart. As noted the spike down in 6/10 hit a floor provided by the end of the great confident rise of EUR spiked to a temporary top on 5/03, providing a double spike which became a retracement. Now why is this important ? Well spike clusters seem to delineate hard retracements which get burned into the market memory (in this case it produced a flag).

There is another cluster referenced by the spike in 6/10, and that is the one in at the end of 1998/beginning of 1999 - now what is a long term precise memory. Let's assume there is the residual computational structure which provides long term memory in forex.

That is a hard memory, a hard valuation structure, hardened by its input into the real debt economy. This suggests why EUR rises on resurrection of a debt economy, it activates this residual. In these cases the debt economy referenced is a housing bubble supported by too low Fed fund target rates and the introduction of the EUR itself on 1/1999.

Why does the introduction of the Euro reference a debt economy. Because it gives the market opinion of the EUR until it got supported by intervention in 01, which sparked the great rise.

The point is the debt economy is based on political management of currencies, a management (which has since the 80s preferred debt to asset bulding) which produced the EUR/USD conduit and which failed in the crisis. It failed because the US decided to kill the housing bubble with high interest rates.

This took some time to revalue financial assets and in this space the stock market took off. What I am saying is that 6/10 spike is referencing political management of currencies, in this case the EUR/USD conduit. But it is referencing the limits of political management. As I have been suggesting patterns are not obvious until after they have formed, that is the hardness of forex.

Let's assume EUR could be separated from this valuation structure. That is the question I have been asking, what is a true valuation for EUR. Why would I ask this, because it might have seemed this economy is over, it was supposed to have been burned away in the crisis.

But as I have always said it may well not be and there is always the search for a replacement (the uncertainty in the spike of 6/10). The not very satisfactory dollar carry trade was one, as I asked what is the new one (the continuation of the carry trade ad infinitum) ?

In all events the US should not lose faith in a recovery. Perhaps one can see Canada as a gauge for the recovery in the US (it is its biggest trading partner, a fact which tends to get overlooked sometimes) as well as referencing it own strong and unique economic fundamentals ? Fundamentally the question is this: is there a new political management of the EUR/USD conduit going on and what will a recovery in the US do to it.

© 2010 Guy Barry - All Rights Reserved.

This concerns a paper by Jingtao Yao et al: "Foreign Exchange Rates Forecasting with Neural Networks". Neural Networks are computer programs which find underlying structure in data, and from this generalized structure, elaborate behavior for new data.

They are based on very simplified models of the way the brain may operate. The work I did was in optimization algorithms which find solutions then find better solutions. There is some evidence the brain may do something like this. My trading on the 1 minute chart which has yielded some interesting results, was based on this.

Chess programs based on these algorithms beat the best chess players in the world. I looked at distributed versions of these. It is basically the structure of problem solving (i.e. one does not worry about the structure of the brain, one looks at the structure of the problem solving act itself).

It does seem the market is a powerful network of problem solving activity, distributed and focused, as getting it wrong hits you where it hurts - your wallet. It may be this focus and distribution makes the collective expression of this precise, which gets mistaken for efficiency.

When Yao applied neural network programs to the forex market he got this result: the worst predictions using technical indiactors applied to the derived structure was for Yen. This is what interested me. Yen is a huge liquid market referenced to flows to and from Japan, another artificial conduit, though based on long term low interest rates.

Yen survives because it is a safe haven currency amongst other reasons. This is the worrying possible future for the dollar though. It is all based on deflation and the effects on asset values, pensions etc. From this, a political necessity driving central bank policy.

Yao thought the reason for the finding was the efficiency of this market, it moved from moment to moment digesting all information, there is simply no room for predictive inference. I might suggest though the distortion caused by the long term conduit may be a factor in this.

Note how the conduit set up between EUR/USD has caused valuation shocks, these look like chaotic surges, or Hurst bias changes, which make prediction impossible (the reasons behind all those inaccurate calls in forex recently). But because there is some evidence there are no long term memory processes in forex, one might think the conduit is the explanation in and of itself.

© 2010 Guy Barry - All Rights Reserved.

There seems to be a mystery surrounding the valuation spike in the *stock* market recently. Let me suggest some reasons:

* Stocks are being valued by money flows only, based on an artificial conduit between EUR and USD.

* The internal states of companies are not determining share values, this makes the stock market like the forex market because:

* there is nothing solid to hold onto, this means:

* it is only surprising there are not more valuation shocks !

The stock market is constrained by regulations which seem to have the effect of removing effective valuations. The stock market traditionally works against this and finds values then gets pushed up by big money to unrealistic levels.

But in a way these are not unrealistic levels they are logical consequences of future valuations which is the way the market works to compute value. This is supposed to be accurate, it is the foundation of many investing theories. But it is so distorted by debt disguised as assets.

In fact the state of the market now ranging on money flows with valuation shocks is a logical conclusion to this. Why this is happening is because of the power of debt, the ability it gives many to get a loan and put it into the future, one way or another. That is the credit market which collapsed under the illogical strain of this in 2008.

This makes debt like an asset. The financial crisis was itself a logical conclusion to this (the assets of financial companies were logically liquidated to debt and share valuations changed to match this). The present carry trade which was supporting the market is the same thing. The point is the markets are inherently logical, it is the inputs into them which tend not to be.

© 2010 Guy Barry - All Rights Reserved.

The ECB keeps interest rates slightly above the Fed for an extended period. This means an artificial conduit is created between EUR and USD biased towards money flow to EUR. The hint of a change in this bias, a rise in interest rates caused a huge fall of Euro, which is being reset now the market seems to have put the possibility of a raise by the Fed out if its horizon.

So perhaps all this engineering is to support EUR, the true state of which the market valued with those huge valuation shocks of recent months. A collapse of EUR and the euro zone would be the end of the way the economy was until the crisis, the attempted resurrection of which this conduit is responsible for.

I like Europe, I do not want to see this happening, but I want to try and see what is happening. $ can take so much, absolutely enormous deficits, interest rates near zero for a long long time, with so prospect of a raise it seems. Why - because the US is still the reserve currency, but more than this, the underlying strength of it is undiminished.

As I said the euro zone does not have this, except perhaps to an extent in Germany. The euro zone gets its strength from sales and value added action - to the US and China the twin powerhouses of the world. The fundamental expression of the EUR/USD conduit (China is caught up in this by the way it buys US debt as well).

© 2010 Guy Barry - All Rights Reserved.

The structure on the long term EUR/USD goes back a long way, those valuation spikes can be seen in 1995. This is what is causing the problems right now to a further rise, the resistance I talked about yesterday (but look at the jump in equities presaged by the rise in Euro).

Just to make some things clear: I think despite how things may seem, this is a good moment in time. While the financial crisis may have seemed devastating, it was really burning off leveraged debt, toppled by the fall of Lehman. They surely knew what the consequences of this would be, this is one reason I think sometimes the Fed and government knows what they are doing.

The financial system has not collapsed because they allowed another inflationary event to take the slack, the cheap cost of borrowing dollars. US companies are strong and remains strong and historically are stronger under pressure. That is not the problem, the problem is the consequences of this financial engineering.

The rise in Euro can be looked upon as a pushing up of Euro with big money, but my feeling is this has consequences through the economy, given Euro's role as a conduit through US assets (the rise in Euro changes the structure of this conduit). But not raising dollar rates makes this possible. This new rise in Euro makes fundamental sense now only because the Fed has put off a rate rise.

If the recovery is real, which at a guess I would say it is, it is just unstable because of the inflationary moves to stabilize the economy after the crisis, then this will take over and boost the market and allow inflationary measures to fade into the sunrise. But inflationary measures are the cause of the range in equities, a new Elliott Wave in the markets can surely only come from company growth.

If it comes from endless inflationary measures then expect more currency shocks. Whether an Elliott Wave can come from inflationary measures is an interesting question. The currency market suggests it can, but it suffers from the problems I mentioned, it has no reference to past events. Keep an eye on those valuation spikes.

© 2010 Guy Barry - All Rights Reserved.

There were the 3 tests on 4 hour EUR/USD followed by the decisive move ! Thus there is a correspondence between 1 min and 4 hour, how exciting. On the 1 min chart that is one of the most reliable tradable structures I saw.

It is hitting the first of the candle bodies in the long chain on valuation spikes in 1 month, those spikes are causing resistance again, another thing to think about is the rise today was from equities, not the forex market itself.

Remember I said a rise on Euro tends to be followed by a stock rise. After the crisis this was especially true, but it has got less and less true, but it still holds to an extent.

What this means is perhaps the risk on/risk off, but probably more a reflection of Euro's role as a pipeline through dollar assets, in some senses, modulated by debt. The way money flows means a counter intuitive correspondence between a rise in Euro and a rise on dollar assets in the form of equities.

How ? It is the pipe, which is not a 3 dimensional structure really, but multi dimensional, i.e. highly complex (this is the computational structure, well suited to multi-dimensional information, I detect in the forex market which contains the obvious long memory of the forex, which other tests say does not exist - those memory structures look computational to me, they are so precise). Multi-dimensional here does not mean time warps etc. it is a way of modeling highly complex interrelated causality structures.

This relationship was closer to being linear than usual in the crisis for the reasons I gave, but it has now become much less. Even in the crisis though it was not linear as I said it was that plunge now and then, which it still is. I know these are complex ideas for a blog, but the forex market is a highly complex environment it is why most lose money there.

© 2010 Guy Barry - All Rights Reserved.

I got to see a probe in action while checking the charts, the fall of EUR/USD (the hammer on the 15 minute chart which became a drop down as a new valuation was accepted). I have found the time around 7-8 pm  New York time to be a time when market turns try to happen, because the removal of warped equity markets make it a time when internal currency valuations reassert themselves.

Look at 4 hour EUR/USD, look where EUR/USD is poised, at the top of the surge on 7/1 but it is running into support from the structure at the beginning of the smaller surge on 7/2.

Note the tests of this level of support, including the present test. I have found on 1 min, around three tests of a significant support level tends to result in the definitive move...(7/6: the move up is exactly like a three test bounce, onto support -20 from 00, remember this analysis for 1 min, the point of this is to see how fractal the market is, but watch for what Europe is doing to this valuation, there are the fundamentals for Euro).

Look on the 1 month EUR/USD chart there is a whole series of valuation probes from mid 2006 onwards which is giving resistance to EUR/USD moving upwards right now  (valuation probes are both technical and fundamental). Mid 2006 onwards is where the stock market surge and the rise of EUR/USD to 1.6 happened.

All debt related. All deflated. Reflated to an extent and now deflating. The problem for the market right now, is if government debt is unstable, like mortgage assets proved to be, what else is left ? Everything...company growth.

© 2010 Guy Barry - All Rights Reserved.

The market is not unfairly valued at all, all that has happened is the inflation upwards from money flow based on cheap borrowing has deflated, a deflation which started when the Fed hinted about raising rates. Raising rates would remove this cheap cash, but the Fed has effectively done this without raising rates.

Now that is the interesting phenomenon. What has been removed from the market is the revenue inflation consequent on mortgage backed assets (were they ever assets ?), the surge one can see on the Dow up till the crash. What was put back in by the Fed was debt again, but debt back stopped by the good faith of the US government.

What I mean by this is keeping rates low has a consequence, because they have to be raised sometime and what effect does this have. Well it seems they have factored this in, by removing the effect. The fall in the market has not been the crisis it was, during the financial crisis.

During the crisis huge companies had their equity reduced to near zero. It was a shock of epic proportions, triggering huge margin calls in the hedge funds and vast movements in currencies.

This time, it was only about the effect of using money flow, consequent on low rates to push a sector keep it there then move to another sector (like using a digging machine). The problem was, there was nothing to hold the values there, the recovery did not happen in time (the good faith in the government and the future) and they have effectively slid back. Look for something to push it all up again (this would work against a head and shoulders pattern on the long term Dow).

© 2010 Guy Barry - All Rights Reserved.

One can look at previous structure to see where a trend will hit resistance (it is best not to enter the market if one sees this coming near, if you go with the trend you may get cut up if you go against the trend you may get becalmed), but one can look as well at spikes to see what the market thought about previous valuations.

If the market remembers previous structure it will probably remember previous valuations. This again is something which makes me think academic research about a lack of memory in forex is not true - btw. if you are into statistics, this is not about stationarity.

My feeling is this is computational memory, a powerful residual in the computational structure of the market, revealed in patterns and spikes to those in it. This again is something to bias things in your favor. All these observations seem to work best on longer term time frames in forex.

Let's look at EUR/USD 1 day. Note the precision of the spikes. The structure in May I talked about which stopped the initial surge of EUR/USD is delineated by a spike. The double spike (note how deadly these are) I talked about during the week hit the bottom of that spike.

The market seems to have been making multiple probes around that value. Probes stop trends. But note how powerful that probe was, because the double spike delineates the end of the next surge stopped by the jobs news (so it seemed).

My comments about raising rates come from a feeling not doing so is *damaging* the way the economy works. Remember those pipes, it fills them with something which does not do anything value adding to the economic future of the US.

© 2010 Guy Barry - All Rights Reserved.

So a certain hard fundamental hit the rise of Euro today (the good job figure in amongst the mess). But look what has happened the structure (1 week) which paused the rise has become support not resistance.

Why are predictive statements about forex so astonishingly hard to make ? It is those patterns. It is a bit like tossing a coin. Guess heads and it is heads and you look like you have something. If tails turns up, well things look different.

The problem as I said is in those patterns. Ever noticed how when you make a losing trade you look at the pattern and say wow that was so obvious how did I miss that (or make a good one and thank your lucky stars) ?

Well you did not miss anything. At the point you make a trade (usually in a basing pattern of some kind) you are actually in the point of greatest degree of freedom of movement of those pips, you have to be.

If you do something else, like hop in on a trend, you run a high chance of getting in at or near the top, this is the place where the trend is clear. That is why it is so easy to get in at a top (or bottom). The point is the patterns only make sense after they have happened. And the point you enter has a whole universe of coherent patterns to choose from.

As to what determines the pattern, it needs a boost, these usually come from fundamentals or technical points. Fundamentals usually depend on policy makers, who make judgments which seem sometimes almost random, but they make sense for all sorts of other reasons (that is actually one of the big sources of randomness in forex).

Technical points again have freedom of movement issues. But, this is something to hold onto, to stack the odds, to give you a sense of a possible future. What I call information. One of the reasons I started this blog was to do something for me about the predictions about the market I was reading.

It is so easy to get drawn into predictions but I am trying to give clarity about the stacking of a coherent future for a currency pair. In stocks, in a working market you can say a company will improve its share value if its price now is not in coherence with its balance sheet over time.

A functioning market precisely does this, and it is efficient at finding companies, to make this computation. Again that is not a prediction, it is a description of a coherent future.

© 2010 Guy Barry - All Rights Reserved.

Well there was the fundamental change which reversed Euro's valuation. To go down from where it was would need a strong fundamental push down, but it got weak fundamentals for up, and shot up. But what are the real fundamentals supporting a rise ? Technically the market likes to spike a low, rise, spike down, not reach the low and shoot up.

This is the basis of the bullish divergent bar, the beginnings of an Elliott wave. The probe is the problem, as it reverses this and finds a new valuation lower. Normally it takes a fundamental to override technicals, in this case today there was weak support for the technical move up on the pattern and this caused a program cascade up, those stacking candles.

It is all about triggering reverse trades from an extreme. That is what I warned about watching for if you trade on fundamentals in forex.

Anyway the surge is now hitting structure from mid May (go left and see on 1 day as I outlined). The point I am making is on real economic fundamentals, long term the US and China are strong. Apart from Germany, where is the inherent strength of Europe (i.e. not strength dependent on China and the US) ? And what are they doing which is not debt related and what does debt do to a currency ?

That is not a straightforward question, remember what I said about the rise of Euro, on hot air, debt...as always Euro rises still on on the economic resurrection of the debt inflationary economy. $ rises in the resurrection of the power of company growth, real economic growth. That is how I would describe the core of the world economy.

© 2010 Guy Barry - All Rights Reserved.