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Abstract:
Interventional Analysis is the study of government interaction with strategic commodities including financial indexes.
Traditional technical analysis (TA) is compared and contrasted with this new method of studying investment opportunities.
A close examination of the dollar index value of gold (DIVG) is presented and certain of its moving averages reveal that non-random
structures exist such that investors may profit. In addition, the major currency dollar index (MCDI) is examined and also
reveals similar non-random patterns that are of predictive value. Multi-phasic regression techniques are introduced.
Introduction:
"TA" as it is called, assumes that there are only two parties in financial markets, those desiring profits and
those fearing losses. In the vast majority of investment vehicles this method is successful. Indeed, Dorsey Wright (Point
and Figure Charting), Robert Prechter and Elliot Wave Theory can deliver wonderful results gauging the change points, magnitudes,
tops and bottoms of investment opportunities. The problem arises when it can be shown that a third party exists in the investment
calculus--government.
Why TA fails when government enters the markets
As governments pursue their national interests they tend to intervene in otherwise free areas. Indeed, the mother of all
set price regimes was the gold standard itself. For 93 years from 1887 to 1971 governments agreed to set the price of silver
and gold bullion. Curiously, this action was taken because the US had too much silver being mined in Nevada. Small houses
were built of excess silver "bricks". The silver glut wrecked foreign currencies to such an extent that the standard
(Including gold) was needed to stabilize world trade relationships in 1887.
For the whole of the industrial revolution from the steam engine to footprints on the moon, governments set the price
of gold and silver. There were no "double tops", "triple bottoms", "flag" shaped breakouts,
fibonacci numbered waves or for that matter, any other TA phenomenon because the price was the price. It was set because governments
deemed that it was in their best interests to do so. Governments always act in their own interests especially in commodities.
Take cotton for example.
The cotton market is warped today by massive Federal farm aid to US cotton producers who, absent such aid, wouldn't be
able to compete with other cotton producing countries and would not even be present in the markets. $3.9 Billion in aid flows
to cotton moguls each year. To assert that this market is free of government intervention is to ignore the truth. Easily a
dozen other such important commodities (Sugar, beef, rice in Japan) could be named with their special subsidies each twisting
their respective areas into free market knots. Sean Corrigan's wonderful quote: "All government is about coercion",
tells the story succinctly and free markets suffer because governments always act in their own interests and low commodities
prices are in their best anti-inflation interests.
Hamanaka/Sumitomo and the Copper Caper
1993 brought a massive copper fraud involving a trader (Hamanaka) who shorted copper relentlessly using, it turned out
later, funds from JP Morgan Chase, the same bank involved with the same infamous off shore, off balance sheet, financial operations
used in the Enron commodities fraud. It should come as no surprise that conventional copper TA was useless during those years
because the market was fully controlled by Hamanaka and his $2 Billion JPM aided operation. They were found guilty in Federal
Court.
A new perspective in the strategic commodities and indexes
By searching for the tracks of government intervention we can profit by seeking the entry, exit, magnitude and duration
of its interventional activity. Without such crucial information a trader or investor is handicapped because the interventionists
have demonstrated deep tactical skills in mimicking a random market pattern for the purpose of hiding their true action plans.
Finding Alan
An important step in detecting and profiting from government intervention in strategic areas is to find how the government
measures its own commodity suppression gains or losses. Once the measure of progress has been found, then a prudent investor
can watch the intervention, guess the future objectives being targeted and ultimately profit by placing their positions away
from the main force applications at the correct moment and re-entering the position as the intervention may favor. Knowledge
of the interventionist's duration tendencies is very important.
Several years ago I guessed that the gold cartel needed a true gauge of the worth of their vault gold (What little of it remains).
I further guessed that this was a currency-adjusted gold price and chose the PM Fix. This is the dollar index value of gold
(DIVG). Over time, the DIVG 200-day moving average was seen not to move randomly, indeed it tracked in what clearly was an
intelligent, three-cycle defense of 323 (An apparent DIVG ceiling). This particular level was the last dollar/euro parity
point and I further concluded that the moving average was important and closely watched it as it retreated higher from the
failed defense of 323. Then in Feb 2004 the DIVG ma entered a linear retreat phase whose impossible straightness shows a finite
structure. It could not be explained by any random process.
The implications are large. For instance, the ups and downs appear to be the result of an algorithm designed to deliver
the façade of a normal market. In reality, it is the moving average that is being steered to the interventionist's target
by intervention.
Need for Invisibility
Traditional TA adherents could draw lines over their PM Fix data until they ran out of pencil lead and still they would
find nothing because nothing is there. Only after the PM Fix is combined with the major currency dollar index (MCDI) and only
after an investigator guesses the right long-term moving average, does the interventionist's true gold target path emerges.
The light colored ma (above) is the trace in question.
Fighting an invisible foe is impossible, however once his cloak is removed (As I have done with the DIVG ma), the odds
change in favor of the nimble. Opportunities increase. Confidence rises.
The Currency Market: "Too Big to Steer"?
I searched other markets for non-randomness and found more impossibly straight moving average lines as we see below in
the major currency dollar index (MCDI) (Pma is proprietary moving average, a simple averaging method).
In order to test suspicious segments, I invented a new mathematics tool that I refer to as "multi-phasic regression "
designed to test parts of data series in order to detect randomness. To my knowledge it has never been used before in statistics
or any other field of science largely because it is counter-intuitive to investigators, who always seek to test more data.
Thirty seconds of regression
As it is used here, the straightness of any line of data can be compared to a perfect "1"R^2 value (All the
points lie on the line). When we see a lengthy linear phase in an index or commodity that reveals an R^2 value higher than
.98 we can conclude that it isn't random. An outside force placed it there.
Ice Cream
Moving averages are like melting ice cream. At first, the top of the scoop is rough from the spoon marks, then it starts
to melt and get smoother and lower while the bottom of the ice cream fills the plate up higher. Over time, the overall ice
cream structure gets rounder, smoother and flatter.
At no time could a scoop of ice cream, under any circumstances, melt into a cube-like structure with flat sides and sharp
edges as the MCDI moving average has done above.
The inescapable conclusion is that the Federal Reserve has given us the appearance of a random market only to produce
their desired flat lines and hairpin turns we see above.
What it all means and how to profit
Since the duration of the Fed's phases can be seen as well as their directions, an investor can assume positions as a
phase begins with more confidence. Indeed, the main benefit from Interventional Analysis is improved confidence.
What about oil?
Oil certainly is a strategic commodity but it is now trading according to standard TA, Elliot Wave Theory--why?
Government needs a well-stocked Strategic Petroleum Reserve (SPR) from which to sell oil into rallies and buy back from
it during pullbacks, its interventional account. Oil is running free now (Oct 18th) and we may guess, as some savvy traders
have already done, that the US Strategic Petroleum Reserve is depleted, leaving the oil market fully exposed to true supply/demand
forces. The government has been pushed out of the oil market and for the moment, can no longer intervene. Whatever corrections
occur are due to free market forces. The Wall Street Journal will never tell you this information.
Conclusion
There are many other tactics and strategies involved with Interventional Analysis that must wait for a later date to discuss,
including how the DOW and the mysteriously strong, transport index (DTI) acan be levitated in the futures market with Federal
Reserve collateralized repurchase agreement issuances---the Repo Pool (Now over $55 Billion). However, I will touch on one
final implication from the findings shown here. The government appears to be engaged in a very large computer-driven effort
to steer major strategic commodity markets and financial indexes, suggesting that leaders have already concluded the American
financial system is unsustainable without such intervention.
Michael Bolser
<http://www.interventionlanalysis.com>
©Michael Bolser, LLC
October 17, 2004
The writer thanks Bill Murphy at <http://www.lemetropolecafe.com> for his gracious support of my earlier commentaries.
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