My STFU thesis

I'm about done with my dissertation here at ScrewTape Files University (STFU). I've actually been sitting on it for awhile, patiently awaiting Lewis Cypher's return from one of his bi-monthly pleasure jaunts to Thailand so he can look at the damn thing and pass it on to the graduating committee. (He owns a villa in Nonthaburi out of which he runs a business of some sort. I think it's a gelato joint. I tried google earthing the address he gave me, but all I see are police cars, so that's got to be wrong.)  Anyway, I thought I'd post my work in progress here for Screwtape readers to comment on. It's called "The Second Principal Component of Multiple Fibonacci Moving Averages, Medians, Maxima, and Minima as leading Price Indicator."

In short, every day gold has dozens of numbers associated with it: the X-day moving average, moving maximum, moving minimum, etc., where X can be any Fibonacci number (I've limited myself to 8,13, 21, 34, 55, 89, 144, 233).  For example, check out the 233-day moving minimum, which captures gold's "floor" pretty well. (Data from GLD, hence starts middle of 2005)





 So, all those Fibonacci indicators convey a lot of information, but how much of that info is meaningful vs. noise, and how much of it is redundant vs. unique? 

The first principal component (PC) of all those indicators collapses dozens of numbers into one number (per day), namely a number that extracts the most information from them by means of the magic of mathematics. The second PC does the same thing as the first, only it's value is extracted from the first PC's leftovers (hence they're independent). 

We see below that the first PC tracks the thrust of price over time (linearly transformed here to be on the same scale as GLD). In a sense, the black line is the "fundamental" moving average, distilling all that's important from many other related and frequently used indicators. Indeed, it would appear that buying above the black line is not wise. You can also think of the distance of daily price from the black line as the "Turd Troll-to-Thanks ratio," as gold bug sites probably get lots of thank you's in proportion to how far above, and trolls in proportion to how far below price goes.

More importantly, the second PC appears to function as a momentum indicator of some sort. (It is clearly correlated to the residuals between GLD and the first principal components linearly transformed to fit it). I didn't clutter the graph with vertical lines, but it's easy to see that the tops of the indicator correspond perfectly to bottoms in price, and that when the indicator clearly rolls over, it does not change direction without a sharp increase in price first.
If gold drops precipitously from here without a strong move up first, that would be unprecedented. Though, like the proverbial tree falling in the forest, only because the pattern has now officially been discovered.

7 comments:

Louis Cypher said...

Sorry man but I sold the bitcoin mineral rights to that place to some Ladymen and moved on. I'll shoot you an email once I have settled on a new location.

Louis Cypher said...

Nice work BTW. I'm sending a package over to you. If you can hang on to it for a couple of days I'll have someone pick it up.
Awesome
Thx

Funky Tape said...

The Thanks-to-Troll Turd factor. Ain't that the truth. Right on as always, GM.

Very impressive as usual. Our buddy duggo's head just essploaded.

Glad to have you back, sir. I was worried about you.

Was curious if you'd update the gold to 10-yr yield chart so see where we're at.

Remember a few months back where several things were pointing to a March-April resolution timeframe? Crude, /DX, copper, bonds - all nearing their wedge completions. Monthly BB's on those four especially (gold, included) are all coiled as much as they've been for a long time, the $US index since 1997 by my measure.

duggo said...

Wasn't Fibonacci a gay piano player with a candelabra?

Oh, silly me that was Liberace.

"The Second Principal Component of Multiple Fibonacci Moving Averages, Medians, Maxima, and Minima as leading Price Indicator."

Isn't usually written for short as Basic Unilateral Lines Leading Suspiciously In Tandem.

Very entertaining comme d'habitude.

What will be the price of Gold tomorrow?

@ Funky Tape. Head still intact ....... so far but brain AWOL.

duggo said...

Sorry.
Should be:-

Basic Unilateral Lines Leading Suspiciously Higher In Tandem.

GM Jenkins said...

Louis- I got the package addressed from Thailand, but it's starting to smell something awful... Hopefully your man will be here to pick it up soon...

duggo - I've tried the Basic Unilateral Lines charting approach, but came to realize any success I had using it was just due to dumb chance.

Thanks Funky Tape. Re: my standard charts, I believe my stockcharts.com account was hacked (or else some glitch - I haven't forgotten the same password I've used for years). Then frickin' yahoo shut down the associated email because it was inactive for 6 mos or whatever, so I'm gonna have to contact them and explain when I have the time. I am retiring all yahoo mail. I've also had an issue where even though I've paid for Yahoo Plus on a different account, my mail keeps getting deleted. They blamed it on balckberry a few years ago, but it continues to happen with two other phones. F#$% yahoo.

Slow Loris Larry said...

@ GM

Try FastMail

Spend the $5, or whatever more for what you require, and have an account that will last.

SLL