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corresponding MIDAS chart for the S&P 500

Ominously, when a corresponding MIDAS chart for the S&P 500 was generated at the same time (see the third figure),   TOPFINDER predicted a top in this index as well two days hence. As we shall see presently, ditto for the NASDAQ. So we have   the quite remarkable circumstance that the same algorithm applied to three distinctly different market indices was predicting a top   at the same time! (It must be freely admitted, however, that prior to July 13th the ambiguities inherent in fitting a two-parameter   curve to rapidly rising price data did lead to premature expectations of the top; however by July 13th a sufficient number of zig   zags were in hand to define the TOPFINDER fairly unambiguously).

So what happened? On July 17th the Dow reached an intraday high of about 4770, and then proceeded to sell off sharply in the   next two days reaching an intraday low of about 4530 on Wednesday the 19th. 240 Dow points top to bottom in two days! A   triumph for TOPFINDER? Maybe, maybe not. For as seen in the fourth figure which is a MIDAS chart for the NASDAQ   Composite Index, generated after the close on July 28th, the sharp drop subsequently reversed itself and we are now back to where we were on July 17th (in fact slightly higher).

The ultimate verdict on TOPFINDER's utility in timing the market is therefore still with the jury. If the market henceforth extends   its gains over a time span of more than a few weeks (which we could view as a reasonable margin of error in top prediction) then   the only conclusion that can be reached is that TOPFINDER by itself (i.e. without the use of supplementary indicators) is not a   reliable timing tool for market indices. My suspicion is, however, that TOPFINDER does have some truth in it. Perhaps it catches   the top of the left shoulder in a head and shoulders top, or the first top in a double or triple top formation. Or maybe in this case at

least MIDAS has come up with "fool's gold"! Time will tell.

TOPFINDER aside, the MIDAS S/R hierarchy does in fact appear to be useful in characterizing trend reversal points in market   indices, as was seen in the first figure. At the very least, it provides downside targets (i.e. expected points of at least temporary   support) in any selloff which might materialize. If the market should appear to be bouncing from such a theoretically predicted   level one would take such a bounce seriously. Thus MIDAS can be viewed as an otherwise unavailable filter for deciding whether   a given bounce is tradable or of the "dead cat" variety.

In the next article we will look at commodities and foreign markets.