1. Web’s Weekly Roundup Trading Value June 20, 2015 Presenter: Web Begole

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3. Web’s Weekly Roundup Analysis of /ES (S&P 500 Futures) and forecast (NEUTRAL TO BEARISH) Analysis of /DX (US Dollar Futures) and forecast (NEUTRAL TO BULLISH) Analysis of /6E (Euro-Dollar Futures) and forecast (NEUTRAL TO BEARISH) Analysis of /ZB (30-Year Bond Futures) and forecast (BULLISH) Value Areas – The Concepts and Trading Them. (Warning: This is gonna be graduate level stuff today, get your hard hats ready!)

4. /ES Futures (S&P 500) YTD 2015 4 Opening Price: 2038.25 Current Price: 2097 High: 2125 Low: 1953.5 O/C Change: +58.75pts (+2.88%) H/L Range: 171.50 Notable Pattern: Having touched the top of value for June and pulled back I think we continue lower to start July near the bottom of value. Forecast: Looking at previous months, I believe we start July near the bottom of value ~2078. But we could start closer to the top ~2110. Expect volatile days without much lasting movement.

5. /DX Futures (USDollar Index) YTD 2015 5 Opening Price: 92.005 Current Price: 94.305 High: 101.23 Low: 91.995 O/C Change: +2.3pts (+2.49%) H/L Range: 9.235pts Notable Pattern: As mentioned last week, the expected move to 93.825 is complete. Forecast: I am seeing a potential pop in the /DX for the rest of the month as it tries to regain 95.81 however I think it will struggle at 95. If it breaks lower it could fall hard towards 91.84.

6. /6E Futures (Euro Futures) YTD 2015 6 Opening Price: 1.2124 Current Price: 1.1365 High: 1.2127 Low: 1.0477 O/C Change: -0.0759pts H/L Range: 0.165pts Notable Pattern: The top of value for June seems to be acting as resistance, and we’re looking to develop value for July completely inside June’s. Forecast: Euro is starting to weaken its run here and I expect it to find support at July’s current POC around 1.125 as I don’t see conviction moves any other direction.

7. /ZB Futures (30-Year Bonds) YTD 2015 7 Opening Price: 157’21 Current Price: 152’01 High: 165’11 Low: 147’16 O/C Change: -5’20 H/L Range: 17’27 Notable Pattern: We’ve closed the week strong into value for June after finding this significantly hard to break. Forecast: With this move into value, I’m looking for continuation towards 154’21 and further upward movement into July as we may start above value for the month.

8. Looking Ahead Overall: As my predictions from last week played out in the /ES and the /DX, the charts now have flipped in their sentiment. I’m detecting a definite weakness in the near term for the S&P 500 and near term strength in the dollar…. Given the above, I interpret that to mean the market is anticipating some very bad news out of Greece over the next week or two. (Notably: I expect the Euro to stay range-bound with a minimum price of 1.125)

9. Trading the Value Area From The Value Concept To Predicting & Trading Price Movement (WARNING: Hardhats required beyond this point.) 9

10. Trading Value 10 What is value? What is something worth? Whether we’re trading stocks, ETFs, futures, options, options on futures, commodities, etc. the question always remains: Am I buying/selling this at a good price? Something is only worth what someone is willing to pay for it. It’s also only worth what someone is willing to sell it for. It is the meeting between these two parties that determines the value/price of the “something” at that given moment. Just because you buy a house, a Ferrari, a painting, or even gold coins because of a belief that their value cannot diminish over time, there is always the external factor of needing someone willing to buy it from you later at the price you want (likely higher than your original investment). The market can change. [Anecdotally: there has recently been a slight “crash” in the antique car market of around 30% in prices according to auctioneers… One may also feel this kind of sentiment change if they bought a new house around 2007/2008] One may look at the “book value” of a company and determine the proper price for the stock, but with speculators in the market that may or may not be an accurate assessment of what you can actually buy/sell the stock for. The market determines its own value based again on what people are willing to buy/sell the stock for. Today we’ll look at methods of determining the market’s perceived value of an underlying and how to trade based on it.

11. Technical Analysis The Old Methods (Trend Lines, MACDs, Fib Retracements, Moving Averages, etc.) 11

12. Technical Analysis – The Old Methods 12 “A person is smart. People are dumb, panicky dangerous animals and you know it...” – Men in Black The above encompasses the underlying concept of traditional technical analysis (trend lines, moving averages, MACD, fib lines, Elliot waves, etc.). By using the highs/lows of each bar (and yes, even the open/close of a bar), these traditional methods are tracking the individual. Example from this week: /ES Futures directly post Fed Announcement To Sell something, someone must buy it. To Buy something, someone must sell it. Some poor shmuck sold on the low tick and now has contributed to countless trend lines, fib retracements, Elliot waves, Moving Averages, MACDs, Ichimoku Clouds….…

13. Technical Analysis – The Old Methods 13 The problem with this is that the individual has free will, and may easily do things that are contrary to what is expected as standard market behavior. Once again, this causes issues with all of the traditional technical methods. Take Fib Retracements for example We’re looking for the market to retrace to specific Fibonacci based price levels, but we’re using the trades of a very few individuals to determine the inputs for those levels. Using one extreme to the other to make the calculations. Can you remember the last time you felt your own free-will shackled by the thought of having to do everything in your life by the.618 golden ratio? Or the last time you could only operate an electronic device with sequences of 1 1 2 3 5 8 13 21 34 55 etc? Not particularly. Fibonacci sequences occur in nature, it is a natural ratio for branches of a tree, sea shells, the branching out of capillaries, etc. Yes it is fascinating how often it shows up, but it rarely if ever shows up in the actions of free will. However, over large participation of a crowd, it is very feasible that the crowd (ie: The Market) may respond to the ratio….. BUT in using the sequence for market analysis, why then are we using the free-willed actions of a few individuals?

14. Technical Analysis – The Old Methods 14 Computerphile – Nuggets of Data Gold (@6:20)

15. Technical Analysis – The Old Methods 15 “Think of how stupid the average person is, and realize half of them are stupider than that.” – George Carlin If we look at the below chart, the extremes of the tails are those individuals making the wrong choices and being caught out. Even using simply the open/close is flawed because it’s just as easy for an individual to make a mistake at the beginning of the time period as at the end (especially on smaller time frames where the time period is more arbitrary). So why, when we draw trend lines (or use traditional indicators) do we use the high/low extremes as the inputs? We’re letting the mistakes of a few individuals inform our choices in the future. The extremes of each candle are going to be the actions of a small fraction of the market (mistake or not) and this is noise in the data. If we’re looking to find what something is worth, and where it will go, we should not be looking at the outliers for guidance.

16. Technical Analysis Value Area – The Concept Tracking and Trading Value (Marginalize the individual, focus on the crowd!) 16

17. Value Area – The Concept 17 “A person is smart. People are dumb, panicky dangerous animals and you know it. Fifteen hundred years ago everybody knew the Earth was the center of the universe. Five hundred years ago, everybody knew the Earth was flat, and fifteen minutes ago, you knew that humans were alone on this planet. Imagine what you'll know tomorrow.” – Men in Black BBC – The Code – The Wisdom of the Crowd

18. Value Area – The Concept (Value Area) 18 In “A Random Walk Down Wall Street”, Burton G. Malkiel wrote (as a proponent of the efficient-market hypothesis) that the movement of a stock was no more predictable than the flipping of a coin. Therefore a stocks price movement was 50/50 up or down at any given moment. He believed he had proved this by charting the flipping of a coin and convincing technical analysts that they were looking at an actual stock. He did however note one thing, that in general the “coin” (ie: the market) was flawed and had a tendency, over large occurrences (ie: time/trades) to favor the Up side 52% of the time… To me, if a system isn’t perfectly 50/50 then there is something to be discovered... So what is there to discover? Well, simply: the Market is not a coin-flip, but rather the Market is a crapshoot… (in a good way) The market is not simply A or B (like flipping a coin), it is any number of combinations (like rolling two dice). We know the odds of heads/tails are 50/50 What are the odds of rolling a 7? What are the odds of rolling a 2 or 12? 23456789101112 3+4 3+34+34+4 2+32+42+53+54+5 2+23+24+25+25+35+45+5 2+13+14+15+11+62+66+36+46+5 1+11+21+31+41+56+16+23+64+65+66+6

19. Value Area – The Concept (Value Area) 19 To take this further, think of the two dice as both sides of the trade. One dice is the buyer, one is the seller. Dice equivalents (for 1 st Dice; Invert Entries/Exits for 2 nd Dice on other side of trade): 1 = Long Term Trader (~1month or more) looking to Enter a Position 2 = Medium Term Trader (~1week-1month) looking to Enter a Position 3 = Short Term Trader (intraday) looking to Enter a Position 4 = Short Term Trader (intraday) looking to Exit a Position 5 = Medium Term Trader (~1week-1month) looking to Exit a Position 6 = Long Term Trader (~1month or more) looking to Exit a Position Remember, entries and exits can easily be buy or sell trades, it doesn’t matter. The longer-term the trader, the less important entry/exit price is… These are outlier trades! A metaphorical 2 or 12 only happens when two Long Term traders meet. 3 or 11 only happens when a long term trader meets a medium term trader. The more frequent trades occur near the middle where all time frames (including the short timers) have reason to trade. Excluding 2,3,11,12 leaves us with 1 Standard Deviation of the trades… 23456789101112 3+43+4 3+33+34+34+34+44+4 2+32+32+42+42+52+53+53+54+54+5 2+22+23+23+24+24+25+25+25+35+35+45+45+55+5 2+13+13+14+14+15+15+11+61+62+62+66+36+36+46+46+5 1+11+21+31+31+41+41+51+56+16+16+26+23+63+64+64+65+66+6

20. Value Area – The Concept (Value Area) 20 In terms of Value Area…. (taking the metaphor further) If I buy at a “4”, and the stock is most probable to trade at a “7”, I can make gains! If I sell at a “10” and the stock is most probable to trade at a “7”, I can make gains! If I’m on the wrong side of either trade, I’m in trouble… 23456789101112 3+43+4 3+33+34+34+34+44+4 2+32+32+42+42+52+53+53+54+54+5 2+22+23+23+24+24+25+25+25+35+35+45+45+55+5 2+13+13+14+14+15+15+11+61+62+62+66+36+36+46+46+5 1+11+21+31+31+41+41+51+56+16+16+26+23+63+64+64+65+66+6 Underlying Price Probability of Price Value Area High Value Area Low

21. Value Area – The Concept (Point of Control) 21 In a liquid (ie: crowded) market, sellers provide “supply” and buyers provide “demand”. Their desire to trade can be charted as the following: As price moves higher, the buyers desire to trade (ie: to Buy) diminishes while the sellers desire to trade (ie: to Sell) increases and vice versa as price moves lower. Therefore there is an equilibrium point at which the desire of the buyers and sellers are matched. This is called the “fairest price to do business”, and because typically this is the price at which the most volume will trade (as both sides are satisfied) it becomes also the “Point of Control”, the reference price of Value for any given time frame. Desire to Trade Underlying Price Buyers Sellers POC When one side of the market has reason to shift their desperation curve, the market becomes imbalanced. A frenzy of price movement can take place in their direction. These are the moments where large profits can be made if we can catch them early on. The moment we’re looking to catch is when the other side of the market starts to adjust in order to find the equilibrium again. Once they’ve adjusted, there’s a chance that they could cause the same move in the opposite direction.

22. Value Area – The Concept (Real World Example) Using TrueCar, I can know a car’s “value area”, I know: what everyone else bought it for, what’s a good price, what’s a steal, and at what price I’m the sucker at. But also knowing the value area, I can recognize when the price is outside of value (something new in the market!) and more actively participate in price discovery: – Below value: How low can I buy it for? I’ll wait to find out. – Above value: How low can I buy it for? How high will the price go? I can’t wait, but the seller can! 22 Value Area Low Value Area High Point Of Control Buyer Wins Seller Wins Price Discovery Zone: Best Trade Price Unknown “ Do I hear 30…25…20…15…?” Price Discovery Zone: Best Trade Price Unknown “Do I hear 40…45…50…55…?”

23. Value Area – The Concept 23 Value area on stock charts works the same way. Volume is charted on the Y Axis and a profile is created. 70% of the profile is the value area (1 Standard Deviation). Buyers In Control, Sellers Step Away Sellers In Control, Buyers Step Away Price Time Buyers In Control Sellers In Control Fairest Price to Do Business Value Area Low Value Area High Point of Control Discovery (Auction) Zone “Do I hear 50…45…40…35…” “Do I hear 60…65…70…75…”

24. Value Area – Trading In & Around Value Areas 24 So how do we trade the value area? Because the Value Area is based on historical data we need to keep that in context. If we are trading outside of the value area (above or below) a new “fairest price to do business” is being discovered. This can be the result of any number of things (typically news events or overall market sentiment). If we are trading above value and the market is looking to discover a new POC above the old value area, we want to be a buyer early in this market and sell higher as the equilibrium price is discovered. Same in the opposite direction. How do we know where price may stall? This is hard to determine but the MarketWebs Value Area Study does provide support and resistance lines (based on the old value area) to provide guidance of targets and likely equilibrium points. If we trade back into an old value area, it is easy to predict price movement based on the aforementioned rules because it is a price area the market knows well. Sellers know their best price, buyers know theirs. This leads to what traders call the 80% Rule. If we’re trading outside of value for a considerable amount of time, and then break back into value, there is an 80% chance the market will remember the previous value area and trade price to the opposite side. Ex: If we’re trading above value and break down into value, there is an 80% chance that we will trade to the bottom of the previous value area before finding support. (If we have touched the previous POC already, I trade with the belief that there is now a 90% chance we’ll rotate to the opposite side of value)

25. Q & A With Web