Chart Reading for Professional Traders by Michael S. Jenkins ct nC, 1. TRADERS PRESS, INC. ENC O Rin @ WATT EO PO Bi 1206 GREENVIL 29606Table of Contents Introduction .. Basic Concepts ... ‘Trend .. Circular Arcs Support & Resistance . Waves Angles ‘The Hourly Chart... onal Charts Common Fatterns .. Long Term Charts . Mirror Images ‘Volume... Strategy Intra Day Patterns Step By Step ... S&PEutures Trading ... Trading Stocks Advanced Techniques Appendix A Rxamples ..Introduction There has always been a debate about whether one should invest as a fundamentalist or as a technician. The fundamentalist, of course, does not look at charts but concentrates on analyzing hard economic figures in the belief that an improving fundamental situation will lead to higher prices. Although this sounds quite logical and perhaps 98% of all investors invest this way, itis nevertheless wrong. Only in a general sense do the fundamentals concer traders or investors who are looking for capital gains on an annual basis, and certainly day traders can easily go bankrupt from short term corrections against the fundamental bias. Unless major accumulation of an issue takes place, no matter how good the fundamentals, the price is likely to move very little, and itis this price movement that makes money for us. Charts and technical analysis, on the other hand, are mostly concemed with price movement. When securities or commodities are fluctuating, we can trade them and make money. Any truly fundamental development of importance will first show up in the price and volume data long before outsiders will learn about the fundamental development causing it. One does not need illegal information to see illegal accumulation or major developments within a corporation or commodity supply demand factors that may be changing. Money moves the markets, and big money isalways. right no matter what the reason. The skilled chart reader will always see this price movement and be alerted long before others. This is the fundamental argument for chart reading, but more important is the fact that cyclesexist and recur over and over again, showing up in the historical record of the price data and can be analyzed from such data to make future predictions. Wall Street would like to deny the existence of cycles because no oneneeds a highly paid analyst ora full service broker if cycles indicate that a stock or commodity is going up or down the next year, regardless of perceived fundamentals, Only by having a price history can we truly say we know what to expect from our investment, the nature of its personality, the extremes it has traded. to over the years, and where it is deviating from its past patterns, which could indicate anew significant development in the life cycle of the company. For years I have heard the arguments about long term investing and the many people who have made fortunes in the market using a buy and hold strategy. What is not said very often, however, is the tens of millions of investors who bought and held the wrong stock and after thirty years have only broken even or worse saw their company go bankrupt. Books are not written about these unfortunate multitudes. In 1965, General Motors was the most popular stock, and “what wasgood for GM was good for the country.” But,did you know that it took until January 1994 forGM tofinally exceed the price it sold at in 1965!!! It took nearly 30 years for those 1965 buyers to break even! The idea of buy and holdis a fundamental strategy. It assumes the issue you hold is going up every year. Inthese cases, you could get rich over time. But, the modern version of buy and hold has been perverted by the big brokerage firms and mutual funds to lock the customer into their particular investment program without emphasis on whether the issue is actually making money. The person who buys and holds a declining issue is not an investor buta fool. Believing the fundamental argument that improving eamings will eventually mean arising stock price has been the death knell for many an investor. Only technical analysis and chart reading can save these sorts of individuals. The chart clearly shows us the objective trend whether up or down, and we can then develop some sort of strategy to limit losses at a reasonable level if the fundamentals do not kick in. Ithas been rightfully said that chartists sell too soon out of fear of heights and miss the big move that often makes millionaires of fundamentalists. The corollary, of course, is that the chartists do not go down with the ship when they see a sinking chart pattem, Iam sure the number of rich buy and hold fundamentalists is a lot smaller than the number who held on and lost everything. The obvious solution, of course, isa marriage of the two concepts. Ihave no problem with the person who strongly believes in his investment and wants to hold it forever, using a common sense strategy tosell it when he gets a technical sell signal, but immediately takes steps to repurchase it ifit again reverses witha buy signal. This kind of long term strategy will be infinitely more rewarding in those cases where a stock goes up for years and truly does make millionaires out of its owners. This Book ‘The purpose of this book is to demonstrate the principles of chart reading and technical analysis as applied to general chart reading for trading purposes. Advanced techniques to find cycles, project price targets, and time periods for reversals will be examined at length. Many of my original discoveries in this field will now, for the first time, be published in an effort to help the investing public makea success of trading and allow the average person the ability to consistently make profits in the speculative markets. I will not cover all areas of technical analysis, nor will I teach the basics of stocks, options, or futures. assume you can learn these things from a thousand other books at your local library. What I will show you. however, is a comprehensive method to make money each and every month. Making money each month, of course, means that with areasonable amount of capital you can become independent and live the kind of life you choose not fettered with the burdens of everyday work drudgery. These principles always work. That is why they are called principles. 1 have no time to spend lengthy chapters explaining to you the reasons behind these principles or the fundamental cause and effect behind price movements. My purpose here is to simply reveal these methods for making money. I have been a professional trader for over twenty-three years now and canassure you that these principles are well worth learning! For those of you who must know the reasons, 1 direct you to my book The Geometry of Stock Market Profits, A Guide To Professional Trading For A Living. ‘There are many esoteric truths handed down to us from ancient times, and many of these are applicable to the speculative markets. The professional trader knows that the objective is to make money, not espouse a particular philosophy or do it “the right way.” Keeping an open mind isthe key. From the earliest days, great spiritual leaders have spent lifetimes trying to conquer the subconscious mind and the body. Often rigid disciplines of starvation, flagellation, meditation, or deprivation were used to teach the body and subconscious to respond without question. If you propose to enter the largest arena in the world that exhibits fear and greed (the speculative markets), and you are brought there motivated by the emotion of greed to make money, you will surely fail. This is why there are few rich stock analysts on Wall Street. They are deluded into thinking they are intellectual and rational in their behavior, but the reality is still emotional greed. The solution, and this may be the greatest lesson in this book, is that in anemotional market you must use your brains not to make money, but to control your emotions. Your logical reasoning should be put to use developing strategies apart from the emotions of the trade. Chart reading with this in mind will yield infinite results. Principles can be applied in a cold, hard, non-emotional fashion, and a stop loss. ipline is then rigidly applied when the strategy goes awry. Of course, this makes trading a business and not an emotional thrill, but it will be a consistently profitable business!Basic Concepts ay ‘The theory behind technical analysis is that all relevant information that concerns the appreciation or decline of stock prices is reflected in the chart of the price and volume. All information, no matter how secretive, must first surface in the buying and selling of the stock and thereby moves the price of the issue if it is of significance to the capital gains’ investor. Fundamental analysis, although possibly relevant to long term trends, may or may not generate current buying enthusiasm. and, in that case, has no effect on the price of the security. The idea of stock price movements as a process of accumulation and distribution is the backbone of chart analysis. Major insiders accumulating large positions prior to significant upward price movements readily show their characteristic footprints in the chart patterns prior tothe big moves, and these pattems have been shown to have high forecasting reliability. Simitarly, distribution periods where insiders slowly sell out major positions prior to big market breakdowns also have telltale characteristics that are of extreme value to the knowledgeable chart reader. Since these trends are usually long term in nature, at least the significant price movement ones, their characteristic patterns can be broken down into subtle waves or fractal patterns for each movement, and many of even the slightest counter-trend movements can be captured by the astute chart reader. A stock or commodity that has an annual range of 20% between the yearly low extreme to the high extreme often has three or four minor movements of 10 to 15% within that larger yearly range. ‘The active trader can therefore often achieve rates of retum several times the annual range ifa comprehensive trading discipline is utilized to exploit the known facts. Recent advances in technical analysis have opened the way to the possibilities of spectacular returns, and the purpose of this book is to acquaint you with many of my own proprietary discoveries in this area, along with the traditional methods that I have found to be most reliable in my professional trading career. Knowledge is only the beginning. Strategy and patience are equally important. In the end, only a few will truly succeed in a spectacular fashion. However, I would say that the vast majority will immensely improve their trading with just a casual reading of this book. Eliminating easy mistakes can often double annual rates of return, and I am sure that this book will point out many principles that you will find can easily change your bad habits into profitable careers.The Basic Accumulation, Distribution Pattern Most traders want to trade every day. In reality, you can only take what the market will give, and each day isnot an equal probability for success. Professional traders can readily size up amarket in the first hour and tell if the day is worth bothering with or whether the daily strategy is for small scalping trades with frequent reversals or for more leveraged major moves lasting several days. If you find yourself buying or selling every day in the first twenty minutes, youhavea problem. Many good trades come mid-day or at the close when most traders have already committed. Make sure you are not so emotional that you cannot keep from the action past the first hour. Knowing that each market movement has a reliable shape and time durationcan help. ‘The basic accumulation, distribution pattern looks like the statistical bell shaped curve, The _basehas an extended period of “backing and filling” in a sideways fashion, then comes the upside hit, traders should move to the sidelines and wait. Typical Accumulation / Distribution Pattern: —ft™ Tepoianbwon ASSESS Breakdown Run Base/Accumulation [cover short] Eqter rade here ing In the baseAUGAT, INC. E maautecturer Hectrocneatcsl Components Accumulation Distribution Phase Phase ‘Splle } for & li[srate > tor 2 1974 1958 [wre] ¥e97 | tome nr [oaea| sess | woes ies | sone | wer | sows | any [soso [ns [soe2 | ose] vcAR Long Term Bull and Bear Market, Accumulation / Distribution ‘The typical pattem is the same, regardless of the time period. In other words, the above pattem could be seen on an hourly, daily, or weekly chart. Obviously, differing trading strategies are employed for longer term movements, lasting days to months, rather than on an hourly chart. Leveraged traders using options and futures will work with hourly charts, and this pattern will often rise and fall over asingle day's duration. The “run” phase, where one owns put or call options or futures, will ideally be limited to8 to 13 HOURS. Holding positions longer than that is not trading but investing. Longer term traders using daily and weekly charts will find their horizon 3- 6 days to extremes of three weeks. These are stock trades and options, and futures would not be appropriate. It is one of the more difficult aspects of trading to “stay out” of the base or top and wait for the real move to get started. Most traders hunger for the cheapest entry point and usually waste days and several stops before the real move begins, when ,if they concentrated on the “easy” 70% of the move during the run phase, they would never get stopped out and would makc quick safe profits in the shortest time possible. Most techniques in this book are used for identifying this most rewarding part of the pattern (run or breakout).Remember that the “flat” areas of the base or top that we want to avoid trading in can be spotted by loss of momentum. Momentum is simply the amount of price movement per time period. Large momentum is nothing more than big price fluctuations in a short time period. When the momentum dies down, we exit our Positions until activity picks up again. If you keej eep in mind the bars ona bar chart, the : and these big bars are the payoff. Failure to trade out of fearis a mortal sin for a professional trader. The Bar Chart ‘There are many types of charts one can use in trading, but the primary basic oneis the simple bar chart. Throughout this book, I will refer to these kinds of charts and use them in the examples. A ‘good chart reader after some practice can easily visualize the other kinds in his head without having to keep up numerous chart papers. Even Japanese Candlesticks, which seem to be the current rage, give no information not found on a regular bar chart but are marketed as being easier to interpret. This is not the case if you know the principlesbehind chart reading, and the simplest bar chart will yield infinite amounts of information if you know where to look. In its basic form, a bar chart is simply a line drawn from the high of the time period to the low represented by a straight vertical line. More information can be obtained by addinga mark on the, Tepresent the opening and closing levels. These opening and closing levels can tellus. current day's probabilities. For instance, aclose at the extreme high or low of the day will usually carry well into the next. Similarly, several bars or: daysin sequence that close strong Tepresent accumulation going on. I could probably write several chaptersalone on the meanings of opening and closing ranges, but for the vast majority of traders the trend is more important than the projection, and I will leave the study of those ranges to you if you want to master intra-day trading. Many of the charts I will use in this book will omit the opening and closing marks on the vertical bars soas to cut out all but the simple trend information that is contained within the range on each bar. For most trading purposes, knowing the trend and the momentum shown by the size of the individual bar’s range is enough. The typical bar chart looks as follows: Three Time Periods Opening Level In Decline Closing Level | | | | Five Time Periods With A Rising TrendTypical Daily Bar Chart Personalities When you look at a chart, one of the first considerations is the type of personality the chart has. By this, I mean its trading characteristics. Some stocks are glamorous and big movers, while others are slow moving snails. Tops and bottoms usually form individual characteristics with some stocks “spiking” into a solitary high bar and rapidly declining, while others gradually “roll over” and go down. You must adapt your trading strategy to these individual characteristics to be successful. Quickly buying into a gradually rounding base is a w: of time, but a buy at a spike bottom on a signal bar reversal is a good practice. Only a Took at the most recent history will alert you to these trading characteristics. Learn to scan all the markets to find ones with personalities that fit your trading style and profit objectives rather than just taking any trade that shows up. A corollary to this is to only trade the most active markets and only when they are moving. Trading wheat, corn, bonds or stocks simply because you have a big account is a mistake. You should concentrate on the active ones to maximize your return over the shortest time period. Identifying the personality characteristics is one of the first things you should do. Only after you note the type of character and see if it will satisfy your particular objectives should you then spend time on a more detailed look at the trend, cycles, and projection targets. Examining the past is always a good first exercise, so you will have an idea ahead of time as to what is possible or likely and what is based on factual past trading patterns. Looking for a huge up or down movement that is out of character will tie up your capital needlessly. 18Trend jy Basic Trend Determination The fundamental reason we look at charts is to determine the trend. We can see at a glance whether the market is rising or falling, but few casual observers realize that the real trend is actually a patternof advances and declines. Once that pattern is discerned, it usually persists for quite some time. This is the basis for all investing —determining the primary trend and tradingwith that trend and not against it. On a basic bar chart, the bars consist of a range from the low to the high foreach period. These periods can be of any length, such as five minutes, fifteen minutes, hourly, daily, weekly, monthly, etc. The following are the critical telltale trend pattems for which we are looking: ows. In its simplest form, cach individual bar would havea higher botiom onevery bar, and, over several days, each swing correction would end at a higher swing low than the previous one. When Tuse the word “swing,” | am talking about a short term movement toa high and back toa low, then back to a high. Each minor high and low in such a pattern, no matter how small the scale, is referred to as a “swing.” It is extremely important to emphasize thatwe are only concerned with lows or bottoms when determining a bull trend. Highs have no relevance. The vast majority of. traders buy breakouts at the high of the day, and, when the market declines the next day, they are stopped out for a losseven though that next day's low was higher than the day before! If you lean emotionally but tohave a strategy to buy into dips that end ata slightly higher price than the prior low, you can enter your trades with low risk and a very easily identifiable sel! out poi at prior low if violated subsequently. Perhaps the real reason behind considering only’ the lows of the move as the critical level is that the big money which moves the markets cannot just jump in and chase stocks or commodities, but must patiently wait and accumulate their holdings atlimit price levels. This gives the market major “support levels,” and, when the markets are really moving and the institutionsstill do not fill their orders, they slowly ratchet up their limits, giving us the classic “stair step” pattern of rising support level bottoms.‘The Bear Pattern consists oftwe critical elements: lower highs and lower lows! This simply ‘means that in acyclical downtrend each highon every individual bar will be lower than the preceding bar, and each low will likewise be lower than the preceding low. Ona ‘swing’ basis, each little rally will fail at a slightly lower level than the prior rally, and eachnew swing low will hit anew low for the entire move. The reasoning here is that the big money is selling at limit levels and lowers them as they do not finish ateach level. In addition, since the market is weak, there are few buyers around, and each decline will usually have to gotoa slight new low to attract bargain hunters or shorts to cover at profitable levels, creating temporary buying. Basic Trends | | lj Simple Downtrend \! || ' iH MH) lI | a Simple Uptrend | | higher bottoms, 1, 2, 3, 4 1 2 3 i) | | 1 | | ‘Swing Dowmtrend with lower tops 1, 2,3 end lower lows A, B, eet B c technical analysis. | find that, over the years, I have tried to make this point over and over, an seems that only a fraction ofa percet x int rket gra nple but_ powerful conce ep Asa resitacvely me the market, plunges 50 points oreven 100 Dow points, werally, | ‘then short on every rally. Plunges per se are not particular ly bearish. Only the lower lowsand lower fopspattern. ‘The same holds true on intra-day charts. S&P futures traders continually get shaken_ out of a bullish trend ona fifteen minute plunge that turns out to. bea single bar decline and not a a 20Remember that at the heart of the theory is the idea of accumulation or distribution, and these are ongoing processesthat do not culminate ona single day. Large trends are cyclic in nature and cannot change overnight. The single day movement would have to be so extreme as to change everyone's long term opinion in order to change from an accumulation to distribution process and vice versa. Also, remember that Bull and Bear Markets, in general, are psychological processes by the masses as a whole and cannot be changed overnight. If it takes institutions a three year_ ike period of day after day buying to get thei them to sell everything and end anew Bear Market in only six weeks. After years ofa continuing 3g for yestenay' leader to go rallies will stop ata higher level as support increases, ing make you a fortune, if you going : against that bar when does not forma pattem. The following two exhibits demonstrate the bull and bear patterns: Basi Uptrend withhigher bottoms le | int a i Mh wif if wifi » [Nata wo are only concerned with bottoms 211 Basie Downtrend with numerous lower highs and lower lows. What Can We Deduce From This Trend Information? ‘The primary use of tren bullish, we wait to buy is todevelop strategies to enter and exit trades. Ifwe are above the most recent low. If we are bearish, we _ ch should be slightly lower than the prior one. In general, the basic rule about higher bottoms. or lower highs and lower lows is that you will eventually break one of the prior swing I Inother words, when buying i intodips, adip may golowerthan the immediate past di level but will usually not ‘carry down to the second one back. When shorting a bear rally, know that the rally could exceed the recent past high but not likely the second one ‘back. This idea also gives rise to.a a swing level prior and move it up or down only as w way we can the trend. allel channels. These are simple trendlines connecting a series of low points and then drawing an upper angle parallel to the lower but through one of the upperlevel swing points, Parallel channels are especially good for analyzing 22Jong term trends, such as over five to ten years. They give you good perspective in that, for both upper and lower trendline to hold parallel over long periods, the trend would have to be extremely strong, and one would have to think twice before assuming the existing trend was about to tun. ‘Multi-year parallel channels for differing industrial groups isone way to determine an overall market’s Parallel Channels Note that these are only approximations used to get a rough idea of the trend Reversal of Trend ‘We know that a bullish trend has a series of higher bottoms and that the bearish trend has a series of both lower tops and lower lows. Since our basic goal is to invest with the primary trend, how do we determine just when one trend tums into another? There are sr of techniques, butthe_ Most basic isthe signal reversal bar. This is defined as follows In an uptrend, when you havea series of higher bottoms each day or for that matter any time period and each few days you see a new high bar for the move, the reversal comes when you find the highest high bar for the move. Weare individual bar. ‘The bar after that must have alowerhighto toset upa ee signi »§ that next day or a subsequent one when the low of th day is by example, you might have a high bar and the next day you have alower high but the low is hier rat the same price as the low on the high bar peri if that bar breaks below the low, of that highbar. When that tlw is fin alyInadowntrend, you have a ‘bar for the move. When you fi a subsequent day the new bar has both a higher | low and the high of the l De baris ¢ you get the reversal buy signal witha sell stp atthe low of that lowest bar. es of lower low bars, and you are looking fer the lowest low Reversal Bar Signal Pattern Sell High Bar Signal Buy Signal nena Lowof high bar Buy signal | gr generated at | |i! 1 Sell signal | this point | generated at this High of low bar point Obviously, this type of simple reversal signal happens quite often and, iftaken indiscriminately, will lead to quick and sure bankruptcy. The best signals are combined with other techniques, such a8 trendline breaks, cycle counts, overbought oversoid readings, and just p! ‘Jonger the trend has been ineffect when the reversal comes, the more likely it will be a val indicating exhaustion, ‘The importance of the signal cannot be overemphasized. I find the vast majority of traders are quick to pull the trigger and reverse in anervous choppy market. Waiting for at least this basic signal will greatly discipline oneself. You will also note thi off the hi; ighest bar or lowest bar for the range and does Most traders make the fatal mistake of trading fora reversal on a big day movement, such asa 50 point up day in the stock market, whereas this signal could not possibly come until the low of that ‘50 point run up was broken! Thisis highly unlikely fora few days. Likewise, itis highly unlikely that buying into a big down day will result in an up move. Futures traders typically want to sell or short intoa big up bar on a strong opening, but thiskind of momentum will usually last all day. Knowing of the reversal pattern would save them a lot of money, and knowing this signal will keep you with the current trend throughout these big bar range movements and warn you when they are followed by asmall range bar that could lead to a reversal. 24jis method usually i after the reversal high or low bar because we the next bar fo penetrate the extreme high or low of a previous bar to get our confirmation. This is still valuable information, since trends persist for quite some time, and the new trend will give us pienty of time to exploit it. A little common sense and some tape reading skill, however, can actually allow us to trade at the exact extreme. What we do is _ make a professional guess that the current bar is the extreme, take our position counter to it_ and use a very close stop that will be confirmed by the next bar. We would want to see an extended run with the current bar being a “tiny” range bar with little momentum before we_ made this guess. We then know that any decline in a subsequent period would generate a sell signal, so we guess, take a position, and see what happens. Keep in mind that professional trading is a process of playing percentages much asa professional gambler does. The difference of course in speculation versus gambling is that in speculation you set your own odds as to when you will trade and what you will risk. In gambling, the house sets the odds against you. In professional speculation, we can often get odds as high as 80-90% as to the trend, and_ using simple money management disci insignificant. _ ‘The following are some examples of simple buy and sell reversal bars. Please note that these are simplesignals, and additional analysis is usually performed coincident with these signal developments to see if they are worth taking. These other factors could be duration of trend in existence when signal given, prices at major support or resistance levels or angles, or near important time cycle change expectations. Please study these examples carefully. 25In these examples, I have not circled every possible signal generated, so as not to confuse you at this stage. You could cut down dramatically on “false” signals, by. waiting 1-3 days_ _after a signal was generated to see if it was confirmed and then buying. th The idea of reversal of trend brings up the question of persistence of trend, lend “themselves to a good rule for defining such persistence. This is the three bar rule. This, simply_ stated, means that a new trend will go at least three bars in the new direction before reversi . For trading purposes, we naturally would want to pay attention to reversals on hourly, daily and weekly charts because of this three bar persistence, rather than, say, a five minute chart. Also, keep in mind that these charts are all nested like Chinese boxes, so, if we get a tum on an hourly chart that is good for at least three hours, then we might have enough to turn the daily chart three days and the weekly chart for three weeks. These fractal chart turns at big cycle pivot points is what causes explosive impulse wave movements in the markets. Besides reversal of trend in terms of price patterns, we also can confirm a reversal through timing or cycle studies. The biggest problem in chart interpretation involves these Chinese nested box patterns. A reversal on an hourly chart or daily chart is one thing, but how do we know the trend will last six months to a year? This is a difficult subject that is covered in the cycle’s section, but you should keep in mind when looking ata persistent chart pattern that; extended counts validate the longer term trend. chart, most reversals come at ‘minor reversals usually only last odds increase dramatically that th ‘Fibonacci numbers will be discussed at length in the hourly chart section. 27Forecasting ‘The rise and fall of stock and commodity prices are a study in human emotion. Although, ina broad general sense, fundamental economic factors are the underlying cause for valuation, the actual day to day fluctuations that we as professional traders exploit to make our livingsare really emotional extremes of the masses. I would guess that perhaps 30 to 70% of all market movement relates to this emotional component, rather than the actual raw economic fundamentals. The vast majority of people attracted to the markets are done so out of greed. This is the motivating influence. Since greed to make money and getrich motivates, itis only logical that people buy or selll at emotional extremes in the market. Buying and selling in this manner causes the vast majority of trading losses that people sustain. The purpose of chart reading and the philosophy of trading set down in this work attempt to construct a system of rational entry and exit points to eliminate the handicap of fear and greed. In theory, the emotions of the masses are statistically quantifiable and uniform over long periods of time. The investment community changes little, day to day. Perhaps, over several years, the makeup of traders and institutions playing the market vary, but, in the short run of six months to two years. the buyers and sellers are the same group. This being the case, we can actually “measure” the emotional extremes of this group over the past few years and use as rough guide such “benchmark” extremes to better predict when the current emotion of either fear or greed will subside and reverse. Keep in mind that emotionalism in stock charts shows up in a number of dimensions. For instance, price “spikes” are certainly emotional, but what about volume extremes, gap movements, orextended time periods of optimism? What we have to do in order to measure the effect of emotional extremes is to find acommon denominator on our charts to measure. We leave volume out of the discussion, for now, since that is a separate discussion with its own statistics. What we will focus on is time and price. The concept of price emotion is simple —a big move is more emotional than a small cone. We can measure the price difference from a high or low to get that extreme. That is only half of the story, however, since fime is an emotional factor too, such as it is for the man facing the electric chair in an hour, or football players down a few points in the championship game with the clock running out. 28Inthe speculative markets, we measure time horizontally across our chart page, and we measure price vertically. This is the familiar bar chart representation that you will see throughout this book. Because emotionalism can take many forms, we must use the universal measurement of vector directions to balance our time and price axis. In physics, vectors are merely sums of energy spent indifferent directions that combine to form a new direction. Think of the ice skater sliding in cone direction but with a strong wind pushing from aright angle. The new direction will bea vector diagonal, and its energy will be the sum of the two forces. On our stock and commodity charts, we can likewise use vectors to combine price and time. At first, you might have difficulty with this ‘concept because it has as its assumption thata unit of emotional time is equal to a unit of price. Statistically, this can be readily proven, but, fornow, you will have to take my word for it. Obviously, if time and price were equal all the time, the vectors on our charts would always be diagonals. The emotions manifesting, however, are seldom equal, and so we get big price movements and then long periods of time but little price movement. Suppose a stock went from 50 to 100. We would normally think that it would meet resistance at that price, since it had doubled. But, what about a stock that goes from 50 to 75, and then goes sideways for two months? Does that two month sideways equal 25 price units, so the resistance is the same in the two cases? If wecan “measure” time inthis way, we can know when prices will break out of trading ranges and consolidation zones. The solution to this problem isto use circular arc measure. THis way time and price components are equal at any. y point on the circular circumference, and we can forecast acoming change in direction. Should the emotionalism be so extreme as to exceed such circumference, it will usually go to an evenmultiple of such measurement, and so, here too, swe can make a good estimate for the coming change in direction. These circular arc measurements _ are known as “measured moves.” Circular arcs are so important that the entire next chapter is devoted to them: 7 Since the extremes of emotionalism in the market do not change over time, we merely need to review the recent past few years of history to see and measure such historic extremes and come up with our benchmarks. Our analysis then takes the existing swing movement and extends these by our historical observations, starting with the most frequent observations, in an effort to estimate the duration of the current swing. The idea of the measured move, although simple, can lead to incredibly complex forecasts. In my trading, Irely almost exclusively on these swings on my hourly chartsto geta first approximation and, only then, refine my technique to counting bars or using trendlines. 1 continually find tradersexpecting swing movements totally atodds with the simple historical record of fluctuations on the chart they are using. You should always first examine the past few weeks, jourly chart or fifteen minute chart, to see the larger movements over the immediate 29Natural Time Period Durations In most markets, butparticula is the three anda quarter week cycl ‘awhole, frequently demonstrate cycles that are twice this or six anda half weeks in length. These cycles come from the natural division of the year of 52 weeks by sixtcenths and eighths. Almost every movement you will find will bea combination of these basic cycles strung together. These are the facts if you look. There is no such thing as atwo week cycle or a four or five week cycle. The ten week cycle is really three cycles of three and a quarter or nine and three quarters. To find where you are, just look to the prior major high or low and count to the present to look for your three and a quarter week pivot. For example: on The strategy to use is to buy intoa three week decline on the first sign of a reversal or sell three week advance. Ifthe trend continues within a day or $o, expect the original trend to go to_ six and a half weeks and then reverse. Many of my best trades are an explosive ‘upmoye item or brokerage firm recommendation, and, when I see the first top, patiently wait three and a quarter weeksand then buy the i riably, the explode upwards i it ping track of these turning point dates, in a 30‘ng at long term hat the general rule is that major rendsnevergo_ -Mote than six weeks to ninety days counter trend. That is, in a bull market,a decline will never _ i, in abear trend, rallies never last more than three __ months, In fact, the basic definition of a bear market trend is that you have broken a swing low from atime = period past three months ‘ago. You generally are safe being along term investor, as long _ as your holding does not go below any price level seen 90 days back or further, and, if you ate looking to sell stocks short, you want to choose i issues that have not seen anew high for at least90_ days and are under a low price level from 90 days ago. Those issues are almost certainly in long term downtrends that could last a year or more. (Iam using 90 dayshere as a practical cutoff for ~ the Bull or Bear Market definition, since that works 80% of the time. Be aware, however, the” extreme cutoff is 4 months, and one or two exceptions thiscentury have gone 6 months.) Thei buy into in sone th sted about six weeks, _ are well above levels seen 90 days ago. You will note t charts usvally spike up and quickly pullback from the high, but no low levels are ever broken. Only the new high recent advance is corrected over the full three or six weeks and then the next upward spike. Many strong stocks can follow this type of pattern for years withouta three month correction. Other cycles most commonly found are the numerological “Gann” cycles. This theory is covered at length in my other book, and indeed I have spent an entire lifetime developing it, Basically, the. premise is that the price of the stock, at the final high or final low, is exactly the sameas the_ time cycle operating. That is, a hig! cycle of 50 units, such as 50 hours, 50 days, 50 weeks, etc. At each numerologi fractional parts of fifty, you" will find a turning point. This sounds strange to those unfamiliar with the concept, but, in over twenty: years of challenging people i in large audiences to find just one exception to this principle on any stock or commodity, noone has ever found an exception nor will they. Again, I refer you tomy other book for the reasons behind the theory. Strategy here is to count the barson the chart you are using until you reach the count equal to the high or low ‘Signal. Natural Squares Another common forecasting method for determining cycles is that of numerical natural squares. This is simply the whole numbers squared as 3 squared is 9, 4 square _Squared is 36, etc. You start your count from each major high and low. days, weeks, months, or: ‘years, but weeks work particularly well as the next chart demonstrates. but prices _ ice level and then look for areversalBasic Concepts Length of the base...equal to the height of the move ‘This phrase originally comes from the area of technical analysis that specializes in point and figure charts, Point and figure charts are pure price charts showing only upward and downward price movements. There is no volume nor any time periods on these charts other than incidental footnotes to mark the beginnings and endings of movements after the fact. Prices themselves are what make us money, so point and figure charts clearly point out issues that are in definable trends. I do not suggest you use point and figure charts as a trader since Time is most important, and return on capital requires a gain every month, whereas a point and figure chart could look good, but may not move for months on end. One of the great uses, however, of point and figure charts is to point out periods of basing or topping patterns. The constant reversals, up and down, in a narrow price range clearly show accumulation or distribution, and the longer this period, or the more frequent the reversals, the more powerful the subsequent move, Long_ ago, analysts discovered that if you meast vays area of the support or re: - -zones, then the subsequent advance or decline would go almost exactly the the same magnitude ofa“ fore exh equal to the height of the move.” 32For many years, when I ran anumber of mutual funds, would rely on thisrule to pick dozens of issues that would more than double over the coming year. I simply found charts that had been confined to a narrow range, such as 12 to 16, for the past three, but preferably five, years and waited until a big volume breakout occurred that took the stock at least $3 above the prior high, such as $19 in the prior example. In these cases, I could reasonably forecast a TRIPLE from the base price range. In the case of the point and figure chart, the measured base is an exact figure, whereas in the normal bar chart it is more of an estimate, but one that is certainly worth making. The reason this works falls ina subject outside the scope of this book, and one covered extensively in my book The Geometry of Stock Market Profits, A Guide To Professional Trading For A Living. Suffice it to say, it is related to “Gann squares” and time cycles. In general, you “measure” the horizontal distance of the basing or topping area, and, when the breakout or breakdown occurs, you reapply that measurement along an angle of momentum to get the probable area of exhaustion. Target Area | \ | Length of base measured Length of Base | hy! along angie of momentum eenghofBae lagi tyry lal This isa rough method, but it is used to quickly scan anumber of charts to pick out ones with potential for big moves and avoid less profitable minor movements. The theory, of course, is that ‘stagnant economic fundamentals have suddenly changed for the better to break out of the trading range, and few people bother to take note because of the past numerous years of disappointment. ‘The rule works equally well withhourly charts when trading options and futures, so that a congestion or consolidation area of two days can lead to a significant three day. move, whereas'atwo hour top” ottom will probably lead to only a two hour advance or decline, 33WOOLWORTH CORP. WOLDINE: "Woolwor:h (FW) Company. rrunted oebt_$413,000,¢00 Shares Pref*a . "131,000 Vn 1304075,000 Length Of Base fincieded Is Equal To ‘nreuce Height Of The Move ¥ SCALP: Ba. block = $1 g81[1a88 [1989 1990 from | 1999) 1993 [ 1951} EAR fist 2 foe 1 gece ras {ia7e fier? Trae 1270 feo 11981 hee | lesser known corollary to this isthe height of the move is equal to the length of the top.” Inother words, a“big” momentum bar on achart cannot be reversed from quickly, Momentum takes time to lose its energy. Often, after a big up move, the momentum generated requires a broad topping phase before adown trend can get started. One of thereal secrets I will now tell you is_ that the range of the final low or final top individual bar, when placed on its side horizontally, will often tell you when the movement is over! The individual bars on a chart can tell you a lot about the emotionalism present in the market, during that time period. Obviously,“big” bars are emotional, but the single barat the final high or low isthe most important. That bar is similar tothe DNA molecule in living creatures. Oursignal reversal buy/sell bar uses the opposite extreme low or high of that bar, instead of the extreme, because, when that level goes, complete emotional exhaustion is reached. Note that these signal bars give completely different support or resistance evels than most traders use — they use the extreme high or low tick. If you look at the charts, you will find that only works half the time at best. Looking at the range of these bars, particularly monthly extreme bars, will be quite rewarding! Turn them sideways for time counts and apply ‘numerology tothose sideways counts, You could be greatly surprised asto just how much information isin those solitary bars. 34Dow Jones Averages a of This barturned sldeways iy 4c Arca = Height of Subdequeht Mave The concept that the length of the base is equal to the height of the move incorporates the notion that a vector distance (base) can be applied in anew direction to forecast where the market is going. This works because of the existence of time cycles. Common cyclic time periods repeat overand over, and each cycle runs approximately the same duration. Since markets are emotional, and human nature does not change, an examination of market history gives usour benchmarks. Great cycles recur infrequently but usually consist of multiple legs of common length cycles. Usually, there will bea consolidation orresting period at these multiple leg extensions, and we measure another equal leg up or down at these visible resistance areas, One rule to keep in mind wh Jooking at charts is that straight line moves without these consolidation “wiggles” will die out as d, whereas a big move with a number of little corrections oF consolidation periods will have enough strength to go multiple lengths. ~ ~~ Since this idea of cyclic emotionality encompasses both time and space (that is how we chart prices), the actual measurement of these cycles is in vector distances. Simply puta measured_ move of any given magnitude can manifest as acircle of resistance around an origin point. The circumference of that circle represents the potential reversal point of a move that has reached a previously observed measured move. Thisis one of the most profound pate iples ofinvestng! whaveever: discovered, andExample of Taking Highest Bar and Turning It Sideways To Give Us Recurring Turns. Dots Are Each Cycle Point Pn EY ae This circular measure accomplishes. a number of things for us. First, it measures potential price targets at thecircumference points. But, more importantly in many cases, it shows the extreme Measured Mover. APABSB Dow Jones Averages 36limit of time duration, where the current trend will end. Often a price advance will quickly go up tothe circumference and top, and then go sideways into a consolidation pattern. At this point, we look to the extreme right axis or at 3 o'clock figuratively on the circumference to see the time limit of the move. When the price reaches that extreme with the passage of time, the market will change direction. Measured Moves ‘Dow Jones Averages Remember that although these measured moves can be very precise, we are only trading for the safe 70 to 80% of the move and need only make an approximation. On an hourly chart, trading options and futures will be much more exact, but here too, other indicators will be used as we approach the area of termination. Specifically, we watch closely for a signal reversal buy or sell bar near the measured extremes, and we also watch our time counts closely. Strategy here is to find large measured moves that are at work and will give us lots of trading room when we initiate a position. A good analyst te that at the ends of large daily and weekly measurements, most other markets like bonds, gold, and the currencies ‘The measured move idea is simple and perhaps crude, but the real principle behind it is extraordinarily powerful and that is what we will now examine at length as we turn to the study of circularares. 37Circular Arcs Finding The Natural Cycle Length Since cycles give rise to measured moves or an emotional time period that can be measured ina vector distance, we can deduce from this that unknown cycles operating within our charts will reveal mathematical structures that will give us a clue to the cycle’s length. The simplest form this takes is a visible circular arc. When we see an arc forming in our data, it implies that along term cycle is operating and that arc is but a part of it. If we use geometry to recreate the actual arc, we will discover its actual length and size. ‘The word cycles implies a return through a 360 degree rotation back to the origin. We view this as acircle on our charts, but in reality circles are only a close approximation of conic sections or slices through a cone. These are what are really known as ellipses and are closer to the real nature of cycles. You can visualize conic sections by imagining an ice creamcone. The cone, if cut directly across itsheight, will yield round circle, but if cut ata slant, will yield an ellipse whose “flatnes will vary depending on how steep or slanted our cross cut is. Although the ellipse is the key to our trading, it isa subject a little too advanced for this book, and I will leave that investigation to your curiosity. Circles are easier to deal with and will suit our purposes just fine in most cases. Additionally, although cycles expand and contract to yield ellipses on many charts, if we use a slightly larger chart such as going from adaily to a weekly, we find that these small expansions and contractions in ourcycles drop out, and a large circle becomes a very close fit to the data to mark our major beginnings and endings of the cycles. The standard textbook method for constructing an are that lies on the circumference of a circle is as follows: first, you must “eyeball” three points that look to you like they fall ona circle. You must have three, and, if they are not really on a circle, your axis lines will be parallel and not intersect. The first step is to pick the three “dots” on our chart. Then, you take adrawing compass, put the point at dot #1, and draw an are not quite the length to dot #2. Swing this arc about a half circle and then move the compass point to dot #2 without changing 38its separation. Now, swing an arc back toward dot #1, also about a half circle so that the two: are swings from each point intersect at two opposite ends. Where these two arcs intersect, you draw an axis line through the intersecting points, Note that this isalso a method toexactly find any midpoint between two points, which we will use later to discover support and resistance at the midpoint of swings. This axis line will point to the center of the circle. Next, you repeat the same process between dots #2 and #3 to find their midpoints and axis line. Where the two axis lines from points #1 and #2 and #2 and #3 intersect will be the exact center of acircle whose circumference goes through the three points. You, then, merely move your compass point to that center, adjust the separation to any one of the dots, and swing an arc or acomplete circle around all three dots. The radius, diameter, and upper and horizontal boundaries of this citcle give us our important cycle turning points on that chart, if we have actually found a real circle. Sometimes what looks like a circle on short term charts is only a curve, so in picking your three dots to work with, you actually want to sec five, ten, or more dots that appear to be connected. When the three important ones are mathematically connected, they will join up all the others, and we have more reliability with our pattern. The real solution of course istouse very long term charts over several years because the visible shapes forming on those charts are much more reliable and long lasting. omwSones cHDUS'L. APERACE “ek [sev 1980] 04! Ht i seas | ea oe? gonres te elie Lone Diente. 39Implications of Circular Arcs and Circles Circular ares tell us a lot about trend, support and resistance, and even where to expect big momentum moves. Remember, we want to pick chart pattems to trade that have big potential and are moving, not stuck in a base or top. The first important observation to note about arcs isthe physical property of acceleration. These arcs describe human emotional behavior, and as we go up the arc this behavior is intensified. Imagine a graph of a car going at a constant speed of 50 mph. This graph would be a diagonal upward sloping straight line. Now, imagine a spaceship launch that is accelerating at a rate of change of 50 miles per second per second, This graph is a parabolic increasing line where the slope gets steeper and steeper unti “goes vertical” or accelerates at an infinite rate or at maximum physical capacity. The emotions of the masses, when chasing a stock or commodity, act like these parabolic curves. Our circular arcs also describe this maximum emotion when the side of the circle is hit, and the are “goes vertical."" At that point, the maximum amount of buying emotion is present, and whoever will buy has bought. The move is then over and must decline. Similarly, a decline accelerate to a point where maximum fear is present, and that pattern will exhibit a circular arc turning down until it drops vertically. At that point, the maximum fear is past, and a basing pattern ensues. ‘When trading, we want to belong as we go into the maximum up phase and time our exit near the arcs’ maximum vertical movement. Likewise, shorts are held until the arc climaxes on the downside. It cannot be emphasized enough how important a knowledge of these arcs can be. ‘When fear or greed is at itsextreme, it takes a very coal head todo the right thing in a fast moving market. By analyzing these arc: ng and only need the slightest st tech cal eves it will go to the top of the circle an of the arc will usually goHaving first drawn an accurate circle, we can now forecast with extreme accuracy all possible future points of support or resistance. Area of maximum — acceleration Move is 9 over at this Common sense is needed when using arcs. If you 1 Tips On Drawing Circular Arcs Although most arcs are drawn by inspection, that is looking at the chart and either trend fitting a circle or by just seeing an obvious circular symmetry, most arcs that I use in trading are not regular circles butcircular “influences” ofa radius vector swung up from a recent low to the high, and then the arc is swung downto the vertical. No matter how bullish you are, itusually pays to wait forthe price consolidation period to move sideways enough to get past that downward arc before itis a safe long. That arc usually times the low, but oftentimes a secondary “crash” starts at the very end of the arc and the price damage can be severe. Likewise, an upward influence is generated by swinging an arc up, using the prior top as the center point, and swinging up from the recent low. This defines at least a time period where a rally could occur. 41Simple Arc Swing Support & Resistance Arc swing up ‘Two Types Of Arc Swings-- One Support, One Resistance Normal Up Leg with are swung down to show RESISTANCE | Normal Up Leg with arc owing SUPPORT Altemative Secret Method For Drawing cssasc eau wl Arcs ----- Study Carefully! center equal to this y ” 3 arn high point but over ‘Center | beginning low mr \ i! il |! —— Center” In this case center is under top located at low price a2Examples of Arcs On Intra-day Charts 43Up Trond Lasts ea. awn. 8. on. 09. as. GILLETTE COMPANY. Se largene Mfr. of Razors, Hadas, atc. — Also Mfr. of ‘onal Care Products, "PAFTR MATE" lall Peas, ete SEH Debt, $728,000,000 Praf'd . "168,000 Com'n 219,376,000 3p Long Term Monthly Arc Reaching Its Maximum Thrust ple 2 tor] ‘scans. Ba block» $2) IB lipase 2 for 1. 1a2] 1985] 1994 r 44spend leever ws a ata ale aa hae ae nae wae eis Note that the arc drawn on the above chart misses the actual timing for the subsequent low. But, if -youuse the secret altemative method shown on the prior exhibit whereby the center is located just left of the low and directly under the first top, the arc drawn that way catches the low perfectly. This is not shown on the chart, but you may want to draw it to prove it to yourself. 45T wa aan gala ae SS wien 42" ti 3600.04 wera 182 "ata ite aap aaa saris aria! 228 " la’ Waahdes! adame o| with Tipe Arcs otis Th chant sts where ast Ms f oso . , ‘f i Here Toot 47Support & Resistance Support and resistance levels can be determined from three basic methods: 1) Actual historical price clusterings, 2) numerologically, based on common harmonics of 360, and 3) calculated or projected methods. This lat includes well-known Fibonacci retracements and projections but for iy purposes [usually use derivatives of arcsand roots of the swings themselves. We will star first with the basics of typical support and resistance visually seen in the chart patterns from past history. Patterns: The typical support area is an area that» low orhigh for aconsiderable time, _ and i lined back to that area. The i prior congestion will give usa hint ‘as to how strong that support might be. Keep in mind that in trading, we are only concerned with identifying these areas, but we do not trade within them! In trading, we are looking for maximum retum over time, so entering a support or resistance area is an opportunity to sell out a long or cover ashort and patiently wz omentum pict 5 prices out - These historical support a Zones are obvious to all who have a chart, and for that reason wecannot always be certain they are meaningful on the first test. In reality, these zones are located where they are because they are mathematically related to the price structure of the stock ‘orcommodity. If you have read my Geometry book, you know that these areas are related to past highs and lows and various “squares” of the price structure. For our present purposes, however, ‘we merely note them since our trading strategy dictates we get out of the market ‘when we arrive at one. “The primary rule in dealing with support and resistance is thatold highs hecome future lows and TS: akdown. Getting above or below ar not change the ‘mathematical underpinnings of that zone. That particular price structure is intimately connected with that particular security forall time, and indeed all highs and lows in the entire historical record for the issue have perpetual significance. This is another reason for examining long term charts before trading a security forthe first time. Youcan alsouse a common multiple such as 1.25 or 1.5 it jatance zone average prices to project future zones of significant resistance. 48SEP Fetwen 5 Maule Chant Numerological Support and Resistance Natural cycles repeat over and over, and like any physical law, these fluctuations can be described in mathematical terms related to the 360 degrees of acircle. Mostactively traded stocks and commodities will eventually gravitate to the common denominators of numbers related to 360. The most commonly observed numbers are the divisional parts of quarters and thirds of 360, or 360 divided by 2 and 360 divided by 3. This sequence starts as 360/2 or 180, which is then divided by 2 to get 90, then divided by 2=45, divided by 2=22.5, /2 = 11.25, etc. The thirds are 360/3 or 120, and this starting point is then divided by 2 or 120/2=60, /2=30, /2=15, /2=7.5, etc. The numbers resulting from such divisions are natural harmonic numbers that can be used in trading. ‘These are considered both from a price perspective anda time perspective. That is to say, 45 is both anumber and atime period, such as 45 bars, orhours, days, weeks, etc. The following table summarizes these 360 harmonic natural divisions. You can subdivide these levels even farther, but Ihave stopped at the major numbers to give you the idea, 49‘Table of Numerological Breakpoints 36072 both (doublyst 3609 7] 5.63 75 E 11.25 5 _| 22.5 0 4 3375 325 45 52.5 56.25 60. 67.5. 75 7875 25 90 75 101.25 105) 125 120) 123.75 127, 135 142.5 146.25 150 157.5 165 168.75 1725 180... 360 Most people are aware that these numbers form natural resistance and support, and most traders will easily recall stocks and commodities that reversed at prices of 45, 90, 30, 60, or 120. Not so obviously, however, is the natural incremental effect of these numbers. For instance, if a stock hits a major low at 17, we add these increments of 7.5, 11.25, etc.,to the price to get this particular stock’s natural support and resistance. From a low of 17, we would get 24.5 (17 + 7.5), and 28.25 (17 + 11.25). All other numbers would be added accordingly. Remember too,Fs that the time periods of 17 plus these increments would be 50important. On atypical barchart of any time periodicity, we would count these time numbers. as individual bars to look for turns when these periods came out. If you need a logical explanation for this (which is dangerous when you're trading), you can visualize cycles as sine waves that alternate through 360 degrees and start at a number. The 90 degree rotations then merely add an increment to the starting point until the full circle of 360 is reached. By the way, the broad market averages will usually be multiples of 360 or 180, and many of the individual bull and bear waves will equal these total points. For instance, some familiar Dow Jones numbers would be: 3240 (9x360), 3600, 3780 (10x360 + 180), 3960 (I1x360), 2520 (7x360), 1800 (5x360), 720 (2x360), 900 (720+180), and 1080 (3x360). An entire book could be written alone on the importance of these number combinations, but I will have to leave that to your investigation and point you to my other books in that regard. Waa Da CR sg Wr Reale TTS This is achart of time resistance based on 360 day counts. The 30 day Jistingsare calendar days and as you can see, time the market very nicely. 51Natural Arc Support and Resistance One of the major discoveries I have made in my technical analysis methods is the use of Arcs to determine vector common denominator time and price projection points. What this simply means is that (since time and space are circular) if we measure in a circle from any high or low to get our estimated “measured moves,” we will find areas of natural support and resistance. The ends of these arcs are the major resistance points as is the gravity center of the force or the center of the circle. We first swing major arcs around major swings of lows tohighs and various highs to lows. ‘The distance away from the current price level these arcs extend to is the area of future support or resistance. If we draw several different arcs from a number of time period swings, we may find that several of these independent swings end at approximately the same price points. This will be one of the major harmonic number fractions of the cycle operating on that individual stock or commodity. method is the only reliable one to show guaranteed true support and resistance levels long before prices ever reach those levels. Normal technical projection techniques are mere approximations based on likely projections, but this method alone is the key toreal analysis. The value of this idea, I can assure you, is worth thousands of times the price of this book, so T urge you toconsider it carefully and leam the principle. [Arc swing from tow to high waded there a3 yet “Clock analogy shows major eupport a resistance zones near mexdmums of 3,6.9,12 ‘Support and resistance In PRICE are found near 6 and 12 white 9 and 3 show areas of TIME resistance for beginnings and endings of cyclesDow Jones Daity Top Resistance Perlod- note low! i Future Low Support que — F highs and lows. Itis the squares of numbers that account forali_ ‘Square root increment of prio [expansion and contraction in the speculative markets, This concept is by far the single most _ ‘natural important one you will ever encounter and time spent understanding the principle will make you~ rich, Since my Geometry book deals at length with the underlying principle behind why this works, T will not go into that here but give a brief overview. ‘athematics of the __ ines tells you tl isthe master mathematicalharmon hours, fifty days, fifty weeks, etc. will important time cycle influenceson that particular stock. This theory goes on to demonst _“square” drawn from that top of 50 in any time period unit such ashours, days, weeks,months,._ 53years, etc., wil _avartered by the tradable unit that is prac gonals, that subdivide this square, sive rise to. trendlines that are the critical | for that particular stock or commodity. These” trendlines can be subsequently continued into the future for any length of time, so you will know all possible support and resistance levels for any foreseeable time period. Because this principle is the basis of all charting, we can use a facet of it to quickly determine where highs and lows will come out in the future or meet massive resistance and support. This application comes from the observation that, in constructing a square out of building blocks (more commonly known as a cube), the smallest divisible unit of that cube is each side, or the square toot (actually it is the cube root, but we are only looking at the two dimensional side, since that is all we chart on paper). There is no other fundamental unit that will construct the square. On a more minute level, the reciprocal of the square root represents a single building block, but, for our purposes, the main side of the square is the foundation. Jt stands to reason that this square root being one of the fundamental building blocks of the cycle will appear as aunit or anexy now the square root is 10, we can surmise that minimum fluctuations _ $10, $20, $30, etc, ‘Thistype of simple increment is easily utilized. Qn a more advanced level, we look at expansion. sequences by starting with the rootand incrementing it, then squaring the incre um. We _ square I to get our target of 1 it s, however, 21 units from 100: large ing unit, so we would want to increment the root 10 by fractions such as.25, or 10,25 squared is | is 110.25. Many of I immediately jump tothe enlightened cor sus ion of using Fibonacci increments like .618, 1.382, 1.618, etc., and that would _ be a step in the rightdirection. __ In regard to the market averages, almostall the past highs and lows in history are related to one another by a square root sequence. For years, it was an addition of 5 to the root, but lately ithas advanced to double digit increment levels. The real key, of course, remains to match both the_ increment support and resistance levels to a commensurate time cycle, sothat both time and_ price come together at the end of the cycle, Only then will you see the final highorlow._ W.D. Gann formalized this process ina chart he called the Square of Nine chart, since it had at its core the first nine numbers. These numbers were arranged in a circle and a large cross. North, south, eastand west were drawn through the number spirals. The numbers incremented until they made a full circle, then jumped to another rung to make the next larger circle. I am sure most tradershave scen this wheel or even uscit daily. A whole book could be written about its origin, but, forour purposes, you should know that itis a simple square root calculator and to go completely arotind one full circle from any starting point and back, you simply take the square root of the starting number, add 2 and square. If you want to go 90 degrees from any origin, take the root, 34add .50 and square. To go exactly opposite the origin number, add | to the square root and square. Each of the 90 degree rotations provide resistance to both price and time, so here too you would like to have multiple correspondences for accurate results. The beauty of the drawn circle arrangement is that all numbers line up in the four cardinal points ona straight line, and ‘one merely draws a circle around the past high and low numbers to see if they fallina line or obvious sequence. Once this sequence is determined, you have the eternal key to that stock or commodity. Gann Square Of Nine Chart ‘Theabove Gann chart starts in the center (blank) and proceeds outward by the numbers. Especially note that the first circle of numbers stops at 9 and then starts a new circle with 10 to 25. Each circle ends at the square of odd numbers, as shown in the line drawn down from 9 through 25, 49, 81, etc. The opposite part of the chart shows the even squares of 2, 4, 16, 36,64, etc. Note that if you take a number suchas 46, calculate the square root, and add 2, you will get 77, the next number down on the chart. If you add 1 to the square root, you get 61, which is directly above 46 on the upper half of the chart. If you can imagine the orbits of an electron and the fact that the electrons when stimulated can + “jump” to higher or lower states, then you will have a better appreciation for what happens to stocks when they enter one of these new circles. Also, note the natural phenomena that higher 55Priced stocks move quickly and further between corrections than lower priced ones. On the chart, these are the numbers ineach “rung” of the circles which have more numbers as you go tohigher cycles, Finally, note the chart is not complete but can be continued to infinity, and you should make your own up to 4000 or so, if you trade the Dow Jones Averages. In theory, this is a generalized chart based on the natural numbers. In the case of specific stocks, you might want to start your chart with the multi-year extreme high or low price in the center and cycle up or down from that price to get very specific price pattern identities. Day traders will note the simple butextremely powerful technique of incrementing the roots of the S&P Futures or the OEX. An S&P number, such as 465 whose root is 21.5638, can be incremented or decremented by sixteenths to get the following sequence: 465, 467.70,470.40, or 473.12 for the upside targets, and the decrement would be: 465, 462.31, 459.62, and 456.95 for three sixteenths, Number sequences other than sixteenths could be used if. you find them more appropriate. The root increments of .25 representa 45 degree rotation around the Gann Square Of Nine Chart. Again, I wish to stress that the information in the above few paragraphs is quite valuable, and you should make sure you thoroughly understand the concept before going on. The following are examples: eer i sh Homy j ‘y ‘1 jt \ i ti v i It Hus chore re Woeth «nc 1 1000 Times The Cost Of This Book! Be Sure i ‘You Understand It. oes) wt Note Highest Price=483.10 f hi Lowest Price=466.50 1 hy yt lah ool | el te Sq Root 483.10-21.9795 i Equals 21.5975, That Squared ~ 466.45! ss : v3 126 1? 128 1M a 22 2 24 27 ae 29 218 850 Top 50 time unit square and support and resistance Note Trendlines arise from diagonals of 50 unit square hh " ty yl Y Ends of square are time cycles | \ 56My Geometry book goes into gre: Squares, and you should study _ work if you want. a rap the reality behind the idea. For our purposes here, however, it to keep track of time cycle counts from importanthighs and (0 construct a sa " around the Bee ee equal to that pri etric square or circle figure will point to the _target, but one of the real secret keys to forecasting is to use the Gann Master Time and Price _ “Calculators. Few people understand these, so be careful if you spend a lot of money acquiring them, In principle, they work off the Square of Nine or the “Octagon Chart”. As previously _ explained, this is a root calculator, but more important than the price levels shown on this _ chart (which is all 99% of the traders bother with) is the fact that these numbers represent_ _harmonic time periods from past highs and lows. The procedure is to find where you currently . erms of time, by noting the numbers in the wheel and converting them todays, weeks, or months, from a past major high or low. Once you know where you currently are located on the chart in terms of an angle radiating out from the center, you can then movealong that angle — back to the previous cycle in the immediate rung prior to where you now are. You then go back to a chart on that prior calculated date and find out if it wasa high or low. Your current forecast on the present calculated number rung will likewise be the same -- that is ahigh if the prior one was high or a low if the prior one was low. It is important tonote that, going — back to the prior theoretical date on the wheel, you may find, on your actual historical chart, no high or low on that date. Thi locke forward or backwards from that heoreticaldate by usually 308 trading daystofind the ~ actual high or low, and then you forecast that the current cycle will come out plusor minus that __ same amount of time this year as it did in the priorcycle. If it was 4 days early last time, it will be — 4 days early this time. Importantly, it will usually be the same character -- a high or low. Once ~ again, I will not show an example inthis book because it is too important. If you desire knowledge, _you must do the work. I will just point. 57Waves Waves are really just recurring pattems that have a specific shape and can be used for predictive purposes. Although there are an infinite number and type of waves, the most common have traditionally been classified as five wave movements fora primary trendand three wave movements for the counter trend. A five wave pattem realistically has but three upward movements separated by two downward thrusts for five in total, but three. goingupand twogoing down. At the end of all five, the big counter trend movement takes place in three waves or two down separated with one up. This is fora primary up trend. A primary downtrend would have five waves down and, at the end of that, three counter waves up. Basically, the most important point js that when you see five _ waves clearly know abig change in trend is at hat Waves can often be difficult to see in complex price structures, but when obvious do giveadded value to the overall chart interpretation. Oftentimes, the use of parallel channels on the data will make counting the waves easier, since each time the prices hit the top of the channel and turn down, that isa wave top.'The touching of the lower parallel channel is the counter trend wave inan uptrend. The idea, of course, is to buy dips and sell o knowing where waves end and begin tellsus where to buy and sell. Th i pattern looks as follow: 5 Wave Downtrend note 1, 3, 5 are down 5 Wave Uptrend note 1, 3, 5 are up 58Usually waves can be identified quickly, through the use of parallel channels. The touch points of the channel lines are where the waves peak, and you can make a quick approximation of the number of zigzags that way. “Most waves form these 1.3, 5 structures in the primary trend; that is a5 sequence fora___ Parallel Channel Wave Counts End S main up trend and a 5 sequence when the main trend isdown. Ifyou see. a dramatic movement of _ only 3 waves, itis probably a counter movement to the primary trend which will shortly revers This idea of waves and parallel channels gives rise to aconcept of retracement levels. Remember, ‘our strategy is to identify the primary trend and enter our trade with the primary trend but enter it ‘on the little counter trends. That is, buy the dips or sell the rallies. Obviously, the “dip” cannot exceed the primary impulse movement, or it would not be adip. So, we watch for retracements, Retracements are usually 25%, 33%, 38.2%, and even 50%. Normal counter trend movements stop at these retracement levels and then resume the main trend again. Ourstrategy, therefore, becomes one of judging the momentum of the counter trend correction_ into which we will make our entry into the trade. Then guess its most likely percentage and buy in. (if itis an uptrend), placing oursell | stopdown at the percentage where we know we are wrong on_ our guess. For instance, if a stock advances from 20 to 30.and we think a 50% retracement likely, we buy on a dip to 25 and use 22 (down 80%) as our stop, since a correction that big is probably not a correction at all but the primary trend and 20 will soon be broken. This strate; accomplishes two very important things and will be the key to our success as traders. forces us to buy against the minor trend and thereby mitigatesagainst our becoming emotional and_ impulsively buying just to satisfy our greed, but forces us to have a plan. And second, we can clearly define our risk on the trade to only a dollar to two. Whereas others may be holding stock ~ from 30 and have a big loss by the time it hits 24, we only have a modest loss of $1 and can easily ~ handle that situation without getting emotional. When we later look at cycles, we will adda third “element to the buy equation: time. That will further define our risk to a set number of hours of ~ holding regardless of price damage.Impulse Waves Impulse waves are the initial thrusts in each wave series. This first primary thrust can tell us a lot about future price trends and targets. Obviously, an impulse wave implies, by its very name, a powerful momentum thrust. When you see an impulse wave, donot think the current trend will reverse any time soon! Recognizing an impulse wave will keep you with the primary trend and even help identify it for you. For example, when prices seem to be randomly ‘bouncing around in a flat, usually a big impulse bar will occur every so often. The direction this “big” bar takes points to the primary direction of the movement, even though it quickiy_ _Seems to reverse. Unless you get a complete 100% retracement of the impulse, do not assume the trend has changed. These big bars are also often accompanied by “gaps” in the chart, and” looking for gaps is a good practice when first picking up a chart. The gaps indicate extremes _ of emotions and big supply demand imbalances. Remember that the purpose of identifying the impulse wave isto not only respect the trend, but once we identify it as an impulse, we know there w waves coming. Sowe can set up long_ term trading strategies to buy into waves 2 and 4 and watch forthe end after five. Impulse waves frequently rise along strong angles, such as geometric angles of 4x | or 8x 1. ‘These big momentum angles are also a tip off asto the strength of the move in progress. In S&P futures trading as well as other leveraged futures markets, the big impulse wave bar on the chart signifies a time period to buy every dip over the next several bars on the chart, Trends usually persist, and the number of bars after the impulse that the trend continues is at least three bars but usually a fibonacci number like 5, 8, 13 or 21 bars in the same direction. It is nice to have the confidence that amove will last this long and stay with it, and identifying impulse waves gives us that, The second major help impulse waves give usis for measuring the distance of the move. Usually, the final high or low is a multiple of the impulse distance. If the Dow Jones Averages impulse up 50 points, we could multiple that amount by ratios like I, 1.618, 2, 3, 3.618, etc., times the initial thrust. Remember, also, our previously mentioned secret of laying the signal bar on its side horizontally to measure the time distance of the move. 7 60,Examples of Impulse Waves: a j Typical Impulse Wave Arising Out of A Multiple Bottom Flat }t+{ And Then Exploding Upwards At A 60 Or 90 Degree Angle 131 Seay 127.2 4 apc B00 7 pot a =z| Initial Impulse Followed By AS Wave se 32] Decline Back To The Low To Close i) A Gap And Make A Double Bottom ; 61Multiple Impulses With Big Bars And Gaps With Volume 62Angles Retracements are easily calculated, and although you could spend most of your time calculating them and recalculating them, I cannot spend too much time in this book on such a: imple subject. What I can point to, however, isa simple technique that actually keeps track of retracements automatically and requires almost no work. This isnothing more than angles. Not simple trendlines most traders use but "geometric timing” angles. These are called geometric angles because they subdivide time and space or price movements into proportionate fractional parts, These fractional parts are our percentage retracements, and when a geometric angle breaks, we know the trend will mostlikely continue to the next angle retracement. ‘The most basic correction is the 50% retracement. This is represented by the 45 degree angle. This angle is the diagonal of the square, and we know that a diagonal evenly divides a square, so we know it represents a 50% measurement. This angle isreferredtoasa I x | angle because of this equality of time and price. accounted for. Remember, we are e measuring vector distance of time and Space, or price, soa sideways movement coupled with an advance or decline represents more than just the price ovement. You will have to contemplate this, concept long and hard if you want to make real progress. This is the reason that any price decline toa 45 degree angle represents a 50% retracement, no matter what the price decline has been. Along that 45 degree angle, time and price are equal with the origin point of the angle. We are over the exact same amount we are down. Ifa stock goes, up 10 dollars, sideways two months, and hits the 45 degree angle coming up from the low, it HAS corrected 50% when it hits that angie. You may have to take a few years to contemplate the nuances of thisprinciple, but for now please memorize it. Since geometric angles evenly d time and space, they are represented as divisions of a: square and designated as one by one, two by one, four by one, etc. These are the units up versus over or time and price. 63These angles are timing lines in that prices falling along these angles are at an exact fractional proportional movement from the origin to that point. The primary rule isthat when you break one _ angle, you must go to the next. That can either be a drop or rally to the next angle or a long consolidation until the next timing angle reaches up to hit the current price. In either event, the current rate of advance or decline is over, and that would require a change in trading strategy. If one were to merely draw these angles with a compass, you would find the 8 x 1, 4x1,2x1,1x1,1x 2,1x 4, and 1x 8 angles equal to 7.5 degrees, 15 degrees, 26.25 degrees, 45 degrees, 63.75 degrees, 75 degrees, and 82.5 degrees, respectively. This is shown as follows: SRP AAD RTE TANCE AER TE PROBS “tN eee Sey [ee AN pty 64Angles are a very important means of measuring momentum and the steeper the angle, the more powerful the move. By measuring the steepness of angles, we are forewarned of changes in momentum and coming changes in trend. Anglesare usually drawn up from lows and down from t timing anglesare used tomeasure_ precise turning points where they intersect price harmonics. For instance, an angle drawn down from atop at 50 ona stock would identifya time area to expect a tum when it reached the major tice harmonics of fifty, like 37.5, 25, 12.5, and 0. These are quarters of the price of 50, and even though the price itself may be located on the chart elsewhere, when the timing angle hits these. important numbers, a tum is indicated in that time period. Major movements occur when time and _ price “square out” or reach the full price, such as a decline of the top angle all the way down to 0 oran angle started up from zero directly under the high of SOand at a later time intersecting the_ Price of 50. At these times, in particular with the 45 degree angle, time and price are in perfect balance, being over the exact number of units as the price was at the top. These “square outs” look like diagonals of squares and as thus called square outs, since they represent a square orbalanced harmonic of the price. An angle coming down froma top and one coming up from acompletely _ different lower price would intersect at the common mathematical vectors of the two Prices,anda major turn would be indicated at that point. This is called “squaring the range” or the price difference between the high and low swing._ - ~ w angle: Ati emely importa ay up from zero and down from each high to zeroto _ see major turns. Most charts do not cont the scale down to zero but only use the relevant trading range. In these cases, you MUST find the location of the actual zero price and continue your angles until they reach that critical point. Additionally, an angle coming up from zero, starting under any high, will almost guarantee major support the first time it rises high enough to hit the current price level. The vast majority of traders do not do this and miss out on the easiest and strongest support point for the stock or commodity. Keep in mind that if your paper or scale does not have room to draw down to zero, you can “tic tac” back and forth / up and down at price harmonics until they add to the appropriate amount to reach zero. For example in the 50 price example, a 45 degree angle drawn from 50 down to its quarter point of 37.5 could then be turned back up to 50 again which would be the midpoint, then down to 37.5 again to represent 25% and finally back up to 50 to get 100% or the zero angle point. Most people do not realize it, but this is where you often find cycles of “x” units which are really just these tic tac harmonic points froma past major high or low being worked out. Whole books have been written on angles, and I hesitate torewrite them, so | refer you to my other writings and other books on the subject. lurge you to do so because the information obtained will be valuable.‘Square Out Complete When Are Hite Zero Zero arice Lint "The above chart of [BM shows the importance of the “zero” angle technique. You should draw your angles up from the zero line under every major high and low of significance. When you do__ this, you will finally see for yourself why every single fluctuation into the future is accounted for by. a fluctuation from the past. Please spend some time with this technique. It will change your life! ‘Whaat is not shown on the chart, so as to not make it too confusing, are the 1 x 1,2x 1,4x I,and 8x | angles, or the 30 and 60 degree ones. Ifyou draw these in, you will see some startling results. Also, remember that the 45 degree angle is the master timing line, so if you watch to see: where this angle intersects the price harmonicsof its origin price (about 50 in the above example), you will see turns at each proportional price level. 66Lwould point out one other common misapplication of angles to charts, and that is the proper orientation. Just because we traditionally draw charts horizontally does not mean the prices are_ going in that direction. Remember to think in terms of time and space vector or circular distance. For example, most traders draw a 45 degree angle with a protractor from any high or low. This. may or may not, however, be the right slope. The real geometric angle bisects a square, and the only valid way to get an accurate angle is to find the directional orientation of the side of the square first. This side in vector distance is a straight line from the last major low up to that is this anglethat the 45 degree angle must be offset against to measure true support or resistance. If you adjust your charts for this critical slope, you will see a major difference! For example: Normal 45 degree ‘Actual adjusted 45 degree angle up from low angle offset from tow to high tal Wa Walp ee + sig" arse! ate" saetaes 2A 67Dew Jones Howry a2 aia | ate avis are” aie trae! ase" aa 24ty2g” a” ‘ow Some Hoarty th standerd fonedjusted) Deomevic ensles Note dWeresces between this chart and adjnted chart 'e accuracy of vend 600.8} inzs! 192 at 68‘The important angles to use are the geometric angles mentioned previously along with the normal trigonometric angles of 30, 45, 60, and 90 degrees. The strongest angles of all are the 90 and 45 degree, in that order. All right angle (90°) slopes hold powerful support and resistance levels and should be noted. Keep in mind that angles themselves, while useful, are much be jon with our other tools, like circular arcs coming to an end at an angle re angle. These tools, in combination, lead to very high probability trades, Another very important point concerns trading off of angles. Most traders buy or sell when angles are broken, and this is often profitable. This strategy misses the point, however, that angles are really timing lines or types of moving averages and should be actually interpreted as changes in momentum rather than direction. After a timing line is broken, we should watch for a technical signal to prove that the trend has reversed before making a trade. The angle warms us of this but does in itself notchange the trend. Remember that an upward sloping angle will be broken sooner or later, but that our definition of trend in a bull pattem is that of apattern which makes higher bottoms. These bottoms are from a horizontal perspective so the price level could decline under an angle but not break low enough to violate a prior horizontal swing low, and we should remain long in the trade. Think about this, and you will see the most common mistake all traders make when trading off of angles. This principle isalso the main stumbling block when deciding ifa long term Bull Market has come to an end. To be sure, prices must break a prior swing low, but trendline angles are often broken hundreds of Dow Jones points higher. This is one of the main advantages tousing cycles orcircular arcs. In a cyclical analysis, we can make a highly probabilistic estimate that the top is in long before either angles are broken or swing lows reached. Nevertheless, swing lows usually offer strong support when reached, anda final bounce offof them usually gives ‘one ample time to go short fora big break. Initial impulse wave is adjusted for true angle of slope (cycle #1). Note the horizontal line starting at this first top and see what happens when each geometric angle hits that first top! These are the cycles! 691 spent a great many years of my life studying angles, and many a book could be written about using them. You must not assume they are not important just because I have only devoted a few pages to the subject in this book. My object here is to simply give you an introduction and hope you will follow up. Suffice itto say, the greate fall technical analysi les! I cannot afford to reveal it in a book such as this meant for mass exposure, but if you follow up on the ideas herein, you may find it for yourself. ‘The following points are most important and need careful attention. Keeping in mind that timeand price must be linked, and we must matchup our natural calendar time with our work, you will note that the basic primary angles used for technical analysis consist of points per day, points per week, and points per month. All basic interpretation must begin with the geometric angles of Ix 1,2x 1, 3x1,4x I,and8 x I in terms of days, weeks, and months. All bull and bear markets beginand_ endon these angles, especially monthly angles. Its the intersection of these angles from past highs ring our cycles to a common time and price point 1ot demonstrate this point in an exhibit because it is too valuable, and those not willing to do some work do not deserve to know the truth. Youcan take my word that it will work every time, if applied. Fromeach beginning and ending of major bull or bear markets, you must start and maintain these angles. Another pointabout angles concems where to start them from, besides the obvioushigh orlow, ‘The theory of angles is that time au price are linked in an exact relationshi pan cour idea of sf 2 can never beexs ne | that angle i is reached th: same, _big momentum moves steeper ones may be evident. Parallel channels are often formed by these 45 degree angles coming down froma top and likewise coming down from the first bottom or last bottom just before the top. This parallel channel will define the downward movement. The upward _ Parallel movement is created with an angle up from the low and a parallel one up from ci __first top or the last top just before the primary low. angles for time and price change “square outs,” ¢ 45 degree di hitting the bottom level, and the 45 s degree up p from alow hitting atop level.” When usi down from the top Indeed, each past high and low will create cycle turns when angles down or up from those levels__ intersect, Since these intersections are numerous, we want to concentrate on only the larger ones for their greater influence. This is implied in the prior paragraph when I mentioned that all bulland _ bear markets begin and end on these angle intersections, particularly weekly and monthlyangles! 70Examples of angle techniques: s74.00 ( s7ace] sap Futures 5 Minute Chart High Low Angle Square Outs. Note The Change Ta Trend At ‘The Time OF Intersection. 7cel ce fae SSE AT ESL 64 GTS 70[ 74] 72] 73] 74] 75| 76] 77] 78] 79} 80] BI] 82" 83] Febed Aapuee setor swine e Ast High To Lam 72The Hourly Chart The primary chart used for forecasting and day trading the markets is the hourly chart. This is simply achart where each period bar is one hour’s duration. There is some debate as to how many hours should be in a daily hourly chart. At present the stock market opens at 9:30 AM and closes at 4 PM, ora period of six and one half hours. Many people use 10 AM as the first hour even though itis only ahalf hour. Others use 10:30 AM but end up with an extra halfhour at 4PM. The_ correct solution is to use a half hour chart since that correctly shows each period in an equal fashion, but the half hour chart is not as good for long term forecasting. My method isto use an hourly chart with six hours ina day with the first hour being 11 AM. This gives the firsthour one and a half hours, but this is far superior to the 10 AM method. Many times that first half hour ending at 10 AM does not include all the openings due todelays. Additionally I find that ahalf hour is simply not enough time to get traders to make a commitment for the morning. I have found that ‘it takes about 45 minutes to a full hour to get day traders tocommit and readings taken before that time period are ofien erroneous. Specialist openings where the specialist manipulateshis stock up or down artificially to get rid of, or purchase inventory, also affects the reading. This is done at the opening but is still often going on by 10 AM. I find that the 11 AM reading represents a smooth continuation from the prior day's 3 to 4PM hourly reading while the 10 AM usually gives an erroncous onc that iscrased by 11 AM. Suffice it to say Ihave made a study of the two charts and the six hour chart is infinitely superior. Afier several thousand hours have passed froma major high or low, the six hour chart still turns the market at the calculated hour, whereas the seven hour does not. I think at lot of the basic truth behind this has to do with the numerology of the number6. This is one of the masternumbers. In Genesis, God worked for six days and rested on the seventh. Six times six is 36 and ten times that is 360 the perfect circle and number of degrees of all cycles. I could go onand on about the number six but will have toleave some ofthat work to you. Basically hourly chart it will have six hours noted in aday. Those hours are I], 73The reason these hourly times are important is that trading can be very precise and the market will tum at cyclic intervals that are extremely precise. | have seen hourly culmination’s tothe exact hour several thousands of hours after an important high or low. For example if the Dow Jones had a_ major high at 3400, you could betanyone that EXACTLY 3400 HOURS later a major tum would manifest in the market worth trading, [he reason for this is not the purpose of this book but is covered at length in my other works. Incidentally I doubt many traders other than myself know this fact, but in August of 1982 the Bull Market started from a Dow Jones closing low of 770. In August 1987 when the market topped it was 7700 trading HOURS from that low! Coincidence? As traders we know the famous Fibonacci sequence of numbers that are an additive series starting with | and adding each number to its neighbor to get the next number in the sequence. Itgoes like this 1, 1,2, 3, 5, 8, 13,21, 34, 55, 89, 144, 233, 377, 610, . This sequence has the important property of demonstrating the golden ratio between its adjacent members. (divide any two adjacent numbers into each other and you get 0.618 and 1.618). The golden ratio 1.618 has forall eternity been considered one of the key building blocks of the universe and shows up in all of nature, mathematics, and stock and commodity market data. The lengths of various market movements are often Fibonacci ratios, and the simple absolute numbers mentioned above usually manifest like clockwork in turning the markets for trading purposes when using an hourly chart, Thatis to say.that fromcvery high and low we count 1, 3,5,8,13, 21, 34... hours, and we will find that m one. of these Fibonacci hourly counts. It_is extremely important therefore to keep track of “these counts on our charts. Most people are shocked at this simple fact when it is first pointed out but I assure you it is true and has worked for hundreds of years that I have examined data for. This greatly improves our trading since we now are not afraid of a reversal each and every hour that we are in a trade. For instance if we buy into a dip and the market does reverse back up, when do we sell? Most traders become shaken out of a position the very next hour with a small profit. Using Fibonacci hours, however, allows us to only take a look 8, oF 13 hours later and forget about worrying about the other hows intervals, If the, counting, ‘urhoursp paying attention at the Fibonacci tu intersect at certain time periods that also correspond to a Fibonacci time zone and therefore hold” high promi | for future - number of hours transpired from each significant high or low. Major: 7 occur at 100 hour intervals but particularly at the 500 multiples like. 1000, 1500, 2000, 2500, etc. _ Also of greatest importance is the long Fibonacci,counts of 1 382and 1618 hours. You will be startled if you examine these facts. 74Since these Fibonacci hourly tums work all the time, it sometimes can get confusing as to which hourly turn is the most important. The rule is generally the longer the sequence the more important the turn. Three and five hour movements usually cannot generate enough momentum to make big profits, but 13 and 2i or more hours in a trend is a good move (Remember with 6 hours in a day a 21 hour movement is over 3 full trading days! Additionally, counter trend movements will usually manifest for a Fibonacci period one o1 two less than the main trend, such as a counter trend starting at the 13th hour and lasting 8 or _ Shours, not 1, 2, or 3; and a 21 hour tum giving rise to an 8 or 13 hour reversal. _ Each of these main trends and counter trends arises at Fibonacci intervals and this leads to another important observation rule. This is, that at major turns worth trading we will see clustering of _ many Fibonacci turns. For example we may w: our charts the Fibonacci ourly _ sequence ahead of time well into the future so as to be prepared for future turns, From each high _ and low in sequence we make a “tick mark” on our paperevery 1,3, __ hoi each swit ig. What we will soon observe is time period clustering such as 13 hours from a low e three tums (13, 55, 21) all coming due at the same hour. That hour will very likely be_ major tum of significance. To plot these efficiently we usually make up a tape measure consisting of astrip of our graph paper taken off the bottom edge and on this tape we mark each Fibonacci_ hour of 1,3,5,8, 13,21 out into the hundreds if not thousands of hours. We then merely line up this tape across our chart and quickly tick off the times from each high and iow in sequence and_ note the clustering. Additionally this method affords us the opportunity torun the tape BACKWARDS _ with the zero time at the present hour and the Fibonacci hours going back into the past in an effort” to observe whether past highs and lows line up on the tape. If that happens and we have several” “hits” we know the current hour is important. Usually this method will pinpoint a time soon to be reached in the future where numerous hits will coincide and we can be ready for it, As market _ movements expand along the Fibonacci number sequence, we will also observe contraction along thisratio also. Using the tape measure approach backwards warms us of these contracting phases. Note also another’ technique that arises from this. number added to its neighbor eventually yields the golden ratio of 1.618, you should be aware that ALL additive series eventually end in the Fibonacci series or golden ratio. Evena series like 11 plus 50 equals 66 plus 50 equals 116.... will eventually yield a ratio of 1.618 of each number toits ~ adjacent number, Knowing this we can project future tums by multiplying 1.618 times the time _ interval between two adjacent highs or lows, or even ahigh and low, and the subsequent time period indicated will be in Fibonacci ratio to the two and give us atum. Likewise we can ADD the two time intervals between three points to get the forth point in time! easy technique should not be overlooked. 75FrBonacct HOURS Paabutoyosbatenad 1 ALCL LY (eet epee add AL pL ADL Led Hel gle at ae vary gear ‘The above chart is a reproduction of my Dow Jones hourly chart using six hours in aday and showing an “X" for each daily close. Note that this is not a bar chart but a line chart with a straight line connecting each “dot” that represents cach of the six hourly closing prices atexactly 11,12, 1, 2,3, and 4 PM. The grid cannot be seen on this drawing but the graph paper can be either 10 or 20 to the inch but it must be gne Dow Point to one hour, This particular illustration shows Fibonacci hourly counts from the major low and how they “cluster” at big turns. Note too, that the farther away from the origin you go, the more powerful the cycle tum is when you reacha large Fibonacci number. You will also note the easily identifiably “stair steps” from each swing low that defines the bull orbear trend and how the “crash” occurred when several small lower highs and lower lows developed, and then the last significant swing low was broken near August 16-19. Before leaving Fibonacci ratios Ishould note that the use of timing angles for square outs between highs and lows can also be accomplished by using Fibonacci angles. These angles when rundown to zero orup from_zero will always yield a Fibonacci relationship when they square outa high or low witha prior one. A timing line of 1.618 points per one unit of time will yield a Fibonacci relationship as will a simple angle of 38.2 degrees, or 61.8 degrees! The masier secret of the great pyramid at Gizeh of course is that the angle down from the top is 38.2 degrees and this relates the circle to the square to the triangle and ties in the orbit of the sun, moon, and earth! Much more could be said, but would give away the store. 16spect of hourly chart reading i to the hour. A good method ch as to whether a daily high or low was. y.and these columns are lined up, you will soon not thos urs. AS ca ay. lo three day patterns of strong oper ial low. These intra-day p reverse almost precisely at day is the low or high hour, end and wheth The common pattem is for bull mo’ 1 show strength early and late. This means a strong Opening and a strong close. The midday is the counter trend pull back. Most bull moves have an up 11 AM hour, a mid-day decline and a strongly up 3 to 4 hour. Oiva slightly larger scale, a weekiy bull trend will have a strong Monday, Tuesday, and pull back inito Wednesday, - day moming, then a strong Thursday afternoon and strong Friday. The bear trends are just the opposite. Please note that these pattems are “nested” so based on strong Monday we t a possi Wi hen for 4 poss id 3 to 4. {hese hourly turns first start of buying opening te g onthe day oper ‘ou stock that opens unchan, then goes down fifty when sellers have entered the market and will be there f for quite some time. Alsonote that on big down days, nobody, especially the Specialist wants to own stock. AS a result he will usually “be stuck” with inventory by midday and knows if he does not get out of 77ithe will end up witha lot more at the end of the day when day traders stick him with market- on-close sell orders. As a group the Specialists then usually engineer a late midday rally to attract shorts to cover thinking the market's going up, the specialists then sell out and go short themselves to get ready for the closing sell off. The end result is the normal pattern where in adowntrend that closes at the Jow of the prior day (meaning the Specialist was forced into buying on the close) the openings the next day are frequently up on light volume as the Specialists work quickly to get rid of the inventory and set up shorts for the day. Because of this you will almost never get a reversal buy signal from an up opening after a weak close. However, when you get another down opening, you can get a reversal buy signal. In these cases the Specialists come in with stock ftom the night before but do not see any sellers. They then open their stocks down to “test the waters” to see if sellers are there. If not, they hold onto their inventory and proceed to mark it up to hook shorts into covering and get the rally going. It is these natural and normal inventory adjustments by the Specialists as a group that often profoundly effect the market but whose actions clearly show up in an examination of the first and last hours. Similar to the Specialists are the large institutional stock brokers in their combined effect on the first and last hour readings. In the normal situation a large mutual fund calls a broker and giveshim 2 100,000 share order. The broker seeing a large commission is impatient to get the trade done knowing that unfinished orders are often canceled by the fund manager and the commission escapes. In these situations (almost always) as soon as the market opens the broker forces the trade to get at least 20 to 30,000 shares done. Once he reports that back to the fund manager essentially notifying him itis too late to pull the order, he only then becomes “responsible” and tries“‘to work” the order for the customer to get hima better price. If its a bullish day he will just lay back for afew hours to see if any stock comes in for sale, but by 2:30 he’s getting worried that if he does not complete by 4 he could lose the remaining shares the next day so he usually get aggressive and forces the issue from 3 to 4PM. In the “old days” when being a stock broker meant having some integrity the broker would simple lay back and bid for very small amounts of stock not forcing the issue and often the order could take a week or so to fill but the markets would be less volatile and the customer would get a better price. Of course the funds are themselves to blame for this practice by having driven the average commission down to 2 to 3 cents on size orders compared with former 10 to 18 cents. The result has been a brokerage community which no longer cares for the customer's orders since they are not profitable but who now trade for their own accounts against the customer's order. In any event intra-day patterns particularly the first and last hours need ‘careful study. BEmotional Charts Often I see a chart, frequently an intra-day hourly, or even five minute chart thatlooksextraordinarily volatile. I often remark at these times that the chart is t00 scary to go down. When you see frequent whipsaw moves in achart it reveals emotionalism where the participants, both buyers and sellers are nervous. The rule of thumbjs thatthe chart eventually i Thisemotionalism usually forces one side or the other to capitulate and reverse position during a runaway straight-line move, just after the emotional period. After shat move, the market usually reverses and the original nervous players finally are proven right. On hourly charts I find that the most powerful moves are always preceded by a period ofa few. _ days of extreme emotional up and down reversals. Inow have leamed to seek out these pattems _ knowing that their resolution means a quick and certain big move. These are the kind of moves you~ want touse leverage on such as with futures and options. Many of these are short covering squeezes where the entire futures pit isbetting in one direction but uncertain. Often one short covers, driving the market up only to have a new short put on a big position and send it right back down. Only after everyone eventually gets short is the entire pit trapped, and a stampede usually results. On individual stocks these up and down choppy periods are the tug of war between the last of the bears and the new bulls on a busted stock just before anew bull leg up. The key seems to be five alternating higher bottoms to be certain that a genuine uptrend has actually started Onan hourly chart, as soon as \s | see at least five higher bottoms after amajor break, I know the uptrend has resumed. These higher bottoms naturally require a good 12 to 18 hours of activity, since each minor fluctuation might last one to three hours before reversing and in order to get at least five consecutive higher bottoms on plunges, we alsoneed at least fourrallies_ up that fail. Five is the key number to remember. Many a market movement lasts until three bottoms have been made and then collapse, and occasionally four higher lows are seen, but when five bottoms are seen it is almost acertainty that the trend is up. This is a most important principle” of investing and will make you huge amounts of money if paida attention to, Most traders think a trend reversal can only occur aftera price level isexceeded or a downward sloping trendline from the last top is exceeded. We know from our basic trend principle, however, that the trend is a pattern of higher bottomsand higher highs for an up trend and this pattem may appear significantly 79below any resistance level froma arene Inthese areas Lofien find myself comfortably invested while most tra forced into breakout buying just v ‘when they should be selling. Option premiums at these levels are likewise very favorable. Always keep in mind that the “wiggles” on the tape are emotionalism of the crowd and if examined from the safety of an analytical vantage pointa sensible trading strategy can often be constructed with an almost certain knowledge of the trend. Most intra-day patterns have an emotional tug of war during the mid-day hours of 12:00 to 2:30 PM EST. These daily emotional patterns are caused by the pit day traders who never know if the market will reverse on them or not. In these cases it is helpful tonote where the emotional action takes place. That is whether it is a consolidation zone just above a breakout or is it a consolidation just after a breakdown. The odds usually favor a resumption of the major trend in these cases. One of the easiest trades is when emotional trend reversals take place within a powerful upward_ sloping parabolic arc formation. Thisis the last acceleration ph: the market i altaid of neigh is St just the number of consec to ae ion mark goes long. It is amazing ym_a stop loss viewpoint. These n defined and a spe Sell stop placed below that arc is. almost never hit until the fit nal high high i is in.’ Wa go! keyi in these moves is to observe abnormally small “creeps ” for many continuous bars inarow. This is almost always the sign of a very powerful moye that will not be exhausted until the “big Inthe final analysis, leam thatall of trading is an emotional experience. Good traders have disciplines that prevent them from getting caught up in the greed or fear of the trade. If you sense the market is“too dangerous” to do something, know it’s not. Itis only your greed for money that prevents you from analyzing the situation. The trend is your friend and if you trade with the trend the market isnever dangerous. What is dangerous is not to realize you are caught up in emotionalism and you are making financial decisions that will affect your life. 80p Major Downirend — i iy —" ; Very Volatile if |) S&P Futures 46.) 5 Minute Chart i 49.50 467.604 59 pare/tine The above chart while only a five minute chart is, however, typical of nervous markets where a major change in trend may be taking place. On the above chart a major downtrend has just started and undoubtedly the entire pit is aggressively short and nervous. A big rally is likely, but just as likely is a bigger break afier that rally comes and relieves the psychological pressure. Remember weneed higher bottoms to turn this trend up anda solitary big spike rally will not do that. During nervous markets like this, it pays to find the average measured movesand alsothe extremes. Quite a few trades can be made before this nervousness dissipates, or the trend definitively changes. 81Common Patterns ‘The most common problem for the traders determining if the existing trend is changing. After a long decline oradvance, one naturally gets nervous about a position reversing and what kind of trading strategy to employ. Common situations are astraight line plunge decline and trying to figure out what kind of bottoming pattern will emerge to turn the trend back up. Bottoms can be “V" bottom spikes; rounding into'a bowl; or double, triple, or multiple testing plunges to the same area before the real advance gets underway. The item to note about patterns developing is where the first “wiggle” occurs. By this I mean a visible counter trend movement that then subsequently fails and the existing main trend continues. Usually there willbe three or five such waves before a low is reached, although Ihave often seen 7,9, and even 13-15in strong trends before a big reversal is made. What is not usually known is tremely p = ic of the t urat the exact midpoint or the one third mark, but often are at Fibonacci ratios of 236, 382, — or 618 of the total distance. With our technique of “measured moves” in usually estimate early into the ne y trend exactly how far it will travel based on past meas moves that havea. similar! ed “wiggle”. Larger waves are usually proy proportionate so the same symmetry ona ‘smaller past observation can be applied to the existing larger movement deriving the appropriate ratio expansion factor from the first counter trend mark. ‘The most basic principle I wish to convey to you is that the more “wiggles” a trend has, the ists oF iggles are frequently referred toas “climbing a wail of worry.” The “worry” part is the ~ ‘numerous minor counter trend movements the shake traders out of their positions. These patterns are extremely reliable, so much so that I make a habit of searching for trends with frequent whipsaws to trade in. Once the main trend is determined, you merely buy every dip, or short every rally, and this will be successful for a great many trades ina row, Traders have a practical rule todo the same thing until it lases money and this is based on this principle of the reliability of “wiggles”. Recently the stock market broke and plunged about 100 Dow Points in two days. Many people were frightened and called me for advice. On my hourly chart I noticed a “straight line” decline that dropped almost 8 to 10 points every hour for the two days or about 50 points each day. There 82was only one two hour counter rally of about 10 points in the entire move and that occurred at about the midpoint of 50 points down. S hat t powerful because it was a panicky plunge withoutcounter trend self corre the counter ter tend rallies for the shorts to.cover ver and the bargz argain hin highs was just Tetracement was ney asthemarketwent The principle here of therising bottoms pattem with frequent small counter trend plunges isa very powerful t. ibout the power of chart interpretation that they must wai fore they think the trend can change to up rally thatis a siraight line affair without counter trend interruptions. That is a sign of the Bear Market trend short squeeze rally, and it can oni shorted. In those rallies the shorts are forced, as soon as the shorts are out. Patterns Remember that the strong numerous “wiggle “wiggle” pattems assume that each wiggle is higher or lower than the last to confirm its strength, . Numerous wiggles that occurat the same level do not necessarily tellus much. What we are looking for is minute bullish or bearish patienis of hit bullish, or lower topsand lower bottoms for a declining pattern. Even thoug a very minute basis suchas on an intia-day tick chart or a five minite chart, the pal focmuch longer term trends. 83Types of Bottoms "W" or Double "V" Bottom or Multiple In looking at the above types of bottoms, the main question is: At what point do we know itis a bottom and not a minor upward wiggle? The usual solutions are three. The first is the use of Jettacement percentages. Down trends can rally back one quarter to one third of the: drop and in extremes, one half or even .618. This type of analysisis most common and does not give us a position until well off the bottom. For that reason I try not to rely on retracements. mentum, and the most common application is the use ofangles. The _ Dl thata declining trend rarely regains the 45 degree angle coming down fromthe —_ top until the trend has changed. This method may alsoonly work when arally isa great distance off _ i Ty point, but sometimes a long sideways bottom fla breaks through the 45 degree angle just by going sideways and does give us an entry right atthe _ Jow. These angle techniques are based on the assumption of momentum exhaustion and one buys when the angle is broken with a stop loss at the low. The three most commonly used angles are 30. degrees, 45 degrees, and 60 degrees, But you will also note the geometric angles of 1x 1,.1x2,__ 1x4,1x8, etc... work nicely. Angles are especially suited for covering shorts rather than going_ long, but if you do go long on the assumption the trend has changed, you then use arising angle from the low point toconfirm the assumed uptrend, and that rising angle is your stop out point. The best technique of course to determine reversal of trend is to spot asignal reversal har and. then watch for a series of higher bottomsto identify the bull patter. Thisis the single most reliable method of determining the trend. ” 84Three Methods To Buy Off A Low Buy Point Higher Retracement > Bottoms Percentage Line Retrncements are 25% 38.2% 50% 61.8% ‘Angle ar030, 45,0160 The above methods apply equally well to selling at tops. Just tum the charts upside down and apply the same principles. Intrying to determine whethera low has been made keep in mind the overall symmetry of the chart pattem. Ifa long term decline has been in effect for say nine months, and the decline was nicely defined with parallel channels, do not think an uptrend reversal will come easily. Usually tobreak_ ‘out ofa parallel channel decline you will need an advance to at least twice the width of the channel and the advance will normally take ona right angle (90 degree) slope upwards from the plane of _ _the decline. The time element is usually similar in retracement percentages as are the prices. In_ “other words a decline that has been going on for ten months may have to base for one quarter (2.5_ months), toone third (3 months) before a major up move beginsagain. Explosive upside reversals come rarely, only at the beginnings of new bull market trends, Most other advances requirean _ appropriate base building period and arounding bottom. Double Bottoms At Distance Equal To WillFail \ To Magnitude Of Decline Decline-- Usually Good Low 85Three Drives To A Low (or High) Many bottoms and tops are only complete after three attempts are made to break to anew extreme price. These patterns are often called “head and shoulders” or “triple bottoms or triple ee Basically the first attempt to turn a powerful trend js only partially successful and nervous. ttle back to where they were before the ..Keep in mind our principle of courting higher botioms that tates that three netimes four, but if you see five higher lows you canrely on the new trend. Triple movements work at least half of the time, however, so three drives toa Jow or high should be watched closely. — Three Bottoming Thrusts Three Top Probes + frequently seen pattern is the tom and the “M" top. In the case of the W bottom, 2 ine to aslightly higher bottom at the poi Meg, slightly higher thanthe left M leg. Anadvance to new highs above the top of the M 86,A, B, C Corrections At the end of many primary trends we find counter trend movementscalled “A BC” corrections. This is really just a three count alternating wave that is very symmetrical. Usually the A and the Clegs goin the same direction and are approximately the same size. After this pattem completes, the primary trend resumes. This is another reason to favor the five higher bottoms count before going long, so you don’t buy intoan ABC just before the next big decline. These counts take the usual form as follows: ABC Patterns B/NC A AaB Cc ‘These patierns are very symmetrical and represent simple counter trend rally attempts that are a dead give away that the main trend is quite strong and is not going to reverse any time soon, Note that the A and C legs are usually the same length, and sometimes the B leg also. Theretracement levels obtained on these legs are usually very small and this too is a sign that the counter trend has little strength. When you see this three wave pattern with little price movement counter to the main, trend you should be prepared to go with the main trend as soon asa new breakout extreme ishit. _ These patterns often show up at the midpoint ofthe bigger leg soa trade at the end of the C leg is, usually quite profitable, Bowls and Arcs We have talked about circular arcs previously but we have not discussed the general principles of their resolutions. Basically, a gradual roll over “dome” are forming an apparent high is actually _ bullish, and when the dome is broken out of.abig leg up usually ensues. A bow! formati other hand that appears to form a bottom, is quite dangerous if broken down fror breakout from a bow | leads (oa crashcollapse. Especially vulnerable are bows that are only half to three quarters formed. These bowls would look like a figurative clock from eight o'clock to five ~ of four o’clock when the breakdown occurs, The only bowls that are bullish are the one: ‘make it past four o'clock headed for three. These are more usually referred toas“cup with a 87handle” pattems, whereby after the cup pattern is formed | “spike” handle is seen to the upside before the first correction. These patterns look as follows:_ Incomplete Minor Domes are usually Incomplete vals cras bullish Completed bowls are Dome also bullish fauna Bowl Bowl Usually you can see the symmetry of the pattern unfolding and know if the bow! will collapse or complete. For example, during a major decline of several months. minor bowl may form, but ifthe time period for the completion of the bowl is small, then that might be inappropriate for a major bottom and will only serve as temporary support until the shorts cover and when the bow! breaks the next leg down will start. This bowl is too shallow This bowl is likely to complete for the time period needed to base \\ because of the long time period Mn” 88The Five Basic Bull and Bear Patterns Although many technicians have studied charts over the years and have their own favorite patterns, Thave come to the conclusion that these standard pattems are the most basic and repeat overand over. These top and bottom patterns are really the inverse mirror images of each other and with subtle variations seem to cover amyriad of possibilities butnevertheless if you memorize these you will have abig head start. All Possible Downtrends All Possible Uptrends Note these lower patterns are just the inverse of the patterns above them. These arecomplete patterns and then you would expect anew trend to emerge. These may be seen on short term charts as well as very long term ones but the basic completion wave structure is almost always the same. You could makea study of just these patterns for the rest of your life and that alone would be a rewarding exercise! I suggest you spend some time with these before going on. 89Long Term Charts ‘The difference between long term and short termcharts is the importance of cyclical influences on the long term chart. Short term charts are filled with numerous emotional reversals that although likewise due to cycles are much more random and subject to “slippage” and “whipsaw” news items. Longer term pattems stretching over many years show accurate trends and those trends are not easily changed. This should make chart interpretation easier, but so many people get caught up in the short term minor reversals they easily lose sight of the bigger picture unless they have a firm grounding in long term cycles. ‘The hasic accurnulation or distribution patterns usually take the form of three years up and one_ year down, o five years up and one and a half to two years down. Major highs and low: ‘come out near anniversaries of prior highs and lowsat cycle lengths of five years, seven years, years, twelve years, fifteen years, eighteen, nineteen and twenty years, thirty years, fifty years, years, ninety years, and one hundred years. These are complete long cycles and each individual stock will tend to follow one ora few of these different lengths but not all. [only mention all (orat least the more important) long term cycles so you can quickly check the historical record and spot those cycle lengths to see if obvious “measured moves” are at work nearing those anniversaries. Chart books with long term chartsare not really that hard to find and many have typical chart time periods of twenty to thirty-five years for many issues. Longer term histories can be looked up in libraries or on computer data bases. Often a good place to start is with a chart of the market averages and you would spot the major highs and lows in history that seem to be currently repeating, and then go back to newspapers ncar those anniversary dates and just look for the most active issues that are being written about in the popular press. These issues are the ones that have common cycle lengthsas the overall market for the current market repetition. Basic analysis would begin with the observation of a possible five or ten year anniversary coming toanend ne: Move and a possible long term trendline pet trategy is tothen assume that the new reversal trend will last for a few years and then go to the shorter length chai ssuch asthe past few months of dailies and wat h day penetration’ ‘year and we can start to years. Keep in mind that ignal reversal barsell or buy signal ona monthly 90chart,]£ you do not have monthly charts you can easily visualize such a final high or low barby __ noting the extreme price high or low during the ir weeks of the e9 existing tren that four week extreme is broken, that would be the monthly reversal signal. This p1 le good one to keep in mind all the time as we note large price impulses on our shorter term charts such as hourly ot dailies, If these big price changes exceed the extremes of the past five days for example ona daily chart, it is a good probability the move is the result of a breakout.on a_. weekly chart and you might want to refer toa large th sal bar atthe turning point extreme. On a monthly bar chart thes, range from the high to low on that very last that once the breakout occurs the secondary test will oniy pull back to the high or low of that” _ extreme bar depending on whether a buy or sell signal was given. Knowing and record where that price level was.at the breakout will come in handy many weeks later onthe: subsequent test when most traders are afraid of | iy back to the exireme low or high ices going all the way bi price. This is a very important poi ‘onsider when looking at long term charts and you _ should review the Trend Section agai these reversal signals are stillunclear. Knowing that long termcycles tend to come out near cycle lengths of 5, 10, 15, etc... years, we also can expect to find reversal points in our cycles near subdivisions of these primary cycle lengths. In other words if a ten year cycle is present, expect to see turns at 2.5 years, 5 years, and 7.5 years in addition to 10. Near the turns we watch our dailies for our natural common cycle lengths of 3.25 and 6.5 week cycles. Once we find these turns we can drop down to any smaller scale to trade within the now clearly defined five or ten year pattern. This type of analysis is best used for long term investors and fund managers who are looking to double large amounts of money over a few years. Traders of course will mostly stick to hourly charts and occasionally dailies, but it is still nice tohave a firm grasp on the longer term outlook first to give us alittle more conviction ina whippy market. Another good technique for looking at long term patie! cycle numbers. Common cyclesare often found at 30, 45, 60,90, eic... weeks and months all important are 45, 90, 180, and 360 sually pays to just look back these 45.“ “more frequently and more precisely as to toexacty ‘price movements imagine. Try it some time and you will be both shocked and elated. inmost people could ever Long term analysis in particular lends itself to subjective sociological analysis of cycle influences ‘on the masses. That is to say, at common known cycles like twenty, fifty, sixty, ninety, and one hundred years, most common social practices return often with uncanny similarity. The building of the Berlin Wall and its destruction 45 years later is an example. The hundred years between the Lincoln and Kennedy assassinations is another. Many similar events such as labor strikes, olindustrial bankruptcies, or wars also color the historical event and give reliability to our cycle choice as the dominant one operating at the present time. Once we see the similar sociological beginnings di peri tly OPI wutcon The actual outcome canusually be deduced, however, from an analysis of the individual elements that make up the larger theme at work in the cycle. In keeping with the idea of alternation of cycles, one of the most powerful techniques in all chart pattern interpretation is that of mirror image foldbacks. This is a very important idea, and I devote a complete section of this book to it. Suffice it to say, on long term charts, patterns are often easily recognized as being exactly backwards to a prior pattem. These shapes are often symmetrical about a major high or low which becomes the foldback and each “wiggle” or wave in the up pattem is mirrored with a similar wiggle in the down pattem. When you see the obvious patterns, be sure you use them! They are highly reliable and can last for years before disappearing. Long Term Chart Examples: M/A-COM, INC. nyse rar ecroave’s Digital Pedate an Long Term Bear Market. Note Zig Zag Downward Pattern With Rallies Lasting, Only Three Months On Average. Also Note 10 Year Cycle -- High 1980, Low 1990. rotmeriy: MICIOUAYE ASSOCIATES, INC vebe $80, 100,000 shares Couren 23,863,000 at + 1991 | iove[ 1995! F958 | 1p 168 92CROWN CENTRAL PETROLEUM “A” ase r : tn roguctiom, Teiaaporting, Retiolag & taveecing Tetfoneus # lee Hoste, PoE : block = ¢2 undead Oaoe, 964,50 Saree Tref'é'-9 43] Mirror Image Foldback sr” | Pattern Forming In Barly 1985 Spite 2 for 1 1980 | sou] 1992] 1993] 1956 | 1995] 1956] ver MERRILL LYNCH & CO,, INC. gzmpsr Hs Axis Orientation Angles On A Long Term Chart. Note Offset Of Angles From 45 Degrees $9 140008 93Long Term Fibonacci Monthly Counts From A Major Top And Then The Next Low. Each 12 Year Cycle Should Repeat Similarly. KIMBERLY CLARK CORP. (RMB) ul oe wh 7 eed oO 1 This Section Should 4 Be A Replay Of The First 12 Years ‘The above chart shows long 12 year span encompassing 144 Fibonacci Months. This was one of W.D. Gann’s master cycles. Often you will see the same kind of up and down bull and bear markets repeating at this time cycle length. The repetition will not be exact but the subtleties of the wave forms will be similar. It is important tonote that near, but not exactly on, these time counts a major trendline was usually broken, and a signal reversal monthly bar was generated. In all technical analysis, particularly cycles, we need confirmation of achange in trend. If you study the above chart you will see multiple confirmations from angles being broken, time countsup, reversal bats, mirror images, and circular arcs or measured moves being completed. It usually pays to spend some time (several hours) on a long term chart first. Once that analysis is done right, you don't need to look too closely for many more months. Long term chart analysis is ideally suited tocyclic pattern recognition. By this I mean that, since cycles repeat, it is usually evident visually on longer term charts that a near identical pattern is forming again. If you take the time to look you will see spectacular reproductions of prior cycles often down to the slightest subtlety. Once you make a thorough study of a stock ona long term chart and have identified its common long term cycles such as 5 years, 7 years, 10 years or other, you look closely at those time intervals to watch for wave structure and patterns repeating. Once you find a good fit you can trade with incredible success for monthsat a time. Often these patterns will follow exact replications for up to six months or even longer and if you are lucky enough to have noticed the pattern forming, you can become rich. The following two examples are General 94Motors following a six year pattem in 1984and 1990, and Motorola following anine year pattern in 1981 and 1990. Please note that it is the wave structure or pattem that is being reproduced and not just the time count of so many days from high to low, etc. An analysis of the past wave — alternations in terms of percentage fluctuations and retracements is the key as price levels aré offen different but cycles follow circular motion so percentage fluctuations should be close on each_ Pattern, _ 95Mirror Images “Time has always been a study for philosophers and scientists. Being a market philosopher, how- ver lends itself othe perfect stucly ofthe subject. As Einstein believed, time isarelative concept tisexted by ones own intemal frame of reference. Ourbiological electrical nervous system and the speed of brain impulse synapses are ‘our only reference guideline for time in the waking state. In sleep, time disappears. Inthe stock market, time goes both backwards and forwards! Charts clearly seem to indicate that time goes in one direction, stops, and then goes it the opposite direction causing price patterns to repeat over and over ‘again with the exact same subtle nuances are vckwvards, The only difficulty inthis type of analysis is that time also appears © havea variable speed so when going forwards and creating price pattem, the speed may ‘change when going backwards and the pater repeats but appears distorted due (0 the change in speed on out constant time plotted axis of our chart. "81 "82 780 Here we take the °82 low and “flip” itvertical 0 the low is now at the top. We then move the pattern down underneath the 1980 to 1981 top and ‘we see the identical ‘wave structure in both the high and its reversed reflection in the bottom! ‘These foldbacks work for near term cycles -- not 10 year highs to low ‘comparisons.{thas often been noted that the pattern going up to the top repeats as a mirror image on the downside after the top is in, and the top itself (or bottom) becomes the reflection point for the entire detailed chart pattem. The proof of this can easily be seen on the above chart pattern which Tecreates the 1982 bottom from the 1981 top. The fact that this pattern is almost exactly back- wardsclearly shows that the emotional greed at the top is the mirrorreflection of the emotional fear at the bottom. This chart is created by taking the bottoming pattern in 1982 and flipping it upside down and backwards and then comparing it with the prior top in 1981. When the two are lined up under each other we see that all the “waves” match up showing that the emotional greed at the top is reflected in the emotional fearat the bottom. IBM Chart showing 1987 top and collapse being recreated in the low the following year. This chart shows a cut out of the top graph overlayed the bottom. The low on the bottom right is the inverted top! You may at first have a difficult time understanding this idea especially if you are not familiar i ch can assure you, however, that Ihave spent most of my adult ife studying this concept and itamounts toroughly 60% of my entire chart analysis time. It is the only way to dra > chart drawings often years ahead of time that come remarkably close to Price fluctuations. Basic analysis beginsby finding an obvious reflection point that looks symmet Since patterns tend to persist for long periods of time we can trace an obvious pattern back- Wards and forwards for many years and still get reliable results. The first step is to-start with « jo 2 low and count the days to the irst significant change in direction ina backwards ion. nother words, from a low count back to the previ h, back beyond that to a prior *yond that to a prior top, etc. We now go ime and note the same days from today where each of the past changes took place and we can make a "stick figure” drawing of the up and d ndextend them intothe future, Itwe find — 97{hata prior high becomes a future low we then expect the next priorlow to likewise invert and now be a high. We do thisexact same procedure from each major high and low over the course of the year and continue these counts backwards and forwards into the future f for} years and years. On my work papers Thave ofien traced back fifteen to twenty years of history and retraced these In This Case The Top Is The Pivot And The Decline Is The Image Foldbacl Of The Advance Point ~ Each Of These Mirror Projections Start At A Time Period Equal In Distance From The Pivot And Point In The Same Direction js enough, eventually we will hit the aga Tenzthof the eyleand the futuations wil repeat again Finding the major beginning and ending points is the more difficult aspect but obvious symmetries are usually quite visible to most people. ‘The best analysis usually consists of making a large workpaper and start on January Ist each yes You count backwards in calendar days to each major high and low over the past decade or more, _ and then project that count forward in time but opposite in direction to the prior movement. This ing | for the coming yeat . number of differing conclusions based on each individual stick figure graph, but in most cases a (od pivi uthe watch the current market as it enters that pivot area and follow the stick figure that most closely resembles the graph of the current move. For example: ~ 98Original Movement Inverted Mirror Projections Using Each Consecutive High Prior To The Pivot Point And Folding Back Into The Future This Is Not A Good Example Since Its Not A Real Price History, But If It Were You Would See Common Clusterings Of High And Lows Into The Future And Those Pivots Would Be Your Cycle Turns 99‘The above drawing shows two different species of fish. Itis clearly implied in the drawing that somewhere in the genetic ancestry of these two, a warping of the genes took place as the second fish appears to be a distorted image of the first created by twisting the major axis lines of the drawing. This picture is what I believe we are actually looking at when we see chart pattems. The mirror image symmetry we often see is just a minor warping of the axis lines of the plotting of price and time while the more frequent complex structures are nothing but more exotic twisting of the time axis with different speeds. I am certain that some time in the future three dimensional com- puter drawings will be able to interpret all our common stock price patterns, making the first users of such technology quite rich!lhl! Volume duiltllol thas been rightfully said that volume precedes price. Most significant moves inthe markets are caused by large supply demand imbalances and it is volume that makes the difference and moves pricesin the direction of the large orders. In most cases, volume is said to be positively correlated. That means that volume goes up with the real trend of the price action. Or, if prices are ina Bull Trend, prices will ise with rising volame and a light volume decline is bullish, anda heavy volume advances the normal condition. For the Bear Trend, volume increases as prices decline and light volume rallies are seen on the counter trends. One merely observes the chartpattem to note the large volume spikesover several months o sec if the overall pattern is rising with increasing volume (Bullish) or falling with heavy volume (Bearish). More than that, volume doesnot ell us _ much. Many of the biggest price movements in history have frequently taken place on light volume _ with large volume only appearing near critical tumsand timecycleendings. _ The most frequently held belief seems to be that volume is Bullish. This isalmost completely false. Itistrue that, in takeover situations, volume indicates the move is underway, but in almost all other situations, volume is indicative of atop! Only in some time and volume dries up to its lowest level in weeks and then the prices rise on increasing ~ volume, is the situation bullish, The typical case where heavy volume is seen is very nearthe top of _ amove where buyersand sellers meet in a tugof war and when the volume declines prices usually ~ do too. Normally this is only a small correction that will last three days to three weeks, but nevertheless it will be a top. Big price movements usuaily take place without too many people noticing. The typical stock will creep up a quarter of a point per day for several days until heavy volume comes in as everyone jumps aboard the move and on that final day the stock goes up a dollar or so and then tops out. Most people need instant gratification and frequently buy or sell at these heavy volume extremes and get trapped on the wrong side of the market, The better trades are to buy the light volume declining days and tosell on the heavier volume rallies. . Keep in mind when looking for volume signs that bull and bear market movements are parts of the psychological process known as accumulation or distribution. The accumulation cycle isthe Bull Market and the distribution is the Bear Market. These accumulation/distribution periods often last for months to years because it takes innumerable institutions that long t acquire their shares or tocompletely sell outafter a bull move is over. When looking at the chart you would want to look _ 101 ations where the market has been declinivigforfor the tell tale volume spikes to see whether accumulation or distribution is underway. When these spikes are present there is a good trending market to actively trade. Much later in the cycle, the volume spikes disappear, the stock goes flat for many weeks to months, and these periods are not conducive to good trading opportunities. ‘The above chart of Lotus shows the basic volume accumulation pattern of big spikes correlating with breakout advances and then sideways corrections on lessening volume. Note the classic “stair step” pattem of higher prices over months with continued heavy volume near each advance. ‘When volume reaches its lowest level the price advance again resumes. As long as these spikes continue the basic accumulation process is at work and you do not have to worry about a major break in the long term trend, Only aftera long period of little volume activity, and then dectining prices on heavier volume, would one become concerned. Keep in mind that institutions who buy stocks showing these positive volume correlations have no intention of day trading but are looking out six months to a year or more and price levels at least 50% higher, or the trade wouldn't make sense to them. Unless the fundamentals charge dramatically, you can assume that you haveat least six months of clear sailing to buy dips on these patterns before the long term trend will change. If you do see a pattern with heavy volume declines you may want to go back over the history ofthe past year or two to see when the big volume buyers got in and at what price. This is not to say you 102will not see big volume declines in a bullish pattem -- you will, but you should not see consistently heavy volume breakdowns that last more than six weeks on adaily chart. Remember our definition ofa Bear ‘Trend includes breakdowns to price levels not seen in 90 days or more, so heavy volume on lower levels more than three months from the top probably spell trouble Another fundamental nue of technical analysis is that “distribution always takes place after the move. Only after a good correction of 10 to 20% will the rallies hack occut on very heavy volume. To the uninitiated this looks like positive volume correlating with a rising market. If, however, the top is in and the stock is making a series of lower tops and lower lows’ pattern, ar volume occurring evenon up days is considered tion o liquidation by the big institution: Institutions have very large positions in stocks and frequently a big fund mightown 3 to 5 million shares or more of an individual issue. These investors are in for the long haul and can only get in and out of positions over many weeks to months. Once the break is big enough so that they believe the upside is limited, they will patiently wait for the next rally to unload. This is called distribution and is done after the final top is in. Bargain hunters and shorts usually buy the stock from the large institutional sellers but these new traders have short term investment horizons and the stock will be back on the market for sale within days to afew weeks. The distribution phase is just like the bullish accumulation phase only backwards. Heavy volume breakdown spikes will be consistently seen over many months as the stock moves lower and — lower. You do not want to own these types of stocks until a period of several weeks has passed since the last volume spike and the stock is now rising forat least three months without making a ~ new low. In regard to the market averages, increasing volume often accompanies advances and when an__ average of say 5 trading days or so of volume starts to decline the topis usually in and a correction is due. As long as the volume is increasing the advance may continue but look for the change in_ volume to note the cyclical change taking place. Cyclical is the key word to remember about volume since it is only on cycle tums that there is widespread participation and volume can change hands. If you are looking for cycles, look to the active issues. ‘The declining phase likewise is measured by increasing volume and when that dries up the decline is over. For years Ikeptan hourly chart of the Dow jones Av erages, and noted the volume foreach hour under each closing hourly price. The volume almost always gave a clear cut indication of the change coming the next hour as volume dried up tothe lowest level in a few days. This light volume _ \was obvious if noted hour by hour but often the last hour of the move would be a big price decline — onlight volume. The big price decline scared everyone from buying into the dip, but the volume dry —Besides stock volume, option volume is even more important. Although this is a subject requiring a book by itself and is covered in my Geometry book, | will mention that volume in options is both bullish and bearish depending on whether the volume on the option is reflected in the stock’s price action. Thatis to say a large option trade suchas a thousand options on IBM would be bullish if the option price is up but the stock price is quiet. This usually signifies big leveraged money racing the tape ahead of a big stock buyer asking around for stock, or it could be just illegal inside information abouta takeover or upcoming analyst recommendation. This is to be compared with IBM up a dollar or so on an obvious bullish day with everyone participating, and the options are also up on heavy volume. This usually means a top as people are buying both stock and options but someone is selling the options to those people otherwise the option volume would not be seen. A light volume option day witha heavy stock volume day would be more bullish. Also keep in mind the fact that most arbitrage buy or sell programs in the market these days are preceded by big OEX or index option volume. Most firms trade for their own account and when they get a big buy or sell program the first thing they do is stock up on puts orcalls, You will almost NEVER see market movement when these firms buy or sell their options because they always race the tape and only hours latershow up with the program to execute. What you must do is constantly note large option transactions and particularly note the time and price they trade so you can refer back to those statistics later in the day or thenext day when you see the big program hit. From that point on. you will know that the program will not end until at least a half hour AFTER you see those same options being traded out with the same volume of contracts! T would say that for most chart reading volume is strictly a secondary consideration. Prices are much more important and cycles in the final analysis are what cause volume to come into the market and begin and end moves, Volume is often the cyclic tip off to a change but the volume itself is notthat important. Presently volume is more important than in the past since it frequently indicates the presence of large institutional investors and this kind of sponsorship is what is needed to cause large price movements. Long term investors particularly need institutional sponsorship to keep prices rising and periodic volume spikes indicate that presence. In the final analysis volume is needed to change direction and indicates cyclic turning points, but prices themselves are what make us money. We watch volume pattemsto note the coming change but trade off the price reversal buy or sell bar. At the end of the trading day itis the price we must adjust our balance sheet to and not the daily volume. ‘One final important point: This point is too important to mention in a book as inexpensive as this, but I know the vast majority of you are too lazy to follow up on it anyway, Forthe selected fer, here itis: s the marketalways changes. direction when the total al capitalization ofa: 104Inan active market! key to success. ould take two months — inan i 9 fect” chart, It shows anew bull move just starting. with an initial impulse. wavs near 90 degree angle accompanied with heavy volume. There are ral more such mpi over the next few weeks — ali on good volume and ai the end ofeach tep lows are all nicely higher. There is also the general sppsrance a of rapid acceleration to the s classic char chart patter be memoriz, orized. ‘Whenever you s¢ seeit you will make a lot tof money being long onit. 105Strategy Reading chart pattems is an art. It is alot like chess. Millions of people play chess and millions of people read charts but there are only a handful of grandmasters ateach vocation. Anyone can learn common chart patterns and anticipate when a trendline will break. But, it is only the grandmaster who can think fourteen moves on the chart pattern into the future. What separates the professional from the novice is the ability to see the possible chart patterns forming /F such and “such an event unfolds. The breaking of the trendline is irrelevant. Itis the possible regaining that trendline, of the magnitude and time duration of the change in trend that is important. In this regard professional strategy is what separates winners from losers. ‘The average investor has no idea what strategy is. He seems to think that you buy or sell what the people on TV recommend, or what the analysts at big brokerage firms think are going to do well He doesnot even conceive of the idea that for every buyer of stock there is a seller. Only one will be right on the trade. If everybody is making money, who is losing? Itmight be better to think in terms of entering the ancient Roman Gladiator pit and knowing only one comes out alive. Trading ona professional basis is like that. You must use strategy like an army general to trick the enemy into making amistake if you are to steal his money. Up tothis point [have tried to train you in some basic good habits like determining the main trend and then waiting for acounter trend movement toenter the trade. At least this way you will not jump in emotionally without even thinking about what you plan to accomplish. What is really required, however, is an entirely different frame of mind. To the Professional, and I mean that termas it is defined — one who makes his living doing it, stocks or commodities, futures and options, are but mere pieces of paper ina greater fool theory, game. That is, there is noreal value to these pieces of paper- they are only valuable if someone is willing to pay more than you did to buy them from you. Itis a never ending source of amazement to me to witness the extreme confidence the public has in their government and the capitalistic system of paper money. Anyway these pieces of paper we buy and sell every day are only valuable for short periods of time, or I should say their value is only perceived to be constant over short periods of time. 106The person who falls in love with the “investment story” will never make a success at trading. You must be like a retailer who buys cheap and sells with a reasonable markup, but sells often and changes inventory with the latest “fashion.” Getting stuck with old merchandise will require a loss liquidation sale. Stocks change in value every day based on emotional perceptions. There is no value per se. Itis the emotions of the masses that drives the supply demand equation. The professional chart reader knows how to look at a chart and see emotions, Measured moves, arcs, trendlines, and a hostof other tools are used to constantly redefine that emotional perception to exploit trends by buying fashionable merchandise and waiting for the store opening a few hours later or the next day when the buyers will beemotionally anxious to buy. The idea here is to tum over the inventory frequently with a small reasonable profit that will compound into significant sums over time. The grocer does not buy ahead of lettuce at $1 and expect to get $3 or $4 for it. He expects to mark it up 10 cents and sell it as often as possible and in large volume. The delivery truck comes back every day. Stock speculation is no different. This being the case, you as the retailerand in business to make a living cannot afford to just buy and sell every day and at every price Jevel. You must have the patience to specialize in wholesale_ buying and retail selling. Charts tell us what the market will bear. Steep angles show very popular merchandise whose fashionability will not change overn igi A broken trendline shows a changein 118 show the culmination of a shopping spree. When looking ata strong trending market that hasa parallel channel defining the move. you should _ _Teasure the average width of the channel to see the average range between high andlow fluctuations. “Being a humble grocer we have to frequently buy and sell atthe most popular and frequent fluctuation “even if that se mall reward. Its ll the market will give us. We cannot afford to make a big play and try to double our money over six months on something not seen in the chart history at present. That's an entirely different game than professional trading. We must buy dips fromeach high at the average normal observed amounts, and immediately offer for sale this merchandise onthe rack at thenormal markup fluctuation price. Trying to get more will mean fewer trades and greater chance of loss. If you trade options you will have a choice of buying a $1 call and selling it at $1.25 or waiting and trying to get $3. Which is better? There is no question the better strategy is to get the 25% markup and sell at $1.25! If you put odds on it you would find that the chance of predicting the direction of the move (being right on the trend) might be 70-80 percent. But, what about the odds once the move starts? They dramatically change! Once the move starts they start to decline so that when your option goes from $1 to $1.25 the odds of the NEXT 25 CENTS BEING UP might only be 50-50. These kinds of odds are gambling, not speculation! Remember as professional speculators we want to set all the odds in our favor. We want to 107choose when to trade, what to trade, how much money to trade with, and what odds of success we need. If we let the market dictate the odds we turn away from professionalism (o crude gambling. Returning to the option example, if we watch our call go from $1 to $1.50, $2, $2.50, to $3, we would see the odds go from 80% down to less than 10% on finally banking the money. This is the whole point of this book. You are supposed to bank profits every night. If that takes lowering your sights and getting small gains, so be it, By the way, making 25 cents ona $1 call is 25 per cent and if thatcan be compounded with ten successful trades the capital will increase nine times from $1 to over $9! ! ! And, this is ‘odds of 70-80 per cent. Only a fool would ignore this to wait for the one in ten chance to increase his In setting the odds at which we will trade, we must consider time as well as price. We cannot get caught trading a large inventory when the markets are inactive and quiet nor can we refuse to carry a full shelf of inventory when the hordes of Christmas panic buyers surface. We trade the active markets and use the charts to show us the active ones with big volume of sales and very steep angles of ascent. We also cannotallow ourselves the emotional luxury of jumping intoa trade every day in the first half hour and not having any capital left for a good midday reversal or end of day dramatic finish. We must constantly be alert for the wholesale truck making drop off deliveries. Almost all strategies encompass the deliberate undertaking of risk. Good trades almost always ¢ minor counter trend movement and we expect it to possi ‘We buy into a dip near known support or sell at resistance | ollar stop losson our entry point and we expect to fac entry point. In interpreting our chart patterns, we have calculated ahead of time thethree or four _passible outcomes from any chart reversal and have planned accordingly. If we do not have a — clear entry point or it is too far away from our pre-defined risk management point, t then we dot not_ make the trade. Remember it is our business, and wemake the rules, ‘The most common mistake futures traders make is with stop loss points. The trailing stop should only be used for the entry point or the immediate fifteen or so minutes after that entry. This is because as professionals we buy into the countertrend decline and if we are wrong it will be painful, After a few minutes in the trade we will know if we were right and will be making money or we are wrong on our guess and must close out to try again later. If we are not making money on the trade after a half hour, we should close it out or try to scratch. If the trade is in the money in the. first fifteen sanumure wealwaysmove the stop upto our entry price and try and get las “free ride” on 108transaction. again most S&P Futures tra sights set 300 to 500 basis or $1500 to $2500 profit per contract so they ar are wi i trailing stop of 100 basis, This seems logical but does not fit the facts. Most of the time the daily fluctuations in the S&P’s will not reach 300-500 basis so the profit target is unreasonable. What is reasonable though, is the 100 basis trailing stop which is hit daily and most of these _ traders consistently bank $500 losses every day. What should be done is to lower ones’ ‘Sights to scalping $500 profits with, 100 basis targets and using timing stops of fifteen minutes. in the trade or 30 to 50 basis trailing stops. Often by lowering ones’ expectations to smaller average daily gains, the rate of successfull hits rises from 50-50 to over he_ ‘compounding effect is mind boggling, . Another rule that will eliminate 90% of alLlosses is to raise our stop immediately to ourcost or cost. _ _plus commission just as soon as we have a small profit or are in anon-losing trade for more than 15 _ minutes. Commissions on futures transactions are practically nil compared to average profit expectations. To let a winning trade tum intoa loser and get stopped out with atrailing loss stop when we could have scratched or made money is perhaps the most grievous sin any trader can make and has absolutely no reason to make. Over the years, | have had the privilege of working with and knowing some of the worlds best traders. What I observed most of the time was that the truly successful ones were “gimmicky” traders, In other words they really treated the marketas if it were a game and the only rules were tolose as little as possible and to bank a profit every single day no matter how small. In one case I knew a very successful trader who made millions every year, but would be scared todeath tomake the first trade every day and chose little ones that would only net $100 or so and to get that in the bank as soon as possible. Only after that trade was successful would he become more venturesome. Another trader watched the tape for he id observing basing areas where _ everyone knew a big breakout was coming, After a three to five hour _Wwas broken out of, he would quickly enter the trade, and although it was “an S&P breakout of that duration would yield at least a 200 basis move, h he would jump i and immediately offer his contracts for sale up only 30 basis higher. This had the affect of allowing ‘him to have a success ratio of over 99% profitable trades. Although the profits were small, there. ‘were almost certain and it was like found money on the sidewalk to him. In only a few yearshe ran a few thousand to over 10 million with this technique. | am consistently reminded of this strategy almost every day when Isce customers get stopped out for 100 basis losses because they insiston getting 150 to 300 basis gains and just miss cashing in before getting stopped out fora loss. Please note that this traders’ success was entirely due tostrategy since his game plan was to scalp a small profit when everyone else would not even remotely want to do that. Because the market is not as predictable as most people believe, this strategy yielded 99% trades when the 109obvious big move only worked half the time and the losses and gains ended up in a break- even with no real net profit in the bank for the masses that expected big things. One of the reasons most people do not take the small trades that add up to real money is the fear of commissions and “churning.” In truth this is what wholesaling is all about — rapid turnover and small margins. Commissions are the same whether you bank a small profit every day, or a large loss every several days, Preconceived attitudes about what is right or fair will ruin you. Putting more money in the bank than you had the day before is the only consideration. Chart reading can very easily pick the winners for you. You must waitto execute and then take the money, and patiently regroup for the next offensive. Remember weare using charts to point out the emotionalism of the masses. That is our advantage astechnicians. Not to use that advantage by just “jumping in” is a waste of your intelligence. Once we see the major long term emotional situation, we plot astrategy to go opposite the minor temporary emotionalism. Hence we “buy the dips” or “sell the rallies” depending on whether we are bullish or bearish. Furthermore, once we set our strategy as to exploiting the rrend by buying or selling, we must now have astrategy tolimit losses if we are wrong, and we must have a strategy as fo when we take profits. All of this requires thinking ahead of time. We are responsible for setting the odds of our play and we must be constantly aware that these odds change all the time. Without a preconceived strategy we would end up executing in an emotional fashion like all the other “alsorans.” ‘When using strategy to enter atrade, do not forget the strategy to exit the trade afterentry. Many traders watch for a base breakout and jump in long knowing they will make 30-80 basis on the trade. What usually happens is that jump in and then just watches and waitsto see what develops. It might be a better strategy to place a sell order 30-80 basis above the entry point at the time of entry, if indeed that was the strategy. Most people get caught up in the emotionalism of the trade after the entry and often lose sight of why they really went in and for what profit objective. Asa result, they get trapped looking for more and end up with a loss, when the original strategy thought out before the trade was entered was the correct one. “Siock is up $3 and only 10% when up $8. You should constantly be thinking what are the odds “of the next $1 move? If you find that your answer is 50-50 or less, you are a gambler, not a. _ professional speculator. You must stop trading as soon as you find you are no longer speculating __ _. and you have let the game dictate the odds to you. 110Intra Day Patterns Most futures and options traders are day traders. That is they buy in the moming and sell by the close. The vast majority do not carry positions overnight. Asa result there is arush to get in and outin the first and last 15 to20 minuteseach day, This busy period is called the “opening bulge” or the “closing bulge.” The normal pattern of day traders buying or selling with the trend of the market usually sets the daily theme right from the start. Not only are futures and options professionals better skilled at trading but in recent years there has been a tremendous amount of “front running” large orders and entering trades with illegal inside information. Front running is the practice of quickly entering orders ahead of large block transactions or in front of soon to be executed arbitrage program orders. In recent years, the rise of behemoth mutual funds and pension funds whocome to market with orders for 200,000 to 500,000 shares of as many as 200 different issues at one time, have given rise to massive amounts of front running, ‘These huge institutional orderscan take several days to fill and are carefully executed secretly to maintain market order. Unfortunately, at least 50 to 100 important traders and individuals are always tipped off ahead of time when these Programs are operating, since the knowledge of such orders is worth millions in the right hands and the right hands always get the information. That is just how the system works. In any event we as independenttraders can easily spot such activity in our charts and trade along with the big inside money, Remember that pcople who have near certain information, either illegal or just in the course of executing large trades; these people do not waste valuable capital on these trades since they are virtually guaranteed. They use lots of leverage like futures and options to get the greatest return in the shortest time. Asa result these trades show up in the morning bulge. Our job is to decipher from the early moming pattern if these knowledgable people are buyers or sellers so we can join them. The typical bull market pattern as mentioned previously is carly strength (opening to 11 AM) and late strength (3-4 PM). Bear patterns are the opposite. The actual intra day pattern for a bullish day would be an up opening that goes straight up for at Teast 20 minutes and sometimes an hour. By 11 AM most bulls are committed and the pattem creates a consolidation trading some several swings up: mgs up and doin aeiaceTien 70RE OF Me OMT tvRMCe— aaout the daily high nor approach the low, Usually arounc akdown” plunge to a slightly lower low than seen so 10:30- 11 AM Bullish Day Pattern N Close 4PM Bearish Pattern 1:30 230 PM 2 Close 4 PM a 7 10:30 - 11 AM These above patterns are very typical. Even so there are to my estimate about 7 or 8 basic permutations, but all usually follow the opening closing same direction, midday counter, tule. The most obvious feature of these patterns gives rise to the important “opening bulge” is rule works 70-80% of the time and basically goes li like. this: The: EXTREME! HIGH, “seem to be worth much but if you stop to think about STRATEGY for the midday and end of day, the rule givestwo very good trades and perhaps athird. The opening trade isthe trickiest “waders will do nothing or po with the obvious bullish/bearish daily trend. You could also ___Buess using a timing stop of perhaps 15 minutes to 1 make money on the guess Or ¢ close it out 112and reverse. The more reliable information is is after we see the 11 AM high or low. We now _ “false counter move eri cea mi We may want to short the false br PMand stay short until the close. Ttisthe characteristics of these counter trend moves that accounts for why most S&P traders who usea 100 basis trailing stop are always stopped out mid-day for a loss and lose their positions when their early moming outlook was usually right. In the quiet day lunch hours, itis easy for the pit traders to nun the stops and load up on these false bottom breakdowns, at which point we_ double up and go long for the close, Unfortunate doctors and lawyers seem to only trade S&P’s with stops and badly at that. can say from experience that if you are not making money day trading, try NOT trading until at least 2 PM. The vast majority of people cannot because they are so emotionally involved and must be in it in the first minutes. Often those trades are not the good ones. Reversals of trend days follo va done closatnontncer everson eet Th Ans peng attract short covering that will unload inventory from the night before, and (once itis unloaded, the _ traders know instinctively togolonga strong 3-4.close and hold ‘overnight to sell into an up. - opening. This can usually reverse.a market back down but the trader who sells out on the opening bulge does not miss anything by doing so because even if the trend does not reverse, we know there will be acounter trend dip mid-day to get back aboard for the end of day rally. Strateg; always remember the 3-4 closing the night before and assume acontinuation by I AM buttothen watch out for the reversal. If bullish day is going to tum into a weak close and a down next day, you usually have an. These intra-day patterns, although ideally suited for futures and options, are also very good ue will usually hit bottom by 11 AM and base and show good follows _thru the next day. Itpays __feading to see if the rea it looks like a weak close and a market decline coming. Many funds sell S&P futures short against longs, or sell OFX options against the portfolio to hedge, The selling of those highly leveraged futures and options in itself will often exacerbate the downward trend and make the nervousness a self-fulfilling event. Day traders should therefore keep an eye towards not only the trend at 3 PM but the action in the futures and options pit to judge whether the leveraged players are making a bet against the existing trend. It does not usually pay to go against those with big pockets. money suchas__ you should kno premiumsto see ifthe calls are expanding in premium with arising market or the puts going up with a falling market. If you see the opposite happening, be prepared for a reversal in trend. These days ‘with the large institutional dominance of the market, almost all reversals will be forecasted first with the futures and options, and only then show up in the broader averages and stock prices. Typical Intra Day Tick Chart Of The S & P Futures Intra Day SEP Futures 12/03/93 Clone At High, . BackTo High Ecigipe nae "Faloe Breakout @1:30 By 3PM N \ Opening Opening Bulge (Extreme ‘Was LOW,Step By Step 2 Putting it into practice Some aspects of chart reading are skills and some are subjective interpretations. I honestly think, however, that the vast majority of people are capable of successfully day trading if the principles in this book are studied. Some are obviously more important than others. In an effort to summarize the book I will attempt to chronologically list the first and most important steps you should follow when you first pick up a chart. 1- Look at the entire chart history and see the broad general trend, whether flat, or sloping up or down. Imagine parallel trendlines if possible. Ifa very long term chart (5 or more years) is available, see if accumulation (bull market) or distribution (bear market) is going on and what strategy will be needed (buy dips or sell rallies). 2- Note the “big bar” impulsesto make sure they follow your assumed trend direction. Note volume to see if it confirms. Make sure the weekly and daily “stair steps” that define the bull or bear patterns are evident in your assumed trend. Note the type of “personality” the chart has (spike highs and lows, rounding bottoms, kamikaze, etc.). 3- Look for obvious symmetries and mirror image foldbacks. This could be considered the first step but symmetries are often so subtle they only show upafier a much closer examination. ‘This search for symmetries should include bowls and arc pattems developing. 4-Note the high and low rangesto see if the pattem is volatile enough to trade and where in that range the current price is located. This also includes examining the average measured moves in the history, and noting if big potential existssuch as a breakout from a large base (length of base equal toheight of move). 11S5-Check for time counts. Three and one quarter week cycles, Fibonacci hours, 30, 45, 60, 90, etc., calendar and trading days from major highs and lows, This will wamus of impending cycle tums. 6- Look for trendlines and timing anglessuch as | x 1,2. 1,4 1,ctc. Are we breaking out or breaking down? Momentum? Is the move just starting or finishing? 7- Wave counts and specific known patterns. Obvious patterns are more reliable for good entry and exit points. 8- Find the most recent impulse wave and try to locate where you are in terms of wave 1,2,3,4,5. Note prior retracement percentages at each prior wave culmination. 9- Is the pattem obvious to everyone? How are the masses currently reacting to this chart pattern, and what strategy will be employed to exploit their weaknessin interpretation? Usually the best trades are the typical “wave 4” mini crashes that look scary but always lead tospectacular up legs. Leam to exploit the masses’ fears. 10- Decide ona strategy, chose entry and exit points. Calculate projections and alternatives. 11-Look at the last 5-10 reversals and see who “won.” Traders know to do the same thing over and over until it does not work. What strategy -- buy dips, or sell rallies -- actually made the most money over the last several swings? Trade with the winner’s strategy. The vast majority of people want to plan for future trades. Very few will take the time to examine the past. It can be very beneficial to review the last several days first, and see who did what based on what the patterns looked like at that time, and find out why the losers lost. 12- Look for buy or sell signals that do not work. A pattern’s potential that is not exploited tells you much more than the pattem that works. Pay attention to technical signals that have little influence. This usually means a much more powerful underlying cycle is present than realized. Remember that one of the basic tenants of cyclic forecasting is that in a bull move the up parts of the cycle are exaggerated and the down parts are attenuated. In a bear move the down cycles show the stronger influence. If you are following a 6.5 week cycle and suddenly find the lows are lower than the last cyclic low, it probably indicates a bigger and longer lasting down cycle is starting to manifest. You could now predict that the up phase would be weaker than the last observation. 116S&P Futures Trading Perhaps the most important market for using technical analysis and chart reading is the S&P Futures market. Fundamentals mean nothing here since the average volatility is so great that by the time the fundamentals are truly known most traders would go broke. Additionally this market is driven by a great number of diverse players whose objectives may be opposite to the general market's direction or trend. Basket programs may buy stocks but sell futures making the S&P’s appear to be going down when the stocks are clearly going up. At other times, ratio strategies may require either the purchase or sale of futures, while taking the exact opposite position with twice as many call or put options. In the final analysis it will usually be nearly impossible to leam the motives of the S&P traders as to why they bought or sold and these motives may be completely irrelevant to your particular objectives. The only thing that is important is the direction of the trend during the time period you will be trading. Whether it reverses tomorrow or next week or whether itis part of an elaborate hedging operation has no bearing on your decision to buy or sell -- only the price direction. For these reasons chart reading is the only means to consistently win in this market. Since arbitrage programs are frequently active in this market, itdoes not pay to have a very long term perspective. Huge moves can take place in only afew hours to a day or so and be completely gone withina day. Because of this, strategy must emphasize trading and not positioning for along term trade. Most traders who are successful in this area average three to five trades per day, and on very active days, may trade 15 to 20 times. As mentioned elsewhere in this book, you will probably do better in this market if you lower you sights and scalp small trades than insist on getting the bigger moves of 300 to 500 basis or more that at best only come once a week. Most winning strategies focuson scalping 80to 100 basis per day, but often that total may take three individual trades. Trailing stops are only used for the first fifteen minutes when you are usually entering acounter trend movement and do not know as yet how far it will travel. A fier fifteen minutes, however, you should be able to tell if you are right or wrong on the trade. Either way it is usually time by then to scalp a profit or scratch or eliminate a bad trade. Holding futures for hours and not making money isa good way to lose money! 117‘You must constantly try to avoid reasoning why the futures are doing something. As mentioned above, many arbitrageurs have differing motives than you and must execute orders to facilitate various strategies, and this may only bea minor temporary influence. Nevertheless you must trade with the size orders in the pit or you will end up losing. The successful traders will therefore always follow rules and chart reading principles with a very rigid interpretation of these rules. Thinking should be limited to entry and exit point strategies and possible chart misinterpretations. ‘Since trades are frequent and small, elaborate sophistication is not needed to become a successat scalping, but many of the principlesin this book could make you spectacularly successful due to the numerous opportunities to identify good trades when more traditional methods are confused as to the actual trend. Basic principles should be our starting point. These are as follows: trend, ares, measured moves, bar counts, waves, and angles. These methods have been explained previously but a quick review seems in order: 1) Trend Higher bottoms, or lower tops and lower bottoms? What period do these trend bars encompass? Isthere a possible reversal bar signal due or just seen? 2) Ares Can we draw an arc to determine support and resistance? At least we can draw a circle around a significant low to high or high to low to get possible measured moves and radius and diameter lengths for future movements. What shape do our arcs describe? Are they just starting or maxing out? Is there an arc intersecting with an angle or support or resistance point? Where do the tops and bottoms of our circles create support and resistance? 3) Measured Moves In conjunction with our arc analysis we can use a compass or ruler to “measure” normal fluctuations over the period relevant to our trading. That is if we are trading ona five minute hart, we learn the most likely 5 minute reversal patterns, but at the same time we must atleast examine an hourly chart of three weeks or so to get a feel for the maximumextremes we are likely to see at some point. Remember our basic scalp should be confined to the run phase of the accumulation, distribution pattern and even on aminute scale such as five minutes, these measured moves are the run phases.and once they are done we will end up in a support or resistance area and we do not trade in those areas! 4) BarCounts Numerology is extremely important. A though I cannot even begin to scratch the surface of sucha subject ina simple book such as this, I will tell you that numbers themselves arealive 118and live in another dimension distinct and apart from us whether or not you know it! They have the power toreverse markets. You must keep number counts from every important high and low! Ata minimum, keep track of Fibonacci numbers and square outs where major highs and lows are equal in timecounts to their price levels. Because human beings ona subconscious basis convert numbersinto circular measure, all highs and lows in history will be proportionally related. If you believe an important tum may beat hand, you should be able to confirm itwith number counts and proportions of previous highs and lows. 5) Waves Atthe end of all big moves watch for wave formation and patterns. A, B,C pattems are easy transitions to large move resumptions and usually appear at the end of normal measured moves. Measured moves with clear five wave segments bear close watching. Three’s, five’s, and eight’s are also important wave pattern segments. Remember the purpose of the wave count is to project prices for the move and our strategy should be ready for a major change in trend if such a probable projection pattern shows up. *6) Angles If we are trading a move that is some distance from its origin, we would want to watch angles closely for change in momentum and time cycle intersections. After an initial impulse wave, we can usually rely ona secondary impulse from the 45 degree angle or from an angle rising from the “zero” point. Measured moves should be apparent at these points of support or resistance also. Remember to adjust the axis of your primary angle to the major thrust vector of the movement. This is a very important point when trading on intra-day charts! Forty-five and ninety degree angles out from these adjusted axes are deadly. ‘The following charts will demonstrate the analytical process for trading. We start with the hourly chart. Begining Of “rash” Resistance 119‘The first thing we note on this hourly chart is the trend, and that appears to be down. A major break occurred some nine days back but the price structure still has not regained the breakdown level. The top of the recent rallies at the end of legs “A” and “B” were near 38.2 percent -- a normal bearish retracement, and even ifa 50% retracement goes to a slight new high above “C” it will just hit the massive resistance line labeled “crash resistance” and it will also be near the 90 degree maximum resistance rally line drawn up from the first low. The obvious A, B, C,corrective pattem is evident so we can possibly expect another big downleg once C is officially completed. ‘Asofthe last bar in this chart a signal bar reversal sell signal was given 4 bars back and thecurrent price is resting at that failure level. Strategy is to think bearish and short, but be aware that if the 50 oretracement level can be regained, then the A, B,C pattern could actually bea double bottom and anew all time high could result. Hence we want to shorta weak market but not arisingone. If we do short a failure we can use the current high as the stop out point and project lower prices, below anything shown on the chart because that is what an A, B, C failure implies. Usually, it ‘occurs at the midpoint of the bigger move, so as much as the all time high was above the A leg starting point that distance will be measured down from the C ending point. Aggressive 29 Zag Lower Lows And Lower igs: Trend bs Clearly Downt Stig" Rally Retraces Only 50x Of Decline Se Far Steep Angular Decine ‘Thisnext chart isa tick chart (every tick printed) of the S&P futures the next day. We come into the day looking for weakness to short or a rally that penetrates the 50% retracement level @476 tochange to.a bullish bias. We now remember the mostimportant aspect of all of day trading --the 120opening bulge rule. To repeat, this rule states that the extreme high or lowfor the entire tr ‘ading day will be seen in the first 20 minutes of trading (with 70-80% probability). Once we can get a legitimate trend (zigzag pattern) we can trust the bulge. By 10 AM, itappears to be a top and we g0 short, or we have guessed and shorted at the 50% retracement approach looking to cover ifa higher high is made after the opening bulge rule period. We can immediately see several powerful impulse waves to the downside even on this very short term chart. Those are the “plumb line” drops that break to each new low. This indicates serious selling. Indeed in the first full hour of trading we do not even see one full fifteen minute rally! If we are scalping, we cover cach 80 basis and look for a 40 basis rally back to re-short. If we are very bearish and are looking for a full day to three day swing trade we will not think about taking our first profituntil we get towards the low point where the first signal reversal bar buy signal was generated on the hourly chart (see Istchart Start of A). This level is near 469-470. Keep in mind that we must take our profits at each potential reversal point and not wait to see if the market will turn. Most of the time this kind ofexit will give us the maximum profit before we see the reversal buy signal bar. That buy signal bar isusually used to go long but taking profits where we expect low probability of further progress is our discipline. Remember we are constantly thinking —is this trade for the next 50 basisa 50-50 trade or an 80% probability. We close outimmediately when we get a50-50 trade. Alsoremember we can always re-enter the trade if it keeps going and we will always consider having asell stop at the low of the day anytime we exit a short trade guessing about a reversal in trend. As we enter the mid-day period we are thinking about the normal intra-day patterns for adown day which this appears to be. In these situations we expect a rally phase anywhere from I to2:30 PM Eastern Time so we are thinking about a strategy to exit our short and where to re-short. We know we want to be short by the close and possibly have a big break again from 3-4 PM. Our chart, however, isnot rallying and is declit ing in a wedge and if whose flat bottom breaks, we will see a big drop back to the lows. We also have some data now tocalculate the possible low. The major high seems to be clearly in with the opening bulge at @ 475.25. We now calculate our expected Gann square of nine chart support levels by subtracting root increments from this level. The square root of 475.25 is 21.80 so we can subtract one eighth or .125 to get 21.675 and Square to get 469.80 as a target. A stronger level would be the Fibonacci increment of 1459 (1.618 rose to the negative 4th power) or 21.80 minus .1459 equals 21.654, and that squared is 468.90. If these are broken, the major .236 level and the quarter (.25) would give us 465 even and 464.40. One of these should do for the current day's operation. Especially, keep in mind the next larger frame of reference. The final high was reached some two weeks prior ata level of 483.10 and the major .25, 382, and .50 ratios equal 472.15, 466.45, and 461.40. Any expected major reversal will most likely combine common harmonics of each of these swings. Our next chart shows the outcome. 121ButNote Cycle ine oF iat ‘This chart shows the waterfall culmination of the day’s deterioration. After such a big climax we cannot rely too heavily on the normal day pattern of a small rally and then another big break into the close. It is more likely to see a “whippy” tug of war between the super bears and the bargain hunters with several whipsaws. Strategy now must be to only trade rally spikes since a big break always leaves a “lingering memory” and the market will be quick to plunge on any future sign of weakness. ‘The arc drawn here is drawn after the fact using the actual low for the center point. This is merely to confirm that the arc influence is indecd dead for the rest of the day. If the arc had not gone maximum vertical down, we would expect another waterfall decline before day's end. Because it is over, We can now expect a normal retracementrally of one third to one half the distance back but most likely a one-sixteenth root up from the low, or 468.20 square root equals 21.636 plus one sixteenth or .0625 equals 21.70 squared, equals 470.90 for the expected top. Note this is almost exactly where the rally went. We would now swing some support arcs up from the low to watch for when the rally starts to fail again. The next chart shows the support arc and the markets extremely weak reaction to that support are. 122Center Of Support Arc ‘Arc Could Have Been Drawn From 1st Top But This Slope. ‘The Fact That The Inmediate Raly Back From The Watertall Did Not Repair The Damage (regain the price leven) ‘Means The Potential Lows Are Probably ther Set Of A B, C. Legs That Wil au Again And Resutt In Another Plunge ([o Yet New Lows For The Mave. Fe Shows Extreme Weakness and another Break Wi Be Needed In this chart I have used a slight variation of the arc radius, measuring from the “obvious” mid-point and the last important high prior to the waterfall. This complete circle will now describe all the behavior from the final high to the final low, even if that low has not been seen yet. If it has not, it will occur as the rising arc neat 40’clock reaches up tothe maximum 3 o'clock. We now see a pattern almost identical to our first one on the hourly chart which was labeled A, B,C. Our Strategy is to short the next sizable break back under the are that the current price is climbing. Since this appears to be an A, B, C leg again we expect prices to fall to yet new lows again before we will look to take profits. Keep in mind, however, that this will be the third such breakdown and we are pressing our luck to expect the market to drop forever. Any double bottom or slightly lower or higher low from this point on could be a good stop and reverse long point for a more significant rally both in price and time duration. ‘We also are reminded of the bigger picture that projects a possible final low near 466.45 (483.10 -.382 sq. rt.). Our plunges so far have been ugly, but, until that (466.45) number is decisively broken, we are still just in a minor correction in a long term bull move. Things could radically change, but for now we will take what the market and our arcs give us, 123‘These Two Ares Describe What We ‘Think Wit Now Happen. “The Support are Rising Gives Us ATime Target ‘And the Dedining Resistance ‘The next day, we see another opening bulge high and waterfall pattern. Clearly the market is beginning to act bearish but on a daily basis oversold. Note we hit a new low for the move but Tegained the old. This isa potential major buy signal crossing 466.45 and we would take it. The vast majority of big reversals go to a new low under arecent one and then reverse after the stops have been cleaned out. The chart below is the result of the projection above. 124The next day, we see a typical bullish day and a very strong bullish pattem. This is a classic bullish chart and itis so basic and simple you would think no one would lose money trading that day. The problem of course is our emotionalism and rationality. We think too much most of the time and need “reasons” why something has to occur. The prior three days’ action was extremely bearish so now the entire trading community is aggressively short and wants to stay short. Because of this we see a classic very bullish pattern with no pullbacks and yet everyone in this kind of environment refuses (o objectively look at the pattem to see the technical strength caused by all the shorts choking to death. It may only last a day or so, but as. chart technicians we do not care. We are only in this for the money! If the trend is up we should note it. SEP Futures Intra Day Tick Chat Note “Big Bar Bulish Trusts Also note the obvious “measured moves” of each impulse up move. As traders we would measure these movements each day and enter or exit trades when these normal extremes are reached. Keep in mind we do this daily to fit that particular day, but we have also previously noted the average fluctuation ranges for the past three weeks on the hourly and daily charts also so we are prepared for any surprising extremes. [have often had conversations with traders who use three or five minute moving average crossover lines to trade S&P's. What typically happens is several days to weeks of great success and then a big wipeout when the extreme hits. You must know the extremes seen over the past few months and be cautious about becoming trapped in amechanical 125system based on a very short term moving average which is only working off data from the last couple of hours. ‘This next chart is just a beautiful example of a circular arc and how profitable a knowledge of them can be when intra day trading. This atc is simply drawn from the opening high to the mid-day low and swung up. This information would certainly have provided you with at least two good trades of significance with very close stops and little risk. ‘This next chart is the same tick chart but with our axis orientation technique and various angles. Remember the major axis thrusts on any chartare very significant for determining the true trend. We can take any major up or down move and draw a straight line from the high tothe low to get the true axis orientation and then we apply or timing angles. The most basic angles would be the 12645 and 90 degree major resistance lines. After that, you could add 2x 1, 4x 1, or 8x I and even 30 and 60 degrees, but most of the time a few basic ones are all we need. Lam sure much of this is new to many of you and you can easily become fascinated with the aspect of exactly predicting each high and low. After having done that myself for some 23 years now and often getting the exact high or low within five minutes and 20 basis in price, I can tell you it is not worth the time to be so precise. As traders we are only interested in making the easy money and avoiding risk. Getting the exact high and low can be done but violates the basic principle of taking on more risk. The odds of success get smaller the more precise we get. In the final analysis, a few simple arcs, angles, time counts, and support and resistance numbers will make all of you rich if you do not get too emotionally involved. SUP intra Day Tick Chart ‘with Angles To Ade Line—_When ‘This Breaks Uptrend ts ‘Over! 90 Degree ortset 127Trading Stocks Stock trading analysis is not much different from intra-day S&P Futures trading, but since the average time horizon for trading stocks can be 3 days to6 weeks oreven six months in the case of mutual funds, time analysis is weighed more heavily than just simple buy or sell technical signals. That is tosay, a daily reversal bar signal may not always be taken, depending on the long term _ outlook for the issue. The complete bull cycle often lasts 3 to 5 years and within the waves making up that cycle, the counter trends occur every 9- 10 months on average, and they last 90 days or so before the main trend again resumes. Our first consideration is therefore to see where the major, high or low for the past twelve months has occurred and determine whether itis indeed a high or low. Once that has been determined it is a simple process to buy dips orsell rallies for3 1/40r6_ 1/2 wee..s ata time and use trendlines and resistance numbers for guidance. Thave chosen UAL as the example for this study since it isa good trading stock. Often the higher priced stocks attract many day traders due to the frequent dollar fluctuations and these mover usually respect the common principles of trendlines, support and resistance numbers, and time_ cycles._In the following discussion, please follow the explanations by referring to the chart. It seems like a simple exercise and you may be tempted to skip it, but I urge you to follow along to see the reasoning behind the strategy. movers __ The chart on the next page isa daily chart from 1991 to 1992. For demonstration purposes we have to start somewhere so we will just assume we want to start trading near the high in April. This is an obvious choice because the high price is $1611.50. A little numerology and decimal point moving should quickly point out that this is the golden ratio of 1.618 or 161.80 --a good place to find an end toamovement! Reviewing the “information box” in the upper lefthand comer of the graph, we see that last year’s low was approximately $84, so $ 160+ isa double anda good place to see ahigh. The actual high was due about a week before the reference point # | because that was the period that was exactly 3.25 weeks up from the last low and a signal reversal bar sell signal had just been given three days before the final high. But, after seeing the $161.50 false breakout price and then another reversal signal sell bar, we must now sell out and go short using 128TTL ee) Teo ae that highas our stop out point. Our minimum expectation now would be a typical 3.25 week down cycle from the high. These typical cycles of 3.25 and 6.5 weeks or about 22.5. and 45 daysare the yuent trading cycles and the larger 6.5 week component is drawn on the chart starting with ‘waves” with the low being the beginning and end of each eycl the square root decrements of our high of $161.50 or ‘We also believe the seasonal tendency for this stock is for highs and lows in April and October since we are 3.5 years from the October 19, 1987, crash low and 18 months from the nfos UAL collapse in October 1989 which led to a 200 point Dow Jones decline. Consequently, w _are now short with a aH08 at $161.50 and we see 5 days later arally back attempt that fails: exactly poi int #2 shows that Ic low. witha: a nice clean signal reversal buy’ bar n now cover palong a 45 _ _and go long using t degree angle coming up from any low we buy. ata minimum should be our stop. During this astrong trend 129but we expect resistance as we approachthe low ranges for the week of the final top. Reme that on a weekly and monthly chart we now havea signal reversal bar too, and arally back to the lows of those bars will most likely result in a failure and confirm another sell signal. Atpoint #3 we tothe trend. Atthe 3.25 time mark we see one final spike up failure from the signal reversal price zone of @ $1 “From point #2.and now we have a long term sel r four days of of hol ite the four day low. at this price hesitated bec becaus the top at 1.618. Atpoint #5 we form. a ‘wing down from $158 o $136 or @ $147 and we break down. The surly _pexthigh at point #5 is only 1 “happens at the midpoint of 6.5 week cycled — 130a Tee point #5 reversal sell barand we go down. There is now a one week tug of war between the __ bulls and bears from #7 to #8 because the top at #7 does not exceed the low #5 and the low after #7 does not break under the high of the buy signal bar at point #6. Point _ H8 resolves this for the bears and we return short once the high of point #6 is broken, invalidating that signal and indicating a new low for the move just ahead, This is the gap down and the penetration of the 200 day moving average which also validates the long term sell signal we saw at point #3 based on the weekly and monthly reversal sell bars. Point #9 is.a feeble attempt (o close the down gap and regain #6 but another sell is generated and we slide into the low just before point #10. We are looking for a major low here since It 18 3 cycles of a full 6.5 weeks from the all time high at point | or 19.5 weeks. A feeble rally _ ensues that reverses 3 days later and we erode into the low at point #11. Point #1 |. generates the, best looking rally so far for it regains the last top at #10 but cannot regain the 2nd one back at #9 -- which is typical bear market stair steps. Two and a half weeks of sideways trading results in a sell signal which declines to point #13 and rests on the high of the point #11 buy signal. Long before this moment, however, we should have been able to solve the_ puzzle and know with almost absolute certainty the day and price of the final low and the, start of the new bull leg up. This is point #14. How do we know that the low on thatdate, at. that particular price, is it? There are innumerable clues. 131eR ee ee au Eh w/oa ee, MIE Pato ree Fiative Saghey First the top was 161.5 and the low day indicated at #1 4 was 162 trading bars later for a major Gann square based on the high. Next the price of the low was 116,5and if we use numerology, here we see that 116.5 isa transposition of the digits in 161.5! You may not want to believe in this but I have seen it too many times not to take notice. Also note the top of 161 .Sdivided by the Fibonacci ratio 1.382 equals 116.85 for the low. Also note 161.5 minus 45 equals 116.5. Also note that on the Gann Square of Nine charta high of 162 would have 115as the low, one full cycle around the chart. The date of the low is near a natural square (25) in months from the October 1989 low, and it is 8 Fibonacci months from the top. Itis also 5 Fibonacci cycles of 6.5 weeks exactly from high to low. Additionally I would note that the price on the low day finally closed a gap left open from January when the last leg up began. There are many other reasons for the final Jow and date to coincide but you get the point. ‘Onthe nextexhibit we look at the same decline but from the perspective of angles and arcs. You _ an instantly see why all the highs and lows came out where and when they did.on this and lows came out where and when the J an angle washit, we gota rally until the angle intersected the arc. These zero price angles will make you rich many times over if you. for them! If you spend some time looking at this : «studying the exact tums ateach and every angle, you will finally grasp the realization that “newsitemsandeamings have absolutely nothing todo with investing! Al human behavior isemotional 132[Trend Fitted Are From Top- Note Final Low When {Arc Bottoms To Zero Angle Method Price 1x8, 1x4, 1x3, 1x2 60 degrees, 45° (111) 55 degrees (Fib) and cyclic inorigin. What this chartreally shows isthe hopelessness of the human condition for the masses. They are constantly deluded into thinking some news item orevent is causing the stock fluctuation, One look at this chart will tell you that is impossible. All Ihave done here is lift you above the crowd, for perhaps a more divine perspective. I could have also shown a nice chart with the angles from the top of one point per week, per month, etc., and it would give the same results. This one shows them a little more elegantly. Allof these methodologies work together and you should try several to find strong correlations inning of all great cycles, all numbersand time periods come together. Only a geometric and cyclic approach will identify them for you. Vow _ today to throw away your newspapers and stock brokerage reports. You only need charts!Advanced Techniques Basic principles can be elaborated upon to acquire an infinite amountof time and price data with which to make forecasts. The natural forces operating in the speculative markets through the mechanism of human emotions can be defined with very good precision. Justas with mathematics, we can apply principles and axiomsto develop theories and hypotheses that will shed light on possible outcomes to our stock marketriddle. Starting with the basics of trend and impulse direction, we then use measured move vectors to get rough approximations for eventual exhaustion and price targets. Circular arcs more closely define our measured move limits and expansion of other geometric shapes like circles, squares and triangles will give us the rest. In this section we will examine some of the basic expansion techniques to define and identify points for forecasting long wave sequences, Our basic premise of the natural cyclic movement of human emotions through the markets is analogous to the tides at the beach. In an advancing market (Bull) each thrust or impulse wave penetrates to higher and higher levels just like waves at the beach. Our higher bottoms’ definition describes the low point of each wave swell priorto the next surge. Once the high tide is reached, the waves diminish orrecede (Bear) but still ebb and flow in a cyclic fashion and our lower highs and lower lows’ pattem describes this movement also. What we need as an additional model is something that will project the size and amplitude of the possible tide thrusts and ebbs without having measured all the moves or having a table of high tides. ‘There are a number of ways to do this but the most natural way, and the logical corollary to our geometric analysis of time and price, isto expand our geometric structures by known natural lawsof physics. ‘There are basically two types of cycles operating in the markets and these are usually referred to as static and dynamic. Static cycles are just fixed length cycles that repeat over and over such as every 100 hours, or every 30 days. Dynamic cycles are growth cycles where each cyclic retum is elongated in time. The most well known dynamic series is the Fibonacci series of each number added to its neighbor to get a sequence like 1, 2,3, 5,8, 13,21, 34, 55,89, etc. Another would be the natural square series of 4,9, 16, 25, 36, 49, 64, 81, etc. When working in geometry we find another dynamic expansion cycle which equates to the roots of the geometric object. Square roots. have been ment as the basis of the Gann Square of Nine Chart, but most common expansions_ 134used in the marketcan be limited to the square root of 2,3, and. S. These.are the mostimportant.... The rest work, buta knowledge of these is essential. ‘The best and easiest way to use these cycles is to actually construct the geome from overy " ‘The abave chart shows an initial impulse wave that is “boxed in” by drawing asquare around the _ Jow and first high. That first box is our primary expansion seed, Knowing the Pythagorean Theorem states that in a right triangle the diagonal squared is equ: mm therefore know that the diagonal of this first square of “1” unit sides v If wenow swing the diagonal down to the 135topshorizonially, it defines the eventual projected top for the move! There are many other subueties_ nique but | cannot show you everything. Experiment! Keep in mind that circles drawn, high and lows can also be expanded by increasing the radius and diameter. _ ext oot to a 45 degree diagonal equally divides time and price, itstands torea i _ extended, we should be able to see ALL turns that are ‘harmon ally related to that origin Price and time. In this: chart I have drawn anangle upwards 4 and put “de harmonics (fractions) of the low price intersect that particular price on the graph, Forexample the low was 23 5/8 so 1.25 times that price is 29.53 and at that price we place a dot. The other expansions are noted along the timing line. The important thing to note is that at the point of intersection of the timing angle and a strong price harmonic (50%, 100%, .382, 618, etc.) wesee _ clic turn in direction of the price and that area also defines future support or resistance levels. _ Please note the little “arrows” going both to the right and down to point out this time cycle turns and the price level areas. Obviously this technique can be expanded to include other angles. This technique is one of the only ones that will work on, achart that is “flat” or having few fluctuations, “or notenough data to draw arcs or other trendlines. In those cases this is quite handy. . 136strates the fact that citcular ares drawn from every major swing will create the major highand low resistance price areas towatch for when the stock reaches that price levelata later date, Here we swing an arc from the low to the previous high to find out just how high ourtarget wil be if that first top is ever exceeded. In this case the final high actually “overshot” the ac target (which israre) butcame close enough to wa us of ani npending drop. But, note thatthe 45 degree timing line from the low intersected the arc target price evel almost at the exact high That would give us added confirmation that the majo ices as soon as we saw a good technical sell signal to confirm the projection. especially in Bear Markets), is the case of drawing anare from the high down through the prior low to give usthe next breakdown ing target. On this chat you would draw it from the high at 79. 3/8 in September down through the low in June near633/4 and down under that final high. ‘That approximate level would be 58 3/4 for the itis very simple and always works!_ Ournext exhibit requires a little more thinking and logical reasoning about the implications of circularares. Since weknow that ares drawn from major swings will exhibit price reversals atthe ends, we can theorize that onc radius of an are (horizontal 137‘will be able to section off that radius into fractions and proportions, and see many minor, but ‘tothe right. (This is the same bia beat ecg Tae to measure is the distance fe the high to the 3 o' "clock point where t SE. segments. This technique e could give your ume: rous t istechnique is particularly: hourly t s chart is completely shows the final results for you to compare, but the beauty ofthe. method is that you can identify all the future turns while you are still at the first top pointand have _ iplications of this idea are staggering and1 _ ris! Please understand sl hl i a 138Il keep it simple so you will just see the basics, are spawned from this structure. Basically, } to A. We connect lines between A and B and _ between C and D. We now have four primary fundamental chords from this pattern. These are _ Jengths A-B, A tomid-point B, C to D, and Cto mid-point D. Note that these arise froma major _ swing AB. What we have are the theoretically perfect measured moves for.this particular exactly equal to the distance A to point 2. This was known before that length was ever seen! Measure it to prove it to yourself. Also note the up impulse just before number | and culminating _ at |. That length is mid-point A-B. Much more could be said, but this isa very advanced technique and reserved for special students. _ fay The above techniques are only a few of the ones I find useful, but they should give you enough ideas to follow up this analysis and find more uses of your own. In the final analysis, chart reading is ascience, but 139Appendix A Examples ‘The chart at the right is the basic pattern of an uptrend. Note the “big bar” impulse thrusts showing emotional buying. Aftereach impulse the ensuing correction drifts sideways to end at a higher bottom just before the next impulse. Volatility increases as the size of the trading bars increase and the stock moves up in price, Trendline angles connecting the lows increase in steepness and start to forma circular are. Cote - i imrase | if

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