What Works In Technical Analysis: Anchoring Trades (Pt 1)

Discussion in 'Technical Analysis' started by NoiseTrader, Jul 4, 2006.

  1. What Works In Trading & Why: Anchoring Trades (Pt 1)

    I've been absent from the forums for a few months, I 've had some health problems to resolve and have been working on better ways of communicating the analysis I do and the trading process I've developed.

    I'm going to explain that process in more detail than previously and in three Parts:

    Pt. 1: Anchoring Trade Analysis in A Primary Trend Model
    Pt. 2: Ideal trade Location & Variant Perception
    Pt. 3: Reversals & the Order Flow Bias

    Some of what I've posted before was objectionable to some and controversial to others, so if for some odd reason, what I write about or how I write it is irritating then read no more.

    In this series of posts, I'm going to demonstrate, as clearly as I can, how it works and why it works. I don't and won't explain everything explicitly, but the process is explained and you can use a lot of tools you have confidence in to fill in the blanks.

    If you want the complete version (this is edited) of this process then go to my blog http://www.street-noise.net/articles/ There is a gray box on the right side where you can drop me an email and I'll send you more complete PDF versions along with updated analysis of current markets and current conditions.

    Here goes...

    Pt. 1: Anchoring Trade Analysis in A Primary Trend Model

    High frequency timeframes (daily & intraday) are frequently noisy, yet that's where most traders focus their time and effort. It's really the low frequency timeframes (quarterly, monthly & weekly) which drives trends and controls how various market structures (price swings and price patterns) are going to resolve.

    In this first Part 1, I'm going to walk through some charts and demonstrate how primary trends control the resolution of structures that develop in lower timeframes, but first we have to define a controlling trend.

    The idea of a primary trend is to isolate a higher timeframe where the bids or offers in that timeframe offset or dominate what is happening in lower timframes. In this way a primary trend, is a controlling timeframe.

    Rising quarterly equilibrium price levels drives what I call primary bull markets in most markets. At the end of each quarter, I run a proprietary calculation to determine a historical quarterly equilibrium price level. Equilibrium can be thought of as a price level around which perceptions of value aggregates.

    I've uploaded a set of charts that accompany this post. If you want the charts with the text, drop me an email (as outlined at bottom of this post) and I'll send you a PDF version with charts.

    In the monthly Gold chart (Primary_B) the solid blue line at X is historical quarterly equilibrium. I also run new estimates every month for the new quarter (see chart above, solid light line at Y).

    When the solid blue line is clearly rising, quarterly equilibrium price levels are rising and the primary trend is up.

    In the lower timeframes (weekly and daily, etc) the major reactions back to quarterly equilibrium have been nothing more than strategic opportunities to reduce short inventory and increase longs.

    At the recent lows, Gold moved back to quarterly equilibrium as it tested the light blue line, which is the where I expect quarterly equilibrium to be in 3rd Quarter 2006, giving me enough confidence to accumulate gold and gold stocks a couple weeks ago near the low.

    Likewise, when the solid blue line is clearly in decline (see the 10-Yr Notes chart, Primary_C) quarterly equilibrium price levels are declining and the primary trend is down. Notice the primary trend reversed in the 1st Quarter of 2006 and the rally in the 1st Quarter was nothing more than a strategic opportunity to reduce long inventory and increase short inventory.

    In the monthly Dollar chart (Primary_D) the solid blue line at X is historical quarterly equilibrium. Notice the primary trend turned down in 2nd Quarter 2002 and exerts a controlling influence as every rally attempt failed for 2 years. After a brief primary bull move up, the primary trend turned just down again in the current 3rd Quarter 2006.

    Finally, look at the S&P 500 Stock Index monthly (see Primary_e). It entered a primary trend bear market in the 1st Quarter of 2001 and once again every major rally failed for two years.

    The S&P then reversed into a primary trend bull market in the 3rd Quarter of 2003. As of June 2006, the recent decline is a correction, not a bear market, because quarterly equilibrium is still rising.

    At the recent lows, the SPY had moved back to quarterly equilibrium giving me enough confidence to increase long inventory in certain individual stocks a couple weeks ago very close to the extreme low.

    Reviewing these charts it becomes self-evident how important it is to anchor trade analysis in higher timeframe trends.

    In sum, seeing trade location, where price is currently positioned relative to a primary (controlling) trend, anchors the analysis by placing a trade in a context where you can see if an asymmetry exists betwen risk and reward and why a price structure in a lower timefame should ultimately resolve in a reversal back with the primary trend.

    Of course, most traders need a finer degree of resolution than monthly bars offer, in order to convert a general strategy into viable tactics.

    In Part 2, to follow which I'll post as a new thread, we'll drill down into weekly bars and talk about ideal trade location in a more specific way.

    I publish this type of analysis (in more detail) for a range of important current markets as PDFs. If you want to follow more current examples and learn more about the tactics simply go to my blog http://www.street-noise.net/articles/ There is a gray box on the right side where you can drop me an email address. It's currently FREE to all.
  2. Attached charts
  3. segv


    It is your assertion then, that the equalibrium values derived from your proprietary calculations have some predictive quality? Are we therefore to conclude that gold prices are not I(1), but are instead mean-reverting? Your proprietary calculations would probably be of substantial interest to the academic community, and the entire field of econometrics. There is probably a Nobel prize in it for you somewhere, so you might consider publishing your research in a peer-reviewed journal.

  4. Exodus


    Interesting post !

    Thanks for sharing, I'm looking forward to the read.

  5. gkishot


    I am kind of confused by your statement that quartely equilibrium for SP500 is still rising. On March 31 the SP500 was at 1294.
    On June 30 it was at 1270. This definetely indicates at a declining trend. Can you explain?
  6. If you look at that SPY chart closely, you'll see that as long as the solid blue line is rising major reactions have been periods to accumulate longs and reduce or cover shorts.

    This will continue to occur until the blue line rolls over (like it did in 2001) where the SPY enters a primary bear. This condition is not present right now.

  7. ================
    Thanks & enjoyed your link with Rich Denins quote on preparation;
    hadnt seen it before.:cool:

    Probably some didnt like what you wrote, because they never studied Dow Theory. Find Dow theory quite helpful, not that it predicts; a weakness of it follows [& use that word respectfully]

    Never bothered me that Dow Theory dosent' predict;
    a primary trend change requires '' many months'' could cause problems if one doesnt want a derivative or stock stop loss of ''many months''.

    Actually amazing that old Dow Theory has so many helpful applications today. If memory serves me right he calls daily charts noise; helpful except on the exception to the rule day in OCT 1987 . Put your website on my ''favorites'':cool:
  8. gkishot


    I bet that equlibrium for Nasdaq ( and Nasdaq100 ) shows that it's in a bear market now or getting close to it.
  9. humble1


    Exactly and refreshing. Thanks.
  10. Hey Noise,

    If you still would happen to have any problems with the above, do an ET search for "Jack". This will resolve any hanging questions for you.

    Nice harvesting.
    #10     Jul 5, 2006