Below are 2 charts, the first is from August 2011 to November 2011. This was an incredibly volatile time in market history. Swings of 30 and 40 points daily were common place with a few of 50 and 60 points. Sideways or consolidation markets create the most volatility. There is obvious disagreement about market valuations as both bulls and bears push and pull the market back and forth in wild swings trying to determine who is eventually going to be right. These can be vary profitable to trade as you just sell the upper bands and buy the lowers. You will notice in the first chart there are 3 sets of bands. The inner blue bands are volatility level 1 ( TREND ) the red and green bands are volatility level 2 ( TRANSITION ) and the gold dashed lines are level 3 ( EXTREME ). We know with certainty the market can only go in 3 directions. UP, DOWN and SIDEWAYS. The bands are the pathways to each market condition. As you move out of trend, you transition with increasing volatility to a low or high sideways market. Usually at major highs or lows the market reaches “Extreme” volatility and gives a clear buy or sell signal. This is caused by over optimism or pessimism that drives the market to an extreme causing a signal. Consolidation in up or down legs can either be at Transition or Extreme volatility levels. In some circumstances the market gradually makes a turn and does not give buy or sell signal. When this happens in an uptrend, after the high is made, a bit later a buy signal low is made and the market rallys back up to the sell zone where the bands are now turning down. These are the ideal places to short and of course the opposite is true at lows. A rollover high was seen in May to July of 2011. The spike type high that has the market busting through the red sell band is the Extreme type high where you sell. A warning here. Markets that have been in consolidation for quite a while, say 3 to 5 months can break through either side and and blow through the bands easily. Usually it’s the start of another leg in the direction of the main trend. Like every party, consolidations have to end, so beware. The bands will in a short time corral the market back to normal. They are after all a unique type of moving average. Another characteristic of the bands is they are designed to stay with the market. If you have a big move up and the price starts to trade sideways, after a bit the bands will bend to accommodate the new developing trend. Price will almost always stop near the band of the current volatility. Another trick is to use the bands, particularly the blue “trend” band as the basis of a trend line and a stop. Not right at the line, a little away from it. If you have big profits , you might use the green band as your stop line, in this case below it a bit. Another technique you can use is to approximate the potential maximum move from the current position. Let’s say the market has traded sideways for 6 trading days at the center of the channel and can’t advance any higher. From the highs of the last 6 days you can measure down to where the bottom of the channel should be, given the same channel width. Example–current channel with green to red band is 54 points. Center channel is 1363 now. Subtract 54 from 1363 and a reasonable target is 1309. If volatility jumps to level 3 you can figure that as well. Play around with trendlines and the bands, it is another good tool.
The second chart is the S&P from January through February of 2012. This is classic Trend market. Volatility returns to level 1 , things calm down and a smooth uptrend is under way. Notice how the tops and bottoms of this trend are defined by the blue bands and the Oscillaters Blue levels. The Oscillator is described below.
The oscillator is a visual representation of the trading bands. It detrends price and indicates turning points by its relationship to the colored lines on the oscillator. Each colored line on the oscillator is the same as the corresponding trading band color on the price chart. They are close, but can be off by a bit. The oscillator is a great back up indicator but the primary indications for trading should always come from the current (Last or Close) price of the issue and it’s relation to the trading bands. It is possible for the high of the day to go into the sell zone and then sell off later in the day. While price WAS in the sell zone earlier, because it sold down, the oscillator which is based on last price will not show it was in the sell zone. This is VERY IMPORTANT to understand. When a market or issue enters a buy or sell zone in “real time” it is the most powerful. That’s why you see candle wicks in the zone a lot. Most of the time the market does not stay in these areas very long before they reverse.
The Gann Squares are a tool I have been fascinated with for years. They can be difficult to get adjusted but once done are awesome trading companions. Just look at the charts, support and resistance can be at any of the lines. No they do not hit perfectly. (Nothing is perfect in the markets) Close enough to be valuable. One of my favorite trading techniques is to buy or sell at an intersection of a trading band and Gann Square line ! The Gann Squares are based on the vibrations of the price of the issue.
Change in Trend dates are derived from 2 sources. Fixed static cycles like 240 (applying Trine) days or degrees ie. Jul 7th to 2011 to Mar 7th 2012. Or 180 days/degrees from Sep 12, 2011 to Mar 12, 2012. The others are derived from either the Market Map or Astro dates. You must keep this in mind. CIT dates are most effective in sideways or transition trading markets. Trending markets have a way of dampening CITS and astro dates. In trending markets A CIT may only last 2 or 3 days. During trending markets it is always best to act on CIT’s in the main direction of trend. If for example the trend is up and there is a CIT for this coming Thursday and the market declines into that date, then buy on that day. If the market is making high on thursday in an uptrend if you sell on that day you have to be very nimble, profits will probable come but they won’t last long. That is the nature of trends. I never advise trading against the trend. The odds are stacked against you. Trade with the trend at either the blue bands, or in higher volatility the red or green band. In sideways markets the CIT’s can be traded either way at level 2 volatility.
The Market Map is made up of over 200 different Astro and fixed cycles. Its accuracy varies from exact to off by a week. It is continuously being tweaked and adjusted. My goal in the next year is to adjust it so it is 90% correct from the @75% accuracy now. Currently it is best used as a confirmation tool. The trading bands are primary in my work.
A FINAL NOTE
When volatility increases to level 3 and the market goes through either the red or green bands it can continue strong for a day or two. There are 2 ways to handle that. 1) wait for the oscillator to reverse by 1 day and then buy/sell. Or 2) start following a 10 or 15 min chart and when the trendline is broken by a reversal, then buy/sell.
I have spent a lot of years learning about the markets and many trading techniques. This is by far the best way to track markets in my opinion. Give it some time and see how these tools will make you a better trader. The other tool that is of utmost importance is money management. Never be all in, you can’t possibly by objective. Break your capital up into small units or platoons. Never risk too many of your units at once. You are involved in a “Money War”. Everything, including yourself is trying to win the war against you. It’s not prudent to put all your solders into battle at once. This is a long haul game you can win with the right attitude and weapons. Another thing traders, you don’t always have to be in the market. Pick and choose your trades carefully. Do not be in a hurry to trade. Savor it, trade like an assassin, wait for the setup and then strike.
GROW AND PROTECT YOUR CAPITAL——-GREAT TRADING TO ALL !