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1 pointIn 2002, Paul Desmond won the 2002 Charles H. Dow Award for his work in identifying market bottoms and new bull markets. Since this work nicely supports Wyckoff's hypotheses regarding selling climaxes, technical rallies, and "secondary reactions", or tests, I've posted Desmond's study below in pdf form. I've also excerpted several points which are particularly pertinent to Wyckoff's aforementioned hypotheses and which will act as an introduction to the study. Please note that all bolding is mine. To spot an important market bottom, almost as it is happening, requires a close examination of the forces of supply and demand – the buying and selling that takes place during the decline to the market low - as well as during the subsequent reversal point. Important market bottoms are preceded by, and result from, important market declines. And, important market declines are, for the most part, a study in the extremes of human emotion. The intensity of their emotions can be statistically measured through their purchases and sales. [P]anic selling must be measured in terms of intensity, rather than just activity. It is essential to recognize that days of panic selling [in which Downside Volume equaled 90.0% or more of the total of Upside Volume plus Downside Volume, and Points Lost equaled 90.0% or more of the total of Points Gained plus Points Lost] cannot, by themselves, produce a market reversal, any more than simply lowering the sale price on a house will suddenly produce an enthusiastic buyer. As the Law of Supply and Demand would emphasize, it takes strong Demand, not just a reduction in Supply, to cause prices to rise substantially....These two events – panic selling (one or more 90% Downside Days) and panic buying (a 90% Upside Day...) – produce very powerful probabilities that a major trend reversal has begun…. Not all of these combination patterns – 90% Down and 90% Up – have occurred at major market bottoms. But, by observing the occurrence of 90% Days, investors have (1) been able to avoid buying too soon in a rapidly declining market, and (2) been able to identify many major turning points in their very early stages – usually far faster than with other forms of fundamental or technical trend analysis. Impressive, big-volume “snap-back” [technical] rallies lasting from two to seven days commonly follow quickly after 90% Downside Days, and can be very advantageous for nimble traders. But, as a general rule, longerterm investors should not be in a hurry to buy back into a market containing multiple 90% Downside Days, and should probably view snapback rallies as opportunities to move to a more defensive position. The following is of course a chart of the Nasdaq over the past few months up through yesterday and is intended as an example. The calculations are not guaranteed to be accurate. Anyone caring to verify them and point out any errors is welcome to do so. Readers are encouraged to read the study in its entirety. 2002DowAward.pdf
1 pointLets get real. The CCI does provide the basis for working trading if its used properly. First: what is required? People trade with the trend or countertrend. Lets say that trading with the trend is easier (longer moves, and more forgiving because if you get your exit timing wrong the retracement frequently won't reach your stop before the move continues, although obviously a trend will finish or do a larger timescale retracement at some time). When you trade with the trend you either hang on trailing stops or you exit at targets that (for most people and strategies) should be at least twice as big as your planned losses. So, can Woodies' use of the CCI help with this? Yes. Its a trend following indicator (its just the current price minus a CCI length simple moving average divided by a normalizing factor (so that reaching 200 is similar to reaching the 2sd bollinger band ... similar)). If you wait until its above zero for a while then the chance is you have an up trend. If you wait for a pullback to zero or a little below you have a pullback of sufficient magnitude to feed liquidity into continuation. So you buy. Then you have to exit. How? When it hits the 2sd bollinger (200cci) or when it pulls back from that perhaps? etc etc So basically Woodie has taken standard reasons for entering and exiting a trade and framed them around a 14sma and 6sma based indicator. They can work. Do most people succeed with them? No. Do most people succeed with any trading method? No. Is it the best method? No. Most would do far better understanding trend, support and resistance, and price action (and where it and volume action are relevant) than messing with the cci. But is it that wcci doesn't work? No. So what has to change? Study price based methods and yourself. In simplicity and understanding lies the holy grail.