[waveslider]

Hey folks,

some of you may know about this method, if not I'm introducing it to spark some conversation.

This is a simple timing method introduced by I don't know, but there are a few who have written about it. Its not really a mainstream method, but some smart technicians do use it religiously.

It is an excellent tool for swing trading, but I will warn here, this is one of the technical analysis "arts" that require interpretation. Some visual people will get it, some won't.

Here goes:

1. Start at the beginning of a trend. So when pivots are forming lower lows or higher highs.

2. To find a peak high, take the two recent pivot lows, match the length of the line to the peak between.

3. A bullish pattern should have the peak between the lows shifted to the right. A bearish pattern should have the trough between highs shifted to the right.

4. The reversal should occur within 2 bars (a bar before, a bar after). This is where momentum will likely shift. Movement further is usually on divergent momentum to fake out before a move.

5. If a low forms in the place where a high should form, the wavelengths are lengthening, and so will the amplitude. This is the location of an "inverse" where price will travel another equal length (50%) higher.

Here are some examples on the chart of ES.D. All lines of the same color are equal angle and equal length.

a. Yellow lines initiated when first higher high pivot formed. I use 4 bar pivots.

b. Peak is off by one day, but momentum has shifted. The next day is the shakeout day.

c. Red lines are drawn and reversal is one day later (a pattern?).

d. Cyan lines are drawn and the day after peak time is reached, price forms a pivot low. In real time this is going to be hard to read, but since there was a pivot high 2 days earlier, this is looking like an inverse, and possibly the halfway point in a pattern.

e. Green lines are formed and this pivot comes in a day later once again.

Currently price has risen 7 days in a row, so it is likely to pullback, but there is no reversal projected. There will likely be a small reversal (staying above point e.) or a sideways movement.

Should price take out point e. then a new downtrend is technically beginning, and we start the process all over again.

I do not recommend trying to pick tops and bottoms with this tool, you will get burned. If timing was that easy, computers would blow the edge out. Maybe they already did. Either way, use it as a tool to see more deeply into the markets. It is not always easy, but these patterns form more frequently than you'd expect.

There is more to learn from this method, but I am just presenting it to spark some conversations. Maybe use this method and can explain some nuances.

ws

[OAC]

Waveslider:
I understand (1) to (4) with no problem. It is a lot like John Crane's reversal Day Phenominum. However I am a little unclear about (5), can you go into more details ? Do you mean with an inversion that we can expect a textbook AB=CD pattern where the total length is increase by 50%?

[waveslider]

OAC, Crane's book has been on my to do for a while. There's another one that deals with this by an author named Stevenson I would like to read. So I'm not really familiar with these, can you add some color to these observations?

In answer to your question, no its not an AB=CD really. It is a period where volatility dies and trend occurs instead of oscillation. When you use the timing method to find these points you can normally mark where the wave will end. In this case, the cycle ended on the 22rd. The 23rd was an "inside day" and marked the approx. 50% mark of this minor wave (in yellow on this chart). The following day was when price broke out, and this is where the new wave began. I marked the 50% time line which shows this observation.

Incidently, there is a cycle top due today, it is more clear on this chart - which includes overnight session.

[OAC]

I have read both Crane's and Stevenson's work. BTW, this Stevenson guy is an electrical engineer. I don't recall them talking about "Inversion". Is this your own observation or is this part of the methodology that you are trying to described that is used by many technical traders ?

[waveslider]

OAC, these are basic wave dynamics which happen everywhere in nature. In the ocean when 2 waves come together and create a single wave double in size, it is called a "rogue" wave.
The inverse of a normal cycle is a circle, so naturally when an inversion occurs the cycle continues another 50% in the same direction instead of reversing and going the other way.
I'll bet that if Stevenson was an electrical engineer, then he observed this in the way energy waves move and probably incorporated into his thinking. He would have to because markets do not oscillate all the time.
So inversions occur in a trend at the point where the end of a cycle occurs.
I have been taught this, and I have observed this. It's probably not the way many technical traders term it, but if they are able to discern where markets make a transition from cycling to trending, then they have seen it.
Cycle analysis is perhaps the most important part of technical analysis because as traders we need to know if the market is trending or cycling. In trends you buy breakouts, in cycles you fade breakouts.

[Kiwi]

Inversions are quite common in economic/market cycle theories (bradley etc).

Being an e engineer wouldn't make you think about inversions because ee's work in continuous waves rather than studying individual wave propagation and reflection. Well the exception would be radio engineers in the antenna design part of things but that's maybe a couple of percent of all ees

FWIW, I suspect most traders would regard markets as having waves not cycles. Cycles implies an extra degree of predictability that waves don't have - like when it might finish! IMHO, cycle theorists are almost as small a proportion of traders as antenna focussed radio engineers are of electrical engineers.

You don't need a cycle to know that a market is trending - waves of buying and overreaction are sufficient. Also you don't need cycles to tell that a market is ranging in congestion before reversing or gathering sufficient steam to continue onwards.

[waveslider]

Hi Kiwi,

you make some interesting points. I think an e engineer would understand the concept of inversions just from exposure in their business to cycles (waves). Inverters are common products changing DC to AC, sounds like there could be some similarities.

I think we got mixed up in symantics with waves vs. cycles. I would rather talk about waves anyday! (hence my screen name). In fact I would love to talk about waves on the Gold coast where you're from. Anywhere but here in Canada where it is very windy during spring.

Anyway, I would agree that most traders do not rely on cycles, because they are always changing and combining with one another. So do waves. However there is cycle analysis that works. If you are interested check out John Elhers work. The man designed R-MESA which is one of the most (if not the most) successful mechanical systems in history. Elhers uses Hilbert transforms I believe, others have studies Fourier and quite a few other processing methods.

As for your last statement, all you need is an experienced eye to see where a market is trending or ranging. This is where humans excel, in pattern identification. However :

"the first principle is that you must not fool yourself - and you are the easiest person to fool!"

- Richard Feynmann

"We don't see things as they are, we see them as we are"

- Anais Nin

It is good to have some kind of structured "rules" to help define "range" or "trend". I have introduced a tool that some traders will find absolutely worthless. That is because they are not inclined to "see" market waves. Once you start seeing waves (or cycles - whatever) you can see where big ones crash into each other and "double up" (in surf speak). You have to train your mind on what to look for.

This is a timing method, as the title of the thread suggests. I would not recommend it as a primary signal for entry, but instead as a tool to see underlying structure in the timing aspect of the market.

I don't understand your last statement "Also you don't need cycles to tell that a market is ranging in congestion before reversing or gathering sufficient steam to continue onwards."

If traders had a sure-fire way of differentiating exactly what phase the market was in, then they would be able know exactly when to use what systems. This is an art more than a science, and while Elhers method is good, it is not sure-fire. There is enough interference and distortion in the markets to annihilate most markets.

The holy grail is money management.

Thanks for your comments.

[waveslider]

Someone else noticed these cycles recently, this is from a tradestation forum. Similar idea.