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Trading Toolkit, Volume 1: Technical Analysis at Work

In these times of high volatility, it is difficult as an investor to be in the right direction with the markets - i.e., being aligned with the trend. The daily range for the SPX recently has been greater than what one would have been very happy to see in a week. It's a bit easier if one thinks of oneself as a trader, although there has been an enormous amount of noise to filter out in order to find the trades. For a trader, noise can mean news, sentiment, excessive and conflicting analysis, and especially conventional wisdom about the fundamentals.

This series of publications from Trading da Numbas offers examples of practical chart-based and indicator-based techniques to identify the trend and find the trades. For a variety of trading timeframes, we highlight instances where technical analysis points to entries and exits and where it informs the decision about whether to stay in a trade. Much of the commentary at TradingdaNumbas.com is offered in real time during intra-day market action.

Our toolkit is diverse. It includes analyses based on Elliott wave theory, Fibonacci levels, cycles, and delta phenomenon, as well as proprietary indicators made available at TradingdaNumbas.com website.

How listening to the VIX helped us find a good trade
by Yahoogle at TradingdaNumbas.com

The CBOE Volatility Index, or VIX, as its name implies, supposedly measures (SPX) market volatility. However, this name can be somewhat deceptive, since the VIX typically rises as the market drops, and it actually goes down when the market is rising. It would be better to say that the VIX only measures "downward volatility," or volatility in a market moving to the downside.

It was this tendency of the VIX that recently revealed the possibility of a sizable rally, just as the SPX was falling in February and early March. By comparing the VIX action in Oct-Nov '08 to that in Feb-Mar '09, we determined that the VIX advance was not going anywhere, and this meant it would actually result in a downward reversal, corresponding to a sharp rise in the market.

When we combined this with our own Elliott Wave counts and Fibonacci levels on the SPX itself, along with our study of cycles, it became very likely that the market would see a major turn, and in the first days of March, we began to zero in on the actual specific levels where the SPX would turn, namely around the SPX 666 area.

The chart below is the actual chart that we provided to members two days before the March 6 bottom in SPX and ES. It shows how we predicted to our members the potential area where the market would bottom.

We then mapped out a likely path for the market on March 6 (shown below) ...

... which turned out to be exactly what the market did (shown below).

Our consideration that SPX might have reached a bottom on Friday, March 6 was strengthened in subsequent days by the VIX falling through the 50 level we had been monitoring, to around the 40 support level. On March 8, we commented to members, "The VIX hasn't had the same meteoric rise as it did in October, and it's been struggling with resistance. Friday's close shows it falling thru the 50 level (for the time being)."

Looking forward, a top to the present rally would require a V-bottom in the VIX from under the 40 level. The VIX dropping below 40 does not guarantee an immediate top, but is a prerequisite if the market is to turn back down.

Using trend indicators and lesser-known applications of Fibonacci numbers with commodities
by Phi at TradingdaNumbas.com

A colleague asked my opinion on wheat recently so I decided to have a closer look. Let's first look at a weekly chart with a conventional RSI, followed by an examination of what our Market Trend Indicator says about the possibility of a change in trend.

There are two things I would like to point out about this chart. First, the RSI had pulled back to very oversold levels in October of last year and had then developed positive divergence versus price. (The divergence in price vs. the RSI is marked on the chart.)

Second, the December low in price was at an interesting and somewhat overlooked Fibonacci retracement value of 76.4 % of the late 1999 low (not shown) to the recent 2008 high. Many are familiar with using phi, 0.618 or sometimes rounded to 62%, as a retracement value. Phi squared or 0.382 is also fairly common as a retracement value. What is not as widely followed is phi cubed or 0.236 and 1 - .236 = 0.764 as retracement values. In the case of 0.236, this is somewhat understandable, it is a very shallow retracement value and may only be a target to watch for in the strongest of markets. The 0.764 however, is a bit of a sleeper and worth keeping an eye on. It is deeper then the well known 0.618 and just above another retracement value of 0.786 which is the square root of phi and perhaps somewhat popularized by Larry Pessavento.

Now let's look at the same chart with a different set of indicators.

In the weekly Market Trend Indicator panel shown above, we have a set of proprietary indicators we like to watch at Trading da Numbas. The important one in this case is the lower one, which is starting to show strength. According to this tool, the price trend is no longer solidly down and may have reversed. This kind of reading combined with Fibonacci analyses helps us understand where we are in a market pattern. Thus, the combination of tools can be extremely useful in catching turns and initiating trades near the start of a long run.

In addition to the kind of weekly indicator shown above, we use daily and sometimes intraday Market Trend Indicators to identify trends on shorter timeframes and to find entry and exit points. We provide our members with Market Trend Indicators for a wide range of markets including equity indexes, bonds, currencies, gold, crude oil, grains, and softs.

Looking forward, although there is some resistance currently at the 20-period exponential moving average, I would tend to favor this market to the upside as long as recent lows hold.

Using all the tools in the toolkit

Senior moderator JayP prepared a series of videos that gives a fantastic summary of how a wide range of market analysis techniques can be brought together to produce real success in trading. This demonstration shows how S&P action in January 2009 was seen in real-time and how multiple techniques were combined to predict market moves and supply members with trades.

The videos show how the unique combination of approaches accomplishes the following for traders:

  • emphasizes catching trends and using support/resistance and target levels to identify start-points and end-points of market moves
  • provides an understanding of where the market is, based on a practical application of Elliot wave theory
  • uses remarkably accurate cycles-based forecasts of trends and turns
  • makes effective use of standard technical analysis tools, including forks, S/R levels, and Fibonacci retracements
  • projects market moves into and following major announcement dates

Video #1: http://tradingdanumbas.com/community/showthread.php?t=5900

or: On YouTube (shown below)

Video #2: http://tradingdanumbas.com/community/showthread.php?t=5937

Video #3: http://tradingdanumbas.com/community/showthread.php?t=5940


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