Due to the vast amount of esoteric techniques that Wave59 contains, a lot of traders tend to come to the conclusion that it's difficult to forecast turning points unless you are a master of astrology, numerology, and sacred geometry. While all of those methods are implemented in the software, and a lot of the advanced users do tend to have knowledge of at least one of those arts, they are by no means prerequisites in order to make accurate and profitable market forecasts.
One of the beauties of computers is that they can reduce extremely complicated processes down to no more than a few keystrokes or clicks of the mouse. In this showcase page, I'm going to discuss one of the oldest indicators in Wave59, built on Chaos Theory, that can be used by anyone (even 5th graders) to forecast when markets are going to stop and turn around. So we'll be going to back to the basics in this installment!
Back before the first line of code for Wave59 had been written, I spent a lot of time studying how to measure the strength of the trend in the market, and I came up with an algorithm that gave a very quick read on how powerful the forces behind the current move were at any given time. This indicator is called the Fractal Trend Index, and it looks like this:
The red line is the Fractal Trend Index (FTI), and it moves up and down as the market marches forward across the chart. The market will basically start off with no trend, and in this situation the FTI will be flat. As the trend picks up, the FTI will also start moving to higher levels, until it reaches a peak, at which point the trend will falter, the market will reverse, and then the FTI will fall back down to a low level. You can see the lifespan of a trend in the graphic above, where we move from a weak trend, to no trend, to a strong trend, then up to the end of the trend at the far right.
While the Fractal Trend Index is useful throughout the trend cycle, it's primary use as a turning point detector comes when it makes a strong top, then reverses. This corresponds with that final point at the right of the graphic. When the index makes that peak, then tops off, it means that whatever strength there was behind the trend has been exhausted. When the force behind a trend exhausts, the market makes a turning point, and heads the other direction. Sometimes the market will just move into a consolidation, and other times it will form another trend back the other direction, but in both cases, either a top or a bottom is formed, and the market will move the opposite direction.
So for us as traders, detecting when the market has formed a turning point is as simple as watching for those Fractal Trend peaks. We need a significant top in the FTI, then a turn, and then price will go back the other way. A chart example will make this more clear:
This is a continuous contract of Treasury Bond futures, with the Fractal Trend Index at the bottom. The dotted green line represents a level of 15 on the index, generally where it needs to get to qualify as a strong trend. So we want to look for peaks near or above that line. There were seven of them in the last 9-10 months, and I've placed arrows to show where they occurred. The first two (at the left) represented small corrections to the trend, while the third kicked the market into a strong retracement move that lasted over a month. The December FTI peak lined up with a major high, and the next three major swings were caught by the remaining signals. So out of 7 signals, 5 represented significant turns, while the other 2 were just minor reactions. In all cases, the market reversed direction, if only temporarily.
Can you see how easy this really is? Just wait for a big peak in the Fractal Trend, then a turn down from there. You won't be able to forecast the date or price of a future reversal, but you know that it's happening right now, which is all that really matters in the end.
Let's take a look at the current situation in the DOW:
This is a longer term chart, showing the last three years of action for the Dow Jones Industrial Average. The FTI has only issued five turning point signals in this time. The first, at A, represented the low of the year for 2005. The next, at B, corresponded with the beginning of a 3-month sideways move. We didn't get a top here, but the uptrend definitely was halted in it's tracks. Point C was the big top in 2006, Point D was the big bottom afterwards, and then we ran up into point E later that year, which was a false signal. Nothing is perfect, so you get those from time to time.
The next point hasn't happened yet, so I don't know the date for F. That's the one that's about to occur. You can see that the FTI has made a strong move up from April 1, and is now in position to turn over. As soon as it does, that's our indication for a top. The FTI doesn't tell us whether this will be a major top, a minor top, or just a sideways move, but it does tell us that we have an extremely high probability that the uptrend will stop there and the profit potential will then be to the downside. That's when you jump in there with those other timing tools and look for good places to go short with the odds on your side.
So you can see that the FTI is not only very accurate at locating turning points in real time, it's also very easy to interpret. I'm not sure how much easier a technical indicator could be, to tell you the truth. It doesn't signal as often as other indicators, but when it does it pays to be alert to what it is telling you. If you've got Wave59, it's pretty easy to watch. If you don't have Wave59, then I hope you have spent some time mastering those arts mentioned previously! ;-)
All for now. Happy Trading!
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