The last four months or so have been very exciting for the end of day S&P traders of the world. The market has been making very large swings and seems to be picking up steam to the downside. We have heard many analysts warning of the "impending crash" that always seems to be coming but never arrives. We are not going to take a stance on whether or not a crash is in the works, but thought it would be interesting to look at how a few techniques have been doing recently on this market. Below is a chart:
We have added three of our favorite tools to this chart and will briefly discuss what each has been telling us. First notice the Exhaustion Bars (red and blue dots). Of all of our tools, these are the easiest to interpret. Red dots above a bar mean sell, blue ones mean buy. You can see that they have been very accurate this last year, and have correctly called nearly all of the major moves in this market. Although we don't recommend trading blindly off of ExBars, they can be an invaluable tool to use to flag potential trading opportunities.
The second tool that we have applied is our Cycle Forecaster, represented by the cyan line on top of price. As this is a forecast, it can be plotted to the right of the price data as shown above. Notice how well this tool has been able to call both the direction and turning points in the S&P. We tend not to use this tool to signal trades, but use it as a broad brush technique to get a feel for where the market should be headed in the near future. If you take a look at the turning points in the Cycle Forecaster, you will notice a high correlation between them to turns in the actual price data. It is very useful to track these turning points to watch for potential trend changes in the market.
The last tool we have added is an 8 bar MA_Momentum curve. Although MA_Momentum is one of the most versatile tools in our arsenal, we tend to spend most of our time using it as a divergence detector. Divergence occurs when the highs and lows of MA_Momentum have a different relationship to each other than do the corresponding highs and lows in price. We have marked off a number of divergence signals with magenta trendlines. There were five of them in the last year, and each correctly called important short term turning points.
Obviously, when trading, hard rules must be used to determine exactly when to enter and exactly when to exit. These tools are excellent ingredients to use when creating such a trading strategy, and can be used to improve almost any trading methodology both discretionary and systematic. Last week we showed how to incorporate these tools with intraday support and resistance levels. We could also have incorporated these tools into Elliot Wave, Fibonacci, or practically any other popular method.
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