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For those of you who track the Coffee market, you will know that this last week has been very exciting. December Coffee rallied 40 points in about a week, retracing almost all of the decline of the last 4 months. It is always very instructive to look at your tools at times like these to see whether or not they would have gotten you into the move or at least prevented you from going the wrong way. In this showcase, we'll take a look at what our tools were telling us just before the big move. Below is a chart:
The area in question is represented by an ellipse. We have applied five tools to the chart, and will discuss each in turn starting from the top of the chart.
The white line over price is our Cycle Forecaster, which represents a forecast for 7 bars into the future. There are two ways to look at this tool: as a direction forecaster and as a turning point forecaster. In both cases, the Cycle Forecaster was projecting a low in mid October that we should have been watching. As it turned out, the first bar of the big upmove occurred exactly at this forecasted low.
The second tool is a magenta stop and reverse line called MA_TrailingStops (comes with the Cycle Forecaster). It can be used as either a stop placement tool or an entry system. We use it both ways. Notice how in early October price decisively crossed over our stop line. This is telling us that the trend has turned upwards and that it is time to get out of shorts.
Inside the ellipse, there is a blue dot under one of the bars. This is a buy signal from our second Exhaustion Bar study, which tries to pick turning points in real time. There were two bars lower than our signal bar, but the ExBar was very close to the low, and alerted us to look for a buying opportunity.
Let's move down to the yellow MA_Momentum line. It can be used in many ways, but if you've been reading these pages you know we like to use it as a divergence detector. In this case the bullish divergence signal was pretty clear, and is shown by the two cyan trendlines.
Lastly, we have MA_Zones working on our adaptive Stochastics indicator. If you compare the adaptive overbought/oversold zones on this chart with the canned SlowK+20/80 zones as found in TradeStation, you will see why adaptive zones are so valuable. Even though we were in a strong downtrend, there were very few false buy signals, and never any periods when our oscillator was wildly oversold for many days (the bane of oscillators.) This indicator gave us a clean buy signal concurrently with our Exhaustion Bars, so those two indicators were reinforcing each other. You'll also notice that a bullish divergence signal was generated here as well as in MA_Momentum, giving further indication that a bottom was forming.
When so many indicators signal in the same direction at the same time, it pays to watch the market very closely. Even if we waited until the Cycle Forecaster low to enter, we still would have made a nice profit in only a few short days. In the worst case, we would have at least known to look to cover shorts. Profits can be made using only MA_Momentum and the Cycle Forecaster, so by using all of these tools as a package, the odds were greatly in our favor for this trade.