TF Commented Chart

It's been a fairly long time since i did last post a commented chart.
I invite all users to compare it with their own "market reading" and let's review this market outlook next week.

DLL update June 1st 2009 ( minor fix )

A silly minor mistake in detrending data could lead to some occasional error in cycle detection. Error would only be visible in Entropy calculations. MTFS and pivot calculations do not use that part of the code.

It has now been fixed in DLL version 1.25, available on request.

SPY Swings & Cycles

We here show some market outlook on SPY using swings and cycles only.

MTFS : a fuzzy approach

As far as MTFS is concerned, it is possible to implement some Fuzzy Behaviour Analysis on our indicator.

For simplicity, we will limit our analysis to the fast white line (WL) and the slow green line (GL).

We can now therefore implement a Fuzzy Logic Controller (such as our sFLC3) onto both MTFS lines in a very classical way as this exercise is somewhat akin to the typical thermostat already described on the ForeTrade web site (see reference below). We do indeed feed each FLC with level and gradient information, to extract a line behaviour as an output.

Note however that we will derive the fuzzy system into 8 variations according to 2 extra pieces of information, namely, according to whether lines have crossed and how (no or outdated crossover, early crossover, spot-on, and late crossover) and whether the WL has peaked or not (crisp boolean). The rule sets will obviously be incompletely defined as some fuzzy states are impossible or of no interest.

We shall also pay attention to state saturation when interconnecting the 2 FLCs.

Next step will be to link the MTFS behaviour to Entropy and Support/Resistance information.


Reference: http://www.seattlerobotics.org/encoder/mar98/fuz/flindex.html

A picture is worth a 1000 words

Complement to the Weekly Report 040509

Chart Reading (Part 1)

I

Our trading method implies capturing snapshots at our charts in the following way:

We see 2 rectangles, one is 128 bars wide and the other is 64 bars wide.

The wide rectangle could actually be even wider if we use a multiplier to detect pivots over 256 or 378 bars. Besides pivots which are recalculated dynamically to eliminate irrelevant minor movements, the other 2 indicators (MM support/resistance and HA bars) are static i.e. are not back-adjusted.

One could add other indicators but it is recommended to stick to "PPP Helpers" i.e. indicators which can help draw Pure Price Patterns (PPP) adding as little lag as possible.

One could trade "Direction" using that box only. This used to be called the "Scalp & Surf" technique whereby one tries to get quickly into the new move and then stay in either til the next pivot or according to other rules (S/R level, money management etc). The "Scalp & Surf" technique is generally applied to fast tick charts although all charts look the same) and has primarily the merit of being very simple.

Entries are given by swing direction and HA bar colour, without using Magnitude or context. Our HA paint bar is a custom version which include some candlesticks-type rules.

II

Let's now take a closer look at the information provided in that box.

1) Swings or pivots are numbered, the last one being Number 7 here. Again, pivots re drawn dynamically. Pivot 7 is still unconfirmed, but assuming it is confirmed after a (limited) retracement, it could still be erased if a Pivot 8 then pops up followed by a strong rally. Pivots 7 and 8 would be simply erased from the chart. One can for instance imagine that this actually happened between the now pivots 4 and 5 (red bar retracement).

2 ) Pivots do "crystallise" over time. In other words, a pivot becomes stronger and stronger during its life inside the 128-bar window.

Having said that, its representation or significance on the contrary diminishes when
it gets older, to finally disappear after 128 bars.

Obviously, a trending market will provide fewer pivots which may take longer to strengthen. A congested market will provide more pivot points which will generally be more stable, but which have less significance individually. They however tend to reinforce one another like on the snapshot above (S/R area).

3) The algorithm is highly non linear and certainly does a good job at detecting all salient pivots. There are however cases where "Swing Quality" is just too low to validate any scenario (SQ=62 on this snapshot is quite adequate), or despite all its good efforts will just fail to capture a sudden move (market spike, or high freq dynamics outside the algorithm spectrum). The search technique is nonetheless VERY biased towards providing the most exact picture on or near current bar, and will ALWAYS adjust within a bar or two, so still faster than most if not all standard indicators.

III

The long rectangle shows additional smoothed indicators, here MTFS and Entropy.
Both provide information from another angle about the underlying energy in the market. One could of course imagine other supporting indicators to add information to the "PPP" picture. Those indicators have already been described in previous reports, so in a few words one also tries to detect specific patterns in MTFS (extreme zones, line gradients, line crossovers etc) and peaks/troughs of Entropy particularly when EntBin is also extreme (-5 or +5) which almost certainly validate reversal points.

IV

We've seen how we try and determine direction at a given time frame. We also capture some indication of magnitude through pattern interpretation. This level of magnitude may be sufficient for a "Scalp & Surf" trading technique, and does provide enough information to optimize money management (tightening stops, moving limits).
Next is to combine 2 or 3 time frames for a more comprehensive visualization of magnitude through context. Context provides the environment for instance to only enter in one direction, or better segregate types of trades according to market configurations.

Market update - Apr 17th '09

The current configuration is another evidence that one should not enter a trade too early (unless one just takes swings in shorter time frames).

The 60mins chart is now on its strong resistance level, and it would maybe have been wise to be patient and not jump into reversing short too early. ES is still quite resilient anyway, particularly on daily and weekly charts, so only agressive traders will have a go at a short now even if a retracement is imminent.

We will however notice that the 60mins MTFS does not indicate a clear reversal yet, and the daily onehas not peaked yet even if seriously overbought. Shall we therefore see 875 being hit first ? That's a scenario that has been mentioned already in previous reports.

Note on tick charts (8 AM UK) a short is under way.

ER (TF): exact same configuration.
ER should technically retrace on stall level (468), but we'll cautiously wait for a red bar first.

( posted 8:05 AM UK )