Wednesday, January 30, 2008


Looking at the post below, we now know in hindsight that SPY dropped further to reach a bottom on Jan 22nd and 23rd... at least for now...

Changing subject, i have decided to postpone the commercial release of the toolset, not so much for technical reasons than because of the lack of support and training resources. I'll have to train a few more users then make sure the knowledge can be passed on etc. Phase 2 beta (signal generator) is still planned for 4th quarter 2008.

For the time being, market snapshots will continue being posted daily on

Saturday, January 19, 2008

Are we close to a bottom on SPY ?

Let's have a look the current SPY chart, and review our indicators.

On the 60mins chart, we have a clear divergence of the MTFS indicator ("failed recovery"), which combined with the clearly down swing and low MTFS significance level did noto fool us at all. However in case some would have taken a long position on the MTFS line crossover, the downturn of the white line looks like a pseudo 'bell shape pattern' which we always use for a 'return to the main trend' trade.

What about Entropy? Entropy is undoubtedly very low, and one may be tempted to look for a reversal point. When Entropy is indeed close to its historic lows (LEntBin = -5), a bottom provides good reversal signals. Having said that, this is only a support indicator. Swing is still down, bars are red, and we do not have a good looking MTFS.

How can MTFS look better if line crossover occured a few days ago? One must not forget that MTFS is also self-adjusting, so it will redraw itself as new events come along. MTFS is essentially used for the pattern shapes (line crossovers, parallel lines, line gradients) and NOT for the end point value like with most conventional indicators.

End of story: the 60mins chart tells you to wait, hang on short or maybe take profits. That's all for now.

The daily chart is the dominant chart here. We now know that there is no entry point from the 60mins chart, but what is the daily chart telling us?

Entropy looks sad, just like on the 60mins chart, and MTFS has tempted a (bearish) crossover. The good thing is that the indicator will adjust to a better looking crossover in oversold territory. At the moment, the line gradients are far too bearish. Then and only then will we look at a Entropy bottoming out. As usual, the picture gets clearer and clearer and we shall probably see prices stall at a Fib/MM target, and the Swing indicator (the earliest of all) attempting to turn up.

Obviously, each trade is to be considered within the context given by the higher time frame, and at this point in time, the weekly chart is also in correction mode (MTFS, Entropy etc).

That's all for now. We know that we must just be patient and wait at least for MM stall level ~128, or more likely right down to 125 (Fib/MM target).

Bears still have some appetite indeed...

NB: I added the SQ indicator (Swing Quality)

Friday, January 18, 2008

Swing Quality

I have added a simple yet interesting indicator called Swing Quality. It is a correlation between swing legs and actual prices. Although visually obvious, it is interesting to notice that swings can sometimes be out of tune for a while, until the indicator adjusts itself again in realtime. SwingQuality can therefore be used to filter those transient situations.

Here above, we have a QQQQ chart with swings and Fibonacci calculated automatically. Swing legs are not always suitable for Fibonacci calculations, and here they clearly are. A Swing Quality above 30 is generally more than good enough. Again, since the algorithm continuously adjusts itself, SQ will very seldom drop to low levels.

As a reminder, Fibonacci expansion levels are displayed from L1 to L5 at the right of the chart. L1 and L5 are seldom used, but L2 (Fib COP), L3 (Fib OP) and L4 (Fib XOP) are quite commonly used. Here QQQQ is sitting on COP. Quite an easy short signal it was, wasn't it...? :)

Tuesday, January 15, 2008

The Lomb-Scargle cycle detection indicator

Another lesser used indicator in the toolbox is the Lomb-Scargle indicator. There is well-known controversy regarding existence of cycles in markets, and even a good cycle detection algorithm like L-S admittedly has flaws, i.e. does not guarantee any stability in cycles. It is merely a market snapshot over a number of bars, and the algorithm tries its best to determine the underlying frequencies at a point in time. Markets are erratic, markets are chaotic, hence the internal dynamics constantly change.
Having said that, such information can probably be used to the trader's advantage. For instance, one can detect when there is a sudden change in dynamics or on the contrary look for periods of time where cycles are relatively stable.

Here above, one can see that a single frequency emerges from the spectrum. The indicator can plot the top 2 frequencies as higher frequencies are generally detected with ridiculously low amplitudes, i.e. noise... In the picture, the top frequency is represented by yellow dots, with its amplitude plotted as a histogram.

Although I do not use it often, i look forward to reading any feedback you may have with this Lomb indicator.

NB: there are a few variations on the algorithm available on the Internet. This one is the EXACT replica from the MIT PhysioNet laboratory.

Wednesday, January 9, 2008

Where to start?

I am often told: your charts look great but what do I do with them? Where to start?

My answer is always the same though: Absorb the charts until you make them your own!

There are now a number of references on this blog for each tool including an audio commented chart. Of course a few prerequites like knowing about Fibonacci and some experience with markets are definitely necessary.

Now, if you want a few pointers to start:
1) Look at Swings to get the overall picture in 3 time frames
2) Check which time frame(s) is dominant and stay with it if it corresponds to your trading horizon (don't forget that a lot of traders get overweight sitting and waiting because there is often nothing to do but wait...)
3) With experience, you'll pick up easly recognisable MTFS patterns, i.e. decision points.
4) Fibonacci and MM are essential tools. In most market situations, one or the other will give you clues, and ambiguity almost disappears when they coincide.
5) The more indicators you get, the clearer the picture will be of course. Try and figure out what you need for your trading style. The Swing indicator is usually the earliest of all.
6) Do not enter counter-trend. Follow swings and bar colours.

Lastly, and this is maybe the trickiest part for beginners: MTFS is the only indicator which requires setting 2 parameters: length and acceleration.

Here is the way I do it:

I generally use 8, 16 or 24 bars (obviously the shorter lengths are more responsive). As far as Accel is concerned, there is a built-in double adaptive algorithm and adaptability to volatility is maximum around 0.1 or 0.2, and minimum at 0 or above 0.33
It is best to set both parameters to values you like and then leave them unchanged for good.

A good way to set those parameters is to find a configuration with a clear swing and try and fit MTFS to "tell you the best story" i.e. lines cross over near pivots points and significance level is high. Obviously MTFS will not always give you the most perfect pattern as the market is erratic in nature, but your indicator will work best when it is tuned in the 'frequency' of the market. You may want to fine-tune it again until you find it is in sync with the market. Note that such setting is only valid on clear patterns, and do not forget that the market most of the time carries no relevant or usable information. This may look like a tedious exercise at first, but it will make your life easier later on.

Feel free to send questions and screenshots anytime, which we can discuss via IM.

Happy trading day to all... :)