The trader is forever faced with the dilemma of taking a position in anticipation of breakout, taking a position on th breakout itself, or waiting for the pullback or reaction after the breakout occurs. This situation is an example of how trading multiple positions simplfies the dilemma. The trader could take a small position in anticipation of the breakout, but some more on the breakout, and add a little more on the corrective dip following the breakout.

The Breaking Of Trendlines

This is one of the most useful early entry or exit signals. If the trader is looking to enter a new position on a technical sign of a trend change or a reason to exit an old position, the breaking of a tight trendline is often an excellent action signal.

Using Support and Resistance

Support and resistance are the most effective chart tools to use for entry and exit points.The breaking of resistance can be a signal for a new long position. Protective stops can then be placed under the nearest support point. For purposes of placing protective stops, support and resistance levels are most valuable.

Using Percentage retracements

In an uptrend, pullbacks that retrace 40-60% of the prior advance can be utilized for new or additional long positions. a 40% pullback after a bullish breakout might provide an excellent buying point. Bounces of 40-60% usually provide excellent shorting opportunities in downtrends. Percentage retracements can be used on intraday chart also.

Using Price Gaps

Price gaps on bar charts can be used effectively in the timing of purchases or sales. After an upmove, underlying gaps usually function as support levels. Buy a dip to the upper end of the gap or a dip into the gap itself. A protective stop can be placed below the gap. In a bear move, sell a rally to the lower end of the gap or into the gap itself. A protective stop can be kept over the gap.

Combining technical Concepts

All of technical concepts used together would improve the timing of the trade. The idea is to buy near support, but ot exit quickly if that support is broken. Violation of a tight down trendline drawn above the highs of a downside reaction could also be used as a buying signal. During a bounce in a down trend, the breaking of a tight up trendline could be a shorting opportunity.

Combining Technical Factors and Money Management

Besides using chart points, money management guidelines should play a role in how protective stops are set. A closer protective stop would permit the taking of larger positions. A looser stop would reduce the size of the position. It’s critically important that the protective stop be placed over a valid resistance point for a short position or below a valid support point for a long position. The use of intraday charts can be especially effective in finding closer support or resistance levels that have some validity.

When we study chart patterns, we’re aware that there is a relationship between the amount of time it takes for those patterns to form and the potential for subsequent market moves. All phases of technical analysis depend to some extent on time considerations.

Cyclic analysts hold that time cycles are the determining factor in bull and bear market. Not only is time the dominant factor, but all other technical tools can be improved by incorporating cycles.

Basic Cyclic Concepts

First, let’s see what a cycle looks like and discuss its three main characteristic. The cycle bottom are called troughs and the tops referred to as crests. Cyclic analysts prefer to measure cycle lengths from low to low.

The three qualities of a cycle are amplitude, period, and phase. Amplitude measures the height of the wave. The period of a wave is the time between troughs. And the phase is a measure of the time location of wave trough. Because there are several different cycles occuring at the same time, phasing allows the cyclic analyst to study the relationships between the different cycle lengths.Phasing is also used to indentify the date of the last cycle low. Once the amplitude, period, and phase of a cycle are known, the cycle can theoretically be extrapolated into the future. Assuming the cycle remains fairly constant, it can then be used to estimate future peaks and troughs. That is the basis of the cyclic apporach in its simplest form.

Cyclic Principles

There are six most important principles of cycles: Summation, Harmonicity, Synchronicity, proportionality, variation and nominality.

The priciple of summation holds that all price movement is the simple addition of all active cycles. Cycle theory holds that all price patterns are formed by the interaction of two or more different cycles. The principle of summation gives us an important insight into the rationale of cyclic forecasting.

The principle of Harmonicity simply means that neighboring waves are usually related by a small, whole number. That number is usually two.

The principle of synchronicity refers to the strong tendency for waves of differing lengths to bottom at about the same time. It is also means that similar cycle lengths of different markets will tend to turn together.

The priciple of proportionality describes the relationship between cycle period and amplitude. Cycles with longer periods (lengths) sould have proportionally wider amplitudes.

The principle of variation is a recoginition of the fact that all of the other cyclic principles already mentioned-summation, harmonicity, synchronicity, and proportionality- are just strong tendencies and not hare and fast rules. some “variation” can and usually does occur in the real world.

The principle of Nominality is based on the premise that, despite the differences that exist in the various markets and allowing for some variation in the implementing of cyclic principles, there seems to be a nominal set of harmonically related cycles that affect all markets. An that nominal model of cycle lengths can be used as a starting point in the analysis of any market.

Dominant Cycles

There are many different cycles affecting the finanical markets. The only ones of real value for forecasting purposes are the dominant cycles. Dominant cycles are those that consistantly affect prices and that can be clearly identified. All technical analysis should begin with the long term picture, gradually working toward the shorter term. That principles holds true in the study of cycles. The proper procedure is to begin the analysis with a study of long term dominant cycles, which can span several years; then work toward the intermediate, which can be several weeks to several months; finally, the very short term cycles, from several hours to several days, can be used for timing of entry and exit points and to help confirm the turning points of the longer cycles. As a general rule, long term and seasonal cycles determine the major trend of a market. For trading purposes, the weekly primary cycle is the most useful.The trend of each cycle is determined by the direction of its next longer cycle. Once the trend of a longer cycle is established, the trend of the next shorter cycle is known.

The Elliot Wave Theory is comprised of wave forms, ratios, and time, in that order of importance. Pattern refers to the wave patterns that comprise the most important element of the theory. Ratio analysis is useful in determining retracement points and price objectives by measuring the relationships between the different waves. Finally, time relationships also exist and can be used to confirm the wave patterns and ratios, but are considered by some Elliotticians to be less reliable in market forecasting.

It is important to keep in mind that wave theory was originally meant to be applied to the stock market averages. It doesn’t work as well in individual common stocks. The theory works best in those commodity markets with the largest public following, such as gold. We should view Elliott Wave Theory as a partial answer to the puzzle of market forecasting.  Using it in conjuction with all of the other technicaal theories will increase its value and improve chance for success.

The actual buy and sell signals are given when the two lines cross. A crossing by the MACD line above the slower signal line is a buy signal. A crossing by the MACD line below the signal line is a sell signal. An overbought condition is present when the lines are too far above the zero line. An oversold condition is present when the lines are too far below the zero line. The best signals are given when prices are well below the zero line (oversold).

Divergences appear between the trend of the MACD lines and the price line. A negative divergence exists when the MACD lines are well above the zero line (overbought) and start to weaken while prices continue to trend higher.That is often a warning of a market top. A positive divergence exists when the MACD ines are well below the zero line (oversold) and start to move up ahead of the price line. That is often an early sign of a market bottom.

MACD histogram

A histogram could be constructed  by plotting the difference between two moving average lines. Using the same technique, the two MACD lines can be turned into an MACD histogram. The histogram consists of vertical bars that show the difference between the two MACD lines. The histogram has a zero line of its own. When the MACD lines are in positive alignment, the hitogram is above its zero line. Crossings by the histogram above and below its zero line coincide with actual MACD crossover buy and sell signals.

The real value of the histogram is spotting when the spread between the tow lines is widening or narrowing. When the histogram is over its zero line (positive) but starts to fall toward the zero line, the uptrend is weakening. Conversely, when the histogram is below its zero line (negative) and starts to move upward toward the zero line, the downtrend is losing its momentum. Although no actual buy or sell signal is given until the histogram crosses its zero line, the histogram turns provide earlier warnings that the current trend is losing momentum. Turns in the histogram back toward the zero line always precede the actual corssover signals. Histogram turns are best used for spotting early exit signals from existing postions.

The oscillato is just one tool among many others and must always be used as an aid, not a substitute, for basic trend analysis.

There are times when oscillators are more useful than at others. During choppy market periods, as prices move sideways for several weeks or months, oscillators track the price movement very closely. The peaks and troughs on the price chart concide almost exactly with the peaks and troughs on the oscillator. At some point, however, a price breakout occurs and a new uptrend or downtrend begins. By its very nature, the oscillator is already in an extreme position just as the breakout is taking place. The trader is faced with a dilemma. Should he buy the bullish breakout in the face of an overbought oscillator reading? Should the dwonside breakout be sold into an oversould market? In such cases, the oscillator is best ignored for the time being and the position taken.

To summarize, give less attention to the oscillator in the early stages of an important move, but pay close attention to its signals as the move reaches maturity.

The value of the oscillator is not limited to horizontal trading ranges, However, used in conjuction with price charts during trending phases, the oscillator becomes an extremely valuable ally by alerting the trader to short term market extremes, commonly referred to as overbought or oversold  conditions. The oscillator can also warn that a trend is losing momentum before that situation becomes evident in the price action itself. Oscillators can signal that a trend may be nearing completion by displaying certain divergences.

The oscillator is only a secondary indicator in the sense that it must be subordinated to basic trend analysis. We should also be aware that there are times when oscillators are more useful than at others. For example, near the beginning of important moves, oscillator analysis isn’t that helpful and can even be misleading. Toward the end of market moves, however, oscillators become extremely valuable.

Interpretation of Oscillators

Most oscillators look very much alike. They are plotted along the bottom of the price chart and resemble a flat horizontal band. The oscillator band is basically flat while prices may be trading up, down, or sideways. However, the peaks and troughs in the oscillator coincide with the peaks and troughs on the price chart. Some oscillators have a midpoint value that divides the horizontal range into two halves, an upper and a lower. Depending on the formula used, this midpoint line usually a zero line. Some oscillators also have upper and lower boundries ranging from 0 to 100.

Genreral Rules for Interpretation

1. When the oscillator reaches an extreme value in either the upper or lower end of the band, this suggests that the current price move may have gone too far too fast and is due for a correction or consolidation of some type.

2. The trader should be buying when the oscillator line is in the lower end of the band and selling in the upper end. The crossing of the midpoint line is often used to generate buy and sell signals.

The three Most Important Uses for the Oscillator

There are three situations when the oscillator is most useful.

1. The oscillator is most useful when its value reaches an extreme reading near the upper or lower end of its boundaries. The market is said to be overbought when it is near the upper extreme and oversold when it is near the lower extreme. This warns taht the price trend is overextended and vulnerable.

2. A divergence between the oscillator and the price action when the oscillator is in an extreme position is usually an important warning.

3. The crossing of the zero(or midpoint) line can give important trading signals in the direction of the price trend.

Measuring Momentum

The concept of momentum is the most basic application of oscillator analysis. Momentum measures the velocity of price changes as opposed to the actual price levels themselves. Market momentum is measured by continually taking price differencs for a fixed time interval. To construct a 10 day momentum line, simply subtract the closing price 10 days ago from the last closing price. This positive or negative value is then plotted around a zero line. Any time period can be employed. A shorter time period (such as 5 days) produces a more sensitive line with more pronounced oscillations. A longer number of days (such as 40 days) results in a much smoother line in which the oscillator swings are less volatile.

Momentum Measures Rates of Ascent or Descent

By plotting price diffrences for a set period of time, we can study rates of ascent or descent. If prices are rising and the momentum line is above the zero line and rising, this means the uptrend is accelerating. If the up-slanting momentum line begins to flatten out, the rate of ascent has leveled off. When the momentum line begins to drop toward the zero line, the uptrend in price is still in force, but at a decelerating rate. The uptrend is losing momentum. When the momentum line moves below the zero line, a near term downtrend is in effect. As momentum continues to drop farther below the zero line, the downtrend gains momentum.

The momentum Line Leads the Price Action

The momentum line is always a step ahead of the price movement. It leads the advance or decline in prices, then levels off while the current price trend is still in effect. It then begins to move in the opposite direction as prices begin to level off. The trendlines on the momentum chart are broken sooner than those on the price chart. The value of the momentum indicator is that it turns sooner than the market itself, making it a leading indicator.

The Crossing of the Zero Line as a Trading Signal

A crossing above the zero line would be a buy signal, and a crossing below the zero line, a sell signal. It should be stressed that basic trend analysis is still the overriding considerastion.  Buy positions should only be takne on crossings above the zero line if the market trend is up. Short positions should be taken on crossing below the zero line only if the price trend is down.

The Need for an Upper and Lower Boundary

One problem with the momentum line is the absence of a fixed upper and lower boundary. One of the major values of oscillator analysis is being able to determine when marekts are in extreme areas. Through checking the back history fo the momentum line on the chart and drawing horizontal lines along its upper and lower boundaries, we can easily identify the outer extremities by  visual inspection.

The simplest way to use Bollinger Bands is to use the upper and lower bands as price targets. If prices bounce off the lower band and cross above the 20 day average, the upper band becomes the upper price target. A crossing below the 20 day average would identify the lower band as the downside target. In a strong uptrend, prices will usually fluctuate between te upper band and the 20 day average. In that case, a crossing below the 20 day average warns of a trend reversal to the downside.

Bollinger Bands expand and contract based on the last 20 days’ volatility. During a period of rising price volatility, the distance between the two bands will widen. Conversey, during a period of low market volatility, the distance between the two bands will contract. When the bands are unusually far apart, that is often a sign that the current trend may be ending. When the distance between the two bands has narrowed too far, that is often a sign that a market may be about to initiate a new trend.

Bollinger Bands work best when combined with overbought/oversold oscillators.

The moving average is a smoonthing device with a time lag.

The moving average is essentially a trend following device. Its purpose is to identify or signal that a new trend has begun or that an old trend has ended or reversed. Its purpose is to track the progress of the trend. It does not, however, predict market action. It never anticipates; it onlyreacts. The moving average follows a market and tells us that a trend has begun, but only after the fact.

The moving average is a smoothing device. By its very nature, however, the moving average line also lags the market action. A short moving average, such as a 20 day average, would hug the price action more closely than a 200 day average. The time lag is reduced with the shorter averages,but can never be completely eliminated. Shorter term averages are more sensitive to the price action, wheareas longer range averages are less sensitive.

The Use of One Moving average

Some traders use just one moving average to generate trend signals. The simple moving average is the one most commonly used by technicians. The moving avearage is plotted on the bar chart in its appropriate trading day along with that day’s price action. When the closing pirce moves above the moving average, a buy signal is generated. A sell signal is given when prices move below the moving avearge.

A shorter average gives earlier signals. While the longer average is slower, but more reliable.

For added confirmation, some technicians also like to see the moving average line itself turn in the direction of the price crossing. If a very short term average is employed, the average tracks prices very closely and several crossing occur. The use of a very sensitive average produces more trades and results in many false signals, but it has the advantage of giving trend signals earlier in the move. The more sensitive the average, the earlier the signals will be. The longer averages work better as long as the trend remains in force, but a shorter average is better when the trend is in the process of reversing.

Use Two Averages to Generate Signals

It becomes clearer that the use of one moving average alone has several disadvantages. It is usually more advantageous to employ two moving averages. This technique is called the double crossover method. This means that a buy signal is produced when the shorter average crosses above the longer. This technique of using two averages together lags the market a bit more than the use of a single average but produces fewer whipsaws.

Moving Average Envelopes

The usefulness of a single moving average can be enhanced by surrounding it with envelopes. Percentage envelopes can be used to help determine when a market has gotten overextended in either direction. The envelopes are placed at fixed percentages above and below the average. Shorter term traders often use 3% envelopes around a simple 21 day moving average. When prices reach one of the envelopes, the short term trend is considered to be overextended. For long range analysis, some possible combiantions includes 5% envelopes around a 10 week average or a 10% envelope around a 40 week average.