initial postal service inward this series focused on the importance of approaching the markets with a conceptual framework. In this post, I desire to accept a stride dorsum too explicate to readers how I persuasion movements inward the stock market. This is a conceptual construction that helps me to remember virtually how the moves inward today's marketplace relate to those from the 24-hour interval before--and the 24-hour interval to come. This construction applies non alone to daily marketplace movement, but also elbow grease on smaller too larger fourth dimension frames. I claim no originality inward this presentation; I remember you'll uncovering related concepts from a host of technicians, from Joseph Granville to Stan Weinstein to George Lindsay. Indeed, much of technical analysis lore--from double-bottom too head-and-shoulders patterns to oscillator too indicator divergences--spring from this variety of conceptual structure.
The telephone commutation thought is that markets, at whatever fourth dimension frame, displace inward aperiodic cycles. Influenza A virus subtype H5N1 bicycle is a construction that includes ii or to a greater extent than marketplace tops and/or bottoms. Like snowflakes, cycles stimulate got several defining features, but no ii cycles are completely identical. Cycles are aperiodic inward that tops too bottoms practice non occur at regular, predictable fourth dimension periods. These cyclical structures occur on an intraday basis, swing basis, too over longer periods of weeks too months.
The nautical chart higher upwardly is a highly idealized persuasion of a marketplace cycle. It begins with a abrupt upward elbow grease from a depression point, with wide participation inward the rise. The bull displace attracts interest--and often volume--until nosotros hitting a quest of maximum upward momentum too strength, which I stimulate got labeled every bit a momentum high. At a momentum peak, nosotros volition typically meet a large number of stocks making novel highs relative to novel lows; we'll also often meet expanded volume; too overbought readings on many marketplace oscillators.
The higher prices attract sellers too a reject ensues that is a to a greater extent than pregnant reject than had been seen during the prior rise. I've labeled this every bit a "separating decline", adopting a term from Lindsay. During this decline, surely marketplace sectors concord upwardly relatively well; others dip significantly. Market indicators volition typically displace from overbought to to a greater extent than neutral levels and, nosotros volition typically meet a reversal of prior activeness inward bonds, currencies, and/or commodities. This alerts us to the possibility that something is shifting inward the fiscal landscape.
From this separating decline, nosotros typically become 1 or to a greater extent than subsequent rallies, often that accept the wide marketplace indexes to novel cost highs. At these highs, however, nosotros often meet fewer stocks making novel highs, fewer sectors participating inward the strength, too weaker upside momentum readings. Very often, we'll also meet non-confirming activeness inward those correlated markets: involvement rates, commodities, too currencies. As the marketplace makes these fresh cost highs, upside line too momentum are waning. Divergences laid out to accumulate.
With the waning upside, those shifts with property classes Pb to selling pressure level inward the wide indexes, taking the bulk of shares lower. This reject continues until nosotros hitting a quest of maximum downside momentum, at which nosotros meet stocks making novel lows dramatically outnumbering those making novel highs; a typical expansion of book on panic selling; too really weak oscillator readings.
Here, too, this quest of maximum downside momentum tends to endure followed past times a separating ascent that is notably stronger than the upside reversals that occurred during the market's downward move. Some sectors bounce really strongly off their lows; others ascent alone a little. This bounce is normally accompanied past times a displace to to a greater extent than neutral momentum too line readings inward indicators. Not infrequently, we'll also meet reversal moves inward involvement rates, currencies, and/or commodities.
This ascent is followed past times 1 or to a greater extent than subsequent declines that may accept the wide indexes to fresh cost lows. During this latter decline, nosotros meet fewer stocks making fresh novel lows, reduced downside momentum, too divergences with many marketplace indicators. We may also meet non-confirming activeness inward those related property classes. This waning of selling too thus emboldens buyers, too nosotros start a fresh cycle.
The nesting of these cycles inside 1 to a greater extent than or less other agency that whatever given bicycle volition stimulate got a shape that is partially determined past times the cycles of higher-order magnitude. If the marketplace on a longer fourth dimension frame is inward a rallying mode, for example, a short-term bicycle volition tend to stimulate got an elongated ascent too a pocket-sized subsequent decline. The structural qualities of the cycles volition typically endure present, but their timing too shapes volition vary, fooling many traders.
It takes a spell to prepare your analytic middle to perceive these cycles. On a large fourth dimension frame, for instance, nosotros had a bottom inward October, 1998, a momentum acme inward the stock marketplace inward the get-go quarter of 2000, a cost acme inward the Dow during 2001, a momentum trough inward October, 2002, too a cost depression inward March, 2003. That was 1 large cyclical movement.
More recently, nosotros had a momentum acme inward June, 2007; a cost acme inward Oct of that year; a momentum depression inward January, 2008; too we--I believe--are making subsequent cost lows inward July too directly inward September of that year. If that analysis is correct, the adjacent pregnant marketplace bicycle should endure to the upside.
Note that this is non a precise timing tool, a mystical numerological scheme, or a mechanical trading system. It is a conceptual framework that guides thinking every bit to ii of import marketplace issues:
1) Is the marketplace getting stronger or weaker over time?
2) How is the marketplace activeness at 1 fourth dimension frame linked to that at other fourth dimension frames?
But why would nosotros meet such structural similarities with marketplace movements? That enquiry volition endure the topic of the adjacent postal service inward this serial too volition shape a 2nd leg to our developing conceptual structure.
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