Predicting Market Behavior…Blindfolded! (Part 1)

Predicting Market Behavior…Blindfolded! (Part 1)

I recently spoke at the New York Traders Expo, and on the flight home, I watched one of those crime lab shows (I think it was called CSI Peoria). You know the shows I mean: the lab people are called in because there are no clues and they find a single skin cell on a gum wrapper. Once they analyze that single cell using their new super computer and its special software, the name of the criminal magically appears and the case is instantly solved. That’s the world we live in, right? High-powered computers running super smart software can make all our decisions simple and flawless. We are surrounded by this message, and pretty soon, we believe it in our hearts and minds.

When I give Webcasts or speak at live seminars, the most commonly asked questions are: What software do I use for charting, and what special indicators do I use to tell me where the market is going? I do my best to answer everyone’s questions. I still do my long-term charts by hand drawing them, and when I use computer charting programs, I use a variety of charting packages because I mentor and write and people like to see my analysis on the charting programs they use themselves.

I don’t use computer-generated indictors to tell me where the market is headed. I never use lagging indicators, and when I use leading indicators (Median Lines, geometric projections, and retracements and simple trend lines), I use them to “frame” price structure. Then I use my mind to sort through the various possibilities, to get a clear, likely path of price. Once I have the likely path of price in my mind, I look to the market to tell me where it is going. The market is always right, so I always trade what it is showing me. Computers, computer-generated indicators, and computer software always tell us what we program them to tell us—so if conditions change or if the premise is incorrect, the computer will give us a meaningless answer. The market is going where it is going, so I spend the majority of my time watching market structure to determine where the market is going.

I want to show you some of my thoughts about a particular market. But to keep your mind open and clear and without opinions, I’m going to show you my work on charts that do not name the instrument, do not give a timeframe, do not give a price scale. In short, I have taken out any of the clues from these charts that would tell you what market you are looking at. If you don’t know these things, maybe it will be much easier for you to see what clues I am looking at and why I think each of the market structures I am looking at are so important. Let’s give it a try, shall we?

This market is clearly in a downtrend. If you look closely at the upper-left portion of the chart, you can see it was in a strong downtrend before it made the current series of lower highs and lower lows.

You can see I have a red, down-sloping Median Line set on this chart, and it’s doing a good job showing me where price should run out of downside directional energy. Price is heading lower, and this leading indicator has marked the probable path of price for me.

More in Part 2.

Timothy Morge

How to “See” the True Message of the Markets (Part 5)

How to “See” the True Message of the Markets (Part 5)

The probable path of price is becoming clearer to me, but perhaps one more chart will bring it into clearer focus for both the trader and for you:

chart

The finishing touches on this analysis are simple. I mentioned before that when I see that the measured length of the swing from pivots A to B equals the length of the swing from pivots C to D, I find the same tools will give me useful projections of the swings forward in time. On this chart, I measured the upside distance price travelled from swing B to swing C, and then projected that same distance upward from the low made at swing D. If I am correct, the swing currently unfolding to the upside from pivot D will be the same length as the swing higher from pivot B to pivot C. Note that I marked where this next swing higher should run out of upside directional energy, at about $880 per ounce.

I don’t see any sign that the current uptrend is over or nearing completion, so if price pulled back a bit to test the up-sloping lower sliding parallel, and that line held, I would be interested in entering a long gold futures position. Remember that this is the pre-trade analysis, so it is too soon to talk about specific entry prices and initial stop loss orders, but as always, I would only enter the orders if the size of the initial stop loss was acceptable and the risk reward ratio was within my normal parameters.

You can see I added a wide green line that unfolds in a wave pattern to show what I consider to be the probable path of price. Once I add the probable path of price onto the chart, it becomes obvious that if I am correct about the projected price target at $880, price will also be running into resistance at the down sloping Schiff Upper Median Line Parallel—and that Upper Parallel marks where price should run out of energy—a great place to take profits.

I showed you charts and analysis that support both a down side move and an up side move. Remember that this analysis is meant as an exercise to help traders objectively identify market structure and then help them determine the probable path of price.

Let’s see what the gold futures did over the next several weeks:

chart

Price came down and tested the lower sliding parallel, and the key support held at that level. Upon successfully testing the sliding parallel, price turned back higher and made a very quick, nearly vertical run up of over $140 an ounce, right to the $880 per ounce area where I projected and marked the equal measured move. Then, after consolidating a bit, price traveled higher and tested the down-sloping Schiff upper Median Line parallel, where it ran out of upside directional energy.

Do not let your opinions get in the way of your trading! Do your best to do objective analysis, and more importantly, trade the market’s actions, not your views or opinions. If you find yourself getting short three times in a row while the market continues to make new highs all morning, you are trading your opinions, not trading the market’s action. The market is always right!

I wish you all good trading.