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41

• Sum of all long duration components Hard up

• IS-week component 14 weeks along.

Down, but due to bottom soon.

• 9.2-week component 4 weeks along.

Up, but topping soon.

• 5.2-wed: component 4 weeks along.

E>own, but bottoming soon.

• 9.9-day component 4 days along.

Up, but topping soon.

The present score, three up and two down. Two of the ups are due to top out soon and two of the downs to bottom out soon-at the "nest" The cyclic status is one of near equilibrium at the moment, with nothing calling for further downside activity in the near future.

On the other hand, in a short time, around the nest area, the situation will be altered to the point wiieie all five components will be simultaneously on the upside. We conclude that this stock is very near a buy signal.

FORMING THE VALID DOWNTREND LINE

At this point we must identify the cyclic component on which we desire to trade. We know that the shorter the tradmg interval selected the greater the percent per unit time yield we can expect. We also know that we can increase our yield by passing by the up-coming edge-band buy signal, and waiting for a mid-band opportunity. The only considerations involved in making a decision are the amount of funds we wish to invest in this stock, and the amount of time we have available for analysis. Let us assume in this case that the funds mvolved are $100,000 or less (allowing us to get into and out of the stock relatively quickly), but that the amount of time available to us is somewhat limited. Accordingly, we make the decision to operate on the 18-week cycle, with the corresponding limitation on yield rate, in order to obviate the need to maintain a number of stocks analyzed and ready to provide numerous action signals.

With this decision made, we select the next shorter duration component as the basis for our valid downtrend line-or the 9.2-week one. We note from Figure VIII-4 that were already over the top of the second 9.2-week cycle, and draw in the aociated trendUne, which terminates in the heart of the expected nest of lows as it should. We determine that if no other steeper valid trend lines form before, we will buy the stock as it crosses the trend line drawn.

COMPUTING POTENTIAL AND RISK

At this point we can invoke a neat trick based upon half-span averages to estimate upside potential and downside risk.

We note that a ten-week moving average approximates a half-span for our trading



cycle. If our analysis is correct, and the present downside trend is reversed within our nest of lows, a ten-week moving average must also halt and reverse a downtrend at this point in time.

However, this effect will not be seen for another five weeks (the lag period of the centered ten-week average). For the average to turn upwards now (as computed five weeks from now), the mean weekly price five weeks in the future must be greater than the one six weeks in the past. Referring to Figure VIII-2, we see that this critical price is 17 1/2.

This tells us that if our analysis is correct, prices will have moved from about 14 1/2 now to 17 1/2 in the next five weeks. But this will be only half of the total move expected (see the theory of half-span averages in Chapter Six). We would anticipate another 3 points, taking prices to 20 1/2 before the move is complete. Our estimated upside potential is thus 6 points, as compared to a downside risk of approximately 1/2 point phis commissions-since our first trailing loss level would be at 14. Such odds, plus the expected batting average of 80 to 90 percent correct decisions, confirm the desirability of the transaction.

We are now primed and waiting for an action al.

A MODEL TRANSACTION

Figure VIII-5 replays the subsequent events and the accompanying analysis.

The next day-Monday, the 4th of November- establishes the action of the preceding Friday as due to a top of a component of shorter duration than that upon which vaUd trend line #1 (VTL 1) was based. Accordingly VTL 2 is drawn, and it is determined that a single trade above this Une will constitute a buy signal.

The market was closed Tuesday, November 5, but on Wednesday, the 6th, the stock opened above VTL 2, and the signal was complete for the placement of buy orders. We will assume that the order was executed at the mean of the high-low range for the day (15 1/2). Simultaneously, we draw in TLL-1 as our first trailing loss level, and we determine to sell instantly if prices trade below this value (14 1/8)-or alternatively, we enter a stop-loss order at this price.

The stock behaves as expected in the following several weeks until the move of November 26. This established the preceding pause in the vicinity of 15 1/2 as the stretched upward low of a short-term component which will be used later in establishing a valid uptrend line. Also, the duration of this element is noted, for the last several cycles, as being about 25 days. These durations are then used to establish the cross-hatched region, "A," as a potential next low for this component.

Meanwhile, we note that a ten-week moving average (constructed as a reasonably close half-span of the 18-vreek component) is just starting to turn down toward the expected low around the 1st of November. We know this average must bottom out in this time region, and turn up once again when prices have advanced approximately half as far as they will be pushed by the 18-week cycle. Since this has not occurred as yet, our prevailing signal is "hold," and we know that aU is well with our trade, barring unforeseen fundamental factors that can override the cyclic expectations. This



SCREW AND BOLT FIGURE

VTL-5

-TLL-2

27 4 II 18 25

SEPT

TLL-I

1988

1069

29 6 13 20 27 3 iO

-i...

49.7% Profit In 57 Days!



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