Day two of our Guest Trader slot with reader Alex a.k.a Grasshopper. If you missed it here is Day 1
(For his charts it might be better to open them in a new tab/window for the sizing.)
Food for thought
Bill Willliams, in his book ‘Trading Chaos’, on page 43, wrote:
‘Not only is technical analysis based on the false assumption that the future will be like the past, but it uses inappropriate linear techniques for analysis.’
This sentence always makes me wonder about the nature of the information we have available upon which to base our trading decisions. Let’s see. We have the news, price, time, and technical indicators, most of which are either directly or indirectly all derived from some moving average computation. It seems, after all these years and countless technical analysts all with their own approaches to trading the markets, no one has come up with something better than what the MACD does. Even Bollinger bands are based on computing the price deviation from its average over a specific period of time. And although Bill Williams says that most technical analysis is useless, paradoxically most of his indicators are also based on linear moving average computations!
Is that it? Is this the best we can do? Moving averages and how far the price swings back and forth from its average?
There might be 2 exceptions to this. John Ehlers’s approach to designing indicators uses signal processing computations and the assertion that price does not follow a Gaussian distribution at all. For those curious about this approach, you can play with his indicators on 2 platforms: MotiveWave and eSignal. Also, some of Ehlers’s papers can be found here: stockspotter.com
But even more interestingly, I believe the biggest overlooked piece of information available to us is time. And by time, I don’t just mean when the trading sessions begin and end. It is obvious that the markets cycle. Even a tool as primitive as the Stochastic shows the market’s oscillations.
What is interesting is that the information given primacy and fed into technical studies is essentially based on the Y-axis, that is, price. The time period is just there to modulate the expression of price variations. Pivot points, trend lines, support/resistance zones, fibonacci structures, RSI and all such studies, all emphazise some combination of price relative to another combination of price (high, low, close, open, high-low, high+low/2,open+close/2, and so on) and thus we are trained to look at and search for specific price points at which one should enter or exit the market.
But what if this obsession with price points is the wrong way to approach the markets? What if instead we should focus on when, that is, when in a given time cycle one should enter and exit a trade regardless of the price level?
What if there is structure to time itself? What if it doesn’t matter as much what price did over an arbitrary amount of periods? But instead, what if time itself had structure just like a riverbed, and price, like water, just flowed over this riverbed, the latter channeling it to and fro? All a trader would need to understand is the configuration of that structure to suddenly see with more certainty where the price might be heading.
I know of only one tool exploring this concept: Hurst Cycles Analysis. Here is the link to some introductory information: www.tradersdaytrading.com/jm-hurst.html. And here is the software: sentienttrader.com. And of course, the book on Amazon: Amazon.com/Mastering-Hurst-Cycle-Analysis-treatment
Chart(s) of the day
It feels a bit silly to analyse the market just before an FOMC meeting, especially the one tomorrow as literally anything could happen. That being said, I see some peculiar price action (PA) ahead of the Fed meeting. Let’s first take a look at the hourly charts for the AUD/USD, USD/CAD, GBP/USD, and EUR/USD
*Right click charts and open in new window
On all these charts, there is an obvious price gap, what I like to call ‘a serious disturbance in the Force,’ and which has not been closed yet, except almost on EUR/USD.
Now, if we look at the daily charts for these four pairs, we can see that all display some sort of harmonic structure, except the EUR/USD.
AUD/USD: ABCD structure completed right at 1.272 fib projection and major weekly resistance with a shooting star. The next candle, although not complete yet, if market keeps going this way, will give us a close below the shooting start and a bearish trigger.
USD/CAD: an imperfect bullish crab structure with a PRZ (price reversal zone) right inside a K-area (which the confluence of fib 38.2% and 61.8% from 2 different fib retrace structures) and at ABCD fib projection 2.618 completed with a hammer. The next candle, if market keeps going up, will then close above the high of the hammer, a classic bullish trigger.
GBP/USD: another crab structure (crab, butterfly, same thing–what matters, is it bullish or bearish?), but this time bearish, and with some peculiar looking candles in the PRZ completion zone: 1 completed spinning top (or UFO), and the weekly pivot point is at 5879.
EUR/USD: now, the euro is a peculiar beast. There doesn’t seem to be any harmonic patterns on the daily chart, at least none that I can see. Maybe some sort of double top at the red line (major resistance on a higher time frame) and 2 dojis, on each side of the gap with current price right at the 800 SMA, which does act as support or resistance at times.
Conclusion: If–and it’s a big IF–all these patterns turn out to be valid, they are all pointing to further USD appreciation, except on EUR/USD where we have nothing really. The caveat is that such patterns do fail, and when they do, they fail miserably. But, considering the singularity about to impact the market tomorrow, and that the price stopped at key resistance or support zones, after the news is out of the way, we should get some nice directional moves setting the tone for the next few days to come, at least, and giving us one of the two boundaries of the new range about to be carved out.
Note: Scott M Carney in his book ‘Harmonic Trading’, on page 18, lists the following harmonic trading ratios as being valid ratios–make of it what you will: 0.886, 1.13, 0.707, 1.41, 2.24, 2.618, 3.14, 3.618. I mention these because although the harmonic structures on the charts do not always display these numbers exactly, it’s close enough. It’s not like we are dealing with an exact science here. Actually, technical analysis and science maybe shouldn’t be used in the same sentence.
