One further thought about the boxes I use in several charts. They offer a very distinct reference on the chart, but some readers will have a chart program that does not allow them to draw an object and then move it around on your computer screen. If this applies to you, just use the Fibonacci expansion tool that your vendor provides. Remember to modify it. The Fibonacci expansion targets should include all the following ratios: 38.2 percent, 50.0 percent, 68.1 percent, 100 percent (equality), 132.8 percent, 150 percent, and 168.1 percent. The 38.2 and 50.0 percent ratios will depend on the markets you trade and the time horizon, but I never use the 261.8 percent ratio of the measured range. It is so far away, I would rather use the new price swings that follow within the new data so a market starting to contract or expand can be caught early in the process.
Just before moving on, notice the bearish divergence in the Composite Oscillator (bottom of Figure 6.2) compared to the final top and the price high at y. This will reinforce earlier discussions to read oscillators only when the market reaches a confluence zone. Indicators tell us how the market will react to the confluence zone, and if they give permission to execute a trading strategy. By ignoring oscillators when price is not at a confluence zone, we filter out the false signals. The divergence of any momentum oscillator is insufficient information by itself to establish a trading position.
In Figure 6.2, there is a near equality move using the conventional method of measuring a range and then producing a new swing up from the next pullback. The measured range is from the end of the triangle at e up to the high marked y. Then projected as an equality move from the corrective low to the right of y, it targets the market top. Nevertheless, a confluence zone could have been used to project and identify this market top much earlier. The method will be discussed shortly in Figure 6.4 once we develop additional confluence zones.
The 2-month JGB chart is displayed again in Figure 6.3, but this time as a candlestick chart. This offers an opportunity to clarify why I often truncate market spikes. The top candle is called a shooting star. It is bearish as it denotes an exhaustion signal in the preceding uptrend. If you are unfamiliar with candlestick charts, the shooting star forms when the market trades higher than the market open, then the session closes below the open and near the lows of the session. The candle develops a real body between the open and closing prices of the chart interval. If the candle body is black, it means the closing price was below the opening price for the 2-month period. If the real body is clear or white, the close was higher than the opening price.
We are not going to read any traditional candlestick patterns from this chart. But we can use the clarity of the candlesticks to define support or resistance. In Figure 6.3, truncate the wick of the shooting star candle when starting the ranges to be subdivided into Fibonacci ratios. To define the end of the ranges, use the real bodies where the strongest moves develop. Three ranges were defined at points 1, 2, and 3. The confluence zones clearly fall at m and n. A third zone grayed in will be used later.
The bottom of the third range at point 3 needs special mention. It is the longest real body within the developing rally. Ensure you include as one of the endings of your selected ranges a pivot that marks the longest single bar within the rally or decline whenever possible. The subdivisions within this range will develop the most important confluence zones from which to make future projections.
Figure 6.3 allows us to begin to consider market character between zones. Support zone at n is a band from 133.31 to 133.63. Remember, we are looking at a 2-month chart, and the confluence zone width is still fairly close together. The next zone at level m falls between 130.16 and 130.35. These confluence zones define precise levels of major support. The single level standing alone at 131.33 is viewed as minor support and not the upper collar of the confluence zone at m. Change minor support levels to a faint color or remove them entirely from your screen when the screen is congested. When the market falls to zone n just to the left of the n label, it recovers from this support zone and resumes the larger trend only to create a head-and-shoulders top. The breakdown through level n will fall rapidly to level m because no other Fibonacci levels are present to impede the decline. Expect this acceleration between zones to occur as the rule rather than the exception when there is a void, so to speak, between major zones.
FIGURE 6.3 10-Year Japanese Government Bond—2-Month Candlestick Chart
Connie Brown, www.aeroinvest.com. Source: Copyright © 2008 Market Analyst Software
For an Elliott Wave practitioner, this is how to know what pattern will develop before it even begins. Near the end of 2007, we saw in prior chapters, numerous stocks and global indexes formed parabolic rallies. Parabolic rallies always develop large voids between confluence zones defining support. These voids under the market create fast breaks or strong decisive swings as the market moves rapidly from one support zone to the next encountering little resistance. As a result, the manner in which the confluence zones fall under the market gives warning well in advance that the Elliott pattern known as a zigzag correction will develop. These three-wave corrections are big countertrend money producers, as the market character will be fast market conditions from one zone to the next. Often the middle consolidation in the correction, we call the b wave, becomes trapped within a nest of minor Fibonacci lines. When the second break comes out of the middle congestion, it is again a fast market condition through the empty void to the next major confluence zone.
Triangles form within a nest of congested Fibonacci levels, and the internal swings get caught between two or more major zones. Often there is no clean break between zones. Consider the triangle in Figure 6.3. Follow along the confluence zones at n and m to the left, and examine the triangle. There is a third zone with a spread of 126.29 to 127.01 just below m that is highlighted with a light gray color. The triangle pattern develops in stages along these three support zones. Triangles will be the toughest challenges we will encounter. The decline that develops from the market top clearly respects the support zones n and m. That’s why I will trade corrective moves like the one we see to the right of the market high and try to stay clear of the final internal swings of a triangle. Other market price action to stay clear of are termination wedges, thinly traded stocks or data showing numerous long key reversals both up and down (market makers are letting stops run), and markets forming tightly congested chop with few well-defined confluence zones. Regardless of the time horizon in your chart, be it very long or very short, the market character or action between zones will respect the spread between the confluence zones created from ranges using strong moves or gaps. Gaps, it should be pointed out, are true market gaps and should not be confused with session breaks that occur because you are not plotting available night sessions.
It was suggested earlier that the market high for the 10-Year JGB market could be identified using a confluence zone. In Figure 6.4, a box from the confluence zone at m is used to start a measured range to the low of the price swing. This zone was ignored earlier because we had to find the first zone that formed under the triangle. Now this higher zone is used to create the measured range marked with a gray box. The height of the box is copied and shifted so that the bottom aligns with confluence zone m. Now subdivide the box into the ratios 38.2 percent, 50.0 percent, and 61.8 percent. The market high ends at the 61.8 percent target. You might have also observed that the first retracement up after the high has a candle whose real body fails at the 38.2 percent subdivision. Imagine the 50 percent line extended to the right and the next rally fails just under this level as well. The JGB 10-Year market is still working off this same price grid defined three years ago.
The next discussion will focus on the EUR/USD Forex market. This market will demonstrate a specific problem in price projections that can be solved, but my discussion will require a more advanced study of the use of Fibonacci numbers for time analysis. The chart in Figure 6.5 is a 2-month EUR/USD currency chart. The extreme price lows and highs have been labeled points A, B,
and C. A 61.8 percent ratio of range AB has been extended from price low c. This again illustrates the industry’s convention for developing Fibonacci expansion ratios. The target is very precise, but three price bars representing a period of six months have freely passed back and forth around the target ratio. Many analysts may view this target of value, but traders need greater accuracy.
Figure 6.6 continues with the same EUR/USD market in a 2-month bar chart. This chart shows a more advanced confluence zone calculation. The difficulty is in knowing where to start the ranges that will be further subdivided into 38.2 percent, 50.0 percent, and 61.8 percent ratios. Study the price bars into points x, y, and z. The strong reversal at the actual price high between points y and z is a bull trap. Don’t use bull or bear traps as a rule. Find where the market defined resistance prior to the trap. Point x is a strong bar moving up that ended the strongest momentum of the swing. The three bars, or six months, that followed made no substantial gain except to display market indecision. A sharp break then develops, and the strongest bar down begins from the same price level as x. A retracement rally is attempted with a massive failure into y. The market then produces the breakout failure and pullback that holds above confluence zone m. The retracement rally fails at point z. This next point is extremely important. Because points x, y, and z all develop at the same level and the deepest retracement from the high between points y and z is respected by the market at m, the key reversal false breakout should be truncated. The ranges selected all start from the xyz level and then end at strong price low bars within the rally. A confluence zone along price level m is identified.
FIGURE 6.410-Year Japanese Government Bond—2-Month Chart
Connie Brown, www.aeroinvest.com. Source: Copyright © 2008 Market Analyst Software
FIGURE 6.5 EUR/USD—2-Month Chart
Connie Brown, www.aeroinvest.com. Source: Copyright © 2008 Market Analyst Software
FIGURE 6.6 EUR/USD 2-Month Chart—Confluence Zone Price Projection
Connie Brown, www.aeroinvest.com. Source: Copyright © 2008 Market Analyst Software
The next step is to take a measured move from the confluence zone m down to the price low. It is a gray box on the bottom left. The range is then projected upwards from m. It is subdivided into the ratios 38.2 percent, 50.0 percent, and 61.8 percent. This method accurately warns that a failure into point p offered a good exit strategy for any long positions. The same level then facilitated a good short sale strategy at p. The bar to the left of p would be stopped out perhaps, so the entry at p is the second time, producing a solid move down without any position jeopardy. Always let indicators in a shorter time horizon confirm a longer horizon chart. The failure at target p would have divergence confirmation in a weekly and monthly chart, while the earlier pivot would not. Therefore, take profits into targets, but do not reverse positions without seeing the setup develop in more than one time frame. The grayed area above p is just to help visualize the larger trend’s target, but indicators warn this target will not end the larger rally because divergence in two time horizons will not be present. Readers who want a more detailed discussion on the relationship of momentum displacement to amplitude range in multiple time horizons will find more in my book Technical Analysis for the Trading Professional.
The market did not stop exactly the first time it approached the target at p, but this level is a significant improvement over the method used in Figure 6.5. The question we are left with is, why was price pivot p so difficult to locate? There is an answer to this question. It was a horizontal level of resistance for price, but not at the vertical confluence zone defining a time target.
Fibonacci Applications for Time Analysis
Many readers will find the notations in Figure 6.7 a new cycle technique. We do not need an extensive discussion about the field of study known as Gann analysis, in order to use some of the conceptual ideas of W.D. Gann within our Fibonacci analysis. One concept credited to Gann is an equality relationship between price and time. How Gann analysts apply this concept is to square the price axis to determine a target of equal units along the time axis. Square does not mean price squared. This is just a geometric equality relationship.
FIGURE 6.7 Advanced Application of Fibonacci Angles
Connie Brown, www.aeroinvest.com. Source: Copyright © 2008 Market Analyst Software
Fibonacci angles were introduced in the last chapter in Figure 5.12. The next step is to apply this concept of Fibonacci angles in a more sophisticated way. Figure 6.7 is the 2-month EUR/USD currency chart. There are five vertical lines through the chart showing confluence targets in time. One cycle is marked with the symbolic glyph for the planet Mars with the number 34 beneath it. This astronomical “hit” simply shows when Mars has moved thirty-four degrees along its elliptical orbit relative to earth. The second cycle is an asteroid being mapped every five degrees along its own orbital path as seen from the Sun. This is called heliocentric. A cycle progression as perceived from Earth is called geocentric. The two cycles will form major inflection points in time when they come close together creating a time confluence target on the x-axis. These two cycles form five vertical, or time, confluence zones. The EUR/USD market has respected each time confluence zone by forming a market reversal or pivot that resumes a strong resumption of the former trend. You will be able to identify the inflection points of high probability with some additional study, but don’t assume the inflection point is a historic price top or bottom unless you become proficient in these methods of W.D. Gann. Most books on the subject discuss the methods of John Gann, his son, and they are far less accurate.
Some caution is needed about what you use to study these analysis techniques. Do take notice that neither of the astrological cycles displayed in Figure 6.7 has a fixed period interval between its cycle hits. Astrological orbit progressions, aspects, retrograde, ingress, speed, and much more can be statistically evaluated over large databases making them viable methods for various models. The notations could have been mapped under a price bar, or along the top or bottom of the page. Place no meaning on the price level of these astrological notations. They just have meaning on the vertical axis, and I have a preference to see them as close as possible to a price bar, because I want to know when a horizontal and vertical confluence zone come together. Like the confluence zones we created for price on the horizontal axis, the width of the bands on the vertical axis have meaning as well.
Now look inside the target box to the right side of the chart that was created for Figure 6.7. Within this box, there is only one vertical time confluence zone, and the market is not trading near the 61.8 percent horizontal price target at that time. The uptrend for the swing ended earlier within the target box at the 50 percent line when Mars marked a 34-degree progression.1
For traders well versed in Elliott Wave jargon, the pivot high within the box, marked ♂ 34 (Mars 34), is the orthodox top concluding a five-wave rally. A corrective pullback then leads to the high marked wave b within an expanded flat corrective pattern. B waves are ugly remnants of the former trend. In expanded flats they exceed the resolution of the impulse wave preceding them. From the 61.8 percent target in Figure 6.7, a wave c decline then unfolded to conclude the corrective pattern. An added measure of confidence occurs that a market reversal will develop because the wave structure of the correction ends at the same time as the confluence target in time. In addition, the price low of wave c was on a short horizon confluence zone not displayed within this chart. The rally favoring the Euro then resumed into the current data of December 2007. The confluence zone of greatest interest in Figure 6.7 is the one on the far right that is a future time target.
As stated earlier, astronomy is a science, and astrology is more of a mystical art. The financial industry has put a stigma on the science because of the perceived voodoo of the art and emotional presentations of financial astrologers targeting the mass retail market. But astronomy and astrology are not the same. If you wish to study astronomical cycles and ne
ed a place to start, begin with planetary retrograde periods. You will find a discussion in Chapter 5, “Price and Time,” in Breakthroughs in Technical Analysis (Bloomberg Press, 2007). I was a contributing author and focused on the Oil market in this discussion. You might then consider ingress studies, solar eclipses (lunar for London and Asia equity indexes). Then look at the specific aspects: opposition and conjunction between Jupiter and Pluto or Saturn and Pluto on the Dow Jones Industrial Average from 1900 offers an interesting place to begin. That will be enough to get you started. It will also leave you eager to become a more serious student of astronomical events and cycles as utilized by W.D. Gann.
In Figure 6.8, the astronomical angles using the Fibonacci numbers 5 and 34 remain on the 2-month EUR/USD chart. To create a more meaningful confluence target on the time axis, a trine or 120-degree angle between the planets Jupiter and Venus has been marked with a vertical line. The angle of separation between planets is called an aspect. The aspect cycle does not occur in a fixed interval period. Traders in our seminars often want to jump right to the study of time confluence zones. Be careful, you need command of price confluence targets first, and only then begin to study confluence analysis of time cycles. We think we can control events and their timing, but this type of work shows we don’t control very much at all.
FIGURE 6.8 EUR/USD 2-Month Chart
Connie Brown, www.aeroinvest.com. Source: Copyright © 2008 Market Analyst Software
Market Character between Confluence Zones
Throughout this book you have seen several methods to develop confluence targets in both price and time. Now it is important to clearly grasp how the spread between confluence zones along the x-axis or y-axis influences how markets move.
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