Category Archives: Education

Scale – Arithmetic or Semi-Log? | 30th August, 2017

The choice of what scale to use on your charts makes a big difference to how trend lines sit. Which scale is correct?

Gold 2 Weekly 2017
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The chart above shows Gold 2 weekly on an arithmetic scale. Notice the bear market trend line has been breached, but did not show where price exactly found support and resistance in the process.

Gold 2 Weekly 2017
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The chart above shows Gold 2 weekly on a semi-logarithmic scale. So far price remains below the bear market trend line.

An arithmetic scale is best used for short term price movements. But for long term movements a semi-logarithmic scale is more correct, particularly for markets like Gold which can exhibit blow off tops and selling climaxes.

Any long term movement a year or more should always use a semi-logarithmic or ratio scale.

From Magee (“Technical Analysis of Stock Trends”, 9th edition, page 11):

“Our own experience indicates that the semilogarithmic scale has definite advantages in this work; most of the charts reproduced in this book employ it… Percentage relations, it goes without saying, are important in trading in securities… certain trend lines develop more advantageously on the ratio scale.”

From Pring (“Technical Analysis Explained”, 4th edition, page 68):

“Arithmetic scaling is not a good choice for long-term price movements, since a rise from 2 to 4 represents a doubling of the price, whereas a rise from 20 to 22 represents only a 10 percent increase… For this reason long term price movements should be plotted on a ratio or logarithmic scale. The choice of scale does not materially affect daily charts, in which price movements are relatively small in a proportionate sense. For periods over 1 year, in which the fluctuations are much larger, I always prefer to use a ratio scale”.

Published @ 04:28 p.m. EST.

Volume and Breakouts – Is it Necessary? | 11th August, 2017

This chart was published two days ago. At that time, it was warned that the possible upwards breakout of the 8th of August lacked support from volume and may turn out to be false:

S&P500 Daily 2017
Click chart to enlarge.

That was proven correct. The strong downwards movement from the S&P comes on a day with an increase in volume. This is a classic downwards breakout.

When a downwards breakout has support from volume, that adds confidence in it. Downwards breakouts do not require support from volume; the market may fall of its own weight. Price can fall due to an absence of buyers as easily as it can from an increase in activity of sellers. But when volume supports downwards movement, it may be more sustainable, at least for the short term.

This downwards breakout was predicted by strongest volume during the consolidation being a downwards day.

This volume analysis technique looks at the presence or absence of support from volume on the breakout after a consolidation period to tells us how reliable the breakout may be.

Published @ 12:17 a.m. EST on 12th August, 2017.

Volume and Breakouts – Is it Necessary? | 9th August, 2017

After a consolidation price will break out. The presence or absence of support from volume on the breakout tells us how reliable the breakout may be.

Gold Daily 2017
Click chart to enlarge.

Pennant patterns are one of the most reliable continuation patterns. But in an upwards trend the breakout should have support from volume.

For price to keep rising it requires increased activity of buyers. Upwards breakouts that do not have support from volume are suspicious.

This upwards breakout comes on a day with slightly higher volume, but the balance of volume for the session is downwards. Stronger volume during the session supported downwards movement, not upwards.

The breakout is suspicious and may turn out to be false.

While volume is important for upwards breakouts, it is not so important for downwards breakouts. The market may fall of its own weight.

Published @ 04:47 p.m. EST.

Non Farm Payroll – What Direction for the S&P500? | 3rd August, 2017

A simple classic technical analysis pattern may answer the question of what direction to expect tomorrow from the S&P500 upon release of Non Farm Payroll data. This release is expected to move markets strongly:.

Gold Daily 2017
Click chart to enlarge.

Pennants are reliable continuation patterns. The pattern is supported if volume declines as the pattern forms. Pennants normally appear about halfway within a trend.

The measured rule takes the flag pole which precedes the pattern and adds that length to the expected breakout of the pattern.

If this pattern is correct, then tomorrow may see an upwards breakout to new all time highs for the S&P500.

Published @ 06:28 a.m. EST.

Learn Elliott Wave – Spot The Mistakes | 3rd August, 2017

For those who want to hone their Elliott wave knowledge, have a go at spotting my deliberate mistakes:

Gold Daily 2017
Click chart to enlarge.

This one is easy (at least, I think it is and I’ve really tried to make it easy).

There is one mistake in the triangle (just one!) and one mistake in the impulse.

Can you find them both?

Name the rules which I have deliberately broken here. Answers will be posted in comments tomorrow or the day after.

Note: During the process of preparing this post, I found a solution that fixes my main problem with the current alternate wave count. This solution will be published in tomorrow’s Gold analysis.

Published @ 05:49 a.m. EST.

Volume Basics | 2nd August, 2017

Volume analysis is essential to a full technical analysis. One of the simplest techniques is to look at volume during a consolidation and note which days, upwards or downwards, have strongest volume.

Gold Daily 2017
Click chart to enlarge.

Gold has been within a large consolidation since about January 2017. A small resistance zone is about 1,295 to 1,300. A wide support zone is about 1,195 to 1,215. During this period of time, it is two upwards days that have strongest volume and this suggests that an upwards breakout may be more likely than a downwards breakout.

This technique does not always work, but it works more often than it fails. This technique is an exercise in probability and not certainty.

Published @ 04:00 a.m. EST.

3 Simple Trend Line Rules | 27th July, 2017

Trend lines used for support and resistance may have varying degrees of technical significance. Here are three simple rules to use to determine how much significance a trend line has and how much attention to pay to a breach.

Gold Daily 2017
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The stronger the line, the more important the breach.

Thus a line which is close to horizontal, very often tested, and very long held would be the most significant.

A line which is steep, only tested a very few times, and not long held offers very little technical significance.

On the monthly S&P500 chart, the green line has more technical significance than each of the yellow lines. The green line has a more shallow slope and is much longer held, although it has only been tested three times.

This analysis is published @ 05:08 a.m. EST.

Learn Elliott Wave – Spot The Mistakes | 12th July, 2017

A second Elliott wave version of “where’s Waldo”. A fun exercise (for the geeks amongst us).

Test your knowledge of Elliott wave rules. Review this chart and find five deliberate mistakes:

Gold Daily 2016
Click chart to enlarge.

Two mistakes break core rules, but one involves some subjectivity and may need to be verified on lower time frames (an issue of subdivisions). But both look fairly obvious at this time frame.

Only one mistake is something that Motive Wave will alert you to, so the other four would be something you’d have to be aware of to avoid.

Price points are provided where you may or may not need them, so that provision of price points doesn’t alert you to where the mistakes are.

If anyone wants to have a go at their own (correct) wave count for Palladium, feel free to post in comments.

I’ll post answers to the mistakes, and my version of a correct wave count, after 24 hours.

Play in comments below.

Published @ 06:00 p.m. EST.

Learn Elliott Wave – Spot The Mistakes | 6th July, 2017

An Elliott wave version of “where’s Waldo” might be a fun exercise (for the geeks amongst us).

Test your knowledge of Elliott wave rules. Review this chart and find five deliberate mistakes:

Gold Daily 2016
Click chart to enlarge.

The mistakes are all fairly obvious. Two of them break core rules, one is a very common mistake, and another mistake is something that MotiveWave allows (but it should not).

Play in comments below.

Published @ 05:38 p.m. EST.

Drawing Bear Market Trend lines | 27th June, 2017

One of my favourite Technical Analysis texts is the classic “Technical Analysis of Stock Trends” by Magee. In this book Magee describes how to draw trend lines for bull and bear markets.

Gold Daily 2016
Click chart to enlarge.

To draw a trend line in a bear market draw the line from the high to the first major swing high within the bear market. Extend the line outwards. Assume the bear market remains intact while price remains below the line. When upwards movement breaks above the trend line, it is an indication of a potential trend change from bear to bull.

My definition of a breach is a full candlestick above and not touching the trend line.

This technique works on all time frames.

This chart is on a monthly time frame and indicates that Gold may remain in the larger bear market, which began on September 2011.

This analysis is published @ 03:02 a.m. EST on 28th June, 2017.

Drawing Trend Lines? Simple is Best | 27th June, 2017

One of my favourite Technical Analysis texts is the classic “Technical Analysis of Stock Trends” by Magee. In this book Magee describes how to draw trend lines for bull and bear markets.

Gold Daily 2016
Click chart to enlarge.

To draw a trend line in a bull market find the first two major swing lows, then draw a line across them. Extend the line out to the right. Assume the bull market remains intact while price remains above the line. When the line is properly breached, it is an indicator of a potential trend change from bull to bear.

This technique works on all time frames.

Gold began a series of higher highs and higher lows on the daily chart after the low in December 2016. Within this upwards trend, the first two swing lows are taken as the 27th of January and the 10th of March. This trend line has now been tested eight times, with downwards movement for the last session of the 26th of June being the eighth test.

How Gold behaves at this trend line in the next few days will be a strong indicator. Does the bull run continue or is it over?

This analysis is published @ 03:43 a.m. EST.

On Balance Volume (Beyond Volume Basics) | 23rd June, 2017

Volume alone is not always a clear indicator. It is necessary to add another volume indicator, like On Balance Volume, to add depth to volume analysis and improve accuracy.

Gold Daily 2016
Click chart to enlarge.

On Balance Volume can be used in two ways.

1. When On Balance Volume creates a range draw trend lines across its highs and lows. A breakout by On Balance Volume can sometimes precede a breakout from price, so On Balance Volume can be a leading indicator. Other times On Balance Volume may break out with or after price, it can then be a confirming indicator. Used this way On Balance Volume works very well.

2. Divergence between price and On Balance Volume can be used to indicate weakness and an impending trend change. This divergence can persist for some time prior to a trend change, so it is not useful in picking highs or lows.

Trend lines are drawn on On Balance Volume in the chart above. Resistance is in purple, support in yellow. A long term line is added in pink.

Bullish signals are noted in green arrows on price:

1. Halfway through an upwards trend On Balance Volume breaks above resistance which was prior support. This adds some confirmation to the trend. Traders may have more confidence in long positions.

2. A long term trend line which previously provided support, then resistance, is breached. This adds confidence in the upwards trend continuing.

3. A long term trend line is touched after some time. The bounce up and away is bullish.

4. A breach of resistance is a bullish signal. This illustrates that this technique does not always work. Price continued higher for only one more day before a major reversal.

Bearish signals are noted in red arrows on price:

1. A breach of support is a bearish signal, which should confirm the downwards trend. But a low is found the next day. Again, this technique works more often than it fails, but it can fail.

2. A break of a long term support line halfway through a downwards trend offers confidence in short positions.

3. Another break below a support line offers confidence in the downward trend.

In addition to breaches of trend lines, tests of support and resistance also offer signals.

Using On Balance Volume in conjunction with volume bars adds considerable depth to analysis.

This analysis is published @ 03:41 a.m. EST.

Volume Basics | 21st June, 2017

The activity of buyers is required for price to rise sustainably. This is indicated by increasing volume on upwards days.

The opposite isn’t necessarily true for a falling market. Price can fall due to an absence of buyers, just as it can with increasing activity of sellers. Rising volume with falling price is good to see as it supports the trend, but it is not necessary.

Does Gold’s price and volume conform to this basic principal of technical analysis?

Gold Daily 2016
Click chart to enlarge.

1. This first rise in price is close to textbook perfect. The trend is well supported by volume. Volume does not increase in a straight line each day; some days are lighter than the prior day, but overall there is an increase.

2. This next rise is not so clear, but there is still overall an increase in volume as price rises. Volume is lighter than the prior stronger trend though, so the deep pullback that followed should not have been entirely unexpected.

3. As price falls initially volume declines and then shows some steady increase. The fall in price has support from increasing selling activity.

4 & 5. As price rises volume is not clearly rising. Sometimes the market can drift higher on light volume, so this type of rise is suspicious. The following deep decline again should not have been entirely unexpected.

6 & 7. As price falls volume declines. The market is falling of its own weight.

8. At the end of the fall volume begins to increase.

9. The start of the next rise has some support from volume by day 5. This shows an increase. However, the fifth day volume spike may also be a blow off top signalling an end to the rise temporarily. Blow off tops are not usually the very end; they usually signal a period of consolidation before the trend has a final rise.

The area between 9 and 10 is very unclear, with choppy overlapping price action generally trending higher and mostly flat volume.

10 & 11. As price falls volume declines. The market is mostly falling of its own weight.

When volume clearly supports a trend, then more confidence may be had in it. When volume does not support a trend, it is suspicious. Lack of support from volume will not tell when price will change direction, but it can warn that price may likely change direction and not just consolidate.

This analysis is published @ 03:51 a.m. EST.