The monthly S&P500 Emini futures candlestick chart has not had a pullback in 14 months. This has...
Predicting Market Behavior…Blindfolded! (Part 1)
03/02/2009 11:03 am EST
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 tomorrow in Part 2.
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