How to Improve Your Market Direction Forecasting Skills (Part 1)
03/09/2009 10:25 am EST
I am a trader. I am not an analyst or a prognosticator, but playing “What if” is an exercise that can pay great dividends if you know what to look for when evaluating a market for potential turning points. For example, I did a chart and projection of the Dow Jones Industrials for the Las Vegas Traders Expo and MoneyShow.com in November 2007, calling for a test and break of the 7500 area within 18 months and then a sharp fall to the 5500 area. And of course, this long-term projection has turned out to be eerily accurate.
Is it luck when these types of projections work out? No, there are there real signs you can look for to help identify potential turning points. Let’s look at a couple of these set ups, let you guess how the set ups turned out, and then look at some current markets that may be setting up for either changes away from their current trend, or accelerations in their current trend.
This first chart clearly shows higher highs and higher lows—strong signs of an uptrend. Everything looks good, right?
Do you think this market is going to continue higher from this point?
Do you think this market is going to change direction from this point?
Are there any clues that help you support your intuition?
Price made one spike high and then consolidated with a set of smaller ranged bars that had alternating closes, and then price plunged lower.
Did you think the turn was near when you looked at the first image and couldn’t tell the instrument, time frame, or price scale? What clues did you see?
I was looking at the noticeable difference between the slope of the line (or Line of Force) that connected the higher highs together, and the slope of the line (or Line of Force) that connected the higher lows together. The slope of the line that connected the higher highs was flattening out, while the slope of the higher lows was still quite steep.
In simple terms, it took little energy to make new highs, yet price would be able to fall quite a bit before finding any prior lows that might act as support. Once price broke below two prior swing lows, the change in direction was confirmed and the fall continued in a near vertical fashion.
More tomorrow in Part 2.