Target for Nasdaq
Crowd following Techniques is an area where I am somewhat blessed as my profession for over 20 years was teaching and mentoring professional traders across the globe, which meant I got to see what they used in their Technical war chest. There is a whole chapter dedicated to the subject in my Mapping Your Voyage of Rest assured nearly every trader in Japan has a Candlestick chart with an Inchmokukinouhyou overlaid on top, which means having at least a rudimentary knowledge of what they are looking for on their domestic markets (especially Dollar Yen and Nikkei) is essential.
Not only is it useful to know what the crowd are doing, it is also when they are doing it. The American stock markets sitting at all time highs are the perfect time to use a common tool utilised by Elliot Wave disciples: namely Fibonacci Extensions. Most people are familiar with Fibonacci Retracements, but in the modern world of Algo’s and far more accessibility to the tools to calculate retracements, the powers of it as a technical indicator have waned over the decades.
Extensions, which are used far less, normally have less power from a crowd following perspective except when markets are somewhere they have never been before or for many years. The reason is because nobody has anything to hang onto. If a market is at all time highs there is no resistance, and by default such times often sees traditional momentum indicators flag overbought scenarios that encourage top pickers who constantly get their fingers burnt and perpetuate the rally. The most commonly used Slow Stochastic setting has now been overbought for 29 days on the Nasdaq.
Extensions are created in two different ways and both have equal weight. The first is to simply the measure the length of a Wave (normally 1 or 3) and simply project that size of the wave from its high point. This fulfils the basic criteria that Wave 3 should be at least to the size of Wave 1. The second method takes 3 reference points, so in an uptrend would take the low point up to the high and back down to the low of the retracement back down. Ideally that retracement should be at least 0.382%.
The following chart is of the Nasdaq Futures on a weekly basis. I have taken the 2008 low to the 2011 high and projected that higher. You can see that the market completely ignored the the 0.618 and 1.00 extension, before stalling almost perfectly at the 1.618% in 2015. That’s not say that it was easy to trade. There was a quick one week slide before it recovered and spent a number of weeks flirting with the level. Even then the slide was short lived and that’s where the problem often lies with Fibonacci. Will the level work and even then how can you trade it?
In order for extensions to be qualified I need two things. The first is that at least two different extensions should create a zone of resistance, and the second is that the market must be overbought in terms of time. This is done via our study called Range Deviation Pivots. The next chart is once again of the Nasdaq and now I have created a zone of resistance. This represents some more recent data points. The first is taking the 2011 low to the 2015 high and back down to the 2016 low. The second takes a more recent starting point at the 2014 low and then the same two other reference points as previously. The critical point is the fact that this has created almost identical projections with a 0.618% of the larger impulse and a 1.618% of the shorter term one. The zone is at 5560 to 5564.
Range Deviation Pivots
This study looks at the range over a user-defined look back period and places 1, 2, and 3 standard deviations around the opening, but with an in built propriety algorithm that creates a skew for the current trend. This means that pivots are not symmetrical in contrast to Volatility Time Bands.
Normal Pivot theory on Historical charts has inherent flaws in that they are often based on just the previous day or last few days price action, and then predict the limits of range or support and resistances points based on the daily bars value. This means that overnight gaps can make the values redundant. They also suffer from the fact that if yesterdays range is wide today’s pivots will be wide, and narrow range days, (which are often ahead of heavy news days), mean that the pivots are narrow just when an expansion is due. The final flaw is the fact that the values are symmetrical and take no account of the dominant trend.
Range Deviation Pivots attempt overcome these problems in various ways. Firstly the computation of the three Pivot levels is set at 1 2 and 3 standard deviations around the opening price of the current bar. This means that any gap opening does not affect the reference points, if looking at the first bar of the new trading day. Secondly, they use a user defined lookback period far longer than traditional pivots so are not affected by the more recent price action. Finally and most crucially, they have in built propriety algorithm that analyses the strength of trend and means that the pivots above and below the opening are not necessarily symmetrical. If the trend is down then the pivots below the market will be wider apart from the ones above the market. This does two things. It allows the trend more room to develop and accelerate, and also tightens the risk parameters for what qualifies as a trend ending or reversing. (See page 44 of Trading Time and the Appendix for probability tables and statistics on Stocks).
One of the most useful aspects of the Range Deviation is there ability to compute the limit of range in any timeframe that you wish to view. I have gone back to the Nasdaq Weekly chart but have placed the Quarterly Range Deviations on. There are two things to notice. Firstly how rare it is for price to reach either the 3rd Deviation up or down as flagged by the Blue and Red lines. It has only happened 3 times. The previous occasion at that Extension high, connected the limit of range for the quarter to create a compelling argument that the market was overextended and needed to correct. What is interesting is that we now find ourselves in the identical set up. The Extension zone above lies just above the 3rd Range Deviation pivot for the quarter. Therefore if price reaches this area by mid March it will allow for a corrective phase. At the very least it will provide the opportunity to take some profits on long positions. Any short position would be qualified by the Trade Safely programme or our proprietary indicators that compute either extremes or divergence. In an uptrend, these are referred to as UFO, Time Continuation, SlammDunk or Bear Cage, which will be covered in future articles.
Nasdaq Chart 3
Please note this is general advice from Trading Safely for all our clients and has been prepared without taking into account your personal objectives, financial situation or needs. If you do wish to consider acting on our information please contact a licensed financial advisor to discuss the appropriateness of this recommendation for your own personal financial circumstances. Please obtain any relevant product disclosure documents before deciding to invest. Trading derivatives, stocks and CFDs can lead to losses greater than your deposit.