When ever we see abnormal volatility in a market we should watch for a Change in Trend (CIT). There is more than one way to look for abnormal volatility but I like the volatility measurements from the candlestick bars. These are displayed by the MarketWarrior indicator “MA Body/Top/Bottom Shadow” which shows a moving average for the body, top shadow and bottom shadow.
The chart below is a daily chart for soybeans, symbol ZS, and this indicator is applied to the subchart.When a market is making a CIT you will often see the market body move below one of the shadow lines. When the body moves back above the shadow line it indicates the CIT is probably occurring.
I have drawn two red arrows from the indicator to the price bars. These are the locations where the body moved below and then back above a shadow line. This volatility pattern provided a good indication the market was in the process of changing direction.
The blue and green lines are are the moving averages for the top shadow and the bottom shadow.
When a market is making a Change in Trend (CIT) you will often see the market body move below one of the shadow lines. This relationship does not occur at every CIT but it does happen enough that I watch this volatility relationship on a regular basis.
On the chart below, I have drawn two red arrows from the indicator to the price bars. These are the locations where the body moved below and then back above the shadow. The exact situation we are looking for is when the body moves back above the shadow. When ever we see abnormal volatility we should watch for a CIT and this indicator does a good job in identifying abnormal volatility.
The two pictures below show daily charts for the interest rate Eurodollars. I am using the June 2011 futures contract. The topic of this discussion is market volatility. My favorite measurement of volatility are the values from the candlestick bars. These are the size of the top shadow and bottom shadow and the body. On the charts below I have added the MarketWarrior indicator “MA Body/Top/Bottom Shadow” which draws a moving average of these three volatility values. Quite often when the market forms a Change in Trend (CIT) the top or bottom shadow size will move above the size of the body. This relationship is different is every market. The greater a markets volatility the more often the shadow size will move above the size fo the body. Also in many indexes the shadow size will almost never be larger than the body. The relationships here should hold true in stocks and futures that do have have excessive volatility.
On the first chart below I have drawn two arrows from the indicator subchart to the price bars. These arrows identify where the body moved below one of the shadow values and then turned back up. The point we are looking for is the location where the body moves back above the shadow. This is where we most often see the change in trend.
Interest Rate Volatility
The second chart below shows shows two more situations where the body moved below the shadow value. Again I have drawn two arrows from the indicator to the price data. This type of volatility pattern often occur when the market makes a CIT because the price action becomes indecisive and unstable as the market changes direction.
Here is a sequence of 4 chart that show how to use the Gann Square. These pictures show the daily chart for Safeway symbol SWY. Starting on the first chart below, I have added a Gann Square of 90, which is set to repeat into the future. The square is set to start on the swing bottom of November 21, 2008. The square is set to a price step of 5 cents or 0.05 and the square is subdivided in 1/4 sections. The first chart below shows where the square starts and also shows that at the (2/4) subdivision there was a top. Next, just after the (3/4) subdivision there was a bottom. This will be seen repeatedly as we look at the next charts. When using the Gann Square you will often find that tops or bottoms occur near the same point in the square.
Gann Square 1
Here is our second chart. Notice that when the market reached the (2/4) subdivision of the next square of 90, there was another a market top. Just after the (3/4) subdivision there again was a market bottom.
Gann Square 2
The third chart below shows the next square of 90. Again as the market reached the (2/4) subdivision, there was a top. As we moved past the (3/4) subdivision, there was a bottom. This bottom occurred farther past the (3/4) subdivision than the first occurrence but it is a bottom in approximately the correct location.
Gann Square 3
Below is our final chart. Now the (2/4) subdivision and the (3/4) subdivision are just ahead in the near future. So what do we expect to happen? We expect this pattern to repeat and have a top form just after the (2/4) subdivision and have a bottom form after the (3/4) subdivision. In a few months we will see if this pattern has repeated. This is how you can use the Gann Square to help dissect market cycles and find tops and bottoms.
The picture below shows the monthly chart for Safeway, symbol SWY. On this chart I have added the Delta count we developed. We do not have a complete Delta count for this Safeway time frame. We only have several pivots that seem to have a good probability of repeating. The sequence of pivots in this count that seems to have a high probability of repeating is the #3 – #4 sequence of pivots. This market is starting the move between #3 and #4 right now. This can be seen on the chart below. After we are certain the #3 pivot has occurred, the move up to #4 should last 9 months to a year into the first quarter of 2011.
The chart below shows the daily Delta count we developed for Safeway. In the count we have developed, the most accurate pivots are the sequence of #4 – #5 and then the sequence of #7 – #1 pivots. The chart below shows that we are currently approaching the last pivot #7 in our count. Then we will be reaching pivot #1 in mid March 2010. This sequence of #7 – #1 pivots should be watched for high probability change in trends.
Here is an example for using the MarketWarrior Horoscope Index (HI). The two charts below show the HI for Safeway, symbol SWY. The HI is not intended to describe every movement in the stock. Instead we are looking for the time periods when the HI is above its upper boundary or below its lower boundary. When this occurs we would expect the energy in this market to cause a Change In Trend (CIT) or a market breakout.
On the first chart below, there are four occurrences when the HI went above or below one of the boundaries. The first three occurrences correlated with a CIT. The fourth occurrence which is labeled A correlated with a strong breakout of the price upward.
SWY Horoscope Index
On the second chart for Safeway, seen below, there are five occurrences of the HI moving above or below one of the boundaries. The first four have already occurred and correlated with a CIT. The fifth time the HI breaks one of the boundaries has not yet taken place. This will happen in early March 2010. This is a time window where we would be watching Safeway for a CIT or a price breakout.
We have had a lot of requests to update the MarketWarrior Gann Square indicator so the requested features have now been added to the Gann Square. The new features described below are avaiable in MarketWarrior Build 390.
We have added the ability to draw a very small Gann Square. The first picture below shows a Gann Square that has the custom size set to only 20 bars wide. This is a very small Gann Square.
Gann Square Chart 1
We have added the ability to subdivide the Gann Square into 4 divisions and 2 divisions. When using a small Gann Square these small divisions are useful. The next picture below shows a Gann Square subdivided into 4 parts.
Gann Square Chart 2
We have now added the ability to draw extra squares forward, up or down. This will allow you to continue using the same Gann Square after the boundaries of the primary square are passed by the price data. The picture below is the same Gann Square shown in the previous chart for Electronic Arts, symbol ERTS but now the Gann Square is drawing 1 extra square foreword. This is a square of 90, so the primary Square runs from 1 to 90 and the second square runs from 1 to 180.
Gann Square Chart 3
The next set of pictures show an example of drawing an extra square up and an extra square down. The chart below shows a weekly chart for Apple Inc., symbol AAPL with a Gann Square.
Gann Square Chart 4
The next picture shows the same Apple chart but now an extra square is being drawn upward.
Gann Square Chart 5
The next picture shows the same Apple chart but now an extra square is being drawn downward.
Here is a daily chart for the wheat futures contract. Barchart.com is the source of the data and we used the electronic futures contact symbol ZW. On this chart I have added the MarketWarrior indicator named Mirror Cycle. The start of the Mirror Cycle is labeled on this chart. The Mirror Cycle turns, which are labeled A and B, correlate with the turns in the market. The next point of interest is the bottom in the Mirror Cycle at C. I expect the market to make a bottom at C and then rally to a top at D. The Mirror Cycle top D occurs in mid March 2010.
The picture displayed in this blog shows the daily chart for Japanese Yen futures. I am using the electronic futures contract symbol J6. The data source is Barchart.com. On this chart I have added the MarketWarrior indicator named Mirror Cycle. The start of the Mirror Cycle is labeled on this chart. The Mirror Cycle turns labeled A and B correlate with the turned in the market. Currently we are watching the Japanese Yen for the bottom at pivot C and then a top at D and finally a decline to the bottom at E. This set of swings will take the Japanese Yen to mid March 2010.