1. Cycle of Accumulation and Distribution
A. Bullish and Bearish Setups
B. Sign of Strength and Sign of Weakness
C. Cause Building
2. Proprietary Indicators
A. Economic Activity Composite
B. Close Oscillator CloseOsc(E) and Trend Oscillators
C. Volatility Based Momentum Oscillator MOVB(E)
D. Trend Energy REV(E)
E. Standard Normalized STDNORM(E)
C. Bag holders
D. Majority and Minority
E. Business Cycle
F. Invisible Hand
H. Running Correction
CYCLE OF ACCUMULATION AND DISTRIBUTION
Investors should use mark ups and downs once price jumps the creek and breaks the ice from accumulation and distribution phases, respectively. Low volume dips and rips that run contrary trend are used as entry points. Investors slowly withdraw from the trend for the safety of the sidelines (sitting on the fence) once a selling or buying climax is identified.
Volume may be more important than price when interpreting price action within the cycle of accumulation and distribution. When price breaks the ice of support or jumps the creek of resistance, it must be statistically significant. A test - fill and close above support on 5% or more contraction of volume, for example, suggests waning downside force and generates a bullish setup. The bigger the percentage, the more decisive the contraction. An insignificant contraction of volume increase the probability that support will be tested or broken in the near future.
Chart: Cycle of Accumulation and Distribution:
Bullish and Bearish Setups
Bullish and bearish setups represent contractions of volume at support and resistance. For example, a bullish setup is generated when price tests and closes above support on contracting volume. Conversely, a bearish setup is generated when price tests and close below resistance on contracting volume. Each setup represents waning force behind the short-term trend and indicates a potential change of trend ahead.
Sign of Strength and Weakness
Sign of strength (SOS) or sign of weakness (SOW), largely ignored by masses, define daily technical patterns that jump the creek of resistance, break the ice of support, and/or low volume divergences. Experienced traders recognize SOS and SOW as drivers of unexpected outcomes. For example, SOS within consolidation often foreshadow unexpected strength when cause transitions to mark up. SOW within consolidation often lead unexpected weakness when cause transitions to mark down. SOS and SOW observations, when combined with trend, leverage, and time analysis, help anticipate change.
SOS and SOW are also applied to cycles. Cycle inversions, the observation of weakness or strength during a bull or bear cycle, can be SOS or SOW. For example, continuation of a decline during a bull phase for stocks, is a cycle inversion and SOW. This cycle inversion, an indication of strong distribution, increases the probability of a stronger than expected decline when the phase transitions to bear.
Cause defines the building of energy to fuel the next move. For example, consolidation patterns, either demand or supply driven, provide a graphical representation of the accumulation of potential energy that drives the next move. Potential energy is proportional to kinetic energy. The longer the consolidation pattern or cause building phase, the greater the potential energy stored. The greater the potential energy stored, the greater the magnitude and duration of the kinetic energy released. In other words, an asset consolidating and storing (potential) energy for three months that will produce a stronger and longer rally than one consolidating for three weeks.
Economic Activity Composite
The Economic Activity Composite (EAC), a proprietary multi-variable composite of mostly market-based variables, represents a leading measure of economic activity within the United States.
CloseOsc(E) and Trend Oscillators
CloseOsc(E) is a multi-period momentum indicator that establish direction, magnitude (size), time, and amplitude (volatility). For example, an CloseOsc(E) reading above 0 suggests positive momentum. The higher or lower the the reading, the greater the momentum push. Momentum pushes expand volatility which pushes the upper and lower bands apart. When volatility contracts, i.e. squeezes price like a tube of toothpaste through the bands, it suggests increased volatility ahead.
The trend oscillators of COT analysis use the same construct as CloseOsc(E).
A bullish COT trend, for example, is defined by positive trend oscillators. Conversely, a bearish trend is defined by negative readings. A change in trend is defined by a transition of sign in the trend oscillators. A bullish technical trigger, for example, is generated when the trend oscillators cross over from negative to positive. This is called a bullish crossover. The setup is reversed for a bearish technical trigger.
MOVB(E) is a momentum indicator that adapts to the volatility of the trend. Adaptation is important as traditional momentum indicators tend to be fixed period.
REV(E) represents the kinetic and potential energy of the trend not captured entirely by price.
STD NORM(E) standardizes price within a normal distribution of n observations. The probability of continuation (rally or decline) decreases exponentially as the standardized observation, called a Z Score, increases beyond 1.96.
Chasers buy and sell in sympathy with price direction. For example, chasers buy bullish crossover and sell bearish crossovers.
Faders trade against the direction of the trend and sentiment of the majority. A fader using fading tactics such as selling bullish crossovers or buying bearish crossovers. These tactics are known as "fading".
In US financial slang, a bag holder is any owner (usually share holder) left holding a bag full of worthless material. In the investment world this bag is filled with worthless stocks, bonds, or other claims to productive capacity. The bag holder, convinced by ego or pride, often refuses to dispose of them despite growing evidence that they could become worthless or unsellable.
Majority and Minority
Also known referred to as the message of the market.
Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, 1776
"Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally neither intends to promote the public interest, nor knows how much he is promoting it ... He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good."
A correction is a reverse movement of at least 10% in a stock, bond, commodity or index to adjust for an overvaluation. Corrections are generally temporary price declines, countertrend moves, interrupting an uptrend in the market or an asset. A correction has a shorter duration than a bear market or a recession, but it can be a precursor to either.
Not all corrections, however, are obvious. Consolidations, often delayed or difficult to recognize by as much as six months, can occur as price declines, chops sideways, or increases. The latter, the observation of strength when weakness is expected, is called running corrections. They're a sign of strength (SOS) that often setup powerful rallies once completed.
The probability distribution of the normal random variable, called the normal distribution, is often depicted as a bell-shaped symmetrical curve. The normal distribution is centered at the mean. The probability that the random variable takes on a value within a certain range is determined by computing the area under the curve that defines the probability distribution between the limits.