Trading stocks and commodities has become a very exciting yet volatile business. Professional traders around the world have searched out a variety of trading systems in the hopes of gaining a decisive edge in their hard won trading abilities. Over the past few decades a number of systems have survived this inexhaustible search for the ﬁnancial holy grail. Many professionals have found it necessary to combine two or more trading systems to compensate for the inherent weakness in a single system approach (and I count myself among them).
I have tried as many as 100 different approaches to analyzing the markets with varying degrees of success. During the past decade I’ve followed the best of the Elliott Wave and Fibonacci Ratio technicians, the most exotic Gann practicioners as well as some of the most advanced computerized analysis of price momentum and trade facilitation available to date. As if this wasn’t enough, I’ve delved into the lesser known world of astro-economic psychology. After this odyssey into the world of real time market analysis, I’ve come to grips with two immutable laws of trading securities and commodities: 1) there is no such thing as a “sure thing” trading system, and 2) if you don’t get hung up on trying to predict the future, there’s a lot of money that can be made with existing trading technologies.
The purpose of this special report is to introduce interested parties to a hybrid trading system called Spectrum Analysistm. This system can best be described as a proﬁle on the markets which interest you most. This “proﬁle” consists of three predictive technologies which are used to determine the overall character of the market (Elliott Wave Theory), major external forces which may inﬂuence the market (cyclical and astro-psychology) and the natural underlying structures of support and resistance in the market. This last feature is accomplished by the skillful use of Fibonacci ratios and concise interpretations of a market’s Gann Architecture. While the results of the battery of studies will provide the trader with great insight into the probable future price movement, it is insufﬁcient in determining tactical trading strategies in the heat of the battle. This primary level of analysis will provide the trader with the big picture from which to create an overall trading strategy.
To develop the all-important tactical trading decisions, I use a battery of computerized trend following systems. Included in this level of the proﬁle are some of the “tried and true” trading systems such as Stochastics, Relative Strength Index (RSI), Commodity Channel Index (CCI), Williams %R, Volume and Open Interest oscillators as well as Multiple Moving Averages. These systems were chosen speciﬁcally for their abilities to determine overbought/oversold conditions both within a trend and/or at trend reversals. The studies are done in real time and in multiple time series. In order to apply the information gained from Level I and Level II, I combine this information with concise interpretation of the CBOT’s Volume Proﬁle/LDB as well as the current volume and open interest statistics. I assert that armed with this kind of information (preferably automated), traders can expect to see signiﬁcant improvement in their trading results.
In the paragraphs to follow we will take a close look at the soybean markets and apply Spectrum Analysis to reveal the finer aspects of the profile and perhaps some mid-year proﬁts.
To begin this inquiry into the nearterm price direction in any market, it is useful to uncover one’s psychological motivation for trading and the intended results of the process. In my case, I do this work for two reasons: 1) the personal satisfaction of sharing the information and 2) the tremendous proﬁt potential of speculating in the markets. The intended outcome of this exercise is to produce a viable trading model which includes prices projections, Change In Trend (CIT) dates, a cyclical outlook and a general understanding of the overall structure of the market such that I can trade effectively.
THE WAVE COUNT
As previously stated, Elliott Wave theory allows for a concise interpretation ot the overall character of a market. lt answers questions like, “Is this the beginning of a move or rather a corrective phase?” or “Should I expect an explosive move or just a slow grind to the next price objective?” In order to get a handle on the answers to those questions, one would have to be familiar with the many rules which are associated with this complex system. Here are some of the basics.
This theory assumes that the price action of a market is an expression of the aggregate of human emotion and decisions which are made in the markets. As the theory goes, a bull market will consist of a ﬁve wave pattern (3 waves up punctuated by two corrective waves down). Conversely bear markets tend to decline in three waves (two down waves punctuated by one up wave). There are rules of alternation which basicly means that any corrective move must alternate from a simple chart formation (ABC type corrections) to a more complex structure such as a triangle or ﬂat correction.
Traders should keep in mind that under this market theory, there are numerous price patterns and wave degrees (size) which must be understood to apply the theory successfully. There are rules of equality which basically states that waves of similar degree must more or less equal previous waves of similar degree. Elliott Wave technicians often employ other technologies such as Fibonacci or Golden Section ratios to help determine the size or degree of a particular wave. Traders using this technology should emerse themselves in some of the well known books on this subject to gain greater insight.
The most objective approach to this technology is to create two or three high probability scenarios based on the rules authored by R.N. Elliott himself. This would entail counting the wave of previous price action and extrapolating future price action based on the theory. I generally look for three scenarios or “wave counts” which give me an overall characterization of where the market has been and it will most likely go next according to the theory.
In the case of soybeans, the July contract has been in the throws of a major correction of the explosive rally in the grain market caused by the drought of 1988. Using sophisticated computer technology to enhance our wave counting efforts (Relevance III Software), we’ve labeled the 1988 advance in the beans as primary wave III of a major bull market. If this interpretation is correct, all of the price action off the June 1988 high can be correctly labeled primary wave IV in progress. In the chart above you can-see that we have labeled this wave IV correction as a double zig-zag formation. This is our primary count. If the future price action validates this count, traders should expect to see a sharp advance unfold in the beans before long.
Our ﬁrst alternate count is a variation on the same theme. It recognizes the June 1988 high as primary wave three and labels the correction of that move as an Elliott triple zig-zag in progress. If this interpretation is correct, then traders should expect to see and X wave rally (currently in progress) which will be followed by another ABC type decline into new lows for the move. While this count is short term bearish, it does imply the inevitability of a ﬁfth wave rally of primary degree Iying directly ahead.
Our second alternate count is extremely bearish suggesting sharply lower prices for the beans and the grain markets at large. This count labels the June 1988 as the completion of primary wave, signalling the end of the bullish move. This interpretation calls for an extended bear market to form. Based on this assumption we’ve labeled the July low as intermediate wave one of a larger ﬁve waves down pattern. We’ve labeled the September 1988 high as wave two for this move wave three is expected to have numerous complex subdivisions as current level, it now appears that we are in the initial stages of wave three of three. If this interpretation is correct, traders should see an unbelievable decline unfold in grain prices in the not too distant future. Later in this report we will explore some of the price and timing projection forecasts for each of these possible scenarios.
THE GANN ARCHITECTURE
As the name implies, these studies were inspired by the legendary Wall Street trader W.D. Gann. It goes without saying~that W.D. Gann was one of the most inﬂuential traders of all time. He developed this intricate system of trading stocks and commodities using a unique combination of precise mathematical and geometric principles which he applied successfully to his trading. Mr. Gann would divide a market price range into eighths and thirds in order to estimate support and resistance during market advances and corrections.
Gann’s geometric angles were drawn from prominent highs and lows at a speciﬁc degree of angulation which represented the relationship between time and price. He explored and mastered these techniques and many more, making himself a fortune in the process.
A close inspection of the Gann architecture would reveal stiff resistance offered by the 1×1 downtrend line off the June 1988. As you can see in the chart above, this line has contained all rally attemps thus far in the correction. If the market were to successfully penetrate resistance offered by this line, it would most likely signal the end of this major correction and thus validate our prclcrreu wavc count. A tallure to penetrate resistance here would signal a continuation of the decline in progress and thus validate our alternate wave counts. It is interesting to notice how the rally attempt in March was aborted as prices approached the intersection of 2xl uptrend line off the March 1988 low and the 1×1 downtrend line off the June high just at the precise time and price. Traders should take note of how these geometric angles actually represent the underlying price/time structure for the market. Mastery of this one technique could greatly enhance the potential earnings of any trader!
As mentioned earlier in this section of the report, one of Gann’s most popular techniques was to divide range of a prominent high and low into eigths and thirds. We have experimented with this techique in numerous variation and ﬁnd that divisions of 1/8 to be typically more useful to us. As you can see in the chart we’ve provided, these range divisions can be extremely useful in conjunction with the geometric angles. Notice how the intersection of the lxl downtrend line with the 1/2, 3/8 and 1/4 range divisions have offered stiff resistance for every rally attempt we’ve seen so far this year. Mastery of this one technique could substantially impact the proﬁtablility of even the most experienced trader. We’ve provided several study references for those of you who are so inclined.
One of the unique characteristics of our trading model is that it produces exact price projections using a proprietary form of analysis which includes Golden Section Ratio (Fibonacci) analysls, eann structural analysls as well as some of the more obscure Gann applications of Astral Pyschology and planetary movements. In regard to the Fibonacci related Golden Section Ratios, the basic assumption in this numerical system is that everything is relative. Not only is it relative, our interpretation of his work asserts that relativity of price movement within a given market can be accurately expressed in terms of a ratio. We apply these ratios to the general price action of the market by multiplying them against the range of a previous rally or correction phase to project the future price objective for the succeeding price direction. The most common of the ratios we use to generate these price projections are; .382, .50, .55, .618 and .892 or their multiples (1.382, 1.50, etc.).
The first place to look is for a retracement of the prevailing trend to develop before any meaningful rally can unfold. The chart in this section of the report provides a graphic illustration of what a Golden Section retracement of the June 1988/April 1989 correction in a bull market.
As you can see, the market would have to rally as much as $1.25 before you start getting excited about a test of the June high in the ofﬁng. Traders can use these projections as either potential exit points if you were long the market and/or as price target zones to sell into strength if the momentum indicators were registering overbought extremes. This approach would provide the trader with a practical guide to plan trading tactics in advance.
We then look for a conﬁrmation of these retracement levels by overlaying another group of projections. To arrive at tnese numbers prevailing price trend (in this case we measure the range of the March selloff) and multiply them by several key Fibonacci ratios. As you can see, the overlap of the ﬁrst group of projections in this study conincides with 50 percent and 62.8 percent retracement levels. We can now begin to reﬁne our opinions about the market saying that if the market does rally above 8.00 (basis July), to expect a good deal of resistance at the 8.20/8.40 level. Again, the price zones can be used to exit long positions and/or entering a new short position.
Now that we’ve gotten a handle on the potential retracement levels within the framework of the previous high for this contract, we can now turn our attention to the potentials of a breakout above the June 1988 high. To accomplish this, we measured the range of the September 1988 high and the April 1989 low and multiplied it by several Key Fibonacci ratios. This technique provided us with further insight into the probable price target zone of an extremely bullish move in the beans. While we cannot rule out further downside fron current levels, to prepare ourselves to take advantage of any such move, should one develop.
Traders should keep in mind that any break below 7.15/7.02 basis July would invalidate all of this upside projections and signal a continuation of the prevailing downtrend. The point here is to determine the natural underlying support levels for the market. To accomplish this, we measure the range of the August low and the September high. This rally phase of the market can be correctly labeled Intermediate wave B of primary wave IV (an alternate count). Under this scenario, the ensuing deline can be labeled intermediate wave C of a large ABC type coreection. What we’re attemping to do here is ﬁnd the most probable low for the move (if we have not seen it already). These downside projections can be used to exit a short position
Fibonacci Downside Projection and/or to initiate a new low position if the momentum studies signal an oversold extreme.
- New Concepts In Multi-dimensional Trading Systems By Marcus S. Robinson