Post on 21-Mar-2018
December 2015
NOVEMBER 2015 ATMASPHERE | 2
CONTENTS
Letter from the President - Page No. 3
Editor’s note - Page No. 4
Understanding the nature of Oscillators (Part 2), by DR. C K Narayan, Sr. Vice President, ATMA - Page No. 5
Trend is your Friend, by Mr. Vivek Patil, Treasurer, ATMA - Page No. 8
Technical analysis myths in Commodity trading, by Mr. Gnanasekar Thiagarajan, Editor, ATMASPHERE and
Trustee, ATMA - Page No. 11
Combining Harmonic Patterns with Elliott Wave Principle for Trading by, Vishal Dalvi, founder, Waves
Research Advisory Pvt Ltd - Page No. 13
Neely Wave- the extension of Elliott wave theory by, Sahil Vijay, CMT an aspirant technical analyst
- Page No. 17
Past and Upcoming Events - Page No. 21
This newsletter is produced by the Association of Technical Market Analysts. All comments and editorial material do not necessarily reflect the organization's opinion nor does
it constitute an endorsement by the Association of Technical Market Analysts or any of its officers, of any products or services mentioned. Sources are believed to be reliable
at time of publication, but not guaranteed. The Association of Technical Market Analysts and its officers, assume no responsibility for errors or omissions.
DECEMBER 2015 ATMASPHERE | 3
LETTER FROM THE PRESIDENT
Dear Colleagues,
There will be new calendars on our desks. New ideas, new commitments, new resolutions and new determinations. Let me wish all the
readers of ATMAsphere and all ATMA colleagues a Very Happy New Year 2016.
The ATMA Board is seriously committed to have as its top agenda for 2016, our own examination that focuses on the local needs and
the local market in terms of content, testing parameters, accessibility and affordability. Mr. Vivek Patil, who now spearheads the Knowledge Management
Committee at ATMA is leading this initiative in close co-ordinate with Dr. Bigyan Prakash Verma, who spearheads the Academics Committee at ATMA. You will
receive details in the near future. It is imperative that appropriate localized credentials for formal training and education in Technical Analysis are made
available that can reach every nook and corner of the country and are affordable. The Regulators have begun testing the investment prowess of all analysts
and in this milieu it is just the perfect timing. Humungous work ahead for all of us to make this into a world class initiative on an ongoing basis.
I am informed, the Editor of the ATMAsphere Mr. Gnanashekhar is in deep contemplation of turning the ATMAsphere into a much more participative vehicle.
He has been working on refining plans for greater participation, recognition and rewards for both contributors of articles as well as for the subscribers. From a
brief preview I have, times are very exciting for the ATMAsphere ahead.
Active Volunteerism, deeper and wider ownership of the organization is the next key agenda your Board of Trustees have. Do write in to me, should you feel
your volunteer contributions will make ATMA and yourself richer and I will engage with you to know your thoughts.
Sincerely,
Sushil Kedia
DECEMBER 2015 ATMASPHERE | 4
EDITOR’S NOTE
Academic and practical knowledge on the subject of technical analysis is very close to my heart. It is very important not to get
complacent when it comes to accumulating knowledge. I learn something new every day in the markets. Just like the price is dynamic,
so are some of the conventional techniques and its limited usage in present day markets. It absolutely becomes necessary to keep
oneself updated as a chartist.
ATMASPHERE will endeavor to enrich the members on keeping up to date with the latest techniques, tools and reviews of any of the
latest books published. Also, we plan to interview successful traders in every issue possible. We, would also like to tap the talent pool
of our own members and request you to send your articles. Once, it is approved by the editorial committee, it will be taken for
publishing subsequently. Kindly send them to editor@atma.ac.
In this Issue:
1. Dr. Narayan started a series in the previous issue on “Understanding the Nature of Oscillators”, which has been well received. In the current issue, he elaborates on that and throws more light using indicators like Ultimate Oscillator.
2. Mr. Vivek Patil, market enthusiast, who has also taken over as Treasurer of ATMA, presents his simple but detailed explanation of how a “trend is a friend” , with extensive examples across time frames.
3. Mr. Gnanasekar Thaiagarajan, trustee at ATMA writes about the myths of using technical analysis in commodity markets. It will be a series beginning with this one basic information on trading using technical analysis on commodities.
4. Mr. Vishal Dalvi, a well know analyst writes about combing harmonic patterns in Elliot wave analysis for trading. It is meant mostly for traders, who like to combine Elliot wave analysis with other patterns.
5. Mr. Sahil Vijay, an aspirant technical analyst writes a detailed and well-presented article on Neely extensions.
ATMAsphere is your platform to learn & to teach. In fact, when you teach you learn better by handling curiosities of younger minds. So do write out to me
sending in your articles and we can all learn from each other. We await your feedback on ATMASphere. Please let us know what we can do to deliver
content that meets your needs by sending an email to editor@atma-india.net. You can also subscribe to ATMASphere completely free by clicking here.
Sincerely,
Gnanasekar Thiagarajan
DECEMBER 2015 ATMASPHERE | 5
Understanding the nature of oscillators
(Part 2)
In the last issue we spoke about the basic nature of oscillators and how
they are excellent tools during ranging times as opposed to line tools which
seem to do very well during trended times. This raises a question of
whether oscillators cannot be used during trends? A tool would surely
become irrelevant if it only addressed a certain portion of the trend. Most
tools within technical analysis are designed such that they can be utilized
whether the market is trending or ranging. The statement that they work
best during ranging was specific as the ideal condition was specified. Any
tool is like our own behavior. We are at our very best in certain areas or in
specific circumstances or in certain locations or with certain set of people
etc. That does not mean that we are incompetent in all other areas. It is
just that something brings out the best in you while in most other areas
you are probably average. Oscillators are no different. It is up to us to find
out how to increase their efficacy in areas where they appear to be
performing at an average level.
It is necessary to do this because, over time, most of us get accustomed to
using just a couple of oscillators. In fact, the world over, one can say that
the small list of RSI, Stochastic, Macd, Roc and perhaps ADX would pretty
much comprise the most widely used set of oscillators. Every now and then
you would see something different. But one can wager that out of the 100
technical reports that you may read, 99 will carry one or more of the above
list of oscillators to describe or annotate price action. This practice has
become so prevalent that many of the entry level software’s (particularly
those available free on the Net) will typically carry these set of five or six
oscillators in their toolkit. It has also become such that almost all training
programs on TA typically teach these oscillators only to the students. Thus
the image gets perpetuated that aside from the above five, there really
isn’t any other oscillator worth following! But that’s a topic for another
article! Right now let’s look at what we were discussing earlier.
Since we are habituated to using only a few oscillators, it becomes
essential for us to know how that indicator will work in trend times as well
as during ranging times. We also need to know more details about it, such
as the influence of the length, the formula underlying the computation of
this oscillator and how that will influence its plot, the nature of its
overbought and oversold moves etc. etc. These and nuances such as these
will determine, to a good extent, how well we are able to use the oscillator.
So let’s take up just a few points for this article.
First up, length of the oscillator. Now this is a point of debate. Most
oscillators come with a default setting of 14 period. Why 14? It is,
according to me, a simple half cycle of one of the commonest cycles known
to us (Lunar 29 day). Remember we are addressing cycles while using
oscillators and hence anything that creates harmonics of existing cycles will
prove to be effective. Another way of looking at it would be that 14 period
is neither too long nor too short. Most traders are happy to look at creating
and holding positions in the one to four week range. In terms of intra-day
charts, again, it would be roughly about two and half days (assuming 6-7
hours of trading per day). This would be a nice half cycle of a week. On a 30
minute chart, it would approximate about a day’s cycle. So any normally
used time frame should work decently with a 14 period.
If one had to use multiple periods, then ideally, cycle theory will tell us that
periods should be harmonics of each other. Then it would be possible to
nest the cycles together more easily. Hence one can use 7 period or even 3
period as smaller cycles to rhyme with the 14 period. You can go to 28
period perhaps to catch the larger cycle. Have you ever wondered why
there are no periods of oscillators that generally greater than 28? You
would be hard pressed to find even a few that use something like 28
periods!
DECEMBER 2015 ATMASPHERE | 6
1 8 15
September
22 29 13
October
20 27 3 17
November
24 1 8 15
December
22 29 5
2015
12 19 27 2 9
February
16 23 2 9
March
16 23 30
April
13 20 27 4
May
11 18 25 1 8
June
15 22 29 6
July
13 20 27 3 10
August
17 24 31 7 14
September
21 28 5 12
October
19 26 2 9 16
November
23 30 7 14
December
21 28 4 11
2016
30
35
40
45
50
55
60
65
70
75
Ultimate Oscillator (50.3763)
540
550
560
570
580
590
600
610
620
630
640
650
660
670
680
690
700
710
720
730
740
750
760
770CIPLA (650.000, 657.700, 648.200, 656.350, +6.59998)
The Ultimate oscillator is one of the few that uses a 28 period in its calculation
The answer to that one is actually quite simple. We are measuring
momentum and generally, momentum occurs in spurts. Its like driving a
car. Unless you are out on the Pune Expressway or some such, it is difficult
to sustain the same speed for long periods of time. Markets are not
highways where uninterrupted movements can occur. Price moves are
always subject frequent to and fro action. This keeps flipping the
momentum from up to down and back. Thus momentum readings register
spurts and decelerations over short periods of time. Hence there is no
point in trying to measure momentum over long lengths because,
inherently, cycles of such nature don’t occur. Therefore oscillators that
attempt this are few and not too popular. What is more important to
remember is that when you take much longer lengths, the trend itself will
begin to kick in and overwhelm the cyclical nature of the movement! This
then, will defeat the very purpose of the using the indicator!!
More, the concept of overbought and oversold is one of the most widely
used ways of interpreting oscillators. If the market did not flip from one
trend to another then it would not be possible for the oscillator to record
these overbought and oversold areas with sufficient regularity to make
them useful for the purpose of trading. In fact, oscillators are redesignated
as Overbought/Oversold indicators to specify those that show this
characteristic in a most pronounced way (for e.g. Williams R). One has to
therefore be able to separate out the large bunch of oscillators into OB/OS
indicators (which can be used very well for trading) and Oscillators (which
can be used more accurately for trend measuring). The length of the
oscillator is one of the primary factors that bridges the two classifications
(OB/OS and Oscillators). By changing the length we can, in most cases,
convert one into another form! When we are using just a couple of them,
would it not be essential to know how to do this? Markets keep changing
from ranging (where OB/OS indicators would work best) to trending
(where trend measuring Oscillators will do well). These happen
unannounced. Of course, we can track them using other tools of TA that
will warn us or even clue us when the trends are about to change. But we
are currently discussing nuances of the oscillator and here the length of the
oscillator will clearly influence the amplitude of the plot and that will
eventually determine the usage. Unless one is clear about the value of
setting the right length it may become difficult to swap the oscillator into a
different mode when market conditions change.
1 8 15
September
22 29 13
October
20 27 3 17
November
24 1 8 15
December
22 29 5
2015
12 19 27 2 9
February
16 23 2 9
March
16 23 30
April
13 20 27 4
May
11 18 25 1 8
June
15 22 29 6
July
13 20 27 3 10
August
17 24 31 7 14
September
21 28 5 12
October
19 26 2 9 16
November
23 30 7 14
December
21 28 4 11
2016
-100
-50
0
50
100
150
200Price ROC (20.2500)
-100
-50
0
50
100
Price ROC (6.25000)
-80-70-60-50-40-30-20-10
010203040506070
Price ROC (11.6500)
550
600
650
700
750
CIPLA (650.000, 657.700, 648.200, 656.350, +6.59998)
Amplitude of the movement changes considerably when the lengths of the oscillator is changed. The above shows a 5/15/25 setting for the ROC.
DECEMBER 2015 ATMASPHERE | 7
So what exactly is the right length? There is no one answer to this. It all
depends on what one is using it for. As an example, the usage as an OB/OS
indicator will obviously demand that the length be shorter, in order to
capture the sensitivity to turns. But the same quality is inappropriate when
trend is to be tracked. Here the length has to be made longer! So unless
one is clear about the results that is sought, the setting of the length
cannot be decided. Also, the time frame of the chart itself will influence
this setting some. But that is not as important an issue as the length of the
oscillator itself. Multiple time frame chart reading is a different ball game
by itself and shall be a subject matter of another article! For now, let us
address multiple lengths on the same time frame charts.
One of the popular ways is to have 2 or even 3 different periods of the
same oscillator on the chart in order to study. Study the example given in
Chart 2 using the ROC. It can be seen that one would draw slightly different
conclusions when referring to each of the periods used. Also, one would
have to make different rules for actioning these findings! They are three
different plots and hence cannot lead you to a single strategy! If you don’t
think of this while setting up your screen this way then it would be better
not to do so and to view each of the periods independently with price. You
look at that picture only when you want some information about the
period that it tracks and when you are going to take action on it. If I am
going to be only day trading, I need to look at the 20 period oscillator only
once in a while, to keep track of the larger picture. The larger picture is
only to provide perspective and would not impact my trades which are
really based on smaller length readings of OB/OS!
This article seeks to highlight a few of the issues relating to length of the
oscillator and its impact on the plot and the readings and conclusions. We
will look at more such aspects in the next part of this series.
-Dr. C.K. Narayan
Dr. C K Narayan is a veteran of stock market. In his 40 years of experience
he has dealt with major market movements and hence is well versed with
strategies to get the best out of them. As Head of the derivatives desk at
ICICI Securities he handled major financial institutions and FIIs
DECEMBER 2015 ATMASPHERE | 8
Trend is your friend
As I started learning Technical Analysis as a subject some 30 years ago,
most books I went through listed 3 basic principles of the subject.
Firstly, “Price discounts everything”. This obviously required prices to be
plotted against a time grid. The result was price charts, whether in Hi-Lo,
Line or Candlesticks style. Since I did not have any charting software in
those times, situation forced me to draw charts on a graph paper with own
hands. Later, of course, I came to know of one useful utility called PGraph,
which could draw charts from the Lotus 1-2-3 spreadsheet data.
As I started building the charts, I realized the second principle that “Price
moves in trends”. As I observed more and more examples of prices moving
in trends, repeatedly over a number of years, the third principle dawned
upon me that “History repeats”. Patterns that are readable, trends I traded
on, repeated over and over again.
After few profitable trades, there was nothing stopping me from falling in
love with the Technical Analysis. However, after few setbacks along the
way, I also realized the power of acting contrary to popular opinion.
This psychological ability to act contrary to the overwhelming public
sentiment was, however, never mentioned as the basic principle in
successful application of Technical Analysis in real life, and I understood it
only through bitter practical experience.
To identify the trend, “trend-line” was used as the basis tool of analysis. It
was the primary tool that was used 30 years ago, and the same is in fashion
till today.
Through experience, later, I also realized the importance of “tolerance”.
The break of trend-line had to be “decisive”, and not “temporary”. What
could constitute as a “decisive break” would be a lower top lower bottom
formation below the trend-line.
This point has been highlighted with the help of Sensex’ Monthly log-scale
chart from ‘2003 to 2008. As Chart 1 would show, the break of the trend-
line during Jun’06, Apr’07 and Aug’07 were “not decisive”, but
“temporary”.
In Jun’06, Sensex was a level of 8800. If one had considered this break as
“decisive” and sold off, he would have missed the rally to 21000 level of
Sensex in Jan’08. However, if one stayed with the trend, he could have
perceived the trend-line as a visual path for the future market action
leading to a grand finale to 21K level.
The more number of times that any trend-line provides support to the
market action, the more significant would the trend-line turn out to be.
This would also mean that a “decisive” break of such significant trend-line
would also be very important and indicative of trend-change that would
happen next. See how much Sensex lost, from 21000 to 7700, once it broke
the trend-line decisively during Mar’08.
DECEMBER 2015 ATMASPHERE | 9
With proper understanding of the “tolerance”, I started looking at such
trend-line as “Support Line”, so that one could enter long whenever price
action dropped closer to the line and took support.
Once I got friendly with the “Support Line”, I tried drawing a “parallel” to it
on the opposite side, which would, at least roughly, provide the upside
target as well as resistance level.
The Sensex Yearly chart on Log-Scale is shown on Chart 2. It shows
“support” as well as “resistance” lines for the moves during (1) ‘1988 to
‘1992, (2) ‘2003 to ‘2007 and (3) ‘2012 till date.
Both these line together provided “Trajectory” or almost-complete visual
path for the future price action. The path continued as long as the price
action remained enclosed inside the “Trajectory”.
However, Index entered into multi-year consolidation phase once the
trajectory got broken. The 1st trajectory shown on chart 2 continued for 7
years, from ‘1988 to ‘1994, and its break resulted in an 8-year long
sideways consolidation.
The 2nd trajectory continued for 5 years, from ‘2003 to ‘2007, and its break
forced Sensex to go into a 5-year consolidation till ‘2012.
The latest trajectory starts from ‘2012, and the action during the years
‘2013, ‘2014 as well as ‘2015 remained enclosed inside the trajectory.
The value of the support line of this trajectory for the year ‘2016 is roughly
at 25500, as marked on the chart. In case Sensex drops below 25500
“decisively” any time during ‘2016, this trajectory would get broken.
The two parallel lines of the trajectory are also relevant from NEoWave
perspective. As per NEoWave, most Complex Corrective developments,
enclosing Standard Correctives separated by “x” waves, usually get
perfectly channeled into two parallel lines.
The Chart 3 shows the most recent channeled Complex Corrective
developments on the Daily chart of Sensex. The first one is from Aug’13 to
Mar’15 (upwards), and the second one is from Mar’15 till date
(downwards).
The Baseline of NEoWave channel usually joins its starting point or “0” with
the first “x”. Both Baselines are shown as 0-x lines on the chart. The parallel
on the opposite side is drawn from the out-most point of the first
corrective.
DECEMBER 2015 ATMASPHERE | 10
Thus, the basic idea behind using trend-lines is not only to provide us with
likely supports and resistances, and help us visualize future path of the
market, but also to help us in proper interpretation and usage of Complex
Corrective developments as per NEoWave.
Prices do not move randomly. There is a reason and logic behind each and
every part of the price action. With the help of simple trend-lines, one
should be able to correctly guess probable supports as well as resistances
for meaningful returns from trading or investing.
So make trend your friend.
- Vivek Patil
Vivek Patil, proprietor of vivekpatil.com, and Treasurer of ATMA, has over
25 years of experience in application of Technical Analysis concepts to the
real-life market situation on a day-to-day basis. He is regularly been
consulted by HNIs, brokerages, and Fund Managers for his advisory, and his
Weekly write-up on ICICI Direct is likely the largest read piece on Technical
Analysis. He is committed to examine new perspectives to achieve a near-
perfect application of Technical Analysis.
DECEMBER 2015 ATMASPHERE | 11
Technical Analysis myths in commodity
trading
After twenty years of struggling to get an idea of how to understand this
market better, I am still a learner. Every day is a new day and every now
and then conventional factors are thrown out and new ones are accepted.
What has a strong co-relation suddenly is no more co-related. This apart,
news flows, from not only related to the commodity, but also factors
external to it takes center stage. A lot of direction for commodities, comes
from external markets mainly foreign exchange and money markets. Unlike
stocks which tend to move in a pack, commodities could be self-centered
and based on the current undercurrent, which might or might not choose
to move with the rest of commodities.
I am a strong believer that one needs to be abreast of developments in the
particular commodity with the ears to the ground, but that cannot
undermine how technical analysis can immensely benefit in predicting
price direction, which no other technique has come close to, up till now
that I have seen or experienced.
When I started writing on Commodities fifteen years back for the ‘The
Hindu Business Line’, it was more like a filler, as there was no content on
the technical analysis for commodities. I was myself surprised at the
success I had in predicting the Malaysian Palmoil futures, traded at Bursa
Malaysia Derivatives, Kuala Lumpur. The weekly column that I started
writing on Palmoil, cotton and Gold futures was so popular outside and in
India and still continues to be. Don't mean to sing my own praises here, but
to drive home the point of the amount of importance the industry started
to give for technical analysis.
Over time, I have moved away from using conventional indicators and
techniques and gone on to embrace some of the new statistic models that
accurately identify exhaustion points. And there will be many sub trends
within a broader uptrend/downtrend. As explained above, the dynamics of
this market keeps changing so fast, adding to the volatility. Because, of
which one can't hold on to a position with a medium-term or long-term
view in futures and due to the these exhaustion points help identify that
the present sub-trend has come to an end helping one to exit the position
in profit or exit with a stop loss. There are many statistical indicators to
help in identifying exhaustion points, but will discuss them in the upcoming
series.
Adhering to stop loss is another key factor that decided success in
commodity trading. Without any mercy one has to adhere to the stop loss
here both technical and otherwise. I have come across so many instances
where investors have not a put a stop consciously hoping for prices move
in their favor like it worked in stocks for them. In my humble opinion, it is
not the transaction tax, or the NSEL debacle subsequently that can be
attributed to the fall ion commodity markets, but inability to be objective
when it comes to dealing with stop losses, that drive away investors from
commodities as an asset class.
The only time charts can go awry is, if there is a huge backwardation or
contango, which can spoil the structure of the continuation charts with
large gaps. Corporates that I consult for, who consume the commodities as
a raw material, make it a point to compulsorily verify their views and
strategies of the purchase department and take a decision only if it concurs
with the technical picture. Their confidence in the technical analysis have
grown over the years and many times the views of the purchase
department will never match with those of the charts. The only problem is
that if seven out of ten times in a month, If I happen to get the direction
right, the team would have ignored my view contrarion, or otherwise all
the seven times, and the eighth time would have placed a lot confidence,
and that is when I would get it wrong and the blame game will start!
Predicting direction for prices in chaos and volatility is a great art.
Practicing this art not only as an advisor, but also actually applying it in
trading is an even tough job. The challenge of successfully applying
DECEMBER 2015 ATMASPHERE | 12
technical analysis for commodity trading, depends on how good one's
teacher's knowledge is. That is why in spirituality, they say one has to be
really lucky to get the right guru, who is not selling the knowledge that he
obtained from his teacher, but without any expectations passes the
knowledge to the deserving student.
Ever in gratitude to my teacher Mr. Yeshwant Rao, the ex-head of Trading
strategies at Reliance petroleum business for teaching the basics of
technical analysis and giving the confidence to apply it in trading and
remains a huge support till today. I can't imagine, how I could had survived
without the help of technical analysis in this ride that I have enjoyed every
moment for the past two decades and continue to.
-Gnanasekar Thiagarajan
Director - Commtrendz Research
He can be reached at gnanasekar.t@gmail.com
DECEMBER 2015 ATMASPHERE | 13
Combining Harmonic Patterns with Elliott
Wave Principle for Trading
In my last article titled “Elliott Wave Principle – An obsessive Forecasting
technique, is it an effective Trading Technique?” which argued that even
though Elliott Wave is a reasonably OK theory to forecast prices it is not
necessarily a good trading tool. I mentioned a technique using RSI indicator
how one can do reverse counting and trade better. In this article I will
present you another technique which can be used along with the Elliott
Wave Principle to make Trades Executions and not just forecast.
So getting straight at the point let me ask you 2 questions
1. Which is the best wave to trade within the Basic 5-3 Elliott wave
pattern?
The answer is pretty obvious and very well known that ‘wave 3’ is what we
all want to ride. Because that is usually the longest wave; clearly
identifiable; Dow Theory Higher High confirmation occurs; Momentum is
strong with possible breakout gap.
Having answered this it bring us to the next question
2. Where should I enter to trade the wave 3?
This is where it gets really interesting. Traditional Elliott Wave Principle
only confirms a start of wave 3, when the high of wave 1 is taken out. So
theoretical answer is “Enter on break of high of wave 1 with a Stop Loss of
low of wave 2 with projection targets (1.618/2.618 of wave 1) for wave 3”.
Conceptually it sounds ok and the Risk Reward picture also looks and one
can do it if either you are trading futures on lower time frames (15/30/60
mins) or if you are buying stock in CASH and holding it for months or year.
There you can follow this “Stop loss of low of wave 2” thing. But for
someone like me who trade futures on Daily/Weekly charts, waiting till the
low of wave 2 breaks it significant Capital Rrosion along with mental
torture. Leave aside the possibility that the wave 3 which you are assuming
is just a ‘wave c’ of a three wave up move and prices will eventually
collapse even below your low of wave 1; there the frustration is even
more.
That makes one think of other ways to enter to play the way 3. Wishfully
we would want to enter at the Low of wave 2, wouldn’t we? Yes and
fortunately there are few ways of achieving that. There are 3 harmonic
patterns which are able to help us initiate Buy or Sell trades right at the
end of wave 2 and start of wave 3.
These 3 Harmonic Patterns are
- AB=CD
- BAT
- GARTLEY
1. AB=CD
This is basically a Zig-Zag (A-B-C) pattern from
Elliott Wave. But Elliott only says that in a Zig-
Zag
- Wave B does not go above start of
wave A
- Wave C goes below end of wave A
- C is usually equal to A
But Harmonic Pattern defines the point D as the “Potential Reversal Zone”
(PRZ) where you should be buying. The naming convention for harmonic is
different than from Elliott wave and should not be confused with each
other.
DECEMBER 2015 ATMASPHERE | 14
This point D needs 3 conditions to be fulfilled.
- BC is retraced 61.8- 78.6% of wave AB (For Elliott, this means
Wave B should retrace wave A by 61.8-78.6%)
- Length of AB=CD ( For Elliott , this means Wave C = Wave A)
- Length of CD is between 1.27-1.618 times projection of BC.
Now this is the unorthodox part and Elliott has no reference or
any relation of wave B with wave C.
What these 3 conditions together ensure is that the PRZ point D is a precise
definable area for a reversal Buy trade.
This harmonic PRZ point D corresponds to the end of wave C/ (2) where
one is buying in anticipation of the upside wave (3). Elliott helps in
identifying the overall structure. If you see a AB=CD pattern preceded by a
5 wave impulse you know that the completion of the correction will result
in a bigger impulsive move higher.
DECEMBER 2015 ATMASPHERE | 15
2. BAT
The Bat pattern is a replica of
the 5-3 pattern of Elliott wave.
XA= WAVE 1
AB= WAVE A
BC = WAVE B
CD = WAVE C
Again what we can see is that the ‘D’ point is a precisely defineable point
which says D is retracing 88.6% of wave XA. Meaning wave (2) retracing
88.6% retracement of wave(1). The Elliott Wave Principle makes no
reference to this retracement level of 88.6% and you will be astonished the
number of times Market respects this level. What is imporant that is also
satisfy the rule of Elliott Wave that wave (2) cannot go below the start
wave of wave (1), which also implies it can retrace wave (1) even by 99%.
The beauty of this pattern is the the kind of Risk Reward ratio it offers.
Your stop loss is either point D or X and it offers a reward of a move above
A, which is huge.
3. GARTLEY
The Gartey pattern is a different version
of the the 5-3 pattern of Elliott wave.
The difference in the Gartley and Bat is
the retracements of AB and CD.
Understand that if you look at AB, BC,
CD these 3 waves together is a clear 3
wave Zig-Zag. What is important is that your first wave XA should be
impulsive in nature. And you don’t really need
to see internal waves, but a swift up move
without any overlapping correction is enough to
be identified as an impulse. Once you have the
impulse up move followed by the 3 wave zig-
zag, just match the Fibonacci combinations to
arrive at the Harmonic pattern and wait
patiently for the point D to initiate the reversal
Buy Trade.
DECEMBER 2015 ATMASPHERE | 16
Risk Management
Once the pattern is made and you get a reversal from D point. Stop loss
could be close below low of point D for a Risk Averse trader. A better
technical stop loss is the point X, which is like the low of wave 1. More
important is at what point you take profits. Understand that these
Harmonic Patterns are probabilistic trade set ups and the success ratio of
these patterns will come somewhere around 70% as per my experience.
Let me tell you where many traders can falter. After seeing a pattern one
starts expecting that implication of the pattern is a break above A, since if
there has to be a wave(3) is has to eventually go above wave (1). But
understand this. What is your Risk when you are buying at the point D?
Difference between point X and D, right; which is very small. So the way I
trade is the moment I am ‘in the money’ twice or thrice of the initial Risk
taken at point D, I am happy to book it. After that let it even go above wave
(1) it doesn’t bother me. Since that’s the trade set up I am playing. The
target are 38.2%, 61.8% retracement of the fall AD; which most of the
times coincides with 2-3 times of initial Risk at point D. Of course there are
various different position sizing strategies if you trade with multiple
quantities, but the point I am trying to drive home is that not always you
will get a move above (1). So keep taking some profits home.
There are several other Harmonic patterns which can be clubbed along
with Elliott Wave Principle to get trade set ups the above listed are just few
of which are in line with the Basic Elliott 5-3 pattern. Remember Elliott
Wave Principle was just created to describe the Market structure but when
used along with Harmonic Patterns it makes it a Tradable concept.
Harmonic Patterns can be traded without understanding of Elliott Wave
also, but when you know the Wave Count and the broader structure of the
Market you have way more edge than just trading the Harmonic Patterns.
-Vishal Dalvi, BE, MBA, CMT.
Vishal Dalvi is the Founder at Waves Research & Advisory Pvt. Ltd.
(www.wavesresearch.com). Vishal is a Full Time trader and focuses on
finding Trader setups and Trading System to manage his Clients and
proprietary funds.
DECEMBER 2015 ATMASPHERE | 17
Neely Wave- the extension of Elliott
wave theory
Investment world is an ever evolving mystery which is hard for any one
person or any one science or method to predict accurately, all the time.
The future is unpredictable to greater extent, and the more one can come
closer to reality, the better is his or her understanding of the markets. This
is so for multiplicity of reasons; some are understandable and rest beyond
the realms of thought. Investment, trading or speculation; by whatever
name, we may call it, the end result depends equally on how well can one
predict the future price movement and how flexible one is to understand
one’s mistake and realign oneself with the current market trend. One thing
that we must understand very clearly is that there are two separate set of
skills involved in investments i.e analysis and investment/trading decision
making. The first leg deals with understanding the market structure and
the other is positioning oneself as per the market directs us. There are
various approaches, methods, types, styles etc. of analyzing the market
structure and trying to figure out what lies ahead of us. The better one
reads the past, the greater are the chances of, calling the future correctly.
The ability to take the right decision at the right time come with the
passage of time, even if, one has developed the analytical skill set to
understand the market structure.
There are broadly two inter linked forms of analyzing financial markets i,e
Fundamental Analysis and Technical Analysis. There are various theories
and methods evolved within each analytical approach overtime to analyze
markets and help one base one’s investment decision upon. In today’s
dynamic investment world, Elliott Wave theory is one such scientific
analytical approach which provides a sound basis of analyzing the financial
markets and an equally sound investment decision making tool. The Elliott
Wave Theory has been under fire for its limitations and despite all the
arguments put against it, it is highly difficult to totally ignore it.
Let’s start with some of the most famous criticism of Elliott Wave Theory as
an analytical tool. First and foremost is, there are plenty of alternate wave
counts available at any one time, then, the analyst can find supportive
structure based on his or her premise by changing the time period covered
in his/her analysis, no two Elliott Wave Theorist, shall come to single
conclusion, then how such an approach be objectively used etc. etc. to
name a few. I am not going to put an effort to justify or negate, these and
other criticism put against the theory. But, these are very essential guiding
poles for someone like me, who is, a junior and early days, into, this
industry. The possibility of alternate wave counts gives us the edge to be
flexible and not stick to the ego of our analysis, if the market has changed
its mind, we should be swift enough to changes ours too. Rather than used
as an criticism, the presence of alternate counts help us keep humble and
listening to the markets and prepared with Plan B when our Plan A is
overturned by the markets. The second criticism, being the ability to make
use of particular market structure to prove our analysis right, is I think over
exaggerated one because, it’s the fault of the analyst and not the theory.
Then, the different analysis and interpretation of the market by different
analysts, is again a subjective issue. We cannot negate the theory, if one
follower of the theory does not agree with the other. Rather, we should be
open to and keep listening to the markets because the flexibility and
alternates available, with the Elliott Wave Theory, makes it all the more
stronger analytical tool. Just try and find out a theory or method, which can
tell us when our analysis at either a particular price or time, is wrong, and
what should be the alternate correct course of action, in such changed
circumstances. All in all, Elliott wave theory is an ever evolving theory, just
as the markets are itself. Instead of going to defend or refute the Elliott
Wave Theory, I am making a humble effort to bring some of the
magnificent developments which have been the great contributions of Mr.
Glenn Neely, into the field of Elliott Wave Theory, which has made this
analytical tool even more comprehensive and objective.
Elliott Wave is basically the graphical representation of crowd psychology.
Every action of the market is for a reason, there is no aberrations and no
DECEMBER 2015 ATMASPHERE | 18
unclassifiable price behavior. Mr. Glenn Neely has made several
discoveries, named as The Neely Extensions. From here on, I shall try to
bring some of the Neely Extensions before you, which I am pretty sure,
shall be thought provoking and helpful for you in your analysis and trading
approach.
Mr. Glenn Neely has redefined and emphasized the significance of
Channeling
In the decision making process. Channeling ranks among the top, essential
considerations of pattern formation. Frequently, through channeling alone,
it is possible to decide whether a move is Impulsive or Corrective. It is
critical in confirming as to whether a move is finish or is about to finish. It
can help us decipher what type of pattern the market is forming and which
segment of an Impulse pattern is likely to be the extended one. It is critical
in identification of end of wave 2 and wave 4. Channeling can tell us when,
the market is developing a terminal pattern or making a triangular pattern
in its very early stages of formation.
I shall start with some of the great inputs and extensions of Neely Wave to
Impulsive Waves. First, we shall discuss about the characteristics of wave 2.
We all know that the wave 2 should not and cannot go past the wave 1
extreme, but Neely extensions, further elaborates, as to whether our
interpretation of wave 2 ending is correct or not. If after an impulsive wave
1 completion, we think wave 2 has ended and the markets have started
into wave 3, then we should draw 0-2 trend line, starting from the extreme
point from where we think wave 1 started to the extreme of wave 2 where
we consider wave 2 has ended, our interpretation is right as long as our 0-2
line is not broken. If the trend line is broken before the supposed wave 3 is
below 61.8% of wave 1, or the second decline breaks back below the top of
wave1 at the same time the trend line is broken, then one can be confident
that wave 2 is still in progress. This is so because, had the wave 2 been
over, the wave 3 should have been impulsive and had the strength to move
at a must faster pace.
Similar to the 0-2 trend line, no part of wave 3 or wave 5 should break the
2-4 trend line unless the wave 5 is a terminal patter. More importantly,
once the wave 5 is complete, the market should immediately (within the
time-period consumed by wave 5 or less) break the 2-4 trend line and
retrace most or all of wave 5. If the market does not meet these
requirements, then either the 2-4 trend line is incorrect or the market is
developing a terminal pattern.
Further, if the assumed 2-4 trend line is broken before the market exceeds
the end of wave 3, and a violent reaction does not immediately and
significantly move the market away from the end of the last move, the 4th
wave is still developing. If the 2-4 trend line is violently broken before wave
3’s terminus is exceeded, then a 5th wave failure is indicated. For the 5th
wave Failure to be proven, the entire impulsive pattern must be
completely retraced faster than it took to form. To exceed the end of the
5th wave failure the market would need to consume at least twice the time
taken by the entire impulse pattern (1-5), usually, much more time is to be
required before a new high or low takes place.
Further, with an understanding of the different ways the various impulse
patterns channel, one can frequently use channeling to decipher which
wave of the pattern is going to be the extension.
When the first wave extends, the channeling of the pattern should
resemble the channel of a terminal move.
When the third wave extends, the channeling of the patterns takes parallel
shape.
When the firth wave extends, the channeling takes the form of
megaphone.
Now, we shall delve on some of the Neely extensions in Corrective Waves.
First, we shall discuss wave b. The end of wave b is found in a similar
fashion to wave 2, with the small difference that the Impulse wave
following wave b (i.e, wave c) will hardly ever be more that 161.8% of wave
DECEMBER 2015 ATMASPHERE | 19
a and the b wave can sometimes be a triangle. If wave b is a triangle, there
are two ways in which the pattern will channel. The 0-b, trend line is
actually drawn across the c wave of the triangle, not the e wave. To draw
the trend line across wave e would create a break of the trend line by wave
c, an unacceptable situation.
Further, if wave b is a triangle, after the 0-b trend line has been drawn
across the wave c of the triangle, the wave e will temporarily break that
trend line and then reverse. This creates what Elliott called a false break
which should be very short lived one.
Neely extensions go a long way to decipher early detection of triangular
patterns, sometimes triangles are evident almost immediately after wave a
is complete. Suppose 0-b trend line is marked and market starts its
assumed wave c or 3, but then turns and breaks the trend line before the
minimum price and time requirements for wave c have elapsed. If the
breakdown does not exceed the end of the last touch point of the trend
line and the market turns around again, this indicates triangular
development. If the market creates a second false break, then a triangle is
virtually guaranteed. Using trend lines, the detection of terminal impulse
activity is quite similar to that used in the detection of triangular behavior.
The wave theory does allow one to speculate when a particular formation
has completed, but the necessary reaction to that formation is
quintessential in the verification of one’s assumptions. Like, the action
after wave 5 must return to the low of wave 4 to confirm the analysis, if
that does not happen, the interpretation is wrong.
Here, in my humble effort, I have tried to depict some of the great inputs
called Neely extensions. I am sure and very hopeful, if we put our time and
efforts into learning the Neely Wave- the extension of Elliott wave theory,
we shall be able to make our present skill set much more objective and
comprehensive. We shall have exactness in our analysis and greater
weapons to predict, analyze and trade the markets in much more effective
and efficient manner.
- Mr. Sahil Vijay
Sahil Vijay, M.com, CS, CAIIB, CMT is the Treasury Font Desk Operations for
Capital Local Area Bank Ltd. He is an aspirant technical analyst who is keen
to learn new things and building on the existing skill set.
DECEMBER 2015 ATMASPHERE | 20
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PAST EVENTS’ UPDATES
CHAPTER DATE SPEAKER TOPIC
Delhi 19-09-2015 Mr. Abhay
Mehrotra
Trading Elliot with
Gartley patterns
Bangalore 8-11-2015
Dr. Musa R Kaiser
Latest Trends in
Trading Platform
Mumbai 21-11-2015 Mr. Vivek Patil New Perspectives
in Technical
Analysis
Bangalore 6-12-2015 Mr. Rajandran Trading
Sentimental
Analysis
Mumbai 12-12-2015 Mr. Shubham
Agarwal
The Machine Way
to Technical
Analysis
FUTURE EVENTS’ UPDATES
CHAPTER DATE SPEAKER TOPIC
Delhi 16-01-2016 Dr. Sanjay Sinha Elliott Beyond
Wave Count-
Essential Tools
supporting the
Analysis.
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