Exploring Charting Techniques

PART VI - Projecting Market Cycles

Here in part 6 of the “Exploring Charting Techniques” series, I discuss a unique way to identify the beginning and end of a market cycle.

Market Cycles

There are many ways to approach it and many have tried, but only a handful of techniques work well to identify cycles. In this article, I’ll discuss a unique method that uses trend channels to find the beginnings and ends of cycles.

Channel Moves

First, let’s look at the chart in Figure 1, which shows an uptrend move on a 30-minute chart of the EURUSD. If you try to draw a trendline or a trend channel on this price chart, you may get frustrated. It may be impossible to draw a channel that covers the entire period displayed on the chart. If you start the trendline from the sharp up move, the corrections will break the possible trendline and there will be long periods with limited trading ranges. In order to create trendlines and channels, you may need to use a different kind of chart.

 

In Figure 2 you see a 10-pips range bar chart of the EURUSD over the same period of time as that of Figure 1. The area where the chart begins is the bottom of the end of a previous correction. From that low there was a 1-2-3 correction pattern to the top at 2. This was followed by a downward correction and a new upturn with a higher bottom than the previous ones. Once you have this reference point, you can draw the blue uptrend line. This uptrend line has a moderate slope, which will likely hold for a longer period of time. To create a channel, you can draw a red parallel line through the top at 2. One basic rule you must keep in mind is that the uptrend will remain valid as long as there are higher bottoms and higher tops. After the top at 2, there was a higher top, which allowed you to draw a new parallel line 3, widening the channel. Similarly, another higher top at 4 widened the channel even further. In fact, this channel is now wide enough because a move to the low side of the channel will be close to the last low support level. Thus, I can project the upper side of the channel further into the future. Once again, you get a higher top outside of the channel, but it corrects back into the channel. If price broke the last support level of the previous low, which is the green horizontal line at 5, then you would have to close the trade. This did not happen and the up move resumed, creating a new higher high level. This one was followed by a larger correction, but it still found support at the last low, which is the green line at 6. Price continued moving higher and reached a new top, which was just a fraction higher than the previous top, after which price reacted with a higher low. This limited new high could be a possible sign that the end of this trend move is near. So you draw a sharper uptrend line, in this case, the brown line 7, which now has three support points. Three more tops are created, but it is clear by now there is heavy resistance at the red resistance line 8. Finally, when the closing price falls through the brown uptrend line at 9, it is best to close the trade and take profit. It is likely that prices have reached the end of this up cycle.

 

.......... Read the full article in the Stocks & Commodities December 2014 issue..........

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