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Tuesday, March 6, 2012

Mar 6 - Daily and 60-min Cycles, Looking for an Edge

Yesterday my 60-min Trend System issued a short signal (that is obviously still in effect). If you recall, I have explained that the trading signals that I post are sub-cycle top and bottom signals. However, I also occasionally relay what is happening with my cycle signals. I don't trade them, but there is a wealth of statistical information that I get out of running studies, several of which have paid off tremendously over the last 6 months.

Today will be another similar study.

Because just now I got a cycle top signal on my 60-min system. Now, does that mean that I think we will have a 'major top' here? Nope. I think for a number of reasons that is not the case, not the least of which the statistics from my trend system say to not expect such an outcome.

Recall two weeks ago this post, Why I am not looking for 'the top' with the next pullback, whenever it happens. Here is the summary position from the post (but you should really read it):

The Daily Trend System long signal is still on a buy. Two weeks ago the 60-min System was also still on the upcycle half of its cycle. However, it was statistically running long and the odds favored a 60-min cycle top on the horizon (which we got today). However, because the main indicator on my Daily System was still increasing right alongside price since October, what were the odds that this peak will be a 'major top'? And my study results showed that there was a 90% chance (18 out of 20 Daily Cycles) that this price peak would not be the top of this Daily Cycle (i.e. 90% of the time the price goes higher after my main Daily Indicator peaks, which it has not yet done).

So the point of this post is two-fold:
1) Reiterate that point. Statistically speaking, there is little evidence that the price peak that we just saw is a 'major top', and instead the next pullback will be a dip you want to buy
2) Show some relevant stats regarding the 60-minute cycles to help navigate this pullback.

The 60-min cycle signal has occurred and we are in the middle of a pullback. The indicator that I have developed to track pullbacks on the 60-min system has not bottomed yet. And in fact, 61 out of 67 60-min cycles (91%) did not bottom at the peak of my 60-min indicator. This means that statistically speaking there is a 91% chance of lower lows before the real dip-buying opportunity presents itself.

So, in summary:
-- 60-min System says there is a 91% chance of lower lows before the bottom is seen in the downcycle half of the current 60-min cycle (and the *average* downcycle half duration is ~20 days)
-- The Daily System says there is a 90% chance that the price peak that we saw was not a 'major' top and that we should expect higher highs before the current Daily cycle is over (i.e. that the bottom of current 60-min cycle is a dip that you want to buy from a Daily Trading Standpoint).

The reason I think this post is useful is that the Daily Cycles (which average 445 days in duration) represents a nice intermediate balance between the timeframes that position traders and investors look at.

Again these are statistics, not prognostications .... past performance is no indication of future results ... yadda, yadda, yadda. Read the binve standard disclaimer... yadda, yadda, yadda...

So in short, I think the next pullback (which we are now in the middle of) is not a 'short it and forget it' type event. I think it will be a dip that will be worth buying.
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