december 2015 - atma.ac december... · december 2015 ... elaborates on that and throws more light...

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


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 [email protected].

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 [email protected]. You can also subscribe to ATMASphere completely free by clicking here.

Sincerely,

Gnanasekar Thiagarajan

mailto:[email protected].

http://www.atma-india.net/20120312540/atma-monthly-newsletters.html


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!


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.


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


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.


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.


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.


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


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 [email protected]


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.


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.


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.


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.

http://www.wavesresearch.com/


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


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


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.


Accessible on your favorite Gadget!

World's FIRST E-Library of Technical Analysis

Some of the latest e-book additions in the Library:

As a well rounded professional you surely wish to read on

negotiation techniques, VBA programming, Statistics,

business biographies, investment classics and a whole host

of subjects. Yes, the R.N. Elliott ATMA E-library of Technical

Analysis regularly stocks up on varied titles that take care of

holistic professional interests of Technical Analysts!

The R. N. Elliott ATMA E-library of Technical Analysis

Inaugurated on 6th October 2012, at the hands of Mr. Robert

Prechter, Jr. the world’s first E-library for Technical Analysts continues

to grow.

A world that is short on time to travel, you can check-out books,

return them as now you have the E-Library that you could access for

ethically obtained, copyright respecting readings using any of your

favorite devices: Whether based on windows, apple, android, kindle

or even nook!

Access E-books as well as audio-books on Technical Analysis, Trading

Strategies, Quantitative Finance, and Back-testing, Algorithmic

Trading, Investment Psychology, Hedge Funds, Behavioral Finance &

lots more!

ATMA Members & Affiliates, except for the student

affiliates, can access the library 24X7 by just logging into

ATMA’s website. In case you still don’t have your PIN No. ,

please feel free to contact ATMA Office and enjoy reading!


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.


Benefits of Membership with the ATMA

Apply for your ATMA Membership Today!

http://www.atma-india.net/why-become-atma-member.html

http://www.atma-india.net/steps-for-becoming-an-atma-member.html

december 2015 - atma.ac december... · december 2015 ... elaborates on that and throws more light...

Documents