Thursday, February 21, 2008

How to read the Spreadsheet Graphs (part 2) Warnings and Signals....

In Technical Analysis, there is a lot of confusion between what are "warnings" that something _may_ happen, and "signals" that tell you that something _is_ happening (and that you should act, it's now time to buy or sell). Beginners are the worst at filtering these two situations and often act prematurely, confusing warnings with signals. With that in mind, I will describe what a warning is, and what a signal would be, with the Exponential Math system.

There are three features on the spreadsheet graphs that produce their information content. Though somewhat obvious, it's worth stating them just to get everyone on the same page. It would be useful to look at one of the spreadsheet graphs I have already published on this blog as you read these descriptions, to familiarize yourself with their features and design.

First is the X axis, often with the label "Time Exponent". These are representations of calendar dates, remapped into a somewhat abstract concept of logarithmic time. You will see that trend change days often align with numbers along the X - axis like .25000, .37500, .50000, .75000, 1.00000, and 1.50000. The 1.00000 and 1.5000 'nodes' are the most common points for the current market swing to exhaust itself, i.e., this would correspond to a date that could become the 0.00000 point on a brand new chart for the next market swing as it is often the exhaustion of the current market swing. A "warning" here, is when the price action approaches one of these benchmark numbers I have listed, and the signal is confirmed when the market changes direction within + or - 1 day of one of those important numbers on the X-axis. The Y-axis is just price, with no modifications.

The second feature is the trendlines themselves. On the spreadsheet graphs, they appear as straight diagonal lines radiating from the lower left and upper left corners of the chart. Numerically their values at these corners reflects the lowest and highest prices of the previous swing up or down. There are three combinations of trendlines, displayed on three separate and otherwise similar charts, and these three charts and their unique mathematical trendlines are labeled 1.272 Crossovers, 1.317 Crossovers, and 1.382 Crossovers. This reflects the fact that the core equations have to be "seeded" with those Fibonacci numbers, alone or in combination, to reveal where along the Exponential expansion the trend changes are likely to take place. Because these three charts are seeded differently, their .25000, .37500, .50000, .75000, 1.0000 and 1.5000 nodes will be offset from one another, and occur on different calendar dates.

Curiously, I found no involvement by the core ratios .618 or 1.618 in this naturally occuring algorithm, Nature doesn't seem to use them in this case as seed ratios, how odd! By the way, the term "Crossovers" was added over time to remind of the importance of watching on what dates the trendlines crossed, as that was often a date of significance (a trend change day). As the trendlines are the second most important feature to watch, in the sense of the intersection of the price line with one of the trendlines, this is a "warning". The signal is when the line representing price action changes it's direction of trend as a result of coming into the proximity of one of the exponential trendlines (this is gradual as the chart is updated day by day, this is after all, slow motion!). The turn may occur when the price action strikes the trendline, approaches it closely, or actually penetrates it slightly and then backs out and reverses.This effect is much enhanced if the trendline contact also corresponds with those points in time I call 'nodes' as mentioned above.

Really, they act just like ordinary trendlines on candlestick charts, the behavior is the same.

As I have already mentioned the Crossovers of the trendlines, a "warning" is when the price action in a trend approaches the time period of the Crossover, and a confirming signal is when the price action changes direction on or after that day, that the crossover happens on the spreadsheet graphs. This is the third feature, or type of warning, available on these charts

The most powerful warnings, which are almost signals in themselves, is a combination of any two of the three warnings above! Watch for these warning clusters, as they delineate important time periods. Because I generate three charts, a 1.272 Crossover, a 1.317 Crossover, and a 1.382 Crossover chart, you will often see a "warning" on any two of these three charts. When that happens, those two will be the charts I publish on this Blog, and will omit the one that provides no additional information.

Not coincidentally, those of you who track and look for overlapping Fibonacci price levels and time clusters should notice a lot of these occuring at the same time when one, and particularly when two, Exponential Warnings happen together, and this also helps confirm these moments as pivotal.. It goes without saying that this method like all methods, will occassionally fail or give false signals, though at a lower rate then most other systems. So it is important to look for confirmation, from your other indicators (overbought and oversold, volume, etc.) and methods before trading, trust no system, including mine, to be 100%. Trade well, but remember the risks, and use good money management....Good luck to all of you!


bill102205 said...

Mark: Out of pocket yesterday, so did not see your first part.
Gave a quick scan of both this morn. and they look excellent!
Will give them a read today and this weekend.
I think your readers will appreciate your explanation, and will allow them to use your charts in their buy/sell decisions!

lagscrew said...


Thank you for your generosity.

I will check this out


mlytle said...

Hi Bill and Lag,
My Philosphy is similar to Boris's, to help the little guy overcome the odds...enjoy!

Mark L.