Tradenet Publishing

Unlocking Wealth

Secret to Market Timing

By John Crane
 Contents
Preface

Introduction

CHAPTER 1 - Order out of Chaos - 5

A discussion of market behavior and how it is effected by human emotions and

economic supply and demand.
How the Action/Reaction theory of a reoccurring cycle circulates throughout the
market.

CHAPTER 2- Time - Trend Reversal Pattern - 21

The Trend Reversal Pattern marks the beginning and end of major trend change.
The Reaction swing is the central point of the Action/Reaction trading method.
It is where the Action ends and the Reaction begin.
Rules to identify Reaction swings and use them to project future turning points
in the market

CHAPTER 3- Time - Trend Continuation Pattern - 87

The Trend Continuation Pattern occurs inside a trending market and identifies
the center of the longer-term cycle.
Rules to identify the Trend Continuation Pattern and project future turning
points in the market.

CHAPTER 4 - Price - Trend Reversal Pattern- 105

Where and when is the right time to enter or exit the market? An easy and
reliable way to determine future support and resistance price levels for entry or
exit.

v
CHAPTER 5- How are they connected? -149
How to identify the difference between a major turning point and a short-term
swing pattern.

CHAPTER 6- Market Tells - 169

Price patterns exhibit specific characteristics and foretell future market action.

CHAPTER 7 - Options with Action/Reaction - 217

Combining options with the Reaction swing projections can enhance gains.

CHAPTER 8 - Combining Technical Indicators with

Action/Reaction - 237

Using technical indicators in conjunction with the Reversal Date Indicator.

Rules to help identify major turning points in the market.

CHAPTER 9- Trading with different time frames- 253

What is a hidden Reaction swing? Sometimes patterns can be hidden in a

longer-term time frame, but revealed in the intra-day chart.
How to find the hidden Reaction swing and use it for an early entry.

CHAPTER 10- Final word - 269

Some final words or wisdom and common sense trading rules to live by.
A list and description of trading tools that will enhance your trading skills and
help you shorten your learning curve.

Resources for Traders - 270

INDEX- 276

vi
 Preface
The continual need to expand one 's knowledge or to improve an
existing idea is an inherent one in all of us. After finishing my last
book "Advanced Swing Trading'', I had many requests for more
specific signals for entry and exit. I continued to work on my
theories of Action/Reaction, with the objective of finding new
ways to expand and to improve this unique trading approach and
share with you my favorite strategies.

This book deals with the Action/Reaction theory by combining

price levels, timing methods and confirmation patterns that
strengthen the predictability of future market moves. I take a step-
by-step look at the Action/Reaction theory and illustrate how to
identify the key trading opportunities. I explain the step-by step
process I use to determine my entry and exit of the positions and
how to use the information provided by the market to project the
next market movement.

One of the unique techniques described in this book is the method

of projecting future prices. I have not seen this incredible
technique published before. By using my Action lines and
Reaction lines, within the Reaction cycle, I illustrate how to project
the time and price of major market reversals. This cycle tells the
trader if the market is going to make a major turn or if the market
is only going to make a small correction against the prevailing
trend.

Since writing my last book, one of the most frequent questions

people asked me was "Does this method also work for Stocks?"
The answer is - Yes, it does! 1 have included several examples
showing how the Reversal dates work just as well for Stocks as
they do for futures. Since most of my experience has been in the
futures market, the majority of the examples in this book are from
futures markets. However, this in no way means that this technique
can only be used in the futures markets.
vii
My hope is that the information in this book will increase your
awareness of the market's true behavior and serve as a
confirmation of your own market analysis.

I offer help throughout every step of your learning process. My

specially trained staff is available to answer questions and guide
you through the rough stops. You can also follow my daily updates
and compare your results with mine. See the appendix for more
information on how to take advantage of this valuable resource.

viii
 Introduction 1

Introduction

am sure many of you have heard the story told by Joe

I Kennedy about the time he got his shoes shined at Grand

Central Station. As he was sitting and reading his newspaper,
the young man who was shining his shoes told Joe that be had
bought some stock for himself, which meant that he now had
himself a piece of the American dream. This conversation
convinced Joe that the bull market of the 1920s was over. He
reasoned, ''If the shoe shine boy is in the market, who is left to
buy? If everyone is in the market, there is nowhere for it to go but
down." The story goes on to tell how Joe Kennedy pulled his
money out of the stock market and avoided the disastrous crash of
1929. This is typical market behavior after any extended market
move. It can happen after a long-term bull market in the stocks or
even a short-term swing trade in the futures market.
Much of this distress and financial loss can be avoided if
investors take the time and a little effort to educate themselves on
market behavior. Inexperienced traders tend to hesitate when it
comes to entering markets near the beginning of a trend but are
more than willing to jump into markets near the end of the trend,
just as professional traders are exiting their positions.
In February of 2000, just before the stock market climax, I was
speaking at a seminar in San Francisco about the Reversal Date
and Action/Reaction Theory (the subject of this book). After the
presentation, I was approached by one of the attendees whom I
knew from one of my previous seminars. He pulled out a chart of
the Dow Jones Index, on which he had applied some of my timing
indicators and reversal patterns. Based on this analysis, he said
that he had just pulled all his money out of the tech stocks and was
going to short the Dow Jones futures. This man offers a perfect
example of what we should strive to emulate. He took the
necessary time and effort to educate himself on market behavior
and he was rewarded when be closed his long position near the top
of the market and was prepared to enter a short positions. He was
aware of the market behavior, but more importantly, be had the
2 Introduction

discipline to act on the information. He did not get caught in all the
market hype that was being spewed daily from the business news
shows.
All too often traders seem to be in a hurry ; we're all seeking
instant gratification. We have learned as traders, this type of
thinking often leads us away from success. If you study the path of
successful traders from the past to the present, you will find each
had much in common. The most important of these similarities are
patience, discipline and a willingness to work as hard and as long
as it takes to succeed. Successful traders realize that the pathway
to continued success comes not from "inside information" or even
from an overabundance of knowledge, but from the understanding
of human behavior and how it translates into the market. This
formula has not changed since the early 1800s, when U.S. futures
trading began on the Midwestern frontier and can probably be
traced back as far as 1640, when trading took place in Bulb futures,
and it will continue long into the future. In other words, a little
education and practice will benefit you forever.
Jesse Livermore, one of the great traders during the early
twentieth century, stated that one of the most important keys to his
success as a trader was understanding market behavior and
knowing when to cut his losses quickly. Jack Schwager, in his
book " Market Wizards," interviews Paul Tudor Jones, who is
possibly one of the most successful traders of recent time. Paul
Tudor Jones insists that a huge part of his success is cutting his
losses quickly. He said one of the most important secrets to his
trading success is, "If the market is not behaving the way I think it
should, I get out!"
Of the millions of people involved in speculative markets, only
a small percentage will spend the time and effort needed to learn
how to trade. Although there is no Holy Grail to trading success,
there are road maps and warning signs available to guide you
toward your desired destination.
Yes, there are many stories of traders who made a killing off
one trade, or maybe even a string of trades. This will always be the
case, as it is the nature of the markets to offer these opportunities.
However, you need to be ready to take advantage of such
opportunities when they are offered, because the market can take
 Introduction 3

them away just as quickly if you do not practice pro-active money

management. Unfortunately, for every lucky trader, there are
countless others who are not so lucky. The good news is that long-
term success is available to everyone who has desire, dedication
and a strong worth ethic.
A few years ago, a young man from our town was preparing to
ski in the Olympics. He and his older brother had been skiing since
they were very young. A friend asked the older brother how he felt
about his younger brother being an Olympic skier and a top
contender for the gold medal. He replied, "I'm a better skier than
he is, but I quit skiing a long time ago, I got tired of all the work.
To me it was not worth all the effort." This statement says volumes
about the difference between success and failure. You have to
believe the rewards will outweigh the effort.
Any investment that offers the potential of high return offers the
potential for high risk ... they go hand-in-hand. The trading patterns
and methods described in this book have served me well and I have
no doubt that they will continue to do so. It will require study and
concentration on your part, but I believe with hard work, you will
quickly realize the tremendous value of reversal timing and trading
techniques.
This book is about Time, Price and Patterns, and their reflection
on market behavior. The Reversal Date trading indicator is not
meant to be a turnkey system, but it can be used by itself or
incorporated into other trading strategies. Flexibility is one of the
strongest features of the Action/Reaction trading approach. I
describe this method in a clear concise manner that should help
you understand market behavior and enable you to use what you
have learned with a high degree of reliability.
My goal is to provide you with the knowledge, confidence and
ability to add what you learn from this book to whatever trading
approach you are most comfortable with. Since most of the
information in this book is designed to anticipate trend exhaustion
or trend reversals, it may strike you as unconventional, but I
believe we must think out of the box to be more successful.
The Reversal Date indicator and the Action/Reaction techniques
described in this book can be applied to stocks or commodities. In
4 Introduction

addition, they work equally as well on daily or intra-day charts. I

strongly encourage you to apply them both.
I believe learning the methods described in this book will give
you a tremendous edge, as well as reduce the stress of blindly
trading without a defined plan or the knowledge of market
behavior. The ability to look at the market and have confidence in
your trading decision is worth its weight in gold.
Trading offers one of the last great frontiers of opportunity. It is
one of the very few avenues that offers everyone equal
opportunity. There are very few venues where an individual can
start with a relatively small bankroll and actually become a
millionaire. While I hardly expect all readers of this book to
suddenly transform into super traders, I do believe this information
will open your minds to a new way of looking at the market and
improve your personal trading performance.
Chapter 1 - Trading is Easy- Anyone Can Do It! 5

Chapter I

"The girl who can't dance says the band can't play. "
Yiddish Proverb

Trading is Easy -Anyone Can Do It!

lmost anyone can open a stock account or commodity

A trading account. All you need is to be old enough and meet

the financial requirements. You don't need a license, a
certificate, or a degree. It doesn't require any advanced training, an
apprenticeship or a college education and trading does not
discriminate when it comes to gender, race, religion or age. Unlike
other businesses, competition is good when it comes to trading; the
more people that trade, the better it is for the business ... it is the
perfect business.
On the other hand, becoming a consistently successful trader is
a completely different story. For example, as when opening a
trading account, almost anyone can buy a set of golf clubs and
attempt to play golf, but very few people can buy a set of clubs and
immediately compete at a professional level. It takes training,
dedication and practice ... lots of practice to become proficient at
the game. Even then, very few can step onto a golf course and
compete with Tiger Woods, but that is exactly what many novice
traders attempt to do on a daily basis. They step into the trading
arena to compete with the seasoned professionals without learning
the proper technique, discipline or a trading strategy that will help
them understand market behavior.
But the good news is, trading is the one arena where this can be
possible. If you have the knowledge of market behavior and
discipline to stick with a trading plan you can go head-to-head with
the professional traders and still come out ahead. It's not easy, but
it is possible.
Chapter 1 - Trading is Easy - Anyone Can Do It! 6

Confusing a Trending Market with Trading Skills

In the later part of 1999, I was at a small neighborhood

gathering. One of the women at the gathering was giving out stock
advice to anyone willing to listen and she had quite a gathering.
She was telling the group about how well her investment club was
doing (the club was a small group of women from her work at a
local computer company) and about how she and her husband were
moving the majority of their retirement savings into the tech
stocks, because the move was just beginning. "This is the new
economy," she said. "And if you don 't buy now, you will be left
behind!"
About the same time the business channel had profiled a young
market analyst, granting him almost celebrity status. This analyst's
stock recommendations had been on target over the past two years
and had registered double-digit returns. He was a brash 28-year-old
and had been in the business for just six years. He predicted the
Dow at 15,000 in the next six months.
It was a crazy time. Day trading had become the new pastime
and internet stocks were the super highway to wealth. It seemed
everyone had become a stock expert. Whenever the market staged
a small correction, the cry was "Buy more, it will go back up!"
This strategy was the only one that most of these new investors
knew and it was the only one they needed; or so it seemed.
The rest, of course, is history. Shortly thereafter the internet
bubble burst. Before long all the gains made during the runaway
bull market had been lost and the buy-every-dip crowd were wiped
out!
It's interesting how history repeats itself. At the beginning of
2006, at the height of the energy bull market, I read an article in
"Trader" magazine regarding the top young trader that year. He
was described as a very astute trader and a master at the energy
markets. The previous year he had made an incredible sum of
money for his firm's hedge fund and had been rewarded
handsomely. Of course, he was bullish in the energy markets and
had been buying every dip, believing there was no end in sight. He
Chapter 1 - Trading is Easy- Anyone Can Do It! 7

was touted as one of the best and brightest ... but the bull market
ended.
By September 2006 the market had reversed but the young man
kept buying. The market behavior had changed, but he failed to
recognize it. He was finally forced to liquidate his long position at
a $6 billion dollar loss for the finn. Traders often confuse a bull
market with intelligent trading skills, but understanding market
behavior and being able to recognize and adjust to change is
necessary to becoming a consistently successful trader. Remember,
price is the final arbitrator and the market will always win if you
choose to fight it.

The least understood part of your trading could be costing you

money.

Traders spend a vast majority of their learning curve on market

entry. Timing the entry has always been the most exciting part of
trading. It's the moment you decide to take action and enter the
market and from that time on there is no turning back. The
adrenaline is pumping as the trade begins to unfold. If the market
moves in the correct direction you feel satisfied; if it moves the
wrong way you feel anxiety. Either is an emotional rush.
In reality, the entry is the easiest part of the trade. The decision
to enter a trade is clear-cut, you either do it or you don't. Once you
have entered the trade, everything changes. Your money is on the
line and emotions can overtake rational thinking and quickly
destroy a well-thought-out trading plan. This can cause a trader to
exit early or too late. Either way, it can take away from the profit
potential. Most traders spend very little time on the exit, but a bad
exit strategy can cost hundreds of dollars.
For example, suppose you are long a position and the market
reaches a new high and reverses and quickly drops through your
stop, causing a loss on the trade. So you make a rule that the next
time you have a profit you will exit quickly, because you reason
that you can't go broke taking a profit. The next trade comes along
and your position is showing a slight profit so you exit the trade
Chapter 1- Trading is Easy - Anyone Can Do It! 8

with a gain. You 're happy until you notice the market continuing
to climb higher and higher as you stand on the sidelines. The
potential for a large profit was missed. So you change the rule
again, and the cycle continues.
A simple trading plan of entering the market and following with
a protective stop is better than no plan, but you will give up a lot of
profit potential when the market pulls back from a high or low and
triggers the protective stop. Don ' t get me wrong, protective stops
are necessary for equity preservation and timing the entry is
important, but timing the exit can add greatly to your bottom line.
This is what I hope to teach you: timing the entry and the exit to
increase the consistency and add to the bottom line.

The Three Ingredients.

Making money consistently in the market requires a good deal of

education and the right psychological makeup. But to enter the
realm of the professional traders there are three more ingredients
you need.
1, A trading method- This means an objective trading approach
with definable trading rules that offers a defined entry method and
can be easily illustrated and explained. This is not to say the
method cannot be refined and improved, but the essential basis
behind the method should remain the same. To trade the method
successfull y, you have to accept the premise that it is not infallible;
nothing works 100% of the time. Losing trades happen; learn to
accept them because if you keep looking for the Holy Grail, you
will fail.
2. Discipline - Without discipline you won't be successful.
Having the discipline to follow the method really comes from
having confidence in the method. Confidence is what allows the
trader to keep the discipline when the markets are not as fri endly as
they should be.
Money management could have its own category, but I included
it under the category of discipline because they go band-in-hand. A
good trading approach will have money management built in to the
method, but it still takes discipline to implement the strategy.
Chapter 1 - Trading is Easy- Anyone Can Do It! 9

3. Practice - Just like with any other skill, practice will help
improve your trading skills. "Paper trading'' will help refine your
skills and bu ild confidence in your method, but it will not provide
the true value learned from actual trading. Paper trading lacks the
very thing that can harm a trader, the emotional stress of having
your money on the line. Having had a successful ru n at paper
trading does not translate into becoming a successful trader.
Markets are not just an intellectual exercise, they are emotional
and they can be very stressful. They are not without risk and risk
can cloud your judgment. OnJy through experience can you begin
to understand and control the emotions derived by having your
hard earned money on the line.
Traders do many things in an attempt to remove the emotions
from the formula, but in the end it is psychological. For example,
when you go to Las Vegas and sit at the Blackjack table the first
thing the dealer does is take your cash away and hand you a pile of
chips. This removes the emotion attached to the cash. Gamblers are
more willing to bet chips than their cash. The same can be said
about trading. Instead of thinking about the price moves in dollar
and cents begin to think of them in points or percentage. Removing
the emotion allows you the discipline to follow your trading
method without the stress. This can onJy be accomplished through
practice and confidence in your trading method.
Practice means experience and experience takes time. Many
new traders do not have the time or are unwilling to spend the time
it takes to become a successful trader. They are always looking for
the shortcut, but shortcuts in trading experience can lead to
disaster.

Been There, Done That.

There is one way around this di lemma and that is to find a mentor,
someone who has already been through the school of hard knocks
and proven themselves over the years. Whether you sit next to
them, attend a seminar or study a book or course, you may be able
to jump some of the hurdles that novices or even seasoned traders
experience along the path to successful trading. I have always
Chapter 1 -Trading is Easy- Anyone Can Do It! 10

believed there is no need to re-invent the wheel if someone has

already been down that path and can stop me from making the
same mistakes they have. Why not learn from their experience and
move forward?
Hopefully, this book will prove to be your mentor when it
comes to the Action/Reaction approach to trading, or at least
provide you with a foundation to begin a successful trading career.
The methods described have been refined through many years of
trading and have progressed to where I feel very confident they can
help any level or type of trader. Although not perfect, this trading
approach offers a sound trading approach with built-in money
management and timing techniques that can offer you that edge to
help you come out on top when competing head-to-head with the
professionals.

Order from Chaos.

Although price fluctuations may seem random, they are the result
of many different market forces working together in a very
efficient manner. Out of this apparent disorder, one begins to see a
market that is moving in a very deliberate re-occurring pattern of
that which is formed as buyers and sellers with different opinions
about future prices act on their opinions.
Since my trading approach is technical in nature and chart
based, it made it easier to implement. There are no outside
distractions from subjective fundamental news stories and
incomplete supply and demand figures. There is no need to try to
interpret bow the large commercial firms will react to a report or
news story. Now, all I had to do is read the market reaction and let
the world's best traders do my analysis for me.
Most of the current technical analysis is just a rehash of
discoveries introduced years ago by great trading legends such as
Gann, Elliott, Andrews and others. Although their trading
approaches were different, the premise of their methodologies was
the same. They aJI believed that there were natural cycles
circulating throughout the markets.
Chapter 1 - Trading is Easy -Anyone Can Do It! 11

Of course the factors of supply and demand play a key role in

market behavior. However, they do not play the role that most
people think. You see the simplistic law of supply and demand is
constantly subjected to a force that is equally powerful, hard to
measure and infinitely less logical. While it is true that the
fundamental factors of supply and demand control the long-term
market trends, the short-term fluctuations are typically a response
of a different force ... human emotion. As a result of two of the
strongest emotions (greed and fear), most traders have a tendency
to over-react to market conditions. When things are going well,
traders succumb to greed and overbuy in an effort to maximize
profits. When the market is not going their way, fear kicks in,
followed by a flurry of selling. These two opposing market forces
are the reason markets fluctuate. Supply and demand figures may
change, but human emotions remain constant.

Prices Lead Fundamentals.

I not only believe price leads fundamental news, I have seen it

happen more times than I can count. It is not uncommon for
markets to top when the fundamental news is the most bullish and
bottom when the news is the most bearish. I' m unable to count the
number of times traders have asked me ''How can the market be
trading higher? We just had a very bearish report." The answer is
simple - we are trading the futures market, not the current or past
market. In other words, the futures price has already discounted the
fundamental news. The large commercial firms and professional
traders are already looking into the future when the news or market
reports are released. While the unsuspecting trader is stepping into
the market because of a news story or a government report, the
experienced traders are stepping out because the recently released
information has already been factored into the market and it is time
to look forward.
Don' t get me wrong. I am not saying that fundamentals do not
influence market prices. In fact, they can have a dramatic affect on
prices. Market fundamentals of supply and demand are the ultimate
decision-makers in the marketplace. These forces will move the
Chapter 1 - Trading is Easy -Anyone Can Do It! 12

markets over the long-term, while the technical side provides entry
and exit signals in the short-term.

Technical Analysis, What Is It?

Technical analysis is devoted to the internal studies of the markets,

such as price, market momentum, chart patterns and market
behavior, to name a few, and not the fundamental (or outside)
forces that influence market movement. It looks at the forces that
lie within the particular market activity and influence price
activity. These forces are generally considered the human qualities
and emotions.
When using technical analysis it is more important to look at
what the market is doing rather than what the market shou ld do. 1t
is not important how much a commodity should be worth, but
rather how much someone is willing to pay for it and the intensity
of their belief. In a market based on supply and demand, the
intensity of emotion will reveal which one is more powerful- those
demanding the commodity or those supplying it.
A few years ago I was working with a trader who knew all the
fundamental information concerning the hog market. He knew how
many hogs were processed on a daily basis, how many hogs were
on feed and how many were due to be processed as well as the
number in cold storage - be knew it all. Based on his extensive
knowledge of the current market he decided to short the market.
His analysis was correct and the market dropped, but as the market
moved lower he increased his position. After a couple of weeks he
was sitting on a very large gain and his analysis was still bearish,
but the market began to change direction. As the market rallied, be
increased his position because, in his words, "the market is
wrong." The market continued higher and yet be refused to exit his
position. He complained that the market was being manipulated;
his fundamental information told him the market shou ld move
lower. Before long all his profits were gone and he began to lose
his initial investment. Yet, he still refused to believe he was wrong.
In the end he was forced to liquidate the position with his account
considerably smaller than before. All his information and analysis
Chapter I - Trading is Easy -Anyone Can Do It! 13

suggested the market should trade lower, yet the market rallied.
The lesson here: If the market does not react as you anticipate, get
out and re-evaluate. Do not get caught in an argument with the
market, you can't win.
Every trader has their own reason for buying or selling a
commodity, whether it is based on a technical signal or
fundamental information or a producer offsetting his risk or even
the end user locking his supply at a certain price. Whatever the
reason, I believe it will be reflected in the price action. Outside
influences affect the price and the net result is reflected in the
market by the characteristics of the price action, the nature of the
activity, when the action appeared and how much time it took to
unfold.
Although the law of Supply and Demand should and does apply
to all free markets, sometimes government regulations interfere for
short intervals. But, as always, after this interference fails, the
markets are given back to the people and the natural laws that
govern them. I find it interesting how many times a market will
make an unexpected large move for no apparent reason, only to be
verified by some fundamental news released at a later date.

Jesse Livermore, a famous speculator once wrote,

"Remember there is always a reason for a stock acting the way it

does. But also remember the chances are you will not become
acquainted with the reason until some time in the future, when it is
too late to act on it profitably. "

Universal Laws of Price Action.

It is obvious that universal laws govern all aspects of life on earth,

from the changing seasons, to the rise and fall of the tides, right
down to the smallest atom of the universe. Since we accept this to
be true, we also accept the premise that these laws may affect the
actions of man and that under certain conditions, he will have
similar or repetitive reactions. If so, it can also hold true in the
markets that price patterns can and will repeat themselves as
Chapter 1 - Trading is Easy -Anyone Can Do It! 14

traders react to current patterns in the same way they did to past
patterns. Therefore, the past can reflect the future.
The Action/Reaction theory suggests every trade needs three
things in order to successfully identify a correct signal - Time,
Price and Pattern. When all three components come together, the
reaction can become very predictable. If you can improve the
timing of your entry and exit price, it will enhance any trading
method. That is what the Reversal Date indicator and the Reaction
cycle can do for you. It will tell you when a market should react
and the price level the market needs to be at for it to react. It will
even tell you what the market must do to confirm the trade signal!
This is aU based on the market theory that -"For every action in
the markets there is an equal and opposite reaction! " Whlch
means that if you can find the right action point in the market, you
should be able to predict the reaction. Amazingly, you can predict
when and where the market will likely reverse. The key to all of
this is the ability to find the end of the initial Action and the
beginning of the Reaction.
This may sound like a complicated and difficult task, especially
to those not well versed in technical analysis. However, in reality it
is very simple and easy to learn. This methodology is entirely
based around one chart pattern that 1 call the Reaction swing. The
Reaction swing is the first thing you will learn as it will lay the
groundwork for your trading and allow everything else to simply
fall into place.
There are many things that help a trader become more
successful. These include common sense rules and sound
techniques. However, I believe that two things are critical and must
be possessed before anyone begins to trade in the market. These
two things vital to any trader are knowledge and confidence;
knowledge of how the markets work and confidence in the trading
approach one has chosen to use. In this book, I give you the
knowledge so you know how to identify when a major move in the
market is about to begin or end, how to know what the market is
telling you and how to react to the well defmed patterns. However,
you will have to build your own confidence. This is critical
because without confidence in your ability to use it, knowledge is
Chapter 1 - Trading is Easy- Anyone Can Do It! 15

useless. Confidence comes from study and practice. The more you
see the market react as you anticipate, the more you will believe.

Lagging Behind

My first introduction to trading was in the early 80s. I started

simple by learning to use basic trend I ine and then moved up to
classic chart patterns, such as Head and Shoulders, flags and
pennant formations, and so on. These chart patterns had been used
by traders for years and still remain very popular today.
Unfortunately, I experienced early success and became
convinced that I knew it all. That quickly changed as reality taught
me a hard lesson, but my short taste of success convinced me of
the potential offered by trading. I became thirsty for more
knowledge and went in search of more advanced indicators
because I was convinced the more indicators I used the more
successful I could become. I began to learn about momentum
indicators, such as the Relative Strength Indicator (RSI),
Stochastics and Moving Averages, to name just a few. I thought
they were the answer to predicting major turning points.
Using these indicators did give me a good idea about the overall
trend and strength of a market. This fit well with the teachings I
found in the majority of the trading books I had read. I had read in
several of these books that the only way to be a successful trader
was to "take it out of the middle". T hey described the danger of
trying to enter or exit at tops or bottoms; stating that the only safe
and sane time to enter a trade is after the trend is established and
well on its way. Even though there is a lot of wisdom in this
trading philosophy, I always felt like I was starting a 100-yard dash
10 yards behind everyone else. It didn' t fit my style.
Using these traditional technical indicators made it easy enough
to enter a market in an established trend. However, several times I
had to sit through large price fluctuations and take on more risk
than necessary. The more I read and the more I traded, the more I
knew I wanted to find a different way to analyze the markets. I
wanted to find a methodology that would allow me to maximize
profits and to reduce risk. This would require a way to enter a
Chapter 1- Trading is Easy -Anyone Can Do It! 16

trade earlier and exit later or, in other words, catch the turns and
improve my timing in the market.

Technical Indicators

There are so many technical tools available to traders today it

can become confusing and make it easier to jump from one new
indicator to the next, in an effort to find the one just right for them.
New technology has made it easy to develop and test new
indicators and has led to a surge of new systems available to the
public. It was widely anticipated that new technology would open
up the floodgates of prosperity to whoever was willing to pay the
price for the system. However, the floodgates did not burst open.
The computer made it easier, but not necessarily better.
The computer should be used as a tool to provide the
information in the format you prefer, but it is not a substitute for
experience and market knowledge. To be a successful trader, you
need to get back to the basics and learn the characteristics of the
market. All markets display certain inherent behavior. Learning to
identify and exploit this behavior is essential in becoming a
successful trader. It enables you to anticipate the market's
movement and react in a purposeful way. Just like any other
business, trading offers rewards to those who are willing to work
hard, learn the markets and anticipate and react to changes quickly.
Just as in business, traders who still look for the easy way to riches
end up losers. I firmly believe that a trader will only experience
real success if he learns the skills to trade, not from buying the
latest system.

The Same, Only Different.

After some time it began to dawn on me, if I was reading all this
information about the right way to trade, then other traders were
probably reading and using the same informatio n in the same way.
If the saying was true, "80% of traders lose money," I quickly
decided that I didn ' t want to look at the market in the same way the
Chapter 1 - Trading is Easy- Anyone Can Do It! 17

80% looked at the market. That is when I started to look at the

markets differently because someone had to have the information
and expertise to trade the markets profitably. Instead of trading
against these traders, I wanted to join them. We've ali heard the
old adage, "If you can't beat them, join them." I concluded, in
order to do this, I'd have to start looking at markets differently and
begin thinking "outside the box." I would no longer be able to be
content to simply follow the mainstream and trade lagging and late
indicators. The easiest way to accomplish this task was to know
what the successful traders were thinking and then follow their
lead. It all sounded so simple and I had my answer ... price action.
It is said that the daily price action is the result of all the news
and information and the analysis of how the information will affect
the price of the underlying product. Based on all the information,
the closing price is determined to be the fair price for that day. If
the market closes higher, the bullish traders are in control and
supply and demand warrants higher prices. When new or
unexpected information enters the market, the large commercial
firms and professional traders take action in the market, and that
action is reflected in the price and that price action should tell me
to buy/sell or stand aside. All I have to do is sit back and let the
most successful traders do my analysis for me. Once they enter the
market, the price action should alert me to the change of
momentum so I can respond accordingly.

70% versus 30%

Markets have a tendency to only trend about 30% of the time while
the other 70% of the time it is the accumulation phase of either
consolidating in range or in a correction. I have never conducted a
study of these facts, but I have been trading long enough to realize
that it's probably true or very close to these percentages. When you
look at a chart, you will see periods of consolidation, corrections or
sideways movement. In between those consolidations there are
periods when the market will break out and make an upward price
movement or thrust (in a bullish market) or a downward price
movement (in a bearish market) and then move into another
Chapter 1 -Trading is Easy- Anyone Can Do It! 18

corrective or consolidation phase. It is between the market

consolidations - during the thrust - that a trader has the best
opportunity to profit. Whether you are a swing trader (a person
who tries to capture short-term swings in the market) or a trend
follower, this is the price move traders are trying to capture.
Have you ever heard the old adage, "If you snooze, you lose"?
It really holds true when it comes to trading. A trader has to be
positioned and ready when the market makes its move. If you are
not ready you will have to join the multitude of traders chasing the
market who usually catch up at the end of the move. The market
will not wait for you!
Without the knowledge or the proper preparation, you will not
be ready and the market will leave you behind. It waits for no one.
That is why understanding market behavior is so important. It
gives you the "heads up" on what to expect next and prepares you
to move at the appropriate time. I believe in trading the price
action and patterns rather than the market news. I am always
amazed by the ability of the market to respond to fundamental
news before it happens or respond differently than anticipated
because the report is already factored into the market. It seems the
market has a sixth sense. So I make it a point to always remember,
"What the market is doing is more important than what everyone
expects it to do."
Swing traders or day traders have to be very careful and very
patient. If they decide to concentrate on one market they are forced
to make their profits during the 30% of the time the market is
trending between consolidations periods. This can cause problems,
because most traders don't have the discipline to sit and wait for
the trade to set up properly. They feel the need for action and
therefore tend to force trades that should not be taken. Trading is
hard enough without adding this additional pressure and taking on
unnecessary risks.
I have talked to many traders who think they are E-mini S&P
traders and believe they can't look at other markets, because they
don't understand them. I say, you don't have to know everything
about T-Bonds, or Japanese yen, or even Coffee to trade them, all
you need to know is market behavior and understand how to use
the reoccurring price patterns on a chart. This allows you to
Chapter 1 -Trading is Easy- Anyone Can Do It! 19

diversify and look for the best sets up in several markets. Why
force marginal trades in one market when you can find high
probability trades in other markets? There are always markets
setting up that offer great opportunities, all you have to do is find
them. That's part of a trader's job.
The traditional way to enter a market is to wait for a breakout
and buy the new high or sell the new low and follow with a
protective stop, giving the market enough room to fluctuate and
hopefully catch a big movement. This works fine, except a large
portion of the potential gain is lost at the beginning of the trade and
another large portion is given up at the end of the trade when the
market pulls back to the stop price. If the trader has an advance
idea where the correction will end and the new price move will
begin, they can be ready to enter near the beginning of the move
and exit near the end, before the market retraces.
•· I
 Chapter 2 - Time 21

Chapter 2

"The future is nothing but a repetition of the past. "

WDGann

Time

was first introduced to the concept of reoccurring cycles in the

I market over 20 years ago. Typically, cycles are determined by

counting the days, or price bars, between two lows. It's
generally accepted that all markets have certain defined cycles,
such as a 28-day cycle in Cattle or a 21-day cycle in Soybeans.
However, these cycles posed a problem for traders because
sometimes they would bottom early or late and other times not at
all and there was always the problem of longer-term cycles
interfering with shorter-term cycles. This concept could be
confusing to traders attempting to use cycles for timing and price
projections. However, after reading about Roger W. Babson's
theory of how Action/Reaction affected economic movements I
began to look at the market from a different perspective.
Roger Babson was a highly successful entrepreneur, educator
and philanthropist during the early 1900s. After graduating from
the Massachusetts Institute of Technology in 1898 be was
impressed with the teachings of the British scientist,
mathematician, and philosopher Sir Isaac Newton, especially
Newton's third law of motion-"For every action there is an equal
and opposite reaction." He eventually incorporated Newton's
theory into many of his personal and business endeavors.
He went on amass a considerable fortune -estimated at over
$50,000,000-and was credited as the first investment advisor to
warn of the 1929 stock market crash. Over the course of 33 years
he authored 47 books, including his autobiography, Actions and
Reactions. He also believed strongly in the need for specialized
22 Chapter 2 - Time

business education and established Babson College in

Massachusetts and Webber College in Florida. Both are still using
his philosophy of a specialized hands-on teaching approach.
Mr. Babson simply stated that economic phenomena move up
and down. In other words, economic activity will not go in one
direction without a movement in the opposite direction. From his
statement about Action and Reaction, I theorized that market
cycles could be looked at from a different point of view than
the conventional approach. If the theory is truly based on natural
reoccurring cycles one must only identify where the action ends
and the reaction begins and use the past to project the future. So
instead of looking from low to low, I should be looking for the
exact center of the cycle.

What is a Reaction swing?

Turning a theory into a reality can be a daunting task. When one is

introduced to the theory of Action/Reaction, the first question that
probably comes to mind is, "This all sounds great in theory, but
can it be applied to real market situations?"
When attempting to solve a problem, the most difficult task is
finding where to start. In this specific case, the problem was to
identify what Action would lead to the equal and opposite
Reaction. Markets will always have short-term fluctuations within
a longer-term trend as buying and selling influences price action. It
is within this price movement that I found the means to identify
where the Action ends and the Reaction begins. Each time the
market corrects (a short-term move in the opposite direction of the
prevailing trend) and then resumes the current trend, an old cycle
ends and a new cycle begins. This pattern occurs over and over
again in every market, whether one is looking at individual stocks
or commodity futures. I call this pattern the Reaction swing. See
Figure# 2.1
 Chapter 2 - Time 23

B
Trend
D

..............·····•·•·····...
...
\
T~ •••·•••••••••••••::"\tion

c ...·.
•·.·.
The center of the Reaction
swing is where the "Action"
ends and the "Reaction" begins. ••
E

Figure# 2.1 - Action/Reaction

The Reaction swing is a reoccurring pattern that appears at the

center of a cycle and divides the action segment from the reaction.
Once this pattern is identified, all I need to do is look at the past
market action and use that information to project the fut.ure market
reaction. Because I can use this pattern to predict a future reversal
- support or resistance - in the market, I call this the Reversal date
Indicator (RDI). Using this technique, I can use the market's own
price action to predict and identify future support and resistance
levels that act as price targets and possible turning points. This is
important because, once a position is entered, I can project, with a
high degree of accuracy, how long the current trend will continue.
This advance knowledge of when a price move will most likely hit
support or resistance. This information will help me determine the
best time to adjust stops or exit at or near completion of the price
move.
24 Chapter 2 - Time

The Reversal date Indicator differs from many other technical

trading methods because it uses the market's own predictive
patterns to identify future market swings. Thus, it is a leading
indictor that allows traders to trade from one market swing pattern
to another with a high degree of confidence. Lagging indicators are
based off past market action, but tend to confirm turning points
after pivot point has been confirmed.
Having foreknowledge of a potential reaction point or Reversal
date can give a trader a huge advantage in any type of market. The
Reaction swing is the key to my methodology and it's where it all
begins. If you can find the exact center of a cycle, you can look
back at the beginning and then, based on this information,
determine where the cycle (market price) will most likely go in the
future and how long it take to get there.
A general observation of the markets shows that they do not
trade in a straight line. There is always a struggle for control
between the bears and the bulls. In this struggle, each side enjoys
victories and suffers defeats; but one or the other will always win
in the end.
For example, if a market makes a bottom formation after an
extended downward move and then trades up to a price where
many chart readers believe the market will run into resistance, the
bearish traders will move in and sell. The bearish traders believe
that the trend is still down and this correction provides a good
selling opportunity. This, in tum, pushes the market down against
the new upward trend. The result is a price correction also known
as a retracement. When a new uptrending market corrects or
retraces, the price will pull back to predetermined natural support
levels. These price levels tend to support any market within any
time frame. By using these support levels, I can determine when
and where a correction will most likely begin or end before
resuming the prevailing trend. It is this market action that forms a
Reaction swing.
 Chapter 2 - Time 25

Natural Support and Resistance Levels.

The theory of natural support and resistance levels existing in the

markets is not new. It has been discussed, argued over and
interpreted for years with the Fibonacci theory being one of the
most noted. Fibonacci is a centuries-old technical indicator that
helps traders identify price fluctuations in non-random patterns. It
evolved from a set of theories by Leonardo Fibonacci, a 12'h
century Italian mathematician whose research resulted in a set of
numbers used today as a statistical tool for quantitative analysis.
My favorite Fibonacci (Fib) application is known as
retracements. It is based on the observation that the market does
not move in a straight line from point A to point B. Instead, along
the way there will be ups and downs in the market price. Fibonacci
retracement levels tell us in advance how far the price correction
may go before it finds support or run into resistance.
After a significant move, prices will often retrace from the
highs only to find support at the predetermined Fib support levels.
Similarly, when a market bounces off a low, it will typically find
resistance at the predetermined resistance levels.
To put these retracements on a chart, you have to identify a
peak (high) and a valley or trough (low) on the chart. Between the
high and low the most popular Fib retracements levels are 38.2%,
50%, 61.8%, and 78.2%. Knowing the Fib levels in advance allow
me to determine where a market will most likely find support or
meet resistance. I am a true believer that if something works then
there is no use in "re-inventing the wheel" and since the Fib
numbers are popular with traders the predetermined levels tend to
be self-fulfilling and work weJJ with the Reversal date Trading
Indicator.
Combining the Fib retracement levels with a Reaction swing
allows me to predetermine the buy and sell levels and project the
price level at which the correction should end or begin. Therefore,
I can take the theory and put it to good use by combining it
with the Reversal dates. On the other hand, I can also take this
information and put my own twist to it, as you will see later in this
book.
26 Chapter 2 - Time

Much has been written about the 50% retracement level. This
means that the market will retrace 50% of the original move, find
support, and then resume the current trend. Although I think this is
a good rule of thumb, I have found the strongest reversals and
largest moves begin beyond the 50% retracement level.
I have seen many times when an upward trending market
retrace 50% of the original price move, find support, and then trade
somewhat higher for a couple of days. Just as the trader begins to
feel comfortable in his position, the market reverses again and
trades to a new low.
Based on my research and experience, I believe the strongest
reversals take place between the 61.8% and 78% retracement
levels. I call the price range between these levels buy/sell windows.
However, I have found the buy/sell windows works best if I give
them a little wiggle room so I use 60% as the beginning of the
window. Whenever a market enters a 60% buy/sell window, it is
time to check for a Reversal date.
Using the buy and sell windows in conjunction with the
Reversal dates provides a powerful blend of time and price. When
a Reversal date occurs inside a buy or sell window, a strong price
move can follow.

Action/Reaction Cycle

Since the Reaction swing is where the Action ends and the
Reaction begins, it must be the center of a repetitive cycle.
Therefore, the past should project the future. Chart Figure # 2.2
better illustrates this concept. In this chart, the dominant trend is
down and price movement between (B) and (C) is the Reaction
swing. Mid-way in the trend, the market trades higher for a few
days before turning lower and resuming the downward trend. The
Reaction swing begins with the low pivot at (B) and ends with a
high pivot at (C) and represents a minor price swing against the
main trend. Once the market confirmed (see Figure # 2.3) the new
pivot at (C) the Reaction swing from (B) to (C) is formed. As soon
as the Reaction swing is established, I can determine the center of
 Chapter 2 - Time 27

••••
••••
•• c
•••
··.. ••
••
•. I
•• I
Action •••
1

I ,'·\··.... •••
••••
•••
B ••
Centerofthe Cycle
•••••
•
••••
•••
D

Figure # 2.2 -Finding the center of the Action/Reaction cycle

the Reaction swing by drawing a line from the high of the previous
Reaction swing, marked as (A) in this example, through the center
of the Reaction swing and find the exact center where the Action
segment ends and the Reaction segments begins. Figure # 2.2
better illustrates how to divide the Action segment from the
Reaction segment

Closing prices only

In traditional technical analysis, these chart patterns are called

flags or pennants. Usually a trader will look at these patterns as a
28 Chapter 2 - Time

means to estimate the distance the market should move if and

when it breaks out of the pattern. Although this method predicts a
good target area, it is limited as it only offers a one-dimensional
approach - that of Price alone.
A Reaction swing begins and ends with the lowest and highest
closing prices--always use the closing price. For example, when a
market is trending lower, it will always make a low closing price
before it begins a corrective rally. This is the beginning of a
possible Reaction swing. When this corrective rally comes to an
end and then resumes the main downward trend, its pivot point is
the highest closing price - and the end of the Reaction swing. The
opposite occurs during an upward trending market.

Reaction Swing

Lowest closing price

A bearish Reaction swing be gins

with the lowest closing price and
ends with the highest closing price.
Reverse the rules for a bullish
Reaction swing.

Figure# 2.3 -Reaction swing begins and ends with closing prices.
 Chapter 2 - Time 29

The beginning of the Reaction swing starts with the highest closing
price before the resumption of the upward trend. Therefore, all
you need to know are the dates of the highest closing price and the
lowest closing price of the Reaction swing in order to move on to
the next step -projecting future turning points or reaction points in
the market called Reversal dates. Figure# 2.3

Pivot points

A Reaction swing consists of two pivot points, one at the

beginning and one at the end. A price pivot contains a minimum
of five consecutive price bars where the highest closing price (for a
high pivot) is preceded by two consecutive price bars with lower
closes and is followed by two consecutive price bars with lower
closes. A low pivot is where the lowest closing price is preceded
by two consecutive higher closes and followed by two consecutive
higher closes. In other words, if the market is trending downward,
a bearish Reaction swing forms when the market makes a low
pivot and trades higher - against the prevailing trend - followed by
a high pivot where the market reverses and resumes the downward
trend without trading above the previous pivot high. See Figure #
2.4.
The low pivot is the beginning of the Reaction swing and the
high pivot is the end of the Reaction swing. A sell signal is
confirmed when a price bar trades below the pivot low, this is call
the Breakout bar. (The opposite configuration would form a
bullish Reaction swing and buy signal.)
A Reaction swing requires a minimum of three price bars,
including the price bar with the lowest closing price and the price
bar with the highest closing price, and at least one price bar in
between. A Reaction swing can contain more than three price
bars, but requires a minimum of three. See Figure# 2.5.
30 Chapter 2 - Time

A pivot low has tYi'O consecutive

Higher closes on both sides of the
Lowest closillg price bar.
Pivot high

t •

I-

t
i A pivot high has two consecutive
higher closes on both side of the
Pivotlow highest closillg price bar.

Figure # 2.4 -Pivot low and Pivot high

R eversal dates

Reversal dates and reaction points, are future dates where there is a
high probability of a reaction in the market. The majority of the
time, this reaction will be a reversal or a pause of the market's
current trend. The reversal can be at either the end of a long-term
price move or the beginning of a short-term price correction.
However, a small percentage of the time the market will not
reverse on the predicted date. Instead, the market will begin to
consolidate or form what I call a continuation pattern. This type of
 Chapter 2 - Time 31

- Reaction swiD&

- Day three
.. Day two
~/
.. - \
.
- ~- -
-
- ~ -
-
/
Day one
/ "
Breakout bar
~

Figure # 2.5 - A Reaction swing consists of a minimum of three

price bars.

pattern suggests that the market is not ready to reverse, but will
continue to trade in the same direction as the current trend. This
usually occurs when the market has been in a consolidation pattern
(trading sideways).
On the predicted date, the market will generally break out of the
consolidation pattern and continue the trend. Both the reversal and
continuation patterns offer extremely important information to a
trader.

Reverse/Forward Count

The key to predicting a future trend reversal is the reverse/forward

count. I begin with the reverse count because it will give me the
length of the action segment of the cycle. I can then use this
32 Chapter 2 - Time

information to forecast the reaction (future) market movement. The

reverse count is a count of price periods backwards in time. The
count starts at the beginning of the Reaction swing and counts in
reverse to the beginning of the previous Reaction swing. This is the
same whether in an advancing or declining market. In other words,
in a downward trending market the reverse count will always begin
with the first price bar to the left of the lowest closing price bar of
the pivot at the beginning of the Reaction swing and count back to
the lowest closing price bar of the previous Reaction swing. On the
other hand, the reverse count, in an upward trending market, will
always begin with the first price bar to the left of the highest
closing price bar of the pivot that begins the Reaction swing and
count back to the highest closing price bar of the previous Reaction
swing. (Please note: When a holiday falls on a trading day, it is
counted as a regular day.)
The forward count is simply the reverse count applied forw.ard
in time. The forward count begins with the first price bar after the
end of the Reaction swing and goes forward in time the
same number of price bars that the reverse count went backwards.
Remember, the end of the Reaction swing, in an upward trending
market, is the lowest close of the downward price correction, and
is the highest close of an upward price correction in a downward
trend.

Upward Trending Market

When the market is in an upward trend the reverse count will begin
with the first price bar to the left of the highest close at the
beginning of the Reaction swing. (In an upward trending market,
the beginning of the Reaction swing is the highest closing price
before the correction.) The count will continue in reverse to the
highest closing price of the previous Reaction swing. The forward
count begins on the first day to the right of the price bar with the
lowest close at the end of the Reaction swing and counts forward
the same number as the reverse count as shown in Figure# 2.6.
 Chapter 2 - Time 33

September Dow Jones n!3

The reverse count - in an upwatd trending

market - begins on the fliSt price bar to
the left of the lowest close and counts
back to the highest close of the previous
Reaction swing.

na

liD

\I:~ Ro"'tion •wing The forwatd count begins on 11111

t the fliSt bar to the right of
the lowest closing price and

' counts fqrwatd the same

number of the reverse count.

Figure # 2.6 - Reverse/Forward count in an upward trending

market.

Downward Trending Market

The process is similar when the market is in a downward trend.

The reverse count begins with the first price bar to the left of the
beginning of the Reaction swing and counts in reverse to the
lowest close of the previous Reaction swing. (In a downward
trending market, the beginning is the lowest closing price of the
low pivot point before the correction.) The forward count begins
with the first price bar to the right of the highest close at th_e end of
34 Chapter 2 - Time

September T-Bonds

The forward count begins on the 1" day IIlii

to the right ofthe lrighest close and
counts forward the same number of the
reverse count.

lUll
'
''
1111
9
Highest closing price 11TI

In a downwazd trending market

the reveme count begins on the
.,.
l''bar to the left of the lowest
close and counts beck to tbe
lowest close of the previous
R.eacoon swing.

Figure# 2. 7- Reverse/Forward count in down trending market.

the Reaction swing and counts forward the same number as the
reverse count as shown in Figure #2. 7.

The end of a Reaction swing

The end of a Reaction swing is confirmed when there are two

consecutive lower closes, thus confirming the high pivot, or two
consecutive higher closes confirming the lower pivot of the swing
pattern and the market continues in the direction of the main or
longer-term trend. One knows for certain that the Reaction
swing is confirmed, when the respective high or low pivot that
 Chapter 2 - Time 35

marks the beginning of the Reaction swing is exceeded by the

Breakout· bar in the direction of the main trend.

Projecting Future Reversal dates.

It is not necessary to draw a line through the center of the Reaction

swing when using it to project future Reversal dates. In order to
project future Reversal dates, you only need to know the date of
the highest closing price and the date of the lowest closing price.
The rules for this process in a downward trending market are as
follows:

1-Identify a Reaction swing. The beginning of a Reaction swing

will be the price bar with the lowest closing price prior to a
corrective rally and the end will be the price bar with the highest
closing price.
2-Start on the first day to the left of this lowest close: consider it as
day one and count each day or price bar going backwards.
3-Continue to count each day or price bar all the way back to the
lowest closing price of the pivot at the beginning of the previous
Reaction swing. (It is important to remember to count back to the
lows in downward trending markets.) This is called the reverse
count.
4-If a holiday falls on a trading day, it must be counted even if the
market was closed.
5-Go to the end of the Reaction swing (in a downward trending
market it is the day with the highest closing price) and complete
the forward count as explained in rule# 6.
6-Begin with the first day to the right of the highest close and
count forward the same number of days or price bars equal to the
reverse count. For example, if the reverse count was 15 days, count
forward 15 days.
7-Mark the date on the chart as the next potential Reversal date.
Note: Reverse the rules in an advancing market.
36 Chapter 2 - Time

Common Mistakes

The most common mistakes that occur while using this trend
reversal tool are usually the result of human error. Examples of
human error include; miscounting periods, incorrectly identifying
starting or ending periods of Reaction swings, misinterpreting a
series of price bars as a Reaction swing, or trying to identify
Reaction swings within trading ranges.
Misinterpreting a series of price bars as a Reaction swing may
happen when you forget that the Reaction swings in a declining
market are supposed to slant up, or that the Reaction swings in an
advancing market are supposed to slant down. In other words, the
group of price periods you identify as a Reaction swing may be
slanting the wrong way.
Learning to correctly identify Reaction swings is vital when
projecting future Reversal dates in the market. If you do not
completely understand this process, go back and review this
chapter and work through the examples before moving on to the
next step. Without a complete understanding of the Reaction
swing, the following information will not make sense. The next
few examples will better demonstrate the identification process as
it is applied in real market conditions.

Major Trend Reversals

Reaction swings can be part of larger price patterns consisting of a

series of pivot points that are found in two different places of a
market trend - each are treated differently. The first pattern we'll
look at is the Trend Reversal pattern (TR) that occurs at major tops
and major bottoms. The TR pattern consists of five pivot points
occurring in a specific order with a Reaction swing being formed
by the final two pivot points as shown in Figure # 2.8
 Chapter 2 - Time 37

Trend Reversal Pattem - (fR)

B Reaction swing

~D
I
I
I
I
I

Figure# 2.8- Major Trend Reversal pattern (TR)

This pattern may look familiar to many and is sometimes

referred to by other names such as, Head and Shoulders
top/bottom, M top or W bottom, or even as al-2-3 top/bottom.
However, I use the TR pattern in a very different way than what
you may be accustomed.
The second pattern I like to use is called the Trend Continuation
(TC) pattern and appears inside a strong trending market and
follows a TR pattern. As the names states, this pattern signals a
continuation of the current trend, but it also tells me much more.
For example, a TC pattern can project how long the trend will
continue and how far it may go. Like the TR pattern, the TC
pattern also consists of five pivots, with the Reaction swing formed
38 Chapter 2 - Time

by the last two pivot points. However, for right now l want to
concentrate on the Trend Reversal (TR) pattern.
I like to break the TR-pattem into two different types, based on
how the patterns unfold. This is important because they have
different rules to confirm an entry signal. As you read through the
rules that define the two patterns you will notice I use a version of
Fib numbers to identify retracement levels. I am making the
assumption that you are familiar with the concept of Fib
retracement levels.
When a market is at a major high or making a major tum, it will
typically be followed by a pullback to support. This is where
bullish traders tend to enter the market expecting another bullish
leg and a run past the recent high. However, if the market is
forming a TR pattern it will run into resistance somewhere
between the 60% and 78% retracement levels and fail to move past
the recent high. This swing pattern failure is the first sign of a
market losing momentum and could lead to a shift in the trend. I
call this pattern the Trend Reversal# 1 pattern or TR-1.
The TR-1 pattern requires the market to retrace over 60% of the
initial price move from (B) to (C). At the 60% retracement level, I
consider the market inside the sell window. The price bar that
enters the sell window is called the Signal bar. When the price
reaches the sell window, I will enter and order to sell when the
price drops below the low of the Signal bar that entered the sell
window. As soon as the price trades below the low of the Signal
bar, the entry price is triggered and the sell signal is confirmed. As
soon as the signal is confirmed a protective stop shou ld be placed
above the (B) high. (The rules are reversed for a buy pattern.)

Calculating Buy/Sell Windows.

The market enters into the buy/sell window when it has retraced
60% of the original move. In other words, if the prevailing trend of
the market is down, the market would have to trade higher (against
the trend) to enter the sell window.
 Chapter 2 - Time 39

Calculating the buy/sell window is a very simple and quick

process - all you need is a calculator. Even though most, if not all
technical charting software programs that can do this
automatically, it is a good idea to know the process.
For a sell window, you take the high price of the current market
swing and subtract the low price of the current of the market
swing. The low is the price made just before the market began to
trade higher against the prevailing downtrend. For example, if the
high price is 7500 and the low price is 6500, the difference is 1000.
Now calculate 60% of 1000. This equals 600.
Add the 600 points to the low price of 6500 to get 7100. This
means that the market will need to trade up to 7100 before entering
into the ideal selling window. Once the market has traded above
7100, a sell signal can occur anywhere between the beginning of
the sell window and the recent high (in this case 7500). The
following is a quick review of a sell window in a downtrend:

1-0nce the market establishes an intermediate low and starts to

trade higher from this low, subtract the high (the high price at the
beginning of the prevailing trend prior to this intermediate low)
from the low. This will equal the total price range of the original
move, i.e.: 7500-6500 = 1000

2-Now multiply the range by 60%, i.e.:

1000 X 60% = 600

3-Add this total to the low.

6500 + 600 = 7100

4-This price (7100) is the beginning of the sell window.

To calculate a buy window, follow the same process except
subtract the 60% total from the high price. When the market is in
the sell window, in conjunction with a TR pattern, a major tum in
the market can occur.
40 Chapter 2 - Time

The Sell Window in the March Crude oil.

In Figure# 2.9, I use the March Crude oil chart to illustrate a sell
window and Signal bar. The Crude oil topped at 69.15 (B) and then
began a new downward trend. Crude oil continued to trade lower
until it hit an intermediate low at 65.45 (C). The low was followed
by a correction against the current downward trend. A quick
calculation determined that 67.67 was the beginning of the sell
window.
From the low at (C), the Crude oil traded higher over the next
five trading days where it entered the sell window and identified a
Signal bar when it reached a high of 69.00 - well inside the sell
window. After the third day of trading inside the sell zone, Crude
oil formed an outside day and broke sharply lower. This reversal
was confirmed when the market broke below the low of the Signal
bar, confirmed the TR-1 pattern and triggered the beginning of a
substantial downward move. Knowing in advance where a market
is likely to reverse or at Least run into support or resistance can
only help give any trader an edge when entering or exiting a
trade.
Let's look at some examples of the TR pattern in action.
Figure # 2.10 features the March 2006 Crude oil and offers a good
example of the TR-1 pattern. The March Crude had peaked at
69.15, but closed at 68.48 on January 20. The high close was
followed by three consecutive lower closes that confirmed (B) as
the high pivot. Crude rebounded with three consecutive higher
closes - confirming a low pivot at (C) - and ended with a
high closing price of 68.35 on January 30, putting the market
inside the sell window.

(B) High - 6915 - (C) Low - 6545 =370

370 X 60% = 222
6545 + 222 = 6767
The Buy window begins at 6767.
 Chapter 2 - Time 41

B
March Crude oil ill
D
---------------------1U

Sell window lilt

Signal bar
It

60% retracement E
"'
ill
A
Ill
u
Stl

\_ "-'
_..
~

1:1
&!t
Q~

lUI

Figure# 2.9- Finding the Buy/Sell windows

Since the market was within the sell window it was time to
enter an order to sell if the March Crude oil traded below the low
1
of the Signal bar inside the sell window. Since the January 30 h
price bar (D) was the price bar that entered the sell window it was
considered the Signal bar, the order should be placed below the
low of 67.25. Since the low was 67.25, the sell stop order should
be placed at 67.20. Two days later (February 1) Crude oil reached
a high of 69.00 but quickly lost momentum and turned lower. The
67 .20-trigger price was reached and confirmed the reversal and sell
signal.
The reverse/forward count began at (C) and went back to the
beginning of the TR pattern (A). The count was 13 bars. I counted
42 Chapter 2- Time

forward 13 days from (D) and determined a future Reversal date of

February 16. In other words, the newly established downward
trend should continue sideways or lower over the next 13 days,
until it reaches the next Reversal date due on February 16. As you
can see from the chart, March Crude oil fell over $17.00 before
time ran out on February 16 and the market turned higher. The
projected Reversal date identified the beginning and the end of a
dramatic price collapse!

March 2006 Crud.e oil 1011)

B

13 Days

Sell stop

'2111

E !i7.tl)

l&eO

Figure# 2.10 -March 2006 Crude oil

Managing the Trade

Money management differs from trader to trader. Some traders are

willing to take more risk than others who prefer to keep the stops
very tight. This also happens on the other end of the trade, where
 Chapter 2 - Time 43

traders differ in their exit methods. I believe one of the many

benefits of the Reversal date Indicator trading methodology is that
it allows all traders to incorporate their own preferences of money
management.
Having said that, I would like to outline the way I like to
manage the risk. As soon as the short position is triggered I suggest
placing a protective stop above the beginning of the Reaction
swing. (This is marked (D) on the Crude oil chart.) After the
market has two consecutive lower closes below the trigger price -
marked (C) - I will move the stop to just above the price bar the
traded through the trigger price, the Breakout bar. After three
consecutive closes below the pivot point the protective stop can be
moved to the entry price. Mter the protective stop is at the entry
price I will allow the market room fluctuate until the market
approaches the projected Reversal date. At this point, I will tighten
the stop by moving it underneath the low of the Reversal date. If
the Reversal date closes higher, the stop is to just underneath
the Reversal date price bar. At this point I can either choose to exit
the position or continue to move the stop on a daily basis until the
stop is hit and the position is closed.

20-Day Simple Moving Average

The Reversal date Indicator is based on market action and price

behavior; therefore I use very few other technical or momentum
indicators. Since most technical indicators are based off an average
of past market action they are lagging in nature so their
confirmation signals typically confirm after the market has
reversed and moved beyond the high or low pivot. However, I will
use the 20-day SMA (Simple Moving Average) as another
confirmation tool when looking for a valid Reaction swing. I have
found the best Reaction swing patterns form around the 20-day
SMA. They may form below the 20-day SMA and break through
to confirm the pattern, or form above the 20-day SMA and pull
back to test the SMA before moving on. Either way, I believe it
makes a stronger confirmation.
44 Chapter 2 - Time

December Hogs

On August 26, December 2004 Hogs, Figure # 2.11, dropped

below the pivot low of 62.10 made on August 17 (A) and closed at
61.17 marked (B). The following two sessions closed above 61.17,
and confirmed August 26 1h as a pivot low. A couple of days later
the market traded above the 20-day SMA (Simple Moving
Average) and posted a pivot high of 64.37 on September 9
(C), before it entered a five-day correction that ended with a low
close at 62.50 on September 8, marked as (D). The pullback from
the (C) high had retraced below the 20-day SMA and more than
60% of the price move from (B) to (C), therefore the market was
inside the buy window and the set up was complete and ready for
me to enter an order to buy if the market traded above the Signal
bar that entered the buy window. In this case the Signal bar was the
fifth price bar from the September 1 pivot high. (Remember, I treat
a holiday the same as a trading day. A [though the market was
closed for the Labor Day holiday I will still count it as a trading
day.) The primary Reaction swing formed between (C) and (D)
also completed the TR-1 pattern and set the stage for a rally when
the Reaction swing buy signal is triggered.
It didn't take long for the buy signal to be triggered as the Hogs
rallied the following day and closed above the previous two closes.
This market action confirmed a longer-term TR pattern and
triggered the buy signal to enter a long position at 63.15. As soon
as the long position was triggered a protective stop was entered
below (D).
Of course, the next step was to determine the projected
Reversal date to see how long this bullish leg should last. When I
do a reverse/forward count I count backwards from the beginning
of the Reaction swing (C) to the pivot low that occurred before the
major low, marked as (A). The reverse count equaled 11 days.
Counting forward 11 days, from the price bar with the lowest close
at (D), projected a future Reversal date of September 23. The
December Hogs continued to trade higher into the September 23rd
Reversal date with only one, two-day pause. The highest closing
price was 71.20 and occurred on September 23, one day before a
 Chapter 2 - Time 45

significant correction began. This date was predicted two weeks

earlier.

December Hogs

lliDI

SUOI
11 Days

~f'--- Buy stop

60 %Buy window

Signal bar

Figure# 2.11 -December 2004 Hogs

December 2005 Dow 1on es

Figure # 2.12 - After a low close at 10,216 on October 13, the

December Dow Jones futures shifted from a bearish market and
began a new bullish trend. During the first couple of weeks the
market was choppy, but it did form a bullish Reaction swing
between October 19 and October 21. The beginning of the
46 Chapter 2 - Time

Reaction swing is marked (C) with a high close at 10,447 and the
end of the Reaction swing, with a low close of 10,240, is marked
as (D). The low was inside the buy window; therefore the TR-1
pattern was in play. The Dow continued its erratic path over the
next six days until it finally broke above the 20-day SMA and
traded above the Reaction swing pivot high of 10,447. This price
action confirmed the Reaction swing and triggered a buy signal for
the Dow. As soon as the buy signal was triggered a
reversal/forward count was done and the count was determined to
be 20 days. The forward count of 20 days projected a future
Reversal date on November 18.
The Dow continued higher, with only a couple of short-term
pauses between the confirmation of the Reaction swing and the
November 18 Reversal date. Four days before the Reversal date,
the Dow Jones formed a small consolidation pattern when the
market posted two consecutive lower closes. This was short-lived
and the market broke to a new contract high of 10,795, on
November 18 ... the Reversal date predicted three weeks earlier
when the Dow was trading at 10,450.
The Dow Jones had rallied over 340 points - following the
bullish TR-1 pattern confirmation - and posted a new high on the
November 18th Reversal date. This is where the individual trader
has to make a decision. They can exit with a very nice gain and
look for the next pattern to unfold, or place a protective stop
underneath the low of the Reversal date. Moving the stop would
keep the long position in place as long as the market
continued higher. If they elect to place the protective stop and stay
with the position, the protective stop shouJd be moved after the
close of every day and placed underneath that daily low.

September T-Bonds

Figure# 2.13 - On June 13, 2003, the September T-Bonds closed

at 122-21 (B). This high was above the previous pivot high posted
on May 23 (A) and was followed by five consecutive lower closes
that ended at 118-18 (C). A two-day bounce confirmed (C) as a
 Chapter 2 - Time 47

December 2005 Dow Jones

IIIDl

1011»
l!lllll

!Sl
20 Days
10«11
lil411l

Signal bar

I
Figure# 2.12- December 2005 Dow Jones

low pivot and suggested the beginning of a bearish Reaction

swing. June 25, started with a higher opening and reached a high of
120-30 (D) early in the session. The 120-30 high was more than
60% of the price swing from (B) to (C), putting the T-Bonds inside
the sell window and established June 25 as the Signal bar.
However, the rally faded quickly and turned lower where it
dropped below the previous day's low of 119-03 and finally closed
at 118-27, well below the previous pivot high. The following day
began with a lower opening that triggered the sell signal and
confirmed the TR-pattern at a major high.
48 Chapter 2 - Time

The (D) to (C) swing pattern formed the primary Reaction

swing and the last swing of the TR-1 pattern. As soon as the T-
Bonds reached into the sell window a sell stop should be entered
below the Signal bar that entered the sell window. However, in this
case the low of the Signal bar was not known until the close. As
soon as the T-Bonds triggered the sell signal a protective stop
should be placed above the pivot high at (D). The next day, a
sharp sell-off in the T-Bonds triggered the sell and pushed the
market below the (C) low and closed at the bottom of the daily
price range. After the market closed below the (C) low for two
consecutive days, the protective stop should be lowered down to
just above high of the Breakout bar. (The Breakout bar is the price
bar that broke the support provided by the (C) pivot low. If a
market closes below/above the pivot low/high for three
consecutive days, it will most likely continue in the direction of the
breakout.)
Now that I'm in a short T-Bond position I will use the
information from the reverse/forward count to project how far and
how long the next downward swing will most likely continue. The
reverse count from the (C) low to the (A) high equaled 20 days. I
used this information to project forward 20 days from the June
24th pivot high at (D) ... the forward count projected a future
Reversal date of July 22. As predicted, the T-Bonds continued
to trade lower into the July 22 Reversal date. The T-Bonds dropped
close to 10 basis points without any significant correction.
The value of this trading technique is in knowing- with a high
degree of confidence - how long the market will continue in the
current direction. One of the most costly mistakes a trader can
make is to hold on to a winning position too long or exiting a
position too early. With the Reversal date Indicator I can make
a reasonable Time projection of when the trend will most likely
end or begin a correction, allowing for a timely exit. Later in this
book I will illustrate how to use the Action/Reaction method to
make price projections in conjunction with the Time projections.
It's just as simple and as effective.
 Chapter 2 - Time 49

September Trc3.SUI}' Bonds 124illl

Ill WI
1221))1
A
Ill!XIII
13.illl

lllilll

Jll!XIJI
1111))1

ll.QJ»

t15.!XIJI
114Qlll

IUI))I

lQIXIJI

llltll»

110.011
l(!iJ]J

! I
Figure # 2.13 -September 2003 Treasury Bonds

When the Trend Continues

Although the name Reversal date may imply the market will
reverse on that day, that is not necessarily the way it works. What
really happens is there is usually a reaction on or near the projected
Reversal date. A high percentage of the time, the reaction results in
a change of the existing trend or the beginning of a market
correction (Reaction swing). On the other hand, a small percentage
of time the reaction results in a continuation of the existing trend.
Later in this book I discuss how to identify the difference between
50 Chapter 2 - Time

a reversal pattern and a continuation pattern. Both can be very

helpful in your trading.
All of the chart examples I have shown so far have made either
a major top or bottom on or near the projected Reversal date. This
makes it very simple; I just exit the trade and wait for the next set
up. However, nothing is that simple, but it doesn't have to be
difficult or complicated either. Many times the market will just
pause and form a new Reaction swing pattern near the Reversal
date before continuing the trend. Even though the market has just
offered a great trading opportunity from the TR pattern, if there is
more to the trend I want to take advantage of the new
opportunity ... and there is a way to do just that. It is called the
Trend Continuation pattern (TC) and - like the TR pattern - it can
be a very useful and sometimes amazing tool for a trader who
understands market behavior.
Since I am still talking about the TR pattern in this chapter, I
don't want to get into the specifics of the Trend Continuation yet,
but I did want you to be aware that there is a very simple way to
take advantage of the extended market move as illustrated in this
example of the September T-Bonds. The TR pattern triggered a
very nice trade, but it was not the end of the move. I think you will
be amazed at the information it provided.

December Coffee

Figure # 2.14 - After a sharp rally, the December 2004 Coffee

peaked with a high closing price at 9030 on May 28. This high was
quickly confirmed as a high pivot when the market pulled back to
establish a low on June 7, followed by a three-day rally into June
10. The June 7 pivot low was the beginning of a new Reaction
swing and the June 10 high was the end of the Reaction swing.
This Reaction swing also completed a major TR-1 pattern and
indicated the end of the upward trend and the beginning of a new
downward trend.
Since the June 10 high peaked inside the sell window a sell
order should be placed underneath the low of the June 10 Signal
 Chapter 2 - Time 51

bar. The sell trigger price was hit the following day, when the
market traded below the Signal day's low and closed below the (C)
low. A soon as the 87.80 trigger price was elected, a protective
stop was placed above the high of the June 10 price bar (D). The
reverse/forward count from the (C) low back the pivot high (A)
high equaled 19 days. (This TR-1 pattern is slightly different from
others we have looked at so far, but it is treated the same.) The
forward count from the (D) projected a future Reversal date of July
9.
The December Coffee plunged over 1,400 points in 19 days,
before posting a low pivot on July 9 ... the Reversal date predicted
almost three weeks earlier!

December 2004 Coffee

B
D

w- ~::~~;.~p
.----~... Coffee dropped 1450
19 Days rC
19 Days

I ~. ~ u ••
1
~, \ dI

llt!r
All

II 1 ' ).ft"'

Figure# 2.14- December 2004 Coffee

52 Chapter 2 - Time

Trident Microsystems Inc. (TRJD)

Figure # 2.15 - After several days of choppy trading, Trident

Microsystems peaked at 31.47 before it closed at 31.07 on April
19, 2006. Two days later, the stock found support at the 20-day
SMA and bounced higher over the next two days, confirming the
April 19low as a pivot low and the beginning of a Reaction swing.
The rebound reached a high of 31.23- well within the sell window
that began at 30.52- therefore I was looking at a TR-1 pattern.
The sell signal would be triggered when the market traded below
the low of the Signal bar that reached inside the sell window. In
this case, the Signal bar it is the price bar of April 25 with a low at
30.03. On April 26, Trident Microsystems rolled over, traded
through the trigger price of 30.00 and confirmed the sell signal that
began a sustained price decline.
The reverse count, from the lowest close at (C) back to the
lowest closing price at (A), equaled 12 days. The forward count of
12 days, from the highest close at (D), implied a futures Reversal
date of May 11. TRID continued to trade lower and reached a close
of 25.14 (E) on the May 11 Reversal date, followed by a six-day
rebound to 28.07. Using the Reversal date Indicator the short
position could have been closed near the low and before the
sudden corrective rally!

Microsoft (MSFT)

Figure #2.16 - During the period between August 5, 2005 and

November 18, MSIT offered two different views of the TR-1
pattern. After peaking at 27.94 on August 5, Microsoft traded
lower until it found support at the 20-day SMA where it posted a
low close of 26.72 on August 19. Eight days later the market
peaked at 27.44 on August 31. This price was slightly above the
60% retracement level (27.42), therefore it is a TR-1 pattern. In
this case the Signal bar occurred on August 31 with a low of 27.04
so the sell stop would be placed at 27 .02.
 Chapter 2 - Time 53

Trident Microsystems Inc

A B D

12 Days

TRID traded from 30.00

to 25.14 in 12 days before
rebounding to 28.07, soon
after the Reversal date.

Figure# 2.15- Trident Microsystems (TRID)

Two days later the market dropped below 27.04 and closed at
27.02. The TR-1 pattern was confirmed and a short position
triggered. Now for the reverse/forward count. The reverse
count, from the pivot low at (C), back to the beginning of the TR-1
pattern, marked as (A) (July 21) - equaled 21 days. Counting
forward 21 days from the end of the Reaction swing (August 31)
marked (D) projected a future Reversal date of September 29.
Microsoft traded consistently lower over the next 17 days,
finally hitting a low of 25.12 on September 23. From this low, the
market traded higher over the next four days and peaked on
September 29 ... the date projected over two weeks earlier. This is a
little different look than I have shown you with the other examples
54 Chapter 2 - Time

(I will address this pattern in more detail in the Trend Continuation

portion of this book), but I wanted to show what happens when the
correction or retracement ended on a Reversal date. (A market that
makes a high pivot on a projected Reversal date will typically turn
lower and a market that makes a low pivot on a Reversal date will
typically turn higher. This can offer valuable information about the
possibility of the trend continuing.)

~ft
B

21 Days
D
Sell window
)~\
I

The September 29, R.everssl

date (E) was followed by a
continuation of the downwsrd
slide.

Figure# 2.16- Microsoft (MSFT)

 Chapter 2 - Time 55

Buying Microsoft

Figure # 2.17 - The September 29th Reversal date, the highest

closing price of the correction, was followed by a price collapse
into October 11, where it finally bottomed at 24.25.
The October 11, low proved to be significant when the market
turned higher and traded into the 20-day SMA where it posted a
high close at 25.09 on October 19. This high was folJowed by two
consecutive lower closes that confirmed October 19 as a high pivot
point and the beginning of a new bullish Reaction swing. The two-
day retracement ended with a low of 24.57, just slightly more than
60%. This put the market inside the buy window and confirmed the
pattern sequence as a possible TR-1 pattern. The trigger price of
25.02 was hit on the following day and buy was confirmed.

Microsoft

Th.e market peaked two days

after th.e November 16 Reversal
Date!

IIJl~~,, ~
18 Days
Ul
11..
Mil
a..
25.8
Yfl

~-
!'ill
llGII
<131
B
2CIII

Figure# 2.17 -Microsoft- (MSFT)

56 Chapter 2 - Time

The reverse count equaled 18 days, which in turn projected a

future Reversal date of November 16. After triggering the buy
signal at 25.02, Microsoft continued to move higher over the next
18 days and reached 27.88 on September 23. The Reversal date
missed the major high by two days!
A major TR pattern generated a major sell signal followed
by another TR pattern that generated a major buy signal, both
offered significant trading opportunities with limited risk.

Identical Closes- Which One Should I Use?

Before I move on I want to talk a little about the reverse count to

September 23, marked (A). The closing price on September 23 was
25.27. The next trading session was on Monday, September 26 and
the closing price was also 25.27. When this happens I will always
use the closing price that occurred first, in this case September 23.
On occasion, a market will have three identical closing prices in a
row. This is rare, but I have found the best results come by using
the closing price in the center for your reverse count.
 Chapter 2 - Time 57

TR-2 Pattern

Market Corrections in a Strong Trending Market

There is always a "but" or "however" when dealing with the

markets because nothing works 100% of the time. Using 60%
retracements for buy and sell windows is an excellent technique for
most markets. However, when the trend is extremely strong, the
market will not usually retrace even close to the 60% level.
lnstead, the market will begin to make small and quick corrections
that usually last three to seven days. The stronger the market, the
shorter the correction time period. These strong trending
markets will normally retrace between 30% to 40% of the original
move - the Fib retracement number is 38.2%. In this type of
market the retracement will typically fail to reach the 60%
retracement level and therefore will not meet the criteria for the
TR-1 pattern. Instead it forms the second type of Trend
Reversal pattern I call the TR-2 and the entry methods are treated
differently than the TR-1.
The TR-2 pattern is almost identical to the TR-1 pattern except
the corrective rally off the (C) low-in a new downward trending
market-does not reach the 60% sell window, therefore there is no
Signal bar. Instead the corrective rally will fail early and turn in the
direction of the newly formed trend. This is a sign of a strong
trending market and subsequent price move following the pattern
confirmation can be robust.
First, let's review the entry rules for a TR-2 pattern in a new
downward trending market. As soon as the low pivot has been
confirmed at (C), I enter a sell stop underneath the lowest low of
the pivot. When the price penetrates the low and triggers the sell
stop, a protective stop is placed above the high at (D). The price
bar the breaks the support and triggers the sell signal is called the
Breakout bar. The rules are reversed for a buy signal. Let's look at
some examples of the TR-2 pattern in action.
58 Chapter 2- Time

I am a believer in using the market's own price behavior

because it is a leading indicator that helps with two important
aspects of trading; first, the market's own price behavior will
provide signals that identify the beginning of a price move and
secondly, it will let you know very quickly if the signal is correct.
Other technical indicators such as Stochastics, RSI and Moving
averages, etc., are considered lagging indicators because the entry
signal typically occurs after the market move is already in progress
and acts as a confirmation of the new trend. Don't get me wrong,
there are certain times when I will us a Stochastic or a RSI to see if
there is a divergence forming and use it as confirmation of my
other signals and they can be very effective if used properly.
However, the indicator I use the most, with the Reversal date
Indicator, is the 20-day Simple Moving Average (SMA).
Although I look at the 20-day SMA in conjunct~on with the TR-
1 pattern, I do put more emphasis on it when I am looking at a TR-
2 pattern. I like to see the Reaction swing form around the 20-day
SMA. For example, if the Reaction swing forms underneath the
20-day SMA the signal bar must trade through the 20-day SMA.
On the other hand, when a market has already passed through the
20-day SMA and formed the Reaction swing above the 20-day
SMA, it has a tendency to pullback to the 20-day SMA and
sometimes penetrates the average before resuming the dominant
trend and confirming the Reaction swing. Either way, I prefer to
see the (C) to (D) Reaction swing form around the 20-day SMA.

May Soybeans

Figure # 2.18 is a chart of the May 2005 Soybeans. Between

January 21 and February 17, the market completed a TR-2 pattern,
ending with a Reaction swing. The pattern began with low pivot of
$5.16 Y4 on January 18 marked (A) - which was followed by a
five-day rally into a pivot high at $5.24 on January 25. The rally
failed and the market dropped to a new contract low close of $5.02
% on February 4 (B) before turning higher and confirmed the pivot
low. The subsequent rally hit a short-term peak at $5.36 Y4
 Chapter 2 - Time 59

on February 14 (C) followed by a three-day correction that ended

near the 20-day SMA and bottomed on February 16 (D). From
here, the market posted a low close of $5.34 3/4 before resuming
the new upward trend and forming a bullish Reaction swing. The
five pivots I just described formed a TR-2 pattern and confirmed a
trend shift from a downward trending market to an upward
trending market. (Note: The Reversal date Indicator uses closing
prices only, when confirming price patterns and Reaction swings.)
Since the retracement from (C) to (D) was less that 60% it didn 't
meet the criteria for the TR-1 pattern, therefore the buy signal and
entry will not be triggered until the Soybeans trade above
the beginning of the Reaction swing at point (C).

:May 2005 Soybeans E

fill
'
The major raUy peaked on
the projected Reversal date!

11 111 ln1
Figure# 2.18- May 2005 Soybeans
60 Chapter 2 - Time

Now, I concentrate on the price swing between the last two

pivot points marked (C) to (D). This correction is the Reaction
swing, which will be used to confirm the buy signal and identify
the end of the TR-2 pattern.
On February 17, May Soybeans opened higher than the
previous day's high and traded above the beginning of the
Reaction swing (C) leaving a gap from $5.35 to $5.39 in the
process. The Breakout bar confirmed the Reaction swing and the
new upward trend. It is also a TR-2 pattern buy signal. The buy
signal was triggered when the market traded above the pivot high
of $5.36 1/2 (C). As soon as the entry is confirmed, a protective
stop is entered underneath the pivot low at (D) and a
reverse/forward count is completed to project the future Reversal
date.
The first step in the reverse/forward counting process is to find
the price bar with the highest closing price of the pivot at the
beginning of the Reaction swing marked (C). Starting with the first
daily price bar to the left of (C), begin counting the price bars in
reverse until you reach the lowest closing price of the low pivot
marked (A). The reverse count ends on January 17, but the market
was closed on this date due to a holiday. (Note: If a holiday occurs
at the beginning of a Reaction swing I will consider the holiday as
the pivot high or pivot low. A also count to this point because it is
the beginning of the TR-2 pattern and represents the beginning of
the current cycle.) The reverse count equaled 20 days. Next, I
went to the pivot point at the end of the Reaction swing (D) and
began the forward count. Starting at the price bar with the lowest
closing price I began counting forward 20 price bars, beginning
with the first price bar to the right of the lowest closing price.
(Note: February 21st was a holiday that occurred during the week
but I counted it as a trading day even though the market is closed.)
Counting forward 20 days suggested a reversal day was due to
occur on March 16. In other words, the current market trend
should continue for the next 20 days.
 Chapter 2 - Time 61

After the Reaction swing was confirmed the Soybeans

remained in a strong upward trend for the next 20 days and reached
$6.91 1/2 on the projected Reversal date of March 16. At this time
I had to make a decision, I could either exit and close out a very
profitable position or place the protective stop under the Reversal
day low and continue to hold the long position.
The following day-called the Trail day-Soybeans traded
below the previous day's low and continued lower for the next
several days.

August 2005 Gold

Figure # 2.19 - On June 9, 2005, August Gold posted a low of

$423.00 before it closed at $426.10. The low was right at the 20-
day SMA. This pattern caught my attention because the market had
closed lower over the previous three days and bounced off the
support provided by the 20-day SMA A possible Reaction swing
had set up; if the market traded above the previous pivot high of
$429.50-marked as (C}-the bullish Reaction swing and the
major TR-2 pattern would be confirmed. In other words, a trade
above $430.00 would confirm the Reaction swing and trigger the
buy signal. It didn't take long for the Gold to reveal its intentions.
The next day, gold traded through the $430.00 trigger price and
closed at 431.10. Once the trade was entered the protective stop
was placed underneath the pivot low price bar and the
reverse/forward count completed. The reverse count from (C) to
(A) equaled 10 days.
Projecting 10 days forward from the pivot low at (C) forecasted a
future Reversal date for June 23.
After reaching the $430.00 trigger price, Gold continued higher
and rallied over $14.00 dollars with only a one-day correction
between the Reaction swing and the Reversal date! Right on
schedule, Gold peaked at $444.20 on the June 23rd Reversal date,
before beginning a 15-day correction that fell all the way back to
$419.00.
62 Chapter 2 - Time

August2005 Gold

Gold peaked on the 6123

Reversal date! E

Another TR plll1em?
B

Figure # 2.19 -August 2005 Gold

December 2005 Gold

Figure #2.20 -The November 41h pivot low marked the end of an
A-B-C correction and suggested the Gold was ready to resume the
longer-term upward trend. However, it was the three-day
consolidation at the 20-day SMA- marked (C) and (D)-that
caught my eye. On Friday, November 11, Gold closed at $469.40
 Chapter 2 - Time 63

followed by a lower close of $469.10 on November 14 and

$469.00 on November 15. This price action had formed a potential
Reaction swing. It may appear to be a small pattern, but a small
pattern can be just as explosive as a larger pattern.
Since the low of the swing pattern is well above the 60%
retracement level, I set the buy stop above the (C) high. The very
next day, Gold exploded at the opening and started trading at
$473.70. The rally continued throughout the remainder of the
session and finally closed at $479.10.
The reverse count from (C) to (A) equaled 16 days, therefore
the forward count from the low at (D) projected a future Reversal
date for December 7.

December Gold

Gold rallied over $43.00

before reaching the Dece ml:>er
1 Reversal date!

16 Days

16Days

Figure # 2.20 -December 2005 Gold

64 Chapter 2 - Time

The market followed the cycle like clockwork as it continued to

climb into the predicted date. Sixteen days after the entry signal
was triggered at $473.70, on November 16, Gold reached a high of
$517.00 and posted a major high of $538.50 three days later. Gold
had rallied over $43.00 in 16 days!

September 2006 Wheat

Figure # 2.21 - September Wheat formed a three-day Reaction

swing between May 2 and May 4. Looking at the chart, in Figure
#2.21 you can see the Reaction swing formed around the 20-day
SMA with the May 4 1h low just below the moving average. So far
the market had retraced slightly more than 38% so it was
considered a TR-2 pattern and a buy stop was placed above the
pivot high of $3.82% at (C). The following day, May 5, Wheat
gapped higher and began trading at $3.81, slightly below the pivot
high of 382 %, but continued higher for the remainder of the day
and finally closed at 386. This price action the price action had
confirmed the bullish Reaction swing and triggered the buy signal.
The reverse count from (C) back to the beginning of the TR-2
pattern (A) equaled 12 days. (The lowest close was on Monday
April 17, however the market was closed on the previous Friday
and left a gap on the chart. If a gap appears at the beginning or
end of a swing pattern, I consider it as the pivot high or pivot low.
Therefore, the beginning of the TR-pattern wasApri/14.)
The forward count from the low pivot at (D) projected a future
Reversal date of May 22. September Wheat continued the strong
rally and reached a high of $4.41 on the May 22"d Reversal date
(E). The market opened higher on the trail day but failed to find
new buyers and turned lower. The rally had ended and Wheat
formed a new bearish TR-pattern that turned that confirmed a sell
signal that was followed by lower prices over the next three weeks.
The September Wheat is a good example of the type strong
trending market action that typically follows a TR-2 pattern signal.
 Chapter 2 - Time 65

September Wheat

Wheat rallied over 50 cents in

12 days! The highest closing price
occurred on the Reversal date.

Figure # 2.21 -September 2006 Wheat

September 2006 Cocoa

Figure # 2.22 - A soon as the September Cocoa confirmed a

Reaction swing, with a pivot high on June 16 (C) followed by a
pivot low on June 20 (D), it was time to do the reverse/forward
count. The count from the high close at (C), back to the low at (A)
equaled 14 days. (The market was closed for Memorial Day and
left a gap on the chart right in the center of the pivot low. Both the
day before and the day after the holiday closed at the same price,
1,489, therefore, I will count the gap day as the low for the
66 Chapter 2 - Time

reversal count.) Projecting forward, 14 days from the low of the

Reaction swing indicated a future Reversal date due on July 10.
Four days after posting the low at (D) Cocoa traded above the
previous pivot high at 1,555 - the beginning of the Reaction swing
- and triggered a buy signal at 1560. During the following 10
trading days, Cocoa rallied to a high of 1,737. The high was
reached on the projected Reversal date of July 10! Six days later,
Cocoa was traded below 1,500; that's a 182-point rally into the
Reversal date followed by a 237-point collapse after the Reversal
date.

Septamber Cocoa
E

Cocoa nillied over 190 points, ~~ I

in 10 days and peaked on the
July 10 Rtwml date! I
I
II \
14Days

~~.~
~·•·D~~~~~ ~
Buy

A B

Figure # 2.22 -September 2006 Cocoa

 Chapter 2 - Time 67

July 2004 Silver

Figure# 2.23 -July Silver peaked at 8.235 on April 6. This high

proved to be the end of a strong three-month rally and the point
where Silver quickly rolled over and began to collapse. Six days
after Silver posted the 8.235 high, the market hit a low of 7 .020.
However, the following three sessions posted three consecutive
higher closes and confirmed a pivot low on April 14. This low also
marked the beginning of the 151 reaction in the new downward
trend and possibly the completion of a major TR-2 pattern. Since
the corrective rally had not retraced at least 60% of the downward
price swing from (C) to (B), I considered this a TR-2 pattern
which means the sell stop was placed underneath the pivot low that
marked the beginning of the Reaction swing marked (C) on the
chart.
After the Silver fell more than a $1.20 in six days, most traders
expected it to resume the upward trend, or were afraid to enter a
short position right after such a large price move. However, the
corrective rally failed on April 19, when the market tested the gap,
but was unable to push any further. The following day began with
a gap lower followed by a lower close. This price action confirmed
the pivot high and marked the end of the Reaction swing. A break
below the (C) pivot low was all that was needed to confirm the
major TR-2 pattern and trigger a major sell signaL
One day later, Silver traded below the pivot low at (C), when
the Breakout bar gapped lower and began trading at 6.50, followed
with a close at 6.18. The price action had confirmed the bearish
TR-2 pattern as well as triggered the sell signal. Now that the sell
signal has been triggered and short position entered, timing of the
exit and stop placement became extremely important, especially
with the volatility Silver had been experiencing.
The reverse count began with the first price bar to the left of the
pivot low at (C), back to the pivot high at (B) and continued on to
the pivot high at (A) ... the count equaled 16. With this information
in hand I moved to the forward count and began on the first price
bar to the right of the pivot high at (D) and counted forward 16
days. I came up with future Reversal date of May 11.
68 Chapter 2- Time

Silver reached a low of 6.04 before it began a three-day bounce

that ended on the April 24th where the market turned lower and
resumed the downward trend. However, the most significant date
was May 11. As you can see in Figure# 2.23, Silver chopped back
and forth for several days before it bottomed at 5.52 on the May
11th Reversal date ... 98-cents below the trigger price of 6.50! Even
after a very volatile beginning the TR-2 pattern and Reaction
swing were able to pinpoint the exact low price bar in the July
Silver.

July 2004 Silver

B

A ~~~~
16 Days

~ rt160.~
M

Figure # 2.23 -July 2004 Silver

 Chapter 2 - Time 69

December 2004 Japanese Yen

Figure # 2.24 - A major pivot low was confirmed on October 6

when December Japanese yen hit a low of .9617 (B), followed by a
day with a higher close. A bullish wide range day followed and
closed above the 20-day SMA. The next trading day was a
Monday, but the market was closed for a holiday. Tuesday 's
session was a narrow range day and the close was below Friday's
close. This market caught my attention because a bullish Reaction
swing was forming above the 20-day SMA and above the 60%
retracement level. Since the market did not pullback far enough to
confirm a TR-1 pattern, I considered this a TR-2 pattern so the buy
stop should be placed above the pivot high of .9182, marked (C).

December Japanese Yen

Figure# 2.24- December 2004 Japanese Yen

70 Chapter 2 - Time

It took two days for the market to break above the (C) pivot
high and trigger the buy signal at .9185. The reverse/forward count
from (C) to (A) equaled 8 days. The forward count projected a
future Reversal date for October 22. The market continued to
climb after the initial entry on October 14 and closed at .9347
on the October 22 Reversal date. It is decision time; do I exit at the
close or adjust the protective stop and hold to see if the market will
continue the trend?
If I elect to hold, I will place the protective stop 3 to 5 ticks
underneath the Reversal date low; in this case the price would be
.9310. Since the Reversal date had been reached the market was
susceptible to a correction or a reversal. Therefore, it is necessary
to be aggressive with the stop movement. Each day the market
made a new high the stop should be moved just underneath the low
of that price bar. The Japanese yen continued the upward trend for
five more days before this method would have exited the trade at
.9427.

June 2004Japanese Yen

Figure# 2.25- On Aprill, 2004, the June Japanese Yen peaked at

.9688 before turning lower. The market continued to trade lower
into April81hwhere the Yen found support at the 20-day SMA The
following session -April 9 -was a holiday (even though the
market was closed, I still count it as a trading day) but the next
trading session closed higher and confirmed the April 81h low as a
pivot low and the beginning of a potential bearish Reaction swing.
After the pivot was confirmed a sell stop should be placed
underneath the April 81h low of .9413. The reverse count from (C)
to (A) equaled 15 days. The forward count projected a future
Reversal date for May 3. The market continued the downward
trend into the May 3rd Reversal date, with only a couple of two-day
corrections before it reached a low of .9043 on the predicted date.
The June Japanese yen had completed a 320-point drop in 15 days!
The next day began with a gap higher, followed by a fast run to
.9245 two days after the Reversal date.
 Chapter 2 - Time 71

June Japanese Yen

B

D
15 Days

The Japanese yen fell over 320 points

before reaching the projected Reversal
date!

Figure# 2.25-June 2004 Japanese Yen

September 2006 Silver

Figure # 2.26 - On May 11, 2006 September Silver reached a new

23-year high at 15.157 (B) and closed near the top of the daily
range. This proved to be the high of the move when the Silver
collapsed and fell over $2.60 during the following six trading
sessions, finally posting a low at 12.00 on May 22 (C) before it
turned higher. The subsequent corrective rebound confirmed the
beginning of a Reaction swing, but ended when the price reached
72 Chapter 2- Time

the 20-day SMA at 13.418 on May 30 (D). (The Memorial day

holiday fell on May 29 and at the end of the Reaction swing. When
a Reaction swing peaks on a holiday I consider it as the highest
close. Therefore the forward count began with May 30 as day
number 1.) The resistance held and Silver reversed and resumed
the downward slide. Two days later, Silver traded below the
beginning of the Reaction swing - marked as (C) - and triggered
the sell signal at 11.980 and confirmed the Reaction swing and
the TR-2 pattern.
The reverse count from (C) to (A) equaled 13 days. The
forward count, from the end of the Reaction swing (D), identified
June 15th as the next potential Reversal date. Based on this
information I felt fairly confident the downward swing should
continue into or near the suggested Reversal date of June 15.
September Silver reached 9.627 on June 13th and closed at
9.724. Two days later - June 15, the predicted Reversal date -
Silver posted a low of 9.720 before it closed at 10.063.

Never enter a pattern before its time.

Because the market traded higher into the Reversal date, 1 assumed
the downward trend was about to resume; however, the Silver
continued to trade higher over the next few days and never
provided another sell signal confirmation. This is important,
because even though the Reversal date Indicator may suggest the
possibility of a continuation of the trend, it still needs to have a
pattern confirmation before the signal is complete. In this case the
Silver traded higher over the next three days before moving into a
six-day consolidation pattern where it formed a new bullish
Reaction swing. A buy signal followed on June 30, when the
market broke above the beginning of the new Reaction swing and
traded through the 20-day SMA. This is an important lesson: you
never assume a pattern and never think you are going to get a jump
on the trade by entering before the pattern is confirmed. I have
always found it is best to give up a little on the entry price in order
to get a stronger confirmation signal. This keeps me out of many
 Chapter 2 - Time 73

bad trades and more than makes up for the extra price I give up on
entry.

September 2006 Silver

B
IS all
The Memorial day holiday fell at the end of 14!1l
the Reaction swing, therefore I considered it
lUll

na
lUll

13 Days

,,rr \e''I,n
-
' ~'~'
~ t•IJI 10.«11
Itt''
,. r II lO.al)

E !II»

Sa»

Billiton (BHP)

Figure # 2.27 - On March 8, 2006, Billiton opened at a new 6-

week low of 33.50 (B) and traded higher for the remainder of the
day, finally closing at 34.22. The market continued to trade higher
over the next six days where it crossed above the 20-day SMA
before hitting resistance at 36.79 on March 17, marked as (C). The
74 Chapter 2 - Time

new high was followed by two consecutive lower closes that

dipped below the 20-day SMA. The March 8 1h low (B) had been
confirmed as a pivot low and (C) had been confirmed as the high
pivot at the beginning of a possible Reaction swing.
At this point four of the five pivots were in place for a TR
pattern. Since the current correction was less than 60% of the
price move from (B) to (C), so a buy stop would be placed above
the high at (C). On the second day - March 23 - BHP opened
slightly higher and began trading at 36.90. The open was above
the previous pivot high and the trigger price to confirm the buy
signal and the TR-2 pattern. The reverse count, from (C) to the
beginning of the TR-2 pattern, marked (A), equaled 13 days. The
forward count of 13 days identified a future Reversal date of April
7.
After the buy signal was triggered at 36.90, BHP continued
higher over the next 11 days, reaching a high of 44.00 one day
before it closed at 42.45 on the April 7 Reversal date. As you can
see in Figure #2.27, the Reversal date was also the lowest close
and the end of a new Reaction swing. Remember, when a market
trades lower into a Reversal date it will usually reverse higher.
This new Reaction swing gave me a "heads up" that the trend
would most likely continue the upward trend and that I should look
for a Trend Continuation pattern to give me a new entry signal. I
you are wondering what a Trend Continuation pattern is, I can tell
you it is covered later in this book.

Dell Inc. (DELL)

Figure# 2.28 - From the low close of 34.83 posted on April 27,
DELL rallied past the 20-day SMA before it reached a high on
May 5. This high was followed by two consecutive lower closes
before it found support at the 20-day SMA and resumed the newly
formed upward trend. A potential TR-2 pattern had formed so a
break above the pivot high at (C) would confirm the Reaction
swing and the TR-2 pattern. On May 13, DELL gapped higher and
 Chapter 2 - Time 75

began trading at 37.87 and closed at 39.33. The TR-2 pattern was
confirmed and a buy signal triggered at 37.87.

Billiton Lt~ BHP

13 Days
D

Figure# 2.27- Billiton (BHP)

The reverse count from (C) to (A) equaled 14 days. Counting

forward 14 days for the low pivot at (D) projected a future
Reversal date of May 30. After the gap opening on May 13, DELL
continued the rapid ascent and reached a high of 40.56 on May
26 ... just two days before the May 30 Reversal date. The market
was closed on May 30 due to the Memorial Day holiday.
76 Chapter 2- Time

Delllnc, (Dell)

The xally lost momentum

••
u
Jll

Figure# 2.28- Dell Inc - (DELL)

Amazon.com (AMZN)

Figure# 2.29 -The chart of Amazon.com offers a different twist

than the previous stocks I've illustrated. In this chart the market
made a low at 32.79 on Friday, July 1, 2005. The followin~
Monday is July 4lh so the market was closed. However, July 5l
closed higher than the July 1 close, but it ran into resistance at the
20-day SMA and peaked at 34.48 before it moved into a three-day
consolidation. Inside the consolidation there were two consecutive
lower closes that set up a possible Reaction swing. A break above
 Chapter 2 - Time 77

34.48 - the high of the Reaction swing at (C) - was needed to

complete the TR-2 pattern and confirm the Reaction swing buy
signal.

Amazon.com (AMZN)

Over $11.00 in two weeks!

Figure# 2.29- Amazon. com (AMZN)

1
July 8 h opened steady, but ended the day at 34.75, slightly
above the 20-day SMA and above the pivot high at the beginning
of the Reaction swing, marked as (C) on the chart. The Breakout
bar also pushed through the trigger price and confirmed the buy
signal just above the previous high of 34.48. The reverse count
from (C) back to the low at (A) equaled 15 days. I began the
reverse count on July 1, because July 4 1h was a holiday and the
market was closed. (When a gap occurs at a major low or high, I
78 Chapter 2 - Time

have found it best to consider the gap day as the lowest or highest
closing date.) Counting forward 15 days from the low of the
Reaction swing (D) projected a future Reversal date of July 28.
Fourteen days after the initial buy signal was triggered at 34.50,
AMZN reached a high of 45.81 on projected Reversal date of July
28.

Las Vegas Sands Corp. (L VS)

Figure # 2.30 - Two separate, but very effective TR patterns

unfolded in the LVS chart between September 27, 2005 and
January 20, 2006. The first pattern began with a pivot low on
September 27 (A) followed by a lower pivot low on October 18
(B). LVS rallied off the October low and traded above the 20-day
SMA, closing at 34.40 on October 24 (C). This pivot high was
followed by three consecutive lower closes that ended on support
provided by the 20-day SMA (D). This price action had confirmed
the October 24 (C) high as the beginning of a bullish Reaction
swing. The market did not pull back far enough to reach the buy
window, so the buy stop was placed at 34.43, above (C) until it
was triggered two days later.
The reverse count equaled 19 days, therefore the forward count
projected the new upward trend to continue into November 23.
Seventeen days after the entry, LVS closed at 45.83 ... $11.40
above the trigger price and on the November 23rd Reversal date.
LVS had been in a three-week correction before it posted a low
close of 38.47 on December 19, 2005. Three days later it posted a
high of 41.00 before it closed at 40.84 on December 22 and just
above the 20-day SMA. From this high, the stock drifted lower
over the next eight days before it made a low pivot on January 3rd
and closed at 38.68. As soon as the market traded below the 60%
retracement level (39.25) it had met the criteria for a TR-1 pattern.
A buy stop should be placed above the high of the Signal entered
the sell window. The high of the January 3rd was 39.74 therefore
the buy stop would be above 39.74. (I typically like to place a stop
3 to 4 ticks above the high or below the low.)
 Chapter 2 - Time 79

January 4Lh opened trading at 38.80 and began to rally, pushing

past the high of the signal bar (39.74) where it triggered the buy
signal before it closed at 40.09. The reverse count from (C) to (A)
equaled 13 days and projected a future Reversal date of January
20. Twelve days after the Reaction swing was confirmed and
the buy signal was triggered, LVS reached a high of 49.98 before it
fell back to 46.05 on January 23 ... one day after the projected
Reversal date and $6.31 above the entry!

Las Vegas Sands Corp

13 Days

19 Days

Figure# 2.30- Las Vegas Sands Corp (LVS)

80 Chapter 2 - Time

Baker Hughes Inc (BHI)

Figure# 2.31 -After an eight-day rally off the major low of March
21, BHI traded through the 20-day SMA before posting a high of
70.19 on March 30 (C). This high was followed by two lower
closes and a retest of the 20-day SMA on April 4 - marked (D).
The pivot high at (C) was the beginning of a new Reaction swing
so a buy stop was entered at 70.22, above the (C) high. On April 5,
BHI traded above (C) and hit the trigger price to confirm the buy
signal and the entry. A protective stop was placed below the low at
(D).
The reverse count from (C) to (A) equaled 15 days. The
forward count projected a future Reversal date of April 24 (E).
Thirteen days after the entry was triggered at 70.22 (C), BID closes
at 76.95 (E) ... $.6.73 higher than the entry.
BHl only paused for a couple of days before resuming the
upward trend. However, the two-day pause formed a new bullish
Reaction swing before the trend continued. The new pattern was
also a new signal and can be used in much the same way as the TR
pattern. In other words, when a new Reaction swing is formed
around a Reversal date projected from a TR pattern it is usually the
center of a longer-term price swing. The new Reaction swing is the
last pattern in a pattern series that 1 call a Trend Continuation
pattern or a TC pattern. This pattern works just as the name
implies, it identifies the center on a cycle and can be used to
project out to the next higMow of consol idation.

December 2006 E -mini S&P

Figure # 2.32 - The Reversal date Trading Indicator can be a very

versatile tool that works in both the commodity futures market and
stock market in any time frame. The December E-mini S&P are a
good example of how the RDTJ can be applied on intra-day charts.
 Chapter 2 - Time 81

Baker Hughes Inc (BHI)

BHI forms a new Reaction

Swing at the projected Reversal
Date.

Figure# 2.31- Baker Hughes Inc. (BHI)

A low pivot formed at 8:40 am (CST) before it rallied to a high

of 1340.00 at 9:30 a.m., where it passed through the 20-bar SMA
The market retraced over the next forty minutes before it closed at
1338.00 at 10:10 a.m. The retracement was slightly more that 60%
of the price move from (B) to (C), therefore the entry price was at
1339.00, just above the Signal bar that entered the 60% buy
window. The very next price bar surged forward, triggered a buy
signal and closed above the (C) pivot high.
The reverse count to (A) was 12 bars (10 x 12 = 120 minutes).
The forward count projected an upward move into 12:00 p.m. The
 Chapter 2 - Time 83

was established and the Dow turned higher. Based on the 60%
rule, a long position was triggered at 11,630 between 10:20 a.m.
and 11:20 a.m. The reverse count to (A) equaled 28 bars or 28
hours. The forward projection of 28 hours predicted the future
reversal bar between 1:20 p.m. and 2:20p.m. on September 28.

December 2006 S&P 500 - E-mini - 60 minute chart E

28Bars

Figure# 2.33- December 2006 Dow Jones- E-mini- 60-minute

chart

Between the hour of 1:20 p.m. and 2:20 p.m., September 28, the
E-Mini Dow Jones peaked at 11,796, right on schedule. From this
point the Dow Jones traded sideways to lower until it closed at
11,735 on October 2 (A). A three-hour rally followed before the
Dow reversed and plunged to a new low of 11,712 during the first
hour of trading on October 3 (B). Six hours later, the Dow hit a
high at 11,823 and pulled back during the next two hours of
84 Chapter 2 - Time

trading where it reached a low at 11,768 during the first hour of

trading on October 4. The Dow Jones had formed TR pattern
inside the longer-term upward trend. During the next two-hour
period the Dow passed through the trigger price and initiated
another buy signal at 11,825.
The reverse count back to (A) equaled 14 hours and projected a
future reversal bar between the hours of 1:20 p.m. and 2:20p.m. on
October 5. The highest price of the entire move was 11,940 and
occurred at 2:15p.m. on October 5.
The last TR pattern occurred at the end of a zigzag correction
pattern, but still produced the same results as a TR pattern at a
major low or high. The key is to look for the correct set up pattern
at the end of a major trend or at the end of a three-wave or five-
wave zigzag corrective pattern. There are constantly opportunities
available if you know where to look and what to look for.

Fore casting the market

The TR patterns are great for forecasting future support or

resistance levels in the markets that allow traders to know in
advance when a market move is about to end. This goes a long way
towards solving one of the most difficult tasks for a
trader ... knowing where to exit. Several of the examples 1 have just
reviewed showed markets reaching a high/low on or very near the
projected Reversal date before reversing and trading in the
opposite direction. However, the market will not necessarily make
a major top or bottom on every Reversal date identified by the TR
pattern. Many times this consolidation or correction is only a
pause in a longer-term trend, with more trading opportunities to
follow.
One of the greatest benefits of learning the Reversal date
Indicator and incorporating it into your trading is the paradigm
shift you will experience in the way you look at the markets. You
will forever have an understanding of market behavior and know
when a market is unfolding properly or out of sync. This
knowledge will allow you to avoid problematic markets and
 Chapter 2- Time 85

identify markets that offer the most potential with the fewest
headaches. The increased confidence in yourself and your
capability will allow you the capacity to trade more efficiently and
reduce the stress you feel about which markets to trade and
determining entry and exits. You will feel a sense of pride and
accomplishment as you take these actions and see positive results
on your own and no longer need to rely on outside "experts" or
trading "gurus" to help you trade. This is a skill no one can take
after from you and can be used for the rest of your life. So often I
talk to traders who rely on outside information or chat rooms or
"online trading advisors" for their trade recommendation and never
learn the basics themselves. They are dependent on others to
do what they should do themselves. If you want to follow others,
at least understand the basics of market behavior.

Preparation is the Key to Success

The key to this type of trading is to have everything prepared

before the signal is triggered. This trading approach is proactive. If
you have to react to a signal, many times you will miss the trade
altogether. The TR patterns and TC patterns are ideal for
identifying the setups in advance of the signal. Once the set up is
identified the orders can be placed before the open and all you
have to do is sit back and watch the trade unfold. There is no
guesswork or pressure to make a snap decision during a fast
market. The signal is either triggered or not. This eliminates the
subjectivity usually associated with trading.
This makes the Action/Reaction trading method a good
candidate for traders who do not have the time to watch the
markets closely once the trade is entered. The entry price and the
stop placement are identified before the trade is entered. The
protective stops are moved quickly to the entry price and then the
market is allowed to fluctuate until the cycle is near completion
where the stops are once again tighten before the anticipated
reversal. Once the patterns have been identified and the
parameters for the trade are set, the trader can concentrate on other
86 Chapter 2 - Time

things. This helps take the human emotions out of the equation
because a good trade will take care of itself and a bad trade will be
closed quickly.

Having a Game Plan

A successful coach will always have a game plan before the game
even begins, a successful businessman will have a complete
business plan before the doors are open and a successful trader
needs to have a trading plan before the first order is placed. Eighty
percent of all new businesses fail within the second year. The two
main reason of failure are because they are undercapitalized and
they fail to follow their business plan. The same can be said about
trading. In order to succeed at trading you must follow your trading
plan every step of the way. In addition to the actual setup, there is
also the need for a solid foundation to manage the setup and the
trade that follows. The foundation should be part of the trading
plan and consist of the basic trading methodology, built in money
management, and the knowledge of which market will respond
best to the particular set up.
 Chapter 3 - Trend Continuation Patterns 87

Chapter3

"Time is on my side" -
The Rolling Stones

Trend Continuation Patterns

W
hen I look at a trending market I can see two different
types of trends. The first is a steady trend with
overlapping waves. In other words, an upward trending
market will move higher and then make a correction or retracement
that is lower than the previous high swing point or pivot. An
overlapping trend will typically retrace between 50% to 78% of the
previous market upswing, before resuming the dominant
upward trend. The pullback will usually last between 7 and 12
days. The other type of trend is a fast moving trend where the
corrections or retracements are somewhere between 20% to 40%
of the previous upswing. The correction will typically end at or
above the previous pivot high before resuming the upward trend.
The correction usually lasts between 3 to 4 days or sometimes can
be as long as 7 days. This type of market is fast moving and can
offer quick gains if played correctly.
Trading success depends on the strength or weakness of a
market, as well as how well the trading plan is followed. The best
trading opportunities generally appear early in a market trend. As
the trend nears exhaustion, the odds for success decrease. At the
end of a long-term trend, market momentum can disappear
quickly. Sometimes, the market will even turn unexpectedly and
dramatically against you. This can leave many inexperienced
traders with the feeling that they've just been ambushed by the
markets. Even though this change in market momentum seems
sudden, there are usually warning signs that hint of a pending
market direction change before it actually happens. It is here that
88 Chapter 3 - Trend Continuation Patterns

the TR pattern has its value. You may have noticed in most of the
TR chart examples the trend wouJd either end at the projected
Reversal date or very soon after. Therefore, I would know in
advance when the trend should be near exhaustion and therefore
manage the position accordingly.
However, not all markets will peak at the end of the TR pattern
projections. There are many times when the market will pause
before continuing the trend. The pause will usually lead the market
into a consolidation or correction phase before continuing the
dominant trend, in other words, form a new Reaction swing. I call
this type of market action a Trend Continuation pattern and it can
be used in the same manner as the TR pattern. A Trend
Continuation pattern (TC) always follows the TR- pattern and - as
the name implies - portends a continuation of the current trend.
But, the TC pattern does much more than just confirm a trend
continuation; it can also be used to make Time and Price
projections of the current trend. Just as the Reaction swing will
fall in the center of a short-term market swing, the Trend
Continuation pattern will fall in the center of a longer-term trend.
Once again this falls in line with the Action/Reaction theory.
When a market trades higher into a projected Reversal date, the
market has a strong tendency to reverse and trade lower. On the
other hand, when a market trades lower into a projected Reversal
date, the market has a strong tendency to reverse and trade higher.
Therefore, if the prevailing trend is sloping downward and the
market makes a low pivot a couple of days prior to a Reversal date
and trades higher into that date, it would suggest the market is
ready to reverse and resume the downward trend. This would be
the beginning of a Trend Continuation or TC pattern. The opposite
holds true if the market is trading higher and pulls back into the
Reversal date; it would suggest a continuation of the upward trend.
There are many warning signs that foreshadow trend exhaustion.
These include: the end of a natural market cycle in a
predetermined sequence, price patterns that foretell possible trend
exhaustion, and momentum. These warning signals are enhanced
when they occur on or near a predicted Reversal date. The
following examples will illustrate what we are talking about.
 Chapter 3 - Trend Continuation Patterns 89

The Trend Continuation (TC) pattern appears inside a strong

trending market and follows a TR pattern. As the names states,
this pattern signals a continuation of the current trend, but it also
tells me much more. Such as, how long the trend will continue and
how far it may go. Like the TR pattern, the TC pattern also
consists of five pivots, with the Reaction swing formed by the last
two pivot points, as shown in Figure# 3.1.

Trend Continuation Pattern- (fC)

D
Reaction swing

Figure# 3.1 - Trend Continuation Pattern- (TC)

Inside a trend the market will make a series of pivot high/lows,

followed by a pulJback to support or resistance. In an upward
trending market, this is where bullish traders tend to enter the
market expecting another bullish leg and a run past the recent high.
In a downward trending market, this is when the bearish traders
90 Chapter 3 - Trend Continuation Patterns

enter the market expecting another downward swing in the trend. If

the market is forming a Trend Continuation pattern it will run into
support or resistance somewhere between the 60% and
78% retracement levels or the 20-day SMA and fail to move past
the recent high or low pivot point. This swing pattern failure is
the first sign of the correction losing momentum and of a possible
extension of the prevailing trend.
The same criteria I use for the TR pattern is also applied to the
TC pattern. For example, as soon as 1 see a pivot point confirmed
inside an existing downward trend I will consider this the
beginning of a new Reaction swing and place a sell stop below the
pivot point. If the market retraces more than 60% of the previous
market swing from (D) to (E) I consider the market inside the sell
window and the entry stop is moved to just below the low of the
Signal bar that entered the sell window. As soon as a sell signal is
triggered I will place a protective stop above the high at (F). I will
usually place the protective stop 2 or 3 ticks above the high.
I also use the 20-day SMA in combination with the TC-pattern.
The 20-day SMA acts as a resistance in downward trending
markets and support in upward trending markets. If the corrective
ralJ y touches or penetrates the 20-day SMA the trigger price
becomes the low of the price bar that touched or penetrated the 20-
day SMA. This technique will provide an early entry in markets
that have been in a steady downward trend where a 60% percent
retracement would be hard to achieve. (The rules are reverse in an
upward trending market.)
Instead of looking for new examples to illustrate the Trend
Reversal pattern (TC), I will go back to the chart examples used to
illustrate the TR patterns.

December Coffee

Figure# 3.2 - The December Coffee had reached a low of 73.75

on July 8 (E), the Reversal date projected from the TR-1 pattern,
(see Figure # 2.13) and began to form another bearish Reaction
swing where the market began a corrective rally after the July 8lh
 Chapter 3 - Trend Continuation Patterns 91

Reversal date. Eight days later, Coffee crossed above the 20-day
SMA and finally closed at 76.65 on July 20 (F). The retracement
bad confirmed a pivot low on July 8 (E) and set up another selling
opportunity and a possible TC-pattem. The high of the preceding
pivot was 76.80 on June 30. The rebound from 73.75 (E) to the
high of 76.65 was more than 60% of the previous price swing and
above the 20-day SMA; therefore the sell stop is placed just below
the Signal bar low (F). In this case the Signal bar occurred on July
20 and the low was 75.25.

December 2004 Coffee

B
D

~j Tlo TC pattorn offered 500

9 Days
1in~ ~' ~~
E w /
~ '.

lldf
G u
9Days

11'

Figure# 3.2 - December 2004 Coffee

The market reversed on the following day, crossed below the

20-day SMA and traded through the sell stop to trigger the signal
92 Chapter 3 - Trend Continuation Patterns

for a short position. After the signal was confirmed the procedure
for the TC pattern is identical to the TR patterns. In other words, it
is time to do a reverse/forward count and project the future
Reversal date and the end of the cycle. The reverse count will start
on the first price bar to the left of the beginning of the Reaction
swing marked (E) and proceed back to the low of the previous
Reaction swing. The previous low was 76.90 on June 25, so
the reverse count equaled 9 days. Counting forward 9 days from
the end of the Reaction swing -marked (F) - projected a future
Reversal date of August 2 marked as (G). After the short position
was triggered the Coffee continued the downward trend over the
next 9 days and closed at 69.80 on August 2 (G). The short
position was never behind and could have been closed for a very
nice gain near the major low of the long-term trend. Using the
Action/Reaction methods and the signals from the TR and TC
patterns a trader could have captured most of the overall downward
trend and exited near the major low.

June British Pound

Figure# 3.3 - In this example, the TR-1 pattern triggered a buy

signal at 1.7430 and projected a Reversal date for April 19. The
June 2006 British pound posted a high of 1.7951 on April 19 and
closed at 1. 7936.
The British pound formed a three-day Reaction swing between
April 24 (E) and April 26 (D). The TR-1 signal finished with
excellent gain and the TC-pattern was confirmed on April 27 when
the British pound surged passed the 1.7960 trigger price and closed
at 1.8042. At this point, the protective stop should be placed
underneath the low pivot bar at (F) and a reverse/forward count
done on the TC-2-pattern that formed between (E) and (F). The
reverse count from (E) back to the high of the previous Reaction
swing - April 4 - equaled 14 days. The forward count from (F)
projected a future Reversal date of May 16-marked (G)--and
forecasted higher prices over the next two weeks. Two days before
the May 16 Reversal date, the June British pound peaked at 1.8934
 Chapter 3 - Trend Continuation Patterns 93

and closed at 1.8897 on May 16. This was another excellent

trading opportunity with very little drawdown. (The
action/reaction method and Reversal date Indicator predicted the
end of a two-month trend, weeks in advance!)

June British Pound

The Bntish Pound surged over

1000 poinls after the TC pattern
triggered a buy signal and topped
out one day after reaching the
I
Reversal date. I
I
I
I
,r
'
I

1151
00
11ll

Figure# 3.3 -June 2006 British Pound

September T-Bonds

Figure # 3.4 - Let's take a look at another TC pattern in action.

The September 2003 T-Bonds offered a classic example of the TC
pattern. In Figure #2.13, the T-Bonds had been trending lower for
94 Chapter 3 - Trend Continuation Patterns

over two weeks when the market closed at a low of 110-00 on July
21, marked (E). The next two trading sessions closed higher,
reaching 111-12 and confirmed (E) as a low pivot and the
beginning of a bearish Reaction swing. Three days after
confirming the low pivot, T-Bonds traded below the low at (E),
confirmed the Reaction swing and resumed the dominant
downward trend. This price action triggered a new sell signal at
109-30. As soon as the short position was initiated it was time to
do the reverse/forward count. The reverse count began on the first
price bar to the left of the lowest closing price at (E), and counted
in reverse to the low of the previous Reaction swing. The reverse
count equaled 9 days.
The forward count started one day after the July 23rd high and
counted forward 9 days. The forward count projected a future
Reversal date due on August 5 (G). After breaking below the pivot
low of 110-00 point (E), the T-Bonds continued the downward
trend, finally posting a low close of 105-09 on the projected
Reversal date of August 5. At this point the T-Bonds bounced
higher and moved into a sideways trading range. However, the
most important thing you want to notice in this example is the
major price move that occurred between the Reaction swing and
the projected Reversal date. Only after the T-Bonds posted the low
close on the Reversal date of August 8, did the market begin to
consolidate and move into a trading range.

Trident Microsystems Inc. (TRID)

Figure# 3.5- After hitting a low of 24.81 and closing at 25.14 on

May 11 (E)- the Reversal date forecasted from the TR-1 pattern -
(see Figure #2.15), TRID entered into a six-day corrective rally
that peaked at 28.07 on May 19 (F). The high was just above the
20-day SMA. The price action had formed the beginning of a new
Reaction swing and set up a possible selling opportunity that
suggested a continuation of the trend.
 Chapter 3 - Trend Continuation Patterns 95

September T-Bonds
B 111.111

1Z!tl,l

IJI.DI

lllllll

n&tlll

9Days
ll«<l

n•
9Days 118111
Sell

!I I
!tr~~ , ~~~~ '
The T-Bonds fell over 4-00
Basis points in 9 days,
~i.tlg a pivot low on the
August 5 Re<ieJ:Sal date!
G 1t

Figure # 3.4 -September 2003 Treasury Bonds

Since the rally broke through the 20-day SMA on May 19, it
became the Signal bar and identified the trigger price as 26.60. It
really didn't matter where the sell stop was placed because
the market opened sharply lower on the following day and began
trading at 23.80, and triggered the sell signal at the open.
The reverse count begins on the first day to the left of the day
with the lowest closing price of the Reaction swing, marked as (E).
In this example the lowest closing price of 24.99 actually occurred
on May 15. So the reverse count will begin on May 12, the first
price bar to the left of May 15 (E). The reverse count from (E)
back to (C) was 16 days. The forward count forecasted a future
Reversal date of June 12. Sixteen days after triggering the sell
96 Chapter 3 - Trend Continuation Patterns

signal at 23.80, TRID reached a low of 18.35 ... a drop of $5.45

with only a two-day pause in the middle of the move. Following
the Reversal date TRID moved into another corrective phase.

Trident Microsystems Inc

(TRlD) A B D

F/Sigoalbu

16 Days

$5.11 in
16 days!

Figure# 3.5- Trident Microsystems Inc.- (TRID)

Jun e 2004 J apanese Yen

Figure# 3.6 - The June Japanese yen reached .9243 on May 5 -

marked as (F) on the chart -just three trading days after posting a
low of .9044 on the May 3 Reversal date (E), projected from the
AprilS (C) to Apri112 (D) Reaction swing. See Figure# 2.25. The
 Chapter 3 - Trend Continuation Patterns 97

three-day rally was more than 60% of the previous downswing

from April 26 to April 30 and slightly above the 20-day SMA. This
means a new Reaction swing had formed and set up a sell signal
and a possible TC- pattern. The trigger price to confirm the sell
signal and the Reaction swing would be at .9135, just underneath
the low of the price bar that entered the sell window (F). The
market fell during the following day and traded through the trigger
price and closed at .9118. The sell stop had been elected and the
TR-1 pattern confirmed. The reverse count, from (E) back to the
previous low (ApriJ 22), equaled 6 days. Projecting forward 6
days from the pivot high (May 5) fo recast May 13 as the next
Reversal date. Six days after hitting the trigger price of .9130, the
Japanese yen closed at 8740 ... 390 points lower! This date proved
to be a major low and the beginning of a major rally!

June Japanese Yen

* The market was closed
B on April9 and fell
between a low close and
high close, so I consider
it a Reaction swing.

\ F
6Days

6Days
E

The Japanese yen fell over

390 pomts m 6 days and
bottomed on the projected
Reversal date! G

Figure# 3.6 -June 2004 Japanese Yen

98 Chapter 3 - Trend Continuation Patterns

December 2005 Cattle

Figure # 3. 7 - On September 15, 2005, (E) December Cattle had

reached the Reversal date projected from the preceding TR-1
pattern and promptly traded lower over the next four days and
formed a new Reaction swing and possible TC pattern in the
process (F). On the fifth day, December Cattle turned higher,
ended the correction and set up a possible bullish Reaction swing.
Since the retracement ended well above 60% of the previous
market swing, the buy stop was placed at 89.10, above the
beginning of the Reaction swing (E). It took three days for the
market to trade above the trigger price and elect the buy stop, but it
was worth the wait. The reverse count, from the beginning of the
Reaction swing at (E) back to the previous Reaction swing marked
(C) equaled 13 days. The forward count projected a future
Reversal date of October 10. Over the next eleven days, Cattle
continued to climb and frnally closed at 91.40 on October 10,
ending a nice trade signal that offered a potential gain of 230
points without any draw down along the way.
This chart brings me to a very important point. I will usually
only trade one TC pattern following a TR pattern. There are times
when a trending market will offer more patterns to trade, but I have
found the majority of time the trend is beginning to mature after
the first TC pattern is complete. This chart is a great illustration of
what I mean. After the current TC pattern reached a climax on
October 10, it formed a new Reaction swing and another buy set
up. The market traded above the high pivot and triggered a new
buy signal on October 13. However, the market failed to carry
through and reversed the following day and closed sharply lower.
This reiterates the need for good money management even with a
trading method you have great confidence in and caution when
entering a new trade after the first TC pattern is complete. There
can be as many as three or four Reaction swings in the trend, but
the risk increases as the number rises.
 Chapter 3 - Trend Continuation Patterns 99

December Live Cattle

The market topped soon

after it reached the Reversal G
date .

13Days\J E

Figure# 3. 7- December Live Cattle

September Eurocurrency

Figure# 3.8- May 26 was the Reversal date predicted by the TR

pattern. However, the Reaction swing had formed between May 20
(E) and May 25 (F) with a trigger price at 1.2560. The Reaction
100 Chapter 3 - Trend Continuation Patterns

swing was confirmed on May 26, when Eurocurrency dropped

through the trigger price and closed at 1.2541.
The reverse count from (E) back to the low of the previous
Reaction swing (C) equaled 14 days and projected a future reversal
day on June 14, marked as (G). The Eurocurrency fell sharply over
the next five days before it hit support and formed a five-day
consolidation. On the tenth day, Eurocurrency resumed the
downward slide and continued lower into June 14 (G) where it
closed at 1.2074 .... 486 points below the trigger price! The
following day marked the beginning of a 255-point three-day rally.
Even though the market formed a new Reaction swing, the trend
was losing momentum, therefore the risk increased if any new
positions were initiated.

113
September Eurocurrency
UD

Ull

~ll
1lll
B
~

~~
.1 lr.J
l ,,I llD

i IS

14~[j
Ill

11.'1
14Days

The EC dropped over 480 points

before reversing on the Reversal date! 11ZI

12$

I.IJI

Figure# 3.8- September 2005 EuroCurrency

 Chapter 3 - Trend Continuation Patterns 101

Billiton (BHP)

Figure# 3.9- BHP closed at 43.50 after it peaked at 44.00 on the

April 6 Reversal date (E). See Figure # 2.27. The market closed
lower the following day and set up a Reaction swing and potential
bullish TC-pattern at (F). Since the pullback was not at least 60%
of the previous market swing the buy stop should be placed at
44.05, just above the pivot high, which was also the beginning of
the Reaction swing. On April 11, BHP reached a high of 44.30,
where it elected the buy stop and confirmed the pattern. The
reverse count for (E) back to the high of the previous Reaction
swing (C) equaled 14 days. The forward count projected the next
Reversal date for April 27. BHP reached 47.19 on April 19, but
pulled back to close at 44.36 on April27 (H). The lower close- on
the Reversal date - suggested the trend could continue.

Extending the Count

This is a technique I haven' t discussed yet, although I have talked

about how a market that trades higher into a Reversal date it will
typically turn lower. On the other hand, when a market trades
lower into a Reversal date it will typically turn higher. When this
happens, as it did in BHP, the lower close on the reverse date is
telling me the market will likely turn higher and continue into the
next Reversal date. To get the new Reversal date, I will continue
the reverse count back to the major low, in this case (B) or to a
major high in a downward trending market. I will use this new
information to continue the forward count. The count back to (B)
equaled 20 days and projected a future Reversal date of May 5.
BHP reached 48.27 on May 5 (I) and continued to a high of 50.74
four days later. Although, this TC pattern did not offer a large gain
on the first Reversal date, it did give the trader more than one
opportunity to profit and even closed with a slight gain on the
April 27 Reversal date. However, the second Reversal date did
offer a nice opportunity.
102 Chapter 3 - Trend Continuation Patterns

Billiton Ltd, BHP

G
The TC pattern identified the
center of the trend.
E
20 14

I
I
I

·~ .
Figure# 3.9- Billiton Ltd- (BHP)

Bakerllugheslnc.(Blfl)

Figure# 3.10 - BID reached a high of 78.46 one day before the
April 24 Rever.sal date (E) projected from the March 30 (C) and
April 3 (D) Reaction swing. See Figure # 2.31. The Reversal date
closed slightly lower followed by another lower close on April 25
(F). The two lower closes confirmed a high pivot (E) and the
beginning of a new Reaction swing and possible TC pattern. The
 Chapter 3 - Trend Continuation Patterns 103

trigger price for a long entry was 78.50, just above the pivot high
at (E). April 26, began trading at 78.36, but quickly breeched the
78.50 trigger price and reached a high of 81.10. The protective
stop should be placed at 74.50, underneath the end of the Reaction
swing, marked (F). The protective stop was tested on April
27 when the market dropped back to 75.88, but the market found
support closed at 79.11. The reverse count from (E) back to the
high of the previous Reaction swing (April 10) equaled 9 days
and projected a future Reversal date of May 8. Nine days after
confirming the buy signal at 78.50, BHI closed at 87.87. Two days
later, BHI began a significant correction.

Baker Hughes Inc (BHI)

G
11.11
BHI forms a new Reaction Swing
between E and F which predicts a ••
major high.

9Days

Figure# 3.10- Baker Hughes Inc - (BHI)

104 Chapter 3- Trend Continuation Patterns

Learning how to spot and trade the TR pattern and the TC

pattern will give you the opportunity to enter the market at nearly
every significant turning point and capture a major portion of the
following price move.
The setups I have illustrated in this article appear often in every
commodity and timeframe. However, you simply need to learn to
understand the market behavior and be patient while you wait for
the market to setup properly. The predictive behavior of the market
can be a powerful tool when determining future market
movements. Traders are always looking for an edge when it comes
to entering or exiting positions. Little do they know the market
itself has the answer when you know where to look. It' s all about
learning to understand market behavior and interpret the charts.
 Chapter 4 - Price 105

Chapter4

"Because it's where the money is."

Willie Sutton- Famous Bank Robber

Price

lthough using the Reaction swing to project Time can be a

A very powerful trading tool, it is still a one-dimensional

trading approach. Through the years of working with many
different traders, I have found most are focused on Price alone.
They enter when the market breaks through a predetermined price
level and then they look for an exit based on a price. I think this
puts them at a disadvantage because-as I have shown in the
previous chapter-Time can run out before the market meets its
price projections. Without this foresight, a trader can give up a lot
of the profit potential before they realize the move is over.
Remember, it's not about entering at the very beginning and
exiting at the very top-although that is good to do once in
while-it's really about making consistent gains with as little
stress and risk as possible. You aren't going to get rich on one
trade; success is built over the long-term. I truly believe that by
combining Time and Price together, any trader can improve their
entry and exit of trade positions and help improve their bottom
line.
Both the TR pattern and TC pattern can not only help determine
how long a market should continue in the current trend, but also
how much to expect out of the move or where the market will
likely lose its momentum before reversing or moving into a
sideways pattern. The more you know about a trade signal the
more confident you will be about stepping into the market. The
more confidence you have in your trading methodology the more
106 Chapter 4 -Price

likely you are to trade the signal properly and not exit too early or
too late.
Action/Reaction is not an exact science and falls more in line
with Fractal laws. Which means I am not looking for perfection in
the trading signals, but I am looking for consistent performance. I
have never forgotten a statement made by an experienced and
successful trader. He said to me, "Amateurs look for perfection,
but professionals look for performance, that is what separates the
two." Fractal perfection allows for some variance in the
projections of Time and Price. In other words, there are times
when Price will accelerate and exceed Time. This means the Price
projections are reached before the Time projections are met. On
the other hand, there will also be trade signals where Time runs out
before the Price projections are met. Either way, you will know in
advance when it is time to take action. '
In the early 1960s, one of Roger Babson's close friends and
students, Dr. Alan Andrews, began to provide a study course based
on the theory of the " Law of Action/Reaction." One of the
techniques he taught was called the " Median Line Study." This
technique employed a set of chart lines that were drawn from a
significant low or high through the center of the following
Reaction swing. Lines were also drawn parallel to the center line,
from the high and low of the Reaction swing. When completed,
these three lines resembled a pitchfork. Eventually, it became
known as the "Andrews Pitchfork" and can be found on many
charting programs today.
I have found the combination of Roger Babson's
Action/Reaction theory and Dr. Alan Andrews Pitchfork is a
powerful indicator of future price action. It seems that I have
combined the two in a rather unusual way; yet it has proved to be
an uncanny combination for price projection. I call these price
projection lines Action/Reaction lines.

Price Projections using Action/Reaction lines.

Action/Reaction lines are the fou ndation to making price

projections. They are simple to identify and very powerful when
 Chapter 4 - Price 107

combined with the Time projections from both the TR (Trend

Reversal) patterns and TC (Trend Continuation) patterns.
Here are the rules for drawing the Action/Reaction lines from a
Trend Reversal pattern (TR) in a downward trending market. The
rules are reversed in an upward trending market. The first step is
locating and drawing the center line. See Figure # 4.1.

A Center line

', I D

''
c

Figure# 4.1 - Find the Center line.

Rules for Finding the Center line.

1-Find the exact center of the (C) to (D) Reaction swing. This can
be done by subtracting the low price from the high price and
108 Chapter 4- Price

dividing by two. Add the sum to the low or subtract the sum from
the high. Either way, you will get the exact center.

2-Now draw a line from the high at (B) through the exact center of
the Reaction swing (C) to (D) and continue the line forward to the
end of the chart. This line divides the cycle in the exact center and
separates the Action segment from the Reaction segment of the
market and is called the center line. See Figure # 4.2.

B
A
Center line

', I D

'' /
>Y, /

i ',
C Action Line '

' E

Figure# 4.2- Draw the Action line

3-Draw a line from the low of the price bar with the lowest closing
price at (C) to the high of the price bar with the highest closing
price at (D). This line is called the Action line.
 Chapter 4 - Price 109

B Action line •
~ ····
..
: Forward cmmt is ectual
A to the Reverse cotmt

''
'
'' ' \
Reverse cotmt from C to A. '' \

Reaction line /E
7/ •'

Figure # 4.3 -Draw the Reaction line

4-The next step is to do a reverse/forward count the same way it is

done with the TR pattern and the TC pattern. The future Reversal
date, determined by the reverse/forward count, is marked on the
center line.

5-At the spot marked on the center line, draw a line parallel to the
action line. This is known as the Reaction line and becomes the
price objective. See Figure# 4.3.

(I use the Andrews Pitchfork function on my charting software to

do this for me. The software will calculate the exact center of the
Reaction swing and draw the Action line and center line for you.
Most technical charting software packages include this function.)
110 Chapter 4- Price

To illustrate this concept I am going to use several of the same

markets I used in the previous chapters. This way you can see how
Time and Price work together.

March 2006 Crude oil

Figure# 4.4- In Figure# 2.10, I made a Time projection for the

March Crude. Now it is time to add another dimension to that
chart. As soon as the high pivot point was confirmed at (D), I drew
the Action line. Beginning at the low of (C), I drew a line to the
high at (D). This gave me the Action line. Using the Andrews
Pitchfork function of my charting software, I clicked on the high at
(B), and then clicked on the lowest low of the pivot at (C) followed
by the highest high at (D). This function drew a line through the
center of the (C) to (D) Reaction swing and divided the Action
segment of the cycle from the Reaction segment of the cycle. The
center line became the first price objective. Alan Andrews states in
his course that the market will reach the center line 80% of the
time. I have found this statement to be very close to correct and
very helpful in my market analysis. I have also made some of my
own observations about the center line and put them to use in the
trading rules I am about to illustrate.
The next step was to do the reverse/forward count, just as I did
when projecting future Reversal dates using the TR pattern. The
reverse count from (C) back to (A) equaled 13 price bars. The
forward count of 13 price bars from (D) projected out to February
16. I located February 16 on the chart and marked this date on the
center line. At the spot I marked on the center line, I drew a line
parallel to the Action line. This is called the Reaction line or
Target line and gave me a price objective to go along with the
Time projections. In other words, if everything plays out as it
should, I can expect the market to reach this line on or before the
projected Reversal date.
I consider the price level where the reaction line crosses the
center line as the primary price objective. This means the price
objective of the short position in the March Crude oil was 58.65.
 Chapter 4 - Price 111

Since the trigger price to enter the short position was 67 .20, I
anticipated the Crude oil to fall to 58.65 within the next 13 days.
The Crude oil will either reach the Reaction line or run out of time;
either way, I know in advance when the market is due to lose
momentum and it is no longer advantageous to stay in the trade.
That information is invaluable to a trader!
Crude oil reached the Reaction line on February 15-one day
before the February 16 Reversal date-where it posted a low of
57.60 before bouncing back to 58.46 on the February 16. In this
case, the market pushed past the projected price to reach the
Reaction line early; either way, the market did exactly what the
Reversal date Indicator had suggested.

March 2006 Crude oil

!Ill

The Revexsal date is marked on the

center line. The Reaction line is drawn
through the mark, pamll.el to the
Action line. _/'1
Reaction line . /

I
Figure# 4.4- March 2006 Crude oil
112 Chapter 4- Price

The Sloping Reaction Line

The Reaction line is not a stagnant target. The line slopes away
from the trend. This means in a downward trending market the
bottom of the Reaction line is farther away from the entry price
than the upper part of the Reaction line. The slope coincides with
the strength or weakness of the trend. For example, in a downward
trending market, the weaker the market, the farther down on the
reaction line the market will go. On the other band, the stronger the
trend, the higher the market will be when it reaches the Reaction
line.
This also holds true for which side of the center line the market
is trading. In a downward trending market, the farther below the
center line, the weaker the market. In an upward trend, the stronger
the trend, the farther above the center line the market will trade.
This is a very easy way to identify the momentum of the trend.

December 2004 Lean Hogs

Figure# 4.5 - After triggering the buy signal on September 9, the

reverse/forward count projected a future Reversal date of
September 23. Since I knew the potential duration of the new
upward price swing, the next step is to determine what kind of
price potential the trade has to offer. To answer that question, I
started at the same place as I did when I made the Time projection
- at the Reaction swing marked (C) to (D). I drew a line from the
high of the price bar with the highest closing price at (C) to the low
of the price bar with the lowest closing price at (D) to make the
Action line. The next step was to identify the center of the (C) to
(D) Reaction swing.
The high at (C) was 64.40 and the low at (D) was 61.90.
Subtracting 64.40 from 61.90 equaled 250 points. Divide 250 in
half and the total was 125. I can either add 125 to the low (61.90 +
125 = 63.15) or subtract 125 for the high (64.40 - 125 = 63.15) to
find the exact center of the Reaction swing. The next step was to
 Chapter 4 - Price 113

draw the center line from the low at (B) through 63.15 and
continue it forward to project slope of the new trend.
Next came the reverse/forward count. This was done the same
way as the reverse/forward count used for projecting future
Reversal dates. Beginning with the first price bar to the left of the
highest closing price bar at (C), I counted back to the lowest close
at (A). The reverse cou nt equaled 11 days. Beginning with the first
price bar to the right of the price bar with lowest closing price at
(D), I counted forward 11 days and marked the center line. At the
spot marked on the center line, I drew a line parallel to the Action
line to make the Reaction line.

I
December 2004 Hogs 1!1111

/:

Figure# 4.5 -December 2004 Hogs

114 Chapter 4- Price

The Reaction line crossed the center line at 69.00, suggesting

the December Hogs were projected to reach 69.00 or higher on or
before the September 23 Reversal date. In other words, I could
expect the December Hogs to rally 550 to 600 points within the
next 11 days. That looked like a pretty good trade!
As expected, December Hogs reached the projected target price
on September 20, three days before the Reversal date was due.
Whether I was trading with just the Time portion and exited on the
September 23 Reversal date or using the Price portion, both
forecasted a successful trade with minimal risk. In fact, after entry,
this trade would have never been negaHve!

Exceeding Price Targets

One thing you may have noticed in the last two examples, both
markets exceeded their projected price targets. Typically, the TR
pattern is the beginning of a fairly strong price move and the trend
can accelerate quickly. A strong trend has a tendency to reach the
center line quickly and move beyond the line. For example, March
Crude oil- Figure #4.4-traded along the upper side of the center
line until it approached the Reversal date. Just before the Reversal
date, the market dropped through the center line and pushed to
57.65, slightly beyond the target price. The December Hogs-
Figure #4.5-are another good example. The Hogs crossed above
the center line mid-way through the cycle and reached the reaction
line at 70.00, three days before the Reversal date was due. When a
market crosses the center line, it suggests a strong price move is
about to occur and the stronger the price move, the higher it will go
before reaching the Reaction line. I always keep this in mind when
considering a target price because targets are dynamic, just like the
markets.
 Chapter 4 - Price 115

December 2005 Dow Jones

Figure # 4.6 - On October 24, 2005, the December Dow Jones

traded above 10,335 to trigger the buy signal and confirm the
Reaction swing marked (C) and (D). The reverse count from (C) to
(A) equaled 20 days. The count forward from (D) identified the
future Reversal date as November 18. I had all the information
needed to make the price projection.

December 2005 Dow Jones

Figure# 4.6- December 2005 Dow Jones

116 Chapter 4- Price

I drew the Action line from the low at (C) to the high at (D),
followed by the center line through the center of the (C) to (D)
Reaction swing and extended it to the end of the chart. I then
marked November 18, on the center line before drawing the
Reaction line parallel to the Action line. The Reaction line crossed
the center line and identified 10,930 as the first price target for the
long position. If everything unfolded according to plan, the
December Dow Jones would reach 10,930 on or before the
November 18 Reversal date. In that case the buy signal suggested
the potential price move of 590 points within the next 20 days!
Soon after the entry signal was triggered the Dow Jones
experienced a two-day pullback before it began a steady climb
over the next 20 days, but it was never able to break above the
center line. Time ran out for the trade when the Dow Jones reached
the November 18'h Reversal date before it was able to reach the
target price of 10,930. However, the Dow traded as high as10,795
before closing at 10,782 on November 18. Eventually, the market
did pass through the Reaction line and reached 10,968 on
November 23 ... three days after the Reversal date. Although the
Dow Jones was able to hit the ultimate target price, the early exit
still would have captured over 60% of the entire price move.

September 2003 Treasury Bonds

Figure# 4.7, the (C) to (D) Reaction swing was confirmed on June
25 and triggered a sell signal when the T-Bonds fell below the 119-
03 low at (C). As soon as the pattern was confirmed, I went
through the steps to draw the Action line and center line, followed
by a reverse/forward count. The reverse count from (C) back to (A)
equaled 20 days. The count forward, from (D), identified July 22
as the Reversal date. I marked July 22 on the center line and drew
the Reaction line parallel to the Action line. The initial target was
identified as 107-10, where the Reaction line crossed the center
line. I now had a price target of 107-10 to go along with the target
date of July 22. If everything went according to plan, the T-Bonds
 Chapter 4 - Price 117

should fall over 11-basis points during the next 20 days! That was
a big move.
Over the next four weeks, T-Bonds continued the downward
trend with only one three-day pause midway through the
downward cycle, before it posted a low at 109-12 and a closed at
110-16, on the July 22 Reversal date. Even though time ran out
before the market reached the price objective of 107-10, it still
offered a potential gain of $8,500 over a three-week period with
only a couple of pauses midway through the trade. Either way, it
was a great trade signal!

September 2003

T""myBo><k A j!' B

D
I

) ~
,h' / / 20 Days
c \Qij \ I
~ ~lllj \ !
11llt

rl;,~::
Target

, tt :
l:rlt

Figure # 4. 7- September 2003 Treasury Bonds

118 Chapter 4 - Price

Continuing the Trend- Projecting Price.

In the previous chapter, I introduced the Trend Continuation

pattern and illustrated how to use it to project forward from a
Reaction swing that falls inside the trend. The same rules for the
Trend Continuation (TC pattern) apply when making price
projections inside a trending market. I will use the following
examples to illustrate how the TC pattern can also project future
support and resistance levels or turning points.

September 2003 T-Bonds

Figure# 4.8 - September T-Bonds didn't reach the Reaction line

target, but they did bounce after the July 21 Reversal day (E) and
posted two consecutive higher closes on July 22 and July 23 (F).
The two-day correction set up another possible Reaction swing and
TC pattern. When the T-Bonds dropped below the pivot low (E) on
July 25, they confirmed the Reaction swing and triggered the sell
signal at 109-10. I have already illustrated, in Figure # 3.4, the
reverse count from (E) back to the low of the previous swing
pattern on July 8-marked as (P-1}--equaled 9 days. When I
projected forward 9 days from (F) I identified August 5 as the next
Reversal date.
However, drawing the center line is a little different when
dealing with a TC pattern. The center line begins at the end of the
previous Reaction swing. For example, the reverse count ended at
the pivot low on July 8, marked as (P-1). This was the beginning of
a swing pattern that ended with a high pivot on July 11, marked as
(P-2). T he center line began from the pivot high of July 11 (P-2)
and extended downward through the center of the (E) to (F)
Reaction swing and continued on to the end of the chart.
I marked August 5 on the center line, added the
Action/Reaction lines and projected the initial target price as 103-
06. Either the T-Bonds will reach 103-06 on or before August 5 1h
or the market will run out of time and end the cycle. In this case
 Chapter 4 - Price 119

the T-Bonds ran out of time when the market closed at 105-09 on
August 5. T-Bonds failed to reach the target price, but they still
offered huge potential as they traveled from 109-10 to 105-09 in 9
days!

S.ptemer2003 B ll'J14

r,.._-: .~~~ D
U111

lll'.

/
ltNrt' ~,,AIW!, C P-l
I
1311

lU

U1'4

I
liS\I

11!15
rk ~~

9Day.<1 F
9Days
:\ llJ21

!JV r 1\llt

rra
lVII

The T-Botds reached the

Reversal date before touching the
Reaction line.

Figure# 4.8- September 2003 Treasury Bonds

December 2004 Coffee

Figure# 4.9 - A sell signal was confirmed on June 14, when the
December Coffee opened below the pivot low at (C) and began
trading at 87.75. The reverse/forward count equaled 19 days,
120 Chapter 4- Price

which in turn projected forward to July 8 as the fu ture Reversal

date. July 8 was marked on the center line and the Action/Reaction
lines were drawn to project an initial target price at 78.00, the price
level where the reaction line crossed the center line.
December Coffee quickly passed through the center line and
stayed below the line throughout the course of the trade. Since the
market was below the center line I anticipated the market would
surpass the target price before it would reach the Reaction line.
Sure enough, the selling pressure continued and the market fell
past the initial target, settling at 75.45 on July 2 ... well below the
initial target of 78.00, but still above the reaction line. The market
was closed on Monday July 5, because of the July 4 1h holiday. July
6 opened with a gap lower and began trading at 74.50. This put the
market below the reaction line and indicated it was time to exit the
trade-a potential gain of 1,325 points in 17 days-because the
market was overdue for a major low or correction. Two days later,
the market turned higher and began the correction as anticipated.
But it is not over!

December 2004 Coffee - TC pattern

Figure # 4.10 - The July 8 Reversal date (E) was the low pivot
point before the market entered an eight-day correction that ended
with a high close of 76.65 on July 20 (F). The following day
began with a higher opening, but the market fai led to find any
willing buyers and began to fall. A sell signal was triggered at
75.20 when Coffee dropped below the low of the highest price bar
at (F). Coffee continued to fall and dropped below the low pivot
point at (E) and confirmed the Reaction swing. The next step was
to make the price projection.
I began the reverse count at the low marked (E) and counted
back to the previous pivot low on June 25, marked (P-1). The
count equaled 9 days. The forward count of 9 days from (F)
suggested August 2 as the future Reversal date. The center line
 Chapter 4 - Price 121

II
December 2004 Coffee
B

1
Coffee reached the Reaction E
line and closed at 15.45
on1uly2.

I
Figure# 4.9- December 2004 Coffee

began at the pivot high on June 30-marked (P-2)--and extended

downward through the center of the (E) - (F) Reaction swing and
continued forward where August 2 was marked on the center line.
As soon as the Action/Reaction lines were drawn, 70.25 was
identified as the initial target price. The 70.25 target price was
reached on Friday, July 30 as the market passed through the target
and closed at 69.85. The following Monday-August 2-Coffee
reached a low of 69.20 before the market moved into a bullish TR
pattern and turned higher.
122 Chapter 4 -Price

December 2004 Coffee

B
D

Initial target of70.25 was

Ill
reecl\ed on J'llly 30.
i\1

Figure# 4.10- December 2004 Coffee

Trident Microsystems Inc. (TRID)

Figure # 4.11 - After the sell signal was triggered at 30.14, on

April 26-Figure # 2.15-the market dropped quickly through the
center line and stayed below the line until May 15. The reverse
count from (C) to (A) was 12 days, which in tum projected May 11
as the future Reversal date. I marked May 11 on the center line and
drew the Action/Reaction lines to identify the initial target price of
26.40.
TRID traded below the center line throughout the trend so Price
was in control; therefore, the market was more likely to pass the
 Chapter 4 - Price 123

target price and converge on the Reaction line on or before May

11. This scenario proved to be true as TRID reached the 27.00
target price on the third day of the trade where it moved into a
consolidation pattern over the next six days. The market broke
support on the seventh day and closed at 26.04 on May 9. This was
just shy of the Reaction line, but the market continued lower
during the following trading session and broke through the
Reaction line, finally touching 24.38 on May 10. TRID
immediately entered into a corrective rally into May 19, forming a
new Reaction swing and a possible TC pattern, setting up the next
potential sell signal.

Trident Microsystems Inc - TRID Ill

A B D

12 Days
--"'1 }t
The market was b'admg below E
the Center line and reached J
the Reaction line one day 1
before th8 Reversal date.

I1'-. Racti>nline

Figure# 4.11- Trident Microsystems Inc. (TRID)

124 Chapter 4 - Price

Managing the Trade

It can be debated which way it is best to trade this signal. Some

traders think is best to wait for the market to reach the Reaction
line before exiting because the market is below the center line and
showing weakness. On the other hand, there are other traders who
feel it is best to grab the quick gains when the market makes a
parabolic move and wait for a corrective rally and another signal.
That's up to the individual trader to decide.

Trident Microsystems Inc, TRID - TC pattern

Figure # 4.12 - After the May 11, Reversal day, TRID began a
short-term rally and formed a new Reaction swing. However, the
beginning of the Reaction swing was considered May 15 (E),
because this date had the lowest closing price before the rally into
May 19 (F). After the sell signal was triggered at 23.80-see
Figure # 3.5-1 drew the center line from the high at (D)
downward through the center of the (E) to (F) Reaction swing and
carried it forward. The reverse count from (E) to (C) is 16 days,
which projected out to June 12 as the future Reversal date. I
marked this date on the center line and drew the Action/Reaction
lines to project a target price of 19.75.
The market dropped below the center line and remained below
the line as it approached the Reaction line target. The target was
reached on June 7, but the market was still above the Reaction line
until June 8 when it dropped to a low of 18.35 before closing at
19.44. Mter a one-day bounce the market traded lower on the June
12 Reversal date and closed at 18.72. The price projected over two
weeks earlier was reached before the scheduled Reversal date!

Microsoft Corp (MSFT)

Figure# 4.13- As soon as MSFf triggered the sell signal at 27.01

on September 2-Figure # 2.16-1 drew the center line through
the (C) to (D) Reaction swing. The reverse count from (C) to (A)
 Chapter 4 - Price 125

equaled 21 days. This put the Reversal date due on September 29. I
marked the date on the center line and drew the Action/Reaction
lines to project an initial target price at 25.42.

Trident Microsystems Inc. TRlD

A

16 Days

16-Days

TRID remained below the Center line ~

and reached the Reaction line two ........-
days before the R.everssl date.

Figure# 4.12- Trident Microsystems Inc.

MSFr traded along the center line until it broke through on

September 16, where the downward slide began to accelerate
towards the Reaction line. On September 22, (E) the market passed
through the target- 25.42- and touched the Reaction line at 25.15
before closing at 25.34 ... six days before the Reversal date is due.
This is a classic case of the Price outpacing Time. The market
reached the target price and the reaction line on the same day, so I
expected to see a rebound from this reaction point and I got it!
126 Chapter 4 - Price

The market bounced off the reaction line and traded higher into
the September 29 Reversal date (F), forming a new Reaction swing
and setting the stage for another sell signal. (Note: When the
market trades higher into a Reversal date the market will typically
turn lower. A lower trade into the Reversal date will typically turn
the market higher. Also worth noting is how the market stops at the
20-day SMA on the Reversal date.)

Microsoft Corp MSFT B

D
21 Days 21 Days

Initial target
reached!

Figure# 4.13- Microsoft Corporation

 Chapter 4 - Price 127

Microsoft Corp- New Trend Reversal

Figure# 4.14 - MSFf peaked on the September 29 Reversal date

and turned lower. On October 4, the market broke below the
previous pivot low (E) and triggered a sell signal that also
confirmed the Reaction swing. The center line began at the end of
the previous Reaction swing (D) and continued downward through
the center of the (E) - (F) Reaction swing on to the end of the
chart. The reverse count for (E) to (C) equaled 25 days. After
counting forward 25 days from (F), I marked November 3 on the
center line and projected 22.80 as the target price.
On October 10, the market bottomed at 24.70 (BB) and turned
higher. Five days later-on October 19-the market crossed the
20-day SMA before it peaked at 25.09 (CC), posting a new pivot
high that was followed by two consecutive lower closes on
October 21 and October 22 (DD). A new Reaction swing formed
and signaled the end of the downward trend. The market shifted
from a downward trending market to a an upward trending market.
The bullish TR pattern was completed on October 24,
confirming the major reversal that and ended the downward trend
and signaled the new buy at 25.02. This should have also closed
the short position shy of the projected target price and the
November 3 Reversal date.
It is important to remember, if a market forms a new TR pattern
that contradicts the existing position, the new TR pattern will
prevail.

Microsoft Corp. (MSFT) the Buy

Figure # 4.15 - The buy signal at 25.02 was triggered on October

24 and MSFT jumped out of the box quickly and began to trend
sharply higher. The reverse count from (C) to (A) equaled 18 days
and projected the future Reversal date for November 16 and a
target price of 26.40. It did not take long for the market to trade
128 Chapter 4 - Price

above the center line and continue the steep upward trend. The
trend remained

The initial tluget is where the

Reaction line crosses the Center~

Figure# 4.14- Microsoft Corporation

strong and the market was still below the reaction line when MSFf
reached 26.40 on November 2. Since there was still 10 trading
days left before the Reversal date was due and the reaction line
was still considerably above the current market price, I expected
there was more upside potential. The market reached the Reaction
line on November 11 when the market gapped above the Reaction
line and began trading at 27.15 and closed at 27.28.
 Chapter 4 - Price 129

Microsoft Co:tp MSFT

Figure # 4.15 -Microsoft Corporation

Managing the Trade

The market reached the preliminary target but still was

considerably above the center line, suggesting a strong potential to
continue the trend into the reaction line. Again, this is up to the
individual trader as to whether to exit at the target price or elect to
move the protective stop underneath the November 2nd low of
25.93 and hold until the market reached the Reaction line or the
130 Chapter 4 - Price

protective stop order had been breeched. Either way, the signal
offered a great trading opportunity with little or no draw down.

May 2005 Soybeans

Figure # 4.16 - A signal to go long the May Soybeans was

triggered on February 28 when the market gapped above the
trigger price (C) and began trading at $5.41 %. The center line and
the Action line were drawn. The reverse count from (C) back to the
low at (A) equaled 20 days, which in turn projected a future
Reversal date of March 16. I drew the Reaction line and identified
$6.21 as the initial target price.
The market remained in a steep trend and broke above the
center line, suggesting the market should surpass the preliminary
target of $6.21 and continue to push towards the sloping Reaction
line. On March 2, May Soybeans reached a high of $6.33, before
moving into a sideways consolidation pattern. The buy signal
offered a potential gain .79-cents without any draw down!
Six days later, the market broke through the Reaction line at
$6.38 and raced to a high of $6.91 1h on the March 161h Reversal
date.

August 2005 Gold

Figure# 4.17- On June 10, August Gold rallied past the $430.00
trigger price and confirmed the Reaction swing and the longer-
term TR pattern. I determined June 23 as the future Reversal date
in conjunction with a target price of $450.00. Ten days after the
entry signal was triggered, August Gold peaked at $444.20 on the
June 23 Reversal date. This is an example of a market reaching the
Reversal date before the projected target price. In other words,
Time ran out before the price objective was achieved. Still, the
signal would have offered a potential of a $14.00 gain.
 Chapter 4 - Price 131

May 2005 Soy-beans

6811

Figure# 4.16- May 2005 Soybeans

December 2005 Gold

Figure# 4.18- On the morning of November 16, December Gold

opened sharply higher and triggered the buy signal at the opening
price of $473.70. As soon as the buy signal was confirmed, I took
the steps to project the future Reversal date as December 9. I
marked the date on the center line and drew the Action/Reaction
lines to identify the initial target price of $505.00.
After the higher opening on November 16, December Gold
continued to surge higher and remained above the center line
throughout the remainder of the trade. It only took 13 days for the
132 Chapter 4 - Price

August 2005 Gold

Reversal date

Figure# 4.17 -August 2005 Gold

market to rally over $31.00 and reach the $505.00 target, but it
wasn't finished. Gold continued to make new daily highs over the
next seven days before finally reaching a peak at $538.50 on
Monday, December 12 ... three days after the predicted Reversal
date!

September 2006 Wheat

Figure # 4.19 - The (C) to (D) Reaction swing confirmed a buy

signal on May 5. The market gapped above the 20-day SMA and
began trading at $3.81 and never looked back. The reverse count
 Chapter 4 - Price 133

from (C) to (A) was 11 days and I used it to project forward to the
next Reversal date of May 19. I marked the date on the center line
and drew the Action/Reaction lines, which identified $4.15 as the
target price.

December 2005 Gold

T~t

w
w
e1
8ll

01

16 Days
at
SJI
51
B
Ill I

Figure# 4.18- December 2005 Gold

The September Wheat was expected to rally at least .34 cents

within the next eleven days. It didn't take the full eleven days as
September Wheat continued the strong upward climb and reached
the $4.15 target price on the eighth day. As predicted, the price
target was reached well within the eleven-day time period.
134 Chapter 4 - Price

September 2006 Wheat

t&

C2!l

Target
~

IB

I, ~ ~I •
II o.\ Ialii ~

B
\ ~·
\ AD

Figure# 4.19- September 2006 Wheat

September 2006 Cocoa

Figure# 4.20 -A small swing pattern between June 16 and June

20-marked (C) to (D)- was confirmed as a bullish Reaction
swing on June 26, when unrest broke out in the Ivory Coast and
caused Cocoa prices to explode higher and triggered a buy signal
at 1560. The reverse count of 14 days predicted the future Reversal
136 Chapter 4 - Price

September Cocoa reached the initial target price seven days

after the entry signal, but continued higher until it reached 1737 on
the July 10 Reversal date (E). This date proved to be a pivotal date
as the market collapsed soon after, giving back all the gains in only
five days. Without the foreknowledge of the pending Reversal date
and price projection, the long position could have turned disastrous
very quickly!

July 2004 Silver

Figure # 4.21 - After a substantial sell-off between April 6 and

April 14, July Silver paused long enough to form a bearish
Reaction swing, marked (C) to (D) on chart. However, the Silver
didn't rest long as the market quickly dropped through the pivot
low (C) and began trading at $6.50 on April 21.
The center line began at the high (B) and sloped downward
through the center of the (C) - (D) Reaction swing and continued
lower to the end of the chart. The reverse count of 16 days was
used to project forward to the May 11 Reversal date where I
marked it on the center line. The Action/Reaction lines predicted
an initial target price of $4.00. The July Silver continued lower
over the next three weeks, but ran out of time before the target
price was reached. Silver bottomed at $5.50 on May 11, the
predicted Reversal date.

June 2004]apanese Yen

Figure# 4.22- The June Japanese yen is a good example of a TR

pattern followed by a TC pattern. The initial sell signal occurred
when the market traded below the low pivot at (C) and triggered a
sell at .9410.
 Chapter 4 - Price 137

July 2004 Silver

16 Days

Silver wss unable to reach the

Reaction line before the
Reve:rsal date.

Figure# 4.21 -July 2004 Silver

I drew the center line from the high marked (B), continued lower
through the center of the (C) to (D) Reaction swing and extended
the line to the end of the chart. The reverse count from (C) back to
(A) was 15 days and projected out to a future Reversal date of May
3rd where I marked it on the center line. Next, I drew the
Action/Reaction lines and used them to forecast the primary target
at 8866. The price objective was not reached because the market
ran out of Time. However, the short position did close at .9073 on
the May 3 Reversal date, even though the market did not reach its
goal. The trade signal offered a potential gain of over 330 points in
15 days!
138 Chapter 4 - Price

June 2004 Japanese Yen

B

15 Days

Taxget line

Figure# 4.22 -June 2004 Japanese Yen

June 2004 Japanese Yen continued.

Fijure # 4.23- As soon as the June Japanese yen reached the May
3r Reversal date it began to form another Reaction swing above
the Reaction line. The TC pattern was completed on May 6 and
another sell signal triggered at .9130. The Japanese yen was off
and running again. Since this was a TC pattern signal, I began the
reverse count at (E) and stopped at the pivot low of the previous
swing pattern, marked (P-1). The count equaled 6 days and was
 Chapter 4 - Price 139

used to project forward from the high pivot at (F) to identify May
13 as the future Reversal date.
The beginning of center line was at the pivot high, marked (P-2)
because it is the first high pivot point following the (P-1) low. The
center line was extended lower through the center of the (E) to (F)
Reaction swing and I marked May 13 on the line and drew the
Action/Reaction Lines. When all steps were completed, .8970 was
identified as the initial target price.

June 2004 Japanese Yen

B

r1~~1~\

~ E

11'41
Figure# 4.23 -June 2004 Japanese Yen

The rapid decline dropped through the center line and reached
the target price on the second day, but it was still way above the
140 Chapter 4 - Price

Reaction line. Since the market was below the center line the
downward momentum continued to push the market lower and
reached the Reaction line on the third day. The Japanese yen
touched the Reaction Hne at .8870, a full point below the initial
target price of .8970. Once again, it is up to the individual trader as
to whether to take the quick gain at the initial target or wait for the
bigger reward at the Reaction line. Either way, the trade signal was
correct!

Billiton Ltd- BHP

Figure # 4.24 & Figure # 4.25 - As soon as the buy signal was
triggered at 36.90, it was time to make the price projection. The
reverse count from (C) back to (A) equaled 12 days and projected
forward to a Reversal date of April 6. I marked this date on the
center line and drew the Action/Reaction lines to project 42.00 as
the initial target price. The target price was reached with ease,
but the trend was not over. BHP formed a new Reaction swing
1
around the April 6 h Reversal date, just above the Reaction line. It
wasn't long before the next buy signal was triggered at 44.10 on
Aprilll. Once again, I was looking at a TC pattern so I began the
reverse count at (E) and ended at the high of the previous Reaction
swing; in this case the high is marked (C). (Note: The market is
trending higher so the reverse count ends on a pivot high.) The
reverse count equaled 14 days and 20 days. (Remember in Figure#
3.9, the initial Reversal date closed lower, which implied a
continuation of the upward trend, so the reverse count continued
on to the major low marked as (B).) The forward count of 14 and
20 projected future Reversal dates of April 27 and May 5. I marked
both dates on the center line and drew two Reaction lines. The
initial target was identified at 52.10 and a secondary target of
55.80 was also forecast.
The trend began to weaken right after the April 7 1h Reversal
date when the market dropped below the center line. BHP did
manage to reach a high of 47.19 on April 19 before falling back
into the April 27th Reversal date. The market found support at the
20-day SMA and made another run at the Reaction line where it
 Chapter 4 - Price 141

finally touched the 151 Reaction line at 47.60 on the secondary

Reversal date of May 5.
This is an example of how a market reacts when it drifts away
from the weak side of the center line. The market is losing
momentum and cannot continue along the center line. It is
debatable whether it is a good idea to hang on to a trade in this
scenario.

Billiton Ltd. BHP

12 Days

Figure# 4.24- Billiton Ltd

142 Chapter 4- Price

Billiton Ltd, BHP

Projected targets

--' R.ever.;al dates

Figure # 4.25 - Billiton Ltd.

Dell Inc. DELL

Figure # 4.26 - The initial buy signal was triggered on May 13

when the market opened sharply higher and began trading at 37.87.
The reverse count from (C) back to (A) equaled 14 days and
projected out to May 30 as the next Reversal date. I began the
center line at (B) and continued it upward through the center of the
(C) - (D) Reaction swing to the end of the chart. Here, I marked
May 30 on the center line and drew the Action/Reaction lines and
used them to project the initial target price of 40.40.
 Chapter 4 - Price 143

The market reached the target with very little effort and peaked
at 40.56 on May 26. After reaching the target price, DELL moved
into a sideways trading market and remained locked in the pattern
for several weeks.

Dell Inc, DFLL

DElL reached the

target price on May 26. Hf
111
tl
If
u
u
Jl
ll
II
181
li

A u

Figure# 4.26- Dell Inc.

Amazon.com (AMZN)

Figure# 4.27- After the buy signal was triggered at 34.48, on July
8, AMZN continued to climb higher, but really exploded on the
12th day of the cycle. Normally, a radical price move makes it
144 Chapter 4 - Price

difficult to make a price projection, but the Action/Reaction lines

were right on target!
The reverse count from (C) to (A) was 15 days and projected a
future Reversal date of July 28. I marked this date on the center
line and drew the Action/Reaction lines to pinpoint 45.00 as the
initial target. AMZN reached the 45.00 target price on July
28 ... the same date predicted 15 days earlier!

Amazon.com AMZN

Figure# 4.27- Amazon.com

 Chapter 4 - Price 145

Bakerllugheslnc.(BlU)

Figure # 4.28 & Figure # 4.29 - A buy signal was triggered on

April 51h when the market passed through the entry price of 70.22.
Since I had already predicted the future Reversal date as April 24 -
see Figure # 2.30 - I marked the date on the center line and drew
the Action/Reaction lines to predict 77.00 as the initial target price.
The target was reached on Friday, April 21 (E) where the market
immediateIy began to form a new Reaction swing around the April
24 Reversal date when BHI closed lower on April 24 and April 25
(F).

Bwr Hughes Inc. BHI

ltll

new swing pattern.

Ifill

A B Ql

'1 10.
Figure# 4.28- Baker Hughes Inc.
146 Chapter 4- Price

The following day began with the market opening sharply higher
with the opening price of 78.36 and closed above the April 21
pivot high of 78.46 (E). This was enough to trigger the new buy
signal at 78.50 for a new long position and complete the TC
pattern. The TC pattern should also identify this swing pattern as
the center of the cycle and the beginning of another bullish leg in
the market.

BebrHughes Inc. BHI

BHI reached the Reaction

line two da,ys before the
Rever.:al date.

A B

Figure# 4.29- Baker Hughes Inc.

The reverse count from (E) back to the previous high pivot,
marked at (P-1), equaled 9 days. The forward count from (F)
forward 9 days projected the future Reversal date as May 8.
 Chapter 4 - Price 147

I drew the center line from the first low pivot follow ing (P-1)
and extended it forward through the center of the (E) to (F)
Reaction sw in~ and continued to the end of the chart. I then
marked May 81 on the center line and drew the Action/Reaction
lines to forecast the initial target price of 83.95. Seven days after
the entry signal and two days before the projected Reversal date,
BHI reached the target price!

December 2006 - E-mini- S&P 500

Figure # 4.30 - As soon as the December E-mini S&P triggered the

buy signal at 1339.00, the center line and Action/Reaction lines
were drawn. The reverse count of 12-10-minute price bars was
used to project forward 120 minutes in the future and mark the
center line. The Reaction line identified a target price at 1345.00.

December S&:.P- E-1Uini - 10 milwte chart

Reaclled dle Reaction at 1347.2~.

1JI1JII

1JIUI

l lQ!II
12 Bars
00.111

lllltll

l D!tll

1D!II)

Figure# 4.30- December 2006- £-mini S&P 500- 10-minute

chart
148 Chapter 4 - Price

After a short-term pause the S&P passed through the center line
and surged higher. The target price at 1345.00, was reached in less
than one hour after the entry signal was triggered. However, the
market was well above the center line and continued higher until it
reached the reaction line at 1347.25. The trade signal lasted less
that 90 minutes and ended near the high of the entire price move!

The Three Things That Can Happen.

Each signal generated by the Reversal date Indicator can end in

one of three different ways. First, the signal can be wrong and the
protective stop is hit very quickly and the trade is over so you can
move on to the next signal. Second, the market will reach the Price
objective on or before the predicted date, or third, the market will
run out of Time and the trade is closed on the Reversal date. Two
out of three isn't bad!
 Chapter 5 - Connecting Patterns 149

ChapterS

"He who could foresee affairs three days in advance would be rich
for thousands ofyears" - Chinese proverb

Connecting patterns

A
fter looking at all the charts in the.previous chapters I am
sure there is one question that comes to mind. "How do
you know if the trend is ending at the Reversal date or will
a TC pattern develop and trigger another buy signal?" The good
new is, there is an identifiable pattern that can give a "heads up" to
a possible trend continuation.

Three to Seven day swing patterns.

The first thing I watch for is how many days it takes to form the
new Reaction swing. Strong trending markets will not pause or
correct for a long period of time. The strongest continuation swing
patterns will typically retrace between three to seven days from the
pivot high or pivot low. However, I don't consider the three to
seven days correction as a hard and fast rule, it is more of a "rule
of thumb". There are always exceptions to the rule, such as the
December Coffee-Figure # 3.2 and Microsoft Corporation-
Figure# 2.16 where the correction extended to eight days, but still
offered excellent trading opportunities. Anything longer will
characteristically form a longer-term zigzag corrective pattern.
This type of corrective pattern is also called an A-B-C pattern and
is a key component of the Elliott Wave Theory. While I will not
get into an in depth discussion about the Elliott Wave Theory at
150 Chapter 5 - Connecting Patterns

this point, it may be helpful to explain that the Elliott Wave Theory
suggests that a market trend should unfold in five identifiable
waves. Each price move, in the direction of the dominant trend, is
followed by a price retracement or correction. Once the market has
completed the fifth wave and final wave, the market will either
experience a substantial correction that consists of three waves -
also known as an A-B-C correction - or begin a new trend
consisting of five waves. Zigzag or A-B-C patterns usually connect
two longer-term reaction cycles. In other words, there is frequently
a TR pattern at the beginning of the correction and another TR
pattern at the end of the correction. Although, the zigzag pattern is
usually short-term, it can still offer some good trading
opportunities.
The second clue to watch for is where the corrective swing
pattern ends. For example, a strong upward trending market will
make shallow corrections with the pivot low bottoming above the
high of the previous swing pattern. Once the pivot low has been
established the market will normally break above the previous high
within the same number of days as the correction. In other words,
if the current correction has lasted three days, once the market
moves off the pivot low it should reach or break above the pivot
high within the next three days.
A weak market will typically drop below the high of the
previous Reaction swing and correct 60% or more of the previous
price wave. Although this is still a good trading market, it will take
longer for the correction to end and will typically form the zigzag
pattern in the process.
Once again, to illustrate this point I am going to refer back the
some of the same markets used in the previous chapters.

September 2003 Treasury Bonds

Figure # 5.1 - After trending lower for over three weeks, the
September 2004 T-Bonds closed at 109-31 on July 20. The close
was near the bottom of the daily trading range and one day before
the projected July 21 Reversal date, marked as (E). The following
day dipped to a low of 109-12 before it closed at 109-31. The next
 Chapter 5 - Connecting Patterns 151

day-July 23-T-Bonds pushed to a high of 111-12 and closed at

110-23, (F) where it completed a three-day corrective swing
pattern. Based on this formation, a possible short-term continuation
pattern had formed and the market was poised to turn and continue
the downward trend. The Reaction swing consisted of three trading
days, counting the low close on July 20 and the high close on July
23.
However, that is not the only clue that suggested we're dealing
with a strong trending market. The low of previous Reaction swing
(C) was 114-19 on July 8, well above the July 23rd high of 111-12.
In the previous chapter I talked about entry signals for the TC
pattern, but just for review, a sell stop should be placed below the
low of the Reaction swing to enter a short position as soon as the
pattern is confirmed.

September 2003 Treasury Bonds U(!IJIIJ

11111111

Figure# 5.1- September 2003 Treasury Bonds

152 Chapter 5 - Connecting Patterns

June 2006 British Pound

Figure # 5.2 - After a three-day rally into April 19, (E) the June
2006 British pound entered into a sideways consolidation pattern.
Three days later-April 24--the British pound closed at 1.7908,
followed by two consecutive lower closes of 1.7903 and 1.7864 on
April 25 and April 26, marked as (F). The low of the swing pattern
- 1.7814 - was well above the high of the previous swing pattern
of 1.7630 that occurred on April 5 and above the 20-day SMA.
This pattern had all the earmarks of a bullish Reaction swing and
suggested the trend was still strong and poised to continue higher.
April 27 opened trading at 1.7860, but quickly surged higher
and traded above the April 25 pivot high of 1. 7957 (F) and closed
at 1.8402. The TC pattern was confirmed and the market continued
to trend higher over the next two weeks.

June 2006 British Pound Ull

1111
\ Ill

E ,.
11111
The coiTection ended
aft·er the third day. "*
ll!l:ll

11!11

110

11JI
A
B ll\llll

Figure# 5.2 - June 2006 British pound

 Chapter 5 - Connecting Patterns 153

TridentMicrosystems Inc. (TRID)

Figure # 5.3 - On May 15, TRID closed at 24.99, (E), near the
bottom of the trading range. This marked the beginning of a four-
day corrective rally that peaked at 28.07 on May 19, (F), where it
formed a bearish Reaction swing. The high of the swing pattern
was well below the low of the previous swing pattern (C) and the
28.07 high was slightly above the 20-day SMA.
The following day opened sharply lower and began trading at
23.79, well below the low pivot low at (E) and below the 20-day
SMA. The Reaction swing was confirmed and the market
continued lower into the June 16 Reversal date, marked as (G),
where another four-day swing pattern suggested more downside
potential.

Tndent Mtcrosystems Inc. (TRID) 3211

A
Jill
llll!
F
aLt
28.11

2111)

The Reaction swing began on May 16.(1)

15 and ended on May 19. The
25111
correction lasted four days
2(111
E
Zl.ll

Z2Jll
2Ull

1 M
Figure# 5.3- Trident Microsystems Inc.- (TRJD)
154 Chapter 5 - Connecting Patterns

Microsoft Corporation

Figure# 5.4- After trending lower for three weeks, MSFf posted
two identical closes of 25.27 on Friday, September 23 and
Monday, September 26, marked as (E). The market was oversold
and overdue for a correction. The stock did climb higher over the
next three days and closed at 25.94, (F), just below the 20-day
SMA. The next day opened lower and continued the dominant
downward trend for another nine days. The Reaction swing
consisted of five trading days, including the two low closes at the
beginning of the swing pattern and the high close at the end of the
swing pattern. Once again the Reaction swing pattern identified a
short-term pause in the trend.

B Microsoft Corporation (MSFI)

A lUI

u
u
u
The correction lS.I
lasted four days. 25.11
lS.
lSJ
:15.11!

:!\I
Ml
?UD

llll
Ml

7 :n 0/1
Figure # 5.4 -Microsoft Corporation
 Chapter 5 - Connecting Patterns 155

June 2004]apanese Yen

Figure# 5.5- After a three week slide June Japanese yen posted a
low close on the May 3 (E) Reversal date and began to trade
higher. Two days later, the Japanese yen reached the 20-day SMA
at .9243 on May 5, (F), before it turned lower the following day,
effectively ending the corrective rally and resuming the downward
trend. The Reaction swing consisted of three trading days,
including the low close and the high close.

June 2004 Japanese Yen

B

G
156 Chapter 5- Connecting Patterns

After testing the 20-day SMA, on the third day of the

correction, the market turned lower and plunged over the next
three days until it posted a low close of .8805 on May 10. The next
two trading sessions ended with two consecutive higher closes and
formed another swing pattern and possible continuation pattern.
However, based on the projections from the TR pattern and TC
pattern I considered the trend near the end of the cycle therefore,
the risk increased significantly if a trade was entered based on the
swing pattern following a TC pattern. This was illustrated very
clearly by the Japanese yen. The market broke support and closed
at a new low on May 13 (G). This was a trap because the market
opened lower on the following day, reversed and never looked
back. A swing pattern failure can lead to a dramatic move in the
opposite direction; this is a classic price pattern and can be a very
powerful signal.

Baker Hughes Inc.

Figure# 5.6- A three-week rally peaked at 78.46 on the Friday 21,

(E), one trading session before the projected Reversal date.
Monday's session was quiet and finished as an inside day. The
following day also closed lower and formed a three-day Reaction
swing that ended at (F). The swing pattern proved to be a short-
term pause before BHI surged higher over the next ten days.

Longer-term swing patterns

How do you know when the market correction is not going to be a

short-term pause inside the longer-term trend or a significant
correction or perhaps a major turn in the market? Actually, it is
very simple. For example take a look at the December 2004 Hogs.
See Figure # 5. 7. Just before the market peaked on the September
23 Reversal date, the market had formed a small three-day swing
pattern with a pivot low of 86.70 on September 22. Three days
later December Hogs reached a high of 71.80 before they closed at
67.82. The market had just dropped below the previous pivot low.
 Chapter 5 - Connecting Patterns 157

Baker Hughes Inc (BHl)

G

81.00

three-day correction. 7tOO

noo
I
lOOO

68.00

6400

A B

Figure# 5.6- Baker Hughes Inc. - (BHI)

This is the first hint that the trend was changing. From this point,
the Hogs formed a new bearish swing pattern and TR pattern that
was confirmed on October 4. At this point the correction had lasted
seven days, but the market continued to make lower lows and
lower highs below the 20-day SMA, bottoming seven days later.
Once the correction had surpassed the seven-day threshold, it can
no longer be considered as a minor correction. Instead, it should be
considered a major correction, which could last up to twelve days.
Once the twelve-day threshold is surpassed, it is no longer
considered a correction. Instead it is time to look for a TR pattern
instead.
158 Chapter 5 - Connecting Patterns

December 2004 Hogs

The correction unfolded as a 5-wave E

rigzag pattern spanning 13 days.

The market retraced over

60% of the price move
from D to F.
D

Figure# 5. 7- December 2004 Lean Hogs

The Zigzag Corrective Pattern

A major correction will typically retrace at least 60% of the

previous market swing and unfold as a three or five-wave zigzag
pattern. This zigzag pattern is most commonly known as an A-B-C
correction. When this pattern connects two Action/Reaction cycles
it can be a powerful tool for long-term traders.
A single zigzag pattern is a simple three-wave pattern labeled
A-B-C whereby the top of wave B is noticeably lower than the
start of wave A. Occasionally, zigzags will occur twice or even
three times in succession, particularly when the first zigzag falls
 Chapter 5 - Connecting Patterns 159

short of the normal target, producing a five-wave pattern also a

called a double zigzag.
Whether the zigzag pattern has three waves or five waves, it
will most likely begin and end with a TR pattern and trigger
another signal. However, do not get caught in the idea that every
A-B-C corrective pattern will be followed with a new signal. There
are many times a market will move into a consolidation pattern or
continue to trade in a sideways or choppy trend that does not offer
any new trading opportunities. When this happens look at another
markets. Understanding market behavior opens up the possibility
of using your knowledge on a wide variety of markets. There are
plenty of opportunities in other markets and new opportunities are
always being setup. Always wait for the proper setup before
entering a trade!
Here are some examples of markets that did not continue the
existing trend after a short-term swing pattern.

Microsoft

Figure # 5.8 - After MSFf posted the low close October 12, (B),
the market began to trade higher over the next five days and closed
above the 20-day SMA, (C). At this time the market pulled back
and closed lower on two consecutive days, forming the beginning
of a potential bullish Reaction swing at (D). Three days later-10
days after the October 12 low-the Reaction swing was confirmed
and MSFf was off and running. The market never traded below
the October 12 low, therefore, new swing pattern sell signal was
never confirmed.
The same scenario unfolded after MSFf reached the November
16, (E), Reversal date signaled and ended the three-week rally.
Three days after the predicted Reversal date, MSFf hit a new high
and closed at 28.16 where it turned lower. Five days into the
correction the market bounced off a low at (F) and closed higher
for three consecutive days and ended with a pivot high on
December 2, (G). A new swing pattern had formed inside the
counter-trend move and suggested a longer-term A-B-C correction.
160 Chapter 5 - Connecting Patterns

MSFT dropped through the 20-day SMA and continued the

downward slide. The correction lasted 27 days and retraced close
to 60% of the price move between October 12 and November 21.

Microsoft Corporation (MSFT)

Anew Reaction swing formed

between day 7 and day 9 of the
correction.

1 1
Figure# 5.8- Microsoft Corporation

May 2005 Soybeans

Figure # 5.9 - Mter breaking out of a short-term consolidation

May Soybeans surged to a high of $6.91 V2 before closing at $6.73
Y2, (E). From this high point the Soybeans entered a correction
phase that lasted ten days and retraced all the way back to the
previous consolidation-(F}--area before staging a two-day
 Chapter 5 - Connecting Patterns 161

bounce. Soybeans remained in a choppy sideways trend for several

days and never offered another trading opportunity.

May 2005 Soybeans

B
1 I . I 1 lOll
Figure# 5.9 - May 2005 Soybeans

August 2005 Gold

Figure# 5.10- August Gold closed near its daily high on the June
23 Reversal date, (E). The following day marked the beginning of
a market correction. Eight days into the correction the market
paused, forming a short-term zigzag consolidation before dropping
below the low of the (C) to (D) Reaction swing. After 15 days of
falling prices Gold finally bottomed and ended the correction.
162 Chapter 5- Connecting Patterns

August 2005 Gold

E
After an 18 day correction, Gold
formtd a new TR pattern.
t 41tl

jQf

f
1
/! 1 I

ltl!\11 I D

~[Ill
B

September 2006 Wheat

Figure# 5.11 - September Wheat reached a high of $4.40 on the

May 22 Reversal date, (E). The following day the market closed
lower and continued lower over the next three days before trading
higher into May 30, (G). Six days into the correction the
September Wheat had formed a new bearish Reaction swing that
indicated the upward trend is over and a new trend had begun. The
market continued lower for the next twenty-one days.
 Chapter 5 - Connecting Patterns 163

September 2006 Wheat

E
A new TR pattern formed six days 161
Ill\ after the Reversal date high at (E). !G
aD

l i II I i111l

~~ i~~~ ~~~ mt~lt

~~t\1 A 11 D
B

511
Figure# 5.11 -September 2006 Wheat

September 2006 Cocoa

Figure # 5.12 - September Cocoa staged a strong rally in early

July, but the subsequent market collapse was even more dramatic.
One day after peaking on the July 10 Reversal date, (E), Cocoa
began to pull back for the high. Twelve days later the market
traded below the (C) to (D) Reaction swing that started it all back
on June 26. The market never threatened the July 10 high at (E).
164 Chapter 5- Connecting Patterns

September 2006 Cocoa 11111

E

If 1731

TheJuly 10 Reversal date was a I llll

major high. The market attempted

a one day test of the high and failed. I lSI

I Iiiii

A B

12 days after theJuly 10

lG
(E) Reversal date.

Ill
1Dir

Dell Inc. (DELL)

Figure# 5.13- Dell Inc. closed at 40.40 on May 26, two days prior
to the May 30 Reversal date, (E). The market traded lower on May
27 and May 31, (F), forming a potential bullish Reaction swing.
The market traded to a high of 40.71 on June 1 and confirmed the
Reaction swing buy signal. However, the market failed to fo llow
through and dropped below the May 31 pivot low on June 10,
where it continued to meander back and forth over the next few
weeks.
 Chapter 5 - Connecting Patterns 165

Dell Inc. (DELL)

The stock broke below the Reaction ~•

Swmg low on October 2.

Figure# 5.13 -Dell Inc- (DELL)

Amazon.com (AMZN)

Figure # 5.14- Amazon.com closed at the high of the daily trading

range on the July 28 Reversal date, (E). The next day, July 29,
closed lower followed by another lower close on August 1 that
completed a potential Reaction swing at (F). The Reaction swing
was confirmed on August 2 when AMZN traded to a new high and
closed at 46.51.
That high was still standing three days later as the market pulled
back to a pivot low of 45.17, (G), followed by two higher closes
into (H). The market bad formed a new bearish Reaction swing and
166 Chapter 5- Connecting Patterns

Amazon. com (AMZN)

47.lll

A new TR pattern formed five

days into the correction.

1300

B )2(1)

lt(l)

Figure# 5.14 -Amazon.com (AMZN)

possible TR pattern that could not be ignored. The Reaction swing

was confirmed the following day-August 10--when the market
dropped below the pivot low. This should have closed out any
existing long position with a small loss and entered a new short
position in front of the market collapse.

Las Vegas Sands Corporation (L VS)

Figure # 5.15 - After the November 23 Reversal date high, (E),

LVS began to trade lower. Once the correction surpassed seven
days, the possibility of a quick turnaround diminished. In fact, the
market formed a small zigzag or A-B-C pattern between December
5- marked as (P-1) - and December 8 - marked as (P-2), before
resuming the downward correction. The entire counter-trend price
 Chapter 5 -Connecting Patterns 167

move lasted seventeen days before it moved into a new bullish TR

pattern. It is also worth noting that the swing pattern from
December 5 to December 8 was the exact center of the correction.
The reverse count from December 5 to the November 24 high was
seven days and the forward count of seven days from the pivot
high of December 8 projected out to December 19 ... the low of the
correction.
The market moved into a correction phase, after the peak, and
formed a three-wave zigzag pattern. The correction ended after 15
price bars (B) and went on to form a new TR pattern and trigger
another buy signal. The reverse count equaled 14 price bars and the
market topped on the projected reversal bar at (E).
A zigzag or A-B-C pattern will typically appear in the center of
a longer-term trend and connects two Reaction cycles. One of the
key characteristics of this pattern is that it wil1 begin with a TR
pattern and end with a TR pattern.

Las Vegas Sands Corporation (LVS)

E

After a 10-day correction, a new

TR·pattem begins to fonn.

A
B

l
Figure# 5.15- Las Vegas Sands Corporation (L VS)
168 Chapter 5- Connecting Patterns

December 2006 S&P 500 -E-mini- 60 minute chart

Figure# 5.16 - The chart is a classic example of the three-wave

zigzag pattern connecting two bullish trends. (You may remember
this chart from Chapter 2 as Figure # 2.33). The December E-
minis had formed a bullish TR pattern between Friday September
22 (B) and Monday September 25 (D). The 60% rule, the trigger
price of 1160.50, was hit during Monday's session and the buy
signal was confirmed.
The reverse count from (B) to (A) equaled 28 price bars or 28
hours. The E-mini continued hjgher, but began to consolidate mid
way through the September 27 session, but managed to breakout
and peak 2 hours after the projected Reversal bar marked (E).

E lll!ll
December 2006 S&P 500- E-mini - 60 minute chart

IIS4!
B

Figure #5.16- December 2006 E-mini S&P 500- 60 minute chart

 Chapter 6- Market Tells 169

Chapter6

((Nothing happens until it happens"

Yogi Berra

Market Tells
n old time trader who was also an avid Poker player once

A told me that trading and poker are similar in many ways;

but not in the way many people think. New poker players
always learn the different hands (card combinations) and the odds
of winning with each. They concentrate on betting strategies and
the rules of the game. He insisted that even though all this
knowledge is necessary and important, it is not the key to
becoming a consistent winner. When I asked him what he meant
by this statement, he said, ''People; you have to learn to study
people. Once you learn this, you can tell what they are about to do
without them even knowing they have already tipped their hand."
He went on to explain that veteran poker players study the other
players at the table. Veteran players play very cautiously, at the
beginning of a game, and do not play aggressively until they start
to notice small, normally unnoticeable characteristics about their
opponents. These can be such things as a player seeming more
nervous when he's bluffing, or another who holds his cards
differently when he thinks he has a winning hand. Whatever these
characteristics are, they can give an edge to the player who is
aware enough to identify these tendencies. In the poker world,
these tendencies are known as "Tells."
The markets are similar to poker players in that the markets also
exhibit "Tells" or certain characteristics that can give clues to
future market price action. If you are aware of the Tells, they can
forewarn you of a price move about to happen. There are probably
enough "Tells" to fill an entire book, but in this chapter I will limit
170 Chapter6-MarketTells

the "Market Tells" to the ones that are extremely useful when
combined with Reversal dates and Action/Reaction trading
method.

Patterns

There are some new traders who know very early in their trading
career what type of trading approach is best for them. Whether
they choose to be a day trader, a short-term swing trader or a long-
term position trader, many will gravitate towards the technical side
of analysis while others choose to use fundamental information to
determine trading decisions. Either way, it is up to the individual
trader to find his or her own way.
Many years ago, I decided to be a technical trader. After a short
time of looking in other directions I decided I wanted to use the
price charts to determine buy and sell signals. I made this decision
when I became painfully aware that it was extremely difficult to
know all the current fundamental information of all the markets
and be able to interpret it as quickly and as expertly as the large
commercial firms. I believe this is a problem for many traders. It is
difficult to know if you have all the relevant news on a market and
how the other major players in the market are going to react to the
news. Therefore, I decided that I wanted the market to tell me what
it was about to do. It is assumed that the market factors in all the
current fundamental news and the traders' interpretations of that
news. Therefore, current price action should reflect this
information and that current price actions are revealed in market
behavior and chart patterns. I realized, if I could learn to interpret
chart patterns with some degree of accuracy, I would have a slight
advantage in the market. To succeed, all you really need is a slight
advantage- just ask the boys in Las Vegas!
 Chapter 6- Market Tells 171

The Breakout Bar

So far I have talked extensively about the Reaction swing and what
to do after the trigger price is hit and the trade is entered. I have
also explained the reverse/forward count process to project Time
and Price with a high degree of accuracy. But, we all know not
every confirmed Reaction swing pattern is going to carry through
and offer a risk free trade. Nothing is 100% percent.
A Reaction swing is confirmed when the market trades through
the previous high or low pivot price and reaches a new high or low.
New highs and new lows are usually significant price junctures
watched by day traders, swing traders and trend traders. The ability
for the market to exceed a previous high or low is a powerful
signal and can trigger a chain reaction of new buying or selling
activity.
Of course, for a market to continue the breakout and establish a
longer-term trend it must maintain momentum and continue to
make new highs or new lows. The market behavior after the
breakout is very important and can provide insight into future price
action. However, I use a "Market Tell" as a secondary
confirmation of the buy or sell signal. It is based on the market
action that occurs after the Breakout bar. (The Breakout bar is the
price bar that penetrates the pivot high or pivot low and triggers the
entry signal.) Let' s take a look at the rules for this "Market Tell"
conformation of a bullish Reaction swing.
Once the market bas traded above the Reaction swing high and
triggered a buy signal (in an upward trending market) it should
remain above the low of the Reaction swing and close above the
pivot high by the third price bar. Therefore, after the entry the
initial protective stop is placed underneath the low of the Reaction
swing. After two consecutive closes above the pivot price the
protective stop can be placed underneath the low of the Breakout
bar. After the a third close above the pivot price the protective stop
can be moved to the entry level. I have found a market that closes
above the pivot price for three consecutive days has a high
probability of continuing the current trend into the next projected
Reversal date.
172 Chapter 6- Market Tells

Once the protective stop is at the entry level, I will usually give
the market room to fluctuate until it approaches the Reversal date.
After the close of the Reversal date, I will place the protective stop
underneath the Reversal date low and repeat the same procedure
after each successive higher close until the stop is elected. Of
course, this procedure can be modified to fit the risk tolerance of
the individual trader. Figure # 6.1 illustrates how the pattern
should unfold.

Type # 1 - SWing Pattern Continuation Type- # 2 - Swing Pattern Continuation

Breakout bar Breakout bar

~votW~~ 1l . hih.\
Pivot ...,

-- i~lT1-f~,. ~. Protective
stop

I~
+--
stop
Protective
stop
j! +---- Protective stop

Figure# 6.1- Breakout bar- Pattern confirmation

March 2006 Crude oil

Figure # 6.2 - The bearish Reaction swing formed between

January 25 (C) and January 30 (D) in the March 2006 Crude oil.
The sell signal was triggered on February 1, but the market did not
trade below the pivot low of 65.45- (C)- until the following day.
 Chapter 6 -Market Tells 173

1-Day one - February 2 - The Breakout Bar - Crude oil opened

slightly lower and dropped through the 65.45 pivot support and
finally closed at 64.68. The close was below the swing pivot low at
(C).

2-Day two - The market pushed to a new low of 63.95 before

closing at 65.37.

3-Day three - The market opened higher and tested the 20-day
SMA at 66.20, but still remained below the high of the Breakout
Bar.

4-Day four - The market gapped lower and began trading at 64.20
before it closed sharply lower. The downward trend was
entrenched and continued lower into the projected Reversal date.

December 2004 Hogs

Figure # 6.3 - The Reaction swing formed between September 1

and September 8 marked as (C) and (D) on the chart. The high of
the (C) pivot point was 64.40. The buy signal was confirmed on
September 9, when the market passed through the trigger price and
continued higher
1-Day one - September 9 - Breakout Bar - The market closed
above the 64.40 pivot price (C).

2-Day two - September 12 - Another higher high and a higher

close.

3-Day three - September 13 - Steady opening before the market

tested the low of day two, but rallied into the end of the session
and closed at 66.57 ... way beyond the (C) pivot high.

The upward trend remained strong into the September 23

Reversal date and the trade signal was never in danger of a failure.
174 Chapter 6 - Market Tells

March 1006 Crude oa nc

B illI

u
II

$11

CUI

Figure# 6.2 -March 2006 Crude oil

December 2005 Dow Jones

Figure # 6.4 - The high of the Reaction swing was 10,453 on

October 19 (C) and the low of the swing pattern fell on October 21
(D). Using the 60% entry rule, the buy signal was triggered on
October 24, but the Breakout bar did not occur until six days later.
This is not a typical situation as the Dow Jones continued to trade
in a choppy sideways trend for a week after the buy signal was
confirmed, but it also stayed above the previous pivot low and the
protective stop so the trade was still active when the market finally
 Chapter 6- Market Tells 175

broke above the 10,453 pivot high (C) on October 31. However, at
the end of the day the Dow Jones closed at 10,410, below the
10,453 pivot high.

December 2004 Hogs

E

,1.(111

lli)lll
B

Figure# 6.3 -December 2004 Hog

The next two price bars were critical for this trade to remain active
and not end as a swing pattern failure.

1-Day one - October 31 - Breakout Bar - After five days of

sideways trading the Dow Jones broke above the 10,453 pivot high
and reached as far as 10,500 before fading into the close. At the
end of the day, the Dow Jones closed at 10,410, below the high
pivot price, but remained above the low pivot and protective stop.
176 Chapter 6- Market Tells

2-Day two- The market finished as an inside day, but managed to

close 21 points higher than day one.

3-Day three- The Dow Jones opened below the low of day two-
but remained above the Breakout bar low and closed well above
the high of day two.

The trend is intact and the market continued higher with onJy
minor pullback before it reached the Time and Price objective.

December 2005 Dow Jones

D
B

Figure# 6.4- December 2005 Dow Jones

 Chapter 6 - Market Tells 177

August 2005 Gold

Figure # 6.5 - A four-day Reaction swing formed between June 6

(C) and June 9 (D) with a pivot high at $429.50. Gold reacted
quickly after the June 9 low and traded above $429.50 the next
day.

1-Day one - June 10- The Breakout bar- The market rallied off
the low and traded above the pivot high trigger price $429.50 (C)
to confirm the buy signal. However, the Gold closed at $429.30,
slightly below the entry.

2-Day two- June 13 - The daily low was $427.60 and the close
was $431.10, well above the pivot high.

3-Day three- June 14 - Gold had a quiet day with a small trading
range and finished as an inside day and above the breakout point at
(C).

After the one-day pause on June 14, Gold surged forward and
continued the upward trend until it peaked at $444.20 ... $14.70
above the breakout price at (C).

Microsoft (MSFT)

Figure# 6.6 - The beginning of the bearish Reaction swing was

August 19- marked as (C)-with the pivot low price at 26. 70.
After MSFT posted a high on August 31, the stock turned lower,
but did not break the pivot support at (C) until September 8 when
the market closed at 26.61 ... 9 cents below the pivot low.

1-Day one - September 8 - Breakout bar - The stock traded

through the pivot low support and closed lower.
178 Chapter 6- Market Tells

August 2005 Gold

E
414.1

~·
Cit

GJ

Qll

Gil

4l6J

41U

Figure # 6.5 -August 2005 Gold

2-Day two- September 9 - The market finished as an inside day

with a close slightly below the previous day 's close.

3- Day three - September 12 - Another inside day and the market

closed at 26.61 ... 9 cents below the pivot low.

The next day MSFf dropped out of the small pennant formation
that bad developed between day one and day three and continued
the downward trend for another two weeks.
 Chapter 6- Market Tells 179

B :Microsoft C01poratiou (MSFf) llillll

11.!1111

11.!1111

.«<I

V.lllll

V.ml

A J lUIII

l~
25-&m

/c /"\ ,25..

/1l~~
~t
Pivotlow BR>kout bor 3
f::
2S.IIIIl

l5.9111

ae
am

~tllll
lS.(Qil

24-DlO

2Ullll

lAlli
24-0lll

Dill
Zl&m

Figure# 6.6- Microsoft Corporation (MSFT)

Figure # 6. 7 - A second Reaction swing formed after the market

bottomed at (B). The high of the swing pattern was on October 19
(C) followed by the subsequent low on October 21 (D). The pivot
high was 25.13.

1-Day one- October 26- Breakout Bar- After testing the pivot
high during the previous two trading sessions, MSFf broke the
resistance and traded to a high of 25.33, but pulled back to close at
25.11.

2-Day two - October 27 - The market pulled back and closed

below the previous day 's low, but remained above the protective
stop at 24.55.
180 Chapter 6- Market Tells

3-Day three - October 28- The stock began trading at 25.10 and
pushed above the previous high where it closed at 25.70 ... well
above the breakout point. The market continued higher into the
projected reversal day without any substantial corrections.

Microsoft Corporation

Figure # 6. 7- Microsoft Corporation (MSFT)

December 2004 Coffee

Figure # 6.8 - The low of the Reaction swing was 73.25 and
occurred on July 8, marked as (C). The Reaction swing ended after
a pivot high was confirmed on July 20 (D).
 Chapter 6- Market Tells 181

1-Day one - July 23 - Breakout Bar - Coffee broke below the

pivot low support of 73.25 and closed at 73.15.

2-Day two - July 26 - Coffee continued the downward slide and

closed at 72.00.

3-Day three - July 27- The market was quiet and traded in a very
small price range, but managed to close lower for the third day in a
row.

The downward trend was solidly intact and continued lower

into the projected date.

December 2004 Coffee B Sial

D

~~ ! B~.kom b~
~II!

---~-!(
8800
Pivot low
i.ll)

lr 6UII

l'l) 8!11

~
IllIll
A
lllll

ll~~;~
F
lUI

1tQ)

E ~~~
l~f
t

Figure # 6.8 - December 2004 Coffee

182 Chapter 6- Market Tells

June 2006 British Pound

Figure# 6.9 - A small three-day Reaction swing formed at the end

of a short-term consolidation pattern. The beginning of the
Reaction swing was confirmed on April 24 (E) with a pivot high
price of 1.7945. Two days later the British pound posted a low at
1.7814, (F), followed by a surge higher that broke through the
1. 7945 pivot high.

1-Day one- April 27- Breakout Bar- The market broke through
the overhead resistance at (C) and closed sharply higher.

2-Day two - April 28 - Another strong trend day with the close
near the high of the daily price range.

3-Day three - May 1 - The British pound pushed to a high of

1.8428 before fadjng into the close and firnshed the day at 1.8285.

The close was well above the breakout point and the trend was still
valid.

September 2005 Eurocurrency

Figure # 6.10 - The low of the three-day Reaction swing was

1.2563 and occurred on May 23, one day after the low pivot at (E).
The Reaction ended on May 25(F).

1-Day one - May 26 - Breakout Bar - The market dropped

through the support and closed at 1.2561. .. slightly below the
previous low of 1.2563.

2-Day two - May 27 - The market rebounded and closed at

1.2632, the high of the daily price range, but remained below the
high of the Breakout Bar of 1.2659.
 Chapter 6 - Market Tells 183

Iwte 2006 Britisb pound

t~r~h
l.ml

um

11811

Pivot bieh
2

1
! l&OI

l.DIII

181111

~\
Iilii

1.8DI

~f4f -'\~~:"'
l.mJ

bu II*
('
l.lliG
1,1!111)

11'llll

1.1111

l llll

B l.ml

Figure # 6.9 - June 2006 British pound

3-Day three - May 30 - A lower opening triggered heavy selling

and the market dropped below the previous Jow and continued to
fall for the remainder of the day, finaJly closing at 1.2515.

The breakout was confirmed and the downward trend remained

intact into the projected Reversal date.

Billiton (BHP)

Figure # 6.11 - The high of the Reaction swing was 44.00 and
occurred on April 6 (E). The low of the Reaction swing was 42.03
184 Chapter 6- Market Tells

and occurred on April 7 (F). Two days after the April 7 low, BHP
traded through the resistance at 44.00.

1-Day one- Aprilll - Breakout Bar- The market opened sharply

higher and began trading at 44.30. This was above the (E) pivot
high price of 44.00. However, the market faded into the close and
finished the day at 43.55. The close was lower than the opening
price and below the pivot price. BHP was in danger of a possible
swing pattern failure. The protective stop was placed underneath
the pivot low of 42.03.

2-Day two -April 12 -The market opened lower--42.77- but

quickly recovered and closed at 43.65, higher than the opening
price.

3-Day three - April 13 - Another lower opening, but the low-

43.34-was still above the low pivot price of 42.03. The market
closed higher than the opening price, but remained below the
breakout price of 44.00. The trade signal was still in danger on the
third day so the stop should be adjusted to 42.40, just below the
low of day three.

The market was closed on April14 due to a holiday, but opened

higher on the following trading day, April 17. The stock opened at
43.97 and closed at 44.53 ... above the breakout price of 44.00.

Baker Hughes Inc (BHI)

Figure # 6.12 - The high of the (E) to (F) Reaction swing was
78.46 and occurred on April 21. The low was 74.60 on April 25.
The swing pattern was confirmed the following day when the
market opened sharply higher.

1-Day one- April 26- Breakout Bar - BID opened sharply higher
and reached a high of 81.10 before settling back to 79.00.
 Chapter 6 -Market Tells 185

2-Day two - April 27 - BHI traded in a wide trading range with a

low of 75.88 and high of 81.50. The market appeared ready to
break below the low pivot, but turned higher and never threatened
the protective stop.

3-Day three - April 28 - The day began promising when the

market opened $1.72 higher, but the excitement quickly faded. The
stock remained in a tight trading range for the rest of the day and
closed at 80.83. However, the close was above the high pivot price
at (E) and the trend continued higher.

September 2005 Eurocwrency

B ua
A
lt. D

~l
tl!QI

1Illl

119l

lBl

low~
11/ll)

Pivot 1Nll

B•-eakout bar
~~ 3 lMJ

001

12.DI
186 Chapter 6- Market Tells

Billiton Ltd (BHP)

••
Breakout bar fiJI

3:1111
B

Figure# 6.11 - Billiton (BHP)

December 2005 Cattle

Figure# 6.13 -The Reaction swing began at the high pivot price
of 89.00 on September 15 (E) and ended on September 21 (F) with
a low of 87.50.

1-Day one - September 26 - Breakout Bar - Three days after

posting a pivot low of 87.50 on September 21 (F), December
Cattle broke above the high at (E) and reached 89 .10.
 Chapter 6- Market Tells 187

2-Day two - September 27 - The daily price range remained inside

the price range of the previous day and closed at 8907.

3-Day three - September 28 - Cattle reached a high of 89.40

before turning lower and closed near the low of the daily price
range. The closing price of 88.75 was below the pivot at (E), but
above the low of the Breakout Bar. The market was in danger of
reversing the trend and trading lower. Therefore, the protective
stop should be placed below the September 28 low.

September 29 opened slightly higher and never looked back

until it reached a high of 91.65 on the October 10 Reversal date.

Baker Hughes Inc (BHl)

!lll

~t
ai\11

1111
~12 &!.II

Pi"t mgh E Jj alii

--~~ ~--- lSII

Jtl Iiiii

1U1

c ~f t 7211

ll J* .~tt~t~ il1lll

w ~}tf
!alii

16111
D

A B

Figure# 6.12- Baker Hughes

188 Chapter 6 -Market Tells

December 2005 Cattle

Three higher closes

10.,
Figure# 6.13- December 2005 Cattle

Reaction Swing Failure

We've all heard the old adage about "making lemonade out of
lemons". This also holds true with a failed signal. Turning failure
into success can be easy, if you know the "Tells" preceding a
swing pattern failure. See Figure# 6.14.
When a market makes a run at a new high it can draw many
traders into the market in anticipation of much higher prices.
However, if the buying frenzy cannot sustain itself it can cause a
price vacuum that leads to a subsequent collapse. Therein lies the
opportunity for the experienced and knowledgeable trader to take
advantage of the failed swing pattern and turn failure into success.
 Chapter 6- Market Tells 189

There are two different scenarios that lead to a swing pattern

failure. The first occurs when the market trades above the high
pivot-the beginning of the Reaction swing in an upward trending
market-and closes above the pivot high. The next two price bars
are critical. If either of the following two price bars trades below
the low of the Breakout bar it is most likely a false breakout and a
trap for unaware traders. When traders realize they have been
duped, they run for the sidelines and the market accelerates to the
downside.

Type#2 Swing Pattern Fail11re

Type# 1 Swing Pattern Fail11re
The market trades above thP prE'Vicms pivot high
The marbt doses above the prmouspivot hi&h. and dosed below brPakonl price.

Sell stop

Figure # 6.14 - Failed Swing patterns

The second set-up occurs when the market trades above the
pivot high and fails intra-day. In other words, the market cannot
hold the early gains and closes below the pivot price. This is an
early warning of a possible reversal. It is critical for the market to
recover during the next two price bars and not trade below the
190 Chapter 6- Market Tells

pivot low. Aggressive traders can take advantage of this market

situation by placing a reversing stop underneath the Reaction
swing low and keep it in place until the first three price bars are
completed. As I will illustrate in several examples, a failed signal
can lead to a significant market move in the new direction.

E nd of the Cycle

The one thing most all failed swing patterns have in common is
that they typically occur at the end of a cycle. For example, a TR
pattern will usually unfold in a five-wave pattern sequence that
consists of a thrust, pause, a second thrust, which is usually the
most powerful price move of the trend, followed by another pause
leading into the final thrust into completion of the cycle. The initial
thrust begins from the major low marked as (B)-see Figure #
6.15-followed by a pause or correction, marked as (C) to (D).
The second and usually most powerful market thrust is followed by
another pause before the third and final thrust into (E). It is at this
point that the likelihood of a swing pattern failure will occur. The
same scenario follows the TC pattern with the likelihood of a
failed swing pattern increasing after every Reaction swing that
follows the completion of the TC pattern at (G).
After the completion of the TC pattern the trend is usually
reaching maturity and losing momentum. Every new Reaction
swing that forms after the TC pattern increases the risk of a major
market reversal. Knowing this ahead of time can help you avoid
major trading disasters and offer significant trading opportunities.
The fo llowing examples illustrate the swing pattern failure in
action.

December 2004 Hogs

Figure# 6.15- On September 23, (E) the December Hogs surged

pass the previous pivot high of the Reaction swing that formed
 Chapter 6 - Market Tells 191

between September 20 and September 22- marked as P-1 and P-2

on the chart. The high at the beginning of the Reaction swing was
69.97.

1-Day one- September 23 - Breakout bar- Hogs reached a new

contract high and closed at 71.20, near the top of the daily trading
range. This was the third thrust and the end of the TR pattern
projection. The risk of a swing pattern failure is high.

2-Day two- September 24- The market opened higher, topping

out at 71.80 before it reversed trend and closed lower than the
opening price. The market had closed above the high of the
Reaction swing for the second day so the stop should be adjusted
and placed under the low of the Breakout bar. The low was 69.10.

3-Day three - September 27 - The market traded sharply lower

and closed at 68.82, below the low of the Breakout bar.

4-Day four - September 28 - The swing pattern was a confirmed

failure and ended the two-week rally in the December Hogs on the
September 23rd Reversal date. After a two-day bounce December
Hogs continued to trade lower until they reached 63.50 on October
13.

Knowing the "Tells" of a possible swing pattern failure could

have turned a potentially trading disaster into a good trading
opportunity.

December 2004 Coffee

Figure# 6.16- Soon after December Coffee reached the August 2

(G) Reversal date, projected from the (E) to (F) Reaction swing.
Three days later, Coffee dipped to a new contract low on August
15, but rebounded the very next day. The reaction cycle, projected
from the TC pattern, was complete therefore a possible reversal
could come into play. The next four trading sessions were spent in
192 Chapter 6- Market Tells

December 2004 Hogs i7lllf

E
•IUJ£
Breakout bar '
1
Bearish Reaction swing 11 m

1he trend fa1led at the end ofafive-wave

Reaction cycle.

Figure# 6.15- December 2004 Lean Hogs

a sideways trading pattern before fa lling to a new contract low of

68.30 on August 12, marked as Day# 1 on the chart. A bearish
swing pattern was confirmed and Coffee was poised to continue
the downward trend ... or was it?

1-Day one- Breakout bar - August 12- Coffee traded below the
previous contract low at 68.60 established five days earlier. The
new low was 68.30 and the close was 68.80.

2-Day two - August 13- Coffee traded in a narrow price range and
finished as an inside day.
 Chapter 6 -Market Tells 193

3-Day three - August 16 - Coffee dipped to a new low early in the

trading session, but quickJy reversed and raced higher. The market
closed at 72.10, above the previous pivot high of 71.20 posted on
August 11.

The new low marked the end of the downward trend and the
end of the reaction cycle. This example illustrates the increased
risk from a new Reaction swing after the TC pattern projection is
completed. As I mentioned earlier in this book, any new Reaction
swing that forms after the TC pattern has reached its completion
has increased risk because the trend is reaching maturity. Traders
should always be aware of where the market is in the cycle and
keep this in consideration before entering a trade at the end of a
cycle.

December 2004 Coffee

1111
194 Chapter 6- Market Tells

August 2005 Gold

Figure# 6.17- The June 9th low at $423.00 marked the beginning
of a seventeen-day rally that ended at $444.20 on the June 23rd
Reversal date. In Chapter 2, (see Figure# 2.19) I explained how
the TR pattern and the (C) to (D) Reaction swing could be used to
project the price move from (C) to the Reversal date at (E).
However, what I didn't telJ you was bow a failed swing pattern on
May 31st signaled a major change of trend before the (C) to (D)
Reaction swing was formed.
August Gold created a low pivot at $419.20 on May 2 (A). Gold
followed with a four-day correction before it gapped sharply lower
and made a new 20-day contract low on May 31 at (B). The new
contract low marked the end of a five-wave down trend.

1-Day one - May 31 - Breakout bar - After being closed for

Memorial day, August Gold opened $4.90 lower. This put the
market below the previous low of $419.20 at (A). Gold went on to
hit a low price of $415.80 before regaining some of the lost ground
and finally closed at $418.90. However, the close was still below
the previous low at $419.20 (A).

2-Day two- June 1 - The trading session ended as an inside day

with a close at $417.70, the second consecutive close below the
previous pivot low.

3-Day three - June 2 - Gold began the day with a slightly higher
open, but a flood of new buying caused the market to surge higher
and break above the previous pivot high and close at $424.80. The
close was well above the high of the Reaction swing and also
above the 20-day SMA. The market had reversed and the trend
shifted after the bearish swing pattern had failed to continue the
downward trend.
 Chapter 6- Market Tells 195

August 2005 Gold

E ~~

1141

'42J

&ell

~·

~I 11
00

lt

Figure# 6.17 -August 2005 Gold

September 2005 Wheat

Figure# 6.18- September Wheat had just reached a new contract

high at $4.41 on the May 22 Reversal date, completing the TR
pattern at (E). Under normal circumstances this would mark the
end of the trade, but May 22 was also a Breakout bar from the
newly formed three-day Reaction swing. If the signal was correct,
the Wheat had set up for another run at higher prices, but the
following day suggested there could be trouble with the signal.
196 Chapter 6- Market Tells

1-Day one - May 22 - Breakout bar - Wheat surpassed the

previous high established three days earlier and closed at the high
of the daily trading range.

2-Day two - May 23 - The market reached a new high of $4.45

1/2, but reversed and closed below the opening price and below the
previous day's closing price. The market looked a little negative,
but the price was still above the pivot low of the Reaction swing.

3-Day three - May 24 - The market gapped lower at the open and
never recovered.

4-Day four - May 25 - Wheat broke below the previous pivot low
and triggered the protective stop.

The breakout had failed and the trend shifted from a strong
upward trend to a new downward trend. The new trend was
confirmed four days later when September Wheat completed a new
bearish TR pattern.

June 2004 Japanese Yen

Figure # 6.19 - May 13 (G) was not only the Reversal date
projected from the (E) to (F) Reaction swing, it was also a
Breakout bar from the new Reaction swing that had just formed at
the end of the cycle. This was the first reaction after the TC
pattern, therefore the trend was reaching maturity and susceptible
to a swing pattern failure.

1-Day one - May 13 - Breakout bar - The June Japanese yen

dropped to a new contract low of .8731, after the two-day rally
failed to continue. The close of .8740 was below the previous pivot
low.
 Chapter 6 - Market Tells 197

September 2006 Wheat E

1
Breakout bar The market faJied at the end 61'.0
ofthe TR pattern projection. ICil

I , ~

ItA lmtlg ~~1 \r lu

\J A lf D
B

Figure# 6.18- September 2006 Wheat

2-Day two- May 14 - The Japanese yen traded to a new low of

.8712, but managed to close at .8761. The closing price was higher
than the opening price and above the previous day 's closing price.

3-Day three - May 17 - An early session rally failed to penetrate

the pivot high and pulled back at the close. The day finished below
the previous day's closing price, but remained above the contract
low.

4-Day four - May 19 - So far the market had not given a clear
signal of the next direction. After the third day, I would typicall y
move the protective stop to just above the high of day three. That
198 Chapter 6- Market Tells

would put the protective stop at .8855. If the trend was going to
continue lower it should continue lower from here.

5-Day five- May 19 - The Yen traded above the high of day three.
This price action was enough to end any hopes of a continuation of
the downward trend and corroborated the trend shift from bearish
to bullish.

The market continued to rally over the next several days with
only one slight pullback. As usual, the failed swing pattern was
followed by a strong price move in the opposite direction.

June 2004 Japanese Yen

c
F

I !Ill

Breakout bar

G
 Chapter 6- Market Tells 199

Dell Inc. (DELL)

Figure # 6.20 - I wanted to show this chart of Dell Inc. and the
swing pattern failure at (A) to (B) because this pattern is a little
different than the previous patterns illustrated; it has three closes
below the previous pivot low at (A). More often that not, this type
of pattern would continue lower and provide a reliable trade signal,
but DELL broke through the resistance and turned higher.
Nevertheless, this is a very good illustration of the importance of
moving the protective stop to the entry level after the third closing
price beyond the previous pivot low.

Dell Inc. lUI

II

••
c ••
lll
1he swing pattern failed at the u
End ofafive-wave pattern.
11
ll
~..

The protective stop lilll

should be lowered Jill
after the third close )II
below the (A) pivot )It
low.

Figure# 6.20- Dell Inc. (DELL)

200 Chapter 6- Market Tells

Las Vegas Sands Corporation (L VS)

Figure # 6.21 - A major trend began with a swing pattern failure

on October 19 - (B). LVS closed at 29.69 on October 18, just
slightly above the previous low of 29.20 posted three days earlier.
The next day opened lower and dipped to a new low of 29.08
before it turned higher and closed at 31.50. The October 19th close
was above the previous three closes, but just shy of the 31.95 pivot
high reached on October 17.

1-Day one - August 9 - Breakout bar - LVS opened lower and

dropped to a new low at 29.08 before it turned higher and closed at
31.50. The close was above the previous three closes, but slightly
lower than the pivot high of Reaction swing at 31.97

2-Day two - October 20 - The market ended the day as an inside

day with a very narrow trading range. (An inside day typically
suggests a continuation in the current direction.)

3-Day three - October 21 - LVS broke above the pivot high and
closed at 32.35.

The failed swing pattern ended the downward trend and

signaled a shift in the trend. Seven days later, LVS completed the
TR pattern and entered a strong upward trend that peaked on the
January 20 Reversal date.
One thing that should stand out after studying all the previous
examples of the failed swing patterns, and the extensive price
moves that follow, is the fact that many of them fall in the center
of a TR pattern, usually marked a (B). That 's right, they are an
early "Market Tell" that a major TR pattern is in the making. Are
you beginning to see how one price pattern leads into another price
pattern? Having the foresight and understanding of this type of
market behavior will provide insight into bow a market should
react after the previous pattern is complete. This knowledge will
help you decide if the next reaction is characteristic of typical
 Chapter 6- Ma rket Tells 201

market behavior or an atypical reaction. Then you can respond

according! y.

E IIlli
Las Vegas Sands Corporation
46.11

~ u
~~~

J-Ill

~~
~~~~

11JJ8
ltl
~~~~

11(11

n11
Ufll
The Reaction ~ing failed lll
at the end ofthe cycle.
llfll
eakout bar
29.11
181
lll

1 11 1 11
Figure# 6.21-Las Vegas Sands Corporation (LVS)

Trail Day - Confirming the Reversal.

Projected Reversal dates are very specific and can be very precise
in determining major turning points in the market. So far I have
only used the Reversal dates to identify the most probable end of
the move. Therefore, it would stand to reason that a Reversal date
might also identify the beginning of a price move in the opposite
direction. Usually, it is not advisable to for a trader to try to buy or
202 Chapter 6- Market Tells

sell before the trend change has been confirmed. It has always been
tempting to try to pick the top or bottom of a major market move,
but the risks are very high.
Once again, the Reversal date Indicator provides a "Market
Tell" that can go a long way towards confirming a major high or
low and provide a confirming price pattern at the major turning
point. For this to happen, the specific criteria for the three major
components of the Reversal date Indicator must come together.
The key to the pattern is the "trail day"; the trail day is the date or
price bar immediately following the Reversal date and it can be a
very powerful directional indicator. The direction in which the
market closes on the trail day is usually the direction of the next
price move. In other words, if the trail day closes higher than the
opening price, the market will usually continue to trade higher over
the next few days. If the market closes lower than the opening
price, the market will tend to trade lower. This falls right in line
with the overall concept of the Time, Price and Pattern. The
Reversal date suggests the Time is correct for a reaction in the
market and the new high or low puts the market at the right Price
level. The only thing left is the Pattern confirmation. Like
everything else, the trail day must meet specific criteria for it to be
a valid trail day confirming pattern. The rules are as follows for a
major high.

1-The trail day must trade above the high of the reversal day and
close lower than the opening price.

2-lf the first criterion is met, a sell stop is placed underneath the
low of the trial day. If the sell stop is filled the following day, a
protective stop should be placed above the high of the trail day.
From this point on, the individual trader can determine the degree
of risk management they prefer.

3-lf the trail day is an inside day (the entire trading range is inside
the previous day's trading range), the following day must trade
lower and not trade above the high of the trail day. The protective
stop is treated the same.
 Chapter 6 -Market Tells 203

4-All rules are reversed for a trail signal at a major low.

The Reversal date and confirming trail day combination is a

leading indicator that uses the market action to identify a major
turning point and trend shift. This allows me to enter the market at
the beginning of a new trend and take advantage of the initial price
thrust. Another advantage offered by a leading indicator is a
specific stop placement. If the Reversal date has just confirmed a
major high the protective stop is placed above the trail day high. A
true reversal will not re-test a new high; therefore it will remain
below the previous high. If the signal is going to fail, it will do so
very quick! y.
Let's look at the trail day signals that occurred after the
Reversal dates in some of the markets we have already reviewed.

December 2004 Hogs

Figure # 6.22 - An eleven-day rally preceded the September 23

Reversal date. A short-term swing pattern formed right before the
market surged to a new high on the Reversal date and closed at
71.20, near the high of the daily trading range. The trail day
opened above the previous day's high and reached 71.80 before the
market turned lower and closed at 70.82, below the opening price.
The trail day directional indicator had just signaled a trend reversal
and the beginning of a new downward trend that didn't end until
December Hogs reached 63.50 on October 13.

December 2005 Dow Jones

Figure# 6.23 -The December Dow Jones made a new contract

high on the November 181h Reversal date when the price pushed
above the previous high made several weeks earlier. The Reversal
date closed near the high of the daily price range. This is the point
where a decision has to be made. Should the long position be
closed out because the Reversal date has been reached and the
market is sitting at a new high, or should the protective stop be
204 Chapter 6 -Market Tells

placed underneath the low of the Reversal date and the trade
continued? If the latter is chosen, the trail day can be used as the
final directional indicator.

December 2004 Hogs 131111

E Trail day
n.m

t 11!111

ft ~t~
nrt
c {

~ttV
D
A

The trail day opened above the previous day ' s high and
continued higher into the close. The trail day directional indicator
had just confirmed a continuation of the upward trend and the
market continued higher over the following six days.
206 Chapter 6- Market Tells

date before the market resumed the downward trend. Therefore,

the trail day did not meet the criteria for a reversal confirmation
and the market continued in the same direction it was trading
before the Reversal date.

B September 2003 Treasury Bonds 1ZHI

11116

11)!1

111"

Reversal day

IOSOO

111111

'~"

Microsoft Corporation (MSFT)

Figure# 6.25- After the Reaction swing between (C) and (D) was
confirmed, September 29 was projected as the next Reversal date.
The market traded consistently lower over the next 17 days until it
made a pivot low at 25.12 on September 23 (E). From this low,
 Chapter 6- Market Tells 207

MSFf traded higher until it peaked at 26.00 on the September 29

Reversal date (F). The Reversal date closed higher than the
opening price and near the top of the daily trading range. Since the
market had pushed higher into the Reversal date, I expected this to
be the end of the correction and a resumption of the downward
trend. The trail day-September 30-opened steady, but ended the
day below the opening price, therefore the directional indicator
was pointing to lower prices. However, the trail was also an inside
day, and thus I wanted to see follow-through selling the next day to
confirm the trail day pattern.
October 3 opened steady and closed below the opening price
and below the previous three closes. This was enough to confirm
the trail day signal and the resumption of the existing downward
trend.

B Microsoft Corporation (MSFT)

llilll

10.,

Figure# 6.25- Microsoft Corporation (MSFT)

208 Chapter 6 - Market Tells

August 2005 Gold

Figure # 6.26 - August Gold reached a new 20-day high on the

June 23 Reversal date. The trail day did not trade above the
Reversal date high, but it did finish the day as an inside day with
the closing price lower than the opening price. The preliminary
indication was for the market to tum lower, but it was two days
later before the market broke below the trial day low and closed
below the previous low.
The trend reversed, as the trial day had suggested, and
continued to trade lower over the next several days. The Reversal
date and trail day combination had identified the major high and
confirmed a significant reversal in the market.
The "Market Tells" forewarned of three great trading
opportunities in the August Gold. A "TeJl" appeared at both major
highs and the low at (B). Can you identify them?

September 2006 Wheat

Figure # 6.27 - September Wheat rallied over $.50 cents in 12 days

before it finally peaked at a new contract high of $4.41 on the May
22th Reversal date. The Reversal date was also the Breakout bar
from the newly formed three-day Reaction swing. The market
appeared poised for new highs. However, when the trail day did
manage to push to a new contract high it failed to sustain the
momentum. The market quickly turned lower and closed below the
opening price. The trail day directional indicator said the rally was
over and the Wheat should reverse and trade lower.
The next day, Wheat gapped lower and continued to trade for
the remainder of the day where it closed below the previous three
closing prices. The upward trend was over and the trial day pattern
had confirmed a sell signal at the major high. Wheat continued
lower without ever testing the trial day.
 Chapter 6- Market Tells 209

August 2005 Gold

E Trail day closed lower
than the opening price:. '" 0

1\U

41$1

1111

Figure # 6.26 -August 2005 Gold

September 2006 Cocoa

Figure # 6.28 - I have always found it interesting that fundamental

news and the Reversal dates can work in harmony. The September
Cocoa is a great example of this phenomenon. Political unrest in
the Ivory Coast caused the Cocoa market to breakout and race to
new heights in late June and early July, but the roaring bull market
came to an abrupt halt on the July 10 Reversal date. The market
peaked at 1,737 on July 10 and closed near the top of the daily
trading range. July 11, the trail day, traded to 1,738, one point
210 Chapter 6 -Market Tells

September 2006 Wheat E

Reversal date ~~--Trail day closed lower than

the opening price.

Figure # 6.27- September 2006 Wheat

above the previous high, before it fell back and closed at 1,730,
warning of an end to the rally. The next day gapped lower and
marked the beginning of a significant market collapse.
The Reversal date, combined with the trail day directional
indicator, provided advance warning of the major reversal and
selling opportunity in the September Cocoa. The trail day
directional indictor warned of this price reversal three days in
advance of the 230-point plunge in September Cocoa!
 Chapter 6- Market Tells 211

September 2006 Cocoa

1191

171
1721

JJW

11111

A B

Figure# 6.28- September 2006 Cocoa

December 2006 E -mini S&P 500- 10 minute chart

Figure# 6.29- The December E-mini S&P had peaked at 1347.75

on the projected 12:00 p.m. reversal bar. The market had closed
higher than the opening price and near the high of the 10-minute
bar. The trail bar pushed above the high of the reversal bar and
closed below the opening price. The reversal bar had indicated an
end of the cycle and the trial bar confirmed the directional change.
The high of the trail bar proved to be the high of the daily price
212 Chapter 6- Market Tells

range and the S&P moved into a sideways-to-lower trading pattern

until the close of the day.

131911
December 2006 E-mini S&P 500 Trail bar
10 minute chart
Reversal b

c ~ ll11111

1ll1

lllll

llU

1))1.00
D
llltl
B
1l1il

Figure # 6.29 - December 2006 E-mini S&P 500 - 10 minute

chart

Trident M icrosystems I nc. (TRID)

Figure # 6.30 - TRID posted a low of 18.69 on the June 12

Reversal date and closed on the low of the daily trading range.
This was not the lowest low because TRID had traded at 18.35 two
day previously. The trail day dipped below the June 12 low, but
stayed above the 18.35 low, before it turned higher and closed
 Chapter 6 -Market Tells 213

above than the opening price, indicting a change of direction.

TRID continued higher for two more days before it hit resistance.
Although the market did follow through in the direction of the trail
day, the new trend couldn't sustain itself. When the trail day did
not trade below the previous low it did not meet the full criteria for
a true trail day signal.

Trident Microsystems Inc

B D
A

E
Reversal date

The previous low was

18.35.---- ..._.__. . . ." ••

Trail day

Figure# 6.30 -Trident Microsystems Inc. (TRID)

June 2004 Japanese yen

Figure# 6.31 -June Japanese yen traded to a new contract low on

the May 13th Reversal date. The market had pushed below the prior
214 Chapter 6- Market Tells

pivot low from three days earlier and closed at the bottom of the
daily trading range. The new low was below the TC pattern,
therefore the trend was reaching maturity and should be losing
momentum. Based on this knowledge, I was on the lookout for a
major reversal at this juncture.
The trail day quickly confirmed what I suspected when the
Japanese yen traded to a new low before it turned and closed above
the opening price. The Reversal date had just signaled it was time
for a reversal. The new low suggested the market was at the right
price level for a possible reversal and the trail day pattern
confirmed a directional change at the end of the trend and the
beginning of a new bullish trend. Everything had come together
and the market responded accordingly.

B JIUlc 2004 Japanese Yen

c
F

Reversal date Trail day

Figure# 6.31 -June 2004 Japanese Yen

 Chapter 6- Market Tells 215

Billiron Ltd (BHP)

Figure # 6.32 - The importance of confirming the pattern and not

anticipating the signal was illustrated in this chart ofBHP.
BHP had reached a new high at 48.27 on the May 5 1h Reversal
date and closed near the high of the daily price range. The trail day
opened higher, but quickly turned lower, leaving the opening price
as the high of the day.
The next day started with a steady opening followed by a rally
to a new high. The market did not trade lower as indicated by the
lower close on the trail day. On the other hand, the trail day was
never confirmed because the following day did not trade below the
low of the trial day. In other words, the sell stop placed below the
low of the trail day would have never been filled and a short
position would have never been entered.

Billiton Ltd !il.lll

$1111

!1)11
Trail day

i -- -- The market did not trade

C!ll
18.11

/w~/
4l.tt
below the Trail day low.
u

E
nt fill

rt~~~t 1~ l\tl ~ 43.11

u l~lnJl~'
f~ 1211

F lUll

rt ft lOIII

c .t~r flt •• !liD

~tt-1/
D
t :1111

u
3111
216 Chapter 6 -Market Tells

Final Thoughts

So far I have been using the same charts over and over to illustrate
the different chart patterns and signals. I mention this because in
the past I have had readers complain about different authors cherry
picking a different chart for every example and suggesting they are
only picking the perfect setup for the trade to make things look
better than they really are.
First of all, I would like to say that yes, many of the charts are
picked to illustrate the chart pattern or signal I am trying to
describe. How am I going to describe the pattern or signal if I don't
use a chart that il1ustrates the point I am trying to convey? I think
it goes without saying that not every chart pattern or trading signal
is going to work 100% of the time in every market situation. That
is why it is important to wait for the correct setup and always use
money management. The best offense is always a good defense.
Having said that, the reason I am using the same charts and
markets over and over is to illustrate that I don't have to cherry
pick a different chart for every pattern and every signal. Notice
how the Reaction swing can be used to project future Reversal
dates and the action/reaction lines can project future price levels all
on the same chart. I can also use the "Market Tells" to identify and
confirm the Reversal date signals on the same charts. In other
words, I don't have to search through dozens of charts to find a
good example of the pattern I want to describe. They are based on
price action and can occur over and over in every market in every
time frame.
 Chapter 7 - Options Trading Strategy 217

Chapter 7

alf you don't have a plan for yourself, you will be part of someone
else's plan"- American Proverb

The Reversal Date Trading

Indicator and Option Trading
Strategy

1 that I have discussed thus far in this book seems great

nd it looks so easy, but the question you are probably
sking now is what is the best way to trade the Reversal
date Trading Indicator? That differs from trader to trader. One
thing I have learned in my 20 years of working with thousands of
traders is that everyone has their own style, even if they are
following the same system or methodology.
Most traders are not aware or they do not want to admit that
their trading style is affected greatly by their emotions. In my
experience I have found that if you have 10 traders following the
same trading system or method you will see 10 different resul ts.
Some traders are willing to take more risk than others, while others
tend to take their profits quickly or overstay their welcome in a
trade.
One of the benefits provided by the Reversal date Trading
Indicator (RDTI) is the flexibi lity and variety of the different ways
it can be used in trading. I consider the RDTI not so much as a
trading system, but more of a trading methodology based on crowd
psychology and pattern recognition. Trading systems are typically
more stringent and are developed and tested under selected market
218 Chapter 7- Options Trading Strategy

conditions. While a system may perform well under certain

conditions, when those conditions change-and they do-the
results may suffer. On the other hand, a trading methodology is
more dynamic and can adjust to the changing market conditions. I
believe the RDTI is dictated more by the human emotions of fear
and greed than by a predetermined set of trading rules.

Plan the trade - Trade the plan.

While the most common way to trade the RDTl is using futures
contract or buying and selling the stock, another approach that
should not be ignored is using options, either by themselves or in
combination with a futures contract or stock.
When you buy an option you are buying time. Time for
something to happen in the market; preferably that something is
the thing you expect. As time passes and the market does not react,
the option loses its value because there is less time for the market
to make that expected price move. Therefore, timing the purchase
or sell of the option is important. It is best to time the purchase or
sell at the right time, i.e., right before a substantial market move.
That is where the RDTI comes into play.
Using the TR pattern and the TC pattern to time the purchase or
sell of an option may enhance the profitability of the trade. There
are two things you know: the market will either make the expected
price move soon after the purchase or sell of the option, or the
signal will fail and the option should be exited quickly. That is all
there is to it ... the trade will either work quickly or not at all.

Long Options

Probably the most common option strategy is the simple purchase

of an option. If you think the market wiiJ trade higher you buy a
call option. If the signal is for the market to fall, you would buy a
put option. That part is simple, but selecting which strike price to
purchase can be a little confusing to new traders. The reasons
 Chapter 7- Options Trading Strategy 219

behind the strike price selections are as numerous as there are

traders. It may be determined by the amount of money the trader
wants to risk on the trade, or how much they are willing to pay. It
can also be determined by the Time and Price projections. The list
can go on and on.
Simply put, the long option strategy is to buy a call option one
or two strike prices out of the money as soon as the trigger price is
hit and exit when the futures price reaches the projected target
price or Reversal date. If the trade fails to confirm by the three
higher close rule, step out of the option with a small loss and wait
for the next signal.
Of course, there are numerous option strategies that can be
implemented, such as the Bull call spread or the Bear put spread
and other combinations. However, it is not my intention to delve
into the many different strategies. If you want to learn more about
the most common and most useful option trading strategies I
recommend you read the "Option Traders Playbook" by Joseph
Kellogg. You can get more information on this excellent book at
"www.tradersnetwork.com."

Short Option

Using options in conjunction with the Reversal date Trading

Indicator may enhance performance and offer the ability to gain in
either direction. One of my favorite strategies is a Covered Write.
This strategy is set up by selling a call or put in combination with a
long or short futures contract. The benefit is the potential for gain
either way the market moves. Here is how the trade is set up for a
bullish pattern.

Covered Write- What is it?

Without going into great details of how a Covered Write position

works, I feel I need to touch on the basics. An option has a delta
value, with indicates how much the option will increase or
220 Chapter 7- Options Trading Strategy

decrease in value in relation to an identical price move in the

underlying futures contract. For example, an at-the-money option
will typically have a delta of 50% and a futures contract will
always have a delta value of 100%. Therefore, a $100 increase in
the futures contract would increase the value of a long call option
by $50.

Entering the position

Once a TR pattern and the TC pattern are formed, a call option is

sold above the Reaction swing. As soon as the option is sold a buy
stop is placed at the trigger price (above the high pivot of the
Reaction swing) and the trade is set.
If the market continues lower and does not trigger the buy stop,
the option will lose value and offer the potential for gain while the
market continues the downward trend. On the other hand, if the
market does turn higher it will hit the buy stop and enter a long
futures position. As soon as the futures position is entered, a sell
(protective) stop is placed underneath the low of the Reaction
swing.
The long position is now a bullish Covered Write (a long
futures position and a short call option) and offers you the potential
to gain as the market moves higher. If the market continues to
move higher you can either continue to hold the Covered Write
until the maximum gain is achieved or exit the option and hold the
long futures.

What is the Risk?

Nothing is without risk. If the market does not continue higher,

after the futures position is entered, it may drop back to the
protective stop and close the long futures position for a loss.
However, the loss will be partially offset by the gain from the short
call option. How much of the loss is offset depends on how long
the short option is held.
The following examples will illustrate how this strategy works.
 Chapter 7- Options Trading Strategy 221

December 2006 J apanese yen

Figure# 7.1 -The December Japanese yen had been in a constant

downward trend for several weeks before it formed a Reaction
swing between September 18, (B), and September 21, (C). After
the Yen established a high close of .8715 on September 22, it
turned lower and confirmed a pivot high at (C) and a potential
bullish TR pattern. It was time to set up the trade.
On September 26, the December Japanese yen .8750 call option
traded for 70 points. Every point for the Japanese yen is worth
$12.50; therefore the option had a value of $875 (70 x $12.50 =
$875). So the first step was to sell the .8750 call option for 70
points and place a buy stop at .8750.
If the December Japanese yen continued lower a gain would be
made and the short option would lose value. (When you sell an
option and the market moves away from the strike price, the option
will lose value. The lost value becomes a loss for the purchaser and
a profit for the seller.)
Japanese yen continued the downward trend and traded below
the previous contract low at (B). Instead of a TR pattern the
Reaction swing turned out to be a continuation pattern. On October
13, the December .8750 call option closed at 17 points. The call
option was sold at 70 and could be covered at 17 for a gain of 53
points or $662. The trade may have had more profit potential with
just a short futures position, but opportunity to profit from a trend
continuation would have been missed if the only order placed was
a buy stop above the high pivot at (C). Combining the Reversal
date Trading Indicator with short options offered the potential to
gain either way the market moved. What more can a trader want?
222 Chapter 7- Options Trading Strategy

December 2006 Japanese Yen

••

The market had fonned

a potential TR pattem

Figure# 7.1-December 2006Japaneseyen

November 2006 Crude oil

Figure # 7.2 - Between September 22 and September 27,

November Crude oil formed a possible TR pattern after an
extended downward move. The high of the pivot at (C) was 6400.
At the same time the November Crude oil 6400 call option traded
at 50. (One point in Crude oil equals $10.00 x 50= $500.)
A sell order was placed to sell the November Crude oil 6400
call option at 50 and a buy stop entered at 6405 - the trigger price
above the pivot high. Everything was in place if the market traded
higher. However, the Crude oil gapped lower, the fol1owing day,
 Chapter 7- Options Trading Strategy 223

and continued lower into October 13. On October 13, the

November 6400 Crude oil call option closed at 2 points. I had
anticipated the market to trade higher and I was wrong. However,
by using this strategy I was still offered the potential gain of $480.

November l006 Cntde oil

I
II\ 111 111

' (~~·' q~t/q ltn

' , ·fir l I ft! 7111
lf'll II l ll II Long fitturcs fi·om64.0~
,, lt'Hi I~ short 64.00 call from 50. 7.11

11111
A\ /
I ./Short 64.00 call from 1811

, I c:// >. II

},, I:...____ Buy stop at 64.0~ 11.1

IIJI'''~~'
'{IJ\Jij jl The 64.00 call me
B Ill closed at 2.

December 2006 Treasury Bonds

Figure # 7.3 - December T-Bonds bad been in an extended bull

market since mid-June, but accelerated near the end of September.
The trend peaked at 113-11 on September 25, turned and closed
lower for two consecutive days. The new swing pattern was near
the end of a longer-term cycle and it could be setting up for a
224 Chapter 7- Options Trading Strategy

major reversal and there weren' t any confmning signals indicating

which way the market was going to break. But, that was all
right... the trade was to be set for a price move in either direction.
On September 27, the December T-Bond 114-00 call option
traded at 45. T-Bonds options trade in 1/64s. (One point is worth
$15.62 x 45 = $703.) The trade is set up by entering two orders,
the first order is to sell the December T-Bond 114-00 call at 45 and
the second order is a buy stop at 113-15 - three points above the
pivot high at (B). Once the option sell is confirmed the trade is set.
T-Bonds drop to a low of 112-01 on September 29 (C). From
this low, the market rebounded off the pivot low and rallied over
the next three days to (D). At this point,
T-Bonds were poised to test the high and possibly continue the
current trend. If this happened, the buy stop was in place.
However, the T-Bonds stalled at 113-05, on October 4 (D),
reversed and continued lower. Ten days later the December 114-00
T-Bond call closed at 3 points ... a potential gain of $656.
You may be looking at the T-Bond chart right now and saying
to yourself, "That looks like a bearish TR pattern, shouldn't a sell
stop be placed at the trigger price below the pivot at (C)?" Yes, a
sell stop could have been placed below (C) and a short position
added to the trade. There was also the option to sell a 111-00 put
when the market bottomed at (C) and traded up to (D). It all
depends on how aggressive the trader wants to be.
That's the benefit of using options in combination with the
Reversal date strategy. There are plenty of different options on
how the trade can be managed. However, there is one critical
criterion that cannot be overlooked ... the protective stops. If you
sell an option and the market triggers the stop to enter a futures
position, the protective stop must be in place. If the protective stop
is not in place and the market turns against you, you will have two
positions working against you. Every time I have gotten in trouble
with a trade it is because the protective stop was not in place. I
have learned it is much easier to get stopped out of a trade and re-
evaluate it from the sidelines, than to think objectively when the
market is running against you. I can re-evaluate the trade without
the pressure of an increasing loss and make an objective decision.
 Chapter 7- Options Trading Strategy 225

December 2006 Treasury Boo~

Short ll.t.OO / If
call at .t5. - - . /
Buy stop at
113-15
/,,,,,,f, 1
!Ill

liD

1llli

,,,,,,
~~''1',,11'II/
11
l~i

l H-00 call closed at I!QJ

3 points. 11191i

I'' I' IIlii

•
II' I IIJrl
li \1 11815

.,·, I
1191

lt115
ilr'l
I· \1 I
jr lUI

1151'
.I
1 lrml
'l,tll 1
10015

Figure # 7.3 -December 2006 Treasury Bonds

December 2006 Cattle

Figure # 7.4 - On October 4, December Cattle broke out of a

bearish Reaction swing and appeared ready to resume the
prevailing downward trend. Although the market was poised to
continue lower, selling the 88.00 put option would also prepare for
a bullish reversal.
The December Cattle 88.00 put option traded at 165. (One point
in Cattle is worth $4.00 x 165 = $660.) Once the option sell was
confirmed and the sell stop in place at 89.50, the trade was set. The
226 Chapter 7- Options Trading Strategy

December 2006 Cattle

~,r\
I It' 1
1
Short88110put@l6l ...

11~11 m~~~ ~~~~~11111/ ·:

I I~ II ~ ,, lij I ._ SeU ~op @89l0
rl I ~I ,,,m,

IIt
l~~~
f
t''1
tl Closed short futures a t /
87A7 and closed short
165 put option at lOl.
~

Figure # 7.4 -December 2006 Cattle

following day Cattle dropped through the sell stop to trigger a

short position against the short put and convert the trade into a
Covered Write position.
Four days after entry, the short futures position was closed
out at 87.47 for a gain of 202 points and the short 88.00 put option
covered at 235. The futures position posted a gain of $808 dollars
while the short option lost $280 for an overall gain of $528.
 Chapter 7- Options Trading Strategy 227

December 2006 Coffee

Figure# 7.5 -From early March through April, Coffee completed

a five-wave zigzag connecting pattern that concluded with a TR
pattern marked as (A)(B)(C) and (D) on the chart. The low pivot
price of 113.70 at (C) was my focal point because it was the trigger
to confirm a sell signal. I expected the TR pattern to confirm, but
the trade could be set up to gain even if the market turned higher.
The low pivot at (C) was confirmed on May 2. The same day
the December Coffee 110.00 put option traded for 875 points. (One
point in Coffee equals $3.75 x 875 = $3,281.) Once the option sell
was confirmed and the sell stop was placed at the trigger price
below 113.50 (C), everything was in place for the next move in
December Coffee.
The Coffee traded higher for a couple of days before it stalled
beneath the previous pivot high (B) and turned lower. Five days
later the sell stop was hit to trigger the sell signal. The position
now had a short futures position in conjunction with the short
110.00 put option that should continue to gain as the market moved
toward the next Reversal date scheduled for May 26.
December Coffee closed at 104.80 on May 26 and the
December 110.00 put option closed at 1,310. The potential gain
from the short futures position was 870 points or $3,262. The loss
on the short put option was 435 points (1310 - 875 = 435) or
$1,631. So the overall trade offered a possible net gain of $1,631
($3,262- $1,631 = $1,631).
In this example, the short put option was held for the duration
of the trade, but that is not necessary for this strategy to work. It
really depends on the individual, bow they choose to manage this
type of trade. For example, after the sell signal was confirmed, the
trader could use the three-lower-close rule and ex it the option with
a small loss and hold the short position. This, of course, would
increase the profit potential, but also increased the risk if the
market turned higher. That is just one of the reasons I like the
strategy; it offers several choices on managing the trade.
228 Chapter 7- Options Trading Strategy

December 2006 Coffee ll&lll

11\fAI

~
11200
I
I
I
I

naoo

sen stop at 113.50

1(1).11)

Figure # 7.5 -December 2006 Coffee

January 2006 Soybeans

Figure # 7.6 - January Soybeans had drifted steadily lower after

the fourth of July. Talk of ideal growing conditions and a possible
record crop kept pressure on Soybeans throughout the summer.
November Soybeans reached a low of $5.50 V2 on September 12 -
two days prior to the projected Reversal date of September 14. The
succeeding two trading days both ended with a close higher than
the previous day. Since the market had traded higher into the
September 141h Reversal date, it set up a bearish Reaction swing
 Chapter 7 - Options Trading Strategy 229

and the possibility of another push to a new contract low. On the

other band, the Reaction swing was at the end of a cycle and the
trend could be ready to shift. Everything suggested the timing was
right to sell a put option and prepare for a reversal. Let's see bow
the setup played out.
On September 14 -the projected Reversal date - the January
Soybean $5.40 put option traded at 11 cents. (One cent in
Soybeans equals $50.00- 11 x $50.00 = $550.00).
Once the option sell was confirmed and the sell stop placed
underneath the September 12 low of $5.50 Yz, the trade was in
place and prepared for the next move in Soybeans, whichever
direction the market broke.
It turned out that the bearish cycle was over as Soybeans traded
higher into September 21 before falling back during the following
two trading sessions. However, the sell stop below the pivot low
was never in danger as the two-day correction ended and the
market moved sideways over the next six trading sessions. The
short option did its job.
As the market chopped back and forth, a potential TR pattern
began to show up. The high pivot at (C) and the low pivot at (D)
had formed a possible Reaction swing with a trigger price above
the $5.75 high at (C). On September 4, Soybeans surged forward
and broke above $5.75 and triggered a buy signal... the TR pattern
had been confirmed. On January 4, the January $5.50 put option
closed at 6 cents. It was decision time - should the option continue
to be held? The TR pattern had been confirmed and the trend had
shifted from a downward trending market to a new upward
trending market. Would it be best to take the 5-cent gain and offset
the short option? Either way, the signal worked out very well. Nine
days later, January Soybeans closed at $614 1/2 and the $5.40 put
closed at 2 1/4 cents.
Do you see what 1 mean about the flexibility this strategy
offers? Each trade signal can be evaluated and treated differently,
depending on the market price action. But remember, it is equally
important to make sure the money management protection is
always in place.
230 Chapter 7- Options Trading Strategy

Janulll)' 2006 Soybeans

On October 17, the mamct closed at

$614 ~ and the $5AO put closed at
j
l V. cent< "-._,.
•
It
~~, "'
~~~, c ~~ !5.7lTrigg<• pri« :

lruuwy !SAO put sold

@11 cents.
A~fi ~ ~ ~J'!~ ~
!1.1111 sell stop pla«d at !5.40 :
---------- V._.----D...:....--

December 200610-Year Treasury Notes

Figure# 7. 7- The December T-Notes had been in a steady upward

trend for about five weeks when the market began to correct and
form a Reaction swing. This looked like a potential continuation
pattern, but what if the market did not continue higher? Let's see
how this option strategy would have worked in the Ten-year Notes.
The pivot high of 106-21.5 occurred on August 4 (E) and
was followed by a six-day correction to (F). On August 11 the
December 107-00 T-Note call option traded for 31 points. (One
 Chapter 7- Options Trading Strategy 231

point in the T-Notes options equal $15.62- 31 x $15.52 = $481.)

As soon as the option sell was confirmed the buy stop was in place
at 106-23, just above the pivot high.
Two days later - August 16- T-Notes traded above the pivot
high and triggered the buy stop to enter a long futures position at
106-23. Four days after the long future position was initiated, the
market had closed above the pivot for three consecutive days,
therefore the protective stop should be moved to the entry. On
August 29, the T-Notes dropped back and traded through the
protective stop to close the long position at the entry price. After
the long futures position was closed the short option was no longer
covered and at risk if the market continued higher. There are two
things that can be done at this point: place a buy stop above higb,
hold the short option and wait for the market to continue lower or
close the option and end the trade. The option closed at 45 on
August 29.

November 2006 Crude oil

Figure # 7.8 - On August 29, November Crude oil had just

completed a successful TR pattern and staged a small two-day
correction from the Reversal date. Most likely, the short-term
correction was just a pause before resuming the downward trend,
but it could also be the low before another rally. So the trade was
set up to be ready whichever direction the market decided to move.
Let's see how it worked out.
The pivot low was 69.80 on August 29. The November Crude
oil 69.00 put option traded at 160 on August 30. (One point in
Crude oil equals $10.00 x 160 = $1,600.) As soon as the option sell
was confirmed and the sell stop placed at 69.80, the trade was set.
The sell stop was triggered on September 51h as the Crude oil
gapped lower and began a rapid descent over the next several days.
The position was now a Covered Write consisting of a short
November Crude oil 69.00 put option at 160 points and a short
futures position from 69.80. At this point it was very important that
232 Chapter 7- Options Trading Strategy

December 2006 Ten-Year Notes 1:8:11

1;voot
ILVZII
118161
1f8fiJ
liliJ31
11.\'!41
IWI&t
107C8J

1$241
Ou August 11, the 107-00 Long osition closed at 106-23. 1rs;.;t
call option traded at 31. Short option dosed at ~1.

rr lir>llll

~~~r1
1W211
F 1~1Gt
I

/fl/
I:SilJJ
1!6Jll

'1_ [r
1
l'tr I
D

Figure# 7.7 -December 2006 Ten Year Notes

the protective stop be placed above the pivot high of the current
Reaction swing at (F). Crude oil had been experiencing some high
volatility so the protection was vital. It should also be noted that
the $1,600 of premium collected from short put option did offer
some protection should the market suddenly turn higher and run
your protective stop. Having said that, let's get back to the trade
and see how it played out.
Crude oil continued to trade lower into the next projected
Reversal dates of September 12 and September 22. On September
121hthe Crude oil closed at 64.90 and the 69.00 put option closed at
510 for a potential gain of $4,900 on the futures position and a
$3,500 loss on the option, netting a gain of $1,400.
 Chapter 7- Options Trading Strategy 233

November 2006 Cmde od 1!.1

B
D
l Ill

A 11\ Ill
/ 1J'l , (' I'i,J 'ilb'/q 1'n
l· 11 r I rl r
• ,,' lr, I ltll

tr,r tr ll I\ I / c IIIII F........... ShOJt 69.00 call @160 12111

It f,~ 'Ill
SeU stop at 69.80 /'I
E lj 181

.
Futum- ~.90~
l\1
I II
Ophon· 510 u,~ ,,,

Futures-60.55~ H ~~~~~ ~~~

Option - 860 I

l 117
Figure# 7.8 - November 2006 Crude oil

Once again, the individual trader can decide if he prefers to

keep the extra protection offered by holding the short option or
giving up the protection by closing the option soon after the futures
position is entered. Each approach has its own pros and cons.

December 2006 Silver

Figure # 7.9- I am including the chart of December Silver because

it offers good examples of both a trend continuation and a trend
reversal.
234 Chapter 7- Options Trading Strategy

The confirming Reaction swing of a TR pattern had formed

between May 19 and May 29. The pivot low of the pattern was
$12.19 on May 22. Two days after the low the December Silver
$12.00 put option traded at $1.30. (One cent in Silver equals
$50.00 x $1.30 = $6,500.) As soon as the option sell was
confirmed a sell stop should be placed at $12.17, underneath the
pivot low at (C). Two days after the Reaction swing peaked on
May 29, Silver slid through the sell stop. The short $12.00 put
option was now covered by a short futures position from $12.17.
The reverse/forward count projected June 15 as the next
Reversal date and Silver bottomed at $9.64 just two days prior to
the June l51hReversal date. December Silver closed at $10.15 on
June 15 and the $12.00 put option closed at $2.49. Therefore, at the
close of the June 151h Reversal date, the combination of the short
futures position and short put option offered a potential gain of
$4,050.
After posting a low on June 14, Silver traded higher during the
two next trading sessions and set up another possible bearish
Reaction swing. Not knowing whether this was a continuation
pattern or a major low, I looked at the December Silver $9.50 put
options. On June 15 the option was trading at 81 cents. (.81 x
$50.00 = $4,050). As soon as the option sell was confirmed a sell
stop should have been placed underneath the June 14low of $9.64.
But that sell stop would have never been challenged, as Silver
continued to climb until it reached $11.92 on July 12. On the same
day the $9.50 Silver put closed at 37 cents for a potential gain of
$2,200 from the short option, all because on June 15 the trade was
set up to take advantage of a market move in either direction.
 Chapter 7- Options Trading Strategy 235

ccembcr 2006 Silver B

1SJII

II Al'1l' 1
,/
lUll

1l0»

Ir'
D ,/
I II Short $12.00 put @$1.30.
ll ua
ill II 1~1 I I If }•m
I I ~~d~ rl'lli
,t [' It t I 1!0»

1~
1
Sell stop at ,Jill!II ~~~ ll.QJ

i lll.19 !Ill I 1'1,~ l9.so puts''""' ::

11
'jr J{'1 [ IIi If 1 .37 cents. 1
na
1l ,r 1 ~•a.
SeU stop at $9.64----. - - Short $9.50 put @.81 cents
E

Figure # 7. 9 -December 2006 Silver

 Chapter 8- Bullish and Bearish Divergence 237

ChapterS

uyou can observe a lot by watching"

Yogi Berra

Bullish and Bearish Divergence

W
hen I first started trading in the late 70's I received my
price charts through the mail every Monday or Tuesday
and then I would update the rest of the week by hand. It
was a great way to learn about price patterns and market behavior
because I could watch the patterns unfold as I updated the charts
every morning.
At the top of the chart page was the Relative Strength Indicator,
also known as RSI, and the Slow Stochastic (SSTO) indicator was
on the bottom of the chart. This was my first introduction to
technical indicators. At the time these were probably the two most
popular indicators and continued to gain popularity as computers
became more available.
While I do consider myself a dedicated student of technical
analysis, I am not a strong proponent of using technical indicators
exclusively. There is a huge difference between trading with a
method based on market behavior and price action versus one
derived from technical indicators. Although many books and
trading systems will lead you to believe otherwise, technical
indicators are lagging in nature. Since they are derived from price
alone and generated based on a time frame and formula that
smoothes out the data, the indicators have a built-in lag time. This
makes it difficult for an indicator to predict a significant price
move in advance, but they can offer a good confirmation of a move
already in progress. Lastly, indicators often require subjective
interpretations that can create problems for novice traders.
238 Chapter 8- Bullish and Bearish Divergence

Having said all that, I now want to say that there is one
indicator that I will use under certain circumstances. That indicator
is the Slow Stochastic, but I don't use it on a stand-alone basis
because of its tendency to give false signals. However, there is one
technique I will use in conjunction with selected price
patterns ... bullish or bearish divergence.
Divergence occurs when the market is making new highs or
new lows, but the SSTO fails to match the new highs of the new
lows. In other words, when the market trades above the previous
pivot high, there should also be a corresponding new high in the
SSTO. If the SSTO fails to trade above its previous high it
suggests - even though the market is moving higher - that the
underlying momentum is beginning to weaken and a major turn is
imminent.
The Slow Stochastic (SSTO) is based on the theory that, as
prices move higher, the daily closes should reflect the high of the
daily range. Likewise, as prices decrease, the daily close tends to
accumulate closer to the low of the daily range. SSTO calculations
are based on the rate of change in the daily high, low, and close.
The SSTO chart needs two lines and three values. The three values
are: the raw value, %K, and %D. These values are plotted on a
scale of 0 to 100. When the raw value and the %K are plotted on
the same chart, the result is "fast stochastic." The fast stochastic
shows you many up and down swings in a very short time period.
When the %K and %D are plotted together you have a "slow
stochastic" that smoothes out the data. I'm not going to take the
time to describe the formula for the SSTO because it is available
on most technical charting software. Even though you do not have
to calculate the formula, you will have to decide the number of
time periods to use. The lower the number of periods used, the
more swings in the SSTO. Therefore, more signals. A higher
number of time periods will smooth the indicator and generate
fewer signals. The default setting on most technical charting
software is at 14 days as its parameter. I prefer 20 days because I
believe it generates better trading signals for the longer-term trend
changes. As everybody has his or her own preferences, you should
test different time periods to see which one matches your trading
style.
 Chapter 8- Bullish and Bearish Divergence 239

This means, in an upward trending market, the closing price

should be near the highs, and during a downward trending market
the closing price should be near the lows. If the closes are near the
highs the trend remains strong; therefore, as the market peaks the
indicator should be at its highest level. As long at the market is
making higher highs the SSTO should also make a higher high.
Although the stochastic indicator can be used in different ways,
many novice traders have only a limited understanding of how to
use them. The most common use is to sell when the indicator
reaches overbought - above 75- or buy when the indicator reaches
oversold - below 25. This method may be the most common
usage, but I found out very quickly that it is not the most effective
use because it can give many false signals. Strong trending markets
can stay above 75 for long periods of time and even fluctuate
below 75 and then turn higher. There are even trading systems
designed around the tendency of the SSTO to dip below 75 and
tum higher. This is typically a sign of strength in the market and
can be followed by a price surge to new highs.

Using the SSTO as a Timing Indicator.

Divergences in momentum indicators is a gauge that has been

around for quite some time and is used on a wide variety of
indicators, such as the RSI and MACD, as well as the Slow
Stochastic. Although using divergence as a timing tool can be
useful, it is not the Holy Grail. Just like all other technical
indicators, I feel it works best when used in conjunction with
charting patterns. Even though there are many different ways to
trade using the SSTO, there is only one way I like to use it, and
that is when the market is showing either a bullish or bearish
divergence in conjunction with a pattern sequence that typically
leads into a TR pattern.
240 Chapter 8- Bullish and Bearish Divergence

The Three Drives to a High or Low.

In the book "Street Smarts" by Linda Radske and Larry Connors,

Linda described a chart pattern consisting of three consecutive
pivot highs each pushing higher than the previous pivot point. She
described how the pattern has a tendency to appear near the climax
of the trend. Of course, three lower lows would also appear at the
end of a downward trend .
The three successive higher pivot highs or three successive
pivots lows w ill usually occur in a relatively short time period.
Knowledge of this pattern can give you a warning before the
pinnacle is reached. Linda nicknamed this pattern "Three Little
Indians."
I like to keep a close eye on the last two thrusts or pivots
because they will typically form the (A) and (B) pivot points of a
TR pattern. The added appearance of bullish or bearish divergence
increases the probability of the pattern confirming a major reversal.
It is just another tool to help confirm the reversal.
The rules to identify bearish divergence are very simple. If the
market is making a series of lower lows the SSTO should also be
making corresponding lower lows. If instead, the second or third
low in sequence does not correspond with a new low on the price
chart, it suggests the market is beginning to gather underlying
strength that is not yet reflected in the price and a major low could
occur soon.
Let's look at a few examples of bullish and bearish divergence
using the Slow Stochastic in conjunction with the TR pattern.

December 2004 Coffee

Figure # 8.1 - The December Coffee chart provides two good

examples of bullish divergence in conjunction with three lower
lows. The first divergence occurred between April 13 and April 30.
The Coffee made a pivot low at 76.10 on April 13, marked as (1),
followed by another dip to 74.30 on April 22, marked as (2). Six
 Chapter 8- Bullish and Bearish Divergence 241

days later, on April 30, the market dropped to 74.00, marked as (3)
on the chart. The Coffee had posted three consecutive lower lows,
but the same lower lows were not reflected in the SSTO. The April
22 pivot low was followed by another lower low on April 30, but
the new low on April 30 was countered by a higher low on the
SSTO, therefore revealing bullish divergence. The April 30th low
held and acted as a springboard to the 1,000-point rally that
followed.
The second appearance of divergence occurred in early August.
The December Coffee had traded to a low of 69.60 on the July 30th
Reversal date (4), but the market wasn't ready to bottom yet.
Coffee went on to make another new pivot low on August 5 (5),
followed by the third new pivot low on August 16 (6). Meanwhile,
the SSTO bottomed on August 2 and followed with two higher
lows on August 5 and August 13. While the market was making
new lows on the price chart, the momentum was beginning to build
in front of a market reversal. The TR pattern was confirmed after
the August 19 pivot low and Coffee shifted from a downward
trending market to an upward trending market. Notice how the
SSTO dipped between August 17 and August 19, while the bullish
Reaction swing was formed.

August 2005 Gold

Figure - # 8.2 - The pivot low on May 16 - marked as (1) - was

followed by another lower pivot five days later on May 23, marked
as (2) on Figure# 8.2. The two new lows corresponded with two
lower lows on the SSTO. But the market sentiment was about to
change when the Gold gapped to a new contract low of $415.80 on
May 31 (3). While the price chart reflected a new low the SSTO
was moving higher. The SSTO did turn lower to mirror the new
contract low, but its low was higher than the previous two. The
new low at (3) was followed by a sharp rally into June 6, which
was the beginning of a bullish Reaction swing and that confirmed
the bullish TR pattern.
242 Chapter 8- Bullish and Bearish Divergence

December 2004 CAffee

Aprill3. 30

August2-13

1 2 3

Figure # 8.1 -December 2004 Coffee

The bottom in August Gold was preceded by three successive

lower lows on the price charts and the ensuing bullish divergence
in the SSTO. The Gold moved off the bottom and proceeded to
form a bullish Reaction swing between June 6 and June 9, which
was reflected in the SSTO as a short-term dip before turning
higher.
If you look to the far right of the chart you see another bearish
divergence pattern begin to develop.
 Chapter 8 -Bullish and Bearish Divergence 243

Bearish divergence

SSTO

Las Vegas Sands Corporation (L VS)

Figure # 8.3 - The chart of LVS presents a classic example of the

three drives to a high collaborated by bearish divergence. During
the two-week period between February 17 and March 6, LVS
made three successive higher highs while the corresponding SSTO
peaked at the second high and failed at the third high. The third
high, in the SSTO, was considerably lower than the previous high
and the divergence made a clear statement that the momentum had
shifted from bullish to bearish and the market responded by trading
lower.
244 Chapter 8- Bullish and Bearish Divergence

Las Vegas Sands Corporation (LVS) Three higher highs 41

\
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l'r ~~¥~r~wl
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SSTO

Figure # 8.3 -Las Vegas Sands Corporation (L VS)

Dell Inc. (DELL)

Figure# 8.4 - The bullish Reaction swing did not appear until May
6 and May 10, but the SSTO foretold of a pending trend change a
week earlier. Although the market did not make the ideal three
successive lower lows on the price chart, it did have two lower
pivot lows on April 18 and April 29 - marked as (A) and (B) on
the chart- before turning higher. However, if you look down to the
SSTO it is very clear that the April 29 low was higher than the
April 18 low, suggesting bullish momentum had entered the
 Chapter 8- Bullish and Bearish Divergence 245

market. This pattern forewarned of a pending climax of the

downward trend and set the stage for a rally into May 6 (C). Note:
Notice how the %K line dipped towards the %D line and then
turned higher when the Reaction swing between (C) and (D) was
confirmed.
Two days before the May 301h Reversal date (E), DELL reached
the first of three successive higher highs marked as (1)-(2)-(3) on
the chart. The corresponding SSTO indicator showed three lower
highs occurring at the same time. The rally ended and DELL
moved into a choppy sideways trend for the next several weeks.

DeUinc.

1 2 3

SSTO
246 Chapter 8 -Bullish and Bearish Divergence

March 2006 Wheat

March Wheat posted a pivot low on November 7, 2005 - marked

as (1) on Figure# 8.5. This low was the beginning of a Reaction
swing that projected a future Reversal date for December 9 at (3).
March Wheat went on to make two more lower lows - marked as
(2) as (3), with the last low occurring on December 9. Meanwhile,
the December 9 low (3) in the SSTO was higher than the previous
low (2) that occurred on November 11. March Wheat went on to
rally over 40-cents in the next three weeks.

March 2006 Wheat

111

Jnl

WrWI
171

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1111

l5<4

r~ ~~ 16)

\1\1~~ ll/1

lJl)

3211

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Figure# 8.5 -March 2006 Wheat

 Chapter 8 - Bullish and Bearish Divergence 247

June 2005 Crude oil

Figure# 8.6 - June Crude oil made a major trend change during
late March and early April 2005. The market made three
consecutive higher highs leading into the peak. I have marked the
last two consecutive highs as (A) and (B) because they represent
the beginning of a TR pattern. The corresponding SSTO indicator
peaked when the Crude oil reached a high of 58.60 on March 17
(A). From this high, the market pulled back over the next week,
before it pushed to a new high of 59.32 on April 4 (B). However,
the related high in the SSTO (B) was considerably lower than the
previous high (A). The bearish divergence, in conjunction with the
TR pattern, forewarned of the pending trend change.

J\Ulc 2005 Crude oil B 10.11

~~
!.alii
D
$.!11

~~
Sllll

~
211

!IJ1II

N 1 2 3
411

4&-l ll

1
1ifl lt!ll

Ql

C.lll
248 Chapter 8 -Bullish and Bearish Divergence

December 2006 Dow Jones - (30-minute chart)

Figure # 8. 7 - The December Dow Jones 30-minute chart posted

three successive higher highs between September 20 and
September 21 with the final peak reaching 11,720. During the
same time period the SSTO indicator made three lower highs,
suggesting an imminent climax to the current upswing and set up a
potential TR pattern - marked as (A) and (B). On September 21,
the Dow Jones turned lower and formed a new Reaction swing
between 8:50 a.m. CST (C) and 9:50 a.m. (D). The TR pattern was
confirmed and projected a drop into 2:20 p.m. the same day (E).

December 2006 Dow Jones- 30-minute chart

11111

B lml

f)D ' 117J

n•
M ¥ I

I !liD

11618
F l

~~~iij~l
IIQI
1111»

11511

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me

Figure# 8. 7- December Dow Jones - 30-minute chart

 Chapter 8- Bullish and Bearish Divergence 249

The Dow Jones hit a low of 11,583 between 2:20 p.m. and 2:50
p.m. and formed a TC pattern. Once again, the bullish divergence,
in combination with the three drives to the high, foretold of a
pending change in momentum before the TR pattern began to
form. Note: If you look to the far right of the chart you will see
another divergence pattern beginning to form.

March 2006 Coffee

In Figure #8.8, March Coffee offered two good examples of

divergence appearing before a significant trend change. The first
example appeared between October 20 and November 9. The
Coffee had made two successive higher highs, followed by a sharp
price drop. During the same time period the SSTO posted
consecutive lower highs in front of sell-off.
Although the earlier divergence was a good forerunner to the
early November reversal, Coffee offered a classic three thrusts to a
trend climax between January 9 and January 30. As the market
pushed higher and higher - with the final high occurring on the
January 30 Reversal date- the SSTO indicator failed to correspond
and posted three successive lower highs at the same time. The
bearish divergence worked as a perfect precursor to the TR pattern
and the major reversal.

December British Pound (60-minute chart)

Figure# 8.9- The 60-minute chart in the December British pound

offers an example of bearish divergence at the beginning of a
downward trend followed by bullish divergence at bottom of the
trend. The first example occurred between September 21 and
September 22, with the third price peak reaching 1.9081 at 2:00
p.m. CST on September 22. The corresponding high (3) in the
SSTO indicator was considerably lower than the second peak on
September 21 (2). The market had reached a new high, but the
SSTO was already trending lower and suggested the British pound
250 Chapter 8 -Bullish and Bearish Divergence

had reached a critical price juncture and would soon follow the
SSTO on its downward path.

March 2006 Coffee 11llll

llS.I
Ill!!
IJll
1171

~ 1151

~~~
11 1121

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UO.I

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112!11
,.,.
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SSTO

Figure# 8.8- March 2006 Coffee

The British pound continued to trade lower, but between

September 28 and September 29, the market posted three
successive lower pivot lows. Each time the price chart dropped to a
new low, the corresponding SSTO indicator made a higher low.
After the British pound posted its third consecutive new low the
market reversed and formed a bullish Reaction swing. The number
(2) and (3) low were also the beginning pivots of a bullish TR
pattern that later confirmed the bottom and triggered a strong rally.
 Chapter 8- Bullish and Bearish Divergence 251

December British Pound- 60-minute chart t9lll

1M

1 2 3 tm

t SIIII

10

,.
l al

SSTO M. . 1 23

~r-Pr-' w~'· ,1\\!vA~ ~

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Combining Chart Patterns with Technical Indicators.

Although this pattern does not appear frequently, it is worth

learning and adding to your pattern toolbox. As I have illustrated
throughout this book, I typically do not use a lot of technical
indications because of their lagging nature. Since momentum
indicators are based off price only and calculated from past price
action, the market change is usually already in progress when the
confirming signal is triggered by the indicator. I believe
incorporating the price in the momentum indicator, with price
patterns, will add the necessary ingredient to catch reversal earlier.
252 Chapter 8- Bullish and Bearish Divergence

This also removes the need for subjective interpretations of the

indicator to determine an entry or exit.
You may read in other books about technical analysis, that the
standard way to use the SSTO indicator is to sell when the
indicator moves above 75 and turns lower or buy when the
indicator moves below 25 and turns higher. I have learned the bard
way this can be a costly way to use the SSTO because of its
tendency to generate false signals when used on a stand-alone
basis. In my years of experience, I have found bullish or bearish
divergence in the SSTO can portend significant trend reversals
when used in conjunction with the TR patterns.
Although I used the SSTO indicator in all the examples, most
momentum indicators such as the RSI, CCI or MACD will offer
the same divergence patterns. I simply use the SSTO because it
was my first introduction to technical indicators and I am most
familiar with its characteristics. 1 have worked with many traders
throughout the years that prefer other indicators and use them in
the same manner. Once again it comes down to individual
preference.
 Chapter 9 - Trading With Different Time Frames 253

Chapter 9

"Time is nature's way of keeping everything from happening at

once. " - Woody Allen

Trading With Different Time

Frames

T
here are count-less different technical indicators used by
traders in an attempt to predict future price movements, and
since every person has a different trading style the same
indicator can be used in different ways or different time frames,
depending on their particular view of the market. For example, a
long-term trend trader may prefer a weekly chart while the swing
trader may feel more comfortable with a daily chart. Both traders
may use the same technical indicator, but in different time frames.
The patterns and confirming signals may be the same, but the
results can differ depending on the time frame from which you
view the chart.
Traders may benefit from widening their point-of-view by using
more than one time frame. Each time frame can offer a different
perspective and reveal a pattern or signal not seen on the other time
frame.
I am sure you have all see a movie or read a story about
someone finding a treasure map or a mysterious code that reveals
very little at first glance, but once the different levels are peeled
away and examined closer, more clues begin to appear. Price
charts can work in the same way. For example, as a swing trader
you may not see a buy/sell pattern on a daily chart, but once you
drop down to a 60-minute or 30-minute chart, a pattern may appear
254 Chapter 9 - Trading With Different Time Frames

that was hidden in the longer-term view. Had you stuck to only one
time frame, you would have missed the pattern entirely.

The hidden Reaction swing offers early entry

If you know what to look for and where to look, a hidden Reaction
swing can offer an early entry signal after a major turning point
and before the regular Reaction swing even begins to form. This is
an opportunity to enter the market after a major high or low
reversal - usually marked as (B) in the TR pattern - and before the
beginning of the first Reaction swing- marked as (C). The only
way to find the hidden Reaction swing is to drop down to the lower
time frame once the correct "Market Tell" is seen on the daily
chart.

The Counter-Close

The "Tell" I am referring to is called the "counter-dose". The

counter-close is a price bar where the closing price is in the
opposite direction of the previous close. In other words, if the
market were trending higher, a counter-close would close lower
than the opening price. If the market were trending lower, the
closing price would be higher than the openjng price.
On the daily chart, a one-day counter close is not enough to
confirm a Reaction swing and set up an entry signal, but a 60-
minute chart may reveal a nicely formed Reaction swing and offer
a potential signal that is hidden from view on the daily price chart.
A counter-close can appear anywhere in a trend, but there are
only two places I look for the "Tell" and that is after a major high
or low reversal and near the 20-day SMA after a TR pattern or TC
pattern. In Figure# 9.1 I have you can see what a counter-close
looks like in a downward trending market and an upward trending
market. The following chart examples will better iJiustrate how to
find the counter-close and the hidden Reaction swing and how it
can be incorporated into your trading strategy.
 Chapter 9 - Trading With Different Time Frames 255

Counte - dose Price Bar

Figure# 9.1 - One-day Counter-Close

December 2006 Hogs

Figure# 9.2 - During the last two weeks of October, the December
Hogs completed a pattern of three successive lower lows. After the
third low, Hogs closed higher for two consecutive days and ended
on the 20-day SMA. The following day-October 24---opened
steady and closed lower than the opening price. The opening price
was 60.10 and the closing price was 59.85. The lower close was
counter to the previous two price bars and the daily price range
straddled the 20-day SMA.
256 Chapter 9 - Trading With Different Time Frames

On the daily chart a one-day pullback is not enough to form a

Reaction swing, but the 60-minute chart told a different story.
As the October 24th daily price bar was trading against the
previous two-day trend, a bullish Reaction swing had formed
above the 20-bar SMA on the 60-minute chart. Based on thjs
pattern, a buy stop could be placed at 60.40, just above the pivot
hlgh of the Reaction swing - this would also be above the high of
the one-day counter-close on the daily chart.

December 2006 Lean Hogs · Daily 60-minute chart

October 24 - One

October24
 Chapter 9- Trading With Different Time Frames 257

October 25 opened slightly higher and traded above the 60.40

trigger price within the first hour of trading. The upward price
surge continued throughout the next day as the Hogs reached
64.47. The hidden Reaction swing signal offered a potential gain of
440-points in two days! A reaction never appeared on the daily
chart and the buy signal would have been missed entirely if by not
looking at the 60-minute chart.

December 2006 Cotton

Figure # 9.3 - Cotton began to form a possible TR pattern with the

(A) pivot low on October 11 and another low pivot low of October
18 (B). After posting a low on October 18, Cotton reversed and
closed higher for three consecutive days and finished above the 20-
daySMA.
The October 24 trading session opened at 49.90 and closed at
49.57 on the 20-day SMA. The close was below the open and
against the newly established trend. The market needed another
lower close, in order to form a Reaction swing, but that wouldn't
happen.
The SSTO indicator was showing slight evidence of bullish
divergence, but it was not enough to suggest the market was
gaining bullish momentum. Since the one-day counter close was
not a bullish Reaction swing, the daily chart didn 't identify a
trigger price for a buy signal, therefore it was time to look at the
counter-close price bar in a shorter-time frame.
The 60-minute chart revealed stronger divergence in the SSTO
and a bullish Reaction swing had formed just above the 20-bar
SMA. The TR pattern was ready and the trigger price was above
the pivot high of 50.41. October 25 opened steady, but wasted little
time before climbing higher and traded through the trigger price.
The daily chart had only a one-day pullback and never formed a
Reaction swing pattern; it was hidden in the lower time frame.
258 Chapter 9 - Trading With Different Time Frames

December 2006 Cotton - Daily chart ~eccmber 2006 Cotton - 60-minute chart

October 24 · 25

Figure # 9.3 -December 2006 Cotton

December 2006 Cattle

Figure # 9.4 - A bullish TR pattern confirmed a bottom and a

Reaction swing had formed between October 13 and October 20,
marked as (C) and (D) on Figure# 9.4. The October 23 breakout
bar triggered the buy signal at 88.50 and closed above the 20-day
SMA. October 24 opened at 88.60, slightly lower than the previous
days close, and ended the day at 88.35. The day ended as an inside
day with the close below the 20-day SMA. The closing price was
lower than the opening price and also counter to prevailing trend.
 Chapter 9- Trading With Different Time Frames 259

In this example the TR pattern had already triggered a buy

signal, but the market had not carried through on the following
day. This could mean the signal is doomed to fail and turn lower.
However, the price pattern on the 60-minute chart was much more
encouraging. The first thing to stand out was the bullish divergence
revealed in the 60-minute SSTO that did not show up in the daily
SSTO. The 60-minute chart also revealed a bullish Reaction swing
above the 20-bar SMA.
The following day - October 25 - opened steady, then traded
lower until it found support at the 20-bar SMA. The support held
and the market began to climb into the close. However, it was the
higher opening on October 26 that caused the market to accelerate.
October 26 closed at 90.70 considerably higher than the 88.95
trigger price.

"(IX)
60-minute chart 92.0

Sl!O st~
9UQ)
Slim
2~ Sl.wJ
91.200

91400
9llm
89.600
89.3»
81!0

~~
ll!lW
111.600
81.31)

~1m
260 Chapter 9 - Trading With Different Time Frames

November 2006 Natural Gas

Figure # 9.5 offers a good example of a counter-close after a major

low. Following a persistent downward spiral November Natural
gas posted a new contract low on September 28 with a slight hint
of bullish divergence on the SSTO. The following day closed
higher than the opening price and against the downward trend. At
first glance this could be considered a counter-close signal bar.
However, it does not meet the criteria of being at the 20-day SMA
and it never triggered a sell signal because the market never traded
below its daily low.
However, the next day-October 2-was a different story. The
market opened higher and closed lower. This was the opposite -
counter - to the previous day so it can be considered a counter-
close day. At the same time the SSTO showed bullish divergence,
but the chart pattern wasn't suggesting much more ... until you look
at the lower time frame.
The 60-minute chart looked a lot different. The first thing that
jumped out was the three lower lows in conjunction with strong
bullish divergence in the SSTO. Secondly, October 2 had formed a
bullish Reaction swing straddling the 20-bar SMA. The Reaction
swing was formed on the 60-minute chart, but it is still treated the
same as a Reaction swing on the daily chart. In other words, the
market had retraced more than 60% from the previous price swing
high; therefore it was considered to be inside the buy window. The
buy window was breeched on October 3 when the market traded to
a low of 5.460. Since the 60% rule was in effect, the trigger price
was above the high of the price bar that entered the buy window;
therefore the trigger price was 5.605. Three hours into the October
3 trading session, Natural gas surged higher and triggered the buy
signal at 5.605 and continued higher until it peaked at 6.800 on
October 9. The signal offered a potential gain of over $10,000 in
only 20 hours of trading.
 Chapter 9- Trading With Different Time Frames 261

Figure# 9.5- November Natural Gas

The pivot high on October 9 was the beginning of a Reaction

swing that later triggered another buy signal with substantial profit
potential. But, if it bad not been for the "Market Tell" provide by
the counter-close pattern, the early entry buy signal, at the very
beginning of the bullish trend, would have been missed. That's the
real advantage of the using counter-close pattern in conjunction
with different time frames to identify market signals. Unless you
look at all the available information you may see the whole picture.

December 2006 British Pound

Figure # 9.6 - The December British pound posted a low close of

1.8645 on October 11. This was the third lower close of a series
262 Chapter 9 - Trading With Different Time Frames

that had unfolded over the past several days. The next day, after
opening higher, the market began a six-day climb that ended with
two consecutive closes above the 20-day SMA. The following
trading session - October 23 - traded lower and closed below the
20-day SMA. This was counter to the previous trading sessions,
but was not enough to form a bullish Reaction swing.

October 23 - CoWlter-close day

The 60-minute chart offered a lot more information. The SSTO

showed bullish divergence, but the retracement was not complete.
The British pound continued slightly lower into October 24, but
 Chapter 9 - Trading With Different Time Frames 263

bottomed early in the session, where it formed a bullish Reaction

swing underneath the 20-bar SMA (Note: The low was posted just
two hours after the reversal bar projected from the TR pattern that
formed between 9:00 a. m. and 1:00 p.m. CST on October 20.)
Between 9:00 a.m. and 10:00 a.m. the market traded through the
1.8740 trigger price and confirmed the buy signal. The British
pound continued higher over the next several days and reached
1.9108 on October 31. This Reaction swing was hidden in the 60-
minute chart and would not have been found if you were only
looking at the daily chart.

Las Vegas Sands Corporation (L VS)

Figure# 9. 7- LVS provided two excellent hidden Reaction swing

signals. The first example occurred after a sharp three-day rally
that pushed the market to a new high on of 78.90 on June 30. The
market paused on Monday, July 2 and closed slightly lower after
trading in a very narrow price range. The market was closed on
July 4, but LVS traded lower again on July 5lh. The market
attempted to rally on the next day, July 61h and reached as high as
77.00 before stalling. However, the market did end as a counter-
close because the closing price was higher than the opening price.
In this case, the market was closed on July 4 and left a gap on the
chart, which could be considered as day one, of a three-day
Reaction swing. However, just to be sure I took a look at the 60-
minute chart and sure enough, there is a hidden Reaction swing
forming on the 20-bar SMA. I marked the Reaction swing as (C)
and (D) on the 60-minute chart.
LVS opened at 77.23 on July 7. The higher opening was above
the 60% retracement level and inside the sell window. so the
trigger price was below the low of the Signal bar. That put the
trigger price at 75.70. On July 7, between 10:30 a.m. and 11:30
a.m. CST, the price dropped through the trigger price to confirm
the early sell signal and close at 73.08.
This is where it gets interesting. The hidden Reaction swing
triggered the early sell signal at 75.70 on July 7 and the market
264 Chapter 9 - Trading With Different Time Frames

closed at 73.08. The following two trading sessions both closed

higher than the previous trading session and formed a bearish
Reaction swing on the daily chart.
The Reaction swing reached as high as 74.92 before it peaked
and turned lower, but the trigger price was 71.30, underneath the
pivot low at (C). This was still a very good trade signal because the
market continued lower after the sell was triggered and reached a
low of 59.39 on the Reversal date projected from the daily TR
pattern.
However, the hidden Reaction swing from the 60-minute chart
offered an early entry considerably higher that the entry provided
by the daily Reaction swing signal.

Las Vegas Sands Corp. ·Daily

The market reached 78.88 -.........

on October 18.
The mamet reached 70.49
on October 2.
~

Figure# 9. 7- Las Vegas Sands Corporation

 Chapter 9 - Trading With Different Time Frames 265

Las Vegas Sands Corporation (L VS)

Figure # 9.8 - The second example occurred in late September.

LVS had just completed and eleven day correction and turned
higher after a failed swing pattern on September 25. The following
day shot higher but hit resistance after it breeched the 20-day
SMA. The next day ended as an inside day with the closing price
lower than the opening price ... a one-day counter-close. The one-
day pullback was not enough to form a Reaction swing on the daily
chart, but the 60-minute chart revealed a hidden Reaction swing.
The 60-minute chart is much more illuminating as it displayed a
potential TR pattern forming above the 20-bar SMA. The market
had made a high pivot at 68.42 on September 26 and pulled back to
the 20-bar SMA, where it posted a low pivot at 1:30 p.m. CST on
September 27. The pattern was confirmed the following day when
LVS traded above 68.42. However, the market paused as the daily
chart tried to form a Reaction swing but never met the criteria
before it pushed to new highs. The market peaked at 78.88 on
October 18 and began to form a new Reaction swing. The TR
pattern was hidden inside the daily chart but could not be seen
unless you dropped to the lower time frame of the 60-minute chart.
The daily chart did not confirm a Reaction swing until five days
later when the market was already trading above 71.00 ... 250
points higher than the trigger price provided by the hidden
Reaction swing.

December 2006 Crude oil

Figure# 9.9- The December Crude oil had been in an unrelenting

downward trend for almost four months, but began to show signs
of losing momentum. After posting the fourth consecutive new low
on October 31, Crude turned and traded higher during the next four
days. On November 6, the market peaked at 60.55, just above the
20-day SMA and followed with a counter-close day on November
7. The market was set up for a possible TR pattern buy signal, but
266 Chapter 9 - Trading With Different Time Frames

Las Vegas Sands Corp - LVS- Daily B 60-minute 1!00

B
D J~ 7 - 8:30 a.m.
r Dl Co--close ·July 6. : ...-- lloo
... ... ...... .. tULlA.~) 7700
Trigger price I&OO
11 7t00
l5eG
c
A
price~~~ : ~ 7400

~ I\JY'~ ' ~
Trigg«
c noo
1
noo
July 5- 9:30 a.m. noo

1~1 1,1 :
E

Figure# 9.8- Las Vegas Sands Corporation (L VS)

the market needed another lower close to set up the Reaction

swing. However, the following day opened slightly higher and
closed above the open. This meant the I would have to wait
another day for a Reaction swing to form in order to give me the
buy signal I needed to enter a long position. Or does it?
The 60-minute chart revealed a bullish Reaction swing pattern
had begun above with a pivot high at 60.55 on November 6 and
ended with a low pivot at 1:00 p.m. CST on November 7. The
market moved off the pivot low and traded toward the trigger price
of 60.60, but didn 't reach it on November 8. The signal was
 Chapter 9 - Trading With Different Time Frames 267

triggered at 60.90 when the Crude opened sharply higher on

November 9.

December 2006 Crude oil -Daily

268 Chapter 9 - Trading With Different Time Frames

Benefits of the Counter-Close

The counter-close pattern can be a very beneficial pattern to add to

your trading playbook. Some traders use it exclusively because it
appears often, as illustrated by the fact that three of the examples
illustrated occurred on the same day, October 24. Another benefit
is the tendency for a quick price surge right after the signal is
confirmed. However, like other pattern set ups you must learn the
criteria and make sure the set up is correct and always manage the
risk. One mismanaged trade can eliminate a lot of good trades.
 Chapter 10- Some Final Words 269

Chapter 10

"A year from now you may wish you had started today"
Karen Lamb, author

Some Final Words

A
fter you have read this material and studied the charts, you
may be filled with such enthusiasm that you feel you are
ready to conquer the markets. However, before you set out
to do just that, I want to share with you another important rule:
never force a chart pattern or signal! Unfortunately, in our
enthusiasm to be right, traders are sometimes tempted by irregular
patterns and formations. Instead of waiting for the correct
formation, they tend to force the trade from a pattern that slightly
resembles a specific pattern. Since chart trading involves risk, even
if you have a perfect pattern, using your creative imagination and
wishful analysis can lead to unsatisfactory results. There are more
than enough markets to trade that you will almost always find a
market with an identifiable Reaction cycle about to begin or end.
Remember, patience and research will be rewarded.
AJways let the market tell you what it is going to do--let it do its
own forecasting. If the market is not behaving as you think it
should, get out and wait for the market to prove itself before re-
entering the trade. Once you are out of the trade, you can re-
evaluate the trade. It is easier to re-evaluate a trade from the
sidelines than from a position with a large loss. If it is still a good
trade, you can always re-enter. That extra commission spent is
always cheaper than riding a bigger loss.
I suggest that you take the time to re-read and review this book
from the beginning before attempting to apply the methodology. It
is vital that you understand all the components of the Reaction
swing and the concept of the reverse and forward count befo re you
can move on to Action/Reaction lines and the projection of Price.
270 Chapter 10- Some Final Words

Take the time to understand and practice the concepts. You will be
glad you did! When you fully grasp the concepts in this book, you
will never look at the market the same. Imagine the confidence you
will feel knowing how the market should react and unfold.
What I have written and illustrated in this book is the result of
years of study, research and experience. In the many years that I
have been involved in trading, I have found one thing to be true:
every day is different, and any actions you take and decisions you
make will depend upon the experience and knowledge you have
acquired. This experience and knowledge will consciously or
subconsciously affect every aspect of your trading.
A very wise trader once told me, ttamateurs look for
perfection, and professionals look for performance!" Remember,
not every pattern or cycle will work or form perfectly - trading is
not an exact science. Even with perfect setups there are going to be
losing trades, but the concept is sound and over a period of trades
your confidence will grow, and with that comes success.

If you have questions, there is help available.

You may have questions that the book just can't answer. This is
okay ... you can always pick up the phone and give me a call or you
can send me an e-mail. Either myself, or one of my trained and
licensed staff will be happy to answer your questions.
If you want more information you can call Traders Network at
1-800-831-7654 and I will have them send you a complete
information kit. This kit contains everything you need to begin
trading; this includes software for online trading, charts, quotes,
news and account access. Traders Network even has a Tech help
line!

You will need this!

Just for reading this book you will receive a two-month trial
subscription to The Traders Market Views (TMV,) now in its 20-
year of publication. This electronic publication is sent out every
 Chapter 10- Some Final Words 271

Monday, Wednesday and Friday and is packed timely market

insights and recommendations. This is my free gift for buying this
book. Don't pass up this offer!
This will allow you to compare your projections with mine -
what better way to test your knowledge! Remember, if there is a
question, you know where to get the answer.

The Traders Market Views is yours free - but first you must call
to sign up at
1-800-831-7654 or visit my website www.tradersnetwork.com

Advanced Swing Trading DVD and Online Seminar

In this 90-minute DVD John Crane clearly describes his original

Action/Reaction trading method. With the help of numerous real-world
examples, he delineates his system and shows how to consistently project
tops and bottoms.

Evaluating Risk
Investors/traders should understand that there are risks associated
with trading futures. The Commodity Futures Trading Commission
(CFTC) requires that prospective customers be provided with risk
disclosure statements. Historic performance results should be
reviewed with the understanding that past performance is not an
indicator offuture results.

Resources for Traders & Recommended Reading

"Trading from the Inside" by Joseph Kellogg

You don't have to be a Wall Street Insider to trade like one!
Trading from the Inside is a must read for every commodity trader.
Mr. Kellogg packs all he has learned about trading into this book.
He breaks down trading and clearI y explains how to read charts,
bow to interpret technical indicators, and how to master trading
psychology. The path to market freedom is knowledge. This book
272 Chapter 10- Some Final Words

is full of wit and war stories and should be a part of every trader's
library.

ul found it direct, clear, and informative. You seldom see

something so successfully straight forward. "
-Stocks & Commodities Magazine
242 pages- $49.95- ISBN 1-931611-00-9- You can order online
at www.tradersnetwork.com or by calling 1-800-521-0705 or 1-
800-831-7654

"The Option Traders Playbook" by Joseph Kellogg

The Option Traders Playbook will answer your option questions
and help you develop option strategies to meet your trading goals.
This easy to understand guide is illustrated with graphs and charts
that go beyond the mechanics and the basic trading strategies of
the commodities market; this guide delves into the market pitfalls
to avoid. The strategies taught inside this course will open up a
whole new way of looking at the futures and options markets.
After taking this course, your eyes will be open, and your trading
will never be the same.
175 pages- $49.95 -You can order The Option Traders Playbook
online at www.tradersnetwork.com or by calling 1-800-521-0705
or 1-800-831-7654

Trading Tools

Market Center Direct (MCD) Online Trading Software

Market Center Direct bas revolutionized futures trading on the
Internet. From the live quote page and real time data to the easy
order placement and order log confirmation, click on Bonds and
instantly send a Bond order; click on E-mini and you instantly get
a chart; click on Corn and you instantly get the FWN Grain news.
Other built-in features include: real-time equity statements,
messaging with your broker, and tracking all your orders. Market
Center Direct is the ultimate trading software for active and
 Chapter 10- Some Final Words 273

beginning traders. With MCD, you have access to quotes from all
the U.S. markets directly on your computer via the Internet.

Traders Market Center (TMC) Web Based Trading Software

Traders Market Center takes MCD to a new level. No longer will

you have to install or configure your computer. You can gain
access to TMC from any computer by logging into our customer
website. You have MCD's functionality with even less fuss. You
will get real-time quotes & charts, equity information, research,
and order tracking all from our Traders Network website.

Trade Simulator

Trade Simulator is a powerful commodity trading software tool

that is built to help teach both beginners and experienced traders
how to trade commodities. You will learn how to properly trade
and gain " real -market" experience without the risk! In just a few
hours you will gain months of trading experience! Trade
Simulator's database comes equipped with 17 years of real market
history that covers 22 markets. Analyze daily, weekly, and
monthly charts with 14 of the most popular technical indicators.

A Futures Magazine comparison of trading simulators gave

Trade Simulator the edge saying, "It offers more indicators, more
control over parameters, and it's the easiest to use. "

"Overall, Trade Simulator is fun and instructive... (and) a good

introduction to tracing's decision-making process... making Trade
Simulator a real deal. "
-Stocks & Commodities Magazine

The Trade Simulator can be ordered online at

www.tradernetwork.com or by calling 1-800-521-0705 or 1-800-
831-7654.
274 Chapter 10- Some Final Words

Reversal Tracker Trading Software

Many trading systems are ambiguous about when to buy -- and

give no indication of when to sell. With Reversal Tracker, you get
clear, precise, easy-to-read signals on every trade. Trade signal
confirmations clearly define where to buy and where to sell with
precise Time and Price projections.

Reversal Tracker will work with any freely traded market

anywhere in the world. It is an easy way to make logical trading
decisions, based on the purest market data known: price movement
and market behavior.

The system's buy and sell signals are calculated by a proprietary,

back-tested algorithm based solely on real-time or end-of-day price
data - giving you timely, specific, and objective signals for every
trade. Proprietary indicators set optimal stops for seeking
maximum profits. Reversal Tracker shows traders the course a
market will take in the future if the prediction is correct.

The two chart examples illustrate the type of signal and analysis
provide by the Reversal Tracker software. For your trial offer call
1-800-521-0705 or visit www.tradersnetwork.com
 Chapter 10- Some Final Words 275

3011.4

187

2AIII 071241l11 -
.
08/II.G6 ICIIIIAI$ '
lomAIS limA~& 11/14«1&

Pol: Long ~lue: 115.7SU Enby: 244.75 Slop: 131.17

Enby Ool>t: 19/ lt/ U

tl

lq
I 1:1
- ----t-L--- ~~~----+1.838
i!
p

~;I
- tm

I
I
i
__L_ ·- -.I 1.816
I I

Pos: Sh<>rt V1lue: 0.1513 Enby: 2.0717 SIDp:t.nu

276 Index

Index

A-B-C correction- 62, 150, Charts - 80, 103, 149, 170,

158, 159 Closing prices and Reaction
Hog example - 158-159 swing- 27, 28, 56, 59
Five-wave pattern -159, 190 Confirming- 34, 40, 52, 59,
Action lines- 10, 13 Consolidation pattern- 31,
Action/Reaction lines- 106, 47, 72,123,130,152,159,
107, 118, 120, 121, 122, 124, 182
125, Connecting patterns- 149,
Action/Reaction theory- 14 227
Andrews, Alan - 106, 110 Corrections. See Retracement
Andrews Pitchfork- 106, -17,57, 70, 87,
109-110 Covered write - 219, 220,
Babson, Roger - 21, 106 226,231
Bearish divergence - 237, Cycles, natural - 10
238,239,240,242,243,247, Downward trending market -
249,252 32,33,35,57,59,89,90,
Bearish trend - 24 Elliot Wave Theory - 10,
Breakout bar - 29, 35, 42, 48, 149, 150
57, 60, 67, 77 Extending, count - 101
Broker, picking - 272 Failed swing patterns - 188,
Bullish divergence - 240 - 189,190,194, 198,200,265
262 Fast stochastic - 238
Bullish trend- 45, 168, 214, Five-wave pattern - 159, 190
261 Forward count- 31-35, 41,
Buy signal, confirming - 29, 44, 46, 48,51-53, 60, 61,63-
44,46,56 65,67
Buy window or zone- 39, Futures trading - 271, 272
40,44, 46,55 Gann, W.D. - 10,21
Calculating - 38, 39, 109, Gap - 60, 64, 65, 67, 70, 74,
Center line - 106, 107, 108, 75, 77, 78,
109, 110, Holidays - 32, 35, 44, 60, 65,
Charting software- 39, 109, 69, 70, 72, 75
110,238 Human emotions- 86,218
Chart patterns- 12, 15, 27, Identifying, see Reversal
170,216,251 dates - 36, 85
 Index 277

Indicator-14-17, 23-25,42, Poker, trading compared to -

43,48,52,58,59, 72,80,84, 169
93,106,111,148,202-204, Price- 7, 9, 10-19
207,208,210,217,219,221, Price action - 13, 17, 18, 22,
237,238 23,46,63-64,67,78,94
Kellogg, Joseph, books by- Price charts, patterns in -
219, 271-272 170,237,240-242,244,250,
Knowledge of market - 5 253,254
Learning and practicing Price correction - 24-25, 30,
concepts- 9, 15, 270 32
Long-term trend- 87, 91, Price target- 23, 113, 115,
253 117, 133
Major reversal pattern - 127, Pivot point - 24, 28, 29, 33,
210,214,224 36,38
Major trend - 36-37, 84, 200, Protective stop- 8, 19, 38,
247 42,44, 47, 48,51
Market Center Direct - 272 Reaction cycle -14, 26-27,
Market correction- 49, 57, 150,158,167, 191, 193,269
156, 161 Reaction line - 106, 107,
Median line study - 106 109-116, 118, 120-126, 128,
Misinterpreting Reaction 129-131, 133
swing- 36 Reaction swing- 14, 22-25,
Money management - 8, 10, 29, 31-37, 42-50, 52-55, 58-
42, 86,98,216,272 61
Moving average- 15, 43, 44, Reading resources - 271
58,64 Retracement- 24-26, 38, 52,
Options - 218, 219, 221, 224, 54-55,57,59,63,69, 78,81,
231,234,272 87,90-91,97, 150,262-263
Options Traders Playbook, Reversal date - 14, 23-24, 26,
The - 219, 272 29-30, 35-36, 42-43, 46-50
Patterns, see Charts Patterns Reverse count- 31-35, 44,
Performance, looking for - 48, 52-53, 56, 60-61, 63-64,
106,219,270,271 67
278 Index

Risk disclosure statement - Tells - 169-170, 188, 191,

271 208,216
Sell signal, confirming- 29, Three Little Indians - 240
38-39, 41, 47-48, 52, 56-57, Three-wave pattern - 158
64,67, 72,90,94-95,97, Time -14, 21, 48, 88
116, 118-120, 122, 123-124, Time duration- 112
126-127 Trade components of- 14,
Sell window - 26, 38-41, 47- 202,269
48,50 Traders Market Views- 270,
Shorter time frame, trading in 271
- 253-254, 257, 260-261, 265 Traders Network - 270, 273
Signal bar - 38, 40-41, 44, 47 Traders Network website -
60 percent retracement level 273
- 38, 52, 57, 63, 69, 78, 263 Trade Simulator - 273
Slow stochastic- 237-240 Trading- 5, 6, 8, 10, 11
Slow stochastic technical Trail day - 61, 64, 201-210,
oscillator (SSTO) - 237-248 212-215
Software. Also see Charting Trend - 6, 11, 15, 17, 18,22-
software - 109, 238, 270, 24,26
272-274 Trend continuation pattern-
Supply and demand law - 10- 50,74,80,87-90,118
11, 13, 17 Trend exhaustion - 88
Support and resistance levels Trend line - 15
-23,25, 118 Trend reversal pattern - 36-
Swing trading - 271 37,57,90,107
Target price -113-115, 118- Trigger price- 41-42, 51-52,
126 55,61,68, 74,77-78,80,84,
Technical analysis- 10, 12, 90,92,95,97,100
14,27,237,252 Upward trending markel-
Technical indicators - 15-16, 26, 28, 32-33, 59, 87, 89-90,
43,58,237,239,251-253, W bottom- 37, 150
271,273 Zigzag patterns- 150, 158-
159, 167-168