For a more in depth description on market structure, continue reading below:
The rules are based on leveraging 4 time periods, and integrating them collectively as an overlay.
1.Day Structure:
Here we want to Qualify the directional structure of the day timeframe as Up or Down.
Instead of using the individual day bars, I've used a 2-Day structure, that is illustrated by the red line overlay. The 2-day chart reduces the noise of the single day chart by combining 2 days together and evaluating their highs and lows as 1 unit.
Follow the Arrows below that indicate the changing directional structure of the day period.
2.Weekly Structure
We must Qualify the 'Slope' of the weekly time period as Up or Down.
The chart below illustrates a blue channel overlay on the day bars that represents weekly activity defined by a set of rules for the weekly time period. The arrows signal weekly 'Slope' change as the day bars violate the boundaries on a weekly closing basis.
The chart captures the activity for the NQ since August 2010 and shows the inital Up signal illustrated by the green arrow. The Weekly structure remains in tact without violation until Feb 22 2011, as illustrated by the red arrow. The fast correction into March 2011 is reversed on the weekly time period as illustrated by the green arrow on March 24 2011. And then another red arrow on May 16 2011 that turns the weekly slope back down again.
So despite all the noisy movement on the day chart, the Weekly slope has turned 3 times in 2011 and 4 times since August 2010.
3.Monthly Structure
We must now Qualify the direction of the monthly timeframe. This is the 'Major' trend of the market and determines the prevailing bias. This time structure is very important for longer term investors. We will discover that monthly closing violations of (monthly) boundaries lead to an indefinite directional change in the underlying trend of the market, signalling longer term investors to prepare to enter (or re-enter) long or prepare to take profits. The first chart below captures the tail end of the Bull market in 07' to 11'. There have been 6 closing monthly violations since June of 07' which have lead to significant directional changes. The first signal below in July 07' produces the only false signal in 4 years, but warns of an exhausted Bull market trend that inevitably reverses back down in Nov 07'.
Once the July 07' failed signal moved back through the monthly channel and violated the upper monthly boundary, the market continued in that direction for a period of 47 trading days (approx 2.5 months). The second signal given in Nov 07' produced a monthly trend that continued uninterrupted for 339 days before producing a monthly buy signal in March 09'. The March 09' buy signal generates 277 days of monthly trending. The May 2010 monthly closing violation of the lower boundary shifts the monthly trend down for 109 days. We have the most recent monthly buy signal in August 2010 to present day that has been continuously trending for 167 days.
The second chart (above) displays the monthly turns in the market during the 02-07' Bull market. There are 6 total monthly swings during that time frame. The first monthly closing violation of the upper boundary takes place in October 02' and continues uninterrupted for 13 months. The following 5 swings produced on the monthly chart generate directional conditions that sustain themselves for 44-236 trading days. I have not shown the performance of the monthly strategy as an isolated method in and of itself. This simply demonstrates the dependence that occurs as shifts across larger timeframes take place.
4.Hourly Pivot Structure
This is the faster signal that is used as a boundary to initiate long and short positions in conjunction with trading rules discussed below.
As we can see from above, we have the most recent (June 2011) open position, which was entered short following a closing violation of the 3 day pivot range. If the market were to reverse back above the 3 day pivot structure, it would indicate a short term change in trend, and thus, it is used as an exit strategy.
Now, lets integrate time frames.
Lets start by looking at the Monthly overlay on the daily bar chart seen below:
This chart shows the NQ mini going back to Nov 10' with the monthly channel overlay (maroon channel). Notice that the monthly channel was trending into Nov 10'-Feb 11' and from March-June 11' its been moving in a sideways holding structure. In March 11' the market violates the lower monthly boundary, as illustrated above by the first black arrow, as the day bars dip below, but recover back into the monthly channel - no monthly close below the structure - so no damage to the monthly trend. Now, we face renewed pressure (June 11') as the market has violated the lower boundary of the monthly channel. We now know that when the market violates the monthly structure on a closing monthly basis, the bias of the market can change going forward. More importantly, long term investors can sit back and observe how the monthly channel has contained the daily price action, and use the structure as a guide.
Now lets intergrate 2-Day and Weekly:
Lets examine the weekly structure under 2 conditions: trending and sideways.
From September 10' - Feb 11', the Weekly channel trends up without a single change in direction. Notice from the chart above the black arrows showing the day bars 'respect' the weekly boundary defined by the channel as they test its boundaries. The first black arrow above shows the the day bars violating lower, but then recovering back into the channel to sustain the weekly trend. From March 11' - June 11' the weekly structure has been oscillating back and forth, but a regression anaylsis would show that its been moving sideways, and we also know that the monthly structure has also been moving sideways in a holding pattern. From the sideways weekly condition, we can see that mini-trends seem to develop, whereby the day bars move higher to push the weekly channel up, respect the channel, and then violate it, taking the channel in the opposite direction. All of this occupies the space of the monthly structure.
