Price fluctuates – It is the nature of everything in this universe. The universe is alive and change is the nature of everything. Eighty years ago, Dr. Andrews developed a methodology that allows us to the most probable path of price, in advance; he stated that this methodology worked on ‘anything that fluctuates, in any time frame’.
In our methodology at Market Geometry, we use market structure like Swing Highs and Lows, Lines of Balance, lines that plot out where a Change in Behavior may occur, areas that show signs of significant buyers or sellers [Whale Tracks] and of course, the two tools pioneered by Dr. Andrews at MIT: Action Reaction Lines and Median Lines. I am one of the few remaining students from Dr. Andrews original ‘Inner Circle’, the Coral Gables Group, and so I know his work probably better than anyone else alive. But since adding emphasis on Market Structure, the other drawing tools I mentioned above and putting greater emphasis on the areas Whales are attracted to, I found my trading has improved dramatically. When I use all these tools together, I get a very detailed map of the most probable path of price-and generally find a handful of high probability entries on these maps.
But what happens when price leaves its most probable path? What happens when the last recognizable repeatable pattern fails and price leaves all the market structure behind?
Looking at the chart below, you will see a very detailed Market Map that was built using an up sloping black set of Action Reaction Lines and a down sloping red Modified Schiff Median Line. These lines of Opposing Force, one down sloping and one up sloping, were laid out on this chart in 2005 and more than five years later, continue to give me the most Probable Path of Price. As Price moved forward in space or time [to the right on the chart], I diligently marked in new Market Structure and used key drawing tools to help focus my mind of high probability entries. If you look closely at this map, there are a handful of key sell entry areas. If you had this map in front of you and if you had taken a short position at any of the key sell areas on this map, by simply trailing a stop above each prior Major Swing High, you would have caught a tremendous long term down move. Even if you had reduced your risk and lowered your stop profit to a Minor Swing High and gotten profit stopped out, this Market Map presented you other high probability areas to get short, if you were simply patient and read the Market Structure.
Looking at the left of the Market Map, price leaves flat tops, a sure sign there are significant sell orders left by the largest players in this market [the Whales]. I began teaching others how to spot ‘Whale Tracks’ because when I long term portfolio trade, the size of my orders make me one of the Whales playing in most of the markets I trade. I can ‘see’ the tracks left by other Whales; each has their own tricks and ways of entering and exiting, so they are readable with some practice. Many Whales look at the same thing or talk with one another, so many times their orders are grouped in the same area. But you don’t have to be a Whale to trade with the Whales – You simply have to be able to read their tracks. In this case, the flat tops which turn into a Multi-Pivot Line or simple trend line after a few touches, shows the Whale interests to sell. The first interesting sale area is at Pivot C and that is a simple sale at the re-test of a horizontal line – in effect, you would have been selling with the Whales!
When price fails to break above the Multi-Pivot Line or flat tops in late 2005 and heads lower, breaking a prior Swing Low in early 2006, I add in a red down sloping Modified Schiff Median Line. Now I have a quandary: Which set of lines, the Action Reaction set or the new Median Line set, are in control and will show me the most probable path of price? There is a Change in Behavior Line [This Line is also a Center Line, but let’s leave that discussion for another article] that is on the chart but not labeled. Can you see it? It is the line that connects Pivot B to Pivot C. Price breaks below this line [it is a dashed red up sloping Line] and then it works its way up to retest it on the ‘Switch Back’ side. Once price tests the Flat Tops and it is obvious that there are sell orders there, price begins to head lower. When price breaks the Swing Low, I have confidence that the Change in Behavior Line has been tested, and price should be headed lower to the next area of transition.
Dr. Andrews taught, and my research confirms, that price will reach the Median Line [the middle of the three Parallel Lines] 80 percent of the time. After breaking below the prior Swing Low, price tests the down sloping red Median Line and then reverses. The pullback ends at the black up sloping Center Line of the Action Reaction set of lines. This is another potential sell area now that price failed to break above the flat tops, broke below the Change in Behavior Line and broke below the prior Swing Low.
You can see that the Center Line acts as resistance now – and if you had confidence in the Action Reaction set, this re-test of the black Center Line from below is another excellent short entry area. Once price turns lower, it makes a series of lower highs and lower lows. When price tests the Reaction Line, you can see it holds little support and after some congestion, price breaks below and leaves the Action Reaction set.
Now imagine this chart without the red down sloping Median Lines-Erase them from the chart. When price breaks below the low at Pivot B, it is in ‘uncharted territories’ and if I didn’t have Median Lines in my tool set, I would be looking at price making new lows with no idea how low or how fast it would likely travel. Without the red down sloping Median Line set in place, price is ‘discovering’ where the next transition area is at and I have nothing on my chart to help me. I will simply have to wait until price finds an area of ‘value’; I would have to wait for price to build some Market Structure I recognize before I had any clues about further movement. But the red down sloping Median Line and its Parallels gives me the Most Probable Path of Price now that the Action Reaction Line set and the Major Low at Pivot B have been broken. Price is headed to the Median Line. If the Median Line is broken, price is headed to the red Lower Parallel Line with 80 percent certainty.
Price zooms through the Median Line and then zooms right back above it [a pattern we call a ‘Lazy Z’] but notice that price stopped right at the last small congestion area or ‘Mountain’ that gave way before price dropped vertically – what was support became resistance. That’s a potential sell area as well, since price has already broken below the major Swing Low at Pivot B. Price doesn’t stay above the Median Line very long and trades lower to re-test the low of the ‘Lazy Z’. After a handful of small range bars made in congestion on the Lazy Z lows, price spikes lower and in a vertical fall, tests the red down sloping Lower Parallel.
IF you were short from one of the areas I mentioned, when price goes vertical, in new territory, with wide range bars, and tests the Lower Parallel, it is a great time to lock in your profit. There are two excellent reasons:
- The Vector or Line of Force that price had been following down was sustainable because it was made up of waves of lower highs and lower lows, where you could clearly see price pause and catch its breath before moving to new lows each time. As my partner Shane is fond of saying: the market breathes in, the market breathes out – it’s a natural rhythm. But then this market finally ‘Gives up’ and the Line of Force literally turns vertical, because there are no longer any buyers to slow the movement, only stop loss sellers and traders selling ‘at the market’ trying to get ‘on board’ a market that is falling with no end in sight. This has turned from an orderly flowing market to a market that is careening out of control, doing its best to discover where any area of value is – an area that will finally attract buyers to slow or halt the free fall. But when markets are out of control, anything can happen. If you look at the chart, once price is down at or near the area of the Lower Parallel, it could pull back a great deal before breaking a prior Swing High or any other structure where there might be Whales or large sell orders that will slow or halt any retracement. This means that your Dynamic Risk Reward has shifted a great deal – it’s the nature of being on the right side of a vertical move.
- Luckily, the methodology I use and teach includes Median Lines, a leading indicator that generally gives me the most probable path of price. And that leads me to the second reason this area is a good place to take your profit: Median Line theory, as pioneered, researched and taught by Dr. Andrews teaches that Median Lines have a set of mathematical probabilities built in, because of the nature of the relationship between the three alternating pivots that form the Median Line and its Parallels. In short, Median Lines project forward in space [or time] and price the probable path of price. The research says that price will reach the Median Line or one of its Parallels [whichever it is heading towards] 80 percent of the time. If it breaks through the Median Line on the up side and begins to break Swing Highs, expect it to test the Upper Parallel 80 percent of the time. If it breaks through the Median Line from above and is heading lower, breaking through prior Swing Lows, expect it to test the Lower Parallel 80 percent of time. The same mathematical relationship holds for Warning Lines, which use the same slope as the Median Line and are projected above and below the Parallels should price break and hold outside them.
Now look at the nature of the bar as price tests and indeed trades through the Lower Parallel: It’s the widest bar of the run down, but it follows two other extremely wide range bars lower – Price is in an unsustainable vertical free fall. Price zooms through the Lower Parallel with an extremely wide range bar but closes back above it. Price is stretched and anyone that wanted to or needed to exit their long position is likely gone. And to make things more interesting, as price kept moving lower, faster and faster, more and more traders jump into new short positions: Break out traders, momentum traders and traders that just have to jump on anything that moves! But they all have one thing in common: Poor trade location. Because price is falling vertically, there is no Market Structure above their entries that will draw in sell orders remotely close to where they got short. IF this market turns higher, they will get an unpleasant surprise as they chase each other to exit the market.
That third wide range bar that tested the Lower Parallel turned out to be the extreme. Remember, price was in its discovery phase. And it found an area, at the Lower Parallel, where price should and did run out of down side directional energy. When price turned, it worked its way higher and then sold off a bit but it didn’t re-test the Lower Parallel. When it turned back higher, it went nearly vertical and zoomed through the Median Line. Even though price had travelled a great deal higher at this point, it still had not broken above a prior Swing High from the down trend – Price would need to break above the top of the Lazy Z Pattern to the left, the last real Swing High formed on the way to the extreme lows.
Price re-tested the red down sloping Median Line from above in a two bar sell off and one bar even managed to close below the Median Line [note that both of these two bars lower were wide range bars] but then price turned up and continued to push straight up to test the Upper Parallel. At the same time and price, it was also re-testing the up sloping black Reaction Line from below. When two lines with opposite slopes meet, an Energy Point is formed – it is an area of confluence, and it generally attracts price.
There are two reasons this is a quality sell area:
- Price is testing the red down sloping Upper Parallel and Median Line theory tells us price should run out of up side directional energy here.
- Price is re-testing the black up sloping Reaction Line from below – we call this a switch back – and support should turn into resistance here.
Put the two together and you have a quality sell area. Price tested that area with three bars and then turned lower with a wide range bar on the fourth test. This wide range bar is followed with a huge bar lower – so wide and so vertical, I would be tempted to take my profit because it came so far, so fast I would view it as a gift. A smaller inside bar follows and then price makes a new low by only a handful of ticks before the bar turns around and closes on its high, just below the down sloping Median Line. The next bar zooms through the down sloping Median Line and closes on its highs: A good deal of traders must have gotten caught short and the execution of their stop loss buy orders is pushing this market higher. And remember what I wrote earlier: Once price breaks and holds above the Median Line, it is heading to test the Upper Parallel 80 percent of the time. This Median Line’s Lower Parallel held at the bottom, when price was in its discovery phase and its Upper Parallel held when price climbed off of the extreme lows and zoomed through the Median Line. I would expect it to hold if price re-tests it as it moves higher.
And of course, price tests the Upper Parallel perfectly – another great area to initiate a short position – and then turns lower. Once again, if the Upper Parallel acts as resistance and price turns lower after testing it, with 80 percent certainty, it is heading to test the Median Line. I keep that in the back of my mind as price heads lower. Then I draw in a simple trend line, connecting the extreme low to the left with the lowest low of the pair of wide range bars with nearly the same lows [they look like wide range double bottoms on the chart], that was formed on the sell off after price first tested the down sloping Upper Parallel. Then I project this line forward in time [or space] to the right. This is a Change in Behavior Line and if price crosses it and holds to the right of it, I expect price is no longer in a simple pullback but instead, the trend has changed to the down side.
Price tests this Change of Behavior Line and the red down sloping Median Line at about the same time; price forms a tight trading range or coil in this area but price is through the Change in Behavior Line and it eventually breaks out to the down side, trading below the Median Line. But then price turns and begins to inch higher. At first, it is a very gentle climb higher and it has a bit of trouble getting back above the down sloping Median Line; but it eventually does climb above the Median Line.
The first thought in my mind is simply this: If price can hold above the Median Line, I will likely see a test of the Upper Parallel. And when price picks up a bit of momentum to the upside, the Swiss Central Bank announces they are doing several rounds of intervention – and that helps price push higher, to re-test the Upper Parallel; at Market Geometry, we call this type of move ‘the Gift’.
This chart has so much to study and so many of the lines worked so beautifully and this test of the Upper Parallel is no exception. Price tests the Upper Parallel at nearly the same time it is testing the switch back side of the Change in Behavior Line – In fact, if you added a simple Sliding Parallel off the extremes of the very first test of the Upper Parallel, it tests the Energy Point formed by the two Lines of Opposing Force to the tick! This is a quality area to consider a short entry.
I am not exaggerating when I say this is one of the prettiest long term charts I have mapped out in all my years of trading.
Once price tested the Upper Parallel and the down sloping red Upper Parallel [or if you like to use them, the Sliding Parallel], it turned lower and fell in a nearly vertical fashion! The first thought in my mind? Price tested the Upper Parallel and turned lower again. Where is it headed? It will head back to and test the Median Line 80 percent of the time. Looking at the chart, you can see the bars narrowed in range but did not lose their momentum as price got close to the Median Line. When price gets to the Median Line, it should reverse, congest, or accelerate through the Median Line. This time, it zooms through the Median Line. But I have one last nugget to add from Dr. Andrews: When price zooms through the Median Line or one of its Parallels, it should trade back to re-test it.
Price trades lower, below the Median Line, to the last prior Major Low. It tests that Major Low and then bounces back and trades up to test the Median Line from below perfectly! And again, this is a quality area to consider a short entry. When price is unable to break above the down sloping Median Line, I draw a simple horizontal line from the low price just made. Price has already tested the prior Major Low and broken just a bit below it before recovering briefly; in my opinion, if price breaks below this simple horizontal line, price should have further significant losses. The first thought in my mind is: Price will be making new record lows; it will be in ‘undiscovered territory!’ The only support below it is the Lower Parallel and 99.99 percent of the traders in the markets don’t use Median Lines, so they won’t be looking at this area to leave profit orders. Price will have to discover, once again, the nature of its ‘true’ value. It will have to find a price level that attracts buyers. And I won’t know how low that price is until price gives me more clues. Will price hold at the Lower Parallel? Only time and price will tell me.
Price congests in an Energy Coil, re-storing all its potential energy, and then it breaks out to the down side and begins to cascade lower; note that the it’s not falling vertically yet – each cascade contains about three bars and then there are a couple of bars in the brief pullback, followed by a new small cascade lower. But price is making good progress to the down side. When it tests the Lower Parallel, it bounces for two bars and then resumes its move lower into new undiscovered territory. But there is one last story to tell here.
As price zooms through the Lower Parallel, it pauses briefly and forms a five or six bar tight range. And then the sell off goes completely vertical and the range of the bars get wider and wider. This is another ‘Change in Behavior’. Price had been selling off with small cascades and now, it was simply plunging lower. The fourth bar after price breaks out of the small range is a very wide range bar and it is testing the red down sloping Warning Line. If you remember the last time price was in its discovery phase, it was testing the red down sloping Lower Parallel. It zoomed through the Lower Parallel with a very wide range bar and looked like it would keep running lower. But everyone that wanted or needed to sell had already done so, and when price managed to close above the Lower Parallel, the run lower was over for the moment.
Last week, price was in the discovery phase. This week, price opened by falling 600 pips in the first two days, testing and breaking below the Warning Line. Traders were talking about 60 cents and 50 cents. This chart was captured at that extreme and I began writing this article that day. Do you think price continued lower, to test the next Warning Line at 60 or 50 cents as the week unfolded?
I was unable to publish this article until the markets were closed on Friday – there was just too much going on to finish an article that did this gorgeous chart justice. If you want to see the finish of this week, you’ll have to pull up your own chart. But remember that price searches out for the edges, looks for the extremes before finding its balance. And this market found some balance around mid-week. It not only turned off the extreme lows shown on this chart, it closed UP on the week, at nearly 78 cents. Price discovered its balance and then took everyone that was short for an unexpected ride. But this chart gave you clues, as it had so many times over the past five or six years, especially if you paid attention to past price behavior at price extremes as they related to Action Reaction Lines and Median Lines and their Parallels, that would have allowed you to anticipate potential turning points at times when most traders were completely turned around.
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