In and of themselves most technical indicators are of little use in predicting future police movement. This is due to the fact that they are “lagging” and therefore simply “follow” the actual price movement. The only two exceptions to this are price itself and volume.
We use volume climaxes at points of price resistance and support to provide clues as to whether those support and resistance levels are likely to remain intact or if price is going to trade past them and go on to higher/lower areas.
The only oscillator that we use is the Moving Average Convergence/Divergence (MACD). Specifically we are looking for divergences showing up in this indicator to assist in determining potential turning points at market lows and highs.
In the 4 Hour Chart of SPX above we can clearly see the expected positive divergence in the MACD between the low made by the A wave of the Intermediate Degree Wave (IV) and the final low for that wave (IV) by the C Wave.
Similar negative divergences generally occur in this indicator between the highs seen in the Wave iii of 3 and V of 3, and then between the tops of third and 5th Waves of the same degree.
The Squeeze indicator attempts to identify periods of consolidation in a market. In general the market is either in a period of quiet consolidation or vertical price discovery. By identifying these calm periods, we have a better opportunity of getting into trades with the potential for larger moves.
Once a market enters into a “squeeze”, we watch the overall market momentum to help forecast the market direction and await a release of market energy.
The Squeeze indicator was built from 3 components. The first two are Bollinger Bands and Keltner Channels. These are what trigger the red and green dots. When the Bollinger Bands (below in cyan) go inside of the Keltner Channel (below in red), the market is said to be in a squeeze. The dots across the zero line of the Squeeze indicator will turn RED, signifying this period market compression. Once the Bollinger Bands expand and again move outside the Keltner Channel, the dots will turn GREEN, signifying that the squeeze has “fired”.
The final component of the Squeeze indicator is a momentum indicator. Once the Bollinger Bands move outside of the Keltner Channel, a Squeeze has “fired”. In order to determine the direction of the move, we then look to the momentum. If it is above zero, the squeeze has fired long. Inversely, a short squeeze would be signified by negative momentum.
In early November 2016 we were expecting to see a significant market low. From our Elliott Wave Analysis we were looking for the bottom of a Minute Degree Wave ii and considering long entries to profit from the potential of the expected Minute Degree Wave iii.
Our Hurst Cycle Analysis suggested that the low was likely on or around the 8th November 2016 and that it would be followed by a strong, sustained move up in SPX through to at least March 2017.
Now lets look at the additional information and long entry signals obtained by utilising the Daily Squeeze Indicator since early November 2016. Clearly this indictor allowed us to be long the SPX and capture each of the accelerated parts of the overall move up while avoiding the periods of retirement and consolidation.
The series of red and green dots seen below the actual Squeeze Indicator for the charted instrument above are the Squeeze Indicator Fire Lines for a choice of related markets and instruments. Obviously when trading the indices it is preferable when the other major indices are also signally in the same direction but also if the major sector ETF’s are also supportive of the potential move in the direction of an intended trade position.
The above is particularly powerful when applied to individual stocks. We look for the relevant Index and Sector ETF to which the stock belongs to also be indicating a move in our desired direction as well as supporting information about the other major indices.
The above chart is for Alibaba Stock (BABA). Using the combination of our Elliott Wave Count, Hurst Cycles expectations and then applying the information from the Squeeze Indicator a long entry was clearly identified in January 2017 when this stock was trading at around $96.00. At the time of writing (July 2017) this stock is now trading up at $152.00 representing a potential to have made a 58% gain in around 6 months in the stock itself. Various entries and exits were also clearly indicated as shown in the chart which could have been very beneficial to Options traders.
The latest part of the price action on this chart also clearly shows that the momentum to the upside is becoming weaker at each successive peak seen in the price. This indicates that a correction may be imminent and agin this is consistent with our other analysis methods at this time.
We would encourage members to also watch the series of video tutorials in this section on the Technical Indicators to further enhance your understanding.