Below is a 30-min chart of the SPY with the Inverted and Regular Cycles (as I wrote about last weekend). Here is the same chart, only this time including the PTT's (red line - Price and Time Targets) and the CTL (purple line - Cyclic Trend Line). Confused?Well, the hardest problem I have seen with Stevenson Price and Time Targets was determining when the Inverted Cycle ends and the Regular Cycle begins in real-time. According to Stevenson, this happens when price makes a close outside of the CTL.
As a refresher, the Cyclic Trend Line (CTL) is drawn by connecting the most recent swing low to high, this line is then moved outward so that it touches only a single price point.
However, when doing this in real-time you'll never know whether the previous high will be taken out (invalidating the end of the Inverted Cycle and confirming the continuation of the Regular Cycle in which you're in), so you'll have to continuously watch for strength or weakness at previous swing highs/lows (perhaps a very good habit to be in).
For example; If you're in the second half of an Inverted Cycle (price moving higher) you will be expecting a transition into the beginning of a Regular Cycle once price breaks the CTL). But once price breaks the CTL there is still just as much likelihood that price may continue making higher highs. Therefore, you should always be looking for a retest of the CTL, or some sort of price topping (or bottoming) pattern.
Referring back to the above overview chart (30-min) that includes CTL's (purple lines), I'll include the same CTL's on our trading chart (the 5-min).
This first chart shows the day of Jan. 20. where we're in the tail-end of a RC. Price closes outside of the CTL, but that's not an actionable signal. We wait for price to tell us whether we'll likely make a lower low (and continue the Regular Cycle), or whether we should look to get long in anticipation to ride the beginning of an Inverted Cycle up.
After a low was made, price rose and tested the previous support level, before selling off (market internals likely telling you to sell resistance?). Price then began to stabilize and base at that resistance level, before breaking out, much more of an actionable sequence.
Now lets move to the end of that day and the beginning of the following Thursday. We have a Cyclic Trend Line in place which price tests at the open. Right away we get a bear flag, Open range breakdown out of the CTL (beginning our Regular Cycle down).Once this CTL is broken we anticipate the beginning of an Inverted Cycle. We see a bottoming pattern develop in the form of an Inverse Head & Shoulders, we buy the breakout, but price gets sold. OK, so we get stopped out, but we learned a valuable piece of information. We learned that sellers are still prevalent in the market and price may want to go lower (at least to test the lows perhaps).
Finally, I'll include the last two days in the SPY with the CTL's in place. Notice we had closes outside of the CTL with some tradeable pullbacks to this line that coincided with technical patterns (i.e. a Head & Shoulders breakdown into the close of 1/21 and the open of 1/22, a lower high breakdown around 12:30 on the 22nd).
I hope this isn't too difficult to follow. If it is, I would love to hear from people who might have valuable input. Anyway, trade in the direction of the cycle!
The setups I include on this blog are used in conjunction with the 3/10macd and the criteria I ascribe to it as a way to alert me to an existing condition of price. The key concept to take away from this blog is that I try to anticipate what will happen on the higher time frame by using a faster time frame to trigger the trade setup. I do not trade a "system" I use two indicators to clue me in to price conditions. Please read the Disclaimer located in the sidebar of this site. I can be contacted via email at email@example.com
I am always open to questions, comments, or suggestions on how to improve this blog.