Contracts for Difference

This is the third section in the Technical Analysis CD from CMC and it looks at time frames, dow theory, elliot wave, divergence, and intermarket technical analysis.

Timeframes

All analysts should adopt a multi tiered time frame approach to their analysis.  As a rule you should work from the longest time frame possible down to the target time frame.  eg a trader with a daily time frame should begin with a monthly chart, then a weekly chart and finally a daily.

What do you do when there are conflicting timeframe signals, which signals do you follow?

The key to successful analysis is to ensure analysis of your timeframe is consistent with the target timeframe, avoid blurring timeframes.

Dow Theory

Defining the start and end of a trend.  A turn from uptrend to downtrend is the point the price first produces a lower high followed by a lower low.  A trend is held to be intact until it reverses.

Benefits and problems of Dow Theory:

• Following the theory misses 20-25% of the trend
• Dow theory accounts for 68% of moves in industrial and transport averages and 67% of those in the S&P500

Bar Charts

Covered a lot of past ground.

Key day reversal signal – shows a strong warning or signal of a reversal prior to the trend.  In an uptrend, the day of the key day reversal prices makes a higher high and then closes below the previous days low.  That is, it closes against the prior trend.  The heavier the volume and the wider the range, the more significant the move.  In a downtrend, the day of the key day reversal, price makes a lower low and then closes above the previous days high.

Volume Analysis

Volumes don’t give buy or sell signals, but serves as a way of confirming or contradicting a given underlying price move.  Typically a price which moves in a given price trend is confirmed if accompanied by higher volumes.  A slight exception is price downtrends don’t necesarily need to be accompanied by strong volumes.

Price Gaps

• Breakaway gaps – point to a new trend and are rarely filled
• Continuation gaps – occur after a trend has begun, confirms the trend
• Exhaustion gaps – suggest the end of trends, these gaps are always filled

If the price gaps in your favour, move your stop loss up to the edge of the gap, if a price gaps against you the look to exit your position.

Elliot Wave

States that markets follw a systematic and repetitive rhythm consisting of 5 waves up followed by a 3 waves structure of decline.

Rules:

1. Wave 3 of the upwaves (1,3, & 5) must NOT be the shortest in terms of price advance
2. The low of the wave 4 must be higher than the high of the wave 1
3. The low of wave 2 must be above the low of wave 1

It’s a controversial theory.

Technical Divergence

Divergence is the opposite of confirmation and refers to a situation where different technical indicators such as RSI, MACD and stochastic fail to confirm one another.

There was then some discussion of Intermarket technical analysis with the basic premise being all markets are interrelated etc and discussed some concepts of correlation.