I was planning to go through the whole Zinc campaign chronologically to deal with a range of issues in depth and how to deal with a range of contingencies in a campaign like manner, which was how the actual events unfolded in order to maintain the integrity of the analysis and application.
I was also planning to go though some other pertinent example such as the DAX example from the recent 02 June high to the 08 June support as published. It’s this simple, short the DAX for a counter trend play on the 04 June, and wind out that short on 08 June.
Given the recent comments and the incessant demand for pieces of the puzzle in piecemeal which won’t really be of any benefit, I just think, “what’s the point”? But I may as well address the nonsense once and for all and leave it at that.
So instead I’ll abandon the methodical approach I was going to do in instalments outlining the whole campaign when time allowed (which I don’t have much of currently), and just quickly answer this specific question in text without explaining the whole trading rule approaches available and gloss over these and let people work it out for themselves.
I can’t currently post any Zinc charts since Hubb has stuffed the data up yet again, and all my Zinc charts have corrupted data.
Hence I’ll make this one quick comment and that will be an end to it.
So for the chart posted on the 18 April 2007 for Zinc, it is clear to see that key support was identified for Zinc on the 16 of April, and a long was signalled then or by the 17th April.
There were three entry options open based on the pattern and the apparently valid time cycle in play:
1. Buy into weakness on either 13 April or 16 April given that April 15 was a cycle termination date.
2. Buy on confirmation on the 17th of April.
3. Wait for a pull back and buy into weakness after the 17th of April.
Failure was signalled with a close below the 13 April higher low. A stop logically would have been set below this low.
Another stop would be set based on time and pattern – the 02 June being the best case bullish scenario given the price action continued into this date. 21 May was the highest probability for a blow off “jamming up” move from the pattern.
These patterns can truncate in time at 50% of the time increment – in English, 03 May was the half way point between 15 April and 21 May, hence if the price action was bullish an exit half to lock in profits would be a major consideration.
The pattern exhibited in the chart posted above suggested that resistance was very likely on this day (03 May) or +/- one trading day, hence the price action called for a half exit or some kind of profit taking or hedging in my view at this point. In English take profits at close on 03 May - that time angle looked pretty compelling for a bounce in my view.
The idea of partial exits is based on a position/swing trading notion that even the most promising patterns can either temporarily pull against the forecast direction, or can fail, hence the idea is to avoid the situation of being in profit at one point, only to see an adverse move and then making a loss.
This approach can be based on doubling – exiting half to cover the initial cost of the position allowing the second half to be essentially a free trade since a loss in no longer possible. But if the pattern indicates further upside, the exit half (or one third) can be delayed depending on the situation and what rules have been adopted.
Hedging can be performed with options by selling calls or buying puts in a limited risk configuration (diagonal ratio back spreads, straight puts, etc depending on the best risk to reward proposition depending on available options, volatility, and duration of time value in strikes – essentially sometimes there is not enough time in the front month depending on where the expiry is in relation to the trading date).
In this case, there was a compelling pattern on 04 May to either fully hedge or exit the position since the price level was near a key increment, and just after a time increment where this kind of pattern can pull back. The idea being to re-enter a long on a confirmed higher low with the two time targets as time exit points.
What happens with some cycles is that the actual price low can be on or near the cycle low date, or it can be on or near a time increment either before the cycle low date, or after. In this case the actual price low came before the cycle low date, and in fact was a higher low to the major 02 February low.
Look at Zinc in a weekly chart, and the pattern was bullish into the top, hence was the bearish activity post the top a counter trend to the bullish drive in the longer time frame, or was it a completion of sorts and the start of a bear market for Zinc?
Either are possible, but what is more likely? The price action and pattern look more like a correction to a longer term bullish trend, and the norm from this kind of pattern/price action is for a strong short lived bullish drive to occur (McLaren “jamming up” move).
If you look through a host of charts with this kind of pattern, the underlying tends to rally strongly briefly, then retest the low over a longer period of time, base for a long period of time, then trend again (usually bullishly). Each of these phases has times and patterns that can define a probability. I have been developing a catalogue of these patterns.
From this pattern I determined that there was a high probability of a sharp bullish drive since the 15th of April was a cycle low, but was a higher low in price. The pattern and time cycle gave a high probability of a strong sharp short lived bullish response, just what you want if swing/position trading.
I had earlier identified a valid bearish time cycle was evident and got the final calibration to this on 26 February 2007. This allowed for a fairly accurate projection of time increments into the future, and during the cycle primary probability for the termination of the cycle was 15 April.
Now the concept here is that a cycle is like a flavour – hence in the cycle period the overall flavour would be bearish in the daily with 15 April the end of that phase. But the longer term “flavour” for Zinc I thought was bullish. Don’t forget that cycles and price action although inherently related are two different things – the actual price low can precede or lag the cycle low (a common mistake made by novice time cycle traders).
Hence the bearish price action in the daily was a counter trend in effect in the longer time frame to the bullish pattern in the monthly and weekly charts. This is a great advantage having a way of measuring in time how long a campaign in the daily chart may last.
This allows for options for instance to be sold with good premium at or near the money in order to generate income from the fairly flat pattern as was forecast.
Once the price action rallied hard on 04 April, this constituted a risk to the bearish forecast, and invalidated the projection for a capitulation move down. Once this happened, and the higher low came in right on the cycle low as a higher low in price with a bullish pattern, everything lined up for a short term bullish position.
But the dominant pattern that comes out of such strong bearish counter trends in a longer term bullish pattern is a short sharp move up which fails and retests the low with a more gentle move down, but usually fails to take out the low and then bases, then moves bullishly again.
The problem is timing and how the price action will play out. At least there is a model that can be used for this, and the way the underlying trades into the key time increments can constitute support of resistance just as price increments can.
If you view the charts there are price increments too. The patterns that develop within this area, and the resulting “time angles” can reveal much about probabilities.
So, once the 04 May high was reached, at least half should have been taken off the table. When the move down occurred, a stop loss needed to be set in both time and price. The projected times were exit points if bullish after a brief counter trend, or if the “jamming up” move was truncated in time (failed near the 03 May time increment), then a price stop would have required an exit of any remaining part of the position.
Trying to trade the counter trends in this kind of situation is highly risky (hence I don’t do it) but for those that do, they really need to take profits at obvious points of support in time and price gingerly.
The pattern suggested a bullish campaign was still the higher probability in the longer time frame, hence bearish plays were essentially counter trend plays. This means any swing trade is going against the trend, hence they are fast and risky, and profits need to be taken decisively especially when key time and price levels are evident. The recent DAX example is a counter trend play from a sharp high with a fast pull back into support. This requires precision trading.
Once Zinc pulled back over the 4% move overnight, this signalled that the jamming up move was definitely over, hence the price action and pattern was likely to be sideways and basing for quite some time. The time cycle here is now very valid, and although I wouldn’t do it, could be very useful for day trading off support and resistance in time and price. Certainly selling positions with premium (probably puts – and I only trade protected positions incidentally - not naked!) would be a consideration, but not one I’d do when there are trending markets to trade.
I hope that makes sense. This is all I’ll have time for, for quite a while... Our friend has demanded and derailed again, so this is the last time I will address his nonsense. So sorry, I won’t have time to do the whole campaign now.
Mag.
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