(Click on image to enlarge it)
(This is Part 2 of a series. Go back to Part 1.)
Let’s begin our analysis of the Copper market by taking a look at the big picture – a monthly chart, and analyzing the primary events of the last 7 years. We’ll then move down to lower time frames using the information provided by the monthly chart to zero in on recent price action and to finesse our trading strategies accordingly.
The market had been in a downtrend throughout 2001, with the –TX crossing above the +TX during March of 2001 (labeled A’ in the lower pane), confirming the bear market. Additionally, BTX broke out above the trend threshold of 35 in May 2001 (labeled pt. A in the pane immediately below the price bars), telling us that the newly established down move was also beginning to exhibit trend strength.
The down move continued through Oct. 2001 (labeled pts. B and B’ in panes 2 and 3 – pane 1 always refers to the price bars), with BTX rising above 50, a zone where pauses and/or reversals in the market can be anticipated.
After BTX exceeds a level of 50, we typically watch for the first downturn in its value to confirm that the market is likely due for a pause or reversal. When two additional clues from the TX lines are then recorded, we can be reasonably certain that a significant pause or reversal is at hand. These additional clues coming from the TX lines will be discussed a little later in the analysis.
The remaining analytical tool in the Ocean Plus library besides BTX and the Plus and Minus TX lines is the STX stop, and the price action and BTX behavior here in late 2001 offers a good opportunity to introduce the STX analysis into the mix.
The STX is a carefully constructed trailing stop, designed to allow you to optimally exit a trade with maximum open equity still intact. Generally speaking, the STX responds to high volatility by moving very quickly to react to rapidly advancing or declining market phases.
Although the advanced math behind the STX and the BTX are radically different, the reality is that as BTX is detecting increases in the trend strength (and thus rising), the STX responds by moving rapidly towards prices. Conversely, when BTX is declining (indicating a diminishment of trend), and particularly when BTX has dropped below 35 (indicating a lack of trend altogether), the STX responds by going virtually “flat”, without reacting to the noise being generated by the market.
Note the BTX peak in late 2001 (labeled pt. B). When BTX rolled over and generated its first lower value (the month ending 11/30/01), prices reversed and exceeded the STX stop value, indicating that the trade should be exited. In fact, with BTX beyond a value of 50, as it was at pt. B, the correct interpretation should be to roll down to lower time frames, expecting to identify a price low even earlier. When we move to the 2-week chart, we’ll see that the STX provided an even better opportunity to exit the short trade with more open equity still intact.
High BTX scores above 50 are also often accompanied by it exceeding its upper standard deviation band, confirming both a high absolute reading (by being greater than 50) and also a high relative reading (by being greater than the upper SD band).
(This is the end of Part 2. Go to Part 3.)
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