(Click on image to enlarge it)
(This is Part 13 of a series. Go back to Part 12.)
Also, the TX lines were telling their own story in no uncertain terms as this parabolic top was forming. Note the peak in the +TX line in May 2006 (labeled pt. G’), taking place at an extremely high absolute level (90) and at its upper SD line. Notice that the level where this top was occurring is at almost exactly the same level (93) that developed at the +TX top in 2004 (pt. E’). Also note that the –TX line was once again encountering a severe SD band pinch (labeled pt. 4), almost exactly as had occurred at the top in 2004 (pts E’ and 3).
After the BTX down turn at pt. J, we then monitor the TX lines for crossovers of their respective CMAs as steps two and three of the topping process. This occurred within two bars of the ultimate high in May (shown via arrows).
As a final note about the top, remember that the monthly BTX generated a peak in May 2006 at a very high value of 82. Also, the monthly +TX line peaked out in agreement with the BTX, and the –TX line was generating the same type of SD band pinch that we are witnessing here on the 2 week chart. These events are telling us in no uncertain terms that the trending advance of the past year is coming to an abrupt end.
Let’s now shift our discussion to the STX stop to see how it performed during the 2005 to 2006 rally. This analysis provides yet another illustration of how to use information generated by a high time frame to then dial down to lower time frames in order to benefit from it.
Our monthly analysis had shown us that the BTX was generating trend scores in the 60’s and 70’s from late 2005 into the peak in May of 2006 (shown as pt. H on the monthly BTX). When BTX is generating such high scores, the correct approach is to roll down to lower time frames to attempt to find a way to exit the trade at a more optimal price level where more existing open equity can be pocketed.
Therefore, let’s look at the behavior of STX here on the 2-week chart beginning in late 2005 and into the ultimate price peak in May 2006. Note that after BTX rose above 35, (labeled pt. H on this chart), the STX responded appropriately by accelerating and tracking just below the lows of each bar as the move became parabolic from late 2005 into the top in mid 2006.
In fact, once the NMC/NXC Zero hit during May 2005 occurred (discussed above), along with the BTX SD band pinch (pt. G) and TX pivots (pt. F’), the STX performed almost flawlessly throughout the entire advance from the ZH and TX entry in May 2005. It remained extremely tight against the price action, yet without ever being hit for more than an entire year!! And this is on a high time frame 2-week chart!! If you know of a better stop placement technique, I’m interested in seeing it.
By the way, when creating these examples, we never alter the default input settings (unless you are told that we have done so for a specific reason), so this STX example is “un-doctored” and re-creatable by anyone loading the Ocean Plus tools for the first time. Keep that in mind if you are trying to optimize a method to accept my challenge of a better stop technique than the STX!!
The STX stop was finally hit on the 2 week bar ending 6/23/06 (shown as the red triangle on the price bars). Note that this exit proved to be much more favorable than the monthly STX stop would have been, which is often case when applying multiple time frame STX logic to your trading plan.
When high BTX scores indicate a very extended advance or decline, you should always come down to lower time frames in hopes of identifying better STX exits to capture more of the available open equity. In fact, in this example, when the BTX rose into the 60’s and 70’s during late 2005 and early 2006, the correct response should be to consult an even lower time frame for a possible tighter STX exit.
When we consult the weekly chart, we’ll take a look at how the STX performed at that time frame. However, even when using only the monthly and 2-week time frames, the differences in the STX stop on each of those time frames is quite dramatic.
(This is the end of Part 13. Go to Part 14.)
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