Filtered Waves and Structure (Back to the Basics) MTA, Nov. 2009 Copyright © 1996 – 2009 Linda Raschke and LBRGroup Inc. All Rights Reserved

Filtered Waves and Structure(Back to the Basics)

MTA, Nov. 2009

Copyright © 1996 – 2009 Linda Raschke and LBRGroup Inc.

All Rights Reserved.

Copyright (c) LBRGroup 1996-2006. All Rights Reserved. 2

Filtered Waves – Basic Theory Arthur Merrill, 1977

• Arthur Merrill’s filtered waves used a percentage of price movement (5%) to filter out the noise. His work was important because he dedicated a whole book to the concept of classifying patterns by the wave structure.

• Gann was probably the most popular predecessor of swing charting. • Welles Wilder documented the use of ATR (Average True Range)

functions to quantify swings as opposed to percent functions. This was applied to a system called the Volatility stop and reverse system.

• Merrill’s work was far more comprehensive, in that not only did he classify previous market structures, he also developed classic actuarial tables, or probability grids, to measure the median % increase/decrease and duration of bull and bear markets.


Market Structure as measured by Swings

Waves eliminate “noise” and thus make is easier to determine TREND Additionally, the absolute support and resistance are one more way of adding structure. While Art Merrill used a percent function, we use an ATR function. A new Up Wave starts when price moves 3 ATRs up from the lowest low or lowest close over 15-period look-back. A new Down wave starts when price moves 3 ATR’s down from the highest high or highest close over 15-period look back period.

Once market swings have been quantified, relationships, turning points, and trend can once again be classified, counted, examined and expressed in numbers. We can start to build a probability grid, evaluating trade management strategies.


Wave Structure


Market Structure – sideways line or “value areas”

The second part to analyzing market structure is the establishment of support and resistance (defined by a “test”) as well as the formation of “value areas”. These can also be called sideways lines or consolidation formations. This is where the price has traded back and forth through a specific level multiple times. The agreement between buyers and sellers has established “value”.

A move outside this value area means the market is out of balance, and it will continue to trend until a new value area is determined. If the push outside the value area fails to lead to continuation, “price rejection” has taken place and the first move is back into the middle of the value area, often followed by a test of the opposite end of the trading range.

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

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Trend Reversal from up to down again – Weekly chart


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The trend in 30-year yields reversed on the daily charts at the end of 2005.


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Trend reversal on hourlies precedes trend reversal on higher time frame.


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Comparison of different structural points – small target versus large target


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Japan Index – Trend reversal is a Process!


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Russell 2000 – Weekly Chart


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Russell 2000 – Daily chart


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Russell 2000 – Weekly Chart – next step


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Russell 2000 – Weekly Chart – current chart


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SP 500 – Weekly Chart


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Weekly Cash SP


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DJ Transport Index – Daily Chart


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DJ transports


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DJ transports – rally into overhead resistance


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DJ Utilities Index – Weekly Chart


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D J Utilities


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D J Utilitiesforming another line (laggards)


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Brazil – Daily Chart


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Brazil – Daily Chart - update


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Brazil – Daily Chart – back into previous “value” area(RS leader)


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Japan Index – Weekly Chart


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Japan Index – Weekly update with Sideways Line


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Japan Index – Weekly, back into value area


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Goldman Sachs Spot Index - Weekly


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GSI – Daily chart with more data


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Goldman Sachs Spot Index - Weekly


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Goldman Sachs Spot Index – Weekly update


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Weekly Dollar Index


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Dollar Index – Daily Chart


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Dollar Index – Hourly Chart


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Weekly Dollar Index


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Weekly Dollar Index – still in downtrend


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20-year treasury Fund Bond - look at this noise coil!


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TLT – upside breakout ultimately rejected, back into “value area”


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Coil & trend reversal process on 10,000 tick e mini chart


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Coil & trend reversal process on 10,000 tick e mini chart


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And trend reversal from down to up, followed by higher value areas.


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SP mini 4000 tick


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Wheat – hourly chart


45Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

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What do you see here?



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Recognize the power of a move out of a sideways line. New Momentum lows were created on all time frames on the break.

Documents

Filtered Waves and Structure (Back to the Basics) MTA, Nov. 2009 Copyright © 1996 – 2009 Linda Raschke and LBRGroup Inc. All Rights Reserved