Understanding and using voodoo lines - Simpler …members.simpleroptions.com/wp-content/uploads/2014/02/voodoomanual.pdfUnderstanding and Using Voodoo Lines 4 This is just one example

Understanding and Using Voodoo Lines

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UNDERSTANDING AND USING VOODOO LINES

Revised 12/12/2012

Find and use hidden

areas of support and

resistance


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Notice

This document is for educational purposes only.

Futures, options, and currency trading have large potential rewards, but also large

potential risks. You must be aware of the risks and be willing to accept them in

order to invest in the futures, options, and forex markets. Don’t trade with

money you cannot afford to lose. Neither this document nor the Voodoo Lines

indicator is either a solicitation or an offer to buy or sell futures, options, or any

other security. No representation is being made that any account will or is likely

to achieve profits or losses similar to any discussed in this document or

elsewhere. The past performance of any trading system or methodology is not

necessarily indicative of future results.

Hypothetical or simulated performance reports have certain limitations. Unlike

an actual performance record, simulated results do not represent actual trading.

Also, since the trades have not been executed, the results may have under- or

over-compensated for the impact, if any, of certain market factors such as lack of

liquidity. Simulated trading programs in general are also subject to the fact that

they are designed with the benefit of hindsight. No representation is being made

that any account will or is likely to achieve profit or losses similar to those shorn.


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Introduction

Voodoo Lines uncover regions of potential support and resistance which might

not otherwise be visible. Used in the simplest form, one can trade against the

lines the same way as any other level such as trend lines, pivot points, moving

averages, etc… Many experienced daytraders have told me that they received

benefit from Voodoo Lines on the same day they received it. From the following

5 minute chart for the E-Mini S&P 500 you can see why.


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Most often, traders who jump in and successfully use Voodoo lines right away are

already comfortable trading against support and resistance. This is important

because price doesn’t always stop at Voodoo Lines just as price doesn’t always

stop at an important moving average. Therefore, it’s important to not blindly buy

or sell at a Voodoo Line level and without an already developed sense of whether

price is likely to stop at a level or not, one might make some costly trades.

While it may be possible to use the lines right away, there is benefit to learning

how to read the more nuanced messages that are delivered as price interacts

with the Voodoo Line levels. Whether you are experienced or not, it is best to

spend time studying any new tool during live market conditions and Voodoo Lines

is no different. This guide is designed to help speed you on your journey. It

covers three broad subjects:

1. Descriptions of the various Voodoo Line levels are and the meaning of the

different colors;

2. An overview of some of the common ways that price acts at Voodoo Lines

3. Techniques help identify longer-term trends with Voodoo Lines

After reading the discussion this guide you should be better positioned to study

Voodoo Lines with an eye toward how to incorporate it into your own trading

strategies. Combining Voodoo Lines with other tools can add additional insights.

For example, the chart below shows the Euro bouncing from its fireline with

MACD divergences suggesting that price is running out of steam as it approaches

this support level:


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This is just one example of how Voodoo Lines can be combined with other

technical analysis techniques and it is not meant to suggest that MACD is the best

indicator to use. What is best is whatever works well for you.

About the Examples

The 5-minute ES chart which served as the first example in this guide was not

“cherry picked” It was the most recent 5-minute chart for this common

daytrading instrument on the day when I sat down to craft this document. The


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importance of the lines on the chart can be immediately seen even though price

didn’t always stop right at them.

The same thing cannot be said about further examples. In most cases they have

been chosen to illustrate a particular concept and, therefore, need to be selected

from many possible charts so that the pattern is clear. That doesn’t mean that

the charts show prices always turning exactly at Voodoo Lines; in fact, it is just the

opposite, most of the examples or of common patterns showing behavior when

prices go don’t reverse exactly at a line to illustrate the variety of patterns which

can occur.

Nevertheless, it is important to recognize that the examples were chosen because

they are good examples of how Voodoo Lines can signal the likely direction of

prices. Not all signals will be as clear and some seemingly clear signals will lead us

to anticipate moves which might not occur.


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What Are The Voodoo Lines?

The underlying techniques to create Voodoo Lines are based on Elliott waves – a

dark art to some. However, you don’t need to know anything about Elliott waves

to make use of the tool. Furthermore, Voodoo Lines overcomes one of the most

cited problems with Elliott waves: analysts often disagree about the current

waves. Voodoo projects levels from long-term levels, usually based on levels

which analysts have long since agreed upon.

Because markets tend to make proportional moves, these projections establish

levels which have an uncanny way of becoming support and resistance. By using

them you get to harness the predictive power of Elliott waves without needing to

do any analysis.

Another benefit of using long-term levels to create Voodoo Lines is that the lines

are always at the same levels until a major turning point occurs. They can remain

in the same place for many years; sometimes even decades. They appear at the

same place on every timeframe from one minute to one month and can be used

on time charts, tick charts, volume charts, range bars, renko bars, point and figure

charts, market profile charts and more.

Even though one can trade against the various Voodoo Lines without regard to

what the many levels represent, one can make more informed trading decisions

by understanding the relationships of the levels and their relative importance.

The most important Voodoo level is the fireline. These are the levels taken

directly from the long-term Elliott wave structure. They are few and far between

and prices can often go for months or even years without visiting a fireline. Let’s

take a look at an example of the Dow Jones Industrial Average with just firelines

shown:


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Treelines, the next most important level, are located relative to the firelines. On

an hourly chart of the DJIA you can see how the treelines fill in support and

resistance areas which exist between the fireline levels.


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Just as the treelines fill in areas of possible support and resistance between the

firelines, more levels are added to fill in other possible areas of interest. They are,

in order,

1. Red firelines

2. Green treelines

3. White snowlines

4. Violet skylines

5. Dashed moguls


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You can see how the addition of the third-level snowlines helps to further clarify

the important areas on the hourly DJIA chart:


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By zooming in on a 15 minute chart of the most recent portion of the 15-minute

chart, the value of incorporating the smaller degree lines becomes evident:


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On some platforms Voodoo Lines has the ability to display a sixth degree of line

which is disabled by default. Turning on this level of line is usually overkill and will

make charts impossible to read. However, some symbols have lines very far apart

on small timeframes and adding the sixth level can fill in some gaps. Below is an

example of 30-Year Treasury futures on a 5-minute chart both with and without

the sixth level micro-moguls shown in magenta:


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Common Voodoo Patterns

When studying Voodoo Lines you want to develop a feel for whether prices will

go through a level or not. In addition to the other analytical tools and experience

which you will bring, there are some common patterns which can help reveal the

intended direction of price once you have some practice recognizing them.

Below are descriptions of several common behaviors that I’ve seen as prices

interact with the various levels. This list is not exhaustive and you may observe

your own patterns. Furthermore, you might find that you can see or trade certain

reliably, but not others. The goal in presenting the patterns is to start you

thinking about the many types of movement you can look for when observing

price action with Voodoo Lines as you’re developing your own feel for them.

Testing and Continuation

The first scenario we want to look at is when prices pause at a Voodoo Line level

before continuing in the direction of the dominant trend. On an hourly chart you

can see that gold futures tested the $1744.80 skyline twice before breaking

through. After each of the first two attempts the price of gold remained in the

general area of the line indicating it was building strength for a possible attempt

to break through.

The two tests of the Skyline let us know that the market respects this level and

that makes it an important event if prices do make it through. Once a level that

is tested multiple times is broken, It is not uncommon for price to move swiftly as

happened with gold. However, this isn’t the only possible resolution as we’ll see

when we cover patterns which retest from the other side.

Notice that once price finally broke, the next level that was visited was the

$1771.80 skyline.


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A similar test and continue pattern can be seen as PCLN approaches and tries to

break through its fireline.


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Test and Reverse

The E-Mini S&P Futures give us an example of a situation where prices stop at an

important Voodoo Line level. In this case they don’t wait around too long and

start taking out levels in the opposite direction.


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Here’s another example of the test and reverse from a daily chart of the DJIA.

See how the DJIA found support right at the 12,030.33 Fireline – the most

important level there is.


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Spike then Fail

It is important to recognize that when prices reverse at Voodoo Lines the turn

doesn’t always happen at the exact level. Sometimes they do like the swing low

that the DJIA put in at the Snowline in the example below. However, sometimes

they will spike beyond the level before failing in the two examples where DJIA

tried to climb above two skylines: first at 13,004.75 and then again at 13,274.08.

In each case, after pulling back from the skyline they made a retest of the level

before failing. It doesn’t always happen this way, but when it does it can be a

real gift. The first failure of the line shows that prices may not go through. The

retest often gives an opportunity to take a trade right by the line while confirming

which side of the line prices want to be on. There are several patterns that

involve retests and we will cover them more.


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Retest from Other Side

It is very common for price to test and retest Voodoo Line Levels. This behavior

not only is a strong signal of a choice of on side of the line vs. the other, but it also

can provide potential trade setups if you become accustomed to identifying the

retest behavior.

Notice how UTX broke through its treeline and then retested from above. Once

the retest held, UTX continued upward.

Unrelated to this specific pattern, notice how UTX first tested the same treeline

from below before breaking through. This is also common and it also serves to


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show us that UTX is aware of the location of the treeline making it more

meaningful when it finds support at the level after breaking.

Base-Building Retest

Sometimes the retesting behavior can be seen through sideways congestion at a

just on the other side of an important level as seen in this chart of EURUSD:


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Congestion

Sometimes price will coil around one of the Voodoo Lines as the Russell 2000

does around the snowline in the example below. When this happens, it is

dangerous to read too much into any movement away from the line unless it

clearly tests and rejects the level, or moves beyond other nearby levels to show

that it is done coiling


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Pong

Sometimes price will bounce between levels before it breaks out to one side or

another.


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Evaluating Trends with Voodoo Lines

So far we haven’t spent too much time considering how the different colors of the

different Voodoo Lines impact the way we interpret action at that line. For the

most part, the color of the line doesn’t mean too much if one is daytrading on a 1-

minute or 5-minute chart. However, the colors of the lines are very important

when trying to use Voodoo Lines for evaluating longer-term moves.

As we dig into these techniques, we’ll start with a weekly chart of the DJIA

showing only the red firelines. For the time period shown there is a good

downtrend followed by a good uptrend. During the downtrend, the DJIA

continued to break successive firelines. It is too simplistic to say that once a level

is broken while in a downtrend that the next lower level will be seen, and we can

see that it isn’t true. But we can see that diring the move from the 2007 high to

the 2009 low none of the bounces carried prices up through two firelines in a row.

So we must allow for prices to carry back up through a line without suggesting

that the trend has changed.


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So if staying below the firelines is going to signal a likely downtrend and staying

above a signal for a likely uptrend we want to get some idea whether a bounce

from a fireline is likely to continue up through the next higher fireline and likewise

for a failure to hold a line. Let’s drill down and look at just the decline on a daily

chart and also added in the treelines to help with the analysis.

Notice the red box which highlights the first attempt to break below a fireline. In

absolute terms price went well below the fireline, over 300 points below, but in

relative terms it wasn’t that far. Price didn’t even reach the first treeline down to

test it before bouncing on either of the visits below the level. Furthermore,


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notice how the second visit below the fireline did not move beyond the first

attempt. When multiple attempts to penetrate an important level fail AND

subsequent attempts do not go beyond earlier attempts AND price returns back

to the other side then it is a sign that prices are likely to retreat before trying

again.

Once prices bounced we can see that the DJIA ran right to the treeline highlighted

by the blue box. This is a natural place to retest having failed to break the fireline.

As price approaches the treelines we cannot know whether the level will hold, but

once it does it signals a likely move back down and this time the fireline breaks.


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Next, let’s focus on the region highlighted in white. There we can see that once

the DJIA cracked the fireline it went down to the lower of the two treelines.

Either of the green lines might be a spot for a possible bounce, the fact that it was

the lower level signals a bit more weakness. However, it is really what happened

after the bounce that signaled the intent. The bounce returned to the fireline

area but failed, allowing the focus to remain on lower prints.

While that is the way trade resolved in that particular instance, it would have

been equally bearish if prices bounced from the lower treeline to the upper

treeline before failing.

Lastly, let’s look at the yellow rectangle. We can see that the prices sliced cleanly

through the fireline before getting caught up in the area of the treelines. A

bounce carried back above the fireline, but support was never established above

the fireline. Prices never tested the fireline from above to establish support and

while they entered the region of the treelines in the upper portion of the yellow

rectangle, they never established support at those lines either. With a firmly

established downtrend already in place noting here suggested a reversal.

The area in the yellow triangle is clearly the most complicated action and the

most difficult to decipher on the daily chart. Nevertheless, the clues are there.

We can see some of them more clearly by looking at the same region on an hourly

chart and adding in the third-degree snowlines. At this point see if you can look

at the price action and see how the interplay with the lines helps to identify when

short-term changes in trend occur and how it relates to the overall trend we

looked at on the daily and weekly charts.


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Special Topics

Futures Data

When charting futures with Voodoo Lines it is important to pay attention to what

data is being used. The calculations used by Voodoo Lines are designed to work

with the front-month futures contract. That’s what most speculators are trading

so that’s not too big of an issue most of the time. However, if one is plotting a

continuous contract (for example @ES on TradeStation or ES #F on eSignal) there

are several things to be aware of.

When trading short-term, be aware that the continuous contract will start

printing trades for the future month contract several days before the front month

contract stops trading. It is my personal preference to chart the front month until

it expires unless the liquidity just completely dries up. In fact, I am sometimes a

little bit leery of the levels a few days on either side of contract rollover and may

be skeptical of moves at the levels during that time. In situations where there are

Voodoo Lines for an underlying instrument I may prefer that instead. For

example, I might pay more attention to the Voodoo Lines on the cash S&P 500

index near the rollover than I might otherwise (although I always look at both

cash and futures when lines are available for both). This isn’t possible for some

things since there are no levels for spot metals, grains, etc…

The second issue has to do with long-term charts and the continuous contract.

When plotting a continuous contract, data from prior to the most recent rollover

are mathematically adjusted. That means that long-term continuous contract

charts may be shoring you bars at prices where no contract ever traded. A

discussion of why this is and how the continuous contracts are constructed is

beyond the scope of this guide. However, it means that there isn’t a meaningful

way to use Voodoo Lines with a continuous contract chart that stretches back to

before the last rollover. Instead, prefer a front-month continuation contract

(@ES=100XN instead of @ES on TradeStation and %ES 1! on eSignal. Front month


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continuation charts aren’t available on ThinkOrSwim and availability will depend

on your data vendor for NinjaTrader.

Forex Futures

There are no explicit values for forex futures in Voodoo Lines. Instead, the

Voodoo Line levels for spot forex are shown on the futures charts for select

currencies (Euro, Pound, Australian Dollar as of this writing). In general the

spread between futures and spot in forex is quite slim so this will not be a large

difference, but be aware that it exists and will be greatest just after rollover and

smallest just before.

Other Chart Types

Voodoo Lines can be used with many different types of charts. A few examples

are shown below without commentary.

Market Profile

E-Mini Dow futures, day session only.


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Point and Figure

Dow Jones Industrial Average on a Point and Figure chart. 100 points per box, 1

box reversal.


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Range Bars

Euro / U. S. Dollar forex cross. 0.0005 range bars.


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Volume Bars

Corn futures 500 volume chart

Documents

Understanding and using voodoo lines - Simpler …members.simpleroptions.com/wp-content/uploads/2014/02/voodoomanual.pdfUnderstanding and Using Voodoo Lines 4 This is just one example