MULTIPLE TECHNICAL TECHNIQUES

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172 The Rule of Technical ~ e c h n i ~ u e s

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andlestick methods, by themselves, are a valuable trading tool.

But candlestick techniques become even more powerfully significant if they confirm a Western technical signal. This is the focus of Part 2. For example, if a bullish belt-hold line intersects at a long-term support line, there are two reasons for a bullish outlook. The candlestick indica- tor confirmed a Western technical indicator or, depending on how you view it, the other way around.

This method of looking for confirmation from different technical indicators is called the "Rule of Multiple Techniques" by Arthur

Sklarew in his book Techniques of a Professional Chart Analyst.' This prin- ciple states that the more technical indicators that assemble at the same price area, the greater the chance of an accurate forecast.

Part 2 of this book will be based on this "Rule of Multiple Tech- niques." The remainder of this section's introduction will examine the importance of this idea using two examples of traditional Western tech- nical analysis techniques. Chapter 10 shows how a cluster of candle- stick indicators provides a clear sign of an important turning point.

Chapters 11 to 17 marry candlesticks to some common Western techni- cal tools. These include trendlines, moving averages, oscillators, and so forth. In each of these chapters, I have detailed how to use candlesticks to supplement traditional Western technical techniques. For novices to technical analysis, or for those who need to refresh their memory on the basics, the introductions to Chapters 11 to 17 offer a broad, and admittedly cursory, explanation of the Western technique reviewed in that chapter. There are many fine books that provide much more detail on these Western techniques.

After these introductions, we'll explore specific examples of how to use the Western technical tool in combination with candlesticks. Since my experience is in the futures markets, the Western techniques with which I join candlesticks are based on futures technical analysis. I will not examine equity technical tools such as advanceldecline lines, the ARMSITRIN index, specialist short sales, and so on. Nonetheless, the concept of using candlesticks as a complimentary tool should be appli- cable, no matter your technical specialty. Western techniques, when

joined with candlesticks, can be a powerfully efficient combination.

13:53 GC UEEKLY BAR @ 1989 COG INC.

. ^{O= 3730}

.H= 3752 .

. L= 3730 -L= 37524.

A = -7

EXHIBIT 11.1. Gold, Weekly Continuation

EXAMPLES OF THE RULE OF MULTIPLE TECHNICAL TECHNIQUES

This section shows, by example, how a confluence of technical indica- tors can help predict where important support or resistance may occur.

The following examples use Western techniques. The rest of Part 2 addresses candlesticks.

In late October 1989, gold broke above a two-year downtrend resis- tance line when it closed above $380. This, in combination with the excellent base built in 1989 at $357, was a sign that higher prices were to fslctw. After gcld's breakout in late 1989, Financial News Network interviewed me about my technical outlook for gold. I said that we should see a rally, but that this rally should stop at $425 up to $433. In early 1990, gold peaked at $425 before the bear market resumed.

How did I pick this $425 to $433 zone as my target for resistance when gold was trading at that time near $380? By using the rule of multiple technical techniques. There were four separate technical indi- cators hinting at major resistance at the $425 to $433 region. Refer to Exhibit 11.1 as I discuss these four indicators (for this example we will not use candlestick patterns):

174 ^{The Rule of} Technical Techniques

1. A 50% retracement of the 1987 high (Area A) at $502 and the 1989 lows (1 and 2) at $357 was $430.

2. The lows, marked 1 and 2 in 1989, were a double bottom. Based on this double bottom, I derived a measured target of $425. (A double bottom measured move is derived by taking the height of the move between the two lows and adding this distance to the intervening high).

3. The late 1988 high was $433.

4. My colleague, John Gambino, who follows Elliott Wave Theory, said gold was in an Elliott fourth wave count. Based on this, rallies in gold should not pierce the prior first wave's low in early 1988 at $425.

These separate technical techniques all pointed to major resistance near the same price area-$425 to $433. By failing to move above the

$425 to $433 resistance zone in gold, the bulls could not prove their mettle (pun intended). It was not long before the major downtrend resumed in earnest.

What would have happened if gold went above the upper end of my resistance zone of $433? Then I would have had to change my longer-term bearish prognosis about the market. This is why the technicals can be so valuable. There is always a price where I will say my market view is wrong. In this case, if gold closed above $433 I would have changed by long-term bearish bias.

The market communicates to us by way of its price activity. If this activity tells me I am mistaken in my opinion, I adjust to the market. I am not egocentric enough to believe that the market will adjust to me.

That is because the market is never wrong.

In early May, after sugar collapsed (see Exhibit II.2), I thought that sugar could have a temporary bounce from $.I4 (that was the bottom a year-long bull channel on a weekly chart as well as the lows in late Februarylearly March). Yet, unless sugar pushed above the $.I515 to

$.I520 zone I believed sugar should be viewed as in an intermediate- term bear market. The rally high on May 14 was $.1505.

Where did I get this $.I515 to $.I520 zone as resistance? From iden- tifying four technical indicators that implied strong resistance in that band. Specifically:

1. This was a multi-tested old support level from early March through April. I believed that once this strong support broke, it should become equally strong resistance.

2. The 65-day moving average (which I find useful for many markets)

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THE MARKET IS NEVER WRONG

: One of my noncandlestick seminars is called the "Techniques of Disci-

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plined Trading Using Technical Analysis." In it, I discuss the importance : : of a disciplined approach to trading. To convey this idea, I use the word

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: "discipline" as an anagram. For each letter of the word D I S C I P L I N E : : I offer a trading rule. For the letter

N

my rule is "Never trade in the

: belief the market is wrongH2

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What do I mean by the expression, "the market is never wrong?" It : : means do not try to impose your beliefs on the market. For example, if

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: you are firmly convinced crude oil is going to rally, wait until the trend : : is heading north before buying. Say crude oil is in a bear market. If you : : buy in the expectation that a bull market will materialize, you are then

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trying to impose your hopes and expectations on the market. You are : fighting the trend. This could be disastrous. You may ultimately be cor- : rect in your bullish viewpoint, but by then it may be too late.

: As an analogy, imagine you are driving along a one-way street. You : : notice a steamroller going down this one-way street the wrong way. You :

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stop your car, take out a sign (that you always carry with you) that

: reads, "Stop, Wrong Way!" and hold it in front of the steamroller. You

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know the steamroller is going in the wrong direction. But the driver may : : not see you in time. By the time the steamroller turns around, it could

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: be too late. By then you may be part of the pavement.

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So it is with the markets. If you are bucking the trend, your outlook : : may turn out to be correct. But by then it may be too late. Margin calls

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in futures may force you out of the position before your expected move : : occurs. Or, worse, in the end, you may be right, but by then you could

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: be broke.

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Do not try to impose your will on the markets. Be a trend follower, : : not a trend predictor. If you are bullish, jump onto uptrends, if bearish,

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: hop onto downtrends. One of the Japanese books I had translated : expresses this idea almost poetically, "buying or selling from the begin- : ning without knowing the character of the market is the same nonsense

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as a literary man talking about weapons. When faced with a large bull : : or bear market they are sure to lose the castle; what seems safe is infi-

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: nitely dangerous. . . . Waiting for just the right moment is virtuous and : : e~sential."~

...

intersected near the $.I515 level. (See Chapter 13 for more detail on using moving averages with candlesticks.)

3. Looking at the highs from area A in January and the gap at area B in March, we can see the psychological importance of the $.I5 level.

4. A Fibonacci 32% retracement of the move from the $.I627 peak (marked H) to the $.I444 low (marked L) is $.1514. A 32%

retracement is where first resistance is sometimes seen after a selloff.

176 The Rule of Technical Techniques

9 : 19 SUN0 D A I L Y BAR @ 1989 CQG I N

.O= 1378 ,

. H= 1388 . ^H

. ^L= 1378 .

, L= 1380v

: ^I

... ... ... ...

- +=. +9 65 SIM 0 SIR ( C ) (C) :

:

O.SIM (C)

. . .

. . . . .

A

:

^{cC --}

. . .

' L

...

65 Day Moving

Average 1

. . . . .

:

^{. .}

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. . .

:

^{. . .}

.:

. . . .

I : n

: : : :

...

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. ... ... ... ... ...

O= 1378 H= 1388 L= 1378

C= 1380 'Jan 'Feb 'Mar 'Apr 'May

12012714 111 118 12612 18 11512212915 112 12012615 11211912612 19 116123130(7 114/21 I29

EXHIBIT 11.2. Sugar-July, 1990 Sugar, Daily

Notes

'Sklarew, Arthur. Techniques of a Professional Chart Analyst, Chicago, IL: Commodity Research Bureau, 1990.

2For those interested readers, my other rules in the D I S C I P L I N E anagram are:

Don't forget old support and resistance levels (old support becomes new resistance and vice versa).

If . . . then system (if the market behaves as anticipated, then stay with the trade-otherwise exit).

Stops-always use them.

Consider options.

Intra-day technicals are important.

Pace trades to market environment (change your trading style according to market conditions).

Locals-never forget them.

Indicators-the more the better (the rule of multiple technical techniques).

Never trade in the belief the market is wrong.

Examine the market's reaction to the fundamentals.

3Sakata Goho Wa Furinkazan, Tokyo, Japan: Nihon Shoken Shimbunsha, 1969, p . 46 (this sec- tion translated by Richard Solberg).