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Copyright 1989 by MLS Publishing,
a division of Market Logc Group, Ltd.
J rights reserved. No part of tis book may be
reproduced or used in any form or by any means,
electronic or mechanical, including photocopying,
recording or by any information storage and
retrieval system witout permission i writing
fom the Publisher. Inquiries should be addressed
to ML Publishing, 401 South LSalle Street,
Suite 111, Chicago, Illinois 60605.
Printed in the United States of America
First Edition
Book Desig by Paul Higdon
ISBN 0-941275-01-9
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I would like to express m appreciation to many
people who either directly or indirectly helped me
with this book. including: Nina Brangan. Dan
Gramza. David Hale. Steen Hawkns. Peter
Hicks. Elle Jackson. Maureen H. Koy. Steven
Kotz. George Kratzner. Connie Lee. Steven Mar
diks. Brendan Moynihan. Lennart Palme. Chuck
Pettet. Steven Pingy. John Powers. Roy Postel.
Lnda Racaniello. Kevn Rley. Jock Shoemaker.
Randy Shell. Thomas and Charlotte Smith.
Special thanks to the followng companies who
prvided data or graphics ued in the produc
tion of "Markets 101".
Technical Tradng Strateges, Inc.
4877 S. Everett Street
Littleton, CO 80123
(303) 972-1433
Tick Data, Inc.
720 Kipling Street
Suite 115
Lakewood, CO 80215
(303) 232-3701
FuturSource (division of)
Commodit Communications Corporations
250 Wacker Drive
Suite 1150
Chicago, IL 60606
(312) 977-9067
(800) 992-9277
Kight-Rdder Tradecenter
25 Hudson Street
New York, W10013
(212) 226-4700
Commodity Quote Graphics
P.O. Box 758
Glenwood Springs, CO 81602
(303) 945-8686
(800) 525-7082
Te CBO Market Profle, Market Profle and
Lquidit Data Bank ("LDB") are registered
trademarks of the Chicago Board of Trade
("CBOT") which holds an eclusive copyigt to
the Market Profle graphic format. Graphics are
reproduced herein under the permission of the
CBO.
TALE OF CONTENTS
AUTHOR'S FOREWORD ............ ......... x
IN1ODUCON ......B .4 .. ..... .. .... .. . X
SECTION ONE: How Active Markets Fnction
CHAER 1. COMMON SENSE AND
M ................... 3
CHAER 2. PRINCIPLES OF TADE
FACILIATON ............... 7
CHAER 3. PRINCIPLES OF M
LOGIC ...................... 13
CHAER 4. PRNCIPLES OF AUCfIONS 23
CHAER 5. OBSERVATIONS DEFINED
AND CHAACfERIZED:
M BACKGROUND AND
DEFINITIONS ............... 29
SECTION TO: Oranizing Markets to Read
Market-Generated Information
CHER 6. TE IMPORTANCE OF
ASSESSING VAUE ........ .43
CHAER 7. GROUPING PATICIPATS
ACCORING TO TMEFRE
............................ 47
CHAER 8. THE BELL CURVE: GIVING
SRUCTRE AND MEANING
TO THE M . .......... 53
CHAER 9. DEFINED OPPORTUNITIES
AND THE TES OF
RESPONSE ................. 63
CHER 10. ORGANIZING DATA TO
DEERINE THE TREND ... 71
CHER 11. DAY STRUCfURES ......... 79
CHAER 12. HOW THE DIFFERENT DAY
STRUCfURES INTERCf ... 95
SECTON THE: Decision-Mng wth
Mrket-Generated Information: Interreting
Rference Points
CHER 13. AN OVERVIEW OF DECISION
MNG IN THE FNANCIAL
..B .........B .... 111
CHAER 14. MAC NUANCES
AND SUBEES ......... 115
CHAER 15. TECHNICAL ANALYSIS AND
MLGIC ........... 123
CHAER 16. MICRO ANALYSIS: DEUCHE
M ........... . ......... 157
CHAER 17. EVOLUION OF THE
LEAING PROCESS ...... 269
AUTHOR'S FORWOR
L
ong-term investors seek to beat the equit,
fe income, curency and agrcultural
commodit markets with a decision-makng
process which relies on some me of research,
intuition and luck. SpeCialists, floor traders,
market-makers, arbitrageurs and other
professionals who compete in the stock, ftures
and options makets using a shorter time horizon
than the long-term investor also wish to do better
tha the market. Tese two groups compete with
one another and other nonprofessionals in an
environment where prices are supposedly
discovered in a statistically random fashion. But
the ver exstence of the Warren Bufetts, John
Templetons, etc., on the one hand, and the many
prosperous short tme horzon maket-makers,
folks who collectively make up the world fnanCia
market's floor communit, on the other, troubles
the random wak theorist. Te fact that these two
groups tend to conSistently beat the market
averages informs us that random walk and
efcient market theories just don't represent the
realit of the fnanCial world. Being a pragmatic
individual, I was troubled by this. Back when I
studied economics in the theoretcal world of
higher education, ad later as co-founder and
editor of Intrmarket I repeatedly came face to face
with a paadox on the one hand, I was told the
fnanCial market was a random walk, unbeatable
over any large sample size. On the other hand, I
came face to face with the non-random results.
Common sense told me that certain individuals
x
X
M 101
who consistetly - whethe measured yearly,
quarterly, or in the case of floor pacipants even
monthly or weekly -take profts fom the market
over a large sample size of trades must have both
informaton ad a logcal market approach based
on a well-gounded understanding of realit.
Simply stated, the must have a edge. Te must
be doing something that the others aren't.
But U I accepted the noton that fnacial
markets were somehow diferent fom the rest of
the world's eerday, unorgaed, non
echange-taded markets, then what could these
informational or decision-makng parameters
possibly be? It's as Uwealth were being allocated
not randomly, but only to those fnancial market
competitors with the ver shortest and the ver
longest time horizons ad away from those
competitors in the middle.
Could it be that the decision-mang process of
the avowed Graham and Dodd group of Bufett,
Templeton, Ruane, et al was in some way similar
to that of the successfl foor partcipants in the
world's major exchanges? I set out to answer this
question.
I interviewed numerous ver successf taders,
and echanged ideas with all of them.
Not that the concept of randomness was some
arcane theoretical propositon that I hoped to slay.
Rther, radom walk is applied on a daily basis
throughout the fnanCial world and can be blamed
for many evls; it lies at the base of the fear and
emotionalism that dominate people who tend not
to do well in the fnanCial markets. Te fear that
price discover occurs randomy pervades most
partiCipants, and the do not overcome this
disinformaton throug obseration-based
experience, they are destned to fail.
lt was with this kowledge that I undertook
AUOR'S FORWOR X
what may be the most compelling adventre of my
life - settng up what I beliee to be te frst
school that teaches a consistent and logical
trading decision-mang process. I, along with
foor trader Pete Steidlmaye, founded the Market
Lgic School in 1986. Our idea was to offer a
educational curiculum oferng decision-makng
insigts that would otherwise take the individual
years to discover. It is my hope that through the
work for which the Maket Lgc School has
become noted, the random walk theor will soon
become an anachronism, een in the academic
comunit. It clealy is obsolete as a descripton
of market realit, but it will take tme for the
fnanCial scholas to accept this and adjust.
Introduction
E
ew enter into the frenied fnancial markets
eectng to fail. However, it is a realit that
the majorit who do t their hand, par
tcularly in leveraged fnanCial products, stager
out of the eerience as fnanCial losers. Why is
this so? Certainly the lack of a solid market
approach, inadequate market kowledge, and the
propensit towad emotonal deCision -makng
contbute to their defeat. But perhaps failure over
the long term lies in a more fndamental failing,
one which towers over the realms of market anal
ysis or a human being's rash behavior. Too many
traders ignore the fact that participaton in the
fnanCial markets is frst and foremost a business
endeavor. Professionals in areas outside the
fnanCial markets begin wth a methodical, struc
tured format that clearly emphasies sound busi
ness prinCiples. J entepreneurs must apply
these same business prnciples their O
product or serce can ever become a market real
it. Yet taders and investors fequently stay from
what is a traditionally successfl mode of opera
ton.
A successful approach to fnanCial makets, i
would sC, would sprng forth from some simple
propositions made by successfl entrepreeurs
remarkng on what made them successfl in their
specifc product or service niche. Te kow that
their particular market is neither mystical nor
foreboding, but in fact is understandable and
approachable. More fndaentally, the truly
appreciate the perasiveness of fee markets and
2
X
M 101
te respect te market's role as a beneolent
fnal arbiter of economic endeavor. Te have dis
covered through eerience certn insigts and
tools which allow them to understand their par
tcular market's realit. From there the ca make
logcal deductons, decide a reasonable course of
acton and stiv to make ratonal, unemotonal
decisions based on business prnciples.
To a limited eent some fnancial market pa
tcipants follow a pa of this approach. A tader's
understanding ad comfort in a gven unor
ganed market is usually not developed throug a
formal educatonal Curculum. Rather, it is
arrived at slowly throug eerience and at tmes
unconsciously throug tal and error. The entr
level pacipant is rarely aware his comfort leel
in a market he does understand is transferable to
the fnanCial market. In tme he leas that by
operatng based on the sae principles he applies
in oter markets, he can successfly compete in
the fnancial marketplace.
Wile te majort of this book's reader ae
interested only in the fnanCial markets, the
book's title does not specif only them. Tis has
been done to underscore a paradox which has cre
ated confSion among market pacipants:
orgaied, echange-traded fnancial markets
have been intellectually isolated, treated as if the
were entrey different in both spirit and makeup
fom other "understandable" markets. Finacial
markets have not been seen as one subgoup of
te arena of marketplaces, ad as such, a sub
group where the same prnciples which hold true
in the broader arenas apply. Instead, because
the dea in the creaton and destruction of
wealth, a generally emoton-laden topic, the are
put on a higer plane, and are conSidered mst
cal, foreboding and comple.
IODUCON
X
such. the fnancial markets have become
misunderstood not only by the so-called man on
the street. but also by the majorit of market par
tcipants. Financial markets are in fact misun
derstood because most people - fnctional in
everday understandable situations - assume
their decision-makng process is not in any way
applicable to formulating a buy-sell decision
makng strateg in the fnancial markets. And so
the remain mstifed. intimidated and in awe of
fnacial markets.
SECTION ONE:
How Active Makets
Fnction
This section w discuss the purpose of ever
market, and the market's components which
make it fuction. It w describe how, in an
active phase, these components interact and
thereby allow the market to carr out its pu
pose. The reader W see how, M in any busi
ness endeavor, the task of the fnancial market
participant is to concentrate not on what the
futue may bring, but on what the market's
prsent condition indicates.
Chapter I
Comon Sense ad Makets
thOUgh it is not general kowledge, it is a
fact that the successfl market participant
wheter the long timefame Graham ad
Dodd "value" investor or the short timefame foor
local - concentrates on current information
rather than on tring to predict how the fture will
unfold. Focusing on the present allows the trader
to employ a decision-making and maagement
approach similar to that of other professionals.
For Cple, i is a rare medical doctor who will
give a staight answer to the question, ''hen wlI
be well enoug to leave ts hospital?" Te M. D.
does not concentate on predictng a fture
faugt with uncertanties. He kows that the
possible outcomes are compounded by the many
variables infuencing the patient's situation -his
current symptoms, his condition and overall
strength, the possible causes of the ailment, the
possible remedies, what, U any, allergic reaction
the patent may have to medication, etc. Te doc
tor, like the lawyer, accountant, or other profes
sional ofering service in a complex and uncertain
word, kows that he can be wrong when he
atempts to predict or forecast fture outcomes.
Te professional kows that he need not expose
himself to the possibilit of being wrong about
fture outcomes so long as he adjusts as he
receives new information. Professionals are
tained to investgate, to seek higly specialied
3
4 M 101
cues or messages which gve meaning to or insigt
into the current situation. Tese cues ofen allow
them to intuit, etrapolate or infer conclusions or
possible scenarios under various conditions.
Hence a professional's conclusions are not based
on forecastg the future, but on what the current
cues and messages mean to the task at hand,
based on deductive logic gven the professional's
eperience.
To bring this point home, consider the opera
tional procedures of the above-mentoned M.D. He
monitors his patient's variables (breathing, pulse
rate. body temperature, brain waves, etc.) know
ing two important truisms which are implicit in
his experience and his professional approach.
First, the doctor kows that by observing these
variables, he W most likely extract some mes
sage or cue from them. From this. he hopes to
interpret the cause of the patient's illness. At
worst. he wl rule out certain possible causes.
Second. the doctor knows that. in the trader's ver
nacular. the trend is hs friend. In other words. as
he treats the patient, continuing to monitor the
patient's variables, he gains confdence in his
course of action if the patent gets better and the
recover appears to be unfolding as he epects. If,
afer receiving treatent, the patient does not
improve or gets worse. the doctor wl hope to
receive other cues as to how to adjust, and will
sugest a new remedy.
The key to the success of the professional. then,
lies in
a) executing an action plan formulated
fom logical. experience-based deduc
tve reasoning based on information
describing current conditions;
b) maintainng the managerial fexbilit
HOW AC M FUNCTION
5
required to adjust as conditons
change.
.
In other words. the professional arrives at con
clusions or expectations through continual and
intensive review of new information as i unfolds.
He adjusts based on changes which may be
occurring in the overall picture. This identical
challenge faces the participant in any market.
fnancial or otherwise.
Te remainder of this book W identif those
cues that the professional fnancial market par
ticipant needs to recogize as he builds the eperi
ence required to follow a consistent decision
makng process. Several markets which most
readers are probably familiar with will be referred
to. Hopeflly. this W provide a cross-referencing
mechanism. making the concepts easier to grasp
and demonstrating with practical examples that
the prinCiples of all markets are the same.
Chapter Z
Pnciples of Trade
FaciHtation
A
n investigation into how a given concept or
tool can be practcally applied or used -or
how an organism fnctions - must begn
by defning its purpose. Describing a flexble piece
of sturdy sheet metal with a sharp. jaged edge
and a handle attached does little to advance an
amateur carpenter's working knowledge of how to
accomplish his goals with it. Disclosing that the
purpose of this implement is to saw or cut through
relatively thin pieces of wood or pipe opens up
many possibilities for use.
Gaining a working knowledge of makets and a
logical methodolog for prospering in the fnancia
markets also requires a basic understanding of
the purpose of the market. What then is its
purpose? A common belief is that the purpose of
the market is to balance supply and demand and
to allocate scarce resources. Consider for a
moment whether the market in fact does these
things. Although the market is frst and foremost
a balancing mechanism, its balancing behavior is
caused by (and hence refects) the collective or net
opinion of all currently active participants. Some
obviously represent those parties in tune with the
consumer or demand factors while others
represent the suppliers. Many participants
represent neither part, but seek to proft.

8
M101
Te queston arises, is the market at any one
time truly balaced? On any gven day, the
currently active partcipats' collective buy-sel
activties cause a rage of prices to be discovered.
Current market behavior, then, is merely a
refecton of the behavior of a goup of "curently
actve" people. It is therefore illogca to assume
that the market is efcient (i.e., that price refects
everone's opinion) in the short run.
Perceptons of what is fair vaue, what is an
attractive opportunit, and what one's needs are
at a given price va among people. Students of
human nature agree that human perception is
rarely an accurate reflection of realit. Manias,
fnancial bubbles and pacs are aloutgowths of
collective or indivdual human conduct.
Perception is rarely unanimous, or in baance,
and the differing opinions of fair value mean that
the market will not be in balance ver ofen. From
a practical standpoint. this meas that the
market's most recent price is always unfair ad is
advertising an opportunit for some group of
buyers or sellers among the spectrum of traders.
Change affects people on a psychological level,
their reaction again being afected by their
particular situation. At certain times, the
dominant goup may be resistant to change, while
at other times i may be anticipating, willing to
accept and even welcome change. People do not
react to change in the sae ways, which is why
markets, when eeriencing change (Le., a trend),
tend to be ver volatle. Te geater the rate of
change, the geater the degree of volatlit. M the
fnal anaysis, human behavior, which M
dynamic, evolving ad ever changng, creates
market behavior. Mrkets B merely humans
reacting or not reacting to inforation and
opportuities.
HOW AC M FUNCON 9
Tese thougts are included to illustrate the
inadequacy of the conventonal supposition that
the purose of the marketlace is to balance
supply and demand and allocate scarce
resources. Since ths is an impossible task. the
suppositon must be incorrect. We cannot
conclude that in the short kets do indeed
balance supply and demand. Te merely balance
the market by makng the situaton far between
the most recently actve buyers and sellers.
Te methodological approach promulgated and
practiced by the Market Lgic School differs fom
curent academic wisdom on markets. here. at the
ver outset.
The purpose of any market is to facilitate
trade, to transact or conduct an incrased
amount of business.
Te self-interest of participants dictates that
this is so. If a ket isn't fair for one side of the
buyer/seller group, that side which considers
itself unfarly disadvantaged by price will not
tade, and the transactional volume will fall off.
Tus, to facilitate trade. the market seeks to fnd
an area where prices are perceived as fair for both
buyer and seller.
Te above statement of purpose defnes a free
market. one in which its participants are free to
engage in buying or selling of the underlying entit
being traded as their self-interest dictates. Such a
marketplace exsts solely to facilitate trade. Tis is
its one and only purpose.
But while the market does not est to allocate
scarce resources and balance supply and
demand. it does in the long run balance supply
and demand and at any one moment does allocate
(and continually reallocates) the scarce resources
traded in a fee market. To continue an earlier
analog. conSider the confsion of the lay
10
M 101
carpenter he embraced the same logcal falac
that hinders the majorit of market partcipats
- mistakng the purpose for one result of the
entit fll g its purpose. Suppose the carpenter
were to mistake the saw's purpose -to slice t
wood - for an ancillar result of the saw's
flflling its purpose -say, to create sawdust. He
would fd that his false concepton of the saw's
purpose would not help him see how the saw
would make his job easier. It is imperatve.
therefore, not to be misled ad mistakenly
conse the outward resuls of the marketlace
that price is rationg supply and demand -wth
its purpose, its raison d'etre.
Consider as an Cple of the implicatons of
this concept the crude oil market during te
1970s. When prices were at $30 /bbl. , the market
was allocatng a scarce resource and balancing
supply ad demand, as it was at $10/bbl. But due
to the self-interest of individual and corporate
energ consumers, the maket was not facilitating
nearly the leel of trade at $30 /bbl. , which is why
the price eventually fell to $10/bbl. Te point is
that the market over the short "allocates" and
over the long run "balances" at any price. But it
does not necessarily facilitate trade at any price.
Te process of allocating and balancing in the long
run is a resut of the market flfl g its sole
purpose -to facilitate trade.
Grasping the prma importance of a market's
need to facilitate trade is the backbone of a
understanding of an eerday market, because it
indicates the abilit of the market to continue
directonally. In other words, the degee to which
a market facilitates trade is iportant market
generated informaton which indicates the
strength of a directional price movement. Oil
prices during the 1970s rose to such levels that
HOW AC M FUNCON 11
te multtude of conseration efforts soon
dropped demand drastically. Anyone who
obsered that the local gas staton was selling
fewer gallons of gasoline per week at the relatively
high prices kew the tend toward higher fel
costs was doomed.
Kowing the degree to which the market is
facilitatng tade, then, is one of the kes to
understanding a market. Yet measuring this
degee can ofen be difcult for the casual
obserer. Tere are several methods of measurig
the degee to which a market facilitates trade.
Te include:
1) comparing total transactons occurring
over different but equivalent units of
time, such as two consecutive days.
2) comparing the hig-low range of prices
transacted over consistent time
increments. The assumption is that the
larger the range, the greater the
participation and market acceptance.
Te smaller range shows a smaller
degree of participation and probably
the diminishing of satsfaction.
3) organiing transactional data via
normal distribution. More information
on this wil be given later in this book.
Mter dweling on the trade facilitation principle,
it becomes obvious that all market participants
understand that the purpose of an everday
market is to faciitate trade. Aso obvious is that in
the process of attempting to facilitate trade and
either succeeding or faing to do so, the market
generates valuable information for the
participants. Tis is the single most important
insight into the inner workngs of everday
markets. This information fow provdes a
measure of results which illumnates for the
12 MS 101
discerng partcipant the current condition of the
market. "Conditons" indicate whether the market
can be exected to contiue in its recent directon,
or trend, or whether that tend is climag and
thus may be chagng direction.
In seekng to facilitate the geatest amount of
trade, a market continually tests different price
levels. Troug this process - the ongoing
probing back and forth between higer ad lower
price leels - te market again generates this
same valuable informaton, both to those who are
actvely involved, and to those who are
perpherally involved ad merely observg. Te
information gaered fom the market's rotation
- its probing back and forth - relates to the
directon in which price is moving over time.
ChapterS
Pnciples of Market Lgic
P
roponents of Market Lgc assert that the
market's components interact in a logcal
fashion, ad that current conditons indeed
can be understood. Tis chapter wll provde an
understanding of the components the
marketplace uses to facilitate trade, advertise
opportunit, and otherwise generate informaton.
Eer marketplace functons wth fve
components: the product and the interests of the
producer-participant, the need on the part of the
consumer-participant, a centraled location or
network providing communication, price, and
time.
T Poduct and the Intrest oj the Pducer
Paipant
Te product must satisf a need, or else be
packaged or marketed in such a way as to
persuade the participants that i satisfes a need.
Te producer is a self-interested individual whose
need is to remain in business and whose goal is to
ma profts. He wshes to facilitate trade in
his product i order to determine the price at
which profts are maed.
T Need on the Part oj the Consumer-Partiipant
Consumer-partcipants have their ow
individual purposes for usig the market. These
purposes are many and varied, and in al but the
14
M 101
most orgaed markets the reflect the
consumer's need for the product. Te
participant's goal is to fulfll his need as cost
effectively as possible and to determine the
quantit of purchase needed to do so. Ever
product has a value in the mind of each consumer.
In assessing the product's value, each consumer
weigs the product's costs and benefts throug
time.
Sigifcantly, the decision-mang behavior of
both consumer and producer is infuenced by
participant timefames. Each actve participant is
restricted to some degree by the amount of tme he
has to make his transacton. Those who need to
buy an item rigt away, for instance, have a short
tmeframe, while those who do not have a pressing
need have the luxr of time and hence a long
timeframe.
If it could be done, organiig a market's
patiCipants along a spectrum of tlmeframes from
shortest tmefame to longest would provide
invaluable information for those wishing to proft
fom a market. The behavior of shorter timefame
participants would be discounted somewhat,
since the must transact soon anyway. But when
the indivduals who are kow to be long
tmeframe partcipants entered the market, an
opportunit to transact at those same prces
would be apparent. This is because the obserer,
kowing that long tlmeframe partiCipants do not
need to act immediately. would deduce fom the
fact of their partcipation now that prices were
suffciently attractive to prompt them to enter the
market.
However, accurately organiing all the market's
participants along a tlmefame spectrum
according to either your ow estimation or the
participants' statements of their individual
HOW AC M FUNCON
15
tmefraes is difcult if not impossible. Te
reliabilit of data gathered would be suspect.
given that a) the only means of objectively gainig
such insight would be to question competing
market partcipants. and b) we all continually
sh our ow tlmefame depending on our
circumstances at the moment. Even if possible.
such informaton would reflect only current
conditions. and thus become quickly outdated as
conditions change. In other words. the tmeframes
change too fast for the tader to reasonably exloit
his kowledge.
A Centralied Latin or Network
All markets have either centralized locations or
a network ofering communications among
market participants. This is an integral
component of the market because. whether it is
centralized or dispersed. the market has hours of
busiess. A business's closing time inserts a
potential forcing point for decision-making. Thus.
participants may act differently early or midway
into a trading session than they will toward the
close of trading. Other eamples of market
imposed tlmeframes include the release of a
report. contract exiration and a board of
directors meeting (for a stock). etc.
Pe
Price. the market component most paiCipants
rely on when makng trading decisions. is the
amount of money given or set as consideration for
the sale of a specifed item. It is a variable and. as
such. it fuctuates. Price facilitates trade by
balancing the market. making the situation fair
for both producer and consumer over the ver
short run.
Te market. in facilitating trade. uses price to
16
MS 101
promote activit. Price does this by advertising
opportunit, movg up or dow in order to make
the market attractive for participants to enter. Te
market continually shs or vacillates beteen
price areas where buying (consuming) and selling
(producing are encouraged. In other words, price
tests excess levels. Howeer, the market has little
or no trade actvt when price moves either too
high or too low. When this occurs, the market
does not facilitate trade, forcing prices to change
eventually.
To prevent price fom movng too eensively in
one directon, the marketplace has "hidden
brakes," namely, the self-interest of the
participants. If price becomes unfairly above or
below value, one of the partes to the producer
consumer equaton wll not trade or wl tade in
decreasing volume. For eample, as price moves
up, the market advertises opportunit for
producers, but may be in an area where the
consumers will not buy, or wll buy grudgngly and
in smaller volume, thus forcing the producers to
lower price over tme.
Te promotional abilit of excess price and the
hidden brakes inherent in ever marketplace can
be illustrated by a business custom exstng in
most Western cultures, the "post-holiday sale."
During tis period, most departent stores
substantially discount merchandise not sold at
regular prces during the holiday season when the
retailer has geatest inventor deMd. Store
management realies that afer the holiday season
a shortage of buyers exsts, and mechandise not
sold at regular pre-holiday prices will not move
quickly. The retailer's primar goal througout
the year is to be quickly rid of slow-moving
inventor (which is costing interest, storage and
insurance) while always increasing liquidit.
HOW AC M FUNCON 17
Hence, merchandise is repriced downward.
Frthermore, merchandise wll be sold only
repriced at enough of a discount to attract bargain
hunters. Thus, eer post-holiday sale is a
market's use of a "purpose (low ecess) price"
desiged to move old inventor not sold during the
holiday season. Te retailer is wlg to promote
his lefover inventor through an ecess low price,
since only the excess price reduction will
accomplish the goal.
Shoppers perceive these new lower prces as
bargains because for the months leading into the
holidays, these same items cost much more. For
Cple, a shirt which had sold for $50 in the
prevous nine months, offered afer the holdays
for $25, gets participants to react. Te realize
the're buying price below the value established
over the prior months. Thus, shoppers have an
associaton of price over time equaling value, not
as an ackowledged and articulated principle, but
rather as a perceived, almost unconscious
insight. Te hidden brake which prevents the
shirt from selling for $10 is the self-interest of the
retailer, who assumes that 50% off wil be as
much of a price ecess as he needs to fulfll his
goal in the tme allocated.
While a low price excess attracts consumers, a
high price excess similarly attracts producers. A
Cple of the latter can be seen in the prices
hotels can charge when demand for hotel rooms is
created.
Te managements of seasonal motels located in
resort areas exect a strong demand, and thus
charge the highest prices only dung the seasonal
perods. Suppose that a major amusement theme
park opens some miles away fom hotel faciities,
creatng vast demand for nearby hotel space. A
lone hotel next to the park is now able to charge
18 M 101
twice what the faraway accommodatons charge
during the off-season. yet stll remains flly
booked. Tis high or ecess price charged by the
lone hotel is providing informaton to compettors.
This informaton wlinevitably promote activit in
land values around the resort park. since vendors
of resort-related services envsion substantal
profts. profts the lone hotel is makng. Tus.
hig prices attract more (producers) sellers. who
buy up lad (at higer values) and build hotels.
Te so-cal ed hidden brakes -the self-interest of
the partcipants assumig a fed demand wl
insure that prices wl fall and the ecess price
charged by the lone hotel wl soon be lowered to
mae proftabilit.
Tus. one of the most importat insigts that
the marketlace wl gve to both producer and
consumer is that activit is being shut of at a
certn price. Tis is a sigal that price is not
facilitatng tade or promotng activt and that
this leel should be offered only for a short period
of tme and thus is an ecess and can be eected
to move. For Cple. when a new. higher price
produces a substantially lower level of actvit. it
signas to the producer that. for the moment. a
lower price (or a corective marketng strateg
such as advertsing is needed sales of the
product or service are to pick up.
Similarly. the producer. for whatever reason.
lowers the price beyond the point where he can
make an equitable proft. he wl soon shut off the
availabilit of the product at the unreasonably low
price and wl charge more.
Tim
Time. the market component few partcipants
rely on when mang trading decisions. allows us
to measure the degree of change between need
and price in the marketplace. It is a kown
HOW AC M FUNCON 19
constant, a measurement which participants
inadvertently use when deterg value
through transactional data. Time impacts trade
by regulatng the duraton during which buyng
(consuming) and sellig (producing) can take
place.
Because competiton to buy low and sell hig is
present, the market, in facilitating trade, uses
prce to promote opportunit and uses te to
regulate how long that opportunit will last. Te
market insures that when price promotes
opportunit to the point of reaching an ecess,
that price is held in check. The market continually
uses time to regulate itself throughout its
stucture.
Examples of how time regulates price activit
can be seen in the previous illustratons showng
how price promotes activt. In the post-holiday
sale, while the departent store management was
willing to sell at prices half of those charged prior
to the holidays, management was not wlling to
offer this "below value" opportunit for long, but
only ut the current inventor was sold. Had the
store extended the opportunity to purchase
merchandise into what is considered the regular
shopping season, the lower post-holiday sale
prices would soon be considered the new value
area. Tis is something no retailer would want to
see. Retail stores and other producers/sellers use
the lower excess price to promote activit only so
long as it flflls the purpose behind the ecess
price. Interestigly, the sharper the price
reduction - or the father the ofered price is
below value - the shorter the time period the
opportunit will be available.
Likewise, the Cple of the resort hotel
illustrates that time regulates activit. Higher
prices promoted activt among producers,
20
M 101
thereby attractng new hotels. Te hig prices
charged frst by the lone hotel and then by the new
hote market entants were in hindsigt an excess
which persisted only until the deman, d for hote
space was met ad eceeded. Tis actvt (rising
land values and hotel constructon) contnued
unt it went too hig (hotels saturated the
demand) and actvit at the high prices was shut
of. Tus. while the hotel near the resort park
could temporary charge prices considered above
value. the market's ecess promoted this
opportunit to others. so that the hotel was not
able to sustain the hig prices ad low vacanc
status for long. Tus. throug a long tmeframe.
tme regulates the hig price actvt and controls
it.
Conclusion: Te components which combine to
create a marketplace interact in the following way.
Participants. each with his ow tmefame for
operating. and each affected by market-imposed
forcing pOints. either enter or do not enter the
market at the most recent price. Tis collectve
activit controls and regulates itself throug its
allocation of price - higer prices advertse for
sellers. while lower prices advertse for buyers -
and tme. Tus it yields tpes of natural
orgaaton which. in producing ecesses to test
market acceptance. produce balance and provide
informaton.
Te obvious conclusion is a major
breakthroug for anyone who understands the
market's inherent and obserable logic. Te
conclusion that the market acts logically flies in
the face of the conventonal wisdom which says
that price is the only mechanism that the market
uses to balance or ration supply and demand.
(Introductor economic theor asserts this.
econometric models are built assuming it. and
HOW AC M FUNCON 21
many investors and traders have eerenced
setbacks believing i.) When participants focus on
prce and price alone. the simply canot obtain
an understanding of the underlying strength or
weakness of the market. the market's conditon.
Tus. an analysis of a prce versus price is
inherently narrowly focused and. taken out of
conte. is ofentimes vually meaningless. Yet it
is this assumption - measuring a price aganst
aother price - upon which moving average.
relative strength. stochastic and other techicaly
based indicators are modeled.
Chapter 4
Pnciples of Auctions
AUCON: A sale by increase of bids. A public sale
in which propert or iems of merchandise are
sold to the highest bidder.
DUH AUCTON: A auction in which the
auctoneer opens with a high price and lowers it
uUa buyer is found.
E
rom the days of early Rome, when soldiers
divided the spoils of war by holding auctions
on the battlefeld, the aucton process has
been the most efectve means of determining the
fair value of propert. The reason, in a word, is
compettion - a multitude of buyers competing
with one another, bidding up the price of the item
being auctioned until price moves hig enough
that only one buyer is left.
Auctions are used eensively in everday
competitive maket Situatons. ConSider the
overbooked fligt, which forces airlines in the U.S.
to compensate "bumped" passengers with a fee
fight. To determine who gets bumped, airline
ofCials hold an auction at the terminal gate,
oferng fee tickets as an inducement to
passengers who wl wl gly give up their seat to
take a later figt. Tose passengers with
important appointents to keep are constraned
by their tmefame and are unwilling to be
compensated for missing their fight with a free
tcket. But passengers who have a longer
23
24 M 101
timeframe from which to operate (i.e., no pressing
appointments) have the lur of feeling
comfortable waiting for another fight and can be
compensated for doing so.
The tpe of auction process known as open
outcr has come to symbolize capitalistic free
markets at their purest and most competitive. Te
open outcr which occurs on the foor of a
fnancial echange is a subset of the universe of
competitve auctions. Terefore, an examination
of the process behind an ordinar competitive
auction reeals insights and a background helpfl
for understanding the internal workings of the
fnanCial markets.
Al markets are auction markets ad are of two
types.
PASSW AUCIONS: In a passive auction.
partiCipants select from a range of prices that are
already determined.
AC AUCIONS: In an active auction,
partiCipants develop the range of prices
themselves (as a part of the auction process).
E7ples of passive auction markets can be
found in the unorganized markets in which we
partiCipate as everday consumers. In a
department store or grocer store. for eample,
the consumer is offered a wide selection of prices
(usually varg with qualit) to choose from.
Watches at the department store may be offered
over a sizeable price range. In the grocer store,
even such staples as beef may var in price
dramatically. This tpe of auction gives the
consumer an opportunit to select, from a range
of predetermined prices. the price at which he
wants to do bUSiness.
In active auctions. on the other hand. the
HOW AC M FUNCON 25
consumer plays an active role in deterg
what price will be attached to a partcular item. At
a taditional aucton the auctioneer acts as agent
for the seller of the propert. Potential buyers bid
on the propert, raising their bids as the process
proceeds, uU all but one bidder reains wl g
to bid. He "wins" and the propert is his.
Another tpe of actve auction is termed a
"dutch auction." In this process sellers offer their
(similar) proprt at successively lower prices
UUa potential buyer accepts one of the offers.
Aside fom auctons of a, collectbles and so
forth, many transactions regularly occur using
actve auctions for price discover. An exmple
which illustrates the tpes of auctons with which
we are all famiiar is the housing market. When a
prospectve buyer begns his search for a house,
he inquires as to the price range that houses in his
chosen aea have actually been selling (trading
for. Tis helps him to establish what is value for
that area. A passive aucton takes place as the
potental buyer selects from the may houses for
sale on the market. Subsequently, in the
negotiations which wl determine the fnal sale
prce of the house, the buyer will keep raising his
bid incrementally (traditional active auction), as
the seller lowers his ofer incrementally (dutch
actve auction).
It is sigifcant to note that in an actve one
directional auction, the auction begins with an
obvous imbalance signiing unfairness to one
side of the consumer-producer equation: many
ready buyers at the opening bid, and only one
ready seller. As the auction proceeds, prices move
directionally uU the vast imbalance beginS to
subside. as fewer and fewer are wlling to bid. (See
illustration, ne page.) Finally, as the market
moves fom imbalance and unfair prices toward
26
M 101
balance ad a fair price, there is but one lone
buyer bidding on the lone object being auctioned.
A fair price has been discovered, according to the
wl gess of the partcipants present at the
aucton to respond or not respond based on the
price movemet.
Faci Market Are Autn
Ts chapter has eed traditonal auctions
because the aucton process which occurs daily
on the foors of the fnanCial echanges operates
H essentally the sae manner. In keeping with a
fnanCial market's sole purpose - facilitating
trade -the market employs both traditional (low
to hig) and dutch actve auction processes, H a
combinaton refered to as "dual auction process."
That is, H a stock, ftures or options market, the
purpose of price is to neutralize any imbalance
between buyer and seller. When an imbalance of
more buyers than sellers occurs, prce moves up
to advertse for selers. If price moves up to a hig
enough level that an imbalance of more sellers
than buyers is discovered, price moves back dow
to fnd buyers. Important to note is that the higher
price moves up to encourage sellers to enter the
market, the fewer buyers are encouraged fom
participatng. So, H order to flfll Its purpose, the
market wl move back dow to involve as many
partiCipants as possible.
Te acton of trade movng back and forth
beteen high and low prces is referred to as
rotatioD. Price rotates, auctons up and auctons
down, advertsing for sellers and buyers to flfll
the market's purpose of facilitating trade. at the
same tme discovering the market's collective vew
of current fair price.
the market's natural behavior unfolds.
another ver important fnction occurs. Tis
process of the market rotating back and forth
HOW ACT M FUNCON 27
fom high prices to low and back again to hig,
etc., ofen produces what we term excess prices.
U other words, markets tend to overcompensate
for an apparent imbalance. Tis propensit for
price to go too far too fast ofen creates temporar
benchmarks, references that price went too far up
in rallying, creatng a sigifcant imbalance
caused by increased selling. Tus, the ecess
provides participants with informaton which
indicates that the market has gone hig enoug to
go too hig, and that the high is an excess.
Howeer, the market does not always produce
these benchmarks or reference pOints for all to
see. When changes in price occur that are so small
and subtle that a gross imbalance is not created
and actvit is not shut of violently, there is no
overcompensaton or ecess in the marketplace.
In this conditon the market may tend or show
slow and consistent directonal continuaton.
Tus, when te market is facilitatg trade, it is
either going to be overcompensatng for imbalance
and hence displaying ecess or else operatng with
sligt, subtle imbalance which produces no
ecess, indicatng the possibilit of steady
directional movement.
Conclusion: Aucton markets are all around us.
Te are understadable and behave in a logical
manner. Financial makets, a subset of actve
aucton markets, demonstrate the sae logical
and understandable operational behavior.
Whether i is an art auction at Christie's or an IBM
out-of-the-mone call option, both consumer
(buyer) and producer (seller) are interested in
either buying or selling the maum amount at
an advantageous price. Because of the endless
quest to facilitate trade on the part of all
participants, the price continually tests for
market acceptance as determined throug an
28 M 101
imbalance of buyers to seller, probing higher and
then lower prices, again and again. In order to
discover balance, the market needs to go too hig
and too low to fnd an area that is fair for both
parties over a peod of tme. Tis rotatng activt
produces overcompensatons which in retospect
become considered either fair or unfair prices: fair
the level of overcompensaton results in a price
level that is accepted over time, unfair the leel
of overcompensaton attracts compettion and
thus does not tade over tme. These ecesses on
both sides give the market its natural organiaton
and provde information to partcipants. Tus, in
the market's natra order, it produces a top
exreme, a bottom ereme, and a fair area. J
three provide empirical benchmarks to market
participants.
Chapter
Obserations Defned and
Characterized:
Maket Background ad
Defnitions
T
he market's production of two eremes
bounding an accepted price area occurs
routinely. Its presence or absence allows
the participant to see the fnancial market's
eanded role, that of an information generator.
Te market consistently promulgates its current
defnition of value -the fact of like transactions
occuring, over tme, in an area of similar prices.
Ts iformation allows all participants to
recoge disparities in the price-value
relationship.
Tis chapter will tie together many of the pOints
made in the previous chapters regarding how
markets operate and what information is
generated. Te following obserations form the
methodological basis for understanding current
market conditons.
Obseration #1: Market participants gain
confdence as time passes.
On a gven day, a fnancial market's volatilit
varies depending on the length of time the market
ha been trading. Soon afer the opening, the
concerns and needs of the dominant partiCipants
29
30
M 101
are brougt Into focus. Te market opens at what
te dominant partcipants consider a fair prce
based on their Interretaton of up-to-the
moment news eents, goveent reports, or
othe information outside the market relatng to
curent conditons, real or ored, ad how the
may afect vlue.
Fom here the prce discover process starts.
Te (ofe news-related) concers and (hedge or
speulatve positoning-related) needs of the
paicipants dominant on the opening are
neutra as the trsact. Tose who wish to
buy and sell do so, and the market fnds balance
in a prce area which is fair for all curently actve
paicipants. Since the market has only just
opened, short tmefame partcipants do not have
a hig lel of confdece in the conditon of the
market. New paicipants can at any tme enter
the market either as net buyers, net sellers or a
me of both. If either net buying or net selling
does enter, the market's fagle balance W be
upset ad a new price leel wll be found. Te
speed and volatit with which tis new price area
is tested deped on the magitude of partcipation
by the new entants. If smal net buyng comes in,
the market W rally somewhat; large orders to
buy "at the market" come in, the rally W be more
pronounced.
Te new entats whose buy and sell orders
were not present on the opening tend to enter the
market shortly after the opening. Te more
anous the partcipants, the earlier the tend to
act. By the end of the frst hour, the market should
have attacted a large pecentage of the
paicipants' orders.
Mter te frst hour's tade, the market's initial
balance has been set and the market-maers
have more confdence than just afer the opening.
HOW AC M FUNCION 31
Te have seen the orders of both buyers and
sellers come in and get sered, moving price
usually both up and down. Te take note of the
high prices where major selling was attracted and
the low prices where major buying came in. Te
market-makers now have reference pOints for the
prices at which the can epect seling and
buying. The kow the extent of range
containment for the present, have some reference
as to the degree of balance or imbalance in the
market, and can identif the range of preailing
market prices over the frst hour of trade.
Once the initial balance has been set, the
market can be said to be in balance over the short
term, but not necessarily over the longer term.
Price remains temporary within the initial range
until the market's balance is upset by an infux of
either new net buyers or net sellers. Tis new
imbalance changes the market's condition, and
price will then normally move directonally to
neutralize the developing imbalance.
Obseration #2: Obsering clusters of
transactions recurring at similar price levels
over time leads one to a general understanding
of value.
Given the obseratons made in the previous
chapters, we can identf a Sigifcant market
behavior as i is occurrg: that certain clusters of
transactions tend to congegate around near
equal prices. Because we are aware of the
inherent self-interest which motivates collective
market activit, we know that transactions at a
given price level recur over time, that price is being
accepted as fair for both buyer and seller.
All markets, regardless of the timeframe over
which the are organized, regularly display a
readable preference for a certain contiguous
range of prices while rejectng price levels above
32
MS 101
and below this fair area. We refer to that price or
the cluster of near equa prices as value - the
market's collectve exression of currently fair
prices - while associating transactional prices
that do not recur, and therefore are not reinforced
by tme, as unfair prices, or prices away from
value. Most informed participants either
consciously or unconsciously associate this prce
range -the area where prces recur over time -
with value.
Tis is a major "edge" the foor market
participant has over the random walk communit:
he understands that
prices recurring over time yield value
(Price 9 Time * Value).
Understanding the exstence of the market's
daly self-described value is a major step toward
appreciating the market's inormational role,
introduced in the last chapter.
mentioned earlier, the most Signifcant
condition of a market revolves around the exent
to which it facilitates trade, which is defned by
transactional volume measured over equal time
increments. The vast majorit of volume will lie
with those prices seen with time. Thus. volume
will almost invariably be concentrated in the value
area, while the price areas above and below value
which were rejected as unfair wll display a
comparatively smaller amount of transactional
volume.
Sigifcantly. monitoring the value area can aid
in determining the direction and strength of a
trend - the ever-important signal as to whether
the market is accepting higher or lower prices over
time versus not being receptive to price change.
The general direction of value areas of similar
wdth is more importat to note than simple prce
HOW AC M FUNCON
33
fluctuatons. A emerging trend can ofen be
discered much more quickly by observing
directonal changes in value than throug
taditonal technical tools.
Obseration #3: To undertand the condition
of a market at any gven time, it is important
to categorize the market's participats by
their timefame and to monitor their behavior.
A market wl eibit curent conditons. For
Cple, the market can trend. or it can meander
i a directionless sideways movement. When
markets trend. the trend can be ver strong and
directonal; or it can be moderately stong.
indicating a zigzag or ebb-and-flow tpe of patter
where higher highs and higher lows are achieved
over time; or the trend can be stalling. with the
market about to move violently in the opposite
direction to the recent trend. Importantly. there
are discerble underlying behavioral patterns
which wlindicate whether the market can eect
to change fom its current condition.
Market behavior is nothing more than human
behavior responding or not responding to current
price. Tus. to understand the market's current
condition. and to be able to reasonably determine
whether current conditons will continue and for
how long. we must study the people who
paiCipate in the fnanCial markets.
Partcipants can be grouped into those with
shorter timefames and those with longer
tmeframes. It is the entr of te longer timefame
participants that upsets a market's balance.
causing a rise in price over the short term. Teir
contnued net entr - that is. more net buying
tha selling. or more net selling without buying to
balance it - over a period of time wl cause a
market to trend directonally. Te challenge of the
market participant seekng to determine the
34
M 101
directon of the tend is to monitor the presence
and leel of anet of long tlmefame pacipants
either as net buyers or net sellers.
Te percentage mix of short timefame to long
tmeframe partcipants in a market affects the
degee of volatlit the market eeriences, while
also providing structure to the market. Active long
tmeframe buyers will buffer the market at prices
low enoug to be attractve for them while the
presence of active long tmeframe sellers wl
prevent the market fom going straigt up, as
higher prices will attract them to sell. This tpe of
condition -a market where both long timeframe
buyers and long timefame sellers are active -
would behave differently from a market where one
goup predominates. We term such a market a
two timeframe market, since both long
tlmefrae buying and selling groups are present
and actve.
In a two tmeframe market, prce, rotating up
and down, shuts of the currently dominat
actvit, and at the same time advertises for
opposite activit. In other words, as the dominant
buying activit enters the market, price moves up
to shut off the buying ad attract sellg, which, if
sucessfl, will make the market move off its highs.
Because the long timeframe seller sells at
suffciently hig prices while the long tlmefame
buyer buys at suffciently low prices, the day's
high-low range can be epected to remain
contained.
Compae this to a situation where only one
group, either long timeframe buyers or sellers,
enters the market wthout the other group. Tis
conditon, which we describe as a one timeframe
market, can be epected to move directionaly
rather than to be contained. Despite occasional
HOW ACV M FUNCON
9 0 1M
"DB Tmetrame MBIXOI"
"To Tmetrame nazket"
- h- L- t 7 6

7 8 8'l5 J' W J' 5 lO 00 l I ' I5 l OO l 5 I ' W

35
Ml5
MlZ
W
W
W
W
36 MS 101
pauses. the market usualy continues
directionaly in this mode in the absence of the
opposite long tlmeframe participant. And the
more the market moves. the more momentum it
picks up and the greater the chance for frther
continuation.
Over the course of any week most markets
comprise a combination of one tlmeframe and two
timeframe modes. with the two timeframe mode
being most common.
Obseration #4: Balance is the essence of the
market. The degree to which a market is
imbalanced wll determine its ability to sustain
a trend.
We are familiar with balance and imbalance as
seen in everday markets. We know how to adjust
to each and we also understand the inherent
ability of markets to self-correct when not in
balance. For instance. the restaurant which
continually has long lines of patrons waiting for a
table informs us that a meal there probably
equals price below value. The restaurant could
either expand capacit or raise prices to adjust to
current imbalanced conditions.
Al markets are balancing mechanisms. with
price being the variable that reacts to an
imbalance among buyers and sellers by moving
directionally to neutralize what was an unfair
situation at that time. Tus. price changes occur
for a logical reason. fulfll a purpose. and reflect
the condition of the market. It is important to
observe and understand the collective activity of
long and short timeframe buyers and sellers
around a given price. We are particularly
interested in the behavior of the long timeframe
buyers and sellers. because their degree of
participation reveals the etent to which a market
is out of balance (trending) . Signifcantly. this
HOW ACV M FUNCION 37
condition of imbalance - trend - does not
subside immediately.
Te group of participants who don't have to
transact but choose to - the long timeframe
paicipants - have the power to cause the
market to trend, the result of imbalance. The
entry of these participants to the market, as we
shall see later in the book, is an observable
phenomenon. And it is important to witness the
degee of imbalance the create if we are to know
whether the market is poised to trend.
An important concept to keep in mind is that
any response or change produces new
surrounding circumstances, or trade-offs. It is
therefore critical to mOnitor the market as
changes in price occur or as the day, the week,
and the month unfold. An information fow comes
fom seeing how both long timeframe buyer and
seller accept changes in both price and time.
A market can either be in balance, or out of
balance. An out of balance market usually
continues to be out of balance until either
suffCient directional price changes occur or
suffCient time passes. Either or both will diffuse
imbalance. Increasingy higher price within a
balanced market condition is not an attractive
situation for one who exects trend continuation.
In contrast, increasingly higer price with
substantial imbalance is a condition which would
tend to indicate continuation. Te same is of
course true for decreasing price with balance
versus decreasing price with substantial
imbalance.
Concentrating on the degree of balance or
ibalance currently ehibited by a market leads
one to recognize behavior patterns as the relate
to value. While to the unobserant outsider the
reoccurrence of manias and panics adds to the
38
M 101
myster associated with markets. the are in fact
merely a reflecton of everday human
emotonalism which causes the imbalanced
condition which always precedes these headline
grabbing events. The hig degree of imbalance is
regularly repeated ad can be detected as i slowly
develops. ahead of the headlines. a market
conditon. i can be readily understood.
SECTION TO:
Organizing Markets to
Read Market-Generated
Information
Tis section wll present two methods of organ
ization which wll more fly display the non
chaotic order wth which the markets have
functioned for centures. These formats wl
alow the market to be obsered in a logical
famework. Wen used confdently, they
shoud enhance the trader's ability to de
emphasize the emotional decision-making
that markets ar famous for fomenting. This
should help him to dispassionately gauge the
Mket's cur ent conditions: the extent of
trade facilitation and the degee of baace or
imbalance present. Finally, use of these for
mats wll enable the trader to gauge a ver
important market factor, namely, the level of
activity of the dominant longer timefame out
side participants at various price levels.
Chapter
The Importace of Asessing
Vaue
C
onsider the tpe of market-generated
information most people deem important.
When asked, most bystanders would
respond that the most recent price is what they
use as their yardstick when evaluating the worth
of their goods. Yet, as those close to the market
kow, the price of the most recent transaction in
and of itself is of little use in formulating an
informed buy-sell decision. It is the relationship of
price to value - the development of price over
time - that provides the greatest and most
important information, defning the type of
opportunit one is facing.
Te bible of the fnancial world, Securities
Analysi, by Graham and Dodd, stresses that
understanding and assessing current market
price as it relates to current market value should
be the ultimate goal of the portfolio manager. Their
seminal work advocates analyzing the company's
fndamentals (balance sheets, income
statements, assets, etc. ), information that is
generated at least quarterly and ofen monthly.
Tis regular fow of information - outside the
marketplace -should be anayed and combined
with kowledge of the current risk-free rate of
return, allowing the investor/analyst to ascertain
a company's value. (It is important to remember
44 MS 101
that value is neer a specifc price, but always a
range of prices.)
Te idea is that the stock's price could either be
trading below, within or above current value at
any one point in te. It is kowledge of where the
stock's curent price is relative to current value
which defnes the opportunit. Tus, the so-called
corporate raider who does his homework well,
remains patient and only enters when he is
buying price substantally below value usually
wns, buying stocks that appreciate, allowg D
either to sell them at higher prices or take over the
company. Te success of the Icahn, Pickens,
Jacobs, Steinberg mode of ivestment is a
testament to the analytical validit of Graham and
Dodd, and obviously is yet another annoyance to
the efcient market theorists who posit that price
equals value once a stock, fture or option is
traded on an echange foor.
mentioned before, successfl foor traders,
partiCipants with shorter tme hOrions, use a
decision-makng process virtually identical to the
Graham and Dodd approach, yet based on a
different informaton fow. Rater than using
information outside the marketplace, the savvy
trader, either consciously or unconsciously, relies
on market-generated information to ascertain the
stock or fnanCial instrument's current value. He
then looks to take advantage of price when it
devates fom current value, just as do Waren
Buffett and the successful investors mentioned
above. Te successfl foor trader, whether
specialist, options market-maker or futures pit
local, consciously or unconsciously applies this
kowledge and exerience to his decision -making
process. Te foor trader' s awareness of a strong
price/time relationship representing value is
knowledge that differentiates him fom the vast
ORGANIZING MS TO RD
M -GENERTD INFORTON 45
majorit of fnancial market partcipants away
fom te floor.
Te Market's SlDefned Value
A understanding of how the market currently
defnes value can augment the decision-making
process, whether the decision-maker is a portfolio
manager, insttutonal trader, or anyone else
actvely involved in fnancial markets. Any
portfolio manager schooled in market logic applies
this tool eer time he or she wishes to buy or sell
a partcular instument on either fndamental,
technical or asset allocation grounds. Again, we
are simply following the recommendations of
Graham and Dodd: conduct analysis which
defnes value. The market in individual equities
offers the flow of information (balance sheets,
income statements. etc.) that Graham and Dodd
require. but fxed income. currency and physical
ftures markets do not. Of course. i could be
argued that government status reports such as
mone supply. balance of trade payments,
producer price index. unemployent. etc. . are
balance sheets for these markets. but avowed
Graham and Doddists would fnd it diffcult to
ascertain value from them. Nevertheless. the fact
that the market defnes value by the collective
transactional exression of all currently involved
partiCipants allows the participant to seek to
exloit opportunities when price is away from
value.
Signifcantly. changes in price occur quickly.
and can be relatively dramatic. whereas changes
in value. particularly when viewed over the longer
term. tend to occur in a much more deliberate.
steady and orderly fashion. Price has a ver
straightforward relationship to value. Price can be
above value. within value [!.e . . unchanged value)
or below value. A range of prices can be composed
46 M 101
of a me of those above, within and below
value.
After ascetaining the proxit of the most
recent price to value, the informed participant
looks at the tpe of response present. For
eample, the most recent transactons produced
prices above value, no actvit could occur, selling
activit could occur, or buying activt could
occur. In other words, the market's collective
response to a price above value can be absent,
thereby displaying a lack of facilitation at that
tme, or i could be the expected response, a
selling response, or it could be opposite of what
would be expected, showing anous buyers as a
goup were initiatng transactons above value.
Chapter 7
Grouping Participats
Accordg to Timeframe
T
o measure the degee of balace in the
market, we re-ee the issue of the
partcipants who act in the market.
It was previously noted that in an everday
market situaton partcipants could theoretcally
be categorized along a spectrum according to their
tmefrae. Te most impatient to buy would be
the shortest tlmefame buyers. Ne to them
would come those who needed to buy ver shortly,
perhaps in the ne day or so. Ne to them would
be those who eected to make purchases during
the upcoming week, and so on. The further out the
buyers are on this tmefame spectrum, the longer
the tlmefame and the more signifcant their
actvit to directional prce movement, because
althoug they do not have a pressing need to
tansact, the fact that long tmefamers are doing
so spells imbalance. In other words, Adam
Smith's "Invisible Hand, " to which he (Smith,
Kondrateff and others) attributes any and every
market's self-correcting mechanism, is nothing
more than the net group of longer timeframe
paicipants pursuing their self-interest.
In order to deduce, isolate and identif the
presence of the invisible hand (the longer
tmefrae activt) we must be able to
economically organie or further categorie
47
48 M 101
participants according to their timefae. We do
so by essentally creating a model which orgaes
market paicipats into two groups:
1. Individuals who intend to trade today,
whom we wil call "day timefame."
2. Individuals who intend to trade at
some point, not necessarily today. Te
latter group has a tmeframe beond and
other than the day. We will call them
"other" timefrae.
It must be remebered that partcipant
tmefames are not statc. Indivduals voluntarly
change their tmeframe, ad prce movement
combined with changes in partcipat
circumstances can force a change in timefrae.
Using the above defnitions, our abilit to discer
curent conditions will not be unduly hindered by
this.
We have now two clearly defned categories
(buyers versus sellers, and day timeframe versus
other tmefame) which we can use to orgae
market partcipants. When we can group market
paticipants by these categories, and understand
the implications of our fndings, we become much
more informed pacipants. We know that the
probable behavor of a buyer differs fom that of a
seller, and to the etent that we kow the
conditions of the market ae such that at
curently low prices unrequited buyers
outumber the few sellers, the obvious imbalance
will mean prces will not fall and have a good
chance of rsing.
Te ne point to be made regarding participant
characterstcs centers around how certain
kowledge of current conditons can allow one to
have what might be termed "reasonable
eectatons." Te goal of attaing reasonable
eectatons comes into play in any logical model
ORGANIZNG M TO R
M -GENERTD INFORTON 49
where the fture is uncertan. For instance, when
playing blacack wth a single deck. the adept
card counter may have a reasonable expectaton
of being dealt a 10 or royalt a certain number of
hads have been played without these cads
coming up. Te more hads dealt without these
cards coming up. the geater his confdence in his
eectaton. Note that he does not predict the
fture, but makes decisions based on probable
outcomes. reasonable exectations gven
kowledge of current conditons.
When analyzing curent conditions, i is ke to
understand the eent to which a market is out of
balance. Tis is because a trend is caused by one
of these to goups contnuing to enter the
market, creating an imbalanced situation that
price neutralizes through directional movement.
Te prime focus of one who seeks reasonable
eectations, then, involves whether either the
other tmefame buyer or the other tmeframe
seller can be eected to enter at a given price.
ConSider the following:
Other timeframe traders transact with day
tmeframe traders.
Day timefame traders transact with other day
tmeframe traders.
Other timeframe buyers do not transact at the
same price at the same time with other timefame
sellers.
To the extent that current imbalance can be
attributed to sigcant activit on the part of one
other timefame group, we can expect that the
market W not move sharply in the opposite
direction any tme within the next half hour time
period and usually longer. Tis is because such
price movement could only be caused by the entr
50 M 101
of the opposite other tmeframe group. In other
words, a strong new hig made afe the inital
range is the result of imbalance caused by the
other timefame buyer. When the new high
occurs, one can reasonably exect that the
market will either remain in the area defned by
the current hig-low range, or else it will continue
to move up, as the conditon of the market -
buying imbalance -either subsides or continues.
The odds are not in favor of the market breaking
sharply within the ne half hour or so afer the
market makes a new high, since the other
timeframe buyer and the other timeframe seller do
not trasact with each other at the same price at
te same time.
Another point to be made is that the day
tmeframe participant and the other timefame
paicipant differ in their reasons for
participatng. Te day timefrae participant
looks only for a "fair" price, a price where volume
has been tansacted, due to his need to trade on
the day. He generally uses close benchmarks of
market-generated information such as an
imbalance of buyers and sellers, and ofen reacts
(and overreacts) to a news event or the release of
fndamental data. Day timefame partiCipants
are most actve and produce most of the volume.
Tus when reacting to a news event or a report
they ofen can produce a tremendous amount of
volatilit and mqor directional price movements.
These report reactions ofen move quickly only to
spring back during that day, often shortly after
the report.
In contast, the other tmeframe participant is
not lookng for a fair price as much as he seeks a
price away fom value or an advantageous
opportunit in value. The other timeframe
participant is usua1 not a sigifcant portion of
ORGANIZING MS TO RD
M-GENERTED INFORTON 51
the average day's volume. Wen this group is
dominant, the day no longer remains average,
since the resulting imbaance must be neutralized
by directional price movement. Responding to
price movements that offer price away from value
opportunities, the other tlmeframe trader is ofen
a buffering factor in the market when a news
event causes the day tmeframe trader to
overreact and move price too far. This is why
sharp directional price changes ofen can change
the condition of the market to a regrouping or test
phase, while smal, incremental changes usually
can continue directionally.
Any imbalance - caused by the long or short
timeframe trader -has the possibility of causing
directional price change. Such a price move, if
sustained, creates the new fair range of prices, a
new area of baance. In other words, when the
other timeframe trader does not buffer the
market. which causes price to spring back to
value, the new area is accepted as fair value.
Obviously, the group of those who partiCipate in
a market will be composed of a mi of the two
timeframe groups. And it is the interplay between
these two goups which creates the ebb and fow
of the market.
Chapter S
The Bell Cue: Giving
Structure and Meaning to the
Market
T
he structure that allows the participant to
extract the most meaning from a market's
price fluctuation is normal distribution, the
bel curve. With the bell cure, seemingly
"chaotic" activit is placed in an understandable
format which defnes current value. The bell curve
organizes price on a vertical axis and time on the
hOrizontal axs. Price therefore becomes a variable
measured by tme. a constant.
For eer exchange-traded fnancial instrument
thus far studied -stocks, options, fnancial and
commodit futures markets -the phenomenon of
a bell cure regularly results on the vast majorit
of das. Te bell cure, an organizing tool that is
used eensively outside the fnancial markets to
provide statistcally signifcant visual
representations of reait. displays an area of
collective acceptance. usually bounded by an
exreme on each side. Applied to a fnancial
market. the area of price recurring over time (the
frst standard deviation; 70% of the total volume
on the day) defnes market acceptance or value to
foor traders and others lookng to garner market
generated information. Tose prices above and
below this value area that are rejected by the
54
M 101
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ORGANG M TO RD
M -GENERTD INFORTON 55
market are seen as unf prices. prices away
fom vlue. Te insigt that stems fom this
realation is that le market. organed over
whatever time increments. regularly displays a
readable collectve preference of prices.
On any gven day. the low exreme (price below
value and without tme) is caused because lower
prices have attacted increased competton
among buyers. while te hig exreme (price
above value and without time) indicates that
higer prices have attracted competton among
sellers. Tus. to the exent that the market
contnues to return over time to, for instance, the
low prices of the day, the market would not have a
buyg exreme; this would
indicate imbalance to the sell side due to lack of
competition among buyers. If in this situation the
market at te same tme displays a well-defned
ereme at the higer range of prices that day, a
trader in tune with the market might remark,
''s market is weak. " Assuming the overall trend
in value is dow, he would be optng more for
being short or neutral the market, rather tha
long. Te point is that the bell cure not only
displays the degree of trade facilitation but also
visually portrays imbalance. In this e7ple it
would display an imbalance caused by an
oversupply of ready sellers relative to those wl g
to buy at current levels.
Te Invisibl Hand Creates Imbalance
If the market is a balancing mechaism, all
signifcat price movement must occur in reacton
to an imbalance of net buying or selling. Tus,
orgaing the market via a bell cure illustrates
imbalance, to the exent tat chages in value
occur more slowly than the volatile changes in
prce. Aalying a series of profles of a particular
market augments longer term decision-makg in
56 M 101
assessing the direction and strength of a longer
term trend, the probable directional movement of
a stock reacting to an upcoming news
announcement, etc. In other words, the other
timeframe group, the so-called invisible hand,
creates imbalance, and continued imbalance
creates a tend. To focus on the dominant other
timeframe goup is our goal.
Before doing this, however, we should consider
the nature of how the market organes itself on a
daly basis, a topic deeloped in Obseration F1 in
Chapter 5. As we said, the market opens and early
on seeks to fnd an initial balance, a range of
prices where fairness can be established, given
the current fow of orders created by the mix of
day and other timefame traders. In order to do
this the market probes high and low, hopefully too
high and too low, thereby setting references with
these ecesses. the day unfolds, the conditions
of the market stay the same or change, and price
may extend in either direction (or, very rarely. in
both directons). If extension occurs. the
benchmarks may be removed as the day's price
range unfolds and is established.
When eed both from a shorter-term
perspective and over a large sample sie. three
areas on the bell cure defne the degree of
imbalance caused by the other timefame
partiCipants or. when they are not active. thefact
of relatve balance. The three indicators. which
may or may not be present on a given profle, are:
Buying and! or selling extremes
Buying and! or selling range extensions
A visually skewed distribution, indicated by
time price opportunity (or "TPO") imbalance
The presence of buying and/ or selling extremes.
range extenSions. and visual imbalace along
ORGANIZING M TO R
-GENERTED INFORTON 57
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58
M 101
with an assessment of the degee of tade
facilitaton defnes the curent condition of the
market. Tese tools do nothing more than
measure imbalance, which is the goal of any
market partcipant in ay market, organed or
unorganed. Each indicates that imbalance -
increased competiton caused by the oter
tmefame net goup - is present. Te more
pronounced a buying and/or seling eee,
range eension and/or a visually imbaaced
profle, the geater the degree of imbalance
present.
Several assumptions are made in coming to the
conclusion that the trend can be deduced from
these three indicators.
1) Over the short term, competition of
either net buying and net selling creates
an imbalance, which is then neutalized
by price moving directonally, thereby
creating a fair and more balanced
situation.
2) Day timefame participants are alway
present in a viable market, but it is the
entr of other tlmeframe participants
competing to either buy or sel which
creates the additional pressure, the net
imbalace.
3) Te day tlefame partiCipants as a
goup are etremely quick to react to a
net imbalance. Tey react by adjustng
the price at which they will trade,
simply because it is in their own best
interest to do so.
In a fture chapter, we will study an
interpretation of the bel cue based on, among
other things, the presence of buying and/or
seling extremes and range extensions. Tese
indicators can forewarn against one of the
ORGANIZING MS TO READ
M -GENERATED INFORMATON 59
greatest frustrations the trader faces: an
unpredictable news event which dramatically
alters price.
It is impossible to kow all news events that will
affect any given market. but the bell curve
(analyzed from the standpoint of the degree of
trade facilitation, buying and selling eremes,
range extensions, and TPO imbalance) is a tool
which provides insigt into the possible nature of
an upcoming event.
Consider the following example of how a series
of profles of Union Carbide stock measured the
degee of imbalance which ested directly prior to
the what was to the interested stockholder well
publicized board meeting in May, 1988. (See
illustration.)
Following the October crash, Union Carbide (UK
hereafter) traded in the mid-$20's, and in the fnal
two weeks of March through the week of May 6th,
UK traded quietly in a narrow range of $22 1/2 to
$24. Note the market action of the 16th, when UK
posted its lowest trade volume in recent months.
Note that on this day price moved lower over time
and was accepted. On the 17th, UK spent most of
the day building value H the 23 1/8 to 3/8 area,
but experienced a late break which extended price
south in M and N periods. Clearly, one could
conclude that price was moving lower over time on
this day, and that this market did not portray a
balanced (normal bell curve) market situation,
but rather one that was dominated by net selling.
Te markets are a subset of the physical
universe and as such are regulated by the laws of
physics; just as any object in motion continues in
motion while an object in rest tends to stay in rest,
so too with markets. When a market is out of
balance (net selling outweighed by buying or vice
versa) price must move directionally far enough to
60
M 101
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ORGANIZNG MS TO READ
M -GENERTD INFORTON 61
remove that imbalance. Remember, market
imbalance is indicative of unfairness. In other
words, market imbalances do not self-correct
without either a slow subsiding of the imbalance
or a directional price movement.
It was the move initiated on the 18th that
brougt concern to many analysts and portfolio
managers. Between 11:30 and 12: 00 Eastern
standard time, prices began plummeting,
obviously due to a wave of sell orders. This
imbalanced condition did not subside but
dominated the session, as subsequent half hours
scored lower lows and lower highs. We label this
patter a "trend day." A patter familiar to all
active traders, i illustrates a directional move
caused by the higest degree of imbalance
possible in a market. It is interesting to point out
that even for the analyst following this stock, the
move came apparently wthout a news
annoucement as provocation.
Late in the afteroon of the 18th, the veil was
lifed: Union Carbide announced a dividend cut of
some 43%. Te following morning, the stock
opened late some $ lower, representing a
devaluation of a major Fortune 500 company of
23% over only 36 hours.
A more in-depth analysis of the stock movement
prior to the break would exlain more clearly why
such a dowward movement would not be a
surprise for someone who was "reading the tape, "
organizing the market via the bell cure. This
Cple was introduced at this point for
illustrative purposes and more in-depth analysis
of other markets wl follow. Suffce it to say that
the lack of volume on the 16th, the penetration of
the to week old value area ($23-$23 1/2) on the
17th followed by the sharp late range etension
down, and the subsequent and continuous sell-off
62 M 101
on the 18th gave ample wang that touble was
afoot. Te market clearly eibited a major selling
imbalance. But unless the strictly fndamental
analyst following this stock considered the
probabilit of a dividend cut, the sell-off probably
came a a surprise. Een the news had been
anticipated, the tng of the announcement was
unexpected and allowed no reaction time. Those
who reacted to the news by selling the delayed
opening were fled on or near the lows of the day
that occurred durng the frst hour of trade on the
19th.
We noted that the market moved lower in the
Union Carbide emple due to an infux of selling,
an infu that created an imbalance; many
impatient sellers outnumbering relatively patient
buyers. The existence of this imbalance created
inevitably lower prices. To fther illustrate the
market's condition, we seek to sense this
imbalance, discover who causes it and then study
their behavior patterns. Our goal is to deduce if
this net buying or selling activit can be epected
to continue or the amount that needed to be
transacted has aready been transacted.
Chapter
Defned Opportunities ad
the Tpes of Response
M
arkets regularly ofer the opportunit to
either buy or sell at a set price to all
participants. Those close to the market
monitor the information that it generates.
kowing that their interpretaton of this market
generated informaton is a major portion of their
decision-makng process.
Mter ascetaining the proxmit of the most
recent price to value. the informed participant
looks at the tpe of response present. For
Cple. the most recent transactions produced
prices above value. the market's collective selling
response to a price above value can be absent.
thereby displaying acceptance or fairness. Or the
selling response could occur as eected. and the
market could fall back somewhat or all the way
back to the point where the imbalance began. Or.
no response occurs after a time. the other
timeframe buyers who created the buying
imbalance seen at lower prices could move up and
buy at the higher prices. This would indicate that
buyers as a group were maintaining a ver
agessive stance. initiating transactions above
value. Assuming trade is being increasingly
facilitated at these higher prices. the market is
strong and the trend can be expected to continue
up.
63
64 M 101
Deterg how the market reacts afer a price
imbalance unfolds tells us about the conditon of
the market, and lets us have more information
fom which to draw fher reasonable
expectations. For example, an other timefame
buyer-motivated price imbalance causing higher
prices tells us not to eect other tmeframe
selling to enter quickly. Now, at higer prices,
does the other tlmeframe seller activit buffer the
market, causing the market to fall back? If so,
does the market fall more or less than halay
fom the extreme of the recent buying imbalance?
If a sigcant seling response occurs, one
expects that the market should be contained for at
least some period at those lower prices, and that
the high of the day can reasonably be exected to
hold at least over the next hour.
What the other timeframe seller buffers the
market only so much that the market does not fall
back halfay from the ereme of recent
imbalance, but only one fourth or less? What the
market hangs on or near its high, advertising for
the other tmefame seler, but not receiving any
selling response? Te obvious conclusion is that
the response that the market receives afer an
imbalance has created a price movement informs
the partcipants as to how imbalanced the market
is and how much frther prce must go to fnd a
twO-Sided area of balance and eqUilibrium.
Another distinction to be made which
illuminates the condition of the market and the
tpe of response to be expected involves the degree
of ageSSiveness of the dominant other
tmeframe goup. By identng the presence of
other timeframe buyers versus sellers by
inspecting and comparing etremes, range
eensions and TPO counts, we can further
ORGANIZNG MS TO R
M -GENERTED INFORTON 65
categorie these indicators by where they occur in
relation to yesterday's value area.
Given that one of the other timefame groups
wll cause an extreme, range extension or TPO
imbalance;
ad given that the participation of the other
timefame gup is volutar and not
motivated by necessity at this moment;
then, to the exent that one of the other
timeframe goups is dominant in crating an
exreme, range extension or TPO imbalance,
and is participating at disadvantageous prices
in reference to yesterday's value, it is
displaying ver agrssive and abnormal
behavor, behavior likely to continue U
conditions remain the same.
In other words. the other tmefame buyers
are buying within or above yesterday's value.
creatng a buyng exreme. a buying range
exension and/or a TPO imbalance to the buy
side. this is abnormal actvit. Tis abnormal
behavior indicates that other timefame buyers as
a goup do not feel they have time on their side.
We label other tmeframe buying actvit (buying
exemes. rage exensions up and TPO buying
wt or above yesterday's value as initiating
buying.
We label other tmefame seling activit (selling
eemes. rage exensions down and TPO selling)
wt or below yesterday's value as initiating
selling.
We label other timeframe buying activt (buying
eemes, range eensions up and TPO buying)
below yesterday's value as rsponsive buying.
We label other tmefame seling actvit (selling
eemes. rage eensions dow ad TPO selling
above yesterday's value as rsponsive selling.
66 M 101
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ORGANIZING MS TO P
M -GENERTED INFORMTON 69
Labeling a market as predominantly initiating
or responsive provides information about the
speed of price change in the market. Te time in
which one has to act at advantageous prices ca
be determined as well as how directional a market
can be expected to be. A preponderance of
initiating activit. ver abnormal and agressive
actvit. usually can be seen in ver fast, volatile
and directional markets. Responsive activit is
usually seen in slower. back and forth. relatively
balanced markets.
Chapter I0
Organizing Data to
Determine the Trend
O
rganiing markets with the bell cure
provides insights into where the
marketplace currently values the
paticular instrument being traded. As we shall
see in a later chapter, the bell curve also reeals
insigts into currently highly probable day
structures. Tis knowledge allows the individual
to refne his positioning in the market beyond the
reference of yesterday's value area.
But before we discuss the bell curve's other
practical applications, we should confront the
most important and overriding market truth that
the successful participant should heed: 'The
tred is your friend. "
How do we use the information provided thus
far to determine the probable direction of the
trend? We can get a reading on the probable
direction and strength of the trend by organizing
shorter term day bell curve information so that it
displays change -imbalance -over a longer time
span. In this way the participant is provided a
picture of subtle imbalance occurring which will,
sustained, lead to the most attractive of trading
opportunities - the trend. For eample,
comparing the quantit of buying exremes with
the quantit of selling exremes over the past
several trading sessions provides frther insights
71
72 MS 101
into the strengh or weakness of a market. Te
quantit and extent of buying versus selling range
extensions also can be contrasted in this manner.
as can TPO counts.
In order to gain a biger picture of the market.
we organize shorter term data through the tool we
call the Lng Term Market Actvit Chart.
Informaton extracted from a single bel cure
might be a to seeing a mosaic fom up close -
the individual chips of data might seem somewhat
disorgaed when removed from the conte of
longer term activit. However. information
deduced fom an interpretation of the Lng Term
Market Activity Chart might provide a biger
picture. one that we might have Uwe stepped back
and saw the mosaic from a distance. This bigger
picture is important because it often allows one to
determine Usuffcient imbalance exsts to suggest
that the market could trend directionally. The key
here is that in deterg whether the market
can be exected to trend. we do not rely on the
past movement of price. but rather on the degree
of imbalance present in the market.
The Long Term Market Activit Chart is
organized with price listed on the hOrizontal as.
the seventh column from the lef. (See
illustration.) Next to i is a space where the size of
the value area can be indicated. On each side of
this space are two groups of three columns
headed "etremes. range extension and TPO
count." Te nearest grouping of the three to the
center is labeled "initiating" and the other
"responsive. " The six cols to the right of the
price/value area column are for buyig activit.
while the si on the lef hand side of the page are
for selling.
Te Lng Term Market Activit Chart is
designed to illustrate the degee of imbalance
ORGANIZNG M TO R
M-GENERTD INFORTON 73
Example ot Inforation for the Lng Ter Market Activity Chart:
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ORGNG STO
-GENERTED INFORTON 75
apparent in the market. Te preparer sorts the
market actvit -exremes. rage eensions and
the TO count - into either initatg or
responsive te actvit and then plots it alongside
the value area of the coresponding day that
exerienced that activt. Initiatng activit is
marked with a block to visual y show its
sigcance i creatng the condition of
imbalance. Responsive activit. on the other
hand. is marked with an "x."
For Cple. note on the ilustatons that when
a day profle displays three forms of initiating
buying actvit. three dark blocks are posted as
demarcations of the stong imbalanced condition.
Responsive actvit. since it is not as Signifcant a
contibutor factor to the condition of continued
ibalance. is represented on the outer columns of
the chart with less visual y dark demarcations.
Organizing day market activit on the Lng
Term Market Actvit Chart allows sigifcant
insight into the current condition of the maket.
This is because the LTMAC so obviously displays
imbalance in the market. It bears repeatng that
imbalance is the essence of the market; it causes a
trend. the most attractive of trading
opportunities. The condition of exenSive
imbalance doesn't self-correct quickly.
A Few Comment on th L1C
Tere are different categories or prototical
conditions that are illustrated by the Lng Term
Market Actvit Chart. The frst categor, Categor
One. displays an ibaanced situation, a market
that can either be eected to continue trending
or move sideways as the imbalance subsides
somewhat, but not sharly in the direction
opposite the trend. In this mode, the Chart
displays a pronounced visual imbalance due to
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M -GENERTED INFORMATON 77
the presence of more net initiating activit (either
buying or selling.
In a market that can be eected to either trend
lower or hover, substantial initiating selng will be
evident without correspondingly substantial
initiating buying. The left side of the chart will be
studded with more boxes and x's than the right,
indicating greater buying than selling. Responsive
buying, a less assertive mode of activit, may be
evident in a Category One market. Yet the market
can remain bearish, so long as larger, lower value
areas indicate that the market is facilitating trade
at lower prices.
Different degrees of imbalance are illustrated in
the LTMAC, because one trend will behave
differently from the next depending on market
conditions and the maturit of the trend. On one
end of the spectrum of the Categor One mode will
be a la, emerging trend, displaying a backing
and flling tpe of activit which progressively
works directionally. This type of trend in a bull
phase would have higher highs, at least a two
thirds retracement to a higher low, and back up to
higher highs, etc. On the other end of the
spectrum is a climaxing-type trend, where
volatile, one time fame gapping movement is
featured. Tis tpe of activit usually happens late
in the development of the trend, particularly a
mature trend, and usually precedes a
turnaround.
Categor Two, the second mode of the Long
Term Market Activit Chart, is the balanced
situation wherein the market cannot be expected
to offer sustained directional movement. This has
been referred to as a trading range or sideways
moving market -a trendless, balanced situation
- where a roughly equal proportion of initiating
buying and selling and responsive buying and
78 MS 101
sellng cancel each other out. Te market which is
backing and flling and exibits the early stages of
a trend will display a great deal of Categor To
tpe LTMC behavior.
Chapter ll
Day Strctues
W
hen one day's transactonal actvt is
organed into the normal distribution (or
bell cure) format. several recurring and
distinct prototpical patterns emerge. We refer to
these patterns as day strctus, and they sere
as guideposts for anyone -hedger and speculator
alike -seekng to positon himself in the market.
A trader who has developed the abilit to ident
which day structure is occurring as i unfolds is
rewarded greatly. as different day structures offer
dramatically different opportunities.
A strateg which incorporates the use of day
structre identifcaton is viable a high percentage
of the time. Ts is because each day structure.
while prOviding certai characteristic trading
opportunities. shows distinct visual and
behavioral characteristics, and establishes pro
totpical or usual range parameters. Should a
prototpical day structure unfold as eected.
ideal trade placement can frequently be exacted.
In Chapter 8 we saw an example of one of these
day structures -the trend day -i the big sell
of of Union Carbide stock on May 18. There are
seeral other prototpical day patterns. all merely
refections of the degee of imbalance esting on
the day.
79
80
MS 101
Th Non-Trend Day
The non-trend day occurs when both longer
timeframe buyer and seller groups are absent
from the marketplace. This indicates direction
less, trendless ad quiet market behavior. It is a
symptom of a stalling auction process, caused
either through the attrition of interested partici
pants (presumably because the price level does
not motivate participation) or because of outside
events such as holidays. The shape of a non-trend
day is parabolic: an exceptionally tight hig-low
range with no pronounced selling or buying
excesses present. Price movement during the
trading session lacks conviction; no market
imbalance, nor any tremendous anet to trans
act business can be deCiphered. It is similar to the
calm either before or after a storm. Depending
upon its appearance within the context of recent
market activit, the non-trend day's occurrence
can be construed as either a harbinger of change
in direction or as a rest day before a continuation
of the trend.
The non-trend day is a sigal that other time
frame buyers and sellers are on the sidelines,
either because of lack of receptivit to the offered
price level or because an outside event motivates
abstinence. Outside events which could bring
about a non-trend day include impending reports
(trade balance, crop production, etc. ) or political
events (elections, State of the Union addresses,
Fed chairmen testifing, etc. ), or holiday dol
drums (especially bank holidays in which the pri
mar market is closed).
Te Norma Dy
The normal day structure is the most common
day tpe, appearing in either its basic form or in
some variation in days of other tpes. Te normal
ORGANIZING MS TO R
M -GENERTD INFORTON 81
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MES 101
day occurs during a trending market - Categor
One on the LTMC - usually afer a big direc
tional move. when the imbalance which has
recently dominated the market is rectifed and the
market "rests. " It also occurs widely during a
tading range market - Categor Two on the
LTMC - which. by defnition. has no single.
overpowering driving force. Since the normal day
fequently provides both buying and selling
opportunites. getting good trade location is
especially iportant. Te characteristics which
distnguish a normal day include: a fairly wide ini
tial balance set up by local participants as they
service orders (generally 80% or more of the day's
range is contained within the initial balance); the
presence of defned top and/or bottom extremes;
and a rotatng action as the market probes fom
one end of the developing value area to the other.
The market may etend beond the inital range.
but usually this move is not robust and acts to
attract the opposite response. Tese probes which
meet with the opposite response -a selling probe
meets with buying that causes a buying extreme
-give the market its bell-shaped cure.
T Norma Varn Day
Te hbrid of the normal day. the normal varia
ton day. also occurs both when the market is in a
tading range and when it is in a trend. It visually
resembles a normal day with its gentle. bell cure
shape. but the normal variation day differs in that
the market moves directonally on the day
because of an increased degree of imbalance pres
ent i the market.
Te normal variaton day's inital balance is
usually wider than the non-trend days. similar to
the normal day. Te wide initial balance provides
reference pOints that -early in the session -the
market has gone hig enough to attract both buy-
ORGAG M TO R
M-GENERTD INFORTON 83
ing and selling. Unlike te normal day, in which
the initial balance makes up most of the day's
range, the normal variation day makes a sigif
cant range eension. Tis range extension is usu
ally dynamic, and can on occasion double the ini
tal balance on a partcularly actve directional
day. More usua is the rage extension equaling
the iital balance. Te sigifcant directional pro
bing which overhelms the early balance found U
the session's frst hour characterizes the normal
variaton day. Tis "overhelming" activit indi
cates a geater degree of imbalance and in a trend
ing market more ofen moves in the direction of
the major trend.
Whether a given day will unfold as a normal day
or a normal variation day depends on the domi
nant other timeframe participant group's degree
of anxet to enter the market. A high level of anx
iet tends to spur the development of a normal
variaton day as agressive buying or selling over
whelms the local trader communit and other day
tmeframe partiCipants who use initial extremes
as references. In other words, the market opens at
an area which neutralies the shorter timeframe
participant group's opinion on news and fnda
menta developments which have occurred since
the previous session's settlement. The market
then proceeds to fnd a fair, balanced area by pro
bing higher and lower, servcing the orders of the
other tlmefame partiCipants, and in doing so dis
covering price areas at which selling and buying
imbalance exst. Wether the rest of the day's
activit will unfold so as to produce a normal vari
aton day or a normal day will depend on the
extent to which order infux continues and the
eent to which the influx is primarily interested
in probing one direction only.
Different from the normal day scenario, in
84 MS 101
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ORGIZING M TO RD
M -GENERTED INFORTON 85
which hig prices attract selling and low prices
attact buying. directonal moves on the normal
variaton day often attract a contrar tpe of
actvit. Stated simpl. the market is nerous:
higer prices attract more buying; lower prices
draw out more selling. Tis conditon continues
untl the market reaches a new eess where
taders wth the opposite opinion are wl g to
respond to the advertised opportunit. Once the
opposite actvit is achieved. the market re
establishes a degee of balance at the new price
leels.
T Trend Dy
Te trend day is among the least common. but
most dynaic. prototpical day structures. It
occurs only 5% to 15% of the time. depending on
the condition of the market. In a trading range or
sideways moving market. the trend day cannot be
eected to occur as fequently as in an emerging
trend market. when open interest and outside
participation are growing. Te maturing trend.
and pacularly the topping trend markets can be
expected to featre the geatest frequenc of trend
days.
Te trend day is a climactc move in which the
market is dominated and overcome by either the
net buying or net selling of the other timeframe
participant goup.
In a trend day. price moves directonally as on
a one-way street. If the market is ralying. new
highs wll not attract selling. as is normal and
occurs on a norma day. Rather. new highs only
deliver a brief rest followed by more buying; the
market is breaking. new lows sere only to attract
more selling in time. Short pauses in the direc
tonal movement are ofen caused by day time
fame traders (usually local pit taders) who
attempt to pick tops or bottoms. Without other
86
M 101
tmefae taders to back up those who are fading
the tend day movement. these short tmefame
taders W no immediate gratifcation for their
boldness. Te have no chOice but to et their
positons wth smal profts. scratches. or losses.
Te acton of these traders etg their trades
only seres to accentuate the prevaing market
directon.
While a market that is in a tpica (non-trend.
normal. normal variation or neutal) day stuc
ture mode wll chop back and forth across the
day's trading rage, a tend day moves solidly in
one direction. Althoug smal setbacks or ral ies
may occur. the are generaly short-lived ad fail
to draw the opposite response and re-establish
baace to the market. In contast to the tpical
day -when. with good trade locaton. one migt
proftably tade both sides of the market - the
trend day rewards either buyers. a trend day up,
or sellers. a tend day dow. Whether or not the
buyer of a trend day up got on board early ad
fom good early trade locaton is not critical on a
day like this. since the trend day should close on
or ve near the eeme of the day.
Anet is perhaps the ke characteristc of the
tend day.Emotonal despair or euphoria domi
nates the mindset of the market as price leads
value. The other tmerame buyer or seller group
overhelms the market ad. in doing so. works at
fll tlt. Representatives of the domant group
either have business that must be done now
(hedgers); or have determined the market is ready
to make a decisive move ad that the must be on
board (speculators); or. influenced by both
motvations. the see their fatert actve ad
feel te must paCipate as well (portolio ma
agers).
ORGAG M TO R
-GENERTD INFORnON 87
CREEPING TREND DAY
DUBLE DISTRIBUTION TREND DAY
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88 M 101
Trend days have defnite behavioral charac
teristics. The market gives several cues or mes
sages early that indicate the possibilit of a trend
day unfolding. To begin with, trend days tend to
start out slowly. They rarely occur on the day of a
major goverment report. The market usually is
relatively quiet and the usual volatilit seen in the
frst hour is distinctly absent, similar to a non
trend day. Few participants seem interested in the
markt, and they fade or igore the initial, direc
tional range etension. Athe other timeframe net
group -either the buyer or seller -takes charge
of the market, the day timeframe traders who
have faded the market hold open losses. Their
short covering or selling helps create the next
directional move.
On trend days, the market tends to open on or
near one etreme and close on or ver near the
other. For eample, on a trend day up, the market
should score lows early and close on or near its
highs. On a trend day down, the action is just the
converse.
Trend days take two basic forms: the creeping
trend day and the double distribution. The creep
ing trend day moves in relatively small, yet consis
tent, increments throughout the day. Te market
moves, making new highs (on a trend day up) at
least ever third half hour, but not with enough
velocit to discourage those who are fading the
directonal movement. Tis tpe of steady march
ing goes on all day until the market closes on or
ver near its highs. It is important to note that in a
big market, the creeping trend day can be
etremely violent, paticularly in the latter half of
the session. In such a case, each increment can be
epected to be more volatile. Tis tpe of day is
dangerous because the market will sometimes
ORGANIZING MS TO RD
M -GENERTED INFORTON 89
U) DAY
I
1J
E1J
DEIJ
DE1JK
DEIJK
DEIJK
DEIJK
DEFG1JK
DEFG1JK
DEFGH1JK
DEFGH1JK
DEFGHJK
DEFGHJK
DEFGHJK
EGHK
GH
GH
H
G WCT
RUNNING PROFILE DAY

E
E
E
E
DE
CDE
CDE
BCDE
BCDE
BCE
ABCE
ABEF
ABF
AF
AF
F
F
F
FG
G
GHJ
GH1JK
GH1JKL
H1JKL
H1JKL
H1JK
1K
I
90
M 101
overeact and reerse direction. (Se running pro
fle. )
Te other common form of trend day displays a
double distribution when organized by profle. The
double distribution trend day is shaped like two
normal days, one rigt on top of the other: the
market creates two bell cures which are sepa
rated by a brief tme-price relationship kow as a
prce trnd. Early in the day, the market builds
value within a relatvely quiet to average size hig
low range. During the course of the session,
howeer, this value area proves inadequate as an
area which baances buyers and sellers. A net
imbalance occurs. It is neutralized, ofen in a
quick and violent manner. Te market moves
directonally, setting up a new normal profle,
where the market re-establishes balance, rotates
and trades much like a normal day before closing
on its extreme. Te double distribution trend day
is fequently an exhaustion or excess day.
Te Neua Da
Te neutra day occurs in circumstances simi-
1ar to those of the non-trend day, although often it
appears in a more active market than the quiet
surroundings which tpif the non-trend day sce
nario. When a neutral day is ready to occur, mar
ket participants lack the conviction needed to
make a long-term trade, or buyers and sellers
engage in a tug-of-war over market direction.
Neutral days can often be excellent harbingers
of change in direction. Te fequently occur at
the extremes of trading ranges or afer big direc
tonal moves. Tops and bottoms of swing moves
are fequently neutral days, and ofentimes sev
eral neutral days occur in a row.
In the classic and most common neutral day,
the market builds a value area similar to that seen
on a normal day. Te diference is that on a nor-
ORGANIZNG M TO RD
-GENERTD INFORTON 91
mal day, the large initial balance established by
te local traders seres to contain the day's range;
on a neutral day, the market extends its range
both higer and lower. Generally, neither range
extension can be sustained, and the market
closes in the middle of the range, the metaphorical
tug- of-war unsettled.
Not all neutral days conclude with such an
impasse. In a rarer tpe of neutral day, the market
does not close in the middle of developing value.
but rallies or breaks late in the session and closes
on or near the extreme for the day. Tis type of
acton, oCCurring outside of holiday markets or
otherwise abnormally quiet conditions, has a high
probabilit of directional continuation. Valuable
informaton can be geaned from this tpe of
behavior. For instance, does the market score new
highs frst in a lethargic manner before breaking
and settling weakly This tpe of activit would
indicate that the tug-of-war has been won by the
sellers.
Assuming this activit did not occur in a holiday
market environment, lower prices might be
exected.
Quiet non-trend tpe days in which the market
scores a high or low by one or two ticks beyond the
initial balance must also be classifed as neutral
days, but would not hold the same sigifcance as
a neutral day that facilitated a reasonable amount
of trade. This is because whether or not the mar
ket is flflling its purpose of facilitating trade Is
much more signifcant market-generated infor
mation than the fact that a slight imbalance is
occurring.
Sometmes the market forms what appears to
be a classiC neutral day. Howeer, afer scoring
the frst range etension fails to continue direc
tionally, the market reverses and etends the
92 M 101
range in the opposite directon with gusto. This
tpe of neutral day generally fts in the categor of
a "running profle" day.
T Runig Pof Dy
Unpredictable and erratic, the running profe
day is an anomaly among the more stable day
structures with fairly recurrent parameters. It
breaks the hearts of trend followers and rewards
the brave souls wl g to fade the prevailing early
day market direction.
Running profle days generally occur when the
market is either forming a trend day structure or a
normal variaton day structure. As previously dis
cussed, under normal conditions the market
rotates, breaking to attract buyers and rallying to
gve sellers their opportunit. Usually, the maket
creates an excess top or bottom which accommo
dates the orders of responsive other timeframe
traders.
On the rnning profle day, however, the market
tends to be movng in a one-timeframe mode. For
instance, the market makes new highs, it will
not set back far enoug to service the orders of
buyers. But at some point during the session, like
a pendulum, the market begns to reverse its
directon. Mer makng a top or bottom, the mar
ket slowly ginds and later rushes the other way.
J the buyers or sellers who would normally
provide balance to the market upon a rotaton in
the second directon are now tentative or entirely
absent. Their orders have al been flled. And the
farther the market swings without the reSistance
of opposite activit, the more momentum it picks
up. A neutral day stucture results fom the vo
lent price reersals endemic to the running
profle.
Running profles, like non-trend days and neu
tal days, frequently occur at market tops ad
ORGANIZING MS TO R
M -GENERTED INFORATON 93
bottoms. Tis structure is also ofen set in motion
by an emotionally charged news event. Other than
the brte directional activit of a major trend cre
scendo or a stock market panic, the running pro
fle day is the most volatile tpe of day structure.
Chapter I2
How the Different Day
Strctes 1teract
U
eing able to corectly identif the exected
day structure as it unfolds affords
indispensable kowledge for trade
management, and B a position is being either
entered or eted, ideal trade placement ca be
eacted. Sigcantly, not only do these day
stuctures unfold in a prototpica manner, but
the interact with each other in what are
understandable and ofen predictable day-by-day
behavioral paters.
Non-Tend Dy
A we have already discussed, non-trend days
tend to occur when the market has stagated at a
price level. Te doldrums can grip the market for
severa days prior to a major change of trend, at
the eremes of a defned trading range, or when
outside eents such as holidays, reports, or
politca eents act to preclude major decision
ma by market pacipants. Te important
thing to remember about non-trend days is that
te siga lack of tade facilitation at the current
leel. The absence of trade means a major move
may be im nent.
When the market has ended a major trend, it is
common to see a series of non-trend days. The
market has accomplshed its long-term objectives,
95
96
M 101
but an opposig market opinion has not yet
surfaced to seize control of the situaton. Tis is
reasonable. for markets generally do not perform
an abrupt about-face afer a major move. Te
changes that occur in a market that has fnished
one tend and is not ready to start a new one are
similar to the changes in the ocean's tde. Just as
it is nearly impossible to determine which wave
marks the exact hig tde point. so is it
eceptonally difcult to gasp when a market wll
begn a new tend in the opposite direction.
For an Cple of how non-trend days can
occur in a series. consider the Soybean market in
late 1986 to early 1987.
When the bull market of 1983 came to an end.
the Bean market. like other agricultural markets.
slowly entered a long-term bear market. Tis
phase took considerable time to develop. Te
market ground its way down for more than three
years and hit a long-term bottom in the autumn of
1986.
During this tme, the Bean market slowly
empted out. Lcal traders and outside
speculatve interests alike abandoned this almost
nominal market for the volatile markets emerging
in bonds. currecies and stock index ftures.
Open interest and volume reached low levels, as
only commercial frms interested in hedging their
inventories and pricing their needs played a major
role as outside participants.
Te result of this lack of interest was a
proliferation of non-tend days. Where once the
Soybean market could trade a dollar range in a
week's time during the height of the growng
season. traders were now getting accustomed to a
ten cent high-low range. Rather than the 15 to 20
cent daily ranges seen in te prevous decade, the
Soybean market labored to traverse a four cent
ORGANIZING MS TO RA
M -GENERTED INFORTON 97
range. Quite simply, there was nothing going on in
the market, and the volatilit and day structure
refected this.
During this quiet period, non-trend days were
rather common, and normal days were the most
common day structure. Lw volatilit. relatively
small high-low ranges and small value areas were
the result of an absence of oter tmeframe
activit.
Non-trend days can also be seen when the
market probes the high or low end of a trading
range.
A a market nears one extreme of a trading
range. the ambition of other timeframe buyers or
sellers fequently wanes. A portion of these
traders have been positioned in the market
correctly and are proftable; they now begin to
close out their positions to take profts. A this
occurs, few traders remain confdent of
continuation. This explains why markets are ver
volatile near tops and bottoms.
Without the large number of confdent other
timeframe traders to carr on the battle, the
market will frequently reach the extreme of its
trading range with all the sigs of an impending
break-out. Perhaps the market will near this
extreme in a volatile. climaxing movement, ofen
in the form of a trend day, or a normal variation
day which pOints to continuation.
It is on the day of expected continuation at the
etreme of a trading range that the market will
turn in a non-trend day. This tpe of non-trend
day is referred to as a test day. At this point, the
market is poised to go higher or lower and is now
testing the extreme. More ofen than not (in a
trading range) , the market fails the test.
Although it usually takes some time (a day or
more) . other market participants become aware of
98 MS 101
te vlnerabilit of the market at its current
leels. Accordingy. the decide to fade the most
recent momentum of the market. Depending on
their tmefame. these traders either buy and
hold. or sel and hold (if the have a long
tmeframe) or the probe the market by fading
etremes (short tmefame). If the market does not
gve them gratfcaton immediately. they look to
scratch their tade.
Once the tug-of-war between other tlmeframe
buyer and other tlmefame seller ends. the market
can either break out of the trading range and
continue in the direction of the most recent
dominant group. or it can begin the journey back
across the width of the entire trading range.
Te non-trend day will also make its
appearance when a market is open during a major
holiday or before a major report or political event.
Lt's review each case briefy.
In a market such as the bond market. the role of
investment and commercial banks is crucial.
These institutions represent much of the
commercial interest in such a market. On a
holiday in which banks close and major traders
are out of the ofce, it would stand to reason that
these clients would not be ver active. For this
reason, local traders at a ftures echange would
fnd themselves with plent of time on their hands
and little trade. The foreign currency markets face
a similar situation. They are dominated by
international banks and a few ver active
corporations. If Japanese businesses are closed
for a national holiday, it follows that there will not
usually be an active session in the Japanese yen.
Te end result on such a day is ofen a non-trend
profle.
Market participants gain much of their
information from a wide variet of reports released
ORGNG STO READ
-GENERTD INFORTON 99
by the government. In fnancial markets,
partlcipants must pay attenton to Gross National
Product reports, unemployment statistics, trade
balance fgures, and a host of other facts and
fgures released by the Commerce Department on
a regular basis. Physical commodit ftures
markets, too, are subject to the release of
government data, weather forecasts, etc. Here,
the United States Departent of Agriculture
(USDA) issues a plethora of reports detailing
everg fom goss planting intentions to
weather forecasts to estimated harests.
PartiCipants use these fgures to help shape their
current market perspective. A a consequence,
only those traders with a long timeframe and
stong conviction will carr their positions
through a report. Because these traders have
probably already established their positions at
more atractive levels, they have nothing to do on
the eve of a report.
It also stands to reason that markets would
remain quiet before important political eents.
Take a presidential speech, for example. If there
are tensions between the United States and the
Soviet Union, grain traders will tend to even their
positons before the President speaks. Tey know
fom past eerience that an address to the nation
can entail anything from the announcement of a
summit to iron out differences to a total embargo
on grain shipments. Similarly, bond traders will
tend to stand aside before an administration
submits its version of the federal budget to
Congress. Te budget, as these traders kow, can
contain many surprises, from defcits to
surpluses.
Te ke to understanding the non-trend day is
to recognie that the other timeframe tader, the
market participant who drives the market, is
100 M 101
absent or extremely quiet. Ts tpe of tader
stays away from the maket because he sees no
opportunit at the curent price level or because
he awaits a report or the outcome of a political
event. Without the participaton of the other
tmeframe trader, the market does not stand the
chance of facilitatng trade.
And because we kow the chief fnction of the
market is to faciltate trade, price wll have to
move directonally to arouse the interest of the
other tmefame trader.
Neutal Dys
Like non-trend days, neutral days are ofen
good indicators of an impending change in market
directon at the end of a trend, on trading rage
eremes and during holiday trading. Unlike the
non-trend day, the neutral day tends to be more
volatle, as long timefame traders are present,
een if not acting out of strong conviction. A far
as its meag for continuation or chage goes, a
neutal day that lacks this volatilit is basically
interchangeable with a non-trend day.
A we discussed earlier, the distinguishing
component of a standard neutral day is rage
extension on both sides of the initial balance. A
neutral day's range extensions can be slight or
can be sigifcantly in excess of the 20% of initial
balance parameter that defned the normal day.
When backed by no strong convictions, these
range extensions tend to fzle out, causing the
market to close somewhere in the middle of the
day's range. At tmes, however, the market can
reject one of these range exensions before closing
in the opposite direction in a dynamic fashion.
When this happens, the day is classifed as a
running profle day stcture.
Neutral days frequently come at the end of a
maor directiona move, ofen forming ad
ORGANIZING MS TO P
M-GENERTED INFORTON 101
signaling a top or bottom of a swing in the market.
Generaly, this etreme follows several days of
initatng activit which sere to clma the trend.
Tat goup of traders with the advantage -
meaning price movement in their favor -pushes
its opposite up against a wall. Tpically, those
taders who have the opposite opinion on the
market back away from trading. Swing traders
who look for three to fve day moves will only probe
the maket the receive good trade location.
Lnger term traders wltake a passive approach,
responding to attractve prices far fom the
prevailing value in the marketplace.
Given this scenario - in which one group of
taders has everything in its favor while its
counterparts are throwing in the towel - the
market tends to act to shut off the current
imbalance. In other words, a given market is
rallying and more and more buyers forge ahead as
weak sellers retreat, the market wl tend to
achiee prices that will frst attract responsive
seling activit and then dampen the enthusiasm
of even the most ardent buyers.
When this situaton occurs, the market is rpe
for a neutral day. A the potential neutral day
unfolds, initating traders retain control of the
market. However, the participants holding
positons at prevailing price leels are thnning
their ranks as some traders take profts and
others are scared off by the extreme level of the
market (this second goup prefers to wait for a
setback or rally before entering the market) . Now
the market has gone fa enoug to attract the
responsive trader. Rlies begn to be met by
restng sell orders, and breaks fnd buy orders
below the market. Once the responsive trader
meets the initating trader head to head, the
market has the potential to regain balance and
102 M 101
possibly delop a new imbalance in the opposite
directon.
Te neutal day in these circumstances is
fequently referred to as a blow-of top or bottom.
Athe market moves into responsive territor (Le. ,
range extension up or down), the other timefame
tader is now actively fading the directonal move
of the market. His orders contain the market
because the will not be closed out at the end of
the day's trading. Faced with this tpe of
challenge, short term initating traders are forced
to take losses, as their trades do not give them
gratifcation. Tis activit. in turn, attracts
additional pressure from swing traders who are
begn g to see some results fom their eforts.
As the market begins to reject its extreme. the
level of anxet among both groups of traders
begns to heighten. Initiating traders want to take
profts or cut short their losses. and responsive
traders sense that a potential change in direction
is imminent. Te net result of this activit is either
a break or rally which results in a range extension
U the opposite direction. This move should act to
attract one last wave of initiating traders who do
not want to miss what they perceive to be a buying
or selling opportunit. Tis activit seres to drive
the market back into its value area by the close.
Tis tpe of neutral day can be described by
likening market participants to passengers on a
boat who rush to the starboard side to look at an
interestng sigt. Once the balance of the boat is
destroyed. they become frightened ad rush to the
port side. hoping to rectif the situation. Instead.
their panic only seres to tilt the vessel in the
opposite direction. It is only when the passengers
regroup in the middle of the deck that the balance
is restored.
ORGANIZING M TO R
M-GENERTD INFORTON 103
Norma ONorm Vatn Dys
Te normal day is the most common tpe of day
strcture. It is distnguished by the wide balance
it establishes in the frst hour of tading. Althoug
the normal variation day features an inital
baance which. while not necessarily smaller in
absolute terms. is a smaler percentage of the
daily hig-low range tha the normal day, both
day structures tend to trade back and forth in a
choppy maner. formig a bell cure. The
oscillating trade seres to provide both buyers and
sellers with several opportunites to enter the
market. Although the normal day can produce a
range etenSion. the market lacks follow-through.
Te range exension acts to widen the developing
value area.
A the most common te of day structure, the
norma day occurs in al market conditions. It is
seen when a market is consolidating at a top or
bottom. within trading ranges, and also during
teds.
Near the end of a trend, particularly when a
market is forming a long-term bottom, the normal
day makes fequent appearances. Tese normal
days are somewhat compact compared with their
ranges at higer levels, due to the lack of volatilit
at the bottOming levels. Stl, despite the lack of
interest shown by speculative other timefame
taders at market bottoms, there is some leel of
bUSiness that must be done. Commercial hedgers,
such as grain frms that need to price soybeans or
fnanCial institutions that need to ofset positions
in the cash securites market. continue to trade.
Tese hedgers seek a fair price at which to
conduct their business. Understanding the
market, the are willing to give the local trader an
edge to encourage D to accommodate their
orders.
104 M 101
Normal and normal variation days also occur
regularly in tading ranges, sideways moving
patters which make up the vast majorit of time
spent tading. (hen viewed over the course of a
three to fve year vntage point, the average
market spends perhaps no more tha 30% of the
tme in a discernible tend.) Whe markets reject
one ereme of a tading range (fequently
signaed by the presence of a neutral or non-trend
day) , the fequently accelerate for a short period
of time, as one group of other tmeframe traders
eerts its power over the market. Te market in a
trading range is, by defnition, fairly stable.
Participants lack a sense of urgency. The absence
of anet among other timefae traders results
in a market that is characterized by many days in
a row of unchanged values. Athough the market
has made a top or bottom - and i doing so has
alerted traders to impending change - longer
timeframe participants kow they have time to get
in at favorable price leels.
When a market comes off the top or bottom of a
trading range, day timefame and shorter other
tmeframe traders, such as swig traders, enter
the market early along wth responsive, longer
other timeframe traders. Te result is generaly a
volatle session or two when it appears the market
is going to make a substantial move. This move
cannot be sustained for long, however, because
swng traders take profts, and the key
participants, the longer other timefrae traders,
do not reach for the market. Indeed, the
characteristic of the emerging trend is a back and
forth movement of values (in a bull market, for
Cple, a zigzagig higher high, higher low)
caused by the fact that the other timeframe
tader, rather than reaching for or chasig price,
fades the move, thereby containing it.
ORGANIZING MS TO RA
M-GENERTED INFORMATON 105
Normal days in trending markets are usually
rest days which sere to allow consolidation. On
the other hand. the behavior of normal variation
days ofen gives early confrmation to the
begnnings of a trend. For Cple. in a trending
market. normal variation days ehibit more range
etensions in the direction of the trend than
counter-trend. Furthermore. the stronger range
extensions will usually point in the direction ofthe
trend. Thus. normal variation range extensions
moving against the trend will usually be weaker.
Trend Dys
Trend days. while usually proceeding in the
direction of the general trend in a trending
market. can as easily move counter to the trend.
When this occurs. being positioned with the trend
day against the trend. even for a day trade. is not
as high percentage a trade as the trend day
moving in the direction of the trend. Tis is
because one tpe of the rare running profle day
results fom a trend day that fails. Failed trend
days usually develop out of counter-trend trend
days. and also occur from trend days in sideways
moving markets. A trend day positioned in the
direction of the trend will almost always be of a
greater directional magnitude than that which is
counter-trend. unless the counter-trend trend
day is occurring in a mature market with
especially high open interest. In this case. the
market. needing to be cleansed of the so-called
"weak hands" riding the trend. will ofen move
ver violently in a trend day fashion. but will
recover within a few days and resume the general
trend.
Trend days do not tend to occur two successive
days in a row. but are ofen followed by at least
one and usually several normal or quiet normal
variation days. Except in a liquidating bear or
106 MS 101
climang bull mode, the trend day is at least an
interim clima, usually signalng the market's
need to rest and regroup via one or a seres of
normal or normal variation days. Ofen, a number
of rest days which follow a trend day become
progressively quieter until the trend can again
kick in in a robust fashion, a large normal
variation day or another trend day.
One caveat must be introduced before leaving
the subject of day structures. The markets have
evolved to the point where in certain instruments
today, legitimate, deep markets are made virtually
24 hours a day. Such is the case in the interbank
market, where active currency trade takes place
in ASian, European and u. S. time zones. This fact
obviously changes the behavior of the market,
since, for example, there is not the forcing point of
a market's close wth which to motivate the trader
to act. Thus, examining the day structure of only
one time zone does not provide the full picture,
and indeed distorts the percentage of recurring
prototpica day structures that would otherwise
occur. Were the volume of transactions is
spreading semi -equally across several time zones,
activit across those time zones can be examined
in order to deduce a logical pattern of trade. For
example, in all U. S. time zone futures and options
markets, except for foreig currencies traded at
the International Monetar Market and the
Philadelphia Stock Exchange, and the precious
metals traded at the COMEX, neutral day
structures are ver infrequent. Yet in the above
mentioned markets, neutral days are not at all
uncommon. Wen viewed from the context of
whether or not the IMM's range extension is
indeed a range extension from price levels seen in
the Far East and London, another picture
altogether is seen. Tis is not to say that the
ORGANIZNG M TO R
-GENERTD INFORTON 107
concept of recurring prototpical day structures
becomes obsolete once a market becomes
intercontnental, but rather that adjustments
must be made for this fact.
Te stucture of the word's capital markets has
bee evolving rapidly and the locaton of the
primar markets in many of the world's ke assets
has shed over the past 20 years. This is another
tend that can be exected to continue. With this
eolution, the behavior of the markets, and
specifcally the character and percentage
fequency of the outlined day structures cannot
be eected to remain unchanged. However, by
organizing activit using the tools described
within this book, the participant will be able to
capture, defne and analyze any and all changes
that take place.
SECTION THE:
Decision-Making wth
Market-Generated
Information:
Interpreting Reference
Points
This section wll introduce a framework for a
decision-making process strctured around an
understanding of the principles of market
operation introduced in Section One and
illustrated through two methods of market
oranization - the bell cure and the Long
Term Market Activity Chart - prsented in
Section To.
Chapter I3
A Overiew of Decision
Making in the Fnancia
Makets
T
he universalit of all markets has been
elored, and we have considered the
operational truths which apply to all
markets, organized fnancial ad unorganized
everday markets alke. Numerous tools have
been intoduced which allow the partcipant to
understand current conditions. Current
conditions are then compared to what would be
normal conditons given a particular outook or
eectations. Te reader of this book, gven some
tme to view the markets, should gain a solid
foundaton in how emerging, matring and
climaed bull and bear markets differ from one
another as seen through profles (exremes, range
exensions and TPO counts), eected percentage
of day stucture occurrence, daily and weekly
hig-low-close, and long-term market activit
chart formatons. With abilit, some practical
eerience and these tools, measuring imbalance
and thereby understanding a market's current
mode becomes not only possible but quite
attainable.
Te reader Is now ready to begn assimilating
market-generated informaton into a structured
decision-makng process. Tis is a lifelong
J J J
1 12 M 101
challenge. not one that ca be leaned fom
reading ad rereading a book. Indeed. preous to
the development of the curiculum offered by the
Market Lgic School. the fnancial market
participant was the only professional who did not
have access to a curriculum that taugt formal
decision-making parameters. If a professional is
compensated because of his abilit to interpret
important data which are unintelligible to the
unschooled. then the fnanCial market partcipant
has. unt recently. been seerely disadvantaged.
He had only "gut instinct," "feel," or intuition, in
sharp contrast to the leaing process of other
well-compensated professionas such as lawers.
accountants, SCientists. medical professionals
and the many others who deal with data
interpretation and decision-mang management
in an environment of uncertaint.
But what must become "experiental
kowledge" nevertheless can be introduced and,
with suffCient reinforcement provided by the
empirical eerience gained from monitoring live
markets. decision-maing abilities can be leaned
and enhanced.
The challenge of successflly competing in
fnanCial markets is not unlike doing so in any
other bUSiness environment. The difference for
the tader is that aalycal decision-making is the
entie emphasis; there is nothing else to fall back
on. In other businesses, personnel, successfl
marketng, a monopoly position, inept
competition or superior serice can mitgate poor
buy-sell decisions. whereas in trading they do not
est. Trading, then, is a concentrated form of do
or-die analytical decision-makng. Te trader's
mandate is to structure all entries, timing,
management and exts around his kowledge of
DECISION-MNG
1 13
curent conditions and the likelihood of chage.
He may ask himsef:
Is the market in a trend? If so, is i a
young and emerging trend that can be
expected to contnue?
Or, is the trend strong, mature, volatile
and lookng to top? Or, has the trend
possibly clied, indicatng that a
break or at least a sideways movement is
imminent?
. . . or . . .
Is the market in a sideways moveent,
a trading range? If so, can that be
exected to continue or is the market
displaying signs of potential imbalance?
Obviously, to answer these critical questons,
questions which indicate how much time the
participant has to remain positioned either long or
short with the odds in favor of the market not
makng an adverse move, intensive scrutiny and
ongoing monitorng of the market are required.
Te successfl tader kows that the ideal
positon has an infnite number of fallbacks.
Tere are tes, for instance, when the market is
so underalued that the long side of a trade may
be good for the day, should be good for the week,
and almost certainly good for the month and year,
etc. Tis approach stresses the importace of
having time on your side. Identing change in its
early stages leads to startlingy low risk
opportunites for this simple reason.
Chapter I4
Maket Activity Nuaces and
Subtleties
L
na preceding chapter, several prototpical day
structures were introduced. By obserng
their recurrent behavioral characteristcs we
are able to reasonably project the range
paameters on a daily basis. In this chapter we
wl make a sligtly broader assessment of the
data in order to identif longer term market
changes in their formative or early stages. Tis is
especially challenging, because early changes are
sligt and subtle, and imbalance as it is begnning
is barely perceptible. Note that identifing
changes early is stressed because being early
offers the lowest risk opportunities.
A discussed previously, one indicator of the
other tlmeframe participant's presence can be
detected through the imbalance that creates a
single print TPO buying or selling extreme. The
exstence of a buying exreme, for instance,
indicates that sufciently increased competition
to buy has occurred at the lower levels where the
single print TPOs occurred. Tis buying exreme
creates the reference point, a benchmark that
tells participants that the market has, for the time
being, gone low enough to fnd an imbalance of
buyers to sellers. Te participant gains the
confdence needed to agressively buy, and the
market rallies, again probing for selling activit.
1 1 5
1 16
MS 101
A initiating buying etreme is one whose low tick
is either within or above the previous day's value
area, at somewhat disadvantageous prices
relative to the previous day's activit.
However, this is not to say that all extremes are
alike, or that the market draws an identical level
of confdence fom all locations where a single
print etreme exsts. Initiating buying etremes
have already been differentiated from responsive
selling etremes. But beyond this, there are
frther, fner categories of extremes, each caused
by varing degrees of anxousness. Tey give the
market vastly different signals as references;
participants interpret them and react with
differing levels of confdence and anxiousness.
Remember, it is anousness that causes
imbalance, and continued imbalance causes the
market to trend.
Tes of Extrmes
T Ealy Enr Ereme
Te early entr extreme is the product of a
highly anous degree of net buying or net selling.
As the name sugests, both the anxousness on
the part of the dominant other timeframe group,
and the extreme being created are established
fom the opening bell. Te market opens and
immediately moves directionally, so that the
opening price (or within a tck) ends up being the
high or low prce for the day. In other words, the
opening creates the maket's high on an early
entr selling extreme, its low on an early entr
bug ereme. When the market opens, the net
other tmerame group that is dominant moves the
market directionally, causing the extreme.
The signifcance of an early entr extreme lies in
the obserable demonstraton of anet in the
market which oftentimes indicates directional
DECISION-MNG
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1 18 MS 101
contnuaton. both for the day (1. e. . normal
variation or a large trend day) and over the longer
term. Tus. days in which the market
immediately fnds an imbalance and the resulting
directional movement which temporarily
neutralizes i are ofen big directional days:
normal variation or aberrational (in that the initial
balance is abnormally large) trend days. As well.
this activit usually indicates that the other
tmeframe group is most dominant. and may
continue to create the imbalance that will
determine the trend.
Te early entr extreme is not at all common in
quiet. two-tlmeframe trading range markets. It is
found more fequently i volatile. trendig
markets. particularly in maturing or climaxed
states.
T Norma Exreme
Te normal extreme can occur at any point
during the day. and is not as reliable an indication
of short or long-term continuation as the early
entr extreme. Nevertheless. i is caused by
competition - an imbalance - and as such
provides a temporar reference point as to the
locaton of an ecess. Tat excess may hold or it
may not. but regardless. we can eact market
generated information as to the location of current
resistance and/ or support. A selling extreme tells
us that the high may be in for the day.
T "No Activity" Exreme
A normal extreme occurs when the dominant
other timefame group. eager to transact at a
gven leel. creates an imbalance that causes a
bounce or a rejected upside probe. But when the
market is qUiet. een though technically a visual
ereme may be present. competition and
DECISION-MNG 1 19
imbalance are not al that apparent. Te "no
actvit" ereme is not as Sigifcant as the
normal or early ent tpes because the market is
quiet and not facilitating trade. A good rule of
thumb is this: when a market is not facilitating
trade, discount the importance of any exremes,
range exensions and TO imbalances.
Tes of Re Exensions
Having discussed the subtle differences of
ereme formaton, let us now turn to range
eensions and consider how two ke factors
infuence the meaning and importance we attach
to them.
Rnge eensions differ from one another frst
by the speed with which the are made. If a range
eension is created by agessive other
tmeframe participants, the greater the
imbalance, the greater the level of agessiveness.
We presume that more passive behavior cannot be
eected to contnue over time, while the more
agessive behavior can be expected to contue.
In other words, if one initial range extension up
moves 25% beond the initial balance while
another moves up only 10%, we would conclude
that the frst market shows a greater degree of
imbalance and is probably stronger. We would
eect that the net other tlmefame buying which
entered, causing the more exlosive range
etension, wl contnue at best, and at least can
be exected to buffer the market from falling.
Range eensions also differ from one another
fom the standpoint of the time at which they
occur, relative to their opening. Ag ressive activity
can occur early or late in the day. We have found
that early range extensions offer the most reliable
benchmarks. A a rule, the early entr extreme is
a ver reliable benchmark indicating range
containment as well as the probable direction of
120
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DECISION -MNG 121
the dominant other timeframe group. Lkewise, a
range eension that occurs early in the trading
session is more signifcant in its reliabilit.
early range extension is defned as havng
occurred during the frst 45 minutes afer the
initial balance. This early range etension
indicates a pronounced imbalance that is more
likely to continue than one which occurs later. Any
range eension that occurs ater this 45 minute
period, whie still indicating imbalance, does not
indicate as strong an imbalance.
Chapter I
Technica Aaysis ad
Market Lgic
T
he past 20 years. wth the advet of
telecomunicatons and computer
technolog. have seen numerous analytical
methods that have gained widespread acceptance
i the trading comunit. Tese methods,
gouped under the general classifcation of
"technical analysis." have become the most
comonly used tools for market ealuation. For
many traders. competing in the organized
markets would be impossible without them.
Given that traditional forms of technical
analysis are the ftures industry's standard
approach to market forecasting, the question
arises: how does technical anaysis relate to the
precepts upon which Market lgC is based?
Furthermore, can the Maket Logician employ the
basic elements of technical analysis in his
decision-makng paameters?
Pluses ad Minuses ofTechnil Analysis
Loosely defned, technical analysis interprets -
mathematically, statisticaly, or visually -
market behavior in order to forecast the fture
direction of price movement. Technicians assume
that markets trend and that there are specifc
discernible. recurrent patterns at work in the
marketplace which determine price action, and
123
124
MS 101
display the tend. By manipulatng price data into
a usable format (usually open-high-Iow-close
bars) the analyst can forecast with better than
ff percent accuracy where prices are headed in
the near fture.
Pror to the publicaton of Maket mdMakt
Li. traditional technical analysis (which
includes Eliot Wave. Fibonacci. Gann analysis
and cycle work) was the only objective means
available by which price behavior could be
evaluated and assessed. Given this. it's not
unusual then that the vast majorit of traders
have at some point employed some variation of
technical analysis in their decision-making
process. While technical methods can at times be
effective trading tools. these means of analysis
ofen have drawbacks.
1. Technical analysis fails to take into account
trade facilitation as a market condition.
Most technical indicators weig present price
behavior against that of the past. The emphasis is
mostly on price behavior. Little or no attention is
paid to whether the marketplace is fulflling its
purpose - to facilitate trade - at a given price
level. A a result. technical indicators often
miSinterpret higher or lower prices as a sign of
strength or weakess. when in realit directional
price movement will in time be rejected by the
market due to a lack of facilitation at those leels.
In other words. in a bul market. lower prices with
less trade facilitation create a condition that ofen
will give the experienced trader. schooled in the
prnciples of Market Lgc. insight that a buying
opportunit may be present. On the other hand.
many technical models. seeing the same market
behavior. would interpret the lower prices as
market weakness and a selling rather than a
buying opportunit.
DECISION-MNG 125
2. Technical analysis often becomes too
"mechanical," failing to accout for the
character of the market (i.e., trnd o trading
rnge, and, Ua trnd, its prmar direction and
strength).
Since many technical indicators (moving
averages. relative strength inde. stochastics.
etc. ) are derived throug mathematcal formulas.
many traders delegate the task of determining
market perspective to a black box. By relying too
heavily on a "system." technica traders
fequently fall out of touch with the ebb and fow
of the markets and. should the system go astray.
the have diffcult determining what current
market conditions portend. Tis undermines the
trader's confdence in his approach. and removes
the most important orientation that the trader
requires: whether. given current conditions. the
trader feels more comfortable playing the long or
the short side of the market.
Despite problems with their practical
application. technical indicators do provide many
advantages to traders.
1. Technical analysis allows visualization of
market activity.
Since technical indicators are most fequently
displayed graphically. traders are given an
opportunit to visually relate price activit as it is
occurring in the maketplace. Te sole purpose of
charting aalysis. for instance. is to draw
conclusions based on visual depictions of day-to
day price movement. Surely. a picture is worth a
thousand words. pacularly when presenting
informaton vital to decision-makng. (Technical
analysis is not. however. the best picture. as we
wl see.)
126
M 101
2. Technical aayis focuses on pce action
not clouded by fudmental ad newrlated
compUcations.
we al have see. a good fndamentalist can
build both a bullish case and a bearish case with a
similar set of supply and demand statstcs. Te
fnal conclUSion of any fndamental analysis
must therefore be quite subjectve. weghtng
certain circumstances while igorng or at least
dowplayng oters.
Rate than approaching the markets purey
fom a subjectve pOSiton. the technical trader is
forced to focus his attenton on what is takng
place within the marketplace. Viewed from
whatee tmefame. a overbougt situation is a
quanttatve eent. To the technician.
fndamental factors do est. but their impact is
aleady refected in the technical data.
It is tre that most technical trading methods
are not sufCiently comprehensive to produce
consistent results over a large sample sie. Some.
such as movng averages. are geared toward
tending markets and "hold and pyramid"
stateges while others. such as stochastcs and
the relative stengh inde are geared towad
trading range markets. Tere are. howeer.
elements of may technical concepts which. when
employed as a supplement to logical market
analysis. add support and bring perspectve to the
decision-makng process. What follows is an
assessment of the merts of these methods ad a
review of how these concepts can be efectvely
used by the Market Lgcia.
Chrng
Chartng is certaly unrivaled for gatherng a
mental picture of where market prices have been
and where they appear to be going. most
DECISION-MNG
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taders are aware, price acton in the makets is
most commonly depicted on charts by plotting
price on a vertcal axs and time on the horontal.
For each tme period (day, week, month, etc. ), the
high, low, opening, and closing prices are
displayed as a "bar." When a sufCient number of
tme periods are displayed on the chart, the trend
or trading range patter becomes quite evdent
and a tader can quicky see where the market has
found buying and selling over the tmefame of the
chart. Chartists seek to ident trend lines,
support and resistance areas, and reversal or
continuation patterns in order to gather
indications of fture price action and trend
movement (on an intraday, daily, weekly, or
monthly basis).
How should a Market Logician use the technical
data available from charts? Athough many
traders have relied on chas almost eclusively
for their trading data, the profle trader is best
advised to use chars to evaluate the direction of
the trend. Tat is to say, charting analysis should
provide clues to the trader of where and when he
can possibly exect certain market activit to take
place and, on the basiS of this information, what
tpe of market-generated information he should
be lookng for which will confrm or deny his
suspicions. To best elain the use of charting
analysis, refer to Figure A.
Figure A is a daily bar chart of price action in
July 1988 Lumber. Lumber had been in an
uptrend since late 1987, with prices continuing to
climb into the frst quarer of 1988. In late
Janua, Lumber ended a bull market pullback
by bottOming at the 178. 00 level. Aer climbing
sharply to the 195. 00 mark, the market then
pulled back in March to form a base at the 182.00
level. B connecting the intraday lows made at the
DECISION-MANG 129
bottoms in Januar and March. a trend line is
formed which depicts the upward bias of the
market. Coming off the lows in late March.
Lumber again rallied to new highs by April.
Following this move. the market once again began
a pullback movement.
Consider the decision-makng parameters of the
chartist who had been observing the activt in
Lumber and was looking for a low risk place to
establish a long position. Having plotted the trend
line depicted on the chart. the chartist might
assume that the selloff in Lumber would continue
until intraday prices intersected the trend line (or
that the trend line would offer support). As prices
moved still lower in May. the chartist would begin
to watch the market action careflly. given that
charting analysis sugests that Lumber should
hold prices above the trend line. Notice for a
moment what information the charting analysis
has provided. In no way does the chart clearly
indicate at what price to buy. It only posits that
the market may hold the trend line. The chartist
would therefore be watching closely for market
generated information which would indicate an
agessive other timeframe buyer. the factor that
would cause a turnaround.
In essence. the chart acts as a roug outline.
gving a general picture of where the market has
been and allowing one to deduce possible
locations where strong buying might appear. Once
one has a rough idea of where turning pOints may
develop. analysis of profes and volume data can
pinpoint if indeed such a turnaround is evident.
Examine May 9 on the chart. A chartist might be
on the lookout for a possible bottom being formed
in lumber and he would begin to carefully study
the daily profles (see Exhibit B). On May 9 and 10.
the market displayed signs of continuing the
130
MS 101
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DECISION-MNG
131
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132
M 101
decline. Mostly present were signs of selling with
only one form of buying (on the 9th) . On May 11,
the market exerienced a normal day with a range
exension down, a strong initiating selling extreme
and initiating TO selling. While the market
penetrated the 186. 00 level on this day, there were
certainly no indicatons that the market was
attemptng to bottom. On May 12, the market
displayed its frst signs of other timeframe buyer
entr. Opening on its lows, Lumber rallied profle
like that of a trend day. On May 13, the market
opened still higher, but the opening half hour
proved to be the high as sellers took control of the
day. In retrospect, it is possible to say that the
rally of the 12th (which continued into the opening
of the 13th) was primarily a short-covering event.
Althoug some other timeframe buyers did enter
and aid in the effort, higher prices failed to
facilitate trade and consequently, the rally fzzled
late on the 16th.
On May 17, bulls were once again encouraged
as, after again opening on its lows (at 186. 00) ,
lumber showed signs of strong responsive buying
(two forms for the day). Bulls had even more to
cheer about as the opening prces touched the
uptend line and were greeted by a wave of buying.
However, the rally which was spurred by this
responsive buying (on the 17th, 18th and 19th)
also ran out of steam in only two days as the
market made a poor showing on the 19th. On May
20, the market opened and began selling from the
bell. However, after etending the range down in I
period, Lumber stabilized during J period and
subsequently rallied to close in the middle of
value. Thoug encouraged by this activit,
certainly the bulls were cautious, given that the
last two attempts to rally had failed. However, it
was becoming apparent at this time that each
DECISION-MAKNG 133
time the market tried to trade through the 186. 00
area, i was being met with signifcant imbalace,
namely responsive buying. This fact should not
have been surprising considering that the bar
chart trend line indicated support at the 186.00
range.
On May 23, Lumber posted the lowest TPO
volume of the previous two weeks. Although there
was rage extension, it was only by one tck, and
came late in the day during K period. Te move
failed to follow through. Te day was a quiet day
and it was clear that trade was not being
facilitated at this price level. To the obserer of
market-generated information, this fact should
have been an early signal that the market had the
potental to change. Te presence of strong
responsive buying (at levels which the start had
shown should hold) in addition to the non
facilitatng action of the 23rd, should have
provided adequate warning. On the 24th, Lumber
traded to signifcantly higer levels and ultmately
reached 210.00 in the next two weeks.
Here was a technical analysis of a chart proving
most usefl in helping the trader get a feel for
where major turning pOints migt occur. Given
this success in using charts to spot turnaround
points, some might wonder why an analysis of the
degee of a market's balance (Le. , range
extensions, extremes, TPO count) is even
necessar. Why couldn't a trader simply have
bought Lumber when it intersected the trend line
on the 17th of May? To answer simply, while
charting analysis is quite helpful in determining
possible pivotal price areas in the markets, the
turns or price changes which the charts lead one
to exect at these pOints do not always occur.
Many tmes, the trend line that can be expected to
halt a price decline or restrain a bear market rally
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fails to do so. Fhermore, tedles or fgure
patters ae ofen ieact in teir appearance.
Te eact point at which a price t may be
eected ca be difcult to determine. Aa result,
market acton slgtly beond the ect spots
identifed on te chart may place one in a bad
trade or encouage etng the maket just before
the trnaround takes place. Te ke, then, is to
identif whether the maket is i a balanced
posture ad could hold technical support.
For an Cple of how charng analysis alone
can be deceptive, refer to Eibit C, a chart of July
Pork Belles for the month of June. Coming of a
cyclical low in May, Bellies had rallied to 55.50 by
May 15, pulled back to 53.00 by May 23, rallied to '
57. 50 by ealy June, and, following this top, were
selling of. Applying chartng anaysis to the Belly
market, a tader would deduce that the trend line
(connectg the lows on May 4, May 10, and May
26) would stop the decline and that the market
would hold at the 53. 75 level. Had the trader
relied solely on these chaing data and placed an
order to enter te market when the target price
was reached on June 8, the results would have
been disastrous. Disregarding technical support,
te Bellies blew trough the 53. 75 mark,
proceeding to go limit down. Within to weeks,
this market had sold off more than 12 basis
pOints.
Could melding maket-generated informaton
with technical analysis have helped the trader
avoid disaster with this trade? Lok at the profles
found in Exibit D. On June 1, Bellies posted their
intraday high at 57. 70 during a neutral day (range
exensions on both top and bottom), and closed on
their highs. A previously discussed, neutral days
can be "test" days, sigals that change is highly
probable. On June 2, the market again tested the
DECISION-MANG 137
tops on another neutral day. Te profle of the 2nd
eibits a strong selling ereme lef during F
period. By the end of the day. the market had
traded down and closed with basically unchanged
value fom the 1st. On June 3. the ket opened
lower and entered into a trend day dow. Given
the back-to-back test days. this action was no
surprise. However. on the 6th the Bellies popped
up to once again look at the highs (the reached
57. 25) but a wave of responsive selling drove them
down. leaving a large F period selling extreme. On
June 7. the market again eperienced a trend day
down. taking prices to 55. 35 by close. At this
point. many a chartist who was looking to buy at
the trend line intersection was eagerly awaiting
the chance to get long. However. prices had not yet
reached the intersection point and the Market
Lgcian. also aware of the trend line intersection
point. was waiting to see defnite signs that the
market was slowing its selling pace.
On June 8. the market opened on its highs and
immediately entered into a trend day down. The
profle for this day. shows a market that did pause
briefy during the D and E periods at the 54.60 to
54. 85 level (the trend line intersection point).
However. the market remained in a one ttmeframe
mode and blew through this area of support. Once
through this level. the market was in a freefall
(notice the single prints during the E period). The
only thing that stopped the selling on the 8th was
the daily price limit at 52. 875. Clearly. prior to the
chartst's point of exected support. the market
gave defnite and distinct signals that it was not
balanced and that it could not be exected to stop
at the trend line intersection pOint. When the
market reached the target price range. responsive
buying did not dominate the market. Any trader
watching this markedly imbalanced activit would
138
M 101
immediately kow that the market was in a selling
mode and that entering into any long positions
would be foolhardy. In fact. the action on the 8th
(and follow-throug on the 9th) made it clear that
the initiating sellers were in control and that the
door migt be open to shorting the market.
Whle i would be nice charting analysis
consistently yielded infallible results. it is a simple
tuth that charting. at best. provides only a roug
guide to price areas that may be pivotal to trend
directon and continuation. When used as a
support tool for the logical analysis of market
generated information. charts do provide utilit
and value. However. when taken alone. or in
conjunction with other price-generated technical
data. they offer only suspect information and
sketchy trading results.
Suppor and Resitance
One of the most basic tenets of technical work is
that price tends to move directionally until it
encounters an area where. for one reason or
another. market partiCipants feel that current
price is fairly valued and the trend action should
stop. The price areas where trending price action
is halted are known as support and resistance
areas. Tese areas are crucial to most technical
traders; they give a good indication of where prices
will slow down and possibly reverse direction. This
book has referred to the abilit of the other
timeframe buyers and sellers to contain the
market through an increased leel of competition
at attractive price levels. Thus. it is the group of
other timeframe buyers which provides support to
the market and other timeframe sellers who act to
give resistance.
One way to conceptualize support and
reSistance is by referring to a bar chart. Exhibit E.
a daily bar chart of August Gold. A technician.
DECISION-MANG 139
eg this chart in early April would have
obsered that Gold had recently made a bottom in
late Februar, rallied to the 468.00 level in March,
and, as of the frst week of April had begun a
break. Seeing this activit, the technician
(assuming he was bullish the Gold) would have
bee draw to look for a spot where Gold had
found support by ceasing to break in the past. A
area such as this would provide support for the
market, possibly haltng the curet decline in
Gold prces and reversing the trend.
Durig the frst two weeks of Febrar, Gold
had found good support at the 450.00 to 455.00
area. Again, in early March, the market found this
prce area sered as resistance (old support areas
ofen become new resistance areas) when the
market tried to rally off its lows. Noting this area of
support/resistance, the technical trader would
have deduced that Gold could fnd support at the
455.00 area and possibly reverse direction. It then
came as no great surprise that the market.
trading dow to the 454.00 area the week of Aprl
4 found support in this area and reversed
directon. Had the trader used this form of
technical analysis to et a short position or
establish a new long pOSition, the method would
have proven quite efective.
Not to be overhelmed by the success in the
frst eample, the trader must be cautous. Tere
are many times when traditional support/
reSistance analysis fails to provide reliable trading
conclUSions. Lokng again at the Gold, note the
two week period June 13 through June 20. The
Gold market had again traded dow to the 454.00
support area, bounced briefy, rallied slightly, and
then resumed its downward course. Te
techniCian, eectng the 450.00 support area to
hold, might be moved to et short positions and
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DECISION-MNG 141
enter long positions. Without the beneft of
kowing precisely how the market is trading
interally (are the dominant other tmeframe
taders buyers or seller?, is there responsive
buying?l, the technician would be sentenced to
simply position and pray. To the dismay of the
technician, the market moved throug te
support area and traded to much lower leels.
Had a short position been exted or a new long
established based on the support/resistance
analysis, the technician would have suffered a
several hundred dollar per contract loss.
How can the analysis of support and resistance
be combined with the use of profles and market
generated information to provide enhanced
results? Refer again to the Gold chart. Using the
support area at 454.00 merely as a reference
point -an area where price trend change is likely
to occur - the trader could then direct his
attention to the profle to obsere whether the
responsive trader becomes active and reverses the
market.
has been noted in the past. it is the presence
of the responsive trader which frst brings about a
change in market direction. His presence is the
tipoff that the market is susceptible to a reersal.
Tis is an opportune time to outline precisely
what tpes of profle activit constitute responsive
behavior.
Illustrated in Exibit F are three basic tpes of
profle activit which are characteristic of the
responsive tader entering the market. The
examples refer to responsive buying activit,
although the inverse would also be true for selling
activit:
1. Buyng Exreme
Tis form of responsive behavior should be
familiar, as it is plotted as an element of the Lng
142
M 101
Term Market Actvt Chart. When sellers drive
prices dow far enoug during one TPO period
that the price level is overhelmingy rejected as
being too low, responsive buyers step into the
market and quickly move prices back up into the
normal range of the day. Tis tpe of behavior
ofen occurs quite rapidly and is ofen sigcant
to the
longer-ter tend.
2. Failed Auction
Wen a market etends the range beond the
initial balance, in effect the market participants
have begun a new auction, concluding that the
initial price level was no longer appropriate gven
the current imbalance and that prices must be
moved to facilitate trade. Should an auction be
started and not gather sufcient velocit, a
situation kown as a "failed auction" is created. A
failed auction can be easily recogned as a
meager range extension with no follow-throug. It
is caused by actvit movng into an area where
responsive traders step in and push prices back
into the initial balance area, containing the
market. Ofentimes a failed auction can trigger a
sharp move in the direction opposite the failed
auction.
3. Double Pnt Exremes
By defnition, an etreme must only consist of a
series of single print TPO's. However, many tmes
a market will probe to an area where price is
rejected but the time period changes from one
letter to another before price moves back into the
intial balance area. Wen this occurs, the market
forms a double print extreme. Though not
tically plotted on the LTM Chart, the double
print extreme is a form of responsive activt and
should be credited as such.

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14 M 101
B notng the above mentoned forms of
responsive profle actvt, the technica trader
can geaty enace his success in using support
and resistance area as a basic guide to trading
suspected reersa areas.
Rele Stent
Another variaton of technical aalysis, relative
strength, is best kow and most fequently used
to indicate when intermediate to long term
changes in trend can be exected. Te relative
stength inde measures the underlying market
stength at a specifc price area, and then
compares that reading with other readings
obtained when the maket traded in the prce
area. Te relatve strength inde is caculated
based on the average "net change" of closing
prices for the preceding 14 number of time units
prior to the time of calculaton. For example, the
longer term RSI measures the average for the past
14 days. Each day, the amount the market closes
up or dow is taken with the same closing fgure
for the 13 days preious. "Up" closes and "down"
closes are grouped independently, averaged, ad
run through a series of calculations to arrive at a
number between 1 and 100 which defnes how
stong the underying momentum of the market is
at that time.
Relative strength inde analysts believe that
makets, when involved in strong trending moves,
begn to reach a fst stage ehaustion point when
their RSI reaches either a level of 30 (dowtrend)
or 70 (uptrend). Once these levels are reached, the
analyst then watches prices for a setback or rally
in the market. Once the rally or setback occurs i
is tpically followed by another move, or possibly
to prices een beyond those reached orignally at
the exhauston point. When the second rally or
break ends, the RSI watcher then compares the
DECISION-MNG 145
inde reading at the open of the second rally or
break with that achieved in the frst move. Many
tmes the RSI on the second move is substantially
lower or higher than it was on the frst move. Tis
occurs in spite of the fact that prices in the second
move matched or surpassed those in the frst.
Tis phenomenon, know as "divergence, " tells
the RSI analyst that a trend change can be
eected. Tis is because even though a market
made higer higs or lower lows on the second
rally efort, the interal stength or weakess of
the market, "relatve" to the frst rally or break, is
substantially lower (on a rally) or higher (on a
break).
To help elain how RSI is used in a practical
sense, the followig W present an example of
how a technician's trading decision-making might
be structured using this measurement.
Exhibit G is the daily bar chart for December
Cotton. From Februar through April, Cotton had
been breag and, on April 21, the market fnally
made a botom at 54.90. (Tis is a closing price.
Since all RSI numbers are based on closing prices
they W be used in the example.) Beginning on
April 22, Cotton began a four week rally until it
made a primar move high on May 17 at 62.60. On
that date, the RSI was 84. 5. Tis fgure was well
above the 70 level (eaustion level for rallies) and
RSI analysts were undoubtedly lookng for a
setback. Durg the next ten days, the market did
setback to a low of 59.08. Te RSI at this point
also retreated to 45. 7.
Undaunted, Cotton then launched a secondar
rally which carried it to a peak of 67. 90 on the
20th of June. EXing the coresponding RSI
for that same date, the index analyst found that
the fgure was only 72. 5. Although the market on
the second leg of its raly carried more than 500
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DECISION-MANG 147
pOints higer than the highest point reached in
the primar leg of the raly, the RSI, een with the
market 500 pOints higher, was some 12 pOints
lower than the corresponding ape of the prmar
move. Tis "divergence" between the higher price
and not higer relatve strength measurement
told the technicia that the market was interally
weak at higer prces and that a tend reversal
migt be forthcoming.
Ready to sell short the market, the RSI analyst
focused his attenton on daily index readings in
relation to the leel reached on May 26 (see point
(3) on the chart). Te RSI on this date was the
"crtical point" for the trade. If and when the
market traded dow to prices which resulted in an
RSI lower that that seen on the lowest point of the
break which occured between the primar and
secondar leg of the rally, then the turaround in
the trend was confrmed and it was tme to get
short.
On June 29, Cotton reached a relatve strength
level of39.3 and confrmed the trend reversal. The
following day, on the 30th, the RSI anayst sold
the opening, establishing a position at 61. 70.
Durng the ne three weeks the market continued
to break untl it reached a low of 54. 95 on July
18th. Te RSI technician was able to take some
675 pOints out of a ver defned (fom an RSI
standpOint) trade.
Despite the apparent merits of RSI analysis, the
employment of the index as a primar tading
deciSion tool does have its drawbacks. Perhaps
the most garng failure of the RSI is its inab1t to
recommend good trade location. Good trade
locaton, it should be stressed, is absolutely
crtcal to the success of any trade.
By eing Exhibi H, the daily bar chart of
te September 1988 S & P, one can clearly see how
148 M 101
the RSI can fail to provide good trade location. and
when markets are choppy. how this poor trade
location can result in losses.
On May 23. the S & P made a low at 252.45. Te
market ten set out on a three week rally.
ultmately reaching a closing hig on June 15 at
276. 95. Te RSI at this point was 74.04. In the
subsequent week. the S & P broke to the 270.00
level ad again rallied. matching and surpassing
the primar leg high. Te new hig on June 22 at
277. 95. though some 100 pOints higer tha on
the 15th. achieed a relatve strength index of only
68. 2 (some 6 pOints lower) . This divergence
signaled a possible reversal in trend.
The reversal was apparently confrmed on June
27 when the RSI crossed the "critical" point
established on June 22. On the following day. the
RSI trader then established a short position on the
opening at 270.60. However. instead of continuing
to sell off. the market rallied sharply. putting the
short positon down some 900 pOints in less than
5 days. Though usefl in a trending market. RSI
use proved ineffective while the market remained
in a tading range.
How would the analysis of market-generated
information provide insight to the RSI trader?
Once the divergence between price and RSI was
spotted in the September S & P on June 22 and
the technical analyst was alerted to a possible
reversal. the analyst of the Lng Term Market
Activit Chart and daily profles would have
wondered whether the market would contnue to
break when it reached the "critical" pOint. or
whether the responsive traders would step in and
rally the market. leaving it in a trading range?
Unless a trader can see the emergence of the other
timeframe trader when a position is conSidered.

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150 M 101
he has no micro informaton upon which to
evaluate whether the move he is "going with" will
contnue, or whether the move has a hig
probabilit of eding abruptly.
Te conclusion which can be draw fom this
comparison is that relative strength, though a
useful tool for longer-term market analysis, leaves
much to be deSired in a micro sense. This micro
analysis, determining market continuaton and
good trade locaton, requires tools provided only
by market-generated information.
Movig Averages
Like relatve strength, moving average analysis
aids traders in identifing changes in trend
direction and momentm. Many of the self
deSCribed technical "systems" rely heavly on
moving averages for overall trading strateg and
trade position location. Moving averages tpically
are measured in 4 day, 9 day, and 18 day
segments and are simply running averages of
closing prices for the duration specifed. Since the
objective of the averages is to capture visually the
changes in short term trend direction in relation
to longer term activit, moving averages naturally
become more volatile in a shorter span (i. e. , 4 day)
and smoother when in a longer span (Le. , 18 day) .
Traditional moving average analysis posits that
when a market is moving directionally in a trend,
the averages run paralel to each other wth the
shorter term leading the way and longer term
lagng behind. When a market initiates price
activit which may spell a change in direction, the
shorter term averages respond frst and
ultimately, when the trend has presumably
changed, cross over the long term averages,
confrming a signal.
A graphic Cple of how moving average
technicians employ these tools is found in Eibit
DECISION-MANG 151
I , the daly bar chart of September 1988 Teasur
Bonds. In early March, Bonds topped out in the
93-00 area and began to break. On March 10, the
9 day Movng Average (solid line) crossed over the
18 day average (dotted line) . To the moving
average trader, this event signaled the reversal of
the trend and dictated it was time to establish a
short position. Te market was sold at the open of
March 11 at 90-22. Immediately, the position was
a loser as the market rallied for the ne 5 days.
However, the tader held the position he would
ultately proft, since the market then turned
and continued the break.
Te only other time the market moved against
the trade was in early April, as the frst leg of the
break eded and the market underwent a
corecton rally. However, the raly was never of
suffCient stength to push the 9 day average back
over the 18. Tis event would have sigaled to the
trader that he consider covering the pOSition.
In early June, the break fnally ended. On the
7th, the 9 day fnally crossed the 18 day, signaling
the end of the trend. The moving average trader
then covered the position at 87-10, reag a
proft of more than 3 basis pOints.
Uke the relatve strength index, moving
averages have great utilit for one attempting to
identif the onset of major trends. Unfortunately,
movng averages fal short of the mark when
markets either do not follow throug in major
tends ad perform what might be termed "swng
tades," or else become choppy, without clear
trend directon.
Take for Cple the activit documented
earlier in August Gold (see Exhibit J). Aer a
sharp rally, Gold moved into a trading range in
early April. When the M analyst obsered the
break which began the last week of March and
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DECISION-MANG
153
which ultmately moved the 9 day average below
the 18 day on April 13, he was moved to short the
market at 456 area on the open of the 14th.
However, since the market was in a trading range
and not a trend, the trade went against the N
analyst and eventualy took him out of the market
when the 9 day crossed the 18 day to the upside
some 7 days later. In fact, the Ntrader, over the
course of the next three months, would have been
directed to positon some fve times, each
resulting in whipsaw action and a lack of trend
follow-through. Undoubtedly, N analysis failed
to provide results when markets were choppy.
Perhaps the greatest faw in trading systems
based on movng average is their inabilit to
provide good trade location. Like relative strength,
use of the averages has a built-in tme lag, a delay
in price trend recognition. Een when accurate in
diagnosing a change in market direction, moving
averages dictate trade establishment well afer the
market has turned and a great deal of the initial
price swing has passed.
Moving averages, as well as other traditional
tools of technical analysis, can be ver effective
when employed as a supplement to the use of
market-generated information. With them, a
trader can develop comprehensive decision
makng methodolog for ascertaining trend
identifcation as well as gaering good trade
location. In essence, macro technical indicators
sere as an "index" to the markets. Used in
conjunction with other tools including the Long
Term Market Activit Chart, these indicators give
the trader a general idea of possible locations
where turning pOints in the market may occur.
Many technical tools actually sere best to merely
confrm that a turn in the market had already
occurred. Aer general reference pOints have been
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DECISION-MNG 155
determined, the identifcaton of the "micro"
elements -precisely and when the market wl
t - can be ascertaned throug eaton
of daiy profles.
Chapter I
Market Aaysis:
Deutsche Mak
A
s mentoned earlier. partcipaton in the
fnancial markets can be likened to
managing a business. Te challege facing
the businessman is the identcal chalenge of the
trader /investor: to manage and to make deciSions
based on an analysis of an ever-changing fow of
two forms of information. Te frst flow is
fndamental information. supply and demad
data outside the marketplace. and the second is
market-generated informaton. To logically
analyze the data that result fom a market
generated information fow in the fnancial
markets requires many of the insigts presented
in this book.
A analysis of one market on a day-by-day basis
illustrates this challenge most gaphically. The
market. contnually ebbing and fowing in an on
going interplay between buyers and sellers.
challenges the trader to:
.
track where (at what price) and how
(responsively or in an initiating manner) the other
tmeframe buyer and seller groups react to an
opportunit
.
analyze the degee of balance or imbalance
present. thereby determining who is currently
more dominant between the other tlmefame
buyers and sellers
11
1 58 MS 101
decide whether to buy or sell
fnd the ideal trade location
place short term information into a framework
that allows a longer term conclusion to be drawn.
This list is most important for the longer term
trader.
This enables the trader to deCide whether to
enter a pOSition, add to i or hold i, lighten the
exposure or look to et the market altogether.
Tis day-by-day analysis of the Deutsche Mark
depicts the weightng of market-generated
information. Issues important to the day trader
are listed under the "micro" heading. analysis
which weights each day's activit within the
contet of the previous day's activit, drawing
conclusions applcable for longer term conviction
is listed under "macro" analysis. Tis narrative
will describe the thoughts that should cross the
mind of both the short term and longer term
trader as they interpret the market's behavior and
structure a decision-makng process around that
interpretation. The weekly chart shows a long
term uptrend beginning in March of 1985. As of
the end of this chart, the 30-month-old bull
market is matre, yet there is nothing that
indicates an attractive selling opportunit for the
long-term trader. Rather, the trend is the bull's
friend. Te question beged by a cursor look at
this weekly chart is simply whether or not this
market - clearly in an uptrend - can stll be
bought. For those who already are long, has the
market moved far enough for them to begin takng
profts? Again, the mature bull market creates a
quandary: while price is above value over the
larger sample size, the quick and pronounced
directonal move which usually occurs at the tail
end of a mature market also provides the geatest
opportunit for substantial returs. Tus,
DECISION-MANG 1 59
correctly identifing sigs that the market is
contnuing the trend versus signs that it has
already climaxed is ver rewarding.
Te next chart, the LTC of October 1-16,
1987, displays a strong market i an imbalanced
condition brought on by agressive other
tmeframe buying. Note the preponderance of
initiating buying activit on the right-hand side of
the chart and the marked absence of
corresponding initiating selling activit. In
addition to displaying the prototpical bull market
feature of prices moving higher over time, the
Deutsche Mark at this time tends to close strongly
on the week. The 2nd, the 9th, and the 16th each
settle their respective week's activity toward at
least the top third of the week's high-low range.
Note the two largest value area ranges occur from
higher, initiating activit.
Before we begin the day-by-day analysis, it
should be noted that an analysis of the Deutsche
Mark was chosen in large part because the
currency market is a 24-hour market, diferent
fom the vast majorit of markets which feature a
single time zone primar market. In the
interbank/ currency markets, trading in three
distinct time zones -the Far Eastern, the London
and the New York/IMM - makes up the entire
day's activit. Unlike many of the other markets
which are traded around the clock, the New York
time zone during which IMM ftures markets
trade does not comprise the majorit of the
worldwide currency market's transactional
activit. Thus. as the following eercise examines
only the New York/IMM time zone, please note
that day structures apparent in markets which
transact the bulk of world trade (for example, the
New York Stock Exchange for IBM, the
International Monetar Market for Eurodollar
160 M 101
ftres, etc.) are not necessarily going to be seen
in the same percentages. In other words, the
following will ee but a slice of the total
market-generated informaton, but aside fom a
skeng of day structure behavior, the analysis
will be identcal to that which would apply to a
non-24-hour market. For ease of analysis, we will
consider the inital balance to be the frst hour's
trade ( -Z period) even thoug we would often look
to ranges established in the Far Eastern tme zone
to establish the initial balance in many cases. Also
note that non-facilitation (non-trend), tend-tpe
and bell-shaped neutral day (wthout as great a
sigifcance attached to them) are the day
structures seen in the New York/IMM curency
ftures. Another behavior particular to the
curencies is that tend days tend as ofen as not
to close in the middle of developing value, in sharp
contrast to the prototpical trend day seen in
non-24-hour markets, which almost always
settles on the exreme. An eplanaton of this may
lie in the fact that the close of the IMM currency
ftres is not a market-imposed timefrae. The
bank's "book is passed" to dealers in the nex tme
zone.
M00M0 0M00 fP00
W ~ 090 L 00 0W
9 9 9 . 9

.
g

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W9 9 9
00
W 0
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1 M
DECISION-MNG 163
16 MS 101
10-19 Mcro Aalysis: Following a quiet initial
balance, the market extends the range up in A
period and a single print is formed in B. Ofen, a
single print rage etension (in either direction)
can sigal a failure to continue, an indication that
the market may probe in the opposite directon. In
this case the market does extend down - in E
period, but fails again to contue beond that.
The market builds value around the range of the
inital balance. Note the degree of balance and the
profle's resemblance to a bell cure.
10-19 Mcro Aalysis: A havoc played on in
the other fnanCial markets due to the stock mar
ket crash, the currency markets were fairly qUiet.
Te have been in a dramatic bull market and
have had a sigifcant run caused by an actve
other timeframe buying imbalance. But the mar
ket is an ebb and fow between buyers and sellers.
Havg ralied, the strength early i the week, plus
the balanced look of this day' s profle leaves te
market susceptible to falg back for a while
other tmefame selers enter and domiate
actvit.
Note - Pices are on the lefmost vertical axis, to the
right of which are to rows of nuber. The row next to
price denote the numer of half hour segments during
which that particuar price traded. The third colun repre
sents the number of trades (not by contract) that took place
at each price. The lat colun is a visual representation of
price formulated over time orgaied with a bell cure, nor
ma distribution. The black lines represent where ofthe
volue on that day's activity occurred as measued both by
the numer of Time-Price Opportunities (TJ and by the
nuber (as opposed to volue) of trades taking place at
each price. This calcuation, the frst standard devia
tion of the normal distriution, is the market's perception
of value on any particua day.
DECISION-MNG
165
TRADI NG SIMULATO Base on the CBOT Market Profi le*
OM 1287 13: 20: 08 56.74 56. 69 H 56.92 L 56.59 V 1 027 TB 770 TV 441 527
1 0/19/87
56.92 0 0
56.91 1 5 B
56. 90 2 7 AB
56. 2 1 1 AB
56. 8 2 17 AB
56.87 3 20 ABO
56. 8 4 22 ABCD
56.85 4 22 ABCD
56.8 4 32 ABCD
56.83 4 42 ABCD
56.82 4 40 ABCD
56.81 4 30 ABCD
56. 80 6 18 ABCJK
56. 79 5 24 ACJK
56. 7 4 28 ADJK
56. 77 6 33 yADJK
56. 76 6 40 yDJK
M. 6 48 yDJK
56. 74 7 59 yDGJX
56. 7 8 56 yADEGHJ
56. 7 8 51 yADEGHJ
56.71 8 53 yDEGHI J
56. 70 8 49 yDEGHI J
56.69 6 38 OGH I J
56.6 6 24 vGH I J
56. 67 5 23 FGHI
56.6 5 34 EFGHI
56.65 5 39 EFGHI
56. 6 4 37 EFHI
56. 63 4 43 EFHI
56. 62 4 42 EFHI
56.61 4 26 EFHI
56.60 3 1 1 EFI
56.59 1 1 E
*CBOT Market Profi l e sMarket Prof i le are regi stered traderks of the
Chicaeo Board of Trade
CoyrI ght Board of Trad of the Ci ty of Chicago 1984. Al l Rights Reserve.
166 M 101
10-20 Mcro Aalysis: Opening with a dis
tinctly wde Y -Z initial balance. the market fnds a
selling imbalance early that causes the market to
fall away quickly and violently in A period. nearly
doubling the initial balance and nearing the 5500
level. Te bounce that forms the buying extreme
indicates that other timefame buyers are inter
ested at lower prices.
10-20 Mcro Aalysis: Are weak and nervous
longs being shaken out of the market by the vio
lent A period break. or is this signifcant new sell
ing. selling which can be expected to continue at
increasingy lower prices for at least several ses
sions to come and possibly more? If it is this sec
ond activit. the market should not have bounced.
but should have continued lower. since the other
timeframe participants as a rule enter a market
slowly and steadily over a period of days and
weeks. Te fact that value and volume develop on
the top hal of the day's range indicates strength.
as does the degree of bounce that this market
eperiences. Note that the market rallies back
from the lows long before the stock market
regouped on this day.
DECISION-MNG 167
ttuisssi.st - ss.w0 :--:satss-t-:---ti .-
:s itsriv. ta. tsss.si ss.aa s ss.aa .ss.as - ivtsts ivaiaat-tvtt
ss.aa
ss.ts
ss.ts
ss.t-
ss.tt
ss.ta
ss.
ss.
ss.
ss.st
ss.sa
ss.rs
ss.rs
ss.r-
ss.n
ss.ra
ss.
ss.
ss.u
ss.st
ss.sa
ss.ss
ss.ss
ss.s-
ss.st
ss.sa
ss.-s
ss.-s
ss.--
ss.-t
ss.-a
ss.vs
ss.vs
ss.v-
ss.vt
ss. va
ss.ts
ss.ts
ss.t-
ss.tt
ss.ta
ss. is
ss. is
ss. i-
ss. it
ss. i a
ss.as
ss.
i a/ta/sr
a
a
i i ,
i i
t t
v it ,
,s - is
s ts ,:s
s vt ,:s
s ss ,:ss
s ,:ss
s vr ,:ss
s st ,:ss
i lt
s vs ,::st
s vs :sst
s -t ::sst
is -r :tssi .
i s :ttsst .
is :sttssi .
i- :stt.
is ita :sstt.
is

rs us::tt.t
iv -s- us.t
iv sr :ssss
s is ss:
- i t ss
- t ss
v v ss
- it ss
- ts ss
- tr ss
v i s ss
t i i s
t is s
t i i s
i s s
i it s
i t s
t i i s
t v s
t - s
i s s
i i s
t s s
i i s
i i s
:tss-t-:---t i .-sss-t-:---t i .-s-- --,i .:--w:-se-t.-t :--
:-i:s,-s-s-e-t t-se-
:- ,-:s-s-e-tt-w-t :--:i :,-t:-i :s,-it. s. . ti ,-:.t-.---w.
168 MS 101
10-21 Mcro Aaysis: After a higher opening,
the market scores a quieter inital balance than
the 20th. Tis can be eected afer so active a
previous session; the other tlmeframe partici
pats need to "rest." In emerging markets the rest
may take several days whereas in active and vol
atle markets, where actvit is sped up, rest can
be as short as the frst few hours of the session
following the major imbalance. Te selling range
etension in P confrmed not by a single TPO but
by contnuation in C, indicates weakess for the
day. Te level of volatile yet directional activit is
to be epected gven the one tlmeframe nature of
this maturing market. Te conSistently lower
lows, the weak close and the lone TPOs in C period
display a trend day structure. This day is
imbalanced and in the hands of the other time
fame seller.
10-21 Mcr Aalysis: Een though this is a
strong selling day, the market fails to probe below
the previous session lows, a sign that selling is not
increasing at the lower levels, something to be
exected the previous session's selling was
caused by new selling. It is still early in the week
and the trend is up, so we would be surprised to
see the buying that is supporting the market at
these lower levels supportg the market at higher
levels over coming sessions, especially by the
week's settlement.
DECISION-MNG 169
ttsai sssisa.stat - ss.w0 :--:satss-t-:---t i .-
as itsriv. it. vsss. ts ss. ra s ss . .ss. tv - tti ts i ivstt- T
::.
::.rs
::. rr
::. rs
::.r:
::. r-
::. n
::.rt
::.ri
::. ra
::.st
::.
::.sr
::.ss
::.s:
:: .u
::.sv
::.st
::.si
::.sa
::.:t
::.:s
ss.:r
s:.:s
::.::
::.:-
:: .:v
::. :t
::.:i
::.:a
::.-t
::.-s
::.-r
::.-s
::.-:
::.--
::.-v
::.-t
::.-i
::.-a
::.vt
::.vs
::.vr
::.vs
::.v:
::.v-
::.vv
::.vt
::.vi
::.va
::. tt
::.ts
::.tr
::. ts
:: .t:
::.t-
::.tv
ia:ti:sr
a
i v ,
i t ,
t i i
t i t
t ta ,:
v is ,:s
v is ,:s
- ts ,:ss
s vt us:
s va ,:ss:
s -a ,us:
- vr us:
v i r u:
t r s:
t - s:
i v :
i v :
v s t
v i a :at
v ia t
v iv :at
- iv tt
- is tt
- tv tt
v att
v ir att
v is att
v ia - att
v t att
v r att
t s at
v iv ats
v ta ats
v ir ats
v it ats
v ti ats
v is ats
v is ats
- i r atss
s i i atss.
s i- atss.
- iv tss.
- iv tss.
s ta tsst .
- tv sst .
- ts sst .
- ts sst.
v va st .
v ts st .
v ti st .
v is st .
t ti t .
v ts t .s
v is
t .t
t s t t
i i r
:sats.-t-:---t i .-sss-t-:---t i .-s----,i.:--w:-w-t.-t :--
:-i :.,-s-.-e-tt-.+
:-;,- ,-:s-.-e-t t-w-t:--:i:,-t:-i :s,-it. s. . ti ,-:.t-.--.
170 M 101
10-22 Mcro Aalysis: Opening at the low end
of the preious session's value, the market has an
actve inital balance and fnds good other time
fame buying which causes a buyig ereme and
then a stong buying range exension. While good
buying is present, good selling also is present,
illustrated by the fact that the market does not
hold the levels reached in the A period rally, and
later comes back to trade in and close at the level
of what was earlier the buying eeme.
10-22 Mcro Aalysis: Te past two days illus
tate a nerous ad ver active market. symp
tomatc of a market in a maturing trend. With
both other timeframe buying and selling present
on this day. the question remains: which is the
dominant force? Given that the market is volatile,
and gven that both the LTMC and the weekly
charts indicate the market has been in a trend,
plus the fact that the buyig imbalance defned
this day by the actve rage exension, we eect
to see other timefame buying dominatng. but the
market needs to demonstrate this.
DECISION-MNG
171
ttsai sssisa.st - ss.w0 :--:satss-t-:---ti .-
as itsr i v. it.::::. vv ::.vs s ::. sa . ::. vi V stvts:t TT
ia:tt:sr
::.sa a a
::.rt a a
::.rs i T s
::.rr a a
::. rs i T s
::. n t 4 ss
::. r- t 4 ss
::.n t v M
::. rt T 4 s
::. ri t : M
::. ra t i : M
::.st t it ss
::. t T: ss
::.sr t T M
::. t ir ss
::.s: t iv ss
::.u t it ss
::.sv t T4 ss
::.st v ss:
::.si v ts ss:
::.sa v ts ss:
::. :t v t: ss:
::. :s t tv s:
::. :r t s:
::. :s t ta s:
:: .:: t t s:
::. :- t : s:
::. :v t s s:
::.:t t t s:
:: .:i v r :s:
::.:a : i- :s:at
::.-t : ta :st
::.-s : tt ::ats
::.-r : ta ::ats
::.-s : tv ::ats
::.-: : :ts
::.-- r -v :attsst
::.-v :atssi
::.-t r ts :attsst
::.-i v- :atssi
::.-a :
% :tsst
::. st 4T ,:tst .
::.vs -t ,:tst.
::.vr - vs ,:t.
::.x : -a :t.t
::.v: : va ,:t.t
::.v- t T T y
::.vv v i a ,.s
::.vt t i v ,.
::.vi t s ,.
:satss-t-:---t i .-sss-t-:---t i .-s-- --,i.:---e:-se-t.-t :--
:-i :s,-s-s-e-tt-s+
:-- ,-:s-s-e-tt-w-t:--:i :,-t:-i :s,- it. s. . ti,-:.t-.---w.
172 M 101
10-23 Micro Aalysis: Te higer opening, the
wide inital balance and the early structure of
day Qsinge TOs from 5540 to 5552, with Z elim
inating the possibilit of a X period selling exreme)
indicate an early buyng imbalance. This sigals the
possibilit/probabilit of directional buying that W
keep the bull market intact. Note that the market
probes lower in B period, testng the Z low. Upon
eausting the selling without eradicating the single
TOs, but discovering a defned buying imbalance,
price etends up in a one timeframe mode, with the
wde (1.e. , facilitating ranges at ech h hour
throug H scoring higher lows and higher or equal
higs. Markets usually make a sustained directional
move that occurs throughout the day in (singe
dominant other timefame goup) maner. Note the
double distibution trend day structure, indicative
of buying supporting the market at higher leels.
10-23 Macro Aalysis: Te stong initiating buy
ing eeme, the wide, untested single TOs
(5586-5598) , combined with the day structure indi
cates a stong buying imbalance. The high-low
rnge and the degree of imbalance in this buying
tend day compared to the selling trend day occur
ring on the 21st, illustates tht buying imbalance
remains dominant at this tme. Also note another
bull market symptom: the week fnishes up well, set
tling near the highs of the week. Te market
imposed timefme of the week's end brngs in buy
ing -both from short covering and new and "add
on" buying. Te mrket contnues in a maturing bull
phase, and over the longer term the other timefame
buyg imbalance can be exected to create higher
values. Keep in mind, though, that major directional
tending days are generally not followed by similar
tpe days.
DECISION-MNG
173
ttsai sssi.st - ss.wM :--:satss-t-:---ti .-
:s itsr iv. ta. i tss.-s ss.ss s ss. ss
. ss.-a - i-wtstta-i t-istsi
ss.s-
ss.st
ss.sa
ss.-s
ss.-s
ss.--
ss.-t
ss.-a
ss.vs
ss.vs
ss.v-
ss.vt
ss.va
ss.ts
ss.ts
ss.t-
ss.tt
ss.ta
ss. is
ss. is
ss. i-
ss. it
ss. ia
ss. as
ss.as
ss.a-
ss.at
ss.aa
ss.ts
ss.ts
ss.t-
ss.tt
ss.ta
ss.
ss.
ss.s
ss.st
ss.sa
ss. rs
ss.rs
ss.r-
ss.rt
ss.ra
ss.ss
ss .
ss.u
ss.st
ss.sa
ss.ss
ss.ss
ss. s-
ss.st
ss.sa
ss.-s
ss .-s
ss.--
ss.-t
ss.-a
ia/ts/sr
i r s
s ts st
- ss st
s st st t
s w st .s
s 0 st .t
s u st .t
t st sst.t
ia ss tsst .t
t it tss.t
s ta ttss
s ss ttss
r % ttss
s t- ttss
s st ttss
s J ttss
s sa ttss
r u ttss
s -s tts
s is tts
- ti tts
- is tts
- it tts
- ta tt
t i t t
v i i tts
t s t
- i a tt
t s t
t ia t
t tt t
t is t
t it t
t s t
t s a
- t at
v ta at
- i r at
- ir at
v s at
v s
- is :a
s t- s:a
s vv s:a
s ss s:a
ia sa ,:ss:a
ia -r ,:ss:
i a sa ,:ss:
r :s:
s si ,:s
- it w
t - ,
t -
7
i i
7
t s
7
t s ,
i i
7
i i
7
Weekly Bar Cart
Week of I0~2J~87
J

W
W
W
bW
:sat s.--: ---t i .-sss-t-: ---ti .-s----,i .:---e :-s+-t.-t :--
:-i :.,-s-.-e-t t-s+
:-;,- ,-:s-.-e-tt-w-t:--:i :,-t:-i:.,- it. s. . ti ,-:.t-.---w.
174 M 101
10-26 Mcr Aalysis: A quieter day with
higer values develops out of an undistinguished
initial balance. and price probes in both directons
fail to contnue. Note that this rest day neverthe
less records sigifcantly higer value and settles
above Friday's higs.
10-26 Mcr Aalysis: Tis day would be
termed a contnuation day. een though it is
higer. balanced and facilitated less trade. Tis is
due to the fact that when one of the two other
tmeframe groups is operatng at its highest level
of actvit. as is the case in the prevous session. a
quiet market which allows a regouping can be
eected. Tis is what occurs. and the higher
values indicate that while "resting." buyers are
still a force in the market. Asurmised. sellers are
on te defensive. otherwise this day would have
provided values lower than it did. If the market is
going to continue to trend higher. it can now do so.
having rested and set back.
DECISION-MNG
175
ttsai sssisa.stat - ss.w0 :--:satss-t-:---t i .-
:s itsr iv. t:. :tss.ss ss. s ss.rs . ss. -t - ststssi t-vivsit
i:/ts/sr
ss.rs : :
ss. rr i s :
ss. rs i s :
ss. n i ir :
ss. r- i i s :
ss. n t ia :s
ss.rt s i t ,:s
ss.ri s i- <s
ss.r: - tt ,::s
ss.st s s: ;:s:s
ss. r_-r :s::s.
ss.sr s ss ,:s::st .
ss. t ss ,:ss::st.
ss.ss t ,:ss::st .
ss.u i i ,:ss::tsst .
ss.e i i ss- ,:sstsst .
ss.st i: si ,:sstst .
ss.si s -i ,:s:tst .
ss.s: s -v ,:satsi .
ss. st s -t ,:s:tsi .
ss.ss s -: ,:s:tst .
ss.sr t -t ,:sattst .
ss. ss t sr ,:sattsi.
ss.ss s ts ;:;ttt .
ss. s- s t- ,:at.t
ss. sv - ti t.t
ss.st - i- at.t
ss.si - s at.t
ss.s: t - t.
ss.-t i i t
:sats.--: ---ti . -ss.-t-:---t i .-.----,i.:--w :-se-t.-t :--
:-i :.,-s-.-e-tt-.e-
:-;,-. ;-:s-.-e -t t-w -t :-- :i:,-t:-i :s,- it. s. . ti ,-:.t-.---w.
176 MS 101
10-27 Mcr Aalysis: Mer a quiet initial bal
ance and a subsequent quiet hour testing both
ends of the day's range. this day is shaping up
either to be another rest day or a directional day.
Tis qUietess is the ideal tpe of opening from
which a directional move can be sustained. Mer
the C period eends with such velocit following
what was quiet trading within the inital balance,
the opening at 5661 looks like i may be the low for
the day, another ver bullish sigal. Again. a one
timeframe move develops. The market indicates
the degree of imbalance (and. hence, strength) by
the wide number of untested single TPOs in both
C and E periods.
10-27 Mcro Aalysis: This continued strength
afer the rest day is to be expected. Price moving
higher over time. creating new highs on the move,
is caused by nothing more than the continued
buying imbalance. Note that the buying that
caused the imbalance on the day was in retro
spect evident early as illustrated by the opening
being the day's low.
DECISION -MNG 1 77
ttsaisssisa.st ss.w0 :--:satss-t-:---ti .-
:s itsr is. it.sasr. ss.si s sr.ts . ss.si - i iarts-s i i tt--svsis
sr.ts
sr.ts
sr.t-
sr.ts
sr.tt
sr.ti
sr.ta
sr. it
sr. is
sr. ir
sr. is
sr. i s
sr. i-
sr. is
sr. i t
sr. i i
sr. ia
sr.at
sr.as
sr.ar
sr.as
sr.as
sr.a-
sr.as
sr.at
sr.ai
sr.aa
ss.w
ss.ts
ss.tr
ss.ts
ss.ts
ss.t-
ss.ts
ss.tt
ss.ti
ss.ta
ss.st
ss.
ss.sr
ss.
ss.ss
ss.
ss.ss
M.
ss.si
ss.sa
ss.
ss. n
ss. n
ss. rs
ss.n
ss. r-
ss. n
ss.n
ss.ri
ss. ra
ss.st
ss.
ss.sr
ss.
ss.ss
ss.u
ss.ss
ss.st
ss.si
ia/tr/sr
a
i s s
i t s
i s s
i s s
t s ss
s it sst
s is sst
s tt sst
s tr sst
v m sst
s t- sst
s ts sst
s tr sst
s ss sst
s m sst
s ti sst
- it sstt
s t- sst.s
- sa st.t
s ss ttst .t
s si ttst .
s sa ttst .
- ss ttt .
- si ttt .
- ts ttt.
- m ttt .
- ttt .
- ts ttt.
- ts ttt .
t ts tt
t i- tt
t s tt
t r tt
i s t
i i t
a
i t
i -
i -
i r
t t
t i i
t is
t ir
t it
t it
t i t
t is
t i t
i -
i i
i s
i v
i -
t i t
- t-
- ts
- ts
- ts
- st
- ti
s tt
s tr
v is
t t
t
t
t
t
at
at
at
at

:
:
:
:
:
<
,:s:
,:s:
,:s:
CI
wss
,ss
,ss
s
178 M 101
10-28 Mcr Aalysis: Opening higher at 5728,
the market sets up during the initial balance in
much the same manner as the 23rd. Yet A period
does not range extend up. Te early part of the day
is spent probing low -making a single tick low in
B period that does not follow throug -and then
probing hgh by a single TPO in D, and then dow
again in E. But the velocit comes in G period, as
the dominant group, the other ttmefame buyers,
contnue to exert themselves. Higer lows and
higer higs fom G throug J periods sigal the
imbalance that pulls values higher.
10-28 Mcro Aalysis: In light of the recent tre
mendous buying imbalance, the early selling
range eensions
that fail would not be of concer, particularly
since deeloping value is sharply higher than the
previous day and prices fnd support at the pre
vious session higs. G period's price probe up that
is not met with any seling indicates that these
higer prices are not successflly attracting other
timeframe selling. Rather, subsequent higher
prices bring in more buying, symptomatic of a
mature bull move. These last seeral days illus
tate clearly that a) the trend (imbalance caused
by the domiant other timeframe group) is your
fiend, b) imbalance (illustrated through this logi
cal approach) causes the trend and therefore
must est in a readable form eary in the trend
(see A period, 10-22 throug end of day 11-02) and
lastly, c) the degree to which the imbalance (trend)
wl continue to unfold is a fnction of the degree
and progession of the present imbalance, which
can be measured both in terms of is velocit and
maturit.
DECISION-MNG
179
ttuisssi.st - ss.w0 :--:satss-t-:---ti .-
as itsr is. ta. a-sr. sr. ts s ss.ar . sr.t- -i-sats i-st-isi
ss.as
ss. a-
ss. at
ss. aa
sr.ts
sr.ts
sr.w
sr.tt
sr.ta
sr.
sr.
sr.
sr.
sr.sa
sr.n
sr.rs
sr. r-
sr.n
sr. ra
sr.
sr.
sr.u
sr.st
sr.sa
sr.ss
sr. ss
sr. s-
sr.st
sr.sa
sr.-s
sr.-s
sr.--
sr.-t
sr.-a
sr.
sr.ss
sr.s-
sr.st
sr.sa
sr. ts
sr.ts
sr.t-
i a/ts/sr
i s .
t is .
t i i .
s i - i .
- t- i .
s -t i .t
s % i .t
s st i .t
s n si .t
s s- si .s
s -s si .t
s st si .t
s i s si t
s i i si t
t i s s
s t- st
s ts st
s i t st
s i s st
t is s
t is s
s is st
t - s
s r st
s s ss
t s s
t s s
t r s
t s s
t t s
- t :as
s ss :as
s -s ::as
t -s ,::as
i i ,::ats
i- ti ,:s:ats
ir isi ,:ss:atts
ir is- ,us:atts
it is- :sstts
i a n stt
r ts ,stt
t s
:satss-t-:---t i .-sss-t-:---t i .-s----,i .:--w:-se-t.-t :--
:-i:s,-s-s-e-t t-se-
:-- ,-:s-s-e-tt-w--t :-- :i :,-t:-i :s,-it. s. . ti ,-:.t-.---w.
180
MS 101
10-29 Mcro Aaysis: The open is slightly
higer than the close of the preious session and
the inital balance leaves a selling exeme. In A
perod. however. buyers push the market two
ticks above the initial balance. Tis other tlme
fame buying activit contnues upwad in B.
more than doubling the initial balance. Sellers
take advatage of these prces and move the mar
ket lower in a one tmeframe fashion through J. J
period eends beow the day's lows. which trg
gers other tmefame buying. Te market closes in
the middle of the inital balance.
10-29 Mcro Aaysis: Volatilit marks the
day. Te low of the day moves to the low of the
preious session's higher distribution. It is appar
ent and understandable at these high prices that
selling has fnally entered and the other tlmeframe
buyers and other tmeframe sellers are in a tug-of
war. But judgng by the range etenSions. the
buyers ae still able to create more imbalance.
preentng one from selling this market yet.
Exect Friday to be strong: if the bul market this
week concludes as is tpical of a mature bull mar
ket (prices moving higer over time) this market
should culinate wth a stong close on the week.
DECISION-MNG
181
ttsai sssisa.st - ss.w0 :--:satss-t-:---ti .-
as itsr iv. ta. as:r. :r.tv s :s.vv . sr.sa - i-astsiatiatt- i i-rt:
:s.vv
:s.vt
:s.vi
:s.va
:s. tt
:s.ts
:s.tr
:s.ts
:s.t:
:s. t-
:s.tv
:s.tt
:s.ti
:s. ta
:s. it
:s. is
:s. ir
:s. is
:s. i :
:s. i-
:s. iv
:s. i t
:s. i i
:s. i a
:s. at
:s.as
:s.ar
:s. as
:s.a:
:s.a-
:s.av
:s.at
:s.ai
:s.aa
:r. tt
:r.ts
:r.tr
:r.ts
:r.t:
:r.t-
:r.tv
:r.tt
:r.ti
:r.ta
:r.st
:r.
:r.sr
:r.
:r.s:
:r.s-
:r.sv
:r.st
:r.si
:r.sa
ia:tt:sr
a
i t s
i
t s
t s s:
t iv s:
t t- s:
t ts s:
t is s:
t it s:
t it s:
v it s:t
v i r s:t
t ti s:
v va s:t
s -s stt
: :i stt
: vs stt
:
vv stt
: -s stt
: -t stt
- ts s:tt
r vt sttss
s -i sattss
r -i s:attts
s vs ttss
r vt s:attss
: vs sttss
:
v: sttss
r vt s:ttssi
s vt sttssi
r v: ssttssi
s vi sstssi
: vi ,sssi
: v- ,sssi
: vs ,sssi
: vs ,ssi .
s t- ,:ssi .
s vi ,:ssi .
s vs ,usi .
s -a :ssi .
s
'
:: :ssi .
r :a ,:ssi :t
r ,:ssi .t
s ts ,:ss.t
: tr ,:s.t
s t: ,:s.s
v it ,:.
i s .
i r .
i - .
i v .
i t .
i t .
i i .
:sats.--: ---ti .-ss.-t-: ---ti .-.-- --,i .:-- :-se-t.-t :--
:-i :.,-s-.-e-t t-.e-
:-;,- ,-: s-.-e-t t-w -t :--:i :,-t :-i:s,- it. s. . ti ,-:.t-.---w.
182 M 101
10-30 Mcro: Te open is 11 ticks lower than the
close on 10-29, and immediate responsive buying
comes into the market at these perceived low
prices, forming a responsive buying exreme. Note
that the opening is only three ticks off the low. Z
period moves a bit higer than the preious day's
close as the initial balance sets up. A, B, and C
periods move successively higher, sigaling that
the other timefame buyer is active at these
prices. Contnuaton is indicated. The market
then builds value on the hig end of the previous
day's value area, closes in the upper third of the
day's range, and settles the week near the top of
the week's range -prce movng higher through
time.
10-30 Mcr: By structure alone (ignoring how
it unfolded over tme), this day's profle resembles
10-20. However, instead of falling and bouncing
back as it did then, this market fnds buying
imbalance almost from the opening. For four days
in a row the buying range exensions have been
sigifcatly more pronounced and directional
than the selling range exensions. Tis is a market
that does not offer the seller any time with which
to wait for the market to break, unless the sale is
positioned at price far above value. Because this
market is so dramatically ibalanced, it can be
eected to move directionally.
DECISION-MNG 183
ttuisssi.st - ss.w0 :--:satss-t-:---ti .-
:s itsr i v. t:. ttss. i a a st.n s ss. tt .sr.t- - wttst-st t-ssi ss:
i :/v:/st
ss. tt a a
ss.ts a a
ss.tt i t t
ss. ts i s t
ss.ts s - :t .
ss. t- s s :t .
ss.ts s i i :t .
ss.tt s is :t .
ss.ti - it t .
l| ||

|| |'
ss. ir r ss sst .t
ss. is t -i sst .t
ss. i s t w s:attst .t
ss. i- t -t sttst .t
ss. iv t ss sttst .t
ss. it i: sttsst .t
ss. i i s -t sttsst
ss. ia s st sttsss
ss.:t s si s:atss
ss.:s s ts sts
ss. ar s ti ssatss
ss. :s s ta sstss
ss. :s - ts ssts
ss. a- - tt ssts
ss. av s sst
ss.:t t sa ss
ss.:i t t- ss
ss.a: t is ss
sr.w t s M
sr.ts i - s
sr.tr i

s
sr.ts i - s
sr.ts i s s
sr.t- t s Z
sr.tv t s Z
sr.tt t i a Z
st.ti t s Z
sr.ta t t Z
sr.st t i- Z
sr. i it :
st.sr i ia :
sr. i t :
st.ss i s :
sr. i t :
sr.sv i - :
sr.st t t y
st.si t s y
sr.sa t i i y
. f
sr.n i is a
sr. rs i s ,
sr.n i s ,
sr.r- i i ,
Weky B O
We of I0~30~87

J 8
W

W
W
W
:sat ss--: ---t i .-sss-t-:---t i .-s----,i.:--w:-se-t.-t :--
:-i:s,-s-.-e-tt-s+
:--. ,-:s-s-e-t t-s+-t :-- :i :,-t :-i :s,- it. s. . ti ,-:.t-.---w.
184 M 101
11-02 Mcro: Not surprisingy, the market
opens higer. Te inital balance is especially
quiet, beckoning for other tlmefae buyers or
sellers to come into the market. Because higher
prices have not attracted sellers recently, a buying
directonal tpe day can be eected fom such a
quiet (non-holiday) opening. Te other tmefame
buyers quickly move in and push the market in a
one tmefame mode up. In their doing so, Z forms
an initatng buying ereme. Tis stong buying
actvt persists to H period when sellers come in
to form a responsive selling eeme. Te rest of
the day's trade hovers at the top end of the range.
Tis day can be considered a trend day.
11-02 Macr: Note that in terms of the size of
the range ad the velocit of range eension, this
ted day is not as strong as 10-23, 27, 28 or the
selling trend day on 10-21. Tis presents some
cause for concern. Te market may need to chop
and vacillate as other tmefame buyers regroup
and gather strength. It is the mday in a row of a
defned buying imbalance, pointng towards the
assumpton that the market may be in store for a
correcton, on the basis of a) lack of strengh in
this day b) the fact that markets need to either
corect or rest afer such a move (except in a blow
of clima, which this day's weaker stucture does
not indicate), and c) the fact that weak early
stong late is the bull market pattern, both on the
day and the week. Strengh early in the week
could set up for pull-back.
DECISION-MNG 185
ttuissst.st - ss.w0 :--:satss-t-:---ti .-
as ttsris.ta. aats. ss.-a s ss.st .ss.sa - tsxw t-est
ss.st
ss.si
ss.sa
ss.
ss. n
ss.rr
ss.rs
ss. n
ss. r-
ss. n
ss.rt
ts.rt
ts.ra
ts.st
ss.
ts.sr
ss.
ts.ss
ss.u
ss.ss
ss.st
ss.st
ts.
ss. st
ss. ss
ss.sr
ss. ss
ss. ss
ss.s-
ss.ss
ss.st
ss.st
ss.sa
ss.-t
ss.-s
ts.-t
ss.-s
ts.-s
ts.--
ss.-s
ss.-t
ss.-t
ts.-a
ss.st
ss.ss
ss.st
ss.ss
ss.ss
ts.s-
ss.ss
ss.st
ss.st
ss.sa
t i/at/st
a
t s
t t s
t tt s
t- s
tv s
t 0 st
t t st
- 0 tst .
s vv ttsst .
s vs ttsst .
t s- ttsst.t
t
ttsst .s
t vt ttsst .t
s ttsst .
t vt ttst .
v tt tts
v m tts
v tt tts
s t t tts
t s ts
t s ts
t 0 t
0 t
t s at
t s at
t t at
t s at
s t t
s tt t
s ts t
- t- st
s tt s
s ta s
v t- s
v tt s
v -- s
- -s ss
- tt ss
- tt ss
v ts s
t s
t v W
t t ,s
t tt ,s
t tt ,s
t ts ,s
s ts
s tt w
t t t y
t s :
s :
v Z
:satss-t-:---ti .-M ss-t-:---ti .-s----,i .:--w:-se-t.-t :--
:-i:s,-s-s-e-t t-s+
:- ,-:s-s-e-tt-w-t :--:i :,-t:-i:s,-tt. s. . ti ,-:.t-.--.
186 M 101
11-03 Mcro: Te day opens much higer than
the close of the previous session and the inital
balance is a bit larger, but it is still relatively qUiet.
Given the previous session's less than robust
ted day up, we conclude that this sigcatly
higher opening presents an opportunit for the
tader probing the short side of the maket. B
perod eends the inital balance dow as the
other tmefame seller acts responsively, as can be
exected, reactng by selling price above the pre
vious session's value. Ts strong sellng activit
contnues through E period in a one timeframe
mode. E period probes through the previous ses
sion's low by 3 ticks and bounces, forming a buy
ing exreme. Tis market moves too far and too
fast (70 ticks fom hig to low) which promotes
responsive other tmeframe buying to come in.
Te market moves higher and closes near the pre
vious day's close.
11-03 Mcro: Based on the breadth of the
recent move, market-generated informaton
would sugest that this day seres the same pur
pose as 10-20, namely to shake weak longs of of a
stong bull trend. We are not surprised at the fact
that sellers dominate at this time, given the some
what lackuster buying imbalance of the preious
session. Note that counter trend pullbacks are
ofen more frious and directional than the pri
mar trend. Having shaken out weak longs, the
market is stll strong, it wl need to work higer.
Due to the leel of other tmeframe activit on this
ver big day, the market may need to rest.
DECISION-MNG
187
ttuisssi.st - ss.w0 :--:satss-t-:---ti .-
as itsris. it.stss.st ss.w s st.= .ss.tr - isats i itt-e-sr
i i/as/sr
st.= a a
st.at - ir
st.aa -
ss.w r st

ss.ts s si :ss
ss.t- r s- y

ss.tt - ts
ss. s t :s
ss. t s s
ss. - si s:
ss. - ts s:
ss.st - is s:s
ss.sa - tt :s
ss.n - ti :s
ss.rs - st :s
ss.r- - sa :s
ss.n s sa :ts
ss.ra s si :ts
ss. t :tssi
ss. i a ss :tssi
ss.u i i si tssi
ss.st i i sr ttsi
ss.sa is ttsi.
ss.ss i- ts attsi .s
ss.ss i t atts.t
ss. s- t -i att.t
ss.st r -s att.
ss.sa r -a att.
ss.-s - st at
ss.-s - ss at
ss.-- - it at
ss.-t s r at
ss.-a - ta at
ss.ss - x at
ss.ss s is at
ss.s- t ia t
ss.st t s t
ss.sa t it t
ss.ts t it t
:satss-t-:---t i .-M ss-t-: ---ti .-s-- --,i .:--w:-w-t.-t :--
:-i:s,-s-s-e-tt-se-
:-,-,-:s-s-e-t t-w-t :--:i :,-t:-i :s,-it. s. . ti ,-:.t-.--.
188
MS 101
11-0 Mcro: Opeing higher, the maket moves
higer ad the lower in forming a wide inital
baance. A period probes lower, forming a buying
eeme as B moves higher than A. The
market facilitates trade the rest of the day in the
inital balance area. Mter I period forms a selling
ereme of two ticks, the day trades and then set
tes in the hig end of value.
11-0 Mcro: Exeriencing two seling days in a
row, a weaker market should have eended the
selling reaction frther, forcing price lower. A
endless ebb and fow between buyers and sellers,
the market exhibits a strong bounce during this
and the previous trading session. This bounce
indicates that selling dominance may be about
exended. If so, the market is set to move higher. A
lower opening should be a buying opportunit.
DECISION -MG 189
ttsai sssisa.st ss.w-- :--:sat ss---: ---ti .-
as i tsr iv. ta. ai ss.ss ss. n s ss.tt . ss.-s - i i-tts i assv t-visrst
i i/a-/sr
ss.tt a a
ss.ti i i i
ss.ta i t i
ss.st t r ,i
ss. t is ,i
ss.sr t is ,
r
i
i
t ss. s i t
ss.ss - it ,:it
ss. s sa ,:i .t
ss. s ts ,:i.s
ss.st r ts ,::si .t
ss.si s si ,:asi .
ss. s ss ,:asi.
ss. s -t ,::si.
ss.rs s ss ,:asi .
ss.n s st ,::si .
ss.rs s ss :asi.
ss.n r w :atsi .
ss.r- s s- :atsi
ss.n - ta :asi
ss.rt s is :as
ss.ri s is :ats
ss.ra s ir :atss
ss.st s is :atss
ss. s t- :atss
ss.sr s ss :stss
ss. r -a :s:tss
ss.ss s si :s:atss
ss.o r si :s:ats
ss.sv r ss :s:ats
ss.st s sr :ss:ats
ss.si s x :ss:ats
ss. s ss :ss:ats
ss.st s -i :ss:s
ss.ss s ss :ss:
ss.sr s ss ss:
ss.ss t tr ss
ss.ss t is ss
ss.s- t ia ss
ss.sv t s ss
ss.st t s ss
ss.si t it ss
ss.sa t it ss
ss.-t t t ss
ss.-s i s s
ss.-r i s s
ss.-s i s s
ss.-s i t s
:satss---:---t i .-sss---: ---t i .-s-- --,i .:--w:-se--.-t :--
:-i:s,-s-.-e-t t--
:-,- ,-:s-s-e -t t---t :--:i :,-t :-i:s,- it. s. . ti ,-:.t-.---w.
190 MS 101
11-05 Mcro: Again, the market opens higer.
Tis day has a much quieter inital balance than
on 1 1-04, hnting that any imbalance may force
the market directonally in a sustained maner.
Te other tmeframe buyer is quiet until the C
period when the range is extended up fve ticks.
Each higher half hour has a broader range which
indicates facilitation of trade at higher prices. This
strong actvit continues throug F period, which
forms a responsive selling etreme. Te activit
for the rest of the day is i the top half of the day's
range.
11-05 Mcro: By the close of this day, the mar
ket has moved signifcantly from last week's set
tlement and has a 200 point high-low range on the
week. Strong buying emerges on this day, which,
combined with a defned responsive selling
ereme, raises the chance of a selling reaction
developing. Clearly, the long-term bull market
marches on, though the market may need to rest
and regroup for some tme. Tomorrow' s session
can be exected to close in top quarter to one-ffh
of the week's hig/low range.
DECISION-MNG
191
tmisssi.st ss.w0 :--:satss-t-:---ti .-
:sitsr is.ta:aist.st a st. i r s.ts . st. as - irtsutts s-t t tt
i i/as/sr
sa. ts a a
sa.t- t t t
.tt t t t
. ta t - t
. ts t tv t
. is t t t t
. t- t t- t
. t t t N t
sa. ia t ts t
sa.as t va t
. t ti t
. a- - t i tsi
.at s tt tsi
.aa r ta ttsi
st.ts t % ttssi
st.ts ta sr ttssi
st.t- i t n ttssi .
st.tt i i ttssi .
st.ta it i ts ttssi .
st. t st tssi .t
st. i a ss tss.t
st. i a sr tss.t
st.st t v- tss.t
st. s ts ts.s
st.n - tt ts
st.rs - t t ts
st.r- s is :ts
st.n s is ats
st.ra s t- ats
st. - va at
st. - at
st.o - st at
st.st - ts at
st.sa - ia at
st.ss - is at
st.ss v ta at
st.s- t ts a
st.st t s a
st.sa t i a
st.-s t ts a
st.-s t s a
st.-- t s a
st.-t - s
st.-a - i s
st.ss - is
st.ss - t-
st.s- t it c
st.st s i- :c
st.va - ti ::
st.ts s v- :s:
st.ts s tr :s:
st.t- s rs :s:
st.tt r -s :ss:
st.ta t -v ,:ss:
st. is r -v

s
st. t s s sv :s
st. i- s ss s
st. it s vs ,:s
st. ia - tt y
st.as v s w
:sats.--:---t i .-sss--: ---t i .-s----,i .:--w:-se-t.-t :--
:-i:s,-s-.-e-tt-.e-
:-,- ,-:s-.-e-t t-w -t :--:i :,-t:-i :s,- it. s. . ti ,-:.t-.---w.
192 MS 101
11-06 Mcro: Te day opens about at the pre
vious day's close. and the initial balance is wde.
Te low is near the low of previous day's high dis
tibuton. A early initiating buying exteme is
formed in Z period. Other ttmefame buying
actvit comes into the market in B period and in C
period forms a responsive selling extreme. Te
market facilitates trade in a two timefame mode
for the rest of the day and closes in the middle of
the day's range.
11-06 Mcr: A pronounced buying imbalance
persists. which. given the breadth of the recent
move. would be eected on the last trading ses
sion of only a ver strong market. Tis is a con
tnuation day up. given the character of the day
within the context of the week. Note that we do not
close on the absolute high of the day and week.
DECISION-MNG 1 93
ttsaisssi.st - ss.w0 :--:satss---:---t i .-
asitsris.ta.atst. a st. ssa. i s . st.sa -isasts i i itt-svs
i i/as/sr
sa. is a a
sa. ir t t :
sa. is i - :
sa. is i s :
sa. i- i r :
sa. is s t t
sa. it s is t
sa. i i s ta t
sa. i a - tt st
. - i s st
. as - i a st
sa.ar - is st
sa.as - ta st
sa.as - N st
.a- - ti st
. as s ts st.
. at s v sti .
sa.ai s sti .
.aa s ss sti .
st.w s m sti .
st.w s st sti .
st.tr s 4 sti .
st.ts s -t stsi .t
st.ts s st stsi .t
st.t- s si stsi .t
st.n r ss s:tsi .t
st.tt s % s:ttsi .t
st.ti r st stssi .t
st.ta r ss sttss.t
st.st s tr stss.t
st. s tr sttsss
st.sr s a tss
st. s sa ttss
st.ss s sa tts
st. s i t tts
st.ss s is tts
st.st s ti tts
st.si 4 ts tt
st.sa 4 m tt
st. 4 m tt
st.n s ir ,ust
st.n - i- ,sst
st.rs s t i ,ust
st.n s r ,ust
st.r- s s ,u
st.n s i i ,u
st.n s is
w
st.ri t tt M
.

.
st. t is u
st.ss s ts
w
st.o t ts M
.
t

st.si t s Z
st.sa i i Z
Weekly Bz Car
Week of II~06~87
J 5 0
W

WW
W

bW
:satss---:---t i .-M ss-t-:---t i .-s----,i.:--w :-w-t.-t:--
:-i:s,-s-s-e-tt-s+
:- ,-:s-s-e-tt-w-t:--:i :,-t:-i :s,-it. s. . ti ,-:.t-.--.
194 M 101
11-09 Mcro: Te market opens higer. Te i
tal balance deelops a good -sied rage and is
violated on the downside in A period by a single
tck. Tis shows that the other timefame seller is
not wl g to sell the market at these prices. Te
singe print A is a sig of the inabilit to follow
trough. Pseen before, a range eension of only
a singe tick W ofen send a maket i the
opposie direction. The other tefame buyer
comes in, causing imbalance. In C period, the
market scores a buying range eension as the
market is of to actve, one timeframe actvit. As
G period eends upward, sellers alert to these
hig prices respond. and G forms a responsive
selg ereme. Te market facilitates trade i
these higer regions for the rest of the day.
11-09 Mcr: Note the strong early imbalance.
Te market opens three ticks off the low, and the
dramatc singe print TPOs lef from 6018-22
again indicate the geat degee of agressive buy
ing. Also note that responsive sellig is aga
apparent. but its estence at higher prices is
exected and not an indication of weakess.
Again, we should be war of strengh eary i a
week, as noted on 11-02.
DECISION-MNG
195
ttsaisssisa.st ss.w0 :--:sats.---:---t i .-
:s itsr is. it.-ssa.ss sa.at ssa. s- .st.w - i i a- tsss ias t-tsr
sa.s-
sa.ss
sa.st
sa.si
sa.sa
sa.-t
sa.-s
sa.-r
sa.-s
sa.-s
sa.--
sa.-s
sa.-t
sa.-i
sa.-a
sa.st
sa.ss
sa.sr
sa.ss
sa.ss
sa.s-
sa.ss
sa.st
sa.si
sa.sa
sa.tt
sa.ts
sa.tr
sa.ts
sa. ts
sa.t-
sa.ts
sa.tt
sa.ti
sa.ta
sa. it
sa. is
sa. i r
sa. is
sa. is
sa. i-
sa. is
sa. it
sa. i i
sa. ia
sa.at
sa.as
sa.ar
sa.as
sa.as
sa. a-
sa.as
sa.at
sa.ai
sa.aa
st.w
i i/at/sr
a
i s s
i s s
i s s
i t s
i t s
t r ts
- it ttss
s ts ttssi
s ts ttssi
s sr ttssi
s -t ttssi
s x ttssi
s st ttssi .
s -s ttssi .
s
x ttsi .
s si ttsi .
s ts ttsi.t
- i s ti .t
s is :ti .t
s ti :ti .t
s ti :.s
t
tt :.
t
ta :.
t it :.
s i s .
s ti .
s ts .
s is .
t
s
t r :a
t s
i s :
i s :
i s :
i s :
i i a :
t is ::
t i s ::
s ti :s:
s m :s:
s tr :s:
s ts :s:
s ti :s:
s it :s:
s ts ,:ss:
s st ,:ss:
- sr ,:ss
- s- ,:ss
- sa ,:ss
s sa ,as
s ts as
s ts ass
s i t ,as
s s as
i t
:sats.---: ---ti .-sss---:---t i .-s----,i .:--w:-w--.-t :--
:-i:.,-s-.-e-tt-.e-
:-,- ,-:s-.-e-t t-w -t :-- :i :,-t:-i :.,-it. s . ti ,-:.t-.---w.
196
M 101
11-10 Mcr: Te market opens sharply higher
wth an average sied initial balance, compaed to
the previous session. Other tlmefame activit
does not start until C period when selling comes
into the market. Te longs b to stop this but
these are ftle attempts as shorts move the mar
ket dow until G perod. Responsive buying fnally
comes in G period, forming a ver weak responsive
buying eeme. The close does not indicate any
stong buying on the part of the other timefame
partcipant as tade remains in the bottom half of
the day's range.
11-10 Mcro: Some pre-opening consideratons:
Give the rally of the last fve sessions, plus the
strength early in the week -a cautionar condi
ton late in a bull -the direction of the range
etension on this day should be heavily weigted.
A range etension up signals that other tlmefame
buyers remain committed and dominant, while a
range etension dow sigals that the market has
moved too far, too fast, and needs to rest. As the
day unfolds, sigals of weakness abound. No
longe are quieter, higher, but non-facilitating
openings used as opportunities to buy. Te higer
opening sell-off shows that sellers are attracted at
higher prices. Te range eension down displays
agessiveness and velocit at signifcantly lower
prices. Te range eension leaves more single
print TOs than the buying range extension of
11-09. This is a ver big day in terms of high-low
range -and i is a selling day. Clearly, the early in
the week turnaround scenario is apparent. Note
the relatvely strong close, showing a two-sided
market. A lower low, and a higer hig, know as
an "outside day," with more trade faciltation, is
quite negatve to any short-term bull.
DECISION-MNG
197
tmisssi.st ss.w :--:sat s.-t-:---ti .-
as i tsr iv. it.sr . ta a sa. ri ssa.ss .st. n - insts itst-issi sst
i i:i/sr
sa. i s :
sa.st s ir :s
sa.sa s
u:
sa.rs s rs :s:
sa. rs r w us:
sa. r- s :ss:
sa.rt s us:
sa. t st aus:
sa. r si ,:s:
sa. r st ,:s:
sa.u s ss ,:s
sa.st s ti ,;s
.sa s ta

sa.ss -
. ss - i-

sa.s- t s
.st t s :
sa.sa i s :
sa.-s t r :
sa.-s t s :
sa.-- s s :t
sa.-t t s t
sa.-a s tr at
sa.ss r -s tt
sa.vs s st att
sa.v- r -s tt
sa.vt s ss att
sa.va s st tt
sa.ts - s at
sa.ts s ia at
sa.t- - ss at
sa.tt - at
sa. ta s -r at.s
sa. is r -- at.t
sa. is s
s- ats.t
. i- t
ss ats.t
sa. it s ss ats.
sa. ia r ta atsi .
sa.as s i i si .
.as - i t i .
sa. a- r st asi.
sa.at s t- si .
sa.aa s is asi .
st.ts s is si
st. ts s asi
:t.t- - -t si
:t.tt s -s ssi
st.ta s ss ssi
st. s -t ssi
:t. s ts ssi
st. - -i ss
st.st - -r ss
st.sa - ir ss
st. n i s s
st.rs i t s
:satss---:---t i .-ss.---: ---t i .-.-- --,i.:--w:-w-t.-t :--
:-i:s,-s-.-e-t t-.+
:-;,- ,-:s-.-e-t t-w--t :--:i:,-t :-i :s,- it. s. . ti ,-:.t-.---w.
198
MS 101
11-11 Mcro: A early entr selling imbalance is
immediately apparent, and the day starts with a
selling initial balance of a good sie. The other
timeframe sellers again extend the range in A
period, causing single print TPO's; strong selling
actvity continues in B period. The market offers
no bounce in Z, A or B period, yet another sig of
weakess. D period makes the last range eten
sion down, forming a responsive buying etreme.
The rest of day builds value around the low end of
the day's range.
11-11 Mcro: Note the imbalance on this day,
the fact that values were lower and that the mar
ket facilitated trade. The initiating selling etreme
is more pronounced than the responsive buying
extreme. The market ties the previous session's
low and displays little bounce. Te market condi
tion remains weak; a pronounced rally in value
over the next several sessions should not be
expected, but rather unchanged or lower prices.
DECISION-MNG 199
ttuisssi.st ss.w0 :--:satss-t-:---ti .-
:s i tsriv.ta. i tst. a sa. ta s sa. ti .st. ts - t--tsn-i t-s
i i/i i /sr
sa.ti a a
sa.ta i r a
sa. it i s ,
sa. is i t ,
. ir i 0 ,
. is i s ,
sa. is i s ,
sa. i- i s ,
sa. is t s
sa. i t i s :
. i i i s :
sa. ia i i :
. at t Z
sa. t tt Z
. ar t m Z
. as t tt Z
sa.as t i- Z
sa.a- t s Z
sa.as i it s
sa.at i
is s
sa. ai i is s
.aa i
it s
st.w t s M
st.ts t s M
st.tr t - ss
st.ts t s ss
st.ts s s ssr
st.t- s is ssr
st.ts

- ta ssi .
st.tt s ts ss:si .
st.ti str ss:si .
st. s sr s:ssi .
st.st s -s s:si .
st. s ss s:ssi .
st.sr t sa s::tssi.t
st. ia t- sttssi.t
st.ss ia sr sttssi .t
st. s u sttsit
st.sv s u sttsis
st.st s ss satti
st.si - tr s:tt
st.sa - ti satt
st. t i i :t
st.n i s 0
st.n i s 0
st. rs i i 0
:sat ss---: ---t i .-sss-t-:---ti .-s----,i .:--w:-se-t.-t :--
:-i:s,-s-s-e-t t-se-
:-,- ,-:s-s-e -t t-w -t :-- :i:,-t:-i:s,-it. s. . ti ,-:.t-.--.
200
MS 101
11-12 Mcr: Tis day opens lower and for the
second day in a row displays sigifcant initiating
selling which develops early. A huge initial bal
ance is formed as the market falls out of bed.
Other tmefrae buyers shut of the initial selling
actvit around the 59.00 level forming a buying
exteme in F period. The market moves into a two
timeframe mode the rest of the day. facilitating
trade i ver large swings.
11-12 Mcro: Te increased facilitation of trade.
coming as it does with lower value. a strong selling
extreme and selling range etension. does not
come as a surprise given the degree of initiating
selling imbalance seen during the previous ses
sion. Tis was an active day. so one can expect a
rest day to follow. but based on the pOints men
tioned in the previous sentence (in order of impor
tance) sellers remain the dominant other time
frame group at this juncture.
DECISION-MNG 201
ttuisssi.stat - ss.w0 :--:satss-t-:---t i .-
as itsr iv. ta. asst.va st.n s st.st .st.at - irts ts iasisat-i ieut
i i/it/sr
st.st a a
st.sa t ia ,
st.rs t s ,
st.rs t s ,
st.r- t r

st.n t ia
st.ra t is ,
st. t i- ,
st. i - ,
st.u i i ,
st.st a a
st.sa s s

st.ss t i i
st.ss t ia t
st.s- - ti
t
t
st.st s ta
st.sa r t- ,:at
st.-s s tr ,:at
st.-s s -a ,:at
st.-- t ,::at
st.-t i a n - ,::at
st.-a i a st ,::at
st.vs _ s -i ,:t
st.vs i t sa ,:s:tt.
st.v- iv ts ,:s:tt.
st.vt i r n ,:s:tts.t
st.va is u ,:s:tts.s
st.ts is sa ,:ssts.t
st.ts is ss ,:ssts.t
st. t- iv tt ,:ssts.
st.tt is i iv :sstssi .
st.ta ir i st ,:sstssi .
st.is is i it :sstssi .
st. is is ts :sstssi .
st. i- is i as :sstssi
st. it i i -r :sstsi
st. ia s tv sts
st.as - vs st
st. - is st
st.a- t s t
st.at i i t
:satss-t-:---ti .-sss-t-: ---ti .-s----,i.:--w:-se-t.-t :-s
:-i:s,-s-s-e-tt-se-
:-,- ,-:s-s-e-tt-se--t :-- :i :,-t:-i :s,- it. s. . ti ,-:.t-.--.
202 M 101
11-13 Mcr: Te open is sligtly lower and Z
period forms an initatng buying ereme and
then wraps around Y period. Other timefame
buying contnues in A period. Buying range eten
sions are seen in C ad E periods with value
slowly workng its way higher in a dual auction.
Note the non-facilitation of trade that follows this
day dominated by the other timefame-motivated
buyng imbalance. Also note that the rally merely
doubles the range produced during Y -Z, a weak
range exension both in absolute size and as a
percentage of Similarly small initial balance
ranges seen on recent selling days such as 11-10
and 11-11.
11-13 Mcro: Te day is a qUiet, end of the week
session with defned buying which, while signif
cant relative to the day's small range, does not go
far in dissipating the selling imbalance seen
recently. Note that this week is strong early and
corrects late in the week -a strong sign for a bull
market showing maturing tendencies. On the
other hand, the market did not test the lows of the
previous week at 5827. A sharply higher opening
on the next session could expect to receive respon
sive selling. But given the longer term trend and
the relatively attractive levels within that trend, it
would also be attractive to buy a sharply lower
opening.
DECISION -MNG
203
ttuisssi.stat ss.w--:--:sats.---:---ti .-
as itsr iv. ta. i ast.x st. ta s st.-- .st. ar - t-rts-viai t-istrts
i i;ivsr
st.-- a
st.-v t s tt
st.-t v i- tt.
st.-i vi r tt.
st.-a v ts tt.
st.vt - vv tt.t
st.vs - vs tt.t
st.vr s vs tts.t
st.x s sa ttsi.t
st.vs s -s ttsi .t
st.v- r vs :ttsi .s
st.vv s va :ttssi .t
st.vt s ti tss.
st.vi r ti ttss.
st.va s vs tss.
st.tt s ts sss
st.ts s tt sss
st. tr s vi ss:as
st.ts s vs sss
st.ts s vs :sss
st. t- s vi :ss
st.tv s vt :ss
.
st. ta s vr :ssa
st. it - m ,:ss
st. i s - m ,:sa
st. ir - ts yB
st. is v tv ,:s
st. is v ta ,:s
st. i- v is ,:s
st. iv t ir ,:
st. it t iv y
st. i i t ia ,:
st. ia t i i
st.at i s :
st.as i t :
st. ar i i :
Weekly Bar Cart
Week ot II~I3~87
|J
5 0
W
W

:sat s.---:---t i .-sss---:---t i .-.----,i .:--w:-.e--.-t :--

:-i :s,-s-.-e-tt-.+
:-,- ,-:s-s-e-tt-w-t:--:i :,-t:-i :.,-it. s. . ti ,-:.t-.---w.
20 MS 101
11-16 Mcro: Te singe tick range exension
rule fais here. Nonetheless, two early indicators of
stength that might have preented the shorter
term traders from selling were a) te fact tat
price was sharply lower than Fiday's session,
advertisig for buying and nearing the support of
te 5827 level, and b) the early buying imbalance
evident by the tme A and then B eended, at
which poit it was clear that the market opened
only fve tcks above the then-low price. Te initial
balance indicates buying actvit as Z period
waps around Y to the upside leaving a buying
eeme. A, B, and C periods almang new highs
indicate more other timeframe buying. E and F
periods move higher still with F leavg a large
selling extreme. Te other timefame sellers take
these prices to heart and drive the market back to
where most of the buying begns. Te day closes in
the middle of the range, indicating no true wnner
between the other timeframe buyer and seller.
11-16 Mcro: Tis day presents a prime exa
ple of the market movng too far too fast, mag
the situaton fair in the short term. At these
sharply lower prices, buyers are able to enter at
advantageous prices while sellers are seerely dis
advantaged. Another point illustrated on this day
is that the market-generated reference pOints
referred to throughout te text not only provide
current information regarding imbalance, but. as
in the case of a week's high and low, can offer
price areas providing exected support and resis
tance. Tis day's opening comes down near to the
lows made on 11-03, where the market had
encountered responsive buying which then
developed into strong initiatg buying activit.
DECISION-MNG
205
ttsaisssi.st - ss.w0 :--:satss-t-:---ti .-
as itsr iv. it. ssss. ss ss.-a s ss. .ss.vs - i i nts its-at-tx
ss.
ss.sr
ss.
ss.ss
ss.
ss.sv
ss.st
ss.si
ss.sa
ss.
ss. n
ss.n
ss. rs
ss.rs
ss. r-
ss. n
ss.rt
ss. ri
ss. ra
ss.st
ss.
ss.sr
ss.
ss.ss
ss. u
ss. sv
ss.st
ss.si
ss. sa
ss. st
ss.ss
ss.sr
ss.ss
ss.ss
ss.s-
ss. sv
ss.st
ss.si
ss.sa
ss.-t
ss.-s
ss.-r
ss.-s
ss.-s
ss.--
ss.-v
ss.-t
ss.-i
ss.-a
ss.vt
ss.vs
ss.vr
ss.vs
ss.vs
i i/is/sr
a
i s t
i s t
i i i t
i i t t
i t t
i s t
i s t
i t t
i s t
i i a t
v iv tss
v it tss
v tt tss
s m ttssi
s -i ttssi
s vv ttssi
- it tssi
- it tssi
- i- tssi
v i t tsi
v s tsi
v v tsi
t - ti
t - ti
v s :ti
v s :ti
- iv s:ti
- is s:ti
- is s:ti
v a s:t
- tt s:ti
s tv s:ti .t
s tt s:ti .s
s ts s:ti .t
s -t s:ti .t
s % s:ti .
r si ssti .
s st :ss:ati .
s st :ss:ati .
t sv ,:ssti .
s ss ,:ss:ai .
r ss ,:ssi
s st ,:ss:a
s -t ,:ss:a
- ts ,:sa
- tt ,:sa
v t-

t t- :
i is ,
i i- ,
i s ,
a
i i ,
:satss---:---t i .-sss-t-:---t i .-s----,i .:--w:--t.-t :--
:-i:s,-s-s-e-tt-se-
:-;,- ,-: s-s-e -tt-w-t :--:i :,-t:-i :s,- it. s. . ti ,-:.t-.--.
206 MS 101
11-17 Mcr: Te market opens a half point
higher, nullg the importance of the previous
day's sharply lower opening by making 11-16 an
ecess day. The initial balance is normal sized and
A period takes out the top of the initial balance by
one tck. The market facilitates trade within the
initial balance the rest of the day except during E
period, which extends the initial balance down
ward by 3 ticks. However, other timeframe buyers
quickly come in to form a buying etreme.
11-17 Mcro: A quiet, non-facilitating session
which moves the market away from support: there
is little else to deduce from this day's activit. Note
the A period range extension failure which then
tests the low end in E. The market is resting and
can now sustain a move. The question is whether
buying or selling will dominate early in the next
session. While a rally off of support portends for
bullishness, we need to see strength early in the
net session. We need to keep in mind that in a
bull market, where price is moving higher over
time, low prices early in the week bode well for
continuaton up. So far, this is eactly what is
shaping up during this week.
DECISION-MNG
207
ttuisssi.st - ss.w0 :--:tss-t-:---ti .-
asitsriv.ta.aist. tv st.ar s st.tr . st. a- - rts nsv t-vta-vr
i i;isr
st.tr a
st.ts i - s
st.ts v i t m
st. t- s ta ,:s.t
st. tv

r vr ,:ss.s
st.tt t-s ,:ssas.t
st.ti t sa ,:ss.t
st. ta t ri ,:ssass.
st. it t ,:ssass.
st. is it w ,:sstssi .
st. i r it ,:sstssi .
st. i s i t ri ,:sstssi .
st. is
'
i i st- ,:ss:atsi .
st. i- s -i s:tsi
st. iv r -t w:tsi
st. i t r vt w:tsi
st. i i s vi w:ts
st. ia s ts :ts
.
t
st. ar t i i
st.as i v t
st.as i v t
st.= i t t
:tss-t-:---ti .-sss-t-:---ti .-s---i .:--w:-s+-t.-t :--
:-i :s,-s-s-e-tt-w
:- ,-:s-s-e:t t-w:t:--:i :,-t:-i :s,- it. s. . ti ,-:.t-.--.
208 M 101
11-18 Mcro: Te opening is sligtly lower with
another normal sied initial balance. The frst sign
of other tmeframe activit is in A period. Buyers
push the market upward through B period, but
selling enters in C period and the market tests the
lows of the initial balance. At this point, we might
eect another rest day. Failing new lows, other
tmeframe buyers then take control for good and
easily move the market higher. There is no sig of
selling untl G period forms a responsive selling
eeme. Te market trades in the top third of the
range the rest of the day. Te day structure is a
double distribution trend day.
11-18 Macro: Te lower opening (which is more
attractive to buyers than sellers), the C down
probe failure, and the strong D period move up al
spell strength and signal the renewed up auction.
Te abundance of singe print TPOs (5921-35) also
shows big anous other tmeframe buying.
Because the market has rested, it can be assumed
that the bull market underway will continue.
DECISION-MNG 209
ttsaisssisa.st ss.w0 :--:satss---:---t i .-
asitsris.ta. asst.-r st. a- s st. .ss.ts - it-rts saittt-sr-si
st.
st.u
st.st
st.sa
st.ss
st.ss
st.s-
st.st
st.sa
st.-s
st.-s
st.--
st.-t
st.-a
st.ss
st.ss
st.s-
st.st
st.sa
st.ts
st.ts
st.t-
st.tt
st.ta
st. i s
st. i s
st. i-
st. it
st. ia
st.as
st.as
st.a-
st.at
st.aa
ss.ts
ss.ts
i i:is/sr
a
t i i s
t is s
t a s
s sr ss
s -s ssi
r st tssi
i a ss tssi .
i t w ttssi .t
i- i is ttssi .t
it ttssi .s
s si ttss.
- st tt
- si tt
- t- tt
- is tt
t - t
i t t
i i t
t s at
t s a
t s a
t tt a
s ti s:
- is s:
- ts sa
- ti sa
s -i ss:
r -s :ss:
t ss :ss
i a ts :s
t -t :s:a
s -i <a
s -t y
s ss
<a
s i s <:
:satss---:---t i .-sss-t-:---t i .-s----,i.:--w:-s+-t.-t :--
:-i:s,-s-s-e-tt-s+
:-- ,-:s-s-e-tt-w-t :--:i :,-t :-i:s,- it. s. . ti ,-:.t-.---w.
210
MS 101
11-19 Mcro: Opening higher, the market is
pushed lower by initatng sellers. D period forms
a large initating buying ereme as other tme
fame buyers defend their positions of yesterday.
Te rest of the day's trade moves into the middle of
the range where i trades in a two tmefame
mode.
11-19 Mcro: A smaller version of 10-20, this
day's break and subsequent bounce display pre
sumably nerous longs who are being shaken out
of the market and strong other tlmefame buying.
Note that the market again fnds buyers and
bounces when probing the low of the previous
da's higer distribution. One sligtly negatve
sig is the fact that the opening is only three ticks
off the high, meaning that buyers are not willing to
initate at substantially higer prices two days in a
row. Perhaps this tempers the bullish eecta
tions mentioned in the last line of 11-18' s macro
analysis.
DECISION-MNG 21 1
tmi sssi.st ss.w--:--:satss---: ---t i .-
asitsris. ta. isst.u st. r- s st. rr . st.ss - t-s ts n-s t-wi -is
i i/it/sr
st. rr a a
st. rs t i r y
st.rs t ti
st. r- t a :
st.n t ss y
st. rt t ts y
st.ri t - ,:
st. ra i s :
st.st s ia u:
st. - i r :ss:
st.sr sts :ss:tt
st. r st :ss:tts
st.ss r -s :ss:tts
st.u s ss:ttsis
st.ss s u ss:ttsit
st.st ia st ss:ttssi .t
st.si ia ri ss:ttssi .t
st.sa i a ss ss:ttssi.t
st. st t si ss:ttssi .
st.ss s si ss:ttsi .
st.sr r -a ss:tsi.
st. ss - ti s:t.
st.ss s is :t.
st. s- s ia t
st. ss s is t
st.st s is t
st.si s
s t
st.sa t s at
st.-t i - a
st.-s i
s a
st.-r i
i- a
st.-s i i- a
st.-s i is a
st.-- i is a
st.-s i ia a
st.-t i i i a
st.-i i i i a
st.-a i s a
st.st i s a
st.ss i i a
:satss---:---ti .-sss---:---ti .-s-- --,i.:--w:---.-t :--
:-i :s,-s-s-e-tt-s+
:-- ,-:s-s-e -t t-w-t :--:i :,-t :-i :s,-it. s. . ti,-:.t-.--.
212 M 101
11-20 Mcro: Tis day opens higher wth a
larger than normal sized initial balace. Initiating
buyng comes into the market early as other tlme
fame buyers move A period ten tcks above the
inital balance. Te buying dries up, however, and
B period can only match the top that A has put in.
(Above 6030, this is not surprising gven the lack
of iitating buyers fom the previous session,
more than 50 points lower. ) Sellers, motivated by
price above value, take control of the market with
a vengeance for the net 2 1/2 hours. Te panic
selling does not stop until hitting the even num
ber, 5900, where responsive buyers come in to
rotate the market back up (as they did in the pre
vious session) forming a 16 tick buying ereme.
Buyers then push the market back to a bit above
the middle of the range and the market closes
where the selers originally took control. Clearly, a
strugle has taken place on this day.
11-20 Mcro: A big, volatile day at the end of
another big, volatile week with 200 pOints fom
low to high. Because of the volatile nature of this
last day, many weaker bulls are losing confdence
in the strength of the market. The paradox of a
market nearing a climax phase - a phase tat
can last for weeks - is that the more dramatic
ascent is usually preceded by an extremely vol
atile shag out period. Viewed with this perspec
tive in mind, this market still provides the maket
generated guideposts necessar to eect con
tinuation. Also, note that prices went fom low to
high this week, as eected in a bull market. Te
market also settles on the top quarter of the
week's low-high range, another plus for longer
term continuation. This market can still be traded
fom the long side.
DECISION-MG
213
ttsaisssi.st - ss.w0 :--:satss---: ---ti .-
as itsris.ta. -rst.ss st. ts ssa.st .st. aa - itss ts tti trt-sstisit
i i/ta/sr
'
sa.t- i t n s
sa.ti it i-s ,:ss
sa. is it iss ,:ss
sa. i s i i n ,:s:
sa. it t n ,s:
sa.at s -s ,s:
sa.as s sa <
.as s ir <
sa.aa s it <
st.tr s s
st.t- s i i :.
st.ti r ta :a.
st. i t -t :a.t
st.ss it ts :a.t
st.st i i n :a.s
st.rt i i ss :a.t
st.rs t -- at.
st. n t ss at.
st. ra s ta at.
st.sr r ts ti .
st.u t ss ti .
st.si t tr tti
st.ss i i ts ttsi
st.ss it rt ttsi
st.st i i st ttsi
st.-t s ts ts
st.-s - r ts
st.-s s -r ts
st.-a t ts tss
st.sr r ir tss
st.s- s ta ss
st.si s s ss
st.ts s i- ss
st. ts s -t ss
st.tt s sa ss
st. it s ts ss
st. is s ia s
st. is s is s
st. ia s i- s
st.ar s is s
st.a- s i i s
st.ai t s s
Weekly Br Car
Week ot II~20~87

`
5
WW
W
W
W

MW
W
W

bW
:sats.--:---ti .-ss.---: ---ti .-.-- --,i.:---e :-.e.--.-t :--
:-i :.,-s-.-e-t t-.e-
:-- ,-: s-.-e -t t-.e--t :--:i :,-t :-i :.,- its. s. . ti ,-:.t-.---w.
214 MS 101
11-23 Mcro: This day opens higher with a nor
mal sized initial balance. Other timeframe buyers
initially come in the market and extend the range
up by two ticks. but fail to move Hfurther. As often
happens. sellers come in quickly in B period to
offset this original exension up with their own
range extension down. There is no great
imbalance during the rest of the day as the market
is two timeframe.
11-23 Macro: A consolidation. or "rest" day. the
market is higher. but not facilitating trade. Expect
lower prices. but also epect responsive buying
imbalance (as seen lately) at those lower prices.
DECISION-MNG
215
ttuisssi.st - ss.w0 :--:satss---:---ti .-
:sitsriv. it.svsa. a- a sa. i i ssa. is .st.tt - ru ts0 t--isttt
i i/ts/sr
. is a a
sa. i s t s u
sa. i- t it u
. is s sr ,:ssa
. i t s :i at
||
. a: s -t ,:s:ttss
.= t ::- ,:s:ttsss
. as t :s s:ttsst
sa.at s ss :s:ttsst
.ai t % :s:tssi .t
. aa r -i s:ssi .t
:t.w s s:ssi .
:t.ts s t: s:ssi.
:t.tr s sa s:ssi .
st.w : ts s:si .
:t. t it si
:t.w t i t si
:t.n t - si
:t.w i i i
:satss---:---t i .-sss---:---t i .-s---i.:--w:-s+--.-t :--
:-i:s,-s-s-e-tt-s+
:- ,-:s-s-e-tt--t :--:i :,-t:-i :s,- it. s. . ti ,-:.t-.--.
216 MS 101
11-24 Mcro: Opening sharply lower. the initial
baance has a larger range than normal. most
likely eliminating the possibilit of a trend day or a
large directional move early. Other timeframe
sellers drive the market seven ticks lower in E and
F periods. Other tlmeframe buyers launch an
attack fom there. initialy forming a responsive
buying extreme and taking the market much
higer. almost to the levels of the previous day.
Note that the activit of 11-23 and 11-24 is con
tained wt the range of 11-20 where other tme
fame partcipants seem to be in a big skirmish.
The highs of 11-20. which are the prices which
found good responsive selling. are this bull mar
ket's net reference point.
11-24 Mcro: Te range extensions show much
more velocit to the upside. This imbalace is
caused by agressiveness on the part of the
buyers. which. combined with the neutral day
structre which closes strongly. indicates
strength.
DECISION -MNG
217
ttuisssi.st - ss.w0 :--:satss---: ---ti .-
:s itsr iv. ta. aast. ast.-t s st. .st.va - i itats t- ni vt
st.
st.ss
st.
st. sv
st.st
st.si
st.sa
st.
st. rs
st.rr
st.rs
st. n
st.r-
st. n
st.rt
st.ri
st. ra
st.st
st.
st.sr
st.
st.ss
st.u
st.sv
st.st
st.si
st.sa
st.st
st.ss
st.sr
st.ss
st.ss
st.s-
st. sv
st.st
st.si
st.sa
st.-t
st.-s
st.-r
st.-s
st.-s
st.--
st.-v
st.-t
st.-i
st.-a
st.vt
st.vs
st.vr
st.vs
st.vs
st.x
st.vv
st.vt
st.vi
st.va
i i/t-/sr
a s
i t t
i r t
i s t
t - .t
t - .t
t - .t
i t .
i r .
t s i .
t - i .
t r i .
t i t i .
t is i.
t is i .
t tt i .
t t- i .
t i - i .
t i t i .
v r :i .
v s :si
v iv :si
v i t :si
s t- :sssi
s m ussi
s ss :sssi
s sv :sssi
- si uss
- sa :sss
s -a ,ss
s tr ,ssss
s ts ,asss
s tt ,ass
r ts ,asss
s vt ss
s -t ss
s ss ts
s tss
s sv mts
s ts mts
- is <ts
- i r wts
- is ts
- iv ts
- iv ts
- ir ts
- i v ts
- ts
- i i ts
- tt ts
v ti ts
v a tts
t ti tt
t iv tt
i r t
4 f
t f
:sat ss---:---ti . -sss-t-:---ti .-s---i.:--w:-w-ts-t :--
:-i:s,-s-s-e-tt-s+
:- ,-:s-s-e-tt-w-t:--:i :,-t:-i:s,-iw. s. . ti,-:st-s-~.
218 M 101
11-25 Mcr: Te market opens a bit higer and
develops a large initial balance. Te frst sig of
other tmeframe activit comes in C period, where
sellers move the market down three ticks below
the initial balance. Other tmeframe buyers come
in at this point and rotate the market up and over
the inital balance in D and E periods. Note that
while both buying and selling range eensions fail
to provide follow-through, buying shows a bit
more velocit. Te market moves into a two
tmefae aucton the rest of the day. Again, the
battle between the other timefame seler and
buyer is still being contested.
11-25 Mcro: We see a tendenc (in the last two
days) for the other tefame seller to come in
early to exend the range below the initial balance
by a few ticks, only to be followed by the other
tmeframe buyer, who moves the market much
higher. In fact, both 11-24 and 11-25 see strong
initiatng actvit on the buy side. We contnue to
look to the highs of the previous week, at 6038,
and exect to see them at least tested due to the
contnuaton of higer values.
DECISION-MNG 219
ttui sssi.st - ss.w0 :--:satss-t-:---ti .-
asitsris.ta. aast. n st.ts s sa.ta .st. - atsrsss sstin
. ta
sa. it
. is
. i r
sa. is
sa. i s
. i-
. is
. i t
. i i
. ia
.
. as
sa. ar

.
sa.as
. =
. as
. at
.ai
.aa
st.w
st.ts
st.tr
st.w
st.ts
st.t-
st.n
st.tt
st.ti
st.
st.st
i i/ts/sr
a
i s t
i - t
i s t
i s t
i s t
at
0 at
v ir ::t
l t

s tr ,:tt
r ts ,:tts
r st ,:tts
0 M ,:sattss
0 vi ,:sattss
s x ,:ssss
s % wssassi
t st ,:ssssi
t -r ,:ss:assi
s ss ssi
s si ,:s:ssi .
t -s :ssi .t
r -t ,s:si .t
s -i ,s:i .t
s sr ,s:i .s
s ti ,:.
i r
i s :
i i :
:satss--:---t i .-sss-t-: ---t i .-s-- --,i.:---e:-se-t.-t :--
:-i:s,-s-s-e-tt-s+
:-,- ,-:s-s-e-t t-w :t :-- :i :,-t:-i :s,-it. s. . ti ,-:.t-.---w.
220 M 101
11-27 Mcro: A holiday market. this day is
marked by a higer opening (above 6038) ad an
eemely quiet inital balance. seen in the last
few days. other tmefame selers move the market
below the inital balance. and then the other tme
fame buyers come in the market ad propel it
upwad. Tis end of the week session is also above
te range of 11-20 and is marked by (what for a
holiday market must be considered relatvely
stong initating buying which settles near the
day's higs. Nerous shorts are covering while
longs are displaying confdence. either staying
long or adding on.
11-27 Mcr: Opening above our reference
point. the market breaks down early to test the
support at the old highs. We attribute the lack of
tade facilitaton to holiday markets. The range
extension move to the upside. plus the fact that
the market closed well on the day and the week.
bodes well for contnuaton. Note that agan. for
yet another week. prices move highe over tme.
DECISION-MNG 221
tmtssst.st ss.w0 :--:satss-t-:---ti .-
as i tsr is. it.sssa.u a .-r ssa.ra .sa.sr - ssrtsstt- si
i i:tr:sr
sa. a a
.st a a
. i t t
. sr i t
. v : t.t
. ss - i r tt .t
.u - tr tt .s
0. - Z tt .t
.st s ta tt .
.si s i s tt .
. s is tt .
. st s i s tt .
.ss s i i tt .
. sr v Z ts.
. ss v d ts.
. ss - iv tst.
. s- - i- tsst
.ss - ir tsst
.st s i: ,tst
.si - ti ts
.sa - sa ,ts
W. l
.-r s x stts
sa.-s s ts ,sst
.-s r sa st
.-- s st ust
.-s s Z sst
.-t - i t ss
.-i s i a s
sa.-a t i i
.st t i t
.x t s
.sr i
Weekly Br Car
Week ot II~27~87

5 0
W
W
W
W

WW
W
W

bW
:tss-t-:---t i .-sss-t-: ---t i .-s----,i .:--w:-w-t.-t :--
:-i:s,-s-tt-s+
:- ,-:s-t t-w-t :--:i :,-t:-i :s,-it. s. . ti ,-:.t-.---w.
222 MS 101
11-3 Mcro: Te market opens 50 pOints
higher and establishes an initial balance which
indicates some proft-taking by longs. Te single
tck failure in A per0d is followed by other time
fame buyers probing. moving the market higher
in D perod, where they are met with other tme
fame selers who rapidly move the market lower.
extending price below the initial balance by a good
margin. Te other timeframe buyers then coun
teract ths move. creating a defned buying
eeme. Te trade is then contained in the middle
of the range for the duration of the session.
11-3 Macro: A imbalanced profle. reminis
cent of 10-20. the market's bounce occurring in F
shows interested other timeframe buying. always
a welcome sig for continued bullishness. but not
suffCient to sustain such a move. Tis day shows
the bullish information of higher values in a larger
value area. but also shows bearishness when
comparing the velocity of the range extension
down versus the range etenSion up. Again. the
bulls who stayed long throug the weekend are
rewarded and should conSider taking profts. Te
big move made early in the week is diffcult to sus
tain and is usualy followed by some pull-back.
DECISION-MNG 223
tmisssi.st ss.w0 :--:sat ss-t-:---t i .-
as itsr is.ta.tt si .a a si .ts ssi .ss .sa.ts - t--tstass t-tnsn
i i/sa/sr
si .ss a a
si .s- i - a
si .ss t s at
si .st t i- at
si .si t is at
si .sa s is

t
t
. l t
si . tr s x ,:t
si . ts s _ ,:st
si . ts s st :ssts
si . t- t s- ,:ssts.
si . ts i a ,:ssts.s
si . tt i i rs ,:ss:atss.t
si . ti i i ss ,us:atss.t
si .ta i i ,us:tssi .t
si . i t i i n ,:ss:tssi .t
si . i s i a ss :ss:tssi.t
si . ir t si usttssi .
si . is t st :ssttssi .
si . is r ts sttssi .
si . i- - is tsi .
si . i s s i s ti .
si . i t s is ti .
si . i i s tt ti .
si . i a s is ti .
si . s s ti .
si . as t r ti
si .ar i r t
si .as i s t
si . as i s t
si .= i s t
si . as i s t
si .at i s t
si . ai i r t
si . aa i - t
.w i s t
.ts i i t
:sat ss-t-:---ti .-sss-t-:---t i .-s----,i .:--w:-w-ts:t :--
:-i :s,-s-s-e-tt-se-
:-;,- ,-:s-s-e -t t-w -t :-- :i :,-t :-i :s,-it. s. . ti,-:ste--.
224 MS 101
12-01 Mcro: The day begins a bit lower. and the
initial balance rallies upward. The other time
fame buyers move in during D period in thin
December trade. exending beyond the initial bal
ance. Price moves far enoug. fast enough so that
other timeframe sellers enter. leaving a small sell
ing ereme and rotating the market past the
other side of the initia balance. The market
breaks late -not a welcome sign for the bulls.
12-01: Mcro: Te market rallies to a natural
stopping place. and closes in the low end of the
range. a sign of weakness. Another sign comes
from the fact that the initial move up by the other
tmeframe buyers is neutralized by sellers later in
the day. Buying imbaance may have ebbed for the
time being. As we saw before. this late session
tpe of activit coming from a neutral day struc
ture may portend a continuation move in that
direction (as we saw on 11-24 and 11-27) . Inter
estngly. the market was contained by the price of
6150.
DECISION -MNG 225
ttsaisssi.st - ss.w0 :--:satss-t-:---ti .-
:sas iv. ta.a-si . is asi . iv s si . sa .si . ar - ttrts t- iti
i t/ai :sr
si . sa a a
si .-t i i a
si .-s i - a
si .-r i s a
si .-s t v at
si .-s s r :tt
si .-- t r at
si .-s i - t
si .-t t v tt
si .-i v - :tt
si .-a t - tt
si .vt i t t
si .vs v - :tt
si .vr v s :ts
si .vs t - :t
si .vs v s :ts
si .x t t :s
si .vv t - :s
si .vt t s :s
si .vi i s :
si .va - s :a
si .tt - r :s
si . ts - r :s
si . tr s s ,:s:s
si . ts s ia :ss
si . ts s it ,ss.
si . t- r ir ,sss.
si . tv r ia ,sss.
si .tt r iv ,sss.
si .ti s i- ,sss.
si . ta s tt ,ss:s.
si . i t s ir ,sssi .
si . is r it assi .t
si . i r s iv assi .
si . is s iv asi .t
si . is s i i si .t
si . i- v s it
si . iv - - s
si . i t i i i
si . i i i t i
si . i a t s si
si . a a
si . as a a
si . ar i i
:satss-t-:---t i .-sss-t-:---t i .-s-- --,i .:--w:-se-t.-t:--
:-i:s,-s-s-e-t t-s+
:-,- ,-:s-s-e-t t-w--t :--:i :,-t:-i :s,- it. s. . ti ,-:.t-.--.
226 MS 101
12-02 Mcro: Te opening sees price at the hig
end of the previous day's value. It is also marked
by a small-to-normal sied initial balance. Other
tmeframe buyers rally the market in D period,
but for the second day in a row, buyers do not
dominate the day's actvit. The remainder of the
day only gets wt three ticks of this hig (in E
period), thus forming a selling exeme. Other
tmefame sellers again rotate the market back
down. Te day closes in the bottom thrd of its
range in what migt be termed sloppy price action
in a thin market.
12-02 Mcro: With a lower low, a lower high,
and the fact that two timefame activit has
become common in the last few days, another cor
recton can be eected.
DECISION-MNG 227
ttuisssi.st W% 0 :--:satss-t-:---ti.-
asW is. it.-t si . it a si .tr ssi .sr .si . = - tsrtssssv i i i ivr
it/at/sr
si .sr a a
si .ss i s a
si .ss i t a
si .x i - a
si . sv t v at
si .st i t a
si .si a a
si .sa t t at
si . tt i t t
si . ts v -
t
. .
i

si . ts - i s t
si . t- s is
W
si . tv s is ,:sstt
si . tt s s ,:ss
1
CI

si . it s i a us:tt
si . is s is us:tssi
si . i r s ia u:ti
si . is s s :ss:ts
si . is s s :s:ti
si . i - v r :si
si . is v s ssi
si . it s r ssi .s
si . i i s i t ss.
si . ia s i- ssi.t
si . at s it ssi.t
si . as s r s.t
si . ar - s si.t
si . as t s .t
si .as t - .t
si .= t t i .
:sat ss-t-:---ti .-sss-t-:---t i .-s----,i.:--w:-s+-t.-t :--
:-i :s,-s-s-e-tt-se-
:- ,-:s-s-e -tt-w-t :-- :i:,-t:-i :s,-i t. s. . ti,-:st-s---w.
228 M 101
12-03 Mcr: Te day opens higer but quicky
moves lower in thin but agessive selling display
ing agessiveness. Te other timefame seler is
responding to price above and then in value, as
has been the case for several days. Te market
falls away, forming a large, ealy ent tpe of sell
ing eeme, indicatng that the hig should be in
for the day. Te trade is then confned to the lower
1/3 to 1/2 of ths inital balance.
12-03 Mcro: Te higher opening received
responsive, agessive selling that took te mar
ket below the previous session low, below te 6100
level (note the disparit of trades takng place at
that price versus the comparatively small amount
of tme during which the price traded) , to new lows
on the week, and dow to the high of 11-27. Te
pronounced imbalance wth greater trade facilita
ton at lower values indicates that the correction is
not over. Support can be eected at the lows of
the previous week, at 5930.
DECISION -MNG 229
ttsaisssi.st ss.w0 :--:satss-t-:---ti .-
:sas is.ta.-t sa.si si .ss ssi .-t .. - sn tssasi t-inir-
i t/as/sr
si .-t a a
si .-a t s ,
si .ss t t

si .ss t t
si .s- t i i
r
si .st s s
si .sa t s ,
si .ts t s
si . ts i i
r
si . t- t s ,:
si . tt i i
r
si . ta t s
si . is i i :
si . is t t :
si . i- a a
si . i t a a
si . ia i t :
si .as a a
si . as t t :
si . a- i t :
si .at s r :s
'. ts
sa.ts r i i :ssts
sa.t- _ia t- :ss:ts
sa.tt is t- :ss::tssi
sa.ta is -t :ssttssi
sa. is sr :ss:attssi
sa. i- t- :ss::ttssi
sa. is ts :ss::ttsit
sa.st t is ui.t
sa. sa i t t- :sati .s
sa.rs t i- :sti .t
sa. rs - i- :s.
sa.r- s is :s.
sa.rt s s s.
sa. ra t t :.
:satss-t-:---ti .-sss-t-:---t i .-s----,i .:--w:-s+-t.-t :--
:-i :s,-s-s-e-tt-s+
:-,- ,-:s-s-e-t t-w -t :-- :i :,-t:-i:s,- it. s. . ti ,-:.t-.---w.
230 M 101
12-04 Mcr: Te open is higher with a much
smaller inital balance than the previous session.
A period breaks throug the initial balance to the
down side, which is the eected continuaton of
recent responsive selling activit. Te other time
fame seller contols the market until H period,
which moves dow in a one timeframe manner.
Only in the last three time periods is any buying
actvit present. Te buying ereme is minimal
and the market settles in the bottom third of te
day.
12-04 Macro: Te higher opening was a price
above value in a market that had recently seen
aggessive responsive and initating selling. Te A
period single print selling range eension was the
frst such high velocit move since the buying
range etension on 11-18, which was much
stronger. Unable to continue at this level of
activit, this day may be some sort of selling cli
max. On the other hand, the fact that the market
made new lows on the week, particularly on Fri
day, does not indicate tremendous strength to the
fainthearted bull. Only the bull market clima
paradox (see macro analysis, 11-20), plus the fact
tat the market didn't close on the low of the day
(and week) indicates some tentativeness on the
part of bears to remain confdently short. While
price didn't move higher over time, the market
remains comfortably above the preious week's
lows. For the following week, this day's lows wl
provide some semblance of support.
DECISION -MG 231
ttuisssi.st - ss.w--:--:satss-t-:---ti .-
asaviv. ta.av sa. sr a si . i a ssi . is .sa.vi - -satsi isrit-intu
si . i-
si . it
si . ia
si . as
si . as
si .=
si . at
si .aa
sa.ts
sa.ts
sa.t-
sa. tt
sa.ta
sa.
sa.
sa.
sa.st
sa.sa
sa. n
sa. rs
sa.r-
sa.rt
sa.ra
sa.
sa.
sa.u
sa.st
sa.sa
sa.ss
sa.ss
sa.s-
sa.st
sa.sa
sa.-s
sa.-s
sa.--
sa.-t
sa.-a
sa.vs
sa.vs
.v-
sa.vt
it/=/sr
i i ,
- is
- is S
i i :
t - u
s s u

t v
t - s
t - s
t t ss
- s ss
v r ss
v - ss
s i i ss:
v - ss
s it ss:
- t ss:
s it ss:
- - ss:
s
|
t ss:t
- s :t
- s :a
s tt tt
s ta att
s ir att
s ir atts
i a tt attst
i i t- atts.s
ia ta ats.t
s i s ts.
s i- ts.
- t s.
s r ss.
r i i ssi .
s a ssi .
s ta ssi
s is ssi
s it ssi
v i i s i
i v s
Heekg Bz Oazt
Km of I2~04~87
0W
W
W
W
W

0
M

WW
W
W

:satss-t-:---t i .-sss-t-:---ti . -s----,i .:--w:-s+-t.-t :--

:-i:s-s-s-e-tt-s+
:- ,-:s-s-e-t t-w -t :-- :i :,-t:-i :s,-it. s. . ti ,-:.t-.---w.
232 M 101
12-07 Mcro: Opening near the previous week's
setlement, the market has a fairly wide inital bal
ance. Other tmeframe selling comes in durg C
perod and the rest of the day follows a downward
bias wth the day closing near its lows, and below
that week's lows. A buying ereme is formed in J
perod.
12-07 Mcro: Te only signifcantly bullish
aspect of this day's activit as it relates to the
longe term involves the fact that the market
dipped slightly below the lows of the previous
week -spending less than a single half hour
below this ke support -and then closed above
them. If the patter of weakess early in the week
with strengh and a strong settlement late in the
week comes to pass, the possibilit of an outside
week is raised, a ver bullish structure this late in
the move. With this scenario, which presumes
that the preious session was a clima sell-off, the
market would be eected to bring a sharply
higher move over the comng seSSions. If so, the
ne major reference point will be the preious
week's highs, 6149. Above them, the market can
resume perhaps the fastest ascent of the move,
due to the maturit of the market.
DECISION-MNG 233
ttuisssi.st - ss.w0 :--:satss-t-:---t i .-
as is.ta. i rsa.sr sa.sa s. .. ts - 0 tssasi t-ttrstv
i tarsr
. ra a
.st t v ,:
. t v ,:
.sr t s ,:
. t s ,:
. ss t is
w
w
s . u v is
. v r ,:s
. st v is ,:s
sa.si s ts

sa.sa s ts :sst
. st s ta
sa
s

t
. ss s ts

satt . sr s n
. ss s vt ,as:at
sa.ss r sv ,zstt
sa.ss s st ,ztt
. ss s ts ,ztt
. st s is tt
. si s is tt
. sa s ti ts
sa.-t s ta - ts
.-s s is ts
sa.-r s is :tss
.ss s i r tss
sa.-s v is tss
sa.-- s is tss
sa.-s s i s tss
.st t ia ss
.si s r ssi
.-a s t ssi
.st t ia si
. t is si
.sr v ir sis
. x s is si .t
.ss v it i .t
sa.x v s i .t
.ss t s .t
.st t iv .t
.si t ir .t
.sa i i s .
sa.tt i i t .
. i i .
:satss-t-:---t i .-sss-t-:---t i .-s----,i.:--w:-w-t.-t :--
:-i:s,-s-s-e-tt-s+
:- ,-:s-s-e-tt-w-t :--:i:,-t:-i:s,- it. s. . ti ,-:.t-.---w.
234 M 101
12-08 Mcro: Tis day opens higer, tading
where value has been deeloped during the pre
vious session. Te other tmeframe activt is ini
tally dow but not vociferously so, and is soon
rejeted by a singe print in D period. Te majorit
of tansactons occur around the inital balance.
H period follows E period's move up throug the
opening price. Trade stays above or near the open
ing price for the remainder of the session and
closes wel.
12-08 Mcro: While not a broad facilitation of
tade day, the market did build higer vaues. Te
quietess in the market is occuring due to a trade
balance report to be released two days hence.
Because of this, te fact tat the market is higer
but quieter is discounted somewhat.
DECISION -MNG 235
ttuisssisa.st - ss.w0 :--:satss-t-:---ti .-
:sawi v. it.sssa. sa. ssa.st .sa.ss - ssi ts ss-i t-virin
it/as/sr
sa.st a a
sa.si t r si
sa.sa v ir sis
sa. v i- si t
sa. n v r si t
sa.rr - r si .t
sa. rs v i t si .
sa. n v ta si .
sa.r- v ta si .
sa. n v ti si .
sa. n v ta si .
sa.ri v is si .
sa.ra v ti ts.
sa.st v ta - ts.
. - is s.
.sr s it ,satss
sa. r n ,ssatss
.ss ia w ,:ssttss
sa.u t sr ,:ss::tts
sa.sv s ,:ss:ats
sa.st s -a s::ts
sa.si s ti :ss:at
sa.sa - ta :s:a
sa.st t iv
sa.ss t s
sa.sr t s
. ss i v 0
:sat ss-t-:---ti .-sss-t-:---ti . -s----,i .:--w:-se-t.-t :--
:-i:s,-s-s-e-t t-se-
:-,- ,-: s-s-e -t t-s+-t :--:i :,-t :-i :s,- it. s. . ti ,-:.t-.---w.
236 M 101
12-09 Mcr: Another higer opening is wit
nessed, again with a ver small initial balance.
Te market probes downward in B period as the
other tlefame sellers become active. Scoring
lower drives, the sellers hold control until F
period, where a buying ereme is formed. Finally,
other tefame buyers push the market back up
to the inital balance, before seting i in the mid
dle of the day's range. Overall, this day has a ver
small rage and is quiet.
12-09 Mcr: An even qUieter day, albeit with
higer values. Market-generated informaton
indicates some bullishness from the fact that par
tcipants are "eeing up" prior to the report -
usual behavior in a market where both buyers
and sellers ext their positons, decreasig open
interest. A market eeriencing quiet but higer
values directly prior to a report can be interpreted
as a sig of strength, because the market is
indicatng that the "weak hands" are the shors,
and that longs are confdent, not caring to et
prior to the report in geat numbers -hence the
higher values. In other words, major reports are
ofen market-imposed catalysts for change, and
their estence often forces the less dominant
other tmefame group to ext. Given that move
ment in values sugests that shorts must be
covering in geater numbers than their counter
pas, we remain bullish.
DECISION-MNG
237
ttuissst.st - ss.w0 :--:satss-t-:---t i .-
asasis.ta. i-. . t-
. ts
sa.
sa.t-
sa.n
.tt
sa.ti
sa.ta
sa.
sa.
sa.sr
sa.
sa.ss
sa.
.
sa.st
sa.si
.sa
sa.
sa.n
sa.rr
sa.rs
sa.n
it/at/sr
a
i i ,
v is
s sa ,
ss
s tt ,ss
r_vi ,sss
s ss ssst
s sr stss.t
s e stss.s
r ss stss.
0 w stsst .
s tr tsst .
s sr ttsst .
5 st ttst .
- it ttt .
s i a ttt
i i- t
t i t tt
i 5 t
i t
ssa. ts .sa. n - sssts-i -i t-Z5N5
:sat ss-t-:---t i .-sss-t-: ---ti .-s----,i.:--w:-w-t.:t :--
:-i:s,-s-s-e-tt-s+
:-;,- ,-:s-s-e-t t-w :t :-- :i :,-t :-i :s,-it. s. . ti ,-:.t-.--.
238 M 101
12-10 Mcro: A point and a half inital balance
rally off of the balance of trade data marks the
day. Te self-adjusting throug over
compensation forms two large eemes on both
ends of the day's value. The day builds value
above the previous week's highs, around the mid
dle of the ver wide inital balance. The market
closes on the high end of the range, furher evi
dence of a strong market.
12-10 Mcro: Having reacted favorably to the
repor by forcing prices above the reSistance of the
preious week's hig (6149), the other tmeframe
buyer is frmly in control of this market. Having
peeked below the previous week's low and now
rallied sharply in reacton to the report, an outside
week is now apparent, a ver strong indicator -
perhaps that we're nearing the clima phase.
DECISION-MNG 239
tmtssstot sssw0 :--:satss-t-: ---ti.-
:sawiv.ta. i asi .w a.si s st.va ..ss - i-tswn t-sti
it:ia:sr
st.ts a a
st.ts a a
st.tt a a
st. it i i
r
st. is a a
st. iv a a
st. i a i v ,
st.ar a a
st. = i i ,
st.ai a a
si .ts i t ,
si . t -
r
si .tt - iv .s
si .st r ,.t
si . - ri .t
si . s vt ,tt .
.

i f
si . r- ta iss :tsst
si .ri ti irt :ttsst
si .

is i i i s:ttss
si .ss
is ix ,:st
si .st i r_ i-t ust
si .st i- ita
si .ss i t -r
si .sv -s
si .sa s -i

si .-r v tt
si .-- - it
si .-i v it
si . v - ,s
si .vs i i
r
si .vt a a
si .n i i ,
si .ts a a
si .tv i i ,
si .ta i i ,
si . i r a a
si . i- i i ,
si . i i a a
si . i i ,
si .as
a a
si .at a a
sa.w i t ,
sa.ts a a
.tv a a
sa. i i ,
sa.sr a a
. i i

sa.si i i a
.n v it
r
. n v t-
r
.rt v it ,
.st v s ,
. i t ,
:sat ss-t-:---t i .-sss-t-:---t i .-s----,i .:--w:-se-t.-t:--
:-i :s,-s-s-e-tt-w-
:-i ,-:s-e-tt-w-t :--:i :,-t:-i :s,-it. s. . ti ,-:st-s---w.
240 M 101
12-11 Mcro: Opening around the close of the
previous session, a small initial balance is formed.
Responsive other tmeframe selng is evident in
the begn g of the day, with a B period selling
range eension. Other tmeframe buyers come
into the market in this sae perod, and create a
buying ereme. Te rest of the day moves gadu
ally up in a two tmeframe mode. More buying
activit is obsered with a E period range exen
sion. Tis rest day settles in the upper third of the
day's rage.
12-11 Macro: The day builds value above the
previous session's values, and develops without a
defned sellig exreme. Te week settles toward
the high ed of this outside week's high-low range
(6028-6220), signaling the contued bull move.
DECISION-MNG 241
ttuisssi.st - ss.w0 :--:satss-t-:---ti .-
:sasss is.ta. i s st.ai a si .w
it/ii/sr
st.as a a
st.ar - r ttss
st.as s is tss
st.as - ir ttss
st.a- s t- ttsst
st.as - st ttst
st.at s tr ttssit
st.ai s ss ttssis
st.aa r sr tsi.t
si .w s sr tsi .
si .ts s -r ,stti .
si .tr s -t ,stti .
si .ts s -a ,sti .
si .ts s x ,uti .
si .t- s x - ,:sti .
si .ts : n ,:s:t
si .tt : % ;s:t
si .ti - -r u:t
si .ta s si ust
si .st - t- st
si . - is st
si .sr - t- st
si . - x st
si .ss s si s
si . s ir s
si .ss s i i s
si .st i s s
si .si i i s
s st.as .si .si - tts t-ti:sta
heeK1 B ChT
h00K 0I IZII87

lIK
l075
lX0
H

..
.
,
RE
550

..

5+00
5N5
I
N
0
:satss-t-:---ti .-sss-t-:---t i .-s-- --,i .:--w:-se-t.-t :--
:-i :s,-s-s-e-t t-w
:-;,- ,-:s-s-e-tt-w-t :--:i :,-t :-i :s,- it. s. . ti ,-:.t-.---w.
242 M 101
12-14 Mcr: Opening higer by over 25 tcks,
tis day deelops a smal initial balance. C period
breaks both sides of the initial balance, frst to the
upside and then to the downside, as other tlme
fame sellers become more dominant. C period
ralles past the opening reference point wth
velocit, but curously falls away, leavng a
defed selling extreme. D period goes dow fr
ther still, with E period continuing this weak
actvt. At these prices, other tlmefame buyers
cannot reSist coming in and movng the market
up. Tis buying actvit forms a meager buying
extreme, and the rest of the day's activit stays in
the bottom third of tis double distribution trend
day's range.
12-14 Mcr: Tis day was a curious one for the
day trader. So solid a range extension as that
which occurred up in C period usually portends
for directional continuaton. Clearly a day domi
nated by selling, this te of qUiet, double dis
tributon profle is usual in holiday markets. As
stated before. weak actvit early in the week is
not as technically damaging as that same selling
actvt late in the week, so we can presume the
bull market remains intact ut profle actvit
and a volation of last week's lows indicate other
wse. Again, this week can be expected to bring the
holiday market's low volatilit and non-facilitating
behavior, brought on by a holiday-motivated
shortage of interested other tlmefame
participants.
DECISION-MNG 243
ttsaisssi.st - ss.w0 :--:satss-t-:---ti .-
:saviv. it.ss st. as a st. ts s st.vv .si .ts - nsts% t-isi sss
it/i-/sr
st.vv a a
st.vt i it :
st.vi i it :
st.va i it :
st. tt i s :
st. ts v t :
st. tr - i-
: st.ts s vi

st.ts s s- ;us:
st.t- s st s::
st.tv s -i ,s::
st.tt s vv s
st.ti s vt s
st.ta - ta s
st. i t - is ss
st. is t it
st. ir t s
st. i s t s
st. is i - a
st. i- i i - a
st. iv i t a
st. i t i v a
st. i i i t a
st. i a i i a
st. at v v ats
st. as s ts atts.t
st.ar r -v attss.t
st. as s -r attssi .s
st.as r -v attssi .
st. a- r -s :ttssi .
st.av r -r attssi .
st.at s vt :ttsi .
st.ai s ts attsi
st.aa s tr attsi
si . v it tti
si .ts t i i ti
si .tr t s ti
si .ts i - t
si .ts i t t
:satss--: ---ti .-sss-t-:---t i .-s-- --,i .:--:-se-t. -t :--
:-i:s,-s-s-e-tt-se-
:-,- ,-: s-s-e -t t-w -t :--:i:,-t :-i :s,-it. s. . ti ,-:.t-.---w.
24 M 101
12-15 Mcro: Tis day opens higer, and has a
smalinital balance which nevertheless indicates
(y the opeing remaining the high) that selling
was evident in a non -agessive manner fom the
opening bell - all clues indicate a selling trend
day may be possible. Aer an A period test of the
higs, other tmerame selling appears in C period
as wel a i D, F, and G periods. Below the lows of
the preous seSSion, buying is fnally attracted in
G period, forming a buying exreme. The market
ralies over half way back of the day's range and
closes in the bottom third.
12-15 Mcro: Selling, as aggressive initatng
actvit, predomnates this session. Because of
the holiday market environment, we would not
eect to see as wde-ranging and volatile a ses
sion as that which occurs during the heigt of
business actvit. Holiday markets tend not to dis
play follow-through, and the average rage of a
market is relatvely small.
DECISION-MNG
245
ttsai sssi.st -ss.w0 :--:satss-t-:---t i .-
asW iv. it.ss si . a st. i - sst. is .si . n - ssttsx
st. i s
st. i-
st. iv
st. i t
st. i i
st. ia
st.at
st.as
st.ar
st.as
st.as
st.=
st.av
st.at
st.ai
st.aa
si .w
si .ts
si .tr
si .ts
si .
si .t-
si .tv
si .tt
si .ti
si .
si .st
si .
si . sr
si .
si .ss
si .
si .sv
si .st
si .si
si .sa
si .
si .rs
i t/is/sr
a
t r
t ir ,s
v ts ,u
:
- t- s:
v it :s:
v iv ::t
t s :t
v is :tt
v ir :tt
v r :tt
v i a :tt
s is ttt
s ts ttt
s x ttt
s vt ttt
- ti atti
s it attst
s ta atsi .
s it atsi .
s t- atst .
s a atssi .
s i s tssi .
s i r tsst .t
- ir ss.t
s va ssi .s
s ts ssi .t
- it ssi .
v r ssi
t s ss
t it ss
t i- ss
i r s
i r s
i s s
i i s
t-tvvs
:satss-t-:---t i .-sss-t-:---t i .-s-- --,i.:--w:-se-t.-t :--
:-i:s,-s-s-e-t t-s+
:-,- ,-:s-s-e-t t-w-t:--:i:,-t:-i :s,-it. s. . ti ,-:.t-.---w.
246
M 101
12-16 Mcro: Opening above yesterday's close,
this day has a normal to small initial balance.
Other timefame sellers issue the frst attack as
the drive the market below the initial balance in
A and again in C periods. Te low prices in C
period coa the other timeframe buyers to
accumulate, propping the market higher. This
forms a defned buying ereme in C period at
6175. Other tleframe buyers continue their
campaign upward to form buying range exen
sions in D, E, F, and J periods. The day closes two
ticks from its higs.
12-16 Mcro: The day again displays the
responsive buyer creating a two-sided market.
The market fails to fall below the prevous ses
sion's lows, and then rallies late, nearing the
highs of the session, a bullish sign. A neutral day
structre with late activit and a defned close,
this could be the start of continuation up, perhaps
the fnal, climactic phase, if the outside week sce
nario is to hold. See comments made in macro
analysis, 12-01.
DECISION -MNG
247
tmisssi.st ss.w0 :--:satss-t-:---t i .-
asW iv. it.sa st. a si .ts sst.at .si .n - sn ts-ssr t-tvv-i-
st.
st.as
st.ar
st.
st.as
st. =
st.av
st.at
st.ai
st.aa
si .
si .ts
si .tr
si .w
si .
si .w
si .n
si .w
si .ti
si .
si .st
si .
si .sr
si .
si .ss
si .
si .
si .
si .si
si .sa
si .
si . n
si .n
si .rs
si . n
it/is/sr
a
i r .
t it .t
v n t.s
- ti tt.t
v iv tt.
v r tt.
- t tts.
i .
s
vs attsi .
s -i attssi
r w attsst .
0 -a ttssi .
s ts ttst
v ir s
t is
W
v i t s
v ta y
v
- t-
r
W
t m
v n m
v ta m
v is m
t it u
v t ssa
v it ssa
- vv ss
- vt ss
v it ss:
v is ss:
t it s:
i r :
i v :
i i :
:tss-t-:---ti .-sss-t-:---t i .-s----,i.:--:-se-t.-t :--
:-i:s,-s-s-e-t t-w
:-,-:s-s-e-t t-w-t :--:i :,-t:-i:s,- it. s. . ti ,-:ste---w.
248 MS 101
12-17 Mcro: Tis day opens higer and
develops what a few weeks ago would be consid
ered a ver small, but now must be considered a
normal sized, initial balance in the context of the
holiday market conditions. Other timeframe
actvt comes into the market in D period as
buyers push the market higher forming a buying
range etension. The day then develops value in
these higher regons with more buying in the form
of range extensions in the G and K periods. Te
day closes on its high.
12-17 Mcro: Te market seems ver strong,
moving above the previous session's high in the
inital balance, range eending to make new
highs of the week - which are new highs on the
move -and then closing at the highs of the day.
While bulls would rather have seen more single
printTPOs by the end ofthe day's trade (only three
ticks between 6218-21), this is not necessarily an
indication of weakess, since the holiday climate
is the overriding factor. A previous pattern has
established the low end of the prevous day's
higher distribution (or at worst the low of the sin
gle ticks) as signifcant support, which is tested on
the next day. So long as the previous session's low
end of the higher distribution holds as support
during 12-18's session, this market should move
Signifcatly over the next several sessions. Is the
holiday market condition infuencing the market's
behavior near settlement? It could very well be
that short tlmeframe participants may be less
interested in carg inventor overnight in these
t conditons, where presumably a news or fn
damental announcement may be grossly over
reacted to due to the absence of the buffering
othe tlmefame participants.
DECISION-MNG
249
ttsaisssi.st ss.w0 :--:satss-t-:---t i .-
:saviv. it.s- st.vr a st. i- s st.vr .st. a- - nstsvs t-tiswi
i t/ir/sr
st.vr a a s
st.vs i i t
st.vs t - st
st.x v i- s.t
st.vv - tr si.t
st.vt s tr tssi .t
st.vi s t- tssi .t
st.va r vt :ttssi .
st.tt r
x :ttssi .
st.ts r -t :ttssi .
st.tr s st :ttss.
st. ts s si :ttss.
st. ts s -i :ttss.
st. t- s t- :tts.
st. tv v i- :tt
st.tt t s at
st.ti i v 0
st.ta i i 0
st. it i - 0
st. is t s y
st. ir t s y
st. is v tr y
st. is - vv :
st. i- s tv :s
st. iv s ts ,:s::
st. it s vv ,:ss:
st. i i s vv ,:ss:
st. ia s vs ,:ss:
st.at - tt :ss:
st.as v is :s:
st.ar v is u:
st.as t is ::
st. as t it :c
st.x t v ::
:satss-t-:---t i .-sss-t-: ---t i .-s----,i.:--w:-s+-t.-t :--
:-i:s,-s-s-e-t t-se-
:,- ,-:s-s-e -t t-w-t :--:i :,-t:-i :s,- it. s. . ti ,-:.t-.-.
250
M 101
12-18 Mcro: Tis day opens below the single
TPOs of 12-17, signaling a potential problem for
the bulls. Te opening hour displays a normal to
large sized holiday market initial balance. Other
tmefrae selling enters the market early, con
frming the problem for bulls, ad A period
eends downward. This selling activit continues
for the remainder of the day with only a slight
bounce up in I, J, and K periods. The market
closes i the lower one-ffh of the day's range.
12-18 Macro: Tere should be no joy in Mudville
for the bulls. Te market on this day, particularly
given the fact that His the end of a week, indicates
that the bull move either has made or is ver near
to makng a clima, and for all but the most
devout bulls, profts should be taken on the nex
raly. Te fact that a strong trend day down that
scores new lows on the week (and nearly closes on
those lows) follows strong initiating buying is
cause for major concern. Clearly, though, ths
week to week volatlit is not unprecedented. In
fact. as noted earlier, this ebb and flow behavior
on a weekly basis is characteristic of a market
near a major top. Note that between the weeks
begnning 11-02 through this one, strong closes
on the week have alternated with weak closes for
the ne week. Nevertheless, the only sig of con
tnuation is a pattern silar to that seen during
the week of 12-07: a lower low followed by a higher
high and a strong settlement during the following
week.
DECISION-MNG 251
tmi sssi.st - ss.w0 :--:satss-t-:---ti .-
asW TtTt T . . T s. T .T .T - ts T Tk
0. T
. T
. T
. T
.Tk
. T
0. T
. T T
. T
.
.
.
.W
.
0.
.
.
.T
.
T .
T .W
T .
T .W
T . W
T .k
T .W
T .
T .T
T .
T .
T .
T .
T .
T .
T .
T .
T .
T .T
T .
T .
T .
T .
T .
T .
T . k
T . J
T .
T .T
T .
T .
T .M
T .
T .
T .
T .
T .
T .
T .T
TJTJ

T ,
T
T T
T

0


T

d
T T u
u
T s
4 ss

k T ss
k 4 ss
k ss
k ss
k k ss
k k ss
k ss
a s
k T s:at
T sat
sat
xt
T sat
k T satt
T att
T att
T att
k T4 atts
Tk tts
T tts
ttss.
ttss.
ttss.t
T tss.t
tss.t
tss.t
a tss.s
k T tsi .
k T T tsi .
tsi
tsi
T tsi
Tk tsi
T tsi
T si
T si
si
T T s
Weekly Bar Cart
Week of I2~I8~87
| 5 s
0W
W
b
WW

bW
:tss-t-:---ti .-sss-t-:---ti .-s---i.:--w:-w-t.-t:--
:-i:s,-s-s-e-t t-s+
:- ,-:s-e-t t-w-t :--:i :,-t :-i :s,-TW. s. . ti ,-:.te--.
252 M 101
12-21 Mcro: Opening higer by 16 tcks. this
day has a smal inita balance. Te day is plagued
with indecision early. as is tpical of the more
thinly taded holiday markets. A period eends
the range meagerly to the downside with B prob
ing the opposite side. and so on. A small buying
exeme is formed in D period. Te remainder of
the day goes up in a one tmefame mode forming
a range exension in J period and closing on its
hig.
12-21 Mcro: Te fact that the market is not
falling away in a trend day fashion diminishes the
possibilit that the market may have topped. Also
the presence of two-sided volatilit is a welcome
sig that the market is stil in the hands of the
bulls. Tis is because the market at these levels is
stl showng the tug-of-war that is tpical of a
market puttng in a top. as opposed to the massive
liquidatng behavior exibited when a top has
been put in. In the case of the latter. the market is
ofen a one directonal. liquidatng one timefrae
break (not unlike the previous session) which
occurs for several days in a row. In contrast. this
day's structure resembles that of 12-16 and those
days alluded to in the comments made in macro
analysis. 12-01.
DECISION-MNG 253
ttxisssi.st - ss.w-- :--:satss-t-:---ti .-
as Ttt T T . T . s. .T . T - k tsT t-T
TJTJ
.
T . T .s
T . .t
T . T .
T . T .
T . T .
T .k T k .
T . s.
T . T s.
T .T T s.
T . T T s.
T .

k i .
T . k T i .
T .

T i
. - :i
T . ,:s:si
T . ,:s:ss
T . ,u:ssi
T .T ,:s:ass
T . T wsss
T . k T s
T . T sts
T . T tts
T . T att
T . T att
T .k T att
T .J at
T . T a
T .T T a
:satss-t-:---ti .-sss-t-:r--ti .-s----,i.:--w:-s+-t.-t:--
:-i:s,-s-s-e-tt-se-
:-,- ,-:s-s-e-t t-w -t :--:i:,-t:-i:s,- T. s. . ti ,-:.t-.---w.
25
M 101
12-22 Mcro: The open is lower and has a nor
mal to small initial balance. Other tlmeframe buy
ing comes into the market in C period. This con
tnues in D. F. H. and J periods. Value develops in
these higer areas.
12-22 Mcro: Again, a two timeframe rotational
market combined with a higher high is con
structive. because a liquidation top is the only
alternative. The buying imbalance is welcome.
although the low of the previous week has not
been pierced and rejected. as is needed to neutral
ize such a poor showing as that of 12-18.
DECISION-MNG 255
tmisssi.st - ss.w0 :--:satss-t-:---ti .-
as Tt Tt T . T .
.W
.
.k

.
.
.T
.
T .
T .
T .
T .
T . W
T .k
T .W
T .
T .T
T .
T .
T .
T .
T .
T .
T .
T .
T .
TJJ

l

J ||r .
T tssi .
atssi .
M attssi .t
k attssi .t
attss
T att
k T tt
T t
:t
:t


Tl
T <
T ,:ss:
k
s:
k :ss:
T M
T Z
s. W .T . - k ts% t- TkZ
:satss-t-:---t i .-sss-t-:---t i .-s----,i .:--w:--t.-t :--
:-i:s,-s-s-e-tt-w
:-,- ,-:s-s-e-tt-w-t:--:i :,-t:-i :s,- T. s. . ti ,-:.t-.---w.
256 M 101
12-23 Mcro: Te open is low enough to pierce
the low of the previous week. The initial balance
develops a larger than normal holiday market
range, and the other timeframe buying activit
carries on, creating a range etension that con
tinues through H period. Te market moves back
away fom these highs and closes on the lower end
of the upper third of the day's range.
12-23 Mcro: Note that the low of the day, in
piercing the support at the previous week's low,
fnds a buying ereme. Tis is also the second
day in a row where responsive buying has created
a signifcant buying range extension. If we do not
see selling, then the outside week scenario could
be seen again.
DECISION-MNG 257
ttxi sssi.st - ss.w0 :--:sat ss-t-:---ti .-
:s Tt Tt T . T . s T . .T . k - ts t-k
T .
T . k
T .
T .
T .T
T .
T .
T . M
T .
T .
T .
.T .
T .
T .
T .T
T .M
T .
T .
T .
T .
T .
T .k
T .
T .
T .T
T .
T . k
T .k
T .k
T .k
TJJ

T T s
si .
k T si .t
k T si .t
T tsi .t
k si .t
T tsi .t
tsi .t
tsi .s
:tsi .t
:tssi .t
n tssi .t

ttsi .
si
T attssi
,stts
,sst
,:sst
,:ss::t
k ,:ss::t
:ssat
k :ssat
:ssat
k T mt
T T m
T T :
T T :
T k :
:satss-t-:---ti .-sss-t-:---t i .-s----,i.:--w:-s+-t.-t :--
:-i:s,-s-s-e-tt-s+
:- ,-:s-s-e-t t-w-t :--:i :,-t:-i :s,- T. s. . ti ,-:.t-.---w.
258 M 101
12-24 Mcr: Opening 20 pOints higher, the
market advertises for other timeframe selling but
receives none. Z period moves higher, leaving an
initiating buying exreme which is tested in C and
again in D period. The buyers fnd confdence with
the market and proceed to rally i in a dramatic
one tlmeframe move. Te market settles near the
higs on this pre-holiday abbreviated session.
12-24 Mcro: Te strong buying that was found
in this session is signifcant. bringng the market
to levels above the previous week's hig, 6237.
The bull market resumes with this turnaround
week.
DECISION MNG 259
OM 0387
1 2/24/87
6250 HI
6249 HI
6248 HI
6247 HI
6246 HI J
6245 GH
6244 GH
6243 GH
6242 GH
6241 GH
6240 GH
6239 GH
6238 GH
6237 GH
6236 GH
6235 GH
6234 GH Weekly 8az Chazt
6233 GH Week ot I2~25~87
6232 G
6231 G
6230 G
6229 G
6228 G
W
6227 G
6226 G

M
6225 G
6224 G
0lW
6223 G
W
6222 G
6221 G
W
6220 G
6219 G
W
6218 G

,
6217 G

6216 G
621 5 G
M
6214 G

6213 FG
W
621 2 FG
621 1 EFG

W
621 0 EFG
6209 EFG
W
6208 EFG
f
6207 EFG S
6206 EFG
blW
6205 EG
k
6204 EG
6203 EG
6202 EG
6201 E
6200 E
6199 zE
6198 lADE
6197 zACDE
6196 zABCDE
6195 zABCD
6194 yzABCO
6193 yzABCO
6192 yzABCD
6191 ,:
6190
W
6189 y
618 y
6187
r
::: 198 CBOT
260 MS 101
12-28 Mcro: A early entry buying extreme -
fom an opening almost 50 pOints higher than the
settlement of 12-24 starts the day. Sharply
higher prices advertse for other tlmeframe sell
ing, but the market receives no selling response.
The initial balance is wide and made up entirely of
Y period. A period eends the initial balance on
the buy side. Tis market facilitates trade the rest
of the day; although it closes ver poorly for a
stong bull market.
12-28 Mcro: Note the intra -day back and forth
movement of this market. Tis is frenzied actvit,
particularly when taken in the context of the holi
day market conditions. Given the age of this bull
move, and the recent directonal move followed by
the zig zag tpe of activit seen on almost a weekly
baSis between buyers and sellers, clearly a cre
scendo must be near.
DECISION -MNG 261
ttxisssi.st - ss.w0 :--:satss---: ---ti .-
as Tt Ttk . . s.kT .. - ts T 4k
TJJ
.kT
.k T si
. T ssi
. T ssi
. Tk ssi
. k k xsi
. k sasi
.k

T satssi
. xtssi
. xtssi .
.T satssi .
v ,ssatss.
. kT ,ssatss.
. k ,ss:atss.
. T ,usts.
. ,ssts.
. ,:ss:ts.
.k k ,:ss:ts.
. M ,:ssts.
. k ,:stts.
.T ,:stt.
. tt.
. T k ,:tt
. T k k ,:t.
. T n ,:tt.
. T

,:t.t
. T t.t
. Tk k ,t.t
. T k T ,t.t
. T k T ,t.t
. T T T t.t
. T T t.t
. k w.t
. .t
. ,.s
.W T T
r
. T T ,
M
. T T
:satss---:---t i .-sss---: ---t i .-s----,i.:--:-se--.-t :--
:-i:s,-s-s-e-t t-s+
:-,- ,-:s-s-e-t t-w -t :-- :i :,-t:-i:s,-T. s. . ti ,-:.t-.---w.
262
M 101
12-29 Micro: Opening sharply higher again,
this market receives responsive selling during the
initial balance and afer. Te ke question which
comes to mind, given the activit of the previous
seSSion, is whether or not sellers will continue to
respond to the higer prices as expected.
Responding as such on the opening, with the
opening being only a few ticks off the day's highs,
other timeframe sellers continue to create
imbalance in the A period, extending the range
down 14 ticks and another 18 ticks in B period.
Other timeframe buyers, leaving a large buying
etreme in B period, push prices back up to the
middle of the established range. The market
builds value in this area for the remainder of the
day.
12-29 Macro: Responding to higher prices, the
other timeframe sellers are providing another
indication that the market may be ofering a cli
maxng top. The absolute top may not yet be in,
though, as indicated by the bounce the market
ehibits in B period.
DECISION-MNG 263
ttxisssi.st - ss.w0 :--:satss-t-:---ti .-
as Ttt . T .k s .k .. - ts t-T T
TJJ
.k
.k T :
. k T k :
.kk T :
.k a:
.k T
.kT T T
.k T ,:
. T ,:
.
. T
. T T
.
.k T
. Tk
. T ,
.T T ,s
. T

,
s . T T
. T tss
. k satss
. T s:atss
. s:atss
. k sts
. kT stsi .
. kk s:attsi .
.T kT s:tti .
. s:atti .t
. T s:atti .s
. T s:ati .t
. T si .t
. T ssai .t
. T ssi .t
. T k k T ssi .
. T si
. T T
. T T T
. T T T
. T T
. T T
. T Tk
. T T
. T
. T
. T
. T
.T T
. T
. T k
. T
. T T
.w T
:satss-:-:---t i .- ss-t-:---t i .-s----,i .:--w :-w-t. -t :--
:-i :s,-s-s-e-t t-se-
:- ,-:s-s-e-tt-w--t :--:i :,-t :-i:s,- T. s. . ti ,-:.t-.---w.
26 M 101
12-30 Mcro: This day opens 10 pOints lower
and develops a large initial balance. given the holi
day market conditons. Z period forms a buying
ereme of 3 ticks. The day then trades within this
initial balance. This day is relatively quiet in
nature, being the third day which developes value
in the same area.
12-30 Mcro: A consolidation or rest day. and
an opportunit for bulls to take profts.
DECISION -MNG 265
ttuisssi.st ss.w0 :--:satss-t-:---ti .-
:s Tt tk . T . T s. .. - :skk t-
TJJ
.
.
. T
T
.k T T
. tt
! i
. T M tssi .
. T t
. Tk
'
k a:ssi .t
. T k
. T T a:s.t
. T T T a.t
. T k Tk .
. k T ,.
. k T ,.
. T T ,
. T ,:
. T y
.k T :
. T :
. T T :
:satss-t-:---t i .-sss-t-: ---t i .-s----,i.:--w:-w-t.-t:--
:-i:s,-s-s-e-tt-s+
:,-. ,-:s-s-e-tt-w-t :--:i :,-t:-i :s,- T. s. . ti ,-:.t-.--.
266 M 101
12-31 Mcro: Te market opens almost 100
pOints higer, offering another opportt to take
profts. Y period immediately forms both a selling
and a buying exreme, with the selling eeme
being more pronounced. A period takes out the
seling exeme and C period creates a buying
range eension. Te day's trade is then confned
to the upper half of the day's range.
12-31 Mcro: Te market is cunating or cli
mag on a move farthe fom anyhing pre
viously seen. Higher prices are advertsing for sell
ing, but market-generated informaton from this
tme zone's slice of the market does not show that
sellers are overhelming the market, takng
profts.
DECISION-MNG 267
tmisssi.st ss.w0 :--:satss-t-:---ti .-
as Ttt T . . T s. .. - kT ts T t-kk
.
.
.k
.
.
. T
.
. T
. T
. T
. T
. T
. Tk
. T
. T
. T T
. T
.
.
.
.
.
.
.
.
.T
.
.
.
.
.
.
.k
. W
.
.T
.
.
TJTJ

T T s
T s
T s
M tsi
tsi
tss
tsi
tssi
ttssi
k ttssi
M ttss
tts
T tt
tt
T tt
k T ,sst
,ss
T ,ss
,s
t
,ss
,ss
T ,s
,ss
T ,s
T
w
T w
T ,

k




T ,
T k ,
T ,
T T ,
KeekIy Br Car
Keek ot 0I~0I~88
h
0W
W
W
b
M

W
:satss-t-:---t i .-sss-t-:---t i .-s----,i .:--w:-s+-t.-t :--
:-i :s,-s-s-e-t t-s+
:-,- ,-:s-s-e-t t-w -t :-- :i :,-t:-i :s,-T. s. . ti ,-:.t-.---w.

Chapter I7
Eolution of the Leaing
Pocess
A
s an individual gains market eerience
ad knowledge, his confdence in his abilit
to make tading decisions increases. Te
leaing cure, in other words, usualy runs
paallel to the confdence cure. A successfl
professionals in other businesses kow, the
begn g maket participant is not inspirted
overgt with a tanscendental calm and self
assurance. Rather, he fees his abilit to
confdently make decisions grows gadually,
sometmes in barely perceptible stages. With each
higer leel of condence comes a coresponding
hegtened awareness of curent market
conditons ad the gowth of a nearly instinctual
abilit to respond eediently to opportunit ad
adversit.
A Mp for the Jouey: Stae One
Te prma Sigcant obseration that the
tader must make is that price discover does not
occur randomly. It is this fndamental belief that
is the basis for any successfl trading program.
P we have mentoned tme and again in these
pages, the market, rather than being random, is
understandable and ca be orgaed in a format
that provdes meaning beond the most recently
tansacted prce. Te trader with a modicu of
269
270 M 101
eerece watching the markets wl come to
accept this theoretca basis not as a matter of
blind faith but as the operational realit being
played out in each tading session. He will see that
markets generate informaton that defnes the
degee of tade facilitaton (the purpose of the
market) and the degee of market imbalance (the
essence of al diectonal movement). Te market
wl fher display recurent patters - each a
refecton of the market's response to either
balanced or imbalanced situatons -and cerin
coresponding prototpical behaviors.
Happily, the trader's witessing this logical
market behavior serves to comfort him. Awae
that the markets have so-caled "circuit breakers"
- prtce limits which cause activit to cease -
many a novice tader, unschooled in Market Lgc,
is consumed by the fear that the market can move
to a "locked limit" position at any tme for days on
end. The trader who has obsered the markets
through the lens of a non-random market model
calmly allocates his energ toward other
concers. He kows that such dramatc moves
occur under only certan relatively infequent
conditons, most of which can be recognied
leading up to the locked-limit session.
A second and no less crucial area of the
successfl Stage One trader's modus operandi
deals with capital and traditional business
concers. A central theme of this book has been
that participaton in the fnanCial markets is a
business like any other business. Te logical
paicipant who wshes to be successfl
stctures his program around sound business
prnciples in order to grow over the long term. Yet
it is ironic and unfortunate that the fnanCia
markets, particularly those which offer a high
degee of leerage, atract many wth short-term
DECISION-MANG
271
mindsets. Te enticing myth of the fnancial
market depicts the trading foor as a place where a
little mone and some luck can be spun overnight
into a fortune. Te successfl trader's program
treats this mindset as anathema from the ver
start. The individual who positions heavily on a
single situation is bound to fail. The individual
who structures his trading program to win over a
large sample size, on the other hand, has a chance
to succeed.
Once accepting long-term objectves as a logical
imperative, most traders still lack an overall
money management game plan that afords them
staying power during the learning cure. Their
neglect of capital concerns frequently accounts for
emotional trading decisions which are based on
information having nothing to do with actual
market behavior. Most market partiCipants are
conditioned to think that when using leverage
they should be prepared to lose some or all of the
fnds placed in their accounts. A successfl
capital management and trading structure
completely opposes this defeatst epectation. Te
premise on which a sound trading/investing
philosophy is based is simply this: "Don't lose
principal. " Under this regmen capital
preseration is the primar goal of the program.
Of course, the degree to which capital
preseration is valued ahead of seeking to make
profts can be placed on a spectrum of trading
stles, fom conserative to ageSSive. Wen
results are favorable, both the agressive and
conserative trading stles proft, with the
agessive stle generating higher returns.
However, when trading results are mied, the
agessive account suffers sizable drawdowns
while the conserative account merely falls back
on the cushion of profts it has accred. Since
272 M 101
losses are an inevitable part of trading. i follows
that over a large sample sie. a conserative
approach offers a greater probabilit of sustained
success and limited exposure. by increasing the
duration of staying power when one is "out of
step" with the markets.
Certairly. trading an aggressive approach.
provided all factors fall into place. will generate
greater profts than a conserative approach.
However. a risk management policy that starts
with conserative trades and moves to an
aggressive posture as results allow also has the
potential to provide siable rewards. This concept
can best be likened to the strateg of a football
team which takes an early lead during the game.
With a few pOints on the scoreboard to cushion
against error. the team is able to comfortably
initiate riskier plays in an effort to score greater
results.
Risk management through volatilit
assessment/ diversifcation is another central
element of a logical capital management plan.
Critical to the formation of such a program is the
control of risk through proper allocation of trading
fnds. Simply put, results will be infuenced in
large part by how volatile the market is and how
much volatilit one is exposed to as a function of
the level of fnding available.
Negotiating the Terain: Stage To
When a trader reaches the second stage of
market understanding. he has achieved a working
familarit with market -generated information on
a short timefame baSis and is ready to exploit this
knowledge for longer term goals. Knowing that
markets are not random and that they at times
trend. the trader concentrates on positioning
himself in the direction of the trend that ofers the
greatest opportunit. The seasoned trader.
DECISION-MANG
273
comfortable now in using day structure
information to his advantage, can devote more
energ to seeking out longer term trends. He
kows that despite the dynamic nature of the
markets, he can only hope to succeed in a limited
number of major moves in a given year.
Nonetheless, his new primar ambition should be
to lengthen his timeframe and to feel comfortable
holding proftable trades as long as possible.
He frther becomes adept at detecting and
ealuating the "micro" information that is the
basis for identifing big markets early. He sees, for
instance, that the market moves in daily, weekly
and longer term cycles - continually vacillating
fom quiet to volatile, bull to bear, and sideways to
trending market conditions - and displays
numerous recurring patterns along the way. For
Cple, bull markets tend to open lower and
close higher more ofen tha not. The tend to
have daily lows occur within the frst hour -
wthin the frst thirt minutes more ofen than
not. Te tend to close strongly on the week and
month, settling on or near the highs at the week's
or month's end. Te seasoned trader has seen for
himself that certain day structures -a trend day
up, a normal variation day up -tend to be formed
more frequently in bull moves than in sideways
markets. And most importantly, the Stage To
trader detects imbalance in the market,
fequently by simply noting this on his Lng Term
Market Activit Chart.
Te trader now has an arsenal of analytical
tools as he sets out beyond the scope of the day
with which to identif and take advantage of the
trend. Market-generated information is used
within a larger context to avoid overemphasizing
the day's actvit at the expense of missing the
broad move. Te trader has arived at the stage
274 MS 101
where, rather than wastng energ inspecting
each and ever piece of foliage, he sees the
proverbia forest for the trees.
Te Stage Two trader now strives for a
consistent decision-makng routine which best
balances his comfort level, aggessiveness, and
abilit to read market-generated information. Te
goa is to systematically categorie each market
into one of several tpes of prototpical market
conditons, determining he is "in step" with
longer term market behavior. It is through this
orgaed approach that eactng trade location
can be enhanced and sound "trade management"
practices can be maintaned.
Trade management refers to the daily
assessment of open or possible market positions
in terms of an overall bias toward the trade.
Proper trade management dictates that market
conditions and possible scenarios should be
evaluated in each trade before the market
opening. In determining a bias toward each trade
for the day, tades can be categorized into one of
three goups: 1) problem trades, 2) trades that
pose a concer, and 3) trades that are unfolding
according to plan. As the day develops, the
challenge is to monitor the markets, looking for
signs which would a) lead to eting problem
trades, b) shi trades from categor to categor as
is warranted, and c) enter new trades (or add to
exsting okay trades) when good trade location ca
be had. When the market is unfolding as
exected, the degree of scrutiny with whch the
trade is managed may be lessened so as not to
distract the trader fom other opportunities.
Oer the Top: Stage Thre
A trader in the third stage of market awareness
assumes a master of the mechanical
methodolog introduced in this book. The master
DECISION-MNG
275
1s able to eract these operational strateges and
apply them in an unself-conscious maner in his
tading. Decision-makng in the fnancial makets
once master is attained, requires as much
thougt as writng one's sigature. Not that
atg the leel of confdence herein labeled
master means that each and eer trade is a
dratc home rn. But eerience and resultng
condece allow the master to focus energ on
being the best he can be.
Indeed, a level of decision-makng master
canot be attained untl one has met with some
sigcat level of failure. Havg met with
enoug of it, havng dealt with it, and havng
resolved to adjust so as to avoid it, the decision
maker loses a subconscious fear of failure. Not
afaid of the numerous outcomes of any given
sitation, the master kows he has handled and
will again be able to handle whatever adverse
behavior the market ehibits. Unfettered, he
maitains a open-mindedness, condently and
conSistently arriving at decisions without over
intellectuag the decision-makng process.
We have eed tools which organe
tansactonal data and support a decision-making
process approach. We this work has focused on
analysis of market-generated informaton, we in
no way advocate discarding fndamental
analysis. Tere are two simple ways to ascerain
value: through fndamental anaysis ad through
the anaysis of market -generated informaton.
Both support each other and are therefore
valuable support tools for all participants. Rther
tha being geaned fom an accounting analysis,
market-generated information is ganered
directly fom the maket ad is therefore more
current. Howeer, just like a conclusion based on
last month's balance sheet, a conclusion reached
276 M 101
fom an interpretaton of market-generated
inforaton is also temporar. since in all aspects
of realit. conditions change. In oter words. just
as the portolio manager must study each new
balance sheet so as to mOnitor whether eags
contnue to reain strong whle liabUites are
steady or shg. so must today's actve
manager monitor market-generated informaton.
decding whether the selling imbalance subsides
and strong buying actvit ases. Conditions
change. and the successfl manager updates his
conclusions based on the most recent informaton
available. J professionals in fnancial markets
must manage and remain feble to chaging
informaton. Keep in mind tat whie tere are
temendous advatages to adding an anaysis of
market-generated informaton to a decision
makng process. its additon wl be no mystical
panacea. despite what others may have you
beliee.
Te level of attainment we label as the master
decision-maker in the fnancial markets wl
unfortunately contnue to be misunderstood. To
begn with. in any area of huma endeavor a small
percentage of the partcipating populaton wll
ecel. ofen causing env and jealousy. not
necessarly among those less successfly
engaged in the pursuit. but in those who choose
not to pursue. Wle everone cannot atain the
higest leel of outard success. the master
reales that his goals shoud not be outwadly
motvated; indeed. his attaining them need not
sere notce to anyone else. He is diffcult for
societ to categore and classif. A professional in
almeanings of the word. he is a speCialist trained
in the behavior of markets under varing
conditons. who is able to make conclusions based
on data that do not make sense to one who does
DECISION-MNG
277
not have the background and understandig that
is earned thoug formal traing and years of
exerience. And yet, the trading decision-maker
must also be considered a businessman, since he
applies the sound rules of logc ad deductve
reasoning to the challenge of managing money in
an eterally changng environment. He does not
ask to be paid for his failures, ad competes with
no one other than hiself. Indeed, he admires
success and achievement by others.
He embraces the ideal that his net worth is his
abilit to functon. He mantais faith in himself
and his abilit to handle all situations. He
disciplnes himself to do what is rigt once he has
decided to do i. And he does not confse his self
wort with his most recent success or failure.