Monday, August 23, 2010

The Significance of Panic Midpoints

VIX
Volatility appears poised to break out to the upside. A close below 1069.49 on the S&P 500 accompanied by a break above 28 on VIX would portent a market that is ready to decline significantly.


The Significance of Panic Midpoints
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As a predictive tool:
The low of an impulse wave can be estimated by identifying a panic--finding its midpoint--and then using that level as the possible midpoint for the entire impulse wave. This example uses the May 4th-May 6th panic.
  • Look for a string of consecutive declining days that produces a loss in excess of a 3%.
  • Candlesticks are excellent at spotting these since they will all be the same color—usually black or red.
  • After the first day up—a white or clear candle—the amplitude of the panic is available for measurement.
  • Measure the amplitude of the panic decline—calculate the midpoint.
  • This will likely be extremely close to the midpoint of the entire decline.
  • Take the high—immediately before the panic occurred—and subtract the midpoint.
  • Take that result and subtract it from the midpoint and that will be close to the bottom of the impulse wave.
  • The midpoint will act as a resistance area in the future.
It works for ‘panic advances’ but not as well


Combining Midpoints to Ascertain Support and Resistance
:
Several panic periods can be used to create multiple support and resistance levels as demonstrated by the chart below. In this example note how the average of the three panic midpoints is very close to the important 1107 area discussed on the July 28th Update and again on the August 9th Update.


On a Short Term Basis:

The example below shows the SEPTEMBER S&P contract:
  • On August 18th the SPU (Sept.) dropped precipitously in the afternoon and continued the next morning. This is the decline highlighted in blue and yellow—the midpoint of the decline being where blue changes to yellow—which is 1092.50 :1069.00 = 1080.75
  • The immediate preceding high on August 17th was 1098.50
  • The distance from the 1098.50 high and the 1080.75 midpoint is 17.75 pts.
  • THE MID POINT OF THE PANIC IS USUALLY VERY CLOSE TO THE MIDPOINT OF THE ENTIRE DECLINE OF THE IMPULSE WAVE.
  • Therefore the bottom of the impulse wave should be approximately 1092.50 – (17.75*2) = 1092.50 – 35.50 = 1063.00
The actual low was 1061.80 slightly below the projected target.

As mentioned above the 1080.75 midpoint should act as resistance to any advance coming into Tuesday's Full Moon. (Note the August 9th high was made on a New Moon.) This knowledge can be invaluable at executing opening positions and managing open trades.


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