Saturday, May 09, 2009

Type 1 mechanical sell signal

Today we are going to learn the parameters of a Type 1 mechanical sell signal by it's creator, Tom Joseph, who is also the creator of Advanced GET software. I am going to then apply to the current market via the Weekly SPX chart. As you will soon learn, the pairing of the above signal with the current chart is not coincidental, it is intentional and for what should be obvious reasons.

Type One Mechanical Sell Signal

"One of the simplest tools we developed for Advanced GET is the Elliott Oscillator. We discovered that this oscillator pulls back to the zero baseline at least 94 percent of the time during this profit-taking retracement. This is a great tool because it lets you stand aside until the profit-taking is over. When the Elliott Oscillator pulls back to zero, it provides a highly accurate area where you can predict that profit-taking is actually over, and the trend is ready to resume."

Remember, since October, 2007 the Weekly SPX chart has been in an impulsive wave down. Wave 3 ended in early March of 2009 and has been correcting, i.e. profit taking, ever since. The EW chart below shows the extent of Wave 3 down as well as the extent of the profit taking since then. As you can see, the Elliott Oscillator (think "MACD") has been working off the early March oversold conditions as the oscillator goes from an extreme reading in late 2008, gradually easing and is almost all the way back to the zero line:

Note that the extreme reading on the oscillator was at Wave 3 of 3, exactly where one would expect the extreme for the downward momentum of the index. Note also that as the index has moved sideways and up, working off the oversold conditions of early March, the oscillator has worked itself almost all the way back to neutral.

"In addition to this, we created the Profit-Taking Index (PTI), which is designed to be used with the Elliott Oscillator and measures the intensity of the profit-taking. The PTI calculates the magnitude of the profit-taking compared to the previous Wave 3 rally. Historically, if the PTI remains above 35, it indicates a normal profit-taking, which allows the market to resume its trend to a new high. A PTI of less than 35 indicates too much profit-taking and diminishes the odds that the Wave 5 rally will set in."

As you can see on the chart above, the PTI index is at 63, indicating normal profit taking and a high confidence set-up for the coming Sell signal.

What's a cake without frosting? Below is the same SPX chart as above, only this time in place of the Elliott Oscillator, the False Bar Stochastic:

"Now, it is time to enter the trade. To confirm the validity of an entry point, we developed the regression trend channel, which contains prices within a set of statistical boundaries. These statistical boundaries are calculated using a standard deviation of 2, which, in essence, means that the area between these boundaries contains approximately 94 percent of the prices. When prices break out of these boundaries, this confirms a change in trend."

The above chart drills down (think "zooms in") to the corrective channel since early March. The regression channels are drawn from the end of Wave 3. As of next week, a print below 868 would be the trigger to short in accordance with this Type 1 trading technique.

There it is, an almost perfect set-up for the next leg down of an ongoing bear market, via the Advanced GET Type 1 mechanical sell signal. Throw in a pending False Bar Stochastic sell signal, the giddy sentiment referenced in my previous blog and it appears to me that everything is coming together for a heck of a profitable trade to the downside.

"Its not dark yet, but its getting there."


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