Saturday, August 08, 2009

Fractal set-up

Below is a chart set-up from The Master Fractal Trader. The premise of this trading theory is that certain market patterns are fractals of prior patterns, sometimes larger patterns, sometimes smaller patterns. By monitoring underlying prices via charts, those prior patterns start emerging in current patterns and when prices finally fulfill the entire prior pattern, the resolution of that prior pattern will also be the resolution of the current pattern.

In Elliott terms, if the pattern of the end of a previous directional wave is being repeated currently, we can expect the end of the current directional wave so long as as there is confirmation in price action. Maybe its best explained with a current chart from

The fractal is labeled on this chart as f1-f7. The idea is that once prices reach f6 and turn down, the high probability trade is to short the market, expecting prices to repeat the action following the previous f6 TOP. In this example, the "CHILD" fractal is being duplicated by the "PARENT" fractal, so expectations would be for a commensurately larger decline between f6 and f7.

This is a current fractal set-up for the Nasdaq Composite Index. The High Friday in this index was 2012.33. and closed the day at 2000.25. Superimposing that price action on the above chart (from last Thursday's close) suggests that the decline from f6 to f7 may have begun. If so, expectations based on the previous "CHILD" fractal would be for this "PARENT" fractal to decline below f3, or to about 1575 on the Nasdaq Composite. That would be about a 25% decline.

Does this kind of analysis work? The web site claims about 75% accuracy. My experience with the service is consisitent with this claim of accuracy, about 3 out of 4 set-ups work. This kind of analysis can be very complementary to a trend-following model, in that it alerts the trader to times where trends may be highly likely to reverse.

As the service suggests on their front page:

Are You Feeling Hopeless With the Stock Market ?

The Market Rules are Changing !

Are You Prepared ?

Maybe It's Time To Do Something Different

I have no interest in this service, it's not even an advertiser on my Blog (though if you're reading this Hank, you are welcome to advertise here, my seal of approval). I am highlighting this particular fractal because it comes at a time where my expectations are very high for a major reversal in the markets.

In other words, 25% may very well be at the lower end of what's coming down the pike.



Hank Wernicki said...

The NASDSAQ fractal has started its turn down on the weekly / yearly charts despite what happened on Friday.

Its previous high still held !

Absolute Stop is 2032

I regard Friday's action as the last chance to short the markets.

Anonymous said...

Waiting for the 10 and 20 EMAs to cross the 50 EMA for the short entry point on SH. Using a 60 minute chart with a 20 day range for reference. Lets see if I have learned enough about the trend from you and Michael Covel for this trade.

Thanks again for your insight. Dave

Richard168 said...
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Anonymous said...

allan, i agree with your opinion, i'm not an expert like the others in this blog. but when i saw weekly chart, the volume didn't pick up, even they were getting lower every week, almost on every stock. so my question for you, who's driving this market? if they wanna attract the money in the sideline, i think they failed.many expert said the volume most important thing,do you agree?
the simple thing that i know,the volume is gone. thank you, allan.


IQ said...

Hi Allan and Hank,
Allan: Thanks for the link.

I read bit more on the fractals . Can the gurus think of more fundamental reasons associated with the technical drops predicted?


Anonymous said...

One other question I have is the MT did not perform well over the last few months when the rest of market soared.
How was the basis of 3 out of 4 winning trades calculated?