Transcript of Session #4:
Timing: How I use technical and cyclical analysis to time entry and exit points
Larry here. Welcome again, to the fourth session of my gold WAR ROOMS!
In today’s session, I’m going to cover some very basic concepts about timing the markets, about entry and exit signals.
But let me start with a caveat: There is simply no way I can impart 35 years of trading experience in this session. It would take me I figure 3 days of intensive 8 hours of presentations each day to give you what I would say would be the basics of my methods.
That said, if you are interested in that type of intimate and detailed classroom type instruction, please let me know your interest by dropping an email to Stanley Pyatt at [email protected]. If there’s enough interest, I’ll try to organize a weekend where we can get together in person and go into my methods in greater detail.
Let’s get started. I use two methods for timing the markets. Technical analysis, or charts, and cyclical analysis.
I do NOT use fundamental analysis. Fundamental analysis is a recipe for disaster and for nothing but losses. You cannot time any market based on fundamental analysis and it should NEVER be used.
So let’s start with charts. Why are they so important? Because they capture all historical price action, and there are price patterns that tend to repeat themselves. Moreover, a good technical analyst can tell you where important support and resistance are in the market, and that alone can help you make oodles more money and avoid large losses.
But I don’t use traditional technical analysis. I do not use traditional trend lines or trend channels. I do not using moving averages and all sorts of other technical studies you hear about.
Why? Because over the years I’ve found that most of them are inadequate and that the ones I developed are far more reliable.
Again, I can’t go into everything in this short of a format. So I am only going to give you a couple of examples of the most important types of things I look at.
And we will start with trend lines, perhaps the most important technical chart element that most people look at.
And I’ll start by telling you that trend lines do NOT work. With very few exceptions, they end up faking out the majority of investors and traders.
Let me show you an example. Take a look at this chart of gold. Back in December 2012, gold broke an uptrend line drawn off of its previous October low.
Most traders thought gold was heading lower so they immediately got short when the trend line was broken.
But look at what happened. Gold immediately turned back up, stopping out most traders. Then, it plunged below the trend line again, rallied again, then fell again, and then rallied again. In short, gold staged five fakeout moves below the trend line, trapping and spitting out slews of investors and traders, and causing nothing but losses.
This is not unusual. In fact, when it comes to most trend lines, no matter what the security or the chart — whether it’s a daily or weekly or even a monthly chart — most action around trend lines tends to be fakeout moves. You never, ever want to buy or sell something simply because it broke a trend line. That’s for rookies.
What you want to do — instead — in order to have a high confidence trade — is wait till a minimum of three fakeouts around the trend line have occurred, and then you strike, of course always keeping your risk small by use of a stop. That way, you avoid most of the fakeouts that occur when trend lines are broken and you dramatically increase your odds of success.
A far better method though, is how I use what I call “cyclical trend channels” to see real breakdowns or breakouts to the upside, as the case may be. Let’s look at that gold chart again, and this time, ignore the trend line.
To reduce risk as much as possible, often times I will wait, in this case, to see a break of the bottom of a cyclical trend channel that has formed.
What’s a cyclical trend channel? You won’t find it in textbooks on technical analysis. It’s a technique I developed over 20 years ago. It essentially captures the cyclical price action in the market, and by waiting for the security to breakout to the upside, or down through the bottom of the channel, gives you a much higher confidence, lower risk opportunity.
In this chart, notice the top line labeled “cyclical channel line.” I formed that line by tying the first isolated low before the spike low, and carrying it over to the right, to the first isolated reaction high after gold dropped. Then I drew a parallel line off of the first low immediately after the major spike low on the left. What that did, in essence, is capture the cyclical rhythm in the market, from low to high, and form a channel. By capturing that cyclical rhythm, it also told me that when the line is broken, that’s the real cyclical turn down into another bear leg lower. And that indeed, is precisely what happened.
Sometimes, I will act immediately when that line is broken. And at other times, like in this chart, I will wait for the market to move back up to re-test that line, and then enter a short position if it fails to move back up into the channel. Either way, using what I call cyclical trend channels offers you a lower risk opportunity and a much higher probability of a successful trade.
This is just one example of how I use charts that I wanted to present today. There are many other technical studies I use, most of them adapted to my own cyclical ways of capturing price action. For instance …
— I use head and shoulders formation, but only those where I can identify a cyclical formation to the pattern and more importantly where my cyclical studies — which I’ll get to in a minute — tell me a trend change is coming.
— I use what I call “projection lines” which are also cyclical in nature and they tell you how fast a market can move, to either the upside or downside.
— I use cyclical breakout and breakdown lines, special lines I developed back in the 1980s.
And more. Suffice it to say that I use very little in the way of traditional technical analysis — largely because most of it is not all that reliable, and because too many traders use it, and I don’t want to trade along with the majority, they too are almost always wrong.
Now, let’s move in this brief time that we have left and take a look at the cycle work. And let’s take, as an example, a chart I showed you recently for the mining sector.
This is the chart that I showed you just a few trading issues ago that told me mining shares were likely to bottom on August 6.
It was right on the money. And how did I generate that chart?
I use specially-developed software that crunches tens of thousands of data points on any market … and then crunches the data often by hundreds of millions of different combinations.
Its objective, to find the most reliable cyclical patterns in the trading data, patterns that help find the most likely next turning points in the underlying security for highs and lows.
It’s all based on what is called “Fourier Analysis” — named after mathematician Joseph Fourier, who essentially pioneered the science of studying cycles and quantifying the rhythms that are the most probable driving forces.
I use my cyclical analysis to pinpoint likely time periods when a turn or acceleration in the existing tend is likely.
Finally, I use my reversal system, a complex algorithm I developed that is computer based and that helps me to distinguish between normal market reactions and trends.
I really wish I could go into this a lot more in-depth. But in this kind of format, as I said at the outset, there’s just not enough time.
So let me summarize for you the steps I take to hone in on the best entry and exit points for any of my recommendations.
First, I look at my charts and what my technical analysis is telling me. I keep charts on a yearly, monthly, weekly and daily levels, and for trading, I use mostly the daily charts.
Next, I determine which cyclical channels of trend lines are of most significance, and nearest by current market price action. I want to buy against cyclical support, or sell a break of that support. Conversely, I want to sell against cyclical resistance, or buy when that cyclical resistance is broken and a new uptrend is established or the existing trend is strengthening.
Third, I look at my cycle studies. Obviously, I don’t want to be a buyer when the cycles say a downturn is coming. And conversely, I don’t want to be a seller when the cycles say an upturn is coming.
Lastly, I look at my propriety reversal system for any buy or sell signals that are near current market action and that need to be acted upon, should the market close at or above a buy signal, or at or below a sell signal.
Those are the four important steps I take with every recommendation I make. If they don’t all line up and flash a green light, then I simply will not make a trade.
That’s important. Because acting prematurely, trading when all the forces are not in your favor, almost always leads to nothing but losses.
As I said at the outset, I would love nothing more than to devote a weekend to educational seminars where we can explore my methods in great detail — and you can learn them. There would be a modest fee involved, but if you’re interested, please email Stan at [email protected] and I’ll organize it.
Tomorrow, in my next session, I’ll go over your most important recent questions, and my answers!
