Price Pulses

Another volatile day as the cash S&P500 made a new low before roaring upwards during the afternoon. The daily price bar is classified as “outside” and meets the requirements to be a reversal bar as well.

Technically the daily chart flashed a “buy” signal at the close when the composite index turned up failing to confirm the RSI’s new low. In my developing trading system I can’t go long here since the immediately higher time frame (weekly) is still on a “sell” signal as described in my posting of January 6. Trading rules help to take the emotion out of my decision making and so I want to explore them deeper. The basis for a lot of the following technical work can be found in the excellent book by Tony Plummer entitled “Forecasting Financial Markets – Technical Analysis and the Dynamics of Price”.

If one subscribes to the theory that market price movements unfold in “waves” then there should be an underlying cause as to why they occur. Mr. Plummer suggests that the waves (or pulses as he describes them) are caused by crowd psychology and can be quantified through the mathematics of shock theory. In his system there are six pulses in a complete a market cycle. Pulses A-B-C are the labels for the first three upward-biased pulses and X-Y-Z for the downward biased pulses. Today’s chart of the daily cash S&P500 show these pulses from December 18. They are on what I call the “short” time scale. From the first z pulse low through the possible x-pulse low of yesterday there are just over 1.5 cycles.

Like Elliott waves there are patterns that the pulses make relative to each other. After the upward moving a-pulse to start the chart note the five wave pulse sequence to the downside. After identifying such a downtrend you want to be alert to a possible buying situation. In this scenario we want to see the trendline drawn across the C and Y pulses broken. This occurs on January 10. A good place to buy? Obviously not as that high is quickly followed by a renewed downtrend. We need a filter. I have two.

The first filter is my technical work on the daily chart. There was no “buy” signal on January 10. Hence no long trade would have been taken. The second filter is from higher time dimensions of the price pulse and will be covered in later postings. To bring us up to date we may have just seen an x-pulse bottom yesterday but the chart is still clearly in a down trend. The short term price pulse pattern is warning us to wait for a re-test of yesterday’s low.