Trading/Investing Strategy

Everything in the universe keeps alternating between chaos and order. In the stock market, this manifests itself as: accumulation/uptrend and distribution/downtrend. Because this applies to ALL time periods, the manner in which the market is analyzed should be consistent, no matter what the time frame.

One of the greatest impediments to good analysis is losing one’s objectivity by putting too much emphasis on one aspect of the market, while neglecting others which are more relevant to the current conditions. Because of the essentially repetitious nature of stock market movements, and in order to develop objective consistency in my analysis, I have created a labeling system which I have found to be immensely helpful; it helps identify the steps by which the market progresses from one phase to another.

Stock market movements appear random until you start applying trend and channel lines and use oscillators to monitor momentum and breadth. Once you do this, you realize that the market moves in identifiable patterns which repeat themselves. At the end of a downtrend, the loss of downside momentum is reflected not only in the chart patterns, but even more clearly in the momentum and breadth oscillators. After the downtrend, once accumulation has run its course and the base pattern is completed, the trend line which had defined the downtrend is broken and a reversal occurs and gives birth to an uptrend. When that uptrend has been exhausted, the same sequence happens in reverse. While this is an over-simplification of the process, with enough experience you can start to discern the fundamental market rhythms in spite of the diversity of patterns which are produced by the market. This is the process which my labeling system breaks down into specific phases.

I make use of Point & Figure charts. These are extremely helpful because they emphasize accumulation and distribution areas. Another great advantage of P&F charting is that it enables the analyst to make projections about how far a move is likely to go. There is a remarkable relationship between the size of a base pattern and the extent of a move which follows a breakout of that base. The same applies to top distribution patterns and downtrends.

Another valuable help in projecting the extent of a move is the use Fibonacci relationships. Whenever possible, I combine Fibonacci with P&F to make the projecting of price moves that much more accurate.

My work is all technical. I understand that fundamentals have some effect on stocks and that economic news may have an impact, but these are usually incorporated in chart patterns ahead of time. There is very little which is not already known to investors and traders. To put it another way, we want to monitor changing supply and demand patterns, not the specific reasons why people buy and sell.

As I explained in detail in my philosophy, I place a great deal of reliance on cycles, and follow some basic stock market cycles that have proven reliable. They can be very helpful in anticipating market behavior. But I have found that analyzing the on-going relationship between breadth and price to evaluate the various stages of the basic market rhythm is one of the most important things that an analyst can do.

I believe that the accuracy of my analysis comes from my ability to perceive the subtle nuances which always appear when the trend is about to change. After many years of stock market observation, I feel that I have a thorough understanding of the underlying market rhythm.