In baseball, pitching is a psychological tug-of-war, a battle of wits. When a power pitcher fires two inside strikes against a power hitter, everyone in the park expects the next one will be low and away to induce the batter into chasing a bad pitch. Why does everyone, including the batter, think this way? The reason is simple. It is a high-probability tendency.
Trading is the same. To succeed, you need to be at your best at all times because you’re competing against an institutional force, the market, that is so much more powerful than you — it doesn’t even know you exist. In sports and trading, identifying high-probability tendencies gives teams, players and traders a big edge. In financial markets, the symmetry of Lucas series cycles is one key to identifying these high-probability tendencies.
The Lucas series has a profound influence on all markets in all degrees of trend (see “Finding patterns with the Lucas time series,” September 2006), and its time symmetries are important pattern-recognition tools. This article, which assumes a basic understanding of wave analysis in general and some familiarity with Lucas, will look at several specific examples of these patterns on the intraday Nasdaq (NQ) E-mini market.
SYMMETRY
The intraday NQ is fast-moving and challenging. On most days, it is also a leading influence for overall market bias. With the right tools, we can trade this market effectively, as well as mine it for guidance on price changes elsewhere.
Most traders know how price action retraces and extends according to the Fibonacci sequence. These Fibonacci calculations also act as important support and resistance zones. In the past few years, more traders have become familiar with how the Fibonacci sequence influences time cycles of technical analysis as well.
These Fibonacci symmetries are the unique language of financial markets. Markets cycle on these symmetries and allow traders to profit by recognizing them as precise entry and exit points. However, Fibonacci time sequences leave a gap, and according to nonscientific observation, they work about 60% of the time.
This is where the Lucas time series comes in. By recognizing the importance of Lucas cycles, a trader can anticipate where a reversal or breakout can materialize. Price action is slowed down to the point where an intelligent, informed trading decision can be made, even in fast-moving markets. On a five- or 15-minute NQ chart, good Lucas setups materialize three or four times a week.
“Wave rider” illustrates a basic five-wave impulse on a typical five-minute chart. The waves up are clearly annotated and wave 4 does not enter the territory of wave 1, an important Elliott rule. Wave 5 completes on the 29th bar of the sequence, leaving an upper tail — an important candlestick formation. While the price action doesn’t immediately drop, the Lucas tendency is highlighted. It does not matter whether it is a 29- or 47-bar variety; both are high-probability candidates for intraday reversals in both directions. Keep in mind, when working with these time windows, they are all plus or minus one bar. A 29-bar leg could terminate from bars 28 to 30 and a 47-bar leg from 46 to 48.
However, not all intraday legs are created equal. They must be taken in the context of overall market conditions. Some days are more powerful than others. Just because we come to a Lucas or Fibonacci window does not mean a reversal is near. On days where the bias is strong for either a bull or bear run, these tendencies will only produce small pullbacks that set up the next buying or selling opportunity. On those powerful days, it doesn’t pay to attempt to look for a reversal.
MONEY MATTERS
The answer to profiting from the high-probability setups is to follow the smart money. In many walks of life, if you can model those who are getting results, you’re in good position to mimic their success. In terms of trading, the best traders look to enter in low-risk/high-reward situations. Simply put, that means buying at support and selling at resistance.
Support and resistance may mean different things to different traders. Many institutional traders look at prior important highs and lows. When price action tests those areas and holds, it confirms that level is significant. Other traders look at Fibonacci retracement levels or moving averages as key levels.
The best applications of the Lucas series are when the bar count terminates at one of these support or resistance levels. According to Steve Nison’s candlestick work, some of the best forms of support and resistance materialize when the price action gaps up or down. These gaps are called windows and act as magnets for price action that are filled before important reversals materialize.
“Filling gaps” illustrates several days on a 15-minute scale. On Nov. 9, prices gap lower and terminate approximately 56 bars (Fibonacci 55 + 1) off the high. A technical bounce materializes and doesn’t quit until it fills the gap, which is acting as resistance. Observe how the combination of the gap and the 29-bar tendency mark the end of the bounce on Nov. 14. The short entry can be made just below the bottom of the confirming black candle. While it is not shown on this chart, this setup did lead to a 106-point drop over the next six trading sessions.
A reasonable question to ask here is: Would the price action have failed anyway at the top of the gap? That is possible, but patterns do terminate on high-probability time windows. Had the price action not been at the end of the Lucas window, it may have consolidated sideways for several bars before reversing.
Many times, small intraday congestion zones are formed simply because price action has achieved the target in terms of price, but not time. Once both are satisfied, price action will reverse. In one sense, trading is like practicing law. The more evidence that stacks, the greater the case. On the chart, more technical evidence means a better setup, which leads to the trader developing greater conviction to ride the leg into profitability.
CONFIRMATION RULES
“Concrete argument” (above) exhibits many of these concepts. A down leg commences on Nov. 11 and comes to a near-term low where an intraday technical wave materializes. This action is typical NQ volatility. First of all, prices retest the low on Nov. 12 to create a double bottom. Elliotticians can argue the price action resembles a small triangle, and they may be correct. However, when trading a fast chart like the intraday NQ, there is no time for subjectivity; you must make a decision based on high-probability tendencies and pattern-recognition skills.
In this case, prices test and retest the 38% retracement level of the move off the high. The 38% retracement level is another high probability tendency that represents strength in the overall trend. From the second low, price action hits the 38% marker on a Fibonacci count of 13 bars. The failure at resistance is highlighted by the evening star candlestick pattern, which is a high-probability reversal signal.
This is a good entry, but resistance is tested one more time before the drop. The second retest of the 38% retracement falls slightly short of the target but does come in on the 30th bar (Lucas 29 + 1). The candle of interest does display an upper tail that confirms the high made on the 13th bar. This bar is also approximately 17 bars (Lucas 18 - 1) from the 13-bar high. Price action finally falls away from resistance at the Lucas tendency for a good 40-point drop. The entry points can either come right below the low of the candle with the upper tails or upon completion of the evening star. As always, stops should be placed one tick above the high.
Observe all of the technical factors that provide evidence for the bearish set up. First of all, the 38% retracement level is the key. Beyond the retracement level, prices retest resistance, which confirms the level as significant. Finally, traders who tend to play the trend-following game will note how the Lucas candle clusters with three different moving averages all in the same place.
Sure, the moving averages might indicate that the trade could have been made without an awareness of Lucas. However, an understanding of the power of the high-probability time element may help the trader keep his conviction that prices are moving in the right direction until momentum takes over. How many times have traders been shaken out of good positions simply because a bar or two moves against them? Conviction is important because the best part of a move usually materializes near the end, and it requires a certain amount of patience not to take profits too soon.
In all cases, it is important not to front-run the bars. Success comes when markets confirm the bar count, and the best way to do this is to follow the candlestick formations. Formations such as morning/evening stars, upper and lower tails, as well as engulfing bars at the right time, will confirm key support and resistance zones. Support and resistance do not always hold, but when the time symmetries line up at these levels, powerful trades tend to materialize. If the price action reaches important support or resistance without good time support, odds are that level will not hold.
The Lucas series is an excellent pattern-recognition tool that helps traders anticipate moves before the crowd. Lucas influences markets in all degrees of trend, but may be most helpful in allowing traders to uncover patterns in fast markets, such as the intraday NQ.
Jeff Greenblatt is the director of Lucas Wave International. He is author of Breakthrough Strategies For Predicting Any Market, a Marketplace book. His new Web site is www.lucaswaveinternational.com and he can be reached at fibonacciman@aol.com
