From the November 01, 2009 issue of Futures Magazine • Subscribe!

Spotting momentum swings in advance

Look closely at your charts and their trendlines. The paired axes of those lines define a wholly unsuspected set of functions related to price cycles. The time value of each of those price cycles must always have an identically corresponding value between the paired axes, unless your lines are parallel. But to find that value — to look into the future — you must convert time to price, which means rotating time value 90 degrees to vertical so that it becomes price value. Complicated? Not at all. You can do it easily with most drawing or charting programs, or even with a simple ruler.

To begin, a Forward Looking Information Radar (FLIR) point is an inflection point that comes in three flavors. FLIRs most often mark reversals from a current trend or mini trend. They also (occasionally) mark momentum change from trending to sideways motion. They also (rarely) mark momentum changes with continuation of current trend at a much steeper angle. And, of course, there’s FLIR failure (and, as such, not really a type of FLIR). Some FLIR examples can be seen in “FLIR or No FLIR?” (below).

You can use Microsoft Paint, or msPaint, to find FLIRs. If your charting program allows you to measure distances and draw and rotate lines 90 degrees, that works as well. Keep in mind that creating FLIRs graphically (with chart and ruler or with a drawing program), rather than mathematically, carries an inherent risk, mainly because measurements may be slightly off.

FINDING FLIR

Here are the steps for determining FLIR points.

Step 1: Set your chart so that you have 20 or 30 bars of blank space to the right to accommodate your prognostication. Do not include any studies.

Step 2: Draw your trendlines, extending them as far to left and right as possible.

Step 3: Create a scale. Do this by measuring the distance from one bar to the next. (A 50-bar scale is often adequate.) Bar widths may vary from chart to chart, so always check your scale for accuracy if re-using it. Copy, paste, and drag your scale so that its zero-point is exactly at the last bar.

Step 4: Measure the distance between two extremes of a cycle, say a low and the next low or more extreme low. Draw a vertical line equal to that distance. Drag the vertical line until it exactly fits between the paired axes of your support and resistance lines out in the future. This marks your FLIR.

Step 5: Look closely to see where your FLIR crosses your scale, or would cross it, if extended. Say the FLIR crosses at 15 on your scale. This means the FLIR should occur 15 periods from the last bar on your chart, plus or minus one period. Count only actual trading days, exclude weekends and holidays.

This simple process works on most charts, but it should be tested for confirmation. Two confirmations are sufficient. To do this, create a couple of vertical lines as described above and fit them between the axes in the part of the chart that has already occurred. They should mark FLIRs. If not, abandon that chart and find another. Some charts simply don’t work. As examples, the stocks Credit Suisse (CS) and Intel Corp. (INTC) seem notoriously difficult to FLIR.

You can use FLIR on charts of almost any duration or instrument type: stocks, forex, daily, weekly, even intraday. One caveat, however: in forex, you may find that FLIR performs well on daily charts, but is virtually useless on short time frames, such as 15-minute charts.

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