From the March 01, 2012 issue of Futures Magazine • Subscribe!

New frontiers in trendline analysis

Any pair of intersecting trendlines contains information that enables the forecasting of major price inflections (see “Spotting momentum swings in advance,” November 2009). This concept has even greater relevance when applied to index exchange-traded funds (ETFs) and exchange-traded notes, and is further enhanced by the introduction of synthetic trendlines. Here, we’ll offer an easier method that can be used to measure the distance from the trendline intersect, simply by counting the candles.

The nature of any index is either that it represents a basket of issues rather than any single issue, or it represents a divergent group of market participants or points of sale. This makes it less vulnerable to minor news and emotions affecting any one issue. Surprise market shocks, and the unknown results that follow them, are dampened. This is why many traders prefer index trading to trading any one issue or commodity. It also makes indexes more answerable to mathematical forecasts.

The technique Forward-Looking Information Radar (FLIR), as described in the November 2009 article, requires several complex steps. For those steps, see the earlier article. However, a simplified approach is to measure from the intersect of any two trendlines to any inflection to the left of the intersect, and then measure that same distance out in the future to the right of the intersect. That point almost always is an inflection in the price trend (see “Creating FLIR,” below). FLIR is surprisingly accurate, seeming to owe its precision to a geometric integration of time and price.

FLIR does not disclose the likely directions of trends on either side of the future inflection point. It also requires precise measuring and placement of trendlines, without which error may occur. To enhance FLIR’s effectiveness and to avoid these problems, the trader can add synthetic trendlines to the analytical mix.

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