Æther Analytics Weekly Technical Conspectus Newsletter User Guide Version 1.0
Author : Alex Bernal, CMT
[email protected] 805.252.7161
Appendix— Know your way around our charts
Wave Analysis One of the major pillars of our analysis is based on wave swing analysis. Along the lines of Elliot Wave theory we are monitoring the 3 main wave structures in any given market. Like the summary given in Edwards and McGee Technical Analysis Book the markets waves can be summarized by the movements of the ocean. Tide, Waves & Ripples. The Primary wave is the longest and largest wave structure that represents the longer term trend or macro tide of the underlying movement. The secondary is the internal wave structure that makes up the primary. This is the most important wave in our research because it offers the best patterns in terms of frequency of appearance and reliability. We can compare the secondary to the primary and find pinpoint exact entry points to ride the longer term trend. The Minor wave is the market ripple or noise short term movement. Sometimes the minor and secondary waves meet in harmony in there behavior to form fractals as well. We don’t focus on trading the minor wave but will often illuminate when harmonic fractals exist. Aether Analytics uses a isolated wave approach with doesn't view the “always and everywhere” rigid rules of counting traditional Elliot Waves. We focus on finding the most symmetrical in terms of price and time structures and then apply a systematic trading approach.
Appendix— Know your way around our charts
Detrended Oscillator The Detrended Oscillator takes the markets wave movements and literally “de-trends” it into a normalized oscillator graph. By essentially removing the up or down trend element from its undulations we can identify points where a market is most likely over extended in one direction in terms of ifs normalized movement. When we identify a overextension signal from the Detrended Oscillator at the same time as we are finding harmonic or 3 wave symmetry patterns it can produce some very accurate reversal points. Used along side with our volatility bands (which are calculated independently from the Detrended Oscillator) We can see points that are not only over extended in terms of a markets natural movement but also in terms its forecasted volatility boundary. We plot a small red dot for “overbought” and small blue dot for “oversold” points. But what also is very important to know about this indicator is its ability to find momentum divergence. For example in the chart shown there is a price to momentum divergence between the December high and the January high that also had an over extension. This often signals to the termination of a current wave swing and suggests a reversion to the mean is possible.
Appendix— Know your way around our charts
Swing Ratio Analysis Another feature that you will see on our charts is the swing ratio membrane. We showcase a tool that shows the exact geometric ratio that is relevant between any two swing points. What we have found is that the market has a undeniable symmetry in its unfolding movement. Like many things in nature these ratios are often based on the Phi or Pi mathematic sequences. But they also can adhere to many other sequences and geometric ratios such as root 3, sacred cut, cubic reciprocals, Lucas series. Some common ratios we try to identify
0236
0.486
0.500
0.618
0.786
0.886
1.272
1.414
1.618
2.058
3.33
4.236
Appendix— Know your way around our charts
Chart Details A) Aether Volatility Bands— This is a proprietary band indicator that overlays price. It essentially measures the current market movement in terms of wave volatility and plots 2 levels that are 1 and 2 standard deviations away from its “Natural” Mean or central moving average. When price moves beyond the 1 standard deviation bands we view this as stretched motion in terms of its normalized movement. If we get a movement outside the 2nd standard deviation this is a extreme signal that suggests that market has made a very strong movement away from its central mean and if it has a daily or weekly close beyond the 3rd standard deviation band a mean reversion is highly likely. Also when a market is in consolidation it will often ping pong in-between the volatility bands which are great for forecasting dynamic support and resistance zones. These zone are much more predictive than the typical Bollinger Bands or Keltner Bands and is a great tool for visualizing the markets upcoming potential swing movements B) Pattern label and % distance from optimal PRZ C) Pattern % retracement measures—this number shows the exact retracement % that the 2 wave swing has completed. D) Instrument ticker symbol
Trade Entry Template Bullish Harmonic Patterns
Once a harmonic pattern has been identified we measure out our typical suggested entry level. Since these trades by nature are counter trend we don’t want to just FADE into a position. Meaning buying as price going down or selling as price going up. We ideally want to catch the new trend as price reverses in our expected direction.
For advanced traders we sometimes will comment on a possible aggressive trade where a short call spread or put spread could be utilized when the pattern is or has just touched the PRZ. These are typically only noted when the pattern structure is very high ranking and we have high degrees of confidence in the trade.
For most (+80%) of our trades we will use the 0.236 of X-A retracement level for a buy stop to entry for long trades. 0.236 is derived from 0.382*0.618. With many years of testing we have found this ratio to be fair enough in helping us assume the pattern has reversed without being so close to the PRZ that it has whipsaws. In certain cases where the pattern is very lengthy in its X-A we will decrease the entry level 1 more degree to 0.146 which is derived from 0.382 * 0.236. These are rare and typically only in patterns we feel have a very high probability of success. Other entry techniques we support would be if after price touched point D and has a “Signal” from a oscillator cross over or a RSI crossing over 30, or any other indicator signal for reversal confirmation this could be a great way to trigger an entry. We like to not depend on indicators but only focus on price but there are many ways to skin a cat.
Trade Entry Template Bearish Harmonic Patterns
For bearish patterns the method remains the same once we have successfully identified and classified a pattern and its rank we measure out 0.236 of X to A and place sell stop to entry orders at this level. Again we want to catch price as it starts to reverse down and move into its perspective new downtrend. As Carney put it the PRZ is like a bus stop. When you are waiting to catch the bus you don’t just jump on it as it drives by you wait for it to pull into the bus stop (Potential Reversal Zone) your board it and then it takes you where you need to go.
Trade Management & Initial Stop Loss Example
Once we have successfully entered a trade. Then comes the art of risk management. We have developed a tool that lets us plot a ATR trailing stop calculation plot from any bar on a chart. Since many of our trades are counter trend in nature is it important to know where you exact risk levels should be if you are attempting to enter a trade near the exact end of a move. There are an array of different ATR trailing stop settings that we often utilize. For markets that are historically more volatile we suggest a smaller position size in concurrence with a larger stop loss calculation. We believe that the ATR approach for determining stop levels has the advantage because it uses the markets current volatility behavior to assess risk and reward. When a pattern is first identified and a entry is taken we show the exact levels that we suggest using for the initial stop loss and target calculations. T1 is 2x the 14 period ATR, T2 is 4X the 14 period ATR, and T3 is 6x the 14 period ATR. We have found these to be great minimum potential movement targets. Markets can often perform better than these levels but most of the time they will at least hit these projections. As you can also see as a trade matures the two stop loss levels will plot along with price and show you where the updated stop loss levels could be placed. Our one main rule that we always follow is when price meets Target 1 objective we always move stops to a minimum of breakeven or (entry price plus commissions) this way we protect profitable trades and prevent any unnecessary losses if a pattern fails.
Appendix Methodology & Strategy Harmonic— “any component of a periodic oscillation whose frequency is and integral multiple of the fundamental frequency.” “The periods of neighboring waves in price action tend to be related by the small whole number.” - J.M. Hurst Our aim with this report is to only focus on identifying the best possible trading patterns that are occurring in any given market. We utilize a variety of algorithms to find specific geometric ratio wave patterns that have favorable risk to reward projected movements. Most of our trades are harmonic patterns and ideal symmetry elliott waves in the tradition of H.M. Gartley, Larry Pesavento, Ross Beck, Scott Carney, R.N. Elliot, Ian Copsey & Bryce Gilmore. We blend all the best nuances that we have studied and thoroughly tested from each of the noted analysts and have also developed some proprietary tools of our own for trade qualification, entry and management. In terms of Elliot Wave theory we analyze waves in isolation for our primary trading time periods (daily & weekly). We don’t believe in the subjective nature of manually counting elliott waves but rather only focusing on 5 and 3 wave patterns that have perfect symmetry in regards to time and price. In essence we focus only on waves we recognize to have high probability fractal structures. Meaning only if specific geometric symmetry is identified we then investigate for a trade entry point. When the market is creating wave fractals that are not amongst our high probability pattern repertoire no trade is taken or forecasted. Common Newsletter Nomenclature Pattern Rank—Our proprietary measurement system ranks patterns based on many variables within the internal structure as well as the macro technical environment (longer term waves & trend). We will highlight these patterns but if the rank is too low we will not recommend a trade. PRZ—Potential Reversal Zone, is also defined as our clearly defined level that a pattern must reach / test at least once in order to qualify as a harmonic pattern Pattern Names—BAT, BUTTERFLY, GARTLEY, GARFLY, CYPHER, SHARK, ALT– BAT, CRAB, DEEP CRAB— These labels refer to specific harmonic 5 point fractal structures that appear in the markets. Please refer to the USER GUIDE here —> LINK (COMING SOON!) or full specifics and details for each pattern Detrended Oscillator—One of the only 2 indicators we will refer to in our charts is the Detrended Oscillator this is a proprietary calculation and is very similar to RVALUE indicator laid out by Mark W. Helweg & David C. Stendahl in there book Dynamic Trading Indicators. We have found this to be a great tool in analyzing the over extending to the up and downside of a markets “normal” behavior. It is also very useful for finding divergence point between price and momentum. Aethex Indicator— Is another proprietary calculation alike to the commonly used Momentum Indicator. We have formulated a smoothing function that allows us to see a markets momentum clearer and with less noise. This can be used for entry signals as well.
Appendix—Know your way around our charts Trade Management We primarily recommend trades that have a minimum of 3 to 1 risk reward ratio. Initial risk (stop loss) levels we often utilize are (ATR 14, 1.618), (ATR 21, 1.272), (ATR 14, 2.5) (ATR 21, 3.0) from the entry price or from the vertex of the pattern. Then a trailing stop from the current price is used with the ATR measures previously outlined. Entry technique is the only somewhat subject process in our trading methodology. Users should always be aware that if a trade risk to reward ratio is less than 3:1 then the entry point, risk point or minimum targets need to be revised. We always show 2 potential target areas for each trade which are based on the potential wave extension measurements. Once Target 1 has been reached we recommend at a minimum putting the trade stop loss at break even. Typically we take 1/2 the position off at target 1 and trail stops until target 2 is reached or we get stopped out. Position Sizing There are many different ways we suggest utilizing position sizing for your portfolio. For the purpose of this newsletter we will simply suggest our confidence rating in the context of each trade. Our confidence ration stem purely from the pattern structure rank. When we mention “Normal” position size this is size that you have determined to be most optimal individual trade position size for your specific risk tolerance and trade management style. We will suggest 1/2 (50%) of normal or 3/4 (75%) of normal for trades we have slightly less confidence in & 6/4 (150%) or 8/4 (200%) for trades we have more confidence in. This is only a suggestion and should only be considered as opinion or commentary from us for each trade. We never ever recommend “betting the farm” or “going all in” in any trade because it surely leads to ruin. One of our favorite portfolio position sizing formulas that we recommend is the following: Percent Volatility Sizing -{ Position Size = (CE * %PE) / SV }- Where CE is the current account equity (NAV of portfolio, %PE is percentage of portfolio equity to risk per trade (2%, 3% and 4% are recommended), SV is the stocks 14 day ATR
Contact
[email protected] +1.805.252.7161 Skype : alexbernal0
Appendix—Suggested Reading / Study List 1. Chaos & Order in Financial Markets , Edgar Peters
Affiliates neoHarmonics.com
2. Geometry of Markets I & II, Bryce Gilmore 3. Fibonacci Ratios with Pattern Recognition, Pesavento 4. Profits in the Stock Market, H.M. Gartley
5. The Harmonic Trader, Scott Carney 6. Harmonic Trading Vol. I & II, Scott Carney
WhenToTrade.com
7. Dynamic Time and Price Analysis, Bryce Gilmore 8. Kane Trading Series, Jim Kane Kanetrading.com 9. Trade What You See, Larry Pesavento & Leslie Jouflas 10. Fibonacci Analysis, Constance Brown 11. Gartley Trading Method, Ross Beck 12. Trade Chart Patterns Like The Pros, Suri Dudella 13. Elliott Wave Principle, A.J. Frost & Robert Prechter
14. Mastering Elliott Wave, Glenn Neely 15. Mastering Elliott Wave Principle, Constance Brown 16. Harmonic Elliott Wave : Ian Copsey 17. New Frontiers in Fibonacci Trading, Micheal Jardine 18. Fibonacci Trading, Carolyn Boroden
Ninjatrader.com
Author Bios Alex Bernal, CMT
Alex Bernal is a Chartered Market Technician with many years of industry experience in the equity, commodity, currency, interest rate and derivatives markets. Alex also holds a degree in Economics from the University of Southern California. Alex started his career at the Beverly Hills branch of Bear Stearns & Co. in the wealth management division. Then in 2007 he moved over to M&N Trading, LLC. where he joined the prop trading desk where he specialized in statistical arbitrage in areas such as global yield curve spreads and STIR futures. Here he was mentored by Veteran Trader, Anthony Lazzara, who was once the largest 5 year treasuries floor trader at the Chicago Board of Trade and executed as much as $100 billion in interest rate futures contracts annually. Alex founded Aether Analytics in 2009 with the intent on providing premier technical analysis research to his clients with a focus only on the methods that have been proven to produce quantifiable edge through he scientific research process. Aether Analytics deploys an approach that emphasizes on the objective not the subjective and aims to reveal the repeating market fractal patterns that trader or portfolio manager can utilized to manage risk or speculate for profit. Alex has also been featured on many prominent news & financial blog networks such as CNBC, Bloomberg, CBOE TV, Fxstreet.com, Seeitmarket.com, Benzinga.com, MTA.org, Yorba Media Radio & First Business News Network.
Travis Pavlik Travis grew up in Paradise Valley, Arizona playing competitive golf across the country. He attended college at the University of Arizona in Tucson majoring in Economics and Business. Here, he discovered his love for the financial markets and economics. After a few years as a Sales Trader at Longboard Asset Management , which is a trend-following, managed futures mutual fund and hedge fund, Travis decided to strike out on his own and become a independent trader and technical analyst
Harmonic Pattern Quick Reference Guide
Retracement zone of A to B length allowed
Retracement of B swing in terms of Length X to A
“Potential Reversal Zone”
Trend direction prior to X point
Area of tolerance where price needs to touch before pattern can be validated as complete Underlined = *exact retracement of the A to X Length
Extension Ratio zone for length of B to C *Level of Exact retracement tolerance can often be allowed a few % degrees of freedom
