Tandem Studies On Market Movement

NEW TECHNIQUES

A New (Market) Frontier

Tandem Studies On Market Movement
by Dima Vonko

Here's a tool that analyzes the structure of the market and anticipates market developments for the immediate future.

Market movements are often referred to as trends, sideways movements, and consolidations. But within these movements are smaller price movements that are subject to fluctuation (noise). These are difficult to analyze, which is why you must understand which phase the market is in and what the likelihood is for this phase to be replaced by another. It is only after knowing this that you can apply any relevant technical analysis tools.
PHASES OF THE MARKET
The behavior of the market and the market's participants differ based on the behavior of the previous phase. For example, the current phase will be different after a weak bullish trend in the previous phase than a strong bullish trend would be. Tandem studies take into account these important differences between phases and how they influence the state of the market and the behavior of its participants.
The essence of the tandem study is an in-depth, side-by-side study of two adjacent market phases: the primary phase and the secondary phase. For each phase, a value is calculated that reflects its momentum, energy, acceleration/deceleration, buying/selling pressure, volatility, or other parameter of interest. The values, derived for each of the phases, are compared or used in calculating the result of a specific tandem study.
By applying tandem study to the two previous adjacent phases, you can anticipate how strong a new market phase will be after the current phase is completed. You can also project the profit/loss potential of the new phase.
In this article I will discuss how to develop a tandem study and use it to determine whether a bullish trend will continue after a strung-out, convoluted correction and whether the continuation will be strong enough to profit from.
IMPORTANCE OF PHASE ANALYSIS
When applying tandem studies, the current phase and the one immediately preceding it are the most important for medium-term analysis. This is because of the psychological aspects and time limits for receiving and processing new information.
Certainly, the overall state of the market and industry is important, but to analyze a specific security it is necessary to analyze the phase the security is in. I refer to this kind of analysis as phase prospecting. It consists of the following components or stages to determine the likelihood:
Of different lengths, stability, and force for the current phase
That a phase will change in several scenarios
Making a profit and evaluating the related risk for the more feasible scenarios.

After this phase-prospecting analysis I can determine the entry point, define the conditions for profitable or unprofitable exit, and position size (including applying a money management strategy). It's only after determining the phase the market is currently in that I will apply the relevant technical indicators. This is because indicators should be interpreted differently for different types of price movements. This kind of approach helps to increase the precision of the analysis and divide the applied trading approaches to certain areas of the market. It also identifies market phases for which certain indicators work better.
Tandem study as a formalized part of phase prospecting is a new addition to technical analysis. When properly combined with the classical technical methods, it can significantly increase its precision.

...Continued in the October issue of Technical Analysis of STOCKS & COMMODITIES

Excerpted from an article originally published in the October 2007 issue of Technical Analysis of
STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2007, Technical Analysis, Inc.

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