Contemporary Market Case Studies from a Harmonic Trading

CONTEMPORARY MARKET CASE STUDIES FROM A HARMONIC TRADING PERSPECTIVE

Despite such extreme volatile long-term price action, Harmonic Trading effectively and accurately provided reliable analysis of the most critical turning points and outlined precise possibilities of probable future action that these markets were facing. In fact, the challenging environment of the past two decades has proven to be a comprehensive test for Harmonic Trading techniques. For example, the Dow Jones Industrials and the S&P 500 have both experienced multi-year bull and bear markets since 2000. This era compares on par with some of the most volatile market environments in history. Notwithstanding, these markets pale in comparison to the incredulous tech bubble in NASDAQ Composite Index at the turn of the century. This index rallied several hundred percent at the end of the 1990s only to lose 80% of those gains in less than three years. These long-term situations challenged the measurement strategies of this approach to decipher the most critical levels of support and resistance and to determine the overall future direction of the markets. The ability of the Harmonic Trading methodology to define the critical long-term market turning points has tremendously validated this approach. For example, the bear market of 2008-2009 possessed a substantial weekly 5-0 pattern that defined the clear make-or-break support zone for the index. Although I no longer operated an advisory service, I posted an initial report of the long-term possibilities outlining the situation earlier in 2008 before the dramatic decline. Since the market environment has changed drastically from the 1990s, it is important to review some historical developments that were a crucial element in the evolution of this approach.

Harmonic Trading was conceived during a particularly bullish era for the markets. Stocks were traded mostly, as currencies and commodities experienced far less public participation than today. Despite the entrenched bullish trend of the 1990s, the market manifested evidence of trouble soon after the decade ended. Although the “pre-9/11” market climate seems as if it is ancient history, these events hold tremendous significance for today and the future. The technical significance of the price action in these markets impacts long-term structural considerations and serves as the established price limits for Harmonic Trading measurements going forward.

The following analysis of these major U.S. indices has two purposes. First, the review of such historic action underscores the importance of these techniques to be analyzed in long-term cases with the same considerations as intra-day situations. The primary difference is that instead of minutes to react as is the case for intra-day opportunities, these markets involved days and weeks of analysis to accurately assess their validity. Second, these markets distinguished the Harmonic Trading approach more than any other situation. At each turn, the reports posted on the website and in related Internet articles accurately outlined the reason for the change in trend based upon distinct harmonic pattern completions and other technical considerations.

The bear market of 2000 and subsequent low in 2003 impacted this approach immensely. The importance of pattern failures during this time was one of the discoveries that expanded the scope of Harmonic Trading. The price action of 2008 reinforced this principle further and engendered an even more vigilant monitoring of the markets in general. Unlike the decisive bullish trend of prior decades, the long-term structure of these indices has vast implications for the future direction and influence on other markets, such as commodities and currencies. The following case studies review these historic patterns and illustrate the clear signals outlined by the Harmonic Trading approach that defined each situation. Starting with actual market reports from my original advisory service from the early 2000s, this review represents a live assessment of the action as it happened. Furthermore, my ability to predict the bear decline of 2008 was directly influenced by the lessons learned from those early days.

THE BEAR MARKET OF 2000 - SAME PATTERNS, DIFFERENT DAY

The true challenge of these changing market environments required a thorough assessment of weekly and monthly harmonic price levels to offer relevant information—let alone pinpoint exact lows and highs of multiyear trends. It is important to remember that Harmonic Trading concepts were relatively new in 2000. The strategies were yielding tremendous success in short-term situations, but the question that loomed in my mind as I refined the approach was whether weekly, monthly, and even yearly Harmonic Trading measurements would be as reliable.

The other dilemma that preceded the turn of the century was the predominant bullish bias of the 1980s and 1990s. The incredible advancement of the Internet in particular opened financial markets to a generation of new online traders. This bullish fervor was the backdrop for unrealistic aspirations and distorted long-term realities. As the bull market of the late 1990s waned, many were locked into a one-sided bias and were unable to adapt to the impending changes. Although bullish harmonic patterns were accurately defining significant opportunities in those early years, the powerful bear market of 2000 overwhelmed many substantial setups. The failure of daily and weekly bullish patterns forced me to step back and take a hard look at the flexibility of this methodology. It became apparent that I had to adjust the approach, employ a more balanced system of pattern analysis, and interpret price action from a more neutral perspective. Although bearish patterns were yielding success, there was a period of time—at least for me—where the major bear market scenario was still not clear and required time to be entirely confirmed. After 13 years, was a major correction at hand? But, an entire meltdown of the preceding bull market still required a violation of many harmonic support levels before I would consider an official bear position. I found myself locked into a bullish mode until enough patterns failed that the information—like a brick being slammed over my head—was indicating significantly more downside than a minor correction. The predominance of the strong uptrend of the prior decades created an inherent bullish bias that favored trading these setups more than bearish patterns. Although the bearish patterns were still effective in determining excellent selling opportunities, the lasting bias of the prior bull market needed to be overcome. As more bullish patterns failed, the technical evidence mounted to respect the severity of the price action. Not to mention, the information provided by this analysis was accurately pinpointing that the overall market direction had changed to a bearish bias. The trend was clearly reversing and heading lower.

THE IMPORTANCE OF PATTERN VIOLATIONS

The bear markets of 2000 and 2008 possessed critical long-term harmonic setups that clearly defined the most relevant technical levels within their overall respective trends. Critical long- term support levels and distinct harmonic patterns consistently marked important turning points and clearly signified the extent of the trouble at hand in each case. The recognition of such price action led to a greater understanding of the importance of these formations as significant technical signals. Within the context of the primary bearish trend, especially in 2000, the repeated pattern failures provided the evidence needed to effectively validate the state of the market. Also, this helped me to focus mostly on bearish patterns for my trading and favor the short side until the major market indices stabilized in both cases.

I must emphasize the importance of this adjustment as a critical advancement in my thinking regarding the entire Harmonic Trading methodology. Instead of staying locked into a bullish mentality, I was able to reassess the current environment of the financial markets at this time and make the adjustments necessary to adapt to the changing environment. Regardless of whether a particular setup was valid, the price action at the completion of many harmonic patterns in the major U.S. indices provided accurate information regarding their future direction. If a pattern was a valid opportunity, the price action typically reversed at the completion point. However, price action that exceeded the completion point for a critical pattern normally resulted in a further extension of the primary trend. In the case of both markets in 2000 and 2008, the failure of long-term bullish patterns led to a substantial downside continuation.

A SIGNPOST FOR FUTURE PRICE ACTION

Another result of these bear markets was a reinforcement of the fact that a pattern is more a signpost of potential future action and not an “end all, be all” signal for trading. I have discussed this principle in each of my three books. In fact, in The Harmonic Trader, I discussed this concept as a critical first step to enable an unbiased perspective and not get locked into one side of the market or the other. Throughout early 2000, a problem quickly emerged when many of the people who initially embraced the Harmonic Trading concepts became disparaged as the bear market progressed. In fact, I received e-mails from people who claimed that harmonic price patterns no longer worked. The problem was not the failure of harmonic patterns, rather their interpretation and analysis of the technical information provided by such failures was flawed. Instead of getting locked in to this mentality, I realized that the overwhelming pattern failures of the time were indicating a further substantial decline in the financial markets. Furthermore, the bullish pattern violations were in fact frequently providing clear trading opportunities, as each breakdown in price action below the projected harmonic support area typically accelerated after failing the setup. In this manner, particular patterns did serve to pinpoint the continuation areas of the major reversal at hand, time and time again.

At a minimum, the price levels determined by Harmonic Trading measurement techniques were consistently identifying the key areas within the primary trend to examine for clues of potential future price action. Distinct long-term Potential Reversal Zones (PRZ) were defining the make-or-break support and resistance levels. Furthermore, the effectiveness of long-term harmonic ratios to gauge price action was particularly impressive. Regardless of the type of setup, the effectiveness of this methodology was consistently accurate in pinpointing the most critical technical levels throughout these volatile times.

THE PROVING GROUNDS—A COMPREHENSIVE TEST

From a longer-term perspective, the experience of these reports of the prior decade resulted in a definitive substantiation of the Harmonic Trading techniques as an effective technical approach to analyze price action. As I mentioned previously, the rules within the Harmonic Trading methodology were relatively new at this time. My ability to navigate through the difficult trading environment during that period was put to the test. In the end, I believe that my overall advisory record and detailed reports prove that Harmonic Trading techniques passed the test and substantiated the validity of this approach. I say this because these reports represent one of the most accurate long-term case studies that have been compiled for this approach.

In each of these markets, I correctly determined the major market trend changes of the time and identified the critical long-term price levels in each instance. The ability to accurately quantify critical price levels was a direct result of applying the Harmonic Trading measurement techniques. The various reports consistently identified the most important levels of support and resistance, utilizing Fibonacci ratios exclusively to project long-term technical areas as critical price targets. Furthermore, the price action at these projected harmonic levels frequently provided early warning signs, as the primary trend remained strong—especially in both bear markets—and indicated that the larger historic price targets were to be tested before a major trend change could occur.

When analyzed within this context and in accordance to the basic rules of harmonic pattern recognition, these reports were capable of anticipating the overall changes in the financial markets and successfully pinpointing the precise levels where these changes would occur. Although this analysis required immense consideration and attention to the daily market action, the ability of these techniques to interpret the overall direction proved increasingly reliable throughout those early years. In the time since, the advancement of the Harmonic Trading methodology, in particular the new strategies outlined in this book, has improved the overall effectiveness and serves to provide a more comprehensive perspective on the basic pattern recognition approach.

Frankly, I was challenged by the market environment during those first few months of reports. Beginning with the extreme multiyear rally of the 1990s and followed by a near-liquidation of the entire market, the remarkable volatility created one of the most difficult market environments of the past 100 years. From a harmonic pattern perspective, the bull market of the late ’90s possessed many bearish patterns that were continually violated. The strong price action overwhelmed many of these setups. Conversely, the bear market from 2000-2003 annihilated what seemed to be once-in-a-lifetime buying opportunities. I learned a great deal during this time. In the long run, this was an important evolutionary process for the entire Harmonic Trading methodology. The lessons learned during this time made me focus on price action in the completion area of harmonic patterns more than the patterns themselves, which led to a more accurate and unbiased analysis of the overall direction of the markets. This opened my eyes and spawned a more flexible interpretation of harmonic price action. In addition, the change in thinking led to a greater integration of applying these patterns within the constraints of the overall trend, especially when related to other standard technical measures. Although this advancement required many years to develop, the time and research invested has yielded significantly improved the strategies and substantially enhanced the already potent capabilities of the Harmonic Trading approach.