Market positions of a Harmonic Trading

MARKET POSITIONS OF A HARMONI TRADING

The following synopsis of these reports represents an accurate research study on the effectiveness of these techniques in real-time situations. Throughout this time period, my reasons for particular market positions and specific price targets were clearly stated and presented well in advance. From a general perspective, my advisory service official positions for each of the three major U.S. indices were as follows:

• 1998–September 2000: Bullish
• September 2000–April 2003: Bearish
• April 2003–November 2003: Neutral
• November 2003: Bullish

I will explain the various pattern developments of the times and my reasons for the analysis presented. The recommendations of the advisory service were exclusively based on Harmonic Trading measurement techniques. It is important to be mindful of the progression of pattern analysis and the associated price action, as various harmonic scenarios unfolded. The most important point is that distinct harmonic measurement techniques provided consistently reliable technical information throughout this entire time period. The end result was an extremely accurate collection of monthly reports that defined critical technical price levels and the major changes in the overall market direction during a rather volatile long-term market environment.

STANDARD & POOR’S 500 REVIEW

Of the three major U.S. indices, the Standard & Poor’s 500 was a leading index that frequently formed distinct harmonic patterns and responded well to critical long-term Fibonacci levels of support and resistance. In fact, the S&P 500 was my baseline index for the entire market. In essence, the price action on the S&P 500 and the validity of the various harmonic setups effectively indicated the probable future price action for the markets in general. For example, it was common for the markets to form different harmonic patterns within each index simultaneously. The S&P 500 was typically forming the most distinct patterns with price action that provided clues of the impending direction before the other two indices. Therefore, a failure in a pattern in the S&P 500 would typically translate into a failure of another pattern in one of the other two indices.

BEARISH GARTLEY MARKS THE BEGINNING OF THE BEAR

In my S&P 500 analysis, I identified some significant harmonic developments that pointed to a major reversal at hand. After the bull market of the 1990s ended with the decade, the index quickly violated some critical technical levels that suggested a greater correction was in the works. In fact, the index formed a Bearish Gartley on the weekly chart in August 2000 that marked a significant failure of the prior all-time high. This pattern turned out to be the structure that initiated the multiyear bear market.

The reversal from the Bearish Gartley was the first significant failure of a prior high within the established bullish trend in nearly five years. The price action from 1995–2000 was among the strongest bull markets in history. Although I maintained a bullish position from 1998 until September 2000, this pattern was clearly signaling trouble for the S&P 500 on a long-term basis. The reversal from its completion was one of the primary reasons for my bearish position.

STANDARD & POOR’S 500 (^SPX): WEEKLY BEARISH GARTLEY

It all started with this weekly Bearish Gartley just above the 1500 area (see Figure 1.1). Although the CD leg was a bit extended, the structure possessed a precise alignment of harmonic ratios to validate the pattern. The interesting aspect of the price action was the decisive downside continuation following the completion of the pattern. I outlined this setup as early as June 2000, stating in the monthly report:

“The S&P 500 has held the lows set in the past two months.… Despite this strength, there is a nice shorting opportunity at the 78.6% retracement from the high that would complete a Bearish Gartley pattern. There are three harmonic numbers just above 1500 that define the potential reversal zone:

• AB=CD at 1505
• 1.27BC at 1515
• .786XA at 1510

I would focus closely on the 1510 area where the .786XA completes. Although the index may exceed this area slightly, if the bearish pattern is valid, the index should not rally too far above this zone.”

FIGURE 1.1

The decisive downside continuation following the completion of this pattern clearly indicated the change in trend that was occurring. In fact, in my September 2000 market report three months later, I outlined this breakdown:

“As we enter the historically ominous September-October period, it is essential to consider such bearish possibilities.… The most critical levels to examine in the next few weeks are the short-term .618 and .786 retracements from the July low to the August high.. I would become extremely bearish if the index sold off sharply through these support levels. In that event, I would look for the index to sell off well below the 1400 level. For now, stay on the sides and watch these levels closely.”

The index declined steadily in the months that followed and triggered the next set of harmonic levels at the 1300 level.

TWO MORE FAILED HARMONIC SCENARIOS—1300 AND 1150

Despite the bearish downtrend, the index still possessed critical support levels that continued to maintain the long-term bullish trend. The next set of long-term harmonic support was well-below the prior Bearish Gartley at 1500. Although the index possessed a Bullish AB=CD on the weekly chart at the 1300 level, the price action failed this area decidedly. Within a few months later, the price action was clearly headed for the 1150 area, where the next set of long-term harmonic retracements converged. I outlined this scenario in my December 2000 market report, stating:

“The test of 1150 will be one of the most critical market events of the New Year. The 1150 area represents a convergence of significant Fibonacci projections or retracements for each of the past six years. From each of the previous years’ low to this year’s high, these retracements converge in the mid-1100 area:

• 1999 1.27 @ 1145
• 1998 .618 @ 1165
• 1997 .5 @ 1145
• 1996 .382 @ 1190

A convergence of numbers like this will most likely act as a magnet and pull the index down to test all of the numbers in this area. A capitulation sell-off could happen quickly and signal the end of the bear trend. But, the index must hold this price level. Therefore, the picture for the S&P is clear: A violation of the 1300 lows will cause a decisive move to 1150.”

THE ROAD TO 800

It didn’t take long for the index to fail the 1300 level and test 1100. In fact, three months after the December 2000 report, the index reached this area. Although the price action bounced on the initial test, there was little upside continuation, and the index quickly stalled in the following months. As the daily price action stalled, I became increasingly concerned and issued this warning in November 2001:

“The S&P is stuck in this sharp bear trend. Although there are a few Bullish AB=CD patterns beginning to form, these patterns complete at much lower levels—around 800. In the next few weeks, the index will most likely encounter resistance as it tests the upper range of the channel. A violation of the 1075 level would trigger a retest of the September lows. Therefore, I remain bearish on the index.”

Although the 800 area was starting to shape up, it is important to note that this was nearly a blasphemous statement at the time. Despite already losing one-third of its value, it was apparent that the index clearly was heading toward the completion of the multiple AB=CD patterns at the 800 level. 

STANDARD & POOR’S 500 (^SPX): WEEKLY

BULLISH AB=CD PATTERNS

A decline to 800 was going to represent a 50% “hair cut” in the index, which would eventually result in one of the most significant bear market declines in history (see Figure 1.2). Despite such a bold prediction, I did not waver, as these patterns converged with a few long-term retracements to clearly define the 800 level as critical harmonic and historic support. This scenario was clearly coming together, signaling its fruition nearly 18 months prior to its eventual completion. Although this scenario required some time before being realized, the harmonic factors of the long-term downtrend were clearly dictating the direction of the price action. Furthermore, it became apparent that the market direction was still down because the overwhelming harmonic setup that completed at the 800 level represented such a fantastic buying opportunity.

FIGURE 1.2

After the first test of this projected support zone, I reiterated the 800 target a year later in my November 2002 Standard & Poor’s market report, stating:

“It is important to note that the S&P 500 possesses the most harmonic scenario of all of the indices. The historic retracements and the distinct bullish AB=CD patterns defined the 800 area as a major potential bottom. The critical element to validate this long- term Potential Reversal Zone (PRZ) is time. If the index can hold these levels and move higher, the stronger the support at 800 will become… the index still needs more time to resolve the larger bearish trend. The index is close to challenging the three-year downtrend and decisively changing its course. But, it must provide more constructive bullish action before ending the downtrend. For these reasons, the official position remains bearish.”

THE HISTORIC LOW AT 800

After the S&P 500 bounced sharply on the initial test of the long-term Bullish AB=CD pattern convergence, the index formed a distinct Bullish Bat in this significant Potential Reversal Zone (PRZ). The completion of this smaller pattern within the larger PRZ was the defining harmonic signal that confirmed the entire 800 area as historic support. In my March 2003 Standard & Poor’s 500 market report, I outlined my argument for the completion of the bear market:

“Without question, the next two weeks will be a historically defining time period for the markets. The Standard & Poor’s 500 has been the Harmonic bellwether for all of the indices. The index has consolidated for the past nine months in a considerable Harmonic support zone at the 800 level.… It is amazing to consider the significance of the 800 area and the price action of the S&P 500 for the past 9 months. The clear Bullish AB=CD patterns and the longer-term trend line support are defining this area as a historic point for the index.”

STANDARD & POOR’S 500 (^SPX): WEEKLY BULLISH BAT COMPLETING WITHIN THE BULLISH AB=CD(AB=CD) POTENTIAL REVERSAL ZONE (PRZ) @ 800

Although the ultimate bear market low reversed at 770—slightly beyond the weekly PRZ, the Bullish Bat pinpointed the precise area within this long-term support zone that marked the beginning of the new bull market. In fact, in my April 2003 S&P 500 market report, I wrote:

“The ‘tea leaves’ of the entire Harmonic convergence at 800 says that the bottom has completed for the index. The impending breakout of the bear market channel will be significant, and it will confirm this 800 as a historic low. For these reasons, the official position is now NEUTRAL with a bias to the upside. Although the index still needs to take out some resistance levels—namely a strong move above the 950 area—the index has resolved this long- awaited Potential Reversal Zone (PRZ).”

Figure 1.3 shows the distinct Bullish Bat that developed within the larger PRZ in the 800 area.

FIGURE 1.3

STANDARD & POOR’S 500 CONCLUSION

My experience in writing these market reports for the Standard & Poor’s 500 Index in the early days was one of the most educational endeavors of my life. The harmonic measurement strategies proved incredibly reliable, as distinct patterns and Fibonacci ratios effectively defined the critical turning points in the index for a period of many years. It is important to emphasize that these techniques were new during the time that I offered my advisory service (1998–2004). However, I knew that this new approach effectively analyzed price action on all time frames. Therefore, I knew that if I properly applied these measurement strategies to the daily and the weekly time frames as I did for intra-day trading, I would be able to accurately decipher the long-term price action. The history of these reports clearly shows how the harmonic measurement techniques consistently predicted the overall market direction and defined those critical areas where the trend would potentially change.

NASDAQ COMPOSITE REVIEW

In much the same manner as the S&P 500, the NASDAQ Composite Index possessed many harmonic patterns and responded well to long-term Fibonacci ratios. Although the price action was much more volatile in the NASDAQ, the predominant trend throughout this time was dictated by several distinct “harmonic events” that accurately defined the future price action in each case.

One notable aspect of the bear market in the NASDAQ Composite was the overwhelming failure of many significant long-term patterns. The violation of many of these setups seriously questioned the integrity of the entire Harmonic Trading approach. Although the overwhelming failure of most bullish patterns during this time might have presented a frustrating environment for the bulls, the technical phenomenon of these pattern violations was signaling a severe decline at hand. I address these situations a bit later in this section, but there was as much to learn about failed harmonic price action on the upside as well as the downside.

THE PARABOLIC RALLY TO 5000

It was amazing. Incredible. Simply stated, the rally from August 1999 to the top in March 2000 was the greatest bullish price action that I have ever witnessed. This was an era of insanely priced tech stocks that frequently traded 10–20 point price swings every day. Stocks such as Dell, Microsoft, Qualcomm, Yahoo!, and others were among the greatest bull markets of all time—right up there with the Tulip Bulb and 1929 manias!