Midas Analysis

Trading and Technical Analysis with MIDAS

Exits with Standard Deviations Bands

We’ve just introduced Standard Deviation Bands, which took the role of resistance and accurately captured a number of pullbacks.  StdDev Bands can be used in trending and sideways markets.  There’s also a third role it can play — as an exit for strong trends.

 

Let’s look at a recent 2min chart of 6E (Euro Futures).   Overall, we have a range bound day, but it’s a large range and price makes some big swings in between.  Each of those swings can be considered an accelerated trend, and we could use TopFinder to track them.

 

Standard Deviation Bands, when fitted to pullbacks or early bars, can play a similar role as an accelerated support line for the upswing.  If price falls below the band, we have a clear signal to exit.

 

The 6E chart below shows three such cases.  From each swing low we launch an S curve. which provides limited value in itself, mainly telling us it’s a sideways market.  However, from each S curve we can add a stddev band, fit it to the first pullback, and we unlock some powerful signals.  The pullbacks are marked with brown arrows and could be our entry point.  The place where price falls below the band is market in red and would be our exit.  The three curves shown track from pullback entry to exit: 15 ticks, 22 ticks, and 7 tickets.

 

Trending with Standard Deviation Bands

Another powerful tool in the MIDAS arsenal is Standard Deviation Bands.   Experience shows they are applicable in a variety of market conditions, including both sideways and trending markets.  Standard Deviation Bands are created by calculating the standard deviation between price and a MIDAS S/R curve, applying an adjustable multiplier, and plotting that above or below the S/R curve.  The multiplier is adjusted so the band catches early pullbacks, and the longer term curve has predictive properties — such as indicating points of pullbacks + reversals.

 

After the recent uptrend in equities, we had a cooling off period on Friday with DOW futures (YM) trending down to retest 12,000 levels.  We could apply S/R curves like we’ve done in numerous other posts, but let’s focus on our new tool – Standard Deviation Bands.  Let’s look at a 2min chart of YM.  First, we launch a primary R curve from the high of the regular trading hours, around 7:30.  Second, we activate standard deviation bands, pulling a lower curve to match the pullback around 8:30.  This produces a powerful stddev curve that resists the pullbacks at 9:50, 11:26, 12:38  to within a few ticks.  Nice catch!

 

 

 

Deeper Pullbacks with Midas Average Curve

In the previous post we demonstrated price action against a powerful R curve, which caught pullbacks 4-5 times.  One pullback slipped through around 11:35.   While MIDAS S/R curves often capture price action with a high degree of accuracy, there are cases where price pushes through, but doesn’t enter into a new trend.  Instead, it tends to hesitate and often reverse off of an invisible zone.

 

Deeper pullbacks can sometimes be explained by looking at a broader time span.  If you are on 1 min bars for example, a 5 min bar chart that includes data from the previous session or extended hours will often produce curves that clearly explain the price zone.

 

Another method for capturing deeper pullbacks is referred to as MIDAS Average Curves (or MACs).  This method was created by Bob English and covered in the book by “Midas Technical Analysis” by Coles and Hawkins.  MACs involve an averaging of the standard MIDAS S/R curves, so in a sense they are nominal MIDAS of MIDAS curves (instead of price data we use the S/R curve as source data).  It’s pretty easy to consider MACs a natural extension of MIDAS, since they simply involve repeating the MIDAS averaging process over the S/R curve.

 

Average curves can be launched along with regular S/R curves, and we often see price interacting with both the S/R curve and the Average.  When price breaks through the primary S/R, it’s common to see it interact with Average.  It might pull back from there, or if it breaks through that as well, we have a good indication of a genuine reversal.

 

The previous post included a number of S/R curves, but also showed Average and Delta curves, which were not explained.  We’ll be covering the Delta curve soon as well, but for now I’d like to draw attention to Average curves.  The previous chart (1 min bars of YM) is repeated above.  Here you see the primary curve holding in most cases, but at one point around 11:35 it fails to hold the price.  Price hesistates along the R curve but presses through.  Around 12:40 it moves to the Average curve and reverses (red dotted line).

 

We also see some later interaction with the Average curve.  Around 12:25 price is consolidating and retests support.  While we see a clean bounce off of its previous S curve, coincidentally we see it retesting the average curve of the major R line covered above.

 

In all fairness it must be noted that not every pullback or price move is explainable in terms of MIDAS.  Price action is the product of traders, who collectively or as major players push price in one direction or another.   As such, price is not bound by MIDAS.  Markets exhibit patterns probably based on fundamental trading behavior, which MIDAS is able to capture remarkably well.  The goal isn’t to explain every pullback and swing, but to understand how the market is moving and find profitable signals. Average curves provide another powerful indicator.

Dynamic Support for the Best Day Since 2009

Headlines are calling today the “Best Day Since 2009″, as the Dow shot up 4.2%.  How could MIDAS help today?  Well, to start, it provides a hierarchy of support levels that track the pullbacks very closely.

 

The chart above shows the extended rally day for YM (Dow Futures).  The YM rally started well ahead of regular trading hours, so the chart shows the night before and full day using 5 min bars.  We launch MIDAS S curves from the typical places (swing lows), and watch how price repeatedly bounces against it, before moving up to the next level.  The chart shows six S curves, and each one shows relevant price action.

 

Only once does price break through an S curve — the very top one around noon.  Even though the top S curve fails, the next S curve immediately catches it, and price continues its ascent until the market closes.

 

Drilling down a bit to a shorter time frame, MIDAS can reveal additional detail.  On the next chart we have YM for the last 3 hours of the day with 1 min bars.   Most of the curves here are standard S/R levels, launched from typical locations.

 

After price has moved up substantially, it makes a swing high (shown at the beginning of the chart).   We likely have some profit taking, with price consolidating lower.  From here, a MIDAS R curve serves as resistance against the next 5 pullbacks for the next hour and a half.

 

Price finally finds  a bottom around noon.  A MIDAS S curve (blue) captures the next pullback, which bounces upward, leading to a new S curve (pink).  As price slices up through the primary resistance curve covered above (in red), we have a good signal price will continue its ascent  (interaction highlighted with box around 12:10).  From here, price consolidates a bit, pulls back to the last S curve, bounces again.  So, we launch another S curve (sky blue), which price returns to at 12:50 to retest.  And again, we launch another S curve (brown), which price returns to at 12:55.   It might be a bit repetitive, but we’ve just seen four levels of MIDAS support curves, serving as powerful inflection points which precisely capture the reversals.

 

Catching Major Market Moves with SPY Weekly

 

While MIDAS often provides powerful signals for day trading, it can also produce highly accurate support for long-term investor time spans.  Going back three years on SPY ETF, we can launch MIDAS S/R curves from swing highs and lows.

 

Starting with the lows of March 2009, we can see price retest it in Oct 2011.  This MIDAS curve (turquoise) provides a powerful support, and it’s remarkable that it caught the low of 2011 with an accuracy measured in ticks!

 

We also launch another support curve from April (sea green), which goes on to catch the low of July 2010 as well as August 2011.  The launch point here isn’t as obvious as the swing lows, but it is a minor pullback.  Even if we missed it initially and launched to fit the next major pullback (July 2009), it captures the two major lows just mentioned.

 

A resistance curve (orange) is launched from the swing high in April 2010, and serves as resistance in June and August (also very close).

 

Looking forward, we can use these established curves as major S/R.  Additionally, we can launch new ones from recent swing highs and lows and watch how price interacts with them.   Launching a curve from early October (in blue),  we see today’s price has fallen and apparently bounced off from it.  So far, the support curve seems to have caught the downturn.  If price breaks below the blue curve, we can probably expect a retest of the next major support (green or even turquoise).  On the other hand, if it holds, we should see it form a powerful support moving forward.   The curves also hint we’ll be range bound so long as price stays below the red resistance curve launched at the last swing high.  For a solid uptrend to form, we’ll need a clean break of the major orange followed by red.

 

Of course, it is not possible to know what will happen next.  The market decides where price will go.  MIDAS provides very powerful signals which are often highly accurate, but we should only trade off of them by monitoring how price responds.