Midas Analysis

Trading and Technical Analysis with MIDAS

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.