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February 12, 2005 Comments: I'd like to continue our discussion of using Hagopian's Rule, blended with my own use of measuring objectives to "map out" where the market is most likely headed. I constantly get these types of questions sent to me via private email: "How do I choose the pivots for a Median Line and what do I do if price trades outside of the Median Line or doesn't make it to the Median Line or its Upper or Lower Parallels? Did I draw the wrong Median Line? Do I discard the Median Line once price trades outside the Upper or Lower Median Line Parallel?"
Looking at the image above, you can see I used a Schiff Median Line [which is a Median Line offset from its pivots] to project the potentials of price and time. If you took the time to go back and look at this period, you'll see this was an easy choice of pivots, because any other set of pivots were immediately violated by price movements. Remember! Many times, the Median Lines will TELL YOU whether they are or are not likely candidates for good projections by the way they interact with price action very near the pivots you choose. If you pick what seem like three logical pivots and then draw the Median Line in and see that price is already trading far through the Upper or Lower Median Line Parallel, this is probably not the best Median Line set. Draw again, using a different set of pivots, or try using a Schiff Median Line. Or remember that gaps have TWO pivots, and they can be used as highs or lows! In other words, draw lines, draw more lines and draw more lines! Eventually, you get a feeling pretty quickly whether what you just put on a chart has a chance of being useful.
Going back to the chart above, you should immediately notice two important things about this chart: The first thing I notice is that price has tested the Upper Median Line Parallel three times and each time, the resistance formed by the Upper Median Line Parallel has held the price advance in check. And then looking more closely, you should notice that earlier, when price traded below the Median Line, price was NOT able to trade down to test the Lower Median Line Parallel. This should always be filed away in the back of your head [or if you are like me, write it on the chart to remind you for future reference...], because this is the direct application of Hagopian's rule: If price doesn't trade lower to the "most probable" line, expect a strong movement in the opposite direction.
Does that mean price will just run through all upper resistance until it goes to the moon? Of course not. In fact, the real importance of Dr. Andrews' work was to show time and time again that price only carries so much potential energy with it at any given time, and once that energy is spent, price will stall and either consolidate or will fail and move in the opposite direction. Where is price likely to be when it expends its stored energy? At a Median Line or Upper or Lower Median Line Parallel [or other lines we have discussed here in the past, of similar nature]. Again, I call these the "most probable lines."
So now we have a longer-term chart [based on 60 minute bars] that has been tested at least three times and done a very good job describing price [meaning, price interacted with its "most probable lines" at least three times and price HAD expended its energy at those areas]. We're feeling good about this chart, so let's move to a fifteen minute version, with the same lines drawn in, the very next day:
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Price shot above the Upper Median Line Parallel on the fourth try and travelled quite some distance before running out of stored energy. Did we have ANY clue that price may be carrying more potential or stored energy than we might normally think, looking at the original 60 minute chart? Yes! The failure of price to trade low enough to test its "most probable" line, the Lower Median Line Parallel, alerted us that price MIGHT be carrying a bit more energy, energy that most likely would be spent on an up-side rally. The "most probable" line to the upside was the Upper Median Line Parallel, so if we had reason to believe price was carrying MORE than the "normal amount of stored energy, we should be looking for it to potentially break through that "most probable" line, because of its inability to expend all its energy to the downside earlier--eventually, that energy will get spent! And price spent that extra energy overshooting the Upper Median Line Parallel.
Once price has expended its stored energy, it is either going to form an Energy Coil and re-store its energy in a trading range or it will head in the opposite direction, to its "most probable" line. In this case, the most probable line to the down side would be a test [trading lower from above] the Upper Median Line Parallel. And as you see, price made a beautiful test of its "most probable" line, the Upper Median Line Parallel, and then headed back higher. Again, once it had spent its energy--this time to the downside--it either had to re-store its energy by coiling or it had to trade back higher.
Now note that I added a line that was parallel to the Upper Median Line Parallel that touches the top of the overshoot. That's a Sliding Parallel, and it carries the same frequency as the Median Line and Upper and Lower Median Lines now, meaning it is now in the class of "most probable" lines. So as price turns back up after testing the Upper Median Line Parallel, its "most probable" line, or the area where it is most likely to run out of its stored energy, is this Sliding Parallel line.
Now let's do something very important: Let's play "What if..." What if price doesn't make it to the Sliding Parallel? That would leave us two choices: First, price may be forming an Energy Coil to re-store the energy it spent on these recent sharp moves. If this is the case, when price re-tests the Upper Median Line Parallel from above, that support will hold and price will turn back up again. But we have a second possibility as well: Price may turn back lower and NOT stop at the Upper Median Line Parallel, its "most probable" line. If this happens, we again have a case where we can invoke Hagopian's Rule and use my own meauring method. If you look at the chart, you'll see I added a line underneath the Upper Median Line Parallel, one that runs parallel to it, but is the same distance below the Upper Median Line Parallel as the Sliding Parallel is above it. This Inside Sliding Parallel also carries the same frequency as the Median Line, the Upper and Lower Median Line Parallels and the Sliding Parallel above the Upper Median Line Parallel. It is also a "most probable" line and should price bust down through the Upper Median Line Parallel, the next area where it would most likely run out of energy is at this Inside Sliding Parallel.
Here's my own charting rule: If you add a Sliding Parallel above a Median Line or outside the Upper or Lower Median Line Parallel, add one on the other side of the nearest original "most probable" line right away--you'll most likely end up using it IF the Sliding Parallel you first added was meaningful. Now let's see whether price kept heading higher to test the Sliding Parallel, its "most probable" line, or formed an Energy Coil to re-store energy, or turned lower again and headed down through the Upper Median Line Parallel:
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Price tries to trade higher but fails well before making it to its most probable line, the Sliding Parallel. It gaps open lower the next morning, just below the Upper Median Line Parallel, and if you were tuned in to Hagopian's Rule, you'd be thinking that since price couldn't make it to the "most probable" line to the up side, its likely to continue lower, to a test of its "most probable" line to the down side, in this case the Inside Sliding Parallel. If you know how to trade "zooms and re-tests," the next bar gave you the opportunity to sell at the re-test of that Upper Median Line Parallel. You'd then be looking to take profit as price approached the Inside Sliding Parallel. And looking at the chart, price quickly traded lower and tested the Inside Sliding Parallel, its "most probable" line. And we would expect that at this point, price SHOULD have expended its downside energy. This means that price will either now form an Energy Coil and re-store its energy, or trade back higher to its "most probable" line, the Upper Median Line Parallel.
The next morning, on economic news, price spiked higher, running up through its first "most probable" line. Where is it headed then? It's most likely heading back to a re-test of the Sliding Parallel, its next "most probable" line. And you can see on this chart that price tests the Sliding Parallel above the Upper Median Line Parallel in both the first two bars of the morning, but then ends up down quite some distance from that Sliding Parallel at the close of the second bar--In fact, it closes back below the Upper Median Line Parallel! Price used its upside energy in one quick rush! When that second bar closes, I add in a new down sloping Median Line, and all three of the pivots use the frequency of this Sliding Parallel [The two high pivots are at the Sliding Parallel and the lower pivot is at the Inside Sliding Parallel].
Without going into too much detail, this two bar spike higher that failed to hold its gains is a rail road track formation and this is a very bearish formation. We have covered it here several times and gone over it in the free forum. They are wonderful to trade when you can see them and react in real-time quick enough, which is why it is SO important to have played "WHAT IF" and drawn in the Sliding Parallel and Inside Sliding Parallel in the first place. This gave you the right context to be looking for the areas where price had "run out of gas," which is exactly what happened. Like a car with no brakes climbing a steep mountain road, when it ran out of gas, it came down as fast or faster than it went up. Price should again be headed towards its next "most probable" line OR it should form an Energy Coil to re-store energy. Let's see what happens:
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Price continues to spike lower and it tests the Inside Sliding Parallel to the down side, where it does indeed run out of energy. When it turns higher, it doesn't make it back up to its "most probable" line, the red Upper Median Line. So again, it's important to play "What if..." and remember Hagopian's Rule. If price isn't going to make it up to its most probable line, it will form an Energy Coil or it will have extra energy to expend to the down side, and we should anticipate this as one of the possibilities. So I take the measurement from the Sliding Parallel to the Upper Median Line and now I draw in another Sliding Parallel, this time below the Median Line. Note that there are still several lines below price that are "probable" lines, but the Sliding Parallel and its mirror Inside Parallel have been catching price so well, its not unrealistic to add this line immediately, just in case price contains much more down side energy than we expect.
Price then trades below the Inside Sliding Parallel again, telling us that it indeed has quite a bit of down side energy left to expend. Where is its next down side "most probable" line? We have the thinner blue Lower Median Line Parallel, but I don't favor this line because price hasn't "respected" any of its lines, although it has generally stayed within the bounds of its Upper and Lower Lines as price traded lower. In effect, the thin blue Median Line set has shown us the general speed of the decline of price through time, but it hasn't really yet acted as support or resistance, which means its lines haven't once successfully predicted an area where price would have expended its energy. I think of these untested lines as "price through time" guides, but not as support and resistance areas. So the next "most probable" line is the red Median Line. Let's see where price heads now:
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You can see price heads lower and DOES test the thin blue Lower Median Line Parallel [its "most probable" line] after gapping open lower and the support formed by the thin blue Lower Median Line did a good job showing us where price was likely to run out of downward energy. Indeed, price started back higher, back towards either its "most probable" line to the upside or into an Energy Coil to re-store energy after such a prolonged move lower. But price was unable to test its upside "most probable" line, so we are again left with Hagopian's Rule: It's likely going to be heading lower, and probably accelerating. And again, that's the importance of why we played "What if..." earlier and added that lower Sliding Parallel. If price doesn't form an Energy Coil or at least find support again at the thin blue Lower Median Line Parallel, we're most likely heading to a test of that Lower Sliding Parallel.
And of course, price doesn't form an Energy Coil, nor does the thin blue Lower Median Line Parallel hold. Instead, price plunges lower again, as Hagopian's Rule suggests, and heads right to a test of the Lower Sliding Parallel, which is its "most probable" line. Let's see what price does now that it's made it all the way from the Upper Sliding Parallel to the Lower Sliding Parallel:
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After reaching the Lower Sliding Parallel, price forms a nice trading range, an Energy Coil that it uses to re-store its spent energy before making its next move. The multiple bottoms that form act as a nice base and as price is increasingly unable to make any progress to the downside, you can again invoke Hagopian's Rule and expect a more extreme move in the opposite direction, which we get several days later with a fast move up to test the red Inside Sliding Parallel, which has acted as one of the three important "most probable" lines in this example.
I put this presentation together as price unfolded the past ten days or so, in the hopes that it would illustrate how I draw lines, add lines and try to play "What if..." as price and time unfolds in front of me. It is never as simple as drawing one set of lines. Many traders would have simply discarded the original red Median Line set once price traded aggressively above it, but it seemed clear to me that though price was "dis-placed" or shifted away from the Median Line, its frequency of energy still matched that of the original Median Line. And that's where tools like Sliding Parallels and Warning Lines and Measuring Objectives and Multiple Bottoms come in--they are the tools you can use along with the base of the Median Line to help you project just where price may run out of energy. All you have to do is keep playing "What if..."
This is a long presentation. It may be full of grammatical errors and spelling errors, but for this evening, I have run out of energy and time and now I must go read to my little ones before bed. I have cut the number of charts from over fourty down to the present number, so hopefully, the charts still flow along with the text.
I wish all of you a good week trading!
Act, don't Re-act!
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