NEW TECHNIQUES
Understanding Leads To Confidence
Auction Market Theory And The Longer Time Frame
by Donald Jones
Knowing when market conditions change will put you ahead of the crowd.
Last issue, I provided an overview of Auction
Market Theory. Two important facts should be kept in mind as I discuss
the next stage, applying the theory: First, markets are not correlated
on a day-to-day basis, and second, markets are in a continuous cycle. The
lack of correlation precludes finding market condition from yesterday's
market, but you still need to know the market condition to make trading
decisions. You find out about market condition from the Overlay Demand
Curve.
MARKET CONDITION FROM OVERLAYS
As traders, we speak casually about market condition. Is the market
trending? Is the market unusually volatile? Has it crossed a resistance
or support price? What path is the market expected to take? Trending implies
a market that may be moving during a certain time frame. Support/resistance
points are historical and rarely tied to current market activity, although
ultimately, current activity may provide the next set of support/resistance
points. But this rarely helps make today's decisions. Market condition
plus a knowledge of the market cycle prepares you for whatever path the
market takes.
You want to run with profits or stay in the hopes of more, but how do
you know if a good move will get better? Look at five sequential days of
Market Profile in Figure 1. The display appears to be three days down (March
16, 19, and 20) followed by three days up (March 20, 21, and 22). If you
sum the five days, the longer-term view is one of balance, which can be
seen in the five-day Overlay in Figure 2 - a roughly bell-shaped curve
with upper and lower distribution limits at 10706 and 10528. The close
of trading at 10628 is well within the balance.
Figure 1: US Treasury bonds, March 16, 2001, through March 22,
2001.
...Continued in the July 2002 issue of Technical Analysis of STOCKS
& COMMODITIES
Excerpted from an article originally published in the July 2002 issue
of Technical Analysis of STOCKS & COMMODITIES magazine. All rights
reserved. © Copyright 2002, Technical Analysis, Inc.
