The New Science of Technical Analysis

Chapter 7

Sequential^™

At the time I entered the investment business, it was commonplace to attempt to identify price tops and bottoms by using cycles. The length of these cycles was determined by calculating either the number of days from one price low to a succeeding price low or the number of days from a particular price low to a subsequent price peak (see Figures 7.1 and 7.2). This method of market timing is subjective and, because the periods are not static, it does not lend itself to statistical analysis and testing. In fact, the interpretation of cycles is sufficiently vague that, often, where a low or a high might be expected to be found, a condition called “inversion” occurs instead: prices actually do the opposite of that which was anticipated. I was disturbed by this lack of predictability. Consequently, I experimented with the application of the Fibonacci time series to cycles and obtained somewhat better results but nothing extraordinary.

I have always been skeptical of the practice of relying on cycles to identify price tops and bottoms. It is difficult for me to accept the fact that an arbitrarily derived number of days possesses repetitive properties. Quite to the contrary, my research studies suggest that the price action of some trading days is actually meaningless.

Consequently, I researched exhaustively to create a technique that would employ a mechanized timing device to identify price highs and lows as they occurred. I experimented endlessly to determine what ...