February Commentary

With the release of version 4.0 for MetaStock 8.0, AlphOmega has engaged in the clarification process of patterns. We all know that sometimes while observing a wave pattern, the wave identification will not follow through as it should. You will get waves that keep failing and the labeling will be obscure and irrelevant. I chose Bow Valley to illustrate the concept. There were two sequences that did not make sense. The first was waves two of different trend where the initial trend is finally resumed. The second is a wave three that is shorter than the wave one. Let's deal with the first sequence; why does it happen? Should not the software pick it up? The program works in such a way that it will not revaluate past waves but only work with forward data (*). Following the sequence, up to the red wave ii in June, the pattern is normal and respects the rules. In July, what should be a red wave iii fails and moves above the peak of red wave ii. The system sees the breach of rules and labels it as an ascending or green wave ii, making the assumption then that the previous wave must have been a green wave i but not modifying the original label. With version 4.0, the failure or second wave ii is labeled with a gray dot (In the small ellipse where I inserted a ii). The reason for doing this is to alert you that the present pattern needs a reinterpretation. The 2 waves ii could indicate the presence of a flat or triangular pattern or a real change in trend. The second sequence confirms the necessity of the warning. The ensuing wave iii threatens to be the shortest wave in the pattern. The system compares it to wave i and displays a gray wave iii and eventually a gray wave iv (In the larger ellipse).

 

To enlarge, click on the image!

The interpretation of the gray iii and iv, is that they could cancel each other so you would still be in a strong impulsive wave iii. This wave iii will not be the shortest. The zigzag line in blue, shows the way the filtered waves are detected by MetaStock?. Obviously because of the strength of the impulse, the filter is no longer adequate. Visual inspection is the only recourse. Fortunately, AlphOmega alerts you of the potential interpretation failure. The red line between green ii and iii is the new interpreted wave iii. Because of the inherent limits of filtered waves, the selected percentage to filter will work 90% of the time but cannot be made variable to adapt to punctual market conditions, AlphOmega has chosen to flag the risk rather than rely only on your observation experience to detect the anomalies. Another risk highlighted is the overextension of five and x waves. Although this feature calls for visual inspection, it compensates by simplification of the labeling as many redundant labels are almost made invisible. You still have the option of turning these additions off. I believe that evaluating the present data and projecting forward is preferable to traders rather than retrofitting to ascertain the name of a completed pattern. If a pattern can be identified before it is completed, you can make a sounder trade decision.

(*) Other programs will revaluate searching for the best fit for a known pattern. The risk is that you could already be engaged in a trade, when the count is changed making your trade a risk. Of course, you will never be protected from a wave failure but at least be protected from after the fact evaluation.