Looking Forward by Looking Back

For a period of time Guppy Multiple Moving Averages captured my imagination and I spent a godly amount of hours analyzing them. One of the main problems I now realize I had at the time was content sans context. While I understood the core nature of trend trading and what it represented, I was lacking a deeper understanding of market mechanics and the relationship between complete set ups and being able to act upon them. As a result I was looking for some magical transformation in my knowledge yet still ended up in a desert using sandpaper as a map. 

 

Over the past two weeks I've been revisiting old notes in order to see what progress I have made. At times I find myself utterly absorbed trying to take the next step I neglect to stop and look around and take a gander at the view. Lately I've found myself repeating a number of the same steps but I'd never know because the scenery is full of dunes and the wind keeps sweeping away my foot prints. Considering this I found it necessary to get my bearings and review.

 

The basis of GMMA analysis is tracking two types of market participants through moving averages, the traders and the investors. The traders are represented by the 3, 5, 8, 10, 12, and 15 EMA while the investors are represented by the longer term 30, 35, 40, 45, 50 and 60 EMA. Based upon the moves of these averages, the underlying sentiment of these two groups can be analyzed by their interaction. A core interpretation of this relationship from the traders perspective is whether or not the investors are supporting the move as indicated by the separation between these two groups of averages, and the separation of the longer term averages themselves as well as the support shown by the longer term averages when the shorter pull back into them.

GMMA Trend Velocity

One of the techniques of GMMA is the Trend Volatility Line, which I've dubbed Trend Velocity Line. Darryl Guppy explains the mechanics of this on his website.  Using these basics, I would move day by day across various charts and document the number of days it would take the 30 EMA to catch up in price to the 15EMA, and the separation and compression of the longer term averages. Additional notes I took were the pull back zones, pinpointing entry signals based upon price breaking the previous peak of the 3 EMA. As much as I tried to make this work at the time, I never quite could. In retrospect, I can now see that I had a full trading system to implement, but I also realize there were some fundamentals lacking in my play book to make something like this work for me. 

Currently one of the market structures I've been studying is momentum. With a clearer understanding of the mechanics and measurements of momentum I decided to take another gander using the NASDAQ since 07/27. I've illustrated key periods of interaction between the traders and investors and how I would now interpret this action. There are four zones where the traders made rally attempts and in each zone the interaction of the investors is telling. 

NASDAQ GMMA Analysis

 

Rally Attempt 1 shows a bounce by the traders, but this quickly fails as the fastest EMAs, the 3 and 5 period barely align to the upside before breaking down.

Rally Attempt 2 shows a crossing of the short term EMAs and price begins to enter into the range of the investors, which in the theory of GMMA analysis are important because it is their buying that ultimately supports the move. In this zone these longer term averages begin to show some support as evident by the flattening of the 30 and 35 EMAs, but not enough as this rally break fails. Further, the short term EMAs did not have a full cross over and realignment to the upside suggesting this attempt has a high probability of failure.

Rally Attempt 3 shows price breaking above the longer term averages and also shows them beginning to compress and flatten out indicating that the there may be some support showing up here from the investors. The velocity of these longer term moving averages is also beginning to slow in this area.

Rally Attempt 4 shows a confluence of price above the longer term averages, a complete alignment of the shorter term to the upside, and further flattening and compression of the longer term averages. As of 10/21/11, these averages are beginning to cross over themselves and realign to the upside.

GMMA Separation Count

Another way of looking at this is the rate of change of the longer term averages as represented by the difference between the 30 and 60 day EMAs. The peak separation was 106 and from there I've jotted at 5 day intervals the separation of these. Additionally, I plotted the number of days it takes the 30EMA to catch the 15 EMA price- between 08/12 this took 6 trading days. On that date I draw a trend line down to where the 15 EMA is and from that price draw a trend line across the chart. As can be seen, this lines has stood for 43 trading days without breaking.

Some other key factors that have become clearer in revisiting some of my old notes and applying it to my studies of underlying market breadth is that the signals given by the the GMMA have been in time with the other indicators I use. The Stock Bee Market Monitor that I use signaled bearishness on 07/27 and the following day the GMMA crossed to the downside. 

MM Bearish Signal

 

Comparing the GMMA to the $BPNYA, the $BPNYA gave a Bull Alert on 10/11, the GMMA crossed to the upside on 10/18, and the $BPNYA gave a Bull Confirmed signal on 10/10. Again, this signal is in line during this period at least. And the Market Monitor I use also indicates bullishness.

MM Bullish Signal

In placing my former thoughts through a sieve of current context I'm attempting to create continuity and bridge some gaps that I had at the time and some of which I continue to have.  In some ways what I thought at the time isn't much different then what I think now and this has both positive and negative connotations.  By taking time to review I can more clearly see where I am dog paddling, where I am swimming, and where I am drowning. More importantly I view this as a process of demystifying tools and indicators to avoid the trap of looking for something special when there are more significant areas where energy should be directed.  All three tools are closely correlated in their timing and each have limitations, but the greater limitation is not being able to do anything about the signal.