I've been watching the recent rise in oil futures and thought we should take a look at how the Market Engine and the Market Effectiveness Chart provides signals. Let's take a look at the two charts that I've put on financialinvestingradio.com.
Go down to the Podcast Charts & Video section and open the charts for FIR #24.
On each of the charts I have placed corresponding numbers that are mapped to gear shifts.
Now, let's take a look at each one of them.
GEAR SHIFT 1: Remember, these gear shifts occur on the Market Effectiveness Chart; but they don't represent a trade entry. A gear shift on this chart is when the red line on the Correlation study spikes down and hits the 0 line or lower. Which is where I have placed the numbers on the Market Effectiveness Chart.
We look for trade entries based on the bias of the Market Effectiveness Chart and trend line breaks on the Trading Chart.
Before we look at the Trading Chart, look at one more thing on the Market Effectiveness Chart...what is the bias of the Market Effectiveness Chart? This is seen by looking at the direction of the bars on the chart...which way are they going? Up!
So, a great bullish setup is when: 1. there's been a gear shift on the Market Effectiveness Chart 2. the bars on the Mkt Eff Chart continue to rise even though price is falling on the Trading Chart 3. when price breaks the trendline on the pullback, go long
So that is the trade set up for this gear shift.
GEAR SHIFT 2: On this Gear Shift the set up is similar. 1. there's been a gear shift on the Market Effectiveness Chart 2. the bars on the Mkt Eff Chart continue to rise even though price is falling on the Trading Chart 3. when price breaks the trendline on the pullback, go long
GEAR SHIFT 3: On this Gear Shift the set up is similar. 1. there's been a gear shift on the Market Effectiveness Chart 2. the bars on the Mkt Eff Chart continue to rise even though price is falling on the Trading Chart 3. when price breaks the trendline on the pullback, go long
GEAR SHIFT 4: This Gear Shift is different, price is chopping sideways and up, and the Market Engine Indicator is at the top and is showing a divergence down. When the price breaks down, the trade is bearish.
But this fast drop sets up something very interesting, look at what is happening to the bars on the Market Effectiveness Chart as price falls. The bars don't close below the green 8 EMA line. This mis-alignment sets up the most powerful Gear Shift in this morning trade, #5.
GEAR SHIFT 5: 1. there's been a gear shift on the Market Effectiveness Chart; with a very fast price drop, 2. the bars on the Mkt Eff Chart continue to rise even though price is falling on the Trading Chart 3. when price breaks the trendline on the pullback, go long
GEAR SHIFT 6: On this Gear Shift the price has been falling in the previous 4-5 bars on the Trading Chart. The Mkt Eff Chart continues to rise. As the price chart breaks the trend line, go long.
GEAR SHIFT 7: This Gear Shift is similar to the previous one, and you would trade it the same way.
The Market Engine and Market Effectiveness Chart provide a foundation for consistent setups and signals.
The key is to get to know very well a small number of instruments to trade and invest. Get to know their personality, the general pattern of the Market Effectiveness chart and the Market Engine signals.
Paper trade or virtual trade them for a while, and then go to live trading very small.
Thanks for joining, until next time, Trade Safe!