Introduction

Every investor wants to know the current trend in order to participate in its profit potential. Uncovering that trend is their primary goal and being able to identify a trend early is an essential prerequisite for profit. Knowing when the trend ends is equally important for bottom line results.

What most investors don't realize is the hidden trend within the trend.

Gravity Center

In the pendulum swings of the market, such as the XAU (gold/silver index), "gravity center" is the point around which prices fluctuate cyclically. This point is constantly changing and is a prime determinant of the overall trend. Prices do not stray too far from this gravity center and eventually return to it. Mathematicians might call this a "mean reversion". In effect, gravity center is a trend all by itself.

In a recently published article, www.gold-eagle.com/editorials_05/tradergarrett062506.html, we suggested that "the herd instincts of greed and fear are prevalent, that virtually all extremes return to a natural equilibrium point or gravity center, and trends and cycles of these tendencies can be identified and measured". What we are attempting to do is demonstrate graphically the motion of emotion across a pendulum equilibrium point.

Examples

Investors use a number of methods to determine primary trend direction and its changes including moving averages, MACD and price oscillators, etc. A simple 10 day moving average can provide a rough outline of the gravity center and its trend but encounters many whipsaws.

My method is to define primary price trends and the gravity center trend in one easily readable display which is smooth as a pendulum's swing while being highly reliable.

It is a simple formula that recognizes the delicate balance of recent highs and lows and then integrates them with today's close. Outside of a sideways market, this method uncovers emerging trends of sufficient slope and degree resulting in a clearly defined and profitable trend chart. Here is an example of the XAU from 2005. The blue line ("GC") is the gravity center trend.

Building on the concept, I developed trading plan to take advantage of these trends. This plan is much like a moving average crossover system while avoiding many of the whipsaws inherent in that methodology.

Let's look at two other examples for the XAU from 2005 and 2006. The blue line is "GC" (gravity center) and the red line "MSM" is a summed derivative of the gravity center trend, smoothed to remove excess noise. A simple crossover, for example, of the blue line (GC) up through the red (MSM) line results in a buy signal.

Current status of the XAU: (7/14/06)

The results again show a profitable uptrend as of 7/14/06. Combined with a review of the TSL (Trend Signal Line) noted in www.gold-eagle.com/editorials_05/tradergarrett062506.html, provides one with additional confidence, confirmation and a significant trading advantage.

Summary

The bottom line is profits and the point of this exercise was to find an effective method for determining the trend in the XAU based on the solid criteria of gravity center. Outside of sideways markets, the methodology appears highly effective and reliable.

July 18, 2006 Contact: Trader Garrett Email: mpendulum@airbits.com Website: www.MarketPendulum.com