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Chart Symmetry

Standard & Poors 500

February 15, 1999

Chart Symmetry – a comprehensive system for technical analysis – is designed around two observations of the way prices behave:

  1. Experimentation with specially developed software, capable of drawing very accurate trend lines, revealed that prices do not execute reversals at random, but tend to change trend or direction along certain preferred gradients. Quite a number of such preferred gradients can be identified on each price chart.
  2. These preferred gradients also do not occur at random, but share a relationship through the Fibonacci ratio, i.e. once one preferred gradient has been identified, other preferred gradients can be derived by applying the Fibonacci ratio to the known gradient, to result in either a steeper or shallower gradient. The transformation can be repeated on the new gradient to generate a whole fan of preferred gradients that can be recreated from any member of the set. If one gradient has been derived from another, they are said to be related, as members of the same family of gradients.

The example shows the Standard & Poors 500 daily chart. Master line M is generated between the two chart points marked with an 'x'. Channel A-B is the steeper derivative of the gradient of line M. Lines A and B are generated from a single origin, marked 'o', using the calculated gradient. The chart formation between A and M is a megaphone; it shows that the boundaries of traditional patterns – wedges, megaphones, triangles and pennants – usually are related, i.e. the gradients can be derived from each other.

Analysis is performed by generating one line on the chart through two chart points. The gradient of this master line is then used to generate additional trend lines, each from only one point on the chart, that are either parallel, inverted or have a derived gradient. If these lines provide a good fit, it serves as confirmation that the master line is indeed a preferred gradient. The search is then continued to identify chart patterns – channels, wedges, etc – that can assist the analysis.

Knowledge that one boundary of a pattern can be derived from the gradient of the other boundary though one or more gradient transformations, is very useful when searching a chart for the correct master line to use and for the exact definition of the formations.

From knowledge of how the price tends to behave within these patterns, it is possible to anticipate its behaviour and to accurately identify points where patterns could be broken.

Chart Symmetry is quite accurate. Although 'false' or temporary breaks from patterns do occur, as a rule a penetration of more than 0.5% should be seen as a break.

One example of a penetration through a trend line that is quite valid and not a 'false' break, is the bifurcated break. On the weekly chart of the US 30-year Treasury bond two examples of such a break can be seen. One lies below line B; the second, smaller break occurred when the yield first reached line X. As usual, master line M was generated through 2 chart points, while parallels A and B and 3rd steeper derivatives X and Y were all generated from a single chart point using calculated gradients. Line I is the direct inverse of line M. The break above X-Y is bearish for the medium to longer term, but a near term recovery to return to line X is a possibility – known as a 'goodbye kiss' – before the main bear trend resumes.

The yen price of gold

This week's analysis is a daily chart of the price of gold in yen, which is calculated by multiplying the daily PM fix by the closing value of the dollar-yen rate.

The master line, M, is the top resistance line on the chart. Lines F1, F3 and F5 are the first, third and fifth steeper derivatives of line M and were generated from a single point on the chart using gradients calculated from the gradient of M. F3 is a watershed line – a major trend line that passes through the chart, acting as both support and resistance more frequently than what it is penetrated.

Two formations are of interest. M-F1 is a large broadening formation, or megaphone. This kind of formation is often characterised by very volatile and sustained price swings.

F3-F5 is a steep descending wedge formation. On the way down, during leg 2, the price made a bifurcated top above line F5. On Friday the price broke just a fraction above line F5 at the end of leg 5 of the wedge, to give early warning of a bull market in the yen price of gold.

Such a bull market can of course develop either through new weakness in the yen or because the dollar price of gold is rising, or as a combination of the two. If, as has happened recently, the yen gains against the dollar, the dollar price of gold has to rise correspondingly faster to maintain a bull trend in the yen price.

On the weekly chart of gold shown here recently, Friday's London PM fix of $289.15 was about $1.50 clear of the top boundary of the steep bear channel – which is promising, but not yet a convincing break from the 30 month bear channel.   Perhaps this week?

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