Rob Nicholas asked: “I’m curious about the minimal requirement for acceptance, a single close above 1406. What do you think about a higher level of confirmation because it’s against the longer-term trend, such as a +3 LCC or WPC? Thanks.”

To answer this question we need first to understand that WPCs, and LCCs are filters to confirm that a change in trend has occurred. Let’s first consider the filters I use and why I employ them. Then I’ll turn to answer Rob’s question.

I use three types of filters:

  1. My main filter is a time filter I call Whole Point Counts (WPC) - a term I adopted from Joseph Hart (Trend Dynamics (http://www.trend-dynamics.com/). WPCs are augmented by two other filters.
  2. A price filter I call Maximum Extension. This is my own idea and
  3. A momentum filter Line Count Change (LCC). This is also an idea adopted from Trend Dynamics.

Those are the filters I use.

The reason I use them is founded on the technical analysis principle that a trend persists until a change in trend occurs. The key word here is persists. Trends often continue for far longer than trades expect. For this reason, I adopted the filters to eliminate some of the false change in trend signals.

Figure 1 shows the idea sequence of events for a change in trend. The black line represents a higher time frame line direction - for the purposes of this post, let’s call it the quarterly line direction; the red line represents the trader’s time frame trend - for the purposes of this post, let’s call it the monthly trend. Point ‘C” is the same price level for both lines. I have drawn the black line above the red for visual purposes only.

When the quarterly turns down, the monthly attempts to change its trend. In an ideal world, following the WPC, the market tests the break down point before heading South. If the market accepts above the Primary Buy Zone, Market Profile Theory suggests the market will proceed to at least the Primary Sell Zone.

With that under our belt, let me answer Rob’s question.

The ideas of WPC, LCC etc play no part on the re-acceptance above the Primary Buy Zone. After an Upthrust Change in Trend pattern, we’d expect the market to form a down trend. If instead the market re-accepts above the Primary Buy Zone, the market will either:

  1. resume the quarterly uptrend.
  2. will form a congestion between the Primary Zones or
  3. will fail around the Point of Control (50%) or the top (66.7% ) or bottom of value (33.33%). The percentages represent the retracement levels of the range. They are rule of thumb approximations of the Market Profile support and resistance areas.

Rob, hope this is clear.

05-06-2008-cit.jpg

FIGURE 1 CIT Path

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