We have created a template which shows the general pattern, that GTSOSC follows over and over again.
The chart below shows that repetitive pattern with typical GTSOSC values plotted against the number of business
days taken to create each swing. You will notice that we label the patterns as cycles 1 through 5 followed
by a connecting A-B-C pattern between each set of 5. One complete pattern from C to C again tends to take about
150 trading days or 7 calendar months. The numbers are not exact of course, but have shown amazing consistency
over many years. Our template shows an average value versus time expectation.
It is useful primarily to help confirm the cycle in the real trading market.
We have lined up a recent chart of the real GTSOSC below the Template chart to show how the cycles can be identified.
With some practice, the patterns become easily recognizable in the real GTSOSC chart.
They don't always travel within the boundaries of +200 to -200 as shown in the Template, in fact recent
ranges as shown in the GTSOSC chart are about 100 units higher than the Template.
This is of little consequence as changes in the boundaries are gradual and easy to adapt to.
Over time they tend to cycle back to near the levels shown in the Template.
GTSMA
In order to add the precision necessary for trading, we developed a 13 day moving average calculation of the
GTSOSC and plotted it on the chart. When the GTOSC line crosses the GTSMA line by at least 15 points,
we consider this a valid signal to Buy (BS) or Sell (SS) depending on the direction of the crossing.
If the current cycle is a B cycle, we consider an upside crossing as a Cover signal (CS) only, to close
out any open positions and stand aside. Occasionally crossings in other cycles may also be assigned (CS)
status if cycle time length and TRIN numbers contradict the validity of a signal. Exceptions such as these are
clearly explained in the analysis which accompanies each of our signals. The E-mini trading chart on our home page
is a record of the accuracy of these signals since July of 1998. (for table of signal results see
Signal History Archive During that period 123 signals were given; 86 being profitable with 37
losses.
Cycle Characteristics
A close look at the individual cycles within the Template patterns will reveal differences in their shape and
time to complete. The following are some of the important points to note.
Cycle 1... Is the first up cycle from a connecting ABC and often has an early pullback to retest the Upward
break above the GTSMA (moving average of GTSOSC). Duration average 17 business days (bd).
Cycle 2... When the market has exhausted the buying pressure from Cycle 1, Cycle 2 down is like a pause
to find some other cash to invest. It usually does not drop to the GTSOSC levels shown at C or 4 bottoms. It very often will form a double bottom pattern. Duration average 17 bd.
Cycle 3... When Cycle 2 has shown that the market has support (double bottom) buying will often be quite
aggressive after the turn. Short, powerful rallies are typical in Cycle 3's. Duration average 17 bd but often shorter if rally is very strong.
Cycle 4... This down cycle is often complex and choppy and does not usually complete until oversold conditions
are reached (defined below). Duration average 26 bd.
Cycle 5... Last main up cycle of each pattern. A good cycle to get out of longer term positions.
Often choppy near the top. Often gives way to a nasty sell off in Cycle A. Duration average 18 bd.
Cycle A... The first down leg of the connecting A-B-C pattern. Sometimes a little choppy at the beginning
as late-comer bulls attempt to buy the first pull-backs. Once this trend is established, however, can produce
sharp and deep sell-off. Duration average 15 bd.
Cycle B... A choppy die-hard attempt by bulls to take the market back towards highs seen at the top of Cycle 5.
Sometimes even reaches new highs in price, but not on the GTSOSC, which signals the unsustainable
nature of this rally. In general an unreliable cycle on which we cover shorts and stand aside. Duration average 15 bd.
Cycle C... The last and generally most bearish leg of the entire 1-2-3-4-5-A-B-C pattern. Sell-offs that
are labeled "crashes" in the media generally occur in C-cycles of the GTSOSC.
Often end in final panic selling which is followed by a sharp reversal which begins the next pattern's Cycle 1.
The powerful selling can produce very low (-400 area) readings on GTSOSC. Duration average 19 bd.
OVERBOUGHT / OVERSOLD
The terms overbought and oversold are widely used throughout the financial world to describe a perceived condition
that buying (overbought) or selling (oversold) has reached a stage that a reversal of trend may be expected.
The trouble is that usually the statements are made without any parameters to define them and are thus most
likely just another manifestation of those old emotions, greed and fear that we referred to previously.
Just as we need normal expected limits to make our GTSOSC useful, we require measurable boundaries for a cyclical
phenomenon which can give the terms overbought and oversold useful definition.
We can be thankful to a man named Richard Arms for providing us with a means to accomplish this measurement.
His ARMS index (also referred to as traders index or TRIN) has become so widely accepted in the financial
community as a tool for gauging the extent of buying or selling pressure, that its value is reported daily
in almost every financial medium. It is very easy to calculate, being the ratio of advances to declines divided
by the ratio of up volume to down volume.
An ARMS number of 1.0 is said to be neutral while bullishness is increasing as the ratio drops lower
(.9, .8, etc) and bearishness increases as the number rises (1.1, 1.2 etc). We would not presume to try to
explain the index as Mr. Arms interprets it. He has written several books (see links page) we will only state
here how we have incorporated the ARMS index into our analysis along with the GTSOSC.
We calculate a 10-day moving average of ARMS and use boundaries near .9 on the average to call the market overbought
and near 1.4 to call it oversold. This can be useful in confirming our analysis of which cycle of the pattern we are
in and are we close enough to normal boundaries to expect a reversal and buy or sell signal.
The primary indicator remains the GTSOSC and its moving average (GTSMA) but the ARMS is a useful supplemental tool.
Below is a current chart of the ARMS (TRIN). Rotated so Oversold\Overbought are oriented correctly. ( NOTE: Our convention is to omit the decimal when describing the TRIN ratio so 1.00 is referred
to on our chart as 100 and .80 as 80 etc. The minus signs have no significance for reading the chart.)
