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MIDAS MARKET ANALYSIS
Modified VWAP Methodologies

New Research: Essay Four


Essay on MIDAS/AC Quadrating Price Levels


© Andrew Coles



Introduction


This essay will introduce a second indicator I’ve developed in 2013/14 since the book’s publication. Interested readers not yet acquainted with the first indicator – the MIDAS/AC Normal Deviation Bands – can access it here or via the MIDAS essays page. They can also read my blog post summary of December 16 2013.


I’ve called the new indicator MIDAS/AC Quadrating Price Levels. The new indicator automatically quadrates (adapts, harmonizes, conforms) to four key variables:


  1. The higher chart timeframe chosen (daily, weekly, monthly, etc)
  2. The direction of the intraday trend
  3. The intraday timeframe chosen
  4. The volume (intraday and higher timeframe)


I’ll say much more about these four variables below.


The essay begins with the first variable (the higher timeframe), but the really dramatic properties of this indicator don’t emerge until we look at the influence of the intraday variables, especially variables (2), (3) and (4). The intraday functioning of the indicator is examined in the second part of this essay with several charts that MIDAS users should find intriguing.


Characteristics of the new indicator


The new indicator consists of a series of five price levels which at first sight resemble the familiar Price Pivot levels. However, the plotting of the five price levels is not coextensive with the standard Pivot Points and the underlying theory is also quite different. From the topmost down I label the five levels Q5 to Q1, with Q3 being the middle level.


The primary function of the price levels of the new indicator is support and resistance. How these levels function in relation to other MIDAS indicators will also be discussed briefly below.


Motivation for the new indicator and Paul Levine’s Inflection Point Philosophy


It was central to Paul Levine’s philosophy that MIDAS curves are launched from trend inflection points. These mooring points he naturally understood to be changes in market psychology. Inflection points occur (fractally) at all degrees of trend, from minor intraday mood changes to massive secular-degree shifts in opinion on monthly and quarterly charts related to evolving market fundamentals.  


In Chapter 16 of the MIDAS book and subsequently in two Active Trader articles (June and July 2011 issues) I extended the Inflection Point Philosophy to out-of-reach inflection points in Fourth Generation (Gen 4) curves. This work has resulted in a large number of Gen 4 curves applied to volume, momentum, sentiment, intermarket RS lines, spread analysis, and economic time series. Interested readers can access the separate essay on Gen-4 curves in the MIDAS Essays section of the website.


The new Quadrating Price Levels extend Paul Levine’s Inflection Point Philosophy further by exploring the idea that inflection points can not only be out-of-reach but also potential.


The idea that an inflection point is potential is easy to grasp. Any chart-based area of support or resistance such as a trendline, or even a standard Pivot Point, is a potential inflection point in the sense that there’s a strong expectation that when the price trend reaches this area there’ll be a change in this trend until there’s eventually a breakout.


The meaning of “quadrating” in relation to the four variables


The verb “quadrating” means conforming, adapting, or harmonizing. The term appropriately describes the behaviour of the indicator in relation to the four variables whose changing values are key to its adapting qualities. In this section I’ll expand on each of the four variables.


1) The higher timeframe chosen (daily, weekly, monthly, quarterly, yearly)


First, the levels adapt to whatever higher timeframe is chosen while creating new price levels. So far, this capacity is shared with standard price Pivot Points. However, the new Quadrating Price Levels aren’t coextensive on any timeframe with standard Pivot Points. This will be illustrated in charts below.


2) Adaptation to the direction of the intraday trend


The second way the levels quadrate (adapt) is in relation to intraday price movement. The five standard Pivot Points are static horizontal lines that a trader will project across his or her chart for the day’s trading session. By contrast, the Quadrating Price Levels adjust up or down in real-time in response to whether price is uptrending or downtrending. When price is moving sideways the curves will become horizontal.


3) The Intraday timeframe chosen


With standard Pivot Points, the lowest level is the daily level, the narrowest and most popular price level used by day traders. However, the new Quadrate Price Levels adjust up or down further in relation to the intraday timeframe chosen. These narrower adjustment levels would be pointless if their potential roles in support and resistance is negligible. However, we’ll see below that this is not the case.


I call the the higher timeframe levels down to the daily timeframe the “outer levels” and the intraday levels the “inner levels”. When using the new indicator, I strongly recommend that traders apply a daily “outer level” to their intraday charts in addition to the “inner level” produced by their intraday timeframe. Choosing between various intraday levels is an important issue and I’ll suggest a methodology below.


In the next main section, we’ll look at the “outer levels” created by the indicator on higher level charts (weekly and monthly) and compare them with levels created by standard Price Pivots. Following this section, we’ll then look at the levels on daily price charts. In the final section we’ll look at the intraday “inner level” functioning of the indicator.


4) Adaptation to the volume trend


The final way the new levels adapt is in relation to the volume trend. As I discussed in Chapter 11 of the MIDAS book, there are four basic relationships between price and volume and each relationship determines a rule-like response in plotting MIDAS curves. Volume therefore plays a fundamental role in the placement of the new curves. Volume will impact the chart placing of the “outer levels” and the “inner levels”.


With this fourfold meaning of “quadrating”, let’s take a first look at the new indicator, starting with the “outer levels”.


 “Outer Level” functioning on Monthly and Weekly Charts


Monthly charts


Figure 1 below is a monthly cash chart of the German DAX index from the start of the current uptrend in August 2011 to the present (February 2014). The standard monthly Pivot Points are in blue and the new Quadrating Price Levels in red. Admittedly, the reader isn’t able to see much of the new indicator in this chart. Its purpose is merely to provide a broad comparison between the two indicators. Subsequent charts will provide more detail.



Figure 1: Monthly chart of DAX with standard Pivot Points in blue and the Quadrating Price Levels in red


Figure 2 below is the same chart timeframe with the standard Pivot Points removed and the Quadrating Price levels in red. As noted, from the topmost level down, I label the levels Q5 to Q1, with the middle level (labeled simply “pivot” in the standard pivot point hierarchy) labeled Q3.



Figure 2: Monthly chart of DAX with the Quadrating Price Levels labelled Q5 to Q1 (Q3 being the middle level)


As we see, the levels perform a very adequate role (especially Q4 and Q2) in capturing the high and low of each month respectively. Q5 and Q1 (the outermost levels) are often further away from the monthly extremes. The reader will also notice that Q3 very often captures the opening price of each month and usually plays an important intraday role.


On the next page, we’ll take a look at one more monthly chart before spending a little more time with weeky and daily chart levels and then with intraday charts.

















     




















































































































































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