The deutsche mark had been in a pronounced bear market during the nine months preceding the time period illustrated in Figure 12.1. Accordingly, that bear market tended to keep the BC under the 50 percent level. The market advisors in the BC survey never got excessively bullish. Rather, they were either excessively bearish, registering readings in the 20 percent and less range, or they were evenly mixed in their opinion, roughly the 50 percent level, about price direction for the DM. The severity of bearishness in this market is also evidenced by noting that the DSI recorded only three readings over the 80 percent level, but 10 times that many readings under the 20 percent level.
Figure 12.2 shows the LTMA chart for December 28 to January 4. December 28 and 29 were back-to-back neutral days which would have prompted the intermediate-term trader to start a new LTMA chart. The neutral day on December 29 was essentially one of the running profile days which closed on its low and produced a DSI of 32 percent versus 61 percent from the previous day. Referring to Figure 12.1, note how in the few days leading up to the creation of the LTMA chart in Figure 12.2 the DSI had already begun to embark on a smooth progression lower from relative high readings. The short-term trader did not receive a sell signal as the market began to roll down the parabola, but as stated earlier the Model is not going to trigger trades for each and every move in the market. Nevertheless, the intermediate-term trader definitely had reason to be looking to short this market vis-à-vis the increasing imbalance of selling activity and the gradual decline in the DSI. The market had the makings for developing a coherent trend down. Whether it would unfold remained to be seen, but that's why it's advantageous to try to operate at the edge of the parabola.
If the down trend did not unfold, the edge of the parabola gives the trader a good entry level. He can exit the trade with a nominal loss or maybe even a small profit.
Figure 12.1 Daily continuation chart, DSI, and BC for DM, 12/1/95 to
7/23/96. (Sources: Bloomberg Financial Markets, MBH Commodity
Advi-sors, Market Vane.)
Figure 12.2 LTMA chart for DM, 12/28/95 to 1/4/96. (Source: SkyTrade.)
Figure 12.3 LTMA chart for DM, 12/28/95 to 1 /10/96. (Source: SkyTrade.)
Figure 12.3 adds the next few days onto the LTMA chart presented in Figure 12.2 and changes the price scale so the new data will fit. January 9 was a 3-R day which would have prompted the creation of another LTMA chart to be maintained concurrently to determine if the market was going to start an up auction. But on January 10, 11, and 12 selling resumed in the market, adding to the imbalance of selling market activity and eliminating the use of the second LTMA chart. As you can see, taking these days as a whole, the market was clearly imbalanced to the sell side.
The bulk of the activity was from OTF sellers and most of the activity was initiating in nature. Moreover, the BC was at the 50 percent area and the DSI has progressed down the parabola in a measured fashion from the relatively high 78 percent on December 27 when the selling range occurred, triggering a sell signal.
Figure 12.4 adds the next several days of activity to the LTMA chart. As you can see, the selling pressure accumulating over the previous days made its presence known in the market and the supply curve shifted lower as more initiating selling came into the market on January 15, 16, and 17. Note the complete absence of buying activity on the right-hand side of the LTMA chart as the market declined those three days. Since I am not going to detail every single day in the moves of these markets, refer to the daily chart in Figure 12.1 to see that the market continued to decline throughout January in an attempt to shut off the selling activity and advertise for buyers.
Figure 12.4 LTMA chart for DM, 12/28/95 to 1/17/96. (Source: SkyTrade.)
Looking at the next section of the market, Figure 12.5 shows a daily bar chart for the DM with the DSI and BC plotted underneath. Referring to that figure, notice that both the DSI and BC readings were excessively bearish in late January 1996. The DSI reached a meager 8 percent and the DSI registered 11 percent. A neutral day on February 2, was a sign of a change in ownership and a potential change in trend for the market. The intermediate-term trader would have started a new LTMA chart on that neutral day. Remember, the goal is to enter the market at the beginning of trends, not after they have been under way for some time. The next two days posted 3-1 buying days as the DSI progressed gradually up to the 70 percent level. The market paused for a few days while the DSI dropped back to the 20 percent level which neutralized the short term excessive bullish element in the market, thus enabling the market to rally if buying came into the market. The market progressed through the parabola in a gradual fashion, with DSI reaching 87 percent on February 20, a neutral day. But at no time between February 1 and 22 did the DSI reach excessively bullish readings and the BC was bumping along under 20 percent at the same time.Figure 12.5 Daily continuation chart DSI, and BC for DM, 1/26/96 to
7/23/96. (Sources: Bloomberg Financial Markets, MBH Commodity
Advi-The market had a neutral day when the DSI was reaching that 87 percent. This prompted the start of a new LTMA chart. Additionally, the BC was just touching the 50 percent level which had served to be the topside excessive bullish reading for quite sometime. Note that as the DSI moved from 87 percent on February 20 back into the random walk range of 50 percent on the twenty-third, the DSI began to lead the BC back down from the relatively extreme 50 percent level. Consequently, the market started to march back down the parabola with selling activity on the LTMA chart and declining sentiment readings. Figure 12.6 shows the beginning of that selling as it accumulated on the LTMA chart. Of the five days recorded, four were days that did not facilitate trade: three neutral days and one non-trend. This activity against the backdrop of relatively high reading in both of the sentiment surveys dovetailed to form a top in the market.