CHART KEY FOR THE DELPHIC PHENOMENON
MOVING AVERAGES
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3 Moving Averages converge signaling a very large move will follow.
3 Moving Averages converge in an onward trending market signaling the biggest move is yet to come.
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weekly charts to find out if the market is still in a bull (or bear) phase. This information will be critical in determining the overall direction of the market and which direction the market will be going after the convergence of the three moving averages.
Another example of the convergence occurring in a strong bull market is on the December 1997 U.S. Dollar Index chart (page 121).
From the beginning of this chart we are in a bull market, heading gradually upward. Then the market drops near the end of April. The eighteen day moving average crosses below the forty day moving average. After the market price goes above the eighteen day moving average we should have sell orders below the eighteen day moving average (around the first of June), these orders would have never been filled. Shortly after these market conditions abate, the three moving averages converge (around the middle of June). We now know a huge move is coming, but in which direction? First, we have already experienced
"system failure", by that we know the market is going up - as you will read about further in this chapter. Second, we are in a strong bull market.
Third, the eighteen day moving average is already aimed like a directional arrow to cross above the forty day moving average. (We are looking for a buying opportunity two days after the convergence when the eighteen day moving average does cross above the forty day moving average). So what does
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all this tell us? It tells us the market is going up -it's time to buy into this market. Where do we get in? With all this information at hand it looks confusing, but it really is not. You simply return to old faithful - the Delphic Phenomenon. Place your buy order above the eighteen day moving average since it has just crossed above the forty day moving average, and place your protective stop below the forty day moving average.
The method I use to find overall direction in a market is the weekly chart of each market. These give a much clearer indication of the market's trend, up, down, or stuck in a channel. By pulling up a weekly chart you can see in a glance which direction the market is heading, do not trade against this trend! That can present a problem though, because it is the daily charts that create the weekly charts. The daily charts materialize first and thus create the weekly's, so which comes first, the chicken or the egg? This is where you will employ some of the tricks you will soon discover in chapter five. They will help you determine when weekly charts could be ready for reversals. If you are in doubt about the direction of a market on a weekly chart, but see a formation you'd like to trade on the daily chart, my advice to you is to leave it alone.
I've found it is much more fun to miss a market move than it is to be in the market going the wrong way. Being in a market that is moving against you, will more likely than not, ruin your day!
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"SYSTEM FAILURE"
1. The Delphic Phenomenon occurs, but no new lows are set.
2. Place a BUY order ABOVE the 40 day moving average.
3. Your protective stop will be placed BELOW previous lows.
4. The Delphic Phenomenon occurs, but no new highs are set, place a SELL order BELOW the 40 day moving average.
5. Your protective stop will be placed ABOVE previous highs.
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After learning about the convergence of the three moving averages you must once again exercise patience before getting into the market. Time will give you the direction the market is going to take.
You also will know a very large move is getting ready to take place, so don't feel like you are going to miss the boat by not being in the market soon enough. There will always be time to get in once this phenomenon appears. (For traders with experience, this is a great time to buy puts and calls simultaneously, because we know one will have great rewards. Don't forget - this does not work in a channeling market).
Before we move on to the more exciting and dangerous trades I think it is appropriate to explain now what is meant by "system failure". As with any trading system - nothing works 100 percent of the time. Nothing ever will! The best anyone can ever hope for is a trading system that has more winning trades than losing trades. This should result in overall net profits. So, as with all other trading systems, this one has its moments of failure also. The neat thing about a system failure with the Delphic Phenomenon is this - the opposite move occurs with a vengeance. Yes, you read that correctly. Using this situation, the eighteen day moving average crosses below the forty day moving average, and the market price drops, then goes above the eighteen day moving average. This would then set the stage for a sell order to be placed below the eighteen day moving average. The whole
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Delphic Phenomenon. I refer to "system failure"
when the market does one of several things, but all have the same results:
1) The market never goes below the eighteen day moving average again, but keeps going up and again crosses the forty day moving average.
2) The market drops to the eighteen day moving average, stops, reverses and goes up, crossing the forty day moving average
3) The market drops below the• eighteen day moving average, goes a short distance, stops and again reverses. This time it will keep going up, crossing back over the eighteen day and forty day moving averages.
In all of these scenarios one thing will be certain, the resulting move up will be enormous. (In a reverse situation, the resulting move down would be enormous). In each instance your buy order should be placed just above the forty day moving average. (A sell order would be placed below the forty day moving average in a reverse situation). In example 3 above, the way to determine what a
"short distance" means, is to look at the first drop the market made after the market price crossed the forty day moving average and before it rose back above the eighteen day moving average. The market set a low price there and that is the critical
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area. If the market, when it drops out of the eighteen day moving average, does not go blasting past this point, it probably isn't going much further down and you need to be extremely careful. The likelihood of the market reversing in that zone can be pretty high if the market did not go zipping right through this previous low. Quite often the market price will stall out somewhere around the eighteen day moving average in cases like this; that alone should tell you the eighteen day moving average is a crucial pivotal point. This is the area where the market (or traders) decide the next course the market price will be going. This is the time, if you are in the market, you must be on your toes. This is when the market price usually takes off like a rocket - one way or the other. Be alert!
Be sure you fully understand the trading system and "system failure" before you move on to the next chapter. This may be a good time to go back and review the materials already presented before continuing.
In the next chapter you will be shown the dangerous and exciting trades. You will also learn how to use the weekly charts for direction and that reversals could be in the works - even when it doesn't seem logical.
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Chapter five will be devoted to the more dangerous and risky trades. These are formations that I have found to occur with a high degree of reliability and they are quite profitable when they work. When they fail, the losses are much higher than a conservative approach like the Delphic Phenomenon. These are trades I do not recommend employing unless you have the stomach for them.
You must also identify the potential losses and decide if you are willing to risk the trades.