Filtered Waves and Structure (Back to the Basics) MTA, Nov Copyright © 1996 – 2009 Linda Raschke and LBRGroup Inc. All Rights Reserved.

Copyright (c) LBRGroup All Rights Reserved. 2 Filtered Waves – Basic Theory Arthur Merrill, 1977 Arthur Merrill’s filtered waves used a percentage of price movement (5%) to filter out the noise. His work was important because he dedicated a whole book to the concept of classifying patterns by the wave structure. Gann was probably the most popular predecessor of swing charting. Welles Wilder documented the use of ATR (Average True Range) functions to quantify swings as opposed to percent functions. This was applied to a system called the Volatility stop and reverse system. Merrill’s work was far more comprehensive, in that not only did he classify previous market structures, he also developed classic actuarial tables, or probability grids, to measure the median % increase/decrease and duration of bull and bear markets.

Copyright (c) LBRGroup All Rights Reserved. 3 Market Structure as measured by Swings Waves eliminate “noise” and thus make is easier to determine TREND Additionally, the absolute support and resistance are one more way of adding structure. While Art Merrill used a percent function, we use an ATR function. A new Up Wave starts when price moves 3 ATRs up from the lowest low or lowest close over 15-period look-back. A new Down wave starts when price moves 3 ATR’s down from the highest high or highest close over 15-period look back period. Once market swings have been quantified, relationships, turning points, and trend can once again be classified, counted, examined and expressed in numbers. We can start to build a probability grid, evaluating trade management strategies.

Copyright (c) LBRGroup All Rights Reserved. 4 Wave Structure

Copyright (c) LBRGroup All Rights Reserved. 5 Market Structure – sideways line or “value areas” The second part to analyzing market structure is the establishment of support and resistance (defined by a “test”) as well as the formation of “value areas”. These can also be called sideways lines or consolidation formations. This is where the price has traded back and forth through a specific level multiple times. The agreement between buyers and sellers has established “value”. A move outside this value area means the market is out of balance, and it will continue to trend until a new value area is determined. If the push outside the value area fails to lead to continuation, “price rejection” has taken place and the first move is back into the middle of the value area, often followed by a test of the opposite end of the trading range.

Copyright (c) LBRGroup All Rights Reserved. 6 Trend Reversal from up to down again – Weekly chart

Copyright (c) LBRGroup All Rights Reserved. 7 The trend in 30-year yields reversed on the daily charts at the end of 2005.

Copyright (c) LBRGroup All Rights Reserved. 8 Trend reversal on hourlies precedes trend reversal on higher time frame.

Copyright (c) LBRGroup All Rights Reserved. 9 Comparison of different structural points – small target versus large target

Copyright (c) LBRGroup All Rights Reserved. 10 Japan Index – Trend reversal is a Process!

Copyright (c) LBRGroup All Rights Reserved. 11 Russell 2000 – Weekly Chart

Copyright (c) LBRGroup All Rights Reserved. 12 Russell 2000 – Daily chart

Copyright (c) LBRGroup All Rights Reserved. 13 Russell 2000 – Weekly Chart – next step

Copyright (c) LBRGroup All Rights Reserved. 14 Russell 2000 – Weekly Chart – current chart

Copyright (c) LBRGroup All Rights Reserved. 15 SP 500 – Weekly Chart

Copyright (c) LBRGroup All Rights Reserved. 16 Weekly Cash SP

Copyright (c) LBRGroup All Rights Reserved. 17 DJ Transport Index – Daily Chart

Copyright (c) LBRGroup All Rights Reserved. 18 DJ transports

Copyright (c) LBRGroup All Rights Reserved. 19 DJ transports – rally into overhead resistance

Copyright (c) LBRGroup All Rights Reserved. 20 DJ Utilities Index – Weekly Chart

Copyright (c) LBRGroup All Rights Reserved. 21 D J Utilities

Copyright (c) LBRGroup All Rights Reserved. 22 D J Utilities forming another line (laggards)

Copyright (c) LBRGroup All Rights Reserved. 23 Brazil – Daily Chart

Copyright (c) LBRGroup All Rights Reserved. 24 Brazil – Daily Chart - update

Copyright (c) LBRGroup All Rights Reserved. 25 Brazil – Daily Chart – back into previous “value” area (RS leader)

Copyright (c) LBRGroup All Rights Reserved. 26 Japan Index – Weekly Chart

Copyright (c) LBRGroup All Rights Reserved. 27 Japan Index – Weekly update with Sideways Line

Copyright (c) LBRGroup All Rights Reserved. 28 Japan Index – Weekly, back into value area

Copyright (c) LBRGroup All Rights Reserved. 29 Goldman Sachs Spot Index - Weekly

Copyright (c) LBRGroup All Rights Reserved. 30 GSI – Daily chart with more data

Copyright (c) LBRGroup All Rights Reserved. 31 Goldman Sachs Spot Index - Weekly

Copyright (c) LBRGroup All Rights Reserved. 32 Goldman Sachs Spot Index – Weekly update

Copyright (c) LBRGroup All Rights Reserved. 33 Weekly Dollar Index

Copyright (c) LBRGroup All Rights Reserved. 34 Dollar Index – Daily Chart

Copyright (c) LBRGroup All Rights Reserved. 35 Dollar Index – Hourly Chart

Copyright (c) LBRGroup All Rights Reserved. 36 Weekly Dollar Index

Copyright (c) LBRGroup All Rights Reserved. 37 Weekly Dollar Index – still in downtrend

Copyright (c) LBRGroup All Rights Reserved year treasury Fund Bond - look at this noise coil!

Copyright (c) LBRGroup All Rights Reserved. 39 TLT – upside breakout ultimately rejected, back into “value area”

Copyright (c) LBRGroup All Rights Reserved. 40 Coil & trend reversal process on 10,000 tick e mini chart

Copyright (c) LBRGroup All Rights Reserved. 41 Coil & trend reversal process on 10,000 tick e mini chart

Copyright (c) LBRGroup All Rights Reserved. 42 And trend reversal from down to up, followed by higher value areas.

Copyright (c) LBRGroup All Rights Reserved. 43 SP mini 4000 tick

Copyright (c) LBRGroup All Rights Reserved. 44 Wheat – hourly chart

Copyright (c) LBRGroup All Rights Reserved. 45 Copyright (c) LBRGroup All Rights Reserved. 45 What do you see here?

Copyright (c) LBRGroup All Rights Reserved. 46 Copyright (c) LBRGroup All Rights Reserved. 46

Copyright (c) LBRGroup All Rights Reserved. 47 Copyright (c) LBRGroup All Rights Reserved. 47 Recognize the power of a move out of a sideways line. New Momentum lows were created on all time frames on the break.