RSI Cycle Chart with mcm-CCI Advanced

Full Dynamic Range RSI Cycles Explained

The Full Dynamic Range RSI Cycles are a proprietary product developed by MCM which measures the RSI without incorporating a time component. It is fully price dependent and it moves with 6 tick range bars, being possible that one bar is a 1min bar or a 10min bar or any time frame in between.
The RSI Cycles point out, first of all, the cycle movements. For the basic info on cycles, please read the following article: http://mcm-ct.com/blog/weekly-charts-explained/

Apart from following the Cycle movement, the RSI Cycles contain a few more interesting tools. Below is a zoomed-in chart of the RSI Cycles which points these out.
First, at the bottom of the chart there is the directionality tool (point 1). At point 2 you can see the arrows pointing at the overbought (dark red) and oversold ranges (light cyan). These are calculated levels at which the market participants would perceive the price as being too high or too low, meaning oversold or overbought condition, at any particular time. These work and move similarly to the Bollinger bands and when the price touches either, the bars will appear highlighted - oversold condition with cyan color (point 3) and overbought with red color (point 4). As it can be seen, an oversold or overbought bar does not mean that the market will stop and reverse immediately and the condition can persist for a while, however it is an indication that the market is perceived as being in an extreme situation and usually this is corrected, either through a reversal or a side-ways movement. As it can be seen in the example, the market moved from oversold to overbought very quickly and finally the overbought condition resolved lower.
At point 5 there is an example of how the different signals are reinforcing each other. The market was in an overbought condition immediately after breaking above the resistance (magenta line) which meant that the up impulse generated had low odds of turning into a true impulse. Additionally the directionality tool reversed from the highs and went at the lower line and stayed there. The impulse up was reversed quite quickly afterwards and the RSI Cycles oscillated for a while, until point 6 when it broke into a down impulse.
The cyan line which moves between the 2 ranges is the mcm-Moving Average (MA). An impulse is confirmed only after the mcm-MA moves above (or below) the break-out level - we can see it confirmed the up impulse at point 5 by breaking above resistance and also at point 6 by breaking below support.

RSI_Cycles_1 in post

RSI Cycles - zoom-in example

An important addition to the RSI Cycles has been done this week, through the introduction of the mcm-CCI line (at the bottom, below the directionality tool). That is a proprietary tool which shows the character of the market - bullish or bearish. It moves between +300 and -400, with 0 being the dividing line. When the mcm-CCI is below 0, the character of the market is bearish. When it is above 0 - it is bullish. Additionally the color of the line shows how strong that inclination is - the brighter the green the more bullish, the darker the red - more bearish. There are several ways in which the mcm-CCI can be used, apart from showing the character of the market in any given time. These are the following:

  1. When the mcm-CCI is testing 0 - that is a significant event and is usually followed by a strong reaction. For example if it comes from a negative value and breaks above 0, that is a warning that the tides are changing and more bullishness is coming.
  2. When the mcm-CCI is testing a round number (+100, +200, -100 etc). Failing at one of these numbers usually triggers a strong reaction, as is breaking one (not as significant as 0 though)
  3. When mcm-CCI is approaching an extreme level - either close to +300 or to -400. That is a sign that the market is at an extreme and a reversal is not far away. When the mcm-CCI is close to +300 and then heads lower, the confirmation that a reversal happened usually comes if it then breaks below +100, so one does not need to wait for 0 to break (usually that will happen as well, but breaking below +100 is confirmation).
  4. When the mcm-CCI is diverging from price. For example price is making lower lows, but mcm-CCI is making higher lows. That is a sign that a reversal is near. The bigger the divergence, the stronger the signal. A difference in mcm-CCI of more than 50 points would be considered a strong divergence.

Below, there is one example which illustrates how powerful this tool is, especially when viewed in the context of the other RSI tools.

In the chart below we can see that the market never changed its bearish character, not even after the big reversal from oversold (around 1925) to overbought (around 1945). At point 1, at the highs we can see that when the market was trying to break into the up impulse, the mcm-CCI was testing the 0 level. And it failed. That failure combined with the overbought condition of RSI Cycles bars immediately after the up impulse was attempted and the directionality tool reversing from top to bottom were very strong signals that the impulse up would fail. Which is exactly what happened at point 2, when the price went below the break-out level and a support level (cyan) was generated. After that the market oscillated for a while, but the weak character was shown not only by mcm-CCI, but also by the fact that the support levels were broken, while the resistance levels were respected. Finally at point 3, the market broke into a down impulse, confirmed by the mcm-CCI which went lower and the directionality tool. At point 4, a divergence between the mcm-CCI and the market price started. While the market made lower lows, the mcm-CCI made a low slightly below -300 and then started to move up, making higher lows. The fact that the down impulse is unwinding (had a bearish retrace - BR - and an END) at the same time, means that the trend is likely changing and a bounce is expected. The down impulse will likely need a 2nd or even a 3rd END to completely unwind, but a reversal is expected nonetheless.

RSI Cycle Chart with mcm-CCI Advanced

RSI Cycle Chart with mcm-CCI Advanced

Weekly Cycles Are Just Turning – Needing Time to Resolve

Last week was a tough week for risk assets as expected. The next few days are key as ideally timing for a bounce exists this coming week it is possible, however, this cycle inflection point can right translate and a turn from down to up may require more time. The reason for this is that we are now in the acceleration phase of double downward running correction breakouts. On a conservative basis, timing should be for Tuesday or Wednesday for a low. However a caveat implies that those "short" should consider trailing stops down rather than exiting shorts on any further weakness. Below is a chart of the weekly cycles - the turn has only just begun as per the rejection of the magenta resistance cycle - additionally, the cycle direction study is only just now beginning its reversal downwards and will require, at a minimum, a few weeks to reach the zero bound (See [1] and [2] on the chart). There will likely be bounces within any such move however, it appears that the market can easily reach the running correction targets of 1,940 or 1,800.

Another anecdotal issue is that the FED is due to report their unbelievably tortured analysis and process geared to raise interest rates by only 25 basis points. However, at this point the FED credibility is pretty tattered and IF they raise interest rates they will be viewed as non-data dependent to the contrary of their propaganda. If they do not raise interest rates they will be show that the verity of their analysis and policies is likely sorely lacking. In either case, the best the FED can do is damage their credibility or damage it more. Not particularly wonderful outcomes and for the markets this could imply that no matter what the FED does will be received negatively.

Weekly Cycles

Weekly Cycles

While we do not have sufficient data to build complete MSP on the HIGH YIELD asset class, there are some worthwhile observations which could be troublesome. While we are not comfortable with MSP setup for HighYield enough to publish it - here are some general observations: market structure projection on a broad basis pointed to normal probabilities starting last week into the Christmas time as among the most positive of the year. This is interesting, because when something deviates significantly from MSP then it's often likely something serious is going on. So far. is that is appears people were attempting to be set up for this potential strong upward move for HighYield and are presently getting stopped out. When people get trapped in trades and the market does not cooperate, things can often go as strongly opposite as they would be expected via MSP to go based on probability because people are caught by surprise. Technically, the MSP setup bullish for HighYield into Christmas, however, IF we have inverted and turned buyers into trapped sellers hungry to get out - then it is possible weakness can continue in HighYield until Christmas. We currently appear to be contradicting the probability projections of MSP for strength for HighYield - this could be A BIG PROBLEM if participants become trapped.

Impulsive Down Move Has Triggered

This is quick post to discuss the setups that are going on the market presently. Currently on some longer intermediate timeframe charts we are showing impulse or structures which require dissipation phases to complete. This means that you get a large wave and then it has to hit shore to fully unwind as it does it creates small dissipation waves to release its energy. This is the same as what occurs in markets when they make an impulsive down move. Essentially they are waves that travel in similar to moving a large quantity of water in the ocean, the waves simply do not just stop the whole process requires a pattern of energy release.

We can see in the chart below, that we are an impulsive down on the hundred and 135-minute chart and that the cycle direction tool has been showing V tops on the 60-minute chart for bounces in this downtrend so far. If this were an uptrend, on the hundred and 135-minute chart, then ideally and similarly we would be showing the cycle direction tool pegged at the 100 level and "V" reactions on the 60-minute chart on drops.

135 minute and 60 minute cycle charts

135 minute and 60 minute cycle charts

Inflection Points Expected This Week – As Market Operates In Its BEAR MARKET CYCLES

This weekend we will present a host of unique charts and a detailed discussion of market structure projection, which had a software issue related to the end of November timing for a low - which actually due to a rare condition forward translated erroneously skipping the correct mapping for the week so the 16th. We identified this early last week and updated members, as soon as it became clear that future vs. historical MSP was not agreeing. This bug/error has been fixed and will be discussed in a separate post. However, inflection points are expected imminently if not already in.

The cycle study shown in the large chart below (you will need to maximize or zoom into the chart to see the details) is a robust and proprietary analysis that we use in our proprietary trading systems. The objective of this study is to devine the direction and timing of market movement by backing out its natural oscillations - or waves. As can be seen in the chart below, the red and pale cyan studies at the bottom of this chart show the larger directional move in the markets. They show when a market is trending by magnetizing to the upper and lower bounds. This means the 100 and 0 levels. Persistent travel at these extreme bounds indicates a trending market as well as the direction of the trend. When markets attempt to change course, a period of questioning is required. These market questions show up as volatility or could be called CHOP. We are currently in a pronounced stretch of zero bound attention which usually occurs once a change direction has successfully occurred. These tools defined the change of direction in June and July this year from UP to DOWN and likely into a bear market. They could not have had better timing. The objective of these analyzes is non-latent and simple, we think that this has been accomplished in the chart we publish on this page.

Additionally, there is another condition occurring similarly to 2007. While it is not our objective to show systematic trading as an indicator. The RVS is an old and established trading system that has unique qualities currently potentially acting a bit like a larger-term indictor. RVS trades only with what it feels is the prevailing trend. During the last five years. While it has had many losing individual trade elements. It has scarcely had a losing model position since 2009 and its releases in 2010 and 2012. This means that every position, including all the entries required to build a position on an NET-BASIS, resulted in a profit this makes the system stable and persistent which is why we trust it and have not changed anything about it in years. Due to the characteristic of the system's trading only in what it perceives to be the prevailing market direction it believes most probable...and its ability to trade profitably and consistently through whipsaws that usually accompany changes in direction in the market, this system is now setting up a pattern almost identical to 2007. Within the cycle analysis, we are presently likely in initiating bear markets, similar to 2007. As such, RVS believed we were in a new bear market starting in July and profitably shorted (albeit small) the September and October bounces. The reaction of the markets since then has created the perception that the Bull-Is-Back. This can be seen via the many Elliott wave counts and technical analysis calling for new highs, dramatic or astronomical new highs. We believe that most of this analysis is founded in an emotional basis and lacking reliable or factual data.  This reaction the markets also has so far attempted to convince RVS that longs are the preferred trades. If the expected inflection points play out and the cycle directional trend analysis is accurate, this phase for RVS should become a similar whipsaw as in 2007 and regardless of if markets make new highs (as in 2007)  the system should soon revert to a preferred bias towards short risk.

RVS & Market Cycle Study

RVS & Market Cycle Study

Weekly Cycle Charts Explained

First some basic information about interpreting the cycles:

  • cycle movements are like waves in nature. The stronger the wave, the more dissipation is needed to release the built-up energy
  • there are two types of waves: "Cyclic" and "Impulse"
  • a magenta line is indicating the peak of a cyclic wave, otherwise said, a resistance level
  • a cyan line is indicating the bottom of a cyclic wave, or a support level
  • a cyclic wave generates a bottom at a cyan line and correspondingly, a top at a magenta line
  • the green line (which turns red in downtrends) is the MCM Moving Average
  • a cycle impulse is confirmed once the price AND the MCM MA move either above a magenta line for an uptrend or below a cyan line in a downtrend.

The current trajectory of the weekly cycle chart on ES is a perfect example of how powerful a cycle impulse can be and what is the typical behavior.

Weekly charts

At point “A” the price moved above the resistance (magenta line) indicating a possible cycle impulse up in the making. At point “B” the MCM MA moved above the resistance (magenta line), confirming the cycle impulse. Once a cycle impulse is confirmed, it usually back-tests before really taking off. This happened almost perfectly at point C, when price came quite close to the magenta line and previous break-out. After that it was clear sailing, with no signals generated to indicate a turn or potential change of the main trend. At point “D” a Bullish Retrace (BR) was triggered, which normally needs an END to finish. The BR and subsequent END higher indicate that the cycle impulse might be coming to an end. Typically an END is enough on longer time frames, but it is common for also 2nd END and 3rd END to trigger. In our case the BR triggered at point “D” had an END, then another BR triggered and 2nd END and at point “E” we had the 3rd END. At that point, the cycle impulse was finished. The price went lower, a cyan support level was generated and broken, turning into a cycle impulse downward at point “F”.

The Dow cycle chart is a bit different, although it moves very much in sync with ES. Dow was already in a cycle impulse upward and had a 3rd END generate at point “G”, which coincides with the timing of point “A” on ES. The price broke above, the MCM MA also, and that became a nested impulse up. Dow had an earlier BR and 1st END (at point “H”). After that it also had a 2nd END and 3rd END, which signaled the end of the cycle impulse. After that it generated a cyan line and a corresponding magenta line, which signifies a regular “wave”. Another cyan line was generated, which was then broken by both price and MCM MA at point “I” signaling a cycle impulse downward.