all the kings horses

KingCAMBO’s Trend Times © 2002 King Cambo Ltd. All rights reserved.

Steve Nison’s FavoriteCandle

Market Structures

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Steve Nison Interview:Light from the East

Options with Options:The Covered Call

The Quiver:e-Waves Part 3

POS.X Index

Trading Earnings

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Articles

All The King’sHorses

by KingCAMBO

And all the King’s men – could not get JesseLivermore interested in this market again. Wewould not be able to raise his ghost, his memory,

his relatives, or any of his kindred spirits. Spring 2002,is so boring his ghost would likely see more opportunityand action (selling time share units in Pascal County,Florida) than fun and trading on Wall Street.

In fact, if you look at what Livermore himself said, hewarned about staying away from situations just like theone we’re in now:

“In a narrow market [...] there is no sense in trying toanticipate what the next big movement is going to be - up ordown. The thing to do is to watch the market, read the tape todetermine the limits of the get-nowhere prices, and make upyour mind that you will not take an interest until the pricebreaks through the limit in either direction.”- from REMINISCENCES OF A STOCK OPERATOR

In the first issue of this magazine, I spoke a bit abouttime cycles – W. D. Gann’s “Cycle of 60”. Gann, whowas a contemporary of Livermore’s, felt that was themost important of all time cycles, though he neverseems to have said straight out why or where he got itfrom. In his writings, he meant the cycle of 60 years isFIRST in importance.

What he said got me to wondering, though: Could therebe an interpretation of the Cycle of 60 that has more

April 10, 2002 Volume 4

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http://www.kingcambo.com/



KinKinKinKinKingCAMBO’gCAMBO’gCAMBO’gCAMBO’gCAMBO’sssss

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immediacy and usefulness to short-term traders? Could the “cycle” of 60 be brokendown into days instead of years? Could it even be broken down into minutes?

As it happens, two years ago, before I had these particular flights of fancy, I satdown with my team of crack coders and created KingCAMBO’s Flux Capacitor in anattempt to try to predict market movements in TIME, based on Fibonacci numericalsequences. Let me stress from the start, that this pursuit was for FUN first, not tomake any scientific claims. On the other hand, I have been following this thing fortwo years now and as whacked as it sounds, 92% of the time it really works.

What I actually did when I first invented the Flux Capacitor was quite similar to thebasics of Gann’s cycle theories. Since then, I’ve taken advantage of some of Gann’sthinking and done some fine-tuning of the Flux Capacitor.

Follow my thinking here. Gann felt, for whatever reasons, that the number 60 fitinto a scheme of what he called “natural law.” And whoever created the hour (60minutes), the minute (60 seconds), longitude and latitude (also measured in terms ofminutes and seconds of 60 units), and perhaps even the 360 degrees in a circle (6 x60) must have thought the same thing.

So what can we do with this fact? First, let’s take the cycle of 60 and divide it intomeaningful components the way Gann himself might have done:

• 45• 30• 22.5• 15• 11.25• 7.5• 3.75



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Now let’s add those same numbers to 60:

• 63.75• 67.50• 71.25• 75• 82.50• 90• 105

Now that we have these numbers, how can we use them for trading? This is easy.We find the lowest market-structure low (MSL) or the highest market-structurehigh (MSH) in recent trading and we mark that as our reference point.

This is where the acclaimed FLUX CAPACITOR comes in. Let me dazzle you withsheer genius here. Let’s take the time and place of a significant marketstructure:



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OK. Let’s bring up a daily chart for the COMPX and pick a starting date. There is amajor top, a MSH on May 22, 2001. Let’s not nit pick on the exact minute for now.But check it out:

1. Check your charts, when did that first down wave end? May 30th.Who knew? The Flux Capacitor knew.

2. The wave of selling that preceded last September’s major low startedon August 2nd 2001. Look at the Flux.

3. Where did last year’s all time low come in? 9/21/01.

This is eerie, is it not? The FLUX CAPACITOR, which is simply a tool for measuringNATURAL time cycles, had this date. It had no way of knowing that a bunch ofmaniacs seeking a free pass to Allah and 77 virgins would strap themselves in toflying missiles and take down the heart of our financial district.

Was the September 21st low a result of the tragedy or was it a basis of natural law?



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Let’s look at another read:



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So far, the high on the Dow for this current year is March 19, 2002. Those that arefaithful followers of the good KingCAMBO know full well about my mighty bearcampaign that exploded in my face. You also know the reason why I had March 19th

as my target date don’t you? It was 180 days – Cycle Of 60 – from the Septemberlow, that’s why.

All right, use the above Flux Capacitor projections to try to find CIT (change intrend) dates for the balance of this year. One such date happens to be tomorrow,April 11th. Note how the last date makes a complete year? Why is that? It is 360degrees of a full circle isn’t it? So, it’s a complete cycle.

Paid members to our trading forum can access our Flux Capacitor in three ways:

· For Swing Trade calculations: https://www.kingcambo.com/members/flux/swingflux.vi

· For intra- day Gann based pivot calculations: https://www.kingcambo.com/members/flux/masterflux.vi

· For intra-day calculations based purely on Fibonacci time pivots our original Flux Capacitor is still up at: https://www.kingcambo.com/members/flux/

One final thought on the Swing trade CIT dates. I do not promise exact hits all thatoften. However, you will find many instances where you get a CIT within one or two,or at most three days from a projection. My feeling on this: it is because time waitson no man, and it certainly doesn’t wait for markets to open or excuse markets fortaking holidays and weekends off. Time follows its own natural law.

Do you remember this scene from the film “Back to the Future”?

Doc: “The problem is, you never know where lightning is going to strike twice.”

McFly: “Oh yeah? Well we do now...”

With that in mind, I sat down with my team of massive coders and createdKingCAMBO’s Flux Capacitor to try and solve the space-time continuum question.



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Play with the Flux Capacitor and have some fun with it. It works on stocks, options,and futures – as well as the indexes. Pick what you believe to be a major date andjust put that in as the reference date. The Flux Capacitor will do the rest for you.

We have a great issue for you this time, with good stuff from Steve Nison and ourregular staff contributors. So let’s get on with it now as I leave you with “A LightFrom The East”… by our resident favorite trader – Romeman.

Happy Trading!KingCAMBO



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Articles Light from the East:Discovering JapaneseCandlesticks

by Romeman

Steve Nison, the leading authority on applyingJapanese candlestick charting to Western markets, isthe author of the books Japanese Candlestick ChartingTechniques: A Contemporary Guide to the Ancient Invest-ment Techniques of the Far East and Beyond Candlesticks:New Japanese Charting Techniques Revealed.

He spoke with Kingcambo.com’s Romeman,who opened the interview with a question from theroom’s MC, Steady Eddie.

Eddie says he wants to retire and he would like toknow where the market is going to close in 30 days.

Well, there’s very few hard and fast rules in technicalanalysis, but there’s one absolute 100 percent rule:There’s excellent support at zero.

I think the Nasdaq made a major low in September.There was a confluence of technical signals back inSeptember that signaled a major bottom. I think therewere five or six indicators that I had at the highs at around5150 and I had about four or five indicators – acombination of Western technicals and candle charts – atthe lows in September. These include a hammer and anisland bottom, a successful test of the 1998 lows.

So I think we did put a major bottom in place.

I’m going to be doing an article for Trend Times, called“Steve’s Favorite Candle Charting Signal.” My favorite





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signal is a window and the window is the same as a gap in Western technicals. TheJapanese will call it a falling window if the market gaps down or a rising window if themarket gaps up.

We had a few falling windows in the Nasdaq composite. And what happens is thefalling window becomes resistance. So, for example, we had a falling window betweenMarch 19 and 20. That’s where the rally stopped during the week of March 22, right atthe window’s resistance and that’s where the rally stopped early this week [the week ofApril 1]. We had a strong rally on April 1. The high of the rally was 1865 and thewindow’s resistance was in a zone between 1873 and 1861.

The fact we have a falling window did turn the short term, intermediate term, down. ButI would expect the mid- and late February lows to hold. So short term, a little negative.Longer term, I think we’re not going to see the September lows again.

Let’s go back to the beginning. You’re credited with introduced Japanesecandlesticks to the West. How did a guy from New York learn about thismethod of charting?

I used to work at E. F. Hutton before they were taken over by Shearson. There was abroker working down the hall from me in New York. She was a Japanese broker. Shewould have these chart books sent to her from Japan, because she would talk aboutthe Nikkei stocks for Japanese clients. We talked from time to time and I saw the chartbooks and that piqued my curiosity.

This was a charting method that was around for over 100 years and nobody knewabout it in the West! [In] their equivalent of our Wall Street Journal, their charts are incandles and I couldn’t believe there was nothing in the West about this. There was alittle book I came across in English, maybe had about 10 pages on it, but that wasabout it.

I found a translator, an American who understood technical analysis, who was going toJapan and I told him, “Buy every book you could on candle charts!” And I had about adozen books translated.

When I started to do the research, I could understand why nothing else was done aboutit here, because it took about two or three years of research! I was lucky, because thejob I had at that time was working in a research department. They saw the value-added



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of this for trading, so they didn’t mind I did this. I did it mainly at home, but I continuedthe research at work.

I gather that candlesticks were first used by the Japanese rice merchants.Why do you think they leaned toward this particularly pictorial method ofcharting, as opposed to Western bar charts or point-and-figure charts?

The Japanese traded rice futures contracts back in the late 1600s, early 1700s. Andthey really didn’t have candle charts then. Candle charts really started when theJapanese stock market started in 1870.

OK.

Back then they were dealing with the psychology of the market. I had a book translatedand in the Japanese book it says, “When all are bullish, there is cause for concern.”And that book was written in 1755! So before America was even a nation, theJapanese were trading with contrary opinion.

The evolution was: They had highs and lows of the day. Then they had high, low, andclose. They used to use bar charts up until 1870. And then from bar charts, they gotopen, high, low, and close, and then they took the step that we didn’t do in the West.They made a bar chart into a candle chart.

The data are the same. It’s just the way you draw it. It was a slow evolution, but thecandles really started when the Japanese stock market started in the 1870s.

What kind of reception did you get when you brought candlestick charting tothe US? Were there particular challenges in getting people interested in thismethod of following the markets?

Yes and no. I was working at Merrill Lynch’s futures research area. And futures tradersare usually the first to grab onto new technical analysis tools. This was in the late ’80sand the stock market then isn’t like it is now. Stocks trade like futures now! Back then,all the volatility was in the futures market. So the futures traders were very eager tograb onto new techniques and they grabbed onto this very quickly.



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You get early turning signals with the candle charts – very, very fast reversal signals – inone, two, or three sessions. On a bar chart, you may have to wait weeks and weeks.

When I started to focus more on the equities markets in the early ’90s, that was a littlebit more of a challenge. But the candle charts use the same data as the bar charts.Yes, you can use a candle chart, but you can also use Western techniques. You canhave moving averages in the candle chart. You can have trend lines in the candle chart.Essentially anything you can do with a bar chart you can do with a candle chart, soyou’re not giving up anything. The major advantage is you’re going to get reversalsignals.

So I approached it from that angle and that’s the way I strongly encourage traders tolook at it. Use what they’re very comfortable with now and just add the extra dimensionof candle charts to their analysis.

When I did it that way – “use this in addition to,” rather than “use this instead of” – itreally took off.

When the stock market became much more volatile and got day traders involved,swing traders, and when all the on-line charting services started to have candle charts,the interest just geometrically, exponentially exploded.

In the second part of this exclusive Trend Times interview, Steve Nison willreveal the unique value of candlestick charting, how institutions use candlesticks,the single-best time-period chart to look at to get the major trend in stocks, andwhat is the best indicator to use to confirm candlestick patterns. Don’t miss it!



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Articles Why You HaveOptions withOptions orOptions 101: The Covered Call

by Sally8

In my first article I said:

“You will hear people tell you that most options (about80%) expire worthless, but what they don’t tell youis that there are ways to make money by lettingan option expire worthless! Many people I knowuse options strategies for income only and they wantthose options to expire worthless. ”

I use this strategy almost every month in my tradingaccount to get extra income. I use it in my IRA to getincome and lower the price of the common that I amholding. What this does is reduce the cost basis of thecommon.

I waited until now to write about this strategy becausethis is the season that usually makes me the mostmoney in covered calls. The Stock Traders Almanacshows us that since 1950 the months of May throughOctober are the worst performing months of the year.In 51 years, the Dow gained 1299.03 points in thesemonths, and 9235.81 points from November thoughApril. I want the stocks I own and write to stay thesame or go down some, because I want to keep thestock, so these are the best months for this play. If Ilose the stock, it is no big deal. I still made money.





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Writing a Covered Call option reduces your stock investing risk because the optionpremium received, in effect, lowers the cost of the stock. The Chicago Board OptionsExchange says that, “Covered Call writing is not only the safest of all option strate-gies, it is also safer than purchasing and selling stocks only.”

Covered call writing provides you with a way to compound your money each monthrather than each year. Many covered call writers earn between 10% and 25% ontheir money each month, providing a good income stream on their investments.Instead of buying a stock and waiting for it to move, investors are able to buy astock and take their profit “up front,” and actually profit should the stock price notmove or even fall slightly.

When writing a covered call, you buy a stock and agree to sell it to someone at agiven price (strike price). In return for this agreement, you are paid a premium(option price).

Writing a covered call consists of selling an option call while simultaneously owningthe underlying stock. You buy a stock and then agree to sell the stock to someoneelse at a specified price (strike price). In return for this, you receive a premium(option price). For example, you purchase 100 shares of XYZ for $50 a share andthen sell a $50 call for $4 per share or a total of $400. This concept may seemconfusing right now, but read on and it will become clearer.

Here’s the math: 100 shares are purchased for $50 per share, for a total of $5,000.You then sell the option and receive back $400 (100 shares x $4 per share). Theimmediate return on this investment is 8.0% (Return = Income/Investment).

Covered Call — A covered call consists of the sale of a call while simultaneouslyowning the underlying stock. A call is an option contract which gives the owner theright, but not the obligation, to buy the agreed upon number of contracts (blocks of100 shares) at a strike price, on or before the strike date.

Buy-Write — It involves buying the stock and selling the call in the same transac-tion. It is a conservative approach, as some people like to buy a stock and hope itgoes up so they can get a better deal on the selling of the call. However, that processwould backfire if the stock drops, and then the seller gets less money on the pre-mium.



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The Basic Concept

The basic concept of covered call writing is very simple. However, for the personwho is unfamiliar with this process it can be confusing at first. A friend told me aboutwriting covered calls and for a couple of days I was skeptical. The light bulb went off,and I have been using this technique ever since.

WRITING A COVERED CALL CONSISTS OF THE SALE OF AN OPTION CALLWHILE SIMULTANEOUSLY OWNING THE UNDERLYING STOCK.Below is a chart showing different covered call transactions:

EXAMPLE STOCK

1 - ABC 25 2.5 25 10.00% 10.00%

2 - DEF 24 2 25 8.33% 12.50%

3 - GHI 26 3 25 11.54% 7.69%

4 - JKL 50 4 50 8.00% 8.00%

5 - MNO 48 3.5 50 7.29% 11.46%

6 - PQR 52 6 50 11.54% 7.69%

In Example 1, we bought 100 shares of ABC for $25 a share, for a total of $2500(100 x $25). Then, we sold the $25 call for $2.50 a share, for a total of $250 (100 x$2.50). If the stock price stays at $25 or higher, we will be “called out” and make$250.

IMPORTANT: Selling a call means that you have agreed to sell someone

RETURN IFNOT CALLED

STOCK PRICE

OPTIONPRICE

STRIKEPRICE

RETURN IFCALLED



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YOUR shares of a stock at a particular price. If the stock price on thestrike date (third Friday of each month) is greater than the strike price,you will sell your shares. This whole process is handled automatically by bothfull service and online brokers.

In Example 2, we bought 100 shares of DEF for $24 a share, for a total of $2400(100 x $24). Then, we sold the $25 call for $2 a share, for a total of $200 (100 x $2).If the stock price stays at $25 or higher, we will be “called out” and make $300.Note here that we sold the stock for more than what we paid for it, therefore wemade an extra $100 on the transaction ((25-24) x 100).

In Example 3, we bought 100 shares of GHI for $26 a share, for a total of $2600(100 x $26). Then, we sold the $25 call for $3 a share, for a total of $300 (100 x $3).If the stock price stays at $25 or higher, we will be “called out.” Note here that wesold the stock for less than what we paid for it, therefore we “lose” $100 on the saleof the stock and profit $200 on the overall transaction.

In Example 4, we bought 100 shares of JKL for $50 a share for a total of $5000(100 x $50). Then, we sold the $50 call for $4 a share, for a total of $400 (100 x$4). If the stock price stays at $50 or higher, we will be “called out” and make $400.

In Example 5, we bought 100 shares of MNO for $48 a share, for a total of $4800(100 x $48). Then, we sold the $50 call for $3.5 a share, for a total of $350 (100 x$3.5). If the stock price stays at $50 or higher, we will be “called out” and make$550. Note here that we sold the stock for more than what we paid for it, thereforewe made an extra $200 on the transaction ((50-48) x 100).

In Example 6, we bought 100 shares of PQR for $52 a share, for a total of $5200(100 x $52). Then, we sold the $50 call for $6 a share, for a total of $600 (100 x $6).If the stock price stays at $50 or higher, we will be “called out.” Note here that wesold the stock for less than what we paid for it, therefore we “lose” $200 on the saleof the stock and profit $400 on the overall transaction.

If you are still confused, keep reading.



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The Simplified Covered Call Process

Here is the step by step covered call writing process:

1. Select the stock on which you want to write a covered call. Buy the stock. Ifyou already own it, you are halfway there.

2. Sell the option contract. You must have permission from your broker to selloptions, but approval is almost certainly guaranteed.

3. Wait until the expiration date. Nothing else is required from you at this point.On the expiration date you may or may not be called out. Generally, if theclosing price of the stock on the strike date is higher than the strike price,you will be called out. If the stock price is lower than the strike price youwill not be called out, and you will still own the stock.

The Benefits of Covered Call Writing

1. Provides a way for you to make money on a stock even if the stockfalls or does not move. Since you are receiving a premium “up front,” thestock price can fall slightly and you can still profit. Always look at the chart tosee if your stock is a good candidate.

2. Provides cash flow. You can see an income stream from your transactions since the premium is “paid” into your account almostinstantly.

3. Provides you a way to potentially compound your money eachmonth rather than each year. Compounding your money is where thereal gains take place.

4. Provides you a way to lower the price you have already paid forstock. If you have purchased a stock and watched the price fall, you canwrite a covered call and receive a premium. This premium has essentiallylowered the price you have paid for the stock.



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The secret to successful covered call writing is to invest in good stocks andfocus on consistency, not on high returns. You will see high returns whenyour investments grow over a period of time. That’s why I use this strategy in myIRA.

The Risks of Covered Call Writing

1. Stock price falls sharply. If the underlying stock falls sharply, you mayend up with an unprofitable transaction. One technique to minimize this riskis buying your calls back.

2. Investing “short term.” Investing in the market with short-termtransactions involves risk. The market has a tendency to be choppy in theshort-term. You should only invest in stock that you believe in and are willingto hold for the long-term.

3. Stock price moves up sharply. Although this is not really a risk of losingmoney, it is a risk of giving up “potential” profit. For example, you may buy astock for $20, sell a $20 call for $2, and make 10% on your money. However,before the strike date, the stock moves up to $30. You have now profited10%, but had you just held the stock you would have profited 50%. Thisrecently happened to me with PG. I initially bought the stock at $75 and soldan $80 call. PG started soaring and one look at the chart told me to buy mycalls back. I then entered long calls and profited nicely.

Calculating Your Return

Many people get confused when it comes to calculating gains and losses on theircovered call plays. Calculating your “true” return is important not just for invest-ment purposes, but also for tax purposes. The following should help explain how tocalculate returns on simple, as well as complex transactions.

To calculate the gain or loss, the formula is FINAL SALE PRICE – BASIS. “FinalSale Price” is the price at which you actually sold the stock. Basis is your breakevenpoint or your actual cost of the stock. Basis is important for calculations, as transac-



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tions become more complicated.

Here Are Some Simple Transaction Examples:

At The Money

1. You purchased 1000 shares of ABC Corp. at $50 a share and sold a $50 callfor $5. Your basis (breakeven point) is now $45 ($50-$5).

2. You are called out on the strike day and sell the stock for $50.3. Your gain is $5 ($50-$45) per share or $5000 ($5x1000 shares). Your

percentage gain on the transaction is 10% ($5,000/$50,000).

In The Money



percentage gain on the transaction is 7.69% ($4,000/$52,000).

Out Of The Money



percentage gain on the transaction is 12.5% ($6,000/$48,000).

How To Get Started Writing Covered Calls

In order to get started, you need to obtain permission from your broker. Sincewriting a covered call means that you already own the stock you have agreed to sell,everyone should be able to obtain permission from their broker to trade covered



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calls. I have not heard of anyone having problems getting permission, so if you dorun into any problems, I suggest that you look for a different broker or make surethat your broker has a clear understanding of what you are trying to do.

After you receive permission you are ready to begin.


SpeakingTheKing’sEnglish

by Holly



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Articles The Quiver:eWaves, part 3 of 3:Increasing the Odds

by Enthios

In the previous installments of this series, you havelearned how to use Fibonacci to gauge retracementsbetween the inflection points of a MSH and MSL. Youhave also learned how to use Fibonacci to predict W3and W5 expansions from the Seed (W1). You knowthat the most important Fibonacci ratios are 0.236,0.382, 0.5, 0.682, 1.382, 1.618, 2.618 and 4.236. Youknow that a retracement of 0.50 is “ideal”, that thetarget ratio of 1.682 is “often” the best target for a W3,and that 2.618 is “often” the target for a W5. If you usethese ratios consistently, you can trade profitably. Butyou can increase the odds greatly by combining meth-ods. The premise is simple: Use multiple methods tocome up with multiple targets. Then see where thesetargets coincide, to create a combined target zone.





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Figure 1: Combining Methods

Figure 1 shows how I combine the retracement pivots from a previous range, withthe Seed Wave targets of the next, to fine-tune the exit target of W3. I know thatprices will pivot at the 0.382, 0.50 and 0.618 retracements from a prior tradingrange. The pivots shown along line (d) are calculated from the prior major tradingrange (a)-(b). After the Seed is created, I then draw the Fibonacci expansion tar-gets off that original seed. The downward targets from the seed wave (b)-(c) areshown along line (e). The combined target zone is where the pivots and targets fromthese two sets of lines coincide, in this example between the 50% pivot and the161.8% target.

The reason this works, relates back to Fibonacci’s discovery about the growth pat-



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terns of rabbits. The mathematics of the sequence – 1,2,3,5,8, etc. - explain thegrowth rate in the general terms. But the market is dynamic; it is made up of notjust one set of waves moving in a given direction, but of sets within sets. Any upwave series could be contained within a larger down wave series, which in turn couldbe contained within an even larger up wave series. And so it makes sense to incor-porate all the “information” from those other, greater wave impulses, to whateverextent possible.

Short of producing a complicated algorithm that can automatically take all these intoconsideration and spit out the ideal end target, this method of combining pivots andtargets works well. Now I’ll show you two more methods of measuring recent waveimpulses. You can be add these to further strengthen the probability of thecombined target zone.

W2 Expansions

So far, expansion targets have been drawn from the first seed, W1. But why notmeasure the strength of the retracement from that first wave, in effect the “seedretracement?” The retracement from the seed is always W2. Figure 2, a 13-minute chart of the Nasdaq Futures Emini contract, shows the Fibonacci targetsdrawn upward, using the distance from the top of W1 (b) to the bottom of W2 (c), asthe basis. This is the calculation:

((b-c) * (1.382, 1.618, 2.618)) + c

Figure 3 shows the same chart, but adding the W1 seed targets that you are famil-iar with from Parts I and II of this series. To review, the targets are calculated as:

((b-a) * (1.382, 1.618, 2.618)) + a

Again, I highlight the zone where the combined targets coincide, to create acombined target zone.



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Figure 2: W2 Expansion targets



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Figure 3: W1 and W2 combined targets

Quantum Expansions

Don’t worry, these are not related to quantum physics. Quantum expansions sim-ply measure the size of a wave, and apply that to the size of the next wave in thesame direction. Imagining taking a ruler to measure the size of one wave, thenshifting that ruler over to the beginning of the next wave and “cloning” that onto thesecond wave. So if the size of W1, from trough to peak, is 100, then the size of W3(the next wave in the same direction) would also be 100, as measured from itstrough to its peak.

Figure 4 shows an actual, though idealized, example of a quantum expansion. Theamplitude of W1 is 1516 – 1463 = 53 points. Add 53 to the start of the next wave,



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1489 + 53 = 1542. In this case, we missed by one point. The quantum size of W3was 0.98 x the quantum size of W1.

Figure 4: Simple quantum expansion

The quantum of W3 is not usually 100% of the quantum of W1, though 1.0 is a goodstarting point for a multiplier. W3 might be smaller, or it might be larger, than W1.So we can use the Fibonacci ratios and multipliers of 0.618. 1.0, 1.382 and 1.682 tomeasure the quantum of W3 against the quantum of W1, then compare that to anyof our other methods – W1 expansions, W2 expansions, or previous rangeretracements – to come up with a combined target zone.

Figure 5 shows the same chart as Figure 4, using both W1 targets and quantumexpansions to create a combined target zone. At the risk of sounding repetitive, let’s



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look at the two formulas for a W1 expansion and a quantum expansion, so that youcan clearly see the difference between the two.

W1 expansion: ((b-a) * (1.382, 1.618, 2.618)) + c

Quantum expansion: ((b-a) * (0.382, 0.5, 1.0, 1.618, 2.618)) + c

Figure 5: W1 and Quantum expansion as combined targets

Figures 3 and 5 show combinations of only two methods. You now know fourmethods. I use a different color for each of my Fibonacci tools, so that I can have allfour methods up on one chart to get an even clearer idea of where the Fibonaccitarget zones are. Unfortunately, the clearer the idea, the more your chart gets filledwith lines! You can experiment to see which combination of Fibonacci targets and



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ratios work best for you, and when to use which ratios. For example, when W2 isvery small or only one or two candles in length, perhaps the W2 expansion methodwill not yield a good combination. Likewise, if prices are not retracing from a previ-ous major trading range, then it would not make much sense to look at prior rangeretracements and one of your combinations.

Multiple Quantum Expansions

Just as I used one quantum expansion from W1 to help determine the target zonefor W3, I also use the two consecutive quantum expansions of W1 and W3 to helpdetermine the target of W5. Figure 6 continues from Figure 5. It shows thequantum expansions from W1 and W3, and well as the original W1 target – threemethods altogether – to pinpoint a combined target zone for W5.

Figure 6: Multiple quantum expansions with W1 targets for combined targets zones



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The five waves in this eWave pattern are labeled (1), (2), (3), (4), and (5), respec-tively. The first set of lines (a) shows the targets from the W1 seed. As always,1.618 (161.8%) is the notional W3 target and 2.618 (261.8%) is the notional W5target. I say “notional” because that can change, depending upon the other combina-tions that we use.

The second set of lines (b) represents the W3 quantum expansion taken from W1.The third set of lines (c) represents the W5 quantum expansion taken from W3.

From these three sets of lines, there are two combined target zones (d) and (e).Zone (d) is made up 161.8% of the quantum expansion from W1, and 100% of thequantum expansion from W3. As you can see, on Tuesday prices gapped right upinto zone (d) then moved slightly higher, proving that even the Fibonacci growthpatterns are not an exact science in the chaos of the market. Or are they?

The Last Laugh

You may ask why combined target zone (e) in Figure 6 was not reached. It ap-pears to be the “stronger” of the two zones, because the 261.8% target from the W1seed, and the 161.8% target from the W1 quantum expansion, overlap exactly; theyare a perfect match. If Fibonacci were an exact science, wouldn’t prices havereached that point? Figure 7 shows the last laugh:



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Figure 7: Another look at the combined target zone

Summary

There are four types of Fibonacci retracements and targets that can be used tocreate expansions targets for waves. These are prior range retracements, W1(seed) expansions, W2 expansions, and quantum expansions. These can be com-bined to create target zones to increase the probability of targeting trade exits. Thefour types are shown in Table 1 and refer to Figure 8:



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Figure 8: Creating combined target zones for potential wave DE

Table 1: Summary of methods to target potential wave DE

Name Description Formula

Retracementpivots

W1 Expansiontargets

W2 Expansion targets

Quantumexpansion targets

Special ((C-B) * (1.382, 1.618, 2.618,4.236))+ B

Using retracements fromprior major range AB

Using growth targetsprojected from the seedwave BC (W1)

Using growth targets pro-jected from the retracementwave CD (W2)

Taking the quantum sizeof the seed wave BC (W1)and applying that topotential wave DE (W3)

((A-B) * (0.286, 0.382, 0.618)) + B

((C-D) * (1.382, 1.618, 2.618,4.236)) + D

((C-B)*(0.382, 0.618, 1.0, 1.382,1.618, 2.618, 4.236)) + D

KingCAMBO’s Trend Times © 2002 King Cambo Ltd. All rights reserved. Page 33


Market Structures

King’s Watch




POS.X Index

Trading Earnings



Articles The POS.X 50Why are we still looking at theselosers?

by Huka

The POS.X is a study in extremes. The index is made up of fiftyformer high flyers. Even in their heyday, some did not operateunder a fundamentally sound business model. Some reallywere and are great companies. For a time, ALL of these stocksmagically traded for hundreds of dollars per share. It was ahigh time in the city as bosses rode scooters around the office,brought the dog to work, offered employee wine tastinglunches and massage sessions after those stressful days. Thencame the correction. (I used to be one of those bosses! Thosewere the days…) Now these little stinkers, not ready to beflushed away, trade at a mere fraction of their former prices.For this reason we disrespectfully, but, with good intentions,call them Pieces Of S***. They offer moneymakingopportunities and occasionally sophomoric entertainment atKingCambo.com.

A series of neutral economic indicators and war in theMiddle East has put the brakes on the markets. As welook at the overall market since March 15, The NASDclosed at 1,770.03 posting a loss of 98.27 points or 5.2%.The DOW is down 335.69 with a close of 10,271.64, for aloss of 3.7%. The NQ’s closed at 1389 with a 25-point or7.6% loss. Posting even larger drops, the POS.X gotwhacked with only five of the fifty stocks posting gains.The index found itself sucked into the downdraft of themarkets with a loss of 36.44 points, down 8.79%. Thejunkers at the bottom of the POS pile are: FMKT down$3.94, WEBM with a loss of $3.57 and RHAT down$2.05.

So here we are again, back to and below support levels.Forty-six of the fifty stocks in the index have sufferedlosses in the past two weeks with WEBM taking thelargest loss. ASKJ was the top gainer in the index with a





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gain of $0.99 or 72%. There is something inherently troubling about seeing the likesof ASKJ as the top gainer in any index. I guess that’s the nature of being a POS.

Looking at my POS highlights from the last Trend Times article, we had fair results:

NTAP had a high of $19.19 a gain of $1.00, but did not hit my target of$24.00.

UCOMA is currently testing the first target, T-3 at $6.03 for a gain of $0.79.

CSCO tested the first target its 200 daily moving average with a high of$17.93, a gain of $1.00. It did not even come close to my $22.00 target.Always take the cookies when the plate is passed.

ELON also tested the first target price of 19.50 for a gain of $0.79 but, likethe others, it fell short of my top target price of $22.00.

With uncertainty in the Middle East, the markets may continue to be hampered. Idon’t see any catalyst for a rise, but I’m looking forward to another roll of thebones…With this in mind, here are some stocks I am looking at:

CSCO could go either way. It has broken below its 20 daily moving averageof 16.68 and has support of $14.50. If CSCO breaks above $17.00, it has ashot at $18.00.

ELON (I still like this one) is holding well above the 200 daily moving average of $18.35. The first resistance level is $19.50 with a price target of$22.00.

JNPR has $10.75 support. $12.14 its 20dma is the first target and $14.75 ismy top target.

PMCS has daily support of 15.25 with a first target its 20dma of $16.51 andan extreme target of $19.60.

WEBM has $15.90 support. $17.80 is the first target then $18.90.



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The following are the only POS.X stocks that are above their 200 daily movingaverages:

ASKJDCLKELONFMKTKANANTAPPALMUCOMA

There are several POS’s that are below their 20 and 200 daily moving averages andare approaching support levels. Here are a few of the most attractive stocks worthkeeping an eye on:

AMCC $7.50CSCO $16.50EXTR $8.85GLW $6.50JNPR $11.00ONIS $5.30PMCS $16.00RHAT $5.00SUNW $8.40TMWD $3.10

Always remember, POS.X stocks move according to the rules, i.e., Moving Averages,Fibonacci Levels, gaps, etc. They can go down faster than they go up.

So why are we still looking at these losers? The POS.X stocks move with greaterpercent changes than their less odorous brethren. Thus they give traders an amus-ing way to make money.



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Ticker3yr.Low

3yr.High

2/4/02 2/25/02 3/15/02 4/6/02 Change

1. AKAM 2.5 345 4 3.27 4.06 3.59 -0.47

2. AMCC 6.01 110 10.1 8.62 9.17 7.8 -1.37

3. AMZN 5.51 113 12.5 13.73 14.03 13.5 -0.53

4. ARBA 1.42 183 4.3 3.78 4.65 4.14 -0.51

5. ASKJ 0.92 190 3.14 1.14 1.38 2.37 0.99

6. AVNX 2.7 273 4.16 3.4 4.4 3.5 -0.9

7. CFLO 0.84 182 1.37 1.06 1.09 0.86 -0.23

8. CIEN 7.13 151 10.63 7.93 8.95 8.13 -0.82

9. CMGI 0.6 163 1.53 1.3 1.55 1.28 -0.27

10. CMRC 1.66 138 1.97 1.83 1.82 1.26 -0.56

11. CMTN 0.65 126 1.17 0.95 1.05 0.93 -0.12

12. CMVT 15.03 125 19.66 16.88 13.92 12.51 -1.44

13. CSCO 11.04 82 18.6 15.6 16.54 16.15 -0.39

14. DCLK 5.23 125 10 11.1 12.7 10.95 -1.75

15. DIGL 1.16 150 5.77 5.07 6.25 5.52 -0.73

16. ELON 5.38 113 18.8 16.67 17.9 18.21 0.31

17. EXTR 5.85 129 11.95 8.24 9.26 9.58 0.32

18. FDRY 5.26 212 6.93 6.1 7.27 6.44 -0.83

19. FIBR 1.5 113 3.4 2.85 2.96 2.43 -0.53

20. FMKT 6.25 370 21.62 20.94 24.7 20.76 -3.94

21. GILTF 2 181 4.11 3.95 3.78 2.76 -1.02

22. GLW 6 113 7.1 6.94 7.82 6.79 -1.03

23. HAND 1.13 100 4.6 5.15 5.16 4.03 -1.13

24. ICGE 0.34 212 1.1 0.81 0.85 0.62 -0.23

25. JDSU 4.74 153 6.63 5.38 6.1 5.58 -0.52

POS.XIndexHighs are rounded,(pennies don’t matterin thin air)



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Ticker3yr.Low

3yr.High

2/4/02 2/25/02 3/15/02 4/6/02 Change

26. JNPR 8.9 244 13.94 9.9 11.42 11.42 0

27. KANA 3.5 1,755 17.04 11.78 16.79 14.95 -1.84

28. LBRT 6.37 148 7.8 6.47 6.21 5.43 -0.78

29. LNUX 0.76 320 2.22 1.73 2.15 1.38 -0.77

30. LVLT 1.89 132 2.54 2.45 3.95 3.85 -0.1

31. MUSE 2 108 9.8 8.36 8.49 8.22 -0.27

32. NTAP 1.5 153 12.57 16.7 20.18 18.35 -1.83

33. NUFO 2.1 165 3.36 2.4 3 2.9 -0.1

34. ONIS 3.5 42 5 5.29 6.22 5.66 -0.56

35. OPWV 5.15 208 6.26 5.49 6.88 5.68 -1.2

36. PALM 1.35 165 3.4 2.98 3.07 3.56 0.49

37. PCLN 1.8 165 7.46 4.27 5.05 4.58 -0.47

38. PMCS 9.37 255 21.96 16.55 16.25 16 -0.25

39. RBAK 1.17 98 4.6 3.09 3.72 2.78 -0.94

40. RHAT 2.4 151 8.22 6.15 7.06 5.01 -2.05

41. RIMM 6.84 175 24.3 21.97 27.08 25.64 -1.44

42. RMBS 4.86 127 7 5.51 8.09 7.22 -0.87

43. SCMR 3 200 4.2 3.47 4.09 3.44 -0.65

44. STOR 3.1 154 5 3.33 3.94 3.15 -0.79

45. SUNW 7.5 65 10.17 8.07 9.06 8.71 -0.35

46. TERN 2.36 143 6.32 6.17 7.02 6.8 -0.22

47. TMWD 1.17 136 4.64 3.85 3.75 3.3 -0.45

48. UCOMA 0.5 115 5.23 4.1 5.19 5.98 0.79

49. WEBM 6.13 336 22.1 16.6 19.9 16.33 -3.57

50. YHOO 8.02 250 16.25 14.46 18.74 18.17 -0.57

Total 196.09 10,062 426.52 363.83 414.66 378.22 -36.44

POS.XIndexHighs are rounded,(pennies don’tmatter in thin air)

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Market Structures

King’s Watch




POS.X Index

Trading Earnings



Articles A guide to TradingEarningsby SteadyEddie

Let the games begin!!!

Earnings season is going to be kicking off this week withthe likes of YHOO, RMBS, GE, DCLK, MCAF, JNPR andMERQ, just to name a few. For a complete list of allscheduled earnings reports:http://biz.yahoo.com/research/earncal/today.html

If you have been on the KingCambo.com site the lastcouple weeks, you have been hearing me sing my hitsong, “who is going to warn tonight.” As you all know,most companies have decided to save the bad news forpre-market, i.e.: PSFT and CHKP. These stocks weresmacked down hard on the lower revenue numbers,and rightly so. With the “NEW” accounting rules cominginto play, thanks to the Enron disaster, most stocks willhave to fess up this time around and actually have to lieless…

With pro forma earnings on the way out, companies willhave to report what they have and not what they hopeto have. This is no easy feat since most of these compa-nies have been lying for years, and telling the truth willbe detrimental to the longevity of the stocks life.

Here are the guidelines that I follow when tradingstocks before/after they report earnings.

1. NEVER hold a stock into earningsunprotected.





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There’s nothing worse for a trader than getting caught in the earnings HALT.To avoid having to use the puke bucket, follow these simple rules:

If you are long, make sure you buy a put if you are short make sure you havea protective call. This is called a hedge, playing both sides. This is what thebig boys do, and we can do it, too. This is a strategy that can be applied whenposition trading and swing trading as well. Learn the strategy, and use it.

2. The revenue number and the forward-looking guidance are whatmatter.

Here is the scenario:Let’s take YHOO for example. YHOO is expected to report two cents pershare and revenues of $161 million for the last quarter. If YHOO reportsfive cents and revenues of $158 million, what happens to YHOOpost-market?

If you guessed the stock goes down to Chinatown ™, you are right. Therevenue numbers are key, and usually are very confusing to figure out atfirst. The first piece of info you’ll need is what revenue numbers areexpected. For more information:http://whispernumber.com/wn_revenues.cfm.

You’ll need a premium news service to get the actual numbers in real-time.When the stock reports, I use Dow Jones Professional Investor & BusinessWire.

Now there is still the conference call that follows the earnings reports. Mostconference calls are at 5 pm EST. Using this scenario, YHOO just missedrevenue numbers and the stock is headed down. On the conference call,however, the CEO or whoever is talking uses key words for bullishness:raising guidance, internet advertising is coming back, and so on. Bearishterms: lack of visibility, Internet advertising is not coming back anytime soon,and so forth. It is always better to listen to the whole call. These guys are slyand always slip something in at the last few minutes of the call. The followingday, the analysts/CNBC will have their say - which will also add to thevolatility.



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This type of uncertainty can be an account maker or an account breaker ifyou have an unprotected position. This is why when I choose to tradeearnings reports, I always have a hedge and stick to just trading the optionsstrangles & straddles.

3. Sympathy plays and sector trading

A sympathy play is a stock that is the same sector as the one that isreporting. Listed below are some sympathy plays stocks that move with:

YHOO CSCO QLGC CHKP PSFTAOL JNPR EMLX ISSX SEBLAMZN BBOX NTAP SYMC ORCLOVER ADPT BRCD MCAF INTUCNET AETH EMC SCUR BOBJ

Those are just a few, you can find other sector plays here:http://biz.yahoo.com/p/technoconameu.html

Trading earnings can be either an account maker or an account breaker literally, justask some of the traders that decided to hold long or short unprotected positions intoany one particular earnings report. Keep in mind that you may have to call them attheir new job because most of the gamblers are gone.

Good trading & always set your stops,

SteadyEddie

Announcing: The KingCAMBO.com

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Free members, this is yourchance to experience theFULL KingCAMBO.comadvantage as we open ourdoors for one day eachmonth!

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KingCAMBO.comThe Traders Think Tankwww.kingcambo.com




Market Structures

King’s Watch




POS.X Index

Trading Earnings



Articles

Steve Nison’sFavorite CandlestickSignalby Steve Nison, CMTPresident, CANDLECHARTS.COM

Steve Nison, CMT, was the very first to introduce candlestickcharts to the Western World. He is acknowledged as the leadingauthority on candlestick charts. Steve is the author of the twointernationally acclaimed and best-selling books, JapaneseCandlestick Charting Techniques and Beyond Candlesticks. Hisbooks have been translated into eight languages.

Steve’s work has been highlighted in financial media around theworld including the Wall Street Journal, Institutional Investor,Worth Magazine, and Barron’s.

As a renowned and sought after speaker, Steve has trainedprofessionals from hundreds of financial firms from around theworld (including World Bank and the Federal Reserve), on howto apply - and profit from - these methods.

Steve is President of Candlecharts.com which provides premiereducational products and advisory services. Their client listincludes hedge funds, NASDAQ and NYSE market makers andmajor brokerage firms.

To help you to fully harness the power of candle chartingtechniques, Steve Nison will be offering his first ever advancedcandle seminar. Details are at www.candlecharts.com.

In a few months Steve will also be giving web-based seminars.To be among the first to be alerted when these will be availableplease send your name, email address and telephone number [email protected] or call us directly at 732.254.8600 orvisit our site at www.candlecharts.com.

technical analysis WORKSHOP



http://www.candlecharts.com/

mailto:[email protected]




mailto:[email protected]



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Candle Charting Basics

What are Candlestick Charts?

Candle charts are Japan’s most popular, and oldest, form of technical analysis. Theyare older than point and figure and bar charts. Amazingly, candlestick chartingtechniques, used for generations in the Far East, were unknown to the West until Irevealed them in my first book Japanese Candlestick Charting Techniques back in1991 B.C. (Before Candles).

So named because the lines look like candles with their wicks, Japanese candlestickcharts are Japan’s most popular form of technical analysis. Candle charts are over100 years old, and, as such, are older than Western bar charts and point and figurecharts. Yet, amazingly, these charts were unknown to the Western world untilrecently. Candle trading techniques have now become one of the most discussedforms of technical analysis around the world. Almost every technical analysis soft-ware and real time system now has candle charts. This attests to their popularityand usefulness. The worldwide interest in candle charts continues to expand formany reasons:

This article is a basic introduction to candle charting techniques. But even with theprimary candle signals discussed, you will discover how candles open avenues ofanalysis not available anywhere else. My goal here is to provide a sense of thepotential of what the candles can offer.

What are the Benefits of Candle Charts?

Candle charts are easy to understand: Anyone, from the first-time chartist to theseasoned professional can easily harness the power of candle charts. This is because,as will be shown later, the same data that is required to draw the candlestick chartis the same as that needed for the bar chart (the high, low, open and close).

Candlestick charting tools will give you a jump on the competition: Candle charts notonly show the trend of the move, as does a bar chart, but, unlike bar charts, candlecharts also show the force underpinning the move. In addition, many of the candlesignals are given in a few sessions, rather than the weeks often needed for a bar



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chart signal. Thus, candle charts will help you enter and exit the market with bettertiming.

Candlestick charting tools will help preserve capital: In this volatile environmentcapital preservation is just as important as capital accumulation. You will discoverthat the candles shine in helping you preserve capital since they often send outindications that a new high or low may not be sustained.

Candle charting techniques are easily joined with Western charting tools: Becausecandle charts use the same data as a bar chart it means that any of the technicalanalyses used with bar charts (such as moving averages, trendlines, retracements,Bollinger Bands, etc.) can be employed with candle charts. However, candle chartscan send signals not available with bar charts.

If you are a seasoned technician, you will discover how joining Japanese candlestickswith your other technical tools can create a powerful tool for understanding themarket’s health.



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Exhibit 1: Candle Lines

The broad part of the candlestick line in Exhibit 1 is called the real body. The realbody represents the range between the session’s open and close. If the close of thesession is above the open then the real body is white the close of the session is lowerthan the open.

The thin lines above and below the real body are the shadows. These are thesession’s price extremes. The shadow above the real body is called the uppershadow and the peak of the upper shadow is the high of the session. The shadowunder the real body is the lower shadow and the bottom of the lower shadow is

Constructing the Candlestick Lines



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the session’s low.

Candle lines can be drawn for all time frames, from intraday to monthly charts. Forexample, a 60 minute candle line uses the open, high, low and close of that 60minute period; for a daily chart it would be the open, high, low and close for the day.On a weekly chart, the candle would be based on Monday’s open, the high and low ofthe week and Friday’s close.

A small real body (white or black), however, indicates a period in which the bulls andbears are more in a tug of war. Such small real bodies give a warning that themarket’s trend may be losing momentum. As the Japanese phrase it, the “market islosing its breath.”

Notice that the candles to the right in Exhibit 1 have no real bodies. These are ex-amples of doji (pronounced doe-gee). A doji is a candle in which the opening andclose are the same. Doji represent a market that is in balance between the forces ofsupply and demand. The emergence of a doji in a trending market could be an indi-cation of a market turn. If a doji follows a tall white candle the Japanese would saythat this doji is “a symptom of uneasiness at a high price.”

For many of you who are already familiar with candle charts, you will know thatmost of them are reversal signals. Patterns such as hammers, shooting stars, en-gulfing patterns, and so forth, ususignal that a prior trend is in the process of chang-ing direction. One of my favorite candle patterns, however, is a continuation signal.That means that the trend before the signal should continue after the signal.



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Exhibit 2: Rising Window

Exhibit 3: Falling Window



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Specifically, the pattern I am referring to is rising and falling windows. Thewindow is the same as a gap in Western technicals. That is, a gap higher is called arising window (see Exhibit 2) in candle terminology. A falling window (Exhibit 3) isthe same as a gap down in Western technicals.

While the terms “windows” and “gaps” are synonymous, the Japanese window,however, provides a signal and unique trading technique. Specifically, the Japanesewill state “corrections stop at the window.” This means that a rising window (thewhole window) should become support on any corrections. And a falling windowshould become resistance on any rallies. In other words, once the market gapsdown, the short-term trend is pointing south.

Exhibit 4: NASDAQ



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We have a classic example of a falling window in the recent action of the NASDAQComposite. Observe the falling windows at 1 and 2. These windows became resis-tance on rally attempts. This chart nicely illustrates the value of candle charts as atool to preserve capital. While the two tall white candle sessions (shown at the bluearrows) showed that the bulls had control, the window’s resistance was still in force.As such, in spite of the tall white candles, one should be cautious about entering longpositions because of the window’s resistance. Indeed, one could consider selling atthis window with a stop on a close above the top of the falling window.

CANDLES AND THE OVERALL TECHNICALPICTURE

Remember a basic principle: candle charting techniques are a tool and not a system.Candle charting techniques must be incorporated with other trading guidelines. Forexample, effective candle charting techniques requires not only an understanding ofthe candle patterns, but also a policy of using sound, coherent trading strategies andtactics.

You should always remember basic strategic principles such as using stops, deter-mining the risk and reward aspects of a trade, observing where a candle pattern isin relation to the overall trend, and monitoring the market’s action after a trade isplaced. By understanding and using these trading principles, you will be in a positionto most fully enhance the power of the candles.

This is only a basic introduction to candle charts. There are many more patterns,concepts and trading techniques that must first be considered. But even with thesebasic concepts, you can see how the candles open new and unique doors of analysis.

I view trading or investing like going into a battle. Trading requires many of thesame skills needed to win a battle; there is strategy, skill, psychology, competition,strategic withdrawals, and yes, even luck.

In this context, there was a famous 17th century Japanese general named Shingen.Whenever his troops went into combat they carried a banner which read, “moun-tain, wind, forest, fire.”



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By utilizing candle charts as a powerful weapon in your battle of trading, you willknow, like General Shingen’s troops knew, when to be:

as immovable as a mountainas quick as the windas patient as the forestand when to invade like a fire

By combining candle charting techniques with your own insights you will have anunbeatable combination!

May the candles enlighten your trading!

Day2

“Secrets to Becoming a SamuraiTrader – Steve Nison’s MostPotent Eastern and WesternTrading Weapons.”

Including for the very first timeever: Advanced CandleCharting Techniques.

Everyone quotes the Master.Now learn personally from theMaster –Steve Nison, the “Fa-ther of Candle Charts.”

Steve will explain, step-by-step,how to fully exploit the incredibleopportunities that candle chartspresent to today’s markets.

More info: www.candlecharts.com

New YorkWorkshopMAY 25-26, 2002

Steve’s first everAdvanced CandlestickCharting workshop!Geared to those who are veryknowledgeable about candlecharts, or have taken Steve’sfull day workshop, or seen hisvideo workshop. In thisground breaking course, Stevepresents new and powerfulmethods (many of which arenot in his books) for tradingwith candle charts with maxi-mum precision and effective-ness.

The EssentialsStarts from the beginning.You will learn everything fromthe basics of candle chartconstruction to learning howto use single candle lines andthe candle patterns to spotearly reversal signals. Stevewill also reveal how to com-bine his favorite candle chart-ing signals with Westerntechnical tools such as movingaverages, Bollinger Bands,trend lines and many others.

Day1Workshop schedule:

Date & Time: Saturday & SundayMay 25 and 26, 2002: 9am-4:00pmBreakfast and Lunch included

Location: The Manhattan Club200 W. 56th St. at 7th Ave(in midtown Manhattan) Kingcambo exclusive bonus: Mention

Kingcambo.com & get two months advisoryservice when you sign up ( a $590 value)!

STEVE NISON’SCANDLE Charting Seminar

Note: To ensure the closest person-alized attention and interaction, DayOne is limited to only 25 studentsand Day Two to only 15 students. Weexpect to close out quickly, so signup now!





Market Structures

King’s Watch




POS.X Index

Trading Earnings



Articles technical analysis WORKSHOP

Market StructureTradingby KingCAMBO

Buy low, sell high. Sell high, buy low. If it’s soeasy, then why isn’t everyone doing it?

In truth, it is pretty easy if you decide to take theguesswork out of it. In order to do this, you have tobecome adept at pattern recognition.

Most traders I have known over the past few yearshave struggled mightily with the concepts of marketstructure lows, market structure highs, market struc-ture triggers, and market structure failures. I suspectthere’s a reason for this: They get so caught up in themumbo jumbo of the lingo that they fail to grasp thebasic principle itself.

Think of a market structure as the place in time (re-gardless of the length of the interval) where a currentwave stops and then reverses.

Market structures form in every type of instrumentand in every type of time frame – in indices, like theDow and the Nasdaq and the Sox semiconductor index;in stocks, like Juniper and Cisco and Yahoo!; and, forthat matter, in the options of these underlying indicesand stocks. The same is true with the futures marketsand commodities.

Wherever candlestick charting exists, market struc-tures form. They also trigger, fail, perfect, or evaporateand re-form.





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A current wave of selling will end in a market structure low. From this it followsthat a current wave of buying will end in a market structure high.

Finding Bottoms - Market Structure Low (MSL)

A market structure low (MSL) formation consists of a three-candlestick patterncalled “low, lower low, higher low” – or, as I prefer to say, “bear, bear, bull.” Itdoesn’t matter if we are talking about a one-minute time frame or a one-month timeframe. The rule applies just the same.

The following weekly chart of the QQQ is a good example of an MSL. The triple Q isa great stock - perhaps the best there is for trend trading. It lets you trade theranges of the Nasdaq without having to learn about and to trade futures. Anotherreason I like the QQQ is that in trading it, I will not be subject to the same kind ofviolence or volatility that occurs (often without any warning) in the E-mini futurescontracts of the Nasdaq or the S&P500 indices.



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In Figure 2.1, notice the last three candles, which form a three-candlestick patternof low, lower low, and higher low. That’s an MSL or bottom. And that’s all there isto it! For me, it is as plain as day if I think in terms of “bear, bear, bull.”



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The MSL Long Trigger

OK, now that I have found an MSL or bottom, do I then scream, “Load the boatlong”? Maybe, if I have no sense or feeling of the risks involved. But savvy tradersknow – with whatever charting system they use – that before they decide a realbottom has formed, they want to see a definite long trigger. That sudden surge thatlooks so exciting now may only be a temporary phenomenon. We want to try to getthe real thing, so we wait for an MSL long trigger to form.

An MSL long trigger happens when a succeeding candle closes above the high ofthe three-candlestick MSL pattern. It does not have to be a consecutive candle –and oftentimes it isn’t. But it must be a higher closing candle.



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In Figure 2.2, you see the three-candlestick pattern of the MSL that we looked at in2.1. At the close of the final candle on this chart, the long position is entered. The triggerformed on a close above the high of the MSL.

Let me repeat: The triggering candle does not have to appear immediately after the MSLhas formed. There might have been a few small candles in between. What matters is thatthe candle closes above the MSL itself; then it’s a long trigger.



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Finding Tops - Market Structure High (MSH)

Now that I have learned about buying low, selling high would be the next good thing to know!

As was the case with an MSL, the market structure high (MSL) is a three-candlestick pattern. It iscalled “high, higher high, lower high” – or as I prefer to say, “bull, bull, bear.”



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In Figure 2.3, which is a 60-min. intra-day chart of the QQQ, we see that a three-candlestick pattern of high, higher high, lower high has formed, creating our MSH ortop.

The MSH Short Trigger

The MSH short trigger confirms that it is time to exit a long position – or to open a shortposition.

Remember how the MSL trigger had to close above the MSL to trigger the long? Wellnow, the MSH trigger has to close below the high of the MSH to trigger the short.



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In Figure 2.4, the MSH three-candlestick pattern forms, and then the short position isentered on the close of the final candle on this chart, which is below the low of theMSH. That’s our trigger!

Again, it helps me here to remind myself that triggers do not have to appear immediatelyafter the MSH. There might have been a few or even a dozen small candles in between.What is critical to the trigger, when it comes, is that it closes below the MSH itself.



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Now that you know how to spot tops and bottoms – and by the way, I encourage you totake whatever time is necessary to master this charting technique if it’s new to you –wouldn’t you like to see how you can make money trading these triggers as they develop?

Trading On Market Structure Triggers

Now that I am more confident about “finding the bottom” as well as acting upon it, howwould I actually manage a trade?

This is no secondary matter! You will find that, once you are in a trade, serious, cash-threatening questions bombard you relentlessly: “What about a stop loss? Where am Igoing to exit? How do I find the top?”

I want to be clear about this right here: I really hate cash-threatening questions in mylife. If they come up, if I have to ask myself these things, it means one thing and onething only: Someone has my cash and it’s not me. And if I don’t protect my capital on aconsistent basis, the day will come when I won’t be trading any more.

This raises the importance of stop losses, of exiting a losing trade before it takes a cata-strophic toll on your capital.

Before I enter any trade, my first rule is to set a stop loss. When trading the MSL longtrigger, my first stop loss is the MSL itself. If the trade begins to move against me, mystop-loss exit is going to be an MSL failure. An MSL failure occurs when a candlecloses below the low of the MSL pattern.



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Figure 3.1, a chart of the QQQ, the Nasdaq 100 tracking stock, shows the initialboundaries that are set prior to acting on an MSL long trigger.



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The Long of It: Trading the MSL Long Trigger

Now that we have an idea of where to set our entry and exit points, let’s move on to atrading situation. Imagine that I’m following Check Point Software Technologies (CHKP)during the trading day on a three-minute chart. I spot the formation of an MSL, which isthen confirmed by a long trigger. What do I do?



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Follow along with me on Figure 3.2 as I review getting into and out of this CHKP trade:

1. The MSL has formed here at 10:27 AM, at a close of 41.55

2. MSL failure line is marked at the low of the MSL, which is 41.38

3. The MSL Long Trigger takes effect at 10:30 AM at a close of 41.70 - above thehigh of the MSL. I am now in the trade. At this point, I use a new rule: Whengoing long, as each candle closes on an up tick, I raise the initial stop loss to theclose of the preceding candle.

4. 10:33 AM candle closes at 42.15; I raise the stop loss to the preceding candle closeof 41.70.



7. The next two candles do not close higher but neither do they hit the current stoploss. This is judgment-call time. I can either lock profits (sell) or tighten my stoploss still higher.



10. The next candle does not go higher but neither does it go low enough to hit stop.Once again it’s judgment-call time. I can lock profits (sell) or tighten the stop losshigher.



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12. 11:00 AM candle closes at 43.61 on a small real body with long upper and lowershadows; this formation is known as a Spinning Top Doji. I raise the stop loss tothe preceding candle close of 43.55, and since Doji candlestick formations oftenpresage a change in direction, I become very alert here.

13. 11:03 AM candle forms a MSH at 43.09 by closing below the previous highcandle at 43.61; it also closes below my trailing stop loss of 43.55. I exit the tradehere at this close (or if I’m particularly aggressive in preserving my gains, duringthe interval in which the bear candle was forming). The key moment was theviolation of the trailing stop-loss line!

The total time in this trade was 33 minutes, from the 10:30 AM MSL long trigger to thetrailing stop-loss exit at 11:03 AM.

The profits I could have grabbed on this particular trade would have been roughly be-tween 1.39 and 1.85. That’s not too bad for a 30-minute swing!

The Short of It: Trading the MSH Short Trigger

The first rule, and I repeat this because I constantly have to remind myself to do it, issetting a stop loss before I enter the trade. When trading the MSH short trigger, myfirst stop loss is the MSH itself. If the trade begins to move against me, my stop loss exit isgoing to be an MSH failure. The MSH fails when a candle closes above the high of theMSH pattern.

To understand what I’m talking about, let’s look at another chart of the QQQ.



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Figure 3.3 shows the initial setup prior to an MSH short trigger.

Let’s again take a look at a real intra-day situation now, going from entry to exit. Thistime we’ll be looking at a Qualcomm (QCOM) swing trade on a daily chart.

Again – I cannot not stress this enough – the time frame in which I am using thesemethods does not matter, what matters is the methods themselves. The methods holdwhether we’re talking about a one-minute scalp or a one-week swing.



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This happens to be a particularly outstanding example of how things can go wrong whenan MSL fails. Remember that once the MSL has formed and once we get our MSL longtrigger, we go long with our stop loss set at the failure of that MSL.

In Figure 3.5, two previous MSLs had already failed. The fact that there are two is notimportant. I merely included them on this chart to illustrate the patterns. What is impor-tant is the ability to recognize the failure of any MSL.



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1. The first MSL forms.2. The second MSL forms.3. The MSL failure trigger line is established.4. An aggressive short position is opened following the greater trend.5. Trailing stop losses are aggressively lowered on every down tick until a new MSL

forms.

In this QCOM trade, I would have gone short on the failed MSL at 60.12 and closed at56.12 or higher, as the hammer candlestick formed an MSL.

MSH Failure

When a MSH or top fails, what does it mean? It means the greater trend is goinghigher. So short positions are stopped out and new aggressive longs can be entered.



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In Figure 3.6, a three-minute intra-day chart of Veritas Software (VRTS), I would golong when the bull candle closes above the previous MSH. Since the “top” failed, thegreater trend is still long. Just as in an MSL failure, entry is aggressive. Stop losses areraised in the direction of the trend on every up tick.

1. MSH forms and the failure line is established



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2. No action is taken anywhere in the boxed area, because the MSH never getstested.

3. The MSH fails as this candle closes above the trigger line, which is the high of thenow-failed MSH.

4. Trailing stop losses are raised aggressively on every up tick.

5. A new MSH forms which closes the trade signal.

The VRTS trade should have been good for between 1.50 and 1.75. It’s just anotherexample of why they coined the old market adage: “The trend is your friend.”


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