UNDERstanding market trends

The Major Market Trend defines the Major Bull Market and Major Bear Market cycles widely covered in main stream media financial news.  The beginning and ending of a Bull or Bear Markets are very hard to pinpoint as they occurr real time and many different parameters are used, some objective and mostly subjective after the fact, to define Major Bull Market TOPS and Major Bear Market BOTTOMS. 

Major Market Trends can be further subdivided into General (Long), Swing (Medium), Setup (Short)  and the Bar (Present) Market Trends according to the Flea Circus Trader System, which concentrates specifically on the objectivce analisys of the 5H Trading Pattern System (5H) based on Price Action (see article TA00XX Price Action Basics).  We also use the Moving Averages Turn Around System (MATA), Price Action Prediction Analisys (PAPA) and the Bollinger Bands Trend System (BBT), among other propietary indicators and statistical probabilities and backtesting studies to predict, indentify, reinforce and confirm the 5H signals to be on the right side of the trade by syncronizing multiple timeframes (minutes, hours, daily, weekly and monthly) in all market trends possible. 

 

PREDICTING BULL TOPS AND BEAR MARKETS BOTTOMS TIP –  Use objective Setup (Short) and Bar (Present) Trend Technical Analysis Systems in different timeframes (daily, weekly and monthly) at all times to be on the right side of the Major Market Trend when it changes without trying to constantly predict it.

COMPONENTS OF OBJECTIVE MARKET TRENDS

Objective measurable Market Trends are composed of five (5) distinct types of trends presented from longest to shortest in duration and each composed of one or severeal trends of the next smaller trend type.  From largest to smallest the Market Trends are; Mayor (Bull or Bear), General (Long), Swing (Medium), Setup (Short)  and the Bar (Present) Trend as described in Table 1 below.

Market Trend Types

Table 1

ROW
TREND
COMPOSED OF
TOPS & BOTTOMS
TIME LENGTH
BAR CHART
1
MAJOR
General Trends
Higher General TOPS & BOTTOMS and/or Lower General TOPS & BOTTOMS
Months or Years
Bull and Bear Markets
MONTHLY
2
GENERAL
Swing Trends
Higher Swing TOPS & BOTTOMS or
Lower Swing TOPS & BOTTOMS
Days to Many Months
WEEKLY
3
SWING
Setup Trends
One Swing TOP & One Swing BOTTOM
Days to Few Months
DAILY
4
SETUP
4 Bar Setups Countertrends
TOP Setup & BOTTOM Setup
1 Day to Weeks
DAILY
5
BAR
Single Bar High-Low
Selected Timeframe
Up Bar or Down Bar
Timeframe dependent
DAILY

Each row of Table 1 explained in detail below

A

ROW 1 –  MAJOR TREND

 

The Major Market Trend is the only trend that has subjective and objective aspects to it in order to identify Major Bull Market TOPS and Major Bear Market BOTTOMS with 100% accuracy.    

SUBJECTIVE ASPECTS – Are a combination of technical and non-technichal made to fit guidelines well covered in financial, economic, monetary and geopolitical media news that do not always fit the same patterns or expectations.

OBJECTIVE ASPECTS – Are 100% based on measurable (range, volume, duration and time) technical analisys derived data to be able to trade in the direction of all the current five (5) Market Trends with the aim to eventually catch and profit from Major Bull Market TOPS and Major Bear Market BOTTOMS following unequivocal technical trading rules and systems. 

 SUBJECTIVE PARAMETERS OF MAYOR TRENDS 

Alhtough well experienced and battle hardened traders can develop a sixth sense to call Major Bull Market TOPS and Major Bear Market BOTTOMS as they unfold, recognizing them as such occur weeks or months later when it is evident to the general public.   A number of subjective paramaters and rules are used to recognize them, although most of the information is already factored into the market and the charts.

BULL MARKET TOP 20% DROP After the fact a Major Bull Market TOP is confirmed when the market drop 20% below the high.  For sophisticated technical traders this rule is meaningless and provides no useful information for trading purposes. 

GENERAL PUBLIC EUPHORIA OR DOOM – When the general public starts giving advise about the latest hot stock or how the market is going to crash into oblivion it tends to be a clear sign that the market is working on a TOP or a BOTTOM and it advisable to take a contrarian position.

SECTOR ROTATION – At Major Martet TOP or BOTTOMS sector rotation takes place.  Professional investor start selling the hot stocks to the general public, from strong hands to weak hands.  At Major Bull Market TOPS professionals start buying more conservative or cyclical stocks in preparation for a Major Bear Market.  At Major Bear Market BOTTOMS they start buying the companies of the hot sector that will lead the next Major Bull Market and start selling the ciclical sectors. 

MARKET BREADTH – Also known as Market Internal Numbers, Professional investors follow the trends of advancing versus decilining issues, percent of stock hitting 52 week new highs or 52 week new lows and other market internals that give clear and worhtwile signs of convergences or divergences that point to the future Major Market Trend.

INVESTOR SENTIMENT – The Put/Call Options Ratio or Bullish versus Bearish advisors are some of the indicators used to ascertain investor sentiment about the future market trend.  These tend to be contrarian indicators about unsophisticated investors who are usually wrong at Market TOPS or Market BOTTOMS. 

CORPORATE EARNINGS TREND CHANGESAt Major Bull Market TOPS corporate quarterly earnings of the overpriced market leaders start to decline due to several potential factors, some covered in this section.  While at Major Bear Market BOTTOMS corporate quarterly earnings of the new emerging leaders or sectors start to accelerate. 

EXTREME FUNDAMENTAL VALUATIONS – At Major Bull Market TOPS and Major Bear Market BOTTOMS fundamental valutations, estimated future earnings and PE rartios are at unreasonable extremes.

CHANGING NTEREST RATES – Rising interest rates are negative for the economic expansion causing a deterioration of corporate earnings and bearish market trends in general, while declining interest rates do the opposite.

CHANGING ECONOMIC DATA –  The never ending daily release of economic data like GDP, unemployment, CPI, etc., affect the financial markets in the short, medium or long term if they are above or below expectations. 

OBJECTIVE PARAMETERS OF MAYOR TRENDS 

The objective parameters that define Major Trends have to be perfectly and consistently identifiable following a set of rules.  Major trends can be identified in monthly charts using the 5H Trading Strategy System (see article TS00XX 5H XXXX).  The drawback is that it takes at least 3 bars or 3 months to confirm a Major TOP or Major BOTTOM after they occur, but the weekly timeframe (and the lower correlative ones) can be used to confirm the probability of successful Major TOPS and Major BOTTOMS being confirmed as they are built. 

The most important aspect of the 5H Trading Strategy System is that it divides the market into measurable uptrends and downtrends, with their point and time range, and the exact time and values of the TOPS and BOTTOMS into a clasiffiable database to analize, interpret and backtest using statiscal probabilities methodologies.

In Image 1 both the objective 5H and subjective 20% Rule Major Market Trends are presented overlapping each other, while Image 2 concentrates on the Major Bull Trend from October 1990 to March 2000 and the Major Bear Trend from March 2000 to October 2002 and how the 5H and the 20% TOPS and BOTTOMS differ in each case.  

TS 5h 20% Major Monthly Market Trend

Image 1 – Explained below – Major Trends SP-500 Monthly Bar Chart with TOPS and BOTTOMS 1970-2022 

ExplanAtion of components of Image 1

MARKET INDEX – The SP-500 Montly Bar Chart is presented in logarithmic scale from 1970 to 2022.

MAJOR BULL TOPS AND MAJOR BEAR BOTTOMS – The Major Bull TOPS and Bear BOTTOMS are presented for the time period following the 5H Trading System Stratgy and 20% drop from a previous Major Bull TOP to qualify as a Major Trend Bear Market as noted in the lower right hand corner of the Image 1.

There are 2 types of Major Market Bull TOPS

  • A. 5H Major Bull TOP following the 5H Trading System Strategy General marked with a green filled purple circle of which there are 19 TOPS for the time period.
  • B. 20% Rule Major Bull Top marked with a green filled white circle of which there are 11 TOPS for the time period.

There are 2 types of Major Market Bear BOTTOMS

  • C. 5H Major Bear BOTTOM following the 5H Trading System Strategy General marked with a red filled purple circle of which there are 19 BOTTOMS for the time period.
  • D. 20% Rule Major Bear BOTTOM marked with a red filled white circle of which there are 11 BOTTOMS for the time period.

5H MAJOR TRENDS – There are two types of Major Trends all in color magenta lines connecting TOPS and BOTTOMS as shown in Image 1.

  • 5H Major Bull Trend which start with a red filled purple circle BOTTOM and finish with green filled purple circle TOP.
  • 5H Major Bear Trend which start with green filled purple circle TOP and finihs with a red filled purple circle BOTTOM.

MOVING AVERAGES – Two classic medium and long term moving averages commonly used by many traders are used to show their relevance in Major Trends.

  • 50 Month Moving Average acts as an excellent support area in strongly advancing Major Trends
  • 200 Month Moving Average acts as an excellent support area in consolidating or violent Major Bear Trends.  Is is interesting to note that the 2oo Month Moving Average has been always uptrending for the last 50 years, which is due to 2 major facts; 1) The economo has been expanding since World War II and the components of the SP-500 Index are constantly revised to withdraw poor performers and add new growth companies as new emerging sectors becoming the leading economic forces of the times. 
TS 5H Monthly Major Trend 1 Cycle

Image 2 – Explained below – 5H Major Bull-Bear Cycle – SP-500 Monthly Bar Chart with TOPS and BOTTOMS 1990-2002 

ExplanAtion of components of Image 2

MARKET INDEX – The SP-500 Montly Bar Chart is presented in logarithmic scale from 1970 to 2022.

MAJOR BULL TOPS AND MAJOR BEAR BOTTOMS – The Major Bull TOPS and Bear BOTTOMS are presented for the time period following the 5H Trading System Stratgy and 20% drop from a previous Major Bull TOP to qualify as a Major Trend Bear Market as noted in the lower right hand corner of the Image 1.

There are 2 types of Major Market Bull TOPS

  • A. 5H Major Bull TOP following the 5H Trading System Strategy General marked with a green filled purple circle of which there are 19 TOPS for the time period.
  • B. 20% Rule Major Bull Top marked with a green filled white circle of which there are 11 TOPS for the time period.

There are 2 types of Major Market Bear BOTTOMS

  • C. 5H Major Bear BOTTOM following the 5H Trading System Strategy General marked with a red filled purple circle of which there are 19 BOTTOMS for the time period.
  • D. 20% Rule Major Bear BOTTOM marked with a red filled white circle of which there are 11 BOTTOMS for the time period.

5H MAJOR TRENDS – There are two types of Major Trends all in color magenta lines connecting TOPS and BOTTOMS as shown in Image 1.

  • 5H Major Bull Trend which start with a red filled purple circle BOTTOM and finish with green filled purple circle TOP.
  • 5H Major Bera Trend which start with green filled purple circle TOP and finihs with a red filled purple circle BOTTOM.

MOVING AVERAGES – Two classic moving averages commonly used by many traders are used to show their relevance in Major Trends.

  • 50 Month Moving Average acts as an excellent support area in strongly advancing Major Trends
  • 200 Month Moving Average acts as an excellent support area in consolidating or violent Major Bear Trends.  Is is interesting to note that the 2oo Month Moving Average has been always uptrending for the last 50 years, which is due to 2 major facts; 1) The economo has been expanding since World War II and the components of the SP-500 Index are constantly revised to withdraw poor performers and add new growth companies as new emerging sectors becoming the leading economic forces of the times. 
5H GWS TREND CHANGE - TABLE 3
5H GWS TREND CHANGE - TABLE 3
5H GWS TREND CHANGE - TABLE 3
5H GWS TREND CHANGE - TABLE 3
5H GWS TREND CHANGE - TABLE 3
5H GWS TREND CHANGE - TABLE 3
5H GWS TREND CHANGE - TABLE 3
GENERAL (G)
SWING (W)
SHORT (S)
5H GWS
Status
Frequency
STRENGTH

CU

Trend
Change
Up

LTHB
+1
CULTHB+1
Higher Bottom
Common
Weak

CU

Trend
Change
Up

LTVB
+1
CULTVB+1
Higher Bottom
Average
Weak

CU

Trend
Change
Up

LBHT
+2
CULBHT+2
Higher Top
Common
Strong

CU

Trend
Change
Up

LBVT
+2
CULBVT+2
HIgher Top
Rare
Strong

CD

Trend
Change
Down

HBLT
-1
CDHBLT-1
Lower Top
Common
Weak

CD

Trend
Change
Down

HBVT
-1
CDHBVT-1
Lower Top
Average
Weak

CD

Trend
Change
Down

HTLB
-2
CDHTLB-2
Lower Bottom
Common
Strong

CD

Trend
Change
Down

HTVB
-2
CDHTVB-2
Lower Bottom
Rare
Strong
A

COLUMN 2 –  5H T/B – CURRENT 5H TREND TOP OR BOTTOM STATUS CODE

 

A General Trend is formed of several consecutive and sequential Confirmed Tops and Confirmed Bottoms.  Uptrends are composed of Higher Confirmend Tops and Higher Confirmed Bottoms, while Downtrends are composed of Lower Confirmed Tops and Lower Confirmed Bottoms as the trend develops over time.  Each Top and Bottom in a General Trend is numbered consecutevely with ascendig numbers starting with the number 0 for the -1, -2, +1 or +2 Trend Change Top or Botom followed by the number 1 and higher for the Swing Trend Tops and Bottoms as they progress along the Current General Trend in each Current Swing Trend until a new Change Trend event occurs that reverses the Current General Trend starting the whole process again in the opposite General Trend direction.  Sometimes consecutive Change Trend events foffow each other, for axample a +1 Bottom followed by a -1 Top, in a market battle trying to establish the new trend.

The 5H T/B NUMBERING SYSTEMThere are 4 ways to intiate a Change Trend, 2 for Change Uptrends (CU) that can start with a +1 Bottom or a +2 Top, and 2 for Change Downtreds (CD) that can start with a -1 Top or -2 Bottom.  The sequential numbering system for the Swing Tops and Swing Bottoms is the following:

5H T/B Numbering System for Uptrends

In General Uptrends built on sequential Higher Tops and Higher Bottoms the numbering sequence starts with the number “0” for the +1 Swing Bottom or the +2 Swing Top from the last Change Uptrend event, but instead of “0” the +1 Bottom or +2 Top is used to number the initiation of the 5H Uptrend in the charts.

  • The next Upswing after a +1 Change Swing Trend Bottom within a General Uptrend will be Top number 1,  the next Bottom number 2, the next Top number 3, etc.  On the other hand, the next Downswing after a +2 Change Swing Trend Top within a General Uptrend will be Bottom number 1,  the next Top number 2, the next Bottom number 3, etc.
  • +1 Bottom initiated Change Uptrends will have odd numbered Tops and even numbered Bottoms, while +2 initiated Change Uptrends will have even numbered Tops and odd numbered Bottoms.  See the summary in Table 4 below.

5H T/B Numbering System for Downtrends

In General Downtrends built on sequential Lower Tops and Lower Bottoms the numbering sequence starts with the number “0” for the -1 Swing Top or the -2 Swing Bottom from the last Change Uptrend event, but instead of “0” the -1 Top or -2 Bottom is used to number the initiation of the 5H Downtrend in the charts.

  • The next Downswing after a -1 Change Trend Top within a General Downtrend will be Bottom number 1,  the next Top number 2, the next Bottom number 3, etc.  On the other hand, the next Downswing after a -2 Change Trend Bottom within a General Dowtrend will be Top number 1,  the next Bottom number 2, the next Top number 3, etc.
  • -1 Top initiated Change Downtrends will have even numbered Tops and odd numbered Bottoms, while -2 initiated Change Downtrenhds will have odd numbered Tops and even numbered Bottoms.  See the summary in Table 4 below.

The 5H T/B STATUS CODE –  The 5H T/B code has 4 components (for Column 2 of Table 1):

  • The first component of the code is the Trend Change Swing Top or Bottom that originated the Trend Change and can be one of four possibilities, +1, +2, -1 or -2.
  • The next letter can be an H for Higher Tops/Bottoms sequences (+1 and +2) of a Current General Uptrend or an L for Lower Tops/Bottoms sequences (-1 and -2) of a Current General Downtrend.
  • The next 3 letters, TOP for Tops and BOT for Bottoms, indicate if the current and last Confirmed Swing move is a TOP or BOT.
  • The last number of the 5H T/B code is the current Top or Bottoms Swing Trend number in the Current General Trend sequence as noted in the 5 T/B Numbering System sections above.

See Table 4 below for examples of the 4 possible Top/Bottom sequences lasting 4 Swings after a Trend Change.  The numbering of the Top/Bottom sequences would increase as long as a Change Trend does not occur.

CURRENT 5H TREND TOP & BOTTOM STATUS - TABLE 4
CURRENT 5H TREND TOP & BOTTOM STATUS - TABLE 4
CURRENT 5H TREND TOP & BOTTOM STATUS - TABLE 4
CURRENT 5H TREND TOP & BOTTOM STATUS - TABLE 4
CURRENT 5H TREND TOP & BOTTOM STATUS - TABLE 4
CURRENT 5H TREND TOP & BOTTOM STATUS - TABLE 4
TREND CHANGE T/B TYPE
T/B TYPE START
1st T/B SWING
2ND T/B SWING
3rd T/B SWING
4th T/B SWING

CU +1

5H T/B +1 CODE

HIgher Bottom 0
Higher Top 1
Higher Bottom 2
Higher Top 3
Higher Bottom 4

CU +1

5H T/B +1 CODE

+1 HBOT0
+1 HTOP1
+1 HBOT2
+1 HTOP3
+1 HBOT4

CU +2

5H T/B +2 CODE

Higher Top 0
Higher Bottom 1
Higher Top 2
HIgher Bottom 3
Higher Top 4

CU +2

5H T/B +2 CODE

+2 HTOP0
+2 HBOT1
+2 HTOP2
+2 HBOT3
+2 HTOP4

CU -1

5H T/B -1 CODE

Lower Top 0
Lower Bottom 1
Lower Top 2
Lower Bottom 3
Lower Top 4

CU -1

5H T/B -1 CODE

-1 LTOP0
-1 LBOT1
-1 LTOP2
-1 LBOT3
-1 LTOP4

CU -2

5H T/B -2 CODE

Lower Bottom 0
Lower Top 1
Lower Bottom 2
Lower Top 3
Lower Bottom 4

CU -2

5H T/B -2 CODE

-2 LBOT0
-2 LTOP1
-2 LBOT2
-1 LTOP3
-2 LBOT4
A

COLUMN 3 –  DATE T/B – SWING DATE OF CURRENT TOP OR BOTTOM

 

The definitive confirmation date of a 5H Swing Top or a Bottom occurs the third day/bar or later after a potential Top High or Bottom Low Bar is identified.  Only in very rare situations or in intraday charts, due to extreme volatility, does the Current Top or Bottom Bar violate both, the Previous Top and the Previous Bottom, creating an unsual bar that functions both as a Top and a Bottom (this case is not covered in this article).  Another unsual situation is the possibility of the Setup Bar violating a Previous Top or Bottom creating a new violation Swing Top or Bottom on the second day or bar.  These 2 rare cases occur without the need of a Confirmation Bar Price Action Pattern (see Violation Tops and Bottoms in Table 4).

Therefore, the date of a Swing Top or Swing Bottom can only be known in the future Confirmation Bar Date as Short Term Interbar Price Action confirms the Top or the Bottom.  The important point is that while awaiting for confirmation the Low (L) of a potential Seing Bottom or the High (H) of a potential Swing Top should not be violated, which if it were to occur the whole process of a new Higher Swing Top Bar or new Lower Swing Bottom Bar and the subsequent Setup Bar would follow starting the whole proces all over again until a Confirmation Bar creates the expected Swing Top or Swing Bottom.

A

COLUMN 4 –  CONF T/B – CONFIRMATION DATE OF CURRENT TOP OR BOTTOM

 

The Confirmation date is the date in which the actual Swing Top or Swing Bottom of Column 3 Table 1 were confirmed.  The further appart the Swing Top or Swing Bottom dates are from the Confirmation Dates the longer the market consolidated sideways without breaking the high of the potential Swing Top or the low of a potential Swing Bottom prior to Confirmation. 

 The Confirmation Time is calculated by substracting the Confirmation Date (time for intraday charts) from the Swing Date (time for intraday charts) excluding the holidays and weekdends.

It is the date in which the Confirmation Bar validated the Setup bar, a process that usually takes 3 or more days or even weeks.  Only in etremely rare occassions does confirmation occur on the same day or the next day after Top or Bottom Swing Bar is in place.  The confirmation date is of extreme significance, since it changes the direction of the Swing Trend from Top to Bottom or Bottom to Top or the Current General Trend from Uptrends to Downtrend or from Downtrend to Uptrend. 

A

COLUMN 5 –  BARS – NUMBER OF BARS SINCE LAST TOP OR BOTTOM

 

Is the count of the number of bars since the formation of the currently active Confirmed Top or Confirmed Bottom.  The highest Confirmed Top Bar or the Lowest Confirmed Bottom Bar is bar number “1” of the Swing Trend move.  This number is important since Top to Bottom and Bottom to Top moves tend to last an average number of bars helping us predict the area where a potential change in the Swing Trend has higher probabilities of occuring.

Usually the lowest number of bars is 3, except in extremely rare cases of extreme volatility where the previous Tops and Bottoms are violated in the same Top or Bottom bar number 1 or in the Setup Bar number 2 as noted in other sections of this article.  These extreme situations are more common in intraday smaller minute timeframes.  As the Unconfirmed Top or Unconfirmed Bottom progesses the number of bars increases as will be noted in Column 5 of Table 1.

It is extremely important to note that the final number of bars that compose a Swing Top or Swing Bottom move gets reduced by at least 2 bars or more once the next Swing Top or Swing Bottom is confirmed for the same reason that there is a difference between the Confirmation Date in Column 4 of Table 1 and the Swing Top or Swing Bottom Date in Column 3 of Table 1.

A

COLUMN 6 –  SETUPS – THE NUMBER OF SETUPS SINCE LAST TOP OR BOTTOM

 

A Setup Bar Pattern provides the possibility to confirm a new Swing Top or a Swing Bottom in the next bar or bars.  A Setup Bar Pattern is composed of 2 bars.  

  • In the case of an Unconfirmed Swing Top being formed coming from a Confirmed Bottom it is composed of the highest bar in the Swing Uptrend and a second bar that does not violate the previous bar high.
  • In the case of an Unconfirmed Swing Bottom being formed coming from a Confirmed Top it is composed of the lowest bar in the Swing Downtrend and a second bar that does not violate the previous bar low.

As soon as a new Swing Top or Swing Bottom is confirmed and a new unconfirmed  Swing Top or unconfirmed Swing Bottom starts trending the number of Setup Patterns will be 0 until the first Setup Bar is in place.  

If the Setup Bar Pattern fails by violating the lowest low in the current downswing coming from a Confirmed Top or by violating the highest high in the current upswing coming from a Confirmed Bottom a new Setup Bar Pattern will have to develop again in order to be able to confirm the currently developing Swing Top or Swing Bottom.

As the market trends Setup Bar Patterns will keep on forming until one of them confirms the next Swing Top or Swing Bottom with a Confirmation Bar.  Therefore, unconfirmed uptend or downtrend moves can have 1 or several Setup Bar Patterns, if any of them fail to be confirmed, and they might be ON if they are awaiting on a potential Confirmation Bar or OFF once they fail and the Upswing or Downswing is awaiting the formation of a new Setup Bar Pattern.

The Setups Code in column 6 of Table 1 provides the following information on its 3 components;

  • Number of Setups.  Can be 0 or a higher number.  The first number is the number of Setup Patterns that occurred in the current Uptrend from a Confirmed Swing  Bottom or the number of Setup Patterns in a Downtrend from a Confirmed Swing Top, which could range from 0 to start with to dozens in outlier situations.  Any Uptrend or Downtrend move would have 1 to several Setup Bars Patterns before the trend revereses, except in the 2 rare cases mentioned before which would lack Setup Bar Patterns before the Swing Top or Swing Bottom confirmation in which case the Setups Code woud be only “0”. 
  • Current Swing Trend.  Can be”U” for up or “D” for down.  The letter “U” means the Setup Pattern is part of an Upswing Move working on creating a Swing Top and the letter “D” which means the Setup Pattern is part of a Downswing Move working on creating a Swing Bottom.  Its unrelated to the Current General Trend and simply refers to the current direction of the Swing Trend.  Current General Uptrends and Downtrends have both Uptrend Swing while attempting to form a Swing Top and Downtrend Swing Trends when attempting to form a Swing Bottom.
  • Status of the Setup Pattern.  Can be ON or OFF.  The word “ON” denotes that there is a current Setup Pattern active and a potential Swing Trend change could be confirmed by a Confirmation Bar in the next bars.  The word “OFF” denotes that all the previous Setup Patern failed and the current trend continues until a new Setup Bar Pattern is formed.
A

COLUMN 7 –  NEXT T/B – SEQUENCE OF NEXT EXPECTED TOP OR BOTTOM

 

Once a Swing Top is confirmed the market will start the process of creating a new Swing Dowtrend in search of confirming a new Swing Bottom, and once a Swing Bottom is confirmed the market will start the process of confirming a new Swing Top independent of the Current General Trend.  In order to accomplish this, the market can trade within 3 clearly defined 5H Zones that will determince the future continuation or change of the Current General Trend during the next Swing Top or Swing Bottom confirmation process;

  • The 5H Neutral Zone or 5HN-Zone within trading zone of the last confirmed Swing Top and Swing Bottom.
  • The 5H Trend Zone or 5HT-Zone in the direction of the Current General Trend, above the previous Confirmed Swing Top for General Uptrend and below the last Confirmed Swing Bottom for General Downtrends.
  • The 5H Reversal Zone or 5HR-Zone in the opposite direction of the Current General Trend, below the previous Confirmend Swing Bottom for General Uptrends and above the previous Swing Top for General Downtrends.

For General Uptrends the 5HT-Zone is above the 5HN-Zone and the 5HR-Zone is below the 5HN-Zone.  For General Downtrends the 5HT-Zone is below the 5HN-Zone and the 5HR-Zone is above the 5HN-Zone.Furthermore, there are 4 types of 5H-Swing-Areas or 5HSA, as presented in the “Last Swing Move” row in Table 5 below,

  • 2 during General Uptrends; Bottom-to-Top Trend Swing or 5HSA-UBT (Case 1 in Table 5) and Top-to-Bottom Trend Swing or 5HSA-UTB (Case 2 Table 5).
  • 2 during General Downtrends; Bottom-to-Top Trend Swing o 5HSA-DBT (Case 3 in Table 5) and Top-to-Bottom Trend Swing or 5HSA-DTB (Case 4 in Table 5).

The 5H Neutral Zone or 5HN-Zone.  Is the trading range between the last Confirmed Swing Top and the last Confirmed Swing Bottom for any General Trend, Current or Change trends.  Once a new Swing Bottom or a new Swing Top is confirmed ALL trading starts within the 5HN-Zone providing an opportunity to maintain the Current General Trend or to Trend Change in the opposite direction in all 4 each 5H-Swing-Areas as noted in Table 5 below.  Therefore, while trading occurs in the 5HN-Zone, Column 7 will first show the next possible Swing Top or Swing Bottom mantaining the Current General Trend followed the next possible Change Trend Top or Bottom against the Current Trend.

The Trend Zone or 5HT-Zone.  Is the trading zone outside of the range of the 5HN-Zone in the direction of the Current General Trend.  In Current General Uptrends the 5HT-Zone will be above the previous Confirmed Top, while in Current General Downtrends the 5HT-Zone will be below the last Confirmed Bottom.  Once the 5HT-Zone is entered a Change Trend is no longer possible within the current Swing Trend.  Only 5H-Swing-Areas 5HSA-UTB and 5HSA-DBT can enter the 5HT-Zone.  Change Swings Tops (-1 or +2) or Change Swing Bottoms (+1 or -2) are no longer possible once trading enters the 5HT-Zone.  Therefore, if trading occurs within the 5HT-Zone, Column 7 will show only the next possible Swing Top or Swing Bottom awaiting confirming within the Current General Trend.

The Reversal Zone or 5HR-Zone.  Is the trading zone outside of the range of 5HN-Zone in the opposite direction of the Current General Trend.  In Current General Uptrends the 5HR-Zone will be below the previous Confirmed Swing Bottom, while in Current General Downtrends the 5HR-Zone will be above the last Confirmed Swing Top.  Only 5H-Swing-Areas 5HSA-UBT, with a -2 Bottom, and 5HSA-DTB, with a +2 Top, can enter the 5HR-Zone.  Therefore, if trading occurs within the 5HR-Zone, Column 7 will show only the next possible +2 Swing Top or -2 Swing Bottom awaiting confirming of a Trend Change.

NEXT T/B SEQUENCE OF NEXT EXPECTED TOP OR BOTTOM - TABLE 5
NEXT T/B SEQUENCE OF NEXT EXPECTED TOP OR BOTTOM - TABLE 5
NEXT T/B SEQUENCE OF NEXT EXPECTED TOP OR BOTTOM - TABLE 5
NEXT T/B SEQUENCE OF NEXT EXPECTED TOP OR BOTTOM - TABLE 5
GENERAL UPTREND
GENERAL UPTREND
GENERAL DOWNTREND
GENERAL DOWNTREND
SWING SEQUENCE
Higher Tops & Higher Bottoms
Higher Tops & Higher Bottoms
Lower Tops & Lower Bottoms
Lower Tops & Lower Bottoms
Last SWING MOVE
BOTTOM to TOP
5HSA-UBT
TOP to BOTTOM
5HSA-UTB
BOTTOM to TOP
5HSA-DBT
TOP to BOTTOM
5HSA-DTB
TO BE CONFIRMED
BOTTOM
TOP
BOTTOM
TOP
5H REVERSAL ZONE 5HR-ZONE
Lower -2 BOTTOM
Only Possible
Does Not Apply
Does Not Apply
Higher +2 TOP
Only Possible
5HR-ZONE LOCATION
Below Previous Confirmed BOTTOM
Does Not Apply
Does Not Apply
Above Previous Confirmed TOP
5H NEUTRAL ZONE 5HN-ZONE
Higher Trend or -2 5HR BOTTOM Possible
Higher Trend or -1 5HT TOP Possible
Lower Trend or +1 5HT BOTTOM Possible
Lower Trend or +2 5HR
TOP Possible
5HN-ZONE LOCATION
Between Confirmed TOP & BOTTOM
Between Confirmed TOP & BOTTOM
Between Confirmed TOP & BOTTOM
Between Confirmed TOP & BOTTOM
5H TREND ZONE
5HT-ZONE
Does Not Apply
Higher Trend TOP
Only Possible
Lower Trend BOTTOM Only Possible
Does Not Apply
5HT-ZONE LOCATION
Does Not Apply
Above Previous Confirmed TOP
Below Previous Confirmed BOTTOM
Does Not Apply
CASE
1
2
3
4

Once a new Swing Top or Swing Bottom is confirmed Column 7 of Table 1 will present the next current Swing Trend options as trading starts within the 5H-Zone depending on which 5H-Swing-Area is developing prior to the confirmation of the next expected Swing Top or Swing Bottom.  Each one of the 4 each 5H-Swing-Area Cases is discussed below as they apply to each of the 3 each 5H-Zones.  There a total of 8 each 5H-Zone/5HSA combinations since the 5HR-Zone and the 5HT-Zone only apply to 2 of 4 of the 5HSA each, while the 5HN-Zone applies in all 4 each of the 5HN-Zone cases.  See “Does Not Apply” in Table 5 for the impossible 5H-Zone/5HSA combination cases.

5HSA-UBT. CASE 1 – TABLE 5For Current General Uptrends that just confirmed a higher sequential Swing Top after a higher Confirmed Swing Bottom the 5HN-Zone Bottom to Top range is defined within them.  Price Action within the 5HN-Zone has to either:

  1. Confirm a new Swing Bottom within the 5HN-Zone above the previous Confirmed Swing Bottom to continue with the higher sequential Swing Tops and higher Swing Bottoms of the Current General Uptrend or
  2. Violate the previous Swing Bottom and enter the 5HR-Zone below to confirm a -2 Swing Bottom Downtrend Change.

As long as the new Swing Bottom is not confirmed and Price Action is withn the 5HN-Zone a sequential higher Swing Bottom or a -2 Swing Bottom are possible and both outcomes will be shown in column 7 of Table 1.  If a higher Swing Bottom following the Current General Uptrend is not confirmed within the 5HN-Zone and If the previous Confirmed Swing Bottom is violated entering the 5HR-Zone below the 5HN-Zone  only a  Downtrend Change -2 Swing Bottom is possible and it will be reflected as  the only possibility in column 7 of the table 1.

5HSA-UTB. CASE 2 – TABLE 5For Current General Uptrends that just confirmed a higher sequential Swing Bottom after a higher Confirmed Swing Top the 5HN-Zone Top to Bottom range is defined within them.  Price Action within the 5HN-Zone has to either:

  1. Trade higher above the previous confirmed Swing Top and move into the 5HT-Zone to confirm a sequential higher Swing Top following the Current General Uptrend of higher Swing Tops and higher Swing Bottoms or
  2. Confirm a new lower -1 Swing Top below the previous confirmed Swing Top within the 5HN-Zone to confirm a Trend Change to the downside. 

As long as the new Swing Top is not confirmed and Price Action is within the 5HN-Zone a -1 Swing Top within the 5HN-Zone or a new higher sequential Swing Top in the 5HT-Zone above the previous Confirmed Swing Top are possible and both outcomes will be shown in column 7 of Table 1.  As soon as the previous Swing Top is violated only a sequential higher Swing Top following the Current General Uptrend is possible and it will be reflected as  the only possibility in column 7 of the table. 

5HSA-DBT. CASE 3 – TABLE 5For Current General Downtrends that just confirmed a lower sequential Swing Top after a lower Confirmed Swing Bottom the 5HN-Zone Bottom to Top range is defined within them.  Price Action within the 5HN-Zone has to either:

  1. Trade lower below the previous confirmed Swing Bottom and move into the 5HT-Zone to confirm a sequential lower Swing Bottom following the Current General Downtrend of lower Swing Tops and lower Swing Bottoms or
  2. Confirm a new higher +1 Swing Bottom above the previous confirmed Swing Bottom within the 5HN-Zone to confirm a Trend Change to the upside. 

As long as the new Swing Bottom is not confirmed and Price Action is within the 5HN-Zone a +1 Swing Bottom in the 5HN-Zone or a new lower sequential Swing Bottom in the 5HT-Zone below the previous Confirmed Swing Bottom are possible and both outcomes will be shown in column 7 of Table 1.  If a +1 Swing Bottom is not confirmed and as soon as the previous Swing Bottom is violated only a sequential lower Swing Bottom following the Current General Downtrend is possible and it will be reflected as  the only possibility in column 7 of the table.

5HSA-DTB. CASE 4 – TABLE 5For Current General Downtrends that just confirmed a lower sequential Swing Bottom after a lower Confirmed Swing Top the 5HN-Zone Top to Bottom range is defined within them.  Price Action within the 5HN-Zone has to either:

  1. Confirm a new Swing Top below the previous Confirmed Swing Top to continue with the sequential lower Swing Tops and lower Swing Bottoms of the Current General Downtrend or
  2. Violate the previous Swing Top and enter the 5HR-Zone above to confirm a +2 Swing Top Uptrend Change.

As long as the new Swing Top is not confirmed and Price Action is withn the 5HN-Zone a sequential lower Swing Top or a +2 Swing Top are possible and both outcomes will be shown in column 7 of Table 1.  If a lower Swing Top is not confirmed in the 5HN-Zone and the previous Confirmed Swing Top is violated entering the 5HR-Zone above the 5HN-Zone only an Uptrend Change +2 Swing Top is possible and it will be reflected as  the only possibility in column 7 of the table 1.

CONCLUSION

The 5H PRICE ACTION TRADING STRATEGY

The 5H Price Action Trading Pattern is an extremely powerful tool to understand and predict market behaviour.  The theory presented in this article may seem complex without knowing the precise price action rules and guidelines that define the setups, triggers and interpretation of how market behaviour builds the General, Swing and Short Term Trends.   We encourage you to invest in your education and acquiring our propietary 5H Master Flea Learning Program.  For more information please write us a comment below or contact us at mastertrader@fleacircustrader.com.

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