The Envelope Nominal Model
The system use 3 different Envelopes (sometimes 4) based on a Centered Moving Average to which I add or substract a fixed value which is a « Gann’s Octave » or a subdivision of the said Octave.
The nominal “model” (average, theoretical) I use is based on 32, 128 and 256 Trading Days (TD) Centered Moving Averages and Envelopes.
This « model » gives excellent results for most of the indexes and shares that I follow ( 150).
The principle is very simple :
when Price reaches the Upper or Lower Limit of the Envelope 32 (blue) a Top or a Bottom is formed, we note it T1 or B1
when Price reaches the Upper or Lower Limit of the Envelope 128 (ocre) a Top or a Bottom is formed, we note it T2 or B2
when Price reaches the Upper or Lower Limit of the Envelope 256 (brown) a Top or a Bottom is formed, we note it T3 or B3
Building the 1 Year Enveloppe (Enveloppe 256)
Let’s analyze the Brazilian BOVESPA Index as of today December 26 th .
Let’s assume that the “ Fractal of Price” within which the price action of the BOVESPA fluctuates is 25.000 / 75.000 , therefore 50.000 points.
Let’s divide these 50.000 points by 8. We get 50.000/8 = 6.250.
This is the “Octave” – value 6.250 points.
Let’s add and substract this “Octave” (6.250 points) to the Centered Moving Average 256 TD. We have built the Envelope 256 TD (the brown one)
Analyzing the BOVESPA Envelopes
We observe :
8 Bottoms noted B3 and 8 Tops noted T3 which underline 7 Upswings (Waves) in green and 7 Downswings (Waves) in red of the same “order”, “degree” “ magnitude”.
This way we have identified 7 “composite” Cycles from the first bottom of October 2008 27 th up to September 2015 29 th.
We have by using this method identified 7 “composite” Cycles in 7 years within the Envelope 256 (1 Year) – which in this case is very coherent.
The proof is in the pudding. The fluctuations of the BOVESPA are related to the Gann’s Octave on which the Envelopes are build at :
– short term ( 32 TD – blue),
– medium term (128 TD -ocre)
– long term (256 TD, brown).
All the fluctuations of the price action are included in the 3 various Envelopes.
How to use the DEPTH of an Enveloppe for analyzing and trading
By construction we know that the DEPTH of the Envelope 256 (1 Year ) is in average of 12.500 points.
This mean that a Swing – up or down – WITHIN the Envelope 256 has a maximum extension of 12.500 points ( in the BOVESPA case in 6 months duration in average).
This allows us to have a good approximation of our potential profit when we go Long or Short.
Let’s assume we wanted to SHORT the BOVESPA after the last Top T3 May 2015 the 5 th at 58.052.
We have identified this possibility because Price goes slightly over the upper limit of the Envelope 256 then reentered the Envelope 256. We saw this reentry move as a good entry point for a short.
Then with our structural and historical knowledge we could assume a Downswing of more or less 6 Months duration, for more or less 12.500 points, therefore a potential profit of 12.500 / 58.052. = 21,55 %.
Analyzing and Estimating the Underlying Trend with Envelopes
Moreover we can calculate an estimation of the 1 Year Underlying Trend.
As Hurstians you know that in the present case the 1 Year Underlying Trend is the sum of all cycles whose duration is more than 12 months.
Let’s do it graphically in a simplified way.
Let’s assume the UP swing started October 27 th 2008 at 31.250 and ended November 24 th 2011 at 75.000 (in fact a little less, a little sooner).
We can note that the Upswing was of 75.000 – 31.250 = 43.750 which divided by 6.250 gives us 7 Octaves.
As we know that the DEPTH of the Envelope 256 (1 Year) is 12.500 (2 Octaves), we know that during the Up move the strength of the 1 Year Underlying Trend was of 5 Octaves.
Which means that the 1 Year Underlying Trend of the BOVESPA has contributed for slightly more than 70 % to the Bullish Move.
Conversely we are now in the 43.750 Area.
We went from slightly less than 75.000 (73.000). The Down Move was of 31.250 points (5 Octaves), in fact 29.250 points in 1227 Trading Days, a little less than 24 points per Trading Day.
We can integrate this parameter in the estimation of our Down Swing Target Price (IF the Underlying Trend is constant)
(to be followed)