In Chapter 6 we saw that a single day could have up to four forms of OTFT activity. (While a neutral day could technically have five forms, the range extensions cancel each other out.) The days are going to have different mixes of OTFT activity and differing degrees of relative imbalance from whether that activity is initiating or responsive. Before detailing how to use the LTMA chart, two particular combinations of day-market activity need to be introduced: a 3-R day and a 3-1 day. A 3-R has three forms of responsive activity, either all buying or all selling. That is, an extreme, range extension, and the TPO count are all caused by either the OTFB or the OTPS and all three forms are responsive. A 3-1 day is the same in that it has three forms of either buying or selling activity, but differs in that the activity is initiating. Figures 7.6 and 7.7 exemplify a 3-R day and a 3-1 day, respectively.
Figure 7.6 An example of a 3-R day. Three forms of responsive selling
ac-tivity by the speculative element in the market, the OTFT, took place.
Figure 7.7 An example of a 3-1 day. Three forms of initiating buying
ac-tivity by the speculative element in the market, the OTFT, took place.
Using the LTMA Chart
When buying or selling builds up on the LTMA chart, the implication is that price and value will either remain sideways, at worst, or move directionally to shut off the accumulated activity. In the same way that price rotates in dual-auction fashion in the developing profile from a state of balance to imbalance and back again, the market does the same thing over a larger time period. Observing a series of days or weeks demonstrates this movement from states of balance to imbalance in the larger time frame. In the same way that the day's profile unfolds as a function of the market carrying out its purpose of facilitating trade, so does the LTMA chart—it merely does so over a longer period of time.
In an up auction with an uptrend on a daily bar chart, the LTMA chart unfolds in four stages. (The same stages apply for an auction down, just in reverse.) Area 1 is an area of imbalance with the OTFB building in the right-hand side of the chart. The degree of imbalance is a function of the relative number of plots on the right-hand side of the ledger compared to the left and also the amount of initiating activity. Prices move higher to shut off the buying imbalance and advertise for sellers. As those sellers surface and the market comes into balance, the market reaches Area 2, as can be seen on the LTMA chart in Figure 7.8. Conventional bar charts show this as an area of correction and consolidation. Area 3 is a test of the vitality of the uptrend. The test comes at the bottom of the horizontal Area 2; if the buyers reemerge, the market resumes its upward auction with more initiating buying activity, facilitating trade on the way up and advertising for sellers at higher levels. A new LTMA chart can be started at this point, but keep the old one for the first time the market returns to these levels.
Types of activity to watch for which indicate a failed test down and the beginning of the next up auction are:
• A 3-1 selling day which does not facilitate trade
• A 3-R buying day which facilitates trade
• A neutral day which closes mid-range or on its highs
• A non-trend day
Figure 7.8 The Areas through which the market progresses on the LTMA chart in an up auction. Obviously, the Areas apply "upside-down" for a down auction.
If the test in Area 3 is successful, the market will start a new auction down and a new LTMA chart is started. Types of activity to watch for which indicate a successful test down and the beginning of the new move down are:
• A trend day, normal day, or normal variation day which facilitates trade. Any of these might be a 3-1 selling day.
• A 3-R buying day which does not facilitate trade.
• A neutral day which closes on its lows.
Conversely, in a down auction on the LTMA, the types of activity which indicate a failed test up are:
• A 3-1 buying day (as previously listed) which does not facilitate trade
• A 3-R selling day which does facilitate trade
• A neutral day which closed in the middle of the range
• A non-trend day
Types of activity to watch for which indicate a successful test down and the beginning of a new auction down are:
• A trend day, normal day, or normal variation day which facilitates trade. Any of these might be a 3-1 buying day.
• A 3-R selling day which does not facilitate trade.
• A neutral day which closes on its highs.
The purpose of the LTMA chart is to place value and market activity in a structure over the bigger picture, so that a single price isn't taken out of context—a single price dipping below a trendline, for instance. The type of market activity, the actual buying and selling, is the important thing to monitor, especially in the test Area-3 and at market turns.
At times you will find yourself keeping two LTMA charts on the same market: one covering a longer time period and the other covering a shorter one. This is a function of trying to determine if the short-term auction is developing into a longer-term auction which would, in effect, negate the longer-term chart you are keeping. If you are in the middle of a LTMA chart which has been in an up auction for several days and the market has a neutral day, you are going to start a new LTMA chart with that neutral day. But you are also going to continue to keep the previous LTMA chart, until the situation defines itself better. There will be more discussion on this later.