III. Objetivo General
3.7. Transportador Automático
The next item of note in terms of using the Model is the time period between March 21 and May 1. As shown in Figure 12.7, virtually the entire period was marked by the BC posting readings under 20 percent. Yet, instead of reversing course, the DM actually declined 300 ticks during that time period. Remember, despite extreme bearish expectations, the crowd will be right just so long as selling from the speculative element in the market continues to enter the market. For starters, notice how the DSI spiked from 19 percent on March 27 to 74 percent on March 28 while price hardly moved up at all. That relatively high reading, given the prevailing conditions, alerts the short-term trader to get short the next day if the market gets range extension down. The market did get range extension down the next day; it was also a neutral day which prompted the intermediate-term trader to start a new LTMA chart. Figures 12.8 to 12.10 show the unfolding LTMA charts for the same time period and illustrate how that selling came into the market despite the extremely bearish sentiment readings.
Figure 12.7 Daily continuation chart, DSI, and BC for DM, 3/21/96 to
5/1/96. (Sources: Bloomberg Financial Markets, MBH Commodity
Advi-Figure 12.8 LTMA chart for DM, 3/29/96 to 4/8/96. (Source: SkyTrade.)
Notice in Figure 12.8 that the first three days following that 74 percent reading on March 28 were pure selling by the OTFT. Notice further that over the next several days, even though the DSI slipped under the 20 percent level, the market had no buying range extension. The selling imbalance is clearly evident, despite the BC regis-tering less than 20 percent.Figure 12.9 continues the LTMA chart by adding the activity from April 9 to 19.
The price drop during this time period was precipitous despite the excessively bearish BC. Expectations combined with activity to produce a coherent bear trend over the intermediate term. Buying range extension did not materialize until April 17, marking the first time this particular type of OTFT activity occurred since the market started down on March 29. For the intermediate-term trader looking for the ideal scenario of Areas 1-2-3-4 to unfold, April 17 would look like the beginning of Area 2 where the market comes into balance, so the buying on April 17 and 18 is not reason enough for exiting the market. Moreover, the "relatively extreme" DSI, given the bear nature of this market, of 68 percent made the market vulnerable if range extension down occurred the following day, which it did. Notice the selling activity on April 19 which sparked a resumption of the down-trend.
Figure 12.9 LTMA chart for DM, 3/29/96 to 4/19/96. (Source: SkyTrade.)
Continuing the LTMA chart with Figure 12.10, April 24 posted a neutral day which would have prompted the intermediate-term trader to start a second LTMA to run concurrently with the existing one. But April 25 made it clear this second LTMA chart was not needed, as selling resumed in force below the level of the neutral day. This example illustrates the crowd can be right. Their extreme expectations when backed up by appropriate activity in the market create the conditions necessary to make the market trend.Figure 12.10 LTMA chart for DM, 3/29/96 to 4/30/96. (Source: SkyTrade.)
The time period following this 300-point decline is also worth examining in some detail. Figure 12.11 presents the familiar daily bar chart with the DSI and BC graphed underneath. Notice the series of gently progressing increases in the DSI as the market experienced several short-term moves to the upside. The DSI didn't bolt from one end of the parabola to the other; this enabled these term moves to unfold as short-term trends. As the market rallied in this series of short-short-term moves, the BC gradually came out of the extreme bearish zone in June and inched back into the 50 percent relative extreme level in the middle of July. Since this had proven to be a relativelyhigh reading during the course of the year, the market advisors were actually extremely bullish on the DM.
Figure 12.11 Daily continuation chart, DSI, and BC for DM, 5/1/96 to
7/23/96. (Sources: Bloomberg Financial Markets, MBH Commodity
Advi-However, the real item I want to draw attention to in Figure 12.11 is the vertical move on July 16 when the market gapped higher and posted a +250 point intra-day high. Figure 12.12 shows the profiles for the September DM contract for the three days preceding this eruptive move with the DSI reading as of the close on each of those days. Note how the market set itself up for this break out of the trading range.
The BC was at the 50 percent area, relatively high for this market during this time period. After trying several times to break out of the range on the upside without success, traders got bearish near the top of the trading range; posting 17 percent on the DSI on July 12. That placed the market at the low end of the parabola in the short term. Range extension up the next day shot the market sharply higher and out of the range.