Zig zag at Trade10.com- The science of trading market momentum for stocks, options, futures and bonds.

Critical Day Analysis

Our critical day analysis is all about trend reversals. We tell you when there is a high potential for a reversal of the short trend and we've been doing it since 1994 with an 80%* accuracy.

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Zig Zag

Zig Zag is trend following indicator that helps define what the trend has been, and can be used as a significance test to help determine when changes in the current price might indicate when the trend of price might be changing. The zig zag indicators filters out changes in a data item that are less than a specific amount that you define. Below is a chart of National Semiconductor. If you bought every time the zig zag moved up and sold every time the zig zag moved down, every trade would be a winner.

Unfortunately, you can't, because the zig zag indicator does not set the last leg until future prices are already known. The zig zag indicator is useful for getting a sense of overall trend in prices or on a security. A zig zag indicator only plots the next leg when a certain percentage or point change has occurred. On the graph below, a 5% zig zag is plotted against the price plot of National Semiconductor.

The Zig Zag can also be plotted on indicators.

The zig zag filters out the noise of daily activity by only plotting changes in price that are of a certain size defined by the investor. It is a very poor indication of future price action as the final leg of the indicator is not set until future price is already known. But one use that might be squeezed from the indicator other than as a trend verification tool, is as a forward look at prices that are 5% (or whatever amount you are using for the zig zag) away from the last point on the indicator. If the stock in a declining trend closed at 47.50, a 5% move higher would project a price of 49.85 . If that leg penetrated a trendline drawn on the zig zag it may lead to an expectation that price trend will continue in the direction of the penetration. This should be tested and have other supporting evidence before leading to a trading decision. Generally the zig zag is used to get a clearer sense of the past price trend and is very little help in determining future price activity that may occur.

To the right technical studies are examined in more detail to provide a sense of conformational evidence for traders of the critical day. Click on any of the terms to take a closer look at a technical discussion on that topic. All formations, patterns, indicators and technical tools fail at various times and so should only be used to build a body of evidence in forming a trading decision rather than being solely relied upon. There are a number of valuable studies that lead to intuitive understandings about price and volume but a strong compliment to technical analysis is an understanding of the trends and changes in the fundamentals and economic activity that ultimately lead valuation levels in the markets.

Walk through a critical day

The graphs show a price plot of the Dow Jones Industrials from Sept 28/00 to early November. The First graph ends on November 3/00, two days before an upcoming critical day on November 7/00. Our members looking at the market are expecting a trend reversal to occur due to the high rate of success in our research. Ideally a member will be using their own skills to judge the supply and demand changes, using technical and fundamental indications to confirm suspicions of a reversal, and trade accordingly.
On the second graph we see that the price action on November 6 was a bullish day, reversing the short trend so that the short trend leading into the critical day is now up. A critical day is an expectation of a reversal of the short trend that immediately precedes the critical day. In the case of the November 7 signal, given to members 3 days before, is an indication that the upward moving trend, recognized at the close of November 6 is expected to reverse direction.
On the third graph we can see that November 7 was a low volatility after a large gain on November 6 of about 160 points for the Dow Jones Industrials. The subsequent move over the three days following the November 7 signal saw the Dow Jones Industrials fall 376 points. The next day, November 13, the Dow Jones Industrials lost an additional 83 points with intra-day low a full 609 point loss since the open on the critical day.

Most recent signals

A closer view of the most recent signals. You can see the short trend immediately prior to a successful critical day, reverses coming away from the critical day. Often a failed critical day will indicate a stronger bias in the market for continuation of the trend that was in place prior to the critical day. A failed signal can therefore provide as much information and opportunity as a successful one. Take a look at tech studies to develop a sense of trend reversals and use.

Tech Studies

Comparative Relative Strength

Congestion Pattern

Consolidation