The Theory of Trend Exhaustion

What goes up…...

One thing is common to all markets - they go up and they go down. Before you snicker "hey, no kidding !!”, stop and consider how useful it would be if one knew when a market was tired of moving higher and was about to turn and go lower for a while.

In many respects, markets are no different than people in their basic actions - after all, markets are created by people making buying and selling decisions.

Markets, or people for that matter, rarely, if ever, move in the same direction for an extended period of time. After a bit they all become tired, or exhausted, of moving in the same direction so they turn and go the other way.

Think in terms of a basketball which is thrown into the air. Obviously, like a rising market, the ball cannot be expected to rise indefinitely. There will be a point at which the rise of both our basketball and our market will slow their respective ascent and begin to fall back in the other direction. When the turning point of the ascent nears, the upward momentum will begin to decline and then cease altogether as the maximum point of the ascent is reached. At sometime during this process the market and the basketball will begin to slow and therefore exhibit signs of exhaustion.

Keep in mind at this point that the ball is still rising and the uptrend is still intact. However, both the rise of the ball and the trend are beginning, however imperceptibly, to exhibit signs of exhaustion. The market and the ball have used most of their internal energy and their trip higher is about to end.

It is obvious to the casual observer that our basketball is slowing its ascent and will soon begin moving in the opposite direction. However, at this point the same casual observer would have a difficult time visually determining the approach of exhaustion in our rising market situation. The dynamics are obviously much different between our two hypothetical situations at this point.

Even though it may be difficult for the casual chart observer to note the market exhibiting signs of exhaustion, there are multiple methods of mathematical calculation and chart pattern recognition which are of assistance in pinpointing market exhaustion.

We will be demonstrating and providing four separate indicators which will definitively identify exhaustion points on any market in any time frame. These are the JFC Reversal Indicator, JFC Exhaustion Indicator, JFC Real Time Pivot Indicator and JFC Cluster Indicators.

These tools are all specifically designed to identify market exhaustion and thus the short term trend of the market. However, it is here that similarity of the indicators ends. Each indicator makes the determination of exhaustion using its own specific computerized series of equations.

The identification of the short term trend of the market is arguably the most difficult task for the day trader. It is necessary to keep the long term picture in mind but also critical that the “noise”, or random movement, of the market be filtered out of the decision process.

Recall that we have previously in our decision defined the longer term trend for the day in question by using the JFC Market Direction and JFC Directional Day Filter indicators. With this fact in mind, we now have to only determine exhaustion from one side of the market on a majority of our trading days.

On the uptrending days we will be looking only for exhaustion on the market pullbacks which inevitably occur. By using this approach, we will be able to accurately identify the completion, or exhaustion, of these corrections of the market and thereby give us an excellent point at which to enter the market in the direction of the predominant trend.

As we mentioned above, this is not a simple task. For this reason we use multiple approaches to pinpoint exhaustion. The key to using these indicators for this purpose is to use all four of these tools in combination with each other as price activity unfolds.

Logic tells us that when more than one method is used to identify the same situation the higher is the likelihood than a turning point can been identified. For this reason we recommend that you not rely solely upon a single exhaustion / short term trend indicator for the determination of the short term trend.

 My research has shown that the use of multiple indicators used concurrently dramatically increase the accuracy of this critical determination.