By Dr. Mircea Dologa, MD, CTA*
Posted: August 29, 2008
Even if the operational side of intra-day trading mainly uses 15- and 60-minute charts (and, very rarely, 5-minute time frame), we will start this technical analysis pre-open preparation with the bigger time frames (monthly, weekly and daily charts). Then, we will continue our approach with the smaller time frames such as the 240-, 60- and 15-minute charts. (The 5-minute chart is usually used for pinpointing entries and exits.)
A trading report would not be complete without taking into consideration the elements of inter-market analysis. We will use different tools under the banner of Integrated Pitchfork Analysis -- Dr. Andrews’ pitchfork, action and reaction line set-up, basic knowledge of Elliott waves, floor pivots and Fibonacci ratios -- to study in parallel, the bigger time frames of the S&P 500 Cash index with those of the Dax Cash index. We will also closely follow the smaller time frames of these indices as the intra-day market is evolving during the day.
The trader will be surprised, not only by the revealed symbiosis, but also by the impact of trading tips that can make the difference between the "to be or not to be" of a consistent trader.
Bigger Time Frames -- Cash Index Charts
As we all know, trading the Dax futures implies the use of futures charts rather than those of the Dax Cash index. However, we are also aware that the duration of the Dax futures contracts is just a couple of months. For instance, the December 2006 Dax contract started in April 2006 and expired at the end of December 2006.
To be as precise as possible in our research work, we need to study contextual Dax behavior through the continuing fluctuation charts on the bigger time frames. Thus, we will analyze only the monthly and weekly charts of the Dax Cash index ($DAXI symbol in eSignal charting). Our inter-market analysis study will be done exactly in the same manner by analyzing the S&P 500 Cash index bigger time frames.
Analysis of the Dax Cash Index Charts – A Prolific Edge for the Intra-Day Trader
Our analysis of market behavior always starts with the monthly chart, even if most traders 
are not aware of this great advantage. The consistent trader is restless in his or her search and the determination of the dominant trend of the futures charts, not only through the use of the monthly and weekly Dax Cash index charts but also through those of S&P 500 Cash index charts.
Once the dominant trend is identified, we verify its behavior and compliance on the smaller time frames, but this time on the 240-, 60- and 15-minute futures charts.
Careful observation of the chart in Figure 1 reveals the global context of this financial instrument, from its inception (January 1984) through 2006. The market has positively evolved in two manners.
- In a crawling attitude that lasted 12 years, until the end of 1995
- Click for a full view of this graphic In a vivacious and vehement move, having a steep slope of approximately 60°, mirroring the euphoric manner of technology stocks (This lasted more than 4 years, culminating in March 2000.)
The occurrence of an almost perfect reversal bar that took the shape of a Gravestone Doji 
informed traders that the golden age was over and that a cruel correction would ensue. Three years later (March 2003) the retracement of the impulsive pattern ended, and a new up-sloping trend emerged. The upward momentum was still in motion, with its classic swings and counter-swings, at the time of the first writing of this article.
The polymorph pullbacks were scattered all over the place. Dr Andrews’ pitchfork generously showed the up-sloping dominant trend of the local market (rightmost side of the chart), which was still valid after 42 months of industrious efforts. In spite of this seemingly long month period, we dared to call the market a local type because it hardly covered 15% of more than 22 years (273 months, to be exact) of the entire market activity. It also means that this local zone had the most current price of the ongoing market.
We tried to focus even closer on the chart in Figure 2. Dr. Andrews’ pitchfork faithfully 
delineated the up-sloping market flow, which was cruising along the channel formed by the lower median line and warning line n°1. The last four bars had found strong support on the trigger line of the pitchfork.
This represented a strong signal of up-trend continuation, emphasized by the presence of the two Dragonfly doji reversal bars, which were, in this case, extremely bullish. They also announced the end of the pullback, and the up-trend continuation. The Fibonacci retracement tool indicated the presence of a two-level cluster around the 7231 key zone.
The dominant monthly trend was up-sloping. We maintained the 7231 key level as the principal target, once the market flow had exceeded the 78.6% level of the prior pattern correction (6863 level). In case of an up-sloping failure (exhaustion of the current momentum), the downward crossing of the trigger line would represent a strong signal for a low-risk, high-probability short trade, with an entry right behind it.
Now, we will study the impact of the weekly time frame on our intra-day trading decisions. 
First of all, the covered period of this chart will be smaller, 4 years instead of 22 (refer to Figure 3). The target (s) will be closer to the trading zone, but not too close yet.
Having enlarged the right side of the chart in Figure 3, we can better observe the most current movements of the local market (refer to the chart in Figure 4).
The most current five wave up-sloping pattern was initiated at the 5244 level, and the first impulsive swing was quickly corrected. An alternate impulsive wave (wave 3 of wave 5 – w3:W5) was born at the 5365 level -- being directed straightforward to the multiple upper resistances. We have drawn (refer to Figure 4) two possible trajectories:
- The first (n° 1), which follows the steep slope of the already existing wave 3 (w3:W5)
- The second (n° 2) having a leaner slope, which we conjectured would probably have been attracted, like a magnet, toward the three confluences created by the intersections of Andrews’ pitchfork median line and the horizontal resistances at the 6162, 6224 and /or 6337 levels (We believed that this trajectory choice had the best probability.)
The dominant weekly trend remained in the same direction as that of the monthly chart. 
Even if we prefer the trajectory choice involving the three confluences, the final targets of the ongoing five impulse wave pattern would be the same: 6162, 6224 and / or 6337.
If the market price turned back on the median line, without trespassing it, and then were to dramatically drop, it would certainly signal an up-sloping failure (exhaustion of the current momentum). Once again…the downward crossing of the trigger line represented a strong signal for a low-risk, high-probability short trade, with an entry right behind it.
S&P 500 Cash Index Charts (An Inter-Market Analysis Tool for the Dax Intra-Day Trader)
By observing the chart in Figure 5, the trader will wonder what kind of interrelations can exist between two separate domestic markets located thousands of miles away across the Atlantic Ocean. The origin of commodities, especially raw industrial materials, is one of the factors that will greatly influence, not only a country’s domestic currency, but also its economy. Thus, we will often find hidden relationships among world economies, very often revealed by their stock market charts.
Let us study the presumed relationships between the S&P 500 Cash index and Dax Cash 
index by observing their monthly and weekly charts. The purpose of this article is not to go into detail concerning the description of the S&P 500.
The weekly, monthly and daily dominant up-sloping trend of the S&P 500 Cash index remains in the same direction on these time frames. Moreover, we mention that they faithfully corroborate the current behavior of the Dax index.
Smaller Time Frames -- Dax Futures Charts
Once we have evaluated the charts of the Dax and S&P 500 Cash indexes, we can study the futures charts of the smaller time frames. We will quickly observe the utility of their intricacy, which will shorten the way to consistent trading.
We can clearly state that the daily futures chart is one of the most important time frames 
in the process of preparing ourselves to execute our intra-day trading strategy. Its characteristics have the advantage of being closer to the current market flow, thus best influencing intra-day trading.
Dr. Andrews’ pitchfork, on the chart in Figure 8, shows that the local market has climbed all the way up to the level of the upper median line. The last green bar (called a spinning top), in spite of its up-sloping-indicating color, shows a reversal rather than a trend continuation. Thus, we are expecting a retracement of the current up-sloping impulsive wave (wave 3).
Even if we consider the median line of the pitchfork our dedicated target, because of its magnet-like power, we still have drawn above it, two ascending minor trend lines, which will probably act as pullbacks (worst case scenario) or immediate targets (best case). Careful observation of the last swing will reveal its exhaustion due to the presence of:
- A continuous five-day, up-sloping move containing higher highs, taking up an entire
week - Three weak and narrow bars willing to terminate the most current swing
- A last bar that is a candlestick textbook example because:
- It's a spinning bar (an excellent reversal signal, especially when located at the end of a trend)
- Its upper tail is twice as big as the lower tail, telling us that the bulls have already lost the game
The reversal confirmation also comes from the RSI behavior. In spite of its sharp upward slope, the median line of the pitchfork, which has been drawn within the indicator’s zone, has suddenly halted its progression. A reversal can be imminent.
Dax Futures 240-Minute Chart
The 240-minute chart is the indispensable magnifying glass that allows extending the 
velleities of the daily chart into the intra-day arena. In spite of the fact that this time frame is mostly used in currency futures, we also warmly recommend it for Dax futures intra-day trading.
Dr. Andrews' Reverse Pitchfork Technique may seem peculiar on the chart in Figure 9, but, for us, it is nothing more than a very efficient tool that will, very often, reveal the imminent reversal of an ongoing trend. The double dojis situated right beneath the median line of the reverse pitchfork, after a long up-sloping trajectory, really announce the end of the up-trend dominance.
If you are familiar with the Fibonacci Count Technique, you will notice that the last swing, finishing with double dojis, has exactly 21 bars. This Fibonacci number accurately predicts a trend reversal. This reversal choice is strongly emphasized by the existence of a negative divergence between the market price and the OSC(5,35).
And, the last-but-not-least argument would be the 6004 key level, which is a several-layer cluster: Daily floor pivot (R1), monthly and weekly resistance. One can imagine how strong its resistance would be at any penetration attempts.
As a valuable decision factor, we should also remember that the breaking of the lower 
border of the ascending channel will signal the beginning of the correction of the prior impulsive pattern.
A reversal will ensue in the absence of overnight positive news.
Dax Futures Operational Time Frames
We can now describe the operational time frame(s). Belonging to the kingdom of intra-day trading, our battlegrounds offer a more accurate set-up of bigger time frames buying or selling pressure.
We like to keep the length of this chart equal to the length of the current trend and also have a partial visual capture of the prior trend, preferably the last half or third portion. It should not go back more than 10 days. Even if the memory of trading participants can, at times, be amazing, most of the time 5 to 10 days back suffice.
The chart illustrated in Figure 10 reveals the high probability of an imminent reversal. Some 
authors may even sustain that the market price has almost reached the 14.6% Fibonacci ratio. This element was not obvious on the upper time frame charts. Let us focus on the local market (refer to Figure 11) and describe more details.
The advantage of the action and reaction line set-up (refer to Figure 11) is that it can replace the pitchfork, when construction of the pitchfork is not possible. A close observation will indicate that the last impulse wave (W5) has tested the center line of the set-up at least three times and finally decided to reverse.
For the moment, it looks as though the reversal has begun but is being held right on the reaction line n° 1. So far, the borderline between a pullback and a retracement is not clear. We can define this situation better only if the correction exceeds the 23.6%. Normal values for a pullback seldom exceed the 14.6% Fibonacci ratio values. In spite of this mitigated situation, we are inclined to plead for an immediate reversal. The drawn divergence on the OSC (5,35) is certainly for something.
In the absence of strong positive news, the morning market flow will drop, all the way down to the 5940-cluster zone. We can take a short trade, right at the opening, with an optimal stop loss (not more than 5 points), having a reward/risk ratio superior to three.
This type of time frame seems to be more adaptable to the volatile behavior of the Dax. However, it implies a tighter and more discipline approach to money and risk management.
We can clearly see on the 15-minute chart (refer to Figure 12) several parameters that will 
plead in favor of a reversal. Moreover, we may say that the reversing movement has already begun:
- The ascending trend line has been broken by the down-sloping market flow (down bars).
- The very strong support 5980 key level, representing the main daily floor pivot, has also been broken, and the breaking bar has just closed beneath it.
- The correction of the prior impulse pattern, ending with wave 5, has begun because we are now in the alternate swing of the first down-sloping corrective swing, right after the termination of wave 5.
- The pitchfork drawn on the RSI shows a very steep down-sloping orientation. The indicator has just been blocked by the upper 150% Fibonacci line, thus continuing its downward move.
The opening market will be downward oriented in the absence of strong positive news. The immediate down targets will be: 5955, 5940 (a very strong support) and, finally, 5930. The latter support level could be exceeded, but there is a very high probability that the main weekly floor pivot at 5924 level will temporarily block the market flow.
What Benefits Can Be Derived from Integrated Pitchfork Analysis?
In the highly competitive trading environment, the intra-day trader needs to be a perpetual student of the market and learn as often as he or she can, new techniques or, at the very least, ways to optimize existing ones, if the trader already has already proved him or herself prolific and especially consistent.
The use of inter-market analysis and of multiple time frames has already been, for many traders, a real, enviable edge in the trenches of everyday trading. We firmly believe that integrated pitchfork analysis is one of the tools that is most reliable and consistent. It harmoniously respects and obeys the following four principles:
- Getting the inexhaustible edge of learning and cruising with the "smart money" people
- An ubiquitous usefulness in trending and sideways markets
- A time-price ethereal space obeying, as close as possible, the reality of trading
- And, finally, an ergonomic and profitable intricacy with risk control and money management
As most experienced traders know, pre-open preparation will, in a way, guarantee the outcome of the day. Better preparation will ensure the optimal choices of low-risk, high-probability trades. All this with one condition…that you have the right and most efficient tools to trade your kind of market, adaptable to your personality traits.
*Reprinted (and modified) with permission from Dr. Mircea Dologa. This article was first published in Traders magazine, in December 2006. Dr. Dologa, MD, CTA, is a Commodity Trading Advisor and a Stock Investment Advisor (NYSE) and the founder of a new trading concept for newcomers and experienced traders at: www.pitchforktrader.com.
