Monday 2 October 2006

John Ehlers Sine Wave Crossover

John Ehlers sine wave crossover today. The Emini fell hard and closed at 1,340.50 on Monday. After a small rally during the morning, the market dropped and closed with a multiple timeframe crossover in the sine wave. Keep reading this post about John Ehlers and how to use multiple timeframes in your analysis.

John Ehlers Sine Wave Image

John Ehlers, market guru

John Ehlers is one of my favorite writers and market analysis gurus. His books include “Mesa and Trading Market Cycles”, “Rocket Science for Traders” and “Cybernetic Analysis for Stocks and Futures”. I own every one, have read them multiple times, refer to them frequently and highly recommend them all, particularly the last two.

In these books Ehlers introduces his sine wave indicator, based on cycles measured using a Hilbert transform. I use this indicator with a small change to the mathematical computations. The indicator has two major advantages. Firstly, it is predictive and anticipates market turning points, which are shown with crossovers in the red and cyan lines plotted. Secondly, when a market begins to trend the indicator will not show these cyclical crossovers until the trend is finished.

Signals in multiple timeframes are more significant

Although I primarily use daily bar charts to interpret market movements, I do occasionally use other timeframes. The lower timeframes that I look at are designed to break the trading day into equal parts. For example, a 135 minute chart breaks the day into three equal trading sessions. Similarly, using 81 minute bars breaks the day into five equal parts and 45 minute bars breaks the day into nine equal parts. This is the lowest time frame that I look at.

The chart above shows 45 minute bars with two Hilbert sine waves plotted below. The first sine wave is based on 81 minute bars and the second is based on 135 minute bars. As you can see at the end of Monday the sine wave crossovers in these two timeframes coincided. When indicators signal in two different timeframes, like this, their significance increases. So tomorrow we could well see temporary resistance to a further downward move and a small bounce in the index.