GENERAL DISCUSSION:

If you don't understand or remember the definition of DIRECTION, FAILURE, or MOVEMENT, you'll make it a lot easier on yourself if you review these concepts in CHAPTER 2, before going on.

A Directional Indicator is usually, but not always, a pattern of some kind. Certain of these patterns are defined by the 3X3. Don't confuse the concept of trend with that of direction, even though the 3X3 is used for trend delineation as well as the criteria for certain of the Directional Indicators we will use. Directional Indicators are not Trend Indicators, irrespective of how they are derived. If there is a conflict between what a Trend Indicator and a Directional Indicator is telling you, follow the Directional Indicator. Direction overrules Trend.

In recent years, a greater percentage of my trades have been based on Directional Indicators rather than Trend Indicators. This is as much a reflection of my maturity as a *trader, as it is my increased patience level. Perhaps philosophically speaking, those aspects are one and the same. Directional Indicators require patience, as they must manifest on their own, while a Trend can always be found. Directional Indicators are typically very powerful and highly reliable. They are in keeping with my overall philosophy:

THE "DOUBLE REPENETRATION SIGNAL" OR "DOUBLE REPO" FOR SHORT

The following Chart 6-1 shows an idealized Double RePo. It has specific, identifiable features.

1. The Double RePo signal bar must be preceded by a minimum of 8-10 periods of thrusting market action; 15 or more is better. Just what constitutes thrust is far easier to visualize than to define. This is good news, since it will make it tough for programmers to specify. Therefore, it should continue to "work" for some time to come.

DOUBLE REPO

•  After the up thrust, we need closes below, above, and again below the 3X3, before the
sell signal is given. The reverse is true for down thrust.

•  The top (or bottom) formed by the bars as specified in the chart shown, should be
reasonably close to one another.

•  The width of the top (or bottom) from the initial penetration to the subsequent
penetration (after the retracement) should not exceed 8-10 bars; three or four are much
better.

•  The signal remains intact until either a major Logical Profit Objective (to be defined
later) is achieved (point 'M' on the chart), or until the .618 retracement '*' from the
furthermost extreme of the consolidation area (after the second penetration) to the
furthermost extreme on the thrust, has been exceeded on close. When we get into
Fibonacci analysis, the last sentence will be easier to understand. In terms to be defined
later, you create a resistance series and look for the '*' retracement level to be exceeded
on close.

•  The periods I use for Double RePos are daily, weekly, and monthly, although many of
my clients have reported excellent results on 30 minute and hourly charts .

Let's review each of the criteria on this idealized chart, to be sure you understand the criteria, before we get to actual market examples.

ITEM 1

Market action is in a thrusting up move, remaining (primarily but not necessarily) in an up trend (above the 3X3 on close) for 13 periods.

ITEM 2

We finally achieve a close below, above, then below the 3X3, yielding the signal bar. Note the circled closes. The second ofthe two is the signal bar.

ITEM 3

The tops formed by the highs of the consolidation area are acceptably close to one another.

ITEM 4

The number of bars in between and including the two closings below the 3X3 are clearly less than the maximum.

ITEM 5

The signal would be negated if the market closed back above the Fibonacci level shown as '*', or if the market achieved the profit objective point 'M.' Neither situation has occurred yet.

IMPORTANT POINTS TO NOTE:

The criteria as defined in Items 1 through 5 will clearly satisfy many of you, and utterly disappoint some of you. The level of specificity as applied to the accompanying real charts should be more than adequate for those of you who are psychologically suited to judgmental trading techniques. I will endeavor to be as specific as possible with the Double RePo as with all of the subsequent Directional Indicators. It's important for you to note that just because the exact criteria are not met, it does not mean that the market will not act as if the criteria have been met. See "Look-Alikes" later in this chapter. In workshops, I sometimes refer to a Double RePo "look-alike" as one Double RePo not being as "pretty" as another. A Double RePo does not need to be a Barbie doll to add significant width to your wallet.

It's also important to note that a Double RePo on a weekly or monthly chart can be a serious event. It can signal the termination of a major bull or bear run.

Chart 6-1A shows typical market action after a Double RePo has occurred.

DOUBLE REPO

FREQUENTLY ASKED QUESTIONS:

Haw didyou come up with the signal?

Like all of the Directional Indicators in this chapter, the criteria were developed by my personal experiences in trading, some of which were blistering events! When dramatic price action occurred, I wanted to know why, and since I typically had my own, real money riding on the event, I was a highly motivated researcher. When I thought I learned something, I looked for the market to replicate the action again, and again, and again, and that's right, again, before I would consider adding what I thought would qualify as a directional signal to my trading arsenal. The standard of reliability was high, since my trading action subsequent to its identification was immediate and strong. The Double RePo signal was actually identified originally by me on the first chart shown in the series of actual market examples, Chart 6-2. It has been an incredible trading resource since 1986!

Can you anticipate the close on a Double RePo and lake a position based on what might happen?

Yes. If, for example, the price on the signal bar shown on the idealized chart is below the 3X3 but the market hasn't closed, it is okay to get short. You could even anticipate the move through the 3X3 if your intraday trend signals, the MACD/Stochastic, were convincing enough. As with any anticipated or unconfirmed signal, however, you say adios to the trade ifyou lack confirmation at the close of the period.

Aren't you simply showing a double top?

No, I am defining a specific type of double top or bottom.

What markets does this signal work in?

All liquid markets. That includes stocks, mutual funds, and cash currencies. But, let's exclude wheat and pork bellies to be on the safe side.

Do I take a signal on close and simply wait for a profit objective?

You can take a position on a confirmed or unconfirmed signal, but you have to be aware of the "get out" point on the loss side as well as the anticipated profit. You can also apply all the other aspects of trade entry we have yet to discuss. One way to approach trade entry for multiple contract players would be to lay on some contracts unconfirmed, more on a confirmed signal, and still more according to other criteria we have yet to discuss.

What if we have a Double RePo and then close above the 3X3, but we do not exceed the Fibonacci point marked '*'?

In the scenario you describe, the Double RePo signal has not been negated. Remember, you not only need to exceed the Fib point at '*', but you must also do so on close for a confirmed get out. As for the Trend confirmation up (confirmed by closing above the 3X3), you ignore it, since Direction overrules Trend.

What if you exceed point '*' on close then turn around and subsequently close back below the 3X3?

At this point, you're probably unhappy and counting some losses. Triple RePos don't exist in my trading plan in the overall "applicability" and "high reliability" sense that Double RePos do. However, I have observed a number of instances where such market action has occurred in U.S. bonds. The bond market has a nasty habit of doing this after very extreme thrusting moves. I trade such action similarly to a Double RePo. This would be classified as a "look-alike."

Why do you limit the periods you use to daily and longer ?

They are the most reliable. A number of my clients use intraday charts for the Double RePo trade as well. If you want to see what one looks like, there's an example of a Double RePo on a 30 minute S&P in CHAPTER 4, Chart 4-5.

Can you explain what is actually happening in the market that makes this signal work?

I can try. The day after day of thrusting moves demoralizes and panics the shorts. Longs that have exited are pulling their hair out from feelings of greed. Most lack the ability to get back on board. The first pull back is bought by these groups, while the second pullback eventually turns into capitulation or even panic, if the preceding up move is confined by the '*' Fibonacci barrier. The important point ofthis psychological discussion of what's happening is understanding that the length of the initial thrust must not be unduly consolidated by the width between the 1st and 2nd penetration of the 3X3. In other words, 18 days of up thrust consolidated by six days is a lot "prettier" than eight days of thrust consolidated by eight days. Too much consolidation works off the greed and fear. We don't want that.