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Page 27

cleaned up Figure 26, we can see that there is a lag, which is viewed as a problem in this
Stochastics chart. However, the smooth oscillation displayed by the Stochastics indicator is
clearly informative.
In Figure 28 a custom indicator called the "Derivative Oscillator" is introduced to you. (A
discussion of the indicator's formula and interpretative guidelines will be deferred until Chapter
14.) Figure 28 shows a "var" Derivative Oscillator, letting you know that a variable period has
been applied within the standard formula. (The use of a variable or weighted period in any
indicator will not be discussed beyond this chapter to avoid confusion.) Figure 28 shows that the
Stochastics lag that was present in Figure 27 has been significantly improved. (Just view price
bottoms at this time to stay within the context of evaluating cycle lows. The oscillator peaks will
need to be addressed in a different discussion.) The last, or far right bar, in both Figures 27 and
28, captures the freefall that was unfolding in the DJIA on June 12, 1998. The Stochastics
indicator does not show a trend change, and prices are still on the way down in Figure 27. In
Figure 28 the Derivative Oscillator shows an

Figure 26

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Page 28

Figure 27

oscillator extreme, and price has formed a spike bottom or key reversal. The oscillator low at
this point is at a precise objective (see also Chapter 14). Figures 27 and 28 show that it is
possible to visually incorporate all the concepts discussed previously in this chapter into one
indicator. The cycles plotted with prices in these figures help the reader compare traditional
methods combined with the weighted oscillators.
We have discussed two kinds of cycles: symmetrical and Fibonacci. We have discussed the use
of applying a weighted factor to a fixed symmetrical cycle period to produce a variable period
that will help us isolate the more significant cycles developing in an expansion and contraction
environment. But we have still not answered the most important question, "How can we tell
what trading signal is the most significant and will have the highest probability for success?" To
answer this question, we need to use multiple time horizons to filter out lower-probability
signals generated within any one individual chart. In

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