KEY REVERSALS ARE NOT REAL REVERSALS

SELL RULE
advanced fakeout
Rule Text: IF Up Range And Close < Close. 1 And Up Range. 1 And Range <
Range. 1 And Close. 1 < High. 12 Or Close. 1 < High. 17 And Not Friday
And Low. 1 <= High.2 Or Close. 1 < Close.7 And Next Bar Open >=
Close
THEN BUY &xt Bar at High. 1 STOP
Action: Long Entry
RuleName:

OOPS/FAKEOUT SELL
Rule Text: IF Up Range. 1 And Open. 1 > High.2 And Close. 1 < High.2 And Down
Range And Close < Close. 1 And Close > Open
THEN SELL Next Bar at Low STOP
Action: Short Entry

FAKEOUT BUY SIGNALS IN AN UP TREND

IF Up Range And Close < Open And Close < Close.1 And Up Range. I And Close.1 > Close.2 And Close
> Close. I3 Or Close > Close.31 Or Close > Close.18 BUY AT H.l STOP

DAX fakeout sell

Rule Text: IF High < High. 1 And Low < Low. 1 And Close > Close. 1 And Not
Wednesday And Not Thursday And Next Bar Open > Close
THEN SELL Next Bar at Low. 1 STOP
Action: Short Entry
LARGER RANGES ON DOWN CLOSES SET UP THE BEST BUYS
SMALLER RANGES ON UP CLOSES SET UP THE BEST BUYS.

The reverse is equally true

LARGER RANGES ON UP CLOSES ARE THE BEST SELLS
SMALLER RANGES ON DOWN CLOSES ARE THE BEST SELLS
GETTING IN THE ZONE TO TRADE
Stock and commodity prices are more complex than most think there is...
intricacy to each day that we need to study. You have begun to see that. I'd
like to introduce you to my next important concept of market structure,
Opening Zones. The market can open in one of four zones as I have
illustrated here;
- ' ZONE 4 OPEN > HIGH
ZONE 3 OPEN > CLOSE < HIGH
ZONE 2 OPEN > LOW < CLOSE
ZONE 1 OPEN BELOW LOW
There is an immense amount of difference in what happens the next day, seemingly based on
where the market opened (what zone) that day. There are only 4 possible ways a market day
can evolve; it can be an up range day, a higher hgh and a higher low than the prior day. A
down range day, that's evidenced by a lower high and low or an Inside or Outside day. There
are no other possible configurations.
A LOOK AT UP RANGE UP CLOSE DAYS ---When we had these days I looked at buying
based on where the market opened, the next day. So, we have an up range day, does it matter
where it opens if I simply buy on the opening? Here are the results
ZONE 4 -$41,138 -$137ATRADE 300TRADES
ZONE 3 +40,893 +$138ATRADE 138TRADES
ZONE 2 +$71,190 +$I23 A TRADE 578 TRADES
ZONE 1 -$16,8 13 $2 10 A TRADE 80 TRADES
What we see is quite a Ifference, opening in zone 1 and 4 lose money, the other 2 zones
make money.
O 2005 Lany Williams - Million Dollar Challenge Page 35
A LOOK AT UP RANGE DOWN CLOSE DAYS---Now let's look at up range days that
have down close. Technical books usually describe these are reversal day, saying markets top
out in this fashion, which is dead wrong. Here are the results from the same testing as above;
ZONE 4 -$16,430 - $183 A TRADE 9 TRADES
ZONE 3 +$68,973 + $359 A TRADE 359 TRADES
ZONE 2 +$16,048 +$I22 A TRADE 134 TRADES
ZONE 1 +$39,213 +$461 A TRADE 85 TRADES
SEE THE SWEET SPOT? What I see is that each pattern as a "sweet spot" an opening zone
that is more bullishhearish than the other 3 zones. Listen up here, now; I trade with this as
one of my key points. This is a critical part to understanding the market on a short term basis.
All signs can be on go, but a wrong opening zone kills the trade. I don't think anyone has
focused on these zones, as I have. They are critical, because not all days are the same.. .they
must be paid attention to.
DOWN RANGE WITH UP CLOSE---In the next example we have had a day with a lower
high and a lower low, but it managed to come off the lows and close up for the day. These are
seen, by most, as reversal days, that prices have bottomed. I don't think so. But, for now
let's look at buying the next day based on the opening zone;
ZONE 4 +$20,925 - $161 A TRADE 130 TRADES
ZONE 3 +$4,430 +$42 ATRADE 106TRADES
ZONE 2 +$67,968 +$365 A TRADE 186 TRADES
ZONE 1 +$16,205 +$1,473 A TRADE 1 1 TRADES
Again we see some zones are better than others. In this case zone 2 has a much larger average
profit per trade.. ..that's the best place to open for this pattern
DOWN RANGE WITH DOWN CLOSE---This is just a good, old fashioned down and dirty
day, the low is lower than the prior day, as is the low and the close. Nothing fancy here,
prices just dropped and kept going down. The question is does it matter where we open
tomorrow? Here, take a peek for yourself;
ZONE 4 -$23,568 - $298 A TRADE 79 TRADES
ZONE 3 -$1,413 - $03 A TRADE 5 15 TRADES
ZONE 2 +$55,780 +$271 A TRADE 206 TRADES
ZONE 1 +$94,118 +$446 A TRADE 21 1 TRADES
Again we can see a world of difference. A traditional chart guy might well see a few down
range down close bars and conclude they are not that great---if he or she only saw time the
opening in zone 3. We see that zone one and two openings are a profit zone for short term
traders.
O 2005 Larry Williams - Million Dollar Challenge Page 36
ADD ANOTHER TWIST TO IT.. ..All down ranges are not the same. Some down range,
down close days close, above the prior days low, others close less than the prior days low,
these are called "naked close" a term Joe Stowell coined, as the close is outside or naked to
the prior days range.
Let's now turn our attention to these days and see if the zones tell us even more as we are now
looking at prices in a microscopic view.
DOWN RANGE DOWN CLOSE > PRlOR DAYS LOW
ZONE 4 $1 1,505 $67 A TRADE 171 TRADES
ZONE 3 1,158 5 A TRADE 2 19 TRADES
ZONE 2 58,243 211 A TRADE 276 TRADES
ZONE 1 74,648 1,588 A TRADE 47 TRADES
It takes just a quick glance to see there are real trading opportunities in zones 1 and 2 and not
nearly as much pay dirt to be mined in 3 and 4. Ok, what if we have a naked close, what type
of pay dirt are we loohg for there?
DOWN RANGE DOWN CLOSE < PRIOR DAYS LOW
ZONE 4 $-7,988 $-200 A TRADE 40 TRADES
ZONE 3 - 6,083 -14 ATRADE 436TRADES
ZONE 2 67,050 373 A TRADE 180 TRADES
ZONE 1 45,903 258 A TRADE 178 TRADES
KHY DOES THE OPEN MATTER?? I think there are several reasons here. If a market
opens up too high it has already become "overbought", particularly if the market had closed
strong the following day. One of the most powerful rules of trading is to do the opposite of
everyone else. So, if the market gaps up---the public bought---there may well be a better place
to buy. When it gaps down---the public sold---we often see that as the best buy entry for most
patterns.
BONDS

There are four major elements that bring about quick, short-term changes in the bond
market that have stood the test of time. They are;
1. TRADE DAY OF MONTH
2. TRADE DAY OF WEEK
3. SEVERAL PRICE PATTERNS
4. THE RELATIONSHIP TO GOLD & CRB
1. TRADE DAY OF NIONTH Generally speahng, the best TDOM's are 8 and 21 for buys,
3 and 13 for sells, as well as the first trade day of the month for buys. Here are the best
TDOMS by the months. These "set up" the best times each month to develop a bias towards
establishing trades. The TDOM means to take action the next day as the computer code reads,
"If TDOM=l then buylsell tomorrow" thus the entry day would be the day following the
TDOM shown.

It is possible to combine what we have learned into a decent, and easy to follow, trading strategy. The
secret is to combine the TDOM with the best months and then make certain the trend of Gold is setting
up the buy or sell trade. The exit is first profitable open + 2 points after on day in the trade, not counting
the entry day.
The buy reauirement is that the TDOM be 8 or 17 (for action the next day) and the months are June,
July, October or November. Gold must have closed lower than 6,9 or 28 days ago. If so, buy at the open
the next day.
The sell requirement is that the TDOM be 3 (for action the next day) and the month is February, May,
June, July, August or November. TDOM 13 is used for January, April-May, August or November. In
both cases Gold must have closed greater than the close 14,16 or 22 days ago. If so sell at the open the
next day.

BEST OF THE FIRST TRADE DAYS OF THE MONTH

Another axiom of the Bond market is that prices usually rally around the first trading day of the month.
To that end, here are the best months to be a buyer of on the open of the first trading day of the month;
JUNE $1 1,020 19/16 84% $580 -3,340
OCTOBER 14,586 21/20 95% $694 1,795
DECEMBER 10,492 21/19 90% $500 1,670
AND THE END OF MONTH RALL Y...

Next let's look at buying if TDOM is 20, at 30% of that days range added to the next days
opening. Use a $1,500 stop and exit after two days in the trade for the $30,373, profits from 1988
to date. These results exclude March and I noticed one might want to exclude October as well.
The point is there is a pattern here we should be looking at for trading opportunities.

2. TRADE DAY OF WEEK these are incorporated in patterns and relationships. Day 5 is
critical. Sells~usuallyc ome mid-week. Check the charts to see what to expect, what is normal for
each day of the week.

3. PRICE PATTERNS
Fake Outs, Oops!, Oops! 1 day back, Naked Close, Best TDOM's, check for
very large OR small values of close minus the open (Nearly Perfect). You need
to be able to instantly spot these set-ups.
4. THE RELATIONSHIPS
Gold or CRB higher tbai~X days 'ago is bearish for Bonds
Generally speaking, 1 and 22 days for buys
Gold or CRB lower than X days ago is bullish for Bonds
Generally speaking 14 and 22 for sells
The combination of both markets is ideal, but fewer trades.

BONDS, GOLD AND THE CRB RULE THE WAY

We know TDW 2 is not a good setup to buy bonds. Thus, I asked about buying any day but
Wednesday if the 30-day average of gold was less than the previous 30-day average. The results
are interesting, when the m.a. is less than yesterday, from 1989 through 1999 77% of buys on
the open were profitable with an average profit per trade of$105 on a $14,568 drawdown with
a net profit of $44,336. If the m.a.was greater than the prior day, Gold in an uptrend, 70% of the
trades were successful, yet there was a loss of $15,3 10 on a $24,453 drawdown. Clearly Gold
rules the way for bonds.
Taking this a step further I looked not only at gold in a downtrend but required entry take place
only if price rallies 20% of the previous days range above the next days opening, and today was
a down close. This does much better, making $63,073 with 80% accuracy and an average profit
per trade 081 65.
Add just one more rule, a requirement that today's range be less than the average range of the
last 5 days and a tradable system begins to appear as the profits of $44,952 on 183 trades means
an average profit per trade of $245 on a $7,627 drawdown. The evidence suggests Gold really
does matter and is a good set up for traditional technical rules, such as volatility breakouts, range
shrinkage and the like.
A NEW TWIST.. . . . ...

Yes, gold impacts bonds, but the CRB index may actually do an even better job. As a case in
point I offer this; when the 22 day m.a. of the CRB is less than the prior days reading and we
buy on the open the next day, like with gold and a 30 day average, we "make" $54,088 with 78%
accuracy, $148 a trade on 364 trades and a $13,642 drawdown. As your recall Gold on 42 1
trades made $44,336 with a $14,568 drawdown.
How about the small range volatility expansion setup that made $44,952 on a $7,267 drawdown
with Gold in a downtrend compared to the CRB? The same pattern but with the 22 day m.a. of
the CRB lower than the prior day makes $42,912 with a $3,377 drawdown and average profit per
trade of $295 vs. $245 when using gold.
We can combine both data streams with a 4-day average of gold less than the prior days and a
14 days average of the CRB less than the prior day to snake out 263 trades with $192 a trade
on a $7,996 drawdown.
Finally, we know the best set up day to buy is Friday with a down close. When the 28 day m.a.
of gold is lower than the prior day and the 14 day of the CRB is also lower There have been 70
trades with 63 winners producing a handsome $41 8 per trade with a net profit of$29,287.
Clearly we can get more bang for our buck using both data streams to set up trades.

6. RULE BASED TRADING

This is how 1 trade. I have numerous rules or patterns to enter long or short.
These are based, in part, on all of the above. The rules appear complicated, but
Can be followed with some ease, thanks to computers. Each day I look
at the current pattern of the last 3-4 days then find similar patterns in the
past to looking for repetitive action.
There are may signal and entry rules I have developed over the years. I am presenting them
here for you in what I hope is an easy to learn---and follow---format.