About the Wave Matrix Indicator (WMI)

Its success is based on combining individual strengths of the four leading analytical tools: the Elliott Wave Principle, the Bullish Trend Indicator (BTI), the Top 20 Differential and the beta matrix.

The Elliott wave principle reveals how mass psychology swings from pessimism to optimism and back in a natural sequence, creating specific, measurable patterns. One of the best places to see this at work is in the financial markets, where changing investor psychology is recorded in the form of price movements.

Once repeating patterns in prices are identified, movements in the future can be predicted.

Stock markets move up in five waves and correct in three:

However, a problem we addressed with Elliott wave is that it is often late identifying the main trend.

This observation led to the research and development of two directional indicators, the BTI and 34-day BTI and two timing indicators, 13-day BTI and Top 20 Differential.

These indicators determine market direction and put the appropriate wave count on the unfolding Elliott wave.

The Bullish Trend Indicator (BTI) is a sentiment indicator that reveals whether investors are bullish or bearish at a specific time, regardless of the state of the fundamental news.

When investors are in a bullish mood, there is high probability the market will rise, and when the daily news is positive one would expect the market and the FTSE 100 to rise.

However, a rising market accompanied by negative news would be abnormal but extremely bullish for stocks.

See how the BTI measures the level of bullishness among market participants:

Daily analysis is made of the impact of corporate and econ

The value of daily news is calculated on the strength of current economic and corporate news.

The aim is to determine how investors react to this information. Important news such as nonfarm payrolls, CPI, PPI, consumer spending are analysed and given a weighting alongside corporate news from the largest companies by market capitalisation.

The outcome of the news weighting is entered in to the BTI formula, which then computes the value of the BTI for the day.

If the BTI rises from one day to another, sentiment is bullish. If it goes down, sentiment is bearish.

Once the current sentiment is established, it is placed in the context of the long-term stock market trend.

To explain further, if sentiment is bullish (rising BTI), but the long term trend is down (bear market), then the market is likely to be in the process of forming a bear market rally.

If this event occurs near the beginning of the bear market, we could assume the anticipated rally will be a second wave (Elliott wave). However, if it occurs after a three-leg move down, we would classify the rally as a fourth wave.

The direction of the BTI in relation to the long-term trend enables the correct Elliott wave count to be placed on the chart.

To determine the long-term trend, the 34-day moving average of the BTI is calculated and the result is the 34-day BTI. This longer-term version of the BTI is used to define the long-term trend in stocks. Its value varies, but the focus is solely on one point: whether the 34-day BTI is positive or negative.

A positive 34-day BTI means the FTSE 100 is in a bull market, while a negative value is associated with a bear market.

Once again, the 34-day BTI is calculated daily and its position is compared to that of the BTI in order to place the correct wave count on the chart. This presents four situations:

Once the near term trend is established, we then determine when to buy or sell. The aim is to enter at the best level, and to achieve this the 13-day BTI and Top 20 Differential indicators provide essential guidance.

The primary function of the 13-day BTI is to identify when the FTSE 100 is near a high or a low.

When the 13-day BTI is oversold (-400 or lower) the FTSE 100 is near a low, and when the 13-day BTI is overbought (400 or higher) the FTSE 100 is near a high.

Note that these levels are short-term support/resistance - a strong move over a one-week or two-week period would be enough to push the indicator to overbought/oversold.

Because the 13-day BTI is derived from the BTI, it measures extremes in sentiment. This is important because an extreme in sentiment generally coincides with a market turn. For example, when the mood is bullish the market rises. The more the market rises, the more bullish investors become and this process continues until the investor’s mood reaches an extreme in optimism, at which point the FTSE 100 peaks and turns down.

This is when the 13-day BTI is overbought. Similarly, when the FTSE 100 is declining and the mood becomes more bearish, the 13-day BTI will become oversold. This indicates that the mood is extremely bearish and, as a result, the FTSE 100 will bottom out and turn up.

The Top 20 Differential indicator measures how some of the largest stocks by market capitalisation move in relation to the FTSE 100. 

A sample of twenty stocks that bear influence on the FTSE 100 are analysed each day. Each stock’s differential is measured by the difference between the stock percentage gain/loss and the FTSE 100 in the current Elliott wave.

The key factor is being aware of which kind of wave it is. For example, a stock with a high beta would probably outperform the FTSE 100 by a large percentage in a third wave.

By looking at historical data, the analyst can establish levels of out-performance and under-performance at the end of a third wave - or any other wave, for that matter.

These levels or limits are where the stock tends to pause and reverse. It is possible to predict when a stock will reach the end of a wave simply by checking if the stock has reached the limit. When a large number of stocks, (some of the largest by market capitalisation), reach their limit in their respective Elliott wave, the FTSE 100 is near a top or bottom. As with the 13-day BTI, these support/resistance levels are short-term.

Beta matrix

Another thing to look at is how the high beta and low beta stocks behave at critical turning points. When the Top 20 Differential is in an extreme zone (below -2.5% or above 2.5%), we observe these two groups for additional clues. For example in the early stage of a rally, very often the low beta stocks will underperform while the high beta stocks will outperform the FTSE 100.

By combining all the indicators, an accurate FTSE 100 short term forecast is produced. The following example illustrates this point:

As the FTSE 100 rallied at the end of October 2008, the 34-day BTI was negative indicating a bear market. As a result it was assumed that the rally was a counter trend. In this case, the rally was labelled wave c (circle) of a potential expanded flat [a,b,c (circle)]. The day before the top on 4^th November, the directional indicator, BTI, was declining, indicating the short-term trend was about to turn down and the timing indicator, 13-day BTI, became overbought. This was a signal to sell and the FTSE 100 did go down in the following days.

The WMI combines all the above indicators to produce an accurate short-term forecast. On 4^th November 2008 it gave a strong sell signal. On that day a fund manager would have adjusted his net exposure to neutral or short while a short-term trader would have been short to profit from falling prices. The FTSE 100 declined from 4639 to 3780 or -18.5% between 4^th November and 21^st November.

WMI guidelines

The WMI is published daily, at least twice a day. If there is a signal during the day (intraday) an alert is sent out by email and SMS.

What do the red arrows on each side indicate?

The arrows point to the current position of the FTSE 100 index as calculated by our Wave Matrix Indicator. The indicator tells you whether the FTSE 100 index is at the start, middle or end of a move. Since this information is based on probability of success, readings with a high percentage (75% or higher) are the strongest signals.

What is the difference between the signals "Strong Sell and Strong Buy", and just "Sell and Buy?

A 'strong sell' or 'strong buy' is the most positive signal because the probability of prices moving up or down is forecast between 75%-100%. With a strong buy or strong sell we recommend taking a full position.
A 'sell' or 'buy' signal has less potential because the probability of prices moving up or down is forecast between 50%-75% but should still be regarded as positive. With a buy or sell we recommend taking a half position.

What is Neutral?

Neutral means do not trade. This refers to opening a new position. A neutral situation occurs when a move is too advanced in its progress or is about to end. If, however, you have an existing open position which is in profit you may want to close it and take profits or you may want to keep it open hoping prices will continue to move in your favour.

When should I trade?

You should trade when the arrows indicate a valid signal, either 75% or 100%.

When do I take profits and when do I cut my losses?

You decide but the system will tell you when to take profits and cut losses. You need a wide stop loss of at least 250 points using this system. Our statistics show that if you use a 250-point stop loss you will achieve a success rate in excess of 75%. You should take profits when the trend is nearing an end (25% short or long).

Can I use a tighter stop loss?

You can use a smaller stop loss but it is not recommended. If you use a stop loss of less than 250 points you will be stopped out more often. Our research demonstrates that with a 250-point stop loss less than a quarter of trades are stopped out.

How many signals will I get?

We send daily updates at 5.30pm and intraday (during the day). On average the system produces 3 Buy/Sell signals per month.

Statistical Analysis

We started to track the signals from the WMI in December 2007.

This table records the number of points gained from the WMI signals since 20 December 2007.

There are two types of signals, Strong buy/sell and buy/sell. With a Strong buy/sell we take a full position, with a buy/sell we take a half position. For example on 8 August 2008 we have a sell signal so we open a half position. As the price continues to move higher, on 11 August we have a strong sell so we add the other half.

FTSE 100 column: the price is the closing price on the day the signal is given. Signals are published at 5.30pm and intraday. If it’s the second half of a position or a new signal, the price will be intraday.

About Wave Matrix Ltd

Wave Matrix Ltd provides stock market research to investors. The majority of clients are private investors, individuals who invest their own money in the stock market. The company was launched in 2000 as a non commercial, information only website www.eyield.co.uk, the trading name of Wave Matrix.

Here Thierry Laduguie published regular research reports on companies as well as his own views on the stock market. In 2002 the company began to market educational stock market investment products to private investors. In November 2005 the company moved into stock market research with the launch of the FTSE short term forecast report. In March 2006 a new research product was launched, the Scoring System. In 2009 a new forecasting tool for professional investors was created, the Wave Matrix Indicator.

About Thierry Laduguie

Thierry Laduguie is a successful technical strategist, writer and researcher. He is a member of the Society of Technical Analysts and holds the Investment Management Certificate. Thierry has provided investment advice on spread betting with Onewaybet.com, where he was responsible for the UK Stock Tips and FTSE Intra-day services, and with Fleet Street Publications where he was the editor of the popular online newsletter, Spread Trader. 

Thierry has worked with leading hedge funds as a consultant and advisor and has written a weekly column for Money Week. He is a regular guest speaker at trading seminars and has appeared on Reuters TV. 

In 2009 he was nominated finalist for best specialist research for the Technical Analyst award. 

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