Capturing Profit With Technical Analysis

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Capturing Profit with
Technical Analysis
Hands-on Rules for Exploiting Candlestick,
Indicator, & Money Management Techniques
Sylvain Vervoort
MarketPlace Books®
Glenelg, Maryland
Publisher: Chris Myers
VP/General Manager: John Boyer
Executive Editor: Jody Costa
Production Editor: Courtney Jenkins
Art Director | Designer: Larry Strauss
Copyright © 2009 by Sylvain Vervoort

Published by Marketplace Books Inc.
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Library of Congress Cataloging-in-Publication Data
Vervoort, Sylvain.
Capturing profit with technical analysis : hands-on rules for exploiting candle-
stick, indicator, and money management techniques / Sylvain Vervoort.
p. cm.
Includes bibliographical references.
ISBN-13: 978-1-59280-375-0 (hbk.)
ISBN-10: 1-59280-375-X (hbk.)
1. Technical analysis (Investment analysis) 2. Investment analysis. I. Title.
HG4529.V47 2009
332.63’2042--dc22
2009028904
CONTENTS
Foreword V
Introduction VII
Part I : LOCKIT Technical Analysis Tools 1

LOCKIT 3
Chapter 1 : Technical Analysis Basics 5
Chapter 2 : Indicators 43
Chapter 3 : Candlestick Charts 65
Chapter 4 : Elliott Waves 93
Part II : The SVAPO Oscillator and LOCKIT 137

Chapter 5 : SVAPO and ATR Trailing Stop 139
Part III : LOCKIT Price Projections 175

Chapter 6 : Price Projection Techniques 177
Part IV : LOCKIT Strategy and Results 199

Chapter 7 : LOCKIT Application and Rules 201
Chapter 8 : LOCKIT Application Results 245
Chapter 9 : LOCKIT Complementary Techniques 273
IV Capturing Profit with Technical Analysis
PART V : L
OCKIT Money and
Risk Management 305
Chapter 10 : Money and Risk Management 307
Conclusion 345
Appendix : Availability of Formulas in Other Programs 347
Index 359
Works Cited and Disclaimers 373
About the Author 375

FOREWORD
T
he following is my weak attempt to glorify a book that I have fallen in
love with.
This decade has been resounding proof that the philosophy of “Buy and
Hold” doesn’t work and certainly doesn’t reduce risk. In the late 90’s,
advisors were illustrating returns above 12 percent because that is what they
experienced from the market in the 10 years prior. Now after two recessions
in one decade where many lost half their portfolios two different times, I
believe there is a new awareness about risk in the asset allocation methodol-
ogy. We are told time and again from investment representatives that return
is derived from asset allocation, NOT market timing. I wouldn’t want to be
the one still selling that!
There is a vast difference between asset allocation and market timing. In be-
tween lies an area of opportunity that would shock the average investor who
trusts their large firm investment advisor. In this world, investors buy near
support levels and sell at resistance levels. They buy when the cycle is low and
sell when it is peaking. Each time they buy, they know exactly where it is they
would sell if things go wrong. They never lose unacceptable amounts on any
single investment position. The result is outperformance of the market with
less portfolio volatility. The bottom line is they never experience 50 percent
draw downs in their portfolios like their buy and hold counterparts.
V
VI Capturing Profit with Technical Analysis
The Lockit system that Sylvain has outlined in his book is exactly such a
system. You don’t need to have years of experience in the market to under-
stand this approach. He leads you step-by-step through the decision process
of which stocks to buy and when. More importantly he helps you determine
an opportune time to sell.
The robustness of this system is what I like the most. It will work on any type
of stock you want to follow. Some like the blue chip names while others look
for more growth potential. Simply follow his methodical approach and you
will come out ahead of the crowd.
I have been in the investment business since 1992 and have continually worked
to improve my investment performance. I have spent countless hours devel-
oping quantitative mechanical investment systems and backtesting them. I
have taken nearly every formula Sylvain includes in this book and rewrote it
to test with my system. I couldn’t be more pleased with the results.
There is no doubt in my mind that good technical analysis will beat the mar-
ket every time. The struggle is going through the maze of technical analysis
tools and determining which ones make sense alongside each other. Sylvain
has taken the tools that I have liked the most and turned them into a com-
plete system.
John M. Norquay
John M. Norquay has been offering investment advice since 1992. He is the owner of
a registered investment advisory service in Madison, Wisconsin, where he utilizes both
fundamental and technical analysis for his investment decisions. Mr.Norquay is also the
founder of eWatch401k.com, a service which helps individuals keep their 401k accounts
invested properly with a quantitative mechanical investment system he designed using
technical analysis.
INTRODUCTION
S
ome 30 years ago, an enthusiastic stock trading colleague at work initi-
ated what has become a lifelong pursuit for me. I can still remember the
first technical analysis program running on my first homemade IBM
PC. I manually entered the hexadecimal machine code in Read Only
Memory for the startup of the machine. This was code that IBM was nice
enough to publish in the first IBM PC technical manual.
A couple of years later after the European Options Exchange (EOE), Eu-
rope’s first option and futures exchange, was founded in Amsterdam, my
friend convinced me that this was the place to make a lot of money with only
a little starting capital. And so, with a group of colleagues we gathered some
400,000 Belgian Francs (some 10,000 dollars) to start an options investment
club. I was going to make the trades based on technical analysis, and every-
body would become rich in no time!
A few months later, the money was gone. Luckily, we continued our meet-
ings at the nearby Chinese restaurant, so it wasn’t all sad.
Since hitting that bottom, I have been on what seems to be a never-ending
quest to find the ideal way of trading the stock market using technical analysis.
After first completing an investment and credit advisor course, I have since
conducted many courses and presentations about technical analysis and op-
tions. The best thing about presenting a course is that as a teacher you learn
VII
VIII Capturing Profit with Technical Analysis
even more than your students; so thank you very much to all who have at-
tended my courses!
There are a lot of books about investing and technical analysis. Most of them
concentrate on a very specific item, exploring that particular concept in great
detail. A book with a real trading system, including all the required basic
knowledge, is much more difficult to find.
This trading book is a complete reference on how to apply technical analysis for
profits. It explains my own trading style—the whole complete story from
start to finish. I learned from my mistakes and wrote down some rules to help
you avoid making these same mistakes over and over again. You will actu-
ally find specific answers to the all-important “where to open” and “when to
close” questions in this book. And, to spare your precious time and to speed-
up the learning process, I am limiting the text to the bare essentials—what
you really need to know. The best part—all of the techniques discussed will
be illustrated with an application example.
If you are disappointed with buy-and-hold investing, then medium-term trad-
ing based on technical analysis is for you. These days technical analysis is quite
extensive and a book with everything you should know about—from the basic
bar chart to candlestick patterns and Elliott wave analysis—is not easy to find.
Add trading rules, money management, and risk management and you have a
book that is virtually impossible to find…. Until now! The goal of my book is
to give you all of that information plus my own proprietary indicator SVAPO,
a “Short Term Volume And Price Oscillator.”
All the basics and all the advanced ideas in technical analysis are not worth
much if you don’t know how to combine and apply them. That is the goal of
this book. With the LOCKIT methodology, you can apply the most effective
trading techniques to capture consistent results in the markets. This book
will teach you to look at the “Long” term trend, when to “Open” a trade,
when to “Close” a trade, to look at the “K-factor” for risk and money man-
agement, and finally to make sure that you use an “Initial” and a “Trailing”
stop—in short, “LOCKIT.” What you have in these pages is a step-by-step
trading system using technical analysis, including tips on good money and
risk management.
You already understand that some trade setups are better than others. That is
why you will find trade setups that offer a better chance for success in LOCKIT.
Now and then, I notice advertisements about learning technical analysis in a
couple of evenings or a weekend. Do you believe that this is possible? No, of
course it’s not; you need to invest more time and you must practice as much
Introduction IX
as possible. The best way to learn technical analysis is to use past price data,
advancing day by day to make buy and sell decisions. Only if you are capable
of making a profit, should you switch to real time; however, you should still
be paper trading. If you are capable of making money at this stage, you can
start with real money, but make absolutely sure that by then you have a good
set of rules that you will follow without any hesitation. The LOCKIT rules
will definitely help you to start off on the right foot.
While applying LOCKIT, you will make practical use of all aspects of tech-
nical analysis. For that reason, I wrote the part “Technical Analysis Basics,”
which will give you a detailed description, including examples, of all the
technical analysis techniques used by LOCKIT. For most of the techniques,
we will show their application within LOCKIT.
LOCKIT introduces you to a number of special indicators and techniques
for a more successful application of technical analysis like: zero-lagging mov-
ing averages, a Heikin-ashi Bollinger Bands %b indicator, SVAPO “Short
term Volume and Price Oscillator,” trailing stop methods, and more. And
let’s not forget, I’ve also included a very good money management method
and a number of examples for good risk management.
I am fully convinced that trading based upon technical analysis (as proposed
in this book) and following the LOCKIT rules will help you to make better
and more profitable trading decisions.
To simplify the decision-making process, there is a set of LOCKIT trading
rules for a number of different circumstances: long and short trading with a
trend reversal or after a correction in an ongoing trend.
Please note that I will continue to contribute articles about technical analysis
in Technical Analysis of Stocks & Commodities magazine. Here, my new ideas and
findings (as well as other writers) will keep you up-to-date.
I am sure that this book with all the technical analysis techniques, money
management, risk management, and high probability entries will be a turn-
ing point for your own technical trading.
I wish you lots of success and happy trading!
- Sylvain Vervoort
Capturing Profit with
Technical Analysis
Chapter
LOCKIT
7 Application
and Rules
L
OCKIT is a stock-trading method based on applying technical analysis
and money and risk management techniques. Please note that special
indicators used within LOCKIT are available in MetaStock® code. I
have included a disc in the back of this book that has all of these codes
ready for upload. If, however, you don’t use Metastock, the Appendix gives
you a list of other programs that have all or most of the used code available
for their application.
Also, please keep in mind that this chapter will give you an overview of the
entire LOCKIT system in a step-by-step process. Now that you have a work-
ing knowledge of the basic technical analysis tools we use within LOCKIT,
I think you will be impressed with how well the methodology works. If you
need a refresher on the basics as you move through this next part, you have
to no further to look than the previous chapters.
LOCKIT is an acronym that stands for:
L “Long term” What is the Long-term trend?
O “Open” The rules for Opening a position.
C “Close” The rules for Closing a position.
K “K-ratio” Keep risk under control and manage your money.

I “Initial stop” Set an Initial stop loss.
T “Trailing stop” Set a Trailing stop loss.
201
202 Capturing Profit with Technical Analysis
Step 1: Long-term Trend

First, we look at the long-term trend. We prefer to trade only in the direction
of the long-term trend. Even with the use of technical analysis, you will have
to leave enough price reaction potential for the intermediate-term in order to
keep a stock in your portfolio for the longer-term.
Figure 7.1: Bankrate Inc. with a 17% trailing stop
Initial stop 15%

Trailing stop 17%
Source - MetaStock® charts courtesy of Equis International.
Look at figure 7.1, Bankrate Inc. We have to keep a 17% trailing stop to keep
us in the trade for the long term. Many times, this means we will have to use
an initial stop in the same order; however, it is clear that we cannot permit
many losing trades that cost us 15% or more. It is, therefore, important to
understand what the long-term trend is doing.
Estimating the Long-term Trend

To estimate the long-term trend for the whole of the stock market, we use
a stock index. During a long-term uptrend, we only trade on the long side.
LOCKIT Application and Rules 203
Figure 7.2: S&P 500 Index monthly chart
Trend
channel
20-month zero-lagging
exponential average
Support
line
S&P 500 Index

Trend line Long-Term Trend
On the other hand, we will only trade from the short side in a long-term
falling market.
We use a monthly chart (Figure 7.2) to look at the long-term trend. Remem-
ber that it is easier to make money in a rising market than in a falling market,
simply because a stock can go up from $1 to $100, or 10,000%, but it can only
fall from $1 to $0, or 100%.
Detailed information about technical analysis used within LOCKIT can be found in
PART I chapters 1 to 4.
We can say that a chart with higher price bottoms and higher price tops is in
an uptrend. Lower price tops and lower bottoms means price is in a down-
trend. The first indication of a possible trend reversal in an uptrend is a lower
top compared to the last one. You get a confirmation when the next bottom
is lower than the last bottom. In a downtrend, a first indication of a reversal is
a higher bottom than the last one. You get a confirmation with a higher top
than the last one.
The use of a moving average on monthly prices is the first tool that we will
use in LOCKIT to look for the long-term trend; however, to avoid the lag-
ging of the average used as much as possible, we will use a short 20-month
exponential moving average with a zero-lagging compensation.
The long-term trend is considered up as long as this moving average is going
up. When this average starts moving flat or slightly downward, you can use
recent price support or resistance and trend lines to find confirmation for an
eventual long-term trend change.
In MetaStock® you can create a zero-lagging exponential moving aver-

age as follows:
Period:= Input(“Exponential Average period?”,1,250,20);
EMA1:= Mov(CLOSE,Period,E);
EMA2:= Mov(EMA1,Period,E);
Difference:= EMA1 - EMA2;
ZeroLagEMA:= EMA1 + Difference;
ZeroLagEMA
Please utilize the disc in the back of the book for instant access to these
codes. You may also download them from www.traderslibrary.com/tlecorner.
Additionally, it is best to use trend lines and trend channels for confirmation.
Because we are looking at big price moves, we will use a logarithmic scale
on the vertical axis. In most cases, trend lines tend to accelerate on the way
to a longer-term target. A trend line broken by the closing price is basically a
reversal signal.
Looking at figure 7.2, there was doubt in the S&P 500 long-term up-move
during the second half of the year 1990, with the average moving down and
breaking a shorter-term uptrend line (not shown). We had a more flat correc-
tion in 1994, but here the price remained above the uptrend line and above the
Figure 7.3: S&P 500 Index in the period 2003 till 2007 with a 7% trailing stop
S&P 500 7%
Trailing Stop
last support level. Finally, there was a bigger correction at the end of 1998. But
even here, the price remained above the trend line and the last support line.
Of course, we can also use or combine the previous techniques with a trail-
ing stop. If the closing price breaks the trailing stop, then we can assume a
trend reversal.
As a reference, look at figure 7.3, which shows the period 2003 until 2007 on
the S&P 500 Index. The closing price trailing stop used was 7%.
This is the first step in the LOCKIT system: Find out the long-term
trend and take trades only in the direction of that trend. LOCKIT
Step 2: Opening a Position

After examining the long-term trend in LOCKIT step 1, let’s investigate the
medium-term using a weekly chart. Keep in mind that you are looking for
the bigger medium-term trades. Are you, conversely, a short-term trader? If
so, you would only look at the weekly chart to find out whether the price is
or is not coming to a medium-term reversal point.
CA Inc. Weekly Chart

The Day of 08/13/2004
Let’s look at figure 7.4, the weekly chart of CA Inc.
Because of the big price shift in this longer period, we use a semi-logarithmic
scale for this weekly chart. First, we look for a probable Elliott wave count. If
our count is correct, we may be near the end of a longer-term correction wave
(4). Correction wave (2) was a sharp correction; most of the time, wave (4)
would then follow with a flat correction, which seems the case here. Drawing
a trend line through the tops (1) and (3) and a parallel line through the bot-
tom of wave (2) show that we have reached a target price for wave (4) at the
bottom of this channel. At the same time, we reach support at the 200-day
simple moving average (dashed line), and we are finding support at a previous
low point (wave (4) bottom) at a price level of $22.
We use three indicators: 1) SVAPO with the standard settings, 2) the standard
14 (weeks) SVE_RSI_StDev, and 3) the standard 18 (weeks) SVE_BB%b_
HA. It is important to examine whether these indicators are making conver-
gent or divergent moves.
These indicators are now moving in the lower part of their normal space,
making a convergent move. Remember, there are usually no divergences in a
wave 4 because the up move is still intact; therefore, we are not really looking
at a price reversal. If there is a divergence, it will probably be a hidden one.
We can now see that there is room for an up-move to create the next impulse
wave (5), which must bring price above the top of wave (3), or above $29.60.
Looking at figure 7.5 (on page 208) and assuming that we reached a not-yet-
confirmed bottom of wave (4), we could try to make a future price projection
for wave (5). A Fibonacci projection with a first target at $22.50 already has
given support three times for different wave (4) corrections.
Figure 7.4: Investigating the medium-term trend on the weekly chart of CA Inc.
CA Inc.
Weekly chart

Figure 7.5: Projecting the long-term price target on the weekly chart of CA Inc.
Longer-term
price target
Weekly Chart
A rising pitchfork, in line with the rising prices and the average, would cross
the second Fibonacci target at $32. This is the closest target for the medium
term to be reached in about 20 weeks.
But, be careful! This projection is only valid if we really have reached the
turning point that starts impulse wave (5). Considering the solid support
here, there is a good chance we are at the turning point. Do we have a con-
firmation on the daily chart?
Figure 7.6: Analyzing the daily candlestick chart of CA Inc.
CA Inc. Daily Chart

Finally, let’s look at the daily candlestick chart for the last few months.
In figure 7.6, correction wave (4) consists of an ABC correction. The C cor-
rection itself has a lower order wave with another (A)(B)(C) correction, of
which the (C) correction finally is an impulse wave.
We can see a number of signs indicating a possible end of this correction.
The price is reaching a second Fibonacci target at $22.40, drawn from the
top of the B-wave and the first correction in the down-move. Also, the first
Fibonacci target at $25 was touched exactly by intermediate wave (A).
A falling pitchfork between B and (A) and 2 gives a medium-term, down-
moving channel. The price reaches the median line of this pitchfork again in
the neighborhood of the second Fibonacci projection target.
The price now also touches the median line of a short-term, down-moving
pitchfork drawn between the wave points 2, 3, and 4, and this happens ex-
actly on the second Fibonacci target.
The price is moving far away from its 50- and 200-day simple moving aver-
ages. A move toward these averages is expected.
The last two candles make up a bullish harami pattern: a candlestick bottom
reversal pattern.
Let’s also have a look at the indicators on the daily chart of figure 7.7.
Figure 7.7: Interpreting the indicators on the daily chart of CA Inc.

If this is going to be the turning point, we will see a divergence in the SVA-
PO indicator next.
The RSI indicator is below the lower standard deviation line in the oversold
territory.
And the BB%b indicator already has a divergence with the price and is mov-
ing up from below the 10-reference line.
Clearly, a turning point cannot be far away!
This is the second step in LOCKIT: Make use of the complete arsenal
of LOCKIT technical analysis tools to decide if opening a position is LOCKIT
the right thing to do.
Step 3: Closing a Position

Step 3, closing a position, will be discussed after steps 4, 5, and 6.
Step 4: Money and Risk Management

Money Management
To comply with LOCKIT money management, we will invest in a fixed
number of stocks. Each stock will get starting capital that is equal to the total
capital divided by the fixed number of stocks. There is no profit or loss shar-
ing between the stocks. My testing showed this to be the most effective sys-
tem with the best results in the long run. We will go over this in more detail
in chapter 10.
With a starting capital of $25,000 and a selection of 20 stocks, each stock will
get $1,250 from the start. Losing 10% in one stock and one trade will be lim-
ited to $125, or just 1% of the total portfolio value. Furthermore, the total loss
of one stock can never be more than $1,250, or 5% of the total portfolio value.
This kind of money management makes the trading system crash resistant.
In PART V, you will find all the details about money and risk management as ap-
plied by LOCKIT.
Risk Management
Risk management means looking for an initial stop and a price target that
gives you a good risk-to-reward ratio. The initial risk should be as low as pos-
sible, but it must have solid technical grounds.
Figure 7.8: Price targets and risk/reward ratio on the daily chart of CA Inc.
Same
inclination
Target prices
Initial stop
Remember the reversal candlestick pattern in figure 7.6? We will take the
low side of this pattern as the initial stop level. A closing price below this level
is a selling signal. In this case, it means buying at $23 with a stop at $22.35,
or a very low risk of only 3%.
In figure 7.8 you can see how, for the moment, we can only create a Fibonacci
price target using a historical Fibonacci projection. If we calculate from the
actual low point to the previous low point, the bottom of wave 3, it will give
us three possible targets.
An important target is the first price resistance at the top of wave 4 at $25.35.
At this level, we also expect resistance from the 50- and 200-day moving av-
erages. Our initial stop and this target give us a good risk-to-reward ratio and
justify opening a long position now.
To have an idea of when this target could be reached, we need this target
crossing with some other line. There is, however, nothing we could use as
a reference for the moment. We could try to create a fictitious pitchfork. To

find an acceptable inclination for this pitchfork, we could use the previous
uptrend line between (A) and 1 as a reference.
Buying at $23 we comply with good money and risk management. On
08/13/2004, we buy $1,250/$23 = 54 shares of CA Inc. The possible loss is
$0.65 per share, and the first price target is $2.35 higher. This gives us a mini-
mum risk-to-reward ratio in our favor better than 3. This is exactly the type
of trade we like to find in LOCKIT.
Step 5: Initial Stop

We always set an initial stop right from the start.
The most important and most difficult decision is closing the position if the
initial stop gets broken by the closing price. Here, it means the closing price
should not fall below $22.35. Making the decision to sell on the break of the
initial stop is not dependent on whether you are involved with long- or short-
term investing. There must be no doubt, no discussion, no “yes but,” or any
other excuses. If the closing price breaks your initial stop, you MUST sell!
Step 6: Trailing Stop

Equally important (in relation to holding on to as much profit as possible) is
closing the position when the price falls through the trailing stop. Technical
analysis has given you selling signals before; but, if you misinterpret them,
you will need a trailing stop to take care of closing the position before you lose
all of the profit. So, if price falls through the trailing stop, you MUST close
the position. The trailing stop used is not only dependent on the investment
period (short, medium, or long term), but is also related to the volatility of
the stock.
To get an idea of the fixed stop percentage to apply for a certain stock
in a certain period, you can use the following trailing stop MetaStock®
formula:
{SVE_Stop_Trail%}
perc:=Input(“Trailing Loss % :”,0,100,14);
loss:=C*perc/100;
trail:=
If(C>PREV AND Ref(C,-1)>PREV,
Max(PREV,C-loss),
If(C<PREV AND Ref(C,-1)<PREV,

Min(PREV,C+loss),
If(C>PREV,C-loss,C+loss)));
Trail
Please utilize the disc in the back of the book for instant access to these
codes. You may also download them from www.traderslibrary.com/tlecorner.
Figure 7.9: More short-term reversals with a small 3% trailing stop on Intel Corp.
Closing a long
position
SVE_Stop_trail
indicator Closing a short
position
3% trailing
stop
Short-term Trailing Stop

If you do not use extremely volatile stocks and you invest over the short term,
then the trailing stop will be in the order of 3% to 5%, using daily charts. It
is best to apply a trailing stop on a previous period to get a visual idea of what
could be the best trailing stop for your particular stock. For that you can use
the previous formula, SVE_Stop_Trail%.
Figure 7.10: Less short-term reversals with a 5% trailing stop on Intel Corp.
5% trailing
stop
With a 3% trailing stop, you have (in figure 7.9) four selling points for Intel
Corp. looking at long positions.
During the same period, you can see in figure 7.10 only two selling points
using a 5% trailing stop.
Medium-term Trailing Stop

A 7% to 11% trailing stop will be adequate for the medium term, using
daily charts. The best thing is to apply a trailing stop on a previous period
to get a visual idea for what could be the best trailing stop for this stock in
this particular moment in time. For this, again, you can use the formula
SVE_Stop_Trail%.
With an 8% trailing stop, you can see in figure 7.11 just one selling point
for a long position in Intel Corp., looking at the same period as before.
Long-term Trailing Stop

A long-term trailing stop will have to be in the order of 11% to 15%. It is best
to switch to a weekly chart when looking at the longer term.
Figure 7.11: An 8% medium-term trailing stop on Intel Corp.
8% trailing
stop
Figure 7.12: A long-term 12% trailing stop on the weekly chart of Intel Corp.
12% trailing
stop
Weekly Chart

Figure 7.13: Buying point and short-term follow-up of CA Inc. with a 5% trailing stop
5% trailing
stop
In figure 7.12, note that with a 12% trailing stop in Intel Corp., there were
two closing buys for short positions and one closing sell for a long position in
the period 2003-2004.
Step 3: Closing the Trade

Long Position CA Inc. Short-term Follow-up
Looking for short-term trading with CA Inc., you can see in figure 7.13 that
a 5% trailing stop seems to follow the short-term price movement best.
We buy CA Inc. on 08/13/2004 for $23. The initial stop is set at $22.35. We
keep a short-term trailing stop at 5%.
The important short-term price targets to keep in mind: $25.40, which was
a previous top, and resistance from the 50- and 200-day simple moving aver-
ages. The next target is at $28.50, the third Fibonacci projection in the neigh-
borhood of a total of four previous tops with previous wave tops (B) and 2.
Figure 7.14: A lot of resistance in the daily chart, time to close CA Inc.
Resistance
Trend lines
On 10/06/2004, are we ready to sell now? After opening the position, the
price moves straight up to the first Fibonacci target at $24.75.
In figure 7.14 we see a short-term correction at the end of August. If we do a
Fibonacci projection from this new pivot point, we get exactly the same tar-
gets as before, proving that historical Fibonacci projections do work.
After this short-term correction, the price continued its move up to the sec-
ond Fibonacci target. During this time, the 50- and 200-day moving aver-
ages were broken. The original uptrend line from the start of wave 1 and the
bottom of wave 2 can, from now on, be drawn more sharply.
Next, there was a short correction back to the Fibonacci level, which is now
support. At the sharper uptrend line, there was enough support to turn price
back up again.
On 10/6/2004 – What Happens?

Price reaches a new high value at a level where a lot of resistance is found:
• We are exactly at the resistance of the line through (B) and 2;
• We are close to the third Fibonacci price target;
• We reach the upper side of a short-term, sharp up-moving
pitchfork;
• We reach the resistance of an inverse trend line; and
• We essentially are completing an Elliott impulse wave count. Most
likely, we are looking at the end of wave 5.
If there were good arguments to close our position on the way up, this seems
to be the right moment. During the way up, there was no problem with the
initial stop or the trailing stop.
We will always try to close the position based on good technical arguments
and not wait for the trailing stop to be broken. If, however, the trailing
stop is broken and we have not yet closed the position, the position MUST
be closed!
Of course, before closing, we also have a look at our indicators in figure 7.15.
We can see a divergence with a second lower top in SVAPO, the RSI indica-
tor is topping and is likely to diverge, and there is divergence with lower tops
in SVE_BB%b_HA.
Conclusion: The indicators are in agreement that a top will be reached.
We sell our 54 shares of CA Inc. at a closing price of $27.85, for a total amount of
$1,503.9, minus the buying cost of $1,242, which yields a profit of $261.9 or 21%.
The new available capital for buying this stock the next time is $1,250 +
$261.9=$1,511.9. Remember; there is no profit or loss sharing with other
stocks in portfolio.
Figure 7.15: CA Inc. diverging indicators give a selling agreement
10/18/2004: Opening a New Long Position?

Have a look at figure 7.16 to see if we should consider buying again. What are
the arguments for opening a new long position?
Figure 7.16: A new entry point in CA Inc. after a short-term correction
Trailing stop First

broken target
Bullish
Engulfing
• The price has retraced back to the 61.8% Fibonacci retracement level,
probably ending correction wave 2 of a medium-term uptrend
impulse wave.
• There is support from the previous turning point of wave 4.
• A fraction lower, there is support of a previous doji candle top.
• Price reaches the lower side of the up-moving pitchfork channel.
• Price has fallen back between the 200- and 50-day moving averages,
which are very close together.
• Price has exactly fallen back to the upward trend line.
• The last two candles in the chart are a bullish engulfing reversal
pattern.
Figure 7.17: I ndicators confirm continuation of previous uptrend
These are a lot of good technical reasons to buy this stock now!
OK, but what about the risk-to-reward ratio?
The short-term price target is the previous top at $28.20. With the long-term
projection we did on 08/13/2004, we had a long-term target of $32. We can
put an initial stop at the bullish engulfing pattern or just below at the trend
line support at $25.80, and buy now at a closing price of $26.58. The possible
loss will be limited to $0.78, and the first price target is $2.40 away. This is a
good risk-to-reward ratio to open the position.
Looking at the indicators in figure 7.17, we notice that SVAPO is very close
to the lower standard deviation line, RSI is turning above the 50 level, and
SVE_BB%b_HA is moving close to the lower side.
If we just had a temporary reaction in the uptrend, a reversal in the indicators
is possible; it is normal that there are no divergences. If there were divergences,
they would most likely be hidden, indicating a previous trend continuation.
This looks like a buy with a high chance for a profitable trade. You could
profit from this and increase the buying power with 50% for this specific
trade. The effect of increasing the buying power will be visible on the longer-
term only. We will keep our normal buying power in our example.
Based on these positive arguments, we are buying 56 CA Inc. shares at a closing price
of $26.58, for a total amount of $1,488.50. We keep an initial stop at $25.80 and
continue to use a trailing stop at 5%.
12/07/2004: Time to Close the Position?
The price is moving up with almost no reactions within the up-moving
pitchfork channel.
Look at figure 7.18 on the following page. On 12/07/2004, there seems to be
a good chance for a price reaction.
• The price has reached a Fibonacci target level;
• The price has reached the estimated long-term target at $32;
• The price is moving up against the upper side of the pitchfork
channel;
• The wave 3 up-move has been made with three consecutive sharper
uptrend lines. The last sharpest trend line is now broken; and
• The last three candlesticks come close to what could be an evening
doji star reversal pattern.
These provide more than enough reasons to believe that a reaction is coming
and that it is best to take a profit now.
Figure 7.18: Price reaction expected after up move, time to close CA Inc. position
Evening
doji star?
5% trailing
stop
Looking once more at the indicators in figure 7.19, we see that SVAPO re-
cently turned down from above the standard deviation level, but is moving up
again. If, however, it turns down again, it will create a divergence. The RSI
has turned already and is showing a divergence and SVE_BB%b_HA has a
number of divergences too.
Chances are big that we have reached a top!
We sell the 56 shares of CA Inc. at a closing price of $30.75. The profit is $30.75-
$26.58=$4.17, or a total of $4.17*56=$233.52 — more than 15%.
Figure 7.19: Topping indicators with divergences confirm possible top in price
The total available capital for the following trade in this stock is now $1,511.9
+ $233.52= $1,745, for a profit of $495 on the starting capital of $1,250 in less
than four months.
Using the LOCKIT system for trading, based on a thorough knowl-

edge of the basic technical analysis techniques, gives you a good LOCKIT
chance for making more profit in the stock market.
LOCKIT Rules for Opening and

Closing Positions
I’ve compiled an overview of the LOCKIT rules for opening and closing long
or short positions. Please read through these carefully and continue to use
these examples as a reference.
LOCKIT Trend Reversal Rules for

Opening a Long Position
A trend reversal will be more certain when more rules are giving a signal. We
will use the following reference letters to indicate which rules are complied
with where on the example charts.
General Rules – Opening a Long Position
F. Price reverses with a higher bottom in a downtrend.
G. Price reaches support. This support is given by the 100- or 200-day
simple moving average, a support line, or the lower side of a trend
channel or pitchfork.
H. Price breaks through the last steepest downtrend line.
I. There is a rising breakout or continuation window.
J. Price reaches a Fibonacci target level or retracement level.
K. Price moves in a trend and is far below the 50-day simple
moving average.
L. A clear complete Elliott wave count is visible.
M. The zero-lagging TEMA average on closing prices (ZLTMACL)
crosses above the zero-lagging TEMA average on re-calculated
OHLC heikin ashi prices (ZLTMAHA).
N. The indicators (SVAPO, RSI, and SVE_BB%b) are in the oversold
area, preferably having divergences with price. If you are keeping
hourly, daily, and weekly charts, you can find the ideal entry time
when buying signals are becoming apparent in all time frames.
O. A price-reversal pattern is visible in the price chart.
P. A candlestick pattern confirms the reversal. The next candle
confirms the new uptrend direction with at least a closing price
in that direction.
Q. AVOID trading while in a trend move and when the indicators keep
moving close around their median value.
An Example
As an example, let’s look at figure 7.20, the medium-term chart of AMR Corp.
G. The price reaches a solid support level at the bottom of a sub-wave 4
(January 2006) of the previous uptrend; a window before that (De-
cember 2005) is still not closed.
J. The price reaches a 50% retracement level over the complete move up
from September 2005 until May 2006. The level of 50% is a com-
mon retracement, providing good support.
K. The price is far below the simple moving averages. An upward move
to the 50-day average is expected.
Figure 7.20: LOCKIT trend reversal rules for opening a long position
Pitchfork in line
with price trend
and 50-day average

L. After the impulse move up from September 2005 until March 2006,
we are likely to finish the correction wave with a double zigzag. If this
is the turning point, we have now completed wave Y.
Next with figure 7.21, let’s look at the shorter term with a candle chart and
our indicators.
G. The price turns at the lower side of the pitchfork. This pitchfork is
nicely in line with the slope of the 50-day moving average.
H. The price breaks the third downtrend line with the sharpest inclina-
tion.
I. There is a window between the last and the previous candle; this
could be a breakaway window.
Figure 7.21: More LOCKIT trend reversal rules on a short-term

candlestick chart

Figure 7.22: LOCKIT trend reversal rules applied for buying AMR Corp.
N. All indicators are in the oversold territory; however, two out of the
three indicators are not showing divergence with price, which could
be an indication that this is still not the ideal moment to open a trade.
P. There is a bullish harami reversal pattern, followed by a candle with a
window and a higher closing price.
These are more than enough reasons to open a long position. This is espe-
cially true because we have a good risk-to-reward ratio if we buy at $20.04
and keep an initial stop at the low of the bullish harami pattern, at $18.78.
This gives us an initial stop with a possible loss limited to 6%.
F: In figure 7.22, notice the possible start of an Elliott impulse wave 3 a
couple of weeks later. We now have a higher bottom in price, which is
an important trend reversal signal for the medium-term trend.
Figure 7.23: AMR Corp. price targets
Price targets
Next, the correction wave 2 in figure 7.23 makes a flat zigzag ABC correc-
tion, bringing the price still a fraction lower. We can now draw a pitchfork
between the turning points of waves 1 and 2 and the start (Y) of wave 1, giv-
ing direction to the future price movement.
A Fibonacci projection over wave 1 gives us some future price targets. The
crossings of these targets with the median and outer lines of the pitchfork give
us some idea of when these targets could be reached.
M: The zero-lagging TEMA average based on the closing price (ZLT-
MACL) crosses the zero-lagging TEMA average based on re-calcu-
lated OHLC heikin ashi prices (ZLTMAHA). This is another confir-
mation that the uptrend has started.
LOCKIT Long Position Trend Reversal Closing Rules

The more rules that are followed, the more trustworthy the selling signal will
be. We will continue to use the AMR Corp. example charts and the reference
letters of the rules to indicate where each one falls on the chart.
General Rules – Closing a Long Position
F. After opening a position, the price keeps moving flat while indicators
move in the expected direction. There is serious doubt about the ex-
pected price up-move, and it’s possible that the price will turn down
after the flat move.
G. Price breaks the initial stop.
H. The price breaks through the last steeper uptrend line, or a support
line, while the price is moving flat.
I. The price reaches a Fibonacci target level.
J. A clear complete Elliott wave count is visible.
K. A candlestick pattern confirms the top reversal. The next candle is
preferably a candle confirming the new downtrend direction with at
least a closing price in that direction.
L. The price reaches the upper side of a pitchfork or trend channel.
M. The indicators (SVAPO, RSI, and SVE_BB%b) are in the over-
bought area, preferably having divergences with price. If you are keep-
ing hourly, daily, and weekly charts, you can find the ideal selling time
when selling signals become apparent in all time zones.
N. The price moves in a trend and is more than average above the 50-day
simple moving average.
O. The zero-lagging TEMA average on closing prices (ZLTMACL)
crosses below the zero-lagging TEMA average on re-calculated
P. The chart shows a price reversal pattern.
Q. The price breaks the trailing stop.
If you get a selling signal and it’s obvious that it is a temporary reaction com-
ing to an end, you could close half of the open position. If it turns out to be a
temporary reaction, you will still make a profit with the other half.
Figure 7.24: LOCKIT trend reversal closing rules selling AMR Corp.
Exhaustion
window
Breakaway
window
If, on the other hand, it’s really a turning point, then there is more room for
closing the trade because losses are only half of what they would have been
with the original quantity.
Note how in figure 7.24 the prices stay nicely within the up pitchfork: Half-
way through November, price breaks above the pitchfork channel. A Fibo-
nacci projection that started from intermediate wave 1 of extension wave 3
is reached.
I: The price reaches a Fibonacci target level.
J: There is a good chance that we have reached the top of wave 3; there is
an intermediate impulse wave 1 to 5.
K: The doji in the candle chart is probably the first indication for a rever-
sal. There is a chance that we will get an evening doji star as a reversal
pattern.
M: All indicators are turning down from the overbought level; there is no
divergence visible. This is an indication that the price will continue
the move up after correction wave 4.
N: The price is moving far away from the 50-day simple moving average.
At the start of wave 3 we saw a breakaway window. Then, we got an exhaus-
tion window, which is a good indication that, at least, this moment in time,
we are at a top level.
The most sensible action is to take profit. If the next wave is really a wave 4,
we will try to enter a new position at the start of wave 5.
Next, we will list the LOCKIT rules for opening and closing a short position after
a trend reversal.
LOCKIT Trend Reversal Rules for

Opening a Short Position
F. The price reverses with a lower top in an uptrend.

G. The price reaches resistance. This resistance is given by the 100- or
200-day simple moving average, a resistance line, or the upper side of
a trend channel or pitchfork.
H. The price falls through the last steeper uptrend line.
I. There is a falling breakout or continuation window.
J. The price reaches a Fibonacci target level or retracement level.
K. The price moves in a trend and is far away from the 50-day simple
moving average.
L. A clear, complete Elliott wave count is visible.
M. The zero-lagging TEMA average on closing prices (ZLTMACL) is
downward crossing the zero-lagging TEMA average on re-calculated
N. The indicators (SVAPO, RSI, and SVE_BB%b) are in the overbought
area, preferably diverging with price. If you are keeping hourly, daily,
and weekly charts, you can find the ideal entry point when sell signals
become apparent in all time zones.
O. There is a chart pattern reversal in the price chart.
P. A candlestick pattern confirms the reversal. The next candle is prefer-
ably a candle confirming the new downtrend direction with at least a
closing price in that direction.
Q. AVOID trading when, while in a trend move, the indicators keep
moving close around their median value.
LOCKIT Short Position Trend Reversal Closing Rules
F. After opening a position, the price keeps moving flat, while indicators
pected price down-move, and it’s possible that the price will turn the
other way around after this flat move.
H. The price breaks through the last steeper falling trend line, or a resis-
tance line, while the price is moving flat.
I. The price reaches a Fibonacci target level or retracement level.
K. A candlestick pattern confirms the reversal. The next candle is prefer-
ably a candle confirming the new uptrend with at least a closing price
in that direction.
L. The price is reaching the lower side of a pitchfork or trend channel.
M. The indicators (SVAPO, RSI, and SVE_BB%b) are in the oversold
and weekly charts, you can find the ideal buy-back time when closing
buy signals become apparent in all time zones.
N. The price moves in a trend and is far below the 50-day simple moving
average.

Q. Price breaks the trailing stop.
LOCKIT Trend Correction Rules for

Opening a Long Position
The buying signal will be more trustworthy if more rules are applied. We will
continue to use the AMR Corp. charts for indicating the rules (with the use
of reference letters) that are followed on the charts.
General Rules
F. The price reaches support. This support is the 50-, 100-, or 200-day
simple moving average, a support line, or the lower side of a trend
channel or pitchfork.
G. The price reaches the end of an Elliott impulse wave 2 or 4, or wave A
of a correction wave.
H. The price breaks through the last steeper downtrend line.
I. There is a breakout with a rising (continuation) window.
J. The price reaches a Fibonacci retracement level.
K. There is a continuation chart pattern in the price chart.
L. The indicators (SVAPO, RSI, and SVE_BB%b) are close to the over-
sold range, but are still around median levels. If you are keeping hour-
ly, daily, and weekly charts, you can find the ideal entry time when
buying signals become apparent in the smaller time zones.
M. Trade in the direction of the medium to longer-term trend.
N. A candlestick pattern confirms the reversal. The next candle is pref-
erably a candle confirming the new uptrend direction with at least a
Figure 7.25: LOCKIT trend correction rules applied for buying AMR Corp.
As you can see in figure 7.25, the correction in AMR Corp. is an Elliott ABC
zigzag pattern.
We now arrive at the point where everything seems to indicate a continuation
of the previous uptrend.
F: The price finds support at the 50-day simple moving average, and the
price turns up from the lower side of the pitchfork channel.
G: An ABC zigzag correction is complete; it is likely that we reached the
end of wave 4.
H: The last descending trend line is broken to the upper side.
J: We closely reach a 61.8% Fibonacci retracement level, which is suf-

ficient for a wave 4 move.
L: There is enough room for an up-move by the indicators.
N: In the candle chart, we have a bullish engulfing reversal pattern, fol-
lowed by a hammer with a higher closing price.
With a stop at the low side of the bullish engulfing pattern, we have a good
risk-to-reward ratio.
There is no doubt that we must open a new long position here.
LOCKIT Long Position Trend Correction Closing Rules

The selling signal is more reliable when more rules are applicable. As before,
we are using the AMR Corp. charts to illustrate where the rules (reference
letters) are followed.
General Rules
F. After opening a position, the price keeps moving flat, while indica-
tors move in the expected direction. There is serious doubt about the
expected price up-move, and it’s possible that the price will turn the
other way around after the flat move.
H. The price breaks through the last steeper trend line or a support line
while price starts moving flat.
I. The price reaches a Fibonacci target level.
J. A clear complete Elliott impulse wave count is visible.
K. A candlestick pattern confirms the top reversal. The next candle is
preferably a candle confirming the new downtrend direction with at
least a closing price in that direction.
L. The price reaches the upper side of the last pitchfork or trend channel.
M. The indicators (SVAPO, RSI, and SVE_BB%b) are in the overbought
and weekly charts, you can find the ideal selling time when selling
signals become apparent in all time zones.
N. The price moves in a trend and is far above the 50-day simple moving
average.
Figure 7.26: LOCKIT trend correction closing rules selling AMR Corp.
Inverse trend line through

tops of wave 1 and 3

crosses below the zero-lagging TEMA average on re-calculated
Q. Price breaks the trailing stop.
Closing the Position
Look at figure 7.26 to see how the price moves up in a short period of time
with high acceleration. Looking for selling signals? There are clearly a num-
ber of them. Is it time to close this position? Let’s investigate.
H: The last ascending trend line is broken to the lower side.
J: We reached a top for Elliott impulse wave 5.

K: We have two consecutive bearish harami patterns in the candlestick
chart.
L: The price reaches the upper side of the last pitchfork. The price also
reaches an inverse trend line drawn over the tops of waves 1 and 3,
possibly the upper side of a longer-term up-channel.
M: Indicators are turning down in the overbought area. There are
divergences visible with the RSI and SVE_BB%b indicators.
N: The price has moved far away from the 50-day simple
moving average.
These are enough good reasons to take profit and to close the position now!
Looking at figure 7.27, you must agree it was a good decision!
Finally, we list the rules for opening and closing a short position after a trend
correction.
Figure 7.27: Further price evolution confirms LOCKIT decision

LOCKIT Trend Correction Rules for

Opening a Short Position
F. The price reaches resistance. This resistance is the 50-, 100-, or 200-
day simple moving average, a resistance line, or the upper side of a
trend channel or pitchfork.
G. The price breaks through the last steeper uptrend line.
H. The price reaches a Fibonacci target or retracement level.
I. There is a falling (continuation) window.
K. The zero-lagging TEMA average on closing prices (ZLTMACL) is
downward crossing the zero-lagging TEMA average on re-calculated
L. The indicators (SVAPO, RSI, and SVE_BB%b) are in the overbought
and weekly charts, you can find the ideal entry point when sell signals
become apparent in all time zones.
M. There is a chart reversal pattern in the price chart
N. A candlestick pattern confirms the reversal. The next candle is prefer-
ably a candle confirming the new downtrend direction with at least a
LOCKIT Short Position Trend Correction Closing Rules
F. After opening a position, the price keeps moving flat, while indicators
pected price down-move, and it’s possible that the price will turn the
other way around after this flat move.
G. Breaking the initial stop.
H. The price breaks through the last steeper falling trend line, or a resis-
tance line, if the price is moving flat.
I. The price reaches a Fibonacci target level or retracement level.
J. A clear, complete Elliott wave count is visible.
K. A candlestick pattern confirms the reversal. The next candle is prefer-

ably a candle confirming the new uptrend but at least a closing price
in that direction
L. The price reaches the lower side of the last pitchfork or trend channel.
M. The indicators (SVAPO, RSI, and SVE_BB%b) are in the oversold
and weekly charts, you can find the ideal buy-back time when closing
signals become apparent in all time zones.
N. The price moves in a trend and is far below the 50-day simple moving
average.
P. The chart shows a price-reversal pattern.
Q. The price breaks the trailing stop.
For a closer look at the charts in this chapter,

go to www.traderslibrary.com/TLEcorner.
Test Your Chapter 7 Knowledge

1. LOCKIT is a short name that stands for?
L_ _____________________________________________________________
_______________________________________________________________
_______________________________________________________________
O______________________________________________________________
_______________________________________________________________
_______________________________________________________________
C______________________________________________________________
_______________________________________________________________
_______________________________________________________________
K _____________________________________________________________
_______________________________________________________________
_______________________________________________________________
I_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
T______________________________________________________________
_______________________________________________________________
_______________________________________________________________
2. Why are we looking at the long-term market trend?
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
3. To open a trade we use?
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
4. To close a trade we use?
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
5. How do we apply good money management with LOCKIT?
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
6. How do we limit risk with LOCKIT?
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
7. The initial stop setting is based on?
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
8. Why do we use a trailing stop with LOCKIT?
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
For answers, please visit the Traders’ Library Education Corner at

www.traderslibrary.com/tlecorner.

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What is LOCKIT and what does it stand for?

What is LOCKIT and what does it stand for?

What are the opening and closing rules for a LOCKIT short position?

What are the opening and closing rules for a LOCKIT short position?

E PR EV IEW

Reserve your copy of this

Copyright © 2009 by Sylvain Vervoort

Printed in the United States of America.

Part I : LOCKIT Technical Analysis Tools 1

Part II : The SVAPO Oscillator and LOCKIT 137

Part III : LOCKIT Price Projections 175

Part IV : LOCKIT Strategy and Results 199

Appendix : Availability of Formulas in Other Programs 347

Works Cited and Disclaimers 373

About the Author 375

L “Long term” What is the Long-term trend?

O “Open” The rules for Opening a position.

C “Close” The rules for Closing a position.

K “K-ratio” Keep risk under control and manage your money.

Step 1: Long-term Trend

Figure 7.1: Bankrate Inc. with a 17% trailing stop

Initial stop 15%

Source - MetaStock® charts courtesy of Equis International.

Estimating the Long-term Trend

Figure 7.2: S&P 500 Index monthly chart

S&P 500 Index

Source - MetaStock® charts courtesy of Equis International.

In MetaStock® you can create a zero-lagging exponential moving aver-

Source - MetaStock® charts courtesy of Equis International.

Step 2: Opening a Position

CA Inc. Weekly Chart

Source - MetaStock® charts courtesy of Equis International.

Source - MetaStock® charts courtesy of Equis International.

Figure 7.6: Analyzing the daily candlestick chart of CA Inc.

Source - MetaStock® charts courtesy of Equis International.

CA Inc. Daily Chart

Figure 7.7: Interpreting the indicators on the daily chart of CA Inc.

Source - MetaStock® charts courtesy of Equis International.

Step 3: Closing a Position

Step 4: Money and Risk Management

Source - MetaStock® charts courtesy of Equis International.

a reference for the moment. We could try to create a fictitious pitchfork. To

Step 5: Initial Stop

Step 6: Trailing Stop

If(C<PREV AND Ref(C,-1)<PREV,

Source - MetaStock® charts courtesy of Equis International.

Short-term Trailing Stop

Source - MetaStock® charts courtesy of Equis International.

Medium-term Trailing Stop

Long-term Trailing Stop

Figure 7.11: An 8% medium-term trailing stop on Intel Corp.

Source - MetaStock® charts courtesy of Equis International.

Source - MetaStock® charts courtesy of Equis International.

Source - MetaStock® charts courtesy of Equis International.

Step 3: Closing the Trade

Source - MetaStock® charts courtesy of Equis International.

On 10/6/2004 – What Happens?

Figure 7.15: CA Inc. diverging indicators give a selling agreement

Source - MetaStock® charts courtesy of Equis International.

10/18/2004: Opening a New Long Position?

Figure 7.17: I ndicators confirm continuation of previous uptrend

Figure 7.21: More LOCKIT trend reversal rules on a short-term