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Carter J - Using Voodoo Lines-1 PDF

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The document discusses how Voodoo Lines can uncover hidden support and resistance levels and help traders trade more effectively. It provides guidance on properly interpreting and applying Voodoo Lines.

Voodoo Lines identify potential support and resistance levels that may not otherwise be visible. Experienced traders have found them useful for trading, but price doesn't always stop at the lines. They should be used similarly to other technical indicators.

Traders new to Voodoo Lines should spend time studying how price interacts with the lines during live market conditions before trading. It's important not to blindly trade at the lines without understanding whether price is likely to stop there.

Understanding and Using Voodoo Lines

UNDERSTANDING AND Find and use hidden


areas of support and

USING VOODOO LINES


resistance

Revised 12/12/2012

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Understanding and Using Voodoo Lines

Notice
This document is for educational purposes only.

Futures, options, and currency trading have large potential rewards, but also large
potential risks. You must be aware of the risks and be willing to accept them in
order to invest in the futures, options, and forex markets. Don’t trade with
money you cannot afford to lose. Neither this document nor the Voodoo Lines
indicator is either a solicitation or an offer to buy or sell futures, options, or any
other security. No representation is being made that any account will or is likely
to achieve profits or losses similar to any discussed in this document or
elsewhere. The past performance of any trading system or methodology is not
necessarily indicative of future results.

Hypothetical or simulated performance reports have certain limitations. Unlike


an actual performance record, simulated results do not represent actual trading.
Also, since the trades have not been executed, the results may have under- or
over-compensated for the impact, if any, of certain market factors such as lack of
liquidity. Simulated trading programs in general are also subject to the fact that
they are designed with the benefit of hindsight. No representation is being made
that any account will or is likely to achieve profit or losses similar to those shorn.

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Understanding and Using Voodoo Lines

Introduction
Voodoo Lines uncover regions of potential support and resistance which might
not otherwise be visible. Used in the simplest form, one can trade against the
lines the same way as any other level such as trend lines, pivot points, moving
averages, etc… Many experienced daytraders have told me that they received
benefit from Voodoo Lines on the same day they received it. From the following
5 minute chart for the E-Mini S&P 500 you can see why.

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Understanding and Using Voodoo Lines

Most often, traders who jump in and successfully use Voodoo lines right away are
already comfortable trading against support and resistance. This is important
because price doesn’t always stop at Voodoo Lines just as price doesn’t always
stop at an important moving average. Therefore, it’s important to not blindly buy
or sell at a Voodoo Line level and without an already developed sense of whether
price is likely to stop at a level or not, one might make some costly trades.

While it may be possible to use the lines right away, there is benefit to learning
how to read the more nuanced messages that are delivered as price interacts
with the Voodoo Line levels. Whether you are experienced or not, it is best to
spend time studying any new tool during live market conditions and Voodoo Lines
is no different. This guide is designed to help speed you on your journey. It
covers three broad subjects:

1. Descriptions of the various Voodoo Line levels are and the meaning of the
different colors;
2. An overview of some of the common ways that price acts at Voodoo Lines
3. Techniques help identify longer-term trends with Voodoo Lines

After reading the discussion this guide you should be better positioned to study
Voodoo Lines with an eye toward how to incorporate it into your own trading
strategies. Combining Voodoo Lines with other tools can add additional insights.
For example, the chart below shows the Euro bouncing from its fireline with
MACD divergences suggesting that price is running out of steam as it approaches
this support level:

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Understanding and Using Voodoo Lines

This is just one example of how Voodoo Lines can be combined with other
technical analysis techniques and it is not meant to suggest that MACD is the best
indicator to use. What is best is whatever works well for you.

About the Examples


The 5-minute ES chart which served as the first example in this guide was not
“cherry picked” It was the most recent 5-minute chart for this common
daytrading instrument on the day when I sat down to craft this document. The

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Understanding and Using Voodoo Lines

importance of the lines on the chart can be immediately seen even though price
didn’t always stop right at them.

The same thing cannot be said about further examples. In most cases they have
been chosen to illustrate a particular concept and, therefore, need to be selected
from many possible charts so that the pattern is clear. That doesn’t mean that
the charts show prices always turning exactly at Voodoo Lines; in fact, it is just the
opposite, most of the examples or of common patterns showing behavior when
prices go don’t reverse exactly at a line to illustrate the variety of patterns which
can occur.

Nevertheless, it is important to recognize that the examples were chosen because


they are good examples of how Voodoo Lines can signal the likely direction of
prices. Not all signals will be as clear and some seemingly clear signals will lead us
to anticipate moves which might not occur.

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Understanding and Using Voodoo Lines

What Are The Voodoo Lines?


The underlying techniques to create Voodoo Lines are based on Elliott waves – a
dark art to some. However, you don’t need to know anything about Elliott waves
to make use of the tool. Furthermore, Voodoo Lines overcomes one of the most
cited problems with Elliott waves: analysts often disagree about the current
waves. Voodoo projects levels from long-term levels, usually based on levels
which analysts have long since agreed upon.

Because markets tend to make proportional moves, these projections establish


levels which have an uncanny way of becoming support and resistance. By using
them you get to harness the predictive power of Elliott waves without needing to
do any analysis.

Another benefit of using long-term levels to create Voodoo Lines is that the lines
are always at the same levels until a major turning point occurs. They can remain
in the same place for many years; sometimes even decades. They appear at the
same place on every timeframe from one minute to one month and can be used
on time charts, tick charts, volume charts, range bars, renko bars, point and figure
charts, market profile charts and more.

Even though one can trade against the various Voodoo Lines without regard to
what the many levels represent, one can make more informed trading decisions
by understanding the relationships of the levels and their relative importance.
The most important Voodoo level is the fireline. These are the levels taken
directly from the long-term Elliott wave structure. They are few and far between
and prices can often go for months or even years without visiting a fireline. Let’s
take a look at an example of the Dow Jones Industrial Average with just firelines
shown:

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Understanding and Using Voodoo Lines

Treelines, the next most important level, are located relative to the firelines. On
an hourly chart of the DJIA you can see how the treelines fill in support and
resistance areas which exist between the fireline levels.

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Understanding and Using Voodoo Lines

Just as the treelines fill in areas of possible support and resistance between the
firelines, more levels are added to fill in other possible areas of interest. They are,
in order,

1. Red firelines
2. Green treelines
3. White snowlines
4. Violet skylines
5. Dashed moguls

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Understanding and Using Voodoo Lines

You can see how the addition of the third-level snowlines helps to further clarify
the important areas on the hourly DJIA chart:

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Understanding and Using Voodoo Lines

By zooming in on a 15 minute chart of the most recent portion of the 15-minute


chart, the value of incorporating the smaller degree lines becomes evident:

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Understanding and Using Voodoo Lines

On some platforms Voodoo Lines has the ability to display a sixth degree of line
which is disabled by default. Turning on this level of line is usually overkill and will
make charts impossible to read. However, some symbols have lines very far apart
on small timeframes and adding the sixth level can fill in some gaps. Below is an
example of 30-Year Treasury futures on a 5-minute chart both with and without
the sixth level micro-moguls shown in magenta:

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Understanding and Using Voodoo Lines

Common Voodoo Patterns


When studying Voodoo Lines you want to develop a feel for whether prices will
go through a level or not. In addition to the other analytical tools and experience
which you will bring, there are some common patterns which can help reveal the
intended direction of price once you have some practice recognizing them.

Below are descriptions of several common behaviors that I’ve seen as prices
interact with the various levels. This list is not exhaustive and you may observe
your own patterns. Furthermore, you might find that you can see or trade certain
reliably, but not others. The goal in presenting the patterns is to start you
thinking about the many types of movement you can look for when observing
price action with Voodoo Lines as you’re developing your own feel for them.

Testing and Continuation


The first scenario we want to look at is when prices pause at a Voodoo Line level
before continuing in the direction of the dominant trend. On an hourly chart you
can see that gold futures tested the $1744.80 skyline twice before breaking
through. After each of the first two attempts the price of gold remained in the
general area of the line indicating it was building strength for a possible attempt
to break through.

The two tests of the Skyline let us know that the market respects this level and
that makes it an important event if prices do make it through. Once a level that
is tested multiple times is broken, It is not uncommon for price to move swiftly as
happened with gold. However, this isn’t the only possible resolution as we’ll see
when we cover patterns which retest from the other side.

Notice that once price finally broke, the next level that was visited was the
$1771.80 skyline.

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A similar test and continue pattern can be seen as PCLN approaches and tries to
break through its fireline.

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Understanding and Using Voodoo Lines

Test and Reverse


The E-Mini S&P Futures give us an example of a situation where prices stop at an
important Voodoo Line level. In this case they don’t wait around too long and
start taking out levels in the opposite direction.

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Understanding and Using Voodoo Lines

Here’s another example of the test and reverse from a daily chart of the DJIA.
See how the DJIA found support right at the 12,030.33 Fireline – the most
important level there is.

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Understanding and Using Voodoo Lines

Spike then Fail


It is important to recognize that when prices reverse at Voodoo Lines the turn
doesn’t always happen at the exact level. Sometimes they do like the swing low
that the DJIA put in at the Snowline in the example below. However, sometimes
they will spike beyond the level before failing in the two examples where DJIA
tried to climb above two skylines: first at 13,004.75 and then again at 13,274.08.

In each case, after pulling back from the skyline they made a retest of the level
before failing. It doesn’t always happen this way, but when it does it can be a
real gift. The first failure of the line shows that prices may not go through. The
retest often gives an opportunity to take a trade right by the line while confirming
which side of the line prices want to be on. There are several patterns that
involve retests and we will cover them more.

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Retest from Other Side


It is very common for price to test and retest Voodoo Line Levels. This behavior
not only is a strong signal of a choice of on side of the line vs. the other, but it also
can provide potential trade setups if you become accustomed to identifying the
retest behavior.

Notice how UTX broke through its treeline and then retested from above. Once
the retest held, UTX continued upward.

Unrelated to this specific pattern, notice how UTX first tested the same treeline
from below before breaking through. This is also common and it also serves to

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Understanding and Using Voodoo Lines

show us that UTX is aware of the location of the treeline making it more
meaningful when it finds support at the level after breaking.

Base-Building Retest
Sometimes the retesting behavior can be seen through sideways congestion at a
just on the other side of an important level as seen in this chart of EURUSD:

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Understanding and Using Voodoo Lines

Congestion
Sometimes price will coil around one of the Voodoo Lines as the Russell 2000
does around the snowline in the example below. When this happens, it is
dangerous to read too much into any movement away from the line unless it
clearly tests and rejects the level, or moves beyond other nearby levels to show
that it is done coiling

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Understanding and Using Voodoo Lines

Pong
Sometimes price will bounce between levels before it breaks out to one side or
another.

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Understanding and Using Voodoo Lines

Evaluating Trends with Voodoo Lines


So far we haven’t spent too much time considering how the different colors of the
different Voodoo Lines impact the way we interpret action at that line. For the
most part, the color of the line doesn’t mean too much if one is daytrading on a 1-
minute or 5-minute chart. However, the colors of the lines are very important
when trying to use Voodoo Lines for evaluating longer-term moves.

As we dig into these techniques, we’ll start with a weekly chart of the DJIA
showing only the red firelines. For the time period shown there is a good
downtrend followed by a good uptrend. During the downtrend, the DJIA
continued to break successive firelines. It is too simplistic to say that once a level
is broken while in a downtrend that the next lower level will be seen, and we can
see that it isn’t true. But we can see that diring the move from the 2007 high to
the 2009 low none of the bounces carried prices up through two firelines in a row.
So we must allow for prices to carry back up through a line without suggesting
that the trend has changed.

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Understanding and Using Voodoo Lines

So if staying below the firelines is going to signal a likely downtrend and staying
above a signal for a likely uptrend we want to get some idea whether a bounce
from a fireline is likely to continue up through the next higher fireline and likewise
for a failure to hold a line. Let’s drill down and look at just the decline on a daily
chart and also added in the treelines to help with the analysis.

Notice the red box which highlights the first attempt to break below a fireline. In
absolute terms price went well below the fireline, over 300 points below, but in
relative terms it wasn’t that far. Price didn’t even reach the first treeline down to
test it before bouncing on either of the visits below the level. Furthermore,

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Understanding and Using Voodoo Lines

notice how the second visit below the fireline did not move beyond the first
attempt. When multiple attempts to penetrate an important level fail AND
subsequent attempts do not go beyond earlier attempts AND price returns back
to the other side then it is a sign that prices are likely to retreat before trying
again.

Once prices bounced we can see that the DJIA ran right to the treeline highlighted
by the blue box. This is a natural place to retest having failed to break the fireline.
As price approaches the treelines we cannot know whether the level will hold, but
once it does it signals a likely move back down and this time the fireline breaks.

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Understanding and Using Voodoo Lines

Next, let’s focus on the region highlighted in white. There we can see that once
the DJIA cracked the fireline it went down to the lower of the two treelines.
Either of the green lines might be a spot for a possible bounce, the fact that it was
the lower level signals a bit more weakness. However, it is really what happened
after the bounce that signaled the intent. The bounce returned to the fireline
area but failed, allowing the focus to remain on lower prints.

While that is the way trade resolved in that particular instance, it would have
been equally bearish if prices bounced from the lower treeline to the upper
treeline before failing.

Lastly, let’s look at the yellow rectangle. We can see that the prices sliced cleanly
through the fireline before getting caught up in the area of the treelines. A
bounce carried back above the fireline, but support was never established above
the fireline. Prices never tested the fireline from above to establish support and
while they entered the region of the treelines in the upper portion of the yellow
rectangle, they never established support at those lines either. With a firmly
established downtrend already in place noting here suggested a reversal.

The area in the yellow triangle is clearly the most complicated action and the
most difficult to decipher on the daily chart. Nevertheless, the clues are there.
We can see some of them more clearly by looking at the same region on an hourly
chart and adding in the third-degree snowlines. At this point see if you can look
at the price action and see how the interplay with the lines helps to identify when
short-term changes in trend occur and how it relates to the overall trend we
looked at on the daily and weekly charts.

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Special Topics
Futures Data
When charting futures with Voodoo Lines it is important to pay attention to what
data is being used. The calculations used by Voodoo Lines are designed to work
with the front-month futures contract. That’s what most speculators are trading
so that’s not too big of an issue most of the time. However, if one is plotting a
continuous contract (for example @ES on TradeStation or ES #F on eSignal) there
are several things to be aware of.

When trading short-term, be aware that the continuous contract will start
printing trades for the future month contract several days before the front month
contract stops trading. It is my personal preference to chart the front month until
it expires unless the liquidity just completely dries up. In fact, I am sometimes a
little bit leery of the levels a few days on either side of contract rollover and may
be skeptical of moves at the levels during that time. In situations where there are
Voodoo Lines for an underlying instrument I may prefer that instead. For
example, I might pay more attention to the Voodoo Lines on the cash S&P 500
index near the rollover than I might otherwise (although I always look at both
cash and futures when lines are available for both). This isn’t possible for some
things since there are no levels for spot metals, grains, etc…

The second issue has to do with long-term charts and the continuous contract.
When plotting a continuous contract, data from prior to the most recent rollover
are mathematically adjusted. That means that long-term continuous contract
charts may be shoring you bars at prices where no contract ever traded. A
discussion of why this is and how the continuous contracts are constructed is
beyond the scope of this guide. However, it means that there isn’t a meaningful
way to use Voodoo Lines with a continuous contract chart that stretches back to
before the last rollover. Instead, prefer a front-month continuation contract
(@ES=100XN instead of @ES on TradeStation and %ES 1! on eSignal. Front month

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Understanding and Using Voodoo Lines

continuation charts aren’t available on ThinkOrSwim and availability will depend


on your data vendor for NinjaTrader.

Forex Futures
There are no explicit values for forex futures in Voodoo Lines. Instead, the
Voodoo Line levels for spot forex are shown on the futures charts for select
currencies (Euro, Pound, Australian Dollar as of this writing). In general the
spread between futures and spot in forex is quite slim so this will not be a large
difference, but be aware that it exists and will be greatest just after rollover and
smallest just before.

Other Chart Types


Voodoo Lines can be used with many different types of charts. A few examples
are shown below without commentary.

Market Profile
E-Mini Dow futures, day session only.

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Point and Figure


Dow Jones Industrial Average on a Point and Figure chart. 100 points per box, 1
box reversal.

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Range Bars
Euro / U. S. Dollar forex cross. 0.0005 range bars.

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Volume Bars
Corn futures 500 volume chart

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