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Strategies & Market Trends : Technical Analysis- Indicators & Systems
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To: Derek B who wrote (1538)6/14/1997 11:14:00 PM
From: Wayners   of 3325
 
<<Zig Zag doesn't predict, only looks back. You should NEVER use Zig Zag as part of any system test.>>

Derek,

The Zig Zag helps me stay in tune and visualize what the trend has been. While the trend can change at any time, I've noticed that a moving average of Zig Zag really helps me focus on what the trend is and what it is likely to be. Momentum is a powerful thing. It takes a lot to turn the trend around.

I have been experimenting with the 5% Zig Zag with a 21 day moving average overlay. The following really ONLY applies to the basing periods, where the bollinger bands have narrowed considerably. Here is a summary of what I found. I am ONLY trying to use Zig Zag to predict breakout direction. I went through 600 charts today to get a feel for how good it works. IMHO it works pretty well.

1. If the Zig Zag line is "in gear" with the 21 day moving average the direction of the breakout is CLEARLY established. "In gear" simply means that both are moving in the same direction. The longer they have been moving together and the greater the slope, the stronger the signal.

2. Zig Zag line crossovers above the 21 day moving average are bullish on the future. Conversely, 21 day moving average crossovers
below the Zig Zag line are bearish. The crossovers lead price so they
make excellent directional movement indicators.

3. When the Zig Zag line is "in gear" the length of time the trend will remain in effect is often related to how close the zig zag line is to the 21 day moving average overlay.

4. As a trend deteriorates, the zig zag line and 21 day moving average will begin to move closer together (narrower distance between them), the zig zag line will start getting choppy with short lived up and down movements. This moving closer together eventually results in a crossover and a reversal in trend.

5. If the Zig Zag line and the 21 day moving average have been trending strongly for several weeks or longer during a LONG basing out period the breakout will be especially strong. I've seen many 50%+ breakouts that only take a few weeks to play out.

6. Sometimes the breakout is followed by the formation of a cup and
handle. After you profit from the 10% made on the breakout, the bands
will be much wider and you can often profit from then reversing your
position for another strong movement in the opposite direction.

7. Changes in Zig Zag lead changes in direction in the 21 day moving average. When I see that Zig Zag and the moving average are NOT "in gear", I look to see which way the Zig Zag will be taking the moving average in the future.

8. The percentage change in Zig Zag should be tailored for the individual stock. While 5% works pretty well on everything, the idea is to adjust that value to eliminate the choppy periods.

This Zig Zag thing is giving me the power I need over the trend. The
trend actually is your friend. Most of the technical indicators out
there fail when a stock starts trending.
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