The overlay profile for current market analysis by Donald L. Jones and Christopher J. Young
Market analysis seeks to determine the condition of the market because the trader who knows whether a market is trending, bracketing or in transition is better able to make an intelligent trading decision. Historically, technicians have studied market conditions using a combination of fundamentals, chart analysis and numerical formulas such as moving averages. The problem with the latter, though, has been that while seeking to average a number of trading days to smooth out the random market fluctuations (noise), moving averages introduce lag, an undesirable side effect.
We have developed a new graphic analysis technique based on value that promises to handle the noise problem without introducing lag. Called overlay methodology, this technique has four parts: The overlay profile, composed of linear additions of the Chicago Board of Trade's (CBOT) Market Profiles; the rotation profile, which is a day-to-day price profile; the rotation index, which numerically measures price rotation, and the quadrant of close, a second numeric measure that notes where in the price range the market closed.
Together, these four tools alert the trader to trending or bracketing markets and, if bracketing, identify the bracket limits They also identify congestion regions, pauses within trends and tendencies toward a change in market condition. These techniques apply to all auction-based markets. They may be used to detect trend onset by position traders, and by day traders to keep their trades with the trend or properly oriented within a bracket.