The Overlay Profile For Current Market Analysis Part 2 by Donald Jones and Christopher Young
Perhaps the best way to learn how to apply long-term overlays to trading is by example. Normally, the trader follows the overlay until an equilibrium time period is identified. The breakout is then noted, the trend is traded and, finally, a new equilibrium is reached and the process begins again.
The Treasury bond September 1988 contract from March 21 through June 7, 1988, begins with an equilibrium (bracketing) period (March 21-31), moves into a downward trend (April 4-May 31) and then rebounds from the trend, ending in a bracket (June 1-7). This trend period is characteristic of most trend behavior: a fairly rapid move, a consolidation, another move and another consolidation.
The market action at the end of the trend is similar to the end of many trends, showing a blow off phase with a rapid retracement of a substantial part of the total move. The entire move from 9000 to 8400 represents $6,000, of which about two-thirds occurred during the trend. The blow-off retracement recovered about half of the trend.