The underlying market structure is made from these oscillations or vibrations. What we are trying to do is to understand them. They are the origin and cause of market structure. All patterns derive from oscillations.

This is why you must learn about the oscillatory nature of markets. A market’s oscillations or vibrations will exhibit a rhythm. This rhythm has an inner harmony. Changes in the inner harmony provide clues about market behavior.

These oscillations take place in time and space. Their rhythm not only configures the different market patterns and structures, but also the market’s cycles and time forms. Discovering the vibratory rate of a market gives you the key to trading it efficiently. Each market is a law unto itself, and this appears as the specific personality of that market. Commodities have personalities of their own. For example, metals do not vibrate like grains. Stocks differ from financial futures.

Let us take a grain futures chart, such as a chart for soybeans, and compare it to a stock chart, such as that of MMM (that is, Minnesota Mining and Manufacturing Company). Their individual personalities will become immediately evident on first examination - intuitively - even before we know why. A more careful examination enables us to define the characteristics that make them different. For instance, the soybeans chart is cyclical in form with huge bull markets at intervals in time. The MMM chart resembles a continually ascending, noncyclical flow.

Why are they different? It is because their vibratory rates differ. They oscillate to different rhythms and in different ways.

This is why it is so important for you to become acquainted with their underlying natures and to try to understand them. You need to identify the specific vibratory rate of each market - its key number. By knowing this, you can unlock the market’s personality and trade in harmony with it.

This is not new. A trader and writer, R. D. Wyckoff, always had this vibratory rate in mind. He called it the personality of a market. This is why he advised others to trade only a few stocks, so that they would be able to understand the stocks’ subtlest behavior.

In his book on tape reading, Wyckoff provided a way to penetrate and understand each stock’s personality.² To Wyckoff, some stocks are leaders and others are followers. Some stocks behave in certain ways and others behave in other ways. What Wyckoff calls the personality of a stock has its origin in its vibratory rate.

Every stock and market vibrates in a unique way. This is the real key. Here is the secret of the markets. If we had to reduce all market structure and technical analysis to one thing, it would be the vibratory rate from which all fluctuations and movements arise. It is each movement’s specific vibration that gives it its specificity.

Now, where do these vibratory rates or oscillatory rates originate? In answering this, we arrive at a confluence of technical analysis, market structure analysis, and fundamental analysis. We find ourselves confronted by the market’s deepest core.

Why are oscillations the underlying foundation of a market? The answer is that oscillations comprise a primary law concealed behind a market. The rate of vibration expresses the true personality of a market in a single element - its fundamental conditions, technical conditions, and structure. They all stem from it.

When we talk of fundamentals, we are referring only to a perspective from which to evaluate a market. Technical aspects comprise another perspective and market structure comprises still another. What makes them one is the vibratory rate.

All these perspectives emerge from a unique, invisible rate of vibration. This is the essential and profound personality of a market.

We will not delve into the differences between technical and fundamental analysis and market structure here. We will approach this subject in a later chapter. We simply want to emphasize the importance of a market’s vibratory nature.

It is important for you to be able to define and describe the oscillatory nature of a market as the foundation of its market structure. Market structure is the price/time structure that forms the basis of technical analysis. This time/price structure is a flow that vibrates at its own rhythm. We need to understand this market structure and its vibratory rate as they make themselves apparent in the time/price flow of a market.

We can say that volume is also part of such a structure and that we cannot set it apart from the flow of price and time. This is why, for any given price at any given point of time, we have a definite and unique volume.

When dealing with futures, we can also add open interest.

In this book, we will only deal with the time/price elements that define market structure and cause its vibration rate to be evident by the sequence of its oscillations. This sequence will have a definite pattern. The oscillatory rate that appears in market structure must be precisely identified for any market, whether for stocks, stock sectors, commodities, financial futures, or indexes, etc. There is no market or anything that flows that is not subject to a given oscillation.

From an understanding of this law will come our understanding of markets and how to trade them. The vibratory rate will be our clue to understanding the language of the market. An inner law will emerge from behind every market. In the end, as Wyckoff suggested, you must be acquainted with the personality of each market that you will deal with. This will give you a definite advantage in your analysis and trading.

Now, let us turn to the fundamental market structure that arises from this vibration core.

By human intervention, the subjective element, we mean such things as counting waves or counting charted bars. For instance, Elliott wave devotees must count waves. They have arbitrarily fixed the number of waves at five. However, it doesn’t work. Also, where does a wave begin and end? You can have as many different answers as there are Elliott wave followers throughout the world. This is not what we want. We need something that is single, unique, and valid for all observers.

We do not mean by this that the Elliott wave theory is useless. There are some traders who succeed with it. However, it is somewhat of an art form that isn’t based on any generally agreed way to define market structure. Traders who use the Elliott wave, a theory that provides interesting market insights, would in this sense benefit from trading it in conjunction with the triad market structure model. This would give their trades an objective frame of reference that would allow them to avoid many false signals coming from incorrect wave counts.

Then, we have, for instance, bar counts. Gann, for instance, has swing charts that are based on two-bar chart counts or three-bar chart counts. This does work. Once you decide that you are on a three-bar chart count, everyone who uses this number will come up with the same answer.³ In this sense, Gann swings are objective, do work, and are very useful. Gann swings are a type of swing that is attributed to W. D. Gann, who was a trader during the first half of the twentieth century and born in the previous century.

However, this method still requires counting. In our method, there is no counting - of anything at all. The market, itself, decides its swings in a natural and completely objective way. The advantage of this procedure is that it enables you to obtain an objective market description that is valid for all observers of the market who use the same descriptive method.

This market model, which the triad makes possible, is so simple that anyone can understand it. It can be used in conjunction with other methods. In the right circumstances, this market model is very convenient and can enhance your trading and analysis.

Our model gives us a general background and a common market language whereby all methods can find a common ground. This enhances the positive features of those methods. You can trade, basing actions only on the market structure described by our model. You can also use our model with mathematical indicators. You can use bar counts or any market approach, system, or method. For instance, you can trade Gann swings, or indicators, such as stochastics or moving average convergences /divergences (MACDs). A moving average becomes an efficient tool when used in conjunction with triads.

In summary, every trading method is significantly enhanced when used with triads. Before explaining triads, let’s continue with our explanation of the fundamental market structure. Markets oscillate. The time/price flow of a market is far from uniform. It is not a line, but rather an oscillating curve. From this oscillatory curve, a market structure will arise. The oscillations within this market structure are called swings. The swings go up and down in an indefinite sequence.

The primal market cycle is composed of these indefinite upward and downward swings. Markets go up and down in a cyclical fashion. All free markets are cyclical in their structures - up, down, up, down.... Cycles exist and do work. We can be sure that an upward market will be followed by a downward market and vice versa. This was true yesterday. It is true today and it will be true as long as free markets exist.

These cycles can vary in length, from micro-oscillations to multiyear bull or bear markets. Also, they resemble Chinese boxes. An oscillation can contain many other oscillations or be contained within many other oscillations. They are fractal in their nature. A swing or market fluctuation is an oscillation. A market oscillation can be composed of other market fluctuations.

What is necessary to understand is that all cycles are oscillations and that all oscillations are cycles. Market swings are market cycles, irrespective of their amplitudes or lengths. Market structure, as defined by these oscillations, was correctly understood by Charles Dow, the father of modern technical and fundamental analysis.

Charles Dow was far ahead of his time. Surprisingly, very little has changed since he made his major discoveries. What Einstein is to modern science, Charles Dow is to modern finance and market analysis. An understanding of his market theory is a must for any serious student of the market. Let us briefly explore his main ideas concerning the structure of the market and his method to read the market’s mind.

For Charles Dow, market oscillations held the key to understanding the market. He developed a theory of markets that enabled the investor and analyst to understand their structure. The principles that Charles Dow discovered are universal and have passed the test of time. He developed a robust model. His theory was not developed systematically, but is found in the collection of articles that he wrote for the Wall Street Journal, and was later studied and developed by Hamilton and Rhea.

Now, let us examine Dow’s idea of market structure. For Dow, markets can be reduced to three kinds of movements:

These three movements have the following traits: first, each is an oscillation or, in market jargon, a swing; second, the smaller movements are contained within the larger ones. The daily fluctuations are contained in the secondary reaction and in the main trend.

Each of these three movements has a time span - years for the main trend, months for the secondary reaction, and less than one day for daily fluctuations. Each of these three movements or swings has a time/price ratio. These are the three kinds of waves on which the market is constructed. These three types of waves and how they are assembled provide the fundamental market structure. Let us examine each of these three waves.

The primary trend has a duration of several years. It is the market’s long-term tendency. There is no method to define its precise duration. However, the past provides some clues. This primary trend separates into a primary bull market and a primary bear market, each of which has three phases.

The primary bull market’s three phases are:

A moment comes when the market reverses itself and the primary bear market takes the place of the previous primary bull market.

The primary bear market also has three phases. They are the reverse of the phases of the previous bull market. The primary bear market’s phases are:

Each of these two main waves or market swings includes a powerful reaction that Charles Dow called the ‘secondary reaction.’

In the secondary reaction, the market retraces between 33 and 66 % of its primary movement. This retracing takes the form of a wave or swing in a direction opposite to the main trend. It is very often mistaken for a change in the main trend. Confusing and mistaking the secondary reaction for a change in the main trend is an error because the market, when the retracing ends, will resume its original main direction. The duration of this secondary reaction can range from many weeks to many months.

The third kind of wave or swing is the daily fluctuation. These swings are less than a day in length and are oscillations that Dow considered to be meaningless ‘wavelets.’ Each main market movement, with its secondary reactions, will encompass a total of five or six waves. This is not a dogma for Charles Dow, nor was it for W. D. Gann, for whom the market had between three and six or seven waves.

Charles Dow has given us a simple model that defines market structure with a minimal number of elements. This gave rise to his index, the Dow-Jones Index of Industrials and Transport. He used a sample of companies to represent and mirror the entire market. The behavior of this sample will be described with his three-waved market structure.

For Charles Dow, his index was a tool with which to observe market reality. With the Dow-Jones Index, he was able to discover the true tendencies of the market. It was a systematic index that enabled him to ‘isolate the daily fluctuations from the waves and the waves from the current.’

Charles Dow looked at market structure as being multilayered. To him, markets had different levels. With Charles Dow, we have a phenomenological approach to markets. This means that the perception of an event or phenomena is observer-dependent.

For instance, a market can be moving downward in the very short term, but at the same time going up in the medium term and long term. This depends on your position as observer. For a day trader, a market can be going down, while for a long-term investor or medium-term trader, it could be going up. This means that a market, in itself, is neither going up nor going down nor anywhere. Such qualifications as ‘up’ or ‘down’ are categories or attributes imposed by our minds as a function of our space/time positions as observers.

A principle emerges from this. It is that the observation of a market event or economic event is defined by the space/time scale of the observer. A market or an economic indicator can have an ascending vector in one time scale and a descending vector in another time scale.

This notion of scale is fundamental for the trader or investor. Often market participants are at a loss in relation to the time/price scale. By this, I mean that many people confuse time scale with price. For example, they may watch the news in the morning and hear that the Dow has dropped by 1 %. Therefore, they think that the market in general is going down. They do not realize that the market can be going up steadily and that it is normal to have downward and upward fluctuations as it moves up in price. Thus, they confuse a one-day reaction with the general tendency of the market. This is because the market can be going up relative to a given time window and down relative to another time window. In the daily chart and weekly charts, a market can be rising, while in the intraday 30-minute chart, it can be falling. To judge whether a market is going up or down, we must first define a time frame in relation to which the market is moving. For example, how often have we heard someone say in the middle of a bear market that the Dow is rising and that he has bought stock, although the rise was only a daily fluctuation and not a reversal of the main trend?

The market index that Charles Dow used as a model of the entire market was actually two indexes, an industrial index and a transport index. They worked together. His indexes enabled him to verify his market theory and to anticipate market behavior.

Charles Dow’s theory of market behavior is based on three movements, which, as we have already explained, define fundamental market structure and three postulates.⁴ Let us examine his three postulates:

William Hamilton, Dow’s disciple, used to call the index the market ‘barometer.’ This barometer must be used in conjunction with as complete a study as possible of the market and the factors that compose it.

The three postulates that we have explained imply that the Index is among the best of tools to use to anticipate the undercurrents of economic events. This is due to the fact that the Index integrates in its composite price all factors that determine market behavior. This integration includes all factors, whether known or unknown, in an objective way that cannot be manipulated.

Using the Index and market structure, Charles Dow was able to determine the direction of the market, using the principle of convergence divergence. In fact, he is also the creator of a method that we find applied now to other indicators. The two indexes, the industrial index and the transport index, must converge or diverge in relation to each other

We have convergence when the movement of one index confirms the other. If the industrials and the transport index are both rising in their primary movement, and then both reverse downward, we have a confirmation of the reversal - indicating a change in the main trend. In Dow theory, the behavior of one index alone is not sufficient. Both indexes are required to confirm a market reversal.

Divergence is the opposite of convergence. In this case, both indexes move in opposite directions. When one has reversed, the other continues in its previous trend. The meaning of a divergence is negative. If one index reverses and the other does not, it means that a change in the main trend may not happen, although it could happen. It is a signal of uncertainty.

An investor who had acted on the signals provided by Dow theory would have earned around 14 % per year on average. This would have been earned for only acting on the signals of confirmation of both the industrial and the transport indexes.

The results above would have been even better if, instead of buying the whole index, the signals were used to buy low-priced stocks with strong fundamentals. Fundamentals are also a tenet of Dow theory. Charles Dow is also the father of fundamental analysis. In fact, he combined the best of both - the technical and the fundamental - and he even delved into the psychology of investing.

Now, let us explore some of his ideas in the fundamental realm. For Charles Dow, fundamental analysis ruled over technical analysis. In the long run, prices will reflect values. Value controls price. Divergences are due to perceptual gaps, but sooner or later they will come together.

The real purpose of technical analysis is to anticipate price changes in order to be able to buy high-value, underpriced stocks when there is a divergence due to a gap in perception. This means that, when the public perceives all stocks as valueless, due to their state of fear or panic, combined with ignorance, some experts recognize the gap between price and value, enabling them to buy cheaply stocks that offer great value. This gap between price and value originates in a gap in perception by the general public. When panic has pushed valuable stocks down to rock bottom prices, we can buy them at the right time, thanks to the signals that the indexes give.

The converse occurs when the markets are exuberant and frantic speculation has created overpriced stocks. Then, as soon as the indexes signal a reversal, we can sell the overpriced stocks to repurchase them later at the right price - when prices are at, or below, par value.

We see that, for Charles Dow, technical analysis and fundamental analysis are like two sides of the same coin. Both are needed - one to describe market behavior and time our investment decisions and the other to make us aware of the real value of our investments.⁵ Therefore, the investor must be able to anticipate two things - changes in price using technical analysis and changes in underlying value using fundamental analysis.

The investor must be a thorough student of the market. He must know all factors, both fundamental and technical. Dow tells us that ‘the main purpose of study is to define, first, the value of the company whose stocks the investor has, and then the right time to buy.’ These two conditions define in a nutshell Charles Dow’s investment theory. Right value and right time make for a good investment.

Then Dow tells us about the right conditions for an investor. Here he dwells on the psychology of investing. An investor needs patience. Dow tells us that ‘the biggest profits come from the greatest patience.’ Also, he emphasizes that the investor must ‘sit over his investment for months or years’ to realize its full profit potential. Further, it is important that the investor does not become a victim of the nervousness that surrounds markets. He must be alone, isolated from market action, in order to remain serene. He must not let himself be provoked into doing something impulsively that would defeat his goal.

It is because of this that Dow tells us that the optimal conditions for investing are those of an investor who lives outside the city. This investor won’t fall prey to fear or be disturbed ‘by rumors and sudden price fluctuations.’ Dow tells us that the biggest advantage of an out-of-town investor, the advantage that prevents him from becoming a victim of fear, is that he is unable ‘to see the market.’

This kind of investor buys, according to Dow, on the basis of ‘demonstrated conviction.’ This is not blind faith, but a true knowledge that the price is below the real value and that prices will sooner or later reflect the real value. The investor is a man of knowledge. He knows value and can look beyond appearances. Even if prices drop for a while after he has bought, he knows that they must come back eventually to their real values.

In Charles Dow, we find a complete approach to markets. He includes all factors and uses them in a simple and efficient way. His approach to market structure, defining it as an integration of waves or oscillations, is the key to our model of market behavior. However, we must also say that market structure by itself is not everything. Market structure is a tool to help you understand the real world of trading. As long as you do not forget this, you will be able to use market structure to your advantage.

Let us return now to fundamental market structure and consider time. Time’s behavior is important. Time also oscillates. Time oscillations are indivisible from price oscillations; that is, time oscillations and price oscillations are so interrelated that, when price is considered, time should also be considered and vice versa. Every price fluctuation takes place in time. Changes in price always imply changes in time. Time changes show definite patterns.

Every fluctuation or swing is cyclical. Upswings are always followed by downswings. There is a constant cycle. However, these fluctuations are not random. They follow patterns. Most swings will be contained within a price/time range. At a given level of volatility, upswings and downswings will have similar lengths and times. This is true not only of small fluctuations, but also of large price swings that take years to develop. Bull markets and bear markets are often similar in length.

This cyclical behavior in time is natural since it follows the cyclical behavior of price. A study of these long-term patterns will prove to you the existence of market cycles that belong to definite time lengths.

These time cycles, swings or waves, can be static or dynamic. A static cycle has the same recurring time length, while a dynamic cycle changes its length according to an inner law. An example of a static cycle is a ten-year cycle, while an example of a dynamic cycle is a Fibonacci time cycle.

Cycle clusters occur when many cycles of different lengths begin or end around the same date. When these dates arrive, significant events occur in markets. A significant event, for example, might be the end of a bull or bear market.

The past will repeat itself in the future, which will then become the present. All past events will be repeated at some time in the future. Bull markets and bear markets, recessions, and expansions will occur again and again.

In all these repetitive cycles, there is an element to consider. We must never ask the past to repeat itself exactly in the future. Here comes the rule of analogy. Events that repeat in cycles are analogical, not identical.

When we compare two similar events, we must look for their differences and not simply their identities. For example, if we know that a bear market might be just around the corner and that it might be similar to another bear market in the past, we must ask how it will differ this time. We must be able to pinpoint the difference in the similarity. This will put us ahead and we will avoid becoming rigid. Nothing repeats itself twice in the same way. Never.

Time, therefore, is an important element in market structure. Measuring time periods and identifying the difference in their similarities is as important as measuring price waves. The market is an interrelated whole, as Charles Dow explained. Nothing must be excluded. It is important at all times to keep an open mind and to not fall captive to market dogmas that could blind us to market reality.

Now, let us return to market structure.