Active-Trader - Voodoo Clues - Part Two

Welcome back Active Traders and Wealth Builders.

In this post, I want to delve further into how the Voodoo lines are calculated.  We know from last week's post that Voodoo lines are a very valuable tool for identifying hidden areas of support and resistance.  While I did not purchase the indicator, I have seen it work first hand many times with almost eerie accuracy.

Further research indicates the Voodoo lines indicator was originally called FibGrid and marketed by First Wave Trader.

The name FibGrid in itself gives some pretty good clues as to how the indicator works.  I struggled with some Fib Tools in ThinkorSwim and then did what every good information worker does - they just ask Google!  Using that I came across a marvelous video found here which basically lifts the lid on the way the indicator works.  Its based on Elliot Wave principles, so if you are not familiar with Elliot wave, do some research here.

1) First step is to zoom out to a weekly or larger time frame and look for a major low that corresponds with the bottom of wave 1 in an 5-wave bull market advance

2) Second, identify the point at which wave 1 ends and gives way to wave 2.  In the example above, that corresponds to point 1 on the chart shown in white.

3) Next, use the Fibonacci extensions tool to measure the distance from the low up to the top of wave 1.  That corresponds with 100% of the high to low move of wave 1.  The low itself represent the first red line and the top of wave 1 represents the second red line.

4) Next step (and here's where it gets really cool), configure your Fibonacci extensions tool with these ratios 0%, 100%, 161.8%, 261.7% and finally 423.5%.  Those 5 red lines represent the 5 most powerful lines in the sequence and will act as areas of both support and resistance.

Knowing that, I figured it would be a snap to fire up ThinkorSwim or Tradestation and replicate the results I grabbed from some screen shares from Simpler Options and videos shown by John F Carter.  This is where it got sticky - where exactly does wave 1 begin and end?  Are the intra-day high and low values included, or just the closing values?

With some trial and error, I was able to replicate the red lines for SCTY with about 10 cents or so.

This is a marvelous discovery and probably the biggest revelation about and indicator since I cracked Range Bands earlier in this blog.

Check back later for part 3 where I delve into the green and white lines.