T-Theory Concepts

This site is dedicated to T-Theory. Terry Laundry discovered Magic T Theory almost 50 years ago. I have taken some of Terry Laundry’s concepts and use them my way for investment purposes. In this section, I will discuss some of the basic concepts that I use in my methodology.

The main concept of T-Theory deals with the Magic T, a concept which Terry suggested may be a natural law. Magic T’s offer a cash buildup period, followed by a period of equal time that provides strength while cash is being put to use in a cash disbursal. When a T ends, expect the period of strength to end, and for the return on equities not to exceed that of the ten year Treasury.

The period of cash buildup may show different types of weakness–it may be in price itself, or it may be in a divergence between price (which can continue to move up) and technical indicators which show themselves to be the forerunner of weakness. This is the difference between a Price T (where price move lower during cash buildup as it shows weakness until it reaches the center post or bottom of the T, and then rises up for an equal amount of time in strength), to a Volume Oscillator T (which may show a weakening in the Volume Up/Volume Down MACD while price continues to move higher, lower, or flat before reaching that vertical center line of a new period of strength).

I suggest every reader of this site reads Terry’s “A 1997 Introduction to T Theory” (which you will find in the menu) as he explains T Theory, and shows how the concept of Magic T’s progressed from Price T’s to Advance/Decline T’s. When Price T’s began giving less information for shorter or longer term investments, he moved on to Volume Oscillator T’s. But all these different Equivalent Time concepts have value on their own.

Price T

An example of a Price T can be found in my post Unbelieveable of October 3, 2020. The chart attached to that post shows the creation of a T with an end date of October 16. This price T existed even though there was no Volume Oscillator T, but recognition was based on the fact that the VO had recovered the zero line from -115, and that price had recovered from a move below the mid-Keltner line.

Removing longs on October 12 from Oct 5 led to a gain of roughly 150 SPX points.

Volume Oscillator T

The Volume Oscillator of a VO T is a derived technical indicator. It is based on the MACD of NYSE Advance/Decline Volume. The most recent entry on this chart has been fairly inaccurate since the Wall Street Journal changed its market data page a few years ago. I now supplement this chart with data from this mcoscillator.com page as it gives a better view of the most recent entry, and provides confirmation of any new T’s.

VO T’s became important after Price T’s stretched into longer bull and bear markets. I believe that Terry was searching for a way to fine tune the visibility of T’s to increase their profitability by finding shorter T’s within larger ones.

These VO T’s also use Keltner bands to define standards that an asset should remain within. The mid Keltner line becomes an important part of this structure because it should lie on the Optimum Moving Average. (This Optimum Moving Average is basically the Moving Average which is most often tagged by Price.) In a positive trending market, there should be many bounces off of this line. In a negative trending market, the mid-Keltner is resistance. Using this as a buy point in an uptrending market allows one to be prepared with an entry point, just as using a move above the upper Keltner or envelope band in order to wait for a reversal back to the midline can help protect profits, while waiting to see what the future may bring. If my memory serves me correctly, Terry believed that you could only have smaller T’s on the right side of a larger T. (More on this below.) These shorter term T’s should find great support at a mid-Keltner line.

Additional Concepts

I am a conservative investor. In order to protect capital, I have created some of my own rules. One is that I like to see at least a 100 point difference between the last high peak of a descending VO to the new center point of a T. I tend to avoid T’s that don’t show this much of a cash buildup.

One of the most important concepts that Terry offered was preparing to enter a trade as close to the center post as possible. Indeed, finding that center post is the Holy Grail. By drawing trend lines of descending peaks and ascending support on the VO, you hope to work out when the next advance will begin. An example of this was the chart posted on Halloween of 2019, when I became aware that there would be an event around mid February of 2020.

I have been asked how I recognize new T’s inside of larger T’s. This is part of the ‘art’ of T Theory. I believe in the Elephant concept of creating art–how do you carve an elephant from a block of clay? You remove everything that doesn’t look like an elephant. It’s valuable to take a fresh look at your charts by removing past annotations to get a fresh point of view. Has the forecasted future maintained its relevance to present price? Clear the decks every few months.

Defining a new T is also a bit of an art, but one that gets easier with use. They need to be recognized, but they also need to be confirmed by the movement of price and the Volume Oscillator itself. New T’s are best when they have made a solid move below the zero line. Once you reach a low in the VO of -100 and move above the zero line, you have more than 50% chance to being inside a new T. New T’s are fully confirmed when the Volume Oscillator moves below the zero line, and then moves above the last descending high prior to moving below the zero line.

new T Formation

The T that was moving forward until January 6 2021 was confirmed in early October 2020. The VO moved from about +40 in July, went below the zero line in September, and on October 9 made a new high.

Once a new T is confirmed, it is very likely that there will be a secondary entry point. Usually, after the VO makes its first new recovery high, it will once more at least tap the zero line, if not go through it as it has in the above formation. If you want to use an alternative concept of price, consider this move lower after an initial move up as an Elliott wave 2. It gives you the opportunity to profit from waves 3 and 5. As you can see in the ‘new T Formation’ illustration above, the fact that the VO maintained a higher low is a positive right now. And it also confirms that this is a smaller T within the larger T.

Bear T

The T in the above example will become a Bear T only if the Volume Oscillator breaks below its last low of -64, and heads down from there. Bear T’s are rare, especially in a Bull Market environment. They collapse, but have a rally from hell near its end before one final collapse. That is what happened in March of 2020. We had a Bear T that was scheduled to end March 19, and that was followed by an important low a few days later.


The Present Shape of Things, As Prsented in Late 2020

From November, 2020

A reminder that the ‘improved’ chart that I am now following shows that January 6 (2021) is not the final conclusion of this present T. In fact, we have until the end of April. There are 3 shorter term T’s that have been created during this longer period. One had its left arm beginning in April, one in June, and one in October. Two of these have finished successfully. The two larger T’s do not look to be in danger of breaking down.

This site has been up for almost a year. If you read from the bottom up on the Post Page, you will be able to see the history of how T Theory (as I use it) navigated the last few years.

I was lucky to have read an article by Terry Laundry in the mid-2000’s, and even luckier to have been a client. T Theory can be used as I use it for long term investing, or as traders like Marty Schwartz (known as Pitbull) did. In Marty Schwartz’s book on trading, he makes note of how he found this strange man living on Nantucket, this former Marine who gave birth to the theory of the magic T, and how it changed his life. Can it do that for you? One needs to know who he is, and what he wants from the market. I hope you have found this year’s journey interesting.

Theory of Complex Versus Simple Structures in Oscillators

added 2-28-2021

I have recently come across an article that will put a new weapon in the T-Theory arsenal. I believe Tom McClellan is on to something important in this article. It is the Theory of Complex Versus Simple Structures in Oscillators.

The concept of Complex formations showing strength, and Simple formations showing weakness is extremely powerful. Removing all the Volume Oscillator T’s from the chart, I have circled areas showing the Complex (Green) and Simple (Red) Structures. Let’s consider the area above the VO zero line to be a positive, bullish environment. If you have a Complex Structure in that area, you have a “true” bullish environment. If you have a (red) Simple Structure, you have a weak bullish environment, one that has the potential for price to reverse lower. On the other hand, in the area below the VO zero line, a (red) Simple Structure means that you have a move lower that can reverse higher imminently, while a (green) Complex Structure means price can continue lower. It appears that a Complex Structure that is moving higher from below the zero line can also portend higher prices, but I am not ready to fully concede this point. And I am not unaware that the December 2019 Simple Structure did not create a similar move in price. There are no 100% indicators.

Green above the blue line bullish Red above the blue line weakness. Green below the blue line weakness, Red below the blue line reversal higher probable

Right now, we have what looks like a weak bearish move downwards. If it continues straight down without creating a complex bottom, this could be a short lived reversible low. But we need to reverse in the next few days.

Closer View

I have added this chart to the Menu.

Using Short Term T’s for Trading

In addition to the way that Terry Laundry used T’s for investment assets, you can create short term T’s for trades. In fact, Marty Schwartz, AKA as the trader Pitbull, used T’s in that manner. I don’t recall Terry ever using T’s to short an asset class. He would recognize a T and the type of T it was (bullish or bearish), but he would wait for the opportunity to invest in assets that had arrived at the centerpost of a T.

The basic premise of T-Theory is that an asset will spend as much time moving up as it has spent in the past moving down. The idea, as he wrote about it, was to be prepared to do what your friends will think you crazy for doing. He based this on his military experience, as he explained in his 1997 paper:

“It takes a special state of mind to “sign up” for a short boat trip, in a flimsy landing craft, to a beach completely controlled by hordes who have anticipated your arrival and have set up every imaginable way to do you in. Buying into major market opportunities presents a similarly discouraging picture. You may have good reason to anticipate profits, but if a great opportunity does indeed exist, nearly everyone will be against you, including your friends, and the predominant opinion expressed by your peers, including people you respect, will be that you are embarking on a foolhardy enterprise.”

Let’s put that into a simple practical thought. If you consider that the positive effect of price moving lower is creating a cash buildup, then the negative effect of price moving higher is the depletion of that cash buildup.

But you can use what you learn about T’s to trade on a short term basis. Let’s take a look at an hourly chart of Price and the Volume Oscillator on Friday morning:

The above chart shows a short term price T that is ending. Its left end is May 10, and it lasts for 14 days. We take the spike high of 514 as the center point for this short term T, if we are looking at it on Friday morning. This is a higher peak than 378 and that confirmed the T. But we should not expect a good outcome for this T because we had a lower low of -501 on May 20. On Friday morning, I posted this chart on elliottwavetrader.net with the warning that this T would end either Friday or Monday. Looking at an unmarked Volume Oscillator gives you an opportunity to judge the VO’s relationship to price more easily. That live hourly chart can be found here.

Let’s take a closer look at this same chart in regards to what happens at the end of a peak. A good T will have price continue to rise after a VO peak, but that is not always the case:

You can also review these peaks in the VO using the Complex versus Simple Structures concept:

In addition to the VO chart, there is an hourly companion chart that can be reviewed as well. The best opportunities for long trades occur with lows in MFI and RSI:

I’m not trading as much as I used to. I’m more interested in staying away from it in fact, and creating the swing trades that will outperform. But I hope that some of you find use out of this post.