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Will 2010 mark the end
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PRODUCT REVIEW
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Traders’ Resource
Exchange Traded Funds 79
Mutual Funds 82

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 CONTENTS APRIL 2010, Volume 28 Number 5

FOREX FOCUS 42 Signal Processing Basics

by Glenn Barlis
10 Trading Automated This is the first of a series that
Spot Forex Systems examines stock price analysis using
by Joseph James Gelet the mathematical methods of signal
Want to trade spot forex? With processing.
proper risk controls, this method can
be used like options to take a posi- INTERVIEW product REVIEW
tion in the market. 60 • Trading The Pristine Method Course,
50 Juggling Dynamite With Part 2
FEATURE ARTICLE Danielle Park Review: Trading course.
14 Kondratieff Wave Comeback by Jayanthi Gopalakrishnan
and Bruce Faber
by Koos van der Merwe
Attorney and Cfa Danielle Park
DEPARTMENTS
Will 2010 mark the end of the reces- 6 Opening Position
is the author of the best-seller
sion? Use the Kondratieff wave to 8 Letters to S&C
Juggling Dynamite and a popular
find out. 67 Traders’ Tips
blog, and she’s got a lot to say about
the current financial situation. 85 †Traders’ Glossary
22 Modified Volume-Price TIPS
88 Trade News & Products
Trend Indicator 59 Explore Your Options 90 Advertisers’ Index
by David G. Hawkins by Tom Gentile 90 Editorial Resource Index
Use this indicator to detect what the Got a question about options? 92 Books for Traders
insiders are doing while they are 93 Futures Liquidity
doing it.
64 Futures For You 94 Classified Advertising
by Carley Garner 98 At the Close
30 Bear Market Survival Kit
Here’s how the futures market
by Anthony Trongone really works.
What can you do when the market
quickly changes direction? TRADERS’ RESOURCE
33 Q&A 79 Exchange Traded Funds
by Don Bright Similar to mutual funds in that they
provide diversity, they can be traded
This professional trader answers on the exchanges.
a few of your questions.
83 Mutual Funds
34
WM Automated Trading
And here’s a sample of mutual
by John Devcic funds.
Can a self-directed trader use a
computer that trades on its own?

38 RSI Trends
by Cory Mitchell
What does the behavior of the
relative strength index within a
trend tell you about the strength
of the trend?
This article is the basis for Traders’ Tips
TIPS
this month.

This article – and articles like it – can be n Cover art: Lisa Haney
WM found online at www.working-money.com
n Cover concept: Christine Morrison/Lisa Haney

Copyright © 2010 Technical Analysis, Inc. All rights reserved. Information in this publication must not be stored or reproduced in any form without written permission from the publisher. Technical Analysis of
Stocks & Commodities™ (ISSN 0738-3355) is published monthly with a Bonus Issue in March for $64.95 per year by Technical Analysis, Inc., 4757 California Ave. S.W., Seattle, WA 98116-4499. Periodicals
postage paid at Seattle, WA and at additional mailing offices. Postmaster: Send address changes to Technical Analysis of Stocks & Commodities™ 4757 California Ave. S.W., Seattle, WA 98116-4499 U.S.A.
Printed in the U.S.A.

4 • April 2010 • Technical Analysis of Stocks & Commodities

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transaction audit services. For US stocks (31 cents per 100 shares better), the analysis included all market orders of 100 shares or more, up to 10,000 shares
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 April 2010 • Volume 28, Number 5
March 2006 • Volume 24, Number 3 O
Opening Position
PENING POSITION

The Traders’ MagazineTM

The Traders’ Magazine TM

I
EDITORIAL
EDITORIAL
[email protected]
[email protected]
Editor in Chief Jack K. Hutson

O
Editor in Chief Jack K. Hutson
Editor Jayanthi Gopalakrishnan
Editor Jayanthi Gopalakrishnan
f you look at the state of the US financial
Managing Editor Elizabeth M.S. Flynn
Managing Editor Elizabeth M.S. Flynn system, what you
nce again we gotare likely to findof
a reminder is that
just
Production Manager Karen
ProductionManager KarenE.E.Wasserman
Wasserman the underlying fundamentals don’t present a
how sensitive the financial markets
Director Christine
ChristineMorrison
picture
are. Wethat would sendselloff
me eagerly sprinting to
Art
Art Director Morrison saw a major in the Japanese
Graphic Designer Wayne
GraphicDesigner SharonShaw
the equity markets. All you have to do is looka
Yamanaka
Staff Writers
Editorial Dennis
Intern D. Peterson,
Emilie Rommel Bruce Faber
markets, which — as expected — triggered
Webmaster Han J.David
Technical Writer Kim Penn at a chart of
domino the total
effect on credit
markets in the private sector
throughout the
Contributing Dennis John
Staff WritersEditors
Anthony W. Warren, Ph.D.
Ehlers, Bruce Faber
D. Peterson, and compare it to the national Gdp. You’ll see
world. Add disappointing earnings numbers
that
fromtheUS credit just keepsand growing and growing
Webmaster Han J. Kim
corporations you have a situa-
Contributing EditorsDon
ContributingWriters Bright,
John Thomas
Ehlers, KevinBulkowski,
Lund,
Martin
AnthonyPring, AdriennePh.D.
W. Warren, Toghraie
and growing. And as that credit keeps growing,
tion that just got worse. So what started off as
Contributing Writers Don Bright, Thomas Bulkowski,
Martin Pring, Adrienne Toghraie
we have seen financial crises come and go. And
a strong year ended up correcting, and rather
OFFICE OF THE Publisher every
rapidly.time there admit
I must is a crisis,
that we see some
although sort
correc-
Publisher Jack K. Hutson of a federal bailout and the Fed keeps interest
tions are healthy for any market, when you haverates
a 2%lowdrop,
in theithope
gets youof rescuing
thinking. the
Credit OFFICE OF Eades
Manager Linda THEGardner
PUBLISHER
PublisherEngineer
Industrial Jason K. Hutson
Jack K. Hutson economy. We saw it in the savings & loans crisis in the late 1980s to the early
Prior to the Federal Reserve’s F OMC meeting, I usually take a look at 1990s,
the yield
Credit Manager
Project Sean M.
Engineer Linda
Industrial Engineer
Moore
Eades
Jason
Gardner
K. Fisher
Hutson
the Ltcm
curve. At bailout,
present,the it’sdotcom
lookingbubble,
a littleandflat,more recently,
and given thatthethesubprime bubble. But
general consensus
Agnes
how long can the Fed keep doing so in light of the growing credit?
Accounting Assistant
Project Engineer Sean M. Moore is that the Fed is going to tighten at their January 31st meeting, I am concerned
Controller Mary K. Hutson
Accounting Assistants Jane Leonard
Controller Mary K. Hutson
thatInthe
Federal Reserve
yield curve may chairman
be heading BeninBernanke’s
the direction testimony
of beingon February
inverted. And 23,if 2010,
that
Advertising Sales
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flat.
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happen, of Bernanke’s
it doesn’t mildlythe
hurt to expect optimistic
worst. Ifwords,
nothing weelse,
have
National Sales Manager Edward W. Schramm
[email protected] yet to see any confirmable economic recovery. We need to see demand picking up,
it helps to preserve your capital.
Classified & Web
National Sales Sales Chris
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Edward W. Schramm we need to see more consumer spending, we need to see people borrowing again,
Production Web Sales Karen
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and we need to see signs of stronger growth. But the main challenge in a growing
Chris J. Chrisman

So
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Circulation economy iswith to notthatgetintoo hungyou
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why it’s forget thatto what goesauptrading
design must
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theIt’s normalistoeasy,
markets see thisthecycle
number of growth
of optionsfollowed by a crisis,
available and although
increases. This makes crisesit
Subscription Sales
Subscription Manager Sean
Karen M. Moore
Adams-Thomas, in the markets are not desirable, their absence would take
important to be thorough with the different types of orders, front-end software, away the character of and
the
Teresa Shockley,
Assistant CarmenManager
Subscription Hale Sheila Peterson
markets. The financial markets wouldn’t be as exciting
trading systems that are out there. Lee Leibfarth, in his article “The Automatedas they are if they didn’t go
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T
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8 • March 2006 • Technical Analysis of STOCKS & COMMODITIES

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 The editors of S&C invite readers to submit their opinions and information on subjects
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Tell us about it. Without a source of new ideas and subjects coming from our readers, this
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009 • Technical Analysis of STOCKS & COMMODITIES
column do not necessarily represent those of the magazine.—Editor

en Moore with approval or changes: SOFTWARE ISSUE copy? I have had great joy working with
Editor, this software, and with the source code, I
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Louis Witte porting that software. We do not know
Netherlands of any sources for the actual source
code. Perhaps someone reading this will
Our 2010 Bonus Issue, which includes know something or will write in with a
the 2010 Readers’ Choice Awards for suggestion.—Editor
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trial subscription. The issue is also avail- Garth Maynard
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section. It is not a ranking or rating of Editor,
software, but it is an extensive list of I would like to see more articles in your
software used in our industry. magazine on the details of put/call strat-
As for analyses of software, we publish egies (such as spreads, covered calls,
in-depth reviews of software or websites leaps, and so on) for option trading.
related to technical analysis in every Grant Sneed
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I was wondering if you
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modities for about 30 years, for most
could help with this of that time as a subscriber. For many
Winner question. Back in 1994, years now I have been continually frus-
2003 - 2004 - 2005 Telerate sold the rights to the CompuTrac trated by your abandonment of detailed
2006 - 2007 - 2008 software to Stratagem Software. But mathematical explanations in favor of
2009 Telerate retained the source code to the code presentations. I think at one time
product. Stratagem renamed the product you did use Excel for these presentations.
Artificial Intelligence Software as Smartrader. Stratagem stopped oper- In any event, many of your readers may
NeuroShell Trader Professional ating back in 2006. I have been able to keep be satisfied, but folks like me without
my copy (Smartrader) going, but now, the needed software are left out; it is just
www.NeuroShell.com with computer and Windows updates, it too expensive to obtain the software and
301.662.7950 will no longer work. Can you help find learn the code to find out what the article
For more information circle No. 26 the source code so that I can update my is saying, whether it makes sense, and
8 • April 2010 • Technical Analysis of Stocks & Commodities

Letters 1004_New-124.indd 1 2/25/10 2:46:01 PM

 LETTERS
whether the technique tests out.
I have gotten to the point where the
value of your magazine to me is marginal
at best; I haven’t written before because
I assume you know folks like me exist,
but you have decided it is more profitable
to present the mathematical explanations
in some form of code currently in use
rather than the math itself and/or rather
than some explanation that would be
generally helpful. But before I end our
long association, I am moved to inquire
why you follow this path, whether it is
permanent, and whether I am missing
some economically reasonable route to
an understanding of your pieces.
L. Grapentine

First, thank you for reading and sub-

scribing to Stocks & Commodities
for so many years. We appreciate your
loyalty and value feedback from long-
time subscribers.
This is a topic that has come up in
our Letters To S&C column from time to
time over the years. Some readers write For more information, visit the S&C ad index or circle No. 25
in appreciation of the mathematical or
statistical nature while many others
complain of too much math and the level FXCM’s Award Winning Forex Platform
of difficulty.
However, code has been an integral
part of this magazine from the start (with
Basic being the most likely programming
language you’d find in the early years).
Since an important part of technical
analysis is being able to test a technique,
with computers aiding this endeavor, there
has always been an interest among techni-
cians in coding techniques for convenient
implementation and the ability to test and
backtest techniques on data sets. (The
very first issue of this magazine featured
three pages of Basic code to implement
a fast Fourier transform, and a floppy
disk containing the code was offered to
users.)
You are correct that in the 1990s, you
were more likely to find sidebars in ar-
ticles with Excel spreadsheet implemen-
tations, given the advent of spreadsheet
software at the time, the readability of
its code, and its accessibility. But today, www.fxcm.com/scawards
there is much more technical analysis 1-888-508-6739
software available than ever before, so WARNING: Trading foreign exchange on margin carries a high level of risk and may not be suitable for all investors. Before deciding to trade
most authors and readers are likely to foreign exchange, you should carefully consider your monetary objectives, level of experience, and risk appetite. The possibility exists that you
could sustain a loss of some or all of your deposited funds, and, therefore, you should not speculate with capital that you cannot afford to lose.
Continued on page 76 For more information, visit the S&C ad index or circle No. 12
April 2010 • Technical Analysis of Stocks & Commodities • 9

Letters 1004_New-124.indd 2 2/25/10 1:07:11 PM

 Like Options, But Not
Trading Automated
Spot Forex Systems
Want to trade spot forex? With proper risk controls, this appreciate greatly. Options are considered sophisticated, and
SCOTT ANDERSNON

method can be used like options to take a position in the in many ways they are. Although it is easy for anyone to open
market. an option account and trade, strategies involving options can
quickly become complex.

O
by Joseph James Gelet Some exotic options are customized to meet the demands
of traders who want to take specific views of the markets.
ptions offer traders a unique way to take a position in One is the double no-touch, which pays off if the market
the market not offered by traditional markets. Options does not touch the two outlying prices. This is betting that
have certain features such as static cost of the option, the market will stay within a range. During short periods
which quantitative analysts and portfolio managers of time, this can be highly successful, such as during a
10 • April 2010 • Technical Analysis of Stocks & Commodities

+Gelet.indd 1 2/25/10 1:22:27 PM

 FOREX FOCUS GRID TRADING STRATEGY

1 Let’s say you start by buying and selling a currency pair with a
grid leg of 100 pips.
week where the market is waiting for news announcements
2 Assume price is at 1.0500. It then moves to 1.0600, a 100-pip
and lacks volatility and volume. However, it is sometimes
move.
difficult to find liquidity for such short-term options, where
an automated spot system would be valuable. It is more 3 Your buy position shows a gain of 100 pips and your sell
difficult to win using this strategy over a longer period of position shows a loss of 100 pips.
time, such as months. However, there are many reasons that
the market will be in a defined trading range, so you should 4 You cash in on your buy position, which adds 100 pips to your
explore all possibilities. account.

Grid trading system 5 You buy and sell again at 1.0600.

A grid trading system, as it is referred to by foreign exchange
6 Assume price moves back to your original entry point, which is
traders, places orders above and below the market every 1.0500.
specific number of pips (the number of pips can be adjusted
according to the pair of currencies traded). You sell above the 7 Your second sell position has now gained 100 pips and your
market and buy below. As long as the market is in a trading second buy position shows a loss of 100 pips.
range, the strategy will never lose. Once the pair starts
trending in either direction, the strategy will begin to open 8 You cash in on your second sell position.
more and more losing positions until the total drawdown of
the system becomes unmanageable or wipes out the account 9 You now have cashed 200 pips.
balances. Horror stories about accounts being wiped out and
10 Your original sell position has now moved back to its starting
other personal experiences have allowed traders to brush off point. In other words, you have broken even on this position.
these systems as useless.
11 So far, you have gained 200 pips, lost 100 pips, and broken
Using them like options even, giving you a net profit of 100 pips.
These systems can be useful with proper risk controls and
can be used like options to take a position on the market.
The most important feature is account protection, or global of an option. Since this is a new type of trading, terminology
stop-loss, that will close all trades if the open drawdown of does not exist to describe this for automated spot forex
the system is greater than what the value is set to. Let’s say it systems.
is set to 1% — the strategy will trade and win as long as the While this strategy is similar to options, the trader isn’t
pair is in the range. The trader knows he is risking only 1% actually paying a premium. It is simply the loss he is willing
of his account, which is similar to a vanilla long call option, to accept to get into the trade. He is paying 1% to gain 3% or
which would have limited risk (limited to the premium of the 10%.
option) and unlimited reward. Two factors will determine the profitability of this
If a trader has $100,000 in his account, he would be strategy:
paying $1,000 to earn an unlimited profit. Of course, that’s
1 The definition of the range, and
theoretical. The trade will come to an end when the pair
resumes trending. But theoretically, profit is limitless as
2 The number of times the market moves up and
long as the pair stays within the trading range. This is why
down within this range.
options have such a high payout for in-the-money options. In
this example, the trader will make $200 per trade (100,000
By the latter, I don’t mean volatility, which is measured by
standard lot size x 20 pips x $10 per pip). Once five trades
the total amount the market goes up and down.
have closed, if there is no open drawdown, the trader has
When playing options, you should play both extreme ends
paid for his trades and all remaining trades are pure profit.
of the curve:
The value of this strategy is that once 1% is made, the rest
is pure alpha. The total loss is limited to 1%, but it could be n Low-risk, very low yield trades, such as delta-
0.25% or 0.5% in the event that the trend forms before the neutral option strategies that may take advantage of
trade pays for itself. certain types of volatility
As long as the market stays in the range, the strategy
continually profits. This can be compared to the time value n Low-risk, low-probability, high-return black swan
trades.
It’s difficult to trade when the Here’s an example
market is not moving, but a strat- Let’s say you applied a grid trading system on the euro/Swiss
egy like this one will work well. franc (Eur/Chf) pair on August 24, 2009, with a strategy
stop-loss set to $25 or 0.25% (the account has US$10,000).
April 2010 • Technical Analysis of Stocks & Commodities • 11

+Gelet.indd 2 2/25/10 1:22:51 PM

 (EURCHF AO-FX - EURO/SWISS FRANC, D) Dynamic, 0:00-24:00
Bollinger Band (20, 2, C)

Volume
Momemtum (1n, C)

01 08 15 22 29 06 13 20 27 03 10 16 24 31 07 14v

eSignal
Jun Jul Aug Sep

Figure 1: eur/chf. Since June 18, 2009, the EUR/CHF has traded between 1.5365 and 1.5105, which is a 350-pip range. You can use this range to set your grid levels.

The strategy placed 24 trades until it was stopped out on always in a historical range, even if the width of the range
September 2, 2009, for a total profit of $7. The profit includes is 4,000 pips. A range that wide would not provide ample
$25 in booked losses so the gross profit was roughly $32. opportunity for a grid trading system. In the case of Eur/Chf
The average profit per trade was $1.85, or 20 pips. Due to the (Figure 1), since June 18, 2009, it trades between 1.5365 and
account size, micro lots with a $1,000 size were used, with 1.5105, a 350-pip range. Knowing the 350-pip range, the
roughly 0.10 per pip. grid levels and account stop-loss can be set accordingly.
This shows it is possible to execute this strategy
successfully. This is a good trade with a good outcome. A On the grid
wider stop-loss would have allowed the strategy to continue This strategy can be used
trading, but it served the account well by limiting the together with other strategies.
losses. While a $7 or 0.07% profit is not much, it happened It can have an extremely
in a period of two weeks using a low trade size for testing short-term time horizon.
purposes. This is just one example of how to use a system For example, if the market
like this, and of course, a larger size would have achieved a is quiet due to an upcoming
larger profit. data release, a system such
By using a $10,000 mini contract instead of a micro, a $70 as this would trade well until
profit would have been achieved with a total $250 in risk. In this the release is announced and
case, the math involved in calculating risk is similar to options the market starts moving. It’s
in that the trader is risking $25 to gain back $25 and have a $7 difficult to trade when the
profit with the potential to achieve $100 in profit or more. market is not moving, but a
Of course, this strategy could not be applied to any currency strategy like this will serve
pair under any conditions to get the same result. The pair chosen, this situation well.
and the market conditions, was highly dependent in achieving
this result. However, the same is true for options. Randomly Joseph James Gelet is the president of Elite E Services, which
picking option strategies will not achieve a good result. develops automated systems for the forex market, available
A trader using this system must identify a flat or ranging at http://eliteeservices.net. Eesfx, www.eesfx.com, is an
market by looking at the average volatility over the past online traders’ portal where users can download strategies
five trading sessions, and calculating what he expects in the free. The code for this article can be downloaded at http://
next five trading sessions in terms of volatility. This can be eesfx.com/eesfx/index.php/docs.html; look under “Expert
done either by experience or using indicators that identify a Advisors — MT4.” In addition, Ees offers market analysis
ranging market. and consulting, available through www.eliteforexblog.com.
Determining the range will depend on the currency pair. ‡eSignal
It should be compared to its historical behavior; any pair is ‡See Editorial Resource Index S&C

12 • April 2010 • Technical Analysis of Stocks & Commodities

+Gelet.indd 3 3/2/10 4:20:34 PM

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 14 • April 2010 • Technical Analysis of Stocks & Commodities

+1004 Merwe_New.indd 1 3/3/10 8:11:30 AM

 CYCLES

The Boom & The Bust, Revisited

Kondratieff Wave
Comeback
Will 2010 mark the end of the current recession? is not a trader should remain in the safest possible
Use the Kondratieff wave to find out. cash equivalents,” he said in his classic Elliott Wave
Principle, cowritten with A.J. Frost.

In I have always had a great respect for Prechter. Elliott

my November 2008 Stocks & Commodi- Wave Principle was my tutor in Elliott wave theory,
ties article, I concluded that “the US and and when I was a South African resident, years ago,
world economies are headed for recessionary times,” as a subscriber to his newsletter, I would often write
with relief only after four years looking more and more him and ask for a further explanation of his wave
likely with each passing week. Elliottician Robert count, which he always provided, mailed back to
Prechter, known for having predicted the stock market me, handwritten on a copy of his newsletter.
crash of 1987, has said in recent interviews that the These days, however, I lean more toward Kondra-
sharp rebound in equities from 12-year lows hit in tieff theory. The reason for this can be provided with
DAVID GOLDIN

March 2009 has been only a near-time rally within a a look at the monthly chart of the Standard & Poor’s
longer-term bear market. “The average investor who 500 (Figure 1).
Figure 1 suggests that the S&P 500 is currently
in a Wave I up. This is confirmed by the relative
by Koos van der Merwe strength index (Rsi). The chart shows that the last

9/30/09 0: 1018.85 H: 1028.45 L: 991.95 C: 1016.40 4.20

July 2000 1530.58

V B
1500.00

III
1259.09
5
I
iii 1000.00
IV
iv
814.41
i A C
ii Oct 2002 Oct 30
3 2008 500.00
I 1
4
2
II
60.96 0.00
Oct 31 1974
RSI 14, 7, 3 Stock 14, 3, 3 MACD 13, 26, 9 97.27

-50.00

0.00
Figure 1: MONTHLY CHART OF the s&p 500. The S&P500 index is currently in a Wave I up. This is confirmed by the RSI. The chart shows that the last time
the RSI gave a buy signal was in October 1974, which was the start of a bull trend that lasted 26 years.

April 2010 • Technical Analysis of Stocks & Commodities • 15

+1004 Merwe_New.indd 2 2/25/10 12:36:56 PM

 Kondrtieff Wave Count - Projected
Years in which panics have occurred and will occur again
1981 18 1999 20 2019 16 2035

Years of good times, high prices. Time to sell values of all kinds.
9 1989 10 1999 8 2007 9 2016 10 2026 8 2034 9
1980

7 1985 11 1996 9 2005 7 2012 11 2023 9 2032 7 2039

Years of hard times, low prices. Good times to buy stocks, goods etc. and hold until times of good times, and then unload.
Figure 2: the kondratieff wave. Note the projected turning point dates on this chart. The index should have topped out in 1999.

time the Rsi gave a buy signal was in October 1974, which was wave theory? Kondratieff waves predict future economic cycles,
the start of a bull trend that lasted 26 years. Now, we all know with dates for turning points. They were designed to predict the
that a Wave 1 up is followed by a Wave 2 down, which can be start and end of economic expansion, recession, and depression,
either a simple or complicated wave. By this I mean a quick, not the movement of the stock market or indexes like the S&P
fast retracement, or a long, drawn-out retracement. In Elliott 500, although the two are related. Elliott wave theory predicts
Wave Principle, Frost and Prechter wrote: “Second waves often turning points of the stock market indexes and even then a wave
retrace so much of wave one that most of the profits gained up count can change as the future unfolds. As I have often written,
to that time are eroded away by the time it ends.” Elliott waves are only a signpost in the wilderness. The K-wave,
Yes, there is a lot of negativity to come, and you can take on the other hand, is solid economic theory.
profits and “remain in the safest possible cash equivalents” as First of all, study Figure 2 and note the projected turning point
Robert Prechter suggests, but you should not forget that the dates, then study Figure 3, a K-chart with the S&P 500 super-
“bear” in a wave 2 is a correction in a major bull trend. imposed, and see what that tells us. Figure 3 shows the K-wave
So why am I comparing Kondratieff to Prechter and the Elliott chart from 1989 to 2015 with the S&P 500 superimposed. The

2276.90
Years in which panics have occurred and will occur again. Years in which panics have occurred and will occur again.
18 1999 20 2000.00

Mar 2000 Oct 2007

1500.00

1989 10 1999 8 2007 9 2015 1000.00

Years of good times and high value. Time to sell values of all kinds. Oct Years of good times and high value. Time to sell values of all kinds.
2002 Mar 2009
500.00

0.00
11 9 7
1996 2000 2003 2005 2003 2009 2012
Years to buy stocks and hold. Years to buy stocks and hold. Years to buy stocks and hold. -500.00

FIGURE 3: THE K-WAVE WITH THE S&P 500 SUPERIMPOSED FROM 1989. The index as shown on the chart peaked in March 2000, one and a quarter years later than what is shown
in the K-wave. Bear markets move faster than bull markets. So the bear market that followed could be expected to fail. The index bottomed in October 2002 rather than the K-wave forecast
of 2005, two and a half years too early.

16 • April 2010 • Technical Analysis of Stocks & Commodities

+1004 Merwe_New.indd 3 2/25/10 12:37:22 PM

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++Full pg Ad Template.indd 1 1/19/10 4:07:59 PM

 2/12/10 O: 1065.50 H: 1080.05 L: 1056.60 C: 1075.50 9.30
1900
1800
October 11, 2007 1700
B 1600
ii ii
2 1500
1488.35
iv a iv c
i c a 1400
i iii ii
ii 1300
v b v b I
iii 1 5 Wave 5 1200
i 3
iv 1100
iv
4 1 II Wave 3 1000
ca
c 4
a ii 900
iii iiiv b
b iv 2 Wave 1 800
i
v3 iii 700
v
5 600
C
March 2009 500
400
RSI 12, 7, 3 98.92

50.00

Divergence buy 0.00

2007 2008 2009 10/09/09 2010

FIGURE 4: WEEKLY CHART OF S&P 500. Here you can see that wave 5 of Wave I is completed and we are in the midst of Wave II.

chart suggests that the index should have topped out in 1999. years earlier than forecast — that is, sometime in 2009. The
The index as shown on the chart in fact peaked in March 2000, S&P 500 appears to have bottomed in March 2009. This means
one and a quarter years later. Bear markets move faster than that you could expect a bull market to top some time in 2019
bull markets (as Elliott Wave Principle tells us), which tend to or even 2020.
languish as most investors buy at the top. We could therefore What would make the market react quicker in today’s economy
expect the bear market that followed to fall fast and furiously than Kondratieff originally forecast? First of all, as mentioned
(with investors selling at the bottom) and it did, with the index earlier, his forecast was designed to predict economic expan-
bottoming in October 2002 rather than the K-wave forecast of sion, recession, and depression, and not the movement of the
2005, two and a half years too early. stock market. The second, and here I can only guess, would be
These figures then give us a guide to anticipate future moves electronic market trading, where orders are filled far quicker
in the S&P 500. The K-wave forecasts a top in 2007. With the than when the huge stock market exchanges slowly grind their
bull market delay previously at one and a quarter years, we way through the buying and selling of stocks. Hedge funds
Generic Ad ~ REVISED 5/18/05
could therefore expect the S&P 500 to top sometime in 2008. in today’s world, something that Kondratieff could not have
As shown, the index peaked October to December 2007. The foreseen, trade large blocks of shares electronically, avoiding
bear market bottom should by all accounts be two and a half the relatively high fees charged by the big exchanges and also
receiving immediate fills. These are typically the most liquid
stocks listed on the big exchanges.
FORMULA RESEARCH Figure 4 suggests that the index has completed wave 5 of
Quantitative Treatment of the Financial Markets Wave I and is currently busy with Wave II. Whether this wave
will be a simple or complicated correction, the Rsi does sug-
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Edited by Nelson Freeburg, 4646 Poplar Ave., Suite 401, Memphis, TN 38117. Overseas orders add 20%.
today’s fast world.
For more information circle No. 11

18 • April 2010 • Technical Analysis of Stocks & Commodities

+1004 Merwe_New.indd 4 3/2/10 4:22:20 PM

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++Full pg Ad Template.indd 1 2/17/10 4:26:33 PM

 2/03/10 0: 1100.65 H: 1102.70 L: 1093.95 C: 1099.10 -4.20
1400
v 1.618 (1325.66) 1350
1316.27
1.500 (1292.68) 1300
1.382 (1259.69)
1250
I 1200
Height of wave 1 5 1.000 (1152.90)
3 1150
v 1103.19
iii 1100
a
i II 1031.32 1050
June 11th 4
iv
4 1 1000
c 944.90 v b
ii
c
a
iii
b 950
a
ii a a 0.000 (873.35) 900
iv c
b
i
2 850
iv b
b
i
800
ii
v iii 750
3
700
v
5 666.80
March 6th 2009
650
C 600
RSI 12, 7, 3 Stoch 14, 3, 3 MACD 13, 26, 9 CC 120 102.80

50

0 • Technical Analysis of STOCKS & COMMODITIES magazine

0

act Karen Moore with approval or changes:

12/01/08 2009 Feb Mar Apr May Jun Jul Aug Sep OCt Nov Dec 2010 Feb

FIGURE 5: WHAT’S NEXT? In this chart you can see that wave 3 of Wave I is less than wave 1. This suggests that wave 5 will be less than wave 3, which is exactly
what happened. This suggests that Wave II will be flat and finish somewhere between 1103 and 1031.
) 938-0570 • fax: 206-938-1307 • email: [email protected]
chart, the fourth wave of lesser degree, as Prechter wrote to me in January 2010 — then we could expect Wave II to bottom
in the 1980s when a similar pattern formed on the Johannesburg sometime in 2010, when Washington, DC–area economists are
Stock Exchange. suggesting as the year that marks the end of the current reces-
The start of Wave III PROOF
in February#12010 will be two years sion. This is because the chart shows that the index previously
earlier than the K-wave suggests. Two things could therefore turned about two years before the K-wave turning point. Do
occur. Wave II could be long and drawn out, or wave 2 of Wave note, however, that Kondratieff is only calling for the end of the
III could be a strong drawn-out correction. recession in 2012, but do not forget, the stock market usually
We all know a wave 2 retracement can be a 72–100% cor- anticipates and moves ahead of the economy.
rection. The bears will therefore jump in exultation, rejoicing Nikolai Kondratieff was a remarkable wave theorist. In today’s
in their accuracy, while the bulls will see the correction as a modern world, however, allowances must be made. I often won-
further buying opportunity. The bulls will have the buy signal of der to what extent he would change his charts if he had lived in
a rising Rsi on the monthly chart as proof of their conviction. today’s fast world, or if he would change them at all.
Looking at the K-wave of Figure 3 once again, if all this were
to happen — namely a market crash and the start of Wave II Koos van der Merwe has been a technician since 1969, having
worked as a futures trader and finally as a technical analyst
with a stock brokerage firm in Johannesburg, South Africa.
Currently, he acts as a consultant for a fee of $1, a charge he
believes is necessary because free advice usually does not carry
much weight. He may be contacted at [email protected].
Advanced algorithms deliver
low lag, low noise analysis. Suggested reading
Frost, A.J., and Robert Prechter
[1985]. Elliott Wave Principle,
New Classics Library.
Now featuring Kondratieff, Nikolai [1984]. Long
Tools for... Wave Cycle, Richardson & Snyder.
Originally published in 1925.
van der Merwe, Koos [2008]. “My
Also for: AmiBroker, Wealth-Lab, MetaTrader, Wavewi$e, Excel, Investor/RT, BioComp Profit, NeoTicker, Kondratieff Wave,” Technical
Tradecision, TradingSolutions, MATLAB, TradeStation, Ninja Trader, eSignal, NeuroShell Trader, Financial
Data Calculator, Genesis TradeNavigator and TradersStudio.
Analysis of Stocks & Commodi-
ties, Volume 26: November.
www.jurikres.com • 800-810-3646 • 719-686-0074 ‡Advanced Get
‡See Editorial Resource Index S&C
For more information circle No. 14

20 • April 2010 • Technical Analysis of Stocks & Commodities

+1004 Merwe_New.indd 5 2/25/10 12:38:32 PM

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 What Are The Insiders Doing?

Modified Volume-Price Trend Indicator

Looking for an edge? Use this indicator to detect what the the broker builds into (or plays out of) the position slowly.
NADIR KIANERSI
insiders are doing while they are doing it. When acquiring a stake, the broker makes many small buys
over a few days. Then as the price starts to move up, the bro-
by David G. Hawkins ker lays off, allowing the price to drift down. Then the bro-

U
ker buys some more, then lays off again, keeping this up for
sing only price and volume data, technicians try to weeks or months until the desired stake has been acquired. If
discern what the “smart money” is doing in a stock. done well, this can be accomplished during an overall down-
Several technical analysis indicators are designed for trend. Similarly, if the player wants to liquidate a stake, the
this. Accumulation/distribution (AD) is one such, and broker sells, then pauses, then sells and pauses some more
in turn, AD is split into two different indicators, inter- until the whole stake is gone. This can happen during an up-
day and intraday. Interday compares the closes and opens of trend. Acquiring a position this way is accumulation, while
different days, while intraday compares the close of each day selling it is distribution.
to the open of the same day. In this article, we are dealing There are many reasons for making such moves. For ex-
only with the interday form. In particular, there is one kind of ample, a group may be planning a takeover of a company
behavior we’re seeking to model. and needs to build a 5% ownership position in the first part
Here’s the scenario: A major player in a stock wants to buy of its campaign. Or a major stakeholder, because of its other
a large stake or liquidate one. So as not to disrupt the price, business activities, may know the company’s business out-
22 • April 2010 • Technical Analysis of Stocks & Commodities

+Hawkins.indd 1 2/25/10 12:52:29 PM

 INDICATORS

look so well that it’s expecting

a negative future for the com-
pany and wants out of its stake.
These players, of course, don’t
want to publicize what they’re
doing. But if technicians could
detect what they’re doing, while
they’re doing it, this would be a
strong leading indicator for the
stock. And that’s our goal for
interday accumulation/distribu-
tion analysis.

The on-balance
volume indicator

METASTOCK
To detect this kind of AD, the cu-
mulative volume indicator was
introduced in the mid-1940s. In Figure 1: OBV indicator, overlaid on chart of Ensco Intl. (ESV). Note the volatility of the OBV compared to
1963, Joseph Granville popular- the stock.
ized it in his book, Granville’s
New Key JANUARY 2010
To Stock Market • Technical
Profits, renaming Analysis of STOCKS
it the on-balance & COMMODITIES
accumulation magazine forming a diver-
and down during distribution,
volume (Obv). gence from price. It is this divergence between the price and
The Please
deliberatecontact
actions Karen Moore with approval or changes:
of the broker during AD produce a the Obv that signals AD.
distinctive disturbance to volume data. During accumulation,
on the days the broker is buying, price will usually move up The problem with OBV
phone: (206) 938-0570 • fax: 206-938-1307 • email: [email protected]
on significantly larger volume. When not buying, the price will On each succeeding price bar, that bar’s entire volume is
drift lower on lower volume. The opposite happens if the inves- added to or subtracted from the previous value of the Obv,
tor is distributing. even if the price change were very small. This tends to make
The Obv attempts to reveal this disturbance PROOF to the vol- #3
the Obv more volatile than the price. Such volatility could
ume. For the first price bar in the data series (daily bars), the obscure an AD or imply one when there is none.
Obv is defined to be the volume of that day. On the next bar, Figure 1 is Ensco International (Esv), with the Obv plot-
if the close is above the first day, then that day’s volume is ted on the same pane as price but on a different scale (left
added to the previous day, but it is subtracted if the close is side). I’ve put a scale factor onto the Obv so its numerical
lower (and there’s no change if the close is unchanged). For values are not large. Note the large day-to-day choppiness in
each succeeding day, the volume is added to or subtracted the Obv, due to each day’s total volume added to or subtract-
from the previous day’s Obv to get the current day’s value. ed from the Obv. Look at the July to September 2008 period;
So the formula for day i is: is that a positive divergence indicating accumulation, or is

OBVi = OBVi-1 + Vi*(Pi-Pi-1)/|Pi-Pi-1|

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If there is no AD going on and the stock is in an uptrend,

the average volume on up days is typically larger than on
down days. Similarly, during a downtrend, the average vol-
ume on down days is larger than on up days. This is the nor-
mal behavior of a stock. In these cases, the Obv will tend to
follow the stock’s trend.
But when AD is ongoing, it disrupts this normal relation-
ship. If accumulation is happening during a downtrend,
there usually is larger volume on average during up days.
And if distribution is in force during an uptrend, there will The Most Innovative Technical Analysis Tool Available Today
Blue Wave Trading: Often Imitated...Never Duplicated
be higher average volume on down days, just the opposite of www.bluewavetrading.com • 808-281-8391
the normal behavior. The Obv will tend to move up during For more information circle No. 3
April 2010 • Technical Analysis of Stocks & Commodities • 23

+Hawkins.indd 2 2/25/10 12:52:47 PM

 INDICATORS

it just the volatility of the Obv?

Since the price subsequently
continued to go down for many
months, the Obv’s behavior was
more likely just its volatility, but
while it was happening, that was
not at all clear.

The volume-price
trend indicator
An improvement to the Obv,
called the volume-price trend in-
dicator (Vpt), was introduced in
1972 by David L. Markstein. The
basic idea behind Vpt is, instead
of adding/subtracting all of each
day’s volume to the indicator,
you add/subtract a fraction of the
day’s volume proportional to the
price change. Thus, the formula
Figure 2: VPt indicator, overlaid on esv. Note the reduced volatility of the indicator, and the absence of a false for day i is:
positive divergence.
Vpti = Vpti-1 + Vi*(Pi-Pi-1)/Pi-1

Where:
V = Volume
P = Close

Each day’s change in the Vpt

is proportional to both the day’s
volume and the fractional price
change.
Figure 2 shows the Vpt instead
of the Obv. Note that the day-
to-day choppiness of the Obv is
gone. Looking at the July to Sep-
tember 2008 period, there’s no
divergence from the price curve,
meaning there was no AD there.

Modifying the VPT

Although the Vpt is a significant
improvement over the Obv, it
still doesn’t closely follow price
in the absence of an AD. The
closer we can make it follow the
price bars, the more sensitive it
will be at detecting an AD when
Figure 3: CALCULATING VPT. The VPT is calculated with the typical price instead of the close. It lies even closer to one occurs. Let’s try using some
the stock price trace. intermediate value of each bar’s
prices instead of the close. Figure
3 is Figure 2 modified by using
the typical price, (O + H + L +
Accumulation/distribution is a technical indicator C)/4 (the mean would have pro-
designed to discern what the smart money is doing. duced a similar curve). Clearly,
this is an improvement.
24 • April 2010 • Technical Analysis of Stocks & Commodities

+Hawkins.indd 3 2/25/10 12:53:06 PM

 The power of the VPT
Before going on to another im-
provement to the Vpt, let’s look
at an example of the Vpt’s power
in detecting an AD, one that made
me a lot of money. From mid-
1996 into late 1997, I had a po-
sition in Ilc Technology (Ilct).
In Figure 4, superimposed on the
chart of the daily bars of Ilct, are
the Obv (blue) and the Vpt (or-
ange), both calculated with mean
prices instead of closes.
In July 1996, Ilct was mov-
ing into a downtrend. Yet the Vpt
turned flat, moving sideways as
the price sharply declined, and
then after a few months, mov- Figure 4: VPT (orange) and OBV (blue) overlaid on chart of ILCT. Note the positive divergence the VPT
ing strongly upward as the price formed in early July 1996.
continued downtrend. This is a
significant divergence from the
price. The Obv also showed a di-
vergence, but not definitively un-
til about September.
My stop-loss discipline would
have taken me out of the stock in
July, but because the Vpt’s diver-
gence was so strong, I stayed with
it. A similar situation occurred in
February 1997, and again I decid-
ed to stay with it.
Then, one day in late 1997, the
news broke that an investor group
was proposing a buyout of Ilc
Technology at a price significant-
ly above where it was trading. In
the text of the company’s press
release, they revealed that they
had started accumulating their
5% position in July 1996!
So the modified Vpt identified
the beginning of an accumulation
campaign, while the Obv’s behav-
ior was not at all clear at that time.
I sold after I read the press release,
making a good profit. Figure 5: LOG PLOTTING. Here the VPT, now called MVPT, is overlaid on the log-scale chart of the stock, while the
MVPT scale is linear. This is a very close fit.
Log plotting
Here’s the final improvement to the Vpt. In Figure 5, there’s METASTOCK CODE FOR MVPT INDICATOR
only one change from Figure 4 — the price plot is on a log-
scale while keeping the Vpt’s plot linear. Level:=Input(“Level”,-1000,10000,0);
This is good! The Vpt’s plot is now so close to the price Scale:=Input(“Scale”,.00001,100000,1);
that had there been any AD present, it would have shown rV:=V/50000;
AvgFour:=(O+H+L+C)/4;
up as a divergence. From here on, the Vpt is being called
Mvpt, for modified volume price trend. (The code for the Level+Scale*Cum(rV*(AvgFour-Ref(AvgFour,-1))/Ref(AvgFour,-1))
Mvpt can be seen in the sidebar.)
April 2010 • Technical Analysis of Stocks & Commodities • 25

+Hawkins.indd 4 2/25/10 12:53:19 PM

 INDICATORS

would expect that the chart of

the Mvpt will be exactly on the
price plot. However, as you can
see, the Mvpt is far from the
price almost everywhere.
Now look at what happens in
Figure 7, when the only change
is that the price scale is now
logarithmic. This is a virtually
perfect match. There is a math-
ematical proof of why these two
are so similar, which I’m not
giving here, and this chart is
simply an illustration of it:

Summary of the MVPT methodology

1 In the formula for the VPT, use
the typical price instead of the
close.
Figure 6: PLOTTING ON A LINEAR SCALE. The MVPT with no volume data is overlaid on the chart of AOL, both on linear
2 Plot the price on a log-scale and
scales. Even though the highs and lows are matched, the curves are very far apart.
overlay the plot of the Mvpt on
a linear scale.
3 Adjust the level and scale of the
Mvpt plot so it coincides with the
price plot as much as possible.
4 Look for divergences between
the two plots.
5 The direction of the Mvpt dur-
ing a divergence is the leading
indicator of the price.

Figure 8 is the South African

gold mining company, Drdgold
Ltd. (Drooy), from February
2008 through March 2009. The
curves are matched from late
February through early May
2008.
The period from mid-Sep-
tember through late November
2008 is distinctive. The price
plot takes on an appearance dif-
ferent from what it was before
and, most important, the Mvpt
is showing a definitive upward
divergence. But the Obv is not
showing any divergence. In
Figure 7: a perfect match? This is the same as Figure 6, except that the stock data is plotted on a log scale, which
late November, a gap up start-
results in an almost perfect match.
ed a major uptrend. Had you
been following this stock, the
Of course, one example does not a rule make. Choosing Mvpt’s divergence would have been clear to you by mid-
log-scale for price and linear for the Mvpt may seem like November, and the gap up breakout would have been your
an ad hoc thing to do. However, for almost all examples I’ve entry signal.
seen over many years, this does work. To investigate the There was no significant company news during this
validity of this, in Figure 6, a chart of Aol during its bubble divergence, and no subsequent takeover announcement
uptrend from April 1998 to July 1999, I’ve replaced each or similar news. But Mvpt’s behavior from September
volume datum with “1.” Both traces are on linear scales. through November tells us that one or more entities were
Since variations due to volume fluctuations are gone, you accumulating the stock. We don’t know who they were,
26 • April 2010 • Technical Analysis of Stocks & Commodities

+Hawkins.indd 5 2/25/10 12:53:36 PM

 what they knew, or why they
were doing what they were
doing. Obviously, they knew
something that the rest of us
didn’t. The Mvpt is sensitive
enough to have detected this ac-
cumulation, whereas the Obv
completely missed it.
Figure 9 shows the small-cap
alternative energy company,
Beacon Power (Bcon), from
October 2008 through July
2009. The upward divergence
of the Mvpt in the first quarter
of 2009 is striking, foretelling
the new uptrend in the stock that
started in March, whereas again
the Obv showed no divergence.

Discontinuities
Since the Mvpt is pro-
portional to volume Figure 8: MVPT vs. price. The MVPT showed a significant upward divergence from the price plot in the autumn of
and price change, a 2008, foretelling the major new uptrend.
day with a large price
gap on huge volume
will put an enormous
jump into the chart of
the Mvpt. Thereafter,
the Mvpt’s trace usu-
ally proceeds in a rel-
atively smooth fash-
ion. It’s as if someone
had imposed large-
scale changes onto
the chart of this indicator. Some
technicians may be tempted to
smooth out these spikes, but
any effort to do so would wash
out the indicator’s sensitivity to
divergences. It would be more
useful to understand these days
as discontinuities in the indica-
tor and not attempt to read the
indicator across such a discon-
tinuity. You should fit the Mvpt
to the price in a region between
two discontinuities and only
look for divergences within such
a region. Moving beyond a dis-
continuity will require new level
Figure 9: an early indication. In early 2009, the MVPT showed a huge upward divergence from the price of BCON,
and scale factors to fit the indica- just before the start of a new uptrend.
tor to the next region.
Figures 10 and 11 are both
of the same ticker (Mck) in the Moving beyond a discontinuity will require new level
same time period. The vertical and scale factors to fit the indicator to the next region.
red dotted lines mark three dis-
April 2010 • Technical Analysis of Stocks & Commodities • 27

+Hawkins.indd 6 2/25/10 12:51:22 PM

 INDICATORS

The current state

of the market
I’ve been using this indicator for
years and have many examples of
divergences as far back as the mid-
1990s. In preparing this article,
I wanted to use recent examples
but was surprised to find that there
are very few good ones in the last
two years. Of course, these recent
times in the market have been ex-
traordinary, as we experienced a
crash of multigenerational propor-
tions. What may be happening is
that the force of the overall market
is swamping individual variations
between stocks, making most AD
divergences hard to see. Either
that, or the market’s behavior is
scaring off most people who would
Figure 10: DISCONTINUITIES. The MVPT level and scale were adjusted to match the price chart of MCK prior to the
first discontinuity.
normally be executing ADs.
But this too shall pass. The mar-
ket won’t stay in permanent tur-
moil. Eventually, groups will start
initiating ADs again, and individ-
ual stock variations will become
more visible. Technicians will be
glad they have the Mvpt to detect
the AD divergences when they do
finally happen.

David Hawkins holds two de-

grees in physics. He has worked
in teaching, engineering, and
sales & marketing. He is a long-
time trader in and a student of the
markets, and is now an individual
investor, living in Newton, MA.

Suggested reading
Granville, Joseph E. [1976].
Granville’s New Strategy Of
Daily Stock Market Timing For
Maximum Profit, Prentice Hall.
Markstein, David L. [1972]. How
To Chart Your Way To Stock
Market Profits, Arco.
Figure 11: price curve-fitting within a region. The MVPT level and scale were adjusted to match the price Williams, Larry [2004]. Letter to
chart of MCK between the first and second discontinuities. the Editor, Technical Analysis of
Stocks & Commodities, Vol-
ume 22: March.
continuities, dividing the chart into three regions, plus the
_____ [2000]. Letter to the Editor, Technical Analysis of
beginning of a fourth. The Mvpt can only be fit to the price
Stocks & Commodities, Volume 18: November.
curve within a region. The first chart fits to the first region
‡MetaStock
and the second to the second. Different level and scale fac-
See our Traders’ Tips section beginning on page 67 for program code, in-
tors would be needed to fit to the third or fourth regions.
cluding Microsoft Excel, implementing David Hawkins’ technique.
S&C

28 • April 2010 • Technical Analysis of Stocks & Commodities

+Hawkins.indd 7 2/25/10 12:48:35 PM

++Full pg Ad Template.indd 1 2/16/10 3:13:55 PM
 TRADING SYSTEMS

formance of these same systems

is rendered ineffective as soon
as the market changes direction.
This article shows how you can
capture profits when taking a long
position in a downtrending mar-
ket. Going back to the 340 days of
the previous bear market, I ran the
numbers to see if a late upside ral-
ly contributed to additional buy-
ing or if it reinforced more selling
when we are in such a nasty trad-
ing environment.

Going against
the grain
When we are in the grips of a bear
market, should we try to magnify
profits by joining a late price run
once it is in motion? Viewed an-
other way, when the market is
experiencing a strong rally from
3:00 to 3:30 pm, should we take a
long position at 3:30 and hold this
position until the ringing of the
closing bell (4:00 pm)?
Why would anyone take a po-
sition in such a perilous environ-
ment? Besides the precipitous
downturn, volatility is at its high-
est, which makes this a dark and
dangerous setting. Despite the
turbulence, an aggressive inves-
tor who knows how an instrument
trades in these remaining minutes
can profit in this fertile trading en-
vironment.
I begin this analysis on October

LISA HANEY
31, 2007, when the Qqqqs stood
at $55.02 — its last close over this
price. The next day, this exchange
traded fund (Etf) began a relentless
Piggybacking On Success slide toward the $25 mark. The anal-

Bear Market Survival Kit

ysis ended on March 9, 2009, with a
closing price of $25.70 — its lowest
close, before the liftoff phase into a
new bull market. The statistics do not
Any system can produce stellar results when it suggests taking a position in the same include preholiday trading days (that
direction of a trending market. But what do you do when the market quickly changes is, 3:30–4:00 Et trading volume be-
direction? low five million shares).

by Anthony Trongone, PhD, Cfp, Cta Trading background

F
With an average trading volume of
ew if any trading systems work across all economic environments. As you 34 million shares in the final hour
know, any system can produce superlative results when it suggests taking of trading, the PowerShares Qqqq
a position in the same direction of a trending market. However, the per- is a good representation of investor
30 • April 2010 • Technical Analysis of Stocks & Commodities

+Trongone.indd 1 3/3/10 10:07:44 AM

 $1.50
1.25
1.00
psychology. The Qs represent the intraday move- .75
ments of 100 companies; however, it trades as a
single security, allowing investors to participate .50
in the collective performance of a portfolio of

15:30 – 16:00
.25
companies.
0
With active pre- and aftermarket trading vol-
ume, the Qs are an attractive trading choice, since -.25
it normally has just a penny difference between -50
the bid/ask price. Another advantage is in its al-
most-perfect correlation with the emini NASDAQ -75
100 futures contract. -100
These two instruments, with 62.5% of its sec-
-1.25
tor weighting in information technology, have no
exposure in the energy, finance, or utility sectors; -1.50
Oct 2007 Jan 2008 Apr 2008 Jul 2008 Oct 2008 Jan 2009 Apr 2009
therefore, they offer you a powerful combination.
Each offers the investor a variety of hedging strat- FIGURE 1: SCATTER CHART FOR THE 3:30–4:00 TRADING SESSION. The extreme scores are
egies, such as defending your portfolio against abundant (for every 12.5 trading days, one day had a result of $0.50, more or less. Note the scores
clustering closely together at the middle of the chart. This calmness was instrumental for the formation
downside risk prior to the release of a “market of the start of a long bullish run that began on March 10, 2009.
moving” economic indicator. Most recently, the
dollar value of one futures NQ contract was worth 814 shares volatility. After encountering the price swings in the autumn
of this popular ETF. of 2009, they became less common. In fact, the tight cluster-
Before we delve deeper into the results of this system, ing of these scores (the right side of the scatter chart) may
let’s look at trading in this late hour. Despite experiencing have been instrumental in producing the long bullish run.
a 340-day drop of $29.21 (a 53% decline), the index was In the chart showing the bear market in Figure 2, the Qs
positive in the first half of this hour, as it was able to register kept above a supportive price of $40 until the autumn of
a $3.55 profit. In the 30 minutes leading us to the closing 2008. When it broke below this price, it quickly got ugly.
bell, the loss was $5.40. In this late hour, trading volume was The pale blue insert demonstrates how an advancing 3:00–
brisk, with trading activity averaging 20 million shares. 3:30 session affects prices in the final 30 minutes of trad-
The scatter chart in Figure 1 shows the results of trading ing.
in the final 30 minutes of the regular session. There were 27 Observe how the amount of a price advance (that is,
days with a performance of $0.50 above or below the 3:30 greater than zero; $0.05; $0.10; $0.20, and $0.25) increases
ET opening price. It is instructive to observe the changes in the mean performance score of the 3:30–4:00 session. Ap-

(QQQQ - Power Shares QQQ Trust 1, D) Dynamic, 0:00-24:00

55.00

50.00

45.00

40.00
15:00-15:30 Trading
Amount of advance days Mean St Dev Sum 35.00
=> $0.00¢ 166 -.0092¢ 3065¢ ($1.52)
=> $0.05¢ 129 -.0129¢ 3281¢ ($1.67)
=> $0.10¢ 99 -.0069¢ 3547¢ ($1.69) 30.00
=> $0.20¢ 39 .00571¢ 4670¢ ($2.23)
=> $0.25¢ 30 .1288¢ 4385¢ ($3.86)

25.00
Volume 500M

25M
eSIGNAL

Sep Oct Nov Dec 2008 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2009 Feb Mar

FIGURE 2: THE BEAR MARKET. The insert on the chart shows the results of trading in the 30 minutes before the closing bell in this downtrending market.
Note the 3:30–4:00 performance increases as the amount of the price advance in the earlier (3:00–3:30) session grew in strength. For instance, after a =>
$0.25 increase in this earlier session, the average advance in these 30 trades was $128.80 for a 1,000-share long position in the Qs.

April 2010 • Technical Analysis of STOCKS & COMMODITIES • 31

+Trongone.indd 2 3/3/10 10:15:30 AM

 TRADING SYSTEMS

As we know too well, the market

can turn on a dime, and the bear
can come out of hibernation at
any time.
scores, which reflects investor sentiment. When
the market displayed a late advance, active inves-
tors became avaricious.
Once there is a 25-cent price change (3:00–
3:30), in this environment, investors will behave
-1.25 -1.00 -.75 -.50 -.25 .00 .25 .50 .75 1.00 1.25
more aggressively. In these 30 days, the standard
15:00 - 15:30
deviation was $0.44; therefore, we could expect
2010 • Technical Analysis
FIGURE 3: RESULTofOFSTOCKS
A $0.25 CHANGE & INCOMMODITIES
THE 3:00–3:30 SESSION. magazine
The right side displays 16% of the trading days to score above $0.57. Pac-
the 14 winning trades; the left side shows the eight losing ones.
ing this fever pitch are active market participants
tact Karen Moore with approval or changes: scrambling to take positions before the close. Ap-
parently, as the rally grew in force, the confidence of active parently, a late rally often inspires a herding mentality. This,
traders grew in strength. For instance, after a 20-cent ad- in turn, puts trading volume at its highest (36 million shares)
06) 938-0570 • fax: 206-938-1307 • email: [email protected]
vance in the earlier session, the 39 trading days resulted in a because it intensifi es the greed factor as prices forge ahead
$2.23 profit, whereas an increase of $0.25 or more brought and rally to the upside, producing six of the 30 days that ral-
in $3.86. lied $0.50.

RUNNING WITHPROOF #1
THE RALLY PUT IN STORAGE UNTIL
Figure 3 shows the results after $0.25 change in the 3:00– THE BEAR RESURFACES
3:30 session. The positive side (right side) contains more No system is effective across all eco-
nomic environments. This strategy is
particularly meaningful for contrarian
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Bright Trading, LLC 340-trading day blowout.
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_____ [2009]. “Situational Trading,” Technical Analysis of
800.249.7488 STOCKS & COMMODITIES, Volume 27: October.
For more information circle No. 4 S&C

32 • April 2010 • Technical Analysis of STOCKS & COMMODITIES

+Trongone.indd 3 3/3/10 10:25:05 AM

 Q&A

SINCE YOU ASKED

Confused about some aspect of trading? Professional trader Don Bright of Bright
Trading (www.stocktrading.com), an equity trading corporation, answers a few of
your questions. To submit a question, post your question to our website at http://
Message-Boards.Traders.com. Answers will be posted there, and selected questions
will appear in a future issue of S&C.

Don Bright of Bright Trading

SUBPENNIES AND money to trade with. They can use (not points. On 30 stocks I placed orders
HIGH-FREQUENCY TRADING abuse) maybe a $1 million or more of to sell short based on this fair value
Don, I read your recent column about our money to engage in good, working opening range, and I placed buy orders
subpennies and high-frequency trading strategies. This brings up the obvious with a wider envelope for the same 30
(S&C, March 2010). How have you and question of, “Don, what are these good, stocks. If I use 2,000 shares, then I have
your traders adapted your order routing working strategies?” used about $5 million in an attempt to
in the last few months? Now for some specifics. The old make $500 to $1,000 or so. I expected to
Good question. For the longest time standard around here is the “opening- get filled on about 10%, which is what
we would advise our traders to “park” only order” strategy. I have written happened — I had three fills, two short
on an electronic communications about this many times over the years, sells, and one long buy. I made money
network (Ecn) to collect rebates when yet it is as viable today as it was years on all three orders, which I calculated in
they were waiting to be hit on a bid ago. Today [February 17, 2010] was no pennies (since you can do this with 100
or offer. We would advise them to hit exception. For those of you who might shares or 5,000 shares), and made about
bids or take out offers on the primary be new to Technical Analysis of Stocks 21 cents. On 2,000 shares, that would
exchange (Nyse, for example), since & Commodities, let me review. Every be about $420. This is an example of
it was cheaper overall. Currently, we day, stocks have a single price only using versus abusing capital. It’s not
feel that it makes sense to do the latter twice, once at the opening, and once margin and it’s not leverage per se. It is
most of the time since we are finding at the close (end of day). Premarket, “use of capital.”
that when we park, we are getting fewer there are millions of shares entered Now, after the market opens, many
fills due to the high-frequency trading to buy and also to sell of most Nyse of our traders turn to our correlated-
(Hft) orders getting placed in front of stocks that are asking for the opening- pairs trading strategy. This involves
our orders. Hopefully, the regulators only price. Many orders are entered researching stocks in the same sectors
will work with liquidity providers to fix as “market on open” — meaning that that tend to parallel each other (and
some of this. they wish to buy or sell, regardless of usually the overall market) in such a way
what the price is. Many are entered as that they trade as a spread. An example
WHAT ARTICLE WAS THAT AGAIN? limit orders “opening-only,” meaning might be Rcl/Ccl or DD/Dow, and so
In a 2007 article in Stocks & that they want to open the position at forth. These pairs tend to diverge and
Commodities, you stated that there are predetermined limit prices or better. converge over time and intraday. When
other strategies rather than directional So, at about five minutes before the you are capable of holding perhaps a
for trading accounts over $1 million. I market opens, there may be two million dozen pairs overnight, again “using
can’t remember what issue that article shares to buy and only a million and a capital” to allow for convergence, then
was in. Could you tell me? I’ve been half shares to sell at or about the previous you have a big edge.
searching through the stocktrading.com day’s closing price. The specialist on Leverage or margin as commonly
articles folder and can’t find it. Much the Nyse must go to his electronic book considered is not the same as “using
thanks. — Ed Goon at higher prices to accommodate these capital” properly. However, if you are
I double-checked a few of the 2007 excess buy orders. If the stock must doing something well with 200 shares,
articles and am not sure which one open high enough, then the specialist imagine how well you can do with
you’re referring to. However, the answer is required to accommodate by selling 2,000 shares.
is still the same, and it’s probably a shares himself. What we try to do is Overall, one step at a time —
good time to review current working participate only when the specialist understand what you’re doing, and
strategies. is involved — and to be on the same adjust capital usage accordingly. I
Our traders put up the same amount side of the trade as he is. How do we go hope this helps!
of capital that they would at any about this? Pretty simple, really.
brokerage, $25,000 or so. The main Today, I entered buy orders and
distinction you’re referring to is that sell short orders because the market
our people actually use the company’s was only opening up about five S&P S&C

April 2010 • Technical Analysis of Stocks & Commodities • 33

+1004 Bright QA.indd 1 2/25/10 11:56:05 AM

 tRADER’S NOTEBOOK

Automated Trading
the computer make the buying and
selling decisions for you. This is not
science fiction. Trading firms have
been relying on computers to make
automated trades for some time now.
Is an automated trading computer
something you should consider?
In automated trading systems,
little or no human intervention is
required. They are based on algo-
rithms, which follow step-by-step
methods to make your trading de-
cisions. You still have your data,
whether it is news or price levels.
You still follow a strategy, which
you use to make your trading de-
cisions for entering a new trade or
terminating an existing one.

Can a computer trade?

The computer is exceptional at
making quick unemotional deci-
sions following an algorithm. The
computer is also exceptional when
it comes to dealing with numbers.
Market data is numbers and market
strategy is nothing more than an
algorithm. Once the computer re-
ceives the numbers or, in this case,
the market data as well as the strat-
egy or algorithm, it can be used to
initiate or terminate market positions.
Institutional traders, mutual funds,
and pension funds use these types of
trading systems extensively.
Computers can be a great benefit
to traders who trade large sums of
money because using computers
allows them to divide large orders
to manage the impact that these or-
ARTHUR FRIEDMAN

ders normally have on the market.

They do so by breaking the large or-
ders into smaller ones and entering
these smaller orders into the market
over a certain time frame. Besides
Can a self-directed trader use a computer that trades on its own? just market data, these computers
receive and process market news.
by John Devcic These computers get a feed from

S
a news service in a format that can
ay you’ve had a hard day at work and you need to relax and maybe be understood and processed. Like
get some good news. You turn on your computer and find out that you any good trader, the computer will
made a nice profit in the market. You were able to do this by just letting use this news to decide if a market
34 • April 2010 • Technical Analysis of Stocks & Commodities

+WM Devcic.indd 1 2/25/10 11:43:22 AM

 Automated trading can be a great
benefit for traders, no matter the
move needs to be made. So you
size of their bank accounts. be too large a barrier for the
have the integration of news trader to overcome.
and market data deciphered
by an unemotional computer that makes trading decisions Can you trust a machine?
based upon a strategy, and a strategy alone. In the end, the question of trust comes down to two parts.
One is the question of trusting the trading strategy. Many
Pros and cons traders will spend months testing and backtesting their strat-
The biggest positive when it comes to using a computer to egies in order to get it as close as possible to making the
make your trades is the removal of emotion from trading. most money out of every trade. No matter the amount of
Traders are always trying to avoid making decisions based money in the account or the location of the trader or firm,
on emotion. Emotions cloud traders’ minds. Traders, no mat- the traders will need to make sure the strategy works before
ter how good they are, can run into a losing or winning streak they can use a computer with which to trade. Backtesting is
that clouds their judgments and makes trading much harder. a wonderful tool used to test all trading systems and strate-
No matter how sound the investment strategy may be, if you gies. The drawback is in trying to make it work perfectly.
use emotions to enter and exit trades, your consistency and Be careful not to curb your rules in order to fit the market
profits can and probably will suffer. you are trading in search of better results. What might have
Computers can run any kind of trading strategies you re- worked in the past can prove to be unreliable when tested on
quire. Computers can be programmed to exit or initiate a trade the real-time market. Consider software that will allow you
at preset conditions dictated by your trading strategy. Com- to test your system results using live datafeeds but without
puters erase errors caused by emotion. They will risk exactly real money.
the percentage they have been programmed to risk. Your exits The second part of the equation is, of course, trusting
will be met. The other great advantage of a computer is that something automated. There are many traders who for vari-
it will never get tired. It does not need a raise and it does not ous reasons do not like or cannot allow a computer to have
need a day off. It can analyze markets constantly with no hu- total control of their money. They would rather make deci-
man intervention needed. Computers
can handle complex trading strategies
or simplistic ones equally.

The cons STOCK UP!

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April 2010 • Technical Analysis of Stocks & Commodities • 35

+WM Devcic.indd 2 2/25/10 11:43:36 AM

 tRADER’S NOTEBOOK

sions on their own using their own strat- ages will allow you to make trades direct-
egy. These traders will make quick deci- ly through a broker. You will also need
sions and enter and exit a trade before any to look at how many trades you will be
of the stops are met. These traders are making monthly. Brokerage firms charge
more comfortable relying on themselves. traders different fees, depending upon the
A computer does not care about losing or amount of trades they make. Depending
winning streaks unless your strategy tells upon the size of your operation, you will
it to trade differently based upon a long or either be the IT department or need to find
short losing or winning streak. someone who can be. While that sounds
Deciding on the type of trading style daunting, it turns out not to be. If your
you use comes down to testing to make trouble is with the software, then that can
sure you are getting the results you want be solved by addressing the issue with the
as well as the level of success you are company you bought the software from.
comfortable with. Many software pack- The problem will be in deciding if you
ages will allow you to backtest a trading will need a new computer just to run your
system and tell you the number of profit- trading operation.
able and unprofitable trades. They will also tell you the dif-
ference between them. Finding that balance
For example, let’s say one system you tested had 20 suc- Automated trading can be a great benefit for traders, no mat-
cessful trades out of 60. On the face of it, this does not inspire ter the size of their bank accounts. A sound trading strategy
confidence, so you decide to dig a little deeper to find out as well as the ability to allow a computer to trade on its own
whether the system is truly successful. You do this by look- is all you need. Keep in mind that you want to be comfort-
ing at the differences between the winning trades and the los- able with the trading strategy you have the computer em-
ing ones. Say the total loss of the losing trades amounted to ploy. Also keep in mind the expenses of having the computer
$500, while the winning trades amounted to $1,200. Clearly, trade unsupervised.
this system is profitable. The winners gain far more than the Automated trading may not be for every trader. But if you
unsuccessful trades lose. happen to be the type of trader who likes this idea, you may
find the perfect marriage of having your trading strategy em-
Leaving it to the computer ployed without worrying about your emotions getting in the
Besides just identifying trade entry and exit points, you have way of making money.
to consider how much you are willing to have on the line on
each trade. Once you decide your position size, which de- John Devcic is a market historian and freelance writer. He
pends upon your account size, you will have to figure out if may be reached at [email protected]. S&C
you can turn on your machine and walk away. As mentioned
earlier, turning over your hard-earned money to a machine
that does not care how much money it makes or loses can be
daunting for many traders. If you fall into this category, you
can try to blend the two.
Obviously, blending automated trading and human inter-
action will no longer make it purely mechanical. This will also
increase the chance of emotion entering the equation. But you
can set the software to identify just the entry and exit points
but not let it make the trading decisions on its own. You will
have to hit the buy or sell button. I know a few traders who
have automated trading systems but make the buying and sell-
ing decisions on their own based on the trading signals gener-
ated by their system. Psychologically, it still lets them feel in
control of the trades, even though they are simply doing what
the computer would have done anyway.

Datafeeds
You will also need to consider the cost of the datafeed you
will need to subscribe to. Depending upon the trading strat-
egy you use, you may need to subscribe to real-time market
data. You will also need to take into account the brokerage
firm you will be making trades through. Some software pack- “I—I suppose you never really know what anyone is planning.”
36 • April 2010 • Technical Analysis of Stocks & Commodities

+WM Devcic.indd 3 2/25/10 11:43:53 AM

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 INDICATORS

with confirmation for what is hap-

pening with price.

Support and
resistance levels
Just as price will show respect for
support and resistance levels, Rsi
levels do as well. This can be an
extremely valuable tool for con-
firming trends and possible rever-
sals. In a bull market, the Rsi (in
this case, I will use the 14-day)
will often be seen moving between
30–40 lows and 80–90 highs. In a
bear market, it will move between
20–30 and 60–70. These key lev-
els seem to hold in all markets re-
gardless of the time frame. Each
market seems to find its own sup-
port or resistance within the levels
outlined.
In Figure 1 we see the Dow
Jones Industrial Average (Djia) in
a downtrend. The Rsi at the bottom
of the chart shows that the indica-
tor only gets as high as 67 during
the entire downtrend (the middle
line marks the 50 level). The Rsi
has respected that resistance level
throughout its downtrend. Near
the bottom of the Rsi, we see that
the Rsi has bottomed around the
30 level with extreme lows at 22.
This is valuable information, as
these levels can provide us with
confirmation that this trend will

NIKKI MORR
continue, or the level on the Rsi
where it is likely to reverse.
In Figure 2 is another example,
this time with an uptrend and a

Rsi Trends
Explaining Trending Markets downtrend. During the uptrend (or-
ange lines on Rsi), the Rsi moves
between 37 (each stock or market
will have its own levels within a
few points of the bear/bull levels
specified) and 80. As the price ac-
What does the behavior of the relative strength index within a trend celerated upward from January
tell you about the strength of the trend? through June 2008 the 40 level on
the Rsi was not approached, as the
by Cory Mitchell Rsi stayed in the 50–70 range most

W
of the time. As the price began to
hile one common method uses divergence between the relative strength in- break down in July 2008, the Rsi
dex (Rsi) and price, we can go beyond that and find out if a trend is likely to broke through that 37 support level
continue. We can do so by looking at certain Rsi levels contained in a trend; and established a new range (red
this provides us with valuable information for making trades within the cur- lines on Rsi), this time at the lower
rent trend. Watching for breakouts of these Rsi levels can also provide us levels of 27–60.
38 • April 2010 • Technical Analysis of Stocks & Commodities

+Mitchell.indd 1 3/2/10 2:45:54 PM

 DJ INDUSTRIAL AVG ACTUAL (DJIAA): DAILY
145.00
140.00
135.00
130.00
125.00
120.00
115.00
110.00
105.00
11 Sep 07 06 Nov 07 04 Jan 08 04 Mar 08 30 Apr 08 26 Jun 08 22 Aug 08
Relative Strength Index Daily 14 Wilder
100
90
80
70
60
50

VANTAGEPOINT
40
30
20

Figure 1: will the trend continue? Here you see the DJIA in a downtrend. The RSI only gets as high as 67 during the entire downtrend. Near the
bottom of the RSI, you can see that the RSI has bottomed around the 30 level with extreme lows at 22. These levels can indicate if the current trend will
continue or the level on the RSI where it is likely to reverse.

Trading applications and benefits Using Rsi support and resistance levels in accordance
Each stock or market will develop its own support and re- with the bull and bear market ranges specified will reduce
sistance levels on the Rsi within the ranges associated with the amount of false signals received by traders. It will also
bear and bull markets. These support and resistance levels reduce the number of trades taken, reducing trading fees,
should be drawn on the Rsi. When the Rsi moves below its and avoiding the whipsaws often associated with volatile
support level in an uptrend, it provides confirmation that a markets. By not overtrading, the trader will be able to take
reversal is in effect; the uptrend is over and prices are go- advantage of the larger trend on any time frame, extracting
ing to head lower. When the Rsi moves above its resistance more profit from it.
level, it warns that a downtrend is completing and prices are
reversing to move higher. If prices pull back (in an uptrend) Real-world example
or push up (during a downtrend) but fail to break the respec- These Rsi support and resistance levels can be used to de-
tive support and resistance levels on the Rsi, it is a strong velop an entire trading strategy for visibly trending markets.
confirmation that the current trend will continue. Figure 3 is an example of how this strategy could have been

SOUTHWESTERN ENERGY (SWN): DAILY

56.00
52.00
48.00
44.00
40.00
36.00
32.00
28.00
24.00
20.00
14 Sep 07 09 Nov 07 09 Jan 08 07 Mar 08 08 May 08 01 Jul 08 27 Aug 08
Relative Strength Index Daily 14 Wilder
100
90
80
70
60
50
40
30
20
10
0

Figure 2: uptrends and downtrends. During the uptrend, the RSI moves between 37 and 80. As price accelerated up from January through June
2008, the 40 level on the RSI was not approached as the RSI stayed in the 50–70 range. As price began to break down in July 2008, the RSI broke through
that 37 support level and established a new range between 27 and 60.

April 2010 • Technical Analysis of Stocks & Commodities • 39

+Mitchell.indd 2 3/2/10 2:45:55 PM

 SOUTHWESTERN ENERGY (SWN): DAILY

54.00
50.00
46.00
42.00
38.00
34.00
30.00
26.00
10 Dec 07 09 Jan 08 22 Feb 08 24 Mar 08 07 Apr 08 05 May 08 03 Jun 08 01 Jul 08 30 Jul 08
Relative Strength Index Daily
14 Wilder Enter long Exit long
100
90
80
70
60
50
40
30
20
10
0
FIGURE 3: EXTRACTING PROFITS FROM TRENDS. Here is an example of how the strategy could have been used to extract profits from the trends in the
stock SWN. In just over six months, this trade would have given you a 60% return.

used to extract profits from the trends within the Swn stock. It is important to note that other methods using the Rsi can
In January 2008 there is a sharp selloff where the Rsi is still be implemented, such as divergence between the Rsi
pushed down near the 40 level. As prices begin to rise once and price. When Swn eventually begins to fall in July 2008,
again, you can feel confident that the down move is over and the Rsi reaches former levels even though the price makes a
that the uptrend is resuming (this entire time we are still in new high. This method can still be used as an early warning
the bull market range). A long entry should be taken when that something is wrong.
the Rsi has moved up from the support level (37 in this case)
by several points or the Rsi has moved above another recent Strength of a trend
support level. In Swn, there was a former support level at Each market will develop its own
48 that held from November through January. The point at trading ranges for bull and bear mar-
which the Rsi bounces up from 37 and reaches this former kets within the Rsi. These levels can
support level is when an entry would be taken. This hap- be used to confirm trends and vali-
pened on January 28 — you enter near the close of that day date reversals. Bull markets often
with a price of $26.48. range between 40 and 90 and bear
You stay in the long position until the Rsi breaks below markets between 20 and 70. Each
37, signaling the uptrend is over. The Rsi breaks through 37 market will develop its own sup-
on July 7, 2008. You then exit on the close of this day at a port and resistance lines within these
price of $42.51. This trade gives you a 60% return in just guidelines. You can avoid whipsaws
over six months. using the range of the Rsi as a confir-
mation and reversal tool, but keep in
Using it effectively mind that it should only be used in trending markets. Other
It is important to remember that this strategy applies to indicators and signals should be used in conjunction with
trending markets. A trend can be visualized using trendlines. this method so major moves are taken advantage of.
If the market stalls and prices begin to range, you do not
need to exit positions. Your Rsi level exits will be triggered Cory Mitchell is an independent trader specializing in short-
when the market has moved a sufficient amount. New trades to medium-term technical strategies. The founder of http://
should not be taken with this strategy if no trend is pres- vantagepointtrading.com, he can be contacted at cory@
ent and the price is range-bound. That said, time frames can vantagepointtrading.com. His website provides trader edu-
be altered to find opportunities on shorter- or longer-term cation, analysis, free trade ideas, and open discussion.
trades.
Using support and resistance lines within the standard Suggested reading
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 TRADING TECHNIQUEs

About Parameter-Sensitive Indicators

Signal Processing Basics

This is the first of a series of articles that examine stock
price analysis using the mathematical methods of signal
processing. These concepts will enable you to better under-
T he mathematical methods of communication and
control theory are the basis for many common tech-
nical trading methods and indicators. This series
stand popular indicators and incorporate them into your of articles will focus on the mathematical basics needed to
trading strategy. understand indicators and will not discuss trading strategies
except to illustrate the use or misuse of indicators. Through-
by Glenn A. Barlis out this series, I will refer to stocks as the trading vehicle
with the understanding that the mathe-
matical principles explained here apply
to any market.
This, the first article, presents a simple
model to describe price action and one
of its elements — cycles. Part 2 will dis-
cuss trends and smoothing methods. Part
3 will conclude the series with momen-
tum, oscillators, and a brief discussion of
the implications of the model. The math
presented will be just detailed enough to
give you an understanding of the con-
cepts that can be further explored in the
references provided.
Many trading strategies are based on
the action and interaction of technical
indicators. In evaluating these strategies,
it is important to know whether the in-
dicators are mathematically sound. The
articles will provide the basis for that un-
derstanding and point out the limitations
of this approach. The reader can then
critically evaluate the theoretical basis of
technical indicators for their own trading
strategies.

A stock pricing model

Figure 1 shows a typical bar chart of
price versus time for a stock. I would
like to build a mathematical model of
this price series that lets me use the
techniques of signal processing to un-
derstand the historical action shown in
the chart and identify trading opportu-
nities. The approach used in this article
presents technical indicators as derived
from a process as a deterministic signal.
This is not the only approach that can be
CHRISTINE MORRISON

used — statistical time series analysis

forecasting, pattern (feature) analysis,
and artificial intelligence based meth-
ods are also used — but signal process-
42 • April 2010 • Technical Analysis of Stocks & Commodities

+Barlis 1004_New2.indd 1 2/25/10 1:33:54 PM

 S&P 500
1300

ing techniques are intuitive and have been

used to develop many technical indicators
1250
and methods.
Use of a deterministic model is a sim-
plification since statistical analysis of
markets tells us that markets are stochas-

Price
1200
tic (random) processes that must be dealt
with probabilistically. I do not claim that
the following model is an accurate descrip-
tion of the stock market. It is presented for 1150
exposition in describing the development
of technical indicators through the use of
traditional signal processing techniques.
Classical signal analysis represents the 1100
signal by a continuous function of time. All 1 51 101 151 201

ESIGNAL
stock data is either discrete transaction val- Days
ues (tick data), samples taken from a time
period (daily open, high, low, and close), Figure 1: typical bar chart of stock prices. Using this price series, a mathematical model was
built using the techniques of signal processing.
or a calculated value from some time peri-
od — say, an average. It will be convenient
at times in the discussion that follows to represent the price Using the simplifying assumption that these character-
data signal as a continuous function of time. This simplifies istics can be modeled by a sum of terms (superposition of
the mathematical explanation and is probably more familiar linear systems), we can expand the model as:
to you than discrete mathematical equations. Just remem-
Equation 1-1a:
ber, analysis of actual stock data is performed using discrete
mathematics. P = Constant + trend + cyclical components + noise
Figure 1 is a multiseries chart showing high/low/close
data. Looking at just one series, say the closing price data, or
allows us to determine that a stock signal can be represented Equation 1-1b:
as a complex mathematical equation of stock price as a func-
tion of time: P = c + f(t) trend + Sum [f(t)cycles] + f(t)noise

P = f(t) A large number of the indicators used in technical analy-

sis are designed to extract trading action points from one or
Even a casual look at the chart reveals signal characteris- more of the terms in this equation(s). Smoothing techniques,
tics that let us build a simple pricing model: designed to minimize noise and high-frequency cyclical
components and reveal the trend, will be discussed in part 2.
1 The price never goes below zero, so the equation will Momentum and oscillators try to identify the near-term price
have a constant offset or bias term to depict this. direction and turning points of the cyclical components.
2 The overall price change for the time charted has They will be discussed in part 3. The rest of this article will
an upward trend. be an examination of the cyclical components.

3 The price also exhibits a cyclical pattern of varia- Cycles

tion with time about the trend. In fact, there are Cycles will be the first element discussed of the model be-
multiple, interacting cyclical components. cause the mathematical concepts will be used later with oth-
4 Finally, there are smaller, seemingly random, er topics. That stock prices have a cyclic component seems
short-term variations of the price that mask other like common sense based on economic/business cycles,
signals that we might call noise. In traditional sig- seasonality effects, and political/social events such as the
nal processing models, the noise is a random fluc- four-year Presidential cycle. We would expect these to affect
tuation independent of the signal and usually con- stock prices, and we see in the charts that prices move up
sidered to have an average of zero (that is, white and down with cyclical patterns. If, in fact, stock prices do
noise). To quote money manager Barr Rosenberg: exhibit regular cyclical behavior, then knowledge of these
“Randomness is not a mystery. Instead, it is the cycles could help identify future price changes and aid in
poorly described aspect of a process.” The noise locating buy and sell opportunities. We would like to find an
then is any signal variation for which we cannot objective mathematical description of price action that we
develop a deterministic model. could use.
April 2010 • Technical Analysis of Stocks & Commodities • 43

+Barlis 1004_New2.indd 2 2/25/10 1:34:13 PM

 6 TRADING TECHNIQUEs
T
C
that cos(0) = 1, the peak value. In this case, we chose
3
to put time t = 0 at a point on the cosine curve that is
Pmax not the peak, so we say that the signal is displaced by
D the phase angle a. We now have the complete math-
ematical description of a sinusoidal signal.
Amplitude

0 Various authors also loosely use the term wave

to refer to a cycle or, alternately, part of a cycle.
B
Portions of a cyclical signal are reflective of spe-
p cific trading conditions. The labeled portions of the
-3 cycle shown in Figure 2 are often alternatively re-
A ferred to as:
A: Accumulation, bottom, low, or basing
-6 B: Markup, advance, bull market, or rising
0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48 51 54 57 60 63
C: Distribution, top, high, or topping
Time
D: Markdown, decline, bear market, or declining
Figure 2: cosine wave with definitions. The time T between successive peaks (or
bottoms) of the signal is called the period of the signal and has units of time periods such as
days, weeks, and so forth. Its inverse is called the frequency and is measured in cycles per
time period.
As we will see, many technical indicators are
aimed at identifying which of the four phases a mar-
ket is in and when the transitions between them occur.
We will start with the simple sinusoidal function, shown Look at Figure 3, where two signals with the same period
in Figure 2, to define some terms. The time T between suc- but with a phase difference are plotted. Sinusoid 1 is the plot
cessive peaks (or bottoms) of the signal is called the period of the equation:
of the signal and has units of time periods such as days,
weeks, and so forth. Its inverse is called the frequency and Equation 1-3a: P1(t) = Pmax Cos(wt)
is measured in cycles per time period. We will occasionally
make reference to the frequency, but in practical technical and sinusoid 2 is the plot of:
analysis, the period is usually the easier to use since we can
measure the time directly. Equation 1-3b: P2(t) = Pmax Sin(wt)
The amplitude of the signal varies with time and can be
represented by a cosine function as: Using the rules of trigonometric identities we can also
say that:
Equation 1-2: P(t) = Pmax Cos(wt + a)
Equation 1-4a: P2(t) = Pmax Cos(wt – π/2)
The maximum value of the signal Pmax is measured from
the center or zero point to the peak of the curve. The term and

Equation 1-4b: P1(t) = -Pmax Sin(wt - π/2)

2π
w=
T These equations show us that the cosine signal leads the
sine signal by a phase angle of π/2 = 90 degrees or a quarter
is called the radian frequency. It is more convenient to mea-
cycle. The peak of the cosine signal comes a quarter of a
sure the angles for the trigonometric terms in radians instead
period in time before the peak of the sine signal. Conversely,
of degrees, since we can just use this formula for w and our
we can say that the sine signal lags the cosine signal by a
knowledge of the period to calculate the cosine. The radian
quarter cycle. As a final mathematical note, from calculus
frequency 2π is equal to 360 degrees, so when t = T, the
we know that the cosine is the derivative of the sine func-
angle is the same as 360 degrees. The a term in the cosine is
tion. The derivative is interpreted as the instantaneous slope
called the phase angle, also measured in radians, and is the
of a function at a point.
angular distance between two signals or a signal and a refer-
As you can see in Figure 3, the slope of the sine is at
ence point. In Figure 2, a is the angle defined by:

2π p
Many trading strategies are based on
T
technical indicators. It is important to
where p is the time measured between the peak and the zero know that the indicators are sound.
reference point. We know from our trig tables or calculator
44 • April 2010 • Technical Analysis of Stocks & Commodities

+Barlis 1004_New2.indd 3 2/25/10 2:59:05 PM

 7

P2(t)
a maximum as it goes through zero. At the same
time, the cosine is at its peak. When the sine is at
Amplitude

0 its peak and the slope is zero — changing from

positive to negative — the cosine is zero, going
from positive to negative. We will use these prop-
P1(t)
erties in a later article when we examine momen-
tum and oscillators.

-7 Fourier analysis
0 3 6 9 12 15 18 21 24 27 30 33 36 39
When we look at a chart
Time of stock prices, we do
FIGURE 3: TWO SIGNALS: SAME PERIOD BUT WITH PHASE DIFFERENCE. The cosine wave not see a nice sinusoi-
P1 is phase-shifted a quarter cycle with respect to the sine wave P2. These equations show us that dal variation. Instead,
the cosine signal leads the sine signal by a phase angle of 90 degrees. we have something that
looks cyclical. We need
to have multiple cycle
5 terms in our model to
describe these cycli-
cal patterns. The 19th-
century mathematician
Joseph Fourier showed
that any periodic signal can be represented by a
sum of sinusoidal components having different fre-
Amplitude

0
quencies (harmonics) and amplitudes. The formula
used to represent an arbitrary periodic signal in
this fashion is called a Fourier series. For example,
Figure 4 shows three harmonic sinusoids, which,
when summed with a constant offset at each point
along the horizontal axis, results in the complex sig-
-5 nal shown in Figure 5. You may recognize this as
0 10 20 30 40 50 60 70 the classic pattern used to explain the Elliott wave
Time theory. Fourier series can be constructed to show
FIGURE 4: THREE HARMONICALLY RELATED SINUSOIDS. The formula used to represent an common chart patterns such as head & shoulders,
arbitrary periodic signal in this fashion is called a Fourier series. triangles, and saucers.
Implicit in a Fourier series as shown in Figure 5
are a number of properties often found in physical
signals. The composite signal is the result of sum-
Y = -4cos(2wt) – sin(5wt) – 2cos(8wt) + 10 ming the component sinusoids. There is a harmonic
20
relationship between the components by definition.
In addition, the amplitude is commonly inversely
proportional to its frequency. Higher-frequency
components usually have less energy. Analyst John
Murphy refers to these properties as the principles
Amplitude

0 of summation, harmonicity, and proportionality.

Since we can construct a complex periodic signal
by adding the appropriate terms in a Fourier series,
it is logical to assume that we can deconstruct a
complex periodic waveform into its Fourier series
components. The mathematical technique to do so
0 is called a Fourier transform. The discrete Fourier
0 10 20 30 40 50 60 70 transform (Dft) is used for discrete sampled data
such as stock prices. While straightforward, the
Time transform typically involves a tremendous number
FIGURE 5: SUMMING UP THE SINUSOIDS. Here you see the signal that results in summing up of calculations.
the three sinusoids from Figure 4 with a constant offset. Early analysts used mechanical tools to measure
charts for cycles and some software packages offer
April 2010 • Technical Analysis of Stocks & Commodities • 45

+Barlis 1004_New2.indd 4 2/25/10 1:35:02 PM

 5 TRADING TECHNIQUEs

4
is broken down into a set of frequency components,
3 much like a prism breaks down light into various
Magnitude

color frequencies of the spectrum. Fft tools can be

2 found in spreadsheets, math toolkits, and some trad-
ing software packages. Figure 6 shows the frequency
1 spectrum for the signal of Figure 5 with the constant
component removed.
0 If we can use the Fft to identify the cycles hid-
0 8 15 22 29 den in the data, we can surely forecast the price ac-
Frequency tion. Alas, there are some significant practical prob-
lems with this approach.
FIGURE 6: FREQUENCY SPECTRUM. Here you see the frequency spectrum for the signal in The first problem — minor but not insignificant
Figure 5 with the constant offset removed. to the average trader— is that it takes skill to use the
9 • Technical Analysis of StockS & commoditieS Fft and interpret the results. The data needs to be
“cycle finder” tools using a similar technique. J.M. Hurst, detrended and carefully preprocessed before applying the Fft.
tact Karen Moore
onewith
of theapproval
pioneers or changes:
of modern analytical technical analysis, The result is seldom as simple as shown in Figure 6 or as often
introduced the concept of spectral analysis for stock cycles demonstrated in articles describing the technique. A good ex-
using• the
6-938-0570 ext. 312 fax: 206-938-1307
concepts • email:
of Fourier analysis. [email protected]
approach he de- planation of these issues can found in books on signal analy-
scribes is more graphical because of the limited access to sis and previous articles and the associated sidebars from this
computers at the time it was written. He does provide in the magazine. Technical analysis software packages that provide
appendix a method for calculating a Dft by hand! spectrum analysis tools have solved some of these problems
proof #1
Thanks to powerful personal computers and an efficient but the use and interpretation is still problematic.
algorithm called the fast Fourier transform (Fft), it is possi- A second problem is a technical issue with the amount and
ble for anyone to use the Dft to examine stock data for cycles. frequency of data needed to identify a cycle. Terms with very
The technique is often called spectrum analysis, as the data long periods show up as trend and the longer-period cycles
can be identified with the proper technique, but information
on shorter-term cycles wanted for trading can be ambiguous
dan Zanger’s or lost in the noise. There are also endpoint problems with
the results and the endpoints are the most critical for trading,
Chartpattern.Com what analyst John Ehlers refers to as the “hard right edge.”
This manifests itself as a distortion of the results at the end-
dan Zanger is a points of the data. Ehlers has written extensively on this and
other issues of cycle analysis and provides one alternative
Monthly Trader Magazine for identifying shorter-term cycles with minimum data using
“Top 100” trader of the year a technique called maximum entropy spectral analysis.
2 Years In A Row! Perhaps the most difficult problem with cycle analysis is
that it is a descriptive tool applied to historical data assumed
to have the mathematical properties of a stationary process.
 High Power Market Leaders It will always find cycles in time-varying data, whether or
not they exist in a causal sense. By “causal,” I mean stock
 Chartpattern Recognition behavior driven by external causes that, if continued, would
allow us to project the price into the future. Causal processes
 Strong Groups use only the current and past data values as inputs. If the
 Seasonal Tendencies process is stationary, then the cycles can be expected to con-
tinue into the future and price action could be predicted us-
 Nightly Report ing this knowledge.
It is not clear that stock prices are totally causal and exhib-
 Loaded With Stocks Set it stationary qualities. The external factors affecting price,
not explicitly represented in the past price data but are at best
To Move Big! in the noise component, can have a significant impact on
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spectral analysis is by no means a sure thing. Some stocks
Free 2 WeeK trIaL! seem to have strong cyclical tendencies, but even these are
subject to externalities that can ruin the pattern.
For more information circle No. 5 As an illustration of these problems, look at the three
46 • April 2010 • Technical Analysis of Stocks & Commodities

+Barlis 1004_New2.indd 5 2/25/10 2:59:45 PM

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DVD_1126.indd 1 12/9/09 10:37:55 AM

 TRADING TECHNIQUEs
50.00

charts in Figure 7. One of these is synthesized

45.00 from a Fourier series, one is produced by a ran-
dom walk process, and one is actual stock data.
It may not be easy to identify which is which by
eye, and an Fft analysis will produce a plausible
40.00 spectrum for all three cases. Using the results of
an Fft to forecast the future prices for the random
walk case would result in a low probability of
success and would be questionable for the actual
35.00
stock data.
1 11 21 31 41 51 61 71 81 91 101 111 121
Cycle analysis
50.00 For the purpose of technical indicator develop-
ment, historical price data can be modeled math-
ematically as a function of time. Cycle analysis
shows us a snapshot spectrum of historical price
45.00 action. A scan over time of such data will show
that the periods and amplitudes of the cycles are
irregular; changing external conditions are one of
the causes of these irregularities. The stochastic
40.00 nature of stock prices means that the results of an
Fft often make a poor predictor of future price
action. The shorter-term cycles with the most
potential for trading decisions are also the most
35.00
1 11 21 31 41 51 61 71 81 91 101 111 121 problematic. This keeps cycle analysis from be-
ing the “killer app” of technical analysis tools.
Although the Fourier cycle analysis may have
50.00 limited use in forecasting future price action,
especially in the short term, it can provide the
trader much useful information. Examples that
45.00 will be analyzed in upcoming articles in this se-
ries include:
1 Choosing the appropriate smoothing pe-
riod for moving average and other low-
40.00
pass filters

2 Determining the length of time to be

35.00 used for linear regression analysis
1 11 21 31 41 51 61 71 81 91 101 111 121

FIGURE 7: WHICH OF THESE CHARTS IS THE REAL STOCK DATA? If you answered the top
3 Choosing optimal parameters for oscil-
chart, you would be correct. The middle chart is synthesized from a Fourier series and the bottom lators
chart is a random walk.
4 Picking the time period for channels and
envelope indicators such as Bollinger
bands

5 Forecasting near-term prices to improve

indicator performance

6 Filtering price data to reveal selected

model components.

When combined with other indicators, Fourier

“Mine is the typical American success story. I started out analysis can be used for evaluating the overall
with nothing and now I am in debt for 200 grand.” state of the market and help identify turning

48 • April 2010 • Technical Analysis of Stocks & Commodities

+Barlis 1004_New2.indd 6 2/25/10 3:01:07 PM

 points in the trend. Many technical indicators can be sensi-
tive to the tuning parameters chosen for their calculation.
Knowledge of the dominant cycles can be useful in choos-
ing the correct value for indicators. Be cautious, however,
because parameter tweaking may be a symptom of an overfit
model. We should question if it is wise to trade based on
such parameter-sensitive indicators.
We will discuss these issues and other tools in the follow- Are you committed
ing articles of this series and see how cycle knowledge can
be applied to them. to being a
Glenn Barlis is an electrical engineer with a master’s degree
“Recognized Expert”?
in business administration and computer science. Now re-
tired, he was a research & development manager for a major CMT, the only designation for Technical Analysts that
integrated oil company. He may be contacted at gabarlis@ qualifies as a Series 86 exemption as recognized by FINRA.
rochester.rr.com.

References
Bernstein, Peter L. [2005]. Capital Ideas, John Wiley & Sons. Registration is Open
Bloomfield, Peter [2000]. Fourier Analysis Of Time Series,
John Wiley & Sons. Sign Up Now
Ehlers, John F. [2002]. Mesa And Trading Market Cycles, 2d
ed., John Wiley & Sons. More info: [email protected] or 646-652-3300
Note: For S&C articles by John Ehlers on signal process-
ing and cycles, go to www.traders.com and search the
article archives for “Ehlers cycle” For more information circle No.15
Elder, Alexander [1993]. Trading For A Living, John Wiley
& Sons.
Hartle, Thom [1994]. “Preprocessing Data And Fast Fourier
Transform,” Technical Analysis of Stocks & Commodi-
ties, Volume 12: April.
Hurst, J.M. [2000]. The Profit Magic Of Stock Transaction
Timing, Traders’ Press. Originally published by Prentice
Hall, 1970.
Hutson, Jack K. [1983]. “Using Fourier,” Technical Analysis of
Stocks & Commodities, Volume 1: January/February.
Jackson, Leland B. [1995]. Digital Filters And Signal Pro-
cessing, 3d ed., Springer.
Meyers, Dennis [1999]. “The Discrete Fourier Transform Il-
lusion,” Technical Analysis of Stocks & Commodities,
YOUR ONLINE
Volume 17: April. RESOURCE
Murphy, John J. [1986]. Technical Analysis Of The Futures FOR
Markets, New York Institute of Finance.
Warren, Anthony W. [1983]. “A MiniGuide to Fourier Spectrum
TECHNICAL
Analysis,” Technical Analysis of Stocks & Commodities, ANALYSIS
Volume 1: January/February.
Warren, Anthony W., and Jack K. Hutson [1983]. “Fast Fourier
Transform,”Technical Analysis of Stocks & Commodities,
Volume 1: January/February.
_____ [1984]. “Forecasting With Maximum Entropy,” Tech-
nical Analysis of Stocks & Commodities, Volume 2:
December.
_____ [1984]. “Maximum Entropy Optimization,” Technical
Analysis of Stocks & Commodities, Volume 2: July/
August.
S&C

April 2010 • Technical Analysis of Stocks & Commodities • 49

+Barlis 1004_New2.indd 7 2/25/10 1:36:30 PM

 INTERVIEW

Secular Cycles In Gold, Currencies, Equities

Juggling Dynamite
With Danielle Park
With more than 18 years of professional consulting experience, Danielle Park is an
attorney as well as a Chartered Financial Analyst (Cfa) and finance author. Park
is a regular guest on North American news media and a popular keynote speaker
about investment markets and money. She is the author of the best-selling book
Juggling Dynamite and a popular financial blog, www.jugglingdynamite.com. She
is a member of the internationally recognized Cfa Institute, the Toronto Society of
Financial Analysts (Tsfa), and she continues to be a member of the Law Society
of Upper Canada. Stocks & Commodities Editor Jayanthi Gopalakrishnan and
Staff Writer Bruce Faber interviewed her on February 8, 2010, via telephone.

D anielle, how did you get inter-

ested in the markets?
I was an attorney for a number
So what did you think would be a good
strategy?
We came to the conclusion that the
of years before I was recruited by a sell- passive buy & hold, the passive alloca-
side securities firm in the mid-1990s. I tions to equities that individuals, mutual
became a portfolio manager, finished my funds, and pensions were using in the
Cfa, and cofounded our current com- 1980s and 1990s, were going to be a
It’s a myth that gov-
pany, Venable-Park Investment Counsel, disaster in this coming period. ernments can step in
with my partner and market technician, This was, of course, all supposition to save the market.
Cory Venable, in 2003. on our part, or educated guessing; no
Doing historical research in the late one knows the future until it actually of risk and volatility with very poor
1990s, we came to see that the 1980s and arrives, after all. But we reasoned that returns. Timing was going to be more
1990s were the best and smoothest secular probabilities favored that we were going important than stockpicking or pretty
bull in stocks ever in human history. into a long or “secular” bear period like much anything else.
We also saw that the “easy gain buy & we had seen in the 1960s and 1970s, So we came up with an approach using
hold” period was not likely to continue, and the 1920s to the 1940s, and that a exchange traded funds (Etfs) for broad
and we were likely headed into a much fundamentally different asset allocation market and sector-specific exposure in-
more challenging environment within approach was required. We came to a stead of having individual company risk.
15 to 20 years, of almost the opposite number of basic principles. We then designed our own grouping of
conditions that the world had known in technical filters to monitor money flow
the 1980s and 1990s. Which were? and about five other key elements.
We came to this realization because That you needed to have tactical al- Maintaining objectivity is paramount,
I am a macro-market analyst and my location to risk assets, you could not just so we don’t love risk assets. We don’t love
partner is a Chartered Market Techni- buy & hold anything, you had to have a commodities, stocks, or any particular
cian (Cmt), and we both have a passion set of rules for when to buy and when to sector. We follow our universe on a very
for market history and cycles in human sell again. In this environment, when to objective count basis using our filters.
behavior, so between our training and buy and when to sell became the most That is where my partner’s Cmt training
studies from other periods in history, like important call. Commodities were likely comes in.
the 1920s, 1930s, 1940s, and 1950s, we to be in a secular bull period during this Even within secular bull or bear peri-
put two and two together and said, “Oh, time when stocks were in a secular bear ods, you are going to have the business
no, look what market conditions may period. So that could be good for the cycle within it. During the business cycle,
be coming our way!” Then we asked, Canadian market, for example, but it you get this economic bottoming phase
“What kind of an investment strategy would be extremely volatile. If people every four or five years, where you have
will people need if they are going to tried to passively allocate to stocks or a recession, and risk assets sell off. This
retain their capital and get some growth commodities during this environment, is a normal part of each market cycle,
in this difficult period?” it was likely to be very painful, a lot but during secular bear periods, these are
50 • April 2010 • Technical Analysis of Stocks & Commodities

+Park Interview_New.indd 1 2/25/10 10:44:02 AM

++Full pg Ad Template.indd 1 1/15/10 9:28:19 AM
 INTERVIEW

really profound downturns. They tend to you are in the middle of a hurricane and Stock Exchange (Tsx) is now below
be much longer and steeper than people you are trying to row your way through where it was in 2000. So it is this kind
are used to during secular bulls. it without capsizing. of investment climate where you can’t
During these times, you cannot afford Income-paying assets are a big help be passive, you can’t relax and enjoy; it
to be lackadaisical. When money flow is during this period, but it also means you is just too violent.
leaving, you need to get out of the long have to avoid overpaying for income If you don’t have a mechanism for
side of the market by selling or hedging assets because where they are equity- controlling your market risk in this sort
to avoid the big losses. If you can avoid based, they still have a tendency to cor- of hurricane, you should stay away from
losing chunks of money with each of rect violently with the down cycles and risk assets altogether. That is because
the cyclical downturns and participate take your capital with it. On top of this, high-quality government deposits or
in even a portion of the recovery expan- as I say, “People’s deposits come to them things that pay modest income and take
sions, we can survive and get ahead dur- lumpy in life.” no market risk have always outperformed
ing these secular bear periods. Without a passive risk investments in these peri-
method like that, you would do better to What does that mean? ods. Not losing money becomes much
just stay out or risk markets completely Typically, people have very little money more important than how much the
until this period finally ends. This secular when they are young. They gain the bulk markets gain in each up cycle. This can
bear period began in 2000 and is likely to of their capital later in life as they amass be a challenging concept for traditional
last until 2017 or so, so we may be just a nest egg, sell a business or property, or “investors” to understand.
about halfway through it. inherit. By the time they have the bulk of At our firm, all of our accounts are
History tells us that during these con- their life savings, their investment horizon balanced. We have a fixed-income com-
ditions, you get a range-bound market is shorter and its capital can’t be easily ponent and we have an earmarked-growth
where, for example, the peak of 2000 replaced. The typical advisor mantra is, component, but that growth component
becomes the peak of 2007 and is likely “You have a long investment horizon can be as little as zero percent invested if
to be the peak of 2011 or 2012. In be- because you don’t need this money for our readings are flashing our sell signals.
tween, you are going to revisit similar 20 years,” but the secular periods have to And when we have buy signals, we can
lows each downturn. So we saw the be taken into account because if you had be fully invested again up to our target
same 2002–03 stock market lows again put money in the stock market in 1920, in weight. So in a 50/50 mix, you would
in 2009. In fact, we got a slightly lower 1940 you would have actually lost money never have more than 50% of the ac-
low in 2009 than we did in 2002, and for 20 years. count fully invested in equities and you
we are likely to retest that same low at It was roughly the same thing in 1960 could have as little as nil or anything in
least one other time, perhaps twice in to 1980; you would have lost money for between.
the next few years. almost 20 years. The same thing is go- For an example of this, we started to
Because of that market pattern, you ing on now. From 2000 to 2010, passive get sells in our rules in early 2006 be-
need to think of yourself as operating in allocations to stocks have lost money. ginning with the financials first. At the
the midst of a hurricane throughout this Even in the Canadian market, which is time, everyone was madly in love with
entire 15- to 20-year period. You can rich in resources, and within the idea of a financials, and they enjoyed a remark-
never fall asleep at the helm because secular bull in commodities, the Toronto able run, but we got sells and so we sold.
They are a leading sector for the overall
market. By 2007, we had pared back all
of the equity exposure in our portfolio,
except for our sector weight in gold and
Canadian energy companies. In early
2008 they came up as a sell as well.
We did not get any buy signals on the
equity side again until February 2009, so
we missed the bear market of 2008–09
completely and then reentered in Febru-
ary 2009. Those positions worked well
for a 10-month trade, but we recently
confirmed sells again on our rules. Now
we are basically down to zero equity
exposure again. This does not mean that
risk markets can’t continue to rally from
here, it just tells us that downside risk is
now higher than further upside reward
“According to his wife, he took a clobbering on Wall Street.” and so prudent risk management requires
52 • April 2010 • Technical Analysis of Stocks & Commodities

+Park Interview_New.indd 2 2/25/10 10:44:28 AM

 caution and capital protection again. was $250 or $500, but then you became of the erroneous policies that went on
Of course, this approach is completely very confident and piled in a bunch more during the secular bull climate. What
at odds with most of the rhetoric that the when gold was at $1,000. The question you had from 1982 through to the early
investment industry espouses. I speak at you need to define is, when would you 2000s were falling interest rates, falling
a lot of investor shows and hard-asset sell? You need to have something more inflation, declining regulation, falling tax
conferences. The error I see a lot of than just an optimistic buy idea. rates, all of which were extremely good for
people making is the “recency effect,” business and risk assets — at the time.
or presumption that a recent market trend What’s an example? Now, what happened was — and this is
will continue unabated. Chinese demand is one that everyone what always happens — we are facing the
For example, when oil was at $147 a hyperventilates over. They say, “China’s great unwinding of these easy conditions
barrel, there was an expectation it would one billion people want to be middle- into a period of increasing regulation,
continue from there to $200 or more. There class, so they are going to be voracious increasing rates, increasing taxes, and
was no consideration for the violent nature consumers of all the goods and services eventually increasing inflation. These
of the pullbacks within these cycles. People and commodities in the world!” But that now become our secular headwinds for
remained heavily exposed even as prices doesn’t seem to be the case. Yes, there the world economy.
went off the charts in gains and risk. is a lot of people there, but they are not There were, for example, the Glass-
Copper at $4 was a bubble-like price, good at consuming. They are not a vi- Steagall Act, which came in after the
and people kept holding, thinking, “We brant middle class. You might have 150 credit crisis of the 1930s, and the Invest-
are in a secular bull in commodities, million people there who would be close ment Company Act of 1940 came in to
prices can only go up.” Of course, that to Western-style capacity for consump- restrain and define obligations for banks
is a horrendous misunderstanding of tion. The rest are basically still trying to and the investment advising population
market history. Copper corrected to $1.37 survive. They don’t have a social safety in the United States. These policies
from $4.00. That is a hell of a correction, net. So they tend to be people who save were introduced in response to a period
right? So price always matters. It is not and don’t spend. You have to be mind- of unbridled risk-taking and leverage
good enough to say we are in a secular ful of those realities within all of these that led to the financial disaster of the
uptrend, so pile in and forget about price. long-term arguments that people make mid-1920s and 1930s. Today, we are
No price is always our greatest risk; we for why demand should continue to surge, having to reinstate similar regulations
can’t fall in love with a story and forget even with a Western world decline. to safeguard the system once again. Yes,
about price. these regulations will constrain growth,
You mentioned in your blog that you leverage, and profits for market partici-
So where are we right now? expect several financial aftershocks in pants, but that is the point. Without these
At the end of January, the uptrend 2010. Is that because we are still in a constraints in place, individuals and the
since March 2009 has been broken in secular bear market? system overheats and blows up. We have
most markets around the world. We don’t Partly. However, the secular bear mar- enough history now to know the dangers
know the extent to which a pullback will ket is really a symptom or an outcome inherent and plan ahead to protect us
take prices down, but we do know that
most assets seem to be at least 25% to
30% overvalued again. That would be
pretty much across the board, so those
who are concerned about protecting their
capital have to be pretty defensive until
this contraction plays out.

What about other commodities like

gold?
Gold seems to be in a slightly dif-
ferent category because the whole “fiat
currency, fear of government default”
theme is driving gold at the moment, but
you can have a secular uptrend in gold
and still get a correction to $700 within
that uptrend.
Anyone not realizing that leaves them-
selves very risk-exposed. Others may be
piling in more capital, but late in the story. “You’re lucky, Smith. You don’t have to deal with the
Maybe you bought some gold when it tax consequences of a big salary and bonuses.”
April 2010 • Technical Analysis of Stocks & Commodities • 53

+Park Interview_New.indd 3 2/25/10 10:44:43 AM

 INTERVIEW

from ourselves. When was that? had a big civil uproar around the world.
Economist John Galbraith used to say, Risk was mounting for many years Political risk and sovereign risk are part
“Every generation’s memory is exactly before that, particularly from 2005, when of the aspects I am speaking about when
as long as its own experience.” That is Federal Reserve chairman Alan Green- I say that the aftershocks will reverberate
it in a nutshell. So what we have found span cut rates after the 2003–04 disaster through 2010–11 because of the realiza-
is that periods of smooth sailing don’t and left them at 1% for a year. You saw tion that the politicians have spent all this
build great sailors. Instead, you had the predatory lending because they cut money to help but haven’t. In fact, the
people who hoisted sails and went to all the regulation that was constricting politicians have really just added to debt
sleep and thought: “Who needs regula- leverage. What you had was this systemic and not been able to salvage the economy
tion? It all looks after itself. You don’t bias in favor of reckless risk-taking. That or restore demand in the economy in
have to worry about bubbles, because is why we got into this disaster. Now a meaningful way. So you get a lot of
they can’t happen.” it is going to take quite a while for the public outrage and anger because they
Of course, just as risk is peaking, system to get cleaned up, written down, have realized it is not a quick fix.
people are the most complacent, and and written off. A while ago, there was
just as you need the most government all this talk about how the US is differ- Nothing is.
intervention and regulation to pull things ent than Japan, saying, “We will never There is nothing easy that can be done to
back from the precipice, legislators are be like Japan because they didn’t want get job creation back in the economy and
slashing all the rules and saying: “We to recognize their banking losses. Their people spending again. A lot of politicians
don’t need this anymore. We are bigger, pride got in the way. Their honor didn’t will not get reelected. A lot of the plans
brighter, better.” And they forget every- allow them to admit mistakes!” that have been proposed to date will prove
thing that was learned the hard way in to be ineffective. It will just take this long
the last debacle. But they were wrong! period where slowly but surely things get
We are now in this period where we If you look at what has happened in the written down, losses get admitted, assets
have to pay back what we overleveraged. last two years, it is remarkably similar. get revalued, and new consumption levels
So you are seeing credit contraction. You The leaders who led us down the rabbit are established, which is below where we
are seeing consumer debt that was exces- hole are still trying to lead us in the same were three years ago.
sive beyond belief now downloaded onto direction. Even President Obama, who At the peak of the credit bubble, you
banks in the form of bad loans, and then came in on this pledge of change, has not had demand at record levels. You had
downloaded onto governments in the changed anything. Really, there has been profitability of companies at record
form of bailouts and sovereign debt. So no meaningful regulation brought in. We levels. You had world Gdp north of 5%.
far in this process we have not actually had the Volcker rule proposed a couple Now you are in a world where even a
accomplished much since the credit crisis of weeks ago. That was the first effort to recovering economy is going to have a
hit in March 2007, which was not when define anything that would actually be Gdp of something like 3.5%. Even with
risk appeared, by the way — it was when meaningful regulation, and it didn’t look massive stimulus spending, 3.5% world
risk was recognized. like it was going to fly, even though you Gdp would be a fairly optimistic outcome
for 2010. Yet compared to where we were
previously, it is not going to feel like a
great outcome. It is not going to feel like
everything is rosy again. As you go along
through that, you get into the tough slog
of it, which is just work hard, save more,
build up your personal savings rate, pay
down your debt, spend less, and learn to
be happy with less. That is the frugality
that ultimately becomes the generations’
behavioral shift.
My grandparents were in the Great
Depression, and they had that mindset
ingrained into them. Unfortunately, the
generation in between theirs and mine
was born into economic halcyon days
where conditions were relatively easy
and so fewer people developed the tough
slog skills. Now we are all learning them
the hard way again. It was like everyone
was in this drunken orgy and you were
54 • April 2010 • Technical Analysis of Stocks & Commodities

+Park Interview_New.indd 4 2/25/10 10:45:02 AM

 like, “They are going to wake up and see since March 2009 on a falling US dollar. US dollar was deeply oversold and not
what a mess we’ve made!” And then they That is the top reason. If you think it has as bad off as some others like the euro,
did wake up, and now they are starting anything to do with Chinese demand or then you have to believe there is going
to say, “Oh, wow! We have to fix this!” rebounding economy, all that, you are to be a rebound in the dollar, even if it
It’s going to take a few years. sorely mistaken. The fact of the matter goes down again in the longer term.
is the dollar was falling. People could
It’s not going to be quick at all. borrow the dollar at next to zero and How?
So most investors did not understand speculate in other places, and that is Dollar moves historically come in
we were going into this profoundly dif- what they did. legs. We studied the dollar for many
ferent climate. They kept doing the same Our indicators were coming up fairly decades and it tends to do this kind of a
old passive allocation to risk. They have bullish last February, so we started accu- bottoming process like it did in the early
lost money now for 10 years. They’ve mulating assets, but by June we noticed 1990s: a three-legged bottom. Once it
lost half their money, twice in two bear that the volume was not increasing with tests, it can recover from 70 to 84 in a
cycles. But you don’t have to keep doing the trend. Fewer and fewer dollars were matter of months. The last time it did
that. Do yourself a favor and don’t even buying it. That is not the precursor for that, the stock market dropped 50%.
try to be into the risk asset market unless a lasting rally. That is the precursor for You have to be aware of that as a major
you can do so with strict rules about how some kind of a head fake and then a risk to whatever investment thesis you
much of your allocation can go into any retest. That is why we were carefully are having. The US dollar broke out in
one sector or asset class and when. watching the trendline from the March the past couple of weeks, and lo and
A couple of weeks ago, a gentleman bottom because once it was breached, behold, the risk trade breached the March
from the Netherlands came up to me and you know things are way overdone to trendline to the downside. Now we are
said, “I run a family trust, and I’m here to the upside. You have to look at “what- into this wait & see mode. But always
get investment ideas at this conference.” if” scenarios. What if it holds support at keep watching because, as I said, it does
He told me how he has 60% of his money different levels? What will you do, and it in legs and it can be sharp and short
in gold because he has no confidence in what is your exit strategy? No one seems and devastating for other asset classes.
institutions. So I said, “So where is this to have within their realm of possibility I don’t think it is the end of the world.
gold? Is it in your basement?” He said, that we could retest the March lows. I just think we are going to go through a
“Some of it, but mostly it is in vaults at I find that amazing because if you get reality check here, and probably a fresh
financial institutions.” I said, “Aren’t another fresh wave of default foreclosure wave of risk-aversion with respect to
those the institutions that you have no data in the US, and it turns out the hous- world markets.
trust in? Isn’t that why you are accumulat- ing market has not stabilized, which I Copper corrected again $0.50 to under
ing all the gold?” People have been like would suggest it hasn’t yet; we are going the $3.00 level in late January. That is a
automatons again, saying: “Banks are to see a fresh phase of credit crisis. We significant downside test, but we still see
bad. Government is bad. No trust.” The have not bottomed yet in housing and that long-term support is about $1.37, so
reality is that a global economy without commercial real estate. You could have we are way above that. I’m just cautious
a fiat currency system, whether it is the a risk-aversion trade that comes back about where asset prices are. Institutions
US dollar or otherwise, is not possible. with vengeance and surprises the hell
Humans are prone to emotional deci- out of everybody.
sions in response to recent developments The other major thing that troubled
rather than following an objective practi- us is that the rally since March 2009
cal rule set to keep them out of trouble. had no meaningful test. That is just not
the way price tends to behave in these
The rally we’ve had since March 2009 cycles. You get some kind of a pullback
until recently was disconnected from or retest to define the bottom. It is a pro-
economic fundamentals. While the cess and we have not seen that. Then we
fundamentals were weak, you saw the were watching the US dollar so carefully
markets rallying and saw that same because of the rhetoric about gold and
euphoria again. I would think that now the US being such a print machine, and
this is another time when people are go- all that is valid commentary in the sense
ing to start realizing that when it goes that we agree they are on a dangerous
down, it goes down really fast. path to huge deficits and huge debt. The
If you look on my blog, juggling- trouble is that we also track most other
dynamite.com, on Friday [February 5, currencies and countries in the world, and
2010], I put up a chart of copper. This relatively speaking, they are doing very
chart makes the point, which is that risk badly as well, and in many cases worse.
assets in the world have been driven up When you realize that currency-wise, the For more information circle No. 22

April 2010 • Technical Analysis of Stocks & Commodities • 55

+Park Interview_New.indd 5 2/25/10 10:45:16 AM

 INTERVIEW

haven’t been any better than individuals, the next year or so, deflation will have 2002 lows again sometime in the next
quite honestly, because they were doing the upper hand. You will see interest few years.
all sorts of passive allocations, especially rates begin to move higher. Again, I When you realize you are not climbing
to hard assets, thinking that they were don’t think that will happen for a while a mountain that goes up forever, but that
some kind of an asset class you could just because we continue to see such massive this is a roller-coaster full of steep drops
plop money into and go away for a quarter. deflation, and governments are scared and climbs, then you will be geared to
And of course, that has worked out badly. witless. They don’t want to raise rates, expect the conditions as they come.
So now a lot of the world’s pensions and but dividend rates will get higher when
institutions are having massive shortfalls. prices are lower. The S&P is yielding When you get out of equities, do you
The answer is going to be that they top up less than 2% again. It’s very unattractive. get into exchange traded funds (Etfs)
contributions, and again that is going to If we get to a period where valuations like Faz and Dxd?
come right out of corporate revenues, and come into dividend yields of 4% plus, We go to money markets or cash or
individual savings are going to have to be and price to earnings ratios of 10 or so, Treasury bills. Sometimes with short-
brought up through actual savings, which then investment prospects will look term government T-bills, we use a US
will be a significant drag on consumption pretty exciting again. Then you are into dollar Etf, but when we leave risk as-
for a while. a period where you have lots of ability sets, we want to be out of risk assets.
to deploy capital at reasonable prices. Sometimes, people will ask us why we
What are the signs that will tell us that It is unfortunate that it takes a while to don’t pile into bonds. We don’t because
there is growth? build that up. You can’t have it whenever we have to manage the risks on bonds as
Revenue will eventually trend up you choose it, or whenever you happen well. It is a separate set of parameters.
again. We saw earnings collapse 90% to have cash. Some people go long and short but we
from the peak in early 2007. The S&P You get it when the conditions cor- are not that aggressive in our model. We
earnings collapsed 90% from 2007 to rect enough to give it to you. The real are long, and then neutral, which means
2009. That is pretty remarkable! We opportunity comes when the secular and we would literally come out of equities
ought to see some kind of recovery after cyclical trends both turn back up and and park in Shv as an example of US
that. We should not expect that earnings there is real wealth stored in the econ- safety parking.
will fall indefinitely. That said, you go omy. The trick right now is to preserve We are concerned right now with the
back to an expectation for maybe 2% capital, grow savings, get rid of debt, front end of the curve being overpriced
to 3% growth, and probably less than and get through this challenging time. because of all the government interven-
that in 2010. Then you have to look at Then be well-poised. Have buy lists, tion. They have artificially suppressed
companies, or industries, that have cash, or have someone you trust who knows the front end of the yield curve, so we
that are defensive, that have a buffer. You what they are doing. That is easy to say find that short-term bonds right now are
watch the savings rate. but hard to do because so many people very expensive. So we stay in cash. Yes,
Here is a long-term trend. The savings are still brainwashed with these passive you collect a modest rate of return while
rate went from 20% in 1980, all the way allocation ideas. I think that for the next you are there, but there is no point in
to virtually nil in 2005. You have to get 10 years, these people will continue to reaching for more yield if you are going
that consumer savings rate back up above be very dangerous. to lose a big chunk of the capital.
10%, maybe even to 15%. It will continue You will have to pick very carefully.
to build because people now realize how Get your ducks in order. There will be Another thing you were talking about
vulnerable they are, now that the asset opportunities coming, and there may is getting the US savings rate back up.
bubble has burst and government has even be another cyclical opportunity here When the Japanese market crashed in
let them down. People realize that they shortly, but we have to let the test play the 1990s, they were a nation of savers,
need cash and not just a line of credit. out first. Then, if we get a rebound at a so that saved them. When we go down
You have to watch for things like that. decent level, and we see money flow go again, we are tapped out of our credit
So how will we know when we are in a back in, and we see volume supporting cards, and we haven’t saved either. Isn’t
fantastic opportunity in terms of a secular the trend up, then we will go back into our it going to be worse for us than it was
change? We will know because savings equity allocations again, but we will be for Japan?
rates will be built up again, and balance charting daily, weekly, monthly, looking The US can’t self-fund as well as they
sheets will be pretty healthy. People will for the next breach of the medium-term did in Japan. One thing that the US has
be spending less and saving more and trends, because we are expecting this going for it over Japan is immigration
have that nice buffer built up. retest of the 2007 top again sometime policy and a younger workforce. Japan,
Corporate profitability will be coming in the next few years, and a retest of the and China too, have disastrous demo-
out of the contraction time, and building graphics. Japan has been isolationist
slowly. People will be hiring workers for so long, not allowing new people to
again. You will most likely see some come in, that they have this huge aging
inflation eventually, but in the near term, population who are selling their govern-
56 • April 2010 • Technical Analysis of Stocks & Commodities

For
+Park Interview_New.indd 6 2/25/10 10:45:39 AM
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1001_PTSK_A.indd 1 12/30/09 9:47:56 AM

 INTERVIEW

ment bonds to live on, because they have Do you believe in this thing they refer men who put things up and down, as
next to no income. They have to liquidate to as the “plunge protection team,” that if we don’t have to worry because they
assets to provide in their old age. someone in Washington is telling the won’t let the market crash. They haven’t
It was great while they saved, in the banks to buy this stuff that causes these been able to help us for the last 10 years
sense that they could fund their own rallies like we had on Friday afternoon clearly, or the market would not have
deficit, but when you look at total debt [February 5, 2010]? crashed more than 50% twice.
to Gdp of 400% in Japan and you realize I am sure politicians would like to I have seen several articles where they
you still don’t have robust immigration influence the business cycle. There is no interview Chinese people who say they
and now your old folks are cashing question about it. They like to take credit believe their government won’t let the
out to live on their savings, you have a for it when the economy is expanding, stock market crash, but it crashed 70%
pretty dangerous scenario. I agree with and they don’t like to take responsibility in 2008. So if they are doing it, they are
what you are saying: it would be nicer for it when it is contracting. The truth is pretty poor at it. I wish some big man —
if Americans could have their own cash that they are not responsible for either, some would call him God, some would
to work with more. That said, they are other than they can help avoid disasters call him the Federal Reserve — could
buying their own T-bills now more than by having decent policies in place at the save us from ourselves, but unfortunately
they did for years. Americans are actually outset. it doesn’t seem to be possible.
saving in their own government-issued What I have noticed is — and this
debt, which will help, in a way, to provide is in my studies and readings from the Too true! Thank you so much for your
some of the liquidity, but not enough. different decades, Galbraith talked about time, Danielle.
When you look around the world, there it, the late Peter L. Bernstein, whom I
are so many governments and companies corresponded with, was a great help
trying to issue debt instruments. At some to me, talked about it a lot — this idea
point, who is going to buy it all? There that governments can step in to save the
are way more people wanting dollars than market is a myth! Everybody has this
there are people willing to place it. mythology that says there is these big S&C

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58 • April 2010 • Technical Analysis of Stocks & Commodities

+Park Interview_New.indd 7 2/25/10 10:46:03 AM

 Explore Your Options
Got a question about options? Tom Gentile is the chief options strategist at
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RSVP for a Cheaper Straddle? sition, you should be better equipped initial credit of the backspread. Despite
I like the idea of positioning with long toward finding and executing straddles the win, there could be a substantial
straddles, but when it comes to pull- more confidently and consistently. profit difference involved relative to
ing the trigger, I’m having problems Another strategy that may have been the long straddle. The adage “you get
executing. More often than not, the overlooked but might help on occasion what you pay for” does come to mind,
spreads that look the most attractive would be the long strangle. The at-the- and the trader needs to consider it when
overwhelm me with the actual cost to money strangle will cost less than the weighing the two position types.
initiate the strategy and/or the associ- same-month straddle, but the reduced
ated time decay. Can you offer any in- price tag does come with the less-desir- Cheap call at a cost?
sight that might help me get over this able characteristic of wider breakeven On more than a few occasions, I’ve
barrier to entry? points, which should be considered. noticed call prices relative to their put
That’s a very good question to a Finally, we know that by establish- equivalents trading at a discount. I
situation many investors battle with in ing a straddle, the trader is looking for know this type of situation is often tied
developing a trading plan. Your central a big move and/or increase in implied to shares being hard to borrow (Htb)
dilemma seems to involve time and its volatility. But do you have a bias with or potentially difficult to short. If I’m
impact on both shorter- and longer- regard to which way shares might bullish and simply want to buy a call,
term straddle pricing. This impact boils move if push comes to shove? If you isn’t this an opportunity to buy the op-
down to heightened concerns regarding maintain some kind of bias beyond tion cheaper than otherwise would be
increased decay risk when dealing with simply expecting a strong move, a ratio the case?
a near-term straddle versus a larger backspread could be an option to think This is the type of situation where I
capital outlay and larger dollar expo- about (if you’ll pardon the saying). would say the cheap call comes with a
sure of the longer-term straddle if left A typical backspread is the 1x2, likely cost down the road. The call buy-
unmanaged during the life of the con- wherein one contract is sold and two er is initially given a theoretical edge
tract. are purchased. If the trader sees a with the purchase. Important to consid-
For instance, if it’s January and move in shares as forthcoming but es- er, however, the straight-up call buyer
shares of Abc are at $35, the April 35 timates upside as being more likely, he loses any theoretical advantage imme-
straddle might trade for about $3.50, or she can sell a lower strike call and diately when any potential hedges are
while the February 35 straddle with buy more contracts of a higher strike passed on at the time of execution.
one month until expiration is priced at call in the same month. For expecta- Further, while the initial objective is
$2.00. Over the next month, if shares tions favoring a downside move, the to make a directional play, any eventual
sit or go nowhere, theta will eat up the trader could use all puts and purchase hedging that is considered in an effort
entire value of the February straddle or the lower strike. to reduce the bullish deltas should be
$200 per spread. When the backspread is executed expected to come with an offsetting
At the same time, because theta is for a credit, an explosive move in ei- disadvantage. The problem is the im-
not linear but works as a function of the ther direction will land a profit, much plied skew that made the call theoreti-
square root of time, if volatility remains like with the long straddle. If shares sit cally attractive could still exist, as Htb
flat, we could expect the higher-priced at the purchased strike, the ratio back- situations don’t just simply get resolved
April straddle to lose a lesser $0.65 per spread will result in a smaller loss than overnight.
spread or so and trade for $2.85 in the the equivalent long straddle placed on That said, when the trader is finally
open market a month later. the same strike. considering an adjustment, selling a
By looking at this issue of cost ver- The drawback or sacrifice to this call either to close or another short call
sus decay, having a firm idea of time strategy is when shares move explo- to open as part of a spread could be ex-
frame expectations based on your anal- sively in the direction opposite our ex- pected to be cheap. As part of the pric-
ysis and considering what type of risk pectations. Compared with the “near” ing dilemma, purchasing a put to hedge
management rules you have in mind open-ended profit potential of the long
prior to entering into any type of po- straddle, the trader is only collecting the Continued on page 85
April 2010 • Technical Analysis of Stocks & Commodities • 59

+1004 Gentile QA-Gloss.indd 1 2/25/10 3:24:46 PM

 Trading The Pristine Method Course
Part 2

Pristine by Dennis D. Peterson fact, you are given a point system to

7-11 South Broadway Street, Suite 210 quantify how successful a trade might

T
White Plains, NY 10601 his is the second of a two-part be. Part 2 drills deeper and analyzes
Phone: 800 340-6477 home study series on how what technical analysts really try to
Email: [email protected] to trade using the Pristine do: Understand what emotions and
or [email protected] method. Part 2 (Tpm 2) expectations are in play with price and
Internet: www.pristine.com gives more insight into the approach volume patterns. Pristine trading has
Product: Trading course taken by Part 1 (Tpm 1). In Part 1, little reliance on indicators. It is about
Price: $2,995 setup patterns lead to trade entry. In understanding what price patterns tell
you about emotions and expectations.
This course has 16 modules. While
Part 1 was rich with example price
patterns, Part 2 emphasizes explanation
with text. The presentation quality you
saw in Part 1 has been carried over
to Part 2: a map that allows you to
pick any module of interest or revisit
ones you’ve already studied, mouse-
controllable sliders to advance or repeat
the dialog for one slide chart, advance
and reverse buttons to move back and
forth between slides in a module, and a
table of contents allowing you to select
any topic in a module with a mouse-
click. It is also clear that like Part 1,
the words on the slide charts in Part 2
Figure 1: pristine candle names vs. common names. The six Pristine names on the right are all a
have been chosen with care. Let’s take
Pristine trained trader needs to use for the Pristine trading method. The common candlestick names are shown a look as some of the modules.
on the left. This simplification helps the student focus on the key points of TPM.
Candlestick analysis
module
A helpful aspect of this course is charts
that summarize. Several examples can
be seen in one of the first topic areas,
“Candlestick analysis.” The Pristine
Trading Method (Tpm) uses candlesticks
because it wants the Pristine trained
trader (Ptt) to observe the size of the
body, its relationship to the upper and
lower tails, the color, and candlesticks
that have preceded the current ones.
The course explains that while there
are numerous names for candlesticks
such as doji, hangman, and engulfing
bar, what matters to the Ptt are just six
Tpm names such as Wrb (wide range
bar) and Cog (changing of the guard).
See Figure 1.
One of the concepts taught is potency.
What Pristine is referring to is the
Figure 2: has a significant shift in momentum occurred? The answer is shown with five candlestick strength, or potency, of a candlestick
patterns. This type of chart is typical for both the Parts 1 and 2 courses. It is nicely illustrated and self-explanatory. pattern to indicate an impending
This part of the discussion shows that the likelihood of trend reversal increases based on the pattern you are
currently observing. Pristine would characterize the difference between the last two patterns on the right as an
reversal, or change in momentum. In
addition of a bar with a topping tail (TT). examining Figure 2, you’ll recognize

60 • April 2010 • Technical Analysis of Stocks & Commodities

+PR Pristine.indd 1 2/25/10 12:25:27 PM

 familiar patterns with the very last
three-bar combination, the most potent
of the patterns for reversal. Looking
for visual candlestick patterns that
work tells you that the Tpm approach
determines what seems to be true in
the trading world, not an academic
discussion of candlestick patterns.

Support and
resistance module
As mentioned, Pristine’s trading
uses few indicators. In the support
& resistance module, this is repeated FIGURE 3: Support And Resistance. This chart makes the case that price bars alone are the only way to
(Figure 3). The statement is made determine support and resistance and nothing involving math, such as moving averages or even Fibonacci, since
that indicators, such as trading bands they are based on a math series.
or envelopes, are “subjective and
unnecessary when you understand
what is real.” Pristine’s point is
that indicators work as support and
resistance when they are a self-
fulfilling prophecy. Some traders might
take argument with that statement and
say that indicators are useful devices
to quantify price action. In any event,
Pristine’s statement reinforces their
visual price action/pattern approach.
This module emphasizes supply and
demand and defines patterns that are
sources of either supply or demand.

Retracement module
In the retracement module, Fibonacci
retracements are set aside as subjective
tools that work only because of self-
fulfilling prophecies rather than as
an actual predictor. As in Tpm 1, the FIGURE 4: Retracement Analysis With A Rounded Top. Reinforcing material presented in the support
percentage of retracement from the and resistance module, a rounded top (candlesticks with red ribbon over the top) is identified as a source of
prior pivot is one of the key factors, support (or demand). The point of this chart is that odds of reversing this downtrend with a V bottom are unlikely
with prices headed into an area of supply.
but Tpm 2 also looks at the shape of the
pivot. If the shape is what Pristine calls
a rounded top, the course says that the
odds are that sellers are waiting to get
out as price approaches (Figure 4) the
rounded top.
Well-illustrated charts are the
norm for both Tpms 1 and 2. Midway
through the retracement discussion,

Well-illustrated charts are

the norm for both Trad-
ing The Pristine Method
Courses, Parts 1 and 2.
“You’re upset with all the fees and want to close your account? Well, there’s a fee for that!”

April 2010 • Technical Analysis of Stocks & Commodities • 61

+PR Pristine.indd 2 2/25/10 12:26:33 PM

 product review

6) showing hypothetical current bars

are discussed. The idea is that traders
will get a sense of the bullishness
or bearishness by watching each bar
being formed, and be ready to act when
a setup materializes.
By the time you get to bar-by-bar
analysis, you should have digested enough
material to characterize a considerable
portion of price movement. The point
is illustrated (Figure 7) with charts that
bring in terms like “void,” “large M top,”
and “very weak reversal.”
FIGURE 5: Retracement Analysis With A V Top. a V top identified with the blue ribbon marks the
The bar-by-bar analysis module fits
point where price was above a prior major peak and retraced no more than 50%. Note the pattern identified as nicely with the support and resistance
“BT and range expansion.” BT stands for “bottoming tail” and it is considered bullish, especially relative to the module. The former looks at what
immediately previous two red candlesticks. Range expansion refers to the fact that the range (high/low) of the the current bar means with respect
bar is greater than the previous bar. The downward momentum started by the two red candlesticks (to the right of
the candlestick identified with the ribbon) lessened as evidenced by the narrow range (NR) bars that follow, one
to immediate prior bars, while the
of which is the bar identified as having a BT. latter also looks at bar patterns — for
example, defining rounding tops and
price voids.

Other
A lengthy pivot discussion is contained
in the trend analysis module. Pristine
pivots are defined by higher highs or
lower lows of adjacent bars. Using this
information, Pristine defines major and
minor pivots, and what to look for in
the case of a trend reversal. The relative
strength module is not shorthand for
relative strength index, but how strong
an equity is compared to an index, such
as the Standard & Poor’s 500, or to
another equity.
The relative strength discussion stops
short of getting into sector rotation.
FIGURE 6: Bar-By-Bar Analysis Approach. What does the current bar tell you about bullishness or The market internals module discusses
bearishness? This chart, along with three others, goes through each of the permutations. The charts give popular sentiment and market indicators.
examples. The sentiment indicators are the Cboe
equity put call ratio, Vix (volatility
a chart (Figure 5) illustrates several Bar-by-bar analysis index), Vxn (Nasdaq volatility index),
points: 100% retracements often lead to Pristine’s bar-by-bar analysis tries and bullish and bear percent based on
reversals, and this example illustrates a to answer the questions, “What do Aaii. The market indicators are the
potent candle pattern (Figure 2, second you learn by each new bar? Given an Nyse and Nasdaq Trin and tick, and
pattern from the rightmost) at the existing three-bar pattern, or simply S&P and Ndx futures.
reversal; retracements of 40–60% are the prior bar, what can you say about
likely to continue the current trend or bullish or bearishness based on the Support
a swing up as seen in Figure 5; and a most recent bar?” Pristine argues that Besides online home study, you can
successful Pristine buy setup (Pbs) can penetration of the previous bar gives take both Tpms 1 and 2 courses live
be followed by a bottoming tail and some information. Penetration is online, as well as at physical locations
range expansion. As always, Pristine how far the current bar closes into or from time to time. Pristine encourages
is not reluctant to use acronyms. goes beyond the close of the previous its students to retake the courses,
Bottoming tail is BT (Figure 5: just left bar. In the case of an engulfing bar, it which are included in the course
and below “Buy” in green caps) and actually goes beyond the close of the fee. Pristine includes three forms of
range expansion is “RE.” previous bar. Several examples (Figure ongoing coaching and mentoring after
62 • April 2010 • Technical Analysis of Stocks & Commodities

+PR Pristine.indd 3 2/25/10 12:26:49 PM

 someone takes the Tpm 1 or 2 course. ‡
This gives you a way to interact with an
instructor to make sure your questions
are answered completely.

Summary
If you look at the daily Qqqqs since
March 2009, you will certainly notice
an uptrend in place by June or July. This
then would lead to Pristine buy setups
for retracements, since you always trade
with the trend. But you won’t find many.
FIGURE 7: Bar-By-Bar Analysis Example. This chart contains examples of much of the preceding
This is not too surprising. If you look at
seven modules, and as a result, you can see a large percentage of the candlestick price behavior that can
chapter 7 of CandlePower by Gregory be characterized. Indirectly, it is also an illustration of all the acronyms that you learn in the course, which are
Morris, you’ll see that while three repeated on a regular basis.
white soldiers (equivalent to Pristine
sell setup [Pss] three green candles)
or three black crows (equivalent to different sectors each day and to look Dennis Peterson is a Staff Writer for
Pristine buy setup [Pbs] three red at three different time frames (weekly, Stocks & Commodities.
candles) are reliable compared to other daily, and hourly) and see what looks
candle patterns, they are infrequent. promising in terms of setups. Some Suggested reading
Engulfing pattern occurrences number might trade the exchange traded funds Morris, Gregory [1992]. CandlePower,
approximately 950 against three black (Etfs) that represent the sectors, while Probus Publishing.
crows at 17 for the same sample period. others, such as Wagner, look for the Peterson, Dennis D. [2010]. “Trading
This says the guerrilla tactics at the end stocks. Admittedly, you might have to The Pristine Method Course, Part
of Part 1 will come into play more often look for some two-bar guerrilla plays 1,” product review, Technical Anal-
than Pbs or Pss. shown at the end of Part 1 to be able ysis of Stocks & Commodities,
This means that if you want to trade to trade. But if you are going to trade Volume 28: February.
every day, you need some plan for daily, you’ll have to have some way to ‡Trading The Pristine Method Course
scanning a large number of stocks. The screen for candidates. Given that you (Pristine)
approach used by Ron Wagner, president do, you should be successful in using
‡See Editorial Resource Index S&C
of Pristine Education, is to look at 40 the Pristine method.

Sneak preview …
To Debit Or Credit? Smoothing The Bollinger %b Indicator
by Giorgos Siligardos by Sylvain Vervoort
Confused about which vertical spread to use? Find out here. Here’s a modification of the popular Bollinger %b, which gives
you clear turning points to identify entry and exit points.
Signal Processing Basics, Part 2
by Glenn Barlis The Modidor Spread
Here’s the second in a series of articles that examine stock by Jay Kaeppel
price analysis using mathematical methods of signal process- This strategy involves one or more modifications to the standard
ing. This time, the author discusses trends and smoothing iron condor spread.
methods.
…Coming soon!
April 2010 • Technical Analysis of Stocks & Commodities • 63

+PR Pristine.indd 4 2/25/10 12:27:34 PM

 FUTURES FOR YOU
INSIDE THE FUTURES WORLD
Want to find out how the futures markets really work? DeCarley Trading senior analyst
and broker Carley Garner answers your questions about today’s futures markets.
To submit a question, post your question at http://Message-Boards.Traders.com.
Answers will be posted there, and selected questions will appear in a future issue of
S&C. Visit Garner at www.DeCarleyTrading.com. Her books, Commodity Options
and A Trader’s First Book On Commodities, are available from FT Press.
Carley Garner
FUTURES VS. FOREX essarily required of those soliciting
What are the advantages of trading trading accounts, trading systems or brokerage-created synthetic market.
currency futures as opposed to forex? signals, and software. Further, many Ecns do not have fixed pip spreads;
The popularity of foreign exchange forex salespeople are comfortable instead, it is determined by market
(spot currency) trading has exploded, in exercising what they consider to liquidity.
thanks to low margins, seemingly low be their right to freedom of speech, Currency futures traders don’t
transaction costs, and flashy trading regardless of the credibility of the have to worry about Ecns vs. deal-
platforms. However, there are a few claims that they make. Of course, ing desks. They are all granted ac-
things that you should consider before not all forex affiliates are in the cess to a centralized and regulated
choosing forex over currency futures business of misleading the public marketplace. Futures brokerage
like those traded on the Chicago Mer- and not all futures industry partici- firms are forbidden from taking the
cantile Exchange (Cme): pants are noble, but there is relative- other side of a customer’s trade.
ly more opportunity for wrongdoing
• Government regulation: The Na- in the world of forex than in others. • Synthetic market: Unlike futures
tional Futures Association (Nfa), contracts that are traded in what are
the Commodity Futures Trading • Forex dealing desk: There are pri- believed to be efficient and open
Commission (Cftc), and the futures marily two types of forex brokers: markets, those trading forex through
exchanges themselves all work to- market makers (dealing desks) and a brokerage firm with a dealing desk
gether to create and enforce rules those that offer electronic commu- are trading a brokerage firm–created
and regulations over industry par- nications network (Ecn) trading. market. Buy and sell orders never
ticipants. More specifically, each In the US, the practice of deal- actually reach the true forex market;
of these entities attempt to produce ing desks is diminishing, but some instead, they are buying and selling
an environment in which solicitors popular forex brokerage firms are at prices set and possibly manipu-
such as brokerage firms, brokers, essentially making markets for their lated by the dealing desk.
and commodity trading advisors are clients. In a nutshell, they are tak- As far as I am aware, price ma-
conducting business in an honest ing the opposite side of their clients’ nipulation such as stop-loss fishing
and candid manner. trades. Their intention is to generate has yet to be proven by a regulat-
The forex market, on the other revenue by charging traders a fixed ing body, but you must be conscious
hand, is global in nature and due to pip spread beyond what those di- of the fact that the potential exists.
the lack of a physical trading floor rectly trading through the interbank Brokerage-driven price skews are
or headquarters, regulation of oper- are paying. This is often referred to not a risk while trading Cme cur-
ations doesn’t fall within any single as a markup. rency futures.
jurisdiction. Although the Nfa and Those trading with a dealing
the Cftc have made strides in the desk are trading against the house. • Customer-segregated funds: Money
right direction when it comes to en- As you can imagine, this poses a on deposit with a futures brokerage
forcing compliance rules for those conflict of interest in that they can firm is required by the Nfa to be
soliciting forex in the US, there are see your stop and limit orders and held in what are known as customer
still operations abroad (and in some possibly make money even as you funds in segregated accounts. This
cases domestic) doing business lose it. means that your funds are not com-
without the necessary restrictions. Those trading with an Ecn bro- ingled with the firm’s assets.
As a retail trader, I find it im- ker are provided access to the actual This is critical because assuming
portant to realize that forex clearing interbank market as opposed to a that the brokerage firm is in fact fol-
firms located in the US are currently
required to register with the Nfa, There are forex traders who have been active for years
leaving them subject to government
regulation. However, Nfa registra- and have yet to be affected by counterparty risk.
tion, and thus regulation, is not nec-
64 • April 2010 • Technical Analysis of Stocks & Commodities

+1004 Garner QA.indd 1 2/25/10 11:46:15 AM

 FUTURES FOR YOU CHARTING
THE
STOCK
MARKET
The Wyckoff Method
lowing the rules, if the firm becomes are exposed to counterparty risk. As
insolvent, then your money will still a forex trader, you might be trading
be safely in the bank. There is a mi- against the dealing desk or it might
nuscule chance that your brokerage be another participant in the actual
firm is not upholding the regula- interbank market, but either way,
tions set forth regarding segregated your profitable trades are dependent
accounts. In this case, your money on their ability to pay up.
would be at risk in the case of a There are forex traders who
brokerage firm bankruptcy. This is have been extremely active for
not a likely occurrence for a futures years and have yet to be affected by
trader, but it is a constant worry to a counterparty risk. Yet the risk exists
forex trader. and you should know about it. As
always, there is substantial risk in
• Counterparty risk: For those trad- trading options and futures, and it is
ing currency futures, the Chicago not suitable for everyone.
Mercantile Exchange guarantees
each transaction. This means that if Edited by Jack K. Hutson
As I delved into this question, I re- 208 pages, 6x9 inches,
your speculation was correct, you alized I could not do the topic justice chart illustrations, indexed
will walk away from the trade with within a single column. I will continue $14.95 plus shipping & handling.
your profit even if the person who this discussion in the next issue; we ISBN: 0-938773-06-2
took the other side of the trade fails will focus on the comparison of trans- Charting The Stock Market
to pay (they might have lost more action costs, both hidden and obvious, describes and illustrates one of the
money than they had on deposit). best pioneering technical analysis
market liquidity, margins, options, and methods. This book takes the
Forex traders, on the other hand, others. Stay tuned! reader step by step through the
S&C
Wyckoff method: first, the basic
principles; second, examples of the
method applied to the bond market;
third, an outline of the steps to put
the method to use. Details of the
Wyckoff method covered in this
book include:
◆ Point & figure charting
◆ Trends
◆ Relative strength and weakness
◆ Stop orders
◆ Forecasting
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◆ Group stock behavior
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April 2010 • Technical Analysis of Stocks & Commodities • 65

+1004 Garner QA.indd 2 2/25/10 3:20:32 PM

 TAKE ADVANTAGE
OF TRADERS.COM

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TradersAdv_DUDE_2010.indd 1 2/4/10 9:57:11 AM

 TRADERS’ TIPS
Here is this month’s selection of Traders’Tips, contributed by various
developers of technical analysis software, all to help readers more
easily implement some of the strategies presented in this issue.
Internet users will also find these and most previous Traders’ Tips
at our website at www.Traders.com. To locate the various tips, use
our site’s search engine, or click on the Stocks & Commodities
magazine link on the left-hand side of our home page, then scroll
down to the “This month in S&C” heading in the middle section and
click on“Traders’ Tips.” For previously published Traders’ Tips,
visit the “Back issues archive” located at http://www.traders.com/
Documentation/FEEDbk_docs/backissues.html. Code can then be
copied and pasted into your program.

This month’s Traders’ Tips are based on

David Hawkins’ article in this issue, “Modi-
fied Volume-Price Trend Indicator.”
Code for MetaStock is already provided
in the article’s sidebar to help readers im-
plement the indicator. Code for other pro-
Figure 1: TRADESTATION, Modified Volume-Price Trend Indicator. Here are
grams is presented here as contributed by
two charts with the MVPT indicator applied (yellow lines). The chart on the left shows the
various software developers. indicator applied to the South African gold-mining company DRD Gold Ltd. (DROOY). The
In addition to the code for technical analysis programs, chart on the right shows convergence between price and MVPT when price is plotted against
this month, readers will also find a formula to implement a logarithmic scale (right scale) and the MVPT is plotted against a linear scale (left scale).
Hawkins’ indicator in Microsoft Excel spreadsheet application.
Readers will find these and more Traders’ Tips at the
Stocks & Commodities website at www.Traders.com in
Indicator: MVPT
the Traders’ Tips area, from where the code can be copied
inputs:
and pasted into the appropriate program. In addition, the Level( 0 ),
code for each program is usually available at the respective Scale( 1 ) ,
software company’s website. Thus, no retyping of code is Price( AvgPrice ) ;
required for Internet users.
variables:
For Stocks & Commodities subscribers, the MetaStock rV( 0 ),
code found in Hawkins’ article can be copied and pasted into MVPT( 0 ),
MetaStock from the Subscriber Area at www.Traders.com. AdjMVPT( 0 ) ;
Login is required.
if BarType >= 2 and BarType < 5 then
rV = 0.00002 * Volume { Volume / 50000 }
else
rV = 0.00002 * Ticks ; { Ticks / 50000 }

F TRADESTATION: Modified Volume-Price Trend if Price[1] <> 0 then

MVPT = MVPT + rV *( Price - Price[1] ) / Price[1] ;
Indicator
David Hawkins’ article in this issue, “Modified Volume-Price AdjMVPT = Level + Scale * MVPT ;
Trend Indicator,” suggests a modification to the on-balance
Plot1( AdjMVPT, "AdjMVPT" ) ;
volume indicator originally developed by Joseph Granville.
On-balance volume adds or subtracts each bar’s volume
A sample chart is shown in Figure 1.
from a cumulative total based on the change in closing price This article is for informational purposes. No type of trading
from the preceding bar. Hawkins’ modified volume-price or investment recommendation, advice, or strategy is being made,
trend indicator uses a reduced volume term (rV) rather than given, or in any manner provided by TradeStation Securities or its
volume. The rV value is equal to volume times the percent- affiliates.
age change in the value ((Open + High + Low + Close) / 4). —Mark Mills
(Granville used bar closing prices.) Hawkins also suggests TradeStation Securities, Inc.
plotting prices on a logarithmic scale while plotting the indi- A subsidiary of TradeStation Group, Inc.
www.TradeStation.com
cator on a linear scale. If necessary, the alignment of chart and
indicator can be adjusted using the inputs level and scale. The
input level is added to a value that is equal to the input scale
multiplied by the calculated Vpt value.
To download the adapted EasyLanguage code, go to the
TradeStation and EasyLanguage Support Forum (https://www. F eSIGNAL: Modified Volume-Price Trend Indicator
tradestation.com/Discussions/forum.aspx?Forum_ID=213). For this month’s Traders’ Tip, we’ve provided the formula
Search for the file “Mvpt.eld.” “Modified_VPT.efs” based on the formula code from David
April 2010 • Technical Analysis of Stocks & Commodities • 67

+Traders_Tips_1004_New.indd 1 2/25/10 2:06:24 PM

 TRADERS’ TIPS
Hawkins’ article in this issue, “Modified Volume-Price Trend
Indicator.”
The study contains the formula parameters level and scale
to make minor adjustments for the indicator display, which
may be configured through the Edit Studies window (Ad-
vanced Chart menu→Edit Studies). The study is a nonprice
study by default so that it can be overlaid on the price chart to
achieve the scaling effects described in the article. First, set
the chart-scaling option (Advanced chart→Scaling menu) to
log scale. Then hold down the shift key and click and drag the
Vpt study over the price window and release. Next, go into
Edit Studies, select the Vpt study from the study list on the
left side of the dialog, and select the options for Display Left
and Scale Left.
To discuss this study or download complete copies of the
formula code, please visit the Efs Library Discussion Board
forum under the Forums link from the Support menu at www. Figure 2: eSIGNAL, Modified Volume-Price Trend Indicator. Here is
esignal.com, or visit our Efs KnowledgeBase at http://www. the VPT overlaid on a price chart.
esignal.com/support/kb/efs/. The eSignal formula scripts
(Efs) are also available for copying and pasting from the }
Stocks & Commodities website at Traders.com. fpArray[x] = new FunctionParameter("Scale", FunctionParam-
eter.NUMBER);
A sample chart is shown in Figure 2. with(fpArray[x++]){
setName("Scale");
/********************************* setLowerLimit(0.0001);
Provided By: setUpperLimit(100000);
eSignal (Copyright © eSignal), a division of Interactive Data Cor- setDefault(1);
poration. 2010. All rights reserved. This sample eSignal Formula }
Script (EFS) is for educational purposes only and may be modi- }
fied and saved under a new file name. eSignal is not responsible
for the functionality once modified. eSignal reserves the right to var xMVPT = null;
modify and overwrite this EFS file with each new release.
function main(Level, Scale) {
Description: var nBarState = getBarState();
Modified Volume-Price Trend Indicator var nMVPT = 0;
if (bVersion == null) bVersion = verify();
Version: 1.00 02/09/2010 if (bVersion == false) return;
if (nBarState == BARSTATE_ALLBARS) {
Formula Parameters: Default: if (Level == null) Level = 0;
Level 0 if (Scale == null) Scale = 1;
Scale 1 }
if (!bInit) {
Notes: xMVPT = efsInternal("Calc_MVPT", Level, Scale);
The related article is copyrighted material. If you are not a sub- bInit = true;
scriber of Technical Analysis of Stocks & Commodities magazine, }
please visit www.traders.com. nMVPT = xMVPT.getValue(0);
if (nMVPT == null) return;
**********************************/ return nMVPT;
var fpArray = new Array(); }
var bInit = false;
var bVersion = null; var bSecondInit = false;
var xCumVPT = 0;
function preMain() {
setPriceStudy(false); function Calc_MVPT(Level, Scale) {
setShowCursorLabel(true); var nRes = 0;
setShowTitleParameters(false); var nCumVPT = 0;
setStudyTitle("Modified VPT"); if (!bSecondInit) {
setCursorLabelName("MVPT", 0); xCumVPT = efsInternal("Calc_CumVPT");
setDefaultBarFgColor(Color.red, 0); bSecondInit = true;
setPlotType(PLOTTYPE_LINE, 0); }
setDefaultBarThickness(2, 0); nCumVPT = xCumVPT.getValue(0);
var x=0; if (nCumVPT == null) return;
fpArray[x] = new FunctionParameter("Level", FunctionParam- nRes = Level + Scale * nCumVPT;
eter.NUMBER); return nRes;
with(fpArray[x++]){ }
setName("Level");
setLowerLimit(-1000); var bThirdInit = false;
setUpperLimit(10000); var xOHLC4 = null;
setDefault(0); var xV = null;

68 • April 2010 • Technical Analysis of Stocks & Commodities

+Traders_Tips_1004_New.indd 2 2/25/10 2:06:24 PM

 TRADERS’ TIPS
function Calc_CumVPT() {
var nRes = 0;
var nRef = 0;
var nOHLC4 = 0;
var nOHLC4_1 = 0;
var rV = 0;
if (!bThirdInit) {
xOHLC4 = ohlc4();
xV = volume();
X = obv();
bThirdInit = true;
}
nOHLC4 = xOHLC4.getValue(0);
nOHLC4_1 = xOHLC4.getValue(-1);
nRef = ref(-1);
if (nOHLC4_1 == null) return;
rV = xV.getValue(0) / 50000;
nRes = nRef + (rV * (nOHLC4 - nOHLC4_1) / nOHLC4_1);
return nRes;
}

function verify() {
var b = false;
Figure 3: WEALTH-LAB, Modified Volume-Price Trend Indicator. A re-
if (getBuildNumber() < 779) {
drawTextAbsolute(5, 35, "This study requires version 8.0 or cent example of MVPT/price divergence can be found in the natural gas ETF, UNG,
later.", which has potentially formed a double bottom. A strong break above the trendline
Color.white, Color.blue, Text.RELATIVETOBOTTOM|Text. resistance could very well signal the start of a larger move higher.
RELATIVETOLEFT|Text.BOLD|Text.LEFT,
null, 13, "error");
drawTextAbsolute(5, 20, "Click HERE to upgrade.@URL=http:// WealthScript Code (C#):
www.esignal.com/download/default.asp",
Color.white, Color.blue, Text.RELATIVETOBOTTOM|Text. using System;
RELATIVETOLEFT|Text.BOLD|Text.LEFT, using System.Collections.Generic;
null, 13, "upgrade"); using System.Text;
return b; using System.Drawing;
} else { using WealthLab;
b = true; using WealthLab.Indicators;
} using WealthLab.ChartStyles; /* Note */
return b;
} namespace WealthLab.Strategies
{
public class MyStrategy : WealthScript
{
—Jason Keck StrategyParameter _scale;
eSignal, a division of Interactive Data Corp. StrategyParameter _level;
800 815-8256, www.esignalcentral.com StrategyParameter _pctRev;

public MyStrategy()
{
_scale = CreateParameter("Scale", 1, 1, 10000, 1);
_level = CreateParameter("Level (disabled)", 0, 0, 10000,
100);
F WEALTH-LAB: Modified Volume-Price _pctRev = CreateParameter("Reverse %", 10, 1, 25, 1);
Trend Indicator }
In the article “Modified Volume-Price Trend Indicator” in this protected override void Execute()
issue, author David Hawkins discusses a modification of the {
volume-price trend indicator (Vpt). double rev = _pctRev.Value;
Overlaying Mvpt properly in the PricePane is a big chal- BarChartStyle bcs = null;
try {
lenge if the user must manually adjust both the level and bcs = (BarChartStyle)ChartStyle;
scaling factors. Changing the scale affects the level, and con- }
versely, changing the level affects the scale. For this reason, catch {
DrawLabel(PricePane, "Please switch to Bar (OHLC) Chart
our Wealth-Lab script creates the Mvpt only for the data dis- Style", Color.Red);
played in the chart (skipping the data “off-the-chart”), thereby return;
allowing it to automatically adjust the Mvpt level factor to }
int b = bcs.LeftEdgeBar;
the average price of the left-most bar. This leaves the analyst
with only the simple task of adjusting the scaling parameter DataSeries mvpt = new DataSeries(Bars, "Modified VPT");
for a visually pleasing presentation. DataSeries avg4 = (Open + High + Low + Close) / 4d;
_level.Value = avg4[b];
As seen in Figure 3, we’re able to automatically detect di-
vergences, although that part of the code is not given here in DataSeries avg4_1 = avg4 >> 1;
the interest of space and clarity. DataSeries change = (avg4 - avg4_1) / avg4_1;

April 2010 • Technical Analysis of Stocks & Commodities • 69

+Traders_Tips_1004_New.indd 3 2/25/10 2:06:26 PM

 TRADERS’ TIPS
// change *= (Volume / 50000d);
// Compensate a little for diverse ranges of Volume
change *= ( Volume / Math.Pow(10, Math.Log10(SMA.
Value(Bars.Count - 1, Volume, 50))) );

for (int bar = b; bar < Bars.Count; bar++)

{
mvpt[bar] = ( mvpt[bar - 1] + change[bar] );
} vp
mvpt *= _scale.Value;
mvpt += _level.Value;

PlotSeries(PricePane, mvpt, Color.Teal, LineStyle.Solid, 2);

}
}
}

A sample chart is shown in Figure 3.

—Robert Sucher
www.wealth-lab.com

Figure 4: AMIBROKER, Modified Volume-Price Trend Indicator VS.

PRICE. The MVPT showed a significant upward divergence, foretelling the major
new uptrend.
F AMIBROKER: Modified Volume-Price Trend Indicator
In “Modified Volume-Price Trend Indicator” in this issue, author
A sample chart is shown in Figure 4.
David Hawkins presents his ideas about using the modified —Tomasz Janeczko, AmiBroker.com
volume-price trend (Mvpt) indicator to discern what the “smart www.amibroker.com
money” is doing in a stock.
A ready-to-use formula for the Mvpt is presented here. To
use it, enter the formula in the Afl Editor, then press the “in-
sert indicator” button. Click on the chart with the right–mouse
button and choose “parameters” from the context menu to se-
lect manual or automatic scaling mode. F WORDEN BROTHERS STOCKFINDER: Modified
VOLUME-PRICE Trend Indicator
MVPT CODE FOR AMIBROKER The modified volume-price trend (Mvpt) indicator from David
Version( 5.25 ); Hawkins’ article in this issue is available in the StockFinder
Level = Param("Level", 0, -100, 100 );
Scale = Param("Scale", 1, 0.1, 10, 0.1 ); indicator library. You can add the indicator to your chart by
clicking the “Add Indicator/Condition” button or by simply
AutoScale = ParamToggle("AutoScale", "No|Yes", 1 ); typing “/VPT” and choosing “volume-price trend” from the
rV = V/50000; list of available indicators.
AvgFour = ( O + H + L + C )/4; By default, Vpt is calculated using closing prices and vol-
ume. Hawkins’ modified version uses typical price and vol-
MVPT = Cum( rV * (AvgFour - Ref( AvgFour, -1 ) )/Ref( AvgFour,
-1 ) );
ume. If you right-click on the Vpt indicator and select Edit,
you can change the “calculate using” setting from “close” to
Plot( C, "Price", colorBlack, styleBar );

if( AutoScale )
{
fvb = Status("firstvisiblebar");
rangePrice = HighestVisibleValue( H ) - LowestVisibleValue( L );
rangeMVPT = HighestVisibleValue( MVPT ) - LowestVisibleValue(
MVPT );
Scale = rangePrice / rangeMVPT;
MVPT *= Scale;
Level = AvgFour[ fvb ] - MVPT[ fvb ];
}
else
{
MVPT *= Scale;
}

MVPT = MVPT + Level;

Figure 5: STOCKFINDER, Modified Volume-Price Trend Indicator. The
Plot( MVPT, "MVPT" + StrFormat("(Scale=%g, Level=%g)", Scale, modified VPT indicator is overlaid on the price graph. The scaling for VPT has been
Level), colorRed, styleThick ); edited to put the scaling values on the left side of the price chart.

70 • April 2010 • Technical Analysis of Stocks & Commodities

+Traders_Tips_1004_New.indd 4 2/25/10 2:06:28 PM

 TRADERS’ TIPS
“typical price.” If you want to plot as an overlay on price as
illustrated in the article, just click on the Vpt and drag it to the
price window. When prompted, choose “overlay” (Figure 5).
To download the StockFinder software and get a free trial,
go to www.StockFinder.com.
— Patrick Argo and Bruce Loebrich
Worden Brothers, Inc.
www.StockFinder.com

F TRADINGSOLUTIONS: Modified Volume-Price

Trend Indicator
Figure 6: AIQ SYSTEMS, OBV, VPT, AND MVPT. Here is a sample chart of
In “Modified Volume-Price Trend Indicator” in this issue, au- Apple with the on-balance volume, volume-price, and modified volume-price indica-
thor David Hawkins presents some modifications to the classic tors.
volume-price trend indicator (Vpt).
The TradingSolutions function presented here is also avail- ! Add OBV, VPT, MVPT as three separate single line
able as a function file that can be downloaded from the Trad- ! indicators to charts
ingSolutions website (www.tradingsolutions.com) in the Free ! To speed up the calculation of the indicators, set the
! startMo, startDa, startYr to the smallest value
Systems section. ! that is needed for the application - currently it is
! set to about two years back from 3/1/2010
Function Name: Modified Price and Volume Trend Indicator
Short Name: MVPT !-----------INPUTS---------------
Inputs: Open, High, Low, Close, Volume obvLevel is 50.
VPT (Div (Add (Add (Open, High), Add (Low, Close)), 4), Volume) obvScale is 1.
vptLevel is 30.
—Gary Geniesse vptScale is 100.
NeuroDimension, Inc. mvptLevel is 260.
800 634-3327, 352 377-5144 mvptScale is 100.
www.tradingsolutions.com startMo is 03.
startDa is 01.
startYr is 2008.
!-------------------------------------
F AIQ: Modified Volume-Price C is [close].
Trend Indicator C1 is val([close],1).
The Aiq code is given here for the indicators described O is [open].
H is [high].
in David Hawkins’ article in this issue, “Modified Volume-Price L is [low].
Trend Indicator.” start is offSetToDate(startMo,startDa,startYr).
Hawkins’ article discusses three volume-price type indica- sDate is makeDate(startMo,startDa,startYr).
tors: the on-balance volume indicator, the volume-price trend !ON BALANCE VOLUME (OBV) INDICATOR
indicator, and the modified volume-price indicator. All three HD is hasdatafor(start).
indicators are provided in Aiq code and these can be plot- DaySum is HD.
F is iff(C > C1,1,iff(C < C1,-1,0)).
ted either as single-line indicators on the chart or as separate VolSum1 is Sum([volume] / 50000 * F, DaySum).
indicators as shown in Figure 6 on the recent chart of Apple. VolSum2 is obvLevel + obvScale * VolSum1.
Should you want to plot the indicators on the chart, you can OBV is iff(sDate >= ReportDate(),obvLevel,VolSum2). !PLOT
adjust the scale by using the “level” and “scale” inputs that
!VOLUME PRICE TREND INDICATOR
are available for each indicator. The Aiq charts can display in F2 is C / C1 - 1.
either linear scale or semilog scale, but we cannot show the VolSum3 is Sum([volume] / 50000 * F2, DaySum).
indicator in linear scale and the price in semilog scale at the VolSum4 is vptLevel + vptScale * VolSum3.
VPT is iff(sDate >= Reportdate(),vptLevel,VolSum4). !PLOT
same time.
The code can be downloaded from the Aiq website at www. !VOLUME PRICE TREND & TYP PRICE
aiqsystems.com and also from www.tradersedgesystems.com/ TP is (O + H + L +C) / 4.
F3 is TP / valresult(TP,1) - 1.
traderstips.htm. VolSum5 is sum([volume] / 50000 * F3, DaySum) .
VolSum6 is mvptLevel + mvptScale*VolSum5.
! Modified Volume-Price TREND INDICATOR MVPT is iff(sDate>=Reportdate(),mvptLevel,VolSum6). !PLOT
! ON BALANCE VOLUME INDICATOR
! PRICE-VOLUME TREND INDICATOR List if C > 0.
! Author: David G. Hawkins, TASC April 2010
! Coded by: Richard Denning 2/7/10 —Richard Denning
! www.tradersEdgeSystems.com [email protected]
for AIQ Systems

April 2010 • Technical Analysis of Stocks & Commodities • 71

+Traders_Tips_1004_New.indd 5 2/25/10 2:06:31 PM

 TRADERS’ TIPS

Figure 8: TRADERSSTUDIO, TEST SYSTEM RESULTS. Here is a comparison

of average system test results for a portfolio of 38 futures contracts over the period
1/2/1999 to 2/8/2010. The system results were solidly improved by adding the modi-
fied volume-price indicator as a filter in the system.

that I chose to test the indicator with.

The test system makes countertrend trades and uses the
volume-price indicators in divergence mode to filter out some
of the trades. The basic idea is to make countertrend trades
based on two moving averages. We buy when the fast aver-
Figure 7: NEUROSHELL TRADER, OBV, VPT, AND MVPT. Here is an example age crosses below the slower moving average and sell on the
of the modified volume-price trend, on-balance volume, and volume-price trend on opposite cross. Time and maximum-dollar loss-stops are also
a chart in NeuroShell Trader.
used.
Back-adjusted data (day session only) from Pinnacle Data
was used for the following symbols: AD, BO, BP, C, CC, CD,
F NEUROSHELL TRADER: Modified Volume- CL, CT, DJ, DX, ED, FA, FC, FX, GC, HG, HO, HU, JO,
Price Trend Indicator JY, KC, KW, LC, LH, NG, NK, PB, RB, S, SB, SF, SI, SM,
The on-balance volume, volume-price trend, and SP, TA, TD, UA, and W over the test period from January 2,
modified volume-price trend indicators described in David 1999, to February 8, 2010.
Hawkins’ article in this issue (“Modified Volume-Price Trend In Figure 8, I show the optimization results comparing av-
Indicator”) can all be easily implemented in NeuroShell Trader erage system results when:
by combining a few of NeuroShell Trader’s 800+ indicators.
To create the indicators, select “New Indicator …” from the • Not using a money flow filter (first line of table)
Insert menu and use the Indicator Wizard to create the follow- • Using an on-balance volume filter (second line of table)
ing indicators: • Using the volume-price filter (third line of table)
• Using the modified volume-price filter (fourth line of
On-Balance Volume Indicator:
CumSum( OBV( Close, Volume, 1 ), 0 ) table).

Price-Volume Trend: Each line represents an average of a range of parameters

CumSum( Mul2( Volume, Subtract( ROC( Close, 1 ) , 1 ) ), 0 ) for the system rather than just the best set of parameters. All
of the metrics improve as we move from the unfiltered system
Modified Volume-Price Trend:
Add2( Level, Mul2( Scale, CumSum( Mul2( Volume, Subtract( to the best of the batch, the Mvpt filtered system.
ROC( Avg4( Open, High, Low, Close ), 1 ) , 1 ) ), 0 ) ) ) I also used the TradersStudio genetic optimizer to opti-
mize all seven parameters of the system. The set chosen by
Since the NeuroShell Trader program was designed as a the genetic optimizer was one that uses the modified vol-
tool to produce analytic, automatic trading signals, it was not ume-price filter.
enough for us to suggest that users do visual analysis. There- The code can be downloaded from the TradersStudio website
fore, we apply the power function to the Mvpt indicator so at www.TradersStudio.com→Traders Resources→FreeCode
that this indicator and the close cannot only be plotted in the and also from www.TradersEdgeSystems.com/traderstips.
same scale for visual analysis, but also so users can compute htm.
meaningful spreads to use in rules and neural networks. —Richard Denning
A sample chart is shown in Figure 7. [email protected]
—Marge Sherald, Ward Systems Group, Inc. for TradersStudio
301 662-7950, [email protected]
www.neuroshell.com
F TRADECISION: Modified Volume-Price
Trend Indicator
F TRADERSSTUDIO: Modified Volume-Price In “Modified Volume-Price Trend Indicator” in
Trend Indicator this issue, author David Hawkins demonstrates using the modi-
The TradersStudio code for David Hawkins’ indicators from his fied volume-price trend indicator to detect divergences between
article in this issue, “Modified Volume-Price Trend Indicator,” price and the indicator and to predict new trend directions.
is shown here. I have supplied the code for all three indicators Using Tradecision’s Indicator Builder, use the following
discussed in the article as well as the code for a simple system code to recreate the Mvpt indicator:
72 • April 2010 • Technical Analysis of Stocks & Commodities

+Traders_Tips_1004_New.indd 6 2/25/10 2:06:33 PM

 TRADERS’ TIPS

FIGURE 9: TRADECISION, MVPT VS. PRICE. The modified volume-price trend Figure 10: NINJATRADER, Modified Volume-Price Trend Indicator.
(MVPT) indicator is overlaid on an AXP chart on a log scale. Even though the highs This screenshot shows the MVPT indicator applied to a daily chart of ESV.
and lows are matched, the curves are quite far apart.
mance possible.
MVPT indicator A sample chart implementing the strategy is shown in Fig-
input ure 10.
Level:"Level",0,-1000,10000;
Scale:"Scale",1,0.00001,100000;
—Raymond Deux & Austin Pivarnik
end_in NinjaTrader, LLC
www.ninjatrader.com
var
rV:=V/50000;
AvgFour:=(O+H+L+C)/4;
MVPT:=0;
end_var
F WAVE59: Modified Volume-Price Trend Indicator
if HISTORYSIZE < 1 then return 0;
MVPT:= Level + Scale * Cum( rV * (AvgFour - AvgFour\1\)/Avg-
In “Modified Volume-Price Trend Indicator” in this issue,
Four\1\); David Hawkins describes a way to get insight into what large
return MVPT; players are doing in the market by watching for accumulation
and distribution by measuring the relationship between price
To import the strategy into Tradecision, visit the area and volume.
“Traders’ Tips from Tasc Magazine” at www.tradecision. Rather than look at stocks, we decided to put Hawkins’
com/support/tasc_tips/tasc_traders_tips.htm or copy the code tools on a weekly chart of the Dow Jones Industrial Aver-
from the Stocks & Commodities website at www.Traders. age (Djia) futures, as shown in Figure 11. Note the major
com. (and very clear) divergence signal at the 2007 highs before the
A sample chart is shown in Figure 9. market lost more than half its value over the next year.
—Yana Timofeeva, Alyuda Research
510 931-7808, [email protected] The following script implements this indicator in Wave59.
www.tradecision.com As always, users of Wave59 can download these scripts di-
rectly using the QScript Library found at http://www.wave59.
com/library.

F NINJATRADER: Modified Volume-Price

Trend Indicator
The modified volume-price trend (Mvpt) indicator discussed
by David Hawkins in his article in this issue, “Modified
Volume-Price Trend Indicator,” has been implemented as an
indicator available for download at www.ninjatrader.com/SC/
April2010SC.zip.
Once you have downloaded the indicator, from within
the NinjaTrader Control Center window, select the menu
File→Utilities→Import NinjaScript and select the downloaded
file. This indicator is for NinjaTrader version 6.5 or greater.
You can review the indicator’s source code by selecting
the menu Tools→Edit NinjaScript→Indicator from within the
NinjaTrader Control Center window and selecting “Mvpt.”
NinjaScript indicators are compiled Dlls that run native,
not interpreted, which provides you with the highest perfor- FIGURE 11: WAVE59, Modified Volume-Price Trend Indicator

April 2010 • Technical Analysis of Stocks & Commodities • 73

+Traders_Tips_1004_New.indd 7 2/25/10 2:06:37 PM

 TRADERS’ TIPS
Indicator: Hawkins_MVPT
#This is David Hawkins MVPT Indicator from the April 2010
#issue of Technical Analysis of Stocks & Commodities

input: color(red), thickness(1);

if (barnum == barsback) {
mvpt = 0;
level = 0;
scale = 1;
}

Rv = volume / 50000;
Avgfour = (o + h + l + c) / 4;

if (avgfour[1]>0) {
mvpt += rv * (avgfour - avgfour[1]) / avgfour[1];
plot1 = level + scale * mvpt;
color1 = color;
thickness1 = thickness;
} FIGURE 12: UPDATA, Modified Volume-Price Trend Indicator. This
chart shows the price/indicator divergence in the S&P 500 in 2007, a precursor to
-------------------------------------------- the selloff that occurred.
—Earik Beann
Wave59 Technologies Int’l, Inc. A sample chart is shown in Figure 12.
www.wave59.com —Updata Support team
[email protected]
F UPDATA: Modified Volume-Price www.updata.co.uk
Trend Indicator
This tip is based on David Hawkins’ article in this
issue, “Modified Volume-Price Trend Indicator.”
Hawkins adds to the on-balance volume (Obv) and vol-
ume-price trend (Vpt) theme of indicators by substituting the F VT TRADER: price-volume Trend Indicator
typical price, (O+H+L+C)/4, for the closing price in the Vpt We’ll be offering the traditional, nonmodified price-volume
formula. Hawkins proposes that this better captures accumu- trend indicator (Pvt) for download in our online forums. The
lation/distribution in the market, thus giving clearer price/ VT Trader code and instructions for recreating the indicator
indicator divergences. The level and scale parameters in the are as follows:
article can be omitted in Updata code, as all charts and over-
lays can be manipulated in real time. 1. Click the Ribbon→Technical Analysis menu→Indicators
group→Indicator Builder command→Indicator Builder
The Updata code for Hawkins’ indicator can be found in the
window's [New] button
Updata Indicator Library and may be downloaded by clicking
the Custom menu and then Indicator Library. Those who can- 2. In the General tab, type the following text for each field:
not access the library due to firewall issues may paste the fol- Name: Price Volume Trend
lowing code into the Updata Custom editor and save it. Function Name Alias: vt_PVT
Label Mask: Price Volume Trend (%Pr%,%LBP%) = %_PVT%
NAME Modified Volume Price Trend Placement: New Frame
DISPLAYSTYLE LINE Data Inspection Alias: Price Volume Trend
INDICATORTYPE CHART
COLOUR RGB(0,0,255)
3. In the Input Variable(s) tab, create the following variables:
@RV=0
[New] button... [New] button...
@AVGFOUR=0
Name: Pr Name: LBP
@MVPT=0
Display Name: Price Display Name: LookBack Periods
Type: price Type: integer
FOR #CURDATE=0 TO #LASTDATE
Default: close Default: 1
IF #CURDATE>1
4. In the Output Variable(s) tab, create the following variables:
@RV=VOL/50000
@AVGFOUR=(OPEN+HIGH+LOW+CLOSE)/4 [New] button...
@MVPT=@MVPT+((@AVGFOUR-HIST(@AVGFOUR,1))/ Var Name: _PVT
HIST(@AVGFOUR,1))*@RV Name: (PVT)
@PLOT=@MVPT Line Color: purple
Line Width: slightly thicker
ENDIF Line Type: solid

NEXT 5. In the Horizontal Line tab, create the following lines:

74 • April 2010 • Technical Analysis of Stocks & Commodities

+Traders_Tips_1004_New.indd 8 2/25/10 2:06:40 PM

 TRADERS’ TIPS

FIGURE 14: CALCULATING THE MODIFIED VOLUME-PRICE TREND INDICATOR

USING AN EXCEL SPREADSHEET
Figure 13: VT TRADER, TRADITIONAL PRICE-VOLUME Trend Indicator.
Here is an example of the price-volume trend indicator on a EUR/USD one-hour
candlestick chart. =H2+(G3-G2)/G2*F3

[New] button... The last step is the plotting of prices on a logarithmic scale,
Value: +0.0000 with an overlay of the Mvpt on a linear scale. Excel can han-
Color: black
Width: thin dle logarithmic plotting but does not allow for flexible values
Type: dashed of the axis scale (minimums and maximums must be a power
of 10). This would prevent the adjustment of the level and
6. In the Formula tab, copy and paste the following formula: scale of the Mvpt plot to coincide with the price plot, as rec-
_VT:= ((Pr - ref(Pr,-LBP))/ref(Pr,-LBP)) * V) + PREV(0); ommended by the authors.
_PVT:= cum(_VT); Instead of a logarithmic plotting, data can be transformed
in the spreadsheet. This could be done by calculating the log
7. Click the "Save" icon to finish building the volume-price trend of prices. However, this transformation would lose the actual
indicator. price values information. It is preferable to apply the inverse
To attach the indicator to a chart (Figure 13), click the right function for Log to the Mvpt. The inverse for Log is the ex-
mouse button within the chart window and then select “Add ponent of base 10 (we would calculate 10^Mvpt). As Excel
Indicator” → “Price Volume Trend” from the indicator list. cannot handle values greater than 10^308, we need to apply
To learn more about VT Trader, visit www.cmsfx.com. a scaling-down transformation to the Mvpt by dividing its
Risk disclaimer: Forex trading involves a substantial risk of loss values by a common number. Divide all Mvpt values by the
and may not be suitable for all investors. first Mvpt value starting in cell M2:
—Chris Skidmore
CMS Forex =H2/H$2
(866) 51-CMSFX, [email protected]
www.cmsfx.com Apply the exponential transformation to the “small” Mvpt
starting in cell N2:
F MICROSOFT EXCEL: modified Volume-Price
=10^M2
Trend Indicator
Here is an implemention of David Hawkins’ indicator in Excel. The data is now ready for plotting. The chart is slightly
The indicator is based on Hawkins’ article in this issue, “Modi- complex to draw; follow these steps:
fied Volume-Price Trend Indicator.”
Start by placing your data in the spreadsheet: open, high, 1. Select columns A to E (including the headers) and generate a
low and close are in columns B, C, D, and E respectively. chart of type “Stock.”
Volume is in column F (Figure 14). 2. Select column A (still including the header), hold down the “Ctrl”
The first calculation is for the typical price: (O+H+L+C)/4. key and select column N (ExpMVPT); copy the selection.
It starts in cell G2:
3. Select the chart, activate the “Edit” menu and select “Paste Spe-
cial.” Click OK (options should be: “Add cells as new series”
=(B2+C2+D2+E2)/4
with “Values in Columns”). See Figure 15.
The Mvpt formula relies on the previous day’s Mvpt value.
It must therefore be primed: the first Mvpt value is set to that
day’s volume. In cell H2:

=F2

The formula can then be applied starting in cell H3: FIGURE 15: PASTE
SPECIAL SCREEN

April 2010 • Technical Analysis of Stocks & Commodities • 75

+Traders_Tips_1004_New.indd 9 2/25/10 2:06:43 PM

 TRADERS’ TIPS
4. Bring up the “Chart” toolbar (Menu: View/Toolbar/Chart).
MVPT indicator plot
5. Select ‘Series “ExpMVPT”’ in the drop-down list of the
Chart toolbar.
6. Right-click on the data series and choose “Format Data
Series....”
7. Update the “Patterns” tab to display a line with no marker, and
update the Axis tab to “Plot series on secondary axis.”

This produces a price and Mvpt chart with automatically

adjusted scales as seen in Figure 16.
—Jez Liberty
Au.Tra.Sy
www.automated-trading-system.com/
FIGURE 16: PRICE PLOT WITH MVPT OVERLAY
S&C

Continued from page 9 an author may be using. Some readers in each issue, and we regret if that goal
peruse these sets of code just to get a isn’t always obtained.—Editor
be using one of these products instead. feel for the logic behind the technique
Some programs are low-cost. (See the presented; that is one reason we print the VORTEX INDICATOR IN TRADING BLOX
Traders’ Resource area of our website, code instead of just making it available Editor,
www.traders.com, for lists of technical for download at our website. I noted with interest the
analysis programs.) We regret you are disappointed in article in your January
If code is ever presented in the magazine the amount of math shown, although 2010 issue on the Vortex
for a program other than the one a reader just taking some recent examples, pure Indicator and its being
is using, we suggest the reader contact mathematical explanations or expres- featured in your Trad-
the software developer of the program sions were provided in articles including ers’ Tips section in the same issue. The
he or she is using to request equivalent “Short-Term Profits With Gap Trading” concept is interesting and I decided to
code for that program. However, not all (November 2009); “Do You Need Volume research it further for myself.
programs are customizable. To Move Stocks Higher?” (November I believe that there might be a con-
Different authors contributing to this 2009); “Making The Most Of A Trend ceptual problem with the indicator in
magazine tend to rely on different prod- With The Disparity Index” (December the way that it handles gaps (by tak-
ucts for implementing technical analysis 2009); “What’s Your Trading Price?” ing absolute values). I am attaching a
techniques, ranging from Excel spread- (January 2010); “Predicting Market diagram to illustrate my point (Figure
sheets to software they’ve developed Data Using The Kalman Filter” (January 1). I have also developed what I think
themselves to commercial software. We and February 2010); “Unraveling The is an improved version of the indicator
are happy to include Excel spreadsheet Mystery Of Stock Prices” (March 2010); using correct handling of gaps and a
implementations when they are provided “The McGinley Dynamic” (March 2010); moving average (available here: http://
by the author. In the January 2010 is- “Trading Tradeoffs With Risk Vs. Reward” www.automated-trading-system.com/
sue, authors Etienne Botes and Douglas (Bonus Issue 2010); and “Signal Process- free-code-improved-vortex/).
Siepman included a sidebar presenting ing Basics” in this issue.—Editor I have discussed this with the authors
an Excel implementation of their Vortex of the article, Etienne Botes and Douglas
Indicator. We’ve always felt this can be LESS COMPLEX ARTICLES Siepman, and they have indicated that
a useful way to express the logic behind Editor, the design of the indicator was intended
a technique in a platform that is readily I’ve been reading Stocks & Commodi- as written and that the use of the indica-
available. ties since the 1990s. I would request tor in the forex markets does not expose
We try to include explanations in more articles on simple, non-complex them to gaps.
English when possible, since part of the techniques. By the way, I noticed that code imple­
mission of this magazine is to be how-to Richard Goldblatt menting the indicator and associated
in nature. system in the program Trading Blox was
Since 1995, we have included a Thank you also for reading Stocks & not provided in your Traders’Tips section.
Traders’ Tips section in the magazine Commodities for so long. We appreciate Since Trading Blox is the backtesting
to have a way to try to offer code for feedback from all our readers. We try to software I use, I coded the indicator for
different platforms instead of just the one include articles for every level of trader this software. (See a sample chart in
76 • April 2010 • Technical Analysis of Stocks & Commodities

+Traders_Tips_1004_New.indd 10 3/2/10 3:14:58 PM

 (AUXILIARY BLOX):

TR calculated indicator formula:

Max(instrument.High-instrument.Low,Abs(instrument.High-instrument.
Close[1]), Abs(instrument.Low-instrument.Close[1])):

minusVM calculated indicator formula:

Abs(instrument.High[1]-instrument.Low)

plusVM calculated indicator formula:

Abs(instrument.High - instrument.Low[1])

List of instrument permanent variables (all of type series):

minusVI (scope: System)
plusVI (scope: System)
TRSum
minusVMSum
plusVMSum

Parameter:
viDays (integer)

Update Indicators script:

plusVMSum=Sum(plusVM,viDays,0)
minusVMSum=Sum(minusVM,viDays,0)
TRSum=Sum(TR,viDays,0)
plusVI=plusVMSum/TRSum
minusVI=minusVMSum/TRSum

CODE FOR SAMPLE SYSTEM:

Exit Orders:
‘ Enter stop if “Use ATR Stops” is true
‘ ---------------------------------------------
IF useATRStops THEN
broker.ExitAllUnitsOnStop( instrument.unitExitStop )

ENDIF

Entry Orders:
VARIABLES: pvi TYPE: Floating FIGURE 1: VORTEX INDICATOR
pvi = plusVI
VARIABLES: nvi TYPE: Floating
nvi = minusVI    
VARIABLES: pos TYPE: String
pos = instrument.position

IF plusVI > minusVI AND

instrument.position <> LONG THEN

IF useATRStops THEN
broker.EnterLongOnOpen( instrument.close - averageTrueRange * atrStop )
ELSE
broker.EnterLongOnOpen
ENDIF

ENDIF
IF plusVI < minusVI AND
instrument.position <> SHORT THEN
FIGURE 2: VORTEX INDICATOR IN TRADING BLOX
IF useATRStops THEN
broker.EnterShortOnOpen( instrument.close + averageTrueRange * atrStop )
ELSE indicator/. The .tbx files can be downloaded from there
broker.EnterShortOnOpen
ENDIF too. (Please note that I am not associated with Trading
Blox; I am just one of their users.)
ENDIF Jez Liberty
—Jez Liberty

See also Jez Liberty’s contribution to the Traders’

Figure 2.) I thought you might be interested in sharing it with your Tips section in this issue for coding David Hawkins’
readers, so I am including snippets of code. (I can also provide the modified volume-price trend indicator in Microsoft
actual .tbx files.) I maintain a blog and I posted an article about the Excel.—Editor
indicator there: http://www.automated-trading-system.com/vortex- S&C

April 2010 • Technical Analysis of Stocks & Commodities • 77

Letters 1004_New-124.indd 4 2/25/10 1:09:24 PM

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 Exchange Traded Funds
An alternative to investing in mutual funds index, you can always study the index before deciding to add
is the exchange traded fund, or Etf. Etfs are an associated Etf to your portfolio.
similar to mutual funds in that they provide Etfs offer a lot of flexibility. You can buy and sell them at
diversity across asset classes or sectors, but any time; you can buy them for the long or short term; you
unlike mutual funds, they can be traded on can buy options on them; and you can short-sell them.
the exchanges like a stock. Etfs have lower Some companies that offer Etfs are Claymore, First Trust,
annual expenses than mutual funds since iShares, ProShares, PowerShares, Rydex, Vanguard, and
they are passively managed. However, since Wisdom Tree.  
you can trade them during trading hours,
you have to pay your broker a commission when you trade There’s more at Traders.com
them. Etfs expose you to less risk than buying individual In addition to the information here, there’s more to be found
stocks does since you are spreading your risk across a basket at our website, Traders.com. Once there, you’ll also find
of securities. information for other products and services. Just click on the
Since Etfs are relatively new to the market, some tend to Traders’ Resource link and follow the category link, or use
have low liquidity. Long-term performance results may also not the search feature to find products or services with specific
be readily available. However, since Etfs follow a particular attributes in the categories.

Name Exchange Category Symbol

Claymore China Technology ETF NYSE Technology CQQQ

Claymore/Clear Spin-Off NYSE Mid-Cap Value CSD
Claymore/MAC Global Solar Energy NYSE Natural Resources TAN
Claymore/NYSE Arca Airline ETF NYSE Sector FAA
Consumer Discretionary Select Sector SPDR NYSE Consumer Discretionary XLY
Consumer Staples Select Sector SPDR NYSE Consumer Staples XLP
CurrencyShares EURO Trust NYSE Currency FXE
CurrencyShares Japanese Yen Trust NYSE Currency FXY
DIAMONDS Trust, Series 1 NYSE Large Value DIA
Direxion Daily 10-year Treasury Bear 3x Shares NYSE Lev & Inv TYO
Direxion Daily China Bull 3x Shares NYSE Lev & Inv CZM
Direxion Daily Latin America 3x Bear Shares NYSE Lev & Inv LHB
Direxion Daily Latin America 3x Bull Shares NYSE Lev & Inv LBJ
EGS DJ Emg Mkts Energy Titans NYSE Energy EEO
EGS DJ Emg Mkts Metals & Mining Titans NYSE Sector EMT
Energy Select Sector SPDR NYSE Natural Resources XLE
ETFS Silver Trust NYSE Commodity SIVR
Financial Select Sector SPDR NYSE Financial XLF
First Trust Consumer Staples AlphaDEX NYSE Miscellaneous Sector FXG
First Trust Indust/Producer Dur AlphaDEX NYSE Mid-Cap Blend FXR
First Trust ISE Glb Engnrg And Const Idx NYSE Mid-Cap Blend FLM
First Trust Large Cap Core AlphaDEX NYSE Large Blend FEX
First Trust Mid Cap Core AlphaDEX NYSE Mid-Cap Blend FNX
Global X China Energy ETF NYSE Energy CHIE
Global X/InterBolsa FTSE Colombia 20 ETF NYSE International GXG
EXCHANGE TRADED FUNDS. Look for the complete listing at Traders.com under Traders’ Resource.

April 2010 • Technical Analysis of Stocks & Commodities • 79

ETFs and Funds 2010_New.indd 4 3/3/10 9:50:03 AM

 Fund family Exchange Category Symbol

GlobalShares FTSE Emerging Markets Fund NYSE International GSR

Grail American Beacon Large Cap Value NYSE Style GVT
Health Care Select SPDR NYSE Healthcare XLV
iPath S&P 500 VIX Mid-Term Futures ETN NYSE Commodity VXZ
iPath S&P 500 VIX Short-Term Futures ETN NYSE Commodity VXX
IQ Hedge Multi-Strategy Tracker NYSE Style QAI
iShares 10+ Year Government/Credit Bond NYSE Bond GLJ
iShares Barclays 1-3 Year Treasury Bond NYSE Short Government SHY
iShares Barclays 20+ Year Treas Bond NYSE Long Government TLT
iShares Dow Jones Real Estate NYSE Real Estate IYR
iShares Dow Jones US Broker-Dealers NYSE Financial IAI
iShares FTSE/Xinhua China 25 Index NYSE Pacific/Asia ex-Japan stock FXI
iShares MSCI Brazil Index NYSE Latin American stock EWZ
iShares MSCI Canada Index NYSEArca Foreign Large Value EWC
iShares MSCI EAFE Index NYSE Foreign Large Blend EFA
iShares MSCI German Index NYSEArca Europe stock EWG
iShares MSCI Japan Index NYSE Japan Stocks EWJ
iShares MSCI Singapore Index NYSE Pacific/Asia ex-Japan stock EWS
iShares MSCI Taiwan Index NYSE Pacific/Asia ex-Japan stock EWT
iShares Nasdaq Biotechnology Nasdaq Biotechnology IBB
iShares Russell 2000 Index NYSEArca Small Blend IWM
iShares S&P 500 NYSE Large Blend IVV
iShares S&P/Citi 1-3 Year Intl Treas Bond Nasdaq Bond ISHG
iShares S&P/Citi Intl Treasury Fund Nasdaq Bond IGOV
iShares Silver Trust NYSE Precious Metals SLV
JPMorgan Alerian MLP Index NYSE Sector AMJ
Market Vectors Brazil Small-Cap NYSE International BRF
Market Vectors Gold Mining ETF NYSE Precious Metals GDX
Market Vectors High-Yield Muni Index NYSE Bond HYD
Market Vectors Indonesia ETF NYSE International IDX
Market Vectors Junior Gold Miners NYSE Gold Miners GDXJ
Market Vectors Pre-Refunded Mun Index NYSE Bond PRB
Oil Services HOLDRS NYSE Natural Resources OIH
PIMCO 1-5 Year TIPS Index Fund NYSE Bond STPZ
PIMCO 15+ Year U.S. TIPS Index Fund NYSE Bond LTPZ
PIMCO Broad U.S. TIPS Index Fund NYSE Bond TIPZ
PowerShares DB Commodity Index Tracking Fund NYSE Natural Resources DBC
PowerShares DB US Dollar Index Bullish NYSE Currency UUP
PowerShares Dynamic Banking NYSE Financial PJB
PowerShares Dynamic Consumer Staples NYSE Miscellaneous Sector PSL
PowerShares Dynamic Large Cap Growth NYSE Large Growth PWB
PowerShares Emerg Mks Infrastructure NYSE Utilities PXR
PowerShares FTSE RAFI US 1500 Small-Mid Nasdaq Small Blend PRFZ
Powershares QQQ Nasdaq Large Growth QQQQ
PowerShares Wilder Hill Clean Energy NYSE Natural Resources PBW
ProShares Ultra FTSE/Xinhua China 25 NYSE Lev & Inv XPP
ProShares Ultra MSCI EAFE NYSE Lev & Inv EFO
ProShares Ultra MSCI Emerging Markets NYSE Lev & Inv EET

EXCHANGE TRADED FUNDS. Look for the complete listing at Traders.com under Traders’ Resource.

80 • April 2010 • Technical Analysis of Stocks & Commodities

ETFs and Funds 2010_New.indd 5 3/3/10 9:58:59 AM

 Fund family Exchange Category Symbol

ProShares Ultra MSCI Japan NYSE Lev & Inv EZJ

ProShares UltraShort MSCI Brazil NYSE Lev & Inv BZQ
RevenueShares Navellier Overall A-100 NYSE Style RWV
Rydex 2x S&P MidCap 400 NYSE Mid-Cap Blend RMM
Schwab International Equity ETF NYSE International SCHF
Schwab U.S. Large-Cap ETF NYSE Large-Cap SCHX
Schwab U.S. Large-Cap Growth ETF NYSE Growth SCHG
Schwab U.S. Large-Cap Value NYSE Value SCHV
Schwab U.S. Small-Cap ETF NYSE Small-Cap SCHA
Semiconductor HOLDRS NYSE Technology SMH
SPDR Barclays Intermediate Term Credit NYSE Bond ITR
SPDR Barclays Long Term Credit Bond NYSE Bond LWC
SPDR Barclays Mortgage Backed Bond NYSE Bond MBG
SPDR Barclays Short Term Intl Treas ETF NYSE Bond BWZ
SPDR DJ EURO STOXX 50 NYSE Europe stock FEZ
SPDR DJ Wilshire REIT NYSE Real Estate RWR
SPDR Gold Shares NYSE Precious Metals GLD
SPDR KBW Mortgage Finance NYSE Sector KME
SPDR S&P Oil & Gas Equipment & Services NYSE Natural Resources XES
SPDRs AMEX Large Blend SPY
Ultra Financials ProShares NYSE Financial UYG
Ultra MidCap400 ProShares NYSE Mid-Cap Blend MVV
Ultra QQQ ProShares NYSE Large Blend QLD
UltraShort Financial ProShares NYSE Bear Market SKF
UltraShort QQQ Pro Shares NYSE Bear Market QID
UltraShort Russell ProShares NYSE Bear Market TWM
UltraShort S&P500 ProShares NYSE Bear Market SDS
United States Natural Gas NYSE Natural Resources UNG
Utilities Select Sector SPDR NYSE Utilities XLU
Vanguard Emerging Markets Stock ETF NYSE Diversified Emerging Markets VWO
Vanguard Europe Pacific ETF NYSE Foreign Large Blend VEA
Vanguard FTSE All-World ex-US Small-Cap NYSE International VSS
Vanguard Intermediate-Term Corp Bond ETF Nasdaq Bond VCIT
Vanguard Intermediate-Term Govt Bond ETF Nasdaq Bond VGIT
Vanguard Long-Term Corporate Bond ETF Nasdaq Bond VCLT
Vanguard Total Bond Market ETF NYSE Intermediate-Term Bond BND
Wisdom Tree Dreyfus Indian Rupee NYSE Currency ICN
Wisdom Tree India Earnings NYSE Pacific/Asia ex-Japan stock EPI
WisdomTree Dreyfus Emerging Currency NYSE Currency CEW
WisdomTree International Hedged Equity NYSE International HEDJ
WisdomTree MidCap Earnings NYSE Mid-Cap Blend EZM
WisdomTree SmallCap Earnings NYSE Small Blend EES

S&C

The information in Traders’ Resource is the most accurate at the time of posting and is subject to change. Because the vendors posting to Traders’ Resource are responsible for their own listing, Technical Analysis, Inc. declines any

and all liability for any representations made by the businesses and individuals listed. Nor can Technical Analysis, Inc. endorse any business or individual listed on Traders’ Resource. Technical Analysis, Inc. makes no warranties,
express or implied, as to the accuracy and reliability of claims herein. You agree to release Technical Analysis, Inc., together with its respective employees, agents, officers, directors and shareholders, from any and all liability and

obligations whatsoever in connection with or arising from your use of Traders’ Resource. If at any time you are not happy with the information posted to Traders’ Resource or object to any material within Traders’ Resource, your
sole remedy is to cease using it. This list is updated frequently. If you are aware of a business that should be listed, please email us at [email protected].

EXCHANGE TRADED FUNDS. Look for the complete listing at Traders.com under Traders’ Resource.

April 2010 • Technical Analysis of Stocks & Commodities • 81

ETFs and Funds 2010_New.indd 6 3/3/10 10:00:19 AM

 Mutual Funds
When investing with mutual funds, the issue Finally, consider balancing your portfolio between bonds or
is cost of all kinds. Sales charges, turnover money market funds and equity funds. A mix of bond funds
costs (trading costs), tax costs, management and equity funds is best for all but the youngest investor. This
fees, marketing costs, and cash-holding portfolio diversification will help limit your risk while still
costs all eat into your returns; then the com- allowing for respectable returns.
pounding effect magnifies your losses. It’s The list that follows is a rundown of some mutual funds
critical to consider all of these costs when houses, along with contact information for following up.
approaching mutual fund investing and do Note: Some of the companies listed here are in transition
the appropriate research to make sure you in light of recent bankruptcies, mergers, and acquisitions. At
are making the most of your investment. A family of low-cost, the time of publication, the information provided here is, to
no-load funds that allows costless switching between funds our knowledge, accurate.
can be very beneficial in the long run.
After you’ve minimized costs, you can look at returns. The Traders’ Resource at Traders.com
benchmarks for returns are usually index funds that mirror one In addition to the information here, Traders’ Resource is also
of the market indexes, such as the Standard & Poor’s 500. It’s available in greater detail at our website, Traders.com. Once
a challenge for actively managed funds to beat the returns of there, you’ll also find information on other products and
the benchmarks, especially when you take into account the services. Just click on the Traders’ Resource link and follow
costs of active management, so consider these index funds in the category link, or use the search feature to find products or
your research. services with specific attributes in the categories.

Fund company Phone Website Email

AARP 866 218 6142 www.aarpfinancial.com/content/ [email protected]

Products/mutualFunds.cfm
Activa Funds 800 346 2670 www.activafunds.com [email protected]
Aegis Value 800 528 3780 http://www.aegisfunds.com/ See website
Alger Funds 800 992 3863 www.alger.com See website
American Century Investments 888 345 7654 www.americancentury.com See website
American Funds 800 421 0180 www.americanfunds.com See website
American Funds Group 800 421 0180 www.americanfunds.com See website
American Pension Investors 800 544 6060 www.apitrust.com/ [email protected]
Ariel Mutual Funds 800 292 7435 www.arielmutualfunds.com [email protected]
Artisan Funds 800 344 1770 www.artisanfunds.com See website
Aston Funds 800 992 8151 www.astonfunds.com [email protected]
Baron Capital Group 800 992 2766 www.baronfunds.com [email protected]
Berkshire 877 526 0707 www.berkshirefunds.com See website
Black Rock Financial Managment 212 754 5580 www.blackrock.com See website
Blue Chip Investor Fund 800 710 5777 www.bluechipinvestorfund.com [email protected]
Boston Trust Investment Mgmt., Inc. 617 726 7257 www.bostontrust.com/options/ [email protected]
separate_accounts.html
Brandywine Funds 800 656 3017 www.bfunds.com [email protected]
Bridgeway Funds 800 661 3550 www.bridgeway.com [email protected]
Burnham Funds 800 874 3863 www.burnhamfunds.com [email protected]
California Investment Trust 800 225 8778 www.caltrust.com [email protected]
Calvert Group 800 368 2748 www.calvertgroup.com [email protected]

82 • April 2010 • Technical Analysis of Stocks & Commodities

ETFs and Funds 2010_New.indd 1 3/3/10 9:41:35 AM

 Fund company Phone Website Email

Century Funds 800 303 1928 www.centuryfunds.com See website

CGM 800 345 4048 cgmfunds.com [email protected]
Chase 800 480 4111 www.jpmorganfunds.com [email protected]
Citi Smith Barney 800 221 3636 www.smithbarney.com See website
Columbia Funds 800 345 6611 www.columbiafunds.com See website
Conestoga Capital Advisors 800 320 7790 www.conestogacapital.com See website
Credit Suisse 52 55 5283 8900 www.credit-suisse.com/mx/privatebanking/ See website
services/en/funds.jsp
Delaware America 800 362 7500 www.delawarefunds.com See website
Direxion Funds 866 476 7523 www.direxionfunds.com [email protected]
Dodge & Cox Funds 800 621 3979 www.dodgeandcox.com See website
Dorfman Funds 877 374 3888 www.dorfmanvalue.com [email protected]
Dreyfus Corporation 800 782 6620 www.dreyfus.com [email protected]
Dupree Mutual Funds 800 866 0614 www.dupree-funds.com [email protected]
DWS Investments 800 621 1048 www.dws-investments.com See website
Eaton Vance Corp. 800 225 6265 www.eatonvance.com See website
Empire Builder 212-953-7800 www.glickenhaus.com [email protected]
Evergreen Investments 800 343 2898 www.evergreeninvestments.com See website
Farm Bureau 877 860 2904 www.fbfs.com [email protected]
FBR Mutual Funds 888 200 4350 www.fbr.com [email protected]
Federated Investors, Inc. 800 341 7400 www.federatedinvestors.com [email protected]
Fidelity Investments 800 544 6666 www.fidelity.com See website
Fifth Third 866 377 3826 www.fifththirdfunds.com See website
First American 800 677 3863 www.firstamericanfunds.com See website
First Pacific 800 982 4372 www.fpafunds.com [email protected]
Firsthand Funds 888 884 2675 www.firsthandfunds.com [email protected]
Forex Day Trading 305 600 4651 www.forex-day-trading.com [email protected]
Franklin Templeton Investments 800 223 2141 www.franklintempleton.com Via website
GAMCO Investors, Inc. 800 422 3554 www.gabelli.com See website
GE Asset Management 800 242 0134 www.gefunds.com/retail See website
Goldman Sachs Asset Mgmt Group 202 637 3700 www.goldmansachs.com See website
Green Century Capital Mgmt., Inc. 800 93-GREEN www.greencentury.com [email protected]
Hartford Mutual Funds 860 547 5000 www.hartfordinvestor.com See website
HSBC 800 662 3343 www.us.hsbc.com/1/2/3/personal/investing See website
ING 800 992 0180 www.ingfunds.com See website
Invesco Aim Investment Services, Inc. 800 959 4246 www.aiminvestments.com Via website
J&W Seligman & Co. Inc. 800 221 7844 www.seligman.com See website
Janus 800 975 9932 www.janus.com Via website
JP Morgan 800 480 4111 www.jpmorganfunds.com [email protected]
Keystone 952 229 8100 www.keystonefunds.com See website
Leeb 866 400 5332 www.leebfocusfund.com [email protected]
Lord Abbett & Co. LLC 800 426 1130 www.lordabbett.com [email protected]
Mainstay Funds 800 624 6782 www.mainstayfunds.com [email protected]
Mass Mutual 800 542 6767 www.massmutual.com Via website
Merk 866 637 5386 www.merkfunds.com Via website
Merrill Lynch & Co. 212 449 3000 www.ml.com See website
MFS Family of Funds 617 954 5000 www.mfs.com See website

MUTUAL FUNDS. Look for the complete listing at Traders.com under Traders’ Resource.
April 2010 • Technical Analysis of Stocks & Commodities • 83

ETFs and Funds 2010_New.indd 2 3/3/10 9:48:19 AM

 Fund company Phone Website Email

Morgan Stanley via broker only www.morganstanleyindividual.com/ Contact a financial advisor

investmentproducts/funds
Motley Fool 888 863 8803 www.foolfunds.com Via website
Munder Funds: Munder Capital Mgmt. 800 4MUNDER www.munderfunds.com See website
Nationwide 877 245 0761 www.nationwide.com/ Via website
mutual-funds-investment.jsp
NAVELLIER 800 887 8671 www.navellier.com [email protected]
Neuberger Berman Management Inc. 800 877 9700 www.nb.com See website
Nuveen 800 257 8787 www.nuveen.com/MutualFunds/Default.aspx See website
Oakmark 800 625 6275 www.oakmark.com See website
Old Mutual Capital 888 772 2888 investors.oldmutualfunds.com See website
OppenheimerFunds 888 470 0862 www.oppenheimerfunds.com See website
Pacific Life Funds 800 722 2333 www.mutualfunds.pacificlife.com/mfc/home.html Via website
Parnassus Investments 800 999-3505 www.parnassus.com [email protected]
Pax World 800 767 1729 www.paxworld.com [email protected]
PIMCO Funds 800 426.0107 www.allianzinvestors.com via website
Pioneer Investments 800 225 6292 www.pioneerinvestments.com [email protected]
Putnam Investments Not provided www.putnaminvestments.com Via website
RS Investments 800 766 3863 www.rsinvestments.com [email protected]
Russell via broker only www.russell.com/us/ contact a financial advisor
Schwab Funds 800 225 8570 www.schwabfunds.com See website
Smith Barney via broker only www.smithbarney.com/ contact a financial advisor
products_services/mutual_funds
State Farm 800 447 4930 www.statefarm.com/mutual/mutual.asp See website
State Street Global Advisors 866 787 2257 www.ssgafunds.com [email protected]
State Street Research Group 617 786 3000 www.statestreet.com See website
T. Rowe Price 800 638 2587 www.troweprice.com See website
The Vanguard Group 800 523 0857 www.vanguard.com See website
Thornburg Investment Management 800 847 0200 www.thornburginvestments.com [email protected]
Thrivent Investment Management 800 225 5225 www.thrivent.com/investments [email protected]
TIAA-CREF Mutual Funds 800 842 2252 www.tiaa-cref.org/products/mutual Via website
Tocqueville 800 697 3863 www.tocquevillefunds.com/index.html Via website
Touchstone Funds 800 669 2796 www.touchstoneinvestments.com See website
Transamerica 888 233 4339 www.transamericafunds.com/wps/portal/tam Via website
Tweedy Browne 888 893 3395 www.tweedy.com/funds [email protected]
U.S. Global Advisors 800 873 8637 www.usfunds.com [email protected]
UBS Global Asset Management 888-793 8637 http://financialservicesinc.ubs.com/ See website
USAA Group 800 286 8257 www.usaa.com See website
Van Kampen Investments 630 684 8000 www.vankampen.com Via website
Vantagepoint Funds 800 669 7400 www.icmarc.org/xp/rc/funds/vantagepointfunds [email protected]
Virtus Investment Partners, Inc. 800 243 1574 www.virtus.com See website
Waddell & Reed 888 923 3355 www.waddell.com Via website
Wasatch 800 551 1700 secure.wasatchfunds.com [email protected]
Weitz Funds 800 232 4161 www.weitzfunds.com Phone calls preferred
Wells Fargo Advantage Funds 800 359 3379 www.wellsfargoadvantagefunds.com See website S&C
The information in Traders’ Resource is the most accurate at the time of posting and is subject to change. Because the vendors posting to Traders’ Resource are responsible for their own listing, Technical Analysis, Inc. declines any and all
liability for any representations made by the businesses and individuals listed. Nor can Technical Analysis, Inc. endorse any business or individual listed on Traders’ Resource. Technical Analysis, Inc. makes no warranties, express or implied,
as to the accuracy and reliability of claims herein. You agree to release Technical Analysis, Inc., together with its respective employees, agents, officers, directors and shareholders, from any and all liability and obligations whatsoever in
connection with or arising from your use of Traders’ Resource. If at any time you are not happy with the information posted to Traders’ Resource or object to any material within Traders’ Resource, your sole remedy is to cease using it. This
list is updated frequently. If you are aware of a business that should be listed, please email us at [email protected].

MUTUAL FUNDS. Look for the complete listing at Traders.com under Traders’ Resource.
84 • April 2010 • Technical Analysis of Stocks & Commodities

ETFs and Funds 2010_New.indd 3 3/3/10 9:49:40 AM

 Explore Your Options
At-the-Money (ATM) — An option an exchange, principally the Ameri- two exponentially smoothed mov-
whose strike price is nearest the can Stock Exchange (AMEX), but ing averages that are plotted above
current price of the underlying de- also the New York Stock Exchange and below a zero line. The cross-
liverable. (NYSE) and the Chicago Board Op- over, movement through the zero
Average Directional Movement Index tions Exchange (CBOE). line, and divergences generate buy
(ADX) — Indicator developed by Exponential Moving Average — A and sell signals.
J. Welles Wilder to measure market variation of the moving average, Near-the-Money — An option with a
trend intensity. the EMA places more weight on strike price close to the current price
Bid and Ask — Highest price and low- the most recent closing price. The of the underlying tradable.
est price that an investor will pay formula for calculating EMA is: Out-of-the-Money (OTM) — A call op-
for a tradable. EMA = (Today’s closing price * k) tion whose exercise (strike) price is
Call Option — A contract that gives + (Yesterday’s moving average * (1- above the current market price of
the buyer of the option the right but k)), where k = 2/(n+1); n = no. of the underlying security or futures
not the obligation to take delivery periods. contract. For example, if a commod-
of the underlying security at a spe- Fade — Selling a rising price or buy- ity price is $500, then a call option
cific price within a certain time. ing a falling price. A trader fading purchased for a strike price of $550
Elliott Wave Theory — A pattern- an up opening would be short, for is considered out-of-the-money.
recognition technique published by example. Pairs Trading — Taking a long position
Ralph Nelson Elliott in 1939, which Gap — A day in which the daily range and a short position on two stocks in
holds that the stock market follows is completely above or below the the same sector, creating a hedge.
a rhythm or pattern of five waves previous day’s daily range. Put Option — A contract to sell a spec-
up and three waves down to form a In-the-Money (ITM) — A call option ified amount of a stock or commod-
complete cycle of eight waves. The whose strike price is lower than ity at an agreed time at the stated
three waves down are referred to the stock or future’s price, or a put exercise price.
as a “correction” of the preceding option whose strike price is higher Relative Strength Index (RSI) — An in-
five waves up. Fibonacci ratios are than the underlying stock or future’s dicator invented by J. Welles Wilder
applied to the price spans and price price. For example, when a com- and used to ascertain overbought/
targets may be projected. modity price is $500, a call option oversold and divergent situations.
Euro — European unit of currency, of with a strike price of $400 is consid- S&P Emini — Electronically traded,
the European Union. ered in-the-money. smaller-sized ($50 times the S&P
Exchange-Traded Funds (ETFs) Long — Establishing ownership of 500) contracts of the Standard &
— Collections of stocks that are the responsibilities of a buyer of a Poor’s 500 index.
bought and sold as a package on tradable; holding securities in an- Stochastics Oscillator — An over-
ticipation of a price increase in that bought/oversold indicator that com-
GENTILE/EXPLORE YOUR OPTIONS security. pares today’s price to a preset win-
Continued from page 59 Money Flow — A number of technical dow of high and low prices. These
indicators that incorporate volume data are then transformed into a
would be expensive due to the elevated and price action to measure buying range between zero and 100 and
skew attributed to the Htb situation. or selling pressure. Calculated by then smoothed.
The only scenario where the call multiplying the day’s volume by its Straddle — The purchase or sale of an
buyer truly comes out ahead both en- average price. equivalent number of puts and calls
tering and exiting is if shares move up Moving Average — A mathematical on an underlying stock with the
enough and the call becomes so deep procedure to smooth or eliminate same exercise price and expiration
in-the-money that it loses all of its ex- the fluctuations in data and to assist date.
trinsic or time value. In such a situa- in determining when to buy and sell. Volatility Index — A widely used mea-
tion, the trader could exercise the long Moving averages emphasize the di- sure of market risk. Sometimes
call without forfeiting premium and sell rection of a trend, confirm trend re- referred to as the “investor fear
stock simultaneously to flatten out the versals, and smooth out price and gauge.”
position into cash. However, this trader volume fluctuations or “noise” that Zigzag — In a bull market, an Elliott
needs to realize what they’ve done is can confuse interpretation of the three-wave pattern that subdivides
execute a profitable directional bet that market; the sum of a value plus a se- into a 5-3-5 pattern with the top of
ultimately has little to do with buying a lected number of previous values di- wave B noticeably lower than the
theoretically cheap call. vided by the total number of values. start of wave A. In a bear market,
Moving Average Convergence/ Diver- this pattern will be inverted.
Contributing analysis by senior
Optionetics strategist Chris Tyler
gence (MACD) — ­The crossing of
S&C S&C

April 2010 • Technical Analysis of Stocks & Commodities • 85

+1004 Gentile QA-Gloss.indd 2 2/25/10 3:25:38 PM

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WM_Invest_NESTEGG.indd 1 2/4/10 9:44:31 AM

 FXS
AT THE CLOSE
USD/JPY(1 day 1 year)

100.00
Volume
USD/JPY (1 day 1 yr)
97.00
until the proper signal time. On the hourly
94.00 chart of the Usd/Jpy in Figure 2, a long en-
try was triggered at 89.00. At 91.00, the Stc
91.00 was in overbought territory, yet the position
88.00 resulted in a 200-pip move on this hourly
86.00 chart. The sell signal came in at about 99.00
STC(10, 23, 50) L25 L75
and stopped at about 94, a 500-pip profit.
90.00 Just because a market is overbought doesn’t
70.00 mean you should sell immediately. What you
50.00 should do is check the Emas for bullish and
30.00 bearish tendencies such as the 23- and 50-day
10.000 crossovers and act based on those tendencies.
02/02 03/02
My cycle period was set at 20, which means
20 bars. What was missed on the upside was
12/21/2009 H: 90.9700 L: 90.2400 C: 90.9200 PV: 79.4500 another 10 to 20 cycle bars, since cycle theory
only allows a maximum of 20 more bars. My
Figure 2: STAYING IN OVERBOUGHT/OVERSOLD TERRITORY FOR EXTENDED PERIODS. A long entry
early assumption may be to adjust the cycle
was triggered at 89.00. At 91.00, the STC was in overbought territory, yet the position resulted in a 200-pip
move on this hourly chart. The sell signal came in at about 99.00 and stopped at about 94, a 500-pip profit. periods higher rather than the Emas. In ad-
dition, this is not an indicator for short-range
trades since it is a trending indicator. Signal
FXS EUR/USD(1 hour 30 day ) lines tend to point sideways with range con-
ditions. Periods of congestion won’t work for
USD/JPY (1 hour 30 day)
this indicator either.
1.4850 True to form with cycles is the ability to
buy and sell many times throughout the day.
1.4800 On the hourly chart of the euro/US dollar
(Eur/Usd) in Figure 3, the short became
1.4750 evident at 1.4900 with an exit at about
1.4750, resulting in a 150-pip profit. Also
1.4700 true to form is the wait for cycles to exhaust
themselves. The next long position signal
1.4650 came in at 1.4650 with an exit at 1.4750 for
a 100-pip profit. Another sell signal came in
STC(10, 23, 50) L25 L75
100.00
70.00 at 1.4750 and resulted in a 70-pip profit. So
40.00 throughout this trading day, you could have
made more than 250 pips in six trades.
10.000
Pretty close to perfect
07:00 12:00 17:00 22:00 03:00 08:00 13:00 18:00 23:00 04:00 09:00
12/09 12/10

12/08/2009 04:00:00 H: 1.4828 L: 1.4781 C: 1.4818 PV: 73.1640 It is practically impossible and probably not
mathematically possible for an indicator to
FIGURE 3: BUYING AND SELLING MANY TIMES THROUGHOUT THE TRADING DAY. On this chart the
short became evident at 1.4900 with an exit at about 1.4750, resulting in a 150-pip profit. Also true to form have a 100% reliability ratio. The best we
is the wait for cycles to exhaust themselves. The next long position signal came in at 1.4650, with an exit at can achieve is a percentage in the low 90s.
1.4750 for a 100-pip profit. Another sell signal came in at 1.4750 and resulted in a 70-pip profit. The Schaff trend cycle indicator comes close
to that number for its reliability factor.
Continued from page 97
frames. The smaller the number used for cycles, the more Brian Twomey is a currency trader and adjunct professor of
turns you will witness while the higher numbers will fore- political science at Gardner-Webb University.
cast fewer turns with more cycle accuracy. What you want
from adjustments is for the signal line to perfectly follow Suggested reading
prices and candles. Schaff, Doug [2002]. “Catching Cur-
While I find this indicator to be amazingly reliable when rency Moves With The Schaff Trend
the signal is caught correctly, there is one problem. The signal Cycle Indicator,” Chartpoint: July/
can stay in overbought or oversold conditions for extended August 4.
periods. The signal may read 92 on an hourly chart and over- ‡EasyLanguage
bought, but still 200 more points were added to the upside. It is
similar to oversold conditions. In this instance, you must wait ‡See Editorial Resource Index S&C

April 2010 • Technical Analysis of Stocks & Commodities • 87

+At the Close.indd 4 2/25/10 3:29:16 PM

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Interbank FX-Prs can be used to spot produced in a variety of formats over
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88 • April 2010 • Technical Analysis of Stocks & Commodities

+1004 Trade News.indd 1 2/25/10 3:31:22 PM

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92 • April 2010 • Technical Analysis of Stocks & Commodities

+1004 Books for Traders_N.indd 1 2/25/10 4:11:30 PM

 FUTURES LIQUIDITY

T
rading liquidity is often over- very high volumes. The greatest number three-year period. Thus, all numbers in
looked as a key technical of dots indicates the greatest activity; this column have an equal dollar value.
measurement in the analysis futures with one or no dots show little Columns indicating percent margin
and selection of commodity activity and are therefore less desirable and effective percent margin provide
futures. The following explains how to for speculators. a helpful comparison for traders who
read the futures liquidity chart pub- Courtesy of CBOT wish to place their margin money ef-
lished by Technical Analysis of Stocks ficiently. The effective percent margin
& Commodities every month. is determined by dividing the margin
value ($) by the three-year price range of
Commodity futures contract dollar value, and then multiply-
The futures liquidity chart shown be- ing by one hundred.
low is intended to rank publicly traded
futures contracts in order of liquidity. Stocks
Relative contract liquidity is indicated Trading liquidity has a significant ef-
by the number of dots on the right-hand fect on the change in price of a secu-
side of the chart. rity. Theoretically, trading activity can
This liquidity ranking is produced by serve as a proxy for trading liquidity
multiplying contract point value times All futures listed are weighted equally and equals the total volume for a given
the maximum conceivable price motion under “contracts to trade for equal dol- period expressed as a percentage of the
(based on the past three years’ historical lar profit.” This is done by multiplying total number of shares outstanding. This
data) times the contract’s open interest contract value times the maximum pos- value can be thought of as the turnover
times a factor (usually 1 to 4) for low or sible change in price observed in the last rate of a firm’s shares outstanding.

Trading Liquidity: Futures

Commodity Futures Exchange % Margin Effective Contracts to Relative Contract Liquidity
% Margin Trade for Equal
Dollar Profit
Eurodollar Interest Rate CME 0.1 1.9 5 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
3 Mo Euribor Interest Rate LIFFE 0.1 1.0 3 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
3 Yr. Cmmnwlth T-Bonds SFE 0.0 0.6 2 •••••••••••••••••••••••••••••••••••
30 Day Federal Funds CBT 0.0 0.1 1 ••••••••••••••••••••••••••••••
Short Sterling LIFFE 0.1 1.4 6 ••••••••••••••••••••••••••
Mini S&P 500 Index CME 10.2 23.9 11 ••••••••••••••••••••••••••
DJ Euro Stoxx 50 Index EUREX 8.1 12.7 11 ••••••••••••••••••••••
Crude Oil - Light Sweet NYM 6.7 8.1 4 •••••••••••••••••••••
Natural Gas NYM 13.7 7.8 3 •••••••••••••••
Brent Crude Oil IPE 5.1 5.9 4 •••••••••••••
S&P 500 Index CME 10.2 23.9 2 ••••••••••••
Gas Oil ICE-EU 5.0 4.6 4 •••••••••
10 Yr Treasury Notes CBT 1.7 13.7 18 ••••••••
2 Yr Euro Schatz EUREX 0.3 5.1 28 •••••••
Gold 100 troy oz NYM 6.1 14.4 6 ••••••
CAC-40 Stock Index MATIF 6.6 10.3 8 •••••
10 Yr German Euro Bund EUREX 1.5 14.7 15 •••••
Heating Oil #2 NYM 6.2 5.8 3 •••••
FT-SE 100 Index LIFFE 5.1 18.9 12 •••••
2 Yr Treasury Notes CBT 0.4 5.5 18 •••••
5 Yr German Euro BOBL EUREX 0.9 8.1 16 ••••
Sugar-World #11 CSCE 8.7 12.5 13 ••••
5 Yr Treasury Notes CBT 0.9 8.0 20 ••••
Wheat - Soft Red CBT 8.0 6.3 8 ••• CBT Chicago Board of Trade
Xetra DAX-30 Stock Index EUREX 4.5 10.8 3 ••• CME Chicago Mercantile Exchange including
Corn CBT 7.3 14.9 29 ••• the International Monetary Market (IMM)
Mini Russell 2000 CME 5.3 13.9 11 ••• CSCE Coffee, Sugar & Cocoa Exchange, New York
US Treasury Bonds CBT 2.8 27.5 22 •• EUREX European Exchange, Zurich & Frankfurt
Aust. Share Price Index SFE 5.2 11.5 6 ••
IPE International Petroleum Exchange, London
Soybeans 5000 bushels CBT 7.8 17.5 12 ••
KCBT Kansas City Board of Trade
Swiss Market Index EUREX 7.4 17.0 10 ••
LIFFE London International Financial Futures and
Mini-Nasdaq 100 Index CME 9.6 21.9 16 ••
RBOB Gas NYM 6.5 9.8 4 •• Options Exchange
Euro Currency € CME 2.4 13.5 9 • MATIF Marché à Terme International de France
Copper NYM 5.7 9.1 5 • MCE MidAmerica Commodity Exchange, Chicago
3 Mo EuroSwiss LIFFE 0.1 1.7 10 • NYCE New York Cotton Exchange
Long Gilt LIFFE 2.1 22.3 16 • NYM New York Mercantile Exchange
British Pound £ CME 2.8 7.5 7 • SFE Sydney Futures Exchange
Japanese Yen ¥ CME 3.0 11.6 8 •
Cotton #2 NYCE 5.3 8.2 10 •
Soybean Oil CBT 5.8 10.7 21 •
Silver 5000 troy oz NYM 8.3 16.8 7 •
Mexican Peso CME 6.4 7.0 7 •
Libor 1 Month CME 0.0 0.5 2 •
Australian Dollar CME 3.8 11.4 9 • 1004
Trading Liquidity: Futures is a reference chart for speculators. It compares markets “Relative Contract Liquidity” places commodities in descending order according to
according to their per-contract potential for profit and how easily contracts can be bought how easily all of their contracts can be traded. Commodities at the top of the list are easi-
or sold (i.e., trading liquidity). Each is a proportional measure and is meaningful only est to buy and sell; commodities at the bottom of the list are the most difficult. “Relative
when compared to others in the same column. Contract Liquidity” is the number of contracts to trade times total open interest times a
The number in the “Contracts to Trade for Equal Dollar Profit” column shows how volume factor, which is the greater of:
many contracts of one commodity must be traded to obtain the same potential return In volume
as another commodity. Contracts to Trade = (Tick $ value) x (3-year Maximum Price 1 or exp –2
In 5000
Excursion).

April 2010 • Technical Analysis of Stocks & Commodities • 93

+1004 Futures July 2009 • Technical

XX • Liquidity.indd 1 Analysis of Stocks & Commodities 2/25/10 9:01:15 AM
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1004_classified.indd 95 2/23/10 11:18:22 AM

 AT THE CLOSE
Continued from page 98 Emas are barely 10- and 20-day simple moving averages,
ginning of problems, especially for short-term and daytrad- and the nine-period signal line falls short as a true signal in
ers because the three-day simple moving average is too short this capacity. More losses were generated before gains were
a term to represent fast markets and act as a true trigger line. realized due to Ema failures.
The %D is supposed to serve as a smoother to %K but fails
in its objectives unless the periods are adjusted to the par- Schaff trend cycle
ticular market. Yet 1950s indicators only focused on simple The Schaff trend cycle (Stc) indicator remedied these prob-
moving averages and closing prices because the study of lems by incorporating a shorter-term Ema set with a default at
Emas hadn’t fully begun yet. 23 with a longer-term Ema with a default at 50. This remedies
the Macd and fast stochastic false signal and price whipsaw
The MACD failure and the key to the success of the Stc indicator.
But more modern indicators incorporated Emas because This combination alone can be employed effectively to
the focus gave credence and relevance to recent prices and capture trends, but it doesn’t incorporate entries and exits
percentages rather than closing prices incorporated in the fully. To fix this, a signal was needed. The Macd’s nine-day
simple moving average. It was a historic breakthrough. exponential signal line was not always effective, while fast
Yet problems existed with its incorporation because Ema, stochastic %D signal line was also a failure in the intended
when established in an indicator, had time frame periods that three-period moving average setting. You need a true signal
were too short to be effective other than for quick and short- that would capture a true trend.
term moves rather than long-term gains. The Macd with its This came from cycle theory, a theory never fully incor-
12- and 26-period Ema and nine-period signal line needed porated into an indicator. This signal line was derived from
adjustment upward to be effective. The 12- and 26-period theories and practices of 10-, 20-, and 40-day currency cy-
cles. The halfway point between the 23- and 50-day Ema is,
SCHAFF TREND CYCLE EASYLANGUAGE CODE in cycle theory, 10 so the cycle default is set as a standard 10.
But this cycle determinant can be viewed as a halfway point
Inputs: TCLen (10), MA1 (23), MA2 (50); of a 20-day cycle as well. This is the signal line that denotes
  trends, ranges, or congestion. It is the line that moves effec-
Plot1(_SchaffTC(TCLen,MA1,MA2), “Schaff_TLC”); tively with prices and candles, a true leading trend indicator
 Plot 2(25); that doesn’t appear to fail when it oscillates from tops to
Plot 3 (75);
 
bottoms, overbought and oversold.
Inputs: TCLen(NumericSimple), MA1(NumericSimple), MA2 To measure the vagaries of cycles, the Ema and the sto-
(NumericSimple); chastic has been one of the most popular measures over
Variables: XMAC(0), Frac1(0), PFF(0), Frac2(0), Factor(.5); many years because they oscillate for stochastics to follow
  cycles and measure trends by Emas. Why Emas? Because
 {Calculate a MACD Line} they apply a smoothing constant in the formula that applies
 XMAC=MACD (c,MA1,MA2);
appropriate weighting to the most recent price: a smoothing
 
 {1st Stochastic: Calculate Stochastic of a MACD} constant = 2/(1+ number of periods for Ema). A 10-period
 Value1=Lowest (XMAC,TCLen); Ema smoothing constant would be 0.1818 (2/number of
 Value 2=Highest (XMAC,TCLen) - Value1; time periods + 1). This weighs the most recent price 18.18%,
  while a 20-period Ema weighs most recent price 9.52%.
{%Fast K of MACD}
Frac1=IFF(Value2 > 0, ((XMAC-Value1)/Value2) * 100,Frac1(1)); EMA calculation:
 
{Smoothed Calculation for % Fast D of MACD}
PF=IFF(CurrentBar <=1,Frac1,PF(1) + (Factor * (Frac1-PF(1)))); Current EMA = Smoothing constant * (Current price –
  previous EMA) + previous EMA
{2nd Stochastic: DCalculate Stochastic of smoothed Percent
Fast D, ‘PF’, above} If the current price is higher than the previous Ema, the
Value3=Lowest(PF,TCLen); difference will be positive (Current price – previous Ema).
Value4=Highest(PF,TCLen)-Value3;
The positive difference is weighted by multiplying by the
 
 {% of Fast K of PF} constant ((Current price – previous Ema) x smoothing con-
 FRAC2=IFF(Value4 > 0,((PF - Value3)/Value4) * 100,Frac 2(1)); stant). The answer is added to the previous Ema and if the
  current price is lower than the previous Ema, the difference
{Smoothed Calculation for %Fast D of PF} will be negative (Current price – previous Ema). The nega-
PFF=IFF(CurrentBar<=1,Frac2,PFF(1) +(Factor * (Frac2-PFF(1)))); tive difference is weighted by multiplying it by the constant
(Current price – previous Ema) x smoothing constant. The
{The STC Function is the % Fast D of PF}
_SchaffTC=PFF;
final number is added to the previous period’s Ema. The new
Ema will be lower. I am measuring lengths with Emas since
96 • April 2010 • Technical Analysis of Stocks & Commodities

+At the Close.indd 2 2/25/10 1:10:47 PM

 AT THE CLOSE
FXS
USD/JPY_1 Hour
USD/JPY_1 Hour
Volume
92.00
cycle lengths must be measured. 91.50
This is important because full cycles are 91.00
always accompanied by half cycles. For ex-
ample, a bottom to top or top to bottom is 90.50
a half cycle. This may represent consolida- 90.00
tion into a new trend or represent a market
top and reversal. This would depend on the STC(10, 23, 50) L25 L75

cycle period. The important measurement is 90.00

time, as market cycle highs and lows must 70.00
mark time.  50.00
Currency cycles generally come in 10-, 30.00
20-, and 40-day cycles. A 16- to 23-day 10.000
period from cycle low to cycle low is con- 01:00 07:00 13:00 19:00 01:00 07:00 13:00 19:00 01:00 07:00 13:00 19:00
sidered a 20-day cycle. Yet 20-day cycles 02/13 02/16

can easily become 40-day cycles. These are 04/01/2009 17:00:00 H: 98.6700 L: 98.4800 C: 98.5100 PV: 90.1700
measured by daily and weekly candlesticks.
Figure 1: Schaff trend cycle buy and sell signals. On this hourly chart of the USD/JPY, note
In addition, you must know that not all highs how the signal line alerted a buy position that resulted in a 200-pip move. Note the overbought signal at 90,
are cycle highs and not all lows are cycle where the cycle alerted the overbought position. When the cycle ended, the downside move from 92 to 91.50
lows. One of the problems with the Stc in- was a sell opportunity that resulted in another 50 pips.
dicator is that the signal line can get stuck in
overbought or oversold territories for extended periods. This signal at 90, where the cycle alerted the overbought position.
is because cycles haven’t completed their time. This means When the cycle ended, the downside move from 92 to 91.50
that more pips can be added to the upside, even though the was a sell opportunity that resulted in another 50 pips.
signal is in overbought territory. Yet when the cycle completes
its time, the signal line will generate a powerful buy or sell Confirming candles
signal. It is a good idea to find confirmation through candles. Before
the long position, make sure you have an upward candle and
Applying the indicator a downward candle for shorts. Doug Schaff recommends a
The EasyLanguage code for the Stc can confirmation by entering on the second candle up for longs
be found in the sidebar, “Schaff Trend and the second candle down for shorts. Following the signal
Cycle EasyLanguage Code.” Using the line will alert traders to the anticipated move of prices, a
Stc is quite easy. The Emas alone will move that is usually substantial. But this takes patience.
denote the direction of the trend. Once
that is established, you have to pay atten- Identifying tops/bottoms
tion to the signal line. The signal line oscillates or cycles Technical analysis jargon would classify this indicator as
between zero and 100 just like fast stochastics and Macd, a banded oscillator where fluctuations occur between over-
but it is a truer signal. bought and oversold extremes. Banded oscillators are used
Buy and sell signals are generated when the signal line to determine overbought and oversold conditions rather than
breaches 25 at the bottom and 75 at the top. When the signal analyze price momentum. But the objective of this indicator
line breaches 25 and is heading up, this is a buy, or a long is to identify cycle tops and bottoms more than overbought
position. Consequently, when the signal line breaches 75 and or oversold extremes. While this is a trend indicator, it can be
is pointing down, this is a short. Exit your trades when the used on any time frame where longer-term charts are much
short hits the bottom and breaches 25 and when the long hits better for reliability factors. Yet it is an indicator for all types
the top and breaches 75. But if the signal line is pointing in of traders — scalpers to swing traders.
the right direction, you may choose to stay in the trade since The more interesting aspect is this indicator is that it can
currencies can easily trend to the high 90s at the top and near be used as a standalone indicator. Yet this is never recom-
zero at the bottom. mended, regardless of how reliable this indicator may be.
On the hourly chart of the US dollar/Japanese yen (Usd/ Keep in mind not to use another leading indicator such as
Jpy) in Figure 1, note how the signal line alerted a buy posi- the relative strength index (Rsi), Williams’ %R, commodity
tion that resulted in a 200-pip move. Note the overbought channel index (Cci), or momentum because these are com-
plementary indicators. Settings can be adjusted according to
various time frames.
The Schaff trend cycle indicator comes For example, Schaff recommends you try smaller Emas
for longer time frames and longer Emas for shorter time
close to a 100% reliability ratio.
Continued on page 87
April 2010 • Technical Analysis of Stocks & Commodities • 97

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 AT THE CLOSE
Fascination
What makes this indicator in-
teresting is that it is a combina-
tion of moving average conver-
gence/divergence (Macd) and
fast stochastics with a cycle
component and a smoother to
capture market prices more
comprehensively. It is a com-
bination of leading and lag-
ging indicators. The Macd is
considered to be a leading in-
dicator because it serves as an
early warning to where prices
will go. It follows prices with
its 12- and 26-period expo-
nential moving average (Ema)
components and nine-day Ema
signal line. In this capacity, it
is a trend indicator. Yet it is a
lagging indicator because it
doesn’t always lead prices, is
prone to false signals especial-
ly in fast-moving markets such
as currencies, and also prone to
whipsaw price action. So you
have to adjust the settings to
satisfy your price and market
objectives.

Stochastic indicator
As a lagging indicator, fast
stochastics is incorporated by

BRUCE WALDMAN
a 14-period %K line and %D
signal line. The %K line set at
14 periods calculates the last
close by its highest high over
14 days and lowest low over
14 days. This determines the

The Schaff Trend Cycle percentile of the last close. The

%D line is the signal line com-
posed of a three-day simple
This indicator can be used with great reliability to catch moves in the currency markets. moving average and ratio of
the %K line. The problem with
fast stochastics is its ability to

D
oug Schaff, president and founder of FX Strategy, created the Schaff trend cycle generate false signals, while
indicator in the 1990s. It is the product of more than 20 years of experience in markets can take off before
technical analysis, trading the markets with an expertise in currencies and a mas- signals are generated.
terful understanding of technical analysis and price functions in the markets. Who better to Part of the problem with
give this generation of traders an interesting, comprehensive, accurate, and brilliant indica- George Lane’s stochastic is its
tor? Schaff divulged the details of his indicator back in 2008, so the public is only now concentration on the three-day
becoming familiar with its functions and uses. In my limited time using this indicator, I’ve simple moving average as the
found it to be hugely intriguing, a fascination I hope to impart to other traders. signal line. False signals and
slow reactions are just the be-

by Brian Twomey Continued on page 96

98 • April 2010 • Technical Analysis of Stocks & Commodities

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