The STA is delighted to be hosting the IFTA conference in London this
month. It is a measure of what an important event this has come to be
for technical analysts around the world that we have managed to attract such a galaxy of international speakers all of whom are distinguished in their particular branch of analysis. The conference could not be taking place against a more challenging market background (the old Chinese curse May you live in interesting timessprings to mind) and we look forward to hearing what each speaker has to say. For those of you unable to attend, there will be feedback in the next issue. The bear market does seem to have brought with it some very favourable press coverage for technical analysis. In August, for example, the US magazine Barrons posed the question would technical analysis have told us to get out of stocks like Enron or WorldCom?to which the author, Michael Kahn, came to an encouragingly positive conclusion. One of the objectives of the Market Technician is to provide a sounding board for new work and ideas that members are in the process of developing as well as a forum for discussing why certain types of analysis do not work in some circumstances. A surprising failure earlier this year was the Coppock, one of the most well-established and hitherto reliable long term indicators. Its upturn earlier in the year prompted considerable interest in the equity markets. In the event, the buy signal proved to be premature. Investment Research of Cambridge has been keeping records of this indicator for the UK market since 1965 and this is the first time that they are aware of it producing an inaccurate call on the market. The records for the US market go back to 1901 and of the 30 buy signals that it has generated only three have failed. These were in 1901, 1914 and 194; the last two were notably times of world war. Perhaps the gathering storm clouds over Iraq were responsible for this latest failure? The Societys Diploma Course on technical analysis at South Bank University attracted a record number of students this year and most of them went on to take the exam afterwards. It is pleasing to report that the results showed a marked improvement on previous years, with the number of both passes and distinctions having risen proportionally. This improvement is even more impressive given the fact that the pass mark was raised in 2001. Under such circumstances there is a natural tendency to query whether the standard required has fallen.Whatever may be happening elsewhere in the educational field, this is not the case with our exam. It has been tightened up to such an extent that questions have been raised about whether the standard is too high. We do not think it is and this years results are surely proof of this. It is hard to pin point any particular reason for such a major improvement. One factor was clearly the Revision Day, which this year was enlivened by a gas leak, but notwithstanding this distraction a lot of hard work was put into the sessions and it clearly paid dividends. Another factor was the quality of this years group of students. They were very enthusiastic and worked extremely hard to develop their knowledge of the subject. The successful candidates are listed on page two congratulations to them all. IN THIS ISSUE STAExam Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 M.Feeny Intellectual property rights prising open the black box . . . . . . . . 3 D.Watts Asurvey of technical analysis charting . . . . . . . . . . . . . . . . . . . . . . . . . 4 G.Celaya Software review . . . . . . . . . . . . . . . . . . 7 B.Jamieson Book review . . . . . . . . . . . . . . . . . . . . . . 7 A.Hill Using Candlesticks to play the trend . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 P.Beutell Further evidence of a Great Bear Market . . . . . . . . . . . . . . . . . . . . . . . . . 10 J.du Plessis Does continued use of the wrong method make it right? . . . . . . . . . . . 12 T.Plummer Pattern and periodicity in financial circles . . . . . . . . . . . . . . . . . . . . . . . . . . 14 S.Griffiths Identifying latent energy in the markets . . . . . . . . . . . . . . . . . . . . . . . . 20 October 2002 The Journal of the STA Issue No.45 www.sta-uk.org MARKET TECHNICIAN COPY DEADLINE FOR THE NEXTISSUE January 2003 PUBLICATION OF THE NEXTISSUE March 2003 FORYOURDIARY 10-12th October IFTAConference,London Wed.13th November Software Solutions, A General Survey of Technical Analysis Software David Watts Wed.4th December Equity Markets in 2003 Nicola Merrell,Technical Analyst, JP Morgan Securities N.B.The monthly meetings will take place at the Institute of Marine Engineers 80 Coleman Street,London EC2 at 6.00 p.m. MARKETTECHNICIAN Issue 45 October 2002 2 STADIPLOMA EXAM RESULTS SPRING2002 DISTINCTION Fabio Fraschetti Walid Moukarzel Tarlock Randhawa PASSLIST DITA II CANDIDATES PASS LIST Eric Lanteigne Dirk Bach Robert Freuchtl Irfan Soezen Cyril Marini CHAIRMAN Adam Sorab, Deutsche Asset Management, 1 Appold Street,London EC2A 2UU TREASURER Vic Woodhouse.Tel:020-8810 4500 PROGRAMME ORGANISATION Mark Tennyson d'Eyncourt. Tel:020-8995 5998 (eves) LIBRARY AND LIAISON Michael Feeny.Tel:020-7786 1322 The Barbican library contains our collection.Michael buys new books for it where appropriate.Any suggestions for new books should be made to him. EDUCATION John Cameron.Tel:01981-510210 Clive Hale.Tel:01628-471911 George Maclean.Tel:020-7312 7000 EXTERNAL RELATIONS Axel Rudolph.Tel:020-7842 9494 IFTA Anne Whitby.Tel:020-7636 6533 MARKETING Simon Warren.Tel:020-7656 2212 Kevan Conlon.Tel:020-7329 6333 MEMBERSHIP Simon Warren.Tel:020-7656 2212 Gerry Celaya.Tel:020-7730 5316 Barry Tarr.Tel:020-7522 3626 REGIONAL CHAPTERS Robert Newgrosh.Tel:0161-428 1069 Murray Gunn.Tel:0131-245 7885 SECRETARY Mark Tennyson dEyncourt. Tel:020-8995 5998 (eves) STA JOURNAL Editor,Deborah Owen, 108 Barnsbury Road,London N1 OES Tel:020-7278 4605 Please keep the articles coming in the success of the Journal depends on its authors,and we would like to thank all those who have supported us with their high standard of work.The aim is to make the Journal a valuable showcase for membersresearch as well as to inform and entertain readers. The Society is not responsible for any material published in The Market Technician and publication of any material or expression of opinions does not necessarily imply that the Society agrees with them.The Society is not authorised to conduct investment business and does not provide investment advice or recommendations. Articles are published without responsibility on the part of the Society, the editor or authors for loss occasioned by any person acting or refraining from action as a result of any view expressed therein. Networking WHO TO CONTACTON YOUR COMMITTEE Exam results ANYQUERIES For any queries about joining the Society,attending one of the STA courses on technical analysis or taking the diploma examination, please contact: STA Administration Services (Katie Abberton) Dean House,Vernham Dean, Hampshire SP11 0LA Tel:07000710207 Fax:07000710208 www.sta-uk.org For information about advertising in the journal,please contact Deborah Owen 108 Barnsbury Road,London N1 OES. Tel:020-7278 4605 Hakon Anderson Karri Andrews Derek Cilliers Matthew Clements Andrew Coles Paul Denley Christopher Farrand Darren Hayward-Williams David Jenni Alison Karlin Robin Kidman Clive Lambert Henry Law James Lewis Martin Llewellyn Jonathon Marriott Robert Melling Jason Moores Cormac OConnell David Owen Matt Peters Malcolm Pryor Ketan Raja Richard Ramyar Sara Raynor David Reddy George Roberts Roger Sanders George Sharpe Toby Sheppard Sam Stanley Adaiklan Subramanian Ewart Sutton Mark Thompson George Traore Eoin Treacy Richard Waldron Henrik Wigernas Oliver Wilson Scott Yarwood Andreas Papdopoulos Matey Gerov Peter Knowles Georgiou Neophytos Kyprianou Kyprianos Issue 45 October 2002 MARKETTECHNICIAN 3 Does the purchaser of a black box trading system acquire full rights of ownership? According to a legal judgement by an English court,the owner of a machine has the full right of ownership and with that goes an entitlement to dismantle the machine to find out how it works and tell anyone the owner pleases. Even if the seller had expressly stated that the information was confidential,this would not work to override the owners entitlement to find out how the machine operates. To me,this seems a pretty important judgement. Lets look at the whole issue of commercially confidential information under English law,and then specifically at the legal judgement on the confidentiality of how a black box works. Suppose you publish a newsletter containing proprietary trading signals or other commercially-sensitive confidential information which you broadcast by e-mail. What principles apply when an unintended or unauthorised addressee receives it? As soon as an addressee realises they are not an intended or authorised recipient of obviously confidential information,they come under a legal duty of confidence to stop reading the e-mail and not to use or disclose the information. In practice the recipients curiosity is likely to get the better of them,and in any event the damage will often have been done by scanning the first few lines. The court would,if necessary in those circumstances,grant an injunction to restrain the use or further disclosure of the confidential information. When the recipient,without turning a blind eye to suspicious circumstances,is honestly unaware that an e-mail has been sent to him by mistake or he honestly believes the sender had the right to disclose the information,he is free to use and disclose the information,until such time as he becomes aware of the breach of confidentiality. He can subsequently come under an obligation of confidence upon discovering the truth,but he will not be prevented from using the information where he has already done something to make himself worse off by acting on that information, or the information has already entered the public domain. For this reason recipients of a leaked or wrongly addressed e-mail should be notified as soon as possible following the discovery of the leak. In the case of anonymous disclosure,a vast amount of news,rumour and gossip swirls around markets,particularly the foreign exchange market, concerning who is buying and selling what. This is price-sensitive information relating to individual trades usually supposed to be confidential to the counterparties and their brokers.The legitimacy of using anonymous data was considered by the court in the Source Infomatics case. The question was whether a company which compiled information about doctorsprescribing habits was entitled to sell that data (with patientsdetails suppressed) to pharmaceutical companies to help them market their products. The UK Court of Appeal concluded that there was very little authority on the subject,and ruled that it was necessary to look in each case at what the law of confidentiality was concerned to protect. In that particular case,providing patientsprivacy was not put at risk,there had not been unauthorised use of confidential information. The fact that the patients had not consented (and may not have consented if asked) was not overriding. This decision is important to parties who publish or disclose statistics as part of the service they offer to customers,brokers,databases and on-line exchanges. It shows the courts will take a pragmatic approach to the use of data on an anonymous or aggregate basis where it can be demonstrated that the interests of the party to whom an obligation of confidence is owed would not be prejudiced by publication. As English law requires criminal and civil trials to take place in public,any information relied on in a trial will become public knowledge. Companies therefore traditionally prefer to resolve commercial disputes in the privacy of arbitration. A court did recently protect the confidentiality of a document beyond the duration of the trial in which it featured,but only because access was not required by those involved in the trial nor by an interested spectator to the trial. If a dispute does end up in court,parties should identify which documents are confidential and take steps to exclude them from disclosure if not relevant,or blank out confidential parts with the agreement of the other parties. What happens when an employee leaves and goes to a competitor? The courts have to strike a balance between protecting the interests of the ex-employer and allowing the individual to use his skills and accumulated knowledge to find another job. Allegedly confidential information would need to have special qualities for it to be classed as a trade secret,on the facts of the case,and be restricted in dissemination such that its disclosure would cause real or significant harm. The courts are reluctant to extend such protection. In a recent case where a business plan was based around a training programme,the information was not judged to be a trade secret because the constituent parts were all available on the internet,albeit separately. A business with confidential information which could be taken to a competitor should identify the specific categories and put confidentiality clauses and enforceable restrictive covenants into the employeescontract of employment;also look into the possibility of patent protection. Regarding technical information,equipment that is sold often contains proprietary technology or clues about how it is manufactured that the seller wishes to keep confidential. For instance suppose a black box trading system containing various indicators and oscillators and algorithms to generate trading signals,is put in a sealed box with a sale price of $10,000 and it does successfully trade the markets.The box contains some commonly available technical analysis tools and relies on well-known technical analysis techniques. Can the seller prevent the purchaser discovering for himself how the equipment was made or put together,by sealing the box and informing the purchaser that the contents of the box are confidential? This was the issue that the court had to decide in the Mars case.Mars was a leader in the design and manufacture of mechanisms to check coins fed into vending machines. A company bought one of the most sophisticated of these mechanisms and reverse engineered it,breaking its operating code which was protected by encryption. Mars claimed that the purchasers reverse engineering amounted to a breach of confidence. But the court rejected the claim,finding that the owner of the machine has the full right of ownership and with that goes an entitlement to dismantle the machine to find out how it works and tell anyone it pleases. Even if Mars had expressly stated the information was confidential this would not work to override the buyers entitlement to find out how the machine worked. So the lesson of this case is that once a process,technique or code is embodied in a product that is sold,it can no longer be regarded as confidential and the buyer cannot be prevented from reverse engineering it. Manufacturers and developers should therefore use the other means described above,such as confidentiality clauses with contractors and partners,restrictive covenants in employment contracts,and arbitration as an alternative to the court,to protect their intellectual property. Intellectual property rights prising open the black box By Michael Feeny MARKETTECHNICIAN Issue 45 October 2002 4 Introduction Since the publication of the last software survey the number and sophistication of technical analysis software continues to be ever growing, such that the scope of this survey can only hope to catch a sample of proven software and a variety of new releases. Good news for the newer technician is that it is now possible to obtain a competent charting package with a quote downloader for under the 50 mark. This is a remarkable development brought about partly as a result of the market boom and competition between vendors over the Internet. Then free quotes from the likes of Yahoo have lead to the development of a number of downloader programs that can obtain quotes on up to 10,700 securities free of charge.While the data quality may be questionable,for many exchanges the data is clean and perfectly acceptable for accurate charts to be produced. These developments would have been just a dream a few years ago,now made reality by the power of the Internet. A price database of this magnitude would have cost many thousands of pounds not that many years ago. A listing of both the available packages and downloader programs are given in the tables. For the professional the quality of the service is of prime importance,but here again Reuters Bridge has such competitive pricing for a quality provider that a professional System becomes increasingly available to the stand-alone trader. One unwelcome development is the return of TA programs tied to the hard drive by means of an authorisation code. Hard drive crashes are still not unknown,with the possible fatal consequence that you may loose both your hard drive and your TA program. As it is not unknown for a software house to go into liquidation, it is always best to request the cumbersome Dongle if possible or buy only those programs like Metastock,with no tied security at all,just a call to the original CD some months after installation. Of note this year has been the takeover of Bridge by Reuters and the very competitive pricing of the new Bridge Internet services,with professional level data quality at a very low price. There are still only a comparatively small number of packages and charting services that offer multi-market and sector analysis for the equity professional. Of note is the introduction of Market-Master to this country.It has superb data handling and just awaits a data service offering world market coverage to make this an attractive package for the equity analyst. For the more mathematically gifted,the new XperTrader will offer spectral analysis amongst other advanced proprietary studies. While one of my own favourites is MTpredictor for elegant wave and time price analysis,but not least because of Steves continued support to users via his support group and his free commentary service with suggested trade set-ups to make this package real value. As always the pressure to release new software after substantial development cost is enormous and there has been a number of complaints from members over buggy software and datafeeds. I have always tended to take the attitude that,when buying newly released software,there will be problems to be sorted and reported at least until version 2 is released.Buyers should always order the demo or trial software,to make sure they are happy with the charts or service offered. I thought it worth highlighting some of the best from this years software survey. Free web services www.Bigcharts.com and www.Stockcharts.com are the most widely used for charts with www.advfn.com and www.FT.com both being widely used. Web-based services US services like www.Iqcharts.com appears highly competitive for realtime stock market data. While www.Quote.com and www.ADVFN.com have many fans at a slightly higher price level. Then Reuters Bridge looks hard to beat for the coverage and range of markets offered. eSignal has a new front end which spruces up the quote and chart pages www.dbc.com Software packages At the entry level the UK Sharescope and US TC2000 by Worden brothers both attract many advocates. A good value package is Gannalyst Lite for $65,the chart package is all that many would ever want and you get free quotes from Yahoo as well. (Pity about the authorisation code protection tied to the hard drive) System testing New is Weathlab 2.1 for portfolio level testing and Tradestation has now gone internet based with a brokerage for full automatic execution (if you trust the system with your money). But note that a reasonable EOD service is also available for $50 per month. Professional level services Commodity Research Bureau still exists and continues to provide those great wall charts to impress your clients and produce those old-fashioned chart books for the desk. Reuters Bridge looks to offer great value via the Internet,but with the attendant risks should the Internet ever fail. Professional Dealing Room Packages A survey of technical analysis charting By David Watts Information System Web Address Packages Available Comment Bloomberg www.bloomberg.com Various.Primarily known for their support to bond traders. Mainstream US service provider.Popular with Bond desks.Extensive web services including Bloomberg Radio and TV. Bridge (Online appllication) www.bridge.com Various.Noted for their Worldwide market coverage. Now owned by Reuters Reuters Bridge Channel is just $79 per month. Reuters Platinum Personal Bridge -$25.00 Per month Bridge In Touch - For Portable Devices $20 per month. Now delivering state of the art web based services with very competitive pricing for the trader,analyst or investor. The Reuters Personal Bridge is excellent value for money and why not have chart updates straight to your PDA? Commodity Research Bureau. Now owned by Logical Systems, Inc.of Chicago www.crbtrader.com Known for their commodity chart books since 1934.Also provides long-term wall charts. Extensive Commodity database available. SystemMaker is available for those who wish to back test their trading systems with many features for the Forex and Commodity markets incorporated. Commodity Quote Graphics www.CQG.com A good TA charting front end that also interfaces a wide variety of TA software. CQGNet is the web- based service. An established supplier to the commodity trading community. Known for their timely and clean data. CRBcharts is a low cost $20 per month, end-of-day charting service. Also SystemMaker is a powerful technical analysis program that easily backtests, trading systems. An extensive collection of chart books and Commodity data is available. Datastream Thomson Financial. www.icv.co.uk Datastream Advance 4 provider. Publishes the famous Extel surveys. Provides Stockbroker information via the Datastream Service. Previously owned the Marketeye Private trader service. Issue 45 October 2002 MARKETTECHNICIAN 5 Stand Alone Technical Analysis Software PC Technical Analysis Toolbox Software Mac.OS Pattern Matching Software Information System Web Address Packages Available Comment Reuters www.reuters.com www.reutersdatalink.com Now with Metastock Professional as a front end TA package. Long established as a premier provider to the Forex Market.The US service Reuters datalink offers a range of North American data packages. Tradermade International Limited 0208 313 0992. www.Tradermade.com Tradermade Workstation &Web are just two of the available products. Web package enables easy chart distribution.. Extensive range of services. Another long established TA data provider for the professional. Onlineservicealso availablewith training and UK support. Technical Package Web Address Packages Comment AIQ Systems 001-800-332-2999 www.aiqsystems.com/ www.aiqsystems.com /uk.htm UK email: sales@aiqsystems.co. uk TradingExpert Pro TradingExpert EOD Monthly plans available from: $59 for delayed data or $79 for RT(+exchange fees) both an internet data feed that interfaces with the Track Data package,Mytrack. A highly regarded package for the Equity Markets.Extensive sector analysis can be performed.With the proprietary expert trading system UK support available. Equis International. Tel: 001 800 882 3040 www.equis.com Metastock Professional for eSignal $1495 MetaStock Prois also available for Reuters. Metastock EOD $399 MetaStock Online Free Downloader Free Metastock,is a long time favourite with technicians, due to a robust program, good support and the range of TA studies. Able to test simple technical systems. Metastock online for free US equity charts. USsupport only. INDEXIA. Tel.01442 878015 Now owned by Updata www.indexia.com INDEXIAhas numerous services.EOD,RTand option trading.Packages available. Indexia and Indexia II Plus. An Established UK software house that provides a wide range of studies plus the excellent propriety Indexia Filters. Dos type interface. With a knowledgeable and professional UK Support service. ShareScope www.sharescope. co.uk or email orders@sharescope. co.uk Membership Fee of 79.95 (inc VAT). EODMonthly subscription of 11.95 (inc VAT). RT84.95 (inc.VAT) per month Demo available via the web site. A popular award winning charting and data package used. Lacks some of the more sophisticated studies and extensive fundamental information. Stratagem Software Intl Tel: 001 (504) 885-7353 http://209.123.116.59 SMARTrader 4.01 $299.0 and , SMARTrader RT 4.01 $995.00 QuickCharts,is $99.00 RT package interfaces with Quote.com SMARTrader the upgrade path for Computrac users. A Computrac for Windows. It has all the standard Computrac indicators plus more. USsupport. AGET Tel:330 645 0077 www.advancedget. com/index.html Advanced GET $2,995 Advanced GET RT $2520 for a one year lease A highly regarded package due to its ease of use,with one click trendlines.Provides indicative Elliot Wave counts and Gann Boxes. Scanner available USsupport only. Tradestation Securities Tel.: 001 800 808 9336 Or 001 888 853 9741 www.tradestation.com Tradestation securities onlinewith various data packages and a tied in brokerage. Tradestation Real Time and EODboth allow system testing. Now a web based service with systems and order interface.Non brokerage fees are RT $199.95 per month and $49.95 EOD. Tradestation is now online.Still with the original easy language for programming systems. Non brokerage options allow you to design and test systems online with US data supplied. TS200i is still supported in the UK via www.scapler.co.uk. Technical Package Web Address Packages Comment Updata Tel: 020 8874 4747 www.updata.co.uk Updata Technical Analyst Updata Trader Pro First Year 990+VAT (Real-Time) Technical Analyst is a new release. With a number of packages at various levels of service. Also supports the Fairshares TA packages. UK support. WaveWise Market Spreadsheet. Tel: 001 908-369-7503 www.members.aol. com/jtiware/ Waverwise costs $299.00 A spreadsheet interface and good charts make this a flexible data handling and charting package.For the spreadsheet lover. Worden Brothers TC2000 www.tc2000.com Free software but tied to their data EOD service at $29.75 per month. Covers US equities. Version 4.7 released. Well know US software package for tracking US equities.Famous propriety indicators Balance of Power and Time Segmented Volume. Synergy Software Tel:01582424282 www.synsoft.co.uk For the professional and dealing room: Sequencer and RITA For the private investor: Portfolio Evolution 169 + VATper annum Portfolio Advantage 395 + VATper annum Portfolio DayTrader (Real-time) 890+VAT plus Exchange Fees Plusdecoder box 155+VAT Both investor and professional packages. The ease of Relative Strength charting has always been a strength of the Synergy software packages. UK Support. Technical Package Web Address Packages Comment Behold for the Mac www.bhld.com Behold Version 2.9 - $795 Now able to be run on the PC with Mac emulation. Behold for the Mac is still a fine product with the ability to test EOD systems. Behold for the Mac . With the original Easy language from the early Omega System Writer Free update policy and US Support. Investor RT Charting Tel: 001800546-6842 or 001404733-5733 www.linnsoft.com Investor/RT$1495 or $595 per year Cross platform TA package with extensive Studies. USsupport. ProTA by Beesoft (Online ordering and support) http://www.beesoft. net ProTA $59 ProTA Gold $199 Extensive studies for a competitive price.With a wide range of data formats supported including,Metastock USSupport. Trendsetter Analyst Tel: 800-825-1852 U.S. or 001 (714) 997-9775 www.Trendsoft.com/ Personal Analyst $259 Personal Hotline $495 Pro Analyst $59 per month An extensive range of Software.The Pro-Analyst package Includes a day-trading Pivot based trading system. USSupport. Technical Package Web Address Packages Comment Dynamic Trader www.dynamictrad ers.com Dynamic Trader V4 $1700.00. RTadditional $33.00 per month. Classic time and price analysis Package by Robert Miner. Pattern Smasher http://www. kasanjianresearch. com Pattern Smasher EOD $1895. RTprogram in development Pattern Smasher can test and scan for pre-defined bar patterns.Has a wide range of pre-programmed patterns such as double tops and bottoms. USsupport and ongoing Newsletters. Patterns http://www.markets online.com/ Patterns $429 The updated Nava-Patterns program.Dos based.Able to test bar by bar and candle patterns. USsupport. MARKETTECHNICIAN Issue 45 October 2002 6 Portfolio Level System Testing Internet Based Charting,Data or News Services Gann Charting Free Software Just Released Technical Package Web Address Packages Comment MTPredictor http://www.mtpre dictor.com MTPredictor 2.0 is $1,495 (plus VAT) Able to recognize certain Elliot wave setups and propriety time-price patterns. With extensive email support and a trading e group you get much more than just the software. UK support. Prognosis Software Development www.elwave.com www.prognoss.nl For those who want automatic Elliot wave counts generated with Projected wave targets. Another program to consider is Elliott Wave Analyzer III at : http://www.elliott software.com Technical Package Web Address Packages Comment Trading Recipes Tel:410 263 0798 None Trading Recipes $2295.00 R W Systems Address: 5757 Westheimer, Houston,TX 77057. Dated but flexible system testing package.Basic type language. USsupport. TechniFilter Plus Tel:919 856 9600 www.rtrsoftware. com TechniFilter Plus V.8 $425 TechniFilter is a reporting and system-testing package for Windows but with only basic charting. Excellent fast scanning. A comprehensive, proprietary system testing language that takes some time to learn but does allow portfolio level testing. Web based support only. WeathLab Developer V2.1 http://www.wealth -lab.com Weathlab 2.1 $650 Both EOD and RT. 30 day trial available. Weathlab combines TA charts with the ability to test a system across a portfolio.WealthScript Programming language. Technical Package Web Address Packages Comment Advanced Financial Network www.adfn.com Unlimited free real time prices. Level 2 Datais from 35+VATper month. A rival to Quote.com for UK equity quotes. FT.com www.FT.com A vast site with news and FTinvestor services. Charts and news.The charting service has been reduced but still a great site.See Bigcharts.com for the OHLC charts. BigCharts www.Bigcharts.com Interactive charts and quotes.BigCharts is a FREEservice. A provider of charts to many other internet sites.Excellent UK share charts available. Mytrack www.mytrack.com Delayed quotes are free for both UK and US equities Mytrack provides a spreadsheet type interface to a quote table. Basic charts available or it can interface to the AIQ charting package. NexTrend www.nextrend.com NexTrend Trader From $15 per month RTand Nextrend Trader Plus From $79.95 a month Wide range of TAstudies and charts. US Securities and Futures data only. Technical Package Web Address Packages Comment Proquote.com www.proquote.com Proquote Service Fees From 45.00 per month (+ VAT). Professional feeds from 100 per month. Equity-based quotes and charts.Primarily a service to equity traders and investors. Siliconinvestor IQcharts http://www.iqchart. com/iqchart/ From $35/month including exchange fees. IQ Chart Delayed Data $24.95/month. Excellent charts and the competitive cost make this a great chart service for US stocks. RealTick www.realtick.com. Real Tick Pro Plus and the Realtick by Townsend Anayltics RealTick by Townsend Analytics features technical analysis,real- time quote displays and direct-access trading. HotTrend provides real time price alerts and analysis. StockPoint by Streaming media http://investor.stock point.com Free interactive OHLC bar and candle charts with indicators and moving averages. Excellent source of equity charts covering most exchanges including the UK. eSignal www.esignal.com eSignal provides the data feed to interface with numerous charting packages,such as the AGETreal-time package. eSignal provides a real- time data feed covering European exchanges. Technical Package Web Address Packages Comment CycleTrader http://www.cycle- trader.com/ CycleTimer $799.00. CycleTimer by Bradley F. Cowan offers Time Price vectors etc. Extensive Cycle Research. The site offers long term data. Gann Analyst. http://www.gann alyst.com Gann Analyst Professional V3 A $ 695.00 Gannalyst Extended $65.0 Gannalyst Lite Free Free Data Downloader and Data Converter. Classic Gann type charts and reasonable pricing make this package worthy of investigation. Free quotes from Yahoo for UK,US equities make this a great introductory package. Web support. Market Analyst http://www.market- analyst.com Gann analyst is the additional module to their Market Analyst product expensive at $1895.0 Market Analyst offers the Gann Analyst add in module. Technical Package Web Address Packages Comment Gannalyst http://www.gann alyst.com Gannalyst Lite. Basic charting A free basic package that can be upgraded for $65 to obtain the free quotes from Yahoo. SpiffyCharts www.spiffycharts. com `SpiffyCharts 1.4.8 Basic chart package. From the Behold software group. Supports CSI,MJK Dial Data format data. Technical Package Web Address Packages Comment Financial Data Calculator www.futures- software.com FDC V1.2 $149.00 The Parabolic prediction tool make this an interesting program. ELWave 6.2is an Elliott Wave identification program.RTanalysis Is available with the Realtick data feed. Scanning Standard Edition is $450.00 Qcharts by Quote.com www.quote.com /quotecom/qcharts/ RT and Eod data service. Excellent charting interface.$79.95 per month plus exchange fees. Great charts and user interface make this a popular real-time chart and data site. Now owned by Lycos. MarketSmart by Pcquote.com www.Pcquote.com MarketSmart Charting interface with a system testing capability from $49.95/month Orbitis $75.00 per month plus exchange fees. Hyperfeed Technologies data transfer technology for fast internet access. Interfaces with a variety of real-time packages including Tradestation and Excel. Market Master http://www.easysoft -inds.co.uk MarketMaster 2000 has great data handling and all the standard tools. MarketMaster was originally released in 1986 and hence has development history. World market coverage and equity sector analysis make this an easy to use package for the analyst/fund manager/equity strategist. Xpertrader www.XperTrader. co.uk Xpertrader. Net is a complete charting TA and decision support system. Built in trend identification and spectral analysis provide some of the decision support tools. Issue 45 October 2002 MARKETTECHNICIAN 7 Free quote downloading software Free Quotes Downloading Programs.Complete OHLCV EOD data can be downloaded for the North American and European exchanges.Currently Yahoo provides UK equity data as well. The following downloaders interface with Yahoo and other free data sources to collect free quotes: Hquotes provides three interface programs at various levels. From $55.00 http://www.hquotes.com/ Ashkon Downloader costs $39.95 http://www.ashkon.com/downloader.htmlDatashark.Downloader http://datasharks.biz/Downloader_Info.php. with a 10,700 quote library for $49.95 AnalyzerXl provides a free quotes via a Bulk Quotes Downloader.at http://www.analyzerxl.com Gannalyst Lite provides a good charting program and downloader combined,all for $65 http://www.gannalyst.com Software review for XLChartPro Details:XL ChartPro $39 USD XL TradeLink $29 USD Bundle for $49 USD Website: www.xlchartpro.iinet.net.au Address:Penzina Pty Ltd,35 Prendwick Way,Willetton WA 6155 Australia This is an intriguing piece of software which I have found useful in plotting point and figure charts in Excel. The software is an add-in to Microsoft Excel,so you need a PC system running this in order to get started. For those of us who use point and figure charts,the last 15 years of advances in computational power and charting systems often seemed to leave p&fs out,or put them in as an afterthought. This has improved over the last few years,but it can still be frustrating trying to plot p&fs in some of the major systems. The XL ChartPro add-in fills in some of the gaps and,given the reasonable cost and the data link facilities,it is worth considering. The installation was fairly easy. I just downloaded the software (around 10 minutes on a slow line) and used the license key when prompted in order to start up the program. The download came with two Microsoft Word documents detailing how to use the XL ChartPro and Link add-ins. The documentation was brief,easy to read and useful. The sample spreadsheet was helpful in showing how to set up data sets and run the XLChartPro program to plot the p&fs,with column counts appearing below the chart and a volume histogram showing up below this. The program has an automatic trendline plotting feature in which the parameters (column count and penetration filter) can be adjusted by the user. Moving averages can also be used,weighted by column count and the software also plots volume weighted averages. Was the software useful ? Yes,and the price makes it a bargain. If you like p&fs this software fills a gap. Even our dealing room systems fail to plot p&fs to our satisfaction,and I have been reduced to charting them by hand now and then. The XL ChartPro plots our data (downloaded using a DDE link from the dealing room systems) quite nicely and given a few minutes of thought into data manipulation and naming conventions it is quite easy to plot useful charts in Excel. The XL TradeLink add-in is a real eye opener though,as this really exploits the power of the internet. The Tradelink add-in can set up your Excel worksheet to link up to data kept in the Ezy chart format (never heard of it) or Metastock (quite popular) or text data files. Therefore,if you keep your data in those formats,you can use it in Excel to plot p&fs. Even more impressive though is the link to 50 exchanges. At the click of a button (around 5-10 seconds on a slow line) the add-in downloads daily high,low,close and volume data from the LSE or NYSE (or 48 other exchanges) for the specified share, going back as many years as the exchange keeps it. For instance,I selected the NYSE,typed in IBM,set the period for weeklyand the nearest date to September 01,1982. The data downloaded in a few seconds. I then opened up XL ChartPro and selected the IBM data sheet,and the chart was plotted in seconds. While some exchanges keep their data in better conditionthan others,for the majors this should not be a huge problem. System limitations? None really. It mostly does what it says on the side of the tin. I had to close down the XL ChartPro add-in and open it up a few times when plotting some bond data downloaded from a dealing room system,and I had to manipulate some FX data to get it to plot on a reasonable scale,but these are easy problems to overcome (anybody using Excel to model or manipulate data is probably used to this). This software uses Excel to plot p&fs,giving the user the option to manipulate the scales,the reversals,a percentage or normal scale and plot moving averages or volume weighted averages on the chart while displaying the column count and volume below the p&f chart. The data link to the stock exchange websites is very useful,and this software bundle should be attractive to any member who wants to look at their share portfolio through the p&f charting technique without paying exorbitant user fees for online systems,or who is dissatisfied with the way that the more expensive systems plot p&fs. The only caveat is to make sure that you have a robust PC (plenty of memory) as plotting charts is addictive and you can easily use up a lot of memory on a large portfolio. Gerry Celaya,Chief Strategist,Redtower Research Joe Ross (1991) Trading is a business. To quote the introduction Warning: this is a nasty book. It will take you apart at the seams,point out your weaknesses as a futures trader and then attempt to resurrect you as a self-disciplined person who can control his trading in a business-like manner. If you cannot stand constructive criticism or you do not wish to succeed as a futures trader,I suggest you lay this book aside now and ignore it. This book is aimed at people who have traded futures,albeit unsuccessfully. The perspective is American and the examples given relate to the US futures markets,however,the aspects discussed are universal and could be applied in any trading environment. The book is split into two sections; part one deals with the mental and psychological factors that cause people to fail as traders and part two details the mechanics of the correct trading methodology. Both money management and trading techniques are described in detail. Chapters four and six in part one are particularly enlightening because the author challenges the reader to question their motives and expectations for trading in general and the specific reasoning behind each trade. Personality traits are identified by the common errors they induce and solutions are suggested. The style of writing is thought provoking, if nothing else. The methodology outlined in part two explains the preparation work required before trading and exposes the myth that futures trading is easy money with little effort. Joe Ross comes from a family of traders and is quite critical of modern technical indicators and the way people use them. Instead he focuses on identifying congestion and trends, and on methods of trading these price patterns. Ross has a practical style of writing that stems from years of experience. His exposure of traders mistakes makes essential reading for those with less than a few years experience in a trading environment. I had to request this book through my local library but there is a web site for anybody wanting to add it to his or her personal library.http://www.ross-trading.com This book is a refreshing change in that the author decries the use of technical indicators/systems in favour of logical reasoning and good money management. I recommend the book to anybody who is unfamiliar with Joe Ross. The methods described are not a holy grail but an important contribution to the subject of technical analysis. Bruce Jamieson The STALibrary has purchased a copy of this book. Software review By Gerry Celaya Book review MARKETTECHNICIAN Issue 45 October 2002 8 Candlesticks patterns generate effective short-term reversal signals,but not all reversals are created equal. Because candlestick reversal patterns range from one to three days,they can occur quite often. Not all reversals turn into profitable trades and a second methodology can help filter less robust signals. The trend is your friend is a classic Wall Street adage and trading with the trend can increase the chances of success. This may sound obvious, but it is not always easy to participate once a trend is underway. Nobody wants to be the last buyer in an uptrend or the last seller in a downtrend. By combining trend identification with candlestick analysis,it is possible to identify short-term entry points and trade in the direction of the larger trend. In this article,I will first identify some of the more robust candlestick reversal patterns. Second,I will present a simple method to decide what kind of reversals to look for and whento look. Third,I will provide some examples that combine both techniques. Narrowing the Candlestick patterns In his bookCandlestick Charting Explained, Greg Morris tested over 50 candlestick reversal patterns based on prediction intervals of 3,5,7 and 9 days. The patterns that scored the best results across the board were: Three Black Crows,Three White Soldiers,Three Inside Up,Three Outside Up,Three Outside Down and Dark Cloud Cover.With the exception of Dark Cloud Cover,all of these patterns consist of three candlesticks. These results provide six patterns to work with. Three Black Crows and Three White Soldiers are robust reversal patterns,but are relatively rare and often skew the reward/risk ratio because of the considerable price movement that has already occurred. In addition,each of the other patterns has a two-candlestick equivalent that can provide an early alert. For example:Three Outside Up is the same as a confirmed Bullish Engulfing pattern and Three Inside Down is the same as a confirmed Bearish Harami. Once the two-candlestick pattern emerges,traders can be on alert for confirmation and act a bit quicker.As such,I would eliminate Three Black Crows and Three White Soldiers. I would then expand the remaining four patterns to include both the bearish and bullish equivalents. Three Outside Up (bullish) corresponds with Three Outside Down (bearish). Three Inside Down (bearish) would be added to match with Three Inside Up (bullish) and the Piercing Pattern (bullish) would be added to match with Dark Cloud Cover (bearish). The Piercing Pattern and Dark Cloud Cover are two candlestick patterns and I have added the third candlestick to show confirmation. Identifying the trends There are two trends that need to be established:the long-term trend and the short-term. The long-term trend tells us whichcandlestick patterns to consider and the short-term trend tells us whento look. Bullish candlestick reversals are mandated when the long-term trend is up and the short-term trend is down. Bearish candlestick reversals are mandated when the long-term trend is down and the short-term trend is up. There are many techniques for trend identification and I have chosen to use moving averages for simplicity and illustrative purposes. Pattern recognition,trendline breaks,resistance breakouts,support breaks,Elliott, Gann and other systems are viable as well. To determine the long-term trend and which candlestick reversals to consider,I applied a 200-day simple moving average (SMA). The long- term trend is considered bullish when a security is trading above its 200- day day SMA and bearish when below. To determine the short-term trend and when to look for candlestick reversals,I used a 10-day SMA.The short- term trend is up when the prior days close is above the 10-day SMA and down when below. It is worth emphasizing that bullish reversals can only occur in short-term downtrends and bearish reversals can only occur in short-term uptrends. Therefore,it is important to wait for the emergence of a short-term trend that runs counter to the long-term trend. AOL and a long-term downtrend AOL first moved below its 200-day SMA in Feb-02 and then gyrated above and below until the final break in Jul-01. The forays above the 200-day SMA were brief and resulted in two whipsaws using these techniques. Using Candlesticks to play the trend By Arthur Hill Issue 45 October 2002 MARKETTECHNICIAN 9 AOL was above its 200-day SMA and below its 10-day SMA when the Three Outside Up patterns formed in May-01 and Jun-01. Both moves were short-lived and AOL proceeded to break back below its 200-day SMA in Jul-01. As entries were made soon after the short-term reversals,stops would have been relatively close and losses minimal. Once AOL moved below the 200-day SMA,it was time to look for bearish reversal patterns and use the 10-day SMA for timing. The stock moved above its 10-day SMA in Mar-02 and formed a Three Inside Down pattern that foreshadowed a decline from 25.5 to 19. Notice that the Bearish Harami was confirmed two days later instead of the very next day. A second day confirmation is justifiable,but I would not extend the confirmation period past the second day. Candlestick reversals are short- term and should be confirmed within two days to be considered robust. In May-02 and Jun-02,AOL remained below the 200-day SMA and made two forays above the 10-day SMA. A Three Inside Down pattern formed in mid May and again in mid June. Both marked the end of the latest reaction rally and the resumption of the long-term downtrend to foreshadow significant declines. Intel and a long-term uptrend INTC was one of the star Nasdaq performers from 1995 to 2000.With the exception of a few brief dips,INTC remained above its 200-day SMA for most time between Aug-98 and Aug-00. While below the 200-day SMA, the stock did not produce any bearish reversal signals because of the quick recovery. The trend was undeniably bullish from Aug-98 to Aug-00,but a methodology was needed to decide when and how to jump on board. In late 1999 and early 2000,INTC dipped below its 10-day SMA and forged three candlestick reversals that provided entry opportunities. They were all Three Outside Up patterns or Bullish Engulfings with confirmation. The Dec-99 Three Outside Up formed as the stock tested the 200-day SMA. Confirmation was on the second day,but came with a long white candlestick to show underlying strength. The second Bullish Engulfing in early January was confirmed with a gap up and doji. However,I would consider this confirmation a bit suspect and difficult to act on. Doji signal indecision and buying would have seemed like chasing the stock. The third Bullish Engulfing was confirmed the very next day and foreshadowed a move to the low 70s. For some addition confirmation,the two-week pattern preceding the breakout looks like a falling flag and the breakout signalled a resumption of the prior advance. With INTC holding above its 200-day SMA in Aug-00,bullish reversals were still the order of the day. After an extended move below the 10-day SMA, INTC formed a Bullish Engulfing pattern and confirmed with an opening gap and long white candlestick. The boost off support in the low 60s led to a move above 75. Incidentally,the move above 75 marked the summer high and the stock declined below its 200-day SMA in mid Sep-00. Conclusion and summary In a strong trend,it is often difficult to decide how and when to participate. Once the long-term trend is established,looking for candlestick reversals in the direction of that trend can offer an entry point with a good reward/risk ratio. For long positions,exit points can be set just below the low of the first candlestick in the reversal pattern. For short positions,the exit point can be set just above the high of the first candlestick. Positions can be established to catch 1-2 week moves or to partake in a longer ongoing trend. Although I have used a 200-day simple moving average to establish the long-term trend,other techniques can be used in conjunction with candlestick reversals. After a strong advance,Fibonacci retracements (38% or 62%) could be used to identify potential candlestick reversal points.As broken support (neckline) often turns into resistance,a return to support- turned-resistance can be used to anticipate candlestick reversals. The key is to use candlestick reversals in harmony with the larger trend. Trading in the direction of the long-term trend puts the wind at your back and can enhance performance. MARKETTECHNICIAN Issue 45 October 2002 10 My original article on Great Bear Markets was drafted in August 2001 in response to a client question:How bad can it get,and when might it finish? (see Market Technician Autumn 2001 or www.mtsresearch.com, Articles section).Whilst the tragic events of September appeared to increase the chances of an extended downtrend,the deep oversold condition and the authoritiesresponse provided the stimulus for a strong rebound. At the time,the action looked like a bear market rally, particularly in the NYSE Composite (see Chart 1),but confirmation of that only came in early May from the S&P 500 (Chart 2). Against this background,I have been asked to write a follow-up article for this issue. As a reminder,the table from the original article was as follows: So how has market action conformed to the Great Bear Market (GBM) model? In two ways it has not. Firstly,compare the percentage declines in these four previous examples,when they were about five months off their ultimate lows,with the World Index at 30th May. Secondly,three out of the four previous GBMs all contained a Crash-type decline in their first 10-15 weeks,whereas the current trend did not. But note that even the UKs All-Share index,which began its decline quite sedately in 1972,had caught up with the pack as the bear market neared its final stages. However,there are two similarities which have been sufficiently close that it has been impossible to dismiss the argument that this is a GBM. Firstly, if this is not a GBM,then it would be reasonable to expect that at some point markets would produce a rally longer in time than the longest rallies seen in the previous four GBMs. The longest two occurred in Gold and Topix. Chart 3 below overlays the NYSE from September 2001 on the longest GBM rallies in those two,all centred at the pre-rally lows. The NYSE produced a classic GBM rally into its March 2002 high. The second similarity is with Japans GBM,which had two important rallies between its 1989 high and its 1992 low. The first occurred from the March 1990 low,retracing 50% of the initial decline (the US did the same between November 1929 and April 1930). The second began at the end of September 1990 and is the one illustrated in the above Gold and NYSE comparison. It retraced 38.2% of the entire 1990 decline. The rallies in the FTSE World Index from the Q2 and Q4 lows in 2001 also produced similar retracements (Chart 4). Further evidence of a Great Bear Market By Peter Beuttell NYSE COMPOSITE S O N D J F M A M J J A S O N D J F M A M J 480 500 550 600 650 700 NYSE COMPOSITE - PRICE INDEX Ratio of C to A .618 1.0 Index intra-day high .618 1.0 b a A c B a b Ratio of C to A in Time .618 .50 (B) C c (A) A classic Zigzag pattern, with an Expanding Triangle B-wave. 1.0 Index Closing Closing % High Low Duration in Peak Low Decline Date Date Days 1. S&P 500 * 31.83 4.41 86 6.9.29 8.7.32 1,035 2. UK All-Share 228.18 61.92 73 1.5.72 13.12.74 957 3. Gold 835 296 65 1.8.80 21.6.82 892 4. Topix 2,885 1,102 62 18.12.89 18.8.92 973 * : week ending figures and dates S&P : February 1932 76% FTASI : July 1974 56% Gold : January 1982 55% Topix : March 1992 51% World : May 2002 29% ) These average out at about 59%. Very different in 2002. } Chart 1 S&P & 14-DAY RSI M J J A S O N D J F M A M J 750 800 900 1000 1100 1200 1300 1350 10 20 40 60 80 100 120 140 160 180 190 S&P 500 COMPOSITE - PRICE INDEX RSI MOMENTUM INDICATOR(R.H.SCALE) Since 1969, whenever the S&P has been beneath its flat or falling 200-day average, if a rally has failed to produce a 70% 14-day RSI reading, and ... 70 30 Downtrend signal ... the RSI then hits 30% on the next decline, that has always been during an on-going downtrend. Chart 2 Gold: March 1980 - February NYSE: September 2001 - June 2002 Topix: September 1990 - August 1991 Chart 3 JAPAN: 1990-92 1989 1990 1991 1992 1000 1200 1400 1600 1800 2000 2200 2400 2600 2800 3000 TOKYO SE (TOPIX) - PRICE INDEX WORLD: 2000-02 1999 2000 2001 2002 170 180 200 220 240 260 280 300 320 340 360 FT WORLD(R.H.SCALE) 50% retracement 50% retracement 38% 38% Doing pretty much what Japan did in Fibonacci terms. Similar rally durations also. Chart 4 Issue 45 October 2002 MARKETTECHNICIAN 11 What other evidence is there that a GBM-sized decline (62-86%) could yet occur? Firstly,it has been clear since early 2001 that a large top pattern was potentially in the process of forming.In the FTSE World Index,the recent downward break targets anywhere from 140 down to the 90 area, depending on whether you use the semi-log or linear measuring method. That is a decline of 60-75% from the high (Chart 5). There are always a number of Elliott Wave counts for any individual chart, but the one illustrated in Chart 6 is preferred. One rule of using this technique is that,once a 5-wave advance has completed,the ensuing correction will retrace into the Area of the Previous Fourth Wave,and often to its low point. The PFW is the 1990 decline and,if achieved,this would represent between 57% and 70% off the 2000 high,which compares with the 62-86% of previous GBMs.(MS World is used to illustrate the count and PFW,due to its longer history). Fibonacci targeting can also be used to arrive at a level which will help indicate whether we should expect a fall greater than 50% from the high. In an (A)-(B)-(C) bear market pattern,wave (C) is more normally related to wave (A) in one of the following ratios:1.0/1.382/1.618. In the FTSE World Index,this gives targets of 140/89/58. These represent 61/75/84% declines from the high,and therefore confirm the risk of a GBM-sized decline (compare these percentages with previous GBM actuals). As I said in the original article,there is no way to prove that a GBM is in progress until a lot of the damage is already done,but it was worth publishing on a forewarned,forearmed basis. However,there is a further problematic aspect to the current situation which was not obvious a year ago. The second table makes the point that the Time profile of this bear market is very different from the four GBMs.They are about intensity a large percentage fall in a given timeframe. There are certainly others which have lasted longer,and the US bear market of 1937-1942 is one example. However,the problem is that if this is a trueGBM (i.e.it sticks to the 900-1,000 day timetable) the inescapable conclusion is that a final decline,which takes markets 62-86% off their 2000 highs,will be sandwiched into the four-month period centred on 13th November 2002, with a point target of 6th November when the current Cycle of Pi bottoms (see the first article for the time aspect). Whereas three of the previous GBMs began with a Crash-type or sustained decline,on this occasion the profile will reverse,and this GBM will end with one. Chart 7 below illustrates that Time and Price target zone. This article was drafted in June/July,and I am adding this paragraph to the final proof in very early September. At this stage,I am pretty convinced that we are eventually going to see a decline of GBM degree. Since the downside wave pattern which began in March 2002 is incomplete,and the July-August recovery looks like another completed bear market rally, the final decline could even have begun. Will the bear market become a trueGBM? I cannot say,but I fear it will. I expect to see the S&P 500 trade beneath 600,and possibly as low as 430,at some point in the next two to fifteen months,based on Fibonacci time and price projections. Chart 8 illustrates an interesting coincidence in this respect. If the worst happens,at least there are these previous GBM and other examples to look at to tell us what indicator readings to expect at the low, and what market action is likely to be in the immediate aftermath. Let us hope it does not come to that. Peter Beuttell is a Director of MTS Research Ltd.,which provides market and stock timing advice to institutional investors. See www.mtsresearch.com and www.taranalysis.com FTSE WORLD INDEX (LOCAL) 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 90 100 150 200 250 300 350 400 FTSE W WORLD - PRICE INDEX The semi-log scale measurement projects to the 140 area, a 60% decline from the high. This pattern requires volume confirmation, which has been given in the NYSE, and is acceptable in view of the 50%+ weighting of the US in this index. S H S Chart 5 FTSE WORLD INDEX (LOCAL) 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 50 100 150 200 250 300 350 400 FTSE W WORLD - PRICE INDEX Note how the % retracements off the high tie in fairly closely with the ratio targets for wave (C). The equivalent GBM lows are listed on the left. (A) (B) (C) Tokyo 1992 London 1974 New York 1932 .618 @ 136 1.0 @ 140 .7236 @ 84 .854 @ 52 1.382 @ 89 1.618 @ 58 GBM time zone 02.09.02 - 21.01.03 Ratios of (C) to (A) Chart 7 (I) (II) (III) (IV) (V) It may be a coincidence, but around 6th November, the trend channel lies in the area of the .7236 retracement off the high at 429. S&P 500 Quarterly since 1927 1.0 1.0 (V) = (I) + (III) Chart 8 MS WORLD INDEX (LOCAL) 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 60 200 400 600 800 1000 1200 MSCI WORLD - PRICE INDEX 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 60 200 400 600 800 1000 1200 1 2 3 4 5 Previous Fourth Wave support and target area. Chart 6 MARKETTECHNICIAN Issue 45 October 2002 12 It is 20 years since the personal computer was first used to bring Technical Analysis to the masses. In fact,in those early days,it was felt that Technical Analysis was far too sophisticated for a computer to handle and many traditional Technical Analysts refused to use computers and perhaps rightly so. The graphics capabilities of the IBM PC rendered computer-drawn charts almost unreadable,but it was a step in the right direction. The speed with which those early programs drew charts would be regarded as laughable today,but early Technical Analysis programs which took 12 seconds to draw a bar chart and a moving average had to be compared with the hour or more it took to generate the same chart by hand. Being able to change a moving average or oscillator period and see the result allowed more research to be undertaken. It opened up a whole world of calculated indicators which would otherwise have been impossible. For many years after those first programs appeared,most professional Technical Analysts continued to use hand-drawn charts as well,but software companies persevered and hardware manufacturers soon realised that computers were being used for more than just word processing. Consequently graphics resolutions improved and are a state now where hand-drawn charts can no longer compete. Thats the good news. The bad news is that the post-computer age allowed anyone with a computer to be a technical analyst (lower case intentional). That in itself is not a bad thing. We welcome the wider use of our discipline,but what is worrying is that in most cases this computer-generation of technical analysts have no understanding of the charts,no knowledge of what technical analysis is all about and have blind faith in lines the software is producing for them. Simply clicking on a button allows the most sophisticated calculation to be performed in an instant and the resultant chart to be drawn. The problem with this is the assumption that the chart is technically correct calculated correctly and plotted correctly. Without any background knowledge of the chart or its history or experience of manual plotting,the user has no way of knowing if the chart is right. Those of us who used to draw charts by hand,know that there is more to technical analysis than just drawing a chart. We know that we have to become intimately involved with the chart and understand what it is trying to tell us. In becoming intimate,we would instantly recognise an incorrect plot or miscalculation. It is unlikely however that any of us would ever wish to go back to those pre-computer days. Now,we can do so much more than we used to. Where constructing charts took 90% of our time,construction now takes no time at all,allowing us to spend all our time on analysis instead. Many traditional charts,however,have suffered at the hands of software developers,to such an extent that users of them now think they are plotted correctly,when in fact they are not. Continued use of the wrong method does not make it right. Welles Wilders popular RSI indicator has suffered because somewhere along the line,a computer programmer (not a Technical Analyst),without access to Wilders original work,misunderstood his idiosyncratic but effective averaging technique and assumed a simple arithmetic or exponential averaging technique instead. The result is a chart that looks like an RSI but isnt one. Its no wonder that two analysts comparing their RSIs cant understand why they get different results. The same scenario applies to many of the well-known calculated indicators. But one chart that has suffered more than most from mis-plotting is the Point & Figure chart and in particular the original 1-box reversal chart. Modern books tend to cover 3-box reversal charts only. It is rare to see 1-box mentioned and when it is,it is often shown incorrectly. If the user of software does not understand how these charts were developed and hence constructed,it is impossible to know whether the Point & Figure chart on the screen is right or wrong,with damaging implications. Most users of Point & Figure know in the back of their minds that every time there is the appropriate reversal,a column of Xs changes to a column of Os and vice versa. You will see authors state that there can never be an O and X in the same column. But is this always the case? With 3-box reversal charts it is. If a rising column of Xs reverses by the value of 3 boxes (it cant reverse by less),you must move diagonally across and plot a column of Os in the opposite direction (figure 1). If it then reverses back again by the value of 3 boxes,you move across diagonally and plot a column of Xs (figure 2). This is the Point & Figure Chart that most are familiar with. But why do we move across to a new column when we change from Xs to Os or Os to Xs? The reason is simply that the only empty squares are in the next column and so one has to move across to fit in the next column of Xs or Os. So,the books are correct, you may never have an O and X in the same column. This is however not the strict rule that so many believe. The 3-box reversal chart is a compressed version of the original 1-box reversal chart. With the 1-box chart it is not always necessary to move across to the next column,because in certain circumstances there is an empty box in the current column. Consider this scenario. If a rising column of Xs reverses by the value of 1 box,you must move diagonally across to the next column to plot the O, because the box in the current column is already occupied. (figure 3). But what if the next price reverses back up again by the value of at least 1 box? You do not have to move across one column to plot the X,because there is an empty square into which the X may be placed. (figure 4) This means that you canhave an X and O in the same column. Figure 5 shows the correct way to account for a reversal of 1-box and a subsequent reversal back again. Figure 6 shows the incorrect method of plotting the same chart. Notice how a new column is started each time there is a reversal. Other than ignorance,there is no dispute as to which is the correct method. Reference to original works will confirm it immediately,so why do we see the incorrect method so often? The answer is simple. Most users of Point & Figure have had the no X and O in the same columnrule drummed into them. Consequently software developers and even some authors have followed the same rule and suddenly the correct plotting method becomes clouded and may even be lost. Does continued use of the wrong method make it right? By Jeremy du Plessis Figure 1 Figure 2 Figure 3 Figure 4 x x x x x o x x x x x x o x x x x x x o x o x o o o x o x o x o x x x x x o Figure 5 Figure 6 x x x x x o x o x o x o o x o x o x o x x x o x x x x x x x o o o x x x x x o o o x x x Issue 45 October 2002 MARKETTECHNICIAN 13 To fully understand the logic of Point & Figure charts and how they should be plotted we need to go back to the late 19th century. Traders wanted a way of recording price changes quickly and easily whilst standing on the trading floor or in the reception area of the brokers office. So,they started writing down prices in columns as the stock traded up or down. Each time a new price was recorded,it was written into a square. The only reason for moving across one column was to avoid writing a figure on top of another. If the price recorded was a series of prices,such as 20,21,22, 23,24,23,24,25,24,25,the first five figures would be written down in a column rising as 20,21,22,23,24. Then the price records 23. Because the square below 24 already has the figure 23 in it,the trader moves across to the next column and writes in 23.The price then records 24. The square above 23 is unoccupied,so 24 may be written in the square above without having to move across. The next price is 25. The square above is unoccupied so 25 is written above the 24. The price then falls to 24. The 24 square in the same column is already occupied so the trader must move across again to plot 24. The price rises to 25. The 25 square in the same column is unoccupied,so 25 may be written in the square above 24. And so the Point & Figure Chart was born. (figure 7). The straight line overlay shows the sequence in which the numbers are written down. As time passed,traders became tired of writing down numbers and so they plotted Xs instead,placing numbers at the 5 and 0 levels. (figure 8) Having Xs in both up columns and down columns was confusing and so Xs were used for up columns and Os for down columns.(figure 9) Referring to figure 9,it is easy to see now that it is possible,and makes sense, to have an O and X in the same column. When A.W.Cohen wrote his excellent work on 3-box reversal Point & Figure charts in 1968, it did not cover the original 1-box charts. Many analysts switched to 3-box charts and so began the demise of the 1-box reversal. When Technical Analysis software started appearing,1-box charts were mostly ignored and when they did appear they were often plotted incorrectly because the correct method had been forgotten through lack of use. These incorrect charts were then inadvertently used by those new to Technical Analysis and when books were written, everyone began to think the wrong method was right. The question is does it matter? Yes,it does,for a number of reasons. This charting method was created over 100 years ago. Considerable time, effort and experience has gone into studying these charts over this time. It is important that we carry forward these original works and methods otherwise we can claim no history to our discipline. Congestion plays an important role in Point & Figure analysis. We can read so much into the shape of the patterns created by the Xs and Os. The width of congestion patterns are used for establishing price targets. But if the congestion includes a number of 1-box price changes,the incorrect method will yield a much wider congestion area and hence an excessive price target because the target is established by counting the number of columns in the congestion area. The incorrect method will yield more columns because a new column is started each time there is a reversal. Trends and trend lines are important in all charts and none more so than Point & Figure charts. A reversal of 1-box followed by the immediate reversal back again (figure 4) shows strength in a trend. Because the O and X are in the same column,the angle of the trend line is steeper. Consequently, the position and angle of trend lines will be different if the incorrect method is used. This is more so when tick data is used to plot the Point & Figure chart, remembering,however,that genuine Point & Figure Charts require tick data. With 1-box charts,repeated recording of the prices in a narrow range 1-box size apart shows resistance or support building up. These clusters of Os and Xs sittingon top of one another are like building bricks (figure 5). Its almost as if the O below the X is a supporting brickunderpinning the X. In many cases you will see a staircase being created as the price forms a new column,then steps backby one O and then resumes the trend when an X is placed on top of the O. The converse is true in down trends,where the lone X,provides a lidon top of the O. This visual aspect is lost completely if the incorrect method is used. It is easy to see the differences and readability by comparing the two charts below. Chart 1 shows a 1x1 Point & Figure chart of the FTSE Future constructed with tick data using the correct plotting method. Chart 2 shows the same chart using the incorrect method. Chart 1 Compare the up trend in both charts. Notice how,in the correct chart,the Os provide the underpinning during the up trend as if the price is climbing a staircase. This is not apparent in the incorrect Chart 2. Chart 2 Notice also the narrow 1-box trading ranges created during the up trend and how they cluster together showing short-term support and resistance. Chart 1 shows these far more clearly than Chart 2. During the up trend the price traded in a number of narrow trading ranges,building up strength for the assault to the next congestion area, almost like the next landingon the staircase. By measuring the width of these congestion patterns,1-box charts allow us to estimate where the next congestion level will occur. The counts are all taken at the base of the break out column. In each case the incorrect method overstates the count. This overestimation is more exaggerated,the more 1-box reversals there are within the congestion pattern. It becomes even more apparent when a congestion area has taken many weeks or months rather than a few minutes to form and is then used to count the next major level. In spite of the evidence,there are those who will argue that the incorrect 1-box method is better. Many will argue that the RSI calculated with an exponential average gives better results than one calculated using Wilders averaging technique. There should be nothing to prevent Technical Analysts from using the incorrect method or modifying any chart,provided that it is done with full knowledge and understanding and that the user of the incorrect method states that it is a non-traditional or modified method. All Technical Analysts should know the right and the wrong method. Ours is not a young discipline. We have a vast body of written knowledge to fall back on when in doubt. It is important that,as professionals,we are perceived to know what we are talking about and that there is a formal and correct way of drawing all the charts that we use. There are those opposed to our discipline that are waiting to catch us out. We must educate and preserve the charting methods upon which Technical Analysis has been built in the last 100 years. Continued use of the wrong does not make it right. Jeremy du Plessis CMT,is head of Technical Analysis at Updata plc and developed one of the first PC based Technical Analysis software systems 20 years ago. He teaches the Point & Figure module for the STA diploma. Figure 7 Figure 8 5 x x 5 x 24 23 22 21 20 25 24 23 25 24 Figure 9 x x x x x x x o x o x x x x 0 MARKETTECHNICIAN Issue 45 October 2002 14 Introduction One of the most difficult questions facing a technical analyst is how to differentiate a signal that requires a minor portfolio adjustment from a signal that necessitates a major re-appraisal of a strategic view. The traditional answer has been that it doesnt matter insofar as accurate short-term decisions will ensure that the long-term decisions are largely unnecessary. This answer is probably correct for day-traders and small- scale investors. Equally,however,it is largely incorrect for strategic investors and large-scale money managers:the movement of large sums of money can incur penal transactions costs,is often disallowed under management agreements,and inevitably exposes funds to huge performance risks against competitors. Consequently,even the most enthusiastic of technical fund managers will cast more than a passing glance at so-called economic fundamentals. This and the fact that technical analysis still does not have a satisfactory theoretical underpinning amongst academics helps to explain why economic analysis continues to have such an intractable hold over investment decisions. Of course,it wouldnt matter if economic forecasting was accurate but it isnt. First,the intellectual framework of economics is still largely incapable of placing accurate time frames on turning points in relevant variables. Second,economic forecasting is based on data that is both out-of-date and inaccurate. Indeed,(and I suppose Im allowed to say this in a market techniciansjournal) at the point where major investment decisions are likely to be made,economic analysis often provides no more than an intellectual comfort for an emotionally based guess. So were left with a situation where technical analysis is often not clear about the importance of its signals and where economic forecasting is often not clear about the imminence of a turning point. Is there any way that the resulting uncertainty can be reduced? In my opinion,there is. It still needs a great deal of research and thought but,in principle,the solution (or,perhaps, asolution) lies in applying some of the concepts of technical analysis to economic variables. The essential point is that financial market fluctuations and economic oscillations are both products of group behaviour. As such, both will reveal non-random patterns and rhythmic vibrations. Moreover,the two arenas will necessarily be integrated in some way. Specifically,economic behaviour provides the context within which financial markets move,and price trends in equities and bonds will generate feedback into the economy. All that is required is that we know what to look for. The theoretical background I have for some years been working with the hypothesis that the conflict between random fluctuations and ordered process in markets is resolved by the influence of the group. That is,the inherent desire of otherwise independent individuals to participate in greater wholes,allows the wholeto devolve order onto the participants. The influence of the whole is psychological,emotional and,accordingly,powerful:individuals are eventually induced to do what everyone else is doing. This is why large numbers of people simultaneously buy dotcom stocks or second houses to rent,when reason suggests that caution might be more appropriate. So,if we can allow that each person has a tendency both to be an individual and to be part of a group,then two of the fundamental assumptions of economic theory fall flat on their face. First,aggregate behaviour is not just the sum of the parts;it is something significantly more. Second,this augmented behaviour involves an important non-rational (and sometimes even irrational) dimension. In effect,what economic theory ignores is that each of us has an impulse to create meaningfor ourselves,where meaning is measured by our inner world of feelings,and where feelings are stimulated by,and integrated with,our relationships with others. All this is now pretty standard psychology,but many may still ask:so what? Why does it matter to forecasting that people have feelings and have a tendency to do things together? Specifically,doesnt the simplifying assumption of rational behaviour by independent individuals just make the forecasting models easier to use? Actually,the literal answer is yes. But,unfortunately,it also makes the forecasts less accurate. Critically,the simplifying assumption of economics does not allow for the simple reality of human behaviour that lies at the heart of cyclical behaviour the emergence of satiation. Indeed,in economics,satiation is treated as an aberration:the unspoken presumption is that we never have enough goods(note the terminology). Hence,growth can and should continue persistently and indefinitely,subject only to the birth rate (which creates new entrants to the consumer market) and the ability of the system to generate new goods(through innovation). In nature,however,every living system oscillates between a state of activity and a state of rest. Indeed,rest is essential in order to re-energise an organism and delay entropy. So,satiation with activity causes an organism to switch from activity into rest and,conversely,satiation with rest causes an organism to switch from rest into activity. Hence,for example,as we approach satiation at the end of a day,we begin to lose energy,our body heat drops and our metabolism slows. Then,suddenly, we fall asleep. We traverse a process gap. Conversely,when weve had enough sleep,our energy potential is re-established,so our organ systems start to speed up and our body temperature rises. Again,we experience a process gap and,suddenly,we are awake. Every living organism regularly, and at some infinitesimal moment in time,passes over the cusp that delineates sleep from rest. Moreover,these moments in time are entrained across nature. Most of us,for example,go to sleep before midnight and wake up in the early morning (give or take a late night out!). The harmonisation of activity and rest throughout the biosphere reduces interference and allows total energy usage to be minimised. There is another element here, which is also critical to our understanding of oscillations in living systems. Living systems respond to the input of energy and information. The interesting point is that when a system receives new energy or information, it has to divert existing energy to deal with it. A simple example is eating. Food provides new energy to our bodies. The first thing that happens, however, is that energy resources are diverted to deal with the transformation and absorption of the food. That is, our freely available energy tends to drop and, while this is happening, we actually tend to slow down and feel sleepy. In a sense, this slowdown revisits the drop in energy that initially signalled the need to eat. But there is a huge qualitative difference: the slowdown without food marks the end of a phase, while the slowdown with food marks the transition to a new phase. Having eaten, our energy is eventually considerably enhanced and we can go about our activities with some degree of vigour. Obviously what we have here is a three-wave pattern that proceeds through input-absorption-application. Importantly,this pattern does not just apply to energy;it also applies to information. In human beings,it has specifically been found 1 that the diversion of energy to deal with the transfer of information from short-term memory to long-term memory momentarily interrupts the ability to apply new learnings. So,the three- wave pattern is also the signature of learning. The first two stages are the true learning stages (where information actually alters the qualitative structure of the organism) and the third stage constitutes the confirmation that learning has occurred. There are thus four ideas that can be used to produce a model of oscillations that mirrors what happens in financial markets. These ideas are:(1) individuals combine into groups,(2) groups respond to the input of energy and information from their environment,(3) the associated absorption of new energy and information involves a pause in activity,and (4) satiation causes a polarity switch between activity and rest. One inference is that a financial market group can be treated as if it were a living organism. Financial market oscillations At the final low of a financial market cycle,the bears will be overextended and the market will be oversold. In the background,we can hypothesise either that fundamentals may have started to improve or that the market has over-discounted the fundamentals. The market will be actively falling but either there will be no new bearish information to sustain the drop,or the number of investors willing to sell will dry up. So the bear will run out of energy (in terms of information and financial allocations) and the situation will be ripe for a bear squeeze. When this bear squeeze occurs, Pattern and periodicity in financial cycles By Tony Plummer Issue 45 October 2002 MARKETTECHNICIAN 15 it will actually develop some momentum and go further than the fundamentalists either expected or wanted. Note that the squeeze has arisen out of satiation ie,the bear case has been taken as far as it can go. It therefore reverses the polarity of the market from bearish to bullish. It is the financial equivalent of waking up in the morning. On this analysis,the bear squeeze is a piece of information that the market has to digest. There will be a resistance level beyond which investors will be unwilling to take the market because they are unsure. Most will not be able specifically to identify this level (although it may be quite discernible in mathematical terms 2 ). However,there will be a sense that the market has risen too far. Nevertheless,much time and effort will now be taken in re-analysing fundamentals,or waiting for fundamentals to catch up. During this phase,therefore,energy is diverted to absorbing the implications of the bear squeeze and the market drops to re-test the low. Many will,of course,see the re-test as being a renewal of the bear. However, not only has the energy available for the bear weakened,but bullish energy has been bolstered. So,as the market re-tests the low,volume,momentum and open interest may contract. There may even be mathematical limits to the extent of the drop. At this stage,the market is absorbing the information ie,learning that the market may be reversing trend. Eventually,trading selling dries up and the market stabilises. It is at this point that the market is peculiarly vulnerable to bullish information from the environment. It may take only one generally available item of such news,or a small amount of persistent buying by those who believe that they can anticipate the news,to generate a sharp upward impulse move. The market has now learnt that it is bullish and most subsequent incoming data will merely confirm that this is so. Negative news creates no more than counter-trend setbacks and buying opportunities. Ultimately,the market becomes satiated,in the sense that investors have enough stock and a shortage of buyers develops. The market is therefore overbought and vulnerable to profit taking. If fundamentals have started to turn negative,or if the market has over-discounted the fundamentals,the profit taking could act as the information shock that reverses the polarity of the market from bullish to bearish. Then the reverse process sets in. The price pulse This model is,of course,very simplistic. Nevertheless,it gives us the basis of a cycle that not only has an understandable mechanism but also has a very specific pattern. In fact,one complete beat of the cycle has six phases three waves up and three waves down. The first two waves of each movement are a true learning phase,consisting of an information shock and its absorption. The third wave is the genuine impulse wave that applies the learnt information. In Figure 1 below,the upwaves are denoted 1-2-3 and the downwaves are denoted A-B-C. Figure 1:The cycle mechanism It is my observation that this pattern underlies all market movements. 3 Moreover,it provides an answer to those who have either found market cycles to be too arrhythmic or believe regular market fluctuations are inconsistent with the assumption of creative behaviour by market participants. First,the cycle is defined by the patternof internal change, not by the precision of the periodicity. Second,the pattern is an essential part of the process of creative adjustment to external change. All that we need to do is isolate the three-wave patterns inherent in the up-phase and down-phase of a cycle. The 11-year cycle in the Dow In order to provide a basis for analysis,it might be useful to look straightaway at some practical examples. Space limitations mean that we can only look at a tiny part of the massive amount of data available. I shall concentrate on the US Dow Jones Industrial Average. The evidence which is borne out by the detailed work of many others indicates that one of the dominant cycles in this average has a duration of (roughly) 11 years. So major price lows since the end of WWII are taken to have occurred in autumn 1946,winter 1957,summer 1970,autumn1981, autumn 1990 and summer 2002. 4 Figures 2-i to 2-v below show the 6-month rates of change in the monthly closes of the Dow. Each chart spans a period of approximately eleven years,measured from momentum trough to momentum trough. Figure 2-i covers the 133 months from November 1946 to December 1957,Figure 2-ii covers the 150 months from December 1957 to June 1970. Figure 2-iii covers the 135 months from June 1970 to September 1981. Figure 2-iv covers the 110 months from September 1981 to November 1990. And Figure 2-v covers the 140 months from November 1990 to July 2002. Figure 2-i:DJIA,November 1946 to December 1957 Figure 2-ii:DJIA,December 1957 to June 1970 Figure 2-iii:DJIA,June 1970 to Sep 1981
-35 -25 -15 -5 5 15 25 35 N o v - 4 6 M a y - 4 7 N o v - 4 7 M a y - 4 8 N o v - 4 8 M a y - 4 9 N o v - 4 9 M a y - 5 0 N o v - 5 0 M a y - 5 1 N o v - 5 1 M a y - 5 2 N o v - 5 2 M a y - 5 3 N o v - 5 3 M a y - 5 4 N o v - 5 4 M a y - 5 5 N o v - 5 5 M a y - 5 6 N o v - 5 6 M a y - 5 7 N o v - 5 7 6 - m o n t h
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c h a n g e -35 -25 -15 -5 5 15 25 35 0 6 12 18 24 30 36 42 48 54 60 66 72 78 84 90 96 102 108 114 120 126 132 Months since low 6 - m o n t h
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c h a n g e -35 -25 -15 -5 5 15 25 35 0 6 12 18 24 30 36 42 48 54 60 66 72 78 84 90 96 102 108 114 120 126 132 138 144 150 Months since low 6 - m o n t h
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-35 -25 -15 -5 5 15 25 35 45 J u n - 7 0 D e c - 7 0 J u n - 7 1 D e c - 7 1 J u n - 7 2 D e c - 7 2 J u n - 7 3 D e c - 7 3 J u n - 7 4 D e c - 7 4 J u n - 7 5 D e c - 7 5 J u n - 7 6 D e c - 7 6 J u n - 7 7 D e c - 7 7 J u n - 7 8 D e c - 7 8 J u n - 7 9 D e c - 7 9 J u n - 8 0 D e c - 8 0 J u n - 8 1 6 - m o n t h
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c h a n g e -35 -25 -15 -5 5 15 25 35 45 0 6 12 18 24 30 36 42 48 54 60 66 72 78 84 90 96 102 108 114 120 126 132 Months since low 6 - m o n t h
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c h a n g e 1 C B A 3 2 0 MARKETTECHNICIAN Issue 45 October 2002 16 Figure 2-iv:DJIA,September 1981 to November 1990 Figure 2-v:DJIA,November 1990 to July 2002 What is apparent from these graphs is that,although there are distortions and anomalies that need to be explained,the 11-year cycle does indeed appear to contain a basic 6-wave (1-2-3 up/A-B-C down) pattern. Triadic cycles If the pattern is so important,it is worth considering what characteristics a complete cycle might have. The starting point is to see if there are any fixed relationships between successive troughs and successive peaks. Table 1 below measures the time elapse,measured in months,between important turning points within each of the 11-year cycles. The lows are absolute momentum lows. Highs are momentum highs,but some of them are relative rather than absolute. That is,some of the highs relate to price highs that are generated on lower momentum (a non- confirmation). This last point will be covered in a little more detail below under the section entitled Biases in momentum. Table 1:Internal cycle timings One of the immediate observations is that,although there is plenty of variability,the positioning of the main peaks and troughs conforms to a very simple formula. This is that the major troughs occur at around 33% and 66% of the total time elapse of the average cycle and that peaks occur at around 17%,50% and 83% of the average cycle.In other words, the cycles are divided into balanced triads:the main cycle consists of three lower-level cycles,each of which has a duration that is about a third of the duration of the main one. This is consistent with the operation of a cycle of about 44 months,which in turn correlates with the short-term business cycle found by Joseph Kitchin. Further,each of these short-term cycles tends to register an important peak very close to its own mid-point. There is variability here,but not randomness. Figure 3 below shows an idealised pattern for the cycles. The higher-level cycle is represented by the move from 0 to C ie,1-2-3 up and A-B-C down. It consists of three lower-level cycles,each of which itself consists of three cycles. Significant lows occur one-third and two-thirds along the time elapse of the higher-level cycle. Important highs occur at one-sixth, one-half and five-sixths along the time elapse of the cycle. And the mid- point of the second lower-level cycle will coincide with the mid-point of the overarching higher-level cycle. Figure 3:The cycle model Cycle translation There are,of course,variations,which are based on the essential creativity of markets. There are two major types of distortion that can arise. The first is that the peaks in lower-level cycles may be biased through time either by their relative positionwithin the larger degree cycle or just by the power of the larger degree cycle. These biases are often called translations. In principle,each cycle within a triad is likely to have certain characteristics. The first cycle is the basecycle,which starts the big cycle off. It can often be centred rather than biased. The second cycle is likely to be the trendcycle,which provides the main impulse move. As such,it is likely to be rightward biased such that it peaks late. The third cycle in a triad is,accordingly,the terminal cycle,which unwinds all the excesses of the trend cycle and incorporates the main bear phase. It would tend to be leftward biased such that it peaks early. Readers may recognise that this cartography reflects R.N. Elliotts insights. These tendencies are modelled in Figure 4 below. Here,the dashed line indicates the existence of the higher-level cycle (although not its locus), which is divided into three lower-level cycles. The latter are themselves sub-divided into triads. The translations are measured either in relation to the 17%,50% and 83% time divisions of the relevant higher-level cycle or in relation to the 50% time division of the lower-level cycle itself. Figure 4:Translations within the triad
-35 -25 -15 -5 5 15 25 35 45 S e p - 8 1 J a n - 8 2 M a y - 8 2 S e p - 8 2 J a n - 8 3 M a y - 8 3 S e p - 8 3 J a n - 8 4 M a y - 8 4 S e p - 8 4 J a n - 8 5 M a y - 8 5 S e p - 8 5 J a n - 8 6 M a y - 8 6 S e p - 8 6 J a n - 8 7 M a y - 8 7 S e p - 8 7 J a n - 8 8 M a y - 8 8 S e p - 8 8 J a n - 8 9 M a y - 8 9 S e p - 8 9 J a n - 9 0 M a y - 9 0 S e p - 9 0 6 - m o n t h
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c h a n g e -35 -25 -15 -5 5 15 25 35 45 0 6 12 18 24 30 36 42 48 54 60 66 72 78 84 90 96 102 108 Months since low 6 - m o n t h
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-20 -10 0 10 20 30 N o v - 9 0 M a y - 9 1 N o v - 9 1 M a y - 9 2 N o v - 9 2 M a y - 9 3 N o v - 9 3 M a y - 9 4 N o v - 9 4 M a y - 9 5 N o v - 9 5 M a y - 9 6 N o v - 9 6 M a y - 9 7 N o v - 9 7 M a y - 9 8 N o v - 9 8 M a y - 9 9 N o v - 9 9 M a y - 0 0 N o v - 0 0 M a y - 0 1 N o v - 0 1 M a y - 0 2 6 - m o n t h
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-35 -25 -15 -5 5 15 25 35 D e c -5 7 A p r-5 8 A u g -5 8 D e c -5 8 A p r-5 9 A u g -5 9 D e c -5 9 A p r-6 0 A u g -6 0 D e c -6 0 A p r-6 1 A u g -6 1 D e c -6 1 A p r-6 2 A u g -6 2 D e c -6 2 A p r-6 3 A u g -6 3 D e c -6 3 A p r-6 4 A u g -6 4 D e c -6 4 A p r-6 5 A u g -6 5 D e c -6 5 A p r-6 6 A u g -6 6 D e c -6 6 A p r-6 7 A u g -6 7 D e c -6 7 A p r-6 8 A u g -6 8 D e c -6 8 A p r-6 9 A u g -6 9 D e c -6 9 A p r-7 0 Date 6 - m o n t h
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c h a n g e -35 -25 -15 -5 5 15 25 35 0 6 12 18 24 30 36 42 48 54 60 66 72 78 84 90 96 102 108 114 120 126 132 138 144 150 Months since low 6 - m o n t h
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c h a n g e 1 C B A 3 2 0 17% 50% 83% 100% 66% 33% 0%
Dates Months from cycle low 1 (High) 2 (Low) 3 (High) A (Low) B (High) C (Low) Nov 46 Dec 57 21 29 50 81 99 133 (16%) (22%) (38%) (61%) (74%) (100%) Nov 57 Jun 70 12 54 73 104 129 150 (8%) (36%) (49%) (69%) (86%) (100%) Jun 70 Sep 81 10 51 69 92 123 135 (7%) (38%) (51%) (68%) (91%) (100%) Sep 81 Nov 90 16 32 54 76 95 110 (15%) (29%) (49%) (69%) (86%) (100%) Nov 90 Jul 02 20 46 76 95 119 140 (14%) (33%) (54%) (68%) (85%) (100%) Averages 16 42 64 90 113 134 (12%) (31%) (48%) (67%) (85%) (100%) Issue 45 October 2002 MARKETTECHNICIAN 17 Biases in momentum The second type of distortion arises in relation to cycle momentum. The distortion basically arises because of the dynamics of cycle inflexion, although the position of the cycle within a triad may also play a role. The point is that cycle momentum acceleratesas a cycle turns up and deceleratesas a cycle turns down. In other words,as a cycle negotiates the energy gap that reverses its polarity,momentum shows a massive move. This is shown in Figure 5 below. One of the results is that the momentum indicator will often show a lesser rate of change at the top of the cycle (ie, at 3) than at the start of the upswing (at 1). Conversely,it will often show a higher rate of change at the bottom of a cycle (ie,at C) than at the start of the downswing (at B). Figure 5:Biases in momentum This means two things. On the one hand,a sharp acceleration or deceleration in momentum can help to confirm that a reversal is occurring. On the other hand,the subsequent moderation in momentum helps to provide non-confirmation of the ensuing peak or trough. But note that neither is valid unless it occurs in an appropriate time window. A sharp change in momentum may occur for reasons other than a cycle inflexion and a slowdown in momentum may be precisely what characterises a long trend. Market fluctuations compared The next stage in the analysis is to overlay one market cycle on another in order to see how closely the loci of the cycles coincide with one another. The trick here is to ensure that the time elapse for one cycle is made geometrically equivalent to the time elapse of another. Hence,to compare two cycles,the time axis of one is placed on the lower horizontal axis and the time elapse of the other is placed on the upper horizontal axis,ensuring that the start and end of both cycles coincide. It should then be possible to see how closely the patterns of the two cycles mirror one another. For simplicity,I have used the 1970 to 1981 cycle as the blueprint;but any combination could be used. Hence,Figure 6-i compares the 1970-81 cycle with the 1946-57 cycle,Figure 6-ii compares the 1970- 81 cycle with the 1957-70 cycle,Figure 6-iii compares it with the 1981-90 cycle and Figure to 6-iv compares it with the 1990-02 cycle. Also shown on the charts are the idealtimings of the peaks and troughs. Figure 6-i:DJIA,1946 to 1957 and 1970 to 1981 Figure 6-ii:DJIA,1957 to 1970 and 1970 to 1981 Figure 6-iii:DJIA,1970 to 1981 and 1981 to 1990 Figure 6-iv:DJIA,1970 to 1981 and 1990 to 2002 To repeat:there are a lot of variations and distortions it would be unreasonable to expect otherwise. Nevertheless,a quick scan of the charts shows that (a) the threesomenessof markets comes across loud and clear and (b) the intrinsic timing of peaks and troughs is reasonably consistent. Hence,once we have an idea about the likely duration of the higher-level cycle,we also have some idea about the points of inflexion of the lower- level cycles. Cycle durations vary,but the patterns (basically) do not. Estimating the duration of a new cycle The problem for forecasting,however,is that we wont initially know the ultimate duration of a newly evolving cycle. We can estimate it from the averages of previous cycles but,as we have already seen,all we can get is a ballpark figure. Can we be more precise? Actually the answer is,yes. There are two ways of doing this. The first is to use the idealised relationship between turning points. For example,once we have the first important momentum peak,we can estimate that this peak will be about 17% of the total duration. So the estimated total duration will be: Time from cycle low to first high/ 0.17 = First estimate of cycle length And,obviously,the analysis is cumulative. Once the first sub-cycle low is in (eg,after 3 to 4 years for a 11-year cycle) we can provide a new estimate:
-25 -15 -5 5 15 25 35 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 105 110 115 120 Months since low (1946-57) 6 - m t h s
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c h a n g e -40 -30 -20 -10 0 10 20 30 40 50 0 6 12 18 24 30 36 42 48 54 60 66 72 78 84 90 96 102 108 114 120 126 132 Months since low (1970-81) 6 - m t h s
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c h a n g e 1946-1957 (l.h.scale, lower time axis) 1970-1981 (r.h.scale, upper time axis) 1 C B A 3 2 0
-35 -25 -15 -5 5 15 25 35 0 6 12 18 24 30 36 42 48 54 60 66 72 78 84 90 96 102 108 114 120 126 132 138 144 150 Months since low (1957-70) 6 - m t h s
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c h a n g e -40 -30 -20 -10 0 10 20 30 40 50 0 6 12 18 24 30 36 42 48 54 60 66 72 78 84 90 96 102 108 114 120 126 132 Months since low (1970-81) 6 - m t h s
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c h a n g e 1957-1970 (l.h.scale, lower time axis) 1970-1981 (r.h.scale, upper time axis) 1 C B A 3 2 0
-35 -25 -15 -5 5 15 25 35 45 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 105 Months since low (1980-90) 6 - m t h s
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c h a n g e -40 -30 -20 -10 0 10 20 30 40 50 0 6 12 18 24 30 36 42 48 54 60 66 72 78 84 90 96 102 108 114 120 126 132 Months since low (1970-81) 6 - m t h s
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c h a n g e 1981-1990 (l.h.scale, lower time axis) 1970-1981 (r.h.scale, upper time axis) 1 C B A 3 2 0
-20 -15 -10 -5 0 5 10 15 20 25 30 0 6 12 18 24 30 36 42 48 54 60 66 72 78 84 90 96 102 108 114 120 126 132 138 Months since low (1990-2001) 6 - m t h s
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c h a n g e -40 -30 -20 -10 0 10 20 30 40 50 0 6 12 18 24 30 36 42 48 54 60 66 72 78 84 90 96 102 108 114 120 126 132 Months since low (1970-81) 6 - m t h s
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c h a n g e 1990-2001 (l.h.scale, lower time axis) 1970-1981 (r.h.scale, upper time axis) 1 C B A 3 2 0 MARKETTECHNICIAN Issue 45 October 2002 18 Time from cycle low to first sub-cycle low/ 0.33 = Second estimate of cycle length And we can average the calculations: Estimated cycle length = (First estimate + second estimate)/2. All that is necessary is that the highs and lows are initially approximately in the right time frame,given momentum distortions. Tracking a new cycle The second way of estimating cycle duration is to track the emerging one against its historical counterparts and infer duration from the coincidence of turning points. However,it is important to keep a sense of perspective. It may be reasonable to expect a significant low (say) 33% of the way into a new higher-level cycle. However,there may well be expansions and contractions as the cycle responds to external shocks. 5 Consequently,it is quite important to compare the lower-level cycles directly with previous lower-level ones. The pattern of the new cycle can then be judged a step at a time. An example of this is the first sub-cycle that began in November 1990. It can be seen from Figure 6-iii that it was shorter than the 52-month sub-cycle that began in June 1970. However,Figure 7 shows what would have happened had we been concentrating just on the 1990-94 sub-cycle as it was developing. By July 1994 the evidence was that it was ending. The point is that the patterns of the 1970-74 and 1990-94 cycles were very similar. Figure 7:Nov 90 to Jul 94 and Jun 70 to Sep 74 However,there is more:If cycles in similar positions in contiguous triads have similar relationships to economic fluctuations,then they may also adopt similar momentum patterns. Hence,it is a good idea to compare the new cycle in the current triad with the analogous cycle in an earlier triad. For example,the Dow has probably just completed the second in a batch of three cycles that began in 1981. This was the infotech innovation cycle. This cycle can be compared directly with the innovation cycle that began in 1957. This was the second in a batch of three that began in 1946. It embraced the social revolution of the Swinging Sixtiesand marked the move to mass consumption. Figure 8 below therefore shows the locus of the Dow measured in terms of 6-month % changes between November 1990 and July 2002 and compares it with the locus between December 1957 and June 1970. The similarities are compelling. Figure 8:Innovation cycles in the Dow The current situation Implicit in the above analysis is the assumption that the Dow completed an 11-year cycle in July 2002 and therefore a new cycle has just begun. 6 The first thing to notice is that the 1990-2002 cycle is more complex than some of its predecessors. In fact,the overall pattern conforms to that shown in Figure 4. This pattern is the single most important variation of the simple triadic pattern shown in Figure 2. This is why,as I have already observed,it is the pattern that is the most consistent with Mr.Elliotts Wave Principle. The pattern in Figure 4 also seems to be the one that consistently emerges in the context of industrial production. Unfortunately,a more detailed analysis will have to wait for another time. However,just to give some indication of what I mean,Figure 9 below shows the profile of the 6-month rate of change in the Dow between 1990 and 2002 against the 2-year rate of change in US industrial production between 1946 and 1980. The patterns are essentially the same. In other words,the pattern exists in different sectors and over different time horizons. Figure 9:Pattern of the Dow against pattern of US output Using the technique of comparing patterns in output over analogous time periods,it is possible to conclude that US industrial production is now turning up out of the infotech innovation cycle into the third (and terminal) cycle of the current era. Figure 10 shows the 2-year rate of change in industrial output between 1946 and 1980,and compares it with the 2-year rate of change in output since 1980. It is clear that the pattern since 1980 is repeating the pattern of the 34-years that preceded it. This is consistent with a momentum low in the equity market in July 2002. Figure 10:Comparable cycles in US industrial production Conclusions This analysis is only work in progress. Moreover,it is only one possible perspective on a very complex subject. Nevertheless,the conclusions are exciting. The very fact that an analysis such as this has been in any way possible confirms that market price fluctuations are not randomly generated. However,the more powerful conclusion is that the analysis strongly suggests that market price oscillations are subject to periodic rhythms and that these rhythms are subject to certain simple laws that place them within the context of natural phenomena. Very specifically,therefore,the main conclusion is that a cycle is defined,not so much by the precision of the periodicity,as by the particulars of its pattern.
-15 -10 -5 0 5 10 15 20 25 S e p - 9 0 N o v - 9 0 J a n - 9 1 M a r - 9 1 M a y - 9 1 J u l- 9 1 S e p - 9 1 N o v - 9 1 J a n - 9 2 M a r - 9 2 M a y - 9 2 J u l- 9 2 S e p - 9 2 N o v - 9 2 J a n - 9 3 M a r - 9 3 M a y - 9 3 J u l- 9 3 S e p - 9 3 N o v - 9 3 J a n - 9 4 M a r - 9 4 M a y - 9 4 6 - m o n t h
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c h a n g e -40 -30 -20 -10 0 10 20 30 J u n - 7 0 A u g - 7 0 O c t - 7 0 D e c - 7 0 F e b - 7 1 A p r - 7 1 J u n - 7 1 A u g - 7 1 O c t - 7 1 D e c - 7 1 F e b - 7 2 A p r - 7 2 J u n - 7 2 A u g - 7 2 O c t - 7 2 D e c - 7 2 F e b - 7 3 A p r - 7 3 J u n - 7 3 A u g - 7 3 O c t - 7 3 D e c - 7 3 F e b - 7 4 A p r - 7 4 J u n - 7 4 A u g - 7 4 O c t - 7 4 D e c - 7 4 6 - m o n t h
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c h a n g e Nov 90 to Jul 94 (l.h.scale, lower time axis) Jun 70 to Sep 74 (r.h.scale, upper time axis)
-20 -15 -10 -5 0 5 10 15 20 25 30 0 6 12 18 24 30 36 42 48 54 60 66 72 78 84 90 96 102 108 114 120 126 132 138 Months since low (1990-2001) 6 - m t h s
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c h a n g e -30 -25 -20 -15 -10 -5 0 5 10 15 20 25 0 6 12 18 24 30 36 42 48 54 60 66 72 78 84 90 96 102 108 114 120 126 132 138 144 150 Months since low (1970-81) 6 - m t h s
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c h a n g e 1990-2002? (l.h.scale, lower time axis) 1957-1970 (r.h.scale, upper time axis) 1 C B A 3 2 0
-20 -10 0 10 20 30 40 0 20 40 60 80 100 120 140 160 180 200 220 240 260 280 300 320 340 360 380 400 420 Months since low (US output, 1946-1980) 6 - m o n t h
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c h a n g e -15 -10 -5 0 5 10 15 20 25 30 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100105110115120125130135140 Months since low (DJIA, Sep 90 to Jul 02) 2 - y e a r
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c h a n g e DJIA, Sep 90 to Jul 02 (smoothed, r.h.scale) US output, 1946-1980 (l.h.scale)
-40 -30 -20 -10 0 10 20 30 40 0 16 32 48 64 80 96 112 128 144 160 176 192 208 224 240 256 272 288 304 320 336 352 368 384 400 Months since low (1946 - 1980) 2 - y e a r
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c h a n g e -10 -5 0 5 10 15 20 0 14 28 42 56 70 84 98 112 126 140 154 168 182 196 210 224 238 252 266 280 294 308 322 336 350 Months since low (1980 - date) 2 - y e a r
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c h a n g e 1946 to 1980 (l.h.scale, lower time axis) 1980 to date (r.h.scale, upper time axis) Recovery Innovation CRISIS Issue 45 October 2002 MARKETTECHNICIAN 19 1 See H.R. Mills,Teaching and Training. Macmillan,London,1967. It is my opinion that Millsfindings have not been given the attention that they deserve. 2 See,for example,Tony Plummer,Some thoughts on the mathematics of turning points. Market Technician,March 1999,Issue No. 34. 3 This formulation appears to contradict R.N. Elliotts 5-3 pattern. In fact,it is perfectly consistent with it. The link between the two is that Elliotts wave pattern emerges when the market receives at least one piece of pro-trend information during the impulse wave. It may emerge just after the end of the re-test (information absorption) stage,or it may occur when the impulse wave has already gained momentum. The important criterion is that there will be an item of generally available news to which market participants feel obliged to respond. This is a shockto the market and,as such,will need to be absorbed. The process of absorption will allow a significant (although mathematically constrained) contra-trend price movement. In Elliotts schema,the absorption of the second information shock is a wave 4. Elliotts pattern is thus the signature of change:markets will develop five wave impulse movements when unexpected information alters the qualitative structure of the market. 4 Of course,this makes the heroic assumption that the July low was in some sense the final one for the cycle that began in 1990. There are a number of reasons for this,which will gradually become apparent. Since the analysis is based on momentum,there remains the chance of a further low in prices. But see also note 7. 5 In this context,monetary shocks appear especially important. In other words,central bank monetary policy can delay or extend the lows and highs. Ultimately,however,it cannot avoid them. 6 There is still a very big issue here,about whether or not the cycle low is July 2002 (or thereabouts) or September/October 2001. For some time, my preference has been for the 2001 date,mainly because the 2001 date is more consistent with developments in the US output cycle. On this conclusion,the rally into December 2001 and the drop into July 2002 could be seen as waves 1 and 2 respectively of the (44-month) sub-cycle that is kicking-off the new 11-year terminal cycle. It is always possible for wave 2 to make a new low. However,it is not unknown for the cycle low in the equity market to lag the cycle low in output. The issue is currently unresolved. So,in order to simplify the analysis,I have actually assumed that July 2002 is the low. In a sense,the outcome doesnt matter for the current sub-cycle,because on either analysis the next move is up. However,it will in due course make a difference to the timing of the overarching 11-year cycle. Help us to help you! Dear STA members, In the light of recent successes we would like to bring to your attention the developing relationship between the STA and Robert Walters. Robert Walters is an international recruitment consultancy with 23 offices in 13 countries. We have extensive experience in recruiting for some of the leading blue-chip names in finance and commerce. We would like to take this opportunity to point out the following aspects of our service to help further develop an effective relationship and raise awareness about what to expect from Robert Walters: We take a pro-active stance in raising the STAs awareness in the finance community. This takes time and can prove frustrating. If you are in a decision-making position and want to hire the best technical analysts then we want to hear from YOU! We take pride in providing the very best in the market to clients. This saves the client time and money but also means that not every candidate is right for the job. Recruitment is very subjective and for every successful placement there are many disappointed candidates.To aid your application,our clients like to see:
Strong academics demonstrated by A levels and preferably a
business or science based degree.
Experience of finance preferably in a recognised financial
institution and not from privately run portfolios.
A broad understanding of wider issues in finance including
marketing,sales,CRM,trading.
Clear and consistent career paths with few interruptions and
jobs.
Evidence of focus and specialisation in senior candidates.
We are keen to stress that clients approach us to provide as close a fit to their wish list as possible and that as an agency we will struggle to provide sideways career hops without relevant experience. To further guide you through your job hunting,attached is a broad salary survey: Investment Bank Research House 0-2yrs 25 - 45K 25 - 35K 2-5yrs 40 - 70K 35 - 50K 5+yrs 65K+ 50K+ We are always happy to review CVs and try to give objective feedback on the strengths and weaknesses of profiles. This reflects our clients wishes and requirements for recruitment; quite often its a story of round pegs not fitting into square holes. As a final note the market has been tight for the last 18 months for hiring budgets with business essential hires taking precedence. We hope that we have experienced the worst of the downturn and there will be an uplift in opportunities to come. We look forward to continuing our service for the STA and clients in the future and thank you for your continued support. Regards, Alec McCann Manager Robert Walters 0207 509 8739 alec.mccann@robertwalters.com New element discovered A major research institution has recently announced the discovery of the heaviest element yet known to science.This new element has been tentatively named Administratium. Administratium has 1 neutron,12 assistant neutrons,75 deputy neutrons,and 111 assistant deputy neutrons,giving it an atomic mass of 312.These 312 particles are held together by a force called morons, which are surrounded by vast quantities of lepton-like particles called peons.Since Administratium has no electrons,it is inert. However,it can be detected as it impedes every reaction with which it comes into contact.A minute amount of Administratium causes one reaction to take over 4 days to complete when it would normally take less than a second.Administratium has a normal half-life of 3 years;it does not decay but instead undergoes a reorganisation,in which a portion of the assistant neutrons and deputy neutrons and assistant deputy neutrons exchange places.In fact,Administratiums mass will actually increase over time,since each reorganisation causes some morons to become neutrons forming isodopes.This characteristic of moron-promotion leads some scientists to speculate that Administratium is formed whenever morons reach a certain quantity in concentration.This hypothetical quantity is referred to as Critical Morass. You will know it when you see it... This snippet was found on the internet and e-mailed to the editor MARKETTECHNICIAN Issue 45 October 2002 20 I have been involved in the speculative markets for over 15 years,and one thing I have learnt,particularly in these days of ever more complicated and sophisticated analysis techniques,is that sometimes the simple approach to analysis is all that is needed to be able to uncover some great trading opportunities. One of the simplest trading patterns that I use is the simple ABC correction. In a previous article (Market Technician, issue No.44) I outlined how the simple ABC correction could be used to uncover profitable trading opportunities but, more importantly, how it was a very simple and easy step to recognise the set-up to this pattern.In this article I would like to take this one stage further and show how one particular occurrence of the simple ABC correction can lead to one of the most profitable trades available in todays markets. This is when the simple ABC correction unfolds as part of the first correction to the first move off an important high or low. In Elliott wave terms, this is the Wave 2 or B correction. Once this correction is complete it can lead into a Wave 3 type move, which is usually the strongest and longest swing in a 5 wave sequence and, as such, it carries the largest profit potential in any Elliott wave sequence. Therefore being able to participate in this swing can result in some very profitable trades. The above chart shows a simple ABC correction on a UK Stock,OML.The most important point is that this ABC correction unfolded as part of the first correction to the initial swing off an important low. Here you can see how OML made a major low in Dec 2001 which was followed by an initial rally off the low. The simple ABC then appeared during the correction to this initial rally. This is a classic Type 1 trade pattern. So why is this pattern so important ? Very often this initial correction is the springboard off which a very strong move unfolds. If we move forward in time we can see how,once this particular ABC correction was complete,OML proceeded to rally by over 30%,from a price of 89.50 to nearly 120. A a result of the large moves that very often unfold off this set-up, identifying these patterns can result in some very profitable trades. This is why it is the main trade set-up I look for. But more importantly,this set-up is very easy to identify,there is no complicated maths or involved analysis,just a simple ABC correction that unfolds as part of the first correction to the first move off an important high or low. Another example is shown in the Dow Jones chart above.Here we can see how the Dow made an initial decline off the March highs. But then the initial correction to this initial decline unfolded as a simple ABC correction. This was the springboard off which a sharp decline unfolded. This particular Type 1 trade unfolds in any market and on any time frame (from weekly charts to 5 min charts),so whether you trade UK Shares, US Stocks,Indices or Commodities,I do suggest that you make the identification of this particular trade pattern one of the major parts of your trading plan. However,it is the simplicity of this pattern that is its strength. In todays ever complicated and involved financial market place,where technical analysis seems to require a degree in computer science,it is nice to see a trade set- up that is characterised by its simplicity. This is why I believe the simple ABC correction is one of the most overlooked and ignored patterns among the hundreds of analysis techniques that are available today. Steve Griffiths is the developer of the MT Predictor software program. Steves website is at www.MTPredictor.com Identifying latent energy in the markets By Steve Griffiths