Technical Analysis Mag

Jan-Mar 2011
The publication for trading and investment professionals
www.technicalanalyst.co.uk
The Market Outlook

for 2011
Market Outlook
Technical Trading
Market Outlook Poll
Fibonacci targets
Dow at 18,000
Indicator focus on
using the MACD
We publish our first

poll for 2011
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Welcome
After last years rally in stocks, there is increasing talk of an imminent correction, both in developed and emerging markets.
However, views are mixed regarding the longer-term outlook,
not only for stocks but also for commodities, most notably, oil
and gold. In this issue we publish our first poll of analysts,
traders and investment managers which we hope provides a
guide to the broader view for the first half of this year.
We also introduce 20 Questions, a short and to-the-point
interview with a leading trader or fund manager. Paul
Mumford of Cavendish Asset Management is our inductee.
Matthew Clements
Editor
We hope you enjoy this issue of the magazine.
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Jan-Mar 2011
THE TECHNICAL ANALYST
OUT NOW!
The Technical Analyst is proud to announce the publication of the third book in its Discussion Series.
"Technical Analysis in the Commodity, Energy, and Power Markets" features interviews with 12 market
analysts and investment managers on their use and application of TA in their research and trading decisions. The book describes technical strategies that are uniquely effective in the commodity, energy, and
power markets with a focus on indicators, market correlations, and commodity trading strategies.
Price: 49.50 + P&P

Format: Hardback
Available direct from the Technical Analyst
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The Technical Analyst is published by Global Markets Media.
Contents
Jan-Mar 2011
The publication for trading and investment professionals
www.technicalanalyst.co.uk
COVER STORY
Market Outlook for 2011
21
We present our first annual poll plus a range of

views and opinions from market experts for the
year ahead
The Market Outlook

for 2011
Market Outlook
Technical Trading
Market Outlook Poll
Fibonacci targets
Dow at 18,000
Indicator focus on
using the MACD
We publish our first

poll for 2011
MARKET NEWS AND VIEWS

MARKET OUTLOOKS
07
Where Now for 2011?
16
SPECIAL FEATURE
12
21
Market Outlook Poll 2011
TECHNICAL TRADING
Indicator focus
23
Trading with Hursts Cyclic Theory
31
Trading the Wedge Pattern
27
20 QUESTIONS
35
RESEARCH UPDATE
37
TRAINING DIARY
40
Paul Mumford, Cavendish Asset Management
Jan-Mar 2011
The outlook for gold
12
Dow Fibonacci target
27
Trading the Wedge Pattern
35
20 Questions
04
Gold
Fibonacci Targets Dow At 18,000
07
Market News and Views
MARKET NEWS
AND VIEWS
TA MOST POPULAR AMONG FX TRADERS
CitiFX released their first poll of global foreign exchange traders in late 2010. The survey found that 53%
of those polled use a combination of fundamental and technical analysis in their trading with 36% using
only technical strategies. Only 8% use solely fundamental analysis to trade.
STRONG BUY SIGNAL FROM PRESIDENTIAL ELECTION CYCLE
NIKKEI ON VERGE OF
HUGE RALLY
2011 is the third year of the presidential cycle which is usually a positive year
for stocks, according to The Fundamental Analyst on Seeking Alpha. The
table below shows annual returns for the 3rd presidential cycle since 1951
for the S&P500. They have been positive 15 out of 15 times with an average
gain of more than 18%. However, if the test period is taken back to (using
the Dow as it has a longer history) 1931, the cycles record is still 18 out of
20 with an average return of 13%. The long-term annual gain of the Dow is
9% (excluding dividends).
A closer look at the data also shows that the 12-month period beginning in
October of the second year of the presidential term has enjoyed average
total returns of more than 28 percent. For the current cycle, this period
began in October 2010.
4
Jan-Mar 2011
Japans Nikkei 225 is on the verge

of surging by more than 50%
according to Yutaka Yoshino, chief
technical analyst at Nikko Cordial
Securities. He says that long-term
equity and FX cycles will converge
for the first time pushing the index
to 15,200 by mid-2012.
Two stock-market cycles of 12
years and 60 years are about to
converge with an 11-year currency
trend. This means the yen is set to
peak against the dollar before losing almost half its value, he said.
The Nikkei rally may be the best
buying opportunity in several
decades he claims.
Market News and Views
TREND FOLLOWING GENERATES ALPHA SAYS CASS

A new report by Andrew Clare and Stephen Thomas of Cass Business
School in London says that trend-following rules enable investors to outperform the indices across the range of asset classes. They add that a combination of trend following and momentum based strategies can generate
alpha on a consistent basis and reduce return volatility.
Earlier research from the US into trend following strategies suggested that
applying them to the S&P500 for the period 1900-2008 would have generated a return of 10.65% with a volatility of 12%. This compares with the indexs
average annual return of 9.2% and volatility of 17.9%. The academics at
Cass says trend following outperformance can be accounted for because the
rules track the market when it is trending up and then switches to cash
whenever it is trending down. Also, the rules can be applied to a wide range
of asset classes at the same time allowing for effective diversification.
TOM DEMARK SEES STOCKS NEAR TOP
T om D e M a r k
BusinessWeek has reported Tom

DeMark, the US analyst and
traders famous for his DeMark
studies, as saying US stocks are
set for an immanent 11% correction, at least. DeMark says his
Sequential and Combo indicators
are giving a sell signal for the
S&P500 for the first time since
mid-2007. January 14th saw the
first reversal signal for US stocks
since March 2009 when the market rebounded strongly after a
57% decline. He warned that this
signals a correction for
January/February that could
exceed 11% but it will be in multiples of 5.56% as market moves
are typically multiples of this.
THAMES RIVER WARNS OF

EM CORRECTION
Peter Geike-Cobb and Paul
Thursby of Thames River Capital
in London have warned that
emerging markets may be set for
a nasty correction because of
volatile capital inflows and
potential policy mistakes in
some EM countries. They say
the risk of higher inflation means
US government bonds and inflation linked assets are the obvious alternative.
BARRONS INDEX AT
NEW CYCLE HIGH
The Barrons Confidence Index
reached a new cycle high of
82.6 at the end of January, up
from mid-Jans 81. This figure is
the highest reached since
autumn 2007. The index is a
measure of how the global bond
markets are positioned. A rising
index indicates that investors are
demanding a lower yield despite
increasing risk and so suggests
increasing confidence in the
economic outlook.
BIRINYI SEES 2013 HIGH IN STOCKS

US money manager Laszlo Birinyi
has forecast the S&P500 will
reach 2,854 on September 4,
2013, Bloomberg has reported.
His precise call represents a 322%
rally from the March 2009 low of
676. The bull markets that began
in 1962, 1982, 1990 and 2002
suggest the current rally should
continue for another 32 months,
he said. He added that history
shows market rallies are greatest
in the first and last quarters of bull
markets; Q4 of the current rally
may start in July 2012 and generate gains of 52%.
La szlo B irinyi
Jan-Mar 2011
Please email news stories to:

editor@technicalanalyst.co.uk
Market Outlooks
Jan-Mar 2011
GOLDS BULL
CHARGE
TEMPERED
BY MULETA
STANDOFF
Market Outlooks
By Ron William
Golds phenomenal bull charge, over 468% since 1999, is

now starting to unwind after being tempered by a muleta
standoff. Akin to traditional Spanish bullfighting, a muleta
or small red cape is raised in order to tire the animals charge
and offer a beautiful display of faena.
Gold has been locked in a critical standoff ever since it
carved out its all-time record high at $1431 and is currently
showing signs of rolling over. Point & figure charts highlight
a price squeeze within a range between $1430 and $1320 (see
Figure 1). A break in either direction has the potential to drive
a 20% change in the price of gold. The probabilities are now
skewed for an extended downside reaction.

Jan-Mar 2011
The trend is your friend, untilC

Nine-consecutive years of higher reaction highs and lows
have elevated gold to unique stardom within technical analysis records (see Figure 1). With such a high calibre breed of
bull, it would only be natural to believe that prices continue
to run in a straight line. However, veteran market observers
know that such accelerated price moves, no matter how
robust, inevitably prove to be unsustainable in the short
term. The aftermath of golds previous bull cycle, between
1969 and 1980 (which has an 11-year time pattern that coincidentally mirrors the current secular uptrend that launched
in 1999 and peaked in late 2010), acts as an extreme, but
be unsustainable in the short term. The aftermath of golds previous bull cycle, between 1969
and
1980
(which has an 11-year time pattern that coincidentally mirrors the current secular
Market
Outlooks
uptrend that launched in 1999 and peaked in late 2010), acts as an extreme, but noteworthy
omen to how markets can avalanche from mountainous peaks. (Note, golds prior bull market
cycle made an annual closing low in 1969, then an intraday low in 1970, which closed up
higher on the day).
$1830 Target
$1830 Target
Muleta Standoff
Key Level
$1320
Secondary
Trend
Primary Trend
(45 degree-angle)
Gold Point & Figure Chart

&$10
Figure
GoldPoint
Gold
Figure
( Point
Scale&
x3 Chart
)Chart
Scale $10
$10 x3
( (Scale
x3) )
1980 spike
high
Figure 1. Point & Figure chart illustrates the primary and secondary trend in gold and its current muleta standoff
between $1430 and $1320. Chart insert (i) Annual candle chart exhibits nine-consecutive years of higher reaction highs
& lows. Chart insert (ii) Gold bull-cycles past and present, mirroring 11-year time patterns. Source. Bloomberg L.P.
noteworthy omen to how markets can avalanche from

mountainous peaks. (Note, golds prior bull market cycle made an
annual closing low in 1969, then an intraday low in 1970, which closed
up higher on the day).
GOLDS PHENOMENAL BULL CHARGE,

WHICH HAS RISEN OVER 468% SINCE
1999, IS NOW STARTING TO UNWIND
AFTER BEING TEMPERED BY A
MULETA STANDOFF.
A confluence of important exhaustion signals were
generated by Tom DeMarks TD Sequential TM indicator
across monthly, weekly and daily time frames (Figure 2).
The daily chart highlights TD Sequential generated Red
13 exhaustion sell signals on two different countdowns
within the current multi-month distribution pattern
(head & shoulders/triangle). A break below $1320 would
confirm the reversal pattern and unlock an extended
downside slide in gold.
Further bearish evidence can also be seen on the monthly
chart which is currently developing a bearish engulfing candlestick pattern from the all-time record highs, following five
8
Jan-Mar 2011
consecutive higher reaction highs and lows. A sustained break

below $1320 also completes a potential Primary degree
impulsive third wave within an Elliott Wave structure. The
tendency for cycle alternation favours a sharp corrective
fourth wave (opposite to the wave two sideways correction in
2001), which would help develop an important low for 2011.
This potentially offers a rare buying opportunity for what is
likely to be the most profitable future rise in gold to come.
Demand Cycles and Speculative Flows

All these headwinds have been further magnified by a traditionally seasonal weak period (Figure 3), coupled with sharp
unwinding from speculative activity (Figure 4). Gold demand
cycles are generally weaker within the early months of the
year, following the summer to winter period when wholesalers typically build up inventory for the Indian wedding season and end of year retail Christmas pickup.
The COT chart (Figure 4) shows golds net position of
large speculators (Commitment of Traders), which is predominantly made up of hedge fund liquidity. This measure
had pushed to all-time highs, marking an extreme reading in
bullish sentiment as the investment community became fully
committed to golds rise after it shattered through the allimportant psychological $1000 barrier.
However, COT readings are now sharply unwinding from
these extreme levels and approaching the lower side of its
bullish structural range. Over one and a half years of sizeable
long gold positions will be under threat once this structural
range breaks. This would offer an attractive price vacuum
consecutive higher reaction highs and lows. A sustained break below $1320 also completes a
MarketThe
Outlooks
potential Primary degree impulsive third wave within an Elliott Wave structure.
tendency
for cycle alternation favours a sharp corrective fourth wave (opposite to the wave two sideways
correction in 2001), which would help develop an important low for 2011. This potentially offers
a rare buying opportunity for what is likely to be the most profitable future rise in gold to come.
3
(5)
(3)
Bearish
Engulf
pattern
Kase Dev Stops

(contracting)
(4)
(1)
(2)
Demand Cycles and Speculative Flows

2
All these headwinds have been further magnified by a traditionally seasonal weak period
(Figure
3), coupled
with
sharp
unwinding
from
speculative
activity
4).Tom
Gold
demand
Figure
2.
Weeklyof
and
Daily
charts
showing
a confluence
of exhaustion
signals (Figure
derived
from
DeMarks
Figure
2. Monthly,
Time
Fractals
Monthly,
Weekly
and Daily
charts
showing
a confluence
of exhaustion
signals
derived
TD
Sequential
indicator.
The
monthly
chart
also
has
Kase
Dev
stops
overlayed
for
potential
levels
to
take
profits
or
exit
from
Tom
DeMarks
TD Sequential
indicator.
chart alsoofhas
Devfollowing
stops overlayed
for potential
levels
cycles
are
generally
weaker within
theMonthly
early months
theKase
year,
the summer
to winter
positions.
Source.
Bloomberg
L.P.
to
take profits
exit positions. typically
Source. Bloomberg
period
whenorwholesalers
build up L.P.
inventory for the Indian Wedding season and end of
year retail Christmas pickup.
pecu
Seasonal
Strength
Seasonal
Weakness
10 year average
Figure
chart
of Gold
acrossacross
10-years;
which highlights
underlyingunderlying
weakness within
the early
months
Figure 3.3.Seasonality
Seasonality
chart
of Gold
10-years;
which highlights
weakness
within
the of
early
the
year
and
significant
strength
between
summer
and
winter
months.
Source.
Bloomberg
L.P.
months of the year and significant strength between summer and winter months. Source. Bloomberg L.P.
Jan-Mar
2011 net position of largeTHE
TECHNICAL(Commitment
ANALYST
9of
The COT chart (Figure 4) shows
golds
speculators
Traders), which is predominantly made up of hedge fund liquidity. This measure had pushed to
all-time highs, marking an extreme reading in bullish sentiment as the investment community
Market Outlooks
illustrate strong downside scope and imply that extended setbacks in gold are being actively
priced into the market.
Structural Level
Figure
COTNet
Net
Large
Speculator
Positioning
undwinding
from record
all-time
record
highs bullish
and testing
bullish
Figure 4.4.COT
Large
Speculator
Positioning
undwinding
from all-time
highs
and testing
structural
structural
range.
shows
further in
deterioration
in gold
with aacross
20% correction
across
range. Chart
insertChart
showsinsert
further
deterioration
gold sentiment
with sentiment
a 20% correction
notable gold
miningnotable
gold
mining
stocks.
Source.
Bloomberg L.P.
stocks.
Source.
Bloomberg
L.P.
for bears to seize control and anchor prices lower. Further Watch for levels at $1240, $1181 and $1111 which are statisConclusion
deteriorating
sentiment
can remains
also be found
in the
fall the
tically
calculated from
goldsneed
currentto
monthly
Golds
primary
trend
intact,
but20%
even
strongest
of bulls
stop true
for arange.
healthy
across
several
gold
mining
stocks,
including
Newmont,
Any
corrective
setbacks
are
likely
to
be
tentatively
cushrest. The muleta standoff is likely to leave an important signature on the precious metals
Goldcorp and Rand Resources (Figure 4 chart insert). All ioned into the $1280-60 confluence zone (primary trendroadmap and offer hard lessons to investors at large. To profit from golds awe-inspiring rise,
these charts illustrate strong downside scope and imply that channel support, 200-day MA, 61.8% Fib retrace) and $1220
we
must first learn to respect the nature of its yin-yang behavior, just as a Torero would
extended setbacks in gold are being actively priced into the (reversal pattern objective), with risk for an overshoot back to
respect
market. the beauty and tenacity of a raging bull. the July 2010 lows at $1157. This would be just shy of a 20%
correction from the all-time record highs. These moves
To do this we need to accept the markets highly

volatile,
double-edged,
characteristics
and
should
provide bulls
with adequate energy
for another charge
onto much
altitudes. Remember
it will
moreStops,
than
enforce disciplined risk management. Astute trailing
stophigher
strategies
such as that
Kase
Dev
likelyprovide
be golds strongest
as characteristic
of thetaking
fifth
help protect fromABOVE
sharp trend
deviations and can
short toascent,
medium-term
profit
CONFIRMATION
$1500-20
wave
structure
(the
equivalent
to
Dows
primary
stage
three,
opportunities. Watch for levels at $1240, $1181 and $1111 which are statistically calculated
irrational exuberance, parabolic excess, within a long-term
OFFERS
MOVES
$1830
from golds
currentTO
monthly
true WITH
range.
bull market cycle).
Confirmation above $1500-20 (secondary uptrend ceiling),
Any corrective setbacks are likely to be tentatively
cushioned
$1280-60
confluence
offers moves
to $1830into
(P&Fthe
target),
with eventual
accelerazone (primary trend-channel support, 200-day tion
MA,to 61.8%
retrace)glass-ceiling
and $1220
(reversal
the next Fib
psychological
at $2000
and
pattern objective), with risk for an overshoot back
to the
July
2010
at will
$1157.
This
would
beyond.
By this
time,
furtherlows
tailwind
likely be
offered
by
significant
weakness
on
be just shy of a 20% correction from the all-time record highs. These moves should provide
US dollar
its major altitudes. Remember that it
bulls with adequate energy for another charge the
onto
muchas higher
downtrend
resumes
will more than likely be golds strongest ascent, as characteristicand
of the fifth wave structure (the
other fiat currencies conequivalent to Dows primary stage three, irrational
exuberance, parabolic excess, within a
tinue to underperform.
Conclusion
long-term
bull
market
Golds primary
trend
remainscycle).
intact, but even the strongest of Moreover, the weak relabulls need to stop for a healthy rest. The muleta standoff is tive performance of key
Confirmation
above $1500-20
uptrend
moves to $1830 (P&F target),
assetceiling),
classes andoffers
renewed
likely to leave an important
signature on (secondary
the precious metals
with
eventual
to the next
glass-ceiling
at $2000 and beyond. By this
in the overall
roadmap
and offeracceleration
hard lessons to investors
at large.psychological
To prof- increase
secular uptrend
acrosson the US dollar as its major
it from further
golds awe-inspiring
must be
firstoffered
learn to respect
time,
tailwind rise,
will we
likely
by significant
weakness
commodities,
by
the nature of resumes
its yin-yang
behavior,
a Torero continue
downtrend
and
other just
fiatascurrencies
to driven
underperform.
Moreover, the weak
rising demand and inelaswould respect the beauty and tenacity of a raging bull.
To do this we need to accept the markets highly volatile, tic supply, will compound
double-edged, characteristics and enforce disciplined risk ample scope for the barmanagement. Astute trailing stop strategies such as Kase Dev baric metal to stage its
Stops, help protect from sharp trend deviations and can pro- grand finale bull Ron William is a Technical
vide short to medium-term profit taking opportunities. charge.
Strategist at MIG Bank
EVENTUAL ACCELERATION TO THE

NEXT PSYCHOLOGICAL GLASSCEILING AT $2000 AND BEYOND.
10
Jan-Mar 2011
FIBONACCI TARGETS
DOW AT 18,000
Market Outlooks
A stock market correction historically lasts 12-24 months before reaching its ultimate low. By comparing the major corrections in the Dow and overlaying them
together on the same chart, we can examine what is likely to happen in the future.
By Kim Cramer Larsson
History and the Dow

Only after the major crash in 1929
(Figure 1 red line) and the burst of the
dotcom bubble did the Dow decline to a
new low after the end of the subsequent
18 month period. The low occurred
approximately 34 months after the high.
At present The Dow is 36 months since
the high (brown line) and has passed
where it experienced a new low in the
1930s. So historically, nothing indicates
a double dip in equities. On the contrary, if history should repeat itself, the
Dow could still rise 15-20% within the
next 2-3 months, with a further 30-50%
rally within the next 2-3 years being a
definite possibility.
Comparing the Dow during the economic crisis in the 1970s with todays
market, they are very identical (Figure
2). The picture clearly shows when psychology rules the market, i.e. during
panics, movements in the market are
identical. On both occasions, the Dow
performed a corrective move to the
Fibonacci 0.618 resistance level within
18 months from the time of the low. In
1975-76 the Dow made an explosive
12
bullish move after taking out that resistance level a move that lifted it 15% in
less than two months. The same has happened to the Dow in the last quarter of
2010.
Fibonacci projection
So, whats next? We have looked back
over the past 100 years of market movements to try and find possible targets
and/or resistance and support levels.
Figure 3 is a log chart of the Dow since
1920 and shows what the index has done
when reaching important support and
resistance levels since the crash in 1929
and up to 2010. These are highlighted as
blue lines with Dow values on the left.
All these levels are in fact Fibonacci levels. We took the high in 1929 at 381.17
and the low when the Dow made its all
time low in 1932 at 41.22 and then
made a projection. Fibonacci levels
shown are: 0.5, 1, 1.382, 2, 3, 5, 8, 13, 21,
34 and 55. If those levels have been
important in the past, the same
Fibonacci levels are very likely to continue to be important in the future.
A new break above the resistance level
Jan-Mar 2011
at around 11,600 would be followed by a

break above the 2007 high at around
14,164. This could take it on to test the
18,740 resistance level within the next 35 years. The threat to this target would
be a move below the support level at
around 7,180 and a break below the
2009 low at around 6,470. Figure 4
shows four extracts from Figure 3 that
illustrate how close the Dow was trading,
and rejected/supported, at the levels that
are Fibonacci levels; levels that have their
base in the 1929 peak - 1932 trough.
RSI supports bullish view
The Relative Strength Index (RSI) in
Figure 3 supports the bullish picture.
Every time the RSI has been below 30
(green circles) the Dow has undergone a
strong recovery. Furthermore, when tested and rejected at the 40 level (purple
line), the index has resumed its bullish
trend. After the major bearish correction
in 2007-2008, where the RSI went below
30, it has recovered quickly and is now set
for further gains and is close to test the 60
level. A break above this will confirm a
bullish market.
Market Outlooks
Jan-Mar 2011
13
Market Outlooks
Source: Bloomberg
Figure 1: Dow overlayed major corrections since 1929
Source: Bloomberg
Figure 2: Dow today and in the 1970s
14
Jan-Mar 2011
Market Outlooks
Source: Bloomberg
Figure 3: Log chart of Dow since 1920
1951 - 1962
1971 - 1986
1982 - 1994
1996 - 2010
Figure 4: Four extracts from Figure 3.
Jan-Mar 2011
15
Market Outlooks
WHERE NOW FOR 2011?

ASSET ALLOCATION FOCUS
We interview five money managers to assess their asset allocation

and market outlooks for 2011 across the bond, equity, FX and
commodity markets.
MARK HEWLETT,
ANELLO ASSET MANAGEMENT
Which currencies currently offer the best opportunities?

With Australian interest rates still much higher than those in the US and Japan, and
with no sign of that changing, more and more people will be dragged into the carry
trade, boosting the AUD.
To what extent is the euros existence under threat?

Not at all, whether all members are still there in 2 years time is another matter but anyone leaving will only
make the Euro stronger. With leading members of the ECB still hawkish by nature, currency debasement is
not on the cards, unlike the US, making the Euro a better bet in the longer term.
What is the best sentiment indicator to use for the FX markets?

We feel the RSI is the best indicator for picking entry and exits with a number of other indicators including
cycle analysis and moving averages assisting trading decisions.
Is the USD in a long-term bear market?

Yes, the only saving grace is it's still the reserve currency. This is an asset being actively devalued and the
long-term outcome is obvious although it won't be alone. You need to pick between the central banks looking to keep purchasing power against those that need to inflate debts away.
Do you consider the technical picture for the dollar? If so, what is your interpretation of
the current picture?
Taking the dollar index into account, it has recently broken below a number of recent support levels and
longer-term moving averages. The shorter-term moving averages are crossing below the longer-term moving
averages and momentum seems to be for a lower dollar. There doesn't seem to be much support until the
76.25 area although there will of course be rallies which those that are nimble can take advantage of, should
they wish.
16
Jan-Mar 2011
Market Outlooks
BEN BYROM,
EXECUTIVE DIRECTOR, CENKOS CHANNEL
ISLANDS INVESTMENT MANAGEMENT
What is your view on the timing of the first Fed or Bank of England rate
rise?
This is a very difficult question to call. The steepening US yield curve implies that
economic activity is improving, as is bank lending (albeit from a low base). Should
this trend continue, one would expect rate rises to start coming through sooner than investors are generally
expecting. However, inflation data is still very poor and the recent rise in yields may turn out to be more of
a jitter in response to FED monetary policy rather than any concerted attempt to factor in higher rates.
What is your current outlook for the Euro, either technically or fundamentally based?
At the time of writing Eurodollar is 1.3257. If we see a break below 1.2969, then I would expect a much
stronger USD against the Euro. As far as fundamentals go, you can pick any of Europes current issues as
justification.
How reliable do you think the yield curve is in implying future economic activity?
The bond market supposedly reflects the real economy. However, its participants are still human and therefore still susceptible to the same herd mentality as other markets. Interestingly, rates still rose despite the
announcement of increased purchasing by the FED suggesting that even Government firepower won't
always create the desired effect once the collective has made up its mind.
What is the best sentiment indicator to use for the bond markets?
I keep an eye on the MOVE.
Do you consider the technical picture for these markets? If so, what is your interpretation of
the current picture?
Over-extended, over-hyped and overdone. At the time of writing, the Dow closed at 11,691.18. Given the
divergences between different market performances and declining breadth as indicated, for example, by market advance/decline ratios, some sort of correction is anticipated.
At the time of writing Eurodollar is 1.3257.

If we see a break below 1.2969, then I
would expect a much stronger USD
against the Euro.
Jan-Mar 2011
17
Market Outlooks
LARS STEFFENSEN,
EBULLIO CAPITAL MANAGEMENT
Which commodities currently offer the best opportunities?

Based on good fundamentals and the attention of the investment community, we
think that copper, tin, platinum, palladium, corn, wheat, cotton and sugar look the
best and should benefit from both factors.
Is gold overbought/in a bubble? If not, how much further has it to go?

Based on fundamentals, gold is definitely in a bubble a huge bubble. However, based on the slow death of
fiat money and the printing presses being red hot in the US, the UK and yes, in the Euro-zone, gold could
run much further; remember that gold is the only accepted form of payment, that doesnt come with a huge
debt burden or pension liability attached.
What sentiment indicators do you use?
We look at the usual key numbers, but our main sentiment indicator is volume; in the volume numbers you
catch what everyone is thinking in general and what the investment community is doing in particular. It is
unusual to use volume, we know, but these are unusual times.
Are we entering another bull market for oil?

Crude is a funny one given OPECs role as a cartel; however even OPEC couldnt keep us from $140 crude
2 years ago. As long as interest rates stay low and the huge liquidity that infers, crude is in a bull market and
can go much higher demand is not going anywhere and whatever the price, crude will be consumed.
Demand destruction is an urban myth.
Do you consider the technical picture for oil? If so, what is your interpretation of the current
picture?
The technical picture for crude is quite constructive; we believe that once $100 is broken we will resume the
long-term uptrend. Obviously, a breakdown caused by macro factors, such as the potential interest hikes
mentioned above, will change that, but as long as we stay above 60, we think crude is safe.
The technical picture for crude is quite

constructive; we believe that once
$100 is broken we will resume the
long-term uptrend.
18
Jan-Mar 2011
Market Outlooks
We think that emerging markets are due

a substantive (10-20%) correction in the
near term in an otherwise well established
bull market.
ROLAND NASH,
CHIEF INVESTMENT STRATEGIST,
VERNO CAPITAL
Are emerging markets stocks due for a large correction as recently suggested by Thames River?
We think that emerging markets are due a substantive (10-20%) correction in the
near term in an otherwise well established bull market. They have run a long way,
and they are now very much a consensus trade. Traditionally, that is dangerous.
Which emerging markets currently offer the best investment opportunities?

Over the course of 2011, and expectations of a near-term Q1 correction notwithstanding, we think that
Russia and Kazakhstan can be among the best performing markets. They have underperformed since the
2008 crisis, despite the superb recovery in commodity prices. We think higher economic growth, low domestic interest rates, attractive valuations and some well-signalled catalysts will drive a period of catch-up
towards the historic discount at which both markets tend to trade to general emerging markets.
What is the difference between frontier markets and BRICS as far as investment opportunities
are concerned?
Frontier markets generally offer lower liquidity and higher volatility, but not necessarily greater fundamental
risk. That is the opportunity. BRIC is an acronym rather than an economic concept. The acronym has been
enough to attract substantially greater fund flows than other frontier markets, driving a valuation gap which
can be arbitraged with the right analysis.
Is the high correlation between emerging markets a good thing? How can you decouple from
this as an investor should you wish to?
High correlation between emerging markets makes little economic sense, and therefore creates inefficiencies.
It perhaps reflects some lazy thinking and the bunching together of a world of different risk-assets into a
catch-all concept. This is unfortunate from an economic standpoint, but offers investment opportunities.
The only real way to decouple is to take a longer-term view eventually the fundamentals will win out.
Do you consider the technical picture for emerging market stocks? If so, what is your interpretation of the current picture?
Technical analysis is a minor part of our investment analysis, but we do use it to signal potential market timing. In our view, the current picture does not look pretty for risk assets.
Jan-Mar 2011
19
Market Outlooks
The yield curves in both countries range

from near zero at the short end of the
low risk spectrum through to nearly
4.5% for longer government bonds of 30
years or more.
JOHN REDWOOD,
CHAIRMAN OF INVESTMENT COMMITTEE,
EVERCORE PAN-ASSET CAPITAL MANAGEMENT
What is your view on the timing of the first Fed or Bank of England rate
rise?
The latest inflation figures in the UK led to more speculation that the Bank of
England could raise official interest rates sooner than most anticipated. RPI rose
to nearly 5%, whilst the government's preferred CPI measure hit 3.7%. Meanwhile inflation fears even rose
in the US, where there is much less reported inflation than in the UK, owing to the strength of the Chinese
and other Asian economies and the recent buoyancy of commodity prices.
Are Eurodollar/Libor futures correctly priced given your view? If not, why?
One of the best market guides we have are the futures markets, which think short rates will rise by early 2012
in both the US and the UK. So far the UK has looked under more pressure to bring forward its first hike
post crisis, but the Governor of the Bank still says that he thinks current inflation is temporary and not particularly susceptible to interest rate medicine.
How reliable do you think the yield curve is in implying future economic activity?
The yield curves in both countries range from near zero at the short end of the low risk spectrum through
to nearly 4.5% for longer government bonds of 30 years or more. This is the best guess of the future we
have, implying more activity and some inflation ahead. The overall level of rates and the yield curve, however, have been substantially affected by past quantitative easing programmes on both sides of the Atlantic,
and by QE II in the USA. We remain unexcited by government bonds on these yields, and ever conscious
that at some point we are likely to return to more normal interest rate levels.
20
Jan-Mar 2011
MARKET
OUTLOOK
POLL 2011
Special Feature
The Technical Analysts
We are pleased to publish our first semi-annual Market

Outlook Poll. It comprises the views of 300 technical analysts,
traders and fund managers on their outlook for where six markets in equities, FX and commodities will close at the end of
June 2011.
Whilst there are many market surveys available, we have
looked to take a longer-term measure of market sentiment and
to try and identify any significant shift in sentiment as the year
progresses. As such, we are not looking for precise forecasts but
instead where the aggregate view lies in terms of bullishness
and bearishness relative to the market today.
In subsequent polls, we hope to incorporate more markets
and a wider range of contributors. In the meantime, we would
like to thank all those who took part in this poll.

Jan-Mar 2011
Results summary
Market
Majority outlook
GBP/USD
1.50 - 1.65
EUR/USD
FTSE
1.25 - 140
5000 - 6000
DOW
10,000 - 11,500
GOLD
1,200 - 1,350
OIL
80 - 100
21
Special Feature
WHERE WILL EUR/USD CLOSE 30 JUNE 2011?
WHERE WILL GBP/USD CLOSE 30 JUNE 2011?
WHERE WILL THE FTSE CLOSE 30 JUNE 2011?
WHERE WILL THE DOW CLOSE 30 JUNE 2011?
WHERE WILL OIL CLOSE 30 JUNE 2011?
WHERE WILL GOLD CLOSE 30 JUNE 2011?
22
Jan-Mar 2011
MACD
Technical Trading
INDICATOR FOCUS
THE
The Moving Average Convergence-Divergence indicator

(MACD), or Mac D as it is usually referred to, was devised
by Gerald Appel a US investment manager in 1977. It is one
of the most popular technical oscillators and uses a moving
average crossover method to generate trading signals by
measuring price momentum in trending markets. Like all
moving average-based indicators, the MACD is a lagging indicator.
Definition
The MACD indicator consists of two lines:

MACD line - The 12-day EMA less the 26-day EMA

Signal line - A 9-day EMA of the MACD line
The MACD is the difference between two exponential

moving averages (EMAs), which are conventionally the 12day and 26-day. The signal line is a 9-day EMA of the MACD
line. It is this line that generates trading signals.
Jan-Mar 2011
It is now usually for software packages to generate a

MACD histogram on the same chart. This usually measures
the difference between the MACD and signal lines.
PLOTTED AROUND A ZERO

LINE, A POSITIVE MACD
INDICATES THAT AVERAGE
PRICES OVER THE PAST 12
DAYS ARE HIGHER THAN
AVERAGE PRICES OVER THE
PAST 26 DAYS.
23
Technical Trading
Trading signals
Plotted around a zero line, a positive MACD indicates that
average prices over the past 12 days are higher than average
prices over the past 26 days and so signal a bullish market
(and vice versa). However, using crosses above and below the
zero line is a crude and ineffective method of generating
trading signals. Nevertheless, if the MACD remains above or
below the zero line for long periods, this suggests that the
underlying market trend is either positive or negative so any
countertrend signals generate by the lines themselves should
be treated with caution.
As usual with all technical indicators and oscillators, traders
should be aware of extreme readings, divergence with price, and
trends within the indicator itself i.e. descending peaks, rising
troughs and movement within channel lines.
Trading signals are most commonly generate by the MACD
crossing above or below the signal line:

A cross of the MACD above the signal line - BUY

A cross of the MACD below the signal line - SELL
Refinements of the MACD have been suggested by

Gunter, Albin and Kai (2001).
They proposed ignoring very short-term trading signals by
waiting three days after a crossover before acting on the signal (assuming no further crossovers happen in this time). A
pre-determined trigger level is then set for the close of the
third day, for example 1%.
Trading signal = MACD Signal
Closing price
If the trigger level is set at 1% and the closes at the end

of the third day are: MACD = 3, Signal = 1 and market =
$100 then;
Trading signal = 3 1 = 2%
100
As this is greater than the 1% trigger levels, a buy signal is

confirmed.
They also suggest setting a 3% or 5% profit taking rule
after a buy or sell signal in order to mitigate the lagging nature
of the indicator.
Their testing of the MACD used optimised parameters,
took no account of trading costs, and made no allowance for
market conditions when applying the MACD. However, they
found that the MACD fails to outperform a buy-and-hold
strategy on G7 stock indices but does outperform on some
emerging market indices.
Zitzlsperger (2002) tested the MACD on the S&P500 and
found that using optimised parameters over a two year period and applying those in trading over the third year produced
significant returns before trading costs.
24
Jan-Mar 2011
There have been a few academic papers on the MACD and

its efficacy as a trading strategy. In a 2006 report Bill Huang
(University of Leicester) and Yong Soo Kim (Yonsei
University) found that the performance of the MACD can be
increased by changing the parameter settings, depending on
the market being traded. Meanwhile, Terence Chong
(University of Hong Kong) found in 2008 that the MACD
tested over a 60 year period on the UK stock market showed
evidence of being able to produce higher returns than a buyand-hold strategy.
What the experts say
Robert Colby in his Encyclopedia of Technical

Market Indicators says that backtesting on the
MACD shows that the indicator is most effective with longer-term trading strategies (with
the Dow) but over the short-term, is not
profitable.
The MACD works particularly well in the

FX markets. It allows you to enter trades
with price momentum on your side.
Christian Bendixen, Bay Crest Partners
The MACD indicator is a fantastic

tool for identifying important price swings.
The common parameters (13, 26 and 9 period moving averages) can give signals that are
too frequent on a daily bar chart, so I have
begun to use 21, 100 and 200 period moving
averages to capture more important intermediate-term shifts.
Katie Stockton, MKM Partners
When I see a monthly MACD crossover

that does not occur very often, say every few
years, I pay attention. Same goes for the
monthly parabolic and double-top formations
that tend to have lasting implications.
Jeff Hochman, Fidelity Investments
Technical Trading
Market examples
Figure 1 shows the Dow from February 2009 to July 2010.
This period saw the low in March 2009 and subsequent rally
to a high in April the next year. The MACD produced a buy
signal in March as the MACD line (blue) crossed above the
Signal line (red). The short-lived correction in June 2009 was
also signalled by an MACD sell.
Figure 2 shows a EUR/USD chart from January to

October 2010. As can be seen from longer-term charts,
clear MACD signals dont happen that often. However, a
buy signal in June captured most of the subsequent rally in
the euro to August.
Figure 1: Monthly Dow with MACD 9, 12, 26
Chart: Yahoo
Figure 2: Monthly EUR/USD
Chart: Yahoo
Jan-Mar 2011
25
Technical Trading
26
Jan-Mar 2011
TRADING
THE WEDGE
PATTERN
Technical Trading
By Yann CORDIER
The wedge is a pattern which can be
found on every timeframe, from
monthly charts to intraday price action.
There are two sorts of wedges:
Rising wedge
Falling wedges; they mostly complete after a sharp slump in prices

and are a bullish
Rising wedges; these usually come

before a violent downwards reversal.
Their bearish bias is all the more
pronounced since they are completed after a long period of time following a clear uptrend.
As a general rule, continuation

wedges tend to complete more quickly
than reversal wedges. Even if a wedge
acts a continuation pattern, the basic
rules still apply: breakouts happen
downwards for a rising wedge
Falling wedge
Jan-Mar 2011
27
Technical Trading
Figure 1 is a Nokia chart that shows a

good example of an intraday rising
wedge. Noice the divergence made by
the slow stochastic oscillator at the end
of the pattern.
Although usually considered a reversal pattern, the wedge can also act as a
continuation pattern. Figure 2 shows a
perfect example of continuation rising
wedge pattern from the Topix in 2007.
Inherent risks to wedges

The wedge pattern's success rate, as a
% of bearish/bullish breakouts for a
rising/falling wedge, is high, but trading wedges accurately is a tricky task.
How can this paradox be explained?
The main reason is the difficulty in
forecasting the timing of breakouts
because of the patterns irregularity.
For example, a trader thinks prices
have broken the lower trendline of a
rising wedge so he bets on a sharp
down move to come. However, wedges
are especially vulnerable to whipsaws.
In the case of our rising wedge
(Figure 1), should prices manage to
reach the former lower support line
which now acts as a resistance line
again, the mistakes to avoid are not
only the cutting of freshly initiated
short position, but also in going long
again. If a pullback occurs following
the breakout of a rising wedge (whipsaw) it is appropriate to:
Figure 1: Nokia Rising wedge reversal
Figure 2: TOPIX 2007 Wedge continuation pattern
(bearish) and upwards for a falling

wedge (bullish).
Over the longer-term, falling wedges
are more seldom encountered than traditional reversal patterns like inverted
head-and-shoulders structures or double/triple bottoms, but they remain
excellent forewarnings of the end of a
downtrend.
Pattern construction
and basic principles
Unlike flags and rectangles, a wedge has
two converging straight lines, a support
line and a resistance line. Both lines
slope either up or downwards. We con28
sider that support and resistance lines

made by only two points are enough
for a wedge to qualify. A rising or
falling wedge can extend itself until its
apex.
All the examples of wedges I use are
daily charts using open/close prices
rather than extreme points reached
during the session. This makes the
charts cleaner during volatile sessions.
Partly neutralise a short position
Re-draw a less steep lower support

trendline to take the supposedly false
breakout into consideration,
Reinitiate a short position once this

newly drawn trendline is broken to
the downside. For more safety, one
can also rely on technical indicators,
or volume, and ideally on bearish
divergences as we will examine
below.
UNLIKE FLAGS AND RECTANGLES, A WEDGE HAS

TWO CONVERGING STRAIGHT LINES, A SUPPORT LINE
AND A RESISTANCE LINE.
Jan-Mar 2011
Technical Trading
Price targets
From our own experience, we are
tempted to say that from a wedge
breakout, prices tend to go almost
always in the expected direction.
Moreover, the duration of their completion before the breakout is generally
a forerunner of the future trend's magnitude: a particularly long rising wedge
mostly warns you of a sizeable bearish
movement to come. Another difficulty
lies in determining a price target. Unlike
other patterns such as triangles and
head-and-shoulders, which have reliable
determinants of a price target, wedges
frequently encompass false and/or multiple breakouts, leading to the need to
adjusting trendlines.
If the wedge looks to be a continuation pattern, for instance a falling wedge
after a clear bullish trend, then one can
calculate the extent of the movement
prior to the pattern and extrapolate it to
the upside once the wedge is broken,
exactly as if you were studying a flag or
a pennant. If, on the other hand, you
anticipate that the wedge will be a reversal, such measures are inefficient.
Fibonacci-like retracements provide
better price targets in this case.
Asymmetrical behaviour
Human psychology suggests that market lows are made at the conclusion of
longer periods. That is why reversal
falling wedges take even more time to
complete than reversal rising wedges.
After prolonged pessimism in the market, we strongly advise against anticipating any upside breakout in a falling
wedge, except when it occurs within an
ocean of bad news. It is well known
that markets that dont react to more
bad news are probably poised for a
bounce.
Figure 3 shows a falling wedge
with bullish reversal implications
plotted in the 1993 chart of
JPYUSD. Notice that its support
line is only propped up by two
points. With the benefit of hindsight, we can see that it was better to
wait for the short pullback a few
days after the pattern's completion
(green arrow) before going long.
Figure 3: JPY/USD 1993 Falling wedge reversal pattern
WHEN ANALYSING WEDGES

SCRUTINIZING VOLUME IS ESSENTIAL.
VOLUME CAN HELP REMOVE ANY
AMBIGUITY AS TO WHETHER THE
CURRENT CONSOLIDATION PATTERN IS AN
ASCENDING TRIANGLE OR A RISING WEDGE.
Figure 4: S&P500 in 1987 - Falling wedge reversal and the MACD
Jan-Mar 2011
29
Technical Trading
Validation
As usual in technical analysis, it is better to check a patterns validity using
additional techniques. An Elliott Wave
study is a great help here as continuation wedges abound in waves 2 and 4.
Wedges can be also found in waves 5;
in this case, they form all of them and
are essentially reversal warnings.
Conceptually, they perfectly coincide
with the exhaustion situations inherent in most of waves 5: new highs are
made (in the case of a rising wedge)
but in a more painstaking way with
contracting volumes and shrinking
volatility.
Volume analysis
When analysing wedges scrutinizing
volume is essential. Volume can help
remove any ambiguity as to whether the
current consolidation pattern is an
ascending triangle or a rising wedge. In
a rising wedge, volumes reached on
each successive high will tend to
decrease. In an ascending triangle, volumes will be greater on up days than on
down days. While diminishing volumes
during up waves in a narrow range are a
serious warning of bearish reversal, the
opposite signal after extended slumps is
far more complex to analyse.
Oscillators
The use of technical indicators is
another method of avoiding false signals from wedges. They can not only
30
avoid whipsaws but can also help with

the timing of trade entries and exits. As
a simple rule, momentum indicators
work best with reversal wedges and
trend following indicators best with
continuation wedges.
For reversal wedges, the slow stochastic is particularly effective in tracking
divergences between prices and the
indicator, generating signals from
crossovers of the %D and %DS lines,
and for generally monitoring exits from
overbought/oversold areas.
The MACD is also a very useful indicator in supporting a wedge pattern.
Figure 4 shows US stocks after the 1987
stock crash. This gives a perfect example of a reversal falling wedge which
coincides with a very clear bullish divergence between prices and MACD.
Trading rules
Timing: For a wedge, timing a

breakout is tricky because unlike triangles, you dont have a deadline for
the completion of the pattern. With
a wedge, it may well last until its
apex, without being invalidated.
Breakouts: A breakout may be a

false signal so look for confirmation
with prices moving, for example, two
candles out of the wedge. Look at
volume and technical indicators to
gauge the degree of price conviction.
If volume fails to follow price then
the possibility of a breakout increas-
Jan-Mar 2011
es. In this case, you should add a

stop-loss a few points below the former breakout level after a rising
wedge.
Price targets: Do not assign any

price target just based on the pattern.
Even though targets are easier to
determine in the case of continuation wedges (by extrapolating), they
are not outstandingly efficient from
our experience.
What if our wedge is invalidated?

In the case of wedges, we need some
tolerance. False breakouts are
extremely frequent and often require
the redrawing of the steepest trendline once or more. Again, watching
volumes is crucial when it comes to
weighing the odds of a false breakout.
Finally, a major stop level, taking the

invalidation of the wedge into account,
should obviously be set but this point
must be chosen clearly above (below)
the high (low) reached during the rising
(falling) wedge. Don't forget: room to
manoeuvre should be greater than for
any other chart pattern. If you work
with daily data, we suggest you replace
the high/low with the highest/lowest
close reached during the wedge.
Yann CORDIER is a portfolio manager in European equities at AXA

Investment Managers in Paris.
Trading with
Hursts Cyclic
Theory
Technical Trading
Introducing JM Hurst
the Father of Cyclic Analysis
JM Hurst was an American aeronautical engineer who proposed a cyclic theory about the workings of financial markets
in the 1970s. He is considered by many to be the father of
cyclic analysis and has published two seminal works: a book
called The Profit Magic of Stock Transaction Timing and a few
years later a workshop-style course which was called the
Cyclitec Cycles Course (now available as JM Hursts Cycles
Course). It is in the Cycles Course that the full theory is
explained in great detail.
Hursts Cyclic Theories
Hurst defined eight principles which provide the definition of
his cyclic theory. The principles are:
The Principle of Commonality

All freely tradable markets exhibit price movements
which have much in common.
The Principle of Cyclicality
Price movements consist of a combination
Jan-Mar 2011
of specific waves and therefore exhibit cyclic characteristics.

The Principle of Summation
Price waves which combine to produce the price movement do so by a process of simple addition.
The Principle of Harmonicity
The wavelengths of neighbouring waves in the collection of cycles contributing to price movement are related by a small integer value.
The Principle of Synchronicity
Waves in price movement are phased so as to cause
simultaneous troughs wherever possible
The Principle of Proportionality
Waves in price movement have an amplitude that is proportional to their wavelength.
The Principle of Nominality
A specific, nominal collection of harmonically related
waves is common to all price movements.
The Principle of Variation
The previous four principles represent strong tenden
cies, from which variation is to be expected.
31
Technical Trading
cycles that makes it particularly different and also begins to

explain why it is impossible to forecast price movement with
100% accuracy. Just as it is impossible to conceive of the sum
of two infinite numbers, it is impossible to define the result
of combining an infinite number of cycles.
Figure 1: An example where six cycles have been identified and

have combined according to Hursts principles to produce a
composite price movement. The green arrows represent buying points at the troughs of the yellow cycle. Price movement
out of the trough (and trade potential) is different for each
trough because of the underlying trend.
In essence these principles define a theory which describes

the movement of a financial market as the combination of an
infinite number of cycles. These cycles are all harmonically related to one another (their wavelengths are related by
small integer values) and their troughs are synchronised
where possible, as opposed to their peaks. In other words, the
trough of each cycle always occurs at the same time as a
trough of all smaller cycles. The principles define how cycles
combine to produce a resultant price movement.
These simple rules distinguish Hursts theory from any
other cyclic theory. For instance most cyclic theories consider cycles in isolation from each other and cycles are often
seen to disappear. By contrast, cycles never disappear
according to Hursts theory, but they may be less apparent
because of the way in which cycles combine. It is the fact that
Hursts theory stipulates that there are an infinite number of
32
Jan-Mar 2011
Phasing Analysis
The true genius of Hursts theory as presented in the Cycles
Course was in the way that he proposed an analysis should be
conducted. The analysis is called a Phasing Analysis
because it is a matter of determining the current phase of as
many cycles as possible. Hurst advocated a process which is
simple in essence and is based on a form of pattern recognition by eye. This method differs from the approach he presented in the Profit Magic book which was purely mathematical in that it required the plotting of a displaced moving
average (inflated to create channels around price the well
known Hurst envelopes).
THE PATTERN RECOGNITION

APPROACH INVOLVES
IDENTIFYING THE MAJOR
TROUGHS OF THE LONGEST
CYCLE THAT APPEARS TO BE
PRESENT IN THE DATA.
The pattern recognition approach involves identifying the
major troughs of the longest cycle that appears to be present
in the data (Hurst called this the dominant cycle). If a particular expected trough is not apparent, or there is ambiguity in
the positioning of the trough, the resolution of this trough is
postponed until the analyst has more detailed information.
One then considers the next shorter cycle in the cyclic model
and identifies the troughs of that cycle using the previously
positioned troughs of the longer cycle as anchoring points.
The positioning of shorter cycle troughs often resolves the
positioning of the longer cycle troughs and so the analyst is
constantly moving between the cycles, but generally moving
from the longest (dominant) cycle down to the shortest cycle.
Having performed a phasing analysis, the results are plotted on a chart using a notation system proposed by Hurst,
involving the placing of diamonds beneath the price to represent the troughs of the various cycles. And then one moves
on to the second aspect of Hursts theory: making trading
decisions on the basis of the cyclic analysis.
This aspect of Hursts theory is once again distinguished
from other cyclic theories. Most cyclic theories advocate
Technical Trading
Figure 2: EURUSD with a cyclic analysis presented in Hursts

diamond notation. Each diamond represents a trough of a
cycle. As of the 7th of January 2011 a trough of the 80-day cycle
is expected (it has been 84 days since the previous trough). The
40-day VTL and 80-day FLD are plotted.
buying a market when the cycle is rising, and selling when the
cycle is falling. Hursts trading methodology on the other
hand takes into account the fact that price is the result of a
composite of many cycles and only advocates buying when a
cycle is rising and the two cycles longer than the trading cycle
(in the harmonic collection of cycles) are also rising. Similarly
one should only sell (go short the market exits are a different matter) when the two cycles longer than the trading cycle
are also falling. There are further guidelines to be observed
before selling short, because of the principle of synchronicity which tells us that troughs are synchronised and therefore much easier to trade whereas peaks are not synchronised and are therefore more complicated to identify and
much more difficult to trade.
Timing Trade Entries and Exits

Beyond the above overall guideline as to when one should
enter the market, trading according to Hursts cyclic theory requires that one times ones trading actions by means
of using two cyclic tools: the FLD (Future Lines of
Demarcation) and the VTL (Valid Trend Line).
The FLD (Future Line of Demarcation) of a particular
cycle is calculated by transposing the median price by
roughly half the wavelength of the cycle in question into
the future.
The VTL (Valid Trend Line) of a particular cycle is a
trend line which joins two consecutive troughs or peaks of
that cycle (as seen in the price movement), and then further validated by obeying a few simple rules defined by
Hurst.
These tools provide evidence of a cyclic nature that a
trough or peak of a particular cycle has occurred and so
they are used to create what Hurst called action signals
when price crosses an FLD or VTL a signal is generated, whereupon one should take an action (such as buying
or selling).
Jan-Mar 2011
Figure 3: EURUSD in more detail. An hourly chart with the

FLDs of the 40 hour, 3 day and 5 day cycles plotted, and the
VTL of the 40 hour cycle. These lines provide good entry levels
for trading the move out of the expected 80 day trough. The
vertical dashed line represents the time at which trading will
commence on Sunday night.
Figure 4: On Monday morning (10th January 2011) the market

starts rising out of a trough and a long entry is effected at a
level determined by the 2-day FLD. A stop-loss exit is positioned according to cyclic principles.
A Note on Intraday Trading

It is a feature of Hursts cyclic theory that cycles move
through time, regardless of whether we are trading financial markets or not. A cycle keeps moving through the
weekend. When analysing daily data this is not much of a
problem, but when analysing intraday data it becomes a
fairly big problem. On a Monday morning one is faced
with a gap of over 60 hours in most markets, during
which time there would have been a good deal of cyclic
activity. There would have been 7 or 8 full waves of the 8
hour cycle, and if that cycle is your chosen trading cycle,
Mondays present an interesting challenge: it will usually
take several hours to identify the current phasing of the 8
hour cycle.
David Hickson is founder of Sentient Trader, a programme designed to perform Hurst Cycle phasing
analysis and identify trade opportunities based on Hurst
Cyclic theory. See www.sentienttrader.com
33
20 Questions
34
Jan-Mar 2011
20 Questions
1. If today you had to invest your entire fund in one market for a period of 12
months, which market would you choose?
Given my history with and specialism in the UK market, Id have to say the UK. But if I had to invest elsewhere right now
Id say Japan.
2. If today you had to invest your entire fund in one market for a period of one
month, which market would you choose?
Same as above if not the UK, Japan.
3. Was the scare over the credit crisis and global economy overdone by the media
and financial commentators?
Not necessarily, although of course being a newsworthy subject a fair degree of time was, inevitably, spent on it.
4. Are more banks going down?
No, but at least one football team beginning with the letter W will.
5. Whats best and why; growth, value or momentum investing?
At the bottom of the market cycle you can find value in growth, whilst at the top of the cycle growth can be overvalued. At
both points momentum can be a useful guide in determining the timing of entrances and exits.
6. If you are restricted to using only one technical/chart indicator, what would
you choose?
Conventional charts to determine trends, resistance, and support levels are all helpful in timing buys and sells.
7. What separates a great fund manager from a mediocre one?

The stocks he picks.
Jan-Mar 2011
35
20 Questions
8. If a manager has had 5 good years in a row, do you carry on investing in him or
pull out?
I dont invest in other managers products. If the manager is me, carry on.
9. Does traditional equity analysis provide any value, if so, what?
It provides value in determining the cheapness or otherwise of a given stock, particularly when it comes to hidden asset situations.
10. If you could employ either an economist or technical analyst, which would you
choose?
An economist, reluctantly.
11. Is BRICS as an investment opportunity still alive and well?

Quite possibly.
12. Are frontier markets a cause for excitement?

Possibly, though these are not my areas of specialisation.
13. When will be the first rate rise from the Fed?
Sometime in the later part of the current calendar year.
14. What was the last business book you read and how would you rate it?
Ive never read a business book in my life.
15. Which analyst (of any sort) do you respect and follow closely?
I dont follow any particular analysts closely.
16. Is gold near its peak and how much further has oil to go?
Gold looks to be consolidating, but oil is likely to go higher, though how high I couldnt say.
17. Is the euro destined to fail within the next few years?
Personally, I would hope so. Though in terms of the fund and market volatility, hopefully not.
18. Stocks: are we in a secular bear or bull market?

Were in a bull market currently, and there is a lot of value in stocks.
19. Bonds: are we in a secular bear or bull market?
Seeing as interest rates are almost certain to rise this year, we are likely to enter a bear market.
20. Overall, will 2011 be better or worse than 2010?

Provided Im still alive at the end, it will be better than 2010.
36
Jan-Mar 2011
Research Update
A BOLLINGER BAND IS PAIRS TRADING

STILL PROFITABLE?
STRATEGY FOR
FUTURES
A team of researchers from the University of Malaya have
investigated the use of a Bollinger Bands Z-Test trading rule on
futures prices. They find abnormal returns over and above that
generated by a passive buy-and-hold policy for FKLI, FCPO,
Soyoil, Soybean and Corn futures. Their model captures large
price movements which happen beyond 1 standard deviation.
The mechanical buy signal is above 1 standard deviation and sell
signal is below 1 standard deviation. For the period
12/15/1995-12/31/2008, the strategy yields a return of 1,048.6
points for FKLI in comparison to the passive buy-and-hold policy which yields a negative return of 110.5 points. The returns
obtained for FCPO, Soyoil, Soybean and Corn futures for the
year 2008 are 1,119, 27, 522 and 328 points respectively.
Azizan, Noor Azlinna and Phooi Mng, Jacinta Chan, Can Technical
Analysis Predict the Movement of Futures Prices? (September 2010). The
IUP Journal of Financial Risk Management, Vol. VII, No. 3, pp. 5774, September 2010.
LOW LEVERAGED
COMPANIES OUTPERFORM
Gulnur Muradoglu and Brian Baturevich of Cass Business

School have investigated the ability of company capital structures to be used as a predictor for abnormal returns. They show
that companies in the lowest leverage decile, exhibit the highest
abnormal returns (17%) over a three-year period, controlling for
size of company, price-to-earnings (PE) ratio, market-to-book
value ratio and beta. A strategy of choosing the smallest companies with the lowest leverage yields cumulative abnormal returns
in excess of 80% over three years.
Muradoglu, Yaz Gulnur and Baturevich, Brian, Would You Follow MM

or a Profitable Trading Strategy? (October 1, 2010). Frontiers in Finance
and Economics, Vol. 7, No. 2, 69-89, October 2010.
Jan-Mar 2011
Two Australian researchers have examined the impact of profitability of pairs trading in the US equity market over the period
1963-2009. After controlling for commissions, market impact
and short selling fees; they find that pairs trading remains profitable, albeit at much more modest levels. Specifically, they document a risk-adjusted return of about 30 bps per month
amongst portfolios of well matched pairs that are formed within refined industry groups. Strategies that are implemented on
the top 30% largest stocks produce an average alpha of 19 bps
per month. The authors conclude that pairs trading exhibits a
lower risk and lower return profile than a short-term contrarian
strategy that sorts stocks relative to their industry peers.
Another study has investigated the profitability of a selffinancing pairs portfolio trading strategy in the Finnish stock
market under different weighting structures. Over the period
1987 to 2004, they find pairs trading to be profitable even after
allowing for a one day delay in the trade initiation after the signal. On average, the annualized return can be as high as 15%.
The authors say the profits are not related to market risk and a
fully invested pairs trading strategy is found to produce positive
alpha during the sample period.
Do, Binh Huu and Faff, Robert W., Are Pairs Trading Profits Robust
to Trading Costs? (November 5, 2010). Broussard, John Paul and
Vaihekoski, Mika, Profitability of Pairs Trading Strategy in Finland
(December 21, 2010).
A LONG-TERM
PERSPECTIVE ON
SEASONAL PATTERNS
Over 300 years of UK stock returns reveal that well-known

monthly seasonal patterns are sample specific, according to Ben
Jacobsen and Cherry Yi Zhang of Massey University. For example, the authors point out that the January Effect only emerges
around 1830, which coincides with Christmas becoming a public holiday. Most months have had their 50 years of fame, showing the importance of long time series to safeguard against sample selection bias, noise, and data snooping. Only monthly July
and October effects persist over three centuries, as does the half
yearly Sell-in-May effect. Winter returns November through
April are consistently higher than (negative) summer returns,
indicating predictably negative risk premia. A Sell-in-May trading strategy beats the market more than 80% of the time over 5
year horizons.
Jacobsen, Ben and Zhang, Cherry Yi, Are Monthly Seasonals Real? A
Three Century Perspective (October 25, 2010).
37
Research Update
Jumps in Bond
Prices Signal
Excess Returns
A team of researchers from Robeco

Asset Management and Erasmus
University Rotterdam have built on previous work that shows that the mean
average jump in bond prices can predict
excess bond returns. They show that
these jumps often take place at 8:30 and
10:00, directly linking them to specific
macroeconomic news announcements. It
appears that excess returns are related to
macroeconomic announcements that
matter to market participants and jumps
are a good market proxy for what
investors believe is important news.
Their improved jump measure produces
a Sharpe ratio of 0.52 in an out-of-sample market-neutral investment strategy.
Duyvesteyn, Johan G., Martens, Martin P.E.

and Safavi Nic, Siawash, Forecasting Bond
Returns Using Jumps in Intraday Prices
(November 28, 2010).
MOMENTUM AND
SEASONAL MEAN
REVERSION
Chelsea Yao of the University of

Melbourne has found that momentum
and seasonality profits are time-varying.
Momentum profits seem to be closely
related to market conditions, being barely profitable during crises, whereas seasonality does not have such a strong relationship with market conditions.
Yao, Chelsea Yaqiong, Momentum, Seasonality
and January (December 30, 2010).
38
Superior Analysts Make

Long-Term Forecasts
Even though the expected growth of

future earnings plays a vital role in investment analysis, not all analysts produce
long-term earnings growth forecasts.
Andreas Simon of California Polytechnic
State University and John Nowland of
City University of Hong Kong have
examined whether the issuance of longterm growth forecasts by analysts is a signal of analyst quality. They find that analysts who issue long-term growth forecasts have better forecasting ability, more
experience and more private information.
Furthermore, a forward-looking trading

strategy that follows the stock recommendations of analysts that issue longterm growth forecasts earns 4-factor
adjusted abnormal returns of 1.33 percent per month higher than a trading
strategy following the recommendations
of analysts that do not issue long-term
growth forecasts.
Simon, Andreas and Nowland, John, Do LongTerm Growth Forecasts Signal Analyst
Quality? (October 25, 2010).
GAMBLING NATIONS AND

STOCK MARKET BEHAVIOUR
A US-based team of researchers have
looked at whether gambling activities of
investors induce excess comovements in
stock returns. Using a religion-based
proxy for gambling propensity, they show
that return comovements are stronger
among stocks that are located in regions
where people are more prone to gamble.
In particular, gambling motivated trading
induces strong comovements among lowpriced stocks, local stocks and lottery-
type stocks. Gambling-induced comovements are amplified when lottery tickets

sales are high, when local investors have
positive income shocks, and following
stock splits. Overall, the evidence indicates that gambling is a common source
of comovements in stock returns.
Kumar, Alok, Page, Jeremy K. and Spalt,
Oliver G., Gambling and Comovements
(December 16, 2010).
Information Flow and

Market Impact
Are investors less attentive to information arriving continuously in small amounts than
to information with the same cumulative stock price implications arriving in large
amounts at discrete timepoints? This is the hypothesis of an international team of
researchers who think a series of gradual frequent changes attracts less attention than
infrequent dramatic changes. When tested, they found strong evidence that continuous
information induces stronger and more persistent return continuation. Over a sixmonth holding period, momentum decreases monotonically from 8.86% for stocks
with continuous information to 2.91% for stocks with discrete information. Higher
media coverage and higher analyst coverage are associated with more discrete and more
continuous information, respectively.
Da, Zhi, Gurun, Umit G. and Warachka, Mitch, Frog in the Pan: Continuous Information and
Momentum (January 05, 2011).
Jan-Mar 2011
Research Update
STOCK MARKET
INTEGRATION LOWER ON
FRIDAYS AND MONDAYS
How independent are each of the four

main US stock market indices? Guglielmo
Caporale of Brunel University and Luis
Gil-Alana of the University of Navarra
have examined the degree of integration
of the Standard and Poor, Dow Jones,
Nasdaq and NYSE, at a daily frequency
from January 2005 to December 2009.
Their results indicate that the four series
are highly persistent; a small degree of
mean reversion (i.e. orders of integration
strictly smaller than 1) is found in some
cases for S&P and the Dow Jones indices.
The most interesting findings are the differences in the degree of dependence for
different days of the week. Specifically,
lower orders of integration are systematically observed for Mondays and Fridays,
consistent with the day of the week
effect frequently found in financial data.
Caporale, Guglielmo Maria and Gil-Alana,
Luis A., The Weekly Structure of US Stock
Prices (November 15, 2010). CESifo Working
Paper Series No. 3245.
TREND FOLLOWING VS CONTRARIAN
Several papers have looked recent at the

question of what is a more effective
kind of trading strategy: trend following
or contrarian? James Kozyra and
Camillo Lento of Lakehead University
in Canada have found that, after adjusting for transaction costs, the contrarian
approach consistently outperforms the
trending approach, and is able to earn
returns in excess of the buy-and-hold
trading strategy.
Meanwhile, in another study, Rizky
Luxianto from the University of
Indonesia has compared the effectiveness
of momentum and contrarian strategies
in the Indonesian Stock Exchange. He
first identifies winner stocks (stocks with
highest gains) and loser stocks (stocks
with highest losses) and then buys or sells
them depending on the whether the strategy is contrarian or trend following. The
author uses three performance measures
for selecting winner and loser stocks. The
first method is cross section relative

return, the second method is cross section relative return plus risk component
(return divided by standard deviation),
and the third method is historical relative
return. According to Luxianto, the
results, for all three methods, prove that a
momentum strategy is more effective for
winner stocks, so in the next period winner stocks will continue to make profit.
For loser stocks, it is more effective to use
a contrarian strategy because in the next
period loser stocks will rebound and
make a profit after suffering from high
losses.
Kozyra, James and Lento, Camillo, Filter Rules:
Follow the Trend, or Take the Contrarian
Approach? (August 27, 2010). Luxianto,
Rizky, Comparison in Measuring Effectiveness
of Momentum and Contrarian Trading Strategy
in Indonesian Stock Exchange (August 11,
2010).
All papers are available from the Social Science

Research Network, SSRN, www.ssrn.com
Technical Trading NEW PAIRS

Rules in EURUSD
TRADING
Stephan Schulmeister of the Austrian Institute of Economic

Research has investigated 1024 moving average and momentum
models in EUR/USD (and prior to the Euro, USD/DEM)
based on daily data. His main results are: First, each of these
models would have been profitable over the entire sample period. Second, this profitability is exclusively due to the exploitation of persistent exchange rate trends. Third, the results do not
change substantially when trading is examined within subperiods. Fourth, the 25 best performing models in each in-sample
period examined were profitable also out of sample in most
cases. Fifth, the profitability of technical trading in the currency pair has been significantly lower since the late 1980s as compared to the first 15 years of the floating rate period.
Schulmeister, Stephan, Components of the Profitability of Technical Currency
Trading (2005). WIFO Working Paper No. 263.
STRATEGY
Susana Yu of Montclair State University has developed a new

pairs trading rule based on financial analysts buy / hold / sell
recommendations from IBES Details Recommendation
Database and tested it for the period 1994-2009. She finds that
the trading rule generally results in positive risk-adjusted returns.
It is more effective on small- and mid-cap pairs of stocks than
on large-cap pairs, consistent with the hypothesis of information
disparity in the stock market. It is more effective in the industries
of mining, finance, and services than in others. In addition, Yu
examined the correlation of analyst recommendations with
stock and corporate earnings performance and found significant
positive correlation between recommendations and recent performance.
Yu, Susana, Pairs-Trading on Divergent Analyst Recommendations
(November 10, 2010). Journal of Investment Management, Forthcoming
Jan-Mar 2011
39
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MARKET NEWS AND VIEWS

Where Now for 2011?

Market Outlook Poll 2011

Trading with Hursts Cyclic Theory

Trading the Wedge Pattern

Paul Mumford, Cavendish Asset Management

The outlook for gold

Dow Fibonacci target

Trading the Wedge Pattern

Fibonacci Targets Dow At 18,000

THE TECHNICAL ANALYST

Market News and Views

STRONG BUY SIGNAL FROM PRESIDENTIAL ELECTION CYCLE

THE TECHNICAL ANALYST

Japans Nikkei 225 is on the verge

Market News and Views

TREND FOLLOWING GENERATES ALPHA SAYS CASS

TOM DEMARK SEES STOCKS NEAR TOP

BusinessWeek has reported Tom

THAMES RIVER WARNS OF

BIRINYI SEES 2013 HIGH IN STOCKS

Please email news stories to:

THE TECHNICAL ANALYST

Golds phenomenal bull charge, over 468% since 1999, is

skewed for an extended downside reaction.

The trend is your friend, untilC

Gold Point & Figure Chart

noteworthy omen to how markets can avalanche from

GOLDS PHENOMENAL BULL CHARGE,

THE TECHNICAL ANALYST

consecutive higher reaction highs and lows. A sustained break

Demand Cycles and Speculative Flows

Kase Dev Stops

Demand Cycles and Speculative Flows

To do this we need to accept the markets highly

EVENTUAL ACCELERATION TO THE

THE TECHNICAL ANALYST

History and the Dow

THE TECHNICAL ANALYST

at around 11,600 would be followed by a

THE TECHNICAL ANALYST

Figure 1: Dow overlayed major corrections since 1929

Figure 2: Dow today and in the 1970s

THE TECHNICAL ANALYST