53 - 2000 Winter

II II1
Ill
III
sv
II
Ill
Ill
i-il1J
$1
Ill
MTAJOURNA
Winter-Spring 2000 0 Issue53

A Publication of
MARKETTECHNICIANSASSOCIATION,INC.
One World Trade Center
o Suite 4447
New York, NY 10048
o Telephone: 212/912-0995
Fax: 212/912-1064
A Not-For-Profit ProfessionalOrganizatione Incorporated1973
o e-mail: shelleyQmta.com
www.mta.org
THE MTA JOURNAL- TABLEOF CONTENTS

WINTER - SPRING
2000 . k3SUE53
MTA JOURNAL EDITORIAL STAFF
MTA MEMBER AND AFFILIATE hFORMATION
199!biOOO BOARD OF DIRF~ORS AbIDMANAGEMENT CoMhnTrEE
EDITORIALCOMMENTARY
A CHALLFNGE TO THE SENIOR MARKET TECHNI~N:
THE TFmNIcAL MARKET ANALYSIS MIX
INTEGRATING
Henry0. (Hank)Pruden,Ph.D.,Editor
1
2
3
4
5
PREDICTING RANK ORDER STOCX PRICE PERFORMANCE USING A MULTI-FACTOR

RELAnvE PRICE STRENGTHMODEL
FredericH. Dickson,CMT
Scmcx
15
IS VALIDATING THE CONCEPT OF THE WAVE PRINCIPLE
RobertR. Prechter,Jr., CMT

THEhlXRAmONOF
21
TRFNDINF.SShkWRE!SANDTNX-INICALhDICATO~
Basil Panas,CFA,CPA,CMT
HEABAND-!jHOUIDERS
Accmcm~~~How
25
TOmETHEM
SergeLaedermann
VOLATILITYANDSmum:
BUILDING BLOCS OF CLASSICAL

C&ARTPAM
ANALYSIS
35
DanielL. Chesler,CTA,CMT
MTA JOURNAL * Winter - Spring 2000
THE MTAJOURNAL
WINTFR . SPRING2000 . hUE53
EDITOR
Henry 0. Pruden, Ph.D.

GoldenGate University
San Francisco,Calijinnia
AssocJATEJhroRs
David L. Upshaw,CFA, CMT
Jeffrey Morton, M.D.
Lake Quivira, Kansas
PRISM Trading Advisors

Missouri City, Texas
Connie Brown, CMT
CharlesD. Kirkpatrick, II, CMT
AerodynamicInvestmentsInc.
Pawlqs Island, South Carolina
Kirkpatrick and Company,Inc.

Chatham, Massachusetts
John A. Carder,CMT
John McGinley, CMT
ToplineInvestment Graphics
Boulder, Colorado
Ann F. Cody,CFA
Hilliard Lyons
Louisville, Kentucky
Technical Trends
Wilton, Connecticut
Cornelius Luca
Bridge Information Systems
New Ymk,New Yorlz
Michael J. Moody, CMT

Dory, Wtight & Associates
Pasadena, Calijornia
Richard C. Orr, Ph.D.

ROME Partners
Marbtehead, Massachusetts
Kenneth G. Tower, CMT

UST Securities
Princeton, NewJersey
Robert B. Peirce
Theodore E. Loud, CMT
J. Adrian Trezise,M. App. SC.(II)
Cookson,Peirce& Co., Inc.

Pittsburgh, Penns$vania
TelAdvisor Inc. of Virginia

Charlottesville, Virginia
Consultant toJ.P Morgan

London, England
PRODUCTIONCOORDINATOR
Barbara I. Gomperts
Financial & Investment Graphic Design
Marblehead, Massachusetts
PURLISHER
Market TechniciansAssociation, Inc.
One World Trade Center;Suite 4447
New Ymk,New Ymk 10048
ABOUTTHE MTA JOURNAL

DE.XRETION
OFTHEMTAJOURNAL
The Market Technicians Association Journal is pub
lished by the Market Technicians Association, Inc.,
(MTA) One World Trade Center, Suite 4447, New
York, NY 10048. Its purpose is to promote the investigation and analysis of the price and volume activities of the worlds financial markets. The MTA Journal is distributed to individuals (both academic and
practitioner) and libraries in the United States,
Canada, Europe and several other countries. The
MTA Journalis copyrighted by the Market Technicians
Association and registered with the Library of Congress. All rights are reserved.
A NOTETO AUTHORS
ABOUTSTYLE
You want your article to be published. The staff of the MTA Journal wants to help you. Our common
goal can be achieved efficiently if you will observe the following conventions. Youll also earn the
thanks of our reviewers, editors, and production people.
1. Send your article on a disk. When you send typewritten work, please use 8-l/2 x 11 paper. DOUBLESPACEYOUR TEXT. If you use both sides of the paper, take care that it is heavy enough to avoid
reverse-side images. Footnotes and references should appear at the end of your article.
2. Submit two copies of your article.
3. All charts should be provided in camera-ready form and be properly labeled for text reference. Try
to avoid using the words above or below, but rather, Chart A, Table II, etc. when referring to your
graphics.
4. Greek characters should be avoided in the text and in all formulae.
5. Include a short (one paragraph) biography. We will place this at the end of your article upon
publication. Your name will appear beneath the title of your article.
We will consider any article you send us, regardless of style, but upon acceptance, we will ask you to
make your article conform to the above conventions.
For a more detailed style sheet, please contact the MTA Oflice, One World Trade Center, Suite 4447,
New York, NY 10048.
Mail your manuscripts to:
Dr. Henry 0. Pruden
Golden Gate University
536 Mission Street
San Francisco, CA 94105-2968
MTA JOURNAL
Winter - Spring 2000
MEMBER
AND
AFFILIATE
hFORhfATION
MEMBER
Member category is available to those whose professional efforts are spent practicing financial technical analysisthat is either made available to the investing public or becomes a primary input into an
active portfolio management process or for whom technical analysis is a primary basis of their investment decision-making process. Applicants for Member must be engaged in the above capacity for five
years and must be sponsored by three MTA Members familiar with the applicants work.
AFFILIAE
Affiliate statusis available to individuals who are interested in technical analysis,but who do not fully
meet the requirements for Member, asstated above; or who currently do not know three MTA members
for sponsorship. Privileges are noted below.
DUES
Dues for Members and Affiliates are $200 per year and are payable when joining the MTA and thereafter upon receipt of annual dues notice mailed on July 1. College students mayjoin at a reduced rate
of $50 with the endorsement of a professor.
h'PLICATION FEES
Applicants for Member will be charged a onetime, nonrefundable application fee of $25; no fee for
Affiliates.
BENEFITS
OF THE MTA
I
I
I
I
I
I
I
I
Invitation to MTA educational meetings

Receive monthly MTA newsletter
Receive MTA Journal
Use of MTA library
Participate on various committees
Colleague of IFTA
Eligible to chair a committee
Eligible to vote
Members
%if
Lx
B
34
2
3
3T
a
Affiliates
@?
Iif
lx
a
a
IT
7
Annual subscription to the MTA Journal for nonmembers:
$50 (minimum two issues).
Single issue of the MTA Journal (including back issues):
$20 each for members and affiliates and

$30 for nonmembers.
MTA JOURNAL 0 Winter - Spring 2000
19994000BOARD
OFDIRECTORS
ANDMANAGEMENT
CoOF THE MARKET TECHINKJANS
Director:President5,1
Director:VicePresident
Nina G. Cooper
Pendragon Research Inc.
815/2444451
Fax: 815/2444452
e-mail:ngcooper@internetni.com
Director:Secretary
Kine!Za%,,:
LP
314/692-8033
Fax: 314/692-8039
Email: jcarterOOl@earthlink.net
Director:Treasurer
Walter J. Burke, CMT
MCM Moneywatch
212/9084325
Fax: 212/908-4331
e-mail: wburke@mcmwatch.com
Director: PastPresident
Director: Past President
Paul F. Desmond
Lowrys Reports, Inc.
561/842-3514
Fax: 561/842-1523
Email: pfd12404QaoLcom
Director
Gail M. Dudack, CMT
Warburg Dillon Read
212/8214869
Fax: 212/8214884
e-mail:gail.dudack@ubs.com
Director
Bruce M. Kamich, CMT
wallstreetREALITY.com, Inc.
732/4638438
Fax: 732/463-2078
e-mail: Barcharts@aol.com
Director
Charles Kirkpatrick II, CMT
Kirkpatrick & Co.
508/945-3222
Fax: 508/9458064
Email: kirkco@capecod.net
Director
(4 Officers, Past President and Committee Chairs)
Accreditation
Bradley J. Hemdon, CFA, CMT
317/467-6161
Fax: 317/467-6161
Email: bjherndon@aol.com
Admissions
heal Genda, CMT
Citv National Bank
310/888-6416
Fax: 310/8886388
Email: ngenda@cityntl.com
Bodyof Knowledge
Bernadette B. Murphy, CMT
Kimelman & Baird, LLC
212/686-7291
Fax: 212/7799603
Email: bernadette-murphy@msn.com
Computer
Philip B. Erlanger, CMT

Phil Erlanger Research
978/2632536
Fax: 978/26&l 104
Email: phil@erlanger.com
DistanceLearning
Richard A. Dickson
Scott & Stringfellow Inc.
804/780-3292
Fax: 804/64%9327
Email: DDickson@ScottStringfel~ow.com
Education
Philip J. Roth, CMT
Morgan Stanley Dean Witter
212/761-6603
Fax: 212/761-0471
Email: Philip.Roth@msdw.com
Journal
Henrv 0. Pruden, Ph.D.
Golden Gate University
415/442-6583
Fax: 415/442-6579
Email: hpruden@ggu.edu
Library
Daniel L. Chesler
561/7936867
Fax: 561/791-3379
Email: dan@crowd-control.com
Membership
Lam Katz
Market Summatv 8sForecast
805/350~1919
Fax: 805/757-0044
Email: Ipkl618@aolcom
Newsletter
Michael N. Kahn
Bridge Information Systems
212/372-7541
Fax: 212/372-2718
Email: mkahn@bridge.com
Placement
Andrew Bekoff
Van de Moolen
212/495-0558
Fax: 212/809-9143
Email: abekoff@bloomberg.net
Programs
Fred G. Schmzman, CMT
914/634-2978
Fax: 914/6341890
Email: fredschutzman@attglobal.net
Regions
Ethics& Standards
M. Frederick Meissner
Meissner Asset Management
404/760-3710
Fax: 404/760-3711
Email: fmeissner@mta.org
Foundation
George A. Schade,Jr., CMT

602/542-9841
Fax: 602/542-9827
Email: aljschade@aol.com
Lisa M Kinne. CMT

Salomon SmithBarney
212/81&3796
Fax: 212/81&3590
Email: lisa.kinne@ssmb.com
John C. Brooks, CMT
Yelton Fiscal Inc.
770/645-0095
Fax: 770/645-0098
Email: jbrooksgcm@aol.com
IFTALiaison
Robin Griffiths
HSBC Securities Inc.
212/6584304
Fax: 212/6584480
Email: robin@fiths@hsbcny.com
David L. Upshaw, CFA, CMT

913/2684708
Fax: 913/2687675
Email: upshawd@juno.com
INC.
Management Committee
Board of Directors
(4 Offtcers,4 Directors & Past President)
Dodge 0. Dorland, CMT

LANDOR Investment Management
212/737-I254
Fax: 212/861-0027
E-mail: dodge@mta.org
&OCIATION,
MTA JOURNAL *
Rules
Seminar
Samual H. Hale, CMT

A. G. Edwards
404/851-1422
Fax: 404/851-1415
Email: mtacmt@aol.com
MTA BusinessOffice
Shellev M. Lebeck
MTA Administrative Officer
212/912-0995
Fax: 212/912-1064
Email: shelley@mta.org
EDITORIAL COMMENTARYON CONTRIBUTIONS TO THE BODY OFKNOWLEDGEIN TECHNICAL ANALYSIS
A CHALLENGE
TOTHESENIORMARKETTECHNICIAN:
INTEGRATING
THETErncAL MARKETANALYSIS
MIX
Henry0. (Hank)Pruden,Ph.D.,Editor
It is the job of the senior market technician to see that all elements of the technical analysis recommendation are
brought together into an integrated whole. This often difficult function of integration must be performed regardless
of the type of market under study, the complexity of indicators utilized or the number of contributing technicians
involved. These complex situations necessitate that the senior technician have in mind some framework or model in
which all the key elements of technical market analysis are included and interrelated. He/she needs a plan or recipe by
which the elements are brought together into a meaningful mix.
The elements of the technical market analysis mix are price, volume, time and sentiment. Most bar charts represent
three components of the market mix: price on the vertical axis, volume on the vertical axis below the price and time
along the horizontal axis. Sentiment can be represented by the relationship between categories of buyers and sellers
(volume ratios) or by external expressions of opinion. These building-block elements are often combined to form
more comprehensive patterns. Common comprehensive patterns are the continuation and reversal formations. Through
the detailed study of charts, the interrelationships among all of these main functional elements of market analysis
become readily apparent.
Coordinating these various elements of market analysis are among the most critical problems the top-level technician will face. This is particularly likely to be so in large and complex technical analysis departments or where the
volume of work created by following a large number of markets stimulates the need for the division of labor and
specialization. One can imagine the combinations of talents which might be assembled to forge the market analysis
mix: an analyst with a flare for sentiment analysis, another with analytical skills in the price area, another who has
creative insight into volume behavior, while still another possesses a creative approach to the study of time. In addition,
there may be technicians who have a great grasp of the whole, so they specialize in traditional or more modern forms
of pattern recognition.
The importance of the overall coordination of such specialization in an environment of mounting globalization of
markets should be reflected in the increasing use of market analysis managers or senior technicians whose work is
the supervision, coordination and integration of various specialists. And these specialists may not reside within the
same organization.
The need for integration of the technical market analysis mix should be obvious at this stage in the evolution of
technical analysis. Indicators and models of price, volume and other elements of the market analysis mix are merely
different tools in the senior technicians kit. They are used individually and in combination for the diagnosis and
prognosis of market behavior.
The central problem of the market analysis manager is to so blend the elements of the technical market analysis mix
as to achieve the utmost accuracy in timing. In part, it is a matter of selecting the right tools from the sometimes
conflicting recommendations of the various technical specialties. In part, it is a matter of teamwork: stimulating
people to work together effectively, think broadly and to see the full implications of any recommended course of
action. Most fundamentally, the job of coordination is a problem of balance: the right elements used in the wrong
combination or the wrong relative emphasis on primary vs. intermediate vs. minor trends may have disastrous results.
Clearly, the job of effectively and efficiently integrating the technical analysis mix by the senior technical analyst or
market analysis manager is a challenging task.
An earlier version of this article original4
appeared in the MTA Newsletter, January
1994
PREDKTINGRANKORDERSTOCKPRICEPERFORMANCE
USING
A MULTI-FACTORRELATIVEPRICESTRENGII-I
MODEL
FredericH. Dickson,CMT
INTR~Du~~N
One of the greatest challenges facing equity investors is predicting individual stocks relative future price performance in a manner that is disciplined, can be easily replicated and produces consistently accurate results over the investment time horizon of interest to the user.
As Research Director of a regional brokerage firm, I am continually asked to offer an opinion regarding the future price performance of specific stocks relative to a specific universe or specific portfolio. To meet this challenge, I have constructed and currently maintain and electronically distribute an extensive equity
database. Updated weekly, this database includes a wide variety of
technical and fundamental indicators and several forecasting models, including a short-term, technically-based, relative strength momentum model designed to provide relative performance guidance
over a three to six-month time horizon.
Currently there is no shortage of proprietary and publicly available research tools attempting to accomplish this objective. In the
authors opinion, there does exist a noticeable absence of published
data evaluating how well these tools work after-the-fact, assuming
multiple start and end dates. We continue to observe that most
published test results are derived from back-testing procedures assuming a single start and end date for the test. A potential user of
the indicator is often at a loss to determine if encouraging results
are the product of a model that has consistent forecasting ability
or merely a coincidentally favorable test period.
Finally, the prospective user of a forecasting or relative ranking
system often has no idea of how long the projected rankings will
provide predictive value before deteriorating, or the consistency
of a ranking methodology in accurately predicting the rank order
of investment results for a significant equity universe under consideration. Results are often reported from universe subsets that
will provide encouraging results. In summary, we have typically
found the absence of data on the pervasiveness and consistency of
test results generated by systems employed live or after-the-fact
to be very troubling.
OVERVIEW
AND CONCJAJSIONS
This paper describes and presents the results of a technically
based, multifactor stock selection and ranking index (momentum
index) research methodology. The results presented are based on
an ex post facto analysis of actual predicted and published rank
performance suggested by the index. The rankings have been
published weekly as part of the Branch Cabell Equity Advantage
Database since June 25, 1999. The test analysis extends from the
initial index publication date ofJune 25,1999 through November
26, 1999. The testing protocol considers the performance of the
index assuming multiple overlapping start and end dates (of variable length holding periods) during this time period. As described
below, the initial test results are encouraging, as the model appears
to have provided positive predictive value over a wide variety of
holding periods as determined using several rigorous academically
acceptable evaluation criteria.
MTA JOURNAL
The momentum index in Chart 1 below shows the rank of an

individual stock relative to its selection universe based on combining two ranked measures of cycle position for each stock and three
ranked measures of price change.
Our investment hypothesis is that the Branch Cabell momentum index can demonstrate consistent predictive rank order performance results in excess of those generated from investing in a
market (S&P 500) index fund over various weekly holding periods
after making appropriate adjustments for historical price risk.
The momentum index was initially created to help investors assess probable three to six month rank order price for a 1,750 company equity universe including approximately 100 listed ADRs. The
debut of this indicator was June 25,1999. As shown in Chart 1, the
S&P 500 experienced two corrections and recoveries of at least five
percent between July 1999 and November 26,1999. Looking back,
this introductory five-month period was extremely trying for most
investors as well as being a very diflicult period to test and evaluate
any technically-based stock selection methodology due to the number and magnitude of the market and individual stock price directional changes. Over the entire time period, the S&P 500 was up
6.5% and the average price change of stocks included in the test
universe was down 2%:
Chart1
TECHNICAL
MOMENTUM
INDEX
ack?Position
RmlA
1 m 1750
(thcns~mnlal)
: -.-_.
i
-_. .-_ . ... i. .--._- _...- ..,^... -+i(
.._..,. -.- __... -.i+
. ^_ ._....j
-ed
Iml750
Final Ranking
For testing purposes,we assumedan equal dollar-weightedinvestment in each name in the universe each week. We then divided the universeinto decilesbasedon the ranking suggestedby
the momentumindex andmeasuredthe performanceof eachranking decile weekly over variousholding periodsduring the test period. This procedure eliminated the possibilityof favorable start
and end datesimpactingthe test results. Although five monthsof
test data is a very short time frame to evaluate an index and to
conclude the validity of our investmenthypothesis,we believethe
following initial observationsare noteworthy andjustify continued
publication of the index and the indefinite extension of the testing procedure.
* Winter- Spring2000
Chart2
10 I
wiw
w2wm
7wpo
7/2wm
WWQO
5nom9
woo
9117198
lpHm@ 1w15lss
lw2ww
1. The momentum index successfullyprojected rank-order performance over 20 overlapping time periods (extending from l20 weeks)basedon multiple start and end datesevaluatedbetweenJune 25, 1999and November 26, 1999 (Table 1). The
resultswerepervasiveand surprisinglyconsistentover the range
of multi-weekholding periods. The correlation coefficientsof
the momentum index ranked order performance ranged between 0.75 and 0.89 (1.0 marksperfect correlation, 0.0 marks
zero correlation and -1.0 marks perfect negative correlation)
for all time periodstested.
2. The absolutereturns alsoinitially suggesta high degreeof rankorder forecastingability. For all periods tested, the absolute
return of stocksranked in the top decile ranking wasgreater
than the returns produced by stocksin the seconddecile (See
Chart 3). Stocksranked in the 2nd decile in turn outperformed
stocksrankedin the 5th decilethen in turn outperformed stocks
rankedin the last (10th) decile. The degreeof outperformance
betweenthe stocksin the top ranked decileand bottom ranked
decile ranged from an averageof 2.3% for a l-week holding
period to 19.4%for a IO-weekholding period and 40.3%for a
20-weekholding period.
The spreadof rank order returns are highly significantwhen
comparedto the distribution of returns generatedfrom a random selectionof stocksmadefrom the sameuniversetestedin
a similarmannerover the sametime period (Table2). The top
decileof stocksselectedrandomly underperformed the bottom
ranked decile by 0.3% for one week,out erformed by 0.08%at
10weeksand underperformed by 1.17?o at 20 weeks.
3. Stocksidentified in the top two ranked decilesproduced positive risk-adjustedexcessreturns for all time periods up to 17
weekswhen evaluatedusingthe JensenModified CapitalAsset
Pricing model (Table 3). The resultswere dramatically above
what a rational investor would expect basedon the risk profile
of the stocksincluded in eachdecile category. Stocksincluded
in the bottom two rankeddecilesconsistentlyproducedthe poorestnegativeexcessreturns over the entire spectrumof holding
period.
4. The momentumrankingsindex produced excessreturns consistentwith their decile position rather than the averagebeta
associated
with eachdecileranking position. Theseresultswere
inconsistentwith what one would expect basedon the volatility
assignedto eachdecile ranking classbasedon historical betas.
This apparent marketanomalyisworth noting and stronglysuggeststhat future testsbe conducted to determine the extent
and pervasiveness
of this anomalyover longer time periodsincluding a full market and economiccycle.
10
MTA
5. Weexpected the averagevolatility, asmeasuredby beta, for the

stocksin each momentumindex decile to decline proportionately by decile ranking category. We expected the highestmomentum index ranked stocksto have the highest averagehistorical beta and the lowestranked stocksto have the lowesthistorical beta. In fact, the observedaveragebeta declinessequentially asexpected betweendecile ranks 1 and 5 but then unexpectedly risessequentiallybetweendecileranks6 and 10 (Table
3).
6. The averagebeta measuredover the entire 20-weektime hori-
zon within specificmomentum ranking decileswasnot stable

(Table 4). During one period of sustainedmarket weakness,
(July 16July 30) the averagebeta of the top decile momentum
ranked stocksfell from 1.38to 1.15while the beta of the lowest
momentumranked stocksrosefrom 1.04to 1.20. The average
beta of the middle-rankeddecile remainedvery stablethroughout the entire test period. The unusualvariability could possibly be attributed to stockseliminated from the universeduring
the testing period that were replaced by stockswith substantially different volatility characteristics.
7. Weexpected the momentumindex to demonstrateproportionately reduced forecastingability asthe holding period lengthened. The testdatasuggests
that the momentumindexsability
to produce returns consistentwith the rankingspersistsmuch
longer than we originally expected. Although we have only a
few data points for holding periodsbeyond 15 weeks,the rank
order correlation coefficientsremainvery high (0.80) with little
noticeable deterioration beyond this time horizon. The positive spreadof realized returns betweenperformance ranksremainsintact from the highestdecile to the lowestdecile for all
periods up to 20 weeks. For this limited testing period, the
momentumindex met our initial objective of pervasiveness
by
maintaining its discrimination ability acrossthe stock universe
for time periodsin excessof 13weeks.
8. We observedsignificant deviation of returns for the individual
stocksincluded within eachof the decilerankings. The performance statisticsof individual stockssuggestthe widestdispersion of individual stock returns at the highestand lowestdecile
ranking levels. Therefore, one needsto look at the decile performancerankingsasonly an indication of central tendencyfor
the stocksincluded in eachdecile rather than an absolutepredictor of future individual stockperformance.The performance
rankssuggestprobability of performancerather than servingas
an explicit predictor of performance on a stock-by-stockbasis.
JOURNAL * Winter- Spring2000
9. We conclude that for the time period tested, the momentum

index provided valuable forecasting information about the future risk-adjusted excess returns that could be profitably exploited by investors after considering reasonable transaction
costs. An investor could have begun to employ the published
momentum index rankings several weeks after the testing period began and would have received approximately the same
benefit as an investor who employed the model from the start
of the test period over the entire array of holding periods. The
results appear to be consistent and pervasive during the test
period across holding periods ranging from one to twenty weeks.
METHODOLOGY
The Momentum Ranking Index

Bacwound.
The genesisof the authors interest in relative
strength analysisdatesback over 30 years. In his 1967 doctoral
thesis,Dr. Robert A. Levy scientifically explored and testeda 26
week relative strength ranking systemthat he claimedinvalidated
the widelyacceptedweakefftcient market thesis.Severalacademic
researchersat the time concludedthat Dr. Levysability to demonstrateexceptional performanceresultswasa direct function of the
volatility inherent in the stocksselectedrather than a persistent
market anomaly. Thus, Dr. Levys claim of refuting the efficient
market hypothesiswaswidely discredited. On a practical basis,we
have found the original 26week rate of change indicator to be
helpful in establishingprobabilities of future results,but lacking
persistenceand consistencywhen appliedacrossa wide universeof
stocks.
Index definition and construction. The momentum ranking
index is constructedusing only historical price behavior of individual stocks. Thus, it is a pure technical index. Conceptually,
the index attemptsto quantify a stocksposition within a 52-week
price cycleand its momentumor rate of changeasmeasuredover
4week, 13-weekand 52-weekperiods. The momentum ranking
index subcomponents,cycle position and velocity (percent price
change) appear to be greatly impactedby overall market factors.
The ability of the stock to respondto changing market factors is
hypothesizedto be a critical variablein determiningnear-termprice
changes.Thisindex hasbeencontinuouslyconstructedon aweekly
basissinceJune 25,1999. No changeswere madein construction
methodologyduring the testperiod.
Eachweekeverystock in the 1,750companyuniverseis ranked
relative to the entire universebasedon itsrespectivePrice/52-week
high and Price/52-weeklow to determine relative cycle position.
Then eachstockis separatelyranked on the basisof its 4week, 13weekand 26weekprice changerelative to the sameuniverse.Each
stocksranked positionbasedon eachof thesefive criteria are then
summedand ranked relative to eachstockin the universeto determine the final technical momentumranking index. A stockranking number 1 in eachcategorywould have a compositescoreof 5.
This scorewould be comparedto the scoresof all other companies
in the universeto determine a final momentumindex rank. The
stock with the lowestcross-rankedscoreis projected to have the
highest probability of outperforming all other stocksin the universegoing forward (SeeChart 1).
During the testing period, approximately 75 companiesfrom
the original starting universewere eliminated from the universe
due to mergersor acquisitions.New companieswere introduced
into the universeduring the testperiod at the requestof our retail
clients, our institutional brokerage clients or to include IPOs of
technical or fundamentalinterest when data becameavailableon
MTA JOURNAL
the StockValdatabase.For companieswith lessthan 52 weeksof

pricing data, we calculatedcomparablecycle position statisticsusing Price/Life of Company high price in place of the Price/52week high ratio and Price/Life of Companylow price in place of
the Price/52-weeklow ratio. For companieswith fewer than 13
weeksof pricing data, we substitutedthe price change from the
companysIPO to the calculationdate for the index in the velocity
indicators. Wehavenot identified the impact of thesechangeson
the test resultsshownin this paper.
The momentum index is calculated basedon Friday closing
prices (4:30PM EST/EDT) and doesnot recognizepricespostedin
Friday aftermarkettrading on electronic exchangessuchasInstinet.
The historicalpricesin the databaseare adjustedwhen a stocksplit
or meaningful stock dividend occurs. Companiesthat have been
acquired during the test period are purged from the universeto
preserve comparability of companiesfrom each weekly starting
point. This adjustmentmight add a smallpositive or negativebias
to the test results.
Testing Procedure
Test period. The test period wasconducted betweenJune 25,
1999and November 26, 1999using the technical momentumindex publishedweeklyin the Branch CabellEquity AdvantageDatabasebetweenJune 25,1999 and November5,1999. June 25,1999
marked the first date the Technical Momentum Index waspub
lishedand distributed to clients.
Stock Universe. The Equity AdvantageStockuniversewasoriginally constructed in October 1998. It includesmembersof the
S&P 500, the Russell1000, selectedholdings or stocksof special
interest to clientsof Branch Cabell,and stockscoveredby CSFirst
Boston and Prudential Research (research correspondents of
Branch Cabell). Stocksnot otherwiseidentified with at least$1
billion in market capitalization are alsoincluded in the database.
The performanceof the Branch CabellEquity Universeversusthe
S&P500 is shownin Chart 2. The stocksincluded in the universe
are included in the StockVal databasewhich is usedasthe basic
information source for all data. Friday night closing prices are
downloadedfrom the StockVal databaseand loaded into the
BranchCabellEquity AdvantagedatabaseeverySaturday.StockVal
providescomponentcalculationsfor the five variablesincluded in
the TechnicalMomentum Index.
Testing Protocol.
Each week the technical momentum ranks
and individual equity betaswereloaded into an Excel spreadsheet
alongwith the modelranking algorithms. Historicalweekly prices
were retrieved from the StockVal databasefor each worksheet,
providing the necessarydatato calculatecumulativeweeklyreturns
from the initial date of the holding period to the lastdateincluded
in the test (November 26, 1999). The stock priceswere split-adjusted but were not adjustedfor spinoffs that may have negatively
impacted the performance of a specificstock. Each weekly databasewasthen sortedin ascendingorder of technical momentum
rank, with most favorable momentum rank at the top of the list
and leastfavorableat the bottom of the list. The universewasthen
divided into deciles,and averageperformance returns werecalculated for eachperformancedecile. The data wereordered sothat
the averageperformance of comparableweekly holding periods
could be determined. The procedurewasrepeatedfor eachof the
twenty weeksincluded in the test. The resultswere averagedfor
each ranking decile by comparableholding periods. Thus one
could easilyevaluatethe returns for all l-week, 5-week,lo-week,
etc. holding periodson a commonbasis.
* Winter - Spring2000
11
This procedure allows us to draw conclusions about the persistence and consistency of the performance ranking results without
assuming specific starting and ending test period dates. We view
this as a very rigorous but fair testing protocol. The results of this
protocol are shown in Table 1. Chart 3 presents a graph of the test
results over the test period. After 20 weeks, initial signs of convergence between the performance of the bottom decile and the
middle decile ranking position were beginning to appear, although
the number of data points observed remain very small (3). The
spread between the top decile ranking position and the middle
decile ranking position continued to widen.
Mindful of the weak efficient market hypothesis which suggests that purely historical stock price behavior has no predictive
power, we decided to construct a benchmark test assigning random numbers as a pseudo technical momentum rank, or pseudo
ranks. Using the Excel worksheets random number function, a
number between 0 and 1 was generated and multiplied by the universe size to determine a stocks pseudo rank. Stock performance
tests were then conducted in a manner consistent with the test procedure used to determine the performance of the technical momentum ranks. The data from this test is shown in Table 2. The
randomly generated performance ranks produced apparently random results within very tight performance boundaries. The results of the pseudo ranking test provide a benchmark in order to
evaluate whether our technical momentum model was the product
of a random process or identified a market anomaly that can be
exploited by investors. Performance that substantially exceeded
the randomly generated results, particularly at the decile rank extremes, added confidence in the validity of the momentum index
test results.
A comparison of the performance of the technical momentum
ranks versus the pseudo ranks strongly suggests that the predictive performance of the technical momentum rank was the result
of a process other than chance. We draw the same conclusion evaluating the average rank order correlation coefftcients of the technical momentum ranks (consistently above 0.75 with 99% of the ob
served individual cell rankings above 0.1) versus the correlation
coefficients produced by the pseudo ranks. As expected and
shown in Chart 3, the performance spread between the decile
rankings for the pseudo ranks was very narrow and the decile
performance showed a high tendency for convergence.
Cognizant of the academic arguments raised in the challenge
of Dr. Levys study, we then constructed a matrix that identified
the betas associated with the stocks grouped into the decile categories by their technical momentum rank. Table Four presents this
data. The betas shown were calculated as of September 30, 1999.
It was not practical to recreate the betas for June 25, 1999. Our
assumption is that the change in betas on a stock-by-stock basis
would be minor, as the beta calculation was made based on five
years of weekly price data for each stock and for the S&P 500.
The data provided an interesting twist. We expected to see rank
order correlation between the betas for each decile and the momentum index decile rankings. This would indicate that the stocks
with the highest estimated technical momentum would have the
highest betas and those with the lowest technical momentum would
have the lowest betas. The data did not confirm this hypothesis.
In fact, the data suggest a bi-modal distribution with the betas accelerating as one approaches the upper and lower decile ranking
levels. We did not expect the worst performers to have the second
highest decile beta rankings in the universe during the test period.
As a final test, we decided to compare the performance results
produced by the technical momentum rankings to those predicted
MTA JOURNAL
by the Jensen Modified Capital Asset Pricing Model (MCPM), a

benchmark test used to determine rational asset pricing. MCPM
states that an assets return is related to the risk free rate of return
plus the difference between market rate of return (S&P 500) and
the risk free rate of return times the beta of the specific security.
(Expected Individual Security Return = Risk Free Rate t (Market
Return - Risk Free Rate)* Individual Security Beta). If the differential is positive, an unexplained excess return is generated. Investors are being compensated for their unusual investment knowledge.
Table 3 presents the excess returns generated using the momentum rankings by decile over the test period, assuming various
holding periods and starting dates. The theory behind the MCPM
assumes that the return of the asset category will be a direct function of the asset categorys volatility as measured by beta. The data
shown below contradict that conclusion. The excess returns systematically decreased in direct proportion to the rank ordered position of the index in contradiction to the directional movement of
the average beta by decile position. This anomaly is certainly worth
exploring in more depth in the future as the momentum index
gains more ex post facto history.
Our hunch is that the anomaly partially reflects the fact that the
measurement period of the performance data is far shorter than
the time period used to calculate each individual stocks beta. We
believe betas calculated for a time period consistent in length with
the test period could have produced far different and more predictable results consistent with that expected using the MCPM.
Thus, we cannot make a strong assertion about the validity of the
Capital Asset Pricing Model when evaluated from the perspective
of this test protocol. The data do suggest that the technical price
momentum model successfully discriminated future price performance on a rank-order risk-adjusted basis during the test period.
FINALOBSFRVATIONS
The findings of this study are highly encouraging. The results
suggest that momentum as a market behavior force was much more
pervasive than we previously expected. Clearly, this is an investment style employed by enough participants in the market place to
impact security pricing behavior. We will continue to capture, test
and evaluate future results using the ability of the momentum index rankings to predict rank order stock performance behavior
over varying time horizons. In the future, we plan to evaluate the
performance of the technical momentum performance ranks on
the basis of market capitalization to determine if there is any small
or large cap bias and in combination with our fundamentally based
indicators. Our goal is to understand how well our published indicators work, why they work, to identify forecasting problems if and
when they occur and to encourage other practicing technical analysts to adapt a similar rigorous approach to testing the validity of
their model forecast on an ex-post-facto basis.
Table 2 - Average
XCumulative
Random
Selected
Portfolios
Jwle *9,1999 - Novembw 29.1sss
Holding Perk& (week*,
1
2
3
4
Table 1 - Average
Percent
Cumulative
Return
Per Holding
Period
Branch
Cabell
Equity
Advantage
Technical
Momentum
index
yomntvm
bdu
1
2
3
4
*vg
Bm
I.30
1.11
1.85
1.80
5
6
7
8
9
10
hcl*Ra*
""IvllY
Avg
swsm
HoldingPwiods(Wwks)
1
2
0.96
0.99
0.97
1.59
0.X
0.22
0.24
-0.27
-0.23
0.40
3 61
1.30
0.49
-0.26
-0.27
0.39
0.61
5.11
1.97
0.45
-0.16
-0.51
4.u
-0.91
6 55
2 36
036
4.49
-1.16
-1.10
-1 .A4
0.99
1.00
1.12
0.51
-0.58
6.73
-0.76
-0.49
-0.64
-0.75
-0.63
-1.13
-1.45
-1.44
-1.69
1 .os
1.00
6.07
0.35
C-Mm1
RSqurd
-piorS
0.87
0.76
22
4.q
Bob
1.30
1.11
1.05
1.00
0.96
0.99
8
9
10
"nh.ru
*rp
SW500
Holding
11
5
7.46
2.4,
0.61
-0.76
-1.43
-1.37
6
8.41
2.68
0.79
-0.93
-1.62
-1.59
7
9.29
2.83
0.44
-1.15
-2.34
-2.22
8
10.34
2.98
0.32
-1.68
-2.84
-2.74
-1.52
-1.65
-1.63
-2.19
-1.82
-1.95
-2.29
-3.16
-2.44
-2.75
-3.00
-3.55
-0.17
1.27
4.53
1.61
0.16
0.49
0.30
0.56
0.05
0.85
0.02
0.88
0.n
0.65
21
0.79
0.63
20
0.80
0.84
0.80
0.65
18
Paiods,Wccks)
12
13
19
I.
14.75
3.55
15
1602
16
18.04
4.96
0.16
-2.09
-3.91
4.92
-5.92
-5.M
-6.66
-6.57
4.88
0.29
-2.68
4.49
-5.55
-6.24
-5.37
-7.40
-8.40
13.43
3.69
13.01
2.66
13.54
2.91
-0.62
-1.67
-3.64
-1.55
-2.63
4.51
-1.01
-2.64
4.44
0.97
0.99
1.00
1.12
427
-5.49
-5.71
-625
-7.86
4.34
6.31
4.19
4.83
4.80
-5.47
-6.66
-6.30
-6.83
-8.97
-0.35
-2.76
4.25
-533
-6.71
6.06
-6.67
-6.66
1.05
1.00
-1.87
1.1,
-2.63
0.62
-2.59
1.25
-2.27
1.83
-1.61
0.12
0.86
0.73
0.88
0.74
carr
ca( ,R)
R squrmd
-r*StlOn
0.87
075
12
0.W
0.74
11
0.89
0.74
IO
0.83
0.68
17
9
11.53
3.71
0.52
-1.70
10
12.32
3.31
-0.14
-2.15
-3.35
-3.97
-3.58
-5.39
-2.66
-2.70
-3.66
-4.22
-426
-5.93
-3.59
-3.86
-4.62
-5.14
-5.55
-7.10
-0.99
1.85
-097
1.80
-1.67
1.39
0.83
0.89
16
0.85
0.72
15
18
17
22.01
7.22
2.12
-1.10
-3.12
4.20
0.88
0.74
14
19
29.65
6.10
25.06
-5.16
-4.75
4.86
-7.52
-1.71
1.83
-0.14
2.12
-2.64
3.16
6.78
403
0.01
3.77
0.84
0.70
0.84
0.71
0.80
0.64
0.76
0.61
0.79
0.63
-0.30
-3.29
-4.46
4.01
-6.27
-8.15
Rid
I.30
1.11
1.05
1.00
0.96
0.99
0.9,
8.99
1.08
1.12
Fe? Rate ,x,

YamDrn
Index
DeaeRnt
1
2
3
4
5
8
7
8
9
19
.bkFRcRab,X,
neu
1.38
1.11
1.05
1.08
0.98
8.99
0.97
0.99
1.00
1.12
-6.62
-7.57
-9.11
-6.06
-8.64
-8.24
3.25
0.95
0.14
-0.62
-0.52
-075
-1 17
-1 13
6.85
-1.19
4.85
I.50
-0.01
-0.85
-0.97
-0.90
-1 37
-1.21
-1.10
-1.59
5.98
1.78
-0.22
-1.07
-1.74
-1 .a
-2.02
-2 03
-2.02
-2.27
6.62
1.63
-00-I
-1.60
-2.27
-221
-2.36
-2 49
-2.47
-3.03
8.98
1.45
-0.84
-2.38
-3.05
-3 43
-3.25
-338
-3.72
4.59
7.18
0.72
-1.87
-3.26
4.45
-4 33
4.55
4.88
-5.11
6.06
7.66
0.32
-2.34
4.33
-5.50
-5.39
-6.00
-6.63
-6.23
-8.05
9.10
1.28
-1.91
4.13
-539
-5.21
-8.09
-6.65
-689
-6.36
0.11
0.22
0.34
0.45
0.56
0.87
079
0.90
101
113
1.24
1.35
1.47
158
Y-DI
hd
ce2n walk
17
19.67
4.67
-0.23
-345
-546
-6.54
-7.52
-7.09
-9.21
-9.87
18
IS.38
-1.70
-7.27
-934
-945
-11.34
-13.25
-13.54
-15.70
-1497
19
19.92
-3.82
-10.03
-13.02
-14.18
-13.73
-16.M
-17.88
-18.84
-17.73
I.69
1.81
192
2.04
2.15
.o.P
4.06
-017
OM
0.05
-010
0.14
-020
-0.06
-0.03
4.03
0.13
0.18
4.34
-0.08
6.17
0.12
0.22
0.01
4.08
8
0.W
-0.43
4.07
6.35
0.w
-0.01
0.24
4.17
0.07
0.09
8
0.22
0.07
0.09
-0.14
-0.01
0.10
0.57
0.21
0.40
0.18
7
0.27
-!I06
0.22
-0.37
-0.19
4.09
0.41
0.06
0.55
0.04
8
4.12
4.18
4.17
0.41
-x?o
0.26
010
-0.05
0.33
421
9
-0.69
4.35
-0.47
0.86
-0.56
-0.2a
-0.13
-0.03
-0.12
-0.62
19
-0.88
4.62
-1.02
-1.22
-0.92
0.79
0.68
-0.39
-0.57
092
0.18
0.35
0.11
0.49
-0.06
0.56
-0.11
0.65
4.07
0.86
0.15
1.27
0.W
1.61
0.12
1.85
-0.40
1.80
-0.80
1.39
-0.22
005
P
4.1.
0.02
21
4.37
0.14
M
-0.21
0.05
19
-0.51
0.26
18
4.49
0.24
17
47.7
0.07
16
4.44
0.19
15
-0.83
026
14
a.37
0.14
13
14
-0.83
-1.56
-1.50
-126
-1.49
-1.93
-1.56
091
-1 .a
0.33
15
-0.08
-1.46
-2.35
4.89
-1.31
-1.84
4.85
-040
-1.10
-2.07
16
0.76
-1.42
-1.09
-0.64
4.85
-0 15
0.07
0 *8
4 49
-0 70
17
2.05
-0.92
0.45
020
0.16
0.75
0.41
0.89
-c.os
0.11
I8
-0.96
-0.20
-0.52
0.38
-1.78
0.39
2.53
0.07
1.99
-0.35
19
-1.56
-1.49
-1.95
-1.70
-2.45
-1.07
1.69
-1 89
-0 19
-1.50
20
0.37
1.08
0.91
2.46
-1.11
1.85
337
172
416
080
6.42
1.83
0.36
2.12
0.16
3.18
-1.16
4.03
149
3.77
26. wss
-I 18
1.11
-1.79
0.62
-2.11
1.25
-1 32
1.83
-1.22
0.12
-0.70
0.49
12
4.35
0.13
11
4.21
0.04
0.02
0.W
0.15
0.02
1
2
6mm7lm9
1.39
1.17
3
4
5
8
1.06
1.04
0.92
1.08
7
8
9
IO
0.96
0.91
0.97
0.98
1
16
18.19
3.03
-1.56
4.73
6.34
-7.40
4.08
-7.22
-9.25
-10.25
-0.01
0.22
0.09
0.12
0.13
002
0.25
6.13
0.18
0.21
Table 4 -Average
1.39
0.31
0.03
4.43
6.47
6.42
-0 59
-071
0.78
0.93
15
14.52
3.46
-1.32
-3.56
-5.42
-8.43
-7.42
-6.70
-6.16
-10.07
Period
10
.0.04
0.W
8
0.04
0.00
7
4.07
0.W
6
0.01
0.00
5
0.03
0.00
4
10
10.83
1.82
-1.63
-3.64
-5.08
-5.35
6.32
-6.83
-7.04
-8.59
June 28,1sss
- novmnba
29.1sss
SWeekr
in H.,ldi"g
Paid
1,
12
13
14
12.33
12.09
12.35
12.7,
2.79
1.96
1.71
1.51
-1.72
-2.46
-22Q
-2.38
-2.97
-3.5-I
-3.83
4.80
-5 04
-543
-5M
-623
-5.37
6.26
466
-737
4.59
-7.22
-7.85
-6 75
-8.80
-7 If
-7.50
-8.12
-7.34
-7.75
402
-871
-8.95
-9.72
-10.17
-10.92
Per Holding
0.07
0.17
0.30
027
0.01
0.15
0.24
-0.01
0.19
040
June
25. lsss
. Nonmbdr
Holding
Periodr
,Waeks,
11
12
I,
-1.28
-2.02
-1.83
-1.16
-1.92
-2.36
-1.55
-1.65
-1.96
-1.70
-2.25
-2.23
-1.16
-1.31
-2.17
-1.10
-1.99
-2.53
-1.11
-1.93
-2.47
-091
1.49
-1.74
-0.95
-1.50
-1.88
-0.86
-1 64
-1.88
20
32.17
6.35
129
-1.46
-5.94
-3.26
3.97
-1.59
-3.67
-3.77
-5.66
-7.57
-7.86
-10.02
-9.30
Table 3 -Average
Percent
Excess
Cumulative
Return
Per Holding
Period (Modified
Capital Asset Pricing Mode0
lhnaw,m
Jne28,1ssstkmmbrzs, ,999
Ihl4.X
I! w&w in lwcong Paiad
Dc*Ran. Eda
1
2
3
4
8
8
7
(I
9
1
2
3
4
5
8
7
8
9
10
0.86
0.74
13
Return
20
24.23
0.4,
-6.65
-940
-13.88
-11.20
-14.56
-15.51
-16.55
-16.16
9/3/999/1049
1.39
7ms9
m&99
141
1.14
1.36
1.25
1.36
1.21
113
1.04
1.03
096
0.85
1.10
1.07
1.07
1.07
1.18
1.07
1.07
1.01
0.96
0.93
0.84
1.0-I
1.02
0.93
0.86
1.04
0.92
0 92
0.96
9/17/9$
141
2
3
4
5
6
7
1.11
1.06
0.95
0.94
0.96
0.94
1.14
102
0.94
0.91
0.97
0.97
8
9
IO
0.98
0.97
1.14
0.99
1.01
1.10
9mlss
Relatlve
7rzYgg
1.2,
1.07
7136
to the Market)
8m99
1.15
1.06
1.21
1.04
1.06
1.02
6/13m8120199wz7199
1.23
1.22
1.09
1.06
1.32
1.15
1.03
0.98
1.01
0.94
0.92
0.97
0.94
0.91
1.01
0.98
1.02
0.69
1.05
1.03
0.93
0.95
0.95
0.96
0.96
0.95
0.90
1.00
0.99
0.92
0.91
1.05
1.02
1.07
1.20
1.08
1.08
1.24
1.06
1.01
1.22
0.97
1.03
1.16
1 01
1.04
1.14
1.28
1.13
1.03
147
1.09
1.03
10/1/99
1owss
1.36
1.09
1.03
0.95
1.26
1.09
097
1.05
1.18
0.97
1.04
0.94
124
1 10
1.02
0.99
0.89
0.93
0.94
0.95
1.06
1.03
0.90
1 .Ol
0.97
1 .oo
1.10
1.12
1.00
1.01
1.03
1.16
I.00
1.00
1.03
1.16
0.99
1.01
107
1.15
1omms10n2i9s1o/zn991115199
1.22
1.26
1.04
1.w
1.01
1.02
1.06
0.97
0.88
1.07
1.03
1.01
0.96
0.95
0.98
1.03
1.05
0.94
0.98
0.97
1.03
0.99
0.98
0.91
1.01
1.04
110
096
094
0.93
0.99
1.13
1.14
1.02
1.14
1.04
1.10
0.94
1.06
BIOGRAPHY
2.26
REI%RENCES
I Robert A. Levy, Random Walks, Realty or Myth, Financial AnalystsJouma1 (November-December 1967a).
I Michael C. Jensen and George A. Bennington, Random Walks
and Technical Theories: Some Additional Evidence, The Journal ofFinance, XXV, No. 2 (May 1970).
MTA.JOURNAL
Betas (Volatility
Frederic H. Dickson, CMT is Managing Director of Researchat Branch Cabell& Co., Inc., in Richmond,VA. Fred is
a pastPresidentof the Market TechniciansAssociation(1983
1984), servedfor many yearsasthe Educational Committee
Chairmanof the MTA and authored the first set of test questions selectedfor usein the CMT Level I examination. Fred
hasservedasan Adjunct AssistantProfessorof Financeat the
University of Richmondand asan Instructor at the NewYork
Institute of Finance. He has contributed severalarticles in
the pastto the MTA Journal. He presently publishesa daily
and weekly market comment and the Branch Cabell Equity
Advantage Databasefor an institutional audience.
winter - Sntincrennn
14
MTA JOURNAL
Winter - Spring2000
SCIENCEIS VALIDATINGTHECONCEPTOF THE

WAVEPRINCIPLE
RobertR. Prechter,Jr., CMT
New discoveries in the field of complexity theory, fractal geometry, biology and psychology are rapidly yielding more knowledge
bolstering the probability that the Wave Principle is a correct description of financial and social reality. This report provides a cursory overview of some of these advances.
To understand the connection between todays scientific discoveries and the Wave Principle, it is necessary to describe it in
modern terms. In the 1930s Ralph Nelson Elliott (1871-1948),
through extensive empirical observation, discovered that price
changes in stock market indexes produce a limited number of definable patterns (called waves) that are variably self-affine at different degrees, or sizes, of trend. As opposed to self-identical fractals,
whose parts are precisely the same as the whole except for size (see
example in Figure l), and indefinite fractals, which are self-similar
only in that they are similarly irregular at all scales (see example in
Figure 2), Elliott proposed a model of intermediate specificity.
Though variable, its component forms, within a defined latitude,
are replicas of the larger forms. Waves have event-specific relutiue
quantitative properties, as do self-identical fractals, but they are
unrestricted in absolute quantitative terms, like indefinite fractals.
The fact that both waves and (as we shall soon see) natural branching systems are fractals of intermediate specificity impliesthat nature
usesthis fractal style to pattern systemsthat require highly adap
tive variability in order to flourish. Therefore, I think the bestterm
for this variety of fractal is robust fractal. As we shall see,this is a
form that living structurestypically display.
The essentialform of the WavePrinciple is five wavesgenerating net progressin the direction of the one larger trend followed
by three wavesgeneratingnet regressagainstit, producing a threesteps-forward,hvo-steps-back
form of net progress.The 5-3pattern
is theminimum requirement for, and therefore the most efficient
method of, achievingboth fluctuation and progress in linear movement.
Elliott describedhow wavesat eachdegreebecomethe components of wavesof the next higher degree,and so on, producing a
structured progression,asillustrated in Figure 3. The word degree hasa specificmeaningand doesnot meanscale. Component wavesvary in size,but it alwaystakesa certain numberof them
to create a waveof the next higher degree.Thus, each degreeis
identifiable in termsof its relationshipto higher and lowerdegrees.
This is unlike the infinite scalingrelating to cloudsor seacoasts
and unlike the discretescaleinvariance?of simplefractals created
by recursive interpolation such as the snowflakein Figure 1. By
incorporating features of both, Elliott describeda third type of
fractal, which we will shortly explore.
Benoit Mandelbrot, an IBM researcherand former professorat
Harvard, Yale and the Einstein Collegeof Medicine, did pioneering work bringing to light the fact that fractals are everywherein
nature.3 The term nature in this context includesthe activities
of man, asMandelbrot beganby studying cotton pricesand most
recently presenteda multifractal model of the stockmarket. This
excerpt from a 1985article in TheNeu Yorki%ressummarizeshis
exposition on the subjectof financial fractals:
Daily fluctuations are treated [by economists]one way,while
the great changesthat bring prosperity or depressionare
Figure 1: IF1
c.
(source: The Fractal Geometryof Nature)

Figure 2: Indefinite Fractal
(source: http://gordonr.simplenet.com)
thought to belong to a different order of things. In each

case,Mandelbrot said, my attitude is: Lets seewhats different from the point of view of geometry.What comesout
all seemsto fall on a continuum; the mechanisms
dont seem
to be different.6
This is alsowhat R.N. Elliott saidabout the stock market sixty
yearsago.Somemembersof the scientificcommunityhaverecently
recognized the connection. Three physicistsresearchedthe stock
marketslog-periodicstructuresand concluded that R.N. Elliotts
model of financial behavior fits their findings. In 1996,Frances
Journal of Physics publishedthe study, Stock Market Crashes,PrecursorsandReplicasby Didier SornetteandAndersJohansen,then
of the Laboratoire de Physiquede la Matiere Condenseeat the
University of Nice, France, and collaborator Jean-Phillippe
Bouchaud.The authors makethis statement:
It is intriguing that the log-periodic structuresdocumented
here bear somesimilarity with the Elliott wavesof techni-
MTA JOURNAL Winter- Spring2000

l
Fractal
15
cal analysis [citation EZliott WavePtincipk Frost & Prechter] .

Technical analysis in finance can be broadly defined as the
study of financial markets, mainly using graphs of stock
prices as a function of time, in the goal of predicting future
trends. A lot of effort has been developed in finance both
by academic and trading institutions and more recently by
physicists (using some of their statistical tools developed to
deal with complex times series) to analyze past data to get
information on the future. The Elliott wave technique is
probably the most famous in this field. We speculate that
the Elliott waves . .. could be a signature of an underlying
critical structure of the stock market.5
Mandelbrots work supports this conclusion. For example, every aspect of Mandelbrots general model, as presented in Scientific
Am&an,* fits Elliottsspecificmodel,and no aspectof Mandelbrots
general model contradicts Elliotts specific model. Mandelbrots
work in this regard should properly be seenas compatiblewith,
and therefore support for, Elliotts more comprehensivehypothesisof financial market behavior. We mustalsoconcedethe possibility that Elliotts specific model will be proven falseand that financial marketswill ultimately be shownto be indefinite fractals,
which isasfar asMandelbrotswork goes.At minimum,though, it
may be said that Mandelbrots studiesare among a number of
modem discoveriesthat increasethe probability that RN. Elliotts
fractal model of financial marketsis true.
A year after this study (one hopesthat it wasnot in response
to
it), Mandelbrot publisheda brief dismissal
of Elliott and hiswork,
deriding his predecessorand taking credit for modeling the stock
marketasa multifractal. (SeePrechtersResponse
of Mandelbrots
Dismissalof Elliott at www.elliottwave.com/response.htm)Advocatesof the WavePrinciple are not particularly interestedin this
controversypersebut in the far more important fact that a renowned
Figure 3: Elliott sfractal model

A
(5)
Owwlme~R-
(source: Elliott
Wave Principle)
Figure 4: The subdivision of waves rep-educes the Fibonacci sequence

Bear
Bull
Both
/
Bear
3,5,8
properly or otherwiseis a questionfor the scientificcommunity to

decide, but the key point is that this very situation is yet another
fact that increasesthe potential validity of the WavePrinciple hypothesis.
Bear
THEROBUSTFRACTAL
It is imperative to understandthat R.N. Elliott went fur beyond
the comparativelysimpleidea that financial pricesform an indefinite multifractal. One of hisbig achievementswasdiscoveringspecific component patterns within the overall form.g Until very recently, it hasbeen generally presumedthat there are two types of
self-similarforms in nature: (1) self-identical fractals, whoseparts
are preciselythe sameasthe whole, and (2) indefinitefractalr, which
are self-similaronly in that they are similarlyirregular at all scales.
(SeeFigures1 and 2.) The literature on natural fractalsconcludes
that nature mostcommonly producesindefinite fractal forms that
are orderly only in the extent of their discontinuity at different
scalesand otherwisedisorderly. Scientific descriptionsof natural
fractalsdetail no specificpatternscomposingsuchforms. Seacoasts
are just Yjaggedlines, trees are composedsimply of branches,
rivers but meander, and heartbeatsand earthquakesare merely
events that differ in frequency. Likewise,financial marketsare
consideredto be self-similarlydiscontinuousin the relative sizes
and frequencies of trend reversals yet otherwise randomly
patterned. Theseconclusionsmay be due to a shortfall in empirical study rather than a scientific fact.
R.N. Elliott describedfor financial marketsa third type of self-
MTA JOURNAL
182
Bull
scientist has decided that at least one implication of Elliotts work is so

impwtant that he wants creditfm it. Whether that credit isto be taken
16
1,
Bull
etc.
(source: Elliott
Wave Principle)
similarity. By meticulouslystudyingthe natural world of socialman

in the form of graphsof stock market prices, Elliott found that
there are specific patterns to the stockmarket fractal that are neverthelesshigh4 variable within a certain definable latitude. In other
words,someaspectsof their form are constant and others are vatiabG If this is true, then financial markets,and by extension, social systems
in general,are not vague,indefinite fractals. Camp+
nent patternsdo not simplydisplaydiscontinuity similarto that of
larger patterns,but th f&m, with a certain latitude, r@icas of them.
Elliott defined wavesin termsof thoseaspectsthat makethemidentical, thereby allowingfor their variability in other aspectsof detail
within the scopeof thosedefinitions. He waseven able to define
someof the patternsvariablecharacteristicsin probabilisticterms.
Elliotts discoveryof degreesin pattern formation, i.e., that a cer-
* Mrinter- Spring2000
tain number of waves of one degree are required to make up a

wave of the next higher degree, is vitally important because it links
the building-block property of self-identicalfractals to the Uave Principle, revealing an aspect of self-identity among waves that indefinite fractals do not possess.
Elliotts discovery of specific hierarchical patterning in the stock
market is fundamental. Fractality alone is only a vague comment
about that form. Zfpou can describe the pattern, you haue the essenceof
the object. The more meticulouslyyou can describethe pattern, the
closeryou get to knowingwhat it is.
Although Elliott cameto his conclusionsfifty yearsbefore the
newscienceof fractalsblossomed,the very ideathat financial marketscomprisespecificformsandidentical (within the scopeof their
definitions) componentformsremainsa revolutionary observation
because,to this day,it haseludedother financial market researchersand chaosscientists.Elliotts work showsthat the generalrelationshipbetweensizesand frequenciesof financial movements,currently considereda breakthrough discovery,isnot the essence,but
a by-product, of the fundamentalsof financial market patterns.
A group of scientists(seebelow) hasvery recently recognized
that there isa type of fractal in nature whose self-similarityisintermediatebetweenidentical and indefinite. As far asI know, theirs
is the only publishedstudy on the subject. Before we discussthis
new aspect of Wave Principle validation, we first must detour
through another of R.N. Elliotts discoveriesand understandhow
it contributesto his grand hypothesis.
THE ROLEOFFIBONACCIIN ROBUSTFRACTAIS

Becausethe essentialform of the wave Principlesis a repeated
5-3,the numbersof wavesat different degreesreflect the Fibonacci
sequence.The Fibonaccisequenceis 1, 1, 2, 3,5, 8, 13, 21, 34, 55,
and so on. It beginswith the number 1, and eachnew term from
there is the sumof the previoustwo. The limit ratio betweenthe
terms is .618034..., an irrational number sometimescalled the
golden mean but in this century more succinctlyphi (4).
The simplestexpressionof a falling wave is 1 straight-linedecline. The simplestexpressionof a risingwaveis 1 straight-lineadvance. A completecycle is 2 lines.At the next degreeof complexity, the correspondingnumbersare 3,5 and 8 (seeFigure 4). This
Fibonaccisequencecontinuesto infinity.
Both the Fibonacci sequenceand the Fibonacci ratio appear
ubiquitously in natural forms ranging from the geometry of the
DNA moleculeto the physiologyof plantsand animals.Figures5
and 6 showexamples.(For more, seeChapters3 and 11 in The
Wave Principle of Human Social Behavior.) In the pastfew years,science hastaken a quantum leap in knowledgeconcerning the universalappearanceandfundamentalimportanceof Fibonaccimathematicsto nature. Uithout the benefit of that knowledge,after researchingthe subjectto the smallextent possibleat the time, Elliott
presentedthe final unifying conclusionof his theory in 1940,explaining that the progressof wavesis governedby a mathematical
principle that governsso many phenomenaof life. From this ob
servation,he concluded that the progressof mankind is the same
type of growth processthat we seein so many instancesthroughout nature.
Modern scienceis catching up to R.N. Elliott. In 1993,five scientistsfrom the Centre de RecherchePaul Pascaland the Ecole
NormaleSupeieurein Franceinvestigatedthe diffusion-limitedaggregation (DLA) model,which isa setthat diffusesvia smallerand
smallerbranches,just like the branching fractalsfound in nature,
suchasthe circulatory system,bronchialsystemand trees. Arneodo
Figure 5: Fibonacci subdivisions in the hand
(source: The Power of Limits)

et al. stateat the outsetthat it isan open
questionwhether or
not somestructural
order is hidden in
the apparentlydisordered DLA morphology. To investigate the question, theyusea wavelet transform microscope to examine
the intricate fractal
geometry of largeThediagramabove
reveaisthedoublespiralingofthedaisy massoff-lattice DLA
head.Twooppositesetsof rotatingspiralsare formedby the clusters. (See Figarrangement
of theindividualfloretsin thebead.Theyarealso
near-perfect
equiangular
spirals.Thereare21 in theclockwise ure 7.)
What mathematdirectionand34 counterclockwise.
This21:34ratiois composedof twoadjacenttermsin themysterious
Fibonaccise- ics govern this roquence.(source:Mathematics)
bust fractal? In the
first linking (asfar as
I can discover) of the two conceptsof fractals and Fibonacci since
Elliott, they demonstratethat their researchrevealsthe existence
of Fibonaccisequences
in the internal extinct region of theseclusters. The authors find that the branching characteristicsof offlattice DLA clustersproceed according to the Fibonacci recursion
law,i.e., theybranch in intervalsto produce a l-2-35-8-13-etc.pro
gressionin the number of branches.The authorsof this study,then,
havefound the Fibonaccisequencein DLA clustersin the samplace
that RN. Elliott found the Fibonacci sequence in the WavePrinci$tz in
the increasing numbers of subdivisions as the phenomenon
progresses.
The authorsfind even more evidenceof Fibonacci.They have
discoveredthat the most commonly occurring screeningangle
betweenbifurcating branchesof theseDLA clustersis 36 degrees,
which holdsregardless ofscale.(SeeFigure8.) This isthe ruling angle
of geometricphenomenathat displayFibonacci properties, from
Figure 6: A SpirabdFlower
MTA JOURNAL t Minter- Spring2000
17
the five-pointed star (Figure 9) to Penrose tiles (Figure lo), a robust filling of plane-space with just two rhombi. The authors elaborate:
The intimate relationship between regular pentagons and
Fibonacci numbers and the golden mean 4 = 2cos(x/5) =
1.618... has been well known for a long time. The proportions of a pentagon approximate the proportions between
adjacent Fibonacci numbers; the higher the numbers are,
the more exact the approximation to the golden mean becomes. The angle defined by the sides of the star and the
regular pentagons is 6 = 36, while the ratio of their length
is a Fibonacci ratio (F,+l/F,).
The authors conclude, The existence of this symmetry at all
sca2RF
is likely to be a clue to a structural hierarchical fractal ordering. Indeed, it is. In a similar way, Elliott found that the price
lengths of certain waves are often related by .618, at all scales, revealing another, though perhaps less fundamental, Fibonacci aspect of waves.
These mathematics pertain to apparently randomly branched
fractals that bear a striking resemblance to the tenuous tree-like
structures observed in viscous fingering, electrodeposition, bacterial growth and neuronal growth, which are strikinglv similar to
trees, root systems, algae, blood vessels and the bronchial architecture, i.e., the typical products of nature.
This is exciting news,but it concernsa model that looks like
nature. What do we find whenwe investigatethe actualproductsof
nature?Wefind phi againand again. In the early 196Os,Drs. E.R.
Weibel and D.M. Gomez meticulouslymeasuredthe architecture
of the lung (seeFigure 11) and reported that the mean ratio of
short to long tube lengths for the fifth through seventhgenerations of the bronchial tree is 0.62, the Fibonacci ratio.* Bruce
Westand Ary Goldbergerhavefound that the diametersof the first
sevengenerationsof the bronchial tubesin the lung decreasein
Fibonacci proportionn Oxford professorof mathematicsRoger
Penrose,who sharedthe Wolf Prize for Physicsin 1988with cosmologistStephenHawking,presentsthis discussionof the smallest
componentsof our nervoussystemin his 1994book, Shadows of the
Figure 8
?i
Histogram
of screening
anglevaluesatthebranchingbifurcations
in thewave/et
transform
representation
of4 off-lattice
DLAclusters;threemagnifications
a1(black),(2.2)a-(grey)and(Z.Zya7(c/ear)areshown,corresponding
respective/y
to threesuccessive
generations
of branching.A
sing/emaximumis observed
for%- 36. (source:GrowthPatternsin PhysicalSciences
and
Biology)
Fipre 9: Fibonucci in the 5-painted star
Mind:
The organization of mammalianmicrotubules is interesting from a mathematicalpoint of view. ...the skewhexagonal pattern... ismadeup of 5 right-handedand 8 left-handed
helical arrangements...The number 13 features here in its
role as the sum: 5 t 8. It is curious, also, that the double
microtubules that frequently occur seemnormally to have
(source:The Power of Limits)

Figure 10: Fibonucci in Penrose tiles
100
36'
Figure 7: Tlz DLA
(source: Growth Patterns in

Physical Scienm and Biology)
18
(source:Bull. Inst. Math. & its Afifil., Vol 10)
MTA JOURNAL
Winter - Spring2000
72'
Fimre 14: Neurons have a Fibonacci Fractal dimension
Fieure 11: Robust fiactal architecture of the human lung
(source: http://polymm
bu. edu/)
Figure 15: Fibonacci in DNA
.618
(source: Lung
.382
Structure)
Figures 12 & 13: Fibonacci organizationof mammalian microtublw
(source: Brain/Mind
(source: Shadows
of the Mind)
a total of 21 columns of tubulin dimers forming the outside boundary of the compositetube - the next Fibonacci
number! [See Figures12 and 13.1
Led by EugeneStanleyof BostonUniversity,fifteen researchers
from MIT, Harvard and elsewhererecently studiedthe physiology
of neurons (seeFigure 14) in the central nervoussystemwith the
goal of quantifying the arboration of the neurites,which are the
arba of neurons. Taking the ganglion cells of a cats retina asa
model system,they find that the fractal dimensionof the cellsis
1.68-t or- 0.15usingthe box counting method and 1.66-t or- 0.08
usingthe correlation method.15Although the authorsdo not mention it, this is quite closeto phi. The sourceof all thesebiological
structuresis DNA. Given current bestmeasurements,
the length of
one DNA cycleis 34 angstroms,and its height is 20angstroms,very
MTA JOURNAL
Bulletin,
June 1987)
nearly producing the Fibonacciratio (seeFigure 15).

Stanley et al note parenthetically in their power-law
study, The DNA walk representationfor the rat embryonic skeletalmyosinheavychain gene [has a long
rangecorrelation of] 0.63,16
which againisquite close
to phi. Living systems,then, are permeatedwith phC
basedstructures.
Recallthat eachpattern under the WavePrinciple
has identifiable rigidities aswell as tendencies.
This is
true not only of Elliott wavesbut of naturesbranching patterns.While the general assumptionhasbeen
that branching patterns are indefinite fractals, this
study showsthat theseapparently random fractals are in fact more
o-rderl~ than@viously realized. Indeed, Arneodo, et al. determinethat
they are working with a type of fractal that scientistshad not yet
found, an intermediateform betweenexactself-identityandvague,
indefinite self-similarity:
The intimate relationship betweenregular pentagonsand
Fibonacci numbers and the golden mean...hasbeen well
known for a long time.... The recent discovery of quasicrystalsin solid statephysicsis a spectacularmanifestation
of this relationship. This new organization of atomsin solids, intermediate between perfect order and di.sor&, generalizes
to the crystalline forbidden symmetries,the properties of
incommensurate structures. Similarly, there is room for
Winter- Spring2000
19
market crashes,precursorsand replicas.Journal de Physique I
quasaj%actal.s between the well-ordered fractal hierarchy of snowflakes and the disordered structure of chaotic or random aggregates.
France6, No.1, pp. 167-175.
8 Mandelbrot, B. (1999, February.) A multifractal walk down

Wall Street. Scientific American, pp. 70-73.
9 Elliott, R.N. (1938). The wauepinciple. Republished:(1994).
RN. Elliotts Masterworks - The Definitive Collection. Prechter,Jr.,
Robert Rougelot. (Ed.). Gainesville,GA: New Classics
Library.
10 Elliott, R.N. (1940, October 1). The basisof the wave principle. Republished:(1994). RN. Elliotts Master-works - The Definitive Collection. Prechter, Jr., Robert Rougelot. (Ed.).
Gainesville,GA New Classics
Library.
11 Arneodo, A., Argoul, R. Bacry,E., Muzy, J.F. and Tabbard, M.
(1993).Fibonaccisequences
in diffusion-limitedaggregation.
Growth Patterns in Physical Sciences and Biology, edited by Juan
Manuel Garcia-Ruiz,Enrique Louis,PaulMeakin and Leonard
M. Sander.NewYork: PlenumPress.
12 Weibel,E.R. (1962).Architecture of the humanlung. Science,
No. 137 and (1963) Morphometry of the human lung. Academic
Press.
13 West, BJ. and Goldberger,AL. (1987,Jul/Aug). Physiology
in fractal dimensions.American Scientist, Vol. 75.
14 Penrose,R. (1994). Shadows of the mind - a search for the missing
science of consciousness. Oxford University Press.
15 Stanley,H.E., Buldyrev, S.V., Caserta,F., Daccord, G., Eldred,
W., Goldberger,A., Hausman,R.E., Havlin, S., Larralde, H.,
Nittmann, J., Peng,CK, Sciortino, F., Simons,M., Trunfio, P.,
and Weiss,G.H. (1993). Fractal landscapes
in physicsand biology. Growth patterns in physical sciences and bioloa. Sew York:
PlenumPress.
16 Ibid.
17 Arneodo, A., et al. (1993). Fibonacci sequencesin diffusionlimited aggregation. Growth patterns in phyical sciences and
This is the sametype of intermediately ordered fractal that

R.N.Elliott describedfor the stock market. I concludefrom these
studies and the Wave Principle that fractals that characterize
natureslife forms shareat leasttwo properties:robustness(intermediateorderliness/variability) and Fibonacci. I prefer the term
robust fractal to quasi-fractal,asits connection to natural, usually
living, phenomenaindicatesthat there is nothing quasiabout it. I
believethat robustnesswill prove to be the essenceof fractalsthat
matter mostin nature.
CONCLUSION
The latestscientific researchis racing headlongtowardvalidating the concept of the WavePrinciple, and not just in its simple
expressionasa financialmultifractal. It isalsosupportingitsgrander
implicationsthat naturesliving fractals are robust, that they are
governedby Fibonacci,that one of them governsthe entire activity
of socialman, and therefore that the mathematicalbasisof mans
socioculturalprogressand of other natural growth systemsis the
same.
The level of aggregatestockpricesis not a m _ tiqsity but a
direct and immediatemeasureof the popular valuation of mans
total productive capability.That thisvaluation hasaform isa fact of
profound implicationsthat shouldultimately revolutionize the social sciences.
ENDNOTE:
THEMENTATIONALCONNECTION
It is alsopossibleto link Fibonacci-basedrobustfractalsin biology to a Fibonacci-basedunconscioushuman mentation that governs impulsive herding behavior. This link completesa tentative
explanation of how the WavePrinciple is produced. For an introduction to this subject,pleaseseethe companionreport, Science
Is Revealingthe Mechanismof the WavePrinciple.
biology.
NOTES
1 Fractal objectswhosepropertiesare not restricted displayselfsimilarity, while thosethat develop in a direction suchasprice
graphsdisplayselfafjnity. The term self-similaris often employed more generallyto conveyboth ideas.
2 For more on this topic, seeJohansen,A. (1997, December).
Discrete scaleinvariance and other cooperativephenomena
in spatiallyextended systems
with threshold dynamics(Ph.D.
Thesis).Somette,D. (1998).Discretescaleinvarianceandcomplex dimensions.Physics Reports 297, pp. 239-270.
3 Mandelbrot, B. (1988). The fractal geometry of nature. New York:
W.H. Freeman.
4 Mandelbrot, B. (1962). Sur certains prix speculatifs: faits
empiriqueset modelebasesur lesprocessus
stablesadditifs de
Paul Levy. Comptes Rendus (Paris): 254, 39683970. And
(1963). The variation of certain speculativeprices. oumal of
Business:
36,394419.Reprintedin Cootner 1964:29i -337.University of ChicagoPress.
5 Mandelbrot, B. (1999, February.) A multifractal walk down
Wall Street. Scientific American, pp. 70-73.
6 Gleick,J. (1985,December29). Unexpected order in chaos.
This World.
18 Clouds and mountains,which are indefinite fractals, have a

Hurst exponent near 0.8. Neurons(which grow as branching
fractals) and the stock market (which growsas waves)have a
Hurst exponent related to phi. Thesestudiesprompt me to
suggestthe hypothesis that fractal objects that manifest as
branchesor waves,i.e., the fractal objectsof growth and expansion, will have a Hurst exponent related to phi, setting them
apart from other fractal objects,which will have other Hurst
exponents.What this meansis that robust fractal objects split the
difference between two Euclidean dimensions by .618, while other
fractal objectsdo not. In other words,PhCrelateddimensionality is a property only of robust fractals.
BIOGRAPHY
Robert Prechter first heard of the WavePrinciple in the
late 1960swhile studying psychologyat Yale. In 1976,while at
Merrill Lynch in NewYork, Bob beganpublishingstudieson
the WavePrinciple. In 1978,co-authored,with AJ. Frost,Elliott
Wave Principle-?@
To Market Behavior, and in 1979,started The
Elliott Wave Theorist, a publication devoted to analysisof the
U.S. financial markets. In November1997,Bob addressedthe
International Conferenceon the Unity of the Sciences(ICUS)
in Washington,DC, an international forum on interdiscipiinary scientific issues.The paper he presentedat that conferencewaslater expanded into his mostrecent book, The Wave
Principle of Human Social Behavior and the New Science of
Socionomics, which waspublishedin 1999.
7 Sornette, D., Johansen,A., and Bouchaud,J.P. (1996). Stock
20
MTA JOURNAL
Winter- Spring2000
THE INTERACTION OF TRENDINESS hhA!WRES AND

TECHNICAL INDICATORS
BasilPanas,CFA,CPA,CMT
Pm I.
PART II.
INTR~Du~~N
Background. Technical analysis has produced a plethora of indicators. Textbooks often classify them according to computational
input: price, time, volume and sentiment. Practitioners need a
taxonomy, which relates indicators to market phases. The art of
technical analysis involves matching indicators with changing market conditions. Prices go through periods of trending and nontrending. The implications of this are profound. Investors and
traders must distinguish between trending and trading markets and
adjust their trading tactics accordingly.
Definition of Trendiness. Although they are related, trendiness
and volatility are different phenomena. A trend exists when prices
are making higher highs and higher lows (uptrend) or lower highs
and lower lows (downtrend). Trend is thus a function of the directionality of price changes. Volatility is a function of the size of price
changes. Thus a strongly trending market displays both trendiness
and volatility. However, a wide trading range displays little
trendiness but much volatility. Finally, a very tight trading range is
an example of low trendiness and low volatility.
If market participants are to rely on different indicators depending on the trendiness of the market, they need to measure the directionality of price changes.
Hypothesis. This work proposescoordinating trend-following
and counter-trend indicators usinga measureof trendiness. The
measurewould characterizeprice action astrending or non-trending and thus selecta trend-following or counter-trend indicator.
The dangeristhat multiple indicatorsdilute eachotherseffectiveness.The promiseis that they becomesynergisticcomplements.
Theoretical Model. A simpleregime-switchingmodelwasused
to test the hypothesis. The model addressedthree issues:how to
trade in trending markets,how to trade in non-trending markets
and how to distinguishbetween the two. Successdependedon
harmonizing the solutionscomponents.
The model employedexponential moving averages(EMA) for
trending and WellesWilders Relative Strength Index (RSI) (see
bibliography) for non-trending markets. The Directional Relative
Volatility Index (DRVI) describedby Robert M. Barnes(seebibliography) measuredthe marketstrendinessor directionality and
dictated whether EMA or RSI signalswere taken.
TestingMethodology. The test subjectswerethe 30 stockslisted
in the appendix. They consistedof daily pricesover various fiveyear periods. The stocksweredivided into three groupsaccording
to their characteristic price action: trending, non-trending and
mixed.
The benchmarktestsconsistedof EMAs and the RSI over lookback periods of 10, 20, 30 and 40 days. The hypothesistestsincluded thesetwo indicators and the DRVI. The DRVIs look-back
period was20 days. Its trendinessthresholdwas0.5.
The testswere averagedfor evaluation purposes. The limited
number of parametersavoided the dangersof overoptimization.
The testsassumedstarting capital of $10,000and commissionsof
$30per trade which wasexecuted at the next daysopeningprice.
All availablecapital wascommitted to each trade.
MTAJOURNAL
BENCHMARK
TESTS
Background. Benchmark tests for all thirty stocks were established separately for the EMA and the RSI. These tests did not
include a trendiness measure.
Exponentially Smoothed Moving Average

The trading rules for the EMA were:
Go long when: todays close > EMA.
Go short when: todays close < EMA.
Table 1 summarizes the results. It gives the average return from
all the EMA tests for each class of stocks. System close drawdown is
the largest equity dip (relative to the initial investment) based on
closed out positions. It is the maximum amount a closed out position fell below the initial investment amount.
Table 1
Exponential Moving Average
Average % Return
System Close Drawdown
Trending
-26%
$7,360
Non-Trending
Mixed
-75%
$8,275
-73%
$7,914
As might be expected, the EMA performed best on trending

stocks,worst on non-trending stocksand somewherein between
on mixed stocks. This wastrue of both measuresof performance.
Relative Strength Index (RSI)

The trading rules for the RSI were asfollows:
1. Go long when RSI crossesabove30. Staylong if RSI drops below 30.
2. Go short when RSI crossesbelow 70. Stay short if RSI drops
below 30.
Table 2 summarizesthe results.It givesthe averagereturn from
all the RSI testsfor eachclassof stocks.
Table 2
Relative Strength Index
Trending
Non-Trending
Mixed
Average % Return
-150%
27%
-30%
$3,408
$504
$2,336
As might be expected,the RSI performed beston non-trending

stocks,worst on trending stocksand somewherein between on
mixed stocks. This wastrue of both measuresof performance.
21
PARTm. TESTOF
HYPOTHESIS
Directional Relative Volatility Index

The DRVI scores trendiness from 0.0 to 1.0. The tests assumed
a trend (trading range) when readings equal or exceed (are less
than) 0.5. This threshold was used because it is the midpoint of
the range. Empirical testing showed it was effective in separating
trending from non-trending periods.
The trading rules for this system were of these:
Go long when:
DRVI < 0.5 and RSI crosses above 30

ur
DRVI ( 0.5 and todays close > EMA.
DRVI < 0.5 and RSI crosses below 70
DRVI ( O.yand todays close < EMA.
Test Results
A visual inspectionof the chartswith their trading signalsconfirms this. Many bad EMA signalswere eliminatedby the DRVI.
The DRVI did not, however,eliminate many bad RSI signals.Apparently, the RSI formula isbetter ableto pinpoint the boundaries
of a trading range than the DRVI.
The RSI comparesprices to their own recent history while the
DRVI comparesreadingsto a threshold,in this case0.5. Manipulating the DRVI trendinessthreshold doesimprove results. Tests
showthat lowering the threshold in a trending market (to 0.25)
makesthe EMA more effective. This generatessignalsearlier in
the trend. Raisingthe thresholdin a trading range (to 0.75) eliminatesmore bad EMA signalsand permits more accurate RSI signals.The problemisidentifying trending and tradingperiodsahead
of time.
The datado not showanypredictivevaluein the DRVI trendiness
readings. In fact, the DRVI signalschangesin trendinesson a
slightly laggingbasis.This canbe adjusted,asdescribedabove,by
manipulatingthe thresholdlevel.
PARTIV. TRADINGAPPLICATIONS
Table 3
EMA, DRVI & RSI
Average % Return
Trending
-11%
Non-Trending
-45%
Mixed
-36%
$4,798
$5,604
$5,121
The combinationof an EMA, DRVI and RSI performed beston

trending stocks,worst on non-trending stocksand somewherein
betweenon mixed stocks. This wastrue of both measuresof performance.
Traders should filter the signalsfrom trend-following indicators with a trendinessmeasure.They can enhancethe measures
effectivenessthrough its sensitivitysetting or threshold. Traders
can use traditional technical tools to identify trending and nontrending periods and adjust the threshold accordingly. For example,traderswould usea high thresholdaslong aspricesremain
in a trading range. After a breakout (in either direction), they
would switchto a low threshold. In uncertain marketsthey would
default to a middle threshold.
Analysis of All Test Results

Table 4 comparesthe two setsof benchmark tests(EMA and
RSI) with the testsof the composite(EMA, DRVI, and RSI).
Table 4
Comparison of All Test Results
Trending
EMA - average % return
EMA - maximum drawdown
Non-Trending
Mixed
-26%
-75%
-73%
$7,360
$8,275
$7,914
27%
-30%
$2,336
RSI -average % return
-150%
RSI - maximum drawdown

EMA, DRVI & RSI -avg. % return
$3,408
-11%
$504
-45%
EMA, DRVI & RSI - max drawdown
$4,798
$5,604
-36%
$5,121
The data suggestthat combininga trendinessmeasurewith technical indicators improvesperformance in certain cases.Regardlessof the type of price action, trending, non-trending or mixed,
better resultswere achieved with the compositemodel than the
EMA alone. However,in the caseof the RSI, the compositeimproved performanceonly in trending markets.
The implication is clear. A trendinessmeasureworks best to
eliminatewhipsawsignals.This isconsistentwith the fact that whipsawsare usuallyassociatedwith trend-followingindicators (suchas
an EMA).
22
MTA JOURNAL * Winter- Spring2000
B~IOGRAPHY
APPENDIX
II Achelis, Steven B., Technical Analvsis From A to Z, Chicago, IL:

Irwin Professional Publishing, 1995.
I Barnes, Robert M., Trading in Chonnv Markets, Chicago, IL:
Irwin Professional Publishing, 1997.
I Wilder, J. Welles, New Concerns In Technical Tradincr Svstems,
Greensboro, NC: Trend Research, 1978.
TrendingStocks
American Home Products
Nelson Thomas
Bankers Trust
Alexanders
Albertsons
Airgas
Agco
Abbott Labs
Clear Channel
Allegheny Power
(l/92 - 12/96)
(l/90 - 12/94)
(1O/93 - 9/98)
(l/89 - 12/93)
(11/91 - 10/96)
(l/89 - 12/93)
(1O/93 - 9/98)
(l/93 - 12/97)
(l/93 - 12/97)
(l/91 - 12/95)
BIOGRAPHY
Basil Panas earned a bachelors degree in Accounting from
Rhodes University, South Africa. He is a CPA and holds the
CFA designation. He has seven years of experience managing
a fixed income portfolio ($60 million) for the City of West
Covina, California, using both fundamental and technical tools.
He is currently employed by the Metropolitan Transportation
Authority in Los Angeles. He may be reached at 909/9314926 or bpanas @ ibm.net.
Non-TrendingStocks
Elf Aquitaine
Ahmanson
Air Products & Chemicals
Alcan Aluminum
Aluminum Company of America
Amerada Hess
AMR
Nacco
Nalco Chemical
AAR
(7/91 (l/90 (l/92 (l/89 (l/90 (l/93 (l/91 (l/91 (l/92 (l/91 -
6/96)
12/94)
12/96)
12/93)
12/94)
12/97)
12/95)
12/96)
12/96)
12/95)
Mixed Stocks
Garan
Albet-to Culver
Allergan
Alliant Techsystems
American General
Noble Affiliates
Norwest
Nucor
Alto Standard Corp.
National Health
(l/92
(l/91
(l/91
(l/91
(l/92
(l/93
(l/91
(l/92
(l/90
(l/93
- 12/96)
- 12/96)
- 12/95)
- 12/95)
- 12/96)
- 12/97)
- 12/95)
- 12/96)
- 12/94)
- 12/97)
~~~~~OURhN.
Winter -
Cntinm
9nnn
24
HEAD4ND~HOUIBF&S
ACCURACIES
ANDHOwTO~E~
SergeLaedermann
INTRoDUC~ON
The Head-and-Shoulders pattern is probably one of the bestknown and venerable of chart formations. It is considered as one
of the most reliable by all odds according to Edwards and Magees
own words in their reference work.
Martin J. Pring quotes the Head-and-Shoulders as probably the
most reliable of all chart patterns, while John J. Murphys analysis
is almost identical when considering probably the best known and
most reliable of all major reversal patterns. Some official legitimacy was gained in August 1995, when the New York Federal Reserve astonished both economists and technicians in publishing a
computer study on the validity of the case: Head-and-Shoulders:
Not just a flaky pattern. The old formation undoubtedly stands
the test of time and represents a powerful tool in todays trading
and analysis. The suggestion is to invite you on a journey inside
the Head-and-Shoulders. Some discoveries are still to be made.
Rounding Bottoms and Complex Head-and-Shoulders are Multiple
formations as well, and should be traded on a level of confidence
that any technician should gain before acting. Traders have always
been faced with some weakness when trying to profit from the pattern. It is not being irreverent to state that technical literature does
not provide enough clear statistical accuracies on the subject. Most
observations are pertinent orjudicious, but they hardly help when
dealing with a trade to do or to avoid.
This uaner will first snecifv what can be considered as a valid or
adeauate Head-and-Shoulders. Harmony limits and rules to follow
will be shown according to classical practice. Secondle the study
will analvze known facts about Head-and-Shoulders. Probabilities
and numbers will be put forward on the major topics such as Volume, Measuring Objective, Pullback and Pattern Length, among
others.
In the third nlace. the naner will suggest trading techniaues to
profit from the nattern and how to estimate the obiective. The
entry level, the stop and three different ways of measuring the objective will be discussed. A complete track record will be established,
showing the pattern degree of efftciency and the level of risk to
take in order to make a living from it. Precise net valuations will be
displayed.
found on a chart may vary from one technician to another. Also,

the picture may sometimes even prove to be rather different the
following day for oneself!
However, well-trained individuals know very well that there is
no room for various methods of assessment in that field; the margin is in fact pretty narrow. Despite the lack of statistics, many
examples of Head-and-Shoulders are to be found in technical books,
therefore diminishing misinterpretation. This work represents a
full coverage of nearly eight years on four major liquid markets. All
patterns discussed have been carefully selected in respect of the
classical methodology as well as strict rules. The information and
opinions contained have been compiled in good faith.
The author asserts that ethical standards of professional conduct have been highly respected. He is available, upon request, to
defend any position taken or decision made.
This studv is based on dailv charts and deals solelv with Headand-Shoulders which are tradable bv evervbodv, in contrast with
patterns which are only caught by floor traders. The natterns selected in this studv meet two criteria. Thev are followed bv a Close
bevond the Neckline, and a Pullback either to the Breakout level
or the Neckline. on a dailv chart. In practice, you will have the
time to analyze many markets and detect which one has just experienced a Breakout of a Head-and-Shoulders. Your next-day limit
order will be easily calculated as well as your exit levels (Stop and
Objective).
RECOGNI~ON
According to Robert D. Edwards and John Magee, the only qualification on an up-sloping Neckline is that the Bottom of the recession between the Head and Right Shoulder must form appreciably
below the general level of the top of the Left Shoulder. The logic
applies for a down-sloping Neckline as well. In modern trading,
the adverb appreciably tends to disappear as commodities charts
look more stretched than stocks charts in the 1950s.
Multiple or Complex Head-and-Shoulders consisting of some
Left and Right Shoulders, or even Tvvo-Headed, are common.
However, the Neckline is not always easy to draw as two or even
several possibilities often exist. Traders should take a position on
METHOD
Daily data from January 1990 till October 1997 have been selected on the S&P 500, US Treasury Bonds, Swiss Franc and Gold
in an attempt to cover the major market sectors. Data are on a
cash or spot basis in order to avoid roll-over gaps implied by the
future markets positive or negative carry.
The idea is to detect possible divergences between stocks, interest rates, currencies and commodities. Do Head-and-Shoulders
develop the same way on various markets? Are all markets profitable? Is the Risk-Reward indisputable? These questions need tentative precise answers.
Subjectivity is clearly the main difftculty when dealing with a
pattern formation. After the fact recognitions make trades more
attractive than they are in the real world. Furthermore, patterns
MTA JOURhM
* Winter - Spring 2000
25
der distance as compared to the Head and Right Shoulder distance

was a matter of worry. The lack of Harmony did not encourage the
desire to trade when the Pullback eventually occurred.
Later on, the pattern looked more balanced and the decision
to trade was logically taken. This time, the market did not give another chance to get in. We must learn to live with it.
any Pullback following an obvious Breakout, even in the case of

multiple formations.
1.50
1.45
430
wno4
Q30322
930407
930428
930512
93w
1.40
Head-and-Shoulders Tops or Bottoms are to be found at the

end of a trend. It is not expected to consider as a true Head-andShoulders a pattern whose size is more than half the amplitude of
the prior trend. John J. Murphy states that Reversal patterns can
only be expected to reverse or retrace what has gone before them.
In other words, the maximum objective is the size of the prior move.
Therefore, too-big patterns may not reach their measuring objective, and imply a doubtful Risk-Reward ratio. Traders may avoid
such trades which usually oblige them to place a Stop too far for
fear of premature exit.
Symmetry is the key word for a Head-and-Shoulders pattern,
even more so in a group of related formations which carry the
same technical implications. Rounding Tops and Bottoms are Multiple formations as well and should be traded on a Pullback as soon
as an obvious Breakout is detected.
I-
355
.._ -._ -__--.

-h-J
dlkhntmqumlor
8ewlfad&
should*rm
. -..
..H -_. _._-.
-..--.-_-.-..
.--.--..
RS?
t*
Lk
__._ fk.-.
970505
970521
970609
9706
FREQUENCY
One hundred and twenty one Head-and-Shoulders patterns have
been found using daily charts on the S&P 500, Swiss Franc, US TBonds and Gold from January 1990 till October 1997 (94 months).
Sixty percent of all formations were Head-and-Shoulders Bottoms, Gold recording an anomalous 76% of Bottoming patterns.
Excluding Gold, Bottoming formations accounted for 53% of all
patterns.
38
36
34
32
30
28
26
24
!
8
970417
I
I
L#
rL/
.__.
1.35
970401
345
22
20
10
340
16
14
335
330
920813
920831
920917
921005
921021
9211oc
80%
70%
The pattern has to be in Harmony with the environment. The

word is somewhat romantic, but describes the kind of level of confidence any trader should gain before acting. Some technicians
may consider this Gold-Comex development as a valid Head-andShoulders Top, but the assumed Right Shoulder represents, in fact,
the move which negated the formation. The objective completion,
a few days later, does not alter the picture.
Some situations are surprisingly not tradable. The Swiss Franc
IMM picture looked promising in May 1997. Why was this trade
not possible? This is a good example of an After the fact trade.
Whenever the first Breakout occurred, the Symmetry or Harmony
of the Pattern was rather poor. The downward-sloping Neckline
was steep, but not eliminatory. However, the Head and Left Shoul-
26
MTA JOURNAL
60%
50%
40%
30%
20%
10%
0%
SPXUJ
Winter- Spring2000
SWFR
USTEI
GOLD
PULLBACK LIha
FULLBACK
Sixty five of the 121 Head-and-Shoulders found experienced a
Pullback powerful enough to initiate a trade. The entry or limit
order has been placed at the Breakout point or the Neckline level,
whichever was the less ambitious. Whenever a Breakaway Gap occurred, the limit was placed at the less ambitious side of it (market
should try to fill the Gap but may not succeed in true Breakaway
situations).
Pullbacks have been seen 59% of the time in the case of Top
formations, but 69% of the time in Bottoming ones. This is a prob
able confirmation of the gravity factor, showing that a market advance takes usually more time to develop than a market decline.
Eighty percent of S&P 500 and US T-Bonds Bottom patterns experienced a Pullback after the Breakout. This analysis is not signi!ticant for currencies (either bullish or bearish, depending on the
country). Gold had too few Top patterns to rely on the Pullback
ratio observed in Top cases.
1.50
1.49
1.18
1.47
1.46
1.45
1.44
1.43
B70818
1.2U
920605
SP500
SWFR
USTS
ORDER
920821
97cm4
870922
920925
920909
Q7loci3
921013
921029
GOLD
OBJECTIVE
WI
009b
The classical method to determine the minimum Objective is

based on the height of the pattern. The vertical distance from the
Head to the Neckline is projected from the point where the Neckline is broken (purists use a logarithmic scale).
Our sample of 79 Head-and-Shoulders demonstrates that another method should be considered when trading patterns which
are experiencing a Pullback (in other words, patterns which are
tradable).
The minimum Objective should be estimated by measuring the
vertical distance from the Bottom of the hollow between the Head
and the Right Shoulder, up to the trendline joining up the Heads
crest and the Bight Shoulders crest.
80%
70%
6096
509b
40%
30%
20%
IO?6
0%
sP5oo
SWFR
USTB
WLO
MTA JOURNAL
Ii
27
That distance is then projected as in the classical style. An even

more conservative method has been tested, using the vertical distance from the Right Shoulders crest to the heckline, then projected as in the classical style.
Cumulative total profits, on all trades, for the third method is
71.9%, clearly behind the classical measurement (77.8%) and the
recommended one (79%)
better if we analyze the length of each transaction. On average, a

trade (from the entry to the exit day) lasts 8 trading days with the
recommended method, while it takes more than 10 days for the
classical one. Considering that 2/3 of the trades in method 1 and 2
are identical, we have to understand what happens with l/3 of them.
Analysis shows that the classical measuring objective is often too
ambitious and is therefore missed. Then, the short-term trend reverses, and either the Stop limit is activated or the position sold at
the Objective when the initial trend resumes, much later on. A
position lasts 6 trading days with the conservative method. The
potential move is, however, chronically underestimated.
Objective Not Tradable

Thirty live percent of patterns did not experience a sufficient
Pullback and have been considered as not tradable. In almost
100% of the cases, the market reached the target quickly, sometimes the same day as the Breakout occurred. Two thirds of the
not tradable patterns lasted less than 10 days. It is highly prob
able that Pullbacks occurred on intraday charts for the majority
of these formations.
VOLUME
Nearly 60% of minimum objectives have been reached using
the recommended style, outperforming clearly the classical one
(only 46% of objectives met). The conservative method managed
to record an impressive, but misleading, 70% of success. This is
where the Profit & Loss per trade comes into play, or the other side
of the picture.
Volume characteristics are considered of critical importance in

assessing the validity of the pattern. Activity is normally high during the formation of the Left Shoulder and tends to be quite significant, but lighter, when the price is at the peak. Right Shoulder
is usually accompanied by lower Volume, a typical warning of diminishing buying activity during a Head-and-Shoulders Top, or the
end of the selling pressure in the case of a Head-and-Shoulders
Bottom.
Confirmation is provided in ranking the Volume: 55% of Left
Shoulders recorded the highest Volume as compared to 32% for
Heads and 13% for Right Shoulders. Objectives reached or not,
the numbers barely change. Future patterns failures are therefore
not to be found using that statistic alone.
Highe8t
Volume
aeon
on
The performance per trade is unsurprisingly favorable to the

classical method, almost compensating for the poor rate of success. However, method two is the best combination taking into account all the parameters.
4.00%
--
3.00%
The lowest Volume was recorded on 61% of Right Shoulders,

30% of Heads and 9% of Left Shoulders. Numbers were almost
identical for Objectives completed and Objectives missed, which is
again not helpful in detecting which Head-and-Shoulder is going
to fail.
2.00%
1.00?&
0.00%
-1 .W%
-2 M%
The Quality difference between method one and two is not so

clear in terms of cumulative performances, but the picture is much
28
MTA JOURNAL
8 Minter - Spring 2000
Forty one percent of patterns recorded the highest Volume (as

compared to the Head and the Right Shoulder) and also a high
Volume in amplitude, the typical case.
Despite this ideal situation, the recommended objective has been
met in only 63% of the cases, not a significant hedge over non
typical situations.
Twenty five percent of patterns recorded the lowest Volume on
the Right Shoulder and a low Volume amplitude as well. This scenario produced an impressive 80% of accomplished Objectives, a
remarkable performance.
70%
1
DURATION
/
Thirty eight percent of the mid (or Nr 2) Volume has been recorded on Heads, 32% on Left Shoulders and 30% on Right Shoulders. Thirty four percent of patterns represented the ideal Volume sequence: Left Shoulder and the highest Volume, Head and
the mid Volume, Right Shoulder and the lowest Volume. A small
4% developed in the most unusual way, with an inversed Volume
sequence.
Volume at Bottom
Theory indicates that the most important difference between
Head-and-Shoulders Tops and Bottoms is the Volume. At Bottoms,
the market requires a significant increase in Buying pressure, reflected in higher Volume on up moves. The rally from the Head
should show an increase of activity, often exceeding the Volume
generated during the up move following the Left Shoulder.
Thirteen percent of Right Shoulders recorded the highest Volume, 5% at Tops and 8% at Bottoms. In this particular situation,
75% of Head-and-Shoulders Tops missed the recommended Ob
jective, while 80% of Bottom patterns succeeded. This is an indication that a high Right Shoulder Volume is not comforting at Tops,
but not really detrimental at Bottoms.
The Left Shoulder recorded the lowest Volume in 9% of all cases,
1% in Top and 8% in Bottom formations. Objectives have been
met in slightly more than 50% of the formations.
Volume Amplitude
The specific Volume number is not of major importance to the
Technician. However, it is often necessary to classify the Volume
into one of three categories: High, Low, Average. Giving a mark
to each category (1 point for High, 2 points for Average and 3
points for Low), the sample shows an extreme similarity to the grading study described before.
LOW
Avon-
High
Volume
8een on
ObjlbVOS
Missed
2.30
2.50
L
Total
200
1.50
1.00
poinb
Measuring Objectives is discussed in terms of height, but too

few studies deal with classical Objectives durations. In our sample,
Head-and-Shoulders lasted 30 trading days, on average, from the
start of the pattern until completion. A pattern started whenever
the move which was at the very beginning of the Left Shoulder,
crossed the future Neckline. The end of the pattern was materialized by the Breakout. Trades, initiated on the Pullback day, lasted
8 days, or 27% of the patterns duration, on average. This is a good
indication of the time required when trading a Head-and-Shoulders. The durations of trades were identical for both reached and
missed recommended Objectives, which means that the Stop order method was efficient (see Trading).
/
66%
100%
60%
60%
40%
20%
0%
<= 20%
Trades
<= 30$&
duntlona
<= 40%
<= 50%
In % of Pltbma
za 50%
8iur
One third of trades lasted less than 20% of patterns durations

(for example, less than 6 days on a 30 days pattern). One half were
shorter than 30% and two-thirds less than 40%.
However, the most significant observation lies in the 50% or
less category where 86% of trades lasted, at the maximum, half the
durations of the patterns. This is a nice probability to put forward
whenever a measuring Objective is activated.
Bottoms are generally flatter and generally take more time to
develop, as the market falls to the floor more quickly due to the
gravity effect. It does require a much greater effort for the market
to launch a new Bull trend.
This characteristic is clearly confirmed by the current study. Top
patterns lasted 23 days on average, while Bottom ones had durations of 34 days, a 50% differential.
Trades were completed after 8.3 days for Bottom formations,
slightly above Top ones (7.6 days), showing that velocity was quite
similar after the Breakout. Accordingly, Bottom trades tended to
be shorter (as a percentage of patterns durations).
However, the major outcome was that 86% of trades lasted, at
the most, half the size of all the patterns found for both Head-andShoulders Tops and Bottoms. Symmetry is perfect knowing that
44% of trades lasted, at the most, onequarter of the duration of all
patterns for both Top and Bottom formations.
29
Lateral and vertical movements are proportional to each other

as suggested by some theories, a statement of the obvious.
BREAKOUT
A Head-and-Shoulders is not complete until the Neckline is
decisively broken on a closing basis: The Breakout Day. A close
beyond the Neckline not only completes the pattern, but also activates the minimum measuring Objective. A sharp increase in Volume is usual during the Break out, a factor not always dominant in
a Head-and-Shoulders Top. Following a Breakout, the market runs
and quickly peaks. In 85% of cases, the Breakouts peak was reached
the day of the Breakout (Day 1) or the following day (Day 2).
Occurencee
As mentioned before, this study deals solely with Head-andShoulders which are tradable by everybody. One hundred and
twenty one Head-and-Shoulders patterns have been detected using daily charts from 1990 until 1997. Pullbacks occurred 79 times,
allowing in practice anyone to enter all 79 trades (see Frequency,
Pullback & Method). The trades are first analyzed on a very straightforward basis showing yearly gross gains and losses on each market.
S&P 500
SW FR
USTB
Gold
1990
1991
-2.1%
2.6%
7.4%
11.3
5.3%
-4.3
3.2
6.3
1992
1.1
4.9
1993
0.5
1.9
3.3
1994
-0.3
0.0
5.1
0.9
3.6
-0.4
-1.3
1.7
2.6
4.7
3.9
0.2
3.5
2.2
18.8%
21 Trades
26.8%
21 Trades
1995
1996
0.0
-0.1
1997
0.7
1.3
9.2
26.9%
6.5%
18 Trades
Day
Day
Bmakoutr
peak
Day
before
Day
tbr Pullback
The average Breakouts peak, or incursion level, reached threeeighths of the expected measured move. In other words, threeeighths of the Objectives were accomplished before the Pullbacks.
CumubUve
Occurencee
91%
19 Trades
Eighty nine percent of traded Pullbacksreachedboth the Neckline and the Breakout level. However,a limit placed at the most
ambitiouslevel (seePullback) would have proved to be costly despitean estimated10%entry level savings.The total profit would
have been cut by asmuch as20%. Sixty three percent of trades
generateda profit. The averageprofit per trade was2.29%,much
higher than the averagelossof 0.90%. No lossabove 2.50% had
been recorded and a small3% of tradeslost more than 2%. Half
of the winning tradesexceeded2% gain and 1 out of 10exceeded
3% gain.
SYSTEM
%oftrades
- ,>= @Jo+
>= 40%
>= 30%
Breakout
peaks incunlon
the Objective%
expected
>= 20%
as a percentage
movement
of
BREAKMAY
GAP
-3%-
-2%- -l%3%
Start of 24h trading as well as a high liquidity explained the

absence of Gaps (only 5%)) still numerous on stocks charts.
2%
lndlvidual
-o%1%
Graes
0%
1%
PIL
1%
2%
2%
3%
in % for the 79 tradee
&SK VS REWAKB
The average gross profit at the recommended Objective was
1.497 higher than the potential loss at the Stop (Exit) level.
Exit
TREND
Head-and-Shoulders are reversal patterns. Thus, 78% of trades
were initiated against the Mid term Secondary trend.
TRADING
30
MTA JOURNAL
3%
4%
level
4%
In order to value the net return of our 79 trades in the real

world, the following rules have been established: $100,000 was the
initial cash put in the account. A contract position in any market
never exceeded 2.5 times the accounts value, a reasonable leverage which boosted the performance. Margins never rose above
15% of the net equity and could have been multiplied by 3, with
positions in all 4 markets, without causing any disturbance for the
trading. Round turn Commission and Slippage were $80 per contract.
At an average pace of 10 trades per year and knowing that each
trade lasted 8 days on average, the interesting feature was the con-
&FERENCES
I Edwards,RobertD. and Magee,John; TechnicalAnalvsisof Stock
-,Trends 6th Edition, 1992
Pring, Martin J.; TechnicalAnalvsisExplained,3rd Edition, 1991
Murphy,John J.; TechnicalAnalvsisof the FuturesMarkets, 1986
I Murphy, John J.; Intermarket TechnicalAnalvsis,1991
Shaleen,Kenneth H.; Volume and Open Interest, 1991
q
Porromnces
Shaleen,Kenneth H.; TechnicalAnalvsis& Ootions Strategies,

1992
Chang, Kevin P.H. and Osler, Carol; Federal Reserveof New
York. August 1995Reoort, Head & Shoulders: Not Just a Flaky
Pattern
Etzkorn, Mark; Futures Magazine,January 1996article, Fed &

Shoulders
1990
1991
Annual
1992
1993
1994
Equity
1990
1991
1992
Yinning Trades
1996
1997
90-97
BIOGRAPHY
and
netPoffomanc0
annualized
19904997
~ooo
1996
Since 1998,SergeLaedermannhasbeen a partner at GF

Geneva Finance, Geneva, Switzerland, focusing on Private
Banking. Fundamentalanalysis,aswell astechnical analysis,
is usedin making investmentdecisions.Technicalanalysisis
his major tool and he ismainly a specialistin pattern recognition.
In the 1980sMr. Laedermannwasa floor trader and a technical analystat Credit Suisseand, later on, Chief Economist
and Analyst at Bank of NewYork - IMB, Geneva.
In 1987Sergecofounded the SwissAssociationof Market
Technicians(SAMT) and is currently a memberof IFTA.
Pwfomanw
In USD
1993
1994
1995
1996
1997
50
Losing Trades
29
Average Gain
$10,312
Average Loss
-$5,798
Largest Gain
$29,200
Largest Loss
-$15,750
Largest % Gain
Consec. Gain
17.7%
7
Largest % Loss
Consec. Loss
-5.9%
2
Profitable Trades
63%
Ratio Gain/Loss
I.78
Total Gross Profit

Total Net Profit
$371,211
$347,491
(63/37) * (10,312/5,798) =
Profit Factor
3.03
sistenthigh level of cashin the account.

Therefore, nothing could be morejustified than trading other
technical patternslike Double Tops & Bottoms or Trianglesusing
the sameaccount equity and the samesystem.Short term traders
may use10 daysof intraday tick by tick charts and trade roughly
100timesper year.
(see over)
MTAJOURNAL
31
TRADERECAP
$100,000
90/02/08
90/02/13
90/03/13
90/03/30
32
B3SP332.11
s3 SP329.91
S2 SF65.92
82 SF67.00
-1,890
-2,860
98,110
92/02/14
92/04/03
S4SF68.75
B4SF67.21
7,380
173,718
95,250
92/04/07
92/04/13
85 SF66.92
S5 SF66.06
-5,775
167,943
B4US99.16
s4 us100.10
3,440
171,383
9,090
180,473
90/05/18
90/05/21
S2SF71.26
B2SF70.57
1,885
97,135
92/05/02
92/05/08
90/06/20
90/07/03
B 2SF70.54
S 2 SF71.72
2,790
99,925
92/06/12
92106118
S4SP411.24
B4SP401.83
90/06/21
90/07/12
90/07/24
90/08/10
S2SP359.92
B2SP361.24
B6GC367.5
S6GC387.8
-820
99,105
92/07/07
92107117
813 GC346.0
S13 GC355.0
10,660
191,133
11,700
110,805
92/10/08
92/11/06
s4us105.29
84 US102.26
11,800
202,933
90/09/10
90/09/18
83 US89.62
S3 US88.54
107,325
92110123
92/11/02
S5SF74.55
B5SF71.78
16,913
219,846
90/09/12
90/09/14
s2 SF75.43
B2 SF76.92
103,440
92/12/07
92112121
B16GC335.0
S16GC332.5
-5,280
214,566
6,660
110,100
92112109
93/01/08
85 US105.06
s5 us104.99
-750
213,816
-3,480
-3,885
90/10/22
90/11/27
B2US91.29
S 2 US 94.78
90/10/30
90/11/02
90/11/06
90/12/06
S2SF77.98
B2SF78.96
-2,610
107,490
93/01/21
93101125
B 6 SF67.71
S6SF68.95
8,820
222,636
B3SP313.07
S3 SP332.77
14,535
122,025
93102123
93102124
B5SP434.55
S5 SP438.74
4,837
227,473
90/12/14
90/12/19
B8GC372.0
S8GC378.8
4,800
126,825
93/03/19
93/04/01
B6SF66.14
S6SF67.64
10,770
238,243
90/12/28
90/12/31
S3 SF77.27
B2SF79.10
-7,102
119,723
93103123
93103125
s5 SP449.11
B5 SP451.03
-2,800
235,443
91/01/25
91102127
B3SP334.50
S3SP363.05
140,896
93/05/28
93/06/01
B5US111.10
s5us112.19
5,050
240,493
91/02/21
91102126
s3 us97.99
83 US97.09
143,836
93106115
93/06/23
S16GC365.4
B16GC373.5
-14,240
226,253
91/03/19
91/03/26
S9GC363.5
B9GC357.6
148,426
93/06/17
93/07/09
S7SF67.46
B7SF65.56
16,065
242,318
93/08/03
93/08/10
B7SF66.88
S7SF65.63
-11,497
230,821
s4 us119.37
84 USl20.95
814GC375.7
S14GC396.3
-6,640
224,181
27,720
251,901
21,173
2,940
4,590
91/05/13
91/06/12
S3 US95.58
B3 US93.41
6,270
154,696
91/05/21
91105128
s3 SP374.30
B3SP379.15
-3,878
150,818
91105129
91/06/10
BlO GC 361.7
SlOGC370.6
8,100
158,918
93109122
93109127
93/11/08
94/01/05
91107124
91/07/31
B4SP393.1
S4SP387.09
8,450
167,368
94103115
94103124
B5SP466.98
S5SP465.44
-2,425
249,476
91/09/20
91/09/27
B4SP386.72
S4SP384.28
-2,760
164,608
94/06/10
94/06/16
B5 US105.49
S5 US104.06
-7,550
241,926
91/10/04
91/10/21
Bll
Sll
172,638
94/06/15
94/06/17
B16GC383.9
S16GC387.9
5,120
247,046
B5US104.15
S5US102.37
-9,300
237,746
GC356.1
GC364.2
8,030
91/10/29
91/10/29
S5SF66.56
B5SF67.88
-8,650
163,988
94/08/05
94/08/11
91/11/04
91/11/13
Sll
Bll
-1,100
162,888
94108125
94108126
S6SF76.79
B6SF76.11
4,620
242,366
91/12/17
91/12/23
B4SP382.95
S4SP392.10
8,830
171,718
94/10/05
94/10/07
S15GC393.1
B15GC389.1
4,800
247,166
92/01/30
92/02/12
s4 SP411.45
B4SP416.51
-5,380
166,338
94/11/01
94/11/15
S16GC384.1
B16GC385.5
-3,520
243,646
GC356.8
GC357.0
MTA JOURNAL
0 Winter- Spring2000
TRADES &AP
$243,646
94111128
94/12/06
10,260
253,906
95/01/30
95/03/01
B6 US9851
S6USlOO.30
B6 USlOl.60
S6US104.28
15,600
269,506
95/02/06
95/02/17
B16GC375.7
Sl6GC378.1
2,560
272,066
95/03/16
95/03/31
B17GC385.6
S17GC398.3
20,230
292,296
96/02/15
96102128
B7SF83.40
S7SF84.28
7,140
299,436
96/02/16
96/02/21
S6USll9.30
B6 USl15.85
20,220
319,656
96/02/21
96/03/21
S18GC399.8
B18GC398.3
1,260
320,916
96103122
96/04/02
B20GC398.5
S20GC393.8
-11,000
309,916
96/05/01
96/05/02
S7 US 109.66
87 US 108.33
8,750
318,666
96/06/17
96106119
B20GC384.4
S20GC386.7
3,000
321,666
96106119
96106121
-8,610
313,056
96106126
96106128
B7SF79.92
S7SF79.00
B7US108.13
s7us109.51
9,100
322,156
96/08/01
96/08/05
B20GC386.3
S20GC389.9
5,600
327,756
96108123
96/08/30
B7USl10.17
S7 USlO8.00
-15.750
312.006
96109113
96/09/13
B 7 USlO7.81
s7us109.12
8,610
320,616
96109124
96109124
B7SF80.80
S7SF81.46
5,215
325,831
96110124
96/10/29
B20GC383.3
S20GC381.2
-5,800
320,031
96/10/28
96/11/01
S4SP701.62
B4SP708.25
-7,190
312,841
96/11/01
96/11/05
S4 SP701.62
B4SP708.28
5,260
318,101
97/02/20
97102121
B22GC346.1
S22GC353.6
14,740
332,841
97103114
97/03/31
S4SP791.42
B4SP761.90
29,200
362,641
97104125
97104129
B4SP768.06
S4SP789.96
21,580
383,621
97/04/30
97/05/02
88 US108.83
S8USl10.39
11,840
395,461
97105119
97/05/02
S8 USlO9.41
B 8 USllO.03
-5,600
389,861
97/06/10
97/07/03
88 USl10.83
S8 USl13.69
22,240
412,101
97/08/14
97/08/18
s4 SP923.00
B4SP899.83
22,850
434,951
97/10/21
97/10/21
Sl2SF68.06
B12SF67.16
12,540
447,491
34
MTA JOURNAL
VOLATILITY
ANDSTRUCTURE:
BUILDINGBLOCKSOF
tk4SSICAL CHART PATTERN ANALYSIS
Daniel 1. Chesler,CTA, CMT
Like many technicians, I began my study of technical analysis with

classical bar chart patterns: trusty head-and-shoulders, triangles, wedges
and so on. Though I still rely on chart patterns today, not all technicians
share my respectfor this fm of analysis. Some technicians criticize classical chart patterns as being dqendent on the imagination of the chartist
rather than on objective rules. While perhaps the essence of charting is
subjective interpretation, I what Ifind even more interesting is the widespread and unapologetic use of classical chart patterns among successful
analyts and traders2 In fact, the question of whether chartists assume a
reality that does not exist seems almost moot given classical chartings longevity over the past century.
Yet the question remains why classical charting, a technique that up
pears to involve more exceptions than rules, attracts such a loyal following
amongotherwise skeptical professionals. What do these analysts and traders actually seewhen they identify a classical chart pattern? The answer
I be&e does not lie hidden in the minutiae of traditional chart pattern
definitions. More likely the answer is found in a set of general conditions
that ex@-ienced chartists recognize intuitively.
Traditional chart pattern definitions stressthe uniqueness of individual
chart pattern shapes. For instance, think of the many variations on, the
triangle theme alone: symmetrical, ascending descending, wedge type,
inverted, inverted with rising or descending hypotenuse, continuation, reversal, top, bottom, et al., each with its own time, pice, and volume subtltties. It is my belief that in ascribing this much significance to individual
patterns, we also understate the common thread that binds all chart patterns.
In the following discussion I will try to &scribe that common thread by
breaking chart patterns into generic components and examining each in
turn before assembling them into a single model. My goal is to suggest a
more compact and user-friendly a@roach to classical chart pattern analysis by focussing on the common elements that appear to characterize classical chart patterns in general.
APPROACH
First, I will reviewthe history of price chartsalongwith the background and basictenetsof classicalchart pattern analysis.While
thesemay be tired subjectsfor many readers,they areworth revisiting asthey reflect the conventional viewsthat we seekto expand.
I will alsodiscussthe role that classicalchart patterns play within
the broader scope of market analysis. Some of the practical
strengthsand weaknesses
of classicalcharting will alsobe covered.
Next, a simpleconceptual model will be presented,which attemptsto depict classicalchart patterns in termsof two basiccomponents: the volatility component and the structure component.
Individually theseobservationswill not constitute new or unique
theory on the subjectof bar chart patternsor price behavior. Taken
together, however,they should help reduce the degreeof separation betweenwhat istypically perceivedasa diverserange of classical chart pattern definitions. Usingrecent examplesfrom the US
stock market, I will showhow the model can be usedto simplify
pattern recognition and enhancethe timing of chart pattern-based
trading decisions.
MTA JOURNAL
l
Again, my goal is not to advancea particular view of chart pattern analysisinto the realm of verifiable science.Rather,I hope to
add a measureof order to what sometechniciansview asthe ambiguousprocessof finding and trading classicalchart patterns.
PRICE CHART hIMFiR

The earliestuseof price charts hasbeen traced back to 17th
century Japan where it is believed price charts were first used to
record and analyze the movementsof the Japaneserice market.
The useof price chartsin the United States,however,did not develop until the late 19th century. Prior to the widespreaduseof
charts in the U.S., price and volume analysiswasgenerallylimited
to what one could observeand memorizeaslive quotesran across
a mechanicalticker tape. This practice becameknown generally
astape reading.
In the late lBOOs,the number of active stockswasfew. However,
asthis number increased,following the list of active stockson the
tape becamemore difficult. Summarizationof the data into price
chartswasthe inevitable result.
Thus, a price chart is merely a graphic record of price and volumeactivity over a length of time-a graphicticker tapesoto speak.
In this context one can understandhow price and volume relationships gleaned from the practice of tape reading ultimately
shapedcharting principles. As one technician aptly put it, tape
readingwasjust primordial technical analysis.4
The earliestcharts used in Western technical analysisare believed to be point-and-figurechartsand existedat leastfifteen years
before the adventof bar charts5 Point-and-figurechartsdiffer sub
stantially from bar charts in that they do not specifically record
time and volumedata. They are noted for their ability to highlight
consolidation zones,which generallyimply either accumulation
or distribution activity. The subjectof this paper, however,relates
only to bar chartsand bar chart patterns.
Bar charts,probablydue to their easeof construction,havebeen
the most popular form of price charts sincetheir introduction in
the late ~BOOS.~
Each bar consistsof a vertical line representing
the rangeof pricestraded over a defined period: an hour, a day,a
week,a month, etc. Pricesare plotted on the vertical axisand time
on the horizontal. Bar chartsoften include a graph along the bottom of the chart depicting volume activity and in the futures marketsthe open interest. The vertical axis of a bar chart is generally
plotted on either an arithmetic or logarithmic scale,with the arithmetic scalebeingthe morepopular form. A logarithmic scaleshows
equal percentageincrementsof price rather than equal absolute
incrementsaswith an arithmetic scale.
CLASSICAL
CHARTPATTERN
EVOLWION
The 1948book Technical Analysis of Stock Trends, written by Rob
ert D. EdwardsandJohn Magee,is often referred to asthe bible
of technical analysis.It is consideredby many to be the definitive
referencesourcefor information on classicalchart patterns. However, Edwardsand Magee attributed the credit for their ideasto
the original researchand theoriesof both CharlesHenry Dow and
Richard W. Schabacker.
Winter- Spring2000
35
Dow was a co-founder of the Dow-Jones & Co. financial news

service and the first editor of The Wall StreetJournal. He createdthe
original Dow Jonesstock averagesin the late 1800sand wrote a
seriesof editorialsin the Journal that analyzedthe price movements
of theseaverages.After his death in 1902,William Hamilton and
Robert Rhearefined Dowsideasinto what becameknown asDow
Theory.
Loosely defined Dow Theory is a method of analysisthat utilizes specificprice patterns to infer the direction of the markets
primary trend. If prices are making a successionof new highs,
interrupted by shorter-termreactionswhich terminate aboveprevious reaction lows,the trend isconsideredto be up. Conversely,a
successionof new lowsin price accompaniedby lower highs on
intervening ralliesindicatesa downtrend. Dow recognizedthat on
all levels,from major swingsdown to day-today fluctuations, prices
do not move in a straight line along their trend but rather in a
pattern of zigzagsor waves. This observationby Dow is significant to chart pattern analysisasit forms the basisof all classical
chart patterns; combinationsof zigzag or wave patterns make
up the core of all classicalchart pattern definitions. Other Dow
Theory principles also underlie classicalchart pattern analysis.
Theseinclude Dow Theory lines which appearasa narrow range
of price fluctuations, and indicate a period of stagnationin price
where buying and sellingforces are roughly equal. As Edwards
and Mageenoted, a degreeof coincidenceappearsto exist between
Dow Theory linesand what might otherwisebe viewedasclassical
chart formations. Finally, the idea that volume tends to expand
on price movementsin the direction of the dominant trend is also
a tenet of both Dow Theory and classicalchart pattern analysis.
While Dowfocusedon the longer-termtrendsof businessactivity asreflected in the relationshipbetweenthe closingpricesof his
averages,it wasSchabackerwho adapted these principles to bar
chartsofindividual securitieson a short to intermediatetimeframe.
In 1930,while employedasthe financial editor of Forbes magazine,
Schabackerauthored Stock Market Theo-yyand Practice, a reference
work on the subjectof the stockmarket and trading. He alsopub
lisheda manualin 1932, Technical Analysisand Stock Market Profits,
which expandedupon the principles introduced in his first book.
It wasprimarily through thesetwo texts that Schabackerpointed
out the various bar chart patterns that were later discussedand
popularizedbyEdwardsand Magee. Thus Schabackerwasthe chief
architect of the classicalchart patterns we know today such as
triangles, head-and-shoulders,
et al. To reiterate, thesepatterns
belongprimarily to the areaof technical theory related to the trading of individual securities.
There have been other significant contributors to the body of
charting knowledge,notably RichardD. Wyckoff and RalphNelson
Elliott. Though it would be inaccurate to label the work of either
Wyckoff or Elliott asclassicalcharting per se,someoverlap does
exist. For instance, like CharlesDow, both Wyckoff and Elliott
soughtto identify repeatableprice patternsof a cyclical or rhythmic nature.8 Wyckoff and Elliott alsoviewed the relationshipbetween price and volume similarly to Dow.
More recently formal researchhasbeen madeinto the areaof
classicalchart patterns. While no definite conclusionsregarding
the efficacy of classicalchart patterns have been reached, there
havebeensomeencouragingresults.For example,a 1995studyby
the NewYorkReserveBankfound that the head-and-shoulders
chart
pattern yielded significant excessprofits in selectcurrency marketsgResearchby Alex Saitta,a technician at Salomon,hasshown
profitable trading resultsusingstandardizedclassical
chart patterns
in the TreasuryBond market.
MTA JOURNAL
CLAssIcAL&ARTPATIXRh BASICS
Most charting methods,including classicalcharting, makeuse
of implied psychologicalor behavioralmotivations. For instance,
doubt is the emotion usuallyassociated
with the early stagesof a
newtrend. After a trend hasmatured,greed!or fear are thought
to be the forces that compeltraders to chasepricesup or down
even farther, culminating in a frenzied climax of buying or selling activity. l1 Elliott wavestructuresare believedto directly reflect
a rhythm in nature that manifestsitself in crowd behavior, and
ultimately in the shapeof market prices.* Classicalchart patterns,
such ashead-and-shoulders,
trianglesand others, are thought to
be indicative of pool operators or inside interestswho intentionally manipulate the market in distinct phasesreferred to as
accumulation,markup, distribution, and markdown.13
Regardless
of the underlying causesattributed to their formation, classicalchart patterns rely chiefly on the interpretation of
trendlines, geometric formations and price and volume relationships. The primary chart patterns that Schabackerpointed out in
hisfirst book, Stock Market Theory and Practice, included patternsof
accumulationor bottoming, and patternsof distribution or topping. Collectively thesepatternsare known asreversalpatterns
as they tend to coincide with a reversalof the prior established
trend. Schabackeralsoidentified a secondgroup of patterns as
intermediate or continuation patternsthat are found inserted
in the progressof an already originated move.14As their name
impliesthesepatternssuggestonly a pausein activity followed by a
continuation of the preceedingtrend.
The fact that a chart pattern appearsaseither a reversalor a
continuation pattern doesnot rule out plentiful exceptions. For
instance,an orthodox head-and-shoulders
reversalpattern may
develop into a continuation pattern, or vice versa. Most of the
literature on classicalchart patternsconcedesthis flaw. What can
be saidwith moderatecertainty however is that when prices have
been in a trend and suddenly stop advancingor stop declining,
they are now doing somethingelse.i5 That somethingelseis
almostalwaysthe start of a classicalchart pattern of one form or
another.
Over time and dependingon which analystor trader you consult, individual patterns within each category have gone through
minor name changesand other slight revisions. For example,
Schabackeroriginallyidentified wedgesasa reversalpattern, while
other technicianshave acceptedthe wedgepattern asboth a continuation and a reversalpattern. Howeverthe namesand categories of the basicarea patterns,which exclude all one and two-bar
formationssuchasislandand gap patterns,aswell asspikeor
V reversals,can be broadly summarizedasfollows:
REVERSAL PATTERNS
Head-and-shoulders
CONTINUATIONPATTERNS
Triangles (symmetrical, ascending, descending)
Rounding
Rectangles/Boxes
Triangle
Flags/Pennants
Wedges (rising, falling, running)
Broadening
Double, Triple, Complex
Diamonds
Patternssuchascomplexhead-and-shoulders,
irregular topsand
bottoms,simpleor naked trendlines,horizontal support and resistancelines, trend channelsand others are alsovery much part
of chart pattern vernacular. For sakeof brevity, however,the patternslistedabovesafelyrepresentthe majority of all classicalchart
patterns.
In addition to identifying specific pattern shapes, classical chart

pattern analysis also incorporates an analysis of the relationship
between price and volume. For example, a price breakout is believed to confirm a patterns validity if it is accompanied by increasing volume. In the case of top reversal formations, this requirement is sometimes relaxed. However, in general, most chart patterns tend to follow a sequence of high and/or irregular volume in
the early to middle stages, with markedly declining volume in the
late stages, just prior to prices breaking out beyond the boundaries of the pattern. There is as Schabacker explained, . . .the tendency for volume to decline during the period of formation of a
technical area pattern. This shrinkage in activity is especially conspicuous as the formation nears completion, just before a breakout occurs.i6 Charts IA-1C demonstrate actual examples of this
behavior.
Another feature of classical chart patterns is the implied price
target. Following the confirmation of a pattern, which is normally
signified by a price breakout, chartists believe that targets can be
determined that indicate how far prices will either rise or decline.
The standard procedure for determining a price target is to measure the horizontal width of the pattern, in points or dollars, and
then add or subtract this value above or below the point at which
prices decisively exit the pattern.
ChartlA
- .-.._-_
&&+e~ro.~c&.
Inc.
ROLEOF bSSICAL
&ART
PATERNS
Between the generous ridicule hurled at charting by well known

market commentatorsn and the often exaggerated claims made by
overzealous char&, it is probably safe to assume that classical chart
patterns are a misunderstood subject. I have even known experienced technicians who mistakenly view classical chart patterns as a
kind of esoteric knowledge for divining the future direction of stock
prices. In the following section I will utilize quotes from various
sources to help clarify the role of classical chart patterns.
It must be understood that chart patterns were conceived primarily as a timing or trading technique used for individual trade
selection. Though Schabacker did find chart patterns useful as
indicators of the general market, he did not view them as a longterm investment or market forecasting strategy; for this he considered fundamentals the more important of the two approaches:
Our study has been devoted chiefly to consideration of the
technical factors affecting stock market fluctuations. We
have previously seen that such factors work much more
swiftly and profitably than do the fundamentals. The technical side of the market is of special importance for the
short-swing stock market trader - he who tries to take his
quick profit and run, and then renew his operation in some
other issue where technical considerations suggest another
ChartlB
CharilC
-_-,,-
_I_. ..___-^-
IDS
-Daily
Uniphase
Corporation
-Daily
.-- .
141
131
0;
121
i
I
60
I
50
351
Volume
301
251
201
151
101
MTA JOURNAL
37
movement is about to materialize.*

The technical approach to the market. ..is based upon factors which relate chiefly, or at least more directly, to the
market itself, to the price movement which results from the
constant interplay between those who want to buy...and
those who want to sell.. .I9
In other words, the fundamental factors suggest what ought
to happen in the market, while the technical factors suggest what is actually happening in the market. It is, therefore, the more important of the two angles for the
trader.. .lzo
Thus Schabacker emphasizes the point that technical factors
are particularly well suited to serving the needs of traders, or those
who operate on shorter time frames. For Schabacker this specifically meant the use of bar chart patterns as a means of highlighting accumulation and distribution activity in individual stocks for
the purpose of providing buy and sell signals.
The notion of chart patterns as a tool of the timer is as accepted among knowledgeable
observers today as it was by
Schabacker seventy years ago. For example, &-hard Aschinger,
Professor of Economics at the University of Fribourg, Switzerland,
makes an indirect but a propos reference to the nature of charting
in a 1988 Swiss Bank Corporation article as follows:
Chart 2A
-i--i _ _/T/, r_ brchasePro.com,
Inc.
-Daily
Speculators, . . are defined as basing their investment

policy on the behavior of the market itself, using recent
patterns to predict future trends. . . . In reality, many chartists would fall into this category. . . . The point is that fundamentalists usually follow a longer-range investment strategy, whereas speculators have a basically short-term orientation. 21
Aschinger implies that speculators are more concerned with
matters of timing than with long-range strategy. He also links the
use of recent patterns with the objectives of speculators as an
accomplished fact. These views echo Schabackers and support
the idea that chart patterns represent a technique belonging chiefly
to traders.
Peter Brandt, one of Commodity Corp.s most successful traders for many years, and a speaker at the 14th Annual MTA Seminar
in Naples, Florida, claims to rely almost entirely on classical chart
patterns for making trading decisions. Brandt explains his views
on classical charting in a 1990 book interview as follows:
Classical charting is . . . useful only to highlight a certain
defined trading opportunity. It is vital to keep in mind that
over 50 percent of chart formations fail to deliver profitable trades. This may be an indictment of classical charting as a forecasting tool, but not as a trading tool. Classical
Chart 28
- .._--.1-11-11-14
.- -Fei?3i:
%&Inc.
-Daily
r-_DS
Chart 2C
- .- - _.-_--_ _ _ _-
Uniphaxe
Corporation
-Daily
,,
I
141 I
-13(
-12[
1:
-ll[
1.
-lO[
-90
-110:
-80
-100
-70
-90
-80
-500
IVolume
!
-400;
-60
k
50
folume
ligh-Low
Range
4.
High-Low
Range
-30
38
igh-Low
Range
t18
charting principles do not explain all the markets all the

time . . . . I am just looking for market situations that meet
certain guidelines 22
Thus, Brandt discounts any directional inferences of classical
chart patterns. He views classical chart patterns as useful for the
purpose of identifying and organizing individual trading decisions
rather than for the purpose of outright prediction. For Brandt,
chart patterns serve as a sort of bookmark that enables trades to be
made with reference to a particular set of price levels, risks and
potential outcomes.
The notion that classical chart patterns do not serve as a means
of prediction is not necessarily a new idea.23 In the following quote
attributed to legendary trader Jesse Livermore, Livermore appears
to counsel that it is best not to place directional significance in
chart patterns:
In a narrow market, when prices are not getting anywhere
to speak of but move within a narrow range, there is no
sense in trying to anticipate what the next big movement is
going to be-up or down. The thing to do is to watch the
market, read the tape to determine the limits of the getnowhere prices, and make up your mind that you will not
take an interest until the price breaks through the limit in
either direction. 24
One can assume that the limits of the get-nowhere prices which
Livermore speaks of correspond to the boundaries of a classical
chart pattern of some type. More importantly, Livermore reserves
judgement regarding the future direction of prices until the price
breaks through the limit. Thus, Livermore suggests that the forecasting value of chart patterns is subordinate to their main role of
cordoning off the conditions that precede certain trends.
If we accept the idea that classical chart patterns are at best mediocre forecasting tools, then it follows that the successful use of
chart patterns is dependant on the occurrence of a sufficient number of sustained trends to offset an even greater number of false
signals. In this context, classical chart patterns are by necessity
allied with the technical trend-following philosophy, which states
that once a trend begins it is likely to continue.
In sum, two main points emerge regarding the role of chart
patterns. The first point is that chart patterns are intended chiefly
as an aid to trading and speculation of individual securities, although other uses such as general market analysis are also possible. The other is that chart patterns are not particularly useful as
a means of predicting the future direction of prices; waiting for a
decisive breakout in order to confirm the validity of a chart pattern would be unnecessary otherwise.
!hFNGTHS
AND WEAKNESSES OF CHART PATTERNS
Perhaps the greatest strength of classical chart patterns is their

ability to help us participate in price trends. As trader and analyst
William Gann noted, . ..the big profits are made in the runs between accumulation and distribution.2 Classical chart patterns
offer traders a viable means of capturing these runsn by highlighting the behavior which normally precedes significant trends.
In addition to highlighting specific trading opportunities, chart
patterns can also be used to control risk by forewarning us of trend
reversals. It is believed among most technicians that price trends
do not reverse immediately, but rather go through a period of gestation before reversing. These periods often coincide with the
development of a classical chart pattern. Those who wish to control their open position risk may find chart patterns useful in these
situations.
Another strength of classical chart patterns is that they delineate when and at what price to buy and sell through the use of
trendlines and price target objectives. Once the boundaries of a
potential formation have been decided upon and marked off, these
boundaries correspond to specific price and time coordinates that
can be used to form specific trading and risk control strategy.
On the weakness side of the balance sheet, chart patterns are
notoriously subjective entities. Surpluses of chart pattern examples
exist in books and manuals with no corresponding supply of fixed
pattern definitions. Thus there exists no simple way of determining whether or not an actual classical chart pattern has been discovered.
Because all classical chart pattern definitions are essentially approximations, chart pattern analysis contains the potential for abuse
by portraying the personal biases of the chartist rather than actual
market indications. The implied directional significance attached
to specific chart pattern names, such as Bearish Wedge or Bullish Triangle, may also interfere with the chartists objectivity. To
the extent that certain chart pattern shapes are associated with specific directional outcomes, the risk of taking on a preconceived
directional bias by the analyst or trader seems inevitable.
Correctly identifying classical chart patterns in time to act on
the breakout is also problematic. To borrow from Dow Theory
parlance, how can one tell in what section of the line they are in
until it is all over, and thus perhaps too late to take a position?
Conversely, if we act too soon and pre-empt a chart pattern
breakout, the result may be a series of false starts, also known as
whipsaws.
THE MODEL
As mentioned earlier, the conceptual model separates chart
pattern behavior into two components: the volatility component
and the structure component. Both are equally significant and
their order is presented arbitrarily. Below I have summarized the
primary aims of the model:
To offset the lack of classical chart pattern specificity by providing a less subjective though still not entirely fixed criterion for
identifying patterns.
I To serve as a notional benchmark for distinguishing valid chart
pattern behavior from other types of market behavior.
I To minimize the risk of implied directional biases by excluding
the use of traditional bull, bear or pattern shape nomenclature.
s To enhance the timing of trading decisions by more narrowly
defining the specific behavior that coincides with chart pattern
breakouts.
THEVOLATILITYCOMPONENT
In lay terms, volatility is a measurement that tells us to what
extent prices are changingover time. A market movingup or down
15 or 20 points a dayis more volatile than the samemarket moving up or down in 3 or 5 point increments.Volatility can alsoserve
asa proxy ofunderlying marketactivity. Usingthe samethree stock
examplesfrom earlier, Charts2A-2C demonstratehow changesin
volatility, asmeasuredby the one period range (highesthigh minus lowestlow over the courseof one day), correspondpositively
with changesin volume over the sametime period. This phenomenon is not unique to daily stock charts;it can be observedacross
virtually all marketsand time frames.
While the relationshipbetweenchangesin volatility and changes
MTA JOURNAL 0 Winter- Spring2000
39
Chart 4
The Structure Component
Chart 3
The Volatility Component
Hypothetical
Chart
Pattern
I<
Time
Petiodicity
(cycle turning
in volume is by no means an absolute one, it is robust enough tc

help us understand the dynamics behind chart pattern develop
ment and the volatility component of the model. For example, i
we assume that for every transaction there is both a buyer and :
seller, volume can be viewed as a measure of the gross supply am
demand at any point in time for a given market. In the case of ou
model, volatility has been substituted for volume as a means of gaug
ing these changes in supply and demand.
We can thus begin to describe the development of a classica
chart pattern in terms of volatility as follows: In the final stages o
a price trend, and at the beginning of a so-called classical char
pattern, the market is characterized by relatively high volatility am
wide price swings. Next, a gradual process of declining volatilit
begins, leading at last to an area of suspense that marks the begin
ning of the end of the chart patterns development. This fina
stage immediately prior to a breakout is marked by a relative ab
sence of price volatility versus the earlier stages of the chart pattern
development. The market has reached a relative standstill and i
positioned at the tripwire of an imminent breakout. Chart 3 de
picts a schematic of the idealized volatility component.
Various tools can be used to help us measure changes in volatil
ity that might not otherwise be obvious through visual inspectior
of the chart pattern alone. The standard deviations of closing prices
or an average of daily high-low ranges are two approaches. How
ever, I prefer to use Welles Wilders Average Directional Index
(ADX) which is based on an average of excesses between period
to-period ranges, and is smoother in comparison to raw measure,
of volatility such as standard deviation. Although ADX is normall;
thought of as a measure of trend strength, this does not preclude
the use of ADX for our purposes. 26 Later I will show how to utilize
the ADX indicator (14 period) to gauge the changes in relative
volatility that occur during chart pattern development.
THE STRUCTURE
COMPONENT
The structure component of the model is not intended as a blue
print that tells us where we are within the structure and hence when
we are likely to go next, such as with Elliott wave or seasonal trad
ing patterns. Rather, the structure component represents an ide
alized form of cyclic behavior unique to classical chart patterns ir
general. It is an attempt at making that which is important abou
classical chart pattern shapes interesting - and not vice versa.
Specifically, the structure component emphasizes the tendency
of chart patterns to exhibit a series of well-defined and periodic
time cycles. This can be observed in most chart patterns as a series
40
MTA JOURNAL
points
at regular
or neafty
regular
Hypothettcal
Hypothetical
Trend Pattern
I
I
time intervals)
Chart Pattern
,
(horizontal
orientation)
of distinct turning points marked by prominent highs or lows occurring at regular - or very nearly regular - time intervals. One
possible rational for this phenomenon is that cycle periodicity is
susceptible to greater distortion from the effects of trends. Hence,
cycle periodicity is noticeably more discernible in non-trending environments as represented by so-called classical chart patterns.
In contrast, traditional chart pattern definitions focus primarily
on the variation in cycle amplitude - or the height aspect of market time cycles as measured in dollars or points - as a means of
classifying and distinguishing individual chart patterns. Traditional
definitions rely on the repeatability of specific chart pattern shapes
as formed by the combination of various cycle amplitudes. The
model however is based on the assumption that generic conditions,
such as declining volatility and distinct periodicity, underlie most
chart patterns regardless of their shape or their individual classical definition.
The structure component also incorporates the tendency of classical chart patterns to exhibit noticeably overlapping cycles or
waves. Most chart patterns reveal this tendency by taking on a
horizontal orientation along the length of the pattern. This aspect
of structure highlights one of the most fundamental differences
between price trends and chart patterns: During price trends cycles
overlap minimally, and in the case of very strong trends cycles may
not overlap at all. Chart 4 depicts the idealized structure compo
nent of the model.
part of 1999. However, starting in mid November 1999, Adobe

begins to retrace some of its gains. Upon closer examination of
the daily chart during this phase (Chart 5B) we see an overlapping
cycle structure and a distinct 18-19 day cycle periodicity. Thus the
action in Adobe satisfies the basic requirements of the structure
component of the model. Rather than attempt to attribute various
meanings to the shape of this pattern, we are simply looking for
generic behavior that is consistent with the model. Yet we are not
ready to trade this pattern until we can satisfy the requirement of
the volatility component of the model. In Chart 5C, we can see
ScREENINcExAMPm
In this section I will present several examples of how the model
components combine to facilitate chart pattern based trading decisions.
Chart 5A, a weekly chart of Adobe, shows that the stock rallied
strongly from a low of about 15 dollars in mid 1998 to a high of
about 75 dollars in late 1999. Note the characteristic cycle structure during this trending phase; there is almost no overlap between
adjacent cycles except for a brief consolidation during the early
Charl5C
Chart5A
hbe systmsInlx-wwkly
-.
10
10
95
90
05
al
75
?a
65
60
55
5a
50
4a
P
2a
ia
-
Chart6C
--,- -_I
_ -- -..- -- - - - - -- -- ..
De&II
slamsImYD4
Chart6A
___ --.----.
Dsptslau lnc-wee&
-_
36
34!
32
30;
20
26:
24 1
n:
ml
MTA JOURNAL
Winter - Spring2000
Chart7A
Novd
Chart78
lnc-We&J~
Chart7C
IncDail~
Novd
Wove6
27
l&Daii~
I c 42
30
al
26
24
22
20
18
16
3
how relatively higher volatility, asdenoted by ADX levelsbetween

30 and 50 during the final monthsof 1999,coincided with a] the
ending stagesof the prior up-trend and b] the beginning stagesof
the chart patternsdevelopment. Note alsohow decreasingvolatility, asdepicted by graduallydeclining ADX levels,markedthe late
and final stagesof chart pattern development. It iscommonto see
ADX levelsdecline into the sub20 level immediatelyprior to the
completion of a chart pattern,just prior to a pattern breakout, as
Adobe demonstratesin January 2000. Bywaiting for the market to
indicatethrough ameasurabledecreasein relativevolatility its readinessto breakout, and by ignoring the directional implicationsof
specificchart pattern shapes,we do not find ourselvesengaged
in the tricky gameof constantlyanticipatingthe time of the breakout
or its direction.
Chart 6A isa weeklychart of AmesDepartmentStores,showing
pricesin a steepdowntrendfrom midJune through November1999.
During this time Ameslost about fifty-percent of its value. Note
the rally attempt in Novemberbeginningfrom point X on the chart,
and the slight pullback in Decemberto point Y. At this stage,on
the heelsof a multi-month decline in prices,a chartist might normally be pondering whether this current pattern representsa
higher low or someother popular formation indicative of the
early stagesof a reversal. However,sincewe are only concerned
with whether and to what extent the pattern imitatesthe model,
we do not refer to specificbull, bear or pattern shapes.A closer
look at the daily chart (Chart 6B) showsthat Ameshasestablished
a distinct 10-l 1day cycleperiodicity with clearlyoverlappingwaves.
Finally, in January of 2000,the stockbreaksdown through support
near 25 dollars (Chart 6C). Note how this pattern breakout followsa decreasein relative volatility, asdenotedby the ADX indicator declining into the sub20 level. Through an awareness
of the
conditionsthat precedepattern breakouts,wearelesslikely to enter
a position basedon a premature or false move outside of the
pattern. Wearewaiting for the market to tell uswhenit is ready to
move, rather than imputing our own biasesto the pattern.
42
MTA JOURNAL
Lastly,Chart 7A showsa weeklychart of softwaremaker Novell,

with prices falling steadilyfrom mid-July through October 1999.
Not unlike in the previous example of Ames Department Stores,
Novell losesroughly fifty-percent of its value over a multi-month
period. Beginning in October, a period of consolidationoccursin
which a distinct 1415 day cycle emerges(Chart 7B). By mid-December,ADX has declined to sub20 levels,a point at which we
have normally cometo expect a breakout (Chart 7C). Although I
havehighlighted the detail around thispattern to simulatea classically styled complex or irregular head-and-shoulders
bottom
reversal,this wasdone purely in hindsight. The point is that such
interpretations are open to wide debate; no doubt many technicianscould have found different classicalpatterns in the chart
prior to the upsideresolutionof pricesin Novell in December1999.
FINALTHOUGHTS
Merely statinga technical observationdoesnot elevateit to the
statusof eternal truth. Yet, distilling our observationsinto strict
rules alsohas its drawbacks;fixed rules inevitably fail to address
the exceptional cases. The conceptual model offers a possible
middle ground. It attemptsto removesomeof the subjectivity involved in chart pattern analysiswhilestill permitting flexibility. The
model is useful, even if it is not alwaysan absoluteindicator, if it
helpsusto understandthe natureof the relationshipbetweentrending and non-trending markets, and how changesin volatility reflect changesin overall supplyand demand.
Wehaveseenhowhigher volatility coincideswith the earlystages
of chart pattern developmentand decliningvolatility with the later
stages.This hasa logical basis:A more active market attracts and
supportsmore participants,and hence more grosssupplyand demand - or total investor interest - than doesa lessactive market.
Any suddenchangesin supplyor demandin a lessactive or quiet
market can result in sharplyhigher or sharplylower quotesdue to
a sheerlack of availablebuyersor sellers,hence resulting in what
we commonly refer to asa pattern breakout. In the caseof the
Winter- Spring2000
structure component, we have seen examples of how chart patterns, regardlessof whether they be reversalor continuation patternsin classicalterms,can be setapart from trendsby their characteristicperiodicity and wave structure.
If we acceptthe idea that classicalchart patternscan be broadly
characterized by general conditions, rather than by a variety of
pattern shapes,then perhapsclassicalchart patterns are truly
not the products of wishful or delusionalthinking assomecritics
allege. Unlike UFOs,we can point to evidencethat supportschart
pattern existencein the form of the volatility and structure components. In addition, we can utilize this template view of chart
pattern construction to help us locate and trade patternswithout
debatingover myriadchart pattern definitionsandtheir directional
significance.
14. Schabacker, Richard W. [ 19301. Stock Market Theory and Practice, B. C. ForbesPublishingCo., pp. 626.
15. Roth, Phil [1997]. Technica& Speaking, interview,TradersPress,
Inc., pp. 346.
16. Schabacker,Richard W. [ 19321. Technical Analysis and Stock
Market Profits, Pitman Publishing,pp. 296.
17. In just one example,the headline of LouisRukeysersMarch
1997newsletterdeclares:Leaving History to the Elves,This
Markets Charting Its Own Course. Rukeysergoeson to say
in big, bold print The typical elf lives in the demonstrably
vain hope that even-shortterm market action is scientifically
predictable, if only one can tweakthe chart one more time.
18. Schabacker,Richard M. [ 19301. Stock Market Theoq andPractice, B. C. ForbesPublishingCo., pp, 658.
19. Schabacker,RichardW. [ 19341.Stock Murk&Pro&s, B. C.Forbes
THANKS
PublishingCo., pp. 101.
20.
Schabacker,RichardW. [ 19341.StockMurketPr@ts, B. C.Forbes
Don Dillistone respondedto my requestfor backgroundinforPublishingCo., pp. 101.
mation on charting and pointed me towardsspecificresourcesin
21.
Aschinger,
Gerhard [ 19981.Reflectionson the Crash,article
the MTA library; John McGinley alsooffered severalsuggestions.
in
the
Swiss
Bank Corp.journal: Economicand FinancialProsBruce Kamich graciouslyprovided copiesof out of print material
pects,August/Septemberissue.
by D.G. Worden. Alan M. Newmanprovided copiesof material by
22. Brandt, Peter L. [ 19901.Trading Commodity Futures with ClassiGerhard Aschinger. Mike Moody offered help in verifying backcal Chart Patterns, Advanced Trading Seminars,pp.1428.
ground information.
23. In the literature of Schabacker,Wyckoff, Edwardsand Magee,
Jiller, Brandt et al., there is general consensus
that bar chart
FOOTNOTES
patterns are at best fallible asforecastingtools. Schabacker
1. Fosback,Norman G. [ 19761. Stock Market Logic, Dearborn Ficonnives to place above average confidence in the predicnancial Publishing,Inc., pp. 213214.
tivenessof somechart patterns, but not without disclaimers
suchas: ...accurateanalysisdependson constantstudy,long
2. John Murphy, LouiseYamada,Alan Shaw,Justin Mamis, Ned
experience and knowledge of all the fine points... (Stock
Davis,Alex Saitta,BruceKamich,RalphBloch,William ONeil,
Market Profits, pp. 35.)
John Tirone, Peter Brandt - thesenamesrepresenta sample
of well known market analystsand traderswho utilize classical 24. Lefevre, Edwin [ 19231,Reminiscences of a Stock Operator, John
chart patterns.
Wiley & Sons,Inc., pp. 125.
3. Shaw,Alan R. [ 19881. Technical Analysis - reprintedfrom Finan25. Gann, William D. [ 19231. The Truth of The Stock Tape, Financial Analyst? Handbook, DowJones-Irwin,Inc., pp. 313.
cial Guardian PublishingCo., pp. 125.
4. Dines,James[ 19721. How the Average Investor CanUse Technical
26. In the book Martin Pring on Momentum, International Institute
Analystifm Stock Profits, DinesChart Corp., pp. 171. Dineswas
for EconomicResearch,[ 19931,pp. 200,Pring givesan explaparaphrasing- Worden, D. G., [date unknown]. Article Tape
nation of how ADX can be usedto indicate declining direcReadingin an Old and NewKey in the Encyclopediaof Stock
tional movement asa precursor to new market trends.
Market Techniques,pp. 820.
REFERENCES
5. Murphy, John J. [ 19861.Technical Analpis of the Futures Markets, New York Inst. of Finance,pp. 322-323.
q Brandt, Peter L. [ 19901.Trading Commodity Futures with Classical
6. Murphy, John J. [1986]. Technical Analysis of the Futures MurChart Patterns, Advanced Trading Seminars
kets, New Ymlz Inst. @Finance, pp. 322-323.
I Dewey,EdwardR. and Dakin, Edwin F., [ 19471. Cycles
-The Set
7. Edwards,Robert D. and Magee,John [ 19921. Technical Ana+
ence of Prediction, Henry Holt & Company,Inc.
sisof Stock Trends, John MageeInc., pp.203.
I Dice, CharlesA. and Eiteman,Wilford J. [ 19411. The Stock Mur8. Edwards,Franklin R. and Ma, Cindy W., [1992]. Futures and
ket, McGraw-Hill, Inc.
Options, McGraw-Hill, Inc., pp. 444.
I Dines,James[ 19721. How the Average Investor Can Use Technical
9. Osler, C.L., and P.H. Kevin Chang [1995]. Head-and-shoulAnalysis fw Stock Profits, DinesChart Corp.
ders:Notjust a flaky pattern, paper,FederalReserveBank of
n
Edwards,Franklin R. and Ma, Cindy W., [1992]. Futures and
NewYork, August.
Options, McGraw-Hill, Inc.
10. Saitta,Alex [19981. ReversalFormations:Predictive Power?,
i
Edwards,
Robert D. and Magee,John [ 19921.Technical Analysis
article, TechnicalAnalysisof Stocksand Commodities,Novemof Stock Trends, John MageeInc.
ber.
I For@, RandallW., [April 28,1995]. Fed Gets Technical, Barrons,
11. Shaw,Alan R. [ 19881. Technical Analysis - repnntedfrom FinanpageMWIO, DowJones& Co., Inc.
cialAnalysts Handbook, DowJones-Irwin,Inc., pp. 316-317.
I Fosback,Norman G. [ 19761. Stock Market Logic, Dearborn Fi12. Koy, Kevin [1986]. The Big Hitters, Intermarket Publishing
nancialPublishing,Inc.
Corp., Interview with Robert Prechter, pp.159.
I
Foster,
Orline D. [1935]. The Art of Tape Reading Ticker Tech13. Schabacker,RichardW. [ 19301. Stock Market Themy and Pracnique, InvestorsPress,Inc. - 1965ed.
tice, B. C. ForbesPublishingCo., pp. 601.
MTAJOURNAL
43
I
n
n
I
I
I
I
n
I
I
i
I
I
I
I
I
I
n
w
n
I
I
Frost, John and Prechter, Robert. [ 19781 Elliott Wave Principle,

New Classics
Library, Inc.
Gann, William D. [ 19231. The Truth of Tke Stock Tape, Financial
Guardian PublishingCo.
Hamilton, William P. [ 19221.The Stock Market Barameter, Harper
& Brothers Publishers.
Hurst, J. M. [ 19701.The Pn@ Magic of Stock Transaction Timing,
Prentice-Hall,Inc.
Jiller, William L. [ 19671.How ChartsCan Help You in The Stock
Market, Trendline.
Kaufman, Perry J. [ 19871. The New Commodity Trading Systems
and Methods, John Wiley & Sons,Inc.
Koy,Kevin [ 19861. TheBigHittem, Intermarket PublishingCorp.
Lefevre, Edwin [19231. Reminiscences
of a Stock @eratar, John
Wiley & Sons,Inc.
Murphy, John J. [ 19861.Technical Analysis of the FuturesMarkets,
NewYork Institute of Finance.
Nixon, John Brooks,Jr. [ 19581.The Seven Fat Years: Chnmtiles of
Wall Street, Harper & Brothers Publishers.
Plummer,Tony [ 19891. The Psycho&y of Technical Analysis, Probus
PublishingCompany.
Pring, Martin J. [ 19931.Martin pring on Market Momentum, Institute for Economic Research,Inc.
Schabacker,RichardW. [ 19301. Stock Market Theary and Practice,
B. C. ForbesPublishingCompany.
Schabacker,RichardW. [ 19321.TechnicalAnalysis and Stock Market Pro@, Pitman Publishing- 1997ed.
Schabacker,RichardW. [ 19341.Stock Ma&tPn$ts, B. C. Forbes
PublishingCompany.
Schultz, Harry D. [1966]. A Treasury of Wall Street Wisdom,
InvestorsPress,Inc.
Shaw,Alan R. [ 19881.Technical Analysis - m@intedfiDm Financial
Analysts Handbook DowJones-Irwin,Inc.
Sheimo, Michael - Michael Sheimo on Dow Theory- Technical
Analvsisof Stocks& Commodities,June 1998.
Sklarew,Arthur [ 19801. Techniques of a Professional Commodity
ChartAnalyst, Commodity ResearchBureau.
Sperandeo,Victor [1991]. Trader Vie - Methods of a Wall Street
Master, John Wiley & Sons,Inc.
Pistolese,Clifford [ 19941. Using TechnicalAnalysis, McGraw-Hill,
Inc.
Wilkinson,Chris [ 19971.Technically Speaking, TradersPress,Inc.
Wyckoff, RichardD. [ 19101.Studies in TapeReading, FraserPub
lishing Company,Wyckoff/Stock Market Institute, CourseUnits
1 and 2. SMI, Phoenix, AZ tel: (609)-942-5165.
BIOGRAPHY
After graduationfrom BabsonCollegein 1988,Dan Chesler
beganhis careerasa cashcommodity trader, buying and selling in diversemarketsrangingfrom industrial tomato pasteto
wheat and corn. Danjoined the LouisDreyfusGroup of companiesin 1992asa price-riskmanagerwhere he helped managethe worldslargestcitrus products hedging and arbitrage
program. In 1996he worked asan analystand trading assistant for a mediumsized,managedfutures fund. Currently he
is a partner in a Miami basedproprietary trading firm. Dan
livesnear PalmBeach,Florida.
44
MTA JOURNAL

53 - 2000 Winter

Diunggah oleh

Informasi Dokumen

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

53 - 2000 Winter

Diunggah oleh

Hak Cipta:

Format Tersedia

II II1

Winter-Spring 2000 0 Issue53

New York, NY 10048

A Not-For-Profit ProfessionalOrganizatione Incorporated1973

THE MTA JOURNAL- TABLEOF CONTENTS

MTA JOURNAL EDITORIAL STAFF

MTA MEMBER AND AFFILIATE hFORMATION

199!biOOO BOARD OF DIRF~ORS AbIDMANAGEMENT CoMhnTrEE

PREDICTING RANK ORDER STOCX PRICE PERFORMANCE USING A MULTI-FACTOR

IS VALIDATING THE CONCEPT OF THE WAVE PRINCIPLE

RobertR. Prechter,Jr., CMT

BUILDING BLOCS OF CLASSICAL

MTA JOURNAL * Winter - Spring 2000

MTA JOURNAL * Winter - Spring 2000

Henry 0. Pruden, Ph.D.

Jeffrey Morton, M.D.

Lake Quivira, Kansas

PRISM Trading Advisors

Connie Brown, CMT

CharlesD. Kirkpatrick, II, CMT

Kirkpatrick and Company,Inc.

John McGinley, CMT

Michael J. Moody, CMT

Richard C. Orr, Ph.D.

Kenneth G. Tower, CMT

Theodore E. Loud, CMT

J. Adrian Trezise,M. App. SC.(II)

Cookson,Peirce& Co., Inc.

TelAdvisor Inc. of Virginia

Consultant toJ.P Morgan

MTA JOURNAL * Winter - Spring 2000

ABOUTTHE MTA JOURNAL

Winter - Spring 2000

Invitation to MTA educational meetings

Annual subscription to the MTA Journal for nonmembers:

$50 (minimum two issues).

Single issue of the MTA Journal (including back issues):

$20 each for members and affiliates and

MTA JOURNAL 0 Winter - Spring 2000

(4 Officers, Past President and Committee Chairs)

Philip B. Erlanger, CMT

George A. Schade,Jr., CMT

Lisa M Kinne. CMT

David L. Upshaw, CFA, CMT

Dodge 0. Dorland, CMT

Winter - Spring 2000

Samual H. Hale, CMT

EDITORIAL COMMENTARYON CONTRIBUTIONS TO THE BODY OFKNOWLEDGEIN TECHNICAL ANALYSIS

appeared in the MTA Newsletter, January

MTA JOURNAL * Winter - Spring 2000

MTA JOURNAL * Winter - Spring 2000

The momentum index in Chart 1 below shows the rank of an

.._..,. -.- __... -.i+

5. Weexpected the averagevolatility, asmeasuredby beta, for the

zon within specificmomentum ranking decileswasnot stable

JOURNAL * Winter- Spring2000

9. We conclude that for the time period tested, the momentum

The Momentum Ranking Index

the StockValdatabase.For companieswith lessthan 52 weeksof

by the Jensen Modified Capital Asset Pricing Model (MCPM), a

Winter - Spring 2000

Fe? Rate ,x,

SCIENCEIS VALIDATINGTHECONCEPTOF THE

(source: The Fractal Geometryof Nature)