For the first time the Bronwen Wood Memorial Prize was open to

candidates of the Spring Diploma examination. Fittingly, it was awarded

to a candidate who wrote an outstanding paper, earning the highest mark
ever given in the Diploma examination 94%. The examiners offer their
congratulations to Nicholas Hodson on his excellent achievement.
Last year saw a significant improvement in the overall quality of
examination papers and the trend was maintained this year. Although
there were fewer candidates, 43 as opposed to 54 last year, more
distinctions were awarded four compared to three in the previous year.
However, the overall average mark of 71.7% was slightly down on last
years 72.1%.
The committee would like to thank all the lecturers; it is pleasing that their
efforts have produced such worthwhile results. It also nice to see that some
of the students from earlier courses have progressed to being lecturers
themselves. This was the first year that the courses have been held at the
London School of Economics. The new location and the move to the
Society running the course by itself have been heralded a great success and
a new round of lectures begins in the New Year (see page 11 for details).
There have been a few changes on the Committee. After serving for many
years as the Societys treasurer, Vic Woodhouse, has stepped down and we
would like to thank him for his contribution. Simon Warren, who has been
working alongside Vic in bringing the Societys book-keeping system into
the 21st century, has taken over the job of treasurer. Earlier in the year
David Watts was co-opted onto the Committee. David has his own
company, Market Systems, and for a number of years he has been
producing the Software reports in the Journal. He is also the author of the
annual survey of technical analysis/data products. We are delighted that
he has joined the Committee and will be taking a fuller role in the running
of the Society. Another very welcome addition to the committee is David
Sneddon. David is an extremely experienced technical analyst, having
worked with Credit Suisse First Boston for nine years.
Technical analysis has been the subject of much comment in the press in
recent months. Philip Coggan, the Investment Editor of the Financial
Times, announced that he has had what might be described as a
Damascene conversion in reverse. After years of watching the Coppock
Indicator, he has become disillusioned with it and challenged technical
analysts to participate in a test devised by Patrick Burns. Apparently very
few analysts took up the challenge, probably because the test
demonstrated a lack of understanding of the basic concepts of technical
analysis as the Chairman, Adam Sorab, pointed out in a letter to the FT
editor which was published on September 13th.
Our own challenge to members to give their views on whether the
market had bottomed met with a similarly poor take-up. Those who did
reply thought that the March low would not represent the bottom of the
bear market but it is encouraging to note that, since the last issue, the
market has been trending higher.
STOP PRESS: IFTA Conference
The IFTA Conference in Washington was well attended with a good
contingent from the UK. The general view was the uptrend in equities
would continue for another year but that investors should not be too
greedy. There are concerns that, once the Presidential election is out of
the way, prices could slide. On the currency front, Fred Bisset of A.G.
Bisset noted that the Japanese authorities had been intervening
heavily to prevent the yen strengthening against the dollar but he
suspected that eventually they would have to abandon this policy
which could see the dollar dropping towards a target of 80. There was
broad consensus that commodities are in a secular bull market. The big
story here is China and there was considerable debate about when the
renminbi is going to float.
IN THIS ISSUE
STA Exam Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
R. Giles Forward Looking UK Interest Rates:
a point and figure chart approach . . . 3
R. Ramyar Ganns Legacy:
a modern perspective . . . . . . . . . . . . 6
R. Lie The Trend Intensity Indicator . . . . . 11
M. Blazey Letter . . . . . . . . . . . . . . . . . . . . . . . . . . 11
G. Celaya Web Notes from Academia . . . . . . . 12
November 2003 The Journal of the STA
Issue No. 48 www.sta-uk.org
MARKET TECHNICIAN
COPY DEADLINE FOR THE NEXT ISSUE
31st January 2004
PUBLICATION OF THE NEXT ISSUE
March 2004
FOR YOUR DIARY
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MARKET TECHNICIAN Issue 48 November 2003 2
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DISTINCTION
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Issue 48 November 2003 MARKET TECHNICIAN 3
In this article, forward looking interest rates are based on pattern
recognition and congestion. This assumes the data series can be
interpreted as a memory pattern using past performance. Attention
is focused on the votes of constituent members of the Bank of
Englands Monetary Policy Committee. The point and figure chart is
able to identify structural breaks in the data, thus only relevant time
periods need be considered.
Introduction
Technical analysis is usually associated with financial markets, where
the interaction of buyers and sellers find a market clearing price.
Additional information is provided by the volume of interest at
defined points in time and price. Such information is portrayed in the
form of a time series chart where critical / sensitive price levels and
time targets are overlaid.
Accuracy in forecasting normally depends on combining a correct
price with correct timing and forecasting failure occurs when one or
both these targets are not met. However, not all forecasting takes this
style. If we consider interest rates, the timing element is often
separated from the level of interest rates. The former becomes the
minor partner. Baker (2001) How low can interest rates go? and the
Bank of England (BoE) (2003) ...an increase in interest rates might
soon become necessary (a support level?) intimate that timing has a
lower role to play and all levels are not equal. Hence, a technical
analysis approach may assist policy makers in interest rate
determination especially as methodological objections may be
diminishing.
Whilst prospect theory and the endowment effect are not common
terms for technicians, repetition of bad mistakes and placing extra
value on items owned will have a familiar ring in behavioural trading
errors. This raging battle (Economist 2003) between economists
moving from neoclassicism to behaviouralism lends support to the
technicians approach. Previously, the technical approach to financial
theory had been relegated to the higher moments of the non-linear
process (Neftci 1991) although important research work was finding
its way into the academic literature (Lo and MacKinlay 1999). Clemen
(2001) summarised the forecasting experience as follows ...simpler
forecasting methods perform well on average whilst statistically
sophisticated methods tend to perform poorly on average
UK interest rate setting
Forecasting plays a crucial role in economic policy decision-making,
especially two-year ahead inflation targets and the pattern of interest
rate changes can provide a planned convergence on currencies and
economic cycles, especially within the European Union. Allen (1999)
and Price (1996) describe the difficulty central banks have, and in
particular the Bank of England (BoE), in forecasting interest rates.
However, interest rate setting is often based on incorrect inflation
forecasts (Howells and Blain 2000). Basing financial decisions on
market interest rate expectations can be also be costly and
dangerous ( FT 2001a). To reflect the uncertainty, BoE forecasts now
embody probability distributions of economic variables in the form of
fan charts. The distributions need not be symmetric. With such
uncertainty, Monetary Policy Committee (MPC) members increasingly
resort to judgement and the characteristics of such judgements over
time are well documented and are of interest to technicians.
Since May 1997, the Banks monetary policy committee has been
granted rate-setting powers consistent with a UK inflation target set
by the UK Treasury, currently 2.5 per cent. As long as financial
markets believe that the MPC is sticking to its task, or that rising
inflation is due to temporary factors, then long term inflation
expectations are likely to remain fairly stable, and UK gilt yields rises
will be constrained. A change in the business cycle has caused a
reversal of fiscal policy, hence the importance of the interest rate
/inflation axis.
The make up of the MPC comprises nine members with a majority of
five from BoE staff. The other four are appointed by the UK
Chancellor of the Exchequer for fixed time periods. (Observer 2001a)
Initially, a hawkish MPC raised rates five times between May and
November 1997. The then eight committee members had to cope
with an in-house inflation forecast breaching the government
guidelines and a highly erratic economy with sectors such as
information technology proving insensitive to interest rate changes.
By February 2000, the headline rate of inflation began rising,
suggesting that underlying inflation would rise above the target by
the year-end, but a year later inflation was falling below target.
Speculation as to fundamentals that may affect future changes split a
cohesive committee on several occasions. Hence, the monthly
meeting and the resultant interest rate set can be viewed as a contest
of differing financial economic philosophies. The purpose of
committee members is not only to vote in a certain direction, but also
to convince sufficient members to support their stance. A
psychological element is part of the members judgement. The MPCs
recorded transparency of views and votes is at the extreme spectrum
of central bank interest rate setting. These views are translated into a
qualitative voting analysis of each member. Given the range of beliefs
on the usefulness of standard econometric forecasting models as an
aid to MPC policy making, it is worth considering the effectiveness of
alternative forecasting methods used in financial markets based on a
theory of contest. One MPC member (FT 2001b) emphasised the bias
in the fan charts of the Bank of England towards an upside risk of
inflation and called for a broader range, in the target. MPC members
(FT 2001b), (Observer 2001b), have also questioned the appropriate
inflation target. In theory, base rate changes should be unpredictable
and set according to the BoE forecast. However, by employing a
strategy of raising rates gradually, the MPC can insure against a rise in
inflation caused by above trend growth. This would not choke off
growth or rule out the new paradigm view (that the trend growth
had risen). The MPC tends to err towards the orthodox view. Belief is
in the supply side view that attributes the current upturn to improved
supply. New technology has boosted capital spending, increasing
competition, forcing down prices and attracting more customers.
Hence, rapid economic growth is a sign that increased potential
output will reduce the inflationary threat. An increase in immigration
has also been attributed to above average growth forecasts (Guardian
2002). The BoE (1997) found that UK economic fluctuations were
supply side driven.
With this in mind, this article considers whether the technical method
of point and figure charts can be used to aid policy decision making of
interest rates. Point and figure charts also have the advantage of
concentrating on target levels. This shows some coherence with the
pattern of interest rate setting, which may not change its level for
several periods and then follow with a period of rapid interest rate
movements.. The UK is left as the dominant economy within the EU
that is not a member of the Euro. A greater convergence with the
Eurozone economies is required before entry. The important role of the
US dollar in Euroland trading has been a primary reason for the British
Pound to not track the Euro but to have stability against the US dollar.
Therefore, this paper can address the short-term problem of the MPC
targets by establishing classic support and resistance levels that are
used in financial markets but differ from standard statistical
significance.
Clements and Hendry (CH1998) argue that the constant time
invariant data generating process, perfectly replicated by a
forecasting model, is not consonant with an empirical track record of
Forward Looking UK Interest Rates: a point
and figure chart approach
By Ronald Giles
MARKET TECHNICIAN Issue 48 November 2003 4
large predictive failures. A theory of forecasting allowing for
structural breaks may provide a useful basis for interpreting and
circumventing predictive failure in economics. Following a shock,
the system is taken some distance from its theoretical equilibrium
and estimating such equations using time series techniques without
the adjustment for the structural break will generally be unstable.
Omeroid, suggests that containment of shocks is a deeper matter
than allowed for by CH. Box-Jenkins type models, however, which
contain a unit root, will adapt quite well to shocks, (Granger 1998),
and soon return to their previous performance level, thus,
emphasising the benefits of non-deterministic modelling. Smith
(1998) responds to CH by suggesting that it is a further development
of the Hendry (1986) concept. Smith concludes that Hendrys
approach gives good reasons for adopting the practitioners stance
on forecasting. Theorists find that the methods that work empirically
are not those that would be predicted by statistical theory.
At the last trough, the UK fourth quarter inflation figure for 1993 had
an out-turn of 1.4 per cent. This presented a problem for the major
forecasters who regularly forecast eight quarters ahead. The timing of
the forecast starting point was unfortunate in that the UK had left the
ERM (European exchange rate mechanism) in September 1992,
expecting inflation to rise. In fact, it fell sharply, against all the
established theory of floating exchange rates being associated with
higher inflation in the past. Of the 52 UK forecasters, only one was
within an error of +/- 1/2 per cent error. The average error was 1.73
per cent, an average 123.6 per cent overshoot. By 1996 trends were
well established, and forecasts improved dramatically. Of the 40
forecasters predicting fourth quarter values for 1997 inflation, over 82
per cent were within +/- 1/2 per cent error. The average error was
+0.15 per cent representing a 5.5 per cent overshoot. Figures for base
rate forecasts showed interesting results. On an out-turn of 7.25 per
cent for UK base rates in the fourth quarter of 1997, the forecasting
panel (abandoned in May 1996) advising the Bank of England had
forecast a 5.8 per cent interest rate. Other forecasters fared better. The
average error was -0.2 per cent and almost 30 per cent of the
forecasters were within +/- 1/4 per cent of the outcome, thus
anticipating most of the interest rate rises by the MPC. In 1999, two
out of 44 forecasters accurately forecasted a UK base rate of 5.5per
cent at the end of the year, another ten were within an error of +/-
1/2per cent. An error in the UK average earnings figures (discovered in
1998) had sent base rates rising to 7.5 per cent in 1998. A downward
incremental fall to 5 per cent during 1999 was reached before another
turn around led to a UK base rate of 6 per cent by February 2000.
Interest rates started to fall in 2001 to 4 per cent by the year end. No
forecaster at the start of the year had predicted such a fall. This fine
tuning of interest rates has been questioned on several fronts. NIESR
(1999) has evaluated the overall impact of these interest rate changes
since the MPCs inception and concluded that it was no different to a
no base rate change. This analysis is supported by a review in the
London Guardian (1999) the snag is the end product.... It is becoming
hard to avoid the view that the MPC.... is a body which has difficulty
seeing the wood from the trees.. Changes in monetary policy take
some time to make themselves felt. In a low inflation environment the
time lag between policy changes and outcome may become shorter,
however, it is questionable that the outlook for inflation between April
and November 1999 changed so much that it required four base rate
adjustments, two down and two up. Another downward spiral of
interest rate cuts took place in 2001. What is clear is at or near the
turning points on base rates, the views of the committee become
more diverse, similar to the way investors respond in financial markets.
What is not captured in the economic forecasts is the sentiment by the
decision makers. Hence the outcome of the MPC vote will at such
times deviate from the forecasts.
Point and figure charting
Market action, as described in Murphy (1998), is important because it
acts as a leading indicator of known fundamentals. The freedom from
relating one variable with another over time provides an added
bonus to the technical analysis approach, primarily because economic
relationships are not well defined for forecasting purposes. Some
charting methods are able to use all the available price information
over a given time period or alternatively ignore the time element
altogether. It is the latter approach that concerns us. The point and
figure method is an extreme example and is not widely used
generally in financial forecasting or specifically in technical analysis,
partly because of the current emphasis on time series forecasting. It
is rarely used as a primary indicator partly because other methods are
more specific for certain tasks. Among technicians its take up rate is
rarely above 10 per cent. Reviewing the literature, it appears never to
have been used in economic policy forecasting.
The term point and figure is attributed to de Villiers (1933). Prior to
that it had been known as the book method. Dow indicated that a
founding date was 1886, (Murphy 1999). Point and figure charts are
ideal for long term observations without being handicapped by
defining long-term relationships, using up less space because there is
no horizontal time axis. The conventional cardinal system of charting
is replaced by an ordinal system of rises and falls causing movement
along the horizontal axis. The result of this alternative approach to
forecasting is that turning points are clearly defined. Breakout
positions both up and down are established, defining stop loss or
trigger levels. These can be of immense use to policy makers as a
form of support and resistance level. Furthermore, as a result of its
construction, the point and figure approach identifies congestion
levels from which future turning point targets are derived. Hence the
time series data can be reconstructed into groups of structural
breaks. Some structures are looped within each other. Whilst this is
obvious to the chartist, it is undetectable by conventional modelling.
Therefore, as extraneous information they provide more specific
information than the BoE forecasts. We consider determination of
current UK base rates in the way nine members of the MPC vote on
altering the base rate. The monthly rate declaration is reported by
the media as a contest of different ideas and groupings within the
MPC, being labelled activists and gradualists as well as hawks and
doves (Guardian 2002). Prior to the MPC, interest rate setting was
undertaken by a UK Treasury Committee headed by the Chancellor.
Thus interest rate setting has always been, in practice, a consensus
view. The contention that point and figure charts are often said to be
one dimensional because of the absence of a time scale is incorrect.
They are two- dimensional because movement along the chart takes
place on direction reversals. For interest rates this could be defined
as a policy reversal. These reversals have a filtering method assigned
to them that is unique to technical analysis. Therefore, if the
price/interest rate movement is less than the assigned movement it is
ignored. Point and figure charts also filter movement differently
depending whether they are with or against the trend. No other
method has the ability to do this. Interest rate change in a column of
Xs is plotted when the movement is up. A series of Os is plotted in
the next column corresponding to a fall in price or level. A significant
upward movement occurs when it breaches a previous turning point.
Results
A degree of modelling the point and figure chart is required. A series
of different box reversal systems with different unit changes of
interest rates was considered but not produced here. In order to
capture most of the activity a one box reversal was considered
optimal. The most common UK interest rate change is 0.25 per cent.
To filter out single rises and falls of 0.25per cent, a 0.5 per cent box
size is used to obtain the best predictor. The count on the horizontal
congestion fitted the down/up count on the vertical scale. The
reason for such symmetry is reflected in balance in the market. This
works quite well for the one box reversal system for the UK base rates
as shown in a point and figure table (PFT). The method requires that
the lower maximum activity level (MAL) is used. Normally a wall of
upward movements (Xs) is required on the extreme left side and a
wall of (0s) is located on the right side of the congestion. However,
extending this method,we have also used two walls of Xs where
applicable. Hence the number of horizontal boxes is a predictor of
the upward or downward movement to give a target level. If the
prediction is incorrect, this often indicates that the congestion period
has not finished. Six maximum activity levels are identified and the
target levels for MAL 2, 3 & 4 are readily achieved. MAL target level 1
eventually reaches the required level but only after three attempts at
breaking through a resistance level. The benefit of this filter is that
points of support/resistance can be more clearly defined. Hence the
decision by the MPC whether to raise interest rates a further 0.25 per
cent in February 2000 did trigger a change of direction and sentiment
to a rising interest regime under a one box regime. No resistance was
found at this new level until over 7.0 per cent, then over 7.5 per cent.
Such vital information is not available to the policy maker from
fundamental models. Target 4 having been achieved, suggests that a
Issue 48 November 2003 MARKET TECHNICIAN 5
new structure started at the beginning of the Labour Government in
1997. Target 4 started its inception over a decade earlier. Yet with a
common starting point two or more target levels may occur. Therefore
the point and figure method in interest rate terms is forward looking.
For conventional forecasting the start is the data collecting stage.
Forecasters have no idea what data period is relevant to their
forecasts. Only when a successful forecast has been made is the
appropriate time period for estimation confirmed. This in one sense
defeats the object of the forecast. The point and figure chart reveals
that appropriate time periods (measured by the number of interest
changes) do vary and do overlap. Once the target level has been
reached, the appropriate time period is confirmed.
The notion of a point and figure approach has inferences that may be
acceptable to financial markets, but not to decision-makers. The
reasoning behind maximum activity levels and the balancing factor
determining future interest rate turning points implies that the
custodians of interest rate change are following a behavioural path in
which future interest rate turning points have been set some time in the
past. This may be as long as a decade before hand. The most recent cut
(July 2003) in base rates reaches the target level, indicative of a trough
and a support level. Therefore the September minutes of MPC showed
that despite a 9-0 vote for unchanged rates,an increase in interest rates
might soon becomes necessary is consistent with our results.
Past performance on the frequency of changing rates may be a guide
to the probability of a future change in the same direction and can be
used as a forecasting tool. Since 1985 UK base rates have been raised
on 33 occasions, but have been lowered on 57 occasions. Rates were
raised on 15 occasions within a month of a previous rise. The
incidence of a rate rise falls drastically after an interval of a month (and
hence the probability). On the lowering of rates, most are followed by
a further fall within a month (26 out of 57 reductions).
Conclusion
This article started with a quote from the Bank of England Inflation
report relating to raising interest rates. The report did not mention a
time or level target. The technical analysis method used was able to
consider time and level targets separately. We have been able to
demonstrate that using the point and figure charts one box system,
important turning point levels for UK interest rates are predictable
sometimes decades in advance. The importance of interest rate
setting should prioritise forecasts. Hence finding the turning points
has a higher priority than predicting the level at a given date. Most
interest changes occur in subsequent months and a time delay
reduces the probability of a further rate change in the same direction.
With the aid of a point and figure chart, interest rate setters may be
able to have a different type of understanding of the environment in
which they are operating. The method works equally well with other
interest rate setters. When applied to US base rates, the level of
congestion merited the drastic falls seen.
References
Allen W A (1999) Inflation Targeting: The British Experience
Handbooks in Central Banking, Lecture Series no 1. Centre for
Banking Studies, Bank of England UK.
Barr D G and Peseran B (1995) An assessment of the relative
importance of real interest rates, inflation and term premia in
determining the prices of real and nominal UK bonds Bank of
England working paper series no 32
Bank of England Inflation Reports (1997-02), various issues.
Clemen R.T. (2001) Simple versus complex methods Journal of
Forecasting Vol 17, No4, 549-550
Clements M and Hendry D (1998) Forecasting Economic Processes,
International Journal of Forecasting Vol 14, No 1, 111-132
Corkish J and Miles D (1994) Inflation, inflation risks and asset
returns Bank of England working paper series no 27
DeVilliers V (1933) The Point and Figure Method of Anticipating
Stock Price Movements traders Library Press, Ellicott City,MD
Deacon M and Derry A (1994) Estimating the term structure of
interest rates Bank of England Working paper series no 24
Economist The (2003) To have and to holdAugust 28th Edn.
Economist The (2001) How low can they go? Oct 4th Edn.
Economist The (1998) A Survey of EMUApril 11 edition
Financial Times (2001a) Alternatives to inflation targets
February 28 edn
Financial Times (2002 b) Fallible guides to your future
May 25th edn.
Financial Times (1997) Forecasts for 1998, p5 Weekend Money Dec 28
Financial Times (1998) Weekend Money p2,May 9 .
Granger C, Omeroid P, and Smith R (1998) Comments on Forecasting
Economic Processes International Journal of Forecasting vol 14
no 1 , 133-137.
Guardian, the London (2002) The Old Lady Opens Up- May 19 edn.
Hans Franses P and Ooms M (1997), A periodic long memory model
for quarterly UK inflation International Journal of Forecasting,
Vol 13 No 1, 117 -126
Hendry D (1986) The role of prediction in evaluating econometric
models. Proceedings of the Royal Society A407, 25-33
Hendry D and Clements M (1998) Forecasting Non-stationary
Economic Time Series ESRC Economic Modelling Workshop
Jan 1998
Howells P and Bain K (2000) Financial Markets and Institutions
Third ed. Prentice Hall
Joyce M A S (1995) Modelling UK inflation uncertainty: the impact of
news and the relationship with inflation Bank of England working
paper series no 30
Continues on page 9
Point and figure chart of UK bank rate, minimum lending
rate and banks base rate 1950-September 2003.
One box reversal at 0.5 per cent intervals.
Legend and legacy
William Delbert Gann was one of the early twentieth centurys great
Wall Street personalities whose trading career spanned from the turn
of the last century up until his death in 1955. His place in the trading
community was respected and affirmed by the trading legends of his
day. Wyckoffs 1909 interview with Gann in the Ticker and Investment
Digest independently verified 92% profitability, over 25 days and 286
trades, and Gann was also one of several creditors who would lend
Jesse Livermore money when he overextended his risk. Uncanny
market forecasts were issued in advance for several decades and his
supposed studies of commodity cycles back to the 1200s were
rumoured to have profited him to the tune of $50m by his death
($335.6m in 2002 prices).
There are several versions of various stories regarding fortunes, or lack
thereof, but a real legacy was indeed bequeathed by Gann to traders.
Gann wrote a number of public and private courses and books
covering a range of conventional and esoteric techniques. His works
do not spoon-feed or provide step by step analysis routines, and it can
thus be difficult to prioritise the techniques given. The most powerful
tools are either the most boring or difficult to work out when to listen to
them. Nevertheless, the reality must be stated: Gann was a self-
marketer who knew the value of mystique and silence. This truth has
allowed many vendors of Gann related products and services to
exploit the holy-grail appeal of the legend at the expense of the
primary truth regarding Gann: he was above all a disciplined trader.
This article focuses on the sound trading advice and primary
techniques most easily integrated into other methodologies, whether
position or intra-day trading. Swing chart trend analysis is introduced
and integrated into the modern indicator environment followed by an
introduction to time and price proportionality. Trading strategies and
key points to note are outlined, followed by an analysis of the S&P.
Gann trend analysis
Trend analysis is the most important part of Gann analysis and asks
the fundamental question of whether you want to step in front of the
train. It is conventional and unexciting but basic realities are too
often ignored by those hunting the truth. Useful swing chart
techniques (similar to P&F) are offered by Gann to filter out noise,
identifying support /resistance relevant to your timeframe whilst
ignoring insignificant levels. The interpretation of swing charts is
similar to other technical analysis techniques an uptrend is a series
of higher highs and lows and a downtrend is signalled by lower highs
and lows. A break of previous turning points shows that the current
trend is at risk.
Figure 1 shows the weekly cash S&P for a swing to turn up a market
must have three bars where the top of the bar is higher than the
previous bar and the low is higher than the previous bar (two bars
can be used when corrections are minor in faster markets). A choice
needs to be made as to how to treat inside and outside bars: ignore
them or base swing changes on the close. The x-axis on the first chart
in Figure 1 does not represent time, as per P&F. Figure 2 shows
another type of chart offered by Gann, the Point Swing Chart. This
daily chart for July Soybeans requires a 30c turn to alter swing
direction, 30c being chosen as appropriate for this particular market.
It has to be noted that traded points do not cater for proportionality
e.g. 100 point swings on the S&P were not appropriate in the 1980s
(this issue does not present as severe a problem if traders tend to
think in fixed units over time e.g. bonds or some intraday
environments). Several charting programs also include swing filters
based on percentage change, for example Metastocks Zig-Zag. The
interpretation of all of these swing charts is merely that the last
extreme to be broken shows the current trend is at risk and may be
treated as changed.
Role of wider trend analysis
If swing charts suggest when a trend is at risk and allow one to
conceptualise trend direction, how can one synthesise this approach
using modern indicators? One could filter swing chart signals using
indicators such as moving average direction and position relative to
price,MACD, ADX, DMI +/-, etc., or vote trend direction using a
combination of these. Note can also be taken of when a trend is over
extended; oscillators are persistently oversold in the later stages of
trends, for example price divergence,MACD and ADX are at extremes
or +/- DI are highly divergent. When this is the case, one can
determine price and time levels at which one could consider
tightening stops but remember that a trend is a trend...
I cannot over-stress that the trader should also assess the sustainability
of the trend by looking at the wider market environment. The technical
position of industry and sector indices should be examined and relative
strength analysis between these and wider indices must be considered
in order to appreciate what is transpiring and how general or specific a
particular trend is. Furthermore, Rome was not built in a day.
Accumulation and distribution cycles require time/volume to be spent
at major tops and bottoms; the CFTCs Commitment of Traders Report
being helpful in this respect. Furthermore, Livermores underlying
conditions also warrant analysis i.e. the fundamentals themselves. The
need to account for these factors challenges the pride in ones ability to
forecast on the basis of an individual chart alone. Whilst individual
chart analysis is undoubtedly powerful, this is one of many areas where
a traders humility needs to coexist with necessary confidence in
pulling the trigger.
Time and price ratios
I said above that one can determine price and time levels at which one
could consider tightening stops. Basic support/resistance and price
MARKET TECHNICIAN Issue 48 November 2003 6
Ganns Legacy: a modern perspective
By Richard Ramyar MSTA
Figure 1 Swing Chart (S&P Weekly)
Figure 2 Point Swing Chart (July Soy)
Issue 48 November 2003 MARKET TECHNICIAN 7
retracements are familiar to most of us who use technical analysis; yet
additional related techniques are offered by Gann analysis.
Fibonacci ratios based on F(1.618) and J(0.618) are used to project
ranges from past swings and examine retracements. Both of these
are performed in respect of time and price. Gann did, however, use a
different set of ratios based on 1/8 divisions:
8/8 100%
7/8 87.5%
6/8 75%
5/8 62.5% (similar to 61.8% Fib ratio)
4/8 50%
3/8 37.5% (similar to 38.2% Fib ratio)
2/8 25%
1/8 12.5%
0/8 0%
Since most readers will be familiar with price retracements and
projections, for example in ABC wave projections, the next section will
only focus on time analysis.
Time analysis
Time considerations can start with cyclical analysis, such as
seasonality, particularly for agricultural products but this is only a
guide to cyclical perceptions of fundamental pressures. The monthly
cycle and even oscillators can be tied in, as these are quasi-cyclical,
but they do require selection of appropriate parameters. The
importance of time results from profitability being a function of both
price and time. Keyness comment that we are all dead in the long
run applies to both fundamental and technical forecasts. Moreover,
there is an emphasis on the time needed to build up the potential
energy required for large moves as people need time to forget what
went before again, accumulation and distribution cycles take time.
In terms of market geometry, the same analytical principles that are
applied to time are applied to price analysis, as it is believed that time
and price are interchangeable and linked in their analysis. Figure 3
shows that the 1500c level approached in early June has been pivotal
since the late 1980s in the CSCE Cocoa market. An examination of
time retracements and projections on the July contract showed that
the downtrend stalled at the beginning of June at 161.8% of the
previous upswings duration and 100% of the time taken between the
October 2002-January 2003 peaks. These lows proved to be the first
trough in a double bottom from which we have just broken out.
These techniques do link through to classic pattern analysis. For a
familiar example Figure 4 shows the symmetry between both
shoulders and the head of the head and shoulder patter much spoken
of on the S&P. Such analysis is best done using calendar days,weeks or
months, with a spreadsheet making the calculations simple. There are
many ways of looking at time but, as Gann would have put it, there
are also pressures of both time and space in this article.
Percentage projections and square root growth
Another simple Gann method for projecting levels involves
percentage projections from highs and lows, based on change from a
single point, rather than price retracements e.g. low at $100 + 25% =
$125, $100 + 50% = $150, etc. Combined with Ganns Square Root
Growth Spiral projections, which are related to the Fibonacci growth
spiral, these levels can be helpful (see Connie Browns video for raising
funds for the MTA library destroyed in the WTC attacks). In 1987 the
DJ-30 had made a 360 degree progression (a full circle across square
root growth) from the 729.9 low (the start of the 1980s bull market) to
the high at 2746.65. This also coincided with a series of 25% and
square root growth projections thereby giving a heads up indication
to be taken account of in the environment of bond yields and
inflationary pressures at that time. This is about all one can take from
any of these techniques as they stand one would have waited to see
how the market traded these levels as they did not predict a crash per
se, they just provided the point at which there was the strongest
confluence of projections. Furthermore, and most importantly, these
techniques do not dictate how one would trade such analysis or the
position management itself, as with any indicator or charting
technique.
Time: price angles
As well as time and price being interchangeable in their analysis,
relationships between them are pivotal in analysis offered by Gann.
Most technical analysts do already analyse time:price relationships
using trendlines and channels. I have often heard it asked why
trendlines work? From a Gann perspective, the reason is one of a
constant relationship between time and price at turning points in the
market. When a trendline is drawn supporting three troughs what we
are saying is that the time:price relationship between these troughs is
constant (if a chart is plotted semi-log the constant relationship is
between percentage changes and time). The optimum time: price
relationship is often referred to as the Gann line or the 45 line. Many
programs do not plot this line correctly, as the 1x1 angle is not in fact a
45 line its screen appearance is immaterial. It represents time:price
unity e.g. price has moved 10 points in 10 calendar days. Time units can
be calendar days,weeks, months or years and price units can be dollars
or traded points. The solution is to draw your own Gann line using the
trend-line tools in your existing software between points equally
separated by time and price. There are many ways which these lines
are used to examine the squaring of time and price, yet the primary
point to note is that many applications do not draw them correctly.
Trading strategies
An examination of trading strategies is frequently not separated from
the wider strategic analysis/directional forecasting outlined above.
Trading strategies look for real opportunity based on risk:reward,
often with a tight stop loss at a level of clear significance (significance
being defined as a technically significant level or at a point of pivotal
information flow). When making trading decisions there is no need to
prove anything cash pays interest and transactions cost money
which is all too easily forgotten. The question is not one of being
correct, but of entirely accepting an individually random outcome at
the moment of taking a risk:reward decision. Statistically, the best
Figure 3 Monthly Cocoa
Figure 4 S&P TIme and Pattern Analysis
MARKET TECHNICIAN Issue 48 November 2003 8
approaches or systems in the world will face periods of many
concurrent losses you will not know when you will face these.
So what things should we watch? The market leaders/decliners and
how these affect the termination of bull or bear markets Gann,
Livermore and many others have written on this (look at the perceived
dot.com leaders AOL, for example,was making a double top when
the Nasdaq made its 2000 top). Watch for basic trade triggers: reversal
days, inside/outside days, persistent 4-7 day support somewhere
interesting and breakouts which look real one level higher.
How can one assess this?
In terms of scientific assessment of these techniques, non-parametric
statistical tests that avoid traditional assumptions about the statistical
distribution of returns are used. This avoids assumptions regarding
the skewness (asymmetry in the distribution of returns) or kurtosis
(fat-tails in the distribution of returns caused by the unusual
frequency of extreme moves in the markets). As a basic example
Figure 5 shows the difference between the Normal distribution
usually assumed, and how returns were actually distributed on last
years NYMEX Light Crude December contract.
Resampling is where one randomly reorders returns data to create
simulated price series e.g. 10,000 series. This is not dependent on any
assumed distribution and uses the actual distribution of the data.
Average results from these simulated time-series provide a benchmark
of what is achievable even with data randomly generated. One
would then examine phenomenon on the simulated series e.g.
breakouts and these real results are then compared to this.
Similarly, random levels can be generated to test any kind of
support/resistance phenomenon. Random levels are placed on the
price series e.g. 10,000 random levels and how the simulated series
reacts on average to the phenomenon being examined provides a
benchmark. Again, the real results are then compared to this.
Step by step review
Traders should be following a review process, regardless of Gann.

Looking at swing charts and indicators, what is the basic trend for
three levels? (The environmental higher timeframe, the timeframe
you are trading and a level below this to fine-tune timing).

Does the trend appear under threat or look overextended? If so,

project time and price levels at which to tighten stops.

What are your patterns and/or wave analysis telling you?

What is happening in the wider market environment?

Which fundamentals are in fashion and which fundamentals are

people going to be forced to accept if reality hits them?
Caveats
This is the section which I feel many readers will skip through, yet is the
most important. Firstly, one must be trading the relevant trend for ones
risk/capital profile. Once this is decided, additional analysis is only there
to assist in the context of support/resistance, help when the minor
trend reverts back to the major trend and tighten stops when the trend
appears overextended. It helps you decide when you will NOT trade...
No techniques can stand on their own (for long) and ones focus
should be risk control a trader is better off being random/non-
systematic with good risk control than vice versa. Because of
fluctuating appropriateness, one must understand what to use in
different types of markets sometimes the solution is to shift
timeframes and trading horizons.
The I could do that! factor is dangerous. do not play number games
or draw lines all over the place. Do not get carried away like Elliott did in
the latter stages of his life it is not about the secrets of the universe.
Gann theory is not a natural law which takes away your responsibility
for your trades, it is just a way to conceptualise a market. Therefore, you
must not expect too much you cannot trade every market position.
Without accepting this and the fact that losses are as sure as night
follows day you will become disillusioned. Never forget that you are
being paid by the market to assume risks and the safest way to double
your money is to fold it over twice and put it in your pocket.
Remember, Gann was a trader whose work overlapped with the rest
of technical analysis. Basic trading analysis always applies as
aforementioned this is different from forecasting. It all comes back
down to the same old things 99.99% of people avoid:

Keep records

Trade management

Position sizing

Know yourself
The Key, if there is one
People attending the presentation I gave in June may have been
surprised by my apparent cynicism, I felt this was necessary because
of the dangers of the holy grail appeal of Gann analysis. Whilst such
cynicism is necessary, it has to be balanced by a mind open to
objective research.
So what is the key? The 3Ps : Patience, Perspective and Pleasure.
What is actually possible in the markets? Gann is not needed to
understand this here is some food for thought:

The 1929 top was not breached until 1956

Early 1960s equities moved sideways until the 1980s regardless of

inflation

Compound returns for the S&P 1966-1982 was 0 per cent

From 1966 the Dow returned 0 per cent after inflation by 1994.

From 1972 Coca-Cola and Disney gave no return until 1985

Capitalisation weighted indices only show winners

The indices would look very different if still composed of their

1929 or 1987 or 2000 constituents!
There is wild speculation in a sector every 20 years or so. Keynes et al
saw cycles as being right at the heart of economics. Despite the
importance of trend, people can become too used to extrapolating
recent trends and growth rates. The patience and perspective allowed
by appreciation of historical market action does have to be enjoyed by
itself and not merely as an attempted route to riches. As Charles
Schwab said, The man who does not work for the love of work but
only for money is not likely to make money nor find much fun in life.
Gann and wider strategic analysis: where are
we now?
In terms of upside resistance on the S&P, the highs at 1170 are
important. They sit at the 38.2% price retracement of the all-time
high to the September 2001 low and both the 61.8% time and price
Figure 5 Normal v Observed Returns
Issue 48 November 2003 MARKET TECHNICIAN 9
retracements of May-September 2001 downtrend (time and price
squared). The current lows are important at this triple bottom at the
50% retracement down from the all time high and for a range of
other reasons (see Figure 6).
At the time of writing, the Dow had been looking more positive than
the S&P but despite both breaking out it appears that the generals
are still being held back by the S&P. Good corporate earnings appear
to have already been priced in or are being ignored for the moment.
Earnings are being perceived as not as bad as expected, hardly a
ringing endorsement. Overcapacity and inventories seem to be being
working through without as much dependence on the consumer for
these earnings improvements, yet... As a proportion of GDP, corporate
earnings levels mean that equities are still overvalued by 40%
compared to 1997. If good volume and activity confirm the current
breakout then we may be on to something that gives people enough
hope to claim a new horizon. We are still a long way off from the
equity highs and people forget that average returns will take a long
time to get us back up to these levels. Furthermore, people appear to
be underestimating the effect of the strength of crude oil.
So, as per usual, we have reasons for both directions. Perhaps, most
crucially, COT records of net short institutional S&P futures positions are
a bearish influence on longer to medium term moves. Institutions
rolled back to a net short position at the start of the 61.8%
retracement/consolidation at the 1000 level. This signals a lack of
institutional support for a longer-term rally at this time. The net long
positions prior to this (after the third leg of triple bottom in March
Figure 7) were the first time institutions had been long since being net
short since the high in March 2000. Institutions have been consistently
short from March 2000 with the temporary enthusiasm (net long
institutional holdings) now closed out to a net short position again.
Based on presentations given to the Scottish Chapter and in July to the
London STA.
Richard Ramyar is currently researching time and price cycle
proportionality for a PhD at Cass Business School in the City and can be
contacted at richard@albanymarkets.com
Continued from page 5
Lo and Mackinlay(1999) A non randon walk Down Wall Street
Princeton University Press
McNees S (1995) An Assessment of the Official Economic Forecasts
New England Economic Review , 17-32
Murphy J J (1999) Technical Analysis of the Financial MarketsChap
11 , 265-296.Prentice Hall New Jersey
McNees S and Reis J (1983) The track record of Economic Forecasts
New England Review , 5-18
Omeroid P (1998) Comments on Forecasting Economic processes
by Clements and HendryVol 14 , No 1,134-136.
Observer newspaper London (2001a) Open Season for Outsiders
July 29th edn
Observer newspaper London (2001b) Stymied MPC is a one Club
Golfer September 9th edn.
Pain D and Thomas R (1997) Real interest rates linkages; testing for
common trends and cycles Bank of England working paper series
no 65
Price L (1996) Economic Analysis in a Central Bank Model versus
JudgementCentre for Banking Studies Hanbook no 3, Bank of
England UK
Neftci S (1991) Nave Trading Rules in Financial Markets and
Weiner- Kolmogorov Prediction Theory: A Study of Technical
Analysis Journal of Business , No 64 ,549-571.
NIER (1999) National Institute Economic Review No 170, pp 12-13.
Sherden W A (1998) The Fortune Sellers Wiley New York
Stacey R D (1992)Managing the Unknowable Jossey Bass,
San Francisco.
Svensson L E O (1996) Inflation Forecast Targeting: implementing and
monitoring inflation targets Bank of England working paper series
no 58.
Figure 6 S&P Lows
Figure 7 SPX Commitment to Traders Report
Visiting New Zealand?
We were delighted to welcome Ian Rawnsley, vice-president
of the New Zealand Society of Technical Analysts (STANZ),
to our September monthly meeting. Ian issued a very
warm invitation to any STA members visiting New Zealand
to drop in at their meetings. These are held on the fourth
Thursday of the month from February to November.
For further information: www.stanz.co.nz
Introduction
Market sentiment plays a critical role in assessing share price movements.
This article describes an indicator that I have developed which delivers a
consistent measurement of market sentiment using a unique
combination of indicators. I have called it the Trend Intensity Indicator.
The Trend Intensity Indicator combines and weighs four simple tools:
trend, volume,moving averages and price momentum. This generates
an invaluable benchmark that highlights only those stocks with
compelling trending qualities that offer the best prospects for
sustained price movement.
Why sentiment?
The motivation for designing an indicator evolved from a realisation
that fundamental analysis was not necessarily providing all the
answers, nor explaining many share price movements.
Price analysis is the examination of a companys share price. At any
one point in time buyers and sellers agree on a market price, which is
a direct reflection of market sentiment and drives the share price.
Fundamental and price analysis are two entirely separate moving
targets that very often diverge, but it is movement in the share price
which we are most interested in and from which we profit.
The sentiment factor can drive prices far from fundamental value.
The unexpected news of the 2002 profit downgrades were dealt with
so harshly by the market that it drove prices well below their
fundamental value. By contrast, future expectations can build prices to
unrealistic levels far beyond fundamental value. This is what made the
Biotech sector such a burial ground of shattered dreams so many
expectations. And of course, the Internet bubble was built almost
entirely on sentiment with little consideration for value at all.
Sentiment is a powerful force, and an understanding is essential to
successful stock market trading and investing. The difference between
a stocks fundamental valuation and its share price could be explained
as the sentiment factor.
How do we measure sentiment?
To initiate analysis using the Trend Intensity Indicator a definition of
trend is first established. A stock, which moves in a sequence of higher
highs and higher lows, is defined as having an uptrend. At the point
that this sequence begins, i.e. when it changes from a downtrend of
lower highs and lower lows,we consider the trend reversed.
Only weekly reversals are employed in our approach. The basis for
this rule is that a weekly trend change avoids daily market noise. It is
a reliable medium term indicator and provides a clear and objective
view of market sentiment.
Once a stock fulfils a simple trend definition, our Trend Intensity
Indicator then rates the power of that trend and establishes a clear
view of market sentiment towards it, or against it.
The Trend Intensity Indicator calculates a single value from a basket
of sentiment indicators.
1.Trend for direction
2. Price/volume investor participation/non participation
3.Moving average for averaging probabilities
4. Price momentum to define the power of the crowd behaviour
The calculation
By taking each indicator and breaking it down to the most basic
signals, we provide a value for the state each indicator is in. For trend,
it is either up or down which then receives a negative or positive
value reflecting that state. This is then weighted into the end result,
its Trend Intensity Rating.
Of the other three indicators we ask the question: Does volume
support the rise? Where is the price in relation to its moving average?
And is price movement attracting positive crowd behaviour?
The following table shows the indicators used for calculating the Trend
Intensity Indicator and their different states. The values and
calculations that generate the Trend Intensity Rating for each stock are
proprietary to Stockradar, however, the objective rule-based approach
becomes clear with only the most reliable signals being employed.
Trend Intensity Indicator
The Trend Intensity Indicator calculation generates a stock rating
between 10 and -10. The highest value of 10 reflects a consensus
agreement by all indicators that all positive sentiment rules have
been satisfied and the stock is, therefore, rated at a maximum on the
Trend Intensity scale. The lowest value of -10 reflects consensus
agreement from all indicators that no conditions have been met that
suggest a stock has any positive sentiment towards it.
A stock that reverses its trend to up and has a Trend Intensity Rating
of 4 or greater will qualify as a Stockradar Stock Pick and, as such, will
have compelling trending qualities and offer the best prospects of
price movement. Alternatively, a stock that reverses its trend and has
a Trend Intensity Rating of -4 or less will be disqualified from
Stockradars Stock Picks on the grounds that it has lost its trending
qualities. This breaks the market down into two distinct groups of
stocks. One that is trending, or one that is not. Our focus is on up
trending stocks only.
MARKET TECHNICIAN Issue 48 November 2003 10
The Trend Intensity Indicator
By Richard Lie
INDICATOR STATUS
PRICE
1a. Trend Up Higher Highs and Higher Lows
1b. Trend Down Lower Lows and Lower Highs
VOLUME
2a. Volume Bullish Volume Expanding & Price Rising
2b. Corrective in up trend Volume Contracting & Price Rising
2c. Volume Bearish Volume Expanding & Price Falling
2d. Corrective in down trend Volume Contracting & Price Falling
MOVING AVERAGE (XMA)
3a. Moving Average Positive Price > XMA
3b. Moving Average Negative Price < XMA
3c. Moving Average Neutral Prices closes once above/below XMA
MOVING AVERAGE CONVERGENCE
/DIVERGENCE INDICATOR (MACD)
4a. MACD Positive MACD lines > 0,
MACD Histogram Rising and > 0
4b. MACD lines > 0,
MACD Histogram Rising and < 0
4c. MACD lines > 0,
MACD Histogram Falling and > 0
4d. MACD lines > 0,
MACD Histogram Falling and < 0
4e. MACD Negative MACD lines < 0,
MACD Histogram Falling < 0
4f. MACD lines < 0,
MACD Histogram Falling > 0
4g. MACD lines < 0,
MACD Histogram Rising > 0
4h. MACD lines < 0,
MACD Histogram Rising < 0
Issue 48 November 2003 MARKET TECHNICIAN 11
TREND INTENSITY INDICATOR RATING SCALE
The Result
Stockradars coverage is of the ASX/300. Weekly results are presented
each Monday with our recommended Stock Picks at
Stockradar.com.au. Our weekly Stock Picks are supported by a Stock
Alert facility that scans the market daily, targeting stocks that are
moving in and out of their trends. Along with specific stock analysis,
the Weekly Sector Update takes on a thorough review of a market
sector. Published bi-monthly our free newsletter features a selection
of market highlights.
Richard Lie is an independent research provider licensed by the ASIC
(Australian Securities and Investments Commission).
An interesting article by Beverley Antrobus (MT August 2003), but
unfortunately a little flawed in the logic and also in some of the facts
quoted. Beverleys basic premise was that you cannot make more money
by actively trading a large move compared to the money you would make
by sitting tight for the long haul. This argument assumes that it is not
possible to identify intermediate turning points in advance and that you
have to wait for a change in trend before you act. This is not the case.
The concept that profit and loss is virtually random at the short term
level is incorrect. Markets are fractal, they are self similar and therefore
become predictable even at short time frames as well as over periods of
several years. I am also curious as to why Beverley uses W.D Gann as proof
that you should throw away your ticker and then describe the same
person as a self publicising failure.
Markets are not random and with hundreds of years of data thoroughly
tested do not appear to have ever been random. Why am I convinced that
the markets are fractal? Because using these fractal qualities, I can predict
future price movements every hour of every day in the same manner on
multiple time frames. Predicting these future price movements, including
definitive price levels in areas where no trading has existed before, is not
impossible as Beverley would have you believe. It is not easy but it is not
impossible. The truth is that market price moves to find a new barrier at
every level of oscillation, and that is quoting Beverleys own article. Of
course you have to know how to find a way of predicting these levels in
advance, and that is the hard part. Beverley states that the short term
trader cannot know where these reflective barriers will appear as there is
no magic formula. The only part of this I would agree with is the fact that
it is not magic. It is just a formula and there are short term traders
effectively using these levels every day.
Beverley seems to think that technical analysis will not be serious until it can
predict all markets all of the time. When are we going to get measured on a
level playing field with the economists? They cant always tell what has
happened accurately in the past, let alone the future. Economics, with
perhaps the exclusion of Econophysics, has nothing to do with predicting
accurate levels where markets will make significant changes in trend.
Telling me that the bond market may have changed trend after one of the
biggest one month falls in over 50 years is not helpful. Predicting the
collapse and getting short at the highs is useful, which is the level of
accuracy actually provided by technical analysis. Is it possible to trade
markets successfully purely from technical analysis with no knowledge of
economic theory or even access to news? Yes it is. Lets take this a stage
further. It is possible to predict, from technicals alone, where a turning point
will come in a market of such magnitude that it will force commentators to
change their assessment of the underlying economic situation? Economists
tend to write the story to fit the events that they know.
Regarding Gann, Livermore and Elliott failures, does the apparent success
or failure of their personal trading matter? One of the most respected
equity analysts of the past 40 years, who made substantial sums for his
clients, couldnt trade his own account successfully. Did that make him a
failure? Livermore took a huge punt on there not being a Second World
War and stopped himself out permanently. I cant see that this proves
anything except that everyone needs a better money management
system than just blowing your brains out.
Gann however was not a failure. The methods worked then and work
now. Nobody, however ever said that they were easy methods. Anecdotal
evidence suggests that much of the negative information about
W.D.Ganns success came from his son, with whom he appeared to have
been in some kind of dispute.
So back to Beverleys basic conclusion that you cannot make more money
by actively trading a large move compared to the money you would make
by sitting tight for the long haul, I have looked hard at the article and
cannot find any solid evidence furthermore if Beverley is so convinced
that you cannot improve results by active trading does his own trading
strategy actually reflect this?
Malcolm Blazey F.S.T.A. Managing Director TradingSkills.Com
August 2003
Letter
RATING STATUS
10 to 7 Trending up strongly
6 to 4 Trending Up
3 to -3 Neutral
-3 to -6 Trending down
-6 to -10 Trending down strongly
Society of Technical Analysts Ltd (STA)
Diploma Course
15 January 6 April 2004
For the eighth year running, the Society of Technical Analysts Ltd (STA) Education
Committee is holding its Diploma course in Technical Analysis. This year it will be
held at London School of Economics in Aldwych.
The course is a preparation for the Diploma examination in April 2004. It consists
of 11 Thursday evenings starting on Thursday 15 January, followed by a full day
Revision Day (including Report writing), on Tuesday 6 April 2004. Evening
sessions are from 6.00pm to 9.00pm and Revision Day, which includes lunch, from
9.30am to 5.00pm. The Exam itself lasts three hours and will be held later in April
(date to be announced).
The course is expected to cover:
1. Bar charts. Gaps, islands, key reversals. Defining price objectives from gaps and
patterns on bar charts. Arithmetic versus logarithmic scales.
2. Moving averages arithmetic, weighted, and exponential. Centred, non-
centred and advanced. Single, double and multiple moving average
crossovers. Moving envelopes, including Bollinger Bands.
3. Candle charts and candle patterns.
4. Point and figure charts. Construction, scale, box reversal, objective counting.
Advantages and disadvantages compared to other types of chart.
5. Dow Theory.
6. Chart patterns, eg. triangles, flags, pennants, diamonds, broadening patterns
(megaphones), wedges.
7. Reversal patterns and how to identify/anticipate them. Rounding tops and
bottoms, head and shoulders, spikes, double/treble/multiple tops and bottoms.
8. Trend. How to draw correct short, medium and long-term trendlines. Trend
channels. Return lines and internal trendlines. Unconventional but useful
trendlines. Acceleration. Speed lines. Trend characteristics.
9. Consolidation how and why it occurs. Breakouts and how to recognise them.
10. Corrections: when and how far.
11. Support and resistance. The various chart points and facets that can act as such.
12. Basic elements of Gann theory.
13. Basic elements of Elliott wave theory.
14. Fibonacci series, fan lines, arcs and time zones.
15. Cycles. Amplitude, length, phase, harmonicity, synchronicity, left and right
translation. Detrending.
16. Relative performance and how to interpret relative strength charts.
17. Momentum indicators and oscillators including:
Rate of change Welles Wilder's RSI Stochastics (%K & D)
Moving Average Convergence Divergence (MACD) & MACD histogram
Directional Movement Indicator Parabolics Commodity Channel Index
18. Volume signals and indicators, including On-Balance Volume, Volume
Accumulator etc. Open interest.
19. Breadth indicators.
20. Sentiment indicators and contrary opinion.
21. Market Profile (TM).
22. Investor psychology individual and group.
If you would like further information
please contact Katie Abberton on 07000 710207
It is interesting to take a snapshot of academic research now and then to
try and gauge where technical analysis stands with respect to our friends
in the ivory towers. Keep in mind that technical analysis as a trading tool
has been a puzzle to academics, as trend following techniques seem to
provide consistent positive returns. A good starting point for examining
these ideas is Dr. Ron Giles paper The Importance of Price Information
which is available on the STA website (www.sta-uk.org/rg_wita.pdf ).
Dr. Giles does a great job of reviewing current research and describing
some of the problems experienced by academicians as the idea that one
can make money in a consistent manner makes a mockery of financial
market theories. Keep in mind that the Efficient Market Hypothesis has
dominated academic thinking for some time. A useful look at some of
the early work by Eugene Fama, the father of EMH, is available at
http://www.sjcny.edu/~kaplan/pdf2/fama_70.pdf. A list of some of his
other major research is available at http://cepa.newschool.edu/het/
profiles/fama.htm. The EMH is important as this sets out the ideas of a
weak form, semi-strong form and strong form of efficiency. The weak
form asserts that all past prices and data are fully reflected in the asset
price in which case technical analysis should be of no use to a trader
attempting to beat the market. The semi-strong form asserts that all
publicly available information is fully reflected in the asset price, which
suggests that fundamental analysis is of no use either. The strong form
asserts that all information is fully reflected in the asset price, which
would suggest that even insider trading is of no use.
As technical analysis models seem to generate positive returns in many
studies, the benchmark has shifted and now a model is judged on the
basis of being able to generate positive returns net of transaction costs
and on a risk adjusted basis. The list of papers below is by no means
complete, but I have tried to cite those that can be found with a weblink
in all instances and will post the links and some information about the
article in the members area (and update them with any more research
links that member send in to me).
A good web source for academic research articles on technical analysis is
the Social Science Electronic Publishing site (www.ssrn.com). One
interesting paper there is Do the Profits From Technical Trading Rules
Reflect Inefficiencies? by Hendrik Bessembinder of the University of Utah
Department of Finance and Kalok Chan of the Hong Kong University of
Science & Technology Department of Finance. They look at stock
returns and seem to conclude that while its possible to forecast returns
using TA models, once transaction costs are added in the market is
difficult to beat.
Another interesting paper is the Foundations of Technical Analysis:
Computational Algorithms, Statistical Inference, and Empirical
Implementation by Andrew W. Lo from the Massachusetts Institute of
Technology (MIT) Sloan School of Management; National Bureau of
Economic Research (NBER) and Harry Mamaysky from the Yale School of
Management and Jian Wang from the Massachusetts Institute of
Technology (MIT) Sloan School of Management; National Bureau of
Economic Research (NBER). They attempt to quantify chart patterns and
conclude that there may be some value to charting after all, but leave the
conclusions open to further research.
A different take on why TA may work is found in Technical Analysis and
Liquidity Provision by Kenneth A. Kavajecz from the University of
Wisconsin Madison Department of Finance; University of
Pennsylvania Finance Department and Elizabeth R. Odders-White from
the University of Wisconsin Madison School of Business. While at first
blush the premise of this paper (chartists are unwittingly finding the
order levels on market makers books and gauging the depth of the
market) may seem unlikely, careful reading does suggest that the authors
have a decent case. Support and resistance levels should/can coincide
with order levels (chicken and egg syndrome here) and the attempt to
square the circle and tie in TA with EMH is useful.
European stock index traders may find the research paper by P.J. Detry
(Facultes U. Notre-Dame de la Paix Namur) and Philippe Gregoire
(University Catholique de Louvain, CeReFiM) on Other Evidence of the
Predictive Power of Technical Analysis: The Moving Averages Rules on
European Indexes useful. They suggest that even the simplest trend
following models can forecast returns, and make money, but with
transaction costs they feel that excess profits will be eliminated.
Foreign Exchange traders should be familiar with the concepts in
Technical Analysis and Central Bank Intervention by Christopher Neely
(Federal Reserve Bank of St. Louis) and Paul A. Weller (University of Iowa)
in which the authors provide further research on their previous work. In
a nutshell they find that technical trading rules usually take a position
against the central bank intervention and in a few currencies are quite
profitable. Food for thought given current activity in Asian currencies?
A very thorough paper on TA in stock markets is Technical Analysis in the
Madrid Stock Exchange by Fernando Fernandez Rodriguez (Universidad
de Las Palmas de Gran Canaria), Simon Sosvilla Rivero (Foundation for
Applied Economic Research) and Julian Andrada Felix (Universidad de
Las Palmas de Gran Canaria). They look at simple trend following rules
over a long period (over 30 years) and show that money can indeed be
made from these TA techniques. The fly in the ointment is that they left
the door open on transaction costs, which may have swung the results.
An argument that TA practitioners will embrace is put forth by Stefan
Reitz (University of Giessen) in the paper Why Technical Trading Works. A
Simple Illustration where imperfect information holds the key. A moving
average system can make up for the lag in information, hence TA works,
simple really...
And finally for this paper, the Fed has a decent history of looking into
market activity and trying to figure out how things work. The NY Fed
weblink at http://www.ny.frb.org/research/staff_reports/index.html is
useful in order to find articles by their economists. A paper by Carol
Osler with P.H. Kevin Chang in 1995 Head and Shoulders: Not Just a Flaky
Pattern not only suggests that Fed economists can have a sense of
humour, but also provides food for thought as they found that this classic
pattern produced profits in the Dollar-Mark and the Dollar-Yen FX rates.
The head and shoulder pattern did not provide great results in the other
currencies studied, but did hold up in the face of transaction costs being
added to the DEM and YEN studies.
A paper that is probably more interesting in the background information
and analysis than in the conclusion is Oslers Identifying Noise Traders:
The Head and Shoulders Pattern in U.S. Equities (1998). The conclusion is
that head and shoulders patterns do not provide consistent profits in U.S.
equities, but the arguments leading into why this may be the case and
the discussion on other factors that could be in play makes this paper a
useful background study. Of note is the idea that pre-1930s insider
trading and market manipulation were more common and that since this
was outlawed some technical patterns may not function as they once
did. Financial newspaper headlines over the last few years would
probably suggest that these practices still plague the market and that
chart analysis may still offer clues as to what is really going on in a share.
Finally, Oslers Currency Orders and Exchange-Rate Dynamics: Explaining
the Success of Technical Analysis (2001) provides an interesting overview
of the FX market participants and the importance of orders. FX trends
tend to pause at order levels which may be clustered at round numbers,
and if these levels are broken, the trend accelerates. Any FX dealer will
be quite aware of how important this information is and this paper will
give them the ammunition to exhort the sales staff to get orders! from
their customers. For the TA community? Good background information
and it should add food for thought in any short term analysis.
In conclusion, the above articles provide a snapshot of what is available
on the web and I hope that the articles, if they spark a bit of interest, will
be useful. Academic researchers seem to find TA quite interesting, not
just in the quest to beat the market but also in the attempt to quantify
what is in many ways a study of market behaviour. I will post these links
and notes in the members section of the web, and if STA members have
any further notes or wish to alert members of other research articles I will
be happy to post them up.
MARKET TECHNICIAN Issue 48 November 2003 12
Web Notes from Academia
By Gerry Celaya