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sept/oct 2004

The publication for trading and investment professionals

www.technicalanalyst.co.uk

TA in Spain
Preview IFTA Conference 2004
Outlook for the Nasdaq

DeMark Indicators

US Presidential Elections

IPO data informs technicals

looking for signals


in the FX market

how do markets react?

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In this issue we also present an introduction to DeMark, whose indicators are gaining a growing reputation amongst trading professionals
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dealing floor to discover how using DeMark has enhanced trading
returns for one City dealer. Finally, all eyes will be on the US presidential election in November, so we take a look at how the election cycle
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September/October 2004

THE TECHNICAL ANALYST

CONTENTS
SEPTEMBER/OCTOBER 2004
Special preview of the IFTA CONFERENCE 2004
page 13

Industry News

05

The Technical Analyst Talks To

32

Nina Cooper, president of the AAPTA

39

Book Review
Technical Trading Tactics by John Person

Software Review

40

MTPredictor RT 4.0

Commitments of Traders Report

44

Long-Term Technicals

46

Training & Events Diary

48
Contents continue overleaf

September/October 2004

THE TECHNICAL ANALYST

DeMark Indicators

20

Kurt Magnus from Westpac discusses the


DeMark Sequential Indicator TM and explains
why this lesser known study is central to his
FX trading.

The US Presidential
Election Cycle

25

What to look for over the next 4 years and


why a win for Kerry could be the best outcome for stock markets.

Market Views
Nasdaq - weak IPO confidence dents technical outlook
EUR/USD - a new challenge to a two-year trend
US Treasuries - bears may soon be back in control

07
09
11

IFTA Conference 2004 - Preview


Behind the scenes
Conference programme
A short history of IFTA Conferences & essential facts

14
16
18

Techniques
Impressive signals from DeMark
The US Presidential Election Cycle - fact or fiction?
Introduction to Kagi Charts

20
25
28

Subject Matters
Backtesting predictors of the S&P 500
When does technical analysis work and when doesn't it?

THE TECHNICAL ANALYST

September/October 2004

34
36

Industry News

INTERACTIVE DATA CORPORATION BUYS


FUTURESOURCE
The Interactive Data Corporation
(IDC), a leading global provider of
securities pricing, financial information
and analytic tools, is to acquire
FutureSource for $18 million.
FutureSource is a privately owned
provider of real-time data to the
futures, commodities and foreign
exchange markets. "The acquisition of
FutureSource will further enhance,
expand and complement our eSignal
division," says Stuart Clark, president
and chief executive officer of
Interactive Data. Interactive Data

sion and so will add 5,000 global cus-

For more information, contact Jeremy

plans to combine FutureSource's prod-

tomers with 6,500 terminals to

Berghorst:jberghorst@futuresource.com

ucts and services into its eSignal divi-

eSignal's customer base.

THOMSON FINANCIAL
TARGETS HEDGE
FUNDS

eSIGNAL ANNOUNCES NEW


QUOTREK 1.1

Thomson Financial has announced the


creation of a new team dedicated to the
UK hedge fund community. The team will
be led by Mark Jackson, sales manager
reporting to Richard Garnier, managing
director, European sales and account management. With over 100 hedge funds
clients in the UK, Thomson's hedge fund
offering in Europe will provide a combination of their products and content sets.
These include I/B/E/S, First Call, AutEx
and Worldscope drawn from across the
Thomson ONE application suite and
Thomson Datastream, which itself is
being integrated into Thomson ONE.
This can be integrated with portfolio management tools from Thomson PORTIA.

eSignal, a division of Interactive


Data Corporation has announced
the immediate availability of
QuoTrek 1.1, with user interface
improvements including free world
indices and added compatibility with
smart phones and the BlackBerry
Web Client service from Research
In Motion (RIM). QuoTrek provides
streaming quotes, charting and analytics to wireless devices such as
BlackBerry Wireless Handhelds.
QuoTrek is currently available on a
30 day free trial basis.

For more information contact: alexandra.brog@thomson.com

For more information on QuoTrek,


visit their website:
www.quotrek.com.
September/October 2004

THE TECHNICAL ANALYST

Industry News

CQG OFFERS INTEGRATED ANALYSIS & TRADING


PLATFORM
CQG has released its new
Integrated Client order routing
product. The new software allows
chart analysis and trading to take
place in one application with
functionality enabling connection
to E-CBOT, CME Globex,
LIFFE Connect, Eurex and
Eurex US, trading both futures
and options and futures. Trading
directly from charts, the user has
a graphical representation of
working orders and filled trades
with online access to 30-days of
trade history. CQG say their

Integrated Client product allows


users to switch between analysis
and trading without changing
computer. Forthcoming features
will include a spread trading functionality, automated
logging and automatic trading triggered by pre-determined studies.

and Obninsk, Russia and Kiev in


the Ukraine.
For more information visit
www.cqg.com.

Meanwhile, CQG
has opened new
offices in Yerevan,
Aremia, Samara

UPDATA INTRODUCES
ADVANCED TECHNICAL
ANALYSIS FOR BLOOMBERG

TRADESTATION
ANNOUNCES SELFCLEARING FOR EQUITIES

Updata, the point and figure charting software specialist, has


enhanced its Technical Analyst system to run in conjunction with
Bloomberg terminals. The company reports that an
increasing number of
Bloomberg users from
within banks and hedge
funds are adopting the
system which combines
charting software with
Bloomberg data.

TradeStation Securities, a subsidiary of TradeStation Group


has commenced equities selfclearing operations for its active
trader client base. TradeStation
completed the conversion to selfclearing of its client account base
in September. All stock trades
made by TradeStation's active
trader client base on or after
September 8th, and all options
trades made on or after
September 10th are now cleared
by TradeStation.

Updata Technical Analyst costs


97 per month to run on
Bloomberg and can be downloaded
from:
www.updata.co.uk.

www.tradestation.com

THE TECHNICAL ANALYST

September/October 2004

Market Views

NASDAQ
WEAK IPO CONFIDENCE DENTS TECHNICAL OUTLOOK
by Karen Griffiths

he time line remains a tough nut to crack when technically forecasting movements in any market.
Establishing direction and range is relatively easy by
comparison. When using technical tools to provide answers
to questions which are wholly impacted by fundamental
events, the fact that your analysis is based on a study of historical pricing allows you to relax in the knowledge that the
anticipation of these events is built into the current price
action. All of this fundamental information is therefore
built into your technical indicators. Accordingly, you may
feel comfortable that you have a grip on the direction and
how far in that direction you are heading. However, this still
leaves open the matter of how long it will take to reach
your objective. The following suggestion may
go against the grain in
certain technical analysis
camps but a calendar
marking the key upcoming fundamental events
is going to be our best
friend in this area.
The NASDAQ, unlike
the other American
stock markets, may have
anticipated benefiting
over the past 3 months
from a seasonal spate of
IPO's. Despite the nervous trading pattern prevailing post the dot com
bubble and 9/11, the NASDAQ has continued to attract
new business to the market with mixed results. Market conditions have been unfavourable since the beginning of the
year with a reported average drop of 4% since issue price.
This alone is likely to apply a sharp handbrake to the
approach of any encouraging and potentially profitable new
issues. The technical resistance in this market, which lines
up well with those gloomy fundamental results, is looking
firm in the 1450 area as marked on Figure 1.
The extremely discouraging signs highlighted on this chart
suggest the technicals are matching the caution currently
being exercised by those banks who are in a position to lead
further IPO's. NASDAQ in particular is a market which can

have its temperature taken by the performance of its recent


IPO's. The weak supply of new business therefore suggests
a lack of confidence, at least from institutional investors,
that this market has turned a corner and is forming a rising
support base. The evidence here in Figure 1 indicates that
we have a potential downside of 1119 at present and that
this target level is declining at an average rate of 4.00 points
per week. By 31st December, if we continue at the current
rate of decline, this target will have lowered to 1058.
Sell the rallies
Selling rallies back into the initial declining resistance at
1420 with a stop above 1460 and a target at 1119 produces
an attractive risk reward
trade of 7.53:1. The
short term target for initial profit taking is 1294
into the Ranger -1 level
(a proprietary term for
an initial exhaustive support level), as marked.
The declining stop is set
at the light blue indicator and a break above
this level (currently
1451) would suggest that
momentum is turning
positive and a move up
into 1578 will be
Karen Griffiths achieved. The 1578 level
is a trend reversal point
which opens a recovery path into 1653 and then 1829.
These Fibonacci wave cycle levels take account of the
weekly range on each price bar and will rise/fall accordingly.
Traders will therefore be kept in a profitable position for
longer and the trailing stop level will provide a potentially
profitable exit should it decline beneath the original entry
level.
Should the market fail to find support at Target 2 on this
chart, the outlook for the first quarter of 2005 will be bleak
to the tune of 835 (a declining level). Until the light blue
trailing stop has been broken, a new low point may be
inevitable.

Uncertainty about the future, coupled with relief at

September/October 2004

THE TECHNICAL ANALYST

Market Views

Figure 1.

being in a position to lock in some much sought after profit


is perhaps causing the market to remain firmly rooted in
this declining channel. The upmoves are worth being long
for - a low point of 1303 pushing back up to 1420 is worth
consideration. The chart indicates that the next breakout to
the downside will be beneath 1294 looking for the pull back
to 1119 and below.
The US election results and the anticipated interest rate rises
over the coming three months should provide the fundamental

THE TECHNICAL ANALYST

clarity which the market is waiting for. Technically, a further


break to the downside is favoured. As the stop loss level
declines each week, the turning point for a shift in momentum
to positive is a level which will aim to reduce losses while speculating from the short side.
Karen Griffiths is chief technical strategist with Pronet
Analytics in London.

September/October 2004

Market Views

EUR/USD
A NEW CHALLENGE TO A TWO-YEAR TREND
by Michael Trefel

fter a 2-year rally, EUR/USD peaked early in 2004


finding strong resistance against a key Fibonacci
retracement level at 1.2925/50. EUR/USD is one
of the few sectors in the market that tends to show a lot of
respect for the 75% retracement and this time around is no
exception. After reversing against this key retracement level
at 1.2925/50, the market lost 12 big figures to find new
support against the 2-year trendline at 1.1750. Unlike
September 2003 when EUR/USD re-tested and held this
technical support, momentum measures and sentiment data
did not support a strong bounce in 2004. On the contrary,
momentum measures indicated a very weak market, while
sentiment highlighted a continuously overbought environment. This technical phenomenon resulted in a choppy
consolidation that lasted for most of the summer months
and, as we entered the presidential election campaign, built
a possible head-and-shoulders top in this market.
Elliott Wave technicians would also note that the 2-year
rally in EUR/USD (February 2002-February 2004) has
completed a 5-wave pattern with
a peak at 1.2925/50 and has
begun the 1-2-3 correction into
the latter part of 2004. Putting
this all together, there seems to
be much technical risk in the
market as we move into the final
stages of 2004 and, if confirmed, should pave the way for
a weaker euro and stronger dollar into the end of the year.
There have been many recent
discussions about the geopolitical risks that might keep the
dollar subdued ahead of the US
elections in November 2004.
However, we have witnessed
similar discussions associated
with both the Democrat and
Republican conventions, as well
as the Olympic Games held earFigure 1.
lier in August. As we enter

autumn 2004, the risks associated with the above events


have dissipated, paving the way for the next directional
move in EUR/USD as well as other major currency crosses
around the globe. In the US, the dollar index (Figure 2)
challenges resistance against the 2-year trendline around
89/90. Similar to EUR/USD, this sector has been in a
choppy consolidation since May 2004 and a confident move
above 90 will be needed to open the door for a stronger
performance from the USD.
A move through this important technical level of 90
would likely correspond with a break below the neckline
support in EUR/USD, in turn offering a first serious challenge to the broader dollar bearish trend that has been in
place since 2002. As food for thought, the measured objective of the current head-and-shoulders formation would
offer a technical target against 1.150. This is well below the
April 2004 low at 1.1760 and would correspond with a 62%
Fibonacci retracement from the September 2003-February

2004 rally in EUR/USD at 1.1590/80.

September/October 2004

THE TECHNICAL ANALYST

Market Views

THERE SEEMS TO BE MUCH TECHNICAL RISK


IN THE MARKET AS WE MOVE INTO THE FINAL
STAGES OF 2004.

Figure 2.

However, while many technical signals are pointing to a


lower resolution for EUR/USD into the end of 2004, some
caution is warranted. The two-year trendline has in the past
been a formidable support and may extend the summer
2004 consolidation further. This may keep EUR/USD in a
wide range of 1.1950-1.2500 for the remainder of Q3 '04.
All in all, the currency markets around the world are now
at a key technical junction. We will cautiously await the
range resolutions for better guidance toward a more directional move from both the euro and dollar into the latter
part of 2004 and early 2005.

10

THE TECHNICAL ANALYST

Michael Trefel is chief technical strategist for global


fixed income and foreign exchange at Lehman
Brothers, New York.
Important Note: This report is the sole possession of Lehman Brothers and is being
provided to The Technical Analyst for educational purposes only. It is by no means
intended as an investment solicitation. Nonetheless, there are important investment
disclosures on the last page. These disclosures should be read carefully. In addition,
this report is copyrighted and may not be reproduced under any circumstances. Any
distribution of this publication outside of its intended use, i.e., the The Technical
Analyst must be approved by the Fixed-Income Publications Department : (212-5266268 or fidpubs@lehman.com).

September/October 2004

Market Views

US TREASURIES
BEARS MAY SOON BE BACK IN CONTROL
by Thomas Anthonj

10-year Treasury

30-year Treasury

10-year Treasury notes have been in a long-term uptrend


that started in 1981 (Figure 1). But after reversing sharply
lower in a key-reversal week on 20th of June 03 and breaking below key-support at 112.15 (last bottom) 12 months
ago, the market finally confirmed a long-term trend reversal. Having formed a wave 1 down to 108.02, the market
performed a 2nd wave rebound up to 116.18 in March, a
level right in its target zone between the 61.8 % and the
76.4 % retracement (115.22-117.16).
Accelerating downwards thereafter in the manner of a 3rd
wave impulse (target 96.19), we see another wave 1 subcount completed at 106.1. Having already retraced 76.4 %
(114.10), the risk of resuming the downtrend to test the
next Fibonacci support level at 103.28 is now very high.
Only a weekly close above 114.10 would start to alter the
bigger picture.

Stalling at a projected price target for a 5th wave top at


122.30 in a head-and-shoulders pattern in mid-2003 (Figure
2), the 30-year Treasury market retreated and broke below a
key support at 117.26 (last bottom) - see Figure 2. Having
also broken the row of higher lows at 106.13, we received
the final certainty that we have seen a long-term turnaround
at 123.03. Bouncing from strong support at 104.00, the
market performed a typical 2nd wave rebound up to 116.12
and resumed its bigger bear trend thereafter, which means
that we are most likely performing a 3rd wave impulse
downwards with a calculated target at 85.08 (wave 1 x
1.618).
The latest rebound from the weekly tendline support at
103.06 is most likely nothing else but another internal 2nd
wave rebound that was expected to stall at 113.06 (76.4 %)
at the latest. Having tested this level two weeks ago we'd

Figure 1.

September/October 2004

THE TECHNICAL ANALYST

11

Market Views

WE ONLY NEED TO BREAK


BELOW AN OLD TOP AT
109.15 TO RECEIVE STRONG
EVIDENCE THAT THE BEARS
ARE BACK IN CONTROL.

only need to break below an old top at 109.15 to receive


strong evidence that the bears are back in control. This
would mean a test of the weekly trendline support, whereas
a break below would open substantial downwards potential
towards 97.06 (old low), and strong support between 92.07
and 89.00 (38.2 % / old bottom).
Thomas Anthonj is chief technical analyst at ABN
Amro in Amsterdam.

Figure 2.

12

THE TECHNICAL ANALYST

September/October 2004

IFTA CONFERENCE 2004 - PREVIEW


Bienvenidos a
Madrid!
I would like to thank The Technical
Analyst magazine for the great job they
have done in this issue to bring the
conference to all its readers. This
year's conference in Madrid is going to
be a worthy meeting and the technical
analysis community should be made
aware of this unique event. We have
made every effort to get first class
speakers such as John Murphy, John
Bollinger, Perry Kaufman, Martin Pring,
Trevor Neil, David Krell and Bernard
Lietaer among others. Special care has
been taken in the selection of conference facilities to make people comfortable and relaxed. Finally, tourist excursions and fine cuisine will be just some
of the highlights of the conference. For
all these reasons, I encourage you to
join us and enjoy this magical three
day event. Bienvenidos a Madrid!

Marc Michiels
Conference Chairman, 2004

September/October 2004

THE TECHNICAL ANALYST

13

BEHIND THE SCENES


TTA: The Spanish TA association has been around since 1992 but never
before applied to host the conference. Why now?
MM: The time felt right. The current boom in technical analysis, both globally and in Spain particularly, and the fact that it was the turn of a European
society to host the conference, convinced us to put forward our candidature.
TTA: How did the AEAT succeed in persuading IFTA to hold the
Conference in Spain?
MM: We have always been interested in IFTA matters and our relationship
with most of the national associations and IFTA has always been excellent.
The most important prerequisite for us to bring the conference to Madrid
was to be sure the big names of technical analysis would be present. Thanks
to our relationship with our partners, it was not difficult to get some of the
best technical analysts to speak at Madrid.
With such a program, we only had to manage a few other things to build
up a strong dossier. A location for the conference headquarters (one of the
best hotels in Madrid), and a marvellous 3-days tourist program to entertain
attendees' partners. To keep to our budget, we have relied on sponsor and
co-sponsor contributions which have allowed us to maintain reasonable fees
for attendees and offer them a top quality conference. As you can guess the
Spanish candidature was unbeatable!

Marc Michiels

With the celebration of the 17th


IFTA Conference in Spain on
November 4, 5 and 6, Madrid
becomes the capital of technical
analysis for three days. Trevor
Neil, John Murphy, John Bollinger,
David Krell and many others will
be there, as will The Technical
Analyst covering the event for its
readers. We talked to Marc
Michiels, daily manager of the
Spanish Association of Technical
Analysts (AEAT) and 2004 IFTA
Conference Chairman, to get
some idea of what goes into
preparing an event for almost 900
attendees.
14

THE TECHNICAL ANALYST

TTA: How did you go about gathering speakers?


MM: The key factor in attracting such first rate speakers to a conference is
to already have a pair of prestigious names on the conference program. For
the Madrid conference, we first made contact with David Krell,
International Securities Exchange founder, a very good friend of Jorge
Bolvar - President of Spanish Society of Technical Analysts - and asked him
if he was willing to participate. David wanted a successful conference and
said yes directly. Other keynote speakers that have been on the program
since the very beginning are John Bollinger and Martin Pring. With those
three keynote speakers, our job of getting good speakers became much easier. In November 2003, we went to Washington D.C. and participated in the
XVI IFTA Conference. We came back with acceptance of participation
from two other giants of technical analysis: Jonh Murphy and Perry
Kaufman. Five keynotes speakers were already scheduled on the program in
what was a great bonus for our organization. After that, there was no more
need to look out for speakers. Since then, speakers have contacted us to be
part of the program. In Spain, local technical analysts have been queuing up
to offer their services!
More recently, Bernard Lietaer accepted our invitation to make a presentation about his best seller "The future of money" on the gala dinner of the
conference. The last star to sign at the conference was Trevor Neil,
Bloomberg chief European technical analyst, in July 2004. In fact,
Bloomberg are one of the conference sponsors and will be installing two flat
screens in the lounge with channels in both English and Spanish.
So far, the conference comprises seven keynote speakers, a record for an
IFTA Conference. Another five local keynote speakers and twelve others
from different parts of the world constitute the full speaker team. We are
very proud of our speakers and their topics, and we hope that attendees will
appreciate them.
TTA: What does the AEAT hope to achieve with this Conference?
MM: Our main objective is to bring together local technicians and offer
them the possibility of exchanging ideas with foreign technicians. We expect
the conference will be the first step in creating a strong local TA community. But, above all, the conference should be viewed from a international perspective, as an international forum for TA professionals to discuss new
trends in the discipline.

September/October 2004

TTA: So what's the thinking behind choosing "Technical Analysis in Active


Portfolio Management and Risk Control" as the conference theme?
MM: The selection of this topic is motivated by the absolute willingness of
the conference promoters to organize a meeting that will really help financial market professionals in their day-to-day work.
The behaviour of the financial markets in the last few years has shown
clearly the importance of adopting active management strategies which help
professionals avoid or even take advantage of bearish phases of the markets.
Timing is essential if we want to preserve our capital in adverse situations
and make the most of bullish phases. Absolute return is equally, if not more
important, than relative return.
Managing a portfolio essentially involves managing its risk. As managers,
we cannot decide on the direction and volatility of the prices. But we can
adjust our investments (exposures or weights) to ensure they do not exceed
the maximum risk of acceptable loss. Quantitative technical analysis allows
us to manage our portfolio dynamically, track prices and volatilities, and to
identify buy and sell opportunities. In addition, technical analysis can also be
used in a 'relative' way (intermarket analysis) to select between different
buy/sell alternatives.
Technical analysis is already widely applied in portfolio management as an
additional tool for taking investment decisions. We want to go far beyond the
current use of technical analysis, bringing all these professionals to Madrid
to talk about their methodologies and preferences in relation to managing
portfolios with technical analysis.

The Conference Team


Jorge Bolvar,
AEAT chairman &
TechRules.com CEO

Fernando Bolvar,
AEAT vice-chairman &
CEO Expert Timing Systems

Marc Michiels,
AEAT General Secretary &
Conference Chairman

TTA: How will this theme be investigated throughout the conference?


MM: We have divided the talks into three subsets: The first day of the conference will focus on technical analysis and portfolio management, with talks
from John Murphy and Perry Kaufman. On the second day, John Bollinger,
among others, will talk about technical analysis and risk control and on the
third day, David Krell, Trevor Neil and Martin Pring will talk mainly about
technical analysis and the markets. Obviously, all the talks at the conference
are related to the main topic of the event, Technical Analysis in Active
Portfolio Management and Risk Control.

Mara Pardo,
AEAT Marketing Manager

TTA: And what about extra-curricular activities. Is there anything planned?


MM: Lots of them! We have organized three special events for attendees
with a global pass. On Thursday evening, they are invited to a welcome dinner with David Krell, president of the International Securities Exchange,
one of the largest equity options exchanges. On Friday midday, attendees
will visit Segovia and its Roman legacy, and will taste a typical medieval lunch
with products from the region Castilla y Len. On Saturday evening, there
will be a gala dinner, held at one of the most emblematic buildings in
Madrid. Bernard Lietaer will give a presentation on the international currency markets. He is one of the co-founders of the single European currency
and was elected the best currency trader in the nineties by Business Week.
Evening visits and many other activities will keep attendees busy all the time!

Jorge Prez,
AEAT IT Manager

TTA: What is the best way to register for the conference and what would
you say to a potential attendee?
MM: The best way is through the web site www.aeatonline.com. We have
already sold three-quarters of passes so if someone is really interested in
attending the conference, he or she should book early to avoid disappointment.
To all professionals involved in Technical Analysis I strongly recommend
not missing the chance to listen to and meet specialists from all over the
world and of keeping up-to-date with new developments in this discipline.

Mercedes Martnez,
AEAT Administration Manager

Welcome to Madrid!

September/October 2004

THE TECHNICAL ANALYST

15

I F T A

C O N F E R E N C E

THURSDAY NOVEMBER 4
TA & PORTFOLIO MANAGEMENT
All passes
09.00 Opening

13.00 Talk by Jorge Bolvar (SP),


Founder and CEO TechRules.com &
President AEAT, "Nearest neighbours.
Pattern recognition"

Global pass
14.00 Spanish lunch
09.30 Walkabout
Daily pass
09.30 Talk by Fernando Bolvar (SP),
CEO Expert Timing Systems Int,
"Quantitative asset allocation for fund of
funds"
10.30 Talk by Jorge Bentu (SP),
Finance Professor, TechRules School of
Finance, "TA Strategies for options"

15.30 Talk by Perry Kaufman (US),


Author of Trading Systems and Methods,
"Portfolio allocation for active traders"
16.30 Talk by Josep Codina (SP),
Founder and Director of TASC
Investor, "Current TA trends and techniques applied in Spanish portfolio management. A real case study"
17.30 Coffee break

All passes

18.00 Round table: Emerging Markets

11.30 Coffee break

21.30 Welcome dinner with David Krell


(US) (Global Pass)

12.00 Talk by John Murphy (US),


Author of Technical Analysis of the
Financial Markets, "Combining intermarket analysis and Exchange Traded Funds
in asset allocation and portfolio management"

FRIDAY NOVEMBER 5
TA & TA & RISK CONTROL
All passes
09.00 Talk by Gerald Butrimovitz (US),
President of Gerald Butrimovitz and
Associates Advisory Service, What
indicators worked post 2003
10.00 Talk by John Bollinger (US),
President of Bollinger Capital
Management, Inc, "Bollinger Bands
around the world"
11.00 Coffee break
11.30 Talk by Matthieu Gilbert (CH),
Head of Currency Overlay Department,
La Compagnie de Trsorerie Benjamin
de Rothschild "The integration of quantitative models in a currency overlay
approach"
Global Pass
12.30 Visit to Segovia province, 6 hour
excursion
Daily Pass

Paella!

16

THE TECHNICAL ANALYST

September/October 2004

12.30 Talk by Roberto Knop (SP), Head

P R O G R A M M E

2 0 0 4

SATURDAY NOVEMBER 6
TA & MARKETS
All passes
09.00 Japan Hour: Hiroshi Okamoto,
Chairman of the Board of Directors of
Nippon Technical Analysts Association,
"Enhanced trend Analysis using a special triangle ruler"
Yoshito TED Tetsuda, Deputy General
Manager, Investment Strategist, Fixed
Income Research Department, Daiwa
Securities SMBC Co. Ltd. (JP),
"Technical tools of active portfolio
management"
Segovia Province

of Balance Sheet & Treasury Risk.


Barclays Bank, "VaR & EaR when measuring and managing risk"
13.30 Lunch
15.00 Talk by Roberto Moro (SP),
Independent financial analyst and advisor, "Understanding new investment
habits from Technical Analysis side"

10.00 Talk by David Krell (US), David


Krell is Founder & CEO of the
International Securities Exchange, "The
International Securities Exchange - catalyst for change"

12.30 Talk by Martin Pring (US), Author


of Technical Analysis Explained,
"Using technical analysis to minimize
risk and maximize profits"
13.30 International lunch
15.00 Bloomberg talk by Trevor Neil
(UK), European Head of Technical
Analysis, Bloomberg, "Mixing fundamentals and technicals - the ultimate
weapon?"
16.00 Coffee break
16.30 Talk by Manfred Huebner, Fund
Manager with Deka Investment GmbH
& Rolf Wetzer, Senior currency manager
with MEAG Asset Management GmbH
(D), "Measuring market sentiment using
the Sentix Market Index"

11.00 Coffee break


17.30 Round table: TA Education
11.30 Talk by Rick Bensignor (US),
Chief Technical Strategist, Morgan
Stanley, "Seeing clearly through the
clouds: an introduction to
Ichimokukinkhouyou"

21.30 Gala dinner with Bernard Lietaer


(B), Visiting Professor at Naropa
University & co-founder of ACCESS
Foundation (Global Pass), "The future
of money, beyond greed and scarcity

16.00 Talk by Miguel Angel Cicundez


(SP), Capital Manager and Technical
Analyst in Afina-Pentor AV, a member
of Commerzbank group, "Speculative
strategies with volatility, a combination
of technical analysis and market feelings"
17.00 Coffee break
17.30 Talk by Jos Lus Cava (SP),
Author of Speculation Systems in Stock
Markets, "Elliott, which guidelines do
work?"
Other activities
Cibeles Square by night

16.00 DITA Level 1 2 hours exam


September/October 2004

THE TECHNICAL ANALYST

17

A SHORT HISTORY OF
IFTA CONFERENCES
The International Federation of Technical Analysts,
Inc. (IFTA) was incorporated in 1986 and is a global
organization of market analysis societies and associations in 26 countries. This not-for-profit federation
has four main goals, one of which is to "provide
meetings and encourage the interchange of material,
ideas and information". It was with this goal in
mind, that IFTA held the first conference back in
1988 and it has continued to do so every year since.
So how have the conferences varied over the 16
years? Michael Smyrk, IFTA Business Manager
1993-2003, tells us more about what is now the
most prestigious TA event of the calendar year.

How many attend these conferences and who are


they?
Numbers have varied enormously, with the result usually
depending on the health (or otherwise) of the financial markets in the run-up to the booking deadline. Japan, for example,
had unusually low numbers because of poor markets beforehand, and the effect of 9/11, which even led to late cancellations. Mostly, the attendance by local members of the host
society makes up around 1/3rd to 1/2 of the total - so a large
host society has an immediate advantage. Nevertheless, IFTA
has usually tried to place the conference wherever it is most
helpful to the largest number of TAs, while trying to keep to
the "pendulum" - Year a in North America, Year b in Europe,
Year c in Asia/Australasia, Year d in Europe, Year e in North
America again. No doubt this will change as local memberships increase/decrease, but traditionally Europe has had the
largest number of TAs overall. Attendees are usually about
2/3rds institutional (including data vendors etc), and 1/3rd
private investors (mainly local).
Do the formats of the conferences vary?
Each Conference in my experience has been different, taking
its character from the host society. The host societies have
been generally allowed to go their own way, apart from sticking to a fairly traditional format.
The format itself has not changed much over the years. The
main difference has been in the social events around the main
event, including "partner programmes" - sometimes very
18

THE TECHNICAL ANALYST

good, sometimes non-existent - and the final night party/celebration, which has sometimes been highly memorable.
Unusual parties have included a "Pirate Ship" in Amsterdam, a
cruise around Manhattan Island & the Statue of Liberty, and
dinner at the Sydney Opera House, for example. And special
side visits for delegates and partners have also been well
received - such as a reception in the NYSE Directors
Boardroom.
What have been the best things about the IFTA
conferences?
Traditional parts of the Conference that I hope will always be
there include the "Japan Hour", which has helped many people
to accept and study those special methods, and Ian Notley's
"Walkabout", which is both a terrific ice-breaker and a most
useful way of finding out other people's favoured TA tools on which subject, I would suggest that methods discussed
have not reflected linear progress, but more a circular re-visiting of recurring methodologies - P&F has come and gone and
come and gone again over the years, Chaos Theory was briefly
in favour, ditto Artificial Intelligence. Last year I think we were
back to very traditional tools like RSI, MACD and Stochastics.
A beneficial side-effect of the Conferences, not often mentioned, is the availability of high-level TA authors and experts,
who are willing to talk to anyone - there is enormous goodwill.
And a further spin-off is the impact of these "important"
people on local data providers, who are made to realise the
importance of what they produce.

September/October 2004

ESSENTIAL FACTS

DATES
Thursday 4 November to Saturday 6 November
inclusive.
LOCATION
Hotel Castellana InterContinental, Madrid
GETTING THERE
If you fly with Iberia, the official conference carrier,
you will receive a 30% discount on the full ticket
price. Quote code OSI IB BT4IB21MPE0313 when
making your reservation at any Iberia office or
through your local Iberia phone number.
COST
Attendees can choose to go for one day (450) or
for the complete program (1,100 for IFTA colleagues and 1,250 for non-IFTA colleagues).
Special events (welcome dinner with David Krell,
Trip to Segovia and Gala dinner with Bernard
Lietaer) are only for those with complete program
passes.

BOOKING AND FURTHER INFORMATION


All information concerning the conference as well
as registration online can be found at www.aeatonline.com. If you need more information concerning
the program, you can e-mail the organisers at
info@aeatonline.com.
CANCELLATION POLICY:
Registration Fees: No refunds will be given unless there are exceptional circumstances.

ACCOMODATION
Discounted accommodation is available at the conference headquarters, Hotel Castellana
InterContinental. The Castellana InterContinental is
a distinguished hotel in the heart of the city, with
comfortable lounges, rooms and other facilities as
well as fine cusinie. The Castellana InterContinental
supports the conference through special room rates
for attendees. To receive these special rates, reservation must be made at www.aeatonline.com
CANCELLATION POLICY:
Hotel cancellation policy: A refund of 85% of the total payment will be returned to
those who notify, in writing, by October 1, 2004. A refund of 50% of the total payment will be returned to those who notify, in writing, by October 30, 2004 .After
this date no refunds will be given unless there are exceptional circumstances

September/October 2004

THE TECHNICAL ANALYST

19

Techniques

IMPRESSIVE SIGNALS FROM DEMARK

Kurt Magnus, head of foreign exchange sales at Westpac bank


in London, discusses Tom DeMark's (TD) Sequential
IndicatorTM, his preferred technique for timing position
taking in the FX markets.

he technical analysis indicators


developed by Tom DeMark
enjoy a reputation for reliability
amongst its small group of market
users that exceeds that of the average
price or volume indicator. DeMark
remains one of the lesser known market indicators and is seldom covered in
technical analysis syllabi or textbooks.
This is largely because DeMark availability has been confined to the professional market and its reputation has
spread mainly by word-of-mouth.
Kurt Magnus is a DeMark devotee
and applies it to all his FX trading and
strategy decisions. "Probably only
around 3% of London traders use
DeMark", he says. "This is because they
take time and effort to master and have
to be uploaded onto your screen. This
is an inconvenience. Consequently,
DeMark enjoys a certain degree of
exclusivity and so is not yet part of
mainstream technical analysis theory".
Magnus and his team deal only in foreign exchange although there is also a
small fixed income desk at Westpac in
London specialising in the Australian
and New Zealand bond markets. For
obvious reasons, the Australian dollar
features highly in Magnus daily trading
but he considers that DeMark remains
reliable, no matter how obscure the
currency cross he may be dealing. "I
recall that a recent backtest of the
Sequential signals showed them to be
20

THE TECHNICAL ANALYST

September/October 2004

Techniques

around 70% accurate. DeMark is essentially a risk-reward strategy and its stoploss positioning means that even when
the indicators occasionally underperform, losses are cut to a minimum. In
my experience, the TD Sequential
Indicator is more than 70% reliable; it
is closer to 90%.

Kurt Magnus

September/October 2004

The DeMark Sequential


Indicator
Magnus uses Bloomberg charts whose
software automatically recognizes and
displays TD Sequential Indicators as
prices change from day to day. The
Sequential is perhaps the most commonly used DeMark indicator and has
an impressive record of identifying and
anticipating turning points across the
FX, bond, equity and commodity markets. Furthermore, the indicators provide signals not only on a daily, weekly
and monthly basis but also intraday.
The Sequential Indicator identifies
when a trend is becoming, or has
become, exhausted. On daily charts, for
example, DeMark identifies precisely
which day to enter into a new position
or liquidate an existing one. This total
absence of ambiguity with regard to
market timing makes the Sequential
stand out. Using the indicator does
require a leap of faith however, as signals often appear prematurely. As such,
a buy signal may appear before a downtrend has completed so the trader
THE TECHNICAL ANALYST

21

Techniques

may have a nervous ride before the


market finally turns. Magnus warns that
it is crucial the indicator is properly
understood. "Unless you understand
exactly the maths behind the signals,
you can make costly errors. There are
only two guys in the London FX market who can explain these signals with
authority. Jason Perl at UBS in London
and I often talk to make sure we get it
spot on.
Setups
The TD Sequential Indicator consists
of two patterns, a TD Setup and a TD
Countdown. Setups are the shortest in
duration, lasting for exactly nine price
bars when completed. For example, a
buy Setup exists when there have been
nine consecutive price bars in which
each bar's close is lower than the close
four price bars earlier. When a price bar
closes below that of four price bars
previously a '1' appears below the bar.
If the next price bar also closes below
that of four bars earlier a '2' appears
and so on. These appear in Figure 2 in
green, a chart of EUR/USD from
February to May '04. If before price bar
9 is reached a price bar fails to close
below that of four bars previously then
the Setup is abandoned and the numbers are automatically deleted. Once
nine consecutive price bars have been
completed the trader will be looking for
a "perfected" Setup; one that is now
valid for trading. A buy Setup is perfected when the low of either price bar
8 or 9 is less than the lows of both
price bars 6 and 7. Perfected sell Setups
look for a high of either price bar 8 or
9 that is greater than the highs of both

22

THE TECHNICAL ANALYST

Figure 1. is a daily chart of the Dow from mid-2003 showing how the DeMark Sequential
Indicator appears with price bars. The numbers in green and red represent TD Setups and TD
Countdowns respectively. The purple dotted lines are the DeMark stop loss levels automatically
generated by the software.

Figure 2.

September/October 2004

Techniques

CONVENTIONAL INDICATORS ARE TYPICALLY


TREND FOLLOWERS WHEREAS DEMARK IS
DESIGNED SPECIFICALLY TO ANTICIPATE
TREND REVERSALS. TOM DEMARK
price bars 6 and 7. Figure 2 clearly
shows perfected sell Setups in February
and April marked with a red arrow.
Countdowns
A TD Countdown occurs after a completed Setup. A buy Countdown consists of thirteen price bars whose close
is lower than or equal to the low two
bars earlier. The corresponding numbers appear below the price bar. Unlike
the Setup, a Countdown doesn't have to

consist of consecutive days. The


Countdown is a bigger pattern than the
Setup in that it can take months for a
Countdown to form and often signifies
a larger market move once the trend
changes. Like the Setup, the
Countdown also has "perfection" criteria. For a buy Countdown this requires
that the low of price bar 13 be less than
or equal to the close of price bar 8.
Similarly, sell perfections require that
the high of price bar 13 be greater than

TD Countdown

TD Setup
Duration

9 price bars

Unlimited

Buy signal

9 consecutive price bar closes


that are less than the close 4
price bars earlier

13 price bars where each close


is less than or equal to the low 2
price bars earlier

Perfection - buy

The low of either price bar 8 or


9 must be less than the lows of
both price bars 6 and 7

The low of price bar 13 must be


less than or equal to the close of
price bar 8

Sell signal

9 consecutive price bar closes


that are greater than the close 4
price bars earlier

13 price bars where each close


is greater than or equal to the
low 2 price bars earlier

Perfection - sell

The high of either price bar 8 or


9 must be greater than the highs
of both price bars 6 and 7

The high of price bar 13 must be


greater than or equal to the close
of price bar 8

or equal to the close of price bar 8.


Figure 3 illustrates how signals have
been generated in EUR/USD since
June 2003 using Countdowns. The buy
signal generated in September '03 and
sell signal in February '04 anticipated
large market moves which included
completed, yet unperfected Setups.
Stop losses
The placing of stop loss levels is a crucial component of the Sequential
Indicator and they are generated automatically only after the completion of a
Countdown. For a buy signal, their level
is calculated by identifying the lowest
price bar of the entire Countdown
(whether numbered or not) and then
subtracting the low of that price bar
from its high, or the prior price bar's
close, whichever is the greater. This
value is in turn subtracted from the low
of that same price bar and the critical
stop loss level is established. The stop
loss is only executed when there is a
close above the stop loss level followed
by a close below it. The next price bar
must also open below the stop loss

Table 1.

September/October 2004

THE TECHNICAL ANALYST

23

Techniques

IN MY EXPERIENCE, THE TD
SEQUENTIAL INDICATOR IS
MORE THAN 70% RELIABLE;
IT IS CLOSER TO 90%.
KURT MAGNUS, WESTPAC

but must also have a low that is below


its open. Magnus concludes, "There is
some debate as to what close should be
used in determining the stop loss level
as this can have some impact on overall
profits and losses. In my view, the
London rather than the New York
close is more valid because of the
greater liquidity in the London market,
at least as far as foreign exchange is
concerned.
Including the Sequential Indicator,
there are 17 TD indicators in total. Tom
Demark told The Technical Analyst,
"The DeMark indicators are proprietary market timing tools that are really
only available to professional investors.
These indicators are not to be confused
with conventional technical analysis
that relies more upon subjective interpretation of price charts. Rather, they
are quantitatively derived and grounded
in market psychology and are totally
objective. Many traders, even if they are
fundamentalists, rely upon the indicators to time their trading decisions.
Conventional indicators are typically
trend followers whereas DeMark is
designed specifically to anticipate trend
reversals.
Tom DeMark is president of Market
Studies and has been involved in the
investment industry for over 30
years. He has served as a consultant
to the Soros Group, JP Morgan,
Citicorp and Goldman Sachs among
others. In the 1980s he was executive
vice president of hedge fund Tudor
and for the past eight years has been
a special consultant and partner to
SAC Capital. www.tomdemark.com

Figure 3.

24

THE TECHNICAL ANALYST

September/October 2004

Techniques

THE US PRESIDENTIAL ELECTION CYCLE


FACT OR FICTION?

The impact of the US presidential election on the financial markets is a subject that has
traditionally been the territory of economists. Nevertheless, that hasn't stopped technical
analysts from attempting to find repeatable patterns. The most noteworthy and oft cited
example is that of Yale Hirsch's Presidential Election Cycle Theory. In 1967, he showed
that stock markets performed better in the second half of the four-year term than the first
half in around 70% of cases going as far back as the mid-1800's.

he theory behind The Theory is


that policies announced by the
president after an election victory, such as increased taxes and regulation, are generally negative for the corporate sector and so have a dampening
effect on stock markets, whereas half
way through the four-year term, the
stock market picks up as the presiden-

tial manifesto becomes more corporate


friendly in preparation for the next
election.
But despite the intuitive explanation
and impressive record cited by Hirsch,
the Presidential Election Cycle Theory
is now largely discredited for the simple
reason that it has been wrong as many
times as it has been right in the years
September/October 2004

since 1967.
Recent research by Wing-Keung
Wong and Cehn Dujuan at the
University of Singapore looked at the
behaviour of the S&P500 in the years
leading up to and following an election.
Wong and Dujuan's analysis of the previous ten elections dating back to
Lyndon Johnson in 1966 showed
THE TECHNICAL ANALYST

25

Techniques

THE ONLY SEVERE LOSS IN A


PRE-ELECTION YEAR GOING BACK
84 YEARS OCCURRED IN 1931
DURING THE DEPRESSION.
that in only half of the cases did the
S&P500 enter a bear market in the two
years
following
the
election.
Furthermore, even when the S&P did
move downwards, the cycle period was
often imprecise and failed to accurately
coincide with the four-year election
cycle.
Yet the influence of the presidential

election cycle may still survive in a


slightly different guise. A more conclusive pattern emerges when looking at
the year prior to the election year itself.
Table 1. shows that in every year prior
to the 15 election years since 1944, the
Dow has finished higher. In fact, the
only severe loss in a pre-election year
going back 84 years occurred in 1931

during the Depression.


So why should the Dow rally in the
pre-election year, rather than the election year, with such regularity? The reason may lie in the timing of crucial
presidential policy changes. Year three
(the pre-election year) of the president's four-year term can be crucial in
establishing a favourable economic cli-

% change in Dow before and after election years


President
Roosevelt
Truman
Eisenhower
Eisenhower
Kennedy
Johnson
Nixon
Nixon
Carter
Reagan
Reagan
Bush
Clinton
Clinton
Bush
Bush/Kerry

Election year
1944
1948
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004

Prior year change


+14
+2
+14
+21
+16
+17
+15
+6
+38
+4
+20
+2
+20
+34
+25
+25

Table 1.

26

THE TECHNICAL ANALYST

September/October 2004

Next year change


+27
+13
-4
-13
+19
+11
-15
-17
-17
-9
+28
+27
+14
+23
-7
?

Techniques

mate before the president embarks on


his election campaign, something that
will consume most of his time in year
four. Policy measures to boost business
and the economy must be put into place
early to take effect; waiting until the election year itself is too late. Any new policies announced in year three will have an
immediate affect on the markets and, as
such, this year rather than the election
year will reap the benefits. A good example of this is President Bush's State of
the Union speech in January 2003 in
which he announced plans for income
tax cuts and the elimination of taxes on
dividends.
Other major policy changes may also
be announced mid-term, such as shifts
in the administration. December 2002
saw the resignation of Treasury
Secretary Paul O'Neill as a result of his
inconsistent US dollar policy statements
and his opposition to the large fiscal
stimulus to the US economy that Bush
was then planning.
As for the year immediately following
the election year, the results are mixed.
With the exception of 2001, there have
been four consecutive post-election year
rallies since 1989. Prior to that, however,
the Presidential Election Cycle Theory
has little to offer in helping to predict
stock market direction in the year after
an election. So, with the important
exception of the regularity of the preelection year rally, in most respects the
cycle theory appears redundant. With
that in mind, ignore it - at least until
2007.

DEMOCRATS VERSUS REPUBLICANS


GRIDLOCK IS BEST by Jeffery Hirsch
Who should Wall Street be rooting for? There are six possible scenarios on Capitol Hill
depending on who has the presidency (Republican or Democrat) and who has control of
Congress (Republication, Democrat or split).
Looking at the historical performance of the Dow under Democrat and Republican
presidents, we see a pattern that is contrary to popular belief. Under Democrats, the Dow
has performed much better than under Republicans. The Dow has historically returned
9.1% a year under the Democrats compared to only a 6.0% return under a Republican
president. The results are the opposite with a Republican Congress, yielding an average
10.0% gain in the Dow compared to a 7.8% return when the Democrats have control of
the Hill.
With total Republican control of Washington, the Dow has been up on average 9.3%.
Democrats in power over the two branches have fared a bit worse with 8.4% gains. When
power is split, with a Republican president and a Democratic Congress, the Dow has not
done very well averaging only a 6.8% gain. The best scenario for investors is a Democrat
in the White House and Republican control of Congress, with average gains of 11.5%.
The direst of circumstances occurs with a Republican president and a split Congress,
averaging a net loss of 1.2%. There has never been a Democratic president and a split
Congress.
Jeffrey A. Hirsch is editor of the Stock Trader's Almanac and Almanac Investor
Newsletter and president of The Hirsch Organization.
Republican vs. Democratic Administrations
Dow Jones Industrials Average % Change Since 1901
10.0%
9.3%
9.1%

12.0%
10.0%
8.0%

8.4%

7.8%

7.5%

11.5%

6.8%
6.0%

6.0%
4.0%
2.0%
0.0%
-2.0%
All Years Rep Pres Dem Pres Rep Cong Dem Cong Rep P/
Rep C

Rep P/
Dem C

-1.2%
Rep P/ Dem P/
Split C Dem C

Dem P/
Rep C

Dow (% change) since 1901


All
years

Rep
Pres

Dem
Pres

Rep
Con

Dem
Con

Rep Pres
Rep Con

Rep Pres
Dem Con

Rep Pres
Split Con

Dem Pres
Dem Con

Dem Pres
Rep Con

7.5

6.0

9.1

10.0

7.8

9.3

6.8

-1.2

8.4

11.5

September/October 2004

THE TECHNICAL ANALYST

27

Techniques

INTRODUCTION TO KAGI CHARTS


by Ikutaro Gappo

28

THE TECHNICAL ANALYST

September/October 2004

How to read kagi chart patterns

B a l a n ce d fo rce

D ominant Buy fo rce

D o minant S ell force

The line and center point in the


kagi chart
The yang (red, thick) line of the kagi
chart indicates the buy force and a yin
(black, thin) line the sell force; when the
yang and yin lines are equal, it means
that the buy and sell forces are balanced; when the yang line is longer than
the yin line, it means that the buy force
is stronger; when it is shorter, the buy
force is weaker; the center point (indi-

S e ll fo rce

How to draw kagi charts


The kagi chart, which is also called the
nehaba (price range) chart, shows market fluctuations with turns in a line. It
can be used to forecast stock price
trends from price changes that exceed
either a certain range or a certain rate.
The former is called a fixed price movement kagi chart and the latter is called a
fixed rate kagi chart.
The price range or rate is determined
in advance, e.g. JPY10, JPY20, JPY100,
or 5%, 10% or 20%. When the stock

and 10%. The choice of which to use


differs according to which stock is
being traded. Greater price and rate
ranges are used for stocks with higher
prices because their upward and downward movements are larger. For lower
priced stocks, smaller price and rate
ranges are used. The point is to use a
price or rate range that suits one's
needs.

Center

he kagi chart is a non-time


series chart. Non-time series
charts, which also include such
varieties as the neri, shin-ne (new price)
and P&F (point-and-figure), are dimensional charts which show stock prices
on the vertical axis but indicate no time
factor on the horizontal axis. These
charts differ in the degree to which
emphasis is placed on the recording of
prices, but share the aim of identifying
trends and changes in trends as accurately as possible.

price moves beyond the given rate or


range, a line is drawn to that price.
Then as long as the price moves in the
same direction even by a yen or two, the
chart is extended accordingly. If the
price moves in the opposite direction
beyond the predetermined range or
rate, only then is a new line formed
showing a change in direction. If the
move in the opposite direction to the
trend is less than the range or rate, it
will not be regarded as significant and
therefore not recorded onto the chart.
The trend prior to a turn is regarded as
still continuing. The closing price is
used for kagi charts.
Take, for example, the JPY10 price
range chart. When the price rises more
than JPY10 from the starting point, a
yang (red, thick) line is drawn up to the
new level (no matter how many days it
takes to reach that level). If the price
continues to rise, each rise is added to
the red line. If a fall of more than
JPY10 yen occurs (no matter how
many days it takes), a new line (in red)
connecting this previous line should be
drawn down to the lower price. When
this fall goes below the previous bottom, however, the line is changed to a
yin (black, thin) line although it remains
on the same vertical.
The black line is extended downward
as long as the price continues to decline
without a rally of more than JPY10. If
there is a recovery of more than JPY10,
the line changes direction and moves
upward to the new price as a black line.
If and when this rise exceeds the previous high, the line changes to a yang
(red, thick) line from that point.
Popular price ranges are JPY5, JPY10,
JPY20, JPY50, JPY100 and JPY200.
Popular rate ranges are 1%, 2%, 5%

B uy fo rce

The kagi chart is a unique kind of line


chart designed to filter out short-term
market noise. It offers an interesting
alternative for identify trends, support/resistance levels, and reversals.
Although believed to date back to the
1870s when the Japanese stock market
began trading, kagi was only recently
introduced into western TA by Steve
Nison in his book Beyond
Candlesticks. Going back to its origins,
The Technical Analyst asked Ikutaro
Gappo - a kagi chart expert at the
Japanese association of technical analysts - to explain how they work and
how they can be used.

Figure 1. Kagi chart and the centre point

Techniques

cated by "X") is the turning point


between the buy and the sell forces and
thus is very important for judging the
strength of the trend (See Figure 1).

Buy
Double
Window
Double
Window

Types of kagi charts

Sell

(1) One-stage break


When the stock price exceeds the
immediately preceding shoulder, buying is indicated. When the price falls
below the immediately preceding waist,
selling is indicated. If the price rises
without crossing the preceding center
point (line), it means very strong buying
momentum. This is a highly reliable
buy signal. Similarly, if the price
declines without crossing the center
point (line), it is stronger than a mere
one-stage break sell signal. See Figure 2.

Figure 3. Double windows


Regular

Tengu

b
a
c

Sell

Sell

Okame
b

Shoulder down, waist down


a

Waist
Shoulder

Sell
(negative turn)

Buy
(positive turn)

Sell

c
d

Sell

Figure 4. Sanson
Buy

Center

Inverse

Center

Sell

Inverse Tengu

Buy

Buy

Figure 2. One-stage break

(2) Double window


When the right and left lines do not
overlap, the space between these two
lines is called a "window." When the
window opens on both sides on the
same level, it is called a "double window." When a price rises through a
double window, it confirms a market
bottom. This is an important

Shoulder down, waist down

Inverse Okame

Buy

Buy

Figure 5. Reverse Sanson

September/October 2004

THE TECHNICAL ANALYST

29

Techniques

"buy" signal. When the price declines


through the double window, it confirms
a ceiling. This is an important "sell" signal. As long as a window is open, the
market is still moving in the same direction. Only when both windows are
open does the move become meaningful. See Figure 3.

3
4

Center
3

Buy goken

30

THE TECHNICAL ANALYST

Center

Figure 6. Goken (Five step points)

2
5

Figure 7. Precipitant Goken

5
2

3
3

4
5

2
1

Figure 8. Successive buy and sell step points

September/October 2004

Precipitant sell goken

(4) Goken
As Figure 6 shows, in the buy goken
the outer waist goes up (1, 2, 3), and so
does the inner waist (4, 5), surpassing
these five points. The closing price following the high (5) (shoulder) represents a buy signal. The selling goken
goes in the reverse order. This form is
completed when the closing price
declines below the low (5) (waist). In
the buying goken, the pattern (3) (higher than the center line) is stronger than
the pattern (3') (dip buying force is
strong). In the selling goken, the pattern (3) (lower than the center line) is

Sell Goken

Soaring buy goken

(3) Sanson (head-and-shoulders)


When two shoulders (a, b) and two
waists (c, d) are equal, respectively, this
is called the "regular sanson". It is the
same as the Head and Shoulders top.
When the center rises higher, it is called
the "tengu sanson" and when it is
lower, it is called the "okame sanson."
Sanson with its shoulder (b) and its
waist (d) lower than (a) and (c), respectively, is called the "shoulder-down,
waist-down sanson." All these varieties
confirm the top, but the tengu sanson
is said to be the most effective.
A reverse sanson is a signal that confirms the bottoming out of a market
and also has many varieties. See Figures
4 and 5.

9
8

3rd - stage
rise

2nd - stage rise

1st - stage rise

3rd - stage fall

1
1
2

3
5
6

Figure 9. Three-Stage rise and fall

stronger than the pattern (3').


(5) Soaring or precipitous goken
In the soaring goken, the waist declines
continuously (3, 2, 1) and so does the
shoulder (4, 5), as shown in Figure 7.
But the price turns upward from the
low (1) and when it exceeds the shoulder (4), it rises further and surpasses the
shoulder (5) in one big movement. In
the precipitous goken, the shoulder
goes up (3, 2, 1) and so does the waist
(5,4). From the shoulder (1), the price
plummets and goes below the waist
(4)and (5).
(6) Successive buy and sell step
points
This pattern is formed when the sell
(buy) goken is immediately followed by

4
5
6

7
8
3rd - stage
fall

2
1

2nd - stage fall

7
6

1st - stage fall

Bottom

2nd - stage fall

1/3 drop

1/2 recovery

Top

1st - stage fall

1/2 recovery

Bottom

1/2 drop

1st - stage rise

2nd - stage rise

3rd - stage rise

Techniques

Figure 10. The Kagi Ashi of Three-Stage rise and fall

the buy (sell) goken. The pattern with


the greater price range is said to be better. See Figure 8.
(7) Numbers in the kagi chart
The number "nine" has special weight
in Sakata's chart and all other Japanese
charts. A pattern called the three-stage
rise (fall) in the traditional Japanese
chart is based on the notion that the
stock price tends to rise (fall) in three
stages. Each stage is composed of three
minor stages. A movement from floor
to ceiling, therefore, includes nine (3 x
3) stages (see Figure 9). This emphasis
on "9" is often applied to the kagi chart.
Experience shows that price tends to
peak (bottom) in three stages, as in
Figure 10.

September/October 2004

Conclusion
The world of technical analysis is
strewn with different charting techniques. They often provide the same
information, but in various formats.
Kagi is no different in this respect. But
the way in which kagi charts illustrate
price action means they are effective in
filtering out distracting market noise,
while remaining sensitive enough to
provide clear trading signals. The very
fact they have survived since the nineteenth century is testimony to their elegant power as a trading tool.
Ikutaro Gappo is an adviser for the
Nippon
Technical
Analysts
Association

THE TECHNICAL ANALYST

31

Interview

THE TECHNICAL ANALYST TALKS TO

Nina Cooper
Nina Cooper is president of the American Association of
Professional Technical Analysts (AAPTA). She has been
advising clients, trading and managing money in the capital
markets since 1980, in both the United States and London.
In 1995, Nina set up Pendragon Research Inc., an independent research firm. Her other undertakings include teaching
Elliott Wave Theory, phi analysis and advanced stochastics
at the Chicago Mercantile Exchange and writing for Elliott
Wave International.

TTA: You first entered the market back in the 1980s


when you joined the institutional bond desk at the First
National Bank of Chicago. How has the practice of TA
and its perception changed since then?
NC: Technical analysis has become more accepted and
accessible. That doesn't mean that it is highly regarded
however. The mainstream investment community still
regards TA as some sort of mumbo jumbo of dubious
value. Yet even the most vocal opponents of the technique use it in some form or another. The remarkable
thing is that as a forecasting approach TA is more often
correct - across any time frame you select - than straight
fundamental analysis. But like Rodney Dangerfield always
whined, technical analysts don't get much respect
TTA: Why is that?
NC: In part the problem is largely semantic. Mainstream
investment theory and academia tend to dismiss anything
that is not currently in the established body of theory.
They forget that every new addition starts as an idea or
an observation - some revolutionary concept. Those with
a vested interest are always dismissive. But with time and
research new ideas are woven into the accepted theory.
Then it - TA or any other new idea - is no longer controversial. TA is becoming accepted as behavioral finance
or quantitative analysis. Many people do not realize that
TA may be graphically represented but much of the
analysis is based on maths. For example, trendlines plot
the slope of a line. Bollinger bands track standard devia32

THE TECHNICAL ANALYST

tions from a mean. Technical analysts don't talk in mathematical terms but if you investigate the underlying
processes, you'll find that TA is seriously mathematical.
Terms that sound quantitative or academic seem to make
the concepts more palatable to the fundamentally oriented.
Another factor in the acceptance of TA is its ready
availability because of the broad use of computers and
technology. TA might have seemed more mysterious
when analysts drew charts by hand. Now with a computer on every desk, charts and technical studies are readily
available to everyone. Of course, with those tools at
hand, younger investment professionals whip through
the graphics programs and trading platforms without a
second thought. Older financial pros face the dilemma of
not knowing what their juniors take for granted. It's a
generational problem too.
TTA: You're known for teaching Elliott Wave analysis.
Why did you choose this as your preferred tool?
NC: I have found that Elliott Wave is a remarkable tool.
Actually it is more of a concept or system than a tool per
se. Elliott's research explains that all market price action
is systematic - cyclical - in a predictable way. The most
persuasive fact for me is that Elliott Wave explains all of
the features in mainstream TA, especially patterns.
TTA: In what ways have you developed your TA over
the years?

September/October 2004

Interview

NC: When I first started working with charts in the early


80s, I looked at many of the studies that seem intuitive moving averages, RSI, volume. What I found is that each
has value but only at certain times. Elliott Wave was the
first technical approach I found that seemed to be universal - explaining all of the action, even at times when
the wave counting was not clear.
In recent years I've developed beyond Elliott Wave
because it does suffer from some shortcomings. Namely,
it is ambiguous at times and it gives little reliable insight
for timing purposes. My work has expanded into phi
analysis which builds on the fractal structure of markets
based on phi (1.618). That number is often attributed to
Fibonacci who in fact identified a summation series with
phi properties. Phi has been around for thousands of
years. It's a pretty amazing number. You can't imagine
how predictive it is. In addition to fractals and phi, I
have done a great deal of work with stochastics as a timing tool. Most traders do not adequately understand the
power of this study. When combined, fractals, phi and
stochastics can forecast what direction the market is
going, where it will stop and reverse and when. You can't
get much better forecasting information.
TTA: Since we're clearly in conference season at the
moment, I'd just like to talk about your involvement with
TA societies and your decision to found a new association earlier this year. What's the background behind this?
NC: I first learned of technical analysis professional
bodies while I was working in the UK. Someone introduced me to the STA and I was bowled over by being in
a room full of people doing what I (of necessity) had
been doing secretly in my job. When I returned to the
USA in 1993 I joined the Market Technicians
Association (MTA) and was an active member in the
Chicago chapter. I held board level positions for a number of years and was the Annual Seminar Chair in 2001.
In 2003 I resigned from the MTA. Shortly afterwards a
group of other technical professionals sharing the same
view decided to form the AAPTA. Why the change?
Well, if I can step back and be objective, organizations
are like people, with different personalities and goals. For
a period, an organization may be broad enough to pursue many agendas which means that it is inclusive and
permits many points of view. In recent years the MTA
Board has become more focused on specific goals.
Unfortunately many of us felt that the MTA's pursuit of

growth came at the expense of supporting professionals


in the field. Our needs were not being met. We believed
that a professional organization should be focused on its
professionals and practitioners. And so AAPTA was
born to be a meeting place for professionals who actively
use technical analysis in their careers.
TTA: So what are the requirements for prospective
AAPTA members?
NC: To become a member, a person must have at least
seven years of professional experience using technical
analysis as a major component of their job. This shows
they have a high level of competency and have learnt
how to survive professionally. Also of importance, they
must hold to and practice high ethical standards.
TTA: As president, what are your ambitions for the
AAPTA?
NC: AAPTA's mandate is pretty simple: our organization exists as a forum or network to enable professional
technical analysts to connect and to interact. We want to
share research, draw on other analysts' expertise and just
enjoy the fellowship of those with a common interest.
We do not have any evangelical goals like educating the
public or credentialing individual analysts. We hope to be
able to support our members with easy means of communication with one another, to help our members with
network, help with tools to help strengthen their professional lives. There may be other specific desires that will
surface as AAPTA grows.
With regard to membership, we have more than 50
members at present and expect that number to grow
steadily. We want to encourage others who meet our
requirements and value that collegial relationship to join
us and build our organization in the direction the members' desire. The potential for growth is substantial but
growth for growth's sake is not on our agenda. There is
no target number projected.

For more information on the AAPTA, see


www.aapta.us.
For more information on Pendragon Research, see
www.phicharts.com.

September/October 2004

THE TECHNICAL ANALYST

33

Subject Matters

BACKTESTING
PREDICTORS OF THE S&P 500
by David Whitaker and Chun Wang

ost stock market participants


would agree that the characteristics of an attractive company
depend to some extent on the sector the
company is in. For example, in the utilities
sector high dividends may be a sought
after sign of stability, while in the technology sector they may be shunned as a sign
the company does not have high growth
potential. Even technical indicators may
vary in their usefulness across sectors companies in some sectors may exhibit
short term mean reversion, while in other
sectors long term trends may be more
important. In this study, we set out to systematically evaluate what were the best
predictors of excess returns within each of
ten sectors of the S&P 500 index (using
the S&P GICS sector definitions). We
found some expected results and some
surprising ones, as well as substantial differences between sectors. This article
describes our methodology and gives an
overview of the results.
Methodology
Our first task was to define a set of candidate factors. The approach used at Ned
Davis Research, which we believe to be
nearly unique in the industry, is to use
both technical indicators and fundamental
accounting measures to gain insight into
the dynamics of a company's share price.
Following this philosophy, we selected 17
technical indicators (including short term
and long term momentum, stochastic
oscillators, and candlestick codes) and 22
fundamental measures as a base set of factors. We added three factors which represent known return anomalies (low price,
small market cap, and positive coskewness) and three which represent measures
of risk. Finally we included three sensitivities to investment "style" and five sensitivities to macroeconomic conditions, for
a total of 53 factors. Examples of these
factors are given in Box 1.

34

THE TECHNICAL ANALYST

We chose to define the fundamental, risk,


and anomaly factors so that higher ranks
represent "better" companies; i.e. higher
values are historically associated with positive excess returns. To accomplish this, we
inverted the signs of several familiar ratios
such as debt/equity and working
capital/sales. Since the technical factors
can display either trending or mean-reverting behavior depending on the sector, the
direction in which these factors are ranked
is arbitrary. The same is true of the style
and macroeconomic factors.
Two aspects of this study were crucial to
avoid some errors which commonly arise
when backtesting quantitative models:
We eliminated survivor bias by using
the full historical list of sector constituents at each point in time (i.e., we
included companies which later dissolved, were acquired, or migrated to a
different sector)
We minimized look-ahead bias by only
using accounting information on or
after the reporting date. For example,
balance sheet items that are measured
as of December 31 but not reported
until March 31, are included in the
study from March 31 forward.
With the factors suitably defined, and the
above rules in place, we calculated the
return to each factor as follows:
Sort the stocks in each sector by the
value of the factor at the end of each
month - e.g., from highest earnings
yield to lowest
Form a portfolio that is long the top
quintile (20%) and short the bottom
quintile of stocks ranked by the factor
Measure the return to this portfolio
during the following month
Re-balance the portfolio at the end of
the month using updated ranks and
sector members

September/October 2004

Note that performance of the sector as a


whole has no effect on the factor return,
since the portfolio is always long and short
equal dollar amounts. Table 1 shows the
annualized return, standard deviation, and
Sharpe ratio for each of the factors in
each sector. The remainder of this article
discusses some themes we found in the
results.
Findings
Mean Reversion: The dominant theme
among our purely price-based technical
factors appears to be reversion to the
mean. Stocks that were the best performers in their sector in a given month tended
to be the worst performers the following
month. See for example Figure 1, which
shows the return to one month momentum in the Consumer Staples Sector (the
result of holding the 20% of the sector
with the highest return the prior month
and shorting the 20% with the lowest
return the prior month). The steady
downward trend evident on this chart
shows that it would have been a winning
strategy to buy the stocks with the lowest
recent returns and short the stocks with
the highest recent returns. Similar results
were found in almost every sector, but
were most pronounced in Financials,
Materials, and Industrials. This is consistent with the findings of other research;
see for example Jegadeesh (1990).
Another technical factor exhibiting
mean-reverting behavior is the candlestick
coding
technique
introduced
in
Likhovidov (1999). To implement this
technique, we retrieve the high, low, closing, and opening prices for the stock in
each month, and then assign to it one of
128 possible codes representing the color,
body size, upper shadow, and lower shadow of the candlestick. We found in eight
of the ten sectors that it would have been
a consistently profitable strategy to buy
stocks with the lowest candlestick readings

Subject Matters

and short those with the highest readings.


See for example figure 2, which shows the
return to the candlestick factor in the
financial sector.

trends, reversals, or underlying economic


conditions that would help to predict
when these factors will be in or out of
favor.

Valuation Measures: Perhaps not surprisingly, the traditional measures of valuation - earnings yield, cash flow yield, and
book to market - performed best in the
value oriented sectors. Materials,
Industrials, Energy, and Consumer Staples
all show positive returns to these factors.
Conversely, these factors had little or no
value in the growth oriented sectors, such
as Health Care and Technology. Figure 3
compares the cumulative return to earnings yield in the Industrials sector to that
in the Technology sector. Clearly, earnings
yield has been a good predictor of excess
returns for Industrials but a poor one for
Techs.

Other Findings: One of the more interesting results concerns the distribution of
cash to shareholders. Repurchase yield
(the sum of stock repurchases by the
company over the prior 12 months divided by total market capitalization) was a
consistent predictor of excess returns for
several sectors: Materials, Industrials,
Health Care, and Financials. In contrast,
dividend yield was not a significant factor
for any sector. In the US, capital gains are
taxed more favorably than dividends. Our
results may reflect a preference by US taxable investors to receive cash via repurchases rather than dividends. It may also
indicate that company managers correctly
recognize when their stock is undervalued
and initiate repurchase programs at these
times.

Efficiency Measures: Similarly, measures


of operating efficiency (such as asset
turnover and working capital to sales) performed well in the growth oriented sectors, but not in the value oriented sectors.
Figure 4 shows the return to asset
turnover in the Health Care sector vs. the
same factor in the Materials Sector.
Factor Rotatio: We also found evidence
of factors rotating into and out of favor.
Figure 5 shows the return to earnings yield
in the Consumer Discretionary sector.
The return to this factor was generally
positive, except during a 12 month period
from October 1992 - October 1993 and
during the 'bubble' years of 1997 - 2000.
Both of these periods showed strong negative returns to this factor. Cash flow yield
and EBITDA/Enterprise value exhibit
similar patterns in this sector. An interesting avenue for future research might be to
examine the predictability of "cyclical"
factor returns such as these, looking for

Examples
22 Fundamental Factors, e.g.:
Earnings Yield, Dividend Yield and
Debt/Equity
17 Technical Factors, e.g.:
Momentum 1, 2, 3, 6 & 12M; RSI 26 & 52W
and Stochastic 26 & 52W

We found that the change in inventory


(as a percent of total assets) was a good
predictor for the Industrial and Consumer
Discretionary sectors, with decreasing
inventory being more favorable. Rapid
increases in inventory may signal a reduction in demand for a firm's products, leading to reduced sales and profits in the
future. Decreasing inventory may signal
rising demand. We also found that the
accruals ratio, which represents the noncash component of reported net income,
may be a good indicator of earnings
"quality". Stocks with lower accruals ratios
produced superior returns in the
Industrials, Health Care, IT, and Utilities
sectors.
Conclusion
We found strong support for the idea that
stock selection should be done on a sector-by-sector basis, with the important
predictors of excess return varying considerably by sector. We also found evidence of mean reversion in short term
returns, consistent with prior academic
research. We hope this study provides useful information to practitioners and
inspires future research into the predictability of stock market returns.
David Whitaker and Chun Wang are
analysts at Ned Davis Research, Inc.

3 Risk Factors, e.g.:


Beta and EPS Stability
3 Anomaly Factors, e.g.:
Price and Market Cap
3 Style Factors, e.g.:
Value v. Growth and Cyclical v Consumer
5 Macroeconomic Factors, e.g.:
Crude Oil; 10-Year T-Note and Credit Spread

References
Jegadeesh, Narasimhan (1990). Evidence of
Predictable Behavior of Security Returns, Journal of
Finance 45, 881-898.
Likhovodov, Viktor (1999). Coding Candlesticks,
Technical Analysis of Stocks & Commodities
November 1999, 38-46.

Box 1.

September/October 2004

THE TECHNICAL ANALYST

35

Subject Matters

WHEN DOES TECHNICAL ANALYSIS WORK


AND WHEN DOESN'T IT? by Kian-Ping Lim

In the financial academic literature, one of the most enduring questions


concerns the predictability of stock prices. Much research has been devoted to forecasting stock prices in order to "beat the market". The general
consensus drawn from earlier empirical work is that stock prices move in a
random fashion, suggesting that analysis of past prices to forecast future
price movement is meaningless because patterns observed in the past
occurred purely by chance. This finding poses a direct challenge to technical analysts, to the extent of implying their work is of no real value to stock
market investors. However, this hardly makes sense given the wide usage of
technical analysis in the investment world.

rom the literature survey, it was


found that those earlier academic
studies tested whether stock prices
follow a random walk by using statistical
tests that are in fact designed to uncover
linear patterns in stocks prices. However,
the lack of linear dependencies does not
necessarily imply the series are random as
there might be other more complex
forms of dependencies that cannot be
detected by these standard linear methodologies. Even Fama (1965) admitted that
linear modeling techniques have limitations as they are not sophisticated enough
to capture complicated patterns that the
chartist sees in stock prices.
One of the possible hidden patterns
that went undetected in earlier studies is
that of non-linear dependency. After the
first evidence of non-linearity reported
by Hinich and Patterson (1985), more
and more evidence has emerged to suggest non-linearity is a universal phenomenon. This new feature of the data supports the idea of stock market predictability. In this regard, Lim and Liew
(2004) argued that non-linearity favours
non-linear technical analysis techniques,
and their view is further supported by the
empirical work of Andrada-Flix et al.
(2003) who demonstrated the profitability of non-linear trading rules. Given the

36

THE TECHNICAL ANALYST

mounting empirical evidence of predictability, the pendulum has swung in


favour of professional analysts, and
Cochrane (1999) has even labeled stock
market predictability as a 'new fact in
finance'.
Though the issue of stock market predictability is still hotly debated, there is a
possible win-win solution for both
groups. The repeated demonstrations by
Schachter et al. (1985) and Hood et al.
(1985) via sub-period analysis strongly
highlights the fact that there are times
when market movement is random, while
at other times, the market moves in a significantly non-random and dependent
pattern. Another recent work by
Ammermann and Patterson (2003) also
found that the stock and index returns of
the Taiwan Stock Exchange follow a random walk for long periods of time, only
to be interspersed with brief periods of
strong linear and/or non-linear dependency structures. These findings, on the
one hand, suggest that stock market predictability is mainly a short-horizon phenomenon, while at the practical level,
highlight the relevance of market-timing
strategies.
The main objective of this study is to
utilize recent statistical advances, the windowed testing procedure, to provide furSeptember/October 2004

ther empirical support to the conjecture


of Schachter et al. (1985) and Hood et al.
(1985) that that there are times when
market movement is random and times
when it is not. To conserve space, this
article only provides a brief discussion of
the methodology. Interested readers can
refer to Hinich and Patterson (1995) and
Hinich (1996) for a full theoretical derivation of the test statistics involved. The
present methodology is robust for at least
three reasons: First, the portmanteau correlation (denoted as C) and bicorrelation
(denoted as H) test statistics employed in
this windowed testing procedure are
designed to detect linear and non-linear
dependency structures in the data respectively; Second, it permits a closer examination of the precise time periods when
markets moves randomly and those periods when it does not. Third, both the C
and H test statistics have good sample
properties over short horizons of data.
This study looked at daily closing prices
for three South Asian stock market
indices: Colombo SE All Share (Sri
Lanka), India BSE National (India) and
Karachi SE 100 (Pakistan). These indices
were collected from Datastream and are
denominated in their respective local currency units for the sample period
1/1/1990 to 31/12/2003. From this

Subject Matters

data, the percentage daily returns are


computed based on the price move from
the close of one trading day to the next.
In the windowed testing procedure, the
data is split into sets of non-overlapping
windows of 35 observations in length,
approximately seven trading weeks.
Evidence of random and non-random walk movement
The results of the window testing are
reported in Table 1. The fourth row
shows the number of windows where the
proposition of pure noise is rejected by
the C statistic (indicating the presence of
linear dependency structures), with the
corresponding percentage in parenthesis.
The statistics for significant H windows
(indicating the presence of non-linear
dependency structures) are also displayed
in the same table. Since both significant C
and H statistics indicate departure from a
random walk, the final row of Table 1
provides the total number of windows or
sub-periods in which the returns series
are non-random. A common finding is
that all three South Asian stock return
series do not follow a random walk all the
time. For instance, in the case of BSENAT, 6 out of a total 104 sub-periods
(equivalent to 5.77%) move in a significantly non-random and dependent pattern, while for the remaining majority of
sub-periods the market moves along at a
close approximation to a random walk.
This corroborates the findings of
Ammermann and Patterson (2003), and
provides additional empirical evidence to
support the conjecture of Schachter et al.
(1985) and Hood et al. (1985). In particular, these three South Asian stock markets
join the list of exchanges that at times
move randomly and at other times do

not.
Figure 1: Significant C and H Windows for South Asian Stock Returns Series

September/October 2004

THE TECHNICAL ANALYST

37

Subject Matters

all three South Asian stock return series


follow a random walk for long periods of
time, only to be interspersed with brief
periods of strong linear and/or non-linear dependency structures.

Graphical Illustration
A graphical depiction of the results could
provide a closer examination of the precise time periods during which the series
deviate from a random walk. The histograms in Figure 1 show those windows
(sub-periods) in which the series are nonrandom, either due to a significant C or H
statistic, or both. Since the windowed
testing procedure breaks the full sample
into equal-length and non-overlapped
windows, it is possible to identify the
exact dates when the series under study
departs from a random walk movement.
For instance, in the case of BSENAT,
there are 6 windows or sub-periods that
the series move in a significantly non-random and dependent pattern. In particular, this occurs in window-8 (11/12/9028/1/91),
window-21
(8/9/9226/10/92), window-45 (28/11/9515/1/96), window-59 (14/10/971/12/97), window-79 (20/6/00-7/8/00)
and window-97 (19/11/02-6/1/03). As a
whole, Figure 1 clearly demonstrates that

Implications for technical analysis


The present study throws some interesting light on the ongoing debate of stock
market predictability. Though the returns
for the South Asian stock market indices
follow a random walk for long periods of
time, there were times when it does not,
suggesting the potential of profitability
for technical trading rules. In particular,
during those periods when the markets
move in a significantly non-random and
dependent pattern, it is possible for
investors to devise a trading rule to
exploit those detected linear and non-linear dependencies to earn abnormal rates
of returns. Furthermore, the results highlight the relevance of market-timing
strategies, as the dependency structures

BSENAT

CSEALL

KSE100

Total number of windows

104

104

104

Window length

35

35

35

Number of lags

Significant C windows

2
(1.92%)

20
(19.23%)

6
(5.77%)

Significant H windows

4
(3.85%)

6
(5.77%)

7
(6.73%)

Significant C and H windows

6
(5.77%)

25
(24.04%)

12
(11.54%)

Table 1. Windowed-Test Results for South Asian Stock Returns Series


Note: BSENAT- India BSE National; CSEALL- Colombo SE All Share; KSE100- Karachi SE 100.

38

THE TECHNICAL ANALYST

September/October 2004

appear only sporadically, and hence suggest that predictability is mainly a shorthorizon phenomenon.
Kian-Ping Lim is a lecturer at the
Labuan School of International
Business and Finance, Universiti
Malaysia Sabah, Malaysia.
References
Ammermann, P.A. and Patterson, D.M. (2003). The
cross-sectional and cross-temporal universality of nonlinear serial dependencies: evidence from world stock
indices and the Taiwan Stock Exchange. Pacific-Basin
Finance Journal, 11, 175-195.
Andrada-Flix, J., Fernadez-Rodriguez, F., GarciaArtiles, M.D. and Sosvilla-Rivero, S. (2003). An empirical evaluation of non-linear trading rules. Studies in
Nonlinear Dynamics and Econometrics, 7(3), Article 4.
Cochrane, J.H. (1999). New facts in finance. Economic
Perspectives, 23, 36-58.
Fama, E.F. (1965). The behavior of stock market prices.
Journal of Business, 38, 34-105.
Hinich, M.J. (1996). Testing for dependence in the
input to a linear time series model. Journal of
Nonparametric Statistics, 6, 205-221.
Hinich, M.J. and Patterson, D.M. (1985). Evidence of
nonlinearity in daily stock returns. Journal of Business
and Economic Statistics, 3, 69-77.
Hinich, M.J. and Patterson, D.M. (1995). Detecting
epochs of transient dependence in white noise. Mimeo.
University of Texas at Austin.
Hood, D.C., Andreassen, P. and Schachter, S. (1985).
Random and non-random walks on the New York
Stock Exchange. Journal of Economic Behavior and
Organization, 6, 331-338.
Lim, K.P. and Liew, V.K.S. (2004). Nonlinearity favours
nonlinear TA techniques. The Technical Analyst, May
issue, 38-40.
Schachter, S., Gerin, W., Hood, D.C. and Andreassen, P.
(1985). Was the South Sea bubble a random walk?
Journal of Economic Behavior and Organization, 6,
323-329.

Book Review

A COMPLETE GUIDE TO
TECHNICAL TRADING TACTICS

A Complete Guide to Technical Trading


Tactics: How to Profit Using Pivot Points,
Candlesticks & Other Indicators
By John L. Person
Published by Wiley Trading
266 pages, 39.99
ISBN 0-471-58455-X

John Person's book is available from the


Technical Analyst bookshop at the reduced
price of 33.99 plus P+P. To order please call
01730 233870 and quote the "Technical
Analyst magazine". Books are usually posted
within one working day of your order.

John Person's new book falls into two parts; a basic introduction to technical analysis techniques and methods for the
novice, and more interesting sections looking at trading strategies that use well know and some lesser well known TA techniques. Unlike many of the numerous books published on
technical analysis, Person's book is well written with clear
charts and easy to follow examples. It is also written purely
from a trader's perspective and contains much that will be of
interest to the professional analyst and trader. Perhaps the
most interesting section regarding trading techniques is
Person's presentation of pivot point analysis which, he says, is
widely used amongst day traders, brokerage firms and market
professionals in the US. Pivot point analysis is essentially a
method for calculating major support and resistance levels.
A pivot point number (P) is the sum of the high, low and
closing price of a period divided by three. From this number
support and resistance levels are derived. For example, the primary resistance level in the next period of trading (ie, day,
week, month etc.) is calculated by multiplying P by 2 and subtracting the low price for the period. The major support level
is calculated by multiplying P by 2 and subtracting the high
price for the period. The reasoning behind these calculations is
that the pivot point represents an equilibrium around which
trading occurs in any given period and so the support and
resistance levels contain the range of prices when trading veers
either side of this equilibrium in subsequent periods.
As an example, Person uses a monthly sugar futures chart
from September 2002 to forecast the low of the next month,
October. In September, the high was 7.80, the low was 6.40
and it closed at 6.63. This produces a pivot point number of
6.943 with a corresponding support number of 6.09. The low
for October was in fact 6.11, just two ticks away. The support
level of 6.09 therefore produces the optimal entry point for
October. However, Person suggests that these levels are best
used in conjunction with conventional chart analysis and goes
on to present his own version of pivot point analysis called
P3T (Person's pivot Point Trade signal) that incorporates candlesticks and stochastics.
His sections on pyramiding, scale trading and options strategies prevents much of the book from going over familiar
ground. This together with the clarity of writing and presentation means that Person's book is, without doubt, a notch
above the average TA publication. Furthermore, techniques
such as pivot point analysis will be relatively unfamiliar to
many non-US traders and so the book will offer an insight
into a new and exciting technique to these professionals.

September/October 2004

THE TECHNICAL ANALYST

39

Software Review

MTPREDICTOR REAL-TIME 4.0


As MTPredictor looks to break into the institutional market with the release of its new realtime software (RT 4.0), we assess the software's viability for professional traders.

MTPredictor has only been around since 2001. Yet it already


has a loyal following of mostly private traders, many in the US,
and the company has been able to charge an amount for its
End-of-Day (EOD) software that deters many casual or low
capital private traders. As such, it is aimed squarely at mid to
high-end private traders and small institutions.
Now, with the release of Real-Time 4.0 (RT), MTPredictor
have simply transferred their "isolation approach" to the realm
of intraday trading.
The isolation approach
Like EOD, the RT software is built around the company's
"isolation approach", which the developer, Steve Griffiths, formulated over the 17 years he spent trading on his own account.
The isolation approach claims to offer a solution to the many
problems associated with Elliott Wave trading. Namely:
forcing wave counts on charts where no wave count is obvious
the difficulty of trading alternative counts
changing wave counts as new data arises, leaving a trader stranded with a "wrong" position
having to use more and more complex Elliott Wave analysis to
make it work, e.g. the X wave

TS2 - is where the ABC correction is part of a Wave 4 correction. The trade set-up aims to take advantage of an ensuing
Wave 5. (Figure 2).
TS3 - identifies an ABC correction of unknown context. The
trade set-up aims to take advantage of an ensuing wave of
unknown count, but probably a Wave C or Wave 3 of larger
degree. (Figure 3).
The software is able to scan at three Elliott Wave timescales minor, intermediate and major. It also gives the option to
search for ABC corrections where Wave C is terminating or
has terminated in a predicted Wave Price Target (WPT), calculated using Fibonacci retracements/projections.
To add further comfort, the software can scan the markets
for the above ABC patterns, but with the added requirement
that the last bar on the chart is a red (sell) or blue (buy) bar.
These reversal bars are derived from several standard reversal
patterns plus an MTPredictor proprietary oscillator.
Compatibility options and availability should grow
At present, RT 4.0 is a stand-alone system that relies on an
eSignal datafeed. The company is also in the process of making the software compatible with Townsend Analytics'
RealTick data.

To overcome these problems, the software looks for just one


part of an Elliott pattern, the ABC correction (or zig-zag), to
identify when a price reversal is imminent. Being able to identify such likely areas of price reversals provides good opportunities for low risk / high reward trades.
Contrary to normal Elliott Wave trading, the software considers it unnecessary to work out how the correction fits into the
overall Elliott count. The thinking being that if you have successfully identified an ABC correction, any of the next waves,
whether it is Wave 1, 3, 5, or Wave C of a larger correction,
could all be potentially profitable.
Once the ABC correction is identified, the software can then
tell you what the risk/reward ratio is for each of the possible
wave outcomes, giving the trader essential information in
deciding whether to take the trade.
There are three key trade set-ups that RT 4.0 looks for:
TS1 - is where the ABC correction is part of a Wave 2 or B
correction. The trade set-up aims to take advantage of an
ensuing Wave 3 (usually the most profitable wave). (Figure 1).
40

THE TECHNICAL ANALYST

Figure 1.

September/October 2004

Software Review

But exposure to the professional market is ultimately dependent on having its software distributed through the likes of
Bloomberg and TraderMade. In this regard, MTPredictor is
already making some headway - it is planning to link up as a
"partial plug-in" with TradeStation. This means that
MTPredictor will offer two of the key modules ('Show Elliott
Waves' & 'Trade set-ups') as an optional extra for TradeStation
users.
In terms of the data available, there is no problem.
Everything you would expect is available through eSignal,
including stocks, indices, mutual funds, futures, options, forex.
The data is real-time and supplied on a tick-by-tick basis,
although the MTPredictor software aggregates the tick data
into time bars down to a 1-minute minimum. There have been
a few niggles with the interface between eSignal and
MTPredictor but these, we have been told, have been resolved.
Easy to use package
The software comes on a CD Rom with a hefty training manual, which is very clear, if slightly repetitive. It could easily have
been half the weight it is (though it is now also available in
downloadable colour PDF format). But those new to Elliott
Wave Theory will appreciate the assumption of no prior
knowledge.
Once up-and-running, the software can be used at its most
basic level with ease. This means running scans for the three
trade set-ups and analysing those set-ups with the risk/reward
module. But the advanced functions are also fairly intuitive,
allowing the trader to do their own manual analysis of graphs,
go back in time, put their own Elliott Wave counts onto charts,
find likely areas for waves to end and so on.
In addition to these Elliott Wave related functions, RT 4.0
also includes other indicators and studies. These include
Bollinger Bands, moving averages, RSI, stochastics and volume
data. But even Tony Beckwith, MTPredictor director of sales
and marketing, admits they are there to keep people happy.
They can be used to give further comfort for the trades that
the software suggests, but they are, he said, 'peripheral nice to
haves'.
Thorough software and support
The software is clearly well thought out. Both Beckwith and
Griffiths use it to trade on their own account and because of
this, they have addressed almost every detail or problem that a
trader is likely to encounter - either in the software itself, in the
manual or on the website.
The trading manual emphasises their practical and down-toearth approach further. It doesn't promise miracle returns, but
simply says that disciplined risk trading is a means of earning
an income, albeit a volatile one. MTPredictor say their trades
typically win 40-50% of the time, but that the winning ones

Figure 2.

are at least two to three times the size of the losing ones. Plus
there are the occasional big winners that come along to make it
all worth while. Used in conjunction with the sensible risk and
money management techniques outlined in the manual, RT4.0
seems to offer a sound and complete system for trading.
The developer as trading king
In essence, the MTPredictor software tries to mimic the successful trading style of its developer, Steve Griffiths. This
explains the eclectic mix of extras that can be scanned for DOJIs, inside days, 80/20 days and minor pullbacks,

Figure 3.

September/October 2004

THE TECHNICAL ANALYST

41

Software Review

RT 4.0 Test: Trade Record for US index and ETF trading, 26 July to 25 August 2004
Number of
Trades

Number of
Winning
Trades

TS3 Set-up

38
11
32

18
4
15

Total

81

37

TS1 Set-up
TS2 Set-up

Number of
Losing
Trades

Profit on
wining
trades
(units of risk)

Loss on
losing
trades (one
unit of risk
per trade)

Total P/L

20
7
17

46.75
22
46

-20
-7
-17

26.75
15
29

44

114.75

-44

70.75

Table 1. Note: 1) Securities ES (E-mini S&P 500); NQ (E-mini Nasdaq-100); YM (mini-Dow futures); SPY (Exchange Traded Fund tracking S&P 500);
QQQ (Exchange Traded Fund tracking Nasdaq-100); DIA (Exchange Traded Fund tracking Dow Jones Industrials). 2) Timeframes 3min. and 5 min. 3) No
account has been taken of slippage and commissions. 4) P/L risk units rounded to nearest 0.25. 5) No trades left open overnight (closed at session end if necessary) 6) No trades were actually taken

which can all be used to provide further confirmation of the


trade set-ups.
There is no doubt RT4.0 is very good software, offering
clear trading signals with precise entry and exit points. The
long periods when no trade set-up is found are to be welcomed since they prevent over-trading. But even the best software can throw up spurious results and MTPredictor is no different. The company recognises this and urges all its customers
to check the Elliott Waves to make sure they look correct
according to Elliott Wave theory. It also encourages its customers to make sure the trade does not run contrary to the
overall market context, and if it is, that it can be justified.
This is clearly the side of trading that calls on human judgement and as previous research has shown, this may be the
most important factor in separating the successful trader from
the unsuccessful one. In recognition of this, MTPredictor provides daily reports and "hotComm Web seminars" on the
members section of the website. The daily report provides
good insight into the way Steve Griffiths is thinking and helps
the trader develop the necessary skills that allow him to choose
which set-ups to trade.
Trading
All this counts for nothing if it doesn't make money.
MTPredictor has carried out its own tests, the results of which
are presented in brief in Table 1. (Further details can be
obtained from MTPredictor, upon request).
The results are certainly impressive. To provide a basis for
42

THE TECHNICAL ANALYST

replicable assessment, very prescriptive rules were used about


which trades to take and how to manage them once they were
open. These rules can be found on their website (called
"Trading Guidelines"). Readers should be aware, however, that
the sample is not statistically large nor necessarily representative of using the software outside of the sampling period. The
Technical Analyst can not verify or endorse these results.
Summary
There is no doubt that MTPredictor will appeal to novice or
relatively inexperienced traders. And rather like your local scientology outfit, it should also thrive on unsuccessful traders
who have lost their way and are looking for confidence and
firm direction.
But can it break into the wider professional market? There
are a few availability issues that need to be addressed first, but
ultimately if the software has a positive impact on a trader's
P&L, then there is no reason why not. Early indications are
good and the success of its EOD version lends further weight
to MTPredictor's argument.
Price
$1,995 for year one, available on a 30-day money back trial
(minus $95 administration fee). Year two onwards at $495 per
annum. Price does not include datafeed.
www.mtpredictor.com

September/October 2004

MTPredictor

TM

The software solution for complete trading excellence


Designed exclusively to find, assess and manage only the
very best trades in stocks, currencies and commodities
This is the type of trade MTPredictor can automatically uncover for you.

A Profit of approximately 7x the initial risk required to take the trade, ignoring
slippage and commissions, in the UK stock GKN (October 2003)

End-of-Day and Real-time programs with automatic routines for:

Ideal trades: Find exceptional set-ups with outstanding Risk/Reward prospects


Ideal trade size: Control your position size
Ideal trade management: Display the exit stop strategy on-screen
Ideal trading psychology: Consistent, logical trading, time after time
Systematic Elliott Wave software: Avoid the pitfalls of standard Elliott analysis
Advanced strategies: Expert trade opportunities and management plans

TAKE CONTROL OF YOUR TRADING WITH


THE NEW MTPREDICTOR 4.0 SERIES!
MTPredictor Ltd www.mtpredictor.com sales@mtpredictor.com Tel +44 (0) 208 9776191

Commitments of Traders Report

COMMITMENTS OF TRADERS REPORT


25 May - 7 September 2004
Futures only (open interest)
Non-commercial net long positions and spot rates
10-year US Treasury

Source: CBOT
10-yr Treasury

5-year US Treasury

Spot

Source: CBOT
5-yr Treasury

-250000

5.00

Spot

300000

4.20

4.80

4.00

-200000
250000
4.60

3.80

-150000
4.40
200000

3.60

-100000
4.20
3.40
4.00

-50000

150000
3.20

3.80
0
100000

3.00

3.60
50000
2.80

3.40
50000
100000

2.60

3.20

150000

3.00
May-25

Jun-08

Jun-22

Jul-06

Jul-20

Aug-03

Aug-17

Dow Jones Industrial Average


DJIA

Aug-31

2.40
May-25

Source: CBOT

Jun-08

Jun-22

Jul-06

Jul-20

Aug-31

Source: CME
Swiss franc

11000

Aug-17

Swiss franc

Spot

-6000

Aug-03

Spot

30000

1.29

25000

-5000

1.28

10800
20000

-4000

1.27
10600
15000

-3000

1.26
10400

10000

-2000

1.25
10200

5000

-1000

1.24
0
10000

1.23
-5000
9800

1000

1.22

-10000

2000

9600
May-25

Jun-08

Jun-22

Jul-06

Jul-20

Aug-03

Aug-17

Pound sterling

1.21
May-25

Source: CME
Pound sterling

-15000

Aug-31

Jun-08

Jun-22

Jul-06

Jul-20

Aug-31

Source: CME
Japanese yen

1.88

Aug-17

Yen

Spot

35000

Aug-03

Spot

10000

125

5000

120

115

-5000

110

-10000

105

1.86
30000
1.84
25000
1.82

20000

1.80

1.78

15000

1.76
10000
1.74
5000
1.72

1.70

0
May-25

44

Jun-08

Jun-22

Jul-06

Jul-20

Aug-03

THE TECHNICAL ANALYST

Aug-17

Aug-31

100

-15000
May-25

September/October 2004

Jun-08

Jun-22

Jul-06

Jul-20

Aug-03

Aug-17

Aug-31

Commitments of Traders Report

Euro

3-month eurodollar

Source: CME
Euro

Source: CME

Spot

3-month eurodollar

40000

1.25

600000

1.24

400000

1.23

200000

1.22

1.21

-200000

1.20

-400000

1.19

-600000

1.18

-800000

Spot
2.00

1.80

35000

1.60
30000
1.40

25000
1.20

20000

1.00

0.80

15000

0.60

10000
0.40
5000

0.20

0
May-25

Jun-08

Jun-22

Jul-06

Jul-20

Aug-03

Aug-17

Nasdaq

Aug-31

Jun-08

Jun-22

Jul-06

Jul-20

Aug-03

Aug-17

Nikkei

Source: CME
Nasdaq

0.00
May-25

Source: CME

Spot

Nikkei

-14000

2100

-12000

2050

Aug-31

Spot

4500

12000

4000

11800

3500
-10000

11600

2000
3000

-8000

11400

1950
2500

11200
-6000

1900

-4000

1850

-2000

1800

1750

2000

1700

4000

1650

2000
11000
1500
10800
1000
10600
500
10400

10200

-500

May-25

Jun-08

Jun-22

Jul-06

Jul-20

Aug-03

Aug-17

Gold

Aug-31

10000
May-25

Jun-08

Jun-22

Jul-06

Jul-20

Aug-03

US dollar index

Spot

Aug-17

Aug-31

US dollar index

Source: CEI
Gold

-1000

Source: NYCE

Spot

90000

415

80000

410

117

6000

116.5
4000
405

70000

116
400
60000

2000
115.5

395
50000
390

115

40000
385
114.5
30000

-2000
380
114

20000

375
-4000

10000

113.5

370

365
May-25

Jun-08

Jun-22

Jul-06

Jul-20

Aug-03

Aug-17

Aug-31

-6000

113
May-25

September/October 2004

Jun-08

Jun-22

Jul-06

Jul-20

Aug-03

Aug-17

THE TECHNICAL ANALYST

Aug-31

45

Long-Term Technicals

LONG-TERM TECHNICALS
Provided by Thomas Anthonj, ABN Amro, Amsterdam

EUR-USD

USD-JPY

Two key-reversal weeks down plus the break below 1.2334


delivered strong evidence that we are at least displaying a
bigger 4th wave setback with a minimum target of 1.1179.
The latest rebound has to be classified as a B-wave rally
only as long as 1.2652 has not been broken decisively.

Breaking above the last top at 112.34 the overall negative


picture has almost been neutralized. But unless neckline
resistance has also been cleared we are still in danger of
testing the last bottom at 101.25 or the H+S target at 95.75.

GBP-USD

S&P 500

As long as the market remains below 1.8067 we have to


expect lower prices towards 1.7375, 1.6958 and maybe even
1.6676 as a completing C-leg down of a bigger A-B-C correction pattern.

Showing a strong bounce up from a Fibonacci-support cluster


and closing above neckline resistance one year ago the market confirmed a medium-term bottom in place. But hitting keyresistance at 1161/77 and closing below trend line support it
is very likely that the market performs an internal 4th wave
correction down towards 1020 before the up-trend is expected to resume.

46

THE TECHNICAL ANALYST

September/October 2004

Long-Term Technicals

Nikkei

Brent Crude Oil

Breaking above the old 12081 top the market delivered


strong evidence for a long-term turnaround. But missing a
2nd wave setback we have to expect more corrective action
over the coming weeks and months particularly as long as
the market remains below 11969.

The market seems to perform an internal 3rd wave impulse


up with 45.95-47.26 as the next immediate target zone. A
break above would re-open the upside towards 56.52-58.64
before any bigger setback could be expected again.

Dow Jones

Nasdaq

Stalling right at key-resistance the market retreated, which


signaled that we are due for a setback that will most likely
form a 4th wave down to 9479 over the next few weeks.
Only a break and close above 10525/71 would now signal a
straight resumption of the old bull-trend.

Failing to stabilize above 2099 the market retreated in what


looks like an internal 4th wave setback as long as trendline
support holds. A decisive break and a close thereunder
though would call for a much deeper setback.

September/October 2004

THE TECHNICAL ANALYST

47

Training and Events Diary

TRAINING AND EVENTS DIARY

OCTOBER

OCTOBER

OCTOBER

8-10

13

25/26

Course:
AAPTA 1st annual conference,
Phoenix Arizona
Organiser:
AAPTA
Contact:
admin@aapta.us

Event:
STA meeting
Organiser:
Society of Technical Analysts
Contact:
info@sta-uk.org

Course:
Technical analysis and charting
Organiser:
Chartwatch
Contact:
ken@chartwatch.com

OCTOBER NOVEMBER NOVEMBER

28/29 4-6
Course:
Advanced technical analysis
Organiser:
Chartwatch
Contact:
ken@chartwatch.com

Event:
IFTA Conference, Madrid
Organiser:
AEAT
Contact:
info@aeatonline.com

10
Event:
STA meeting
Organiser:
Society of Technical Analysts
Contact:
info@sta-uk.org

NOVEMBER NOVEMBER NOVEMBER

10

15

25/26

Course:
Introduction to technical analysis
Organiser:
7city
Contact:
s.sycamore@7city.co.uk

Course:
Introduction to technical analysis
Organiser:
Quorum Training
Contact:
courses@quorumtraining.co.uk

Course:
An introduction to charting &
technical analysis
Organiser:
International Petroleum Exchange
Contact:
training@theipe.com

For submissions please email us at: editor@technicalanalyst.co.uk

48

THE TECHNICAL ANALYST

*All venues are in London, unless otherwise stated.

September/October 2004