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Just when you thought things couldn’t get any worseHwith sentiment being so negative at the moment for all markets, not just stocks, it is perhaps time to take a contrary view, as advocated by Anthony Bolton. Technical analysis has much to offer in this area and the indicators of Tom DeMark work specifically as a coun - tertrend signal generator for both the short and long term. In this issue we summa - rize DeMark’s recent talk in London, review a new book on his indicators, and look at the D-Wave, a DeMark take on Elliott Wave formations.

We hope you enjoy this issue of the magazine

Matthew Clements, Editor

CONTENTS 1 > FEATURES OCTOBER

US stocks: 1973/74 revisited We summarise Tom DeMark’s recent talk at Bloomberg’s offices in London and the views he >08 gave on the markets

2008: presidential election cycle update >18 Dimitri Speck of Seasonal Charts looks again at the cycle and how stock markets may move as the election day approaches

Interview We speak to Jason Perl, head of technical analysis at UBS about how he uses DeMark > 41 indicators in his client research

© 2008 Global Markets Media Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of Global Markets Media Limited. While the publisher believes that all information contained in this publication was correct at the time of going to press, they cannot accept liability for any errors or omissions that may appear or loss suffered directly or indirectly by any reader as a result of any advertisement, editorial, photographs or other material published in The Technical Analyst. No statement in this publication is to be considered as a recommendation or solicitation to buy or sell securities or to provide investment, tax or legal advice. Readers should be aware that this publication is not > > intended to replace the need to obtain professional advice in relation to any topic discussed.

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CONTENTS 2 >REGULARS

MARKET VIEWS Editor: Matthew Clements FTSE 100: major low at 3277 04 Managing Editor: Jim Biss Consultant Editor: Trevor Neil AUS/USD: outlook to the downside 06 Advertising & subscriptions: US stocks: 1973/74 revisited 08 Louiza Charalambous Marketing: Vanessa Green Events: Adam Coole Design & Production: SPECIAL FEATURE Stuart Field Currency Asset Management 10

The Technical Analyst is published by TECHNIQUES Howe’s Limit Rule 16 2008: Presidential Election Cycle Update 18 Global Markets Media Ltd Jeffries House Observations on Lunar Phase & US Panics 22 1-5 Jeffries Passage Stumbling on Value Investing 25 Guildford Volatility Trading using the VIX 28 GU1 4AP UK TD-Wave - A rule based approach to Elliott Wave analysis 32 Sizing up a Superpower: a Socionomic Study of Russia 34 Tel: +44 (0)1483 573150 Web: www.technicalanalyst.co.uk Email: [email protected] INTERVIEW SUBSCRIPTIONS Jason Perl, UBS Investment Bank 41

Subscription rates (6 issues) UK: £160 per annum Rest of world: £185 per annum RESEARCH UPDATE 45 Electronic pdf: £49 per annum For information, please contact: [email protected] BOOK REVIEW DeMark Indicators 47 ADVERTISING

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October 2008 THE TECHNICAL ANALYST 3 Market Views

FTSE 100: major low at 3277 By Sandy Jadeja

Sandy Jadeja

4 THE TECHNICAL ANALYST October 2008 Market Views

The financial markets have been hit by a tornado of selling which has taken major indices to new five year lows. The question on investors and traders minds is how bad can this really get?

Support levels bar before attempting to buy a particular stock. Many have The UK FTSE 100 index has already lost 37% from the July tried to capture bargains in the financial stocks only to have 2007 high of 6754. A bear market is considered if a decline found that the pain of losing can be excruciating as it has of 20% or more is in place. Clearly we have surpassed this been in this particular sector. and sentiment figures are showing that we are already in a If we take seasonality and cycles into consideration, the bear market. One should remember that the rally we saw year 2007 was already flagged as being a potential high. We from March 2003 reached a high of +106% and so the know that years ending with sevens tend to be marked by decline can be counted as a retracement, albeit a major one. market highs and years ending with twos offer market lows. Unless we surpass 3277 on the FTSE - which equates to the This suggests that we are likely to be in a bear market until neckline of a double top formation (see Figure 1) - the cur - 2012, with a strong corrective rally during 2009. The major rent move is still classified as a correction. indices had also reach Fibonacci Price Extensions and Elliott Wave traders had seen a major five wave pattern pointing to a market fall.

Turning points In the current market if one were to use oscillators and lag - ging indicators, such as moving averages, one would find that these tools would be rendered useless. The market has tech - nically been oversold for three months now and oscillators tend to perform poorly in trending markets. For short term forecasts a break above the weekly high is far more superior for the bulls and vice versa for the bears. Price tools have always been more powerful than indicators which are simply Figure 1 derivatives of price anyway. Technically the key support levels are 4605 and 4020 of Analysing open interest figures has shown that there have which the latter should hold the index up. If we fail to stay clearly been more sellers than buyers recently and volume on above 4020 this would have serious implications for the the downside has been three times greater than the upside on index as the next support level would be below the major low average. This is typical in downtrends once panic kicks in. We coming in at 3277. Although this sounds unrealistic we still do not have a full out bearish sentiment at the extreme should remember that when oil had been trading at $37 dur - which is required to see a major reversal. Time analysis points ing 2003, expecting the commodity to reach a gain of more to October 14-17 or the last week of October as potential than 400% also seemed unrealistic. In the current environ - turning points. We also have mid November as an extreme ment anything is possible. cycle date. Combining timing with classical technical analysis Historically we know that the months of September and should prove useful for technical traders. October are disastrous for the stock market and this year is Once we have a firm low in place this would have complet - no different. If we are to see a late rally then a break above ed a “phase one” which should be followed by “phase two” 5090 is required to turn the downward trend to an upward a corrective rally. This should take us into 2009 and then the trend, at least in the short term for the FTSE 100. technical picture shows that another leg down could take place as the “phase three” which could be very devastating. Buying opportunity? Analysts such as Bob Prechter and Albert Edwards also have Some analysts feel that the market is cheap and ripe for the come up with similar conclusions that the decline is not yet investor to get in and pick up bargains. History has taught us over. It is possible that we could still see a further 20% that trying to catch a falling knife is dangerous and should shaved off current levels in the next phase. not be attempted. My view is that a significant reversal is required where we see at least a higher close on a weekly price Sandy Jadeja is chief market strategist at ODL Markets

October 2008 THE TECHNICAL ANALYST 5 Market Views AUS/USD: OUTLOOK TO THE DOWNSIDE By Mohammed Isah

Reversal ahead of the 0.8005/0.7991 zone to herald recovery

AUD/USD came in strongly off its recent low at 0.7802 to gle (a continuation chart pattern) which ultimately broke out close higher at 0.8362 recently. This is coming on the back of a to the upside in Mar 2007. collapse off its YTD high at 0.9851 in mid-July’08 (Figure 1). Target of 0.9230 reached Having decisively resolved to the upside, two technical issues were triggered: the first being the resumption of its longer term uptrend started in Sep 2001, and the second relating to meeting its ascending triangle pattern price target at 0.9230 established by measuring the width of the pattern and pro - jecting it from the breakout point. Although setbacks through the breakout point and the 0.8005 level occurred in Aug 2007 after the pair attained a high of 0.8873 in July 2007 (Figure 2), recoveries off the 0.7676 low (Aug 17 2007 low) saw the pair resume its long term uptrend and later achieve its breakout target at 0.9230. With the pattern of higher highs and higher lows established, AUD/USD rallied to a high of 0.9851 in mid-July 2008 after a two-month corrective pull - back was seen in Nov/Dec2007.

Overbought signals With clear overbought signals displayed on both the weekly and monthly charts (though parity status was looming fol - lowing AUDUSD’s attainment of its highest price since 1983), the collapse off the mentioned high was technically expected though the sell off was fast and deeper than envis - aged. Although the parabolic declines tested the 0.8005/0.7802 levels and turned back above there while key supports at the Figure 1: Weekly Chart Source: ProRealTime 0.9328 (June 2008 low), 0.8954 (Mar 2008 low) and 0.8512 Before the pair’s recent sell off, AUD/USD had enjoyed an (Jan 2008 low) levels remain unbroken, the medium term uptrend dating back to Sep 2001 after a bearish trend struc - outlook continues to point lower implying its bounce off the ture that began in Dec 1996 and bottomed at 0.4825/51 in 0.8005/0.7802 area is corrective of its weakness started at April/Sep 2001. While pullbacks off its Feb 2004 high at 0.9851. Our medium term target resides at the 0.7676 level, 0.8005 were seen, and subsequent retests failed at the 0.7773 its Aug 2007 low and its 100 monthly EMA at 0.7570. level in Nov 2004 and the 0.7872 level in Mar 2005, price On the other hand, as indicated above, a combination of consolidation that ensued developed into an ascending trian - oversold conditions, parabolic declines, the formation of →

6 THE TECHNICAL ANALYST October 2008 Market Views

two hammers, and the provision of support by the 0.8005/0.7991 zone have triggered the present recovery higher. This corrective recovery based on its foundation should target the 0.8512 level on a follow-through to the upside from the mentioned hammers with possible further strength to the 0.8954 level. On the whole, as long as the losses of the earlier men - tioned key support levels and bearish monthly and quarterly studies remain in place, AUDUSD’s broader (medium term) outlook remains to the downside.

Mohammed Isah is a Technical Strategist and Head of Research at FXTechstrategy.com, a technical research website. He was also a for - mer market analyst and head of research at Fxinstructor LLC. FXTechstrategy.com offers to its client’s daily and weekly technical commentaries on currencies and com - modities. Mohammed can be reached Source: ProRealTime Figure 2: Monthly Chart at [email protected].

October 2008 THE TECHNICAL ANALYST 7 Market Views

Tom DeMark 8 THE TECHNICAL ANALYST October 2 008 Market Views US STOCKS: 1973/74 REVISITED

A summary of Tom DeMark’s recent talk in London and his views on the markets

Monday October 6th saw Tom DeMark give another of his all-time high of 6700. annual talks at the London offices of Bloomberg, part of a However, DeMark is not a charting purist. His rational for whistle stop tour of the major European financial centres. the fall in US stocks next year is based on political-economic These have proved to be very popular in the past but dramat - factors: namely, Barack Obama winning presidential election ic events in the markets on the day threatened to dampen this year. Once he takes office in the White House next year, turnout. In the end, DeMark need not have worried: atten - his administration will be perceived as being anti business and dance was impressive with close to 200 hearing him give his pro higher taxation. views on the markets and discuss his indicators.

1973 and today His talk centred on the similarity between the markets in “THE LOW OF W/C 6TH 1973/74 and today. By overlaying charts from the two peri - ods on top of each other, DeMark dramatically highlighted OCTOBER WILL SEE THE START the similarity in price patterns and volatility levels over one OF A RALLY TO THE END OF THE year periods for US stocks and oil. Prices today are likely to go on to continue this correlation next year. This view was YEAR, BUT THE FTSE 100 WILL also supported by a wide range of technical factors using his own indicators and Fibonacci retracements. In the short to THEN RESUME ITS DECLINE TO medium term a stock market rebound will present a good buying opportunity. After that, the outlook becomes much A LOW OF 4150 BETWEEN darker. MARCH AND OCTOBER 2009”.

DeMark indicators Using the TD Sequential, DeMark showed that the S&P500 TOM DEMARK is at a Countdown “13” – a key indicator of market exhaus - tion and a potential major price turn. This is also supported by his measure of market volatility, or fear gauge, the VXO. This has proved to be a reliable indicator for market lows Fibonacci whenever it has spiked about the 50 level. This was the case DeMark also highlighted his faith in Fibonacci retracements. in 2001 after September 11 and is happening again this Indeed, many of the parameters he uses in his indicators are month. Furthermore, this is typically followed by a rally of based on the Fibonacci sequence. He drew particular atten - 20% or so before further unravelling takes place. As such, the tion to levels to be expected from a market top based on the low of w/c 6th October will see the start of a rally to the end classic 61.8% retracement. For example, oil = $90 (from $144 of the year, but the FTSE 100 will then resume its decline to x 61.8% - this retracement is also what happened in 1973/4). a low of 4150 between March and October 2009. This target From this retracement, DeMark sees a price target for the is based on a 61.8% Fibonacci retracement from the market S&P500 of 960 between March and October next year.

October 2008 THE TECHNICAL ANALYST 9 Special Feature

10 THE TECHNICAL ANALYST October 2008 Special Feature CURRENCY ASSET MANAGEMENT We talk to Chris Charlton of Centa Asset Management about his multi-manager investment approach to the foreign exchange markets

Chris Charlton has been actively involved in the inter - national foreign exchange markets for over 30 years, starting his career at J.Henry Schroder Wagg in 1974. At Merrill Lynch in the eighties he ran the London- based trading desk for large institutional investors, and later at Security Pacific bank he was responsible for advising European central banks. In the mid-nineties he ran the treasury sales desk at Credit Lyonnais/BfG Bank in Frankfurt, and his last post in FX was as treasurer of Bankhaus Wölburn, a private bank in Hamburg. He has been running his own business since 2002 focusing on currency asset management and consultancy services.

October 2008 THE TECHNICAL ANALYST 11 6-8 November 2008 Le Meridien Etoile Paris, France

Conference Includes

Thursday 6 November Friday 7 November Saturday 8 November

Walkabout, traditional IFTA round Prof. Carol Osler (Brandeis University): Tony Plummer: the logic of non- tables meeting analysis of stop-loss orordersders rational behaviour in financial Chistopher Neely (Fed de St Louis): distribution and its rrelationelation to market markets relationshiprelationship between ororderder flow and volatility Claude Mattern (BNP): strstrengthength and macroeconomicmacroeconomic announcements on YYasminaasmina Hasanhodzic (MIT): limit of technical analysis : market the forexforex market demystifying and automating action, interpretationinterpretation and price technical analysis and hedge-fund anticipation 2009 outlook by a panel of strategists strategies Private visit of the museum and gala Dinner cruise on the Seine YYannickannick Daniel (Société Générale): dinner at the Louvre combining behavioural financial with fundamental inputs in a hedge fund Maxime VViémontiémont (BNP): hybrid trtrend-end- following strategies

Full programprogram on wwwwww.iftaparis2008.com.iftaparis2008.com

Registration and accomodation by phone +33 1 53 85 82 82 and on: www.iftaparis2008.com

Delegate fee: 900 € + VAT (IFTA member) Delegate fee: 1200 € + VAT (non-IFTA member) Special Feature

TA: What is the difference between a FX multi-manager managers that we look at and search for ones that meet our and fund of funds approach? criteria. We start using basis quantitative analysis and progress through various stages of more complex due-dili - CC: From the concept of modern portfolio theory, very lit - gence until we come out with a core number of managers tle. Both look to reduce risk by diversification. The difference that suit our expectations. lies in the scope of investment opportunities and the struc - To begin with we look at some traditional statistical analy - ture of the investment vehicle. There are a vast number of sis such as absolute returns, maximum drawdown, Sharpe currency managers available (CTAs) to choose from whilst and Sortino ratios. We then look at the managers’ trading the number of currency funds is limited. As the name strategies and conduct look-back analysis to check their implies, fund of fund managers can only invest in funds and robustness. An important part of this is the comparison therefore the investment choice is limited. analysis with our own in-house benchmark portfolios. We The difference in structure is more complex but there are also put great emphasis on qualitative analysis and this is the a few important points. In many cases a fund of funds will next step: we look at factors such as staff turnover, risk con - not be able to know its real exposure and results until all the trols and back up, administration, office location and others. different funds have reported their own. Liquidity can be a Once we have arrived at a core number of managers we problem and there can be restrictions on entry and exit. In then conduct personal visits. It is our intention to get under our case - the multi-manager route - we have daily liquidity so the skin of the managers and really understand their plans we can exit or change the portfolio on a daily basis as well as and targets, their fears and anxieties, their daily routines and our investors. We have daily reporting so we know exactly pressures etc. We are specialists in behavioural analysis and what each of our managers is doing and we can see our total this plays a large part in our due-diligence. currency exposure. Another point is that a fund of funds may Finally we come up with a simple question, Can we trust charge extra fees in that they often charge an extra manage - these guys with our money going forward? ment and performance fee on top of the individual fund fees. As I have said, for the programme we have come to the This can add up. At Centa, we do not charge any perform - conclusion that around ten managers is the optimal number ance fee. to provide a variety of trading strategies that will perform in most market conditions and provide us with steady growth TA: What are the advantages of investing in a multi- within an acceptable risk profile. manager fund rather than a single manager one? TA: What’s different about your selection process com - CC: This is classic portfolio theory; diversification reduces pared with other multi managers? specific risk. By investing in a number of managers with dif - ferent strategies, one can reduce the risk of the overall port - CC: We put a lot of emphasis on the behavioural aspect of folio down to a certain point whilst still expecting to achieve managers not just the traditional statistical returns. We have a satisfactory return. five members in our asset allocation committee all with over thirty year’s individual experience in the markets. I believe TA: Whose money do you manage and how much do that combined we are in a better position to judge managers you have under management? and their strategies. That is our advantage.

CC: We have designed the product to be eligible for both TA: How do you decide on the weightings that you give institutional and retail investors. There are different ways of each manager? Is it purely performance related? reporting AUM. We launched the product in January and at the present time we have $64 million under management. CC: Preferably we like to have a relatively even distribution but there are cases where we will have lower or higher weight - TA: Can you explain the process you go through in ings. If a manager has a high volatility then we will be biased selecting your managers? to have a lower weighting despite the potentially higher returns and vice-versa. In other words we are always looking CC: We select our managers via the Deutsche Bank platform at ways of reducing risk and volatility rather than just produc - called FXSelect platform and it is a perfect solution for an ing high returns. investor who wishes to invest in a single manager or an index We will also look at the strategies: many managers will be of his choice. One example is that the investor has a single active in all markets which means we have to look at their contract with Deutsche bank rather than having individual individual exposures to certain currencies. We have our over - ones with each manager. all limits to different currencies within the total portfolio and We have decided that around ten managers is a suitable this will then affect the weightings of the individual man - number for our programme. We have a universe of about 100 agers. →

October 2008 THE TECHNICAL ANALYST 13 Special Feature

TA: Why do you think there are so few fund of fund cur - Markets. Then we can look at their strategies: fundamental or rency managers? systematic, short-term or long-term. Many managers build complex models to assess yield differentials, economic funda - CC: This is because it is only relatively recently that curren - mentals and so-on. Many use technical analysis. As you can cies became a recognised asset class and therefore there are see there are many variations. only a limited number of currency funds. I think you have to differentiate between currency funds and currency managers TA: How do you assess the risk associated with each (CTA programmes) of which there are many. We have creat - strategy? ed a multi-manager programme that can be integrated into a fund or another structured product. CC: This is an important point and we look closely at the risk profile of each strategy. Most managers sets the risk level of TA: What returns has the multi-manager programme their strategies by allocating a risk budget and setting stop seen in the past 12 months. What is the Sharpe ratio? losses to ensure that the budget is not exceeded. Thus the risk is not simply associated with a particular strategy, but also CC: We launched the programme in the middle of January with its implementation. this year and we are currently up 4.8%. I would like to stress that the aim of our programme is to produce an annual TA: Are you looking for strategies that are uncorrelated return of 5% over Libor. We are not expecting to see 20% with other asset classes, strategies and FX rates? returns, and more importantly, we do not expect to see 20% drawdowns. Looking back to 2004, the present portfolio has CC: Generally we can say that currency returns are uncorre - a Sharpe ratio of 1.6 and has not had a monthly drawdown lated to the returns of other traditional asset classes such as exceeding 2%. equities and bonds, but there are many situations where the strategies may be correlated. An obvious example is the cor - TA: What performance measures do you use to assess a relation between the yen-carry trade and the equity market manager? performance, at least until recently. We are not concerned whether the strategy is correlated to CC: For performance we look at traditional quantitative other markets or not, rather that the strategy itself is robust, measures such as Sharpe and Sortino ratios, drawdowns and has adequate risk parameters, and that we can feel confident volatility. We also use a series of sentiment strategy bench - that we are protected should events change rapidly and the marks to assess the success of manager strategies on a correlation unravels. monthly basis. For example these can be based on yield, trend or volatility. TA: What strategies tend to perform best in periods of high volatility and/or market turmoil? TA: You mention on your site that you look at the strat - egy of a manager and assess if this is likely to continue CC: Short-term strategies tend to perform better in these into the future. How do you assess whether a strategy is environments. The reason simply is that they have much likely to perform well in the future? shorter profit and loss horizons. Although one can argue that they could produce a series of small losses, the danger of CC: If a manager has had a good year of returns it is not the large losses is reduced. This is typical of models that have case at all that this will necessarily continue. A pure trend fol - more medium-term horizons and do not react quickly lower will under-perform in a consolidation market and vice- enough to sharp moves in price or volatility. Therefore our versa. The carry-trade was a simple bet in 2006 and the first portfolio contains some short-term trading managers. half of 2007. Now it is far more complex. The main point here is to look at the adaptability of the manager and how TA: What strategies and currencies have performed best much experience he has had in the market. Managers mostly over the past 5 years or so? can be put into two classes: fundamental or systematic. Either way we like to see that the managers are dynamic in their CC: Certainly the carry-trade was the best performer, so long approach to different market conditions. This is very impor - high-yielders and short the yen and CHF. In the last two years tant. the US dollar gained prominence as a carry-trade currency as US rates fell. This is being reversed now. It seems that the TA: Can you give us some examples of the type of markets are not so straightforward anymore and the best strategies employed by the managers? example of this is when one looks at many managers who have “hockey-stick” performance records. In that I mean CC: Firstly we can differentiate between what currencies they many years of positive growth and then a sideways move - are trading. Let’s categorise them into G10 and Emerging ment over the last few years.

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Indicator Focus: Howe’s Limit Rule Howe’s Limit Rule isn’t an indicator as such; it is more of a trading strategy. Nevertheless, the “rule” does provide trading signals of a kind that can be used in futures markets where there are limits on permissible daily price ranges.

Definition For instance, if a market trades at a "limit up" price then: Robert Howe, a market technician and analyst, first offered • Short-term traders may more confidently buy into any his rule in 1977. Howe's Limit Rule simply suggests that: pullback (whether intraday or during subsequent trading days) A price at the limit of a tradable daily range, once reached, becomes • Traders already long may be encouraged to maintain their an objective which the market will again test and ultimately exceed, positions at least briefly and usually sooner rather than later. • Prospective short-sellers may be discouraged from taking immediate action and wait until the price level is exceeded Why should this be so? A primary function of any market is to explore and discover value. A market that is artificially Trading strategy interrupted (when limit up) in its pursuit of current value is By acting on the principles of HLR, each of the above would unsatisfied and leaves unanswered questions, such as how far expect any price decline to be small, unless and until the limit and how urgently the market would continue searching. price is exceeded by at least one tick. However, if after a pro - Unlike objectives derived from chart formations and mathe - longed trend a limit price is exceeded only briefly and tenta - matical formulae which might approximate a target range, tively, a failure leading to a reversal may be imminent as HLR identifies precise price targets. the market exhibits exhaustion. →

16 THE TECHNICAL ANALYST October 2008 Techniques

“A PRICE AT THE LIMIT OF A TRADABLE DAILY RANGE, ONCE REACHED, BECOMES AN OBJECTIVE WHICH THE MARKET WILL AGAIN TEST AND ULTIMATELY EXCEED, AT LEAST BRIEFLY AND USUALLY SOONER RATHER THAN LATER.”

As a corollary, an unexpected limit move in the opposite on nearby contracts often become significant sup - direction of the prevailing trend can be an early warning of a port/resistance points on weekly/monthly charts. Limits left trend reversal (as everyone changes their minds at the same hanging in deferred contracts are specific to them only and time). Finally, an abrupt limit move out of a accumulative or usually become irrelevant at expiration. distributive congestion phase can signal the beginning of a powerful new trend (as everyone tries to go through the same Exceeding the limit door at the same time). According to the Moore Research Centre (MRCI), of key his - On the rare occasion when a lead contract leaves a traded torical significance are the first and third days immediately limit price "hanging" (not exceeded prior to its expiration), following a trade at a limit price. In a majority of those mar - that limit price is carried over as a future objective for subse - kets a limit traded price has been exceeded on the first day quent lead contracts. As such, it can become a magnet for following 50-70% of the time. In almost all markets studied, intermediate- or long-term trend exhaustion. In other words, the analysis suggests the historical probability of exceeding a the prevailing trend may be maintained and/or a new trend limit price is often greater than 80% within 3 trading days, suppressed from beginning until that "hanging" limit is and 90% within 7 trading days. exceeded, often creating a double top or double bottom. This happens because the lead contract is most cash-con - Many thanks to the Moore Research Centre (MRCI) and Jim Wyckoff nected and used on weekly/monthly charts. Hanging limits in the writing of this article.

October 2008 THE TECHNICAL ANALYST 17 Techniques

18 THE TECHNICAL ANALYST October 2008 Techniques

P2re0sid0ent8ial :E lection Cycle Update By Dimitri Speck

Dimitri Speck of Seasonal Charts looks again at the cycle and how stock markets may move as the election day approaches

Past performance may include measures financed through The vertical scale displays perform - The direction of equity market prices is deficit spending and the (not complete - ance on a percentage basis. So in the not really dependent on whether a ly independent) Fed supporting each first section of the chart above Republican or a Democrat president is incumbent president through its mone - “Election” you see the average per - elected. Recent presidential periods tary policies. But after the election formance of all election years, above have shown solid equity markets under unpopular measures are piled on such “Post-Elect.” the performance of all both Clinton (Democrat) and Regan as those designed to counter a sprawl - post election years is shown, above (Republican). Thus the election cycle ing federal deficit. Figure 1 shows a typ - “Midterm” the performance during the does not differentiate between political ical four-year election cycle going back middle part of the cycle, and above parties but rather according to the year to 1897. “Pre-Election” the performance of → of the presidency. During the last hun - dred years or so the Dow rose on aver - age 7.3% during a presidential election year. In pre-election years it performed on average an even better 9.3%. In con - trast, in post-election years perform - ance was only 3.4%, and in the subse - quent mid-term years it was just 3.2% on average. A comparable link between equity market performance and the year of the presidential election cycle already existed during the 1800s. So, for a mar - ket gauge it is a statistically well ground - ed relationship.

Reasons for the cycle Why are the years after an election weak and the two years prior to an election so good for equity markets? The reasons are obvious: Presidents want to be re- elected (or want a successor from their own party) and so work to stimulate the economy prior to an election in an effort to get voters on their side. This Figure 1.

October 2008 THE TECHNICAL ANALYST 19 Techniques

future - although its fundamental caus - es should remain relatively stable. This assumption is supported by the obser - vation that the economic cycle seems to be subject to a four year pattern (Figure 3).

Forecasting with the cycle The four-year election cycle can serve as one of many decision-support tools. What it ultimately does is increase the probability of a price move. A cyclical pattern is namely one among several influential factors on price direction such as sentiment, the dollar, oil, earn - ings and the like. Thus it is feasible to integrate the cycle into a widely-struc - tured forecasting model as one of a number of decision-making factors. This is suitable for discretionary trading decisions as well as for systematic trad - ing approaches. In the process all input Figure 2. factors are weighted and taken together all those years directly preceding an point is that many different values go in as a total. election year. Average performance to making up an average. Accordingly Anyone basing trading decisions on during the entire four-year cycle there have also been exceptions during monetary policy, crude oil prices, the amounted to 25% on average. election years. For instance, of the last currency situation and stock market The horizontal scale shows each year seven election years, two - 1984 and trends can also use the election cycle as of the four-year cycle. As previously 2000 - ended in losses. So, one should an additional decision factor. mentioned, election years (on the left) never expect the same results with Unfortunately one cannot know and pre-election years (on the right) every election year. In addition, the beforehand which weighting an individ - have been good years for the stock mar - election cycle itself could change in the ual factor will have. In addition → ket. Both of the middle sections of the chart, i.e. the post election year and the midterm year hardly provided investors with any profits. Let's now take a closer look at the cycle’s current year, the elec - tion year.

Election year Figure 2 shows the average perform - ance during election years only. The weakness during the first half of the year is clearly visible. Then the Dow rises during the second half of the year in typical fashion with a high in November with Election Day. So dur - ing election years, stocks move exactly opposite to their typical annual season - al pattern when they usually increase during the first half of the year and per - form modestly during the second half. For example, an average price move of 0% can be made up of a 10% price increase and a 10% price decline. The Figure 3.

20 THE TECHNICAL ANALYST October 2008 Techniques

“DURING ELECTION YEARS, STOCKS MOVE OPPOSITE TO THEIR TYPICAL PATTERN WHEN THEY INCREASE DURING THE FIRST HALF OF THE YEAR AND PERFORM MODESTLY DURING THE SECOND HALF.”

there are factors such as the current credit crises whose influence on prices can hardly be quantified in advance.

Other market cycles It must be stressed that the election cycle does not end with the election year. It also influences the subsequent three years, although the media pays less attention to it. Next to the US stock market, the currency and bond markets also possess four-year cycles. Especially noticeable in the bond market is the fact that the year prior to an election is typ - ically quite weak. It is exactly reciprocal to the stock market, strengthening the assumption that the two markets are cyclically connected to each other through investment preferences and reallocation measures. Equity markets Figure 4. in other countries also demonstrate a three months following the election. impulse is expected from the new team four-year cycle. This results from the Thus the day of the election is used as in the White House. This optimism, dominance of the US markets whose an anchor for the study as opposed to even if it is caused by something unre - developments influence markets in the calendar. Indeed, the election does lated, stimulates the tendency to buy. other countries. Incidentally, that even not always take place on the same day of goes for countries that have their own the year. In this way a higher level of election cycle running counter to the accuracy is attained for detailed analysis four-year cycle. surrounding the actual election date. We can clearly see that in the days prior to the election, stock market Before and after Election Day Next to the election cycle there is still prices tend to increase sharply. In a sim - another, hardly noticed phenomenon ilar way, statistics show that markets related to the election. The movement tend to be positive prior to holidays. of the US equity market directly before Apparently these two phenomena are the election. In order to study it more related. The backdrop is likely that the closely, we’ve constructed a special mood tends to be positive before spe - chart (Figure 4). It shows the Dow’s cial days as investors do not only make average price during the weeks directly rational decisions but rather emotional before and after Election Day. This ones as well. Likewise, prior to an elec - occurs during a period of six months – tion the mood improves as people hope three months prior to the election and for their candidate’s victory and fresh Dimitri Speck, Seasonal Charts

October 2008 THE TECHNICAL ANALYST 21 Techniques

OBSERVATIONS ON LUNAR PHASE & US PANICS By David McMinn

Is there a link between the moon and the markets?

An amazing correlation exists between the phase of the If we extend the timeframe back to 1910 and forward to the moon and the timing of major US financial panics. Figure 1 present, we can add the events listed in Table 1 plots annual one day (AOD) falls 1 greater than 4.25% for the Dow Jones Industrial Average (DJIA) against the lunar cycle, AOD Fall Event DJIA between 1915 and 1999. AOD falls in the DJIA greater than % Fall Phase Angle 4.25% 2 have nearly always appeared in two quarter segments Jan 20, 1913 One day fall -4.90 153 of the lunar phase: between the first quarter and full moon Jul 30, 1914 Onset of WW1 -6.63 099 and between the third quarter & new moon, the only anom - Apr 14, 2000 Tech Wreck -5.64 130 aly being in 1930. 3 Sep 11, 2001 WTC attack na 281 Jul 23, 2002 One day fall -4.64 122 LUNAR PHASE & MAJOR DJIA Jan 21, 2008 (a) Stock market panics na 169 ONE DAY AOD FALLS Sep 15, 2008 After Black Sunday -4.41 184 1915 - 1999 Sep 29, 2008 Bailout rejected -6.98 004

Table 1. ( a ) W o r ld w i d e s t o c k m a r k e t p a n ics occurred on this day. The US stock market was closed for the Martin Luther King Jr holiday.

Of the total 31 major DJIA AOD falls (> 4.25%) since 1910, only the 1930 event did not occur when lunar phase was within the two quarter segments noted in the diagram, (ranges: 085 to 185 Ao and 280 to 005 Ao). This finding is extremely significant and would be equivalent to tossing a coin 31 times and getting 30 heads. However, it’s worth not - ing that this lunar phase effect does not apply before 1910 or to DJIA AOD falls below 4.25%. It also does not show up in FT-30 daily data post 1935. One obvious question arises: Why does a correlation exist? Presumably it has something to do with moon sun tidal →

1 The annual one day fall is the biggest one day % fall in the year commencing March 1. 2 The -4.25% cut off was chosen from the data. For one day falls less Figure 1. LUNAR PHASE & MAJOR DJIA AOD FALLS 1915 – than this there was no significance. 1999. Note: The angular degree (Ao) between the moon and the 3 This diagram was first presented by myself in 2000 and published sun (lunar phase) increases on the chart in an anti-clockwise by the Australian Technical Analysts Association: McMinn, David. direction, i.e. 90 degrees is equivalent to South on the chart and Lunar Phase & US Crashes. Australian Technical Analysts Assoc 270 degrees is equivalent to North. Jour. p 20, Jan/Feb 2000.

22 THE TECHNICAL ANALYST October 2008 Techniques

harmonics, although how this functions remains unknown. Where are we now? And whilst it’s true that correlation does not equal causation, The 2007 to 2008 market crisis has historic parallels. The these and many other correlations support a strong moon record DJIA high occurred on October 9, 2007, which was sun affect on market activity. Such findings confirm the idea close to the September highs in 1895, 1899 and 1912. Each that markets are cyclical and past activity is indeed indicative of the four highs was followed by a major crash 104 to 112 of future outcomes. days later (see Table 2) and a protracted market decline there - If you list DJIA market highs by the year, they will not cor - after. relate with lunar phase. However, if you list the highs by Market Interval 1 Day Fall month – day (year ignored) excellent relationships can be High > 4.50% Interval Low established. If the peaks at the beginning of a bear market occur around the same month, the moon ans sun will be in 1895 (a) 107 days 1895 (a) 232 days 1896 similar ecliptical segments, giving rise to similar lunar phases Sep 04 Dec 20 Aug 08 and market outcomes. The best example occurs for the September 3, 1929 and August 25, 1987 peaks, both of which 1899 104 days 1899 280 days 1900 took place just after the new moon and both were followed Sep 05 Dec 18 Sep 24 55 days later by spectacular October panics. The violent mar - ket decline lasted only a few months, with the DJIA hitting a 1912 112 days 1913 556 days 1914 bottom on November 13, 1929 and December 4, 1987. For Sep 30 Jan 20 July 14 1929 and 1987, there was an interval of 717.0 lunar months between the spring lows, the record highs, the autumn highs, 2007 104 days 2008 (b) ??? ??? the panics, the recoveries and the major post crash one day Oct 09 Jan 21 falls (Carolan, 1998, McMinn, 2006). Curiously, major events in the current market have taken place near the full and new moons (to within a day). Thus, intervals between the events were all in whole and half num - bers of lunar months.

DJIA World Black Black Peak Panics Sunday Monday

2007 2008 2008 2008 Oct 09 + 3.47 Jan 21 + 8.03 Sep 14 + 0.51 Sep 29 346 A° 169 A° 172 A° 004 A° Table 2. ( a ) B a s e d o n t h e 1 2 S t o c k A v e r age index. (b) This date witnessed worldwide stock market panics, although the US market was closed because of the Martin Luther King Jr holiday. Even so, January 21, 2008 has been taken as the DJIA one day fall.

We are now going through the long bear market period. Unfortunately, timing the final low using past analogies is dif - ficult. As can be seen in Table 2 the interval between the one day fall and the market low ranges from 232 days to 556 days, which is not helpful. However, picking the low in the current turbulent market will have immense financial rewards.

References Carolan, Christopher . Autumn Panics. The Market Technician. Journal of the Society of Technical Analysts. p 12. July 1998. McMinn, David . Market Timing by the Moon & the Sun. Privately published. 2006. © Copyright 2008. David McMinn. All rights reserved. www.davidmcminn.com

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Techniques

Stumbling on Value Investing Behavioural biases play a dual role in the markets. Firstly, they can be viewed as the biases that a trader or investor should try to avoid in order to take a more rational and disciplined approach. Secondly, they can be viewed as the biases that, en-masse, are played out in the market and can be exploited for profit. In this arti - cle, The Brandes Institute looks at some of the most common biases that prevent investors from taking a purely rational value-based approach.

Stumbling on Happiness 1 is a book by Daniel Gilbert, Harvard “Presentism” in the Past University professor of psychology, about “the foibles of Gilbert defines presentism as “the tendency for current expe - imagination and illusions of foresight that cause each of us rience to influence one’s views of the past and the future”. to misconceive our tomorrows and misestimate our satisfac - For investors, this tendency points to the dangers of extrap - tions.” olation. We may find it difficult to believe that a security So what does Stumbling on Happiness have to do with value whose price has gone up recently could ever be a bad invest - investing? First, many studies have illustrated the potential ment. Conversely, we may have trouble envisioning a securi - benefits of value investing. The value investing approach ty that has been a poor performer recently ever being a good hinges upon taking advantage of discrepancies between a investment. Value investors need to counter the tendency to security’s price and its underlying value . Value investors tend to extrapolate what is happening today and look at things purchase a security when it is out of favor and selling at a dis - rationally by comparing business values with security prices. count to its true or “intrinsic” worth. Then, as other This may sound reasonable – until we realize that the very act investors recognize this value, the price of the security typi - of making comparisons may trigger some behavioral traps. cally rises. The Brandes Institute has published research reports (such as our “Value vs. Glamour” series) that echo Comparing and Presentism the findings of various academics and illustrate the merit of Gilbert points out that how we make comparisons affects our value investing. Value investing sounds simple – and has been emotional response. And this may influence our decisions. shown to work. So why don’t more people adhere to this He writes, “. . . (a) value is determined by the comparison of approach? one thing with another; (b) there is more than one kind of Using excerpts and examples from Gilbert’s book, this arti - comparison we can make in any given instance; cle seeks to illustrate a variety of psychological pitfalls that and (c) we may value something more highly when we make may prevent people from achieving long-term success as one kind of comparison than when we make a different kind value investors. The titles for each section are borrowed from of comparison”. Often, market participants may get into → chapter titles or subheadings in Gilbert’s book. We begin with presentism. 1 Gilbert, Daniel. Stumbling on Happiness. New York: Knopf, 2006.

October 2008 THE TECHNICAL ANALYST 25 Techniques

brains get busy looking for ways to think about the experi - ence that will allow us to appreciate it”. As examples, Gilbert cites studies in which consumers, job seekers, high school stu - “WE END UP PREFERRING dents, gamblers, and voters rated their appliances, jobs, col - leges, horses, and candidates more positively after they pur - BAD DEALS THAT HAVE chased, accepted, enrolled in, wagered on, or voted for them, BECOME DECENT DEALS TO respectively. Challenging Facts GREAT DEALS THAT WERE Once we have formed an opinion about something, it can be difficult to change it. Often, our perceptions and hypotheses ONCE AMAZING DEALS” become our realities – regardless of the facts. Gilbert notes we tend to treat facts “unevenly” when confirming or chal - lenging “our favored conclusion” and cites a study to illus - trate this point. Volunteers were asked to judge the intelli - trouble when they “compare with the past” by comparing a gence of another person. security’s current price with its past price. Many investors When the person being evaluated was perceived to be “anchor” on the purchase price for a security. For example, if “funny, kind, and friendly,” little evidence was required. they buy a stock at $40 a share, they constantly compare its However, if the person being evaluated was perceived to be performance with that original cost. Thus, if the stock price “unbearable,” volunteers required much more evidence. drops to $30, they tend to get upset. But looking at a stock’s Thus, when we want to believe something, just a few facts can current price vs. its purchase price is only one way to make a convince us. As such, people would be wise to actively seek comparison. If the value of the business remains $70 per out information that counters our conclusions when making share, a decline to $30 represents an even greater discount – investment decisions. And we should seek a great deal of this and perhaps an opportunity to purchase additional shares. countering information. In an example, Gilbert writes that “. . . people are more likely to purchase a vacation package that has been marked Valuing Things Differently down from $600 to $500 than an identical package that costs Why can it be so hard to be a patient investor? Gilbert may $400 but that was on sale the previous day for $300. Because offer some insight when he writes, “The fact that we imagine it is easier to com - the near and far pare a vacation pack - futures with such dif - age’s price with its ferent textures causes former price than us to value them dif - with the price of ferently as well”. He other things one cites an example of might buy, we end up paying for a preferring bad deals Broadway show tick - that have become et. Most people decent deals to great would be willing to deals that were once pay more for a ticket amazing deals”. to a show tonight than a ticket to the Disambiguating same show next Experience month. “Delays are There is an old Wall painful,” he writes, Street adage, “Never “and it makes sense get emotional about stock.” Great advice – but very difficult to demand a discount if one must endure them.” But he adds to put into practice. According to Gilbert, there is a reason that studies show when people imagine the pain of waiting, why we tend to get emotional – our brains take life’s ambigu - they expect it to be far worse in the near term vs. the long ities and reshape them into “good” things or “good” experi - term. “And this,” Gilbert contends, “leads to some rather odd ences once we are personally involved. A stock in the United behavior”. For example, most people would rather get $20 in States, one of thousands of securities we could own, is rather a year than $19 in 364 days. Apparently, a one day delay that ambiguous – until it’s in our portfolio. At that point, investors takes place in the far future looks (from here) to be a minor may get emotional about their holdings. According to inconvenience. But – most people would rather receive $19 Gilbert, “. . . as soon as we have a stake in its goodness – our today than $20 tomorrow because a one-day delay that →

26 THE TECHNICAL ANALYST October 2008 Techniques

takes place in the near future looks (from here) to be unbear - 1. You own shares in Company A. During the past year, you able. considered switching to stock in Company B but decided “Whatever amount of pain a one-day wait entails,” Gilbert against it. You now find that you would have been better writes, “that pain is surely the same whenever it is experienced; off by $1,200 if you had switched to the stock of and yet, people imagine a near-future pain as so severe that Company B. they will gladly pay a dollar to avoid it, but a far-future pain as so mild that they will gladly accept a dollar to endure it”. 2. You also owned shares in Company C. During the past year Value investing likely will not trigger that part of our brain you switched to stock in Company D. You now find out that generates feelings of pleasure in the short term. (Such that you’d have been better off by $1,200 if you kept your feelings of excitement help drive gamblers into casinos, not stock in Company C. into value managers’ offices). Value investing often doesn’t feel exciting or pleasurable. That’s because it’s not a short- term, get-rich-quick approach to the markets. But it is impor - tant to know that our short-term emotional responses can VOLUNTEERS WERE ASKED TO affect our long-term rationality. JUDGE THE INTELLIGENCE OF The Least Likely of Times ANOTHER PERSON. WHEN THE People tend to remember specific, infrequent experiences. We tend to remember the best and worst of times vs. most of the PERSON BEING EVALUATED WAS times. And this can affect decision-making. For example, Gilbert highlights how our reaction to the way a movie ends PERCEIVED TO BE “FUNNY, KIND, influences our perception of the entire film. “The fact that AND FRIENDLY,” LITTLE EVIDENCE we often judge the pleasure of an experience by its ending can cause us to make some curious choices”. There are par - WAS REQUIRED. HOWEVER, IF allels when investing: We might tend to remember with greater clarity the bad investments we have made – especially THE PERSON BEING EVALUATED if they have happened recently and ended with great pain WAS PERCEIVED TO BE “UNBEAR - (large losses). The sharp emotions connected with these short-term experiences may affect our long-term investment ABLE,” VOLUNTEERS REQUIRED approach. MUCH MORE EVIDENCE. Paradise Glossed Perhaps we have heard the theory that negative events can have twice the emotional effect as positive events. For exam - ple, a $10,000 investment gain might earn us one “point” on Which scenario causes more regret? Nine out of 10 people an emotion based scale. However, losing $10,000 when expect to feel more regret by switching. But Gilbert notes, “. . investing would feel like losing two points. Same amount of . in the long run, people of every age and in every walk of life money involved – but twice the emotional impact when los - seem to regret not having done things much more than they ing money. This may be true, yet Gilbert argues that the regret things they did . . . ”. Thus, not switching stocks (scenario human spirit is very resilient. He writes, “The fact is that neg - 1) causes more emotional stress. Why? We tend to reward our - ative events do affect us, but they generally don’t affect us as selves mentally for taking action – even if it’s the wrong action. much or for as long as we expect them to”. So this is great Our “psychological immune system” has trouble making us news, right? So why do we still have such trouble focusing on feel good about inaction. In other words, doing nothing rarely the long term? The answer: we continually subject ourselves feels very good. This is another reason why value investing to an assortment of short-term stimuli. can be so difficult. Often, long-term success depends upon Successful value investors may remember a handful of inaction. But not taking action may trigger sharp pangs of clunkers, but, over time, the short-term emotional pain asso - regret – especially in the short term if prices for holdings ciated with these few holdings fades when they realize their decline. The successful value investor may have to wait three long-term success. Yet it can be difficult to shed the emotion - to five years or more to be rewarded. That can be a long time al drag of short-term pain when we expose ourselves to it so to “do nothing,” a long time for regret to build. frequently. Brandes Institute Research Paper No. 2007-05, August 2007. This Looking Forward to Looking Backward material was prepared by the Brandes Institute, a division of Brandes Gilbert uses two investment scenarios to illustrate the influ - Investment Partners®. Please visit www.brandes.com/institute for the ence of regret: full version, (also available from www.ssrn.com).

October 2008 THE TECHNICAL ANALYST 27 Techniques VOLATILITY TRADING USING THE VIX By Carley Garner

The adage ‘buy low and sell high’ was originally used in refer - ters ultimately comes down to timing of entry along with a ence to price, but can also be applied to the practice of trad - good understanding of volatility, market sentiment and mar - ing volatility. In fact even if you do not trade volatility ignor - ket knowledge. Additionally, experience, instinct and, of ing measures of potential explosiveness while entering or course, luck will also come into play. Yet, in my judgment exiting a market could mean financial peril. While many option selling is a superior strategy in the long run. traders understand the concept of buying options during Options selling advocates and equity market volatility times of low volatility and selling them during times of high traders seem to migrate to the S&P 500 futures market. Both volatility, emotions often lead a well planned strategy astray. the full sized and mini versions of the contract provide ample Unlike traders that are looking to profit from a directional liquidity to actively trade the market without the burden of move in price, volatility traders are more interested in the unreasonable bid/ask spreads. pace at which the market is moving than in its direction. However, it is important to chart both price and volatility. CBOE's Volatility Index (VIX) Doing so provides trades with a better understanding of the An important measure of volatility when referring to the 'big picture'. S&P is the now infamous Chicago Board Options In my opinion, the most efficient means of trading US Exchange's Volatility Index, often simply referred to as the equity market volatility isn't through the VIX index or any VIX. According to the CBOE, the VIX is a "key measure of other similar measure. Liquidity is a major factor working market expectations of near-term volatility as conveyed by against the viability of doing so. Instead, I believe that traders S&P 500 stock index option prices" and has become one of should look to buy or sell options on S&P 500 futures. The the most prominent measures of market sentiment in the S&P is a broad based index and its value is sharply impacted world. Before 2007 the VIX spent a majority of its time by market sentiment and the corresponding volatility. Thus, a below 20, it is now obvious that times have changed....at least trader that is of the opinion that volatility will increase may for now. look to buy volatility through the purchase of options writ - Keep in mind that there were adjustments made to the ten on S&P 500 futures, and those looking for volatility to parameters of the index in 2003 that may have arguably decrease may look to sell volatility by going short options on affected the value of the index. For our purposes we will dis - the index. regard the possible discrepencies. It is important to note that increased values of VIX are Trading Volatility through Premium Collection highly correlated with higher option premium in the form of As mentioned, one way to speculate on variations in volatili - higher implied volatilities and are ideal conditions for an ty is through the practice of option selling, often referred to experienced option seller assuming that they are willing to as premium collection. Option sellers are in the business of accept the risk of participating in such a market. collecting premium, much like an insurance company, under the assertion that in the long run the premium collected The Quest for Implied Volatility should outweigh any potential payouts. This theory is based Unlike the VIX which is derived from the underlying futures on the assumption that more options than not price among other factors, implied volatility is a component expire worthless which has been suggested by several studies of option price. The implied volatility of an option, is the including one conducted by the Chicago Mercantile amount of volatility implied by the market value, or price, of Exchange. Unfortunately, just as insurance companies are the option. In other words, the implied volatility is forward sometimes forced to honor their policies on excessive claims, looking in that it incorporates the current market precarious - option sellers are vulnerable to monster market moves than ness as well as what market participants are expecting at some can be potentially account threatening. Preventing such disas - point in the future.

28 THE TECHNICAL ANALYST October 2008 Techniques

You may also find that market emotion and sentiment are For example, based on this assumption put sellers may a component of implied volatility. As traders scramble to go have fared well during the lows in 1998, 2001, 2003 and 2007. long volatility through the purchase of options in an attempt That is of course assuming that the trader wasn't early in his to profit from the latest hype, option premiums can and do entry. If a short volatility trader enters a market prematurely, explode exponentially. As a sidelined option seller, these there is a strong possibility that the trader will be forced out types of conditions should be inviting. The premise of this of the market prematurely due to lack of financing or mar - approach is to attempt to sell options to buyers that are sim - gin. Let's take a look at an example of a trader that is inter - ply "late to the party". The key is making sure that as a sell - ested in selling volatility by going short S&P puts. er you aren't too early. Beginning in the middle of 2002 and throughout the begin - ning of 2003, put sellers with savvy timing may have done Selling Puts can be Lucrative, but it Comes with very well. However, trading is a game of risk and those sell - a Hefty Price Tag ing puts during those times were accepting great amounts of It is often the case that selling puts is more lucrative than risk in order to reap the reward. calls, but the added reward carries baggage in the form of Let's take a look at a continuous S&P 500 futures chart additional risk. Due to the increased levels of risk, timing during the 2002/2003 lows in Figure 2. While the VIX is a becomes crucial. By nature an option selling program tends great indication of volatility and extreme market sentiment, it to leave room for error in the execution. Nonetheless, being is also helpful to look at indicators of volatility such as stan - short puts in a spiraling market can quickly change that. dard deviations. Luckily, the creation of Bollinger Bands The phenomenon of put premium in the stock indices allows us to visually determine market volatility through the being larger than call premium is often referred to as the line plot of two standard deviations from its mean. Times of volatility smile. The volatility smile is a long observed pattern high volatility are denoted by wider bands, or a larger stan - in which at-the-money options have lower implied volatility dard deviation, and times of decreasing volatility result in than out-of-the-money options along with the argument that narrowing bands. there is more value in owning a put relative to an equally dis - As market volatility increases, so will option prices. During tant call. This scenario seemed to be born after the crash of such times, option buyers are forced to pay extremely high 1987 in the U.S. prices for options that in theory are more likely to expire While there are no crystal balls to let us know when a mar - worthless than not. On the other hand, option sellers are pro - ket will turn around and how low that it may go before it vided top dollar for accepting theoretically unlimited risk. does, being aware of historical patterns in price, volatility and market sentiment may help to avoid a compromising situa - tion. Let's take a look at the relationship between the VIX and the S&P. "IT IS IMPORTANT TO CHART BOTH PRICE AND VOLATILITY."

Figure 1. Higher premiums collected not only increase a traders VIX and the S&P 500 profit potential but it also increases the room for error. The Looking at Figure 1, it is obvious that the S&P 500 has been money collected for a short option can be viewed as "cush - able to forge recoveries during times of spiked volatility as ion" in that it defines the amount in which the trader can be measured by the VIX. Armed with this knowledge, it may be wrong and still make money by shifting the reverse break a viable strategy to look at erratic, and many times irrational, even further from the market. The Reverse Break Even trade as a point of entry for put sellers. (RBE) of a short put is calculated as follows:

October 2008 THE TECHNICAL ANALYST 29 Techniques

Figure 3. At expiration, this trade would yield the maximum profit of Figure 2. $1,075 before commissions and fees if the futures price is above 680 (see Figure 3). Ignoring transaction costs the RBE RBE = Put Strike Price - Premium Collected + on the trade is at 675.7. This simply means that this particu - Commissions and Fees lar trade makes money with the futures price trade anywhere above 675.7 before commissions and fees. Please note that As you can see, the more money that the option seller col - the amount of commission paid will reduce the premium col - lects, the deeper-in-the-money the option can be at expira - lected and shift the RBE closer to the market. To look at it in tion without resulting in a loss to the trader. another perspective, the trader can be wrong by 104.3 points According to the hypothetical data available to us, in July of after entering the trade and still manage to break even. If the 2002 with the September futures price near 780, it may have trader's goal is to put the odds in their favor, this seems to be the solution.

Conclusion "THE S&P 500 HAS Without regard to transaction costs, trading is a zero sum game; for every winner there will be a loser. Thus, putting your odds ahead of those of your competition is a must. In BEEN ABLE TO my opinion, selling options during times of high volatility while exercising patience and incorporating experience is doing just that. FORGE RECOVERIES With that said, where there is reward there is risk; in effi - cient markets you cannot have one without the other. This strategy should only be attempted by those that have ample DURING TIMES OF risk capital to allow for potential draw downs as well as the ability to manage fear and greed. Fearful traders are vulnera - SPIKED ble to panic liquidation at inopportune times in terms of market volatility and option pricing. Likewise, greedy traders are tempted to sell options closer-to-the-money in hopes of VOLATILITY." higher payouts but the risk may turn out to be unmanageable. I strongly believe that less is actually more when it comes to premium collection. Trade less, collect less and hopefully enjoy more success. been possible to sell the August S&P 500 futures 680 put for $4.3 in premium which is equivalent to $1,075 before com - Carley Garner is the Senior Analyst of DeCarley Trading LLC where missions and fees. If this was the case, a trader could have she also works as a broker. Her book, "Commodity Options" published collected a little over a thousand U.S. dollars for an option by FT Press will be on shelves in January 2009. Visit that was, at the time, approximately 100 points or nearly 13% www.DeCarleyTrading.com for your free subscription to Carley's e- out-of-the-money. newsletters and for details on the services she provides.

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-T A rDule- baWsed aappvroae ch to Elliott Wave analysis By Trevor Neil

Tom DeMark is adamant that subjective methods used in technical analysis can - not be trusted. When technical analysts cannot agree amongst themselves how to draw them, how can they be tested and how can be people be confident in using them? Perhaps the most subjective of all technical analysis methods is Elliott Wave analysis. There is a joke amongst technical analysts - bring together five Elliott wave analysts and you will get ten views on the markets. Yet all these ana - lysts use the same technique with the same rules.

Tom has distilled this technique into a strict set of rules and measurements, so strict that a computer can calculate them and display them, marking up the wave counts according to defined rules. With his rules, everyone sees the same thing and makes the same correct count (if you agree with his rules). Elliott wave is now objective and mechanical - This is Tom DeMark’s D-Wave.

D-Wave rules Conversely, wave 1, 3, 5, and B counts require that the D Wave constructs Elliott cycles with user defined wave user specified price (low, true low, close) must be lower than counts. The trend cycles develop with five impulse waves the previous 'N' number of bars, while the 2, 4, A, and C followed by a counter trend pattern of three corrective require that the specified price (high, true high, close) must waves. The recommended D Wave settings suggest the be higher than the previous 'N' number of bars in a down - waves 1, 3, 5 will become increasingly more significant in ward trend. the development of the overall trend. The wave 1, 3, 5, and D-Wave uses patterns that are defined by a series of B counts require that the user specified price (high, true Fibonacci highs and lows. This approach makes a D-Wave high, close) must be higher than the previous 'N' number of objective, e.g. Wave 1 could be identified as an 8 bar high, a bars: the 2, 4, A, and C counts require that the specified high higher than all previous 7 bars' highs. The succeeding price (low, true low, close) must be lower than the previous waves 2, 3, 4, and 5, as well as the correction waves, use 'N' number of bars in an upward trend. Fibonacci numbers. →

32 THE TECHNICAL ANALYST October 2008 Techniques

D-Wave displays waves according to the following logic: Screen shots of D-Wave on Bloomberg

For Up-Waves, High of 1 is less than the low of 4, and High of 1 is less than the high of 3, and High of 3 is less than the high of 5.

For Down-Waves, Low of 1 is greater than the high of 4, and Low of 1 is greater than the low of 3, and Low of 3 is greater than the low of 5.

Level / Price, Wave Start-21 Low Wave 1-8 High DeMark D-Wave for the S&P500 Wave 2-5 Low Wave 3-13 High Wave Properties Wave 4-8 Low Wave 5-21 High Wave A-13 Low Wave B-8 High Wave C-21 Low The reverse logic applies for sells.

Price Projections Price projections are created based on the length of a wave and Fibonacci extensions. To calculate the projection, you must obtain the difference of the prices between waves. Obtain the difference between the "Wave Validation" prices - the "From" and "To" waves, then multiply that value by the Fibonacci number in the "Times" category. The resulting value is then added to the "At" wave start for an Up wave and subtracted from the "At" wave start for a down wave.

Example To calculate the Wave 3 Objective, take the difference between the start and end of Wave 1 equalling 10 points. The difference is then multiplied by 1.618, resulting in a value of 16.18. In a down sequence, this value would be deducted from the start of Wave 2, equalling 40 in the above example. The Wave 3 price objective would be 23.82. As always with Tom DeMark’s work, the most valuable ben - efit of using this indicator is to help you identify low-risk buy and sell trading zones. D-Wave takes a difficult and highly subjective technique and turns it into a rule-based method. It offers the flexibility of deciding what and how you want the rules to be enforced but then will accurately implement them.

Trevor Neil is CEO of Betagroup and head of training at the Technical Analyst.

For further information on D-Wave, please refer to Thomas R. DeMark’s book, “The New Science of Technical Analysis”, (New York: John Wiley & Sons, 1994).

October 2008 THE TECHNICAL ANALYST 33 Techniques

34 THE TECHNICAL ANALYST October 2008 Techniques

SIZING UP A SUPERPOWER: A SOCIONOMIC STUDY OF RUSSIA By Alan Hall

Elliott Wave International analyst, Alan Hall, uses Robert Prechter's principle of Socionomics to tie events in Russian history to Elliott Wave cycles, and explains why his analysis has serious implications for Russia and its neighbours going forward.

Looking Back: Russian History through a Socionomic Lens Russian history is a story of extremes — from battleground to superpower and back to second tier state, from totalitari - anism to dysfunctional democracy, from Gulag to glasnost, and from communism to a mixed economy. Politics and social landscapes tend to wax and wane along with the wave pattern. A stock market would certainly have reflected Russia’s extreme social swings had the Kremlin allowed one. Stock market data provide an objective measure of the rela - tive optimism and pessimism of investors, so they serve as our primary indicator of social mood. Although there is no pre-1995 Russian stock market data, we observe that events in Russia have correlated well with the social mood of the U.S., as illustrated by trends in U.S. stock prices, which to a Figure 1. substantial degree are correlated with social mood worldwide. A brief historical review will give some perspective. (See 1892 generated no major conflicts and only one war, the brief Figure 1) Russo-Turkish War, from 1877 to 1878. (Note the pullback in the middle of wave III.) This period of relative peace is what 1859-1892: Cycle Waves I, II and III we expect from third waves. The bear market of the 1850s produced the Crimean War (1853-1856), which devastated Russia. With 256,000 dead, 1892-1920: Cycle Wave IV Grand Duke Konstantin Nikolayevich said “… we are both The wave IV bear market caused increasingly negative social weaker and poorer not only in material but also in mental expressions in Russia. The years 1901 through 1903 saw a resources, especially in matters of administration.” steady increase in peasant revolts, in which mobs burned Positive events began in 1861 as wave I unfolded. Tsar manor houses and mutilated animals. The Russo/Japan war Alexander II emancipated the serfs in an attempt to relieve was initially popular in 1904 but ended in crushing defeat. revolutionary pressures and move Russia out of its feudal The Russian Revolution of 1905 brought nominal reforms by economy. Living conditions for the peasants remained unfa - the Tsar, followed by a crackdown in 1906. The Tsar declared vorable, however. absolute executive power, then disrupted revolutionary The wave II bear market produced several uprisings and a groups and imprisoned or exiled the groups’ leaders. capitulation. In 1864, Alexander declared the end of the long By 1913, deep into wave IV, the average Russian was earn - Caucasian War (1817-1864). ing 27 percent of an average Englishman’s wages and paid The positive social mood that drove wave III from 1865 to 50% more in taxes. The Cycle-degree global bear market →

October 2008 THE TECHNICAL ANALYST 35 Techniques

and the decaying tsarist autocracy exacted terrible social costs. economic and social damage. From 1914 to 1921, Russia’s Russia had the highest mortality rate in Europe and a lower population crashed more than 22 percent. Industrial output literacy rate than England 163 years earlier in 1750. dropped 87 percent between 1913 and 1922, and gross crop The effects of negative social mood worldwide led to yield fell by more than half. From these depths wave V in World War I in 1914. By its end, 3.3 million Russians had social mood emerged, but due to the form of government died, by far the largest death toll of any combatant nation. that took over in wave IV, Russia’s recovery was much slow - The massive social and political chaos at the end of wave IV er than the rising social mood would have produced in a freer decimated manufacturing, foreign trade, agricultural produc - society. tion and Russia’s already poor per capita income, which fell over 70 percent. 1920-1929: Cycle Wave V of Supercycle Wave (III) Radicalism tends to emerge and become entrenched in cor - In 1921, the year after the rise of wave V began, Lenin aban - rective waves. Marxism was Cycle wave IV’s radical idea. It doned attempts at communal agriculture and allowed individ - encouraged the Russian Revolution of 1917, which ended the ual farming. The following year, the U.S.S.R. was formed. By reign of the Tsars and eventually led to a savage civil war. 1926, agricultural output had returned to at least the pre-rev - In 1918, as the five-year civil war wore on and wave IV olution level of thirteen years previous, and industrial output approached its nadir, Lenin narrowly survived an assassina - did so two years later. Compared to those in the West, most tion attempt. Shortly afterward came the successful assassina - economic recoveries in Russia look like half-hearted relief tion of a secret-police chief. Lenin then instituted a policy of rallies. That was certainly true of Supercycle wave (III), and it open and systemic mass terror. His handwritten “Hanging left little for wave (IV) to draw upon. Order” of August 11, 1918 began the “Red Terror” cam - paign. This edict illustrates how a bear market of Cycle degree accommodates Russia’s tendency toward social extremes, in this case with fear, recrimination and "NEGATIVE SOCIAL THEMES DUE scapegoating: TO APPEAR IN ANY APPROACHING 11 VIII 1918 BEAR MARKET FIRST EXPRESS Send to Penza To Comrades Kuraev, Bosh, Minkin and other Penza communists THEMSELVES IN MILDER FORM IN Comrades! The revolt by the five kulak volosts must be suppressed with - THE PRECEDING FOURTH WAVE OF out mercy. The interest of the entire revolution demands this, because we have now before us our final decisive battle “with the kulaks.” We need ONE LESSER DEGREE." to set an example. 1) You need to hang (hang without fail, so that the public sees) at least 100 notorious kulaks, the rich, and the bloodsuckers. 2) Publish their names. 1929-1948: Supercycle Wave (IV) 3) Take away all of their grain. The following quote describes how some points in the Elliott 4) Execute the hostages — in accordance with yesterday’s telegram. wave pattern allow unique social forecasting: This needs to be accomplished in such a way, that people for hundreds of miles around will see, tremble, know and scream out: let’s choke and Forecasting Styles of Social Events strangle those blood-sucking kulaks. Here is another esoteric point but one of great value. A section on Telegraph us acknowledging receipt and execution of this. “Nuances” in Chapter 15 of The Wave Principle of Human Social Yours, Lenin Behavior explains that negative social themes due to appear in any P.S. Use your toughest people for this. approaching bear market first express themselves in milder form in the preceding fourth wave of one lesser degree. Stop for a minute until you TRANSLATOR’S COMMENTS: Lenin uses the derogative term get this idea. Here is a more detailed explanation: Social mood repeat - kulach’e in reference to the class of prosperous peasants. A volost’ was edly traces out five waves up followed by three waves down. The negative a territorial/administrative unit consisting of a few villages and sur - themes in “wave four” within the “fives waves up” presage those that rounding land. (Library of Congress, http://www.loc.gov/exhibits will dominate, more dramatically and on a much bigger scale, in the /archives/ad2kulak.html) ensuing “three waves down.” It is also true of the character of social events. In an earlier fourth Scholars estimate that Lenin’s campaign caused the execu - wave from 1916 to 1921, collectivists took over Russia. In the larger tion of up to 200,000 people between 1918 and 1921. The fourth wave that followed, from 1929 to 1949, collectivists took over concurrent civil war took the lives of seven to eight million nearly half of the earth’s population, in Germany, Italy, Eastern people, five million of whom died by famine. Europe and China. (The Elliott Wave Theorist, September 2001.) → Overall, Cycle wave IV (1892-1920) wreaked tremendous Sure enough, the collectivism and social repression

36 THE TECHNICAL ANALYST October 2008 Techniques

that emerged in Cycle wave IV (1892-1920) foreshadowed workers and even parents. The economic costs what was to come in Supercycle wave (IV). were immense, as the state killed the brightest or hauled Even at the peak of Supercycle wave (III), the Soviet econ - them off to the gulag. Fear stifled innovation, experimenta - omy was unable to support the growth of industry and tion and constructive criticism and played a dominant armed forces. Foreign investors were not interested in the social role. country, and the middle class had been exterminated. Stalin, Fear is a key aspect of negative social mood. While democ - who took power after Lenin’s death in 1924, had few sources racies typically oust leaders in bear markets, dictatorships of revenue. He decided to plunder the 78% of the popula - seem to thrive on bear market fear. Stalin died a natural death tion in the private agricultural sector. In 1929, at the onset of in office in 1953 while apparently planning yet another purge Supercycle wave (IV), he began transferring control of farms, of top men in his government. equipment and livestock to the government. Farmers considered this policy a return to serfdom. They 1948-1965: Supercycle Wave (V) resisted and destroyed about half the U.S.S.R.’s livestock — The upsurge in positive social mood in wave (V) pulled some 55 million horses and cows — whereupon Stalin Russia out of its worst depths. From the turbulence of responded by sending about a million families into exile. This Supercycle wave (IV), the communist state engineered a conflict, and a catastrophic decline in grain production, exac - weapons and space program that gave it superpower status. erbated the famine of 1932-1933 that killed between five and With Stalin gone, the Communist Party resurged. In 1953, ten million people. Nikita Khrushchev was confirmed as head of the Central Stalin’s move to bring farmers under state domination Committee, and change was in the air. revealed the classic bear market trait of the desire to control Social mood can make or break political careers, and the people. By most accounts, Stalin was rude, ruthless, unforgiv - politicians that thrive are either lucky or canny enough to ride ing and without pity or empathy, and as the powerful wave the winds of change. Prior to Stalin’s death in 1953, (IV) bear market accelerated, his malevolence expanded dra - Khrushchev was a devoted Stalinist. In the 1940s, near the matically. end of wave (IV), his participation in Stalin’s purges earned Stalin’s purges and deportations were a huge magnification him the nickname “The Butcher of the Ukraine.” But of Lenin’s “Red Terror” campaign of the preceding fourth Khrushchev would soon put this past behind him. wave of one lesser degree. His massive social repression With perfect timing, in 1956, near the middle of wave I of spanned the period from 1929 to 1949, all of Supercycle (V) in Figure 1, Khrushchev read a speech, “On the wave (IV). His purges were initially aimed at the most pros - Personality Cult and its Consequences,” denouncing Stalin perous peasants (or “kulaks”) who resisted collectivization, and weakening the Stalinists in the government. This marked but they expanded into a genocide in which tens of millions the beginning of the “Khrushchev Thaw,” a socially more were starved, exiled or killed. This wave also amplified anoth - positive period in which the Soviets partially reversed repres - er fixture of Cycle wave IV, the “katorga,” the predecessor of sion and censorship, improved relations with the West and the Gulag labor camp. released thousands of political prisoners from the Gulags. Supercycle wave (IV) ultimately gave rise to World War II. During and just after Supercycle wave (V), the U.S.S.R. was The U.S.S.R. suffered the deaths of nearly 24 million civilians first in a number of critical space successes, including the and soldiers (13% of the population) at the hands of the launch of Sputnik into orbit and the first space walk. The Axis. U.S. and U.S.S.R.’s achievements in space were an astounding The social environment today is so radically different that expression of positive social mood that has not been equaled few people can imagine the destructive power of a in the 35 years since. In the list of positive aspects of social Supercycle fourth wave. Photos of the kind that appeared in mood in chapter 14 of The Wave Principle of Human Social 1940s-era Life magazines — of the dead, wounded and gan - Behavior, we see the ones that made this achievement possi - grenous — simply are not published in any mainstream ble: adventurousness, clarity, confidence, constructiveness, media today. daring, desiring power over nature, embrace of effort, opti - Stalin executed millions of comrades and other mism, practical thinking and sharpness of focus. Communist Party members, officers and even heroes in It’s no coincidence that the U.S.S.R.’s moon landing came the Soviet Army — anyone who might have threatened his the year of the top in the powerful 1965 Supercycle wave (V) power. He used fear, anti-Semitism, racial polarization, peak in U.S. stocks. Three years later, as the achievements starvations and secret police to consolidate his power so deriving from a positive social mood peaked, the U.S. put firmly that no political opposition was possible. He used men on the moon. scapegoats to cover his failures and re-wrote history to his advantage. His police state forced Russians into sub - 1965-1982: Supercycle Wave (a) mission. His impetus to “cleanse” society escalated into mass Conciliation and inclusion characterize large degree wave hysteria, in which people denounced their neighbors, co- peaks, and the peak of wave (V) brought about a cluster →

October 2008 THE TECHNICAL ANALYST 37 Techniques

Gorbachev, and the U.S.S.R. collapsed. In Russia, economic crisis followed. The result was a shattered economy, millions of Russians pushed into poverty, pervasive political corrup - tion, an explosion of organized crime and looting of state assets. These developments were extreme given the small degree of the mood change, but the decades of structural damages ultimately deriving from the dark mood of 1917 had left little infrastructure or social organization to cushion the setback. But the positive mood trend resumed, and Gorbachev gave way to Boris Yeltsin, the first democratically elected president of Russia. The country even developed a stock market. The Russian Trading System Index (RTSI) formed in 1995 and immediately began an ascent to a peak in late 1997. In 1996, in the heart of that bull market, Yeltsin won re-elec - tion, with help from newly wealthy “oligarchs,” business Figure 2. magnates. The First Chechen War was the only major Russian of arms control treaties. 1964 also marked the first major U.S. conflict of the period. sale of grain to Russia. The superpowers adopted an attitude The Russian financial crisis in August of 1998 accompa - of détente and they balanced in an uneasy truce. nied a global recession and a bear market in world commod - Wave (a) was characterized by indirect superpower compe - ity prices at a time when Russia got 80% of its revenue from tition, mainly expressed in proxy conflicts in the third world. oil, gas, metals and timber. Despite an IMF bailout, Russia The Soviets played a supporting role in wars in Vietnam, dramatically devalued the ruble to avoid default. Investors Somalia, Angola, Mozambique, Laos, Cambodia and fled the country and the RTSI fell below its starting level, tak - Nicaragua, while the U.S. government countered with ing Yeltsin’s popularity with it and bringing his previously tol - materiel and support for military coups. erated buffoonery into sharp focus. Vladimir Putin then As both superpower economies contracted, their space inherited a young bull market and a new uptrend in Russia’s programs atrophied. The Soviet Union continued to suppress social mood. dissent. In 1968 it sent about 500,000 troops into Czechoslovakia to crush the Prague Spring and negate Elliott Wave Forecast reforms that had promised new freedoms of speech, travel, Figure 2 is a chart of the Russian Trading System Index from debate and association. its inception. Our Elliott wave count in the RTSI showed in In December 1979, the Soviets began their ill-fated war in November 2007 that a clear five-wave advance beginning in Afghanistan. The U.S. boycotted the 1980 Moscow Summer 1999 was near completion. During this time, the RTSI Olympics, and the policy of détente became much less increased by sixty-fold. As expected, this index has begun its relaxed. biggest bear market since the five-wave pattern began. The In 1980, near the bottom of wave (a), the U.S. elected minimum probable drop — a move into the area of the Ronald Reagan on a platform opposed to détente. In 1983 he fourth wave of 2004 — would more than halve the value of gave his pivotal “Evil Empire” speech, describing the the index. U.S.S.R. as “totalitarian” and attempting to take the moral Such a decline should produce financial and social events high ground in the Cold War. This speech marked the end of of a character comparable to those seen during comparable détente and a new period of change within the U.S.S.R. declines in the past. Viewed in the context of Russian histo - ry, this outlook has serious geostrategic implications. 1982-1999: Supercycle Wave (b) Recent events do seem to foreshadow the expected social Soon after wave (b)’s onset, the Politburo unanimously chose character of the ensuing contraction. They suggest that a Mikhail Gorbachev as General Secretary, and he began “per - bear market in Russia should be taken very seriously. estroika,” a process of restructuring that weakened the Communist Party’s grip within Russia. He also applied a pol - Social Signs of Coming Political Danger icy of “glasnost,” meaning maximal transparency in the activ - When social mood shifts from bullish to bearish at a large ities of the Soviet government. On November 9, 1989, dur - degree of trend, people need to protect their assets and ing the steepest ascent in wave (b), glasnost and freedom ensure their livelihood and safety in advance. This requires came together, and the Berlin Wall fell in a global wave of anticipation of major change, a difficult task due to the euphoria. human psychological tendency to envision the future by In 1991, during a recession at the end of Primary wave extrapolating the present. Used correctly, the Wave Principle ((4)) in U.S. stocks, the KGB failed in a coup attempt against allows a certain degree of anticipation: →

38 THE TECHNICAL ANALYST October 2008 Techniques

The Wave Principle guarantees reliable forecasting only of probabilities. found prosperity into a growing military confidence include It allows us to predict some aspects of the future and not others. For the recent conflict with Georgia, resumption of bomber example, early in a new social mood trend, we can forecast society’s com - flights along the US East Coast, a new air defense system, ing character changes but not necessarily specific events. We can forecast new offensive weaponry such as nucleur submarines and that a major rising impulse wave will bring an increase in goodwill and ICBMs, and recent announcements that the Russian Navy productivity. The specific decisions that each man makes and the specif - will return to the Mediterranean Sea through a port in Syria. ic social actions and events that result depend upon countless details and In 1999, Putin told the Russian Federal Security Service are therefore chaotic. As the trend progresses, however, we can watch for (FSB), “A few years ago, we succumbed to the illusion that we signs to indicate such specifics and actually anticipate some of them quite don’t have enemies and we have paid dearly for that.” One well, as demonstrated in Chapter 17. (The Wave Principle of Human spokesman described Russia’s changing mood this way: “In Social Behavior, Robert R. Prechter, Jr. New Classics Library, 1999. Gorbachev’s time Russia was liked by the West and what did Chapter 20, p. 404.) we get for it? We have surrendered everything: Eastern Europe, Ukraine, Georgia. NATO has moved to our bor - ders.” (Economist)

Social Implications The stock market is our best indicator of social mood, so a stock market forecast is first a social mood forecast, which implies a commensurate change in the social environment. Wave IV from 1892 to 1920 in Figure 1 retraced about 30 percent of the previous wave III that began in 1865. Wave (IV) from 1929 to 1948 retraced about 40 percent of the pre - vious wave (III) that began in 1859. Those declines accompa - nied the extreme Russian social history described earlier. They brought intense social repression, redirection of capital from infrastructure to weaponry, and war and death on a massive scale. Although the coming bear market has started from a much higher point, realization of our forecast for a large-degree decline in the RTSI will have major negative effects on Russia, her neighbors and perhaps the rest of the world. A long-term trend toward a positive social mood leads to peace and political cooperation, and an extreme trend change in social mood toward the negative yields turmoil. A situation where social mood in both the U.S. and Russia is in decline would be quite different from the Cold War that occurred during a bull market. Russia’s long history of border wars and its desire to reclaim the resources of satellite states lost upon the collapse of the U.S.S.R. make future border conflicts likely. NATO, Russia in positive mood. Putin’s approval rating is Muslim and Asian countries border Russia on the west and nearly 80%. south. The ethnic diversity within these states represents con - flicts-in-waiting for the xenophobia that attends bear mar - Russia seems more ready to confront the U.S. today than at kets. any time since the Cuban Missile Crisis, 45 years ago. Indeed, Much as investors descend a “slope of hope” in a bear on October 26, Putin made a comparison to that dangerous market, we can expect the popular media to continue to time, reversing the protagonists’ roles, with the U.S. this time underestimate the seriousness of Russia’s steady resurgence placing missiles at Russia’s doorstep via the European missile to the world’s second largest military power. One should defense shield. The steadily increasing potential for conflict remain alert to the patterns unfolding in the stock markets, between the two superpowers represents the potential for the primary indicators of this social mood progression, and serious trouble. On November 20, Putin warned that Russia to social and political events in Russia. will react to a NATO military buildup on its borders. (BBC) Social mood change at large-degree turns is not instanta - Extracted from Alan Hall, November 2007, “Sizing up a neous. It can seem broad and slow as it develops. Recent top - Superpower: A Socionomic Study of Russia”, Parts I & II, Elliott ics in the news that show how Russia is converting its new - Wave International.

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C INTERVIEW UBS opyright 2 0 October (208) 8 marketin timng of suite DeMark the exp (B Esential: B of author seion a n o i t a c u d e e k o p s e b m ter um pr team He Lond. in Bank B U t a y g e t a r t S o C Fi globa is Per l Jason xed lomb i d o m m er r Cur Inc ome, tise for clients. for s ovide P r erg dicators strateg trading TH D s e i t E the past 14 y TEC Market lomberg eM Te es medi and t hor HNICAL s) In ark I S and . H e n e m t s ve n n i a r t l h h nci i s I nt dicators

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of 41 - t Interview

TA: What was you motivation for writing your book on it doesn’t give you an insight into the magnitude of the DeMark indicators? expected reversal. I find that when using TD Sequential on multiple time frames, combining it with TD D-Wave puts the JP: I was approached early last year by David Keller (then signals into context – i.e. are we mid-way through the impul - head of technical strategy at Bloomberg, now Director of sive stage of a trend or in the latter part and therefore termi - Technical Strategy at Fidelity in Boston). Bloomberg was nal phase when a macro move is more likely? Typically, I find thinking of producing a series of definitive books based on that TD Sequential signals in TD D-Wave 3 (the impulsive market timing and technical analysis techniques and David phase of a trend) are less reliable than TD Sequential signals asked if I would be interested in writing a user guide to the in TD D-Wave 5 (when the bulk of the trend has already hap - DeMark indicators. pened). I suppose like many authors, I was adamant that it was As far as which indicators are more or less effective than never my intention to put pen to paper, but over the years a others, I think it’s more a question of what one’s investment number of UBS clients around the world had asked for edu - objective and time horizon is. Tom has both trending and cational material covering the popular DeMark indicators, so trend exhaustion indicators in his suite of tools so in my this was a great opportunity to address that demand. It was opinion, it’s more a question of finding the DeMark indica - also a chance to answer a number of questions that people tors that suit the individual’s objectives and personality – as consistently ask about DeMark’s work when they start using the old trading adage goes – your chosen methodology the indicators. Furthermore, very little information was avail - should be defined by whether you wish to eat well or sleep able about TD D-Wave (developed by Tom DeMark as an well. I don’t mean that flippantly: for example, counter-trend objective and mechanical version of Elliott Wave), which was trading is by definition counter-intuitive, so if you don’t like

“THE TD SEQUENTIAL IS PROBABLY THE DEMARK INDICATOR THAT PEOPLE ARE MOST FAMILIAR WITH. ITS TOM’S SIGNATURE STUDY SO IT’S GENERATED A LOT OF INTEREST IN THE 30 PLUS YEARS SINCE IT WAS DEVELOPED”

generating a lot of interest and the book project gave me a going against the market consensus, then TD Sequential platform to discuss the subject in detail. probably isn’t for you. Hopefully the finished product accomplishes what we set out to do, i.e. providing a definitive information source for TA: Does the Sequential Indicator remain the most pop - first time users, as well as a practical user guide for those ular DeMark indicator? If so, why do you think this is? already familiar with the studies. Of course, I was delighted when Tom DeMark offered to write the foreword and hon - JP: Well, TD Sequential is probably the DeMark indicator oured that a number of high profile industry names; John that people are most familiar with. Firstly, it’s Tom’s signature Bollinger, Peter Borish, John Burbank, Leon Cooperman and study so it’s generated a lot of interest in the 30 plus years David Kyte endorsed the book. since it was developed and along with its counterpart TD Combo, it’s also the study that differs the most from whatev - TA: Which DeMark indicator do you use most often? er else is available in the market. Are there some that you think are more effective than others? TA: Have you done any back-testing of DeMark or do you know of anyone who has? If so, what were the JP: Actually, rather than just one study, I use TD Sequential, results? Tom’s signature trend exhaustion indicator in conjunction with TD D-Wave. TD Sequential is good at identifying JP: Although I fully understand why new users would want prospective exhaustion points in both ranges and trends, but to back-test the DeMark indicators, I haven’t felt the need →

42 THE TECHNICAL ANALYST October 2008 Interview

to do so personally because I’ve been using them real-time Combo versus just using the TD Sequential? for the past 14 years and have seen how they behave in all types of environment. Suffice to say, while I recognise the JP: Frankly, I always struggled to determine when one should indicators are by no means infallible or indeed the Holy Grail, use TD Sequential rather than TD Combo and vice versa. I do believe they give one a considerable edge when it comes Obviously, it gives one a greater sense of confidence if the to market timing if used in an objective and disciplined man - TD Sequential and TD Combo happen to generate a signal ner over time. simultaneously, but since both indicators are trying to identi - A number of very smart people have tried to back-test the fy trend exhaustion points it can be difficult rationalising a indicators, but I should say that Tom is keen to emphasise preference for one over the other. that his body of work is indicators, not trading systems. So for TD Sequential, one does get an entry signal and an initial However, a couple of things do stand out: risk level but DeMark doesn’t provide information on how to manage the risk once the trade starts moving in your direc - 1) DeMark suggests TD Combo has a slight edge over TD tion or advice on where to take profit. So if you did want to Sequential if one is trading off intra-day charts, back-test the TD Sequential, you’d need to recognise that the results are based on your interpretation of how to manage 2) By definition, TD Sequential requires a minimum of 22 the risk and profit taking inputs. price bars before it can generate a buy or sell signal subse - quent to a completed TD Setup and TD Countdown, TA: Presentations that we have heard on the Sequential whereas TD Combo only needs a minimum of 13 price suggests that the profitability of trading Setups and bars to generate a completed TD Setup and TD Countdowns lies not necessarily in the frequency of Countdown – so TD Combo is useful in determining their success but rather in using them as a risk manage - prospective trend exhaustion points after an abrupt direc - ment tool. In effect, the gains from when the Sequential tional move. Again, combining the indicators on multiple works are much bigger than the losses from when it time frames and coupling them with TD D-Wave gives fails. Do you go along with this? one an objective insight into the most opportune time to use one rather than the other, particularly if the market has JP: Yes, absolutely. Like I said, TD Sequential is by no means reached a projected TD D-Wave target. the Holy Grail, but it does provide some acute risk / reward trading opportunities, both in ranges and in the latter stages TA: What exit strategies do you use/recommend using of a trend. When used over multiple time frames and in con - after entering a TD Sequential triggered trade? junction with other TD indicators such as TD D-Wave, the hit rate on successful trades based on TD Sequential can be JP: DeMark doesn’t discuss this in detail, so this is my per - significantly improved. Both Tom and I are keen to stress that sonal interpretation; the indicators are market timing tools rather than technical analysis per se. Increasingly I find non-technically oriented 1) Wait for a fresh signal in the opposite direction customers are recognising the added value the indicators pro - vide in terms of improving the efficiency of trade entry and 2) Trade around prior TDST levels or exit in conjunction with a fundamentally driven trade idea. 3) plot the distribution of signals generated by TD Sequential TA: What, in your view, are the main weaknesses of the over time and try to determine the most that the market Sequential Indicator? moves on average subsequent to a signal or prior to a pull - back of at least x% - then use that as a take profit target, JP: By definition, since TD Sequential is counter-trend so it regardless of whether there is a fresh signal in the oppo - will have a tough time when markets are trending strongly in site direction or not. one direction. However, that’s precisely why I stress the need to evaluate each signal on a case by case basis and consider it TA: How has the use of DeMark changed over the past in the context of the broader trend. One should always be few years? If it has increased, why do you think this is? aware of what the indicator is saying on longer-term time frames (so you know whether you are trading in-line with or JP: When I first heard about the DeMark indicators 14 years against the broader trend), and note where the signal lies rel - ago, their use was limited to a relatively small number of peo - ative to the current TD D-Wave count. That won’t complete - ple who were familiar with Tom and his work. The indicators ly offset the risk of being stopped out in strong trends, were not available on the mainstream quote vendors as they but it will certainly reduce the occurrence in a very objective are now (such as CQG, Thomson and Bloomberg). The manner. introduction of the TD indicators onto Bloomberg about 6 TA: What are the main advantages of using the TD years ago was a tremendous boost as it meant the studies →

October 2008 THE TECHNICAL ANALYST 43 Interview

“UBS CLIENTS AROUND THE WORLD HAD ASKED FOR EDUCATIONAL MATERIAL COVERING THE POPULAR DEMARK INDICATORS, SO [THE BOOK] WAS A GREAT OPPORTUNITY TO ADDRESS THAT DEMAND.”

became readily available to a much wider audience and could ology happens to appeal to me and my trading psyche. be applied to a much bigger universe of instruments. Since then, Bloomberg, Tom DeMark and the team of people TA: To what extent is DeMark used by UBS working with Tom (including TJ Demark, Rick Knox and traders/investment managers and your clients? Roderick Bentley), have done a fantastic job of enhancing the TD indicator functionality and user experience. JP: I cannot comment on this question specifically for client In the past 18 months, Market Studies (Tom’s company), in confidentiality reasons, but the number of people who look association with Bloomberg introduced the TDRS service. A at or use the indicators has grown over time. Personally, I am number of features have significantly enhanced the value of most encouraged by the number of fundamentally oriented the indicators in my opinion and as people are getting a bet - traders who are starting to incorporate the TD indicators into ter appreciation for how they work, they’re realising the their analysis to improve the efficiency of their market timing power of the studies. Specifically, there is an educational – something that was far less prevalent amongst traders 9 service called TD Cursor Commentary, whereby the user years ago before I joined UBS. clicks on an individual price bar to see the interpretation of the TD studies applied to that bar. There is also an instant TA: To what extent is DeMark used in the markets? messaging service on Bloomberg, where Tom and his col - Bloomberg say that they have around 36,000 users of leagues provide real-time educational information about the DeMark on their terminals. Does this sound accurate? application of the indicators. Lastly, and perhaps most valu - able is a scanning facility. This enables users to scan virtually JP: I couldn’t comment on exact numbers, but given the fact the entire Bloomberg database for TD based signals on mul - that Bloomberg have roughly 350,000 customers, it’s not tiple time frames. One can even create custom portfolios and unreasonable to assume that roughly 10% of those look at look for signals based on combinations of TD indicators. I the TD indicators in some form or another. believe this functionality is revolutionary and opens up a whole new area of relative value trading opportunities which TA: : Did any DeMark indicators signal the current crisis would not have been possible previously. in the credit markets/banking stocks?

TA: Is your TA research mainly focused on using JP: One of the advantages of TDRS and the scanning func - DeMark? tionality is that it enables one to follow a large number of instruments and look for common macro themes among the JP: I believe UBS Technical Strategy is unique in the sense signals generated. I don’t have a stock specific remit as my that the group consists of product specialists, (based in primary focus is FX, fixed income and commodities, but it London, Zurich, Stamford and Singapore), who are each was interesting to me that there was a confluence of cross- experts in their respective areas. Consequently, each member market signals in a number of markets over the summer: a of the group publishes research (and trade ideas) based sole - buy signal on the VIX at 16.30 on 15-May, a sell signal in US ly on their individual methodology. My personal focus is 2 Year yields at 2.9206% on 10-June: a sell signal at 108.18 in DeMark and the majority of the research that I produce is USDJPY on 13-June, a sell signal in the Nikkei at 14,354 on based on that in addition to some historical statistical analy - 16-June: a sell signal in the Nasdaq Composite at 2,457.7 on sis. That’s not to say I don’t believe in other forms of analy - 17-June, a buy signal in gold at 883.80 on 23-June and a sell sis, quite the contrary – but I do believe there is a limit to the signal in AUDCHF at 1.0011 on 27-July. number of things one can follow and this particular method -

44 THE TECHNICAL ANALYST October 2008 Research Update

Dow Jones Industrial Average data, sug - exploiting these dependencies. EXPLOITING FRACTALS gest that the fractal nature of a time series Moving averages and trading range break- leads to dependencies that technical Lento, Camillo,A Synthesis of Technical out rules are the best at exploiting long- analysis should be able to identify and Analysis and Fractal Geometry - Evidence from term dependencies in financial data, exploit to earn profits. Lento’s research the Dow Jones Industrial Average Components according to Camillo Lento of Lakehead showed that moving averages and trading (September 4, 2008). University. His results, based on analyzing range break-out rules were the best at

FX Strategy: Fundamentals and Technicals Combining fundamental and technical formance of currency trading strategies investment strategies. The authors also analysis into one strategy brings based on monthly real interest rate differ - speculate that a dynamic weighting improved risk-adjusted returns, according entials and GDP growth as well as mov - scheme between technical and funda - to four Netherlands-based researchers. In ing average trading rules and support and mental information may yield improved their study, they measure the economic resistance levels. They document that performance relative to an equally value of information derived from both types of information can be exploit - weighted combination. macroeconomic variables and from tech - ed to implement profitable trading strate - nical trading rules for emerging markets gies. In line with evidence from surveys De Zwart, Gerben J., Markwat, Thijs D., currencies, based on a sample of 21 of foreign exchange professionals con - Swinkels, Laurens A.P. and Van Dijk, Dick J. emerging markets with a floating cerning the use of fundamental and tech - C.,The Economic Value of Fundamental and exchange rate regime over the period nical analysis, they find that combining Technical Information in Emerging Currency 1997-2007, using non-deliverable forward the two types of information improves Markets(21 2007, 12). ERIM Report Series data. Specifically, they assess the per - the risk-adjusted performance of the Reference No. ERS-2007-096-F&A

Deflated Optimism? Long-run stock market underperformance after security offerings is a CATEGORIZING INVESTOR well documented phenomenon and some have conjectured that this BEHAVIOUR post-issue underperformance might be the result of pre-issue investor Making the link between behavioural biases at the optimism. Researchers from California State University have investigat - individual level and what we see in the markets ed this by looking at: 1) whether investor optimism is associated with remains largely a matter of untested speculation. A post-issue underperformance; 2) how investor optimism changes in the team of researchers from Erasmus University in the one-year period surrounding the security-offering month; 3) whether Netherlands has looked at how models can be used investor optimism differs between equity issuers and debt issuers; and to build stylized representations of individual 4) whether such differences affect companies' financing choices. Their investors and further studied using agent-based arti - findings confirm underperformance of debt and equity issuers and ficial financial markets. In this way, agent-based mod - found that the post-issue buy-and-hold abnormal returns are negative - els can bridge the gap between the micro level of ly associated with pre-issue investor optimism. They found little evi - individual investor behavior and the macro level of dence, however, that investor optimism affects companies' financing aggregate market phenomena, and can be used as a choices. tool to generate or test various behavioural hypothe - sis. Yi, Bingsheng, El-Badawi, Mohamed and Lin, J. Barry,Pre-Issue Investor In the same vein, Indian investors have recently Optimism and Post-Issue Underperformance(September, 23 2008). Financial been categorized into different personality types and Analysts Journal, Vol. 64, No. 5, 2008 researchers have explored the relationship between various demographic factors and investment person - ality. Their results reveal that the Indian investor can MOMENTUM VERSUS REVERSAL be classified into four dominant investment person - Two UK-based researchers have provided evidence from US, UK and alities – casual, technical, informed and cautious. Japanese equity markets that returns depend on the size and sign of previous price changes. They find support for the idea that investors Lovric, Milan, Kaymak, U. and Spronk, J.,A Conceptual Model display behavioral biases and simultaneously underreact to some types of Investor Behavior(June 23, 2008). Erasmus Research Institute of events and overreact to others. Their results show that the market of Management - ERIM, Forthcoming. Mittal, Manish and tends to reverse after large price changes, while after small price Vyas, R. K.,Personality Type and Investment Choice: An changes a momentum type effect is observed. Empirical Study(September 4, 2008). The Icfai University Journal of Behavioral Finance, Vol. V, No. 3, pp. 6-22, Hudson, Robert and Atanasova, Christina V.,Short Term Overreaction, September 2008 Underreaction and Momentum in Equity Markets(July 10, 2008).

October 2008 THE TECHNICAL ANALYST 45 Research Update

Volume Spikes Further evidence that past price extremes stock price last achieved the price are reliably positive and, among small influence investors' trading decisions has extreme, the smaller the firm, the higher investors, trades classified as buyer-initi - emerged from a US-based research team. the individual investor interest in the ated are elevated. They show that volume is strikingly high - stock, and the greater the ambiguity er when the stock price crosses either the regarding valuation. Volume spikes when Huddart, Steven J., Lang, Mark H. and upper or lower limit of its past trading price crosses either the upper or lower Yetman, Michelle,Volume and Price Patterns range. This increase in volume is more limit of the past trading range, then grad - Around a Stock's 52-Week Highs and Lows: pronounced the longer the time since the ually subsides. After either event, returns Theory and Evidence. Management Science.

Earnings New Momentum Richard Harris of the University of low frequency momentum trading strate - Surprises and Exeter and Fatih Yilmaz of Bank of gy offers greater directional accuracy, America have developed a momentum higher returns and Sharpe ratios and trading strategy based on the low fre - lower maximum drawdown than tradi - Market quency trend component of the spot tional moving average rules. exchange rate. Using, alternately, kernel regression and the high-pass filter of Harris, Richard D. F. and Yilmaz, Fatih,A Sentiment Hodrick and Prescott (1997), they recov - Momentum Trading Strategy Based on the Low There is growing evidence in the finance er the non-linear trend in the monthly Frequency. Component of the Exchange literature that investor sentiment affects exchange rate and use short-term Rate(August 2008). Xfi Centre For Financial stock prices. Two researchers from New momentum in this to generate buy and & Investment Working Paper No. 08/04. York University have examined whether sell signals. According to the authors, the stock price reactions to earnings surprises and accruals vary systematically with the level of investor sentiment. They find evidence that holding extreme good news firms following pessimistic sentiment INTRA-MONTHLY MOMENTUM periods earns significantly higher excess returns than holding extreme good news PATTERNS firms following optimistic sentiment peri - Are momentum strategies in the FX markets likely to work consistently through the ods. Similarly, their results suggest that month? Not according to a team from the Universities of Exeter and Bristol. In their holding low accrual firms following pes - paper, they document a very strong day-of-the-month effect in the performance of simistic sentiment periods earns signifi - momentum strategies in the foreign exchange market. For example, for simple mov - cantly higher excess returns than holding ing average based strategies the authors found that the Sharpe ratio is close to zero low accrual firms following optimistic during the first half of the month until day 12, from when it starts to rise sharply, sentiment periods. In addition, they doc - peaking initially around days 13-15, and then again at around days 20-22. The authors ument that excess returns in the short show that a two-factor model employing conditional volatility and the volatility of window around the preliminary earnings conditional volatility explains as much as 70 percent of the intra-month variation in announcements for extreme good news the Sharpe ratio. They further show that the seasonality in volatility is in turn closely firms are significantly higher during peri - linked to the pattern of US macroeconomic news announcements, which tend to be ods of low sentiment than during periods clustered around certain days of the month. of high sentiment. Overall, their results indicate that investor sentiment influ - Harris, Richard D. F., Stoja, Evarist and Yilmaz, Fatih,Day-of-the-Month Effects in the ences the source of excess returns from Performance of Momentum Trading Strategies in the Foreign Exchange Market(October 2008). earnings-based trading strategies. Xfi Working Paper No. 08-05.

Livnat, Joshua and Petrovits, Christine,Investor Sentiment, Post-Earnings Announcement Drift, All papers are available from the Social Science Research and Accruals*(September 1, 2008). Network, SSRN, www.ssrn.com

46 THE TECHNICAL ANALYST October 2008 Book Review DEMARK INDICATORS

Jason Perl is head of technical analysis at UBS in London, and is well known as one of the financial market’s acknowledged experts on the indicators of Tom DeMark. DeMark himself works closely with Steven Cohen at SAC Capital in the US, one of the world’s largest hedge funds. This fact alone lends credence to his work and should persuade those who are highly sceptical of his indicators to spend some time looking more closely at them. Tom DeMark is always keen to stress that his indicators are more a market timing technique rather than pure technical analysis. Either way, while DeMark does have many loyal followers, evidence suggests that the indicators are still of minority interest among the trading and invest - ment community. However, their profile has increased in recent years and this book meets the demand for those wishing to learn more. DeMark indicators are potentially a difficult technique to describe in writing. While they are not especially complex to understand, they are more mathematical in nature than many tech - nical indicators and as such, are better understood by looking at real examples. Because of this, it is important that any book on the subject is clearly written. By Jason Perl Much of Perl’s book focuses on the TD Sequential indicator, the most popular and widely Published by Bloomberg Press used of all the DeMark range. This is a counter-trend signal generator that looks to capture 208 pages points of market exhaustion and reversal – both in uptrends and downtrends. Its popularity is ISBN: 978-1-57660-314-7 probably down to the clarity of the signals it generates and the lack of active price analysis $29.95 required by the user: the software generates the buy and sell signals – the so called Setup 9s and Coundown 13s - and sets the stops. All the trader needs to do is determine his exit. Perl describes in easy to follow detail how the Setup and Countdown work along with trad - ing tips and numerous examples. He also augments each chapter with a FAQ section that addresses some of the points that are often brought up about the indicators. These include, for example, why the parameters 9 and 13 are used in the TD Sequential. While his answers to some of these points, including the backtesting of the indicators, may not satisfy everybody, he makes no attempt to shirk some of the more difficult questions usually posed about the indicators. However, there is a lot more to DeMark than the TD Sequential. Tom DeMark has his own interpretation for many traditional technical analysis techniques such as moving averages and trendlines. These are well worth further investigation as they offer a new approach to tradition - al techniques that often suffer from subjectivity in their application. Perl also covers the TD Combo, the TD D-Wave, TD Lines, TD Retracements, Trends, Oscillators and Waldos. Tom DeMark’s own book on his indicators, “New Market Timing Techniques”, published in 1997, has been criticised by some as difficult to read and understand. If this is the case then Perl’s book is a well written and essential antidote to this. In addition, Bloomberg’s new range of technical analysis books are well designed and crucially, appear to have benefited from care - ful editing, something that many such books often lack. If you are looking for DeMark enlight - enment, or simply a fresh way to analyse price action, then this is the book to get.

All of the above books are available from the Global Investor bookshop at a discount. Please call +44 (0)1730 233870 and quote "The Technical Analyst magazine".

October 2008 THE TECHNICAL ANALYST 47 Training Courses

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The Society of Technical Analysts (STA) represents and accredits professional and private Technical Analysts operating in the UK

Originally established in the 1960s, the STA provides its members: • Education Monthly lectures and regular teaching courses in technical analysis

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The STA represents the UK at the International Federation of Technical Analysts (IFTA)

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