Market Technician No 51

M ARKET TECH CHN N I CI CIA AN November 2004 Issue No. 51

The J ournal of the STA www.sta-uk.org

2004 has been a pa rticul 2004 rticularly arly challenging yea r for technical analysts since most of the financial (as opposed to commodity) markets have spent much of the year trapped in trading trading ranges and si sidewa dewa ysys-moving moving markets present a real challenge for most t echnicallyechnically-ba ba sed systems of ana lysi lysis. s. This issue issue of the Journal is being prepa red in the run-up run-up to the US presidential election and many analysts are hoping that a decisive outco me w il illl trigg trigg er off the trad itional end-of-year end-of-year rally rally in the equity markets. mark ets. One area where we have a lr lready eady seen a strong break-out break-out is the currency market where the dollar has slid to a new eight-month low in trade-weighted terms.

Dollar trade-weighted index

– 200 DAY MOVING AVERAGE

Source Thomso n Financial Datast ream

Forty-si orty-six x cand idates sat the STA Dipl Diploma oma Examination in the spri spring, ng, of which 10 were were aw arded distinctions distinctions and a further 31 passed. Fourteen DIT DI TA candidates a ls lso o pa ssed. Candi Candidates dates were faced w ith a q uesti uestion on o n a © Market Mark et Profile chart. As the topic had been tho roughly cover covered ed in a Revisi evision on Day exerci exercise, se, many cand idates, not surprisingly surprisingly,, opte d to answ er that question and most scored high marks. marks. This led led to an o ver verall all improvement impr ovement in the marks marks obta ined and to one of the highest averag averag e markss ever. mark ever. More important important ly ly,, the stand ard of a nswers to the cru cruci cial al major analysis q uestion also improved. improved. Furthermore, it is is particularly particularly pleasing t hat for the first time th e averag e ma rk for STA cand idates (75.2 75.2% %) wa s hig her t ha n t he ave rag e m ark for DITA can dida tes (6 (69.7% 9.7%).

Raj who we lcomed t he STA to Aberdeen an d RGU, RGU, and highlight ed t he importance of t echnic echnical al ana lys lysis is and b ehavioural finance finance in modern market mark et theory. He helped the audience diff differenti erentiate ate bet ween fundament al and technical analysis analysis by t ell elling ing the foll follow ow ing story... story... ‘Two men a re trying trying to cross a bridg bridg e during during a storm. They had a rr rriv ived ed at night and one says to the ot her “we sho uld cross cross now, it’ it’ss raining raining so heavil heavilyy that the bridge might be w ashed a wa y”. The other man replies,“the replies,“the bridge has been b uil uiltt by the best engineers,gauging historical rain and water flow and using the best mat erials and e ng ineering principles.W principles.Wee can cross tomo rr rrow ow in da yli yligh gh t.” After a few hours, hours, duri during ng w hich the w ater continues to ris rise, e, the first first man says,“I don’t disagree with you ab out the b ri ridge’s dge’s construction,b construction,b ut the trend of t he w ater’s ris risee is making making m e nervous.I’m nervous.I’m crossing crossing now, go od luck! luc k!””. He scampers safely safely across the bridge. The second m an w aits and in the morning,with the water roaring underneath,he starts to cross the bridg bri dg e. Needless to say,t he bridg bridg e’ e’ss underpinnings underpinnings are wa shed awa y,the bridg bri dg e falls falls and he is swept swept aw ay. ay.’’ Profes Professor sor Raj Raj left left his audience to spot who was the trend follower and who was the fundamentalist! Gerry Celaya (MSTA) add ressed t he aud ience next , explaining w hat the STA sta nds for a nd w hat it is trying trying to d o in Scotlan d. The STA is holding meetings in different different cities and encouraging stud ents to consider joini joining ng as associate members and a ttending t he meetings in Edinburgh Edinburgh whenever possible. Murray Gunn (MST (MSTA) explored explored t he ‘Sta ‘Sta te o f the Mark Markets’ ets’ and ga ve an interesting talk on the stock,bond,commodity and foreign exchange markets. mark ets. He covered covered th e key princi principles ples of each ma rk rket, et, giving examples of important technical chart patterns,momentum indicators and his own forecasts forec asts of t heir probable direction. direction. He took questions from from the audience throughout t he talk,and there were liv lively ely interchanges interchanges w hen the principles of technical analysis challenged the Efficient Market Hypothesis Theory tha t the MBA students had been studying. Josh Bruzzi (M (MST STA) also spoke a nd e xplained how he uses t he ‘leade r follower’and ‘quality rotation’ideas that he learned from very successful, fundamental analysis-based stock market traders as the basis for his quant itativ itativee ranking ranking models and chart a nalysi nalysis.His s.His talk prompted an interesting discussion discussion o n the issues of market market t imi iming ng and pric prices es discounting disc ounting information information a head of the a ctual event (why (why d oes a share fall after goo d new s? s?)). As a res result ult of the very positive positive feedback that ca me out of this meeting,w e hope to hold anot her meeting meeting a t RGU RGU next year. year.

The Scot tish cha pter o f the STA held t heir first first m eeting in Aberde Aberde en o n 30th October at RGU Aberdeen Business School.Locally-based staff from fund man ag ement houses as well as MBA MBA students from t he Universi University ty were joined joined by a number of members from from Edinburgh Edinburgh w ho ha d decided t o make a w eek eekend end o f it. The three-hour three-hour meeting wa s opened b y Professor Professor

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Rat io and p roportion – a mat ri rix x of convergi conv erging ng equa tions to d etermi etermine ne prefential vs vs alternate counts for g old . . 8

D.W D. Watts

Bytes and Pieces . . . . . . . . . . . . . . . . . . . . . . . . 8

Obituary

Tim Bra in . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

H.Pruden & H.Prude B.Belletante B. Belletante

Wyck yckoff off law s a nd tests . . . . . . . . . . . . . . . . . . 9

D.Kna D. Knapp

Market Profile . . . . . . . . . . . . . . . . . . . . . . . . . . 11

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MARKETTECHNICIAN

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Issue 51 – No ve m b e r 2004

Ra ti tio o and a nd pr propo oporrti tion on – a ma m a tri trix x of converg converg ing eq uat uatiion onss to d et eter ermi mine ne prefent prefentiia l vs. a lter terna nate te counts for g ol old d By Peter Goodb ur urn n

Summary of p resenta tion to the STA’s Elliott Elliott Wave Wave Symposium o n 2nd July 2004

The ma in difficulties in the a pplicat ion o f the Wave Wave Principle a rise beca use there are only three go verni verning ng rules and its ma ny guidelines are open to some variation. variation. The categ ori orisation sation of each pa ttern sequence into its correct correct nomenclature, nomenclature, or wa ve degree, is essential essential to the counting process but is open t o interpretation. Furthermore, a five wave impulse sequence that is associated associated with trend can actually exis existt w ithi ithin n a three wave countercounter-trend trend correctiv correctivee pa ttern,na mely a flat, or its variation, variation, the expanding or running running type. And a s if to add a new dimens dimension ion to the term ‘alternation’, a counte rr-trend trend seq uence can be found w ithin the components of a n impulse impulse wa ve – for example,a example,a zi zigg zag or its variation, variation, the doub le le,, tri triple ple within within wa ves 1, 1, 3 or 5 of an end inging-diagona diagona l.So, is there a wa y or a metho dology tha t can a ssi ssist st in the process process of correct correct counting,to diff differenti erentiate ate when a fi five ve wa ve impuls impulsee is part o f a corr correction ection and a zig zag part of an impulse? Also,is it possible to identify when any pattern has been truly completed? completed? It It is these q uesti uestions ons tha t lie at the very core of Ell lliott’s iott’s founda tion.

Now taki taking ng a glance at this chart,w e can see that the decline decline for wave IV IV has no t a chieved one of Elli Elliott ott ’s guidelines – tha t a retracement should enter t he price territory territory of ‘fourth ‘fourth wa ve preceding deg ree’. A fib.38.2 fib.38.2% % retracement of w ave III III is is calculated calculated tow ards 224.00 224.00 but g old has never traded at this price level after 1980.A 50%target is at 157.00 and this does mo ve into the price area of cycle wave 4 of III III.. Inserting a t welve year cyclee (vertical cycl (vertical red red lines), lines), we can see t his highlighting highlighting t he beg inni inning ng o f wa ve I,I, III and the conclusion of wa ve V, but it do es not co inci incide de w ith the abso lute low low for gold tha t trad ed in August August 1999.T 1999.These hese tw o fact s alone do no t disprove that w ave IVcould have completed in 1999,b 1999,b ut it does offer good reaso n to consider the probab il ility ity that it cont inues to unfold. unfold.

Figure 2

It is the time old science science of g eometry,ratio and proporti proportion on tha t can assis assistt in our search for for a system t hat allows us to co unt w aves correctly. correctly. The geo metric order found found in price activity not on ly causes repetition repetition o f pat tern, but it simultaneo usly creates creates a n intricate intricate m at ri rix x of Fibona Fibona cci (fib) (fib) ratios over varyi varying ng degrees of size, size, mergi merging ng tog ether in a fractal ha rmony that b inds each each tog ether ether.. In a case study of g old prices,w prices,w e shall search for this harmonic matrix matrix of ratios that combine the proportional element in an attempt to determine the correct w ave count betw een tw o po ssi ssibili bilities.Nei ties.Neither ther is considered considered ‘preferenti ‘pr eferential’ al’ or ‘alter ‘alternat nat e’a t this stag e – both are eq ually ana lys lysed ed w ithout prejudice.This will will be used juxtapo sed to fib-time-ratios, fib-time-ratios, the eva luation o f the ‘rari ‘rarity’ ty’ of pat tern and a ny rule rule or guideline guideline tha t may b e applicable such as ‘overlap’ ‘overlap’ and ‘retracement to ‘fourth preceding deg ree’.

Figure 1

Fig 1 beg ins with viewing go ld prices prices from the historic low in 1932 1932 at 17.06 17.0 6 US$ US$ per oun ce. An initial ad van ce to 34.87 complet es super-cycle wave I and w as followed followed by a prol prolonged onged wave II sequence of the same level until its its com pletion in Octob er 1967 1967.. Eventua ll lly,a y,a thrust high er began,a typical characteristic of third waves as in 1971 the international ‘gold standard’wa s abandoned. The m ost impressi impressive ve a spect of supe rr-cycle cycle wa ve III III is that it subd ivi ivides des neat ly into into a five wa ve impulse impulse sequen ce of cycle cycle deg ree,right into its conclusion conclusi on a t 698.75 698.75 in in ea rl rlyy 1980 1980 (closing (closing price based on q uarterly dat a series) seri es).. But our main study w il illl be wa ve IV IV and to est ab li lish sh whe ther it has completed or remains in progress.

Issu e 51 – No vem b er 2004

The pat tern cont ained in the d ecli ecline ne from 1980 1980 must now be a nalysed. In riginal ginal ‘alternate’ count from WaveTrack date d fig 2, this cha rt d epicts a n o ri October 1999.It labels the decline from 850.00 (monthly hi-lo-close data series) seri es) as unfolding into a doub le zig zig za g pa ttern to 251 251.70 .70,, completing wave IV. It is is important important to not e that under this this counting,Primary counting,Primary wa ve X comp leted at 499. 499.75 75 as an expa nding flat p at tern, (A)-(B (B))-(C (C),3-3),3-3-5. 5. But why w as it cate go ri rized zed as a n ‘alternat ‘alternat e’ count? The reason is beca use it is is uncommon for the two zig zag seq uences within within a double pattern to unfold to a ratio of 61.8%( 61.8%(as as show n) n).. As the insert diag ram from our tutorial tutori al archive archive shows, there is is a greater correlation correlation between the tw o whe re either either eq uality is found, fib.100%, or whe re the first first is extended b y fib.61.8% fib.61.8 %. This prompts us to examine t he cha rt further. It is interesting however that the second zig zag can be cut by the ‘golden ‘golden section’and this exactly intersects th e low of w ave A at 325.50.T 325.50.This proves that this decline decli ne is a zig zag , but no t necessarily necessarily part of the double patt ern from from 850.0 85 0.00 0 – so wha t else can b e considered? The low at 251. 251.70 70 is is the low est lo w since 1980 – the p revious ‘coup ‘coup le’ in Jan ‘82 and Feb ‘85 ‘85 which we know co mpleted t he first first zig za g – therefore,through theref ore,through deduction, if the second zig zag decli decline ne is not completing compl eting a double formation, formation, it can only be part of a more complex complex pat tern for cycle wave X. If so, so, then a n ew lower low to 251 251.70 .70 (below Jan ‘82 and Feb ‘85 ‘85)) will will become an ‘expanding’ ‘expanding’ B wave w ithi ithin n such a pa ttern – see fig 3. This must now b e tested. B waves tha t move into new pri price ce territory territory commonly extend by either fib.23.6%or fib.23.6%or by fib. 38 38.2 .2%– %– but no t usually by fib. 61.8 61.8% %. And so b y extend ing w ave A by fib. 23.6 23.6% %, the ca lcul lculat at ion coincides coinci des exact ly at 25 251. 1.70 70 + /- formi forming ng tw o rat ios into proportion at this fixed fix ed price level (red (red an d b lack lines lines coincide). A valuab le insigh insigh t from t his last calculat calculat ion is achieved achieved – this proof of a n expanding B wave e li liminates minates the probab il ility ity of go ld completing supersuper-cycl cyclee w ave IV at 251 251.7 .70,a 0,a nd

MARKETTECHNICIAN

3

Figure 3

ta ken from from th e original forecast forecast in May May 2000. 2000. In this count, the a dvance from 251.70 251.70 is is Primary wa ve C w ithin a contract ing/ ing/symmetrical symmetrical type triangle. Target s tow ards 423.80 423.80 were calculated b ecause w ithin such a pattern, there is a common ratio relationshi relationship p bet ween w aves A and C – wh ere wa ve C unfolds to a fib.100%equality ratio of w ave A – but especiallyy since w ave B o nly extende d w ave A by fib. 23. especiall 23.6% 6%. Other fib. ratios may b e used if wave B were extend ing by fib. 38. 38.2%or 2%or greater.

Figure 5

combining this with th e doub ts raised earlier earlier in in fig 1,t he proba bili bility ty tha t wa ve IV IV remains in in progress can no w be con sider sidered ed high. The inserted chart, ag ain from the tuto ri rial al archive archive show s these fib. calculations unfolding within a n expa nding flat p at tern, A-BB-C,3-3 C,3-3--5.That mean s the ad vance from 251.70 251.70 is wave C of this sequence a nd must subdivide into a five wave impulse patt ern. A very interesting interesting observation is now mad e – if this this ongo ing patt ern is is an expanding flat, then Primary w ave A is itself itself an expa nding flat (see remarks made regarding fig 2) of Intermediate deg ree.The fracta l implications implications of t his are signifi significant cant b ecause we have an expanding flat within a larger degree expanding flat – know n a s self-simi self-similari larity.T ty.The he q uestion no w raised is this – how common is itit for an expanding flat pat tern to conta in another self-simi selfsimilar lar pat tern in t he po sition of w ave A? The a nswer is th at it is uncommo n, but no t rare (wh (wh ich will will be discussed discussed later). later).

Figure 4

Looking further ahea d, should a cont racting/ racting/symmetrical symmetrical triang triang le eventually unfold as cycle wave X,then the second cycle degree zig zag can be ca lcul lculate ate d to complete to wa rds 177. 177.80 80 whe re a fib. fib. 100 100%equa %equa li lity ty ratio is app li lied ed from t he extremity o f the triangle (top o f w ave A) A). This relationship is quite common – it allows the second zig zag to unfold uniformly by incorporating the corrective sequence – something that could not be ca lcul lculate ate d in the ‘alternat ‘alternat e’ count o f fig fig 2. This works in the same w ay w here here,, for example,a example,a n impulse impulse wave d oes not reach its measured target, but the foll following owing corr correction ection unfolds unfolds w ith an expanding B wave t hat trades into a new pri price ce extreme extreme at the original measured measured target – in in other wo rds,the B w ave of the correction correction compensates by trading at the intended ta rget of the preceding impuls impulsee wa ve. At t he original time of pub li lishing shing th e ta rgets for w ave C tow ards 423.80, 423.80, the price price of g old wa s still still trading trading at around 276.0 276.00 0 – a long wa y aw ay.But as go ld began t o move closer closer to this target late last last year,it became imperative to a scertain the exact t ermination level.The 423.80 423.80 ta rget for wa ve C was ca lc lcul ulated ated by eq uating it to wa ve A (see above),but actually actually,, wa ve A unfol unfolded ded a s an expanding fl flat at pattern in its own ri right ght – so which part o f A wa s used to mea sure targets for wa ve C? Referr eferring ing ag ain to fig 5, we ca n see highlighted highlighted in red, red, the measure used was from beg inni inning ng to end o f the expanding flat – from 296.7 296.755-499 499.75 .75.. So wha t oth er possibilities possibili ties are t here? There are fo ur in all,t he first w e ca lcul lculate ate d a lr lread ead y, the ot her three three are by measuring measuring ea ch of the w aves within the expand ing flat – namely,w aves A,B A,B and C.

Figure 6 What ta rgets a re likel likelyy for Primary wa ve C of cycle wa ve X of the expanding flat? In In fig 4 we c an se e an ot her foreca st from WaveT WaveTrack in October 1999 1999 which which w as t he ‘pref ‘preferenti erential’count al’count at the t ime.It shows a fib. fi b. 10 100% 0%equality equality betw een the extensions of wa ve B and C of t he expanding flat flat pa ttern so that w ave C targets are projec projected ted tow ards 568.6 56 8.65. 5. This price price level coincides w ith a fib.61.8 retracemen retracemen t calculation of the preceding de cli cline ne for the first first cycle degree zig zag, ag ain forming two ratios into proportion and significantly increasing the probability of price pri ce follow follow ing this harmon ic path. Going a li little ttle further,if prices prices eventually complete this expanding flat for cycle wa ve X at 568.75, 568.75, and t he second cycle deg ree zig zig zag declines afterwards, then usi using ng a fi fib. b. 10 100% 0%equality equality ratio from the fi firs rst, t, proj projects ects the secon d to complete a t a price level level of 198.7 198.75 5 – and this area moves to t he top range of ‘fourth ‘fourth w ave preceding preceding deg ree ree’’ – considered considered a minimum mini mum requirement (fig 1). Earli arlier er we ment ioned a pplying the ha rmonic matrix of ratio ratio a nd proportion proporti on to d etermi etermine ne the correct correct wa ve count between t wo possibilities – what other count can be considered? A B wave that moves price pri ce into a new extreme is not excl exclusiv usively ely part of a n expand ing flat pattern. Another patt ern that contains the same is the triangle triangle (seefi fig g 5)

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MARKETTECHNICIAN

Two of the t hree remaining remaining w ere calculate calculate d. In fig 6 we ha ve used a fib. 100%equa 100 %equa li lity ty ratio of wa ve (B) (B) of the expand ing flat, giving a ta rget for Primary Pri mary w ave C t ow ards 450.95.A 450.95.Also,m lso,m easuring just w ave (A) (A) produces produces a slight sli ght ly lower ta rget tow ards 431.90 431.90 – see original original ca lcul lculat at ion in Feb.‘03 Feb.‘03 in fig 7.


Figure 7

pat tern do wn from the 431 431.38 .38 high. The first is shown infig 10 as an expanding flat . In order to valida valida te this, minuette w ave [b] [b] must itself be labelled subdividing subdividing into a n expanding flat o f smaller smaller,, or sub-minuette sub-minuette deg ree.This is is important beca use we refer back to the o pening remarks ab out ‘rarity’ ‘rarity’ of pat tern. Earli arlier er,, we e xamined self-simi self-similari larity ty w here an expanding flat unfolded in the A wave position of a larger expanding flat – an uncommon event.But in this case,we find ourselves considering an expanding flat in the B wa ve position – now t his is is seen as a ‘rare’ ‘rare’ event and it must be taken into context of evaluating probabilities.

Figure 10

And so t he next q uestion a ri rises ses – which one is correct? To a scerta in this,w e must look at the subd ivi ivisi sions ons o f the adva nce from 251.7 251.70.If 0.If primary primary w ave C is is really unfolding in the a dva nce from 251.70 251.70,, then it must subd ivi ivide de into an Intermediate Intermediate d egree zig zig zag , or multipl multiplee variation. variation. In fig 8, this (A)(B) B)--(C) C),, 55-33-5 5 zig zag is show n a lr lread ead y reaching its price targe t in Ja nuary 2004 20 04 – all that is left left to examine is the next lower d egree, the subd ivi ivision sion of minor wave v. of (C) (C) to en sur suree a fiv fivee w ave impulse impulse pat tern has completed – see fig 9. This however,seems incomplete.Minor incomplete.Minor w ave v. is shown as subdividing subdivi ding into only three wa ves of minute minute deg ree,w aves 4 and 5 are still still unfolding. This must therefore allow Primary wa ve C the cha nce of unfolding unfoldi ng beyond the 431.90 431.90 target, tow ards the higher area a t 450.95 450.95?? In In this chart,w e have highlighted highlighted the point o f ‘overl overlap’ ap’ of minute wave 1 at 375.25 because wave 4 must complete above this level in order to allow wa ve 5 to prog prog ress into a new higher high. high.

Figure 8

The second w ay to co unt this pat tern is labeling the comp letion of minute wa ve 4 at 387.48 387.48 and wa ve 5 at the slightly higher high at 432 432.60 .60 – see fig 11. The problem w ith this count is that wa ve 4 must be labelled as subdividing subdividing into a double zig zag in minuette minuette deg ree and it is clear clear that the terminating terminating level of the second second zig zag did not meet any fib. ratio relat relat ionships.For example, it did not equa te to the first, neither did 387.4 38 7.48 8 complete at a fib.suppo rt level of the a dvan ce in preceding preceding minute wave 3.

Figure 11

Figure 9

At t his junctur juncture,t e,t he tw o competing counts are at least balanced for consideration.On consi deration.On the one ha nd, a rare B wa ve of an expanding flat flat subdivides subdiv ides into into a small smaller er pattern of the same, and alternati alternativel vely,a y,a double zigg za g d oes not conform to the commonly established zi established ratio relat rel at ionships found in such patterns. The only w ay to differ differentiate entiate betw een the two w ould be to see in in which pattern sequence the ad vance unfolds into, counting from t he current low low at 377.20.A 377.20.A five five wa ve impulse impulse advance trad ing beyon d ‘fourth ‘fourth wa ve preceding preceding de gree’, above 399.75 (27th April) would confirm minute wave 5 in progress with new higher highs highs o bta inable inable.. Alter lternativel natively,any y,any three wa ve advance to the same area w ould revert revert the count labeli labeling ng the conclusion conclusion of wa ve 5 at the current h igh o f 432.60 432.60 (1st (1st April) April)..

Now examinat ion of minute w ave 4 is necessary. So far,t he price is is maintained abo ve the overlap, overlap, but t he entire entire sequence of t his pattern is is very complex complex.. It seems that there are two viable wa ys to count the


What foll followed owed wa s a three wa ve advance to 39 395. 5.88 88 and a nother decline decline to b elow 377.20.In 377.20.In fig 12, the fifth wave o f the decline decline from the high a t 432.6 43 2.60 0 is is show n unfolding into a n uncommo n ending -expand ing diagona l.But this is is not so impor important tant as the fact that this extra extra decline decline to a lower low, to 371 371.00 .00 broke broke th e ‘overlap’o ‘overlap’o f minute w ave 1 (375.2 (375.25) 5) – this

MARKETTECHNICIAN

5

Figure12

level show n earlier in fig fig 9. It confirms confirms the co nclusi nclusion on o f minute w ave 5 at 432.60 and with it,the termination of Primary wave C of the contract ing/ ing/symmetrical symmetrical triangle – see fig 13.

Figure 14

Figure 15

Figure13

Of course, course, the 432.60 432.60 high high ca n also be lab ell elled ed a s completing Intermediat e wa ve (3) (3) of Primary Primary w ave C as described ea rl rlier ier,, and so w e must return return to our original original query – the tw o counts, fi finely nely balanced at this point a nd und er consideration for cycle cycle wa ve X are either the contract ing/ ing/symmetrical symmetrical triang triang le or the expan ding flat. In order to differenti diff erentiate ate b etween these two, it will will be important important to calculate calculate t he amplitude decline from 432.60. Lets beg in with labelling labelling t he high a s Intermediat Intermediat e wa ve (3) (3) of C of the expanding flat scena ri rio. o. Wave (4) declines must remain a bove wa ve (1) (1)’s high a t 342.00 342.00 to avoid ‘overlap’ ‘overlap’, and so far, with a fiv fivee w ave impulse decline betw een 432.60 432.60--371 371.00 .00,, this must b e labelled minute w ave a of an o ngoing zi zigg za g decli decline ne for minor wave a. (assumi assuming ng a t ri riangle angle for wa ve (4) (4) will eventua ll llyy unfold). unfold). Usi Using ng t he tw o commo nly established fib. ratio measurements measurements to ca lc lcul ulate ate t he termination termination of the zi zigg zag , wave a is either multipli multiplied ed by fib. 10 100%r 0%rat at io and subt racted from w ave b to produce ta rgets for wa ve c to 341.8 341.80, 0, see fig 14, or extended by fib. 61.8%to 61.8 %to 337.4 337.40 0 – see fig 15. Both calculations o verl verlap ap wa ve (1) (1).T .The he o nly way ‘overlap’can be avoided is if a deeper retracement unfolds for minute minu te wa ve b,t hen measurements measurements applied applied as follows: follows: a fib.38.2% fib.38.2% retracement for wa ve (4) (4) is calculat calculat ed t o 352.70 352.70 – measure the a mplitude decline of minute wa ve a a nd a dd t o 352.70 352.70 (log (log sca le) – this produces a potential target for w ave b tow ards 410. 410.20 20 where where w aves a a nd c unfold to a fib. 100 100%equa %equa li lity ty rat io – see red line in fig fig 14.

It is now important to establish whether such an advance can be considered consider ed w hen examining examining t he unfolding unfolding pa ttern within minute wave b. Counting higher from from 371.00 371.00,, it appea rs a zig zag of minuette deg ree completed at 399.50 – see fig 16. And the following decline has also unfolded into a zig zag (note 100%ratio 100%ratio equa li lity) ty) and so can b e labelled labelled wa ve [x] [x] – itit completed a t the fi fib. b. 61 61.8 .8%r %retracement etracement lev level,forming el,forming tw o ratios into proportional harmony.Now if the w ave [x] [x] has completed at 381. 38 1.15 15 and the second zig zag unfolds to a fi fib. b. 10 100% 0%equa equa li lity ty ratio to the first, fir st, then t he ta rget for completion is towa rds 410. 410.40 40 – only 20 cents cents aw ay from our previous calculation, ag ain forming a n intricate ma trix of ‘clusters’ clusters’.

Figure 16

If wa ve b canno t retrace deeply insi inside de the decli decline ne of w ave a, it would significant signifi cant ly decrease the proba bili bility ty for this count to be correct, negat ing the expanding flat scenario. scenario. Onc Oncee overlap overlap occur occurs,t s,t he only medium-term mediumterm count remaining w il illl be the contract ing/ ing/symmetrical symmetrical triangle as c ycle wave X.

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The result o f go ld prices tra ding to w ard s the 410. 410.20/ 20/.40 level level w ill maintain the expanding flat flat pa ttern for wave X, X, at least for the time being.Even when prices decline following the completion of minute wa ve b it w il illl be only the ‘overlap’ ‘overlap’ level at 342 342.00 .00 tha t w il illl nega te it. As it currently curr ently does remain valid, valid, the ong oing forecasts for Intermediat Intermediat e, Primary Pri mary a nd Cycle Cycle deg ree can be seen in figs 17,18 17,18 and 19.

Figure 17

the 410. 410.20/ 20/.40 level as price p enet rat ion o f 342.00 342.00 (‘overlap’) (‘overlap’) is is expec ted as part of Primary Primary wa ve D.Neverthel D.Nevertheless,as ess,as we ha ve seen from from the shortterm pattern sequence, an a dvance tow ards this level level is is highly proba proba ble, and un der this count, labeled Intermediate w ave (B) (B) – see fig 20. The ongoing forecasts for Intermediate,Primary and Cycle degree are updated a ccor ccording ding to this count and can b e seen in in figs 21,22 21,22 and 23.

Figure 20

Figure 18 Figure 21

Figure 19 Figure 22

And a final return return to the co ntract ing/ ing/symmetrical symmetrical triang triang le scenario for cyclee w ave X. cycl X. For this count,it is not necessary for wave b to a dvance to


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7

Figure23

Bytes and a nd Pi Pieces eces By David Wa Wa tt s

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Summary To a ssi ssist st in the corr correct ect count ing of w ave seq uences,ratio a nd proportion have been co mbined to rev reveal eal the ha rmonic vibr vibration ation o f growt h in gold. Pri Prices ces move towa rds points of least least resistance resistance in that process, and the o rder of this grow th is revealed revealed in Ell Elliott iott ’s categorization of wave patterns,and the amplitudes are governed by the fib. summation series. series. Super-cycle wa ve IVis unfolding into a do uble zig zag – within this, Cycl Super-cycle Cyclee wa ve X has been show n as unfolding unfolding w ithin tw o possibilities possibilities,, an expanding flat, or a contracting/symmetric contracting/symmetrical al triang triang le.Both count s currently curr ently indicate th e proba bili bility ty o f declines during during the n ext several month s.The next decli decline ne w il illl ultimat ultimat ely determine w hich patt ern w il illl remain valid as bot h t arget s d iff iffer er.. A decli decline ne b elow 34 342.0 2.00 0 w il illl eliminate eliminate the expand ing flat pat tern as overlap will occur occur.. Pri Prices ces remaining remaining ab ove this level level during during the next t welve mont h period period w il illl weaken the contracting /symmetric symmetrical al t ri riang ang le count .

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Obituary Tim Bra in Tim wa s a t echnical analyst w ith the Abu Abu Dha bi

And finally...a finally...a glimpse into the distant future reveals something really insight insi ght ful – a forecast fo r a super-cycle super-cycle wa ve IVlow t ow ards t he 183.00 183.00 level lev el but then wave V unfoldi unfolding ng thereafter with ultimate ultimate targets t owa rds 1814. 18 14.00 00 – completion som etime a round t he yea r 2029 2029 – see fig 24. Hard to imagine?

Investment Authority’ uthority’ss Lond Lond on office and will be sorely sorel y missed by his colleag colleag ues, fri friends ends a nd fa mil mily. y. Tim came into te chnical analysis via via a route th at many members have travelled travelled – computers computers.. He wa s

Figure24

employed in the Computer Depa rtment of ADI ADIA A in Abu Dha bi but show ed a keen interest in technicial technicial an alysis. Tim joined ADIA ADIA Lond on in Jun e 1992 af ter recommend at ions from Mick ickey ey Bain, MSTA, who wa s the tec hnical a na lyst a t ADIA ADIA’s Head Office in Abu Abu Dhabi at the time, time, and w ho wa s succ succeeded eeded by the lat e Bron w en Woo Woo d, FS FST TA, in 1995. 1995. With his comput er ba ckground Tim Tim wa s qu ite a wizard w ith the various Datastream, Reuters and Bloomberg Bl oomberg systems. He wa s respected respected for his his analytical analytic al wo rk rk,, and spent many producti productive ve hours with his colleag colleag ues reviewing reviewing ma rk rkets. ets. Tim shared a com mon interest w ith many of o ur members as he wa s a w in ine e buff,collecting buff,collecting a mod est investmen inv estmen t in wines and Bordeaux wine futures – although it w as his ‘nose’rather tha n charts wh ich served served him w ell there!

“A lot of people see see thi ngs as they were, were, and say why, But I am dream ing of thi ngs that n eve everr have been, been, And say,‘why say,‘why no t’?” Peter Goodburn i s Senior Senior Consultan Consultan t to Wave WaveT Track Internati onal that prod uces regula r Elli Elli ott Wave price forecasts for Fixed Fixed Income, Sto ck Index, FX and Comm odit y pro ducts.info @wavenetonline.c wavenetonline.com om

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MARKETTECHNICIAN

Tim passed a wa y unexpected ly ly,, on 8th J une 2004 2004 and is surv surviv ived ed b y his wife wife Debb ie a nd teena ge children Mark &N &Nat alie.


Wyck ycko o ff la la w s and a nd t est estss By Dr Dr.. Hank Pruden a nd Dr.Berna rd Belleta Belleta nte Wyck yckoff off is a name g aining celebrity status in the w orld of technical ana lysi lysiss and tra ding. Richard D. D. Wyck yckoff, off, the ma n, wo rk rked ed in New New York York City Ci ty d uri uring ng a “golden a ge” for technical technical ana lys lysis is that exi existed sted d uri uring ng the early decade s of the 20th Century.Wyck Century.Wyckoff off wa s a cont emporary of Edwin Lefevré who wrote The Remin Remin isce iscences nces of A Stock Operat or. Like Lefevré, Wyck yckoff off wa s a keen observer and reporter who codified the be st practices practi ces of the celebrated celebrated stock and commodity operators of tha t era. The results o f Richard Richard Wyckoff’s Wyckoff’s effort b eca me know n a s the Wyckoff Wyckoff Metho d of Techn ical Ana Ana lysis and Sto ck Speculat ion. Wyck yckoff off is a practical, straight fo rwa rd bar chart and point-and-fi point-and-figure gure chart pat tern recognition recognition method that, si since nce the foundin foundingg of the Wyck Wyckoff off and Associates ed ucationa l enterprise enterprise in the early 1930’ 1930’s, s , has sto od t he test of t ime ime..

divergencies signalled b y t he Optimism Pessimism Pessimism (on-balanced-volume) Index. These e xpress xpressions ions o f positive divergence in late 200 2002 2 an d early 2003 showed the Law of Effort (volume) versus Result (price) in action. Those d iver ivergen gen ces reveal an exha ustion in supply and the rising dominance of demand or accumulation. accumulation. The bullish price trend during 2003 wa s confirmed b y the st eep ly rising rising OBV OB V index index;; accumul accumulation ation d uri uring ng the t rading range continued upwa rd as the price rose in 2003 2003.T .Tog ether the Law s of Supply and Dem and and Effort vs. Result revealed a po werful bull market market und erwa y.

Chart 1

Around 1990, 1990, afte r ten yea rs of trial-and trial-and -error with a variety of t echnical ana lysi lysiss systems and approa ches, the Wyck Wyckoff off Metho Metho d beca me the ma insta y of The Gra dua te Cert ificate in Techn ical Market Market Analysis at Golden G ate Univ Universi ersity ty in San Francisco,Californi rancisco,California, a, U.S U.S.A .A.. Duri During ng the p ast decade d ozens of Golden Gate g raduates have g one on t o successful successfully ly apply the Wyck Wyckoff off Metho Metho d to futures,e quities, fix fixed ed income a nd foreign exchang e markets using using a range o f time frames. frames. In 200 2002 2 Mr Mr. David Penn, in a Technical Ana lysis of Sto Sto cks and Comm odi ti es m ag azine article mag article named Richard D.W D.Wyckoff yckoff o ne of th e five “Titan “Titan s o f Techn ical Ana Ana lysis.” The Wyck yckoff off Metho Metho d ha s withsto od t he test o f time. Nonet heless,t his article proposes to subject the Wyck Wyckoff off Method t o t he further challenge of real-timereal-time-test test und er the nat ural lab lab orato ry conditions of the current U.S.. Stock market. U.S market. To set up t his “test,” three funda menta l law law s of the Wyck yckoff off Method will be defined a nd a ppli pplied. ed.

THREE WYCKOFF LAW LAWS The Wyck Wyckoff off Method is a scho ol of tho ught in technical Market Market ana lysi lysiss tha t necessitat es judg judg ment. Althoug h the Wyck Wyckoff off Metho Metho d is not a mechan ical system per se,n evertheless high rewa rd/low risk oppo rtunities can be routinely and systema ticall ticallyy based on w hat Wyck Wyckoff off identified as three fund amen ta l laws (see Tab le 1): 1):

Table 1 1. The Law Law of Supply Supply and Demand – states that w hen demand is great er than supply,prices will will rise,a rise,a nd w hen supply is is greate r tha n dema nd, pri prices ces will fall. Here the analyst studies the relationship between supply vs. demand usi using ng price price and volu volume me over time time as found o n a b ar chart. 2. The Law o f Effort Effort vs. Results – divergencies divergencies an d d isharmonies between vol volume ume and price price often presage a change in the direction of t he price t rend. The Wyckoff Wyckoff “Optimism vs. Pessimism” index is an o nn-ba ba lancedlanced-volume volume type indicator helpful for identifying accumulation vs.distribution and gauging effort.

Chart 2

3. The Law Law of Cause and Effec ffectt – postulates tha t in order to have a n effect, effec t, you must first first have a cause, and t hat effe effect ct w il illl be in proportion to the cause. This law law ’s operation ca n be seen working as the force of accumulation or distribution within a trading range w ork orkss itself itself out in in the subsequent move out of tha t trading range. Point and figure figure chart counts can be used to measure this cause and project the extent of its effect.

Past: st:position position of the U.S. stoc stock k marke arkett in 2003 2003 – Bullish Charts 1 a nd 2 show the application o f the Three Three Wyck Wyckoff off Laws t o U.S. Stocks during during 200 20022-200 2003. 3. Chart 1, a b ar chart , show s the d ecli ecline ne in price price during 20012001-02,a 02,a n inverse inverse hea d a nd – shoulders ba se formed during 2002200 2-200 2003 3 and the sta rt o f a new bull market during March-June March-June 2003. 2003. The upw ard trend reversal defined by the Law o f Supply Supply vs.Dema nd, exhibited exhi bited in the lower part of the chart, wa s presag presag ed by t he positive positive


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9

The“Nin Nine e Classic Buying Buying Tests”o ests”off the the Wyckof yckofff method The classic se t of “Nine Classic Buying Test s” (and “Nine Selling Tests” ) wa s designed to d iagno se significant significant rever reversal sal formations: the “Nine “Nine Classic Classic Buying Buyi ng Tests” define t he eme rgence o f a new bull trend (See Tab le 2). 2). A new bull trend emerges out of a base t hat forms after a signifi significant cant price price decline.(The “Nine “Nine Selling Selling Tests” help define t he o nset of a bea r trend o ut of to p format ion following a signifi significant cant ad vance.) These nine classic tests of Wyck yckoff off are logical, time tested , and rel reliable. iable. As the rea der a pproa ches t his case o f “Ni “Nine ne Classic Buying Tests,” he/ he/she she ought to keep in mind mind the foll following owing admo niti nitions ons from the Reminiscences of a Stock Operator (See Appendix):

Table 2 Wyckoff Buying Buying Tests: ests:Nine Nine Classic Tests for Accumulation Accumulation Nine Buying Buying Tests (applied to an averag e o r a st ock after a decline) decline)**

Indication:

Determined From:

1) Do Do w n si sid e p ri ric e o b je je ct ct iv iv e a c co co m pl plis he he d

Fig u re re Ch a rt rt

2) P Prre lilim in in ar ary su p p or ort , se se llllin g clim ax ax, secondary test

Ve rt rt ic ic a l a nd nd Fig ur ure

3) Activity bullish (volume increase s on rallies and decreases on reactions)

Vertica l

4) Dow nw ard stride broken (i.e.,s upply line penetrated)

Vertica l or Figure

5) Hig h e r s up p o rt s (d a ily lo w )

Ve rt ica l o r Fig ure

6) Hi Hig h er er t op op s (d a ilily h ig ig h p ri rice s ris in in g )

Ve rt rt ic ic al al o r Fig ur ure

7) Stock strong er tha n the market (i. i.e., e., stock more responsive on rallies rallies and more resista resista nt to reactions than the ma rk rket et index)

Vertical Chart

8) Ba Ba se se fo rm rm in g (h (h o ri rizo nt nt al al p rice lin e )

Fig ur ure Ch a rt rt

9) Estimated upside upside profit pot ential is at least three thr ee times times the loss loss ifif protec protecti tive ve stop stop is is hit hit

Figure Chart for Profi Pr ofitt Object Objectiive

* Adapted with m odificatio ns from Jack Jack K.Hut K.Hut son,Editor,Chartin g the Market: (Technical echnical Analysis,In Analysis,In c. c.,, Seattle,Washingto n, 1986),page 87. The Wyckoff Meth od (T

“The averag e ticker ticker hound – or, or, as they used t o call him, him, ta pew orm – goes wrong, I suspect,a suspect,a s much from overspeci overspeciali alization zation as fr from om a nything else.It mean s a highly expensive expensive inelasticity.A inelasticity.After fter all, all, the g ame o f speculation isn’t isn’t all mathema tics or set rules, rules, how ever rigid rigid the main laws may be. Even in in my tape reading something enters that is more than mere arithmetic.There is wh at I call the beha vior of a stock,a ctions tha t enable you to judge w hether or not it is going to proceed in accordance with the precedents that your observation observation has no ted. If a stock doesn’t doesn’t act right do n’ n’tt to uch it;b ecause,b eing unable to tell prec precis isely ely what is wrong, you cannot tell which which wa y it is is going. No diagno si sis,no s,no prognosis prognosis.. No progno sis sis,, no profit. “This experience experience has be en the experience of so ma ny trade rs so many times that I can give this rul rule: e: In a narrow market,w hen prices prices are not gett ing anywhere to speak of but move within a na rr rrow ow range, there is is no sense in trying tryi ng to antici anticipate pate w hat t he next big movement is going to be – up or dow n.The thing to d o is to wa tch the market,read the t ape to determi determine ne the limits limits of the g etet-nowhere nowhere prices,and prices,and make up your mind mind t hat you will not take an interest until the price breaks through the limit in either direction.A speculator must concern himself with making money out of the market mark et and not w ith insi insisting sting that t he tape must a gree with him. “Therefore, the t hing to d etermine is the specula tive line line of least resistance at the moment o f trading; trading; and w hat he should wait for is is the moment when t hat li line ne defines itself itself,, because tha t is his his signa signa l to get busy. busy.”” Point 4 on the ch art s ident ifi ifies es the juncture w hen a ll Nine Wyckoff Buying Buying Tests w ere passed. The pa ssage of a ll nine tests confirmed tha t a n uptrending

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MARKETTECHNICIAN

or ma rk rkup up pha se ha d be gu n. The pa ssag e of all Nine Nine Buying Tests determined that the speculative line of least resistance was to the upside.

Future:A Future: A market market test in 2004 The auth ors as acad emics are intri intrigued gued b y the nat ural lab lab orato ry cond itions of the stock market. market. A prediction study is the sine sine q uo non o f a g ood laborat ory experiment. The Wyck Wyckoff off Law Law of Cause a nd Effect Effect seemed to us to provide an unusually fine instrument of conducting such an exper experiment,a iment,a “forwa rd test.” Parentheti Parentheticall cally,it y,it ha s been our feeling, feeling, shared by a cademics in in g eneral eneral,, that techni technici cians ans have focused to o heavilyy upon “b acktes heavil acktesting” ting” and not suff suffic icientl ientlyy upon real experimenta experi menta tion. The time series series and metric nature of the m arket dat a allow all ow for “forward “forward testing.”F testing.”Forwa orwa rd testing necess necessitates itates prediction, prediction, followed foll owed by the empir empiric ical al test of t he prediction prediction with ma rk rket et da ta that tell wha t actually happened. How fa r will this bull market rise? Wyckoff used th e Law Law of Cause a nd Effect and t he Pointand- figure figure chart chart to answ er the question of “how far.” far.” Usi Using ng the In Invers versee Head-and-Shoul Head-and-Shoulders ders formation a s the ba se of accumulation from which to take a measurement, of the “cause” “cause” buil builtt during the accumula tion pha se, the po intint-and and -figure chart (Chart (Chart #2) indicates 72 boxes between the right inverse-shoulder and the left inverse-shoulder. Each b ox has a va lue of 100 Dow points.Hence,t he point-and-fi point-and-figure gure chart reveals a ba se of accum ulation for a po tent ial rise rise of 7,200 7,200 points. When add ed to the low of 7,200 7,200 the price price projects projects upwa rd to 14,400 14,400.. Henc Hence, e, the expectation is for the Dow Industrials to continue to rise to 14,400 before the onset o f distribution distribution and the commencement of the next bea r market. market. If the Dow during 2004-200 2004-2005 5 comes w ithin + or - 10% 10%of of th e projected 7,200 7,2 00 points we w il illl accept t he prediction as ha vi ving ng been positi positive. ve.

Conclusions In summary,U.S.eq uities are in a bull market market w ith a pot ential to rise to Dow Jones 14,400.T 14,400.The a nticipation is for the cont inuance of t his pow erful bull market in the Dow Industrial Average Average of th e U.S.A U.S.A. throug h 2004.T 200 4.This market forecast is the “test ” to wh ich the Wyck Wyckoff off Method of Techn ical Ana Ana lysis is being subject ed. Part (B (B)) of “W “Wyckoff yckoff Law Law s: A Mark Market et Test ” w ill be a rep ort in yea r 2005 2005 ab out “What “What Actua ll llyy Happened.” As with classical laborat ory experiments, experi ments, the results will be recorded, interpreted and appraised. This seq uel will invite invite a cri critical tical app raisal of th e Wyck Wyckoff off Laws a nd in particular a cri critical tical ap praisal of t he Wyck Wyckoff off Law of Effort Effort vs. Result.T esult.The he q uality of the a utho r’ r’ss application o f the Wyck Wyckoff off Law Law s will also und ergo a cri critique. tique. From these investigations a nd a ppraisals,w e shall strive strive to extract lessons for the improvement of techn ical market market a nalyses. Ir Irrespective respective of the outcomes of t his marke markett test, we a re confident confident t hat t he appreciation appreciation of t he Wyckoff Wyckoff Meth Meth od of Techn ical Market Market Ana Ana lysis will ad van ce an d th at the stat ure of Mr. Mr. Richard D. Wyck yckoff off w il illl not dimini diminish. sh. Dr. Hank Pruden Dr. Pruden is a professor in the Schoo l of Business Business at Golden Ga te Universi Univ ersity ty in Sa n Francisco, Francisco, Cali California fornia an d a visi visiting ting professor at EURO EU ROME MED-M D-MA ARSE RSEIL ILL LE Ecole Ecole de Mana g em ent , Marseille, Fran ce. Dr. Bernard Belletant Dr. Belletant e is a Professor of Finance Finance a nd Dea n of t he EuromedEuromedMarseill Marsei llee Ecole Ecole d e Mana gem ent.

References Fort e, Jim, CM CMT T,“A ,“Ana na to my o f a Trading Ran ge,” Market Techn icians Associa tion J ourna l,” Summer-F Summer-Fall all 1994. 1994. Hutson , Ja ck K., Edito r,Cha rting The The Market: The Wyckoff Wyckoff Meth Meth od, Techn ical Ana lysis,Inc., 1986 1986.. Lefervé, Edw in, Reminiscence s of a Stock Opera Opera to r, Wiley Press (origina (origina l, Dora n &Co, 1923 1923)). Penn , David, “T “The he Titan Titan s o f Techn ical Analysis,”Techn ical Analysis of Stock &Commo &C ommo dities,Octo ber,2002. Prud en , Henry (Hank) O.,“ O.,“ Wyckof f Test s: Ni Nine ne Clas sic Test s For For Accumula tion ; Ni Nine ne New Tests for Re-accu Re-accu mulat ion,” Mark Market et Techn icians Associa tion Jo urnal, Spring- Summer 2001. 2001. Prud en , Henry (H (Han an k) O.,“A Test of Wyckoff,” Wyckoff,” The Tech nica l Ana Ana lyst, Feb ruary 2004 2004.. Chart s, court esy of Wyckoff/ Wyckoff/Stock Market Market Instit ute, 1360 13601 1 N. N. 19th Avenue Avenue 1, Pho enix, Arizona , U.S. U.S.A A. 8502 850299-1672 1672..


Ma rket Pr Pro o fi fille – a t ra d ing pe perrspe spect ctiive By David Knap Knap p In th is article article I ana lyse two recent ma rk rket et p rofi rofile le distributions distributions – the Septembe r 8th to Septembe r 22nd 22nd US ten year no te fut ure (TYZ4 Z4)) and the S&P 500 future (SPZ4) (SPZ4) from August 13t h to Septe mbe r 22nd. I aim to show how markets distribute over time and how price objectives and stops ca n be emp loyed to creat e profitable risk/ risk/rewa rd scenarios. Strategies discussed discussed include include the importance of t he longest li line ne as a n average cost mechanism,how that influences positions and consequently prices; pri ces; and the concept o f building building value and its importance in staying with a t rade to its ultimat ultimat e conclusion. conclusion. The first cha rt sho w s a co mbine d ma rk rket et p rofile for TYZ4 from Sept 8 to Sept 22. 22. It is a goo d example of an unbalanced up market market that organises itself into into a b ell shaped curve,a normal distribution over time. This is is an almost complete distri distribution bution because it has a low,a high and a midpoint. The market is an order seeking seeking m echan ism where price price moves to determine determi ne a level that is too high, too low and a lev level el in in betw een, where buyers and sell sellers ers are more in equilibrium. equilibrium. Pri Price ce is said to ‘distri ‘distribute’ bute’ as it moves to discover these levels. levels.

Chart 1 Open: 111111-13 13 Last Last : 113113-11 11 High High : 113113-16 16 Low Low : 111111-09 09

This up ma rket has almost met the target of the distribution. The target can be ascertained by measuring measuri ng where the top of the distribution would have to be, to ma ke the midpointt and the poin longest line the same i.e.(longest line-midpoint) x 2 + hi high gh , which in this case is: (112-15 – 112-12++ ) x 2 + 112-12 113-16 = 113-21 113-21..

The next cha rt breaks dow n this same d istri istribution bution into indivi individua dua l days so we ca n see the dynamic involv involved ed in the d ail ailyy bat tle between buyer buyerss and sellers. sell ers. From this we ca n see the d ecisi ecision on ma ki king ng p rocess involved involved in finding location for a trade. Day 1 on the left (lab (lab ell elled ed 9/8 at the b ott om o f the cha rt) sta rts the distribution with a powerful surge higher -a rally that starts with the C period buy extreme and b ecomes a t rend day up. This signifies signifies an imbalance o f buyers versus sell sellers ers and t ypicall ypicallyy closes near the high. This is our signal signal to g o long. The ne xt five da ys (9/ (9/9 to 9/15) 9/15) are ra ng e tra ding da ys, all building uncha ng ed b ut hig her value (112(112-06 06 to 112-18) 112-18).. This highe r value is important because it puts the shorts from the first day of this distribution under increasing pressur pressure. e. It is possible from this early point to predict the 113-21 113-21 target, beca use all the volume is concentrated near the high of the developing distribution distri bution so t he d istri istribution bution is incomplete incomplete t o t he upside (low (low :11 :1111-08 08 high :112 :112--24 long est li line: ne: 112112-15) 15)..

Now look what happens next :On 9/ 9/16 the ma rk rket et ha s anot her powerful up day, breaking the rang e high, hi gh, distr distributi ibuting ng higher and closing closing nea r the high. So far so good – the next t wo da ys are a ga in rang e da ys but still building building UN UNCH CHA ANGE GED D TO HIGHE HI GHER R VALUE UE.. Value is still the key here, beca use it is this tha t puts pressure pressu re on the shorts’ average co st. Remember Steidylmeyer’ Steidylmeyer’ss original original formulaa : Pri formul Price ce x Time = Volume. Value is creat creat ed o ut o f the volume traded a t a price. price. (On the day profiles profiles abo ve,va lue is repr represented esented by the vertical vertic al line line to the ri right ght of th e profiles profiles – 2/3r 3rds ds o f the activity for tha t d ay). 9/21 is is an interesting d ay b ecause it builds unchang ed value for most of the time,then attempts t o break down in J period period but finds strong strong responsive responsi ve buying a nd reverses higher higher t o close a t a high. The ma rk rket et is still positive and value o n 9/22 is higher still – show ing o ur 113113-21 objective as still valid. Having achieved achieved location and rationale for for a trade, how d o we t hen manag e the risk risk?? How do w e know know w hen we’re wron g? Not all distributions distributions continue to meet their targets. They can and do fa il il.. The most important element in this risk management decision is the timeframe.

Chart 2


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Chart 3

The parameters for the trade – the location,the target and the stop – must all be in the same t imef imeframe rame for the trade to make sense. Here is a chart that fails to follow through and distribute to its target. The SPZ4 rally rally from Aug Aug ust 13th b eco mes to p hea vy bet ween 112 1120 0 and 1130 and fails to t he upside wh en it brea ks 1120.5 1120.5 wh ere th e TPO (time (time p rice oppo rtunit ies) count is roughly eq ual. (251 2517 7 TPOs ab ove t he line and 235 2354 4 below).. The ta rget for the distr below) distributi ibution on w as: (1125(11 25-1097) 1097) x 2 + 1132 = 1188 but b reak reaking ing below 11 1120 20.5 .5 has the a ver verag ag e long trader under pressure pressure on their positions. A move ba ck to th e 1097 mid-point might be necessary to balance out the bad positions in this profile profile distribution. distribution. Any long po sitions should be li liquida quida ted on t he brea k of the TPO point. By analysing analysing distr distributi ibutions ons in the same t imef imeframe,w rame,w atching the ba ttle betw een buyers and sellers sellers unfold unfold and monitoring value as the d istri istribution bution d evelops, it is is possible to create profitab profitab le trading trading strateg ies that achieve good entry and exit points. There are other fact ors influencing influencing th e market. There are medium and longer term distributions at work as well as short term ones. But,if you can identify identify the timeframe timeframe for your trading horizon and fit your parameters for the trade to that distr distributi ibution, on, then ma rk rket et profile profile becomes a very powerful analytical tool. David Knapp [email protected]

Acknowledgement The a utho r would li like ke to th ank Peter Steidlymeyer for the original concept b ehind th is article, article, Joe Musolino Musolino o f ABN ABN NY for his ad vanced profil profilee t heories and CQ CQG G for t heir excellent excel lent Market Market Profile softwa re,t o.

IFTA Co Con n fe re ren n ce IFTA’s Annu a l Con IFT Con ferenc e ho ste d b y AE AEATin Madrid w as c on side red b y all those who attended to have been a great success. success. Ov Over er 200 200 delegat es atten ded from all over the w orld to hear presentations from a large numbe r of highly highly respected technical analysts and traders. Included amo ngst the spea ker kerss were, John Murphy, Murphy, Br Bruno uno Estier Estier,, John Bollinger Boll inger,, Marti Martin n Pri Pring, ng, Hi Hiroshi roshi Okamo Okamo to, Regina Meani, Jorge Boli Bolivar var,, Trevor Neil Neil,, Ralph Acampora Acampora and Matt hieu Gilbert. Gilbert. In to tal t here were over 20 presentations ma de a nd a ful fulll list list of all the speakers can can b e found on the Spanish Spanish society’s society’s web si site te w ww.aeat onli online. ne.com. com. In addition to these formal formal presentations,delegates presentations,delegates ha d t he opportunity to meet fa ce to face w ith their coll colleag eag ues from from throug hout th e world to exchange ideas and share thoughts on current markets and techniques. Apart fro m running a n excellent excellent a na lytical conference, AEATalso ma de suree the event proved extremel sur extremelyy popular from a social point of view with a large numbe r of excell excellent ent events and tours for bot h delegat es and their accompanying accompanying partners. partners. Many delegates also took full full adva nta ge o f Madrid’ Madrid’ss legendary reputat ion for fine fine food and nightlif nightlife. e. This was certa inl inlyy not a d ull conference for many of tho se att ending. The event culminated in a wo nderful gala d inner held held a t the Oper Operaa

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House in in Madrid; Madrid; where delega tes dined in palatial surroundings surroundings and were entert ained by several local opera singers. AEATdese rves hug e credit for org an ising a n o utst an ding IF IFT TA 2004 conference. The cha ll llenge enge now facing t he Canad ian Society,CSTA, is how to repea t this success in in 2005 2005 when t hey host the con ference in in Vanco uver in celebrat celebrat ion of their 20th year as an associat ion. We sugg est you b lock off your diaries diaries for the 3r 3rd d t o 5th of November 2005 2005 to b e in Vanco uver uver.. Now tha t th e Spanish have raised t he ba r, next yea r’ r’ss IF IFTA conference in Canad a is likely likely to b e a n extrao rdinari rdinarily ly successful successful event. The IFT IFTA executive bo ard of d ir irecto ecto rs also m et tog ethe r in Madrid. The STA is represented represented on t his boa rd by Ada Ada m Sorab and Si Simon mon Warren; Warren; wh o also cha irs IFT IFTA’s Finan Finan ce Com mitt ee. We a re plea sed to repo rt t ha t IFTA cont inues to g row a nd t hat techn ical analysis societies lik likee the STA cont inue to develop a ll over the wo rld. IF IFT TA’s finances rema in strong an d the IFT IFTA bo ard ag ain voted t o leave fees unchang ed for 2006.Oth 2006.Oth er key items items o n the IF IFT TA bo ard‚s a ge nda this year included upd at ing th e internationa inter nationa l accreditation accreditation program and method s to increase increase the exchange o f research research and ideas bet ween and among st IFT IFTA associates.


Market Technician No 51

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