asian stocks - technicalanalyst.co.uk6 0 0 2 may/june the publication for trading and investment...

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.technicalanalyst.co.uk wwwThe publication for trading and investment professionals

Asian Stocks Are the emerging markets in a bubble?

Point and figure strategies InterviewJeff Hochman discusses Fidelity’s Chart Room

Software CQG’s TradeFlow

Charts Time horizons and risk

reward ratios

© 2006 Clements Biss Economic Publications Limited. All rights reserved. Neither this publication nor any partof 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 Clements Biss EconomicPublications Limited. While the publisher believes that all information contained in this publication was correctat 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 othermaterial 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. Readersshould be aware that this publication is not intended to replace the need to obtain professional advice inrelation to any topic discussed.

CONTENTS 1 FEATURES

InterviewJeff Hochman at Fidelity in London takes us

inside Fidelity's Chart Room and explains thefund manager's approach to technical

asset allocation

EURUSDDollar decline to continue

John Noyce of Citigroup explains the technicalfactors behind the recent dollar decline and

presents a longer-term Fibonacci-based pro-jection for euro/dollar.

Elliott Waves Wave analysis is bullish the yenJeffrey Kennedy of Elliott Wave International

explains how traditional wave analysis supportsa bullish outlook for the Japanese yen.

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WELCOMEAsian stock markets in the emergent economies, notably China, have continued to

rally in May despite concerns that we may have entered a bubble scenario for thesemarkets. With the sharp sell off seen in other emerging regions, such as the Middle

East, we ask if technical factors point to a less bullish outlook for these Asian indicesfor the rest of the year.

Point and figure remains an undervalued charting technique despite its ability to filterout market noise and generate clear buy and sell signals. This edition also includes afeature demonstrating how specialised P&F software can generate risk reward ratios

that aid in developing an effective trading strategy.

We hope you enjoy this issue of the magazine.Matthew Clements, Editor

May/June 2006 THE TECHNICAL ANALYST 1

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INDUSTRY NEWS

MARKET VIEWS EURUSD: Potential target above 1.35 Bunds: Approaching major support area Cable: Bulls in control longer-term Asian equities: Are they in a bubble?

TECHNIQUES Elliott Wave and the yen The 4-week rule Time horizons and risk reward ratios Relative strength: Part 2 Pragmatic aspects of trading rectangles

INTERVIEWJeff Hochman

SUBJECT MATTERS Cycles and the Australian dollar

SOFTWARECQG: TradeFlow Charts

BOOK REVIEWDay Trading the Currency Market by Kathy Lien

COMMITMENTS OF TRADERS REPORTRECRUITMENT

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CONTENTS 2 REGULARS>

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Relative strength by Julius de Kempenaer

Kathy Lien of FXCMon trading strategies


4 THE TECHNICAL ANALYST May/June 2006

Industry News

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Market Views


EURUSD POTENTIAL TARGETS ABOVE 1.35 by John Noyce

Back in early 2005 we wrote anarticle for the Technical Analystdetailing that EURUSD

appeared to have formed a multi-month topping structure. Although nottaken as an immediate target, theextended target for the correction weexpected was the 200-week movingaverage. At the lows in November2005, EURUSD moved very close tothis ideal target, the 200-week MA thenstanding at 1.1448 (Figure 1.). Althoughthe low was slightly short of the idealtarget, in a correction which lasted for10½ months and moved 20.3 big fig-ures high to low, this is close enoughfor comfort. GBPUSD moved near tothe same target, the low in November2005 being 1.7047, when the 200-weekstood at 1.7043. USDCHF hit, andmoved very marginally beyond the tar-get in February 2006. The list goes onbut suffices to say the target was effec-tively reached on the majority ofG10/USD currency pairs.

Once the move to this corrective tar-get is in place it's time to watch priceaction and developments in correlatedmarkets to determine whether the mar-ket is likely to enter a period of consol-idation prior to a continuation of thecorrection (i.e. a move beyond the 200-

week), or reverse and continue thelonger-term underlying trend. Webelieve the price action seen since mov-ing to these targets on EURUSD andon correlated markets indicates thatthis is a case of the latter. EURUSDhas formed a significant base and islikely to move higher in line with theunderlying bull trend. Put another way,the USD bear-market seen during 2002,2003 and 2004 is likely resuming.

Another 76.4% retracement Our reason for believing this is as fol-lows. In terms of price action therehave been two key developments.Following the base at 1.1640 in midNovember 2005, EURUSD rallied to ahigh of 1.2325 in late January 2006. Itsubsequently retraced to a low of1.1826 in late February. The 76.4%retracement of the move from 1.1640to 1.2325 comes in at 1.1798. The lowat 1.1826 was extremely close to thislevel if taken in the context of a multi-week move. We know that EURUSDhas a track record of performing 76.4%retracements such as this as it formssignificant turns. The pattern's impor-tance is increased when it is formedagainst a "cycle extreme" as it was here.Good examples of such price action

are the base and subsequent rally in lateJanuary 2002 and the base and subse-quent resumption of a multi-year bullmarket in September 1989. To confirmthe 76.4% retracement is in place, theweek it was posted EURUSD complet-ed a bullish weekly reversal (tradedbelow the prior weeks low, closedabove the prior weeks high). This com-bination of patterns is rare and strongevidence that a significant base is inplace.

The question from here is "What isthe upside target"? When 76.4%retracements are formed, what we termas a 76.4% pivot is created. In terms ofa basing structure this is the initial cor-rective high against which the 76.4%retrace is formed. In this case theJanuary 2006 high at 1.2325. We take aweekly close above this level, which isnow confirmed, as confirmation that abase is in place and the market shouldresume its long-term uptrend. Initialresistance is formed by the Februaryand March 2005 lows at 1.2732 and1.2766 respectively. However, webelieve the potential target is signifi-cantly beyond here. Following past bas-ing structures such as this onEURUSD, the average size of the trendwhich follows is 12.35 big figures fromthe break point or 76.4% retracementpivot, in this case at 1.2325. This givesa potential target of 1.3560 (1.2325 +0.1235). The average period this movehas taken to complete is 10.6 weeks. Inapproximate terms this indicates theability for the market to obtain this tar-get by late June 2006.

John Noyce is technical analyst forCitigroup Foreign Exchange

Figure 1.


Market Views

Back in July last year I describedthe strong market top indicatorsfor Bund futures. The signals

were derived from two of TomDeMark's most widely used indicators:TD Combo and TD AggressiveCombo (TDAC). The situation com-pared well with the two previous bigtops in 1994 and 1999, and led me tothe conclusion that a similarly big downmove was on the cards. Regarding thedownside potential, I mentioned that"in the past, reactions to monthlyTDAC signals led the market backtowards the monthly TDST level. Thisis located at 114.19." The time framewas set at six to twelve months.

While the tops in 1994, 1999 and2005 had monthly TDAC signals incommon, the ensuing bear markets of1994 and 1999 bottomed out. Here wecan compare those situations with thecurrent market status.

Glossary: Buy (Sell) Setups are com-prised of 9 consecutive periods wherethe closing price is below (above) theclosing price four periods ago. Thehighest (lowest) point of a Buy (Sell)Setup is a resistance (support) levelcalled TDST line.

Current situationWith a weekly TD Combo 13/9 and adaily TD Combo 13 in place (Figure 1)it is highly likely that the market willbottom out above 114.19. The signalsin place resemble the 1994 and 1999bottom indicators and suggest that weshould see at least a 38.2-61.8% correc-tion of the last wave down. Thisimplies a move towards between 117.81and 119.66.

My assessment is that such a movehigher will be wave 4 of a 5-wave struc-

ture and that we shall see a final attackon 114.19 over the summer months.Since the Bund futures bull marketbegan in 1990 monthly TDST supportshave always contained the down moves.This stresses the long-term importance

of this level. It would imply a change oftides if it broke. For now it looks like itis going to hold.

Gordon Kolling is technical analystat Commerzbank in Frankfurt

BUNDS APPROACHING MAJOR SUPPORT AREA by Gordon Kolling

In 1994 the bear market• started at 101.46 • lasted 9 months • bottomed out at 87.65 • just above the monthly TDST of 86.55• had a perfected monthly Buy Setup• had a week ly 13/9 TD Combo Buy

signal right at the Low • had completed a 5 wave structure

In 1999 the bear market• started at 117.96• lasted 12 months• bottomed out at 101.85 • just above the monthly TDST of 101.28• had a perfected monthly Buy Setup• had a week ly 13/9 TD Combo Buy

signal right at the Low • had completed a 5 wave structure

1994/1999

Chart 1.

Figure 1.


Market Views

The GBP/USD market hasalready made some significantupside advances but this could

prove to be the midpoint of a largermove higher. Prices took off in analmost straight line after a period ofbase building that started at the end of2005 and went on until April this year.The upside break out that followedpierced the old 1.8512 barrier, whichimplies a major uptrend has taken hold.The way it looks now, the marketshould eventually work its way up pastthe major top at 1.9550.

Short-term outlookThat does not imply it will happensoon, or dramatically. The market isalready starting to cool off slightly anddip lower in what could prove a test ofthe 1.8512-1.8500 breakout area as newsupport. If that holds, meaning no dailyclose beneath it, then expect a newround of buying to start with room totest the last upside Fibonacci level at1.8955 (Figure 1). This is where a larg-er decline could occur though it might

prove limited to the 1.8512-1.8500 areabefore the upside resumes. Once1.8955 is dislodged then the bulls willfocus on 1.9217, 1.9325 and the crucial1.9550 level. These are all places wherea correction can be expected beforeprice finally fall.

Zooming in, a close under 1.8500 willbe the start of a correction phase withthe bears trying to take out the smalllow at 1.8336. It could easily give way,which would then call for a test of theformer 1.7935 break out level as newsupport. It should hold however andact as a springboard for a new bullishimpulse. But if that should fail to shoreup any eventual decline, then pricescould sink further to 1.7754, 1.7624and as far as the 1.7376. This though isnot the likely scenario at the moment.What is likely, given the current con-struction, is that any dip will be metwith fierce buying pressure. Sooner orlater the mentioned resistance levels(1.8955, 1.9217, 1.9325 and 1.9550)should be eliminated. This is alsounderscored by the overall dollar weak-

ness seen in the EUR, JPY and dollarindex futures charts.

Longer-term outlookLooking at the longer-term monthchart, (Figure 2) the last major declineto 1.7049 appears to have been a test ofthe old resistance as new support.Further, it coincides with the 38.2%Fibonacci level of the last up leg.Holding there was a general bullish sig-nal, and since then, the market has beentesting higher. Once the 1.9550 top istaken out then the bulls should set theirsights on the double top that formed at2.0115 back in the earlier 1990's.

Timing these moves is always a bittricky but history suggests that it couldtake 2-3 months to finally dislodge1.9550 and perhaps a month after thatto reach 2.0115. That is a massive bar-rier, so reaching it could be the catalystfor a sell-off to at least 1.9550 to testthat top as new support.

Steven Wesiak is technical analyst atABN Amro in Amsterdam

CABLE BULLS IN CONTROL LONGER-TERM by Steven Wesiak

Figure 1. Figure 2.


Market Views

ASIAN EQUITIESAre they in a bubble?


Market Views

The stock markets of the 'emerg-ing' major Asian economies,China, India and Indonesia

among them, have all seen their indicesappreciate by at least 20% over the pastsix months. Indeed, these markets havebeen in an uptrend for three years or sobut this trend has accelerated in recentmonths as buyer optimism continues tobe supported by positive fundamentalsand bullish press coverage. Moreover,investors following the trend have hadno reason to pull out despite themarked, but short lived, correctiontowards the end of last year.

The rallies in these markets contraststarkly with the turn around seen in theMiddle East markets. Saudi Arabia,Bahrain and the major market in theregion, Egypt, have all seen sharp sell-offs as the bubbles formed last yearfinally burst. In these countries, franticbuying by private investors did much toboost the prices of indices, many of

which are almost completely dominat-ed by oil stocks. Higher oil prices werethe obvious catalyst here and, as such,Middle East markets remain vulnerableto lower crude prices.

Overbought conditions Are the Asian markets in a bubble andlikely to go the same way? "With themove from 3000-12000, the Sensex hasnow become a bubble in this presentcycle", says Robin Griffiths, head ofasset allocation at RathbonesInvestment Management in London."Its current P/E ratio makes it themost premium rated emerging market.However, the secular trend remainsupwards although a correction is duewhich will be prompted by a downturnin the US stock market". As far as tech-nical factors are concerned, Griffithsstresses that the overbought conditionsof the index means India remains high-ly susceptible to a correction. "The

Figure 1.


Market Views

index is currently trading at 26% aboveits 200-day moving average. By anystandards, this is seriously overbought".

Griffiths also believes that strongGNP growth in the Asian countriesand healthy demographics have donemuch to support the current rally inlocal stock markets and will mean thatthe much longer-term uptrend will con-tinue. Nevertheless, he concludes on acautionary note. "The old maxim statesthat emerging markets are the marketsyou can't emerge from when things gowrong because of a lack of liquidity inthese stocks".

Secular bull market intact According to Hamid Malik, a technicalanalyst at Fimat in London, these Asianmarkets are already in the final weeks ofa major high. "For me, the Sensexpeaked at 12671 in mid-May which hasset the stage for a move down to the10,000 mark by the end of July" hesays. A bursting of the India bubble isa shorter-term view shared by RonWilliams of Stockcube Research who,like Griffiths, also sees the continuationof the long-term bull market in all theemerging Asian markets. "Asian stockmarkets are part of the dynamic secularbull story. While a tempered medium-term correction is perhaps due, thevery nature of the secular bull shouldpersevere much further than rationalpeople may think".

Figure 3.

“THE SENSEX IS CURRENTLY TRADING AT

26% ABOVE ITS 200-DAYMOVING AVERAGE.

BY ANY STANDARDS, THIS IS SERIOUSLY

OVERBOUGHT.”

India SensexShanghai Composite

Indonesia JKSE

Saudi TASI Egypt CMA

Bahrain All Share

+25%+24%+21%

-42%-22%-13%

Index % change since 01/02/06

Table 1. Comparing Asian and Middle East indices

Figure 2.

ROBIN GRIFFITHS, RATHBONES


Techniques


Techniques

Applying wave analysis to JPYBefore showing exactly how I came tothis conclusion I will first briefly out-line the Wave Principle, which is a typeof technical analysis based on crowdpsychology and pattern recognition.Ralph Nelson Elliott discovered whathe came to call the Wave Principle inthe 1930s, after spending many yearsanalyzing stock market data. Elliottfound that stock prices trend andreverse in recognizable patterns. Hethen named, defined and illustrated 13such wave patterns and described how

they form larger and smaller versionsof themselves.

Figure 1 illustrates the basic buildingblock of the Wave Principle. Elliottobserved that when prices rally in a bullmarket, they do so in five distinctwaves, which he called impulse waves.Once a five-wave move is complete,prices decline in three waves to correcta portion of the preceding advance.When the sequence finishes, the pat-tern repeats in larger and smaller ver-sions of this same basic pattern. Thesame holds true for bear markets, but in

reverse - five-wave declines precedethree-wave rallies

Now let's examine the yen usingElliott wave analysis. Figure 2 shows alarge impulse wave in the yen that hasbeen in force since the late 1970s. WaveI trended up; wave II trended sidewaysand down; wave III moved up stronglyin five smaller waves (third waves aretypically the longest and strongest inimpulse patterns); wave IV trendeddown and sideways; and now we awaitthe fifth wave trending up.

This figure also shows a promis-

The Japanese yen's sideways price action in recent years has convinced most people that it'sgoing nowhere and that perhaps the sun has actually set on the yen. But my Elliott wave analy-sis shows a different picture: this period is over, and we should witness a rising sun on the yenin the months and years ahead. Specifically, I expect US dollar/yen futures prices to rallybeyond the April 1995 peak of .012625, as the larger uptrend that began in the late 1970s con-tinues to rise to an all-time summit.

ELLIOTT WAVETHE SUN RISES ON THE JAPANESE YEN by Jeffrey Kennedy

Figure 1. Figure 2.

→→

ing pattern within the typical five-wavepattern that signals a strong upcomingmove for the yen. The two trendlinesdelineating wave IV mark out a largecontracting triangle (one of Elliott's 13wave patterns) that has taken shapesince the April 1995 peak.

This is where the sun breaks throughon the yen: Contracting triangles gener-ally resolve in sharp wave V thrusts. Itlooks like this multi-year contractingtriangle recently ended at .008252 inDecember 2005. If so, it implies thatprices are gearing up for a multi-yearadvance in wave V to move wellbeyond the April 1995 peak of .012625.

To illustrate what a contracting trian-gle looks like on a different figure, Ihave included a recent example in cop-

per (Figure 3). As you can see, the endresult in terms of a price was dramatic.

Supporting evidence for a bullish yen outlookHere are four pieces of supporting evi-dence for a bullish yen outlook:

1. Fibonacci relationship. One keycharacteristic of a contracting triangleis that alternating waves tend todemonstrate .618 Fibonacci relation-ships. That relationship shows up onFigure 4 where you can see that wave Eequals a .618 multiple of wave C at.008273. On the basis of the monthlycontinuation chart, the low in the yen,which occurred in December, actuallyreached .008252. Since that's a differ-


Techniques

Figure 3. Figure 4.

Figure 5. Figure 6.

You can identify a contracting trian-gle by looking for these importantcharacteristics:

It is a corrective move containedby converging trendlinesEach wave of a contracting trian-gle, labeled A-B-C-D-E, subdividesinto three smaller wavesAt least one pair of alternatingwaves within this pattern frequent-ly demonstrates a .618 Fibonacciratio relationshipWithin the context of the WavePrinciple, a contracting triangle canoccur in only three positions (wavefour, B or X)Finally, the thrust out of a con-tracting triangle is in the directionof the larger trend

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Techniques

ence of merely .000021, confidencegoes up that the fourth-wave contract-ing triangle is coming to an end.

2. Direction of larger trend.Following the December low, priceshave been rallying impulsively just likeour idealized Elliott wave pattern inFigure 1. That's significant because,according to the Wave Principle, five-wave moves identify the direction ofthe larger trend. So, a five-waveadvance beginning from a near-perfect.618 relationship between waves E andC makes a compelling case for beingbullish the yen.

3. Short-term outlook. The next logi-cal question is: Where are we within theforecasted advance? In Figure 5 I pro-pose that wave (1) of the much largerfive-wave advance in progress ended at.008880. So, for the short term, thenext move in the yen should be downin wave (2). It will most likely drop tonear the previous fourth-wave extremeat .008534, providing what could be an

excellent buying opportunity becausewave (3) will head back up.

4. Daily Sentiment Index. The evi-dence to support this short-termout-look includes the completed five-waveadvance in Figure 5 (because retrace-ments follow five-wave advances) aswell as Daily Sentiment Index (DSI)data. DSI is a contrary opinion indica-tor whose interpretation is simple:Extreme bearishness on the part ofnon-professional speculators signals anadvance in prices. In contrast, extremebullishness portends declines, just as isthe case in the yen right now. Figure 6shows that the 10-day moving averageof DSI is at a bullish extreme, implyingthat the upside is indeed limited andthat the next big move will be down inwave (2) as prices decline. (I have high-lighted a few examples showing the sig-nificance of extreme DSI readings.)

Add these four pieces of supportingevidence for a bullish turn in the yen tothe knowledge that the contracting tri-angle pattern alone signals a sharp,

swift move in the future providingForex traders with an excellent oppor-tunity.

Jeffrey Kennedy is a senior financialanalyst with Elliott WaveInternational.

“THERE ARE FOURPIECES OF EVIDENCE

POINTING TO ASTRONGER YEN:

FIBONACCI RELATIONSHIPS,

THE LARGER TREND,THE SHORT-TERM

OUTLOOK AND THE DAILY SENTIMENT

INDEX.”

Techniques


Donchian's 4-week rule The price breakout is one of the mostsuccessful and simple concepts ininvesting. A price breakout happenswhen prices move out of a consolida-tion pattern or from an establishedprice pattern. The more power associ-ated with the break, the more likely it isto follow through as a sustained trend.

The father of the breakout wasRichard Donchian who devised hisfamous 4-week rule:

Go long (and cover short positions)when the market makes a new 4-week (20 day) high. That is, whenthe price exceeds the highest highof the last four weeks.Go short (and cover long positions)when the market makes a new 4-week (20 day) low. That is, when theprice exceeds the lowest low of thelast four weeks.

The 4-week highest high and lowest

low represent resistance and supportlevels. The markets can spend longperiods of time not breaking theseranges (longer than four weeks) but abreak out of these ranges is often anindication of a break from a consolida-tion and strong moves often follow.This type of trading system is analways-in-the-market SAR system (SAR= Stop and Reverse). So, if you are longand a sell signal is encountered then theposition is liquidated and a new shortposition is taken i.e. the position isstopped out and reversed. This methodhas become very popular and is thebasis of many trading systems nowused by hedge funds.

Turtle trading systemIn the 1980's Richard Dennis, a futurestrader on the Chicago floor, devised theTurtle Trading System. This was a vari-ant on Donchian's 4-week rule thatused alternative period, highesthigh/lowest low, for its breakouts.Crucially, he also used a different,shorter period for the exit. He waslooking for breaks from big consolida-tions and to take profits relativelyquickly when a reversal set in.Importantly, unlike the Donchianmethod, Turtle-type methods mean thetrader is out of the market when it isnot moving.

In the big trending conditions incommodity markets we saw in the '70'sand '80's, the Turtle system workedextremely well and it has not goneunnoticed by many hedge fund man-agers that these are the same conditionswe are in now. Hence the resurgence ofbreakout trading in recent years. Thesetechniques mean that a manager isautomatically long (or short) when the

market goes into a trend. While thedeveloped stock markets are not cur-rently behaving like the commoditiesmarkets, the emerging stock marketsare. These markets are being tradedsuccessfully by many hedge funds inthis way.

Applying stop lossesAs a generalization, the longer the peri-od of the highest high (or lowest low)chosen, the greater the likelihood ofpicking up a major trend. But the largerthe number of days to determine thehighest high (or lowest low), the laterthe entry or exit from the trade. Byusing a shorter term for the exit thanthe entry, the market does not need toreverse completely for the trader to getout. A protective stop loss calculatedoff the lowest low can work wonders. Itwill ratchet up below the market withthe last pivot low. Therefore, as themarket zig zags higher, the stop is at thelast zag and keeps rising as long as high-er zags keep forming. When the last zagis broken (the pattern of rising topsand rising bottoms is broken), the tradeis exited. This is entirely logical. It isapplying the principal that a bull run isintact while there is a continuing pat-tern of higher highs and higher lows.When this pattern is broken, the bullrun is finished.

There are many variants on the break-out system. Developers look carefullyat the quality of the range breaks. Ifthey are accompanied by volume, gaps,long bars or closes at extremes, theseare often the signals from the marketthat the break will be meaningful.

Trevor Neil, [email protected].

1.

2.

REACHING A HIGHER HIGH: THE 4-WEEK RULE by Trevor Neil

For most investors the idealtrade is to latch on to atrend, run with it, and exit

as soon as possible after the highhas been reached. Momentumoscillators may provide early indi-cations of a new move but proveunreliable or misleading as thetrend gathers momentum. Movingaverage crossover-based methodshave the advantage of holding theposition while the trend is intactbut lag the price action resulting inlate entry and exit. Is there a strat-egy that will allow you to enter asthe move starts and run with thetrend and exit early enough tokeep almost all the open profits?

presentsFour premier events for trading and investment professionals

The Technical Analyst Conference 2006, India 31 May 2006

2nd Annual Technical Analyst Conference, South Africa 24 August 2006

2nd Annual Technical Analyst Conference, Middle East 17 September 2006

Automated Trading Systems 2006, UK 12 October 2006

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Topics Covered:

+ Trading the Sensex+ Indian Rupee & NDF markets+ Applied contrary opinion+ Elliott Wave strategies+ Global markets outlook

Topics Covered:

+ Global markets outlook+ Elliott Wave strategies+ Trading gold and the ZAR+ DeMark indicators, Ichimoku + Single stock futures

Topics Covered: + Global markets outlook+ Elliott Wave strategies + DeMark Indicators+ Trading the Gulf markets+ Point and figure strategies

Topics Covered:

+ Developing a mechanical trading system + Backtesting strategies + High frequency trading + Genetic algorithms + Systematic FX strategies

Speakers include

Speakers include

Speakers include

Speakers include

Jeffrey Kennedy Deepak Mohoni Prakash Gaba

Jeffrey Kennedy Robin Griffiths Jeremy du Plessis

Jeffrey Kennedy Robin Griffiths Trevor Neil

James Binney Rami Habib Rashpal Sohan


Techniques

One of the greyest areas ofcommunication betweenmarket participants is the

qualification of 'time horizon'. Weknow that we can apply most tech-niques to different data series, but weoften forget that the time frame of thebars used gives some indication of thetime scale of our view point. We oftenfail to emphasise this when we presentour calls to others. This can result in amisinterpretation of the view.Therefore it is a good discipline to givea clear time frame with a view.

Typically we define time frames asshort-, medium- and long-term. Theproblem here is that people have differ-ent definitions of what these termsactually mean. Many traders will definethe coming days as long-term whilefund managers, for example, may viewwhat will happen in the weeks ahead asshort-term. There is no harm in map-ping out your definitions (See table 1.)and presenting them frequently withyour work in order to overcome anypossibility for misinterpretation.

Point and figure & time horizonMany traders and analysts put pointand figure charts to one side oftenbecause they struggle with the idea thatthere is no reflection of time in the

chart. It is easy to jump to the conclu-sion that the charts provide no valuefor different time horizons; but in factthey are one of the most valuablecharts in this regard. Jeremy du Plessisemphasises this point in his extensivebook, 'The Definitive Guide to Pointand Figure' (Harriman House). Beingable to choose your box size defineswhat price moves you are prepared toeliminate from the chart. For instancevery long-term investors are not goingto want to know about every point ofmovement in price, while traders willtend to go down to very small boxsizes.

Because point and figure charts giveunambiguous trends and price targets,you have the ability to run through dif-ferent time horizons very quickly. Youcan use minute or tick data for theshort-term frames and daily data formedium-term outwards. Figure 1shows a eurodollar 10 point x 3 chartwhich is ideal for very short-termmoves. For the ultra short-term, youmay use 5 point x 3 on tick data forinstance.

The trends are unambiguous 45degree lines projected off a low and aretherefore less retrospective than trendsplaced on line charts. You know thetrend sooner just by knowing a signifi-

cant high or low. On this chart,eurodollar is undoubtedly in anuptrend. Zooming into tick and asmaller box size we see a downtrend intrain while zooming out to a long-termview may also show a downtrend. Thishelps others understand the idea oftrends within trends.

Targets, stops and risk rewardPerhaps the greatest aspect of pointand figure charts is the power to proj-ect targets. This is another area wheredu Plessis' book is invaluable. In thefigure we see how a buying thrust off alow in early April (1.21 to 1.23) pro-duced a price target of 1.2760. At thetime this target was produced therewere two stops; One at 1.2240 andanother at 1.2030. Which stop you usewill also depend on your time horizon.The longer your time horizon the morepain you will be prepared to ride out.This trade did in fact get stopped outon the first stop, but not on the second.The count was never negated andanother target was given to 1.2640 soonafter.

If time horizon is one grey area, theidea of 'risk/reward' is another. Thefact that risk reward ratios are reallyreward to risk numbers is a sign of this.Because point and figure charts giveyou targets and stops, you have the abil-ity to know your upside versus yourdownside. Most professionals knowthat a ratio of 3 to 1 is the area youshould be looking for in a trade. Youwant the upside (target) to outweigh thedownside (stop) by around three timesin order to make the trade morefavourable.

TIME HORIZON AND RISK REWARD RATIOSby David Linton

Table 1. * MNTF = My Normal Time Frame - Source: Cracking the Market, www.updata.co.uk

Frame: UltraShort

Very Short

Short Medium(MNTF*)

Very Long

Ultra Long

Horizon: Hour(s) Days Weeks Months Few Yrs 5 Yrs +

Data: Tick Minutes Hourly Daily

Long

1-2 Yrs

Weekly Monthly Quarterly

→→

Techniques


Even though we can work it out quitesimply:RR Ratio = (Target Price - Signal Price) /(Signal Price - Stop Price), we often don'tdo the maths. The beauty of point andfigure charts is that you can have theratios shown with every target. So inthe case of the 1.276 target on eurodol-lar we had RRs of 9.4 at the first stopand 1.8 at the lower stop at the point ofactivation, ie: the top of the target col-umn. This information can also helpyou to understand what size you mightallocate to a trade.

If a trade is in train and the price hasmoved from where the target was givenwe can recalculate the ratio on the basisof the current price:CRR Ratio = (Target Price - Current Price)/ (Current Price - Stop Price).

This really helps in understanding ifyou have missed a trading opportunity.The price may have started to run, butif the CRR is still greater than 3, thetrade can still be worth taking. Again onthe eurodollar chart, for the 1.299 tar-get we have two stops but the higherstop has been introduced by raising ourstop to the last low. The RR at activa-tion may have deteriorated to a CRR of2.5 but the new stop gives us a CRR of4.5 making the trade more viable.

Scanning for risk reward ratiosThe real power of having an empiricalmethod of defining RR ratios is thatyou can start to scan for them acrosslarge universes of constituents on mul-tiple time frames. This would be virtu-ally impossible with any other target

producing technique such as Fibonacciextensions or patterns. For instance,you may do the following scan settingthese 4 conditions:

The fact that you can also define thetrend more readily with point and fig-ure is another real bonus. Imagine howcomplex defining an uptrend mightotherwise be. Moving averages could beused but the trends will be moreambiguous. Setting a minimum upside

Figure 1.

1.

2.

3.

4.

The CRR is greater than 3 (break-out only just happened perhaps)The trend position is up (only takesignals with 45 degree uptrend)The upside target is more than 15%away (less for shorter term)Set your box size and choose yourconstituent list


Techniques

% target is also important because theRR may be exaggerated by virtue of theprice being very near the stop level.

Now you can set a box size to matchyour time horizon. You can use arith-metic or log scales. You may take theview that the nearest round arithmeticbox size near 2% of the price is a long(or very long) term time horizon.Running this scan on the FTSEEurotop 300 stocks, there are only 6(2% of the universe) which have CRRsover 3, in uptrends where the upsidetarget is over 15% away. BP is one ofthose stocks. Figure 2. shows thebreakout on the 15 x 3 chart with along-term target price of 945. Thisprice may be years away with this boxsize; the 10 x 3 and 5 x 3 charts will giveyou closer targets for closer time

frames. We have CRRs of between 1.4and 4.2 depending on where you wouldchoose to exit.

Scanning the Eurotop 300 on a boxsize near 1% (medium-term) gives a listof 11 stocks, which is around 4% ofthe market. Running these scans fre-quently starts to give you proxies forthe bullishness or bearishness of a mar-ket. A 1% scan on the S&P 500 stocksgives us 20 stocks - 4% again. Japancomes out much the same at 7 stocks inthe Nikkei 225. Whether you run thescans or not, the real value of point andfigure charts is provided by the abilityto vary your time horizon so quicklywith objective trends, targets stops anda clearer understanding of risk versusreward in any trade. David Linton is chief executive of

Updata plc. www.updata.co.uk

Figure 2.

In Relative Strength Part 1 in theMarch/April issue, I introducedthe Relative Strength concept and

the way I use it on a day to day basis. Torecap, the relative strength line (RS) iscalculated by dividing the price of asecurity by the price of another securi-ty thereby creating an index: (RS =price item A / price item B). The slopeof this RS line indicates outperfor-mance or underperformance of A ver-sus B. A rising trend in the RS line sug-gests it is better to own A while a downtrend in the RS line suggests it wouldbe better to own B. Figure 1. shows theshare price of Tesco against theSTOXX index.

As the raw RS line acts like a normalsecurity we can apply any technicalanalysis technique to it. I use a movingaverage double crossover system inorder to determine the trend of a RS-line i.e. whether a security is outper-forming a benchmark (or another secu-rity). In the previous article I highlight-ed a problem with trend changes in theRS-line after extended rallies ordeclines similar to such situations inordinary price charts. In order to tacklethis shortfall I started using a tradition-al MACD indicator on the RS-line inorder to get signals a bit earlier. As longas the analyst applying these techniquesis aware of the pitfalls they should beable to add value to the investmentprocess of an investor.

A stock ranking methodWhen attempting to identify the best orthe worst sector or the top stock, usingthe RS concept as described abovewon't suffice. We can tell whether weprefer stock or sector A over a

RELATIVE STRENGTH: PART 2 by Julius de Kempenaer

Figure 1. Tesco vs. STOXX

Figure 2. Tesco vs. STOXX with the RS-ratio (blue line)→→


Techniques


Techniques


Techniques

given benchmark or that we do not likestock or sector B compared to thatbenchmark. But the question of whatthe best or the worst stocks or sectorsare cannot be answered as the numeri-cal values of RS lines or its movingaverages are not comparable. The samegoes for the numerical values of theMACD indicator applied to the RS-line.These values also cannot be comparedacross different market.

Consequently, we are looking for amethod to create a certain stock or sec-tor numerical ranking; this step is rela-tively simple. The problem can besolved by plotting a ratio of the twomoving averages instead of the differ-ence between them. The resulting val-ues can be compared across a stock orsector as it shows percentage moves.Figure 2 shows Tesco against theSTOXX index once again but with theRS-ratio plotted in the lowest pane ofthe graph instead of the standardMACD as in Figure 1.

However, looking at the graph a newproblem emerges. We can see that val-ues over 104 are 'high' and values below96 are 'low'. The RS-ratio reaches highvalues at point "A" and at point "B"although we prefer to maintain a posi-tion only as long as the RS-ratio is mov-ing up (at point "A") but prefer to beout, or at least be warned, when the RS-ratio line is starting to turn down (atpoint "B"). Therefore what we alsowant to know is the direction or

momentum of the RS-ratio line. Forthis I use a trigger line plotted as a 9-period MA of the RS-ratio line. It's thethin red line that trails the RS-ratio.

In order to be able to compare the

various momentum values acrossstocks or sectors another ratio is there-fore calculated. In this case the ratio ofthe RS-ratio line to the trigger line. Theresulting RS-mom (Relative StrengthMomentum) line is the thick brown lineplotted in the lowest pane of the chart.The formulas are:

RS-ratio = close A / close B (this is the raw RS line)

RSma1 = x-period moving average of RS(ideally 10-weeks)

RSma2 = y-period moving average of RS(ideally 30-weeks)

RS-ratio = RSma1 / RSma2Trigger = z-period moving average of RS-

ratio (ideally 9-weeks)RS-mom = RS-ratio / trigger

The most important values to moni-tor are the RS-ratio and RS-mom. RS-ratio values above 100 indicate a posi-tive relative strength for the security(sector, stock, index …) in question, thehigher the better. RS-mom valuesabove 100 indicate positive relativemomentum (not to be mixed with stan-dard price momentum). It should benoted that it is very well possible thatprice can be in a down trend but thatthe RS-ratio and/or RS-mom is rising.

Stock/sector comparisons With this information in place it is nowpossible to judge the attractiveness ofstocks and sectors. With a ranking sys-tem based on the RS-ratio it is possibleto find the strongest and the weakestelements in terms of relative strength.A ranking based on RS-mom will point

out the elements that are rising orfalling fastest in relative terms. Table 1is an example showing the rankings ofthe various STOXX sectors using theSTOXX index itself as the benchmark.

In this article I have tried to build onthe classic relative strength concept andadded some twists to enable investorsto rank the elements and visualize sec-tor rotation. Any feedback is greatlyappreciated at [email protected].

Julius de Kempenaer is a technicalanalyst at Kempen & Co, a mer-chant bank in Amsterdam.

Ranking STOXX sector RS- ratio RS- mom

1st Basic Resources 108.38 101.05 2nd Fin Services 106.07 100.16 3rd Constr & Materials 105.23 100.58 4th Industrials 103.18 99.55 5th Automobiles & Parts 102.82 101.13 6th Utilities 101.61 99.06 7th Insurance 101.03 98.88 8th Banks 100.71 98.90 9th Technology 100.37 100.58 10th Personal/House Goods 100.17 99.21 11th Retail 99.98 100.19 12th Chemicals 99.65 99.91 13th Media 97.75 100.36 14th Travel & Leisure 97.63 98.91 15th Oil & Gas 97.40 101.19 16th Health Care 97.17 100.44 17th Food & Beverage 96.11 99.93 18th Telecom 94.89 102.20

Table 1.

“THE RELATIVE STRENGTH LINE IS CALCULATED BY DIVIDING

THE PRICE OF ONE SECURITY BY ANOTHER.”

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Courses are one or two days in duration and include our standard “Introduction to Technical Analysis” for those new to TA; the intermediate level “Short Term Trading Techniques”; and an advanced two-day course for experienced analysts and technically-based traders and fund managers. Other courses available focus on important and developing areas in the world of TA, such as DeMark Indicators, Mechanical Trading and Behavioural Finance, and are designed for professionals with varying amounts of experience. Please visit our website for further details.

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Techniques


We all know the markets goup, down and sideways.Most of the time, non-

trending behaviour accounts foraround 70% of the trading period andtrending the remaining 30%. It seemsobvious therefore that one should havea trading strategy that can trade prof-itably through a sideways period.Trading rectangles is one effective strat-egy for achieving this.

Rectangles are arguably one of thesimplest patterns to recognise (seebox), yet there are some obligatorysteps that must be employed in order totrade rectangles effectively. The firststep is to establish the rectangle's loca-tion within the existing trend - a vitalmacro aspect of trading (see Figure 1).This can further be split into three cat-egories: i) establishing the larger-scaletrend direction, ii) identifying the majorpivot points of that trend, and iii) eval-uating the remaining trend potential:

Macro aspectsi) Trend directionEstablish the previous low or high inorder to define if the market is in an upor down trend; Enter only along the

trend's direction. In case of doubtdon't hesitate to use the bigger timeframe to find the precise location ofyour market price. Clarify if the currentrectangle belongs (or does not belong)to a larger pattern.

ii) Pivot pointsCount the major pivots of the existingtrend and locate the exact market posi-tion within the previous swings. UsingElliott waves, we should know:

the type of market we are in: impul-sive or corrective.the type of wave we are in: impul-sive - Wave 1, Wave 3 & Wave 5 orcorrective - Wave 2, Wave 4 or thewaves A , B & C.

iii) Remaining trend potentialEvaluate the remaining trend potentialuntil reversal, through the use of one ormore of the following techniques:

Fibonacci count bars - 5, 8, 13, 21,34, 55.Fibonacci Ratio Analysis, especially127%, 138.2%, 150%, 161.2%.Gann's Square of Nine, especially45°, 90°, 135°, 180°, 225°, 270°315° & 360°. It is vital to mention

here that most of the time the mar-ket price exhibits a very strongencircled zone, defined within a sin-gle 360° cycle, especially with rec-tangle trading.Dynamic Gann Levels developedby Don Fisher, where so calledLevel three takes its full importance.Gann Angles, where the 45° trend-line gives the direction and theother angles lines serve as support,resistance or price objectives.Gann Percentage Rule based onspecific values: 12.5%, 25%, 33%,37.5%, 50%, 62.5%, 66%, 75%,87.5% and 100%.

It is highly probable that the currentrectangle's breakout will continue thetrend, but it is essential nonetheless tocount the number of rectangles in aprevailing trend in order to projecttrend termination. Most of the time, ina prevailing trend, rectangles representpullbacks (true landmarks of thetrend's development) and the morepullbacks experienced, the closer we areto the termination of the trend.

Sometimes we trade the counter trendif Elliott wave 3 is over extended,lengthy enough (at least 2.00 x Wave 1),to allow a nice profitable Wave 4retracement. We enter the trade onlywhen the Reward/Risk ratio is at least2.5, with a target of 38.2% Fib retrace-ment.

Minor aspectsThe second critical step to trading rec-tangles involves analysing the internalaspects of the rectangle - the microaspect of trading. Analyse carefully thedifferent traits of the rectangle in

PRAGMATIC ASPECTS OF TRADING RECTANGLES by Mircea Dologa

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What is a Rectangle?"A rectangle pattern is nothing more than a trading range between a resistancepoint on the upside and a support price below. The tops and bottoms in thechart should allow you to draw parallel lines. The end result is that the patternresembles a rectangle. This formation is considered a continuation pattern andshould break in the direction of the longer trend. That point is not a hard-and-fast rule. The signal for the next move is given with the penetration of eitherresistance or support… once the price moves outside of the pattern it will indi-cate the direction it is going to take. The length of time a stock is in this patternwill give us an approximate idea of the projection that you might expect fromsuch a move. It is very important that volume increases on the breakout orbreakdown… If volume remains stationary, you should be concerned about afalse signal." John C Brooks (2006).

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Techniques

such a way that it will give you a validprojection value for low risk high prob-ability trades.

i) Failures Failures are often ignored by traders inspite of their fairly easy identification.They occur when price doesn't reachthe corresponding target trendline afterthe rectangle has been properly validat-ed (4 touches). The current momentumsuddenly shades off, announcing animminent move in the contrary direc-tion (see Figure 2).

ii) Partial declines & partial ascentsA partial decline (a down sloping fail-ure) constitutes one of the best factors

in establishing an imminent upwardbreakout, but only if the rectangle isproperly validated. The partial decline'sbottom, will be a higher low, which willautomatically project a new intra-rec-tangle trend, capable to acquire the nec-essary upward momentum and blowoutside the rectangle's upper boundary.A new upwards inside rectangle trendcan be drawn.

A partial ascent (an up sloping failure)constitutes one of the best items inestablishing an imminent downwardbreakout, but, once again, only if therectangle is properly validated. The par-tial ascent's top, will be a lower high,meaning that the market has lost itssteam, provoking an intra-rectangle

reversal. It will automatically project anew intra-rectangle trend with itsdownwards trendline capable ofacquiring the necessary downwardmomentum to blow outside the rectan-gle's lower boundary.

We have found that the use of FalseStochastics, a proprietary tool ofeSignal Advanced GET System, is oneof the best tools for sideways trading.Its advantage lies in its ability to identi-fy the early development of a trend, outof a reversal.

Tracking reversal bars is also of agreat help. We trust the Momentum(10)indicator in combination with mirror,inside or outside bars, in confirmingpartial declines and partial ascents.

iii) Location & geometryDefine the nearness of the rectangle inrelation to the top or the bottom ofthe entire commodity's lifetimerange or stock's yearly price range.This value could affect the trade'sprobability. Many authors agreethat near the contract's highs thebreakout of rectangles is muchmore efficient that near its lows.Rectangle height: we can say thattall rectangles break higher than shortones. We can usually project the rec-tangle's breakout target at a mini-mum of one height. The maximumtarget can rise to several height mul-tiples.Rectangle width: the width, likethe height, is primordial in rectangletrading. We can obtain a probabletarget by counting rectangle's barsand applying it to the target project-ed value (measure rule).

iv) Throwbacks and bull trapsThrowacks and bull traps are associatedwith breakouts more than a quarter ofthe time, with throwbacks being morethan twice as frequent as the bull traps.These two features are responsible formost losses suffered by the aggressivetrader. We may also name this phenom-enon a false breakout (see Figure 3).

An experienced trader can avoid thesehighly risky situations if while prepar-

Figure 2.

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Figure 1.


Techniques

ing the trade he checks for the exis-tence of an overhead strong resistance.Defining an overhead resistance/sup-port is priceless for low risk high prob-ability trades. One should be aware ofall the possible levels, including:

an old high and low or previousgap level, on hourly, daily andweekly charts.a single daily floor pivot or a clus-tered zone with weekly and month-ly floor pivots.a strong Gann level: 45° trendline,50% trendline, a percentage retrace-ment, a Level 3 belonging toDynamic Gann Levels method byDon Fisher, or a main value with-in Gann's Square of Nine.

a Fibonacci retracement or exten-sion.a specific pattern, like a price con-solidation.

v) VolumeVolume gets heated when the breakouttakes off. We normally use it togetherwith a volume moving average of 21bars. Look for the breakout spike,which will outpace the level of previousones. Go to a lower time frame whenthe price approaches a rectangle'strendline (go to a 2-min chart if youtrade 5-min time frame, or go to a 5-min chart if you trade 15-min timeframe).

vi) Andrews pitchforksThere is an obvious resemblancebetween a rectangle's morphology andthe morphology associated with DrAlan Andrews' PitchFork (see Figure4). Certainly, the integration of thesetwo techniques should greatly increasetrading consistency. However, there area few differences in the trading charac-teristics that should be noted:

the 50% Fib line of the rectangleattracts price less than the pitch-fork's median line.the upper/lower boundaries of therectangle attract the price moreintensively than the upper/lowerpitchfork's median lines (see Figure4).the up/down 100% projected linesof the inceptive rectangle performbetter than the pitchfork's warninglines (see Figure 4).the parallel sliding trendlines drawnon top of the spike's high/low, justoutside of a rectangle, perform atleast as well as those of the pitch-fork's or even better.

Most traders are gun shy when consid-ering rectangle trading. Yet rigorouslyapplied rectangle trading is one way ofconquering the sideways movementthat accounts for around 70% of mar-ket activity. As such, rectangle tradinglays the foundation for a consistentlyprofitable strategy.

Mircea Dologa, MD, CTA is a com-modity trading advisor who found-ed a new teaching concept foryoung and experienced traders atwww.pitchforktrader.com He canbe contacted for any questions [email protected]

Figure 3.

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Asia and Japan Hedge Fund Directory

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2005

EurekaProductAD220405.pdf 19/05/2005 12:18:12


Interview

THE TECHNICAL ANALYST TALKS TO...

Jeff Hochman is Director ofTechnical Strategy at FidelityInvestments in London.

TA: Fidelity is well known for its 'Chart Room' in the US.Has this been replicated in London?

JH: Yes, Fidelity's Chart Room has been a featured attrac-tion of our analytical capabilities for around 50 years.Although not quite on the same scale as that in Boston, ourChart Room in London is modelled from the same concept.

TA: What is the Chart Room?

JH: The Room displays and highlights a vast array of priceactivity in various asset classes globally including the stockand bond markets, commodities, foreign exchange, andeven stock market earnings. It is used regularly for externalmarketing purposes, but most importantly for a monthlyBig Picture market review.

TA: How many TA researchers and fund managers do youhave in London?

JH: Currently we have two full time analysts in London;myself and Trevor Meeks. We also have six full-time techni-cians in Boston and one in Tokyo. On the fund manage-ment side its growing all the time, but currently we haveabout 30 dedicated equity fund managers and another six orso fixed income managers.

TA: How would you describe Fidelity's approach to techni-cal analysis?

JH: Our approach is to employ TA as a reality check to allthe fundamentally based assumptions and decisions that ourportfolio managers and fundamental analysts make.Analyzing the charts properly can aid in helping to increasethe level of conviction one has in the decision makingprocess which is paramount in active fund management.Once a decision has been made to buy or sell, the chartshelp highlight whether our underlying fundamental assump-

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Interview

tions are being rewarded or not by the markets. In short,TA is used as a tactical tool to the more strategic funda-mental process.

TA: How does this application of technical analysis of themarkets differ in the fund management area compared with,say, the use by an FX trader? Are their specific techniquesthat are more suited to portfolio management? Does theanswer lie in the more long-term nature of fund manage-ment?

JH: Yes, as we primarily manage long-only money ourapproach to TA needs to be more long-term in nature, andtherefore we try to avoid making knee-jerk decisions basedon only daily price movements or trading too frequently.Liquidity is also an issue in the equity markets but generallynot so for a FX trader, so this must be taken into accountwhen analysing the trading nature of the security in ques-tion.

TA: Do you think this approach is unusual within the fundmanagement industry?

JH: No, I do not think we are unusual in the sense that weare using TA as part of the decision tool arsenal to helpenhance returns, which is no different if one is working fora long-term fund manager or as part of a hedge fund/CTA.But Fidelity is probably more open than most asset man-agers in admitting that TA is actually integrated into thefund management decision model.

TA: Does the investment approach of the typical managerusually include an element of TA? If so, what elements ofTA does the manager use? Does it tend to be indicators andmoving averages rather than pattern analysis?

JH: Just as with fundamental analysis, there are numerous

approaches to TA and which techniques we apply at anyone time are dependent on market conditions, volatility, etc.That said, we are all concerned with determining if a givensecurity is trending up or down or not at all, and to whatdegree of relative strength it is displaying to its benchmarkindex or sector, etc. There will always be an element ofmomentum in our approach in both the absolute and rela-tive sense. Pattern analysis is something that is used if we

have a very high degree of conviction in the outcome.There are also times when anticipating the likely outcome ismore important than waiting for the confirmation that youare right, but that decision always depends on the nature ofthe fund manager and how conservatively or aggressivelythe fund is managed. The same approach does not alwayswork for everyone.

TA: Do you work closely with fundamental or quantitative

The Fidelity Chart Room

“OUR APPROACH IS TOEMPLOY TA AS A REALITY

CHECK TO ALL THE FUNDAMENTALLY BASED

ASSUMPTIONS AND DECISIONS THAT OUR

PORTFOLIO MANAGERS AND FUNDAMENTAL ANALYSTS MAKE.”

36 THE TECHNICAL ANALYST March/April 2006

Interview

researchers at Fidelity? What is your approach to fundamen-tals?

JH: We work closely with our fundamental and quantitativecolleagues in the sense that we all are aware of each other'sopinions and recommendations, but our mandate is not totry to persuade them away from their fundamental view-points and analysis. Internally, we do not play a game of Usversus Them, but do work very well together as a largeteam. Our twice weekly sector reviews integrate a healthydose of both fundamental and technical analysis designedto put all the available and pertinent information in front ofour fund managers who then must weigh the evidence ofboth sides before making any decisions.

We integrate our analyst's earning estimates in most ofthe charts we produce and I do believe that in the long runcorporate profits drive the stock market and stock prices.That said, as we all know the long run is made up of manyshorter runs, some of which have drivers that completelydiverge from the "E" in the P/E ratio. To that extent, webelieve that the markets are semi-efficient, and for that rea-son TA will hopefully always play an important role in ourstockpicking. I am paid to be objective and although I amaware of the fundamental backdrops and valuations, it doesnot drive my recommendations.

Once a month I present a big picture overview for allour managers and analysts in which I will employ my ownstyle of intermarket analysis, integrating both fundamentalsand technicals and weighing the evidence of what the mar-kets are likely telling us. At the end of the day, however, thename of my game is stockpicking.

TA: Do you get involved in model building with mechani-cal/automated trading?

JH: Yes, we are spending more time developing some sys-tems that help eliminate some of the subjectivity that isinherent in traditional technical analysis. This is continualwork-in-progress that I anticipate will become very fruitfulin time.

TA: Behavioural finance can obviously be a useful consider-ation in building automated trading systems. Do you haveany interest in this subject?

JH: Yes, we as a house are very aware of the main doc-trines of behavioural finance and the various pitfalls that allof us have in relation to the heuristics, and have held sever-al excellent presentations in house from various profession-als in this regard. At the very least, we are all behaviourallyaware so to speak even if we do sometimes repeat the mis-takes you are told to avoid.

TA: Do you look at market sentiment/contrary opinion? Ifso, which indicators/measures do you consider most useful?

JH: I do look at many sentiment indicators including thebetter known ones such as the ARMS/TRIN indicator,put/call ratios, DSI, the McClellan Oscillator, etc. and allthe newsletter related stuff out there, in addition to follow-ing flow of funds data, etc. As we know, outside of the USreliable sentiment data has been notoriously difficult tocome by, and therefore believe the relatively new SENTIXindicators developed in Germany are useful. That said, Istill believe that the most consistently reliable sentimentindicators are derived from one's internal market senses andthat there is no substitute for pure market experience.

TA: Do you consider that some markets are more technical-ly driven than others. (For example, EUR/USD) If so, whatis the evidence for this?

JH: Forex always seems to be more technically driven dueto the vast flows and liquidity that these markets offer.There is also a tremendous amount of noise in the forexand bond markets due to the numerous macro data pointsso technicals help cut through this. Generally speaking, themore liquid the market and the more volume that is gener-ated, the more reliable traditional technical tools add valueregardless of the asset class. Therefore, my conviction levelis usually higher when analysing a large cap stock over asmall cap, although that is not to say that certain momen-tum and volume indicators can't help.

TA: There has been a lot of talk from other analysts con-cerning a sharp decline in US stocks towards the end ofthis year. Do you go along with this view?

JH: Sorry. No market views I'm afraid!

“WE ARE SPENDING MORETIME DEVELOPING

SYSTEMS THAT HELP ELIMINATE SOME OF THE

SUBJECTIVITY THAT IS INHERENT IN TRADITIONAL

TECHNICAL ANALYSIS.”


Subject Matters

The Australian dollar (AUD) isone of a group of commoditycurrencies that are heavily influ-

enced by commodity prices. Usuallythese currencies are those of small eco-nomically defined countries that areunable to influence the world economyand to a considerable extent commodi-ty prices. Consequently, the AUDappreciates (depreciates) in both nomi-nal and real terms when the prices ofcertain commodities exported byAustralia, rise (fall) in internationalmarkets. (Hatzininikolaou and Polasek,2005).

CyclesIn our research, we look at some of thereasons for these fluctuations andtrends, and ask whether there are anyhidden cycles. The quantitative methodwe use for this examination is theFourier analysis of time series.

A visual examination alone of thecommodity price and exchange rateseries (see Figures 1 and 2) suggestsnoticeable peaks and troughs thatappear approximately in the same yearsfor both series.

If cycles exist, it's possible they arerelated to the mining and productioncycles of minerals and perhaps othercommodities that Australia exports(such as sugar and wool). Australianmineral production is an importantcomponent of world production. Itsshare of world iron ore and nickel pro-duction was, in 2003, 20% and 17%

respectively. And for Australia itself,exports of rural and non-rural com-modities average around 60% of totalexports (Reserve Bank of Australia).

A report by Western MiningCorporation (2004) finds that the aver-age time taken from discovery to start-up for Australian, Canadian and USgold firms is 5.4 years, compared to 8.3years for other countries. For copper,Graedel et al (2002) report all the prin-cipal uses of copper and the corre-sponding residence time for each use.The weighted average of this time isabout 35 years (author's calculations).Cortazar and Casassus (1998) haveshown that the optimal timing of amine expansion is intrinsically relatedto changes in copper prices via theinvestment process. The relationship

between supply and demand as well asinventories in mineral production hasbeen well evidenced.

We can therefore hypothesize that thecycles we need to consider are those ofcommodity prices per se (average peri-od length about 7-8 years) and those ofeconomic business cycles: an averageperiod length of about 3-4, 15-16 and30-32 years. Cashin et al (2002) foundthat most commodities have cycles ofan average duration of between 6 and 8years. In addition, it is important tostress that most commodities are coin-tegrated thus generating a commoncycle for themselves.

The so-called business cycle of dura-tion 3-4 years is primarily related toproduction, inventories, and employ-ment. The "Kuznets" cycles of about

CAN FOUR CYCLES EXPLAIN FLUCTUATIONSAND TRENDS IN AUD? by Elias Sanidas

Figure 1. Four cycles for AUD. Raw data and fitted line (upper graph) and residuals of fittedmodel (lower graph). Source of data: RBA. The A$ is expressed in terms of US$.

Research shows that the Australian dollar's exchange rate depends largely on commodity prices. This articlebuilds on that conclusion and proposes the idea that the Australian dollar's behavior is overwhelminglyexplained by a handful of cycles and that these cycles are related to various cycles of commodities and inperticular mineral mining and production. If this proposition is correct, we have a very simple yet substan-tial explanation for long term trends and fluctuations in the Australian dollar, and possibly also for manyother commodity currencies.


Subject Matters

15-16 years and 29-30 years are morelinked with the investment process (fora good paper on all these cycles seeForrester (1976)). In our context thesethree economic cycles are intrinsicallyrelated with the commodity price cycleof about 7-8 years, since these pricesare also a consequence of or a reasonfor the existence of these economiccycles. All four cycles are creating eachother through the properties of har-monics.

As we can see in Figure 3 the 4 har-monics produce consecutive waveswith varying height (amplitude) andphase. The sequence from 1988 to2013 of these waves is as follows (inparenthesis is the corresponding periodof the cycle): 9/88 (3.75); 1/90 (7.5);6/92 (3.75); 11/94 (15); 2/96 (3.75);6/97 (7.5); 10/99 (3.75); 7/03 (3.75);11/04 (7.5); 5/07 (3.75); 11/09 (15);2/11 (3.75); 5/12 (7.5); 6/13 (30). Thissuccession of waves of various

strength and length is the reason for85% of fluctuations in the floatingexchange rate of the AUD. It is alsointeresting to note that in 2001 allcycles were found to be at their respec-tive troughs and hence we had a sub-stantial depreciation of the currency.

In fact, our model predicts the peaksof economic cycles as identified byother scholars quite accurately. Forexample, Bajada (2003) suggested thatsignificant peaks took place in1989/908 and 1994/95; these datescoincide with our peaks of the 7.5 yearand 15 year waves. Finally, it might bepossible to link all four harmoniccycles: thus, two consecutive peaks ofthe 3.75 year business cycle in 11/84and 9/88 generated the commodityprices cycle (of 7.5 years period) peakof 1/90; the latter in conjunction withanother business cycle peak in 6/92generated the longer investment-causedcycle (of 15 years period) peak in

11/94, and so on.

ConclusionsOur analysis of AUD trends and fluc-tuations has produced some very inter-esting results. The four harmonic cyclesused in this respect (3.75, 7.5, 15, and30 years) explain 85% of the everydaychanges of this commodity currency,the remaining being attributed to adhoc situations, such as policy measures.These conclusions if true have farreaching implications at least for com-modity currencies.

Of importance to speculators, ourresearch suggests that it's better to holdAustralian dollars until about 2012 (thehighest peak of the AUD appreciation)before moving back into USD again.

Elias Sanidas is an economics lecturerat the University of Wollongong,Australia. Email: [email protected]

This article is based on "The Australian Dollar'sLong-term Fluctuations and Trend: The CommodityPrice-cum-Economic Cycles Hypothesis", EliasSanidas, Economics Working Paper Series 2005,WP 05-29, University of Wollongong, Australia.

ReferencesBAJADA, C. Business Cycle properties of the legiti-mate and underground economy in Australia. EconomicRecord. 2003, vol. 79, no. 247, Dec, pp. 397-411.

CASHIN, P., McDERMOTT, C.J., SCOTT, A.Booms and slumps in world commodity prices. Journal ofDevelopment Economics. 2002, vol. 69, no. 1, pp. 277-296.

CORTAZAR, G., CASASSUS, J. Optimal Timingof a mine expansion: implementing a real options model.The Quarterly Review of Economics and Finance.1998, vol. 38,Special Issue, pp. 755-769.

FORRESTER, J.W. Business structure, economiccycles, and national policy. Futures. 1976, June, pp. 195-214.

GRAEDEL, T.E., BERTRAM, M., FUSE, K.,GORDON, R.B., LIFSET, R., RECHBERGER,H., SPATARI, S. The contemporary European coppercycle: the characterization of technological copper cycles.Ecological Economics. 2002, vol. 42, no. 1-2, pp. 9-26.

HATZININIKOLAOU, D., POLASEK, M. Thecommodity-currency view of the Australian dollar: amultivariate cointegration approach. Journal of AppliedEconomics. 2005, vol. 8, no. 1, pp. 81-99.

Figure 2. Commodity Prices in USD (upper graph), in SDRs (middle graph) and in AUD(lower graph). Source of data: RBA.

Figure 3. The four cycles for AUD. The higher the amplitude the higher the period of thecycle. Thus, the first peak of the 15 year cycle occurs on the 1510th day or 1/1990. Every 250days constitute a year on the x-axis. Thus the 5000th datum is in July 2003.


Software

To see the value of this innovative tool,recall that today's popular chartingstyles, such as the classic bar chart, can-dlestick chart, point & figure and thesimple tick chart, all have one elementin common: they use just the last pricefor plotting. The fact is, just observingthe last price for a trade is, withoutquestion, a limitation. Why? Considerthis: does the last price reveal whattraders are actually doing? For example,if the inside market is rising, are traderscontinuing to be aggressive and payingthe ask price, which should cause high-er prices, or are they starting to backaway at higher levels, which will lead toa retracement. Can you see whethertraders are hitting bids or lifting offerson any of the above listed charts? No,but traders using CQG's innovativeTradeFlow charts can, and that maygive them an edge.

First, TradeFlow charts display themovement of the inside market.TradeFlow charts use the best bid andask for the low and the high. Second,the TradeFlow bar is colour coded toshow the percentage of volume execut-ed at the ask price (green) versus at thebid price (red). If 500 contracts tradedduring one TradeFlow bar and 400were up at the ask price (buying) and100 at the bid price (selling), the barwould be 80 percent green and 20 per-cent red. You instantly know thattraders were aggressively buying rela-tive to the sellers. Finally, the width and

brightness of the colour is based on thetotal volume of executed trades duringthe formation of the bar. Wide andbrightly coloured TradeFlow bars indi-cate heavy activity. Narrow bars indi-cate low activity. Therefore, TradeFlowbars give floor trading visibility becauseyou see whether other traders are buy-ing or selling and by how much.

TRADEFLOW CHART AND THETRADEFLOW VOLUME STUDYFigure 1 shows the TradeFlow chartalong with the TradeFlow Volumestudy for the June DAX Index futurescontract. The TradeFlow Volume studydisplays the actual number of contractstraded at the ask price as a green his-togram bar and at the bid as a red his-

CQG's new charting service, TradeFlow™, tracks the inside market of electronically tradedfutures contracts, gauges the level of volume of executed trades and displays the aggressor's -the buyers or the sellers by colour coding the bars. TradeFlow charts place floor-trading visi-bility on the desktop.

CCQQGG''SS TTRRAADDEEFFLLOOWW™™ CCHHAARRTTSS::

A REVOLUTIONARY WAY TO SEE & TRADE THE MARKETby Thom Hartle

Figure 1. TradeFlow Bars and TradeFlow Volume. TradeFlow bars are colour coded on a splitbasis. The green portion is the percentage of volume of trades at the ask price (buying). The redportion indicates the percentage of volume of trades into the bid price (selling). TradeFlowVolume separates the actual number of contracts traded at the ask (green histogram bars) ver-sus the bid (red histogram bars).

Software

togram bar for each TradeFlow bar.We'll walk through both in Figure 1 andshow the unique information availableto traders using TradeFlow.

In Figure 1, bar A to bar B is a rallyaccompanied with steady buying asindicated by the TradeFlow Volumehistogram bars being approximately thesame height until the completion ofTradeFlow bar B. Notice the histogrambar directly below bar B is slightly lowerthan its predecessor. At that point inthe rally, fewer traders were willing topay up at the ask price then the previ-ous bar. Also, the red histogram bars,which represent trades into the bid orselling, were beginning to edge lower atbar B, also indicating that there wassome light selling beginning to appear.

Following bar B, the inside markettraced out a trading range with narrowTradeFlow bars indicating low activity.Buyers bid the market up to resistanceat 6073.50 and then traders hit bidscausing the entire TradeFlow bar toturn red (bar C). This led to a retest ofsupport at 6072.00 bid and tradersagain stepped up as indicated by thenearly all green TradeFlow bar, bar D.The next three TradeFlow bars are nar-row, but entirely green, indicating thatdespite the low volume, traders werelifting offers. This is quiet accumulationgoing on. Then, buyers jumped in dur-ing bar E, the volume expanded,traders only lifted offers and the marketbroke through the resistance. We knowthis because the entire bar is green andwide.

The inside market climbs to 6075.00bid and offered at 6075.50 (bar F). BarF is entirely red, indicating traders onlyhit bids at this price level. We werewarned that the market was runningout of buyers by the declining greenTradeFlow Volume histogram bars justbefore bar F. But, TradeFlow bar F isnarrow, which means the volume islight, and therefore indicates thatdespite being all red and a sign of sell-ing, the low volume did not necessarilyimply a top. The inside market tradessideways for two more bars and on thesecond TradeFlow bar the buyers again

appear as indicated by the high percent-age of green colouring in theTradeFlow bar.

The market advances up to an askingprice of 6076.50 (bar G). But, this levelbrings in some selling and theTradeFlow bar is almost entirely all red.Also, the red TradeFlow Volume his-togram bar directly below it extendsmore below the zero line then the pre-vious red histogram bars, indicating apick up in selling pressure. Followingbar G the inside market is hit by bids.Traders aggressively hit bids leading towide TradeFlow bars, with deeper redTradeFlow Volume histogram bars.Any buying (traders lifting offers) wasweaker than during the previous rally asindicated by the low green TradeFlowVolume histogram bars. Finally at barH, the inside market was neutral as theTradeFlow bar is nearly 50 percentgreen and red.

TRADEFLOW ON BALANCEVOLUME STUDYCQG's TradeFlow method includes aversion of the 'on balance volume'(OBV) study. The classic OBV study isa running sum of final bar volumewhere if the close of one bar is higherthan the previous bar's close the entirebar's volume is added to the OBV line.If the bar closes down from the previ-ous close then the volume is subtracted.This version fails to differentiatebetween true buying and selling. TheCQG TradeFlow On Balance Volumestudy uses the net difference between

buying and selling for the running sum.In other words, if traders bought 500contracts and sold 100 contracts, theTradeFlow On Balance Volume linewould climb by 400 contracts no matterwhat the last price was. This is an accu-rate indication of what traders are actu-ally doing.

Figures 2 and 3 show how theTradeFlow On Balance Volume studycan aid the trader reading the priceaction.

In Figure 2, the inside market firstdropped to 6074.50 bid and thenmoved into a trading range tracing ashigh as 6076.50 offered and retestingthe 6074.50 bid three times. During thistrading range the TradeFlow OnBalance Volume line was showing aslight upward bias or that, on balance,there was slightly more buying thanselling. At point C, as the market wastesting resistance, the TradeFlow OnBalance Volume line started to movejust above the previous peak readings,signaling buyers were beginning tocome into the market.

Figure 3 takes up the action followingthe rally after point C.

In Figure 3, as the inside marketclimbed to TradeFlow bar A, theTradeFlow Volume study was warningof an end of the advance by the greenhistogram bars flashing lower readingsindicating buyers were being lessaggressive. At this point the TradeFlowOn Balance Volume line traced out apeak at point A in the study. Next, theinside market made a new high, point B


“THE TRADEFLOW VOLUME STUDY DISPLAYS THE ACTUAL NUMBER OF

CONTRACTS TRADED AT THE ASK PRICE ASA GREEN HISTOGRAM BAR AND AT THE BID

AS A RED HISTOGRAM BAR FOR EACHTRADEFLOW BAR.”

Software

and the associated TradeFlow OnBalance Volume reading was at a lowervalue than the previous reading. Inother words, buyers were less aggres-sive on this drive to make a new highthan on the previous drive. In addition,at point B when the inside market was6079.00 bid and offered at 6079.50,traders only hit bids as indicated by theall red TradeFlow bar. Sellers were evenmore aggressive in the second redTradeFlow bar at point B, as the barwas all red and wider than the previousbar.

The inside market then droppeddown and support was established at6077.50 bid (point C), the inside markettraded sideways and then made a newlow down to 6076.50 bid (point D).There are two things to notice: whenthe market traded to 6076.50 bid(TradeFlow bar D) the volume of trad-ing was very light and nearly 100 per-cent buying. The lower bid ask pair didnot draw out sellers and the TradeFlowOn Balance Volume reading was at ahigher reading at point D than the read-ing at point C. This indicated that sell-ers were not the aggressors, that therewas buying going on, and a rally fol-lowed.

SUMMARYOther charting styles fail to give you theinformation provided by theTradeFlow chart and two studies,TradeFlow Volume and TradeFlow OnBalance Volume. This innovative chart-ing style gives back to traders in theelectronically traded futures marketsthe same edge pit-traders had when theworld had to enter into their domain totrade.

For more information aboutTradeFlow charts and other featuresabout CQG as a solution for traders,please visit www.cqg.com.


Figure 3. TradeFlow Charts and TradeFlow On Balance Volume Study. Watching for divergencebetween the TradeFlow bars and TradeFlow On Balance Volume study can give a good readingon whether buyers or sellers are dominating the trading action.

Figure 2. TradeFlow Charts and TradeFlow On Balance Volume Study. As the inside market wasmoving back and forth between 6074.50 and 6076.50 the TradeFlow On Balance Volume linewas slowly edging up (point A to B).

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Day Trading the CurrencyMarket: Technical andFundamental Strategies toProfit from Market Swings

By Kathy LienJohn Wiley & Sons, Inc. 240 pages, £45.00ISBN: 0-471-71753-3

Day Trading the CurrencyMarket can be purchased fromthe Technical Analyst book-shop for £38.25 plus postage.To order please call 01730233870 and quote "TheTechnical Analyst".

The currency market is the biggest and fastest of all the financial markets - a $1.9trillion per day monster that is nearly 30 times larger than the New York StockExchange. As such, the FX market has traditionally remained the domain of the

large institutions - banks, fund managers and blue-chip corporates - and private investorshave found it difficult to enter in any meaningful way. In fact, 73% of FX activity is con-centrated in just 10 banks, giving them unrivalled access to order flow information. Anyattempt by a retail investor to trade profitably in the midst of such powerful counterpar-ties might easily be described as foolhardy.

However, the advent of online trading platforms and readily available leveraged prod-ucts (such as spread-betting, CFDs and covered warrants) has given private investors theconfidence to compete and has led to an explosion in this market over the past few years.One retail broker recently estimated the market to be between $25 and $50 billion a day,admittedly a small 2% of the total, but a big leap from what must have been near zero afew years ago.

But are private traders making any money? Not according to Drew Niv, CEO of ForexCapital Markets (FXCM), one of the largest FX brokers for the retail market. Niv wasrecently quoted in the Wall Street Journal as saying, "If 15% of day traders are profitable,I'd be surprised." Indeed, FXCM has developed a Speculative Sentiment Index, whichtracks the positions of its retails clients ostensibly for use as a contrary indicator.

In Day Trading the Currency Market, Kathy Lien, Chief Strategist at the same FXCMsets out to give private traders a fighting chance. This includes useful coverage of sub-jects such as currency correlations, the short and long term factors that move the market,and a section on how to determine if the trading environment is trending or range-bound(using a combination of ADX, risk reversals, implied volatility and momentum).

Lien's major strength, however, is in her ability to suggest rule-based technical strategiesto exploit widely accepted characteristics and idiosyncrasies of the market. For example,"Fading the Double Zeros" is a strategy that takes advantage of the strong tendency fororders to cluster around the big figures. "Waiting for the Real Deal" is another simple rule-based strategy that exploits the observation that "U.K. traders are notorious stop hunters",where a trend developed in the London early morning session reverses after a few hoursor when New York opens. And "Perfect Order" is an elegant moving average based strat-egy designed to pick up on strongly trending currency pairs.

Notwithstanding, Lien stresses the importance of the economic calendar. One of herown studies in this book examines the first 20 minutes of EURUSD trading following therelease of economic data. Nonfarm payrolls were the clear winner in terms of affect ontrading range (average 124 pips in 20 minutes), with FOMC decisions second in the tablebut well behind (74 pips), while GDP was "no longer a big deal" (43 pips). Lien concludes,"Nonfarm payrolls day would be a perfect day to stand on the sidelines and wait for pricesto settle, whereas GDP day still provides an opportunity for solid range or systems-basedtrading."

Kathy Lien's book - undoubtedly aimed at the private trader - is a leap forward in sophis-tication. Here is a book that provides genuine insight into the way the currency marketoperates and presents several strategies based on that knowledge. As such, this is recom-mended for any new entrant to the FX trading arena, whether retail or institutional, andto any experienced trader who is looking for new ideas, possibly for incorporation into amechanical trading system.

DAY TRADING THE CURRENCY MARKET

Book Review



COMMITMENTS OF TRADERS REPORT10 May 2005 - 9 May 2006

Futures only (open interest) commercial and non-commercial net positions

10-year US Treasury Source: CBOT

Dow Jones Industrial Average Source: CBOT

5-year US Treasury Source: CBOT

Swiss franc Source: CME

Pound sterling Source: CME Yen Source: CME

-150000

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0

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10/05/2005 02/08/2005 25/10/2005 17/01/2006 11/04/2006-200000

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1000000

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1400000Non commercial (LHS)Commercial

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10/05/2005 02/08/2005 25/10/2005 17/01/2006 11/04/20060

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10/05/2005 02/08/2005 25/10/2005 17/01/2006 11/04/2006-80000

-30000

20000

70000

120000

170000


-80000

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-60000

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0

10000

10/05/2005 02/08/2005 25/10/2005 17/01/2006 11/04/2006-20000

-10000

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

Non commercial (LHS)Commercial

-6000

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0

2000

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10000

10/05/2005 02/08/2005 25/10/2005 17/01/2006 11/04/2006-15000

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30000


Commitments of Traders Report


Commitments of Traders Report

Review of the Commitments of TradersReport released on May 12, 2006

In the November issue I said I was looking foranother up leg in the commodity/stock/currencybull market. In the January issue I said nethedger positions had moved to neutral and thattrends would continue. In the March issue I saidI was looking for a run to hard assets to set atop. Now, I believe net hedger positions suggestgrossly over valued markets and I am lookingfor a dramatic change in trend into a commodi-ty/stock/currency bear market.

When net commercial positions are near theextreme levels of the last one, three or fiveyears, hedgers view the markets as either over-valued or undervalued. In the current report wehave many net commercial positions near theone year and five year records. Gold, Euro FX,and Kansas Wheat have net commercial posi-tion near the largest net short of the last fiveyears. Crude, Yen, Pound, Corn, Bean Oil, andOJ, and combined Stock Indexes have nethedger positions near their largest net short inthe last year. Bonds have recently had theirlargest net long hedge in the last five years.

Having many markets with heavy net hedgepositions and some with significant underlyingdivergences suggests that the commodity mar-kets are grossly overvalued and that we may beat the end of the five year bull in commoditiesand equities.

George Slezak www.commitmentsoftraders.com

Euro Source: CME

Nasdaq Source: CME

Gold Source: CEI

-20000

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10/05/2005 02/08/2005 25/10/2005 17/01/2006 11/04/2006-150000

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0

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10/05/2005 02/08/2005 25/10/2005 17/01/2006 11/04/2006-200000

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Call +44 (0)20 7833 1441 for a discussion in full confidence or email [email protected]

Candidates Required

Are you looking for a role in the development of trading models? We would like to hear from candidates with:

1. Strong quantitative and analytical abilities; and

2. Outstanding academic qualifications, preferably in computer science, mathematics, physics, statistics or another quantitative field; and

3. Demonstrable interest in financial markets and aptitude for trading OR proven track record of developing quantitative models OR one to two years equities trading experience.

Is your company looking to recruit an individual with skills / experience in technical analysis?The Technical Analyst recruitment service can put you in touch with market professionals in the UK, US, Europe, South Africa, the Middle East and India, who are looking for positions as analysts/strategists or technically-based traders/investment managers.

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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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in Technical Analysis

TTACoverbackinsideJUN06.qxd 5/16/2006 5:06 PM Page 3

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