bob prechter interview - the technical analyst · bob prechter interview elliott waves and the 300...

6002

ju

ly/aug

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

Bob Prechter InterviewElliott Waves and the 300 year bear market

US stocks FX trading strategiesWaiting for the

Real Deal

Software featureTrading Technologies

X_Trader 7Is the 4-year rally

over for the S&P500?

This advertisement is intended for institutional investors who subscribe to The Technical Analyst magazine. It is directed at persons having professional experience in matters relatingto investments, and it relates to investments which are only available to, and will only be engaged in with, such investment professionals. Persons who do not have professionalexperience in matters relating to investments should not rely on this advertisement. This advertisement has been issued by Barclays Global Investors Limited (“BGI”), which is authorised andregulated by the Financial Services Authority in the United Kingdom (“FSA”). iShares plc and The Exchange Traded Fund Company plc (the “Companies”) are investment companies with variable capitalincorporated in Ireland and are authorised by the Financial Regulator in Ireland. The iShares funds are authorised by the Financial Regulator in Ireland. Any application for shares in any fund is on theterms of the relevant prospectus. The iShares funds may not be registered in your jurisdiction. In particular, none of the shares has been or will be registered under the United States Securities Act of1933, or as an investment company under the 1940 Act, or the laws of any of the states of the United States, and, therefore, may not be offered or sold, directly or indirectly, in the United States or toor for the account of any U.S. Person, as defined by the 1933 Act, except pursuant to an exemption form, or in a transaction not subject to, the regulatory requirements of the 1933 Act, the 1940 Actand any applicable state security laws. In addition, the Companies have not been, nor will they be, qualified for distribution to the public in Canada as no prospectus for the Companies has been filedwith any securities commission or regulatory authority in Canada or any province or territory thereof. This document is not, and under no circumstances is to be construed, as an advertisement, or anyother step in furtherance of a public offering of shares in Canada. No person resident in Canada for the purposes of the Income Tax Act (Canada) may purchase or accept a transfer of shares in theCompanies unless he or she is eligible to do so under applicable Canadian or provincial laws. This advertisement is not intended to constitute an offer to sell or a solicitation of an offer to buy shares ofany fund, nor shall any such shares be offered or sold to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction.BGI and/or its affiliated companies and/or their employees may, from time to time, hold shares in the funds included in this publication or any underlying shares heldwithin the funds, and may as principal or agent buy or sell the funds or securities. Copies of the relevant prospectus can be obtained from www.iShares.net or by calling+44 (0)20 7668 8007. “iShares” is a trademark owned by Barclays Global Investors N.A. © 2006 Barclays Global Investors Limited. All rights reserved.

Trade the world with

The world is your oyster.(Plus plenty of options if

you’re allergic to seafood.)The extensive range of iShares exchange traded funds gives you access to markets across the globe.

Choose global benchmarks in developed economies. Add emerging markets such as Brazil, China and

Korea into the mix. Explore beyond geography into asset classes, style products, high yield and

inflation-linked products. A world of opportunity awaits you, with iShares.

Institutional enquiries: +44 (0)20 7668 8007

or www.iShares.net or ISHARES <GO>

© 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

InterviewBob Prechter

We talk to the undisputed king of Elliott Wave.

Brent crude outlookOil prices to head higher

Jean Paul van Straalen of ABN Amro discusses his short and long term

outlook for Brent crude.

An FX trading strategyWaiting for the Real Deal

If the opening of the London FX market is a period of stop hunting, then once these are

taken out, the true direction of the market is then established. Kathy Lien of FXCM in

New York explains.

JULY/AUG

>06

>20

> 31

>

> >

WELCOMEIn this issue we enjoy a talk with world renowned analyst and author, Bob Prechter of

Elliott Wave International. As well as discussing the pros and cons of Elliott Wave the-ory, Bob outlines his views on the global markets and explains why stocks and com-modities have now embarked on the biggest bear market for 300 years. Needless to

say, Elliott waves have a large part to play in his outlook.

We hope you enjoy this issue of the magazine.

Matthew Clements, Editor

July/August 2006 THE TECHNICAL ANALYST 1

Insightful UK5th Floor, Network HouseBasing View, BasingstokeHampshire RG21 4HGUnited KingdomTEL +44 (0) 1256 339800FAX +44 (0) 1256 [email protected]

Copyright® 2006 Insightful Cor-poration. All rights reserved. This advertisement is for informational purposes only. INSIGHTFUL MAKES NO WARRANTIES, EXPRESS OR IMPLIED IN THIS SUMMARY. S, S-PLUS, InFact, Insightful, Insightful Corporation, the Insightful logo, and “the knowledge to act” are trade-marks or registered trademarks of Insightful Corporation in the United States and/or other countries.

Insightful SwitzerlandKägenstrasse 174153 ReinachSwitzerlandTEL +41 61 717 9340FAX +41 61 717 [email protected]

Insightful France7 Rue Auber31000 ToulouseFranceTEL +33 (0) 5 62 27 70 60FAX +33 (0) 5 62 27 70 [email protected]

Predict, Profit and Share the ResultsInsightful’s new Dynamic Reporting Suite is abreakthrough in creating and delivering yourfi nancial analytics on demand.

Register now at www.insightful.com/optimizefor our free webcast showing you how to moreeffi ciently and eff ectively deliver results.

For more information please visit www.insightful.com or email [email protected]

With Insightful your company now has

The Knowledge to Act.™

Editor: Matthew ClementsManaging Editor: Jim BissAdvertising & subscriptions:Louiza Charalambous Marketing: Vanessa GreenEvents: Adam CooleDesign & Production: Paul Simpson

The Technical Analyst is published byClements Biss Economic Publications LtdUnit 201, Panther House,38 Mount Pleasant, London WC1X 0AN

Tel: +44 (0)20 7833 1441Web: www.technicalanalyst.co.ukEmail: [email protected]

SUBSCRIPTIONS

Subscription rates (6 issues) UK: £160 per annumRest of world: £185 per annumElectronic pdf: £49 per annumFor information, please contact: [email protected]

ADVERTISING

For information, please contact:[email protected]

PRODUCTION

Art, design and typesetting by all-Perception Ltd.Printed by The Friary Press

ISSN(1742-8718)

INDUSTRY NEWS

MARKET VIEWS Brent crude: Bull trend to continue?An overview of Middle East marketsS&P 500: The 4-year cycle

TECHNIQUES Scalping the markets The Belt Hold - a powerful candlestick pattern FX strategy: Waiting for the Real Deal Why does the UK stock market go down?

INTERVIEWBob Prechter of Elliott Wave International

SUBJECT MATTERS Research update

SOFTWARETrading Technologies’ X_TRADER 7

BOOK REVIEWInside the House of Money by Steven Drobny

COMMITMENTS OF TRADERS REPORTRECRUITMENT

04

060811

14172025

31

37

41

45

4648

CONTENTS 2 REGULARS>

17 45

A powerful candlestick pattern Interviews with top traders and hedgefund managers


4 THE TECHNICAL ANALYST July/August 2006

Industry News

CQG RELEASES TRADEFLOW ™

Charting provider, CQG, hasannounced the launch of its newTradeFlow™ charts and studiespackage. Available in CQG's latest7.3 version, Tradeflow uses colourcoded bars to instantaneously indi-cate the volume of buying and sell-ing in a particular exchange tradedmarket. By displaying the relativevolumes of contracts traded at thebid and offer prices, CQG says users

have access to enhanced markettransparency and are able to analyseprice independently of time. Alsoreleased are two new studies:Tradeflow Volume and TradeflowOn-Balance Volume.

Further details on TradeFlow™are available for download from theTechnical Analyst website at:wwwwww..tteecchhnniiccaallaannaallyysstt..ccoo..uukk//ssooffttwwaarree

The TechnicalAnalyst launches

DERIVATIVES TRADING BOOSTEDBY INTEREST RATE UNCERTAINTYAND TURMOIL IN OIL MARKET

The latest report from the Bank ofInternational Settlements (BIS) hasshown a sharp jump in exchangederivative trading in the first quarterof 2006. Total turnover in interestrate, equity and currency derivativesreached $429 trillion, an increase of28% on Q1 2005. The BIS says thisincrease surpasses the rise in tradingusually expected to come in the firstquarter of the year. The organisa-tion points to increased uncertaintlyover the future course of monetarypolicy in the major economies andthe turmoil in the the global oilmarket, boosting trading in USDand JPY money market contracts by26% (on Q4 2005) and trading inenergy derivatives by 40% (on Q42005). On the other hand, an 11%increase (on Q4 2005) in stockindex derivatives trading is attributa-ble to higher equity prices ratherthan a significant change in tradingvolume.

The Technical Analyst will bedevoting a permanent section of itsbi-monthly magazine to automatedtrading systems from September2006. This exciting new section willfeature the very latest news on allaspects of automated trading sys-tems and has been launched inresponse to reader demand for agreater focus on trading systemsand software. Content will include:

Automated Trading Systems willbe available as part of the TechnicalAnalyst magazine or as a separatePDF file. All editorial and advertis-ing enquiries should be emailed tothe editor: eeddiittoorr@@tteecchhnniiccaallaannaallyysstt..ccoo..uukk

Software, product news & features Interviews with key market players Quantitative and technical strategies Building trading systems & backtesting Algorithmic & high frequency trading Electronic trading platforms

eSignal is a division of Interactive Data Corporation (NYSE: IDC).*All fees will be refunded to you, minus any taxes and applicable add-on service/exchange fees, if you cancel within the first 30 days of service. Call for details. x13445

The FutureSource Workstation advantageoffers you:�Quotes — Global data from the exchanges you trade

�Charts — Ease-of-entry for chartable expressions plus the intervals you need

�European and US weather maps from WSI for weather risk management

�Fixed pages — Pre-set, easy-access energy information layouts from Platts and Dow Jones

�News — Your choice of trustworthy sources

�Alerts — Price, time, news and customisable condition alerts

�DDE links — Simple copy-and-paste of data into Excel

Meet the demands of the commodities market head-on with superior software tools and service and the power of award-winning eSignal data.

Call now for your FREE personalised demonstration and get 30 days risk-free*.

+44 (0)20 7825 7910Asia: +61 2 9261 1513 • Australia: 1800 089 275

You NeedFutureSourceWorkstation!

Trading Futures?

FutureSource workstation brings real-time, streaming futures, options, cash, energy, foreign exchange and equities data direct to your PC.

“Workstation is simply the best, as well as the best-for-the-value system I have used in more than 10 years of trading.”

— Olivier Jakob, Business Development Manager, Lukoil International Trading and Supply Company

Market Views



Market Views

BRENT CRUDE HEADING FOR NEW HIGHS by Jean Paul van Straalen

The long term outlookThe weekly chart of the Brent crudeindex (IPE) reveals that the price of oilhas continued to reach new highs(Figure 1). Our analysis shows that theprice of oil is still in an upward long-term trend and - although it retracedfrom its high of $74.40 on 3 May 2006to a support area of $66.67 - it remainsin a multi-year bull market.

The 50-week rate of change indicator(ROC) (plotted below the Brent crudeindex) has remained above the zero linefor the last few years, and has contin-ued to support the bullish long-termtrend, although it should be noted thatwe are starting to see a negative diver-gence. Positive momentum (the ROCabove the zero-line) is considered anessential characteristic of a healthy bulltrend but after a strong peak in theROC indicator we typically see a signif-icant decline in oil prices. Nevertheless,the longer-term uptrend is still intact -as long as the support level around the$66.67 level (the 20-week simple mov-ing average) and the upward slopingchannel line are not significantly bro-ken.

The short-term outlookIf we look at developments this year

(Figure 2), the acceleration in theuptrend is clearly visible in January andApril. In June, Brent bounced off theupward sloping trend channel/supportline after it crossed the two simplemoving averages on the downside. Anupside break above the 20 and 50-daymoving averages would trigger a buysignal and will confirm the bullish sen-timent.

The early year rally led to an over-bought condition which resulted in ashort term sell-off from the high inMay. This is illustrated by the movingaverage convergence/divergence(MACD) indicator. The MACD indica-tor shows the difference between the12- and 26-day moving averages, thushighlighting the strength and momen-tum of the trend. The MACD (bottompanel in Figure 2) has been successfulin identifying turning points within thetrend-channel in the last year, as high-lighted by the arrows in the over-bought/oversold territories.

From its low in November 2005 at$54.13 to its high in May 2006 at$74.40, Brent crude retraced back tothe 38.2% Fibonacci level at $66.66 inJune 2006. The current price is at a cru-cial level in the longer term uptrend. Ifthe $66.67 level holds, we could see oil

bouncing back to higher levels with adistinct short-term resistance at thehigh of $74.40. If the $66.67 level isbroken on the downside, we may seeBrent decline further in the short termto the support level at $64.30 - the 50%Fibonacci level - and then the bullishtrend will significantly deteriorate.

In the short term, we expect Brentwill resume its upward trend based onthe breakout from the symmetrical tri-angle formation, the crossover of theof the MACD signal line and the strongsupport-area at $66.67. An upwardbreakout of the continuation pattern isclearly confirming the bullishness ofBrent crude. Based on this short-termoutlook, we expect prices to re-test thehigh of early May at $74.40.

Jean Paul van Straalen is a quanti-tative strategist and portfolio man-ager at ABN Amro AssetManagement

The views and opinions expressed above maybe subject to change at any given time.Individuals are advised to seek professionalguidance prior to making any investments.The value of investment may fluctuate. Pastperformance is not an indication of futureperformance.

Figure 1. Weekly Brent crude Figure 2. Daily Brent crude


Market Views

MIDDLE EAST MIRAGE IN THE DESERT? by Ron William

After a stratospheric bull-run inwhich the Saudi stock marketrose 774% in 39 months, it

should have come as no surprise whenthe grossly overvalued petrodollar mar-kets of the Middle East finally capitu-lated between November 2005 andMarch 2006 (see Figure 1). In the after-math of this most recent stock marketcrash, we find ourselves drawing histor-ical parallels with other asset bubbles inan attempt to evaluate which stage theMiddle East markets are now at - a con-tinuing mirage or one of real value.

Irrational exuberanceThere is a natural relationship betweenthe extent of an advance in a stockmarket and its subsequent fall. In a sim-ilar fashion to the most recent stockmarket bubbles - the technology maniain the late 1990s and Japan in the 1980s- Middle East investors had been guiltyof ‘irrational exuberance’, a term madefamous by the former US chairman ofthe Federal Reserve, Alan Greenspan,during a televised speech in 1996.

Irrational exuberance alludes to thephenomenon when financial marketsaccelerate to unsustainable levels underthe influence of herd psychology,resulting in the third and final stage ofa secular bull market in which pricesurges result in investor euphoria whichin turn feeds further price surges. InRobert Schiller’s exemplary book‘Irrational Exuberance,’ this stage isdescribed as spreading “…psychologi-cal contagion from person to per-son…bringing in a larger class ofinvestor, who despite doubts about thereal value of an investment, are drawnto it partly through envy of others’ suc-cesses and partly through [speculator’s]

excitement.’This characterises what happened in

the Middle East, where it was commonfor retail investors to join the equityparty, albeit late, by selling their person-al assets and obtaining a loan from their

bank with collateral as security. In fact,the best anecdotal evidence of thismindset was the hiring of a football sta-dium to facilitate over 800,000 peopleapplying for an IPO in a yet-to-belaunched bank.

Figure 1: Middle Eastern equity markets out perform the MSCI Emerging markets.Lower axis illustrates three-month volatility across the region rocketing to its highestlevel for which we have records, three times its historic levels and the rest of emergingmarkets.

Figure 2: Sentiment and liquidity combine to create expanding valuations on the wayup and contracting valuations following the asset bubble's bursting.


Market Views

BubbleologyThe key drivers of a bubble - sentimentand liquidity - can be found in the sup-ply and demand mechanics of a pricechart. The rollercoaster journey usuallybegins with a "paradigm shift", whichthen sparks an extraordinary rise aboveits historical mean valuation, beforecrashing back. On the way up, the riseattracts more investment, temptingmomentum players to increase leverageand amplify gains. This fuels accelera-tion in a self-feeding cycle, before buy-ers capitulate in a vacuum of demand,

suffocated under the weight of margincalls.

In isolation, a strong rise in price doesnot necessarily imply a bubble, becauseprices may start from undervalued lev-els. It is only a bubble when sentimentand liquidity combine to expand valua-tions (increasing price-earnings ratio(PER) and lowering yields) well abovehistorical means (see Figure 2). Theopposite is true following the burstingof a bubble, with contracting valua-tions on the way down (lowering PERand increasing yields), eventually pro-

ducing bargain basement levels.Bubbles are fractal in nature, with dif-

ferent types (small/big) causing differ-ent effects. The larger ones typicallydevelop after several years of econom-ic growth, represented within a healthysecular uptrend. For example, the tech-nology bubble came in the last threeyears of a nine-year economic expan-sion, following fifteen years of a rela-tively strong stock market. Expandingvaluations helped produce the mania ofthe late 1990s, with PER over 30, wellabove the long-term average of about14-16.

The Middle Eastern bubble The Middle Eastern bubble was fuelledby an unprecedented inflow of liquidi-ty, with the valuations of some firmsrising to more than 1,000-fold.Moreover, PER's of the Saudi marketreached a factor of 40, compared withthe average PER that stood between 12and 15 for many years. At its peak theregional market cap of over US$900bnconstituted 20% of total emerging mar-ket cap (with no listed oil stocks),underscoring the extent of overvalua-tion.

Nevertheless, oil has a pivotal role indriving valuations in the Middle East. Asimple overlay between oil and the

Figure 3: Crude oil overlaid with the Saudi Tadawul Index, illustrating a high correla-tion between the two markets. However, the index overshot its target in late 2005 (dur-ing oil's range period). Note, a six-month rolling correlation study indicates the rela-tionship has now slumped to its weakest level.

Figure 4: A comparison of Saudi's Tadawul Index to the NASDAQ and Nikkei bub-bles of the late 1990s and 1980s. Note, different initial stages following the bursting ofeach bubble.

“EVERY PERCENTAGEPOINT GAIN IN OIL

BETWEEN 2003 AND2006 HAS LED TO ATHREE PERCENTAGE

POINT RISE IN SAUDI’S TADAWUL

INDEX.”

→→


Market Views

Saudi stock market implies a strongcorrelation between oil and corporateprofits (Figure 3). Moreover, it revealsthat every percentage point gain in oil(between 2003 and 2006) has led to athree percentage point rise in Saudi'sTadawul Index. However, even by thisbasic measurement we can see theindex significantly overshot its target inlate 2005 (during oil's range period),before correcting violently lower. A six-month rolling correlation indicates therelationship has now slumped to itsweakest level below the 2002/2003troughs. Once oil reasserts its uptrendand equities stabilize, it is plausible thatsome of these excess petrodollars mayprovide further support for the region'sequity market.

Superimposing price curves of differ-ent bubbles, while simplistic, helps

illustrate a comparison of performanceand timing (Figure 4). By adjustingscales and comparing the SaudiTadawul Index chart with the NAS-DAQ and Nikkei bubbles, price dynam-ics can be deconstructed into threestages; capitulation, trending and exten-sion/basing. The first stage triggers thesharpest correction, whereas the sec-ond stage is much larger in scale, butless violent in the sense that it is spreadout over a greater time period.Meanwhile, the final stage involvesextension of the trend and inevitablebasing.

ConclusionThe Middle Eastern bubble has left alasting footprint on financial boursesand history will always provide a valu-able rebuke to investors. The good

news is that the most terrifying stagesof the bubble burst are over and stocksare reverting closer towards their mean.However, it is still too early to recom-mend technical levels at whichinvestors may re-enter the market. Inthe meantime, until the dust settles,prices will rise and fall intermittentlyand it may be a while longer beforeMiddle Eastern markets are ripe fornew investments. Ultimately, a contin-ued high oil price will ensure ample liq-uidity within the region, offering enor-mous amounts of spending to the restof the economy. The implication is thatthere is more growth to come, whichwill in time rationalise high valuations.

Roni William is technical analyst atStockcube Research.

Saudi Arabia Oil Refinery

Many cycles affect the marketsand one of the most recog-nized is that which provides

an important low every 4 years. Figure1 shows the recurrence of this cyclesince 1962 (blue circles). It was offtrack only at the bottom due in 1986,which occurred one year later (red cir-cle). The last 4-year cycle low happenedin October 2002, so there is a bottomdue for 2006 (green circle).

On the weekly chart (Figure 2), wecan see that March-April of the last sixyears has provided important turning

points (red circles), leading to signifi-cant moves. These turning points arealternating tops and bottoms startingwith a top in March 2000. Followingthis order, a top was due in March-April 2006 and it was only slightly offwhen it occurred on May 8.

Elliott WavesElliott Wave theory states that a direc-tional move takes place in 5 waves(1,2,3,4 & 5) and corrections in 3 waves(A, B & C). Wave 3 of the 5-waveadvance is never the shortest one and

when extended, waves 1 and 5 are oftenabout equal. The logarithmic weeklychart (Figure 2) shows a 5-waveadvance from the October 2002 lowthat seems to be complete. We can alsosee that wave 3 is extended and thatwaves 1 and 5 are about equal on a per-centage basis (see vertical blue lines). Acorrection could unfold from the highmade on May 8, 2006. Elliott Wave the-ory indicates that the most likely targetfor such a correction would be the areaof the 4th wave of the preceding 5-wave advance - in this case 1060-

IS THE 4-YEAR RALLY IN THE S&P500 OVER ?by Nicholas Di Carlo

Figure 1.

Market Views


→→


Market Views

1163 (green box).

Other indicators From the weekly chart we can see animportant high at 1316 in May 2001that has only been slightly surpassed bythe May 8 top (green horizontal line).We can acknowledge that this level hasprovided strong resistance. From there,the market went down and found sup-port on the ascending trendline drawnfrom two important intermediate lowsmade in 2005 (red line).

The RSI reached an overbought levelabove its horizontal red line at 75 at thebeginning of 2004. Since then, it hasshown lower highs while the price hasreached higher highs. This divergence isa warning of a potential change oftrend. Moreover, the Nasdaq's topdates back to January 11 and this indexis considered a leading indicator as it

often changes its trend well in advanceof other stock indices.

Conclusion All the aforementioned indications hintat the possibility that the S&P500 mayhave reached an important high on May8 and that the market has begun a cor-rection of the rally that started inOctober 2002. If this correction con-tinues, the most probable target wouldbe the area between 1060 and 1163.The period from September toDecember 2006 seems to be a likelytime window to witness the next 4-yearcycle low.

The first line of defence on the waydown is the June 14 low at 1219, whichcurrently provides good support. Aclose below that level would be addi-tional evidence that a top of impor-tance is already in place. However, we

have to be aware that before supportgives way, we might witness a signifi-cant bounce as we enter a time of theyear where seasonality speaks in favourof a summer rally. However, a weeklyclose above the May 8 top at 1326would probably postpone or even com-pletely invalidate this scenario.

Nicolas Di Carlo, CMT, is a traderand technical analyst at a Swisstrading company.

Disclaimer : this article is intended for educa-tional purposes only. It is not a trade recom-mendation to buy, sell or hold any securitywhatsoever. Any decisions in financial mar-kets are solely the responsibility of the reader,and the author does not assume any responsi-bility at all for those individual decisions.Please conduct your own research and takeresponsibility for your acts.

Figure 2.

Market Master Xec provides all the extensive tools

that the serious investor and day trader requires,

and combines these with such ease-of-use that even

novice investors will be charting and analysing

PrimeChartsThe International Analysis Solution

� Extremely user friendly � Fast, professional and customiseable graphics, menus and toolbars � Comprehensive Portfolio Manager controls your assets � Powerful Share Highlighter finds buy and sell opportunities� Market Scanner alerts you to stoploss signals and price moves� Market Stats feature gives you top Movers by price, volume and value� Quicklist allows you to rank securities by many fields - market cap, year high/low etc. � Extensive Online Help � Free Program Update via the Internet Plus much more...

Market Master X- ce

A Real-Timepackage

for all Bloomberg Terminals

An End-of-Day

package for all

SeriousInvestors

www.primecharts.com www.marketmasterxec.com

SCALPINGTECHNIQUESFOR THE FXMARKET

Scalping has traditionally been defined as a technique whereby a

trader could profit from very short-term moves in the marketplace by

using a combination of 1 and 5-minute charts as well as a keen

sense of tape reading. How suitable is such a strategy for the FX

markets? This article will illustrate how some of the techniques and

indicators used in a scalping strategy can be overlaid onto a swing

trading approach in order to maximize entry and exit points.

by David Floyd


Techniques


Techniques

As with any technical approachthat combines a fair degree ofdiscretion, there are limitations

in a scalping strategy. For example, rigidentry guidelines may prevent a tradefrom being executed. However, theeffectiveness and precision of the entrytechniques will typically avoid costlydrawdowns while the trade is playingout.

Here are three examples of a short-term scalping strategy (see box for trad-ing parameters):

USD/JPY shortThis is an ideal example of using a bigpicture viewpoint/analysis, but drillingdown to a lower time frame in order topinpoint the entry in an attempt to exe-cute at a price that will perhaps provideimmediate validation.

In Figure 1, a daily chart ofUSD/JPY, I am anticipating that anupward re-testing of the bull trend-linewill fail. In this case, the ideal scenariois to have the daily stochastic pointingdown in order to have bearish momen-tum at our back. However, as the lowerchart shows, this is not the case.Therefore we wish to 'speed up' theanalysis by scaling down a time frameor two to forecast the turning down ofthe stochastic.

Figure 2 provides an ideal example ofusing the shorter time frame (240minute chart in this case) for execution

and the following signals are generated:Spinning top suggesting an immi-nent reversal Stochastic crossing lower ignitingbearish momentumTrend line break (115.53) triggeringideal entry

If there is one question mark on thisentry it is that the current trend on the240 minute chart is upwards sloping.The trend is defined by two parameters:

The slope of the 20-period expo-nential moving average (EMA) overthe last half a dozen barsWhether the price bars are above orbelow the EMA

Ideally, for shorts, price bars are belowa downward sloping moving averageand vice versa for longs.

So where do we take profits? In thiscase, given that the trend is upwards on

the short time frame being used forexecution we don't have the luxury ofletting the trade ride. In this instance,the logical exit points are either at the50% Fibonacci retracement level(115.12) or at the swing high of 115.24.These levels are easily achieved.

AUD/NZD shortIn this scenario we have a situationwhere the daily chart (Figure 3) sug-gests a possible short but it does notprovide all the points on the checklistfor a high probability short:

Wave 4 completion is confirmed bya stochastic cross lower and a trend-line breakPrice targets are calculated by a sim-ple Fibonacci extension of wave 3using a 1.25 and 1.50 setting (Figure4)

Regardless of the trade, it is impor-

A Short Term Trading Technique for the FX MarketsKey Points

Trade selection is made using daily charts in combination with 60 minuteand/or 240 minute chartsWeekly chart are used to identify long-term support and resistance areas onlyThe average trade duration is several daysMarkets traded are G10 pairs and several crossesRisk is defined in advance of each trade and lot size is calculated based onstop-loss levelsIndicators and tools used include stochastics, trendlines, RSI, Elliott Waves,candlestick patterns, and Fibonacci retracements and extensions

→→

•

• • • •

•

Figure 1. Figure 2.

•

•

•

•

•

1.

2.


Techniques

tant to respect the timeframe the tradewas executed on. In this case, the exe-cution was based on analysis of the240-minute chart so exit points alsoneed to be calculated from the sametime frame.

Given that our first target was 1.1740,we still want to give the chance for thetrade to play out. However, given thatthe trade is approximately 100 pips inthe money and the stochastic suggestthat the selling pressure is waning(Figure 5), it is prudent to take some of

the trade off and adjust the stop-loss toeither break-even or to some price thatsuits the traders risk tolerance. A trail-ing stop is ideal.

NZD/SEK shortFigure 6 provides a perfect example oftwo time frames coming together toisolate a fantastic short opportunity. Inthis case, the daily chart (left panel) isalready confirmed as bearish. It is nowjust a matter of isolating the entry pointas a way to avoid the trade going

against you while waiting for the down-ward trend to resume. Until the 60-minute charts stochastic rolls back over(bottom panel) prices are likely to drifthigher. The better entry is to wait for apullback into Fibonacci resistance at5.2450-5.2500 (right panel) and wait forbearish momentum to resume by wayof a stochastic cross.

David Floyd is CEO of AspenTrading

Figure 5. Figure 6.

Figure 3. Figure 4.


Techniques

It's widely accepted that candlestickformations reveal high probabilityreversals, but how does a trader

know how strong a new move is goingto be? There is a simple candlestick pat-tern that not only helps to confirm thetrend reversal, but can also tell us thatthe new trend has great force: The BeltHold signal (Yorikiri in Japanese).

The opening price of a Bullish BeltHold signal gaps open well below thecurrent trading area (Figure 1). Veryoften, the buying will start almostimmediately from that level and theprice starts moving back up into, orvery near, the previous trading area.The bearish Belt Hold signal has thesame construction except it gaps openat the top and comes back down intothe trading range. For the sake of illus-tration, all explanations in this descrip-tion will be for the Bullish Belt Holdsignal.

Key elements of a Belt Hold signal1. The price will gap away from the cur-rent trend.2. The price will usually open at theextreme price creating a shaven head orshaven bottom. If a shadow appears, itis usually very small.3. The bullish candle at the bottom orthe bearish candle at the top is extreme-ly long.4. The pattern can act alone or it can becombined with other candlestick rever-sal patterns such as the meeting line sig-nal, the piercing pattern, or the bullishengulfing signal at the bottom (or thecorresponding sell signals at the top)

Trader psychology The gap down below the previous

trend reveals panic selling or the impa-tience of sellers wanting to get out ofthe position as quickly as possible.Buyers then step into the market bring-ing the price right back up near the pre-vious trading range. Where do mostinvestors panic sell? At the absolutebottom. The immediate formation of astrong bullish candle after a severe gapdown in price reflects new investor sen-timent. The selling pressure is over andthe last of the sellers have finally been

eliminated. This usually creates an envi-ronment of new optimism coming intothe price trend.

As a reversal signalUnderstanding the ramifications of aBelt Hold signal allows an investor tolook for other technical factors thatmay add to the credibility of the rever-sal signal. For example, in Figure 2 aBelt Hold signal occurred at the samelevel as a previous bullish candle-

A POWERFUL CANDLESTICK PATTERN:THE BELT HOLD SIGNAL by Steve Bigalow

Figure 1. The Belt Hold

→→

Techniques


stick signal, a Bullish Harami, and pro-vided greater evidence that an uptrendhad begun.

Furthermore, the Belt Hold signaloccurred in the same area that thedowntrend stopped two weeks earlier,suggesting a double bottom may form.The implications of the Belt Hold sig-nal, i.e. that the last of the sellers havebeen soaked up, together with the factthat a double bottom may be inprogress, makes it extremely likely thatthe Bulls are starting to take control.

Figure 3, a chart of First IndustrialRealty Trust Inc., demonstrates how aBelt Hold/Bullish Engulfing signalbrings new life to the price trend.Whatever investor sentiment had beendominating the price trend over theprevious few months was completelyaltered. The gap down in price, fol-lowed by the immediate strong buying,changed the perception of price activi-ty significantly.

As a continuation signalThe Bullish Belt Hold is also aninformative pattern for revealing whenprofit taking is over in an uptrend, mak-ing it an accurate continuation signal.

In Figure 4, a chart of BroadwingCorp., a Belt Hold signal occurs whereprofit taking 'could' have occurred. Theprofit taking was taken out very quick-ly. The Bulls stepped in immediatelyand continued their buying. Thisreveals that the uptrend is likely to con-tinue with excessive strength. Havingthis knowledge allows the candlestickinvestor to maintain their position andto take profits at much higher levels.

Stephen W. Bigalow is author of"Profitable Candlestick Investing:Pinpointing Market Turns toMaximize Profits" and "High ProfitCandlestick Patterns", and isprincipal of:www.candlestickforum.com.

Figure 2. Sandisk Corp.

Figure 3. First Industrial Realty Trust Inc. The Belt Hold/Bullish Engulfingsignal creates a new investor dynamic in the price perception of the stock

Figure 4. Broadwing Corp.

presents

Three premier events for trading and investment professionals

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

See our website www.ta-conferences.com for details on these and other TA events.

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

Automated Trading Systems 2006, UK 12 October 2006

www.ta-conferences.com +44 (0)20 7833 1441

[email protected]

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

Jeffrey Kennedy Robin Griffiths Jeremy du Plessis

Jeffrey Kennedy Robin Griffiths Trevor Neil

James Binney Rami Habib Rashpal Sohan

Techniques


Techniques

One of the biggest frustrationsthat currency traders havewith the currency market is

the lack of volume data. This hasforced many traders to develop strate-gies that rely less on the level ofdemand and more on the micro struc-ture of the market.

The most unique characteristic thatday traders try to exploit in the FX mar-ket is the availability of 24-hour roundthe clock liquid trading. Although themarket is open for trading throughoutthe course of the day, the extent ofmarket activity during each trading ses-sion can vary significantly.

Traditionally, trading tends to be thequietest during the Asian market hourswhich means that currencies such asEUR/USD and GBP/USD tend totrade within a very tight range duringthese hours. The London market how-ever is one of the busiest accountingfor 31% of total volume. Adding inGermany, France and Switzerland,European trading as a whole accountsfor 42% of total FX trading. In con-trast, the US market is only second tothe UK for the title of most active trad-ing center accounting for a total ofapproximately 19% of marketturnover. This makes the London openexceptionally important because it givesthe majority of traders in the market anopportunity to take advantage ofevents or announcements that mayhave occurred during late US trading orin the overnight Asian session. Thisbecomes even more critical on dayswhen the FOMC meets to discuss andannounce monetary policy because theannouncement occurs at 2:15pm NYTime, which is past the London close.

The WRD strategyThe "Waiting for the Real Deal"(WRD) strategy focuses on the Britishpound, the currency that trades mostactively against the US dollar during theEuropean and London trading hours.There is also active trading during theUS/European overlap, but besidesthose time frames, the pair tends totrade relatively lightly because themajority of GBP/USD trading is donethrough UK and European marketmakers. This provides a great opportu-nity for day traders to capture the initialdirectional intra-day move that general-ly occurs within the first few hours oftrading in the London session.

The WRD strategy exploits the com-mon perception that UK traders arenotorious stop hunters which meansthat the initial movement at theLondon open may not always be thereal one. Since UK and European deal-ers are the primary market makers forGBP/USD, they have tremendousinsight into the extent of actual supplyand demand for the pair. The WRDstrategy first sets up when inter-bankdealing desks survey their books at theonset of trading and use their clientdata to trigger close stops on both sidesof the markets to gain the pip differen-tial. Once these stops are taken out andthe books are cleared, the real direc-tional move in GBP/USD is ready tooccur - and this is what we are waitingfor.

The rules for the strategy are to betaken as general guidelines. It is moreimportant to understand the logicbehind the strategy than to follow therules blindly. With this strategy you arelooking to wait for the noise in the mar-

kets to settle down and to only tradethe real market price action afterwards.If a currency pair breaks a range lowand has the strength to recuperate fromthe low to break the range high, thenthe break is probably a real one thatcould very well see a strong continua-tion move.

Here are the rules/guidelines:

Strategy RuleLongs:

Early European trading inGBP/USD begins around 1:00 AMNY time and the pair makes a newrange low of approximately 25-pipsbelow the opening price (the rangeis defined as the price actionbetween the Frankfurt and London‘Power hour’ of 1am NY Time to2am NY Time but can also includethe Asian trading session range ifthat is clearly defined)The pair then reverses and pene-trates the highPlace an entry order to buy 10 pipsabove the high of the rangePlace a protective stop no morethan 20-pips away from your entryPlace a target at two times theamount risked or 40 pips fromentry

Shorts:GBP/USD opens in Europe andtrades approximately 25-pips abovethe high of the Frankfurt toLondon Power HourThe pair then reverses and pene-trates the lowPlace an entry order to sell 10 pipsbelow the low of the range

FX TRADING STRATEGY: WAITING FOR THE REAL DEALby Kathy Lien

1.

2.

3.

4.

5.

1.

2.

3.


→→


Techniques

Place a protective stop no morethan 20-pips away from your entryPlace a target at two times theamount risked or 40 pips fromentry

*Use 15 minute charts

Although the rules or guidelines of thisstrategy are important, what is moreimportant is to understand the dynam-ics of the currency's price action whenthe move occurs. Therefore eventhough we are first looking for a breakof 25 points or more above the range

high or low it is not a hard written rule.In a short scenario for example, if thecurrency pair breaks above the range by20 points or so, and then reversescourse to break the range low, it stilltells us that the initial break higher wasa fake one and that the correspondingslide was so significant that it not onlybroke below the range high, but is alsomaking a new range low. Thereforewhat is happening in the shift of direc-tion is more significant than theabsolute value of how far the initialfalse break extended.

ExamplesNow let us go ahead and take a look atsome examples of this strategy inaction.

The first example is a short that wasinitiated on June 8, 2006 (Figure 1).During the Frankfurt - London powerhour, we saw GBP/USD quietly con-solidate. At 1:45am EST, GBP/USDbegan to break higher as Europeaninterbank traders join the market.Prices were taken above the range highby 20 pips and we wait patiently to seeif the break is a real one or simply stop

Figure 2.

Figure 1.

“THE LONDON OPEN [IS] EXCEPTIONALLY

IMPORTANT BECAUSE ITGIVES TRADERS AN

OPPORTUNITY TO TAKEADVANTAGE OF EVENTS

THAT MAY HAVEOCCURRED DURING

LATE US TRADING OR INTHE OVERNIGHT

ASIAN SESSION.”

4.

5.


Techniques

induced. We quickly see that the rallywas not sustained and prices began tosell off, breaking the range low around2:45am EST. We enter short at 1.8540(10 pips below the low) with a stop at1.8560, 20 pips higher. The move con-tinues and our target of two times riskis reached 45 minutes later.

The next example is a long trade thatwas initiated on June 2, 2006 (Figure 2).Once again between 1am EST and 2am EST, GBP/USD quietly consolidat-ed. At 2:30am EST, shortly after theLondon open, the currency began tobreakdown at which point we watch tosee if the break lower is a real one. Itproves to not be as the currency pairbottoms out around 3:30am EST. Thecurrency pair quietly grinded higherand broke above the range high plus 10pips at 1.8675. Our stop is 20 pointslower at 1.8655. The price comes just ahair shy of our stop but then consoli-dates ahead of the US non-farm pay-rolls report. The number of jobs creat-ed by US companies in the month ofMay was 75k vs. the market's forecastfor 170k jobs growth. This caused asharp sell-off in the US dollar and cor-responding rally in the British pound.This gave traders long GBP/USD

based upon the WRD trade an exit of1.8715 (two times risk) or better.

The final example is another shorttriggered on May 17, 2006 (Figure 3).After consolidating between 1am ESTand 2am EST, the GBP/USD brokehigher at 3:15am EST. Prices climbed aresounding 100 points over the nextfew hours, but resistance at 1.90 provedto be significant. GBP/USD attempt-ed to break that level and stops weretaken out, but the attempted breakhigher quickly failed. The currency pairreversed course and began to meltdown, breaking the range low duringthe Frankfurt - London power hourtriggering our short entry at 1.8887.Our take profit of two times risk at1.8847 was hit 15 minutes later and infact, the price sold off far below ourtarget to 1.8800 in that same candle,giving some more patient traders anopportunity to get out at an even betterlevel.

One key point that you may haveobserved from the three examples isthat prices actually move far beyondour target of two times the amountrisked or 40 pips. More active andaggressive traders may opt to trade twolots instead of one. This would allow

them to take profit on one of the lotsat the two times risk level, then trail thestop on the second lot, targeting aneven better blended exit price.

Kathy Lien is chief technical strate-gist at FXCM in New York and isthe author of "Day Trading theCurrency Market: Technical andFundamental Strategies to Profitfrom Market Swings" (Wiley 2006).

Kathy Lien has adapted this article from herbook “Day Trading the Currency Market:Technical and Fundamental Strategies toProfit from Market Swings” (Wiley 2006).

Figure 3.

“THE WRD STRATEGYEXPLOITS THE

COMMON PERCEPTION THAT UK TRADERS ARE NOTORIOUS STOP

HUNTERS.”

In the short term equity markets aredriven by various technical factorsthat are not related to economics.

Short term investing is most effectivewhen trading decisions are based ongood technical analysis and good riskappetite analysis rather than fundamen-tal economic analysis. Indeed an analy-sis of stock market reports on any web-site or in any newspaper will quicklyhighlight the contradictory nature ofshort term economic explanations forstock market movements. For instance,here's one example taken from a wellknown and indeed well respected web-site which analyses daily (and longerterm) movements in financial markets.

"The market opened sharply lower, as soar-ing oil prices weighed on sentiment"

"Stocks rebounded nicely following two daysof consolidation…. (despite)….a late-day

surge in crude oil prices (+1.5%)"

The suggestion from these reports isthat on the Tuesday the stock marketsold off sharply because of soaring oilprices yet by the Thursday when cruderose another 1.5%, the stock marketwas suddenly impervious to this fact.This is just one of many examples ofthe contradictory nature of daily expla-nations of the stock market's move-ment using economics. Other than itsdirect affect on oil company profits, theoil price's daily movement is not impor-tant to daily movements in equityindices. Daily and weekly movementsare much better understood in the con-text of technical and risk appetiteanalysis and without reference to newsflow. For example, as we illustrate in

Figure 1, a medium term moving aver-age gauge of the risk appetite in finan-cial markets exhibits a high correlationto the short term movement in theequity market.

The risk appetite gauge shown inFigure 1 is one good way, without antic-ipating or reacting to any news flow, ofjudging the direction of the equity mar-ket in coming days/weeks.

Beyond the short term (i.e. ~3-4months), however, the importance ofeconomic fundamentals, and withinthat context the price of oil, becomescentral and dominant. In contrast to

the short term, we would argue that anyanalysis of longer term trends shouldbe entirely predicated upon an analysisof economic fundamentals in thebroadest sense of the term. The pur-pose of this analysis, therefore, is todemonstrate the importance of thoseeconomic fundamentals in particular inthe context of equity markets correc-tions (downward moves of over 10%).

Key results and approachWe have analyzed the UK stock marketusing the FT actuaries all share indexgoing back to 1960. Using that data


Techniques

→→

WHY DOES THE UK STOCK MARKETGO DOWN?by Chris Watling

Figure 1. Longview risk appetite gauge vs. S&P500

Table 1. Occurrence of key factors during UK stock market corrections since 1960. Our over-bought indicator is a 12 week rate of change using standard deviations to judge how overboughtthe equity market is - a reading of +2 or +3 standard deviations is considered overbought forthe purpose of this exercise.

5 6 9 4 15 3

UK recessions

US recessions

Shocks Valuation extremes

Rising cost of capital (3)

Overbought(4)


Techniques

series and a Dow Theory approach todetermining trends, we have defined allbear trends of 10% or greater as a cor-rection. We have then analysed themacroeconomic situation, the valuationof the equity market, the occurrence ofshocks and the overbought nature ofthe equity market at the time of thosecorrections.

The summary results are given inTable 1. Naturally during some correc-tions a number of key factors are pres-ent. Most strikingly, though, of the 18

corrections in the FT actuaries all shareindex since 1960, by far the mostimportant driver has been a rising costof capital (as defined using a UK 10year bond yield). Of the 18 corrections,15 were either preceded by or coinci-dent with a rising cost of capital (the10-year UK gilt yield). Indeed oftenover the course of the last 45 years, thedirection of the stock market, whetherrising or falling, has been highly corre-lated to the direction of bond yields.

The cost of capitalThe importance of bond yields to thedirection of the stock market (both upand down) can be seen in Figure 2. Inthis chart we plot UK 10 year bondyields on an inverted basis against theUK stock market (using the FT actuar-ies all share index, daily data) during theperiod from 1980 to 1983. From early1982 through to the end of 1983, UKbond yields fell from as high as 15.5%to under 11%. That period was accom-panied by a rise of over 50% in thestock market. Conversely, in the priortwo years as bond yields rose from 12%up to over 15%, the stock market ini-tially moved tentatively higher beforecorrecting by almost 17% from August1981 through to September.

This relationship of a rising bondyield preceding or coincident with astock market correction is evident atmany other points in the last 45 years.The average rise in bond yields at a timeof a correction is 241 bps with a rangeof as little as 50bps to as much as930bps (November 1971 to December1974, Figure 3) with most bond yieldtrends amounting to between 150 and300bps.

Over that time (i.e. from 1960 up until1980) there were 8 corrections in theequity market (shown in the chart asshaded yellow areas). Of those 8 cor-rections, seven were either preceded bya rising bond yield or coincident with arising bond yield. The exception was in1977 (one of the smallest corrections inthe last 45 years) which was one of thethree corrections that occurred whenthe market was overbought - notablythe FT all share had rallied as much as89% from its 1976 October lows.

The importance of valuationDespite continual reference to the valu-ation of the stock market by marketcommentators, however the valuationis measured it is rarely helpful in judg-ing the market's future direction.

Our analysis of the situation suggeststhat there have been only 4 main pointsin the last 45 years at which it can rea-sonably be argued that the valuation inthe equity market was critical at the

Figure 2. UK FT actuaries all share index vs. UK 10 year bond yield (inverted)

Figure 3. UK 10 year bond yields and stock market corrections (i.e. yellow shaded areas = cor-rections)


Techniques

time of a correction in the equity mar-ket. Those points are shown in Figure 4and listed in Table 2. They include1969, 1987, 1994 and 1999-2000. Asthe chart shows at those times, the pre-mium that investors were paid for theextra risk of owning equities relative tobonds was at extremely low levels - inall cases below 2.5%. A low premiumfor equities relative to bonds impliesthat equities are priced complacentlyand therefore vulnerable to any bad

news.It is, however, also true that other fac-

tors were in evidence at such times. Inthe months preceding and during the1969-70 correction (which was equal to35%), for instance, UK bond yields hadbeen rising aggressively. Havingreached a local low of 6.4% (April1967), UK yields steadily marchedhigher to reach 9.6% by June 1969.That represented a rise of over 300bps- its notable that considerably smaller

rises had brought about stock marketcorrections in prior decades.

In the other three instances (1987,1994 and 1999-2000) there were alsosimilar rises in bond yields ahead ofstock market corrections. Over andabove that, other factors were also atplay. In 1994, for instance, Europeanstock markets were shaken by theEuropean wide ERM confidence crisisas speculators attempted to derail theeuro currency project attacking theFrench Franc and the Italian Lira. In1999-2000 the peak in the stock marketwas then followed by a global recessionstarting in 2001 (in some parts of theworld) and continuing in other partsthrough into 2003. In 1987 the equitymarket was overbought having risen byalmost 50% in that year ahead of thecrash.

The role of shocksShocks play an important contributorypart in equity market corrections. Ofthe 18 corrections, there have beenshocks associated with 9 of them.While it is the case that it is not alwaysclear that the shock has been the keydriver of the correction, there are anumber of examples where it is selfevident. For example the 1976 correc-tion (which notably did not happen inthe US stock market) occurred at thesame time as the UK suffered a sterlingcurrency crisis which resulted in anIMF bailout. The confidence crisiswhich affected the currency not sur-prisingly also affected the stock marketas investors sold UK pounds and soldsterling denominated assets (i.e. inmuch the same way as emerging marketassets and currencies have been aggres-sively sold down in the recent wave ofrisk aversion in financial markets sincethe beginning of May).

Equally in 1992, we witnessed a UKequity market correction during thebuild up to the UK's ERM crisis whensterling was forcibly ejected from theEuropean exchange rate mechanism(October 1992). The Russian/LTCMcrisis is another example of the impor-tance of shocks in relation to stockmarket corrections. In 1998, bond →→

Figure 4. UK FT all share equity risk premium. Calculated as an earnings yield less a real bondyield. The Earnings yield is derived by assuming a constant payout ratio of 50% and using thedividend yield. The real bond yield is derived using a nominal bond yield and a 3 year rollinginflation average.

Figure 5. UK FT all share and pound at the time of the 1976 sterling currency crisis


Techniques

yields up until the time of the crisis hadbeen trending sideways to downwards -indeed this is one of the three correc-tions (out of the 18) in which bondyields did not play a part. The economy(both UK and global) was growing at areasonable pace while no valuationextreme existed. Yet despite the other-wise benign backdrop, global equitymarkets, not surprisingly given thenature of the shock, corrected marked-

ly in response to it.

ConclusionWhile there are a number of approach-es for investing for the long term, it isclear from the analysis of the 18 cor-rections in the FT all share since 1960that an understanding of the likely evo-lution of the economic cycle is a valu-able tool in that respect. In particularunderstanding the likely evolution of

bond yields in the UK should consider-ably enhance an investor's ability toreduce equity weightings at a time ofmaximum risk in terms of the econom-ic cycle.

Chris Watling is managing directorat Longview Economics

Table 2. UK stock market corrections since 1960

End date

UK bond yield move & date

Nov '59 - Sept '61

(5.0% to 6.6%)

Sept '63 - Jul '65 (5.2% to 6.8%)

Sept ' 65 - Aug '68 (6.35% to 7.41%)

Apr '67 to Jun '69 (6.42% to 9.55%)

Nov 71 to Dec '74 (7.9% to 17.2%)

Feb '76 - Oct '76 (13.46% to 16.0%)

NO – bond yield falling before and during correction

Apr '79 - Dec '79 (11.68% to 14.72%)

Nov '80 - Jan '81 (12.2% to 13.7%)

Oct '80 to Oct '81 (13.12% to 15.95%)

Mar '84 to Jul '84 (10.23% to 11.67%)

May '87 to Sept '87 (8.82% to 9.98%)

Aug '89 - Apr '90 (9.4% to 11.8%)

Sept 91 to Nov 91 (9.5% to 10.0%)

NO – bond yield was flat/falling

Jan '94 to Sept '94 (6.3% to 8.82%)

NO – bond yield was flat into crisis

Jan '99 to Jan '00 (4.17% to 5.73%)

Start date

04/1961

09/1964

06/1966

01/1969

04/1972

01/1976

09/1977

04/1979

11/1980

08/1981

04/1984

09/1987

08/1989

09/1991

05/1992

01/1994

05/1998

12/1999

No.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

US correction (Y/N)

07/1962

07/1965

10/1966

05/1970

11/1974

10/1976

02/1978

10/1979

01/1981

09/1981

07/1984

11/1987

09/1990

12/1991

08/1992

06/1994

10/1998

03/2003

26.7

14.3

20.7

34.6

72.8

30.5

15.6

22.1

11.1

21.5

13.3

35.8

21.5

12.3

18.1

18.0

24.9

51.2

Size

(%)

YES

-

YES

YES

YES

-

YES

-

YES

YES

YES

YES

YES

-

-

-

YES

YES

UK recession (Y/N)

YES: 1961 Q3 - Q4

-

-

-

YES: 1973 Q3 - 1974 Q1

-

-

-

YES: 1980 q1 81 q1

-

-

-

YES: 1990 Q3 - Q4

YES: 1991 Q2 & Q3

-

-

-

-

-

-

-

-

-

-

YES

YES

-

-

-

YES

-

-

-

-

-

-

Over-bought?

-

-

-

Jan '69

-

-

-

-

-

-

-

Sept '87

-

-

-

Sept '94

-

Dec '99

Valuation extreme

Shock

Cuban missilecrisis

-

Start of Vietnam War

-

Oil price shock/Watergate

£ CCY crisis

-

2nd oil price shock

continued impact of oil price shock

-

-

-

Kuwaiti war

-

UK ERM crisis

European ERM crisis

Russian & LTCM crisis

9/11 terrorism attack


Interview


Interview

TA: How involved are you in the day to day operations ofElliott Wave International (EWI)?

BP: I have an excellent staff, headed by seven directors,who handle operations. There are 21 analysts here and eachof them specializes in a particular market or set of markets.As for myself, I am in the office every day, all day. I overseethe company, write books, do interviews, speak occasionally,write The Elliott Wave Theorist and edit The Elliott WaveFinancial Market Forecast.

TA: What are EWI’s ambitions as a company? Are youlooking to expand more outside the US?

BP: Most of our analysts already work from some remotelocation. We do not need offices anywhere else. Our ambi-tions are to stay the leader in our business. We are thelargest independent technical analysis firm in the world. Wewere one of the first to go to an on-line distribution, offerfree daily content on markets and post video seminars onanalysis and trading.

TA: How do you suggest that Elliott Waves (EWs) are bestused? In isolation or in tandem with other indicators? If thelatter, what are the best confirming indicators to use?

BP: In Chapter 2 of 'The Elliott Wave Principle' (1978), Iwrote a section on "Wave Personality." It is essentially abasis for using indicators with Elliott waves. The best indi-cators shift from time to time because of changes in themechanics of markets. For instance, when pricing went tohundredths in individual stocks, the advance-decline line

lost its value. Since computers came about, the TICK read-ing has become one of my favourite indicators. If I were tomake a list today, it might be inapplicable in a few years.

TA: Does very high (or low) market volatility make any dif-ference to the formation of EWs?

BP: EWs predict high and low volatility. In the stock mar-ket, high volatility comes in wave 3 and sometimes wave 1.In commodities, it comes in wave 5. Corrective waves cansport extreme volatility although it almost always occurs insubwave 3. High volatility helps clarity. Slow markets areharder to read. Volatility is also great for trading.

TA: Are there any other techniques that you use or value?What are your favourite indicators/oscillators, if any?

BP: It is dangerous to pick a favourite sentiment indicatorbecause different ones speak more forcefully at differenttimes. We keep a lot of them and wait for a majority to besaying the same thing. Sometimes it’s the polls; or theCommitment of Traders; sometimes it’s put/call ratios. Butthe ones that seem immune to mechanical changes in themarket are trader polls. There is a lot of history in the data,too. One of the best indicators of all, though it’s not quan-tified, is media coverage. When some financial trend makesmajor magazine covers then it’s weeks from being over. Asfor oscillators, I think people make way too much of theirvalue. You don’t need anything complex because they allbasically look the same. A series of rate-of-change graphsbased on the percentage price difference of the marketfrom X time units ago, from short term to long term,

THE TECHNICAL ANALYST TALKS TO...

Bob Prechter is founder and president of Atlanta based consultancy,Elliott Wave International. He is widely regarded as a leading authorityon Elliott Wave theory and is the author of 13 books on trading, themost recent of which, ‘Conquer the Crash’, was a New York Timesbestseller. In 1989, CNBC named him ‘Guru of the Decade’.

→→


Interview

works fine. Advance-decline figures used to be the mostvaluable, but since the stock market went to .01 pricing, thecumulative line doesn’t work as well. For intraday predic-tion, TICK is by far the best indicator. That’s the runningnumber of stocks that last traded on an uptick minus thosethat last traded on a downtick. A divergence in TICK alongwith a non-confirmation among the most active stockindexes is a great indicator of a near-term trend change. Butwith momentum indicators, you have to understand some-thing tricky: Every turn has a divergence, but every diver-gence is not a turn. So ideally you look for divergenceswithin the context of extreme sentiment. Then your oddsof success go up.

TA: Which software packages do you think offer the bestEW charts and tools?

BP: In short, none of them are good enough. A smart,experienced human is still far better at the task. But ahuman also has the huge drawback of possessing mood andemotionality which is the engine of both Elliott waves andinvestors' destruction.

TA: How important is risk management in the applicationof EWs? Do you think this is an area this is too often over-looked in textbooks?

BP: The most consistently successful traders I know havediscipline and do not over-trade their capital. Doing thesethings reduces the chances that emotion will induce you toact. I do not use the term "risk management" because riskis not easily quantifiable and the formulas I have seen arenonsense - ask LTCM. The chance of an opinion being cor-rect is a crucial aspect of the answer to the question. Inother words, there are times to take a large position, whichsome would view as being a greater risk. In fact a programof taking occasional large positions reduces your lifetimerisk if you are good at identifying probable turning points.If you think every trade has an equal chance of working, asmost risk formulae assume, then I think you are lost beforeyou begin. So the short answer is yes, but the long answer is

very long.

TA: Do you see any clash between EW theory and the the-ory of market and business cycles? What can be said if thetwo do not coincide?

BP: It does not clash with our theory of the market andbusiness cycles! Socionomic theory holds that social moodcauses actions to express that mood, two of which are mak-ing investment and business decisions. A positive moodinduces people to buy stocks and expand business. A nega-tive mood induces people to sell stock and contract busi-ness. The latter activity takes time to implement. That's whythe stock market turns before the economy.

TA: But would you say that EWs work better in some mar-kets than others or over different times frames?

BP: EWs work better with markets that express overallsocial mood, such as the stock market. They also work lesswell the further one looks below minor degree. The reasonis that mass psychology is the only residue recorded atmajor degree, while all sorts of random or chaotic influ-ences can distort the expression of mood at very smalldegree such as minute-by-minute.

TA: To what extent are EWs suitable in developing amechanical trading strategy? Do you know of anytraders/prop houses incorporating EWs into such a strate-gy?

BP: The quantitative aspects of EW are highly variable,making mechanical signals difficult to program. But we'reworking on it. This fact is not a problem specific to Elliottwaves. It is the reality of markets in general, which is whatEWs describe. Mechanical trading programs based on any-thing else are going to make assumptions that may not -and probably won't - hold. Markets are a reflection of socialaction and therefore an aspect of living entities and aretherefore highly variable quantitatively, even as they traceout EW forms time and again. Before the 1987 crash,

“WE ARE IN A GLOBAL BEARMARKET IN STOCKS,

PROPERTY, COMMODITIESAND MOST BONDS. IT IS THE

BIGGEST BEAR MARKET IN 300 YEARS.”

→→

the portfolio-insurance gurus thought they had it all workedout. They didn't. Next time it will be some other quantita-tive assumption that fails. The latest source of humour isthe idea that the "Plunge Protection Team" will save the USstock market from crashing. The only thing the PPT isgoing to try to save eventually is its own rear end. So itmight appear to slow the market down initially, but then itwill appear to make it fall faster when the members panic.

TA: Should you wish to include EWs in a mechanical strat-egy, how easy or difficult is it to backtest EWs? Have EWIdone any work in this area?

BP: You can't do it because sceptics would say that youwere labelling waves in retrospect. Trading records are not atest because they combine two tests: EW per se as well asone's analytical and/or trading ability and emotional disci-pline. The theory of socionomics - in utter contrast to theEfficient Markets Hypothesis - explains why these are cru-cial aspects of markets. They also ruin the purity of testsbased on market calls. Despite all that, published EW prac-titioners going back to 1934 have a striking record of mak-ing dramatic long-term calls in real time. I published areport on it called "A Track Record of the Wave Principle."

TA: Perhaps the biggest criticism of Elliott Wave theory bynon-enthusiasts is that interpreting and identifying waves istoo subjective. What is your response to this? Is it simplymatter of experience in using EWs?

BP: Well, interpreting and identifying the significance ofeconomic news, political behaviour or the fundamentals islargely subjective. Show me an analytical method that istotally objective or contains no human interpretation orforecasting. There is no such thing, even in a black box. Toanswer your question more specifically, there should be nosubjectivity in interpreting waves as a set of rules exist forinterpretation. People mislabel probabilistic forecasting assubjectivity. Interpretation gives you only the most probablescenario(s), not a sure one and subjectivity or bias can ruin

that value, just as in any other approach. In contrast to theimprobable or false wave interpretations we often see fromothers, we are as close to an objective service as you'regoing to find.

TA: What is your view of the current markets? Are we inan equity/commodity bear market or are we seeing a cor-rection in a secular bull market? What does Elliott Wave sayabout this?

BP: We are in a global bear market in stocks, property,commodities and most bonds. It is the biggest bear marketin 300 years. The overriding theme will be deflation. Noneof this is obvious to anyone yet, and when it is finally obvi-ous to everyone, it will be over.

TA: What wave or part of the EW cycle do you think weare currently in?

BP: Back in 1978, when A.J. Frost and I wrote Elliott WavePrinciple, we predicted a great bull market but warned thatit was a fifth wave in a sequence dating from the late 1700s.In wave-speak, its peak would mark the end of a “GrandSupercycle” advance. A key aspect of tops of this magni-tude is historic overvaluation. There is no question that thestock market reached historic overvaluation in 2000, whenthe dividend yield on the S&P 400 Industrials fell to justone percent. This is much lower than it was in 1929, forexample. The NASDAQ index had virtually no yield. So ourforecast and what has subsequently come about are compat-ible. Once a wave ends, the correction that follows is of thesame degree as the wave just completed, so, if our analysisis right, the market is in the early stages of a GrandSupercycle bear market. The last time one of theseoccurred was in the 1700s, when the British stock marketlost value for 64 years. So we have begun a correctiveprocess that will probably last a bit less than a century andappear as a series of large swings with net downsideprogress. This will be like a much larger version of whathappened between 1966 and 1982 in the Dow.


Interview

“MECHANICAL TRADING PROGRAMMES BASED ON ANYTHING ELSE [OTHER THAN ELLIOTT WAVES] ARE

GOING TO MAKE ASSUMPTIONS THAT MAY NOT - AND PROBABLY WON’T - HOLD.”

Subject Matters

Update on January EffectIn a seminal article Rozeff and Kinney(1976) showed that there was a strongseasonal effect in the US stock marketinvolving the month of January.During the period from 1904 to 1974the average return in January was3.48% while the average return in allother months was just 0.42%.Subsequent researchers, such as Roll(1983) found that the "January Effect"was largely driven by small capitalisa-tion stocks. Until recently, the mostpromising explanation for the JanuaryEffect in the US centred around tax-loss selling. It was argued that investorssold stocks, especially those that hadproved to be loss makers, in Decemberto realize tax losses. Investors werethen said to buy these stocks back againin January thereby driving up prices.

Two researchers from the Universityof Kansas have now conducted a com-prehensive and up-to-date study of theJanuary Effect. In their unpublishedworking paper entitled "The JanuaryEffect", Mark Haug and Mark Hirscheypresent conclusive evidence that theJanuary Effect still exists in the UStoday and that it cannot be explained byinvestors engaging in December selling(and January buying) for tax-loss rea-sons. In 1986 tax laws in the USchanged, with the amended law requir-ing mutual funds to distribute capitalgains and dividend income to investorsin October. In this environment mutu-al funds would have an incentive to sellloss making shares in October ratherthan December. This suggests that theJanuary effect is driven by some phe-

nomena other than tax-loss selling.Jensen (1978) proposes that a princi-

ple such as the January Effect is onlyindicative of an inefficient market ifthe benefits from exploiting it offsetthe costs of doing so. This cost bene-fit analysis is also vitally important toinvestment managers and individualinvestors who may wish to attempt toexploit such a phenomena. It thereforemakes sense for future research to con-sider the transaction costs involved ingoing overweight in small stocks in lateDecember and back to normal weight-ings in early February. Brokerage costsand market impact costs should bothbe considered, with particular attentionbeing given to the estimation of the lat-ter given the lower liquidity of thestocks in question.

Sentiment Indices &Subsequent ReturnsIn a forthcoming paper in the Journalof Finance entitled "InvestorSentiment and the Cross-Section ofStock Returns", Malcolm Baker ofHarvard Business School and JeffreyWurgler of NYU Stern School ofBusiness investigate how investor senti-ment affects stock returns.

The authors begin by forming a sen-timent index for the period from 1963to 2001 based on several variables. Thefirst variable is the average differencebetween the net asset value of closed-end fund shares and their marketprices. When this difference is smallsentiment is said to be high. The sec-ond variable is NYSE share turnover.In a market with short-sale constraints

irrational investors are said to partici-pate and therefore add liquidity onlywhen they are optimistic. The thirdvariable is the average first day returnfrom the IPO market, with largerreturns indicating investor enthusiasm.The fourth variable is the share ofequity issues in total issues of equityand debt. More equity is said to beissued when sentiment is high. Thefinal variable is average dividend premi-um which is said to be a proxy forinvestor demand.

Baker and Wurgler find that whensentiment is low small stocks earn par-ticularly high subsequent returns butwhen sentiment is high there is no sizeeffect. Furthermore, when sentiment islow, subsequent returns are relativelyhigh on newly listed stocks, on highvolatility stocks, on unprofitable stocks,and on non-dividend paying stocks,consistent with an initial under pricingof these stocks. When sentiment ishigh these returns fully reverse. Takentogether, these results suggest thatwhen sentiment is low (high) stocksthat are unattractive (attractive) to opti-mists and speculators tend to earn rela-tively high (low) subsequent returns.The authors consider the traditionalexplanation that their results reflectcompensation for systematic risks, butfind that their results are inconsistentwith this explanation.

Future research in this area might liketo consider the profitability of imple-menting trading strategies based oninvestor sentiment. It would be inter-esting to see if consistent abnormalreturns could be earned by investment

RESEARCH UPDATE:JANUARY EFFECT PERSISTS DESPITE USTAX CHANGES by Ben Marshall


managers and individual investors whobuy when their measure of investorsentiment is low and sell when theirmeasure of investment sentiment ishigh.

Ben Marshall is a Senior Lecturer inthe Department of Finance,Banking and Property, MasseyUniversity, New Zealand.([email protected]). Hisresearch interests include investi-gating the profitability of technicalanalysis techniques, with a focus onthe application of rigorous statisti-cal methodologies.

ReferencesBaker, M. & Wurgler, J. (2006). Investor Sentimentand the Cross-Section of Stock Returns, Journal ofFinance Forthcoming.

Haug, M & Hirschey, M. (2006). The JanuaryEffect, Financial Analysts Journal, 62(5), acceptedand forthcoming. Available at SSRN:http://ssrn.com/abstract=831985.

Jensen, M. (1978). Some anomalous evidence regard-ing market efficiency. Journal of FinancialEconomics, 6, 95-101.

Roll, R. (1983). Vas ist das? The Turn of the YearEffect and the Return Premia of Small Firms,Journal of Portfolio Management, 9(2), 18/29.

Rozeff, M. & Kinney, W. (1976). Capital MarketSeasonality: The Case of Stock Returns. Journal ofFinancial Economics, 3(4), 379-402.

“THE JANUARYEFFECT STILL EXISTSIN THE US TODAY AND

CANNOT BEEXPLAINED BY

INVESTORS ENGAGING IN

DECEMBER SELLING(AND JANUARY

BUYING) FOR TAX-LOSS REASONS.”


Subject Matters

The Technical Analyst offers a range of authoritative training courses for trading and investment profes-sionals, all of which are delivered by outstanding individuals in the world of trading, technical analysis and training, including Trevor Neil (former global head of technical analysis at Bloomberg), Martin Pring and Jeffrey Kennedy (Elliott Wave International).

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 and Behavioural Finance, and are designed for professionals with varying amounts of experience. Please visit our website for further details.

23 August

25 September

26/27 September

04 October

05 October

10 October

12 October

13 October

17 October

11 November

12 November

Short Term Trading Techniques

Martin Pring’s Technical Analysis Course

Complete Advanced TA course (2 days)

Introduction to Technical Analysis


DeMark Indicators

Behavioural Finance and Market Psychology

Pairs Trading Strategies


Martin Pring’s Trading Strategies

Martin Pring’s Trading Strategies

Johannesburg, South Africa

London, UK

London, UK

Dublin, Eire

Dublin, Eire

London, UK

London, UK

London, UK

London, UK

Mumbai, India

Dubai, UAE

Asia and Japan Hedge Fund Directory

Qsjodjqbm!Tqpotps;!

Tfdpoebsz!Tqpotps;!

2005

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


Software

Trading Technologies' X_TRAD-ER, the benchmark front endtrading platform for derivatives

traders, has recently been upgradedwith the release in January ofX_TRADER® 7 and X_STUDY™.This entirely new platform enjoysnoticeable improvements on its fore-runner, X_TRADER 6 including newin-depth charting capabilities and areflex-fast application with a patentedstatic display of prices and marketdepth that redefines the way traders arelooking at the market.

X_TRADER 7 With X_TRADER 7 (Figure 1), TT hasincreased the speed that users haverelied on to move in and out of themarket. The noticeably significantspeed enhancements with faster, moregranular price updates, help keep theuser ahead of the market. Expandedmarket coverage provides users withmore arenas for making money as TThas begun to add asset classes to theirderivatives base by connecting withmore exchanges. Now traders may takeadvantage of TT connectivity andX_TRADER 7 functionality to tradecash bonds (Broker Tec) and cash for-eign exchange (Hotspot FXi), as well asall futures and options on products atthe major derivatives exchanges.

New chartingIncluded with the release of X_TRAD-

ER 7 is the highly anticipatedX_STUDY charting and technicalanalysis package. X_STUDY (Figure 2)combines exceptional speed with a newFinancial Market Data Server (FMDS)database to warehouse historic data.This premium level charting capabilitycomes at no additional cost withX_TRADER 7. Drawing from thesame execution price feed, X_STUDYcharts give technical traders the advan-tage of getting their signals faster thanever before. Charting, quoting and exe-

cution have been combined into oneeasy-to-use platform. Traders may viewthe patented MD Trader® depth ofmarket display as a grid to the right ofthe chart or drag a floating MD Traderfrom X_TRADER to position it any-where in the chart.

TT customers have been enthusiasticin their response to the new product."We are committed to providing ourtraders with the best software avail-able", explains Rob Creamer ofGeneva Trading in Chicago. "As such,

Figure 1. X_TRADER 7 workspace

TTRRAADDIINNGG TTEECCHHNNOOLLOOGGIIEESS’’XX__TTRRAADDEERR 77NEW ENHANCEMENTS TO TRADING PLATFORMINCLUDE TOP-END CHARTING PACKAGE

®®

Software

we were eager to beta test X_TRADER7 to better understand its capabilitiesand we came away very excited aboutthe new performance enhancements.We also believe that X_STUDY, themultitude of new order types support-ed, and the many other new features inX_TRADER 7 will keep TT at theleading edge of trading software devel-opment."

New studiesThe robust catalogue of studies anddrawing tools available in X_STUDY isexpected to enable TT to quickly grab aposition of leadership in the profes-sional charting community. X_STUDYoffers unique position studies wherefills are plotted directly on the chart sotraders can visually analyze their tradingand adjust their methodology. Newspread charting provides a realistic viewof spreads previously not available tothe market. Spread charts can be con-structed using Bid to Bid or Ask to Askcalculations so users can see the actualspread price available, not just the trad-ed market. Another popular aspect isthe ability to view charts on the basis of

net change as well as actual price.Innovative data warehousing sets

X_STUDY charting apart and allowsfor in depth analysis of volume studies(Figure 3). TT captures bids and offersat the time of trade, which enablesusers to see the state of the market atthe time a trade was executed. Six newstudies based on volume analysis pointto where supply and demand ebb andflow to create swings in the market.

New volume studies found inX_STUDY include:

• Cumulative Bid/Ask • Cumulative Bid• Cumulative Ask• Volume Delta• Volume Delta - Histogram• Cumulative Volume Delta (CVD™)

Traders can quickly build charts basedon traditional open/high/low closebars, candlesticks or close only (linecharts or dot charts). In all, X_STUDYoffers 30 of the most popular technicalstudies including four different kinds ofmoving averages (simple, exponential,triangular and weighted), stochastics,

RSI, trend/momentum studies, andBollinger Bands. Among the availabledrawing tools are Fibonacci levels,trend lines and adding text directly tothe chart.

Trades placed in X_STUDY appear inthe X_TRADER 7 Audit Trail andOrder Book as well as within MDTrader. These orders are then fullyfunctional outside of X_STUDY andmay be adjusted in X_STUDY, MDTrader, Market Grid or the OrderBook.

Faster APIDriving the speed enhancements is theAPI (Application ProgrammingInterface) provided by X_TRADER 7.The API (XTAPI) allows users tomerge proprietary software applica-tions with the connectivity and func-tionality of X_TRADER 7 to incorpo-rate their own resources and build theirown trading components. The MDTrader application has been upgradedto link into Excel for quantitative orderentry and new "laser lines," which addcolor-coded lines within the MDTrader grid to draw attention to keylevels generated by Excel-based mod-els.

New Quote Board The inclusion of a Quote Board to goalong with the traditional Market Gridis another new addition to X_TRAD-ER 7. As well as the standard open,high, low and last price, the new TTQuote Board includes current volume,most recent bid with size, most recentoffer with size, trader P/L for eachcontract, and trader position for eachcontract. The color-coded format ofQuote Board gives users the ability toquickly access the state of multiplemarkets with one glance.

One left click on the contract ofchoice launches an order entry windowand a right click on the contract opensa menu to enable formatting or tolaunch one of several other X_TRAD-ER 7 components. The addition of a"Floating Order Book" to both MDTrader and Market Grid adds appeal tosales desks and brokers, as now multi-


Figure 2. X_STUDY workspace

www.tradingtechnologies.com

“At least 50% of the electronic volume on the world’s top four futures exchanges goes through TT’s X

_TRADER®

order-entry platform. From a trader’s viewpoint, that speaks for itself.”

See X_TRADER® 7. Now with

X_STUDY™ charting

and analytics.

Harris Brumfield, CEOVeteran Trader

ple orders at the same price may bemanaged individually with simplemouse clicks to change the price levelor quantity.

TT has also made getting started eas-ier by adding to the functionality ofMarket Explorer. Now users mayspecify individual contracts within aproduct. Instead of pulling up all con-tract months, users may select only themonths they wish to view. Market

Explorer now also has the ability tolaunch individual X_TRADER compo-nents including MD Trader, MarketGrid, Quote Board, Autospreader®,Autotrader™, Spread Matrix, Time &Sales and Alerts Manager.

Improved automationEnhancements have been made to theautomated applications included inX_TRADER 7 Pro. New to

Autospreader, users may "freeze" aworking leg order without losing theirspot in the queue. A frozen order mayenhance the chance of getting filled involatile markets as the software will not"chase" the market and continuallyplace orders at the back of the queue.Users may also dynamically changeAutospreader pay-up ticks on workingorders. Autotrader now allows the userto "clone" rows. This simplifies theprocess of running the same strategyon multiple contracts as well as runningmultiple variations of one base strategy.After cloning a row, the new rowappears below the original and allowsthe user to replace the contract or makea simple change to the original formu-la.

Chris Hehmeyer of Chicago futuresbrokerage and prop trading house,Goldenberg, Hehmeyer & Co con-cludes, "X_TRADER 7 has proven tobe faster, more intuitive and more func-tional, and we are ready to deploy it toour global customer base and our inter-nal proprietary traders."

Further details can be found atwww.tradingtechnologies.com

Trading Technologies®, X_TRAD-ER®, MD Trader® andAutospreader® are registered trade-marks and Autotrader™ andCVD™ are trademarks of TradingTechnologies International, Inc.

Figure 3: Sample X_STUDY volume studies (from top to bottom): Change inVolume Histogram, Change in Volume and Cumulative Volume Delta (CVD).[Blue = Buys, Red = Sells]

“X_STUDY OFFERS 30 OF THE MOST POPULAR TECHNICAL STUDIES INCLUDING FOUR DIFFERENT KINDS OFMOVING AVERAGES, STOCHASTICS, RSI, TREND/MOMENTUM

STUDIES, AND BOLLINGER BANDS.”


Software

Inside the House of Money By Steven Drobny John Wiley and Sons

ISBN: 0-471-79447-3

Inside the House of Money can be purchased from theTechnical Analysis bookshop. To order please call 01730 233870and quote "The Technical AnalystMagazine".

Amongst the plethora of books published on trading techniques, technical or oth-erwise, few are as interesting as those that feature the opinions and commentsof individuals with a long track record of trading success, whether it be as a sole

trader or working for an institution. 'Inside the House of Money' features interviewswith thirteen traders and hedge fund managers some of whom are celebrities but othersrelatively unknown. All have an exceptional history of trading and investment perform-ance behind them and all are considered global macro players. However, as the bookillustrates, in practice 'global macro' usually means taking advantage of many differentfactors in decision making including using both fundamental and technical analysis todiffering degrees.

Most hedge funds and top-flight traders are reluctant to talk to the press or openly dis-cuss their trading approach but author Steve Drobny has managed to gain the confi-dence of some of the worlds best traders and describe exactly what they do and howthey do it. But the book has no narrative as such. With the exception of a short intro-ductory chapter, the text for the rest of the book is just 'Q and As'. Each player gets achapter and is labelled according to their area of expertise, i.e. The Prop Trader, TheTreasurer, The Commodity Specialist etc. The questions posed include details of the bestand worst trades, trading and investment approach and the outlook for different markets.

Three of the interviews stand out: John Porter, 'The Treasurer', at Barclays Capital hasa PhD in psychology and is a former trader at Moore Capital. He now manages interestrate risk at the UK investment bank in London. His trading approach incorporates thebroadest range of techniques and methods of those interviewed. These include behav-ioural finance, technical analysis, fundamentals, market psychology and even lunar cycles.Porter is not afraid to admit that he considers the lunar calendar worth noting andexplains that viable research has been done that closely links stock market reversals withfull moon days. Christian Siva-Jothy is the former head of proprietary trading atGoldman Sachs in London. His story of losing $200 million of the bank's money in awayward trade early on in his career highlights the entrepreneurial spirit that existedwithin the proprietary trading group at Goldman in the 1990s. He was simply told to goand win the money back, which he did, but over confidence he stresses, is the surest wayto lose money in the markets. The gruelling selection process for new recruits on theprop desk and the potential rewards on offer means Goldman have the pick of the bestnew talent available. Despite this, the success rate of new recruits on the prop desk is nohigher than 5%, a figure that may say more of the standards required by Goldman Sachsthan the ability of the individual traders. Finally, Jim Rogers, the commodities guru, talksup the long-term continuation of the commodities bull market. With a further 10-15years to go, he says, prices will be largely supported by demand for raw materials fromChina and India. This in turn will increase costs for the corporate sector thereby puttingdownward pressure on stock prices. Rogers, like all those in the book, is incrediblyknowledgeable about his chosen markets. His bullish outlook for Africa is based on thecontinent's obvious abundance of raw materials, but he also has first hand experiencehaving famously travelled through 32 African countries by motorbike and undertakenmammoth trips in other areas of the world to get a feel for the countries he may beinvesting in.

From all those interviewed, two messages emerge: discipline and money managementare everything when it comes to successful trading and that the successful guys are near-ly always contrarians who wait for four or five big trades a year. If you think the marketis always right, then being able to spot an opportunity that everyone else is missingrequires skill and hard work. If you think the market is always wrong, then it's all a mat-ter of timing.

INSIDE THE HOUSE OF MONEYTOP HEDGE FUND TRADERS ON PROFITING IN THE GLOBAL MARKETS

Book Review



COMMITMENTS OF TRADERS REPORT5 July 2005 - 3 July 2006Futures 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

-6000

-4000

-2000

0

2000

4000

6000

8000

10000

12000

05/07/2005 27/09/2005 20/12/2005 14/03/2006 06/06/2006-40000

-30000

-20000

-10000

0

10000

20000

30000

40000Non commercial (LHS)Commercial

-80000

-60000

-40000

-20000

0

20000

40000

05/07/2005 27/09/2005 20/12/2005 14/03/2006 06/06/2006-80000

-30000

20000

70000

120000

170000


-40000

-30000

-20000

-10000

0

10000

20000

30000

40000

50000

05/07/2005 27/09/2005 20/12/2005 14/03/2006 06/06/2006-80000

-60000

-40000

-20000

0

20000

40000

60000

80000


-80000

-70000

-60000

-50000

-40000

-30000

-20000

-10000

0

10000

20000

05/07/2005 27/09/2005 20/12/2005 14/03/2006 06/06/2006-40000

-20000

0

20000

40000

60000

80000

100000

Non commercial (LHS)Commercial

-300000

-250000

-200000

-150000

-100000

-50000

0

50000

05/07/2005 27/09/2005 20/12/2005 14/03/2006 06/06/20060

200000

400000

600000

800000

1000000


-150000

-100000

-50000

0

50000

100000

150000

200000

250000

300000

05/07/2005 27/09/2005 20/12/2005 14/03/2006 06/06/2006-200000

0

200000

400000

600000

800000

1000000


Commitments of Traders Report


Commitments of Traders Report

Review of the Commitments of TradersReport released on 3rd July 2006

The net commercial hedge positions in theCommitments of Traders Report can be viewedas a broad statement of value by the dealers inthe various markets. In the May / June issue of“The Technical Analyst” I said: “I believe nethedger positions suggest grossly over valuedmarkets and I am looking for a dramatic changein trend into a commodity/stock/currency bearmarket.”

Since then we have seen a decline begin inmost commodity/stock/currency markets. Thecurrent question is if this is a major change intrend or just a correction.

The current CoT Report data on net commercialhedging does not suggest the recent marketmoves completed a market value correction.Net hedging generally is not decreasing in a sig-nificant way to say markets have completed atransition from overvalued to cheap. Until suchtime that the net hedging data in the Reportsuggests the markets are cheap, I expect thedowntrend in the commodity/stock/currencymarkets to continue.

As a technical trader armed with the marketview that the new trends are still in place, andseeing that many markets have put in their firstbounce from the first lows since the high, Ibelieve we will be moving into the more volatilenext stage of market declines. I expect the mar-kets that had the greatest bull market exten-sions into the May tops will suffer the greatestdecline in the coming few months.

George Slezak www.commitmentsoftraders.com

Euro Source: CME

Nasdaq Source: CME

Gold Source: CEI

-100000

-50000

0

50000

100000

150000

200000

05/07/2005 27/09/2005 20/12/2005 14/03/2006 06/06/2006

-200000

-150000

-100000

-50000

0

50000

100000

150000


-40000

-20000

0

20000

40000

60000

80000

100000

05/07/2005 27/09/2005 20/12/2005 14/03/2006 06/06/2006-150000

-100000

-50000

0

50000

100000

150000


-15000

-10000

-5000

0

5000

10000

15000

05/07/2005 27/09/2005 20/12/2005 14/03/2006 06/06/2006-30000

-20000

-10000

0

10000

20000

30000

40000

50000

60000


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.


Recruitment

GET QUALIFIED IN TECHNICAL ANALYSIS

For more information on how to join and what is involved in passing

the STA Diploma exam, visit our website at: www.sta-uk.org or call

us on +44 7000 710207

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

• Research The STA Journal publishes research papers on TA techniques and approaches

• Meetings Provide members the opportunity to discuss technical approaches and markets

• Representation The STA lobbies on behalf of analysts with data vendors, exchanges and regulators.

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

• Accreditation The STA Diploma Exam is internationally recognised as a professional level qualification

in Technical Analysis

The ultimate TA ‘add-on’for Bloomberg

For details: type IDOC UPDATA<GO> on your BloombergOr to arrange a Trial or DemonstrationCall: 020 8874 4747 Email: [email protected]

OR DOWNLOAD YOUR FREE TRIAL NOW AT:www.updata.co.uk/bloomberg

Scanning, real time alerting and more...

All Trade Marks are the property of their respective owners

Familiar Bloomberg codes for fast ticker entry

Full Windows look and feelwith multiple desktops

High speed scans for any technical criteria

Hundreds of TA techniques and tools covered

Draw or add notes, labels,logos and images

Automatic creation of Index Constituent Lists

Create your own portfoliowatch lists

Market Maps of any list of instruments

Chart Bloomberg CIXIndices

Best Point and Figure charts in the world

Risk Reward Ratios andprice targets for any trade

Chart your own Excel data,Metastock and otherformats

Schedule Automatic Chart Runs

Optimise and Test anyIndicator

Optimised Trailing Stops

High quality printing and page setup

Report Writer fordocuments and presentations

Sophisticated technicalanalysis alerts with screenpop ups, SMS messaging or email

More and more Bloomberg Professional users are running

Updata Technical Analyst to unleash the power of their Bloomberg data

bob prechter interview - the technical analyst · bob prechter interview elliott waves and the 300...

Documents