Jesse Livermore Methods

THE TRADERS’ MAGAZINE SINCE 1982

The Super Passband Filter

Are low and high frequencies getting in your way? 10

Trade Using Pure Price Action Try naked charts!

14

Wave Theory

What do the swings on a chart really mean?

18

Shannon Entropy

Know when to trade trends versus channels 22

INTERVIEW

Fred Meissner of The FRED Report

PRODUCT REVIEW n StockCharts.com JULY 2016

32

www.traders.com

JULY 2016

presents

September 23rd and 24th Learn More and Register at

StockCharts.com/ChartCon Unparalleled Expert Technical Commentary John Murphy

Martin Pring

Arthur Hill

Tom Bowley

ChartCon features expert technical commentary and unparalleled investment education from some of the industry’s most distinguished analysts. This year’s two-day agenda is jam packed full of amazing presentations from leading technicians such as John Murphy, Martin Pring, Arthur Hill, Tom Bowley and more. ChartCon is the world’s premier technical investing conference, and 2016 is set to be the best year yet.

An All New, More-Accessible Online Format Julius de Kempenaer

Chip Anderson

Greg Schnell

Gatis Roze

Greg Morris

Bruce Fraser

Erin Heim

Grayson Roze

StockCharts.com © 2016 StockCharts.com,Inc. All Rights Reserved.

This year marks an exciting new change for ChartCon as we move to a virtual, live-streamed format. The conference will be broadcast online this September 23rd and 24th, allowing you to conveniently stream the event from the comfort of your own home. No need to travel, no need to break the bank with expensive attendance costs. Just one low price for unlimited, live-streamed access. In addition, all attendees will receive a complete video recording of the entire two-day live broadcast event. This timeless content is yours to watch and re-watch for years to come.

September 23rd and 24th Learn More and Register at

StockCharts.com/ChartCon

As measured by the S&P 500 index, dividends included, the market was up by 1.4% in 2015

How did you do? And your broker? Is it time to consider a less expensive alternative?

At Interactive Brokers you enjoy the lowest trading cost* and can allocate funds from your self-directed account to registered advisors and hedge funds.

DOWNLOAD OUR FREE DEMO

ibkr.com/scfreetrial

Interactive Brokers Member - NYSE, FINRA, SIPC – Supporting documentation for any claims and statistical information will be provided upon request. *According to Barron’s best online broker review on March 9, 2015, How Secure Is Your Securities Portfolio. Lowest cost of any broker and Best Trading Experience & Technology in Barron’s survey. Barron’s is a registered trademark of Dow Jones & Company, Inc. Hedge funds are highly speculative and investors may lose their entire investment. 05-IB16-973CH963

CONTENTS FEATURE ARTICLE

8 Anatomy Of A Trade: The One That Got Away

by Thomas Bulkowski Have you ever traded with exceptionally bad timing? Here’s one to ponder.

10 The Super Passband Filter TIPS

by John F. Ehlers Are low and high frequencies getting in your way? Here’s a filter that will reject both of these extremes so you can focus on what really matters.

14 Trade Using Pure Price Action, Part 1

by Solomon Chuama Looking at charts without indicators can make them look naked. But the charts could actually be more reliable and profitable viewed this way. Here’s why.

18 Another Look At Wave Theory

by Michael Dylan What do the swings on a chart really mean? Maybe organizing them into groups based on their size can help answer that question.

21 Futures For You

by Carley Garner Here’s how the futures market really works.

22 Shannon Entropy Indicator by Stephen Massel Here’s an indicator that discerns the nature of the underlying market and helps you decide whether you should trade trends or channels.

JULY 2016, Volume 34 Number 8

26 Q&A

by Rob Friesen This professional trader answers a few of your questions.

28 Richard Demille Wyckoff, Part 4

by Stella Osoba, CMT Whether you’re an investor or trader, you need to know how to intelligently evaluate price action. In this fourth of a five-part series about Richard D. Wyckoff, we look at how he evaluated price action using charts.

INTERVIEW

32 Measuring Indicators With Fred Meissner

by Jayanthi Gopalakrishnan Fred Meissner, CMT, is the founder and president of The FRED Report. His professional career spans 27 years, encompassing market analysis, trading strategies/portfolio management, and business development/relationship management. He offers a consulting service for financial advisors and speaks around the world on market analysis and the markets. We spoke with him about how to effectively apply indicators in line with broad macro indicators.

37 Explore Your Options

AT THE CLOSE

60 The Palm Beach Traders

by James E. Rich Expand your resources and learn more by connecting with other like-minded traders. Here’s a group to emulate.

REVIEW 40 • StockCharts.com Technical analysis charting website

DEPARTMENTS

6 Opening Position 7 Letters To S&C 46 Traders’ Tips 55 †Traders’ Glossary 56 Futures Liquidity 57 Advertisers’ Index 57 Editorial Resource Index 58 Trade News & Products 59 Classified Advertising 59 Traders’ Resource 62 Books For Traders

by Tom Gentile Got a question about options?

45 Multiple-Gap Breakouts

by Ken Calhoun This month, this professional trader explains a breakout strategy for finding swing trade entries based on a series of upward gaps in an uptrend. This article is the basis for TIPS Traders’ Tips this month.

n Cover: Lisa Haney n Cover concept: Christine Morrison / Lisa Haney

Copyright © 2016 Technical Analysis, Inc. All rights reserved. Information in this publication must not be stored or reproduced in any form without written permission from the publisher. Technical Analysis of Stocks & Commodities™ (ISSN 0738-3355) is published monthly with a Bonus Issue in March for $89.99 per year by Technical Analysis, Inc., 4757 California Ave. S.W., Seattle, WA 98116-4499. Periodicals postage paid at Seattle, WA and at additional mailing offices. Postmaster: Send address changes to Technical Analysis of Stocks & Commodities™ 4757 California Ave. S.W., Seattle, WA 98116-4499 U.S.A.

Printed in the U.S.A.

4 • July 2016 • Technical Analysis of Stocks & Commodities

ALWAYS BE DATA DRIVEN Fidelity Active Trader Pro® helps traders: CVL 1

CVLCVL Year Today Today

KNOW WHEN TO GET IN

INDIVIDUAL (X12345678) Support/Resistance (100 Day) 3 MO 3 MO

6 MO 6 MO

1 Year 1 Year

Trade

Alert

2 Year 2 Year S

18.65 18.79 Draw Indicators Indicators Events Events Compare Compare Technical Technical Analysis Settings Settings Draw Analysis 03/21/2015 3:44:06 PM O 236.02 H 236.20 L227.50 C 229.45 03/21/2015 3:44:06 PM O 236.02 H 236.20 L227.50 C 229.45 18.29

CVL CVL

TB

TB

16.85

$8,725

15.80 15.80

500 SHRS

Cost

$8,735

$17.47

Margin Req.

$2,616

30.00%

Today’s G/L

-$10

-0.12%

Total G/L

-$10

0.12%

CLOSING EQUITY ORDERS

Est. Gain (Limit)

CARSON GENETICS CARSON GENETICS Est. Loss (Stop)

$

Volume 6,228,654 Volume 6,228,654

-0.03 (-0.17%)

T TS

17.45 17.29

16.30

17.45

Value S

S

SaveExport Export Save B 17.45 x 515 Zoom: A 17.45 x 1,971 Zoom: V 45.819.056

OPEN POSITION

17.79

16.80

CARSON GENETICS

$690

7.90%

-$260

-2.98%

$2,735

3.60%

CLOSED POSITION

YTD G/L

250.00 250.00 240.00 240.00 229.45 229.45 220.00 220.00 210.00 210.00 200.00 200.00 190.00 190.00 180.00 180.00 170.00 170.00 160.00

KNOW WHEN TO GET OUT

with tools that let you set conditional orders based on proﬁt and loss scenarios.

EASILY PLACE TRADES & ALERTS directly from charts.

160.00 150.00 150.00 140.00 140.00

14.80 14.30

260.00 260.00

with pattern and event recognition fully integrated into the interactive charts*.

Positions

News

Research

Options

OPEN AN ACCOUNT GET 500 FREE TRADES† Visit Fidelity.com/AlwaysBe, or call 800.FIDELITY

Where smarter investors will always be. STOCKS | BONDS | MUTUAL FUNDS | ETFS | OPTIONS

Sell orders are subject to an activity assessment fee (from $0.01 to $0.03 per $1,000 of principal). Trades are limited to online domestic equities and options and must be used within two years. Options trades are limited to 20 contracts per trade. Offer valid for new and existing Fidelity customers opening or adding net new assets to an eligible Fidelity IRA or brokerage account. Accounts receiving $100,000 or more will receive 500 free trades. Account balance of $100,000 must be maintained for at least nine months; otherwise, normal commission schedule rates may be retroactively applied to any free trade executions. See Fidelity.com/ATP500free for further details. Fidelity reserves the right to modify these terms and conditions or terminate this offer at any time. Other terms and conditions, or eligibility criteria may apply. * Active Trader Pro PlatformsSM is available to customers trading 36 times or more in a rolling 12-month period; customers who trade 120 times or more have access to Recognia anticipated events and Elliott Wave analysis. Screens are for illustrative purposes only. Fidelity Brokerage Services LLC, Member NYSE, SIPC. © 2016 FMR LLC. All rights reserved. 736003.1.2

†

July 2016 • Volume 34, Number 8

Opening Position

The Traders’ MagazineTM

Editor in Chief Jack K. Hutson Editor Jayanthi Gopalakrishnan Production Manager Karen E. Wasserman Art Director Christine Morrison Graphic Designer Wayne Shaw Webmaster Han J. Kim Contributing Editors John Ehlers, Anthony W. Warren, Ph.D. Contributing Writers Thomas Bulkowski, Martin Pring, Barbara Star, Markos Katsanos

OFFICE OF THE Publisher

Publisher Jack K. Hutson Industrial Engineer Jason K. Hutson Project Engineer Sean M. Moore Controller Mary K. Hutson

Advertising Sales

4757 California Ave. S.W. Seattle, WA 98116-4499 206 938-0570 Fax 206 938-1307 [email protected] National Sales Manager Edward W. Schramm [email protected]

Circulation

Subscription & Order Service 1 800 832-4642 1 206 938-0570 Fax 1 206 938-1307 [email protected] Subscription Manager Sean M. Moore

Website

http://www.traders.com

Staff members may be emailed through the Internet using first initial plus last name plus @traders.com

Authorization to photocopy items for internal or personal use, or the internal or personal use of specific clients, is granted by Technical Analysis, Inc. for users registered with the Copyright Clearance Center (CCC) Transactional Reporting Service, provided that the base fee of $1.00 per copy, plus 50¢ per page is paid directly to CCC, 222 Rosewood Drive, Danvers, MA 01923. Online: http://www.copyright.com. For those organiz ations that have been granted a photocopy license by CCC, a separate system of payment has been arranged. The fee code for users of the Transactional Reporting Service is: 0738-3355/2016 $1.00 + 0.50. Subscriptions: USA: one year (13 issues) $89.99; Magazines shipped outside the US require additional postage as follows: Canada, US$15 per year; Europe, US$25.50 per year; all other countries US$39 per year. Single copies of most past issues from the current year are available prepaid at $8 per copy. Prior years are available in book format (without ads) or digitally from www.traders. com. USA funds only. Washington state residents add sales tax for their locale. VISA, MasterCard, AmEx, and Discover accepted.Subscription orders: 1 800 832-4642 or 1 206 938-0570. Technical Analysis of Stocks & Commodities™, The Traders’ Magazine™, is prepared from information believed to be reliable but not guaranteed by us without further verification, and does not purport to be complete. Opinions expressed are subject to revision without notification. We are not offering to buy or sell securities or commodities discussed. Technical Analysis Inc., one or more of its officers, and authors may have a position in the securities discussed herein. The names of products and services presented in this magazine are used only in an editorial fashion, and to the benefit of the trademark owner, with no intention of infringing on trademark rights.

As

you settle into the dog days of summer with your long list of things to do, places to go, and people to see, you still have to find some time to stare at your screen and place a trade or two. Even though the markets are generally—and I say that with caution—as lethargic as the hot, sultry days of the summer months during that time, they’re still chugging along. In fact, they may even make a surprise move, spiking up volatility, and presenting plenty of trading opportunities. Didn’t we see a major fall take place during August 2011? You wouldn’t want to miss out on those volatile periods! They’re the ones that present the greatest opportunities to make some money, so there’s no excuse for you to slow down your trading just because there isn’t much happening. Given that global markets are interconnected, anything that happens in one country can have a significant impact on any market. Not all countries go through the lethargic dog days of summer. I encourage you to be aware of what is going on globally instead of focusing on a narrow segment of the markets. Pull up charts of global indexes so you know how those markets are performing. It’ll be well worth your time to be aware of the currency markets as well as some commodities such as gold and oil. Remember that markets trade around the clock. Obviously, you can’t watch markets while you’re sleeping, but you can see how markets in Asia or Europe are doing well before the US markets open. Often, traders focus on trading one or two high-flying equities, and that may be fine for a limited period of time, but cultivating that habit can get you lost in the forest among the trees. There’s an endless list of what you could trade, so spread your wings and explore trading opportunities you may not have thought of before.

Y

our goal is to be consistently profitable, even if your profits are small. When you have a broader understanding of how the global markets, commodities, currencies, equities, and bond markets are performing, the more trading opportunities you can exploit. And with more opportunities, the more chances to be profitable. So don’t slow down just because summer is here. Keep on trading! How else will you be able to do all the things you want to do, see all the places you want to see, and visit all the people you want to visit?


Jayanthi Gopalakrishnan, Editor

Miami Downtown Richard Cavalleri/Shutterstock

EDITORIAL

[email protected]

2016 WINNER AI TRADING SOFTWARE The editors of S&C invite readers to submit their opinions and information on subjects relating to technical analysis and this magazine. This column is our means of communication with our readers. Is there something you would like to know more (or less) about? Tell us about it. Without a source of new ideas and subjects coming from our readers, this magazine would not exist. Email your correspondence to [email protected] or address your correspondence to: Editor, Stocks & Commodities, 4757 California Ave. SW, Seattle, WA 98116-4499. All letters become the property of Technical Analysis, Inc. Letter-writers must include their full name and address for verification. Letters may be edited for length or clarity. The opinions expressed in this column do not necessarily represent those of the magazine.—Editor

MACD and Aroon Editor, I consider every article written by Barbara Star a must-read. She’s my favorite S&C writer and I use her technical ideas to guide me. Regarding her most recent article, “Zero In On The MACD” (S&C, May 2016), I am trying to figure out the entry rules for this approach. I know that: 1. The price needs to be above both moving averages—the 34 should be above the 55 2. The MACD or PPO should cross above zero. But here is my question: Should the aroon-up also be hitting 100 to indicate that a trend has begun? Gary Author Barbara Star replies: Thank you for the kind words. I appreciate knowing that the information I share helps your trading. Your question about the aroon indicator is a good one. Generally, I find that it does hit 100 at about the time the MACD crosses its zero line. But since that doesn’t always happen, my first choice would be to use the three-pronged strategy of having the MACD cross above zero; price cross above the moving averages; and a price break above resistance. The aroon can serve to confirm the direction of the MACD.

early 1980s and I’ve been a subscriber for probably 25 years. You produce a fascinating magazine with both brand-new ideas as well as new takes on old ideas that make them relevant again. Barbara Star authored an excellent article on MACD in the May 2016 S&C, which was superb in simplifying the signal by ignoring the MACD line/signal line crossover and focusing solely on the MACD zero line crossover. The result is fewer trades while also staying in a trade longer, which suits my trading style much more comfortably. She also combines the aroon indicator with MACD to confirm the current MACD signal, which is very clever, in my opinion. Star’s writing style is clear, concise, and immediately actionable. I hope we continue to see future articles from her going forward. Jim Hayes MACD ORIGINATOR Editor, I enjoyed Barbara Star’s article about the MACD in the May 2016 issue of Stocks & Commodities. Her approach is intriguing. I appreciate that she acknowledged my father (Gerald Appel, who is now retired) and will share her article with him. Marvin Appel Author Barbara Star replies: I am glad you enjoyed the article. I thought

LONG-TIME SUBSCRIBER Editor, I have been a reader of Technical Analysis of Stocks & Commodities since the

Winner 14 years in a row! Build powerful trading systems in MINUTES without coding

®

www.NeuroShell.com 301.662.7950 it might be too basic for many S&C readers, but I have already received several complimentary emails from readers who are fans of the MACD but who had not thought to use it for longer-term trading. Your father created an indicator and system that have tremendous enduring qualities. I am glad that I was able to bring some of them to a contemporary audience. Best wishes to you both. STUDY GROUP Editor, I am a subscriber to your excellent magazine, which has been a source of knowledge and interesting information, and has played a role in my understanding of the complex world of trading and technical analysis. For about three years now, I have been studying the different aspects of the market based on technical analysis, and I have been leading a study group. We have learned about the interpretation and utility of many technical indicators and other useful tools. We are now able to implement trading strategies, set up entry points, targets, and stopContinued on page 55

July 2016

• Technical Analysis of Stocks & Commodities • 7

Resist Temptation

Have you ever traded with exceptionally bad timing? Here’s one to ponder.

On

by Thomas Bulkowski

January 5, 2016, I was flush with cash, so I started window-shopping for stocks to buy. Sometimes I use a top-down approach, where I assess the condition of the general market, then find a stock I like on the longer-term chart, and drill down to the daily scale. Figure 1 shows the market landscape as represented by the Standard & Poor’s 500 index. In the fall of 2015, the index bottomed at A and B, with a tall peak between those bottoms at C. The ABC pattern is a double bottom, which point D confirmed as a valid pattern when the index closed above peak C. The index continued advancing and soared to E before meandering down to F. The move from B to E reminded me


of a flagpole with a flag suspended from E to F. Of course, this is not an actual flag pattern, because flags are shorter than three weeks, but it suffices for an overview of the trading landscape. The inset shows what an ideal flag is supposed to look like. I like to see the rise from b to e forming a straight-line runup. The retrace from e to f should be tight, forming a solid block of color, not waving up and down like the market’s move from E to F. After the flag ends, if the stock behaves, price will make a strong push higher and bust out upward, climbing to g and beyond. Flags in stocks during a bull market break out to the upside 54% of the time, according to statistics I compiled for my book Encyclopedia Of Chart Patterns, Second Edition. That is about random. Still, I hoped the index would resume its upward trend, carrying my stock upward along with it (that is, a rising tide lifts all boats).

Nikki Morr

Anatomy Of A Trade: The One That Got Away

ANATOMY OF A TRADE

Stock selection

The setup

S&P 500 (^GSPC) 2131 2115

E

2099 2083 2067 2051 2035

C

2019

e

1987

Continued on page 54

F

1971 1955

f

1939 1923

b

1907

Ideal flag pattern

1891 1875

Jan ’15

Feb

Mar

Apr

May

Jun

Jul

Aug

A Sep B Oct

Nov

Dec

Jan ’16

Figure 1: GENERAL MARKET ON A DAILY SCALE. When looking at the broad markets, you can use a top-down approach to assess the condition of the general market and then find a stock you like, first on the longer-term chart, and then drilling down to the daily scale.

Christopher & Banks Corp. (retail [special lines], CBK) A

12 11 10 9 8 7 6

B C

5

D

4 30 24 19 15 12 9 7

3

A

E

5 4 3

2

H

2

Inset 1: Monthly scale

1 2006

1

14

F

M

A

2007

2008

M

2009

J

2010

2011

J

2012

A

2013 2014 2015 2016

S

O

N

D

15 F

M

A

M

J

J

A

F

S

O

N

G

D 16

Figure 2: STOCK SELECTION. After selecting a stock, you look at it on longer-term charts using weekly and monthly scales.

7 6

Christopher & Banks Corp. (retail [special lines], CBK) A

5

B

4

J

3

2

I looked at the daily chart, which I show in Figure 3. The stock peaked in May 2015 (A) and made a steady but alarming decline to the bottom at D. Along

D

g

2003

1

May ’15

C

Jun

Jul

Aug

F

Sep

DOct

K

G I

H Nov

Dec

E

Jan ’16

Feb

Mar

Figure 3: DRILLING DOWN. On this daily chart you see how the trade unfolded. You can’t win ‘em all. July 2016


L

SOFTWARE BY TOM BULKOWSKI

I use weekly charts to scan through nearly 550 stocks I follow, looking for something that piques my interest. I zeroed in on Christopher & Banks Corp. (CBK), shown in Figure 2. The monthly chart (inset 1) shows the stock starting a long dive from 31.25 in the fall of 2006 and splattering on the ground, falling below $1.00 in 2016. It suggests management cannot figure out how to make the business work. In fact, they were closing stores, and comparable-store sales were down. Usually, these long-term declines will scare me away from a stock. I reason that if management cannot make the business work over a decade, what will it take to turn the situation around, and when will it happen? I would rather look for a more promising opportunity with a quicker payback. However, spurring me on was a wad of cash earning almost nothing. On the weekly scale, the stock peaked at A (shown on both scales) and began tumbling, making weekly plunges at BCDE along the way to the bottom at F. A bounce lifted price up to H before another decline took it back down to G. Notice that the FHG move looks like a double bottom, similar to the market’s ACB bottom in Figure 1 (although they happened at slightly different times). In Figure 2, the double bottom (FHG) has not confirmed as a valid chart pattern (yet) because price has not closed above H, the highest peak between the two bottoms. Drilling down into the stock, according to Yahoo! Finance, “Christopher & Banks Corporation…operates as a retailer of women’s apparel and accessories in the United States.” Women’s apparel is a competitive business with limited growth potential (hence the decade-long decline in the stock). None of these conditions thrilled me.


Trading SYSTEMS

Clean Those Lenses!

The Super Passband Filter bug or rounding error in the program. The EMA is a low-pass, or smoothing, filter. It provides the smoothing by rejecting the high-frequency components that are present in the price data spectrum. The EMA frequency transfer response can be visualized as in a well-known fact: The real enemy of Figure 1. The low-frequency components are passed technical traders is the lag from their unattenuated while the frequency components above indicators and trading strategies. Sure, the critical frequency are increasingly attenuated. The super passband filter is formed by using two it is relatively simple to create a fancy filter that will give you a precise answer to your trading decisions. EMA filters. One has a critical frequency that is set But fancy filters require more data than simple filters to a lower frequency than the first. Then, the second do, which will cause a delay in the calculations. What EMA filter is subtracted from the first. Since both EMAs pass the very low frequencies with no attenuause would that be to a trader? It is far better to get a reasonable answer with no tion, the subtraction eliminates the lowest frequencies lag, which is precisely what my super passband filter by cancellation. This is important, because the very does. Because it passes a band of frequencies through low frequencies are eliminated without the use of a filter from the data spectrum, it rejects the very low filtering, which means there is no induced lag. Figure 2 illustrates the concept of the super passband frequencies and therefore displays as an oscillator. It rejects the very high frequencies to eliminate the filter. The original EMA is shown by the red line. The distracting wiggles that often occur in indicators. I second EMA, having a lower critical frequency, is will show you how to use the super passband filter shown by the blue line. The resultant super passband with maximum effectiveness to supplement your filter response is shown by the dashed black line. discretionary trading, and I’ll give you sufficient The response of the blue line is subtracted from the detail so you can also implement the rules as part of response of the red line. At the very low frequencies, the values of the red and blue lines are the same, so an algorithmic trading strategy. Are low and high frequencies getting in your way? Here’s a filter that will reject both of these extremes so you can focus on what really matters.

It’ s

The filter concept Perhaps the simplest technical indicator is the exponential moving average (EMA). The EMA takes a fraction of the current price and adds the complement of the fraction to the value of the EMA one bar ago. In EasyLanguage notation, using a to denote the fraction, the equation is:

LISA HANEY

EMA = a*price + (1 – a)*EMA[1]

Frequency

I always write the EMA equation this way to ensure the coefficients add up to unity, thus avoiding a potential

Figure 1: eXPONENTIAL MOVING AVERAGE (ema) TRANSFER RESPONSE. This diagram shows that the EMA transfer response rejects high-frequency components.

by John F. Ehlers July 2016


JOHN EHLERS

EMA1

PassBand EMA1

The very low frequencies are eliminated without the use of filtering, which means there is no induced lag.

EMA2

Frequency Figure 2: SUPER PASSBAND FILTER. The super passband filter is created using the difference of the two EMAs.

the value of the super passband filter is zero by cancellation. Slightly above the critical frequency of the blue line, you’ll see its value decrease, so less cancellation occurs. The response of the super passband filter increases until the value of the blue line is essentially zero. Then, its response is flat through the passband until the critical frequency of the red line EMA is reached. The high-frequency attenuation of the super passband filter is determined by the attenuation of the red line EMA.

Computing the indicator

TRADESTATION

The usefulness of the super passband filter can be enhanced by also computing some trigger points, which can increase the efficiency of your entries and exits. I do this by computing the root mean square (RMS) value of the cyclic output of the super passband filter. In working with cycles, the RMS value describes the power in the waveform. The RMS value is the conceptual equivalent of the first standard deviation in a more generalized waveform. When the waveform exceeds the RMS value, there is a higher probability that the waveform will turn

and revert toward the mean. Therefore, I will use the computed RMS value as convenient trigger levels for trading. The EasyLanguage code for computing the super passband filter can be found in the sidebar “EasyLanguage Code For Super Passband Filter.” The two inputs to the super passband filter are the critical periods of the two EMA filters. Cycle periods are the reciprocal of frequency, and so the shorter period is given first. Don’t worry if you get the two inputs reversed. The result will be that the output waveform will be upside down, which is easily identified. The critical periods are used to compute the EMA coefficients, a relationship I obtained heuristically (that is, by computational trial and error). I have written the equation for the passband (PB) variable in closed form by taking the difference of the two EMA Z-transform responses. It could have as easily been done by computing each EMA and then taking the difference, as described conceptually. There are only two pieces of input information: the current closing price and the closing price one bar ago. The equation is completed using the computed value of PB one bar ago and two bars ago. The super passband filter will not have unity gain at the center of the passband, but the absolute value of the filter amplitude is irrelevant because the trigger points are referenced to the RMS value of the PB waveform. I compute the RMS value of the PB waveform by summing its square over the last 50 bars and taking the square root of the averaged sum. There is nothing magic in the number 50, and

FIGURE 3: SUPER PASSBAND FILTER IN ACTION. Here you see that the super passband filter has a zero mean and nearly no lag.


Noisy indicators delay your analysis

you can substitute a different value if you choose, but it should be sufficiently long to use approximately one cycle’s worth of data in the calculation.

The super passband filter in action

I have applied the super passband filter to approximately one year’s worth of SPY daily data (Figure 3). The filter response is shown as the red line in the first subgraph. The two yellow lines display the +RMS and –RMS values, and the blue line is the zero reference. The super passband filter output has a guaranteed zero mean because the low-frequency components are removed by cancellation. The near-zero lag of the filter can be verified by comparing a notch in the prices, say, near the beginning of October 2015 or the third week of January 2016, to the lowest spots in the filter response. Since going beyond the RMS levels and then starting to return to the mean is significant, the red line crossing over the –RMS line is a good trade entry signal. You can also sell short when the yellow line crosses under the +RMS line for the same reason. The basic idea is to hold the trade until the red line crosses the other RMS line. There are many cases where the slope of the red line is not consistent when traversing from one RMS line to the other. In this case, a slope reversal is a good time to exit the trade, even if it’s a loss. Then, when the slope of the red line resumes its original trajectory, you can reenter the trade even though the red line has not crossed over (or under) the yellow line.

Less is clearer

That’s all there is to it. I am sure you will find the super passband filter response will accurately reflect the pattern of the prices, making your trade opportunities clearer. You will find that the smaller you make the critical periods of the two EMAs, the more raggedy the filter response becomes. This is the straightforward result of using less smoothing in your EMAs. S&C Contributing Editor John Ehlers is a pioneer in the use of cycles and DSP technical analysis. He is president of MESA

Jurik algorithms deliver low lag, low noise analysis Tools for: TradeStation, AmiBroker, Investor/RT, MultiCharts, NeuroShell Trader, eSignal, NeoTicker, Tradecision, TradingSolutions, MATLAB, Ninja Trader, Sierra Charts, Genesis TradeNavigator, Market Delta, Extreme charts, DLLs for custom software

Jurik Tools on live charts, on the web ! tinyurl.com/jurik-online

Jurik Research

2010 -- 2011 -- 2012 -- 2013 Add-In software

jurikres.com

•

•

719-686-0074

Software. MESASoftware.com offers the MESA Phasor and MESA intraday futures strategies. He is also the chief scientist for StockSpotter.com, which offers stock trading signals based on indicators and statistical techniques. The code given in this article is available at the Subscriber Area at our website, www.Traders.com, in the Article Code area. See our Traders’ Tips section beginning on page 46 for commentary on implementation of John Ehlers’ technique in various technical analysis programs. Accompanying program code can be found in the Traders’ Tips area at Traders.com.

Further reading

EASYLANGUAGE CODE FOR SUPER PASSBAND FILTER //Super Passband Filter // (c) 2016 John F. Ehlers

PB = (a1 - a2)*Close + (a2*(1 - a1) - a1*(1 - a2))*Close[1] + ((1 - a1) + (1 - a2))*PB[1] - (1 - a1)*(1 - a2)*PB[2];

Inputs: Period1(40), Period2(60);

RMS = 0; For count = 0 to 49 Begin RMS = RMS + PB[count]*PB[count]; End;

Vars: a1(0), a2(0), PB(0), count(0), RMS(0); a1 = 5 / Period1; a2 = 5 / Period2;

800-810-3646

RMS = SquareRoot(RMS / 50); Plot1(PB); Plot2(0); Plot3(RMS); Plot7(-RMS);

Ehlers, John F. [2013]. Cycle Analytics For Traders, John Wiley & Sons. [2016]. “Aliasing,” Technical Analysis of Stocks & C ommodities, Volume 34: January. [2015]. “Decyclers,” Technical Analysis of Stocks & C ommodities, Volume 33: September.

‡TradeStation —J. Ehlers July 2016


Price action vs. Fibonacci trading

Trade Using Pure Price Action Part 1

Looking at charts without indicators can make them look naked. But the charts could actually be more reliable and profitable viewed this way. Here’s why.

P

by Solomon Chuama rice action provides first-hand information about the market, whereas indicators provide lagging or secondary information. In the first part of this two-part article, I will discuss price action by looking at candlestick charts.


Trends

Generally speaking, a trend gives you the general direction of price movement. An uptrend is when prices make a series of higher highs and higher lows. A downtrend is when prices make a series of lower highs and lower lows. When prices move without a discernible series they are said to be trending sideways.

Who is Danny / shutterstock.com

Charts Sans Indicators

Candlestick charts are used to describe price action in any given timeframe. Price action can follow a continuation pattern, where price continues in the direction it was moving preceding the pattern’s formation. Otherwise, price action can be in a reversal pattern, indicating the likelihood of a change in price direction from prior to the pattern’s formation. A critical aspect of price action is identifying support & resistance levels. These levels help identify trading opportunities mainly because these are the areas where price reverses. To trade profitably with price action you have to enter at the reversal of the trend in order to catch the trend close to its beginning. If you buy at the support level, place your stop-loss a few pips below it. If you sell at the resistance level, place your stop-loss a few pips above it. Traders often use Fibonacci retracement levels to identify potential support & resistance levels. I will discuss Fibonacci retracement levels in part 2. Before you can apply Fibonacci levels to your trading, you need to understand the concept of trends, support, and resistance.

FOREX FOCUS

From a logic standpoint, you go long when the market is in an uptrend and go short when the market is in a downtrend. In a sideways market. you may choose to trade the shorter-term trends or abstain from trading. Exhaustive candlestick patterns or price-rejection candlesticks indicate when buying or selling pressure is exhausted and gives clues as to when price may continue to trend. The main price reversal candlesticks discussed in this article are more effective at support & resistance levels. When you make trade decisions at these support & resistance levels, you will increase your odds of having successful trades.

Trade using support & resistance levels

DIP’s New Relative-Strength Investment Program! • Profitable Investing in Less than 20 Minutes • Use Our Proven Strategies or Develop Your Own • Worlds Only Fully Customizable Relative Strength Program • Safe 30-Day No-Quibble Guarantee

Dynamic Investor Pro equals safe, profitable investing in less than 20 minutes. This is the only fully flexible and customizable investment software focusing on multiple means of relative strength investing. Dynamic Investor Pro includes a Market Exit Signal to prevent losses, free support, and is endorsed by relative strength guru Michael J. Carr, CMT. TAKE CONTROL of your investments.

DynamicInvestorPro.com • 877-822-1445

Support Support is the price level (floor) where buying is strong enough to interrupt or reverse a downtrend. There’s a tough battle going on to keep prices above this level. In the four-hour chart of GBPJPY in Figure 2, you see the horizontal support level of the GBPJPY currency pair price at $170.68. Notice how prices bounced off this level several times (see arrows). But how do you know when the downward trend will reverse before you start taking long positions? In this case, it’s the harami cross reversal pattern that gave an indication that perhaps the trend is finally starting to turn up. The harami cross is a bottom reversal or bullish candlestick.

0.9315 0.9275 0.9235 0.9195 12/29/11 12/30/11 1/3/12

1/4/12

1/5/12

1/9/12

1/10/12 1/11/12 1/13/12 1/16/12 1/17/12 1/19/12 1/20/12 1/23/12 1/25/12

FIGURE 1: BOUNCING OFF RESISTANCE. Here you can clearly see that the horizontal resistance level of USDCHF is at 0.9573.

Price bounces off horizontal support level at 170.68

Harami cross

174.25 173.95 173.65 173.35 173.05 172.75 172.45 172.15 171.85 171.55 171.25 170.95 170.68 170.65 170.35

7/29/14 7/30/14 7/31/14 8/4/14 8/5/14 8/6/14 8/8/14 8/11/14 8/12/14 8/14/14 8/15/14 8/18/14 8/20/14 8/21/14 8/22/14 8/26/14 8/27/14 8/28/14 9/1/14 9/2/14

FIGURE 2: BOUNCING OFF SUPPORT. The horizontal support level of GBPJPY is at 170.68. Notice how price bounced off this level several times. July 2016


IFX Trader

Resistance is the price level (ceiling) where selling is strong enough to interrupt or reverse an uptrend. There’s a lot of resistance there, so price will have a difficult time going above There are other bullish candlestick patterns that can help you that point. In the four-hour chart of USDCHF in Figure 1, the identify reversals to the upside as well, a few of which you will horizontal resistance level of the currency pair at 0.9573 is find pictured in the sidebar “Bullish Candlesticks Or Bottom pretty clear. Notice how when the uptrend hits that resistance Reversal Patterns.” Any one or two of these candlestick patterns level, it tumbles down. Notice the bearish candlesticks as price that appear after prices hit a support level could indicate a buy approaches that resistance level. Those bearish candlesticks signal. Markets oscillate, and over time, support & resistance further confirm the uptrend’s reversal at the resistance level. levels are continuously formed. Another aspect of support & DBdesign 2016 and pullbacks. This should give traders a cue to get out of long positions and resistance levels is the issue of breakouts take short positions. The bearish CLIENT: RxCrossroads/Omnicare engulfing pattern highlighted in JOB #: DIP102b blue clearly shows the beginning SIZE:resistance3.375 x 2.875” Price bounces off horizontal at 0.9573 0.9595 of a reversal in trend. There are DATE: 4/25/2016 0.9573 other bearish candlestick patARTIST: db Bearish engulfing patterns 0.9555 terns that can help you identify a PROOF: 1 0.9515 Stocks & Commodities trend reversal. Some of these are 0.9473 pictured in the sidebar “Bearish 0.9435 Candlesticks Or Top Reversal 0.9395 Patterns.” 0.9355

Breakouts Breakouts are prices that cross support & resistance levels. They are usually accompanied by high volume and large price movement. I don’t find them reliable because the odds of their continuation are usually not high. They often turn into fakeouts, especially in the currency markets. Pullbacks When a price retouches support & resistance levels that were previously broken, it’s referred to as a pullback. When prices pull back, you can think of it as a high-quality signal to enter a trade, since a trend is likely to resume after the pullback. Pullbacks usually occur a few bars after a breakout.

Price action in the forex market

Price action analysis is when you make trading decisions based purely on price bars without any indicators overlaid on them. Here are a few steps on how to approach trading using price action. 1. Determine the direction of the market. 2. Identity support & resistance areas. Support & resistance areas should form the foundation of your decisions. You need to wait for price to reach these areas before you initiate your trades. Support & resistance levels are based on historical price action. When you look at a chart of a particular currency pair, you will notice that price had a tendency to reverse at the same level several times in the past. This historical price action helps to identify where the support & resistance levels are on a chart. In Figure 1, USDCHF was in a downtrend. Initially, the market started as an uptrend until it reached the resistance level. Price bounced off the 0.9573 resistance level. When you see this happening, you have to look for a price rejection candlestick. In this case, a bearish engulfing pattern formed. You can enter a short order immediately after the price rejection candlestick. But how long do you leave this trade open? The converse applies. As the downtrend progresses you have to look for a price rejection or exhaustive candlestick patterns. You may find some of these candlesticks along the trend, but you’re better off paying more attention to them when you spot them at the support level of the downtrend. That’s when you should exit your trade. Similarly, a critical look at the chart of GBPJPY in Figure 2 shows a downtrend that reversed at a harami cross. Prices were bouncing off support levels at 170.68. The harami cross suggested that the trend has finally reversed, which means you can take a chance at opening a long position. Exit your long position when you see price rejection or exhaustive candlesticks appear at a resistance level.

Trading approach

Here’s a recap of some of the points you need to keep in mind. 16 • July 2016 • Technical Analysis of Stocks & Commodities

What are you afraid of? Try removing those indicators and trade on price action or market movement. • Define the direction of the market. • Look for bearish reversal candlesticks at the resistance level in uptrends. A minimum of one or two bearish candlesticks must appear as confirmation. In downtrends, look for bullish reversal candlesticks at the support level. At least one or two bullish candlesticks must appear as confirmation. • Enter your positions following confirming reversal candlestick patterns. • Place your stop-loss a few pips above the resistance level for a short position or below the support level for a long position. You may place trailing stops if the trade continues to move favorably.

Remove the indicators

What are you afraid of? Try removing those indicators and trade on price action or market movement. You can get into trades early. You can try using different timeframes such as 30-minute, hourly, or even daily charts. Be mindful of reversal candlesticks at support & resistance levels. They have a unique characteristic—they tell you when buying or selling pressure is exhausted. Solomon Chuama has been working in the financial industry for 15 years. He is a trading seminar organizer and instructor who tries to pass on to students his passion and knowledge of forex trading.

Further reading

Chuama, Solomon [2015]. “The 10 Principles Of Successful Trading,” Technical Analysis of Stocks & Commodities, Volume 31: November. [2016]. “Explore Trend Trading In FX,” Technical Analysis of Stocks & Commodities, Volume 34: April. ‡IFX Trader (MetaQuotes Software Corp.) ‡See Editorial Resource Index

BEARISH CANDLESTICKS OR TOP REVERSAL PATTERNS

Bullish candlesticks or bottom reversal patterns

Bearish-Gravestone Doji

Bearish-Engulfing

Bullish-Dragonfly Doji

Bullish-Engulfing

Bearish-Evening Doji Star

Bearish-Harami

Bullish-Morning Doji Star

Bullish-Harami

Bearish-Harami Cross

Bearish-Shooting Star

Bullish-Harami Cross

Bullish-Inverted Hammer

Bearish-Hanging Man

Bearish-Kicker

Bullish-Hammer

Bullish-Kicker

Bearish-Dark Cloud Cover

Bearish-Tweezer Top

Bullish-Piercing Pattern

Bullish-Tweezer Bottom

July 2016


Riding The Ebbs & Flows

Another Look At Wave Theory What do the swings on a chart really mean? Maybe organizing them into groups based on their size can help answer that question.

tock prices move in rhythms, but you never know when a price drop is a correction or a reversal. A stock such as Apple Inc. (AAPL) has been up for several years, but the price dropped sharply in August 2015, as you see in Figure 1. When you see something like that happen, you have to wonder whether the big price drop is a trend reversal or a big correction. If it’s a correction, you would want to buy, but when should you buy? I came up with a wave theory I call Dylan Wave Theory that can help determine whether a price drop is a correction or a reversal. It can also help you understand what the price swings really mean.

What is it?

Dylan Wave Theory organizes price swings into groups based on correction sizes. These groups of price waves 18 • July 2016 • Technical Analysis of Stocks & Commodities

AAPL [CV] [M] Daily

135.00 130.00 125.00 120.00 115.00 110.00 108.98 105.00 100.00 95.00

13

May 15 Jun 12

Jul 14

Aug 17 Sep 15

Oct 14

Nov 16 Dec 14

FIGURE 1: Correction or a trend reversal? When you see a big price drop in a stock that has been moving up consistently for several years, you have to wonder whether it’s a correction or a trend reversal.

2

Sierra Charts

S

by Michael Dylan

(swings) are part of a natural rhythm that markets produce. There are many tradable rhythms, each having a distinct pattern of movement yet going on at the same time, which is why it’s hard for the untrained eye to decipher them. Here, I will demonstrate how Dylan Wave Theory organizes price charts, which can bring clarity to the price swings and help

chARTIng

40 40

40

40

40 100

100 FIGURE 2: Two rhythms. In this illustra100 100 tion, there is a new uptrend and a correction of 100 points. The market makes a new high followed by a 40-point correction, and then a new high. There are two rhythms on the FIGURE 3: Corrections during trends. Each FIGURE 4: Smaller rhythms complete first. The 40- and chart—a 100-point rhythm and a 40-point rhythm has its own first correction and subsequent 100-point rhythms are completed with matching, similar-size correcrhythm. matching second correction. tion waves.

STYLIZED WAVE: JAVI RUIZ / ABSTRACT METAL: EKY STUDIO/SHUTTERSTOCK / COLLAGE: CHRISTINE MORRISON

you find the natural support levels. To take advantage of these market rhythms, you need to follow three simple rules: 1. Identify new rhythms based on correction wave sizes. To be a new rhythm, the size of the correction wave must be 20% bigger or smaller than the other correction waves in a trend. The first new correction by size will be marked as correction number one. 2. As the trend continues to develop, the first correction wave in a rhythm will be matched by at least one other correction wave of similar size. In other words, rhythms develop between one or more pairs of similar size correction waves. To be considered similar in size, these correction waves must be within a 20% band. For example, a correction that is 100 points can be matched with a correction of 80–120 points. But a 100-point correction cannot be matched with a 75-point correction or a 125-point correction. 3. Since there are several different rhythm sizes on a chart, the smaller rhythms will complete first. In other words, there is a sequence to how market rhythms work out. The smaller corrections 40 70 40 are matched first and then the bigger ones. Here is a simple explanation of these three rules. Let’s say there is a new uptrend and a correction of 100 points (Figure 2). Then the market makes a new high followed by a 40-point cor-

rection, and then another new high. Now there are two rhythms on the chart—one of 100 points and one of 40 points. Rule 1 tells you that for a new rhythm, a correction must be at least 20% bigger or smaller in size than previous corrections. The 40-point correction is much smaller than the 100-point correction and that’s why it’s considered a new rhythm. Rule 2 tells you that as the trend continues to develop there will be a similar-size correction(s) to the first correction in a rhythm. It is important to remember that each rhythm has its own first correction and subsequent, matching second correction. As the market makes new highs, subtract 40 points from the new highs to calculate the first Dylan support price (Figure 3). Rule 3 says the smaller rhythms will complete first. In other words, the 40-point correction will match first, followed by the 100-point correction. As the market makes a new high, you subtract 100 points to calculate the second Dylan support price (Figure 4). There can be numerous patterns to these rhythms. For example, the next correction may not be 100 points as in

100 FIGURE 5 : Many patterns to the rhythms. The smallest 40-point rhythm is completed. The 70- and 100-point rhythms have not been completed yet.

70 40

40

70

100

100 FIGURE 6: Three rhythms. All rhythms are completed with matching, similar-size waves. Now we wait for a new rhythm to develop.

July 2016


AAPL [CV] [M] Weekly #6 120.00 100.72

105.67 100.00 80.00

first, followed by a rally, even if it is a small rally. Subsequently, the 100-point correction should be matched (Figure 6). At this point, the uptrend has developed in three rhythms, namely, the 40-, 70-, and 100-point rhythms.

Chart analysis

When AAPL went through its large correction in 2013 it was bigger than any of the previous cor40.00 rections, as you can see on the weekly chart of AAPL in Figure 7. According to rule 1, this is a 20.00 potential new rhythm. To measure the size of the 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 new correction wave, draw a box from the trend FIGURE 7: Measuring correction lows. On this weekly chart of AAPL, you see a new high at 100.72 to the correction low at 55.01, or you could subtract 55.01 from 100.72 to get the rhythm developing in correction 1. size of the correction. When the stock price makes a new high, as ilAAPL [CV] [M] Weekly #6 lustrated in Figure 8, the new rhythm is confirmed, 120.00 and in the future we should expect a similar-size New high correction one more time. As AAPL makes new 100.72 105.67 100.00 highs, keep moving the box up (Figure 9). The bottom of the box is the Dylan support price. 80.00 Sometimes the second correction in a rhythm 60.00 will not quite reach that support price, which is 55.01 why I recommend that the entry price be placed 40.00 slightly above the support price. The first blue box on the chart is the first correction, and the 20.00 second blue box represents the matching second 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 correction of the rhythm. Since the theory states that more often than not FIGURE 8: New high, new rhythm. When the price goes above where the first correction a trend will develop in sets of two similar-size began, 100.72, the new rhythm is confirmed. corrections, and since the correction of 2013 in AAPL had not yet been matched with at least 134.54 AAPL [CV] [M] Weekly #4 2-to-1 certainty, then the current rhythm contain130.00 ing the 31% price drop can be considered a big 120.00 correction and not a trend reversal. Therefore, the 110.00 Dylan support price at 88.97 is an opportunity 105.67 100.72 100.00 to buy (Figure 9). Dylan Wave Theory has answered the ques90.00 88.97 tion of whether the big downward price action 80.00 you saw in Figure 1 is the beginning of a bear 70.00 trend or whether it’s a big correction. It was a big 60.00 correction matching the one in 2013. The other 55.01 50.00 question Dylan Wave Theory answered is where to enter the market. The answer is to enter near 1 May Sep 2012 May Sep 2013 Jun 2014 Jun 2015 Jun 2016 the 88.97 Dylan support price. FIGURE 9: Finding support levels. The size of the first correction, 45.71, is subtracted from It is not necessary to use the rectangular boxes the new highs to find the support price. to find the support prices; however, they do provide a quick way to find the support prices and the previous example, but rather 70 points followed by a new organize waves into color schemes. For example, instead of market high (Figure 5). drawing a box, you could have subtracted the low of the first Now there are two rhythms in the market, of 70 and 100 correction 55.01 from the beginning of the correction 100.72 points, and very likely the 70-point correction will match and come up with 45.71 for the correction size. As AAPL made first. The 40-point rhythm is finished, because the 70-point new highs, you would subtract 45.71 to find the support price. rhythm is 20% bigger. According to rule 3 of the Dylan Wave Theory, the 70-point Dylan support price should be matched Continued on page 44 60.00

55.01


FUTURES FOR YOU INSIDE THE FUTURES WORLD Want to find out how the futures markets really work? Carley Garner is the senior strategist for DeCarley Trading, a division of Zaner Group, where she also works as a broker. She authors widely distributed e-newsletters; for your free subscription, visit www.DeCarleyTrading.com. Her books—Currency Trading In The Forex And Futures Markets; A Trader’s First Book On Commodities; and Commodity Options—were published by FT Press. To submit a question, email her at [email protected] or via www.DeCarleyTrading.com. Selected questions will appear in a future issue of S&C.

NEW DOLLAR SPOT INDEX The CME recently launched a new dollar index futures contract. How does it differ from the ICE version? The US dollar index futures contract— the DX—that is traded on the Intercontinental Exchange, better known as ICE, is the original benchmark. I often refer to it as the currency ETF of the futures market because it offers speculators a way to place wagers on the strength, or weakness, of the dollar against a basket of major currencies, as opposed to a single currency. Although the DX has never been a poster child for healthy trading volume, it sees enough action for seamless entry and exit of futures contracts, and the option market makers “make” a relatively fair arena to buy and sell options against the dollar index at reasonable prices. However, in light of the new ICE policy to charge traders $110 per month for access to live price data for the US ICE division of the exchange housing the dollar index futures contract (not to mention another $110 per month for price access to products on each of their other divisions), the Chicago Mercantile exchange has rolled out a competing product, the Bloomberg Dollar Spot Index (BDI). Although the CME also charges users for price data, they categorize traders as either professional or nonprofessional; this acts as a litmus test as to who must pay higher data fees. For example, a professional trader wishing to have access to real-time data on the CME’s version of the dollar index, along with other futures contracts traded on that particular division of their exchange, must pay $85 per month to the exchange. Yet those deemed to be nonprofessional

traders might pay as little as $3 per month if they subscribe to top-tier data. There is a substantial difference between the $110 the ICE exchange is asking and the $3 the CME is asking for live price data. Unfortunately, those seeking the economic benefits of moving their dollar index trades to the CME’s Bloomberg Dollar Spot Index will find that the BDI is suffering from a dire lack of liquidity. Nonetheless, this is a growing pain that all new futures products undergo, and I suspect that as traders become more and more aware of the alternative, trading volume will begin to migrate from the ICE’s DX to the CME’s BDI.

The CME is offering “fee-free” trading until the close of the third quarter of 2016. Although trader interest in the BDI is lacking, market makers are in place essentially “making a market” that doesn’t currently exist by offering extremely competitive bids & asks. Accordingly, during normal market conditions (not high volatility or during a significant economic data release or news event), I suspect traders would be able to buy and sell the BDI with relative ease. There are some notable differences between the dollar index traded on ICE and the new version traded on the CME. The basket of currencies the ICE version trades against is comprised of roughly 60% euro, causing the DX to be more heavily influenced by action in the euro. The CME version, meanwhile, has a euro weighting closer to 30%. The CME verJuly 2016

Carley Garner

sion also includes some emerging market currencies it reasoned to be liquid and pertinent to include in the basket. In addition, the CME BDI is “designed to keep pace with an evolving FX market” via annual rebalancing to Federal Reserve reports and data from the Bank for International Settlements. In other words, its basket of currencies is dynamic and related to actual cash flows taking place in the spot forex markets. A massive drawback to the CME’s version of the dollar index is a lack of available options to use for hedging, or speculating. In other words, an ICE dollar index trader could go long a DX futures contract and then purchase a put option for insurance purposes, but a CME BDI trader wouldn’t have the ability to purchase options for risk management purposes. Similarly, the DX offers traders the opportunity to purchase calls and puts as limited-risk speculative ventures, but no such prospect exists using the BDI. In an attempt to boost trading in their new product, the CME is offering “fee-free” trading until the close of the third quarter of 2016. In short, although traders will still be required to pay their brokerage firm commission for each transaction executed in the BDI, they will not be charged the exchange fees that are charged per transaction. The savings is likely a few dollars per contract, and that alone is not necessarily a compelling reason to trade the CME’s dollar index, but for those wishing to trade a diversified basket of currencies against the greenback, the savings in exchange fees and data fees make the CME’s BDI worth a good, hard look.


described in terms of the mixing or spreading of the total energy of each constituent of a system over its particular quantized energy levels. Keeping this concept in mind will be useful when applying these ideas to trading. I am looking to identify when the market’s energy is focused in a single direction, as opposed to spread out and directionless. As per a 1948 paper by Claude Shannon, for whom the term Shannon entropy was named, entropy, H, is given by:

∑P

H= –

n

i=1

i

log2 (Pi)

where P is the probability of a particular element.

Types of price action

Markets typically act in two fundamental ways: they oscillate between periods of trending price action, which could be considered focused energy, and periods of sideways price movement or consolidation, which could be considered unfocused energy. I will examine these two behaviors and develop a framework for analyzing each in terms of their entropy.

Seek, And Ye Shall Find

Shannon Entropy Indicator Here’s an indicator that discerns the nature of the underlying market and helps you decide whether you should trade trends or channels.

In

by Stephen Massel

my last article on Shannon entropy in the August 2015 issue of Stocks & Commodities, I introduced the concept of using entropy to detect structure, or nonrandomness, in a strategy’s trading results. In this article, I will extend this idea and create an indicator that seeks to discern the nature of the underlying market and whether price action is acting randomly or with more purpose. This can then be used to help decide whether to be trend trading or channel trading. But first, a few words on entropy. As well as providing a measure of structure/ randomness in data, entropy can be considered a measure of dispersion; the more mixed up or evenly distributed the data, the higher the entropy, as in a pack of well-shuffled playing cards. In thermodynamics, entropy changes have been


To calculate entropy, I’m going to use a slightly modified form of rank 1 entropy. Recall that rank 1 entropy is based on groupings of single elements. In this case, I will be looking at the S&P daily close relative to the prior day’s close in percentage terms. (The spreadsheet showing the calculations is available from http://traders.com/files/Pattern_Entropy3. xls.zip.) The first step is to quantize the daily price changes; I have used a threshold of 0.1% for this. Anything above 0.1% will be considered an up day (U), below -0.1% a down day (D), and in between that range is a flat day (F). Rather than defining three outcomes U, D, and F, as you might expect, I am going to define two outcomes, U and D, with F = (0.5 × U) and (0.5 × D), respectively. That is, a single up day will be U with frequency 1, a single down day will be D with frequency 1, and a flat day will be U with frequency 0.5 and D with frequency 0.5. Random entropy (maximum dispersion) will be given by -log2(1/2) = 1. Note that this treatment is justified, as an even distribution of ones and zeros is the same as an even distribution of 0.5s (that is, 0+1 = 0.5+0.5). A sequence of “1, 0, 0.5”

SERGY NIVEN/SHUTTERSTOCK

Calculating entropy

will therefore be inter8 up days, 8 down days preted as U, D, F. See Up 8/16 x 1 + 0/16 X 0.5 = 0.5 the example of even Down 8/16 x 1 + 0/16 X 0.5 = 0.5 distributions pictured Total: 16 in Figure 1. Entropy: -0.5 x log(0.5) -0.5 x log(0.5) = 1 I’ll start by calculat16 flat days ing the entropy of three Up 0/16 x 1 + 16/16 x 0.5 = 0.5 idealized price pat0/16 x 1 + 16/16 x 0.5 = 0.5 terns—uptrend, down- Down Total: 16 trend, and sideways Entropy: -0.5 x log(0.5) -0.5 x log(0.5) = 1 channel (consolida1 up day, 1 down day, 14 flat days tion). Then I will per1/16 x 1 + 14/16 x 0.5 = 0.5 form the same analysis Up 1/16 x 1 + 14/16 x 0.5 = 0.5 on actual price data Down exhibiting these types Total: 16 of price patterns. Entropy: -0.5 x log(0.5) -0.5 x log(0.5) = 1 As discussed, the FIGURE 1: EVEN DISTRIBUTIONS. Here are examples of simple quantization even distributions of maximum entropy for up days, down scheme will allow days, and flat days. daily price changes to be defined as U, D, and F. To help visualize this I have created some idealized patterns (my own pseudo price points) and plotted these cumulative price changes with the cumulative 14 quantized levels on the second axis, including +/- signs to show direction. The entropy can then be calculated for each 12 pattern using Shannon’s entropy formula. Diff is the difference 10 between the calculated entropy and random entropy (maxi8 mum dispersion), or diff = (1–entropy). An example of this calculation is shown in Figure 2 for the uptrend. You can see 6 idealized and quantized plots for an uptrend in Figure 3, for 4 a downtrend in Figure 4, and for a channel in Figure 5. As you can see, the entropy characterizes these patterns 2 exactly as you would expect. The diff of 1.1% for the channel 0 is significantly lower than the 45.6% for the trends.

Real price data

This is all well and good for idealized price patterns, but what about real price data? Let’s find out. In Figures 6 , 7, & 8 you

Pseudo% 0.25 0.90 0.25 1.20 1.50 0.08 0.80 0.50 -1.20 0.60 0.70 1.40 1.20 1.10 0.10 1.00

Uptrend 0.25 1.15 1.4 2.6 4.1 4.18 4.98 5.48 4.28 4.88 5.58 6.98 8.18 9.28 9.38 10.38

-2

1

2

3

4

5

6

7

8

9

10 11 12 13 14 15 16

U/F 1 1 1 1 1 0.5 1 1 0 1 1 1 1 1 0.5 1 14 0.544 45.64%

D/F 0 0 0 0 0 0.5 0 0 1 0 0 0 0 0 0.5 0 2

Idealized Uptrend 12 10 8 6 4 2 0 1

2

3

4

5

6

7

8

Quantized

9

10 11 12 13 14 15 16 Uptrend

FIGURE 3: ENTROPY OF IDEALIZED UPTREND. The diff for the uptrend is 45.6%.

Idealized Channel 2

0

Quantized 1 2 3 4 5 5.5 6.5 7.5 6.5 7.5 8.5 9.5 10.5 11.5 12 13 Total: Entropy: Diff:

FIGURE 2: difference between calculated entropy and random entropy for an uptrend. Using idealized uptrend calculations of U>0.1%, D<-0.1%, and F≥-0.1% & ≤0.1% resulted in a diff of 45.64%.

Idealized Downtrend 2

Quant 1 1 1 1 1 0.5 1 1 -1 1 1 1 1 1 0.5 1

0

2.5

0.6 0.4

2

0.2

-2

-4

-4

-6

-6

-8

-8

-10 -12

-10

-14

-12 Quantized

microsoft excel

INDICATORS

0

1.5

-0.2 1

-0.4 -0.6

0.5

-0.8 -1

0 1

2

3

4

6

7

8

Quantized

Downtrend

FIGURE 4: ENTROPY OF IDEALIZED DOWNTREND. The diff for the downtrend is 45.6%.

5

9 10 11 12 13 14 15 16 Channel

FIGURE 5: ENTROPY OF IDEALIZED CHANNEL. The diff for the channel is 1.1%, which is significantly lower than that of trends. July 2016


16-Day SPX Uptrend 5

8

4

7 6 5

3

4 3

2

2 1

1 0

Quantized

-1

-A ug

-1 -2

27

25

-A ug

-1

4

4

4 -1

-1 23

-A ug

-A ug

21

19

-A ug

-1

4

4

4 -1

-1 17

-A ug

-A ug

15

13

-A ug

-1

4

4

4 -1

-1 11

-A ug

Au g 9-

7-

Au g

-1

4

4

0

S&P%

FIGURE 6: USING REAL PRICE DATA. In this uptrend segment, the diff equals 10.4%.

14

14

ct-O

ct-

0

12

-O 10

Oc

t-1

4

4 t-1

8-

Oc 6-

Oc

t-1

4

4 t-1

4-

30

Oc

ep -S

-S

2-

ep

-1

-1

4

4

4 28

26

-S

ep

ep -S

24

22

-1

-1

-1

-1 ep

-S

0

4

4

16-Day SPX Downtrend

-1

-2

-2

-3

-3

-4 -4

-5

-5

-6 -7

-6

-8

-7 Quantized

S&P%

FIGURE 7: REAL PRICE DATA, IN A DOWNTREND SEGMENT. The diff equals 14.3%.

16-Day SPX Channel 1.4

2

1.2

1.5

1 0.8

1

0.6

0.5

0.4

0

0.2

-0.5 14 3Ju l-1 4 5Ju l-1 4 7Ju l-1 4 9Ju l-1 11 4 -Ju l-1 13 4 -Ju l-1 15 4 -Ju l-1 4

14

Ju l-

-1

1-

n-

n14

-Ju

-Ju 29

14 n-

27

25

-Ju

n-

23

-Ju

-0.2

14

0

-0.6 -0.8

-1.5 -2

Quantized

S&P%

FIGURE 8: CHANNELING SEGMENT USING REAL PRICE DATA. The diff equals 0.28%.


see selected 16-day segments from the S&P 500 index (SPX) from 2014. The segments display up, down, and sideways price action, along with the quantized plot and calculated entropy differences. Again, there’s a significant difference in the channel diff of 0.28% versus 10.4% for the uptrend and 14.3% for the downtrend. The difference is not as marked as in the idealized patterns, but it’s pretty good given real-world market conditions. Also, the quantized plots match the actual price data very accurately. Now we have a framework that shows when the market is trading with focused or directional energy and when it’s trading with dissipated, nondirectional energy. The reason I used 0.5 × U and 0.5 × D for a flat day (basically 50% up and 50% down simultaneously) is that I want to view the market through a binary lens of up and down only, and do not want the entropy measure to consider a sequence of flat days or a channel to be a focused energy (nonrandom) price pattern. The objective is to differentiate trends and channels. Note that as you reduce the quantization level, you will decrease the number of flat days, and entropy will be more predominantly based on up/down day sequences. Having ascertained that the entropy measure works to differentiate market conditions, I can create an indicator and see if it offers any insight.

Putting it all together

In order to create an indicator I need to quantize price and calculate entropy over a rolling period. In analyzing the charts I found that a rolling entropy period of 10 days with a quantization threshold of 0.05% worked well. The indicator is plotted in the chart in Figure 9 for the SPX from January 2009 to March 2016, together with two diff simple moving averages of periods 15 (dotted) and 20. The diff plots have been split up into red (below 3.5%) and green (above 3.5%) to more clearly indicate regions of market trending behavior versus consolidation. I have added some arrows in the chart that show that the market seems to cycle regularly between periods of focused energy (trendiness) and unfocused energy (range-bound). A zoomed-in view of this chart in Figure 10 shows the indicator from January 2014 to March 2016. The moving average crossover points (where the dotted MA crosses over the solid MA) from within the red channeling zone appear to indicate points where the market is ready to enter the trending zone. In such a case, a trending strategy is probably more likely to succeed. At a more macro level, by looking at the diff trend indicator (green) and diff moving average peaks, you can see that since around October 2015 the market has been tending toward consolidation and may soon be ready to enter a more trending environment.

Deploying the right strategy

I think this approach can provide insight into the market’s behavior, in that it can help you determine if its energy is

S&P vs. Diff (1–Entropy)

2300

60%

2100 50% 1900

Green = Trending Red = Channeling

1700

40%

1500 30% 1300 20%

1100 900

10%

Close

Trend

MA20

Jan-16

Nov-15

Jul-15

Sep-15

May-15

Jan-15

Mar-15

Nov-14

Jul-14

Sep-14

May-14

Jan-14

Mar-14

Nov-13

Jul-13

Sep-13

13

May-13

Jan-

13Mar--

Nov-12

Jul-12

Channel

Sep-12

May-12

Jan-11

Mar-12

Nov-11

Jul-11

Sep-11

May-11

Jan-11

Mar-11

Nov-10

Jul-10

Sep-10

May-10

Jan-10

Mar-10

Nov-09

Jul-09

Sep-09

May-09

Jan-09

500

Mar-09

700 0%

MA15

FIGURE 9: TRENDING VS. CONSOLIDATING PERIODS. On this chart of the SPX from January 2009 to March 2016, you see the cycles of trending (green) vs. consolidations (red). The diff moving averages are also plotted and help show how the market cycles between focused (trendiness) and unfocused energy (range-bound).

focused and more susceptible to trend trading or whether its energy is unfocused and more amenable to a mean reversion– type strategy. It would be interesting to extend this analysis to entropy of higher rank and different time periods. Of course, like most indicators, it is delayed, since previous price data is used in its calculation. However, if you believe that trending versus consolidation behavior has some persistence, then this could be a good approach to consider.

provider and trading strategy development/testing company. He can be reached via his website at dragonfishgroup.com. A spreadsheet offered by the author with his calculations can be downloaded from http://traders.com/files/Pattern_Entropy3.xls.zip.

Further reading

Massel, Stephen [2015]. “Shannon Entropy,” Technical Analysis of Stocks & Commodities, Volume 33: August. [2011]. “What Can You Expect, Mathematically?” Technical Analysis of Stocks & Commodities, Volume 29: March.

Stephen Massel has been developing strategies and indicators and has been trading futures and options for over 18 years. He is cofounder of Dragonfish LLC, a news sentiment data

S&P vs. Diff

2200

Green = Trending Red = Channeling

2150

Trending / ordered market

2100

60%

50%

2050

40%

2000

Channeling / increasingly random market

1950

30%

1900 20%

1850 1800

10%

Close

Channel

Trend

MA20

Mar-16

Feb-16

Jan-16

Nov-15

Dec-15

Oct-15

Sep-15

Aug-15

Jul-15

Jun-15

May-15

Apr-15

Mar-15

Feb-15

Jan-15

Nov-14

Dec-14

Oct-14

Sep-14

Aug-14

Jul-14

Jun-14

May-14

Apr-14

Mar-14

Feb-14

1700

Jan-14

1750 0%

MA15

FIGURE 10: ZOOMING IN ON THE SPX FROM JANUARY 2014 TO MARCH 2016. The diff moving average (MA) crossover points (dotted MA crossing over the solid MA) from within the red channeling zone appear to indicate points where the market is ready to enter a trending zone. In such a case, a trending strategy is more likely to succeed. July 2016


Q&A SINCE YOU ASKED Confused about some aspect of trading? Professional trader Rob Friesen, president & COO of Bright Trading (www.stocktrading.com), an equity trading corporation, answers a few of your questions. To submit a question or suggest a topic, email him at [email protected], or post your question to our website at http:// Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C. Rob Friesen

Feedback Loops TO Improve Future Results The three items all traders should have if they want to improve their trading results are their trading plan, a log of all their trades, and a trading journal. These items are necessary so that the trader can develop a feedback loop. In engineering, a feedback loop is where a portion of a system’s outputs are sent back to the inputs to further affect and modify future outputs. The two major categories of feedback loops are positive and negative. Negative feedback loops reduce aspects of the future inputs, while positive feedback loops enhance future systematic feedback loops. The concept of the feedback loop can help a trader refine his trading processes and systems, which can only be accomplished if a trading plan, trading log, and trading journal are in place. The trading plan is the utility to engage trades and is also the baseline from which to compare future results. The log and journal provide the feedback loop. The goal of utilizing the log and journal is to remove what isn’t working from the system and enhance what is working. Whether you trade multiple strategies systematically through full automation, partial automation, or on a fully discretionary basis, those items are necessary for spotting issues and inconsistencies that are affecting your trading results. A trading plan might contain the following elements (this is not an exhaustive list):

- Daily procedures checklist - Details of overall system - Quantified, backtested results - Walk-forward test results, if possible - Assumptions

- Details of various strategies used -M odels and variations for each of the strategies -M ethods used to execute each opportunity - Position sizing - Risk-management system -T he expected value of each transaction The trade log—which should be multiple documents/spreadsheets if you’re trading multiple systems or methodologies—shows you your ongoing results so you can see whether they are within the past results documented in the trading plan.

A feedback loop can help a trader refine his trading processes and systems. If you’re a fully discretionary trader, you need to make sure you do not go through “style drift.” Continue to monitor the behaviors that are helping you become a better discretionary trader and eliminate those that are hurting you. The feedback loop can help you identify fear and greed patterns that are affecting your trading and causing you to have subpar trading results. As an aside, discretionary trading has become more challenging in the last seven years due to the increased use of information technology, increased noise, lower volatility, and smaller trade sizes. If you’re a fully systematic trader, you’re not responsible for executing trades. However, you have to make sure your system is prepared to trade each day. You will use your journal and logs in different ways than the discretionary


trader does. You should have concrete backtesting stats and forward-testing indications against which to compare your ongoing results. Use your journal to monitor market conditions and specific items like changes in volatility, correlations, interest rates, currencies, and sector performance. By writing these down and using the stats generated from your trade logs, you can begin to notice factors that help or hurt your system over time. This can then help you to modify and fine-tune your system/systems for future revisions. If you combine discretionary and systematic trading, you’ll have the best and worst of both worlds. You’ll need to combine the principles of the fully systematic trader and the discretionary trader. Oftentimes, you’ll have to decide which of your systems to deploy based on your read of market conditions. The journal and trade log can help you determine if you are correctly interpreting the conditions and putting the correct systems into place to take advantage of those conditions. Sometimes, you’ll have the leeway to exit your trading strategies early. You can use your logs and journals to determine over time if you are getting better results by interfering with the system or if your mind is getting in the way of optimal performance due to emotions, presumptions, forecasting, speculation, and fear/greed tendencies. You can use backtested data that displays odds for the stock’s behavior the next trading day. Picking up on a theme from my June 2016 column and using the analogy of betting on streaks, the trading plan and feedback loop from your trade log and journal may go something like this: Strategy 1 Take trades on streaks where a few ducks

Q&A are lined up in addition to the parameters of a Sharpe ratio filter of +0.20 or greater for longs and -0.20 or less for shorts. A backtest showed a positive expectation for both of these long/short candidates. Trade log feedback: Longs seem to be performing as expected, but you are getting hurt on your shorts and they are causing greater losses than the model displayed. Journal entries: Note the problems you are experiencing (your mental and emotional state) and brainstorm possible causes of the short-side drift. Note any news or macro influences. Research all possible ideas that come from the brainstorming process. Determine the number of live samples you will gather before making a change to the system/trading plan. Plan for any additional factors you can watch for in future samples. Sample results: After going over your results for a specified number of live trades, observing additional factors, recording data, and journal entries each day, the results show that shorts are consistently underperforming their projected results. You make a decision to change the Sharpe ratio to -0.40. This reduces the number of short selections for the day but increases their quality. You can make up the difference in capital by perhaps using an exchange traded fund to balance long/short dollars. Strategy 2 Take long trades in the bin of 2.5–3.0% up on the previous day and hedge with the SPY. These would be “go-with” trades based on the expectation of the continuation of strength. Your backtest has shown a positive expectation for these long trades

outperforming the Feedback hedge. Why hedge if you have a positive expectation for the Outputs Inputs System longs? Because you don’t know for sure if your longs will go up. There could Passage of time be a market event FIGURE 1: Basic feedback loop. that causes a major selloff. The key here Trading journal is that your longs outperform the short hedge(s) regardless Trading Execute Profit of the direction of plan trades / loss the market or instruments you are trading. It is the relative Trade log performance you FIGURE 2: Traders’ feedback loop. are after. This would have been included in your backtesting greater than the signals, and you should for odds anyway, as you would have cap- roll to your mean-reverting strategies tured the previous day’s performance of that have been on the shelf waiting for the stocks as compared to the SPY and a time like this. Note: One thing that’s other suitable ETFs. always helpful is to have all your strategies in live sample mode through a Trade log feedback: Longs are not staging server or demo mechanism, but performing against the SPY hedge as not live in production. This way, you can well as expected. see the daily results without losing any money. It’s not perfect, but it is helpful Journal entries: Each of your longs went and it can be used as part of the feedback the wrong way even though the market loop process. Traders who employ these was sideways. You wonder whether the methods of tracking strategies while they market has entered a phase of perfor- move forward day-to-day are usually the mance reversals instead of continuations. most sensitive to market changes and What about news and macro catalysts? able to adapt by switching strategies. How long will you give this to start This facilitates lower variance and more working? Monitor events over the next consistent profits. week, continuing to keep your executions to the minimum position size you Remember to change one parameter planned for, staying disciplined within at a time instead of changing all your the trading plan. settings. Be patient and disciplined and gather the data precisely using the feedSample results: After a specified amount back loop process strategically. of samples, you notice that reversals dominate. The noise in the market is

Your Online Resource For Technical Analysis Join us on Facebook at www.facebook.com/STOCKSandCOMMODITIES Follow us on Twitter @STOCKSandCOMM July 2016


Analyzing Price Movement

Richard Demille Wyckoff Part 4

T

by Stella Osoba, CMT

he core skill of a technical analyst is the ability to read charts to make intelligent trading decisions. As with any skill, the more you practice, the better you will get at it. For the lay person new to chart reading, the admonition bears repeating that chart reading is not the holy grail. It just increases your chances to better than even. Wyckoff said that he had stood at the ticker and observed as some of the great traders of his day, such as James R. Keene, John W. Gates, and Jesse L. Livermore, traded. The one thing they had in common was that they used their judgment. These men practiced constantly and continuously over a long series of years and were thus able to trade successfully more often than not. As Wyckoff said, all you need for success is to be a “little more expert in discernment than


others.” So it is worth bearing in mind Wyckoff’s caution as you read what follows, and also bear in mind that there are no rigid rules to chart reading. Study Wyckoff’s method, but then make it your own.

Be the hitchhiker

The goal of chart reading is to watch and detect the intentions of major institutions, large operators, well-informed insiders, bankers, and other major interests. As Wyckoff said, imagine yourself—the small trader—as a hitchhiker. Someone else supplies the car, the gas, the oil, the driver. When the hitchhiker observes that the car is traveling in his direction, he hops on for the ride. As long as the car travels in his direction he stays on, but as the car begins to slow or change direction, the hitchhiker hops off. All the hitchhiker has supplied are the brains to spot the opportunity and the guts to hop on for the ride. Someone else has supplied everything else—the driver, the car, the oil, and the gas. In this same way and with a similar intention, the small trader studies the charts, looking for the opportunity to hop on or off.

suphatit73 /shutterstock.com

Whether you’re an investor or trader, you need to know how to intelligently evaluate price action. In this fourth of a fivepart series about Richard D. Wyckoff, we look at how he evaluated price action using charts.

CLASSIC METHODS

Keep it simple

To judge price action, you only need a few facts. They are:

Wyckoff used two main types of charts to analyze markets and stocks. He used bar charts to time his commitments, and he used point & figure charts to determine the points or objectives a campaign could be expected to travel. This article will focus on bar charts. According to Wyckoff, there are four principle phases of a typical stock market campaign:

Mark up STOCKCHARTS.COM

1. Price movement 2. Volume, or intensity of trading 3. Relationship between price movement and volume 4. Time required for all the movements to run their respective courses.

Mark down

Distribution

Accumulation

FIGURE 1: BROAD PRICE SWINGS. This chart shows the delineation of broad price swings. In between the main moves indicating extreme low and high are the intermediate-term swings of between five and 30 or more points.

Range of accumulation

1. Accumulation 2. Marking up 3. Distribution 4. Marking down

Signal of further strength to come

Springboard

Accumulation and marking up are bullish, while distribution and marking down are bear- FIGURE 2: ACCUMULATION. Price is locked in a range of accumulation from March 2012 to December ish. Sometimes there will be periods when there 2012. does not appear to be an active interest in the stock and no campaign is underway. These are times when the Wyckoff said that “reading charts is like reading music, stock is neutral and it is best to be out of the position. in which you endeavor to interpret correctly the composer’s I will use the bellwether stock FedEx (FDX) to illustrate ideas and the expression of his art. Just so, a chart of the avWyckoff’s approach to chart reading. In Figure 1 you see a erages or a single stock reflects the ideas, hopes, ambitions, five-year chart of FDX showing broad swings in the stock and purposes of the mass mind operating in the market, or of price, which can be broadly delineated as marked. In between the manipulator handling a single stock.” With that in mind, the main moves indicating extreme low and high are the I’ll use Wyckoff’s methods to discern what the chart of FDX intermediate-term swings of between five and 30 or more might be telling us. points, which Wyckoff pointed out are the best opportunities for trading. Stock prices are fractal, so the swings in a Accumulation minute or hourly chart will often mirror the swings in a daily In Figure 2 you see FDX locked in a range of accumulation or weekly, or even monthly, chart. I will use daily charts for from March 2012 until December 2012. This is something you want to see because the preparation for an important move in this article. As in any other business, you want to buy when prices are the market should take a considerable amount of time. low and sell when prices are high. Study a chart with the Figure 3 starts on August 27, 2012, about six months into benefit of hindsight and nothing could appear easier, but the the range of accumulation. A decline is checked on September skill of the chart reader is to be able to determine in real time 5, 2016 and the ensuing rally peaks on September 13, 2016. when prices are relatively low and when they are relatively The entire decline from September 17 to September 21 that high. From analyzing price movement you need to be able culminates in a low lower than that of the previous low could be seen as part of a selling climax, or the panicky unloading to determine: of stock. An important characteristic of a selling climax is the abnormal increase in volume. On the September 17, volume • Comparative strength and weakness is approximately 2.5 million, while on the next day it almost • Previous points of support & resistance triples to over 6.5 million shares. The other high-volume days • Rate of acceleration or angles of advances & declines • Shakeouts, terminal thrusts, and oversold & overbought are on September 20 at 4.1 million and September 21 at 5.3 million. After the selling climax is concluded, support comes conditions. July 2016


2

18 13

14

17

5

16 21

FIGURE 3: IDENTIFYING WHEN THE SELLING IS OVER. After being in a prolonged trading range, the stock is showing signs of the beginnings of a possible uptrend.

8

19 25

27

2

FIGURE 4: MARKUP AND REACTION STAGE. From November 16, 2012 to February 8, 2013 you see an intermediate price swing. Buying on any except the last reaction during the initial marking up stage would have given you a profitable trade (blue arrows).

in to halt the decline of the stock. For the next eight days, it trades in a tight range on lighter volume, indicating that poor supply (stock being held in weak hands) has been exhausted. So we wait for a technical rally to ensue to confirm this is the case. On October 18, the stock rises to a new high signaling further strength to come. Wyckoff points out that if the bulk of buying during a selling climax was by the big operators, principally to support the stock, then after a technical rally occurs, there is likely to be a secondary reaction as stock is thrown back on the market at the first favorable opportunity. This happens here and the secondary reaction takes the stock back down. The low on November 16 is higher than the low after the selling climax. This is an important signal indicating that liquidation might have been completed. Also note that the decline from November 14 to November 16 is on increasingly lighter volume. This is the starting point to begin your forecast. Price action is telling you that the trend is possibly going to be upward, which means there could be a reversal. A trade can be initiated in any of the following ways: 1. You can take a long trade on any day between September 24 and October 3 when the closing price on each of these days is between 82 and 84 and the market shows an unwillingness to move any lower. This is an indication 30 • July 2016 • Technical Analysis of Stocks & Commodities

that the selling pressure has lost its force. Also, the volume is lower than that on the decline from September 17 to September 21, indicating the same thing: a decline in selling pressure. 2. The stock makes a higher low on November 16 and closes in the upper half of its range. This is what Wyckoff would call the springboard move. It provides another opportunity to enter a long trade. Your stop would be just below the low of this move, which Wyckoff called the danger point. He stressed that it is vitally important to have stops to protect your position. Getting in and taking a position when a stock is on the springboard is, Wyckoff said, the best of all times to get into a position. It is at this psychological moment that you can avoid having your money tied up in an inactive long trade. 3. A less-aggressive entry would be on January 2, 2013 when the stock gaps up and closes above the highs in the range of accumulation. This entry is the riskiest of the three because the proper stop placement would be a significant distance from entry. But it is still a viable entry point.

After breaking out from the prolonged range of accumulation depicted in Figures 2 & 3, the stock entered its markup stage. Figure 4 shows an intermediate swing of about 20 points, which lasted from November 16, 2012 until February 8, 2013. Buying on any except the last reaction during the initial marking-up stage would have given you a profitable trade (see blue arrows). The whole campaign lasted much longer, from about November 16, 2012 until the high on December 8, 2014. During this period there were many opportunities to go long during subsequent intermediate markup stages. There were also opportunities to reverse and take the short position during significant reversals. Here, another word of caution is in order. Remember when reading a chart that there is nothing a stock must or should do. This might seem unceasingly obvious, but a stock only goes in the direction that it is traveling for as long as it continues to do so. So always be on the lookout for signs of a coming reaction or reversal. A trader must never get complacent when in a position. The high of 105 on February 8 was tested twice before reacting to a low of 100 on February 27. This was your first signal to exit your longs. Also note the unusually long bar on February 25. This is unusual behavior that should not be ignored. It is not necessary to guess what the stock is likely to do, because it is telling you what it is going to do. It is likely that price is meeting supply from those who bought on the end of the runup to 105 and are looking to get out even. Those

who bought earlier in the rise may be looking to get out of a profitable trade. In any event, there is a change in character of the chart. On February 27, price closes near the high of its day range and over the next few days, there is a quick rise to new highs. The speed of this rise Range of distribution is not to be trusted. It could well be a buying climax. Wyckoff observed that any sudden “whooping up” after a stock has advanced in price increases the stock’s vulnerability to selling pressure. Experienced operators pay attention and are likely to withdraw for a time, refusing to continue to buy at these high levels. FIGURE 5: RANGE OF DISTRIBUTION. The price of FedEx Corp. (FDX) reached its high of 181 on The chart shows that price has failed to hold the December 8, 2014. It stayed in the range of distribution until it broke out of the range to the downside highs over the next few days. Increasing volume on heavy volume on August 20, 2015. on the March 19th down day is your last good 11 warning to close out longs. 16 By the time the stock has reached the range 17 of distribution, its lengthy markup has attracted broad interest in the stock. This is when strong hands start to dispose of their holdings. The stock works its way into the hands of buyers who are eager to own the rising stock. Wyckoff describes these buyers as “weak hands” because they have bought near the top of the rise when news about 17 the stock was most bullish, and they will easily be shaken out of their positions. The symptoms characteristic of distributions that Wyckoff tells FIGURE 6: PRICES REACH A PEAK AND REVERSE. Price had been in the range of distribution for us to watch out for are the amplitude of swings about six months. On June 16, 2015 the high volume decline was not a good sign. On the next day, getting wider and often more erratic. In addition, volume doubled as price dropped further. This was a sign to exit any long positions in the stock. remember that important distribution always has to follow a long, sustained increase in price. jumping into it, and In Figure 5 you see that FDX reached its high of 181 on 2. A habit of optimistic stubbornness that causes them to December 8, 2014. It stayed in the range of distribution until become wedded to their commitments instead of coldit broke out of the range to the downside on heavy volume bloodedly disposing of them when they no longer act on August 20, 2015. right. Figure 6 shows price action from May 11, 2015 to September 18, 2015. By this time, price had been in the range of I cannot hope to do justice to Wyckoff’s methods in such a distribution for about six months. As we can see from Figure 5, the swings within the range had become wild and erratic, brief article. The constraints required will not allow for a more with price making little to no progress. On June 11 the price comprehensive discussion, which this method requires. For made a high of 183.99, which it was unable to hold onto. Price instance, point & figure charts were important to Wyckoff in began to reverse to the downside the next day. On June 16, his analysis of price action but we have not been able to touch 2015 the high-volume decline was not a good sign. On the upon their interpretation here. Also, Wyckoff created what he next day, volume doubled as price dropped further. The stock called Wave charts, which he used to study the market. It is my was clearly in trouble. Price action was telling you what it was hope that you will read this article and then out of curiosity going to do. There were ample opportunities to get out of any and interest, research Wyckoff’s own writings for yourself. As I end this part in the series, it bears repeating here another long positions before any damage was done. one of Wyckoff’s admonishments. “As you study these charts, remember that they are intended only to illustrate some typical Some final words Wyckoff pointed to patience and detachment as two important cases. They should not be regarded as covering all possible qualities for a trader to cultivate. It will help to offset the two conditions nor be used as exact standards of comparison. In common faults that are the death knell to most people’s trad- brief, do not make the mistake of attempting to classify chart ing success. As Wyckoff says, they are: formations according to mechanical rules with the idea that 1. The failure to wait until a stock acts just right before

Continued on page 44 July 2016


INTERVIEW

Take The Macro Road

Measuring Indicators With Fred Meissner Fred Meissner, CMT, is the founder and president of The FRED Report. His professional career spans 33 years in the investment business, including serving as president of the Market Technicians Association from 2002 to 2004. His background encompasses market analysis, trading strategies/portfolio management, and business development/relationship management in diverse environments. He holds a BS degree in business administration (with a minor in economics) from Trinity University in San Antonio, TX, and an MA degree from The University of California, Los Angeles (UCLA) in Latin American studies with an interdisciplinary curriculum of international business, history, and sociology. Currently, Meissner publishes The FRED Report (www. thefredreport.com), offers a consulting service for financial advisors, and speaks extensively around the world on market analysis and the markets. Stocks & Commodities Editor Jayanthi Gopalakrishnan spoke with Meissner on May 9, 2016 about how to effectively apply indicators in line with broad macro indicators. Fred, tell us a little bit about yourself and how you got interested in the markets. I was in graduate school at UCLA. I had read some books about investing in the stock market before. I saw an ad in The Daily Bruin that asked the question, “Do you want to be a stockbroker?” The ad was by a small firm in Culver City, CA, and this company allowed you to work part-time and get your securities license. I thought it sounded interesting, so that’s what I did. That’s how I got started in this industry. At that time, were you using fundamental analysis? Yes, I was using fundamental analysis, and as I’m sure you’ve heard from lots of other people, I began to notice that sometimes, the fundamentals weren’t working out as they should. When I finished my graduate studies, I went to work for Dean Witter Reynolds in Torrance, CA. There we had a lot more access to fundamental analysis, and I saw that it really didn’t work most of the time. While I was looking for something that worked, I met a couple of advisors who used technical analysis, so I started studying

it, and realized I had an affinity for it. And it turned into my career. That’s interesting. I was a financial advisor—we called them “stockbrokers” back then—at Dean Witter and knew a guy named Jeff Weiss who at that time was the number two guy in the technical analysis department at Shearson Lehman. He got me over to Robinson Humphrey as a technician, and I ended up running the technical analysis department at Robinson Humphrey for many years under Bob Robbins, who was the chief investment strategist. Bob taught me how to relate technical signals to fundamentals, an important aspect of technical analysis that is often overlooked. Robinson Humphrey was the largest regional brokerage firm in the country, but we were part of Shearson Lehman Brothers and then Smith Barney and then Citigroup. What do you do now? I quit Robinson Humphrey in 1999 and sold my Citigroup stock. I then went back into research in 2002 with a small firm that did institutional work on cycles.


I like to look at indicators on a discretionary basis and measure how they’re doing. It’s this measuring part that is vital and overlooked. I then went to Merrill Lynch from 2004 to 2009 and now I’m writing independent research along similar lines to the research I wrote at Robinson Humphrey and Merrill Lynch. I noticed that you publish your newsletters on a weekly and monthly basis, giving readers a broad perspective of the current markets. Why is it important for a technical trader to have a broad view of the markets before he or she starts to trade? I’ve always done broad macro technical analysis. Most of my clients get in-depth fundamental research but I also believe that comprehensive macro trend analysis helps you understand where you are in the market, regardless of what you’re trading. And that would help you judge your risk management.

Chart Scan Learn Award-Winning Charting

Professional Commentary

Trusted by thousands of online analysts, StockCharts.com makes it easy to create high-quality technical charts with just a few clicks. No software to install, just an internet connection and the browser of your choice. Watch your charts automatically update in real-time and access them on-the-go from any web-enabled device.

From daily blogs to weekly webinar shows, StockCharts.com hosts free current market analysis and educational commentary from some of the industry’s leading technical analysts. Learn from the best to boost your technical skills and financial prowess.

Customizable Scanning Fully customized to your technical parameters, our world-class scan engine allows you to instantly find the stocks that meet your specific criteria. Plus, our technical alerts notify you of key moves to help you stay ahead of the curve.

Pring

Murphy

Hill

Elder

Bowley

Schnell

and more! Proud to be voted “Best Technical Analysis Website” 14 Years in a row!

Follow Us

Start Your FREE 10-Day Trial Today

© 2015 StockCharts.com,Inc. All Rights Reserved. Information provided by StockCharts.com is not investment advice. You are responsible for your own investment decisions.

I’ll give you an example. A lot of technical traders use Bollinger Bands, which is a great indicator. I don’t publish anything about Bollinger Bands but I do look at them. I think that if you’re buying at the top end of a Bollinger Band, your risk management should be different than if you’re buying at the bottom end. You have to have a broad perspective to know where you are in order to manage that risk. Another thing about technical analysis I think people sometimes overlook is that good technical indicators do two things: They help you select a trade and tell you where you are in that trading process. But they also measure the progress of a trade that you’re in. And that measurement can sometimes be more important than knowing that you’ve got a buy or sell signal. I can give you an example of that. When I was trading for myself between 2000 and 2002, I embarked on a study of 30-minute bars on the S&P 500. I had been saving 30-minute S&P bars from the 1980s to the 2000s. So I had over 30,000 S&P bars to study. Let’s say I get a stochastic buy signal. What’s the average amount of points gained before that indicator gives a sell signal? Let’s say the average number of points on a buy signal is two. If you and I are sitting here trading and we get 12 points on a buy signal, what does that tell you about the market? It tells you the market is a lot stronger than average. It tells you that on the next buy signal, you can add or even double up on your trade because the market is stronger than average. If you only get one point on the S&P, and the stochastic goes all the way up to 80 and turns over, you know that market is much weaker and you trade accordingly. That measuring factor can tell you much more. There’re lots of indicators where that applies. This gives me a broad picture of the market instead of just looking at the indicator. Most new traders look at an indicator and if the indicator gives a buy signal, they buy. They ignore the trend of the market and everything else. I use a lot of different indicators, but the ones that I show and the ones

I teach are a combination of stochastics and moving What I like about the averages. If I’m using a daily stochastic is that it’s chart to open a long trade and essentially a moving the weekly moving averages are positive, suggesting that average of trading ranges. the longer-term trend is up, I And trading ranges are will be likely to stay with that really important to me. trade a little longer than if the weekly moving averages are pointing straight down. You can only do this if you have a upgrade and the stochastic is at 90, it pays big-picture view of things. Without that to wait until it goes back to 20, which it big-picture view you could have some will do. But there are traders who will astounding losses. Most brand-new often buy based on what they hear from traders don’t do that well. I know that another trader or friend. Well, how do when I was a brand-new trader, I didn’t you know where XYZ is unless you do that well. have a broad-perspective view? Buying Netflix at the absolute high in July just What did it take to change that and because you heard it’s good is probably become what you are now? not as clever as waiting a bit. It takes a lot of study and a lot of time. You can test trading systems us- So you consider yourself a discretioning computers, but I think that people ary trader? sometimes overlook just stepping back Yes. I’m a great believer in discretionand looking at the indicator and what ary trading systems versus mechanical it does. Not many people look at an trading systems. I have some good friends indicator and ask, “What phenomenon who use mechanical trading systems, is that measuring?” I think that’s really but the type of client I work with can’t important to know. really use a mechanical system. That’s One of the reasons I use stochastics in because different things are happening at my analysis is because it generates more different times. My clients are financial buy signals. A trader wants more than advisors who generally do not buy or one signal a year. There may be people sell for purely technical reasons. Often, who want just one signal a year. If you they buy because a stock is upgraded to don’t look at what the indicator is trying a buy fundamentally. Another reason to measure and how it does it, you may could be that it is put on a recommended end up using the wrong indicator for list or into a model portfolio. The same your purposes. can happen in reverse—a stock can be Most of my clients don’t buy and sell downgraded fundamentally, or could be for technical reasons. They buy because a removed from a list. Or, in cases where stock gets a fundamental upgrade. But if the analyst leaves the firm, the advisor the stock gets a fundamental upgrade and must sell. Of course, the advisor has the stochastic is at 20, that means a whole some leeway as to when he must take different thing than if the stochastic is at action, and that’s an area in which I 90. When a stock gets that fundamental often help clients. Besides that, one problem I’ve always had with mechanical systems is that trading systems can’t last forever. At some point they’ll stop working and you’ll have to use new ones. And when I ask someone how they know their system stopped working, they’ll usually answer with something like high equity drawdown or adverse price excursion, which are just fancy ways of saying, “ I


lost a bunch of money on that.” Now, the solution to that could be to have five or six different mechanical systems trading five or six different markets. That would mean you’re diversified, which is fine, but because the people I work with are investing in balanced portfolios for their customers, I like to look at indicators on a discretionary basis and measure how they’re doing. It’s this measuring part that is vital and overlooked. And don’t forget that you can use a mechanical system as an indicator—if the system says the trend is up, it can be great confirmation and vice versa. By measuring, you mean what we discussed earlier. What I use is the standard 14-period stochastic and the five- and 20-period moving averages. You can use different moving averages or different stochastic parameters. I’m going to use a funny analogy. The secret to being a good surfer is to know that waves come in sets, and your job as an optimal surfer is to catch the right wave in the set every single time. Say the market has been coming down, and the five- and 20-period moving averages are negative. So if I want to buy using the stochastic, then I want price to go up enough to have those moving averages go positive to confirm the buy. If they don’t go positive after a while and price starts to act badly, you know that’s a bad buy signal. I haven’t figured out a good way to program that, especially because on a long-term basis, moving average systems generally don’t work mechanically. Why is that? The reason is they give up too much of the profits you already have, or they don’t get you in soon enough after they decline. I’ll give you an example. In March 2009, we got a great signal on the stochastics to buy the S&P. The moving averages were negative and did not confirm that trend until the S&P went from roughly 670 to 1,070. When you get that trending buy signal, all you know at the time is that it went up 400 points or almost doubled. But before you got your trending buy signal, you did not know that it was going to go

ninjatrader.com

Simple Rates. Clear Savings. Deep Discount Commissions as low as $.53 per contract. View Commissions at ninjatrader.com/Futures

You Know our Award-Winning Platform. Get to Know our Next Generation Brokerage.

NinjaTrader equips traders with unmatched benefits including 1000s of Apps & Add-Ons to personalize your platform with indicators, signals and custom strategies.

Go Direct to the Source. NinjaTrader Brokerage. up an additional 1,400 points from there, which it did do. Well, those moving averages went negative in December 2015. So if you use that trend-following system, you went long in June/July of 2009 and got out in December 2015. You were still not back in. The market went from 1,800 to 2,000 and you’re still not in. And if you look at the moving averages, they got more negative in the following month. It’s going to take even more to get you in. This is why no algorithm can be used for moving average systems. But if you look at it and tell yourself that you should July 2016

be a little more cautious while these are negative and you just had a great run, that’s helpful information. Can you give another example of measuring moves? If you look at the stock of Apple Inc. (AAPL), you’ll see that the stock goes through 50% retracements often. Say the stock moves down from 720 to 340 and you realize that all it did was a 50% retracement before starting its next up move, that information can be helpful. Say the stock went from a low around 56 to a high closing price of around 130. You


Good technical indicators do two things: They help you select a trade and tell you where you are in that trading process. They also measure the progress of an open trade. take 56 and add it to 130 and you get 186. Divide that by 2 and you get 93. Where did the stock bottom? It’s at $93.52 right now, which is close enough. If you know that AAPL has done this type of retracement several times and you see that the monthly stochastic is at 16 and getting ready to turn up, even if everybody on TV is saying the company’s never going to earn any money ever, you see that the stock is at your buy point, which you knew about in advance. It might be worth adding to your portfolio for the dividend. When you get a monthly buy signal on AAPL and you’re $2.00 from that retracement point, you might want to think about buying some AAPL stock. That’s another reason to say you want to look at the big macro picture. There are stocks that never do 50% retracements and for those stocks there’s no point in placing Fibonacci levels on your chart because you’ll be waiting a long time for a 50% retracement. When there are so many indicators, why did you create your own indicators? I looked at some of the other indicators out there and discovered that they were lagging. There were some things they didn’t have that I wanted to have. For example, I work a lot with people who work with Dorsey-Wright, who does a great job of relative strength analysis. But I have some issues with point & figure charting. The biggest issue is it uses only closing prices. If I have a trading vehicle that goes from, say, $1 to $3, then to 1, then to 3, then to 1, from 1 to 10, but closes at 3, and then goes to 1, and then to 3, the most important bar to me is the one that goes from 1 to 10. Point & figure charting ignores that completely. It’s like that never happened.

What I like about the stochastic is that it’s essentially a moving average of trading ranges. And trading ranges are really important to me. So some of the indicators I’ve built take into account the entire range. There’s nothing out there that does that except for stochastics. So I had to build my own.

And the same goes for your breadth oscillator? I have a breadth oscillator that essentially works with breadth similarly to the way the McClellan oscillator does. I love the McClellan oscillator and often reflect on how wonderful Sherman McClellan was to invent it. The issue I have with the McClellan oscillator is that it’s very quick. I wanted to slow breadth down, so I had to build my own breadth oscillator. What timeframe charts do you use? I use daily and weekly charts, and on occasion, even monthly charts. When you think about the 50- and 200-day moving averages—and this may sound funny to you—one of the reasons those were used was because they were very easy to calculate on a hand calculator. That’s why Granville invented them that way. If you divide 200 by 4, you get 50. It’s really easy to do. And now we have computers so you don’t have to do any of those calculations. If I want my fiveand 20-day to expand in time, all I have to do is switch to a weekly or monthly chart and see them displayed. One of the reasons I use the five and 20 periods is that the average quoting machine has the 50 and 200 as defaults and it’s easy for people to remember to take off just one zero and then save


the chart. Really, that’s why I do it. It’s easy for people to remember to just take off a zero. We are in the midst of an election year in the US. How do elections impact the financial markets? We saw the markets start to narrow in July/August 2015. That narrowing up—that is, the falling off of smalland mid-caps, and the money flowing into large-cap stocks—is much more important to me than who’s going to be president from the standpoint of the market. There are a lot of mutual funds out there that have to be 80% invested in stocks. When those big guys—who get great information that we don’t get—start to see a bear or tough market coming, their tendency is to sell their junk and buy quality, and that’s reflected in the new high/new low indicators. Those were negative for much of 2015 and the first part of 2016, and that reflects that narrowing. In the last month, we’ve seen that situation start to reverse. The Russell 2000 was up a bit more than the S&P 500. As far as the election, what I’ve observed and learned from various senior investment strategists is that after six months, no one is going to care. You could say for the first couple of months or three months, no one likes uncertainty. And so people may be a little bit more skittish. But I’ll look at market internals. Last year, when I saw the amount of new lows, negative week after week, I knew the big guys were selling. That’s the best footprint you can look at to see what they are doing. And that’s why we were cautious for the last part of the year and into the first part of this year. Now that has switched and it looks like the market is saying that whoever is elected probably isn’t going to be so bad. I think there will be three of four months where the markets might be erratic, but after that, it’s going to be as if the election never happened. That’s what I thought. Thank you for speaking with us, Fred.

Explore Your Options Got a question about options? Tom Gentile started his trading career on the floor of the American Stock Exchange in 1994. He has appeared on many financial TV and radio shows, as well as hosting a weekly talk show himself, and has coauthored many books on the markets. He can be found at www.tomgentile.com. To submit a question for Tom Gentile, post it to our website at http://MessageBoards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C. Tom Gentile

Channeling upward Take a look at the chart of SPDR Gold Shares (GLD) in Figure 1. It is the life of the party this year, as it has moved from a low of near $100 to a high of near $125, up nearly 25% since December 31, 2015. Well, it seems to most traders that buying gold is the same as selling the US dollar, and since interest rate hikes have been put on the back burner by the Fed at the moment, this has caused a flock of buyers to rush to the yellow metal. When looking at short- and long-term channels, it appears as if this ETF has paused before wanting to move higher. There seems to be some good support at the $115 level, as this is where both channels seem to collide. Now that I see the trend is clearly up at this time, how far is it likely to move over summer? The chart in Figure 2 is a probability chart. It takes a look at the range of the past and calculates a standard deviation of the future. The gray area on the chart within the red lines gives a more conservative estimate of where GLD might trade, so I’ll use that. One more look at the chart tells you that in 58 days, GLD should stay between $115 (support level from above) and $132.50. Because I am bullish on GLD, I will use the 130–135 range as a target by summer. Now that I have a target for this ETF, I’m going to create a low-risk option strategy around this target. One of the cheapest

ways to leverage an asset with options is to use a directional butterfly. I like to use my target as the midpoint for my butterfly

strategy, and I also like to use out-of-themoney (OTM) calls when entering and exiting a directional butterfly.

www.tomsoptiontools.com

GOLD ON THE MOVE What’s up with gold? Why is it on the move up? Yes, gold has been moving up. The “gold rush” started earlier this year and the party might not be over quite yet. Let’s take a look at what all the fuss is about with gold this year, what’s likely to come, and how you can trade it for low risk and high reward.

Figure 1: gold is on a run. Since December 31, 2015 gold has been on a run.

Figure 2: probability chart. The grey area within the red lines is a more conservative estimate of where GLD might trade. July 2016


Explore Your Options One of the cheapest ways to leverage an asset with options is to use a directional butterfly. An OTM call butterfly strategy involves buying a lower strike (the workhorse) and hedging it by selling at the target, and finally, buying protection above the target. I utilize the same expiration across all strikes, so for this exercise I will look at GLD options that expire in August. My butterfly strategy for GLD would look like what you see in Figure 3. The butterfly strategy consists of the GLD August 2016 125-130-135 calls. I’ll break these down. • Purchase one contract of the 125 calls for 4.13 • Sell two contracts of the 130 calls and receive 2.60 (x2) • Purchase one contract of the 135 calls for 1.66 • Total cost of the butterfly is 0.59 (x100) or $59 before commissions. The risk on this butterfly The worst case is that I am wrong and GLD drops below 125, or trades above 135 on the August expiration. Here’s a look at each scenario: GLD at 100 by August expiration The 125 calls purchased for 4.13 would be worth 0.00 The 130 calls sold at 2.60 (x2) would be worth 0.00 The 135 calls purchased for 1.66 would be worth 0.00

FIGURE 3: OUT-OF-THE-MONEY (OTM) CALL BUTTERFLY. This butterfly strategy is made up of the GLD August 125-130-135 calls.

Total spread price = 0.00, because everything above would expire worthless

tions is 130. That’s because on that day, time is up and the options only have real value. Here’s an example:

GLD at 150 by August expiration The 125 calls purchased for 4.13 would be worth 25.00 The 130 calls sold at 2.60 (x2) would be worth 20.00 The 135 calls purchased for 1.66 would be worth 15.00 Total spread price = again, 0.00 when you add everything up…

GLD at 130 by August expiration The 125 calls purchased for 4.13 would be worth 5.00 The 130 calls sold at 2.60 (x2) would be worth 0.00 The 135 calls purchased for 1.66 would be worth 0.00 Total spread price = 5.00, or a near 750% return.

In either case, we lose our $59 before commissions. That’s the total risk.

I am not expecting this to happen (that would just defy the laws of probability) but if GLD were to rise to 130 over time, there’s a good chance that this trade will double or triple in value. Like all option strategies, only time will really tell.

Profiting on GLD Where do I want this trade to go? The best position GLD could possibly be in on the August expiration day for the op-

Your Online Resource For Technical Analysis Join us on Facebook at www.facebook.com/STOCKSandCOMMODITIES Follow us on Twitter @STOCKSandCOMM


Take Control of Your Trading with the

Professional Traders’ Starter Kit ™ Stocks & Commodities magazine Digital Edition Article Code

only

5

$

per month! *

Working Money

Digital Archive

Optimized Trading Traders.com Advantage The Foremost Collection For Traders

This massive collection packages the best tools for trading and investing in any market! 1. Technical Analysis of Stocks & Commodities, the Traders’ Magazine™. The premier magazine for technical analysis. You’ll get five years — 65 issues — including our annual Bonus Issues with our Readers’ Choice Awards. 2. S&C Digital Edition. Recent complete issues available in their entirety as PDFs for you to either download or read directly in your browser. No more waiting for the mail to deliver your magazine! You will still receive the printed magazine unless you opt for a digital-only subscription. 3. Complete Digital Archive. The complete archives as PDFs — more than 17,000 pages — from Technical Analysis of Stocks & Commodities from 1982 through the present. The articles can be read in your browser or download to your computer (or any device with Internet access and the ability to read a PDF)!

4. Traders.com Advantage, premium website content delivering real-world technical analysis to you! You’ll get five years of charts, indicators, and “how-to” advice for specific markets, currencies, stocks, and commodities; near-term opportunities; price movement; new techniques. Posted in real-time with an archive of thousands of articles. 5. Working Money, the Investors’ Magazine online. You’ll get five years of market observations; explanations of charts, markets, and market sectors; money management; and interviews with money people that will help you trade and invest wisely. 6. Article Code. Download or copy & paste code presented in past issues of Stocks & Commodities — no need to type it out manually. 7 . Optimized Trading. The optimized indicator values can be used as starting points when trying to decide what values to input into your charting software. Search for a certain symbol or company or build your own portfolio.

ALSO RECEIVE A FREE✝ BOOK WITH YOUR PTSK ORDER! Charting The Stock Market: The Wyckoff Method, edited by Jack K. Hutson, is yours free✝ with your order for the Professional Traders’ Starter Kit. ✝

Shipping and handling charges apply for foreign

orders.

Email: [email protected] • Phone: 206-938-0570

www.Traders.com *Based on the 5-year subscription rate of $299.99. Shipping extra for foreign addresses.

facebook.com/STOCKSandCOMMODITIES

@STOCKSandCOMM

product review

StockCharts.com STOCKCHARTS.COM 11241 Willows Rd. NE, Suite 140 Redmond, WA 98052-1009 Phone: 425 881-2606 Email: [email protected] Internet: www.StockCharts.com Product: Technical analysis charting website Data updates: Real-time with fiveto 15-second refresh rates depending on plan selected, as well as end-of-day. Requirements: Works with most Internet browsers. Mobile-friendly on all web-enabled devices. Price: Four subscription plans are offered with three different monthly options ranging from $14.95 to $49.95 per month, or one- and two-year options ranging from $154.95 to $519.95 per year. A free 10-day trial is available to new members.

S

by Leslie N. Masonson

tockcharts.com is a well-respected and comprehensive online charting site used by advanced technicians, traders, and investors as well as by casual chartists. In 1999, Chip Anderson, president of StockCharts.com, founded the site and set it up as a privately held firm. The site has expanded its technical analysis tools and charts over the past 17 years and also added valuable analytical commentary from an ever-expanding group of savvy market technicians. I’ve been using this website for over a decade, first as a free member and then as a paying subscriber at the “Extra” level for the past three years. What tilted me toward the paid subscription option were the wide-ranging chart choices to track individual stocks and ETFs, the ability to analyze market trends, the continual flow of upgrades, and the add-ons and expert commentary at no additional charge. Some of the latest types of charts added in recent years include seasonality charts, Julius de Kempenaer’s Relative Rotation Graphs (RRG), and Bruce

Fraser’s Wyckoff charting analysis and commentary. Moreover, the site has expanded its cadre of advisors to join those already contributing for years including John Murphy (its chief technical analyst), Greg Morris, and Arthur Hill. More recent additions include a team of highly knowledgeable and well-known strategists and technicians including Martin Pring, Carl Swenlin, Greg Schnell, Gatis Roze, and Tom Bowley. Greg Schnell, for example, writes a blog dubbed “The Canadian Technician.” If that’s not enough commentary for you, users can view the free Top Advisors Corner, which is a collection of articles by several independent, technically oriented individuals who frequently contribute to the site, including Tom McClellan, Tim Ord, Martha Stokes, Jack Steiman, and Gene Inger. There are four subscription plans with the basic plan (costing $14.95 a month or $154.95 for 13 months) with enhanced charting capabilities and expert commentary. The website provides a table titled service package comparison list-

ing each plan’s features, various monthly and annual subscription time periods, and associated pricing. All subscribers receive real-time data during the trading day, multiple chartlists with large numbers of charts, predefined technical scans, enhanced charting features, John Murphy’s Market Message commentary, Martin Pring’s Market Roundup, Arthur Hill’s Art’s Charts, and DecisionPoint’s ChartPacks, Reports & Spreadsheets. The more advanced plans provide more enhanced features, as well as real-time data from the NYSE/NASDAQ/TSX exchanges, as compared to BATS realtime data, which is what you get in the two lower-priced plans.

Charting tools

The heart of the website is the availability of various high-quality charts, many technical indicators, and the ability to annotate directly on the chart. The free charting option provides newbies with sufficient tools to quickly become knowledgeable, especially after viewing the free ChartSchool section before tackling more advanced charting subjects. Only

FIGURE 1: PERFCHART DISPLAYED AS A LINE CHART. Any ticker symbol can be compared to any other with the result shown in a line chart. This chart compares the S&P Sector ETFs over the past 200 days. Utilities and consumer staples are the best-performing sectors.


paying members have access to the advanced chart features and analysis, including realtime intraday prices, full-screen charts, and automatically refreshed prices. Numerous chart types are available for viewing including SharpCharts (in candlestick, line, renko, ichimoku, heikin-ashi, and OHLC bar formats), point & figure (P&F) charts, gallery charts showing multiple timeframes, CandleGlance Groups displaying minicharts side by side, and performance charts (also called PerfCharts) that allow you to compare up to 10 tickers over various timeframes in a line chart (Figure 1) or bar chart (Figure 2) formation to show percent performance. Chart annotation allows for customized comments on most charts. In addition, SharpCharts users can customize the chart type, colors, time periods, trendlines, indicators, text, and many other variables. To see how others have used this software, go to the Public ChartLists tab. You’ll probably be as amazed as I was at the ingenuity and creativity of individual public contributors. CandleGlance Groups are a way to view multiple charts simultaneously as a group of minicharts. For example, you can compare predefined groups such as the S&P sector exchange traded funds (ETFs), the Dow Industrials, sector breadth indexes, or US major market indexes. Another option is to view any of the major industry groups such as airlines, semiconductors, or electric utilities. By quickly viewing these charts, you can easily see the trend as well as which securities are leading or lagging. Then, by keying in the tickers to the PerfChart’s screen, the relative performance of any time period can be compared. In addition, there are three other types of specialized charts available to users. Seasonality charts (Figure 3) provide a monthly performance bar or line chart of any symbol for a customizable period of time, indicating percentage change by month. MarketCarpets provide an individual display of seven different market segments viewed by either price, RSI, full stochastics, Bollinger Band width, or six other technical factors. And third, the Relative Rotation Graphs (Figure 4) show the relative strength and momentum for a selected group of securities. You can track the strength of individual components of the graph to watch them move through a complete cycle of lagging to improving to leading to weakening. Astute investors can jump on those vehicles that are moving toward improving and lead-

FIGURE 2: PERFCHART DISPLAYS AS BAR CHART. Here you see the comparison of the S&P Sector ETFs displays as a bar chart.

FIGURE 3: SEASONALITY CHART OF APPLE (AAPL). Notice that Apple’s best performance months for the last four years occurred in March, April, May, and October. This information can be used in combination with confirming technical indicators to time potential purchases.

FIGURE 4: RELATIVE ROTATION GRAPH. This chart shows weekly rotation from weak performance to leading performance for S&P sectors over a one-year timeframe. In this chart, XLE is seen making a move over weeks into the leading green quadrant, joining XLB and XLI. July 2016


ing categories to improve their odds of making profits. Members have access to many more symbol combinations and customized options. Predefined scans Predefined scans provide a gold mine of technical analytical information about individual stocks, ETFs and mutual funds. They offer 17 bullish and 17 bearish technical indicators, 26 candlestick patterns, nine bullish, and nine bearish P&F patterns. By tracking the number of securities on a particular exchange such as the NYSE, you can see the market shifting from bullish to bearish extremes and take the appropriate action. For example, if there were 1,000 new 52week lows on the NYSE, then you could conclude that the market could possibly be washed out and due for a rally. By keying any ticker symbol into the “search for” symbol box, you can see any scans that the security passed that day. For example, on April 28, the morning after Facebook (FB) announced blowout earnings, the stock gapped up at the open, resulting in passing nine scans by the close, including: new 52-week highs, moved above upper Bollinger Band, new CCI buy signals, gap up, and P&F spread triple top breakout. The predefined scans screen provides a unique way to monitor stocks of interest, possible stocks to include in a watchlist, or even for determining the market trend by tracking the number of stocks that passed bullish or bearish daily scans. In Figure 5 you see some scan results of technical indicators. User-defined scans After working with predefined scans for a while, you will become proficient enough to develop specific, customized scans using single scans or combining multiple scans to search for potential investing or trading ideas. The user-defined scan is a powerful tool to search for securities on specific exchanges, components of major indexes, different country securities, regions of the world, ETFs with or without leverage, and inverse funds. For example, the predefined scans do not offer a category for ETFs alone since they are part of the NYSE universe. How-

FIGURE 5: PREDEFINED TECHNICAL SCANS. Bullish and bearish indicators are shown with the number of equities on seven exchanges that pass the scan. By clicking on any number, a list is generated for further review.

FIGURE 6: STOCKCHARTS TECHNICAL RANK (SCTR). Gold mining, steel, and coal stocks were the topranked SCTR stocks for the week ended May 5, 2016. All column headings can be clicked to sort the data from high to low or in alphabetical order.

ever, the user-defined scan can be used to scan the ETF universe, since The heart of the website is the one of the search criteria choices is availability of various highfor ETFs only. The same scan opquality charts, many technical tions are available as for user-defined indicators, and the ability to scans, but multiple scan criteria can be used to strictly limit the universe annotate directly on the chart. of candidates. For example, on a given day you could scan for three criteria all at once for all ETFs that have, Advanced user-defined scans say, a P&F triple top breakout, combined Users who want to develop their own with a bullish engulfing candle, and an scan criteria even further can use the Elder green bar. The ETFs meeting those 10-scan builder dropdown menus to three criteria will be shown and you can select the appropriate criteria, and then view the charts for them. by a mouse click, automatically insert


STOCKCHARTS HOMEPAGE

the code in the criteria box and save the search for future use. No programming experience is necessary, since once the scan criteria item is selected, the software codes it and seamlessly transfers it to the scan criteria box. It couldn’t be simpler. There is an entire description of scans in the ChartSchool library, which offers a complete explanation of the process involved from the simple to the advanced scanning process. Stockcharts Technical Rank (SCTR) Another useful product feature is the SCTR technical score, which is based on six indicators (shown and explained in the SCTR section of the site) over varying timeframes—short-, medium-, and long-term. The technical scores are then ranked from high to low and presented in a table format. The table can then itself be sorted to show the strongest to weakest stocks. The top 10% of stocks will be ranked between 90 and 100, and conversely, the bottom 10% will be ranked from zero to 10. You can select from a handful of stock universes (smallcap, large-cap, ETFs, US stocks) to find the SCTR ranking. Figure 6 shows the top portion of the table for end-of-day prices for large-cap stocks. Blogs, market commentary, and public ChartLists Seventeen blogs are offered from on-staff experts. In addition, all users can sign up

for the free bimonthly “ChartWatchers” newsletter that offers commentary from John Murphy, Arthur Hill, Carl Swenlin, and many others. One of the most valuable features of the service that is free to all users is the public Chart Lists, which contain the contributions of dozens of users who post their annotated charts and commentary for everyone to see. Users can then vote for the ones they feel are most valuable, and the highest-ranked contributions are displayed in order. There’s a good deal of interesting analysis embedded in these ChartLists that any chartist can learn from.

Product support

and education Users will find that this website offers an in-depth technical analysis education coupled with extensive product support, including:

• FAQs (frequently asked questions) with 58 questions covered • A troubleshooting tab that covers five areas • Your account settings with information on passwords, logins, automatic renewal, and upgrading service • Online chat-based support • Useful articles on the analysis tools • Instructional videos, webinars, and archives • An extensive ChartSchool • An annual user conference, with this year’s streamed live for the first time • Policies regarding the general terms of service, data provided, usage limitations, membership, reprint permission, public ChartLists, and customer support • All inquiries answered within 24 hours, and many answered the same day. July 2016

StockCharts.com offers a comprehensive charting service with four affordable subscription plans. You can also send a message to the support team by typing in a support request with the issue at hand. I have used this approach a few times over the past few years and the response has been fast and helpful.

It’s all about the charts

Whether you’re a newbie or an advanced chartist, this product offers advanced charting capabilities you can use in your trading. StockCharts.com offers a comprehensive charting service with four affordable subscription plans and unique features that provide any user with the ability to customize their charts to meet their individual requirements. It continues to attract traders who are technical analysis enthusiasts. Leslie N. Masonson is a trader and the author of Buy, Don’t Hold and All About Market Timing. His blog is at www. buydonthold.com. He can be reached at [email protected].

Further reading

Davis, Summer [2011]. “ChartCon 2011,” Quick-Scan, Technical Analysis of Stocks & Commodities, Volume 29: December. Gopalakrishnan, Jayanthi [2010]. “StockCharts.com,” product review, Technical Analysis of Stocks & Commodities, Volume 28: August. Masonson, Leslie N. [2014]. “StockCharts University,” Quick-Scan, Technical Analysis of Stocks & Commodities, Volume 32: April. S&C staff [2009]. “StockCharts.com,” product review, Technical Analysis of Stocks & Commodities, Volume 27: May. ‡StockCharts.com

‡See Editorial Resource Index


A chart of the averages or a single stock reflects the ideas, hopes, ambitions, and purposes of the mass mind operating in the market.

OSOBA/WYCKOFF

Continued from page 31

you may discover automatic buying and selling signals from similar patterns.” Do not substitute anything for the necessity of “employing judgment and sound, practical reasoning.” The fifth and final part of this series will be a discussion of Richard Wyckoff’s latter years, during which time he invested in the phonographic industry, lost control of his Magazine Of Wall Street, and also published his memoirs. Stella Osoba is a freelance writer and trader. She has earned the Charted Market Technician designation and has written for several financial websites and publications. She is a frequent contributor to Technical Analysis of Stocks & Commodities magazine and Traders.com Advantage online publication. She may be reached via email at stellaosoba@ gmail.com.

Further reading

Osoba, Stella [2016]. “Richard Demille Wyckoff (part 1),” Technical Analysis of Stocks & Commodities, Volume 34: April.

DYLAN/WAVE THEORY Continued from page 20

[2016]. “Richard Demille Wyckoff (part 2),” Technical Analysis of Stocks & Commodities, Volume 34: May. [2016]. “Richard Demille Wyckoff (part 3),” Technical Analysis of Stocks & Commodities, Volume 34: June. Wyckoff, Richard D. [1985]. Wall Street Ventures & Adventures Through Forty Years. Originally published in 1931 by Harper & Bros. [1910]. Studies In Tape Reading, Ticker Publishing Company. [1933]. Stock Market Technique, Number 1, Fraser Publishing Co. [1934]. Stock Market Technique, Number 2, Fraser Publishing Co. [1937]. Wyckoff Method Of Trading And Investing In Stocks: A Course Of Instruction In Stock Market Science And Technique, Wyckoff and Associates Inc. ‡StockCharts.com


AAPL [CV] [M] Weekly #4 130.00 120.00

AAPL peaked at 134.54, so subtracting 45.71 will give a support price of 88.97. Naturally, the best trades are the ones when the stock price does not reach the Dylan support level. To catch these best trades, your entry should be placed a little above the support price. Note that AAPL came close to the Dylan support price of 88.97 twice and then rallied. The second time it came near the support price, the weekly chart gave a double-bottom formation, and the breakout of the previous week’s high was a nice confirmation signal.

110.00 100.72 88.97

80.00 70.00 60.00 Sep

2013 Apr

Jul

Oct 2014 Apr

Jul

Oct 2015 Apr

Jul

Oct 2016

2

FIGURE 10: THE RHYTHM OF THE CHARTS. Bigger trend waves will have several smaller rhythms in it. The yellow boxes illustrate smaller rhythms within the price range of bigger rhythms (blue boxes).

FOLLOW the naturaL rhYthM

At any given time, there are bigger and smaller rhythms, as illustrated in Figure 10. You’ll notice that after the first big correction (shown in the blue box), the uptrend wave developed in smaller rhythms, and each of those rhythms is identified by the yellow boxes. According to rule 3 of the theory, the smaller rhythms complete their cycle first. Different-colored boxes help you keep track of each rhythm and help to measure the support prices. A daily chart will reveal additional rhythms, and an hourly chart even more. The Dylan Wave Theory can be used for day, swing, and position trading. 44 • July 2016 • Technical Analysis of Stocks & Commodities

100.00 96.96 90.00

Michael Dylan has more than 35 years of experience analyzing the markets and has created trading systems, published newsletters and videos, and given seminars. He provides an analysis and timing service at www.dylanwave.com. The second edition of his book Smart Trader has just been released as an ebook. He can be reached at [email protected]. ‡Sierra Charts


TRADING ON MOMENTUM

Multiple-Gap Breakouts This month, we present a breakout strategy for finding swing trade entries based on a series of upward gaps in an uptrend. This professional trader explains what to look for.

F

by Ken Calhoun

inding strong swing trading breakout charts becomes easier when you find a chart with two or more priceaction gaps in an existing uptrend, occurring several days apart. Since one of the strongest technical entry signals you’ll find is gaps, a series of gaps up is an especially strong pattern that’s useful in locating new, long swing trading entries.

Trading Strategy: 15-Day Multiple-Gap Entries It’s common for traders to miss out on an initial price gap up, finding it late, several days after a first gap up is seen. The good news is that strong breakout charts often have a series of tradable in-trend gaps that occur during the days following an initial gap up day. For swing trades that could be of several weeks in duration, it could give you new opportunities to enter trades following second or third gap up days. If you follow uptrending charts that exhibit this multiple-gap technical trading pattern, you’ll be able to capitalize on new momentum-based breakouts as the trend continues upward.

Step-by-step action plan

Here’s how you can put this strategy to work in your trades. Step 1: Scan through 15-day 15-minute stock charts priced between $20 and $70 per share with a minimum high-low price range of at least 10% (for example, $3 or more for a $30/share instrument) that show a minimum of two gaps up, similar to the chart of Medivation Inc. (MDVN) illustrated in Figure 1. Note that the price-action gap needs to be only a gap up from the prior day’s close (as seen on April 6, 2016), not a gap above prior day’s high (as seen on March 31, 2016 and April 13, 2016). Step 2: Check that the sequence of two or more gaps is part of a continuous uptrend, in which the gap up prices are sequentially higher, as seen in this example. You are looking to enter on a day following either the second or third gap-up day, at a new high breakout price. Step 3: Set a buy-stop order to enter your trade on any day following the second or third gap up day. Enter once price has moved at least $0.50 above the high of the gap up day (I use $0.50 above the current 15-day high as a filter to help avoid false breakouts). In Figure 1, this signal occurred on April 15, 2016 ($50 + 0.50) = $50.5.

Third long gap continuation breakout Second long gap continuation breakout

esignal

First long gap continuation breakout

55.00 54.00 53.00 52.00 51.00 50.00 49.00 48.00 47.00 46.00 45.00 44.00 43.00 42.00 41.00 40.00 39.00 38.00 37.00 36.00 35.00 2.00M 1.80M 1.60M 1.40M 1.20M 1.00M 800K 600K 400K 200K

09:30 13:30 09:30 13:30 09:30 13:30 09:30 13:30 09:30 13:30 09:30 13:30 09:30 13:30 09:30 13:30 09:30 13:30 09:30 13:30 09:30 13:30 09:30 13:30 09:30 13:30 09:30 13:30 09:30 13:30 3-29-2016 3-30-2016 3-31-2016 4-1-2016 4-4-2016 4-5-2016 4-6-2016 4-7-2016 4-8-2016 4-11-2016 4-12-2016 4-13-2016 4-14-2016 4-15-2016 4-18-2016

FIGURE 1: Multiple Long Gap Continuation. Here you see a sequence of three gaps that provide a technical long breakout signal. July 2016

Step 4: You can use a maximum $2 initial and trailing stop value on all stock swing trades.

Insights: why

this technique works Institutional pre-market large volume buy orders is what causes price to gap up. When two or more gaps are seen in an uptrend, it tells you that institutional demand is so strong that priceaction breakout strength is likely to continue. You can trade breakouts above this series of gaps because buying Continued on page 53


For this month’s Traders’ Tips, the focus is John Ehlers’ article in this issue, “The Super Passband Filter.” Here, we present the July 2016 Traders’ Tips code with possible implementations in various software.

The code for the following Traders’ Tips selections is posted here:

• Traders.com  Home–S&C Magazine  Traders’ Tips

The Traders’ Tips section is provided to help readers implement a selected technique from an article in this issue or another recent issue. The entries here are contributed by software developers or programmers for software that is capable of customization.

Indicator: Super Passband Filter //Super Passband Filter // (c) 2016 John F. Ehlers // TASC JUL 2016 inputs: Period1( 40 ), Period2( 60 ) ; variables: a1( 0 ), a2( 0 ), PB( 0 ), count( 0 ), RMS( 0 ) ; a1 = 5 / Period1 ; a2 = 5 / Period2 ; PB = (a1 - a2) * Close + (a2*(1 - a1) - a1 * (1 - a2)) * Close[1] + ((1 - a1) + (1 - a2))*PB[1] - (1 - a1) * (1 - a2)*PB[2] ; RMS = 0; for count = 0 to 49 begin RMS = RMS + PB[count]*PB[count] ; end ; RMS = SquareRoot( RMS / 50 ) ;

F TRADESTATION: JULY 2016 TRADERS’ TIPS CODE In “The Super Passband Filter” in this issue, author John Ehlers describes a new oscillator he’s developed to help minimize computational lag. Ehlers calls this new oscillator a super passband filter. He has designed it to reject very low-frequency components and thus display as an oscillator as well as reject high-frequency components so as to minimize noise. For convenience, we are providing TradeStation code for super passband filter indicators. In addition, we are providing EasyLanguage code for a TradeStation strategy based on the super passband filter calculation.

Plot1( PB, "Super PB" ) ; Plot2( 0, "Zero Line" ) ; Plot3( RMS, "+RMB" ) ; Plot7(-RMS, "-RMS" ) ; Strategy: Super Passband Filter //Super Passband Filter // (c) 2016 John F. Ehlers // TASC JUL 2016 inputs: Period1( 40 ), Period2( 60 ), UseZeroLineTarget( true ), UseReversalStop( true ); variables: a1( 0 ), a2( 0 ), PB( 0 ), count( 0 ), RMS( 0 ) ; a1 = 5 / Period1 ; a2 = 5 / Period2 ; PB = (a1 - a2) * Close + (a2*(1 - a1) - a1 * (1 - a2)) * Close[1] + ((1 - a1) + (1 - a2))*PB[1] - (1 - a1) * (1 - a2)*PB[2] ; RMS = 0; for count = 0 to 49 begin RMS = RMS + PB[count]*PB[count] ; end ; RMS = SquareRoot( RMS / 50 ) ;

Figure 1: TRADESTATION. Here is an example of the super passband filter indicator and strategy applied to a daily chart of the S&P 500 index.


if PB crosses over -RMS then Buy next bar at Market else if PB crosses under RMS then Sell Short next bar at Market ;

if UseZeroLineTarget then begin if PB crosses over 0 then Sell next bar at Market else if PB crosses under 0 then Buy to cover next bar at Market ; end ; If UseReversalStop then begin if PB crosses under -RMS then Sell next bar at Market else if PB crosses over RMS then Buy to cover next bar at Market ; end ;

To download the EasyLanguage code, please visit our TradeStation and EasyLanguage support forum. The code can be found here: https://community.tradestation.com/Discussions/Topic.aspx?Topic_ID=142776. The ELD filename is "TASC_JUL2016.ELD.” For more information about EasyLanguage in general please see http://www.tradestation.com/EL-FAQ. A sample chart is shown in Figure 1. This article is for informational purposes. No type of trading or investment recommendation, advice, or strategy is being made, given, or in any manner provided by TradeStation Securities or its affiliates. —Doug McCrary TradeStation Securities, Inc. www.TradeStation.com

F METASTOCK: JULY 2016 TRADERS’ TIPS CODE In “The Super Passband Filter” in this issue, John Ehlers presents his indicator called the super passband filter and suggests ways to trade it. The MetaStock formula given here for the indicator allows you to set whatever time periods are desired for the filter. The buy & sell signal formula has set those time periods as variables on the first two lines. If you wish to use different time periods, you must change those two lines in all four formulas or else the signals will not align. Indicator: Passband filter p1:= Input("short time periods", 1, 100, 40); p2:= Input("long time periods", 2, 200, 60); a1:= 5/p1; a2:= 5/p2; PB:= (a1-a2)*C + (a2*(1-a1)-a1*(1-a2))*Ref(C,-1) + ((1-a1) + (1-a2))*PREV - (1-a1)*(1-a2)*Ref(PREV,-1); RMSa:= Sum( pb*pb, 50); RMS:= Sqrt(RMSa/50); pb; 0; RMS; -RMS

Trading signals: Enter Long: p1:= 40;

p2:= 60; a1:= 5/p1; a2:= 5/p2; PB:= (a1-a2)*C + (a2*(1-a1)-a1*(1-a2))*Ref(C,-1) + ((1-a1) + (1-a2))*PREV - (1-a1)*(1-a2)*Ref(PREV,-1); RMSa:= Sum( pb*pb, 50); RMS:= Sqrt(RMSa/50); el:= Cross(pb,-RMS); xl:= pb < Ref(pb, -1); trade:= If(el, 1, If(xl, 0, PREV)); Cross(trade, 0.5) Exit Long: p1:= 40; p2:= 60; a1:= 5/p1; a2:= 5/p2; PB:= (a1-a2)*C + (a2*(1-a1)-a1*(1-a2))*Ref(C,-1) + ((1-a1) + (1-a2))*PREV - (1-a1)*(1-a2)*Ref(PREV,-1); RMSa:= Sum( pb*pb, 50); RMS:= Sqrt(RMSa/50); el:= Cross(pb,-RMS); xl:= pb < Ref(pb, -1); trade:= If(el, 1, If(xl, 0, PREV)); Cross(0.5,trade) Enter Short: p1:= 40; p2:= 60; a1:= 5/p1; a2:= 5/p2; PB:= (a1-a2)*C + (a2*(1-a1)-a1*(1-a2))*Ref(C,-1) + ((1-a1) + (1-a2))*PREV - (1-a1)*(1-a2)*Ref(PREV,-1); RMSa:= Sum( pb*pb, 50); RMS:= Sqrt(RMSa/50); es:= Cross(RMS,pb); xs:= pb > Ref(pb, -1); trade:= If(es, 1, If(xs, 0, PREV)); Cross(trade, 0.5) Exit Short: p1:= 40; p2:= 60; a1:= 5/p1; a2:= 5/p2; PB:= (a1-a2)*C + (a2*(1-a1)-a1*(1-a2))*Ref(C,-1) + ((1-a1) + (1-a2))*PREV - (1-a1)*(1-a2)*Ref(PREV,-1); RMSa:= Sum( pb*pb, 50); RMS:= Sqrt(RMSa/50); es:= Cross(RMS,pb); xs:= pb > Ref(pb, -1); trade:= If(es, 1, If(xs, 0, PREV)); Cross(0.5, trade)

—William Golson MetaStock Technical Support www.metastock.com

F eSIGNAL: JULY 2016 TRADERS’ TIPS CODE For this month’s Traders’ Tip, we’ve provided the study SuperPassband.efs based on the formula described in John Ehlers’ article in this issue, “The Super Passband Filter.” In the article, Ehlers presents a method for filtering data and how to apply the study to your trading. The study contains formula parameters that may be configured through the edit chart window (right-click on the chart and select “edit chart”). A sample chart is shown in Figure 2. July 2016


low or too high. The common practice to refine frequency is to enable smart filters. However, good filters take lots of computational power. So Ehlers shows us how to use filters while keep computing power relatively low. We have recreated Ehlers’ study using our proprietary scripting language, thinkscript. We have made the loading process extremely easy. Simply click on the link http://tos. mx/zeAlsQ and choose view thinkScript. Choose to rename your study EhlersSuperPassbandFilter. You can adjust the parameters of this strategy within the edit studies window to fine-tune your variables. In Figure 3, you see a chart of SPY, the ETF built to track the S&P 500, along with the EhlersSuperPassbandFilter added. For use of the study, traders should focus on the red line crossing one of the yellow lines. For more information about the filter, please refer to Ehlers’ article in this issue. Figure 2: eSIGNAL. Here is an example of the SuperPassband study plotted on a daily chart of SPY.

To discuss this study or download a complete copy of the formula code, please visit the EFS Library Discussion Board forum under the forums link from the support menu at www.esignal.com or visit our EFS KnowledgeBase at http:// www.esignal.com/support/kb/efs/. The eSignal formula script (EFS) is also available for copying & pasting from the Stocks & Commodities website at Traders.com in the Traders’ Tips area. —Eric Lippert eSignal, an Interactive Data company 800 779-6555, www.eSignal.com

F THINKORSWIM: JULY 2016 TRADERS’ TIPS CODE In “The Super Passband Filter” in this issue, John Ehlers addresses the problem of frequencies in indicators that are too

—thinkorswim A division of TD Ameritrade, Inc. www.thinkorswim.com

F WEALTH-LAB: JULY 2016 TRADERS’ TIPS CODE Author John Ehlers continues to please readers with more nearly-zero lag filters—this time, it’s the super passband oscillator, which he describes in his article in this issue, “The Super Passband Filter.” Following the trading idea in his article, we are presenting a simple WealthScript system that can be applied selectively (only long side or both sides): • Buy on the filter crossing above its -RMS line • Short on the filter crossing below its RMS line • Exit long when the filter either crosses below its RMS or crosses below -RMS (which signifies a false entry signal) • Cover short when the filter either crosses above its -RMS or crosses above RMS (which signifies a false entry signal) Our tests suggest that this new nearly-zero lag filter looks promising for countertrend trades and for buying on significant dips (see Figure 4). To execute this trading system, WealthLab users need to install (or update) the latest version of the TASCIndicators library from the extensions section of our website if they haven't already done so, and then restart Wealth-Lab. Wealth-Lab code using System; using System.Collections.Generic; using System.Text; using System.Drawing; using WealthLab; using WealthLab.Indicators; using TASCIndicators;

Figure 3: THINKORSWIM. Here is a chart of SPY along with the EhlersSuperPassbandFilter added, showing the red line crossing one of the yellow lines.


namespace WealthLab.Strategies {

Figure 4: WEALTH-LAB. This sample Wealth-Lab 6 chart illustrates entries made by a system based on John Ehlers’ super passband filter. public class TASC201607 : WealthScript { private StrategyParameter paramPeriod1; private StrategyParameter paramPeriod2; private StrategyParameter paramGoShort; public TASC201607() { paramPeriod1 = CreateParameter("Period1", 40, 10, 100, 10); paramPeriod2 = CreateParameter("Period2", 60, 20, 300, 10); paramGoShort = CreateParameter("Go short?", 0, 0, 1, 1); } protected override void Execute() { int Period1 = paramPeriod1.ValueInt; int Period2 = paramPeriod2.ValueInt; bool goShort = paramGoShort.ValueInt == 1 ? true : false; var spb = SuperPassband.Series(Close,40,60); var rms = SuperPassbandRMS.Series(Close,40,60); var mrms = rms*-1; var pbPane = CreatePane(30,true,true); PlotSeries(pbPane,spb,Color.Red,WealthLab.LineStyle. Solid,1); DrawHorzLine(pbPane,0,Color.Blue,WealthLab.LineStyle. Solid,1); PlotSeriesFillBand(pbPane,rms,mrms,Color.Yellow,Color. Transparent,WealthLab.LineStyle.Solid,1); for(int bar = Math.Max(Period1,Period2); bar < Bars. Count; bar++) { SetBackgroundColor(bar,Color.Black); if (IsLastPositionActive) { Position p = LastPosition; if( p.PositionType == PositionType.Long ) { if( CrossUnder(bar, spb, rms) || CrossUnder(bar,

spb, mrms) ) SellAtMarket(bar+1, p); } else { if( CrossOver(bar, spb, mrms) || CrossOver(bar, spb, rms)) CoverAtMarket(bar+1, p); } } else { if( CrossOver(bar, spb, mrms)) BuyAtMarket(bar+1); else if( CrossUnder(bar, spb, rms) && goShort ) ShortAtMarket(bar+1); } } } } }

—Eugene, Wealth-Lab team MS123, LLC www.wealth-lab.com

F NEUROSHELL TRADER: JULY 2016 TRADERS’ TIPS CODE John Ehlers’ super passband oscillator described in his article in this issue, “The Super Passband Filter,” can be easily implemented with a few of NeuroShell Trader’s 800+ indicators. Simply select new indicator from the insert menu and use the indicator wizard to set up the following indicators: PB: RMS: -RMS:

ExpAvg1-ExpAvg2(Close,16,24) SqrRt(Divide(Sum(Pow(PB,2),50),50)) Neg(RMS) July 2016


Figure 6: TRADERSSTUDIO. Here is a sample equity curve for the system from 1999 through 2014 trading one share per signal of the NASDAQ 100 stocks.

Figure 5: NEUROSHELL TRADER. This sample NeuroShell Trader chart shows the PassBand, RMS and –RMS indicators.

Users of NeuroShell Trader can go to the Stocks & Comsection of the NeuroShell Trader free technical support website to download a copy of this or any previous Traders’ Tips. A sample chart is shown in Figure 5. modities

—Marge Sherald, Ward Systems Group, Inc. 301 662-7950, [email protected] www.neuroshell.com

F TRADERSSTUDIO: JULY 2016 TRADERS’ TIPS CODE The TradersStudio code for John Ehlers’ article in this issue, “The Super Passband Filter,” can be found at www.TradersEdgeSystems.com/traderstips.htm. The following code files are contained in the download: · Function: Ehlers_SPB—Returns the Ehlers Super PassBand values · Function: Ehlers_RMS—Returns the Ehlers RMS value · Indicator plot: Ehlers_SPB_Ind—Plots the Ehlers SPB indicator on a chart · System: Ehlers_SPB_sys—An example, not in the article, created by Richard Denning, that shows how the indicator might be used in creating a trading system.

I tried various rules for the shorting but could not find one that returns a profit, consequently I added a parameter that shuts off the shorting. Figure 6 shows the equity curve for the example system (long only) from 1999 through 2014 trading one share per signal of the NASDAQ 100 stocks. 'THE SUPER PASBAND FILTER 'Author: John Ehlers, TASC July 2016 'Coded by: Richard Denning 5/11/16 'TradersEdgeSystems.com


'returns the Ehlers Super PassBand value: Function Ehlers_SPB(Period1, Period2) Dim a1 Dim a2 Dim PB As BarArray a1 = 5 / Period1 a2 = 5 / Period2 PB = (a1 - a2)*Close + (a2*(1 - a1) - a1*(1 - a2))*Close[1] + ((1 - a1) + (1 - a2))*PB[1] - (1 - a1)*(1 - a2)*PB[2] Ehlers_SPB = PB End Function '-------------------------------------------------------------------------------------'returns the Ehlers RMS value: Function Ehlers_RMS(Period1,Period2) Dim PB As BarArray Dim RMS As BarArray Dim count PB = Ehlers_SPB(Period1,Period2) RMS = 0 For count = 0 To 49 RMS = RMS + PB[count]*PB[count] Next RMS = Sqr(RMS / 50) Ehlers_RMS = RMS End Function '-------------------------------------------------------------------------------------'plots the Ehlers_SPB and RMS indicators: Sub Ehlers_SPB_Ind(Period1,Period2) plot1(Ehlers_SPB(Period1,Period2)) plot2(Ehlers_RMS(Period1,Period2)) plot3(-Ehlers_RMS(Period1,Period2)) plot4(0) End Sub '-------------------------------------------------------------------------------------'example system created by Richard Denning using the Ehlers SPB & RMS indicators: 'Note the following system is not in the article but is an example ' of how the indicator might be used in a system Sub Ehlers_SPB_sys(Period1,Period2,TrendLen,longOnly) 'default: Period1=40, Period2=60, longOnly=1 Dim myRMS As BarArray Dim mySPB As BarArray Dim NDX As BarArray mySPB = Ehlers_SPB(Period1,Period2) myRMS = Ehlers_RMS(Period1,Period2) NDX = C Of independent1 If CrossesOver(mySPB,-myRMS)And C>Average(C,TrendLen)

And NDX>Average(NDX,TrendLen) Then Buy("LE",1,0,Market,Day) If CrossesUnder(mySPB,myRMS) Then ExitLong("LX","",1,0,M arket,Day) If CrossesUnder(mySPB,0) Then ExitLong("LX_ SE","LE",1,0,Market,Day) If CrossesUnder(mySPB,0) And longOnly<>1 And C
—Richard Denning [email protected] for TradersStudio

F NINJATRADER: JULY 2016 TRADERS’ TIPS CODE The filter discussed in “The Super Passband Filter” by John Ehlers in this issue is available for download at www.ninjatrader.com/SC/July2016SC.zip. Once you have it downloaded, from within the NinjaTrader Control Center window, select the menu File → Utilities → Import NinjaScript and select the downloaded file. This file is for NinjaTrader Version 7. You can review the indicators’ source code by selecting the menu Tools → Edit NinjaScript → Indicator from within the NinjaTrader Control Center window and selecting the SuperPassBandFile file. NinjaScript uses compiled DLLs that run native, not interpreted, which provides you with the highest performance possible. —Raymond Deux & Jess Pennell NinjaTrader, LLC www.ninjatrader.com

Figure 7: NINJATRADER. The SuperPassBandFilter is displayed on an SPY daily chart ending in May 2016.

F UPDATA: JULY 2016 TRADERS’ TIPS CODE Our Traders’ Tip for this month is based on “The Super Passband Filter” in this issue by John Ehlers. In the article, Ehlers seeks to filter out both high and low frequencies from market data, eliminating distracting “wiggles” from the resultant signal with minimal lag effect. This indicator achieves this with two differenced exponential moving averages (EMAs) of varying periods. Trigger points for the filter are added with a root mean square (RMS) envelope over the signal line. The Updata code for this article can be found in the Updata library and may be downloaded by clicking the custom menu and indicator Library. Those who cannot access the library due to a firewall may paste the code shown here into the Updata custom editor and save it. 'Super PassBand Filter PARAMETER "Period 1" @PERIOD1=40 PARAMETER "Period 2" @PERIOD2=60 NAME "" "" DISPLAYSTYLE 4LINES INDICATORTYPE CHART PLOTSTYLE THICK2 RGB(255,0,0) PLOTSTYLE2 THICK2 RGB(255,255,0) PLOTSTYLE3 THICK2 RGB(255,255,0) COLOUR4 RGB(0,0,255) @A1=0 @A2=0 @PB=0 #COUNT=0 @RMS=0 FOR #CURDATE=MAX(@PERIOD1,@PERIOD2) TO #LASTDATE @A1=5/@PERIOD1 @A2=5/@PERIOD2 @PB=(@A1-@A2)*CLOSE+(@A2*(1-@A1)-@A1*(1-@ A2))*CLOSE(1)+((1-@A1)+(1-@A2))*HIST(@PB,1) ...-((1-@A1)*(1-@A2)*HIST(@PB,2)) @RMS=0 FOR #COUNT=0 TO 49 @RMS=@RMS+(HIST(@PB,#COUNT)*HIST(@

FIGURE 8: UPDATA. Here, the super passband filter is applied to the SPY ETF of daily resolution. July 2016


the classic EMA uses factor of 2/(period+1). So the relationship between passband filter parameters and the classic MACD is given by: PeriodMACD = -1 + PeriodPassBand/2.5;

A ready-to-use formula that implements the super passband filter as described in Ehlers’ article is shown here. To use the formula, enter the code in the formula editor and press apply to display the passband indicator. AmiBroker code Period1 = Param("Period1", 40, 1, 100 ); Period2 = Param("Period2", 60, 1, 100 );

Figure 9: AMIBROKER. The Ehlers super passband (red) is shown in the middle pane together with RMS lines (yellow). A classic MACD with periods of 15 and 23 is shown in the bottom pane. Both produce the same values.

a1 = 5 / Period1; a2 = 5 / Period2; // pass band by difference of EMA’s // essentially it is ‘re-invented’ MACD PB = AMA( C, a1 ) - AMA( C, a2 ); RMS = sqrt( MA( PB * PB, 50 ) );

PB,#COUNT)) NEXT @PLOT=@PB @PLOT2=EXPBASE(@RMS/50,0.5) @PLOT3=-EXPBASE(@RMS/50,0.5) @PLOT4=0 NEXT

Plot( PB, "PassBand" + _PARAM_VALUES(), colorRed, styleThick ); Plot( RMS, "", colorYellow ); Plot( -RMS, "", colorYellow ); Plot( 0, "", colorBlue, styleNoLabel );

—Updata support team [email protected] www.updata.co.uk

F AMIBROKER: JULY 2016 TRADERS’ TIPS CODE In “The Super Passband Filter” in this issue, John Ehlers presents a passband filtering technique based on subtraction of two exponential moving averages (EMAs). It is worth noting that mathematically, such a filter is similar to the classic MACD indicator. The difference is the way the smoothing factor is calculated. Ehlers uses a smoothing factor of 5/period while

—Tomasz Janeczko, AmiBroker.com www.amibroker.com

F MICROSOFT EXCEL: JULY 2016 TRADERS’ TIPS CODE In “The Super Passband Filter” in this issue, author John Ehlers presents an indicator with a very quick reaction profile. By replicating Figure 3 from Ehlers’ article (Figure 10) and playing with the cursor, we can see that the lowest and highest points on the indicator are never more than one bar behind the lowest or highest closes, marking a change in significant localized trends. Hard to get much closer than that, eh? Ehlers suggests using crossover points of the filter value and an RMS envelope of the super bandpass filter as a means

FIGURE 10: EXCEL. Here is an approximation of Figure 3 from John Ehlers’ article in this issue, “The Super Passband Filter.”


of generating long or short entry signals. For those crossovers where a trend appears to be in progress, this seems to work well. In sideways patterns where a trend is not well established, this technique can lead to whipsaws. This indicator can give the trader a very early warning of trend changes. For safety, one should look for additional entry confirmations to control risk. A note about the EMA calculations used in this article: In this filter, Ehlers is using a more aggressive alpha calculation to build his EMAs than is used in either of the perhaps more familiar EMA versions. This EMA is significantly more reactive to the most recent input value than a standard EMA or a Wilders’ EMA. Generalized EMA formula = price today * α + EMA yesterday * (1- α)

Here is the formula for a more standard EMA, as found in many software packages:

Here is the formula for Wilders’ EMA: α = 1/N Using N = 40: α = 1/N = 0.02500, and (1 - α) = 0.97500

And finally, here is the formuala as used in the super bandpass filter: α = 5/N Using N = 40: α = 5/N = 0.12500, and (1 - α) = 0.87500

The spreadsheet file for this Traders’ Tip can be downloaded from www.traders.com in the Traders’Tips area. To successfully download it, please follow these steps: • Right-click on the Excel file link (“SuperPassbandFilter.xlsm”), then • Select “save as” to place a copy of the spreadsheet file on your hard drive.

—Ron McAllister Excel and VBA programmer [email protected]

α = 2 / (N+1) Using N = 40: α = 2 / (N+1) = 0.04878, and (1 - α) = 0.95121

Find the complete collection of Traders’ Tips and code at our website, Traders.com. Subscribers will also find code from past articles (from Nov. 1999 onward) at our website in the Article Code area, for downloading or copy & paste. TRADING ON MOMENTUM

CALHOUN/MULTIPLE-gAP BREAKOUTS Continued from page 45

pressure leads to a continuous price movement during this uptrend. The multiple price gaps serve as technical alerts that buy-sell imbalance is extremely strong (and likely to continue), which is why this gap breakout pattern is a favorite among professional traders.

TRADE MANAGEMENT TIP:

ENTERING AFTER EVERY GAP As part of a position sizing approach, you should look to add to any winning open swing trade on a day following a gap up ($0.50 above the high of the gap up day), each time a gap occurs. The reason for waiting to add to your position until the day after a gap up is to avoid gap retracement (gap fill) days.

Strong breakout charts often have a series of tradable in-trend gaps that occur during the days following an initial gap up day. Trading several entries with a strong swing trading chart using the help of multiple in-trend gaps can provide the foundation of a successful swing trading approach. Ken Calhoun is a producer of trading courses, live room, and video-based training systems for active traders. He is a UCLA alumnus and is the founder of TradeMastery.com, an educational resource site for active traders.

July 2016


BULKOWSKI / ONE THAT GOT AWAY Continued from page 9

When I trade a stock based on emotions (a hip shot), it is invariably the wrong decision. I just did not think about it on that day when I pulled the trigger.

the way, it made significant one-day plunges at B (down 18% on an earnings release) and C (down 48% on preliminary sales results). These are dead-cat bounces (an event pattern), even though these two do not show much of a bounce after the plunge. The stock does fit the profile of a continued drop after the bounce. Statistics show that there is a 38% chance of having a second dead-cat bounce within six months (which happened at C). I try to avoid taking positions in a stock for at least six months after a dead-cat bounce for that reason. This trade happened just short of five months, so that made me nervous. All of that was the bad news. The good news is that I turned in the manuscript for a new book titled Chart Patterns: After The Buy. I studied the behavior of stocks after different chart patterns end to see if that would help with stock selection before the buy. It does, and the research said that while this setup happened only 13% of the time, “a slow recovery” would then unfold followed by a big advance, according to my notes that I had made when I was making this trade. The chart pattern I was thinking about trading was the double bottom at DE. That confirmed as a valid pattern at G when the stock closed above the peak between the two bottoms (F). I started to look into the stock by checking the fundamentals. Insiders bought the stock nine times in December, scooping up 4,000 to 100,000 shares per trade. If insiders believed in the company, why not me? The specialty retailers were gathering momentum with two stocks up six months ago compared to six up a month prior to the buy. I scored the double bottom using the guidelines in my book, Trading Classic Chart Patterns, and it signaled a strong buy with a 2.10 target. “Scoring” the pattern means I looked at several factors such as length of the inbound price trend, overhead resistance, pattern height, volume trend, and so on to help predict a successful trade. Overhead resistance was at 3.25, 4 (shown in Figure 3 as two horizontal blue lines) and 5, well above the current price of 1.54 on the day I bought. Earnings were two months away, far enough not to worry about. I will not buy a stock within three weeks of an earnings release because of the risk of a sharp selloff on earnings news. My position-sizing algorithm (discussed in my book, Trading Basics) uses the current portfolio value to size new positions according to market and stock volatility. For this trade, it said that the position should be no larger than $25,000 (total, for multiple buys), but I should limit this purchase to 5,800 shares worth a bit less than $10,000. A stock priced near a dollar tells me the company is on the verge of bankruptcy, so it is rare for me to buy such a stock. I downsized the buy to just 1,000 shares, filled at about $1.61 on January 7. My notes on the trade said, “This is a high-risk 54 • July 2016 • Technical Analysis of Stocks & Commodities

play on the double bottom. Since the stock has dropped from my buy price, I might have bought too early. It’s still throwing back now.” The chart in Figure 3 shows the price action. I bought at H and watched the stock decline for a week or two before the throwback bottomed. If the company declared bankruptcy, the position was too small to worry about, so I did not place a stop. My program did say that a volatility stop should be at 1.39 or almost 20% below the buy price. If that stop were in place, it would have triggered two days after I bought. Inexpensive stocks (below $20 and especially below $5) tend to be more volatile than higher-priced ones, so that was another reason for not using a stop on this trade. I watched the stock bounce around and travel sideways but was not concerned, nor did I pay much attention to it.

The sale

On March 3, 2016, I got fed up with waiting for the stock to make its move. The sale was what I call a “hip shot,” a quick, thoughtless decision. My trading notebook reads: “This just didn’t work out as expected, so I’m selling it. Lousy industry. DCB [dead-cat bounce] emphasized the weakness, I think. But in the face of improving markets, this just dropped. It’s beyond late to sell, but at least the amount of loss is small compared to normal positions.” It has been my experience that when I trade a stock based on emotions (a hip shot), it is invariably the wrong decision. I just did not think about it on that day when I pulled the trigger. As the chart shows, I sold at point I, the very low for the day, and watched from the sidelines as the stock shot up to J. The peak at J was more than double my sale price and 83% above the buy price. The stock eased back to find support at K, forming a pennant chart pattern. The stock broke out upward from the pennant and is now throwing back (L). Looking back at trades such as these, I groan. If only I had remembered the curious observation in my notebook that the recovery would be a slow one, and had held on a bit longer. I had the potential to turn this trade into a big win. Instead, I took a 17% loss. Fortunately, with such a small position size, I lost just $270.

Stocks & Commodities Contributing Writer Thomas Bulkowski (who may be reached via email at tbul@hotmail. com) is a private investor and trader with more than 30 years of market experience and considered by some to be a leading expert on chart patterns. He is the author of several books including Getting Started In Chart Patterns, Second Edition and the Evolution Of A Trader trilogy. His website and blog, www.thepatternsite.com, have more than 700 articles of free information dedicated to price pattern research.

Attenuation—The fractional part of reduced energy or lost power due to smoothing or filtering. Bandpass filter—An oscillator that accentuates only the frequencies in an intermediate range and rejects high and low frequencies. Implemented by first applying a low-pass filter to the data and then a high-pass filter to the resulting data (for example, a two-SMA crossover system). Butterfly spreads—A sideways market strategy using all calls or puts, designed to profit from a stock trading in a specific range. Cutoff frequency—A point where higherfrequency cycles will not pass through a filter. For example, a 10-day simple moving average (SMA) will eliminate cycles of 20 days or less. High-pass frequency filter—A detrending filter that lets pass the high-frequency noise and rejects low-frequency trend.

LETTERS TO S&C

Continued from page 7

losses. We have a money management system in place that helps us minimize risk and establishes capital allocation for each trade. We have analyzed complex mathematical formulas to get to the core of their utility. We are aware that there is always more to learn. Roberto Thank you for your note. You may be interested in the article “The Palm Beach Traders” in this issue by James Rich on the topic of investing user groups.—Editor

Further reading

Bulkowski, Thomas [2005]. Encyclopedia Of Chart Patterns, 2d ed., John Wiley & Sons. [2016]. Chart Patterns: After the Buy, John Wiley & Sons. [2002]. Trading Classic Chart Patterns, John Wiley & Sons. [2013]. Trading Basics, John Wiley & Sons.

Implemented by first applying a low-pass filter to the data, then subtracting the filtered data from the original data. Low-pass f requency filter—A data smoother or filter that lets pass lowfrequency trend sinusoids and rejects high-frequency noise. Smoothing—Simply, a mathematical technique that removes excess data variability while maintaining a correct appraisal of the underlying trend. Entropy—The degree of or degradation to disorder or uncertainty in a system. In thermodynamics, it’s a measure of the unavailable energy in a closed system. In information theory, it’s the unpredictability of information content. In the financial markets, entropy refers to the constant movement of price. The more prices move, the higher the entropy. Exponential smoothing—A weighted average of past periods; a mathematical series in which greater weight is given to more recent price action. Heuristic bias—The use of rules of thumb for decisions. Heuristic method—Problem-solving approached by trying out several different methods and comparing which provides the best solution. In behavioral finance, trial-and-error learning leading to the use of rules of thumb for decisions. Heuristics (computer science)—Computational rules of thumb. Distinct from algorithms, which are programs guaranteed to generate the correct result under all circumstances, heuristics may only turn out to be correct a certain percentage of time. Maximum entropy method—More flexible than Fourier analysis, the maximum entropy method is both a tool for spectrum analysis and a method of adaptive filtering and trend forecasting. As a tool July 2016

for spectrum analysis, the MEM system can provide high resolution spectra for identifying the dominant data cycles within relatively short time series, such as open, high, low, close, volume and open interest, or study results, such as Rsi, Trix, and so on. (Fourier analysis, in contrast, gives best results when applied to time series of six months or longer.) As a forecasting tool, MEM is used in conjunction with moving averages to forecast lower and upper trend channels in the data. Mean-reverting—When price is oscillating randomly about some (unknown) mean value. That is, it is not trending. Noisy signal—A signal in which the effects of random influences cannot be dismissed. Quantize—In signal processing, it’s map-

ping a large set of input values to a (countable) smaller set.

Sharpe ratio method—Also, Sterling ratio method. The Sharpe ratio method is a classic measure of return/risk. Both the Sharpe and the Sterling ratio methods compare returns with variability of returns, as opposed to risk of loss of original investment. Standard deviation—A widely used statistical concept that describes how a given distribution varies around its mean observation. In the case of the P/L statistic, a high standard deviation would indicate a widely varying P/L, while a low one would suggest a more stable performance. Also: A measure of the fluctuation in a stock’s monthly return over the preceding year. Z-transform—Converts a discrete-time signal, which is a sequence of real or complex numbers, into a complex frequency domain representation.


FUTURES LIQUIDITY

T

rading liquidity is often overlooked as a key technical measurement in the analysis and selection of commodity futures. The following explains how to read the futures liquidity chart published by Technical Analysis of Stocks & Commodities every month.

very high volumes. The greatest number of dots indicates the greatest activity; futures with one or no dots show little activity and are therefore less desirable for speculators. Courtesy of CBOT

Commodity futures

The futures liquidity chart shown below is intended to rank publicly traded futures contracts in order of liquidity. Relative contract liquidity is indicated by the number of dots on the right-hand side of the chart. This liquidity ranking is produced by multiplying contract point value times the maximum conceivable price motion (based on the past three years’ historical data) times the contract’s open interest times a factor (usually 1 to 4) for low or

three-year period. Thus, all numbers in this column have an equal dollar value. Columns indicating percent margin and effective percent margin provide a helpful comparison for traders who wish to place their margin money efficiently. The effective percent margin is determined by dividing the margin value ($) by the three-year price range of contract dollar value, and then multiplying by one hundred.

Stocks

All futures listed are weighted equally under “contracts to trade for equal dollar profit.” This is done by multiplying contract value times the maximum possible change in price observed in the last

Trading liquidity has a significant effect on the change in price of a security. Theoretically, trading activity can serve as a proxy for trading liquidity and equals the total volume for a given period expressed as a percentage of the total number of shares outstanding. This value can be thought of as the turnover rate of a firm’s shares outstanding.

Trading Liquidity: Futures

Commodity Futures Exchange % Margin Effective Contracts to Relative Contract Liquidity % Margin Trade for Equal Dollar Profit E-Mini S&P 500 GBLX 5.1 21 3 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>> 10-Year T-Note CBOT 1.1 21.2 11 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••> Crude Oil WTI NYMEX 8.1 6 1 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• T-Bond CBOT 2.7 12 2 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• Ultra T-Bond CBOT 3.1 14.2 2 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 5-Year T-Note CBOT 0.8 30.8 24 •••••••••••••••••••••••••••••••••••••••••• Euro FX CME 2.8 11.3 2 •••••••••••••••••••••••••••••••••••••••••• E-Mini Nasdaq 100 GBLX 6.1 17.1 2 ••••••••••••••••••••••••••••• Gold COMEX 4 23.9 4 ••••••••••••••••••••••••••••• Natural Gas NYMEX 9.6 4.5 2 •••••••••••••••••••••••••••• Russell 2000 Mini ICEUS 5.3 32.9 4 •••••••••••••••••••••••• ULSD NY Harbor NYMEX 8.1 6.9 1 ••••••••••••••••• Gasoline RBOB NYMEX 7.2 7.7 1 ••••••••••••••• British Pound CME 2.5 13.5 5 ••••••••••••• 2-Year T-Note CBOT 0.3 28.8 31 •••••••••••• Australian Dollar CME 2.7 7.7 3 ••••••••••• Japanese Yen CME 2.6 15 4 ••••••••••• Sugar #11 ICEUS 7.7 19 10 ••••••••• Canadian Dollar CME 2.2 7.6 3 •••••••• Corn CBOT 5 5.9 5 •••••••• Soybeans CBOT 3.1 5.9 3 •••••••• DJIA mini-sized CBOTM 4.9 28.5 5 ••••••• Eurodollar CME 0.2 36.5 59 ••••••• CBOE S&P 500 VIX CFE 35.9 46 6 •••••• E-Mini S&P Midcap GBLX 5.1 21.8 2 •••••• Cotton #2 ICEUS 4.1 7.1 4 •••• Live Cattle CME 4.1 9.8 4 •••• Mexican Peso CME 7.5 15.8 6 ••• Platinum NYMEX 4.5 8.6 3 ••• Crude Oil Brent (F) NYMEX 7.9 5.6 1 •• New Zealand Dollar CME 3.8 12.6 4 •• CBOT Chicago Board of Trade, Division of CME Soybean Meal CBOT 3.4 9 5 •• CFE CBOE Futures Exchange Swiss Franc CME 3.5 16.1 3 •• CME Chicago Mercantile Exchange U.S. Dollar Index ICEUS 2.3 13.4 5 •• COMEX Commodity Exchange, Inc. CME Group Wheat CBOT 5.6 9.9 6 •• GBLX Chicago Mercantile Exchange - Globex Brazilian Real CME 11.7 16.2 4 • ICE-EU Intercontinental Exchange-Futures - Europe Canola WCE 4.6 17.5 27 • ICE-US Intercontinental Exchange-Futures - US Hard Red Wheat KCBT 6.4 7.1 4 • KCBT Kansas City Board of Trade Palladium NYMEX 8.3 13.1 2 • MGEX Minneapolis Grain Exchange Soybean Oil CBOT 4.7 7.9 7 • NYMEX New York Mercantile Exchange Spring Wheat MGEX 5.9 10.4 5 • 30-Day Fed Funds CBOT 0.1 27.3 61 Class III Milk CME 5.6 6.1 3 Cocoa ICEUS 5.7 21.7 10 1607 Coffee ICEUS 5.6 7 2 Trading Liquidity: Futures is a reference chart for speculators. It compares markets “Relative Contract Liquidity” places commodities in descending order according to according to their per-contract potential for profit and how easily contracts can be bought how easily all of their contracts can be traded. Commodities at the top of the list are easior sold (i.e., trading liquidity). Each is a proportional measure and is meaningful only est to buy and sell; commodities at the bottom of the list are the most difficult. “Relative Contract Liquidity” is the number of contracts to trade times total open interest times a when compared to others in the same column. The number in the “Contracts to Trade for Equal Dollar Profit” column shows how volume factor, which is the greater of: many contracts of one commodity must be traded to obtain the same potential return In volume 1 or exp –2 as another commodity. Contracts to Trade = (Tick $ value) x (3-year Maximum Price In 5000 Excursion).


Free Information From Advertisers Advertiser

Page

Brokerages

Advertiser

Page

Software

Fidelity

05

Fidelity.com/AlwaysBe

Jurik Research

13

jurikres.com, tinyurl.com/jurik-online

Interactive Brokers

03

ibkr.com/scfreetrial

NinjaTrader

35

NinjaTrader.com/Futures

NinjaTrader

35

NinjaTrader.com/Futures

Ward Systems

07

www.NeuroShell.com

TDAmeritrade

64

TDAmeritrade.com/tradefutures

Websites

StockCharts.com

02, 33 StockCharts.com/ChartCon, StockCharts.com

Courses/Seminars

StockCharts.com

02, 33 StockCharts.com/ChartCon, StockCharts.com

Stocks & Commodities

39, 63

Store.Traders.com, Traders.com

Publications

Stocks & Commodities

39, 63

Store.Traders.com, Traders.com Software

Dynamic Investing, LLC

15

DynamicInvestorPro.com

Editorial Resource Index Thomas Bulkowski . . . . . . . . . . . . . . . 09 John Ehlers . . . . . . . . . . . . . . . . . . . 11 TradeStation . . . . . . . . . . . . . . . . . . . 12 IFX Trader (MetaQuotes Software Corp) . . . 15 Sierra Charts . . . . . . . . . . . . . . . . . . 18 TomsOptionTools.com . . . . . . . . . . . . . 21 Microsoft Excel . . . . . . . . . . . . . . . . . 23 StockCharts.com . . . . . . . . . . . . . . . . 29 eSignal (Interactive Data) . . . . . . . . . . . 45 MetaStock . . . . . . . . . . . . . . . . . . . . 47 thinkorswim . . . . . . . . . . . . . . . . . . . 48 Wealth-Lab . . . . . . . . . . . . . . . . . . . 48 Neuroshell Trader (Ward Systems Group) . . 49

TradersStudio . . . . . . . . . . . . . . . . . . 50 NinjaTrader . . . . . . . . . . . . . . . . . . . 51 Updata . . . . . . . . . . . . . . . . . . . . . . 51 AmiBroker . . . . . . . . . . . . . . . . . . . . 52

For more information about our advertisers, go to Traders.com/reader where you will find the alphabetized list of this month’s advertisers. For reference, the list is also printed above along with the corresponding page number for each ad. Just follow the simple directions below and the advertisers will get your requests the same day! Step 1: Go to Traders.com/reader and scroll through the list of our current month’s advertisers.

How to reach us For questions, address changes, or ordering information for Technical Analysis of Stocks & Commodities magazine and its online publications: Toll-free 800 832-4642 (800-Technical) or: 206 938-0570. Email us at: [email protected]. Or write to us at: 4757 California Ave. SW, Seattle, WA 98116-4499.

Do your magazines arrive tattered and torn? Polybagging of magazines (domestic delivery) is available for $6/year. Single back issues from the current year (subject to availability) are $8 prepaid. Subscribers have access to our digital archive of all past articles. Individual articles can be purchased from the Online Store at our website, Traders.com. Editorial feedback We always want to know more about the needs of our readers: What kinds of articles would you like to see more of? What do you find useful? Address your written questions and comments to [email protected] or to: Editor, Stocks & Commodities, 4757 California Ave SW, Seattle, WA 98116-4499. Sorry, we cannot perform research on individual financial questions not related to this magazine and we cannot respond to all mail. Letters or emails containing questions or information that other readers may enjoy or that relate to our articles or technical analysis topics may be published in our Letters to S&C column. Join us on Facebook at www.facebook.com/ STOCKSandCOMMODITIES

Click the box for each advertiser you’d like to hear from. At the bottom of the list, click Continue when finished.

Follow us on Twitter @STOCKSandCOMM

Step 2: Fill out your contact information and click Send Request. Your request will then be sent to the advertisers you selected. And that’s it!

To receive information on the products and services listed in the Editorial and Advertisers’ Indexes, go to: Traders.com/reader/. These indexes are published solely as a convenience. While every effort is made to maintain accuracy, last-minute changes may result in omissions or errors.

July 2016


New Edition OF Investment Software Dynamic Investing, LLC has released a new version of its Dynamic Investor Pro software, designed for advanced investors and investment advisors. The program offers buy & sell signals and is designed to allow users to spend less than 20 minutes per week on investing. It also features a signal to exit the market when the market declines. The software is customizable and focuses on relative strength investing with multiple means of analysis. The Advanced Advisor Edition was developed in consultation with private investors and investment advisors and is designed to allow the user to easily manage client portfolios with multiple investing strategies. New features of this version include Portfolio Charts, which can be viewed in multiple ways to aid in managing portfolios and to provide reports on portfolio performance; trading strategies within a selected portfolio; and symbols within a selected portfolio. Any number of portfolios may be created along with unlimited master portfolios.

www.DynamicInvestorPro.com

TECHNICAL ANALYSIS COURSES, FALL & spring 2016 Golden Gate University, with campuses in San Francisco, Los Angeles, Silicon Valley, Seattle, and online, offers courses in finance, technical analysis, and the Wyckoff method among its choices. The fall or spring 2016 lineups will include:

• Technical Analysis Of Securities— Examines empirical evidence concerning nonefficient markets in which technical analysis is thought to apply. Topics include trend analysis, turning-point analysis, charting techniques, volume and open interest indicators, contrary opinion theories, and technical theories such as Dow theory and Elliott wave. • Technical Market Analysis Strategies— Provides advanced studies in technical analysis and trading. Money management, investor psychology, and technical analysis elements are considered. Focuses on the development of a trading plan. • Wyckoff Method I & II—Studies the Richard D. Wyckoff approach to market analysis and trading. • Behavioral Finance—Introduces the theories developed by research into cognitive biases, investor emotions, and herd effects. Explores the applications of these theories in corporate finance and investment management and suggests approaches through which investors can exploit the opportunities created by nonrational investors.

The undergraduate programs at GGU and many of the graduate courses are also offered online.

EXCHANGE-TRADED MANAGED FUNDS Interactive Brokers Group, Inc., an automated global electronic broker and market maker, announced plans to offer NextShares exchange-traded managed funds (NextShares) to retail investors and financial professionals through its investing and trading platforms. NextShares provide a way to invest in actively managed strategies. Because they trade on an exchange, NextShares may offer cost and tax efficiencies that can enhance shareholder returns. NextShares were developed by NextShares Solutions, an affiliate of Eaton Vance Corp., and are expected to be offered by a range of well-known asset managers and across fund asset classes. The first NextShares funds began trading on the Nasdaq earlier this year. Eaton Vance launched an initial three NextShares funds in the first quarter of this year and expects to introduce additional funds later this year. Ivy Investments has announced plans to launch its first three NextShares funds by late summer. The NextShares structure is broadly applicable across all asset classes in which mutual funds invest.

interactivebrokers.com

www.ggu.edu

Sneak preview... Averaging Reward-To-Risk Ratios

by Giorgos Siligardos When you evaluate your trading systems, you probably use different metrics to gauge their reward/risk profile. But how do you rank your systems according to their overall reward/risk profile? Here’s one method you may not have thought of using.

Revival Of The Gold Myth

by Bani Arora When the dollar weakens, gold prices tend to rise, since a plummeting buck means it takes more dollars to buy the same ounce of gold. Can changes in the US interest rate serve as an important mediation? Here’s how you can trade the shiny metal.


Middle-High-Low Moving Averages

by Vitali Apirine You know moving averages inside out, but maybe it’s time to change things up a bit. Here, we look at how you can apply another moving average to an already existing moving average.

...Coming soon!

Advisory Services

BROKERAGES

30% – 92% RETURNS

ZenithFutures.com

$

79.95

SOFTWARE

Revolutionary Relative-Strength Investment Program!

Deep Discount Rates!! FREE Platforms 1(949) 424 2399

ReadTheMarkets.info Yes, You Can Cash In On Chaos! Certified Chaos Traders Courses teach you how. Learn to earn at http://moneytide.com?r=s EMini MoonTide Hotline up 171 months in a row http://daytradingforecasts.com?r=s

— TRADE BONDS — with the Bond Trader’s Resource Free Forecast — Free Newsletter www.FixedIncomeSpecialties.com

• Profitable Investing in Less than 20 Minutes • Use Our Proven Strategies or Develop Your Own • Worlds Only Fully Customizable Relative Strength Program • Safe 30-Day No-Quibble Guarantee

educational

877-822-1445 DynamicInvestorPro.com

OptionsWest.com Follow each trade and mgmt move we make with our successful minimal risk CC approach 54% average annual ROI since 2009

Build and test systems without coding!

®

Keep it Super Simple!

Beat The Market!

Sector Rotation and Market Timing. Buy stocks with high relative strength

Free weekly newsletter!

Easy options trade for 5% daily profit Personal Training/Live Trading/Software FREE Inner Circle trial/newsletter Book your Intro Meeting with Trader Hugh

SOFTWARE

BROKERAGES

Divergence Software, Inc. A wide variety of studies and indicators for the eSignal platform. Custom programming, code translation services. www.sr-analyst.com

Check us out!

trading systems

daytradeSPY.com

Wallstreetwindow.com

GlobalFutures.com

www.NeuroShell.com

DBdesign 2016

CLIENT: RxCrossroads/Omnicare JOB #: DIP101 To Advertise contact: SIZE: 2.25 x 11.5” [email protected] DATE: 4/25/2016 • (206) 938 0570 ARTIST: db TRADERS' RESOURCE PROOF: 2 Stocks & Commodities

TOP 10 VIEWED Publications for Traders Where can traders turn for market insight, trade recommendations, and education about trading and investing? Perhaps the question should be where can’t you? These days, financial information is put out in print, on TV, on your smartphone, and over the Internet in various formats, but there’s still nothing more readable, reliable, or researchable than a regularly published newsletter or magazine. In the Traders’ Resource area of our website, www.Traders.com, we present a listing of publications on a variety of subjects — printed on paper, accessed online, or delivered straight

to your email inbox — that may help you improve your trading. Some publications have been around for quite a while (in fact, this magazine itself has been published since 1982), and they can be well worth the asking price for the information they deliver. In the listing, you’ll find information about each publication, such as how many years it’s been published and whether it is available on the newsstand.

Product

LINKS

Company

1. Technical Analysis of Stocks & Commodities Magazine

Technical Analysis, Inc.

2. The Zanger Report

ChartPattern.com

3. Traders.com Advantage

Technical Analysis, Inc.

4. Working Money, at Working-Money.com Technical Analysis, Inc. 5. Active Trader magazine

Active Trader magazine

6. Options Trader magazine (PDF)


7. Currency Trader magazine (PDF)


These are the 10 publications for traders clicked 8. Steve Woods’ FloatCharts.com on most often on the Traders’ Resource website, in order of clicks received. This is not an editorial 9. Chaos Trader’s Email rating or ranking. For more information on specific products and services, try checking store.Trad- 10. Cash In On Chaos Newsletter ers.com for archived S&C product reviews.

FloatCharts.com LLC MicroMedia MicroMedia

The information in Traders’ Resource is the most accurate at the time of posting and is subject to change. Because the vendors posting to Traders’ Resource are responsible for their own listing, Technical Analysis, Inc. declines any and all liability for any representations made by the businesses and individuals listed. Nor can Technical Analysis, Inc. endorse any business or individual listed on Traders’ Resource. Technical Analysis, Inc. makes no warranties, express or implied, as to the accuracy and reliability of claims herein. You agree to release Technical Analysis, Inc., together with its respective employees, agents, officers, directors and shareholders, from any and all liability and obligations whatsoever in connection with or arising from your use of Traders’ Resource. If at any time you are not happy with the information posted to Traders’ Resource or object to any material within Traders’ Resource, your sole remedy is to cease using it. This list is updated frequently. If you are aware of a business that should be listed, please email us at [email protected].

July 2016


enthusiasm of our participants. Initially, in an effort to encourage participation in the meetings, we had each member submit one stock symbol at each meeting. The list of stocks was then tracked until the next meeting, and the member who submitted the best-performing stock won a nominal prize. The process gave each member the opportunity to share his or her favorite stock and tell the group what led to their choice, while we displayed a chart of the stock on the screen. The process also provided a watchlist for the other members to examine, since it was not unusual for the list, as a whole, to have annualized returns in excess of 40%. Attendance at specific meetings, always held on the second Tuesday of every month, depends on the topic of discussion and how it relates to the interests of the individual members. Meeting topics run the gamut from stocks, commodities, futures, and forex, as well as daytrading, swing trading, and long-term investing. Over the years, our list of speakers has grown to the point where presentations are booked four to five months in advance. Jeffrey Saut, chief investment strategist for Like-Minded Gatherings Raymond James, routinely gives presentations to advisors, analysts, and money managers all over the world. Last year, he finally responded to a long-standing invitation to speak to the Traders. When he walked into our meeting room on the second floor of Expand your resources and learn more by connecting with other like-minded traders. a Publix Greenwise, he broke into a Here’s a group to emulate. grin and said, “I have to admit that this is the first time I have ever spoken by James E. Rich in a grocery store.” Seeing that we had about 30 members in attendance, fter spending a career facilitating meetings in which business people met to when he usually addresses several improve their individual businesses and develop best practices, I decided a hundred, he said, “This is going to similar concept could be applied to trading and investing. In April of 2010, I, be a lot of fun because we can have along with cofounder Ken King, established The Palm Beach Traders with the a conversation instead of me presentmission of enhancing the trading performance of its members (Figure 1). ing and you listening.” Saut’s grasp The charter meeting of The Palm Beach Traders, with 30 participants, was of domestic and global markets was held on April 13, 2010 and featured speaker Michael Thompson, director of business and amazing and provided a “big picture” client relations for Worden Brothers. In the six years since that first meeting, The Palm view that the members could not have Beach Traders’ roster has grown to over 200 individuals. We’ve had the good fortune to otherwise achieved. feature several internationally known presenters at meetings, but we have determined Paul Desmond, president and that the true success of the group has been the result of the knowledge, talent, and owner of Lowry Research, a highly

The Palm Beach Traders


FROLOVA_elena/shutterstock

A

At The ClosE

regarded Wall Street research members. firm, agreed to share Lowry’s The point of this article is current market analysis as to encourage individual tradwell as their market outlook, ers and investors to expand even though Lowry normally their education and research only provides such detailed resources beyond individual analysis via paid subscription research, books, and trading to registered analysts and in& investment classes. Indivestment specialists. Again, vidual traders and investors the Traders were provided a have a wealth of knowledge view of the markets that was that grows exponentially not available through any when pooled with other likeother means. minded individuals. ComFIGURE 1: THE PALM BEACH TRADERS MISSION STATEMENT Louis Navellier is the puter user groups and trading chairman of the board, CEO, & investment software user and chief investment officer of Navellier and Associates, an groups are a great resource for people looking for a way to investment firm with $2.7 billion under management. Navel- improve their skills. Publicizing that the group is open to lier, in addition to addressing audiences all over the world, is the public also helps bring in people who are curious to see also a regular on CNBC and participates in its annual stock what benefits they might derive from such a group. Time and challenge. Navellier and Associates is headquartered in Reno, time again, we hear our members discuss how they have been NV, but Navellier has a home in Palm Beach, so we conspired able to formalize trading plans, improve money management with his administrative assistant to schedule Navellier for our techniques, or discover new sources for research. Roundtable December meetings, which allows him to spend the holidays management and brainstorming have been around for a long at home. Thus, the Traders get to hear Navellier’s view of the time and are proven techniques for improving performance markets, and he gets to spend the holidays with his family. and finding best practices. At our recent member roundtable meeting, we addressed the following topics that members had asked we put on the James E. Rich has been trading for more than 30 years and agenda: currently trades multiple family accounts using a combination of technical analysis, fundamental analysis, and intermarket • Value vs. growth analysis. He is the cofounder of The Palm Beach Traders, a • Fundamentals vs. technicals group of individuals who take an active roll in the manage• Changing allocations to fit the market ment of their investments. The group, now in its seventh year, • When to sell; patterns/ meets monthly in Palm Beach profits/losses Gardens, FL to hear speakers • Trading breakouts, with and discuss various aspects of or without volume trading and investing. Rich can be contacted at Richtrader3@ With over 20 members in gmail.com. attendance, the topics proFurther reading voked some lively discussions. Rich, James E, with John B. As in the past, the members’ Rich [2015]. “Simplify roundtable proved to be one of It,” Technical Analysis of our most productive meetings. Stocks & Commodities, New members come into the Volume 33: November. Traders—which is open to the Star, Barbara [1991]. “Startpublic—believing that their ing A Technical Analysis challenges are unique, only Group,” Technical Analysis to find that anyone who takes of Stocks & Commodities, an active roll in managing Individual traders and investors Volume 9: September. their own investments faces have a wealth of knowledge that Wasserman, Karen [2011]. “Insimilar challenges and are alvesting Clubs And Trading ways searching for solutions. grows exponentially when pooled Communities,” WorkingGuest speakers can provide with other like-minded individuals. Money.com. an overview of the market, but day-to-day problems get solved through interaction among July 2016


The following selection of book descriptions represents a sampling of recent book releases in the investing field. Books described here may be from some of the major book publishers as well as some independent book publishers. These are not critical reviews or editorial evaluations, but rather a brief look at the book marketplace to help keep readers up to date on new or recent book offerings.

Concentrated Investing: Strategies Of The World’s Greatest Concentrated Value Investors (256 pages, hardcover $49.95, ebook $32.99, April 2016, ISBN 978-1-119-01202-3) by Allen C. Benello, Michael van Biema, & Tobias E. Carlisle, published by Wiley. This book chronicles the virtually unknown but very successful value investors who have regularly achieved results better than those of even the world’s top fund managers. Sharing the insights from four top value investors, the authors discuss the strategies that can make concentrated value investing profitable, while at the same time showing how to mitigate risk over time. The approach goes against the conventional wisdom related to diversification and instead picks a small group of undervalued stocks and holds onto them even through the lean years, such as the approach championed by Warren Buffett. www.wiley.com Anatomy Of The Bear: Lessons From Wall Street’s Four Great Bottoms (336 pages, £29.99 hardcover, £26.99 ebook, January 2016, ISBNs 9780857195227 / 9780857195234) by Russell Napier, published by Harriman-House. How does one spot the bottom of a bear market? What brings a bear to its end? These are important questions to be answered in modern finance. Financial market history is a guide to understanding the future. Looking at the four occasions when US equities were particularly cheap (1921, 1932, 1949, and 1982), the author sets out to answer these questions by analyzing every article in the Wall Street Journal from either side of the market bottom. In the 70,000 articles he examines, he begins to unravel the features that indicate when a great buying opportunity is emerging. Napier tries to look at how markets actually worked in these bear-market bottoms rather than theorizing how they should work. www-harriman-house.com The Way To Trade Better: Transform Your Trading Into A Successful Business (208 pages, £34.99 hardcover, £27.89 ebook, February 2016, ISBNs 9780857193360 / 9780857195326) by John Piper, published by Harriman-House. In this new edition, the author returns to the fundamental topic of how to transform yourself into a winning trader. Building on more than 30 years of trading experience and over two decades of teaching and coaching, he explains how 62 • July 2016 • Technical Analysis of Stocks & Commodities

winning at trading involves turning your trading into a business. To do this, according to the author, you must follow a five-step process that he explains. He also covers the essential areas that he believes every winning trader needs to master, including trading systems, money management, psychology, good and bad habits, and trading professionally. The book is for both novices or those with some experience. www-harriman-house.com The FINTECH Book: The Financial Technology Handbook For Investors, Entrepreneurs And Visionaries (312 pages, $39.95 hardcover, ebook $25.99, May 2016, ISBN 978-1-11921887-6) by Susanne Chishti & Janos Barberis, published by Wiley. This guide to the financial technology “revolution” seeks to cover the disruption, innovation, and opportunity therein. Who are the key players? What’s driving the explosive growth? What are the risks? This book collates insights, knowledge, and guidance from industry experts. Key industry developments are explained, and insights from practitioners offer first-hand lessons. According to the book, the fintech market captured over $14 billion in 2014, a three-fold increase from the previous year. New startups are increasing, and large banks and insurance companies are being pushed toward increasing digital operations. This crowd-sourced book seeks to provide entrepreneurs, bankers, and investors with information on how to capitalize on this sector. www.wiley.com Multi-Asset Investing: A Practitioner’s Framework (296 pages, $105 hardcover, $68.99 ebook, May 2016, ISBN 978-1119-24152-2) by Pranay Gupta, Sven R. Skallsjo, & Bing Li, published by Wiley. Despite the accepted fact that a substantial part of the risk and return of any portfolio comes from asset allocation, the authors state that today, the majority of investment professionals worldwide are focused on security selection. This book questions this basic structure of the investment process and investment industry. It poses questions such as: Should alpha and beta really be separated? Are the traditional definitions for risk and risk premium relevant in a multi-asset class world? Does the “emerging markets” demarcation make sense for investing? Does having a performance fee for your manager create alignment or misalignment? These and many other questions are asked, and potential solutions are provided. The authors have worked together for 15 years and seek to present solutions that have helped them manage large asset pools. www.wiley.com

subscribe or renew today! Every Stocks & Commodities subscription (regular and digital) includes: • Full access to our Digital Edition The complete magazine as a PDF you can download.

8999 $ 99 2 years............ 149 $ 99 3 years............ 199 1 year.................

• Full access to our Digital Archives That’s 33 years’ worth of content! • Complete access to WorkingMoney.com The information you need to invest smartly and successfully. • Access to Traders.com Advantage Insights, tips and techniques that can help you trade smarter.

$

PROFESSIONAL TRADERS’ STARTER KIT A 5-year subscription to S&C magazine that includes everything above PLUS a free* book, Charting The Stock Market: The Wyckoff Method, all for a price that saves you $150 off the year-by-year price! *Shipping & handling charges apply for foreign orders.

5 years..........

29999

$

That’s around $5 a month!

Visit www.Traders.com to find out more! Email: [email protected] • Phone: 206-938-0570

facebook.com/STOCKSandCOMMODITIES

@STOCKSandCOMM

TRADE FUTURES LIKE

THERE’S A TOMORROW. Trade over 50 futures products virtually 24 hours a day, 6 days a week, with thinkorswim® on your desktop or your mobile device using TD Ameritrade Mobile Trader. Trade futures on indices, currencies, commodities and more to diversify your portfolio, and be better prepared to weather market conditions. You also get live interactive in-platform education, access to former floor traders, and even the ability to test-drive strategies without risk on paperMoney.® There’s never been a better time to make your fear of futures a thing of the past.

Visit tdameritrade.com/tradefutures to learn more and open a futures account. Futures trading is speculative and is not suitable for all investors. Futures accounts are not protected by SIPC. Futures trading services provided by TD Ameritrade Futures & Forex LLC. Trading privileges subject to review and approval. Not all clients will qualify. This is not an offer or solicitation in any jurisdiction where we are not authorized to do business. TD Ameritrade, Inc., member FINRA/SIPC. © 2016 TD Ameritrade IP Company, Inc. All rights reserved. Used with permission.

Jesse Livermore Methods

Recommend Documents