38 - 1991 Fall

FALL 1991
ISSUE 38
A PUBLICATION OF THE MARKET TECHNWANS ASSOCIATION

71 BROADWAY, 2ND FLOOR, C/O NYSSA l NEW YORK, NEW YORK 10006 l (212) 344-1266
MARKET TECHNICIANS ASSOCIATION JOURNAL
Issue 38 Fail 1991
Editor
James J. Bohan
Merrill Lynch
New York, New York
Associate Editors
John R. McGinley Michael J. Moody, CMT

Technical Trends Smith Barney Harris Upham
Wilton, Connecticut Los Angeles, California
Manuscript Reviewers
Frederick Dickson, CMT David Upshaw, C.F.A., CMT

TDA Capital Waddell and Reed Investment Management
Westport, Connecticut Shawnee Mission, Kansas
Richard Orr, Ph.D. Anthony W. Tabell

John Gutman Investments Delafield, Harvey, Tabell
Lexington, Massachusetts Princeton, New Jersey
Henry 0. Pruden, Ph.D.

Golden Gate University
San Francisco, California
Printer Publisher
Tritech Services Market Technicians Association
New York, New York 71 Broadway, 2nd Floor
New York, New York 10006
MTA JOURNAL /FALL 1991 1

MARKET TECHNICIANS ASSOCIATION, INC.
Member and Affiliate Information
ELIGIBILITY: REGULAR MEMBERSHIP is available to those “whose professional efforts are

spent practicing financial technical analysis that is either made available to the investing public
or becomes a primary input into an active portfolio management process and for whom technical
analysis is the basis of their decision-making process.”
AFFILIATE category is available to individuals who are interested in keeping abreast of the field
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I MTA JOURNAL /FALL 1991

STYLE SHEET FOR THE SUBMISSION OF ARTICLES
MTA Editorial Policy
T~~MARKETTECHNC~SASSOC~~'IONJO~~%NAL ispublishedbytheMarket Technicians Associ-

ation, 71 Broadway, 2nd Floor, New York, NY 10006 to promote the investigation and analysis of
price and volume activities of the world’s financial markets. The MTA Journal is distributed to
individuals (both academic and practitioner) and libraries in the United States, Canada, Europe
and several other countries. The Journal is copyrighted by the Market Technicians Association
and registered with the Library of Congress. All rights are reserved.
Style For The MTA Journal
All papers submitted to the MTA Journal are ences should be put at the end of the article. Sub-
requested to have the following items as pre- mission on disk is encouraged by arrangement.
requisites to consideration for publication:
4. Greek characters should be avoided in the
text and in all formulae.
1. Short (one paragraph) biographical presenta-
tion for inclusion at the end of the accepted 5. Two submission copies are necessary.
article upon publication. Name and affiliation
will be shown under the title. Manuscript of any style will be received and ex-
amined, but upon acceptance, they should be
2. All charts should be provided in camera-ready prepared in accordance with the above policies.
form and be properly labeled for text reference.
Mail your manuscripts to:
3. Paper should be submitted double-spaced if
typewritten, in completed form on 8% by 11 James Bohan
inch paper. If both sides are used, care should Merrill Lynch, No. Tower
be taken to use sufficiently heavy paper to World Financial Center
avoid reverse side images. Footnotes and refer- New York, NY 10281-1214
MTA JOURNAL ! FALL 1991 3

MARKET TECHNICIANS ASSOCIATION
Board of Directors, 1991-92
Officers/Office Manager
President Vice-President/Long Range Vice-President/Seminar

Bruce Kamich Philip Erlanger John Brooks, CMT
MCM Inc. Fidelity Management Davis, Mendel & Regenstein
71 Broadway, 10th Fl. 82 Devonshire Street-N9A 5600 Glenridge Drive, #210
New York, NY 10006 Boston, MA 02109 Atlanta, GA 30342
2121908-4326 6171570-7248 404/252-4008
Treasurer Secretary MI’A Office Manager
Steven Nison, CMT Ken Tower Shelley Lebeck
Merrill Lynch, No. Tower Delafield, Harvey, Tabell Market Technicians Association
World Finl. Center, 21st Fl. 5 Vaughn Drive 71 Broadway, 2nd Fl., c/o NYSSA
New York, NY 10281-1321 Princeton, NJ 08543-5209 New York, NY 10006
2121449-1859 609/987-2300 2121344-1266 FAX: 2121673-9334
Committee Chairpersons
Programs Education Marketing

James Stewart, CMT Ralph Acampora, CMT Ron Daino, CMT
NatWest USA Prudential Securities Inc Smith Barney
175 Water Street, 26th Fl. 1 Seaport Plaza, 23rd Fl. 1345 Avenue of Americas, 27th Fl.
New York, NY 10038 New York, NY 10292 New York, NY 10105
2121602-1732 2121214-2273 2121698-6006
Newsletter Library Computer Applications
Jack Cahn Michael Moody, CMT David Runkle
Cabn/Vince & Company Smith Barney Private Management
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St. Louis, MO 63110 Los Angeles, CA 90071 Salem, OR 97302
3141535-6810 2131486-8901 5031399-7992
Journal Ethics and Standards FutureslFX
James Bohan Philip Roth, CMT Andrew Humphrey
Merrill Lynch, No. Tower Dean Witter Reynolds Aubrey Lanston & Co.
World Financial Center 2 World Trade Center, 63rd Fl. 20 Broad Street, 15th Fl.
New York, NY 10281-1214 New York, NY 10048 New York, NY 10005
2121449-0552 2121392-3516 212/612-1628
Accreditation IFW Liaison Regional
Alan Shaw, CMT David Krell, CMT Phillip (Skip) Becker
Smith Barney, 27th Fl. New York Stock Exchange Bufka and Rodgers
1345 Ave. of Americas 11 Wall Street, 23rd Fl. 425 No. Martingale Road, 11350
New York, NY 10105 New York, NY 10005 Schaumburg, IL 60173
2121698-6296 2121656-2865 7081240-2240
Membership Placement Past President
Mike Epstein Ken Spence Robert Prechter, Jr., CMT
Richard A. Rosenblatt & Co. Salomon Brothers New Classics Library
20 Broad Street, 26th Fl. 7 World Trade Center, 40th Fl. PO. Box 1618
New York, NY 10005 New York, NY 10048 Gainesville, GA 30503
2121943-5225 2121783-3791 4041536-0309
4 MTA JOURNAL /FALL 1991

TABLE OF CONTENTS
Unchanged Stock Indicator The New York

NYSE Unchanged Stocks: Stock Exchange
Trash or Treasure?. . . . . . . . . . . . .12 Bullish Percentage
Kenneth G. %wer Few technical analysts Index . . . . . . . . . . . . . . . . . . . . . . . . . . . ...* 28
have given consideration to unchanged issues James D. Anderson The Chartcraft group
in computing various market breadth indica- and Abe Cohen have been innovative in
tors. The significance of unchanged issues has their use of point and figure analysis which
remained obscure and the data has not gained is one of the oldest technical approaches.
widespread use as an indicator. Ken Tower James Anderson has applied decision rules
provides us with guidelines on how un- to The New York Stock Exchange Bullish
changed issues can be used to improve market Percentage Index, originated by Chartcraft.
timing, utilizing daily data from 1946.
Two Steps Forward The Influence of

and One Step Back: Geomagnetic
The Congestion Phase Fluctuations
Charting System . . . . . . . . . . . . . . . .23 on Market
Fred Gehm In the last twenty years or so, Momentum. . . . . . . . . . . . . . . . . . . . . . . .31
trend following has become the dominant James E. Astroanalysis has
Casebeer
trading technique. There have been few docu- gained favor as a method for analyzing the
mented cases of success while in a trading markets. Analysts, however, often fail to
range environment. Because the markets provide a rationale for the approach which
spend a majority of the time in a non-trending can detract from credibility. William
mode, however, there should be opportunities Casebeer establishes the effect of changes
for successful trading. The literature has not in the earth’s electromagnetic field on the
ignored the topic and Fred Gehm’s explora- environment and the human psyche, show-
tion of Eugene Nofri’s techniques should ing the potential for influencing market
stimulate further interest. activity.
MTA JOURNAL I FALL 1991 5

Using the Membership and
McClellan Oscillator Affiliate
for Bond Market Information.. . . . . . . . . . . . . . . . . . . . . . . .2
Timing . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
Bob Kargenian The McClellan Oscillator
has gained popularity as a momentum indi-
cator and has been included in popular soft- Style Sheet for the
ware packages. Bob Kargenian has developed Submission
a McClellan bond oscillator by substituting of Articles . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
breadth on New York Exchange Bonds for
breadth on the New York Stock Exchange.
The techniques explored should be an aid to
timing the bond market.
MTA Officers and
Committee
A New Dimension Chairpersons.. . . . . . . . . . . . . . . . . . . . . .4
to Risk Assessment.. . . . . . . . . . .42
Victor Sperandeo Victor
and Terry Brown
Sperandeo recently spoke to the MTA at a
Editor’s
monthly meeting in New York. His com-
ments were reviewed in the November Commentary . . . . . . . . . . . . . . . . . . . . . . .7
Newsletter. Victor provided a candid view of
his methodology in trading markets which
emphasized calculating probabilities before
taking action. We have reprinted his han- MTA
dout, “A New Dimension to Risk Assess- Annual Seminar
ment”byVictorSperandeoand Terry Brown,
with the permission of TraderForum, a pro- Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
duct of the Insitutional Investor. David H. Weis

Editor’s Commentary
by James Bohan, Editor
The MTA Journal and Accreditation Committees Types of Articles

held a workshop on writing an article for the Candidates should try to choose familiar topics
Journal at the 1991 seminar in Santa Barbara. The in which they have a degree of proficiency. If that
Journal committee was represented by John is not possible, they should try to choose an area
McGinley, Mike Moody, Tony Tabell, Hank Pruden of strong interest. Articles written primarily to ex-
and Jim Bohan. John Brooks represented the press opinions or forecasts of market action are not
Accreditation Committee. What follows is the sub- acceptable.
stance of the comments and suggestions they made. A glance at any recent issue of the MTA Journal
Anyone can submit an article for the Journal. will provide an idea of the wide variety of articles the
For those entering the CMT program in 1991, Journal accepts. The following classification of arti-
however, a paper publishable by the Journal is a cles (taken from the Publication Manual of the
requirement for level 3 of the accreditation process. American Psychological Association, third edition) is
Those entering the program earlier still have the designed to give information on the main types of
option of writing a paper or taking level 2 of the articles the Journal typically prints and suggestions
CMT examination. A CMT article must be passed for how to arrange the parts of a manuscript. Journal
by the Accreditation committee and must be ap- articles are typically research articles, although we
proved for publication in the Journal. Consequently, encourage review articles and theoretical articles as
the requirements for a CMT paper can be more rigid well.
than a regular Journal article.
If a CMT paper is not approved by the Accredita- Research articles present original research. They
tion Committee the candidates have several choices. generally have the following sections:
They may make revisions and resubmit it for ap-
1. The Introduction states the purpose of the research
proval within six months. They may also decide to
or the test procedure and briefly summarizes the
submit a new paper. Alternatively, while a paper
background of the problem or question.
may not fulfill the requirements of the CMT
2. The method describes precisely the manner used
Accreditation Committee, it may still be suitable
to examine the problem.
for publication as a regular Journal article.
3. A results section summarizes the findings.
The workshop was designed to provide as much
4. A discussion section interprets the results and
information as possible about the steps involved in
discusses their implications. It is helpful if both
submitting a paper, from selecting a topic to sub-
positive and negative results are discussed, as
mitting a final draft. The initial step for a CMT
well as the limitations of the procedure.
candidate should be the submission of an outline.
The committees will then be able to offer commen-
Review articles are discussions of previously pub-
tary on the topic, it’s suitability and on the approach
lished research in which the author examines the
the candidate is taking. Choosing a topic or ap-
progress of the research toward clarifying or resolv-
preach which is not acceptable will likely result in
ing an issue. They generally have the following
a wasted effort. The process will also help clarify
sections:
and organize the candidate’s thoughts. We cannot
stress this first step too much. It usually saves the 1. An introduction which defines the research
candidate making extensive revisions to the paper problem in question.
and saves the review boards considerable time. The 2. The overview summarizes previous research to
outline should be as complete and detailed as possi- show the current state of the issue.
ble. The outline on page 9, submitted by John 3. The analysis discusses the results of previous
McGinley, can serve as a guide. research, taken as a whole, including interrela-
MTA JOURNAL / FALL 1991 7

tionships, overlaps, contradictions, gaps, and If you make your points succinctly, there is no
inconsistencies. reason why an article can’t be short. A long-winded
4. The discussion suggests possible future steps piece is of no use if it doesn’t show us anything.
toward solving the problem or resolving the issue. Sophisticated testing is not always required, but
it could enhance a paper and improve the chance of
Theoretical articles are generally presentations acceptance. If you are making claims you should be
of an original theory, or significant modifications able to back them up.
of existing theory. The author develops the back-
ground observations out of which the theory grew Evaluation
and discusses the significant implications of the new An evaluation is made when the paper is first
theory. This type of article is usually much more received. Some papers are straightforward and the
important and useful when it can be combined with committees are able to come to a quick conclusion.
a research article, so that it has testable results. Others are missing one or more elements and more
As a result, theoretical articles generally have the extensive changes are required. When the quality
same sections as research articles. of the work, the complexity of the topic, or the
suitability of the paper is a consideration, the com-
Suggested Approach mittee chairman will draw on the expertise of other
The approach taken can be as important as the members of the MTA. It is a rare paper that is not
topic It would probably be better to do a thorough returned at least once for some rewriting. Some
job on a narrow area than to do a superficial job papers need extensive modification while others
on a broad topic. Consider stating a problem to be need only minor changes. If the candidate does not
solved. The problem could range from ambiguity or agree that the suggested changes should be made,
controversy surrounding a concept or an indicator he or she can request that the paper be reviewed by
or to a method of investment. the MTA Board of Directors, which will act as the
If you select a topic that is original your research final arbiter.
methods could be exploratory, your evidence only In all cases, CMT charters are granted by the
sketchy. On the other hand, if you are dealing with MTA Board after reviewing all relevant matters in-
a popular topic in which a body of research has been cluding the recommendations of the joint Accredita-
built up, rigor and thoroughness will be an impor- tion and Journal Committees. The CMT designation
tant criteria. What is the incremental or added value will be granted only to regular members of the MTA,
of your research? and professional members of other IFTA societies.
In your introduction you should state to whom Affiliates or non-members who successfully complete
the article would be of interest and why. The review the CMT program will be notified, but they cannot
committee will be concerned with the scope of your use the CMT designation. An affiliate or non-
research and your methodology in testing and member who successfully completes the CMT pro-
gathering data. It should lend credibility to your gram and later becomes a regular member of the
conclusions. MTA, will be awarded the CMT designation. If a
The presentation and interpretation of the data paper is to be published, it will be at the earliest
including graphs and statistics will be evaluated. convenience of the Journal editor.
Present the findings in a reasonable, logical and
persuasive manner, but without undue salesman- This Month’s Articles
ship. Adequate interpretation of the tables in your The first five articles in the current Journal
text is important. Do not expect your illustrations were submitted to fulfill the CMT II requirement.
to be self evident. Interpret them for your reader: The CMT candidates have been approved by the
point out the connections between the data and the Accreditation and Journal Committees and their
original problem or hypothesis as you go along. names will be submitted to the MTA Board at the
The summary and conclusion is a critical part December meeting. The articles cover a wide range
of your research paper. Often your reader will skip of topics and show some of the approaches being
right to this section. Recapping the article may save taken to technical analysis. In addition to qualify-
your reader time and effort. Or, you may make your ing members and helping them attain new skills,
summary and conclusion short and force the reader a key aim of the CMT requirement to publish is
to review the article. to provide the membership with useful research.
State the significance and direction of your The editors are seeking a blend of academic and
findings, who might use it and how they might use professional articles to give the Journal balance.
it. If appropriate, provide ideas for further research. Continued on page 9
8 MTA JOURNAL ! FALL 1991

Editor’s Commentary continued
McGinley Dynamics - Volatility Version
A. Introduction c) Tracks with Exp. & MA in trending

markets
B. Background on Moving Averages, d) Diverges from MA’s and Exp. in trading
Exponentials, Power fits, etc. markets
e) No large drop-off problem
1. Calculations f) Unlike Exponential, can rise with
a) MA falling data
b) Exponential g) Requires less back data
c) Power fits
4. Comparison with MA’s and Exponentials
2. Uses
a) Charts of all three
a) Smooth b) Explanation of charts
b) Calculate parameters on which to base
indicators 5. Remaining Problems with Dynamic
1) Bollinger Bands, Etc. a) Missing volatility input
b) Should react to changing markets faster
3. Benefits MA’s c) Not enough different from an exponential
a) Smooths data
b) Can rise in the face of falling data
c) Can be used in calculation of Std. D. Introduction of Volatility-Driven McGinley
Devs., etc. Dynamic
1. Discussion of volatility
4. Problems MA’s a) Various calculations, definitions
a) Static width (e.g. lo-days) b) Reasons for choosing this method of
b) Large drop-off calculation
c) Whipsaws 1) KISS
d) Is left behind when market speeds up 2) Effectiveness
5. Benefits Exponentials c) Others more complicated, probably work
as well
6. Problems Exponentials
2. Calculation of Dynamic, volatility-driven
7. Suggested areas for improvement a) Equation
a) Should avoid whipsaws to great
degree 3. Explanation of calculation
b) Should change speed as market 4. Additional benefits
does a) Tracks trending markets
c) Must be able to rise as market falls b) Avoids trading markets
and vice versa
d) Should be relatively easy to calculate 5. Comparisons of Dynamic, MA, and
Exponential
C. Introduction of McGinley Dynamic a) Charts
1. Calculation b) Explanation
a) Equation
E. Uses of Volatility-driven Dynamic
2. Explanation of calculation 1. As better smoothing technique
a) Second term only effective if divergence
large 2. With Bollinger Bands
b) Explanation of Constant N 3. In statistical parameter calculations
1) Can be set tight, loose
2) How to calculate 4. Oscillators
3. Benefits of Dynamic F. Summary
a) Speeds up or slows down dynamically
b) Avoids most whipsaws which catch MA’s G. Bibliography

MTA Annual Seminar Review
by David H. Weis
The MTA held its annual seminar from May 2 by a drunkard’s walk where one of the variables is
through May 5 at the Red Lion Resort in Santa momentum. When traders ask the question “Will
Barbara, California. Presented below is a synopsis the trend continue?’ they are really concerned with
of various lectures from the seminar. In addition to the variable of momentum. When traders ask “Will
the lectures, a number of workshops were held. For the market change today?” they are concerned with
example, the MTA Journal Committee conducted a the variable of direction. The subtle differences be-
workshop on writing and submitting a paper for the tween these two questions are the validation of the
Journal. A journal article is now a requirement of fundamentals behind the existence of cycles.
the CMT program. John Carder and his committee
presented a workshop on computers. Arch Crawford l Theodore Theodore’s discussion, “Charts: Use
conducted a workshop on “Stock Market Astromics” First? or Last?’ dealt with the process of looking at
while Steve Nison held a session on “Candlestick data in pictorial form. Citing the array of data shown
Charting.” The agenda for the 1992 seminar is being on a famous chart of Napoleon’s march to and retreat
developed by John Brooks. It will be held at the from Moscow, Mr. Theodore stressed how pictures
Registry Resort in Naples, Florida from May 14 speed up the flow of information. Although charts
through May 17, 1992. are the main tools of technical analysts, these pic-
tures can be misleading. The major problem with
chart study is seeing what you actually see rather
SYNOPSES OF MTA LECTURES
than seeing what you know or want. To see what
l John Murphy discussed and illustrated the use- truly exists on a chart, an analyst or trader should
fulness of intermarket analysis. By comparing the understand that computers generate graphics with
relationships between the U.S. dollar, the CRB index, a default option to fill the page.
bonds, and the stock market, an analyst can observe
how trend reversals in one sector cause opposite reac- l Style Management, a product of First Quadrant,
tions in other market area. A technician may not is a multi-variable model for portfolio management.
recognize any bearish behavior on a bond chart, for It incorporates a number of common factors such
example, but if the CRB index is showing clear signs as volatility, growth exposure, and trading activity.
of bottoming action, the inference is that interest One of the proprietary factors used in this model
rates will rise thus driving bond prices lower. Inter- is earnings revision. In fact, earnings revision is
market relationships also exist between individual viewed by John Dorian as the single most powerful
commodities and equity groups (e.g. crude oil vs. oil inefficiency. Another proprietary factor is residual
stocks), global stock markets (DIJA vs. FT-lOO), and reversal which represents the tendency of stocks to
commodity group indices. over-react in the short term. For example, among
the utility stocks, one or two issues may outperform
l John Ehlers is an engineer who has captured the the group for a week or two, but they become under-
beauty and magic of cycles in terms of equations, performers in succeeding weeks. Style Management
phaser diagrams, and physics. Yet his mental model also utilizes a 12-month RSI with negative adjust-
is related simply to physical phenomena. For exam- ment to treat a strong tilt toward valuation. The
ple, a trend is seen as a plume of smoke that becomes purpose is to get on board cheap stocks after several
more obscure as it moves further away from its years of lateral movement and when they are begin-
origin. Cyclic activity is compared to a meandering ning to accelerate. The 1Zmonth RSI is particularly
river. It is described by the periodicity of waves powerful when the most recent price action is
traveling up and down a telegraphic wire. The ran- negated. One to four weeks of price movement can
domness that exists at times in markets is depicted be negated in order to filter out the tendency of
10 MTA JOURNAL! FALL 1991

stock prices to over-react during a short period of l Henry Pruden’s lecture on “Organizing Yourself
time. for Effective Decision Making” was subtitled, “A
Sealed Room and Only One Client.” Speaking meta-
l Stan Lipstadt of PSM Investors moderated a phorically, a trader or analyst should create a
fascinating panel on mutual fund switching. The “place” for independent thought. This sealed room
first speaker, Paul Desmond of Lowry’s Report, deliv- is modeled after the space created by John Magee
ered an informative talk on the history of switching. for thinking about the market without the sound of
This discussion covered the original concepts of Peter other voices and the confusion of facts. Such a
Sholley in 1932 that ultimately evolved into what physical or mental retreat should become a place for
are known today as the Keystone Funds of Boston; independent thought; a place for viewing your
the scandal in the 1950’s surrounding the activities technical efforts from a client’s perspective; to
of Bernie Cornfeld; Milton Mound’s First Multifund develop an image of both yourself and your client
of America that was the first fund that invested in growing and prospering together.
mutual funds; the creation in 1971 of the Reserve
Fund of New York that provided the first money
market fund although originally for excess corporate
capital. Philip Verrill of Palace Financial Services David Weis is the editor and publisher of Technical
Forces, a monthly financial market letter that utilizes
spoke from the point of view of a mutual fund vendor the analytical methods of R.N. Elliott and Richard
and stated, forthrightly, that the “statement that Wyckofi From 1983 to 1987, Weis edited the Elliott Wave
market timing eliminates 50% of market risk is Commodity Letter which was published by Robert
F’rechtel: Weis joined the Technical Research Department
wrong.” For example, a fund with 1.0 Beta and with of ContiCommodities in 1971 and later served as its
a strategy of being in T-bills 50% of the time is still Director He has written numerous articles on technical
faced with a 100% risk when in the market. The analysis and is the author of an Elliott Wave workbook
entitled Trading with the Elliott Wave Principle, A
problem with market timing programs is that costs Practical Guide. David Weis holds degrees in English
exceed early projections and 25% of the time the ap- Literature
proach does not work. Tom Weaver of Davis, Weaver,
and Mandel spoke on the fees inacted by mutual
funds that penalize timers and therefore diminish
the opportunity for free switching. He recommends
selecting funds on their performance and to take
timing decisions out of funds through hedging with
futures and options. In this light, Dan Ryczek of
Rushmore Funds demonstrated the performance of
his NOVA portfolio that is geared to S&P 500 futures.
l Robert Arnott gave an eloquent presentation on

portfolio management through a tactical asset allo-
cation strategy used by First Quadrant. Tactical
asset allocation is based on a fundamental under-
standing of the market mechanism. For example,
close attention is given to the ratio between earn-
ing yields on stocks and yields on T-bills. Actions
are taken when the ratio falls below parity and
when earnings rise 1.33 x T-bill yields. In addition,
the ratio of bond yields to T-bill yields plays an im-
portant role. Here again, the appropriate action is
taken when ratio falls below parity and when the
ratio reaches 1.33 to 1. These fundamental mech-
anisms produced great aggregate results but were
not designed to pick tops and bottoms. These are
some of the relationships that show when markets
are priced to provide unusual opportunity or risk.
Since 1973, portfolios utilizing this approach have
suffered only one year of negative returns.

Unchanged Stock Indicator
NYSE Unchanged Stocks: Trash or Treasure?
by Kenneth G. Tower
Introduction October 22,1949. The lowest 5% of values were those

The number of New York Stock Exchange (NYSE) below 12.7%, the next 5% were between 12.7% and
issues which trade but close unchanged in price from 16.7%. Testing these for significance over time
the previous day can provide valuable information periods ranging from 1 to 126 days yielded informa-
about the overall market trend. Sharply falling tion of little practical use. The lowest values showed
levels of unchanged stocks have signaled nearly all a very slight bullish significance, while the next
significant market bottoms since 1946. It is impor- lowest values were quite bearish. This type of out-
tant to contrast “sharply falling” with “low levels” come, where results vary dramatically over adjacent
of unchanged stocks because the “normal” level of clusters of data, produce unreliable results and are
unchanged stocks varies over time. It is this obser- best discarded. These findings are similar to those
vation which distinguishes this analysis from earlier of Colby and Meyers as published in The Encyclo-
research. pedia Of Technical Market Indicators. They tested
the thesis that the level of unchanged stocks “. . .
Background seems likely to be relatively low prior to a bottom
Few indicators use, let alone rely on, the number and relatively high preceding a market peak.“’
of unchanged stocks. Standard stock market indi- Instead they found that they “. . . tended to be
caters such as the 10 day advance-decline oscillator, bearish at low readings and bullish at high readings,
cumulative advance-decline line and the ARMS which is the exact opposite of popular expectations.“*
index, all ignore unchanged issues. Unchanged
stocks are rarely mentioned in market recaps, 100 Day Average
whether in print, on the radio, or television. The Plotting a 100 day moving average starting in
market is commonly described as having x issues up 1946 revealed surprisingly dramatic long term
and y issues down. Yet the change in the level of un- swings in the number of unchanged stocks from year
changed stocks, has signaled the vast majority of to year (see Chart 2). Values ranged from 13.7% to
market lows since 1946. 27.1% of issues traded with a mean value of 20.6%.
The spring of 1986 found Alan Shaw and I The moving average tended to spend long periods in
preparing to make a presentation on cumulative the high or low range of values rather than
breadth before the Market Technicians Association’s oscillating rapidly between high and low. For exam-
Annual Seminar in Boston. We had identified six dif- ple, the average was above the mean from mid 1947
ferent methods of constructing a cumulative breadth through 1954, below the mean from 1959 through
index. Five of the six methods we studied yielded 1962, again below the mean from mid 1965 through
similar results, only (advances-declines)/unchanged early 1974, etc. Testing the rising, or falling, trend
differed. This technique was a favorite of Anthony of the moving average offered no immediate promise.
Tabell having been passed on by his father, Edmund. Attempts to construct a useful indicator based on
Why should dividing by the number of unchanged high and low levels failed.
stocks result in such a difference? Didn’t the number Nonetheless, the wide variation in the 100 day
of unchanged stocks simply fluctuate randomly moving average was startling. I had imagined a long
around some central value? term smoothing would result in a fairly level line.
Perhaps, given the wide fluctuation, low values
Initial Analysis should be analyzed in relation to the current long
A graph of the daily number of NYSE unchanged term moving average of unchanged stocks (the “nor-
stocks resembles a seismograph recording an earth- mal” level). The daily ratio of unchanged stocks to
quake (see Chart 1). Since 1946 values have ranged issues traded was divided by its 100 day moving
from a low of 2.6% on October 19, 1987 to 36.1% on average. This is the Tower Unchanged Ratio NYSE

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16 MTA JOURNAL I FALL 1991

(TURN). Interesting results appeared immediately. excellent results, particularly a 21 day moving aver-
Clusters of low values appeared around image (BlDMA, see Table2 and Charts 9 through 14). A
portant market lows. A five day moving average longer moving average is useful for identifying major
(5DMA) of the daily ratio further isolated mean- market lows, and may be used in conjunction with the
ingful signal periods. Analyzing data from January 5DMA to refine the entry point during a selling cli-
2, 1946 through April 26, 1991 (see Table 1 and max. Results using the 2lDMA began to show statis-
Charts 3 through 8) shows that the average three tical significance after only 10 trading days continu-
month holding period (63 trading days) would see ing through 253 (approximately 1 year). The peak
the Dow Jones Industrial Average (DJIA) up 61% significance appeared to be around 82 days with a chi-
of the time, rising an average of 1.74%. On 253 of square reading of 140 for readings below .880 (2.9% of
those 11,599 trading days (2.2%) the 5DMA of all values). Over the ensuing 82 trading days the DJIA
TURN was below 81. Had one bought the DJIA was up 91.98% of the time versus. 62.28% for all peri-
on those days, and held it three months, it would ods,the average advance of 7.39% was triple the 2.28%
have been up 77% of the time, rising an average average for all periods. Once again the lowest 10% of
of 4.6%. The chi-square3 of 27 suggests that the all values provided significant predictive ability.
chance of similar results being arrived at randomly
Table 2
is less than 1 in 10,000.
2lDMA of Tower Unchanged Ratio NYSE (TURN
82 day look ahead, (Xi-Square analysis
Table 1 January 2, 1946 through July 13, 1989
5DMA of Tower Unchanged Ratio NYSE (TURN)
63 day look ahead, Chi-Square analysis TURN # of % of Prob of Chi Avg %
January 2, 1946 through April 26, 1991 ZlDMA observations total up mkt. Square Change
> ,906 < .933 551 5.0 69 10.49 3.9

# of % of Prob of Cbi Avg %
> ,880 < .906 226 2.0 86 53.42 7.5
TURN 5DMA observations total up mkt. Square Change
r.641 <.880 324 2.9 92 121.64 7.4
> ,867 < .924 930 8.0 66 10.66 2.3
all data 11,131 100 62 0 2.3
>.810 < .867 344 3.0 69 10.36 3.5
>.32 <.810 253 2.2 17 27.44 4.6
Another way of examining the record of this in-
all data 11,599 100 61 1.7
dicator is to check the most recent times that low
values have been registered. The last 10 buy signals
A 5DMA TURN value below 81 occurs when the
(the first day that the 21 day average fell below .88)
five day moving average of unchanged stocks is 19%
are shown in Table 3.
lessthan the 100 day moving average. By calculating
the indicator as a ratio of two moving averages it is Table 3
possible to eliminate the step of dividing the daily
data by the number of total issues, which was only DJIA 82 days
Date DJIA later % chg
necessary to correct for the rising number of issues
traded in order to ensure that readings taken over November 16, 1973 891.33 874.22 -1.92
January 23, 1976 953.95 997.27 4.54
long time periods be comparable. This ratio of two
November 1, 1978 827.79 815.84 -1.44
moving averages yields the same type of result as October 19, 1979 814.68 884.98 8.63
a rate of change calculation. March 28, 1980 777.65 918.09 18.06
Further analysis of the 5DMA TURN continued August 24, 1982 874.90 1004.51 14.81
to generate highly significant results for all holding January 9, 1986 1518.23 1775.30 16.93
January 29, 1987 2160.01 2310.68 6.98
periods between 42 and 126 trading days. While
October 20, 1987 1841.01 2000.99 8.69
periods of less than 42 days provided near random August 23, 1990 2483.42 2626.73 5.77
or less significant results. Values between 81 and
average % change 8.10
867 were also highly significant. Values between
.867 and .924 were significant. Thus the lowest Of these 10 signals, only November 16,1973 was
13.2% of values had significant predictive ability. a bad signal, occurring in a pause during the 73-74
The results of these tests are displayed on Chart 15, bear market. The other nine signals were quite
insignificant chi-square numbers have been omitted. accurate, occurring a little early (August 23, 19901,
The chart also illustrates a consistent hierarchy of or a little late (August 24, 1982), but all in the im-
results. Beginning with 42 trading days the lower mediate vicinity of important market lows. A further
the TURN value the more bullish the result. strength of the indicator is its ability to recog-
Smoothing periods other than 5 days also yielded nize low points marked by either a selling climax

Chart 9
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18 MTA JOURNAL / FALL 1991

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20 MTA JOURNAL i FALL 1991

or a buying panic. Traditional analysis concentrates ’ is then followed by months of languid action before
identifying market lows by looking for a selling an explosive up move which marks the end of the
climax. Various indicators, the ARMS index in par- bear market. The bear markets of 1981-1982 and
ticular, are excellent at isolating these periods of particularly 1983-1984 ended in just such a way. As
intense selling pressure. As institutional portfolio the buying panic got under way the number of un-
managers have replaced the individual investor as changed stocks dropped and TURN buy signals were
the prime participant in the markets, the timing of registered (see Charts 13 and 14).
selling climaxes within the market cycle appears to
have shifted. Bear markets which end without a sell- Comparison With Prior Research
ing climax are a recent phenomenon. Before 1978, While I did not recognize it at the time of
classically defined climaxes tended to occur at the discovering the TURN, the theory behind this ratio’s
end of each major decline. More recently, the selling success in identifing market bottoms is described by
climax has tended to occur early in the decline and Norman G. Fosback, in his book Stock Market Logic,
Chart 15
SUMUARf OF CHc8QuARED SK3NUXXMCE TESTS FOR TURN (SMM)

S-TARTlXTEJAN2lW3 E?4DDATEJAN25lS’I
T
-I

where he wrote that “. . . the Unchanged Issues In- If there is a weakness in this analysis it is the
dex [the number of unchanged stocks divided by total exclusion of data prior to 1946. While low levels of
issues traded] tends to be low . . . near market bot- unchanged stocks did mark the major lows during
toms.“4 Fosback, however, did not test this indicator, this period, there were a number of inaccurate
instead presenting “. . . an approximately com- signals recorded. This period is excluded because
parable indicator. . .“5 the Absolute Breadth Index, there are many characteristics of the late 1920’s and
which attempted to observe the same phenomenon 1930’s markets which have not carried through into
by examining advances and declines (rather like the post World War II period and because the sam-
listening to Al Jolson for soul music). The original ple size remains very large (45 years) even without
theory, that unchanged stocks would be low at this period.
market bottoms, was tested by Colby and Meyers. Additional work remains to be done to refine the
Their test results are at odds with those presented timing of the actual entry point during selling
here because: 1) they defined low values as relative climaxes and testing for the same phenomenon in
to the entire range of values, rather than low com- other markets CASE, NASDAQ, Japan, etc.). Rigor-
pared to the recent “normal” level, and 2) they in- ous testing over diverse market environments
cluded data from 1928-1946 when the indicator did strengthens confidence that the TURN indicator will
not work as well. Why the indicator does not work continue to signal important market lows in the
as well in the 1930’s is a mystery. There are, however, future. While no single indicator is perfect, a low
a number of characteristics of the 30’s which did not TURN can be relied upon to signal important
extend into the post-war markets. market lows.
Another technician who did early research on
unchanged stocks was Walter A. Heiby. In his book
FOOTNOTES
Stock Market Profits Through Dynamic Synthesis he
1. Colby, Robert W. and Meyers, Thomas A. The Encyclopedia Of
presents a wide variety of indicators. His Unchanged Technical Market Indicators. Dow Jones-Irwin, 1988, 500.
Issues Index, along with several others, were 2. Ibid.
calculated by dividing the data’s range over the past 3. Chi-square is a simple test for significance. While a detailed
50 trading days into quartiles. In this sense he was explanation may be found in any standard statistical textbook
examining the data on a relative basis. However, he a simple explanation is aa follows; The Chi-square test compares
actual results to expected results in an attempt to determine the
did not use the indicator alone but as a confirming probability that the actual result might have occurred due to pure
component in his Advance-Decline Quartile Diver- chance. The higher the number the less likely it is that a result
gence Syndrome. No other analysis of unchanged could be arrived by chance.
4. Fosback, Norman G. Stock Market Logic. The Institute for
stocks could be found. Econometric Research, 1976, Eighth Printing March 1984,125.
5. Ibid.
Conclusion
Low levels of unchanged stocks are an excellent
indicator of future market direction. The key factor BIBLIOGRAPHY
in this analysis, the one that differentiates it from Heiby, Walter A. Stock Market Profits Through Dynamic Syn-
the earlier work done by Fosback and Colby & thesis. The Institute of Dynamic Synthesis, 1965, pgs. 219,
257-263.
Meyers, is the finding that different markets have
Fosback, Norman G. Stock Market Logic. The Institute for
unique “normal” levels of unchanged stocks. It is Econometric Research, 1976, Eighth Printing March 1984, pgs.
from this “normal” level that relative values should 124-125.
be calculated. The basic tenet, that volatile market Colby, Robert W. and Meyers, Thomas A. The Encyclopedia Of
periods tend to occur near market bottoms and that Technical Market Indicators. Dow Jones-Irwin, 1988, pgs.
500-504.
low levels of unchanged stocks are one sign of a
Merrill, Arthur A. Behavior Of Prices On Wall Street. The
volatile market, is upheld. Analysis Press, 1966, pgs. 3, 4, 164, 165.
The indicator is able to highlight low points
signaled by either a selling climax or a buying panic
Low TURN values often occur in tandem with
extreme advance-decline oscillator readings. These Kenneth G. Bwer has been a Technical Analyst and
low advance-decline oscillator readings, however, Account Executive with Delafield, Harvey, Tabell,
since 1979. A member of the MTA
occur much more frequently than low TURN values, contributor to the MTA Journal, and currently serving
particularly in bear markets. In fact, a similar
analysis of extremely low advance-decline oscillator
readings suggests that these readings are a bearish
forecast.

Two Steps Forward and One Step Back:
The Congestion Phase Charting System
Fred Gehm
The trader or investor who wants to use a tested period, keeping the former opposite limit
investment method has many to choose from. These as the boundary of the new congestion?
methods may be well or poorly tested, but at least And,
some data is available Unfirtunately, fir the chart&,
few of these methods are chart based. An exception Before trading in the new congestion
to this rule is the Congestion Phase System. period, plot seven days closing prices from
the new top or bottom to make sure the
Introduction price is stabilizing in a congestion!
The Congestion Phase System is a chart-based sys- If the rule just presented is not followed, then in
tem developed by Mr. Eugene Nofri and described Exhibit 1, action could be taken as early as Point
by Mr. Nofri and his daughter Jeanette Nofri Stein- D, two days after the bottom is formed. If the new
berg. The system is designed to take profits in non- rule is followed, then action cannot be taken until
trending markets? The system has two parts. Point E, seven days after the bottom.
First, a certain price pattern, to be described Second, when the market is in a congestion
shortly, indicates that the market has entered a phase, action is taken in the direction opposite that
“congestion phase,” Mr. Nofri’s term for a nontrend- of very short term trends. These trends are indicated
ing or sideways market. The Congestion Phase Sys- by 32 chart patterns. Sixteen of these patterns are
tem considers closing prices only. Mr. Nofri writes, used to take long positions or exit short positions.
Sixteen of them are used to take short positions or
When a high or low price in your chart is not exit long positions. If these patterns are used by
broken through by subsequent closing prices, themselves, then positions taken are closed out the
and are both immediately followed by two next day. These patterns can also be chained to-
consecutive closing prices in the opposite gether in complicated patterns.
direction, the commodity can be said to be in Two patterns will be described. The 30 remain-
a period of market congestion. ing will not. Nor will the ways the patterns can be
Until either the top or the bottom boundary combined be described. These are beyond the scope
of the congestion is broken through by subse- of the article. The general principle, however, will be
quent price it is in a period in which Conges- described. As the reader might guess, these positions
tion Phases can be used? are mirror images of each other. Less obviously, these
patterns are all minor variations on a theme. In gen-
In Exhibit 1, Point B indicates the top of a Con-
eral, as Mrs. Steinberg writes, “When the price of
gestion Phase. Point A does not indicate the top of
any commodity (but especially the grains) is closing
a Congestion Phase because the price dropped for
lower (or higher) for the second day in a row, you buy
only one day following the top rather than the
(sell) it on the close, expecting it to close higher
required two days. Point C indicates the bottom of
(lower) on the third day, which is when you close out
a Congestion Phase.
the trade.“5
Mr. Nofri adds two additional rules that may fil-
ter out some pseudo congestion phases.
The System’s Properties and Attributes
On occasion, a price may break through the The Congestion Phase System has at least six
top or bottom of a congestion and then interesting properties; many of these are far from
reverse with two consecutive days back into obvious. These are:
the congestion within two or three days. If First, the system is relatively obscure. This
this happens, use the new high or low price means that the system’s signals are not likely to be
as an upper or lower limit of a new congestion discounted.

Exhibit 1
Closing Prices only. Each dot represents one day.
It is, of course, of some importance why the sys- There is nothing in Mr. Nofri’s book that a trend
tem is obscure. As noted, the system was developed follower would necessarily disagree with, if he or she
by Eugene Nofri and described by Mr. Nofri and his read the book and thought about it. To the contrary,
daughter Jeanette Nofri Steinberg in their appar- if the techniques in the book work, trend-follow-
ently self-published book Success in Commodities. . . ers can use them to identify markets where trend-
the Congestion Phase System. An article about the following methods are more likely to work than
book was published in Commodities Magazine (later otherwise. But someone who is dogmatic about
Futures Magazine) in 1975, about the time of publi- trend-following, as opposed to someone who just uses
cation and the year after Commodities Magazine it to trade, is not likely to do so.?
published a book review. In 1980 a second article on Second, many investment methods have been
the method was published in Commodities Maga- tested over the years. In fact there is a small group
zine. For a time the book was widely advertised and, of people, myself included, who make their living
if my experiences are typical, the method was wide- testing investment methods. Perhaps not surpris-
ly talked about. Now, fifteen years later, the situa- ingly, not all methods are equally vulnerable to test-
tion is different. The book is out of print and, if my ing. Trend following methods are relatively easy to
experiences are typical, few traders know about it. test, for example. Charting methods are not. To the
One possible reason why the method is no longer contrary, while there is a large literature claiming
in favor is that the method is, in part, a trend-fight- tests of charting methods, the methods actually test-
ing method and such methods are not stylish. To the ed bear little relationship to the methods chartists
contrary, it is trend-following that is stylish. Notice actually use.8 This is not because the people perform-
the popularity of slogans such as, “The trend is your ing the tests are unskilled or unaware of the meth-
friend.” Notice also that many technical approach- ods chartists actually use, but because the problems
es are sold or presented as trend-following methods are quite difficult.
when in fact they are not. For example, one of John Be that as it may, the Congestion Phase System
R. Hill’s books on charting is titled, Stock and is sufficiently objective so that a method can be test-
Commodity Trend Trading by Advanced Technical ed that is quite close to the method described? This
Analysis! is a more important virtue than might first appear

obvious. If the method actually works it might chance of a move up or down on each day and an up
provide a source of information that other tested move on days 1 and 2, the Theory of Runs predicts
methods, say, trend-following or indicator-based a 50% chance of an up move on day 3J5
methods, do not provide.
Third, Mr. Nofri’s and Mrs. Steinberg’s claim Method
that 75% of the trades are profitable. Presumedly, There are no published studies of this method
wins and losses are about equal. This is a more im- other than the authors’. Donald L. Jones checked
portant virtue than it would seem. Many traders be- the specific examples in the book and states that,
lieve that the win/loss ratio is more important than “. . . the author’s claim of 75% profitable trades was
the percentage of winning trades but mathematical verified,“16
analysis indicates that this is not the case?O As is the case with most charting methods, the
Fourth, a Congestion Phase is supposed to be a Congestion Phase System is impossible to test as is.
nontrending market but this is not quite the case. There are too many rules and the rules are too vague
Donald L. Jones writes, “In a 1973 soybean contract, to program. Fortunately, if three adaptations are
for example, one congestion phase was more than made, the method is relatively easy to program and
$1.50 wide. A lot of trending can take place within test. First, the rule that if a price breaks through
boundaries that wide.“” a congestion phase top or bottom and then reverses,
Fifth, there is no logical place to put intraday the congestion phase should be redrawn, has been
stops. To the contrary, as the system is based on ignored. For technical reasons, this rule would be dif-
closing price movements only, such stops are a viola- ficult to program. Ignoring this rule will decrease
tion of the logic of the system. But this means that the sample size but sample size is not a problem. It
there is no reasonable upper limit to losses. Even if should not bias the results.
75% of the trades are winners, an occasional large Second, rules concerning what counts as a price
loss can bring ruin. change have been ignored. Mr. Nofri and Mrs. Stein-
If stops cannot be placed logically they must be berg note, “. . . if the price ever closes s-cent or less
placed arbitrarily. Mrs. Steinberg suggests, “. . . points from a previous day’s close it should not be counted
to place stop-loss orders are at the top and bottom as a day’s move.“17 Except ifit occurs in, “. . .a conserv-
of the congestion area. There’s nothing wrong with atively-moving market when %-cent moves are a
using stops within the congestion space, though, daily happening? Also, “In a market characterized
utilizing a percentage-of-margin guideline, or by very small daily price changes, a limit move in one
something like it.“12 day is considered to be two days’ worth of movement
Sixth, there is no obvious theory behind the and, therefore, can be used as a two day Phase.“ls
method. On the positive side this means that there Obviously, these rules apply only to the grains. Worse,
is no reason why the method should not work with there is no obvious way of making them objective. On
other investments, such as stocks. On the negative the other hand, there is no reason to believe that
side, if it is not clear why a method works it is not ignoring these rules will bias the study.
clear when it will fail. Third, only the most basic two day patterns will
Two theoretical claims have been made for the be tested. The other patterns are not sufficiently
system but neither holds up. Nofri and Steinberg precise to test. For example, pattern number 2 is a
suggest that, “If a commodity’s price has gone up large close-to-close drop in price followed by a small
yesterday, some traders who are long will take their close-to-close drop in price. Pattern number 6 is a
profit today, and other traders will take a short posi- small close-to-close drop in price followed by a large
tion, causing a reaction when there is more selling close-to-close drop in price. But what precisely is a
than buying.“13 But the fact that profits must even- large or small drop in price. As all the other patterns
tually be taken does not mean that the charting pat- are variations on this theme, this should not bias
terns presented can be traded on. results. At worst it will decrease sample size.
Perry Kaufman argues that the mathematical The system was programmed in SASzo and test-
Theory of Runs supports this method, especially the ed on three data series picked more or less at random:
claim of 75% profitable trades. He states that, “If wheat from April 1, 1968, gold from December 31,
there is a 50% chance of a move either up or down 1974 and the S&P 500 from April 21,1982 to, in all
on day 1, there is a 25% chance of the same move three cases December 30,1988 inclusive. Continuous
on the next day, and a 121/2% chance on day 3.“14 Un- contracts were used?l
fortunately, the probabilities can only be calculated
if the run length is specified before the run begins. Results
In other words, assuming independence and a 50% Results are summarized in Exhibit 2. For wheat

Exhibit 2
Commodity Wheat Gold S&P 500
Start Date lApr68 31Dec74 21Apr82

End Date 30Dec88 30Dec88 30Dec88
Average Price Change -0.005 -0.069 0.065
Average Absolute Price Change 3.692 3.884 1.178
Number of Long Trades 1081 583 233
Number of Short Trades 1036 588 304
Average Profit Per Trade Long - 0.062 -0.478 -0.411
Average Profit Per Trade Short 0.320 0.540 -0.057
Average Change After Long -0.062 - 0.478 -0.411
Standard Deviation -5.509 - 7.307 -6.144
Average Change After Short -0.320 -0.540 -0.057
Standard Deviation 5.322 6.426 2.510
T-Test (Variance Unequal) 0.272 0.878 0.273
T-Test (Variance Equal) 0.272 0.878 0.228
-
and gold, the system generates profitable sell signals that the system as presented does not work. This sug-
but not buy signals. For the S&P 500, both types of gests that either the analysis is wrong at least in parts
signals were unprofitable. Statistical analysis of or that the system could be made to work by one or
price changes following system signals confirm this. more modifications. The research I have done to date,
In none of the three cases did a T-test indicate a stat- all of which is presented, does not give much hope.
istically significant difference between the price Nevertheless, there are at least five possible
change following a buy signal as opposed to the areas of further research. First, the rule for identi-
change following a sell signa1.22 Results were the fying congestion phases could be corrected for the
same whether the variances were assumed to be simplifying assumption described above. It is quite
equal or notF3 Considering that 3,825 trades were unlikely that this will change the results, but it is,
generated, results are not likely to be a fluke. perhaps, possible.
It is reasonably certain that the system as pre- Second, the other 30 chart patterns could be in-
sented does not work. It is possible that the system vestigated. It is possible, although unlikely, that by
can be made to work by a skilled chart analyst or using the full spectrum of chart patterns profits can
a trader with an intuitive feel for the market. Quite be produced.
possibly Mr. Nofri was such a person. But a person Third, volatility may be much more important
without such skills, such as myself, cannot make the than the authors indicate. It is possible that a one
system work. day price move, measured in terms of previous days’
moves, should be considered a move of two or more
Discussion days or no days at all. If some skill allows certain
The Congestion Phase System has many inter- traders to use the Congestion Phase System suc-
esting properties. Unfortunately, profitability is not cessfully and if this skill can be quantified this is
one of them. More correctly, the Congestion Phase the most likely place it resides.
System as presented does not seem to work. Quite Fourth, traders who use the method success-
possibly the basic principle is wrong. fully, if any, must do something that other traders
On the other hand, given the analysis of the do not. Steinberg’s article “Trading in congestion
system’s properties above, it is somewhat surprising phases” gives the impression that Mr. Nofri used a
26 MTA JOURNAL/FALL 1991

complicated set of rules to determine which pattern Commodities Magazine, December 1976, p. 35.
would be used when?4 These rules may or may not 12. Steinberg, op. cit., p. 32ff. The first edition of the book that
stop-losses were only needed when the price was near the edge
have been intuitive. I do not know any traders who of a congestion phase. Nofri, op cit., p. 30. As part of his review,
have used the method successfully, but that does not Mr. Jones talked to Mrs. Steinberg. Mr. Jones said Mrs. Steinberg
mean they do not exist?5 The first step would be to conceded that, ‘! . . some sort of stops might be helpful but could
provide no guidelines!’ Jones, Zoc cit. A later article suggests plac-
find out if such traders exist; that is, to prove that ing stops, for long positions, somewhat below the previous days’
their results are not a fluke. Further, their results close. Mrs. Steinberg, “Trading in congestion phases” Com-
must be proven to be the result of their use of the modities Magazine, February 1980, p. 47. In nc case does the stop
strategy tit the logic of the method. To the contrary, all of these
Congestion Phase System rather than, say, the use strategies violate the logic of the method.
of an oscillator. The next step would be to find out 13. Nofri, op. cit., p. 36.
what these traders do that traders following the 14. Kaufman, Perry J., The New Commodi& Trading Systems and
method mechanically do not do and vice versa. The Methods, Wiley, New York, 1987, p. 217.
only way to find out is to watch. 15. If this is not clear, the reader needs to review some elemen-
tary probability theory. There are quite a number of good books
Fifth, it may be that while the basic concept is on the subject. Among other sources see, Gehm, Fred, Commod-
sound, the definitions are wrong. On the one hand, ity Market Money Management, Wiley, New York, 1983.
this means that Mr. Nofri’s way of identifing conges- 16. Jones, op. cit.
17. Nofri, op cit., p. 18.
tion phases only worked by accident. On the other 18. Nofri, op cit., p. 18.
hand, as Mr. Mike Dever notes, other means of iden- 19. Nofri, op cit., p. 18.
tifying congestion phases might workF6 Unfortu- 20. SAS is a trademark of the SAS Institute, Inc Statistical tests
were performed using SAS procedures.
nately, the Congestion Phase System provides no 21. There are a number of proprietary products where one con-
means of identifying them. tract is appended to another. All of these products make assump
tions which need not be true. Prudence demands that a method
proven successful on this kind of data be retested on other data.
FOOTNOTES 22. Even at the 10% level of significance, there was no difference.
23. A T-Test for equal variances showed no difference for Wheat
1. In the last twenty years or so, trend-following has become one at the 10% level. However, Cold and the S&P 500 showed dif-
of the most stylish of market techniques, especially among com- ferences at the 1% level.
modity market technicians. Few technicians today realize that 24. Steinberg, lot cit.
there is a large literature devoted to trend-fighting techniques 25. Mr. Nofri is retired or, perhaps, dead. I have not been able to
such as scale-trading. locate him.
2. Nofri, Eugene and Steinberg, Jeanette N. Success in Com- 26. Mike Dever (personal communication, no date.1 Mr. Dever has
modities. The Congestion Phase System, Success in Com- a number of ideas for alternative measures. So far he has not
modities, PO. Box 19&i, Santa Monica,CA, 1’975. pp. 9-11. I have published on this topic.
not been able to obtain any later editions of the book, which may
differ significantly from the first edition.
3. Nofri, op. cit., pp. 13-15.
4. Nofri, op. cit., p. 15.
5. Steinberg, Jeanette N. “Timing Market Entry and Exit (The
Congestion Phase System)” Commodities, September 1975 p. 24.
6. Hill John R., Stock and Commodity Trend Trading by Advanced
Technical Analysis, Commodity Research Institute, Henderson,
N.C., 1977. This is by no means the only example. Finance, Marketing and Communications Research.
7. It is important to understand that it is possible to turn anything
into dogma. Whether or not the dogma is true does not matter.
Dogmas are always dangerous. They prevent thinking More likely
than not, I have presented several dogmas of my own in this paper.
If I knew what things I was dogmatic about I would rethink them
or, at least, make up excuses why this or that item is so obvious-
ly true that it does not need rethinking.
8. Most of this literature can be found in unpublished disserta-
tions. Typically, a mathematical technique such as discriminant
analysis, will be used to model one or more charting patterns.
The problem with most such techniques is that they do not
replicate what chartists actually do very well.
9. It’s important to understand that unless the method of interest
is defined as the method tested, there is always some error. When
trend-following methods are described, the error is generally
defined away; that is, the method tested is defined as the method
of interest. Other methods do not fare so well.
10. I know of no published proof of this to date. I will deal with
this and similar issues in lbugh Minded Investing: No Nonsense,
No Excuses, No Easy Answers, John Wiley & Sons, New York,
forthcoming.
11. Jones, Donald L. “Review: Success in Commodities”

NYSE Bullish Percentage Index
James D. Anderson
As the sophistication level of the technical analyst years. Each has proven financially rewarding.
expands we should not lose sight of the common and
Date of pressure buy points Date of cycle low points
simple techniques that have proven so useful over and the level of the Dow and the level of Dow
a prolonged period of time. My favorite market in- Jones Industrial Average Jones Industrial Average
dicator is the New York Stock Exchange Bullish November, 1957 @ 449.87 October, 1957 @ 419.79
Percentage Index, originated by the Chartcraft July, 1962 @ 597.93 June, 1962 @ 535.76
group and Abe Cohen. September, 1966 @ 774.22 October, 1966 @ 744.32
June, 1970 Q 683.53 May, 1970 Q 631.16
Chartcraft determines, on a daily basis, if the October, 1974 @ 665.52 December, 1974 Q 577.60
common stocks traded on the NYSE are in a bullish November, 1987 @ 1833.55 October, 1987 @ 1738.74
or bearish position. To determine if an individual
The second long term buy signal generated by
stock pattern is bullish or bearish a three unit rever-
the NYSE Bullish Percentage Index occurs when
sal point and figure chart is utilized. For stocks
a prior peak in the index is penetrated while the
under five dollars one unit is represented by a
index is below 50%. A good example of the second
quarter point increment. A half point increment is
type of buy signal can be seen in 1960. In Figure
used for stocks trading between five and twenty and
2, the percentage of stocks in bullish patterns
a full point increment is used for stocks trading over
decreased for the first few months of the year. The
twenty. A reversal that carries a stock above a prior
level began at 54% and by February had deterior-
peak places a stock in a bullish position. If a stock
ated to 24%. During March the bullish percentage
breaks a prior low it is placed in the bearish category.
increased to 30% and then promptly declined again
This charting basis allows for very precise, yet easy
to 22%. That pattern set the stage for a buy signal
to recognize bullish and bearish signals. Examples
in April when the percentage of bullish stocks
of Buy and Sell Signals can be seen in Figure 1.
increased to 32% or 2% above the previous March
Chartcraft computes their index by taking the
level. Note the repeat buy signals: May, 1960 and
number of NYSE bullish stocks and dividing by the
again in December, 1960. These buy signals are
total number by bullish and bearish stocks. The
simply a confirmation of the initial signal and do
resulting ratio is plotted on a point and figure chart
not carry any increased significance. The type two
with each unit representing 2%, and three units (6%)
buy signals are recorded below:
being necessary for a change in direction. Figure 2
shows the history of the indicator back to 1955. Buy signal on point and Date of cycle low point and
BUY SIGNALS can originate in two ways. The figure reversal while index level of the Dow Jones
is below 50% Industrial Average
first method is referred to as a “pressure buy point”
and is indicated in Figures 2 & 3. The signal occurs April, 1960 @ 601.70 October, 1960 @ 566.05
August, 1982 @ 901.31 August, 1982 @ 776.92
after a prolonged decline in the NYSE Bullish August, 1984 @ 1224.38 July, 1984 Q 1086.57
Percentage Index to eight percent or lower followed
by a three unit reversal. SELL SIGNALS-To achieve a sell signal, two
I refer you to Figure 2 in the year 1957. Dur- events must occur. First, a sell alert occurs on the
ing October of that year the bullish percentage NYSE Bullish Percentage Index. For a sell alert to
achieved a low of eight percent. In November (point occur a price reversal must be recorded while the
A) a three unit reversal occurred when the level of index is greater than 50%. An example can be found
the index increased to 14%. These signals have in Figure 2 in the year 1955. In January the Bullish
always indicated a low ebb in stock prices has Percentage Index fell from 90% to 80%. This was
passed and a new more positive period lies directly followed by another rally. The percentage of stocks
ahead for common stocks. Listed below are the six in bullish patterns increased in February to 88%,
PBPs which have occurred in the last thirty-six setting the stage for a “sell alert.” In March, 1955,

Buy Point
Figure 1
Sell Fht
Figure 2
BUY
PBP = Pressure Buy Point
Figure 3
PBP = Pressure Buy Point

the bullish percentage achieved a high of 90% before only during bull market phases and not taking direct
beginning its decline. On penetrating 78%, it created interest income or dividends into consideration, a
a “sell signal” by moving below the previous reversal gain of +820.3% would have been realized. A sim-
point. The eventual low on the index was not record- ple buy and hold policy over this same time period
ed until October of 1957 at 8%. Other examples of would have returned +527.6%.
sell alerts include: March, 1955; February, 1959; An investment philosophy which favors a longer
June, 1961; July, 1963; October, 1967; July, 1971; term, patient approach is appropriate for this inter-
October, 1977; August, 1983 and August, 1988. pretation of the NYSE Bullish Percentage Index.
To confirm an alert, I wait until the month end The old adage, “buy low, sell high” perfectly
closing price of the Value Line Index moves below describes this method. Reversal points occur after
its nine month moving average. Prior to 1961 when the trend changes, but occur against the prevailing
the Value Line Index was established, I used the major trends. One buys after an extended period of
monthly Dow Jones Industrial Index. Table I is a market weakness and sells after a period of strength,
summary of the NYSE Bullish Percentage Index buy but only upon confirmation of a trend reversal.
and sell signals since 1955. Perhaps the most difficult problem is having the
The cumulative percentage return shown in this discipline to follow these simple buy and sell signals.
table assumes being both long during projected bull The emotional environment of the market can be
market phases and short during projected bear hard to resist at key turning points.
market phases. No accounting is made for transac-
tion costs or dividend income. Those investors who ME Anderson is a Vice President in the Private Place-
do not have the resolve to “short” stocks have the ment Dept., at John G. Kinnard and Company, Incor-
porated in Minneapolis. He has written a market letter
alternative to remain liquid in a variety of cash stnce 1970 and authored an entry for the May, 1979
equivalent investments during the alternating Market Technicians Journal entitled “Znterest Rates/
bearish market phases. By owning common stocks I__
Table 1
NYSE Bullish Dow Jones Cumulative
Percentage Industrials Points IGain %Gains
Alert 3155
Sell Signal 5/56 478.05
Buy III57 449.87 + 28.18 + 5.9% + 5.9%
Alert 2159
Sell Signal l/60 622.62 +172.75 +38.4% +46.6%
Buy 4160 601.70 +20.92 + 3.4% +51.5%
Alert 6161
Sell Signall/ 700.00 +98.30 +16.3% +76.3%
Buy 7/62 597.93 + 102.07 +14.6% +102.0%
Alert 7163
Sell Signal 6/65 868.03 +270.10 +45.2% + 193.3%
Buy 9/66 774.22 +93.81 +lO.B% +225.0%
Alert 10167
Sell Signal 2/68 840.50 + 66.28 +8.6% +252.9%
Buy 6/70 683.53 + 156.97 +18.7% +318.9%
Alert 7171
Sell Signal 7/71 858.43 + 174.90 +25.6% +426.1%
Buy 10174 665.52 + 192.91 +22.5% +544.5%
Alert 10177
Sell Signal lo/77 818.35 + 152.83 +23.0% +692.7%
Buy 8182 901.31 -82.96 -10.1% +612.7%
Alert B/83
Sell Signal lo/83 1225.20 +323.89 +35.9% +868.5%
Buy 8184 1224.38 +.82 +0.1% +869.1%
Alert 8188
Sell Signal 11/88 2114.51 +890.13 +72.7% +1573.6%

The Influence of Geomagnetic Fluctuations
on Market Momentum
James E. Casebeer
Overview responses. I will give an overview of some of the

The usefulness of technical analysis is apparent underlying physics of astronomy and the physiology
when it aids in making good investment decisions. of man. Using geomagnetic fields as an example, I
The theoretical basis for many of the techniques, will attempt to show how measurable changes in the
however, has not often been articulated. Hence, over environment due to astronomic occurrences affect
the years technical analysis has been viewed as an human psychology through measurable changes in
art form without a solid foundation. Despite a neurohormones. I will correlate this to solar sunspots
tendency by non-technicians to dispute technical (a major source of geomagnetic field changes) using
analysis, mainly due to differences in underlying previously published data as well as to some new
philosophies, technical analysis has nevertheless concepts on geomagnetic fields in general. While I
gained favor due to its ability to add to the invest- will hint at some of the other astronomically related
ment equation in ways fundamental analysis cannot. factors affecting mass psychology (light, electric
However, despite the “prove by doing” history of charges, gravitational fields and so on), the focus of
technical analysis, some technicians have loosely this paper will be limited to geomagnetic fields.
defined some of the concepts of why technical
analysis works. One obvious concept is that technical Physics
analysis measures, in various ways, sentiment (IE First, we’ll take a brief look at the physics of
psychology) in the market. The literature is strewn the planet we call home. The Earth is essentially
with indicators of “sentiment”, “overbought/over- a spherical condenser consisting of a negatively
sold”, concepts of greed and fear and so on. Yet, rarely charged crust and a positively charged stratosphere
do authors try to actually explain how that senti- with a conductive ionosphere. This electric field of
ment is being measured. Many authors assume the atmosphere and Earth’s crust causes an air-
because indicators have proven successful there is Earth electrical current which is both constantly
some tie to mass psychology. The main thrust of the present and constantly changing. Fluctuations in
article will always be the indicator itself, since that this field have been measured and found to fluctuate
is what helps make money. in various cycles ranging from daily to yearly and
It is intriguing that while astroanalysts have longer. Remember that electric fields are a property
recently established creditable records in predicting of electric charge at rest while magnetic fields are
market changes, they have met resistance because a property of electric charge in motion.
their means of market analysis is thought to rely on While many elements combine to cause changes
mysticism, astrology, the occult etc. Even other in the geomagnetic field of Earth, some obvious
technicians belittle astroanalysis. It would appear astronomic phenomena are pertinent here. Sun-
that technicians themselves require “underlying spots, for instance, exhibit an eleven year cycle with
proof’ for WHY astroanalysis should work, despite a close relationship to the gradient in this field. A
a history of relying on successful application to ac- 100% increase in Sunspot activity will cause a 20%
cept other forms of analysis. While not an increase in the air-Earth electromagnetic field. In
astroanalyst in the formal sense, in investigating addition, the Sun, planets and stars emit practically
this “new” area of analysis, I have found unlike any all material particles and forms of radiation. This
other area assuming to monitor mass psychology corpuscular cosmic radiation includes x-rays, U.V.,
(Elliot wave, sentiment indicators etc.), astroanalysis visible, infrared and low frequency light. These
has a definite, measurable relationship to changes corpuscular particles, or solar wind, interact with
in psychological behavior! the Earth’s field and change its gradient as well
This paper will show some of the relationships as causing secondary radiation, all with potential
between astronomic events and human psychological effects.

Also, the interrelationship of the planets, Sun behaviors including rage, fear, anxiety and
and Moon not only affect the air-Earth electrical cur- depression.
rents, but affect the production of solar flares on the The pineal gland is known to be particularly
Sun and therefore further enhance the change in the sensitive to changes in light exposure (full Moon,
electromagnetic field through the solar wind as well eclipses, geological transposition) and electro-
(Hans Hannula, 1989). The Moon is also known to magnetic currents (sunspots, planetary alignments
modulate the Earth’s geomagnetic field during its and apposition to the Earth etc.). Increases in
monthly 29 112 day phase with this influence tend- both serotonin and norepinephrine levels can be
ing to peak at the full Moon; the closer the full Moon measured in individuals during these types of
is to the plane of the ecliptic (the plane of the Earth’s changes.
orbit round the Sun, i.e. to there being a lunar Serotonin and norepinephrine, two more promi-
eclipse), the greater the effect. nent neurohormones controlled by the pineal gland,
The greatest affect on earths geomagnetic field are very important chemicals in many neurologic
comes not from sunspots, the moon or individual responses. Norepinephrine is one of the direct nerve
planets per se, but rather from the impulses of the end stimulators important to the sympathetic ner-
torque (IOT) in the sun’s motion about the center of vous system. The sympathetic nervous system
mass (CM) of the solar system. Strong IOT occur mediates our response to stressful external stimuli.
when the suns center, CM, and Jupiter-the weighty In layman terms, this is the fight or flight response.
center of the world of planets-are in line and form It prepares the body to ward off adversities and puts
heliocentric conjunctions of Jupiter and CM. IOT one in the psychological mode of protection. Nervous
events form cycles with a mean period of 9.275 years. reactions while in this state are magnified, as ex-
Since this cycle is slightly less than the approximate- emplified by stories of individuals suddenly lifting
ly 11 year sunspot cycle, peaks of geomagnetic ac- an automobile to save a life. Psychological reactions
tivity may not necessarily fall at peaks of sunspot are magnified as well with our sense of fear often
activity. intensified over what is realistically justified.
Serotonin increases in the blood stream are found
Human Physiology to coincide with numerous psychological changes.
The human body has been found to be a conductive Again, increases in fear, depression and euphoria
antenna in this field and becomes itself a constant can be related to serotonin levels. Most everyone in-
dipole magnet. The development of the Magnetic volved in day to day market decisions can remember
Resonance Imager was made possible by knowledge time when they had an overwhelming “need” to
of that fact. By setting up a fluctuating electromag- enter or exit a position.
netic field about the body, the resultant electromag-
netic radiation of the body in response to this field Psychology
is used to make very accurate pictures of the inter- Many psychological investigations begin with an
nal structure of an individual, thus providing a great attempt to categorize people into broad categories
leap over the diagnostic ability of “old fashioned” of response as related to phenomena being studied,
X-rays. the famed AA personality types for instance. The
With this dipole antenna called mankind con- same is true of climate, and the following list
stantly receiving these changes, it only follows that presents one possible classification of climatological
this electrical field could possibly affect man’s psychological types.
health, physical and psychological. Twenty years of 1.) Balanced constitution. The rarest of the five,
research has already shown that man is weather sen- the balanced constitution shows sufficient hormone
sitive due to reactions based on regulatory functions stability to cope with nearly all daily stress, no mat-
of the hypothalmus, pituitary, thyroid and adrenal ter what the weather.
glands. Recently it has been shown that glands are 2.) Vagotonic constitution. This personality is
also affected by changes in astronomic phenomena, especially sensitive to temperature changes (cold
the most studied of which is electromagnetic at- front personality) and can become a “nervous wreck”
mospheric changes. One of the more intriguing under adverse climatological conditions.
organs of the body affected by the changes is the 3.) Sympathotonic constitution. Another per-
pineal gland, a small gland located in the central sonality particularly affected by temperatures (warm
brain which regulates the production of numerous front personality), this person becomes aggressive,
neurohormones in the body. Neurohormones direct- restless, and even sometimes euphoric in response
ly affect the nervous system. These reactions include to climatological changes.
many that can be directly related to psychological 4.) Serotonin constitution. This personality is

1
particularly sensitive to electromagnetic changes the effects of astronomic changes on the market
and has the widest extreme of reactions to changes. place (Figure 1). A primary change in planetary
They become tense, irritable and even irrational alignment occurs which subsequently changes the
with changes in conditions and are prone to over- environment for the investor. While a multitude of
react. This group makes up 30% of the population. possibilities exist, for this paper we will consider the
Because serotonin levels change with approaching example of a major increase in the geomagnetic field
weather fronts due to the change in electromagnetic caused by an increase in sunspot numbers or by a
fields, these individuals are able to predict weather strong IOT. This increased geomagnetic field
changes with an 80% reliability. strength causes an increase in the production of
5.) Thyroid constitution. This individual shows neurohormones in individuals, the most notable be-
the highest degree of mental activity and, during ing norepinephrine and serotonin. The body’s
adverse changes in climate, becomes very active with response to this increased hormonal activity is a
subsequent exhaustion. They have recently been heightened psychological state whereby responses to
shown to very sensitive to electromagnetic changes other economic factors become greatly enhanced.
much as the serotonin constitution types. Thus, market momentum is suddenly amplified by
Thus, as our environment changes, the majority greed and fear helping to cause either a reversal in
are at least prone to hypersensitivity to various direction or an acceleration in the move.
stimuli about us. As shown above, at least some of
this hypersensitivity can be directly related to Geomagnetic Activity
changes in the neurohormonal system which in turn Much work has been done on the 11 year sunspot
is directly affected by the climatologically sensitive cycle and its multiple effects on earth from crop pro-
hormone glands of the body. When these elements duction to economic cycles. One of the major changes
combine with the multitude of other environmental in earth’s climate is from changes in the
and economic conditions capable of affecting our geomagnetic field associated with changes in the
thinking, the theory that astronomic sequences may sunspot cycle. Collins has shown a statistical correla-
cause predictable changes in fear and greed in the tion between sunspot numbers and the stock market.
marketplace becomes tenable. Going back to 1871 he was able to show that “an im-
In essence, then, the following explains, in part, portant market peak has been witnessed or directly
Addition to or diminution of market momentum
11
M’TA JOURNAL I FALL 1991 33

anticipated when in the course of each new sunspot to 30 range, it makes sense that 23+ readings would
cycle, the yearly mean of observed sunspot numbers occur in the year preceding the peaks. In 1928 the
has climbed above 50”. sunspot > 50 indicator suggested the 1929
Reference to Collins article shows multiple tables downturn. With the geomagnetic > 23 indicator oc-
and charts showing the correlations of the NYSE and curring soon thereafter the major early 30’s decline
the sunspot numbers. In essence, once the yearly followed. The sunspots caught the 1937 peak while
mean of sunspots has risen above 50, a significant geomagnetics caught the ‘42 bottom. From ‘42 to ‘87
market peak has occurred within one year. Figure the sunspots and geomagnetics were out of sync with
2 shows on a yearly basis those points at which these each catching intermediate tops or bottoms.
phenomena have occurred (noted by *>. This includes However, in early ‘87 both the sunspot and
a rise above 50 shortly before the 1987 crash. geomagnetic indicators came into play with the
As mentioned, the geomagnetic cycle is subsequent market break later that year.
somewhat shorter than the sunspot cycle. Peaks in Since both sunspot numbers and geomagnetic
this cycle occur at epoches of JU-CM conjunctions. peaks are predictable, forecasts of market changes
Landscheidt’s article lists numerous tables and can be entertained. Sunspot numbers greater than
graphs showing this cyclic pattern and relating them 50 must be awaited in the data as it is released but
to ozone measurements. If these peaks are plotted can be predicted to occur in the year preceding the
on the Dow Jones from 1915 (Fig. 2, shown as down 11 year cycle peak. Similarly, geomagnetic means
arrows), a correlation begins to appear. Because the greater than 23 must be awaited but can similarly
premise here is that psychological responses begin be predicted in the year preceding the maximum.
to become intensified as the geomagnetic field levels The maximum can be measured approximately from
increase, as with the sunspot numbers, it would the last peak by adding 9.275 years (the last peak
make sense that market interactions would occur at was 1990.3) or more precisely using planetary
a given level rather than waiting for peaks. models to measure JU-CM conjunctions. Of course,
The up arrows on Fig. 2 show that year in which since multiple factors can influence geomagnetic
the yearly mean of the aa-index of geomagnetic peaks, they may occur at other times than just the
means exceeds 23. Since peaks occur in the high 20’s JIJ-CM conjunctions.
Figure 2 lir EIYRLY

I
I 15oo.t
’ 2000 I
/
I 15oo.i
I
I 1000 c
5OO.Ol
I
I I
‘15
i
Sunspots and Geomagnetic Critical Points vs. DJIA 1915-1990
Legend: *-yearly mean sunspots exceed 50; up arrow-yearly mean geomagnetic aa-index exceeds 23; down arrow-
yearly mean geomagnetic aa-Index peaks

1
Personally, I believe that astronomic factors act

as a “set up” with mankind as a type of elec- James E. Casebeer, M.D. received a B.A. in Physics and
tromagnetic resonator. When a resonator is in a low Mathematics at USC and a Doctorate of Medicine at
University ofArizona He currently owns Management
stress state (little market momentum) a given Consulting Services in Flagstaff; Arizona and is a trader
amount of outside energy has little effect. When the 1 and technical analyst. 1
resonator is stressed to a higher energy level (other
factors have increased the momentum in the market)
then this given outside energy (cosmic conditions
leading to increased neurohormonal release and
subsequent heightening of psychological responses)
has a magnified effect on the energy state of the
resonator. Rather than astronomic phenomena caus-
ing market action to take place per se, they affect
the human psyche in such a way that given other
interactions are true, our reactions will be exag-
gerated in a predictable way which then adds to the
picture. This would explain why sometimes astro-
nomic occurrences seem to act exactly as predicted
when there is additional momentum from other
factors and at other times are a dud when there is
no particular coexisting momentum. As always,
as many factors as possible need to be taken into
account.
REFERENCES
Collins, C.J., “The Effect of Sunspot Activity on the Stock Market.”
Cycles, 1989, 281-289.
Galindo, I., “Evaluation of the Impact of Some Atmospheric
Elements on Health”. Climate and Human Health Symposium,
Sept 22-26, World Meteorological Organization, 1986.
Hannula, H., “In Search of Truly Scientific Correlations”. Market
Technicians Association Journal, 1989, 32, 124-137.
Landscheidt, T., “Predictable Cycles in Geomagnetic Activity and
Ozone Levels”. Cycles, 1989, 261-264.
Lute, G.G., Biological Rhythms in Psychiatry and Medicine.
Washington: Department of Health, Education and Welfare, 1970.
Netter, F.H., The Ciba Collection of Medical Illustrations. Vol 1:
Nervous System, Vo14: Endocrine System, New York: Ciba/Col-
orpress, 1972.
Smith, E.W. & Simon, B., Electromagnetic Man. New York, St. Mar-
tins Press, 1989.
Snoyman, I? & Holdstock, T.L., “The Influence of the Sun, Moon,
Climate and Economic Conditions on Crisis Incidence”. Journal
of Clinical Psychology, 1980, 36, 884-893.
Sulman, FG., “The Impact of Weather on Human Health’! Reviews
on Environmental Health, 1984, IV-2, 83-118.
Sulman, F.G., “Health, Weather and Climate’! Perspectives in
Medicine, Base1 (Switzerland): S. Karger A.G., 1976.
Stone, M.H., “Madness and the Moon Revisited’! Psychiatric
Annals, 1976, 6(4), 170-176.
Tasso, J. & Miller, E., “The Effects of the Full Moon on Human
Behavior”. Journal of Psychology, 1976, 93(l), 81-83.
Templer, D.I. & Veleber, D.M., “The Moon and Madness: A Com-
prehensive Perspective’! Journal of Clinical Psychology, 1980,
36(4), 865868.

-
Using the McClellan Oscillator

for Bond Market Timing
by Bob Kargenian
Overview technical analysis. Because interpreting patterns in-

Advance-decline data is widely used in analyzing the volves a high degree of subjectivity, however, it might
stock market on a technical basis. The data mea- also be helpful to focus on a mechanical or mathe-
sures market breadth, which serves to show the level matical approach to provide an unemotional, objec-
of participation in the market, and is a guide to tive method of timing the bond market.
internal strength or weakness.
The McClellan oscillator and its companion tool Characteristics of the Oscillator
the Summation index, developed by Sherman and The McClellan oscillator has two significant
Marian McClellan in 1970, takes the advance- characteristics. The oscillator usually reaches an ex-
decline data a step further. The oscillator reflects the treme value, indicating overbought and oversold
difference between two moving averages of the levels, prior to market turning points. Secondly, the
number of advancing stocks minus those declining oscillator usually passes through the zero line at or
on the New York Stock Exchange on a daily basis. soon after significant turning points in the market.
The summation index is created by summing the In the stock market, extremes in the oscillator
daily values of the oscillator. (See the appendix for are at the 100 to - 100 level. Very strong up or down
references and method of calculation.) Both indi- moves in the market, however, have frequently
caters are now standard technical tools on various resulted in the oscillator moving to greater extremes.
technical analysis software packages, including For instance, during the summer decline of 1990, the
Equis International’s “The Technician”. oscillator reached -187 on August 23. In contrast,
Because advance-decline data is also available during the rally in early 1991 after the Persian Gulf
on bonds, however, a similar calculation can be per- War, the oscillator reached 171 on February 6.
formed to evaluate the technical position of the bond Approximately 2100 issues trade on the New
market. This paper will explore the use of the bond York Stock Exchange compared to about 700 issues
data as a guide to timing purchases and sales of on the New York Bond Exchange. The McClellan
interest rate futures contracts. oscillator utilizing bond data, therefore, will not
reflect the same extreme levels. The highest positive
Divergence Analysis level in recent years on the bond oscillator was
Turning points in the markets are often led by reached on November 12, 1981 at 119. The most
various momentum indicators including rate of extreme negative reading occurred on May 23 of
change analysis, relative strength and advance- 1983 at -110. Since early 1988 the oscillator has
decline measures. Breadth oriented indicators can exhibited declining volatility with values remaining
often provide better entries and exits to the stock between plus and minus fifty. The tighter param-
market because they have a tendency to lead the eters in recent years reflect reduced volatility in the
broad market averages. As a bull market matures, bond market.
the bulk of stocks will start deteriorating; but a nar- Rising prices are generally associated with
row list of issues can carry the market averages to positive and rising oscillator values. Likewise, a fall-
a higher level. When a momentum indicator diverges ing oscillator and negative readings are usually
(by failing to move to a new high or low in tandem accompanied by falling pries. Turning points occur
with the market averages) we receive preliminary when reversals from extreme levels take place,
warning of a possible trend change. Chart 1 shows especially when the last price extreme was accom-
a number of divergences between the Treasury bond panied by a divergence between the price and the
futures and the McClellan oscillator utilizing bond oscillator. For instance, a top in the market can occur
data. while the oscillator is still positive, but begins declin-
Divergence analysis is an important element of ing toward the zero line. Acceleration of the declining

Chart 1 r Dally ht. l/03/89 - 6/19/W
- .T
. T ~Bonds, Bond A/D Line and the hicClelan
McClellan Oscillator
-.K&
. hs/ 7 I ..
96
94
TREASURY BOND FUTURES
Above Is a chart of T-Bond futures, the NYBE a/d line and the McClellan Oscillator
from January 1989 through June of 1990. The various positive and negatlvo
divergences are Indlcabd at Ilnes A-F. Line C shows T-Bonds advancing from
about 96 to 100 from early June 1989 to early August 1989, while the Oscillator
clearly dlverged. A b-polnt selloff to the 95 level followed In late September.
A posltlvo divergence was created at Ilne D, which led to the rally to mld9ecember
1989 and Is shown by Ilne E. The buy and sell arrows on the chart are based on
Oscillator parameters which are detalled In Chart 2.
Chart 2
r
oa11y oata 3/30,81 6/19/90
T-Bond Futures and the McClellan Oscillator
102 .
99 _
96 _
. -60
- -75
- -90
. -105

trend usually is most severe after the oscillator has parameters were found. The results are shown in
turned negative. In contrast, most bottoms will occur Chart 2 and Exhibit 2. Treasury bond futures were
when the oscillator is negative but rising. The rising purchased when the oscillator rose above -26 and
trends tends to accelerate when the oscillator turns sold on a drop below 18. During the 108 month test
positive. period, an initial investment of $10,000 would have
grown to $85,105, which is a 26.86% annualized
Trading with the McClellan Oscillator return. In contrast, the buy-hold rate produced
The basic strategy in using the McClellan $41,468 for a return of 17.3%. There were 87 trades
oscillator is to buy when the oscillator rises above and 46 (53%) were profitable. The largest string of
the zero line and sell on a drop below zero. The both winning and losing trades was six and the
importance of any one buy or sell signal is determined maximum dollar drawdown was $9040, or 10.19% of
by the major trend which is indicated by the sum- equity. Fifty percent of the increase in equity was
mation index. The basic strategy was tested on the experienced in the first eighteen months of the study.
bond advance-decline data (see Exhibit 1). A $10,000 The reduced volatility of the bond market has had
investment over 107 months beginning April 1981 an impact on trading gains but we would also note
grew to $21,488, or an 8.96% annual compounded that drawdowns have been smaller in recent years.
return. Out of 149 trades 39 or 58% were successful The best results with the summation index were
and there were two drawdowns in excess of $14,000. achieved by using slope signals, as shown in Chart
There was no net progress in equity from September 3. The best decision rule was to sell when the sum-
1982 to February of 1990. By comparison, the buy- mation index fell by 106 units from a peak and buy
hold rate for the same period allowed the investment when it rises by 99 units from a bottom. The strategy
to grow to $39,812 a 16.76% annualized return. produced 55 trades of which 29 or 53% were profit-
Clearly, the basic strategy was not worth pursuing. able. A 19.9% annualized return was produced which
Compared to stocks, there are far fewer listed bonds was also superior to the buy hold strategy.
which lead to numerous whipsaws around the zero
line and the poor relative performance.
To determine the best approach various combina- Conclusion
tions of buy and sell levels were tried until optimal The analysis suggests that we should look for
Chart 3
2500 1 Be 2500
225” + - 2250
11000t SUMMATION INDEX - 2000
1750 t - ,750
1500 b i - 1500

Actior 1 Date Price Actior 1 Date Price Net Points $10,000
---- ----- ---- ---------- _____--
Sell 2-07-81 70-14 cover X-29-84 66-28 114 21,191
Exhibit 1 tin9 3-29-84 66-20 se11 d-03-84 65-21
l
- 39 19,872
Short d-03-84 65-21 cover 4-10-84 66-06 - 17 19,240
tin9 d-10-84 66-06 se11 d-19-84 64-24 - 46 17.702
Short d-19-84 64-24 cover d-26-84 65-10 - 18 17,039
Long d-26-84 65-10 se11 5-04-84 63-08 - 66 14,876
Short 5-04-84 63-08 cover 6-04-84 61-27 + 45 16,182
mn9 6-01-84 61-27 se11 8-27-84 64-25 + 94 19,019
36,950
Strategy: Short
Low
8-27-84
g-11-04
64-25
66-24
coyer
se11
9-11-84
9-26-84
66-24
67-09
-
+
6,
17 17,381
Short 9-26-84 67-09 cover 9-27-84 68-08 - 31 16,312
un9 9-27-84 68-08 se11 10-01-84 66-25 - 47 14.713
Short 10-01-84 66-25 COVer 10-11-84 67-22 - 29 13,736
10-11-84 67-22 se11 11-13-84 69-27 69 15,792
Long bond futures Low
Short 11-13-84 69-27 cover 11-23-84 72-2,
l
- 92 12,817
Long 11-23-84 72-2, se11 11-30-84 71-01 - 54 11,029
while Oscillator Short
-n9
11-30-81
12-19-84
71-01
72-08
cover
se11
12-19-84
12-21-84
72-08
72-10 +
- 39
2
9,710
9,672
Short 12-21-84 72-10 cover l-09-85 71-12 l 30 10,509
above zero. Lana
Sh&t
l-09-85
l-14-85
71-12
70-08
se11
cover
i-14-85
i-15-85
70-08
70-21
- 36
- 13
9,284
a,???
Long l-15-85 70-21 se11 2-07-85 71-10 + 21 9,333
Short 2-07-85 71-10 cover x-27-85 68-22 + 84 Il.858
tin9 3-27-85 68-22 se11 d-30-85 70-28 + 70 13,945
Short d-30-85 70-28 cover 5-03-85 71-11 - 15 13,377
Low 5-03-85 71-11 se11 6-12-85 77-11 +x92 19,277
Short S-12-85 77-11 CO”*= a-19-85 76-12 + 31 20,145
mn9 8-19-85 76-12 se11 9-05-85 76-08 - 4 19,920
Short bond futures Short 9-05-85 76-08 ccmer 10-02-85 74-30 l 12 21,132
20,936
LQw 10-02-85 74-30 se11 10-04-85 74-27 - 3
20,431
with Oscillator Short
Law
10-04-85
10-15-85
74-27
75-08
cover
se11
10-15-85
12-06-85
75-08
80-04
-
r156
13
25,206
12-06-85 80-m cover 12-09-85 61-15 - 43 23,762
below zero. mn9
Short
12-09-85
l-09-86
al-15
83-10
se11
cover
i-09-86
2-03-86
83-10
85-10
+ 59
- 64
25,505
23,405
mn9 2-03-86 85-10 se11 2-07-86 84-03 - 39 22,066
Short 2-07-86 ad-03 cover 2-n-86 85-17 - 46 20,548
un9 2-11-86 85-17 se11 1-17-86 96-15 +31* 30,385
Short 3-17-86 96-15 cover 3-31-86 102-07 -184 24,535
tin9 J-11-86 102-07 se11 4-02-86 102-01 - 6 24,247
Short d-02-86 102-01 cover d-16-86 104-19 - a2 21,584
un9 d-16-86 104-19 se11 d-18-86 103-19 - 32 20,484
Short d-18-86 103-19 CO"*= 6-24-86 98-07 +172 25,759
tin9 6-24-86 98-07 se11 7-17-86 99-23 + 48 27,159
Short 7-17-86 99-23 cover S-11-86 99-12 + 11 27,402
LQn9 E-11-86 99-12 se1: 9-08-86 95-29 - 111 23.833
Short 9-08-86 95-29 cover 10-03-86 97-01 - 36 22,608
LQn9 10-03-86 97-01 se11 10-20-86 93-11 -118 18,820
Short 10-20-86 93-11 coyer 10-22-86 95-08 - 61 16,813
10-22-86 95-08 se11 12-u-86 98-27 +115 20,106
Sh&t 12-11-86 98-27 cover l-05-87 100-12 - 49 18,674
Lana i-05-87 100-12 se11 2-02-87 98-28 - 48 17,074
Sh&t 2-02-87 98-28 cover 2-05-87 100-04 - 40 15,724
tin9 2-05-87 100-04 se11 2-09-87 99-01 - 35 14,530
Short 2-09-87 99-01 cover 5-07-87 91-16 +241 21,961
Action Date Price Action mte Price Net Points $10,000 un9 5-07-87 91-16 se11 5-15-87 aa-oa -104 18,611
------ ---- ---- ----------
Short 5-15-87 aa-oa cover S-26-87 91-00 - *a 15,761
Short d-06-81 63-29 CO”*= 5-15-81 63-01 + 2S 10,775 brig 5-26-87 91-00 se11 7-21-87 90-09 - 2, 14,942
LQn9 5-15-81 63-01 se11 6-26-81 65-06 + 69 12,831 Short 7-21-87 90-09 cover a-ii-a? 88-24 + 49 16,373
Short 6-26-81 65-06 cover a-ii-81 62-29 + 7, 15,012 a-ii-87 88-24 se11 a-27-87 87-09 - 47 14,804
Long
tin9 a-11-81 62-29 se11 a-18-81 61-14 - 47 13,441 Short a-27-87 87-09 cover 10-23-87 85-31 + 42 16,016
Short a-18-81 61-14 CoVer g-15-81 59-09 + 69 15,500 10-23-87 85-31 se11 12-07-87 85-28 - 3 15,822
bn9
-ng g-15-81 59-09 se11 g-28-81 56-29 - 76 13,025 Short 12-07-87 85-28 cover 12-17-87 86-11 - 15 15,253
Short g-28-81 56-29 cover lo-02-81 57-24 - 27 12,081 Long 12-17-87 86-11 se11 2-16-88 92-20 +201 21,434
Long lo-02-81 57-24 se11 10-26-81 55-31 - 57 10,200 Short 2-16-88 92-20 cover 2-24-88 93-25 - 37 20,177
Short 10-26-81 55-31 cover 10-30-81 58-25 - 90 7.287 Long 2-24-88 93-25 se11 2-26-88 93-22 - 3 19,983
Long lo-x0-81 58-25 se11 12-02-81 63-21 + 156 12.062 Short 2-26-88 93-22 cover 3-02-88 94-05 - 17 19,351
Short 12-02-81 63-21 cover l-26-82 59-20 + 129 15.993 mn9 J-02-88 94-05 se11 3-04-88 92-19 - 50 17,688
tin9 1-26-82 59-20 se11 2-08-82 57-15 - 69 13;736 Short x-04-88 92-19 cover 6-01-88 86-24 +lS? 23,431
short 2-08-82 57-15 cover 2-12-82 58-n - 28 12,761 tin9 6-01-88 86-24 se11 7-08-88 86-10 - 14 22,893
bn9 2-12-82 58-11 se11 2-16-82 59-13 + 34 13,723 Short 7-08-88 86-10 cover a-02-88 87-05 - 27 21,949
Short 2-16-82
2-17-82
59-1,
59-15
ccNer
se11
2-17-82
3-16-82
59-15
62-10
-
+ 91
2 13,560
16,303
Long a-02-88 87-05 se11 a-08-88 86-20 - 17 21,317
LQn9 Short a-08-88 86-20 cover a-31-88 85-20 + 32 22,217
Short 3-16-82 62-10 cover 3-17-82 62-20 - 10 15,890 -n9 a-31-88 85-20 se11 10-27-88 90-05 l 145 26,648
L-9 s-17-82 62-20 se11 I-26-82 61-27 - 25 15,008 Short 10-27-88 90-05 cover 10-28-88 90-17 - 12 26,173
Short 3-26-82 61-27 ccNer 4-12-82 63-19 - 56 13,158 mn9 10-28-88 90-17 Sell ii-04-88 89-15 - 34 25,010
Long d-12-82 63-19 se11 5-18-82 64-09 + 22 13,745 Short 11-04-88 89-15 cover 12-09-88 89-09 + 6 25.097
se11 5-18-82 61-09 cover 7-08-82 61-24 l ai 16,176 tin9 12-09-88 89-09 se11 12-u-88 89-03 - 6 24,809
mn9 7-08-82 61-24 se11 g-13-82 67-29 + 197 22,232 Short 12-n-88 89-03 cover 12-30-88 89-03 0 24,709
Short 9-n-82 67-29 CO”er g-22-82 70-13 - a0 19,632 -n9 12-30-88 89-03 se11 i-03-89 aa-oa - 27 23.765
tin9 g-22-82 70-13 se11 10-25-82 74-12 + 127 23,500 Short i-03-89 aa-oa CO"er i-04-89 88-12 - 4 23,540
Short 10-25-82 74-12 cover u-02-82 77-26 - 110 19,962 -n9 i-04-89 88-12 se11 2-10-89 88-26 l 14 23.877
Long 11-02-82 77-26 se11 n-15-82 76-26 - 32 18,862 Short 2-10-89 88-26 cover 3-31-89 88-14 + 12 24,152
Short n-15-82 76-26 CO”ee i-04-83 77-00 - 6 18,574 L-g 3-31-89 88-14 se11 6-16-89 95-07 +21? 30,833
-n9 l-04-83 77-00 se11 i-21-83 74-14 - 82 15,911 Short 6-16-89 95-07 cover 7-07-89 97-29 - a6 28,045
Short i-21-83 74-10 cover 2-18-83 75-08 - ia 15,248 Long 7-07-89 97-29 se11 7-18-69 96-23 - 38 26,757
Long 2-18-83 75-08 se11 3-u-83 75-19 + 11 15.491 Short 7-m-89 96-2, ccwer 7-28-89 98-29 - 70 24,469
Short 3-14-83 75-19 cover 4-06-83 77-07 - 52 131766 un9 7-28-89 98-29 se11 a-04-89 97-26 - 35 23,275
tin9 4-06-83 77-07 se11 5-12-83 78-09 + 34 id;728 Short a-04-89 97-26 cover 10-06-89 98-09 - 15 22,706
Short 5-12-83 78-09 CO"er 7-21-83 72-11 + 190 20,565 Lana 10-06-89 98-09 se11 10-16-89 98-20 + 11 22,949
tin9 7-21-83 72-11 se11 7-22-83 71-17 - 26 19,652 Sho;t 10-16-89 98-20 cover lo-i?-89 98-09 + 11 23,192
Short 7-22-83 71-17 cover 7-26-83 71-17 0 19,552 -w lo-i,-89 98-09 se11 lo-la-89 98-02 - 7 22,873
tin9 7-26-83 71-17 se11 7-27-83 71-14 - 3 19,358 Short lo-la-89 98-02 CO"el 10-19-89 98-24 - 22 22,085
Short 7-27-83 71-14 COVeI a-15-83 70-27 + 19 19,851 10-19-89 98-24 se11 11-03-89 99-08 + 16 22,485
mn9
tin9 a-15-83 70-27 se11 lo-n-83 ii-00 + 5 19,907 Short u-03-89 99-08 cover 11-08-89 99-24 - 16 21,885
se11 lo-l+83 71-00 cover 11-14-83 70-27 + 5 19,963 u-08-89 99-21 se11 12-11-89 99-14 - 10 21,472
Long ii-u-83 70-27 se11 11-15-83 70-22 - 5 19,706 Sh&t 12-u-89 99-14 CO"er I-09-90 97-15 + 6, 23,340
Short u-:5-83 70-22 co"er 11-16-83 70-18 + 4 19,731 Long l-09-90 97-15 se11 l-10-90 97-17 + 2 23,302
L0nq 11-16-83 70-18 se11 11-17-83 70-15 - 3 19.537 Short l-10-90 97-17 cover l-11-90 97-17 0 23,202
Short 11-17-8, 70-15 cover n-22-83 71-12 - 29 1s;530 =Jn9 l-11-90 97-17 se11 l-12-90 96-31 - 1s 22,539
Long 11-22-83 71-12 se11 12-02-83 70-12 - 32 17,430 Short l-12-90 96-31 cover 2-12-90 94-00 + 95 25,407
se11 x2-02-83 70-12 cover 12-29-83 70-05 + 7 17,548 2-12-90 94-00 se11 2-20-90 92-00 - 64 23,307
tin9
Long 12-29-83 70-05 se11 2-07-84 70-14 + 9 17,729 Short 2-20-90 92-00 cover 2-26-90 93-23 - 55 21.488

Action Date Price Action Date Price Net Points $10,000
---m-e ---- ----- ---- ----- ---------- -------
Exhibit 2 Short 4-13-81 64-11 Cover 5-08-81 62-08 + 67 11,993
Long 5-08-81 62-08 Sell 6-30-81 64-14 + 70 14,080
Short 6-30-81 64-14 Cover 8-06-81 60-23 +119 17,698
Long 8-06-81 60-23 se11 8-24-81 58-26 - 61 15,691
Short 8-24-81 58-26 Cover 9-10-81 58-17 + 9 15,872
Long 9-10-81 58-17 se11 12-03-81 64-11 +186 21,584
Short 12-03-81 64-11 Cover l-18-82 59-03 +168 26,734
Long 1-18-82 59-03 se11 5-27-82 63-12 +137 30,915
Short 5-27-82 63-12 Cover 7-01-82 60-25 + 83 33,408
-v 7-01-82 60-25 Sell 10-26-82 74-31 +454 47,495
Short 10-26-82 74-31 Cover 10-29-82 76-06 - 39 46,176
Long 10-29-82 76-06 se11 11-16-82 76-01 - 5 45,919
Shor't 11-16-82 76-01 Cover 12-29-82 76-18 - 17 45.287
Long 12-29-82 76-18 Sell l-24-83 73-24 - 90 42.374
Short l-24-83 73-24
strategy: Long 2-11-83 73-23
Cover
Sell
2-11-83
3-22-83
73-23
75-16
+1
+ 57
42,305
43,986
Short 3-22-83 75-16 Cover 6-16-83 76-06 - 22 43,198
Long 6-16-83 76-06 Sell 6-20-83 75-06 - 32 42,098
Short 6-20-83 75-06 Cover 7-20-83 72-25 + 75 44,341
Long bond futures L-3 7-20-83 72-25 se11 l-29-83 69-22 - 99 41,147
Short 7-29-83 69-22 Cover 8-11-83 69-05 + 17 41,578
when Oscillator Long 8-11-83 69-05 se11 10-25-83 70-22 + 49 43,009
Short 10-25-83 70-22 Cover 10-31-83 70-14 + 8 43,159
rises above -26 mng 10-31-83 70-14 Sell 12-08-83 69-16 - 30 42,121
Short 12-08-83 69-16 Cover 12-22-83 70-02 - 18 41,458
Long 12-22-83 70-02 Sell 2-09-84 70-04 + 2 41,420
Short 2-09-84 70-04 Cover 3-27-84 66-09 +123 45,163
Long 3-27-84 66-09 Sell 4-05-84 65-17 - 24 44,313
Short 4-05-84 65-17 Cover 5-18-84 61-19 +126 48,150
Long 5-18-84 61-19 Sell 5-24-84 60-09 - 42 46,737
Short bond futures Short 5-24-84
5-31-84
60-09
59-19
Cover 5-31-84 59-19 + 22 47,324
54,411
Long se11 10-02-84 66-25 +230
Short 10-02-84 66-25 50,467
when Oscillator Long 11-19-84 70-20
Cover
Sell
11-19-84
12-03-84
70-20
71-05
-123
+ 17 50,898
Short 12-03-84 71-05 12-18-84 72-21 - 48 49,298
falls below -18 Long 12-18-84 72-21
Cover
se11 l-02-85 70-07 - 78 46,760
Short l-02-85 70-07 Cover l-07-85 71-08 - 33 45,628
Long l-07-85 71-08 Sell 2-11-85 71-05 - 3 45,434
Short 2-11-85 71-05 Cover 3-21-85 68-21 + 80 47,834
Long 3-21-85 68-21 Sell 6-13-85 77-00 +26? 56,077
Short 6-13-85 77-00 Cover 7-05-85 78-26 - 58 54,164
Long l-05-85 78-26 Sell 7-11-85 76-30 - 60 52,189
Short 7-11-85 76-30 Cover 7-16-85 77-13 - 15 51,620
Long 7-16-85 77-13 Sell 7-18-85 76-07 - 38 50,332
Short l-18-85 76-07 Cover 8-09-85 75-25 + 14 50,669
Long 8-09-85 75-25 Sell 8-13-85 75-01 - 24 49,819
Short 8-13-85 75-01 Cover 9-19-85 74-30 + 3 49,812
Long 9-19-85 74-30 Sell l-10-86 82-25 +251 57,555
Short l-10-86 82-25 Cover l-17-86 83-11 - 18 56,892
Long l-17-86 83-11 Sell 4-07-86 99-26 +52? 73,260
Short 4-07-86 99-26 Cover 4-08-86 101-26 - 64 71,160
Long 4-08-86 101-26 se11 4-23-86 99-28 - 62 69,122
Short 4-23-86 99-28 Cover 5-27-86 97-18 + 74 71,334
Long 5-27-86 97-18 Sell 5-29-86 95-00 - 82 68,671
Short 5-29-86 95-00 Cover 6-13-86 94-29 + 3 68,662
Long 6-13-86 94-29 se11 7-24-86 96-12 + 47 70,030
Short 7-24-86 96-12 Cover a-05-86 96-02 + 10 70,242
Long a-05-86 96-02 se11 9-11-86 94-24 - 42 68,829
Short 9-11-86 94-24 Cover 9-23-86 93-29 + 27 69,572
Long 9-23-86 93-29 se11 9-29-86 94-25 + 28 70,347
Short 9-29-86 94-25 Cover 4-30-87 92-20 + 69 72,403
Long 4-30-87 92-20 Sell. 5-04-87 90-00 - 84 69,678
Short 5-04-87 90-00 Cover 5-21-87 87-16 + 80 72,078
Long 5-21-87 87-16 se11 8-03-87 87-22 + 6 72,165
Short 8-03-87 87-22 Cover 9-22-87 83-16 +134 76,252
Long 9-22-87 83-16 se11 9-25-87 82-08 - 40 74,902
Short 9-25-87 82-08 Cover 10-13-87 80-09 + 63 76,770
Long 10-13-87 80-09 se11 3-10-88 91-24 +36? 88,138
Short 3-10-88 91-24 Cover 4-07-88 89-29 - 59 86,194
Long 4-07-88 89-29 se11 4-14-88 89-06 - 23 85,375
Short 4-14-88 89-06 Cover 4-22-88 88-04 + 34 86,337
Long 4-22-88 88-04 se11 5-02-88 86-27 - 41 84,955
Short 5-02-88 86-27 Cover 5-20-88 84-25 + 66 86,917
Long 5-20-88 84-25 se11 7-14-88 85-20 + 27 87.660
Short 7-14-88 85-20 Cover 8-19-88 84-16 + 36 88,685
Long 8-19-88 84-16 Sell 8-25-88 84-07 - 9 88,303
Short 8-25-88 84-07 Cover 11-30-88 88-06 -127 84,234
Long 11-30-88 88-06 se11 12-02-88 87-10 - 28 83,259
Short 12-02-88 87-10 Cover 3-02-89 88-08 - 30 82,221
Long 3-02-89 88-08 Sell 3-20-89 86-17 - 55 80,402
Short 3-20-89 86-17 Cover 3-22-89 87-06 - 21 79,645
3-22-89 87-06 se11 8-10-89 97-25 +339 90,138
Sho;t E-10-89 97-25 Cover E-30-89 96-12 + 45 91,444
Long E-30-89 96-12 Sell 9-25-89 95-08 - 36 90,219
Short 9-25-89 95-08 Cover l-19-90 95-26 - 18 89,556
Long l-19-90 95-26 Sell 4-19-90 90-03 -183 83,737
Short 4-19-90 90-03 Cover 5-02-90 88-20 + 47 85,105

-
reversals in the McClellan oscillator from extreme To calculate exponential averages, you do the
levels as an aid in market timing. Evidence of a following:
divergence between price and the oscillator can be
a confiiing factor. The McClellan oscillator and the New 19-day exponential average = .lO(A-B) + B
~ trading parameters cited provided a superior return A = today’s differential of advances-declines on the
in the past nine years. The study has used corporate NYBE
bond data to time trading in the Treasury bond B = the previous day’s exponential average of a-d
futures. There are periods when the performance of differentials
corporate bonds can differ from Treasury issues.
The same formula is used for the 39-day exponen-
There is also an equity influence on the bonds,
tial, except that the smoothing constant is .05. For
however, since about 20% of the approximately 700
example:
issues traded are convertible.
The availability of upside-downside volume data New 39-day exponential average = .05(A-B) + B
would allow for the development of additional
As an illustration, let’s say that yesterday’s .lO
indicators from which further trading strategies
exponential average of a-d differentials stood at
could be developed. Using the McClellan oscillator
+48 and that today there were 331 advancing issues
on the bond data with other indicators could also
and 155 declines on the NYBE for a differential of
enhance performance further.
+176.
Strategies using the oscillator could be developed
for trading bond mutual funds. One approach would The new .lO exponential average would be
be to utilize relative strength measures to choose .10(176- 48) +48.
from corporate, treasury or high yield bond funds. = .10(128) + 48 = 12.8 + 48 = 60.8
In the stock market, consideration should be given
to developing strategies for trading an Index fund. To show an example using negative numbers, let’s
Advance-decline data from NASDAQ might be used say the .lO exponential average stands at -31, and
to determine trading strategies for trading the small that today’s data shows 250 advances and 300
capitalization sector. declines for a differential of -50.
The new .lO exponential average would be
REFERENCES
.lOt-50 -C-31) + (-31)
Patterns for Profit, The McClellan Oscillator and Summation
Index, by Sherman and Marian McClellan. Copyright 1970 and = .lO(-19) + (-31) = -1.9 - 31 = -32.9
1989 (second edition). Published by the Foundation for the Study Here is how a worksheet might look to track this
of Cycles, Irvine, CA.
data on an on-going basis.
Time Trend ZZZ, by Gerry Appel. Copyright 1988. Published by
Signalert Corporation, Great Neck, NY. Date A-D .lO Expo .05 Expo MtEn Summation
The author would also like to express his appreciation to Joe 4-5-91 + 96 62.58 57.44 5.14 5.14
Kalish of Ned Davis Research. Without his assistance in secur- 4-8-91 + 38 60.12 56.46 3.66 8.80
ing the data and helping to generate the charts and studies used, 4-9-91 + 36 57.70 55.43 2.27 11.07
this project would not have been possible. 4-10-91 - 20 49.93 51.65 -1.72 9.35
4-11-91 + 34 48.33 50.76 -2.43 6.92
4-12-91 + 176 61.09 57.02 4.07 10.99
APPENDIX To start from scratch, you may assume that the frost
daily advance/decline differential is the first expo-
How to Calculate the McClellan Oscillator nential average. As an alternative, you can compute
The only data required to calculate the Oscillator the average differential over the previous 19 or 39
are the number of issues that advance each day on days. In either case, it is suggested that you procure
the NYBE (or NYSE) and the number of issues that at least 50 days of data to achieve stabilization of
decline. You then take the difference of these num- the smoothing constants. It is also suggested that
bers. For instance, if there are 750 advances and 430 you get an updated number on the Summation Index
declines, the differential is +320. If there are 430 so your are not starting at zero.
advances and 750 declines, the differential is -320.
You then must run two exponential averages on Bob Kargenian, a First Vice President with Prudential
Securities, specializes in the market timingofstock, bond
the data, one being a 19.day (smoothing constant, andgold mutualfunds and a variety offutures contracts
.lO) and a 39-day (smoothing constant, .05X The and manages approrimately$8 million in discretionary
accounts. He is also the President of TASC (Technical
Oscillator is derived by taking the differential each Analysts ofsouthern California). Mr. Kargenian can be
day between the .lO exponential average and the .05 reached at 2390 E. Orangewood Ave., Suite 100,
Anaheim, CA 92806, (714) 3853717.
exponential average.
I

A New Dimension to Risk Assessment
by Victor Sperandeo and Terry Brown
Approximately 85 percent of money managers under months, the stock should move up 16 percent. Beta
perform the S&P 500 index. Why? The reason is that is measure of volatility. A stock with a Beta of 2
there is a central problem with all conventional ap- should be up 20 percent when the market is up 10
proaches to risk analysis in the stock market. Most percent, or down 20 percent if the market is down
investors either focus on “value,” which is subjective 10 percent. Most money managers buy stocks accord-
and constantly changing, or they base their investing to some set Alpha and Beta combination, plus
ment selections on relative measures of performance. other factors such as price-earnings ratios, book
While valuable in certain contexts, both approaches value, and yields.
fail to take into account a much more fundamental These measures are all useful in the appropriate
and crucial element of market involvement-objec- place and time, but what do they really have to do
tive risk. with market risk as such? None of them provide any
What is objective risk? In general, risk is the information about whether the current market trend
exposure to the chance of injury or loss. In market will continue or fail, about the effect a change in
terms, this translates to exposure to the chance of Federal Reserve policy will have on the movement
losing money. Note the term “chance” in this defini- of prices in the market as a whole, or about the likeli-
tion. Chance implies the possibility of alternative hood that the market might be subject to a dramatic
occurrences, and any time alternatives exist, the decline. These kinds of measures are all secondary
probability of the different alternatives occurring considerations, dependent on the integrity and per-
can be expressed in terms of odds. formance of the market as a whole for their merit.
Odds take two forms: either those set according For example, consider book value as a measure
to the subjective judgement of a professional odds of the likelihood of success in an investment. The
maker, or those that are concretely measurable ac- term “value” implies evaluation, which means that
cording to probabilities based on a statistical distri- individual human minds determine it. What some-
bution of limited possibilities. The term “objective,” thing is worth-its value-depends totally on what
in this context, means that which exists indepen- the predominance of individuals in the marketplace
dently of one’s thoughts or feelings. Therefore, objec- determine it is worth through free exchange in the
tive risk is risk which can be concretely known and marketplace.
measured according to a statistical distribution of Value can change and often does. . . rapidly. For
possibilities. With respect to the stock market, the example, in early 1970, Value Line’s investment ser-
measure of the objective risk is the ratio of the prob- vice reported that the book value of Penn Central
abilities of the market going down x percent versus was $110 per share. By this measure, it was “under-
going up y percent. valued” at $74/share, and the stock price should
Approaching the stock market from the stand- have soared. It went to $2 per share! The analyst,
point of objective risk is radically different from the or team of analysts, who calculated the value of the
conventional wisdom. Most professionals today think company’s holdings failed to account for the fact that
in terms of distributing financial resources accord- the value of the Penn’s assets was dependent on the
ing to some relative measure of performance or earnings of the company and that those values would
value. For example, Alpha and Beta are typical tools deflate during a recession. In other words, they
used in stock portfolio management. Alpha is a assumed that the market’s standard of valuation
measure of quality which compares the performance would remain unchanged.
of an individual stock relative to the market. An No one truly knows the liquidation value of a
Alpha value of 1 means that the stock has, on company-it depends totally on the supply of and de-
average, outperformed the market by 1 percent per mand for the company’s assets on the market at the
month, so if the market moves up 10 percent in six time of the sale (witness the deflated prices in the

current real estate market in parts of Texas and the $90 at stake in the game-Tex’s potential reward is
Northeast). As a more recent example, some analysts 9 to 1 (even though $10 of the $90 is his, he should
were saying in June, 1990 that Citicorp was under- consider each betting round separately in risklre-
valued when its price was about $24 l/2 per share. ward terms). Assuming that Tex has four hearts and
Their presumption was that Citicorp is too big to fail, wants to draw one card for a flush, his chances (odds)
that there wouldn’t be a recession, and that there- are 1 in 5.2 that he will draw another heart-his risk
fore some of Citicorp’s bad loans would turn into good is 5.2 to 1. With a risk of 5.2 to 1 and a reward of
loans. They were unable to factor the objective risk 9 to 1, the risk/reward for the current round is 1.73
of a general market down turn into their analysis, to 1 in Tex’s favor.
and as of early December, Citicorp stock was approxi- There are 2598,960 possible five-card hands in
mately $14 per share. poker. Of those, only 9,515 hands will beat the lowest
The analysts’ entire conclusion rested on a subjec- flush, which makes the probability of a flush being
tive assumption that the market value of Citicorp’s a winning hand .9963; it is a highly probably win-
assets was either fixed and static or would appre- ning hand. With a risk/reward of 1.73 and a prob-
ciate, which assumed that the economy as a whole ability of .9963 that a flush will win, the overall
would expand, and that such an expansion would be risk/reward is better than 1.72 to 1 in his favor. If
reflected in a general rise in stock market prices. But Tex employs this kind of strategy consistently, he
the fact is that, in a market downturn, like the cur- may lose the hand, but the probability is very high
rent one, the Citicorp’s, the Trump’s, any entity that that he will win much more money than he loses
is highly leveraged against assets which depend on over time. This kind of approach to poker is not
easy credit and/or dollar appreciation through con- gambling, it is speculation. Gambling is taking a
tinued inflation are subject to decline and possible blind risk. Speculation is taking a risk when the
failure. odds are in one’s favor. That is the essential differ-
The “buy and hold value” approach is equally ence between gambling and speculation. The key is
flawed. Consider the case of IBM, probably the bluest in understanding and acting upon the underlying
of the blue chip stocks. While IBM is undoubtedly risk in the game. So, how does one measure the risk
a good, solid company, any investor who bought Big of being long or short in the stockmarket?
Blue in January, 1983 or later and held it until In order to measure something, it is necessary
November, 1989, would have been losing money to identify a quantitative relationship established
during the third largest and second longest upward by comparison to a standard unit reference value. In
stock market movement in this century! Why “hold the financial markets, this presents a perplexing
value” when there are other opportunities to make problem: how can one establish a standard to measure
money? Why ever invest capital in a declining issue risk and determine the probability of success without
or market if it is avoidable? being arbitrary and subjective in the process? Mar-
The problem with the conventional approaches kets aren’t like a deck of cards with a limited number
to market involvement is that none of them address of permutations possible; they are composed of indi-
one simple and fundamental question: “What are the viduals engaged in the pursuit of their own unique
odds that the current market trend will continue?” In set of desires or values which are by their nature
other words, what is the objective risk of being long subjective-unique to the situation and frame of
or short in the current market? Alpha, Beta, value, mind of each person. So it would seem that to ac-
yield, PE’s, book value-all of these measures have curately guage market behavior, to predict the likeli-
merit, but only as secondary considerations when hood of success of any investment, one would have
one has a firm grip on the most likely direction the to practically be omniscient-be able to poll every
market trend will go. To take a position on the basis person’s mind simultaneously and be certain how
of this kind of criterion alone is tantamount to a card they would react to coming events.
player entering a major Las Vegas poker tournament Obviously, such knowledge is unattainable. It is
without knowing the odds involved in the game-he impossible to predict the future of price movements
may win, but in large part he is playing blind, leav- with absolute certainty. The best one can do is deal
ing much of his fortune to chance. with probabilities, so the question becomes: By what
In poker, odds are measurable, concrete, objective. standard does one measure probabilities in the
For example, assume Tex, a poker player, is sitting financial markets?
at the right side of the dealer in a game of five-card The initial answer is best presented by analogy.
draw with five players. With a $10 ante, there is $50 Insurance companies use statistical data, such as
in the pot after the first round. If the first player bets mortality tables, to set insurance premiums accord-
$10 and everyone has called but Tex, then there is ing to the odds of receiving substantially more in
MTA JOURNAL / FALL 1991 43

premiums than they pay out in claims. For exam- (important intermediate movements which move
ple, the current odds of a 24-year-old white female contrary to the primary trend).
dying in New York are 50,000 to 1. The average life Without realizing it, these men implicitly discov-
insurance premium for a $100,000 policy for this ered a standard with which to objectively measure
group is $100 per year. According to the statistical stock market movements. If one follows up and com-
odds, the probable outcome is that the insurance pletes Rhea’s work to date, it is possible to derive
companies will gross $500,000 in premium payments statistically significant bell curve distributions for
for every $10,000 they pay out to the beneficiaries the extent and duration of all market movements
of 24-year-old white females who have died. That is since 1896.
odds of 50 to 1 in the insurance company’s favor- In a bell curve distribution, the value of the
excellent prospects for success over the long term. statistical samples tend to bunch around the median
It is no wonder that most well managed life in- or mid-point of the distribution, with the most sam-
surance companies are so profitable (the ones that ples falling within the second and third quartiles of
didn’t fill their balance sheets with junk bonds and the distribution (see Figure 1). To be significant, the
real estate). distribution must remain relatively constant over
These is nothing certain about the life expec- time. The life expectancy profiles for market move-
tancy of any one individual, but that doesn’t mean ments meet these requirements.
it is imposssible to define a standard with which to Shown in Table I are the results of a study which
gauge the odds of an individual person living to a show the distribution of the Dow Industrials bull
certain age within a given standard of health-insur- market primary swings from 1900 to 1946 and from
ance companies make such measures their business. 1900 to present. As is evident from the results, the
The same type of reasoning can be applied to the variation in the quartile breakdown of the sample
stock market. distribution is very minor.
A study of all stock market movements from In addition, the variation in the actual sample
1896 to date shows that stock market movements, distribution is quite minor as shown in Table II.
like people, have statistically significant “life expec- Everything dies eventually, even the giant red-
tancy” profiles which can be used as a standard for woods. But unlike the redwoods, market movements
the measurement of risk exposure in terms of odds tend to live shorter lives more often than longer ones.
and probabilities. The results in Table II show that 79.47% of the 114
To compile these profiles, one has to begin with Industrials bull market primary swings in history
the questions: “What exactly is a trend? How high expired at or below a 35 percent appreciation. And
or low does it usually go? How long does it usually as Table I shows, 50 percent of all moves in history
last?” The best answer to these questions can be (the samples falling in quartiles 2 and 3) have fallen
drawn from the work of Charles Dow, William Peter within the range of 12.7 percent and 30.3 percent
Hamilton (editor of the Wall Street Journal from appreciation.
1907-19291, and Robert Rhea, which they performed Based on these statistics alone, one would be
in the late 19th and early 20th centuries. justified in speculating that a current primary swing
Dow identified the fact that there are three con- would appreciate somewhere between 12 percent and
current market trends, each of which may be moving 30 percent, and the odds would say to be out of the
in a direction opposing the other(s): the short-term, market after the 30 percent appreciation had been
lasting from days to weeks; the intermediate-term, reached. The same kind of reasoning can be applied
lasting from weeks to months; and the long-term, to the duration profiles, and actually, both should
lasting from months to years. Drawing on Dow’s be used in conjunction.
work, Hamilton refined a method to classify stock For example, the median extent and duration for
market movements and Robert Rhea used this bull market primary swings is 19.8 percent in 113
method to log the extent (how much) they moved in days. If a primary market swing were to appreciate
percentage terms from the previous highs or lows) 20 percent in just 60 days, then it could be im-
and duration (how long they lasted in calendar days) mediately recognized as deviating from “normal”
in tabular form for both the Dow Jones Industrials behavior and special consideration should be given
and Transportation (Rails) averages. In particular, to the determination of why it has appreciated so
Rhea logged the extent and duration of primary quickly. To reiterate, the statistical profiles provide
movements (the long-term bull or bear markets), the objective basis with which to begin an assess-
intermediate primary movements (the legs that ment of market risk.
make up primary movements in between secondary This is very similar to how life insurance com-
corrections), intermediate secondary corrections panies go about gather information to set premiums.

Table I
BELL CURVE DlsTRlBIJnON OF BEAR MARKET
SECONDARY CoRixcnoNs:
Probablllty of Current Trend Reversal
r Historical Comparison of
Bell Curve Sample Dlstributions
Dow Industrials Bull Market Primary Swlngs
lntermedlate Correcrlon (Uptrend) In Bear Market
1900-1946 1900-1990
Quartile Extent Duration Extent Duration
(%) (days) (%I (dam)
1 7.1-14.2 16-60 4.3-12.7 16-62
2 14.3-22.9 61-99 12.7-19.8 63-113
3 23.3-32.4 102-213 20.0-30.3 113-221
4 35.0-116.6 222-898 31.6-116.6 222-898
Total number of occurrences from 1900-1946 Is 56.
Total number of occurrences from 1900-1990 Is 114.
L J
Table II
Historical Comparison of
Sample Distributions
Dow lndustrlals Bull Market Primary Swings
1900-1946 1900-1990
% Appreclatlon % of Occurrences % of Occurrences
Less than 10% 8.93 10.71
Less than 15% 25.00 33.04
From 15-35% 51.79 46.43
Bell curve distribution for extent and duration In bear More than 35% 23.21 20.57
market secondary corrections. The arrow Indicates the Total number of occurrences from 1900-1946 Is 56.
position of the current Intermediate movement In the Total number of occurrences from 1900-1990 Is 114.
distribution. L
-
First they determine the age and health of the pro- likely that a market that has appreciated 12 percent
spective customer, then they factor in job hazards, in 60 days is much more likely to see another 8 per-
medical history, family history, and so forth. But age cent appreciation than a market which has appre-
in relation to the mortality tables is the standard ciated 45 percent in 270 days. The profiles provide
of reference, the starting point of evaluating the risk invaluable information, in the context of history, of
of insuring the customer. the likelihood that the current stock market trend
In the same way, one can use market extent and will continue or fail.
duration distributions as a means to establish the Returning to the insurance analogy, if two men,
base probability that a market movement will reach one 18 years old and one 75 years old (the median
or go beyond a given extent and duration. BUT age that American men die), both in good health,
THEY ABSOLUTELY CANNOT BE USED TO PRE- went into an insurance company to apply for a term
DICT THE EXACT LEVEL THE MARKET WILL life policy, the younger man would pay a very low
REACH OR IN EXACTLY WHAT TIME FRAME! premium and the older man would pay a very high
Market turning points occur when the tide of market premium. The premiums would be set such that the
participant’s judgements change. Period. This is risk, according to the statistics, of the person dying
usually driven by fundamental economic factors before he pays the entire policy value plus interest
such as changing policies of the Federal Reserve is very low. But if the older man had a temperature
Board, major world events, and so forth. To use of 102, high blood pressure, and was a heavy smoker,
extent and duration profiles to predict in advance he wouldn’t be sold a policy at all.
exact market turning points would be like an insur- Consider the example of the October 19, 1987
ance company telling someone when and how they crash and the October 1989 mini-crash in a similar
will die on the day they buy their policy. Each in- context. The primary intermediate movement lead-
dividual person dies in a different manner, context, ing to the crash of 1987 began on May 20,1987. By
and point in time; and so do market movements, each August 24,1987, the Industrials had increased 22.9
in their own unique time and way. But just as one percent in 96 days, while the Transports had in-
is much more likely to see Meryl Streep perform in creased 21.3 percent in 108 days. These were nearly
two years than George Burns, so it is much more the exact median levels, both in extent and dura-
MTA JOURNAL ! FALL 1991 6

tion, of all bull market intermediate movements in for the death of this friend, many gave back years
history. In life insurance terms, the market had of unprecedented gains.
reached the median life expectancy, meaning that The point in describing conditions before the
50 percent of all intermediate movements in history crash of October 1987 is to show how watching extent
ended before it, making it a likely candidate for retire- and duration criterion can act as a caveat, warning
ment. From this standpoint alone, caution was war- an investor to pay close attention to fundamental
ranted, so it was time to examine the medical history. market conditions.
The market was no Jack LaLanne. There were Sometimes, the statistical profiles give more
divergences; the Dow made a new high in August, information than just a warning. For example, as of
but the advance/decline ratio did not-a bearish indi- October 9th, 1989 the Industrials had appreciated
cation. PE’s were at an average of 21 times earnings, 24.4 percent while the Transports had appreciated
the highest levels since 1962 when they were at 22. 52 percent, driven by takeover stocks. In the frame-
The average book value to price ratio was nominally work of the market life expectancy profiles, these
higher than 1929. Government, corporate, and con- were highly significant levels.
sumer debt were at unprecedented levels; interest On the Dow, the median net appreciation, or
rates were on the rise; and it was possible that any yield, for succeeding primary intermediate move-
major decline in the dollar could set off a panic sell ments in bull markets is 10 percent (the median net
off which would cascade into the stock market. percent gain achieved by buying and holding from
Further, there were billions of dollars of “hot the bottom of one intermediate correction to the
money” in the markets due to program trading, next). As of October 9th, only 15 of 114 such moves
which would “unwind” in a major sell off and exag- in history yielded more-or 13.15 percent of all
gerate the down move. But it wasn’t just program moves in stock market history. Even more important,
trading that made the sell-off so steep; when a feeble only 8 of 174 upward movements in both bull and
72 year old gets pneumonia, it is much more serious bear markets had matched or exceeded the Trans-
than when a healthy 18 year old does. In October, port’s 52 percent gain. In other words, as of October
1987, the market was not only no Jack LaLanne, it 9th, 1989, 95.4 percent of all bull market primary
was an alcoholic, with pneumonia, that smoked three swings in history had failed before the move in the
packs of unfiltered Camels a day. Transports.
The statistics indicated to be out of the market In statistics, anything that occurs 85 percent or
in October and to be looking for a shorting oppor- more of the time is called a highly significant event.
tunity and the fundamentals soon backed them up. In terms of odds, based on history, the chances that
The first telltale fundamental sign of the forthcom- the market would fail ranged from 7.46/l on the Dow
ing down move was on October 5th when the Wall to 21.75/l on the Transports! Measured by statistical
Street Journal printed the following: “Fed Chairman criterion alone, to be long in October was one of the
Greenspan said interest rates could become ‘danger- poorest risks on record. And once again, the fun-
ously high’ if inflation worries ‘mushroom’ in fman- damental and technical factors were on the side of
cial markets. Greenspan called such worries un- the statistics.
warranted but hinted the discount rate may have to From a technical standpoint, the new high set
rise to allay them.” The next day, stock prices by the Industrials on October 9th was unconfirmed
plunged a record 91.55 points for no immediately ap- by the Transports-a bearish indication. As of Fri-
parent reason other than Greenspan’s pronounce- day, October 13th, the Japanese and the Germans
ment. On October 15th, Dow Theory gave a sell had raised interest rates, making it more expensive
signal, marking the opportunity indicated by the for their companies and citizens to buy American
statistics. The patient’s heart could fail with even products on credit. The Fed had reduced the money
the slightest excitement. supply and credit availability (as measured by free
The heart attack occurred when Germany and reserves) over the previous two reporting periods, and
Japan failed to heed James Baker’s request to with the CPI already at an annual rate of approx-
stimulate their economies (inflate) to protect the imately 5.5 percent, there was little room for them
value of the dollar. In response, Baker announced to to ease to stimulate business activity, which was
the world on Sunday, October 18th, that he “would already sluggish. Northeastern real estate and the
let the dollar slide.” It was apparent at this point that regional banks holding the mortgages were already
the financial markets would collapse from the dollar in recession. The bottom had already fallen out of
devaluation. When the market gapped down on Octo- the junk bond market. In short, the patient was once
ber 19th, those who were long watched in terror as again old and sick and another stroke was immi-
a old financial friend failed before them. Unprepared nent-not a good time to write an insurance policy

at any premium rate. It was certainly no time to were at 5 percent, and earnings were estimated to
be long, and an ideal time to look for a shorting increase substantially; the manager would then
opportunity. underweight the statistics and invest the full 60 per-
The market life expectancy profiles do not always cent in stocks.
make market decisions as clear as they did on
October 9,1989, nor do they eliminate every element Conclusion
of subjectivity. But consider what the profiles say in The “life expectancy” profiles of stock market
the context of the current market. movements take much of the subjectivity out of mak-
We are currently in a bear market. More specif- ing market decision and act as an extraordinarily
ically, we are in a secondary correction in a bear significant caveat to the approach of major market
market-an intermediate uptrend. As of December turning points. They provide an objective reference,
4th, the stock market had, on average, retraced 23.7 allowing the market participant to place his or her
percent of the previous primary down move (the primary focus on objective risk, which is the ideal
down move from the June-July highs to the mid- basis of any approach to speculation or investment.
October lows) over an average period of 50 days. The It should be obvious from the examples that this
average median retracement in corrections is 50.9 presentation is not intended to imply that market
percent over an average period of 40 days. Using forecasting can be made on the basis of statistics
average numbers, of all bear market secondary cor- alone. Further, the complexity of how the statistics
rections in history, 93.8 percent have retraced more are derived and are put to use is too great to discuss
than the current one and 40.7 percent have lasted in further detail in this article. But no matter what
longer. Based on the statistical criteria alone, there method of market evaluation is employed, market
is a 32.7 percent chance that the correction is due life expectancy profiles can provide an objective base
for imminent reversal, as demonstrated in the figure context within which to quantitatively gauge the
below. The odds are therefore 2.06 to 1 that the cur- risk of market involvement. They can add a unique
rent correction (intermediate uptrend) will continue. new dimension to risk assessment and provide a
One can refine the statistics and apply them to powerful means to produce superior returns.
x
specific indexes rather than to the market as a
whole, but a full discussion of these techniques is
beyond the scope of this article. The point is that, Victor Sperandeo has been a professional trader and
no matter what the scenario, the statistical profiles money manager for twenty years. For the past thirteen
years Mr Sperandeo has been a consultant and advtsor
always provide an objective criterion with which to to a small group oflnstitutianal clients, and is the Presi-
begin the process of risk assessment. dent of Rand Management Corporation.
As an example of how one might apply this
information, consider the case of a pension fund
manager who must be long to some extent in the
stock market. Suppose the fund manager is trying
to determine what percentage of capital to allocate
to the stock market, with 60 percent being an aggres-
sive position and 20 percent being the minimum
allowable position according to the investment
charter of the fund.
In the context of the current market, the statis-
tics say that the likelihood of the market as a whole
continuing to move up is 67.3 percent. On that basis
alone, the portfolio manager should commit to no
more than 67.3 percent of the maximum 60 percent
to stocks. In other words, on the basis of the statistics
alone, he should have no more than 40.4 percent of
his portfolio committed to stocks.
It should be emphasized again that, like the age
for someone who is applying for a life insurance
policy, this is only a starting point, a basis from
This article is reprinted with the permission of TraderForum.
which to evaluate the risk of market involvement.
TraderForum is a research service not available to the general
If under these same statistical circumstances, infla- public Nothing in this report shall be construed as a recommen-
tion was at 1 percent, PE’s were at 9, interest rates dation to buy or sell securities.


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FALL 1991

A PUBLICATION OF THE MARKET TECHNWANS ASSOCIATION

Issue 38 Fail 1991

John R. McGinley Michael J. Moody, CMT

Frederick Dickson, CMT David Upshaw, C.F.A., CMT

Richard Orr, Ph.D. Anthony W. Tabell

Henry 0. Pruden, Ph.D.

MTA JOURNAL /FALL 1991 1

ELIGIBILITY: REGULAR MEMBERSHIP is available to those “whose professional efforts are

Receive Monthly MTA Newsletter Yes Yes

Receive MTA Journal Yes Yes

Use of MTA Library Yes Yes

Participate on Various Committees Yes Yes

Eligible to Chair a Committee Yes No

Eligible to Vote Yes No

Colleague of IFTA Yes Yes

Annual Subscription to the MTA Journal ONLY-$3500 minimum two issues.

Single Issue of MTA Journal (including back issues)-$20.00 each.

I MTA JOURNAL /FALL 1991

MTA Editorial Policy

T~~MARKETTECHNC~SASSOC~~'IONJO~~%NAL ispublishedbytheMarket Technicians Associ-

Style For The MTA Journal

MTA JOURNAL ! FALL 1991 3

Board of Directors, 1991-92

President Vice-President/Long Range Vice-President/Seminar

Programs Education Marketing

4 MTA JOURNAL /FALL 1991

Unchanged Stock Indicator The New York

Two Steps Forward The Influence of

MTA JOURNAL I FALL 1991 5

6 MTA JOURNAL /FALL 1991

The MTA Journal and Accreditation Committees Types of Articles

MTA JOURNAL / FALL 1991 7

8 MTA JOURNAL ! FALL 1991

McGinley Dynamics - Volatility Version

A. Introduction c) Tracks with Exp. & MA in trending

MTA JOURNAL I FALL 1991 9

10 MTA JOURNAL! FALL 1991

l Robert Arnott gave an eloquent presentation on

MTA JOURNAL /FALL 1991 11

Introduction October 22,1949. The lowest 5% of values were those

12 MTA JOURNAL /FALL 1991

4 MTA JOURNAL /FALL 1991

MTA JOURNAL /FALL 1991 15

16 MTA JOURNAL I FALL 1991

> ,906 < .933 551 5.0 69 10.49 3.9

MTA JOURNAL /FALL 1991 17

18 MTA JOURNAL / FALL 1991

M’lA JOURNAL /FALL 1991 19

77l206 7mQl2 ao+2l 0lOE.S mom cslloe

20 MTA JOURNAL i FALL 1991

SUMUARf OF CHc8QuARED SK3NUXXMCE TESTS FOR TURN (SMM)

MTA JOURNAL /FALL 1991 21

22 MTA JOURNAL I FALL 1991

MTA JOURNAL /FALL 1991 23

Closing Prices only. Each dot represents one day.

24 MTA JOURNAL /FALL 1991

MTA JOURNAL /FALL 1991 25

Commodity Wheat Gold S&P 500

Start Date lApr68 31Dec74 21Apr82

26 MTA JOURNAL/FALL 1991

MTA JOURNAL /FALL 1991 27

28 MTA JOURNAL /FALL 1991

PBP = Pressure Buy Point

T~~MARKETTECHNC~SASSOC'IONJO%NAL ispublishedbytheMarket Technicians Associ-