market technician no 68

MARKET TECHNICIAN

THE SOCIETY OF TECHNICAL ANALYSTSA professional network for technical analysts

THE JOURNAL OF THE STA

ISSUE 68 DECEMBER 2010

IN THIS ISSUE

T. Pelc The rhythm of time ....................................................................................................1

R. Miller Point and figure charting...........................................................................................5

J. Monfort Acute monthly reversals (AMRs) .............................................................................7

D. McMinn DJIA peaks, seasonality and market outcomes..................................................10

D. Watts Bytes and Pieces ......................................................................................................13

STA Diploma results ....................................................................................................................................6

FOR YOUR DIARY

TUESDAY January 11thPanel DiscussionCommodities ............................................................................................Brenda Sullivan, Sucden FinancialEquities .......................................................................................................................Peter Goodburn, WavetrackFixed income.........................................................................................................Tim McCullough, Lloyds TSBForeign exchange...................................................................................................................William Moore, RBS

TUESDAY February 8thMarket analysis using the Elliott Wave Theory ...................................................................Thomas Anthonj, JP Morgan Chase

TUESDAY March 8thThe 3T methodology(trend, targets, timing) ...........Jean-Francois Owczarczak, Management Joint Trust, Geneva

Welcome to the new look journal. We have tried to give it a more 21st-centurystyle and to tie it in with our website. If anyone has any comments orsuggestions please e-mail them to Katie at [email protected]

This year's IFTA conference was held in Berlin in the week that the city wascelebrating the 20th anniversary of the Wall coming down. As usual itprovided an excellent forum for technical analysts around the world to meetand exchange views. One day of the conference was devoted to the energymarkets and we hope that some of the speakers will submit articles to thejournal in the coming months. Next year's conference will be held in Sarajevoon 6-8 October.

THE SOCIETY OF TECHNICAL ANALYSTSwww.sta-uk.org

COPY DEADLINE FOR THE NEXT ISSUE FEBRUARY 2011

PUBLICATION OF THE NEXT ISSUE MARCH 2011

MARKET TECHNICIAN

1ISSUE 68 DECEMBER 2010

Looking for when markets may turn,using cycles gives us the timing elementfor strategic activity (50% of theequation, the other half is focusing onprice). The premise is that we, aspeople, manipulate our measurement oftime (and the calendar) and thesuggestion is maybe we should useexternal influences such as planetary

movements, or lunar cycles, or theactual natural Earth cycle for timingevents. The argument is there may belittle dualism between natural eventsand the reactions of the financialmarkets.

There is a lot of speculation about the2012 date generally; it is significant in

the natural cycle of the Earth. If we takea top down approach (big picture tosmall picture), as we should in technicalanalysis, we see the Earth has roughly a26,000 year cycle (25,820 years). Thisis how long it takes to complete theprocession of the Equinoxes (for theEarth to travel past all 12 signs of theZodiac).

We are currently in Pisces (the Fish)moving to Aquarius (Water). Arguablyan indication of major change in ourspiritual belief systems/behaviour, butdefinitely a cycle change period in late2012 (December) for the Earth.

Splitting this grand cycle into substructures we can see 5 smaller cycles(5,125 years each from the Mayans),with our current sub structure startingaround 3113BC and finishing around 21Dec 2012.

5,125 years =13 smaller cycles called Baktuns1 Baktun =394 tropical years (144,000 days Fibonacci no.)Thus we are in the 13th Baktuncycle 1618-2012 according to theMayan calendar.

The Grand Cycle The Heavensand the Earth

But measuring time is an interestingexercise since humans have manipulatedour measurement of it in history. Todaywe use the Gregorian calendar (still outby 26 seconds a year) which was aproduct of its predecessor the Romancalendar. Why do we have 28 days inFebruary and 31 in July and August? Itis thanks to Augustus Caesar. But 90countries today use the alternative lunarcalendar in their culture namely the 13months calendar with 28 days permonth.

65% of US publicly traded companiesuse January to measure the fiscalyear.

In the UK, pre-government ownedcompanies eg, BT Group and NationalGrid, continue to use thegovernments financial year whichends on the last day of March.

Many universities have a fiscal yearending in summer months

The rhythm of timeBy Tom Pelc MSTA CFTe

The key theme of my talk to the STA earlier this year was the third tenet oftechnical analysis History repeats itself. There is a cyclical nature tofinancial market oscillations mainly because what we are actually analysing ishuman investment behaviour. This is arguably driven by three primaryemotions fear, greed and hope, whatever the culture you look at. Peoplereact to a predictable series of emotions in their investments from beingcautious about investing to eventually facing fear and disgust, (being closelylinked to Dow Theory) and this forms the basis of a simple Sine wave, whichin turn is one cycle. The cycle repeats itself over time in a similar rhythm butmaybe not exactly in the same way.

ConvictionEnthusiasm

ConfidenceGrowing recognition

HopeDisbelief

Disdain SurrenderDisgust

CautionSkepticism

ApprehensionShock & fear

Gree

d

Fear

Pric

eDe

velo

pmen

t

Time

DOW THEORY

Accumulation

Participation

Distribution

Chart 1: The Grand Cycle The Heavens and the Earth

Grand CycleProcession of the Equinoxes = 25,820 yrs

We enter the age of Aquarius in 2012 We enter the age of Aquarius in 2012

Earth transits through each of the 12 Zodiac signs= 2152 yrs approx each

This article is an abridged version of a talk given to the STA on 8th June

2MARKET TECHNICIAN


In Australia and New Zealand thefiscal year runs from 1st July to 30thJune

Whatever the measure, the cycle is stillthe same namely driven by theprimary emotions. If we can get thedata of an instrument going back we canlook for the three cyclic principles tomeasure forward the next cycle. Weneed the amplitude (how big a cyclegets), the period, (distance betweencycle troughs), and phase distancebetween varying cycle troughs. (Chart 2)

When the cycle is not exactly rhythmicwe can use various cyclic principles tosmooth the pattern from summation to synchronicity and we can use the concept of proportionality. Theamplitude of a 20 day cycle should, intheory, be roughly double a 10 daycycle. The best situation is if you have acycle which has a turn confirmed by aprice pattern or you could try summationto generate pattern signals. (Chart 3).

A 36 week cycle for GBP/USD (chart 4)sees technical patterns signal turns oncycle dates using Japanese candlesticksand added to this is a Lucas table (usingratios of 7 compared to range extremesand added to a sequence low key is theresults column on the table far right.)

This is a simple example of justmeasuring time as a static cycle, but wecan use more esoteric techniques such

Chart 4

1.6904 1.36820.320.321.007.007.00

1.7441 1.36820.380.321.176.007.00

1.8193 1.36820.450.321.405.007.00

1.9321 1.36820.560.321.754.007.000.32 Total

2.1200 1.36820.750.322.333.007.001.3682 01/06/2001

2.4959 1.36821.130.323.502.007.001.6904 01/06/2003

3.6236 1.36822.260.327.001.007.00Low

ObjectivesLowR*(C/S )Range RC/SSequence SConstanct Cminus

AddGivenMultiplyGivenDivideAdditiveRULE OF 7High

UpsideUpsideUpsideUpsideUpsideUpsideUpsideSubtractCable

Long legged Doji & Sankawa yoi no myojyo

Kirikomi

Takuri

Yo-sentsutsumi

Doji

Kenuki

Simple example = next cycle

date end of July 2010

S S

NL

H

Cycle

Chart 3

Chart 2: Three cycle principles

The best situation, is if you have a

cycle which has a turn confirmed by

a price pattern, you could also try

summation to generate pattern

signals eg. previous Double Top.

Chart 5

When the Earth is at the mid-point betwixt two planets 45, 90, 135 and 180 degrees are

considered as difficult angles and tough for stocks.

Aug 24 1987 five planets were on the same ecliptic longitude, this last happened 800 years

ago

Aug 6 2008 Mars-Uranus crash cycle

AUG 1 2010 - +/- 1 week 5 planets aligned Cardinal Climax not happened in 1,000

years watch out stock market and the world

Monthly Dow Jones

Aug 1987

Aug 2008

MARKET TECHNICIAN


as sunspot activity or lunar cycles or even in some cases planetaryalignments.

Professor Tchijevsky in the 1920ssuggested that, as sunspot activityapproaches its maximum, the numberof important mass historical events,taken as a whole increases, approachingits maximum during the sunspotmaximum and decreasing to itsminimum during the periods of thesunspot minimum. Sunspots reach amaximum about every 11 years, butsuccessive maxima have spots withreversed magnetic polarity, thus thewhole cycle is 22.2 years long. We are ina quiet period at the moment but hugeactivity could come between 2011 and2012 be warned.

When China revalued the Renminbi on21st July 2005, it was the closest theMoon was to the Earth in eight years.My suspicion is that, as a result of theircultural heritage, they are extremelyaware of important natural dates. Onthe Summer Solstice, 21st June 2010,another China story hit the market. The authorities announced they wereadopting a more flexible exchangerate policy, moving from the US dollarpeg.

The charts 6, 7 and 8 are examples ofsome of the cycles I have observed. Theoptimal cycle across many markets isthe 37.33 week cycle as my studies haveconcluded between 36-39 weeks iswhere most cycles for many assetscluster. Martin Armstrong is a strongproponent of this 37.33 week cycle andI dedicated a slide in my presentation tohis invaluable work.

To conclude, I illustrated two majorcycles, one for fixed income productsand the other the decennial cycle of thestock market in years ending with a 7based on Ganns original observations.For the fixed income example, calendarweeks 32-34 in 2005 since 1980 were88% time positive for long bonds i.e.yields fell for that three week period ona net basis. I gave numerous examplesof how this cycle is still going on; notonly has the curve in 2s30s in Swapsflattened overall in that time period butalso the butterfly trade 2s10s30s waslower (which is like trading 2s10s vs10s30s).

39 week cycle

Chart 7: USD Index Weekly chart with 39 week cycle

KENUKI TOP

Chart 8: Nymex Oil 25.8 months cycle (sub cycle = 8.6 months x3)

Very simplified E-Wave count with the cycle on

a logarithmic chart

Chart 6: UK 10 Year generic yield weekly and 39 week cycle

4 ISSUE 68 DECEMBER 2010

MARKET TECHNICIAN

-8bp to -21bp in weeks 32 -34

2006

7th Aug

Chart 9: US 2s10s30s fly (using Swaps) Daily chart 2006

Chart 10: Dow Daily chart

New Moon 11th Oct 2007 and a bearish key day reversal

Full MoonFall was 20.5% from Oct 11, 2007- Jan 22, 2008

Chart 10a

1887 Dec 3 1886 Apr 2, 1888 -20.1%1897 Sept 10, 1897 Mar 25, 1898 -24.6%1907 Jan 19, 1906 Nov 15, 1907 -48.5% 1917 Nov 21, 1916 Dec 19, 1917 -40.1%1927 Oct 3, 1927 Oct 22, 1927 -10.2%1937 Mar 10, 1937 Mar 31, 1938 -49.1%1947 May 29, 1946 June 13, 1949 -24.0%1957 Apr 6, 1956 Oct 22, 1957 -19.4%1967 Feb 9, 1966 Oct 7, 1966 -25.4%1977 Sep 21, 1976 Feb 28,1978 -26.9%1987 Aug 25 1987 Dec4 1987 -35.1%1997 Aug 6, 1997 Nov 12, 1997 -13.2%2007 ?????? YTD (05/10/07) +12.52% post payrolls

Chart 10b

1887 September 19 (-2.24%) and October 12 (-2.29%) 1897 September 21 (-3.95%) and October 12 (-3.90%) 1907 March 14 (-8.29%). Major banking panic October 221917 November 01 (-4.16%) and November 08 (-4.21%) 1927 October 8 (-3.65%) 1937 October 18 (-7.75%) Panic/depression 1947 April 14 (-2.95%) 1957 October 21 (-2.48%) Credit crunch 1967 No fall =>2.00% recorded 1977 July 27 (-2.17%) 1987 October 19 (-22.61%) Black Monday 1997 October 27 (-7.18%) Blue Monday

One example of this fixed income cyclewhich is still on going and relevant forthis August calendar weeks 32-34.(Chart 9)

Finally the decennial cycle for theDow Jones with bear markets, yearsending with a 7 (Chart 10a)

So what about 2007?What actually happened thereafter

It did not add up the market shouldhave turned South or a new cycle wasbuilding (Chart 10b).

The Dow did, indeed, turn a weekafterwards on the 11th October. Theinitial impulse decline until January 2008was 20.5% = a bear market. The lunardates tied in with examples I gave thatthe decennial cycle has turned on majorlunar dates either New and Full moonsor awkward angles. (Chart 10)

Conclusion

Seasonality plays a part in manypeoples analysis (including economists).The longer the history with reliable data,the more powerful the argument is if itties in with technical signals. There arecycles within cycles so first look for thebig picture then work smaller. Use therule of multiple techniques.

Some suggested key dates to lookout for:

March 11 2011 and April 4th 2011.These are likely to be a positive time forstocks but increased periods of volatility.

More important is mid-June 2011. Thisis a major cycle period using 4.3yearssub cycle from long term 51 year cycle.

8th-26th Aug 2011 very bullishrebound period for US long bonds(calendar weeks 32-34).

Picks for future investment based onlong term cycles are nuclear energy andAfrican stock markets South Africa,Kenya and Egypt. Others to watch goingforward long term are food EDF (PF) andMitsubishi heavy industries (MITS).

Millionaires dont use astrology,Billionaires do J.P. Morgan

5MARKET TECHNICIAN


From my studies, the P&F chart puristconcluded that the only data which canbe used effectively for the constructionof P&F charts is tick-data [i.e., theconcept of data based on the old tickertape, trade by trade, reporting]. There is no doubt, of course, that onlytick-data can provide the basis for atotally correct P&F chart construction.However, in today's markets there isjust too much tick-data and the

process of storing all this data toconstruct P&F charts, which willinevitably date back over a period oftime, would be hugely cumbersomeand beyond the scope of all but thelarger computers.

In stepping away from tick-data, thereare two other methods which are used,namely: close-only construction; and,high/low construction.

With close-only construction the closeprice only for each chosen time period isadded to the chart. This method workswell in certain markets, but it does nottake into account the intra-time-periodhighs and lows. This can leave a majordata gap, especially when analysingvolatile markets. This data gap can, ofcourse, be overcome by using thehigh/low data for each chosen timeperiod thereby taking into account thefull range of price movement. In short,one can say, for example, that a 1minute high/low P&F chart is extremelyclose to using tick-data.

The main problem with using thehigh/low construction method is, tostate the obvious, that there are twopieces of price data for each time period.This problem can, of course, beovercome by applying a trend biasedsystem. The normal application of thistrend bias works in the followingmanner, namely: when there is anexisting column of X's the high takespriority; when there is an existingcolumn of O's the low takes priority. Thismaintains the correct support/resistancelevels on the P&F chart until an outsideprice period occurs where the high and

Point and figure chartingBy Richard Miller

Over many years I have studied various charting techniques but, as time wentby, I found that 3-box reversal Point and Figure charts (P&F charts) were themost suitable method to use for the analysis of movements in market prices.The objective nature of P&F charts definitely gives a significant advantageover other forms of charting which, in general, rely heavily upon a subjectiveinput in order to achieve a clear result from interpretation. With a 3-boxreversal P&F chart, 45 degree trend lines can be drawn objectively from thefirst thrust away from the top or bottom, vertical and horizontal counts arealso taken objectively. Again, it is purely the product of an objectiveobservation, whether a market is in upward or downward trend.

Chart 1 Chart 2

6MARKET TECHNICIAN


STA DiplomaResults

DISTINCTION

Pretesh Bhayani

Bruno Vignoto

Woo Fook Mun

PASS

Joy Basford

Magnus F Becher

Dmytro Bondar

Sammy Chammas

Kyriakos Charilaou

Jack Davidson

Jamie Davis

Daljit Dhaliwal

Yeo Kam Fai

Peter S Fox

Goay Chia Chia

Philip Heurich

Leona Gomez-Lopez

Peng Kong Mah

James Maitland

James Kenneth Seymour

Andrew Stone

Amresh Subramaniam

Eu-Gene Toh

Emily Chu-Chun Tseng

Samuel Utere

Luke John Warren

Low Ley Yee

Date of next STADiploma ExamWednesday 13 April 2011

the low are both significant. Theproblem in such a case is this: whichprice should be recorded?

Some experts say that because it isimpossible to tell whether the high orlow came first during the time period,the basic rule should be maintained,namely: that in a column of X's the hightakes priority; and, in a column of O'sthe low takes priority. Thus, in short, theother prices should then be discarded.This basic method works in most casesbecause the market invariably catchesup and consequently the full pricemovement is recorded in the followingcolumns. In short, the market confirmsupwards or downwards movement.

However, on some occasions this is notthe case and the P&F chart is left withpotentially incorrect support/resistancelevels. Indeed, some well known expertsin this field have said that although thisis a problem it should be ignored as it isinsurmountable.

Well, after years of study and a suddenmoment of realisation, I believe that Ihave found a workable solution to thisinsurmountable problem and I wish toshare my idea with colleagues. Bysharing my idea, I am hoping to seewhether my idea is robust enough towithstand the scrutiny of others who arealso users of P&F charts. For simplicity, Ihave called my idea the "RM Dot".

The "RM Dot"

The clear major advantage of P&F chartsis the ability to remove noise from themarket and give clear, unambiguousindications of support/resistance andentry/exit points. Because of thesesignificant advantages of P&F analysisover and above other forms of analysis,it is imperative that nothing is added tothe P&F chart which would detract fromthese advantages or add in noise thathas been so successfully removed.

Now referring to the given examplecharts [see chart Nos. 1 and 2]: as P&Fchart users will clearly see, Day 5 causesthe problem [i.e., an outside priceperiod the problem which has in thepast been described as insurmountable].This is because in standard P&F chartingthere is no record of the fact that theprice reached 90 and rallied to 125. Thereader of the chart could therefore make

the mistake of assuming that there issupport at 95. Thus, when the pricereaches 90 on Day 7, this could be a P&Fdouble bottom sell signal.

However, with the simple addition of the"RM Dot", which shows 2 "Dots" in the2nd column, we have a record of theprice reaching 90 and, thus, the P&Fdouble bottom sell signal could beignored until confirmation at, say, 85.

The great advantage, short of recordingfull price movements, is that the additionof "RM Dots" play no other part in theP&F analysis; save the simple record thatthe price, e.g., in my given example,dropped to 90. The addition of the "RMDot" should, of course, only be made ifthere is a blank box in the oppositedirection. If there is an "X" or "O" inthese boxes, then support/ resistancehas already been recorded and the priceshave no impact on support/resistance.

I trust that this brief introduction to the"RM Dot", which I believe provides themissing factor in the great value of P&Fanalysis, is sufficient for you tounderstand why I am enthusiastic aboutits value and why I am keen to share theidea with colleagues. I would welcomeall comments and further discussion.Please feel free to email me [email protected] better, it would be great to seesome discussion played out in thecolumns of this Journal.

The STA Diploma Course

The STA Diploma Course willcommence in the New Year. Thecourse runs for one evening a week over an 11 week period,commencing 12 January 2011. Thecourse also includes an ExamPreparation Day. The cost of theJanuary 2011 course is 2,695. Thecourse fee includes membership ofthe STA for one year, the courseitself, the Exam Preparation Dayand Exam.

For further information, pleasecontact Katie Abberton [email protected]

7MARKET TECHNICIAN


It has been noted that major trendchanges often exhibit an earlycharacteristic which distinguishes themfrom mere corrections of the prevailingtrend. This is not true all the time butmany times it is. This characteristic isthat major trend reversals tend to occurwith an initial explosive change in price.This is the initial lift-off stage.Corrections can have this characteristictoo but it is more often the case that itaccompanies stronger longer termcyclical market moves.

Expressed in another way, it is the angleof ascent or descent compared to theangle of the established trend whichhelps differentiate the two types ofmarket activity. In a reversal, the angletends to be sharper in the direction ofthe new trend than in the direction ofthe dying trend. This is illustrated in thediagram below:

The diagram above represents idealisedprice activity during the tail-end of abear market. The price has been fallingbut then bottoms out and rises again ina countertrend rally. The major changein trend is signalled by the rapid sudden

rise after the low. The y and z degreesrepresent the angles of ascent anddescent and the odds favour theoccurrence of a reversal when y ishigher than z over the same period oftime. This can be representedmathematically as:

Reversal = y degrees > z degrees (oversame time period).

Corrections tend to exhibit the opposite,which means the angle of the maintrend tends to remain the more acute asshown graphically below:

In this case the mode of marketbehaviour could be representedmathematically as

Correction = y degrees < z degrees(over same time period).

In a way this makes perfect sense giventhe initial drive required to change anestablished trend. I found that wherethis initial thrust was absent the oddsfavoured the anticipation of merely acorrective phase before resumption ofthe existing trend.

The AMR works best on a longer term

monthly timescale. Looking at new highsor lows and the bars on either side, it ispossible to make judgement about thestrength of a correction or reversal andwhich category the market activitymight fall into.

Whilst it could be possible to measureangles in real time and compare them,this approach would be complicated todevelop although it provides anexciting area for further research.

There is, however, a much simpler waywhich avoids complex trigonometry andyet encapsulates the core principle ofthe idea of a sudden explosive change indirection.

By simplifying the application of theprinciple it can be adopted quite easilyas a strategy technique. Using theheight of price bars as a guide and usingmonthly bars it is possible to measurethe rate of ascent and descent of a movequickly and easily. At market turns,where the price bar in the oppositedirection to the established trend isstronger and higher then the precedingbar it signals that the ascent is an AMR.Where the bar is weaker it signals acorrection.

The charts below show how the principleis applied in practice. Fig 1a representsthe initial green bar. The nextrequirement is for another bar whichmakes a new low/high, and a third barwhich fails to make a new high or lowand actually breaks down to below orabove the low/high of the first bar. Thissignals a reversal. Figs 1a, b and c showthe progression of the bearish version ofthe setup. The trigger for the analysistechniques signal occurs at point a onfigure 1c.

Acute monthly reversals(AMRs)By Joaquin Monfort

Staying with the trend is the oft-stated goal of many an investment strategyand this article proposes a long-term strategy technique applicable acrossmost markets which will aid investors in achieving precisely that. The resultsbelow show a solid track record back-tested over the last eight to 30 years,with consistent returns (see results below).

Fig 1a Fig 1c

Fig 1b

8MARKET TECHNICIAN


shooting star produces a more likelyreversal opportunity and we wouldmove our stops and short trigger uponce again to the October lows but,once again, the market remains bullishand keeps rising. The next majoropportunity to go short occurs in March08 but although there is a move downthe market fails to take out the Februarylows so our long trades are still running.Eventually in July 08 there is an acuteenough reversal to trigger the stops onboth our longs and open a short order.After the devastating bear of 2008 themarket reverses in 09 but there is noAMR to close out our shorts and openany longs. Eventually in November 09there is another acute decline whichopens a second short order so we areshort 2 contracts. Junes hammercreated another AMR set up which would

The bullish version is the inverse of theabove setup and is shown below:

The bullish buy signal would betriggered at the high of candle 1: point bon the diagram. A correction isanticipated where the market fails tobreak above either points a or b.

Variations

Apart from the classic set-ups describedabove, I have included a variation.Obviously the main principle is that themarket rebounds in a more acute moveto that which it preceded and so I havewidened the definition to includemonthly key reversals too. A monthlykey reversal is a bar which posts a newhigh or low and then during the samebar reverses posting a new low or highrespectively. Chart 1 shows a bearishkey reversal from the chart of theGBP/USD.

The signal for the key reversal variantworks a little differently from that of theclassic 3-bar setup. Given that the usualsignal point has already been surpassedby the 2nd key reversal bar, the signalis given at the low/high of the keyreversal bar and is triggered when the3rd bar passes below or above thatpoint.

Chart 2 is an illustration of some realexamples of AMRs using EUR/USD.

Trading the signals

The trading system derived from thisanalysis technique is illustrated aboveand derives its signals from the set-upsthemselves. This is because thetriggering of stops means de facto thatthe reverse signal has been given and anew order in the opposite direction istriggered at the same time, thus the

trader is kept in the market for most ofthe time. The monthly time-scalereduces the number of whipsaws.

Were trading the signals in the abovechart of the EUR/USD, we would start byplacing a buy trigger order at the May07 candle highs and our initial stop lossat the June 07 candlestick lows. Julywould have triggered our buy ordersince it broke the May highs. August setup another buy order with a lower lowand Septembers long marabuzo candlewould have triggered another buy orderat the July highs. We would now placestops for both orders at the August lows.At the end of October we would moveour stop up to the September lows inthe unlikely event that the marketturned around and came back downrapidly triggering a short. Novembers

Fig 2a Fig 2c

Fig 2b

Chart 1: GBP/USD

Chart 2: Real examples of AMRs

MARKET TECHNICIAN


require a breach of Mays highs of1.3342 a considerable reversal.

As can be seen from the example above,this trading system is a simple lowmaintenance turn-key style strategywhich is also quite good at keeping atrader in the trend. All that is requiredto operate the system is to check themonthly charts at the end of each monthand move the stop-and-reverse ordersto the high or low of the last candle.What is more, back-tested for majorcurrency pairs it has proven profitable particularly for the dollar pairs.

Strategy notes

The signal created by the AMR can either be used in conjunction with other indicators or as a stand aloneinvestment strategy. The signal worksbest in volatile markets so it could beoptimised using Average True Range toavoid losing signals in sidewaysmarkets.

If being used as a stand aloneinvestment strategy, the followingadditional rules apply:

1) If a key reversal occurs, go back amonth before the first month to findout the direction of the trend. If upthen the key reversal is bearish, ifdown then bullish.

2) Allow for pyramiding: if multiplesignals occur in the same direction,which is a feature of this strategy,allow pyramiding. When a signal inthe opposite direction is triggeredthen close all the trades in thepyramid. Use the most recent tradeentry point for stop placement andremember to make the stop/buy tocover orders for all the contracts inthe pyramid!

Results

The table shows the results for variousperiods up until July 2010. The startdates were between 8 and 35 yearsback, depending on the security inquestion. The euro, for example, it iseight years because it has a shorterhistory compared to the others. Theresults included a 1% commission costand 3% slippage costs.

Capital Requirements

Although trade size was set at 100,000

currency units, given that margin isquite generous in the foreign exchangemarket, the capital requirement varieddepending on the maximum drawdownfor the particular security. At the time ofwriting (in Oct 2010) these maximumdraw-downs stood at $15,433.97 for theUSD/JPY, $10,551.00 for EUR/USD,$48,430 for the GBP/USD and$28,616.80 for the USD/CHF.

Risk/Reward

There was no strict constant staticrisk/reward because the size of theinitiating candlestick could vary. Giventhe moving stop beyond the first month,the risk/reward varied after that too.The results showed however that onaverage the rewards far exceeded therisks. But the actual probability successrate hovered around the 50% or justbelow and it was the greater reward thatmade the strategy profitable rather thana higher probability success rate. Thislends weight to the principleunderpinning the strategy that the AMRis good at determining changes in trendat an early stage. It is also highlights theimportance of overlaying any tradingsystem with a disciplined moneymanagement approach i.e. lettingprofits run and cutting losses.

Carry Trade Considerations

Interest accrued or deducted because ofinterest rate differentials were also notincluded or calculated although interest

for periods out of the market was set at2% in the broker account. Brokers dovary quite a lot however on what theywill pay you. Calculating carry tradeprofit or loss would be a necessaryexercise to any serious application of thestrategy given the long periods in themarket.

Comparison with 5%interest/annum

Taking the minimum capitalrequirements above from the maximumdraw-down figures we can also assesswhat the money would have earned hadit been placed in a savings account tomake a comparison. Below are theresults for an annual 5% return.

EUR/USD = $15,588.53USD/JPY = $85,134.02GBP/USD = $267,140.60USD/CHF = $157,850.70These show that, apart from theEUR/USD pair which far outperformed aregular savings account, the other pairsspread over 35 years only beat the 5%savings account by quite small amounts,particularly in the case of GBP/USD butcrucially they did outperform the savingsaccount. This is particularly attractive in alow interest rate environment when it isincreasingly hard to find assets yielding a5% return.

Joaquin Monfort is an analyst for theinternet Forex brokerwww.Forex4you.com

Results:

July 2010 EUR/USD USD/JPY GBP/USD USD/CHF

In US Dollars ($)

Gross Profit 58,691 281,570.00 528, 143.00 276,263.03

Gross Loss 10,711 79,069.00 156,491.50 99,933.35

Net Profit 47,980 202,501.00 371,651.50 176,329.68

Total no of trades 8 54 61 51

Profitable trades 4 24 27 25

Unprofitable trades 4 30 34 25

Avg winning trade 14,672.75 11,732.10 19,560.85 11,050.53

Avg losing trade 2,677.75 2,635.65 4,602.69 3,843.89

largest winning trade 21,477 58,332.60 83,210.00 59,031.09

largest losing trade 3,928 5,569.88 16,000.00 12,534.88

Open position P/L 48,920 0 0 2,189.23

Trading Period 8 yrs 35yrs 35yrs 35yrs

3 months, 1 day 3mon, 29 days 3mon, 29 days 3mon,29 days

Tradesize 100,000 100,000 100,000 100,000(In units of currency)

MARKET TECHNICIAN

If major peaks form around the samemonth, they will often be followed bysimilar peak-panic intervals and marketoutcomes, a trend that has held up verywell since 1895. Numerous examplesmay be given of this phenomenon in USfinancial history. The peaks in the DowJones Industrial Average (DJIA) wereconsidered in relation to the ensuingbiggest one day rises and falls. Theannual one day post peak (AODPP) riseand AODPP fall were taken as thebiggest one day percentage DJIA rise orfall in the year after a major market top.Seasonality was also appraised for DJIApeaks and subsequent panics andrallies. The timing of major DJIA peaksby month and day (year ignored) ishypothesised to have relevance on howsubsequent market trends develop.

On a technical note, the DJIA data arebased on closing values throughout this article. Peaks at the beginning of abear market were sourced fromfiendbear.com for the 100 years to1996, with additional DJIA peaks in1998, 2000 and 2007 being inserted bythe author.

Peak AODPP Fall Intervals

If DJIA highs occurred near the samemonth and day, then close parallels canarise on how the ensuing marketunfolded. The September 3, 1929 andAugust 25, 1987 record peaks providedthe best example, as both were followed55 days later by the most spectacularOctober panics in US history. The violentmarket decline lasted only a fewmonths, with the DJIA hitting bottom onNovember 13, 1929 and December 4,1987.

An overall summary of peak AODPPfall intervals for the DJIA is given inTable 1 and Appendix 1. Some of theparallels were quite remarkable as, forexample, the highs in 1895 1899,1901 1946, 1906 2000 and 1929 1987.

Anomalies. DJIA peaks occurring at thesame time of the year will not always befollowed by comparable marketoutcomes. Trends after the secular highof September 3, 1929 aligned with thoseexperienced after August 25, 1987.Comparisons could not be made withoutcomes after the September 4, 1895or September 5, 1899 tops. Other peakDJIA pairs did not produce parallelism:

The peak at the beginning of a bear market can be a key indicator for predictingUS market outcomes. This paper considers two key factors the intervals betweenthe peaks and ensuing panics, as well as the seasonal timing of these events.

DJIA peaks, seasonalityand market outcomesBy David McMinn

Table 1 DJIA peak pairs and market outcomes

High High Comments

Sep 04, 1895* Sep 05, 1899 AODPP rises and falls took place between Dec 18 andDec 23. The final lows were recorded on Aug 08, 1896and Sep 24, 1900.

Jun 12, 1901 May 29, 1946 Two major one day falls six days apart occurred in earlySeptember after each of the respective highs in June andMay. AODPP rises were recorded on Sep 16, 1901 andOct 15, 1946. The protracted bear markets persisteduntil Nov 1903 and Jun 1949. Black Thursday occurredon May 9, 1901 prior to the 1901 top, but this dramaticspring event had no counterpart in 1946.

Jan 19, 1906 Jan 14, 2000 AODPP rises and falls occurred in the 7 weeks to May 4.The parallels continued into the subsequent year, withstock market tremors on Mar 14, 1907 (-8.29%) & Mar12, 2001 (-4.10%) and major autumn panics in 1907and 2001. Bear market lows took place on Nov 15, 1907and Sep 21, 2001.

Nov 19, 1909 Nov 21, 1916 AODPP falls were experienced a few months later on Feb07, 1910 and Feb 01, 1917. The final lows were reachedon Sep 25, 1911 and Nov 19, 1917.

Sep 30, 1912 Oct 09, 2007 Panics happened on Jan 20, 1913 and Jan 21, 2008. Bothbear markets were drawn-out and severe. In 1914, theNew York stock market was closed after the outbreak ofWWI, while the world financial system neared completecollapse during Black October in 2008.

Nov 03, 1919 Nov 12, 1938 The AODPP falls were experienced on May 21, 1920 andApr 08, 1939. The parallels extended in the subsequentyear with major one day rises and falls taking place inthe two months to July 15.

Sep 03, 1929 Aug 25, 1987 The biggest stock market crashes in US history tookplace some 55 days after these peaks. The dramaticslumps were brief with post crash lows on Nov 13, 1929and Dec 04, 1987.

Apr 06, 1956 Apr 27, 1981 There were no notable AODPP falls over -2.25% afterthese peaks. Even so, similarities were experienced inthe subsequent year, with key falls on Oct 21, 1957 andOct 25, 1982. Final lows were recorded on Oct 22, 1957and Aug 12, 1982.

Jan 05, 1960 Jan 10, 1973 The AODPP falls occurred on Sep 19, 1960 and Nov 26,1973. Otherwise there were no resemblances betweenthe 1960 correction and the severe 1973-74 bear market.

Jul 16, 1990 Jul 17, 1998 AODPP falls were experienced on Aug 06, 1990 and Aug31 1998 respectively. Both markets declined by around-20% and the financial distress was short-lived withlows on Oct 11, 1990 and Aug 31, 1998.

* High based on the 12 Stock Average index.


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September 12, 1939 and September 21, 1976; January 5, 1960 and January 10, 1973; December 13, 1961 andDecember 3, 1968; January 10, 1973and January 14, 2000.

The obvious question arises as towhether the approach was valid or dueto coincidence. Statistical testing wouldbe very difficult to undertake to helpclarify this point. However, it seemsimprobable that the numerous examplesin Table 1 would take place collectivelyby chance. When the peak-panicparallels do arise, they can be veryprecise (eg: 1895 1899, 1901 1946,1912 2007, 1929 1987 and soforth). Importantly, some years cannotbe appraised because they contained nosignificant AODPP falls over about -2.25% (eg: after the 1956, 1968, 1976and 1981 peaks).

The April 23, 2010 DJIA high markedthe beginning of yet another marketcollapse and aligned most closely withpeaks on April 6, 1956 and April 27,1981. No one day falls over -2.25%were experienced in the year after thetops in 1956 or 1981. Even so in themonth to June 5, 2010, there werethree days that registered fallsbetween -3.10% and -3.60%. (Thisincluded the May 6 Flash Crash, whenthe intra-day low plunged by over -9.00%.) Given such inconsistencies,the 2010 market decline may not followother historic DJIA bear markets thatcommenced in April.

Seasonality

For all highs between February 1 andSeptember 10, the 23 ensuing AODPPrises and falls (=> 2.00%) happened inthe half year commencing August 5,with NO EXCEPTIONS (see Appendix 2).This would be very unlikely to arise bychance. For the DJIA peaks betweenSeptember 11 and January 31, mostensuing AODPP rises and falls occurredin the 6.5 months commencing January20. (Table 2)

Remarkably, DJIA peaks betweenFebruary 1 and September 3 nearlyalways had ensuing AODPP falls (=> -2.00%) in the three months to October31. The corresponding AODPP rises (=>+2.00%) happened in September andOctober, with two anomalies in January.(Table 3)

Since 1910, major September-Octoberannual one day falls (=> -3.60%) werepreceded by a peak in one of threeways:

A record high happened betweenSeptember 5 and October 31 and wasfollowed by an AODPP fall within 10days. The associated downturn was abrief correction (1927, 1955, 1986and 1989).

If the record high occurred from July15 to September 3, a major AODPPfall took place some months later andthe market decline was usuallysevere but only lasted a few months(1929, 1987, 1997 and 1998).

If the market peak for the calendaryear happened between February 24and May 31 and was not a recordhigh, then the ensuing autumnAODPP fall was within a protractedbear market (1931, 1937, 1946,2001 and 2008).

NB: The annual one day fall is taken asthe biggest % one day fall in the yearcommencing March 1.

Curiously, four autumn panics occurredafter market highs between May 1 andJune 12. Each consisted of two majorone day percentage falls six days apart.The autumn panic of 1901 was triggeredby the assassination of PresidentMcKinley and has been included,together with the 1946, 2001 and 2008events. (Table 4)

Conclusions

There was a notable propensity forpeak-panic intervals to be similar forthose bear markets beginning at thesame time of the year. As a trend it wasquite reliable surprising given thesimplicity of the approach. When thepeak-panic parallels do arise, they can

Table 2 DJIA highs, seasonality and AODPP falls

DJIA Highs DJIA AODPP Rises and Falls (a) No

Feb 01 Sep 10 Aug 05 Feb 05 23

Anomalies - -

Sep 11 Jan 31 Jan 20 Aug 05 22

Anomalies Nov 13, 1919, Sep 19, 1960, 4Nov 26, 1973 & Dec 22, 1916

(a) AODPP rises and falls => 2.00%

Table 3

DJIA Highs AODPP Falls No AODPP Rises No

Feb 01 Sep 03 Aug 01 Oct 31 9 Sep 05 Oct 31 7

Anomalies Feb 01, 1982 1 Jan 28, 1982 Jan 17, 1991 2

Sep 04 Sep 10 Dec 18 23 2 Dec 18-23 2

Anomalies - - - -

Table 4

DJIA Peak 1st OD Fall % 2nd OD Fall % OD Rise %

Jun 12, 1901 Sep 07, 1901 -4.43 Sep 13, 1901 -4.27 Sep 16, 1901 +4.10

May 29, 1946 Sep 03, 1946 -5.56 Sep 09, 1946 -4.41 Oct 15, 1946 +3.58

May 21, 2001 * Sep 11, 2001 na Sep 17, 2001 -7.13 Sep 24, 2001 +4.47

May 02, 2008 * Oct 09, 2008 -7.33 Oct 15, 2008 -7.87 Oct 13, 2008 +11.08

(a) These intra bear market peaks were the high for the calendar year.

Abbreviation: OD One Day.

12 ISSUE 68 DECEMBER 2010

MARKET TECHNICIAN

be very precise. Unfortunately, thepeak-AODPP rise intervals had a poortrack record and only worked well on afew occasions (eg: 1895-1899 and1929-1987-1997). Thus it would bespurious to use them as an indicator offuture AODPP rises.

Seasonality in the timing of major DJIAtops and AODPP rises and falls was theother notable finding. The peaks fromFebruary 1 to September 3 were oftenfollowed by AODPP rises and falls in thethree months to October 31. Peakstaking place between September 11 andJanuary 31 usually had the ensuingAODPP rise and falls in the 6.5 monthscommencing January 20.

From the findings, major DJIA peaks can be a useful indicator, when thesubsequent AODPP falls were most likelyto occur. The month and day when amajor peak formed at the beginning of abear market are crucial for comparisonsto be made to historic trends. However,the relationship was not 100% accurate,with historical anomalies being evident.

McMinn (2006, 2009) established stronglinks between Moon-Sun cycles andmarket cycles. Given the importance ofDJIA peak seasonality, the position ofthe Sun on the ecliptical circle could behypothesised to be highly relevant in thetiming of US stock market peaks andpanics. (The Sun is at the same positionon the ecliptical circle at the same timeof the solar year.) Alas, the Moon-Sunmathematics involved in market timingis extremely complex and impossible tounravel based on current knowledge.

References

fiendbear.com. DJIA Bear Markets of thePast 100 Years.www.fiendbear.com/bearenc1.htm

McMinn, David. Market Timing By TheMoon & The Sun. Twin Palms Publishing.2006.

McMinn, David. Market Timing MoonSun Research 2006-2009. PrivatelyPublished. 2009.

Appendix 1 DJIA peak AODPP fall intervals

1895 and 1899 Peaks

DJIA Peak AODPP Fall % AODPP Rise % BM Low

Sep 04, 1895 (a) Dec 20, 1895 -6.61 Dec 23, 1895 +4.37 Aug 08, 1896Sep 05, 1899 Dec 18, 1899 -8.72 Dec 19, 1899 +4.72 Sep 24, 1900

1901 and 1946 Peaks

DJIA Peak AODPP Fall % OD Fall % AODPP Rise %

Jun 12, 1901 Sep 07, 1901 -4.43 Sep 13, 1901 -4.27 Sep 16, 1901 +4.10May 29, 1946 Sep 03, 1946 -5.56 Sep 09, 1946 -4.41 Oct 15, 1946 +3.58

1906 and 2000 Peaks

DJIA Peak AODPP Fall % AODPP Rise % BM Low

Jan 19, 1906 Apr 27, 1906 -2.76 May 04, 1906 +3.04 Nov 15, 1907May 01, 1906 -2.73

Jan 14, 2000 Apr 14, 2000 -5.64 Mar 16, 2000 +4.98 Sep 21, 2001

OD Fall % OD Rise % Panic

Jan 19, 1906 Mar 15, 1907 -8.72 Mar 16, 1907 +6.69 Oct 22, 1907Jan 14, 2000 Mar 22, 2001 -4.08 Mar 26, 2001 +3.28 Sep 11, 2001

1909 and 1916 Peaks

DJIA Peak AODPP Fall % AODPP Rise %

Nov 19, 1909 Feb 07, 1910 -3.44 Jun 07, 1910 +2.99Jul 28, 1910 +3.01

Nov 21, 1916 Feb 01, 1917 -7.24 Dec 22, 1916 +5.49

1912 and 2007 Peaks

DJIA Peak AODPP Fall % AODPP Rise %Sep 30, 1912 Jan 20, 1913 -4.90 Jun 12, 1913 +3.01Oct 09, 2007 Jan 21, 2008 (b) Mar 11, 2008 (c) +3.55

Mar 17, 2008 (c) +3.41

1919 and 1938 PEAKS

DJIA Peak AODPP Fall % AODPP Rise % OD Fall % OD Rise %

Nov 03 May 19 -4.22 Nov 13 +3.30 Jun 20 -3.49 Jul 06 +3.181919 1920 1919 1921 1921

Nov 12 Apr 08 -3.86 Sep 05 +7.26 May 14 -6.76 Jun 12 +4.741938 1939 1939 1940 1940

May 21 -6.781940

1929, 1987 and 1997 Peaks

DJIA Peak AODPP Fall % AODPP Rise % PC Low

Sep 03, 1929 Oct 28, 1929 -12.83 Oct 30, 1929 +12.24 Nov 13,1929Aug 25, 1987 Oct 19, 1987 -22.61 Oct 21, 1987 +10.17 Dec 04, 1987Aug 06, 1997 Oct 27, 1997 -7.18 Oct 28, 1997 +4.71 Nov 12, 1997

1956 and 1981 Peaks

DJIA Peak OD Fall % OD Rise % BM Low

Apr 06, 1956 Oct 21, 1957 -2.48 Oct 23, 1957 +4.12 Oct 22, 1957Apr 27, 1981 Oct 25, 1982 -3.52 Aug 17, 1982 +4.90 Aug 22, 1982

1990 and 1998 Peaks

DJIA Peak AODPP Fall % AODPP Rise % PC Low

Jul 16, 1990 Aug 06, 1990 -3.32 Jan 17, 1991 +4.57 Oct 11, 1990Jul 18, 1998 Aug 31, 1998 -6.63 Sep 08, 1998 +4.98 Sep 10, 1998

(a) Peak based on the 12 Stock Average index.

(b) Worldwide stock market panics occurred on January 21, 2008. However, the US market wasclosed on the day due to Martin Luther King Jnr holiday. Even so, this date was taken as theDJIA AODPP fall for 2007.

(c) The two biggest percentage one day rises in the 11 months after the Oct 09, 2007 high.

Abbreviations: BM Low Bear Market Low; PC Low Post Crash Low.

AODPP annual one day; OD one day.

Source: McMinn, 2009.

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Appendix 2 DJIA peaks and ensuring AODPP rises and falls (a)

DJIA High DJIA AODPP Fall % Fall DJIA AODPP Rise % Rise

Feb 09, 1966 Oct 03, 1966 -2.10 Oct 12, 1966 +2.58

Mar 10, 1937 Oct 18, 1937 -7.75 Oct 20, 1937 +6.07

Apr 06, 1956 (b) - (b) -

Apr 27, 1981 (c) Aug 24, 1981 -2.23 Jan 28, 1982 +2.56

Feb 01, 1982 -2.22

May 29, 1946 Sep 03, 1946 -5.56 Oct 15, 1946 +3.58

Jun 12, 1901 Sep 07, 1901 -4.43 Sep 16, 1901 +4.10

Jul 16, 1990 Aug 06, 1990 -3.32 Jan 17, 1991 +4.57

Jul 17, 1998 Aug 31, 1998 -6.63 Sep 08, 1998 +4.98

Aug 25, 1987 Oct 19, 1987 -22.61 Oct 21, 1987 +10.17

Sep 03, 1929 Oct 28, 1929 -12.83 Oct 30, 1929 +12.34

Sep 04, 1895 (d) Dec 20, 1895 -6.61 Dec 23, 1895 +4.73

Sep 05, 1899 Dec 18, 1899 -8.72 Dec 19, 1899 +4.72

Sep 12, 1939 (c) May 14, 1940 -6.76 Jun 12, 1940 +6.73

May 21, 1940 -6.78

Sep 21, 1976 (b) - (b) -

Sep 30, 1912 Jan 20, 1913 -4.90 Jun 12, 1913 +3.01

Oct 09, 2007 (e) Jan 21, 2008 (f) Mar 11, 2008 +3.55

Mar 17, 2008 +3.51

Nov 03, 1919 May 21, 1920 -4.21 Nov 13, 1919 +3.30

Nov 12, 1938 Apr 08, 1939 -3.86 Jul 17, 1939 +3.41

Nov 19, 1909 Feb 07, 1910 -3.44 Jul 28, 1910 +3.01

Nov 21, 1916 Feb 01, 1917 -7.24 Dec 22, 1916 +5.49

Dec 03, 1968 (b) - (b) -

Dec 13, 1961 May 28, 1962 -5.71 May 29, 1962 +4.68

Jan 05, 1960 Sep 19, 1960 -2.56 (b) -

Jan 11, 1973 Nov 26, 1973 -3.40 May 24, 1973 +3.27

Jan 14, 2000 Apr 14, 2000 -5.64 Mar 16, 2000 +4.98

Jan 19, 1906 (c) Apr 27, 1906 -2.76 May 04, 1906 +3.04

May 01, 1906 -2.73

(a) The ensuing AODPP rise and AODPP fall were taken as the biggest one day percentagechange in the year after the peak at the beginning of a DJIA bear market.

(b) No AODPP rise and/or AODPP fall over 2.00% took place in the year after the peak.

(c) Two almost identical percentage AODPP falls occurred after the highs in 1906, 1939 and1981.

(d) Based on the 12 Stock Average index.

(e) Two AODPP rises of about +3.50% were recorded in mid-March. They were the biggest oneday rises in the 11 months after the Oct 9, 2007 peak.

(f) Major one day falls were recorded worldwide on January 21, 2008. However, the US stockmarket was closed due to the Martin Luther King Jr holiday. Even so, this date was taken asthe DJIA AODPP fall for 2007.

Source: McMinn, 2009.

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