technical analyst issue

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

Markets SoftwareSaxo Banks

TradeCommander

InterviewCarl-Gyllenram discusses

trading psychologyOutlook for crude oil:

$100 and above?

Donchian Channels

Stockmarket roundtable:Where next for equities?

Market breadth and technical models

IFTA conference roundup

Trading intraday market moves

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2007 Global Markets Media Limited. All rights reserved. Neither this publication nor any part of it may bereproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical,photocopying, recording or otherwise, without the prior permission of Global Markets Media Limited. While thepublisher believes that all information contained in this publication was correct at the time of going to press, theycannot accept liability for any errors or omissions that may appear or loss suffered directly or indirectly by any reader as a result of any advertisement, editorial, photographs or othermaterial published in The Technical Analyst. No statement in this publication is to be considered as a recommendation or solicitation to buy or sell securities or to provide investment, tax or legal advice. Readersshould be aware that this publication is not intended to replace the need to obtain professional advice inrelation to any topic discussed.

CONTENTS 1 FEATURES

Donchian ChannelsJason Leavitt explains how to use Donchian

Channels to trade intraday market moves

Roundtable Three market experts discuss the technical

and fundamental outlook for US and UK stocks.

Interview Carl-Gustav Gyllenram of AAM in Sweden

discusses using trading psychology and behavioural finance as a fund manager

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WELCOMEWith fears growing of a possible slowdown in the US economy, the outlook for

stocks in 2008 remains unclear and, to some, murky at best. Fundamental factorsincluding the decline in banking stocks offers cause for concern although the bigger picture and technical factors are less clear cut. In this issue we bringtogether three analysts to debate the view on US and UK stocks next year.

We hope you enjoy this edition of the magazine

Matthew Clements, Editor.

November/December 2007 THE TECHNICAL ANALYST 1

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SPECIAL FEATURE20th Annual IFTA Conference roundup

MARKET VIEWS Outlook for crudeFTSE 100 & DAX: Corrective action continues

ROUNDTABLEOutlook for US and UK stocks

TECHNIQUES Donchian ChannelsMarket breadth and technical modelsSelecting stocks using non-financial criteria

INTERVIEWCarl-Gustav Gyllenram, Ability Asset Management

SOFTWARESaxo Banks TradeCommander

BOOKSAnatomy of the Bear by Russell Napier

AUTOMATED TRADING SYSTEMSInterview: Stanley Dash, TradeStationARMA automated trading

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Special Feature

Walkabout - The event-opening "Walkabout" was an inter-active session which gave delegates the ideal environment toget to know each other. The Walkabout involved a series offive separate round-table discussions in which delegates wereencouraged to actively participate. Subjects for discussionincluded Commodities and Derivative Products (Options &ETF's), as well as debates on which technical studies weremost popular and why (Relative Strength Index came out

top). Other discussions centred on the global role of IFTAand the correlation between emerging, developing andmature stock markets around the world.

Each topic was moderated by a noteworthy technician whodirected the discussions and encouraged all delegates to jointhe debates. At the end, the moderators gave an overview tothe conference on the views and issues raised on their partic-ular topic during the sessions.

"Middle East Energy, Commodities and the Globalisation of Financial Markets"

The annual conference of the International Federation of Technical Analysts (IFTA) gave the opportunity fordelegates to meet many of the major names in the industry and to network in a friendly and informal atmos-phere. Martin Pring, Robin Griffiths and Tom Dorsey were among the international speakers who presentedtheir latest thoughts and techniques to delegates from around the world. Set amid the glorious setting ofSharm El Sheikh, the Domina Coral Bay Resort on the Red Sea, the conference included no less than 25speakers and included a final day panel discussion featuring four of the major names.

20TH ANNUAL IFTA CONFERENCESHARM EL SHEIKH, EGYPT, 8-11TH NOVEMBER 2007 by Paddy Osborn

Major Session Summaries

6 THE TECHNICAL ANALYST November/December 2007

Special Feature

Martin Pring - Stock Sector Rotation StrategiesMartin explained how to execute profitable sector rotation byapplying technical analysis to economic indicators. He alsooutlined how he uses inter-market analysis to identify indus-try groups or sectors that are predicted to outperform othersectors. He analysed the relative performance of bonds,stocks and commodities within the economic cycle anddemonstrated his techniques for interpreting the relation-ships between these different asset classes. He split the eco-nomic cycle into six stages, showed how to recognise thesestages and illustrated the performance of each asset classwithin each stage. Regarding sector rotation, he noted thatstock sectors tended to lead their respective sectors of theeconomy, and showed how he uses ETFs to trade by sectoror by industry group to avoid the hassle of having to trade abasket of individual stocks within a particular sector.

John Person - Rule-Based Trading SystemsJohn explained how he uses Pivot Points to construct hisrule-based trading systems. He emphasised the value of theactual price to build his trading strategies, with slightly lessemphasis on calculated studies. He explained how he usespivot point moving averages to help identify the longer termtrend (bullish or bearish mode) and then uses Price PivotPoints to develop his strategy to sell into short term rallies orbuy short term dips. These Pivot Points are used to predictpotential support and resistance target levels to help tradersremain focussed on the bigger picture while entering themarket at better levels.

Robin Griffiths - A Global Overview ofInvestment MarketsRobin gave another of his straight talking presentations onthe global outlook, world demographics and the futureexpectation for global stock markets. He gave the audience afascinating view of inter-market mapping through his analy-sis of medium term and long term cycles. He remains verybullish for some of the large emerging markets - particularly

China - and while his approach is very long term and strate-gic, everyone benefitted from his view of how the big picturelooks like unfolding.

Murray Gunn - Trading Regime AnalysisMurray began by explaining how human psychology causesmarket volatility in liquid markets to effectively revert to themean. He explained that markets either trend directionally,trade sideways or "do a bit of both"; he calls this the "trad-ing regime" and identifying (or even anticipating) the tradingregime can ensure that traders use the most suitable technicalstudies at any particular moment in time. He outlined somerecognized methods for indicating trading regimes (i.e.volatility, DMI/ADX, Bollinger Bands, etc.) and then intro-duced two new studies, the Trend Following PerformanceIndicator (TFPI) and the Trading Range Indicator (TRI).This Regime Analysis helps with asset allocation, risk man-agement and position sizing, as well as helping investorsdecide what markets to trade and what studies to use.

Tom Dorsey - Point & Figure MethodologyTom also focused on a tactical portfolio managementthrough positive Relative Strength identification. Havingselected, say 40 stocks, he calculates their relative strengthagainst each other to create a large matrix of 40x40 stocks.He then uses Point-&-Figure charts of the relativelystrongest stocks to create his stock rotation strategy. In thebigger picture he uses the same technique to calculate the rel-ative strength between different asset classes to define assetallocation levels within his overall portfolio.

Rashpal Sohan - Using Quantitative Techniquesto Reduce the Subjectivity in TARashpal began his talk by explaining that seven of the top tenbest performing funds use quantitative analysis and three ofthe top ten are purely quant-driven. He went on to explainhow he identifies his "universe" of stocks and then rankstheir absolute strength (long & medium term) and relative


Special Feature

strength. He then backtests these results over 1, 3, 6 & 12month periods and builds his portfolio of stocks from thosein the top quintile. For trade exit he explained that stocksshouldn't be sold simply on ranking (i.e. when they leave thetop quintile), but fixed stops should be based on maximumdraw-downs of 15-20% (for long term positions). Otheranalysis can be developed from this information such ascomparing quintile rankings now with those 1 month agoand 3 months ago.

Rolf Wetzer + Manfred Huebner - BehavioralTreatment of Bond MarketsRolf and Manfred base their sentiment analysis on the factthat investors display herding, anchoring and overconfidencecharacteristics in their trading styles. They spent some timeanalyzing the curvature, steepness and volatility of the yieldcurve. Herding effects are caught by trend following tools -this behavioural measure is price based. They explained howthey apply simple moving average strategies to trade thesteepness of the yield curve and then use leverage to improvereturns (a 75% improvement in returns in 8 years). Theyexplained how they evaluate investor expectations using 400Sentix behavioural indices - into which more than 2500investors give input. The result is a Neutrality Index whichenables behavioural management of the bond markets.

Rick Bensignor - Interpretation of Cloud ChartsRick explained the calculations behind the many lines withinan Ichimoku chart, namely the Tenkan, Kijun, Chiku andKumo lines. He explained how each line can be used toenhance trade execution timing, as well as providing zones tobuy/sell on retracements in strong uptrends/downtrends.The Ichimoku lines and clouds also provide useful zones toadd value to levels generated by Western analysis techniques.

Jeff Hochman - TA within a buy-side environ-mentJeff Hochman gave an excellent presentation of his view ofglobal markets from his position on the buy side. He believesthat the growth of a number of external influences (i.e.ETF's, Sovereign Wealth Funds and Hedge Funds) is affect-ing global markets and will continue to do so. He doesn'tthink that US market groups should be reconstructed, butbelieves that the time has come for a new World Index to becreated, based on demographic considerations. Internationaldemographics are expected to significantly alter investorstrategies - since people in their 40's and 50's are much heav-ier "investors" than 20-29 year olds who have much less dis-posable income. Jeff uses the MY ratio (i.e. number of peo-ple aged 40-49 divided by number of people aged 20-29) asa basis for this new World Index. If such an Index was intro-duced, then there would be many changes from the estab-lished MSCI World Index which would prompt significantrebalancing of portfolios. Japanese stocks would be the

major winners (with market share up 43% from their currentslice of the MSCI Index pie) while US stocks would be thebiggest loser (down 12%).

Panel Discussion, moderated by Ian NotleyTom Dorsey, Connie Brown, Robin Griffiths & Martin Pringstarted by giving their predictions for major markets. Theoutlook was somewhat mixed but the overall view in theshort term (i.e. next few months into Q1 2008) was bearishfor developed markets.

Ian was particularly bearish, basing his argument on a com-parison of historical Q4 crashes. Robin was bullish in thelong term for China but expects huge volatility on the way.Connie spent some time giving her predicted support &resistance levels for major markets, based on her Gann analy-sis. The discussion covered the potential value of water, thefuture trends for grain commodities and metals. Robin wasbullish for Uranium, seeing electricity as the power sourcedriving modern life. Other fuels are used simply to generateelectricity and nuclear power is the major source. Improvednuclear technology provides a huge bull story for Uranium-related stocks.

Julius de Kempenaer - A New Way to VisualizeRelative StrengthJulius gave another fascinating talk about his uniqueapproach to relative strength. He explained how he canobserve his entire universe (by creating scatter charts ofRelative Strength Ratio (x-axis) v Relative StrengthMomentum (y-axis). He then rolls positions on a monthlybasis as the RS ratio and momentum values change. The dotson the scatter diagram always move in a clockwise directionaround a fixed benchmark point and since this technique canbe employed on any time frame, it is particularly useful forprop traders with large universe of instruments to cover.Julius usually uses this technique as a sector rotation strategy,although it can also be applied to global stock indices, usingthe MSCI World Index as the benchmark.

Saleh Nasser - Moving Forward By LookingBack Revisiting the BasicsSaleh based his strategy on Japanese Candlesticks and theassumption that the midpoint (including shadows) of "signif-icant" candlesticks (i.e. candlesticks illustrating more than 1.5times the range of recent candles) should provide significantsupport or resistance. He explained how this simple calcula-tion creates horizontal levels at which to set stop lossesaround strong support/resistance areas. He explained anoth-er study based on the price crossing above and below the 9-event exponential moving average. These two studies arethen combined to determine his position management,where to sell some or all of a position and when and whereto re-establish new positions.

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Market Views

OUTLOOK FOR CRUDE by Bruce Zaro

Ibelieve technical factors support apause in crude oil's advance and apull back is likely as it has comevery close to the psychologicallyimportant $100 price. While there aremany reasons to see a continuation ofthe powerful move to new nominalhighs, some significant technical chal-lenges are present that could preventcrude from moving higher in the shortterm. As such, I expect crude to retreatinto the $80 range.

Trading bands Currently the top of its trading band is$97 and the mid point is $84. I findthat assets in strong up trends tend totrade from the mid point of that bandto the upper end, and conversely weakassets from the mid to the low end ofthe trading band. Furthermore, correc-tions in strong assets generally takethem back to that mid point beforegaining traction and pushing back tothe former higher and possibly higher.On the other hand, marginal bouncesin weak assets can very well giveinvestors false signals, tricking theminto thinking that their bottom fishingtrades have been timed nicely only tohave the trade run out of steam at themid point on the band.

There is likely a deeper followthrough to come in oil's pull back afterit reached the top of its band andreversed. The possibility of a movedown to the $89 USD bottom isincreasing, and if that support fails, the$84 - $85 range - and the mid pointwould be likely.

Overbought / oversold IndicatorLike trading bands, my overbought /oversold indicators can remain in atrend much longer than one might

imagine. There is no rule that statesthat when an asset reaches a 100%overbought reading it is bound toreverse course right away. Oil hasremained overbought since late Augustand, but for an extremely brief periodin mid August and another short periodin May, it has remained overboughtsince February. We are now at the mostextreme overbought period - 96% ofthe year. Comparing that to the mostrecent oversold reading, back in lateOctober 2006 when oil traded at $58,you can see the duration and extremesof this indicator.

Support lines / resistance linesCrude's bullish support line has been inplace since September 2001 at $19(Figure 1). The slight violation of thattrend line in January of this year at $53was short-lived. Since then it has gener-ally stayed comfortably above the lineand lately has accelerated, distancingitself further from that strong support.Right now the bullish line is at $75, soif oil trends down there is a large fallbefore reaching the line-in-the-sandsupport.

Bruce Zaro is technical analyst atDelta Global Advisors

Figure 1.


Market Views

FTSE 100 AND DAX: CORRECTIVE ACTION CONTINUES by Mark Arbeter

The FTSE 100 has pulledback into a zone of strongchart support, and so far,the sell off has been limited to a6.3% decline from the recent highon October 12. The FTSE is in aclear corrective mode, havingtraced out a series of lower highsand lower lows. Our concernsabout the FTSE and other globalmarkets over the past couple ofweeks were primarily sentimentdriven, as there seemed to be ahigh degree of bullishness in theindicators we monitor based onthe US stock market. However, wehave seen a very quick turn in mar-ket sentiment back to the bearishside, and from a contrarian view,we think this is a positive.

It is possible that the initial low of thepull back is in, as the FTSE has alreadyretraced about 50% of the rally frommid-August to October (Figure 1). Themarket found support fairly close to thetop of the base or inverse head-and-shoulders formation that was tracedout in August and September. The topof this reversal formation, or whereprior demand was seen, starts at 6394and runs all the way down to theAugust lows at 5859. Like the S&P 500,the base is wide and it is therefore dif-ficult to be more precise where theindex may find support.

On Thursday, the FTSE came veryclose to the low of 6305 on November9. Many times after a pull back or cor-rection, an index will bounce and thenrollover and test the initial low. Often,intermediate-term lows are double bot-toms, with the second bottom lower

than the first. If the FTSE does takeout its recent low, the next Fibonacciretracement of 61.8% comes in nearthe 6200 level. To confirm that thetrend has reversed to the upside, wewould like to see a close above the mostrecent high at 6432. That would com-plete a bullish, double bottom pattern,and we believe set the FTSE up for arun back to the October highs.

On the upside, there are a couple ofkey pieces of resistance that the marketwill eventually have to deal with. Chartresistance, from the lows in Octoberand early November, comes in aroundthe 6460 level. The 65-day exponentialaverage sits up at 6466, and may alsoact as resistance.

Daily momentum is still headinglower and in a bearish configura-

Figure 1.


Market Views

tion. The 14-day RSI has not yetbecome oversold, having fallen to 36during the current pullback. While anoversold condition is not a prerequisiteof an intermediate-term low, we believeit creates a better set-up for a moredurable rally. We also prefer to see atleast one positive momentum diver-gence, but it is a bit too early for thatyet.

Longer term, we are worried by theaction of the weekly momentum indi-cators. The 14-week RSI has put in aseries of lower highs since March 2006.In addition, the FTSE has not beenoverbought on a weekly basis since thatmomentum peak in early 2006. Long-term support, on the weekly chart,comes in at around the 6200 zone. Thisis where a long-term trendline sits,drawn off the lows in 2004 and 2007.

In addition, this is where the 80-weekexponential average lies, and this sup-port line has done a good job at creat-ing a floor for the index during the bullmarket. Overall, we remain somewhatcautious until there is more evidencethat a low is in.

The DAX Index had been pullingback in a very gradual manner untilrecently, when it lost 1.5% (Figure 2).In the process, the index broke downthrough a plethora of technical sup-ports, but has still only dropped 4.7%from its mid-October low. So far, theindex has not fallen nearly as much asmany of the other global indexes. Theintermediate- and long-term patternsare still bullish, in our view, and eventhough some short- to intermediate-term supports have been taken out, thelonger term trend is still firmly bullish.

The index broke below trendline sup-port, drawn off the lows since March,on Thursday, as well as the 80-dayexponential average. This is the firstbreak of the 80-day average since July.The DAX also broke the high from thebase that was created during the sum-mer bottoming process at the 7722level. Chart support, from the base thissummer, runs all the way down to the7270 level, and we think the index willhold above the lows from August. Withthe loss today, the index has retracedabout 50% of the mid-August toOctober rally. A 61.8% retracement ofthe rally targets the 7565 area. Anotherpotential support, the 200-day expo-nential average, sits down at 7444.

Daily momentum continues to fall,but is not yet oversold. The 14-day RSIhas dropped into the 40 area, and manytimes, falls down near 30 during inter-mediate-term pullbacks. The dailyMACD is negative, having droppedbelow the zero line. This is the firsttime that the daily MACD has dippedbelow the zero line since the latter partof July.

On the weekly chart, potential sup-port comes in at 7469 from the 40-week exponential average. This averagehas done a good job of providing sup-port for the DAX during the bull mar-ket. If the lows from August get takenout, long-term trendline support, offthe lows since 2004, sits in the 7200area.

The weekly MACD has traced out amuch lower high compared to the onein July, and has started to rollover onceagain. The indicator is still above zero,and for the most part, has stayed inpositive territory during the bull mar-ket. The 14-day RSI is in a downtrendbut remains firmly above bull marketsupport in the 40 area. With the indexmaking lower lows and lower highs, wewould remain cautious.

Mark Arbeter, CMT is ChiefTechnical Strategist at Standard andPoorsFigure 2.

OUTLOOK FOR US AND UK STOCKS With the impact of the credit crisis still being felt and the future direction ofthe US economy uncertain, we discuss the short and longer term outlook forUS and UK stock indices and consider the possibility of a new bear marketfor equities in 2008.

Chair: Matthew ClementsEditorThe Technical Analyst

Roger Cursley Strategist Investec

David FullerGlobal Strategist Fullermoney

Sandy Jadeja Chief Market StrategistODL Securities

Sponsored by:

Interactive Brokers is a non discretionary broker, hence whatever is discussed oradvised at this roundtable is not endorsed by Interactive Brokers.



Do you subscribe to the view that we are in a long-tterm secular bear mar-ket for stocks?

SJ: I'm purely technical although the fundamentals must beconsidered. Recession talk has been around since 2001. Wecan have a short dip but the charts suggest that the bull mar-ket is not over, or rather we are still in an upwards correctionwithin a secular bear market. I think there has been a radicalshift in the markets in recent years as private traders nowhave much greater access to the markets, due mostly to theadvances in technology. This has contributed to the growthand volatility of the market. There is also a lot more peoplenow with great wealth looking for somewhere to put theirmoney.

DF: I approach technical analysis from a behavioural per-spective. Looking at the sell off in the banking sector, youcan see that this is fear and panic. The charts show me wherethe liquidity is going; either into the market or out of it.Crowd psychology determines how the markets move.Sentiment can change very quickly which has been demon-strated recently with the VIX moving up to around 30 or so.On the fundamental side, global economic growth will comefrom Asia, India and Latin America while the US slowsdown.

There is still a strong disinflation impact from China andIndia etc. which will continue to compensate for higher com-modity prices and a weaker dollar. Moreover, the competitivepressures of globalisation will continue to keep wage pres-sures under control. If there is an inflationary risk then Ithink it comes from the excessive liquidity that the Fed hasinjected into the economy.

I don't go along with the view that we are somehow "over-due" for a market fall or a recession. Things really are differ-ent this time because of the rise of the Asian economies. Bullmarkets don't just die of old age; there is a major event thatbrings things down. You might argue that the banking crisisis that event but what impact will that have in China forexample? Not much. With emerging economies nowaccounting for 52% and rising of global GDP, a localisedbanking problem in the US or UK isn't enough to dip the

Figure 1. DJIA 2005-present

BANKS ARE MAKING THE LOSSESFROM SUB-PRIME BUT HEDGE

FUNDS ARE DOING GREAT BUSINESS BY SHORTING THE

BANK STOCKS.

- ROGER CURSLEY

Roger Cursley


global economy into recession.

RC: I think that statement underestimates the amount oflinkage between the US and Chinese economies. Economicand financial events in the US will effect the Chinese econo-my and visa versa. I'm not a technical analyst but I know ifwe are in a bull or bear market. We are now coming out of alow inflation global environment especially with rising com-modity prices. This will mean that central banks have a prob-lem in that there is a limit to how aggressively they will beable to cut rates given greater inflationary pressures in thefuture.

What other factors need to be considered in assessing the upside anddownside risks for stocks next year?

DF: Bond yields are an area that needs to be considered as apotential threat to higher stock prices. The last secular bullmarket in US government bonds ended in 2003. Althoughthere has been a period of consolidation recently, a move inthe 10-year Treasury to 6% and higher could potentiallycause a secular bear market in stocks.

RC: I'm looking at 12 month time scales. Although I'm fair-ly bearish over the next year, it's a lot more difficult to saywhat will happen over the next few months. While techstocks are holding up very well, the banking, housing andretail sectors in the UK especially are not performing well.The importance of these sectors should not be underestimat-ed; moreover, it is possible that worse is to come in terms ofthe credit crunch and the decline in the UK housing market.

Does the sharp fall in bank stocks now present a good buying opportu-nity?

SJ: From a technical perspective - Fibonacci levels and pat-terns - it all looks oversold. However, I need to see some con-solidation and then a breakout above that or a break above arecent high. I don't necessarily have to catch the bottom ofthe move but we are definitely looking out for buy signalsnow rather than expecting more entrenched declines.

DF: If we're looking for straws in the wind - US bankingstocks have been up for the last three days in a row. You haveto go back a long time to find the same pattern in daily pricemoves. This suggests to me that it's better to be a buyer thana seller at the moment but I'm also happy to sit and wait a bitlonger. My guess is that further falls in bank stocks will pro-voke more action from the Fed coupled with a short cover-ing spike. This is the time to become more optimistic.

RC: This is a good point. Banks are making the losses fromsub-prime but hedge funds are doing great business by short-ing the bank stocks. You only have to look at a chart of bank-ing S&P to see what's been happening. Again, opportunities

David Fuller

A MOVE IN THE 10-YEARTREASURY TO 6% AND HIGHERCOULD POTENTIALLY CAUSE A

SECULAR BEAR MARKET INSTOCKS.

- DAVID FULLER


are being presented here although the actual banking funda-mentals remain uncertain with regards book value and earn-ings etc.

Is there any great difference between the banking sector indices in the USand UK from a trading point of view?

SJ: Looking at the daily charts for the FTSE banks looks likea very good buying opportunity. From a purely technicalpoint of view I can see a multiple Fibonacci confluence andany break to upside would be a buy. The S&P is similar butperhaps presents less obvious buying signals than the FSTE.With the S&P it's a matter of waiting a bit longer.

DF: I would think that the UK banks are not in quite as bada shape as the US banks which would support Sandy's imme-diate FTSE outlook. There isn't the same hysteria in the UKas there in the US.

What will be the best sectors to buy next year?

RC: When do you buy cyclical sectors? The full impact ofthe banking crisis probably won't be known until the begin-ning of next year but we are also seeing a slowdown in thehousing market. If you look at the stocks of the major housebuilders they are all off, quite significantly, from earlier in theyear. But I don't think we have reached a buy for these sec-tors as yet.

SJ: An interesting factor is that if you look back over a 15 to18 year period, November has been one of the best buyingopportunities, even if you only hold until January. Banks arealso way off their 200-day moving average. Years ending in"7" tend to be underperforming years whilst those ending in"8" do tend to perform better.

Are there any obvious technical signals in the FTSE 100 at themoment?

SJ: The FTSE has recently failed to surpass its previous highat 6750. The resulting pattern looks very much like a doubletop which is obviously bearish. To say the market is in adowntrend for sure we need to see lower highs and lowerlows. It's just too early to call a bear market right now.

DF: Many of the European indices are very heavily weight-ed with banks which makes then especially vulnerable. Theseinclude Sweden, Ireland and Switzerland where you do see adowntrend in the major index. The FSTE is more diversifiedand so is a different story as it acts as a sort of clearancehouse for all these fabulous listed companies such as the Riosand BHPs of this world.

Do you see the rising oil price acting as a damper on equity prices?

RC: Let's not forget that the markets have gone up despiterising oil prices so the market apparently doesn't see higherprices as a threat to economic or corporate growth yet. Ithink much of the rise in oil prices is a symptom of the weakdollar. If you look at the oil price in euros the rise has beenmuch more restrained. The same goes for other commoditiessuch as copper.

SJ: The correlation between oil and stocks, whatever thatwas, doesn't exists anymore. If we saw oil prices fall signifi-cantly do you think stocks would rally? I doubt it.

Sandy Jadeja

THE CHARTS SUGGEST THAT THEBULL MARKET IS NOT OVER, OR

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SECULAR BEAR MARKET.

- SANDY JADEJA


Techniques


The Donchian Channel was cre-ated by Richard Donchian inthe 1950's as a technical indica-tor. It's comprised of an upper andlower band - the upper band indicatesan issue's highest level over a givennumber of periods, and the lower bandindicates the issue's lowest level overthe same number of periods.

Some software packages use the high-est and lowest closes, but my prefer-ence is to use the highest and lowestlevel, and since the bands automaticallyadjust for new highs or lows, by defini-tion, the underlying issue cannot break-out from the bands. It will insteadalways be contained by them. In thisarticle, I'm going to show you a verysimple yet powerful technique I use forday trading the S&P 500 e-mini futurescontract (ES). But first let's back upbecause a technique is useless unlessyou know its frame of reference.

In my opinion, the big money is maderiding the bigger intraday moves, sowhen I day trade the ES, my first goal isto figure out whether it's a "trend day"or "chop day." Unfortunately there aremore chop days than trend days, andDonchian Channels shouldn't be usedduring chop days. But when you get atrend day, Donchian Channels will helpyou add to your position and stay in themarket for a good portion of a move.

Here's how I use a Donchian Channelto help define a trend.

When trending, the ES will constant-ly press against one of the bands, andalthough moves to the opposite bandare common, the ES will not press toofar on the opposite band. Figure 1shows an example. It's the 3-min. ESchart with a 20-period Donchian

Channel.Notice the ES presses on the lower

band - pushing lower in workman-likefashion all day - and although the issuebounced and touched the upper band(red arrows), it never pressed the upperband to a higher level (meaning it nevermade a new 20-period high all day).

How I trade this is simple.

1) The down-trending channel definesa downtrend, and that's exactly what Iwant to ride. As long as the lower chan-nel line continues to get pressed downand the upper channel follows along, Iwant to stay in my short position. Thebig money is made riding the big

trends, so when you get a solid trend,you must sit tight, resist taking profitstoo soon, and ride it for everything itsworth. The Donchian Channel will helpyou stay in your position.

2) I want to sell every move to theupper channel. You've probably heardthe adage about selling a dead catbounce within a downtrend or buying apullback within an uptrend. Well, theDonchian Channel helps define what adead cat bounce and pullback are.

That's it. Any good strategy is simple,and this is no different. Let DonchianChannels tell you what the trend is,enter positions in the direction of the

DONCHIAN CHANNELS: A TRENDING STRATEGY by Jason Leavitt

Techniques

Figure 1.

trend when the issue moves to theopposite channel line, and try to hold aslong as possible. More active traderscan take partial profits during the dayand re-enter, but you don't want to beentirely out of the market. You want tomaintain some exposure and ride themove for all it's worth.

Entering your initial position will bethe hardest part because within a givenday, the ES may chop around for halfthe day and then trend the second half.You may enter a position based onanother strategy and then useDonchian Channels to define the trend,add to your position and stay in your

position.Figure 2 shows such a situation. It's

the 3-min ES chart with 20-periodDonchian Channel along with the3,10,1 MACD.

The first hour produced a lot of sell-ing pressure, but if you used the posi-tive divergence from the 3,10,1 MACDat around 10:35 to enter a long positionwith a stop below the low, you can thenshift to your Donchian strategy thatdefines the uptrend and says to staylong while the ES continues to press onthe upper channel. And if you didn'tenter on the divergence you got achance to enter just after 13:00 when

the ES pulled back to the lower band.Solid trend days (Figure 1) do occur,

but learning an entry technique andthen using Donchian Channels to addto your position and stay in your posi-tion (Figure 2) is a skill that needs to belearned because the set up appearsmuch more often.

Jason Leavitt is CEO of LeavittBrothers, a US based stock marketresearch house.


Techniques

Figure 2.

DONCHIAN CHANNELS WILL HELP YOU ADD TO YOUR POSITIONAND STAY IN THE MARKET FOR A GOOD PORTION OF A MOVE.

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MARKET BREADTHAND TECHNICALMODELS by Gregory L. Morris

Techniques


Techniques

After more than 30 years ofexperimenting, creating, mod-eling, and trying every conceiv-able technical indicator and systemimaginable, I have settled on the sim-plicity of trend analysis. I would neverinsinuate that trying to pick tops andbottoms is not possible, but wouldargue strongly that it is more predictionthan analysis. The only thing I am cer-tain of with regard to making predic-tions is to make a lot of them andoften. There is actually one other thingI am quite certain of, and that is thenecessity to use a disciplined approachin all aspects of investing.

At PMFM, Inc. we use a "weight ofthe evidence" approach to trend fol-lowing. The "weight of the evidence"method combines the input from anumber of technical indicators; witheach one assigned a weight for its con-tribution to the overall model. Fromthis, a picture of the total weights canbe derived and different levels of riskcan then be assigned. Further, each risklevel uses different buy, sell, and tradeup rules. This is a rules-based approachto active money management using aweighted trend following indicator.Some specifics to follow.

The technical indicators that make upour trend model consist of price,breadth, interest rate, and relativestrength measures. Let's talk aboutbreadth first (one of my favorite sub-jects). Market breadth or market inter-nals as they are often called, provide theanalyst/manager with an unbiased viewof the market, void of capitalization,sector, or style domination. Basically,all issues on an exchange participate inbreadth analysis equally, which makesbreadth the best measure of the mar-ket's liquidity. There are six primarybreadth numbers: advancing issues,declining issues, up volume, down vol-ume, new highs, and new lows. For theprice-based indicators we use theNasdaq Composite Index. Of late theNasdaq has blossomed into a goodoverall blend index; it has a little (or alot) of everything - large cap, mid cap,small cap, technology, etc. For years,we also used the NYSE Index, but after

long analysis realized that the Nasdaq ismuch better for its trend following con-tribution. One of the reasons might bethat the NYSE, in the last 5-7 years,almost ruthlessly allowed anything andeverything to be listed with them. I doknow that the breadth data from theNYSE is not nearly as reliable as it usedto be. When the Nasdaq does well,most other markets do well. A simplemeasure of long-term interest rates isused. Long-term rates are controlledby the marketplace and not the FED.Relative strength measures are used intheir own composite indicator, whichincludes small cap vs. large cap, growthvs. value, and large cap vs. very largecap.

About the chartsIn most of the charts that follow, thebottom plot is the Nasdaq CompositeIndex with a binary indicator overlaidon it. A binary is just a visual indicationshowing the indicator in the top plotwhen it crosses the zero line, thereforechanging its signal. When the binary isup, it means the indicator is above itssignal line and when the binary is down,it means the indicator is below its signalline.

Price-based measuresWe use a number of price indicators,but the medium term one that we giveconsiderable weight to is a modifiedMACD that is then normalized withthe longer-term average as shown inFigure 1. While it does not pick topsand bottoms, it does react quickly whenthere is an appreciable change in thetrend of the market. We use otherprice-based indicators but the purposeof this article is to introduce the con-cept, not provide complete modeldetails.

Breadth-based measuresThe advance decline indicator we pre-fer is a modified McClellan SummationIndex as shown in Figure 2. We use theratio-adjusted version in which theadvance decline difference is divided bythe advance decline sum. This ratiotechnique allows it to compensate for

the increase in the number of issues onan exchange over long periods of time.Further modifications are enacting theMiekka contribution to the McClellanSummation Index. Jim Miekka devel-oped this to keep the values (levels) ofthe summation index consistent nomatter when you started the data calcu-lation. This makes the levels of thisbreadth measure useful since they areconsistent across any time frame. Asyou know, summation indicators gener-ally do not utilize or reference theirnumerical values, for example theadvance decline line. The numbers thatmake up the advance decline line areessentially worthless because they arealways different if different startingpoints are used; with the advancedecline line, one is concerned withdirection, rate of change, and its rela-tionship with its price-based counter-part. The McClellan Summation Indexwhen incorporating the Miekka adjust-ment has important levels; which weview as important measures of risk.The final difference that we use, andone that Tom McClellan also talksabout, is using the zero line as thecrossing reference instead of the tradi-tional +1000. Tom says that when hisparents created this in the 1960s, theyadded 1000 to it in order to avoid usingnegative numbers as much as possiblesince the calculations were done with amechanical adding machine.

Our new high new low measure usesa calculation similar to what is used inthe McClellan Summation Index, how-ever, with shorter periods used in thesmoothing of the difference betweennew highs and new lows. We do notuse a ratio-adjusted version, as it doesnot seem to come into play as muchwith new highs and new lows. Manyforget that new highs and new lows area very different "animal" than advancesand declines. Advances and declines, asis up volume and down volume, arebased upon daily price action. Newhighs and new lows are based upon theprice action over the last 52 weeks.These breadth parameters are very verydifferent. We also utilize a Miekka cal-culation using appropriate multipli-

ers, even though we are mainly moni-toring its direction and not its level.Finally, signals are given based upon thenew high new low line crossing its ownmoving average (red line) as shown inFigure 3.

Another breadth-based indicator usedin our "weight of the evidence"approach to trend following is one thatincorporates up volume and down vol-ume. And, once again, we utilize aratio-adjusted McClellan Summationwith a Miekka adjustment for this indi-cator. Volume will tend to move high-er faster, and of course, it will movelower faster. Stated differently, volumewill accelerate the measure in bothdirections. Volume has always been animportant supplement to classical tech-nical analysis and is no less importantwhen used with breadth analysis. InFigure 4, you can notice that the indica-tor is still below its signal line at +400.This is because the volume since theAugust 16th low has not been impres-sive except on a few days.

The last breadth-based measure I willcover in this article is what we refer toas our combination indicator. I wasalways frustrated using breadth meas-ures on days when the overall tradingvolume was quite low. For example, inthe US, the day after Thanksgiving isusually only a partial day and accompa-nied with extremely low volume.However, the breadth measures still useall of the issues on the exchange, nomatter what the volume, and whenused in a ratio format, imply just asmuch importance. Instead of usingexchange volume, it was decided to useup and down volume as the breadthqualifier. In other words, the advancesand declines are qualified by theamount of up or down volume, respec-tively, above the respective volumes'short-term simple average. Days inwhich the up volume or down volumeis above their average, the advance ordecline components are given addition-al weight. This means that when vol-ume is supporting the move, it movesfaster, and vice versa. Figure 5 showsthe combination indicator and it, likethe up volume down volume indi-


Techniques

Figure 3.

Figure 1.

Figure 2.

cator is still below its signal line. Infact, you can see that the most recentdays are rolling over because of the lackof sufficient up volume.

Trend capturing measuresWe utilize a different type of "weight ofthe evidence" indicator that is a combi-nation of three indicators, one is price-based, and two are breadth-based.These are intentionally set with quickerparameters and, in concert, yield a sig-nal when any two of them are giving apositive signal. Figure 6 below showsour trend-capturing binary indicator inthe top plot overlaid on the Nasdaq

Composite index. The three compo-nents of the trend-capturing indicatorare then shown below, in order fromtop to bottom (starting with the secondplot from the top): up volume downvolume, advance decline, and price.You can see the signals from the indi-vidual binary lines and when any twoare giving a signal in the same directionthe binary in the topmost plot gives asignal in that direction also. You cansee in Figure 6 that the bottom compo-nent just gave a signal so that it alongwith the other component made thebinary for the trend capturing to give apositive signal.

Relative strength measuresWe use a compound relative strengthindicator that is probably overly com-plicated. However, it seems to do thejob and tests quite well back into thelate 1970s. It uses three relativestrength components for growth vs.value, small cap vs. large cap, and largecap vs. very large cap.

For growth vs. value, we use theRussell 2000 small cap growth andvalue indices, which provide a goodpicture of small cap speculation. Wheninvestors are speculating in small caps itis a more optimistic period. Thisreminds me of the old SpeculationIndex we used back in the 1970s. It wasa relative strength measure of theAmerican Stock Exchange (AMEX)volume and the New York Exchange(NYSE) volume. Whenever theAMEX increased to a high percentage(still small relatively), we deemed it asoverbought. In fact, it was really tellingus that investors were being more spec-ulative and was bullish for the overallmarket.

The small cap vs. large cap gives us abull phase measure that again showsspeculation as represented by the smallcaps and safety as measured by thelarge caps. The bear phase relativestrength measure is looking for biglarge cap leadership at market low turn-ing points. An example of these twocomponents could be the S&P 100 vs.S&P 500. These two phases are onlyactionable if the Russell 2000 growthvalue relationship is positive.

Weight of the evidenceAll of our "weight of the evidence"indicators are assigned an individualweighting value so that the grand totalis 100. If all indicators were giving pos-itive signals, the weight of the evidencewould be 100, if they were all givingnegative signals; the weight of the evi-dence would be zero. And of course,there can be any value in between.Each indicator's weight is assignedbased upon its performance in all mar-ket environments. From this weight ofthe evidence measure, we assign differ-ent levels of risk. As an example,

Techniques


Figure 5.

Figure 4.


Techniques

one could say that if the weight of theevidence is between 0 and 25, we woulddeem it as too much risk to be invested.Alternatively, at the other end, if theweight of the evidence was between 75and 100, we would want to be fullyinvested with active trade up rules andfairly loose stops. When our model isgiving the all clear signal we want toensure we have maximum flexibility,both in trading up, and allowing morevolatile holdings some room to workthemselves higher.

Once risk levels are determined, thena full set of buy, sell, and trade up rulescan be developed for each level. One

should keep the stops at the least riskylevel fairly loose and encourage aggres-sive trading up of any holding that isnot performing as expected. Theweight of the evidence measure can bebroken into as many levels as meetsyour trading needs. At PMFM, we uti-lize four levels since we not only active-ly manage two listed mutual fundsusing ETFs and similarly managed sep-arate accounts, but we also managemutual fund retirement accounts usingopen-end mutual funds and ETFs.

We have gone so far as to color codethe different levels; red for the lowest,green for the highest, and orange and

yellow for the two levels in between.Figure 7 below shows the NasdaqComposite index color-coded to repre-sent the level of the blue line, which isthe weight of the evidence line. As youcan see the weight of the evidence, linedoes a good job of picking up the uptrends and staying away from the downtrends. In addition, keep in mind thatany selling is done based upon a set ofstop loss rules tied to the weight of theevidence level; the lower the level thetighter the stops. Why? Because we donot own the model, we own the hold-ings.

Breadth plays an important role inour rules-based technical model, as itwill generally be a little early at tops andcoincident at bottoms. Breadth alongwith price measures and any othergood trend capturing indicators can beput together into a "weight of the evi-dence" approach to trend analysis.Remember, one big advantage to thisapproach is that there is no single pointof failure, like there is with many indi-cator systems. Finally, remember thatdiscipline is the most important com-ponent of any technical model. Weadhere to our rules without exception.There is only one thing worse thanbeing wrong, and that is staying wrong.

Gregory L. Morris is the senior port-folio manager for PMFM, Inc. Priorto this role, Greg served as a Trusteeand Advisor to the MurphyMorrisETF Fund and as Treasurer and ChiefExecutive Officer of MurphyMorrisMoney Management Co. andMurphyMorris.com. Greg has been atechnical market analyst for over 30years ranging from analysis softwaredevelopment to website analysis andeducation, to money management.He has written two books, "CandlestickCharting Explained," "The Complete Guideto Market Breadth Indicators," and is writ-ing his third book for McGraw-Hill on"Technical Analysis for Money Managers."He was a Navy fighter pilot, is a grad-uate of the Navy Fighter Weapons"Top Gun" School, and holds a degreein Aerospace Engineering from theUniversity of Texas. 2007, GregoryL. Morris

Figure 7.

Figure 6.


Techniques

There is a growing tendency touse non-financial criteria toassess potential targets forinvestment, especially long-term invest-ment in equities. Typical examples ofsuch non-financial criteria are: cus-tomer retention, proportion of multi-skilled staff, availability of shareoptions for employees, length of MDcontract, diversity of suppliers for agiven product line, staff turnover, etc.The origins of this trend go back to theearly 80' when organisations such asEthical Investment Research Services(EIRIS), set-up to identify "ethical"assets for investment for churches andcharities. A decade later, the buddingCorporate Social Responsibility (CSR)movement had started to influencesome pension funds, such as UniversitySuperannuation Scheme (USS) in theUK, to select assets on the basis ofadherence to certain social and envi-ronmental criteria. Today, every 8thdollar in the USA (about $2.2 trillion) isinvested in CSR or Socially ResponsibleInvestment (SRI) funds. The biggestinvestor is the California PublicEmployees' Retirement System(CalPERS) with funds of $250 billion.In Europe this type of investment in2006 amounted to at least 38 billion incore SRI investment, with a further 64billion using simple negative ethicalscreening and 594 billion integratingsome ethical criteria in their asset selec-tion process. (Source: European SRIStudy 2006).

Nearly all of these CSR/SRI criteriaare non-financial and most of themcould be used for selecting any long-term equity, not only those with a CSRor SRI tag. But today relatively fewinvestors use such criteria for their

long-term investment. It is even moresurprising that about 50% of UK funds(25% life insurance and 25% pensions)are by their very nature long-terminvestments. The question is why doesthe financial sector continue to rely soheavily on quantitative analysis?

The main reason is most probably thefact that the majority of investors haverather a short-term investment horizon.Non-financial criteria-based asset selec-tion can only be meaningfully appliedto long-term investment because anyimpact of these criteria can usually onlybe noticed over a longer period.

Secondly most investors are not con-vinced about the correlation betweenfinancial and non-financial perform-ance. It is true that despite variousclaims, so far there has been no com-prehensive and convincing study on thecorrelation between the overall impactof non-financial data and the financialresults. This has led to some mistrust ofsuch criteria. However, there have beenseveral studies on the correlationbetween certain parts of a company'sstrategy, policies or business operationson financial results. For example,according to a Governance MetricsInternational 2003 survey, good corpo-rate governance boosted growth by20% over three years in the bestEuropean companies. Another aspectis the correlation between the CEOskills and the share value. For example,it was widely assumed by financial ana-lysts that a sudden departure of JackWelch from GE could lower GE's mar-ket capitalization by about 30% (a lossof about $100bn at that time). As such,asset scoring based purely on non-financial criteria is possible since wecan at least draw correlations from a

broader longer term comparison ofcompanies that succeed long-term andthose that do not. By identifying keynon-financial aspects in growth man-agement applied by the companies thatsucceed, we can infer indirect correla-tions between the selected criteria andlong-term financial growth.

Thirdly, although there are a numberof competing approaches mainly creat-ed for CSR and SRI asset selection, it isdifficult to rely on them without under-standing what type of criteria they use,how objective is their assessment orwhether the compiled data can be usedby for any other form of stock selec-tion other than that based on a CSR orSRI remit. That is certainly true. Thereare now quite a few CSR asset selectionmethods but very few that could beapplied for generic long-term assetselection. So, how can we deal withthese objections?

Competing methodsTable 1 can perhaps shed some light onwhat is important for such asset selec-tion methods. It compares the method-ology of the various non-financial cri-teria based assessments. Such assess-ments are usually carried out as part ofevaluating a company's CSR or SRIperformance. Since they all use non-financial criteria they are the closesttool we have available for an independ-ent assessment of long-term growth ofthese companies. Therefore, at leastsome of them can be considered forlong-term growth equity selection.

The results show that from the rangeof compared methods, broader assetselection (beyond CSR/SRI screening)based on non-financial criteria is pro-vided by two organizations -

SELECTING STOCKS FOR LONG-TERM INVESTMENT USING NON-FINANCIAL CRITERIAby Tony Czarnecki

Techniques


Symbiosa and partially SAM (SwissAsset Management). EIRIS, which hasabout 60% of the UK CSR market, hasthe largest number of assessed compa-nies. However, since it relies on self-assessment (with some verificationonly) and its "negative" asset screening(rejecting companies for investmentaltogether if they do not fulfil certainCSR criteria, rather than applying a rel-ative lower score), it would be difficultto use it for broader asset selection.

The difference in the analyzedapproaches is also seen in the numberof criteria, on which the assets areassessed. BITC (Business in theCommunity) assesses companies basedon self-assessment in just six broad cri-teria groups: Community Management,Environmental Management,Marketplace Management, WorkplaceManagement, Environmental Impactand Social Impact. The results providevaluable insight into how well compa-nies manage their social and environ-mental areas but cannot be used forbroader asset selection purposesbecause it excludes the most importanteconomic domain.

A more interesting approach is

offered by Symbiosa. It uses 116 crite-ria grouped into 14 areas coveringentire business operations such asStrategy and Values, Leadership,Corporate Governance, Managementof Economic Growth, Human CapitalManagement, StakeholderRelationships, Company LongevityRisk and all typical CSR/SRI criteria.But more importantly, apart frombroad asset selection, it can be used fora wide range of investment objectivessuch as M&A, finding intrinsic value orfor long-term strategy evaluation, giv-ing comparisons between individualcompanies or sectors. There are nowother such approaches appearing onthe market, mainly from the US, such asInnovest. This is followed by setting upbrand new funds, which use their ownproprietary method in-house for select-ing assets using non-financial criteria,such as the Generation Fund.

A fund manager that would like to usenon-financial criteria for asset selectionin addition to their standard financialcriteria, would also want maximumobjectivity of the data gathering andassessment process. That can only beachieved by carrying out such assess-

ments by professional assessors.Among the compared methods onlySymbiosa does this. EIRIS and SAM dothat to some extent through a data ver-ification process. Other assessingorganizations, such as Innovest, do notuse questionnaires at all but conductinterviews by professional assessors.

There are various ways of distributingthe assessment results. Most methodsabove produce reports either for allcompanies assessed or for individualcompanies. Apart from that, the datacan be accessed on the Internet on asubscription basis or in a form of anindex, like the Dow Jones SustainabilityIndex maintained by SAM.

ConclusionMost investment funds consider somenon-financial elements as part of theiroverall asset selection process.However, such embedded non-finan-cial analysis blurs the impact of non-financial criteria on business growth.That makes consistent comparisonwith other potential investment targetsnearly impossible. On the other hand,asset selection for long-term invest-ment based exclusively on non-finan-cial criteria, carried out separately andin addition to a standard quantitativeanalysis, can be of great value to invest-ment funds. It is a well-known fact thatnon-financial criteria of long-termgrowth tell us much more about thefuture strengths and weaknesses of acompany and its likely performancethan the financial ones, which tell usabout past growth. Therefore, suchadditional separate non-financial crite-ria based asset selection can play animportant role in counterbalancing theassessment of the company's long-term financial performance.

Tony Czarnecki, MSc, FRSA, is co-founder and Managing Partner ofSymbiosa Ltd. (www.symbiosa.co.uk)and Managing Partner of EuroBusiness Management Ltd. [email protected].

No. Assessment Organizations ---->

Covered scope BITC Covalence EIRIS Oekom SAM (DJSI) SymbiosaThomson

Extel

1 Assessment ScopeCSR and SRI

onlyCSR and SRI

onlyCSR and SRI

only CSR

CSR, SRI and partly econ.in

Human Capital

Full: Econ., Social and

CSRCSR and SRI

only2 Where can the assessment be applied?

a. CSR and SRI asset selection Yes Yes Yes Yes Yes Yes Yesb. General assets (equities) selection No No No No No Yes Noc. M&A No No No No Partial Yes Nod. Finding intrinsic value No No No No Partial Yes Noe. Overall business risk assessment Partial Partial No No Yes Yes Nof. Reputational risk assessment Yes Yes Yes Yes Yes Yes Yesg. Long-term strategy evaluation No No No No No Yes Noh. Assessment of how balanced is business growth No No No No No Yes Noi. Private equity investment No No No No Partial Yes No

3 Is the Assessment made by independent assessors?

No (self-assessment

with verification)

Yes, (by students)

No (self-assessment

with verification)

No (self-assessment

with verification)

No (self-assessment

with verification)

Yes (by professional independent assessors)

No (generic CSR self-

assessment by 158 broker.

firms)

4 Degree of comparison between assessed companies? Low Very Low Very low Low High Very high Medium

5 Number of criteria in the whole assessment

6 broad criteria groups 45

up to 400 depending on client request 34 50 116 25

6 Has each criteria a different option description (rather than based on the same Agree-Disagree range)? No Yes No No Yes Yes

Mainly "Agree-disagree"

7 Is Assessment based on numeric index? No Yes No No Yes Yes No8 Objectivity (Independence) of assessment Low Medium Medium Low Medium Very High Low9 Full competitor analysis? No Yes No No Partial Yes No

10 Sector analysis? Yes Yes Yes Yes Yes Yes No11 Alternative sector analysis for investment purposes? No Yes No No Yes Yes No

12 Identification of information source (tracing) at criterion level?

Yes (at overall level)

Yes Yes (at overall level)

Yes Yes Yes, for each criterion

No

13 Number of assessed companies 80 200 2800 850 2500 110

Generic CSR assessment)

Comparison of asset selection methods using extra financial criteria

Table 1. Source: Euro Business Management Ltd

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C-GG: We use a lot of technical analysis including patternrecognition and proprietary indicators. My colleague, Tony,is really the expert on TA and has refined and developedmany technical indicators that perform well, or outperformthe original on which they were based. TA is a very naturaltrading approach for us regardless of which technique wemay use. We look at the fundamentals as well of course butwe never make a decision based purely on the fundamentals.

TA: You are a devotee of trading psychology and havewritten a book on the subject. What is the differencebetween trading psychology and behavioural finance?

C-GG: They are quite different approaches: Behaviouralfinance is like crowd psychology which examines why peo-ple, and the markets, act as they do. Trade psychology issomething quite different in that is describes the psychologyof individual investors and the mental traps they fall into

Carl-Gustav Gyllenram

Carl-Gustav Gyllenram works at AbilityAsset Management (AAM) inGoteborg, Sweden, a firm set up in2003 by his colleague Tony Ugrina tomanage private client funds. Previouslyhe was a fund manager at SEB EnskildaBanken, and in 1984 he founded theSwedish Technical Analyst's Society. Heis also the author of "Trading withCrowd Psychology" (Wiley).

INTE

RVIE

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Interview

Interview


such a greed, prestige and ego. In this sense it is about iden-tifying your own mental weaknesses when it comes to trad-ing. The subject then attempts to explain what attributes youneed to be a good trader. Like behavioural finance, the chal-lenge is to work out how to make money from the subjectknowing what you know. Analysing the psychology of themarket as a whole is another subject.

TA: How do you use your knowledge of trading psy-chology to make money?

C-GG: This question highlights the difference between beinga good analyst and a good trader. Technical analysis incorpo-rates many elements of behavioural finance and crowd psy-chology. However, being a good technical analyst does notmake you a good trader necessarily. It's not just a matter ofpredicting where the market is going. The most importantaspect of trading psychology is discipline, or the lack of it.You may be able to forecast the market but trading in a dis-ciplined way is something else altogether and represents thereal challenge in making money from the markets. Just know-ing the entry and exit points is not enough.

TA: So it really comes down to risk and money manage-ment?

C-GG: That is one element of trading psychology but it isnot everything. You still need a method that works but thenyou need the mental discipline in order to exercise it effec-tively. We all know trading is about buying low and sellinghigh but one's own emotions interfere with this and inhibitone's performance. Trading psychology has very little to dowith technical analysis and trading patterns etc. It's moreabout knowing yourself and developing a plan and propermethod of trading taking this into account - buying and sell-

ing when you should, not when you want to. This is mucheasier said than done.

TA: Has the challenge for behavioural finance been inbridging the gap between the theoretical and practicalsides of the subject?

C-GG: I went to a behavioural finance conference in Londonsome time ago which had some good speakers but concen-trated very much on why markets are not rational and so onsuch as criticising the Random Walk theory etc. What was notcovered however was a talk on how to use this knowledge tomake money. I believe that studying the charts is one of thebest ways of understanding the crowd psychology behind themarkets. Panics and bubbles are obvious examples along withmarket behaviour at the end of a long positive or negativetrend. When I worked for SEB I wrote technical research butI called it market psychology instead as this better describedwhat is was about.

TA: What do you see is happening in the market at themoment, especially global stocks? Is the sub-prime cri-sis impacting on Scandi banking stocks?

C-GG: I am cautious for next year, let's put it that way.Although I have no exposure to US and UK stocks, I watchthem because of the impact on the Scandi indices. TheScandi banking sector is down as you would expect althoughit is hard to understand why they should be suffering whenthey have relatively little exposure to the sub-prime sector(although there is some via Eastern Europe). There is someconcern about a possible devaluation of the currency butthere haven't been any resignations at the major banks, atleast not yet!

TRADE PSYCHOLOGY DESCRIBES THE PSYCHOLOGY OF INDIVIDUAL INVESTORS AND THE MENTAL TRAPS

THEY FALL INTO.

THE MOST IMPORTANT ASPECT OFTRADING PSYCHOLOGY IS

DISCIPLINE.

TRADING PSYCHOLOGY HAS VERYLITTLE TO DO WITH TECHNICAL

ANALYSIS AND TRADING PATTERNS.

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Software

SAXO BANK'S

TRADECOMMANDER

My first contact withTradeCommander was in thespring of this year. Saxowere nearing the end of their initialdevelopment cycle with the productand they wanted a third party opinionon the capabilities of the product,together with input on its future devel-opment as well as help in identifyingsome of the support challenges theymight face following release.

Before seeing TradeCommander, Ihave to admit that I was highly scepti-cal. My experience of banks producingproducts of this type in-house was notgood. Only a few months before, I hada similar request for a pre-launchreview from another bank who hadinvested nearly $10 million over a twoyear period only to produce what couldbest be described as a lemon. In theend, they recognised the risk to theirreputation of releasing the product andthankfully consigned it to the recyclebin. Saxo's approach to the challengehowever had clearly been quite differ-ent. What impressed me was that frommy first contact withTradeCommander, I was immediatelyable to find my way around the system,and I was also able to construct a trad-ing model within just a couple of hours- albeit, admittedly a very simple one.Unusually for somebody in my busi-ness, I don't have a programming back-

ground, so products I use really dohave to tick the "user friendly" box or Isimply won't use them.

As I learned more about Saxo as anorganisation I started to understandwhy. Although they are a bank, theiroutlook is in many ways similar to agood innovative software developmenthouse. This is far from accidental.Saxo started as a telephone broker ofFX for their domestic Danish market,but with the arrival of electronic trad-ing, founders Lars Christensen and

Kim Fornais quickly realised that tobuild an organisation there were a num-ber of dependencies. Near the top ofthe list they had identified the need togive their clients better trading toolsthan the competition. Christensen andFornais still retain the majority ofSaxo's equity and manage the businessas joint CEOs. This unusual structuremeans that at the senior managementlevel. Saxo is not afraid to take somedevelopment risks, but the whims ofeither CEO are moderated by the other.

John Howard, Managing Director of systematic trading consultancy, JH Financials Ltd,provides an ongoing consultancy service to Saxo Bank who has recently incorporatedTradeCommander, a fully in-house developed systematic trading module into theirSaxoTrader platform. He explains what interested him about TradeCommander andSaxo's strategy in this fast growing area.

Figure 1. Condition and Action blocks


Software

System requirementsThe TradeCommander product wasfirst conceived in 2004 and develop-ment started in 2005. The Bank hadcorrectly recognised that systematictrading was a high growth area and setout two key objectives from the project- to provide the Bank's private clientswith an institutional quality systematictrading tool, and to stay ahead of thetechnology curve in it's offering toSaxo's growing institutional client base.Within these two objectives, it was alsorecognised that for either a private

client or a hedge fund wanting to auto-mate a technical strategy there were anumber of dependencies that Saxocould simplify. Firstly, developing asystematic strategy requires a backtest-ing capability; running backtestsrequires historical data, and that histor-ical database needs be kept updated andcleaned. The designer is then likely towant to optimise the variables withinthe approach. Having settled on astrategy and setup, the signal generatingengine then needs a live data feed togenerate its signals and a liquidity pool

to send the orders to. This in turn cre-ates communication and infrastructurechallenges as well as issues related tothe monitoring of active trading sys-tems, risk management and back officeintegration. Saxo's approach was tocombine all of the above into a singleproduct, meaning that the process ofcreating trading rules, testing and opti-mising, and then deploying them forlive execution would be greatly simpli-fied.

Programming Saxo also identified that few tradershave programming skills meaning thatboth hedge funds and proprietary trad-ing banks end up employing armies ofprogrammers and quants to systematisetraders ideas for them. One of the keydecisions taken early on in the develop-ment process was to make the creationof trading rules something that almostanybody would be able to achieve viaTradeCommander's innovative use ofCondition and Action blocks beinglinked by Combination blocks (Figure1). This enables users to easily buildcombinations of conditions consistingof bar and price values, earlier refer-enced values, functions, study valuesand composite expressions. For userswho are more comfortable writing

Figure 2. Trade system statistics

Figure 3. Equity Curve


Software

complex conditions as single state-ments, an advanced condition editorwill be released later this year.

In order to allow users to makeinformed judgement calls on whether atrading strategy meets the tradersrisk/reward criteria, TradeCommanderproduces detailed statistics (Figure 2)both for backtests and for trading sys-tems being run live, together with agraphical display of where trades haveoccurred and an equity curve for thestrategy (Figure 3).

System Execution MonitorAnother useful tool for understandinghow a trading system is behaving isSystem Execution Monitor. Using thistool it is very easy for users to step backto any given point in time to evaluatewhich elements of an overall condition

have been satisfied, on a virtual tick bytick basis together with values of anystudies or other calculations. In linewith the design philosophy of makingthe system as visually informative aspossible, conditions are marked witheither a green or red square dependingon whether they have been satisfied ornot.

From a risk management perspective,the designers understood that traderswould want the capability to preventsome strategies from trading under cer-tain market conditions and so incorpo-rated some very useful capabilities for auser to pre-define the conditions underwhich a trading system would automat-ically stop.

In terms of tradeable instruments,TradeCommander currently only allowsusers to automate trading strategies on

160 FX pairs - a small subset of Saxo's20,000 instrument universe. In thecoming months they plan to extendsystem trading to other asset classesincluding stocks, futures and CFDs.

In summary, I feel the concept ofincorporating advanced condition writ-ing capabilities, backtesting, optimisa-tion, and execution across multipleasset classes, all within a single fullyintegrated package that any competenttrader will be able to use, is a very pow-erful offering.

Those interested in learning moreabout TradeCommander and SaxoBank's institutional offerings cancontact John Howard on +44 20 71512083.

Figure 4. System Execution Monitor

Books


Published by Harriman House 304 pagesISBN: 1-905-641-57-524.99

Anatomy of the Bear is availablefrom the Technical Analyst book-shop at Harriman House. To orderplease call 01730 233 870 andquote, The Technical Analystmagazine.

There is currently no shortage of stock market doomsayers predictingsharp falls in US and UK stocks over the coming years. Very often theanalysis is based on the assumption that the bear market started in2000/2001 and will continue until 2010 and beyond. If stocks have rallied overthe past few years that is because we are enjoying an upward correction thatwill shortly end. Moreover, because of this upward move, stocks will have fur-ther to fall when the bear market gets fully underway with some forecasts pre-dicting an 80% decline in the Dow. Using historical data, this type of analysisis reasonably sound but fundamentals do matter; there is little to suggest at themoment that we are entering any type of economic recession. Stocks tend tolead the economy and the credit crisis aside, there is little evidence in stockprices to suggest a forthcoming downturn. But maybe it is still too early.

Russell Napier is a consultant for CLSA in Asia and he has written a bookthat thoroughly examines the history of the last four major market bottoms inUS stocks. Napier's arguments are essentially based on cyclical analysis: risinginflation has historically reduced the relative attractiveness of equities versusbonds and we are now coming out of, or have come out of, a long period oflow inflation. An environment of rising inflation and robust valuations has nottended to bode well for the stockmarket. To demonstrate this Napier looks atthe four previous market bottoms in US stocks: 1921, 1932, 1949 and 1982.The rise in prices since 2002 is probably something of a false dawn he argues.Consequently, the market will probably bottom sometime between 2009 and2014.

Napier loosely defines a bear market as a fall of 10% or more in the index.Given recent market volatility some would argue that this is an insufficient def-inition. Furthermore, the role that central banks now play is not given enoughweight in the book. Even since 1982, the role of the Fed in reacting to marketdownturns has changed radically. Inflation is simply not allowed to get out ofcontrol anymore and the Fed is prepared to do whatever it has to in order toprevent an economic or market downturn. For this reason alone, it is hard toaccept the worst of the market prophesies for the years ahead.

Napier's book is comprehensive overview of US stock market historyalthough his coverage of the four major market bottoms in individual chapterstends to get repetitive and can be heavy going. However, he highlights someimportant factors that have driven particular bull and bear markets over the lastcentury or so and from this there is much to learn, even if you don't agree withhis conclusions for the decade ahead. Overall, the book provides a valuableinsight into what drives stocks over the medium and longer term.

ANATOMY OF THE BEARLessons from Wall Street's Four Great Bottoms

CONTENTS:PAGE 42INTERVIEW:STANLEY DASH, TRADESTATION

PAGE 46ARMA AUTOMATED TRADINGBY LUBOMIR NONDEK


INTERVIEW: STANLEY DASH, TRADESTATION

In your experience of training TradeStationclients, what makes a trader decide to build anautomated system?

As more and more markets have goneelectronic, people are attracted to threethings about automation: discipline,speed, and, somewhat related to thesecond point, being able to trade multi-ple strategies on multiple markets. Inother words, being able to stick to therules regardless and transact a strategyquickly is throwing up all sorts of newopportunities.

What kind of strategies are most often builtinto a successful system?

Strategies come and go in fashion. Oneof the things we stress to our clients isto give some consideration to what theywant to achieve. Apart from profitabil-ity, that means how much capital theywant to commit, how frequently theywant to trade, and what markets aretheir markets of interest. Some peoplecome in as dedicated futures traders,others are equities traders, and othersare interested in options and combinedstrategies. There is something of a trad-

er know thyself required. People whoare willing to build structures aroundwhat they're comfortable with are morelikely to succeed than those whochange according to what is givenprominence in the financial press,whether its pairs trading or the use ofmoving averages or whatever.

One of the things we suggest ourclients look for is an assessment ofwhether they have built something thatjust reflects what worked in the past orif they have created a system thatreflects current market tendencies. It'snot my position, however, to say whichstrategies work and which don't. Iwouldn't rule anything out withoutthorough backtesting first. Havin

technical analyst issue

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