MARKET TECHNICIAN

THE SOCIETY OF TECHNICAL ANALYSTS

A 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 11th
Panel Discussion
Commodities............................................................................................Brenda Sullivan, Sucden Financial
Equities.......................................................................................................................Peter Goodburn, Wavetrack
Fixed income.........................................................................................................Tim McCullough, Lloyds TSB
Foreign exchange...................................................................................................................William Moore, RBS
TUESDAY February 8th
Market analysis using the
Elliott Wave Theory ...................................................................Thomas Anthonj, JP Morgan Chase
TUESDAY March 8th
The 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-century
style and to tie it in with our website. If anyone has any comments or
suggestions please e-mail them to Katie at info@sta-uk.org
This year's IFTA conference was held in Berlin in the week that the city was
celebrating the 20th anniversary of the Wall coming down. As usual it
provided an excellent forum for technical analysts around the world to meet
and exchange views. One day of the conference was devoted to the energy
markets and we hope that some of the speakers will submit articles to the
journal in the coming months. Next year's conference will be held in Sarajevo
on 6-8 October.
THE SOCIETY OF TECHNICAL ANALYSTS
www.sta-uk.org
COPY DEADLINE FOR THE NEXT ISSUE FEBRUARY 2011
PUBLICATION OF THE NEXT ISSUE MARCH 2011
MARKET TECHNICIAN
1 ISSUE 68 DECEMBER 2010
Looking for when markets may turn,
using cycles gives us the timing element
for strategic activity (50% of the
equation, the other half is focusing on
price). The premise is that we, as
people, manipulate our measurement of
time (and the calendar) and the
suggestion is maybe we should use
external influences such as planetary
movements, or lunar cycles, or the
actual natural Earth cycle for timing
events. The argument is there may be
little dualism between natural events
and the reactions of the financial
markets.
There is a lot of speculation about the
2012 date generally; it is significant in
the natural cycle of the Earth. If we take
a top down approach (big picture to
small picture), as we should in technical
analysis, we see the Earth has roughly a
26,000 year cycle (25,820 years). This
is how long it takes to complete the
procession of the Equinoxes (for the
Earth to travel past all 12 signs of the
Zodiac).
We are currently in Pisces (the Fish)
moving to Aquarius (Water). Arguably
an indication of major change in our
spiritual belief systems/behaviour, but
definitely a cycle change period in late
2012 (December) for the Earth.
Splitting this grand cycle into sub
structures we can see 5 smaller cycles
(5,125 years each from the Mayans),
with our current sub structure starting
around 3113BC and finishing around 21
Dec 2012.
5,125 years =
13 smaller cycles called Baktuns
1 Baktun =
394 tropical years
(144,000 days Fibonacci no.)
Thus we are in the 13th Baktun
cycle 1618-2012 according to the
Mayan calendar.
The Grand Cycle The Heavens
and the Earth
But measuring time is an interesting
exercise since humans have manipulated
our measurement of it in history. Today
we use the Gregorian calendar (still out
by 26 seconds a year) which was a
product of its predecessor the Roman
calendar. Why do we have 28 days in
February and 31 in July and August? It
is thanks to Augustus Caesar. But 90
countries today use the alternative lunar
calendar in their culture namely the 13
months calendar with 28 days per
month.
65% of US publicly traded companies
use January to measure the fiscal
year.
In the UK, pre-government owned
companies eg, BT Group and National
Grid, continue to use the
governments financial year which
ends on the last day of March.
Many universities have a fiscal year
ending in summer months
The rhythm of time
By Tom Pelc MSTA CFTe
The key theme of my talk to the STA earlier this year was the third tenet of
technical analysis History repeats itself. There is a cyclical nature to
financial market oscillations mainly because what we are actually analysing is
human investment behaviour. This is arguably driven by three primary
emotions fear, greed and hope, whatever the culture you look at. People
react to a predictable series of emotions in their investments from being
cautious about investing to eventually facing fear and disgust, (being closely
linked to Dow Theory) and this forms the basis of a simple Sine wave, which
in turn is one cycle. The cycle repeats itself over time in a similar rhythm but
maybe not exactly in the same way.
Conviction
Enthusiasm
Confidence
Growing recognition
Hope
Disbelief
Disdain
Surrender
Disgust
Caution
Skepticism
Apprehension
Shock & fear
G
r
e
e
d
F
e
a
r
P
r
i
c
e
D
e
v
e
l
o
p
m
e
n
t
Time
DOW THEORY
Accumulation
Participation
Distribution
Chart 1: The Grand Cycle The Heavens and the Earth
Grand Cycle
Procession 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
2
MARKET TECHNICIAN
ISSUE 68 DECEMBER 2010
In Australia and New Zealand the
fiscal year runs from 1st July to 30th
June
Whatever the measure, the cycle is still
the same namely driven by the
primary emotions. If we can get the
data of an instrument going back we can
look for the three cyclic principles to
measure forward the next cycle. We
need the amplitude (how big a cycle
gets), the period, (distance between
cycle troughs), and phase distance
between varying cycle troughs. (Chart 2)
When the cycle is not exactly rhythmic
we can use various cyclic principles to
smooth the pattern from summation
to synchronicity and we can use
the concept of proportionality. The
amplitude of a 20 day cycle should, in
theory, be roughly double a 10 day
cycle. The best situation is if you have a
cycle which has a turn confirmed by a
price pattern or you could try summation
to generate pattern signals. (Chart 3).
A 36 week cycle for GBP/USD (chart 4)
sees technical patterns signal turns on
cycle dates using Japanese candlesticks
and added to this is a Lucas table (using
ratios of 7 compared to range extremes
and added to a sequence low key is the
results column on the table far right.)
This is a simple example of just
measuring time as a static cycle, but we
can use more esoteric techniques such
Chart 4
1.6904 1.3682 0.32 0.32 1.00 7.00 7.00
1.7441 1.3682 0.38 0.32 1.17 6.00 7.00
1.8193 1.3682 0.45 0.32 1.40 5.00 7.00
1.9321 1.3682 0.56 0.32 1.75 4.00 7.00 0.32 Total
2.1200 1.3682 0.75 0.32 2.33 3.00 7.00 1.3682 01/06/2001
2.4959 1.3682 1.13 0.32 3.50 2.00 7.00 1.6904 01/06/2003
3.6236 1.3682 2.26 0.32 7.00 1.00 7.00 Low
Objectives Low R*(C/S) Range R C/S Sequence S Constanct C minus
Add Given Multiply Given Divide Additive RULE OF 7 High
Upside Upside Upside Upside Upside Upside Upside Subtract Cable
Long legged Doji & Sankawayoi 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
3 ISSUE 68 DECEMBER 2010
as sunspot activity or lunar cycles
or even in some cases planetary
alignments.
Professor Tchijevsky in the 1920s
suggested that, as sunspot activity
approaches its maximum, the number
of important mass historical events,
taken as a whole increases, approaching
its maximum during the sunspot
maximum and decreasing to its
minimum during the periods of the
sunspot minimum. Sunspots reach a
maximum about every 11 years, but
successive maxima have spots with
reversed magnetic polarity, thus the
whole cycle is 22.2 years long. We are in
a quiet period at the moment but huge
activity could come between 2011 and
2012 be warned.
When China revalued the Renminbi on
21st July 2005, it was the closest the
Moon was to the Earth in eight years.
My suspicion is that, as a result of their
cultural heritage, they are extremely
aware of important natural dates. On
the Summer Solstice, 21st June 2010,
another China story hit the market.
The authorities announced they were
adopting a more flexible exchange
rate policy, moving from the US dollar
peg.
The charts 6, 7 and 8 are examples of
some of the cycles I have observed. The
optimal cycle across many markets is
the 37.33 week cycle as my studies have
concluded between 36-39 weeks is
where most cycles for many assets
cluster. Martin Armstrong is a strong
proponent of this 37.33 week cycle and
I dedicated a slide in my presentation to
his invaluable work.
To conclude, I illustrated two major
cycles, one for fixed income products
and the other the decennial cycle of the
stock market in years ending with a 7
based on Ganns original observations.
For the fixed income example, calendar
weeks 32-34 in 2005 since 1980 were
88% time positive for long bonds i.e.
yields fell for that three week period on
a net basis. I gave numerous examples
of how this cycle is still going on; not
only has the curve in 2s30s in Swaps
flattened overall in that time period but
also the butterfly trade 2s10s30s was
lower (which is like trading 2s10s vs
10s30s).
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
7
th
Aug
Chart 9: US 2s10s30s fly (using Swaps) Daily chart 2006
Chart 10: Dow Daily chart
New Moon 11
th
Oct 2007 and a bearish key
day reversal
Full Moon
Fall 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 22
1917 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 cycle
which is still on going and relevant for
this August calendar weeks 32-34.
(Chart 9)
Finally the decennial cycle for the
Dow Jones with bear markets, years
ending with a 7 (Chart 10a)
So what about 2007?
What actually happened thereafter
It did not add up the market should
have turned South or a new cycle was
building (Chart 10b).
The Dow did, indeed, turn a week
afterwards on the 11th October. The
initial impulse decline until January 2008
was 20.5% = a bear market. The lunar
dates tied in with examples I gave that
the decennial cycle has turned on major
lunar dates either New and Full moons
or awkward angles. (Chart 10)
Conclusion
Seasonality plays a part in many
peoples analysis (including economists).
The longer the history with reliable data,
the more powerful the argument is if it
ties in with technical signals. There are
cycles within cycles so first look for the
big picture then work smaller. Use the
rule of multiple techniques.
Some suggested key dates to look
out for:
March 11 2011 and April 4th 2011.
These are likely to be a positive time for
stocks but increased periods of volatility.
More important is mid-June 2011. This
is a major cycle period using 4.3years
sub cycle from long term 51 year cycle.
8th-26th Aug 2011 very bullish
rebound period for US long bonds
(calendar weeks 32-34).
Picks for future investment based on
long term cycles are nuclear energy and
African stock markets South Africa,
Kenya and Egypt. Others to watch going
forward long term are food EDF (PF) and
Mitsubishi heavy industries (MITS).
Millionaires dont use astrology,
Billionaires do J.P. Morgan
5
MARKET TECHNICIAN
ISSUE 68 DECEMBER 2010
From my studies, the P&F chart purist
concluded that the only data which can
be used effectively for the construction
of P&F charts is tick-data [i.e., the
concept of data based on the old ticker
tape, trade by trade, reporting].
There is no doubt, of course, that only
tick-data can provide the basis for a
totally correct P&F chart construction.
However, in today's markets there is
just too much tick-data and the
process of storing all this data to
construct P&F charts, which will
inevitably date back over a period of
time, would be hugely cumbersome
and beyond the scope of all but the
larger computers.
In stepping away from tick-data, there
are two other methods which are used,
namely: close-only construction; and,
high/low construction.
With close-only construction the close
price only for each chosen time period is
added to the chart. This method works
well in certain markets, but it does not
take into account the intra-time-period
highs and lows. This can leave a major
data gap, especially when analysing
volatile markets. This data gap can, of
course, be overcome by using the
high/low data for each chosen time
period thereby taking into account the
full range of price movement. In short,
one can say, for example, that a 1
minute high/low P&F chart is extremely
close to using tick-data.
The main problem with using the
high/low construction method is, to
state the obvious, that there are two
pieces of price data for each time period.
This problem can, of course, be
overcome by applying a trend biased
system. The normal application of this
trend bias works in the following
manner, namely: when there is an
existing column of X's the high takes
priority; when there is an existing
column of O's the low takes priority. This
maintains the correct support/resistance
levels on the P&F chart until an outside
price period occurs where the high and
Point and figure charting
By Richard Miller
Over many years I have studied various charting techniques but, as time went
by, I found that 3-box reversal Point and Figure charts (P&F charts) were the
most suitable method to use for the analysis of movements in market prices.
The objective nature of P&F charts definitely gives a significant advantage
over other forms of charting which, in general, rely heavily upon a subjective
input in order to achieve a clear result from interpretation. With a 3-box
reversal P&F chart, 45 degree trend lines can be drawn objectively from the
first thrust away from the top or bottom, vertical and horizontal counts are
also taken objectively. Again, it is purely the product of an objective
observation, whether a market is in upward or downward trend.
Chart 1 Chart 2
6
MARKET TECHNICIAN
ISSUE 68 DECEMBER 2010
STA Diploma
Results
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 STA
Diploma Exam
Wednesday 13 April 2011
the low are both significant. The
problem in such a case is this: which
price should be recorded?
Some experts say that because it is
impossible to tell whether the high or
low came first during the time period,
the basic rule should be maintained,
namely: that in a column of X's the high
takes priority; and, in a column of O's
the low takes priority. Thus, in short, the
other prices should then be discarded.
This basic method works in most cases
because the market invariably catches
up and consequently the full price
movement is recorded in the following
columns. In short, the market confirms
upwards or downwards movement.
However, on some occasions this is not
the case and the P&F chart is left with
potentially incorrect support/resistance
levels. Indeed, some well known experts
in this field have said that although this
is a problem it should be ignored as it is
insurmountable.
Well, after years of study and a sudden
moment of realisation, I believe that I
have found a workable solution to this
insurmountable problem and I wish to
share my idea with colleagues. By
sharing my idea, I am hoping to see
whether my idea is robust enough to
withstand the scrutiny of others who are
also users of P&F charts. For simplicity, I
have called my idea the "RM Dot".
The "RM Dot"
The clear major advantage of P&F charts
is the ability to remove noise from the
market and give clear, unambiguous
indications of support/resistance and
entry/exit points. Because of these
significant advantages of P&F analysis
over and above other forms of analysis,
it is imperative that nothing is added to
the P&F chart which would detract from
these advantages or add in noise that
has been so successfully removed.
Now referring to the given example
charts [see chart Nos. 1 and 2]: as P&F
chart users will clearly see, Day 5 causes
the problem [i.e., an outside price
period the problem which has in the
past been described as insurmountable].
This is because in standard P&F charting
there is no record of the fact that the
price reached 90 and rallied to 125. The
reader of the chart could therefore make
the mistake of assuming that there is
support at 95. Thus, when the price
reaches 90 on Day 7, this could be a P&F
double bottom sell signal.
However, with the simple addition of the
"RM Dot", which shows 2 "Dots" in the
2nd column, we have a record of the
price reaching 90 and, thus, the P&F
double bottom sell signal could be
ignored until confirmation at, say, 85.
The great advantage, short of recording
full price movements, is that the addition
of "RM Dots" play no other part in the
P&F analysis; save the simple record that
the price, e.g., in my given example,
dropped to 90. The addition of the "RM
Dot" should, of course, only be made if
there is a blank box in the opposite
direction. If there is an "X" or "O" in
these boxes, then support/ resistance
has already been recorded and the prices
have no impact on support/resistance.
I trust that this brief introduction to the
"RM Dot", which I believe provides the
missing factor in the great value of P&F
analysis, is sufficient for you to
understand why I am enthusiastic about
its value and why I am keen to share the
idea with colleagues. I would welcome
all comments and further discussion.
Please feel free to email me on
Richard@rmmarketpredictions.com.
Even better, it would be great to see
some discussion played out in the
columns of this Journal.
The STA
Diploma Course
The STA Diploma Course will
commence in the New Year. The
course runs for one evening a
week over an 11 week period,
commencing 12 January 2011. The
course also includes an Exam
Preparation Day. The cost of the
January 2011 course is 2,695. The
course fee includes membership of
the STA for one year, the course
itself, the Exam Preparation Day
and Exam.
For further information, please
contact Katie Abberton on
info@sta-uk.org
7
MARKET TECHNICIAN
ISSUE 68 DECEMBER 2010
It has been noted that major trend
changes often exhibit an early
characteristic which distinguishes them
from mere corrections of the prevailing
trend. This is not true all the time but
many times it is. This characteristic is
that major trend reversals tend to occur
with an initial explosive change in price.
This is the initial lift-off stage.
Corrections can have this characteristic
too but it is more often the case that it
accompanies stronger longer term
cyclical market moves.
Expressed in another way, it is the angle
of ascent or descent compared to the
angle of the established trend which
helps differentiate the two types of
market activity. In a reversal, the angle
tends to be sharper in the direction of
the new trend than in the direction of
the dying trend. This is illustrated in the
diagram below:
The diagram above represents idealised
price activity during the tail-end of a
bear market. The price has been falling
but then bottoms out and rises again in
a countertrend rally. The major change
in trend is signalled by the rapid sudden
rise after the low. The y and z degrees
represent the angles of ascent and
descent and the odds favour the
occurrence of a reversal when y is
higher than z over the same period of
time. This can be represented
mathematically as:
Reversal = y degrees > z degrees (over
same time period).
Corrections tend to exhibit the opposite,
which means the angle of the main
trend tends to remain the more acute as
shown graphically below:
In this case the mode of market
behaviour could be represented
mathematically as
Correction = y degrees < z degrees
(over same time period).
In a way this makes perfect sense given
the initial drive required to change an
established trend. I found that where
this initial thrust was absent the odds
favoured the anticipation of merely a
corrective phase before resumption of
the existing trend.
The AMR works best on a longer term
monthly timescale. Looking at new highs
or lows and the bars on either side, it is
possible to make judgement about the
strength of a correction or reversal and
which category the market activity
might fall into.
Whilst it could be possible to measure
angles in real time and compare them,
this approach would be complicated to
develop although it provides an
exciting area for further research.
There is, however, a much simpler way
which avoids complex trigonometry and
yet encapsulates the core principle of
the idea of a sudden explosive change in
direction.
By simplifying the application of the
principle it can be adopted quite easily
as a strategy technique. Using the
height of price bars as a guide and using
monthly bars it is possible to measure
the rate of ascent and descent of a move
quickly and easily. At market turns,
where the price bar in the opposite
direction to the established trend is
stronger and higher then the preceding
bar it signals that the ascent is an AMR.
Where the bar is weaker it signals a
correction.
The charts below show how the principle
is applied in practice. Fig 1a represents
the initial green bar. The next
requirement is for another bar which
makes a new low/high, and a third bar
which fails to make a new high or low
and actually breaks down to below or
above the low/high of the first bar. This
signals a reversal. Figs 1a, b and c show
the progression of the bearish version of
the setup. The trigger for the analysis
techniques signal occurs at point a on
figure 1c.
Acute monthly reversals
(AMRs)
By Joaquin Monfort
Staying with the trend is the oft-stated goal of many an investment strategy
and this article proposes a long-term strategy technique applicable across
most markets which will aid investors in achieving precisely that. The results
below 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
8
MARKET TECHNICIAN
ISSUE 68 DECEMBER 2010
shooting star produces a more likely
reversal opportunity and we would
move our stops and short trigger up
once again to the October lows but,
once again, the market remains bullish
and keeps rising. The next major
opportunity to go short occurs in March
08 but although there is a move down
the market fails to take out the February
lows so our long trades are still running.
Eventually in July 08 there is an acute
enough reversal to trigger the stops on
both our longs and open a short order.
After the devastating bear of 2008 the
market reverses in 09 but there is no
AMR to close out our shorts and open
any longs. Eventually in November 09
there is another acute decline which
opens a second short order so we are
short 2 contracts. Junes hammer
created another AMR set up which would
The bullish version is the inverse of the
above setup and is shown below:
The bullish buy signal would be
triggered at the high of candle 1: point b
on the diagram. A correction is
anticipated where the market fails to
break above either points a or b.
Variations
Apart from the classic set-ups described
above, I have included a variation.
Obviously the main principle is that the
market rebounds in a more acute move
to that which it preceded and so I have
widened the definition to include
monthly key reversals too. A monthly
key reversal is a bar which posts a new
high or low and then during the same
bar reverses posting a new low or high
respectively. Chart 1 shows a bearish
key reversal from the chart of the
GBP/USD.
The signal for the key reversal variant
works a little differently from that of the
classic 3-bar setup. Given that the usual
signal point has already been surpassed
by the 2nd key reversal bar, the signal
is given at the low/high of the key
reversal bar and is triggered when the
3rd bar passes below or above that
point.
Chart 2 is an illustration of some real
examples of AMRs using EUR/USD.
Trading the signals
The trading system derived from this
analysis technique is illustrated above
and derives its signals from the set-ups
themselves. This is because the
triggering of stops means de facto that
the reverse signal has been given and a
new order in the opposite direction is
triggered at the same time, thus the
trader is kept in the market for most of
the time. The monthly time-scale
reduces the number of whipsaws.
Were trading the signals in the above
chart of the EUR/USD, we would start by
placing a buy trigger order at the May
07 candle highs and our initial stop loss
at the June 07 candlestick lows. July
would have triggered our buy order
since it broke the May highs. August set
up another buy order with a lower low
and Septembers long marabuzo candle
would have triggered another buy order
at the July highs. We would now place
stops for both orders at the August lows.
At the end of October we would move
our stop up to the September lows in
the unlikely event that the market
turned around and came back down
rapidly triggering a short. Novembers
Fig 2a Fig 2c
Fig 2b
Chart 1: GBP/USD
Chart 2: Real examples of AMRs
MARKET TECHNICIAN
9 ISSUE 68 DECEMBER 2010
require a breach of Mays highs of
1.3342 a considerable reversal.
As can be seen from the example above,
this trading system is a simple low
maintenance turn-key style strategy
which is also quite good at keeping a
trader in the trend. All that is required
to operate the system is to check the
monthly charts at the end of each month
and move the stop-and-reverse orders
to the high or low of the last candle.
What is more, back-tested for major
currency 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 alone
investment strategy. The signal works
best in volatile markets so it could be
optimised using Average True Range to
avoid losing signals in sideways
markets.
If being used as a stand alone
investment strategy, the following
additional rules apply:
1) If a key reversal occurs, go back a
month before the first month to find
out the direction of the trend. If up
then the key reversal is bearish, if
down then bullish.
2) Allow for pyramiding: if multiple
signals occur in the same direction,
which is a feature of this strategy,
allow pyramiding. When a signal in
the opposite direction is triggered
then close all the trades in the
pyramid. Use the most recent trade
entry point for stop placement and
remember to make the stop/buy to
cover orders for all the contracts in
the pyramid!
Results
The table shows the results for various
periods up until July 2010. The start
dates were between 8 and 35 years
back, depending on the security in
question. The euro, for example, it is
eight years because it has a shorter
history compared to the others. The
results included a 1% commission cost
and 3% slippage costs.
Capital Requirements
Although trade size was set at 100,000
currency units, given that margin is
quite generous in the foreign exchange
market, the capital requirement varied
depending on the maximum drawdown
for the particular security. At the time of
writing (in Oct 2010) these maximum
draw-downs stood at $15,433.97 for the
USD/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 static
risk/reward because the size of the
initiating candlestick could vary. Given
the moving stop beyond the first month,
the risk/reward varied after that too.
The results showed however that on
average the rewards far exceeded the
risks. But the actual probability success
rate hovered around the 50% or just
below and it was the greater reward that
made the strategy profitable rather than
a higher probability success rate. This
lends weight to the principle
underpinning the strategy that the AMR
is good at determining changes in trend
at an early stage. It is also highlights the
importance of overlaying any trading
system with a disciplined money
management approach i.e. letting
profits run and cutting losses.
Carry Trade Considerations
Interest accrued or deducted because of
interest rate differentials were also not
included or calculated although interest
for periods out of the market was set at
2% in the broker account. Brokers do
vary quite a lot however on what they
will pay you. Calculating carry trade
profit or loss would be a necessary
exercise to any serious application of the
strategy given the long periods in the
market.
Comparison with 5%
interest/annum
Taking the minimum capital
requirements above from the maximum
draw-down figures we can also assess
what the money would have earned had
it been placed in a savings account to
make a comparison. Below are the
results for an annual 5% return.
EUR/USD = $15,588.53
USD/JPY = $85,134.02
GBP/USD = $267,140.60
USD/CHF = $157,850.70
These show that, apart from the
EUR/USD pair which far outperformed a
regular savings account, the other pairs
spread over 35 years only beat the 5%
savings account by quite small amounts,
particularly in the case of GBP/USD but
crucially they did outperform the savings
account. This is particularly attractive in a
low interest rate environment when it is
increasingly hard to find assets yielding a
5% return.
Joaquin Monfort is an analyst for the
internet Forex broker
www.Forex4you.com
Results:
July 2010 EUR/USD USD/JPY GBP/USD USD/CHF
In US Dollars ($)
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 same
month, they will often be followed by
similar peak-panic intervals and market
outcomes, a trend that has held up very
well since 1895. Numerous examples
may be given of this phenomenon in US
financial history. The peaks in the Dow
Jones Industrial Average (DJIA) were
considered in relation to the ensuing
biggest one day rises and falls. The
annual one day post peak (AODPP) rise
and AODPP fall were taken as the
biggest one day percentage DJIA rise or
fall in the year after a major market top.
Seasonality was also appraised for DJIA
peaks and subsequent panics and
rallies. The timing of major DJIA peaks
by month and day (year ignored) is
hypothesised to have relevance on how
subsequent market trends develop.
On a technical note, the DJIA data are
based on closing values throughout
this article. Peaks at the beginning of a
bear market were sourced from
fiendbear.com for the 100 years to
1996, with additional DJIA peaks in
1998, 2000 and 2007 being inserted by
the author.
Peak AODPP Fall Intervals
If DJIA highs occurred near the same
month and day, then close parallels can
arise on how the ensuing market
unfolded. The September 3, 1929 and
August 25, 1987 record peaks provided
the best example, as both were followed
55 days later by the most spectacular
October panics in US history. The violent
market decline lasted only a few
months, with the DJIA hitting bottom on
November 13, 1929 and December 4,
1987.
An overall summary of peak AODPP
fall intervals for the DJIA is given in
Table 1 and Appendix 1. Some of the
parallels were quite remarkable as, for
example, the highs in 1895 1899,
1901 1946, 1906 2000 and 1929
1987.
Anomalies. DJIA peaks occurring at the
same time of the year will not always be
followed by comparable market
outcomes. Trends after the secular high
of September 3, 1929 aligned with those
experienced after August 25, 1987.
Comparisons could not be made with
outcomes after the September 4, 1895
or September 5, 1899 tops. Other peak
DJIA pairs did not produce parallelism:
The peak at the beginning of a bear market can be a key indicator for predicting
US market outcomes. This paper considers two key factors the intervals between
the peaks and ensuing panics, as well as the seasonal timing of these events.
DJIA peaks, seasonality
and market outcomes
By 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 and
Dec 23. The final lows were recorded on Aug 08, 1896
and Sep 24, 1900.
Jun 12, 1901 May 29, 1946 Two major one day falls six days apart occurred in early
September after each of the respective highs in June and
May. AODPP rises were recorded on Sep 16, 1901 and
Oct 15, 1946. The protracted bear markets persisted
until Nov 1903 and Jun 1949. Black Thursday occurred
on May 9, 1901 prior to the 1901 top, but this dramatic
spring 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, with
stock market tremors on Mar 14, 1907 (-8.29%) & Mar
12, 2001 (-4.10%) and major autumn panics in 1907
and 2001. Bear market lows took place on Nov 15, 1907
and Sep 21, 2001.
Nov 19, 1909 Nov 21, 1916 AODPP falls were experienced a few months later on Feb
07, 1910 and Feb 01, 1917. The final lows were reached
on Sep 25, 1911 and Nov 19, 1917.
Sep 30, 1912 Oct 09, 2007 Panics happened on Jan 20, 1913 and Jan 21, 2008. Both
bear markets were drawn-out and severe. In 1914, the
New York stock market was closed after the outbreak of
WWI, while the world financial system neared complete
collapse during Black October in 2008.
Nov 03, 1919 Nov 12, 1938 The AODPP falls were experienced on May 21, 1920 and
Apr 08, 1939. The parallels extended in the subsequent
year with major one day rises and falls taking place in
the two months to July 15.
Sep 03, 1929 Aug 25, 1987 The biggest stock market crashes in US history took
place some 55 days after these peaks. The dramatic
slumps were brief with post crash lows on Nov 13, 1929
and Dec 04, 1987.
Apr 06, 1956 Apr 27, 1981 There were no notable AODPP falls over -2.25% after
these peaks. Even so, similarities were experienced in
the subsequent year, with key falls on Oct 21, 1957 and
Oct 25, 1982. Final lows were recorded on Oct 22, 1957
and 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 between
the 1960 correction and the severe 1973-74 bear market.
Jul 16, 1990 Jul 17, 1998 AODPP falls were experienced on Aug 06, 1990 and Aug
31 1998 respectively. Both markets declined by around
-20% and the financial distress was short-lived with
lows on Oct 11, 1990 and Aug 31, 1998.
* High based on the 12 Stock Average index.
ISSUE 68 DECEMBER 2010 10
MARKET TECHNICIAN
11 ISSUE 68 DECEMBER 2010
September 12, 1939 and September
21, 1976; January 5, 1960 and January
10, 1973; December 13, 1961 and
December 3, 1968; January 10, 1973
and January 14, 2000.
The obvious question arises as to
whether the approach was valid or due
to coincidence. Statistical testing would
be very difficult to undertake to help
clarify this point. However, it seems
improbable that the numerous examples
in Table 1 would take place collectively
by chance. When the peak-panic
parallels do arise, they can be very
precise (eg: 1895 1899, 1901 1946,
1912 2007, 1929 1987 and so
forth). Importantly, some years cannot
be appraised because they contained no
significant AODPP falls over about -
2.25% (eg: after the 1956, 1968, 1976
and 1981 peaks).
The April 23, 2010 DJIA high marked
the beginning of yet another market
collapse and aligned most closely with
peaks on April 6, 1956 and April 27,
1981. No one day falls over -2.25%
were experienced in the year after the
tops in 1956 or 1981. Even so in the
month to June 5, 2010, there were
three days that registered falls
between -3.10% and -3.60%. (This
included the May 6 Flash Crash, when
the intra-day low plunged by over -
9.00%.) Given such inconsistencies,
the 2010 market decline may not follow
other historic DJIA bear markets that
commenced in April.
Seasonality
For all highs between February 1 and
September 10, the 23 ensuing AODPP
rises and falls (=> 2.00%) happened in
the half year commencing August 5,
with NO EXCEPTIONS (see Appendix 2).
This would be very unlikely to arise by
chance. For the DJIA peaks between
September 11 and January 31, most
ensuing AODPP rises and falls occurred
in the 6.5 months commencing January
20. (Table 2)
Remarkably, DJIA peaks between
February 1 and September 3 nearly
always had ensuing AODPP falls (=> -
2.00%) in the three months to October
31. The corresponding AODPP rises (=>
+2.00%) happened in September and
October, with two anomalies in January.
(Table 3)
Since 1910, major September-October
annual one day falls (=> -3.60%) were
preceded by a peak in one of three
ways:

A record high happened between

September 5 and October 31 and was
followed by an AODPP fall within 10
days. The associated downturn was a
brief correction (1927, 1955, 1986
and 1989).

If the record high occurred from July

15 to September 3, a major AODPP
fall took place some months later and
the market decline was usually
severe but only lasted a few months
(1929, 1987, 1997 and 1998).

If the market peak for the calendar

year happened between February 24
and May 31 and was not a record
high, then the ensuing autumn
AODPP fall was within a protracted
bear market (1931, 1937, 1946,
2001 and 2008).
NB: The annual one day fall is taken as
the biggest % one day fall in the year
commencing March 1.
Curiously, four autumn panics occurred
after market highs between May 1 and
June 12. Each consisted of two major
one day percentage falls six days apart.
The autumn panic of 1901 was triggered
by the assassination of President
McKinley and has been included,
together with the 1946, 2001 and 2008
events. (Table 4)
Conclusions
There was a notable propensity for
peak-panic intervals to be similar for
those bear markets beginning at the
same time of the year. As a trend it was
quite reliable surprising given the
simplicity of the approach. When the
peak-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, 4
Nov 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, the
peak-AODPP rise intervals had a poor
track record and only worked well on a
few occasions (eg: 1895-1899 and
1929-1987-1997). Thus it would be
spurious to use them as an indicator of
future AODPP rises.
Seasonality in the timing of major DJIA
tops and AODPP rises and falls was the
other notable finding. The peaks from
February 1 to September 3 were often
followed by AODPP rises and falls in the
three months to October 31. Peaks
taking place between September 11 and
January 31 usually had the ensuing
AODPP rise and falls in the 6.5 months
commencing January 20.
From the findings, major DJIA peaks
can be a useful indicator, when the
subsequent AODPP falls were most likely
to occur. The month and day when a
major peak formed at the beginning of a
bear market are crucial for comparisons
to be made to historic trends. However,
the relationship was not 100% accurate,
with historical anomalies being evident.
McMinn (2006, 2009) established strong
links between Moon-Sun cycles and
market cycles. Given the importance of
DJIA peak seasonality, the position of
the Sun on the ecliptical circle could be
hypothesised to be highly relevant in the
timing of US stock market peaks and
panics. (The Sun is at the same position
on the ecliptical circle at the same time
of the solar year.) Alas, the Moon-Sun
mathematics involved in market timing
is extremely complex and impossible to
unravel based on current knowledge.
References
fiendbear.com. DJIA Bear Markets of the
Past 100 Years.
www.fiendbear.com/bearenc1.htm
McMinn, David. Market Timing By The
Moon & The Sun. Twin Palms Publishing.
2006.
McMinn, David. Market Timing Moon
Sun Research 2006-2009. Privately
Published. 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, 1896
Sep 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 +4.10
May 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, 1907
May 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, 1907
Jan 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 +2.99
Jul 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 +3.01
Oct 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 +3.18
1919 1920 1919 1921 1921
Nov 12 Apr 08 -3.86 Sep 05 +7.26 May 14 -6.76 Jun 12 +4.74
1938 1939 1939 1940 1940
May 21 -6.78
1940
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 13,1929
Aug 25, 1987 Oct 19, 1987 -22.61 Oct 21, 1987 +10.17 Dec 04, 1987
Aug 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, 1957
Apr 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, 1990
Jul 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 was
closed on the day due to Martin Luther King Jnr holiday. Even so, this date was taken as the
DJIA 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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MARKET TECHNICIAN
13 ISSUE 68 DECEMBER 2010
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 percentage
change 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 and
1981.
(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 one
day 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 stock
market was closed due to the Martin Luther King Jr holiday. Even so, this date was taken as
the DJIA AODPP fall for 2007.
Source: McMinn, 2009.
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