2004 has been a particularly challenging year for technical analysts since

most of the financial (as opposed to commodity) markets have spent

much of the year trapped in trading ranges and sideways-moving
markets present a real challenge for most technically-based systems of
analysis. This issue of the Journal is being prepared in the run-up to the
US presidential election and many analysts are hoping that a decisive
outcome will trigger off the traditional end-of-year rally in the equity
markets. One area where we have already seen a strong break-out is the
currency market where the dollar has slid to a new eight-month low in
trade-weighted terms.
Forty-six candidates sat the STA Diploma Examination in the spring, of
which 10 were awarded distinctions and a further 31 passed. Fourteen
DITA candidates also passed. Candidates were faced with a question on a
Market Profile

chart. As the topic had been thoroughly covered in a

Revision Day exercise, many candidates, not surprisingly, opted to answer
that question and most scored high marks. This led to an overall
improvement in the marks obtained and to one of the highest average
marks ever. More importantly, the standard of answers to the crucial
major analysis question also improved. Furthermore, it is particularly
pleasing that for the first time the average mark for STA candidates
(75.2%) was higher than the average mark for DITA candidates (69.7%).
The Scottish chapter of the STA held their first meeting in Aberdeen on
30th October at RGU Aberdeen Business School.Locally-based staff from
fund management houses as well as MBA students from the University
were joined by a number of members from Edinburgh who had decided to
make a weekend of it. The three-hour meeting was opened by Professor
Raj who welcomed the STA to Aberdeen and RGU,and highlighted the
importance of technical analysis and behavioural finance in modern
market theory. He helped the audience differentiate between fundamental
and technical analysis by telling the following story... Two men are trying
to cross a bridge during a storm. They had arrived at night and one says to
the other we should cross now,its raining so heavily that the bridge might
be washed away. The other man replies,the bridge has been built by the
best engineers,gauging historical rain and water flow and using the best
materials and engineering principles.We can cross tomorrow in daylight.
After a few hours,during which the water continues to rise, the first man
says,I dont disagree with you about the bridges construction,but the
trend of the waters rise is making me nervous.Im crossing now,good
luck!. He scampers safely across the bridge. The second man waits and in
the morning,with the water roaring underneath,he starts to cross the
bridge. Needless to say,the bridges underpinnings are washed away,the
bridge falls and he is swept away. Professor Raj left his audience to spot
who was the trend follower and who was the fundamentalist!
Gerry Celaya (MSTA) addressed the audience next,explaining what the STA
stands for and what it is trying to do in Scotland.The STA is holding
meetings in different cities and encouraging students to consider joining
as associate members and attending the meetings in Edinburgh whenever
possible. Murray Gunn (MSTA) explored the State of the Marketsand gave
an interesting talk on the stock,bond,commodity and foreign exchange
markets. He covered the key principles of each market,giving examples of
important technical chart patterns,momentum indicators and his own
forecasts of their probable direction. He took questions from the audience
throughout the talk,and there were lively interchanges when the
principles of technical analysis challenged the Efficient Market Hypothesis
Theory that the MBA students had been studying.
Josh Bruzzi (MSTA) also spoke and explained how he uses the leader -
followerand quality rotationideas that he learned from very successful,
fundamental analysis-based stock market traders as the basis for his
quantitative ranking models and chart analysis.His talk prompted an
interesting discussion on the issues of market timing and prices
discounting information ahead of the actual event (why does a share fall
after good news?). As a result of the very positive feedback that came
out of this meeting, we hope to hold another meeting at RGU next year.
IN THIS ISSUE
STAExam Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
P.Goodburn Ratio and proportion a matrix of
converging equations to determine
prefential vs alternate counts for gold . . 8
D.Watts Bytes and Pieces . . . . . . . . . . . . . . . . . . . . . . . . 8
Obituary Tim Brain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
H.Pruden &
B.Belletante Wyckoff laws and tests. . . . . . . . . . . . . . . . . . 9
D.Knapp Market Profile . . . . . . . . . . . . . . . . . . . . . . . . . . 11
COPY DEADLINE FOR THE NEXTISSUE
30th January 2005
PUBLICATION OF THE NEXTISSUE
March 2005
FORYOURDIARY
Wednesday,8th December Alpesh Patel
TraderMind Derivatives Ltd
Wednesday,12th January TBA
Wednesday,9th February Martin Scott
Chief Technical Strategist,RBS Financial Markets
Wednesday,9th March Elizabeth Miller
Head of Research,Redtower Research
N.B.The monthly meetings will take place at the Institute of
Marine Engineering,Science and Technology
80 Coleman Street,London EC2 at 6.00 p.m.
November 2004 The Journal of the STA
Issue No.51 www.sta-uk.org
MARKET TECHNICIAN
200 DAY MOVING AVERAGE
Dollar trade-weighted index
Source Thomson Financial Datastream
MARKETTECHNICIAN Issue 51 November 2004 2
DISTINCTION
CHARLOTTE DENISTY
DOMINIC GODFREY
PETER JENKINS
GULAMABBAS LAKHA
DOMINIC LIVERSEDGE
TAI ONO
MARIA PACINI
RICHARD PERRY
NEIL SMITH
MATTHEW VAN DYCKHOFF
PASS
ABDULAZIZ ALMUZAINI
TAMSIN BARTH
MARTIN BRABENEC
SARAH CANNEY
AMES CARTER
MURRAY COLLIS
MARK DEANS
SHAYAM DEVANI
JIM DRU DRURY
PATRICE DU LUART
KAREN EYNON
ERNESTJ FERRIDAY
JAY GANDHI
REMY GAUSSENS
LEE GOGGIN
MICHAEL GRIFFITHS
NICHOLAS HOGG
TONI JOHANSSON
HARJ KALLAH
DAVID KNAPP
SIMON MAELZER
BRIAN MAGEE
ILESH MAWJI
SEAN MEADOWS
STEWARTNIXON
JEROEN PADT
ARJUN PANCHAPAGESAN
MARK PANTER
ANNALISA PICCIOLO
NUDGEM RICHYAL
MARCO ROBUTTI
CHAIRMAN
Adam Sorab,
Tel:020 7201 6900
TREASURER
Simon Warren. Tel:020-7656 2212
PROGRAMME ORGANISATION
Mark Tennyson d'Eyncourt.
Tel:020-8995 5998 (eves)
LIBRARY AND LIAISON
Michael Feeny. Tel:020-7786 1322
The Barbican library contains our collection.Michael buys new books for it
where appropriate.Any suggestions for new books should be made to him.
EDUCATION
John Cameron. Tel:01981-510210
George Maclean. Tel:020-7312 7000
EXTERNAL RELATIONS
Axel Rudolph. Tel:020-7842 9494
IFTA
Anne Whitby. Tel:020-7636 6533
MARKETING
Gerry Celaya. Tel:01561 340358
Simon Warren. Tel:020-7656 2212
Kevan Conlon. Tel:020-7329 6333
Barry Tarr. Tel:020-7522 3626
Richard Raymar. Tel:07890 821619
David Sneddon. Tel:020-7888 7173
MEMBERSHIP
Simon Warren. Tel:020-7656 2212
REGIONAL CHAPTERS
Robert Newgrosh. Tel:0161-428 1069
Murray Gunn. Tel:0131-245 7885
SECRETARY
Mark Tennyson dEyncourt. Tel:020-8995 5998 (eves)
STA JOURNAL
Editor,Deborah Owen. Tel:020-7278 4605
WEBSITE
Gerry Celaya. Tel:01561 340358
Simon Warren. Tel:020-7656 2212
Deborah Owen. Tel:020-7278 4605
Please keep the articles coming in the success of the Journal depends
on its authors,and we would like to thank all those who have supported
us with their high standard of work.The aim is to make the Journal a
valuable showcase for membersresearch as well as to inform and
entertain readers.
The Society is not responsible for any material published in The Market
Technician and publication of any material or expression of opinions
does not necessarily imply that the Society agrees with them. The
Society is not authorised to conduct investment business and does not
provide investment advice or recommendations.
Articles are published without responsibility on the part of the Society,
the editor or authors for loss occasioned by any person acting or
refraining from action as a result of any view expressed therein.
Networking
WHO TO CONTACTON YOUR COMMITTEE
Spring Exam 2004
Results
ANYQUERIES
For any queries about joining the Society, attending one of the
STA courses on technical analysis or taking the diploma examination,
please contact:
STA Administration Services (Katie Abberton)
Dean House,Vernham Dean, Hampshire SP11 0LA
Tel:07000 710207 Fax:07000 710208
www.sta-uk.org
For information about advertising in the journal,please contact
Deborah Owen
POBox 37389,London N1 OES. Tel:020-7278 4605
Issue 51 November 2004 MARKETTECHNICIAN 3
The main difficulties in the application of the Wave Principle arise
because there are only three governing rules and its many guidelines are
open to some variation.The categorisation of each pattern sequence into
its correct nomenclature, or wave degree, is essential to the counting
process but is open to interpretation.Furthermore, a five wave impulse
sequence that is associated with trend can actually exist within a three
wave counter-trend corrective pattern, namely a flat, or its variation, the
expanding or running type.And as if to add a new dimension to the term
alternation, a counter-trend sequence can be found within the
components of an impulse wave for example, a zig zag or its variation,
the double, triple within waves 1, 3 or 5 of an ending-diagonal.So, is
there a way or a methodology that can assist in the process of correct
counting, to differentiate when a five wave impulse is part of a correction
and a zig zag part of an impulse? Also, is it possible to identify when any
pattern has been truly completed? It is these questions that lie at the
very core of Elliotts foundation.
It is the time old science of geometry, ratio and proportion that can assist
in our search for a system that allows us to count waves correctly.The
geometric order found in price activity not only causes repetition of
pattern, but it simultaneously creates an intricate matrix of Fibonacci (fib)
ratios over varying degrees of size, merging together in a fractal harmony
that binds each together.
In a case study of gold prices,we shall search for this harmonic matrix of
ratios that combine the proportional element in an attempt to determine
the correct wave count between two possibilities.Neither is considered
preferentialor alternateat this stage both are equally analysed without
prejudice.This will be used juxtaposed to fib-time-ratios,the evaluation of
the rarityof pattern and any rule or guideline that may be applicable
such as overlapand retracement to fourth preceding degree.
Fig 1begins with viewing gold prices from the historic low in 1932 at
17.06 US$ per ounce.An initial advance to 34.87 completes super-cycle
wave I and was followed by a prolonged wave II sequence of the same
level until its completion in October 1967.Eventually, a thrust higher
began, a typical characteristic of third waves as in 1971 the international
gold standardwas abandoned.
The most impressive aspect of super-cycle wave III is that it subdivides
neatly into a five wave impulse sequence of cycle degree, right into its
conclusion at 698.75 in early 1980 (closing price based on quarterly data
series).But our main study will be wave IV and to establish whether it has
completed or remains in progress.
Now taking a glance at this chart,we can see that the decline for wave IV
has not achieved one of Elliotts guidelines that a retracement should
enter the price territory of fourth wave preceding degree.A fib.38.2%
retracement of wave III is calculated towards 224.00 but gold has never
traded at this price level after 1980.A 50% target is at 157.00 and this
does move into the price area of cycle wave 4 of III.Inserting a twelve year
cycle (vertical red lines),we can see this highlighting the beginning of
wave I,III and the conclusion of wave V,but it does not coincide with the
absolute low for gold that traded in August 1999.These two facts alone
do not disprove that wave IV could have completed in 1999,but it does
offer good reason to consider the probability that it continues to unfold.
The pattern contained in the decline from 1980 must now be analysed.In
fig 2,this chart depicts an original alternatecount from WaveTrack dated
October 1999.It labels the decline from 850.00 (monthly hi-lo-close data
series) as unfolding into a double zig zag pattern to 251.70, completing
wave IV. It is important to note that under this counting, Primary wave X
completed at 499.75 as an expanding flat pattern, (A)-(B)-(C), 3-3-5.But
why was it categorized as an alternatecount? The reason is because it is
uncommon for the two zig zag sequences within a double pattern to
unfold to a ratio of 61.8% (as shown).As the insert diagram from our
tutorial archive shows, there is a greater correlation between the two
where either equality is found, fib.100%, or where the first is extended by
fib.61.8%.This prompts us to examine the chart further.It is interesting
however that the second zig zag can be cut by the golden sectionand
this exactly intersects the low of wave A at 325.50.This proves that this
decline is a zig zag, but not necessarily part of the double pattern from
850.00 so what else can be considered?
The low at 251.70 is the lowest low since 1980 the previous couplein
Jan 82 and Feb 85 which we know completed the first zig zag
therefore, through deduction, if the second zig zag decline is not
completing a double formation, it can only be part of a more complex
pattern for cycle wave X.
If so, then a new lower low to 251.70 (below Jan 82 and Feb 85) will
become an expandingB wave within such a pattern see fig 3.
This must now be tested.B waves that move into new price territory
commonly extend by either fib.23.6% or by fib.38.2% but not usually by
fib.61.8%.And so by extending wave A by fib.23.6%,the calculation
coincides exactly at 251.70 +/- forming two ratios into proportion at this
fixed price level (red and black lines coincide).A valuable insight from this
last calculation is achieved this proof of an expanding B wave eliminates
the probability of gold completing super-cycle wave IV at 251.70,and
Ratio and proportion
a matrix of converging equations to determine prefential
vs.alternate counts for gold
Summary of presentation to the STAs Elliott Wave Symposium on 2nd July 2004 By Peter Goodburn
Figure 1
Figure 2
MARKETTECHNICIAN Issue 51 November 2004 4
combining this with the doubts raised earlier in fig 1,the probability that
wave IV remains in progress can now be considered high.
The inserted chart, again from the tutorial archive shows these fib.
calculations unfolding within an expanding flat pattern, A-B-C, 3-3-5.That
means the advance from 251.70 is wave C of this sequence and must
subdivide into a five wave impulse pattern.A very interesting
observation is now made if this ongoing pattern is an expanding flat,
then Primary wave A is itself an expanding flat (see remarks made
regarding fig 2) of Intermediate degree.The fractal implications of this
are significant because we have an expanding flat within a larger degree
expanding flat known as self-similarity.The question now raised is this
how common is it for an expanding flat pattern to contain another
self-similar pattern in the position of wave A? The answer is that it is
uncommon, but not rare (which will be discussed later).
What targets are likely for Primary wave C of cycle wave X of the
expanding flat? In fig 4 we can see another forecast from WaveTrack in
October 1999 which was the preferentialcount at the time.It shows a
fib.100% equality between the extensions of wave B and C of the
expanding flat pattern so that wave C targets are projected towards
568.65. This price level coincides with a fib.61.8 retracement calculation
of the preceding decline for the first cycle degree zig zag, again forming
two ratios into proportion and significantly increasing the probability of
price following this harmonic path.
Going a little further, if prices eventually complete this expanding flat for
cycle wave X at 568.75, and the second cycle degree zig zag declines
afterwards, then using a fib.100% equality ratio from the first, projects
the second to complete at a price level of 198.75 and this area moves
to the top range of fourth wave preceding degree considered a
minimum requirement (fig 1).
Earlier we mentioned applying the harmonic matrix of ratio and
proportion to determine the correct wave count between two
possibilities what other count can be considered? A B wave that moves
price into a new extreme is not exclusively part of an expanding flat
pattern.Another pattern that contains the same is the triangle (see fig 5)
taken from the original forecast in May 2000.In this count, the advance
from 251.70 is Primary wave C within a contracting/symmetrical type
triangle.Targets towards 423.80 were calculated because within such a
pattern, there is a common ratio relationship between waves A and C
where wave C unfolds to a fib.100% equality ratio of wave A but
especially since wave B only extended wave A by fib.23.6%.Other fib.
ratios may be used if wave B were extending by fib.38.2% or greater.
Looking further ahead, should a contracting/symmetrical triangle
eventually unfold as cycle wave X, then the second cycle degree zig zag
can be calculated to complete towards 177.80 where a fib.100% equality
ratio is applied from the extremity of the triangle (top of wave A).This
relationship is quite common it allows the second zig zag to unfold
uniformly by incorporating the corrective sequence something that
could not be calculated in the alternatecount of fig 2.This works in the
same way where, for example, an impulse wave does not reach its
measured target, but the following correction unfolds with an expanding
B wave that trades into a new price extreme at the original measured
target in other words, the B wave of the correction compensates by
trading at the intended target of the preceding impulse wave.
At the original time of publishing the targets for wave C towards 423.80,
the price of gold was still trading at around 276.00 a long way away.But
as gold began to move closer to this target late last year, it became
imperative to ascertain the exact termination level.The 423.80 target for
wave C was calculated by equating it to wave A (see above), but actually,
wave A unfolded as an expanding flat pattern in its own right so which
part of A was used to measure targets for wave C? Referring again to fig 5,
we can see highlighted in red, the measure used was from beginning to
end of the expanding flat from 296.75-499.75. So what other
possibilities are there? There are four in all, the first we calculated already,
the other three are by measuring each of the waves within the
expanding flat namely, waves A,B and C.
Two of the three remaining were calculated.In fig 6we have used a fib.
100% equality ratio of wave (B) of the expanding flat, giving a target for
Primary wave C towards 450.95.Also, measuring just wave (A) produces a
slightly lower target towards 431.90 see original calculation in Feb.03
in fig 7.
Figure 3
Figure 5
Figure 6
Figure 4
Issue 51 November 2004 MARKETTECHNICIAN 5
And so the next question arises which one is correct? To ascertain this,we
must look at the subdivisions of the advance from 251.70.If primary wave
C is really unfolding in the advance from 251.70,then it must subdivide
into an Intermediate degree zig zag,or multiple variation. In fig 8,this (A)-
(B)-(C),5-3-5 zig zag is shown already reaching its price target in January
2004 all that is left to examine is the next lower degree,the subdivision of
minor wave v.of (C) to ensure a five wave impulse pattern has completed
see fig 9.This however,seems incomplete.Minor wave v.is shown as
subdividing into only three waves of minute degree,waves 4 and 5 are still
unfolding.This must therefore allow Primary wave C the chance of
unfolding beyond the 431.90 target,towards the higher area at 450.95? In
this chart,we have highlighted the point of overlapof minute wave 1 at
375.25 because wave 4 must complete above this level in order to allow
wave 5 to progress into a new higher high.
Now examination of minute wave 4 is necessary.So far, the price is
maintained above the overlap, but the entire sequence of this pattern is
very complex.It seems that there are two viable ways to count the
pattern down from the 431.38 high.The first is shown in fig 10as an
expanding flat.In order to validate this, minuette wave [b] must itself be
labelled subdividing into an expanding flat of smaller, or sub-minuette
degree.This is important because we refer back to the opening remarks
about rarityof pattern.Earlier, we examined self-similarity where an
expanding flat unfolded in the A wave position of a larger expanding flat
an uncommon event.But in this case, we find ourselves considering an
expanding flat in the B wave position now this is seen as a rareevent
and it must be taken into context of evaluating probabilities.
The second way to count this pattern is labeling the completion of
minute wave 4 at 387.48 and wave 5 at the slightly higher high at 432.60
see fig 11.The problem with this count is that wave 4 must be labelled
as subdividing into a double zig zag in minuette degree and it is clear
that the terminating level of the second zig zag did not meet any fib.
ratio relationships.For example, it did not equate to the first, neither did
387.48 complete at a fib.support level of the advance in preceding
minute wave 3.
At this juncture, the two competing counts are at least balanced for
consideration.On the one hand, a rare B wave of an expanding flat
subdivides into a smaller pattern of the same, and alternatively, a double
zig zag does not conform to the commonly established ratio
relationships found in such patterns.The only way to differentiate
between the two would be to see in which pattern sequence the
advance unfolds into, counting from the current low at 377.20.A five
wave impulse advance trading beyond fourth wave preceding degree,
above 399.75 (27th April) would confirm minute wave 5 in progress with
new higher highs obtainable.Alternatively, any three wave advance to
the same area would revert the count labeling the conclusion of wave 5
at the current high of 432.60 (1st April).
What followed was a three wave advance to 395.88 and another decline
to below 377.20.In fig 12, the fifth wave of the decline from the high at
432.60 is shown unfolding into an uncommon ending-expanding
diagonal.But this is not so important as the fact that this extra decline to
a lower low, to 371.00 broke the overlapof minute wave 1 (375.25) this
Figure 7
Figure 8
Figure 9
Figure 10
Figure 11
MARKETTECHNICIAN Issue 51 November 2004 6
level shown earlier in fig 9.It confirms the conclusion of minute wave 5 at
432.60 and with it, the termination of Primary wave C of the
contracting/symmetrical triangle see fig 13.
Of course, the 432.60 high can also be labelled as completing
Intermediate wave (3) of Primary wave C as described earlier, and so we
must return to our original query the two counts, finely balanced at this
point and under consideration for cycle wave X are either the
contracting/symmetrical triangle or the expanding flat.In order to
differentiate between these two, it will be important to calculate the
amplitude decline from 432.60.
Lets begin with labelling the high as Intermediate wave (3) of C of the
expanding flat scenario.Wave (4) declines must remain above wave (1)s
high at 342.00 to avoid overlap, and so far, with a five wave impulse
decline between 432.60-371.00, this must be labelled minute wave a of
an ongoing zig zag decline for minor wave a.(assuming a triangle for
wave (4) will eventually unfold). Using the two commonly established fib.
ratio measurements to calculate the termination of the zig zag, wave a is
either multiplied by fib.100% ratio and subtracted from wave b to
produce targets for wave c to 341.80, see fig 14,or extended by fib.
61.8% to 337.40 see fig 15. Both calculations overlap wave (1).The only
way overlapcan be avoided is if a deeper retracement unfolds for
minute wave b, then measurements applied as follows: a fib.38.2%
retracement for wave (4) is calculated to 352.70 measure the amplitude
decline of minute wave a and add to 352.70 (log scale) this produces a
potential target for wave b towards 410.20 where waves a and c unfold
to a fib.100% equality ratio see red line in fig 14.
If wave b cannot retrace deeply inside the decline of wave a, it would
significantly decrease the probability for this count to be correct,
negating the expanding flat scenario.Once overlap occurs, the only
medium-term count remaining will be the contracting/symmetrical
triangle as cycle wave X.
It is now important to establish whether such an advance can be
considered when examining the unfolding pattern within minute wave b.
Counting higher from 371.00,it appears a zig zag of minuette degree
completed at 399.50 see fig 16.And the following decline has also
unfolded into a zig zag (note 100% ratio equality) and so can be labelled
wave [x] it completed at the fib.61.8% retracement level,forming two
ratios into proportional harmony.Now if the wave [x] has completed at
381.15 and the second zig zag unfolds to a fib.100% equality ratio to the
first,then the target for completion is towards 410.40 only 20 cents away
from our previous calculation,again forming an intricate matrix of clusters.
Figure 12
Figure 13
Figure 14
Figure 15
Figure 16
Issue 51 November 2004 MARKETTECHNICIAN 7
The result of gold prices trading towards the 410.20/.40 level will
maintain the expanding flat pattern for wave X, at least for the time
being.Even when prices decline following the completion of minute
wave b it will be only the overlaplevel at 342.00 that will negate it.As it
currently does remain valid, the ongoing forecasts for Intermediate,
Primary and Cycle degree can be seen in figs 17,18 and 19.
And a final return to the contracting/symmetrical triangle scenario for
cycle wave X.For this count, it is not necessary for wave b to advance to
the 410.20/.40 level as price penetration of 342.00 (overlap) is expected
as part of Primary wave D.Nevertheless, as we have seen from the short-
term pattern sequence, an advance towards this level is highly probable,
and under this count, labeled Intermediate wave (B) see fig 20.The
ongoing forecasts for Intermediate, Primary and Cycle degree are
updated according to this count and can be seen in figs 21,22 and 23.
Figure 17
Figure 18
Figure 21
Figure 22
Figure 19
Figure 20
MARKETTECHNICIAN Issue 51 November 2004 8
Summary
To assist in the correct counting of wave sequences, ratio and
proportion have been combined to reveal the harmonic vibration of
growth in gold. Prices move towards points of least resistance in that
process, and the order of this growth is revealed in Elliotts
categorization of wave patterns, and the amplitudes are governed by
the fib. summation series.
Super-cycle wave IV is unfolding into a double zig zag within this,Cycle
wave X has been shown as unfolding within two possibilities,an
expanding flat,or a contracting/symmetrical triangle.Both counts
currently indicate the probability of declines during the next several
months.The next decline will ultimately determine which pattern will
remain valid as both targets differ.A decline below 342.00 will eliminate
the expanding flat pattern as overlap will occur.Prices remaining above
this level during the next twelve month period will weaken the
contracting/symmetrical triangle count.
And finally...a glimpse into the distant future reveals something really
insightful a forecast for a super-cycle wave IV low towards the 183.00
level but then wave V unfolding thereafter with ultimate targets towards
1814.00 completion sometime around the year 2029 see fig 24. Hard
to imagine?
A lot of people see things as they were,and say why,But I am dreaming of
things that never have been,And say,why not?
Peter Goodburn is Senior Consultant to WaveTrack International that
produces regular Elliott Wave price forecasts for Fixed Income,Stock Index,
FX and Commodity products.info@wavenetonline.com
Free Charting Services
For free charting is coming on with many suppliers of web charting
offering a cut down EOD service free to promote their real-time services.
For US securities, there is a great free program: Incredible Charts, see
www.incrediblecharts.com.This is a Java full featured program.
Commodity charts, are available via TFCCommodity Charts, see:
http://futures.tradingcharts.com/
For web based charting services both Stockcharts:
http://stockcharts.com/ and their rivals Bigcharts:
http://bigcharts.marketwatch.com/ take some beating.Normally if you
sign up they enhance the service.
For UK/European securities, good charts are another issue, best to
register for the free service via either ADVFV:www.ADVFN.com, or
MoneyAm: http://www.moneyam.com they also offer a wide range of
add on services.
There are many more a good link sit is www.metronet.co.uk/bigwood/shares/,
this has a set of links to UKcharging programs.Many brokers offer free
charting as part of their services, details are on the site.
Figure 24
Bytes and Pieces
By David Watts
Figure 23
Obituary
Tim Brain
Tim was a technical analyst with the Abu Dhabi
Investment Authoritys London office and will be
sorely missed by his colleagues, friends and family.
Tim came into technical analysis via a route that
many members have travelled computers. He was
employed in the Computer Department of ADIA in
Abu Dhabi but showed a keen interest in technicial
analysis. Tim joined ADIA London in June 1992 after
recommendations from Mickey Bain, MSTA, who was
the technical analyst at ADIAs Head Office in Abu
Dhabi at the time, and who was succeeded by the
late Bronwen Wood, FSTA, in 1995.
With his computer background Tim was quite a
wizard with the various Datastream, Reuters and
Bloomberg systems. He was respected for his
analytical work, and spent many productive hours
with his colleagues reviewing markets.
Tim shared a common interest with many of our
members as he was a wine buff, collecting a modest
investment in wines and Bordeaux wine futures
although it was his nose rather than charts
which served him well there!
Tim passed away unexpectedly, on 8th June 2004
and is survived by his wife Debbie and teenage
children Mark & Natalie.
Issue 51 November 2004 MARKETTECHNICIAN 9
Wyckoff is a name gaining celebrity status in the world of technical
analysis and trading. Richard D.Wyckoff, the man, worked in New York
City during a golden age for technical analysis that existed during the
early decades of the 20th Century.Wyckoff was a contemporary of Edwin
Lefevr who wrote The Reminiscences of A Stock Operator. Like Lefevr,
Wyckoff was a keen observer and reporter who codified the best
practices of the celebrated stock and commodity operators of that era.
The results of Richard Wyckoffs effort became known as the Wyckoff
Method of Technical Analysis and Stock Speculation.
Wyckoff is a practical, straight forward bar chart and point-and-figure
chart pattern recognition method that, since the founding of the Wyckoff
and Associates educational enterprise in the early 1930s, has stood the
test of time.
Around 1990, after ten years of trial-and-error with a variety of technical
analysis systems and approaches, the Wyckoff Method became the
mainstay of The Graduate Certificate in Technical Market Analysis at
Golden Gate University in San Francisco, California, U.S.A.During the past
decade dozens of Golden Gate graduates have gone on to successfully
apply the Wyckoff Method to futures, equities, fixed income and foreign
exchange markets using a range of time frames.In 2002 Mr.David Penn,
in a Technical Analysis of Stocks and Commoditiesmagazine article named
Richard D.Wyckoff one of the five Titans of Technical Analysis.
The Wyckoff Method has withstood the test of time.Nonetheless, this
article proposes to subject the Wyckoff Method to the further challenge
of real-time-test under the natural laboratory conditions of the current
U.S.Stock market.To set up this test, three fundamental laws of the
Wyckoff Method will be defined and applied.
THREE WYCKOFF LAWS
The Wyckoff Method is a school of thought in technical Market analysis
that necessitates judgment.Although the Wyckoff Method is not a
mechanical system per se, nevertheless high reward/low risk
opportunities can be routinely and systematically based on what Wyckoff
identified as three fundamental laws (see Table 1):
Table 1
1. The Law of Supply and Demand states that when demand is
greater than supply, prices will rise, and when supply is greater
than demand, prices will fall.
Here the analyst studies the relationship between supply vs.
demand using price and volume over time as found on a bar
chart.
2. The Law of Effort vs.Results divergencies and disharmonies
between volume and price often presage a change in the
direction of the price trend.The Wyckoff Optimism vs.Pessimism
index is an on-balanced-volume type indicator helpful for
identifying accumulation vs.distribution and gauging effort.
3. The Law of Cause and Effect postulates that in order to have an
effect, you must first have a cause, and that effect will be in
proportion to the cause.This laws operation can be seen
working as the force of accumulation or distribution within a
trading range works itself out in the subsequent move out of that
trading range.Point and figure chart counts can be used to
measure this cause and project the extent of its effect.
Past:position of the U.S.stock market in 2003 Bullish
Charts 1 and 2 show the application of the Three Wyckoff Laws to U.S.
Stocks during 2002-2003.Chart 1, a bar chart, shows the decline in price
during 2001-02, an inverse head and shoulders base formed during
2002-2003 and the start of a new bull market during March-June 2003.
The upward trend reversal defined by the Law of Supply vs.Demand,
exhibited in the lower part of the chart, was presaged by the positive
divergencies signalled by the Optimism Pessimism (on-balanced-volume)
Index.These expressions of positive divergence in late 2002 and early
2003 showed the Law of Effort (volume) versus Result (price) in action.
Those divergences reveal an exhaustion in supply and the rising
dominance of demand or accumulation.
The bullish price trend during 2003 was confirmed by the steeply rising
OBV index; accumulation during the trading range continued upward as
the price rose in 2003.Together the Laws of Supply and Demand and
Effort vs.Result revealed a powerful bull market underway.
Wyckoff laws and tests
By Dr.Hank Pruden and Dr.Bernard Belletante
Chart 1
Chart 2
MARKETTECHNICIAN Issue 51 November 2004 10
The Nine Classic Buying Testsof the Wyckoff method
The classic set of Nine Classic Buying Tests (and Nine Selling Tests) was
designed to diagnose significant reversal formations: the Nine Classic
Buying Tests define the emergence of a new bull trend (See Table 2).A
new bull trend emerges out of a base that forms after a significant price
decline.(The Nine Selling Tests help define the onset of a bear trend out
of top formation following a significant advance.) These nine classic tests
of Wyckoff are logical, time tested, and reliable.
As the reader approaches this case of Nine Classic Buying Tests, he/she
ought to keep in mind the following admonitions from the Reminiscences
of a Stock Operator (See Appendix):
The average ticker hound or, as they used to call him, tapeworm
goes wrong, I suspect, as much from overspecialization as from anything
else.It means a highly expensive inelasticity.After all, the game of
speculation isnt all mathematics or set rules, however rigid the main laws
may be.Even in my tape reading something enters that is more than
mere arithmetic.There is what I call the behavior of a stock, actions that
enable you to judge whether or not it is going to proceed in accordance
with the precedents that your observation has noted.If a stock doesnt
act right dont touch it; because, being unable to tell precisely what is
wrong, you cannot tell which way it is going.No diagnosis, no prognosis.
No prognosis, no profit.
This experience has been the experience of so many traders so many times
that I can give this rule:In a narrow market,when prices are not getting
anywhere to speak of but move within a narrow range,there is no sense in
trying to anticipate what the next big movement is going to be up or
down.The thing to do is to watch the market,read the tape to determine
the limits of the get-nowhere prices,and make up your mind that you will
not take an interest until the price breaks through the limit in either
direction.A speculator must concern himself with making money out of the
market and not with insisting that the tape must agree with him.
Therefore,the thing to determine is the speculative line of least resistance
at the moment of trading;and what he should wait for is the moment
when that line defines itself,because that is his signal to get busy.
Point 4 on the charts identifies the juncture when all Nine Wyckoff Buying
Tests were passed.The passage of all nine tests confirmed that an uptrending
or markup phase had begun.The passage of all Nine Buying Tests
determined that the speculative line of least resistance was to the upside.
Future: A market test in 2004
The authors as academics are intrigued by the natural laboratory
conditions of the stock market.A prediction study is the sine quo non of
a good laboratory experiment.The Wyckoff Law of Cause and Effect
seemed to us to provide an unusually fine instrument of conducting such
an experiment, a forward test. Parenthetically, it has been our feeling,
shared by academics in general, that technicians have focused too
heavily upon backtesting and not sufficiently upon real
experimentation.The time series and metric nature of the market data
allow for forward testing. Forward testing necessitates prediction,
followed by the empirical test of the prediction with market data that tell
what actually happened.
How far will this bull market rise? Wyckoff used the Law of Cause and Effect
and the Pointand- figure chart to answer the question of how far. Using
the Inverse Head-and-Shoulders formation as the base of accumulation
from which to take a measurement,of the cause built during the
accumulation phase,the point-and-figure chart (Chart #2) indicates 72
boxes between the right inverse-shoulder and the left inverse-shoulder.
Each box has a value of 100 Dow points.Hence,the point-and-figure chart
reveals a base of accumulation for a potential rise of 7,200 points.When
added to the low of 7,200 the price projects upward to 14,400.Hence,the
expectation is for the Dow Industrials to continue to rise to 14,400 before
the onset of distribution and the commencement of the next bear market.
If the Dow during 2004-2005 comes within + or - 10% of the projected
7,200 points we will accept the prediction as having been positive.
Conclusions
In summary, U.S.equities are in a bull market with a potential to rise to
Dow Jones 14,400.The anticipation is for the continuance of this
powerful bull market in the Dow Industrial Average of the U.S.A.through
2004.This market forecast is the test to which the Wyckoff Method of
Technical Analysis is being subjected.
Part (B) of Wyckoff Laws: A Market Test will be a report in year 2005
about What Actually Happened. As with classical laboratory
experiments, the results will be recorded, interpreted and appraised.This
sequel will invite a critical appraisal of the Wyckoff Laws and in particular
a critical appraisal of the Wyckoff Law of Effort vs.Result.The quality of
the authors application of the Wyckoff Laws will also undergo a critique.
From these investigations and appraisals, we shall strive to extract
lessons for the improvement of technical market analyses.Irrespective of
the outcomes of this market test, we are confident that the appreciation
of the Wyckoff Method of Technical Market Analysis will advance and that
the stature of Mr.Richard D.Wyckoff will not diminish.
Dr.Hank Pruden is a professor in the School of Business at Golden Gate
University in San Francisco, California and a visiting professor at
EUROMED-MARSEILLE Ecole de Management, Marseille, France.
Dr.Bernard Belletante is a Professor of Finance and Dean of the Euromed-
Marseille Ecole de Management.
References
Forte, Jim, CMT,Anatomy of a Trading Range, Market Technicians
Association Journal, Summer-Fall 1994.
Hutson, Jack K., Editor, Charting The Market:The Wyckoff Method,
Technical Analysis, Inc., 1986.
Leferv, Edwin, Reminiscences of a Stock Operator,Wiley Press (original,
Doran & Co, 1923).
Penn, David,The Titans of Technical Analysis, Technical Analysis of Stock
& Commodities, October, 2002.
Pruden, Henry (Hank) O.,Wyckoff Tests: Nine Classic Tests For
Accumulation; Nine New Tests for Re-accumulation, Market Technicians
Association Journal, Spring- Summer 2001.
Pruden, Henry (Hank) O.,A Test of Wyckoff, The Technical Analyst,
February 2004.
Charts, courtesy of Wyckoff/Stock Market Institute, 13601 N.19th Avenue
1, Phoenix, Arizona, U.S.A.85029-1672.
Table 2
Wyckoff Buying Tests:Nine Classic Tests for Accumulation
Nine Buying Tests (applied to an average or a stock after a decline)*
Indication: Determined From:
1) Downside price objective accomplished Figure Chart
2) Preliminary support, selling climax, Vertical and Figure
secondary test
3) Activity bullish (volume increases on rallies Vertical
and decreases on reactions)
4) Downward stride broken (i.e., supply Vertical or Figure
line penetrated)
5) Higher supports (daily low) Vertical or Figure
6) Higher tops (daily high prices rising) Vertical or Figure
7) Stock stronger than the market (i.e., stock Vertical Chart
more responsive on rallies and more resistant
to reactions than the market index)
8) Base forming (horizontal price line) Figure Chart
9) Estimated upside profit potential is at least Figure Chart for
three times the loss if protective stop is hit Profit Objective
* Adapted with modifications from Jack K.Hutson,Editor,Charting the Market:
The Wyckoff Method(Technical Analysis,Inc.,Seattle,Washington,1986),page 87.
Issue 51 November 2004 MARKETTECHNICIAN 11
In this article I analyse two recent market profile distributions the
September 8th to September 22nd US ten year note future (TYZ4) and
the S&P 500 future (SPZ4) from August 13th to September 22nd.
I aim to show how markets distribute over time and how price objectives
and stops can be employed to create profitable risk/reward scenarios.
Strategies discussed include the importance of the longest line as an
average cost mechanism,how that influences positions and consequently
prices;and the concept of building value and its importance in staying
with a trade to its ultimate conclusion.
The first chart shows a combined market profile for TYZ4 from Sept 8 to
Sept 22. It is a good example of an unbalanced up market that organises
itself into a bell shaped curve, a normal distribution over time.This is an
almost complete distribution because it has a low, a high and a mid-
point. The market is an order seeking mechanism where price moves to
determine a level that is too high, too low and a level in between, where
buyers and sellers are more in equilibrium. Price is said to distributeas it
moves to discover these levels.
This up market
has almost met
the target of the
distribution. The
target can be
ascertained by
measuring where
the top of the
distribution
would have to be,
to make the mid-
point and the
longest line the
same i.e.(longest
line-midpoint)
x 2 + high ,which
in this case is:
(112-15
112-12+) x 2 +
113-16 = 113-21.
The next chart breaks down this same distribution into individual days so
we can see the dynamic involved in the daily battle between buyers and
sellers. From this we can see the decision making process involved in
finding location for a trade.
Day 1 on the left (labelled 9/8 at the bottom of the chart) starts the
distribution with a powerful surge higher -a rally that starts with the C
period buy extreme and becomes a trend day up. This signifies an
imbalance of buyers versus sellers and typically closes near the high. This
is our signal to go long.
The next five days (9/9 to 9/15) are range trading days, all building
unchanged but higher value (112-06 to 112-18). This higher value is
important because it puts the shorts from the first day of this distribution
under increasing pressure.
It is possible from this early point to predict the 113-21 target, because
all the volume is concentrated near the high of the developing
distribution so the distribution is incomplete to the upside (low:111-08
high:112-24 longest line: 112-15).
Now look what happens next :-
On 9/16 the market has another powerful up day,breaking the range
high,distributing higher and closing near the high. So far so good the
next two days are again range days but still building UNCHANGED TO
HIGHER VALUE. Value is still the key here,because it is this that puts
pressure on the shortsaverage cost. Remember Steidylmeyers original
formula : Price x Time = Volume. Value is created out of the volume
traded at a price. (On the day profiles above,value is represented by the
vertical line to the right of the profiles 2/3rds of the activity for that day).
9/21 is an interesting day because it builds unchanged value for most of
the time,then attempts to break down in J period but finds strong
responsive buying and reverses higher to close at a high.The market is
still positive and value on 9/22 is higher still showing our 113-21
objective as still valid.
Having achieved location and rationale for a trade,how do we then manage
the risk? How do we know when were wrong? Not all distributions
continue to meet their targets. They can and do fail. The most important
element in this risk management decision is the timeframe.
Market Profile a trading perspective
By David Knapp
Chart 1
Open:111-13 Last:113-11 High:113-16 Low:111-09
Chart 2
MARKETTECHNICIAN Issue 51 November 2004 12
The parameters for the trade the location, the target and
the stop must all be in the same timeframe for the trade
to make sense.
Here is a chart that fails to follow through and distribute to
its target.
The SPZ4 rally from August 13th becomes top heavy
between 1120 and 1130 and fails to the upside when it
breaks 1120.5 where the TPO (time price opportunities)
count is roughly equal.(2517 TPOs above the line and 2354
below). The target for the distribution was:
(1125-1097) x 2 +1132 = 1188
but breaking below 1120.5 has the average long trader
under pressure on their positions. A move back to the
1097 mid-point might be necessary to balance out the bad
positions in this profile distribution. Any long positions
should be liquidated on the break of the TPO point.
By analysing distributions in the same timeframe, watching
the battle between buyers and sellers unfold and
monitoring value as the distribution develops, it is possible
to create profitable trading strategies that achieve good
entry and exit points.
There are other factors influencing the market. There are
medium and longer term distributions at work as well as
short term ones. But, if you can identify the timeframe for
your trading horizon and fit your parameters for the trade
to that distribution, then market profile becomes a very
powerful analytical tool.
David Knapp
aoxx52@dsl.pipex.com
Acknowledgement
The author would like to thank Peter Steidlymeyer for the
original concept behind this article, Joe Musolino of ABN
NY for his advanced profile theories and CQG for their
excellent Market Profile software, to.
IFTAs Annual Conference hosted by AEATin Madrid was considered by
all those who attended to have been a great success. Over 200
delegates attended from all over the world to hear presentations from
a large number of highly respected technical analysts and traders.
Included amongst the speakers were, John Murphy, Bruno Estier, John
Bollinger, Martin Pring, Hiroshi Okamoto, Regina Meani, Jorge Bolivar,
Trevor Neil, Ralph Acampora and Matthieu Gilbert. In total there were
over 20 presentations made and a full list of all the speakers can be
found on the Spanish societys website www.aeatonline.com. In
addition to these formal presentations, delegates had the opportunity
to meet face to face with their colleagues from throughout the world to
exchange ideas and share thoughts on current markets and techniques.
Apart from running an excellent analytical conference, AEATalso made
sure the event proved extremely popular from a social point of view
with a large number of excellent events and tours for both delegates
and their accompanying partners. Many delegates also took full
advantage of Madrids legendary reputation for fine food and nightlife.
This was certainly not a dull conference for many of those attending.
The event culminated in a wonderful gala dinner held at the Opera
House in Madrid; where delegates dined in palatial surroundings and
were entertained by several local opera singers.
AEATdeserves huge credit for organising an outstanding IFTA 2004
conference. The challenge now facing the Canadian Society, CSTA, is how
to repeat this success in 2005 when they host the conference in
Vancouver in celebration of their 20th year as an association. We suggest
you block off your diaries for the 3rd to 5th of November 2005 to be in
Vancouver. Now that the Spanish have raised the bar, next years IFTA
conference in Canada is likely to be an extraordinarily successful event.
The IFTA executive board of directors also met together in Madrid. The
STA is represented on this board by Adam Sorab and Simon Warren; who
also chairs IFTAs Finance Committee.We are pleased to report that IFTA
continues to grow and that technical analysis societies like the STA
continue to develop all over the world. IFTAs finances remain strong
and the IFTA board again voted to leave fees unchanged for 2006. Other
key items on the IFTA boards agenda this year included updating the
international accreditation program and methods to increase the
exchange of research and ideas between and amongst IFTA associates.
Chart 3
IFTA Conference