What may now fairly be described as the annual dinner of the STA

took place in the National Liberal Club on 21st September. After

not having held a dinner for a number of years, it was decided
to organise one last year to see what the level of interest was
amongst the membership. It was such a resounding success
that another one was arranged this year. All that really needs to
be said about this years dinner is that dates are already being
discussed for next year and, as we all know, once there are three
points of contact the trend becomes firmly established. This
years speaker was David Murrin, who has 20 years experience
in proprietary trading and financial market analysis. In 1997 he
joined Emergent Asset Management Ltd as a Principal and Chief
Investment Officer. David gave an amusing talk explaining
amongst other things how his first job living and working with
local tribes in the Sepik Basin in Papua New Guinea was a
formative experience and shaped his theories on behavioural-
based analysis techniques that could be applied to the financial
markets. After the dinner, Clive Lambert organised a hybrid
version of heads and tails and musical chairs. Spotting the
trend was the key and it was noteworthy that there was a very
strong female representation amongst those left standing in the
last few rounds. Cathryn Lyall, Managing Director of the
European Office of the Chicago Board of Trade, was the winner
and elected to give the 500 charitable donation to the Global
Crop Diversity Trust. It was a very balmy night and everyone
then repaired to the terrace overlooking the river to discuss the
markets and/or the meaning of life.
Ally McKinnon, the new head of the Scottish Chapter, organised
a meeting on 5 October, attended by some 20 people and
sponsored by NCB Stockbrokers. It was held at the Scotch Malt
Whisky Society in Edinburgh, and began with a tasting of three
types of whisky! Thereafter Richard Crossley, of NCB
Stockbrokers, gave a talk on the markets. Ally hopes to
organise two to three meetings a year, so Scottish members
should look out for the announcement of the next one.
The Swiss Association of Market Technicians (SAMT) hosted the
IFTA conference in Lugano in October. The stunning location
and beautiful weather provided an ideal backdrop for a very
stimulating three days. The theme was inter-market analysis
and John Murphy, one of its early proponents, noted that
Chinas industrialisation has had a significant impact on
correlations between different markets. It has exaggerated the
strength of the upturn in commodities and, at the same time,
exported deflationary pressures, thereby keeping bond yields
unusually low for an extended period. Most participants at the
conference felt the equity markets were in the grips of a strong
uptrend but there was concern that the increasingly
overbought condition of these markets might prompt some
short term correction. There was a general consensus that the
decline in oil prices was near its end but opinion was very
divided about the future outlook for interest rates and the
dollar.
Membership of the Society has been growing steadily and we
now have 857 members 415 full members, 421 associate
members and 21 fellows. Just over 10 per cent of the
membership are based outside the UK in 34 different countries.
IN THIS ISSUE
D. Watts Bytes and Pieces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
G. Gandolfi, Variable MACD adapting to financial
M. Rossolini market dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
& A. Sabatini
A. Nasser Real technical analysis. . . . . . . . . . . . . . . . . . . . . . . . 5
A. Angeli Smartview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
M. Bain Gold a point and figure perspective. . . . . . . 8
COPY DEADLINE FOR THE NEXT ISSUE
30TH JANUARY 2007
PUBLICATION OF THE NEXT ISSUE
MARCH 2007
FOR YOUR DIARY
Wednesday 17th January Monthly Meeting
Tuesday 13th February Monthly Meeting
N.B. Unless otherwise stated, 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.
December 2006 The Journal of the STA
Issue No. 57 www.sta-uk.org
MARKET TECHNICIAN
MARKET TECHNICIAN Issue 57 December 2006 2
CHAIRMAN
Adam Sorab: adam.sorab@cqsm.com
TREASURER
Simon Warren: warrens@bupa.com
PROGRAMME ORGANISATION
Mark Tennyson-d'Eyncourt: mdeyncourt@csv.org.uk
Axel Rudolph: axel.rudolph@dowjones.com
LIBRARY AND LIAISON
Michael Feeny: michaelfeeny@yahoo.co.uk
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: jrlcameronta@tiscali.co.uk
IFTA
Robin Griffiths: robin.griffiths@rathbones.com
MARKETING
Clive Lambert: clive@futurestechs.co.uk
David Sneddon: david.sneddon@csfb.com
Simon Warren: warrens@bupa.com
Karen Jones: karen.jones@ commerzbank.com
MEMBERSHIP
Simon Warren: warrens@bupa.com
REGIONAL CHAPTERS
Robert Newgrosh: new.skills@ntlworld.com
SECRETARY
Mark Tennyson dEyncourt: mdeyncourt@csv.org.uk
STA JOURNAL
Editor, Deborah Owen: editorial@irc100.com
WEBSITE
David Watts: DWattsUK@aol.com
Simon Warren: warrens@bupa.com
Deborah Owen: editorial@irc100.com
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 members research 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 CONTACT ON YOUR COMMITTEE
GRISOFT AVG Free Editions.
AVG Anti-Virus with the Free Edition for single home use is being
upgraded. The new 7.5 version with an improved interface is now
available, compatible with the new Microsoft Operating system
Windows Vista. Those users of the previous version 7.1 can upgrade
their software from the website below. The existing 7.1 version will
be discontinued on 15th of Jan 2007, so its import to update.
See: http://free.grisoft.com/doc/1
AVG has also released a home user edition of its Anti-Spyware
protection tool. If you browse the web, it is essential that you check
your computer for spyware. AVG now has another free home user
tool to keep your computer free of Spyware and Trojans. These are
both excellent tools for the home computer user.
Professional editions provide the additional protection of
continuous updates.
For the free edition see: http://free.grisoft.com/doc/avg-anti-
spyware-free/lng/us/tpl/v5
Multicharts
With the dollar in fast decline its an opportunity to pick up a cheaper
dollar priced technical analysis and charting package. Muticharts with
its system testing and Omega Easy Language compatibility is one of
the products of choice. Compatible with a wide variety of data feeds
IB (TWS), eSignal, Patsystems (J-Trader), IQFeed, etc, it has the ability
to run Tradestation studies and systems. The soon-to-be-released
update to Version 1.9 includes many essential features for a program
of this type while still at the old Version 1.9 pricing of $399. There is a
30 day free trial edition available.
Dynamic Trend
Dynamic Trend is a multi-timeframe approach to technical analysis
trading, brought to you by Advanced GET developer Tom Joseph.
When three or more timeframes align in the direction of the
market it confirms this via coloured signals. So Dynamic Trend
trades in the direction of the major timeframes to increase profit
potential. It is not a charting program, but for those who use
confirmations by looking at longer timeframes, it is an essential
time saving tool.
I see that Advanced GET has now been upgraded too with a similar
Dashboard showing multiple time frame confirmations.
Advanced GET is supported by Interactive Data Corporation the
supplier of Esignal data and charting software. See the link below
for details of the upgrade.
Dynamic Trend: http://www.dynamictrend.com/
Advanced GET Upgrade:
http://www.advancedget.com/ads/0106/realtime/default.asp
Dual Core Processors
Im impressed with Intels new dual core processors, fast efficient
and cool. By expanding the processors resources true multi-tasking
is a reality. The leap in technology is sufficient for me to make a
recommendation and it is well worth specifying Dual Core if you
are considering a new computer or laptop. The mobile processors
are also impressive with power saving modes that effectively
double the battery life over that of a single core processor.
http://www.intel.com/technology/computing/dual-core/
Bytes and Pieces
Issue 57 December 2006 MARKET TECHNICIAN 3
Abstract
One of the major limits of technical analysis tools is its ability to
supply operative signals in all types of market conditions. Lagging
Indicators are efficient primarily in trending markets, whereas
leading Indicators exhibit better performance in sideways market
conditions. This article introduces a new technical instrument
Variable MACD. The advantage of Variable MACD is that it
demonstrates high efficiency both in trending and non-trending
markets. The method for constructing Variable MACD is shown
below. Empirical results and considerations based on historical
data of major indices and financial time series data are
demonstrated and show encouraging results: Variable MACD is
not only more efficient than MACD, it also performs very strongly
in a range of market conditions.
Introduction
In order to better appreciate the effect of Variable MACD on
financial markets time series, it is important to outline the
concept of phase lagging and leading. A wave, and in general, any
dynamic series whose motion is oscillatory, is defined by the
following three parameters:
1. AMPLITUDE: measure of the height or intensity of the wave;
2. PERIOD: measure of the time interval between two minima
(or two maxima);
3. PHASE: measure of the positioning along the time axis of
two minima.
Given the time series x = x
1
, x
2
, x
3
,...x
n
, the time series moving
average (MA) is defined as:
MA is a lagging indicator. On the other hand, the Rate of Change
(ROC) indicator, defined as ROC = [100(x
2
-x
1
)/ x
1
]% is a leading
indicator.
Mathematically, for a function (t), if every occurrence of t is
replaced by t-a or t+a, a being a constant,
(t-a) is a lagging function with delay a;
(t+a) is a leading function with lead a.
Operators, also, may affect the phase. For example, integration has
lagging effects, whereas differentiation has leading characteristics.
Method
The two indicators used in the construction of Variable MACD are
the MACD (Moving Average Convergence Divergence) and VIDYA
(Variable Index Dynamic Average).
The aim of the VIDYA dynamic indicator is to automatically reduce
the moving average time period when volatility increases and
automatically increase the moving average time period when
volatility decreases. In this work, volatility is defined as a measure
of trending vs. trading range behaviour. High volatility indicates a
strong trending market. By contrast, low volatility indicates the
market is range bound. Market Volatility can be measured by the
use of Chandes proprietary indicator called Chande Momentum
Indicator (CMO) as follows:
CMO = [(S
u
S
d
)/(S
u
+ S
d
)];
where
S
u
= Sum of Moves up of n previous bars;
S
d
= Sum of Moves down of n previous bars;
Moves up = difference between two price bars when current
close is higher than previous close;
Moves down = difference between two price bars when current
close is lower than previous close;
The CMO indicator ranges between +1 and -1 The absolute value
of the CMO will, therefore, vary as follows:
Abs(Cmo) approaching 0 when there is Low Volatility
Abs(Cmo) approaching 1 when there is High Volatility
Vidya is defined as:
Vidya
t
=
a
* k * C
t
+ (1-
a
* k) * Vidya
t-1
where:
C
t
= Current Close;
K = Volatility Indicator (|CMO|);
a
= constant determined by Analyst (
a
= 0.5);
Vidya
t-1
= Previous-bar-Vidya.
True Vidya Length, N, is:
N = (2-k*
a
) / (k*
a
)
Inferring that
If |CMO| r 1 Then N decreases;
If |CMO| r 0 Then N increases;
VARIABLE MACD = Vidya[12] Vidya[26] =
(
a
* |CMO| * C
t
+ ((1-
a
) * |CMO| * Vidya[12]
t-1
) b *|CMO|* Ct +
(1- b) *|CMO|* Vidya[26]
t-1
)
where
a
= 0.154;
b = 0.074;
|CMO| = Absolute value of CMO;
C
t
= Current Close;
Subscript
t-1
indicates previous bar;
a
=2/(N+1) with N=12,
a
=0.154
b =2/(N+1) with N=26, b =0.074
Variable MACD: adapting to financial market dynamics
This article is a short summary of a paper presented at the IFTA Conference, Lugano, 2006 By G. Gandolfi, M. Rossolini and A. Sabatini
Fig. 01: Leading and Lagging Curves
MARKET TECHNICIAN Issue 57 December 2006 4
To calculate the True Length, N, we have to consider volatility:
N
12
= (2 |CMO| *
a
) / (|CMO|*
a
) for 12-day-Vidya
N
26
= (2 |CMO| * b) / (|CMO|* b) for 26-day-Vidya
If |CMO| r 1 Then
N
12
r 12
N
26
r 26
If |CMO| r 0 (i.e. 0.005) Then the two Vidya will have a higher
Length
N12 r 2596
N
26
r 5404
Interpreting the Signals
Signal interpretation is the same as for MACD. The advantages of
using Variable MACD are the following:

False signal reduction;

Good trading range management;

Less frequent trading;

Better performance than MACD.

The major disadvantage is exhibited by a delay in triggering the
beginning of a new trend.
Fig. 02: NIKKEI225 MACD trade signals (vertical grey lines) Fig. 03: NIKKEI225 Variable MACD trade signals (vertical grey lines)
Conclusion
Variable MACD adapts better to market conditions. It modulates the phase lagging and leading effect efficiently.

G. Gandolfi, Professor of Financial Markets and Institutions University of Parma

M. Rossolini, Ph.D Candidate in Banking and Finance Tor Vergata University Rome; Researcher and Lecturer University of Parma

A. Sabatini, Electrical Engineer (MIT B.S. MS), Portfolio Manager MIT EC, Finbest, CEO, CFO, Florence
Signal Number of Trades Performance (%) Max Drawdown (%)
MACD on NIKKEI 225 12 +29.71% -15.31%
VARIABLE MACD on NIKKEI 225 3 +49.76% -6.00%
MACD on MIB30 18 -21.92% -22.06%
VARIABLE MACD on MIB30 5 +10.52% -7.39%
Results
Society of Technical Analysts Ltd (STA)
DIPLOMA COURSE
For the eleventh year running, the Society of Technical Analysts Ltd (STA) Education Committee is holding its
Diploma course in Technical Analysis. This year it will be held at London School of Economics in Aldwych.
Technical analysis has become an important part of most investment house activity. The STA is the professional body associated with
technical analysis. All teaching is by STA members. The courses may be suitable for the annual PIA Continuous Professional
Development Programme.
The course runs from: 11 January 3 April 2007
It prepares students for the Diploma examination in April 2007. The Course consists of 11 Thursday evenings and is followed by a full
Revision Day (including Report writing), on Tuesday 3 April 2007. The sessions are from 6.00pm to 9.00pm and the Revision Day, which
includes lunch, runs from 9.30am to 5.00pm. The Exam itself lasts three hours and will be held Thursday 19th April 2007.
If you would like further information please contact Katie Abberton on 07000 710207
Society of
Technical Analysts Ltd
Issue 57 December 2006 MARKET TECHNICIAN 5
Pick up any national newspaper or lifestyle magazine, and in it
you are sure to find an advert by the latest market "guru" enticing
you to learn his or her sure fire way to make millions trading the
markets. Go to one of their "free evening seminars" and you will
learn to spot triangles, bottoms and tops paving the way to your
future riches. With technical analysis being so oversold and freely
available, has it become a victim of its own success? Has technical
analysis become an exercise in simply spotting pretty patterns on
a chart or drawing imaginary lines that have mystical meaning to
the artist?
Whenever I teach students of "modern" technical analysis as
taught by these "gurus", I always begin by showing them the
following chart and ask what each of the five figures represent.
Without fail, the resounding answer is always five "Double
bottoms"! Although each one of the five images is different, the
pre-programmed modern student of technical analysis will see
only one thing a double bottom chart pattern. How can each
image, looking very different from the other, have the same
meaning and possible outcome?
In addition to pattern spotting, the modern student of technical
analysis is taught to draw imaginary lines on a chart and when
those imaginary lines are breached in what is commonly termed a
"breakout", to buy the stock. Recent research, carried out by Larry
Connors on price breakouts of the S&P500 index in his book "How
markets really work", concluded that only 53% of the time did the
index continue to trade higher a week after making a new one
month high. Furthermore, only in 49% of cases did the index
trade higher the day after it made a new one month high. Does
that mean that our beloved breakout trade has about the same
chance of success as flipping a coin?
As a technical "trader" (i.e. one of those who actually utilises
technical analysis to make money trading, rather than these
modern gurus teaching people to draw imaginary lines on
charts), I am reading an ever increasing number of failed
breakouts and failed chart patterns on my charts. The two charts
below provide a simple example of failed "support/resistance"
lines and chart patterns that are now more and more common.
At the beginning of this article I asked whether technical analysis
has become a victim of its own success? Are breakout and
pattern failures due, paradoxically, to the success of technical
analysis in reaching the wider retail investor audience?
To answer this question, I believe we need to take a step back and
at the most basic level consider the definition of a "market". A
market is a place where buyers and sellers meet to exchange their
goods or services. With this definition in mind, let us assume you
as a market participant have a large number of goods to sell.
You know that, if you simply offered this large amount of stock on
the open market, it is likely that there will not be sufficient
demand at the current price and the probability is that you will
receive progressively less as you sell your goods.
Now, assume you know that there is a large pool of buyers of your
goods that have been taught to draw imaginary lines at a previous
price point and to buy goods once the price of goods rises above
that level. Above this imaginary price point, you have a ready market
to offload all the goods you have at a very attractive high price.
In our story so far, let us assume that you are a financial institution
with a large sell order to fill and let us assume that the artists of
Real technical analysis
This article is a summary of a talk given to the Society on 11th October, 2006 By Aboudy Nasser
Figure 1
Figure 2
Figure 3
MARKET TECHNICIAN Issue 57 December 2006 6
the imaginary lines are the thousands of people that have been
taught by technical analysis "gurus" to buy the breakouts and I
believe you will find the answer to why so many chart patterns
and breakouts fail. I believe that the success of technical analysis
in reaching the wider retail investor audience has not gone
unnoticed by the "smart money", and it is this wider audience
that provides liquidity for smart money to fill orders at levels
which are easily calculated.
Program Trading
Reportedly, over 30% of all trades on the NYSE are undertaken by
computers in what is known as "program trading". As computer
technology continues to improve and algorithmic trading
becomes more popular, this figure is likely to continue rising. If
technical analysis is about understanding how human psychology
and emotions such as greed, fear and panic affect stock price
movements, what effect will a market dominated by machines
have on technical analysis?
I should be surprised if the program trading algorithms of large
institutions are set up to buy breakouts. On the contrary, I believe
that the more people learn about technical analysis and the more
we move to a program trading environment, the more we will see
pattern and support/resistance break formulas.
Who is buying and who is selling?
I am regularly asked how you spot when "smart money" is buying
or selling. My answer is that the smart money acts as a gate
keeper price breaks will work when smart money is behind the
move and will fail when it is not.
In the chart below, we see the stock break below an imaginary
"support" line which also happens to be around the other
imaginary "whole number support" level of $48. As the stock
breaks below this level, the large volume spikes tell us that a large
number of stocks are changing hands. However, despite the
break below the imaginary line, there was very little movement in
price. In fact, the price stayed just below $48 for the best part of
half an hour on high volume.
With this in mind, the question needs to be asked "Who is buying
and who is selling"? Is it likely that smart money is selling or
shorting on the break below $48, or is the smart money likely to
be using the break as an opportunity to buy up stock? The
answer you will agree is the latter.
What is also particularly interesting about this chart is that, once
the price moved back up through the imaginary line, a scramble
took place to cover the short positions resulting in a $2 move in
less than one hour. The price then rallied through another
imaginary resistance line where no doubt new unsophisticated
money entered the market to buy on the breakout providing the
smart money with the liquidity to offload some of the stock
purchased earlier.
What about technical indicators?
In addition to the sport of spotting chart patterns, "modern"
technical analysis taught by "gurus" now appears to be pre-
occupied with designing mathematical derivations of price
known as "technical indicators".
Such technical indicators, of which there are many, are all
designed to provide the technical analyst with "supporting
information" to assist in the trading decision. The key problem
with nearly all these indicators is that they appear to work some
of the time and fail wholeheartedly at other times. Put different
indicators together, as many people do, and interpretations of the
indicators can lead to a confused and contradictory view of the
market.
Without going into the "interpretation" of each indicator in the
chart below I shall leave that to the pattern spotters you will
see a range of conflicting views based on some of the more
popular indicators. Are we trending or not? Are we overbought
or are we at resistance? Are we touching the top of the band or
are we breaking out? I shall stop there.....
What is clear, if I may use such a term in the above chart, is that
price and the action of price are almost impossible to see. If we
accept the definition of technical analysis as the "study of buyer
and seller behaviour, through the use of charts, to give meaning
to price action", then why do so many of us litter our price charts
with mathematical derivations of price. Price is what we trade,
not a derivation of it.
So where does this leave "technical analysis"?
What I have been discussing so far is what I have termed
"modern" technical analysis as taught by the modern "gurus".
Let's go back to "traditional" technical analysis since I believe it is
only through the "spirit" of technical analysis as laid down by the
Figure 4
Figure 5
Issue 57 December 2006 MARKET TECHNICIAN 7
early pioneers of technical analysis that will help us make sense of
the modern markets and future markets where program trading
will play a greater part.
The early pioneers of technical analysis were not concerned with
the latest fad indicator. These pioneers stressed the importance
of seeing a chart as a picture telling a story. Charts depict a story
about buyers and sellers in the market and the pressures they
both exert as played out in price action. It is the skill in reading
the story that for me is the spirit of technical analysis that seems
to be lost amongst the modern pattern spotters and technical
indicator junkies.
Real technical analysis is concerned with understanding the
forces of supply and demand, reading the story of whether buyers
want the stock so much that they are willing to hold price up and
take it higher, or whether sellers have had enough and are willing
to sell the stock at any price.
The skill required for real technical analysis is not one of spotting
patterns or indicators. On the contrary, the skill required is that of
putting aside all pre-conceptions and beliefs, and opening our
minds to being in tune with the market, and listening to what it is
telling us about the forces of demand and supply.
In the chart below, pattern spotters and indicator junkies will tell
you that the stock is heavily overbought and is setting up for a
"double top" reversal. Leaving such pre-conceptions aside and
reading the story, the chart is telling us that there are very few
sellers interested in selling the stock after the significant gap up
and rally. We also read that even at this high price level, buyers
continue to demand the stock and keep it trading near the highs.
The lack of selling pressure and the continued buyer demand tell
a very different story to what many pattern spotters/ indicator
junkies would say.
The lit wick
No discussion about "modern" technical analysis would be
complete without discussing charting that dates back well before
the days of Charles Dow but which has gained great interest
amongst the pattern spotters candlestick charting.
A myriad of candlestick patterns have been "identified", each
giving the modern technical analyst a clue as to future price
direction. "Modern" technical analysts now have even more
patterns to play with in their quest to spot patterns on charts.
I believe candlestick charting is essential to understanding the
story about demand and supply in one period. However, it is not
a candlestick chart pattern itself that is important in my view, but
the story behind price action as played out within each
candlestick pattern or formation.
Let us take the example of the "hanging man" candlestick.
According to modern technical analysis literature, the hanging
man gives a good reversal indication as a market top. I fail to see
how that can be, for if we read the story of the hanging man, a
different picture emerges.
Price opened and collapsed early during the period as supply
pressure overwhelmed demand. At some point during the
period, new demand entered the market and halted the price
collapse, soaking up the remaining supply. As supply was
absorbed, increasing demand caused price to rise. What little
supply was left continued to be absorbed and price kept rising.
By the end of the period, demand soaked up all available supply
and closed near where it opened for the period.
If this is the story behind a hanging man and if the hanging man
appears at the top of a strong price move, led by strong buying,
does this not indicate buyers still want the stock? For my trading,
a hanging man at the top of a strong price move is a great buying
opportunity, with the more hanging men the better, as in the
example below.
In his classic book, "Where are the customer's yachts?" Fred
Schwed Jr begins by saying:
""Wall Street" reads the sinister old gags, "is a street with a river at
one end and a graveyard at the other". This is striking, but
incomplete. It omits the kindergarten in the middle"
As technical analysts, we need to protect our art and teach our art
in the way it was meant to be taught. In kindergarten, children
are taught to spot pictures in books. At school, they are taught to
read the stories in books.
Aboudy Nasser is a founder of www.via-trader.com, an automated
real time technical news service designed to provide readers with the
full real time holistic story behind price action. He may be reached
on Aboudy@via-trader.com
Figure 6
Figure 7
MARKET TECHNICIAN Issue 57 December 2006 8
The purpose of this article is to bring a new, reasoned and logical
argument to the plotting of moving averages on price-charts
which I have called the SmartView model. Further on, Ill try to
prove that the use of the SmartView model, in every market
condition, gives the analyst a better interpretation of what is
happening on the price-chart than the one he or she would have
got just by using a closing moving average in relation to the
closing price itself.
1 An introduction to the SmartView model
I have always been amazed by the capacity of a closing moving
average to provide, during trending markets, support and
resistance areas and profitable buy and sell signals. But, aware of
these limitations, I have tried over the last four years to develop
something, without departing too much from the basic idea of
moving averages, that does not perform any worse during
trending markets and does much better during other kinds of
market conditions.
After reading many technical analysts reports and specific books,
the first thing I have noticed is that, generally, closing moving
averages are plotted on bar-charts or candle-charts and not on
close-only charts. The second thing I have observed is that analysts
usually ask the closing moving averages to provide, during bullish
trends, support areas near the lows of the price-bars and, during
bearish trends, resistance areas near the highs. Furthermore, it is
generally accepted that a buy signal is generated when the price
closes above the closing moving average and that a sell signal is
generated when the price closes under the closing moving average.
In my opinion these interpretations are not wrong, but they
contain something that doesnt persuade me completely. Why
should I use an algorithm (the moving average) based on the
closing price hoping it will provide support areas near the lows of
the price-bars and resistance areas near the highs? Closing prices
are usually above the lows and under the highs; and in any case
they are different. Rather than focus on closing prices, I believe
that support and resistance should be determined using high and
low prices, since these are specifically geared to ideas of support
and resistance. So, rather than examine moving averages of
closing prices for support or resistance, it might be better to use
moving averages of lows and highs to determine support and
resistance respectively.
And something else could be observed also about the classical
definitions, explained above, of the buy and sell signals. Surely
they are correct because everything is based on the closing price.
But, if we try to imagine a buy signal when the price closes above
the high-moving average and a sell signal when the price closes
under the low-moving average, the signals can be considered
much stronger.
2 Moving averages
The moving average is one of the most versatile and frequently
used of all technical indicators. It is very often the basis for many
trend-following systems. A moving average is an indicator which
shows the average value of a price over a period of time. The term
"moving" means the average changes or moves. For example, in a
5-day average of closing prices only the latest five prices are used
in the calculation.
The most popular method of interpreting a moving average is to
compare the relationship between a moving average of the
closing price and the closing price itself. A sell signal is generated
when the closing price falls below its moving average and a buy
signal is generated when the closing price rises above its moving
average. Furthermore, a moving average tends to be a support in
an uptrend and to become a resistance in a downtrend.
Usually, before plotting a moving average, its necessary to set at
least three parameters; the price field, the number of time periods
(the length) and the calculation method.
The first thing to do is to choose the price field to use when
calculating the moving average. This is also one of the most
important points of my research; in fact most technical analysts
use just the closing price and they prefer to concentrate on
modifying the other parameters. Instead, the SmartView model is
based on two moving averages: the first one uses the high prices
and the second one the low prices.
The number of time periods used in calculating the average is
generally considered as the critical element in a moving average.
Many analysts think that a good choice of the length is the real
key to make a moving average consistently profitable. So they
usually do their best to look for the perfect length for each
security. Many analysts also believe that its necessary to adapt
manually or automatically this number if the market conditions
change for example from volatile to non-volatile. I will try to
demonstrate that while the choice of a number of time periods is
surely very important, it is not as critical as many people think.
The last parameter to set is the calculation method which wil be
discussed in the next section.
Moving averages calculation methods
There are several types of methods for calculating moving
averages. These four most popular are simple, weighted,
exponential and triangular. The only significant difference
between these various types of moving averages is the weight
assigned to the most recent data. Simple moving averages apply
equal weight to prices. Exponential and weighted averages apply
more weight to recent prices. Triangular averages apply more
weight to prices in the middle of the time period.
What you should ask and what you shouldnt ask of moving
averages
Moving averages are generally considered as trend-following
indicators because their signals are profitable during trending-
markets and they are less effective when the market moves
sideways.
So the first thing you shouldnt expect from a closing moving
average is that it works well during trading-ranges. But another thing
you shouldnt expect is that a particular closing moving average (for
example a 15-period one) will work well on all the trends which are
developing on the chart. First of all, note that I define a trend as
bullish if its possible to identify on the chart rising highs and lows
Smartview
This article is a summary of a paper presented to the IFTA conference, Lugano, 2006 By Alessandro Angeli
Issue 57 December 2006 MARKET TECHNICIAN 9
and I define a trend as bearish if its possible to identify falling highs
and lows. However, in order to get good results, trends have to be
extended. In fact, if this doesnt happen, a long term moving average
is unlikely to become an efficient support or resistance point in a
short-term movement. This happens because the change of
direction of the closing moving average is generally quite slow.
Furthermore, in order to obtain profitable buy and sell signals,
uptrends and downtrends should have more or less the same
slope. In fact, if the trends have consistently different slopes it is
very difficult for a particular closing moving average (for example
the 15-period ones) to be able to provide good signals.
Figure 1 illustrates this point on the weekly chart of the DJIA with
the 20-period closing EMA. On the left side of the chart its possible
to identify a bull trend with rising highs and lows; the 20-period
closing moving average becomes a support from October 1998 to
September 1999 and its buy and sell signals are very profitable. By
contrast, on the right side of the chart, the market begins to move
in a trading-range from 10.000 to 11.500 points. The moving
averages signals become much less indicative and its impossible to
make a profit from them during this sideways movement.
Figure 2 shows the weekly chart of the Eur/Usd with the 15-
period closing EMA. Clearly the signals are profitable during long-
time or middle-time trends with more or less the same slope (B
and D) and they become less good at identifying trends with a
different slope (A), in short-time trends (C) and during sideways
movements (E).
Some solutions to improve the moving averages signals
Aware of the limits of the moving average in relation to the
closing price, many technical analysts have conducted extensive
research in order to develop a moving average which would be
able to work well in almost all market conditions. They have
concentrated their work mainly on two of the three parameters
discussed earlier: the number of time periods (the length) and the
calculation method. The two people who have obtained the best
results in this way are Tushar Chande and Perry Kaufman. They
respectively have developed the Variable Index DYnamic Average
(VIDYA) and the Kaufmans Adaptive Moving Average (KAMA).
Another person who has also worked with moving averages is
Jake Bernestein who has concentrated on the third parameter, the
price field, developing in this way the Moving Average Channel
(MAC).
Chandes VIDYA
Tushar Chande explains in his first book that one of the principal
problems of moving averages is due to the fixed number of time
periods chosen to calculate the average. This parameter is static
and it cant change when market conditions vary, for example
when volatility increases or decreases. So, he has had the idea of
developing a dynamic exponential moving average (VIDYA) which
adjusts its effective length using a market variable or, more
precisely, a volatility index (k).
VIDYA0 = alpha * k * C0 + (1 alpha * k) * C-1
When the volatility index (k) = 1, we have an exponential average
determined by alpha; when k > 1, we take a larger bite of the new
data and the effective length of the average decreases; when k <
1, we take a smaller bite out of the new data, and the effective
length of the average then increases.
The result of this process is that the VIDYA tends to increase its
angle when the volatility increases (because the effective length
of the average decreases) in order to follow as closely as possible
the probable incoming trend. Further on, it tends to flatten when
the volatility decreases (because the effective length of the
average increases) in order to identify as well as possible the
probable incoming sideways movement.
For instance, VIDYA can be indexed to the standard deviation of
closing prices or to other indicators such as the absolute value of
the Chande Momentum Oscillator (AbsCMO). The software
Metastock indexes the VIDYA to the AbsCMO but, in my opinion,
this choice is disputable because the AbsCMO can oscillate only
from 0 to 1. Personally, I would prefer to index the VIDYA to the
standard deviation using the formula presented in Chandes book:
k = standard deviation (9-periods) / standard deviation (30-periods).
Figure 3 shows the same Eur/Usd chart of figure 2, except the
VIDYA is plotted.
Figure 1: DJIA (weekly data) and the 20-period closing EMA.
Figure 2: Eur/Usd (weekly data) and the 15-period closing EMA.
Figure 3: Eur/Usd (weekly data) and the Variable Index DYnamic
Average (default settings).
MARKET TECHNICIAN Issue 57 November 2006 10
Kaufmans AMA
Perry Kaufman has worked more or less in the same direction as
Tushar Chande to develop the KAMA, an adaptive moving
average indexed to a particular noise indicator called Efficiency
Ratio (ER) which he also developed. In the book in which he
introduced the KAMA, Kaufman defines the price direction as the
net price change over n periods and the volatility as the sum of
all the day-to-day or hour-to-hour price changes (each taken as a
positive number) over the same n periods the price direction was
calculated. Then he defines the Efficiency Ratio (ER) as the ratio
between the price direction and the volatility. This indicator
obviously varies from 0 to 1. When the market moves in the same
direction for all the n days then the price direction = volatility and
the ER = 1; in this particular case the fastest possible moving
average is surely the best choice to follow the market because its
moving very fast in a clear direction. If the volatility is much
greater than the price direction, the ER will be probably very close
to 0 which means that the market is going nowhere and the more
suitable moving average to follow is surely one of the slowest. In
order to transform the ER into the trend speed, Kaufman has
changed the ratio into a smoothing constant (c) for use in an
exponential moving average. The smoothing constant and the
KAMA formulas are then:
c = [ER * ( fastest slowest ) + slowest]
2
KAMA
0
= KAMA
-1
+ c * (C
0
KAMA
-1
)
The fastest value in the (c) formula is 0.667 and the slowest
0.0645.
Figure 4 shows the same Eur/Usd chart of figures 2 and 3, except
the KAMA is plotted.
Kaufman shows that squaring the value of (c) greatly improves
the results by virtually stopping the KAMA from moving during
sideways markets. This process selects very slow trends during
sideways markets, and speeds up to a very fast trend during
highly trending periods.
At the end its important to note that Kaufman has also provided
a personal way to work with the KAMA which is not based on its
relationship with the price but is fully based on the KAMAs angle.
Bernsteins MAC
Jake Bernstein has tried to improve moving average signals in
relation to the price working with another parameter, the price
field. In one of his first books in which he presented the MAC he
explains that, inspired by concepts originally introduced in the
1950s by Richard Donchian, he departed from the traditional use
of the moving average having conducted intensive research on
moving average channels (MACs) which consist of a moving
average of high prices and a moving average of low prices. Rather
than focus on closing prices, he felt that support and resistance
should be determined using high and low prices because usually
resistance tends to be found near previous highs and support
tends to be found near previous lows. His technique uses a
moving average of high prices and a moving average of low
prices which in conjunction form a Moving Average Channel that
is used to determine support and resistance. More precisely, when
the trend of prices is up, the Moving Average of Lows (MAL) tends
to act as support and when the trend of the prices is down, the
Moving Average of Highs (MAH) tends to act as resistance.
Jake Bernstein provides many examples in his book but almost all
of them are about intraday markets. He suggests many different
interpretations in order to use the MAC during trending or
sideways markets by both aggressive and more conservative
traders.
Figure 5 shows the same Eur/Usd chart of figures 2, 3 and 4, with
the MAC also plotted.
Although the MAC is not easy to use because the two lines tend
sometimes to clutter the chart, it is possible to notice that, very
often, the two averages provide efficient support and resistance
areas. Have a look also at figure 6 which shows the daily chart of
the S&P500 Index.
3 The SmartView model explained
The SmartView model is my contribution to the research to
improve moving average signals in relation to the price. It could
Figure 4: Eur/Usd (weekly data) and the Kaufmans Adaptive Moving
Average (default settings).
Figure 5: Eur/Usd (weekly data) and the MAC or the 10-period
exponential moving average of the high prices (MAH) and the 8-period
exponential moving average of the low prices (MAL).
Figure 6: S&P500 Index (daily data) and the MAC (10-period MAH and
8-period MAL).
Issue 57 December 2006 MARKET TECHNICIAN 11
also be intended as an attempt to complete Bernsteins MAC in
order to simplify its use and to identify more easily the key levels
of support and resistance.
Two is better than one
I believe that the use of two moving averages, a moving average
of the high prices and a moving average of the low prices, could
give analysts a better interpretation of what is happening in the
price-chart than the one they would have by just using a closing
moving average in relation to the closing price itself.
There are two reasons for this. The first is that this argument is
logical and rational. As mentioned before, usually resistance tends
to be found near previous highs and support tends to be found
near previous lows. So, its surely reasonable that rather than
examine moving averages of closing prices for support or
resistance, it might be better to use moving averages of lows and
highs to determine support and resistance respectively.
Furthermore, if we consider the buy signal when the price closes
above the high-moving average and the sell signal when the
price closes under the low-moving average, these signals can be
considered much stronger in relation to the classical moving
averages buy and sell signals.
The second reason is that, in my experience, this idea works well
in practice. Ive tested it on stocks, currencies, indexes,
commodities and bonds in different market places and in
multiple time frames (from 5-minute data to quarterly data) and I
have obtained encouraging results.
But, using of the MAC does require accurate and careful analysis.
For example, during an uptrend analysts could pay attention only
to the MAL (which tends to act as support) ignoring the fact that
the MAH could also be very useful. In the same way, during a
downtrend, analysts could pay attention only to the MAH (which
tends to act as resistance) and they could overlook that the MAL
could also be very powerful. But it is also true that there are often
occasions when one of the two averages is completely redundant
and its presence on the chart is superfluous. During high-volatility
sideways movements the two averages are continuously
penetrated. In conclusion we could say that it is easier to work
with a closing moving average rather than with the MAC,
although its signals are probably less indicative.
The real key of my research, therefore has been to develop a new-
elaboration of the MAC based on programming a technical
analysis software to show the moving average of the low prices
(MAL), the moving average of the high prices (MAH) or both of
them exclusively when I really need them. The output of this
programming is the SmartView model which I like to define as a
new way of looking at price-charts.
The SmartView model is based on the relationship between the
MAC, the closing price and the opening price in each trading
period.
The position of the closing price
The closing price has surely the major weight compared to the
other three prices (open, high and low) which form a price-bar.
Consequently, it is very important to consider the closing price in
relation to the MAC in each trading period.
The MAH, can be defined as a resistance moving average. Then, if
the closing price is above the MAH, we can presume that the
resistance has been broken. When this happens, there is no need
to see the MAH on the chart because in an uptrend prices are
expected to rise and it is not helpful to see a resistance line
under prices. We need to see the MAH on the chart only if the
closing price is under the MAH. In the same way the MAL can be
defined as a support moving average. Similarly, if the closing
price is under the MAL, we can presume that the support has
been broken and there is no need to see the MAL on the chart
because there is little point in showing a support line above the
price line. The MAL is only shown on the chart if the closing price
is above the MAL.
These are the two first conditions of the SmartView model and
they have a heavier weighting than the second ones which are
considered in the next section.
The position of the opening price
Even if the opening price probably has a lesser significance
compared to the other three prices (high, low and close) which
form a price-bar, it is in any case very important to take it into
account in relation to the MAC.
For example, if the opening price of a trading period is above the
MAH, it means that it is not working very well as resistance. If the
closing price of the same trading period is also above the MAL, it
will be useless to show the MAH on the chart because it represents
a resistance which hasnt done its job well. However, if the closing
price is under the MAL, the MAH should be plotted on the chart
because we can presume that in the next trading period the
market will fall (a support has been broken) and it will be useful to
have in advance a reference resistance value. In the same way, if the
opening price of a trading period is under the MAL, it means it is
not working very well as support. Later, if the price in the same
trading period closes under the MAH, it will be useless to show the
MAL on the chart because it represents a support which hasnt
done its job well. But, again, if the closing price is above the MAH,
the MAL should be plotted on the chart because we can presume
that in the next trading period the market will rise (a resistance has
been broken) and it will be useful to have in advance a reference
support value.
The next three figures (7, 8 and 9) show the daily chart of Procter
and Gamble, the MAC (blue lines) and the SmartView model
(coloured dots). It is easy to see that they always coincide except
the SmartView model plots the MAC levels only when the
explained conditions are fulfilled.
Figure 7: Procter and Gamble (daily data), the MAC (10-period MAH and
80-period MAL) and the EMA-Smartview
MARKET TECHNICIAN Issue 57 December 2006 12
The SmartView model
The SmartView model can be defined as a new way of looking at
price-charts with moving averages. Its first aim is to help analysts
to follow as easily and as clearly as possible financial market
movements. The SmartView model appears on the price chart
combining each trading period with alternatively: a green dot
placed under the price-bar (the MAL value), a red dot placed
above the price-bar (the MAH value) or two dots of two colours.
Briefly, the model signals the probable presence of:

a bullish trend, when the SmartView model shows just green dots;

a bearish trend, when the SmartView model shows just red dots;

a trading range when the SmartView model shows dots of both

the two colours.
Besides providing information about the market direction and the
real existence of a trend, the SmartView model also furnishes
support and resistance levels which can be identified observing
the exact position of each dot on the chart. As a consequence, the
model is able to provide in every period, both stop loss and long
and short entry levels. A buy signal occurs in the first trading
period when the model plots only a green dot; a sell signal occurs
at the first trading period in which the model plots only a red dot.
Before going on, it is very important to notice that price levels
provided by the SmartView model when the market is still open,
should be broken by the closing price in order that the signal be
considered valid. For this reason, it is useful to consider the model
only at the end of each trading period and not during its
construction. Obviously this condition must be fulfilled by all
technical indicators which are based on the closing price.
However, in the case of the SmartView model this aspect has a
lower weighting. In fact, the resistance and the support levels
depend exclusively on the highs and on the lows and they are not
based on the closing price. Therefore, in some cases, if the market
is trading sufficiently away from the highs or from the lows, it is
possible to have an effective resistance or support reference value
before the end of each period.
Before plotting the SmartView model, it is possible to choose the
moving averages calculation method (simple, weighted,
exponential, triangular, Chandes Vidya and Kaufmans AMA) and
their length. My default settings are: 10-periods exponential MAH
and 8-periods exponential MAL. The Exponential SmartView model
can be written as an indicator in Omega code as:
{EMA-SmartView : SmartView of Exponential Moving Averages
Provided By: Alessandro Alberto Angeli (c) Copyright 2004. All
rights reserved.}
Inputs: PeriodH(10), PeriodL(8);
If(C>Xaverage(H,PeriodH)) then
plot1(Xaverage(L,PeriodL),"Support")
else
if (O<Xaverage(H,PeriodH)) then
plot2(Xaverage(H,PeriodH),"Resistance");
If(C<Xaverage(L,PeriodL)) then
plot3(Xaverage(H,PeriodH),"Resistance")
else
if (O>Xaverage(L,PeriodL)) then
plot4(Xaverage(L,PeriodL),"Support")
I prefer to use the EMAs but combining the VIDYA or the KAMA
with the SmartView it is possible to obtain a double result in the
process to improve moving averages signals.
Figure 10 shows the same Eur/Usd chart as figures 2, 3, 4 and 5,
except the EMA-SmartView is plotted. The model shows the
support and the resistance levels exactly when I want and need
them.
Figure 8: the first condition of the SmartView model is that the MAH
(red dots) is plotted on the chart only if it is above the closing price. In
the same way the MAL (green dots) is plotted on the chart only if it
under the closing price.
Figure 9: the second condition of SmartView model is that the MAH
(red dots) is plotted on the chart if it is above the opening price. In the
same way the MAL (green dots) is plotted on the chart if it is under the
opening price. However the closing price condition (the first) is stronger
than the opening price one (the second).
Figure 10: Eur/Usd (weekly data) and the EMA-SmartView
(default settings).
Issue 57 December 2006 MARKET TECHNICIAN 13
Figure 11 shows again the same Eur/Usd chart, except the VIDYA-
SmartView is plotted.
4 Advantages of using the SmartView model
I believe that the use of the SmartView model leads analysts to a
better interpretation of what is happening on the price-chart
than they would have by just using a closing moving average in
relation to the closing price itself. If the logical and reasoned
arguments presented in section 3 havent yet persuaded you, Ill
now try to prove my point with some real examples in multiple
time frames taken from different markets.
5 During trending markets
Figure 12 shows the monthly chart of the German DAX Index, the
EMA-SmartView and the 15-period closing EMA. The 15-period
length has been chosen because, during trending movements,
this average tends to be very similar to the EMA-SmartView with
default settings and in this way it is possible to do a comparison.
Observing carefully the chart it is possible to notice that, when
the market is trending, the EMA-SmartView provides buy and sell
signals very similar to the closing EMA ones even if, in my opinion,
the EMA-SmartView works better. However, from this point of
view, we could say that the use of the EMA-SmartView instead of
the closing EMA is not a handicap.
Considering now the function of support and resistance, the two
indicators confirm that the EMA-SmartView works better. Have a
look at the rectangles in the second part of 2000 and 2003. The
EMA-SmartView furnishes correct resistance and support levels
sooner than the 15-period closing EMA. Further on, during bullish
(bearish) trends the EMA-SmartView provides interesting
resistance (support) areas which, if broken, confirm the original
trend. Consider the ovals in figure 12; this information is not given
by the 15-period closing EMA.
During major reversal patterns
During major reversal patterns (double bottoms, head and
shoulder, broadening formation, etc.) prices very often move
sideways for a time even if the volatility remains quite high. For
this reason a closing moving average usually provides wrong buy
and sell signals.
Figure 13 shows the 60-minutes chart of the S&P500 Future (04-
Sep), the EMA-SmartViewand the 15-period closing EMA. In the
middle of the chart it is possible to identify a double bottom
pattern. The buy and sell signals that the two indicators provide
during this reversal formation are very similar. However, in the
rectangle, which underlines when prices are moving sideways, the
EMA-SmartViewgives interesting and correct support and resistance
levels, especially in the oval, providing precious information which
the 15-period closing EMA is not able to furnish at all.
During trading-range movements
Figure 14 shows the weekly chart of the DJIA, the EMA-SmartView
and the 15-period closing EMA. When the market moves sideways,
the closing EMA tends to flatten and to place itself in the middle of
the trading-range, becoming completely unable to provide efficient
support and resistance areas. Further on it gives a lot of wrong buy
and sell signals, in particular when the volatility is quite low, as its
possible to see in the rectangles drawn on figure 16. On the other
hand the EMA-SmartView provides very good resistance and
support areas which really help analysts to identify the trading-
Figure 11: Eur/Usd (weekly data) and the VIDYA-SmartView (VIDYA
default settings).
Figure 12: Dax Index (monthly data), the EMA-SmartView (default
settings) and the 15-period closing EMA.
Figure 13: S&P500 Future 04-Sep (60-minutes data), the EMA-SmartView
(default settings) and the 15-period closing EMA.
Figure14: DJIA (weekly data), the EMA-SmartView (default settings) and
the 15-period closing EMA.
MARKET TECHNICIAN Issue 57 December 2006 14
range bands. When the volatility increases but the market
continues to move sideways (in the ovals) the two indicators
provide more or less the same buy and sell signals even if its right
and honest to say that in some (unlikely) cases the 15-period EMA
works better.
What you shouldnt ask to the SmartView model
The SmartView model is first of all a trend-following indicator
which seems to work very well, or at least no worse than a closing
moving average. However I could prove that, with the default
settings, the EMA-SmartView gives good signals in all the trends
that develop on the price-chart. Have a look at figure 10 in
comparison to figure 2. The EMA-SmartView always works better,
except for the last oval (E).
Furthermore it provides a powerful information during low-
volatility trading-ranges. In these situations it is much more useful
than a closing moving average but, unfortunately, it is not perfect.
In fact, it becomes less reliable during high-wave movements and
high-volatility trading-ranges but even during these periods it is
no worse than a closing moving average.
In order to reduce the false signals we could try to work on the
system in different ways as for example:

modifying the length of the two averages (the MAH and the
MAL);

working with multiple data compressions for example daily and

weekly or weekly and monthly;

combining the SmartView model with other technical indicators;

developing low-risk strategies, for example using the

pyramiding technique or combining the SmartView long and
short entry signals with exit signals which are function of the
Wilders Average True Range;

simply accepting the faults and consequently the losses.

About the first point I have to say that in general I dont like to
modify manually the length of technical indicators looking for the
more suitable number. However, the increase of the length of the
two averages from the default settings sometimes can bring an
improvement. Figure 15 shows the daily chart of General Electric
and the EMA-SmartView with the default settings. The model
works very well, except for the drawn ovals; in fact in those
periods there were high-wave movements or high-volatility
trading-ranges. Figure 16 shows the same chart, except the EMA-
SmartView with the 50-period EMAH and the 30-period EMAL is
plotted. Indeed, some of the previous problems have been solved.
But I dont like to work in this way. I would prefer to use the
VIDYA-SmartView or to work with the data compression without
modifying the default settings even if its important to remember
that in any case it is not possible to always obtain good results
with these techniques. Consider figure 17. It shows the weekly
chart of General Electric and the EMA-SmartView; the ovals are
corresponding to the ones in figure 15. In the second oval a
wrong signal would have been given in the weekly chart too.
Another way to try to reduce SmartView model wrong signals is
to combine it with other technical indicators. Personally, I use the
EMA-SmartView with the stochastic oscillator. It helps me to
identify possible reversals and to understand if the market is in a
positive or in a negative cycle.
Other solutions could be used to develop low-risk strategies. In
section 7 Ive provided one of them based on the pyramiding
technique.
Finally, the last way I propose is to accept the models faults and,
as a consequence, the losses. Maybe this is the real key to make
enough money and live in peace!
6 The SmartView model in over-underweight
decisions
In this section Ive provided some simplified examples which
show how the SmartView model could be used during 2004 to
arrive at over-underweight decisions. All the six stocks have been
taken from the Stoxx50 Index. (Figure 18 Figure 23)
7 A low-risk strategy to use the SmartView model
This section looks at a low-risk trading strategy which could be
utilized to use the SmartView model as a trading method.
Consider figure 24.
Figure15: General Electric (daily data) and the EMA-SmartView
(default settings).
Figure16: General Electric (daily data) and the EMA-SmartView
(50-period EMAH and 30-period EMAL).
Figure17: General Electric (weekly data) and the EMA-SmartView
(default settings).
Issue 57 December 2006 MARKET TECHNICIAN 15
It consists in opening a 33% position at the end of the first period
combined with just one dot in a colour different from the previous
one (A). Later it is possible to increase the position with a further 33%
when the market tests the support or resistance area where the dots
of the initial colour are placed and it seems to be able to continue
the trend; this obviously happens when the SmartViewmodel plots
again just dots of the initial colour (B and C). The exit level will be the
first closing price where there are no dots of the initial colour. At this
point (D) a 33% position in the opposite direction should be opened.
Using this strategy, most wrong signals should be faced with only
33% of total exposure because generally, during high-wave
movements or high-volatility trading-ranges, the SmartView
model doesnt give confirmation to act as support or resistance.
Consider the drawn ovals in figure 10, 14 and 15. However this
protection has a cost. In fact no trend will be fully exploited
because positions will only lead be increased to the total
exposure when the trend is already well established.
8 Conclusion
The SmartView model, in every market condition, brings the
analyst a better interpretation of what is happening on the price-
chart than the one he would have obtained by just using a
closing moving average in relation to the closing price itself.
Alessandro Angeli is a Strategist at T&F Asset Management SA in
Lugano, part of the Tax and Finance Group, a global provider of
international tax consultancy, trust and financial services.
Figure 18: ABN Amro (weekly chart).
Figure 19: Credit Suisse (weekly chart).
Figure 20: E. ON (weekly chart).
Figure 21: HSBC (weekly chart).
Figure 22: Swiss Re (weekly chart).
Figure 23: Total Fina (weekly chart).
Figure 24: S&P500 Future 04-Jun (60-minutes data) and the EMA-
SmartView (default settings).
MARKET TECHNICIAN Issue 57 December 2006 16
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