Thom Hartle Strategies Analysis Collection Vol 2

Thom Hartle
Strategy and Analysis collection,

Vol. 2
Thom Hartle Strategy and Analysis collection, Vol. 2
Article 1: “Putting the squeeze on volatility” 3
(Active Trader, November 2001).
Article 2: “The bottom and the Bands” 9

(Active Trader, February 2003).
Article 3: “Relative volume analysis” 12

(Active Trader, July 2003).
Article 4: “Short-term oscillator opportunities” 16

(Active Trader, September 2003).
Article 5: “Retracement tendencies” 20

(Active Trader, March 2004).
Article 6: “Percent b” 24
(Active Trader, April 2004).
Article 7: “Following the money: Quarterly momentum and ETFs” 28

(Active Trader, June 2004).
Article 8: “The market facilitation index” 34

(Active Trader, October 2004).
Article 9: “The squat bar” 37

(Active Trader, January 2005).
Article 10: “HOLDRS: Stock groups in a single trade” 40

(Active Trader, April 2005).
Article 11: “Dissecting T-note futures: Tendencies and characteristics” 43

(Active Trader, July 2005).
Article 12: “Index vs. Index: The QQQQ/SPY spread” 50

Article 13: “Comparing moving averages” 58

(Currency Trader, November 2005).
Article 14: “The ETF money trail” 62

(Active Trader, December 2005).
Article 15: “Follow the leaders” 70

(Active Trader, February 2006).
Article 16: “The intraday MFI” 77

TRADING Strategies
Putting THE SQUEEZE

ON volatility
P eople sometimes com-

plain about excessive mar-
ket volatility, but volatility is
a trading necessity for one
simple reason: Once a position is en-
tered, the market has to move to a point
where a reasonable profit is available.
Low volatility and sideways markets
result in small profits and more losses.
High volatility and trending markets
mean good trades and more of them. It
follows that identifying when a market
is moving from a low-volatility environ-
ment to a high-volatility environment
would improve the odds of profitable
trading. The BandWidth Indicator
(BWI) — a derivative of Bollinger Bands
— can be used for this purpose.
Bollinger Band background

Bollinger Bands, developed by John
Bollinger, are price envelopes plotted
two standard deviations above and
below a moving average of the closing
BY THOM HARTLE prices. (For more information, see “John
Bollinger: Focus on the markets,”Active
Trader, January/February 2001.) The
price envelope essentially captures his-
torical volatility — identifying bound-
aries price is likely to fluctuate between
Volatility is essential for profitable based on past volatility levels. Wide
envelopes are indicative of high volatili-
ty (upward or downward price trends),
short-term trading. The BandWidth and narrow envelopes signify low
volatility (sideways price action).
Indicator can help you identify points at Experienced traders know that a low-
volatility market condition often pre-
cedes up or down price trends (see the
which a market is poised to switch from discussion of flag patterns in this
month’s Technical Tool Insight). Therein
a low-volatility to a high-volatility phase. lies the opportunity: If you are patient
and wait for a low-volatility situation,
you can take advantage of an increase in
volatility. Bollinger’s recognition of
how the bands contracted and expand-
3 www.activetradermag.com • November 2001 • ACTIVE TRADER

FIGURE 1 THE BWI
ed to signal a change in volatility led to The BandWidth Indicator (BWI) helps identify extreme volatility situations.
the development of the BWI. The low BWI reading here reflects a tight trading range.
Identifying volatility shifts 125.00

IBM (IBM), daily
The BWI is the width of the Bollinger 120.00
Bands expressed as a percentage of the 115.00
moving average. It is particularly help- 110.00
ful for finding stocks trading in narrow
100.00
ranges that may be ready to break out.
The formula for the BWI is: 95.00
90.00
(Upper Bollinger Band - Lower Bollinger Band)
85.00
Moving average of price
80.00
The lower the volatility, the closer

BWI
the upper and lower Bollinger Bands
will be, and this difference will consti- .30
tute a smaller percentage of the middle
Bollinger Band (i.e., the moving aver-
.20
age of price). Very low BWI readings
are often followed by volatility expan-
sions. .10
Figure 1 (right, top) is a daily chart 18 26 2 8 16 22 29 1 5 12 20 26 1 5 12 19 26
with Bollinger Bands using the default Jan. 2001 Feb. March
values of 20 bars for the lookback peri- Source: CQGNet
od and two standard deviations for the
bands. The bottom chart is the BWI. FIGURE 2 EARLY WARNING
When the BWI falls to historically low During the trading range in mid-November, the BWI began to fall, dropping
levels (such as a six-month low in below .10. On Nov. 27, the prices tested the upper Bollinger Band, reversed
Figure 1), market volatility is exception- and closed at the low of the day. The next day the market gapped down and
ally low and the “Squeeze,” as closed at the low with higher volume. The BWI turned up.
Bollinger calls it, is on.
During a Squeeze, the market enters Microsoft (MSFT), daily A
74.57
a sideways consolidation and the mov-
69.71
ing average levels, following the center
of the price bars. In such conditions the 64.86
Bollinger Bands narrow dramatically
60.00
and the BWI drops to low levels.
During the week of Feb. 20, the BWI 55.00
dropped below .10, producing the low- 50.00
est reading on the chart.
At this point, you could draw in the
support and resistance levels for the BWI
.40
trading range, as shown. Breakouts of .30
such trading ranges can signal new
.20
trends. In this case, IBM dropped
through the bottom of the trading A .10
range, breaking support just below 110 Volume
and falling 20 additional points. 1,000,000
Notice the break of the support level 50,000
in this example coincided with the BWI
turning up. Sometimes the BWI will 16 23 30 1 6 13 20 27 1
November December
move up in advance of the break of Source: CQGNet

FIGURE 3 INTRADAY TRADING
Here, the Bollinger Bands and the BWI are set to a lookback period of 10 bars. support or resistance, forewarning the
Twice, the BWI dropped to the .10 level as the 30-minute bars were forming direction of the break. For example,
triangle formations. IBM dropped more than a point in both of these situations. when a trading range in Microsoft began
in mid-November 2000 (see Figure 2) the
IBM (IBM), 30-minutes BWI began to fall, dropping below .10.
117.00
On Nov. 27, price tried to push to new
116.00 highs but closed at the low of the day.
The next day (point A), the stock gapped
115.00
down and closed near the low on higher
114.00 volume. At the same time, the BWI
turned up. Microsoft had not broken
113.00
support or resistance yet, but the rise in
112.00 the BWI indicated volatility was rising,
and the weak price action and volume
BWI increase as prices moved down suggest-
.40
ed a break of support.
.30
The longer the
.20
lookback period,
.10
28-8:30 12:30 29-8:30 12:30 2-8:30 12:30 3-8:30 5-8:30
the fewer signals
July
Source: CQGNet will be generated.
FIGURE 4 THE HEAD FAKE Short lookback
A Squeeze is sometimes followed by a false breakout. In this case, the BWI
narrowed to below .10, and the market broke through the resistance level periods will identify
and penetrated the upper Bollinger Band. However, the stock then reversed
and trended back down to make a new low in the downtrend. low-volatility
IBM (IBM), daily 130.00
situations more
125.00
120.00
117.72
often.
115.00
109.51 Intraday trading

105.00 Intraday traders can use the BWI
101.30 Squeeze as a setup for short-term trades.
100.00
Figure 3 is a 30-minute chart with 10-bar
BWI .25 Bollinger Bands/BWI. There are two
instances where the BWI dropped to the
.20 .10 level as the stock was tracing out tri-
angle formations. IBM dropped more
than a point after breaking out of both
..15 these patterns.
In this example, the lookback period
.10 was shortened because intraday activity
tends to consist of short price trends, fol-
7 24 1 8 15 22 1 12 19 26 3 10 17 24 1 7 lowed by consolidation, and new trends.
May June July August The longer the lookback period, the
Source: CQGNet
fewer signals will be generated. Short

FIGURE 5 LONGER-TERM ANALYSIS
lookback periods will identify low- This monthly logarithmic scale chart of the Dow Jones Industrial Average
volatility situations more often. illustrates how the index has been in a trading range for a number of years.
BWI readings below .20 reflect the low volatility.
Head fakes
Bollinger cautions that BWI signals are Dow Jones Industrial Average (DJIA), monthly 12,000
11,391
subject to “head fakes” — when the BWI 10,688
drops to a historically low level and the 9,985
market moves through support or resist- 9,000
ance, but suddenly reverses direction.
8,000
Figure 4 shows a head fake. The BWI fell
below .10 and the stock broke through 7,000
resistance and penetrated the upper
6,000
Bollinger Band. However, it then
reversed and trended back down to
5,000
make a new low.
There are two ways to trade the
Squeeze without getting burned. First, 4,000
trade in the direction of the breakout
with a tight trailing stop. That increases
your chances of locking in a profit. (One BWI
possible solution of this type is to use .40
Welles Wilder’s Parabolic SAR, which is
a technique that trails a stop increasing- .20
.132
ly closer to price as time goes by. The 1997 1998 1999 2000 2001
Parabolic technique is included in many Source: CQGNet
software packages and will be discussed
in the December issue of Active Trader.)
The second technique is to wait for
the initial breakout to occur and watch FIGURE 6 DOW JONES INDUSTRIAL AVERAGE (1991-1996)
the market to see if the trend from the The BWI dropped to low levels during 1993 and early 1995. The dip during
initial breakout holds. If it does, commit 1993 was followed by a 500-point rally — a 14-percent increase. The dip by
to the trade; if it is a head fake, go with the BWI during 1995 also was followed by a substantial rally.
the reversal of the false breakout and
take advantage of the fact that many Dow Jones Industrial Average (DJIA), monthly 6,000
traders will be on the wrong side of the 5,500
real trend.
5,000
Other exit strategies can be developed
by using a maximum favorable excur- 4,500
sion (MFE) analysis of 30 to 50 of the
setups. MFE analyzes the typical maxi- 4,000
mum profit of a trading strategy (see,
“On-target trading,” Active Trader, July 3,500
2001). That way, you can determine typ-
ical action after the Squeeze sets up and 3,000
establish a preset target to exit a portion
of your position. Also, consider taking
partial profits when price tags the upper 2,500
or lower Bollinger Band.
BWI
Thinking big picture .40
The BWI can also be used for long-term
analysis. For example, Figure 5 is a log- .20
arithmic scale (i.e., price movement 1991 1992 1993 1994 1995 1996
shown as percentages, rather than Source: CQGNet
ACTIVE TRADER • November 2001 • www.activetradermag.com 6

The greatest
FIGURE 7 DOW JONES INDUSTRIAL AVERAGE (1982-1986)
strength of the BWI
The BWI dropped to low levels during the 1983 to 1984 trading range. Another
major bull move followed.
is it makes it easier
Dow Jones Industrial Average (DJIA), monthly
2,250
to find low-volatility
2,000
1,750 situations that can
1,500
presage a new trend.
1,250
absolute point values) monthly chart of
the Dow Jones Industrial Average that
1,000
illustrates how this index has been in a
trading range for the better part of the
last two years.
750 Figure 6 shows the BWI dropped to
low levels during 1993 and early 1995.
BWI The low reading by the BWI in 1993 was
.60
followed by a 500-point rally — a 14-
.40 percent increase. The next dip during
.20 1995 was followed by another substan-
1982 1983 1984 1985 1986 1987
tial rally.
Figure 7 shows the Dow and the BWI
Source: CQGNet
during the 1983-1984 trading range.
After the BWI bottomed in late 1984, a
FIGURE 8 DOW JONES INDUSTRIAL AVERAGE (1977-1981) major bull market followed.
During this tumultuous period of the late 1970s and early 1980s, the BWI However, sustained major trends
dropped to low levels in late 1979. During the first quarter of 1980, the Dow don’t always follow such BWI readings.
tested both major resistance and support before breaking out above 900, only Figure 8 shows the tumultuous period
to move back below the original resistance level one year later. of the late 1970s and early 1980s. The
BWI dropped to low levels in late 1979.
Dow Jones Industrial Average (DJIA), monthly During the first quarter of 1980, the
1,050 Dow tested both major resistance and
1,000 support before breaking out above 900,
only to move back below the original
950 resistance level one year later.
Finally, Figure 9 shows a head fake in
900
mid-1968. The BWI dropped to low lev-
els and the Dow broke through the 950
850
resistance level. However, the rally
failed and the bear market ultimately
800
resumed.
750
Making the most of the BWI
The greatest strength of the BWI is it
700 makes it easier to find low-volatility sit-
BWI .40 uations that can presage a new trend. In
addition, the BWI can help you avoid
.30
marginal trades (trades with a high BWI
.20
reading). Wait for the volatility to settle
1977 1978 1979 1980 1981 down and a trading range to establish
Source: CQGNet
itself, and then trade according to your
rules.

FIGURE 9 DOW JONES INDUSTRIAL AVERAGE (1966-1970)
The Dow made a head fake when the BWI dropped to low levels in mid-1968
and the Dow broke out through the 950 resistance level. However, the rally
failed and the bear market ultimately resumed.
In general, high BWI readings indicate
the better part of the current trend is Dow Jones Industrial Average (DJIA), monthly
1,000
already over. Track the BWI to find trades
that put you in the early phase of the 950
trend. Keep in mind, though, that in the
current market environment, stocks are 900
much lower in price than they have been
850
the last few years. As a result, the nomi-
nal moves will not be what you are
800
accustomed to. After the Squeeze, you
may want to use percentages — instead 750
of points — for exit and stop-loss tar-
gets. 700
To accompany his new book, Bollinger on 650

Bollinger Bands (McGraw-Hill, 2001),
Bollinger has created a Web site, BWI .40
www.bollingeronbollingerbands.com, which
.30
provides lists of stocks that meet his criteria
for this technique as well as others he details .20
in his book. 1966 1967 1968 1969 1970
Source: CQGNet
ACTIVE TRADER • November 2001 • www.activetradermag.com 8

TRADING Strategies
The BOTTOM and the BANDS

The W-bottom pattern reveals a great deal about market action —
especially when it’s used in conjunction with Bollinger Bands.
FIGURE 1 WATCH THE VOLUME
A volume spike accompanied a new low at point A. However, a retest of the

low at point D occurred on light volume, a sign the market was ready to
move up.
Coach Inc. (COH), daily

BY THOM HARTLE 32.50
30.00
T
27.50
F
he technique for trading the B E
Resistance
W-bottom pattern, as de-
25.00
scribed by John Bollinger in
his book Bollinger on
Bollinger Bands, blends classic technical A C 22.50
analysis and modern indicator-based D
analysis. Volume Volume spike
It’s classic because the W-bottom con-
2M
cept consists of a double bottom sup-
ported by traditional volume character-
istics: heavy volume on the first low, a 1M
price recovery and a retest of the low on
lighter volume.
The high volume on the first low indi- 0
cates a climactic selling spree: Sellers are 16 23 30 7 14 21
October
jumping ship, most likely because of a
news event. However, this low marks a Source: eSignal
bearish sentiment peak. The retest —
when the market fails to make new lows The approach also takes advantage of Bollinger Bands can help find stocks that
— occurs on low volume, which sug- the more modern statistical price meas- are setting up W-bottoms.
gests there are no more shares to sell at urement of Bollinger Bands. Augmenting The following trading approach com-
this price level. As a result, the market is W-bottoms with Bollinger Bands enables bines the implications of how price
set up to rally if there is any good news you to determine whether price action is behaves relative to 20-day Bollinger Bands
on the horizon. within a typical range. In addition, with classic price-volume chart analysis.
9 www.activetradermag.com • February 2003 • ACTIVE TRADER

The classic
FIGURE 2 W-BOTTOM ON A WEEKLY CHART
Regardless of the time frame, W-bottoms usually exhibit the same approach is to wait
price-volume relationships. Long trades are signaled when price pushes above
the resistance level of the W-bottom, which subsequently acts as support. until the market
Microsoft (MSFT), weekly
65.00
breaks above
60.00
the resistance level
Resistance
B
55.00
established during
D
50.00 the rebound
C Support
E
45.00 following the first
A
Volume Volume spike

low. From that
236M
point on, a trailing
stop is progressively
March April May June July August Sept. Oct. Nov.
0
raised to just under
Source: eSignal each successive
Price and volume: The W-bottom the previous two days. This is part of the
support point in
In Figure 1, bar A closed below the lower strategy template: The first low and close
Bollinger Band on a significant volume occur below the lower Bollinger Band, a market advance.
increase. This is evidence of extreme and the second test of the low is above
downside price movement. In this case, the lower Bollinger Band.
the stock began to recover the same day, The following day, bar E gapped up on double-bottom patterns is to wait until
rallying and closing at the high of bar A. another volume increase (this occurred the market breaks (or closes) above the
The recovery process lasted three right at the resistance level established resistance level established during the
more days (bar B), with volume running during the recovery of the bar after A). At rebound after the first low, which in this
less than 50 percent of what it was on the bar F, the stock began the day testing the case would mean buying on bar F. After
climactic low day. Then, after this short previous day’s low, but then rallied that, a trailing stop is used to protect the
recovery period, the stock made another through resistance on low volume — a position. The stop is moved up just
significant penetration of the lower sign there were very few sellers. The under each support level as the market
Bollinger Band on increased volume (bar close above resistance signaled higher advances. Another good idea is to take
C). The stock subsequently traded with- prices, and the market gapped up again partial profits if the upper Bollinger
in the confines of this day’s range (and the next day. Band is tagged (which suggests price has
on lower volume) for two days. These What about trade management? stretched to the higher end of its expect-
two days, though, were above the lower Bollinger recommends entering on the ed range), and use a trailing stop for the
Bollinger Band. close of the first bar that 1) follows the remainder of the position.
Bar D opened much lower, near the test of the low and 2) closes near its high Figure 2 shows an example on a week-
support level of the bar A low. However, on increasing volume. In Figure 1, this ly chart. Bar A closed below the lower
instead of sellers entering the market, would mean buying on bar D’s close and Bollinger Band on a substantial volume
buyers stepped in and the stock closed placing a stop-loss below the low. increase. The stock then recovered, clos-
near the day’s high on more volume than The classic approach for trading W- or
ACTIVE TRADER • February 2003 • www.activetradermag.com 10

A close outside
The stock did advance the following high volume. It then rallied two days and
week (D), but it encountered sellers at established a resistance level (point B)
a Bollinger Band the moving average and closed below just below the moving average. The stock
the midpoint of the week on higher vol- subsequently retreated, closing at or near
does not indicate ume. This price-volume action suggest- the daily low of the next five bars (with
ed a test was still underway at this point. one exception) on heavy volume,
The stock traded lower the following although all the closes were still above
the market will three weeks (bars), each week closing the lower Bollinger Band.
toward the lower end of the weekly Bar C opened very near the previous
simply retrace back range on increasing volume.
At bar E, the stock initially tested the
day’s closing price and traded toward
the lower Bollinger Band, but encounter-
previous week’s low, but it rallied to ing strong demand it eventually closed
to the moving close at the top of the bar with the high- near its high. The volume was slightly
est volume since the week of bar A. On less than the previous two days, but still
average. heavy volume, the stock then punched
through the resistance formed by the
heavier than average. The next day, the
stock gapped up over the resistance
formed by the high of bar B and closed at
FIGURE 3 SAME STOCK, DIFFERENT TIME FRAME the high of the day. This bar was accom-
panied by volume greater than that of
Two back-to-back weekly bars from Figure 2 turn out to form a W-bottom the mid-September spike-volume day,
on the daily time frame. Although the volume characteristics are slightly and it left a lot of sellers behind. The
different than those of a classic W-bottom, this formation functioned as market continued to advance on increas-
a bottoming pattern within a bottoming pattern. ing volume.
Figures 2 and 3 use the same pattern
Microsoft (MSFT), daily and indicator analysis to examine the
57.2676
same data on different time frames.
55.0000 While the daily chart does not have the
precise volume characteristics of the clas-
52.2930 sic double bottom, the price and volume
activity comprise part of the bottoming
50.0000 process shown on the weekly chart.
B 47.3185
Bollinger Bands:
Resistance Trading tool and scanner
Bollinger Bands are a statistically
45.0000
derived measurement of extreme price
A C action relative to average price action. A
42.5000
close outside the Bollinger Bands repre-
Volume Volume spike Second highest sents excessive price movement, but it
volume does not automatically mean the market
will retrace back to the moving average
50M (or the opposite band). However, a valu-
able analytical template is created by
adding the price and volume character-
istics of a classic double bottom.
0 Bollinger Bands enable you to screen
19 26 3 9 16 23 30 7 14 21 28 4
September October November for setups consisting of the combination
of a close below the lower Bollinger
Source: eSignal
Band occurring on volume greater than
the 30-day average volume. This will
ing (on declining volume) just above the weekly reversal high at bar D; the resist- produce a list of stocks with the poten-
moving average of the Bollinger Bands at ance level subsequently functioned as a tial to form W-bottoms. The support and
point B. Next, the stock turned back again, support level. resistance levels defined by the W-bot-
and at bar C it closed at the upper end of A closer look at this chart indicates Bar tom pattern allow you to construct a set
that week’s range. At this point, a success- E and the preceding bar may have of procedures for managing trades once
ful low-volume test appeared to be com- formed a double bottom of their own. the pattern is complete.
plete because the price held above the Let’s look at those two weeks using daily
lower Bollinger Band. The market should bars (see Figure 3). At bar A, the stock
be set to rally. closed below the lower Bollinger Band on

TRADING Strategies
Relative VOLUME analysis

Traders commonly use total volume to take the pulse of price
moves, but when it comes to determining whether the bulls
or bears are in charge of
the market, up and down
volume speak volumes.
BY THOM HARTLE
V olume has always been a

component of classic tech-
nical analysis. For example,
one of the precepts of trend
analysis is that volume should increase
in the direction of the longer-term trend
and decrease during countertrend
moves.
Expanding volume during a price
move implies many market participants
are driving the price action, confirming
the trend. If volume does not increase,
the move is suspect because of the lack
of commitment implied by the weak vol-
ume.
Although basic volume analysis can
be useful, there’s more to volume than
first meets the eye. End-of-day volume
figures are comprised of the volume for Dividing the up-volume and down- of buying or selling taking place at a spe-
stocks that are up (above the previous volume numbers for each day by the cific time, such as when price is chal-
close), down (below the previous close) total volume (not counting unchanged lenging a support or resistance level.
and unchanged on the day. More so than volume) gives the percentage of the The following examples analyze end-
total volume, up volume and down vol- day’s volume attributable to stocks that of-day up-volume and down-volume
ume can provide additional insight are trading up or down. These percent- statistics in the S&P 500 index (see
about the direction of the stock market. ages aid analysis by revealing the degree Figure 1). Candlestick charts are used to
12 www.activetradermag.com • July 2003 • ACTIVE TRADER

highlight whether a particular day The first basic principle of this analy- demand. Candles 2-5 accounted for the
closed above the opening price (a white sis is that during an uptrend, the up-vol- largest uninterrupted up move on the
candle) or below the opening price (a ume (green) bars will generally be high- chart.
black candle). Below the price candles er than the immediately preceding Candle 6 was an inside day that
are green and red volume bars that down-volume (red) bars. In Figure 1, closed lower than the open. The down
reflect the relative up or down volume. which is characterized by rising prices, volume that day was just less than 85
the majority of the green volume bars percent of the day’s total up-down vol-
Bar-by-bar breakdown are higher than the red volume bars, a ume. That this down-volume bar was
Figure 1 shows the percentage of volume clear sign of an uptrend. slightly lower than the previous up-vol-
that was up (green bars) or down (red Bars 2 through 5 are all green, and bar ume bars suggests candle 6 is just a cor-
bars) — whichever was greater relative 3 reached 90 percent, which means nine rection, or pause, in the uptrend. Had
to the combination of up and down vol- out of 10 shares traded that day were in the red-volume bars been larger than the
ume for the day. stocks up on the day, a sign of strong previous green-volume bars, a reversal
would have been more likely.
The market advanced further during
FIGURE 1 RELATIVE VOLUME candles 7, 8 and 9, but their up-volume
bars were all lower than candle 6’s
The green and red volume bars show the percentage of volume that was up
down-volume bar, and up-volume bar 9
or down, respectively, on a given day.
was lower than previous up-volume
bars 3 and 5. This means the up-volume
950 percentage was dropping off and the
S&P 500 index (SPX), daily higher prices were not attracting that
930
20 33 much additional buying; the market was
910 30 32 becoming more balanced, with many
11 17 19 21 25
22 2829 31
stocks up and many others down.
890 23
10 14 27 The S&P made a new high (for the
12 13 16 18
870 9 24 26 period shown on the chart) at candle 14,
8 15
6
7 but this upside breakout failed and the
850
5 index closed down for the day. However,
830 its down-volume bar is lower than the
4
previous up-volume bars. Candle 15’s
810 2
1 3 low broke below the immediate support
790 level established by bars 11, 12 and 13,
but it closed back above this level; again,
770
the down-volume bar was still lower
3 Up /down volume than the most recent up-volume bar.
90% 1 5 24 27
6 22 The lack of high-percentage down vol-
2 9 32
80% ume in this context implied the longer-
7 13 18 21 23 31
70% 10 15 16 19 25 28 term uptrend is still intact. Generally, the
11
12 17 2930 down-volume bars would be starting to
60% 4 14 20
8 dominate in such a situation if the mar-
26 33
50% ket was going to break down. However,
40% volume bars 16 and 17 in this emerging
10/14 10/21 10/28 11/4 11/11 11/18 trading range were dropping.
Source: Excel
Candle 18 was an up day, and its up-
ACTIVE TRADER • July 2003 • www.activetradermag.com 13

that up volume will dominate down vol-
Relative volume reveals the degree of ume in an uptrend. The key sign of an
uptrend, though, is the relatively low
down-volume percentage during correc-
buying and selling taking place at a tions.
Let’s now look at how the volume can
reverse as the market forms a short-term
top.
specific time, such as when price is
Reversal signal
Figure 2 (below) shows the S&P 500 dur-
challenging a support or resistance level. ing January 2003. Candles 1, 2 and 3 all
had strong up-volume bars; the inter-
vening down-volume bars were much
volume bar was the highest in the previ- up-volume bars, which meant the sellers lower, all of which underscored bullish
ous eight days, a sign buyers were com- were still not in control and this move price-volume action.
ing back into the market after the test of was likely a correction in the overall However, as the market tested resist-
support. But as the market started to uptrend. Candles 31 and 32 were bullish ance around 930 after candle 3, the up-
climb, the up-volume bars trended candles with relatively strong up vol- volume percentage dropped off, indicat-
down: bars 19, 20 and 21 were all lower ume (increasing up-volume bars). ing selling was occurring in the back-
than bar 18. Conclusion: The higher This chart supports the general idea ground. Candle 4 closed below the low
prices were attracting sellers in the back-
ground.
Candle 22 opened and reversed at the FIGURE 2 CHANGING OF THE VOLUME GUARD
high of the recent trading range, closing
As the market tested resistance around 930, the up-volume percentage
below the lows of candles 19, 20 and 21.
dropped off (between bars 3 and 4), hinting at background selling.
But more importantly, volume bar 22
was the highest of the last 12 volume
bars, which meant sellers were asserting S&P 500 index (SPX), daily
control in the market. The S&P subse- 940
quently tumbled to the support level (at 930
candle 24) and the down-volume bars
920
were higher than the recent up-volume 1 4
bars. 910 3
2
The high down-volume percentages 900
5
at the test of support would indicate a 890
strong likelihood the market would drop 880
below this level. However, although can- 870
dle 26 took out candle 24’s low, the mar-
860
ket recovered. Also, the down-volume
percentage for this bar was the lowest on 850
the chart (barely above 50 percent), 840
which means sellers were not participat-
1 Up/down volume
ing aggressively at this level — they had 90%
already sold. This evidence points to a 3
2
potential upside reversal. 80%
4
The next day, candle 27, marked 70% 5
another advance, with an up-volume bar
60%
substantially higher than the previous
down-volume bar. Candle 28 also 50%
moved higher, but its volume bar was 40%
lower than that of bar 27. Candles 29 and 1/6 1/13 1/21 1/27
30 moved lower, but their down-volume
Source: Excel
bars were lower than the previous two

of the previous two days on a higher was trending lower, with the down-vol- day, though, the market started to
down-volume percentage than the three ume percentages dominating the up-vol- advance, and by the end of the day the
previous up-volume days — a sign sell- ume percentages. On March 10 (candle high up-volume percentage (over 90 per-
ers were coming into the market. 1), the down volume was above 90 percent) confirmed the up move and alerted
traders to the potential for additional
gains.
FIGURE 3 BOTTOM REVERSAL However, notice the up-volume bars
As the market bottomed out at candles 1, 2 and 3, the corresponding began to decline at this point, similar to
down-volume bars shrank. the way the down-volume bars for can-
dles 2 and 3 did when the market reversed
to the upside. The two situations have an
S&P 500 index (SPX), daily
important difference, though: Candle 4’s
890 up-volume bar was substantially higher
than candle 2 and 3’s down-volume bars.
You must be able to compare up-volume
870
bars to down-volume bars (or vice versa)
— not up-volume to up-volume or down-
850 volume to down-volume — before draw-
5
ing any conclusions about potential rever-
4
830 1 sals. Therefore, until the market made a
correction following the rally that began
2
at candle 4, you must assume the trend is
810 3 still up.
The key to this analysis is that coun-
790 tertrend volume patterns indicate
1 whether the trend is up or down. Low
90% Up/down volume down-volume bars indicate the trend is
4
80% up. Low up-volume bars indicate the
2
70% trend is down.
60%
3 5 Trade influence
50%
Price-volume analysis is a useful barom-
40%
3/3 3/10 3/17
eter of the market environment. If your
analysis in a market indicates the princi-
ples outlined here are in effect, consider
Source: Excel executing your strategies in the direction
of the trend indicated by the volume pat-
terns — i.e., if the up-volume bars are
The market moved steadily lower cent. However, candle 2 and candle 3’s green and the down-volume bars are
over the next few candles on a rising per- down-volume percentages dropped red, long positions are likely to perform
centage of down volume. Candle 5 was even as price continued to fall. In other better than short trades.
an up day, but the up-volume bar is words, the lower prices were not bring- One thing to keep in mind is that it is
lower than the previous down-volume ing more sellers into the market. Candle always possible that news can trigger
bars — a negative sign. Subsequently, 3 made a new low but reversed to close major buying or selling and reverse the
the market continued to trend down, above its open, hinting the market was trend. However, following the percent-
with high percentage down-volume vulnerable to a short-covering rally. age of up-volume and down-volume rel-
days and low percentage up-volume Candle 4 was a big up day. The up- ative to the total up-down volume dur-
days. volume bar was much higher than the ing a trend (and at key support and
The final example illustrates the down-volume bars of the two previous resistance levels) can help clarify
reversal of a downtrend. Figure 3 down days. Bar 5 is more ambiguous. whether the bulls or the bears are domi-
(above) shows the S&P 500 and its up The market closed above the 830 resist- nating the market at a given moment.
and down volume percentages for the ance level established during the previ-
first few weeks of March 2003. From ous week but the up-volume percentage
March 3 through March 12, the market was low, reflecting uncertainty. The next

FUTURES & OPTIONS
Trading Strategies
Short-term oscillator opportunities

Exploring the relationship
between an exponential moving average
and an oscillator leads to new ways
of defining trend changes and
capturing price swings.
BY THOM HARTLE
A lthough it sometimes seems as if trends consist of

smooth, orderly up or down moves (especially if
your trade is a loser), prices usually zigzag up
and down even during strong trends. If the
longer-term trend is up, price will rise from a shorter-term
identifiable on historical charts, there is rarely a regular time
relationship between these swing peaks and troughs. Life
would certainly be easy if a market would simply bottom, rise
for five days and peak, fall for three days and bottom, and then
rise for five days again, repeating this pattern indefinitely.
oversold state to an overbought state and back again, repeating
this cycle until the market tops, then moves into a downtrend.
The reality is the number of price bars between swing peaks
and troughs throughout a trend is much more random.
The difficulty is that while these price swings are easilyNonetheless, some straightforward analysis makes it possible
to identify trade opportunities using the con-
cept that markets zigzag around their longer-
FIGURE 1 THE EMA-RSI CONNECTION
term trends.
Closes below the six-day EMA correspond to RSI readings below 50. To spot such opportunities relative to the
trend, we must first select a method to define
the trend. The moving average is probably the
U.S. Treasury Bonds (US), daily most popular trend-defining tool, but it is not
112 the only one. Oscillators, which are calcula-
Six-day exponential moving average
tions that highlight shorter-term price swings,
are usually thought of as tools for identifying
overbought/oversold conditions or diver-
111 gences, not as trend indicators.
However, one of the most popular oscilla-
tors, the relative strength index (RSI, see “The
relative strength index”), can be used with a
110
simple moving average to trade with the
trend and to warn of trend reversals.
109
Uptrends and downtrends
In technical analysis, as in most other areas of
30-day
simple
life, you always give up something to gain
moving something else; for every advantage an indi-
average cator or approach possesses, it also has a
RSI A B C D E F G H I J drawback.
75 For example, the longer a moving aver-
age’s lookback period (the number of price
50
bars used to calculate the average), the less
February 25 likely it will result in false signals (when price
27 3 10 18 24 repeatedly moves above and below the aver-
Source: CQGNet
age), but the more it will lag changes in mar-
ket direction. Although there are several types
16 www.activetradermag.com • September 2003 • ACTIVE TRADER

FIGURE 2 THE TREND EFFECT
The RSI peaks during this period were all below 75, while downward
price thrusts pushed the indicator below 25.
S&P 500 E-Mini (ES), daily

1,140
of moving averages (simple, exponential, 30-day SMA
weighted, etc.), they all have one purpose:
identifying the trend by smoothing price 1,120
action and removing market “noise.”
This allows traders to create simple defini-
tions for trend direction, such as the one we
1,100
will use here: If the moving average is rising,
the trend is up; if the moving average is
falling, the trend is down. Using the direction
of the moving average to define the trend, we 108
can then move on to the next step of qualify-
ing the nature of intratrend price swings.
106
Adding the oscillator
Most oscillators, in one way or another, meas-
ure the difference between prices over a short
RSI A B C D E F 75
time period (e.g., three to 20 days). This
removes any longer-term trend influence and 50
produces a horizontal picture of price zigzag- 25
ging above and below the trend, which is rep-
May 0
resented by the oscillator’s median line (the
8 15 22 29 1 6 13
midpoint or “zero line”).
“The trend-following RSI” (January 2003, Source: CQGNet
Active Trader, p. 44) illustrated how crosses
above and below the RSI median line are nearly equivalent to in the direction of the trend depending on the strength of that
price crossovers of a moving average with twice the length of trend — readings will be skewed higher in uptrends and lower
the RSI lookback period. in downtrends. In this case, the low RSI values are around 40,
For example, Figure 1 (opposite page) shows T-bond futures which confirms the strength of the uptrend (which is also
with a rising 30-day simple moving average (indicating the reflected by price only once tagging the rising 30-day moving
trend is up), a six-day exponential moving average (EMA) and average). Finally, any thoughts that divergence between the
a three-day RSI. (The choice of lookback period is a function of RSI peaks and the price peaks forewarn of a reversal should be
the desired number of trades and the typical volatility of the discarded with such a short-term RSI lookback period.
market. For example, if you choose a 14-day RSI, you would A simple guideline can be derived from this information: If
have far fewer signals compared to using a three-day RSI.) the 30-day moving average is rising and the three-day RSI
Each time the market closes below its six-day EMA (the bars drops below 50, go long on the next up close. This is a good
indicated by A, C, E, G and I) the RSI moves below 50, which example of how a short-term RSI can be used to identify swing
is the indicator’s median line. In other words, RSI readings trade opportunities in the upward zigzags of a rising trend.
below 50 mean the market has closed below its six-day moving Why not just buy on the first up close following a close
average. below the six-day EMA, which we’ve already defined as equiv-
More interesting, however, is that the day after each of these alent to the three-day RSI? Because of the subtle but valuable
bars, the market closed up and the RSI rose, sometimes cross- information provided by the level from which the RSI turns
ing above 50 and sometimes not. Following bar B’s higher back up: During a rising market the RSI will bottom around 40.
close, the market rallied for two more days; following bar D it (More about this in a moment.)
rallied one more day; following bar F it rallied two more days;
after bar H it rallied three more days; and following bar J the The RSI as trend indicator
market moved up two more days. Figure 2 (above) shows a downtrending market with a three-
A couple of other points are worth noting. First, in February, day RSI and a 30-day moving average, but no six-day moving
the RSI dropped only to between 40 and 50 and then rallied average, to give a clearer view of the price action. At bar A the
near (or above) 75. Although this is a very short-term RSI, the 30-day moving average is falling and the RSI makes its first
fact that the RSI turned back up from such high “oversold” lev- move above 50. The following day (bar B) the RSI declined and
els was a sign of strength. Relative strength index values shift
ACTIVE TRADER • September 2003 • www.activetradermag.com 17

FUTURES & OPTIONS
Trading Strategies continued
FIGURE 3 RSI INDICATIONS
The lower closes at point A and B established a support level in the RSI.
When the indicator fell below that level at point C, it signaled a trend
change.
the market closed lower that day and the
Nasdaq 100 E-Mini (NQ), daily next. The next day the market and RSI
1,150 both closed higher, but still below their
respective readings at bar A. The market
then dropped for six days. At bar C, the
1,100 RSI closed above 50; after bar D the mar-
ket fell three days; and after bar F the mar-
ket dropped one day.
1,050 During this downtrend, the RSI peaked
each time below 75 and dropped well
below 25 on down swings because of the
influence of the downtrend, which
1,000
pushed the RSI to a lower range — the
30-day SMA opposite of the situation in the Figure 1
uptrend. The typical trend-influenced
950
shift in RSI readings can be used both to
confirm the trend and to warn of a trend
change.
900 For example, in Figure 3 (left) the E-
RSI Mini Nasdaq 100 futures are in an uptrend
75
(indicated by the rising 30-day moving
50 average), and at points A and B the RSI
A B C 25 turns back up from lows at 45. However,
November December
at point C the RSI falls to 35, closing below
1 11 18 25 2 9
the support level established by points A
Source: CQGNet and B. In other words, there was a down-
ward shift in the trend that pushed the RSI
readings lower well before the market
FIGURE 4 SIGNALLING A TREND SHIFT
crossed below the 30-day moving aver-
The move at point C above the RSI resistance level indicated a switch age.
from downtrend to uptrend. Figure 4 (left) is an example of an
upward shift in RSI readings against the
Nasdaq 100 E-Mini (NQ), daily trend. In this case, the 30-day moving
average is rolling over, indicating the mar-
1,100
ket trend is turning down, which is also
30-day SMA indicated by the RSI peaks (points A and
B) that occur just below 60 and the follow-
1,075
ing RSI bottom that is well below 25. But
at point C, the RSI climbs as high as 75
and breaks the RSI resistance line, an early
1,050
sign the trend was turning up. Next, the
RSI moved well above 75, and at the first
pullback (point D) the RSI bottomed at 50,
1,025 more evidence of an upward trend.
This behavior leads to a second guide-
line: Support lines drawn along RSI
1,000 troughs during an uptrend should be just
below 50. During a downtrend, resistance
lines connecting RSI peaks should be just
above 50. Violation of these trendlines
RSI D
A B C 75 warns the trend is changing.
Also, consider RSI readings above 75
50
E not as entry points, but as signs the mar-
25
January 2003 ket is strong or turning strong — i.e., con-
9 16 23 30 2 6 13 firmation of an uptrend. The opposite is
true of RSI readings of 25 or lower con-
Source: CQGNet
firming a downtrend.

The relative strength index (RSI) Exponential moving average (EMA)
The relative strength index (RSI) is an oscillator that The simple moving average (SMA) gives every price point in
ranges from 0 to 100. The formula is: the average equal emphasis, or weight. Weighted moving
averages emphasize more recent price action. The exponen-
RSI = 100 - (100/[1+RS]) tial moving average (EMA) weights prices using the following
formula:
where
EMA = SC * Price + (1 - SC) * EMA(yesterday)
RS = relative strength = the average of the up closes where
over the calculation period (e.g., 10 bars, 14 bars) SC = a “smoothing constant” between 0 and 1, and
divided by the average of the down closes over the cal- EMA(yesterday) = the previous day’s EMA value.
culation period.
You can approximate a particular SMA length for an EMA
When calculating a 10-day RSI, if six days closed higher by using the following formula to calculate the equivalent
than the previous closes, subtract the previous close from smoothing constant:
the current close for these days, sum the differences,
and divide the result by 10 to get the up-close average. SC = 2/(n + 1)
(The sum is divided by the total number of days in the where
lookback period and not the number of up-closing days.) n = the number of days in a SMA of approximately
For the four days that closed lower than the previous equivalent length.
day’s close, subtract the current close from the previous
close, sum these differences, and divide by 10 to get the For example, a smoothing constant of .095 creates an
down-close average. If the up-close average was .8 and exponential moving average equivalent to a 20-day SMA
the down-close average was .4, the relative strength over (2/(20 + 1) = .095). The larger n is, the smaller the constant,
this period would be 2. The resulting RSI would be 100 - and the smaller the constant, the less impact the most
(100/[1+2]) = 100 - 33.3 = 66.67. recent price action will have on the EMA.
Further experimentation
The RSI was used here to find trade opportunities in the Trading approach highlights
direction of the trend, as well as to indicate the trend was
shifting direction. Using the RSI to catch swing points
This is not the only tool that could function in this role 1. Define the trend: If the n-day (default: 30-day) simple
— other oscillators could be used as well. The key is to moving average (SMA) is rising, the trend is up; if the SMA is
review market action and determine practical criteria falling, the trend is down.
based on the typical behavior of the oscillator within the
context of a trend. Once that behavior is quantified, you 2. Use a short-term RSI to find swing entry points: If the 30-
can develop entry strategies and risk management points day moving average is rising and the three-day RSI drops below
for trades. 50, go long on the next up close. Reverse for short trades.
Using the RSI as a trend indicator

1. Support lines drawn along RSI troughs during an uptrend
should be just below 50. During a downtrend, resistance lines
Additional research connecting RSI peaks should be just above 50. Violation of these
levels warns the trend is changing.
“Indicator Insight: Relative strength index (RSI),”
Active Trader, August 2001, p. 88 2. Consider RSI readings above 75 as signs the market is
strong or turning strong — i.e., confirmation of an uptrend, not
“Indicator Insight: Weighted and exponential moving as entry points. The opposite is true of RSI readings of 25 or
averages,” Active Trader, July 2002, p. 76 lower and downtrends.
“The trend-following RSI,”

Active Trader, January 2003, p. 44

TRADING Strategies
RETRACEMENT TENDENCIES
Traders often calculate likely retracement levels, but
BY THOM HARTLE is there any validity to such techniques? Objectively
defining trends and retracements makes it possible to
T
analyze the price swings in a market and determine
he market never moves in a if retracements follow any noticeable patterns.
straight line — it repeatedly
swings up and down on a
shorter-term basis as it moves
in the direction of the longer-term trend.
During a bull trend, the market FIGURE 1 DEFINING PRICE MOVES
advances and then retraces part of each
previous rise, repeating the process until Solid green lines indicate uptrending conditions and dashed red lines repre -
the long-term trend turns down. Similarly, sent downtrending conditions.
during a bear trend, the market zigzags
A Nasdaq 100 index-tracking stock (QQQ), daily
downward, with upswings retracing the
down legs of the prevailing trend. 42.00
As such, retracements represent oppor-
tunities to get on board a trend. Traders
often project retracement, or pullback lev- 40.00
C
els to use as entry points. K
It’s easy to see retracements on a chart E
in hindsight. If a market advances or
38.00
declines overall for six months, it’s obvi- G
ous how each countertrend swing repre- B
sented a retracement and potential entry D
36.00
point. I
To take advantage of retracement
opportunities as they develop, it’s neces- F
sary to first have objective definitions of 34.00
both trends and retracements. Then, you J
can determine if retracements display any H
noticeable patterns that could be used in
the future. For example, if you could 1/2/2002 2/1/2002 3/1/2002
determine with a measure of certainty the Source: Fibonacci Trader
next retracement in an uptrend would be
50 percent of the previous upswing, it would greatly simplify Before analyzing percentage retracements, we must first
entering the market on the long side. establish a definition for a trend.
Some traders believe the market frequently retraces in per-
centages derived from the numbers in the Fibonacci series (see Defining trends
“The Fibonacci series”). The most common Fibonacci There are a number of ways to define trends, such as moving
retracement targets corrections of 38.2 percent, 50 percent and averages and regression analysis. All trend-defining tech-
61.8 percent of the previous price move. niques have limitations, the primary one being lag. No matter
To determine if there are such identifiable retracement per- what a trend indicator says, you can never be sure a trend has
centages, we analyzed two years of daily Nasdaq 100 index- changed direction until after (sometimes well after) the fact.
tracking stock (QQQ) prices from January 2002 to October We’ll use a price-based technique here. Let’s start by defin-
2003. The January 2002 opening price was $42.11. The market ing an uptrend as a pattern of consistently higher highs and
fell to a low of $19.76 in October 2002 before climbing back to higher lows and a downtrend as a pattern of consistently lower
$36 in October 2003. Because, the QQQ experienced both highs and lower lows. This means support levels will progres-
falling and rising trends, we can be confident there is no sively climb (higher lows) during uptrends while resistance
unusual bias to the data in that regard. levels will fall (lower highs) during downtrends.
20 www.activetradermag.com • March 2004 • ACTIVE TRADER

FIGURE 3 POST-RETRACEMENT MOVES
FIGURE 2 RETRACEMENT SIZES Although two of the follow-through moves after retrace -
ment were noticeably large, there was no pattern to
There were 28 retracements, but there was no particular
these price swings.
percentage size that appeared unusually often.
100% 300%
90% 250%
80%
70% 200%
60% 150%
50%
40% 100%
30% 50%
20%
10% 0%
1 2 3 4 5 6 7 8 9 10 1 11 21 31 41 51 6 1 71 81 9 2 02 12 2
0%
1 3 5 7 9 11 13 15 17 19 21 23 25 27
level, changing the trend from up to down.

If the market has been in a downtrend, a price breakout The price swings can all be defined relative to the moves that
above a resistance level will be the sign the trend has turned preceded them. Starting with the early January peak (point A),
up. If the market has been in an uptrend, a breakdown below the first downswing was a drop from $42.60 to $37.33 (B), a
a support level will be the signal the trend has turned down. $5.27 decline. The market then rallied to $39.40 within the
This approach allows the immediate market action, rather downtrend (C), which constitutes a 39-percent retracement of
than an arbitrary moving average lookback period, to deter- the A-B decline. Next, the market fell to $36.85 (D), a move that
mine the trend. was 123-percent the size of the B-C retracement.
Moving forward, the D-E swing retraced 80 percent of the B-
Defining support and resistance levels C swing and the subsequent E-F swing was 193 percent of the D-
It’s also necessary to objectively define support and resistance E. The F-G upswing retraced 87 percent of the E-F downswing,
levels. The Gann swing rule, which provides precise rules for and the drop from G to H was 172 percent of the F-G move.
determining swing lows (support) and swing highs (resist-
ance), is one possible approach.
This technique uses consecutive highs or lows to determine FIGURE 4 FAILED PRICE SWINGS
the direction of the swing, as exemplified by the “three-day Post-retracement follow-through swings that failed were
swing rule.” If the market makes three consecutive higher as inconsistent as the other types of price swings.
highs, the swing direction is up, and remains so until the mar-
ket makes three consecutive lower lows. 100%
In this case, though, we will use the equivalent two-day 90%
swing rule. In his 1997 book, A W. D. Gann Treasure Discovered, 80%
70%
Robert Krausz showed a copy of a page from one of Gann’s
60%
study courses that showed a hand-written note by Gann in the 50%
margin stating a two-day swing rule worked better than the 40%
three-day rule. “The two-day Gann swing charting technique” 30%
(p. 56) explains the definitions we will use. 20%
The trend is determined according to whether the market 10%
has broken above resistance (which indicates the trend is up) 0%
1 2 3 4 5 6
or below support (which means the trend is down). Once a
trend is established we will measure the following three kinds
of price moves: the size of each retracement as a percentage of The market then rose to point I, which marked a 54-percent
the previous trend move; the size of the subsequent (post- retracement of the previous downswing. After retracing 73
retracement) move back in the direction of the trend as a per- percent of the H-I move (at J), the market rallied and closed
centage of the preceding retracement swing; or, if the market above the resistance level established by the point I swing
fails to follow through in the direction of the previous swing, high, turning the trend from down to up. The swing from J to
the size of the retracement before a trend reversal. K was 309 percent of the I-J swing.
For example, Figure 1 (opposite page) shows the QQQ price
action during the first three months of 2002. Solid green lines Retracements
indicate an uptrend and dashed red lines indicate a down- If a market trended upward in stair-stepping fashion making
trend, based on the two-day Gann swing rule. For example, in 77 total up moves without ever violating a previous support
mid-January, the line turned from solid green to dashed red level, there would be 38 retracements of those up moves.
because the market closed below the early January support
ACTIVE TRADER • March 2004 • www.activetradermag.com 21

FIGURE 5 REVERSING A REVERSAL
The trend changed from up to down when price fell below the point-A support
level, but it turned back up when price rallied above point B.
ments that preceded a trend reversal. The
Nasdaq 100 index-tracking stock (QQQ), daily D
six failed swings ranged from just under
30.40
30 percent to just over 80 percent.
30.00
In short, none of the statistics here are
consistent.
29.60
Trend reversals
29.20 The market changed trend by breaking
B through a previous support or resistance
28.80 level 20 times over the test period.
Because the first trend change occurred in
28.40 early January and was based on a support
level outside the study period, it will be
28.00
ignored, leaving 19 reversals to analyze.
A Six of these remaining reversals were
27.60
preceded by the failed swings shown in
C 27.20 Figure 4. Interestingly, of the six times the
trend changed direction after a failed
swing, it reversed again immediately in
5/5/2003 5/12/2003 5/19/2003 5/27/2003 6/2/2003
the direction of the prior trend four times.
Source: Fibonacci Trader When the market changed trend by
breaking support or resistance, it was
Our two-year study of the QQQ contained 76 trending price from a greater than 100-percent price move of the previous
swings, but only 28 retracements — nearly 25-percent fewer swing 13 times. In other words, if the market was in an
than expected. The remaining swings were trend reversals, uptrend, it reversed and took out a previous support level by
most of which were larger than 100-percent countermoves, rel- dropping virtually straight to it.
ative to the previous swing. In Figure 5 (above), for example, swing A is a downswing
Figure 2 sorts the 28 retracements from smallest to retracement of a previous upswing, and swing B is a move to a
largest. Notice there is no tendency — no cluster of readings at new high. But swing B-C retraces all of swing A-B, and by break-
a certain percentage, which means that commonly referenced ing the swing low support level at point A, the trend turns down
Fibonacci retracement levels did not make their presence felt — but only briefly. The market soon reverses again and rallies
during the test period. (There is precisely one 50-percent past the swing-high resistance level (B), changing the trend to up
retracement.) again. In this case, there were two back-to-back trend reversals.
Now let’s look at the price swings that followed the retrace- Figure 6 (below) shows the percentage moves relative to the
ments — the post-retracements price swings back in the direc- previous swing for the 19 trend reversals, including those that
tion of the prevailing trend. There were 22 such “follow- were percentage comparisons to a failure swing. For example,
through” moves after completed retracements (the remaining from Figure 5, the B-C downswing was 128 percent of A-B (bar
six were failed swings, which will be addressed separately).
Figure 3 displays the size of these moves as a percent-
age of the preceding retracement move, and sorts them from FIGURE 6 TREND REVERSAL
smallest to largest. The observations that are just barely larger
Here, price swings that reversed the trend are sorted
than 100 percent (far left) indicate the market followed through
from low to high in terms of their size relative to the
past the beginning of the retracement, only to reverse again
previous swing.
and either retrace a portion of the swing or the entire swing
(and more), signaling a reversal.
As was the case with the retracements, there does not seem 350%
to be any particularly consistent or typical percentage size to 300%
the follow-through moves. The final two percentages are high- 250%
er than expected, but two out of 22 does not indicate anything
200%
significant.
With 22 of the 28 retracements having greater than 100-per- 150%
cent follow through, the remaining six were failed price swings 100%
that were themselves reversed — for example, price swing I-J
50%
in Figure 1, when the market failed to make a new low. When
the market subsequently rallied above point J, the trend 0%
switched from down to up. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19
Figure 4 shows the percentage sizes of the six retrace-
22 www.activetradermag.com • March 2004 • ACTIVE TRADER

The two-day Gann swing charting technique
7 in Figure 6), and upswing C-D was 247

percent of B-C (bar 15 in Figure 6).
Referring again to Figure 1, the J-K
swing was 309 percent of the I-J swing,
A two-day swing consists of two consecutive higher highs or lower lows.
In Figure 7, the first two consecutive higher highs are labeled 1 and 2
on the left side of the chart. This makes the swing direction up, and
the green line indicates there was a previous breakout above resistance (not
shown), which is the definition of an uptrend (see main story). The market
which is also the final observation in rises, and then makes two consecutive lower lows, down to point A. This is a
Figure 6. The interesting thing in Figure downswing in an uptrend.
6 is the larger higher-percentage swings Following point A, the market
FIGURE 7 TWO-DAY SWINGS
to the right of center compared to Figure makes two consecutive higher
3, which showed the sizes of the post- highs, leading to new highs. This is
2 E
retracement follow-through moves in the an upswing in an uptrend. Point A is 1
direction of the trend. now a swing low and a support C
Of the 19 trend reversals, the market point. 12 2
continued in the direction indicated by Next, the market drops below
1
the break of support or resistance trend the support point A, established by
level only five times. Five other times the the downswing and upswing. This
market immediately reversed again, as changes the trend to down at point 1
in Figure 5. In other words, there were 10 B, and the Gann Swing line becomes 2 2 1
times the market made back-to-back a dashed red line. A B 2
1 1
swing moves violating a previous sup- The market then makes two con-
port or resistance point, signalling a secutive higher highs to point C.
trend reversal, without an interim swing This is an upswing in a downtrend. 2
move in the opposite direction. One time The two consecutive lower lows D
the market made four consecutive back- down to point D means this is a
to-back violations of the previous sup- downswing in a downtrend. Point C
port and resistance (think of the broad- is a swing high or a resistance point.
ening triangle chart pattern). The market reverses and makes
two consecutive higher highs (an
Overcoming subjectivity upswing in a downtrend) until it
The difficulty of performing this type of breaks the resistance established at
analysis begins with the challenge of point C. Because this was a down-
developing objective criteria for trends, trend, the trend now changes to up.
trend reversals and retracements. Some Finally, the market makes two
nuance is inevitably lost when creating a consecutive lower lows, which is a Source: Fibonacci Trader
framework that can accommodate all downswing in an uptrend.
price action.
As a result, some might argue that a
trend reversal indicated by the method
used in this study is not (to them, based on their own interpre- sive, stair-stepping fashion, either up or down, as shown in
tation of the chart) really a reversal and, therefore, a retrace- Figure 1. However, it also can trade in a manner that would
ment is still unfolding, and so on. However, without clear-cut lead one to conclude that support and resistance levels, like
definitions, you are left with ambiguity, rather than numbers records, were made to be broken. In this sense they represent
on which to gauge probabilities and build trading procedures. targets for the market to flush out traders with stops just
Having said this, the study provided some interesting beyond these levels — which is exactly how markets func-
insights about retracements. First, there was no consistent per- tion.
centage retracement size of prior price swings — Fibonacci or Why is this the case? The collection of individuals in the
otherwise. Similarly, if a retracement held, and the market did marketplace probably does not change that much on a day-to-
continue in the direction of the trend, the market gave no evi- day basis, and if the market is going to go somewhere, it has to
dence of a consistent percentage size for these moves, either. change the general sentiment to set the stage for the next price
Also noteworthy was the number of times the market broke a swing. If everyone is very bullish, all the available capital has
support or resistance level, only to immediately reverse with probably been put to work. If this is the case, there is no one left
substantial follow-through movement, as shown in Figure 6. to buy. This is why the market ebbs and flows, and people get
This indicates the need for procedures to take advantage of such in and out of positions, either by design or pain.
false breakouts. One name for these kinds of patterns is spring But a break of support or resistance can lead to a positive or
(false break of support) and upthrust (false break of resistance). negative sentiment extreme, creating a situation in which a real
opportunity exists for a big trade.Ý
Don’t count your retracement level before it’s touched
The market does have periods when it trends in a progres-
ACTIVE TRADER • March 2004 • www.activetradermag.com 23

FUTURES & OPTIONS
Trading Strategies
Percent b
Putting a new twist on an old indicator results
in a tool that determines short-term market
bias and sets up intraday swing trades —
with a little help from a price pattern.
BY THOM HARTLE
T he eternal quest for would-be short-term traders sents the oversold threshold and the moving average repre-
is to find a way to identify swing points consis- sents the median line.
tently and mechanically. It cannot be done, but The strategy discussed here uses the percent b indicator both
traders never tire of experimenting with this or to define the prevailing market bias and, combined with a
that indicator in the hope it will lead to a universal rule for three-bar price pattern, to signal trade entries in the E-Mini
identifying short-term exhaustion points, or overbought and S&P 500 futures (ES) on an intraday basis.
oversold levels.
Oscillators are the indicators typically
enlisted for this role, and although there
are literally dozens of tools that fall FIGURE 1 PERCENT B
under this heading, virtually all of them
rely on similar momentum calculations The percent b indicator shows where the closing price is relative to the
that measure how much price has moved upper and lower Bollinger Bands (indicator levels 100 and zero, respectively).
up or down over a recent time period.
Typically, a high indicator threshold Continuous S&P 500 E-Mini futures (ES), five-minute
defines prices that are theoretically over- 1,074
bought and a low indicator threshold Upper Bollinger Band
identifies prices that are theoretically
oversold. A middle equilibrium or medi- 1,072
an line separates rising and falling
momentum conditions.
Bollinger Bands are a similar tool that 1,070
use a statistical calculation to measure
the degree to which price has moved
above or below its average. The indicator 1,068
consists of lines placed (by default) two 20-bar simple
standard deviations above and below a moving average
moving average of closing prices (see 1,066
Lower Bollinger Band
Figure 1, right). For a more detailed dis-
cussion of Bollinger Bands, see Percent b 150
“Bollinger Bands, variance, and standard
deviation,” and the references listed at 100
the end of the article.
The percent b indicator, which was 50
developed by John Bollinger, measures
the closing price relative to the upper 0
and lower Bollinger Bands. In a way, the 15,000
Volume 10,000
indicator is a more typical oscillator-type 5,000
depiction of Bollinger Bands for which 0
ˇ 16-8:30 9:30 10:30 11:30 12:30 13:30 16-14:30
the upper band is equivalent to the over-
Source: CQGNet
bought threshold, the lower band repre-
24 www.activetradermag.com • April 2004 • ACTIVE TRADER

Percent b basics above or below any of the lines. This is the information percent
The percent b indicator reflects closing price as a percentage of b provides.
the lower and upper Bollinger Bands according to the follow-
ing formula: Highlighting the market bias
To the untrained trader, a price move beyond a Bollinger Band
Percent b = [(Close – lower Bollinger Band)/(Upper (upper or lower) implies a market is at an extreme, having
Bollinger Band – lower Bollinger Band)]*100 moved more than two standard deviations from the 20-bar
average price. The natural conclusion is the market is over-
If the closing price is the same as the upper Bollinger Band bought or oversold and should reverse.
value, percent b would be 100 (percent), and if the closing price Although this is often true in the very near term, the fact a
is above the upper Bollinger Band, percent b would be greater market has moved to an extreme level is, first and foremost, a
than 100. If the close is equal to the moving average, percent b sign of momentum strength — a trend. Therein lies a trading
opportunity.
In Figure 1, the percent b indicator
FIGURE 2 DOWNTRENDING MARKET BIAS closed above 100 (meaning price closed
The fact that percent b falls below zero and never trades above 100 means above the upper Bollinger Band) a total
the market bias is down. of five times and never closed below zero
(i.e., price did not close below the lower
Continuous S&P 500 E-Mini futures (ES), five-minute Bollinger Band). The first percent b close
1,085.0 above 100 occurred on the first five-
minute bar (8:30 a.m. CT) of the first full
Upper Bollinger Band
20-bar simple 1,082.5 trading day on the chart.
moving average The market dropped to the lower
1,080.0 Bollinger Band, but did not close below
it, which means percent b held above
1,077.5
zero. Throughout the trading day per-
1,075.0 cent b sometimes dipped below 50 but
stayed above zero while the market
1,072.5 trended higher for the day. Overall, per-
Lower Bollinger Band cent b was indicating the market had an
1,070.0 upside bias.
Figure 2 shows the opposite circum-
1,067.5
stance. In this case, percent b broke
below zero on the first bar and subse-
100 quently pushed below zero (that is, price
Percent b breaks zero No values above 100 dropped below the lower Bollinger
50 Band) a few more times. It rallied above
50 but never as high as 100. In this case,
0 percent b indicated the market bias was
down.
-50
Volume 20,000 Setting up trades
10,000 The percent b indicator is not used to
0
ˇ 15-8:30 9:30 10:30 11:30 12:30 13:30 15-14:30 trigger trades, but rather to signal favor-
Source: CQGNet able conditions for a trade. If percent b
indicates the market bias is up, look for
pullbacks to enter long trades and take
is 50 percent, and if the close is equal to the lower Bollinger profits as the uptrend reasserts itself.
Band, percent b would be zero. If the close is below the lower Returning to Figure 1, notice the market traded back below
band, percent b would be negative. Figure 1 shows these rela- the 20-bar simple moving average a number of times. Many
tionships on a five-minute chart of the E-Mini S&P futures people believe a price drop below a moving average signals a
using 20-bar Bollinger Bands and percent b. downtrend. But if you have a tool that defines the market bias
Although Bollinger Bands show you where price is relative to be up, then a price move below the average is more appro-
to its three lines, it does not tell you the degree to which it is priately interpreted as a buying opportunity because the mar-
ACTIVE TRADER • April 2004 • www.activetradermag.com 25

FUTURES & OPTIONS
Bollinger Band, variance ket has become cheap relative to the market bias, or trend.
The percent b readings in Figure 2 indicated the bias or trend
and standard deviation was down. In this case, prices above the 20-bar simple moving
average meant the market had become expensive relative to
Bollinger Bands consists of three lines, as shown in the bias.
Figure 1 (p. 66): Shrewd traders seek to buy when price is cheap in an
uptrending market and sell short in a downtrending market
Upper band = 20-period simple moving average + 2 when price is relatively expensive. Next, we’ll illustrate a pat-
standard deviations tern that can be used to place trades when these conditions are
in effect.
Middle line = 20-period simple moving average of
closing prices Trade entry
An extreme percent b reading dictates the market bias or trend.
Lower band = 20-period simple moving average - 2 Although this may run counter to traditional interpretations of
standard deviations oscillator-based approaches (in that extreme readings are usu-
ally considered signs of an overbought or oversold market,
The upper and lower bands represent levels at which and an indication of an impending reversal), careful scrutiny
price is trading higher or lower, respectively, than it reveals that during trends, oscillator readings shift. That is,
has approximately 89 percent of the time over the they have persistently higher high and higher low readings in
past 20 days. uptrends, and lower low and lower high readings in down-
trends.
Standard deviation measures the degree to which With this in mind, we’ll trade based on the following con-
values in a group (say, closing prices from day to day) cept: If the trend is up, we’ll look for a buy (price) setup once
vary from the mean value. Standard deviation is price trades back below the 20-bar simple moving average —
derived from the variance of a set of numbers which, in other words, when percent b moves below 50. In this case,
mathematically, is the average squared “deviation” we’ll use the simple “pivot low” pattern shown in Figure 3 (p.
(or difference) of each number in the group from the 70): a three-bar pattern in which bar 1 is followed by a bar with
group’s mean value, divided by the number of ele- a lower high and lower low (bar 2), followed by a bar with a
ments in the group. For example, for the numbers 8, 9 higher high and higher low (bar 3).
and 10, the mean value is 9 and the variance is: Figure 3 depicts an ideal setup. The percent b indicator trad-
ed above 100, signaling an uptrend. Next, percent b dropped
{(8-9)2 + (9-9)2 + (10-9)2}/3 = (1 + 0 + 1)/3 = 0.67 below 50, indicating price was cheap on a relative basis. At this
point, you would watch for a pivot low and confirm percent b
Now look at the variance of a more widely distributed has not dropped below zero. Go long when price moves above
set of numbers — 2, 9, 16: bar 2’s high. If the market is strong, this pivot low (the low of
bar 2) should act as a support level and should not be taken
{(2-9)2 + (9-9)2 + (16-9)2}/3 = (49 + 0 + 49)/3 = 32.67 out. Therefore, an appropriate risk point is just below the low
of bar 2.
The second group of numbers are more widely distrib- Profits can be taken based on an evaluation of recent volatil-
uted and thus has a higher variance. Standard devia- ity (i.e., how much the market has tended to move lately), a
tion is simply the square root of the variance. So, the
standard deviation of 8, 9 and 10 is:
0.67 = 0.82 Additional Active Trader reading

The higher the standard deviation, the greater the “Indicator Insight: Bollinger Bands,” July 2003, p. 74.
volatility.
“Relatively speaking: John Bollinger,” April 2003, p. 60.
The proper use of standard deviation calls for a sam-
ple of at least 30 observations, in which case, statisti- “John Bollinger: Focus on the markets,” January 2001,
cally, 95 percent of values will fall within two stan- p. 74.
dard deviations of the mean value. Because Bollinger
Bands typically use only 20 days of closing prices, the Past articles can be purchased and downloaded through
bands will generally encompass 88 to 89 percent of the Active Trader online store at www.activetradermag.
the price action. com/purchase_articles.htm.

FUTURES & OPTIONS
FIGURE 3 THE PIVOT PART OF THE EQUATION
Trading Strategies The percent b indicator signals conditions are favorable for an up move; the
continued three-bar pivot triggers the actual trade.
Continuous S&P 500 E-Mini futures (ES), five-minute

1,076
Upper Bollinger Band
1,075
trailing stop, or a retest of the high of the 1,074

day. (It is always important to track
recent volatility when taking profits, as 1,073
this is not a stable attribute in the mar-
kets.) 20-bar simple 1,072
moving average
Figure 4 shows an ideal short selling
1 3 1,071
opportunity. The percent b dropped
below zero around 12:15 p.m., signaling 2
1,070
the trend was down. Next, the percent b
rose above 50, indicating price was Lower Bollinger Band
expensive relative to the trend.
As long as percent b has not crossed Percent b breaks 100
above 100, look for a pivot high. Go short 100
when price drops below the low of bar 2.
And if the trend is down, this resistance 50
level should hold, so the risk point Percent b drops below 50
0
should be just above the high of bar 2.
Again, for taking profits, you can use a Volume 15,000
retest of the previous support point, such 10,000
5,000
as the low for the day, a trailing stop or a 0
preset target based on the current volatil- 13:30 13:45 14:00 14:15 14:30 14:45 17-15:00
ity. Source: CQGNet
Potential weaknesses FIGURE 4 SHORT TRADE

It is always wise to consider the circum-
stances that would cause a trading In this case, the percent b reading below zero indicated a downtrending mar-
approach to fail. ket and the move above 50 signaled a pullback or correction had occurred that
In the case of a percent b setup, a mar- set up a trade. The sell is executed when price drops below the low of bar 2.
ket may not have a true bias during a
congestion period, so there will be peri- Continuous S&P 500 E-Mini futures (ES), five-minute
ods when support and resistance levels 2 1,073
established by the pivot lows and highs 3
will be violated rather than hold. 1
Upper 1,072
Also, the move by percent b back to
Bollinger Band
the 50 level might be the first leg in a
trend reversal rather than an opportuni- 1,071
ty to trade in the direction of the trend.
Unfortunately, neither situation is easy 1,070
to ascertain until after the fact. Lower
Bollinger 20-bar simple
Band moving average 1,069
Turning a concept inside out
Trading is the process of converting an
observable market attribute into rules 1,068
and procedures that capitalize on price
moves. The oscillator-based percent b
approach is based on the observation that Percent b rises above 50
Percent b breaks zero 100
high or low indicator readings actually
portend further directional movement, 50
not the more commonly expected rever-
sal. Combining this view with a simple 0
price pattern offers a basic trading
approach that can be modified and aug- Volume 15,000
10,000
mented. 5,000
0
12:00 12:15 12:30 12:45 13:00 13:15 3-13:30
Source: CQGNet

TRADING Strategies
FOLLOWING THE MONEY :

Quarterly momentum and ETFs
In certain situations, the market
tips its hand regarding which
sectors are likely to stay atop
the market. Certain signals
early in each quarter can help
locate sectors that are likely
to remain strong through the
end of the quarter.
BY THOM HARTLE
E xchange Traded Funds

(ETFs) — a group of related
equity products that repre-
sent different indices, mar-
ket sectors and groups, and which trade
like stocks — have been enormously
successful since the first few were
launched in the 1990s. The two most
popular are the Nasdaq 100 index-track-
ing stock (QQQ) and S&P 500 index- This abundance of ETFs enables basis. So, for example, traders who
tracking stock (SPY). traders who expect a certain investment believe money will move into semicon-
However, there are many more avail- “theme” to become popular on Wall ductor stocks could buy the Merrill
able — more than 120 are listed at the Street to position themselves according- Lynch Semiconductor HOLDR (SMH),
Nasdaq Web site for evaluation (see ly.A working hypothesis of some traders an ETF that represents a basket of 20
“Funds for all,” Active Trader, November is that when an influential investment semiconductor stocks.
2002 ), ranging from sector indices house starts buying certain sectors or This approach is predicated on the
(biotechnology, IBB) to country-specific market areas, other big money will flow ability to spot the emergence of a new
instruments (the Australian stock mar- in that direction for fear of being left investment theme. One way to approach
ket, AAA) to Treasury bond index funds behind. Fund managers will often make this is to monitor the initial trading each
(TLT). big allocation decisions on a quarterly quarter with the expectation the emerg-
28 www.activetradermag.com • June 2004 • ACTIVE TRADER

Top 50 ETFs
Name Symbol
Dow Jones index-tracking stock DIA
Fresco DJ EURO STOXX 50 FEZ
iShares Dow Jones U.S. Real Estate index fund IYR
iShares Lehman 1- to 3-year Treasury bond fund SHY
iShares Lehman 7- to 10-year Treasury bond fund IEF
iShares Lehman 20-year Treasury bond fund TLT
iShares MSCI - Austria EWO
iShares MSCI - Brazil EWZ
ing leaders will hold their advantage for iShares MSCI - EAFE EFA
the remainder of the quarter. (This is iShares MSCI - EMU index fund (European Monetary Union) EZU
similar to an idea discussed by trader iShares MSCI - Hong Kong EWH
Linda Raschke regarding the subse- iShares MSCI - Japan EWJ
quent strong performance of certain
iShares MSCI - Malaysia (Free) EWM
stocks that post the biggest gains at the
beginning of a quarter. See “Linda iShares MSCI - South Korea EWY
Raschke keeps up the pace,” Active iShares MSCI - Taiwan EWT
Trader, February, 2004). iShares MSCI - United Kingdom EWU
The following analysis investigates iShares MSCI Emerging Markets EEM
whether early-quarter momentum in
iShares Nasdaq Biotechnology index fund IBB
individual ETFs tends to sustain itself,
and how well early leaders compare to iShares S&P 500/BARRA growth index fund IVW
the performance of the QQQs and the iShares S&P 500/BARRA value index fund IVE
SPYs. iShares S&P 500 index fund IVV
iShares Russell 1000 growth index fund IWF
Following the leaders iShares Russell 1000 index fund IWB
To see if the ETFs that show strength
iShares Russell 1000 value index fund IWD
early in a quarter tend to keep outper-
forming the market over time, 50 of the iShares Russell 2000 growth index fund IWO
currently most popular ETFs (based on iShares Russell 2000 index fund IWM
average daily volume greater than iShares Russell 3000 index fund IWV
100,000 as of the end of 2003) were stud- Merrill Lynch B2B Internet HOLDRS BHH
ied on a quarterly basis from the first
Merrill Lynch Biotech HOLDRS BBH
quarter of 2001 through the fourth quar-
ter of 2003. (Note: Only 40 of the current Merrill Lynch Internet Infrastructure HOLDRS IIH
collection of ETFs meeting this criteria Merrill Lynch Internet HOLDRS HHH
existed in the first quarter of 2001.) Merrill Lynch Market Oil Service HOLDRS OIH
The leading ETFs at the beginning of Merrill Lynch Pharmaceutical HOLDRS PPH
a given quarter were defined as those Merrill Lynch Retail HOLDRS RTH
with the largest percentage gains from
Merrill Lynch Semiconductor HOLDRS SMH
the close of the last day of the previous
quarter to the close of the second Friday Merrill Lynch Software HOLDRS SWH
of the current quarter. For example, the Merrill Lynch Utilities HOLDRS UTH
initial two-week performance for the MidCap SPDR Trust Series I MDY
first quarter of 2001 was calculated by Nasdaq-100 index-tracking stock QQQ
comparing the Jan. 12, 2001, ETF closing
Select sector SPDR fund - Basic Industries XLB
prices to the Dec. 29, 2000, closing
prices. (Incorporating the second Friday Select sector SPDR fund - Consumer Discretionary XLY
of the month insured the monthly Select sector SPDR fund - Consumer Staples XLP
employment numbers, which are poten- Select sector SPDR fund - Energy Select Sector XLE
tially market-moving statistics — see Select sector SPDR fund - Financial XLF
“Trading the monthly jobs report” — Select sector SPDR fund - Health Care XLV
were reflected in the analysis.)
Select sector SPDR fund - Industrial XLI
The end-of-quarter performance for
each of the top-five performing ETFs Select sector SPDR fund - Technology XLK
was then calculated. This was done by Select sector SPDR fund - Utilities XLU
comparing the closing prices on the last S&P 500 Index-tracking stock SPY
day of the current quarter to the last day Vanguard Total Stock Market VIPERs VTI
Source: Nasdaq
ACTIVE TRADER • June 2004 • www.activetradermag.com 29

TABLE 1 PERFORMANCE OF EARLY-QUARTER ETF LEADERS, 2001
Although the beginning of the first quarter of 2001 was very bullish, all but one of the ETFs — the iShares MSCT-Taiwan Index
Fund (EWT) — were in the red by the end of the quarter.
First quarter Second quarter Third quarter Fourth quarter

First End First End First End First End
two weeks of quarter two weeks of quarter two weeks of quarter two weeks of quarter
ETF 1/12/01 Rank 3/30/01 Rank ETF 4/12/01 Rank 6/29/01 Rank ETF 7/13/01 Rank 9/28/01 Rank ETF 10/12/01 Rank 12/31/01 Rank
HHH 19.68% 1 -9.81% 19 SWH 17.34% 1 35.91% 1 EWM 4.65% 1 1.40% 2 BHH 34.63% 1 99.61% 1
EWY 18.37% 2 -0.08% 4 SMH 11.71% 2 16.17% 7 XLY 3.58% 2 -16.99% 22 SMH 27.67% 2 41.58% 5
SMH 13.16% 3 -15.33% 30 QQQ 9.32% 3 16.73% 4 UTH 2.58% 3 -11.31% 8 SWH 21.61% 3 45.99% 4
EWT 13.02% 4 13.89% 1 IIH 8.22% 4 15.35% 9 XLU 1.54% 4 -6.07% 4 IIH 20.38% 4 18.11% 18
XLK 11.88% 5 -20.80% 34 XLK 7.02% 5 13.59% 11 XLB 1.50% 5 -12.96% 9 QQQ 19.22% 5 34.27% 7
QQQ 7.47% 9 -32.93% 36 XLB 6.91% 6 10.47% 13 SPY -0.29% 12 -14.81% 13 HHH 14.68% 9 26.86% 9
SPY 0.62% 18 -11.05% 23 SPY 1.85% 23 5.06% 26 QQQ -5.58% 34 -36.59% 37 SPY 4.84% 18 9.44% 32
%Bullish 42.00% 66.00% 16.00% 84.00%
Source: data - eSignal; table - Excel
The fourth quarter was the only one in 2002 that had more than 50-percent bullishness among all ETFs. Three of the top-five
ETFs at the beginning of the quarter were still near the top at the end of the quarter.

IIH 13.90% 1 -21.09% 45 IYR 4.92% 1 2.35% 3 EWY 6.53% 1 -20.01% 27 SWH 11.21% 1 29.26% 3
SMH 8.24% 2 11.18% 5 EWZ 3.93% 2 -26.68% 38 EWM 3.32% 2 -11.89% 7 HHH 9.69% 2 28.45% 4
SWH 7.85% 3 -7.83% 39 EWM 3.89% 3 -3.38% 7 EWT 1.16% 3 -26.23% 38 XLK 9.55% 3 25.11% 5
BHH 7.21% 4 -20.27% 44 EWO 2.78% 4 10.64% 1 SMH -2.11% 4 -36.61% 41 QQQ 7.24% 4 17.62% 7
QQQ 4.99% 5 -7.32% 38 IWM 2.40% 5 -9.44% 16 EWZ -2.16% 5 -40.31% 43 BBH 6.20% 5 8.55% 15
XLK 4.58% 6 -9.71% 41 SPY -2.71% 27 -13.59% 27 QQQ -4.98% 9 -20.61% 30 SMH 5.82% 6 15.12% 8
SPY 0.56% 15 0.19% 28 QQQ -7.04% 38 -27.62% 40 SPY -7.18% 22 -17.35% 15 SPY 2.90% 16 7.87% 19
%Bullish 31.00% 15.50% 0.07% 52.00%
Nearly 82 percent of the ETFs had positive returns in the first two weeks of the first quarter of 2003. This kind of broad-based
strength was more likely to result in the early-quarter leaders maintaining their dominance through the rest of the quarter.

IIH 19.33% 1 -5.04% 34 EWY 10.85% 1 33.09% 3 SMH 10.45% 1 21.86% 3 HHH 14.78% 1 18.09% 8
BHH 16.23% 2 17.28% 2 FEZ 9.72% 2 26.41% 8 EWT 10.29% 2 22.93% 2 EWY 12.18% 2 17.28% 9
SWH 15.34% 3 -5.85% 38 EZU 8.39% 3 26.91% 7 IBB 8.75% 3 7.11% 15 EWZ 11.98% 3 33.96% 1
SMH 15.30% 4 4.24% 5 EWZ 6.23% 4 27.07% 6 EWY 8.10% 4 6.80% 17 EWM 11.71% 4 9.51% 33
HHH 13.02% 5 17.65% 1 XLF 5.64% 5 18.26% 22 EWJ 7.84% 5 20.50% 4 SMH 11.48% 5 20.61% 6
QQQ 11.20% 8 3.61% 7 SPY 2.84% 17 15.21% 32 QQQ 6.31% 10 8.25% 11 QQQ 7.99% 9 12.46% 20
SPY 5.47% 14 -3.96% 28 QQQ 1.03% 35 18.61% 20 SPY 2.67% 28 2.38% 33 SPY 4.62% 27 11.34% 27
%Bullish 81.60% 71.40% 72.00% 88.00%

FIGURE 1 BEGINNING VS. END OF FIRST QUARTER, 2001
This ranking shows only a relative handful of the funds had strong returns
(green bars) in the first two weeks of the quarter; the remaining funds post -
ed near breakeven to negative returns. This narrowness in the leadership
early in the quarter belied the behind-the-scenes weakness in the market.
When the leaders finally gave up, the entire market tumbled.
30.00%
Jan. 12, 2001, return
20.00%
of the previous quarter. For instance,
performance for the first quarter was 10.00%
calculated by comparing the March 30, 0.00%
2001, closing prices to the Dec. 29, 2000, -10.00%
closing prices. Finally, the percentage -20.00%
returns from the top-five performers -30.00%
were compared to those of the QQQ and -40.00%
March 30, 2001, return
the SPY. -50.00%
Tables 1 through 3 show the quarter- -60.00%
ly returns for 2001, 2002 and 2003, -70.00%
respectively. The five ETFs that per-
-80.00%
formed best in the first two weeks of
each quarter are shown, along with the Source: data - eSignal; chart - Excel
final quarterly returns and where each
ETF ranked at the end of the month. The FIGURE 2 BEGINNING VS. END OF FIRST QUARTER, 2002
results for SPY and QQQ are included
for each period as well. As was the case in 2001, only a handful of ETFs were positive in the first two
In Table 1, although the first several weeks of the first quarter of 2002, while the rest were flat to down; just 30
trading days of 2001 were spectacular percent had positive returns.
(the top two ETFs were up nearly 20
40.00%
percent), the market quickly turned Jan. 11, 2002, return
down and all but one of the ETFs — the 30.00%
iShares MSCT-Taiwan Index Fund
(EWT) — posted losses for the quarter. 20.00%
Figure 1 provides some explanation
10.00%
for this. Ranking all 40 ETFs by their
performance in the first two weeks of 0.00%
2001’s first quarter, along with their
respective end-of-quarter 2001 returns, -10.00%
reveals only a relative handful of the March 28, 2002, return
funds had strong returns in the first two -20.00%
weeks of the quarter; the remaining -30.00%
funds posted near breakeven to negative
returns. This narrowness in the leader- Source: data - eSignal; chart - Excel
ship during the first two weeks of
January indicated there was a great deal FIGURE 3 BEGINNING VS. END OF FIRST QUARTER, 2003
of weakness behind the scenes in the Early in the first quarter of 2003, buying was strong across the board. The
market and, as a result, when the lead- final first-quarter 2003 returns were mixed, but the action that occurred in
ers finally gave up, the entire market the first two weeks of the period set the tone for the rest of the year.
tumbled.
To reflect the extent of the leadership
25.00%
in a given quarter, Tables 1 through 3 Jan. 10, 2003, returns
also include (in the last row, labeled “% 20.00%
15.00% March 31, 2003, returns
Bullish”) the percentage of ETFs that
had positive returns in the first two 10.00%
weeks of the quarter. 5.00%
The tables also show the QQQ and
0.00%
the SPY were below the top five the
-5.00%
majority of the time — not surprising,
since QQQ tracks 100 stocks and SPY -10.00%
tracks 500. Although this diversification -15.00%
spreads risk, it also lowers return. -20.00%
Also, what the QQQ and the SPY did -25.00%
in the first two weeks during the second,
Source: data - eSignal; chart - Excel

FIGURE 4 BROAD-BASED BUYING
Demand was high in the first two weeks of 2003’s second quarter. Only a
handful of ETFs had negative returns, and even those ended up positive by
the end of the quarter.
45.00%
third and fourth quarters of each year
40.00% indicated the outcome for the top-five
June 30, 2003, returns
35.00% ETFs: Positive QQQ and SPY returns
30.00% correlated to positive ETF returns and
25.00%
negative returns also were hand-in-
hand.
20.00% Figure 2 is similar to Figure 1 in that
15.00% it shows only a handful of ETFs were
10.00% positive in the first two weeks of the
5.00%
first quarter of 2002, while the rest were
flat to down; just 31 percent had returns
0.00%
April 11, 2003, returns greater than zero.
-5.00% Figure 3, on the other hand,
Source: data - eSignal; chart - Excel shows how broad based the buying was
in the first two weeks of January.
FIGURE 5 4TH QUARTER 2001 Although the final first quarter 2003
returns were mixed, most of the action
The Merrill Lynch Internet HOLDR (BHH) was a steady climber in the fourth occurred in the first two weeks of the
quarter of 2001. The remaining ETFs followed suit, but at a slower rate of period, and this strength set the stage
ascent. for the rest of the year. Table 3 shows
nearly 82 percent of the group had pos-
120.00% itive returns in the first two weeks.
Figure 4 shows how demand was
100.00%
BHH high in the first two weeks of 2003’s sec-
80.00% HHH ond quarter, as there was just a handful
60.00% IIH of ETFs with negative returns during
SMH this period, and even those ended up
40.00% SWH positive by the end of the quarter.
SPY An important aspect of the fourth
20.00%
QQQ
quarter for each year is, despite 2001
0.00%
and 2002 being bad years, there was
-20.00% substantial recovery. In 2003, the fourth
quarter was a continuation of the
strength of the previous three quarters
(refer to Tables 1-3).
Source: data - eSignal; chart - Excel However, the tables don’t show the
day-to-day price action and the risk you
FIGURE 6 4TH QUARTER 2002 may face by simply owning the top-five
ETFs from the first two weeks. Figures
In the fourth quarter of 2002 the ETFs peaked in early December and then 5, 6 and 7 show the day-to-day relative
declined. BHH again led the ETF pack. performance of the top-five ETFs and
QQQ and SPY. The day-to-day percent-
0.6 age changes are tracked and adjusted to
0.5 a start price of zero on the last day of
the previous quarter.
0.4 BHH
HHH Figure 5 shows BHH was a steady
0.3 climber in the fourth quarter of 2001.
SMH
0.2 SPY The remaining ETFs followed suit, but
0.1 SWH at a slower rate of ascent. In the fourth
QQQ quarter of 2002 (see Figure 6), the ETFs
0.0 XLK peaked in early December and then
-0.1 declined. Figure 7, fourth quarter for
-0.2 2003, was more volatile, with a sharp
descent in the middle of November,
and then a recovery.
This study indicates if broad-based
Source: data - eSignal; chart - Excel buying or selling in the top-volume

ETFs occurs in the first two weeks of the quarter — accompanied by confirmation from the QQQs and SPYs — that trend
can persist to the end of the quarter.
FIGURE 7 4TH QUARTER 2003 However, as Figures 5, 6 and 7 sug-
gest, what happens along the way can be
Although follow-through from the beginning to the end of a quarter may be
wide ranging.
more likely when there is early-quarter strength among all ETFs, the price
action can be wide ranging. The fourth quarter of 2003 was volatile, with a
Starting at the bottom
sharp drop in the middle of November, followed by a recovery.
There are many ways to screen for top-
40.00% performing ETFs. If the trend indicated
in the first two weeks of a quarter is sup-
35.00%
ported by broad-based participation,
30.00% HHH there is a better chance the top-perform-
25.00% EWM
EWY
ing ETFs in the early part of the quarter
20.00% will follow-through in the same direc-
EWZ
15.00% SMH tion the remainder of the quarter.
10.00% SPY Traders looking for ETFs with the best
5.00% QQQ odds for long-side trades can use a list of
0.00% top performers as their departure point.
-5.00% If the Street has latched on to certain sec-
tors, they are likely to benefit the
most.Ý
Source: data - eSignal; chart - Excel

FUTURES & OPTIONS
Trading Strategies
THE Market Facilitation INDEX
Traders are always looking for ways to determine when the market is
poised to make a move. The Market Facilitation Index is a tool you
can use to identify market lulls that can precede price trends.
BY THOM HARTLE
G lancing at intraday charts shows the market often

trends, either right from the opening or at some
other time in the day, and all a trader has to do is
be aggressive to take advantage of such moves.
But more often than not, trying to capture intraday moves
that have already begun is fruitless. As soon as you enter the
trade, the market stalls and you are either pushed out by risk
before they begin, a trader can get in the market quickly
enough to capitalize on the maximum portion of a price move.
One indicator for measuring whether the market is in a
potential pre-trend lull is the market facilitation index (MFI).
Here, we will analyze the price action after high MFI readings
to see if there’s a relationship worth trading.
management rules or forced to wait, stressfully, for a resump- The indicator

tion of the trend. If the market continues to languish, most Bill Williams, Ph.D., detailed the MFI in his book Trading Chaos
traders will exit the trade — only to see the market begin to (John Wiley & Sons, 2004). The MFI is a price bar’s range divid-
trend again. Nothing is more frustrating than having accurate- ed by its volume:
ly anticipated the market’s direction and having nothing to
show for it. MFI = (High – Low)/Volume
What would help avoid these situations is an indicator that
can signal lulls in the market. Quiet periods often precede The MFI will climb if volume subsides relative to the price
trends, and by being able to identify potential trending periods bar’s range. Low volume activity is one way to identify a mar-
ket that is pausing, a condition that can precede a trend.
The raw MFI number is multiplied by 1 million because the
FIGURE 1 THE MARKET FACILITATION INDEX (MFI) base calculation is typically very small. For example, if a bar’s
high for the E-mini S&P 500 futures (ES) was 1,133 and the low
This 45-minute chart illustrates the tendency of the MFI to
was 1,130, the range is 3 points. If the trading volume was
increase when the market trades sideways and falls into a
92,000, the raw MFI would be 0.00003261. Multiplying by 1
lull. The MFI began to drop as the market moved into a
million results in 32.61, which is easier to work with.
downtrend.
September2004 E-mini S&P 500 futures (ESU04), 45-minute The study
A B D E F The following study used 45-minute bar data for the E-mini
C S&P 500 futures from Jan. 2, 2004, to June 10, 2004, a total of 111
G
11,400.0 days. Only the pit session hours were tracked, opening at 8:30
a.m. (CT) and closing at 3:15 p.m.
For this period the mean (average) MFI reading was 63.16
11,350.0
and the standard deviation (STD) of all the readings was 23.98,
I
H meaning the MFI should fall between roughly 49 (the mean
minus the STD) and 87 (the mean plus the STD) 68 percent of
the time.
Market facilitation index Our goal is to see how the market behaves following a high
100 MFI intraday value, which we will define as 87. This value (the
mean plus one standard deviation) was chosen to generate
50 more observations than would be the case if the mean plus two
standard deviations were used. Also, 45-minute bars were cho-
a g
h i 100K sen because as the time frame gets shorter the MFI becomes
b increasingly volatile and does not serve the purpose of identi-
c
d e f fying market lulls that should precede trends.
Volume 0
Figure 1 is a 45-minute chart of the September E-mini S&P
6/28 6/29 500 futures contract (ESU04) with MFI and volume. We will
Source: eSignal walk through the chart bar by bar to better understand the MFI
readings relative to the price action.
34 www.activetradermag.com • October 2004 • ACTIVE TRADER

TABLE 1 OUT TO LUNCH
The majority of high MFI readings during the analysis period occurred during
the 11:30 a.m. and 12:15 p.m. bars.
The market tended to trade sideways Time 8:30 9:15 10 10:45 11:30 12:15 1 1:45
for the first half of the day and as the vol- (Central) a.m. a.m. a.m. a.m. a.m. p.m. p.m. p.m.
ume decreased, the MFI rose. Bar A, the MFI > 87 0 0 6 27 47 54 20 4
first bar of the day, gapped up from the
previous day’s close. The volume (his-
togram bar a) was nearly 100,000 con-
tracts, producing an MFI of 32.70. The next bar (B), which TABLE 2 FAVORABLE AND UNFAVORABLE MOVES
started at 9:15 a.m., was an inside bar (lower high and higher AFTER HIGH-MFI BARS
low than the preceding bar) and the volume dropped off to The median MFEs and MAEs following high-MFI bars
just under 55,000 contracts (b). Consequently, the MFI rose to
50.16. Bar C’s range was less than bar B’s and the volume Occurrences Time MFE MAE
trailed off to less than 38,000 contracts (c), and the MFI edged 6 10 a.m. 3.125 -0.875
up to 52.86. At bar D, the range expanded but the volume
27 10:45 a.m. 1.500 -0.500
declined to 24,000 (d) and the MFI climbed to 106.82.
Bar E, which began at 11:30 a.m., was another inside bar and 47 11:30 a.m. 0.750 -2.000
the volume dropped to slightly below 16,000 (e), pushing the 54 12:15 p.m. 1.750 -1.125
MFI to 109.59. Bar F had a larger range but the volume only 20 1 p.m. 1.250 -1.500
reached 25,000 (f), so the MFI increased to 117.32. Note these
4 1:45 p.m. 1.375 -0.750
two bars (E and F) cover the time period most traders in
Chicago and New York would be at
lunch.
Bar G was a wide-range down bar FIGURE 2 FAVORABLE MOVES: COMPARING THE 11:30 AND 12:15 BARS
and the volume hit its peak for the day The maximum favorable excursions (MFEs) for the 11:30 a.m. bars (green)
at nearly 145,000 contracts (g). The MFI are less than those for the 12:15 p.m. bars (blue) except for three occur-
dropped to 84.21. Bar H and bar I had rences.
narrower ranges, but the volume
remained high (near 80,000) and the MFI 8.00
Maximum favorable excursion
dropped back to 37.98 and 40.71, respec- 7.00

tively. 11:30 bars
Figure 1 illustrates a number of attrib- 6.00
utes of the relationship between market 5.00
action and the MFI. The first bar gapped 12:15 bars
4.00
higher, had high volume and a low MFI
reading. In this case, the high volume 3.00
was less of a sign of good demand than 2.00
an indication demand was spent, as
1.00
there was no follow-through price
movement to the up side. (This is not 0
1
4
7
10
13
16
19
22
25
28
31
34
37
40
43
46
49
52
always the case, as there are plenty of
days a market trends immediately from Number of occurrences
the opening bar, accompanied by heavy Source: Excel
volume.) As the market traded sideways
and the MFI rose to well above 87, the period. This suggests the MFI action in Figure 1 is typical. High
market did, in fact, fall into a lull. Then, as it moved into a MFI readings, which imply low volume relative to the price
downtrend, the MFI began to fall. The final two bars had high range, are followed by low MFI readings, which imply high
volume, sideways price trend and high MFI readings. volume relative to the price range.
Let’s look at the data for the entire study to see if we can The next question is what happens after high MFI readings?
identify any consistencies in the price action and the MFI in We will look at the price action following MFI readings above
terms of the time of each bar. 87 at the close of each 45-minute bar. To do this, we need a way
to qualify which way the market moves in the bar immediate-
How high, MFI? ly after each high MFI bar.
Table 1 shows the number of times the MFI exceeded 87 for the Let’s say if a high MFI bar closes in the upper 50 percent of
different 45-minute bars throughout the trading day. The MFI its range, the difference between the close of this bar and the
never exceeded 87 during the first two bars, which encompass next bar’s high is the maximum favorable excursion (MFE) and
the first 90 minutes of trading. Next, the number of high MFIs the difference between the close and the next bar’s low is the
climbed until peaking at 54 during the 12:15 p.m. bar; the num- maximum adverse excursion (MAE). If a high MFI bar closes in
ber of occurrences trailed off the rest of the day. the lower 50 percent of its range, the MFE is the difference
The 54 occurrences equal just less than 50 percent of the total between the close and the next bar’s low; the MAE is the dif-
number of times the MFI exceeded 87 over the 111-day study ference between the close and the next bar’s high. We are only
ACTIVE TRADER • October 2004 • www.activetradermag.com 35

FUTURES & OPTIONS
FIGURE 3 UNFAVORABLE MOVES
Reflecting the tendency shown in Figure 2, the maximum adverse excursions Let’s take a closer look at the difference
(MAEs) of the 11:30 bars are consistently worse than those of the 12:15 bars. between the 11:30 a.m. bar and the 12:15
The 12:15 bars had larger favorable moves and smaller unfavorable moves p.m. bar. Figure 2 shows the MFEs for the
than the 11:30 bars. two periods sorted from smallest to high-
est. The MFE was zero for both bars four
0 times. Notice how the MFEs for the 11:30
bars (green) trail below the MFEs for the
Maximum adverse excursion
-2.00
12:15 bars (blue) except for three occur-
-4.00 rences.
-6.00 Figure 3 shows the MAEs for the two
11:30 bars time bars sorted from smallest to largest
-8.00
negative move. The MAEs for the 11:30
-10.00 a.m. bars are consistently worse than those
12:15 bars for the 12:15 p.m. bars. (By contrast, the
-12.00
12:15 p.m. bars with MFI readings below 87
-14.00 had a median MFE of 1.50 and a median
MAE of -2. The 64 times the MFI was below
-16.00
87 during the 11:30 a.m. bars, the median
1
4
7
10
13
16
19
22
25
28
31
34
37
40
43
46
49
52
Number of occurrences MFE was 1.50 and the median MAE was -
Source: Excel 1.25.)
Also, recall the price action in Figure 1
FIGURE 4 8:30 A.M. BARS showed the 8:30 a.m. bar had no follow
through that day after it closed and the
This chart shows the MFEs and MAEs for the one hundred and eleven 8:30 MFI was below 40. How common is this?
a.m. bars with MFI readings below 87, sorted by MFE. Figure 4 shows the MFEs and MAEs for the
one hundred and eleven 8:30 bars with
10.00 MFI readings below 87, sorted by MFE.
Not until bar 66, which spans approxi-
8.00
mately 60 percent of the observations, is
8:30 a.m. bar MFE and MAE
6.00 the MFE 1.75 or higher, which is the medi-

MFE an MFE for the 12:15 p.m. bar. The median
4.00
MFE for the bar following the 8:30 a.m.
2.00 bars is 1.50 and the median MAE is -2.00.
0
No free lunch
-2.00 The study shows there is a tendency for the
-4.00
E-mini S&P 500 futures market to go into a
low-volatility state, or lull, during
-6.00 lunchtime in Chicago. But after this lull the
-8.00 market is prone to trend. It appears taking
MAE a countertrend approach prior to lunch
-10.00 would be more profitable because of the
1
6
11
16
21
26
31
36
41
46
51
56
61
66
71
76
81
86
91
96
101
106
lack of follow-through price movement

Number of occurrences during the lunch period. Also, the likeli-
hood of a persistent trend early in the
Source: Excel morning is not as likely following lunch.
This research can be the basis for devel-
checking the next bar’s behavior. oping a strategy based on a shorter time frame, such as five-
Table 2 shows the median MFE and MAE for each occur- minute bars. For example, if the MFI indicates a lull period dur-
rence of the MFI exceeding 87 by time and based on the coming the 12:15 bar, use your strategy with more-distant targets
bination of up- or downtrend movement. We used the median than if you were placing a trade in the morning. Countertrend
to reduce any skewing of the data by outliers. trading, or trading with very small targets, appears to be a better
Although it has the highest MFE, the 10 a.m. bar only has six approach going into the lunch period.
high MFI readings, so you cannot read too much into it. The Trading is a probability issue. When we review charts with
11:30 a.m. bar is more interesting. It starts at 11:30 a.m. and indicators and price patterns outlined our eyes are drawn to
ends at 12:14:59 p.m. The median MFE is only 0.75 and the the great trades where the outcome is known after the fact.
median MAE is -2, which suggests taking a directional trade Without digging into the data it’s difficult to identify a partic-
going into lunchtime is a low-probability proposition. The ular market characteristic that can be the basis for a viable trad-
12:15 p.m. bar, which has the greatest number of occurrences, ing method. Once you find a characteristic, you can then
also has the highest MFE of all bars besides the 10 a.m. bar. develop a strategy around that information.
36 www.activetradermag.com • October 2004 • ACTIVE TRADER

TRADING Strategies
The Squat Bar

Traders often anticipate trend moves to follow low-volume, low-volatility periods.
The squat bar pattern shows high-volume bars can also lead to tradable price
moves.
FIGURE 1 SQUAT BAR EXAMPLES
A squat bar (highlighted red) has both higher volume and a lower MFI reading
than the preceding bar.
BY THOM HARTLE Nasdaq 100 index-tracking stock (QQQ), daily

35.00
T raders have long studied

the relationship between
price and volume looking
for some definitive way to
identify high-probability trades. For
example, traders sometimes look for
low-volume trading ranges because of
A
34.00
33.00
the theory that with such markets many

participants are on the sidelines, and if
some event triggers a price move, these MFI
sidelined players will react and poten- 0.800
tially create a trend. 0.600
Many techniques and indicators, such
as on-balance volume and equivolume 0.400
charts, have been devised specifically to Volume 1,500,000
gauge volume and price action. “The 1,250,000
Market Facilitation Index” (Active Trader, 1,000,000
October 2004 ) discussed another 750,000
August
volume-based indicator developed by 26 2 9 16 23
Bill Williams, who detailed the MFI in
his book Trading Chaos (John Wiley & Source: CQGNet Inc.
Sons, 2004). Williams used the MFI as
one of two parameters to classify price bars into four cate- a range of $0.46 range. Its daily volume was 81,401,200. The
gories. Here, we’ll analyze the category Williams referred to as MFI for that day was:
the “squat bar” to see if it signals trade opportunities.
MFI = (0.46/81,401,200)*1,000,000 = 0.00565
MFI revisited
First, let’s review the MFI, which is a price bar’s range divid- The MFI measures the amount of price movement for each
ed by its volume: share traded. If volume increases and the price movement
(range) remains the same, the MFI decreases. If the price
MFI = [(High – Low)/Volume]*1,000,000 movement stays the same and volume decreases, the MFI
increases.
Multiplying by 1 million makes the numbers easier to work
with because the raw MFI value is typically quite small. Squat bar definition
For example, on Aug. 31, 2004, the Nasdaq 100 index-track- The squat bar has two criteria: The current bar’s MFI reading
ing stock (QQQ) had a high of $34.12 and a low of $33.66, for must be less than the previous bar’s, and the current bar’s vol-
37 www.activetradermag.com • January 2005 • ACTIVE TRADER

FIGURE 2 NARROW-RANGE SQUAT BARS
This chart supports a general contention that many trends end (within one to three bars from a top or bottom) with
squat bars, but many squat bars are part of continuation moves. Squat bars with trading ranges smaller than the
previous day’s range are marked with dots below them. However, these bars failed to signal trading situations.
39.00
Nasdaq 100 index-tracking stock (QQQ), daily
38.00
37.00
36.00
35.00
34.00
33.00
2004 February March April May June July August Sept.

2 12 20 26 2 9 17 23 1 8 15 22 1 12 19 26 3 10 17 24 1 7 14 21 1 12 19 26 2 9 16 23 1
Source: CQGNet Inc.
ume must be greater than the previous bar’s. Figure 1 shows a ranges smaller than their preceding bars. The theory is if the
daily bar chart of the QQQ and highlights several squat bars squat bar’s range was narrower than the prior day’s range, that
(in red). day was a tight battle between the bulls and bears. However,
Because the MFI measures range relative to volume, the lower the chart doesn’t indicate these bars signal particularly favor-
the MFI, the more volume per unit of range. If volume increases able trade opportunities.
from one bar to the next, we can conclude there was more activ- If the squat bar does represent a battle between buyers and
ity on this bar than the previous bar. This is a squat bar. sellers, a short-term trading opportunity might exist because the
Williams used the term “squat” to convey the idea the mar- day after a squat bar, one side of the market will be right and the
ket was squatting and preparing to make a big jump because other will be wrong. Those who are wrong will be forced to react
the increased level of activity on such bars reflected a battle and exit their positions, which could create a trend move.
between the bulls and the bears; the battle is intense because For example, if you sold short one day and the next day the
the bar has high volume and relatively little price movement. market rallied, you’d probably take a loss at a certain point.
Williams stated almost every trend ends with a squat bar as Similarly, if you went long one day and the market headed
one of the three top or bottom bars, but he also said not every lower the next, you might be forced to sell. This idea is the
squat bar signals the end of a trend. opposite of the concept mentioned earlier of low volume indi-
Figure 2 is a daily chart of QQQ from January to September cating market participants are on the sidelines awaiting some
2004 with squat bars highlighted in red. The figure indicates event to trigger a price move.
Williams’ statement is accurate: Squat bars do often occur
within one to three bars of the end of trends, but many others The study
are followed by continuation moves. To test this idea, we analyzed daily QQQ data from Jan. 2, 2003,
The squat bars marked with dots are those with trading
ACTIVE TRADER • January 2005 • www.activetradermag.com 38

FIGURE 3 BREAKING THE SQUAT BAR’S HIGH
outside days (bars with lower lows and higher
When price exceeded the high of a squat bar the next day, there was
highs than their preceding bars). Finally, the market
more upside follow-through than downside movement.
opened the next day within the range of the previ-
1.00 ous squat bar 58 times (68 percent).
Because the market opened within the range of
0.80
High broken the squat bar nearly 70 percent of the time and
0.60 failed to exceed its high or low only 11.8 percent of
the time, these statistics suggest the market has a
0.40
tendency to trend the day after a squat bar and take
0.20 out the previous day’s high or low.
For example, July 26, 2004, in Figure 1 (bar A) is a
0.00
squat bar. The next day, the market opened within
-0.20 the squat bar’s range, its high was $0.30 above the
previous day’s high and its low was $0.32 above the
-0.40
prior day’s low.
-0.60 Let’s review the data to see the range of outcomes
-0.80
on the day immediately following a squat bar. Figure
3 sorts the differences between a squat bar’s high and
Number of occurrences the following bar’s high when that bar traded above
the squat bar’s high (blue bars). The purple bars rep-
Source: Excel resent the differences between squat-bar lows and
the following bars’ lows, shown as negative numbers
FIGURE 4 BREAKING BELOW THE SQUAT BAR’S LOW (i.e., a purple bar with a value of -0.40 means that
bar’s low was 40 cents above the squat bar’s low). An
A move below a squat bar’s low tended to be followed by more outside bar will have positive values for both the
downside price action than upside movement. high and the low (notice the eight purple bars above
1.50 the x axis). For example, number 30 represents the
price action on July 27, the day following Figure 1’s
Low broken
1.00 first squat bar. Its high is $0.30 above the x axis and
the low is $0.32 below the x axis.
Figure 4 shows the differences, sorted from small-
0.50
est to largest, for days when the following bar’s low
exceeded the squat bar’s low. The positive bars rep-
0.00 resent the difference between the squat bar’s low
and the next bar’s low (i.e., a purple bar with a value
-0.50 of -0.50 means that bar’s low was 50 cents below the
squat bar’s low). The negative bars represent the dif-
-1.00 ferences between the squat bar’s high and the fol-
lowing bar’s high.
-1.50 Figures 3 and 4 both show good price movement
following a squat bar. If the high is broken, the aver-
Number of occurrences age move is $0.26 above the squat bar’s high. If the
low is broken, the average move is $0.39 below the
Source: Excel squat bar’s low.
to Aug. 31, 2004. Of the 418 days tracked, 85 days (20 percent) Using the squat bar’s probabilities
were squat bars, which means they appeared roughly once a The bottom line of this study is the market remains within the
week. squat bar’s range only 11.8 percent of the time. If the market
Squat bars were followed by inside days (bars with lower opens within the squat bar’s range, which happens 68 percent
highs and higher lows than their preceding bars) only 10 times of the time, there is a good chance the prior high or low will be
(11.8 percent of the time); eight squat bars were followed by broken. Therefore, you can set trade targets outside the squat
bar’s range. If you get the direction right for your original posi-
tion, the odds are good you’ll be able to capture the price move.
Additional Active Trader reading The squat bar offers a unique way to look at price and vol-
“The Market Facilitation Index,” by Thom Hartle, ume action. Many trading setups are based on momentum and
October 2004, p. 70. volume reaching low points. However, the squat bar repre-
sents the opposite approach, because its setup is based on vol-
You can purchase past articles at ume hitting a high level. Ý
www.activetradermag.com/purchase_articles.htm
and download them to your computer.
39 www.activetradermag.com • January 2005 • ACTIVE TRADER

TRADING Basics
HOLDRS: Stock groups in a single trade

Exchange traded funds (ETFs) such as HOLDRS allow traders and investors to
specialize in certain indices, market sectors, or groups with a single “stock.”
BY THOM HARTLE Company Depositary ReceiptS. HOL- DRS with their respective 2004 percent-
DRS offer the opportunity to trade a age returns. For comparison, three of the
group of stocks with a single instrument, most popular index-based ETFs — the
C
and thereby profit if a particular indus- Nasdaq 100 tracking stock (QQQQ), the
urrently, there are more try, group, or sector does well. The S&P 500 Depositary Receipts (SPY), and
than 160 exchange-traded advantage of the group ownership rep- the Dow Industrial Diamonds (DIA) —
funds (ETFs) traders and resented by a HOLDRS is you don’t also are included.
investors can analyze or have to pick the best stock. Few invest- The Market 2000+ HOLDRS (MKH)
trade. These instruments, which trade ment decisions are as disappointing as represents 50 companies trading on the
like common stock, represent a wide owning an individual company that is New York Stock Exchange, American
range of market indices, sectors, and having problems while its industry is Stock Exchange, or the Nasdaq National
groups. Here, we will look at one group doing well. (Of course, there’s always Market System that were considered to be
of ETFs — Merrill Lynch HOLDRS — the risk that a single company’s woes among the largest in terms of worldwide
and review their salient features. will negatively impact an entire group.) market capitalization on July 7, 2000. The
HOLDRS stands for HOLding Merrill Lynch has created 17 HOL- Europe 2001 HOLDRS (EKH) represents
DRS. Overall, there is a 50 of the largest European companies
TABLE 1 MERRILL LYNCH HOLDRS slight emphasis on the (worldwide market capitalization on
Internet, but groups such as Nov. 14, 2000) whose equity securities
The 2004 percentage return of the HOLDRS banking and utilities are were listed for trading on a U.S. stock
ranged from 42.08 percent (Internet) to –19.57 also represented. Table 1 market.
percent (Semiconductor). Seven HOLDRS out per- lists the seventeen HOL- Figure 1 shows the HOLDRS’ 2004
formed the broader market indexes, such as the
Nasdaq 100, the S&P 500, and the Dow Jones. FIGURE 1 2004 HOLDRS RETURNS
Symbol Name 2004 Return In this histogram bar format returns are sorted from lowest to
HHH Internet HOLDRS 42.08% highest. Seven of the HOLDRS outperformed the Nasdaq 100 track-
OIH Oil Service HOLDRS 37.21% ing ETF (QQQQ). Utilities HOLDRS benefited from a low interest
UTH Utilities HOLDRS 24.59% rate environment and Oil Services did well due to higher oil prices.
BDH Broadband HOLDRS 24.16% 2004 percentage returns
WMH Wireless HOLDRS 22.54% 50.0
IIH Internet Infrastructure 21.69%
40.0
BBH Biotech HOLDRS 13.01%
QQQQ Nasdaq 100 9.46% 30.0
2004 percentage returns
RTH Retail HOLDRS 9.18%

SPY S&P 500 8.62% 20.0
RKH Regional Bank HOLDRS 7.04%
10.0
TTH Telecom HOLDRS 6.19%
SWH Software HOLDRS 5.81% 0.0
IAH Internet Architecture 5.25%
EKH Europe 2001 HOLDRS 4.34% -10.0
MKH Market 2000+ HOLDRS 3.27% -20.0
BHH B2B Internet HOLDRS 2.89%
DIA DJI 30 2.81% -30.0
QQQQ
SMH
PPH
DIA
BHH
MKH
EKH
IAH
SWH
TTH
RKH
SPY
RTH
BBH
IIH
WMH
BDH
UTH
OIH
HHH
PPH Pharmaceutical HOLDRS -8.57%

SMH Semiconductor HOLDRS -19.57%
Exchange traded funds
Source: eSignal Source: eSignal

TABLE 2 TOP-FIVE SEMICONDUCTOR HOLDRS STOCKS
percentage returns sorted from lowest to
highest. The Semiconductor HOLDRS Here is a list of the top five companies by percentage weighting held in the
(SMH) fared worst, posting a -19.57-per- Semiconductor HOLDRS. All five showed negative returns for the year 2004.
cent loss for the year; the Internet HOL- The Semiconductor HOLDRS was only down 19.57 percent while the largest
DRS (HHH) gained 42-percent. Seven company, Intel Corp., was down 27.02 percent.
HOLDRS outperformed the QQQQ,
Stock Symbol Shares Weighting 2004 Return
eight outperformed the SPY, and all but
Intel Corporation INTC 30 21.83% -27.02%
two outperformed the DIA.
Let’s take a closer look at the two Texas Instruments TXN 22 15.82% -16.20%
extremes — the Semiconductor HOLDRS Applied Materials AMAT 26 13.37% -23.80%
and the Internet HOLDRS. Table 2 lists Analog Devices ADI 6 6.76% -19.12%
the top five companies (by current per- Maxim Integrated Products MXIM 5 6.19% -14.50%
centage weighting) held in the Semicon- Source: eSignal
ductor HOLDRS, as well as their respec-
tive 2004 returns. The Semiconductor
HOLDRS represents companies that TABLE 3 TOP-FIVE INTERNET HOLDRS STOCKS
develop, manufacture, and market inte- Here is a list of the top five companies by percentage weighting held in the
grated circuitry and other products made Internet HOLDRS. Four of the five showed positive returns with eBay Inc. up
from semiconductors for computers and 80.07 percent, Yahoo! Inc. up 67.39 percent, and McAfee up 92.35 percent for
other electronics. The largest company by the year 2004. The Internet HOLDRS was up just 42.08 percent for the year.
weight, Intel (INTC), suffered the largest
percentage loss in 2004 (-27.02 percent vs. Stock Ticker Shares Weighting 2004 Return
-19.57 percent for the SMH itself). The eBay EBAY 24 38.19% 80.07%
diversification offered by owning the Yahoo YHOO 52 28.03% 67.39%
SMH provided a better return compared Time Warner TWX 42 11.82% 8.12%
to an entire investment in Intel. Amazon.com AMZN 18 11.76% -15.83%
Table 3 shows the opposite side of the McAfee MFE 7 2.63% 92.35%
coin. It lists the 2004 returns for the top
Source: eSignal
five stocks (based on current weight-
ings) in the Internet HOLDRS. Three of
the top five had substantially higher
FIGURE 2 RELATIVE PERFORMANCE (HHH/SPY)
returns than the Internet HOLDRS.
(Amazon.com was actually down on the This spread chart shows the price of the Internet HOLDRS divided by the price
year.) Tables 2 and 3 demonstrate the of the S&P 500 Depository Receipts (SPY). The Internet HOLDRS dominated
double-edged sword of diversification. SPY receipts, except during the market correction that spanned July through
For traders, high liquidity is critical. August and also during January, when eBay released negative news.
Table 4 lists the average daily vol-
ume for the first five trading days of 2005. Internet HOLDRS/S&P 500 spread ratio (HHH/SPY), weekly
Three HOLDRS — Semiconductor 0.58
(SMH), Oil Service (OIH), and Retail
(RTH) — had average daily volume 0.56
above one million shares for the first
week of the year. At the other extreme is 0.54
the Europe+ 2001 HOLDRS, which aver-
aged less than 2,000 shares a day. 0.52
Figure 2 is a ratio spread chart of the
Internet HOLDRS (HHH) and the S&P 0.50
500 Depositary Receipt (SPY) — i.e., the
closing price of HHH divided by the 0.48
closing price of SPY. The chart high-
lights HHH's relative strength for most 0.46
of 2004, as well as the sharp down
moves that occurred in summer 2004 0.44
and at the beginning of this year.
Figure 3 is a similar chart of the Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. 2005 Feb.
Oil Service HOLDRS (OIH) and SPY. Source: TradeStation

TABLE 4 AVERAGE DAILY VOLUME
FIGURE 3 RELATIVE PERFORMANCE (OIH/SPY)
Here, the 5-day average volume
The price of the Oil Services HOLDRS (OIH) is divided by the price of the S&P
for the first week of January 2005
500 Depository Receipts (SPY). Investors wanting to profit from the current
is listed. The Semiconductors and
rising price of oil can use the OIH. The price action of the OIH has steadily
the Oil Service HOLDRS demon-
outperformed the SPY over the past year.
strate the highest daily liquidity.
Oil services/S&P 500 spread ratio (OIH/SPY), weekly
Symbol 5-day avg. volume
BBH 912,120
BDH 84,160
0.76
BHH 256,600
EKH 1,760 0.74
HHH 544,380
0.72
IAH 31,460
IIH 267,420 0.70
MKH 10,480 0.68
OIH 3,076,700
PPH 728,860 0.66
RKH 340,360 0.64
RTH 1,679,360
SMH 35,565,880 0.62
SWH 572,980 0.60
TTH 505,880
0.58
UTH 493,200
WMH 45,160 2004 Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov.
0.56
Dec. 2005 Feb.
Source: eSignal Source: TradeStation
OIH was also relatively strong in 2004 — ison, other ETFs such as the QQQQ or the performers in 2004, just as the
buoyed by record oil prices — and SPY can be bought and sold in any Pharmaceutical HOLDRS (PPH) was
unlike the HHH, its strength carried amount (e.g., 10 shares of the QQQQ, 35 one of the worst performers because the
over into early 2005. shares of the SPY). problems of Merck & Co. and Pfizer, Inc.
These types of charts are good tools Exchange traded funds are excellent For detailed information on HOLDRS
for understanding the behavior of a par- tools for putting capital to work in spe- performance, see the ETF Snapshot on p.
ticular HOLDRS vs. the broader market. cific equity groups, sectors, industries, 49. To see which HOLDRS are perform-
as well as countries and fixed-income ing the best on weekly basis, refer to the
Finding a theme products. Weekly HOLDRS review on the Active
Unlike other ETFs, HOLDRS can only be Tracking the performance of the HOL- Trader Web site
bought and sold in round lots of 100 DRS can provide insight into what ( w w w. a c t i v e t r a d e r m a g . c o m ) .
shares. As a result, they are not always an investment “themes” are working or not Additional information on HOLDRS can
affordable option. For example, as of Feb. working, or which areas of the market be found at www.holdrs.com.
4, the Biotech HOLDRS was trading at are in or out of favor. Considering the
145. 45, meaning a minimum investment rise in oil prices, it is not surprising the
in the BBH would be $14,545. By compar- Oil Service HOLDRS was one of the top

TRADING Strategies
DISSECTING T-NOTE FUTURES:

Tendencies and characteristics
BY THOM HARTLE
S even years after the Chicago

Board of Trade (CBOT) intro-
duced 30-year U.S. T-bond
futures in August 1977, the
exchange launched the 10-year T-note
contract (TY), which is now the most
heavily traded treasury futures product
Ten-year T-notes are a sensitive meas-
ure of the fundamental forces driving
interest rates. Any hints of inflation and
the so-called “bond vigilantes” will sell
bonds and notes, driving up interest rates.
Conversely, if they see the economy soft-
ening, they will bid up prices for bonds
Analyzing the price history of the 10-
year T-note futures market will allow us
to identify its characteristics and deter-
mine if there has been any shift in its
typical price behavior. We will identify
typical daily ranges, closing prices rela-
tive to daily range, as well as tendencies
in the U.S. and notes, pushing interest rates down. for the low relative to the opening price
FIGURE 1 CONTINUOUS 10-YEAR T-NOTE FUTURES
The 10-year T-note futures contract is the highest-volume U.S. treasury futures contract. Over the past year, the
contract has been in uptrending, downtrending, and trading-range environments.
10-year T-notes (ZN), daily

112-00
111-00
110-00
109-00
108-00
107-00
106-00
105-00
104-00
1,500,000
Total
1,000,000
500,000
March 2004 April May June July Aug. Sept. Oct. Nov. Dec. 2005 Feb.
Source: CQGNet, Inc.

A detailed understanding of a market’s price history and characteristics
allows you to craft trade strategies founded on statistical reality
rather than casual observation. The following analysis takes the pulse
of the T-note futures market.
FIGURE 2 10-YEAR T-NOTE YIELD

for days the market closes up, and the
high relative to the opening when the This chart of T-note yield covers the same time period as Figure 1 and shows
market closes down. With this informa- the inverse relationship between price and yield.
tion in hand, we’ll have a better under-
standing of this market and a stronger 10-year T-note yield
5.00
foundation on which to build strategies.
4.75
A look at the charts
The review period spans March 1, 2004 4.50
to Feb. 28, 2005. Figure 1 is a continuous
Yield
daily chart of the electronically traded 4.25

T-note futures, which is the volume
leading in the Treasury futures contract 4.00
— daily volume commonly exceeds one
3.75
million contracts. T-note prices and
yields are inversely related. Figure 2 3.50
shows the T-note yield for the same
3/1/04
3/15/04
3/29/04
4/12/04
4/26/04
5/10/04
5/24/04
6/7/04
6/21/04
7/5/04
7/19/04
8/2/04
8/16/04
8/30/04
9/13/04
9/27/04
10/11/04
10/25/04
11/8/04
11/22/04
12/6/04
12/20/04
1/3/05
1/17/05
1/31/05
2/14/05
2/28/05
period shown in Figure 1.
Figure 1 shows three market phases
have occurred over the past year: a
Source: Excel, Data: CQGNet, Inc.
downtrend, during which price
dropped from above 112-00 to below
FIGURE 3 DAILY RANGES
104-00, followed by an uptrend that
took the market back above 112-00. Daily ranges of the 10-year T-note contract have contracted over the past
Then the market settled into a trading year, as highlighted by the down-sloping linear regression line.
range bounded roughly by 109-00 on
the downside and 112-00 on the upside. Price has been converted to decimal format.
2.0
Daily ranges
Figure 3 plots the daily ranges of T-note 1.5
futures. Keep in mind this market trades
on the E-CBOT, the CBOT’s electronic
Points
arm, and is available globally 21 hours a 1.0

day (opening each evening at 7:00 p.m.
CT and closing at 4:00 p.m. the next day). 0.5
There are two interesting characteris-
tics. First, there is a monthly spike in the 0.0
size of the daily ranges and, second, the
1
14
27
40
53
66
79
92
105
118
131
144
157
170
183
196
209
222
235
size of the daily ranges has been trend-

ing down over the past year.

FIGURE 4 MOST FREQUENTLY RECURRING DAILY RANGES
This distribution of daily ranges shows how much you can expect T-notes to
move on a given day based on the review period. The daily range was less
than 24/32nds on 205 days, or 82 percent of the time.
Bond and note basics
Frequency distribution of daily ranges
70
60
50
Price has been converted to decimal format.
T reasury bonds and notes are
debt securities issued by the
U.S. Treasury. Bonds and
notes are considered debt because
by purchasing these instruments you
are, in effect, loaning money to the
Frequency
40 Treasury department, which then

pays you interest (determined by
30
the “coupon rate”) on a semiannual
20 basis and returns the principle when
the bond or note matures on the
10 maturity date.
For example, if you purchased a
0 $1,000 10-year T-note with a 4-per-
1.50
1.75
2.00
2.25
2.50
2.75
3.00
0.00
0.25
0.375
0.50
0.625
0.75
0.875
1.00
1.125
1.25
cent coupon, you would receive $20

every six months, totaling $40 per
Source: Excel, Data: CQGNet, Inc. year and the $1,000 would be paid
back to you on the maturity date 10
FIGURE 5 WHERE DOES THE T-NOTE CONTRACT TEND TO CLOSE? years from now.
T-bonds and T-notes are called
This depiction of where the T-note closed relative to the day’s range indi- “fixed-income” securities because
cates T-notes tend to close more toward the daily high or low — i.e., below of the fixed coupon payment an
the 30-percent level of the range or above 70-percent level of the range. investor receives while holding the
bond or note. T-notes are issued in
45 maturities of two, three, five, and
40 10 years; T-bonds have maturities
greater than 10 years. (In October
35
2001, the Treasury department sus-
30 pended issuing fixed-principle
Treasury bonds, but there is still a
Frequency
25
large amount of unredeemed bonds
20 traded in the open market.)
15 T-bonds are priced as a percent-
age of the notational value with the
10 combination of the handle, 100 for
5 example, and 32nds of 100. For
example, 98-14 is a price that trans-
0
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
100.00%
Source: Excel, Data: CQGNet, Inc. ranges are often accompanied by

decreased volatility). If you trade with
Plotting a linear regression line (see more impact on prices than any other preset targets, you need to downsize
“Key Concepts and Definitions” on p. economic release, this may not always be these target price levels when daily
92) through the data highlights the the case. There was a time when money ranges are contracting. If the daily
downward trend. The formula for the supply numbers dominated treasury ranges begin to expand again, you can
linear regression trendline shows its first crowd psychology. In the future, it could set targets farther from your entry level.
value is nearly 24/32nds and its last be price or inflation measurements that Figure 4 is a frequency distribution of
value is below 16/32nds. influence traders’ actions. the daily ranges, which provides an
The monthly one-day spike in the The decline in daily ranges could be indication of how much you can expect
ranges is the result of the release of the result of the trading range the mar- T-notes to move on a given day. The
employment data the first Friday of each ket moved into during the last three market had a range larger than
month. Although this event currently has months of the analysis period (trading 16/32nds (.50) but less than 20/32nds on

FIGURE 6 OPEN-LOW DIFFERENCE
Of the 124 times the market closed up for the day, it also closed below the
open only eight times, and only twice at the opening price.
Low for days T-note closed up

lates to 98-14/32nds or $984.38 for 2.5
a $1,000 T-bond. T-notes are priced Price has been converted to decimal format.
in a similar fashion, except they can 2.0
trade in one half of a 32nd, which is
also referred to as “plus.” For 1.5
example, 98-14+ is 98-14.5/32nds.
As market conditions change, so do 1.0
fixed income players’ expectations.
For example, if there are signs of Points 0.5
inflation, the purchasing power of
the fixed cash flow from coupon 0.0
payments would diminish.
Consequently, bond and note -0.5
investors would demand a higher
yield to be compensated for the -1.0
lower future purchasing power. In
the next Treasury auction, investors -1.5
might be interested in buying 10-
year T-notes only if they receive a 5 Source: Excel, Data: CQGNet, Inc.
percent coupon. Also, if you wanted
to sell a 4-percent coupon T-note, FIGURE 7 OPEN-LOW FREQUENCY DISTRIBUTION
you would have to mark the price
down from 100 to 80 (mirroring the Here’s the frequency distribution of the differences from Figure 6. Of the
20-percent difference in its coupon 124 times the market closed up, the low was less than 8/32nds below the
rates and a 5-percent coupon T- open 105 times. (The market traded more than 16/32nds below the open and
note). This is why bond and note still closed up for the day only once.) If you’re long and the market is more
prices fall when yields rise. For than 8/32nds below the opening and below the previous day’s close, the odds
many investors, Treasury bonds and of a recovery are low.
notes are appealing because they Open to low for up closes
are backed by the full faith and 35
credit of the U.S. Treasury, which Price has been converted to decimal format.
means your principle and coupon 30
payment have virtually no risk. This
25
is very different from owning a
Frequency
stock, for which there is no guaran- 20

tee the company will be profitable
in the future. 15
10
5
64 days (the peak reading), or 25 percent
of the time. The daily range was less 0
0.000
0.125
0.250
0.375
0.500
0.625
0.750
0.875
1.000
1.125
1.250
1.375
1.500
than 24/32nds on 205 days, or 82 per-

cent of the time.
What does the closing price
indicate? ment purposes uses the pit closing price, Overall, the chart indicates T-notes
Next, Figure 5 highlights tendencies of which closes at 2:00 p.m. CT and the tend to close more toward the daily high
the daily close relative to the day’s electronic session trades for two more or low — i.e., below the 30-percent level
range. The chart is a frequency distribu- hours. For example, the market closed of the range or above the 70-percent
tion of where the T-note futures closed between the 20- and 30-percent levels of level of the range. The largest number of
relative to the day’s range on a percent- the day’s range 40 times (third bar from closes (41 occurrences) fell in the 80- to
age basis. The e-CBOT T-note for settle- the left).

FIGURE 8 OPEN-HIGH DIFFERENCE
closed up for the day, the market closed
The raw differences between the open and the high on days the market below the open only eight times, and just
closed down has a subtle difference from Figure 6: The high is more than twice the market closed at the opening
16/32nds above the open numerous times. price.
Figure 7 is the frequency distri-
High for days T-note closed down
1.5 bution of the differences from Figure 6.
Of the 124 times the market closed up,
1.0 the low was less than 8/32nds below the
open 105 times (85 percent). Only one
0.5
time did the market trade more than
0.0 16/32nds below the open and still close
up for the day.
-0.5 What does this tell us? If you are long
Points
and the market is more than 8/32nds

-1.0
below the opening and below the previ-
-1.5 ous day’s close, your chances of a recov-
ery are not very good.
-2.0 Reversing the perspective and looking
at the difference between the open and
-2.5
the high for those days the market closed
-3.0 down leads to Figures 8 and 9. Figure 8
plots the raw differences between the
Source: Excel, Data: CQGNet, Inc. open and the high. There is a subtle shift
in the data: The high is more than
90-percent level (second bar from the Another attribute to consider is how 16/32nds above the open numerous
right). The market closed in the 50 to 60- the market trades on days it closes up vs. times.
percent level of the daily range only 23 days it closes down. Figure 6 dis- Figure 9 is a frequency distribution of
times, or less than 10 percent of all days. plays the difference between the open- the data from Figure 8. It shows that in
The lesson from this data is that traders ing price and the low for days when the 96 of the 121 days (79 percent) the mar-
should consider using rules that enable market closes higher than the previous ket closed down, the high was less
them to stay with the trend for the day. day’s close. Of the 124 times the market 8/32nds above the open. However, on
seven occasions the market traded more
FIGURE 9 OPEN-HIGH FREQUENCY DISTRIBUTION than 16/32nds above the open and still
closed down for the day. This tendency
The frequency distribution of the data from Figure 8 shows 96 of the 121
suggests traders tend to be optimistic
days the market closed down, the high was less than 8/32nds above the
open. However, on seven occasions the market traded more than 16/32nds about a market holding onto gains, and
above the open and still closed down for the day. This tendency suggests long long traders must be wary even when
traders must be wary even when the T-note is up more than 16/32nds above the T-note is up more than 16/32nds
the opening price. above the opening price.
The market traded above the opening
High for days T-note closed down
35 price and closed down for the day only
Price has been converted to decimal format. three times. The T-note closed
30
unchanged only five times during the
25 review period.
One big-picture observation: Figure
Frequency
20 10 is the long-term view of the 10-

15 year T-note yield (logarithmic scale).
Following the rate peak in 1982, yields
10 have steadily declined for more than 20
5 years — the kind of long-term trend
often referred to as a “secular” move.
0 Once this long-term trendline is broken,
0.000
0.125
0.250
0.375
0.500
0.625
0.750
0.875
1.000
1.125
1.250
1.375
1.500
fixed income traders will be watching

for any signs the interest rate market is

Related reading
Related Active Trader articles FIGURE 10 T-NOTE BIG PICTURE
by Thom Hartle: Yields have steadily declined since the rate peak in 1982. When this long-
“Treasury bonds and notes,” term trend is broken, fixed income traders will be watching for any signs the
Active Trader, June 2005. interest rate market is moving again into another secular rising-rate trend.
A primer on the bond and note market,
CBOE 10-year yield as of 3/24/05
covering the cash market, bond funds, and 20
ETFs and futures.
15
“Short-term T-bond trading,”
Active Trader, October 2002.
10
Yield
A strategy that uses a multiple time frame
approach: Two indicators applied to daily
bars work together to determine the
trend; two others, Bollinger Bands and the 5
moving average convergence-divergence
(MACD) indicator, identify entry and exit 3
1965 1970 1975 1980 1985 1990 1995 2000
signals on an intraday basis.
“Relative volume analysis,” Source: Excel, Data: CQGNet, Inc.
Active Trader, July 2003.
Traders commonly use total volume to take
the pulse of price moves, but when it FIGURE 11 EMPLOYMENT FRIDAY: ONE-MINUTE CHART
comes to determining whether the bulls or
With expectations for a rise of 200,000 non-farm payroll jobs, the number
bears are in charge of the market, up and
came in at 146,000. The T-note contract started falling before the number’s
down volume speaks volumes.
release at 7:30 (CT), but rallied when the news actually came out.
“Familiarity breeds profitability,”
Active Trader, September 2002. 10-year T-note (ZN), One-minute
The author analyzes price patterns to
determine the odds that different kinds of 110-00
price moves will occur.
“Up-down volume and next-day 109-28
follow-through,”
Active Trader, December 2004.
109-24
What kind of trading is likely to occur
today? Yesterday’s balance of up volume
and down volume — and whether the mar- 109-20
ket establishes the high or low of the day
first — provides guidance in the Nasdaq
100. 109-16
“Getting in on follow-through days,”

Active Trader, January 2004. 109-12
In a follow-up to the previous article’s dis- Volume 15,000
cussion of the odds of next-day follow-
through in the S&P futures, the author 10,000
looks at the realities of basing entries on 5,000
this price behavior.
0
“Following through in the S&Ps,” 7:10 7:15 7:20 7:25 7:30 7:35 7:40 7:45 7:50
Strong closes and large ranges are often Source: CQGNet, Inc.
interpreted as signs of potential follow-
through. This study unveils another way to moving again into a secular rising-rate reaction to the report is typically very
find out what today’s market action says trend, such as the one that ended in volatile. Because employment-report
about tomorrow by analyzing the NYSE up- 1982. Fridays are such exceptional trading
down volume statistics at the close of the days, it makes sense to analyze them sep-
day to see if there is any consistent follow- T-notes and the employment arately from the rest of the T-note data.
through price action in the E-mini S&P 500 report Figure 11 is a one-minute T-note chart
futures the next day.
The Commerce Department releases the following the release of the Feb. 4, 2005
You can purchase and download past employment report the first Friday of employment report. Expectations were
Active Trader articles at www.activetra- each month. The treasury market’s initial
dermag.com/purchase_articles.htm.

FIGURE 12 RANGES FOR EMPLOYMENT FRIDAYS
Similar to the overall T-note data in Figure 3, the size of the Employment
Friday daily ranges has been declining.
Employment for a rise of 200,000 non-farm jobs, but
3.0 the number came in at 146,000.
Price actually started falling before
2.5
the number came out at 7:30 (CT), and
2.0 then rallied when the news was
Points
released. As the price peaked above

1.5
110-00, three one-minute bars had vol-
1.0 ume in excess of 15,000 contracts —
that’s 250 contracts ($25 million) chang-
0.5 ing hands per second.
Figure 12 displays the ranges for the
0
3/1/04
4/1/04
5/1/04
6/1/04
7/1/04
8/1/04
9/1/04
10/1/04
11/1/04
12/1/04
1/1/05
2/1/05
12 employment Fridays in the analysis
period (Figure 11 represents the last
Friday in Figure 12). Similar to the over-
all data shown in Figure 3, the size of the
employment Friday ranges has been
FIGURE 13 T-NOTE RANGES WITHOUT EMPLOYMENT FRIDAYS declining. If we remove the employment
Removing the Employment Fridays from the data decreases the typical daily Fridays from the data, the typical daily
ranges. The linear regression line is shifted slightly lower, but the slope is range drops. Figure 13 is the same as
nearly the same. Figure 3 except that employment Fridays
are removed. The linear regression line is
shifted slightly lower, but the slope is
2.0
nearly the same (-.0009 versus -.001).
Price has been converted to decimal format. Figure 14 is the frequency distribu-
1.5
tion of daily ranges without the
Points
employment days. Only one day

1.0
exceeded a range of 1.5 points, vs. 11
additional when employment Fridays
0.5 are included (see Figure 4).
Obviously, it’s a good idea for T-note
0.0 traders to develop two sets of trading
1
12
23
34
45
56
67
78
89
100
111
122
133
144
155
166
177
188
199
210
221
232
procedures — one for employment

Fridays, and the second for the rest of
the month.
FIGURE 14 RANGE DISTRIBUTION FOR EMPLOYMENT FRIDAYS Taking a market’s pulse

Performing relatively simple statistical
Without Employment Fridays, only one day in the review period had a range
larger than 1.5 points. This highlights the importance of developing two sets analysis can give you a clearer under-
of trading procedures in T-notes — one for employment Fridays, and the standing of a market’s typical behavior
second for the rest of the month. and provide the foundation for new
trading approaches, or improvements
70 to existing ones. Comparing recent price
Price has been converted to decimal format. action to that of a year ago will alert you
60 to, among other things, volatility
50 changes that critically impact trading
decisions and profit potential.
Frequency
40 Also, separate analysis of a market’s

30
reaction to specific economic reports can
alert you to the best ways to trade in these
20 unique situations. As the discussion
regarding employment data indicates, the
10
T-note market is very different on
0 employment Fridays than other trading
days.
0.00
0.25
0.50
0.75
1.00
1.25
1.50
1.75
2.00
2.25
2.50
2.75
3.00

TRADING Strategies
The QQQQ/SPY
spread
BY THOM HARTLE

Analyzing the relative strength of major stock indices can help you
define the market’s current condition and exploit trade setups at
potential turning points.
D uring bull markets money flows into growth-oriented stocks as
investors attempt to capitalize on companies with the potential to
expand in the favorable economic environment.
When the economic outlook sours, investors will move money out of growth
stocks and into so-called “defensive stocks” — those companies that offer products
and services consumers tend to purchase despite the weak economy, and which often
pay dividends. These stocks do not necessarily go up in a weak environment, but
they tend to fall less than the growth-oriented companies.
Comparing growth and defensive stocks is one way to characterize the broader
market environment and trend: When growth stocks are leading defensive stocks,
the outlook for the broad market is good. If defensive stocks are outperforming, the
outlook is negative.
A relative strength calculation of two of the most popular exchange traded funds
(ETFs) — the Nasdaq 100 index tracking stock (QQQQ) and the S&P 500 Depositary
Receipts (SPY) — allows you to gauge the stock market’s overall trend and set up
swing trades that are in sync with that trend. The setup outlined here uses an entry
concept based on the work of Richard Wyckoff, a stock market analyst and educator
from the 30s.

FIGURE 1 QQQQ/SPY RATIO
Dividing the Nasdaq 100 tracking stock (QQQQ) by the S&P 500 Depositary
Receipts (SPY) reflects how the QQQQ is performing relative to SPY. A rising
QQQQ/SPY ratio indicates money is flowing into technology stocks; a weak highlights how this ratio has tended to
QQQQ/SPY ratio suggests funds are flowing out of technology and into more trend: In the fourth quarter of 2004, the
“defensive” S&P stocks.
ratio was in an uptrend, while during
Nasdaq 100 index tracking stock/S&P 500 Depositary Receipts the first part of 2005 it was trending
(QQQQ/SPY), daily down.
What does the trend of the
QQQQ/SPY ratio tell us? To help
0.33
answer that question, let’s break down
the components of these two ETFs. Table
1 shows the top 10 holdings and indus-
try groups in the S&P 500. The S&P 500
0.32 contains a high percentage of defensive
stocks, which are those companies that
tend to remain stable when the economy
and the stock market are weak.
0.31 Industries that provide products and
services consumers need even when the
economy is moving into a recession
include financials, health care, consumer
staples, and utilities. These four groups
Aug. Sept. Oct. Nov. Dec. 2005 Feb. March April May make up 45 percent of the S&P 500.
Source: CQGNet Table 2 lists the top 10 holdings and
industry groups for the Nasdaq 100. In
Comparing indices is to calculate the ratio between two contrast to the S&P 500, the Nasdaq 100
Relative strength is a comparison of one markets. contains no financial stocks, and health
market’s performance to another’s. A Figure 1 shows the price of QQQQ and consumer goods make up less than
simple way to measure relative strength divided by the price of SPY. The chart 4 percent of the index. Information tech-
nology hardware and computer
software/services comprise
TABLE 1 TOP 10 S&P 500 HOLDINGS AND INDUSTRY GROUPS* more than 55 percent of the
index.
Top 10 holdings % of Top 10 industry groups % of Given its makeup, the Nasdaq
index index 100 should lead the S&P 500
1 General Electric Co. 3.41 1 Financials 20.73 when the economic outlook is
2 Exxon Mobil Corp. 3.02 2 Information technology 14.97 favorable and funds flow into
3 Microsoft Corp. 2.89 3 Consumer discretionary 13.33 growth-oriented technology
4 Pfizer Inc. 2.22 4 Health care 13.03 companies. If the economic/
5 Citigroup Inc. 2.20 5 Industrials 12.64 stock market backdrop is nega-
tive, the Nasdaq 100 index
6 Wal-Mart Stores Inc. 2.17 6 Consumer staples 8.22
should lead the S&P 500 down as
7 American Intl. Group Inc. 1.70 7 Energy 7.19
funds flow out of growth com-
8 Bank of America Corp. 1.69 8 Telecommunication services 3.69 panies and into the S&P 500
9 Johnson & Johnson 1.61 9 Materials 3.15 defensive stocks.
10 International Business Machines 1.38 10 Utilities 3.05 The market adage that “a ris-
Total 22.29 Total 100.00 ing tide lifts all ships” is central
*As of 09/30/2004 to this concept. If the Nasdaq 100
Source: Nasdaq.com
is headed up and the S&P is lag-

TABLE 2 THE TOP 10 HOLDINGS AND THE INDUSTRY GROUP BREAKDOWN
OF THE NASDAQ 100 INDEX*
Top 10 holdings % of Top 10 industry groups % of

index index
1 Microsoft Corp. 7.29 1 Information technology hardware 35.09 ging, the S&P will catch up.
2 Qualcomm Inc. 5.86 2 Computer software/services 20.25 However, if the Nasdaq is head-
3 Intel Corp. 4.08 3 Other services 11.65 ed down, the S&P 500 won’t be
4 Apple Computer Inc. 3.82 4 Retail/wholesale trade 11.54 far behind, which creates an
5 Cisco Systems Inc. 3.33 5 Pharmaceuticals & biotechnology 9.31 opportunity for SPY and S&P
futures swing traders.
6 Nextel Communications Inc. 3.20 6 Telecommunications 4.50
7 eBay Inc. 3.01 7 Manufacturing 3.13
Using momentum to define
8 Dell Inc. 2.80 8 Health 2.67 the QQQQ/SPY trend
9 Amgen Inc. 2.75 9 Consumer goods 1.06 Finding a way to define uptrend
10 Comcast Corp. 2.59 10 Transportation 0.80 or downtrend conditions is
Total 38.73 Total 100.00 always a challenge. The sim-
*As of 03/31/2005 plest technique is to use a mov-
ing average: If the QQQQ/SPY
Source: Nasdaq.com
ratio closes above the moving
average, the trend is up, and if
FIGURE 2 THE RELATIVE STRENGTH INDEX (RSI)
the ratio closes below the moving aver-
During the uptrend, the RSI peaked well above 60 and bottomed at 40 or age, the trend is down.
higher. The indicator oscillated between 60 and 40 during the November- A problem with this approach is
December trading range. In February, the RSI peaked well below 60, and the choosing the look-back period. A too-
downtrend was confirmed when the RSI closed below 40 in March. short moving average will result in
Nasdaq 100 index tracking stock (QQQQ) 39.00 many false signals; a too-long moving
average will increase the lag time
38.00 between a change in direction in the
ratio and the ratio-moving average
37.00 crossover signal.
Another approach is to determine the
36.00 trend using a momentum calculation —
in this case, a 14-bar relative strength
index (RSI). Up momentum indicates a
35.00
rising trend, while down momentum
implies a falling market. Although there
34.00
is a problem of selecting appropriate
levels to define momentum as negative
33.00
or positive, momentum behaves differ-
ently during rising trends vs. falling
32.00
trends. This behavior provides the basis
for the trend-determination rules. (See
31.00
“Key concepts and definitions” for more
information about the RSI.)
30.00
During an uptrend, momentum-indi-
RSI cator readings are shifted upward — the
indicator lows and highs are both high-
60
er than they would be during a period
when price is moving sideways. The
40
indicator does not reach the typical
oversold level before the upward trend
Aug. 2003 Sept. Oct. Nov. Dec. 2004 Feb. March
reasserts itself following a countertrend
Source: CQGNet

FIGURE 3 QQQQ/SPY RATIO WITH RSI
At point A the RSI peaked above 70 and, as the ratio began to decline, the
RSI dropped below 50. Turning up twice from above 40 (points B and C) indi-
cated the ratio could turn up again. At point D, the RSI closed below 40, sig- move. Similarly, during a downtrend,
naling the ratio was now in a bearish momentum trend. momentum-indicator readings are shift-
Nasdaq 100 index tracking stock/S&P 500 Depositary Receipts
ed lower and the indicator fails to reach
(QQQQ/SPY), daily the typical overbought levels during
0.335 countertrend rallies.
This requires adjusting the momen-
tum indicator’s overbought and over-
0.330 sold levels accordingly for the trending
period. Figure 2 shows daily QQQQ
bars with a 14-bar RSI. The RSI has two
0.325
horizontal lines at 60 and 40.
Throughout the uptrend from August
2003 to January 2004, the RSI peaked
A RSI
above 60 and bottomed at 40 or higher.
60 Then the market began to turn down in
February and March of 2004. At first the
RSI didn’t fall below 40, but when the
40
B C market rallied in early February, it
D
November December 2005
peaked well below 60. Finally, in early
1 8 15 22 1 6 13 20 27 3 10 18 March the RSI closed below 40.
The 60 and 40 readings will be the key
Source: CQGNet
RSI thresholds in this analysis. During
an uptrend, peak readings should be
FIGURE 4 DEFINING THE TREND above 60 and low readings should hold
At point A, the RSI was below 40, indicating bearish momentum. At point B, above the oversold level of 40. If the
it had crossed above and back below 50 — continuing to indicate a bearish trend is down, the RSI will tend to peak
trend for the ratio. The RSI bottomed above 40 at point C, indicating a trad- near 60 and make lows below 40. If the
ing range. At Point D, the RSI peaked just above 60 and indicator readings RSI begins fluctuating between 60 and
were shifting upward, a bullish sign for the market. 40, the market is moving into a trading
range.
Nasdaq 100 index tracking stock/S&P 500 Depositary Receipts
0.320 Figure 3 shows the QQQQ/SPY ratio
(QQQQ/SPY), daily
with the RSI. It contains an example of
0.315
the RSI switching from indicating bull-
ish momentum to bearish momentum.
During early December 2004, the RSI
0.310 peaked well above 60 and even above 70
(point A) and as the ratio began to work
0.305 its way lower, the RSI dropped below
50, but turned up from above 40 twice
RSI (points B and C). At point D, the RSI
D closed below 40, signaling the ratio was
60
now in a bearish trend. (There was a
B warning the ratio was turning bearish
C when the RSI closed below the rising
40
trendline connecting points B and C one
A day before the RSI closed below 40.)
August September October
Figure 4 shows an example of the RSI
2 9 16 23 1 7 13 20 27 1 11
indicating a downtrend in the
Source: CQGNet
QQQQ/SPY ratio and then changing to

indicate a bullish trend. At point A, the FIGURE 5 UPTHRUST TRADE
RSI is below 40, indicating bearish The false breakout was confirmed (upthrust) when the market closed back
momentum. At point B, the RSI has below the December high. The short sale was signaled on the close, and the
crossed above 50 (but well below 60) risk point is above the high of the entry bar. Another upthrust occurred in
and back below 50, so it continues to April, which preceded another new low in the downtrend.
indicate bearish momentum. At point C,
S&P 500 Depositary Receipts (SPY), daily
the RSI troughs at 40, indicating a trad-
ing range. At point D, it peaks just above Upthrust 122.00
60 at 60.15 — not a definitive bullish sig-
nal, but this reading is higher than point
B, so the momentum readings are shift-
120.00
ing upwards, which is a bullish sign for Short
the market as the QQQQ is starting to
lead.
118.00
A swing trading approach:

Springs and upthrusts Short 116.00
A swing trading method needs two
components: a definition of the market
trend and an entry criteria for trading in 114.00
the direction of the trend. Because
QQQQ tends to lead SPY, the following
Nasdaq 100 index tracking stock/S&P 500 Depositary 0.33
strategy trades SPY based on the trend
Receipts (QQQQ/SPY), daily
of the QQQQ/SPY ratio.
The entry rules are based on two 0.32
Richard Wyckoff setups called upthrusts
and springs (see “Related reading” ). An 0.31
upthrust is a breakout and close above a
previous resistance level that fails. The
breakout usually leads to an overbought RSI
60
situation, and if the false breakout is
against the direction of the trend, the sub- 40
sequent decline can be dramatic. A spring
Downtrend
is a false breakdown and close below sup- 2005 February March April 20
port. Once support has been broken, pes- 20 27 3 10 18 24 1 7 14 22 1 7 14 21 28 1 11 18
simism rises and the market becomes Source: CQGNet
oversold and then rallies.
An example of an upthrust occurred ing that day: cent) and the S&P 600 Small Cap 600 Index
in March 2005. Figure 5 shows SPY from (+1.2 percent) have both touched all-time
December 2004 through April 2005, “Stronger than expected job creation, highs, while the Russell 2000 Index (+1.0
along with the QQQQ/SPY ratio and the absent worries of inflation, ignited a broad- percent) also surged but remains just shy of
14-day RSI of the QQQQ/SPY ratio. The based rally that kept a bullish bias intact and a new 2005 high, as the index touched
low RSI readings reflect a clear down- closed the blue chip indices at 3-year highs. 654.27 on Jan. 3. [T]he Nasdaq, however,
trend. [A]ll three major Dow Indices hit new 52- despite a strong performance, is still off
On March 4, SPY made a new high week highs, as the Dow Industrials sur- roughly 4.8 percent in 2005.”
closing price for the year. This was an passed the 10,900 level for the first time
employment-report Friday, and the since June 2001 with gains realized in 27 of Here we have a situation where the
news was good. Here’s commentary 30 components. [T]he S&P 500 erased 2005 market is digesting great fundamental
from Briefing.com after the close of trad- losses while the S&P 400 MidCap (+1.1 per-

FIGURE 6 NOT JUST THE RATIO
From late January through early March, SPY led an uptrend against the direc- close (with the risk point above the entry
tion of the QQQQ/SPY ratio. Don’t short SPY simply because it is climbing and bar). Four days later, SPY made a new
the ratio is falling. low in the downtrend.

123.00
Caveat
The QQQQ/SPY spread is a good
barometer of the broader trend, but it
122.00
should not be used as the sole indicator
Out of the market. Sometimes SPY will trend
121.00
higher while the ratio is declining, as
occurred between late January and early
120.00
March. You would not want to simply
Short short SPY because it was climbing and
119.00 the QQQQ/SPY ratio was falling. There
Out
Short
were, as Figure 6 shows, two additional
118.00 trades based on the upthrust concept
during this rally — one win and one loss
117.00 — prior to the setup at the March high.
Springs
Nasdaq 100 index tracking stock/S&P 500 Depositary Receipts Figure 7 is an example of the QQQQ
(QQQQ/SPY), daily leading the way and trading SPY from
0.32
the long side. The RSI of the QQQQ/SPY
ratio began generating bullish readings
0.31 with a close at 61 on Sept. 20. Later in the
month, the RSI dropped below 50 for
just one day and climbed back above
RSI that level, providing further bullish evi-
60
dence.
40 On Oct. 20 SPY dropped through the
September support level and closed back
February March 20 above it, completing a spring setup and
18 24 1 7 14 22 1 7 14 signaling a long trade on the close. Three
Source: CQGNet days later, the market traded below the
entry bar’s low, so the trade was stopped
news and key market indices are making market took out the support level out. But the market reversed again, clos-
new highs. However, if the market was defined by the late-February low, as selling near the high of the day and back
actually strong, QQQQ should have ing would likely accelerate, creating above the entry bar’s low. The situation
been leading the pace, not lagging so sig- good liquidity for covering short posi- qualifies as a new spring because the
nificantly — capital should have been tions. close (A) is above a support level, even
moving into technology, not out of it. A second, shorter-term trade example though the support level is three days
These conditions set up a short sale in occurred in April 2005. The RSI of the away. However, you could enter the
SPY or the S&P 500 futures. QQQQ/SPY ratio was still indicating a market after it trades above the bar’s
When the market closed back below (weak) downtrend was in place by high (B) or wait for a bar that closes back
the December high, the false breakout climbing above 50 only twice and revers- above the September support level (C).
was confirmed and a short sale was sig- ing immediately each time. A move above the early October high
naled on the close. The stop point would On April 7, SPY closed above the pre- is a logical profit-taking level, as you
be above the high over the entry bar. A vious week’s high, then closed back would be selling into a very optimistic
logical place to take profits was after the below it, signaling a short sale on the

FIGURE 7 SPRING SETUP
This “spring” setup triggered a trade on the close above support (A), with
risk below the entry bar. The first entry setup can fail, as was the case here.
Then, use the second spring to buy or place a buy stop over the high of the
entry rule bar or wait for the close back above the original support level.
116.00
market.
Spreading the wealth

114.00 Using relative strength to gauge for
fund flows removes the challenge of try-
ing to understand the implications of
112.00 every tick of the market. The
QQQQ/SPY ratio is a good tool for
C identifying the flow of funds between
technology and more defensive large-
110.00
Long B cap stocks, such as financials and health
Out A care.
Nasdaq 100 index tracking stock/S&P 500
Traders can benefit from this informa-
Depositary Receipts (QQQQ/SPY), daily tion by incorporating trading signals
that exploit price patterns that can form
0.32 when the market is reversing direction.
The upthrust and spring patterns illus-
trated here are good examples. These
patterns take advantage of a market’s
0.31
tendency to make a false breakout of
RSI 80
support or resistance, which can pre-
60 cede strong price movement in the
direction of the longer-term trend.
40
October November
13 20 27 1 11 18 25 1 8
Source: CQGNet
Related reading
“Trading the Wyckoff way: Buying springs ing people out. Active Trader Staff (Active Trader, June
and selling upthrusts,” by Henry O. (Hank) 2002). Relative strength can be measured
“RS System No. 1,” by Thomas Stridsman
Pruden (Active Trader, August 2000). and interpreted in several different ways.
(Active Trader, October 2000). This is a
Understanding Wyckoff’s springs and
short-term relative-strength (RS) system “Indicator Insight: Relative Strength
upthrusts can help you identify low-risk,
that compares the stock price with its Index,” by Active Trader Staff (Active
high-reward trade setups based on false
underlying market index, but also looks Trader, August 2001). The relative
breakouts.
for confirmation from volume. strength index (RSI) is a momentum oscil-
“Wyckoff axioms jumps and backups,” by lator used to identify short-term momen-
“Relative strength bands,” by Thomas
Hank Pruden (Active Trader, January- tum extremes (overbought and oversold
Stridsman (Active Trader, March 2001).
February 2001). Not every breakout will points). J. Welles Wilder, developer of the
This system uses a mix of relative
turn into a good trade, but using RSI, provides step-by-step instructions for
strength (not RSI) analysis and Bollinger
Wyckoff’s concepts of “jumps” and calculating and interpreting the indicator.
Bands to identify markets that are about
“backups” can help you sort the good
to break out of congestion areas. Special notice: From Aug. 1 to 31, these
trades from the bad.
articles will be available for 30 percent
“Finding strength with the ratio spread,” by
“The telltale spread,” by Thom Hartle off through the Active Trader online store
Thomas Stridsman (Active Trader, August
(Active Trader, November 2003). (www.activetradermag.com/purchase_art
2000). The ratio spread provides a better
Analyzing the relationship between the E- icles.htm). You can download them
alternative to moving averages for deter-
mini Nasdaq 100 and the E-mini S&P 500 directly to your computer as PDF files for
mining trend and support and resistance.
can indicate when the broad market is easy viewing and printing.
making a genuine move or when it’s fak- “Indicator Insight: Relative Strength,” by
57 ACTIVE TRADER • September 2005 • www.activetradermag.com

CURRENCY BASICS
Comparing moving averages

This review provides simple ways to interpret and apply the most commonly used moving averages.
BY THOM HARTLE
FIGURE 1 — SIMPLE MOVING AVERAGE
T he moving average is a funda-

mental tool for smoothing price
action and revealing trend. In the
early days of technical analysis,
traders simply looked for a crossover of the
moving average (i.e., when price crosses above
or below its average) as a sign the trend had
The 10-bar SMA smoothes price but lags market turning points. When
price slips (point B), the moving average continues to rise. But at point
C, the SMA turns down, following the declining prices.
changed. Today, traders have shorter-term

trading horizons, so the moving average is also
used as a “decision filter.” For example, if price
is above its moving average, then the trend is
up, and the trader will look for short-term buy
setups (rather than sell setups).
Although moving averages can simplify
price action and highlight the underlying trend,
they also trail behind (lag) price action — the
longer the moving average, the more it lags
price. There are several types of moving aver-
ages; traders originally used the simple moving Source: eSignal
average (SMA) because it was easy to under-
stand and calculate. Over time, other smoothing techniques over time (e.g., the 50-day and 200-day moving averages),
were incorporated to reduce the lag inherent in the SMA. but there is no moving average length that will best reflect
Here, we will compare the three most common moving the trend in all conditions and markets. The following
average types — simple, weighted, and exponential. examples use several representative moving average
There is no “correct” number of bars to use in a moving lengths.
average. Certain “look-back” periods have become popular
There is no “correct” number of bars to use in a moving average. Certain

“look-back” periods have become popular over time, but there is no moving
average length that will best reflect the trend in all conditions and markets.
58 November 2005 • CURRENCY TRADER

FIGURE 2 — 10-DAY SMA
At point A, the Euro/U.S. dollar peaks, and its 10-day SMA turns down three
days later. The retracement (point B) doesn’t affect the SMA much, and price
Simple moving average rallies above its moving average well before the SMA turns up (point C).
Our first example uses a 10-bar SMA,
but technicians commonly use moving
averages as long as 200 days (approxi-
mately one year in trading days) to
define the long-term trend, as well as a
combination of moving averages such
as four-, nine-, and 21-day periods to
simultaneously track three trends.
To calculate a 10-bar SMA, add the
last 10 bars’ closes and divide by 10.
When the next bar closes, the most dis-
tant closing price in the look-back peri-
od is dropped, the new bar’s closing
value is added, and the new sum is
divided by 10.
Figure 1 shows simulated prices with
a 10-bar SMA. (Notice it takes 10 closes
to plot the first SMA value.) At point A,
the simple moving average is near the
Source: eSignal
middle of the price range. As price
begins to rise, the simple moving aver-
FIGURE 3 — 10-DAY WMA VS. SMA
age turns up a few closes later, illustrat-
ing the moving average’s inherent lag. The weighted moving average tracks price action closer than the simple moving
The average continues to rise despite a average. The WMA’s turning points (points A and C) occur before the SMA’s.
short-term retracement (point B), and Point B’s price rise did not materially affect the WMA.
both values climb after that.
Next, price forms a double top and,
as it declines, the simple moving aver-
age crests and turns down (point C).
During the drop, the SMA trended
down despite a final countertrend rise.
Figure 1 shows the benefits and
drawbacks of simple moving averages.
Despite short-term, counter-trend
movements, the SMA filters out this
noise and continues in the direction of
the trend. But the SMA’s lag is notice-
able when price changes direction.
Figure 2’s daily chart of the Euro/
U.S. dollar currency pair shows the
same characteristics as in Figure 1.
Here, the simple moving average fol-
lows the market as it peaks and then
turns down (point A). The market
Source: eSignal
CURRENCY TRADER • November 2005 59

CURRENCY BASICS continued
FIGURE 4 — 10-DAY EMA VS. SMA point B’s countertrend move did not
derail the descent of the WMA.
The EMA turns each time price closes above or below it (points A and B), and
the EMA turns up slightly at point C.
Exponential moving averages
The exponential moving average
(EMA) uses a special algorithm (the
“smoothing constant”) that weights
price by a percentage factor. There are
two versions of the EMA calculation.
Both versions use a smoothing con-
stant to weight the closing price and
adjust the previous day’s EMA value.
The constant uses a formula to approx-
imate the value of a SMA:
SC = 2/(n + 1)
where
n = the look-back period for a simple
moving average
SC = a smoothing constant between 1
and zero
Source: eSignal
Therefore, if n = 10:
retraces (point B), but the moving average continues to SC = 2/(10+1) = 2/11 = 0.1818
trend lower. At point C, price rallies above its moving aver-
age and the MA turns up. We see the same lag at points A The first version of the EMA calculation multiplies
and C when the market reverses the trend. today’s close by the smoothing constant and yesterday’s
EMA by 1 minus the smoothing constant:
Weighted moving averages
One reason the SMA lags price is because all prices are (today’s close * 0.1818) + (yesterday’s EMA * 0.8182)
equally weighted — the current close and the first close
have the same impact on the average. A weighted moving The second approach uses the following formula:
average (WMA) uses specific multipliers to weight each
price, giving the most weight to the most recent price and (today’s close - yesterday’s EMA)* 0.1818) + yesterday’s
reducing this emphasis the further back in time you go. EMA
Thus, the most current price impacts the WMA more than
the last price in the look-back window. The formulas show how important today’s close is rela-
For example, a 10-bar WMA multiplies the current price tive to the previous day’s EMA. If today’s close is above
by 10, the next most recent price by 9, the next by 8, and so yesterday’s EMA for the first time, the EMA will immedi-
on. The sum of these weighted prices is divided the sum of ately turn up. If today’s close is less than yesterday’s EMA,
the weights, which is 55 (10 + 9 + 8 + 7… 1) in this example. the average will immediately turn down.
Figure 3 compares a 10-bar WMA (blue) to the 10-bar SMA There is no lag between today’s close and the direction of
(red). Notice the WMA crests and troughs (points A and C) the EMA. During trading ranges, however, the EMA will
ahead of the SMA. The WMA responds much quicker to the flip back and forth.
reversal patterns at the top and bottom, which took approxi- Figure 4 compares a 10-day EMA to the 10-day SMA. At
mately five days. In contrast, the SMA required either more points A and D the EMA reverses direction once the Euro
time or a more dramatic price move to reverse its trend. But crosses above or below it. It is a little less noticeable, but at
60 November 2005 • CURRENCY TRADER

FIGURE 5 — WMA/EMA CROSSOVER SIGNALS
If the 20-day EMA is rising, the trend is up and price moves below the three-
day WMA represent buy opportunities (green area). If the EMA is falling, the
area between the EMA and WMA can be considered a sell zone (red).
points B and C, the EMA turns up

because price closes above it.
The EMA is best applied to markets
that are prone to spike reversals. A
market that moves into a lengthy trad-
ing range will be constantly crisscross-
ing this average.
Applying moving averages

Think of the moving average as exact-
ly what its name says: the average
price. Many years ago, traders viewed
a cross of the moving average as a sign
the trend has changed direction. But it
doesn’t make sense the trend has
changed direction simply because
price is somewhere above or below its
Source: eSignal
average.
On the other hand, if the average
price is rising or falling, then it pro-
vides information about the trend’s direction. A rising aver-
Related reading age price indicates the trend is up; a falling moving average
reflects a descending trend.
“The weighted moving average system” These two ideas can be used together with two different
Active Trader, November 2004. moving averages and look-back periods. Figure 5 shows the
A test of a WMA crossover system on a futures Euro/ U.S. dollar with a 20-day EMA and a three-day WMA.
portfolio. For example, you could consider the direction of the expo-
nential moving average as the trend. If the EMA is rising, the
“Trend vs. countertrend indicators” trend is up. If the EMA is falling, the trend is down.
Active Trader, June 2004. Next, the three-day WMA can be considered a level of
An explanation of how technical indicators work and the value. If the trend is up as defined by a rising EMA and
differences between trend-following and countertrend price is below yesterday’s WMA (we don’t know today’s
calculations. reading until the close), then price is cheap relative to the
upward trend. Consider the area between the rising EMA
“Indicator Insight: and the WMA as a buy zone (green area) for intraday and
Weighted and exponential moving averages” short-term setups.
Currency Trader, January 2005. If the trend is down (the EMA is declining) and current
How to calculate and interpret weighted and exponen- price is above yesterday’s WMA, then price is expensive rel-
tial moving averages.Includes simple comparison tests ative to the downward trend. The area between the falling
of different moving averages. EMA and the WMA is a sell zone (red area).
Moving averages can be used as a frame of reference to
“Indicator Insight: Simple moving average,” indicate the trend and whether the current price is cheap or
Currency Trader, December 2004. expensive relative to the trend. Considering how trends in
A primer on the calculation and application of simple forex tend to persist, having a tool that keeps you looking
moving averages. for opportunities on the right side of the trend is a very wise
first step towards profitability.
You can purchase and download past articles at
www.activetradermag.com/purchase_articles.htm.
CURRENCY TRADER • November 2005 61

TRADING Strategies
The ETF money trail

Quarter-by-quarter analysis
shows how tracking ETF
performance can tip
you off to overall market
performance and trade
opportunities in certain
sectors.
62 www.activetradermag.com • December 2005 • ACTIVE TRADER

TABLE 1 TOP 50 EXCHANGE TRADED FUNDS
The Top 50 Exchange Traded Funds based on ranking of the 10-day average
volume on June 30, 2005.
Name Symbol
Merrill Lynch Biotech HOLDRS BBH
DIAMONDS Trust Series I DIA
iShares Dow Jones Select Dividend Index Fund DVY
iShares MSCI Emerging Index Fund EEM
iShares MSCI EAFE Index Fund EFA
iShares MSCI Germany Index Fund EWG
iShares MSCI Hong Kong Index Fund EWH
iShares MSCI Japan Index Fund EWJ
iShares MSCI Malaysia Index Fund EWM
BY THOM HARTLE iShares MSCI Taiwan Index Fund EWT
iShares MSCI Mexico Index Fund EWW
iShares MSCI South Korea Index Fund EWY
iShares MSCI Brazil Index Fund EWZ
Merrill Lynch Internet HOLDRS HHH
F
iShares NASDAQ Biotechnology Index Fund IBB
iShares Lehman 7-10 Year Treasury Bond Fund IEF
irst launched in the early 90s, iShares Goldman Sachs Software Index Fund IGV
Exchange Traded Funds iShares S&P MidCap 400 Index Fund IJH
(ETFs) have continued to iShares S&P MidCap 400/Barra Value Index Fund IJJ
proliferate on Wall Street.
iShares S&P SmallCap 600 Index Fund IJR
Today, there are more than 170 ETFs list-
ed for trading — an increase of more iShares S&P 500/BARRA Value Index Fund IVE
than 50 in less than two years. These iShares S&P 500 Index Fund IVV
instruments, which trade like regular iShares Russell 1000 Value Index Fund IWD
stocks, represent everything from major iShares Russell 1000 Growth Index Fund IWF
stock indices to specific market sectors iShares Russell 2000 Index Fund IWM
and instrument groups (bonds, etc.). iShares Russell 2000 Value Index Fund IWN
The appeal to investors and traders is iShares Russell 2000 Growth Index Fund IWO
twofold. First, people can buy assets that
iShares Dow Jones U.S. Real Estate Index Fund IYR
closely replicate the returns of popular
MidCap SPDR Trust Series I MDY
market indices fund managers use as
benchmarks. Second, traders can use iShares S&P 100 Index Fund OEF
sector ETFs to capitalize on specific mar- Merrill Lynch Market Oil Service HOLDRS OIH
ket areas that are outperforming the Merrill Lynch Pharmaceutical HOLDRS PPH
broad market. NASDAQ-100 Index Tracking Stock QQQQ
“Following the money: Quarterly Merrill Lynch Regional Bank HOLDRS RKH
momentum and ETFs” (Active Trader, Merrill Lynch Retail HOLDRS RTH
June 2002) detailed a strategy for identi-
iShares Lehman 1-3 Year Treasury Bond Fund SHY
fying ETF leaders early in the quarter.
Merrill Lynch Semiconductor HOLDRS SMH
The premise was that money managers
will commit capital to stocks offering the SPDR Trust Series I SPY
best opportunity for profit for the quar- iShares Lehman 20 Year Treasury Bond Fund TLT
ter. Thus, the ETFs leading the market at Merrill Lynch Telecom HOLDRS TTH
the beginning of a quarter had the poten- Merrill Lynch Utilities HOLDRS UTH
tial to maintain their dominance for the Select Sector SPDR Fund - Basic Industries XLB
entire quarter. Select Sector SPDR Fund - Energy Select Sector XLE
The following analysis reviews the
Select Sector SPDR Fund - Financial XLF
findings of that article and, using the
Select Sector SPDR Fund - Industrial XLI
same procedures, explores how its con-
cepts have held up in the eighteen Select Sector SPDR Fund - Technology XLK
months since publication. Select Sector SPDR Fund - Consumer Staples XLP
Select Sector SPDR Fund - Utilities XLU
Narrowing the ETF field Select Sector SPDR Fund - Health Care XLV
Because there are so many ETFs to con- Select Sector SPDR Fund - Consumer Discretionary XLY
sider, the first step is to narrow the field
Source: eSignal
to a reasonable number by focusing on
ACTIVE TRADER • December 2005 • www.activetradermag.com 63

fourth, reflecting the resurgence of
TABLE 2 TOP 10 TRADED ETFS BASED ON AVERAGE VOLUME small-cap stocks since the market bot-
These ETFs were the most actively traded during the review period. tom in late 2002 (IWM has risen over 100
percent since that low).
Not surprisingly given the recent oil
Name Symbol 10-day avg. vol.
surge, two energy-oriented ETFs are in
NASDAQ-100 Index Tracking Stock QQQQ 88,389,774 the top 10: the Select Sector SPDR-
SPDR Trust Series I SPY 48,865,710 Energy (XLE) and the Merrill Lynch Oil
Service HOLDRS (OIH).
Merrill Lynch Semiconductor HOLDRS SMH 21,776,440 Table 3 shows ETFs from “Following
iShares Russell 2000 Index Fund IWM 19,471,120 the money” that didn’t meet the current
average daily volume criteria, and the
Select Sector SPDR Fund - Energy Select Sector XLE 14,061,760 ETFs that replaced them for the current
iShares MSCI Japan Index Fund EWJ 7,610,670 study.
DIAMONDS Trust Series I DIA 7,073,800 ETF recap

Merrill Lynch Market Oil Service HOLDRS OIH 5,494,090 The first step in the analysis is to calcu-
late the performance of the 50 top-vol-
Select Sector SPDR Fund - Financial XLF 3,528,900
ume ETFs for the beginning of every
MidCap SPDR Trust Series I MDY 2,461,530 quarter. Returns were measured from the
end of the previous quarter to the second
Source: eSignal Friday in the new quarter. (The second
Friday was chosen to ensure market reac-
the most-liquid instruments — in this Stock (QQQQ) and the Standard & tion to the all-important monthly
case, the 50 ETFs with the highest 10-day Poor’s Depositary Receipts (SPY), which employment number.) Then the end-of-
average volume (Table 1). averaged more than 80 million and 48 quarter returns were calculated for the
Table 2 shows the top 10 from this list million shares daily, respectively, for the top-five ETFs (as well as for QQQQ and
sorted by volume. The two top-traded last 10 days of June 2005. The iShares SPY) to see if there was any connection to
ETFs are the Nasdaq-100 Index Tracking Russell 2000 Index Fund (IWM) is early-quarter performance.
TABLE 3 NEW VS. OLD
The first column lists the ETFs from the “Following the money” article that did not make the volume cut for this
analysis. The second column shows the ETFs that replaced the deleted ETFs.
ETF (Deleted) Symbol ETF (Added) Symbol

Fresco DJ EURO STOXX 50 FEZ iShares Dow Jones Select Dividend Index Fund DVY
iShares MSCI Austria Index Fund EWO iShares Goldman Sachs Software Index Fund IGV
iShares MSCI EMU Index Fund EZU iShares MSCI Germany Index Fund EWG
iShares MSCI United Kingdom Index Fund EWU iShares MSCI Mexico Index Fund EWW
iShares Russell 1000 Index Fund IWB iShares Russell 2000 Value Index Fund IWN
iShares Russell 3000 Index Fund IWV iShares S&P 100 Index Fund OEF
iShares S&P 500 Index Fund IVW iShares S&P MidCap 400 Index Fund IJH
Merrill Lynch B2B Internet HOLDRS BHH iShares S&P MidCap 400/Barra Value Index Fund IJJ
Merrill Lynch Internet Infrastructure HOLDRS IIH iShares S&P SmallCap 600 Index Fund IJR
Merrill Lynch Software HOLDRS SWH Merrill Lynch Regional Bank HOLDRS RKH
Vanguard Total Stock Market VIPERs VTI Merrill Lynch Telecom HOLDRS TTH
Source: eSignal

TABLE 4 QUARTERLY BREAKDOWN OF THE ETF PERFORMANCE FOR 2004
“Following the money”
showed the early-quarter The first column for each quarter lists the top-five ETFs after two weeks (along with
leaders often placed fairly QQQQ and SPY). In addition, the average return of these top five ETFs (excluding the
high at the end of the quarter QQQQ and SPY) is listed. Below, the percentage of all 50 top-volume ETFs with positive
— as long as there was returns (and their median return) is shown. The next column lists the individual returns
broad-based buying of ETFs for the initial top-five ETFs at the end of the quarter, their rank, and their average
and confirmation from SPY return. Finally, the percentage of all 50 ETFs up for the quarter and their median end-
and QQQQ at the start of the of-quarter return are shown.
quarter. For example, if only
First Quarter (2004) Second Quarter
20 percent of ETFs were up
by the second Friday of the First End of First End of
two weeks quarter two weeks quarter
quarter, chances were high
the quarter would perform ETF 1/9/04 Rank 3/31/04 Rank ETF 4/8/04 Rank 6/30/04 Rank
poorly overall, and even SMH 7.86% 1 -4.80% 50 HHH 9.57% 1 26.48% 1
those ETFs showing positive EWZ 7.65% 2 -1.18% 44 EWY 5.29% 2 -13.66% 50
returns at the beginning of EWW 7.14% 3 21.55% 1 SMH 3.92% 3 -4.23% 39
the quarter would likely be
EWT 6.32% 4 8.36% 7 EWT 3.28% 4 -11.17% 47
dragged down by the broad-
er market’s downtrend. On EWH 5.30% 5 6.00% 14 QQQQ 3.07% 5 5.30% 4
the other hand, if 80 percent QQQQ 3.48% 14 -1.70% 46 BBH 3.07% 6 3.06% 7
of ETFs were up at the end of SPY 1.00% 33 1.64% 32 SPY 1.12% 24 1.26% 14
the first two weeks of the Average 6.85% 5.99% Average 5.03% 0.10%
quarter and QQQQ and SPY
were also strong during this
period, the odds were better % Bullish 84.00% 80.00% % Bullish 76.00% 56.00%
that the best-performing Median 1.42% 3.66% Median 1.10% 0.44%
ETFs at the beginning of the
quarter would also be among
the strongest at the end of the Third Quarter Fourth Quarter
quarter. First End of First End of
The ETF performance in two weeks quarter two weeks quarter
the six quarters since ETF 7/9/04 Rank 9/30/04 Rank ETF 10/8/04 Rank 12/31/04 Rank
“Following the money” was EWM 4.96% 1 4.19% 12 EWZ 4.64% 1 19.96% 3
published are summarized in
XLE 1.43% 2 10.96% 3 EWY 4.60% 2 17.00% 7
Table 4 (2004) and Table 5
(the first two quarters of IYR 1.31% 3 6.86% 5 XLE 3.61% 3 3.98% 45
2005). The tables show the EWH 1.18% 4 9.77% 4 IGV 3.40% 4 23.05% 1
returns for each of the top- TLT 0.87% 5 5.50% 9 EWT 3.36% 5 12.71% 16
five ETFs (along with QQQQ QQQQ -5.27% 43 -6.89% 44 QQQQ 1.25% 22 13.59% 11
and SPY), as well as the aver-
SPY -2.44% 27 1.26% 34 SPY 0.67% 27 8.15% 31
age return for these five ETFs
on the second Friday of each Average 1.95% 7.46% Average 3.92% 15.34%
quarter; the same statistics
are shown for the end of the % Bullish 18.00% 40.00% % Bullish 78.00% 96.00%
quarter. Also included for Median -2.36% -1.11% Median 0.89% 9.54%
each interval are the percent -
ages of all 50 top-volume Source: eSignal
ETFs that were positive and
their median return. HOLDRS (SMH), which was the top- also outperformed QQQQ and SPY.
performing ETF at the start of the quar- The end-of-quarter average return for
2004 performance ter (+7.86 percent), was at the bottom of the top five was 5.99 percent, mostly
In Q1 2004, 84 percent of the 50 top-vol- the list at the end of the quarter (-4.80 because the iShares MSCI Mexico Index
ume ETFs were up on the second Friday; percent). Still, three of the top five ETFs Fund (EWW), which started ranked No.
80 percent were up at the end of the at the beginning of the quarter had posi- 3 and finished No. 1, climbed 21.55 per-
quarter. Interestingly, the Semiconductor tive returns at the end of the month and cent. Two of the top five, EWW and

TABLE 5 THE FIRST TWO QUARTERS OF 2005 EWT, were in the top 10 at
The same statistics from Table 4 are shown here for 2005. Many of the ETFs were
experiencing new highs for
First Quarter Second Quarter the year heading into March
2004, but a correction unfold-
First End of First End of
two weeks quarter two weeks quarter ed that erased much of the
first quarter’s gains.
ETF 1/14/05 Rank 3/31/05 Rank ETF 4/8/05 Rank 6/30/05 Rank Consequently, the average
EWM 4.76% 1 -5.03% 37 EWY 3.74% 1 0.60% 37 return for the top five at the
EWY 2.05% 2 8.75% 3 IBB 2.86% 2 6.85% 9 end of the quarter was posi-
TLT 1.83% 3 0.88% 8 EEM 2.71% 3 5.92% 11 tive (5.99 percent), but below
the second Friday’s average
OIH 1.70% 4 13.02% 2 BBH 2.60% 4 18.83% 1 return (6.85 percent). The
XLP 0.48% 5 -0.26% 10 XLV 2.01% 5 3.92% 19 median return on the second
QQQQ -3.72% 34 -8.38% 46 QQQQ 0.19% 18 0.57% 38 Friday for all 50 ETFs was
SPY -2.18% 17 -2.41% 25 SPY 0.03% 22 1.03% 35 1.42 percent; at the end of
quarter it was 3.66 percent.
Average 2.16% 3.47% Average 2.79% 7.22%
Figure 1 shows the first
two-week and end-of-quar-
% Bullish 14.00% 18.00% % Bullish 44.00% 78.00% ter periods sorted by the
Median -2.83% -2.46% Median -0.13% 2.69% highest returns for the sec-
ond Friday of the quarter.
Source: eSignal Many of the ETFs did well
for the quarter compared to
the top five.
FIGURE 1 BEGINNING VS. END OF FIRST QUARTER 2004 The start of the second quarter looked
positive, with 76 percent of all 50 ETFs
The ETFs are ranked from the highest to lowest return on the second Friday showing positive early returns and
of the quarter (green bars), while the red bars represent the return for the QQQQ making it into the top five. The
same ETFs at the end of the quarter. Looking to the right, many of the ETFs median return for all 50 ETFs was 1.10
did much better than their initial returns. percent on the second Friday, but only 56
percent of the ETFs showed a positive
return by the end of the second quarter,
with a final median return of just 0.44
percent. The average return for the top
five was only 0.10 percent for the quar-
ter.
Still, two of the initial top five (exclud-
ing the QQQQ) were in the top 10 at the
end of the second quarter, and the
Internet HOLDRS (HHH) were No. 1 at
both the start and the finish. The SPY
was nearly unchanged from the second
Friday to the end of the quarter. Figure 2
shows how mixed the returns were at
At the beginning of Q3 2004 it looked
like the poor performance at the end of
Q2 was carrying over. Only 18 percent of
the ETFs had positive returns by the sec-
ond Friday, with a median return of -2.36
percent for all 50 ETFs. QQQQ was
Source: eSignal
down 5.27 percent and SPY was down

2.44 percent. However, by the end of the FIGURE 2 BEGINNING VS. END OF SECOND QUARTER 2004
quarter there were signs of recovery:
Forty percent of all 50 ETFs were posi- The top-performing ETF (HHH) at the start of the quarter also was the top-
tive, with a median return of -1.11 per- performing ETF at the end.
cent. QQQQ continued to drop, falling
to -6.89 percent at the end of the quarter,
but SPY recovered (-2.44 percent vs.
+1.26 percent).
The initial top-five ETFs held up well
in Q3. The average return at the end of
the quarter was 7.46 percent, 5.51 per-
cent above the quarter’s starting point.
Also, four of the original top five were in
the top 10 at the end of the quarter.
Figure 3 shows how the early leaders
did well for the quarter, while the major-
ity of ETFs declined.
As in “Following the money,” the
fourth quarter of 2004 showed the best
returns for the year. At the start, 78 per-
cent of the ETFs were positive and 96
percent were up by the end of the quar-
ter. The top five averaged 15.34 percent
for the quarter (adding almost 12 per-
cent from the second Friday’s average
return), nearly outperforming QQQQ’s Source: eSignal
return (up 12.34 percent from the second
Friday to 13.59 percent for the quarter)
and nearly twice SPY’s return (8.15 per- FIGURE 3 BEGINNING VS. END OF THIRD QUARTER 2004
cent). At the start of the quarter, the
median return for all 50 ETFs was 0.89 The early leaders (left-hand side) continued to advance, while the remainder
percent; it jumped to 9.54 percent by the of ETFs declined for the quarter.
end of the quarter.
Figure 4 compares fourth-
quarter 2004 performance. The early
returns were below +5 percent, but the
buying was broad based. Also, three of
the initial top five placed in the top 10 at
2005 performance
The first quarter of 2005 got off to a
rocky start, with just 14 percent of the 50
top-volume ETFs showing positive
returns (-2.83 percent median return),
and QQQQ down 3.72 percent and SPY
down 2.18 percent. Only 18 percent of
the top-50 ETFs were positive at the end
of the quarter (-2.46 percent median
return).
However, the initial top-five ETFs
had an average return of 2.16 percent in
the first two weeks and four of these
Source: eSignal
www.activetradermag.com • December 2005 • ACTIVE TRADER 67

FIGURE 4 BEGINNING VS. END OF FOURTH QUARTER 2004
ETFs enjoyed a dramatic rise for the quarter, as just two failed to show
positive returns at the end of the quarter. were still in the top 10 at the end of the
quarter. Figure 5 shows the two sets of
returns sorted by initial review period.
At the start of the second quarter of
2005, only 44 percent of the top-50 ETFs
were up, but by the end of the quarter
78 percent were positive. The first two
weeks had a median return of -0.13 per-
cent. The median return for the quarter
for all 50 ETFs was 2.69 percent.
In the first two weeks of the second
quarter, the average return for the top-
five ETFs was 2.79 percent; it had
climbed to 7.22 percent by the end of the
quarter. QQQQ gained 0.57 percent for
the quarter vs. being up 0.19 percent at
the beginning of the quarter. SPYadded
an additional 1 percent from the second
Friday to the end of the quarter. Figure
6 compares the initial and end-of-month
returns for this quarter.
Source: eSignal
Although Q4 2004 reinforced the ten-
dency highlighted in “Following the
money” for fourth quarters to have the
FIGURE 5 BEGINNING VS. END OF FIRST QUARTER 2005 best returns, it is worth noting that the
period between the second Friday and
Despite the overall weak reading of positive ETFs at the start of the quarter the end of the quarter can be a volatile
(just 14-percent with positive returns and median return of -2.83), three of period. Figure 7 shows the relative price
the initial top five were positive at the end of the quarter. action based on percentage change for
the top five ETFs on Oct. 8, 2004 from
the start of the quarter to the end. Once
October had passed the ETFs started
climbing — except energy (XLE), which
was flat.
What the performance says

First, the trading-range behavior of the
broad market during the review period
is evident. There was no follow-through
movement (up or down) for two entire
quarters. Nonetheless, the top-five ETFs
had better-than-average returns (com-
pared to QQQQ and SPY) from the sec-
ond Friday to the end of the quarter
four out of the six quarters. For swing
traders, this suggests the top-five ETFs
could offer better trading opportunities
than QQQQ and SPY.
When the market peaked in the first
quarter of 2004, the initial top-two ETFs
Source: eSignal
led the way down for the quarter (SMH

FIGURE 6 BEGINNING VS. END OF SECOND QUARTER 2005
Only 44 percent of ETFs showed positive returns by the second Friday, but
the early leaders performed well, as did ETFs overall.
was 50th and EWZ was 44th). The same

thing happened in the second quarter of
2004, except the HHH was in its own
world while the ETFs ranked 2, 3, and 4
(EWY, SMH, and EWT) came in at or
near the bottom for the quarter. On the
other hand, in the third quarter of 2004,
four of the initial top five landed in the
top 10 at the end of the quarter.
The early leaders can tell us a great
deal about the quarter: If the early lead-
ers begin to roll over, then the overall
market can be in trouble. If the early
leaders can maintain their relative per-
formance, then the outlook is more pos-
itive.
Considering how much the oil market
has dominated the markets and looking
over the big winners for the last six quar-
ters, there should not be any surprise Source: eSignal
energy-related ETFs were lead-
ers at the outset of three of the
past six quarters. Similarly, FIGURE 7 FOURTH QUARTER 2004 DAILY PERCENTAGE GAINS
healthcare and biotech ETFs This relative view of the top-five ETFs for the fourth quarter of 2004 shows that after
(IBB, BBH, and XLV) made up October, the ETFs headed higher, with QQQQ coming in second.
three of the initial top five in the
second quarter of 2005 and
returned an average of nearly 10
percent for the quarter.
This research confirms what
“Following the money” origi-
nally indicated: There is evi-
dence that initial market trends
can hold for an entire quarter.
In addition, tracking the top-
five leading ETFs can provide
an indication of how the quar-
ter may eventually unfold.
Funds appear to move in and
out of various groups based on
a “theme” and reflect the herd
mentality of market partici-
pants. This process of ranking
ETFs at the start of the quarter
is a simple but valuable analyt-
ical tool for staying on the right
side of the market overall, as
well as finding particular sec-
tors and instruments with
above-average trading oppor- Source: eSignal
tunities.Ý

TRADING Strategies
FOLLOW the leaders

Updating analysis of ETF
quarterly performance
reveals market patterns
over the past year and a
half.
BY THOM HARTLE
T raders gravitate toward

opportunity, and the easi-
est-to-exploit trading
opportunities occur when
the broad market is trending strongly
and certain stock sectors or groups are
attracting capital because of strong fun-
damentals. Regardless of the type of
strategy you use, you can increase your
chances of success by finding the best
instruments to trade.
Simple screening techniques can sig-
nal which groups are exhibiting the kind
of relative strength that sets them apart
from the broader market. The following
analysis updates a screening process
explained in two previous Active Trader
articles — “Following the money:
Quarterly momentum and ETFs” and
“The ETF money trail” (see “Related
reading”).
“Following the Money: Quarterly
Momentum and ETFs” details how
comparing the closing prices of the 50
most-active exchange traded funds
(ETFs) on the second Friday of a quarter

TABLE 1 Q1 2004
to their closing prices at the end of The average return for the top-10 ETFs from Jan. 9, 2004 to March 31, 2004 was
the previous quarter provides nearly identical to the S&P 500’s return.
insights into potentially top-per-
Name Symbol 1/9/04 3/31/04 Difference*
forming ETFs, as well as the
underlying strength of the market Merrill Lynch Semiconductor HOLDRS SMH 7.86% -4.80% -12.65%
as a whole. iShares MSCI Brazil Index Fund EWZ 7.65% -1.18% -8.82%
For example, the leading ETFs iShares MSCI Mexico Index Fund EWW 7.14% 21.55% 14.40%
in the first two weeks of a quarter iShares MSCI Taiwan Index Fund EWT 6.32% 8.36% 2.05%
could be a reflection of an invest- iShares MSCI Hong Kong Index Fund EWH 5.30% 6.00% 0.70%
ment theme being pursued by
Merrill Lynch Market Oil Service HOLDRS OIH 5.15% 13.27% 8.13%
large money managers. The impli-
cation is that those leaders could iShares MSCI Emerging Index Fund EEM 5.07% 7.06% 1.99%
dominate the entire quarter. Select Sector SPDR Fund — Technology XLK 5.00% -1.08% -6.08%
Also, when a high percentage of iShares NASDAQ Biotechnology Index Fund IBB 4.46% 7.42% 2.96%
the top-50 ETFs were up on the iShares Russell 2000 Growth Index Fund IWO 4.37% 5.47% 1.10%
second Friday of the quarter, it was S&P 500 SPX 0.89% 1.29% 0.39%
an indication there was wide-
Average change for the top 10 0.38%
spread demand for equities. On
the other hand, if only a small per- Percentage of top-50 ETFs that were bullish 84.00%
centage of these ETFs were up on *Results in the Difference column may vary due to rounding.
the second Friday, the likelihood of
Source: data — eSignal
a good quarter decreased.
Comparing the performance of
the top-10 ETFs and the S&P 500 index FIGURE 1 Q1 2004 RELATIVE PERFORMANCE
(SPX) for each of the four 2004 quarters
The bars at the bottom of the chart show the number of the top-10 ETFs that
and the first two quarters of 2005 will were outperforming the S&P 500 at any given time. Seven of these ETFs had
reveal whether these tendencies have outperformed the S&P 500 by the end of the quarter. Notice if a leader falls
remained intact, or if the market is below the S&P 500, it is unlikely to recover.
exhibiting other characteristics. The
results have useful implications for both
shorter-term trading and longer-term
investors.
2004 quarterly performance

Table 1 lists the top-10 ETFs on Jan. 9,
2004 (the second Friday of the quarter)
and their percentage returns as of the
close on March 30, 2004 (the end of the
quarter). The bottom of the table shows
that on Jan. 9, 84 percent of the top-50
ETFs had positive returns, which indi-
cated good demand at the start of the
quarter and year.
The best-performing ETF at the begin-
ning of the quarter was the Merrill Lynch
Semiconductor HOLDRS (SMH), which
ended up making a big downswing, los-
Source: data — eSignal; chart — Excel

TABLE 2 Q2 2004
The S&P 500 was only marginally positive at the end of the second quarter, and
only three of the top-10 ETFs outpeformed the index.

Merrill Lynch Internet HOLDRS HHH 9.57% 26.48% 16.92%
iShares MSCI South Korea Index Fund EWY 5.29% -13.66% -18.94% ing 12.65 percent from Jan. 9 to
Merrill Lynch Semiconductor HOLDRS SMH 3.92% -4.23% -8.15% March 30. Overall, however, seven
iShares MSCI Taiwan Index Fund EWT 3.28% -11.17% -14.45% of the top-10 ETFs followed through
NASDAQ-100 Index Tracking Stock QQQQ 3.07% 5.30% 2.23% with gains for the remainder of the
Merrill Lynch Biotech HOLDRS BBH 3.07% 3.06% -0.01% quarter that were greater than those
of the S&P 500.
Select Sector SPDR Fund — Technology XLK 2.93% 8.52% 5.59%
Figure 1 shows the per-
iShares MSCI Emerging Index Fund EEM 2.82% -7.90% -10.72% centage changes for the top-10 ETFs
iShares NASDAQ Biotechnology Index Fund IBB 2.74% -2.83% -5.58% (plus the S&P 500 index) from Table
iShares Goldman Sachs Software Index Fund IGV 2.48% 0.58% -1.90% 1. The bars at the bottom of the chart
S&P 500 SPX 1.16% 1.30% 0.13% indicate how many of the 10 ETFs
Average change for the top 10 -3.50% are outperforming the S&P 500.
There was a tendency for an ETF
Percentage of 50 bullish 76.00%
whose relative performance
*Results in the Difference column may vary due to rounding.
dropped below the performance of
the S&P 500 (for example, SMH,
Source: data — eSignal EWZ, and XLK) to continue to lag
the index. Also, notice that as the
FIGURE 2 Q2 2004 RELATIVE PERFORMANCE market began to falter in early March
the entire group declined, but the final
One month into the quarter only three of the top-10 ETFs were outperform-
leader (EWW, the iShares MSCI Mexico
ing the S&P 500 — not a good sign for the market as a whole. Generally,
Index Fund) diverged from the group
when five or more of the early leaders have negative returns in the first
month of the quarter, the outlook for the remainder of the quarter is poor. and ended up making a new high for
the quarter.
Table 2 shows the top-10 performing
ETFs at the start of 2004’s second quar-
ter and their respective outcomes. The
top early leaders did not fare as well this
quarter. The average return from April 8
to June 30 was a 3.5-percent loss, while
the S&P 500 was essentially unchanged
(a .13-percent gain). This goes against
past tendencies, in that the early leaders
floundered even though 76 percent of
the top-50 ETFs had positive returns on
April 8 — a bullish scenario. The lone
standout was the Merrill Lynch Internet
HOLDRS (HHH), which tacked on an
additional 16.92 percent for the quarter.
Figure 2 shows how this quarter pro-
gressed. Before the first month ended,
six of the 10 ETF’s percentage perform-
ance lines were below the S&P’s, and
Source: data — eSignal; chart — Excel when the index went negative for the

TABLE 3 Q3 2004
The average performance of the top-10 ETFs was far superior to the S&P 500’s
performance during this quarter.

iShares MSCI Malaysia Index Fund EWM 4.96% 4.19% -0.78%
Select Sector SPDR Fund —
Energy Select Sector XLE 1.43% 10.96% 9.53%
iShares Dow Jones
quarter, the losses mounted for the U.S. Real Estate Index Fund IYR 1.31% 6.86% 5.55%
bottom three ETFs. As in Figure 1, iShares MSCI Hong Kong Index Fund EWH 1.18% 9.77% 8.59%
this chart shows leaders that fall iShares Lehman
out of favor are unlikely to recover. 20-Year Treasury Bond Fund TLT 0.87% 5.50% 4.63%
Also, when five or more early iShares Lehman
leaders have negative returns in 7-10 Year Treasury Bond Fund IEF 0.76% 3.41% 2.65%
the quarter’s first month, the out- iShares MSCI Brazil Index Fund EWZ 0.75% 26.04% 25.29%
look for the quarter is poor. Merrill Lynch Market Oil Service HOLDRS OIH 0.43% 13.11% 12.68%
Table 3 shows 2004’s third-quar-
iShares Lehman
ter performance. At the start of the
1-3 Year Treasury Bond Fund SHY 0.13% 0.40% 0.27%
quarter, only 18 percent of the top-
Select Sector SPDR Fund — Utilities XLU -0.72% 5.43% 6.14%
50 ETFs had gains (and were, in
fact, the first nine ETFs in the top- S&P 500 SPX -2.46% -2.36% 0.10%
10 list). This is an indication the Average change for the top 10 7.46%
quarter is off to a poor start. Percentage of 50 bullish 18.00%
However, by the end of the quar- *Results in the Difference column may vary due to rounding.
ter, all 10 ETFs had gains, and only
one (EWM) had lost ground from Source: data — eSignal
July 9. The average return for the
top 10 was 7.46 percent. (Also,
FIGURE 3 Q3 2004 RELATIVE PERFORMANCE
notice three of Table 3’s top-performing
ETFs were fixed-income funds. While There were only three days during this quarter when all 10 ETFs were under-
they are not equity oriented, they have performing the S&P 500.
defensive characteristics that added to
the bottom line in this case.)
Figure 3 shows how the early leaders
outperformed the S&P 500, despite
some of them having gone negative
(dropping below 1) midway through
the quarter before climbing back into
the black. With the exception of three
days in August, all the ETFs outper-
formed the S&P 500 for the entire peri-
od.
The 2004 fourth-quarter results are
displayed in Table 4 (p. 46). On the sec-
ond Friday of the quarter, 78 percent of
the 50 most-active ETFs were up, which
was a sign of optimism for the end of the
year. There is a strong seasonal tendency
for the fourth quarter to do well after
October has passed. Figure 4
shows how troublesome October was

TABLE 4 Q4 2004
After a bullish start, both the top-10 ETFs and the S&P 500 posted strong returns
this quarter, with the ETFs closing the quarter slightly stronger.

iShares MSCI Brazil Index Fund EWZ 4.64% 19.96% 15.32% for the market as a whole.
iShares MSCI South Korea Index Fund EWY 4.60% 17.00% 12.40% However, when it was over funds
Select Sector SPDR Fund — flowed into the market. At the end
Energy Select Sector XLE 3.61% 3.98% 0.37% of October, only four ETFs were
iShares Goldman Sachs outperforming the S&P 500, which
Software Index Fund IGV 3.40% 23.05% 19.65% is not bullish. But considering how
iShares MSCI Taiwan Index Fund EWT 3.36% 12.71% 9.35% October tends to be a bad month for
the stock market and the rest of the
Merrill Lynch Market Oil Service HOLDRS OIH 3.16% 4.12% 0.97%
quarter tends to be strong, an “all-
Merrill Lynch Telecom HOLDRS TTH 3.10% 1.57% -1.53%
clear” signal was given when the
iShares MSCI Germany Index Fund EWG 2.79% 18.14% 15.35% S&P 500 and eight of the 10 ETFs
iShares MSCI Japan Index Fund EWJ 2.68% 12.58% 9.90% moved into positive territory
iShares MSCI Emerging Index Fund EEM 2.43% 17.01% 14.58% (climbing above 1) in early
S&P 500 SPX 0.68% 8.67% 8.00% November.
Figure 4 shows again that when
Average change for the top 10 9.63%
an ETF begins to lag the S&P 500 it
Percentage of 50 bullish 78.00%
tends not to outperform it by the
*Results in the Difference column may vary due to rounding. end of the quarter. Nonetheless, by
the end of the quarter seven of the
10 had outperformed the S&P 500
and only one (TTH) lost money
FIGURE 4 Q4 2004 RELATIVE PERFORMANCE from Oct. 8.
Looking at 2004 as a whole, the mar-
Despite a volatile October, seven of the top-10 ETFs outperformed the S&P
500 this quarter, and only one (TTH) posted a negative return. ket swung up and down in a broad trad-
ing range. With the exception of the
fourth quarter, a high percentage of
ETFs with positive return at the start of
a quarter did not necessarily generate
follow-through upside action for the
remainder of the quarter.
On the other hand, the weak start for
the third quarter (only 18 percent of the
50 most-active ETFs had positive
returns) was reversed by the top lead-
ers.
2005 performance
Table 5 shows the first quarter for 2005.
At the start, only 14 percent of the 50
most-active ETFs were positive on the
second Friday of January 2005. Those
seven are in the top-10 list, and two of
them are fixed-income instruments. The
group’s returns were wide-ranging over
the quarter. The top performer, Select

TABLE 5 Q1 2005
Reviewing the best-performing ETFs from Jan. 14, 2005 shows that despite the mar-
ket’s weak start, the average end-of-quarter return for the top-10 ETFs was nearly
2 percent better than the S&P 500’s return.
Name Symbol 1/14/05 3/31/05 Difference

iShares MSCI Malaysia Index Fund EWM 4.76% -5.03% -9.79%
iShares MSCI South Korea Index Fund EWY 2.05% 8.75% 6.70%
Sector SPDR Fund-Energy Select iShares Lehman
20 Year Treasury Bond Fund TLT 1.83% 0.88% -0.95%
Sector (XLE), gained an additional
17.65 percent from Jan. 14, while Merrill Lynch Market Oil Service HOLDRS OIH 1.70% 13.02% 11.32%
the poorest performer, the iShares Select Sector SPDR Fund —
MSCI Malaysia Index Fund Consumer Staples XLP 0.48% -0.26% -0.74%
(EWM), reversed and lost 9.79 per- iShares Lehman
cent from Jan. 14. 7-10 Year Treasury Bond Fund IEF 0.44% -1.48% -1.92%
Figure 5 shows two of the top Select Sector SPDR Fund —
three performers were energy ori- Energy Select Sector XLE 0.39% 18.03% 17.65%
ented — XLE and the Merrill Lynch iShares Lehman
Oil Service HOLDRS (OIH). Most 1-3 Year Treasury Bond Fund SHY -0.07% -0.69% -0.61%
of the ETFs peaked in early March Merrill Lynch Retail HOLDRS RTH -0.27% -2.85% -2.58%
and trended lower for the rest of
iShares MSCI Japan Index Fund EWJ -0.64% -3.94% -3.30%
the quarter. The S&P 500 led the
S&P 500 SPX -2.26% -2.59% -0.33%
way down — the bar count at the
bottom of the chart began rising Average change for the top 10 1.58%
and reached 10 in mid-March, indi- Percentage of 50 Bullish 14.00%
cating all 10 ETFs were outper-
forming the S&P 500 during the
decline.
Table 6 (p. 48) shows only 44 percent
of the top-50 ETFs were bullish at the The top three ETFs this quarter were XLE, OIH, and EWY, the first two of
start of the second quarter 2005. The which are energy oriented. Seven of the 10 ETFs outperformed the S&P 500,
S&P 500 was flat for the quarter, while which posted a slight loss.
the 10 ETFs gained an average of 4.13
percent from April 8 to the end of the
quarter. Biotech was the big winner: The
Merrill Lynch Biotech HOLDRS (BBH)
added an additional 16.23 percent from
April 8.
Figure 6 shows the majority of the
10 ETFs did better than the S&P 500
for the entire quarter — the histogram
count never dropped below eight. (The
Merrill Lynch Biotech HOLDRS [BBH]
was off in its own world.)
Market characteristics and trad-

ing implications
The average return for the top-10 ETFs
from the second Friday of the quarter to
the end of the quarter was better than
the S&P 500 return in four of the six
quarters. (The S&P 500 bested the ETFs

TABLE 6 Q2 2005
The S&P 500 gained less than 1 percent from April 8 to June 30, while the average
gain for the top-10 ETFs came in at 4.13 percent.
by a mere 0.01 percent in Q1 2004,
and in Q2 2004 the ETFs posted an
average loss of 3.50 percent while Name Symbol 4/8/05 6/30/05 Difference*
the S&P was up 0.13 percent.) iShares MSCI South Korea Index Fund EWY 3.74% 0.60% -3.14%
For the entire six-quarter period, iShares NASDAQ Biotechnology Index Fund IBB 2.86% 6.85% 3.98%
the sum of the averages for the top- iShares MSCI Emerging Index Fund EEM 2.71% 5.92% 3.21%
10 ETFs was 19.67 percent, while the Merrill Lynch Biotech HOLDRS BBH 2.60% 18.83% 16.23%
sum for the S&P 500 was 9.15 per-
Select Sector SPDR Fund — Health Care XLV 2.01% 3.92% 1.91%
cent. Execution costs, slippage, and
dividends were not considered in Merrill Lynch Pharmaceutical HOLDRS PPH 1.75% 1.92% 0.17%
this review. iShares MSCI Hong Kong Index Fund EWH 1.30% 7.91% 6.60%
Tracking the top 10 performers in Select Sector SPDR Fund — Utilities XLU 1.03% 8.27% 7.24%
the first two weeks of a quarter pro- iShares MSCI EAFE Index Fund EFA 1.03% -1.07% -2.10%
vides a useful watch list for swing Merrill Lynch Utilities HOLDRS UTH 0.89% 8.09% 7.20%
trading. For example, if an ETF’s
S&P 500 SPX 0.05% 0.91% 0.86%
performance starts to lag the S&P
500, you can assume this ETF has Average change for the top 10 4.13%
lost its luster. Such ETFs are likely Percentage of 50 bullish 44.00%
weaker candidates for long-trade *Results in the Difference column may vary due to rounding.
setups, but may offer potential on
the short side (especially if the over- Source: data — eSignal
all market is weak).
Also, for the past six quarters, either
energy or biotech (sometimes both at the
same time) have been in the group of
top-10 ETFs. This simple screening The S&P ultimately finished the quarter with a minor gain. However, eight of
process would have alerted you to their the top-10 ETFs came in with stronger performance, led by the Merrill Lynch
strength early on. Biotech HOLDRS (BBH).
Related reading
Other ETF articles
by Thom Hartle:
“Following the money:

Quarterly momentum and ETFs”
Active Trader, June 2004.
“The ETF money trail”

You can purchase and download

past Active Trader articles at
www.activetradermag.com/pur-
chase_articles.htm.

TRADING Strategies
The intraday MFI

The bar-to-bar comparisons of volatility and volume in the Market Facilitation Index
make it possible to logically determine when the indicator is relatively high and
price follow-through is likely.
BY THOM HARTLE
T here are different ways

traders attempt to identify
“quiet periods” that have
the potential to be followed
by bursts of price activity. Some people
look for narrow consolidations, for
example. The Market Facilitation Index
(MFI) is an indicator that can serve the
same role — mathematically.
In “The Market Facilitation Index”
(Active Trader, October 2004), the MFI
was applied to 45-minute bars of the E-
Mini S&P futures (ES) as a way to deter-
mine periods of intraday price action
from which short-term trends might
emerge.
The following analysis updates that
study of the E-Mini S&P and also applies
the same analysis to the E-Mini Nasdaq
FIGURE 1 MFI: TRACKING VOLUME AND VOLATILITY 100 (NQ) and E-Mini Russell 2000 (ER2)
futures contracts to look for unique
High Market Facilitation Index readings indicate low-volume and sideways movement. opportunities in these three markets.
In this case, the MFI peaked right before a rally in the E-Mini S&P 500 futures.
MFI background
The MFI was introduced by Bill
Williams, Ph.D., in his book Trading
Chaos (John Wiley & Sons, 2004). The
MFI is a bar’s price range divided by its
volume:
MFI = (High - low)/Volume
Low MFI readings occur when vol-

ume is high relative to the range. If vol-
ume subsides and the bar ranges remain
relatively constant, the MFI reading will
climb. Similarly, the MFI reading will
climb when the ranges increase but vol-
ume does not.
This basic calculation leads to very
small values: If a bar’s range in the E-
Mini S&P 500 was 4.25 points and the
volume was 90,782 contracts, the MFI
would be 4.25/90,782 = 0.0000468154.
Accordingly, the raw MFI value is multi-
plied by 1 million to make the number
easier to use (in this case, resulting in an
MFI reading of 46.82).
Source: CQGNet, Inc. Figure 1 shows one day’s activity in

FIGURE 2 RANGE VS. VOLUME
45-minute bars of the E-Mini S&P. At bar During this period the three-month average monthly volume (immediately below
A, the market trended down from the price) increased while the three-month average monthly range (bottom) fell.
previous day’s final 45-minute bar, the
volume was 128,402 contracts, and the
MFI was 21.42. With bar B, the market
edged lower, the bar’s range was slight-
ly wider, and the volume decreased to
115,065; the MFI climbed to 30.42. Bar C
was an inside bar (a lower high and a
higher low than the preceding bar) and
the volume dropped further to 62,272
contracts; the MFI rose to 36.13. Bar D
established another new low for the day.
It had a larger range than bar C but the
volume dropped to 55,162 and the MFI
jumped to 49.85.
Bar E, which began at 11:30 CT, traded
above bar D. It had a small range and its
volume was the lowest of the day (21,711
contracts); its MFI reading was 80.60. Bar
F, which began at 12:15 CT, had a larger
range than bar E and volume rose to
26,487; it had the highest MFI reading of
the day — 84.95. Note that bars E and F
encompass lunchtime in Chicago, where
the E-Mini futures are traded.
From this point, the market rallied.
Bar G kicked off a sharp rally. It had a
six-point range and volume of 136,090 —
the highest of the day. The MFI dropped
to 44.09. Bar H marked another new Source: CQGNet, Inc.
high for the day, but the range narrowed
and the volume was still high at 88,768 Low MFI readings indicate high vol-
contracts traded; the MFI dropped to ume, which means traders have taken Analyzing high MFI readings
33.80. Finally, bar I was a narrow-range their positions in the market; there is less The original study from the October
bar with higher volume (109,751 con- likely to be follow-through once traders 2004 article analyzed 45-minute bars of
tracts) than bar H, and the MFI dropped have placed their trades. the E-Mini S&P futures from Jan. 2, 2004
to 20.50. In the Figure 1 example, the greatest to June 10, 2004. The new study covers
High MFI readings indicate low-vol- opportunity to capture a good intraday 125 trading days from Oct. 3, 2005 to
ume, narrow-range trading periods. trend followed the higher MFI readings, March 31, 2006.
Markets tend to move from low-volume, not the low ones. Both studies use pit-trading hours,
sideways activity into trends accompa- Now let’s analyze three markets to see which open at 8:30 a.m. CT and close at
nied by heavy volume, and then back exactly what happens after high MFI 03:15 p.m. CT. The mean (average) MFI
again into trading ranges. readings.
TABLE 1 THE MFI BEFORE THE EMPLOYMENT REPORT
The day before the employment report (March 9, 2006), the MFI readings were unusually high.
Time (CT) 8:30 9:15 10:00 10:45 11:30 12:15 13:00 13:45 14:30
MFI 83.55 155.52 115.44 236.79 242.84 230.65 382.70 211.80 163.37

FIGURE 3 PRE-EMPLOYMENT REPORT ACTION
On March 9, 2006, the market trended lower but volume was very low. High
minute bar MFI readings was used to
MFI readings were the result.
determine what constitutes a “high”
MFI reading. In this case, any MFI read-
ing greater than the mean MFI plus one
standard deviation was considered high.
However, we need to look a little more
closely at the data before finalizing this
threshold.
The standard deviation for the current
study was 24.91, compared to 23.98 for
the previous study. The fact that the
standard deviation increased slightly
while the mean MFI reading dropped 21
percent implies some outliers (extreme,
anomalous values) are skewing the MFI
readings higher.
Sorting the MFI readings from high to
low revealed that March 9, 2006 — the
day before the monthly employment
report release — produced some very
high MFI readings relative to the rest of
the analysis period. Table 1 lists the MFI
readings and Figure 3 is a chart of that
day. Given that days immediately pre-
ceding important economic reports are
often exceptionally quiet, the high MFI
readings are not surprising.
Source: CQGNet, Inc. Removing the March 9 data lowers
the mean from 49.75 to 48.51, but the
from Jan. 2, 2004 to June 10, 2004 was respective three-month simple moving standard deviation drops from 24.91 to
63.16. For the new period, the mean MFI averages). It shows the average monthly 19.48. Adding the new standard devia-
dropped to 49.75 — a 21-percent decline. volume is higher and the average tion (19.48) to the new mean (48.51)
Figure 2 offers an explanation monthly range is lower in the last six results in a high MFI threshold of 67.99.
as to why this change occurred. It’s a months compared to the first six months. Table 2 shows the number of times the
monthly chart of the E-Mini S&P 500 Smaller ranges and higher volume trans- MFI exceeded 67.99 during the new
from January 2004 to March 2006 with late into lower MFI readings. analysis period. Table 3 shows compara-
volume and monthly range (and their The standard deviation of the 45- ble statistics from the original study,
TABLE 2 HIGH MFI READINGS

Tallying the number of times the MFI exceeded 67.99 for each 45-minute bar between Oct. 3, 2005 and March 31, 2006
shows the high readings tended to cluster mostly between 10:45 and 13:00.
Time (CT) 8:30 9:15 10:00 10:45 11:30 12:15 13:00 13:45 14:30
MFI> 67.99 0 2 5 25 46 38 24 16 0
TABLE 3 PREVIOUS STUDY

This summary of high MFI readings from Jan. 2, 2004 to June 10, 2004 is from the original study published in October
2004. The readings were similar to those in Table 2, except there were fewer high readings for the 13:45 bar.
Time (CT) 8:30 9:15 10:00 10:45 11:30 12:15 13:00 13:45 14:30
MFI> 87 0 0 6 27 47 54 20 4 0

FIGURE 4 STUDY COMPARISON
when 87 was the MFI threshold. The original study required the MFI to exceed 87, while the new study
One thing the two studies have in required the indicator to surpass 67.99. The 13:00 and 13:45 bars had higher
common is the MFI readings for the first MFI readings during the second study period.
and last 45 minutes of the trading day
never exceeded the MFI high threshold.
This makes sense, as the beginning and
end of the trading day have the largest
volume — participants react to
overnight news in the morning and
adjust to the day’s trading going into the
close.
One difference between the studies is
the greatest number of high MFI read-
ings occurred at the 11:30 bar in the new
study and the 12:15 bar in the original
study. Also, the new study suggests
there are more high MFI readings dur-
ing the afternoon (specifically, the 13:00
and 13:45 bars) compared to 2004.
Figure 4 compares the two studies
side by side. The chart implies ranges
are not expanding and volume is not
climbing in the latter part of the day. In FIGURE 5 MFE-MAE STUDY COMPARISON
other words, the opportunities implied
The 12:15 bar has a higher average MFE for the 2005-2006 study (purple) and
by a high MFI reading at one bar are not
a more negative MAE (burgundy) than the same bar in the 2004 study (gold
developing after a series of consecutive
for the MFE and light blue for the MAE).
high MFI readings.
Measuring price reaction to high

MFI readings
Now it’s time to look at the follow-
through price movement once a high
MFI reading has occurred. To do this,
the maximum favorable excursion
(MFE) and maximum adverse excursion
(MAE) are calculated after each bar with
a high MFI reading, as follows:
Calculating the MFE:

1. If the MFI at the close of a bar
is greater than 67.99, and if the bar
closes above its midpoint (imply-
ing bullish momentum), the differ-
ence between the close and the next
bar’s high is calculated. Calculating the MAE: MAE values for each 45-minute bar in
2. If the bar closes at its mid-point 1. If the signal is for an up move (a the two studies. Figure 5 displays the
or lower (implying bearish close above the midpoint), the dif- average MFE and MAE for each study.
momentum), the difference ference between the close and the Figure 6 shows the respective net differ-
between the close and the next next bar’s low is calculated. ences between MFEs and MAEs for the
bar’s low is measured. 2. If the signal is for a down move two studies.
(a close below the midpoint), the
The idea is the market may be leaning difference between the close and E-Mini S&P results
in the direction of an emerging trend fol- the next bar’s high is calculated. Because the MFI exceeded 67.99 at the
lowing the high MFI reading. close of the 9:15 bar only two times in six
Table 4 shows the median MFE and

TABLE 4 MFE AND MAE STATISTICS
Comparing the median maximum favorable excursion (MFE) and maximum adverse excursion (MAE) figures for each 45-
minute bar in the two studies indicates the largest moves occur around lunchtime in Chicago.
New study: 10/03/2005 to 3/31/2006 Original study: 1/02/2004 to 6/10/2004
Occurrences Time MFE MAE Occurrences Time MFE MAE
2 9:15 0.3750 -1.6250 0 9:15 0.0000 0.0000
5 10:00 1.5000 -0.6500 6 10:00 3.1250 -0.8750
25 10:45 1.4200 -1.3400 27 10:45 1.5000 -0.5000
46 11:30 1.6630 -1.3696 47 11:30 0.7500 -2.0000
38 12:15 2.2434 -2.0461 54 12:15 1.7500 -1.1250
24 13:00 1.7292 -1.3542 20 13:00 1.2500 -1.5000
16 13:45 1.5156 -1.8125 4 13:45 1.3750 -0.7500
TABLE 5 E-MINI NASDAQ 100 MFI READINGS
The number of occurrences is highest at lunchtime in Chicago.
Time (CT) 8:30 9:15 10:00 10:45 11:30 12:15 13:00 13:45 14:30
MFI > 38.44 1 4 7 18 39 39 22 13 1
TABLE 6 E-MINI NASDAQ 100 MFE direction after this bar. The more follow-through price movement is
AND MAE READINGS current study produced an occurring in the direction of the bar’s
The average net points for the MFE of the MFE of 1.42 and an MAE of close (above the midpoint indicating an
e-mini Nasdaq 100 futures contract is higher -1.34, so this tendency up move and below the midpoint indi-
than the E-Mini S&P 500 contract. seems to have dissipated. cating a down move) after these bars.
In the current study the
Occurrences Time MFE MAE MFE is largest after the E-Mini Nasdaq 100 and Russell
1 8:30 3.000 -1.000 12:15 bar, coming in at 2000 results
4 9:15 4.000 -2.125 2.2434 — but at -2.0461, the The same analysis was applied to E-Mini
MAE after this bar also is Nasdaq 100 (NQ) and E-Mini Russell
7 10:00 3.143 -1.357
the largest. This indicates an 2000 (ER2) futures. The E-Mini Nasdaq
18 10:45 3.083 -1.917
increase in volatility but not 100 futures contract had a median MFI
39 11:30 3.090 -2.846 necessarily directional reading of 27.37 and a standard devia-
39 12:15 3.038 -3.859 movement. (Nonetheless, tion of 11.07, so an MFI reading greater
22 13:00 3.500 -2.500 the edge is towards the than 38.44 was considered high.
13 13:45 2.231 -3.346 direction of the close rela- Table 5 details the results for
1 14:30 0 0 tive to the bar.) The final October 2005 through March 2006
two 45-minute bars also (again, with March 9 removed). The MFI
had higher MFEs in the new did exceed 38.44 once each in the first
months in the second study and zero study, but the MAE for the and last 45 minutes of the day. The great-
times in the first study, this bar can be final bar in the new study was est number of high MFI readings
ignored. Although high MFI readings for -1.8125 points compared to just -0.75 occurred in the 11:30 and 12:15 bars
the 10:00 bar also were rare (only five points in the original study. More impor- (both had 39).
and six occurrences in the new and old tantly, the MFE for the final bar was Table 6 details the MFE and MAE
studies, respectively), the second study 1.5156 for the new study. In other words, numbers. The peak MFE (4.00 points)
showed a drop in both the MFE and the setup saw a negative return (+1.5156 occurred after the the 9:15 bar, but there
MAE for this bar. The 10:45 bar has near- vs. -1.8125). were only four occurrences. After the
ly the same MFE readings in both stud- The fact that over the 124 days of the 12:15 bar the MAE was larger (-3.859
ies, but the MAE reading nearly tripled current study (March 9, 2006 was points) than the MFE (3.038 points).
in size in the new study, implying non- removed) there were 133 high MFI read- Even more challenging for directional
directional price movement following ings from the 10:45 through 13:00 bars — traders is the price behavior after the
the high MFI reading. all of which have higher MFEs than 13:45 bar — an MAE of -3.346 vs. an MFE
The 11:30 bar had an MFE of 0.75 and MAEs — indicates the high MFI reading of 2.231, indicating a reversal tendency
MAE of -2.00 in the first study, which could be the basis of a trading strategy. during the afternoon trading.
indicated the market tended to reverse In other words, the higher MFEs suggest

FIGURE 6 NET DIFFERENCE
The 11:30 bar in the latest study has a larger MFE and MAE than the original
study. The 12:15 bar has a larger MFE and a smaller MAE. The 13:00 bar has a
larger MFE and MAE.
E-Mini Russell 2000 results

Tables 7 and 8 contain the analysis of the
E-Mini Russell 2000. The median MFI
reading was 26.13 and the standard
deviation was 8.89, making the MFI high
threshold 35.02. Table 7 summarizes the
results for October 2005 through March
2006, with trading on March 9 removed.
Of the three markets, the E-Mini
Russell had the greatest number of high
MFI readings in the first and last 45-
minute bars. And as was the case with
the other two markets, the peak number
of high MFI readings occurred around
lunchtime in Chicago.
TABLE 7 E-MINI RUSSELL 2000 AND THE MFI
In the E-Mini Russell 2000 futures, the MFI exceeded the high reading in the first 45 minutes of trading four times.
Time (CT) 8:30 9:15 10:00 10:45 11:30 12:15 13:00 13:45 14:30
MFI > 35.02 4 1 8 25 43 40 14 11 8
From the close of the 10:00 bar to the The analysis was built upon a very
close of the 12:15 bar, the MFEs edge out simple signal. Additional rules could be Related reading
the MAEs, with the 10:45 bar having the included to fine-tune the identification
widest margin. The afternoon trading in of a reliable trend following a high MFI “The squat bar”
the E-Mini Russell indicates a tendency reading. An additional filter could be by Thom Hartle
towards reversals, as the MAEs are larg- applied that might shift the high MAE (Active Trader, January 2005).
er than the two MFEs. readings over to the MFE column. Traders often anticipate that trend
moves will follow low-volume, low-
The lessons of the data volatility periods. The squat-bar
The analysis provides some pattern shows high-volume bars
useful insights into the can also lead to tradable price
TABLE 8 E-MINI RUSSELL 2000 MFE moves. The MFI is used as one of
ways these markets typical-
AND MAE READINGS two parameters to classify price
ly move intraday. Not sur-
prisingly, all three tend to bars into four categories.
During the afternoon, the MAE tended to be
slow down during worse than the MFE for the E-Mini Russell 2000
lunchtime in Chicago. “The Market Facilitation Index”
futures.
However, the S&P 500 By Thom Hartle
tended to trend more dur- Occurrences Time MFE MAE (Active Trader, October 2004).
ing this period in the new Traders are always looking for ways
4 8:30 1.425 -1.250
study compared to the to determine when the market is
1 9:15 0 -1.700
original 2004 study. poised to make a move. The
8 10:00 1.238 -0.825 Market Facilitation Index is a tool
The E-Mini Nasdaq 100 25 10:45 1.344 -0.952
futures had a higher MAE you can use to identify market lulls
43 11:30 1.535 -1.349 that can precede price trends.
than MFE following the
40 12:15 1.638 -1.600
close of the 12:15 bar. All
three markets had larger 14 13:00 0.893 -1.757 You can purchase and download
MAEs than MFEs follow- 11 13:45 1.236 -1.355 past articles at
ing the close of the 13:45 8 14:30 0 0 www.activetradermag.com/pur-
bar. chase_articles.htm.

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Strategy and Analysis collection,

Article 2: “The bottom and the Bands” 9

Article 3: “Relative volume analysis” 12

Article 4: “Short-term oscillator opportunities” 16

Article 5: “Retracement tendencies” 20

Article 7: “Following the money: Quarterly momentum and ETFs” 28

Article 8: “The market facilitation index” 34

Article 9: “The squat bar” 37

Article 10: “HOLDRS: Stock groups in a single trade” 40

Article 11: “Dissecting T-note futures: Tendencies and characteristics” 43

Article 12: “Index vs. Index: The QQQQ/SPY spread” 50

Article 13: “Comparing moving averages” 58

Article 14: “The ETF money trail” 62

Article 15: “Follow the leaders” 70

Article 16: “The intraday MFI” 77

Putting THE SQUEEZE

P eople sometimes com-

Bollinger Band background

3 www.activetradermag.com • November 2001 • ACTIVE TRADER

Identifying volatility shifts 125.00

The lower the volatility, the closer

4 www.activetradermag.com • November 2001 • ACTIVE TRADER

109.51 Intraday trading

5 www.activetradermag.com • November 2001 • ACTIVE TRADER

ACTIVE TRADER • November 2001 • www.activetradermag.com 6

7 www.activetradermag.com • November 2001 • ACTIVE TRADER

To accompany his new book, Bollinger on 650

ACTIVE TRADER • November 2001 • www.activetradermag.com 8

The BOTTOM and the BANDS

FIGURE 1 WATCH THE VOLUME

A volume spike accompanied a new low at point A. However, a retest of the

Coach Inc. (COH), daily

9 www.activetradermag.com • February 2003 • ACTIVE TRADER

Volume Volume spike

ACTIVE TRADER • February 2003 • www.activetradermag.com 10

11 www.activetradermag.com • February 2003 • ACTIVE TRADER

Relative VOLUME analysis

V olume has always been a

12 www.activetradermag.com • July 2003 • ACTIVE TRADER

ACTIVE TRADER • July 2003 • www.activetradermag.com 13

14 www.activetradermag.com • July 2003 • ACTIVE TRADER

ACTIVE TRADER • July 2003 • www.activetradermag.com 15

Short-term oscillator opportunities

A lthough it sometimes seems as if trends consist of

16 www.activetradermag.com • September 2003 • ACTIVE TRADER

S&P 500 E-Mini (ES), daily

ACTIVE TRADER • September 2003 • www.activetradermag.com 17

18 www.activetradermag.com • September 2003 • ACTIVE TRADER

Using the RSI as a trend indicator

“The trend-following RSI,”

ACTIVE TRADER • September 2003 • www.activetradermag.com 19

20 www.activetradermag.com • March 2004 • ACTIVE TRADER

level, changing the trend from up to down.

ACTIVE TRADER • March 2004 • www.activetradermag.com 21

22 www.activetradermag.com • March 2004 • ACTIVE TRADER

7 in Figure 6), and upswing C-D was 247

ACTIVE TRADER • March 2004 • www.activetradermag.com 23

24 www.activetradermag.com • April 2004 • ACTIVE TRADER

ACTIVE TRADER • April 2004 • www.activetradermag.com 25

0.67 = 0.82 Additional Active Trader reading

26 www.activetradermag.com • April 2004 • ACTIVE TRADER