Market Technician Issue 83 - September 2017

Market Technician Issue 83 - September 2017

The Journal of the Society of Technical Analysts

STA BRAVE THE HEAT AT JP MORGAN CORPORATE CHALLENGE 12

18

The 'Keep it simple, Silly' (KISS) portfolio

My Top Charts for Analysing Any Financial Instrument

Technical Analysis in a Multi-Asset World

by Gerry Celaya

CEO of Updata, David Linton shares his knowhow into buying and selling

Contents Foreword 06 • STA annual dinner • Save the date 50th Anniversary

News 07 • Teaching technical analysis in universities • Building links with the CISI • JP Morgan Corporate Challenge • Latest news from the STA board • In memoriam: Dr. Henry O 'Hank' Pruden Research 12 • The KISS Portfolio - Gerry Celaya • My Top Charts for Analysing Any Financial Instrument - David Linton • Stops versus Call Options: Using Volume at Price to Illustrate the Point - Paul McLaren • The Manifestation of Universal Law: Complexity, Chaos and the Elliott Wave Principle (Part II) - Peter Goodburn Analyst Focus 40 • Interview with a private investor - Susan Marmor Book Review 42 • Review of The Socionomic Theory of Finance

by Robert Prechter The Society of Technical Analysts • Benefits of STA Membership • STA Calendar 2017/18 • The Education Channel • Congratulations! Latest STA Diploma MSTAs • STA Library • The STA Executive Committee • STA Advertising Rates

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Disclaimer: The Society is not responsible for any material published in The Market Technician and publication of any material or expression of opinions does not necessarily imply that the Society agrees with them. The Society is not authorised to conduct investment business and does not provide investment advice or recommendations.

Articles are published without responsibility on the part of the Society, the editor or authors for loss occasioned by any person acting or refraining from action as a result of any view expressed therein.

The Society of Technical Analysts: www.sta-org.uk

3

Editor's Letter Welcome to the second edition of the online-only Market Technician The Journal of the Society of Technical Analysts. I do think that this one looks even better than the first. More to the point, anecdotal evidence and a totally unscientific straw poll has revealed that most members are happy with its new incarnation.

Nicole Elliott Technical Analyst, Private Investor, E-journalist for the STA

The new journal has increased in size to give a whopping 50 pages of news, articles, brand new research and interviews. Do remember that yet more novel ideas and systems are explained at our monthly meetings and that members can revisit this on the videos posted on our website shortly after www.sta-uk.org.

I’ve found pausing and rewinding an excellent way to make notes and ensure I have understood the speaker’s points.

We will, as always, have another eminent (and hopefully amusing) speaker at our Annual Dinner on Wednesday 20th September at our preferred venue, the National Liberal Club. We’ll kick off at 7pm with drinks in the library, a formal dinner in Gothic splendour with silver spoon service from the redoubtable waitresses. Post-prandial drinks on the terrace overlooking the Thames at Hungerford Bridge are an option too.

It’s easy to attract fresh talent to the arts; less so to professions like maths, engineering and finance. April saw the Global March for Science in 600 cities with the slogans: ‘without science it’s just fiction’ and ‘there is no planet B’. Virgin Sport emphasises the importance of enthusiasm and joining in, largely driven by founder Richard Branson’s quest for fun and passion. STA members raised money for Cancer Research UK in July’s J P Morgan Challenge in Battersea Park. Recently the Institute of Chartered Accountants has established a global search for 35 exceptional chartered accountants less than 35 years old: they are seeking out young people who are making a difference to the profession and who are likely to ‘shine’.

With this in mind the STA has linked with the CISI (Chartered Institute for Securities and Investment) so that our Diploma Course is recognised and CPD (Continuing Professional Development) points are earned when attending our meetings.

Like other organisations, we believe in nurturing and inspiring the next generation, not brashly but gently. As a result, we offer a special reduced membership fee for those who fit certain criteria. At the moment this stands at £20 and I would urge STA members to recommend the offer to young people they know. It gives up-and-coming analysts the chance to try out a new arrow in their professional quiver. Equally important, it gives them the opportunity to mix with and ask for help and advice from industry veterans at networking events - something sadly lacking in today’s corporate world. MSTAs, a call to arms! Please welcome and chat to them.

We have also noticed that, in today’s zero interest rate world, retired and semiretired folk are taking a more active stance with their investments. We believe this older age spectrum should consider studying for the Diploma Course. It will help with awareness of market timing and increase confidence. Our senior citizens, too, can discover the intellectual stimulation of sitting in a lecture hall with younger brains, and benefit from the chance to mix with people from many walks in life.

Wishing you hours of happy reading.

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6

FOREWORD

We are delighted to announce the date of the STA’s annual dinner The highlight of the year for our members is the STA Annual Dinner.

Join us for a fantastic evening on Wednesday 20th September 2017 at the National Liberal Club.

Tickets for this year’s dinner are on sale now and include: •

•

7pm: Drinks reception with complimentary drinks - a fantastic chance to mingle with industry friends and colleagues.

Gala Dinner with a three-course sit-down meal and refreshments - a great opportunity to entertain clients and guests.

Hosted at the magnificent National Liberal Club overlooking the Thames, this is a rare opportunity for members to enjoy the extraordinary building built by noted Victorian architect Alfred Waterhouse with “the most splendid terrace in London”.

Our speaker this year will be Charlie Morris, who is Head of Multi Asset at Newscape where he manages the Newscape Diversified Growth Fund. He is also the editor of the Fleet Street Letter, Britain’s oldest financial newsletter, which discusses financial markets from a British perspective. Until 2015, he spent 17 years at HSBC Global Asset Management as the Head of Absolute Return. Prior to fund management, Charlie was an officer in the Grenadier Guards, British Army.

Tickets cost £70 per person, and we look forward to seeing you there.

Click here to purchase yours.

It’s our birthday! Save the date and be part of the celebrations!

In 2018 The STA will celebrate its 50th anniversary. This golden landmark gives us the opportunity to look back at all we have achieved since our inauguration and to look forward to building on our success together.

We’re already excited about celebrating with you on the 7th June 2018 at the spectacular London Living Rooms - City Hall’s venue with a view - and as part of our pre-event planning we’d like to offer you an exclusive member’s offer.

Purchase your 2 for 1 ticket (bring your partner) before the 31st December 2017 and only pay £25. But don’t delay, this offer is limited to just 75 member tickets and once sold out the price will increase to £50 per ticket (price also includes partners).

Click here to book now!

Non-members are also welcome to join in the celebrations but will not be eligible for the offer.

Don’t forget to put the date in the diary. This is one party you won’t want to miss!

Keep up to date with the conversation by joining us on:

The Society of Technical Analysts: www.sta-org.uk

NEWS

7

Teaching technical analysis in universities For the past five years, the STA has been running an introduction to technical analysis course for MA students

See pg. 46 for more info on courses

Queen Mary University of London, the stage for Part 1 Paper of the STA's Diploma

The academic world has traditionally taken a rather sceptical view of technical analysis, being wedded for the most part to the efficient market hypothesis (EMH). But the financial crisis brought the underlying assumptions of the EMH into question and found them wanting. Academics have, therefore, subsequently been looking to construct alternative models to explain the dynamics of the financial system.

This has been very successful and last year we ran the same course for students studying for an MA in Finance and Business Studies at King's College.

The quest for a new methodology to interpret market behaviour has led to a re-evaluation of technical analysis - particularly when it is considered as a practical application of behavioural finance.

We are in discussion with a number of other universities and over the next five years hope to roll out technical analysis programmes across a broad spectrum of academic institutions.

For the past five years, the STA has been running an introduction to technical analysis course for MA students at Queen Mary University of London that prepares the students for the Part 1 paper of the STA's Diploma.

Some of the MA students are members of the university investment club or are trading on their own account. They are quick to appreciate that one of the great merits of technical analysis is that it keeps market practitioners out of trouble.

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NEWS

Building links with the CISI Over the past 50 years, the STA has been dedicated to the promotion and understanding of technical analysis and its role as an important investment tool.

One of the primary aims that the board has embraced in the last few years is to build relationships with the CISI (Chartered Institute for Securities & Investment).

Deborah Owen (pictured) made the major initial steps in forging this solid relationship by achieving accreditation for the STA.

Further to this, the CISI is very keen for the STA to be integrated into part of its education process as it offers considerable benefits to their own members and teaching programme.

The STA is also now certified by the CISI as a CPD provider (continuing professional development) and in June, we were invited to provide a speaker for a CISI event in Bournemouth.

Guido Riolo attended on behalf of the STA giving a presentation on ‘Technical analysis and behavioural finance - an alternative approach to investing’.

Subsequently, the board has also managed to enhance and bolster this association by adding representation on the education and examinations panels at CISI, adding lecturers to the approved panel for CISI educational events and through further media and education cooperative measures. The board has put considerable efforts into this important relationship, one which will bring significant benefits to the Society over time.

Clive Lambert has also lectured to CISI members and these key invitations to speak will continue to grow over time. This positive exposure will only underline our professionalism and high standards that we demand of our members and the lecturing and examination process.

We very much hope to continue to work collaboratively to share our expertise. Our aim is to widen access to learning and qualifications both here in the UK and abroad.

The Chartered Institute for Securities & Investment is the leading professional body for securities, investment, wealth and financial planning professionals. Formed in 1992

by London Stock Exchange practitioners, they have a global community of circa 40,000 members in 116 countries.

Last year more than 40,000 CISI exams were sat in 80 countries, 15,000 taken outside the UK. For more info, please visit www.cisi.org

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JP Morgan Corporate Challenge Now called the JP Morgan Corporate Challenge this annual race was first organised by Manufacturers Hanover (Manny Hanny to older readers) in New York in 1977. The idea was to encourage fitness, camaraderie, and teamwork among work colleagues.

Today the 3.5 mile fun-run is held across 13 cities in 7 countries, London’s Battersea Park along with Frankfurt being the only two in Europe.

For a third consecutive year the STA has put a team forward with money raised going to Cancer Research UK. Meeting at the rather grand old Victorian pub the Prince Albert by the Albert Bridge Road park gate, Mark Tennyson-d’Eyncourt and I were on hand to look after the runners’ bags and things while Tom Hicks supplied them with T-shirts, this year in a fetching baby blue with the red STA logo to make them easier to spot.

Setting off in stages according to predicted speeds, they were among the 14,100 or so who took part on the day. In fact last year a total 254,500 people from 7624 companies around the globe took part, half of them women.

Happily posing for the team photo they rushed off only to find they had to queue for about 300 metres just to get to the starting line. Meanwhile Mark, describing his role as cloakroom attendant, and I (photographer in residence) had ample time to chat.

Reminiscing about how finance in

London used to be, remembering members who are no longer with us, we agreed that our running days were over - though we would not rule out walking the course next year.

Asked why the Committee had decided to support this event he said, ‘we [STA] don’t have the public profile we should have, within and without the City’.

Runners and riders at Team STA were an enthusiastic bunch, pleased to be taking part in this worthwhile event on one of the hottest summer evenings in 40 years. All completed the course with ease and were, on the whole, pleased with their performance - and were given another T-shirt to prove it.

Having a wager on the winner, it was youthful outsider Nick Jarvis who came in streets ahead running the crowded course in just 22 minutes.

Asked why he’d come he said, ‘Dad mentioned it. I like running; I’ve done it all my life’.

Like father like son and bearing a striking resemblance, because guess who came in second - Steve Jarvis, a real one-two for father and son.

Congratulations!

Other participants were determined to pace themselves, and a lucky thing it was too. The last thing we needed was them collapsing from heat and exhaustion. What would happen to our subscriptions then!

By: Nicole Elliott

10

NEWS

The latest news from the STA board We have been working hard behind the scenes to improve the services available to our members. We kicked off this year by digitising the STA’s Library. You can now can see all the books we own here and UK based members can borrow them directly via the site. We have moved the STA journal online (as you can see!) and we have taken the opportunity to refresh the content. We have also upgraded and improved the STA website.

We hope that you like the improvements. Our intention has been to give these resources a modern, brighter image and we would very much like to hear your feedback. You can find the upgraded and modernised website (with a new font, slides, layout,

functionality etc.) at www.sta-uk.org We would also like to take this opportunity to update you on some of the other developments that the STA has been focussing on over the past few months. We have been working tirelessly towards our goal of expanding the use and knowledge of technical analysis. In particular, we have been busy forging links with third parties - we have so far provided talks at CISI meetings, the Round the Clock Trading conference and at an ActivTrades event.

STA Marketing is now active on Facebook, LinkedIn and Twitter and should you have any comments or blogs that you would like us to publish, please forward these to info@sta-uk.org

The STA board continuously aims to improve and update services for you, our members. Behind the scenes we are currently working on a new membership system. Launched in August, the new system enables you to edit your details, book onto meetings etc. In time, the system will integrate with the member section of the STA website www.sta-uk.org Luise Kliem, together with the STA board members, has been busy working on HSC 2 (Home Study Course version 2). This is an updated version of the course first produced in 2009.

There is still much work to be done but at last the end is in sight!

The Society of Technical Analysts: www.sta-org.uk

DR. HENRY O 'HANK' PRUDEN

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In memoriam It is with a heavy heart that we announce that Dr. Henry O 'Hank' Pruden passed away on Saturday, August 26th at St. Francis Memorial Hospital surrounded by his family.

Hank was a towering figure in the field of Technical Analysis for decades, publishing numerous research articles on the markets as well as a bestselling book, The Three Skills of Top Trading.

He established the first graduate-level Certificate in Technical Market Analysis Program in the world at Golden Gate University in 1976, which included courses in the Wyckoff Method and Behavioral Finance. For over 40 years he taught technical analysis and Wyckoff concepts to thousands of students, many of whom have become successful traders, analysts, money managers, and educators.

Hank served as Editor of the Market Technicians Association’s Journal of Technical Analysis and as a Board member of the Technical Securities Analysts Association of San Francisco, and was invited to speak at numerous investment seminars around the world.

Hank received many awards recognising his contributions to technical analysis, including the Lifetime Achievement Award from the International Federation of Technical Analysts, the Mike Epstein Award from the MTA Educational Foundation, and, earlier this year, the Annual Award from the Market Technicians Association, which acknowledged his career of “outstanding accomplishment in technical analysis.”

His passing is a huge loss to his family, to the international Wyckoff community, and to the world of technical analysis.

a towering figure in the field of Technical Analysis for decades...

Above: The Edward S. Ageno School of Business congratulates Professor Henry O. Pruden for winning the Market Technicians Association’s Annual Award. Established in 1974, the Annual Award does not recognise a single achievement or even a year of achievements, but rather acknowledges a career of “outstanding accomplishment in technical analysis.

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RESEARCH

The KISS Portfolio Introduction: stop and reflect It is a good idea for those who express their market views in public to review what they have said in the past now and then. While it would be nice to say that this is because the ‘unexamined life is not worth living’ (Socrates, according to Plato) it has more to do with the fact that it is helpful to stop and reflect and learn from one’s mistakes and successes.

Gerry Celaya MSTA is a former board member of the STA and is currently a director of Redtower Asset Management.

He previously worked at US banks in London providing research and proprietary trading services and ran the European technical analysis team for one of the largest providers of real time research to professional dealers. Gerry holds economics degrees from UCSD (BA) and CSUSF (MA).

With this in mind, I was lucky enough to be asked to give a presentation to my fellow members, associates and guests of the Society of Technical Analysts on May 2015 and one of the slides that I used was the one below (Figure 1).

FIGURE 1: STRUCTURING A KISS PORTFOLIO

Source: Celaya (2017)

Technical Analysis in a Multi-Asset World Keep it simple... Silly...

Private Investor/Pension - Fire and Forget...

Use low cost ETF's or tracker funds in a tax efficient vehicle or 'wrapper' 60% stocks - 30% UK, 30% US, 15% Europe, 10% Japan, 5% China 10% Emerging (or so) 20% bonds (or so) 10% commodity/alternative 10% cash Or in the UK 500% in buy to let!

Society of Technical Analysts - May 2015, London.

I presented many more slides and talked about the various swings and roundabouts that different financial instruments and markets could be subject to over the coming weeks and months. However, the above slide is worth breaking down and examining to see if the idea of a ‘buy and hold’ portfolio holds up.

Keep in mind that presenting a slide advocating ‘buy and hold’ as an investment strategy to STA members borders on being foolhardy. However, the idea that a balanced portfolio, able to ride out ‘storms’, is suitable for private investors and their pension plans is worth considering.

The Society of Technical Analysts: www.sta-org.uk

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The background of course is that, as a user of technical analysis, my goal is always to try to mimic the beautiful charts in the ‘textbooks’ that show that a broad uptrend (and downtrend) in market prices is formed of smaller ‘zigs’ and ‘zags’. If one can perfectly time these smaller trends to buy and sell in the direction of the broader trend then one can generate many times the return of the ‘bigger move’. This is easy enough in theory. The tricky part (as we all know) is trying to put it into practice on a sustained basis whilst keeping an eye on transaction costs, slippage and just being plain wrong at times (zigging when one should have been zagging…).

To participate or not to participate? That is the question My experience has spanned periods as a market analyst, proprietary trader and in fund management working in FX, bond, commodity and stock markets. Not surprisingly, this has led to trading and analysing markets on everything from a ‘tick’ basis in spot FX trading as part of a bank’s proprietary trading desk (slightly less frenetic than market making) to providing five-year or longer views for commercial clients hedging commodity risks. Technical analysis techniques are useful in all aspects of trade idea generation and risk management, so why advocate a ‘buy and hold’ strategy in the first place? This is on the view that many private investors and those planning investments on a long term basis may not have the knowledge or mental ruthlessness to ‘zig and zag’ effectively enough to avoid the pitfalls associated with timing trades and investments. Moreover, the opportunity cost of not participating in the market can have very large impact on returns.

The last point is worth highlighting. Back in March 2008, a client (Blue Sky Asset Management - since then bought out by another structured product provider) asked for a study on the effects of missing out on a cyclical rally in the equity market after a significant bear market and trough. They did not want a ‘timing the market’ sort of research note, though, as the idea of investors missing out on ‘10 key days’ or ‘20 key days’ during an equity market cycle seemed like a random event study (which many others have done). Rather they asked for a ‘time in the market’ study which looked at the effect of missing out on a year of equity market gains after a significant trough (1974, 1987, 2003 and 2009 troughs).

The results were surprising as UK investors who had been shaken out of their equity holdings (capitulated) and came back into the market a year after the trough saw much smaller returns than investors who rode out the fall and participated in the first year of the new rally. Table 1 below sums this up, with the numbers highlighted showing the returns of an investor who waited a year after the trough to enter the market again.

TABLE 1: ESTABLISHING THE EFFECT OF MISSING OUT ON A YEAR

Source: Celaya (2017)

Table of returns - Monthly Close Data FTSE All Share Percent 1974

1987

2003

2009

1 yr after trough

128.49

17.22

26.99

41.82

5 yrs after trough

244.95

64.89

74.19

90.01

4 yr / 1yr after trough

50.97

40.66

57.93

33.98

Trough to next peak

1712.43

290.62

100.56

Monthly Close Troughs: Nov 1974 (66.7) / Nov 1987 (796.31) / Jan 2003 (1722.28) / Feb 2009 (1929).

Of course, why would an investor wait a year before coming back into the market? Many of us hardly draw a breath between cutting a losing trade and entering into another trade. However, private investors and long term fund managers or advisors who may either cut their equity market holdings completely or reduce their exposure to them after a market fall may take some time before increasing their exposure again. The Coppock indicator measures some of this effect, and the ‘rule of thumb’ in the construction of the indicator was that bereavement after a significant personal loss may take 11 to 14 months. Coppock incorporated this estimate when constructing his indicator. The chart of the FTSE 100 index and the Coppock indicator next page (Figure 2) is from ADVFN and shows that a turn above zero (buy signal) can come six months or even later after a significant trough.

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RESEARCH FIGURE 2: A BUY SIGNAL CAN COME SIX-MONTHS OR MORE AFTER A SIGNIFICANT TROUGH

Source: Celaya (2017)

Capturing the benefits of “time in the market” The apparent benefits of ‘time in the market’ for long-term investors and my work with a variety of fund managers and product providers over the last few decades led to the idea behind the KISS portfolio, which I first presented to the STA in 2015. This was by no means an active portfolio - rather, the idea was to create a low-cost, relatively aggressive portfolio. The model uses ETFs available to UK investors (monthly close data is in Table 2 opposite page) along with comparable monthly data from the FTSE 250, 100 and 350 total return indices.

Data compiled here from a leading UK fund manager’s flagship fund is included for comparison purposes and the portfolio’s performance can be tracked. The actual weightings used in the KISS portfolio were split as follows: • • • • • • • • • •

FTSE 100 (9%) FTSE 250 (9%) S&P 500 (18%) Europe ex-UK (9%) Japan NIKKEI 225 (6%) China (3%) Emerging market equities (6%) Commodities (10%) UK Gilts (20%) Cash (10%).

The Society of Technical Analysts: www.sta-org.uk

15 TABLE 2: KISS: A LOW-COST, RELATIVELY AGGRESSIVE PORTFOLIO Table of returns - Monthly Close Data FTSE All Share Percent FTSE250

Date

FTSE100

FTSE350

CofE

KISS

Fund

Portfolio

ISMIDD

CSUK

IUSA

IEUX

CNKY

FXC

IEEM

COMF

VGOV

TRIMCX

TRIUKX

TRINMX

FTSE 250

FTSE 100

S&P 500

MSCI XUK

Nikkei 225

China

MSCIEEM

Commod.

UK Gilts

Total Ret

Total Ret

Total Ret

31/12/14

15.605

84.020

13.318

20.985

82.995

76.555

23.848

16.610

21.343

10911.84

4956.470

5480.62

1339.22

31/01/15

15.900

86.235

13.310

21.750

88.830

79.125

24.640

15.680

22.370

11071.480

5099.790

5626.650

1356.95

28/02/15

16.795

88.990

13.588

22.470

90.945

81.130

24.965

16.270

21.333

11736.35

5269.200

5837.32

1385.87

31/03/15

16.645

87.570

13.964

23.130

96.815

85.595

25.391

15.670

21.740

11637.700

5166.300

5733.910

1398.93

30/04/15

17.015

90.170

13.628

23.070

95.235

95.620

26.428

16.240

21.248

11955.86

5329.140

5910.73

1421.65

31/05/15

17.680

90.095

13.725

22.708

96.395

91.175

25.418

15.775

21.275

12458.48

5367.57

5986.89

1422.68

30/06/15

17.085

85.105

13.068

21.470

94.460

83.520

23.848

15.793

20.848

12052.17

5023.82

5635.28

1357.69

31/07/15

17.240

87.015

13.468

22.340

95.165

74.870

22.530

14.490

21.158

5162.51

5773.58

1358.28

31/08/15

16.600

81.305

12.915

21.020

92.010

66.645

20.683

13.988

21.185

11816.56

4854.74

5459.49

1281.41

30/09/15

16.250

78.960

12.600

20.303

86.605

65.525

20.310

13.778

21.433

11548.23

4715.95

5309.1

1289.24

30/10/15

16.620

82.910

13.490

21.233

91.260

69.420

21.171

13.738

21.125

11877.42

4959.95

5561.99

1361.93

30/11/15

16.925

83.285

13.840

21.565

96.100

68.985

21.095

12.935

21.288

12102.91

4976.07

5595.26

1359.96

31/12/15

16.850

81.880

13.830

21.403

95.200

68.175

20.626

12.493

21.020

12131.12

4890.97

5518.66

1352.22 1292.01

29/01/16

15.950

79.375

13.448

20.905

93.015

62.365

20.139

12.270

21.818

11486.16

4769.44

5353.8

29/02/16

16.075

80.525

13.978

20.710

92.105

62.430

20.738

12.225

22.048

11576.75

4808.71

5397.5

1313.16

31/03/16

16.335

82.085

14.278

21.380

93.930

67.325

22.570

12.755

22.008

11835.21

4894.5

5497.93

1338.55

29/04/16

16.250

83.175

13.998

21.510

92.135

65.540

22.083

13.673

21.700

11801.76

4964.16

5560.07

1339.87 1344.17

31/05/16

16.780

83.065

14.368

21.510

96.145

65.170

21.470

13.720

22.078

12109.19

4979.35

5598.73

30/06/16

15.645

86.800

15.580

21.970

103.705

73.695

24.440

14.240

23.510

11496.23

5214.61

5767.24

1350.17

29/07/16

16.665

90.145

16.305

23.040

109.135

76.470

25.789

13.548

23.860

12229.45

5393.88

5992.61

1442.03 1462.01

31/08/16

17.128

91.605

16.478

23.473

112.695

81.130

26.493

13.370

24.510

12574.05

5483.94

6104

30/09/16

17.250

93.395

16.574

23.770

114.465

82.345

27.068

13.730

23.895

12721.16

5582.74

6207.38

1470.43

31/10/16

16.905

94.360

17.365

24.698

123.765

85.220

28.678

13.790

22.843

12509.24

5640.37

6243.34

1513.73

30/11/16

16.970

92.080

17.631

23.325

118.885

84.985

26.710

13.848

22.473

12526.87

5527

6139.94

1476.04

30/12/16

17.385

96.690

18.220

24.930

120.960

81.645

27.120

14.095

22.905

12939.13

5823.91

6448.36

1520.00

31/01/17

17.513

96.605

17.955

25.100

121.450

83.680

28.110

14.273

22.408

12998.47

5790.76

6422.59

1507.44

28/02/17

18.040

99.745

18.996

25.600

125.095

88.175

29.095

14.280

23.130

13453.76

5969.78

6625.53

1541.11

31/03/17

18.255

101.015

18.810

26.485

124.500

88.250

29.763

13.890

23.168

13640.73

6036.73

6702.77

1549.72

#

18.990

99.485

18.353

26.940

122.175

85.305

29.275

13.720

23.208

14163.90

5956.51

6671.85

1544.04

2015*

-4.69%

-9.12%

0.77%

-5.75%

-1.24%

-25.23%

-18.85%

-20.81%

-1.20%

-2.63%

-8.88%

-7.82%

-4.95%

-5.88%

2016

3.18%

18.09%

31.74%

16.48%

27.06%

19.76%

31.48%

12.82%

8.97%

6.66%

19.07%

16.85%

12.41%

16.32%

2017**

9.23%

2.89%

0.73%

8.06%

1.00%

4.48%

7.95%

-2.66%

1.32%

9.47%

2.28%

3.47%

1.58%

2.65%

FTSE 250

FTSE 100

S&P 500

MSCI XUK

Nikkei 225

China

MSCIEEM

Commod.

UK Gilts

FTSE 250

FTSE 100

FTSE 350

CofE

KISS

ISMIDD

CSUK

IUSA

IEUX

CNKY

FXC

IEEM

COMF

VGOV

Total Ret

Total Ret

Total Ret

Inv Fund

Portfolio

2015

7.98%

-2.55%

3.85%

1.99%

14.71%

-10.95%

-13.51%

-24.79%

-1.51%

11.17%

-1.32%

0.69%

0.97%

-2.34%

2016

3.18%

18.09%

31.74%

16.48%

27.06%

19.76%

31.48%

12.82%

8.97%

6.66%

19.07%

16.85%

12.41%

16.32%

2017

9.23%

2.89%

0.73%

8.06%

1.00%

4.48%

7.95%

-2.66%

1.32%

9.47%

2.28%

3.47%

1.58%

2.65%

Total Ret.

7.41%

10.42%

33.72%

18.64%

26.74%

-6.44%

15.18%

-13.03%

9.09%

13.69%

10.97%

11.44%

8.53%

12.21%

* from May 2015 to end of 2015 ** 2017 YTD April 2017 Total Return = from May 2015 to April 2017

There are many problems with the KISS portfolio and weightings, of course. Diversifying the equity holdings (60% weight) could be a ‘waste of time’ given that the leading UK, European and US indices seem to move in lockstep at times, as do those of Japan and the emerging markets. The yellow row on Table 2 show the returns from May 2015 to April 2017 and illustrate that in this time period the best bet would have been to put all the money into the US S&P 500 (and US dollars) and relax, followed by the Nikkei 225 and Japanese yen. This highlights what UK investors already know, namely that the currency effect of diversification (Swiss stocks in francs during the SNB debacle, anything other than sterling after the Brexit vote…) can sometimes outweigh the actual effect of stock market diversification.

16

RESEARCH Another problem is that commodity ETFs need to address ‘roll’ problems, but these have been well flagged in the past.

The KISS portfolio as presented in 2015 could also have an ‘overweight’ China risk as the equity weighting of 5% of the 60% equity holding adds to the emerging market index weighting (10% of the 60%) which have a weighting near 25% in Chinese shares now (mostly ‘H’ or ADR shares, likely to become ‘A’ shares or onshore after the recent MSCI changes). On a total portfolio basis this means that China would have a minimum weighting of 3%, which could potentially rise to 5% or more.

From a ‘research point of view’ there is simply not enough data to form a meaningful conclusion on the value of the KISS portfolio, but this is true for most stock market and fund returns studies. Statisticians would suggest that you need a very large database conforming to all sorts of different data rules before you can make any real studies with useful and meaningful conclusions, but financial markets don’t usually give us these. Still, from the data available, it would seem that the KISS portfolio has held up relatively well compared with leading indices and a leading actively managed portfolio, with the added benefit of being relatively inexpensive given the use of ETFs that track the chosen indices/markets.

The use of ETFs that track leading stock market indices is part of the ‘mental ruthlessness’ without which investing can be so difficult. Study after study suggests that, in equity markets, ‘passive’ investment strategies are very difficult for ‘active’ fund managers to beat consistently on a medium- to long-term basis (usually net of fees). Keep in mind though that ‘passive’ investment strategies are anything but passive if they are tracking the usual equity indices that tend to be constructed using the largest shares in a chosen market (commonly calculated as the market capitalisation or

On a total portfolio basis this means that China would have a minimum weighting of 3%, which could potentially rise to 5% or more.

the share price times the amount of free floating shares).

The indices may have their membership examined on a quarterly basis with those stocks that have seen their market capitalisation fall to be the smallest within the index sometimes replaced. Their place is taken by companies from outside the index that have seen their market capitalisation rise to the point of being bigger than those at the bottom of the index. This rebalancing turns a ‘passive’ tracking strategy into an effective momentum strategy.

The companies with rising share prices go into the portfolio regardless of being ‘too expensive’, having ‘unjustifiable’ earnings or dividend forecasts or being all ‘sizzle’ with no steak. Meanwhile, those with a falling share price go out of the index with no regards for their ‘value’ or being ‘cheap’ and attractive.

The standard equity indices don’t really care about these factors, and the ‘mental ruthlessness’ of periodically eliminating those shares that are not holding up well and replacing them with shares that are improving helps to explain some of the outperformance that tracker funds or ‘passive’ investment strategies have over active fund managers (along with fee structures).

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17

The YouTube video 'Peter Lynch talks about bottom-fishing on Wall Street Week' shows two Wall Street veterans musing on their experiences. A very young Peter Lynch highlights the peril of trying to find value when a share is falling in price - something that active fund managers try to do, while an index might simply drop the share entirely and replace it with one that has a rising price (or market capitalisation).

In the same video, Philip Caret gives insight into the perils of worrying too much about what lies ahead. While active fund managers need to worry about things like lofty valuations and risk, stock market indices don’t. This disparity can lead to periods of ‘passive’ outperformance, as active fund managers may shift to underweight positions in their equity holdings while momentum carries on until a ‘brick wall’ is inevitably hit a few quarters, or years, down the road. While the push in the fund management industry to ‘smart Beta’ or even ‘Alpha’ ETF strategies attempts to offer investors further choices to simple market capitalisation criteria when creating investment indices, the risk is that they are simple ‘data mining’ exercises working with a marketing department. Breaking down the return numbers over time and comparing them to a simple total return index usually gives insight into any real difference.

Conclusions: no substitute for knowledge or mental ruthlessness The conclusion is not that we should give up on analysing markets in order to make better trading and investment decisions. Rather, while we do this we should hear a voice in our minds reminding us that there are costs in missing out on parts of a market rally (time in the market). As we have shown, a relatively simple portfolio (KISS) using ETFs can produce ‘ok’ returns when compared to a very popular UK fund (and leading indices that track stock and other markets).

The KISS idea addressed the problem that private investors and long term fund managers may have in timing their ‘zigs and their zags’ as they may lack the knowledge or mental ruthlessness for this.

The KISS idea addressed the problem that private investors and long term fund managers may have in timing their ‘zigs and their zags’ as they may lack the knowledge or mental ruthlessness for this. STA meetings and their educational courses offer some of the knowledge that can help in making the required decisions in order to time and control market risks associated with making trading and investment decisions, and help in developing the mental ruthlessness that is sometimes needed when making investment decisions.

18

RESEARCH

My Top Charts for Analysing Any Financial Instrument

David Linton MFTA is CEO of Updata, which he founded in 1991 after several years of trading and developing systems himself. He is a regular commentator on financial markets in the UK press and TV. He is himself an active investor using the Updata TA system for analysis and trading. He teaches the Ichimoku charting module for the Society of Technical Analysts' Diploma course. He still enjoys meeting clients face to face, which is how he spends the majority of his time.

Introduction: in the beginning I started using technical analysis for trading more than 30 years ago while I was studying engineering at Kings College London. In those days, it involved typing the previous day’s prices for hundreds of companies from the back of the newspaper into an Amstrad PCW. After a couple of years, I found a way of stripping the data from Teletext pages and ‘Updata’ was born. This seems prehistoric now, in the days of automation and the Internet, where analysis software has access to a virtually unlimited amount of data from market terminals, trading platforms, databases and a plethora of free data sources.

I mostly used oscillators in my early days as a technical analyst. Welles Wilder spawned a whole industry of computer software that could draw these tools and I hung off every signal I could find and actively bought and sold traded options in the London market. After many years I became disillusioned with oscillators.

The 1990s was a rampant bull market and the indicators keep saying that everything was overbought almost daily, year after year. Just because a stock is overbought, that doesn’t mean it cannot go much higher still. Indicators work quite well for trading in sideways price ranges, but I was finding I was getting too many counter trend signals and not enough alerts for good points of entry.

Knowing when to sell In those heady days in the run up to dotcom bubble, pretty much all the analysis was skewed and log charts became essential. At that time, I was doing a lot of work with trailing stop-losses and I came to the conclusion that once a stock started to run, only a trailing stop-loss optimised for the price would save investors. I extended this research further producing a paper ‘The Optimisation of Trailing Stop-losses’ for the IFTA Master Financial Technical Analyst designation. My research showed that this simple tool had a success rate of around 80%. Only one time in five would you sell too soon and watch the price of a stock go much higher still. The lost opportunity to make more money is outweighed four-fold by the optimum place to take a profit.

After working with many trading teams and investors over 25 years, I have come to the conclusion that it is all too easy to start interpreting charts to confirm that a position you hold should be held for longer. An optimised stop is a more objective tool that addresses this conundrum. It stops a short-term trade from becoming a long-term investment.

How many holdings?

Most stock market investors are net accumulators of stocks. There is a far greater wiliness to buy a new share than there is to sell an existing holding. I am constantly asked ‘What should I buy?’ and most of the time I answer ‘What should you sell?’ I like to limit myself to around 10 holdings in my personal portfolio. This also makes the maths really easy; a 10% loss (my preferred maximum limit) only means a 1% loss for my portfolio.

The Society of Technical Analysts: www.sta-org.uk

19

Typically, I am looking for stocks that are in strong uptrends on different time horizons and have the potential to double in around a year.

FIGURE 1: HOW I MONITOR MY HOLDINGS IN ONE SCREEN

With only 10 holdings, I find it is easy to stay focused on which stocks I need to watch more closely for an optimum exit. I am always striving to own the best 10 stocks in my universe, which is mostly US (especially NASDAQ), UK (particularly midcaps) and some other special situations internationally such as ETFs or small caps.

Knowing what to buy Having found the ideal tool for making clear-cut selling decisions, I spent many years looking for the ideal tools for making buying decisions. The discipline of owning 10 holdings means that I have to have a strong conviction that an opportunity that presents itself looks much better than the stock that is worrying me most in my portfolio. Or, if I sell something, I need to go on the hunt for the best thing to buy in order to replace it.

Typically, I am looking for stocks that are in strong uptrends on different time horizons and have the potential to double in around a year. I may have to settle for finding a stock with 50% upside, hoping that it happens in six months, and then finding another one. I prefer breakouts to new highs from sideways trading ranges to recoveries that can take too long to play out.

Trends and time horizons I am often asked what I think of a particular market or stock and I always respond ‘Before I can answer that, what is your time horizon?’ Without that knowledge, it is difficult to conduct a meaningful chart analysis. Too many people are using technical analysis without due consideration of the chart timeframe that is best suited to a given investment horizon. Over the years I have become an avid fan of Ichimoku charts. I wrote the book, Cloud Charts on the subject in 2010. These charts have a lot of advantages: • •

An uptrend or a downtrend is defined at a glance - you know where you are The only real variable (if you stick to the construction) is the time frame you choose

20

RESEARCH

• • •

Multiple time frame analysis is simple - long term, medium term and short term The cloud extends forward, giving a forward projection of how a trend must be maintained Key levels of support and resistance are drawn into the future.

My study of Ichimoku charts led me to produce Table 1 below. Daily charts, which most people use, allow a view some weeks into the future. The Ichimoku cloud extends around one month. A weekly chart, which many people have forgotten to use, allows a view for some months into the future. For me, short term means days ahead (though that can be long term for a shortterm trader), which means I need to look at 60-minute charts.

TABLE 1: TIME HORIZON TABLE - SOURCE: CLOUD CHARTS ULTRA SHORT

VERY SHORT

SHORT TERM

MEDIUM TERM

LONG TERM

VERY LONG

ULTRA LONG

Time Horizon

Minutes

Hours

Days

Weeks

Months

Years

Many Years

Chart Frame

tick/1 Min

5/10 Mins

Hourly

Daily

Weekly

Monthly

Quarterly

30 Mins

2-4 Hours

3 Days

1 Month

6 Months

2 Years

8 Years

Cloud Extracts

SHORT TERM TRADER SHORT

MEDIUM

LONG TERM INVESTOR LONG

SHORT

MEDIUM

LONG

Here’s the simple way to remember this: weeks mean months, days mean weeks and hours mean days. A daily chart is no good for analysing what the price will do today and a weekly chart is no good for telling you what the market will do tomorrow.

Looking at all three charts together gives you a better picture of what is going on. For instance, Figure 2 (below) shows the Nasdaq 100 index is bullish long term with prices above the weekly cloud, bullish medium term with prices finding support on the daily cloud and bearish short term with prices below the cloud.

FIGURE 2: NASDAQ 100 INDEX - LONG TERM, MEDIUM TERM AND SHORT TERM

Having this picture for any instrument immediately helps with market timing. The clouds need to line up with all the trends showing as bullish for a safer entry.

The Society of Technical Analysts: www.sta-org.uk

21

Price Targets There are a few technical analysis techniques for projecting prices targets but the most objective way is to use point and figure counts. Because point and figure targets are rules based, it is easy to scan for stocks that have given double-top buy (breakout) signals and have the most upside potential. This only takes a few minutes on a computer with the right software. While I am looking for stocks that can double in a year, I normally have to accept a lower percentage. If the market is looking very strong, 100% may be possible but there will be many more stocks with say 20% upside. A quick scan (less than a minute) of the FTSE 250 constituents for stocks with 50% upside targets produced only one result at the time of writing, while a scan for 30% upside produced eight stocks.

I may want to scan for 20% to get a bigger shortlist of stocks to run through. I am normally doing this when I have sold a holding and need to find a replacement stock in my portfolio. My ideal is to come up with a shortlist of between 10 and 20 potential stocks. These I will analyse further to find the best candidates.

FIGURE 3: SCANNING FOR STOCKS WITH THE MOST UPSIDE GIVES ME A SHORTLIST IN UNDER A MINUTE

Once I have this shortlist, I marry the Ichimoku and point and figure techniques together with six ‘tracker’ charts, which change as I run down the list. To match the long-, medium- and short- term cloud charts (weekly, daily and hourly respectively), I use percentage log scale charts: a 1% x 3 box daily chart as my long term, a 0.5% x 3 daily chart for medium term and 0.1% 60-minute point and figure chart as my short term. This means the top two charts are my long-term view, the middle two charts are my medium term and the bottom two charts are my short-term view. With these six charts, I get a full overview of any instrument on the three time horizons at a glance.

I look at data from lots of different sources, ranging from free web services to professional systems feeding into the software.

I normally analyse currencies, stock indices, commodities, interest rates and individual stocks. I run through 40 instruments in several minutes every morning for my Charts Today webcast. This gives me a handle on the market and I may do this a few times through the day as well as run scans. Just once a day means I am looking at 60,000 charts a year fairly effortlessly. Of course, you don’t need to go to these lengths and once a week is probably enough for most medium- to long-term investors.

22

RESEARCH FIGURE 4: MY TOP SIX CHARTS FOR GETTING A QUICK VIEW OF ANY INSTRUMENT

The key feature of this process is that I don’t just choose the stock with the biggest upside target. I am looking for a series of things that add up to make it the bestlooking buy opportunity in my shortlist from my universe. For instance, in Figure 4, I notice that all the cloud charts show prices and the lagging line above the cloud and the point and figure trends are all up. But a closer look shows the weekly cloud chart making a long-term transition to bullish. The daily cloud chart shows the price breaking out to new highs and the 60-minute chart showing prices finding short-term support on the cloud.

The long-term 1% point and figure chart has two upside targets of 36% and 40%. Two targets pointing to the same price area is a ‘cluster’ and increases the likelihood of the targets being met. The medium term 0.5% chart has two upside targets both 38% higher, which is another ‘cluster’ matching the long term.

Four separate upside targets pointing the same price area gives me a stronger conviction about this stock. Whilst I might wait for a new high on the short-term chart to reduce the risk of a further pullback, there is a 2.4% upside target on the short-term point and figure chart. Most of all there are no active downside targets (selling thrusts) on any of the three charts.

I may not be looking to buy something with a full portfolio, but will often run this exercise anyway to ensure that I am aware of new opportunities.

Monitoring I may not be looking to buy something with a full portfolio, but will often run this exercise anyway to ensure that I am aware of new opportunities. I take the view that you can always find something better than your worst looking stock.

This may not be enough of a reason to make the swap, but it keeps the focus on performance.

The Society of Technical Analysts: www.sta-org.uk

23 FIGURE 5: FTSE 250 INDEX - BEARISH SHORT TERM, BULLISH MEDIUM AND LONG TERM

There are critical times in the market and that may be when you need to watch things a bit more closely. You may hear sensational headlines like ‘the market is plummeting’ and see the move on the chart doesn’t change things. Equally there may be no news and something is steadily falling out of bed.

The most important thing is you have your regular framework that allows you to look at objective charts with multiple techniques bringing those views together. When things line up, then you know you are likely to have a higher success rate.

Charts by Updata, data Bloomberg.

References • • • • • • •

Optimisation of Trailing Stop-losses - IFTA Journal 2009: www.ifta.org/public/files/journal/d_ifta_journal_09.pdf Cloud Charts - David Linton: www.cloudcharts.com Cloud Charts - Point and Figure - training videos: www.updata.co.uk/training.html The Definitive Guide to Point and Figure - Jeremy du Plessis: www.harriman-house.com My portfolio Blog: www.updata.co.uk/blog.html Charts Today daily webcast: www.chartstoday.com Updata Analytics: www.updata.co.uk

24

RESEARCH

Stops Versus Call Options: Using Volume at Price to Illustrate the Point I have had the privilege of presenting the Volume At Price indicator to a number of audiences over the last 18 months.

In this article, I will demonstrate how I use it to trade options, as well as looking at Long Calls as an alternative to going Long Underlying (Shares) with a stop loss.

Paul McLaren Paul McLaren is Managing Director of his own company, Enhance Your Options Pty Ltd, specialising in training and education of options trading strategies.

He has more than 20 years’ experience in the local share market, and has a keen interest in options on futures. Paul has served on both his local ATAA chapter committee, and on the ATAA National Board for two years.

The Problem with Stop Losses This analysis follows on from an article entitled “Forget The Stop, You've Got Options” (Drakoln). He cites two disadvantages of using stop losses; • Considerable slippage in a fast moving market • Being whipsawed in a consolidating market.

In this article, I want to explore these two events and consider them from a Volume At Price (VAP) perspective.

Key points to remember about Volume At Price (VAP) As we have seen from the Volume At Price presentations - VAP quickly and easily identifies areas where the stock is likely to • Provide Support and Resistance • Gap through VAP is most useful in mean-reversion (range) trading. It tells us where to enter, not when. We rely on other tools to give us timing signals.

Are Long Options an alternative to stop-losses?

Stop losses are the cornerstone of trade management, yet are inherently problematic. This is amplified by Gaps, which will magnify slippage. Futhermore, once a trader have been kicked out of the trade, where and when do they re-enter?

Options are well known to depreciate over time. This is seen as one of their many purported faults. However, the flipside is that they only depreciate over time, because they buy the trader time for the trade to move in the right direction. They could be viewed as having a prevailing, albeit temporary, stop-loss, as opposed to the sudden death stop loss found by trading the underlying stock.

QBE as an Example I am using the Australian stock, QBE as an example because it has been rangebound between $9.50 and $15.00 for several years and displays several principles quite nicely that I wish to drawn on. It also is subject to large, sharp moves in both directions, which makes it potentially a good stock to trade options.

As can be seen in Figure 1, the stock has;

• Risen sharply after the Trump election from $9.23 to 13.6 (= 47%) from November 2016 to early May • Fallen sharply when a trading update in late June sent it from $13.48 to $11.45 (= 15% fall)

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25

• Partially recovered to just shy of $12.00 at the time of writing (29th June 2017).

It has not provided a clear buy signal on the RSI or MACD. Using Volume At Price on the same chart, we can identify the; • Low Volume Nodes (LVN) - coinciding with fast moves, gaps, support and resistance • High Volume Nodes (HVN) - coinciding with slow moves, consolidation.

FIGURE 1: QBE (DAILY) - 18 MONTHS, VAP, RSI, MACD

26

RESEARCH Is an Entry Point near?

Over the last few days, QBE seems to have found support at the $11.50 level, so the question becomes “Is an Entry Point near?”

The first answer is the usual Technical Analysis response. It depends upon your time frame.

Timeframe and perspective are two sides of the same coin.

At $11.5, it is exactly halfway between significant support at $9.5 and $13.5, so for some the answer to the question “Is an Entry Point near?” may be simply no, as it is in the middle of a long-term range.

Looking at it from a shorter term perspective, say the last 7 - 8 months, and considering Volume at Price analysis on the daily chart, we can clearly identify the following characteristics of the price movement, summarised in Table 1.

TABLE 1: QBE - NODES, SUPPORT AND RESISTANCE LEVELS AND GAPS Stock Price

VAP Nodes

Support and Resistance

Gaps

$12.50

HVN

Resistance

$12.00

LVN

Support *4, now resistance

Gaps

$11.75

HVN

$11.50

LVN

Previous resistance, now support

Gaps

$11.25

HVN

$11.00

LVN

Gaps

The issue has become that the stock has gapped right through the significant HVN around the $12.5 mark, and also the lesser HVN at the $11.75 level, passing through two LVN (support levels in the process).

Is there a trade?

Personally, I was looking to enter around the $11.5 mark.

The issue is, as we have learnt from VAP studies, if it were to fall through that level, it would almost certainly move to $11.25 (HVN) and even possibly overshoot to near the $11.00 level, before settling around the $11.25 before the next move. It would continue in this behaviour up or down, extending to the LVNs before consolidating around the HVNs, depicted in Figure 2.

FIGURE 2: QBE - POSSIBLE PATHWAYS USING VAP

LVN: $12.00 HVN: $11.75 LVN: $11.50 HVN: $11.25 LVN: $11.00

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27

As it so happened, on 27th June, it opened down at around $11.50, touched $11.45, before ending at about $11.78.

The VAP on a daily basis shows how quickly the price reverted, and more importantly, how little volume was traded below $11.50, depicted in Figure 3.

In the following days, it rebounded to almost $12.00, before settling around the $11.75 level as this point in time.

FIGURE 3: QBE (MINUTE) - EIGHT DAYS, VAP

So coming back to the question, did I get in at around $11.50 for a nice quick profit? The answer is No. Why I did not enter by buying the stock?

The reason I like trading options is the versatility it provides, provided they are reasonably priced. If options are cheap (low volatility environment), I can buy the options with the built in stop loss. But options become expensive as a result of high volatility, which is usually associated with sudden declines. This is because stocks tend to fall faster than they rise. So with the recent sharp falls, the options are too expensive. So at this stage, options are not an option!

Alternatively, I could have bought the stock and tried to manage with a stop loss, dealing with the issues I have outlined above.

The issue here was that $11.5 was a LVN area, which means

that it was (equally?) likely to move either to $11.75 or $11.25, the next HVN in either direction, or overshoot in those directions. And because the trend was down, between $11.25 and $11.00 were likely targets. As you can see illustrated in Figure 2, the price tends to move below the HVN towards the next LVN, before settling around the HVN. This means that if I had entered the trade at $11.50, my stop would have needed to be around the $11.15. More importantly, if I was stopped out, where would I get back in?

If I did get stopped out at $11.15, and it did not breach $11.00, it would be consolidating around the $11.25 level.

If I tried to re-enter at the $11.50 level, I might just be repeating history. And I would be effectively buying at $11.50,

28

RESEARCH selling at $11.15, buying back at $11.50, with the chance I would be selling again at $11.15.

If I tried to re-enter at around the $11.25 level, with a lower stop-loss, I have effectively extended my stop-loss on the original trade.

And if I tried to enter at $11.00 with a lower stop loss I am just chasing the market down.

To avoid this, I prefer to use options, when the price is right.

Coming back to the two issues: 1) Gaps - A second market shock, following the trading update, which may be released after the market closes, could really hurt my open position, with losses far exceeding what I had anticipated. It would gap right through the LVN, and now we are looking around the $10.75 level for consolidation.

2) Whipsawing - If the stock bounced around the $11.40 - $11.20 level, and I continued to try and enter there is a good chance that I would be continually kicked out, my losses again could magnify.

The beauty of options is perfectly illustrated in this scenario as I would be only exposed to a single loss (the initial premium), yet I would also be exposed to the eventual(?) upside, provided it occurred prior to the options expiry date. For that benefit, I would be happy to wear the time decay.

Why did I not enter using long calls?

Clearly, my preferred tactic in this scenario is to use long calls, with that built in stop loss that is semi-durable.

But I did not enter using long calls for three reasons, illustrated in Figure 4.

1) On the 27th of June, volatility was high and decreasing, making not only long options expensive, but significantly the premium would be likely to decrease in value from both time decay (theta) and falling volatility (Vega). This is seen as the spike in the Long Term Volatility (Green Line) versus the Short Term Volatility (Purple Line).

2) In addition, the premium was all extrinsic (time) value. My strike could be deeper in the money, but then I start to commit more to the trade.

3) The breakeven for the $11.50 28th September which theoretically were priced at 63c was about $12.13 including brokerage. With such an expensive premium, big moves are required just to break-even.

The Society of Technical Analysts: www.sta-org.uk

29 FIGURE 4: QBE (DAILY) - EIGHT MONTHS, ROTOR PAYOFF DIAGRAMÂŽ, VOLATILITY, VAP

So what am I looking for to enter the trade?

To match my criteria for the trade I need:

Right Position - I would like to see QBE test $11.50 support (LVN) again. If I was trading the long stock I would be faced with exactly the same problems as before, in terms of trying to manage the stop loss.

Right Premium - But the second time the price nears the $11.50 level; the volatility should be significantly lower making the premium value much more affordable and much less prone to falling volatility, with volatility falling from around 28% to near 20%, if the share price decline was gradual.

This means that my QBE 28/9/17 11.5 Calls should be priced around 43c, adjusted for time decay.

Right Time - I would now be looking to other TA indicators to provide a buy signal around that level.

So I would like to enter at around 43c, which would be about the premium price should the underlying price settle around $11.5, and the volatility declines significantly. By waiting for this volatility decline, I would be risking around $1500 less in premium (63c - 43c) * 79 contracts * 100 shares per contract = $1580.

Managing the trade after entry Without getting too far ahead of myself, if the share price falls to $11.15 soon after the entry at 43c the options would be worth around 25c, should this happen within the first week or so, as shown in Table 2. I have used this example to illustrate the scenario of timing it wrong and the stock continues its rapid descent.

30

RESEARCH TABLE 2: QBE OPTIONS TRADE - TRADE CALCULATIONS BASED ON FALL TO $11.15 ON 3RD JULY

The calculations can be done several ways to illustrate the point, but would be something like this.

If I decide that I am willing to risk about 3 ½ K, ($3,475), I can determine how many shares and how many options contracts that equates to. Importantly, whilst the maximum at risk for the options trade is - $3,475, this only occurs at expiry if the price is below $11.50. Should the share price decline fairly quickly (in the first week or so) to around the $11.15 level, the actual loss is only in the order of -$1,400.

TABLE 3: QBE OPTIONS TRADE - LONG STOCK VERSUS LONG CALLS Shares

Options

No. of Contracts

79.2

Shares per Contract

100

No of Shares (Equivalent) Total Delta

10129

7919

100% $10,129 51%

$4.038

Strike Price

$11.50

Entry Price

$11.50

$ 0.43

Opening Brokerage

$

$

Total Outlay

35

$116,514

Closing Brokerage

$

Closing Out Position (Stop Loss Level $11.15)

$11.15

35

Option Premum At Stop Loss (After 5 Days) Total Loss At Stop Loss if Close Out Position Absolute Maximum At Risk

N.B. Not rounded for illustration purposes

35

$3,475 $

35

$ 0.25 -$3,475

-$1,448

-$116,514

-$3,475

= Original Premium - (∆ * Price Movement)

Crucially, at this point I am still in the trade. I have time for the trade to work, and time to rethink my position.

It is worth remembering that the premium paid on the option is the maximum we can lose, it does not mean that it is the maximum that we have to lose. I could at this point close out my options trade.

Significantly, the share price would need to fall to below $10 for the entire premium to be lost soon after the trade entry, as shown in Table 4.

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31 TABLE 4: QBE OPTIONS TRADE - TRADE CALCULATIONS BASED ON FALLS BELOW $10 ON 3RD JULY

One further point, because the delta is about half at entry (Strike Price = Underlying Price = At the Money), it means that all else being equal, the trader is going to experience less gains and less losses versus holding the underlying.

However, this potential benefit is lost if the trader decides to double down. The analogy is thinking you can drink twice as much diet soft drink because it contains only half the calories. Options have the unique ability of either reducing risk, or increasing risk, depending on how they are used.

In summary Coming back to the original issues with stops losses, • Considerable slippage in a fast moving market • Being whipsawed in a consolidating market Many novice traders are kicked out of trades because their stop-losses are too tight, and whilst licking their wounds, watch to see the trade head in their anticipated direction. Options should be considered in this case.

Options lose value over time because they buy you time for your trade to head in the right direction, rather than the sudden death that is the nature of stops on shares.

Options can be used in the place of buying the underlying shares, but the conditions have to be right not only from a technical analysis perspective, but also in terms of the premium price.

The novice will try and enter the options trade on the first dip. More experienced (patient) options traders will wait for a re-test of this level when the volatility has declined. This is in addition to a timing signal being present.

Paul McLaren is the Managing Director of Enhance Your Options Pty Ltd, which specialises in the training and education of options trading. This analysis is intended for education purposes only and is not intended as a trade recommendation. Individuals are encouraged to consult their financial advisor to help determine if options are suitable for them.

Acknowledgements and References • All charts used are courtesy of Amibroker software. The RoToR Payoff Diagram® is owned exclusively by Enhance Your Options Pty Ltd. www.investopedia.com/articles/optioninvestor/08/options-stops.asp

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RESEARCH

The Manifestation of Universal Law: Complexity, Chaos and the Elliott Wave Principle: Part 2 of 2

Peter Goodburn Peter Goodburn is a member of the Society of Chaos Theory in Psychology and Life Sciences, is leading Elliott Wave analyst at WaveTrack International and author of the Institutional Elliott Wave Navigator reports.

For more information/subscription services, please contact Peter using services@wavetrack.com or see www.wavetrack.com ‘help-desk’.

Introduction: vibrational frequencies Inflexion points are ‘attractors’ and they can be predicted within the system (the markets) using the ratio and proportion qualities derived from the Fibonacci Summation Series (FSS), i.e. 1-1-2-3-5-8-13-21-34-55-89-144 etc. The way we link Universal Law in the context of Sacred Geometry with Fibonacci Ratios is graphically represented by the most basic yet prolific symbol known to Man - the circle. It has stretched across the eons of time and hidden within its motion are the ratio relationships that make up its DNA, the market’s vibrational frequencies.

Consider how a moving circle generates the ‘Golden Ratio’, 1.618 or 0.618. These ratios were revered by the ancients because of their symmetrical, proportionate and harmonious qualities. They are the most important of all ratios, but others also manifest from the Fibonacci Summation Series.

• Point A is considered the resting point of the circle before the motion begins (see Figure 3). The circle moves to the right by one integer, the distance of its diameter. The radius = 1.00 and the diameter = 2.00. Point A becomes connected with point B, the resting point of the circle after the motion is completed.

FIGURE 3: CONSIDER HOW A MOVING CIRCLE GENERATES THE ‘GOLDEN RATIO’

(Edited and additions from original article published 18th October 2000; Copyright 2017 © Peter Goodburn, CFTe, MSTA 9th January 2017.)

The vertical radius of the original circle between A and 0 is now re-drawn from its origin to its new location of 01 forming a diagonal - see Figure 4 A line that changes its length and position is known as a ‘Vector’. Moving along the diagonal from A to 01, an intersection is made at C upon touching the rim of the second circle. From the centre of the second circle, a vertical line is drawn to create a radius to point B. This creates a right-angled triangle from the base A to B and the hypotenuse A to 01. The ‘Golden Ratio’ is revealed when placing a divider/compass at points A-C and drawing a partial circle until the arc intersects the line of A-B at G. At this intersection, G cuts the line at or phi. This can be expressed a number of

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different ways, but all represent the ‘golden ratio’. For example, if the line A-B represents 2.00, then the intersection cuts the two separating points so they become ratios 1.236% between A-G and 0.764% between G-B, i.e. 2.00 x 61.8% = 1.236 and 1.236 x 61.8% = 0.764%. If we had started this exercise by designating the radius as 0.5 and the diameter as 1.00 then another way to express the same is where A-B represents 1.00, so that A-G is 61.8 and G-B is 38.2.

FIGURE 4: THE ‘GOLDEN RATIO’ IS REVEALED

•

Whichever you choose, the ratio relationship remains constant and this harmony epitomises the necessity for nature to express separation, or individualism, whilst being part of a greater whole. This consequence can be also found in the fluctuations of the markets - every wave that composes an Elliott Wave pattern is neither dependent nor independent but inter-dependent upon the others. Together, they evolve into a growth-decay process within a hierarchical non-linear order that relates to each preceding sequence - cause is followed by effect that simultaneously becomes the cause for the next effect ad infinitum. ‘The smaller dimension is to the greater as the greater is to the whole.’

•

The ‘golden ratio’ can be found in another relationship within the motion of this circle. First, we need to calculate the hypotenuse of the triangle, A-01. Applying Pythagoras’ Theorem, which states that the square of the length of the hypotenuse equals the sum of the squares of the lengths of the two other sides. Then 1 x 1 = 1 and 2 x 2 = 4 so that 1 + 4 = 5 and √5 = 2.236 - see Figure 5.

FIGURE 5: THE ‘GOLDEN RATIO’ CAN BE FOUND IN ANOTHER RELATIONSHIP

34

RESEARCH

•

We know the radius of the circle is already 1.00 between C and 01, so A-C must measure 1.236. Extending the diagonal line from 01 to the outer-limit of the circle creates point D measuring the radius to 1.00. When combining this line along its entirety, points A-D measure 3.236 so that A-C is 1.236 and C-D is 2.00 creating the ‘golden section’ once again - 1.236 ÷ 2.00 = 0.618, or inversely as 2.00 ÷1.236 = 1.618.

It is truly amazing how the simplest movement of the circle reveals Fibonacci ratios. The circle could represent the spheres of our solar system or carbon particles in a molecular experiment - scales don’t matter. What matters is the fact that the ratios are produced without contortion, without conditions and without prejudice. They exist everywhere, as R.N. Elliott’s monograph (1946) stated, ‘Nature’s Law’, perhaps Universal Law. The financial markets also vibrate to this same frequency.

When applying these Fibonacci-Price-Ratios (FPR’s) to the markets, there is really no necessity to use greater ratios than 161.8%, i.e. 261.8%, 4.236%. Most, if not all Elliott Wave patterns encompass these ratios within the 161.8% limits on a recurring frequency that is predictive. The real discovery is how to identify the golden ratio and other subliminal ratios to the pattern development of Elliott Waves.

Fib-Price-Ratio Matrix When constructing a forecast for any particular financial instrument, whether for stock indices, equities, currencies, commodities or bonds, the most important aspect in deriving the ‘attractor’ or ‘inflexion-point’ is the combining of structure/ form of the Elliott Wave pattern development with a Fib-Price-Ratio Matrix. It is important to understand that this is a dualistic approach to achieve success; they must be equally assessed qualitatively and quantitatively. The qualitative aspect relates to structure/form. The quantitative aspect is achieved by taking the most frequently recurring fib-price-ratios for the existing pattern and then applying these over several degrees of trend in an attempt to form a unified convergence. When a matrix of unified price-convergence is discovered, using the finite amount of possible fib-price-ratios, then an ‘attractor’ or ‘inflexionpoint’ has been identified. This area/level pulls the price activity towards it, much like iron filings are drawn towards a magnet.

Once reached, there is a discharge that neutralises the trend, which in turn, then begins an opposite, balancing correction.

Case Study: 40,000.00 Dow Jones Industrial Average The Dow Jones Industrial Average (DJIA) is currently approaching the 20,000.00 mark for the first time in its history, but if Elliott Wave analysis and accompanying Fib-Price-Ratios have anything to say, then this secular-bull uptrend will continue to 40,000.00+/- before exhaustion. Our final four charts will attempt to identify the next major ‘inflexion-point’ that will define the end of this long-term uptrend. This analysis begins with the Dow’s advance from the Great Depression low of year-1932 of 40.50 (see Figure 6).

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35 FIGURE 6: DOW JONES 30 INDEX - QUARTERLY (LOG SCALE)

The overall upward progress fits the structural profile of a developing five-wave expanding-impulse pattern labelled in cycle degree, 1-2-3-4-5. Commonly, about 80-85% per cent of the time, third waves are the longest sequence of the impulse waves, 1-3-5, but in this case it is Wave 5 that is longest - the ‘extension’ wave. This means using different Fib-Price-Ratios that commonly recur for fifth wave extensions. Two obvious ratios can be used: either cycle Waves 1-3 can be extended by a fib.

61.8% ratio or Waves 1-4 by its inverse, 161.8%. The former approach does not project the fifth wave longer than the third, so this can be eliminated. The remaining measurement projects a terminal high for Wave 5 to 41,116.70+/-.

• 1-4 (40.50-570.00) x 161.8% = 41,116.70+/- [all measurements log-scale]

The 41,116.70+/- projection is still a candidate, this is simply a possibility not a high probability level unless other ratios are used to form a convergence-matrix in identifying the ‘attractor’ area. At this point, it is a good idea to check and verify the completion of cycle Wave 3 in order to avoid errors in establishing the terminal high for cycle wave five. The structural breakdown of cycle Wave 3 is shown in Figure 7.

36

RESEARCH FIGURE 7: DOW JONES 30 INDEX - QUARTERLY (LOG SCALE)

Subdividing into primary degree, 1-2-3-4-5, the advance begins with primary Wave 1 beginning from the April 1942 low of 92.60.

Primary Wave 2 ends at 160.20 with Wave 3 undergoing ‘price-expansion’ from this low where it fits into structural profile, it ‘expands’ beyond the measurement of wave one, it subdivides into a smaller five-wave pattern, intermediate degree, (1)-(2)-(3)(4)-(5) but importantly adhering to several fib-price-ratios.

Wave (1)-(4) x 61.8% = (5) at 749.40+/- (actual high 739.80) The above measurement validates the terminal high of primary wave three.

A Fib-Price-Ratio matrix forms an ‘attractor’ towards the 1,053.20+/- level. This is derived where the origin of primary Wave 1 at 92.60 is extended to the same point as intermediate Wave (4) at 416.10. In authenticating a terminal high for the complete primary degree uptrend, focal points like intermediate Wave (4) frequently provide the corroboration needed to form a fibprice-ratio matrix ‘attractor’. In other words, this wave’s low at 416.10 forms a double ‘golden-ratio’ point as it not only intersects phi for measuring the terminal high for intermediate Wave (5) but also primary Wave 5. There is some slight deviation, but negligible. Another fib-price-ratio measurement worth remembering is to extend primary Wave 1 by a fib. 161.8% ratio. This frequently projects accurate terminal levels for fifth waves - in this case, it ran too short to form a matrix at 865.00+/-.

Having authenticated the terminal high for cycle Wave 3, we now move on to cycle Wave 5 - see Figure 8.

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37 FIGURE 8: DOW JONES 30 INDEX – QUARTERLY (LOG SCALE)

This uptrend begins from the year-1974 low of 570.00, again labelled in primary degree, 1-2-3-4-5. In this five-wave impulse pattern, we have tested various potential upside targets for ending primary Wave 5 but found that one of the most common ratios is the best candidate for a convergence matrix. Measuring waves 1-3 between 570.00 to 11,750.30 then multiplying this by a fib. 61.8% ratio projects a terminal high for Wave 5 towards 41,982.10+/-. Extending primary Wave 1 by a fib. 161.8% ratio would also project Wave 5 in close proximity if it were just a fraction higher (see golden ratio phi symbol, left, actual and theoretical). But importantly, the 41,982.10+/- area is in very close proximity to the 41,116.70 area, as derived from cycle degree shown earlier. This is the first time we have observed a fib-price-ratio convergence matrix being formed - an ‘attractor’.

The final chart, Figure 9, depicts primary wave 5 within cycle wave 5 unfolding into a smaller impulse pattern labelled in intermediate degree, (1)-(2)-(3)-(4)-(5).

38

RESEARCH

FIGURE 9: DOW JONES 30 INDEX - WEEKLY (LOG SCALE)

Once again, the first wave as intermediate Wave (1) is extended by a fib. 161.8% ratio to project the terminal high for intermediate Wave (5) at 39,207.00+/-. As this moves into close proximity to two other measurements, those of primary and cycle degree towards 40,000.00+/-, it becomes the most probable area to ‘attract’ the price development. It seems that intermediate Wave (3) remains incomplete at the moment, with upside targets to 23,800.00+/- for late-2017/early-2018, then later, completing a corrective decline as wave (4) towards 17,500.00+/- before wave (5) stages a final thrust to 39207.00+/-. These calculations could change though as the various ‘permutations’ are formed due to external, exogenous events, but the ultimate target is not expected to change.

Conclusions There seems no doubt that the Elliott Wave Principle is more than just annotating numbers and letters to a chart. There’s a real science behind it, one of the ‘natural sciences’ that is currently being explored by a new generation of scientists into the phenomena of ‘behaviour’, ‘physics’, ‘astronomy’ ‘chemistry’, ‘biology’ and even ‘finance’. Our understanding of its qualitative aspects are perhaps less known in finance than in the other disciplines, but is there a case where it is needed more? The efforts made in an attempt to forecast the Dow Jones (DJIA) should not be a distraction to anyone interested in discovering more. In fact, we have hundreds if not thousands of examples of fib-price-ratio convergence-matrices where forecasts have unfolded into predetermined ‘inflexion-points’, later changing direction in the way ‘attractors’ pull prices towards them before ‘repelling’ too. Any failure is on the part of the analyst, not the laws that lay behind it.

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Acknowledgements and References My grateful thanks to the following people and organisations that have made this presentation possible: • Walter E. White - ‘Mathematical Basis of Wave Theory’ - Originally published in the 1968 and 1970 supplements of the ‘Bank Credit Analyst’.

• Manly P. Hall - ‘The Secret Teachings of All Ages’ - The Philosophical Research Society Inc. • Peter Lemesurier - ‘Decoding the Great Pyramid’ - Element Books Ltd. • Gyorgy Doczi - ‘The Power of Limits’ - Shambhala Publications Inc. • L. Gordon Plummer - ‘By the Holy Tetraktys’ - Point Loma Publications/Stockton Trade Press • Robert Lawlor - ‘Sacred Geometry’ - Thames & Hudson Ltd. • Nina Hall / Benoit Mandelbrot / Caroline Series / Robert Savit - ‘The New Scientist Guide to Chaos’ - Penguin Books Ltd. • Bill Williams PhD - ‘Trading Chaos’ - Wiley Finance • Edgar E. Peters - ‘Chaos and Order in the Capital Markets’ - Wiley Finance • Ilya Prigogine & Isabelle Stengers - ‘Order out of Chaos’ - Flamingo • Jack Cohen & Ian Stewart - ‘The Collapse of Chaos’ - Viking/Penguin Group • R.N. Elliott - ‘Natures Law - The Secret of the Universe’ • Peter Goodburn - ‘The Manifestation of Universal Law in Chaos & Wave Theories and • Its Application to Determine Trends in Fixed Income Markets’ - 18th October 2000 - WaveTrack International

Did you know?

You may only use the designation MSTA after your name if you are a paid up member of the STA. This is because MSTA stands for “Member of the Society of Technical Analysts”.

Anyone (prospective or current employer etc.) can look up your name and membership number on the front page of the website.

40

ANALYST FOCUS

Head and Shoulders above: Interview with private investor Susan Marmor What attracted you to technical analysis?

Great question. I was lucky to meet some people who use TA and thought what they used was very good so I started to use it too. For me, it started with using indicators such as the MACD (moving average convergence/divergence), the RSI (relative strength index) and also MA crossovers (moving average crossovers). The three people I met used these indicators on their own, but I put them together into a little system that would get me into a stock and out of a stock.

Susan Marmor Susan has been managing her own money since 2005. She has a degree in Economics and Philosophy from the University of East Anglia, after which she spent nearly 25 years working in the advertising industry.

I declared myself a full-time trader in September 2005. I didn’t know exactly what I was doing but I had bags of confidence.

As a private investor how do you benefit from TA on a daily basis?

It gives me a low stress way of entering and exiting my position. So, for example, when we had the Brexit shock and the baby was thrown out with the bath water, I didn’t have to panic. I just sat there and watched the carnage, looking at my signals.

When a signal was hit, I would get out a little of the stock and when the next one was hit I got out some more. Largely I remained invested, as my signals didn’t get hit. So the advantage of TA the way I use it is that it takes away much of the thinking and gives one a framework. If you stick to your rules and your rules work, then days like Brexit don’t faze you.

Why should other private investors train to be a technical analyst at the STA? The STA is the main provider of a course that teaches people the facets of TA. Its members are the only people who provide a course of this kind and I think that it is superb. The syllabus is constantly updated and along with the meetings there is a lot to be learned.

Why do you think TA is important within the markets?

Well the advantage is that it shows you crowd psychology, by tracking TA (volume) you can see where the crowd is headed and decide whether you want to be a contrarian or go with them. I am a momentum investor so I try to catch a moving train and stay with it until it stops. I feel naked in the markets without TA. Please give a brief background on your trading and investing history?

I declared myself a full-time trader in September 2005. I didn’t know exactly what I was doing but I had bags of confidence. Meeting people at the STA, and I met all sorts of people, I found a number who were doing very well using TA and decided it was very much for me.

Why did you choose TA over fundamental analysis?

That’s a good question; I don’t have an accountant’s eye and believe TA is more straightforward. TA jumped off the page at me.

Is there any advice you would give to a new starter?

Yes! A new starter needs to understand that you must leave your ego in bed in the morning and trade what you see, not what you think. So falling in love with a concept that a mine will produce gold or a well will produce oil, forget it! If the signal is telling you a stock is going down you sell and you can always get back in

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Love your losses; you must love your losses as much as your gains because every trade should be planned.

later. So don’t fall in love with a stock. Also, if you sell and sell early and the price keeps moving back up you can always buy back in; nothing wrong with that. Look at ASOS: many people went in at 2p and sold at 3p but it ended being one of the best rising stocks ever. If you don’t buy back you miss out. (Susan only trades UK equities.)

Would you change anything about your trading journey?

Erm... I wish I knew what I know now at the beginning. The biggest mistake was the ego thing at the beginning and that is the main thing I would change.

are all planned in the sense of how much I am prepared to lose.

How have you adapted to technological change?

I was lucky when I came in to the market as there was affordable software available.

Are there any psychological tips you would give?

Yes, love your losses; you must love your losses as much as your gains because every trade should be planned. So you should plan how much you could make on any trade and plan your losses and be prepared to lose money. Always set out to make more money than you are going to lose on a trade.

Can you explain how you come towards your trading decisions?

If I am looking for positions, I am looking for price momentum, often using Level 2 data. I have 200 stocks on my watch list. What I am looking for is RSI to be over 50, MACD divergence (MACD making higher lows while price making lower lows). The final leg is the 20 MA being over the 50 MA, so that’s how I pick the stocks. I get out using the same in reverse. It sounds like a buy side only strategy? How long are you typically in the trades? Some positions are three to five years old but now the market is choppy most are more like weeks and months - the signals dictate.

Describe your best or favourite trade?

My best trade ever was buying Telecom Plus at £1 and sticking with it all the way up to £12; it also paid a nice dividend. Did you re-leverage or just let it run? I leveraged at the beginning and used a four-tranche entry. The positions

What has the STA done for you?

The monthly meetings are a superb opportunity to meet like-minded people and industry legends and the journal is fantastic and people are sharing their methods and the annual dinner with the IFTA conference was also amazing.

42

BOOK REVIEW

The Socionomic Theory of Finance Robert Prechter. (2017) Socionomics Institute Press, Georgia GA, USA).

By Simon Gray BA MPhil MBA MSTA The fundamental question addressed here is what determines market price moves. For years, neo-classical economics has held that fully informed rational individuals produce a stable equilibrium, a mean-reverting system of pricing values and trades that is regulated by supply and demand.

In this system, external events impact the market and shift prices temporarily out of equilibrium and away from the mean. So, for example, a reduced level of demand from emerging markets (cause) might allow the price of oil to fall by more than expected (effect) or a Bank of England comment (cause) could send sterling reeling (effect).

This allows our rational reactions to exogenous causes to ‘explain’ market behaviour. This conventional view of cause and effect simply requires us to identify or invent an external cause, which typically is the job of most economists, analysts and commentators. This type of news causality is easy to understand and, in some ways, reassuring. Unfortunately, for the most part, it is simply ad hoc rationalisation with retrospective data fitting, and Prechter demonstrates that it is a myth that even significant shocks (earthquakes, assassinations, terrorist attacks etc) have much effect on indices apart from in the very short term.

Such external cause explanations hold good while markets are trending and simple linear extrapolation works. However, this causal paradigm is unable to predict trend changes in the market or the economy with its forecasts significantly lagging the market at turning points. Hence the economists’ failure not only to foresee the 2007-08 financial crisis but also, in some cases, to deny that it would ever happen. Naim (2009) observes: “The financial crisis has killed the claim that economics deserves to be treated as a science. The measure of a science is its capacity to explain, predict, and prescribe. And

most economists not only failed to anticipate the nature and evolution of the catastrophe, but their conflicting recommendations on how to stabilise the situation exposed the unreliability of their knowledge.

Policy gyrations and faulty calls have revealed that economics itself is in crisis: The experts simply have no idea what to do.”

Prechter puts forward an alternative paradigm in which action is motivated by mood: an unconscious state of mind inclining someone to certain emotions, attitudes and then actions. In other words, how an individual feels is the primary cause of how they act. In the aggregate, social mood is an unconsciously shared mental inclination that arises in humans when they interact socially. Fluctuations in social mood regulate the tenor and character of social actions.

As social mood is a shared experience, people then tend to herd or participate in coordinated actions with others.

Particularly in situations where knowledge is lacking and the future uncertain, people are inclined to align themselves with the feelings and conviction of the group and move with the group.

This insight - how social mood motivates social actions - is one of two fundamental concepts of the “socionomic” theory Prechter has been developing over several decades and which studies how waves of social mood regulate changes in social behaviour including politics, financial markets and popular culture.

The second concept is that social mood fluctuates according to the hierarchical fractal pattern described originally by Ralph N. Elliott and known as the Wave Principle. Socionomic causality operates irrespective of the Wave Principle, so those who are sceptical about Elliott’s analytical approach can ignore it and still pursue the socionomic approach.

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The Socionomic Theory of Finance (STF) consists of eight parts: Part 1 The Absence of Exogenous Causes in Financial Markets challenges the paradigm under which our rational reactions to exogenous causes are held to account for financial market behaviour. By examining how markets react to major shocks and other business, financial and political events, it becomes clear that news has no consistently reliable effect on the markets and that the most dramatic market moves have no clear exogenous causes even with hindsight. This finding gives rise to the need to search for a new model.

Part 2 Socionomic Theory explains what Socionomics is and how socionomic causality differs from the traditional mechanics paradigm of cause and effect. An approach to measuring social mood is introduced with sociometers, the key benchmarks being the major stock markets, with discussion on whether leading/lagging sociometers and Elliott waves can help predict trend changes in the economy, politics and culture. Socionomics is also purported to be both falsifiable and predictive, thereby satisfying the requirements of a valid scientific theory.

Part 3 The Socionomic Theory of Finance details why the socionomic approach is more appropriate to financial markets than classical macro-economics. In particular, economic concepts of supply and demand are argued to be inapplicable to financial markets with buy/sell decisions impulsive rather than rational and largely influenced by herding. Traditional financial theories including the Efficient Market Hypothesis, Utility and Value Theory and Asset Pricing Theory are all reviewed and found wanting.

Part 4 Herding and Social Mood looks at the biological and psychological reasons for herding, why it is pervasive in all areas of the investment world and usually leads to losses.

With most people possessing inadequate information, they assume that the herd knows where it is going. As stress intensifies, so does the tendency to herd thereby reinforcing the conviction that one is correct.

Part 5 STF vs Conventional Thinking looks at examples of the contrasts between STF and traditional macro-economics.

Linear extrapolation is contrasted with the fractal Elliott wave model and how its analysis of the stock market has implications for other financial and social trends. Ch22 (“Elliott Waves vs. Supply and Demand: The Oil Market”) is particularly worth reading and concludes that changes in the supply/demand for oil are the result of prices rather than the cause of them.

Part 6 The Primacy of Social Mood in Financial-Market Causality Since social mood is central to any socionomic argument, this section examines how it impacts everything from the tone of Federal Reserve board meetings to economic and financial views on inflation and business activity.

Part 7 Metatheory and STF’s Relationship with Other Theories. This looks in particular at other theories of herding. It compares Socionomics with Pareto’s sociological theory and considers whether meaningful social science knowledge should be derived from the study of individuals or the study of group organisations and processes, or, as with socionomics, an integration of the two.

Part 8 And For Dessert contains a selection of short essays on various topics including an interview with John Casti, author of the socionomics primer “Mood Matters” (Casti 2010) and an interview with Prechter.

The book has a clear structure and is illustrated with hundreds of charts which, although in black and white, are easy to read and clearly annotated. Notes, references and, where needed, bibliographies are easily accessible by being placed at the end of each chapter rather than at the end of the book.

Overall this book is a refreshing challenge to traditional classical economics and brings together the work of Prechter and his colleagues. Taking 13 years to write and stretching to 813 pages, it includes a number of articles written for academic journals that, for readers without a sociological or socionomic background, are quite challenging.

It may prove helpful to read Prechter’s earlier two books on socionomics (Prechter 1999, 2003) in preparation for tackling The Socionomic Theory of Finance.

Casti (2010): Casti, John, “Mood Matters”, Springer, 2010.

Naim 2009: Naim, Moses, “An Intellectual Bailout: We Must Add Another Field to the List of Those in Need of Rescuing - Economics Itself,” Foreign Policy January-February 2009.

Prechter 1999: Prechter, Robert, “The Wave Principle of Human Social Behaviour and the New Science of Socionomics”, Gainsville GA: New Classics Library, 1999.

Prechter 2003: Prechter, Robert, “Pioneering Studies in Socionomics”, Gainsville GA: New Classics Library, 2003.

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Benefits of STA membership

The STA holds 11 monthly meetings in the City of London, including a summer and Christmas party where canapés and refreshments are served.

As a service to our members, many of whom are unable to attend all our monthly meetings, we have been making videos of meeting presentations for several years.

Key benefits • Chance to hear talks by leading practitioners • Networking • CPD (Continuous Professional Development)

Key benefits • Never miss the latest meeting.

• Browse our extensive video archive of previous meetings.

The STA has been running educational courses on technical analysis for 25 years.

Student members have access to a question and answer forum which is available in the member’s area of the website.

Key benefits • Courses are taught by leading authorities in their field such as authors, highly regarded professionals and Fellows.

• The STA also offers a Home Study Course for self-study.

The STA ”Market Technician” journal is published online twice a year.

Key benefits Members receive the latest issue of the “Market Technician” via e-mail.

They are also able to access an archive of past editions in the member’s area of the website. Technical analysts from all over the world contribute to the STA journal.

Key benefits Members can ask questions on technical analysis in the Technical Analysis Forum which a course lecturer, author or Fellow will answer.

The STA has an extensive library of classic technical analysis texts. There are over 1000 books in the collection. It is held at the Barbican Library with a smaller selection available at the City Library, a reference library in London. As a member you can now browse which titles are available on-line.

Key benefits Members are encouraged to suggest new titles for the STA book collection and, where possible, these are acquired for the library.

The complete listing of books held can be downloaded in Excel format from within the member’s area.

The Society of Technical Analysts and the Chartered Institute for Securities & Investment (CISI) have formed a partnership to work together on areas of mutual interest for our respective memberships.

Key benefits CISI examination exemptions for STA Diploma Part 1 and 2 holders. MSTAs with three+ years’ experience can become full members (MCSI).

Endorsed by the Chartered Institute for Securities & Investment (CISI), members of the STA are entitled to receive continuing professional development points (CPD) for their attendance at monthly meetings and taught course lectures.

Key benefits • Remain compliant.

• Be informed of all new industry developments.

STA members benefit from significant discounts on technical analysis books, magazines and software.

Key benefits STA members currently enjoy discounts from: • Your Trading Edge • The Technical Analyst Magazine • MT Predictor • CQG • Tradermade and the Global Investor bookshop.

The Society of Technical Analysts: www.sta-org.uk

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STA Calendar 2017/18 More information about the STA events can be found here.

See pg.6 for more info

Tues 12 September

Wed 20 September

6.00pm British Bankers Association Trevor Neil

7.00pm National Liberal Club STA Annual Dinner

Fri 13 - Sun 15 October

Wed 11 October

8.30am Excelsior Hotel Gallia, Milan IFTA’s 30th Annual Conference

Tues 14 November 6.00pm British Bankers Ass. MiFID II Round table on Research Unbundling

6.00pm LSE, STA Diploma Part 1 Course commences

Mon 4 December 10.00am StayAhead Training Centre STA Diploma Part 1 Exam

venue to be confimed

Tues 9 January 6.00pm Central London Speaker TBC

Tues 10 October 6.00pm British Bankers Association Dmytro Bondar

Thurs 19 October 1.00pm Student Central STA Diploma Part 2 Exam

Tues 12 December 6.00pm British Bankers Association Christmas Party

venue to be confimed

Mon 15 January 6.00pm LSE, STA Diploma Part 1 Course commences

Tues 13 February 6.00pm Central London Speaker TBC

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THE EDUCATION CHANNEL

STA DIPLOMA COURSES Learnt ever so much.

Would recommend this course to anyone, even if they are not in the financial industry as yet.

Gives a great detailed insight into the world of technical analysis.

Colin Jones

Gain full accreditation through an STA professional development course Booking is well under way for the CISI and IFTA accredited STA Diploma Part 1 and Diploma Part 2 courses.

The two courses have been designed to cater for newcomers and experienced professionals who are looking to challenge themselves. They will learn to develop the methodology, tools and confidence to make better informed trading and investment decisions in any asset class anywhere in the world.

Students on the STA Diploma Part 1 course will also receive a signed copy of Clive Lambert’s book Candlestick Charts: An introduction to using candlestick charts.

Videos of lectures are available to students who miss a session. Also copies of all lecturers’ presentations are emailed to students on the day following each session.

STA Diploma Part 1 Course The course will start on Wednesday 11th October 2017.

It costs £995 if booked by 28th September 2017; £1195 thereafter.

This course is designed for those with little or no previous experience and individuals looking to initiate themselves in the practice of technical analysis. The course will give you an introduction to technical analysis and provide you with the tools to progress to the Diploma Part 2 Course.

The Diploma Part 1 schedule enables students to maximise their learning while complementing their work and home life. The course is accredited for Continuing Professional Development (CPD) by the Chartered Institute for Securities and Investment (CISI).

Programme at a glance

6x1 evening a week classes Exam preparation tuition 2 hour exam Qualification accredited

by CISI and IFTA

• •

• • • • • •

• •

Introduction to technical analysis and comparison to fundamental analysis Construction and interpretation of Line, Bar, Point and Figure and Candlestick charts; introduction to Heikin- Ashi, Three Line Break, Renko and Kagi charts Support and resistance, theory, identification, utilisation, breakouts Trend and return lines, where and how to draw them Fibonacci numbers and retracements Reversal and continuation patterns, target projection from patterns Moving averages, different types and how to interpret them Momentum, indicators/oscillators, relative strength, sentiment measures; definition, interpretation and how to use them Dow Theory, introduction to Elliott Wave Theory How to use technical analysis strategically.

Take the next step: to purchase please click here

Diploma Part 1 and Diploma Part 2 package!

Due to its popularity last year we are again offering the Diploma Part 1 and Diploma Part 2 courses as a ‘package’. The cost of this package is £2795 (early bird until 28th September 2017) and £3795 thereafter. Take the next step: to purchase please click here

STA Diploma Part 2 Course The course will start on Monday 15th January 2018.

It costs £1995 if booked by 15th December 2017; £2,995 thereafter.

The Part 2 Course provides you with advanced professional knowledge, understanding and skills to use technical analysis as a vital investment tool or to pursue a career in technical analysis within the investment community. Basic technical analysis knowledge is a prerequisite for attending this course. During the 12-week programme you will learn from leading experts and develop both theory and practical experience in the major techniques, analytical tools and indicators to enable you to select the most advantageous portfolios, trades, hedges and much more for your clients, your employers or your own trading systems. The Diploma Part 2 Course provides you with a deeper understanding of technical analysis, added confidence and the capabilities to develop your career further. The course is accredited for Continuing Professional Development (CPD) by the Chartered Institute for Securities and Investment (CISI).

Programme at a glance 12x1 evening a week classes Exam preparation tuition 3 hour exam Qualification accredited

by CISI and IFTA

•

•

•

•

The practical application of support, resistance and price objectives from market professionals - how they build on the essential basics and add advanced techniques eg Fibonacci projections; working in different time frames Construction and advanced applications of candlestick and point and figure charts, including point and figure moving averages and indicators Advanced moving average, momentum indicator and oscillator techniques; use of market breadth and sentiment measures The practical application by market professionals of Dow, Elliott Wave and Gann Theory, Ichimoku Charts; Market Profile®, behavioural finance, risk management - and much, much more.

Take the next step: to purchase please click here

47

48

THE EDUCATION CHANNEL

Home Study Course The Home Study Course costs £495. If you wish to book for the exams at the same time, then our Home Study Course & Diploma Exam package costs £1195.

Live overseas or too far from London? Not to worry - you can study at your own pace at any time with our online home study course.

Developed over several years in collaboration with leading analysts and systems operators from around the world the STA Home Study Course© (HSC) offers you the flexibility to study at your own pace and to learn where you live with the highest quality materials. Learning with the HSC you will gain the skills and confidence needed to either use technical analysis in a professional manner or become a qualified technical analyst (subject to passing the Part 1 and 2 exams) with the added advantage of balancing all other aspects of your busy life.

12 units Diploma Part 1 Exam (optional) Diploma Part 2 Exam (optional)

Conveniently divided into 12 units and covering all relevant aspects of the STA Diploma, your learning will be tested as you progress through the 700 page e-book syllabus with a series of multiple choice questions on the core topics covered. Supporting material is also provided for report writing and author commentaries as well as a recommended reading list.

Programme at a glance • Foundation • Chart Types • Point and Figure Charts • Candlestick Charts • Dow Theory • Market Breadth • Moving Averages • Momentum Indicators and Oscillators • Cycles, the Elliott Wave Principle • Basic Elements of Gann Theory • Market Profile™ • Market Psychology.

Take the next step: to purchase please click here

Special Journal offer We have put together a great offer for you.

Book any of our courses, including the Home Study Course, before 30th October 2017 and save £50.

SIMPLY CLICK HERE and enter code JNLPROMO in the coupon box to redeem your £50 discount.

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Congratulations to the latest STA Diploma MSTAs Distinction Muhammad Maherilham Bin Alias Matt Craig Aldo Lagrutta Mary Lee Thomas Pooler Laurie Roberts

Pass Mohd Zaki Bin Ali Amran Shahrul Fadli Bin Amzah Anatoli Antonov Mohd Fikri Nabil Bin Mohd Bakri Sam Bloxham Chun Kit Chan Kieran Chauhan Christopher Clarke Mohamed Elsherief Anas Bin Ahmad Faris James Gilbert Zaleha Binti Mat Hassan Jung-Jae Hur Shahrul Ezwan Bin Ilias Colin Jones Constantinos Kasapis

Jasjiv Kohli Marcello Kolax Cheng Li Dorian Lucas Andreas Mamas Kyriakos Maratheftis Rajesh Mathrani Hooman Meghrazi Petros Mina Zul Ilman Bin Muhammad Salua Nahhat Asyraf Amin Bin Jamal Abdul Nasir Luca Pezzot Ahmad Lokman Bin Abd Rahim Thomas Reilly Hanan Fateha Binti Rozaimee

Siti Humairah Binti Shahir Zulnureen Bin Mohd Shariff Mona Shehab Jason Stokes Kamarul Haizat Bin Tukiman Darion Turner Lauren Van Biljon Roman Van Den Bosch Damiano Vembrini Marcus Webster Hannah Whiting Alexander Yeadon Syed Zahid Faisal Bin Mohd Zain Muhammad Fawwaz Bin Zakaria Mohd Shaqil Haziq Bin Mohd Zubil

50

THE EDUCATION CHANNEL

STA education: the LSE courses, and the Diploma in Technical Analysis The Education Channel - Monthly meetings videos are available to members here.

July 2017

Summer Party & Awards Ceremony

No video recording

June 2017

Zaheer Awari

Ignore the noise of the crash and profit from this bull run

May 2017

Rajan Dhall

Finding value across asset classes using volume profile

April 2017

Paul McLaren

Volume at price: Not all prices are equal!

March 2017

Shaun Downey

Trading time: using the fourth dimension to create a third spatial visualisation from a two dimensional image

February 2017

Rolf Wetzer

Cycles in trading, empirical mode decomposition

January 2017

Stephanie Ames, Chris Clark, Zaheer Awari

Panel discussion: outlook for 2017

December 2016

Russell Napier

Technical analysis in an age of financial repression

November 2016

Nicole Elliott

FX charting with candles and clouds

October 2016

Stephen M Barrett

Gann’s master time cycle

September 2016

Lee Sandford

High probability day-trading strategies

June 2016

David Sneddon

Multi-asset & macro technical analysis

STA Library The public library of the City of London at the Barbican Centre holds around 1500 books on Economics, Finance and Investing; this includes the STA collection. UK STA members can obtain free membership of the library and are sent the relevant form in their membership pack. A UK-wide postal service is also available to members. If you do not have an application form to hand and would like to join, please contact STA Administrative Services (info@sta-uk.org) and they will send you one.

More information about the STA library services can be found here.

The Society of Technical Analysts: www.sta-org.uk

THE COMMITTEE

51

The STA Executive Committee

Axel Rudolph BSc (Hons) MSc FSTA MCSI Chairman of the STA

Charles Newsome MSTA FCSI Vice Chairman

Karen Jones BSc (Hons) FSTA Head of Marketing

Mark Tennyson d’Eyncourt FSTA Programmes

Guido Riolo BSc MBA MSTA Marketing / Journal

David Watts BSc (Hons) CEng MICE MIWEM MSTA Systems and Website Specialist

Anne Whitby BA (Hons) FSTA Company Secretary

Clive Lambert MSTA Marketing

Simon Warren FSTA Treasurer

Tom Hicks MEng MSTA MSCI Head of Programmes

Richard Adcock MSTA Journal

Nick Kennedy BA (Hons) MSTA Systems and Website Specialist

Please keep the articles coming in The success of the Journal depends on its authors, and we would like to thank all those who have supported us with their high standard of work. The aim is to make the Journal a valuable showcase for members’ research - as well as to inform and entertain readers.

Keep up to date with the conversation by joining us on:

STA Advertising Rates 2017 The Society of Technical Analysts Journal “The Market Technician” is a bi-annual publication, published in pdf format only.

The STA will accept advertisements in this publication if the advertising does not interfere with its objectives.

The appearance of advertising in the Market Technician is neither a guarantee nor an endorsement by the STA.

Position

Price

Specification

Inside Cover

£500.00

A4 Portrait, 210mm (w) x297mm (h), plus 3mm bleed.

Full Page

£500.00

A4 Portrait, 210mm (w) x297mm (h), plus 3mm bleed.

Half Page

£300.00

Landscape, 198mm (w) x 139.5mm (h).

Quarter Page

£200.00

96mm (w) x 139.5mm (h).

Circulation The Market Technician has a circulation of approximately 1300. Readership includes technical analysts, traders, brokers, dealers, fund managers, portfolio managers, market analysts, other investment professionals, and private investors.

Contact Contact Katie Abberton, Society of Technical Analysts on info@sta-uk.org or +44 (0) 207 125 0038 for more information.

Advertising policy Advertising is subject to approval by the STA Journal Committee. All advertisements must be non-discriminatory and comply with all applicable laws and regulations.

The STA reserves the right to decline, withdraw and/or edit at their discretion.

The Society is not responsible for any material published in The Market Technician and publication of any material or expression of opinions does not necessarily imply that the Society agrees with them. The Society is not authorised to conduct investment business and does not provide investment advice or recommendations. Articles are published without responsibility on the part of the Society, the editor or authors for loss occasioned by any person acting or refraining from action as a result of any view expressed therein.

Society of Technical Analysts Dean House Vernham Dean Andover Hampshire SP11 0JZ tel: +44 (0) 20 7125 0038 info@sta-uk.org www.@sta-uk.org

The Society of Technical Analysts (STA) is recognised worldwide as one of the largest and most widely respected not-for-profit organisations which trains and accredits members of the investment community, from industry professionals to private individuals, interested in the study of technical analysis. We have been setting the standards in technical analysis for nearly 50 years and have been teaching at several UK universities such as LSE, King’s College, Queen Mary etc. for nearly 25 years.

www.sta-uk.org www.@sta-uk.org