Market Technician
Issue 86 - March 2019
The Journal of the Society of Technical Analysts
A BIG THANK YOU TO AXEL RUDOLPH PG.06 NEW VENUE FOR STA MEETINGS PG.09 16
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Elliott Wave Principle Why is it still Marmite?
Weeks not months signalled the October 2018 crash in equity market momentum
The Million Dollar Question(s)
Murray Gunn
Bernard J C Tyler
Stephen Hoad
Contents Foreword New Chairman’s vision - Tom Hicks Save the date STA Annual Dinner
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News • Thank you to Axel Rudolph, out-going Chairman - Anne Whitby • 31st Annual IFTA Conference report - Axel Rudolph • New venue for STA monthly meetings • Obituary: David Fuller
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Research • Why the misnamed ‘Traditional’ method of Point and Figure box sizing has no place in the 21st Century - Jeremy du Plessis • Elliott Wave Principle - Why is it still Marmite? - Murray Gunn • Measure Rule - Thomas Bulkowski • DJIA bear market lows - David McMinn • Weeks not months signalled the October 2018 crash in equity market momentum - Bernard J C Tyler • Did you know?
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Analyst Focus • Head and shoulders above - Eddie Tofpik
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The Education Channel • The Million Dollar Question(s) - Stephen Hoad • Note from the Editor • STA Home Study Course
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Book Reviews • Ichimoku Charts by Nicole Elliott - John Cameron • Jesse Livermore Boy Plunger by Tom Rubython - Nicole Elliott
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The Society of Technical Analysts • Benefits of STA Membership • STA Calendar • STA Library • Congratulation! Latest STA Diploma MSTAs • 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
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Editor's Letter
Nicole Elliott Technical Analyst, Private Investor, E-journalist for the STA
I was pondering what to write in this letter back in late January where the start of the third week is now labelled ‘Blue Monday’ in Britain - named so because it is the time, as I know all too well myself, when many a resolution starts to pale and falter. Austerity and self-punishment often seem like a good idea after the excesses of year-end festivities, but they can be so very hard to persevere with, especially in the grey short days. But there’s one January resolution that I have never, ever regretted - when, many moons ago, I embarked on the study of technical analysis. And at the start of all the subsequent years, and once again in 2019, I renewed my pledge: I will seize opportunities to hone my skills (aiming for 20:20 vision), pick up new tips and tricks, and keep an eye out for cutting edge methodology. Stupid not to!
In this, my quest, the STA can, and has, helped a lot. First the Diploma Course, which for the savvy ought to be one’s starting point. I urge members to point out our website www.sta-uk. org to young people who might be considering a role in finance. Infinitely cheaper than a year at a British university, and flexible to boot, they can read our teachers’ profiles and see what previous students have said on the site.
IFTA in their updates and annual Journal (2019 Download PDF (27.1 MB) Update posted on 13/12/2018). Both organisations welcome submissions and will give you pointers one how to structure a research paper - in itself a useful tool and addition to any curriculum vitae. And let’s not forget the STA’s library at the Barbican (pictured), where more than 1000 books and classic texts can be read on site or borrowed.
As an old hand, I place more value on the monthly lectures. Many of the biggest names in the industry have spoken, and unexpected newcomers with fresh ideas are a big bonus - as is the fact that these can be viewed and reviewed at a later date on video. Networking and drinks event are also great fun, and a good opportunity for novices to hear from the horse’s mouth. This alone might be a good reason to buy STA membership as someone’s birthday present.
There have been some important changes to the STA’s Executive Committee. After years of sterling service, Chairman Axel Rudolph has become the back-seat driver (Vice Chairman and Head of Education) letting colleague Tom Hicks step into his shoes as Chairman. Eddie Tofpik is now Head of Marketing with Clive Lambert remaining on the team, Richard Adcock heads the Journal’s Committee.
Other very valuable resources are the articles published here and by
Barbican Library
As from January, our monthly meetings have also moved to a new venue: One Moorgate Place, London EC2R 6EA, (pictured) a grade II listed building which opened in 1893 - and has seen many additions and modifications since. Really rather grand, the venue is a lot more spacious than CISI’s offices which we used up until last year. Whilst one member has described our old digs as ‘cosy’, another has assured us that the new venue ‘is of a different class’. Home to the Institute of Chartered Accountants in England
One Moorgate Place
and Wales, it has suitably professional audio-visual and catering facilities and is equidistant from Bank, Liverpool Street and Moorgate stations. Thinking well ahead - classic technical analyst behaviour! - we have dates for your diary. Our annual dinner is on Wednesday, 18 September at the National Liberal Club on the Embankment by Charing Cross station. Tickets are reasonable for such a very special event and eye-watering location; please feel free to bring along family, friends and work colleagues. Then, on 5 and 6 October, IFTA holds its 32nd annual conference in Cairo. At the Marriott Hotel on the swanky island of Zamalek, bang in the centre of town on the banks of the Nile, this should be a worthwhile trip for many. Perhaps we’ll meet up there. Do please keep writing in with comments and suggestions, submissions for publication, and book reviews.
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FOREWORD
New Chairman’s vision I would like to thank Axel Rudolph for his tireless work and dedication as chairman of the Society of Technical Analysts over the past six years. In that time, he has led the STA through a number of significant changes. The website and membership system have been vastly improved. The STA now has an effective online presence and benefits from digital marketing and social media.
Tom Hicks MSTA Chairman, Society of Technical Analysts
As the new chairman, I would like to build on these successes and attract new members to the society.
Axel Rudolph
The much-awaited new version of the Home Study Course 2 (HSC2) has also been released with excellent videos and digital content. It has sold numerous copies and been white labelled to other technical analysis societies. The STA is affiliated with the CISI and holds its monthly meetings at the ICAEW, contributing to members’ continuing professional development. Most of all, in the time Axel has been chairman, the STA has continued to grow and the diploma is today held in high regard and viewed as the industry standard in technical analysis.
New STA Home Study course
As the new chairman, I would like to build on these successes and attract new members to the society. I would like to continue to market and white label the home study course and look to grow and retain membership through professional affiliations and collaborative events. We held events in 2018 with CAIA and other organisations. I would like to build on
these successes and host future large joint events and also attract high profile speakers. I would also like to continue our charity events such as the chase challenge which has raised money for Cancer Research UK for three years in a row now. The aim of the STA is to promote and educate people on technical analysis. I would like to improve the mainstream view of technical analysis, show people that it is a valid form of analysis and help to dispel some of the myths such as the infamous ‘vomiting camel’ chart formation. I’m looking forward to the challenge 2019 will offer as I take over as chairman, promoting and training the next generation of technical analysts.
The Society of Technical Analysts: www.sta-org.uk
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STA Annual Dinner On Wednesday 18 September 2019, the STA will be holding its annual dinner at the National Liberal Club.
Save the date!
This is an excellent opportunity to network with fellow STA members and colleagues in the convivial surroundings of the historic club at its central Westminster location. Guests are able to roam freely between the library, dining room and grand Club Bar with its huge terrace looking over the Thames and South Bank. The evening will start with a networking drinks reception, followed by a sit down three-course dinner. Booking will open later in the year - in the meantime please save the date!
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A big thank you to Axel Rudolph
At our December AGM, Axel retired as STA Chairman after six years in the post. During his tenure, membership grew by nearly 50%, the STA hosted a very successful IFTA conference (2014), a new website was launched, along with an on-line cloud based membership system and, last but by no means least, the Home Study Course has been thoroughly upgraded. This latest achievement has already generated good sales even before any real marketing and is being white labelled for the Australian society, with more negotiations ongoing. Under Axel’s chairmanship, other international relationships have also been formed with societies in Myanmar and Malaysia, the latter leading to a significant number of their members taking our Diploma examination. In home academic news, we have seen collaboration with Queen Mary University of London and Kings College London, both of which now run courses in technical analysis. Other institutions are expected to follow and Axel is already having some discussions to this end. The focus on education is not surprising - between 2010 and 2013, before he took over as Chairman, Axel was the Head of Education on
Over these past five years, Axel has worked tirelessly for the Society in his role as Chairman, and the results are clear to see. We owe him a great debt for the work that he has done for us all. the STA’s board. He has also been actively involved for many years in the teaching of our Diploma course, to the extent that he is the go-to person if any lecturer has to cancel. From this, you can appreciate that Axel’s knowledge of technical analysis is wide - you can’t wing a lecture to Diploma students! It is hoped that he will continue, even expand, his involvement in education now his chairmanship is over. On a social note, this year Axel organised the celebration of 50 years
of ACTA/STA, held at London’s Living Room at City Hall. Against a backdrop of wonderful views over London, a gathering of technical analysts young and older feasted, drank and chatted, with notable guests including Teddy Clarke, one of the Founders of ACTA, and Philip Gray, who was the driving force in its transformation into the STA. Over these past five years, Axel has worked tirelessly for the Society in his role as Chairman, and the results are clear to see. We owe him a great debt for the work that he has done for us all. Anne Whitby FSTA
The Society of Technical Analysts: www.sta-org.uk
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The 31st annual IFTA conference
The 31st annual IFTA conference was hosted by the Malaysian Association of Technical Analysts (MATA) in the Kuala Lumpur Convention Centre (KLCC) on Friday 26 - Sunday 28 October 2018 What is impressive is that MATA joined IFTA only four years ago as a developing member society, became a member society only one year ago and yet organised an outstanding conference. Indeed, the event was officially inaugurated by no other than the prime minister of Malaysia! The title of the conference “Navigating through time & volatility” explored how trading and investing has evolved from the perspective of “time” and also tried to get to the bottom of what “volatility” really means and how to best exploit it. Keynote speakers and forum panellists including Connie Brown, John Bollinger, Martin Pring, Perry Kaufman, Andrea Unger and Dr Nazri Khan joined around 30 other speakers in analysing and debating these themes, before presenting their latest findings over four days to around 300 delegates from all over the world.
The speakers were introduced by a professional presenter who not only made sure that the conference was kept on track but who was, according to one speaker - Chris Tate from Australia - “the best dressed person in Asia.” And while the presenter was slick, so too was the excellent highspeed wifi throughout and also the other facilities at the KLCC, much to the delegates’ joy. This was also evident when the world’s oldest prime minister, Tun Dr Mahathir Bin Mohamad aged 93, officially opened the conference in a packed auditorium, all delegates standing up and singing the national anthem. In his speech the prime minister talked about the role of technical analysis in finance and his vision of a united, prosperous and internationally recognised Malaysia. Senior representatives of Bursa Malaysia and the local regulator, the Securities Commission of Malaysia, were also present, striving to show that Malaysia is on the verge of becoming a major player in the region. All of the above came as something of
a first for delegates, as did the opening nights’ mocktail reception, high up in a skyscraper with excellent food and terrific views over the Kuala Lumpur skyline and the fun welcome dinner in the KLCC. To top everything off was the exciting police motorcade, which accompanied guests in their busses, helping them speed in no time through the local traffic to the lovely gala dinner’s outdoor venue, with tasty food and local entertainment. This MATA conference has been one the most memorable IFTA conferences ever. The next one will be a bit closer to home, on an island in the middle of the Nile, in fascinating Cairo, Egypt. We hope to see many of you there and will, for the first time, organise an STA group booking with highly discounted prices. If you wish to put your name down for this provisional, no obligation group booking please contact info@sta-uk.org Axel Rudolph FSTA
The Society of Technical Analysts: www.sta-org.uk
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New venue for STA monthly meetings Since January 2019, the STA has been holding its monthly meetings at One Moorgate Place, Chartered Accountants Hall, 1 Moorgate Place, London EC2R 6EA. Home of the Institute of Chartered Accountants in England and Wales, One Moorgate Place is a beautiful grade-II listed venue in the heart of the City of London. However, the move from the CISI offers us much more space for our growing membership! Members are asked to continue to pre-book where possible to help with numbers and catering, but will no longer need to bring photo ID with them. We hope this flexibility will give a more relaxed approach to our meetings and mean that members can decide to attend at the last minute. For continuing professional development, we do ask that members continue to bring their membership cards with them as we will be recording members’ attendance at meetings using a scanner. Click here for details on upcoming meetings.
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Obituary: David Fuller Not very long after he founded Chart Analysis in the late 1960s, Teddy Clarke, with a sister company to run, concluded that he needed to recruit a top technical analyst to head up the fledgling organisation. The supply of such analysts was fairly limited, so the net was cast wide. The result was that he recruited from the US an analyst in his late 20s, who was very keen to come and live in the UK. His name was David Fuller, and he arrived in late 1969. The rest, as they say, is history... In those distant days computer charts had not yet been invented, so if you wanted a chart of an index, share or commodity, you had to draw it. The first thing David did in his new post as the leader of Chart Analysis was to oversee the inception of a weekly book of UK share charts - and they were all point and figure. A weekly book of international share charts followed in the early 1970s, again point and figure, and shortly after that a weekly commodity publication, this time with both P&F and bar charts. The library was completed around 1980 with a weekly book of currency charts, again containing both P&F and bar charts. Commentary on the different markets, both in the books and as a set of separate offerings, was also provided by David and his team of analysts, taught by him. All these publications helped spread the TA word - and freed market participants from at least some of the task of drawing their own charts! Meanwhile David was also building his reputation as an analyst and a highly regarded conference speaker and teacher of TA. Behavioural Finance is now used universally, but David in fact coined the phrase ‘Behavioural Technical Analysis’ right back in the 1970s, well before people started talking about Behavioural Finance. That is how he taught his team of analysts to make their decisions on likely market movements. In his early years in the field, in New York, he had reached the conclusion that the
plethora of indicators then available tended to provide an equal plethora of answers, frequently contradictory. So he began to look rather at the way the charts showed how people were actually making their decisions in the various markets. This meant a strong emphasis on support and resistance, and why these areas formed and persisted, and studying how the market was trading - accelerating, losing momentum, experiencing sudden sharp reactions, steady trends losing consistency. In other words, very close observation of market activity as depicted in the price chart. Thanks to his individual approach, and to the fact that he was an exceptionally good - and note-free - public speaker, David spoke at very many conferences over the years, in the UK, Europe, the US, Australia and the Far East. His talks were always lively, frequently expressing contrarian views rather than conventional ones, and always well attended. From his early days in London he also instigated his two day Chart Seminars, teaching his Behavioural Technical Analysis approach, and also presented these all over the world. Past attendees may also remember that for a particularly good answer, or indeed question, David would award a ‘Chart brolly’, whose distinctive bright green could be seen on rainy days in many financial centres. David Fuller was also a long term advocate of the STA. Not only did he attend and speak at many meetings and take a Chart Analysis table at annual dinners, but he also gave immense practical support, not least when one of his colleagues was the STA Chairman. Without his backing that job would have been much harder. In January this year we lost this great figure in technical analysis in the UK, who had spent his last eighteen months in the peace of his
For all David’s achievements over the years, we can only be thankful. So thank you, David, we will not forget you. beloved Devon countryside. For all David’s achievements over the years, we can only be thankful. We can also remember his great enthusiasm for the study of all and any markets, and wider ranging and forthright discussions of economics and politics - and also the arts, which he enjoyed and supported to the full. On a personal note, he gave me a wonderful career in the TA community. So thank you, David, we will not forget you. Anne Whitby
The Society of Technical Analysts: www.sta-org.uk
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Why the misnamed ‘Traditional’ method of Point and Figure box sizing has no place in the 21st Century Introduction: a brief history of Point and Figure charts
Jeremy du Plessis FSTA CMT Jeremy du Plessis FSTA CMT founded Indexia Research in 1983. He is an expert on Point and Figure charts. He lectures the Point and Figure module for the STA and also sets this module for the International Federation of Technical Analysts. Jeremy has taught technical analysis to thousands of professional traders and investors over the past 20 years. He is a Fellow of the STA and author of the books ‘The Definitive Guide to Point and Figure’ and ‘21st Century Point and Figure’.
When Point and Figure charts were first used in the late 18th and first half of the 19th centuries, prices of all instruments being traded were in single figures, or at least low double figures. Point and Figure box sizes of a quarter, a half or a single point were therefore used. The charts were all plotted on an arithmetic scale meaning each X and O had the same points value. The same vertical distance, ie the same number of Xs or Os, represented the same number of points. So a move of five Xs or Os would represent the same move in price no matter what the current price. That was fine until prices started to rise and Point and Figure analysts realised that a box value of ¼ or ½ point when the price was 10 produced a completely different looking chart when the price was around 100. This is because a box size of quarter point at the 10 price level means the price would have to move by 2.5% in order to plot another box, whereas at the 100 price level, the price need only move by 0.25% to plot another box. So a move of 10% around the 10 level would result in four boxes, but 40 boxes around the 100 level. Let’s take the S&P 500 for example. In the early 1950s, the price ranged between 13 and 25. To plot a useful Point and Figure chart, a box size of quarter point could have been used as shown by Figure 1 below. Some 60 years later, the picture is very different. The S&P is a hundred times the 1950s price. Figure 2 shows the S&P chart in 2017 if the same box size is used.
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RESEARCH FIGURE 1:
The S&P 500 1949-54 with a quarter point box size - a good readable chart
FIGURE 2:
The S&P 500 in 2017 with a quarter point box size - no use at all
The problem can be clearly seen. Figure 1 is a good, readable Point and Figure chart, but Figure 2, with its long columns of Xs and Os, is useless for any analysis. It means you can’t use the same box size for long-term analysis and especially where the price has moved by a large amount. Cohen’s attempt at a solution This problem came to the attention of Abe Cohen of Chartcraft in the 1950s, who realised that, to make the chart readable at ‘all’ price levels, he would have to use larger box sizes at the higher price levels. So he decided that the box size should change when the price reached certain arbitrary levels. He used a quarter point box for prices under five, then a half point for prices under 20, one point between 20 to 100 and two points above 100 and so on. He never would have envisaged the S&P reaching 2,900, so he made no mention of prices into the thousands. Although he may not have realised it at the time, he was in fact making an attempt, albeit flawed, at a log scaled Point and
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RESEARCH
Figure chart; that is to say, a chart where the box size (or value) increases as the price rises, so that the same percentage move results in the same number of Xs and Os. The trouble is with his method, it doesn’t. The transition from one box size to the next is not smooth, but rather stepped. Although a brave attempt to address the problem of constant box sizes and rising prices, his method brings all sorts of problems. The sensitivity of the chart changes at these arbitrary key levels. For example, at 20, the box size of one point is 5% but at 100 it is 1%. Also, as a column of Xs or Os goes through a key level, some of the Xs or Os are at one value whilst the others are at another, making the calculation of targets difficult and most likely inaccurate. That is not to mention discrepancies with 45° trend lines. What it really needed was a better thought out method. Cohen could have had more key levels, less far apart, but that might well have resulted in fractional box sizes making the construction of the charts a laborious process, remembering everything had to be done by hand, which is why he chose so few key levels with easy-to-use box sizes.
A better way For long-term analysis, users of line, bar and candle charts use a log price scale. Impossible for Point and Figure chart to be log scaled, everyone thought, because Point and Figure charts are on a squared grid where each box has a constant value. Some software companies, laughably thought, and still do think, that plotting a log scale Point and Figure chart means that the physical size of Xs and Os would have to be made smaller as the price increases, turning round Os into ovals ! What it needed was a bit of lateral thinking; an understanding of the impact of different scaling on a Point and Figure chart and the means to do it. With an arithmetic chart the same vertical distance equates to the same number of points increase or decrease, whereas with a log chart the same vertical distance equates to the same percentage change in price. In Point and Figure terms, this would mean that five Xs or Os on an arithmetic chart would represent the same number of points, but on a log chart it would represent the same percentage and a different number of points. Therefore, for a log scale Point and Figure chart, the box size must be a percentage rather than a number of points. Even if Cohen and his successors had realised this, it would be been impossibly difficult to do in the days of slide rules and log tables, but the introduction of the personal computer changed all of this. Suddenly, everyone had the power to do anything. Indexia Research was one of the pioneers of technical analysis software, in particular Point and Figure, and in the early 1980s created one of the earliest, if not the first, true log scaled Point and Figure charts. Instead of a number of points, the box size was set to a percentage. This solved all the problems that Point and Figure chartists had endured over the years. The value of each box slowly and smoothly increased and decreased as the price rose and fell, maintaining the same sensitivity throughout the whole chart history. The result was that a pattern from many years ago could be compared with a current pattern; trend lines showed the correct percentage rate of change and targets were based on columns where the value of each box varied according to a simple formula. This technique immediately enabled the use of long-term Point and Figure charts where the sensitivity remained constant. Figure 3 below is a log scale chart of the S&P 500 with a 1% box size. Notice how well the 45° trend lines define the trends.
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RESEARCH FIGURE 3:
A 1% x 3 Point and Figure chart of the S&P 500 from 1949
To compare this true log scale with the arithmetic charts in in Figures 1 and 2, Figure 4 shows the 1949 to 1954 period with a 1% box size and Figure 5 shows the 2016-17 period, also with a 1% box size. Compare log scale Figure 5 with arithmetic scale Figure 2. The long unreadable columns have gone, resulting a very useful, analysable Point and Figure chart.
The Society of Technical Analysts: www.sta-org.uk
RESEARCH FIGURE 4:
S&P 500 between 1949-54 with a 1% box size
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S&P 500 in 2017 with a 1% box size - useful at last
Conclusion - neither ‘Traditional’ nor best So why would anyone still use Cohen’s old brave, but flawed, attempt at a log scaled chart with all its problems? Even more puzzling is why someone decided to elevate its status by calling it the ‘Traditional’ method? A better name is the ‘Redundant’ method. Traditional implies something that is old, endeared but still valid. Cohen’s method is old but it is no longer a valid method, so it should be removed from any software. There is no third way. The chart is either arithmetic, where the box size is a number of points, or log where the box size is a percentage. Drawing a Point and Figure chart where the box size is a constant value up to an arbitrary level and then constant at a different value above that level has no place in modern Point and Figure analysis.
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Elliott Wave Principle - Why is it still Marmite? Love it or hate it As British readers will know, Marmite is a food spread made from yeast extract. In recent years it has become a by-word for polarisation because, famously, people either love it or hate it. Well, if the field of technical analysis has a Marmite, it surely must be the Elliott Wave Principle. People either love the Elliott Wave Principle or they hate it. This article addresses why that is the case and concludes that, far from being something that should divide technical analysts, the Elliott Wave Principle is actually the glue that binds all forms of the field together.
Murray Gunn MSTA Murray Gunn MSTA is Head of Research for Elliot Wave International’s Global Market Perspective, a monthly summary of the firm’s 25 analysts’ views on every major freely traded market in the world. (You can follow his Elliott Wave analysis at www.elliottwave.com)
Students of the Elliott Wave Theory will recognize this particular division of the major bull market into three distinct phases.
I will show some current Elliott Wave analysis at the end but first, let’s remind ourselves of why Elliott matters. The principles on which modern day technical analysis lie were laid out by Charles Dow around 120 years ago. Dow, a financial journalist, was fascinated by economic cycles and in 1884, along with his business partner Edward Jones, created a stock market average, consisting of 11 stocks. Dow’s vision was that this average would act as a “barometer” of general business conditions. In 1896, the original average grew into two, an Industrial and a Railroads average. To this day, even though the Dow Jones Industrial Index (as it is now known) is criticised for its calculation methodology, it remains the paramount barometer of economic sentiment, not just in the US but globally. Dow founded the Wall Street Journal (a fact that every technical analyst should remind fundamentalists of as often as possible!) and wrote about his ideas in those pages. Thanks to the work of Samuel Nelson, William Hamilton and, especially, Robert Rhea, Dow’s writings became known as Dow Theory. In 1932 Robert Rhea published the book Dow Theory and started a newsletter, Dow Theory Comment. Enter Ralph Nelson Elliott. Elliott was one of the first subscribers to Rhea’s newsletter and Dow Theory undoubtedly clicked with him. However, he had spent most of his career as one of the top US accountants and so craved detail.
Putting aside any preconceived ideas about how markets behave, Elliott embarked on empirical research into US stock market data himself. What he discovered not only validated Dow Theory but, crucially, enhanced it. In 1934, Elliott wrote to Charles J. Collins, one of the leading investment newsletter publishers, saying that he had discovered three novel features of market action: recognition of wave termination, classification of wave degree and time forecasting which were “a much needed complement to the Dow Theory.” He added, “These discoveries are much less mechanical than the Dow Theory but add great forecasting value which it lacks.” Collins became impressed with Elliott’s discoveries and, in 1938, published The Wave Principle on Elliott’s behalf. Forty years later, in 1978, Collins wrote in the foreword of Elliott Wave Principle (Frost & Prechter): “Elliott, in developing his theory through observation, study and thought, incorporated what Dow had discovered but went well beyond Dow’s theory in comprehensiveness and exactitude. Both men had sensed the involutions of the human equation that dominated market movements but Dow painted with broad strokes of the brush and Elliott in detail, with greater breadth.” Clearly then, there is an inexorable bond between Dow’s Theory and Elliott’s Wave Principle. As Collins alluded to, what Elliott had discovered was the detail lying within Dow Theory.
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RESEARCH
Examining the principles of Dow Theory, we can instantly see the connection with Elliott’s discovery. 1.
There are three trends in the market - Primary, Secondary and Minor. With this tenet, Dow is saying that, at any one point in time, the market is being pulled in different directions depending on the timeframe involved. For example, a long-term uptrend could be in force (Primary trend) but the market could be in a corrective decline of that trend (Secondary trend). And within that corrective decline, the market may be advancing (Minor trend). With this, Dow was pointing to the fact that the market is fractal in nature. Elliott proved that the market is fractal by revealing the detailed, internal workings of price action. Dow referred to the Primary trend as the tide, the Secondary trend as waves and Minor trends as ripples. Elliott, of course, continued this nautical theme.
2.
Corrective trends are expected to retrace one to two thirds of the preceding trend. Dow had realised through observation that corrections against the bigger trend tended to give back between a third and two thirds, before resuming. This is Dow’s “broad brush”. The detailed Elliott would have written 33.33% and 66.66%, and what he actually discovered through his painstaking empirical research, of course, was that retracements often end at the Golden Ratio related 38.2% and 61.8%. Again, this is Elliott verifying Dow’s theory.
3.
Major trends have three phases. Dow noticed that there are three distinct phases to a trend. Taking a stock market uptrend as an example, he observed that there was an initial “accumulation” stage whereby “strong hands” were accumulating stock from “weak hands.” There then followed a public participation phase when stock prices tend to gather upward momentum, accompanied by improving business news. The final phase is widespread participation and speculation. It is during the last phase where “distribution” occurs when “strong hands” sell out to “weak hands.”
As John Murphy writes in Technical Analysis of the Futures Markets: “Students of the Elliott Wave Theory will recognize this particular division of the major bull market into three distinct phases.” That’s exactly right. Dow’s phases describe waves 1, 3 and 5 of an Elliott Wave cycle. Once again, Elliott proved Dow’s theory. The difference is that Elliott went further and discovered that the connections between Dow’s three phases (waves 2 and 4) also have certain characteristics. FIGURE 1: Combining Down Theory and the Elliot Wave Principle
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Just about every technical analyst in the world accepts that Dow Theory is the bedrock upon which all else in modern technical analysis sits. The Elliott Wave Principle enhanced Dow Theory by giving it much needed detail and forecasting ability. If one accepts Dow, one must also accept Elliott. Getting back to Marmite, perhaps the single biggest aspect of the Elliott Wave Principle that puts people off is the existence of alternate wave counts. At any one moment in time, two or more possible wave counts exist for a market. As price action develops, the Elliott Wave analyst will, by adhering to Elliott’s objective rules of wave formation, eliminate those counts that no longer obey the rules. By following this process, the analyst dismisses the possible scenarios and narrows down to the probable scenario. What this means in reality is that wave counts can and do change in accordance with the evolution of price action. For many years I struggled with this concept. If there’s always an alternative, and wave counts change, where is the utility in Elliott Wave? For me, the light bulb moment came from my interest in the investment strategy known as Trend Following. Academic studies and real-life performance have shown that Trend Following is a viable long-term investment technique, if done correctly and on a diversified portfolio. One concept of Trend Following, in its simplest form, follows a moving average of price - and many technical analysts and traders, of course, rely on moving averages in their work. For example, a well-worn concept is that if the market price is above a moving average the trend is considered to be bullish; if below, bearish. Well here’s the rub. On one particular day the market price may be above the moving average, but the next day it might have fallen below. In other words, the defined trend has moved from bullish to bearish. A few days later, the trend might turn back to bullish. Of course, this sort of “chop” can be annoying but it is accepted as being part and parcel of technical analysis. As price changes, the analysis changes. Well, guess what? That’s exactly the same for Elliott wave analysis. A valid wave count can exist one day but, as price changes, it can be invalidated the next. In that respect one could view Elliott wave as being just the same as using a moving average, or any other methodology used in order to identify trends. However, the Elliott Wave Principle actually contains an advantage over other forms of trend analysis because it allows us, by process of elimination, to narrow the focus down to the most probable outcome, not just a possible outcome. Before moving on to (a Fibonacci) three current charts, let me conclude this section with this: If you are one of those who “get” the Elliott Wave Principle but struggle to use it in practice, I urge you to consider that alternate wave counts are an advantage. If you hate Elliott Waves, please ponder the fact that it can be thought of as Dow Theory Plus. It encapsulates Dow’s principles yet provides much, much more in the way of forecasting ability. Now to some current market analysis... It’s vitally important to analyse each market independently
because each will be in its own cycle. Correlations wax and wane, so whilst it might be tempting to think that if a particular market is in a bull cycle then that means another market should also be, this approach can lead us way off track. Take the European stock market, for example. Older readers will remember that, back in 2001 when US and European stocks were in a bear market, conventional analysis was that, whilst it was bad, central banks would never let a Japan situation develop whereby stocks were in a multi-decade bear market. Well check out Figure 2 opposite. This shows the EuroSTOXX index of Eurozone shares and we can see that, after 18 years, it has still not regained its March 2000 peak. In fact, the pattern of contracting highs and lows since 2000 can be counted as a Supercycle degree triangle, with Cycle degree wave d having completed in January 2018. If that is correct, a decline in wave e is just starting which has the potential to take the EuroSTOXX index down nearly 50% from current levels. Note that the top of the market in early 2000 coincided with the launch of the euro currency - a product of the incredibly positive trend in social mood (manifested by a bull market in stocks) during the 1980s and 1990s. That zenith marked a peak in social mood, which has trended negatively since (a sideways movement in stocks is a bear market, something that Elliott himself first noted). The end of a triangle is often marked by a social action that is a symptom of the previous bear market. The greater the degree of the triangle, the more emphatic the social action. This chart is predicting that the end of the Supercycle degree triangle will be marked by a social action consistent with the negative trend in social mood built up in Europe since 2000. Will that mark the end of the euro? Perhaps a European conflict? Both? We don’t know exactly what it will be, but we do know that we can’t stop it from happening. As socionomists, though, we can prepare for it. The chart of the euro itself appears to be negative for the single currency at this juncture (see Figure 3). One of the questions asked most often about Elliott Wave analysis is how it applies to markets such as foreign exchange and interest rates where there is no implied perpetual growth as in stocks or commodities. The answer is that FX and interest rate markets tend to cycle in very broad three-wave structures. Within those Cycle and Supercycle degree threewave structures, smaller structures of five-wave movements appear as impulse waves. Our labelling of the euro-US dollar exchange rate contends that it is declining in Primary degree wave (C). That wave should subdivide into five Minor degrees and, thus far, it appears that waves one and two have been completed. The conclusion is that wave three down is underway and that points to a weaker euro and stronger US dollar in 2019. Note the alternate wave count on the chart, that the January 2018 top could be wave (A) of a three-wave up cycle. That alternate would start to kick in should EURUSD exceed our wave two label at 1.1815.
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FIGURE 2: After 18 years, the EuroSTOXX index has still not regained its March 2000 peak
FIGURE 3: FX and interest rate markets tend to cycle in very broad three-wave structures
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20
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Finally, metal and commodity markets appear to be turning down into the final wave of a bear market that started in 2008. Our labelling in Figure 4 below of the S&P GSCI index shows that a decline in Cycle degree wave c started in June 2011. Primary degree wave (1) ended in December 2011 and then wave (2) took the form of sideways double-three. That’s important to note because it means that the sharp wave (4) correction is consistent with Elliott’s guideline of alternation. Wave (5) should take the index below the 2016 low but, given that fifth waves in commodities have a habit of being extended, we would not be surprised if the decline went a lot further. FIGURE 4: Commodities turning into the final wave of the bear market that started in 2008
In conclusion, I would urge you to follow the evolution of Elliott wave analysis through books and published research. So many times over the years I have heard people say to me: “Oh yes, I looked at Elliott Wave in (pick a year) and then I looked at it again in (pick a year) and it was different / just the same.” That’s akin to looking at the position of your long-term moving average once a year. The Elliott Wave Principle is a dynamic methodology that flows with the herding behaviour that drives markets. That’s what makes it so powerful.
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21
The measure rule: Use the measure rule to predict a price target after the breakout from a chart pattern Introduction In the second edition of my book, Encyclopedia of Chart Patterns, I explored how often a price prediction method, called the measure rule, works for more than 60 chart and event patterns in both bull and bear markets. This article updates the results for various chart patterns, including how often the measure rule works and what to look for. For most chart patterns, the measure rule is the height added to (upward breakouts) or subtracted from (downward breakouts) the breakout price. Figure 1 shows an example of the rule for a double bottom pattern. Double Bottom A classic double bottom is a twin bottom pattern with both bottoms at or near the same price and a peak nestled between the two bottoms. I show a double bottom on the chart in Figure 1 as Eve and Eve. Thomas N. Bulkowski Thomas Bulkowski is a private investor and trader with almost 40 years of market experience and considered by many to be a leading expert on chart patterns. He is the author of several books including Chart Patterns: After the Buy, Getting Started in Chart Patterns, Second Edition and the Evolution of a Trader trilogy. His website and blog, www.thepatternsite. com, include more than 700 articles of free information dedicated to price pattern research. You can reach Thomas at tbul@hotmail.com
Each valley in a classic double bottom appears wide and rounded. If spikes are present, they are usually short and clustered, like cut grass. About 20 years ago, I read in Alan Farley’s book, The Master Swing Trader, about a new naming convention for double bottoms and tops, called Adam and Eve. The Eve bottom is as described, a rounded looking turn like that shown at B. Contrast the Eve bottom with an Adam bottom in October. An Adam bottom appears narrow, usually with a one- or two-day downward spike. The various combinations of Adam and Eve peaks or valleys for double tops and bottoms give performance and identification differences. The time between the two bottoms of a double bottom varies, but the best performance comes from bottoms spaced three to seven weeks apart. Valleys wider than seven weeks show diminished performance after the breakout. The height of the pattern (as a percentage of the breakout price) from the lowest valley to the highest peak between the two valleys is at least 10%, but allow variations. Tall chart patterns often perform substantially better than short ones. In the example shown in Figure 1, a throwback occurs after the breakout when the stock returns to the breakout price. A throwback happens 67% of the time in the 2,295 double bottoms I looked at.
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FIGURE 1: An Eve & Eve double bottom
Rowan Companies (Oilfield Svcs/Equipment, NYSE, RDC)
To apply the measure rule to double bottoms, subtract the lowest valley in the chart pattern (B) from the highest peak (A) to get the height. Since the breakout is upward, add the height to the highest peak (A) to get a target price. Price reaches or exceeds the target 69% of the time in a bull market, or about two out of every three trades. Head-and-shoulders bottom A head-and-shoulders bottom, such as the one shown in Figure 2, has a left shoulder that is opposite a right shoulder with a head in between. The shoulder valleys should bottom near the same price and be almost an equal distance from the head. Symmetry is important for easy identification. The head must be below the two shoulder valleys otherwise you may be looking at a triple bottom. A neckline joins the armpits in the pattern, and it signals a trade when price closes above it (for down-sloping necklines only). For up-sloping necklines, use a close above the price of the peak located between the head and right shoulder as the buy signal. Otherwise, you may never get a buy signal for steep necklines. Volume is usually heavier on the head or left shoulder and diminished on the right shoulder.
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23
FIGURE 2: A head-and-shoulders bottom
Northwest Airlines (Air Transport, NASDAQ, NWAC)
The measure rule is unique for head-and-shoulders patterns (both tops and bottoms). Find the lowest valley in the head and measure the vertical distance from that low to the neckline. I show the measure between the head and point A in Figure 2. That gives the height. Add the height to the breakout price – the point where price pierces the neckline (for down-sloping necklines) or the peak price between the head and right shoulder (for up-sloping necklines). The result is the target price. Price hits the target 73% of the time in a bull market. Falling Wedge A falling wedge is a somewhat rare pattern, and Figure 3 shows an example. A wedge is a price pattern bounded by two converging and down-sloping trendlines. The trendlines will eventually join at the wedge apex. The breakout averages 57% of the way to the wedge apex. Look for price to come close to or touch each trendline a total of five times or more – three times on one side and two on the other. Anything less than five touches and the pattern may be invalid. Price should also cross the pattern from side to side several times like that shown. Volume usually trends downward from the start of the pattern to just before the breakout. The measure rule for upward breakouts from falling wedges is the top of the pattern, point A in Figure 3. A downward breakout uses the height of the pattern (A - B) projected downward from the lowest valley in the pattern (B). Price reaches the top of the pattern 66% of the time in a bull market. For downward breakouts, the measure rule is less successful, working just 32% of the time. To increase the likelihood of a successful target, use half the height projected downward.
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RESEARCH
FIGURE 3: A falling wedge with an upward breakout
Amgen Inc. (Biotechnology, NASDAQ, AMGN)
Symmetrical Triangle Figure 4 shows a symmetrical triangle ABC. A symmetrical triangle is a chart pattern that has two converging trendlines that join at the triangle apex (C). The top trendline slopes downward and the bottom one slopes upward. Look for at least two touches of each trendline and make sure price crosses the chart pattern plenty of times, filling the pattern with price movement. Avoid cutting off a rounded turn and calling it a symmetrical triangle.
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25
FIGURE 4: A symmetrical triangle
Coherent (Precision Instrument, NASDAQ, COHR)
The traditional way to use the measure rule is to compute the height (A – B) and add it to the upward breakout price or subtract it from the downward breakout price. Price stages a breakout when it closes outside of the triangle trendline. This works 67% of the time for upward breakouts and 44% of the time for downward breakouts in a bull market. An alternative way to compute a price target is to draw a line parallel to the bottom trendline (for upward breakouts like that shown by the dashed line) or parallel to the down-sloping line AC, beginning at point B, for downward breakouts. Begin drawing the line from the start of the pattern on the top (point A), ending directly above the breakout point (D). The price directly above the breakout becomes the target. The Numbers Table 1 shows how often the measure rule works for popular chart patterns. For example, I looked at a database of the various combinations of Adam and Eve double bottoms and found 837 chart patterns that I tested against the measure rule prediction. The rule worked between 66% of the time in a bull market using data from 1991 to 2018 in as many as 1,100 stocks, but not all stocks covered the entire period, and I excluded data from bear markets. That means price met or exceeded the target price before dropping at least 20% (a trend change, measured from the highest peak to the close) or a close below the lowest valley in the chart pattern.
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TABLE 1: The table shows how often the measure rule works for various chart patterns and breakout directions. Chart Pattern
Upward Breakouts
Downward Breakouts
Double bottoms (all variations)
69%
N/A
Double tops (all variations)
N/A
45%
Head-and-shoulders bottoms
73%
N/A
Head-and-shoulders tops
N/A
58%
Triangles, ascending
70%
55%
Triangles, descending
73%
49%
Triangles, symmetrical
67%
44%
Triple bottoms
67%
N/A
Triple tops
N/A
48%
Wedge, falling
66%
32%
Wedge, rising
58%
46%
Notes: N/A means not applicable. All variations mean the four combinations of Adam and Eve shapes for peaks and valleys. Table 1 shows that price meets or exceeds the target better after an upward breakout than a downward one. For percentages below 50, use a projection that is half the height of the pattern. That will increase the probability that the price will hit the target. Closing Position The measure rule is a tool used with chart patterns that suggests a price target. Typically, the height of the pattern is used in the computation. Add the height to upward breakouts or subtract it from downward ones to get a price target. For a more conservative (closer) target, use half the chart pattern height projected in the direction of the breakout. Once you have a price target, look for nearby support or resistance zones. These may be round numbers (10, 15, 20, and so on), prior peaks and valleys, horizontal price consolidation regions, trendlines, and even other chart patterns. Often price will stall at overhead resistance or underlying support as it nears the target price. Close out your position if price shows weakness or signs of reversing.
Copyright Š 2005, 2018 by Thomas N. Bulkowski. All rights reserved. All figures use Bulkowski’s proprietary software.
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RESEARCH
27
DJIA bear market lows and lunar phase Introduction If the DJIA peaks at the beginning of a bear market are listed by month and day (year ignored), then excellent links with lunar phase can be produced. Numerous examples of this effect have been shown (see McMinn, 2018). Those peaks occurring at a certain time of year will also have similar market outcomes (McMinn, 2010b). This article examines the corresponding DJIA bear market lows to see if such remarkable findings are repeatable. A comprehensive listing of DJIA bear markets has been sourced and the sample was assessed for significance. Those bear market lows with similar lunar phase occurred in eras lasting roughly 50 years, while the moons siting on the ecliptic could be linked to lunar phase for the 36 lows since 1885.
David McMinn David McMinn completed a Bachelor of Science degree from the University of Melbourne in 1971 (geology major) and subsequently became a Minerals Economist in ANZ Banking Group Ltd. Since leaving this position in 1982, he has conducted private research on cycles arising in seismic and financial trends, publishing numerous papers on cycle theory, especially in relation to the 9/56 year cycle.
The DJIA data are based on closing values throughout the article. The DJIA bear market lows were sourced from Bespoke Investment Group (2008) for the 1900 to 2008 era, with additional lows for the 1890s being inserted by the author (see Appendix 1). The moon and sun data was timed at 12 noon New York time, with daylight saving ignored. The ecliptic position of the moon and sun has been given as Eáľ’, whereas the angle between these two luminaries in the heavens (lunar phase) has been denoted as Aáľ’. This was to avoid confusion between two different concepts. Lunar phase for the bear market lows is shown in Appendix 2.
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RESEARCH TABLE 1: THE SECULAR TREND, DJIA LOWS AND LUNAR PHASE 1888–2018 DJIA Lows
Sun Eᵒ
Moon Eᵒ
Phase Aᵒ
Phase 355 - 130 Aᵒ Phase 020 - 110 Aᵒ
1895 - 1940 1998 - ???? 31 Mar 1938
010
009
359
19 Oct 1933
206
214
008
24 Sep 1900
181
191
010
25 Sep 1911
182
219
037
27 Feb 1933
339
016
037
25 Mar 1898*
005
045
040
09 Oct 2002
196
242
046
10 Jun 1940
080
138
058
08 Jul 1932
106
165
059
21 Sep 2001
179
239
060
19 Dec 1917
267
337
070
31 Aug 1998*
158
265
107
15 Nov 1907
232
000
128
Phase 150 - 247 Aᵒ Phase 162 Aᵒ
1893 -1949 2009 28 Apr 1942
038
188
150
26 Jul 1893
124
280
156
09 Mar 2009*
349
151
162
02 Nov 1914*
219
036
177
26 Jul 1934
123
306
183
27 Oct 1923
213
065
212
13 Jun 1949
082
298
216
08 Apr 1939
018
255
237
09 Nov 1903
226
104
238
24 Aug 1921
151
038
247
Phase 317 - 353 Aᵒ Phase 248 - 355 Aᵒ
???? - 1896 1957 - 2001 28 Feb 1978
340
228
248
26 May 1970
065
319
254
02 Apr 1888*
013
273
260
07 Oct 1966
194
106
272
12 Aug 1982
140
053
273
06 Dec 1974
254
168
274
11 Oct 1990
198
115
277
26 Jun 1962
095
027
292
08 Dec 1890*
257
214
317
19 Oct 1987
206
170
324
22 Mar 2001
002
336
334
08 Aug 1896*
137
130
353
22 Oct 1957*
209
202
353
Inserted by author. Main source of DJIA data: Bespoke Investment Group, 2008. Source: McMinn, 2010a.
The Secular Trend Table 1 shows the DJIA bear market lows listed by increasing lunar phase. The lows with similar lunar phase occurred in historic periods lasting about 50 years. When phase ranged from 355-130 Aᵒ, 10 lows took place between 1895 and 1940. The three recent lows with phase in this range, namely 1998 (107 Aᵒ), 2001 (060 Aᵒ) and 2002 (046 Aᵒ), may reflect a secular change and the beginning of a new lunar phase emphasis. The market troughs with lunar phase from 150-247 Aᵒ took place between 1893 and 1949, with one exception in 2009. During the 1962 to 1990 era, bear market bottoms nearly always had lunar phase around the third quarter moon (270 Aᵒ) at between 245-295 Aᵒ) (see Table 2). The exception was the low of 19 October 1987 (324 Aᵒ), which was only slightly out by 30 ᵒ. All these lows had the moon sited between 025-170 Eᵒ, with the sun between 095-255 Eᵒ. They also repeated in a precise four-year cycle (apart from 1987), which was well known in financial forecasting during the 1990s. The series may be extended, as the correction low of 4 April 1994 also had lunar phase near the third quarter moon (289 Aᵒ). The lows of August 31, 1998 (107 Aᵒ), 9 October 2002 (046 Aᵒ) and 9 March 2009 (162 Aᵒ) marked the end of the third quarter moon effect. The year 2002 also was the end of the four-year cycle of bear market lows.
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TABLE 2: LUNAR PHASE AND DJIA BEAR MARKET LOWS 1962-2002 1962 26 Jun 292 Aᵒ
Ln Mths + 52.96
1966 07 Oct 274 Aᵒ
Ln Mths + 44.94
1970 26 May 254 Aᵒ
Ln Mths + 56.04
1974 06 Dec 274 Aᵒ
Ln Mths + 39.96
1978 28 Feb 248 Aᵒ
Ln Mths + 55.06
1982 12 Aug 273 Aᵒ
Ln Mths + 64.14
1987 19 Oct 324 Aᵒ
Ln Mths + 36.84
1990 11 Oct 277 Aᵒ
Ln Mths + 43.07
1994* 04 Apr 289 Aᵒ
Ln Mths + 54.52
1998 31 Aug 107 Aᵒ
Ln Mths + 50.79
2002 09 Oct 046 Aᵒ
* Correction low. Abbreviation: Ln Mth - Lunar month of 29.53 days is the time interval between two successive new Moons. Source: McMinn, 2010a.
There were three anomalies with lunar phase in the range of 248-355 Aᵒ, namely 1888, 1890 and 1893. These may represent the ending of a previous lunar phase emphasis, something that will never be known due to a lack of raw data. The findings on the secular trend may be summarised as follows: Phase Ao
Era of BM Lows
Number
Anomalies
355 – 130
1898 - 1940
10
-
020 - 110
1998 - ????
3
-
150 - 247
1893 - 1949
9
2009
248 - 355
1955 - 2001
10
-
260 - 355
???? - 1896
3
-
Moon’s Ecliptic Position Of the total 36 DJIA lows since 1888, 27 had lunar phase in an approximate half circle from 235-060 Aᵒ (significant p < .01). However, this masks a more interesting relationship. The DJIA trough dates were arranged in increasing order of the moon’s ecliptic position (see Appendix 3). When the Moon was sited between 005 and 255 Eᵒ (27 lows), lunar phase was found in an approximate half circle from 235-060 Aᵒ on 24 occasions (significant p < 10-4). DJIA peaks at the beginning of a bear market could not be linked collectively to lunar phase. However, if they were listed by increasing order of the sun’s ecliptic position (month and day) then excellent lunar phase relationships were revealed. Those highs occurring at around the same time of year had similar lunar phase and similar market outcomes (McMinn, 2018). Repeating this process for the sun and DJIA bear market lows did not yield significance, despite much research. When the lows were listed by increasing lunar phase, there was some clustering of lows with similar ecliptic positions of the moon and sun. Even so, the results were only ‘interesting’ because of various anomalies. With such compilations, it is difficult to undertake statistics to clarify whether the patterns arise by chance and thus no conclusions could be drawn.
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RESEARCH Discussion and conclusions When DJIA lows were listed by increasing lunar phase, the lows with similar lunar phase occurred within certain eras lasting about 50 years. The secular trend in DJIA lows was extraordinary because certain lunar phase ranges completely dominated certain eras. Lunar phase can be best correlated with the timing of DJIA lows, by considering only those episodes with the moon sited between 005-255 Eᵒ. This gave 27 lows, of which 24 had lunar phase in an approximate half circle 235-060 Aᵒ, resulting in very high significance (p < 10-4). The timing of bear market lows may be intimately linked to lunar phase and the ecliptic positions of the moon and sun. Such findings offered further support for the Moon Sun Hypothesis, which views financial activity as being mathematically structured in time and moving in tune with changing lunisolar cycles. Alas, the mathematics involved were complex and current knowledge remains very limited. Good correlates can be produced, but how the effect actually functioned remained unknown.
Here are two options to explain the effect: Causal: Moon sun tidal effects influence the physiological cycles of a population, which cause the mass mood to oscillate between the extremes of optimism and fear. This in turn shows up in market activity. A connection between these effects, physiological cycles and market outcomes can be supported by various studies; hormone levels of animals and humans have been shown to fluctuate over the lunar month (Endres & Schaad, 2002; Zimecki, 2006), while studies have linked hormone levels to market trading success (Chen & Ozdenoren, 2005; Coates & Hebert, 2008; Coates et al, 2009). Acausal: The moon, sun and market events may be connected by time rather than cause. This may be a variation of synchronicity, which was first promoted by Jung (1952). He defined it as “an acausal connecting principle,” “meaningful coincidence” and “acausal parallelism.” Academia gives little support for the concept. Either approach can explain why millions of people react in the same erratic manner during times of extreme market behaviour. It may also explain why there is a constant repetition of mania, panic and depression throughout history, with people learning nothing from the foolishness and greed of previous generations. The moon sun relationships presented in the article were very interesting, but they cannot explain how these luminaries could possibly influence the markets. Obviously, the changing angles between the moon and sun on the ecliptic were vitally important in solving the mystery. There may be emerging a simple theory based on moon sun tidal harmonics, which would reduce the complexity of market cycles to a few basic principles. Such a breakthrough may allow accurate financial forecasting years in advance. Even when this enigma is finally solved, the findings probably will not be published given the potential profits to be made.
References Bespoke Investment Group, 2008. Historical Bull and Bear Markets for the Dow: 1900 - Present. October 14. http://bespokeinvest.typepad.com/bespoke/2008/10/historical-bull.html Chen, Y, Katusccak, P & Ozdenoren, E. 2005. Why Can’t A Woman Bid More Like A Man? Working paper. September 3. Coates, J M & Herbert, J. 2008. Endogenous Steroids and Financial Risk On A London Trading Floor. Proceedings of the National Academy of Sciences. Apr 22; 105 (16): 6167-72. Coates, J M., Gurnell, M & Rustichini, A. 2009. Second-to-Fourth Digit Ratio Predicts Success Among High Frequency Financial Traders. Proceedings of the National Academy of Sciences. Jan 13; 106: 347-348. Durden, T., 2014. August 1914, When Global Stock Markets Closed. August 1. https://www.zerohedge.com/news/2014-08-01/august-1914-when-global-stock-markets-closed Endres, K P & Schaad, W., 2002. Moon Rhythms in Nature. How Lunar Cycles Affect Living Organisms. Floris Books. Jung, C G., (1993) [1952]. Synchronicity: An Acausal Connecting Principle. Bollingen, Switzerland: Bollingen Foundation. ISBN978-0-691-01794-5. McMinn, David. 2004. Market Timing By The Moon & The Sun. Twin Palms Publishing. McMinn, David. 2010a. Market Timing Moon Sun Research 2006-2009. Privately Published. McMinn, D., 2010b. DJIA Peaks, Seasonality & Market Outcomes. Market Technician. Journal of the Society of Technical Analysts. Issue 68. p 10-13. October. Zimecki, M. 2006. The Lunar Cycle: Effects On Human and Animal Behviour and Physiology. Postpy higieny i medycyny doświadczalnej (online). 01/02/2006; 60:1-7. http://www.ncbi.nim.nih.gov/pubmed/164007788
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RESEARCH
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APPENDIX 1: DJIA BEAR MARKETS 1886-2018 â&#x2030;Ľ -18.5% Beginning of BM
End of BM
% Decline
03 Dec 1886*
02 Apr 1888*
-20.1
17 May 1890*
08 Dec 1890*
-22.6
04 Mar 1892*
26 Jul 1893*
-34.6
04 Sep 1895*
08 Aug 1896*
(a)
10 Sep 1897*
25 Mar 1898*
-24.8
05 Sep 1899*
24 Sep 1900
-31.8
17 Jun 1901
09 Nov 1903
-46.1
19 Jan 1906
15 Nov 1907
-48.5
19 Nov 1909
25 Sep 1911
-27.4
30 Sep 1912
02 Nov 1914 (b)
-48.0
21 Nov 1916
19 Dec 1917
-40.3
03 Nov 1919
24 Aug 1921
-46.6
20 Mar 1923*
27 Oct 1923*
-18.6
03 Sep 1929 (c)
08 Jul 1932 (c)
-89.1
07 Nov 1932
27 Feb 1933
-37.3
18 Jul 1933
19 Oct 1933
-22.4
05 Feb 1934
26 Jul 1934
-22.8
10 Mar 1937
31 Mar 1938
-49.1
12 Nov 1938
11 Apr 1939
-21.7
12 Sep 1939
10 Jun 1940
-28.3
07 Nov 1940
28 Apr 1942
-32.5
29 May 1946
13 Jun 1949
-24.0
06 Apr 1956*
22 Oct 1957*
-19.4
13 Dec 1961
26 Jun 1962
-27.1
09 Feb 1966
07 Oct 1966
-25.2
03 Dec 1968
26 May 1970
-35.9
11 Jan 1973
06 Dec 1974
-45.1
21 Sep 1976
28 Feb 1978
-26.9
27 Apr 1981
12 Aug 1982
-24.1
25 Aug 1987
19 Oct 1987
-36.1
16 Jul 1990
11 Oct 1990
-21.2
17 Jul 1998*
31 Aug 1998*
-19.9
14 Jan 2000
22 Mar 2001
-19.9
21 May 2001
21 Sep 2001
-27.4
19 Mar 2002
09 Oct 2002
-31.5
09 Oct 2007
09 Mar 2009*
-53.9
17 Apr 1930
16 Dec 1930
-46.4
24 Feb 1931
02 Jun 1931
-37.4
03 Jul 1931
10 Oct 1931
-44.3
09 Nov 1931
05 Jan 1932
-39.1
08 Mar 1932
08 Jul 1932
-53.6
1930-32 Era for the DJIA
* Inserted by the author. Pre 1895 data based on the 12 Stock Average index. A bear market was defined as a DJIA decline of over -20% that was preceded by a rise of over +20%. The author included four near bear markets which registered declines between -18.5% and -19.9%. These commenced in 1923, 1956 and 1998. (a) A percentage decline could not be calculated, as the 1895 high was based on the 12 Stock Average index and the 1896 low on the DJIA. (b) Due to the outbreak of WWI, the NYSE was closed from 30 July to 12 December 1914, although stocks were still quoted by brokers and traded off the exchange. According to Durden (2014), Global Financial Data calculated the average of the bid and ask prices from 24 August to 12 December and found that the 1914 bottom occurred on 2 November when the DJIA hit 49.07. This has been used as the 1914 low in this paper. The DJIA decline in the early 1930s was taken as occurring from 3 September 1929 to 7 July 1932, as given by most references. However, Bespoke Investment Group broke this down into several bear markets due to the extreme DJIA gyrations during this period. Main Source: Bespoke Investment Group (2008).
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RESEARCH APPENDIX 2: DJIA BEAR MARKET LOWS AND LUNAR PHASE IN CHRONOLOGICAL ORDER DJIA Lows
Sun E°
Moon E°
Phase A°
02 Apr 1888*
013
273
260
08 Dec 1890*
257
214
317
26 Jul 1893*
124
280
156
08 Aug 1896*
137
130
353
25 Mar 1898*
005
045
040
24 Sep 1900
181
191
010
09 Nov 1903
226
104
238
15 Nov 1907
232
000
128
25 Sep 1911
182
219
037
02 Nov 1914* (a)
219
036
177
19 Dec 1917
267
337
070
24 Aug 1921
151
038
247
27 Oct 1923*
213
065
212
08 Jul 1932
106
165
059
27 Feb 1933
339
016
037
19 Oct 1933
206
214
008
26 Jul 1934
123
306
183
31 Mar 1938
010
009
359
11 Apr 1939
018
255
237
10 Jun 1940
080
138
058
28 Apr 1942
038
188
150
13 Jun 1949
082
298
216
22 Oct 1957*
209
202
353
26 Jun 1962
194
106
272
07 Oct 1966
095
027
292
26 May 1970
065
319
254
06 Dec 1974
254
168
274
28 Feb 1978
340
228
248
12 Aug 1982
140
053
273
19 Oct 1987
206
170
324
11 Oct 1990
198
115
277
31 Aug 1998*
158
265
107
22 Mar 2001
002
336
026
21 Sep 2001
179
239
060
09 Oct 2002
196
242
046
09 Mar 2009*
349
151
162
Source: McMinn (2010a)
* Inserted by the author. (a) Because of the outbreak of WWI, the NYSE was closed from 30 July to 12 December 1914, although stocks were still quoted by brokers and traded off the exchange. According to Durden (2014), Global Financial Data calculated the average of the bid and ask prices from 24 August to 12 December and was able to determine that the 1914 bottom occurred on 2 November when the DJIA hit 49.07. This has been used as the 1914 low.
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RESEARCH
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APPENDIX 3: MOON’S ECLIPTIC POSITION & LUNAR PHASE (A)
* Inserted by the author.
DJIA Low
Sun E°
Moon E°
Phase A°
15 Nov 1907
232
000
128
31 Mar 1938
010
009
359
27 Feb 1933
339
016
037
07 Oct 1966
095
027
292
02 Nov 1914* (a)
219
036
177
24 Aug 1921
151
038
247
25 Mar 1898*
005
045
040
12 Aug 1982
140
053
273
27 Oct 1923
213
065
212
09 Nov 1903
226
104
238
26 Jun 1962
194
106
272
11 Oct 1990
198
115
277
The lows with the moon’s ecliptic position between 005 Eᵒ and 255 Eᵒ have been highlighted in BLUE. The lows with lunar phase between 235 Aᵒ and 060 Aᵒ have been highlighted in RED.
08 Aug 1896*
137
130
353
Source: McMinn, 2010a.
10 Jun 1940
080
138
058
09 Mar 2009*
349
151
162
08 Jul 1932
106
165
059
06 Dec 1974
254
168
274
19 Oct 1987
206
170
324
28 Apr 1942
038
188
150
24 Sep 1900
181
191
010
22 Oct 1957*
209
202
353
08 Dec 1890
257
214
317
19 Oct 1933
206
214
008
25 Sep 1911
182
219
037
28 Feb 1978
340
228
248
21 Sep 2001
179
239
060
09 Oct 2002
196
242
046
11 Apr 1939
018
255
237
31 Aug 1998*
158
265
107
02 Apr 1888*
013
273
260
26 Jul 1893
124
280
156
13 Jun 1949
082
298
216
26 Jul 1934
123
306
183
26 May 1970
065
319
254
22 Mar 2001
002
336
026
19 Dec 1917
267
337
070
(a) DJIA lows listed by increasing order of the Moon’s ecliptic position. (b) The NYSE was closed between 30 July 1914 to 12 December 1914, due to the outbreak of WWI. Global Financial Data calculated the low to have occurred on 2 November 1914, based on trading outside the exchange (Durden, 2014).
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RESEARCH
Weeks not months signalled the October 2018 crash in equity market momentum Five STA directors delivered their review of 2017 and their “2018 Outlook” for current market momentum at the STA’s monthly meeting on 9 January 2018. Click here to view. They used different techniques and gave individual insights but they were generally agreed that holding equities was still profitable despite the extreme length of the equity bull market. They focused upon risk management and trading long positions rather than asset allocation. Insights were based upon analysis of current charts rather than predictions for the next four quarters. Encouraged by their positive views, the audience voted that in 2018 the equity market would be the top-performing asset. So what went wrong? Just 10 months after the committee members sat down, the bottom fell out of global equity markets. The triple whammy of China’s slowdown and trade war, reduced sales growth forecasts and rising interest rates turned most funds’ good performance into losses for 2018. Bernard J C Tyler MSTA Ben Tyler is a member of the STA executive committee. Ben has had three formal careers: auditor, finance director of new media companies and, since 2000, investment strategy developer for pensions and long-term savers. Author Note: Follow up to 9 January 2018 monthly meeting presentation by five members of the executive.
My own positive equity view was based on global markets making regular fresh highs so forcing the rising support lines to “show the blue (shorter) moving average above the green (longer) one”. These signals confirmed support for holding equities in addition to their strong pattern of high monthly returns. Charles Dow was the master of confirmation signals for market strength. He looked for a (fairly unspecified) pattern of Higher Highs and Higher Lows to confirm positive or negative sentiment. As an experiment we can mirror this pattern simply by recording, for each quarter-end, the delay in weeks since the last Higher High for the five day moving average price. Comparing weeks since last fresh high quarter on quarter gives us an inverse sentiment index, which can act as a leading indicator of change/no change in the outlook (see Table 1).
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RESEARCH
35
TABLE 1: AN INVERSE SENTIMENT INDEX CAN ACT AS A LEADING INDICATOR 5 day sma at: 30 Sep 2017 Weeks since high 31 Dec 2017 Weeks since high 7 Jan 2018 Weeks since high
Dow Jones
Nikkei
FTSE
Dax
22,320
20,110
7,360
12,640
0
0
15
15
24,750
22,950
7,580
13,110
0
0
0
6
25.040
23,120
7,660
13,130
0
0
0
7
Av wks since high
8
2
2
Clearly the first two markets show rock solid positive sentiment. The FTSE recovered from its June to September 2017 uncertainty by posting a fresh five-day simple moving average high in early October. Similarly, the DAX struggled from 18 June to 8 October before making a fresh high and this volatility continued as the DAX (and FTSE) failed to post a higher high on 28 January along with the stronger markets. There was a sharp correction in early February 2018 but our focus here is upon the more serious October downturn. The metrics that might go along with our “weeks since high” equity sentiment signal are: that a 15-week delay casts the index into weakness and a 23-week delay is severe weakness - possibly time to sell. The purpose of this article is to show what happened next in 2018 and to pose the question: “Should technical analysts have been surprised by the sudden crash in early October if they were measuring Charles Dow’s weekly sentiment strength?” If studying this pattern is valuable then the technical analysts’ decision making focus might become split towards more time spent on the defensive task of “risk of loss” management rather than just the more active task of asset allocation across markets. Current Momentum As a multi-asset investor rather than a trader, I avoid daily contact with on screen prices so my various Current Momentum1 signals, based upon rolling weekly average prices, are critical in keeping on top of risk management. Unconventionally, our metrics don’t recognise significant capital preservation benefits from asset diversification in a down market so risk management here means retreating to cash, in part or in whole. We use rolling weekly rather than monthly data for decision taking, and we recast sentiment signals daily during the worst crisis months. Aside from the volatile US market, the 2018 decline in equity sentiment is revealed in Table 2. The pink boxes indicate weakness. Red indicates severe weakness in sentiment despite holding gains increasing. TABLE 2: THE 2018 DECLINE IN EQUITY SENTIMENT 5 day sma at: 31 March 2018 Weeks since high 30 June 2018 Weeks since high 28 Sep 2018 Weeks since high
Dow Jones
Nikkei
FTSE
Dax
24,370
21,360
7,110
12,190
9
9
10
10
24,740
22,430
7,650
12,630
22
22
4
23
26,470
23,440
7,380
12,170
0
35
17
36
Av wks since high
10
18
22
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RESEARCH
This table records the weeks since the last high as an inverse sentiment index. Unlike the regular fresh Higher Highs of 2017, most markets failed to retake their January 2018 highs. This was a weakness alert. The US market showed a different pattern as its unique technology strength masked the underlying weakness. It alone was able to record modest fresh highs between 20 September and 3 October which instantly turned a 32-week drought in fresh highs on the Dow to zero weeks. Market index breadth, column six, shows a rise from Table 1’s two weeks to an average of 22 weeks on Friday 28 September. This was significant because the 22 weeks average across the four main markets would become a 23-week danger signal on Friday 5 October despite a fresh high in the US markets. Looking back, some asset managers might envy a clear technical global equity sell signal on 5 October as the collapse on 10 and 11 October produced a 7% drawdown from the 3 October high. Figure 1 shows the Dow’s performance in the second half of 2018. FIGURE 1: THE PERFORMANCE OF THE DOW IN H2 2018
Trending Tickers powered by StockTwits, 20 December 2018. This six-month chart of the Dow Industrial Index clearly shows the price action before and after the 3 October high. The candlesticks show the 21-day exponential moving average being breached on the 5 and 6 of October and turning down. The (21,55,34) MACD gives a clear negative signal on 8 October. The RSI gives negative signals on both 24 September and 4 October. The wise manager is the one who followed these signals and acted upon them by 9 October so as to bank his profits. Conclusion: Portfolio managers who follow technical analysis may manage their sell signals according to their own preferences but they might all benefit from access to a forward-looking sentiment signal such as “weeks since last fresh high” which alerts them to the coming end of the market trend’s support. No monthly data would have assisted such managers in re-weighting before 1011 October.
Footnote 1: Current Momentum is a fresh factor that the author is researching. Ignoring all data over 10 months old this factor can be calculated over suitable periods always right up to the last close.
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RESEARCH
37
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38
ANALYST FOCUS
Head and shoulders above - Eddie Tofpik How I realised life’s too short for fundamentals When first asked to write this piece I was perplexed. I’d written many pieces before... but not on how or why I chose technical analysis as a career. I slowly realised that the best way would be to approach it as I would a piece of market analysis. Describe how I got here... explain what’s going on now... describe likely future events.
Eddie Tofpik MSTA Eddie Tofpik MSTA is Head of Technical Analysis and Senior Markets Analyst at ADMISI, and a member of the STA Executive Committee. At ADMISI, he produces and publishes ‘Eddie’s Crayons…’, a monthly technical analysis review of FX and selected commodity futures markets along with other Daily & Weekly Technical Analysis.
One past story comes to mind. I tried many times to explain to my mother what I did in the City. She was never convinced, but was always grateful I’d got past part-time jobs as a youngster in the Petticoat Lane street market in London (left). She specifically credited my current success to being a teenage salesman selling suiting material in a shop, now long gone, in Goulston Street. It was here that I started studying human behaviour and also realised I wanted to work in the City rather than follow in my father’s footsteps as a baker. My decision coincided with the rise of the City as a financial centre in the 1980s and portals, for naturally savvy ‘market’ traders, opened into areas previously shuttered. Sadly, these seem since to have closed once more.
Study TA... and someday, when you’re too slow as a broker, you’ll be able to use this to extend your career and remain useful. Anyway... I started working in the LME base metals industry (right), initially clerking for traders, then moving onto trading and broking. In about 1984 I first came across technical analysis whilst working as a junior futures broker for the London office of a Chicago brokerage, receiving and placing orders in international futures markets... that meant London, New York and Chicago in those days. My manager and first guru was a great man, now sadly missed, called Keith ‘Eddie’ Edwards. He kept scrolls of Point and Figure charts going back years, carefully rolled up. He gave me a sage piece of advice: “Study TA... and someday, when you’re too slow as a broker, you’ll be able to use this to extend your career and remain useful.” I echo his words to young brokers nowadays. Eddie (Edwards) introduced me to my second guru and good friend, the wellknown and respected technician Trevor Neil. It was Trevor who introduced me to ACTA - the Association of Chart and Technical Analysts, the precursor to the STA. He gave another sage piece of advice: “Join now... someday the (then) forthcoming regulators will either make it a requirement via circumstance or regulation to be a member to practise technical analysis.” Very apposite! So... I started learning about technical analysis, attending meetings, growing as an analyst, concentrating on the disciplines I liked/understood in this wide all-
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39
embracing church we call technical analysis... until I started to write my own pieces, articles and analysis. This was over 30 years ago and this has grown and metamorphosed into what is now the ‘Eddie’s Crayons...’ series of technical analysis publications on various markets I produce today for ADM Investor Services International Limited (‘ADMISI’), the largest non-bank clearer in the UK, Europe and the world. These are freely available to clients and other interested parties. I’ve been at ADMISI for close to 30 years, initially starting the Foreign Exchange Desk and running it successfully since 1991 until last year. Due to the increased exposure technical analysis had both within and without ADMISI via social media, I was asked to start up a technical analysis unit and in January 2018 I became Head of Technical Analysis & Senior Markets Analyst. In the middle of 2018 I was pleased to help the STA promote our 50th Anniversary reception at London’s Living Room in City Hall (below). I was then caught completely off guard when subsequently asked to serve on the Board of the STA. I was nevertheless very honoured, humbled and pleased to do so, standing for my first election this past December as a Director and Executive Committee Member responsible for marketing the STA.
50th Anniversary Party on Thursday 7 June 2018 at the London’s Living Room - City Hall. (Market Technician Issue 85)
So... this is my TA journey and where I currently stand... What’s next? I’ve already mentioned how wide a ‘church’ technical analysis is. We’ve followers of Dow, Elliott and Gann. We’ve lovers of Candlesticks, Point and Figure and Pattern Recognition...all with many years of solid data, pre-dating other analysis not just by decades but by centuries! For example, look to Japan at the work of Munehisa Homma in the mid 1700s, arguably linked to earlier work in China and possibly as far back as ancient Egypt. Technical analysts can embrace all these different disciplines. We can even accept those using the ‘F’ word...dare I say it...fundamentals! We can accept fundamentalists; I’m sure there are many sincere, good people who follow ‘fundamentals’. My sadness is that we (technicians) can accept them... yet so many cannot accept us. Whilst tolerant in other aspects of their lives, many show a malevolent streak when dealing with technical analysis. ‘Witchcraft’ is one phrase my son heard recently used describing what I do... Not nice! I can see at least part of my/our work will be to try to bring genuine love and tolerance to the minds of these hardened fundamentalists towards technical analysis. It may take some time!
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EDUCATION CHANNEL
The Million Dollar Question(s) As a prop trader and educationalist, part of my role is to teach new and old traders and investors the art of technical analysis. As a trading all-rounder, I get quizzed on all aspects of trading: psychology, winning, losing, strategy, trade and risk management and technical analysis. In the many years I’ve been doing this, there has been a common thread of questions I get asked. Most notably, these questions arise around the subject of technical analysis.
Stephen Hoad BA (Hons), MSc, MSTA Stephen Hoad BA (Hons), MSc, MSTA is a lecturer with the Society of Technical Analysts and specialises in Japanese charting & trading methods. Currently a trader for HC Tech and CEO of The Stop Hunter. He is also the author of the book: #TradingThought: Mind Medicine for Traders & Investors. Stephen can be contacted by email: info@thestophunter.co.uk or via: www.thestophunter.co.uk
To some, technical analysis is a dark art; to others it is the perceived golden ticket to wealth and riches. A few dismiss it without consideration as pure hokum. For those willing to dig deeper, though, technical analysis opens up a treasure chest of trading and investing possibilities. Some of the best questions I get asked come from the uninitiated, who are seeing it with fresh eyes and a clear mind, even sometimes making me think about my own application and use of technical analysis. The questions inevitably comprise the good and the bad, as well as the ugly! So, I’m going to share some of these questions with you. Most fall into two camps, being either theoretical or practical. This is by no means an exhaustive list, and I’m sure you’ll have come across many others far more deep and meaningful, as well as having your own set of questions you’ve always wanted to ask but maybe never have.
The theoretical enquiries This is where all the controversial questions get asked - the meaning of life, the creation of earth, will my team West Ham ever win another trophy, does technical analysis have a future? Most of the questions on technical analysis in this section could probably warrant their own individual essay or even book, but for the purpose of this article I will keep things brief! Q. Does technical analysis really work? A. Yes it does, if understood and applied correctly. If it didn’t, professional traders, investors and analysts wouldn’t use it, so it obviously has some value! Q. But isn’t technical analysis just a hindsight, ‘I told you so’ tool? A. I can understand why it could be perceived in this way, and it is a very good tool for analysing the past, but this is also where its hidden strength lies. It is great at giving us clues and breadcrumbs to determine the future direction of price action on any given market. The best practitioners of technical analysis are those who can piece these clues together and apply these interpretations. Q. Can I make money using technical analysis, because whatever I try just fails? A. Yes you can. I’ve made a living, as have countless others over the years, using purely technical analysis as a trading and investing tool. It must be understood, though, that technical analysis is not a ‘golden bullet’ to instant riches. It is an art, a skill, a craft which has to be learned and honed over time, if you are to take make money from using it.
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Q. Technical analysis is such a vast subject. What areas should I specialise in to get the best results? A. There is no right answer to this question. It depends on the individual, your trading style and objectives. I always suggest learning the fundamentals of technical analysis first, then exploring and branching out. It is crucial to get experience and find what works best for you. I specialise in Japanese charts and it took me many years of using technical analysis before I settled on these. Q. What works best, a fundamental approach or technical analysis? A. There are good and bad traders and investors in both camps. There is no one best style; both can work equally well. I’ve been lucky enough to work with brilliant fundamental and technical traders. If you’re good at something and it works then stick to it. I also advise that you should never be blinkered into just one approach. You may find a blend of the two actually works very well for you. Q. Does technical analysis have to be used only on price? A. No, it can be applied to almost anything that you can create a time series of data from. It could be volume, volatility, sentiment, behaviour - pretty much anything! You can apply the same indicators, rules, theory and analysis to these data sets. Q. Can I automate technical analysis? A. Technical analysis lends itself very easily to automation in the ‘new age’ of trading. One of the biggest growth areas currently is algorithmic trading. With enhanced technologies and data mining capabilities, technical analysis is proving an invaluable tool for the 21st century trader.
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THE EDUCATION CHANNEL Figure 1: Is technical analysis finding a whole new breed of sophisticated user from the quantitative, algorithmic, tech world of trading?
The practical enquiries These are the day-to-day questions that real users of technical analysis would like the answers to and are often stumbled across by getting stuck in to the subject. Often, these questions are either affecting the bottom line, adding frustration to their trading, or are a sticking point when it comes to applying the user’s own technical analysis. Q. I use indicators like stochastics to trade and measure whether a market is over bought or sold. I follow the rules but I always end up losing; the market never reverses at these points like the rules suggest and the trend simply continues. Am I doing something wrong? A. No, you’re doing nothing wrong as such. The overbought / sold concept is an idea to apply, but it’s a guide. It works best in conjunction with other indicators and tools, for example volume, sentiment, understanding the markets you are trading and being smart with your analysis and trading. Who knows, you may have just discovered a reverse stochastic strategy! Q. How does Fibonacci work? This concept sounds more science fiction than fact! A. It’s normally the ignorant who don’t want to understand the concept and who dismiss it out of hand. In some ways it has become a self-fulfilling trading tool due to its popularity and ease of application - but it does work. Its rules are discretionary around picking highs and lows and this doesn’t help its cause. However, if you follow these basic rules of application, it is an especially good tool for discovering psychological price levels, creating stop loss strategies, risk and return targets, and other risk management approaches. Q. What time frames should I use to analyse and trade in? A. The idea of time frames is initially quite tricky for some to grasp, but it basically
Figure 2: Fibonacci is always a controversial point of discussion in technical analysis - but it does work!
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Figure 3: A great risk management tool for keeping your money safe and growing your trading pot! depends on many variables such as the user’s own trading objectives, availability and markets traded. I emphasise the importance of analysing higher time frames to gauge the ‘flow’ of the market you are trading and to stick to your trading window and not jump about, no matter what, if you want to be successful.
as a guideline to determine the trend, such as two or three touches as well as specific tools designed to recognise reversals, but the user really needs to understand the basics first; how to apply trend lines, moving averages and indicators for example. They also have to realise that there is a discretionary, subjective element involved in any analysis.
Q. Do patterns (such as Triangles, Flags and Pennants) really work or are they just made up to make charts look interesting? A. I answer this one by getting the person asking the question to take a step back from the chart and translate what is actually going on with the psychology of the price action. Very quickly they can see these psychological trading patterns forming on the chart and come to appreciate their use. I also make it very clear, that these patterns work better in conjunction with other technical analysis tools and indicators.
Q. What type of charts work best? A. You will only be able to answer this question through trial and error and experience. Bar charts, Heikin Ashi, Point and Figure, Renko etc. all have their advantages and disadvantages. So there is no right answer and traders and investors can be successful using a singular style or even mixing and matching various chart types.
Q. What are the most common types of indicators used? A. From my experience the most commonly used are: Pivots, RSI, Fibonacci, Stochastics, moving averages and MACD. Q. What are the most powerful candlestick patterns? A. There’s not a very straightforward answer to this question, as many patterns have their own individual merits. I initially refer users to the more popular patterns, such as Dojis, evening and morning stars etc., but I urge anyone interested to dive in a bit deeper to fully understand their usefulness in certain situations and markets. Users need to try to speak the same language that these patterns are talking in to best appreciate which are the most useful. Q. How do I know if I’m in a trend or it is reversing? (When is a trend not a trend?) A. There are some official technical analysis rules laid out
Q. I heard technical analysis can be used for trade and risk management, and help me to stay in the game? A. Yes it can. An often-overlooked part of technical analysis is its application in trade and risk management. By using technical analysis tools and indicators, you can create stop loss points, trailing stop strategies, risk reward levels, aid entry and exit to your trades and keep the shirt on your back! Technical analysis is often seen as just an ‘entry-to-trade’ tool by some, but it is far more than just that. Q. Does technical analysis work in all markets? A. Technical analysis works best in liquid, unbiased markets. So those ‘thin’ markets, such as small cap stocks or minor commodity markets, may be harder to apply the generic concepts to. This is where you have to dip into your technical analysis toolbox, apply a bit of smart thinking and common sense, and use a different approach, maybe even in conjunction with fundamental analysis to get the best results out of your technical analysis. Generally though, technical analysis does work well in the majority of markets.
44
THE EDUCATION CHANNEL
Note from the Editor Nicole Elliott Technical Analyst, Private Investor, E-journalist for the STA
If you would like to learn more about the different techniques used in technical analysis, why not attend our Diploma Part 1 course starting in October or purchase our Home Study Course. Donâ&#x20AC;&#x2122;t forget that our monthly meetings and education forum also offer a great opportunity to meet knowledgeable members who will be more than happy to chat about technical analysis and answer any questions you may have.
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45
STA Home Study Course YOU JOIN THE STA TO BE BETTER
Be ready to lean from some of the most incredible technical analysts in the finance industry In 2018 the STA launched its new Home Study Course, HSC 2©. This is an exciting upgrade to the hugely successful HSC©, and one which has been a number of years in development. The STA’s aim was simple - to give you the best product on the technical analysis market, not just in terms of course content and the number of experts involved in its development, but also with the administrative and continuous student support you receive. What’s new in HSC 2? • • • • • • • • •
It addresses how one encounters, engages and manages within the heightened uncertainty and ambiguity that define risk roles. New industry experts were involved in development. It is even more interactive. There is an improved Q&A. There are now 40% more units, created to cover increased range of topics (IFTA syllabus compliant). The Gann unit is now more practical and user friendly; we have added additional Elliott Wave theory coverage. You will find interactive questions for each unit using Exambuilder STA Diploma Part 1 exam software. We have added new modules: Risk & Trading systems, Behavioural Finance, Ichimoku Kinko Yyo. Some additional techniques are also taught: Renko, Kagi, Three-line break charts and much more... ...and there is more revision and exam preparation, including an exam preparation session video.
The new HSC 2© course costs £1,195.00 and can be purchased by clicking here. This new price reflects the major enhancements as well as the additional and expanded content. The STA Home Study Course© (HSC) is perfect for students who wish to learn at their own pace rather than in a classroom, due to either time or geographical constraints. Anyone who is not able to, or does not wish to, travel to London to attend the STA Diploma Part 1 and 2 courses will find the HSC an excellent alternative. Although website based, it is fully downloadable and may be used online or offline by PC, Mac, iPad or Android machines. For more details click here or contact the STA office on +44 (0) 207 125 0038 or info@sta-uk.org www.sta-uk.org/hsc
“I have had a great experience studying and becoming a member with the Society of Technical Analysts. Directed by industry experts, the STA provides a world-renowned home study course and community for anyone looking to pursue a professional career in technical analysis.” Says Akif Din MSTA, former HSC 2 student. Akif scored an outstanding 90% in his Diploma Part 2 exam, achieving a Distinction in his qualification.
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BOOK REVIEW
Ichimoku Charts (Updated and Revised 2nd edition) Nicole Elliott (2018) Harriman House, Petersfield, Hampshire, UK Book review by John R L Cameron FSTA CFTe
So are you turning Japanese? I bet you are; I really think so! Not literally, of course, but to the extent that, at least, you prefer to use candlestick charts and you may even have explored Renko, Kagi et al. I’m willing to bet because candlesticks are colourful and hugely popular and particularly well taught in both the Diploma Part 1 and Diploma Part 2 courses by recognised professional practitioners – and where else can you get that? Nicole Elliott’s new book, a timely update and revision, gives you a real opportunity to develop and expand your knowledge and become an expert. It is a clever and well-organised work, so don’t omit the prefaces. (The author’s comment on when she started learning absolutely chimed with me and I realised exactly what she meant as my experience was similar; there were no books or internet when I started). There is a pleasing flow, a natural progression to the book. Chapter 2, Constructing the Cloud Charts, really gets down to it. Brief, clear paragraphs set the stage. For instance, the span of averages is elucidated and from that so is the fact that there is a statistical argument for their origin. There immediately follow sensible comments on which ma’s to use. Case studies and more sensible commentary progress the construction of Ichimoku charts. Particularly helpful is the last part of this chapter; the calculation of every element is given in detail and it is worth working through
them. Incidentally, while the example gives all the calculations for 10 October 2005, there is a “Table of sample calculations for FTSE 100” at the very end of the book which gives them all for the months of September, October and November 2005. The next chapter, 3 Interpretation of the Clouds, starts with support and resistance. In a way this may require you to be even more Japanese because you will have to think of those important factors in a very different way to western appreciation. Seven case studies follow on this major topic, each of which has a clear chart intelligently placed in the relevant text. The last paragraph of this chapter is very interesting. The author claims that thus far you could have reached the level of most Japanese traders, and I concur, provided you have worked at it assiduously. Chapter 4, The Three Principles, (The Wave Principle, Price Targets and Timespan Principle), covers important and generally overlooked material and offers you a chance to become properly proficient. In the author’s words: “The thorough Cloud analyst looks at patterns, waves and calculates price and time targets”. It must also be understood that these three make up a single coordinated whole, they are “fundamentally interconnected”, although necessarily explained in separate, detailed sub sections. To get the most out of this book, both this and the next chapter, 5 Case
Studies, require concentration and study but the effort will be immensely rewarding. As already mentioned, the placement of charts in this section, and indeed throughout the whole book, is neatly integrated with the text. If you are into traded options or futures then the next section, 6 Options Trading with Clouds is a must. It is based on the author’s presentation at the STA organised London 2002 IFTA Conference. Note particularly the final heading: Recommendations. The final two numbered chapters, 7 An Update on How I Use Cloud Charts Today and 8 New Case Study are as fascinating as their enticing titles suggest! The final, unnumbered section, Conclusion, is not strictly a technical exposition but confirmed my opinion on an aspect that is rarely mentioned in reviews of technical analysis tomes: literary merit. Earlier I suggested that you should not omit the prefaces. In this, the author comments on her aims and also style. As you might expect, given that Nicole Elliott graduated obtaining a BSc in Social Psychology at LSE and is a Fellow of our Society, it is well written. In fact it is vastly better than that; it is beautifully written. In literary terms the work is a synergetic blend of exposition and partial autobiographic commentary. The clarity, elegance and wit lift it above the norm of most technical analysis treaties. It is a joy to read. So buy the book and treasure it.
The Society of Technical Analysts: www.sta-org.uk
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Jesse Livermore - Boy Plunger Tom Rubython (2016) The Myrtle Press, Northampton, UK Book review by Nicole Elliott FSTA
Subtitled ‘The Man Who Sold America Short in 1929’, and with a foreword by famous American trader Paul Tudor Jones, this is a book I can recommend. I thought it would be a good read because its author, who spoke at the STA’s monthly meeting earlier this year, was an interesting and entertaining guest. Mr Jones notes that: “The best lessons I learned from Jesse Livermore (from the book Reminiscences of a Stock Operator) were his repeated failures and how he dealt with them. He lost his entire fortune four or five times.” Perhaps that’s why today he is famous for spotting the stock market crash of 1987 - Mr Jones, that is, because Livermore shot himself in the cloakroom of the Sherry-Netherland hotel overlooking Central Park on Thursday the 28 November 1940. This probably doesn’t sound like a good way to learn about trading or a biography with a happy theme - but it is. From a dirt-poor childhood in Massachusetts the frail boy excelled at school and some considered him a ‘prodigy’. He left home at 14 with USD6 in his pocket heading for Boston. By the end of his first week working as a board boy in a bucket shop he had USD20. Keeping journals, “having taken down hundreds of observations in my mind, I found myself testing their accuracy, comparing the behaviour of stocks today with other days”. From which he concluded: “Speculation is as old as the hills. Whatever happened in
week ending the 30 October 1929 he had made USD100 million - by shorting stocks. Among the many who had lost an awful lot were top American economist Irving Fisher and his British equivalent John Maynard Keynes. Livermore observed: “A man can have great mathematical ability and an unusual power of accurate observation and yet fail in speculation unless he also possesses the experience and the money.”
the stock market today has happened before and will happen again.” Sound familiar? Through to 1901, Livermore rode the full-blown bull run, making money effortlessly because of it, rather than by his own talents. But it was not until the crash of October/November 1907 that he managed to make USD1 million in a day. The following year he switched to trading commodity futures on the Chicago Board of Trade, partly because here he could still trade on margin. This did not go well and by 1909 he was worse off than at any point in his life. He realised that his past success was causing his present failure. The swings and roundabouts continued, boom turning to bust followed by lean years. But with a little help from secret phone calls to a member of the Bank of England in the
His personal life and lavish spending were legendary, with much time spent in Florida and on his many yachts; several wives and a stream of dalliances and mistresses round out the picture. His final act was to write a book explaining the Livermore Market Key where readers were reminded: “Profits always take care of themselves but losses never do.” I shall be donating my signed copy to the STA library at the Barbican.
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THE SOCIETY OF TECHNICAL ANALYSTS
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 an education 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
THE SOCIETY OF TECHNICAL ANALYSTS
STA Calendar 2019
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More information about the STA events can be found here.
New venue! pg.9
Monday 4 March 10:00am Stay Ahead Training Centre STA Diploma Part 1 Exam
Thursday 25 April 1:00pm London School of Economics STA Diploma Part 2 Exam
Monday 1 July 10:00am Stay Ahead Training Centre STA Diploma Part 1 Exam
Tuesday 12 March
Monday 8 April
6:30pm One Moorgate Place
6:30pm One Moorgate Place
Tuesday 14 May
Tuesday 11 June
6:30pm One Moorgate Place
6:30pm One Moorgate Place
Thursday 4 July
Tuesday 9 July
6:45pm JPMorgan Corporate Challenge Battersea Park
6:30pm One Moorgate Place
See pg.5 for more info
Tuesday 10 September 6:30pm One Moorgate Place
Tuesday 12 November 6:30pm One Moorgate Place
Wednesday 18 September 7:00pm Annual Dinner National Liberal Club
Monday 2 December 10.00am Stay Ahead Training Centre STA Diploma Part 1 Exam
Tuesday 8 October 6:30pm One Moorgate Place
Tuesday 10 December 6:30pm Christmas Party One Moorgate Place
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THE SOCIETY OF TECHNICAL ANALYSTS
STA Education: the LSE courses, and the Diploma in Technical Analysis The Education Channel - Monthly meetings videos are available to members here. February 2019
Richard Adcock
When overbought or oversold signals continuation
January 2019
Market outlook panel
Panel discussion
November 2018
MiFID II panel
Panel discussion
October 2018
Dr Van Tharp
Interview with Dr Van Tharp by Ron Williams
September 2018
Mathew Verdouw
Quantitative strategies for technical analysis
July 2018
Tony Plummer
The understandings of William Gann
May 2018
Paul McLaren
Trading: Itâ&#x20AC;&#x2122;s completely mental!
April 2018
Eddie Tofpik
Avoiding the spikes... uses and abuses of Andrews and Schiff Pitchforks
March 2018
Tom Rubython
Fireside chat
February 2018
Daniel Gramza
Behavioural Japanese Candle Trading Clues for 2018
January 2018
Market Outlook Panel
Panel discussion
STA Library STA members are eligible to join the library as standard adult library members. They need to attend in person to the library to join - bringing with them proof of name (STA membership card, bank card, staff pass etc) and proof of address (driving licence, recent bank statement, utility bill etc). The library address is Barbican Library, Silk Street, London, EC2Y 8DS. For full details on address and opening times, visit www.sta-uk.org/library
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Congratulations to the latest STA Diploma MSTAs Distinction Akif Din Mohamed Syukri Bin Muhdzir
Pass Abdul Taib Bin Tajudin Ahmad Nadzif Bin Ahmad Nadzri Aiman Nawwar Binti Mohd Razi Aizat Murtaza Bin Abas Ammar bin Mohamad Hanapiah Awangku Nazreen Bin Awg Napri Charikleia Avgousti Che Muhammad Bukhari b Che Mohd Razali Cheow Poh Khaw Faten Fariza Binti Pakhruddin Fatin Athirah Binti Roslan Fred Chai Meng Foong Gary Chew Kiew Seng Izuhan Rahimi B. AB Kadir Jonathan Holmes
Julieana Amburayan Jun Anthony Garcia Kalwant Singh Karnail Singh Kamal Aliq bin Mohd Ali Lee Tiong Sin Mohamad Hafiz Hafifi Bin Hassan Mohd Firdaus Bin Mohd Osmani Muhammad Nur Izhar Mosliman Natali Monardo Noraishah Binti Ismail Norhidayah Mohd Sehat Nurul Aini Bt Ahmad Rani Sabaraiah Akhair Serina Patel Jing-Ren Zhou
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THE SOCIETY OF TECHNICAL ANALYSTS
The STA Executive Committee
Tom Hicks MEng MSTA MSCI Chairman of the STA
Axel Rudolph BSc (Hons) MSc FSTA MCSI Vice Chairman
Charles Newsome MSTA FCSI Vice Chairman
Clive Lambert MSTA MCSI Vice Chairman
Eddie Tofpik MSTA, ACI-UK, ACSI Head of Marketing
David Watts BSc (Hons) CEng MICE MIWEM MSTA Systems and Website Specialist
Leona Gomez-Lopez MBA ACCA MSTA Treasurer
Richard Adcock MSTA Journal
Nick Kennedy BA (Hons) MSTA Systems and Website Specialist
Mark Tennyson d’Eyncourt FSTA Programmes
Ben Tyler BA (Econ) FCA MSTA ACSI Finance
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