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Technical Analysis: Power Tools for Active Investors
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- Copyright 2005
- Dimensions: 7x9-1/4
- Pages: 264
- Edition: 1st
- ISBN-10: 0-13-147902-4
- ISBN-13: 978-0-13-147902-9
- eBook (Adobe DRM)
- ISBN-10: 0-13-195186-6
- ISBN-13: 978-0-13-195186-0
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Table of Contents
The No-Frills Investment Strategy.
Picking the Right Investment Vehicles.
Risk: Reward Comparisons Between More Volatile and Less Volatile Equity Mutual Fund Portfolios
Drawdown: The Measure of Ultimate Risk
The End Result: Less Is More
Changing Your Bets While the Race Is Still Underway
Relative Strength Investing
Testing the Relative Strength Investment Strategy: A 14-Year Performance Record of Relative Strength Investing
Results of Quarterly Reranking and Quarterly Rebalancing (1990-2003)
Buy-and-Hold Results: The Standard & Poor's 500 Benchmark
Increasing the Risk: Maintaining a Portfolio of Somewhat More Aggressive Mutual Funds
Upping the Ante: The Effects of Applying the Concepts of Relative Strength Selection to a Still More Volatile Portfolio of Mutual Funds
A Quick Review of Relative Strength Investing
Two Quick-and-Dirty Stock Market Mood Indicators.
Identifying High- and Low-Risk Investment Climates
The Nasdaq/New York Stock Exchange Index Relative Strength Indicator
The Maintenance and Interpretation of the Nasdaq/NYSE Index Relative Strength Indicator
Measuring the Market Mood with the Intermediate Monetary Filter
The Monetary Model
The Calculation and Rules of the Intermediate Monetary Filter
Combining the Two Indicators
Point and Counterpoint
A Final Long-Term Statistic
Moving Averages and Rates of Change: Tracking Trend and Momentum.
The Purpose of Moving Averages
The Intermediate-Term Moving Average
The Long-Term 200-Day Moving Average
Using Weekly-Based Longer-Term Moving Averages
Moving Averages and Very Long-Term Moving Averages
Moving Averages: Myths and Misconceptions
Using Moving Averages to Identify the Four Stages of the Market Cycle
Patterns of Moving Averages During Stage 1
Patterns of Moving Averages During Stage 2 Advances
Patterns of Moving Averages During Stage 3 Distribution Periods
The Rate of Change Indicator: How to Measure and Analyze the Momentum of the Stock Market
The Concept and Maintenance of the Rate of Change Indicator
Constructing Rate of Change Measurements
Bull Market and Bear Market Rate of Change Patterns
Adjusting Overbought and Oversold Rate of Change Levels for Market Trend
Looking Deeper into Levels of the Rate of Change Indicator
The Triple Momentum Nasdaq Index Trading Model
Notes Regarding Research Structure
Rate of Change Patterns and the Four Stages of the Stock Market Cycle
More Than Just Pretty Pictures: Power Tool Chart Patterns.
The Concept of Synergy
Powerful Chart Formations
The Wedge Formation: Times to Accumulate and Times to Distribute Stocks
The Wedge Formation
Declining Wedge Formations
Synergy in Chart Patterns
Head and Shoulder Formations
Using the Head and Shoulder Formation to Establish Downside Price Objectives
At Market Bottoms, the Inverse Head and Shoulder Formation
Confirmation by Measures of Market Momentum
Volume Spikes Are Very Bullish If the Stock Market Has Been in Decline
The Selling Climax
Support and Resistance Levels
Example: The 1999-2003 Stock Market Climate (Chart 4.4)
Major Trend Synergy in Action
Tricks with Trendlines
Inverse Trendline Support and Resistance Zones
Channel Support and Resistance
Early Warnings Provided by Channel Patterns
Extended Channel Support
Rising Resistance Zones
False Breakouts and Breakdowns: Key Market Patterns
A Significant Sell Signal
A Significant Buy Signal
Political, Seasonal, and Time Cycles: Riding the Tides of Market Wave Movements.
Calendar-Based Cycles in the Stock Market
Days of the Month
The Best and Worst Months of the Year
The Best Six-Month Period, the Worst Six-Month Period
Evaluating the Tabulations
The Presidential Stock Market Cycle
Time Cycles: Four Days to Four Years
Example of Market Cycles: The 53-Day Market Cycle
Segments of Market Cycles
The Significance of Segmentation
Distinguishing Bullish Cyclical Patterns from Bearish Patterns
Lest We Forget the Concept of Synergy...
Lengths of Market Cycles
The Very Significant and Regular Four-Year Market Cycle
An Intermediate Market Cycle with a Confirming Indicator
How the Confirming Indicator Helps the Cause
The August-September Cycle
The October-November Cycle
The November to Early January Market Cycle
The January-March Cycle
The 18-Month Market Cycle with a Rate of Change Confirming Indicator
Synergy Between Rates of Change and Cyclical Patterns
Enter the Rate of Change Indicator
For Future Readers of This Work
Day Trading with Short-Term Cycles
T-Formation: The Ultimate Cyclical Power Tool?
The Construction of T-Formations
Further Examples of T-Formations, Including the Application of Synergy
T-Formations and Mirror Patterns of Stock Movement
T-Formations and Longer-Term Time Periods
One Final Set of T-Formations
Seasonal and Calendar Influences on the Stock Market
Bottom Fishing, Top Spotting, Staying the Course: Power Tools That Combine Momentum Oscillators with Market Breadth Measurements for Improved Market Timing.
A Quick Review of Where We Have Been
The "Internal" as Opposed to the "External" Stock Market
Measures of Market Breadth
New Highs and New Lows
New High/New Low Confirmations of Price Trends in the Stock Market
Positive and Negative Confirmations, 1995-2004
New Lows at a Developing Stock Market Bottom
Creating a New High/New Low Indicator to Keep You in the Stock Market When the Odds Heavily Favor the Stock Market Investor
Method of Interpretation
The Application of the New High/(New Highs + New Lows) Indicator to the Nasdaq Composite
Pre-Bear Market Comparisons
The New York Stock Exchange Advance-Decline Line
Relating to Advance-Decline Breadth Data
Chart 6.4: The Advance-Decline Line Between 2002 and 2004
The 21-Day Rate of Change of the Advance-Decline Line
Breadth Patterns at Bull Market Highs 1997-2000: A Period of Breadth Transition
A Change in Tone
A Major Negative Breadth Divergence Followed
Using a Somewhat More Sensitive Rate of Change Measure of the Advance-Decline Line
The Ten-Day Rate of Change Indicator
The Weekly Impulse Continuation Signal
But First, an Introduction to the Exponential Moving Average
The Smoothing Constant of Exponential Averages
Stabilizing the Exponential Average
Some Special Qualities of Exponential Moving Averages
The Weekly Impulse Signal
The Required Items of Data Each Week
Buy and Sell Signals
General Concept of the Weekly Breadth Impulse Signal
The Daily-Based Breadth Impulse Signal
The Construction and Maintenance of the Daily-Based Breadth Impulse Signal
The Performance Record of the Daily Breadth Impulse Signal
The Application of the Daily-Based Breadth Impulse Signal to Trading the Nasdaq Composite Index
Volume Extremes, Volatility, and VIX: Recognizing Climactic Levels and Buying Opportunities at Market Low Points.
Market Tops: Calm Before the Storm; Market Bottoms: Storm Before the Calm
TRIN: An All-Purpose Market Mood Indicator
The Data Required to Compute TRIN
Interpreting TRIN Levels
TRIN as a Bottom Finding Tool
The Volatility Index (VIX) and Significant Stock Market Buying Zones
The Volatility Index
Theoretical Pricing of Options
Ranges of VIX
Bullish Vibes from VIX
The Major Reversal Volatility Model
Calculating the Major Reversal Volatility Model
Major Market-Reversal Buy Signals
The 1970-1979 Decade
The 1979-1989 Decade
The 1989-1999 Decade
Post-1999: Mixed Results
The Ideal Scenario
Advanced Moving Average Convergence-Divergence (MACD): The Ultimate Market Timing Indicator?
Scope of Discussion
The Basic Construction of the Moving Average Convergence-Divergence Indicator
The Signal Line
Very Important Supplementary Buy and Sell Rules
Rationale for Supplementary Rules
Using Divergences to Recognize the Most Reliable Signals
Improving MACD Signals by Using Different MACD Combinations for Buying and Selling
Two MACD Combinations Are Often Better Than One
MACD During Strong Market Uptrends
MACD During Market Downtrends
Modifying MACD Rules to Secure the Most from Strong Market Advances
Reviewing Chart 8.9
Market Entry Supported by Positive Divergence
Moving Averages, MACD Patterns Confirm Advance
Initial Sell Signal Not Reinforced by Any Negative Divergence
Secondary Sell Signal Confirmed by Negative Divergence
Use Moving Average as Back-Up Stop Signal
The Stop-Loss When Trades Prove Unsuccessful
Synergy: MACD Confirmed by Other Technical Tools
MACD Patterns Confirmed by Cyclical Studies
When the MACD Does Not Provide the Most Timely Signals
Money Management with the MACD (and Other Indicators)
An MACD Configuration That Suggests More Active Selling
MACD Through the Years: Long Term, Short Term, and Intraday
The Start of a Bull Market
An Example of the MACD Stop-Loss Signal in Action
MACD Employed for Day-Trading Purposes
MACD and Major Market Trends
The Amazing Ability of the MACD to Identify Significant Market Low Points Following Severe Stock Market Declines
MACD Patterns and Significant Market Bottoms
Initial Rally at Start of Year
Brief Decline and Well-Timed Market Re-Entry
Rally and Topping Formation
Waterfall Decline, and Then Bottoming Process
Final Shakeout and Recovery
MACD and the Four Stages of the Market Cycle
Reviewing Rules and Procedures Associated with the MACD Indicator
Creating and Maintaining Your MACD Indicator
Converting the Daily Breadth Thrust Model into an Intermediate Entry
Summary of Results
MACD Filtered Breadth Thrust Applied to the Nasdaq Composite Index
Moving Average Trading Channels: Using Yesterday's Action to Call Tomorrow's Turns.
The Basic Ingredients of the Moving Average Trading Channel
Creating the Channel
What Length of Offset Should Be Used?
Moving Average Trading Channels in Operation
Area A: The Chart Opens with a Market Downtrend
Area B: The First Recovery Rally
Area X: The Technical Picture Improves
Area D: The Upper Trading Band Is Reached
Area E: Prices Retrace to the Center Channel
Area F: Improving Market Momentum Confirmed
Area G: The Center Line of the Moving Average Trading Channel
Area H: Warning Signs
Area I to J: One Final Attempt That Fails
The Basic Concept
The Evolution of Phases Within the Moving Average Trading Channel
A Classic Topping Formation to End a Major Bull Market
Chart 9.2: The Ingredients
January 2000: The Bull Market in Nasdaq Moves Along Steadily
Area E: The Fun and Games of the Bull Market Come to an End
Area F: Trend Reversal Is Confirmed and Completed
The Development of a Bottom Formation
Moving Average Channels and the Major Trend
1996-1998: Strong Bullish Upthrust
The First Correction Stops at the Center Channel Line
Resurgence of Market Advance
Technical Warnings Develop
The Top Formation Moves Along
Major Downtrend Gets Seriously Underway
Patterns Suggest a Phasing-Out of Long Positions
Significant Downturn Is Confirmed
How to Construct a Price/Moving Average Differential Oscillator
A Review of the Key Rules Associated with Moving Average Trading Band Trading
Putting It All Together: Organizing Your Market Strategies.
The First Step: Define the Major Trend and Major Term Cycles of the Stock Market
The Second Step: Check Out Market Mood Indicators and Seasonal Cycles
The Third Step: Establish the Direction and Strength of the Current Intermediate Trend and Try to Project the Time and Place of the Next Intermediate-Term Reversal Area
The Fourth Step: Fine-Tune Your Intermediate-Term Studies with Studies Based on Shorter-Term Daily-or Even Hourly-Market Readings
Remember Our Favorite Mutual Fund Selection Strategy!
Lessons I Have Learned During 40 Years as a Trader
Recommended Reading and Resources
Sources for Research
Books Relating to Technical Analysis
This book, Technical Analysis , is meant for every investor who has been hurt trusting his brokerage firm, trusting his friendly mutual fund manager, or trusting the latest hot guru. It is meant for every investor who has ever wished for the skills required to deal with an increasingly volatile and uncertain stock market. It is meant for every investor willing to take responsibility for the outcome of his own investments. It is meant for every investor ready to take at least some of the time and to put forth at least some of the effort required for the quest.
The stock market tends to condition investors to make the wrong decisions at the wrong times. For instance, the stock market explosion of the late 1920s convinced investors that the only path for stocks was up, and that the prospects of stocks rising indefinitely justified even the high levels of margin leverage that could be employed at the time.
Investors plowed in, the stock market collapsed, and, thereafter, the public remained fearful of stocks for 20 years, although the stock market actually reached its lows during 1931 and 1932. In the mid-1990s, the Standard & Poor's 500 Index was king and index mutual funds were the royal coach. Between 1996 and 1998, huge inflows of capital were injected into Standard & Poor's 500–based index mutual funds, such as those sponsored by Vanguard. The largest inflows took place just before a serious intermediate market decline in mid-1998. The market advance that followed that decline was headed not by the Standard & Poor's 500 sector of the stock market, but by speculative areas of the Nasdaq Composite: technology sectors (Internet issues and the like) that, in some cases, sold for hundreds of dollars per share, even though many companies had no earnings whatsoever. And then came the crash, in March of 2000. The Nasdaq Composite ultimately declined by more than 77%.
So, investors returned to the sanctity of total return, value, earnings, and dividends, not the worst strategy during the bear market that took place between 2000 and 2002, but definitely not the best of strategies when the new bull market more clearly emerged during the spring of 2003. The play returned to technology and the Internet, with growth back in and total return back out. (During the first nine months of 2004, however, technology issues once again lost market leadership to value- and income-oriented market sectors.)
The point, of course, is that the typical investor follows and does not lead trends, is late rather than early, and is a crowd-follower rather than a self-director. According to Dalbar, Inc., a financial services research firm, the average equity fund investor realized an annualized return of 5.32% between 1984 and 2000, while the Standard & Poor's 500 Index rose at a rate of 16.3% per annum. Matters become even worse when comparisons are updated through July 2003. The average investor was ahead by only 2.6% per year for the 1984–2003 period, compared to annualized returns of 12.2% for the Standard & Poor's 500 Index.
This book has been prepared to help investors achieve better than average performance—considerably better, we believe.
The structure of Technical Analysis has been designed to provide information and investment tools, some of which can be put to work immediately, by both sophisticated and relatively unsophisticated stock market investors. I will share with you, right at the start, my favorite techniques for picking mutual funds and ETFs (securities that trade on the stock exchange and act similarly to market index mutual funds but provide greater investment flexibility at lower ongoing internal management fees, though, possibly, with some initial commission expense, which is often involved with mutual funds as well).
We move from there to some of the basic tools stock market technicians use to track and predict market behavior. A certain amount of statistical calculations is required in applying some of the "practical power tools" you will be learning—nothing truly complex. I have placed a strong emphasis on the "practical" in "practical power tools." The KISS (Keep It Simple, Stupid) principle is observed throughout the book—at least, to the best of my ability.
For example, in Chapter 1, "The No-Frills Investment Strategy," I show you two indicators that, together, should require no more than five or ten minutes for you to post and maintain each week—that's right, each week, not each day. These have a fine history of helping investors discriminate between favorable and unfavorable market climates. Nothing in the stock market can ever be guaranteed for the future, of course, but you will see how powerful these two simple indicators have been during more than three decades of stock market history in supplementing your selections for market investment with straightforward but surprisingly effective market-timing strategies.
Even if you go no further, you will have already acquired a useful arsenal of tools for improved investment results. By this time, you might well have become ready for additional, more involved technical tools that I have found over the decades to be more than useful in my own investment decisions. These include, for example, T-formations, special time-based patterns of market movement that frequently provide advance notice of when market turning points are likely to occur. In a subsequent chapter, you learn about the application of moving average trading channels, a technique for employing certain patterns of past market behavior to predict likely patterns for the future.
Finally, you get my personal take on Moving Average Convergence-Divergence (MACD), an indicator that I invented in the late 1970s and, since then, has become one of the most widely followed of market-forecasting tools employed by technical analysts, private and professional. You will learn how to maintain the MACD indicator and how to interpret it for time frames ranging from 15 minutes (for day trading) to many years (for long-term investing).
Each of these indicators alone can be quite powerful, particularly as you develop the facility for combining various elements of your trading strategy for disciplined decision-making, higher returns, and less risk. Synergy helps the cause. I will show you many ways to achieve this synergy.
All in all, Technical Analysis is about the best stock-market timing tools that I have learned in nearly 40 years of studying, trading in, and writing about the stock market. These are real tools, practical tools, tools that my staff and I employ every day in tracking the stock market and investing our own and our clients' capital. These are tools that you, yourself, can begin to employ almost immediately.
There will be some additional interesting side trips and excursions along the way, but I think that we will conclude the description of our itinerary at this point. The time has come to begin the journey....
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