Technically Speaking, October, 2005

From the Editor’s Desk

As I write this, the commentators on financial television are working themselves into a frenzy as the S&P 500 has just declined below its 200-day moving average for the first time since early July. The index’s negotiation of this widely-watched major trend proxy characterizes the indecision in the financial markets right now as the marketplace ponders the economic effects of two hurricanes that recently destroyed the US gulf coast. Our cover article by Thomas Neuhaus discusses this very topic: the market’s historic reaction to natural disasters. It is both timely and interesting.

Inside, Contributing Editor Garry Rissman has provided us with the dialogue and some great photos from the question and answer session of the the MTA’s 2005 Market Forecast Panel held at the American Management Association headquarters on September 12th in New York City. Panelists included Gail Dudack, CMT, Katie Townshend, CMT, Louise Yamada, CMT, and Jeanette Schwartz Young, CFP, CMT. Also inside, Chicago Chapter Chair Ross Leinweber reports on the August 31st regional meeting in Chicago that featured Buff Dormeier, CMT’s discussion of volume as a confirmation tool. Finally, in the last of a three-part series of how-to articles by Dave Landry of Harvest Capital Management, Dave answers some frequently-asked questions about swing trading.

One last reminder: Don’t forget to sign up for the MTA’s Second Annual Mid-Winter Retreat to be held on January 20th and 21st at the Four Points Sheraton in Miami Beach. Each session of this retreat will discuss technical analysis from a different professional perspective: that of the trader, the analyst and the portfolio manager. The relaxed format will also allow time for experienced technicians to sit down and share ideas with one another, which is often one of the most valuable and memorable parts of these events. Just being in Miami Beach in January can be pretty memorable, too.

Hope you enjoy this month’s issue.

John Kosar, CMT
Editor

What's Inside...

From the President’s Desk Technical Interest Continues to Trend

Jordan Kotick, CMT

As John Kirby has pointed out in previous columns, the NYIF approached us about their goal of providing both basic...

From the Executive Director’s Desk Member Sponsor List

John R. Kirby

If you have 5 years experience in the business or if you have 3 years experience and have passed all...

Natural Disasters and the Financial Markets

Thomas Neuhaus

Despite the catastrophic damage and unimaginable loss incurred by residents of the Gulf Coast, history shows that natural disasters have...

Chicago Chapter Meeting

Ross Leinweber

On August 31st, the Chicago Chapter of the Market Technicians Association had...

MTA Colorado Lobsterfest

MTA members, as everyone knows by now, always march to the beat of a different drum, so a Lobsterfest in...

2005 Women’s Market Forecast Panel

Garry Rissman

It is no exaggeration as stated on the MTA’s website that the September 12th Spectacular held at the American Management...

The Foundation For Successful Swing Trading, Part III

Dave Landry

In Part 3 of this lesson, I’d like to answer some frequently asked questions I receive from readers:

Q&A

Q....

Dear fellow MTA Members and Affiliates,

Ralph Acampora, CMT

You may have heard that Prudential Securities recently had a broad scale cutback that eliminated several departments including economics, mutual...

From the President’s Desk Technical Interest Continues to Trend

As John Kirby has pointed out in previous columns, the NYIF approached us about their goal of providing both basic and advanced technical analysis courses not only in major cities in the US but globally as well. Based on their interest, we finalized a join venture to launch the International School of Technical Analysis (ISTA). The increased interest in technical analysis and technical education is a great thing to see and partnering up with the New York Institute of Finance is a wonderful opportunity for the MTA. Again, like on so many other issues, my thanks to John Kirby for negotiating a very good deal for the MTA.

As per our contractual agreement, I appointed Ralph Acampora our “Relationship Manager” given his long history and stellar reputation with the NYIF. I have also had to appoint an advisory Board of two other people. I have asked Brad Herndon and Barry Sine to join me. Brad brings his knowledge of the courses and workings of the CMT. Barry has made tremendous contributions on our Board and seminars, has been very involved with the CMT program and he is a CMT/CFA to boot.

The task now in front of us is to assist in the review, assessment and/or evaluate the Content and/or Materials of these courses. On that note, we will be looking for subject matter experts to assist us and eventually, also be recommending teachers for the courses. If you are a subject matter expert or interested in teaching, please feel free to drop me an email at president@mta.org. Those with a CMT or who have passed CMT Level III are preferred.

Hirings and firings on The Street continue but the underlying interest in technicals continues to grow. I believe that this deal is good for the NYIF, good for the MTA but most importantly, good for technical analysis.

Contributor(s)

Jordan Kotick, CMT

Bio Coming Soon.

Natural Disasters and the Financial Markets

Despite the catastrophic damage and unimaginable loss incurred by residents of the Gulf Coast, history shows that natural disasters have little effect on broad financial markets over the long term. While certain industries such as insurance, transportation and other regional businesses are impacted significantly by major natural disasters, the broad financial markets recover swiftly after an initial shock. The economic environment, monetary policy and technical trends are much more important to the long-term direction of stock prices.

I have highlighted four of the most devastating natural disasters of the past century and the financial market’s reaction. Two of the four markets bounced back swiftly from impulsive declines and the other two never declined significantly. However, each market saw a different long-term outcome, indicating the market’s ultimate trend was probably based on a multitude of factors not related to the natural disaster.

2004 Indian Ocean Earthquake and Tsunami

On December 26, 2004, the fourth largest earthquake in the 20th century caused a tsunami that stretched from South Asia to East Africa. The tidal wave killed over 200,000 people and displaced 1.1 million others. The estimated $2 billion in damage caused by the tsunami does not convey the significant human loss.

Financial markets in the Asia Pacific region were brazen in their reaction to the natural disaster. From Indonesia to India, stock prices closed higher in the days and weeks after the tsunami. In fact, the Jakarta market hardly reacted at all, despite Indonesia being one of the hardest hit nations with an estimated 120,000 people killed. The Jakarta market, which was in a powerful bull trend as shown by the rising 50 and 200 day moving averages, rose 15% over the next several months following the disaster.

1992 Hurricane Andrew

On August 22nd, 1992, Hurricane Andrew made landfall in southern Florida, causing 15 deaths, $30-billion in property damage and leaving more than 250,000 homeless. Until Hurricane Katrina, it was billed as the most expensive natural disaster in US history.

While numerous insurance companies declared bankruptcy following Hurricane Andrew, the Dow Jones Industrial Average fell only 2.2% during the two days following the hurricane’s landfall. The Dow made a second bottom in October, 1992 and continued its steady climb throughout 1993. The Index rose 14% in 1993 until the Federal Reserve began a tightening cycle in 1994.

1969 Hurricane Camille

On August 17, 1969, Hurricane Camille struck the Gulf Coast, causing over 250 deaths and an estimated $4.2 billion in damage (1969 dollars). The parallels between Hurricane Camille and Katrina are eerie – both were category five hurricanes before landfall, both caused hundreds of deaths in Mississippi and Louisiana, and both ravaged the Gulf Coast economic infrastructure.

“For survivors, chaos reigned along the coast. There was no gas, electricity or drinking water. Roads were impassable, railroads washed out, telephone lines down,” wrote Time magazine in August 1969.

Despite the destruction, the Dow Jones Industrial Average actually closed higher the day and week of the hurricane. The market had been falling for the previous three months because investors feared President Nixon would institute price controls to alleviate rising inflation. While the Dow Jones Industrial Average began a brief recovery several months after Camille, it fell again towards the end of 1969 as inflation and interest rates continued to rise.

1906 San Francisco Earthquake and Fire

An earthquake registering 7.9 on the Richter scale struck California on April 18th, 1906. The earthquake and resultant fire, which engulfed much of San Francisco, caused over 600 deaths and an estimated $400 million in property damage (1906 dollars). The combined disasters essentially destroyed a city of 400,000 inhabitants (versus a total US population of 85 million at the time).

The Dow Jones Industrial Average reacted rather slowly to the news because the most significant damage was caused by fire after the earthquake. Still, the Dow Jones only fell 5% during the next two weeks and recovered rapidly after the decline. The index made a second bottom in July and essentially traded sideways for the remainder of 1906.

Not until March 1907, did the market make a dramatic move, when the Dow Jones plunged in the “Panic of 1907.” However, the crash was caused by the deflating of copper stocks and the resultant financial panic, not the devastating earthquake a year before.

Markets Rebound In The Short Term

Despite swift downdrafts, financial markets often rebound quickly from major natural disasters. Several reasons account for such rapid bounces. First, large corporations, whose stocks make up the major indexes, are usually insured against business interruption and have the wherewithal to resume operations quickly. While the companies might miss a quarterly profit estimate, the long-term financial impact to large companies is minuscule. Second, governments and central banks often inject liquidity into the financial system to provide money for the rebuilding effort. Third, the short term economic disruption caused by a natural disaster is often offset by the long term economic activity generated from reconstruction. And finally and unfortunately, the majority of the damage is often incurred in poor areas, which have little economic influence to begin with, as was the case in the 2004 Indian Ocean tsunami.

Historically, damage resulting from major earthquakes, hurricanes or tsunamis has had little effect on broader financial markets over the long-term. While today’s market might be slightly different because of the nationwide spike in gasoline prices, the lesson from history is fairly clear. No matter how severe the destruction, investors are better off understanding economic fundamentals, monetary policy and technical trends than reacting to the negative short-term fallout from natural disasters.

Contributor(s)

Thomas Neuhaus

Thomas Neuhaus is a principle of Investment Management of Virginia, a registered investment advisory firm for which he comanages. Mr. Neuhaus’ career has encompassed all aspects of the investment business from investment banking to sell-side research to buy-side portfolio manager. Prior to...

Chicago Chapter Meeting

On August 31st, the Chicago Chapter of the Market Technicians Association had the privilege to host Buff Dormeier, a highly respected technician and MTA member. The topic of discussion was volume as a confirmation tool and an indicator Mr. Dormeier has developed called the VPCI (Volume Price Confirmation Indicator).

The VPCI analyzes the relationship of a volume weighted moving average and a simple moving average. By analyzing this relationship, price trends can be confirmed or contradicted. The indicator is then leveraged or discounted by two important factors: a short-term time frame of these same two components and a volume calculation which provides evidence of whether overall volume is increasing or decreasing.

Once the calculation has been made, there are four simple rules to follow:

A rising price trend coupled with a rising VPCI confirms the trend and is bullish.
A rising price trend coupled with a falling VPCI contradicts the trend and is bearish.
A falling price trend coupled with a rising VPCI confirms the trend and is bearish.
A falling price trend coupled with a falling VPCI contradicts the trend and is bullish.

Mr. Dormeier has found the indicator quite effective as a second line of defense for entering and exiting positions. It provides a solid filter to use in technical trading, asset allocation, and system design, especially for small-cap stocks. His research has found it to be reliable across market sectors, with varied levels of capitalization and volume. He did not find the same success with low volatility stocks, but high volatility stocks exhibited normal distribution patterns of return and risk. For more information regarding this research and indicator, please reference the 2004 Summer/Fall issue of the Journal of Technical Analysis.

Mr. Dormeier currently manages portfolios for individual and institutional clients as a financial advisor at a major international brokerage firm. He is Series 7, 8, 63, 65, and insurance licensed and has the accreditation of Chartered Market Technician (CMT).

For more information regarding MTA events in the Chicago area, please contact Ross Leinweber at rleinweber@lakeshoretrading.com.

Contributor(s)

Ross Leinweber

Bio Coming

MTA Colorado Lobsterfest

MTA members, as everyone knows by now, always march to the beat of a different drum, so a Lobsterfest in the mountains of Colorado shouldn’t raise any eyebrows. So here’s a picture of the MTA Colorado Lobsterfest.

(As embroidered on the bibs by June Arms); from left to right: Bobbie Deemer, Walter Deemer, Dick Arms, Charlie Kirkpatrick CMT, June Arms and Ellie Kirkpatrick (holding one of the six very special guests). Thanks to Dick Arms for supplying his cabin, the lobsters, and his wife June, who did all the work while Dick tracked his index.

How to follow a Lobsterfest? Only one thing could possibly do; Ellie baked an elk pie for the attendees the following night.

Contributor(s)

2005 Women’s Market Forecast Panel

It is no exaggeration as stated on the MTA’s website that the September 12th Spectacular held at the American Management Association in New York City was spectacular! On September 12, 2005, we were honored to hear the views of the 2005 Women’s Market Forecast Panel moderated by Vincent Catalano, CFA, President and Chief Strategist of ViewResearch, LLC. Many experts have written that women are better investors than men, partially because instead of viewing investing as a horse race they can more clearly recognize long-term trends.

Seeing that this is my first submission to the newsletter, I will start off by paraphrasing my question to Louise Yamada and then provide excerpts of the panels’ closing remarks:

Question from Garry Rissman: I have been reading over the past few days regarding your description of the inverse head and shoulders; the triple bottom as seen on September 2001, October 2002, and March 2003; you were giving a projection that we will go back to the old S&P 500 highs. Do you still share those views; number one? And number two, is that in the context of the Jan. 2004 panel that the (stock) markets tend to go 18 to 20 years within the band range(s) respectively of 100, then 1,000 and then 10,000 before breaking out and hitting the next higher range? That it went from 18 to 20 years in the Dow 100 range, then 18 to 20 years in the 1,000 range, is it going to go sideways for another 15 years, if you understand what I mean?

Answer from Louise Yamada, CMT, Louise Yamada Technical Research Advisors, LLC: I do, that was written by my mentor and predecessor, Alan Shaw, and what I talked about in terms of the alternation cycle hypothesis is what I think perhaps is happening. Bear markets do last a long time; and we talked about whether or not it will be horizontal or not. The alternation of cycles suggests that it is not, that you are going to have very dynamic rallies, and you are going to have setbacks. We could ask the question whether or not 2002 proves to be the bear market low, just the way 1932 did.

Moderator, Vincent Catalano: That has been brought up a few times about the ten times factor.

One final question for the panel: Has anybody taken a long-term look of the VIX?

Jeanette Schwartz Young, CFP, CMT, President of JASchwartz Market Analytics and writer of the Option Queen Letter: I do studies on the VIX frequently. Yes, we are in complacency land. If you go back to the chart of the VIX from 1986 to 1987; you will see we are very similar to that period right now; although the VIX was slightly lower then; although I didn’t bring the numbers with me. I think we will go back up. Yes, we will hit a point where this VIX will slowly turn around and start to go back up. We will go to 17, 18 as a first plateau. First we will come down from 40.

Moderator: Let me add something to this. I think it was Ken Tower…he uses the VIX as an effective short term trading tool. Any bounce in the VIX that is a 30% bounce off its low, for example, usually is a very good indication that the market is now poised for at least a near term type of rally. In fact, Katie, do you do any short-term work on the VIX?

Katie E. Townshend, CMT, Chief Market Technician/MKM Partners: I don’t use the VIX short term, I keep it within a framework, but I do use the TRIN on a day-to-day basis.

Moderator: I just found that to be very fascinating. When I started to investigate it, I added one or two more layers to it for my own self. That became something that I found worked repeatedly.

Jeannette Schwartz Young: within the past month the VIX has begun to move all over. 11 and change today. It is beginning to try to turn.

Moderator: It bounced off of that 10 level back up to 13, that is a requisite 30% move according to Ken Tower; and there was a subsequent market rally after that. It is kind of fascinating, because over the past 3 years it has worked like every single time. Maybe it will stop working after today.

Moderator: This is the final segment of the program where I ask our panelists to give us the one, two, or three things that are uppermost on their minds. Since Gail has done this before and she knows the drill, your closing comments please:

Gail M. Dudack, CMT, Managing Director of Research and the Chief Investment Strategist/SunGard Institutional Brokerage Inc.: I tend to go on my own tack, it kind of goes in flows; we were just talking about the VIX.

It reminded me of something I think about a lot that is very important to all of us who do any kind of technical analysis. You need to take a step back and see who the drivers of the market are, the investors who drive the markets.

In the 90’s it was all about household sector. In 1982 50% of the financial assets were in cash; 25% were in equities. It started a long cycle until it got to 55% equities.

They constantly bought every pullback; low volatility trend, low VIX; because that is what drove the market. We then had a bubble in the market felt by every investor in the world.

We now know that the money flow has gone into hedge funds which are not measurable. We don’t know the real size of their assets and we don’t know what they invested in. Most of them hedge; you tend to have more volatility.

The hedge funds tend to be very short term, so they do use a lot of charts, at least the ones that I know. They only rent stocks; they never own them, they love to see breakouts and breakdowns. Maybe they help make the breakouts and breakdowns, because they want follow through.

I am very skeptical today of breakouts and break downs, because I don’t know who is driving it. I have seen too many false break outs and break downs out of what looked like great trading ranges. That is the reality of our world.

Just to put some numbers on it, there is about a trillion dollars in hedge funds. 400 billion of that is in equities; another 300 billion is in diversified; you add it up it is about 700 billion. You add leverage to that times two or three giving you about 2.2 trillion of hedge fund money driving equities. This compares to pension fund assets of under 2 trillion.

They have a very big footprint, they rent, they are short term, they create a lot of noise in charts. So a lot of things I look at are things that I hope they can’t actually impact, longer-term things, 25-day net oscillators, for example.

But I am a mid cap person. I am mid cap because I talk to institutions. They are money managers. They really don’t want to deal with this short-term noise; they are investors. There are so many ETF’s; so many “hedgy” things going on in the large caps, to a lesser extent you see that in the mid caps.

Midcaps are large, they are liquid, you can replicate whatever you want out of the large cap and mid cap index. The money is steadily going into midcap. You can escape a little bit of the noise by being midcap. Also, one last point; we are nearing the end of the year; it’s September.

Hedge funds want to get paid if they perform. It has been a tough year for performance for a lot of people. As you move towards the end of the year you get more desperate for performance. They are momentum followers. I believe it is very significant that we got through 1220 in the S&P; that was viewed as a major resistance range for the top of the trading band. Once we got through it on the top we spent very few days below it. Because I think it changed the sentiment of the hedge fund community.

Longer term I am bullish on stocks, because I look at where money is invested today, where it could shift. The hedge fund community could compete. They are all competing for the same thing. The public wants more; over time people are going to get disillusioned. Their money is going to come back to more traditional money managers. Because it will be a supply demand shift that will be positive for equities.

Of course, the real estate market is plateauing right now; that excitement is disappearing…

Moderator: Katie; your closing comments please.

Katie Townshend: First I should say that I don’t own any of the stocks that I mentioned, my company does not make a market in them, just for the compliance sake. Honestly, I am bearish on the market short term, based on short term exhaustion signals…overbought readings, negative divergences, momentum, relative strength, also the DeMark work, based on common methods and on the Crab Model, I think that is where technical analysis really can be valuable.

Especially to people who have the charting systems right on their desktops and institutional customers of ours that can do a lot of the common technical research by themselves.

Calling the turning points before you gotten the breakdown of that trend line, before moving averages have started to roll over; etc. It has been a new demand of technicians; I think that’s really important.

I also think it is important to stay on top of the new indicators that are out there; before we didn’t really have the technology to do what we can today. They weren’t as available to us, the charts on Bloomberg. There are just endless possibilities now. There are so many components to these models. Now our screening tools are so great, but I still would always say you never want to use just technicals on your own; that is one thing that I in my short eight years have learned the hard way; that you always need to keep the economics and fundamentals in mind.

Jeanette Schwarz Young: I believe that fundamentals do count; and I believe that there is a marriage between fundamentals and technicals; and I use economics as well because I don’t think we can be blinded to things that are going on around us.

My commentary earlier that the market was in for a rough ride until October is not only based on my chart but was also based on the fact that by the end of October mutual funds will have to take in their losses for the year; and that will relieve some of the downward pressure that will be exacerbated onto stocks.

I also feel that the last quarter of the year we will have some repatriation of funds coming in abroad from U.S. companies that have been given a tax break with the Bush administration; and their corporate tax will not be 35% but 5.7% on repatriated funds. This will bring funds back into our shores. These funds will be put to work in our market. Therefore, I do believe that we will have a Christmas rally; the Grinch will not make an appearance this year.

Pre-hurricane I felt that the market after that period of bounce would move on forward and enter into a stagnant period culminating in April where I felt that the fed’s constant ratcheting of their measured rate increases would begin to weigh on the market. And at that point, rather than raise interest rates, I feel that the fed would probably turn and reduce interest rates starting perhaps as early as April.

But that was pre-Katrina, pre-hurricane. I don’t know how the hurricane is going to affect it. The time schedule may change slightly; but it won’t change dramatically, it will be somewhat there.

Louise Yamada: To a degree fundamentals are built into technicals because it is the fundamentals that drive the price. And in price there is knowledge that is created for the technician.

The market in any area is a discounting mechanism; what we are seeing is the action that people are taking based on their perception of the fundamentals. And you don’t know the reasons why until later because there is always someone out there brighter than you or I taking action.

What we have seen — I am going to leave you with a think point — over the past four years is up to 20 plus year structural trend reversals is taking place under the surface. In not only the Dow and S&P breaking their 18-year uptrends to enter the bear market back in 2000, but gold has clearly reversed a 22-year bear market environment.

The CRB I am totally in agreement has broken a 22-year bear market trend entering a new structural bull market. Oil breaking through a 24 year trend; you get my drift. The only trend out there yet to reverse is bonds, and you know that it is not a question of if but when.

Let me leave you with one thought on the CRB index; that is something that I have been playing with for probably 8 years now. We are looking for inflation in all the wrong places.

CRB is breaking a 22-year downtrend, but bear in mind that the CRB index is 52% agricultural. With agriculture you have to consider what has been my favorite commodity for a decade: Water, because agriculture utilizes 87% of the world’s fresh water supply. CRB is 18% oil, and we know what our feelings are about oil; 18% gold — structural bull market in place, only 12% industrial.

Recognize too, that oil is no longer a capital goods commodity; we use 50% less oil to produce goods in this country than we did in the 1970’s. So oil has very definitively in my opinion become a consumer goods commodity for your cars, your houses, your electronics as we talked about before.

I think China and the other developing nations are going to continue to bring to bear deflationary pressures on product. Those prices will remain down so where we lead we are going to see inflationary pressures in what I call consumer essentials: food, water and energy. And if you add to that mix the population expansion; which when I was born there were fewer than 3 billion people on this planet, today there are 6 billion, about to grow to 8 billion by 2050.

We have a finite land mass, a finite water supply, and a finite oil supply. I think that there is a very distinct shift of inflationary forces out of the 20th century into what I call the consumer essentials.

Moderator: Excellent, thank you very much. This was an honor and a privilege and I very much appreciate this opportunity to be the moderator of this program. I would ask that all of you join me in thanking our panel for the wonderful discussion.

Contributor(s)

Garry Rissman

Bio Coming

The Foundation For Successful Swing Trading, Part III

In Part 3 of this lesson, I’d like to answer some frequently asked questions I receive from readers:

Q&A

Q. When trading pullbacks, how do you know that this pullback won’t be the last?

A. You don’t. You have to keep playing the stock as if the trend will last forever. Hopefully, you won’t get triggered on a pullback that turns into a major reversal. Or, at worst, you’ll get stopped out with a modest loss. The good news is that markets often offer many opportunities before they eventually fail.

Q. You didn’t mention ADX as a determinate of trend. Do you still use ADX?

A. In my first book, I felt that I had to quantify trend for those new to trading or those who needed more of an objective type analysis. Inadvertently, I think too much emphasis was placed on the indicator. I don’t use ADX to quantify a trend for a potential setup. I “eyeball” a chart and look for Trend Qualifiers. I do use ADX for research purposes, especially when working on contra-trend market timing signals. However, on a day-to-day basis, I simply prefer looking at the charts.

Q. Do you use actual or mental stops?

A. If I am distracted or have many positions on, I will place an actual stop. If I can watch a screen and not be distracted, I will use mental stops. I will look to exit after my mental stop is hit. In other words, I will “trade out” of the position. In some cases, I end up risking slightly more than intended and in other cases the trend resumes I end up with a winner. Mental stops do require discipline though. I’m amazed at the number of people who ask me for advice on what to do with a position after they have losses of 5, 10 and even 15-points or more. For these people, they should place actual stops in the market. This makes controlling losses a passive decision and not an active one.

Q. Do you carry stops overnight (i.e. good till canceled orders)?

A. No, I allow the stock to open and then place my protective stop. This allows me to “trade out” of adverse moves. Again, this requires discipline. If you find yourself being a “deer in the headlights”, hoping for a stock to come back, then you’re much better off carrying the stop overnight.

Q. You mention that the low of the pullback is a target area for market makers. Can you elaborate?

A. Yes. The “textbook” place to put your initial protective stop is right below the low of the pullback. However, if this is fairly close to the entry, for instance, less than those parameters given in table XX, then there is a high likelihood that it could be hit.

Q. You mentioned that the initial protective stop should be varied depending on volatility of the stock but you didn’t define volatility.

A. It’s beyond the scope of this text to get into complex volatility measurements. The good news is, one of the best ways to gauge volatility is to simply “eyeball” the chart. A hot technology stock that moves several points a day is volatile. And, you’re kidding yourself if you think you will be able to trade that stock with a tight stop. Conversely, REITs or certain utility stocks that might only trade several points in a week are not. Therefore, on stocks like these, tighter stops can be used.

Q. You seem to imply that people use too tight of stops to capture swing moves. Are there cases where a tight stop can be used?

A. Yes, if everything is “in gear”—the market is rallying, and the sectors and most stocks in it are rallying, then a stock should trigger and not look back. In these cases, you could use a tighter-than-normal stop and be willing to re-enter or find a better candidate if stopped out. Also, there are patterns (e.g. Witch Hats, Gatekeepers, etc.) where you can look to enter intra-day on the first signs of a reversal and use a fairly tight stop. If you are right, there’s the potential to be right big. But if you are wrong, you are only risking a small amount.

Q. Doesn’t “2 for 1” money management have a negative expectancy since you are really only getting “1 for 1” at your initial profit target?

A. If you got stopped out on every winning trade after you took the initial profit at breakeven, then yes, it would have a negative expectancy because you are risking twice as much as you are making. However, by trailing a stop higher on the remaining shares, you position yourself for a potential home run. And, one or two home runs will take care of a lot of losing trades. Also, as mentioned in this chapter, this is a basic money management system. Use it as a base to build upon. For instance, this system can be “beat” by using simple techniques like taking profits early in choppy markets and letting them ride in momentum markets.

Good luck with your trading,
Dave Landry

Contributor(s)

Dave Landry

Dave Landry has been have been actively trading the markets since the early 90s. In 1995 he founded Sentive Trading, LLC, a trading and consulting firm. He is author of Dave Landry on Swing Trading (2000), Dave Landry’s 10 Best Swing Trading...

Dear fellow MTA Members and Affiliates,

You may have heard that Prudential Securities recently had a broad scale cutback that eliminated several departments including economics, mutual funds and technicals. Since this followed a similar cutback at Smith Barney, I thought you might like to get my take on this change.

Since the bubble burst in the late 1990s, equity markets have been very challenging, choppy and net sideways. In that environment, money and focus has turned towards other asset classes… specifically commodities, foreign exchange and fixed income. Many firms that specialize in these areas have been growing their technical teams. The focus on these markets is growing, technical trading and timing is becoming more important and news worthy.

I can honestly say that there is today more interest in and more respect for technical analysis and the CMT charter than I have ever seen before! The nature of financial markets causes constant change. Those people who depended on technical analysis yesterday will still depend on it tomorrow. From my vantage their numbers are growing. This is still the golden age of technical analysis. Some firms will lose and some firms will gain. The demand for technical analysis will still continue to grow.

Cordially,
Ralph Acampora

Contributor(s)

Ralph Acampora, CMT

Ralph Acampora, CMT is a pioneer in the development of market analytics. He has a global reputation as a market historian and a technical analyst, providing unique insights on market timing and related investment strategy issues to a wide audience within the...