M ARKET TECH

CHNN I CI
CIAAN
November 2004 The J ournal of the STA
Issue No. 51 www.sta-uk.org

2004 has been a pa rticul

2004 rticularly
arly challenging yea r for technical analysts since Raj who we lcomed t he STA to Aberdeen an d RGU, RGU, and highlight ed t he
most of the financial (as opposed to commodity) markets have spent importance of t echnic
echnicalal ana lys
lysis
is and b ehavioural finance
finance in modern
much of the year trapped in trading trading ranges and sisidewa
dewa ys-
ys-moving
moving market
mark et theory. He helped the audience diff differenti
erentiate
ate bet ween fundament al
markets present a real challenge for most t echnically-
echnically-ba
ba sed systems of and technical analysis
analysis by t ell
elling
ing the foll
follow
ow ing story...
story... ‘Two men a re trying
trying
ana lysi
lysis.
s. This issue
issue of the Journal is being prepa red in the run-up
run-up to the to cross a bridg
bridg e during
during a storm. They had a rr rriv
ived
ed at night and one says to
US presidential election and many analysts are hoping that a decisive the ot her “we sho uld cross
cross now, it’it’ss raining
raining so heavil
heavilyy that the bridge might
outco me w ililll trigg
trigg er off the trad itional end-of-year
end-of-year rally
rally in the equity be w ashed a wa y”. The other man replies,“the
replies,“the bridge has been b uil uiltt by the
markets.
mark ets. One area where we have a lr lready
eady seen a strong break-out
break-out is the best engineers,gauging historical rain and water flow and using the best
currency market where the dollar has slid to a new eight-month low in mat erials and e ng ineering principles.W
principles.Wee can cross tomo rr rrow
ow in da yli
yligh
gh t.”
trade-weighted terms. After a few hours,
hours, duri
during
ng w hich the w ater continues to ris rise,
e, the first
first man
says,“I don’t disagree with you ab out the b ri ridge’s
dge’s construction,b
construction,b ut the
Dollar trade-weighted index trend of t he w ater’s ris
risee is making
making m e nervous.I’m
nervous.I’m crossing
crossing now, go od
luck!
luc k!””. He scampers safely
safely across the bridge. The second m an w aits and in
the morning,with the water roaring underneath,he starts to cross the
bridg
bridg e. Needless to say,t he bridg bridg e’
e’ss underpinnings
underpinnings are wa shed awa y,the
bridg
bridg e falls
falls and he is swept
swept aw ay.ay.’’ Profes
Professor
sor Raj
Raj left
left his audience to spot
who was the trend follower and who was the fundamentalist!

Gerry Celaya (MSTA) add ressed t he aud ience next , explaining w hat the STA
sta nds for a nd w hat it is trying
trying to d o in Scotlan d. The STA is holding
meetings in different
different cities and encouraging stud ents to consider joini joining
ng
as associate members and a ttending t he meetings in Edinburgh Edinburgh whenever
possible. Murray Gunn (MST (MSTA) explored
explored t he ‘Sta
‘Sta te o f the Mark
Markets’
ets’ and ga ve
an interesting talk on the stock,bond,commodity and foreign exchange
markets.
mark ets. He covered
covered th e key princi
principles
ples of each ma rk rket,
et, giving examples of
important technical chart patterns,momentum indicators and his own
 – 200 DAY MOVING AVERAGE
Source Thomso n Financial Datast ream
forecasts
forec asts of t heir probable direction.
direction. He took questions from from the audience
throughout t he talk,and there were liv lively
ely interchanges
interchanges w hen the
Forty-si
orty-sixx cand idates sat the STA Dipl Diploma
oma Examination in the spri spring,
ng, of principles of technical analysis challenged the Efficient Market Hypothesis
which 10 were
were aw arded distinctions
distinctions and a further 31 passed. Fourteen Theory tha t the MBA students had been studying.
DIT
DI TA candidates a ls
lso
o pa ssed. Candi
Candidates
dates were faced w ith a q uesti
uestionon o n a
Market
Mark ©
et Profile chart. As the topic had been tho roughly cover covered
ed in a Josh Bruzzi (M (MST
STA) also spoke a nd e xplained how he uses t he ‘leade r -
Revisi
evision
on Day exerci
exercise,
se, many cand idates, not surprisingly
surprisingly,, opte d to answ er follower’and ‘quality rotation’ideas that he learned from very successful,
that question and most scored high marks. marks. This led
led to an o ver
verall
all fundamental analysis-based stock market traders as the basis for his
improvement
impr ovement in the marks
marks obta ined and to one of the highest averag averag e quant itativ
itativee ranking
ranking models and chart a nalysi
nalysis.His
s.His talk prompted an
markss ever.
mark ever. More important
important ly ly,, the stand ard of a nswers to the crucruci
cial
al interesting discussion
discussion o n the issues of market
market t imi
iming
ng and pric
prices
es
major analysis q uestion also improved.
improved. Furthermore, it is is particularly
particularly discounting
discounting information
information a head of the a ctual event (why
(why d oes a share fall
pleasing t hat for the first time th e averag e ma rk for STA cand idates after goo d new s? s?)). As a res
result
ult of the very positive
positive feedback that ca me
(75.2
75.2%%) wa s hig her t ha n t he ave rag e m ark for DITA can dida tes (6 (69.7%
9.7%). out of this meeting,w e hope to hold anot her meetingmeeting a t RGU
RGU next year.
year.

The Scot tish cha pter o f the STA held t heir first
first m eeting in Aberde
Aberde en o n COPY DEADLINE FOR THE NEXTISSUE
30th October at RGU Aberdeen Business School.Locally-based staff from 30th January
January 2005
fund man ag ement houses as well as MBA MBA students from t he Universi
University
ty
PUBLICATION OF THE NEXTISSUE
were joined
joined by a number of members from from Edinburgh
Edinburgh w ho ha d decided t o
March 2005
make a w eek
eekend
end o f it. The three-hour
three-hour meeting wa s opened b y Professor
Professor

FOR YOUR DIA

DIAR
RY IN THIS ISSUE
Wednesday,
ednesday,8th
8th December Alpesh Patel STA ExamResult
ults
s .......................................... 2
Trad erMind De rivat
rivatives
ives Ltd
P.Goodburn Rat io and p roportion – a mat ri
rix
x of
Wednesday,12th January TBA convergi
conv erging
ng equa tions to d etermi
eterminene
Wednesday,9th February Martin Scott vs alternate counts for g old . . 8
prefential vs
Chief Techn ical Stra teg ist, RBS Finan
Finan cial Markets D.W
D.Watts Bytes and Pieces . . . . . . . . . . . . . . . . . . . . . . . . 8
Wednesday, 9thMarch Elizabeth Miller Obituary Tim Bra in . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Head of Research,
Research, Redt ow er Research
Research
H.Pruden &
H.Prude
N.B. The mo nthly meet ings w il
illl take place
place a t th e Institute
Institute of
B.Belletante
B.Belletante Wyckoff law s a nd tests . . . . . . . . . . . . . . . . . . 9
yckoff
Marine Eng ineeri
ineering,
ng, Sci
Science
ence and Techno logy
80 Coleman Street , Lond on EC2
EC2 at 6.00 p.m. D.Kna
D.Knapp Market Profile . . . . . . . . . . . . . . . . . . . . . . . . . . 11
 Networking Sprin g Exa m 2004
Sprin
Results
WHO TO CON
CONTTACT
ACTON
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YOU R COMMI
CO MMIT
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2 MARKETTECHNICIAN Issue 51 – No ve m b e r 2004

Ra ti
tio
o and
a nd pr
propo
oporrti
tion
on –
a ma
m a tri
trix
x of converg
converg ing eq uat
uatiion
onss to d et
eter
ermi
mine
ne prefent
prefentiia l
vs. a lter
terna
nate
te counts for g ol
old
d
Summary of p resenta tion to the STA’s Elliott
Elliott Wave
Wave Symposium o n 2nd July 2004 By Peter Goodb ur
urn
n

The ma in difficulties in the a pplicat ion o f the Wave Wave Principle a rise Now taki
taking ng a glance at this chart,w e can see that the decline decline for wave IVIV
beca use there are only three go verni verning ng rules and its ma ny guidelines are has no t a chieved one of Elli Elliott
ott ’s guidelines – tha t a retracement should
open to some variation.
variation. The categ ori
orisation
sation of each pa ttern sequence into enter t he price territory
territory of ‘fourth
‘fourth wa ve preceding deg ree’. A fib.38.2
fib.38.2%%
its correct
correct nomenclature,
nomenclature, or wa ve degree, is essential essential to the counting retracement of w ave III III is
is calculated
calculated tow ards 224.00
224.00 but g old has never
process but is open t o interpretation. Furthermore, a five wave impulse traded at this price level after 1980.A 50%target is at 157.00 and this
sequence that is associated
associated with trend can actually exis existt w ithi
ithin
n a three does mo ve into the price area of cycle wave 4 of III III.. Inserting a t welve year
wave counter-
counter-trend
trend correctiv
correctivee pa ttern,na mely a flat, or its variation,
variation, the cyclee (vertical
cycl (vertical red
red lines),
lines), we can see t his highlighting
highlighting t he beg inniinning
ng o f
expanding or running
running type. And a s if to add a new dimens dimension ion to the term wa ve I,I, III and the conclusion of wa ve V, but it do es not co inci incide
de w ith the
‘alternation’, a counte r- r-trend
trend seq uence can be found w ithin the abso lute low low for gold tha t trad ed in August
August 1999.T
1999.Thesehese tw o fact s alone
components of a n impulse
impulse wa ve – for example,a
example,a zi zigg zag or its variation,
variation, do no t disprove that w ave IVcould have completed in 1999,b 1999,b ut it does
the doub le
le,, tri
triple
ple within
within wa ves 1,1, 3 or 5 of an end ing-
ing-diagona
diagona l.So, is offer good reaso n to consider the probab il ility
ity that it cont inues to unfold.
unfold.
there a wa y or a metho dology tha t can a ssi ssist
st in the process
process of correct
correct
counting,to diffdifferenti
erentiate
ate when a fifive
ve wa ve impuls
impulsee is part o f a corr
correction
ection Figure 2
and a zig zag part of an impulse? Also,is it possible to identify when any
pattern has been truly completed?
completed? It It is these q uesti
uestions
ons tha t lie at the
very core of Ell lliott’s
iott’s founda tion.

It is the time old science

science of g eometry,ratio and proporti
proportion on tha t can assis
assistt
in our search for
for a system t hat allows us to co unt w aves correctly.
correctly. The
geo metric order found
found in price activity not on ly causes repetition
repetition o f
pat tern, but it simultaneo usly creates
creates a n intricate
intricate m at ri
rix
x of Fibona
Fibona cci (fib)
(fib)
ratios over varyi
varying
ng degrees of size,
size, mergi
merging
ng tog ether in a fractal ha rmony
that b inds each
each tog ether
ether..

In a case study of g old prices,w

prices,w e shall search for this harmonic matrix
matrix of
ratios that combine the proportional element in an attempt to determine
the correct w ave count betw een tw o po ssi ssibili
bilities.Nei
ties.Neither
ther is considered
considered
‘preferenti
‘preferential’
al’ or ‘alter
‘alternat
nat e’a t this stag e – both are eq ually ana lys
lysed
ed w ithout
prejudice.This willwill be used juxtapo sed to fib-time-ratios,
fib-time-ratios, the eva luation o f
the ‘rari
‘rarity’
ty’ of pat tern and a ny rulerule or guideline
guideline tha t may b e applicable
such as ‘overlap’
‘overlap’ and ‘retracement to ‘fourth preceding deg ree’.

The pat tern cont ained in the d ecli ecline

ne from 1980
1980 must now be a nalysed. In
Figure 1
fig 2, this cha rt d epicts a n o ri
riginal
ginal ‘alternate’ count from WaveTrack date d
October 1999.It labels the decline from 850.00 (monthly hi-lo-close data
series)
series) as unfolding into a doub le zig zig za g pa ttern to 251
251.70
.70,, completing
wave IV. It is
is important
important to not e that under this this counting,Primary
counting,Primary wa ve X
comp leted at 499.
499.75
75 as an expa nding flat p at tern, (A)-(B (B))-(C
(C),3-3-
),3-3-5.
5. But
why w as it cate go rirized
zed as a n ‘alternat
‘alternat e’ count? The reason is beca use it is is
uncommon for the two zig zag seq uences within within a double pattern to
unfold to a ratio of 61.8%(
61.8%(asas show n) n).. As the insert diag ram from our
tutorial
tutorial archive
archive shows, there is is a greater correlation
correlation between the tw o
whe re either
either eq uality is found, fib.100%, or whe re the first first is extended b y
fib.61.8%
fib.61.8 %. This prompts us to examine t he cha rt further. It is interesting
however that the second zig zag can be cut by the ‘golden ‘golden section’and
this exactly intersects th e low of w ave A at 325.50.T
325.50.This proves that this
decline
decline is a zig zag , but no t necessarily
necessarily part of the double patt ern from from
850.0
85 0.00
0 – so wha t else can b e considered?

The low at 251.

251.70
70 is
is the low est lo w since 1980 – the p revious ‘coup
‘coup le’ in
Jan ‘82 and Feb ‘85
‘85 which we know co mpleted t he first
first zig za g –
therefore,through
theref ore,through deduction, if the second zig zag decli
declinene is not
completing
compl eting a double formation,
formation, it can only be part of a more complex
complex
Fig 1 beg ins with viewing go ld prices
prices from the historic low in 1932
1932 at pat tern for cycle wave X.
17.06
17.06 US$
US$ per oun ce. An initial ad van ce to 34.87 complet es super-cycle
wave I and w as followed
followed by a prol
prolonged
onged wave II sequence of the same If so,
so, then a n ew lower low to 251
251.70
.70 (below Jan ‘82 and Feb ‘85
‘85)) will
will
level until its
its com pletion in Octob er 1967
1967.. Eventua ll
lly,a
y,a thrust high er become an ‘expanding’
‘expanding’ B wave w ithin such a pa ttern – see fig 3.
ithin
began,a typical characteristic of third waves as in 1971 the international
‘gold standard’wa s abandoned. This must now b e tested. B waves tha t move into new pri price
ce territory
territory
commonly extend by either fib.23.6%or
fib.23.6%or by fib. 3838.2
.2%–
%– but no t usually by
The m ost impressi
impressive
ve a spect of supe r- r-cycle
cycle wa ve III
III is that it subd ivi
ivides
des fib. 61.8
61.8%
%. And so b y extend ing w ave A by fib. 23.623.6%%, the ca lcul
lculat
at ion
neat ly into
into a five wa ve impulse
impulse sequen ce of cyclecycle deg ree,right into its coincides
coinci des exact ly at 25
251.
1.70
70 + /- formi
forming
ng tw o rat ios into proportion at this
conclusion
conclusi on a t 698.75
698.75 in
in ea rl
rlyy 1980
1980 (closing
(closing price based on q uarterly dat a fixed
fixed price level (red
(red an d b lack lines
lines coincide). A valuab le insigh
insigh t from t his
series)
series).. But our main study w il illl be wa ve IV
IV and to est ab li
lish
sh whe ther it has last calculat
calculat ion is achieved
achieved – this proof of a n expanding B wave e li liminates
minates
completed or remains in progress. the probab ilility
ity of go ld completing super-
super-cycl
cyclee w ave IV at 251
251.7
.70,a
0,a nd

Issu e 51 – No vem b er 2004 MARKETTECHNICIAN 3

 Figure 3 ta ken from
from th e original forecast
forecast in May
May 2000.
2000. In this count, the a dvance
from 251.70
251.70 isis Primary wa ve C w ithin a contract ing/
ing/symmetrical
symmetrical type
triangle. Target s tow ards 423.80
423.80 were calculated b ecause w ithin such a
pattern, there is a common ratio relationshi
relationship
p bet ween w aves A and C –
wh ere wa ve C unfolds to a fib.100%equality ratio of w ave A – but
especiallyy since w ave B o nly extende d w ave A by fib. 23.
especiall 23.6%
6%. Other fib.
ratios may b e used if wave B were extend ing by fib. 38.38.2%or
2%or greater.

Figure 5

combining this with th e doub ts raised earlier

earlier in
in fig 1,t he proba bili
bility
ty tha t
wa ve IV
IV remains in
in progress can no w be con sider
sidereded high.

The inserted chart, ag ain from the tuto ri rial

al archive
archive show s these fib.
calculations unfolding within a n expa nding flat p at tern, A-B- B-C,3-3
C,3-3--5.That
mean s the ad vance from 251.70251.70 is wave C of this sequence a nd must
subdivide into a five wave impulse patt ern. A very interesting
interesting
observation is now mad e – if this this ongo ing patt ern is is an expanding flat,
then Primary w ave A is itself
itself an expa nding flat (see remarks made Looking further ahea d, should a cont racting/
racting/symmetrical
symmetrical triang
triang le
regarding fig 2) of Intermediate deg ree.The fracta l implications
implications of t his eventually unfold as cycle wave X,then the second cycle degree zig zag
are signifi
significant
cant b ecause we have an expanding flat within a larger degree can be ca lcul
lculate
ate d to complete to wa rds 177.177.80
80 whe re a fib.
fib. 100
100%equa
%equa li lity
ty
expanding flat – know n a s self-simi
self-similari
larity.T
ty.Thehe q uestion no w raised is this ratio is app li
lied
ed from t he extremity o f the triangle (top o f w ave A) A). This
– how common is itit for an expanding flat pat tern to conta in another relationship is quite common – it allows the second zig zag to unfold
self-simi
self-similar
lar pat tern in t he po sition of w ave A? The a nswer is th at it is uniformly by incorporating the corrective sequence – something that
uncommo n, but no t rare (wh (wh ich will
will be discussed
discussed later).
later). could not be ca lcul
lculate
ate d in the ‘alternat
‘alternat e’ count o f fig
fig 2. This works in the
same w ay w here
here,, for example,a
example,a n impulse
impulse wave d oes not reach its
Figure 4 measured target, but the foll following
owing corr
correction
ection unfolds
unfolds w ith an expanding
B wave t hat trades into a new pri price
ce extreme
extreme at the original measured
measured
target – in
in other wo rds,the B w ave of the correction
correction compensates by
trading at the intended ta rget of the preceding impuls impulsee wa ve.

At t he original time of pub li lishing

shing th e ta rgets for w ave C tow ards 423.80,
423.80,
the price
price of g old wa s still
still trading
trading at around 276.0
276.00 0 – a long wa y aw ay.But
as go ld began t o move closer
closer to this target late lastlast year,it became
imperative to a scertain the exact t ermination level.The 423.80 423.80 ta rget for
wa ve C was ca lclcul
ulated
ated by eq uating it to wa ve A (see above),but actually actually,,
wa ve A unfol
unfolded
ded a s an expanding fl flat
at pattern in its own ri right
ght – so which
part o f A wa s used to mea sure targets for wa ve C? Referr eferring
ing ag ain to fig 5,
we ca n see highlighted
highlighted in red,red, the measure used was from beg inni inning
ng to
end o f the expanding flat – from 296.7 296.75-
5-499
499.75
.75.. So wha t oth er
possibilities
possibili ties are t here? There are fo ur in all,t he first w e ca lcul
lculate
ate d a lr
lread
ead y,
the ot her three
three are by measuring
measuring ea ch of the w aves within the
expand ing flat – namely,w aves A,B A,B and C.

Figure 6

What ta rgets a re likel

likelyy for Primary wa ve C of cycle wa ve X of the
expanding flat? In In fig 4 we c an se e an ot her foreca st from WaveT
WaveTrack in
October 1999
1999 which
which w as t he ‘pref
‘preferenti
erential’count
al’count at the t ime.It shows a
fib.
fib. 10
100%
0%equality
equality betw een the extensions of wa ve B and C of t he
expanding flat
flat pa ttern so that w ave C targets are projec
projected
ted tow ards
568.6
56 8.65.
5. This price
price level coincides w ith a fib.61.8 retracemen
retracemen t calculation
of the preceding de cli cline
ne for the first
first cycle degree zig zag, ag ain forming
two ratios into proportion and significantly increasing the probability of
price
price follow
follow ing this harmon ic path.

Going a lilittle
ttle further,if prices
prices eventually complete this expanding flat for
cycle wa ve X at 568.75,
568.75, and t he second cycle deg ree zig zig zag declines
afterwards, then usi using
ng a fi
fib.
b. 10
100%
0%equality
equality ratio from the fi firs
rst,
t, proj
projects
ects
the secon d to complete a t a price level
level of 198.7
198.75
5 – and this area moves
to t he top range of ‘fourth
‘fourth w ave preceding
preceding deg ree
ree’’ – considered
considered a
mum requirement (fig 1).
minimum
mini

Earli
arlier
er we ment ioned a pplying the ha rmonic matrix of ratio
ratio a nd Two of the t hree remaining calculate d. In fig 6 we ha ve used a fib.
remaining w ere calculate
proportion
proporti on to d etermi
etermine
ne the correct
correct wa ve count between t wo 100%equa
100 %equa lility
ty ratio of wa ve (B)
(B) of the expand ing flat, giving a ta rget for
possibilities – what other count can be considered? A B wave that moves Primary
Pri mary w ave C t ow ards 450.95.A
450.95.Also,m
lso,m easuring just w ave (A)(A) produces
produces a
price
price into a new extreme is not excl
exclusiv
usively
ely part of a n expand ing flat slight
slight ly lower ta rget tow ards 431.90
431.90 – see original
original ca lcul
lculat
at ion in Feb.‘03
Feb.‘03
triangle (seefi
pattern. Another patt ern that contains the same is the triangle fig
g 5) in fig 7.

4 MARKETTECHNICIAN Issue 51 – No ve m b e r 2004

Figure 7 pat tern do wn from the 431 .38 high. The first is shown infig 10 as an
431.38
expanding flat . In order to valida
valida te this, minuette w ave [b][b] must itself be
labelled subdividing
subdividing into a n expanding flat o f smaller
smaller,, or sub-minuette
sub-minuette
deg ree.This isis important beca use we refer back to the o pening remarks
ab out ‘rarity’
‘rarity’ of pat tern. Earli
arlier
er,, we e xamined self-simi
self-similari
larity
ty w here an
expanding flat unfolded in the A wave position of a larger expanding flat
– an uncommon event.But in this case,we find ourselves considering an
expanding flat in the B wa ve position – now t his is is seen as a ‘rare’
‘rare’ event
and it must be taken into context of evaluating probabilities.

Figure 10

And so t he next q uestion a ri rises

ses – which one is correct? To a scerta in this,w e
must look at the subd ivi ivisi
sions
ons o f the adva nce from 251.7
251.70.If
0.If primary
primary w ave
C is
is really unfolding in the a dva nce from 251.70 251.70,, then it must subd ivi
ivide
de
into an Intermediate
Intermediate d egree zig zig zag , or multipl variation. In fig 8, this (A)-
multiplee variation.
(B)
B)--(C)
C),, 5-
5-3-
3-5
5 zig zag is show n a lr lread
ead y reaching its price targe t in Ja nuary
2004
20 04 – all that is left
left to examine is the next lower d egree, the subd ivi ivision
sion of
minor wave v. of (C) (C) to en sur
suree a fiv
fivee w ave impulse
impulse pat tern has completed –
see fig 9. This however,seems incomplete.Minor
incomplete.Minor w ave v. is shown as
subdividing
subdivi ding into only three wa ves of minute minute deg ree,w aves 4 and 5 are stillstill
unfolding. This must therefore allow Primary wa ve C the cha nce of
unfolding
unfoldi ng beyond the 431.90
431.90 target, tow ards the higher area a t 450.95450.95?? In
In The second w ay to co unt this pat tern is labeling the comp letion of
this chart,w e have highlighted
highlighted the point o f ‘overl
overlap’
ap’ of minute wave 1 at minute wa ve 4 at 387.48
387.48 and wa ve 5 at the slightly higher high at 432
432.60
.60
375.25 because wave 4 must complete above this level in order to allow  – see fig 11. The problem w ith this count is that wa ve 4 must be labelled
wa ve 5 to prog
prog ress into a new higher high. high. as subdividing
subdividing into a double zig zag in minuette
minuette deg ree and it is clear
clear
that the terminating
terminating level of the second
second zig zag did not meet any fib.
Figure 8 ratio relat
relat ionships.For example, it did not equa te to the first, neither did
387.4
38 7.48
8 complete at a fib.suppo rt level of the a dvan ce in preceding
preceding
minute wave 3.

Figure 11

Figure 9

At t his junctur
juncture,t
e,t he tw o competing counts are at least balanced for
consideration.On
consi deration.On the one ha nd, a rare B wa ve of an expanding flat flat
subdivides
subdiv ides into
into a small
smaller
er pattern of the same, and alternati
alternativel
vely,a
y,a double
zigg za g d oes not conform to the commonly established
zi established ratio
relat
rel at ionships found in such patterns. The only w ay to differ differentiate
entiate
betw een the two w ould be to see in in which pattern sequence the
ad vance unfolds into, counting from t he current low low at 377.20.A
377.20.A five
five
wa ve impulse
impulse advance trad ing beyon d ‘fourth‘fourth wa ve preceding
preceding de gree’,
above 399.75 (27th April) would confirm minute wave 5 in progress with
new higher highshighs o bta inable
inable.. Alter
lternativel
natively,any
y,any three wa ve advance to
the same area w ould revert
revert the count labeli
labeling ng the conclusion
conclusion of wa ve 5
at the current h igh o f 432.60
432.60 (1st
(1st April)
April)..

What foll
followed
owed wa s a three wa ve advance to 39 395.
5.88
88 and a nother decline
decline
377.20.In fig 12, the fifth wave o f the decline
to b elow 377.20.In decline from the high a t
Now examinat ion of minute w ave 4 is necessary. So far,t he price is
is 432.6
43 2.60
0 is
is show n unfolding into a n uncommo n ending -expand ing
maintained abo ve the overlap,
overlap, but t he entire
entire sequence of t his pattern is
is diagona l.But this is
is not so impor
important
tant as the fact that this extra
extra decline
decline to
very complex
complex.. It seems that there are two viable wa ys to count the a lower low, to 371
371.00
.00 broke
broke th e ‘overlap’o
‘overlap’o f minute w ave 1 (375.2
(375.25)
5) – this

Issu e 51 – No vem b er 2004 MARKETTECHNICIAN 5

 Figure12 Figure 14

level show n earlier in fig

fig 9. It confirms
confirms the co nclusi
nclusion
on o f minute w ave 5 at
432.60 and with it,the termination of Primary wave C of the
Figure 15
contract ing/symmetrical triangle – see fig 13.
ing/symmetrical

Figure13

It is now important to establish whether such an advance can be

considered
consider ed w hen examining
examining t he unfolding
unfolding pa ttern within minute wave b.
Of course,
course, the 432.60
432.60 high
high ca n also be lab ell
elled
ed a s completing Counting higher from from 371.00
371.00,, it appea rs a zig zag of minuette deg ree
Intermediat e wa ve (3)
(3) of Primary
Primary w ave C as described ea rl rlier
ier,, and so w e completed at 399.50 – see fig 16. And the following decline has also
must return
return to our original
original query – the tw o counts, fi finely
nely balanced at this unfolded into a zig zag (note 100%ratio
100%ratio equa li lity)
ty) and so can b e labelled
labelled
point a nd und er consideration for cycle
cycle wa ve X are either the wa ve [x]
[x] – itit completed a t the fi
fib.
b. 61
61.8
.8%r
%retracement
etracement levlevel,forming
el,forming tw o
contract ing/
ing/symmetrical
symmetrical triang
triang le or the expan ding flat. In order to ratios into proportional harmony.Now if the w ave [x] [x] has completed at
differenti
differentiate
ate b etween these two, it will
will be important
important to calculate
calculate t he 381.
38 1.15
15 and the second zig zag unfolds to a fi fib.
b. 10
100%
0%equa
equa li
lity
ty ratio to the
amplitude decline from 432.60. first,
first, then t he ta rget for completion is towa rds 410.410.40
40 – only 20 cents
cents aw ay
from our previous calculation, ag ain forming a n intricate ma trix of ‘clusters’
clusters’.
Lets beg in with labelling
labelling t he high a s Intermediat
Intermediat e wa ve (3)(3) of C of the
expanding flat scena ri rio.
o. Wave (4) declines must remain a bove wa ve (1) (1)’s Figure 16
high a t 342.00
342.00 to avoid ‘overlap’
‘overlap’, and so far, with a fivfivee w ave impulse
decline betw een 432.60
432.60--371371.00
.00,, this must b e labelled minute w ave a of
an o ngoing zizigg za g decli
decline ne for minor wave a. (assumi
assuming ng a t ri
riangle
angle for
wa ve (4)
(4) will eventua llllyy unfold).
unfold). Usi
Using
ng t he tw o commo nly established fib.
ratio measurements
measurements to ca lc lcul
ulate
ate t he termination
termination of the zi zigg zag , wave a is
either multipli
multiplied
ed by fib. 10 100%r
0%ratat io and subt racted from w ave b to
produce ta rgets for wa ve c to 341.8 341.80, 0, see fig 14, or extended by fib.
61.8%to
61.8 %to 337.4
337.40 0 – see fig 15. Both calculations o verl verlap
ap wa ve (1)(1).T
.The
he o nly
way ‘overlap’can be avoided is if a deeper retracement unfolds for
minute
minu te wa ve b,t hen measurements
measurements applied applied as follows:
follows: a fib.38.2%
fib.38.2%
retracement for wa ve (4) (4) is calculat
calculat ed t o 352.70
352.70 – measure the a mplitude
decline of minute wa ve a a nd a dd t o 352.70 352.70 (log
(log sca le) – this produces a
potential target for w ave b tow ards 410. 410.2020 where
where w aves a a nd c unfold
to a fib. 100
100%equa
%equa li lity
ty rat io – see red line in figfig 14.

If wa ve b canno t retrace deeply insi

inside de the decli
decline
ne of w ave a, it would
significant
significant ly decrease the proba bili
bilityty for this count to be correct,
negat ing the expanding flat scenario.
scenario. Onc Oncee overlap
overlap occur
occurs,t
s,t he only
medium-term
medium- term count remaining w il illl be the contract ing/
ing/symmetrical
symmetrical
triangle as c ycle wave X.

6 MARKETTECHNICIAN Issue 51 – No ve m b e r 2004

The result o f go ld prices tra ding to w ard s the 410.
410.20/
20/.40 level
level w ill the 410.
410.20/
20/.40 level as price p enet rat ion o f 342.00
342.00 (‘overlap’)
(‘overlap’) is
is expec ted
maintain the expanding flat flat pa ttern for wave X,
X, at least for the time as part of Primary
Primary wa ve D.Neverthel
D.Nevertheless,as
ess,as we ha ve seen from from the short-
being.Even when prices decline following the completion of minute term pattern sequence, an a dvance tow ards this level level isis highly proba
proba ble,
wa ve b it w il
illl be only the ‘overlap’
‘overlap’ level at 342
342.00
.00 tha t w il
illl nega te it. As it and un der this count, labeled Intermediate w ave (B) (B) – see fig 20. The
currently
currently does remain valid,
valid, the ong oing forecasts for Intermediat
Intermediat e, ongoing forecasts for Intermediate,Primary and Cycle degree are
Primary
Pri Cycle deg ree can be seen in figs 17,18
mary a nd Cycle 17,18 and 19. updated a ccor
ccording
ding to this count and can b e seen in in figs 21,22
21,22 and 23.

Figure 17 Figure 20

Figure 18
Figure 21

Figure 19

Figure 22

And a final return

return to the co ntract ing/
ing/symmetrical
symmetrical triang
triang le scenario for
cyclee w ave X.
cycl X. For this count,it is not necessary for wave b to a dvance to

Issu e 51 – No vem b er 2004 MARKETTECHNICIAN 7

 Figure23
Bytes and
a nd Pi
Pieces
eces
By David Wa
Wa tt s

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Super-cycle wa ve IVis unfolding into a do uble zig zag – within this, Cycl
Super-cycle Cyclee
wa ve X has been show n as unfolding
unfolding w ithin tw o possibilities
possibilities,, an
expanding flat, or a contracting/symmetric
contracting/symmetrical al triang
triang le.Both count s
currently
currently indicate th e proba bili
month s.The next decli
decline
ne w il
bility

remain valid as bot h t arget s d iff

ty o f declines during
illl ultimat
during the n ext several
ultimat ely determine w hich patt ern w il
iffer
er.. A decli
decline
ne b elow 34 342.0
2.00
0 w il
illl
illl eliminate
eliminate
Obituary
the expand ing flat pat tern as overlap will occur occur.. Pri
Prices
ces remaining
remaining ab ove
this level
level during
during the next t welve mont h period period w il illl weaken the Tim Bra in
contracting /symmetric
symmetrical al t ri
riang
ang le count .
Tim wa s a t echnical analyst w ith the Abu
Abu Dha bi
And finally...a
finally...a glimpse into the distant future reveals something really Investment Authority’
uthority’ss Lond
Lond on office and will be
insight
insight ful – a forecast fo r a super-cycle
super-cycle wa ve IVlow t ow ards t he 183.00
183.00
sorely
sorely missed by his colleag
colleag ues, fri
friends
ends a nd fa mil
mily.
y.
level
level but then wave V unfoldi
unfolding
ng thereafter with ultimate
ultimate targets t owa rds
1814.
18 14.00 2029 – see fig 24. Hard
00 – completion som etime a round t he yea r 2029
Tim came into te chnical analysis via
via a route th at
to imagine?
many members have travelled
travelled – computers
computers.. He wa s
Figure24 employed in the Computer Depa rtment of ADI
ADIA
A in
Abu Dha bi but show ed a keen interest in technicial
technicial
an alysis. Tim joined ADIA
ADIA Lond on in Jun e 1992 af ter
recommend at ions from Mick
ickey
ey Bain, MSTA, who wa s
the tec hnical a na lyst a t ADIA
ADIA’s Head Office in Abu
Abu
Dhabi at the time,
time, and w ho wa s succ
succeeded
eeded by the
lat e Bron w en Woo
Woo d, FS
FST
TA, in 1995.
1995.

With his comput er ba ckground Tim

Tim wa s qu ite a
wizard w ith the various Datastream, Reuters and
Bloomberg
Bloomberg systems. He wa s respected
respected for his
his
analytical
analytical wo rk
rk,, and spent many producti
productive
ve hours
with his colleag
colleag ues reviewing
reviewing ma rk
rkets.
ets.

Tim shared a com mon interest w ith many of o ur

members as he wa s a w in
ine
e buff,collecting
buff,collecting a mod est
investmen
investmen t in wines and Bordeaux wine futures –
although it w as his ‘nose’rather tha n charts
wh ich served
served him w ell there!
“A lot of people see
see thi ngs as they were,
were, and say why, But I am dream ing of 
thi ngs that n eve
everr have been,
been, And say,‘why
say,‘why no t’?”  Tim passed a wa y unexpected ly
ly,, on 8th J une 2004
2004
and is surv
surviv
ived
ed b y his wife
wife Debb ie a nd teena ge
Peter Goodburn i s Senior
Senior Consultan
Consultan t to Wave
WaveTTrack Internati onal that 
prod uces regula r Elli
Elli ott Wave price forecasts for Fixed
Fixed Income, Sto ck Index, children Mark &N
&Nat alie.
FX and Comm odit y pro ducts.info @wavenetonline.c
wavenetonline.com om 

8 MARKETTECHNICIAN Issue 51 – No ve m b e r 2004

Wyck
ycko
o ff la
la w s and
a nd t est
estss
By Dr
Dr.. Hank Pruden a nd Dr.Berna rd Belleta
Belleta nte

Wyck
yckoff
off is a name g aining celebrity status in the w orld of technical divergencies signalled b y t he Optimism Pessimism
Pessimism (on-balanced-volume)
ana lysi
lysiss and tra ding. Richard D.
D. Wyck
yckoff,
off, the ma n, wo rk
rked
ed in New
New York
York Index. These e xpress
xpressions
ions o f positive divergence in late 200
2002
2 an d early
City
City d uri
uring
ng a “golden a ge” for technical
technical ana lys
lysis
is that exi
existed
sted d uri
uring
ng the 2003 showed the Law of Effort (volume) versus Result (price) in action.
early decade s of the 20th Century.Wyck
Century.Wyckoff off wa s a cont emporary of Edwin Those d iver
ivergen
gen ces reveal an exha ustion in supply and the rising
Lefevré who wrote The Remin
Remin isce nces of A Stock Operat or. Like Lefevré,
iscences dominance of demand or accumulation.
accumulation.
Wyck
yckoff
off wa s a keen observer and reporter who codified the be st
practices
practi ces of the celebrated
celebrated stock and commodity operators of tha t era. The bullish price trend during 2003 wa s confirmed b y the st eep ly rising
rising
The results o f Richard
Richard Wyckoff’s
Wyckoff’s effort b eca me know n a s the Wyckoff
Wyckoff OBV
OB V index
index;; accumul
accumulation
ation d uri
uring
ng the t rading range continued upwa rd as
Metho d of Techn ical Ana
Ana lysis and Sto ck Speculat ion. the price rose in 2003
2003.T
.Tog ether the Law s of Supply and Dem and and
Effort vs. Result revealed a po werful bull market
market und erwa y.
Wyck
yckoff
off is a practical, straight fo rwa rd bar chart and point-and-fi
point-and-figure
gure
chart pat tern recognition
recognition method that, si since
nce the foundin
foundingg of the Wyck
Wyckoffoff Chart 1
and Associates ed ucationa l enterprise
enterprise in the early 1930’
1930’s,
s , has sto od t he
test of t ime
ime..

Around 1990,
1990, afte r ten yea rs of trial-and
trial-and -error with a variety of t echnical
ana lysi
lysiss systems and approa ches, the Wyck Wyckoffoff Metho
Metho d beca me the
ma insta y of The Gra dua te Cert ificate in Techn ical Market
Market Analysis at
Golden G ate Univ
Universi
ersity
ty in San Francisco,Californi
rancisco,California, a, U.S
U.S.A
.A.. Duri
During
ng the p ast
decade d ozens of Golden Gate g raduates have g one on t o successful successfully
ly
apply the Wyck
Wyckoff
off Metho
Metho d to futures,e quities, fix fixed
ed income a nd foreign
exchang e markets using
using a range o f time frames.
frames. In 20020022 Mr
Mr. David Penn,
in a Technical Ana lysis of Sto
Sto cks and Comm odi ti es  m ag azine article
mag article named
Richard D.W
D.Wyckoff
yckoff o ne of th e five “Titan
“Titan s o f Techn ical Ana
Ana lysis.”

The Wyckyckoff
off Metho
Metho d ha s withsto od t he test o f time. Nonet heless,t his
article proposes to subject the Wyck
Wyckoffoff Method t o t he further challenge
of real-time-
real-time-test
test und er the nat ural lab
lab orato ry conditions of the current
U.S.. Stock market.
U.S market. To set up t his “test,” three funda menta l law
law s of the
Wyck
yckoff
off Method will be defined a nd a ppli
pplied.
ed.

THREE WYCKOFF LAW

LAWS
The Wyck
Wyckoff
off Method is a scho ol of tho ught in technical Market
Market ana lysi
lysiss
tha t necessitat es judg
judg ment. Althoug h the Wyck
Wyckoff
off Metho
Metho d is not a
mechan ical system per se,n evertheless high rewa rd/low risk
oppo rtunities can be routinely and systema ticall
ticallyy based on w hat Wyck
Wyckoff off
identified as three fund amen ta l laws (see Tab le 1):
1):

Table 1

1. The Law
Law of Supply
Supply and Demand – states that w hen demand is
great er than supply,prices will
will rise,a
rise,a nd w hen supply is
is greate r
tha n dema nd, pri
prices
ces will fall.
Here the analyst studies the relationship between supply vs.
demand usi
using
ng price
price and volu
volume
me over time
time as found o n a b ar
chart.

2. The Law o f Effort

Effort vs. Results – divergencies
divergencies an d d isharmonies
between vol
volume
ume and price
price often presage a change in the
direction of t he price t rend. The Wyckoff
Wyckoff “Optimism vs. Pessimism”
Chart 2
index is an o n-
n-ba
ba lanced-
lanced-volume
volume type indicator helpful for
identifying accumulation vs.distribution and gauging effort.

3. The Law
Law of Cause and Effecffectt – postulates tha t in order to have a n
effect,
effect, you must first
first have a cause, and t hat effe
effect
ct w il
illl be in
proportion to the cause. This law law ’s operation ca n be seen
working as the force of accumulation or distribution within a
trading range w ork
orkss itself
itself out in
in the subsequent move out of tha t
trading range. Point and figure
figure chart counts can be used to
measure this cause and project the extent of its effect.

Past:
st:position
position of the U.S. stoc
stock
k marke
arkett in 2003
2003 – Bullish
Charts 1 a nd 2 show the application o f the Three
Three Wyck
Wyckoff
off Laws t o U.S.
Stocks during
during 200
2002-
2-200
2003.
3. Chart 1, a b ar chart , show s the d ecli
ecline
ne in price
price
during 2001-
2001-02,a
02,a n inverse
inverse hea d a nd – shoulders ba se formed during
2002-
2002-200
2003 3 and the sta rt o f a new bull market during March-June
March-June 2003.
2003.
The upw ard trend reversal defined by the Law o f Supply
Supply vs.Dema nd,
exhibited
exhibited in the lower part of the chart, wa s presag
presag ed by t he positive
positive

Issu e 51 – No vem b er 2004 MARKETTECHNICIAN 9

 The“Nin
Nine
e Classic Buying
Buying Tests”o
ests”off the
the Wyckof
yckofff method or ma rk
rkup
up pha se ha d be gu n. The pa ssag e of all Nine
Nine Buying Tests
determined that the speculative line of least resistance was to the upside.
The classic se t of “Nine Classic Buying Test s” (and “Nine Selling Tests” ) wa s
designed to d iagno se significant
significant rever
reversal
sal formations: the “Nine
“Nine Classic
Classic
Buying
Buyi ng Tests” define t he eme rgence o f a new bull trend (See Tab le 2). 2). A Future:A
Future: A market
market test in 2004
new bull trend emerges out of a base t hat forms after a signifi
significant
cant price
price The auth ors as acad emics are intri
intrigued
gued b y the nat ural lab
lab orato ry
decline.(The “Nine
“Nine Selling
Selling Tests” help define t he o nset of a bea r trend o ut cond itions of the stock market.
market. A prediction study is the sine sine q uo non o f
of to p format ion following a signifi
significant
cant ad vance.) These nine classic tests a g ood laborat ory experiment. The WyckWyckoff
off Law
Law of Cause a nd Effect
Effect
of Wyck
yckoff
off are logical, time tested , and rel
reliable.
iable. seemed to us to provide an unusually fine instrument of conducting such
an exper
experiment,a
iment,a “forwa rd test.” Parentheti
Parentheticall
cally,it
y,it ha s been our feeling,
feeling,
As the rea der a pproa ches t his case o f “Ni
“Nine
ne Classic Buying Tests,” he/
he/she
she shared by a cademics inin g eneral
eneral,, that techni
technici
cians
ans have focused to o
ought to keep in mind
mind the foll
following
owing admo niti
nitions
ons from the Reminiscences  heavilyy upon “b acktes
heavil acktesting”
ting” and not suff
suffic
icientl
ientlyy upon real
of a Stock Operator (See Appendix): experimenta
experi menta tion. The time series
series and metric nature of the m arket dat a
allow
allow for “forward
“forward testing.”F
testing.”Forwa
orwa rd testing necess
necessitates
itates prediction,
prediction,
Table 2 followed
followed by the empir
empiric
ical
al test of t he prediction
prediction with ma rk rket
et da ta that tell
wha t actually happened.
Wyckoff Buying
Buying Tests:
ests:Nine
Nine Classic Tests for Accumulation
Accumulation
How fa r will this bull market rise? Wyckoff used th e Law Law of Cause a nd Effect
Nine Buying
Buying Tests (applied to an averag e o r a st ock after a decline)
decline)**
and t he Pointand- figure
figure chart
chart to answ er the question of “how far.” far.” Usi
Using
ng
the In
Invers
versee Head-and-Shoul
Head-and-Shoulders ders formation a s the ba se of accumulation
Indication: Determined From:
from which to take a measurement, of the “cause” “cause” buil
builtt during the
accumula tion pha se, the po int-int-and
and -figure chart (Chart
(Chart #2) indicates 72
1) Do
Do w n si
sid e p ri
ric e o b je
je ct
ct iv
iv e a c co
co m pl
plis he
he d Fig u re
re Ch a rt
rt
boxes between the right inverse-shoulder and the left inverse-shoulder.
Each b ox has a va lue of 100 Dow points.Hence,t he point-and-fi
point-and-figuregure chart
2) P
Prre lilim in
in ar
ary su p p or
ort , se
se llllin g clim ax
ax, Ve rt
rt ic
ic a l a nd
nd Fig ur
ure
reveals a ba se of accum ulation for a po tent ial rise
rise of 7,200
7,200 points. When
secondary test
add ed to the low of 7,200
7,200 the price
price projects
projects upwa rd to 14,400
14,400.. Henc
Hence, e, the
expectation is for the Dow Industrials to continue to rise to 14,400 before
3) Activity bullish (volume increase s on rallies Vertica l
the onset o f distribution
distribution and the commencement of the next bea r market. market.
and decreases on reactions)
If the Dow during 2004-200
2004-2005 5 comes w ithin + or - 10%
10%of of th e projected
7,200
7,2 00 points we w ililll accept t he prediction as ha vi
ving
ng been positi
positive.
ve.
4) Dow nw ard stride broken (i.e.,s upply Vertica l or Figure
line penetrated)
Conclusions
5) Hig h e r s up p o rt s (d a ily lo w ) Ve rt ica l o r Fig ure
In summary,U.S.eq uities are in a bull market
market w ith a pot ential to rise to
Dow Jones 14,400.T
14,400.The a nticipation is for the cont inuance of t his
6) Hi
Hig h er
er t op
op s (d a ilily h ig
ig h p ri
rice s ris in
in g ) Ve rt
rt ic
ic al
al o r Fig ur
ure
pow erful bull market in the Dow Industrial Average
Average of th e U.S.A
U.S.A. throug h
2004.T
200 4.This market forecast is the “test ” to wh ich the Wyck
Wyckoff
off Method of
7) Stock strong er tha n the market (i.i.e.,
e., stock Vertical Chart
Techn ical Ana
Ana lysis is being subject ed.
more responsive on rallies
rallies and more resista
resista nt
to reactions than the ma rk rket
et index)
Part (B(B)) of “W
“Wyckoff
yckoff Law
Law s: A Mark
Marketet Test ” w ill be a rep ort in yea r 2005
2005
ab out “What
“What Actua ll llyy Happened.” As with classical laborat ory
8) Ba
Ba se
se fo rm
rm in g (h
(h o ri
rizo nt
nt al
al p rice lin e ) Fig ur
ure Ch a rt
rt
experiments,
experi ments, the results will be recorded, interpreted and appraised. This
9) Estimated upside
upside profit pot ential is at least Figure Chart for seq uel will invite
invite a cri
critical
tical app raisal of th e Wyck
Wyckoffoff Laws a nd in particular
a cri
critical
tical ap praisal of t he WyckWyckoff
off Law of Effort
Effort vs. Result.T
esult.The
he q uality of
three
three times
times the loss
loss ifif protec
protecti
tive
ve stop
stop is
is hit
hit Profi
Profitt Object
Objectiive
the a utho r’ r’ss application o f the Wyck
Wyckoff
off Law
Law s will also und ergo a cri critique.
tique.
* Adapted with m odificatio ns from Jack
Jack K.Hut
K.Hut son,Editor,Chartin g the Market: 
From these investigations a nd a ppraisals,w e shall strive strive to extract
The Wyckoff Meth od (T
(Technical
echnical Analysis,In
Analysis,In c.
c.,, Seattle,Washingto n, 1986),page 87.
lessons for the improvement of techn ical market market a nalyses. IrIrrespective
respective of
the outcomes of t his marke markett test, we a re confident
confident t hat t he appreciation
appreciation
of t he Wyckoff
Wyckoff MethMeth od of Techn ical Market
Market Ana Ana lysis will ad van ce an d th at
the stat ure of Mr. Mr. Richard D. Wyck yckoff
off w il
illl not dimini
diminish.sh.
“The averag e ticker
ticker hound – or,
or, as they used t o call him,
him, ta pew orm –
goes wrong, I suspect,a
suspect,a s much from overspeci
overspeciali
alization
zation as frfrom
om a nything Dr. Hank Pruden
Dr. Pruden is a professor in the Schoo l of Business
Business at Golden Ga te
else.It mean s a highly expensive
expensive inelasticity.A
inelasticity.After
fter all,
all, the g ame o f Universi
Univ ersity
ty in Sa n Francisco,
Francisco, Cali
California
fornia an d a visi
visiting
ting professor at
speculation isn’t
isn’t all mathema tics or set rules,
rules, how ever rigid
rigid the main laws EURO
EU ROME
MED-M
D-MA ARSE
RSEILILL
LE Ecole
Ecole de Mana g em ent , Marseille, Fran ce.
may be. Even in in my tape reading something enters that is more than
mere arithmetic.There is wh at I call the beha vior of a stock,a ctions tha t Dr. Bernard Belletant
Dr. Belletant e is a Professor of Finance
Finance a nd Dea n of t he Euromed-
Euromed-
enable you to judge w hether or not it is going to proceed in accordance Marseill
Marsei llee Ecole
Ecole d e Mana gem ent.
with the precedents that your observation
observation has no ted. If a stock doesn’t
doesn’t
act right do n’
n’tt to uch it;b ecause,b eing unable to tell precprecis
isely
ely what is
wrong, you cannot tell whichwhich wa y it is
is going. No diagno si sis,no
s,no prognosis
prognosis.. References
No progno sis
sis,, no profit. Fort e, Jim, CM
CMTT,“A
,“Ana
na to my o f a Trading Ran ge,” Market Techn icians
Associa tion J ourna l,” Summer-F
Summer-Fallall 1994.
1994.
“This experience
experience has be en the experience of so ma ny trade rs so many times
Hutson , Ja ck K., Edito r,Cha rting The
The Market: The Wyckoff
Wyckoff Meth
Meth od,
that I can give this rul
rule:
e: In a narrow market,w hen prices
prices are not gett ing
Techn ical Ana lysis,Inc., 1986
1986..
anywhere to speak of but move within a na rr rrow
ow range, there is
is no sense in
trying
trying to antici
anticipate
pate w hat t he next big movement is going to be – up or Lefervé, Edw in, Reminiscence s of a Stock Opera
Opera to r, Wiley Press (origina
(origina l,
dow n.The thing to d o is to wa tch the market,read the t ape to determi
determine
ne Dora n &Co, 1923
1923)).
the limits
limits of the g et-
et-nowhere
nowhere prices,and
prices,and make up your mind
mind t hat you will
Penn , David, “T
“The
he Titan
Titan s o f Techn ical Analysis,”Techn ical Analysis of Stock
not take an interest until the price breaks through the limit in either
&Commo
&C ommo dities,Octo ber,2002.
direction.A speculator must concern himself with making money out of the
market
mark et and not w ith insi
insisting
sting that t he tape must a gree with him. Prud en , Henry (Hank) O.,“
O.,“ Wyckof f Test s: Ni
Nine
ne Clas sic Test s For
For
Accumula tion ; Ni
Nine
ne New Tests for Re-accu
Re-accu mulat ion,” Mark
Market et Techn icians
“Therefore, the t hing to d etermine is the specula tive lineline of least resistance Associa tion Jo urnal, Spring- Summer 2001.
2001.
at the moment o f trading;
trading; and w hat he should wait for is is the moment
when t hat li
line
ne defines itself
itself,, because tha t is his
his signa
signa l to get busy.
busy.”” Prud en , Henry (H
(Han
an k) O.,“A Test of Wyckoff,”
Wyckoff,” The Tech nica l Ana
Ana lyst,
Feb ruary 2004
2004..
Point 4 on the ch art s ident ifi
ifies
es the juncture w hen a ll Nine Wyckoff Buying
Buying Chart s, court esy of Wyckoff/
Wyckoff/Stock Market
Market Instit ute, 1360
13601
1 N.
N. 19th Avenue
Avenue
Tests w ere passed. The pa ssage of a ll nine tests confirmed tha t a n uptrending 1, Pho enix, Arizona , U.S.
U.S.A
A. 8502
85029-
9-1672
1672..

10 MARKETTECHNICIAN Issue 51 – No ve m b e r 2004

Ma rket Pr
Pro
o fi
fille – a t ra d ing pe
perrspe
spect
ctiive
By David Knap
Knap p

In th is article
article I ana lyse two recent ma rk
rket
et p rofi
rofile
le distributions
distributions – the The next cha rt breaks dow n this same d istri
istribution
bution into indivi
individua
dua l days so
Septembe r 8th to Septembe r 22nd 22nd US ten year no te fut ure (TYZ4Z4)) and we ca n see the dynamic involv
involved
ed in the d ail
ailyy bat tle between buyer
buyerss and
the S&P 500 future (SPZ4)
(SPZ4) from August 13t h to Septe mbe r 22nd. sellers.
sellers. From this we ca n see the d ecisi
ecision
on ma ki king
ng p rocess involved
involved in
finding location for a trade.
I aim to show how markets distribute over time and how price objectives
and stops ca n be emp loyed to creat e profitable risk/
risk/rewa rd scenarios. Day 1 on the left (lab
(lab ell
elled
ed 9/8 at the b ott om o f the cha rt) sta rts the
distribution with a powerful surge higher -a rally that starts with the C
Strategies discussed
discussed include
include the importance of t he longest li
line
ne as a n period buy extreme and b ecomes a t rend day up. This signifies
signifies an
average cost mechanism,how that influences positions and consequently imbalance o f buyers versus sell
sellers
ers and t ypicall
ypicallyy closes near the high. This
prices;
prices; and the concept o f building
building value and its importance in staying is our signal
signal to g o long.
with a t rade to its ultimat
ultimat e conclusion.
conclusion.
The ne xt five da ys (9/
(9/9 to 9/15)
9/15) are ra ng e tra ding da ys, all building
The first cha rt sho w s a co mbine d ma rk
rket
et p rofile for TYZ4 from Sept 8 to uncha ng ed b ut hig her value (112-
(112-06
06 to 112-18)
112-18).. This highe r value is
Sept 22.
22. It is a goo d example of an unbalanced up market market that organises important because it puts the shorts from the first day of this distribution
itself into
into a b ell shaped curve,a normal distribution over time. This is is an under increasing pressur
pressure.e.
almost complete distri
distribution
bution because it has a low,a high and a mid-
point. The market is an order seeking
seeking m echan ism where price price moves to It is possible from this early point to predict the 113-21
113-21 target, beca use
determine
determi ne a level that is too high, too low and a levlevel
el in
in betw een, where all the volume is concentrated near the high of the developing
buyers and sell
sellers
ers are more in equilibrium.
equilibrium. Pri
Price
ce is said to ‘distri
‘distribute’
bute’ as it distribution
distri bution so t he d istri
istribution
bution is incomplete
incomplete t o t he upside (low
(low :11
:111-
1-08
08
moves to discover these levels.
levels. high :112
:112--24 long est li
line:
ne: 112-
112-15)
15)..

Chart 1 This up ma rket

has almost met Now look what happens next :-
Open: 111-
111-13
13 Last
Last : 113-
113-11
11 High
High : 113-
113-16
16 Low
Low : 111-
111-09
09
the target of the On 9/9/16 the ma rk rket
et ha s anot her powerful up day, breaking the rang e
distribution. The high,
high, distr
distributi
ibuting
ng higher and closing
closing nea r the high. So far so good – the
target can be next t wo da ys are a ga in rang e da ys but still building
building UN
UNCHCHAANGEGEDD TO
ascertained by HIGHE
HI GHER R VALUEUE.. Value is still the key here, beca use it is this tha t puts
measuring
measuri ng where pressure
pressu re on the shorts’ average co st. Remember Steidylmeyer’
Steidylmeyer’ss original
original
the top of the formulaa : Pri
formul Price
ce x Time = Volume. Value is creat
creat ed o ut o f the volume
distribution traded a t a price.
price. (On the day profiles
profiles abo ve,va lue is repr
represented
esented by the
would have to be, vertical
vertic al line
line to the ri
right
ght of th e profiles
profiles – 2/3r
3rds
ds o f the activity for tha t d ay).
to ma ke the mid- 9/21 isis an interesting d ay b ecause it builds unchang ed value for most of
pointt and the
poin the time,then attempts t o break down in J period period but finds strong
strong
longest line the responsive
responsi ve buying a nd reverses higher
higher t o close a t a high. The ma rkrket
et is
same i.e.(longest still positive and value o n 9/22 is higher still – show ing o ur 113- 113-21
line-midpoint) objective as still valid.
x 2 + hi
high
gh , which
in this case is: Having achieved
achieved location and rationale for
for a trade, how d o we t hen manag e
(112-15 – the risk
risk?? How do w e know
know w hen we’re wron g? Not all distributions
distributions
112-12++ ) x 2 +
112-12 continue to meet their targets. They can and do fa ilil.. The most important
113-16 = 113-21
113-21.. element in this risk management decision is the timeframe.

Chart 2

Issu e 51 – No vem b er 2004 MARKETTECHNICIAN 11

 The parameters for the trade – the location,the target and
Chart 3
the stop – must all be in the same t imef
imeframe
rame for the trade
to make sense.

Here is a chart that fails to follow through and distribute to

its target.

The SPZ4 rally

rally from Aug
Aug ust 13th b eco mes to p hea vy
bet ween 112
1120 0 and 1130 and fails to t he upside wh en it
brea ks 1120.5
1120.5 wh ere th e TPO (time
(time p rice oppo rtunit ies)
count is roughly eq ual. (251
2517 7 TPOs ab ove t he line and 235
2354
4
below).. The ta rget for the distr
below) distributi
ibution
on w as:
(1125-
(1125-1097)
1097) x 2 + 1132 = 1188
but b reak
reaking
ing below 11 1120
20.5
.5 has the a ver
verag
ag e long trader
under pressure
pressure on their positions. A move ba ck to th e
1097 mid-point might be necessary to balance out the bad
positions in this profile
profile distribution.
distribution. Any long po sitions
should be liliquida
quida ted on t he brea k of the TPO point.

By analysing
analysing distr
distributi
ibutions
ons in the same t imef
imeframe,w
rame,w atching
the ba ttle betw een buyers and sellers
sellers unfold
unfold and
monitoring value as the d istri
istribution
bution d evelops, it is
is possible
to create profitab
profitab le trading
trading strateg ies that achieve good
entry and exit points.

There are other fact ors influencing

influencing th e market. There are
medium and longer term distributions at work as well as
short term ones. But,if you can identify
identify the timeframe
timeframe for
your trading horizon and fit your parameters for the trade
to that distr
distributi
ibution,
on, then ma rk
rket
et profile
profile becomes a very
powerful analytical tool.

David Knapp 
aoxx52@dsl.pipex.com 

Acknowledgement
The a utho r would li
like
ke to th ank Peter Steidlymeyer for the
original concept b ehind th is article,
article, Joe Musolino
Musolino o f ABN
ABN
NY for his ad vanced profil
profilee t heories and CQ
CQG
G for t heir
excellent
excellent Market
Market Profile softwa re,t o.

IFTA Co
Conn fe re
renn ce
IFTA’s Annu a l Con
IFT Con ferenc e ho ste d b y AE
AEATin Madrid w as c on side red b y House in
in Madrid;
Madrid; where delega tes dined in palatial surroundings
surroundings and
all those who attended to have been a great success. success. OvOverer 200
200 were entert ained by several local opera singers.
delegat es atten ded from all over the w orld to hear presentations from
a large numbe r of highly
highly respected technical analysts and traders. AEATdese rves hug e credit for org an ising a n o utst an ding IF IFT
TA 2004
Included amo ngst the spea ker kerss were, John Murphy,
Murphy, BrBruno
uno Estier
Estier,, John conference. The cha ll llenge
enge now facing t he Canad ian Society,CSTA, is how 
Bollinger
Boll inger,, Marti
Martin
n Pri
Pring,
ng, Hi
Hiroshi
roshi Okamo
Okamo to, Regina Meani, Jorge Boli Bolivar
var,, to repea t this success inin 2005
2005 when t hey host the con ference in in
Trevor Neil
Neil,, Ralph Acampora
Acampora and Matt hieu Gilbert. Gilbert. In to tal t here were Vanco uver in celebrat
celebrat ion of their 20th year as an associat ion. We sugg est
over 20 presentations ma de a nd a ful fulll list
list of all the speakers cancan b e you b lock off your diaries
diaries for the 3r3rdd t o 5th of November 2005
2005 to b e in
found on the Spanish
Spanish society’s
society’s web si site
te w ww.aeat onlionline.
ne.com.
com. In Vanco uver
uver.. Now tha t th e Spanish have raised t he ba r, next yea r’ r’ss IF
IFTA
addition to these formal
formal presentations,delegates
presentations,delegates ha d t he opportunity conference in Canad a is likely
likely to b e a n extrao rdinari
rdinarily
ly successful
successful event.
to meet fa ce to face w ith their coll
colleag
eag ues from
from throug hout th e world to
exchange ideas and share thoughts on current markets and techniques. The IFT
IFTA executive bo ard of d irirecto
ecto rs also m et tog ethe r in Madrid. The
STA is represented
represented on t his boa rd by AdaAda m Sorab and Si Simon
mon Warren;
Warren; wh o
Apart fro m running a n excellent
excellent a na lytical conference, AEATalso ma de also cha irs IFT
IFTA’s Finan
Finan ce Com mitt ee. We a re plea sed to repo rt t ha t IFTA
suree the event proved extremel
sur extremelyy popular from a social point of view  cont inues to g row a nd t hat techn ical analysis societies liklikee the STA
with a large numbe r of excell
excellent
ent events and tours for bot h delegat es cont inue to develop a ll over the wo rld. IF IFT
TA’s finances rema in strong
and their accompanying
accompanying partners.
partners. Many delegates also took full full an d the IFT
IFTA bo ard ag ain voted t o leave fees unchang ed for 2006.Oth
2006.Oth er
adva nta ge o f Madrid’
Madrid’ss legendary reputat ion for fine
fine food and nightlif
nightlife.
e. key items
items o n the IF
IFT
TA bo ard‚s a ge nda this year included upd at ing th e
This was certa inl
inlyy not a d ull conference for many of tho se att ending. internationa
inter nationa l accreditation
accreditation program and method s to increase
increase the
The event culminated in a wo nderful gala d inner held held a t the Oper
Operaa exchange o f research
research and ideas bet ween and among st IFT IFTA associates.

12 MARKETTECHNICIAN Issue 51 – No ve m b e r 2004