THE TRADERS’ MAGAZINE SINCE 1982 www.traders.

com AUGUST 2015

DECEMBER

Analyzing S&P
Price Action
Determining the next
trading day’s bias 8

Trading The Loonie

A trading system 12

Trading First-
Hour Breakouts
Identifying the strongest
patterns 20

Gap Trading
Do exhaustion gaps
really fade? 24

INTERVIEW
Steve Bigalow 28

QUICK-SCAN
n VantagePoint 9.0

DecEMBER 2015
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 Which Brokers
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 CONTENTS
8 Analyzing Price Action
In The S&P 500
by Adel Weng, PhD
What will the market do the next
day? Short-term traders look for
some hints that suggest which
way prices will move. Here’s
one approach you can use to help
determine what the next trading
day’s bias will be.
FEATURE ARTICLE
12 Trading The Loonie
by Markos Katsanos
Here’s a trading system that
exploits the strong correlation
between the Canadian dollar and
crude oil.
19 Futures For You
by Carley Garner
Here’s how the futures market
really works.
20 Trading First-Hour
Breakouts
by Ken Calhoun
It is well known that as soon as the
markets open, there’s a significant
amount of trading activity, much
of which is strong breakout pat-
terns. How do you identify which
of these patterns are strong enough
to continue and generate success-
ful trades? Find out here.
24 Gap Trading
by Kevin Luo
Do exhaustion gaps really fade?
Here’s a study that creates and
tests an exhaustion gap prediction
technique using two measurable
factors: stock trend and gap size.
Copyright © 2015 Technical Analysis, Inc. All rights reserved. Information in this publication must not be stored or reproduced in any form without written permission from the publisher. Technical Analysis
of Stocks & Commodities™ (ISSN 0738-3355) is published monthly with a Bonus Issue in March for $89.99 per year by Technical Analysis, Inc., 4757 California Ave. S.W., Seattle, WA 98116-4499. Periodicals
postage paid at Seattle, WA and at additional mailing offices. Postmaster: Send address changes to Technical Analysis of Stocks & Commodities™ 4757 California Ave. S.W., Seattle, WA 98116-4499 U.S.A.
Printed in the U.S.A.
4 • December 2015 • Technical Analysis of Stocks & Commodities
DECEMBER 2015, Volume 33 Number 13
INTERVIEW
28 Charting Your Way
With Steve Bigalow AT THE CLOSE
by Jayanthi Gopalakrishnan
60 Align Your Analysis &
Stephen W. Bigalow has more than Trading Persona
40 years of investment experience,
including eight years as a stockbro- Tushar Chande
ker with major Wall Street firms, We are all different. As a result,
and 15 years of commodity trading we each have our comfort zones in
overlapped with 12 years of real which we tend to perform better.
estate investing. He holds a busi- But how do you define that com-
ness and economics degree from fort zone? We take a look.
Cornell University. He has advised
TIPS
professional traders, money man-
agers, mutual funds, and hedge QUICK-SCAN
funds, and is recognized by many 42 • VantagePoint 9.0
in the trading community as the Product review: Market forecasting
“professional’s professional.” We software
spoke with him about the value of
candlestick charts.
DEPARTMENTS
34 Trading Multiple Stocks 6 Opening Position
by Norman J. Brown 7 Letters To S&C
Here’s a switching technique that 48 Trade News & Products
further enhances the annual return 49 Traders’ Tips
associated with “one rank” perfor-
mance. 56 Futures Liquidity
57 Advertisers’ Index
38 Is The Average Analyst 57 Editorial Resource Index
Average-Aware? 58 Books For Traders
by John Cameron 59 Classified Advertising
Such a simple term, yet easy to 59 Traders’ Resource
misinterpret. Here, we clarify the
differences between mean, median,
and mode.
40 Explore Your Options
by Tom Gentile
Got a question about options?
45 Q&A
by Rob Friesen
This professional trader answers
a few of your questions.
This article is the basis for
TIPS
Traders’ Tips this month.
n Cover: Roy Wiemann
n Cover concept: Christine Morrison
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 December 2015 • Volume 33, Number 13
Opening Position
The Traders’ MagazineTM

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6 • December 2015 • Technical Analysis of Stocks & Commodities

 Trade Easier,
Faster, Smarter!

The editors of S&C invite readers to submit their opinions and information on subjects
relating to technical analysis and this magazine. This column is our means of communi-
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expressed in this column do not necessarily represent those of the magazine.—Editor
PAGET 16-YEAR CYCLE
Editor,
I really enjoyed the September 2014
article in S&C, “Looking At Cycles,” by
Koos van der Merwe. I have been using
the Paget 16-year cycle template that he
provided in the article. Based on that,
point 1 was expected in October 2015,
since 2016 is a leap year. However, in
van der Merwe’s September 2015 article
in S&C, “Where Is The Market Head-
ing?” he has 2018 as the starting point.
Is 2016 the real starting point, since it
is a leap year?
In addition, I have used the du Toit
method of Gann lines with success.
I would like to tell van der Merwe to
keep up the great work. I really enjoy
his articles.
Dom
Author Koos van der Merwe replies:
Thank you for your email. Quite hon-
estly, I don’t think Paget took leap years
into his calculations, but it’s a good
suggestion and something worth looking
into, and perhaps I’ll even incorporate it
into my analysis. Thank you for bringing
it to my attention.
I’m pleased that you like Franco du
Toit’s method of using Gann lines. Du
Toit was a brilliant analyst, and he
made a great deal of money trading the
stock market. We became good friends.
Unfortunately, he died when in his late
50s. His wife blamed his death on his
success in using Gann lines, convinced
that Gann’s ghost was jealous!
MONEY FLOW OSCILLATOR
Editor,
Thank you for Vitali
Apirine’s October 2015
article, “The Money Flow
Oscillator.” It’s an inter-
esting indicator that he
has developed. I would like to explore it
more, but before doing so, and in making
some assumptions, I have a few questions
for the author.
My questions are based on a few
statements and items from the article;
specifically, Apirine writes:
• “The default period is 20 but that can
be changed based on your trading
style.”
• “The indicator can be used on daily,
weekly, or monthly charts.”
• “The MFO does not generate
valid signals when the market is
choppy.”
1. The examples in the figures were all
stocks. Has the MFO been used with
anything other than stocks? Should
this indicator be limited to stock
trading or might it be useful for other
instruments?
2. Might lengthening the period (to po-
tentially remove some of the market
choppiness) make it more suitable for
intraday trading—intraday on other
instruments like futures?
3. Might applying smoothing with a short
period remove some of the choppiness
(that is, making it less leading)?
4. Assuming the answer is that it is not
suitable for intraday trading, might it
be useful to have the MFO on a daily
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chart for trend determination and trade
intraday on a lower timescale chart?
5. Have you used multiple instances with
different periods superimposed on
each other so that they cross? Might
this be a valid signal?
In addition, I’d like to ask if he has used
multiple instances with different periods
superimposed on each other so that they
cross. Might this be a valid signal?
Frank Gemma
Author Vitali Apirine replies:
Thank you for your interest. Here are my
answers to each of your questions.
1. The MFO can be used for indexes,
stocks, or ETFs (commodity, currency,
and so on).
2. The MFO doesn’t work for futures
contracts. The reason has to do with
volume and open interest numbers.
Normally, only the total volume and
open interest figures are used in futures
charts. Although figures are available
Continued on page 47

December 2015 • Technical Analysis of Stocks & Commodities • 7

 Go With The Bias
Analyzing Price Action
In The S&P 500
What will the market do the next day? Short-term traders
look for some hints that suggest which way prices will move.
Here’s one approach you can use to help determine what the
next trading day’s bias will be.
by Adel Weng, PhD
It
is widely believed that price movements in the stock
market, over time, tend to be repetitive. The constant
daily actions of buying and selling by market par-
ticipants, whether by humans or algorithms, can be
manifested in price patterns. Short-term directional traders
who actively trade the emini index futures contracts are always
analyzing these end-of-day (EOD) price patterns for any clues
or hints, trying to determine whether the market will be up
or down the next day. Any insights on whether there is an
upward or downward bias in the close and/or in the direction
of its intraday price range can provide the trader with profit-
8 • December 2015 • Technical Analysis of Stocks & Commodities
able opportunities to go long or short along the market bias
and exit the trade on the same day.
Accumulation/distribution,
close to close
In March 2013, I introduced a simple, practical method I called
the cumulative EOD CCHL price action. “CC” stood for close-
to-close price and “HL” stood for high-to-low or high–low price
range. The method, which showed marginal results, was meant to
be a tool to forecast and help daytraders or active traders gain a
different perspective on the short-term bias of the major indexes
such as the Dow Jones Industrial Average (DJIA).
kheng Guan Toh/Shutterstock
In this article, I will present a new method that shows
much-improved results over the CCHL method. I call it the
ADCC, where “AD” stands for accumulation/distribution and
“CC” again stands for close-to-close price. Accumulation/
distribution is a well-known momentum indicator developed
by Marc Chaikin that measures supply & demand. I follow the
 TRADING TECHNIQUES

Note: only a portion of the rows are shown here. full spreadsheet is available at www.traders.com in the Article Code area.
FIGURE 1: LABELING WITH BINARY NUMBERS. When there is an up day from yesterday’s AD value, AD is labeled as 1. When there is a down day from yesterday’s
AD value, AD is labeled as -1. The same exercise is applied to the CC.

basic and cumulative calculations used in the earlier CCHL Computing the ADCC
methodology, but instead of using the HL range, I substitute The first step is to label each trading day with a binary number
the AD indicator without the volume component. In addition, or a combination of two numbers (see the table in Figure 1).
I perform the analysis on the S&P 500 index. The first number is designated for the AD and the second
This method is not a system or indicator per se but rather a number is designated for the CC. AD is defined here as [((C-
short-term-oriented approach that can shed light on tomorrow’s L)-(H-C))/(H-L)] without the volume component, where H is
market bias based on the market’s historical footprints. The the high price of the day, L is the low price of the day, and C is
method should also not be used solely as a standalone tool. It the close of the day. CC is defined again as the close to close.
is best utilized in conjunction with other short-term indicators When there is an up day from yesterday’s AD value, AD is
or tools as an add-on or a confirming one. labeled as 1. When there is a down day from yesterday’s AD
value, AD is labeled as -1
(see Figure 1, under the
columns direction and
sign). The same exercise
is applied to the CC.
The next step is to
add or accumulate these
numbers to obtain the so-
called cumulative binary
numbers that will repre-
sent each trading day. The
binary numbers increase
or decrease, reflecting
the short-term trend or
price action that is occur-
ring. Each time the trend
changes, the direction
or sign changes (see the
last column of Figure 1,
cumulative AD & CC).
To reiterate, the first
binary number and sign
characterize the cumula-
Note: only a portion of the rows are shown here. full spreadsheet is available at www.traders.com in the Article Code area.
Figure 2: predictive adcc numbers. By tabulating and arranging all possible four (or less) outcomes or quadrants in the
tive A/D direction. The
order of highest percentage of occurrence, the highest two outcomes or quadrants will serve as the bias or predictor for tomorrow’s second binary number
trading day. and sign characterize the
December 2015 • Technical Analysis of Stocks & Commodities • 9
 Note: only a portion of the rows are shown here. full spreadsheet is available at www.traders.com in the Article Code area.
FIGURE 3: PREDICTIVE CCHL NUMBERS. The boxes marked in gray represent the actual daily CC and HL. When two quadrants have equal probability or bias, the
boxes are marked in orange. These values are omitted from the analysis as are the rows that are blank.

cumulative close direction. This cumulative binary coding will two variables (AD and CC) with only two possibilities (up or
facilitate further data calculations. down), there will always be a total of four possible outcomes
Now that each trading day is uniquely coded into a cumula- (or less) for each trading day. The task of the next step is to
tive binary number, I look back at historical EOD data and determine what these four binary numbers that might occur
determine all possible outcomes of these binary numbers tomorrow are and how often they occurred over an extended
for tomorrow’s trading day and compute how often they oc- period of time.
curred, that is, I compute their distribution or probability of All calculations to determine the historical distributions
occurrence (see the table in Figure 2). Since there are only were done in a Microsoft Excel spreadsheet. Anyone familiar
with Excel can write the formulas and construct
the spreadsheet. All you have to do daily is obtain
1st 2nd 3rd 4th Total # of the EOD index data (O,H,L,C) from any online
Method Quadrant Quadrant Quadrant Quadrant Days financial website, plug them into the spreadsheet,
and perform tasks such as copying, pasting, sorting,
CCHL 99 74 44 32 250
and tabulating data.
ADCC 133 67 46 13 257
By tabulating and arranging all possible four (or
Data As % less) outcomes or quadrants in the order of highest
percentage of occurrence as shown in Figure 2, the
CCHL 39.60 29.60 17.60 12.80 100 highest two outcomes or quadrants will serve as the
ADCC 51.75 26.07 17.90 5.06 100 bias or predictor for tomorrow’s trading day. You
Comparative analysis on the S&P 500 index from 5/6/2014 to 5/29/2015 should trade in the direction of the two highest
Historical data dates back to 1/3/2000 possible percentages of occurrences in conjunc-
FIGURE 4: COMPARING THE TWO METHODS. This analysis implies that the daily accumula-
tion with other preferred short-term indicators. No
tion/distribution is more predictive than the daily price range (H-L) when combined with the positions should be taken when the bias is unclear
close-to-close price. or in doubt.
10 • December 2015 • Technical Analysis of Stocks & Commodities
 The daily accumulation/
distribution is more predictive
than the daily price range
when combined with the
close-to-close price.

Comparing CCHL and ADCC

Figure 2 shows how well the ADCC method worked on the
S&P 500 index (as an example) over a period of about one year
from May 16, 2014 to May 29, 2015. [Editor’s note: While only
portions of the spreadsheet are shown in Figures 1, 2, & 3 due
to space, the spreadsheet in its entirety is available as an Excel
file at www.traders.com in the Article Code area as well as
at traders.com/files/ADCC-Tables.xlsx.] For comparison, the
table in Figure 3 shows the results on the same index over the
same period of time but with the CCHL method.
The boxes marked in gray color represent the actual daily
AD and CC in Figure 2, and CC and HL in Figure 3. When two
quadrants have equal probability or bias, the boxes are marked
in orange color. These do not count and are omitted from the
analysis. Omitted also are some rows that are blank where
there were no precedent occurrences to look back historically.
Equal- and zero-probability days were excluded in the counting
because they offered no bias or prediction for whether they
will be correct or incorrect calls for the next day. not be utilized as a standalone tool but rather in conjunction
The table in Figure 4 shows the final comparison between with other short-term indicators.
the two methods on the S&P 500 index. The first two rows
show the number of correct calls in each of the quadrants from Adel Weng holds an MS and PhD in macromolecular sci-
May 6, 2014 to May 29, 2015. The lower two rows in the table ence (plastics) from Case Western Reserve University, Ohio.
show the data in percentage terms. Historical data on the index He has invested in stocks and mutual funds since 1995 and
dates back to January 3, 2000. It can be seen from Figure 4 has actively traded the emini Dow and S&P 500 futures for
that the ADCC method shows better results in the two highest three years. He may be reached via email at aweng718@
quadrants compared to the CCHL method. More than a 10% gmail.com.
improvement can be seen in the first quadrant alone and about
7–8% when the first and second quadrants are combined. It The spreadsheet discussed in this article is available at the Subscriber
can also be seen that the ADCC method predicted far less Area at our website, www.Traders.com, in the Article Code area,
occurrences in the fourth quadrant. This analysis implies that as well as at http://traders.com/files/ADCC-Tables.xlsx.
the daily accumulation/distribution is more predictive than the
daily price range (H-L) when combined with the close-to-close Further reading
price. Short-term traders who trade other indexes can further Achelis, Steven [2013]. Technical Analysis From A To Z, 2d.
expand on this concept with their own ideas to fit their own ed, McGraw-Hill.
methodology and needs. Weng, Adel [2013]. “Cumulative CCHL Analysis,” Active
Trader, Volume 14: March.
Where’s the bias? ‡Excel (Microsoft Corp.)
In this article, I have presented an improved, simple, and prac- ‡See Editorial Resource Index
tical method for short-term active traders or daytraders. The
method is based on the historical price actions of the end-of-
day cumulative accumulation/distribution and closing prices
of the S&P 500 index as an example. The method provides a
slight edge and is much improved over the CCHL method for
suggesting an upward or downward bias in the direction of the
close. It is not considered a system or an indicator and should
December 2015 • Technical Analysis of Stocks & Commodities • 11
12 • December 2015 • Technical Analysis of Stocks & Commodities
 TRADING SYSTEMS

Woe Canada!

Trading The Loonie

Here’s a trading system that exploits the strong and is tens of billions of dollars ahead of the next
correlation between the Canadian dollar and largest category, automobiles. Since the start of the
crude oil. millennium, oil exports increased substantially due
to the massive expansion of the oil sands in Alberta,

T
he Canadian dollar (affectionately referred to
as “the loonie” by traders because of the ap-
pearance of a loon, a bird common in Canada,
on the back of the Canadian one-dollar coin), like the
Australian dollar, the New Zealand dollar, the South
African rand, and the Norwegian krone, is regarded
as a commodity currency because of the sizable role
of commodity production in the Canadian economy.
In the case of Canada, the price of oil seems to be
especially significant in currency moves.
Loonie and crude
When you think of major crude oil exporters to the
US, Saudi Arabia and other nations in the Middle
East come to mind. But the bulk of the imported oil
consumed in the US comes from Canada, which is
an advantage for Canadian oil producers in that ship-
ping costs are low. The following list represents the
four highest dollar–value exports in Canadian global
shipments during 2014. Also shown is the percentage
share that each export category represents in terms of
overall exports from Canada.
CAD/USD
■■ Oil: US$128.9 billion (27.2%
of total exports) CAD/USD
and today, Canada’s oil reserves are third only to
Venezuela and Saudi Arabia.
Movements in the price of crude oil, therefore, will
have a significant impact on the supply of US dollars
into the Canadian economy. High oil prices will in-
crease the amount of US dollars flowing into Canada,
resulting in an increase in the value of the Canadian
dollar. Conversely, low oil prices will result in a fall
in the value of the Canadian dollar.
The price of crude oil will also affect the direction
of interest rates because a rise in crude oil prices will
increase economic growth, and thus is a reason for the
Bank of Canada to raise interest rates, which will of
course impact the exchange rate of the currency.
A 10-year correlation analysis between the CAD/
USD and oil prices (see the table in Figure 1) shows
that there is a strong 0.81 positive relationship, with
a value of 1 indicating a perfectly positive relation-
ship. (Note that I am expressing the Canadian dollar
and Norwegian krone in terms of US dollars here,
which is the inverse of what is traded in the forex
CL XAU GSG NOK/USD
1.00 0.81 0.76 0.43 0.83

■■ Vehicles: US$59.8 billion CL 0.81 1.00 0.44 0.57 0.75

(12.6%) XAU 0.76 0.44 1.00 0.41 0.71
■■ Machines, engines, pumps: GSG 0.43 0.57 0.41 1.00 0.67
US$32.6 billion (6.9%) NOK/USD 0.83 0.75 0.71 0.67 1.00
■■ Gems, precious metals, FIGURE 1: 10-YEAR CORRELATIONS. Here you see the Pearson’s 10-year correlation between the Canadian

coins: US$21.5 billion (4.5%)

dollar (CAD/USD) and WTI crude oil futures (continuous contract), the Philadelphia Gold & Silver Sector Index
(XAU), the iShares S&P GSCI Commodity Indexed Trust ETF (GSG), and the Norwegian krone (NOK/USD).
The correlations were calculated using data from January 1, 2005 through September 8, 2015 as provided by
ROY WIEMANN

As you can see, crude oil is by Reuters Datalink. Data for the GSG ETF was only available since July 2006. Note that I am expressing the
Canadian dollar and Norwegian krone in terms of US dollars here—which is the inverse of what is traded in the
far Canada’s most exported product forex market—since it’s easier to visualize positive correlation this way.

by Markos Katsanos
December 2015 • Technical Analysis of Stocks & Commodities • 13
market, since it’s easier to
visualize positive correla- 150
B CAD/USD 1.1
140
tion this way.) Notice the 130
weak correlation with com- 120
E 1.0
110
modities (represented by the 100
S&P GSCI index, or GSG). 90
The strong correlation with 80 0.9
the Norwegian krone is no 70 D
surprise, as both countries 60
are heavily dependent on oil Crude oil futures 0.8
exports. Production from the 50
Alberta oil sands is still in
A
40 F
its early stages, so you can
0.7
expect the strong correlation
with oil to remain stable or 30 C
even increase in the future,
provided that oil prices re-

MetaStock
0.6
cover from their lows. 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
In Figure 2 you can see
how closely the Canadian FIGURE 2: CANADIAN DOLLAR VS. CRUDE OIL PRICES. On this weekly chart of the Canadian dollar (CAD/USD) in black and
dollar tracks crude oil prices. WTI crude oil futures superimposed in red, you can see how the two are closely correlated. The right-hand scale depicts CAD prices
and the left-hand scale depicts crude oil prices. Red vertical lines are drawn at crude oil tops and blue vertical lines at bottoms.
The correlation, however,
breaks down for very high or
very low prices of oil. From 2007 to 2008 during oil’s spectacular the regression is 0.65, which implies that 65% of the variation
rally from $50 in the beginning of 2007 to $145 in July 2008 in the US–Canadian exchange rate can be explained by oil price
(see the red vertical line B on the chart), the Canadian dollar changes. In addition, the slope of the regression line is 0.003,
made a top almost eight months earlier, in November of 2007, which means that for every US dollar increase of crude oil, the
refusing to follow oil any higher. Canadian dollar should appreciate by about 0.3 cents.
At the end of 2008 (see blue line C) during the financial But how can you profit from the above? Now that you un-
crisis, oil fell as low as $33 while the Canadian dollar made a derstand the strong link between the Canadian dollar and oil
bottom on October 24, 2008, almost two months in advance of prices, can you use this to forecast the Canadian dollar exchange
the bottom in oil, forming a triple-bottom consolidation pat- rate? Probably not, because you still have to predict the price
tern and refusing to decline any lower. At other instances, the of oil. You can, however, take advantage of temporary market
dollar’s tops and bottoms were
slightly lagging (see lines A
and E), leading (see line D), or
coincident (see line F). This is 160
more obvious in the scatterplot 150
in Figure 3. The relationship 140
R2 = 0.6488
is approximately linear, as the 130
points fall near the regression 120
line most of the time. Significant 110
Crude oil

deviations from the regression 100

line (in black) are evident for 90
high oil prices (>$115) at the top 80
right of the chart, very low oil 70
prices (<$35) at the bottom left 60
of the chart, and for high CAD/ 50
40
USD prices (>$1.05) at the right-
30
hand side of the chart.
20
There’s some additional use-
$0.73 $0.78 $0.83 $0.88 $0.93 $0.98 $1.03 $1.08
ful information from the regres-
sion analysis and the scatterplot CAD/USD
in Figure 3 that you may find
FIGURE 3: Scatterplot of the CAD/USD and Crude oil for the last 10-year period THROUGH September
of interest. The coefficient of 2015. The relationship is approximately linear, as the points fall generally along the regression line in the middle. The cor-
determination or r-squared of relation breaks down for high or very low values (>$115 or <$35) of oil.
14 • December 2015 • Technical Analysis of Stocks & Commodities
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inefficiencies to calculate divergences between the actual and
predicted exchange rate and hope that it will eventually revert
to normal. You can also apply technical analysis indicators on
both the dollar and oil and wait for one indicator to confirm
the other before executing a trade.
Trading the loonie
The Canadian dollar is traded in the forex
markets and is expressed in US dollars
in terms of Canadian dollars (USD/
CAD). You can also trade Canadian
dollar futures on the CME GLOBEX
system under the symbol 6C. The lowest
increment (pip) is 0.0001, the contract
size is $100,000, the overnight margin
is $2,608, and the intraday margin is
$2,086. A mini Canadian dollar futures
contract is also available under the sym-
bol MCD and a contract size of $10,000.
The Currency Shares Canadian Dollar
Trust (NYSE:FXC), which tracks the
loonie’s daily performance, can also be
used by investors who do not have an
account with a forex or futures broker.
For the test I ran for this article, I used Canadian dollar fu-
tures continuous data provided by Reuters. The default trade
size was one contract per trade and the trade duration was 20
years from September 1995 to September 2015. Signals were
executed the next day at the open. The commission charged by
discount brokers of $2.40 was deducted from each trade and no
interest was credited to the account when out of the market, as
this was assumed to cancel out additional slippage costs. The
system did not reinvest profits. The total return would obviously
be far larger if the returns were compounded.
To calculate the divergence between the loonie and oil I used
the Bollinger Band divergence indicator as discussed in my
book Intermarket Trading Strategies. Here’s how you can use
this indicator to calculate the divergence between a security
and a related market.
First, the relative position of both securities in the Bollinger
Bands is calculated and the divergence is then derived by
subtracting the relative position of the base security from the
intermarket security. Values less than zero indicate negative
divergence and above zero indicate positive divergence. Buy
signals are generated when the indicator reaches a peak above
a certain level (usually 10 to 30%) and subsequently declines.
Similarly, sell signals are triggered when the indicator reaches a
bottom below a certain level (usually -10 to -30%) and rises.
Here’s how the final system can be summarized.
Buy condition:
If the maximum BB divergence rose above 20 and then reversed
direction, a buy signal will be generated. I used the default Bol-
linger Band parameter (20 days and two standard deviations)
with no optimization. To filter out trades when oil and the dollar
were in a downtrend, I added two additional conditions: the
16 • December 2015 • Technical Analysis of Stocks & Commodities
direction of oil’s 40-day moving average should be up and the
dollar should have been trending up during the last two days.
An additional filter eliminated trades during negative correla-
tion between the dollar and oil.
Sell (close long) conditions:
In addition to the sell short signals described here (which reversed
the trade), I decided to add the following three conditions:
1. Overbought. A combination of the stochastic and mov-
ing average convergence/divergence (MACD) indicators
were used to close the trade when the MACD crossed
under its signal line but only on extremely overbought
conditions indicated by the stochastic indicator.
2. Divergence. The second sell signal was generated on
negative divergence (below -20) on falling oil prices
(below -3% in the last three days).
3. Stop-loss. The stop-loss was introduced to take care
of cases when the dollar decoupled from oil and the
divergence condition failed to close the trade. In this
case, when the correlation between the dollar and oil
turned negative (below -0.4), a channel stop-loss condi-
tion closed the trade if the dollar fell below the lowest
low of the last 15 days.
Sell short condition:
This was the reverse of the buy condition described earlier.
Short signals were triggered if the divergence fell below -20
while oil was in a downtrend.
Buy to cover conditions:
Again, these were the opposite of the sell conditions described
earlier except for the first condition, which was triggered only
when the oversold condition indicated by the stochastic and
MACD was confirmed by a short-term bottom in oil prices as
well. This eliminated some premature exits and improved the
results. You can find the MetaStock code for this trading system
in the sidebar “MetaStock Code.”
Evaluation of results
The backtest results are summarized
in Figure 4. In the accompanying
chart in Figure 5 you can see the most
recent trades. During the course of
the 20-year simulation, the system
produced an annualized 129% return,
producing 123 trades that were roughly
70% accurate. The profit factor, which
is defined as gross profits divided by
gross losses, was 4.7. A profit factor
above 3 is considered excellent.
The average win was $1,512 over
86 trades and the average loss was
$754 over 37 trades. There were 10
 consecutive winners and five consecutive losers that produced A problem with divergence indicators is they always pro-
only small losses during a string of whipsaw trades in 1997. duce signals, even in declining markets. In other words, in a
During that time, oil prices were relatively flat, and thus the downtrend, if the intermarket security declines less than the
variation in the Canadian dollar was driven by other factors. base security, there is the danger that a divergence signal will
Somewhat worrisome, however, were the drawdowns. The be generated, but the trade will end up losing money. To take
maximum drawdown occurred in November 2011. In this case, this into account I introduced an additional filter to eliminate
the stop-loss failed to close the trade as the dollar decoupled long trades when the intermarket security (oil) was below its
from oil only briefly, but the correlation never turned nega- 40-day moving average and to short trades when it was above
tive. Removing the correlation requirement from the third exit the moving average. This additional condition improved profit-
condition reduced the maximum drawdown by about $1,000, ability and drawdown considerably, but the number of trades
but at the same time, the profitability deteriorated dramatically fell rather dramatically. Regardless, most of the discarded
(the winning trades fell from 70% to 54% and the profit factor trades were unprofitable or produced large drawdowns before
to 2.25). becoming profitable.
Nevertheless, the timing of the exits was not the best or most The second filter dealt with trades during periods of nega-
efficient, and some signals were late to materialize when needed, tive correlation between the dollar and oil. But did it improve
as some winning trades suffered large adverse price movements results? My first choice of correlation parameters (30-day
before becoming profitable. This is because intermarket- correlation < 0) eliminated a lot of trades, reducing profits
generated signals can fail in cases of temporary decoupling of without improving performance. By optimizing the correlation
the base security from its related intermarket. More stringent parameters, however, this filter managed to improve profitability
exit rules, however, failed to improve on profitability, as they for negative correlations below -0.4. The optimized parameters
tended to close out trades far short of their maximum profit (20-day correlation < -0.4) improved the overall profitability,
potential. Obviously, your exit conditions will depend on your the percentage of winning trades, and drawdowns.
risk tolerance. Minimizing drawdowns can result in early trade Although some trades were a little later than the ideal un-
exits and less profits. filtered trades, you could avoid most of the trades that would
But what about the efficiency of the entry signals? Did the have been executed during choppy markets. Another interesting
filters improve results? Entry conditions relied on only inter- statistic is the distribution of profits throughout the duration of
market divergence, the test. The bulk of the profits were realized during the most
with the addition of recent period from 2002 to 2015. This is no surprise, since in
Test Results: CAD Futures a couple of filters, to the preceding period and especially in the 1990s, oil prices
Trading Amount 1 contract generate signals. were not the primary drivers of the exchange rate, as the price
Req. account size $3,943
Net Profit $102,150
Compounded Annual Return 129.5%
Total Number of Trades 123
Percent Profitable 69.9%
Average Profit $1,512
Average Loss $-754
Avg. Win/Avg. Loss 2.01
Profit Factor 4.66
Highest Loss $-2,425
Highest Profit $13,885
Max Intraday drawdown $-4,115
Avg. Trade Length (Bars) 26
MetaStock

From 9/14/95
To 9/14/15
Figure 4: Profit/loss report for the 20-year
period from September 14, 1995 TO september
14, 2015. During the course of the 20-year simulation, the
system produced an annualized 129% return, producing
123 trades which were roughly 70% accurate. The profit
factor was 4.7, which is considered excellent.
Figure 5: CHART OF CANADIAN DOLLAR FUTURES, May 2013–September 2015. Test signals generated by
the intermarket Bollinger Bands (BB) divergence method are superimposed on the chart. The 20-day BB divergence
is plotted on the top and crude oil futures in the middle window. Bollinger Bands (in green) are included in both charts.
Buy signals were generated when the divergence crossed over 20 and turned down; short signals were generated
when the 20-day BB divergence crossed below -20 and turned up. Note the position of the Canadian dollar and oil in
the Bollinger Bands at each signal.

December 2015 • Technical Analysis of Stocks & Commodities • 17

of oil was relatively stable and crude oil extraction from the
oil sands was still in its infancy. The system produced the
most profits during periods of high volatility. In fact, the most
profitable years were 2007, 2008, and 2014, which were also
the most volatile years in the dollar’s history. This is because
of larger movements between the high and low range captured
by trades.
In conclusion
Given that this simple intermarket divergence system performed
consistently well for such a long period of time, I’m convinced
that the relationship between the Canadian dollar and oil can
provide the basis for a successful trading system.
A problem with intermarket divergence systems is that they do
not produce a lot of trades. That is because these systems take
METASTOCK CODE
n Bollinger Band Divergence Indicator
D1:=Input("BB DAYS " ,1 ,200 ,20 );
SEC2:=Security("ONLINE:CLc1",C); {Users of locally stored Data
should substitute this line with: SEC2:=Security("C:\Metastock
Data\@:CLc1",C);}
sec1BOL:= 1+((C- Mov(C,D1,S)+2*Stdev(C,D1))/
(4*Stdev(C,D1)+.0001));
sec2BOL:=1+((SEC2- Mov(SEC2,D1,S)+2*Stdev(SEC2,D1))/
(4*Stdev(SEC2,D1)+.0001));
DIVERG:=(sec2BOL-sec1BOL)/sec1bol*100;DIVERG
n CAD Futures System
BUY
SEC2:=Security("ONLINE:CLc1",C);
D1:=20;
sec1BOL:= 1+((C- Mov(C,D1,S)+2*Stdev(C,D1))/
(4*Stdev(C,D1)+.0001));
sec2BOL:=1+((SEC2- Mov(SEC2,D1,S)+2*Stdev(SEC2,D1))/
(4*Stdev(SEC2,D1)+.0001));
DIV1:=(sec2BOL-sec1BOL)/sec1bol*100;
HHV(DIV1,3)>20 AND DIV1<REF(DIV1,-1) AND ROC(C,2,%)>0
AND MOV(SEC2,40,S)> REF(MOV(SEC2,40,S),-2) and
CORREL(C,SEC2,20,0)>-.4
SELL
SEC2:=Security("ONLINE:CLc1",C);
D1:=20;
sec1BOL:= 1+((C- Mov(C,D1,S)+2*Stdev(C,D1))/
(4*Stdev(C,D1)+.0001));
sec2BOL:=1+((SEC2- Mov(SEC2,D1,S)+2*Stdev(SEC2,D1))/
(4*Stdev(SEC2,D1)+.0001));
DIV1:=(sec2BOL-sec1BOL)/sec1bol*100;
18 • December 2015 • Technical Analysis of Stocks & Commodities
Movements in the price of crude
oil have a significant impact on
the supply of US dollars into the
Canadian economy.
advantage of temporary market inefficiencies to generate signals,
and these inefficiencies do not occur often. However, the addition
of classic technical analysis conditions developed specifically to
work together can add value and increase trade turnover.
Continued on page 46
(CROSS(MOV(MACD(),9,E),MACD()) AND STOCH(30,3)>85) OR
(LLV(DIV1,3)<-20 AND ROC(SEC2,3,%)<-3 ) OR
(C<REF(LLV(L,15),-1) and CORREL(C,SEC2,60,0)<-.4)
SELL SHORT
SEC2:=Security("ONLINE:CLc1",C); D1:=20;
sec1BOL:= 1+((C- Mov(C,D1,S)+2*Stdev(C,D1))/
(4*Stdev(C,D1)+.0001));
sec2BOL:=1+((SEC2- Mov(SEC2,D1,S)+2*Stdev(SEC2,D1))/
(4*Stdev(SEC2,D1)+.0001));
DIV1:=(sec2BOL-sec1BOL)/sec1bol*100;
LLV(DIV1,3)<-20 AND DIV1>REF(DIV1,-1) AND ROC(C,2,%)<0
AND MOV(SEC2,40,S)< REF(MOV(SEC2,40,S),-2) and
CORREL(C,SEC2,20,0)>-.4
COVER
SEC2:=Security("ONLINE:CLc1",C); D1:=20;
sec1BOL:= 1+((C- Mov(C,D1,S)+2*Stdev(C,D1))/
(4*Stdev(C,D1)+.0001));
sec2BOL:=1+((SEC2- Mov(SEC2,D1,S)+2*Stdev(SEC2,D1))/
(4*Stdev(SEC2,D1)+.0001));
DIV1:=(sec2BOL-sec1BOL)/sec1bol*100;
(CROSS(MACD(),MOV(MACD(),9,E)) AND STOCH(30,3)<25 AND
SEC2>=(1+4/100)*LLV(SEC2,4) ) OR
(HHV(DIV1,3)>20 AND ROC(SEC2,3,%)>4.5 ) OR
(C>REF(HHV(H,15),-1) and CORREL(C,SEC2,60,0)<-.4 )
NOTE: Users of locally stored data from Reuters Datalink should
substitute the first line of the code of all the above orders with:
SEC2:=Security("C:\Metastock Data\@:CLc1",C);
—M. Katsanos
 FUTURES FOR YOU
INSIDE THE FUTURES WORLD
Want to find out how the futures markets really work? Carley Garner is the senior
strategist for DeCarley Trading, a division of Zaner Group, where she also
works as a broker. She authors widely distributed e-newsletters; for your free
subscription, visit www.DeCarleyTrading.com. Her books—Currency Trading
In The Forex And Futures Markets; A Trader’s First Book On Commodities;
and Commodity Options—were published by FT Press. To submit a question,
email her at info@carleygarnertrading.com or via www.DeCarleyTrading.com.
Carley Garner
Selected questions will appear in a future issue of S&C.

GlencorE collapse: BUYING
OPPORTUNITY IN COMMODITIES?
Is the collapse in Glencore a signal
that there is more pain to come in the
commodity sector?
No, Glencore has captured the at-
tention of the media because it’s the
largest commodity trading company
on the planet, but that doesn’t mean
it’s a bellwether for the underlying
commodity markets.
It is estimated that Glencore has a
50% share of the global copper market,
slightly less than 10% of the world’s
grains, and in excess of 50% of all zinc
on the planet. Further, it was ranked
10th in the 2014 Fortune Global 500
list of the world’s largest companies.
Even more impressive, it is the world’s
third-largest family business.
Anyone who has tuned into a busi-
ness news station or picked up the
financial section of a newspaper has
likely read about the incredible fall
from grace in Glencore stock. To put the
carnage into perspective, the Glencore
stock peaked in July 2014 at $375.50
and found a low just over a year later
at $68.62. Many are pointing to this
as a sign that commodities will stay
“lower for longer” this time, but I beg
to differ.
Despite its sheer size, there are plenty
of reasons for the long-term commod-
ity bulls to take the Glencore collapse
with a grain of salt rather than a sign of
despair throughout the entire complex.
For instance, since its inception in 1974,
Glencore has been riddled with accu-
sations of corruption, and even fraud
allegations. The original founder of
the firm, billionaire commodity trader
Marc Rich, had a plethora of legal and
ethics allegations, including tax eva-
sion and illegal business dealings with
Iran during the Iran hostage crisis.
Commodity industry insiders have
made assertions that in the early
1990s, March Rich (via Marc Rich &
Company) attempted to corner the zinc
market. Allegedly, failure to effectively
do so eventually forced him into selling
his majority stake to Glencore. Rich
received a controversial presidential
Instead of looking at
the carnage as a sign
of more to come, view
it as an attractive
opportunity to play the
upside in commodities.
pardon from his offenses by President
Bill Clinton on his last day of office in
early 2001. Even at the hands of oth-
ers, Glencore has been plagued with
contentions of questionable business
practices.
December 2015
Glencore has a reputation for an
opportunistic and contrarian approach
to commodity investments. In other
words, they tend to accumulate posi-
tions that are contrarian to the trend.
Generally speaking, their deep pockets,
experience, and fortitude tend to offer
favorable odds of success utilizing such
a strategy. Nevertheless, even for a firm
like Glencore, picking a bottom in the
2015 commodity market wash was a
seemingly impossible task.
Exacerbating the problem, they were
also carrying a large amount of debt
into 2015. Thus, the combination of
highly leveraged bullish speculations
in a tumbling commodity market forced
them into a fire-sale of holdings and as-
sets. In my opinion, the Glencore com-
modity liquidation played a substantial
part in the seemingly never-ending
decline in commodity prices during
2015, particularly in copper. However,
rather than looking at the carnage as
a sign of more to come, I believe the
forced liquidation of the largest com-
modity trading firm in the world might
have provided a historically attractive
opportunity for those willing to play
the upside in commodities. In other
words, it could eventually prove to be
a simple case of “one man’s pain is
another man’s pleasure.” Partly due to
the mass liquidation of Glencore assets,
the price of copper fell to levels not
seen since the financial crisis. In our
view, it is difficult to justify this pricing
structure simply because Chinese GDP
has “slowed down” to 7%.
• Technical Analysis of Stocks & Commodities • 19
 is to avoid false breakouts and instead
enter trades that keep going in your favor,
your ability to spot these useful technical
momentum patterns is a valuable strategy.
In this article, I’ll show you top first-hour
breakout patterns to be on the lookout for
when entering your trades.

Tall, opening range

five-minute candles
The first strong pattern to look for is to
see how tall the first five-minute candle
is in the stock or exchange traded fund
(ETF) you’re considering for a trade entry.
Ideally, this opening-range candle, formed
from 9:30 am to 9:35 am Eastern time, has
a height of at least 30 cents or better for
stocks in the $20–70/share range.
You can see this pattern illustrated
in the five-minute chart of Sina.com
(SINA) in Figure 1. The first five-minute
candle was well over 30 cents tall (from
$37.85–$38.70), leading to a subsequent
breakout that went up over an additional
point to a day’s high of $40.45. The first
tall candle you see is a signal that trad-
ers were enthusiastically buying during
the open, while additional buyers then
lifted the price higher in the hours that
followed.
The step-by-step trading strategy is to
visually scan for five-minute charts that
are trading above the prior day’s high, and
Prepare For The Open that have an opening five-minute candle

Trading First-Hour
of greater than 30 cents. If these condi-
tions are met, then you enter just above
the high of this five-minute “opening

Breakouts
range” breakout candle. Stops are placed
under the initial five-minute candle low.
For trailing stops to exit your trade, use
bearish candle reversal signals such as
Marco M S Wordley/Landscape: Artur Synenko/Shutterstock/collage: Nikki Morr

It is well known that as soon as the markets open, there’s a significant amount of shooting stars and/or bearish engulfing
trading activity, much of which is strong breakout patterns. How do you identify patterns. It’s often smart to scale out of
which of these patterns are strong enough to continue and generate successful half the trade on loss of support of the first
trades? Find out here. reversal (such as at $39.70 below the shoot-
ing stars in Figure 1), and the remaining
by Ken Calhoun shares under the second reversal ($39.90

M
below the bearish engulfing pattern).
any of the strongest breakout trade entries can be found using specific
chart patterns that you can see during the first hour of each trading day. Don’t miss strong
When you’re looking for successful breakout trades, it helps to visually breakouts
scan for these technical trade setups during the market open for potential A common error that retail traders make
swing and intraday trades. is to avoid entering after strong initial
One reason these patterns work so well is because institutional traders enter high- moves (or opening gaps, as discussed
volume “market on open” client orders during the first few minutes of each trading in one of my earlier articles, “Gap
session, which leads to rapid breakouts that you can capitalize on. Since your goal Continuation Breakouts”). This is out
20 • December 2015 • Technical Analysis of Stocks & Commodities
 TRADING STRATEGIES

of misplaced concern
that a chart that has just
shown strong buying is
exhausted and unlikely
to continue with upward
price action for long
breakouts.
In fact, a core profes-
sional swing and intraday
trading strategy you can
use is to enter new trades
just above prior resistance
levels on the strongest
breakout charts, because
(with rare exception) they
are most likely to continue,
as you can see in Figure 1.
An inexperienced trader
following this chart live
would have likely mistak-

eSignal
enly thought the high of
the first candle, at $38.70, Figure 1: Opening Range Breakout Candle. Looking for a tall initial 5-minute buying candle reveals strong early price
to be overbought and action.
missed out on the larger,
nearly two-point breakout move that followed. seen in the five-minute chart of Apache Corp. (APA) in Figure
Successful breakout trading is focused on entering price- 2. You can also see that the volume bars are increasing in
action moves above prior high resistance areas in the unseen height for this set of three candles, indicating increasing buying
“upper right” area of where a strong chart will move. Many momentum. Although the candle following these three is a
technical traders struggle with this because “buying high, selling bearish shooting star, price subsequently went up from $41.90
higher” isn’t as appealing as buying a dip or a potential reversal. to $43.10, which is a full one-point intraday breakout.
If you go back and review your personal profits & losses (P&Ls), This is an effective second pattern you can visually scan
your wins versus stops, you may well find, however, that you for, in case you miss the initial 30-cent opening candle pattern
have a higher percentage
of losing pivot-attempt
trades (trying to outguess
the market) compared to
breakouts. This “buy it
on sale” department store
mentality leads traders
to mistakenly buy weak
stocks in a downtrend,
which usually continue
downward. You may find
that a buy high, sell higher
professional breakout en-
try approach helps you
make better trades.

Opening
breakout after
three tall
candles
Another strong first-hour
breakout pattern is to en-
ter a long trade following Figure 2: Three Tall Candles. Here you see a strong early breakout showing a three-candle sequence for a breakout
three green candles, as entry.

December 2015 • Technical Analysis of Stocks & Commodities • 21

 in the preferred $20–70/
share range.

Multiday
opening
breakouts
It often helps if you put
price action in perspective
by looking at three-day
charts, especially when
swing trading. This will
be useful so that you
can see average daily
volume, trading ranges,
and breakout patterns that
are unique to the stock
that you are considering
trading.
In the one-minute chart
of Alibaba Group Holding
Ltd. (BABA) in Figure 3,
Figure 3: Multiday Breakout Continuation. Strong breakout charts will often continue in-trend for several days in a row you can see that buying
such as in this intraday chart of Alibaba Group Holding Ltd. (BABA). above each prior day’s
high would result in win-
discussed earlier. In this type of strong breakout chart, you ning trades, on September 15, 2015 and September 16, 2015.
see not just one but three sequential tall momentum candles, You will also see that price action on September 15, 2015
each of which is at least 30 cents in height. You wouldn’t use formed a classic bullish ascending triangle, leading to a large
30-cent candles on expensive stock charts like those of Apple breakout on the following day.
(AAPL) or Netflix (NFLX); you would need to use values larger If you combine the strongest confirmation signals such as
than 30 cents due to the higher price and larger, potentially multiday highs, tall opening candles, and large volume you’ll
riskier wide trading ranges. It is best if you focus on using be well on your way to developing an effective personal break-
this strategy with stocks and exchange traded funds (ETFs) out entry strategy. In working with hundreds of traders in live
seminar appearances, I
have found the biggest
breakout error comes
from traders overtrading
choppy charts.
It’s important that you
narrow your watchlist to
exceptionally strong out-
lier charts and patiently
wait and selectively trade
only the strongest few
charts available. Much
like hiring employees,
inexperienced managers
fail to see “red flags”
and make hiring errors;
similarly, as a trader
you should seek to profit
from the rare high-per-
formance breakout charts
using these specific crite-
ria to focus your efforts.
Figure 4: Breakout Following Early Selling. On this chart of Range Resources Corp. (RRC), price recovers above For example, in Figure 3,
an early bearish shooting star to continue upwards. BABA is in a multiday
22 • December 2015 • Technical Analysis of Stocks & Commodities

Institutional traders enter high
volume “market on open” client
orders during the first few
minutes of each trading session,
which leads to rapid breakouts
that you can capitalize on.
uptrend with an average daily trading range of two to four
points with a clear, easy-to-follow price-action chart.
Bullish cup following
shooting star
You can see a useful “breakout re-
covery” opening pattern in the chart
of Range Resources Corp. (RRC) in
Figure 4 in which long price action
overcame the initial bearish shooting
star. This opening cup breakout pat-
tern is helpful when you are looking
for breakouts that occur between
10:00 am and 11:00 am Eastern time,
after the initial wave of the 9:30–10
am breakouts.
Whenever initial bearish signals, such as shooting stars, are
overpowered by buying during the early part of the day, they
often provide exceptionally strong breakout entries. You’ll
also note that the early resistance level of $37.55 subsequently
became support in this chart, which continued up into the
day’s close. This change in price action from short to long
is also supported by having a tall 30-cent candle occurring
on the right side of the cup from 37.40 to 37.70 in Figure
4. These 30-cent candles can also help you filter out false
breakouts, because a tall green candle with this much strength
provides a visual clue as to upcoming buying pressure for a
new breakout entry.
Visual momentum entry patterns
In looking at all four chart examples, you’ll see they all have
sustained, strong breakout price momentum patterns in com-
mon. Much like being a detective, studying these patterns can
reveal valuable trading clues, if you know what to look for.
They are not uncertain, weak charts with unstable momentum;
instead, they all show you strong entry patterns you can look
for whenever you visually scan through charts for trading.
When you’re considering entering a new position during
the early part of the trading day, it’s smart to look for break-
out confirmations using one or more of these specific chart
patterns. If you don’t visually see one of these four primary
patterns in a chart you’re considering, it may be wise to avoid
trading until you do see one of these technical patterns start
to emerge.
One key to successfully trading breakouts is that there’s
Noisy indicators
delay your analysis
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deliver low lag,
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a big difference between simply buying a new high (which
often fails) and buying at a breakout high entry price that’s
strong enough to attract new buyers after you get into your
trade. The patterns I’ve discussed in this article are designed
to help you accomplish that goal. Using these experienced
traders’ opening breakout patterns can help you find some of
the strongest charts for day and swing trading.
Ken Calhoun is a producer of multiple trading courses, live
seminars, and video-based training systems for active traders.
He is a UCLA alumnus and is the founder of TradeMastery.
com, an online educational site for day and swing traders.
Further reading
Calhoun, Ken [2015]. “Managing Breakout Trades,” Techni-
cal Analysis of Stocks & Commodities, Volume 33:
October.
[2015]. “Gap Continuation Breakouts,” Technical
Analysis of Stocks & Commodities, Volume 33: Sep-
tember.
‡eSignal (Interactive Data)
December 2015 • Technical Analysis of Stocks & Commodities • 23
 Trend And Size Matter
Gap Trading
Do exhaustion gaps really fade? Here’s a study that creates
and tests an exhaustion gap prediction technique using two
measurable factors: stock trend and gap size.
by Kevin Luo
A
price gap is a price range in which no trading takes place.
An upside price gap occurs when today’s price range is
above yesterday’s high price. A downside price gap oc-
curs when today’s price range is below yesterday’s low
price. It is easy to spot price gaps on bar charts. According to
the statistics from this study, the typical US stock generates
18 price gaps on average, annually. The average gap sizes are
1.62% for upside gaps and 1.72% for downside gaps.
What do gaps imply?
From a technical analysis perspective, one of the scenarios
for a price gap is that the stock has gone too far and too fast
to sustain price momentum. As a result, it would reverse its
course of action and begin to move in the opposite direction
after the gap. Price gaps associated with this type of situation
are called exhaustion gaps. Exhaustion gaps, like runaway
gaps, imply rapid, extensive advances or declines which are
often wide. In other words, a wide price gap after an extensive
24 • December 2015 • Technical Analysis of Stocks & Commodities
price movement in the same direction is considered a potential
exhaustion gap.
Based on the descriptions, this study attempts to create
and test an exhaustion gap prediction technique consisting of
two measureable factors — stock trend and gap size. From a
trading strategy development point of view, the opportunity
presented by an exhaustion gap is to trade in the opposite
direction after the gap. This study also intends to test a price
gap trading strategy that trades predicted downside exhaustion
gaps. Predicted downside exhaustion gaps refer to the price
gaps that are selected using the gap prediction technique. In
this article, I’ll detail the technique and its application process.
I’ll also introduce the price gap trading strategy and show
you the backtesting results.
Downside exhaustion gaps
This study only analyzes downside exhaustion gaps and a
downside exhaustion gap trading strategy. Since I am look-
Lightspring/Shutterstock
ing for downside exhaustion gaps, the two factors in the
gap-prediction technique are stock downtrends and downside
gap size. In terms of definition, a downtrend is when prices
move downward for more than 20% and an uptrend is when
prices move upward for more than 20%. This definition is
practically identical to “appreciation or depreciation in value
 CHART PATTERNS

of more than 20%” which you find

in the Dow Theory. 44
43
A stock that is in a downtrend 42
41
Archer Daniels Midland Co.
qualifies for a downside exhaustion 40
39

Close price in dollars

gap. The chart of Archer Daniels 38
37
Midland Co. (ADM) in Figure 1 36
35
shows some uptrends and down- 34
33
trends. The trends are isolated 32
31
based on the definition of trends. As 30
29
Trend
confirmation
defined, a downtrend is recognized 28
27
when a stock declines at least 20% Trend reversal

Intrendstocks.com
26
25
in price. The area shaded in red on 24
01JAN2010 01JUL 2010 01JAN2011 01JUL 2011 01JAN2012 01JUL 2012 01JAN2013 01JUL 2013 01JAN2014
the chart identifies a downtrend that
was recognized at the level marked 20%+ Trend Uptrend Downtrend
trend confirmation (left horizon-
tal gray line). The stock declined FIGURE 1: UPTRENDS & DOWNTRENDS. The area shaded in red identifies a downtrend that was recognized at the level
marked as trend confirmation. The stock declined 20% from the prior uptrend high to the point marked by the gray line.
20% from the prior uptrend high The gray line marked trend reversal on the right indicates that the stock has advanced 20% from the downtrend low.
to the gray line. The gray line
marked trend reversal on the right
indicates that the stock advanced 20% from the downtrend Figure 2, the gray shaded area covers the price range that is
low. The downtrend ended at that point. During the time the divided by a horizontal red line. This red line represents the
stock was in the red shaded zone, it was considered to be in level of the gap-open (open price of the gap day). The por-
a downtrend. Downside price gaps that occur during such tion above the red line is called upper range and the portion
downtrends are considered to be potential exhaustion gaps below is called lower range. The entry and stop prices are
for further evaluation. calculated based on the typical lower range and the target
For the purposes of this article, a downside gap size is the price is computed based on the typical upper range of the
width of a downside gap or the vertical distance between stock. Here are the formulas (rules).
yesterday’s low price and today’s open price in percentage.
When a downside price gap occurs within a stock downtrend ■■ Entry = First available price between red line and
and its gap size is greater than the stock’s average gap size, stop (except open below stop)
it is considered to be a predicted downside exhaustion gap.
■■ Stop = Size of typical lower range below red line
The green shaded range in Figure 2 is considered a predicted
× 1.5
downside exhaustion gap since the gap occurs in a downtrend
(the vertical yellow bar is the trend measure) and the gap size ■■ Target = Size of average typical upper range above
is wider than its average gap size. red line

The trading strategy

Now that you know how to identify 7.3
a predicted downside exhaustion 7.2
7.1
gap, I’ll now move on to developing 7.0
6.9
a trading strategy for the predicted 6.8
6.7
downside exhaustion gap. I define a 6.6 Upper range
Price in dollars

6.5 Exit
trading strategy as a set of methods 6.4
(algorithms or techniques) that can
6.3
6.2
be independently and repeatedly
6.1
6.0
20% decline
used in trading operations. This 5.9
5.8 Lower range
price gap trading strategy was 5.7
5.6 Entry
designed to take long trades after 5.5
5.4
AuRico Gold Inc.
predicted downside exhaustion gaps 5.3
5.2
and complete the trades within 10 08/16/2012 09/01/2012 09/16/2012 10/01/2012
days (10-day trading period in Fig-
Predicted downside price gap 10–day trading period
ure 2) after the gaps. The strategy
consists of entry, target, and stop
FIGURE 2: PREDICTED DOWNSIDE EXHAUSTION GAP. The green shaded range is considered a predicted downside
price levels computed based on the exhaustion gap since the gap occurs in a downtrend and the gap size is wider than its average gap size. The entry
typical price range of 10-day trad- and stop prices are calculated based on the typical lower range and the target price is computed based on the typical
ing period of individual stocks. In upper range of the stock.

December 2015 • Technical Analysis of Stocks & Commodities • 25

 In the backtesting, the software
4 generated 36,872 trades for the
strategy on the 1,816 stocks.
3 Top-275: 302 % According to the summary
Cumulative P&L (100%)

Top-450: 252 %
statistics for AuRico Gold,
2 Top-900: 206 %
the strategy lost 30.48% on 33
trades over the 10-year period
NASDAQ: 148 % of time under study. Why did
1
the strategy fail to perform on
NYSE: 71 %
the other gaps of the stock? Ac-
0 cording to the statistics, it had
a typical upper range of 6.24%
-1 and lower range of 14.41%. The
01JAN2004 01JAN2006 01JAN2008 01JAN2010 01JAN2012 01JAN2014 01JAN2016 ratio between upper and lower
Max drawdown (%): 17.30 24.53 38.86 94.06 85.95 ranges is 1:2.31. When there is
Win trades (%): 59.20 58.68 57.70
P&L per trade (%): 1.32 1.14 0.98 a tendency for a stock to move
much lower than higher after the
FIGURE 3: BACKTESTING RESULTS. Stocks with higher upper/lower range ratios tend to perform better. The strategy gaps, it is difficult to profit from
appears to produce much smaller drawdown numbers than the indexes.
long trades. This stock did not
show any pattern that consis-
From the chart of AuRico Gold in Figure 2 you can see that tently produced exhaustion gaps similar to the one shown in
the stock price carried an average gap size of 2.22%, the Figure 2. Fortunately, the statistics indicate that AuRico Gold
typical upper range of 6.24%, and the typical lower range of belongs to a minority, so if the stock is removed from your
14.41%. Note that AuRico Gold was acquired by Alamos Gold portfolio, the performance of the strategy could improve.
in July 2015. In this example, the red line level was $6.07 so To prove the assumption, I had the software pick the top
the calculated stop level is $4.76 ($6.07–$6.07×14.41%×1.5). 275 (top-275), top 450 (top-450), and top 900 stocks (top-
The entry price would be the first available price between 900) from the range-ratio-sorted list of 1,816 stocks. These
$4.76 and $6.07 in the first five days of 10 day trading period. stocks had the higher upper/lower range ratios. They were
The target was computed as $6.45 ($6.07+$6.07×6.24%). As grouped as three separate stock portfolios. AuRico Gold
you can see on the chart, the entry took place on the first day had a low ratio so was not selected. If there is a positive
of the 10-day trading period at the open of $5.62. The trade relationship between backtesting returns and the upper/lower
completed when the exit occurred on the seventh day at the range ratio, the assumption that it is difficult to profit from
target of $6.45. long trades in stocks that move lower than higher after gaps
Next, I need to figure out if this strategy also works on is considered correct.
other predicted downside price gaps in this stock and with
other stocks. To determine this, it’s necessary to do a full- Test results
scale backtest. I collected 1,816 NYSE and NASDAQ listed You can see from Figure 3 that the av-
stocks in random order with a data range covering a 10-year erage annual returns from the strategy
period from September 1, 2004 to September 1, 2014. I used backtesting are 20.60%, 25.20%, and
a custom-designed software system — I’ll refer to it as the 30.20% for top-900, top-450, and top-
software — to implement tasks such as isolating stock trends, 275 respectively. The per-trade returns
filtering price gaps, analyzing upper and lower ranges, comput- are 0.98%, 1.14%, and 1.32%. The win-
ing trading price, generating trades for predicted downside ning trade rates are 57.70%, 58.68%,
price gaps of the stocks, and summarizing the backtesting and 59.20% for the respective stock
results. There are a few more trading rules to add. portfolios. Stocks in the top-275 carried the higher upper/
lower range ratios than the stocks in the other two portfolios.
◆◆ Entry is only allowed if there is no holding. The portfolio performance from the returns to drawdowns
has also topped the other portfolios most of time during the
◆◆ If no entry occurs in the first five days of 10-day trading
period under study. As expected, the top-450 outperformed
period, I withdraw the trade.
the top-900. This confirms the assumption that stocks with
◆◆ After the entry, if the stock stays between the target and higher upper/lower range ratios tend to perform better. Figure
stop to the end of 10-day trading period, the software 3 also includes cumulative profit/loss statistics for NASDAQ
sells the stock at the close price of the 10th day. (^IXIC) and NYSE (^NYA). In addition to the stronger returns
over time, the strategy appears to produce much smaller
◆◆ No exit is allowed on the entry day.
Continued on page 33
26 • December 2015 • Technical Analysis of Stocks & Commodities
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 INTERVIEW

Let Candles Light Your Way

Charting Your Way

With Steve Bigalow
Stephen W. Bigalow has more than 40 years of investment experience, including
eight years as a stockbroker with major Wall Street firms: Kidder, Peabody &
Company, Cowen And Company, and Oppenheimer & Company. This was fol-
lowed by 15 years of commodity trading, overlapped with 12 years of real estate
investing. He holds a business and economics degree from Cornell University,
and has lectured at Cornell and at many private educational investment func-
tions over the past 20 years.
Bigalow has advised professional traders, money managers, mutual funds,
and hedge funds, and is recognized by many in the trading community as the
“professional’s professional.” He is an affiliate of the Market Technicians As-
sociation (MTA, a not-for-profit association of professional technical analysts)
and a member of AAPTA, the American Association of Professional Technical
Analysts.
Stocks & Commodities Editor Jayanthi Gopalakrishnan spoke with Stephen
Bigalow on September 10, 2015 about the value of candlestick charts.

Steve, tell us about how you said, “You’re a stockbroker. Tell me

got interested in the financial
markets and especially in
candlestick charting.
My real interest started when I was
in college, but I was always interested
in investing. At a young age, my dad
bought me one share of Eazor Express,
which was a trucking company in the
northeast. The stock split two-for-one, so
I then had two shares of the company. I’d
watch the stock every single day in the
financial section of the newspaper.
I became a stockbroker in 1976 and did
that for eight years. That was when the
DJIA was trading between 750 to 1,000.
For eight years it didn’t go anywhere and
I thought this wasn’t good, so I got out
of the business.
One thing I discovered was that even
in the major brokerage firms, they didn’t
have any more inclination of what made
prices go up or down in the markets than
anybody else did.
When I got out of the business, I
started renovating houses in Atlanta,
GA. I bought them, renovated them, and
resold them. One day, somebody plopped
candlestick charts on my desk. They
28 • December 2015 • Technical Analysis of Stocks & Commodities
what you think of this.” Candlesticks
sounded so unsophisticated, they had
to badger me for three months to take
a look at it. Finally, out of courtesy, I
picked up the information and looked
at it. I said, “Well, this makes sense.”
The more I studied candlesticks, the
more I realized that candlestick charts
were a graphic depiction of investor
sentiment.
Through a few examples or situations
in the market, I realized that prices
do not move based on fundamentals.
Prices move based upon the perception
of fundamentals. Because candlestick
charts are the graphic depiction of hu-
man nature, they tell you when people
are willing to buy or sell. That’s how I
became interested in candlesticks.
When you looked at the charts and price
points in these candlestick charts, did
you find the patterns, or were you just
finding the movement in buying and
selling? Did you look at anything else
such as volume?
I do not look at volume because
through the years I discovered that I am
By using visual analysis of
candlestick charts, you can
more quickly identify what
the market conditions are.
not buying volume. I’m buying price.
When I first started looking at candle-
stick charts, it was still antiquated. It
was stuff that the Japanese had written
about years before. I would go back and
look at the candlestick charts and see if
there was any sort of candlestick signal
at an obvious bottom. I discovered that
probably about 90% of the time, there
was an identifiable candlestick signal,
or at the top, an identifiable candlestick
sell signal.
There were about 50 or 60 candlestick
signals. I tried to learn every single one of
them because, being greedy, I wanted to
make sure I knew every reversal signal.
As I started researching or just visually
looking at charts to see what was happen-
ing at the bottoms and tops, I discovered
that there are only about 12 signals—six
buy signals and six sell signals—that oc-
 Chart
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 curred most of the time. In some cases,
I tell people not to bother learning the
other signals. They just need to be able
to recognize them since they don’t occur
often enough. There’s no need to spend
the time and energy to study them.
Just by natural evolution, I found that
the six buy signals and six sell signals
were graphically easy to recognize. Also,
we have the advantage in that over the last
400 years, the Japanese rice traders told
us what the signals looked like and what
the investor sentiment was that created
those signals. With that combination,
you were able to gain insights similar
to those of an experienced investor—
you would be watching the same thing,
knowing what the psychology was when
a reversal occurred in the market or in
a trend.
That’s how I learned candlesticks. I
had looked at the bottom reversal of
a chart to see what type of signal was
there and then go back and say, “What
signal was this?”
Since then, have you come up with other
techniques for using candlesticks be-
sides those six buy and sell signals?
Yes, and not only do we have those
signals, but the Japanese rice traders also
showed us patterns that depict human
nature, in that prices move in patterns.
There are about six patterns that show
strong results and they’re based on the
execution of those patterns. For example,
there’s the fry pan bottom, which is a big
rounding bottom that you couldn’t trade
if you wanted to. But you know that if
price broke out toward the end of that
fry pan bottom, it was going to be a big
price move to the upside.
The same thing happens with a dump-
ling top. We saw this pattern in the Dow
Jones Industrial Average over the last six
months. There was a big, slow round-
ing top and then about three weeks ago
it started cratering or selling off very
hard. That is the expected result of that
dumpling top. We couldn’t trade at all
during the summer because the market
was so choppy, but we made huge profits
in that big downdraft, which was the end
of the result of that dumpling top.
The good thing about candlestick
charting is that they depict human nature,
30 • December 2015 • Technical Analysis of Stocks & Commodities
and human nature doesn’t change. So you
see the same patterns over and over. If
you apply the signals to the patterns, it
just gives you much more clarity as far
as what’s going on in investor sentiment
and whether a pattern is about ready to
break out or not.
We’ve also added things that the Japa-
nese rice traders didn’t have, such as the
moving averages. We can see what all the
major money managers around the world
are doing when prices hit a resistance
or support level at the 50-day moving
average (MA) or the 200-day MA. We
also use the eight-period exponential
moving average (EMA), which we call
the T-line, or trigger line. It is based on
a simple concept, and that is if you see
a candlestick buy signal and it closed at
around the T-line, you can stay long until
you see the combination of a candlestick
sell signal and a close back below the
T-line. That keeps you in trends even
though you might see a candlestick sell
signal. You need that combination.
I was making good money prior to
applying things like the T-line on the
chart. But after applying the T-line, I
was making more money only because
I was not getting whipsawed in and out
of positions.
Is that the technique you use to manage
your trades?
Yes it is. By adding the eight-period
EMA or T-line to the chart, and applying
the simple rule of staying in a long trade
until you see a candlestick sell signal
and a close back below the T-line, you
manage trades much better.
What were you doing before applying
the T-line?
I was just using the signals generated
on a chart. If I saw an uptrend and then
saw a sell signal, I’d close it out. But
that’s no longer the case. Now I won’t
close it out until I see a sell signal and a
confirmation that it’s closed below the
T-line. Prior to placing the T-line on my
chart, there were several occasions where
I would close out the trade and then have
to come back into it as it moved back up
again. The T-line became an effective
trend analytical tool telling me to stay
long as long as it doesn’t close below
the T-line.
What do you mostly trade?
I trade stocks, which are oriented
toward option trading. I also trade com-
modities during the middle part of the
day when the market gets slow. I’ll trade
crude oil, cattle, and soybeans because,
remember, candlesticks were developed
on the most basic of commodities in the
world, which is rice. I always tell people
that the Japanese rice traders did not
become wealthy trading candlesticks.
They became legendarily wealthy. They
were the financial powerhouse in Japan
for centuries because all they were
doing was trading based off of human
emotions.
I often reiterate that prices do not move
based upon fundamentals. Prices move
based upon the perception of fundamen-
tals. The most consistent indicator that
has been in the markets ever since the
beginning of investing is human emo-
tions. Given that candlesticks are the
graphic depiction of human emotions,
they show you where trends or investor
sentiments change and also show how
it continues.
Do you trade visually or do you have
an automated trading system that does
all the trading for you, based off your
entry and exit conditions that you just
described?
You can certainly create an automated
trading system, but I find that it’s not
as successful as visually analyzing a
chart. It’s similar to riding a bike. I tell
people once you learn the candlestick
signals and patterns and how they work,
you can trade in any market you want
to, the reason being that candlesticks
aren’t oriented toward a specific market
like the stock or commodity market.
It’s oriented toward all markets, and all
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fear & greed.
There are automated systems but
they don’t work well because you have
to mentally know what the factors are.
Obviously, you don’t want to aggressively
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generated if the market is selling off
hard. You’ve got to factor that into the
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I’ve tried automated trading but it just
didn’t work as well because the auto- Deep Discount Commissions
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Several people have struggled with

trying to come up with an automated
system to trade candlesticks. When
you trade futures, are there certain
variables that you look at that are dif-
ferent than when you trade equities
or options?
No, a soybean chart looks exactly like
an IBM chart. It’s the trend movements
and the reversal signals. Candlesticks are
fractal in that a one-minute chart, five-
minute chart, daily chart, and monthly
chart all look the same. Whether you’re
a scalper, swing trader, or long-term
investor, all charts will look alike. The
basic description of candlesticks is that
it is an accumulative knowledge of
everybody buying and selling during a
particular time frame. I used to trade the
eminis off the one-minute, three-minute,
and 10-minute chart combination. I also
do long-term investment positioning
in which I use the daily, weekly, and
monthly chart combination. All the
charts look the same on any time frame.
It’s just a function of which time frame
somebody wants to be trading.
That’s good but when you use candle-
stick charts, are you looking for
different patterns when a market is
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trending versus when it is a choppy trades were very short-term even though
market? You said that you had noticed they were swing trades. The trades may
a dumpling top occurring in the Dow. last about two or three days. But when
During that time frame, you did not the market is trending, and if you see a
trade anything? buy signal in the Dow and it continues
During the summer months, you’ll moving up and consistently stays above
have maybe two weeks of the market the T-line, you are going to hold your
trading up and then two weeks of trad- positions a lot longer. Your time factor
ing down, a week trading up, and a week is going to be based on what the market
trading down. Because you can see conditions are. By just using the visual
where the buy & sell signals are, you analysis of candlestick charts, you can
have to orient your trading time frame more quickly identify what the market
based upon what type of market condi- conditions are.
tions you’re looking at. That means our Because they have so much more
December 2015 • Technical Analysis of Stocks & Commodities • 31

Prices don’t move based on
fundamentals. Prices move
based on the perception of
fundamentals.
information built into each daily for-
mation, candlesticks give you a clearer
analysis of whether the bulls or bears
are in control in the short term. When
you apply all that to a pattern, it gives
you much more insight into whether
price is ready to break out to the upside
or downside.
Tell us a little bit about what you do
right now.
I run a chat room. We usually have
about 200 people in the chat room every
day. We also have an options trading chat
room. I will usually have two or three
stock picks every day and have that info
on a two-minute video where I give my
analysis of what the market looks like.
Again, that’s using the analysis of what
the trend is for the market based upon
what the signal and patterns are telling
us. I also discuss which way we want to
be oriented. During the summer, with
a choppy market, we were long and
short in our portfolios at any one time
because the market was not moving in
any general direction.
I teach people how to use candlesticks
successfully. Our website has about 1,300
pages of information on candlesticks. We
offer training programs in the evenings.
On Monday night we train our members
and Thursday night trainings are open
to everybody. We go through an analy-
sis of all the signals and patterns that
are developing in specific markets. We
also have about 18 signals and patterns
quantified for scanning. I teach traders
how to set up their own scans. These
are scans that will give traders ample
opportunities.
We teach people how to recognize
which signals and patterns are going
to produce profitable results so that no
matter what your trading inclination is,
whether you’re a short-term trader, a
long-term investor, an options trader,
or a commodity trader, you can learn
32 • December 2015 • Technical Analysis of Stocks & Commodities
to trade on your own. You will
know what trades to make without
having somebody tell you what
to trade.
The training sessions for our
members involve showing them
how to successfully use entry &
exit strategies, how to establish
correct stop-losses using candlestick
charts, how to set up their own scan-
ning techniques, and different trading
strategies. For example, if you’re an
options trader, we teach you how to
identify which patterns are better for
trading calls or puts outright, and which
patterns are better for putting on debit
spreads and credit spreads. We’re an
educational institution where we teach
people how to fish versus giving them a
fish each day.
And do you find that people would still
rather have you give them a fish every
day than learn how to fish?
Yes. That seems to be the general
nature of most people. Many are in the
learning process of investing and want to
be told what to invest in. I always orient
my education in the direction of “this
is what you want to do but this is why
you want to do it.” I encourage people
to know what they’re doing, so if I was
not there they would still know what to
do using candlesticks.
It seems that you spend a lot of time
educating other traders. What’s your
typical work day like? When do you get
time to place trades?
I’ve got the chat room open all the time.
I’ll come in two or three times during
the day, usually from 11:00 am to 12:00
and then another 45 minutes at the end of
the day. Maybe once or twice I’ll come
in during the day if somebody’s talking
about a specific topic or if I see a specific
chart pattern that should be brought to
everybody’s attention.
I continue to trade and teach people
how to trade. I don’t find doing both to
be much of a burden because I’m sitting
here watching the charts anyway. I can
just make comments to people in the
room. Plus, there’s the known adage
that the best way to learn something is
to teach it. Teaching people how to do
it always keeps my mind sharp, which
helps in my own trading.
To give you an idea of the dynamics
that take place in the chart room, the
topic of conversation today was regard-
ing today’s recommendation. I had
recommended going short on Wynn
Resorts today. Somebody said, “I saw it
opening lower but I just couldn’t pull the
trigger,” which is one of the emotional
problems that I had. I tell people I was
the worst investor in the world before I
discovered candlesticks. Knowing that
the probability of a pattern is greatly in
your favor helps you fight through the
emotions of trading because you know
what you should be doing based on what
the chart is telling you. You know where
you should be entering the trade. You
know where you should be out of the
trade based on the chart pattern telling
you that the trade isn’t going to work.
It helps you process your own mental
discipline because you know what the
probabilities are.
Yes, and that’s important.
Yes, it is. Mental discipline teaches
people how to recognize the signals, pat-
terns, and what they represent. It also lets
you know that even if you have the most
successful trading program, if you don’t
have the right mental mindset, you’re
never going to be a good trader. I also
teach people how to use the candlesticks
to eliminate emotions. Just let the charts
tell you what to do.
When you say signals or patterns, do
you have proprietary ones or do you use
the ones that are publicly available?
There’s nothing secretive about
candlestick charting. You always come
across investing gurus who say they’ve
found the new secret to investing. There
are no secrets in candlesticks. The one
thing I tell people is there’s one truism
on Wall Street and that is if something
doesn’t work, it doesn’t stay around very
long. Candlestick signals have been
around for a long time and they still work.
It’s just a matter of learning how to use
that information correctly and recognize
the good trade setups, and also training
yourself to keep your emotions out of
your trading.
But you can’t just look at the charts and
expect to learn how to use the informa-
tion quickly. It does take experience to
identify the successful signals.
When I started learning candlestick
charting it was still in its infancy in the
United States. I didn’t have anybody
whom I could use as a mentor. Fortunate-
ly, for investors today, all that information
is now documented in books. Steve Nison
has written several books on the subject.
I’ve written three. The learning process
for candlesticks is a lot faster because all
of the information is there. But just like
any other activity, you need to practice
it. The learning process is fairly quick
and then after that it’s just making sure
it processes well in your mind.
Again, there’re only six buy signals,
six sell signals, and only six or eight
patterns that you really need to know.
It’s not like you have to learn formulas.
You’re visually recognizing when a pat-
tern is working. Oftentimes, that pattern
is working based on all of the other
rhetoric that we hear on the financial
news stations.
The biggest benefit
that I got from can- One truism on Wall Street is if
dlestick signals was something doesn’t work, it doesn’t
that it’s the graphic
depiction of what’s stay around very long. Candlestick
going on in investor signals have been around for a long
sentiment. Know- time and they still work.
ing that most people
panic-sell at the bot-
tom and most people buy exuberantly at Patterns: Turning Investor Sentiment
the top is what makes candlestick charts Into High Profits, Profit Publishing.
valuable for trading. The chart will show [2002]. Profitable Candlestick
me the panic selling at the bottom. Be- Trading: Pinpointing Market Op-
fore I started using candlesticks, I would portunities To Maximize Profits, John
always question why that when I sold, the Wiley & Sons.
stock would turn right around and head [2004]. “Market Timing With
back up or when I bought, why would Candlesticks,” Technical Analysis
it turn right around and head down? It’s of Stocks & Commodities, Volume
because I was a typical investor who was 22: May.
panic-selling at the bottom and greedily [2005]. “When To Sell? Candle-
buying at the top. Once I started looking sticks Tell,” Technical Analysis of
at candlestick charts I was able to identify Stocks & Commodities, Volume
the panic selling and buying. Instead of 23: May.
doing what I would normally do, I did Nison, Steve [2008]. The Candlestick
the opposite. Now you can be that smart Course, Marketplace Books.
buyer buying with the smart money at the [1994]. Beyond Candlesticks:
bottom and selling into everybody when New Japanese Charting Techniques
they’re buying exuberantly at the top. Revealed, 2d. ed., New York Institute
of Finance.
Thank you very much for sharing your [1991]. Japanese Candlestick
thoughts with us. Charting Techniques, New York
Institute of Finance.
Further reading • aapta.us
Bigalow, Stephen W. [2011]. Candle- • mta.org
stick Profits: Eliminating Emotions
With Candlestick Analysis, Profit
Publishing,
[2005]. High Profit Candlestick

LUO / GAP TRADING the top-450 stock portfolio, the average stock count in the
Continued from page 26 backtest was only 29 stocks.

Kevin Luo is an independent technical analysis researcher

drawdown numbers than the indexes. This generally means
that the strategy is less risky.
dOeS it WOrK?
This price gap trading strategy aims to profit on oversold
conditions generated by exhaustion gaps. It tends to produce
relatively smoother return curves with lower drawdown rates
compared to the indexes. Testing of the strategy suggests the
exhaustion gap prediction technique works. Because the strat-
egy involves frequent trading, unlike a buy & hold approach,
it requires a much smaller amount of funds to operate. For
who focuses on automated price trend–related analysis and
generation of trading strategies. He and his project partners
developed an automated trend analysis and backtesting system
for high- and low-frequency trading. He may be reached via
email at kxluopub@gmail.com.
Further reading
Edwards, Robert D., John Magee, W.H.C. Bassetti [2007].
Technical Analysis Of Stock Trends, AMACOM.
‡Intrendstocks.com
December 2015 • Technical Analysis of Stocks & Commodities • 33
 Persistence & Strength

Trading Multiple Stocks

Here’s a switching technique that further enhances the annual
return associated with “one rank” performance.
by Norman J. Brown
Discussion of results
In Figure 1 you see a table of the 10 stocks studied showing
their S/Ys. The S/Y needs to be less than 63 switches per year
to exhibit persistence. Also listed is the individual stock’s OR
Ann return (a trading technique I first described in my June

In
my previous article, “Combining Persistence With 2003 article, “A Mutual Fund Trading Method”) since that
Strength,” published in the August 2015 issue of Tech- indicates whether there is an improvement over buy & hold
nical Analysis of Stocks & Commodities, I showed
that you can achieve an enhanced annual return (Ann) Run Stocks BH Rtn% S/Y ORL Rtn%
for stocks if you trade stocks, one at a time, that exhibit
persistence (that is, short-term memory), a technique 1 RES 23.8 57.4 32.1
I termed “OR.” I have had a number of articles published in 2 HAR 16.0 61.7 25.8
S&C that discuss the advantages of that approach. In my August
2015 article, the OR Ann is considerably improved if you trade 3 BBY 13.0 60.8 23.8
two stocks using the trading technique OR, including a relative 4 HAL 13.2 60.8 23.6
strength (RS) term (designating the composite as “ORRS”) by
using an if/and command that is easily implemented in Excel. 5 FAST 18.2 59.3 20.2
In this article, I expanded the ORRS concept from two stocks 6 TIF 18.3 60.3 18.7
to 10 persistent-type stocks and found a dramatic improvement
in Ann by adding those stocks into the ORRS process, one at 7 GLW 5.7 61.6 14.1
a time, to assess the optimum number of funds. 8 CAT 14.1 60.8 14.1
In the August 2015 article, I studied two persistent stocks
that displayed excellent Ann for ORRS of 34.5%: Lowe’s 9 TMO 11.3 61.0 14.0
Companies, Inc. (LOW) and Haliburton Co. (HAL), as de-
violetkaipa/shutterstock

10 LOW 13.6 61.2 13.9

termined by a low switch rate (S/Y) described in that article.
In this study, I added eight more stocks of low S/Y capability
and evaluated the OR and ORRS results over a 20-year period
(June 30, 1994–July 1, 2014).
Figure 1: COMPARING BUY & HOLD AND PERSISTENCE. Here you see 10
stocks with their switching rate (S/Y). All S/Y values need to be less than 63
per year to exhibit persistence. This table shows whether the OR Ann return is
better than a buy & hold approach.

34 • December 2015 • Technical Analysis of Stocks & Commodities

 MONEY MANAGEMENT

(BH) consistent with that low switching days steadily increases as the number
Run Stock comb. ORRS Rtn%
rate. Keep in mind that the OR process of stocks is added in. Concurrently,
is out of the market about 50% of the 1 RES/FAST 53.0 the number of zero days (days out of
time. For example, an OR Ann of 20% the market) decreases from 53.3%
2 RES/HAR 49.1
is equivalent to a 44% rate of change, to 9.8% as the number of stocks is
showing a considerable improvement 3 RES/BBY 47.1 increased.
in the return rate. The 10 stocks are As the data of Figure 3 is overly
4 RES/LOW 38.6
ranked according to their OR Ann, optimized by the selection process, a
and that ranking will be used in a 5 RES/TIF 38.3 more realistic approach would be to
subsequent study for ORRS. add in stocks based on their OR Ann
6 RES/TMO 37.1
My first thought to start the ORRS as ranked in Figure 1. This data is
process for multiple stocks was to select 7 RES/HAL 36.4 shown in Figure 5 with, unsurprisingly,
out the two stocks with the best ORRS lower ORRS Ann than that of the data
8 RES/CAT 34.2
performance for Ann return. To do that, of Figure 3, until at 10 stocks it has
I paired up 45 different combinations of 9 RES/GLW 30.3 identical Ann (54%) as in Figure 3. This
the 10 stocks (the number of different Figure 2: DUAL STOCK COMPARISONS. Here you see is as it should be, as the 10 stocks have
combinations is given by [(10^2-10)/2]. that the best dual combination for persistence and relative the same composition in each run and
The results are shown in Figure 2. The strength is achieved by RPC Inc. (RES) and Fastenal Co. as the ORRS trading does not depend
(FAST), with a 53% return.
best dual combination for ORRS return on the sequence of the stocks, but only
is achieved by stocks RPC Inc. (RES) their composition.
and Fastenal Co. (FAST) with an impressive 53% Ann, so I The graph in Figure 4 clearly shows the above statement
used them as my starting combination (Figure 3). holds for all combinations of the 10 stocks (at the end point).
To optimize subsequent insertions I added in each of the This graph displays the ORRS Ann for the data from Figures
remaining stocks one at a time, and used the stock with the best 3 and 5 as well as two additional studies. The red curve is
Ann contribution. It is a bit of “cherry picking” but it would obtained by adding in the OR results in descending OR Ann
yield the maximum ORRS Ann possible when summing up 10 order. The green curve is for a random selection of the 10 stocks
stocks. This series is designated “optimized ORRS ranking” (I inserted them alphabetically) and results in a slowly increas-
in Figure 3 and in the graph in Figure 4. ing ORRS Ann in between that of the blue curve (optimized)
Notice in Figure 3 that ORRS Ann improves steadily as and that of the bottom curve (minimized OR from Figure 2).
stocks are added in, up to the optional amount of six stocks Thus, the bottom curve was obtained by taking the reverse
(a superb Ann return of 71.5%). After that point, the ORRS ranking for OR from Figure 2, and again, the results show a
Ann steadily decreases to an acceptable 54% Ann for the 10 very subdued response, although again ending up at 54% Ann.
stock combinations. Also of interest is that the percentage of up Note the optimized curve peaks at six stocks, the red curve
at five stocks, the green
curve at eight stocks,
Run Starting stk. Added stk. Total stks. ORRS Rtn% % Up days % Dn days % Zero days and the bottom curve at
10 stocks. This simply
1 RES 1 32.1* 24.6 22.1 53.3
means the optimum
2 RES FAST 2 53.0 32.6 28.1 39.3 ORRS Ann is a function
of the order in which the
3 RES BBY 3 60.1 38.7 34.8 26.5
stocks are compiled.
4 RES LOW 4 64.7 41.4 37.2 21.4 To determine what
parameters contribute
5 RES HAR 5 65.4 43.5 39.2 17.3
to enhancing the pro-
6 RES CAT 6 71.5 44.9 40.4 14.7 cess of converting OR to
ORRS and BH to ORRS
7 RES GLW 7 68.7 45.5 41.6 12.9
(the data is for the aver-
8 RES HAL 8 60.1 45.5 42.6 11.9 age of all 10 stocks), I
have summarized the
9 RES TIF 9 52.6 46.0 43.4 10.6
results in Figure 6 to
10 RES TMO 10 54.0 46.5 43.7 9.8 provide some insight.
The ORRS improves
“ORRS” is one rank incorporating relative strength of additional stocks
the OR Ann of 20% to
* First reading for RES alone is actually OR (one rank no relative strength term) 54% (column E, row
FIGURE 3: OPTIMIZING RETURN VS. STOCK COMBINATIONS. The ORRS Ann improves steadily as up to six stocks are added. 1), a factor of 2.7. Still
After that, the ORSS Ann steadily decreased to an acceptable 54% return for the 10 stock combinations. greater improvement is
December 2015 • Technical Analysis of Stocks & Commodities • 35
 achieved in the BH to ORRS conversion,
80 improving Ann by a factor of 3.67. Row
Optimized ranked 2 depicts the ROR (rate of change, which
70 is a function of the amount of time in the
market, thus indicating trading efficiency)
Random ranked
Maximum showing that OR is in the market only 50%
60
OR ranked of the time and has an excellent ROR of
42.8%. In the case of the BH to ORRS
Annual return %

50 conversion, the ROR is increased still

further to 60.8%, suggesting the mecha-
40 nism for the 3.67 factor referenced earlier
is an even greater trading efficiency. This
Minimum
30
OR ranked is confirmed by row 9 showing that the
OR expectance (E=.071) is much im-
20 proved over BH (E=.041) and that the
BH/ORRS expectancy is enhanced still
10 further to 0.108.

0 Strength in numbers
0 1 2 3 4 5 6 7 8 9 10 In my August 2015 article referenced
earlier, I introduced a novel technique
Number of stocks in combination combining stocks with one rank (OR) and
FIGURE 4: PERSISTENCE AND RELATIVE STRENGTH RETURN VS. NUMBER OF STOCKS. The optimum relative strength (RS) trading to consider-
ORRS Ann is a function of the order in which the stocks are compiled.
ably improve the individual stock’s OR
Ann performance with a trading tech-
nique designated ORRS. The formulas for ORRS were given in
that article (and are shown here in the sidebar “Excel Formulas
For OR/RS”) and can be easily implemented in Excel.
Pooling persistent stocks An important conclusion is that once you select a batch
together in random fashion will of persistent stocks (by switching using the OR approach to
yield enhanced persistence & determine that the switching rate S/Y is less than the random
value of 63, and validating with OR for improved ROR perfor-
relative strength annual returns. mance) then pooling them together in random fashion should
yield enhanced ORRS Ann returns. It seems that 10 stocks
is a good compromise, but I leave it up to you to determine if
there is a better combi-
nation. The optimized
Run Starting stk. Added stk. Total stks. ORRS Rtn% % Up days % Dn days % Zero days
approach is obviously
1 RES 1 32.1 * 24.6 22.1 53.3 not practical in the real
world (as it uses post-
2 RES HAR 2 48.0 30.8 28.7 40.5
predictive data mining)
3 RES BBY 3 55.0 37.2 35.1 27.7 but is simply depicted
here out of interest.
4 RES HAL 4 53.0 41.2 38.3 20.5
The 54% Ann return
5 RES FAST 5 59.0 43.6 39.8 16.6 for pooling 10 S&P 500
stocks over the last 20
6 RES TIF 6 51.0 44.1 41.4 14.5
years is a rather startling
7 RES CAT 7 54.5 44.9 42.3 12.8 result. These results
could be questioned
8 RES GLW 8 50.7 45.2 43.2 11.6
since they are all per-
9 RES TMO 9 51.8 45.7 43.6 10.7 formed on a lookback
basis. Whether they
10 RES LOW 10 54.0 46.5 43.7 9.8
can be replicated go-
* OR value ing forward depends
FIGURE 5: ADDING STOCKS BIASED ON INCREASING OR RETURNS. The ORRS returns based on increasing OR are depicted on whether such stocks
in the red curve of Figure 4 and are lower than the optimum rate shown in the top curve. will continue to display
36 • December 2015 • Technical Analysis of Stocks & Commodities
 Norm Brown is a retired electrical en-
A B C D E F G
gineer and private investor. He may be
BH OR ORRS ORRS/OR ORRS/BH reached at njb.nb@verizon.net.
1 %Ann 14.700 20.000 54.000 2.70 3.67
Further reading
2 %ROR 14.700 42.800 60.800 1.42 4.14 Brown, Norman J. [2015]. “Combining
Persistence With Strength,” Techni-
3 %Up Bias 50.600 25.700 51.600 2.01 1.02
cal Analysis of Stocks & Com-
4 %Down Bias 49.400 24.500 48.600 1.98 0.98 modities, Volume 33: August.
[2003]. “A Mutual Fund Trad-
5 %Zero Bias 0.000 49.800 9.800 0.20
ing Method,” Technical Analysis of
6 %Roc+ 1.953 2.089 2.294 1.10 1.17 Stocks & Commodities, Volume
21: June.
7 %Roc- (Bet) 1.848 1.915 2.001 1.04 1.08
[2003]. “Combining Long and
8 R 1.059 1.091 1.146 1.05 1.08 Short Funds,” Technical Analysis of
Stocks & Commodities, Volume
9 E 0.041 0.071 0.108 1.52 2.63
21: July.
FIGURE 6: COMPARING PERFORMANCE OF BUY & HOLD, PERSISTENCE, AND PERSISTENCE AND RELATIVE
‡Microsoft Excel
STRENGTH. Combining persistence and strength generates better returns than persistence and buy & hold.

the critical low switching rate that indicates they have the
necessary persistence on which the OR and ORRS trading
technique depends.

Excel Formulas For OR/RS

Download the data for two stocks (LOW
and HAL, in this case) that you will be
trading with the OR/RS technique . The
time frame I analyzed was from July 1,
1985 to March 6, 2014 (28.7 years).
Calculate the Rocs for each stock
in columns B and C by entering the
formula

=100*(B5/B4-1) and copy down in column

D, and then enter the formula

=100*(C5/C4-1) and copy down in col-

umn E. SIDEBAR FIGURE 1: SPREADSHEET FOR EXAMPLE OR/RS CALCULATIONS

To calculate the OR (calculations are only illustrated for the The final OR/RS is the sum of the two Rocs just calculated.
LOW symbol here), use this formula: In cell J6 enter:

= IF (D5>-.001, D6, 0) and copy down in column F. =H6+I6 and copy down in column J.

The OR equity is given by summing the OR Roc starting with
1 in column G, row 5. In cell G6, enter:
=G5*(1+F6/100) and copy down in column G.
OR/RS is then calculated using the if/and command from the
BH Rocs. In cell H6, enter:
The resulting equity is obtained by placing 1 in column K5
and copying down the following formula: =K5*(1+J6/100) in
column K.
To obtain the Mdd from the equity stream, in cell L6, enter: =
(K6/MAX(K$5:K6))-1
To obtain Mdd, apply the formula:

=IF (AND (D5= MAX ($D5:$E5),D5>-.001),D6,0) MDD = -100*(MIN (L5:L7241)

and copy down in column H for LOW the following formula: where L7241 is the end equity (not illustrated).
For instructions on calculating Ann (APR), Bias (B), Std., and
= IF (AND (E5= MAX ($D5:$E5),E5> .001),E6,0) and copy down S/Y, see my June 2003 Stocks & Commodities article, “A Mutual
in column I for HAL. Fund Trading Method.”—N. Brown

December 2015 • Technical Analysis of Stocks & Commodities • 37

 That One Number
Is The Average Analyst
Average-Aware?
Such a simple term, yet easy to misinterpret. Here, we clarify
the differences between mean, median, and mode.
by John Cameron
T echnical analysts should be aware that the mean is not
the only average employed in this field. The point &
figure “average” connects column medians. Ichimoku
clouds are also based on medians. There are many more
examples.
To most, the word “average” is the usual way of expressing
a central tendency, which is itself described in many ways: a
typical value, a representative value, a central value, one value
to describe a set of data. The last is the clearest. The one that is
least immediately clear is the central value, as it is shorthand
for the central or middle value in a frequency distribution of
a set of values. When put this way, it is a definition of one of
the three ways of finding a central tendency.
The mean, median, and mode are those three ways of
finding that typical, representative, descriptive central value.
Statisticians are after a useful, realistic, and meaningful value,
as well as a mathematically impeccable definition.
• Mean or arithmetic mean
The mean, as set out earlier, is the familiar average. It involves
totaling the values and dividing by the number of values.
38 • December 2015 • Technical Analysis of Stocks & Commodities
Suppose you have a set of values (or a price sequence)
like this:
51, 52, 54, 56, 54, 52, 53, 54, 57
If you add up each number in the sequence, the total is 483,
which, divided by nine, is 53.67. The result fulfills all those
characteristics and is immediately acceptable to most. Note,
though, that all those values are in the 50s. Suppose that
instead of 57, the last value was 97. This changes the price
sequence to:
51, 52, 54, 56, 54, 52, 53, 54, 97
Totaling these numbers gives us 523, which, when divided by
nine, is 58.11. Then the result, even though it’s mathematically
correct, is greater than all values in the sequence except for
the last number, 97. So this resulting number is not typical or
representative of the series. Note that this does not invalidate
the use of moving averages (MA). A jump similar to this in the
MA would confirm the exceptional price move. Such unusual
values are known as “outliers” to statisticians and analysts.
Anatoli Styf/shutterstock
• Median
The median is the central value, which I mentioned earlier.
If you use the original set of values:
 STATISTICS

51, 52, 54, 56, 54, 52, 53, 54, 57 The mean, median, and mode are
three ways of finding a typical,
you can arrange the numbers in increasing order of magnitude,
starting with the lowest value. Now you have:
representative, descriptive,
central value.
51, 52, 52, 53, 54, 54, 54, 56, 57

Immediately, you can see the central value. The number that The most frequent number, or the mode, in this example is
is in the middle is the first 54, with four values before it, and 54. Suppose that the frequency table reads:
four after it. Again, the result satisfies the needed traits.
If you repeat the set but change the final number 57 to 97, 51 x 1
then the median is still 54. This method discounts or ignores 52 x 3
outliers while keeping to the spirit of the characteristics. 53 x 1
Incidentally, if the data set has an even number of constitu- 54 x 1
ents, the central value is calculated by averaging, as usually 55 x 3
understood, the two middle numbers. For example, if the
values are: Both 52 and 55 are modal values.
If you’re familiar with Market Profile of the Chicago Board
51, 52, 52, 53, 54, 54, 54, 56, 57, 58 of Trade (CME Group), you’ll understand that it’s based on
frequency distribution. The “point of control,” the price at
then the two central values are the first and second 54s, since there which the greatest amount of activity takes place during the
are four values before the first and four after the second. day, is the equivalent of a mode.

Mean or median? What should you use?

The mean uses all the data including outliers. Obviously, I have only touched the surface
For example, if you use the mean to obtain the of the topic of frequency distributions here.
average height of a class of children including But I encourage you to view your indicators
a very tall child, the tall child will obviously in light of the various definitions I have
skew the result since it moves the mean away reviewed here. It may give you a different
from the central value. Clearly, the effect will perspective.
also be more apparent if there are only five
children in the class than if there are 30. John Cameron is a training and education consultant and a
The median excludes uncharacteristic outliers. For example, fellow of the Society of Technical Analysts, UK. He may be
the average pay of a group of workers would be far less rep- reached via email at jrlcameronta345@btinternet.com.
resentative if it consisted of a boss and 10 laborers when the
boss’s pay is a considerable outlier! Not including the boss’s Further reading
earnings would give a more realistic employee figure. Cameron, John [2013]. “Market Mobs,” Technical Analysis of
Stocks & Commodities, Volume 31: August.
• Mode or modal value
Unlike the mean or the median, there can be more than one
mode. The mode is the most typical or popular or, more
specifically, the most frequent value. To identify the value
that occurs most frequently, it is often necessary to prepare
a frequency table. Here, I’ll show a simple observation using
the original ordered sequence of numbers:

51 x 1
52 x 2
53 x 1
54 x 3
56 x 1
57 x 1
58 x 1

December 2015 • Technical Analysis of Stocks & Commodities • 39

 Explore Your Options
Got a question about options? Tom Gentile started his trading career on the floor
of the American Stock Exchange in 1994. He has appeared on many financial
TV and radio shows, as well as hosting a weekly talk show himself, and has co-
authored many books on the markets. He can be found at www.tomgentile.com.
To submit a question for Tom Gentile, post it to our website at http://Message-
Boards.Traders.com. Answers will be posted there, and selected questions will
appear in a future issue of S&C.
Tom Gentile

NONDIRECTIONAL TRADES:
STRADDLING THE MOVES
When you’re making a decision on buy-
ing a call or put option, trying to pick
direction can cause confusion, which
delays your decision, and by the time you
decide, the stock has already moved and
you miss out on the trade. How would you
like a strategy that allows you to place
a trade that doesn’t care which way the
stock moves, just so long as it moves?
A nondirectional trade has a slight dis-
advantage over a directional trade in that
the cost of the trade will be higher than
with the directional long option trade,
but it does offer more of a directional
advantage in terms of allowing the stock
to make a move higher or lower, which
gives it a chance to profit no matter which
way it eventually goes.
The straddle
The straddle is a nondirectional trading
strategy that incorporates buying both a
call and put option on the same stock. The
trade is structured by buying a call and
a put option with the same strike price
and the same option expiration. It ben-
efits, or has the chance for profitability,
as long as the stock moves up or down
in a big-enough price move to cover the
cost of the trade and more.
It should not be a shock to you when
I say the straddle trade will cost more
than a straight long call or put option
trade. It costs more because instead of
just buying one option, you are buying
two. Since cost is risk, the straddle trade
has an increased price risk over the
directional option trade.
for profitability—is that the stock can
go higher or lower (two of the three
directions).
One of the larger risks on the straddle
is if it goes sideways or doesn’t go higher
or lower. If the stock stays stagnant, theta
(time value) and intrinsic value will come
out of both options and losses will happen
rather quickly.
Just move!
How do you counter or prevent getting
into a trade where the stock doesn’t move?
You want to take an option trade on a
stock that has what’s called a catalyst
for a move coming up in the near future.
There has to be a reason for investors/
traders to make a decision to either buy
or sell the stock and do so in a fashion
that causes the price to move higher or
lower. You want the move to be large
enough to cover the cost of the trade
and more.
There are several events or announce-
ments that can cause a big move in a stock.
But the one news event or announce-
ment that you can count on happening
consistently is the company’s earnings
announcement. The other events can
happen, but they don’t happen all the
time, and though they sometimes forecast
a date and time for the announcement,
things can change that make the timing
less certain. Earnings announcements
can change as well, but for the most part,
they are consistent in that they announce
every quarter, basically on the same day,
and if they usually announce before
the market opens, that is usually what
they stick with. You can count on using
this strategy four times a year or once
a quarter. So you can be a directional
trader for the year overall, but four times
a year you can be a nondirectional trader
and use this strategy.
Here’s an example
Apple, Inc. (NASDAQ: AAPL)
Say the price of AAPL is $112.29 some-
time in early October 2015. Earnings are
due to report on Tuesday, October 27,
2015, and whether that happens before
market open or after market close, I
would like to be out of this straddle by the
close of market on October 26, 2015.
My option analysis tool can show
me a great deal of information on the
behavior of stocks before and after their
earnings over the last four earnings re-
ports. Research what information your
brokers can provide and see if they have
something at least close to this to help
in your research.
My option analysis tools show me
how many times AAPL has beat or not
beat their earnings expectations. AAPL
has beat the actual estimate eight out
of the last eight earnings releases (see
Figure 1).
My option analysis tools show me what
AAPL has done by way of a percentage
price move prior to the last four earnings
(Figure 2). It shows an increase in price
on four of the last four earnings. This
percentage shown is for the four days
prior to the earnings report.
tomgentile.com

Stocks can go in one of three

directions—up, down, or sideways.
The reason I said a “nondirec-
tional” strategy—in this case, the FIGURE 1: HOW MANY TIMES HAS AAPL BEAT EARNINGS EXPECTATIONS? According to this table, AAPL beat
straddle has a two in three chance expectations eight out of eight times.
40 • December 2015 • Technical Analysis of Stocks & Commodities
 Explore Your Options
The table in Figure 3 dis-
plays the price move percent-
age after the earnings an-
nouncement for those same
four earnings reports. FIGURE 2: WHAT DOES PRICE DO PRIOR TO EARNINGS? This table shows that the stock price increased on four of the last
The move in AAPL had a four earnings. The percentage shown is for four days prior to the earnings report.
50/50 split between positive
and negative price moves.
This table represents the
move of the stock from
before the earnings an-
nouncement and the day of FIGURE 3: WHAT DID PRICE DO AFTER EARNINGS? There was a 50/50 split between positive and negative price moves.
the announcement (if before Here, you see the move of the stock from before the earnings announcement and the day of earnings. Even though AAPL beat
market open [BMO]) or the earnings expectations eight out of the last eight times, it didn’t always mean the stock was going to go higher the day after its
day after, if after market earnings announcement.
close [AMC]. Even though
AAPL beat earnings expectations eight over the earnings announcement. is $112 (call and put). The 112 call costs
out of the last eight times, it didn’t always The straddle construction is done with $4.20 and the 112 put costs $4.05. The
mean the stock was going to go higher the call and the put that shares the same cost of the straddle is more than just
the day after its earnings announce- buying the call or put, which makes
ment. That could be because they beat A straddle has the sense, since you are buying both. Even
on earnings but revenues were down for though you are buying both, it is still
the quarter, or they forecasted a light chance for profitability considered one trade.
upcoming quarter, or both. as long as the stock The cost of this straddle would be
If this scenario has a solid run—either moves up or down in a $8.25 on a per-contract basis. This is
up or down—into the earnings report, big-enough price move not looked at as two contracts to pay
then the actual earnings could cause commissions on; it is the combined cost
an adverse effect on this trade, where to cover the cost of the of the premiums. The challenge of this
the stock makes a countermove to the trade and more. trade is that the price of AAPL needs to
run it had going into the report post- make a move of $8.23 prior to expiration
announcement and wipe out the gains strike price and month of expiration. It is in order to break even. That may seem
achieved. The goal of this opportunity also constructed with the at-the-money like a daunting challenge, but we have
is to get a run up or down in the stock strikes. It may end up that the strikes seen movements like this before. So if
prior to the earnings and get out the day are slightly in or out of the money, as it you take a straddle trade, and someone
before. I am not inclined to risk whatever is rare that the stock price is exactly the asks you if you need the stock to move
profitability has been achieved by chang- same as the strikes. up or down, your answer will be yes!
ing my trade plan once I am in it into one The recent price on AAPL just before
where I now want to hold the position earnings is $112.29, so the closest strike

Sneak preview …
Coming soon!

Aliasing futures market is unforgiving of mistakes. High-Volume Breakouts

by John Ehlers
Most traders consider the price data they
use for analysis to be a continuous func-
tion. Nothing could be further from the
truth. Here’s what you should be doing.
Decision Areas In Daytrading
by Peter Hill
With its high degree of leverage, the
That makes it necessary for the small
trader to take his position at the optimal
moment. But how do you know what the
optimal moment is? We’ll find out.
Bottom Fishing
by Tom Bulkowski
Profiting from bottom fishing is notoriously
difficult, but this setup may help.
by Ken Calhoun
The two most important technical trading
signals are price and volume. Here’s how
you can use a combination of price-action
breakout patterns with specific volume
confirmation signals to help you identify
strong trading entries as they’re moving
to new highs.

December 2015 • Technical Analysis of Stocks & Commodities • 41

 VantagePoint 9.0
Market Technologies, LLC
5807 Old Pasco Road
Wesley Chapel, FL 33544
Internet: http://www.tradertech.com
Phone: 813 973-0496
Product: Market forecasting software
Price: Starting from $2,900

by Sunny J. Harris

I love to try out new software, so when

I was asked to review the newest release
of VantagePoint, I jumped at the chance.
In 2011, I reviewed VantagePoint release
8.6 and was greatly impressed by the
capabilities of the software. Here, I’m
going to take a look at the new features
and measure the performance and pre-
dictive accuracy of this new release. I Figure 1: opening screen. Here, you see a chart of the emini S&P 500. If you look to the “hard right edge”
decided to not read any documentation of the chart, you’ll see a gray vertical bar for which there is no candle body. In this chart, it predicts that tomor-
before using it, because if the software row will be lower than today and it touches the low of August 24, 2015. This gray bar represents the prediction
for the next day’s price.
designers did a good job, the program
will be intuitive and I would need noth-
ing other than good help files, which I effective VantagePoint appears to be in Background
can use if necessary. making these predictions. With each new release, VantagePoint’s
In Figure 1, you can see the preliminary In my 2011 review, I evaluated the neural networks are retrained and
screen that opens when I launch the pro- VantagePoint software according to a set updated to teach it the recent past for
gram using my chosen settings. I am able benchmark. To assess the program’s fore- thousands of symbols—both US stocks
to save my portfolios and charts, which casting accuracy, I looked to determine and foreign stocks. Also included are
is a timesaver. While VantagePoint uses whether the price prediction fell within futures, forex, and ETFs in their list of
sophisticated technology, the interface is a three-day moving average of price. My symbols. Each evening you get a market
clean and intuitive. You can readily see tests supported the company’s published forecast for just about anything you are
the four-day crash of August 2015 about claims and showed VantagePoint to be looking for.
two-thirds of the way over. The VantagePoint program
VantagePoint is forecasting was originally developed by
software that forecasts the next Louis Mendelsohn, a trad-
day’s prices. Figure 1 displays VantagePoint was designed to tell ing software pioneer. In the
the symbol for the emini S&P you tomorrow’s expected high and investment field, Mendelsohn
500. If you look to the “hard played a role in developing
right edge” of the chart in low. This can help traders manage the concepts of strategy back-
Figure 1, you’ll see a gray their entries & exits. testing (in 1983) and global
vertical bar for which there is intermarket analysis (in 1988)
no candle body. In this chart, in commercially available
it predicts that tomorrow will trading software for the per-
be lower than today and it touches the accurate in its predictions more than 80% sonal computer. Mendelsohn also applied
low of August 24, 2015. This gray bar of the time. By contrast, I have found artificial intelligence to intermarket
represents the prediction for the next throughout my decades of evaluating analysis and trend forecasting. His use
day’s price. trading systems and software that upon of neural network pattern recognition in
Most analysis software operates by evaluation, most companies can’t support intermarket analysis and trend forecast-
plotting only current and historical their accuracy claims. ing for the financial markets laid the base
prices. Indicators are calculated and This time, I evaluated VantagePoint for the development of VantagePoint and
plotted based on those same prices. using a different set of criteria: I over- his next generation of trend-forecasting
VantagePoint is different in that it was laid tomorrow’s chart on top of today’s software.
designed to tell you tomorrow’s expected prediction to see whether the prediction First released in 1991, VantagePoint
high and low. Let’s take a look at how was accurate. has been improved and refined over
42 • December 2015 • Technical Analysis of Stocks & Commodities
the decades, and the latest 9.0
version is the most powerful
version released to date. Not only
have the neural networks been
retrained, which is an ongoing
process for each new version that
keeps the software updated with
current market conditions, but
version 9.0 also offers a number
of new stocks and exchange
traded funds (ETFs) to expand
its global coverage. In addition,
the data is now automatically
downloaded each evening.

Product overview
VantagePoint is not an auto-
mated trading system produc-
ing buy/sell signals, entry/exit
points, or risk-management
rules. Instead, VantagePoint is a
trend-forecasting tool that relies Figure 2: forecasting THE next day’s prices. Here you see the chart after the next day’s close. How accurate
on leading-type indicators rather was the software’s forecasting capabilities? See Figure 3 for the comparison.
than lagging indicators. By
design, it removes much of the
work inherent in finding and confirming markets in all of the major trading areas:
potentially profitable trades. futures/commodities, forex, exchange
Using the neural network process traded funds (ETFs), and stocks. The
for intermarket analysis designed by futures/commodities category covers all
Mendelsohn (for which he holds two US of the major financial and commodity
patents), VantagePoint first identifies the markets and includes contract months
markets that have the most influence on going back several years for historical
a target market. Then, VantagePoint’s study. It also projects contracts out for
neural network “brain” sifts through more than two years into the future.
the data to find the best combinations The forex category includes the eight
of moving averages for short-term, major currency pairs and 13 important
medium-term, and long-term crossover cross pairs. The stocks category has
and momentum studies as well as other been expanded and now includes 12
predictive indicators to provide forecasts major sectors each for stock markets in
of prices several days ahead. the United States, Canada, Australia, FIGURE 3: PREDICTED VS. ACTUAL PRICES. Here
The first piece of trading advice that India, and the United Kingdom. The list you see that the forecasting was pretty accurate.
young traders usually receive is “the includes most of the major stocks from
trend is your friend.” A second piece of each country. in VantagePoint can identify potential
advice is almost as important: spot when To analyze all of these markets from an trades quickly using criteria chosen
a trend is beginning and when it has run intermarket perspective and then provide from more than 70 filters. Then it uses
its course. Having a tool that can help predictive indicators for trend forecast- its predictive indicators to identify
identify and forecast trends reliably and ing requires a lot of “horsepower.” This trend direction, trend strength, market
consistently—particularly when it spots is an impossible task for the human eye momentum, potential trend changes,
potential changes in trend direction that and human brain, but VantagePoint 9.0 next day highs and lows, and possible
could occur within a day or two—helps delivers the necessary power efficiently. points for trade entry & exit. It can do
make successful trading an attainable Like its predecessors, version 9.0 is fast, all that relatively quickly (it took less
goal. And using the clues provided by efficient, powerful, easy to use, and than 10 seconds when I was testing this
VantagePoint’s indicators, I found that accurate. feature). This information is also avail-
goal possible. Although it might seem daunting to able in daily and historical data tables,
VantagePoint can provide these lead- “sift” through and analyze all of these which can be exported into Excel for
ing-type indicators for more than 1,300 global markets, the IntelliScan feature further analysis.
December 2015 • Technical Analysis of Stocks & Commodities • 43
 Tomorrow’s results
Using the emini chart in Figure 1, I com-
pared VantagePoint’s forecast. Assume it
is now “tomorrow” and that I am looking
at the same market as in Figure 1. The
new chart, from the close of today, is
shown in Figure 2. Yesterday’s predicted
values for today and actual closed-out
values can be seen in Figure 3.
From the table in Figure 3, you can
see that VantagePoint’s forecasts were
accurate. It is also important to note that
since the emini was in a downtrend, the
accuracy of the predicted high is impor-
tant for placing stops for short positions.
By using the forecasts, you would have
remained in a profitable short position if
you had placed your buy-stop exit order
above VantagePoint’s predicted high.
Shortfalls?
In any fair review, you must also look at
the shortfalls of the product. With Van-
tagePoint, there aren’t many. Everything
I tried worked as I would expect. Every-
thing in the software was intuitive and
easy to use. There was only one feature
visit TRADERS.com
All the trading
information you need
is just a click away.
Community
Find out what other
traders are talking about.
44 • December 2015 • Technical Analysis of Stocks & Commodities
I would suggest the company improve
and that was the printing feature. When
I printed the listing of the data, I found it
to be misformatted. I figured it might just
be the printer driver, so I tried it on sev-
eral other printers, but it was universal.
These errors do not affect the accuracy
of the predictions, but for a product that
has been out as long as this one has, I
would expect near perfection.
Conclusion
VantagePoint is intuitive, easy to use,
and offers traders unique leading-type
technical indicators. Using intermarket
analysis and an intelligent neural-
network process to find hidden patterns
and relationships between markets, these
indicators provide short-term trend fore-
casts and anticipate trend changes. This
process provides a unique perspective
on markets that uses foresight instead
of hindsight. In addition to the software,
quality educational materials in various
media formats are provided to Vantage-
Point customers, which makes learning
how to maximize VantagePoint for your
Online Store
Purchase articles, books,
software and more!
Traders’ Tips
Implement strategies
from various developers.
trading style a snap. With software this
accurate and with the support and train-
ing the company provides, the cost of the
software should be able to be recouped
by the average trader.
A trader, author, computer programmer,
and mathematician, Sunny Harris has
been trading since 1981. The first print-
ing of her first book, Trading 101: How
To Trade Like A Pro, sold out in two
weeks, and continues to be a financial
bestseller, and her second book, Trad-
ing 102: Getting Down To Business,
also achieved record sales. She may be
contacted at MoneyMentor.com.
Further reading
Harris, Sunny J. [2011]. “VantagePoint
8.6,” Quick-Scan, Technical Analysis
of Stocks & Commodities, Volume
29: October.
‡VantagePoint (Market Technologies,
LLC)
‡See Editorial Resource Index
Traders’ Resource
Get info on industry
products and services.
 Q&A
SINCE YOU ASKED
Confused about some aspect of trading? Professional trader Rob Friesen, president
& COO of Bright Trading (www.stocktrading.com), an equity trading corporation,
answers a few of your questions. To submit a question or suggest a topic, email him
at robfriesen@brighttrading.net, or post your question to our website at http://
Message-Boards.Traders.com. Answers will be posted there, and selected questions
will appear in a future issue of S&C.
TO RAISE OR NOT TO RAISE
What would happen if the Federal Re-
serve raised interest rates? Who or what
will be impacted the most?
There has been a considerable amount
of time devoted in the media to the
subject of whether the Federal Reserve
(the “Fed”) should raise rates. The big
question I have is not should they but
can they.
There is no one-word answer to any
of these questions. Polarized debate has
and will continue to be spawned around
complex scenarios. Sentiment shifted
after the September FOMC meeting
as a result of a decision by the Fed to
leave rates unchanged. The takeaway
by many was that the Fed would have
to begin the process toward normal-
ization at the October meeting. Data
after the September meeting began to
dampen the idea of a rate hike occur-
ring anytime soon, and then the Septem-
ber employment situation released on
October 2, 2015 disappointed hawkish
supporters even further.
It has been my observation for the past
two years (during which expectations
of a rate hike ran high) that bonds have
been giving us the clues all along. Many
market participants watch bonds as one
of the leading indicators in their trading
and investing toolbox. Bond yields have
remained low and shrugged off the fears
of a rate rise. A few times this year, the
10-year yield did trend up from deeply
discounted levels but was hard-pressed
to get over 2.5%. This shows that bond
traders had adjusted their expectations,
allowing for a nominal increase, but were
shrugging off any significant concerns
throughout the year. On occasion, as the
media banter surrounding rate increases
grew, the more the yield declined. It was
as if savvy bond traders were looking out
on the horizon and factoring in another
round of “something like quantitative
easing.” I tend to agree; it would not
surprise me in the least to see some Fed
action resembling QE commencing as
early as March or at least by September
2016.
I believe that due to the deflationary
pressures in the world, which seem pitted
against all asset classes, we have to be
careful to use formulas and metrics of the
past as our guide. With 10-year bonds at
2% or less, expected returns on equities
Many market participants
watch bonds as one of
the leading indicators in
their trading and investing
toolbox.
by investors should be adjusted. Perhaps
markets are getting more comfortable
with higher P/E multiples, accepting
more risk to get similar and even lower
returns on equities than in the past.
Going back to my comment about
disinflation, perhaps there is a real fight
by central bankers against deflation-
ary pressures stemming from a global
marketplace, slowing growth globally,
increasing automated technologies, pop-
ulation, and demographic changes.
The Fed has a dual mandate: “The
FOMC is firmly committed to fulfilling
its statutory mandate from the Congress
of promoting maximum employment,
stable prices, and moderate long-term
interest rates” (Federal Reserve press
release, January 25, 2012).
Maybe the journey toward normaliza-
tion is stalled due to the efficiency of our
GDP. But is the way we calculate GDP
accurate or adequate? Let’s face it: the
December 2015
Rob Friesen
world has changed in the last 10 years,
driven by catalysts such as the Internet.
The way people work keeps changing,
which makes the real employment situ-
ation controversial. With the abundance
of data and advances in mining that data,
are the economic reports now lumpier
or smoother?
Let’s take a look at some other factors
that could affect interest rates. One is
the current balance sheet for the Federal
Reserve. The Federal Reserve publishes
its balance sheet every Thursday at 4:30
ET. You can review the balance sheet
by going to www.federalreserve.gov/
monetarypolicy.
Another is the leverage ratio of the
Federal Reserve. You can compute a
leverage ratio by dividing total capital
by total consolidated assets. Using
this formula, the leverage ratio of all
the Federal Reserve banks was equal
to 1.3% for the period as of September
24, 2015.
What is the leverage ratio for other
banks? The rules state that highly capi-
talized tier 1 banks need to meet a 3%
leverage ratio, and tier 2 banks need to
meet 4%. In addition, supplementary
ratios are required for “too big to fail”
banks. Next, you need to know how
assets are classified in the banking
industry: besides short-term trading of
securities, assets are marked as held to
maturity (HTM) or available for sale
(AFS). HTM assets are debt securities
that the bank has the intention of and
ability to hold until maturity. Stocks
don’t have maturity dates and so are not
able to be marked “HTM.” AFS can be
applied to debt and equity securities that
are not marked either held for trading
or HTM. These are instruments that the
bank may retain or they may be sold.
Think of AFS as similar in fashion to
• Technical Analysis of Stocks & Commodities • 45
 Q&A
mark-to-market or fair value accounting,
which simply is that the instrument can
be liquidated, as it has a current market
price or a fair value based on similar
assets and liabilities.
The majority of the Federal Reserve’s
holdings are government bonds, nominal
notes, and mortgage-backed securities.
From 2009 to 2014, they purchased over
60% of all newly issued treasuries dur-
ing all the QE periods. There has been
an increasing trend of the Fed to mark
assets as HTM, possibly to keep the
leverage ratios from being as extreme as
they would be if marked AFS. However,
in my opinion, there is still a concern
about the effect that raising rates would
have on the assets marked AFS. A rate
hike can reduce the value of the debt
instruments.
How would that affect the leverage
ratios for banks? During the credit cri-
sis, there was a lot of concern about the
leverage ratios of banks and brokerages,
and some of those institutions collapsed.
Also, if rates go up, would it hamper the
Fed from new bond purchases?
If banks hold mortgage-backed securi-
ties, they should be marked AFS.
US obligations can be marked It would not surprise me to see
HTM. There has been a lot of some Fed action resembling QE
regulation on banks with the commencing as early as March
introduction and enforcement
of the Volcker Rule and Dodd- or at least by September 2016.
Frank Act.
Another significant force is the strong we see will be the advent of some new
US dollar. If rates rise, the dollar may form of stimulus. This just perpetuates
get even stronger, which could affect the endless age of moral hazard. I am not
US exports. It also affects commodity a Fed basher. I just see that the global
prices that are priced in US dollars. pressures, efficiencies from the Internet
What if other sovereign nations waiver and automation, currency wars, chang-
or potentially default? The USD is the ing of power centers, and the looming
world’s reserve currency, and others debt crisis as a big burden to a central
may not take too kindly if the Fed or banker.
US government is playing poker with As I look around everywhere and at
the dollar. everything, I see a new norm, which
Wouldn’t all the money the Fed has may be why the Fed cannot raise inter-
put into circulation cause inflationary est rates. There are different schools
pressures? Inflation comes from too of thought and I am a firm believer in
much money chasing too many goods. brainstorming different scenarios and
We have plenty of goods, but we really developing a probability bias for each.
don’t have too much money, as the ve- I hope the questions I have posed here
locity of money isn’t robust despite the will encourage you to explore these dif-
trillions of dollars of QE. ferent scenarios.
I am concerned that the Fed cannot
raise rates at all and then the next action

KATSANOS / TRADING THE LOONIE

Continued from page 18

Keep in mind, however, that intermarket analysis relies on
the premise that relationships in the past will be the same
in the future, which is not always the case. Markets may de-
couple for a prolonged amount of time, and a strategy based
on that assumption might produce considerable drawdown.
Therefore, having a good exit strategy should be an essential
part of your trading system.
Markos Katsanos is the author of Intermarket Trading Strate-
gies and is a STOCKS & COMMODITIES contributing author. He
can be reached at markos.katsanos@gmail.com or through
his website at http://mkatsanos.com.
See our Traders’ Tips section beginning on page 49 for commentary
on implementation of Katsanos’s technique in various technical
analysis programs. Accompanying program code can be found in
the Traders’ Tips area at Traders.com.
FURTHER READING
Katsanos, Markos [2008]. Intermarket Trading Strategies,
John Wiley & Sons.
[2009]. “Trading The Aussie,” Technical Analysis of
StockS & commoditieS, Volume 27: February.
‡MetaStock

‡See Editorial Resource Index

The code given in this article is available at the Subscriber Area at
our website, www.Traders.com, in the Article Code area.

46 • December 2015 • Technical Analysis of Stocks & Commodities

 LETTERS
Continued from page 7

for each individual delivery month, the

total figures for each commodity market
are the ones that are used for forecasting
purposes. As John Murphy explains on
pages 43–44 of his 1999 book, Techni-
cal Analysis Of The Financial Markets,
there is a good reason for this:
In the early stages of a futures contract’s
life, volume and open interest are usually
quite small. The figures build up as the
contract reaches maturity. In the last couple FIGURE 1: Brent Crude Oil, Apr 2015 (EOD). The MFO doesn’t work correctly for futures contracts due
of months before expiration, however, the to volume and open interest numbers.
numbers begin to drop again. Obviously,
traders have to liquidate open positions
as the contract approaches expiration.
Therefore, the increase in the numbers in
the first few months of life and the decline
near the end of trading have nothing to
do with market direction and are just a
function of the limited life feature of a
commodity futures contract. To provide
the necessary continuity in volume and
open interest numbers, and to give them
forecasting value, the total numbers are
generally used.
(See Murphy’s book for more on this.)
As a demonstration, see Figure 1 for
a chart of ^BJ15 Brent Crude Oil, Apr
2015 (EOD).
However, you can use the MFO on
ETFs that track commodities.

3. The MFO does not generate valid

signals when the market is choppy. See
Figure 2 for a daily Dow Jones Average FIGURE 2: Dow Jones Average (DJIA), April–August 2000, with MFO 5, MFO 20, and MFO 60.
(DJIA) chart (April–August 2000) with The MFO does not generate valid signals when the market is choppy.
the MFO 5, MFO 20, and MFO 60 for
comparison.
The MFO (5,20,60) produces poor
signals (zero-line crossover) because
the market move is trendless.

4. About intraday trading: After trend

determination (weekly/daily chart
analysis), you can apply the MFO on
an intraday lower timescale chart in
conjunction with price oscillators such
as the MACD or RSI.

5. Figure 3 shows a daily Nasdaq 100

index chart (November 2011–May 2012)
with MFO 20 and MFO 60. Periods of
overlap show when the MFO is strong
for two different periods.
Good luck in your exploration.
FIGURE 3: daily Nasdaq 100 index (November 2011–May 2012) with MFO 20 and MFO 60. Periods
of overlap show when the MFO is strong for two different periods.

December 2015 • Technical Analysis of Stocks & Commodities • 47

 New OPTIONS Feature in Chaikin
Analytics platform
Chaikin Analytics has introduced a new
options functionality named OptionsPlay
into its trading platform for finding can-
didate strategies for option trades. Once
you have identified a stock of interest
using the Chaikin Analytics platform,
OptionsPlay allows you to compare vari-
ous option strategies for the underlying
side by side to determine the most profit-
able strategy. Based on whether you have
a bullish or bearish outlook on a stock,
you can enter hypothetical performance
criteria to evaluate the potential results
of a given trade. OptionsPlay suggests
optimal option plays on any stock and
generates a ticket you can input on your
broker’s platform to execute the trade.
Users can opt for the “plain English”
panel and sort through 40 different
strategies. Strategies can be customized
by setting parameters. Users can compare
risk/reward and probabilities, and can set
their own investment or risk limitations
and then find an option play to match.
The OptionsPlay overlay is included
with all Chaikin Analytics subscriptions
at no extra charge.
http://chaikinanalytics.com
Charles H. Dow Award
SUBMISSIONS DEADLINE
The Charles H. Dow Award conferred
by the Market Technicians Association
seeks to highlight outstanding research
in technical analysis. The submission
deadline for next year’s award is
December 1, 2015. The competition is
open to all practitioners and academics.
Submissions are judged based on their
ability to enhance the understanding of
market action, the concepts of technical
analysis, and thoroughness of the
48 • December 2015 • Technical Analysis of Stocks & Commodities
research. Additional information on the
judging standards is available at MTA’s
website.
Past winning papers have outlined
successful trading systems, provided
insights into theories of how markets
function, and explored rich technical
analysis topics. Of the 22 past winners,
eight have gone on to publish books based
on their submissions. Winners have
presented at multiple MTA events and
have gotten mentioned in the media.
The winning submission is distributed ability to share portfolios and charts
to the approximately 4,500 MTA saved on Barchart.com to the app.
members in 85 countries. The award www.barchart.com/app
carries a prize of $5,000 and is presented
at the MTA Gala Awards Dinner held in
New York City in April.
Your Online
Resource
For
Technical
Analysis
www.MTA.org
VERSION 3.0 OF BARCHART APP
Barchart.com, Inc., a market data
provider, has released version 3.0 of
its Barchart.com mobile app for iOS
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free access to stocks, ETFs, options,
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Join us on Facebook
data and information. The app provides at www.facebook.com/
market data and news coverage along STOCKSandCOMMODITIES
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Follow us on Twitter
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offers faster in-app speed, additional
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Previously available features still
offered include unlimited watchlists;
quickviews of symbols; market over-
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sector lists and leader lists; customizable
charts; commodity market commentary;
symbol-specific news coverage; and the
 For this month’s Traders’
Tips, the focus is Markos
Katsanos’s article in this
issue, “Trading The Loo-
nie.” Here, we present the
December 2015 Traders’
Tips code with possible
implementations in vari-
ous software.
Code for MetaStock is already provided in Katsanos’s
article by the author. Subscribers will also find the same
code at the Subscriber Area of our website, www.Traders.
com. Presented here is an overview of possible imple-
mentations for other software.
The code for the following Traders’ Tips selections is
posted here:
Figure 1: eSIGNAL. Here is an example of the indicator and strategy plotted on a
• Traders.com  Home–S&C Magazine  daily chart of CAD A0-FX.
Traders’ Tips

(Or from Traders.com, scroll down to the current articles

section and click on the Traders’ Tips tab.)
The Traders’ Tips section is provided to help the reader
implement a selected technique from an article in this is-
sue or another recent issue. The entries here are contrib-
uted by software developers or programmers for software F THINKORSWIM: DECEMBER 2015 TRADERS’ TIPS CODE
that is capable of customization. In “Trading The Loonie” in this issue, author Markos Katsanos
explains the heavy correlation between the Canadian dollar
and crude oil. He then goes on to describe how one could
trade this correlation. Using similar logic as that employed
in Bollinger Bands, Katsanos has built a study to provide buy
and sell signals for trading the Canadian dollar future.
F eSIGNAL: DECEMBER 2015 TRADERS’ TIPS CODE
We have replicated his BBDivergence study and strategy
For this month’s Traders’ Tip, we’ve provided the studies
using our proprietary scripting language, thinkscript. We
BBDivergenceIndicator.efs and the BBDivergenceStrategy.
have made the loading process extremely easy: simply click
efs based on the formulas described in Markos Katsanos’s
on the links http://tos.mx/v0vYZd and http://tos.mx/rdRUvt
article in this issue, “Trading The Loonie.”
and choose “Save script to thinkorswim,” then “Backtest in
In the article, the author presents a trading system that’s
thinkScript.” Choose to rename your study and strategy as
based on the positive correlation between the currencies of
“BBDivergence.” You can adjust the parameters of this study
major oil exporters and the price of oil. Katsanos focuses on
within the edit studies window to fine-tune your variables.
the relationship of the Canadian dollar and the price of oil,
and uses an indicator and strategy based on the divergence
between them as indicated by a Bollinger Band study.
The eSignal studies contain formula parameters that may be
configured through the edit chart window (right-click on the
chart and select “edit chart”). A sample chart implementing
the studies is shown in Figure 1.
To discuss these studies or download a complete copy of the
formula code, please visit the EFS Library discussion board
forum under the forums link from the support menu at www.
esignal.com or visit our EFS KnowledgeBase at http://www.
esignal.com/support/kb/efs/. The eSignal formula script (EFS)
is also available for copying & pasting from the Stocks &
Commodities website at www.traders.com in the Traders’
Tips area.
—Eric Lippert
eSignal, an Interactive Data company
800 779-6555, www.eSignal.com
Figure 2: THINKORSWIM. This example chart shows the Canadian dollar future.

December 2015 • Technical Analysis of Stocks & Commodities • 49

 In the example shown in Figure 2, you see a chart of /6C,
which is the Canadian dollar future. Just below the volume and
open interest indicator is Katsanos’s BBDivergence indicator,
which is used to define the conditions that trigger the trade
plotted. Finally, in the bottom indicator, you can see that over
this four-year charted time frame, the BBDivergence strategy
has produced a positive return.
For more on this indicator, please see Katsanos’s article.
—thinkorswim
A division of TD Ameritrade, Inc.
www.thinkorswim.com

Figure 3: WEALTH-LAB. Signals generated by the intermarket Bollinger Bands

F WEALTH-LAB: DECEMBER 2015 TRADERS’ TIPS CODE (BB) divergence method are superimposed on the chart as colored triangles. The
20-day BB divergence is plotted on the top and crude oil (light sweet) futures in the
This Traders’ Tip is based on “Trading The Loonie” in this middle window.
issue by Markos Katsanos.
The CAD/USD, also known as the “loonie,” is a {
petrocurrency like NOK/USD, USD/RUB and others. The paramPeriod = CreateParameter("days", 20, 2, 300, 1);
}
price of oil undoubtedly plays the major role in its exchange
rate for the most part. However, the correlation with oil is not protected override void Execute()
{
always a positive 1.0, since other drivers like the key rate or int days = paramPeriod.ValueInt;
carry trading periodically come into play. StdDevCalculation s = StdDevCalculation.Sample;
var oil = GetExternalSymbol("Light",true).Close;
The system is most likely to exhibit periods of prosperous var bbCAD = 1 + ((Close - SMA.Series(Close,days)
behavior while crude oil is volatile and trending, and is expected + 2*StdDev.Series(Close,days,s)) / (4*StdDev.
to take a break during prolonged range-bound movements Series(Close,days,s)+0.0001));
var bbOil = 1 + ((oil - SMA.Series(oil,days) + 2*StdDev.
like in 2011–2013. Series(oil,days,s)) / (4*StdDev.Series(oil,days,s)+0.0001));
In addition to the author’s use of the light crude oil (CLC) var divergence =(bbOil-bbCAD)/bbCAD*100; divergence.
Description = "Divergence";
contract, it may also make sense to experiment with the WTI
contract to measure correlation. Some believe that this blend var hhvDiv = Highest.Series(divergence,3);
follows Canada’s Western Canadian Select more accurately. var llvDiv = Lowest.Series(divergence,3);
var llv = Lowest.Series(Low,15);
We leave testing this idea to motivated traders. var hhv = Highest.Series(High,15);
A participating indicator, correlation, is part of our var roc = ROC.Series(Close,2);
var mov = SMA.Series(oil,40);
Community Indicators library, which is driven by the Wealth- var correlation20 = Correlation.Series(Close,oil,20);
Lab user community. To run the Wealth-Lab 6 strategy code var correlation60 = Correlation.Series(Close,oil,60);
shown here, install the indicator library (or update to the actual var rocOil = ROC.Series(oil,3);
var llvOil = Lowest.Series(oil,4);
version using the Extension Manager) from our website, var macd = MACD.Series(Close);
wealth-lab.com, in the Extensions section. var macdSignal = EMAModern.Series(macd,9);
var sto = StochD.Series(Bars,30,3);
After updating the library to v2015.07 or later, the correlation
indicator can be found under the Community Indicators group. ChartPane oilPane = CreatePane(50,true,true); HideVol-
ume();
Applying it to charts or rule-based strategies is as easy as drag PlotSymbol(oilPane,GetExternalSymbol("Light",true),Colo
& drop without having to program any code yourself. r.Green,Color.Red);
A sample chart is shown in Figure 3. ChartPane divPane = CreatePane(50,true,true);
LineStyle ld = LineStyle.Dashed;
PlotSeries(divPane,divergence,Color.Black,LineStyle.
Wealth-Lab 6 strategy code (C#): Solid,1);
DrawHorzLine(divPane,20,Color.Black,ld,1);
using System; DrawHorzLine(divPane,-20,Color.Black,ld,1);
using System.Collections.Generic;
using System.Text; for(int bar = GetTradingLoopStartBar(60); bar < Bars.
using System.Drawing; Count; bar++)
using WealthLab; {
using WealthLab.Indicators; if (IsLastPositionActive)
using Community.Indicators; {
bool sell =
namespace WealthLab.Strategies (CrossUnder(bar, macd, macdSignal) &&
{ sto[bar]>85) ||
public class LoonieStrategy : WealthScript (llvDiv[bar] < -20 && rocOil[bar] < -3) ||
{ (Close[bar] < llv[bar-1] && correlation60[bar] < -0.4);
private StrategyParameter paramPeriod;
bool cover =
public LoonieStrategy()

50 • December 2015 • Technical Analysis of Stocks & Commodities

 (CrossOver(bar, macd, macdSignal) && sto[bar]<25 &&
(oil[bar] >= (1 + 4.0/100d) * llvOil[bar]) ) ||
(hhvDiv[bar]>20 && rocOil[bar]>4.5 ) ||
(Close[bar] > hhv[bar-1] && correlation60[bar] <
-0.4);

Position p = LastPosition;
if( p.PositionType == PositionType.Long )
{
if( sell )
SellAtMarket(bar+1, p);
}
else
{
if( cover )
CoverAtMarket(bar+1, p);
}
}
else
{
bool buy = (hhvDiv[bar] > 20) && (divergence[bar] <
divergence[bar-1]) &&
(roc[bar]>0) && (mov[bar] > mov[bar-2]) &&
(correlation20[bar] > -0.4);

bool shrt = (llvDiv[bar] < -20) && (divergence[bar] >
divergence[bar-1]) &&
(roc[bar]<0) && (mov[bar] < mov[bar-2]) && Figure 4: AMIBROKER. Here is a daily chart of CAD futures (upper pane) with
(correlation20[bar] > -0.4); buy (green), sell (red), short (hollow red), and cover (hollow green) arrows gener-
ated by the system. The Bollinger Band divergence oscillator is shown in the bottom
if( buy ) pane.
BuyAtMarket(bar+1);
else
if( shrt ) sec1BOL = 1 + ( ( C - MA( C, D1 ) + 2 * StDev( C, D1 ) ) /
ShortAtMarket(bar+1); ( 4 * StDev( C, D1 ) + 0.0001 ) );
} sec2BOL = 1 + ( ( SEC2 - MA( SEC2, D1 ) + 2 * StDev( SEC2,
} D1 ) ) /
} ( 4 * StDev( SEC2, D1 ) + 0.0001 ) );
} DIV1 = ( sec2BOL - sec1BOL ) / sec1bol * 100;
}
Plot( Div1, "Bollinger Band Divergence", colorRed );
—Eugene, Wealth-Lab team
MS123, LLC Buy = HHV( DIV1, 3 ) > 20 AND
www.wealth-lab.com DIV1 < Ref( DIV1, -1 ) AND
ROC( C, 2 ) > 0 AND MA( SEC2, 40 ) > Ref( MA( SEC2, 40
), -2 )
and
Correlation( C, SEC2, 20 ) > -0.4;

F AMIBROKER: DECEMBER 2015 TRADERS’ TIPS CODE Filter = 1;

In “Trading The Loonie” in this issue, author Markos Katsa-
nos presents a trading system for CAD futures based on its
relationship with price action on crude oil futures.
A ready-to-use formula for use in AmiBroker is shown here.
To use the Bollinger Band divergence oscillator, enter the code
in the formula editor and press the apply indicator button.
You can adjust the averaging period using the parameters
window. To backtest the system, click the send to analysis
button in the formula editor and then the backtest button in
the analysis window. You may need to change the symbol of
crude oil futures to match your data provided symbology (the
code shown here uses IQFeed symbology).
A sample chart is shown in Figure 4.
AmiBroker code:
// using IQFeed symbology here
// you may need to adjust symbol for different data source
SEC2 = Foreign( "QCL#", "C" ); // crude oil futures continuous
D1 = Param( "BB DAYS " , 20, 1, 200, 1 );
AddColumn( Buy, "Buy" );
Sell = ( Cross( Signal(), MACD() )
AND StochK( 30, 3 ) > 85 ) OR
( LLV( DIV1, 3 ) < -20 AND ROC( SEC2, 3 ) < -3 ) OR
( C < Ref( LLV( L, 15 ), -1 ) AND
Correlation( C, SEC2, 60 ) < -0.4 );
Short = LLV( DIV1, 3 ) < -20 AND
DIV1 > Ref( DIV1, -1 ) AND
ROC( C, 2 ) < 0 AND
MA( SEC2, 40 ) < Ref( MA( SEC2, 40 ), -2 ) AND
Correlation( C, SEC2, 20 ) > -0.4;
Cover = ( Cross( MACD(), Signal() ) AND StochK( 30, 3 ) < 25
AND
SEC2 >= ( 1 + 4 / 100 ) * LLV( SEC2, 4 ) ) OR
( HHV( DIV1, 3 ) > 20 AND ROC( SEC2, 3 ) > 4.5 ) OR
( C > Ref( HHV( High, 15 ), -1 ) AND
Correlation( C, SEC2, 60 ) < -0.4 );
—Tomasz Janeczko, AmiBroker.com
www.amibroker.com

December 2015 • Technical Analysis of Stocks & Commodities • 51

 COVER SHORT CONDITIONS: [1 of which must be true]
And3( CrossBelow(MACD Signal(Close,9,12,26),
MACD(Close,12,26)), A<B( Stoch%D( High, Low, Close, 30, 3),
25), A>=B(Crude Oil Close, Add2(1, Mul2(0.04, Min(Crude Oil
Close,4)))))
And2( A>B(Max(BBDIV(Close,Crude Oil Close,20,2),3),20), A>B(
%Change(Close,3),4.5))
And2( A>B(Close,Lag(PriceHigh(High,15),1)),A<B(LinXYReg
r(Close,Crude Oil Close,20),-0.4))

Users of NeuroShell Trader can go to the Stocks &

Figure 5: NEUROSHELL TRADER. This NeuroShell Trader chart shows the Cana-
dian loonie and crude oil Bollinger Band divergence system.
F NEUROSHELL TRADER: DECEMBER 2015
TRADERS’ TIPS CODE
The Bollinger Band divergence indicator described
by Markos Katsanos in his article in this issue, “Trading The
Loonie,” can be easily implemented with a few of NeuroShell
Trader’s 800+ indicators. Simply select new indicator from
the insert menu and use the indicator wizard to set up the
following indicator:
BBDIV
Multiply2( 100, Divide( Sub( BB%B(Crude Oil Close,20,2),
BB%B(Close,20,2)), Add2(100, BB%B( Close,20,2))))
To implement the Canadian loonie and crude oil divergence
trading system, simply select new trading strategy from the
insert menu and enter the following formulas in the appropriate
locations of the trading strategy wizard:
BUY LONG CONDITIONS: [All of which must be true]
A>B( Max(BBDIV(Close,Crude Oil Close,20,2),3),20)
A<B( Momentum(BBDIV(Close,Crude Oil Close,20,2),1),0)
A>B( %Change(Close,2),0)
A>B( Momentum(Avg(Crude Oil Close,40),2),0)
A>B( LinXYReg r(Close,Crude Oil Close,20),-0.4)
Commodities section of the NeuroShell Trader free technical
support website to download a copy of this or any previous
Traders’ Tips.
A sample chart is shown in Figure 5.
—Marge Sherald, Ward Systems Group, Inc.
301 662-7950, sales@wardsystems.com
www.neuroshell.com
F AIQ: DECEMBER 2015 TRADERS’ TIPS CODE
Here is some code for use in AIQ based on Markos
Katsanos’s article in this issue, “Trading The Loo-
nie.” The code and EDS file can be downloaded from www.
TradersEdgeSystems.com/traderstips.htm.
The code I am providing contains both the divergence
indicator and a long-only trading system for the NASDAQ
100 list of stocks. Rather than trading forex, I wanted to try the
divergence idea and the author’s entry rules on the NASDAQ
100 stocks. The stocks are traded long using the author’s entry
rules with two of the parameters adjusted as shown at the top
of the code file. The exit has been changed completely to use
a profit protect (protect 50% of profits once a 20% profit is
reached), a stop-loss (protect 75% of capital), and a time-stop
exit (exit after 21 days). I used the NASDAQ 100 index (NDX)
in place of the crude oil futures. The assumption is that since the
stocks on the list are all in the NDX, they would generally be
correlated to the index. The author’s entry rule filters out those
with a negative correlation to the index. Note that I changed
the minimum correlation from a -0.4 to 0.0. In addition, I

SELL LONG CONDITIONS: [1 of which must be true]

And2( CrossAbove(MACD Signal(Close,9,12,26),
MACD(Close,12,26)), A>B( Stoch%D( High, Low, Close, 30, 3),
85))
And2( A<B(Min(BBDIV(Close,Crude Oil Close,20,2),3),-20), A<B(
%Change(Close,3),-3))
And2( A<B(Close,Lag(PriceLow(Low,15),1)),A<B(LinXYReg
r(Close,Crude Oil Close,20), -0.4))

SELL SHORT CONDITIONS: [All of which must be true]

A<B( Min(BBDIV(Close,Crude Oil Close,20,2),3),-20)
A>B( Momentum(BBDIV(Close,Crude Oil Close,20,2),1),0)
A<B( %Change(Close,2),0)
A<B( Momentum(Avg(Crude Oil Close,40),2),0)
A>B( LinXYReg r(Close,Crude Oil Close,20),-0.4) Figure 6: AIQ. Here is a sample equity curve for the modified divergence system
versus the NASDAQ 100 index for the period 1/5/2000 to 10/14/2015.

52 • December 2015 • Technical Analysis of Stocks & Commodities

 FIGURE 8: TRADERSSTUDIO. Here is an example of the DIVERG indicator on a
chart of Apple Inc.

function DIVERG(bbLen,F1,F2)
'Set parameters:
'bbLen = 20. 'Default = 20
'F1 = 2 Default = 2
'F2 = 4 Default = 4
'IDX = “NDX” NASDAQ 100 Index for independent 1

'Close percent relative to BB band width for stock:

Dim SD As BarArray
Dim SMA As BarArray
Dim stkBB As BarArray
Figure 7: AIQ. Here are the metrics for the modified system and the test settings. SD = StdDev(C,bbLen)
SMA = Average(C,bbLen)
stkBB = 1+(C-SMA+F1*SD)/(F2*SD)

found that increasing the minimum divergence from 20 to 'Close percent relative to BB band width for index:
Dim IDXc As BarArray
2,000 increased the Sharpe ratio and decreased the maximum Dim StdDevIDX As BarArray
drawdown without affecting the annualized return. Dim SMAidx As BarArray
Figure 6 shows the equity curve versus the NASDAQ 100 Dim idxBB As BarArray
IDXc = C Of independent1
index for the period 1/5/2000 to 10/14/2015. Figure 7 shows StdDevIDX = StdDev(idxc,bbLen)
the metrics for this same test period. The system clearly SMAidx = Average(IDXc,bbLen)
outperformed the index. idxBB = 1+(IDXc-SMAidx+F1*StdDevIDX)/(F2*StdDevIDX)
—Richard Denning
DIVERG = (idxBB-stkBB)/stkBB*100
info@TradersEdgeSystems.com end function
for AIQ Systems '----------------------------------------------------
'INDICATOR TO PLOT DIVERG:

sub DIVERG_IND(bbLen,F1,F2)
F TRADERSSTUDIO: DECEMBER 2015 plot1(DIVERG(bbLen,F1,F2))
TRADERS’ TIPS CODE
End Sub
The TradersStudio code based on Markos Katsanos’s article
in this issue, “Trading the Loonie,” can be found at www. —Richard Denning
TradersEdgeSystems.com/traderstips.htm. info@TradersEdgeSystems.com
The following code files are provided in the download: for TradersStudio

• Function DIVERG—Computes the divergence indicator for

the tradable and a another security, index or future
• Indicator plot DIVERG_IND—For plotting the DIVERG on
a chart. F NINJATRADER: DECEMBER 2015 TRADERS’ TIPS CODE
The TradingTheLoonie strategy and the Bollinger Band
Figure 8 shows the DIVERG indicator on a chart of Apple
divergence indicator, which are discussed in Markos Katsa-
Inc.
nos’s article in this issue, “Trading The Loonie,” have been
'TRADING THE LOONIE made available for download at www.ninjatrader.com/SC/
'Author: Markos Katsanos, TASC December 2015 December2015SC.zip.
'Coded by: Richard Denning 10/19/15 Once you have downloaded them, from within the
'www.TradersEdgeSystems.com
NinjaTrader Control Center window, select the menu File →

December 2015 • Technical Analysis of Stocks & Commodities • 53

 A sample chart implementing the strategy
is shown in Figure 9.
—Raymond Deux and Zachary Gauld
NinjaTrader, LLC
www.ninjatrader.com

F UPDATA: DECEMBER 2015

TRADERS’ TIPS CODE
Our Traders’ Tip this month is based on
“Trading The Loonie” by Markos Katsanos
in this issue.
The author proposes that CAD/USD is a
commodity currency, meaning it is highly
correlated with the price of oil. The reason for
this is that Canada’s main export destination
is the US. Thus, when the price of oil is high,
more US dollars will be flowing into the
Canadian economy, increasing the value of
the Canadian dollar. Conversely, when the
Figure 9: NINJATRADER. The Bollinger Band divergence is displayed above the CL and 6C, both of price of oil is low, there will be a fall in the
which display the Bollinger Bands in their respective panels. The TradingtheLoonie strategy is displayed Canadian dollar value. This trading system
in the 6C panel of the chart.
primarily uses Bollinger Band divergences to
judge the most opportune times to enter into
Utilities → Import NinjaScript and select the downloaded file. a CAD futures trade.
This file is for NinjaTrader Version 7. The Updata code for this article is in the Updata library and
You can review the strategy source code by selecting the may be downloaded by clicking the custom menu and system
menu Tools → Edit NinjaScript → Strategy from within library. Those who cannot access the library due to a firewall
the NinjaTrader Control Center window and selecting the will also find the code listing at the Stocks & Commodities
“TradingtheLoonie” file. To view the indicator source code, website in the Traders’ Tips area; simply paste the code into
go to Tools → Edit NinjaScript → Indicator and select the the Updata custom editor and save it.
“BollingerBandDivergence” file. Figure 10 shows an example of the Bollinger Band diver-
NinjaScript uses compiled DLLs that run native, not gence indicator applied to CAD/USD and crude oil.
interpreted, to provide the highest performance possible. —Updata support team
support@updata.co.uk
www.updata.co.uk

F TRADE NAVIGATOR: DECEMBER 2015

TRADERS’ TIPS CODE
We have created a special file based on the
formulas given in Markos Katsanos’s article
in this issue, “Trading The Loonie,” to make it
easy to download as a library in Trade Naviga-
tor. The filename is “SC201512.”
To download it, click on Trade Navigator’s
blue telephone button, select download special
file, then erase the word “upgrade” and type in
“SC201512” (without the quotes), then click
the start button. When prompted to upgrade,
click the yes button. If prompted to close all
software, click on the continue button. Your
library will now download.
FIGURE 10: UPDATA. Here, the Bollinger Band divergence indicator is applied to CAD/USD and crude This library contains four indicators named
oil in daily resolution. “CAD Futures TS Buy,” “CAD Futures TS
54 • December 2015 • Technical Analysis of Stocks & Commodities
Sell,” “CAD Futures TS Sell Short,” and “CAD Futures TS
Cover.” These indicators can be inserted into your chart
(Figure 11) by opening the charting dropdown menu, then
selecting the add to chart command, then selecting the
highlight bars tab.
The TradeSense language for the indicators is as follows:

CAD Futures TS Buy

&D1 := 20
&SEC2 := Close Of "CL3-067"
&sec1BOL := 1 + ((Close - MovingAvg (Close , &D1) + 2 * Mov-
ingStdDev (Close , &D1)) / (4 * MovingStdDev (Close , &D1) +
FIGURE 11: TRADE NAVIGATOR. Here, the four indicators (buy, sell, sell short,
.0001))
&sec2BOL := 1 + ((&SEC2 - MovingAvg (&SEC2 , &D1) + 2 * cover) are applied to a monthly USD/CAD chart as highlight bars.
MovingStdDev (&SEC2 , &D1)) / (4 * MovingStdDev (&SEC2 ,
&D1) + .0001))
&DIV1 := (&sec2BOL - &sec1BOL) / &sec1bol * 100
Highest (&DIV1 , 3) > 20 And &DIV1 < (&DIV1).1 And Ra-
teOfChange (Close , 2) > 0 And MovingAvg (&SEC2 , 40) >
MovingAvg (&SEC2 , 40).2 And Correlation (Close , &SEC2 ,
20) >= (-.4)

CAD Futures TS Sell

&D1 := 20
&SEC2 := Close Of "CL3-067"
&sec1BOL := 1 + ((Close - MovingAvg (Close , &D1) + 2 * Mov-
ingStdDev (Close , &D1)) / (4 * MovingStdDev (Close , &D1) +
.0001))
&sec2BOL := 1 + ((&SEC2 - MovingAvg (&SEC2 , &D1) + 2 * FIGURE 12: TRADE NAVIGATOR. Strategy entry/exit points are displayed on a
MovingStdDev (&SEC2 , &D1)) / (4 * MovingStdDev (&SEC2 , one-minute USD/CAD chart with profit/loss shading.
&D1) + .0001))
&DIV1 := (&sec2BOL - &sec1BOL) / &sec1bol * 100
(Crosses Above (MovingAvgX (MACD (Close , 12 , 26 , False) , 9
To create this indicator manually, click on the edit dropdown
, False) , MACD (Close , 12 , 26 , False)) And StochK (30 , 3) >
85) Or (Lowest (&DIV1 , 3) < (-20) And RateOfChange (&SEC2 menu and open the trader’s toolbox (or use CTRL+T) and
, 3) < (-3)) Or (Close < Lowest (Low , 15).1 And Correlation click on the functions tab. Now click on the new button, and
(Close , &SEC2 , 60) < (-.4)) a new function dialog window will open. In its text box, type
CAD Futures TS Sell Short
in the code for the highlight bar. Ensure that there are no extra
&D1 := 20 spaces at the end of each line. When completed, click on the
&SEC2 := Close Of "CL3-067" verify button. You may be presented with an add inputs popup
&sec1BOL := 1 + ((Close - MovingAvg (Close , &D1) + 2 * Mov- message if there are variables in the code. If so, click the yes
ingStdDev (Close , &D1)) / (4 * MovingStdDev (Close , &D1) +
.0001)) button, then enter a value in the default value column. If all is
&sec2BOL := 1 + ((&SEC2 - MovingAvg (&SEC2 , &D1) + 2 * well, when you click on the function tab, the code you entered
MovingStdDev (&SEC2 , &D1)) / (4 * MovingStdDev (&SEC2 , will convert to italic font. Click on the save button, and type
&D1) + .0001))
&DIV1 := (&sec2BOL - &sec1BOL) / &sec1bol * 100
a name for the indicator.
Lowest (&DIV1 , 3) < (-20) And &DIV1 > (&DIV1).1 And Ra-
teOfChange (Close , 2) < 0 And MovingAvg (&SEC2 , 40) < Strategy
MovingAvg (&SEC2 , 40).2 And Correlation (Close , &SEC2 , This library also contains a strategy called “SC CAD Futures
20) > (-.4)
Trading System.” This prebuilt strategy can be overlaid on
CAD Futures TS Cover your chart (Figure 12) by opening the charting dropdown
&D1 := 20 menu, selecting the add to chart command, then selecting
&SEC2 := Close Of "CL3-067"
the strategies tab.
&sec1BOL := 1 + ((Close - MovingAvg (Close , &D1) + 2 * Mov-
ingStdDev (Close , &D1)) / (4 * MovingStdDev (Close , &D1) + If you have any difficulty using the indicators or strategy,
.0001)) you can contact our technical support staff at 719 884-0245 or
&sec2BOL := 1 + ((&SEC2 - MovingAvg (&SEC2 , &D1) + 2 * click on the live chat tool either under Trade Navigator’s help
MovingStdDev (&SEC2 , &D1)) / (4 * MovingStdDev (&SEC2 ,
&D1) + .0001))
menu or near the top of our homepage at www.TradeNavigator.
&DIV1 := (&sec2BOL - &sec1BOL) / &sec1bol * 100 com. Our support hours are 6 am–7 pm (M-F) Mountain Time.
(Crosses Below (MACD (Close , 12 , 26 , False) , MovingAvgX Happy trading!
(MACD (Close , 12 , 26 , False) , 9)) And StochK (30 , 3) < 25 —Genesis Financial Technologies
And &SEC2 >= (1 + 4 / 100) * Lowest (&SEC2 , 4)) Or (Highest
(&DIV1 , 3) > 20 And RateOfChange (&SEC2 , 3) > 4.5) Or
www.TradeNavigator.com
(Close > Highest (High , 15).1 And Correlation (Close , &SEC2
, 60) < (-.4))

December 2015 • Technical Analysis of Stocks & Commodities • 55

 FUTURES LIQUIDITY

T
rading liquidity is often over-
looked as a key technical
measurement in the analysis
and selection of commodity
futures. The following explains how to
read the futures liquidity chart pub-
lished by Technical Analysis of Stocks
& Commodities every month.
Commodity futures
The futures liquidity chart shown be-
low is intended to rank publicly traded
futures contracts in order of liquidity.
Relative contract liquidity is indicated
by the number of dots on the right-hand
side of the chart.
This liquidity ranking is produced by
multiplying contract point value times
the maximum conceivable price motion
(based on the past three years’ historical
data) times the contract’s open interest
times a factor (usually 1 to 4) for low or
very high volumes. The greatest number
of dots indicates the greatest activity;
futures with one or no dots show little
activity and are therefore less desirable
for speculators.
Courtesy of CBOT
All futures listed are weighted equally
under “contracts to trade for equal dol-
lar profit.” This is done by multiplying
contract value times the maximum pos-
sible change in price observed in the last
three-year period. Thus, all numbers in
this column have an equal dollar value.
Columns indicating percent margin
and effective percent margin provide
a helpful comparison for traders who
wish to place their margin money ef-
ficiently. The effective percent margin
is determined by dividing the margin
value ($) by the three-year price range of
contract dollar value, and then multiply-
ing by one hundred.
Stocks
Trading liquidity has a significant ef-
fect on the change in price of a secu-
rity. Theoretically, trading activity can
serve as a proxy for trading liquidity
and equals the total volume for a given
period expressed as a percentage of the
total number of shares outstanding. This
value can be thought of as the turnover
rate of a firm’s shares outstanding.

Trading Liquidity: Futures

Commodity Futures Exchange % Margin Effective Contracts to Relative Contract Liquidity
% Margin Trade for Equal
Dollar Profit
E-Mini S&P 500 GBLX 3.8 11.3 3 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>
10-Year T-Note CBOT 1.2 23.2 14 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
T-Bond CBOT 2.1 11.4 3 •••••••••••••••••••••••••••••••••••••••••••••••••
5-Year T-Note CBOT 0.6 16.5 20 ••••••••••••••••••••••••••••••••••••••••••
Corn CBOT 14.3 14 5 ••••••••••••••••••••••••••••••••••••••••
Ultra T-Bond CBOT 2.7 17.7 4 ••••••••••••••••••••••••••••••••••••••••
Russell 2000 Mini ICEUS 3.8 11.1 2 ••••••••••••••••••••••••••••••••••••••
E-Mini Nasdaq 100 GBLX 2.5 5.7 2 ••••••••••••••••••••••••••••••••••
Euro FX CME 1.7 7.5 3 ••••••••••••••••••••••••••••••••••
Soybeans CBOT 10.2 12.5 3 •••••••••••••••••••••••••••••
Japanese Yen CME 2.6 5 2 ••••••••••••••••••••••••••
Crude Oil WTI NYMEX 10.9 7.4 1 ••••••••••••••••••••••
Silver COMEX 13.1 11.3 1 ••••••••••••••••••••••
Natural Gas NYMEX 10 6.2 2 ••••••••••••••••••
Australian Dollar CME 2.3 4.9 3 •••••••••••
Wheat CBOT 13.2 15.2 4 •••••••••••
Gasoline RBOB NYMEX 11.3 7.2 1 ••••••••••
High Grade Copper COMEX 8.9 14.8 3 ••••••••
Canadian Dollar CME 1.4 4.4 4 •••••••
E-Mini S&P Midcap GBLX 3.1 8.9 2 •••••••
Sugar #11 ICEUS 10.1 23.3 14 •••••••
2-Year T-Note CBOT 0.1 19.5 59 •••••
Coffee ICEUS 10.6 13.1 2 •••••
DJIA mini-sized CBOTM 3.2 11.8 4 •••••
Soybean Meal CBOT 8.7 11.7 4 •••••
British Pound CME 1.4 12.1 8 ••••
Hard Red Wheat KCBT 10.5 10.6 4 ••••
Soybean Oil CBOT 9.8 11.3 6 ••••
CBOE S&P 500 VIX CFE 7.8 8.5 6 •••
Cotton #2 ICEUS 7.8 14.7 6 •••
Lean Hogs CME 5.2 5.4 4 ••• CBOT Chicago Board of Trade, Division of CME
Mexican Peso CME 7.3 18.8 8 ••• CFE CBOE Futures Exchange
Cocoa ICEUS 5.8 16.2 8 •• CME Chicago Mercantile Exchange
Crude Oil Brent (F) NYMEX 10.2 7 1 ••
COMEX Commodity Exchange, Inc. CME Group
Eurodollar CME 0.1 81.9 224 ••
GBLX Chicago Mercantile Exchange - Globex
U.S. Dollar Index ICEUS 1.4 8.2 6 ••
ICE-EU Intercontinental Exchange-Futures - Europe
Canola WCE 5.7 14.8 25 •
New Zealand Dollar CME 2.6 8.5 4 • ICE-US Intercontinental Exchange-Futures - US
Palladium NYMEX 7.5 24.1 4 • KCBT Kansas City Board of Trade
S&P GSCI CME 8.5 9.7 1 • MGEX Minneapolis Grain Exchange
Spring Wheat MGEX 12.7 14.2 4 • NYMEX New York Mercantile Exchange
Swiss Franc CME 1.7 9.7 4 •
30-Day Fed Funds CBOT 0 75.7 341
Class III Milk CME 5.6 9.7 5
Ethanol Futures CBOT 9 6.8 2 1512
Trading Liquidity: Futures is a reference chart for speculators. It compares markets “Relative Contract Liquidity” places commodities in descending order according to
according to their per-contract potential for profit and how easily contracts can be bought how easily all of their contracts can be traded. Commodities at the top of the list are easi-
or sold (i.e., trading liquidity). Each is a proportional measure and is meaningful only est to buy and sell; commodities at the bottom of the list are the most difficult. “Relative
when compared to others in the same column. Contract Liquidity” is the number of contracts to trade times total open interest times a
The number in the “Contracts to Trade for Equal Dollar Profit” column shows how volume factor, which is the greater of:
many contracts of one commodity must be traded to obtain the same potential return In volume
as another commodity. Contracts to Trade = (Tick $ value) x (3-year Maximum Price 1 or exp –2
In 5000
Excursion).

56 • December 2015 • Technical Analysis of Stocks & Commodities

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December 2015 • Technical Analysis of Stocks & Commodities • 57

 The following selection of book descriptions represents
a sampling of recent book releases in the investing field.
Books described here may be from some of the major book
publishers as well as some independent book publishers.
These are not critical reviews or editorial evaluations, but
rather a brief look at the book marketplace to help keep
readers up to date on new or recent book offerings.
The Ruff Guide To Trading: How To
Make Money (146 pages, £24.99 soft-
cover, ebook £15, September 2015, ISBN
9780857194008 / 9780857194985) by
Steve Ruffley, published by Harriman-
House. There is no shortage of peo-
ple who think trading is a good way to
get rich, and they are not wrong, since
there’s more money in the world mar-
kets than ever before. But why do so
many people fail? The Ruff Guide ex-
plores this question and more. Ruffley
maintains that people are their own worst enemy. This is not a “get
rich quick” book; it does not set out to tell you the one secret to
successful trading, he states. Rather, it poses a series of questions
for self-analysis to help you come up with your own strategy, along
with teaching about the markets and fundamental and technical
trading. The author started his career at PricewaterhouseCoopers
in investments, then in risk management at Refco, then managing
a trading floor in a prop room, where he discovered much about
traders and their behavior, then traded for himself. He then be-
came an educator at InterTrader, and he has since presented thou-
sands of webinars and traded at over 150 live events. In prepara-
tion for the release of this book, Ruffley reportedly publicly traded
a £5,000 trading account to £11,000 in 90 days.
Stocks & Commodities interviewed Ruffley in our October 2014
issue.
www.harriman-house.com
Systematic Trading (324 pages,
£38.25 hardcover, £30 ebook, Sep-
tember 2015, ISBN 9780857194459 /
9780857195005) by Robert Carver,
published by Harriman House. This au-
thor believes it’s better for investors to
hand over their portfolio to a system,
which employs a set of rules unaffect-
ed by emotion, rather than try to beat
the markets every year on their own. His
reasoning is that research shows our
brains are flawed, and fear and greed cloud our judgment. Carver
was a hedge fund manager for systematic hedge fund AHL before
retiring to invest his own money. In this book, he demonstrates the
benefits of trading systematically. He shows how traders and in-
vestors can create their own systems that don't trade too quickly
or take excessive risks. He believes that technology can make it at
times too easy to take too much risk and also overtrade, and that
the influence of social media can lead people to make poor trad-
58 • December 2015 • Technical Analysis of Stocks & Commodities
ing decisions. The book covers the theory behind systematic trad-
ing, including why and when it works, and when it doesn’t. It pro-
vides ways to design strategies and gives examples of the frame-
work that can be used.
www.Harriman-House.com
The Wealth Dragon Way: The Why,
The When And The How To Become
Infinitely Wealthy (224 pages, $17.99
softcover, $9.99 ebook, July 2015, ISBN
978-1-119-07783-1) by John Lee & Vin-
cent Wong, published by Wiley. This
book is a practical guide on becoming
financially free through building asset-
based wealth and creating passive in-
come. Part motivational, part informa-
tional, the book discusses both moral
and monetary wealth, and looks at how
the author suggests we can be misled and influenced by media-
driven myths surrounding money. The author seeks to debunk the
notions that there is no truly moral way to become wealthy, or the
belief that the state will provide for us in retirement. Real-life ex-
amples discuss how two property entrepreneurs built their signif-
icant portfolios using alternative strategies such as lease options
and structuring and securing deals at below-market value. The au-
thor holds that to achieve personal wealth, you must be clear as to
why you want it. This book explores the psychology of our relation-
ship with money and tries to offer practical advice for those deter-
mined to meet their goals.
www.wiley.com
Financial Regulation And Compli-
ance: How To Manage Competing And
Overlapping Regulatory Oversight
+ website (256 pages, $65 hardcov-
er, $42.99 ebook, August 2015, ISBN
978-1-118-97221-2) by H. David Kotz,
published by Wiley. This book provides
step-by-step guidance for compliance
professionals seeking to manage reg-
ulatory responsibilities. Written by Da-
vid Kotz, former inspector general of
the SEC, with additional guidance pro-
vided by experts, this book helps the reader navigate the numer-
ous regulations that have been enacted in response to the 2008
financial crisis. The book discusses how to defend your organi-
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December 2015 • Technical Analysis of Stocks & Commodities • 59

 AT THE CLOSE
Get Comfortable!
Align Your Analysis
& Trading Persona
We are all different. As a result, we each have our comfort
zones in which we tend to perform better. But how do you
define that comfort zone? We take a look.
E
ach one of us has a comfort zone as a trader, and to be
successful, we need to stay within that comfort zone,
or know ourselves well enough that we can extend the
envelope of our comfort zone. The trouble is that it’s easy to
give an overly broad definition of our comfort zone, when actu-
ally we should be giving a narrow, specific one. For example,
you can define your comfort zone by expected return, depth of
drawdown, and length of drawdown. Ideally, we will align our
analysis and trading persona as one of the keys to success.
An elastic time horizon
complicates analysis
Here’s how one trader described his strategic needs to me: “My
holding period can be a few days to a few weeks, as long as
by Tushar Chande
60 • December 2015 • Technical Analysis of Stocks & Commodities
the stock does not reverse trend.” You can define the persona
of this trader by the length of the holding period. However, it
is not clear what he means by “does not reverse trend.” So this
trader must have a consistent definition of what he means by a
trend and what he means by a reversal of that trend. However,
the elastic definition of holding period can make a consistent
definition difficult, since “few” could mean one to four, but by
going from days to weeks, the trader has effectively extended
his holding period from, say, three or four days to 15–20
days. Since the average amplitude of a reversal increases as
the holding period increases, it’s difficult to properly answer
what he means by “does not reverse trend.” Now imagine if
“few” means up to 10 days or weeks, and the amplitude of
the average reversal increases from, say, less than 1% to 10%,
which is a huge range. Naturally, this definition is too elastic
to be implemented consistently.
Define your trading persona
The easiest way to define your trading persona is to use the
alarus/Shutterstock
length of the position’s holding period. At the portfolio level,
you may have several personas. For example, one portion of
your portfolio could be very long-term position trading, often
 AT THE CLOSE
A Simple Definition of Trading Persona via Holding Period Length of S&P 500 Drawdowns, 1950–Current
100
Trading Persona Frequency of Changes Holding Period
90
Very long-term (core) 1-5 times in your lifetime Few decades
80

Length of drawdown (months)

Long-term 1-5 times a decade Few years 70

Medium-term 1-5 times a year Few months 60

50
Short-term 1-5 times a month Few days
40
Figure 1: length of holding period. The easiest way to define your trad-
ing persona is to use the length of the position’s holding period. For example, one 30
portion of your portfolio could be very long-term position trading, where you want 20
to hold the stock or ETF for decades.
10
0
53–54 96–97 59–60 83–84 62–63 87–89 80–82 56–68 68–72 07–13 00–07 73–80
Align Your Persona, Data Period, and Risk Tolerance Years during which drawdown occurred

Risk Tolerance FIGURE 3: THE LENGTH OF S&P 500 DRAWDOWNS IN MONTHS. The market
Trading Persona Data Time Period has had some very long, multi-year drawdowns. As an investor, you would have
(very rough) to be patient, and add to core positions and adjust the definitions of your trading
personas.
Very long-term (core) Yearly data Up to -60%
Long-term Monthly / weekly data Up to -30%
Medium-term Daily / weekly data Up to -20% The easiest way to define
Short-term Daily / intraday data Up to -5% your trading persona is to use
Figure 2: risk tolerance level. Although the values for risk tolerances are the length of the position’s
arbitrary, they must be viewed as little more than rough guidelines. For example, say
you own an S&P 500–oriented mutual fund or ETF and wish to make it a part of your holding period.
core holding, you would have to withstand drawdowns on the order of -60% and still
hold on to the position, or sit through long periods between new market highs.

called a core holding, where you want to hold the stock or
exchange traded fund (ETF) for decades (see Figure 1). You
are then willing to hold the core position even through major
market drops of 50% or more. Thus, this persona ignores all
market volatility. Another part of your portfolio might be
traded more frequently, say a few times a year. It should be
fairly obvious that the type of analysis needed and the type
of review and trade management needed are different for
each persona. Naturally, there are other definitions of trad-
ing personas. The key is to recognize that different personas
can coexist in your portfolio, but the analytical tools and risk
tolerance for each persona must be kept separate.
Align your persona
and risk tolerance
In the table in Figure 2 I explore the risk
tolerance needed for each type of persona.
The values for risk tolerances are arbitrary
based on my trading experiences and must be
viewed as little more than rough guidelines.
For example, say you own an S&P 500–oriented mutual fund
or ETF and wish to make it a part of your core holding. You
would have to withstand drawdowns on the order of -60%
and still hold onto the position, or sit through long periods
(many years—see Figure 3) between new market highs. It is
not uncommon for individual stocks or ETFs to have large
declines approaching or exceeding -50% that build up over
many months. However, how would you react if this occurred
over just a few days? In the table in Figure 4, I show the declines
in some ETFs during the mini-crash of August 2015, when
large declines occurred in just three days. So it is important to
make allowances for increased market volatility as you think
about your personas and their risk tolerance.
Align personas and trading tools
A practical approach to trading might adapt the technical
analysis tools to the time period of the data. I show in the
table in Figure 5 that a simple moving average (SMA) will
generally be sufficient to identify the underlying data when
using yearly data for your core holdings. An SMA or channel
breakout analysis would be sufficient for long-term analysis
using monthly or weekly data to identify underlying trends. As
the time period shrinks, you might get “cleaner” signals with
channel breakouts on daily data for medium-term analysis.
Finally, you can combine an overbought/oversold oscillator
such as the relative strength index (RSI) or stochastic RSI to
identify short-term extremes within the long-term trend for
short-term trading.
It is clear that any of the tools can be used with each of the
time periods, that is, say, the stochastic RSI with yearly data
or SMA with intraday data, just as long as you are aware of
the strengths and limitations of each of the tools. However,
December 2015 • Technical Analysis of Stocks & Commodities • 61
 AT THE CLOSE
Close Low Difference Low
Symbol Description
(Wed 8/19/15) (Mon 8/24/15) (%) < 8/14 Low
SPX S&P 500 Index 2079.61 1867.01 -10.22% No
DEF Guggenheim Defensive Equity ETF 37.50 30.34 -19.09% Yes
VOOV Vanguard S&P 500 Value Fund 88.17 70.00 -20.61% Yes
IVE iShares S&P 500 Value ETF 91.56 72.55 -20.76% Yes
RPV Guggenheim S&P 500 Pure Value ETF 52.55 41.06 -21.86% Yes
NOBL PowerShares S&P 500 Dividend Aristocrats 50.43 36.98 -26.67% Yes
SPHD PowerShares S&P 500 High Dividend Portfolio 33.11 19.83 -40.11% Yes
SPYV SPDR S&P 500 Value ETF 99.36 59.45 -40.17% Yes
RSP Guggenheim S&P 500 Equal Weight ETF 80.18 43.77 -45.41% Yes
FIGURE 4: declines in some ETFs during the mini-crash of August 2015. Here you see that some ETFs that were oriented toward value or low
volatility showed significant (if short-lived) drops during the recent mini-crash in August 2015. Ordinarily, such losses would build up over many months rather
than in just three days. Thus, defining risk tolerance is an important part of defining the trading persona.

aligning your holding period with the appropriate tool will you can then recombine them cleanly. For example, a market
simplify your analysis and improve consistency. can be down sharply over the short term but still trending higher
over the long term, thus offering a low-risk entry point into a
Combining personas long-term trend. Conversely, a market can be overbought on a
It is best to align analysis with trading personas and holding monthly basis, allowing you an opportunity to rebalance your
periods. Naturally, when you separate tools and time periods, portfolio over a multi-decade time frame. An ideal example
would be a period of stock market decline accompanied by
Align Your Persona and Trading Tools strong bond market returns. Then rebalancing your portfolio
would allow you to trade off lower bond yields into stronger
Trading Persona Data Time Period Trading Tool returns when stocks rebound. The converse is also true. If
Very long-term (core) Yearly data Simple moving average stocks have been strong, then bonds are likely to be weak
or flat, and you can capture some higher-interest income
Monthly / weekly Simple moving average / by rebalancing your portfolio in your core holdings.
Long-term
data channel breakout
What’s your persona?
Medium-term Daily / weekly data Channel breakout
You can reduce your stress and improve the consistency
Overbought / oversold of your investment or trading decisions by clearly defining
Daily / intraday the particular persona you are trading. Then, you can align
Short-term oscillators or channel
data your data frequency and technical analysis tools with a
breakouts
particular persona to trade more effectively.
FIGURE 5: aligning your persona with trading tools. Here you see that
a simple moving average (SMA) will generally be sufficient to identify the underlying
data when using yearly data for your core holdings. An SMA or channel breakout Tushar Chande has traded the futures markets for two
analysis would be sufficient for long-term analysis using monthly or weekly data to decades for clients and institutions. He is the developer of
identify underlying trends. As the time period shrinks, you might get “cleaner” signals numerous widely used original technical indicators, and
with channel breakouts on daily data for medium-term analysis. For short-term trad-
ing, you can combine overbought/oversold oscillators to identify short-term extremes is the author of important books on technical analysis.
within the long-term trend. You can follow him at ETFMeter.com.

62 • December 2015 • Technical Analysis of Stocks & Commodities

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