Letters - April 2005

April 2005 Letters To The Editor
or return to April 2005 Contents
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 communication with our readers. Is there something you would like to know more (or less) about? Tell us about it. Without a source of new ideas and subjects coming from our readers, this magazine would not exist.
Address your correspondence to: Editor, STOCKS & COMMODITIES, 4757 California Ave. SW, Seattle, WA 98116-4499, or E-mail to editor@traders.com. All letters become the property of Technical Analysis, Inc. Letter-writers must include their full name and address for verification. Letters may be edited for length or clarity. The opinions expressed in this column do not necessarily represent those of the magazine. -Editor

FUTURES LIQUIDITY
Editor,
I just received and enjoyed reading your magazine, STOCKS & COMMODITIES. In the February 2005 issue, on page 87, you list futures liquidity from most to least liquid. I find it amazing that you list the British pound (GBP) as being more liquid than the Canadian dollar (CD). I have traded on the floor at the Chicago Mercantile Exchange for 25 years and have traded actively in both the GBP and the CD pits. The CD pit is far more liquid than the GBP pit. While trading in the GBP pit, I was told that if you compare the daily range with the volume, the GBP pit was the least liquid pit on the floor.
--Lgo, via email
______________________
Editor,
The Futures Liquidity page of the December 2004 Technical Analysis of STOCKS & COMMODITIES states that [the] "Greatest number of dots indicates the greatest activity." Taking a look in the average volumes traded in the Chicago Mercantile Exchange (CME) reveals that emini Standard & Poor's 500 has more volumes than S&P 500. If that is the case, why does S&P 500 [have] more dots than emini S&P 500?
In the article "The End Of The Trend," author Cornelius Luca states that intraday formations are much less reliable than daily ones. If the concept or strategy is robust, shouldn't it work in all time frames and all markets? Luca also mentions that shoulders patterns should be of fairly similar heights. How much leeway can we give to determine if it is a perfect head and shoulders pattern?
--Vetrivel, India
Staff Writer Bruce Faber replies:
The answer is both simple and complicated. First, let's look at the simple part. Volume is a very important part of the liquidity equations we use for the Futures Liquidity page, but it is far from the only part. Some of the other factors in the equations are price, margin, and both daily and total open interest.
As the S&P is five times as expensive (the margin) and five times as large (the contract) as the emini S&P, it has five times the potential profit. So even if more contracts are traded in the emini, it cannot overcome the size of the parent contract. I believe that is the basic answer to your question. Hope this helps.
Editor Jayanthi Gopalakrishnan replies:
As for your question about the head and shoulders pattern, considering that the head and shoulders take several weeks to a few months to form, it makes sense that daily charts are more reliable. Luca states that the height of the shoulders portion of the pattern shouldn't surpass the height of the head. That's the most important characteristic.

CHART PATTERN RECOGNITION
Editor,
Could you recommend chart pattern recognition software or some products that work well?
--S. Richter, via email
We don't recommend products or services, but you may want to visit our website, www.Traders.com, and look under Traders' Resources to identify such software. We have in the past reviewed chart pattern recognition software, which you can find by searching through our archives. --Editor

TRADING TERMS AND FOREX
Editor,
Reading through your website was very helpful. Please explain the following:
1. Swaps, forward options, and charting
2. Regularization in the field of technical analysis
3. Intraday and end-of-day trading and their differences
4. Futures trading
5. Options
6. Fibonacci resistance levels
7. Stochastics
8. Shorter-period Bollinger Bands
9. Foreign exchange brokerages
10. Trading systems
11. Gann analysis
I would also appreciate it if you can send more information on the technical analysis of forex trading. I hope to start trading very soon. I would appreciate it if you can give expert advice on how I can achieve my dream.
--Ayodeji Ogunjobi, via email
To understand the terms you have listed, you should start by looking at our glossary. Regarding forex trading, try searching our article archives. We have published articles on this topic, and we intend to continue publishing forex trading articles in the future.--Editor

MISSING METASTOCK CODES
Editor,
Where is the MetaStock code in the Traders' Tips section of the January and February 2005 issues of S&C? MetaStock was a winner of your 2004 Readers' Choice award for charting software. I would expect to see code for MetaStock before I see code for many less popular products in Trader's Tips. What happened?
--P. Mann, via email
For both the January and February issues, the MetaStock code was included in the articles.--Editor

INTERMARKET REVIEW
Do you sell Intermarket Review separately? Can I get hold of the past Intermarket Reviews? Thank you.
--Mustafa Turker Savkal
via email
You can purchase Intermarket Reviews via our Online Store: https://store.traders.com.--Editor

MORE EXCEL CODE
Editor,
"When you operate a business, you have not time to resolve puzzles," somebody said. That is why I agree 150% with Marc Carfi and others before him (Letters to S&C, February 2005) that all authors should include some Excel code in their articles. If this magazine doesn't have the staff for that, I am sure that many college or university students may compete to write them and have their names in such a prestigious magazine! And I am pretty sure it will instantly raise the number of your subscribers.
--Marc Thibault, via email

SIMPLE ABC CORRECTION
Editor,
In his January 2005 S&C article "The Simple ABC Correction," author Thomas Bulkowski incorrectly characterizes the Guess Inc. (GES) chart as containing a head-and-shoulders bottom pattern. The pattern identified by points A, B, C and D is not a bottoming (reversal) pattern but a bullish head-and-shoulders continuation pattern.
The differences between a head-and-shoulders bottom and a bullish head-and-shoulders continuation pattern are twofold. First, the latter pattern forms after a sustained bullish advance, as was exhibited by GES, while the former forms after a sustained price decline. Second, the volume characteristics are different. In a head-and-shoulders bottom pattern, volume generally is lightest in the left shoulder and steadily increases as the head and right shoulder are formed. In a bullish continuation head-and-shoulders pattern, volume generally is heaviest in the left shoulder and steadily diminishes as the head and right shoulder are formed.
GES exhibited its heaviest volume between points A and B, the left shoulder. This fact, coupled with the pattern forming after a price that almost tripled between datapoints 1 and 2, identifies the pattern as a bullish continuation. Subsequent price action confirmed this identification as GES continued moving high after breaking out in November 1999 and reaching a high of 33 in March 2000.
--David R. Steckler
Member, American Association of Professional Technical Analysts. via email
Thomas Bulkowski replies:
In January 1998, I started a project to catalog every chart pattern I could find, then statistically measured their performance. I found more than 15,000 patterns, each one visually assigned as a reversal or continuation. The results of that project became the book titled The Encyclopedia Of Chart Patterns.
In September 2003, I extended the project and found more than 38,500 patterns, but this time I automated the process of determining whether a chart pattern was a reversal or continuation. If price enters and breaks out of the chart pattern in the same direction, then it's a continuation pattern. If price enters and breaks out in different directions, then the chart pattern is a reversal. The beauty of this approach is that it's repeatable, it's consistent, and everyone agrees with the result. With your method, trend length (which trend? Short, intermediate, or long term?) and volume levels (how high is high; how low is low?) are subjective.
By my definition, the head-and-shoulders (H&S) you reference is a reversal; price enters from the top and breaks out upward. The H&S is also part of the corrective phase of a large measured move up chart pattern. The H&S forms as prices switch from trending down to up as the second leg begins. This also confirms that the H&S bottom acts as a reversal.

LIQUIDITY: LAS VEGAS OR LOS NASDAQ?
Editor,
I was browsing through the Traders' Tips section of the January 2005 issue and was surprised to see a comment by Tomasz Janeczko of AmiBroker that my breakout system in "Las Vegas Or Los NASDAQ" wasn't realistic because of liquidity problems.
To support his opinion, he tested Vion Pharmaceuticals, limiting the transaction size to 5% of the daily trading volume, which reduced the profit from 2,728% to only 187%.
Although all stocks tested had an average volume of more than one million shares (at the time of the test), I could not screen for volume all 100 stocks all 1,758 days of the test.
It seems to me that Janeczko's solution to the problem is a little extreme, because by limiting certain trades in certain stocks, we would defeat the purpose of testing, which is to evaluate and compare trading systems.
The problem of liquidity, however, can be solved by reducing the original equity. This will not alter profit or loss in percentage terms, provided that commissions are also calculated in percentage terms.
A second method would be to scale the purchasing or selling, accumulating or distributing the shares for three to four days after the signal. As far as I know, none of the off-the-shelf available software offers this option.
Out of curiosity, I tried this method, repeating the Vion test and manually reducing trades to 5% of the daily volume and spreading the trade to three to four days after the signal. The results were similar and slightly better than the original test. This was mainly because the reduced profit from the third trade was offset by the reduced loss of the second trade and higher profit of the fourth trade (as the stock declined during the two days after the signal date).
--Markos Katsanos, via email

KATSANOS METASTOCK FORMULA
Editor,
Thanks for Markos Katsanos's article ["Las Vegas Or Los NASDAQ?"] in the January 2005 S&C magazine. I have found the article to be useful in my trading. Does Katsanos have a search formula for MetaStock to find stocks that meet the trading requirements?
--Christine Martin, via email
Markos Katsanos replies:
You can use exactly the same formula I used for testing. You could also add the following conditions: C<10 (to limit the search to low price stocks) and mov(V,50,S)>50000. (This condition will eliminate illiquid stocks.)
Because of supply and demand dynamics, the system works better with low float stocks (less than about 60 million shares outstanding), so you might also want to manually eliminate high-float or high-cap stocks.
In addition, when exploring NASDAQ stocks, you could add the following line to eliminate the possibility of a stock getting a NASDAQ delisting notice or declaring a reverse split:
MOV(C,21,S)>1
Keep in mind that there will be few breakouts in bear markets, so use it to explore only when the market is going up (that is, when the S&P 600 is above its 50-day average and its 20-day average is pointing up).
For your convenience, here is the full formula. Just copy and paste it into the MetaStock explorer.
MACDH:=MACD()-Mov(MACD(),9,E);
SDC:=Stdev(C ,30)/Mov(C,30,S);
PERIOD:=14; COEF:=.1;
INTRA:=Log(H)-Log(L); VINTRA:=Stdev(INTRA,PERIOD);
INTER:=Log(Typical())-Log(Ref(Typical(),-1)); VINTER:=Stdev(INTER,PERIOD);
CUTOFF:=COEF*(VINTER+VINTRA)*C;
MF:=C-(H+L)/2+Typical()-Ref(Typical(),-1);
FVE:=Sum(If(MF>CUTOFF, +V,If(MF<-CUTOFF,-V,0)),PERIOD)
/Mov(V,PERIOD,S)/PERIOD*100;
{Buy Conditions}
FVE>-1   AND LinRegSlope(C,35)/Ref(C,-35)*100>-.35
 AND LinRegSlope(C,35)/Ref(C,-35)*100<.4
AND LinRegSlope(C,70)/Ref(C,-70)*100>-.4º
AND LinRegSlope(C,70)/Ref(C,-70)*100<.4
AND LinRegSlope(C,170)/Ref(C,-170)*100>-.2
AND MACDH>-.003ºº
AND (Sum(SDC-LLV(SDC,150),3)/Sum(HHV(SDC,150) -LLV(SDC,150),3))*100<20 AND C>Mov(C,10,E)
AND SDC*ADX(25)<1.3 AND Stoch(10,3)>30 AND C<10 AND MOV(V,50,S)>50000
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