March 2004 Letters To The Editor
or return to March 2004 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
ON-BALANCE VOLUME
Editor,
I enjoyed D.W. Davies' January 2004 article, "Daytrading With On-Balance
Volume." As a point of reference, I need to point out that while Joe Granville
(for whom I have utmost respect as a technician and friend) popularized
the term on-balance volume, the idea was originally called cumulative
volume and was presented in a course written by Woods and Vignolia
in San Francisco in 1946.
Larry Williams
Thank you for pointing this out.
Editor's note: Larry Williams is author of Definitive Guide
To Futures Trading, as well as The Secret Of Selecting Stocks For
Immediate And Substantial Gains, and other works. He was an early contributor
to STOCKS & COMMODITIES with "The Ultimate Oscillator" (August 1985)
and was interviewed in the June 1987 S&C ("Larry Williams: Where Will
He Go Next?") and again in July 1997 ("Contextual Trader Larry Williams").-Editor
BOLLINGER BANDS
Editor,
Regarding the letter to the editor that appeared in the January 2004
S&C from Steven Schon on the topic of Bollinger Bands:
Low bandwidth, which can be defined as:
... is indeed useful in predicting higher volatility,
but as Schon correctly observes, bandwidth in and of itself contains little
in the way of a directional forecast. We have found volume indicators such
as David Bostian's intraday intensity or the money flow index (detailed
in STOCKS& COMMODITIES, March 1989, Vol. 7, No. 3) to be useful in
helping to anticipate direction in the wake of a "squeeze." In addition,
certain price patterns, such as the head fake, have proven to be helpful
too.
In his letter, Schon asked you for suggestions for websites that might
feature lists of stocks with low bandwidth. We wanted to mention that our
website, www.BollingerOnBollingerBands.com, might provide what he is after.
It offers prescreened lists of typical Bollinger Band setups such as the
squeeze -- which is our nomenclature for low bandwidth -- as well as custom
technical screening. The site also offers charts, M&W pattern analysis,
portfolio monitoring, and a number of other features for the Bollinger
Band enthusiast.
Thanks for your fine magazine. I remain, as always, a thorough reader,
John Bollinger, CFA, CMT
John Bollinger has thrice been interviewed in S&C: in July 1993,
April 1997, and May 2002, and has contributed two articles to S&C:
"Using Bollinger Bands" (February 1992) and "Put Volume Indicator" (March
1993). He is author of Bollinger On Bollinger Bands.-Editor
40-WEEK CYCLE IN THE STOCK MARKET
Editor,
Jay Kaeppel's article "The 40-Week Cycle In The Stock Market" in
the January 2004 S&C reveals arguably the best cyclical analysis of
the Standard & Poor's 500 I have seen to date. However, I was surprised
that the S&P was the only index used as supporting evidence. Using
my LIM data/software, I was able to quickly recreate Kaeppel's analysis
and then test for normalization across other US stock market indexes. I
found very similar (if not better) bullish phase results:
- S&P 500 = 77% of the time
- Dow Jones = 80% of the time
- OEX (S&P100) = 75% of the time (starting 1975)
- Russell 2000 = 69% of the time (starting 1978)
- Nasdaq 100 = 72% of the time (starting 1971)
- AMEX (XAX) = 80% (starting 1995)
Spiders would have yielded 4.95% (average) since 1/12/2001, and diamonds
would have yielded an average of 8.45%! I can't wait to see what happens
at the end of the 5/2/03 cycle!
Tomas Kornegay, via email
MORE ON THE 40-WEEK CYCLE
Editor,
In my work on longer cycles, I have found that they are not symmetric,
probably because of the ongoing secular or supercyclical bull market we
have been in for more than 200 years. I find a four-year cycle, for example,
has to be treated as being positive for 30 months and negative for 18 months.
I also find, as Kaeppel did, that for shorter cycles, the negative
periods are really neutral, again because of the upward bias.
However, the key point is that the 40-week cycle might really be
positive for something like 24 or 30 weeks and negative for the balance.
If he hasn't considered that, he should.
Bob Peirce, via email
Venetia, PA
QUESTIONS ABOUT THE 40-WEEK CYCLE
Editor,
Thanks for the interesting article on cycles in the January 2004
S&C ("The 40-Week Cycle In The Stock Market").
On page 32, author Jay Kaeppel states, "Our analysis of the 40-week
cycle starts on May 15, 1970..." I want to ask, why that date? What is
important about May 15, 1970? Why not another start date? How was this
date selected? Was this 40-week cycle backtested and fitted to the best
start date? Does the theory hold up if another start date is used? I would
appreciate further discussion of the selection process for the start date.
Seems to be an important part of the cycle theory.
Mike Ruff Pampa, via email
Jay Kaeppel replies:
I don't recall where I first heard about the 40-week cycle. Cycles get
bandied about a lot in financial literature (and much of it does not seem
to hold up), and somewhere, somebody mentioned the "40-week cycle is due
to bottom" on such and such a date. This was probably 10 or more years
ago. I tested this one at the time, and it has held up reasonably well
going forward.
I have not tried testing it with other starting dates. My guess is that
if you tested every day in 1970 as a start date, you would probably find
a better optimum start date, but I have essentially left well enough alone.
One last note: I do not trade based solely on this cycle. I do, however,
use it as a factor in deciding whether to be bullish or bearish.
I hope this answers your questions.
DETECTING BREAKOUTS
Editor,
First, I would like to thank Markos Katsanos for those two great
articles on detecting breakouts ("Detecting Breakouts," April 2003, and
"Detecting Breakouts In Intraday Charts," September 2003). Without exaggerating,
I may say that they were two of the best articles I have read in S&C.
I have been studying the markets and developing trading systems over
the past two years and I am very interested in gaining experience and new
ideas in this field.
After studying the system's code in "Detecting Breakouts In Intraday
Charts," I have a couple of questions that were not answered in the article.
First, in the simulation report, different values are set in the upper
and lower bound fields for each time frame. However, what isn't explained
is what those values derive from. Is there a formula as in the case of
the cutoff amount and length of "period," or is it simply a result of simulation
and optimization? If it is a result of optimization, isn't there a large
risk of curve-fitting the system?
One more thing: Which parameters does Katsanos suggest optimizing
when testing the system? I guess the number shouldn't be larger than three
or four in order for the system to be robust across different markets.
Have you tested the system over a range of markets (for example, stocks,
futures, bonds, and so on) or do you suggest considering it to trade stocks
only?
Finally, why does the indicator only trigger long entries? Is there
some technical difficulty, or is it simply that Katsanos designed it for
trading stocks?
George, via email
Markos Katsanos replies:
Thank you for your kind words about my article.
The upper and lower bound values for minute charts have not been optimized
but are adjusted according to the square root of time (formula 3 in the
article) from the corresponding daily value. For example, the upper bound
value for the 15-minute chart is 0.6*sqrt(15/390)=0.12, where 0.6 is the
corresponding value for daily charts, and 390 is the number of minutes
per trading day (6.5*60). You can optimize the linear regression angle
values, as these will vary from stock to stock.
An FVE-based system, as long as you have correct volume data, works
with indexes, but I have not tested it with futures. Take a look at http://www.trading-konzepte.de/indikator/fve.htm
and how FVE predicted the German DAX's spectacular advance three months
in advance. (I have no connection with this German website.)
You should also take market conditions into consideration. This particular
system worked well at the time I wrote the article (May 2003), but I don't
get as many hits now (at least in daily charts), since most stocks have
already broken out from bases (the stock under test, ATML, has tripled
since). I suspect that a momentum-based system might work better under
current market conditions.
As for short-selling opportunities versus long entries: FVE is a leading
indicator, and this is a problem if you want to use it for short-selling.
If you buy a stock early, you will only need some patience, but if you
sell short too early, you also need deep pockets, otherwise you will be
stopped out. This is because as the stock goes up, buyers become less enthusiastic,
volume diminishes, and Fve turns down and triggers a short sale signal.
At this point, momentum players step in and the stock continues to go up
for some time.
If you want to use FVE with a short-selling system, it is best to combine
it with a lagging indicator such as MACD or moving average.
TRADERS' TIPS
Editor,
Just completed the January issue. I've been reading your magazine
for a long time and wouldn't be without it.
My reason for writing is to question your reasoning for including
so much programming material. I counted 18 pages in the last issue. In
how many of those pages do you think I would be interested? Of the 18,
probably 16 are a waste of my time and money.
Most of us have only one of the programs involved. I highly recommend
that a reference to each be included but no macros or programming. Think
about it. Would you manually copy the material from the magazine, or go
to the website to copy and paste? Much less potential for error and a lot
easier and faster. Is there an advertiser($) reason for including this
material in the magazine? I think this would be an improvement.
RB Millar, via email
We have included code in the magazine since the very first issues, since
STOCKS & COMMODITIES readers have always been interested in code. It
is part of our editorial format to try to include code, to make implementation
of techniques easier. But the code isn't printed in the Traders' Tips section
with the intention of it being retyped by readers; in fact, all the Traders'
Tips code is posted monthly at our website for copying and pasting. We
print it only because some readers like to browse the code to see the logic
in the programming as part of studying the technique, and to see how the
various software implements a given technique.
But we haven't cut back on articles to include code; instead, we increased
the page count in part to include the section. Two years ago, we typically
published a 108-page magazine; these days, the magazine is typically 124
pages or more.
We appreciate your feedback and would be interested in hearing from
other readers as well at Editor@Traders.com. We could switch to posting
the code at our website only.-Editor
VOLUME-WEIGHTED AVERAGE PRICE
Editor,
An article appeared in the May 2001 S&C titled "Volume-Weighted
Average Price" by George Reyna. This article appeared before I subscribed
to S&C, but I was so interested in the article that I purchased it
from your website. Unfortunately, it did not contain any coding for analysis
packages that you usually publish in the Traders' Tips section. I looked
on your website in the hope the code would be there, but I can't locate
it. Could you direct me to a source of code for TradeStation 2000i? Whilst
there is code for VWAP on TradeStationWorld.com, I'm concerned that it
is not the code that appeared with the article.
Dave G., via email
The Traders' Tips section that appeared in the May 2001 issue was based
on that article; however, TradeStation didn't submit code for that technique
that month. On the other hand, Reyna did provide an Excel spreadsheet with
code for the VWAP in his article. Please compare that code with the TradeStation
2000i code you found at TradeStationWorld.com and see if they are the same
formula.-Editor
HEAD & SHOULDERS PATTERN
Editor,
The head and shoulders pattern is formed not only on price but on
momentum as well. But is there any signficance of this pattern on volume
behavior? Attached is a chart for your review (Figure 1).
FIGURE 1: Chart submitted by reader.
Syed Rehan Ali, via email
A head and shoulders pattern can be either a reversal or continuation
pattern. In the case of a reversal to an uptrend, the volume on the head
and the right shoulder should be less than the volume on the left shoulder.
Otherwise, similar volume on the head and right shoulder should alert the
analyst that a continuation of the uptrend is possible. The key is that
uptrends that exhibit subsequent peaks on lowered volume are likely to
either reverse or go sideways -- hence, the volume would not have the characteristic
head and shoulders profile.-Dennis Peterson, Staff Writer
ERRATA: TRADERS' RESOURCE
In the Traders' Resource section on page 111 of the February 2004
S&C, the "Top 10 Viewed" box incorrectly refers to the Trading Systems
category instead of the Exchanges category. We regret this error.
ERRATA: ANATOMY OF A CANDLESTICK
Editor,
In my article "Anatomy Of A Candlestick" in the December 2003 S&C,
the wrong candle was highlighted in Figure 1 when my article was published.
The doji from December 30 was circled, not the December 31st hammer candle,
as it should have been.
Clive Lambert, via email
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