2004 has been a particularly challenging year for technical analysts sincemost of the financial (as opposed to commodity) markets have spentmuch of the year trapped in trading ranges and sideways-movingmarkets present a real challenge for most technically-based systems ofanalysis. This issue of the Journal is being prepared in the run-up to theUS presidential election and many analysts are hoping that a decisiveoutcome will trigger off the traditional end-of-year rally in the equitymarkets. One area where we have already seen a strong break-out is thecurrency market where the dollar has slid to a new eight-month low intrade-weighted terms.

Forty-six candidates sat the STA Diploma Examination in the spring, ofwhich 10 were awarded distinctions and a further 31 passed. FourteenDITA candidates also passed. Candidates were faced with a question on aMarket Profile© chart. As the topic had been thoroughly covered in aRevision Day exercise, many candidates, not surprisingly, opted to answerthat question and most scored high marks. This led to an overallimprovement in the marks obtained and to one of the highest averagemarks ever. More importantly, the standard of answers to the crucialmajor analysis question also improved. Furthermore, it is particularlypleasing that for the first time the average mark for STA candidates(75.2%) was higher than the average mark for DITA candidates (69.7%).

The Scottish chapter of the STA held their first meeting in Aberdeen on30th October at RGU Aberdeen Business School. Locally-based staff fromfund management houses as well as MBA students from the Universitywere joined by a number of members from Edinburgh who had decided tomake a weekend of it. The three-hour meeting was opened by Professor

Raj who welcomed the STA to Aberdeen and RGU, and highlighted theimportance of technical analysis and behavioural finance in modernmarket theory. He helped the audience differentiate between fundamentaland technical analysis by telling the following story... ‘Two men are tryingto cross a bridge during a storm. They had arrived at night and one says tothe other “we should cross now, it’s raining so heavily that the bridge mightbe washed away”. The other man replies,“the bridge has been built by thebest engineers, gauging historical rain and water flow and using the bestmaterials and engineering principles. We can cross tomorrow in daylight.”After a few hours, during which the water continues to rise, the first mansays,“I don’t disagree with you about the bridge’s construction, but thetrend of the water’s rise is making me nervous. I’m crossing now, goodluck!”. He scampers safely across the bridge. The second man waits and inthe morning, with the water roaring underneath, he starts to cross thebridge. Needless to say, the bridge’s underpinnings are washed away, thebridge falls and he is swept away.’ Professor Raj left his audience to spotwho was the trend follower and who was the fundamentalist!

Gerry Celaya (MSTA) addressed the audience next, explaining what the STAstands for and what it is trying to do in Scotland. The STA is holdingmeetings in different cities and encouraging students to consider joiningas associate members and attending the meetings in Edinburgh wheneverpossible. Murray Gunn (MSTA) explored the ‘State of the Markets’ and gavean interesting talk on the stock, bond, commodity and foreign exchangemarkets. He covered the key principles of each market, giving examples ofimportant technical chart patterns, momentum indicators and his ownforecasts of their probable direction. He took questions from the audiencethroughout the talk, and there were lively interchanges when theprinciples of technical analysis challenged the Efficient Market HypothesisTheory that the MBA students had been studying.

Josh Bruzzi (MSTA) also spoke and explained how he uses the ‘leader -follower’ and ‘quality rotation’ ideas that he learned from very successful,fundamental analysis-based stock market traders as the basis for hisquantitative ranking models and chart analysis. His talk prompted aninteresting discussion on the issues of market timing and pricesdiscounting information ahead of the actual event (why does a share fallafter good news?). As a result of the very positive feedback that cameout of this meeting, we hope to hold another meeting at RGU next year.

IN THIS ISSUE

STA Exam Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

P. Goodburn Ratio and proportion – a matrix of

converging equations to determine

prefential vs alternate counts for gold . . 8

D. Watts Bytes and Pieces . . . . . . . . . . . . . . . . . . . . . . . . 8

Obituary Tim Brain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

H. Pruden &

B. Belletante Wyckoff laws and tests. . . . . . . . . . . . . . . . . . 9

D. Knapp Market Profile . . . . . . . . . . . . . . . . . . . . . . . . . . 11

COPY DEADLINE FOR THE NEXT ISSUE 30th January 2005

PUBLICATION OF THE NEXT ISSUE March 2005

FOR YOUR DIARY

Wednesday, 8th December Alpesh PatelTraderMind Derivatives Ltd

Wednesday, 12th January TBA

Wednesday, 9th February Martin ScottChief Technical Strategist, RBS Financial Markets

Wednesday, 9th March Elizabeth MillerHead of Research, Redtower Research

N.B. The monthly meetings will take place at the Institute ofMarine Engineering, Science and Technology80 Coleman Street, London EC2 at 6.00 p.m.

November 2004 The Journal of the STAIssue No. 51 www.sta-uk.org

MARKET TECHNICIAN

– 200 DAY MOVING AVERAGE

Dollar trade-weighted index

Source Thomson Financial Datastream

MARKET TECHNICIAN Issue 51 – November 20042

DISTINCTION

CHARLOTTE DENISTYDOMINIC GODFREY

PETER JENKINSGULAMABBAS LAKHADOMINIC LIVERSEDGE

TAI ONOMARIA PACINI

RICHARD PERRYNEIL SMITH

MATTHEW VAN DYCKHOFF

PASS

ABDULAZIZ ALMUZAINITAMSIN BARTH

MARTIN BRABENECSARAH CANNEYAMES CARTER

MURRAY COLLISMARK DEANS

SHAYAM DEVANIJIM DRU DRURY

PATRICE DU LUARTKAREN EYNON

ERNEST J FERRIDAYJAY GANDHI

REMY GAUSSENSLEE GOGGIN

MICHAEL GRIFFITHSNICHOLAS HOGGTONI JOHANSSON

HARJ KALLAHDAVID KNAPP

SIMON MAELZERBRIAN MAGEEILESH MAWJI

SEAN MEADOWSSTEWART NIXON

JEROEN PADTARJUN PANCHAPAGESAN

MARK PANTERANNALISA PICCIOLO

NUDGEM RICHYALMARCO ROBUTTI

CHAIRMAN

Adam Sorab,Tel: 020 7201 6900

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Simon Warren. Tel: 020-7656 2212

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The Barbican library contains our collection. Michael buys new books for itwhere appropriate. Any suggestions for new books should be made to him.

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John Cameron. Tel: 01981-510210 George Maclean. Tel: 020-7312 7000

EXTERNAL RELATIONS

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Anne Whitby. Tel: 020-7636 6533

MARKETING

Gerry Celaya. Tel: 01561 340358 Simon Warren. Tel: 020-7656 2212 Kevan Conlon. Tel: 020-7329 6333Barry Tarr. Tel: 020-7522 3626Richard Raymar. Tel: 07890 821619David Sneddon. Tel: 020-7888 7173

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Please keep the articles coming in – the success of the Journal dependson its authors, and we would like to thank all those who have supportedus with their high standard of work. The aim is to make the Journal avaluable showcase for members’ research – as well as to inform andentertain readers.

The Society is not responsible for any material published in The MarketTechnician and publication of any material or expression of opinionsdoes not necessarily imply that the Society agrees with them. TheSociety is not authorised to conduct investment business and does notprovide investment advice or recommendations.

Articles are published without responsibility on the part of the Society,the editor or authors for loss occasioned by any person acting orrefraining from action as a result of any view expressed therein.

NetworkingWHO TO CONTACT ON YOUR COMMITTEE

Spring Exam 2004Results

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Issue 51 – November 2004 MARKET TECHNICIAN 3

The main difficulties in the application of the Wave Principle arisebecause there are only three governing rules and its many guidelines areopen to some variation. The categorisation of each pattern sequence intoits correct nomenclature, or wave degree, is essential to the countingprocess but is open to interpretation. Furthermore, a five wave impulsesequence that is associated with trend can actually exist within a threewave counter-trend corrective pattern, namely a flat, or its variation, theexpanding or running type. And as if to add a new dimension to the term‘alternation’, a counter-trend sequence can be found within thecomponents of an impulse wave – for example, a zig zag or its variation,the double, triple within waves 1, 3 or 5 of an ending-diagonal. So, isthere a way or a methodology that can assist in the process of correctcounting, to differentiate when a five wave impulse is part of a correctionand a zig zag part of an impulse? Also, is it possible to identify when anypattern has been truly completed? It is these questions that lie at thevery core of Elliott’s foundation.

It is the time old science of geometry, ratio and proportion that can assistin our search for a system that allows us to count waves correctly. Thegeometric order found in price activity not only causes repetition ofpattern, but it simultaneously creates an intricate matrix of Fibonacci (fib)ratios over varying degrees of size, merging together in a fractal harmonythat binds each together.

In a case study of gold prices, we shall search for this harmonic matrix ofratios that combine the proportional element in an attempt to determinethe correct wave count between two possibilities. Neither is considered‘preferential’ or ‘alternate’ at this stage – both are equally analysed withoutprejudice. This will be used juxtaposed to fib-time-ratios, the evaluation ofthe ‘rarity’ of pattern and any rule or guideline that may be applicablesuch as ‘overlap’ and ‘retracement to ‘fourth preceding degree’.

Fig 1 begins with viewing gold prices from the historic low in 1932 at17.06 US$ per ounce. An initial advance to 34.87 completes super-cyclewave I and was followed by a prolonged wave II sequence of the samelevel until its completion in October 1967. Eventually, a thrust higherbegan, a typical characteristic of third waves as in 1971 the international‘gold standard’ was abandoned.

The most impressive aspect of super-cycle wave III is that it subdividesneatly into a five wave impulse sequence of cycle degree, right into itsconclusion at 698.75 in early 1980 (closing price based on quarterly dataseries). But our main study will be wave IV and to establish whether it hascompleted or remains in progress.

Now taking a glance at this chart, we can see that the decline for wave IVhas not achieved one of Elliott’s guidelines – that a retracement shouldenter the price territory of ‘fourth wave preceding degree’. A fib. 38.2%retracement of wave III is calculated towards 224.00 but gold has nevertraded at this price level after 1980. A 50% target is at 157.00 and thisdoes move into the price area of cycle wave 4 of III. Inserting a twelve yearcycle (vertical red lines), we can see this highlighting the beginning ofwave I, III and the conclusion of wave V, but it does not coincide with theabsolute low for gold that traded in August 1999. These two facts alonedo not disprove that wave IV could have completed in 1999, but it doesoffer good reason to consider the probability that it continues to unfold.

The pattern contained in the decline from 1980 must now be analysed. Infig 2, this chart depicts an original ‘alternate’ count from WaveTrack datedOctober 1999. It labels the decline from 850.00 (monthly hi-lo-close dataseries) as unfolding into a double zig zag pattern to 251.70, completingwave IV. It is important to note that under this counting, Primary wave Xcompleted at 499.75 as an expanding flat pattern, (A)-(B)-(C), 3-3-5. Butwhy was it categorized as an ‘alternate’ count? The reason is because it isuncommon for the two zig zag sequences within a double pattern tounfold to a ratio of 61.8% (as shown). As the insert diagram from ourtutorial archive shows, there is a greater correlation between the twowhere either equality is found, fib. 100%, or where the first is extended byfib. 61.8%. This prompts us to examine the chart further. It is interestinghowever that the second zig zag can be cut by the ‘golden section’ andthis exactly intersects the low of wave A at 325.50. This proves that thisdecline is a zig zag, but not necessarily part of the double pattern from850.00 – so what else can be considered?

The low at 251.70 is the lowest low since 1980 – the previous ‘couple’ inJan ‘82 and Feb ‘85 which we know completed the first zig zag –therefore, through deduction, if the second zig zag decline is notcompleting a double formation, it can only be part of a more complexpattern for cycle wave X.

If so, then a new lower low to 251.70 (below Jan ‘82 and Feb ‘85) willbecome an ‘expanding’ B wave within such a pattern – see fig 3.

This must now be tested. B waves that move into new price territorycommonly extend by either fib. 23.6% or by fib. 38.2% – but not usually byfib. 61.8%. And so by extending wave A by fib. 23.6%, the calculationcoincides exactly at 251.70 +/- forming two ratios into proportion at thisfixed price level (red and black lines coincide). A valuable insight from thislast calculation is achieved – this proof of an expanding B wave eliminatesthe probability of gold completing super-cycle wave IV at 251.70, and

Ratio and proportion –a matrix of converging equations to determine prefentialvs. alternate counts for goldSummary of presentation to the STA’s Elliott Wave Symposium on 2nd July 2004 By Peter Goodburn

Figure 1

Figure 2

MARKET TECHNICIAN Issue 51 – November 20044

combining this with the doubts raised earlier in fig 1, the probability thatwave IV remains in progress can now be considered high.

The inserted chart, again from the tutorial archive shows these fib.calculations unfolding within an expanding flat pattern, A-B-C, 3-3-5. Thatmeans the advance from 251.70 is wave C of this sequence and mustsubdivide into a five wave impulse pattern. A very interestingobservation is now made – if this ongoing pattern is an expanding flat,then Primary wave A is itself an expanding flat (see remarks maderegarding fig 2) of Intermediate degree. The fractal implications of thisare significant because we have an expanding flat within a larger degreeexpanding flat – known as self-similarity. The question now raised is this– how common is it for an expanding flat pattern to contain another self-similar pattern in the position of wave A? The answer is that it isuncommon, but not rare (which will be discussed later).

What targets are likely for Primary wave C of cycle wave X of theexpanding flat? In fig 4 we can see another forecast from WaveTrack inOctober 1999 which was the ‘preferential’ count at the time. It shows afib. 100% equality between the extensions of wave B and C of theexpanding flat pattern so that wave C targets are projected towards568.65. This price level coincides with a fib. 61.8 retracement calculationof the preceding decline for the first cycle degree zig zag, again formingtwo ratios into proportion and significantly increasing the probability ofprice following this harmonic path.

Going a little further, if prices eventually complete this expanding flat forcycle wave X at 568.75, and the second cycle degree zig zag declinesafterwards, then using a fib. 100% equality ratio from the first, projectsthe second to complete at a price level of 198.75 – and this area movesto the top range of ‘fourth wave preceding degree’ – considered aminimum requirement (fig 1).

Earlier we mentioned applying the harmonic matrix of ratio andproportion to determine the correct wave count between twopossibilities – what other count can be considered? A B wave that movesprice into a new extreme is not exclusively part of an expanding flatpattern. Another pattern that contains the same is the triangle (see fig 5)

taken from the original forecast in May 2000. In this count, the advancefrom 251.70 is Primary wave C within a contracting/symmetrical typetriangle. Targets towards 423.80 were calculated because within such apattern, there is a common ratio relationship between waves A and C –where wave C unfolds to a fib. 100% equality ratio of wave A – butespecially since wave B only extended wave A by fib. 23.6%. Other fib.ratios may be used if wave B were extending by fib. 38.2% or greater.

Looking further ahead, should a contracting/symmetrical triangleeventually unfold as cycle wave X, then the second cycle degree zig zagcan be calculated to complete towards 177.80 where a fib. 100% equalityratio is applied from the extremity of the triangle (top of wave A). Thisrelationship is quite common – it allows the second zig zag to unfolduniformly by incorporating the corrective sequence – something thatcould not be calculated in the ‘alternate’ count of fig 2. This works in thesame way where, for example, an impulse wave does not reach itsmeasured target, but the following correction unfolds with an expandingB wave that trades into a new price extreme at the original measuredtarget – in other words, the B wave of the correction compensates bytrading at the intended target of the preceding impulse wave.

At the original time of publishing the targets for wave C towards 423.80,the price of gold was still trading at around 276.00 – a long way away. Butas gold began to move closer to this target late last year, it becameimperative to ascertain the exact termination level. The 423.80 target forwave C was calculated by equating it to wave A (see above), but actually,wave A unfolded as an expanding flat pattern in its own right – so whichpart of A was used to measure targets for wave C? Referring again to fig 5,we can see highlighted in red, the measure used was from beginning toend of the expanding flat – from 296.75-499.75. So what otherpossibilities are there? There are four in all, the first we calculated already,the other three are by measuring each of the waves within theexpanding flat – namely, waves A,B and C.

Two of the three remaining were calculated. In fig 6 we have used a fib.100% equality ratio of wave (B) of the expanding flat, giving a target forPrimary wave C towards 450.95. Also, measuring just wave (A) produces aslightly lower target towards 431.90 – see original calculation in Feb. ‘03in fig 7.

Figure 3

Figure 5

Figure 6

Figure 4

Issue 51 – November 2004 MARKET TECHNICIAN 5

And so the next question arises – which one is correct? To ascertain this, wemust look at the subdivisions of the advance from 251.70. If primary waveC is really unfolding in the advance from 251.70, then it must subdivideinto an Intermediate degree zig zag, or multiple variation. In fig 8, this (A)-(B)-(C), 5-3-5 zig zag is shown already reaching its price target in January2004 – all that is left to examine is the next lower degree, the subdivision ofminor wave v. of (C) to ensure a five wave impulse pattern has completed –see fig 9. This however, seems incomplete. Minor wave v. is shown assubdividing into only three waves of minute degree, waves 4 and 5 are stillunfolding. This must therefore allow Primary wave C the chance ofunfolding beyond the 431.90 target, towards the higher area at 450.95? Inthis chart, we have highlighted the point of ‘overlap’ of minute wave 1 at375.25 because wave 4 must complete above this level in order to allowwave 5 to progress into a new higher high.

Now examination of minute wave 4 is necessary. So far, the price ismaintained above the overlap, but the entire sequence of this pattern isvery complex. It seems that there are two viable ways to count the

pattern down from the 431.38 high. The first is shown in fig 10 as anexpanding flat. In order to validate this, minuette wave [b] must itself belabelled subdividing into an expanding flat of smaller, or sub-minuettedegree. This is important because we refer back to the opening remarksabout ‘rarity’ of pattern. Earlier, we examined self-similarity where anexpanding flat unfolded in the A wave position of a larger expanding flat– an uncommon event. But in this case, we find ourselves considering anexpanding flat in the B wave position – now this is seen as a ‘rare’ eventand it must be taken into context of evaluating probabilities.

The second way to count this pattern is labeling the completion ofminute wave 4 at 387.48 and wave 5 at the slightly higher high at 432.60– see fig 11. The problem with this count is that wave 4 must be labelledas subdividing into a double zig zag in minuette degree and it is clearthat the terminating level of the second zig zag did not meet any fib.ratio relationships. For example, it did not equate to the first, neither did387.48 complete at a fib. support level of the advance in precedingminute wave 3.

At this juncture, the two competing counts are at least balanced forconsideration. On the one hand, a rare B wave of an expanding flatsubdivides into a smaller pattern of the same, and alternatively, a doublezig zag does not conform to the commonly established ratiorelationships found in such patterns. The only way to differentiatebetween the two would be to see in which pattern sequence theadvance unfolds into, counting from the current low at 377.20. A fivewave impulse advance trading beyond ‘fourth wave preceding degree’,above 399.75 (27th April) would confirm minute wave 5 in progress withnew higher highs obtainable. Alternatively, any three wave advance tothe same area would revert the count labeling the conclusion of wave 5at the current high of 432.60 (1st April).

What followed was a three wave advance to 395.88 and another declineto below 377.20. In fig 12, the fifth wave of the decline from the high at432.60 is shown unfolding into an uncommon ending-expandingdiagonal. But this is not so important as the fact that this extra decline toa lower low, to 371.00 broke the ‘overlap’ of minute wave 1 (375.25) – this

Figure 7

Figure 8

Figure 9

Figure 10

Figure 11

MARKET TECHNICIAN Issue 51 – November 20046

level shown earlier in fig 9. It confirms the conclusion of minute wave 5 at432.60 and with it, the termination of Primary wave C of thecontracting/symmetrical triangle – see fig 13.

Of course, the 432.60 high can also be labelled as completingIntermediate wave (3) of Primary wave C as described earlier, and so wemust return to our original query – the two counts, finely balanced at thispoint and under consideration for cycle wave X are either thecontracting/symmetrical triangle or the expanding flat. In order todifferentiate between these two, it will be important to calculate theamplitude decline from 432.60.

Lets begin with labelling the high as Intermediate wave (3) of C of theexpanding flat scenario. Wave (4) declines must remain above wave (1)’shigh at 342.00 to avoid ‘overlap’, and so far, with a five wave impulsedecline between 432.60-371.00, this must be labelled minute wave a ofan ongoing zig zag decline for minor wave a. (assuming a triangle forwave (4) will eventually unfold). Using the two commonly established fib.ratio measurements to calculate the termination of the zig zag, wave a iseither multiplied by fib. 100% ratio and subtracted from wave b toproduce targets for wave c to 341.80, see fig 14, or extended by fib.61.8% to 337.40 – see fig 15. Both calculations overlap wave (1). The onlyway ‘overlap’ can be avoided is if a deeper retracement unfolds forminute wave b, then measurements applied as follows: a fib. 38.2%retracement for wave (4) is calculated to 352.70 – measure the amplitudedecline of minute wave a and add to 352.70 (log scale) – this produces apotential target for wave b towards 410.20 where waves a and c unfoldto a fib. 100% equality ratio – see red line in fig 14.

If wave b cannot retrace deeply inside the decline of wave a, it wouldsignificantly decrease the probability for this count to be correct,negating the expanding flat scenario. Once overlap occurs, the onlymedium-term count remaining will be the contracting/symmetricaltriangle as cycle wave X.

It is now important to establish whether such an advance can beconsidered when examining the unfolding pattern within minute wave b.Counting higher from 371.00, it appears a zig zag of minuette degreecompleted at 399.50 – see fig 16. And the following decline has alsounfolded into a zig zag (note 100% ratio equality) and so can be labelledwave [x] – it completed at the fib. 61.8% retracement level, forming tworatios into proportional harmony. Now if the wave [x] has completed at381.15 and the second zig zag unfolds to a fib. 100% equality ratio to thefirst, then the target for completion is towards 410.40 – only 20 cents awayfrom our previous calculation, again forming an intricate matrix of ‘clusters’.

Figure 12

Figure 13

Figure 14

Figure 15

Figure 16

Issue 51 – November 2004 MARKET TECHNICIAN 7

The result of gold prices trading towards the 410.20/.40 level willmaintain the expanding flat pattern for wave X, at least for the timebeing. Even when prices decline following the completion of minutewave b it will be only the ‘overlap’ level at 342.00 that will negate it. As itcurrently does remain valid, the ongoing forecasts for Intermediate,Primary and Cycle degree can be seen in figs 17, 18 and 19.

And a final return to the contracting/symmetrical triangle scenario forcycle wave X. For this count, it is not necessary for wave b to advance to

the 410.20/.40 level as price penetration of 342.00 (‘overlap’) is expectedas part of Primary wave D. Nevertheless, as we have seen from the short-term pattern sequence, an advance towards this level is highly probable,and under this count, labeled Intermediate wave (B) – see fig 20. Theongoing forecasts for Intermediate, Primary and Cycle degree areupdated according to this count and can be seen in figs 21, 22 and 23.

Figure 17

Figure 18 Figure 21

Figure 22

Figure 19

Figure 20

MARKET TECHNICIAN Issue 51 – November 20048

SummaryTo assist in the correct counting of wave sequences, ratio andproportion have been combined to reveal the harmonic vibration ofgrowth in gold. Prices move towards points of least resistance in thatprocess, and the order of this growth is revealed in Elliott’scategorization of wave patterns, and the amplitudes are governed bythe fib. summation series.

Super-cycle wave IV is unfolding into a double zig zag – within this, Cyclewave X has been shown as unfolding within two possibilities, anexpanding flat, or a contracting/symmetrical triangle. Both countscurrently indicate the probability of declines during the next severalmonths. The next decline will ultimately determine which pattern willremain valid as both targets differ. A decline below 342.00 will eliminatethe expanding flat pattern as overlap will occur. Prices remaining abovethis level during the next twelve month period will weaken thecontracting/symmetrical triangle count.

And finally... a glimpse into the distant future reveals something reallyinsightful – a forecast for a super-cycle wave IV low towards the 183.00level but then wave V unfolding thereafter with ultimate targets towards1814.00 – completion sometime around the year 2029 – see fig 24. Hardto imagine?

“A lot of people see things as they were, and say why, But I am dreaming ofthings that never have been, And say, ‘why not’?”

Peter Goodburn is Senior Consultant to WaveTrack International thatproduces regular Elliott Wave price forecasts for Fixed Income, Stock Index,FX and Commodity products. info@wavenetonline.com

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For US securities, there is a great free program: Incredible Charts, seewww.incrediblecharts.com. This is a Java full featured program.

Commodity charts, are available via TFC Commodity Charts, see:http://futures.tradingcharts.com/

For web based charting services both Stockcharts:http://stockcharts.com/ and their rivals Bigcharts:http://bigcharts.marketwatch.com/ take some beating. Normally if yousign up they enhance the service.

For UK/European securities, good charts are another issue, best toregister for the free service via either ADVFV:www.ADVFN.com, orMoneyAm: http://www.moneyam.com they also offer a wide range ofadd on services.

There are many more a good link sit is www.metronet.co.uk/bigwood/shares/,this has a set of links to UK charging programs. Many brokers offer freecharting as part of their services, details are on the site.

Figure 24

Bytes and PiecesBy David Watts

Figure 23

ObituaryTim Brain

Tim was a technical analyst with the Abu Dhabi

Investment Authority’s London office and will be

sorely missed by his colleagues, friends and family.

Tim came into technical analysis via a route that

many members have travelled – computers. He was

employed in the Computer Department of ADIA in

Abu Dhabi but showed a keen interest in technicial

analysis. Tim joined ADIA London in June 1992 after

recommendations from Mickey Bain, MSTA, who was

the technical analyst at ADIA’s Head Office in Abu

Dhabi at the time, and who was succeeded by the

late Bronwen Wood, FSTA, in 1995.

With his computer background Tim was quite a

wizard with the various Datastream, Reuters and

Bloomberg systems. He was respected for his

analytical work, and spent many productive hours

with his colleagues reviewing markets.

Tim shared a common interest with many of our

members as he was a wine buff, collecting a modest

investment in wines and Bordeaux wine futures –

although it was his ‘nose’ rather than charts

which served him well there!

Tim passed away unexpectedly, on 8th June 2004

and is survived by his wife Debbie and teenage

children Mark & Natalie.

Issue 51 – November 2004 MARKET TECHNICIAN 9

Wyckoff is a name gaining celebrity status in the world of technicalanalysis and trading. Richard D. Wyckoff, the man, worked in New YorkCity during a “golden age” for technical analysis that existed during theearly decades of the 20th Century. Wyckoff was a contemporary of EdwinLefevré who wrote The Reminiscences of A Stock Operator. Like Lefevré,Wyckoff was a keen observer and reporter who codified the bestpractices of the celebrated stock and commodity operators of that era.The results of Richard Wyckoff’s effort became known as the WyckoffMethod of Technical Analysis and Stock Speculation.

Wyckoff is a practical, straight forward bar chart and point-and-figurechart pattern recognition method that, since the founding of the Wyckoffand Associates educational enterprise in the early 1930’s, has stood thetest of time.

Around 1990, after ten years of trial-and-error with a variety of technicalanalysis systems and approaches, the Wyckoff Method became themainstay of The Graduate Certificate in Technical Market Analysis atGolden Gate University in San Francisco, California, U.S.A. During the pastdecade dozens of Golden Gate graduates have gone on to successfullyapply the Wyckoff Method to futures, equities, fixed income and foreignexchange markets using a range of time frames. In 2002 Mr. David Penn,in a Technical Analysis of Stocks and Commodities magazine article namedRichard D. Wyckoff one of the five “Titans of Technical Analysis.”

The Wyckoff Method has withstood the test of time. Nonetheless, thisarticle proposes to subject the Wyckoff Method to the further challengeof real-time-test under the natural laboratory conditions of the currentU.S. Stock market. To set up this “test,” three fundamental laws of theWyckoff Method will be defined and applied.

THREE WYCKOFF LAWSThe Wyckoff Method is a school of thought in technical Market analysisthat necessitates judgment. Although the Wyckoff Method is not amechanical system per se, nevertheless high reward/low riskopportunities can be routinely and systematically based on what Wyckoffidentified as three fundamental laws (see Table 1):

Table 1

1. The Law of Supply and Demand – states that when demand isgreater than supply, prices will rise, and when supply is greaterthan demand, prices will fall.

Here the analyst studies the relationship between supply vs.demand using price and volume over time as found on a barchart.

2. The Law of Effort vs. Results – divergencies and disharmoniesbetween volume and price often presage a change in thedirection of the price trend. The Wyckoff “Optimism vs. Pessimism”index is an on-balanced-volume type indicator helpful foridentifying accumulation vs. distribution and gauging effort.

3. The Law of Cause and Effect – postulates that in order to have aneffect, you must first have a cause, and that effect will be inproportion to the cause. This law’s operation can be seenworking as the force of accumulation or distribution within atrading range works itself out in the subsequent move out of thattrading range. Point and figure chart counts can be used tomeasure this cause and project the extent of its effect.

Past: position of the U.S. stock market in 2003 – BullishCharts 1 and 2 show the application of the Three Wyckoff Laws to U.S.Stocks during 2002-2003. Chart 1, a bar chart, shows the decline in priceduring 2001-02, an inverse head and – shoulders base formed during2002-2003 and the start of a new bull market during March-June 2003.The upward trend reversal defined by the Law of Supply vs. Demand,exhibited in the lower part of the chart, was presaged by the positive

divergencies signalled by the Optimism Pessimism (on-balanced-volume)Index. These expressions of positive divergence in late 2002 and early2003 showed the Law of Effort (volume) versus Result (price) in action.Those divergences reveal an exhaustion in supply and the risingdominance of demand or accumulation.

The bullish price trend during 2003 was confirmed by the steeply risingOBV index; accumulation during the trading range continued upward asthe price rose in 2003. Together the Laws of Supply and Demand andEffort vs. Result revealed a powerful bull market underway.

Wyckoff laws and testsBy Dr. Hank Pruden and Dr. Bernard Belletante

Chart 1

Chart 2

MARKET TECHNICIAN Issue 51 – November 200410

The “Nine Classic Buying Tests” of the Wyckoff methodThe classic set of “Nine Classic Buying Tests” (and “Nine Selling Tests”) wasdesigned to diagnose significant reversal formations: the “Nine ClassicBuying Tests” define the emergence of a new bull trend (See Table 2). Anew bull trend emerges out of a base that forms after a significant pricedecline. (The “Nine Selling Tests” help define the onset of a bear trend outof top formation following a significant advance.) These nine classic testsof Wyckoff are logical, time tested, and reliable.

As the reader approaches this case of “Nine Classic Buying Tests,” he/sheought to keep in mind the following admonitions from the Reminiscencesof a Stock Operator (See Appendix):

“The average ticker hound – or, as they used to call him, tapeworm –goes wrong, I suspect, as much from overspecialization as from anythingelse. It means a highly expensive inelasticity. After all, the game ofspeculation isn’t all mathematics or set rules, however rigid the main lawsmay be. Even in my tape reading something enters that is more thanmere arithmetic. There is what I call the behavior of a stock, actions thatenable you to judge whether or not it is going to proceed in accordancewith the precedents that your observation has noted. If a stock doesn’tact right don’t touch it; because, being unable to tell precisely what iswrong, you cannot tell which way it is going. No diagnosis, no prognosis.No prognosis, no profit.

“This experience has been the experience of so many traders so many timesthat I can give this rule: In a narrow market, when prices are not gettinganywhere to speak of but move within a narrow range, there is no sense intrying to anticipate what the next big movement is going to be – up ordown.The thing to do is to watch the market, read the tape to determinethe limits of the get-nowhere prices, and make up your mind that you willnot take an interest until the price breaks through the limit in eitherdirection. A speculator must concern himself with making money out of themarket and not with insisting that the tape must agree with him.

“Therefore, the thing to determine is the speculative line of least resistanceat the moment of trading; and what he should wait for is the momentwhen that line defines itself, because that is his signal to get busy.”

Point 4 on the charts identifies the juncture when all Nine Wyckoff BuyingTests were passed.The passage of all nine tests confirmed that an uptrending

or markup phase had begun.The passage of all Nine Buying Testsdetermined that the speculative line of least resistance was to the upside.

Future: A market test in 2004The authors as academics are intrigued by the natural laboratoryconditions of the stock market. A prediction study is the sine quo non ofa good laboratory experiment. The Wyckoff Law of Cause and Effectseemed to us to provide an unusually fine instrument of conducting suchan experiment, a “forward test.” Parenthetically, it has been our feeling,shared by academics in general, that technicians have focused tooheavily upon “backtesting” and not sufficiently upon realexperimentation. The time series and metric nature of the market dataallow for “forward testing.” Forward testing necessitates prediction,followed by the empirical test of the prediction with market data that tellwhat actually happened.

How far will this bull market rise? Wyckoff used the Law of Cause and Effectand the Pointand- figure chart to answer the question of “how far.” Usingthe Inverse Head-and-Shoulders formation as the base of accumulationfrom which to take a measurement, of the “cause” built during theaccumulation phase, the point-and-figure chart (Chart #2) indicates 72boxes between the right inverse-shoulder and the left inverse-shoulder.Each box has a value of 100 Dow points. Hence, the point-and-figure chartreveals a base of accumulation for a potential rise of 7,200 points. Whenadded to the low of 7,200 the price projects upward to 14,400. Hence, theexpectation is for the Dow Industrials to continue to rise to 14,400 beforethe onset of distribution and the commencement of the next bear market.If the Dow during 2004-2005 comes within + or - 10% of the projected7,200 points we will accept the prediction as having been positive.

ConclusionsIn summary, U.S. equities are in a bull market with a potential to rise toDow Jones 14,400. The anticipation is for the continuance of thispowerful bull market in the Dow Industrial Average of the U.S.A. through2004. This market forecast is the “test” to which the Wyckoff Method ofTechnical Analysis is being subjected.

Part (B) of “Wyckoff Laws: A Market Test” will be a report in year 2005about “What Actually Happened.” As with classical laboratoryexperiments, the results will be recorded, interpreted and appraised. Thissequel will invite a critical appraisal of the Wyckoff Laws and in particulara critical appraisal of the Wyckoff Law of Effort vs. Result. The quality ofthe author’s application of the Wyckoff Laws will also undergo a critique.From these investigations and appraisals, we shall strive to extractlessons for the improvement of technical market analyses. Irrespective ofthe outcomes of this market test, we are confident that the appreciationof the Wyckoff Method of Technical Market Analysis will advance and thatthe stature of Mr. Richard D. Wyckoff will not diminish.

Dr. Hank Pruden is a professor in the School of Business at Golden GateUniversity in San Francisco, California and a visiting professor atEUROMED-MARSEILLE Ecole de Management, Marseille, France.

Dr. Bernard Belletante is a Professor of Finance and Dean of the Euromed-Marseille Ecole de Management.

ReferencesForte, Jim, CMT,“Anatomy of a Trading Range,” Market TechniciansAssociation Journal,” Summer-Fall 1994.

Hutson, Jack K., Editor, Charting The Market: The Wyckoff Method,Technical Analysis, Inc., 1986.

Lefervé, Edwin, Reminiscences of a Stock Operator, Wiley Press (original,Doran & Co, 1923).

Penn, David,“The Titans of Technical Analysis,”Technical Analysis of Stock& Commodities, October, 2002.

Pruden, Henry (Hank) O.,“Wyckoff Tests: Nine Classic Tests ForAccumulation; Nine New Tests for Re-accumulation,” Market TechniciansAssociation Journal, Spring- Summer 2001.

Pruden, Henry (Hank) O.,“A Test of Wyckoff,”The Technical Analyst,February 2004.

Charts, courtesy of Wyckoff/Stock Market Institute, 13601 N. 19th Avenue1, Phoenix, Arizona, U.S.A. 85029-1672.

Table 2

Wyckoff Buying Tests: Nine Classic Tests for AccumulationNine Buying Tests (applied to an average or a stock after a decline)*

Indication: Determined From:

1) Downside price objective accomplished Figure Chart

2) Preliminary support, selling climax, Vertical and Figuresecondary test

3) Activity bullish (volume increases on rallies Verticaland decreases on reactions)

4) Downward stride broken (i.e., supply Vertical or Figureline penetrated)

5) Higher supports (daily low) Vertical or Figure

6) Higher tops (daily high prices rising) Vertical or Figure

7) Stock stronger than the market (i.e., stock Vertical Chartmore responsive on rallies and more resistant to reactions than the market index)

8) Base forming (horizontal price line) Figure Chart

9) Estimated upside profit potential is at least Figure Chart forthree times the loss if protective stop is hit Profit Objective

* Adapted with modifications from Jack K. Hutson, Editor, Charting the Market:

The Wyckoff Method (Technical Analysis, Inc., Seattle, Washington, 1986), page 87.

Issue 51 – November 2004 MARKET TECHNICIAN 11

In this article I analyse two recent market profile distributions – theSeptember 8th to September 22nd US ten year note future (TYZ4) andthe S&P 500 future (SPZ4) from August 13th to September 22nd.

I aim to show how markets distribute over time and how price objectivesand stops can be employed to create profitable risk/reward scenarios.

Strategies discussed include the importance of the longest line as anaverage cost mechanism, how that influences positions and consequentlyprices; and the concept of building value and its importance in stayingwith a trade to its ultimate conclusion.

The first chart shows a combined market profile for TYZ4 from Sept 8 toSept 22. It is a good example of an unbalanced up market that organisesitself into a bell shaped curve, a normal distribution over time. This is analmost complete distribution because it has a low, a high and a mid-point. The market is an order seeking mechanism where price moves todetermine a level that is too high, too low and a level in between, wherebuyers and sellers are more in equilibrium. Price is said to ‘distribute’ as itmoves to discover these levels.

This up markethas almost metthe target of thedistribution. Thetarget can beascertained bymeasuring wherethe top of thedistributionwould have to be,to make the mid-point and thelongest line thesame i.e. (longestline-midpoint) x 2 + high , whichin this case is:(112-15 – 112-12+) x 2 +113-16 = 113-21.

The next chart breaks down this same distribution into individual days sowe can see the dynamic involved in the daily battle between buyers andsellers. From this we can see the decision making process involved infinding location for a trade.

Day 1 on the left (labelled 9/8 at the bottom of the chart) starts thedistribution with a powerful surge higher -a rally that starts with the Cperiod buy extreme and becomes a trend day up. This signifies animbalance of buyers versus sellers and typically closes near the high. Thisis our signal to go long.

The next five days (9/9 to 9/15) are range trading days, all buildingunchanged but higher value (112-06 to 112-18). This higher value isimportant because it puts the shorts from the first day of this distributionunder increasing pressure.

It is possible from this early point to predict the 113-21 target, becauseall the volume is concentrated near the high of the developingdistribution so the distribution is incomplete to the upside (low:111-08high:112-24 longest line: 112-15).

Now look what happens next :-

On 9/16 the market has another powerful up day, breaking the rangehigh, distributing higher and closing near the high. So far so good – thenext two days are again range days but still building UNCHANGED TOHIGHER VALUE. Value is still the key here, because it is this that putspressure on the shorts’ average cost. Remember Steidylmeyer’s originalformula : Price x Time = Volume. Value is created out of the volumetraded at a price. (On the day profiles above, value is represented by thevertical line to the right of the profiles – 2/3rds of the activity for that day).9/21 is an interesting day because it builds unchanged value for most ofthe time, then attempts to break down in J period but finds strongresponsive buying and reverses higher to close at a high. The market isstill positive and value on 9/22 is higher still – showing our 113-21objective as still valid.

Having achieved location and rationale for a trade, how do we then managethe risk? How do we know when we’re wrong? Not all distributionscontinue to meet their targets. They can and do fail. The most importantelement in this risk management decision is the timeframe.

Market Profile – a trading perspectiveBy David Knapp

Chart 1

Open: 111-13 Last: 113-11 High: 113-16 Low: 111-09

Chart 2

MARKET TECHNICIAN Issue 51 – November 200412

The parameters for the trade – the location, the target andthe stop – must all be in the same timeframe for the tradeto make sense.

Here is a chart that fails to follow through and distribute toits target.

The SPZ4 rally from August 13th becomes top heavybetween 1120 and 1130 and fails to the upside when itbreaks 1120.5 where the TPO (time price opportunities)count is roughly equal. (2517 TPOs above the line and 2354below). The target for the distribution was:(1125-1097) x 2 +1132 = 1188 but breaking below 1120.5 has the average long traderunder pressure on their positions. A move back to the1097 mid-point might be necessary to balance out the badpositions in this profile distribution. Any long positionsshould be liquidated on the break of the TPO point.

By analysing distributions in the same timeframe, watchingthe battle between buyers and sellers unfold andmonitoring value as the distribution develops, it is possibleto create profitable trading strategies that achieve goodentry and exit points.

There are other factors influencing the market. There aremedium and longer term distributions at work as well asshort term ones. But, if you can identify the timeframe foryour trading horizon and fit your parameters for the tradeto that distribution, then market profile becomes a verypowerful analytical tool.

David Knappaoxx52@dsl.pipex.com

AcknowledgementThe author would like to thank Peter Steidlymeyer for theoriginal concept behind this article, Joe Musolino of ABNNY for his advanced profile theories and CQG for theirexcellent Market Profile software, to.

IFTA’s Annual Conference hosted by AEAT in Madrid was considered byall those who attended to have been a great success. Over 200delegates attended from all over the world to hear presentations froma large number of highly respected technical analysts and traders.Included amongst the speakers were, John Murphy, Bruno Estier, JohnBollinger, Martin Pring, Hiroshi Okamoto, Regina Meani, Jorge Bolivar,Trevor Neil, Ralph Acampora and Matthieu Gilbert. In total there wereover 20 presentations made and a full list of all the speakers can befound on the Spanish society’s website www.aeatonline.com. Inaddition to these formal presentations, delegates had the opportunityto meet face to face with their colleagues from throughout the world toexchange ideas and share thoughts on current markets and techniques.

Apart from running an excellent analytical conference, AEAT also madesure the event proved extremely popular from a social point of viewwith a large number of excellent events and tours for both delegatesand their accompanying partners. Many delegates also took fulladvantage of Madrid’s legendary reputation for fine food and nightlife.This was certainly not a dull conference for many of those attending.The event culminated in a wonderful gala dinner held at the Opera

House in Madrid; where delegates dined in palatial surroundings andwere entertained by several local opera singers.

AEAT deserves huge credit for organising an outstanding IFTA 2004conference. The challenge now facing the Canadian Society, CSTA, is howto repeat this success in 2005 when they host the conference inVancouver in celebration of their 20th year as an association. We suggestyou block off your diaries for the 3rd to 5th of November 2005 to be inVancouver. Now that the Spanish have raised the bar, next year’s IFTAconference in Canada is likely to be an extraordinarily successful event.

The IFTA executive board of directors also met together in Madrid. TheSTA is represented on this board by Adam Sorab and Simon Warren; whoalso chairs IFTA’s Finance Committee. We are pleased to report that IFTAcontinues to grow and that technical analysis societies like the STAcontinue to develop all over the world. IFTA’s finances remain strongand the IFTA board again voted to leave fees unchanged for 2006. Otherkey items on the IFTA board‚s agenda this year included updating theinternational accreditation program and methods to increase theexchange of research and ideas between and amongst IFTA associates.

Chart 3

IFTA Conference