web site: www.sta-uk.org The Journal of the STA

1

Members might be interested to know that the committee iscurrently working on an initiative to develop a strategic alliancewith Robert Walters Associates, the recruitment consultants. Itis hoped that, through Robert Walters, the STA will be able toestablish a dedicated technical analysis recruitment service forthe benefit of members of the Society. At the time of going topress some of the details are still being finalised but we hopeto be able to make a full announcement shortly.

The Societys website has now been up and running for twoyears and we thought it would be a good idea to look at howwe might expand the site to make it more inter-active. Ifanyone has any ideas or suggestions as to what they wouldlike to see included, please contact Gerry Celaya.

Anyone wishing to take the Societys Diploma should notethat the next examination will be held on October 4th andthe cost for taking it will be 235. For the first time this yearthere will be a choice of two levels for our introductorycourse on technical analysis. One course will last for fourweeks and the other for six weeks. The cost for these courseswill be 225 and 295 respectively. Both courses will beginon 31st October. In recent years we have had a growingnumber of enquiries about whether the Society would beprepared to run a distance learning course on technicalanalysis and we are now in the throes of preparing one. Weare grateful to all the people who have agreed to contributeto this project. More details will be released later in the year.

As some of you will have seen in the IFTA Update, the IFTAboard is spearheading a drive to build a Body of Knowledge

reference work on technical analysis. The workload is beingdivided up between the member societies. Adam Sorab is co-ordinating the northern European input on the subject ofprice. He would be very pleased to hear from members of theSTA who would like to be involved in this project.

On behalf of all the members who attended the summerparty, we would like to thank Reuters for hosting such anexcellent occasion. Glyn Bradney started the evening offwith a talk explaining how he tries to identify energy levelswithin the markets. His ideas prompted a large number ofquestions from the audience and those of you who werenot able to attend will be pleased to know that Glyn haspromised to do a comprehensive write-up of the subject inthe Journal.

Finally Luise Kliem is stepping down from the board and wewould like to take this opportunity of thanking her for all thework that she has done. In particular, Luise has been anextremely active member of the last minute speakers club,often agreeing to step in and talk at the monthly meetingswith only a day or sos notice when the scheduled speakerhad had to cry off for some reason.

COPY DEADLINE FOR THE NEXT ISSUE31 AUGUST 2000

PUBLICATION OF THE NEXT ISSUEOCTOBER 2000

July 2000 ISSUE No. 38

MARKET TECHNICIAN

FOR YOUR DIARY

IN THIS ISSUE

Wednesday 13th September Introduction to Ichimoku Cloud FormationsNicole Elliott and Yuichiro Harada, Industrial Bank of Japan.

October 5th 7th IFTA Conference

Wednesday 11th October STA AGM

N.B. The monthly meetings will take place at the Institute of Marine Engineers, 80 Coleman Street, London EC2 at 6.00 p.m.

Exam Results 2

Book review 3

Exam Report 3

G. Celaya Charting the regional FX markets. 4

L. Kliem Equity markets: Outlook for Wall Street and FTSE TMT and theold economy. 9

M. Wignall Mutual offsetting systems a problem for technical analysis? 11

N. Burnton ChronographicsSM 12

Z. Harland Trading a 2 year old the real-timeperformance of a neurogenetic T-bond futures trading system. 14

IFTA Conference 2000 16

WHO TO CONTACT ON YOUR COMMITTEE

CHAIRMANAdam Sorab, Credit Suisse First Boston, Five Cabot Square, London E14 4QR. Tel: 020-7888 7240

TREASURERVic Woodhouse. Tel: 020-8810 4500

PROGRAMME ORGANISATIONMark Tennyson dEyncourt. Tel: 020-8995 5998 (eves)

LIBRARY AND LIAISONMichael Feeny. Tel: 020-7786 1322The Barbican Library contains our collection. Michael buysnew books for it where appropriate, any suggestions for newbooks should be made to him.

EDUCATIONJohn Cameron. Tel: 01981-510210Clive Hale. Tel: 01628-471911George MacLean. Tel: 020-7312 7000

IFTAAnne Whitby. Tel: 020-7636 6533

MARKETINGSimon Warren. Tel: 020-7656 2212Kevan Conlon. Tel: 020-7329 6333Tom Nagle. Tel: 020-7337 3787

MEMBERSHIPSimon Warren. Tel: 020-7656 2212Gerry Celaya. Tel: 020-7730 5316Barry Tarr. Tel: 020-7522 3626

REGIONAL CHAPTERSRobert Newgrosh. Tel: 0161-428 1069Murray Gunn. Tel: 0131-245 7885

SECRETARYMark Tennyson dEyncourt. Tel: 020-8995 5998 (eves)

STA JOURNALEditor, Deborah Owen, 108 Barnsbury Road, London N1 0ES

Please keep the articles coming in the success of the Journaldepends on its authors, and we would like to thank all thosewho have supported us with their high standard of work. Theaim is to make the Journal a valuable showcase for membersresearch as well as to inform and entertain readers.

The Society is not responsible for any material published inThe Market Technician and publication of any material orexpression of opinions does not necessarily imply that theSociety agrees with them. The Society is not authorised toconduct investment business and does not provideinvestment advice or recommendations.

Articles are published without responsibility on the part of theSociety, the editor or authors for loss occasioned by anyperson acting or refraining from action as a result of any viewexpressed therein.

Results of Diploma ExaminationAPRIL 2000

DISTINCTION

Anthony Fletcher

James OConnor

Angelina Ng

PASS

Des Bailes

R. Crozier

Valerie Enguehard

David Franklin

Stephen Hatton

Michael Hugget

Julian Mahne

Martin Miller

Darren Read

Bert Reymenants

Soon Hock Gary Tan

Duncan Webb

2 MARKET TECHNICIAN Issue 38 July 2000

Networking Exam Results

ANY QUERIES

For any queries about joining the Society, attendingone of the STA courses on technical analysis ortaking the diploma examination, please contact:

STA Administration Services(Katie Abberton)

P.O. Box 2, Skipton BD23 6YH.

Tel: 07000 710207 Fax: 07000 710208 www.sta-uk.org

For information about advertising in the journal,please contact:

Deborah Owen

108 Barnsbury Road, London N1 OES.

Tel/Fax: 020-7278 7220

Issue 38 July 2000 MARKET TECHNICIAN 3

THE PREDICTORS:

How a Band of Maverick Physicists set out toBeat Wall Street

By Thomas A. Bass (Penguin Press 18.99)

If you read James Gleicks wonderful Chaos, youll remember theDynamical Systems Collective, a group of hippie physicists sharing aratty student house in California in the 1970s who made a set ofdiscoveries crucial to the infant science of chaos theory. They foundways to map the messy, turbulent processes of the everyday worldby considering them as flows of information. Once they startedlooking, they found unexpected order everywhere: a dripping tap, arising column of cigarette smoke. Later, rechristened theEudaemonians, some of them tried to win at roulette by putting toe-operated computers into their shoes. Weird science against thepolyester barons of Las Vegas! Thomas Bass wrote a book about it,The Newtonian Casino.

In the early 1990s, after several respectable years in academia, twomembers of the Collective, Norman Packard and Doyne Farmer,matched wits again with the world of money. Farmer, at the LosAlamos National Laboratory, had come up with a technique formaking non-linear predictions projecting the futures chaos fromthe presents. At the Institute for Advanced Studies, Packard haddevised adaptive computer algorithms that proved spectacularlygood at recognising patterns in whatever he pointed them at, fromsnowflakes to the spending habits of Italian municipal bureaucrats.Together, these seemed like the keys required to make a profitableintervention in the jetstream of capital that flows continuouslyaround the globe from exchange to exchange, formidably divorcedfrom the actual business of making, moving and selling things.

As Bass explains, in a beautiful analogy, the streaming trillions ofdollars really do behave like a fluid in a state of turbulent flow. Theintricate structure of gas turbulence was revealed when a photographwas taken in a wind tunnel by the light of a high-voltage spark.Anyone who had the means to fix an equivalent high-definitionpicture of the fractal whirlpools that form in money couldtheoretically divert some of it their way.

Packard and Farmer and a gaggle of younger colleagues set up inSanta Fe in an office equipped with the most expensive Sunworkstations they could afford, and the cheapest possible gardenfurniture to sit on, and started building a system to play the markets.Bass writes well about the intellectual questions that developed asthey used physics to do economics.

Effective market theory, for example, holds that price fluctuationsare purely random when buyers and sellers have full access to marketinformation if true, it would have made the task impossible. Butthis is not really a popular science book; it comes from the nexus inour culture at the moment where money and technology make eachother exciting. Here, as in Wired magazine, technology soaks upmoneys status as pure potential, stuff that can satisfy every desire,while money acquires technologys quickness, and above all, itsscalability, its power to expand suddenly by orders of magnitude, asInternet systems can. It comes true like a granted wish, it inflates likethe airbag in a limousine.

Basss story is a business history, told with a nice sense of line, and anelegant eye for oddities of the interface between the bankers in theirsuits and the physicists working in their shorts, under MoonMountain and Sun Mountain, which grace Santa Fe like a spiritualWonderbra.

By 1995, the Prediction Companys models were making money. Lotsof it. Regularly. Experimental verification cant get any solider. Youcan compare them to Marx, who also thought he had detectedhidden structure in the market-place. His predictions failed. The real-world experiments of the last century show that all history is not, asit happens, the history of class struggle. But Marxs structure did

allow for the possibility of people taking deliberate, rational,concerted actions. The temporary laceworks of structure that thePrediction Company spots, as they slide across the flanks of theworlds financial waves, do not allow you to plan to make the worlddifferent. They can only be used to make you individually rich. Thismay well be a more innocent dream: it is also a smaller one, and tosettle for it is to lose something.

Differences in style soon separate the former members of a scientificcommune from the Swiss Bank Corporation, their backers.

The price of Farmer and Packards access to venture capital is thatthey abandon every trace of hippie egalitarianism. It takes them justtwo days to decide to do so. They learn to fire people (eventually,every founding member except themselves) and to spout businessclaptrap about team playing and empowerment. Its a long way fromFarmer saying I want to beat the system, not join it, yet anotherdemonstration that maverick, as used in this books subtitle, is anAmerican term meaning conformist. There is something terriblysad about the way that they go on acting out their original tasteswhen theyre millionaires, except on a much, much larger budget.When you have reached a certain degree of personal wealth, surelyits unseemly to wear an Eat the Rich T-shirt?

Francis Spufford

This article originally appeared in the book review page of the

Evening Standard, 31.1.00.Evening Standard

Examiners Report Candidates faced a tougher examination than previously. Highermarks were needed for both pass and distinction and a morerigorous approach was taken to the framing of questions. Indeed inthe opening section the choice was reduced to two questions asopposed to three in order to avoid an easy option. Once againassistance was given in preparing questions on a specialist topic bythe Diploma course lecturer concerned.

There were 23 candidates of whom 3 gained distinctions, a further12 passed and 8 failed. The average mark was 61.3% (compared to61.3 last year, 60.8% in 1998 and 60.9% in 1997).

The percentage of candidates failing rose to 34.8%, which ismarginally worse than the 33% students are warned to expect and isin line with other courses at academic establishments.

There was, however, an improvement in the general quality of workpresented and this may well stem from another change in this yearsexam: time allowed has been extended from two and a half hours tothree. An omission from a full complement of answers is much rarerand fuller answers are common.

Point and Figure is an option that most candidates choose and it isan obvious strength of the South Bank Diploma course since mostare well conversant, if not yet expert, in the technique.

Candidates seemed well prepared and the quality of communicationhas improved. Revision day was held nearly three weeks ahead ofthe exam permitting more time for its influence to help guidecandidates.

Despite the increased failure percentage, the average mark remainsthe same. It does mean that the general standard has improved.Students have manifestly worked hard; the lecturers on the Diplomacourse are to be congratulated; the examination author andadministrative team also deserve much credit.

Book Review

4 MARKET TECHNICIAN Issue 38 July 2000

Trading in the FX market has changed dramatically over the last fewyears. While this is still a $1.3 trillion per day market, as outlined inthe article All change in the FX market published in the IFTAmagazine last year, the market has gone through a period of change.The consolidation of the FX industry is partially due to theintroduction of the euro and the headline-making bank mergers,both of which have led to margins being squeezed in traditional FXmarkets. This makes banks more eager to deal in exotic marketsthat they would have avoided in the past, as the margins in lessliquid currencies are still wider, hence making them more profitablefor dealers to work in. On the other side of the trade, the Asiancrisis of 1997/1998 highlighted the need for corporate andinstitutional customers to be pro-active in their FX risk managementas the sharp swings can affect returns in a quite a large way. Chartsare very useful for spotting opportunities and helping to determinethe risk / reward ratio that is critical to any trade or investment,especially in regional markets where strict adherence to theunderlying fundamentals or listening to the locals can be very,very wrong! For example, it was inconceivable to many in Asia inearly 1998 that by cutting interest rates the local currency wouldstrengthen. The charts however identified potential reversal patternswhich showed that the market was re-evaluating the trend and thatcutting interest rates, despite what the local experts were saying, wasbeing well received by the market.

Some key things to keep in mind are: Charts and common sensecan help...

Basic charting techniques are best (patterns, moving averages)

Know the local market conventions and legalities

Yield enhancement versus real risk must be considered at all times

Dance like a butterfly, sting like a bee (the exit doors can getrather small!)

CARRY TRADES AND YIELD ENHANCEMENT

Many investors and funds trade in regional currencies in order toenhance the yield that is available to them. This is usually done ona leveraged basis by borrowing funds in a low yielding currency andinvesting the funds in a high yielding currency. The potentialcarry gains are easy to calculate and the potential positivemovement in the FX rates can be very attractive. Keep in mindthough that the high yield on the currency is probably there for areason, and that can make the potential losses on adversemovement in the FX rates extremely high. The question that mustbe asked on every trade is Does the potential reward outweigh thepotential risk?.

Indicative yields for market amounts of $1 million USD or more ondeposit for 92 days are: EUR 3.00% US 5.69 % GBP 5.68% Yen0.2% CHF 1.75% South African Rand 10.50% Turkish Lira 25%Greek Drachma 8.25% Czech Koruna 5.13% Slovak 7.50% PolishZloty 17 % Norwegian Krone 5.25% Icelandic Krona 10%Mexican Peso 16%

Carry trade = Lending yield borrowing yield or

Carry trade = high yield low yield which hopefully will outweighdepreciation /devaluation risk!

Example1 million USD worth of EUR/ISK for 30 days = $6,250 (yield spread x amount x number of days)/360

on a $20 million portfolio = funding at 2.5% lending at 10 % FXstable = $125,000 profit per month with no gearing. If this was

done every month for 1 year there would be a $1,500,000 profit!Given the market norm of 10 times gearing, the $20 million USDportfolio would gear up to $200 million and the profit would be$15,000,000 per year. To repeat the main point, the question iswhether or not the FX relationship is stable. If the spot rate moves inan adverse manner the gearing can create a situation where the $20million portfolio becomes a $5 million portfolio at the end of theyear.

The Yen is the funding currency of choice for many carry trades.With interest rates near zero the yen is attractive but as the chartbelow shows, it is a very whippy currency. The move from theY147.60 yen lows (USD high) of 1998 down to below 110 wiped outmany of the carry trades that were funded with the yen as theadverse spot rate move really hit the market. Looking at the chartshows that a head and shoulders pattern (the first of many) could bein place with targets near Y80. This serves to keep Yen carry traderson their toes.

The chart below shows the THB/USD a weekly chart with 13 and50 week moving averages. The THB was until summer 1997 awonderful currency to trade. The central bank (Bank of Thailand)ran the THB as a basket currency, with the basket made up mostly ofYen and Deutschemarks. Given that THB deposits paid a lot morethan Yen and DEM deposits, borrowing the last two and lending inTHB was an easy way to put a carry trade on, with the stabilityof the FX relationship more or less ensured as long as the basket wasintact. The summer of 1997 basically shattered that relationship asthe THB was attacked by speculators, the BoT smashed thespeculators by using the forward market and spot, driving spotsharply higher against the USD before giving up, letting the THBfloat (no more basket) and the Asian crisis was underway. Thelessons from the early part of the crisis are clear, always be awarethat the exit door in illiquid FX markets is smaller than the entry door.When there is a panic big/offer spreads will widen out, options willbe expensive (if available) and the disappearance of market liquiditymeans that you really need to have a good relationship with yourbank to trade these currencies for any hedging purposes. From acharting perspective the blowout in 1997 was basically a series ofbull flags on the daily charts, with market sentiment following thetraditional fear / greed / fear / greed cycle. The USD peak wasmarked by the market being in full panic mode, while the firming ofthe THB against the USD in 1998 was marked by continued disbeliefin many that the worst was over. Charts showed a pretty V topwith a potentially massive head and shoulders pattern dominatingactivity. Current activity is showing a potential crossover in the 13and 50 week moving averages but for choice any USD upmove will

Charting the regional FX markets

By Gerry CelayaThis article is a summary of a talk given to the Society on 12th April, 2000

JPY=. Bid [Hi/Lo/Cl Bar] [(MA 50] Weekly

Issue 38 July 2000 MARKET TECHNICIAN 5

be limited to the 40.000 zone with the next major move stillexpected to be in line with the major top pattern, towards 36/35.60again and lower for the USD (25.000 in a few years?). As a sidenote, even though the USD rally in 1997 suggests that thespeculators won the battle, George Soros is on the record as sayingthat the BoT squeezed them and many others out of their positionsbefore the THB really devalued, suggesting that the major USDbuying through the 3rd and 4th quarters of 1997 was done bycorporates and hedgers.

The chart below shows the THB/YEN relationship. As seen, the pre-summer 1997 relationship was relatively stable. Since then the crossplummeted (weak THB, strong YEN, hurting any carry trade) andhas yet to show any convincing long term basing signals. For choice,a flat trading range should continue to dominate.

The USD/SGD chart shows the Asia crisis effect pretty well withSingapore in the middle of it all . The breakout of the flat channel in

1997 was followed by a solid panic of buying USD. The SGDchart is different from the other Southeast Asian FX charts becausethe fact that the Malaysian Ringitt, its cross straits neighbour, ispegged,has served as a dampener on activity over the last 18months. Technically, current activity shows pressure on USDresistance and the risk of a break through 1.7360/7400 is high. Forchoice, even though the turn above the declining trendline in early2000 suggests that the USD will fly higher, the horizontal resistanceline at the 1.7360/1.7400 area should hold up. A break would bebad for the SGD and leave 1.76/1.78 open.

The SGD/JPY chart shows the effect of the strong Yen sinceSeptember 1998 and while it could be basing at the 60 zone, this isby no means confirmed. In fact, moving averages are still bearishfor the cross rate; watch 66 as a turning point for a reversal, 60 asthe zone to break in order to continue the trend lower.

The USD/HKD chart below shows the extremes that the HongKong fx rate went to during the crisis. The spike in the HKD fromthe 7.74 area to the 7.62 zone really happened, as the Hong KongMonetary Authority took on the speculative players. The realaction from then on was in the forward market, when rates(normally close to USD rates) skyrocketed to 80% and even higherat one stage. The spot rate, given the peg that the HKMA held to,did not move that much, and has only moved to a weaker HKDrate. This chart highlights our forecast for 7.800 in the coming 12months.

The Indonesian Rupiah chart (overleaf) shows the large breakdownin 1997 in the IDR, with a run from 2500 to 17000 seen in a littleover a year. Not only did the Asian crisis hit the IDR but localevents deteriorated further which gave the IDR the second spikeagainst the USD in the summer of 1998. Current activity supportsthe USD with the 13 and 50 week moving averages pushinghigher for the USD with 9200 open and spikes to 10,000 possibleon the charts.

THB=. Bid [Hi/Lo/Cl Bar] [MA 13][MA 50] Weekly

SGDJPY=R. Bid [Hi/Lo/Cl Bar] [MA 13][MA 50] Weekly

AKD=. Bid [Hi/Lo/Cl Bar] [MA 13][MA 50] Weekly

THBJPY=R. Bid [Hi/Lo/Cl Bar] [MA 13][MA 50] Weekly

SGD=. Bid [Hi/Lo/Cl Bar] [MA 13][MA 50] Weekly

6 MARKET TECHNICIAN Issue 38 July 2000

The JPY/IDR cross (number of IDR per Yen) weekly chart belowshows a relatively flat trend over the last 16 months, with the cross inthe 13/50 week moving averages suggesting that the Yen could beset to gain against the IDR over the coming weeks towards 8000.

The chart of the USD/KRW below shows how the Korean Won wassold off from 850 towards 1920 /1980 over a few months. Whilethe 1997 crisis was seen as a Southeast Asia problem to beginwith, the exposure to Thai debt and short term USD exposure reallyhit the KRW at the tail end of 1997. Technically the KRW formed alarge reversal in the 1st quarter of 1998 and has been slowly firmingsince then. The 13/50 week moving averages show the KRW tryingto put together a move through 1100 for 1000; this should takesome time. When seen, though, 1060/20 will be open.

The YEN/KRW (Korean Won per Yen) chart shows a very flat trendwhich is expected to continue to dominate trading over the comingmonths. The 13/50 week moving averages are flat while the chartsshow a sidways channel dominating. This does present a decentcarry trade given the KRW yields near USD levels (or above) andthe very low Yen rates.

The USD/MYR (Malaysian Ringitt) chart is a favourite for chartiststhese days. The MYR had the same breakout pattern as the rest ofthe SE Asian currencies in 1997 but the fixing at 3.8000 and theintroduction of controls prevented the MYR from firming with therest over the last 18 months. Market rumours continue to roil aboutthe fixed FX regime ending but as usual the market will need someclear signals from the central bank to really get excited.

Looking at regional currencies closer to home, some key points needto be made. The first and probably most important one is that manyof the eastern European countries will be joining the EU in thecoming 10 years and hence their currencies will be euro candidates.While this is a significant amount of time, the FX market is notoriousfor trading ahead of itself (or is it very efficient at discountinginformation?). The second is that liquidity in the FX market is nothigh in these currencies, especially outside of London hours. Andthirdly, while derivatives are available in some of these markets, theliquidity issue is a key one and bid/offer spreads can take much ofthe incentive out of dealing here.

The EUR/CZK chart below shows a head and shoulders top pattern

IDR=. Bid [Hi/Lo/Cl Bar] [MA 13][MA 50] Weekly JPYKRW=R. Bid [Hi/Lo/Cl Bar] [MA 13][MA 50] Weekly

MYR=. Bid [Hi/Lo/Cl Bar] [MA 13][MA 50] Weekly

EURCZK=. Bid [Hi/Lo/Cl Bar] [MA 20][MA60] Daily

JPYIDR=R. Bid [Hi/Lo/Cl Bar] [MA 13][MA 50] Weekly

KRW=. Bid [Hi/Lo/Cl Bar] [MA 13][MA 50] Weekly

Issue 38 July 2000 MARKET TECHNICIAN

that dominated trading in early 1999. While the central bank wasnot happy with the CZK firming and many economists and localmarket players were convinced that the CZK had to weaken, thechart told a different story. The current push through trendlineresistance is central bank inspired (heavy intervention) but with therisk zone at 37.20 and expected to be difficult to break, thisshould be another CZK buying opportunity. Technically flattrading in a large band is expected to dominate activity here forthe coming months with the risk being that the downtrend hasbeen broken.

The Slovakian koruna has rallied strongly over the last year againstthe euro but is now losing some ground. For choice the 42.00 areawill be able to hold off the euro gains, but, if broken, then the turnabove the 60 day moving average would suggest that the SKK couldback up further. Looking out though and given the decent carryover the euro, the SKK would be seen to be a buy for further flattrading as the top of the range should be the old head and shouldersneckline near 44.30/50 while 41.60 supports. A bout of SKKstrength through the latter would put 40.80/40.60 into the sights,continuing the firming trend seen over the last year.

The chart below is of the Polish Zloty, now one of the most liquidEastern European FX rates. The last two years have seen this marketmature from where one would have to trade the Tbills to gain PLNexposure, to a free floater as of yesterday! On the chart one can seethat the PLN took the flotation news pretty well and firmed back tothe 4.06 area against the USD. There is a floor at 4.000 though andfurther choppy trading seems likely. The local market tends to focuson the Nasdaq as a barometer of sentiment (foreign directinvestment into Poland is seen as one of the big reasons for any PLNstrength) which makes it worthwhile keeping an eye on that market.The risk would be that this is a bull flag and sustained gains through4.20/25 would worry for 4.40/4.50 and worse.

The South African Rand has been in a breakout since the early partof the year, and even though I kept looking for a turning point or a

top, there has been little joy here yet. Hit by very negative sentimentthis one could be on course for 6.85 to break with technical targetspointing to 7.00 and 7.50. The key has been the fact that the ZAR isnot paying for risk, interest rates have only edged higher since the6.20 level broke and the market seems very reluctant to take the riskon board without getting paid for it!

The Icelandic Krona is a basket currency which is tied mostly to theeuro and euro-linked currencies as well as to the GBP and USDand other currencies*. This FX rate offers one of the moreinteresting regional or exotic FX plays as Iceland, population250,000 on a good day it seems, pays over 10% on the Kronacompared with rates below 4.0% on the euro. The chart below isof the ISK/USD and for those who wish to bottom fish for a longterm EUR/USD recovery, the ISK is a different way to play this asthe positive yield differential over the USD gives one some cover.Technically this is a broad range in play but 73.80/74 needs tohold as resistance, since a turn in the trend will be signalled by abreakthrough 73.00. The warning on liquidity definitely applies tothe ISK as the market is usually for 5 million USD or less, andoptions are very difficult as the bid/offer spreads can reach truckdriving levels.

The chart overleaf shows EUR/ISK which is pretty much locked in abear trend. The key here is the 70 zone which is likely to be astruggle, and I could see flat trading dominate in a 73/70 range,yield differential makes playing the range from the buy ISK above72.30, sell below 70.80 angle attractive.

7

EURCZK=. Close(Bid) [Line] [MA 60][MA20] Daily

PLN=. Bid [Hi/Lo/Cl Bar] [MA 20][MA60] Daily

ZAR=. Bid [Hi/Lo/Cl] [MA 13][MA50] Weekly

ISK=. Close(Bid) [Line] [MA 60][MA20] Daily

*The ISK (Icelandic Krona) trades as a currency basket with the majority of theweighting placed on the European rates. The major short term risk on the currency isstill an overheating economy with rising inflation and inflation expectations, whichsuggests that interest rates should remain on the high side. One month money isnear 10.00% and three month money is near 10.00% as well. The breakdown of thebasket is:

EUR 32.14% GBP 13.39% DKK 9.16% NOK 8.26% JPY 5.39%USD 24.09% SEK 3.85% CAD 1.37% CHF 2.35%

MARKET TECHNICIAN Issue 38 July 2000

The Greek Drachma is now trading with eyes on the 340.70 entryrate (March 2001) and is a trading buy for the yield. Basically,most of the rate cuts are expected to take place closer to the EMUentry date (like the Irish did in 1998) which should leave theEUR/GRD to give carry opportunities up until then.

The Turkish Lira chart is a pretty easy one for trend followers topredict! The controlled devaluation with 80% and much higher yieldsdid provide decent returns for some time, but those days are over.With the new IMF backed inflation fighting regime, yields havedropped to the 25%/40% zone in the 3 month money area and theFX is expected to devalue nearly 20% on the year, breakeven if youare lucky! Given our criteria of risk vs. reward (need to be paid forthe risk) the TRL is now a much more selective play (wait for yieldsto back up on any political concerns and then jump in).

And finally, Latin America. The Mexican Peso is the most liquid of theLATAM currencies and even trades as a reasonably deep contract onthe IMM. The close ties with the US makes this one attractive as ahedging or speculative currency and the high rates often entice hotmoney into it as well. The 1994/1995 Tequila crisis is seen prettyclearly below as traders went home for the holidays in 1994 only tofind out that the MXN had taken a swan dive in their absence! Thegeneral trend was for a weak MXN over the last few years with carrytrades mostly working out depending on the entry point (yields wellover 20% compensating for the risk). While the Asia crisis of

1997/1998 ran its course with little in the way of sustained pressureon the MXN, the Russian/Brazil effect of August 1998 really hit theMXN. Given the liquidity of the MXN compared to the Brazilean Real,the USD shifted higher in a very aggressive manner and even touchedthe 11.10/20 zone after Brazil devalued in early 1999. Since then themarket has seen the MXN firm sharply and a case for 9.20/9.85 as arange trade can be made. While the recent push towards 9.20/9.15could have threatened to see 8.70 and lower for the USD, the factthat yields in the short term instruments dipped to 13% and lowertook away the risk premium. Holding to the view for the rangetrading , then buying MXN below 9.20 is not that favoured and infact a turn back to 9.60/9.65 is needed before the MXN becomes abuy again. A sustained USD rally through 9.85 would shift the riskhere and put 10.20/10.50 into the light, not really favoured.

The chart of the Brazilean Real below shows the devaluation, as onceagain a market went from We will never devalue to Whoops!.The toppy pattern after the devaluation could be a head andshoulders in the USD/BRL with subsequent activity being very flat.While moving averages are convergeing and there is a risk of a shiftback to 1.90, this one seems more likely to trade in a flat mannerbetween 1.86/1.76 for the coming months. The 17%+ yields help onthe carry trade for the BRL but keep in mind that activity is mostlydone through the non-deliverable forward market (NDF, with noexchange of the local currency taking place, only USDs going backand forth for the difference in FX between entry and exit levels).Thus, in a crisis, the exit door in the BRL gets very, very small.

SUMMARY

In summary while the potential carry gains are easy to calculateand the potential positive movement in the regional FX market canbe very attractive the critical factor to keep in mind is that the highyield on the currency is probably there for a reason. This willusually make the potential losses on adverse movement in the FXrates extremely high as the exit door in these markets is invariablymuch narrower than the entry door. The question that must beasked on every trade is Does the potential reward outweigh thepotential risk?. Charts give a very useful indication as to what themarket is doing and can give valuable insights for forecastingpurposes. While data is at times not that clean, this is improving andthe charting of regional FX markets will continue to grow inimportance for hedging and speculative purposes.

8

EURGRO=. Bid [Hi/Lo/Cl Bar] [MA 60][MA20] Daily

TRL=. Bid [Hi/Lo/Cl Bar] [MA 60][MA20] Daily

MXN=. Bid [Hi/Lo/Cl Bar] Weekly

BRL=. Bid [Hi/Lo/Cl Bar][MA 60][MA20] Daily

EURISK=. Bid [Hi/Lo/Cl Bar] [MA 60][MA20] Daily

Issue 38 July 2000 MARKET TECHNICIAN 9

CONCLUSIONS:

1. The new economy TMT group of stocks has recently ralliedfrom deeply oversold positions. These initial reflex rebounds arelikely to be followed by some back testing. That should lead tomore extensive base-building, which, in turn, should lead into anew and more sustainable advance later this year.

2. Undervalued old economy groups rallied during the March / MayTMT sell-off. But progress is likely to slow for a while as thesesectors do battle with significant overhead resistance levels.

3. Ultimately, its possible that the two sides manage a degree ofreconciliation. The higher quality TMT build new bases (althoughthey may well not surpass Q1 peaks for some considerable time)whilst a number of cyclical / value plays regain their share of thelimelight. The issue is probably not so much new economy versusold economy as, quite simply, a changing, evolving, economy.

4. Uncertainty and market volatility could remain a feature a littlelonger. But, looking ahead to later this year, markets could bepreparing for their next advances. Medium and long term rate-of-change momentum measures look in place for this, at least forthe U.S. and the UK. These cycle indicators seem to be buyingthe soft landing scenario for the Anglo Saxon economies.

CHART 1:The NASDAQs March May decline broadly speaking foundsupport in the 50% retracement region of the October 1998 /March 2000 advance. Medium term momentum (e.g. 13 weekRoC) reached oversold extremes not even seen in October 1998, andis starting to turn up.

Chart 1: NASDAQ, Fibonacci Retracements, 13 Week RoC

CHART 2:But a number of technical positives are still missing, e.g. sentiment isnot yet really bombed out. And long term momentum, shown inchart 2, suggests that at this stage rallies largely still provide tradingbuys. A more secure base can be seen in the 2800 area, where a61.8% retracement of an 18-month trend (see chart 1) more or lesscoincides with the 50% level in relation to the entire 1995 2000bull market. Chart support in this region is a bonus.

Chart 2: NASDAQ, Long Term Chart; Long Term Momentum

CHART 3: Dow Industrials. The medium term momentum buy signal shouldreinforce support levels. At the very least, it should limit downside,particularly since the long term version has now fallen back tobelow the zero line its first visit to that area since Q3 1998. Thatkind of combination is not saying that the index starts to trend upfrom this point forward, but it is likely to be setting the stage for amajor upturn a little later in the year. Price activity over the last 12months looks to be shaping up into a diamond: this may be acontinuation pattern. Some people see a head and shoulders:volume would argue against that.

Chart 3: Dow Industrials, Weekly Data Momentum; Volume

CHART 4: FTSE looks broadly similar. Medium term momentum is bottoming;the long term version is already giving a buy i.e. it is a littleahead of the Dow. The 6400 / 6000 area has recently re-establisheditself as support.

Chart 4: FTSE 100

CHART 5:A founder member of the TMT group, the Software & ComputerServices sector. Sharp falls between March and May have foundsupport in the 50% retracement region (in relation to the Q3 1999 Q1 2000 relative uptrend). But base-building, leading to a sustainablenew uptrend, is still going to take some time.

Chart 5: Software & Computer Services Relative to the All Share

Equity Markets: Outlook for Wall Street andFTSE, TMT and Old Economy

By Luise Kliem, MSTAThis article is a brief summary of the talk given to the Society on 10th May 2000

Source: Bridge Information Systems

Source: Bridge Information Systems

Source: Bridge Information Systems

Source: Bridge Information Systems

Source: Datastream

continues on page 11

10 MARKET TECHNICIAN Issue 38 July 2000

INTRODUCTION

Under the normal course of events an analyst examining thehistorical record of the behaviour of an exchange traded futurescontract for any particular delivery month would reasonably assumethat the numerical data on prices, volume and open interestrepresented the outcome of the trading activity for that contract.Similarly, it would be assumed that the transformation of these datainto a graphical form would provide a meaningful visualrepresentation of that behaviour from which various relationshipsmight be deduced using different analytical techniques. However, it islikely that this no longer is the case with certain futures contracts.

ENTER MOS

The reason is the existence of the Mutual Offset System or MOSwhich is provided by the Chicago Mercantile Exchange (CME) inconjunction with the Singapore International Monetary Exchange(SIMEX) for clearing members on both exchanges. What is MOS? Itis a facility to allow new or liquidating trades to be executed onSIMEX by CME members and then be transferred back to the CME.The opposite is also catered for e.g. SIMEX firms can have tradesexecuted on the CME and then be transferred back to SIMEX. Thefacility is currently available for three interest rate futures contractsi.e. 3 month Eurodollar, Euroyen, Euroyen Libor, together with theJapanese Government Bond. There is also a MOS arrangement ,termed a Link , between SIMEX and the International PetroleumExchange (IPE), London for Brent Crude Oil futures. Theimplications of such MOS for technical analysis is discussed here inthe context of the CME-SIMEX system.

MOS allows a participant to effectively borrow the liquidity inSIMEX when the CME is closed and vice versa, and have theconvenience of only having to post margin for one exchange i.e. their own local one. In addition, a participant whose localexchange was, say, the CME, could establish a position in SIMEXthen have two choices open to them:

(1) have the position brought back to the CME at the price theirorder got filled on SIMEX, to be processed through the CMEclearing house [as if the order had been filled in the CME pit],thus being marked to the market against the CME marketsettlement price.

(2) leaving the trade with SIMEX and having it processed throughthe clearing house system there, thus being marked to themarket against the SIMEX settlement price.

Given such convenience, MOS must undoubtedly be a welcomedevelopment from a hedgers viewpoint. However, a personal view isthat what is generally good news for the hedging community usuallyspells bad news for the speculating community. MOS appears to beno exception.

SOME INFERRED DYNAMICS

However, before spelling out the nature of the bad news it isnecessary to explore the consequences of participants takingadvantage of the MOS facility, in terms of the impact on the internaldynamics of the auctions at the Chicago and Singapore ends of thesystem. If, say, a Chicago based participant has an order executed onSIMEX, which represents the initiation of a new position, then thearrival of that order in the Singapore pit will impact on the ongoingauction, by influencing a shift in the price, in some way dependingon the liquidity conditions prevailing at the time of its arrival inrelation to the size of the order. For the order to be filled, some otherparticipant, be it a floor broker or a local will have to take the other

side of the trade. Consequently the creation of the transaction will berecorded in the exchanges time and sales register for that market.Thus the price level and number of contracts involved will have beencaptured and be available to be fed into the clearing house system should the Chicago based participant decide to leave the positionin Singapore.

What happens if (s)he so elects? The answer is that a footprint ofthat trade, in the form of a data point, will subsequently appear inthe tick price data record for that day. If the exchange is in the habitof issuing volume at tick price then the volume associated with thetrade will also appear there. Secondly, if the position is held after theClose it will be recognised as new commitment and factored into theclearing house calculation of the open interest figure for that day. If itwas a relatively large order in relation to the typical orders of the day,it could well end up helping to generate an increase in the openinterest figure, as it reflects the initiation of a new position(s). So farwhat has been described is the normal i.e. non-MOS process,which would occur irrespective of the geographical location of theparticipant.

However, what if our Chicago participant elects to have the positiontransferred back to Chicago? It will be marked to the market usingthe CME settlement price. As such it will end up being factored intothe clearing house calculations that produce the open interest figurefor that day. The interesting question then arises. What happens tothe transactional volume figure associated with the trade? This hasalready been captured by the SIMEX time and sales computers aswas the price tick(s) involved. As such they are a unique constituentelement(s) of the historical record of the auction microstructure atSIMEX during that trading session in which our Chicago participanttook part. As such these data can hardly be transferred to CMEalongside the fill price(s) of the local trade(s) it would make amockery of the time and sales data for that days auction on theCME, because the trade(s) never took place there! The answer is thatthe transactional volume and price ticks remain with SIMEX, but thetrade makes no contribution to its clearing house calculations of thenew open interest figure for the day in question, for that SIMEXcontract.

THE BAD NEWS

How these data, relating to the trades transferred from theexchange where the position was initiated to the exchange wherethe participant wishes to have the trade marked to the market andthus carried until it is either offset or delivery is made/taken, arehandled, is a key issue. This is because under the normal course ofevents the price tick record, which goes to make up the summaryor short-hand statement of the familiar Open, High, Low, Closeprice bar, together with the days transactional volume and thechange in open interest represents the outcome of the how of theway that the various orders were processed in the pit, in terms oftheir size and sequence of execution.

As such the record encapsulates the cause and effect relationshipbetween the three variables of price, volume and open interest.Knowing this, it is normally quite realistic to undertake an analysis ofthese data and have a legitimate expectation that whatever cause-effect relationship might be discovered for that day [possibly inconjunction with a number of previous days data] it is valid, and canthus legitimately be allowed to influence an analyst or traderssubsequent view of the likely future behaviour of the market ofinterest.

If, however, as appears to be the case with a market having a MOSfacility, where it seems impossible to maintain the integrity of thelegitimate tick price/volume/open interest relationship that reflects

MUTUAL OFFSETTING SYSTEMS A PROBLEM FOR TECHNICAL ANALYSIS?

By Dr Michael Wignall MSTA

Issue 38 July 2000 MARKET TECHNICIAN 11

the auction process, the results of any analysis will likely be faulty.This is because the cause-effect relationship between the threevariables will have been corrupted by the MOS trades which theirowners decided to transfer back to their local exchange.

IS WHAT YOU SEE THE WAY IT WAS?

Before the advent of MOS the answer to this question for the pricechart of any market of interest would simply have been Yes.However, with the existence of MOS, the answer must now beMaybe. It will depend on whether the contract under scrutinytrades on more than one exchange and whether it has been blessed[cursed?] with a MOS facility or some equivalent. If it has, then theanswer is Unlikely and the analyst and trading system developerwill be inviting trouble if they ignore the implications. Ultimately itwill come down to the volume of MOS transactions involvinginter-exchange transfers in relation to the volume of MOStransactions not involving inter-exchange transfers and the volumeof non-MOS transactions for the contract of interest. The greaterthe proportion of MOS transferred transactions in any one contract,over time, the greater the likely distortion of the historical record ofthe dynamic relationship between intra-day price changes,transactional volume and inter-day open interest changes for thecontract in question.

SOME CONSEQUENCES

As pressures for 24 hour hedging facilities grow to recognise existing24 hour global trade flows, it is likely that mutual offsetting willbecome an increasingly common feature of contracts as commodityexchanges around the world set up partnerships based on jointinterest. Why accept the costs of fighting for market share for a newfinancial product, or retain a share for an existing product, when therevenue from its usage in the form of exchange fees can literally beshared between exchanges co-operating, rather than competing,across time zones?

Assuming the interpretation of the implications of the mutual offsetprocess is correct, then the likely consequence is that conventionaltechnical indicators which factor volume and open interest intoprice changes can be expected to demonstrate erratic behaviour insome markets, but not so in others. Whereas in the MOS-free worldof the past such indicators would have been expected to giverelatively uniform results across any selection of markets, thiscomfortable simplicity has likely passed away. In the case of futures,for example, erratic behaviour can be expected from the operationof the Herrick Payoff Index, and were MOS to be eventuallyextended to cater for options on futures, then the Hines Indexwould be so affected. Thus charts, whether they be hard copy orscreen-based might one day, when MOS markets become moreprevalent, display a disclaimer by the more perceptive and riskconscious data vendors:

This market has a mutual offset facility with another exchangewhich may consequently render unreliable any analytical methodswhich factor volume and open interest into the price history.Analysts making recommendations or traders basing decisions onsuch methods do so entirely at their own risk.

CONCLUSIONS

In other words no assurance can any longer be implied that what isbeing offered via a chart is how it actually was. Unfortunately a MOSsuch as the CME-SIMEX, has the ability to destroy the hithertoinseparable linkage between tick price, volume at tick price, dailyvolume and changes in open interest. Perhaps the most prudentapproach would be for analysts and traders with a speculatorsmindset to avoid futures markets which have MOS assuming theytake the trouble to discover which do.

Computer based trading system developers who typically viewmarkets simply as collections of time series data needing to bemanipulated, and who lack any real understanding, or even interest inthe how or the why the numbers came into existence in the form theydid, are particularly vulnerable to the trap offered by such markets.

Of course speculator participants who remain ignorant of theproblem will continue to unwittingly provide the liquidity that thehedging community needs. As ever, hedgers bliss can be defined interms of speculators ignorance, and MOS represents just one morepotential facet of the latter attribute. Speculators wondering why theactual future, being experienced through the constantly unfoldingpresent, does not materialize in the form that their definition of thefuture would have them believe it should, may unknowingly betrading a market with a Mutual Offset System. One in whichsignificant inter-exchange transfers are taking place.

REFERENCES

Chicago Mercantile Exchange, CME/SIMEX Mutual Offset System;The Worlds Most Successful Trading Link, CME, n.d., Chicago, IL.,http://www.cme.com/market/interest/ mos.html

Chicago Mercantile Exchange, Euroyen Futures At The CME, CME,n.d., Chicago, IL., http://www.cme.com/ market/euroyen.html

Chicago Mercantile Exchange, CME Contract Specifications ForInterest Rate Futures And Options, CME, Jan. 06, 2000, Chicago,IL., http://www.cme.com/clearing/spex/ csinterestrate.html

Chicago Mercantile Exchange, Interest Rate Marketing Dept. toWignall, Jan. 24, 2000, (e-mail)

Hines, Ray, Hines Index, Technical Analysis Of Stocks &Commodities, Vol. 7, No. 4, (April) 1989.

Neil, Trevor, The Herrick Payoff Index: making use of futurescontracts open interest, Market Technician, Issue No. 25, (March)1996.

Wignall to CME Currency & Interest Rate Marketing Dept., Jan. 24,2000, (e-mail)

Authors postscript: SIMEX has since merged with the SingaporeStock Exchange to form what is known simply as the SingaporeExchange, or SAX. The MOS facility remains in being.

Copyright Michael Wignall 2000

The writer (who, contrary to conventional wisdom, is seeking todevelop the Holy Grail of computer based trading systems)welcomes comments on this article, via the journals Letters section,or tel. 01923 450681, or email wig.mail@telinco.co.uk

continued from page 9

CHART 6: Old economy sector Restaurants, Pubs & Breweries. Spikedowntrend reversals by these groups have been a commonoccurrence in the market this year. They look to be bottoming, butthey have a lot of overhead resistance areas to deal with, both inabsolute and relative terms.

Chart 6: Restaurants, Pubs & Breweries, Relative to the All Share

Reprinted by permission. Luise Kliem, Analyst, Merrill LynchCopyright 2000 Merrill Lynch, Pierce Fenner & Smith Incorporated

Source: Datastream

12 MARKET TECHNICIAN Issue 38 July 2000

INTRODUCTION

Financial markets like futures and commodity markets produceenormous amounts of data for analysis. It is much quicker and easierto analyse a graph than it is to analyse copious amounts of tabulardata. So it is not surprising that many people choose to display datain a graphical format. How this data is actually represented on achart, and what information is highlighted, depends on the nature ofthe plot type.

Different plot types make certain information more obvious thanothers. Bar charts, line charts, point and figure charts, candlestickcharts and CBOT Market Profile are all different plot types.ChronoGraphicsSM is a new plot type and, as such, should be thoughtof in the same terms.

However ChronoGraphics offers very easy access to moreinformation than that offered by other plot methods. It tells you:

what happened first in a period the high or the low? how fast the move was between the high and the low was it

quick or slow? when during the period the high or low happened- early or late?

What this means in terms of added analysis capabilities we shallcover later. First, let us examine the way a ChronoGraphics bar isdrawn. The easiest way to do this is to examine the way that atraditional bar is constructed and then to compare this with the waythat a ChronoGraphics bar is constructed.

Construction of Traditional bars andChronoGraphics bars

A traditional bar is constructed by finding the highest high tradedduring the trading period under consideration and then the lowestlow. The difference between the two gives the periods trading range;and it is represented by a single vertical bar, drawn from the low tothe high. The bar also includes a mark, showing the close (usually thelast trading price) of the period. When plotting a marketsperformance over more than one time period, each bar is separatedfrom the neighbouring bars by a constant distance. The constructionof a weekly bar, which embraces five trading days, is shown in Figure1.0 below.

Fig 1.0With ChronoGraphics, however, the bar is drawn from the actual lowto the actual high. This reflects the time element. See Fig 1.1opposite.

Fig 1.1If the price action for the week had been different, but the high, lowand close had been the same, the traditional weekly bar would havebeen as in Fig 1.2 opposite.

Fig 1.2However using the ChronoGraphics methodology there would havebeen a clear indication that the action during the period had beenvery different, as in Fig 1.3.

Fig 1.3So in Figure 1.1 we have a forward, or positive, sloping bar and inFigure 1.3,we have a negative, or backward, sloping bar. The slopeof the bars shows us the exact sequence of events during the period.It represents the directional characteristic of a bar. We can also tellfrom the angle of this slope whether the move occurred quickly or ifit took most of the period.

We have two more bits of information to add to complete theChronoGraphics bar. These are the Open and the Close. On aChronoGraphics bar, the colour between the Open and the Close isshown in a different colour from that which is otherwise usedbetween the High and the Low extremes. See Figure 2.

ChronoGraphics SM

By Nick Burnton

Fig 1.0

Fig 1.1

Fig 1.2

Fig 1.3

5 Days

High

Low

X axis Time

Y a

xis

Pr

ice High

Close

Standard WeeklyBar Chart

Low

5 Days

5 Days

5 Days

High

High

High

Low

LowLow

X axis Time

X axis Time

X axis Time

Y a

xis

Pr

ice

Y a

xis

Pr

ice

Y a

xis

Pr

ice

High

Close

Standard WeeklyBar Chart

Low

High

Close

Standard WeeklyBar Chart

Low

High

Close

Standard WeeklyBar Chart

Low

ChronoGraphicsBAR

ChronoGraphicsBAR

Issue 38 July 2000 MARKET TECHNICIAN 13

Fig 2By adding in this information we are now also able to define eachChronoGraphics Bar in terms of its behavioural characteristics: This isbecause the Close may be either above or below the Open.

If a Close is above the Open in a positive sloping ChronoGraphics bar(Fig. 2.1 and Fig. 2.2), or if the Close is below the Open in anegative sloping ChronoGraphics bar (Fig. 2.5 and Fig. 2.6), thenthat bar is deemed to be normal.

If, however, the Close falls back below the Open in a positive slopingbar (Fig.2.3 and Fig. 2.4), or if the Close rises back above the Openin a negative sloping bar (Fig.2.7 and Fig. 2.8), then that bar isdeemed to be abnormal.

Note that for an abnormal bar, the colours of the ChronoGraphic barinvert.

The importance of an abnormal ChronoGraphics bar (whetherpositive or negative sloped) is that it is an item of additionalinformation, which has trading implications. Evidence suggests thatonly about 10% of ChronoGraphics bars are abnormal.

ChronoGraphics bars can therefore be defined by their directionaland behavioural characteristics.

Applications of ChronoGraphics

The extra information that is supplied by ChronoGraphics bars can beused in a number of different areas of Technical Analysis. Chapters ofa book could be devoted to some of these areas. However, here is avery brief overview:

Multiple time framesMultiple time frames have been difficult to incorporate on one chartusing traditional bars. Quite simply, they become too difficult toread. ChronoGraphics allows the overlay of a number of periods,with no confusion, and with clear and easy to read trend lines.

Trend linesWhen using traditional bars, trend lines drawn using different timeframes tend to give different results. ChronoGraphics integratesdifferent time frames on one chart, and thereby gives consistencyof trend line signals. Also ChronoGraphics enables trend lines to bedrawn that, although relevant to trading decisions, would not havebeen apparent using traditional methodology.

Chart patternsWith each bar now being defined in more detail, classic chartpatterns can be seen and analysed in more detail. Also

ChronoGraphics has its own unique patterns given by the variousangles, colours and lengths of the bars.

System testing One of the drawbacks of traditional system testing is that thealgorithms in software assume that the price extreme closest to theOpen was the one that traded first. This is not always necessarilytrue and can give false system performance results. ChronoGraphicsshows the chronology of High, Low, Open and Close.

FormulaeGenerally speaking, current formulae used in TA are restricted intheir ability to adapt to market conditions due to the one-dimensional time element. However with the added informationfrom the slope of the bar (in terms of direction and angle), as wellas the time element of the extremes, the potential for derivingnew and better formulae has increased significantly.

StrategyChronoGraphics can be used to focus attention on opportunities inthe market such as highlighting abnormal market conditions. Thiscan be combined with other forms of analysis to formulate astrategy for trading.

CONCLUSION

ChronoGraphics bars are a new way of presenting price information.They provide much more information per bar than was traditionallythe case. The slope of the bar provides information about thedirection and speed of the market movement, and the colours of thebars provide information about the chronology in between the openand the close. In principle ChronoGraphics integrates the informationfrom traditional bars and candlestick bars, and goes beyond both.

Probably the most exciting aspect of using ChronoGraphics is thatthey provide new building blocks for research to be carried out.ChronoGraphics will be available from Bridge Information Systems onBridgeStation as part of their charting software packages of Athenaand AthenaExpert as from the middle of July. Chronographics willalso be available on Aspen Graphics for BridgeFeed. Bridge has aPatent pending on ChronoGraphics.

Nick Burnton is the European Director of Technical Analysis at BridgeInformation Systems.

Copyright Nicholas Burnton 2000

Fig 2

Fig 2

Fig 2.1 Fig 2.2Positive Normal

Fig 2.3 Fig 2.4Positive Abnormal

Fig 2.5 Fig 2.6Negative Normal

Fig 2.7 Fig 2.8Negative Abnormal

Open Open

Low

High

CloseClose

Bytes & PiecesThe Global Exchange Database from

Grade Publishing

Finding a reliable source of data is never easy, so you may wishto check out the Global Exchange database. As the namesuggests it covers all the worlds major exchanges and have anextensive database of stock, commodity and derivativeinstruments. The data is updated daily via the Web or can beFTPd to your own network, with an extensive database, manyTechnicians may find this an invaluable resource.

For details see Grade Publishing Ltd: Tel: 020 8672 6655

* * *

Need another Brain?Artificial Intelligence can help!

The use of artificial intelligence modelling technologies continuesto become more accessible with the release of TradingSolutionsa technical modelling programme by NeuroDimensions.TradingSolutions combines traditional indicators with neuralnetworks and genetic algorithms, with step by step wizards toallow you to chart and model times series data. It also has theability to read standard format ASCII or Metastock data. This isthe most user friendly program of this type I have seen, withguided instruction and a step by step tutorial.

Contact NeuroDimensions: Tel: 001 352 377 5144

14 MARKET TECHNICIAN Issue 38 July 2000

INTRODUCTION

In early 1999 I had a paper in the March issue of the MarketTechnician entitled, Using Non-linear neurogenetic models withprofit related objective functions to trade the US T-Bond future. Thepaper described a neural network based bond futures trading system,the performance of which I later presented at a talk I gave to the STAin February 2000.

The paper was originally written for an academic conference and, assuch, was not particularly trader friendly. Given that readers of theMT tend to be practitioners rather than academics, in this article Iexplain how I built the system from a traders perspective and, moreimportantly, show how the system has performed over the last 2years, during which it has been running in real-time.

It is an EOD system and is 100% mechanical with no over-rides.The system is in fact fairly simple even though the methods used tobuild it may appear complex if one has little experience in usingneural networks. It uses five inputs in all; two formed from Bondfutures prices and three from the S&P500 futures two of whichare merely lagged values of the one distinct S&P input see figure1. A genetic training algorithm was used as this allows one greaterflexibility with regards to the choice of objective function (i.e., MSE,Total Profit etc.) than the more commonly used gradient-basedalgorithms.

METHODOLOGY

The steps taken to build the system were as follows:

1) Using historical closing data derived from the 30 year T-Bond andS&P500 futures contracts, spanning from the 12th April 1983 tothe 10th Oct 1994 (approx. 3000 days of in-sample data),design inputs/indicators which show correlation to future T-bondfutures price returns.

2) Using the derived indicators as inputs, test a number of neuralnetwork architectures and optimisation functions. Choose thearchitecture with the least free parameters and the most stableand profitable performance over the full in-sample dataset.Figure 1 shows the resulting optimal neural networkarchitecture.

3) Train 20 separate networks with the specified architecture toconvergence by maximising total log returns.

4) Use the outputs of the resulting networks in conjunction with amajority trading rule to create daily buy and sell decisions.

5) Run networks on out of sample data from 10th Oct 1994 to the30th June 1998 and examine performance (approx. 900 days outof sample data).

No stops were used for the system after a number of tests showedthem to be detrimental to overall performance. My research hasshown that this is generally the case with trading systems designedusing this methodology a result somewhat at odds with thecommonly held notion that stops are de rigueur. It may be thatincluding stops in the initial optimisation process would yield differentresults as opposed to adding them ex post facto. In actual trading theidea is to have enough capital in the trading account to deal withdrawdowns and to use a peace of mind stop placed at a distancesuch that it will only be hit in extreme trading conditions. A standardmonte carlo simulation was used to analyse drawdowncharacteristics.

Figure 1. Neural Network architecture used for final system.

Figure 2. In-sample and out of sample equity curve.

Figure 2 shows the cumulative equity curve over the whole in and outof sample periods. It can be seen from the chart that the performanceis relatively stable and exhibits a steadily upward sloping equitycurve. The figure for slippage and commission was derived fromexperience trading with real prices and amounted to average slippageper round turn (RT) of 1 tick ($31.25) and commission of $20 i.e., atotal of US $51.25 per RT. The slippage of 1 tick per RT is notsurprising given that when using the open(t+1) to open(t+2) to tradethere is no significant difference to the results. Table 1 shows aperformance summary from the same period (the results have beenamalgamated over both in and out of sample periods for the sake ofbrevity all figures include slippage & commission).

Table1. In-sample and out of sample performance summary.

Trading a 2 year old the real-time performanceof a neurogenetic T-bond futures trading system.

By Zac Harland www.kruegerresearch.com

Total net profit $202,183 Ratio avg win/avg loss 1.24

Total no. of trades 710 Avg trade $284

% profitable 57% Max consec. winners 9

No. winning trades 410 Max consec. losers 7

No. losing trades 300 Avg bars in winners 6

Largest winning trade $9,698 Avg bars in losers 5

Largest losing trade -$4,238 Max drawdown -$10,389

Average winning trade $1,199 Profit factor 1.69

Average losing trade -$965 Sharpe Ratio 1.3

Issue 38 July 2000 MARKET TECHNICIAN 15

Real time Results

The system has been operating in real-time since the 30th June1998. Its cumulative equity curve can be seen in figure 3, along withsome standard measures of performance in table 2. All figuresinclude slippage & commission as referred to above.

Figure 3. Real-time performance.

Table 2. Real-time performance summary.

It is evident from the real-time results that the system continues toperform within expectations. In fact it has over performed withregards to average trade figures and so one would expect somereversion to the mean as time passes. Figure 4 shows the UnderwaterEquity Curve of the system during the real-time period. Note that thechart depicts the underwater equity that would have beenexperienced if one was trading a single contract, assuming a $20,000account. This is somewhat artificial if ones money managementpolicy dictates an increase in the number of contracts traded asaccount equity rises and results in equity drawdowns, as apercentage, decreasing unrealistically towards the right hand side ofthe chart.

Figure 4. Underwater Equity Curve

DISCUSSION

A point worth raising is that there is nothing inherently complexabout the way in which the neural network was utilised. It wouldhave been perfectly possible, with the same inputs, to design atrading system using traditional methods of technical analysishowever, it is more than likely that this would have resulted in lessthan optimal performance. The justification for using a neuralnetwork is that when used correctly they are one of the bettertools for extracting trading signals from inputs/indicators sufferingfrom low signal to noise ratios . They are certainly more efficaciousthan the brute force optimisers found in many trading packagestraditionally brought to bear in trading system design.

The networks are not designed to be re-trained, as it is assumedthat the inputs themselves will adapt to current market conditions.For an article elucidating the pros & cons of using a neuralnetwork as opposed to traditional methods please visit my websiteat www.kruegerresearch.com.

In the initial search for reliable inputs many of the more commonlyknown indicators were tested but found wanting; they did notexhibit sufficiently stable relationships with T-Bond returns to beconsidered for the model. If noise inputs are used the neuralnetwork will suffer from the garbage in, garbage out syndromeand no amount of optimisation, connectionist or otherwise, willcreate a workable trading model. Of course, it is not just sufficientto find inputs that contain some measurable and usable signal in-sample; the signal content must remain stationary in itsrelationship to both historical and future T-Bond returns. Designinginputs with these attributes is no trivial endeavour a fact anyonewho builds trading models will attest to. In fact input/indicatorconstancy is arguably the most important issue concerningmechanical trading system design, regardless of the methodologyused (of course money management is also very important,though it is only applicable once ones model exhibits a statisticaledge).

To arrive at the inputs for this system I used a number ofcorrelation measures including mutual information and coherenceamongst others. It is not advisable to use linear correlationmeasures as they will not detect non-linear regularities, if theyexist in the data. Moreover, if one is testing for linear correlationsit is prudent to use a non-parametric statistic as prices and pricereturns tend not to conform to most standard statisticalassumptions i.e., normality, stationarity, homoskedasticity etc. SeeRzempoluck (1998) for further information software is includedfor the calculation of linear correlation, mutual information andcoherence.

THE FUTURE

The most important consideration at this juncuture is whether ornot the system will continue to perform in the future. Since theoriginal system was built it has been updated with the objective ofrendering it more robust to potential future input degradation. Todo this, two additional systems were created, each constructed inan identical manner but using different inputs. The outputs of allthree systems are combined using a majority rule again to providethe final signal. The overall performance should be improved dueto low correlation between each individual systems trading signals.The system is now running live on my website for those readersinterested in viewing the signals in real-time.

REFERENCES

Harland, Z. 1999. Using nonlinear neurogenetic models with profitrelated objective functions to trade the US Tbond future. TheMarket Technician. March 1999.

Rzempoluck, E.J. 1998. Neural network data analysis usingsimulnet. Springer-Verlag. New York.

Total net profit $27,024 Ratio avg win/avg loss 1.64

Total no. of trades 80 Avg trade $337

% profitable 53% Max consec. winners 4

No. winning trades 42 Max consec. losers 5

No. losing trades 38 Avg bars in winners 6

Largest winning trade $6,667 Avg bars in losers 6

Largest losing trade -$3,238 Max drawdown -$6,006

Average winning trade $1,435 Profit factor 1.81

Average losing trade -$875 Sharpe Ratio 1.7

16 MARKET TECHNICIAN Issue 38 July 2000

PROGRAMME

THURSDAY, OCTOBER 5, 2000

9.00-13.00 Walkabout with John Brooks

13.00-14.30 Lunch

14.30-15.15 Wieland Staud

15.15-16.00 Rudolf Wittmer

16.00-16.30 Coffee break

16.30-17.30 (with spouses) Adrienne L Toghraie: Come out on top

18.00 Buses leave for KlusterEberbach (Wine tasting,Sightseeing, Dinner)

FRIDAY, OCTOBER 6, 2000

09.00-09.45 Hartmut Sieper:. Three-Dimensional TechnicalAnalysis

09.45-10.45 Erich Florek: KISS Dilemma Avoiding KISS-philosophyNegatives and EvolvingTechnical Analysis Beyond it.

10.45-11.30 Coffee break

11.30-12.30 Japan Hour

Takehide Matoba: A new Money ManagementTechnique Combining andOscillator Indicator andMACD

Kouchi Suzuki:The application of theIchimoku Balance Table (no. 2)

MinoruEda:The Japanese TraditionalChart (Makino chart) and itsModernistic Interpretation.

12.30-14.00 Lunch

14.00-14.45 Jorge Bolivar:Quantitative PatternRecognition ForecastingMethodology.

14.45-15.30 Patrick Young

15.30-16.00 Coffee break

16.00-16.45 Joachim Goldberg:Everything Under Control?Or Bet on the Wrong Horse?

16.45-17.30 Prof. Hank Pruden

Free eveningDinner with Ouants / Press Event

SATURDAY, OCTOBER 7, 2000

09.00-09.10 Welcome address by BrunoEstier, IFTA Chairman, andMike Esptein, Chair of theTA/QU meeting.

09.0-10.00 David Damant

10.00-10.45 Emmanuel Acar:Inferences of Stop-loss onReturn DistributionComparison of Various AssetClasses.

10.45-11.30 Coffee break

11.30-12.30 Ian Notley/John Brooks

12.30-14.00 Lunch

14.00-14.45 Ralph Acampora

14.45-15.15 Prof. Paul Weher, John F. Murray:Is Technical Analysis in the FXMarket Profitable? A GeneticProgramming Approach.

15.15-15.45 Pierre Lequeux: Profitability of TechnicalIndicators at High Frequencies.

15.45-16.15 Coffee break

16.15-16.45 Prof. Andrew W. Lo:Foundations of TechnicalAnalysis: ComputationalAlgorithms. StatisticalInference and EmpiricalImplementation.

16.45-17.15 Panel discussion:Technical Analysis A New Research Path forQuantitative and AcademicsMethods. Where Are We SoFar? Prof. Hank Pruden, Prof Stephen Satchell, Prof.Mark Taylor, Robert Schwob,David Darmant.

18.00 Visit to the Guttenbergmuseum (where the historyof information began).

SCHEDULED SPEAKERS

Ralph Acampora, CMT, Managing Director,Global Equity Research, PrudentialSecurities and founding member of IFTA.

Linda Bradford Raschke, Author of StreetSmarts expert in short-term tradingmethodologies, etc.

David Damant, President of the EFFAS

Erich Florek, Manager and Director ofTechnical Trading, Midas Trading House.

Joachim Goldberg, Global Head forTechnical Analysis and BehaviouralFinance, Deutsche Bank. Author ofBehavioral Finance, Finanz Buch Verlag.

Ian Notley and John Brooks, Yelton FiscalInc., respectively Publisher and Directorof Sales for Institutional Informationservice Notleys Notes, specialising onlong-term cycles in the internationalfinancial and commodity markets.

Joerg Schreiweis, Chief of Equity Sales, DGBank. Advisory board member andformer Chairperson of the VTAD.

Hartmut Sieper, Consultant, Author ofnumerous books and articles onTechnical Analysis and current boardmember of the VTAD.

Wieland Staud, Managing Advisor forSinus Funds. Well-known German ElliottWave Analyst.

Adrienne Laris Toghraie, President ofTrading on Target.

Rudolf Wittmer, President of WHS GmbH,which specialises in system developmentand a leading expert in the field oftrading systems.

Patrick Young, Author of Capital MarketRevolution, Prentice Hall 1999. Founderand Editor of the electronic magazine,Applied Derivatives Trading.

Prof. Andrew W. Lo, MIT Sloan School ofManagement (via video conference).

Prof. Paul Weller, John F. Murray,University of Iowa.

Pierre Lequeux, ABN AMRO LondonResearch.

Prof. Hank Pruden, Golden Gate University.

Prof. Stephen Satcheli, CambridgeUniversity.

Prof. Mark Taylor, Oxford University.

Robert Schwob, Style Research.

HOTEL ACCOMMODATION

Mainz Hilton (The Conference Hotel)Rheinstrasse 68Tel: +49/6131/2450Fax: +49/6131/245589DM 280/night for double or single room,plus DM 30 pp for breakfast.

When reserving please be sure to specifythat your reservation is in connection withthe IFTA 2000 Conference.

IFTA Conference 2000 The Challenges ofInformation Overload in Todays Marketplace

October 5-7, 2000, Mainz Hilton, Mainz

CONFERENCE FEES3-day conference, including all lectures, luncheons and evening events.

Early Registration(Until July 31, 2000) Registration Fee

IFTA and VTAD DM 1.450, -- DM 1.590,--Non-IFTA members DM 1.750,-- DM 1.890,--Spouse program DM 900,--