Market Report 25th October

26th Oct '09 by Robert Newgrosh

15 comments 4723 reads

In my last report four weeks ago, the Dow stood at 9665 and the FTSE100 at 5082. I said that the main trend was clearly up and still looked healthy. The markets have continued higher, and now stand at 9972 and 5242 respectively. It's worth bearing in mind how things have progressed on a slightly longer timescale. When I called the start of the bull market in May based on the Coppock signal, the Dow was at 8268 and FTSE at 4348, so anyone using a buy and hold strategy as I did for my personal pension has done really well. The large, nine-month head & shoulder bottom areas which completed in July are still indicating more upside potential with their targets of 11,200 and 5725. Both indices would meet some resistance at those levels, but there isn't much resistance on the way up to those targets, which gives them a good chance of being reached.

Head & Shoulder targets have been very accurate in recent years on the indices. In 2003 the Dow completed a nine-month H&S bottom which reached almost to the point a 1700 point move indicated by the pattern. In 2005 the Nikkei completed an amazing four-year H&S bottom and again fulfilled its target - a massive 4400 points away. Finally the Dow completed a nine-month head & shoulders top in January 2008 which initiated the bear market. This one, of course, massively exceeded the target - remember, targets are a minimum move.

In the current situation, we once again have nine-month patterns, a duration that I regard as highly reliable. Time is the key to reliability. A two-month H&S pattern would be nowhere near as reliable as a nine-month version, and I wouldn't want to make any major decision based on such a short duration. But once you get above six months then they become much more reliable, and then I'm prepared to trust the pattern.

Even if you're not really a technical analyst, I'd say you should definitely get to know your head & shoulder patterns - both tops and bottoms - since it's fair to say that most of the bull/bear market junctures in recent years in the key indices have been such patterns. Count them up - I've mentioned five in this report. The one exception is FTSE's top in 2007/8 which was a double top,…

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Stockhound

26th Oct '09

You say that Gold is a potentially major upside breakout but don't mention anything quantitative. Does your P&F analysis give any price targets?

There's some excellent reading on gold and precious metals trading opportunities using relative moving averages from zealllc http://www.zealllc.com/2009/relatrad.htm . Adam Hamilton writes excellent essays every week on the subject.

Robert Newgrosh

StockHound, I think the upside potential is 1300 in the medium-term. Gold has effectively been in a range from 700 to 1000, and the height of the range gives a minimum target once the price breaks out of the range.

31st Oct '09

As this is the first time my column has appeared on the site, I would be grateful if the two people who have given it a thumbs-down could explain their reasoning. This would help in producing future reports. Thanks.

emptyend

3rd Nov '09

Robert,

I wasn't one of the two. However, there are a substantial number of people who simply don't believe that so-called technical analysis is at all* useful, however seductive it might appear to be from time to time.

Your piece starts by stating:

"In my last report four weeks ago, the Dow stood at 9665 and the FTSE100 at 5082. I said that the main trend was clearly up and still looked healthy. The markets have continued higher, and now stand at 9972 and 5242 respectively......more upside potential with their targets of 11,200 and 5725. Both indices would meet some resistance at those levels, but there isn't much resistance on the way up to those targets, which gives them a good chance of being reached"

....and six trading sessions later the markets have closed today at 9771 on the Dow and 5037 in the FTSE. In both cases, therefore, they are not only trading below your confident "up call" of last week but they are also trading below your previous "up call" of several weeks ago.

There is perhaps some risk that people might feel that claiming that TA is useful in such circumstances is simply worthless bull####?

I can offer an alternative explanation for the rally of the last six months: the markets had fallen a helluva long way (since I sold at 6600 on the FTSE two years ago) and had started to price in a continuation of bank failures and accelerating recession. Governments stopped the bank failures and relieved the economic gloom somewhat by printing money and throwing it at "the problem" in vast and unprecedented quantities. Many people seem to believe that "all our problems are thereby solved" and that, as sure as eggs are eggs, we'll head out of recession and stock prices will recover dramatically. I have been surprised by the extent to which people appear to believe that and have been amazed at the length of the run....but, even with apparent support from TA and other mystic beliefs, rational behaviour cannot be suspended indefinitely......

....sooner or later the piles of debt are going to have to be repaid via a much more aggressive fiscal policy and great reductions in public spending. Currencies have been and are being debased by this borrowing binge and the result will be the rise in stores of value such as much of the commodities complex....coupled with a loss of faith in promises of "growth tomorrow".

In my opinion, people who believe blindly in TA are risking the same fate as those who appear to be saving money by not insuring their houses and then finding them destryed by fire, flood or whatever. One might well appear to come out ahead for long periods at a time - but one shouldn't pretend that any apparent gains are from some superior approach to risk or some superior techniques.

rgds

[ps....I was the third]

*I should qualify this point. If one is operating in a market where the VAST MAJORITY of trading by participants is by people who share TA beliefs then it can tend towards being self-fulfilling for long periods. The only example of markets where this condition holds, IMO, is with liquid currency pairs - and even then it can be completely undermined at a stroke by concerted government actions, as happened, for example, with the Plaza Accord in 1985 http://en.wikipedia.org/wiki/Plaza_Accord ......which caused a dramatic reversal of the strong dollar trend that had taken the GBP down to $1.05 (IIRC)

Betasurfer

4th Nov '09

Nothing in Robert's article suggests that people should ONLY rely on TA. Of course, it is a TA analysis and the relevant question is surely whether such an analysis helps one understand the historic development and potential future evolution of the market. As a macro-level, I think it does help. Markets are a mental construct. Relying purely on fundamentals misses the point that stock prices are driven by sentiment. Even if from a purist fundamental analysis perspective, some people may not like chartism, the fact remains that a lot of people make good money from these techniques. And there is empirical evidence that chartism has predictive power. Of 95 modern studies, 56 concluded that technical analysis had positive results, 20 studies obtained negative results, and 19 studies indicate mixed results (see research by Irwin & Park in Journal of Economic Surveys, Sept 2007). In light of this, the most effective approach is surely to learn from both approaches (TA and fundamentals), rather than rejecting one out of hand?

"Relying purely on fundamentals misses the point that stock prices are driven by sentiment."

......in the absence of information!

ie......the more liquid a market and the less relevant any events or news are to price formation, the bigger the "hole" that sentiment can fill....which is why TA works quite well for currencies over long periods - and why it works very much less well for event-driven individual stocks (and indeed why its misapplication to such stocks and situations can be extremely damaging to investor wealth!).

In fairness, though, I should note that Robert's comments appear to lean towards using TA in relatively liquid markets and, as previously implied, I don't have a major problem with using TA for currencies....and though I DO have a bit of a problem with using TA for equity indices that, in turn, pales into insignificance compared to the problem with misapplying TA to individual stocks (which is mostly where I continue to see people trying to use it!).

Agreed. It's a useful macro tool to my mind and much less insightful/relevant at the level of individual stocks.

The Invisible Man

Guys, you are getting a little hot under the collar here. TA works... live with it. The whole quant industry is based on TA - albeit of a different form to the sort that Robert is using.

Robert tends to use the Coppock and Point and Figure, which have pretty good track records over the long term. But, quants tend to use statistics and the use of outliers in their decision making process. It's very similar, but just at different ends of the scale. Good well managed risk management combined with pure quant definitely works. The fundamentals don't necessarily matter.

And I'm sorry to say, but TA helps with stock picking too. Knowledge of fundamentals will help put you in good probabilistic situations, but without a sense of timing and understanding of volume and price action you can get horribly burnt.

If people here insist on owning individual stocks, then attach some wing mirrors and use TA to back yourself up. Otherwise it's idiocy and negligence.

Emptyend, I'm not sure if you've read my profile. You'll see that I try to forecast medium-term moves, not short-term; medium-term being measured in months. So if I publish a forecast, and a week or even a month later it has gone the other way, that does not necessarily make the medium-term forecast wrong. My best ever winning trade captured 5,600 points on the Nikkei, yet at one stage it was a few hundred points against me. That move did not alter the medium-term picture, so I stayed with the position, which by the way was not leveraged. In the short-term, prices are closer to random and less predictable, so a short-term move against you does not necessarily mean you are wrong. It all depends if it damages the overall picture, which is best seen on a P&F chart. Often these moves don't. Take Gold. At the moment it's around $1090, well above $1055 in my report. I said it was bullish, but it had a short-term dip for a few days after the report before moving higher. This short-term move, however, did not break the overall upward trend. Another example: I called the Dow higher in May from 8268 based on Coppock. It recently went above 10,000 yet two months after my bullish call it was more than 100 points against. Once again though, the short-term move did not alter the overall bullish picture, and I said exactly that in the column at that time. You can read the columns from the last six months and check.

I didn't really want my columns (which have been published elsewhere for three years) to become a debate about TA. All I can say is that if you look in the Profile, I have called the major medium-term stockmarket moves for several years purely using TA. So I regard this as evidence or proof that the techniques that I use - mainly Point & Figure - do indeed work in the medium-term, and I don't tend to worry too much about the short-term. I also feel that this track record is more accurate than those who don't use TA, many of whom have totally failed to identify the new bull market.

5th Nov '09

I didn't really want my columns (which have been published elsewhere for three years) to become a debate about TA.

I don't want to debate it either. Everyone knows where I stand, having debated it long and hard on Motley Fool for 10 years and shown it frequently to be misapplied.

I was simply responding to the question that you yourself asked. I can't help the fact that my reply is inconvenient for you and gets in the way of your promotional activities.

I also feel that this track record is more accurate than those who don't use TA, many of whom have totally failed to identify the new bull market.

The possibility of a short-run bounce was always there - just as it was in 2003. Markets rarely keep going one way for very long (which is one reason why TA often appears to have some merit to those who like to look at pictures). I don't recall any TA practitioners having called the TOP of the market.......and I don't recall any who identified the slippery fundamental slope that the market started on in 2007 (when I went completely into cash and bonds in my pension fund with the FTSE at 6600).

I do, however, recall vast numbers of them who looked at the charts of banks in 2007/2008 and identified a plethora of false entry-points, thereby throwing good money after bad. My comments at the time were plentiful - you can get a flavour of them by searching this thread: http://boards.fool.co.uk/Message.asp?mid=10797024&sort=whole

I'll leave it there.

To keep Robert's thread clear, I suggest we adjourn the general discussion to here: http://www.stockopedia.com/forum/view/33031/does-technical-analysis-work-and-if-so-under-what-conditions

Keep up the good work, Robert - I like what you're doing and will be watching your forecasts with great interest.

In reply to emptyend (post #10)

"I don't recall any TA practitioners having called the TOP of the market ..."

Emptyend, I did, publicly, in my Jan 2008 report. I notice that you still haven't acknowledged my major market calls which were all made purely using TA. Is that inconvenient for you? They are in the profile and were all made publicly as well. By the way, I am only defending myself here, the intention was simply to write a TA column every four weeks, but no sooner had it appeared, you attacked it. It was also agreed that I could mention my training.

It might also help if I explain that out of hundreds of techniques that I've seen as a qualified technical analyst for 20 years, I only use six, and just three on a day-to-day basis. The rest simply aren't good enough. So on the vast majority of what is called TA, we actually agree - I wouldn't use it either. However, there are a limited number of outstanding techniques, Point & Figure being one. In my courses, I tell delegates NOT to use many of the popular techniques because they don't work. You can't just say TA is good or bad, you have to distinguish between the limited number of strong techniques, and the rest which offer no advantage. If you dismiss the whole of TA, am I to assume you tested every technique and found them all to be poor, or is it just some prejudice against charts full stop?

MrT

Evening all - I suggest you both agree to disagree on this one. Each to their own and all that. There's plenty of room for contrasting perspectives and lots of different ways to make money. Cheers, MrT

I agree Mr T. As I said, I simply came on board to write reports every four weeks, not start a debate (or a war!)

For the record, I'm not anti-fundamentals - they can be particularly important for stocks. I concentrate on markets, where I think TA is more efficient and effective.

9th Nov '09

In reply to Robert Newgrosh (post #12)

" By the way, I am only defending myself here, the intention was simply to write a TA column every four weeks, but no sooner had it appeared, you attacked it."

...err....no!

I merely responded to a question that you yourself posed, in which I suggested some reasons why people might have given a thumbs down. If you don't want answers to your own questions then why ask them??

Regarding your comment "For the record, I'm not anti-fundamentals - they can be particularly important for stocks. I concentrate on markets, where I think TA is more efficient and effective.", I suspect we may not be quite as far apart as it might appear.....see my comments in post 6.

As to fundamentals and market calls, see the following for a sample of mine from September/October 2007:

http://boards.fool.co.uk/Message.asp?mid=10659363

http://boards.fool.co.uk/Message.asp?mid=10694975

http://boards.fool.co.uk/Message.asp?mid=10695589

http://boards.fool.co.uk/Message.asp?mid=10696695

http://boards.fool.co.uk/Message.asp?mid=10765607

http://boards.fool.co.uk/Message.asp?mid=10694179

http://boards.fool.co.uk/Message.asp?mid=10694535

...following which I went all into cash and bonds in my pension fund, with the FTSE at over 6600.... as noted here http://boards.fool.co.uk/Message.asp?mid=10767162

Thats enough from me here, I think.

Market Report 25th October

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Robert Newgrosh

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