New Thinking in Technical Analysis: Trading Models from the Masters

Practical trading strategies from top authorities. Sometimes even the most thorough homework on fundamentals can't pinpoint the best time to buy a stock or take profits. Technical analysis, however, can often help predict a stock's price behavior, providing valuable clues about the course a stock may take in the coming weeks and months. When timing is of the essence in making logical, informed decisions about a stock's future, technical analysis is the tool. This book gathers a dozen top authorities who reveal their techniques and strategies for successful trading. Each chapter guides the reader through a different expert's practical approach to predicting stock behavior, based on the expert's proven analytic methods. Every reader will find value in this straightforward, application-rich presentation of market dynamics forecasting, learning analytical techniques from some of the best minds in the industry.

New Thinking in Technical Analysis contributors include: Thomas R. DeMark (New Market Timing Techniques), Peter Eliades, Larry McMillan (McMillan on Options), Robin Mesch, John J. Murphy (Technical Analysis of the Financial Markets), Steve Nison (Japanese Candlestick Charting Techniques), Steven Poser, Linda B. Raschke (Street Smarts: High Probability Short Term Trading Strategies), Bernie Schaeffer (The Option Advisor), Courtney D. Smith (Option Strategies), Ken Tower, and Larry Williams (Long-Term Secrets to Short-Term Trading).

Inside each chapter:

- Descriptions of a particular model, what it measures, and the theory behind it

- Explanation of how the technique works and how it is validated

- Helpful illustrations, featuring multiple screen images

- Discussion of each technique's particular value and usefulness as compared with alternative models

- Examples of how and in what situation the technique is applicable--and when not to use the model

About the Author

Rick Bensignor is a vice president and senior technical strategist at Morgan Stanley Dean Witter. He is also an adjunct professor at New York University where he teaches technical analysis. Formerly he was Bloomberg LP's senior product specialist for technical analysis, futures, and commodities, following a 14-year career as a floor trader on several New York futures exchanges. A contributor to Investor's Business Daily Guide to the Markets, Bensignor has written for BloombergMagazine and is a popular speaker at industry conferences. He lives in New York

Table of Contents

About the Contributors xiii

Acknowledgments xxi

Preface xxiii

1 SWING TRADING AND UNDERLYING PRINCIPLES OF TECHNICAL ANALYSIS 1

Linda Bradford Raschke

Influential Thinkers in Technical Analysis 2

General Principles of Price Behavior 16

A Trend Is More Likely to Continue Than Reverse 17

Momentum Precedes Price 18

Trends End in a Climax 19

he Market Alternates between Range Expansion and Range Contraction 20

Creating Swing Charts 20

The Three Types of Trades 23

Retracements 23

Tests 25

Breakouts 26

Trade Management 27

2 FORECASTING TRENDS USING INTERMARKET ANALYSIS 29

John Murphy

Basic Principles 29

Commodities versus Bonds 31

CRB Index versus Rates 31

Oil versus Rates 33

Bonds versus Stocks 33

Intermarket Sector Effect 35

Transports Hurt By Rising Oil 37

Other Sector Influences 38

Sector Rotation and the Economy 39

REITs Turn Up As Technology Turns Down 39

From Biotechs to Drugs 41

Commodities as Economic Indicators 42

Japan's Effect on U.S. Markets 44

The Technical Nature of Intermarket Analysis 44

Inverted Yield Curve Implies Weakening 46

The Evolving Intermarket Model 46

3 APPLYING MOVING AVERAGES TO POINT AND FIGURE CHARTS 47

Kenneth G. Tower

Background of Point and Figure Charting 48

Basics of Chart Construction 48

Consolidation Zones 50

Price Objectives 51

Constructing Moving Averages on Point and Figure Charts 52

Recognizing the Long Consolidation Breakout Pattern 53

Identifying Moving Average Reversals 53

Distinguishing between Temporary Pullbacks and Tops 57

Advantages of Point and Figure Charts over Bar Charts 59

When and How to Use the Technique 61

4 SPOTTING EARLY REVERSAL SIGNALS USING CANDLE CHARTS 63

Steve Nison

Constructing Candle Lines 64

Using Individual Candle Lines 65

Doji 66

Shadows 69

Hammers and Shooting Stars 70

Engulfing Patterns 74

Windows 76

Candles and Risk/Reward Considerations 78

5 READING THE LANGUAGE OF THE MARKET WITH MARKET PROFILE 81

Robin Mesch

The Cycle of Equilibrium and Disequilibrium 84

Daily Profile Shapes 88

Normal Days 88

Non-Trend Days 89

Normal Variation of a Normal Day 91

Trend Days 92

Profiles of Equilibrium and Disequilibrium Cycles 93

Non-Price Control and Price Control Phases 97

The 4x4 Formation 98

The Four Steps of Market Activity 100

Using Market Profile to Create a Buy/Sell Strategy 109

Minus Development 115

Summary Principles Underlying Market Profile 118

6 USING OSCILLATORS TO PREDICT TRADE OPPORTUNITIES 119

Tom DeMark

Traditional Oscillator Interpretation 120

Importance of Duration Analysis vs. Divergence Analysis 120

Common Overbought and Oversold Oscillators 121

TD Range Expansion Index' 122

Construction of TD REI 123

Using TD REI 125

TD DeMarker 1''M 128

Construction of TD DeMarker I 130

Using TD DeMarker I 130

TD DeMarker 11'"' 133

Construction of TD DeMarker II 133

Using TD DeMarker II 134

Key Considerations 136

7 USING CYCLES FOR PRICE PROJECTIONS 137

Peter Eliades

Basic Steps in Generating Price Projections Using Offset Lines 139

Nominal Price Projections and Terminology 142

Key Terms and Concepts 143

Guidelines for Projecting When Price Extremes Will Occur 143

Applying Market Cycle Projections 145

When New Projections Are Generated 148

Tips on the Success Rate of Projections 150

Cycle Projections Are Either Met or Invalidated over Time 152

Offsets for Weekly, Daily, and Intraday Cycle Projections 156

Preliminary vs. "Confirmed" Projections 157

Adding Cycle Price Projections to One's Toolbox 161

8 TRADING WITH THE ELLIOTT WAVE THEORY 163

Steven W. Poser

History of Elliott Wave Theory 164

Description of Elliott Wave Theory 165

Recognizing Wave Characteristics 168

Applying Elliott Wave Theory 169

Multiple Time Frame Analysis 169

From Long-Term Trading to Day Trading: The U.S. Stock Market 172

Making Money When Your Analysis Is Wrong 182

U.S. Bond Market Example 182

Flexibility Is Key 184

Fine-Tuning Your Elliott Wave Theory-Based Trading 186

9 TRADING VOLATILITY IN THE OPTIONS MARKET 189

Lawrence McMillan

Can You Predict the Market? 189

Volatility Trading Overview 190

Historical Volatility 192

Implied Volatility 195

Implied Volatility as a Predictor of Actual Volatility 197

Spotting Implied Volatility That Is Overvalued or Undervalued 200

Volatility Extremes 201

Vega 205

Trading Volatility 207

Establishing a Delta Neutral Position 207

Determining Whether Volatility Is Cheap, Expensive, or Neither 209

Buying Volatility 212

Selling Volatility 219

Key Benefits of Volatility Trading 223

10 ENHANCING TECHNICAL ANALYSIS BY INCORPORATING SENTIMENT 225

Bernie Schaeffer

Proper Application of Contrary Thinking 226

Interrelationships of Sentiment Indicators with Technicals 229

Sentiment Measures 231

Qualitative Measures 232

Quantitative Measures 237

Sentiment at Work: A Case Study 253

Stock Market Backdrop 253

Sector Timing 254

Stock Selection 255

Results 256

Caveats in Using Contrarian Analysis 257

11 MEASURING INVESTOR SENTIMENT IN INDIVIDUAL STOCKS 259

Larry Williams

How Investor Sentiment Affects Individual Stocks 260

The Basic Rule 261

Using the Index 263

What Makes the Advisers Too Bullish and Too Bearish? 265

Avoiding Pitfalls 268

Doing What the Majority Is Not Doing 269

12 CONTROLLING RISK WITH MONEY MANAGEMENT TECHNIQUES 273

Courtney Smith

The Fixed Fractional Bet 274

Place Your Stops, Then Apply the Rules 275

Start with Sufficient Capital 276

Stay Cool 276

Maintain Your Discipline 277

Index 279