2014 IFTA Syllabus New

Certified Financial Technician (CFTe) I & II Syllabus & Reading Material (For exams taken from 1 October, 2014 onward)

Last updated: 29 May 2014 of 117

Certified Financial Technician (CFTe)

Syllabus for CFTe Level I & Level II

Document Change History

Revision Date Summary of Changes 29 May 2014 Page 17. Updated #3: Required additional IFTA reading material (see Appendices)

Page 18. Added to XI. Charles D. Kirkpatrick, Julie R. Dahlquist: Technical Analysis: The Complete Resource for Financial Markets Technicians: Chapter 9. Temporal Patterns and Cycles and Chapter 19. Cycles.

20 May 2014 Page 10. Updated Outline of Topics Item 21.

Page 17. Added VI. Yukitoshi Higashino, MFTA: Primer on ICHIMOKU (Appendix E) (IFTA Required CFTe II Reading Material)

Page 17./ Page 18. Moved XII. David Linton: Cloud Charts: Trading Success with the Ichimoku Technique [Hardcover] from IFTA Required CFTe II Readiing Material (Page 17) to IFTA Recommended (Additional) CFTe II Reading Material (Page 18)

Page 88. Added Appendix E: VI. Yukitoshi Higashino, MFTA: Primer on ICHIMOKU ) (IFTA Required CFTe II Reading Material)

11 March 2014 Page 46: Added: Appendix B: Breadth Analysis (IFTA Required CFTe I Reading Material) Page 20. Added: Appendix A: The Elliott Wave Principle (EWP) (IFTA Required CFTe I Reading Material)



Outline of Topics

1 HISTORY OF TECHNICAL ANALYSIS.............................................................................................................3

2 PHILOSOPHY OF TECHNICAL ANALYSIS AND MARKETS ...........................................................................3

3 CHART CONSTRUCTION ...............................................................................................................................3

4 DOW THEORY................................................................................................................................................3

5 CONCEPTS OF TREND ...................................................................................................................................4

6 CLASSICAL BAR CHART PATTERNS..............................................................................................................4

7 SHORT TERM PRICE PATTERNS ...................................................................................................................5

8 POINT AND FIGURES CHARTING..................................................................................................................5

9 CANDLE STICK CHARTING ............................................................................................................................6

10 ICHIMOKU CHARTS.......................................................................................................................................6

11 OTHER CHARTING METHODS ......................................................................................................................6

12 MARKET PROFILE..........................................................................................................................................6

13 ELLIOTT WAVE THEORY ...............................................................................................................................7

14 BASIC ELEMENTS OF GANN THEORY ..........................................................................................................7

15 BASIC QUANTITATIVE TECHNIQUES............................................................................................................7

16 MOVING AVERAGES......................................................................................................................................8

17 OSCILLATORS AND CONTRARY OPINION ...................................................................................................8

18 RELATIVE STRENGTH....................................................................................................................................8

19 TIME CYCLES .................................................................................................................................................9

20 VOLUME AND STOCK MARKET INDICATORS..............................................................................................9

21 OTHER TECHNICAL IDEAS .......................................................................................................................... 10

22 TECHNICAL SYSTEMS ................................................................................................................................. 10

23 ACADEMIC FINDINGS ON TA...................................................................................................................... 10

24 SENTIMENT AND CONTRARY OPINION..................................................................................................... 10

25 BEHAVIORAL FINANCE & INVESTMENT PSYCHOLOGY............................................................................. 11

26 ETHICS .......................................................................................................................................................... 11



Outline of Topics (continued)

1 History of Technical Analysis

• Early days: Dow, Schabaker, Wykoff

• Major Publications

2 Philosophy of Technical Analysis and Markets

• Technical versus Fundamental Forecasting

• Technical Approach to Trading and Investing

• What is a trend and how are they identified?

• Supply and Demand

• Assumptions of Technical Analysis

• Random Walk Theory, Fat Tails, Proportion of Scale

• Market Efficiency, Prediction of the Future

• Criticism of Technical Analysis

• Financial Markets and the Business Cycles

3 Chart Construction

• Types of Charts: Line, Bar, Candle, Point and Figures

• Construction of Charts

• Arithmetic or Logarithmic Scale

• Volume, Open Interest

• Time Frame

4 Dow Theory

• Basic Ideas

• Closing Prices and Lines

• Primary Trend, Secondary Trend, Minor Trend

• Concept of Confirmation

• Importance of Volume

• The Dow Theory’s Defects




5 Concepts of Trend

• Definition of Trend

• Directions of Trend

• Support and Resistance

• Trendlines and Channels

• Major Trendlines

• Fan Principles

• Strength of a trend

• Percentage Retracements

• Consolidations and Corrections

• Breakouts

• Speed Lines

• Unconventional Trendlines

• Internal Trendlines

• Regression

• How does psychology impact trends

6 Classical Bar Chart Patterns

• Basics

• Psychology and Patterns

• Reversal and Continuation Patterns

• Patterns and Volume

• Patterns and Price Objectives / measured moves

• Head and Shoulder Patterns (normal and reversed)

• Double Tops and Bottoms

• Triple Tops and Bottoms

• Rounding tops and bottoms

• Saucers and Spikes

• Triangles (symmetrical, ascending, descending)

• Diamond Tops




• Broadening Formation

• Flags and Pennants

• Wedge Formation

• Rectangle Formation

• Gaps

7 Short Term Price Patterns

• Basics and Pattern construction

• Gaps

• Spike (wide range bar, low range bar)

• Dead cat bounce

• Island reversal

• Reversal Days Run Days

• Thrust Days

• Two-‐bar or three-‐bar patterns

8 Point and Figures Charting

• Basics

• Chart Construction: Time and Volume Omitted

• Box Count

• Box Size and Reversal Filter

• Price Patterns: Breakouts, Double Tops, Triple Tops

• Support and Resistance

• Trendlines

• Measuring Techniques and Price Objectives

• Point and Figures and Relative Strength

• Point and Figures and other Technical Indicators




9 Candle Stick Charting

• Basics

• Chart Construction

• Bullish Reversal Patterns (i.e. Hammer, Engulfing Patterns, Harami ...)

• Bearish Reversal Patterns (i.e. Hanging Man, Engulfing Pattern, Dark Cloud pattern ...)

• Bullish Continuation Patters (i.e. separating Lines, upside Tasuki gap, ...)

• Bearish Continuation Patterns (i.e. separating line, three line strike ...)

• Candle Patterns and Filters

10 Ichimoku Charts

• Basics

• Chart and Cloud Construction

• Turning Line

• Standard Line

• Span 1

• Span 2

• Lagging Line

• Interpretation of clouds

11 Other Charting Methods (Kagai Charts, Renko Charts and Three Line Break Charts are included in the CFTe Level II reading material section. The rest of the reading material in this section will be added later.)

• Equivolume

• Swing charts

• Kagi Charts

• Renko Charts

• Three Line Break Charts

• Heikin Ashi Charts

• Drummond Geometry

12 Market Profile

• Basics, Construction and graphics

• Market Profile organizing Principles




• Range Development and Profile Patterns: Normal day, Trend day, neutral day, non trend day, double distribution day

• TPO

• Point of Control

• Value Area

13 Elliott Wave Theory

• Basics and History

• Principles of Wave Counting

• Corrective Waves

• Rule of Alternation

• Channelling

• Wave 4

• Fibonacci Numbers, Ratios and Retracements

• Fibonacci Time Targets

14 Basic Elements of Gann Theory (reading material to be added later)

• Basics and History

• Gann Fan Lines

• Fibonacci numbers and Gann lines

• Gann Two-‐Day Swing Method

15 Basic Quantitative Techniques (reading material to be added later)

• Mean, Variance, Skewness

• Frequency and Probability

• Basic Time Series Concepts

• Random Walk Theory

• Yield Math Concepts

• Time Value of Money / Present Value Concept

• Compounding




• Performance Measurement

• Test procedures

16 Moving Averages

• Different Types of Moving Averages (Simple, Weighted, Exponential, Geometric, Triangular ...)

• Moving Average Envelopes

• Moving Average crossovers

• Bollinger Bands

• Bollinger Bands and Bandwidth

• Moving Averages and Cycles

• Estimating the Length of a Moving Average

• Adaptive Moving Average

17 Oscillators and Contrary Opinion

• Principles of Oscillation

• Oscillator usage and Trend

• Measuring Momentum

• Rate of Change

• Double Moving Averages

• Commodity Channel Index

• Relative Strength Index

• Stochastics

• Williams %R

• Directional Movement Indicator

• Parabolics

• Moving Average Convergence/Divergence (indicator and histogram)

18 Relative Strength

• Basics

• Ratios, Spreads, Rankings,

• Relative Strength Levy




• Comparative Relative Strength

• Relative Performance

• How to Interpret Relative Strength Charts

19 Time Cycles

• Basics

• Cycle Concept

• Amplitude, Length, Phase, Harmonicity, Synchronicity

• Detrending

• Dominant Cycles

• Cycles and Trends

• Left and Right Translation

• How to Estimate Cycles

• Seasonalities

• Stock Market Cycles

• Fourier Analysis

• Maximum Entrophy Spectral Analysis

20 Volume and Stock Market Indicators

• Measuring Volume and Open Interest

• Volume and Chart Patterns

• Volume Signals

• On Balance Volume

• Volume Accumulator

• Measuring Market Breadth

• Comparing Market Averages

• Advance-‐Decline Line and Divergence

• Different Time frames

• McClellan Oscillator

• New Highs Versus New Lows

• Upside versus Downside Volume




• Arms Index

• TRIN and TICK

• Equivolume Charting

21 Other technical Ideas (*reading material to be added later)

• CoT Data Filtering*

• Trend indicators

• Volatility Indicators

• Range / Momentum Indicators

• Cyclical Indicators

• Hurst Exponent*

• DeMark Indicators = fixed Pattern systems

22 Technical Systems

• Construction

• Typical elements

• Proper testing

• Evaluation

• Optimisation

• Typical systems

23 Academic findings on TA

• Testing procedures

• Testing objectives

• Efficient Market Hypotheses

24 Sentiment and Contrary Opinion

• Principle of contrarian Opinion

• Crowd Behaviour and the Concept of Contrary Opinion

• Investor Sentiment readings

• Investor Intelligence Numbers




• Commitments of Trades Report

• Net Traders Positions

• Open Interest in Options

• Put/Call Ratios

• Polls

• Insiders

• Investors Psychology – Individual and Group

25 Behavioural Finance & Investment psychology (reading material to be added later)

• Prospect Theory

• Typical Behavioural Effects

• Single Investors Behaviour

26 Ethic (reading material to be added later)



CFTe Level I Reading Material

CORE READING MATERIAL:

I. Edwards, Robert D. and Magee, John, Technical Analysis of Stock Trends, 9th (or current) Edition (2001-‐2008), John Magee Inc., Chicago Illinois ©2001, ISBN 1-‐57444-‐292-‐9

Chapters: 1. The Technical Approach to Trading and Investing 2. Charts 3. The Dow Theory 4. The Dow Theory in Practice 5. The Dow Theory’s Defects 6. Important Reversal Patterns 7. Important Reversal Patterns – Continued 8. Important Reversal Patterns – The Triangles 9. Important Reversal Patterns – Continued 10. Other Reversal Phenomena 11. Consolidation Formations 12. Gaps 13. Support and Resistance 14. Trendlines and Channels 15. Major Trendlines 16. Technical Analysis of Commodity Charts 17. A Summary of Some Concluding Comments 17.2 Advancements in Investment Technology 18. The Tactical Problem 18.1 Strategies and Tactics for the Long-‐Term Investor 20. The Kind of Stocks we Want: The Speculator’s View Point 20.1 The Kind of Stocks we Want: The Long-‐Term Investor’s View Point 23. Choosing and Managing High-‐Risk Stocks: Tulip Stocks, Internet Sector and Speculative Frenzies 24. The Probable Moves of Your Stocks 25. Two Touchy Questions 27. Stop Orders 28. What is a Bottom -‐ What is a Top? 29. Trendlines in Action 30. Use of Support and Resistance



CFTe Level I (Continued) Reading Material

33. Tactical Review of Chart Action 34. A Quick Summation of Tactical Methods 36. Automated Trendlines: The Moving Average 38. Balanced and Diversified 39. Trial and Error 40. How Much Capital to Use in Trading 41. Application of Capital in Practice 42. Portfolio Risk Management 43. Stick to Your Guns

II. Murphy, John J.: Technical Analysis of the Financial Markets, New York Institute of Finance, New York, NY, ©1999, ISBN 0-‐7352-‐0066-‐1 Chapters: 1. Philosophy of Technical Analysis 2. Dow Theory 3. Chart Construction 4. Basic Concepts of Trend 7. Volume and Open Interest 14. Time Cycles

III. Pring, Martin J.: Technical Analysis Explained, 4th (or current) Edition, McGraw Hill Book Company, New York, NY, ©2001, ISBN 0-‐07-‐138193-‐7

Chapters: 2. Financial Markets and the Business Cycle 4. Typical Parameters for Intermediate Trends 12. Individual Momentum Indicators II 16. The Concept of Relative Strength 18. Price: The Major Averages 20. Time: Longer-‐Term Cycles 22. General Principles 26. Sentiment Indicators



CFTe Level I (Continued)

Reading Material IV. Le Beau Charles, Lucas David: Technical Traders Guide to Computer Analysis of the Futures Market, Chapters: 1. System Building 2. Technical Studies 4. Day Trading V. Nison Steve: Candlestick Charting Techniques, Second Edition Chapters: 1. Introduction 2. A historical background 3. Constructing the candlestick lines 4. Reversal patterns 5. Stars 6. More Reversal Patterns 7. Continuation Patterns 8. The Magic Doji 9. Putting it all Together VI. Du Plessis Jeremy: The Definitive Guide to Point and Figure Chapters: 1. Introduction to Point and Figure Charts 2. Characteristics and Construction 3. Understanding Point and Figure Charts 4. Projecting Price Targets 5. Analysing Point and Figure Charts



CFTe Level I (Continued) Reading Material

Required additional IFTA reading material (see Appendices): 1. Elliott Wave Theory (Appendix A) 2. Breadth Indicators (Appendix B) 3. Time Cycles Analysis (Appendix C: additional reading material to be added. Note: The questions on the

exam for this topic will be pulled from Murphy, John J. recommended reading listed above. ) 4. Point and Figure Techniques (Appendix D: to be added) RECOMMEDED (ADDITIONAL) READING: VII: Elder, Alexander Dr.: Trading for a Living, Psychology, Trading Tactics, Money Management Chapters: 1. Individual Psychology 2. Mass Psychology 3. Classical Chart Analysis 4. Computerized Technical Analysis 5. The Neglected Essentials 6. Stock Market Indicators 7. Psychological Indicators 10. Risk Management



CFTe Level II Reading Material

Core Readings I. Edwards, Robert and Magee, John, Technical Analysis of Stock Trends, 9th Edition

II. Martin J. Pring: Technical Analysis Explained Chapters:

1. The Market Cycle model 2. Financial Markets and the Business Cycle 16. The concept of Relative Strength 18. Price: The Major Averages 19 Price: Group Rotation 20. Time: Longer-‐Term Cycles III. Le Beau Charles, Lucas David: Technical Traders Guide to Computer Analysis of the Futures Market Chapters: 1. System Building 2. Technical Studies 4. Day Trading IV. Steve Nison: Beyond Candlesticks: New Japanese Charting Techniques Revealed (Wiley Finance, Nov 10, 1994)

Chapters: 2. The Basics 3. Patterns 4. Candles and the Overall Technical Picture 5. How the Japanese use Moving Averages 6. Three-‐Line Break Charts 7. Renko Charts 8. Kagi Charts



CFTe Level II (Continued)

Reading Material V. Jeremy Du Plessis: The Definitive Guide to Point and Figure Chapters: 1. Introduction to Point and Figure Charts 2. Characteristics and Construction 16. Understanding Point and Figure Charts 18. Projecting price targets 20. Analysing Point and Figure Charts VI. Yukitoshi Higashino, MFTA: Primer on ICHIMOKU (Appendix E) VII. J. Peter Steidlmayer and Steven B. Hawkins: SteidlMayer On Markets. Trading with Market Profile. Second Editon Chapters: 6. Understanding Market Profile 7. Liquidity Data Bank, On Floor information, and Volume @ Time 8. The Steidlmayer Theory of Markets 9. The Steidlmayer Distribution 10. The You 11. Anatomy of a trade 12. Profile of a Successful Trader 13. Trading, Technology, and the Future VIII. Howard B. Bandy: Quantitative Trading Systems, Practical Methods for Design, Testing, and Validation IX. Brian Millard: Future Trends from Past Cycles Chapters: 3. How Prices Move (I) 4. How Prices Move (II) 6. Cycles and the Market 8. Properties of Moving Averages 9. Averages as Proxies for Trends 10. Trend Turning Points (I) 11. Trend Turning Points (II)




Reading Material 12. Trend Turning Points (III) 13. Cycles and Sum of Cycles 14. Bringing it all Together

X. A.J. Frost, Robert R. Prechter: Elliott Wave Principle: Key To Market Behavior Chapters: 1. The Broad Concept 2. Guidelines of the Wave Formation 3. Historical and Mathematical Background of the Wave Principle 4. Ratio Analysis and Fibonacci Time Sequence. XI. Charles D. Kirkpatrick, Julie R. Dahlquist: Technical Analysis: The Complete Resource for Financial Markets Technicians Chapters: 3. History of Technical Analysis 4. The Technical Analysis Controversy 5. An overview of Markets 7. Sentiment 8. Measuring Market Strength 9. Temporal Patterns and Cycles 10. Flow of Funds 13. Breakouts, Stops, and Retracements 18. Confirmation 19. Cycles 21. Selection of Markets and Issues: Trading and Investing 22. System Testing and Management




Reading Material RECOMMEDED (ADDITIONAL) READING: XII. David Linton: Cloud Charts: Trading Success with the Ichimoku Technique [Hardcover]

Chapters: 8 . Cloud Chart Construction 9. Interpreting Cloud Charts 10. Multiple Time Frame Analysis 11. Japanese Patterns Techniques 12. Clouds Charts with other techniques 13. Ichimoku indicator techniques 14. Back-‐testing and Cloud Trading Strategies 15. Cloud Market Breadth analysis 16. Conclusion Notice to CFTe II Candidates: IFTA will supply additional reading material for the CFTe II on: Quantitative Analysis, and Behavioral Finance. This material, along with reading material highlighted above (if applicable), will be posted in the Appendices by 30 June 2014.



Appendix A

The Elliott Wave Principle (EWP)

(IFTA Required CFTe I Reading Material)

Mohamed ElSaiid, CFTe, MFTA Egyptian Society of Technical Analysts (ESTA)

Introduction

In this chapter, the Elliott Wave Principle is introduced to the candidate. The general form and essential concepts of the Elliott Wave structure–and role, as well as the psychology and characteristics underlying the theory. Additionally, the chapter explains the relationship of the Elliott Wave Principle with the Dow Theory and classical approach in technical analysis. The chapter is partially designed in study guide format, offering various visual organizers, in an effort to help the reader connect the related concepts offered in the material and ultimately increasing comprehension of the basic principles of the EWP.

Part One: The Elliott Wave Principle; historical background and basic tenants

The Elliott Wave Principle (EWP) or Elliott Wave Theory (EWT) is a technical analysis approach developed by Ralph Nelson Elliott (R.N. Elliott) in the early 1900s that was primarily intended to describe or explain the action of the market index, namely; the Dow Jones Index (DJI). Prior to his works and findings on the EWP, R. N. Elliott was an accountant working for railways and a restaurant. During the early 1930s—and while recuperating from a severe illness, he became interested in the Dow Theory. The various development of market phases as viewed via Dow Theory piqued his interest. Specifically, he became interested in categorizing the time-‐frames of the observed market trends. Through his meticulous research, R. N. Elliott measured the movements in the DJI and identified specific relationships between these movements later termed as “waves”. The relations between these waves varied from a size and time-‐related one, to a structure and role-‐related one. With respect to wave-‐role, R. N. Elliott contended that there were two types of waves; waves that move in the main trend direction, and waves that move against the main trend direction. R. N. Elliott organized his observations and findings and developed the EWP. R.N. Elliott initially introduced the EWP through a publication titled “The Wave Principle” in 1938. This was followed by a more detailed book; “Nature’s Laws: The Secret of the Universe in 1946”, just before his death in 1948. Over the years since his death, several followers and pioneering practitioners of the EWP continued to promote the wave principle by offering publications and newsletters to the investors and the financial community. Of those followers were, Charles Collins, publisher of the book "Wave Principle", Hamilton Bolton, who was accredited for introducing the EWP to a wide readership in the mid 1900s, and finally A.J. Frost and Robert R. Prechter who co-‐authored “Elliott Wave Principle” in 1978; a book which is regarded by many EW practitioners to be the best available description and validation of the EWP to date.



The general form and basic tenants of the Elliott Wave Principle

The Five Wave Pattern

Elliott Wave patterns take the form of five waves of a specific pattern. Three of these waves (labeled “1”, “3” and “5”), cause the development of the overall directional movement of prices. They are separated by two interruptions against the trend direction (labeled “2” and “4”) which, in turn, cause the fluctuation that is naturally observed in the price action. In other words, waves “1”, “3” and “5” describe the main direction of the move, while waves two and four are seen as pauses. Each of these five waves play a critical role in the construction of the waves and the overall description of the movement.

Figure 1: the basic five wave EW Pattern sequence



The Complete EW Cycle

The EWP contends that the progression of the five-‐wave pattern completes a single wave of a larger degree which ultimately builds the directional move. Following this progression, a three wave pattern develops to partially counteract this directional move. These three waves act as an interruption to the progression and complete the formation of a single EW cycle, consisting of eight waves.

This idealized complete EW cycle, consists of two fundamentally distinct structures or modes. These two modes are referred to as the motive mode and the corrective mode. In this idealized cycle, the (five-‐wave) motive modes are always denoted by the numbers (“1”, “2”, “3”, “4” and “5”). Meanwhile, the (three-‐wave) corrective modes are always denoted by the letters (“A”, “B”, “C”). The concept of wave modes will be later discussed in details in part three.

Figure 2: the complete “idealized” eight wave EW cycle



Wave degrees

Initially, R.N. Elliott recognized nine different degrees of waves. They ranged from degrees as small as ripples on an hourly chart to the largest wave degree he could assume existed from the data that was available to him at the time. Since, as the theory implies, the degree progression in both directions is infinite, both A.J. Frost and Robert R. Prechter have suggested six additional wave degrees, of which three were of larger degree than the initial nine, while the remaining three were of lesser degree. Both Frost and Prechter have been accredited for standardizing the original labeling scheme, initially added by R.N. Elliott. In addition to that, they have suggested a general-‐but-‐more-‐detailed framework of the various wave degrees with respect to the range of span or duration of each degree. This addition, suggested that the most adequate or relevant time-‐frame chart for each wave degree would appear visibly. This is deemed as a very important aspect in EWP application, as it represents common grounds for EW practitioners when applying the EWT in practical life; imagine counting a wave degree without knowing what the minimum and maximum durations of this wave are, as well as what time-‐frame charts to use to chart this wave degree.

Table 1: The initial nine-‐ degree waves of the EWP

Table 1 depicts the nomenclature of the initial nine EW degrees, with each wave degree following a unique labeling process. The maximum and minimum durations as well as the corresponding proposed time-‐frame chart for each wave degree are also offered as guidelines to aid in charting the waves.

The rationale behind the overriding (5-‐3) structure



It is consistently observed in all price actions that progression in either direction always takes the form of fluctuations (meaning that there are actions in the opposite direction as part of the entire move). EWP adds that since a one-‐wave occurrence does not allow fluctuation (action in the opposite direction), the minimum requirement for achieving fluctuation is three waves. Three waves in two opposite directions do not allow progress. Hence, to achieve a net progress or development in one direction over the other (i.e. the interrupting three waves), the main trend must contain at least a five-‐wave structure.

Part Two: Wave personality: characteristics and psychology of the E-‐Waves

Wave personality offers an in-‐depth focus on the aspect of crowd psychology and behavior of the market participants. The EWP attempts to offer a framework that enhances our understanding of the market action and behavior that was initially introduced and discussed in the classical approach of technical analysis.

The personality of each wave in the Elliott Wave sequence plays an integral part in the reflection of the mass psychology it embodies. As such, EW Analysts assume that each wave has its own mark or "signature" which generally reflects the psychology of that phase under observation. Thus, understanding how and why the waves develop is key to the application of the EWP.

The characteristics which will be described are in reference to the idealized form of the EW cycle previously presented in figure 2.

Characteristics of Wave(s) “1”:

• Commonly, during the bottom (start) of waves “1”, the accompanied news is generally bad, the period often exhibits the occurrences of recession (during intermediate wave degrees), or even depression and war (during large wave degrees).

• At this point and given that the input information on the current economic situation does not look good, fundamental analysts continue to lower their earnings estimates.

• Quite commonly, waves “1” are formed as a part of the bottoming phase or more generally, during periods of disbelief and thus, tend to demonstrate deeper corrective movement in wave “2”.

• Wave 1, the rebound from a preceding bear trend, is constructive and offers a more structured rebound from undervalued price levels. This move often displays a subtle increase in volume and is relatively supported by market breadth.

• The short interest level peaks as the majority of market participants believe that the overall trend is to the downside. Investors view the rally as a last chance to sell and get out.

• When waves “1” rise from either large bases formed by the previous correction, or from extreme compression. They appear as dynamic and dramatic, and the result is that only moderate retraced is seen in wave “2”.




• Waves “2” act so as to interrupt the progress and the directional move of prices. They tend to heavily retrace (but not extend beyond) wave “1”, especially, since they themselves occur mostly during the periods of disbelief, prior to the market-‐up phase.

• More often than not, news and fundamentals tend to be worse during the end (bottom) of wave “2” when compared to the beginning (bottom) of wave “1”.

• Systematically, during wave “2”, investors are convinced that the bear market is proceeding once more following the termination of wave “1”, or what they had perceived to be another counter trend rally.

• Waves “2” are often associated with downside non-‐confirmations. This usually takes the shape of a weakening downside momentum and breadth. Adding to this, waves “2” are often accompanied by low volume and volatility, indicating a drying up of selling pressure. It is not uncommon for waves “2” to take more time in formation compared to their preceding waves “1”.


• Waves “3” are strong and broad; the trend at this point is unmistakable. Waves “3” occur and are confirmed during the start of what the classic approach highlight as the “mark-‐up” phase.

• Turnaround fundamentals stories begin to flow in the financial arena, causing an investor confidence re-‐build.

• Waves “3” usually generate the greatest volume and price movement, as they most often extended beyond their normal limits, with respect to both time and distance.

• During waves “3”, successful classical pattern-‐breakouts are commonly observed; multi-‐continuation gaps, volume expansions, exceptional breadth (since almost all share prices and market sectors participate), as well as major Dow Theory trend confirmations and runaway price movement, which create large gains in the market, depending on the wave degree.

• Corrections in waves “3” are usually weak and short-‐lived as those who bet on buying pull-‐backs suffer the likelihood of missing the move.


• In principle, the occurrence of wave “4” implies that the best part of the growth phase which was evident in wave “3” has ended.



• More often than not, waves “4” appear as a form of a sideways interruption. They develop as part of the building of a base for the final fifth wave move. In part, wave “4” is seen as the “public participation phase” as termed by the classical approach (Dow Theory).

• Lagging stocks build their tops and begin declining during this wave, since only the strength of wave “3” is thought to have pulled them along for the upside participation. This initial deterioration in the market sets the stage for breadth divergences, non-‐confirmations and subtle signs of weakness during the fifth wave.


• Specifically, in stocks, waves “5” are always less dynamic than waves “3” in terms of breadth. With the exception of fifth wave extensions (which will be discussed in part three), they usually display a weaker momentum as well.

• As a general feature, volumes in waves “5” tend to be less when compared to wave “3” volumes.

• During advancing waves “5”, optimism runs extremely high as further public participation emerges, despite a narrowing of breadth. Nevertheless, market action does improve relative to prior corrective wave rallies.

• Commonly, during the top (end) of wave “5”, the accompanied news is positive, implying that prosperity and peace are guaranteed forever as arrogant complacency becomes evident in the financial community and financial news.

Characteristics of Wave(s) “A”:

• During "A" waves of bear markets; the investment world is generally convinced that this reaction is just a pullback pursuant to the next leg of advance. The public surges to the buy side despite the first valid technically damaging cracks in trend patterns of individual stocks.

• The "A" waves set the tone for the waves that follow. A five-‐wave “A” indicates a start of a directional or trending mode, while a three-‐wave “A” indicates that a flat or sideways mode will likely follow.

Characteristics of Wave(s) “B”:

• "B" waves are phonies. They are sucker plays, bull traps, speculators' paradise, orgies of oddlotter mentality or expressions of dumb institutional complacency (or both).

• They are often accompanied by an emotional advance of narrow list of stocks, which would be evident through non-‐confirming signs of TA-‐breadth and momentum indications.



• “B” waves are often unconfirmed by all/broader market indices and are almost always expected to be completely retraced by the following wave “C”.

Characteristics of Wave(s) “C”:

• "C" waves inherit most of the characteristics and properties of third waves in the sense that they are persistent and broad.

• In the case of bearish "C" waves:

o They are usually devastating in their destruction. o There is virtually no place to hide except cash. o The false impression that the bull trend is “back on track” which was held throughout its

preceding waves “A” and “B” tend to fade away, as fear and occasionally multiple panic phases take over.

o Fundamentals ultimately collapse in response of the market action.

• In the case of bullish "C" waves:

o They are constructive and often render sizable gains or returns in waves of larger degrees. o They usually give a fake indication that the bull trend is back to stay.



Part Three: Aspects and structure of the Elliott Wave Principle

Figure 3: Modal (structure) map of the EWP



The EWP is comprised of three key aspects, namely; pattern, ratio and time. Pattern: The aspect of pattern (or structure) is regarded as the most important one of the three aspects. This aspect describes and categorizes the various structures of the underlying waves, which ultimately add up to form a larger hierarchy of structure. Ratio: The aspect of ratio describes the relationship between the lengths of the waves of same and/or different degrees. Time: The aspect of time describes the relationship between the durations of the E-‐waves and E-‐cycles of same and/or different degrees. In this chapter, we will focus exclusively on the aspect of pattern (or structure).



Wave Function (role) According to the EWP, each wave has a role or function. This function is determined only by the relationship of that wave to the wave of one larger degree. As such, when a wave is termed as actionary, this means that this wave is responsible for the progression and development of the wave of one larger degree. Accordingly, this wave moves in the same direction and helps in building the wave of one larger degree. Conversely, when a wave is termed as reactionary, this means that this wave is responsible for the interruption and regression of the wave of one larger degree. Accordingly, this wave moves in the opposite direction and partially tears down the progress of the wave of one larger degree.

Figure 4: Wave function Wave Mode (structure)

In addition to the wave function, R.N. Elliott identified and differentiated between two fundamental types of waves with respect to their shape or structure, which he referred to as the “mode”. With respect to wave structure or mode, R.N. Elliott categorized the waves into motive waves and corrective waves. It is the fundamental distinction between those two that shapes the back bone of the EWP.

Motive waves

Definition: Motive waves are responsible for the progress and development of the overriding trend. They must always exist as a five-‐wave structure and adhere to the following rules:

1. Wave “2” does not extend beyond the start of wave “1”. 2. Wave “4” does not extend beyond the start of wave “3”. 3. Wave “3” always travels beyond wave “1”. 4. Wave “3” is never the shortest of the motive waves “1”, “3” and “5”.



5. Waves “2” and “4” must be corrective in structure. These rules define the structure of the motive waves and ensure its purpose-‐-‐that is the progress and development of the overriding trend. It is understood from the EWP that any structure failing to adhere to any one of the above rules is automatically identified (in mode) as a corrective structure, even if it takes the form of a five-‐wave structure. Types and characteristics of motive waves: There are two different types of motive waves, namely; Impulses (or Impulse waves) and Diagonals (or Diagonal waves). Impulses Impulses are types of motive waves that always exist as a five-‐wave structure. These five-‐wave structures must adhere to the primal rules of the motive waves. In addition to that, the following extra rules are exclusive to Impulses:

1. End of wave “4” does not overlap with end of wave “1”. 2. Waves “1”, “3” and “5” of an impulse wave must be motive in structure. 3. Extensions (to be discussed shortly) can never exist in all three waves; “1”, “3” and “5” at once.

It is worth noting that waves “3” can only exist as Impulses. Structural or “modal” characteristics of impulses: Extension: Extensions are defined as-‐-‐and are primarily the cause of an extra stretch or elongation of the impulse waves (with respect to time, length or both). Naturally, as a result of this stretch, subdivisions exist in abundance. Extensions are a very common modal characteristic of impulse waves and generally occur during one of the three actionary waves (“1”, “3”, and “5”) as they develop.



Figure 5: Types of extensions in impulse waves of bull and bear markets

Truncation: Truncation is another characteristic of impulses in which wave “5” fails to exceed the end of wave “3”. In that sense, truncations only occur in impulse waves “5”, and are generally perceived as a sign of weakness in the market. Truncations imply that although the market was able to develop into a 5-‐wave structure, this development was not associated with enough momentum to drive the market beyond the end of its preceding wave “3”. Moreover, a truncation generally implies a sharp wave to follow in the opposite direction.



Figure 6: Bull and Bear market impulse truncations

Diagonals Diagonals are types of motive waves that always form as a five-‐wave structure. Diagonals must adhere to the primal (overriding) rules of the motive waves. However, these motive waves can never exist as middle motive waves i.e. motive wave “3”. Moreover, unlike impulses, an overlap between waves “1” and “4” is accepted and is considered as a characteristic of such types of motive waves. Diagonals are identified as two rising (or falling) semi converging lines, or – in less common cases – diverging lines. Thus, it is important not to assume that this EW pattern will always resemble a classical wedge formation. Despite sharing almost similar psychology, their structures are not always identical. There are two types of diagonals, namely; Leading and Ending Diagonals. Leading Diagonals As the name implies, Leading Diagonals appear as motive waves that initiate the build and development of a new trend (a larger degree wave). They can appear only as wave “1” of a five-‐wave motive structure, or appear as wave “A” of an “ABC” Zigzag corrective development. Leading Diagonals are five-‐wave structures whereby waves “1, “3” and 5” are subdivided into five motive waves, while waves “2” and 4” are corrective in structure.



Figure 7: Converging and diverging Leading Diagonals

Ending Diagonals As the name implies, Ending Diagonals appear as motive waves that terminate the build and development of an existing trend (a larger degree wave). An Ending Diagonal can appear only as motive wave “5” or appear as wave “C” of an “ABC” corrective development. Being a member of the motive structures (or modes), the five waves of the Ending Diagonals strictly adhere to the primal (overriding) rules of the motive waves. However, the subdivisions of some of these five waves are somewhat different from the subdivisions of all other types of motive structures. Each wave of the five Ending Diagonal waves is subdivided into three waves (i.e. including waves “1”, “3” and “5”). In other words, all its subdivisions are corrective in structure. It is worth noting that waves “1”, “3” and “5” in Ending Diagonals are corrective in structure and actionary in function (or role). Meanwhile, waves “2” and “4” are both corrective in structure and reactionary in function (or role).



Figure 8: Converging and diverging Ending Diagonals

Corrective waves

Definition:



Corrective waves appear in-‐-‐and are exclusively responsible for all counter trend interruptions. In that sense, corrective structures primarily function as reactionary waves. However, they may also exist (in special cases) as actionary waves (for example: during waves “1”, “3” and “5” of an ending diagonal). Corrective waves are primarily structured in the form of three waves or a more complex variation thereof. The fundamental difference between motive and corrective waves is that the latter will always break one or more of the cardinal rules of the motive wave. Thus, any five-‐wave structure that breaks any of the motive wave rules is corrective. The reason as to why they are called corrective is that – being the sole driver for all counter trend interruptions – corrective waves accomplish only a partial retracement, or "correction," of the progress achieved by any preceding motive wave. As for why corrective waves tend to cause only partial retracement, is that movements against trends of one larger degree appear as a struggle. This is primarily caused due to the overriding force of the larger degree trend which prevents counter trend movements to fully develop as motive structures. A byproduct of this situation is that corrective structures tend to be less identifiable and more varied than their motive counterparts. Types and characteristics of corrective waves: Corrective structures appear in two types, sharp and sideways. Sharp corrective structures are manifested through “Zigzags”, while, sideways structures are represented through “Flats” and “Triangles”. Sharp corrective structures: Zigzags Zigzags represent the most common form of the EW corrective pattern. They exist as a three-‐wave structure. The three waves are denoted by the letters “A”, “B” and “C” respectively. Wave “B” will never terminate beyond the start of wave “A” and wave “C” will travel beyond the end of wave “A”. In zigzags, the function of wave “A” is actionary because it helps build the wave of one larger degree (either wave “2” or “4”). Meanwhile its structure is motive (can either an impulse or a leading diagonal), thus it is subdivided into five waves and adheres to the motive wave rules. Wave, “B” – on the other hand – acts as a reactionary wave, since it interrupts the progress of the wave of one larger degree (either wave “2” or “4”), while its structure is corrective. Finally, wave “C” ” is actionary because it helps build the wave of one larger degree (either wave “2” or “4”). Meanwhile its structure is motive (can either an impulse or an ending diagonal), thus it is subdivided into five waves and adheres to the motive wave rules. As such, Zigzags are commonly known by EW practitioners as 5-‐3-‐5s.



Figure 9: Bull and bear market Zigzags

Sideways corrective structures: In general, sideways corrective structures generally occur due to a stronger trend of one larger degree as well as a lack of countertrend pressure, relative to Zigzags. There are two types of sideways corrective structures, namely; Flats and Triangles. Flats Flats represent another form of the EW corrective pattern, where – as the name implies – they represent a sideways transition to the overriding direction (unlike Zigzags). Similar to Zigzags, they also exist as a three-‐wave structure, where each wave is labeled by the letters “A”, “B” and “C” respectively. However, Flats offers a variation from Zigzags in that wave “A” does not hold enough momentum to develop as a five wave structure as does wave “A” of a Zigzag. Instead, wave “A” of a flat structure develops into three waves. As a result, wave “B” of a Flat structure does not suffer the same pressure which causes it to partially retrace wave “A” as does wave “B” of a Zigzag. It’s worth noting that wave “A” of a Flat structure is both actionary and corrective, wave “B” is both reactionary and corrective, and wave “C” is actionary and motive. As such, Flats are commonly known as 3-‐3-‐5s.



Types and characteristics of Flats: Regular Flats In regular Flats, wave “B” terminates at or near the start of its preceding wave “A”, while, wave “C” terminates at, near or faintly beyond wave “B”. Expanded Flats Expanded Flats are regarded as the most commonly recurring type of Flat formation. In this type, wave “B” terminates beyond the start of its preceding wave “A”, while, wave “C” terminates beyond the start of wave “B” (i.e. the end of wave “A”). Running Flats Running Flats are rare when compared to the former two Flat types already discussed. In this running Flat, wave “B” terminates beyond the start of its preceding wave “A” (similar to expanded flats). However, wave “C” fails to match the length of wave “B”. It is implied by this formation that the momentum of overriding trend is significantly strong to the extent that it forces the corrective pattern to tilt in its direction.



Figure 10: Bull and bear market Flat types



Triangles EW Triangles are yet another type of sideways corrective structures. They are similar to EW Flat corrections, in the sense that they reflect a form of temporary balance of forces (buyers and sellers). This is also synonymous to the interpretations of the classical approach of sideway corrections. However, unlike the Triangles in the classical approach, EW Triangles always act as continuation patterns (or wave degrees) to the larger degree trend or wave.

EW Triangles consist of 5 overlapping waves, in which each wave subdivides into three waves (five threes). Since they are corrective, they are labeled in letters as follows: (“A”, “B”, “C”, “D”, and “E”) respectively.

EW Triangles can be categorized into; Contracting and Expanding Triangles. There are three types of Contracting Triangles; Symmetrical, Ascending and Descending, while there is only one type of Expanding Triangles. Expanding Triangles are also referred to as Reverse Symmetrical Triangles. In general, they are corrective patterns that tend to precede the final move in the direction of the major trend.

Contracting Triangles

In Contracting Triangles:

1. Wave “C” never moves beyond the end of wave “A”. 2. Wave “D” never moves beyond the end of wave “B”. 3. Wave “E” never moves beyond the end of wave “C”.

Expanding Triangles

In Expanding Triangles:

1. Wave “C” always move beyond the end of wave “A”. 2. Wave “D” always move beyond the end of wave “B”. 3. Wave “E” always move beyond the end of wave “C”.



Figure 11: Bull and bear market EW Triangle types



Running Triangles:

Running Triangles are a very common case in contracting EW Triangles in which wave “B” exceeds the start of wave “A”.

Figure 11: Bull and bear market EW Running Triangle types



One final point with regards to the subject of wave function and wave mode: It is implied from the EWP that motive structures are always actionary. Whereas, corrective structures are mostly reactionary, but can also be actionary in role or function.

Part Four: Comparing the EWP to the Dow principle and the classical approach (relationships and similarities)

According to the Dow Theory’s tenants, there are three main trend-‐frames; the major (primary), the intermediate and the minor trends. The Dow Theory focuses more specifically on the primary trends. The theory states that waves or trends have three phases. They are termed as the accumulation phase, the public participation phase and the distribution phase. The EWP elaborated and expanded on this concept by initially introducing nine various trend (wave) degrees, each with a specified range of durations as previously presented in part I.

Followers of the Dow Theory whom were later accredited for developing the classical approach managed to affirm, complement and expand Dow’s three phases of the market trend. Some suggested that an idealized form of a complete bull/bear succession will likely involve six phases. Three of which constitute the bull tranche of the succession, and are recognized as the “accumulation” the “mark-‐up” and the “public participation” phases respectively. In addition, three phases would make up the bear tranche of the succession and are termed as the “distribution”, the “panic” and the “discouraged selling” phases respectively. Advocates of the classic approach added that the discouraged selling and accumulation phases (which constitute market bottoms) occur during a period of “disbelief” in which the irrational crowd psychology is caught on the wrong side of the market. Meanwhile, the mark-‐up and fear driven-‐major panic phases occur during a period of “belief” in which the irrational crowd psychology is caught on the right side of the market. And finally, the public participation and distribution phases (which constitute market tops) occur during a period of “euphoria and extreme optimism” in which the irrational crowd psychology is again caught on the wrong side of the market.

When trying to relate the concepts offered through the Dow and classic approach to the EWP, we find that the classic approach’s three bull market phases and three bear market phases seems quite compatible to the EWP’s idea of a five wave bull market advance followed by a three wave bear market decline.

Finally, both the Dow Theory and the EWP made reference to volume, breadth and indices’ confirmations through their tenants and guidelines respectively. The Dow Theory tenants explained that volume and breadth act as a confirmation to the sustainability of the overriding trend. While the EWP further emphasized on this matter and explained the importance of volume, breadth and indices’ confirmations during advancing motive waves. While, characterizing corrective and ending waves to be more likely associated with divergences and non-‐confirmations from volume, breadth and other market indices.

As such there is little doubt that the EWP was largely influenced by Dow Theory and can be regarded as some form of extension to the Dow Theory, in which the EWP validates much of Dow Theory and may be regarded as an extension thereof.



Figure 12: Relationships and Similarities Between the EWP Dow/Classic Approach

Figure 12 depicts a complete EW cycle superimposed over the idealized six phases of complete bull/bear succession of the Dow/classic approach. As observed, the wave sequence “1” through “5” share similar characteristics, psychology and seem to fit quite well within the accumulation, mark-‐up and public participation phases, as does wave sequence “A” through “C” when compared to the following three phases.



Part Five: Summary and Conclusion

Unlike the Point and Figure approach in technical analysis which functions under the assumption that the market action contains unnecessary noise, the EWP indirectly implies that market action does not contain noise. The EWP contends that market action – even at the smallest of time frames – adheres to a predefined structured framework of patterns that is of fractal nature. These patters collectively collaborate to ultimately build a larger degree structure/trend and so on.

Moreover, through the interpretations of the social mood, crowd psychology and characteristics of each wave, EWP offers an extended and more detailed explanation of the Dow Theory with regards to understanding the market behavior and action.

On the other hand, the EWT has been criticized for its complexity and the many variations to the general (idealized) form of the theory. The issue that – at times –causes the theory to offer multiple scenarios at various junctures as the wave progresses in practical life, and thus, sometimes fails to support implementing an investment-‐decision process based on its findings.

In his book, “Evidence-‐Based Technical Analysis”, David Aronson wrote:

“The Elliott Wave Principle, as popularly practiced, is not a legitimate theory, but a story, and a compelling one that is eloquently told by Robert Prechter. The account is especially persuasive because EWP has the seemingly remarkable ability to fit any segment of market history down to its most minute fluctuations. I contend this is made possible by the method's loosely defined rules and the ability to postulate a large number of nested waves of varying magnitude. This gives the Elliott analyst the same freedom and flexibility that allowed pre-‐Copernican astronomers to explain all observed planet movements even though their underlying theory of an Earth-‐centered universe was wrong.”

Nevertheless, proper implementation of the EW analysis in conjunction with other tools and approaches of TA generally offers a better understanding of market action. While other tools and approaches of TA can aid the EWP in narrowing down the expected scenarios, thus reducing the limitations of the EWP.

Quoting John J. Murphy:

“The key is to view EWT as a partial answer to the puzzle of market forecasting.”

Reference material

In its entirety, the material expressed in this chapter is a simplified reproduction and tribute to the exclusive pioneering works of the Frost and Prechter on the EWP and the combined thoughts of Murphy and other authors on the subject.



Appendix B

Breadth Analysis (IFTA Required CFTe I Reading Material)

Tamar Gamal, CFTe, CETA

Egyptian Society of Technical Analysts

Introduction

What is a market (stock market)? A market is a place where both buyers and sellers exist to trade. Similar to any market, a stock market is a place where both buyers and sellers trade all kinds of listed

securities.

What is technical analysis? Technical analysis (TA) is the study of market action (in terms of price and volume), primarily through

the use of charts, for the purpose of forecasting future price trends.

Foundations, premise, and concepts in TA

• Market action discounts everything.

• Prices move in trends (and trends persist).

• History repeats itself.

Types of TA Indicators

Indicators that are calculated based on price.

• Moving averages and MACD.

• Momentum oscillators “RSI”, “CCI”, and “stochastic”.

Indicators that are calculated based on volume.

• On-‐balance volume “OBV”.

• Demand index “DI”.

• Volume zone oscillator “VZO”.



Indicators that are calculated based on advancing and declining issues.

• Advance-‐decline line

• McClellan oscillator

• Market thrust index History of Breadth Analysis Colonel Leonard P. Ayres, of Cleveland Trust Company, is generally credited with being the first to count the advancing and declining issues. In 1926, he produced his first work, which he called “making the count of the market.” However, 25 years earlier, Charles H. Dow, of Dow Theory fame, commented in his June 23, 1900, editorial in the Wall Street Journal about the number of advances and declines thusly, “Of these 174 stocks, 107 advanced, 47 declined, and 20 stood still.” However, it is widely accepted that Colonel Ayres and his associate, James F. Hughes, popularized the concept that is widely used today. When it comes to breadth analysis, as we know it today, Gregory L. Morris gets most of the credit for explaining, discussing and categorizing a large variety of indicators based on market breadth data. In his book “Market Breadth Indicators”, Gregory L. Morris discussed clearly every form of market breadth known to man, from basic to advanced applications, with hundreds of chart examples and valuable statistical results.

What Is Stock Market Breadth? Breadth analysis is one of the most valuable aspects in technical analysis. Breadth introduces a new dimension to analysis, where it reveals the true strength or weakness of the targeted market. Such dimension is not attainable from the standard price 8/volume chart. Market breadth indicators are sometimes referred to as broad market indicators, since they do not refer to individual stocks. Breadth is more related to indices, large or small capitalization, price or capital weighted, all are the same in breadth analysis. Stock market breadth is a tally of how many stocks rose versus declined in value. Unlike the Dow Jones Industrial Average or EGX (30) Index, which follows just 30 stocks, stock market breadth is a more inclusive ratio, taking almost all stocks traded on an exchange into account, rather than concentrating on just a few key stocks. Stock market breadth gives the investor a much larger overview of the market's overall trend. If more issues close higher today than yesterday, stock market breadth is said to be positive. If more issues close lower, stock market breadth is considered to be negative. Stock market breadth is often a key component of the technical analyst's arsenal of market indicators.

Types of Breadth Indicators

Indicators that are calculated based on advancing and declining issues.

• A/D line

• McClellan oscillator

• McClellan summation index



Indicators that are calculated based on volume.

• Up/down volume oscillator

Indicators that are calculated based on both A/D issues and volume.

• Market thrust index

• Thrust oscillator

Indicators that are calculated based on highs/lows.

• New hi/new lo oscillator

Indicators that are calculated based on moving averages.

• % of stocks above/below certain moving average

There are many ways and techniques that use or combine all three groups; their aim is to identify the overall health of the target market, in terms of trend analysis, for the sole purpose of forecasting trend reversals. Moreover, breadth analysis can also be applied to any sector in the market or to a specific industry group, as long as there is a way to determine their constituents and the components mentioned above. These indicators use different data than open, high, low, close, and volume. They are obviously related to prive movements but use other data: Number of stocks that advanced Number of stocks that declined Number of stocks that were unchanged Total advancing volume Total declining volume Total unchanged volume New 52-‐week high (how many stocks made new highs) New 52-‐week low (how many stocks made new lows) These data concern the overall market situation and not a particular stock. For example, during a day on the NYSE, we can have the following information. Number of stocks that rose: 1,243 (30%) Number of stocks that declined: 2,756 (67%) Number of unchanged stocks: 117 (3%) Advancing volume: 954,856,870 Declining volume: 2,051,149,098 Unchanged volume: 49,848,916



This means that the 1,243 stocks that rose during the day had total volume of 954,856,870, while the 2,756 stocks that declined had total volume of 2,051,149,098, and so on. Important signals are triggered when the market is continuing to make higher highs but market breadth indicators are not confirming. This means that the rise is not confirmed by the overall market, as more and more stocks are failing to confirm the market rise, which is obviously a signal of a potential reversal. Advance-‐Decline Line The advance-‐decline line is perhaps the most commonly known and used market breadth indicator of all time. Probably because of its simple calculation and application, the advance-‐decline line has stood the test of time. It is a long-‐ term indicator that shows the general trend of a certain market. Advance-‐decline formula:

AD Line = Advancing Issue – Declining Issues. The difference is added cumulatively to show it as a trend-‐following indicator that provides valuable information every day the market trades. There are many variations of the advance-‐decline line, such as A/D ratio or smoothed versions of the advance-‐decline line itself. In his book Opportunity Investing, Gerald Appel discussed using a 10-‐day moving average of the advance-‐decline line along with negative/positive divergence with respect to the S&P 500 index to spot trend reversals. On the other hand, Stan Weinstein and his colleague Justin Mamis preferred using the 10-‐day moving average of the advance-‐decline line as the signal for a 30-‐day moving average of the same difference, as discussed in his book Secrets for Profiting in Bull and Bear Markets. However, Gregory Morris, in his book Market Breadth Indicators, stated that he preferred to use a 21-‐day moving average for most of his work. Using raw or smoothed versions of the advance-‐decline line is primarily dependent on the market under study; choppy markets will require a certain degree of smoothing, while other developed markets, with huge numbers of issues traded every day, will require far less or no smoothing to begin with. Time is also an important factor here; peaks may require a certain degree of smoothing due to the rapid changes in the advance-‐decline difference, while bottoms may not due to the dull environment that surrounds them.

Calculation of A/D line A/D Line = (# of Advancing Stocks – # of Declining Stocks) + Previous Period's A/D Line Value

Example: Day 1, Advancing stocks= 35, Declining stocks= 25,

A/D Line= (35 – 25) + 0 = 10

Day 2, Advancing stocks= 45, Declining stocks= 25, A/D Line= (45 – 25) + 10 = 30

Day 3, Advancing stocks= 50, Declining stocks= 17,



A/D Line= (50 – 17) + 30 = 63



Plotting the A/D values

The drawback of this calculation is that with time, the numbers of shares and companies increase in the stock market, especially with the new IPOs that appear from time to time. This will obviously change the A-‐D line values with time and can distort the results. Another way to calculate the A-‐D line to overcome this problem is to take a ratio by dividing advancing issues by declining issues: AI/DI. Obviously, the results will also be accumulated as in the first calculation. Another way to calculate the A-‐D ratio is to take the difference between advancing and declining stocks and divide by the total of advances plus declines.

A-‐D ratio = (A-‐D) / (A+D) *100

Using A/D line

• Zero crossovers Crossing above/below zero levels can be useful, but don’t expect this to happen regularly, A/D is a cumulative/medium to long-‐term indicator, and the way it is calculated will not allow oscillating around the zero line often.

• Divergences



This is where the A/D is most useful, when NOT confirming price action, the A/D is of great importance. A rising market with a declining A/D line reflects that though the market is making new highs, nonetheless, lesser stocks are following this uptrend every day, indicating that the current uptrend may reverse soon. A declining market with a rising A/D line reflects that though the market is declining, the number of stocks that are following that decline is getting lesser every day.

• General trend analysis This is where you get to apply support/resistance, breakouts, trendlines and other classical techniques on the A/D line.

The red line (upper part of chart) represents the A/D line for the Egyptian market. The black line (lower part of chart) is the EGX (30) Index. In the above chart, A/D is confirming EGX (30) uptrend. Both EGX (30) and A/D line are forming higher lows – higher highs formation.



A/D line (red line / upper part of chart) confirming EGX (30) (black line lower part of chart uptrend in the period from 2004–2007.

EGX (30) upper panel and A/D line lower panel. Failure to confirm the EGX (30) higher lows/higher highs during Aug – Nov 2009 was the first sign of weakness (-‐ve divergence); during late October, the A/D line broke below previous support levels. This was another sign



of weakness (S/R breakouts); later during 2010, the A/D line failed to confirm any of EGX (30) higher highs/higher lows.

A/D line failed to confirm EGX (30) breakout, followed by breaking below previous support levels, was enough of a signal to forecast the very sharp decline that followed. Later, after few months and only few weeks before Jan 25 2011, again the A/D closed below previous support levels, indicating that market conditions are far from healthy.

A/D line failure to confirm EGX (30) breakout during Jan 2012, followed by breaking below previous support, was another good example of how the A/D is a leading indicator that marks medium to long-‐term potential



moves. The A/D line upside breakout during Aug 2012 was a good example of A/D confirming the EGX (30) move that went to nearly the 6,000 level a few weeks later.

NSYE A/D line upper panel and NY Composite lower panel. Again, a good example of -‐ve divergences on the A/D line that lead to significant declines later during Nov 2007 to Feb 2008.



The above chart shows the S&P 500 along with an A-‐D line for the NYSE data. As we can see, during March 2003, the A-‐D line was rising along with the S&P 500. During May of the same year, the A-‐D line broke its resistance before the S&P. The A-‐D line was a leading indicator for the S&P 500 in some cases, and in other cases was moving along with the S&P (coincident). At the right edge of the chart, during end of April 2004, the A-‐D line was showing some weakness, forming lower highs formation, and broke a support, which was not confirmed yet by the S&P 500.

S&P

A-D line

NASDAQ

A-D line



The NASDAQ index along with it’s A-‐D line. As we can see, the A-‐D line rose during March 2003, confirming the market strength. At the end of April 2004, the A-‐D line witnessed lower highs formation and violated a support, which was not confirmed yet by the NASDAQ. McClellan Oscillator The McClellan oscillator is a breadth oscillator created by Sherman and Marian McClellan in 1969. The McClellan oscillator uses the daily advancing minus declining stocks by smoothing them with two different exponential moving averages and then taking the difference between them. It is a short/medium-‐term indicator that shows the general trend of a certain market. The idea about the indicator came when both Sherman and his wife, Marian, discovered that when the stock market declined sharply, both moving averages 19 and 39 EMA of breadth data reached very low levels. During a strong upward move, both moving averages were reaching very high levels. They discovered that when both moving averages went to oversold levels, this was a good time to buy, even before a crossover occurred between both moving averages. By the same token, when the market moved sharply to the upside and both moving averages reached overbought levels and then began to decline, this was a signal to sell.

Calculation of McClellan oscillator

1. Calculate the daily difference between advancing stocks and declining stocks.

2. Calculate a 19-‐day exponential moving average of the difference between advancing stocks and declining stocks.

3. Calculate a 39-‐day exponential moving average of the difference between advancing stocks

and declining stocks.

4. Take the difference between 19-‐day EMA and 39 days EMA. The McClellan oscillator thus consists of one line that moves above and below a zero level. Obviously, crossovers between the two moving averages coincide with zero-‐level violations. The idea of the McClellan oscillator sounds a lot like the MACD.

Using the McClellan oscillator

• Zero crossovers When the McClellan crosses zero to the upside it means that the 19-‐day EMA broke the 39-‐day EMA to the upside. A violation of zero to the downside coincides with the 19-‐day EMA breaking the 39-‐day EMA downwards. (Of course, we are using moving averages of A-‐D.) The zero crossover technique is not recommended, as it leads to many whipsaws. However, usually positive values in the oscillator are seen as bullish, while negative values are seen as bearish.

• Divergences

The McClellan oscillator can track divergences with price action. Usually, when the price of the market gauge is still rising and the McClellan declines, it is considered a negative divergence.



Positive divergences can occur too. We recommend waiting for a price confirmation after such divergences, as they may not always lead to profitable moves. False divergences can occur sometimes, so waiting for confirmation is required. Obviously, divergences that occur in the same direction of the major trend are more significant.

• Overbought and oversold

The McClellan oscillator is very useful when it reaches overbought levels and then begins to turn down, or reaches oversold levels and turns up afterward. As we know, it is an unbounded oscillator, so overbought and oversold zones can be detected by visual inspection. Usually for the NYSE the +200 and -‐200 levels serve as strong overbought and oversold levels. These are not fixed levels, however, as each market has a different number of stocks and volatility often changes in the stock market, so OB/OS levels change.

EGX (30) (upper panel) and McClellan oscillator (lower panel) during 2008–2010. +ve and –ve divergences occurred during the 2-‐year period, and most of them were successful. The McClellan oscillator is a very short-‐term indicator that must be confirmed along with price action and is better used in the direction of the upper degree trend.



EGX (30) (upper panel) and McClellan oscillator (lower panel) during 2012–2013. Most signals were successful, and divergences and zero-‐crossovers are shown on the chart above. All signals were applied in the same direction as the upper degree trend.

S&P 500 (upper panel) and McClellan oscillator (lower panel) during 2012–2013. Most divergences were successful. Another way to confirm divergences is to wait for a cross above/below the zero line (marked by a circle) and will still be leading and early.



EGX (30) (upper panel) and McClellan oscillator (lower panel) during 2011–2012. Overbought signals are another advantage when using the McClellan oscillator. Visual inspection is the best technique for marking such levels, and one should understand that such levels will change over time and will need some adjustments.

EGX (30) (upper panel) and McClellan oscillator (lower panel) during 2010–2012.



Oversold signals are another advantage when using the McClellan oscillator. Visual inspection is the best technique for marking such levels, and one should understand that such levels will change over time and will need some adjustments. McClellan Summation Index This indicator is also created by the McClellan's. The Summation Index is a cumulative function of the McClellan oscillator. It is more smoothed than the normal McClellan oscillator.

Calculation of McClellan Summation Index

1. Calculate today’s McClellan oscillator value.

2. Add each previous value of the McClellan oscillator to the cumulative total. McClellan Summation Index shows the real trend of the McClellan oscillator. It is more of a medium to long-‐term indicator that will show the true strength/weakness of the market on a longer timeframe. Caution is needed when using the Summation Index because signals are usually leading, but sometimes the lead time is a bit longer than expected. Summation Index signals have very high credibility, but the issue of the lead time sometimes becomes very confusing; this is where the discipline is needed and highly appreciated.

Using McClellan Summation Index

• Zero-‐crossovers Usually, when the Summation index is moving above zero and rising, it tells us that money is entering the market. When it is declining and going below zero, it indicates that money is leaving the market. It is a breadth measure that shows us the bigger picture. Sometimes the zero line will act as support/resistance.

• Divergences

Unlike the McClellan, the Summation Index is a smoothed indicator, and it gives us early signals of potential strength or weakness. Divergences are very significant when they appear. Divergences on the Summation index are rarely false.

• General trend analysis Breaking below/above previous support/resistance levels is also a good technique when using the McClellan Summation Index. Moreover, the general trend of the Summation Index is of great importance. Swings are not common within this indicator and hence, once you point out a change in the indicator direction, it is quite possible that the change will continue in the new direction.



EGX (30) (upper panel) and McClellan Summation Index (lower panel) during 2012–2013. Zero-‐line crossovers are marked with a blue circle; most of the signals were successful. Sometimes the zero line acts as resistance, as marked on the extreme left of the chart.

S&P 500 (upper panel) and McClellan Summation Index (lower panel) during 2012–2013. Zero line acting as support, marked with a blue circle; most of the divergences were successful and are followed by significant tradable moves.



EGX (30) (upper panel) and McClellan Summation Index (lower panel) during 2011–2012. Positive divergences are marked with blue line arrow; breaking of the previous resistance is also marked with a blue line and a circle around the breakout day. Both signals are of high credibility and are rarely false.

EGX (30) (upper panel) and McClellan Summation Index (lower panel) during 2008–2010. The chart above shows multiple combinations of signals, a zero-‐line resistance marked with a blue circle at the extreme left side. That was followed by a significant decline. At the beginning of 2009, a triple +ve divergence showed that there is strength in the market, and a significant rise followed. Later in Sep 2009, a new –ve divergence signal occurred, marking the end of the current uptrend.



Market Thrust Index and Thrust Oscillator The market thrust index was created by Tushar Chande in 1993. It is a medium-‐term indicator that shows the general trend of a certain market and a technical indicator that plots changes in the value of the advancing issues and declining issues, with respect to their volume. First, Chande explained the problems of the TRIN and why it obscures the picture sometimes. As we know, TRIN = (AI/DI) / (AV/DV) Which means that TRIN = (AI*DV) / (DI*AV) As Chande explains in his book "Because the index multiplies AI by DV and DI by AV, it can produce unusual effects in mixed markets, this is, when AI>DI but AV<DV, or AI<DI but AV>DV. It is intuitively contradictory to have the index driven by the product of AI*DV (and DI*AV) rather than AI*AV (and DI*DV)." Tushar S. Chande and Stanley Kroll, The New Technical Trader. Note: AI: Advancing Issues DI: Declining Issues AV: Advancing Volume DV: Declining Volume Chande used some examples to show how the TRIN can lead to misleading results when a strong one-‐sided up or down action occurs: Day AI AV DI DV TRIN 1 1000 1,000,000 100 100,000 1 2 100 100,000 1000 1,000,000 1 3 1000 1,000,000 100 200,000 2 4 100 200,000 1000 1,000,000 0.5 Day 1 is a strong up day, while day 2 is a strong down day. TRIN shows both days as neutral. Day 3 is also a strong up day, but TRIN shows it as a bearish day because the average volume in declining stocks is greater than the average volume in advancing stocks. So, declining stocks took more than their share of volume, hence a bearish TRIN, despite that AI is much bigger than DI and AV is greater than DV. Day 4 is a bearish day, but TRIN shows it very bullish. Why? Because on a relative basis, advancing stocks had a bigger % of volume than that of declining stocks. (200,000 for 100 advancing stocks versus 1 million for 1,000 declining stocks). This means that we can have bullish days with bearish TRIN values and vice versa. The thrust oscillator, as Chande explains, fixes this problem by using advancing and declining issues in one side of the equation and advancing and declining volume in the other side. "The thrust, or power of the move, is measured by the number of stocks and the volume going into those stocks. For example if 5 stocks advanced on 100 shares, the thrust is 500; next, if 7 stocks advanced on 90 shares, the thrust is 630. Thus, we would say there was greater market thrust the second day." Tushar S. Chande and Stanley Kroll, The New Technical Trader.

Calculation of market thrust index



MT = (AI*AV – DI*DV) / 1000,000

Next, we add the MT value of today to the cumulative total of previous days. The MT line is accumulated exactly like the A-‐D line.

Using market thrust index

• Zero crossovers Crossing above/below zero levels can be useful, but don’t expect this to happen regularly, like the A/D line. Market thrust (MT) is a cumulative/medium to long-‐term indicator, and the way it is calculated will not allow oscillating around the zero line often.

• Divergences

Like the A/D line or the McClellan Summation Index, the MT index will signal +ve/-‐ve divergences that, once correctly recognized and applied, will provide the technician with great value.

• General trend analysis

This is where you get to apply, support/resistance, breakouts, trendlines and other classical techniques on the A/D line.

EGX (30) (upper panel) and market thrust index (MT) (lower panel) during 2006–2009.



The chart shows how the MT is a trend-‐following indicator and hence, general trend analysis such as trend analysis/breakouts can be easily applied.

EGX (30) (upper panel) and market thrust index (MT) (lower panel) during 2008–2010. The chart shows how the MT is a trend-‐following indicator and hence, general trend analysis like trend analysis/breakouts can be easily applied.



EGX (30) (upper panel) and market thrust index (MT) (lower panel) during 2011–2012. The +positive divergence that occurred in early 2012 suggested that, despite the recent declines, the market is building strength and an upward move is quite possible. EGX (30) rallied to the 5,500 level during the next few weeks.

EGX (30) (upper panel) and market thrust index (MT) (lower panel) during 2011–2012. A clear resistance breakout that, if added to the prior example of positive divergence (both happened at nearly the same time), will provide enough evidence that EGX (30) may reverse direction to the upside. EGX (30) rallied from 4,000 to 5,500 over the next few weeks.

Calculation of thrust oscillator

TO = (AI*AV – DI*DV) / (AI*AV + DI*DV) * 100

This indicator is also created by the Tushar Chande. The thrust oscillator consists of one line that moves above and below a zero level. It is more famous than market thrust index, and it fixed some of the TRIN (Arms Index) problems. The TO is bounded between +100 and -‐100.

The thrust oscillator has two main advantages over TRIN: First, it is bounded both to the downside and the upside. As we know, the TRIN is bounded for up days and unbounded for down days. Second, the TO identifies clearly strong upward markets and strong downward markets as it uses advancing issues and advancing volume in one part of the equation, and uses declining issues and volume in the other part. So it is more consistent by providing normalized volume flows.



Using thrust oscillator

• Zero crossovers The zero-‐crossover technique is not recommended, as it leads to many whipsaws. However, usually positive values in the oscillator are seen as bullish, while negative values are seen as bearish.

• Divergences

The thrust oscillator can track divergences with price action. We recommend waiting for a price confirmation after such divergences, as they may not always lead to profitable moves. False divergences can occur sometimes, so waiting for confirmation is required. Obviously, divergences that occur in the same direction of the major trend are more significant.

• Overbought and oversold

Tracking OB/OS levels on the thrust oscillator can provide useful insights on current market conditions. OB/OS near +/-‐ 100 are the most important.

EGX (30) (upper panel) and thrust oscillator (TO) (lower panel) during 2008–2010.



The S&P along with the TO and the third chart shows a 10-‐day moving average of the TO. As we can see, the 10-‐day moving average is more smoothed and gives clearer signals. Overbought and oversold



levels are clearer in the moving average. The TO, despite its high volatility, gives good signals when it approaches +100 and -‐100 and then turns quickly to the other side.

New High-‐New Low Oscillator The new high-‐new low (NH-‐NL) oscillator is one of the leading breadth indicators that are used to hint of potential strength or weakness in the market. It is a medium-‐term indicator that shows the general strength of a certain market. Usually, when an uptrend is underway, more stocks reach new highs (new 52-‐week high). During a downtrend, more stocks reach new lows. We use this information to construct an indicator that is considered one of the important breadth measures.

Calculation of NH-‐NL oscillator The NH-‐NL oscillator is calculated by taking the difference between stocks making new 52-‐week highs and stocks that make new 52-‐week lows. It is a very simple calculation, but it is very significant, as it gives us early warnings.

Using the NH-‐NL oscillator

• Zero crossovers • Divergences • Overbought and oversold

EGX (30) (upper panel) and NH-‐NL oscillator (lower panel) during 2008–2013. OB/OS extremes are marked above with a small blue circle. Most of those levels are marked either medium-‐term highs or lows.



NYSE NH-‐NL index during 2008–2012. Two extreme values marked the 2009 and 2012 major lows. Upside-‐Downside Volume The Up Volume/Down Volume Line is a very simple indicator that is constructed by plotting the daily difference between the upside volume and the downside volume of the total issues for a specific market index. Upside Volume is the advancing volume (AV) that accompanies advancing issues in a certain day. Downside Volume is the declining volume (DV) that accompanies declining issues in a certain day. Using the analogy that volume precedes price, the Up Volume/Down Volume Line, should be used in the same manner as the Advance Decline line, divergences and trend lines are most valuable when using such indicator. Further derivatives or smoothing will help reduce noise, provided that the raw plot is not clear enough. Some technicians like to smooth the data by using a 10-‐day or 20-‐day moving average; others use two different moving averages and trade on crossovers between these two averages.

Calculation of Up/Dn Volume



1. Calculate the daily volume of advancing stocks.

2. Calculate the daily volume of declining stocks.

3. Calculate advancing–declining and then smooth the outcome with 10/20-‐day moving average.

Using Up/Dn Volume

• Zero Crossovers

• Divergences

EGX (30) (upper panel) and Up/Dn Volume (lower panel) during Aug 2012–Aug 2013. Several signals marked above, divergences, zero crossovers, zero line acting as support, S/R breakouts. Using a certain moving average as a breadth indicator Combining moving averages with breadth indicators is not a new idea. Several pioneers in the field used moving averages in many different ways to enhance most breadth indicators. Some used them to smooth choppy breadth indicators; others used them to construct a signal line for the main breadth indicator, for the purpose of timing adjustment. A new technique can be applied using a long-‐term moving average; for example, a 50-‐day moving average, where we calculate the number of stocks above/below the moving average and plot a cumulative line that represents the difference. Such a line will oscillate around the 50% line, with a maximum boundary of 100% and minimum boundary of 0%. Naturally, when the line value is close to zero, the market is oversold and we should be looking for rebounds and vice versa for the 100% line. The psychology behind such a method is quite simple; the numbers provided reflect the underlying psychology of the market participants: high percentages of stocks above a certain moving average at first sight reflect bullishness and strong buyers controlling that specific market. But from the contrary point of view, those high



numbers may have more of a bearish implication than a bullish one once they start decreasing. In other words, the buyers may be running out of steam and the current bullish picture may change soon. Another way to study such figures is to monitor their extreme values. Regardless of the ways and techniques used to evaluate such figures, it must be implemented with conventional techniques such as trend analysis and support/resistance concept for the sake of discipline and proper application of technical analysis. It is quite essential at this stage to clarify that breadth analysis generally does not provide buy/sell signals. The main aim of breadth analysis is to provide a broad view of current market strength or a preliminary setup that will help to properly forecast and identify trend reversals. During a bull/bear market, the majority of stocks will follow the underlying trend; any deviation from such behavior will provide a valuable insight. Nonetheless, the main driver for buy/sell signals is still and will always be price action and other conventional techniques such as support/resistance, price patterns and momentum concept.

EGX (30) (upper panel) and Up / Dn Volume (lower panel) during 2009–2010.

Using a 50-‐day moving average

• 50% crossover The 50% line is the balance zone; crossing above/below it provides additional useful information. Prior to the cross, it is already clear that “The Indicator” is rising, showing that there is a flow of liquidity into the market under study, as more stocks are joining the underlying rise. Such information, as valuable as it is, does not indicate that the liquidity going into the market is greater than the liquidity going out of the market. Once By the time “The Indicator” crosses above the 50% line, it is clear beyond a doubt, that the number of stocks above the moving average is greater than the number of stocks below it. Accordingly, it is quite safe to assume that the liquidity going in is greater than that going out of the market. After all, a bull market will take many, if not most, stocks with it.



Dow Jones Industrial Average (DJI) -‐ Daily Chart (Oct 2007 to Oct 2008)

From the chart above, applying the previous tactic without properly identifying the underlying price trend will be quite confusing and will generate a lot of whipsaws. “The Indicator” crossed above/below the 50% line several times. All the highlighted crosses caused whipsaws and much confusion.

A better tactic is to identify the underlying medium-‐term trend first, then use the 50% zone in that context. From October 2007 through October 2008, The DJI medium-‐term trend was bearish; if we applied the same crosses, but in the direction of the underlying medium-‐term trend, all the crosses below will represent a good setup for selling, while the crosses above will be completely ignored. Accordingly, it is quite essential to use “The Indicator” in the same direction as the underlying medium-‐term trend.

During uptrend

Once the underlying medium-‐term trend is properly identified, “The Indicator” will be used to provide a setup for buying only, while other contradicting setups will be completely ignored.



EURO STOXX Index (STOXX50E) – Daily Chart (Mar 2005 to Feb 2006)

From the chart example above, “The Indicator” crossed below the 50% line twice (labels 1 and 3), and both sell setups were ignored because the medium-‐term uptrend was intact. “The Indicator” crossed above the 50% line twice (labels 2 and 4), and both buy setups constitute a valid uptrend setup and were taken into account for the sake of the medium-‐term uptrend.

During downtrend

Again, the underlying medium-‐term trend must be properly identified. “The Indicator” will be used to provide a setup for selling only, while other contradicting setups will be completely ignored.

EURO STOXX Index (STOXX50E) – Daily Chart (Oct 2007 to Oct 2008)



From the chart above, “The Indicator” crossed above the 50% line two times (labels 2 and 4), and both buy setups were ignored because the medium-‐term downtrend was intact. “The Indicator” crossed below the 50% line three times (labels 1, 3 and 5), and all sell setups were taken into account for the sake of the medium-‐term downtrend. It is worth noting that setup number 6, where “The Indicator” rebounded off the 50% line without crossing above it first, may be used as a valid sell setup.

During sideways trend Again, the underlying medium-‐term trend must be properly identified. “The Indicator” will be completely ignored during sideways trends. “The Indicator” idea depends on moving in the same direction as the upper degree trend (medium-‐term trend). Sideways trend is always a nondirectional move, and therefore, it is not possible to ignore certain setups and put into action the remaining ones.

Dow Jones Industrial Average (DJI) – Daily Chart (Jan 1979 to Dec 1979)

From the chart above, during sideway trends, “The Indicator” behavior will not permit for a proper buy/sell setup to put into action.

• Divergences Divergence is valuable tool in the technical analysis arsenal. Identifying divergence between price action and indicators reveals hidden strength or weakness within the underlying trend. Positive divergence indicates hidden strength when in a bearish situation, while negative divergence reveals weakness during bullish circumstances. Applying divergence analysis on breadth indicators can be quite valuable once the underlying medium-‐term trend is properly identified.

A positive divergence between “The Indicator” and price action is set once the index under study is forming a lower low formation, during which “The Indicator” is simply rising or forming higher lows. Such



behavior indicates that, while being in a bearish situation with respect to price action “lower low”, the flow of liquidity is still building up into the market under study, sas more stocks are rising above the moving average.

A negative divergence between “The Indicator” and price action is set once the index under study is forming a higher high formation, during which “The Indicator” is simply declining or forming lower highs. Such behavior indicates that, while being in a bullish situation with respect to price action “higher high”, the flow of liquidity is going out of the market under study, as more stocks are declining below the moving average.

EGX (30) (upper panel) and % above 50-‐day moving average (lower panel) during 2009–2010. The chart above marks two divergences (-‐ve and +); both signals triggered significant rallies within the next few weeks.

• Extreme overbought/oversold

“The Indicator” is very useful when it reaches overbought levels and then begins to turn down, or reaches oversold levels and turns up afterward. As we know, it is a bounded oscillator between 0 and 100, so overbought and oversold zones can be easily marked. Usually, the zone from 80 to 100 zone is considered overbought and from 0 to 20 is considered oversold. After all, if 20% or less of the stocks are above the selected moving average, this is considered an extreme oversold situation, and the market must be declining for quite some time. On the other hand, if 80% or more of the stocks are above the selected moving average, this is considered an extreme overbought situation, and the market must be rising for some time. The most important thing to understand and expect is that “The Indicator” may and will stay within this oversold/overbought zones for some time without triggering any reversals, and any action must be accompanied and confirmed by price action.



EGX (30) (upper panel) and % above 50-‐day moving average (lower panel) during 2012–2013. Overbought zone is marked in red; the indicator can stay for a while within the overbought zone, but once it breaks below the zone and the price action confirms such a move, prices will most probably decline for a while.

EGX (30) (upper panel) and % above 50-‐day moving average (lower panel) during 2012–2013. Oversold zone marked in green. Every time the indicator reaches the 0 to 20 zone and breaks above the 20 level to upside once more, a significant market rally follows.



Advantages and limitations of breadth analysis

Using types of data other than price and volume provides a deeper overview for market strength, so different from the standard price chart.

Breadth analysis is concerned only with major indices, sectors, or industry groups.

Breadth treats each stock the same, regardless of price, number of shares or even volume.

It is usually a leading type of analysis, which provides valuable information for the purpose of forecasting trend reversals.

Breadth analysis is flexible enough to allow for several techniques and strategies, which is very essential due to market alternations.

Being leading has its own limitations for providing signals too early, but this can be adjusted by enforcing conventional technical analysis methodology such as support/resistance, momentum concept and market psychology.

Most of market breadth indicators are better used in the smoothed form rather than the raw form, which some may consider a minor limitation.

Breadth data seems to be inconsistent among the data providers. In emerging markets it is even hard to acquire breadth data.

Breadth analysis recent developments

Breadth analysis has undergone many developments over the past few years. From smoothing raw data to original equation adjustment, all done for a better plot. A good example is the McClellan Summation Index, created by Sherman and Marian McClellan. In the early 1990s, James R. Miekka came up with a modification to the McClellan formula that is today used by the McClellans and most of the other purists in the field. While this modification does not affect the McClellan oscillator, it does have a significant effect on the Summation Index, where it is possible that the Summation Index levels will remain the same no matter the when calculation began.

In his book Technical Analysis Explained, Martin J. Pring discussed the diffusion indicators and the positive trend criteria, where he scratched the idea of a new type of breadth indicator that utilizes a classic price-‐based indicator in a very different way—as a breadth indicator. That will be the aim of the remaining part of this research paper.

Conclusion Breadth analysis is a very complex job that requires a lot of time and effort. Breadth indicators are leading indicators that will give early signals; such signals must be treated as setup, while the actual signal must be triggered from the price action itself. There are hundreds of breadth indicators; make sure you know few of them that meet your trading objectives and discipline.



Appendix B (Continued)

Breadth Analysis (IFTA Required CFTe I Reading Material)

Arms Index – TRIN

Saleh Nasser, CMT

Egyptian Society of Technical Analysts

The Arms Index was invented by Richard Arms in the 1960s and was originally presented in an article in Barron's in 1967. Later, this indicator gained popularity and was publicized in many channels by the name of TRIN (Short Term Trading Index). It can be used in daily as well as intraday charts.

Calculation of TRIN The logic of the calculation is to see whether or not advancing stocks are gaining more volume than declining stocks. In a strong upward market, advancing stocks should gain more than their share of the volume. During a declining market, declining stocks gain more than their share of the volume. What does this mean?

The calculation is as follows:

(A/D)/(AV/DV)

where A= advancing issues D= declining issues AV = total volume of advancing issues DV= total volume of declining issues We divide the ratio of advancing to declining stocks by the ratio of advancing to declining volume. So if A/D is bigger than AV/DV, the ratio of advancing to declining stocks is bigger than the ratio of advancing to declining volume, which means that volume is biased to declining stocks. On the other hand, if A/D is smaller than AV/DV it means that the ratio of advancing to declining stocks (numerator) is smaller than the ratio of advancing to declining volume (denominator). Volume in this case is biased to the upside—more volume with advancing stocks. For example, if 50 stocks rose and 35 declined, the volume of advancing stocks (the 50 stocks) is 1.5 million, while volume of declining stocks is 500,000. Then TRIN is: (50/35)/(1,500,000/500,000) = 1.428 / 3 = 0.476



The result is 0.476, which means that the ratio of advancing to declining volume is much bigger than the ratio of advancing to declining stocks. Then, more volume is accompanying advancing stocks than declining stocks. Obviously, this is bullish. In this example, we have more stocks going up than down and more upward volume than downward volume. Let us look at another example: If advancing stocks = 55 Declining stocks = 48 Advancing volume = 987,000 Declining volume = 970,000 TRIN = (55/48) / (987,000/970,000) = 1.14 / 1.017 = 1.12 The result is 1.12, which is considered a bit bearish. If we only look at the raw numbers, we will get a bullish feeling: more advancing than declining stocks and more advancing than declining volume. However, the TRIN tells us that volume is beginning to be biased to the downside (i.e., ratio of advancing to declining stocks is higher than ratio of advancing to declining volume). A third example: Advancing stocks = 75 Declining stocks = 60 Advancing volume = 650,000 Declining volume = 1,000,000 TRIN = (75/60) / (650,000/1,000,000) = 1.25/0.65 = 1.92 As we can see, despite that the number of advancing stocks was greater than the number of declining stocks, declining volume was higher than advancing volume. The result (1.92) tells us that declining stocks obtained over 90% more than their share of the volume. A result of 1 means that both advancing and declining stocks are getting their fair share of volume. A TRIN above 1 means that declining stocks are getting more than their share of volume, which is bearish, while a TRIN below 1 tells us that advancing stocks are getting more than their share of volume (bullish). The Arms Index, or TRIN, moves in the opposite direction of prices. Rising TRIN is bearish, while falling TRIN is bullish. Some technicians like to invert the scale so that rises and declines in the TRIN match those of prices; however, Richard Arms recommended using the TRIN as is without inverting the scale. It is up to the technician whether to invert the scale or not, but it must be understood that if the scale is not inverted, then a rise in the TRIN will be bearish, and vice versa. The Arms Index has its pitfalls. We will explain these pitfalls as we go through the thrust oscillator. For now, we will look at how do we use this indicator, showing some examples.

Using the Arms Index



1-‐ Using the raw indicator as overbought and oversold Richard Arms explained in his book Trading Without Fear that the TRIN usually stays between 0.75 and 1.15 about 70% of the time. He mentioned that readings below 0.5 and above 1.75 are very rare; thus, they constitute important overbought and oversold levels.

Values below 0.5 are overbought Values above 1.75 are oversold.

So when using the raw indicator, pay special attention to the two extreme numbers (0.5 and 1.75). One of the pitfalls is that bullish numbers are limited, while bearish numbers have no limit. The index could only go from 1 to zero in the bullish direction, while it can go to infinity in the bearish direction. This means that we can see values of 2, 3, or even higher. For this reason, we recommend that technicians define by themselves the levels that they see crucial as overbought and oversold. We should not just stick on the numbers defined by Arms to define overbought and oversold. Let the chart tell you where the real overbought and oversold levels are.

The chart above shows the S&P along with the TRIN. We have defined 1.75 and 0.5 as oversold and overbought. As we can see, values that spiked sharply above 1.75 served as good buying opportunities. The major trend was up; this is why low numbers did not serve as strong overbought areas. Many times, the TRIN declined temporarily below 0.5 and rose, but the market continued its rise without witnessing a significant decline.

2-‐ Using a moving average of the TRIN A 10-‐day moving average is usually used to define overbought and oversold levels. Using a moving average of the TRIN has the advantage of reducing the noise of the raw data. Overbought and oversold levels will be altered to 0.7 and 1.2, respectively. Obviously, these levels can also be altered.



The chart above shows the NASDAQ along with a 10-‐day moving average of the TRIN. The scale on the left belongs to NASDAQ, while the one on the right belongs to the TRIN. As we can see, signals are easier to detect than those triggered by using the raw indicator. Overbought and oversold levels are placed at around 0.7 and 1.2, respectively. Note that when the TRIN violated 0.7 to the downside, it coincided with a short-‐term top. A break above 1.2–1.3 also signalled a bottom. The indicator, however, sometimes stays in the oversold area for longer periods of time. In his book Technical Analysis of the Financial Markets, Murphy mentioned that we can use a double crossover method. He advised using 21-‐day and 55-‐day moving averages of the TRIN. Using two moving average crossovers with an oscillator has the pitfall of generating whipsaws.

NASDAQ

10 days MA TRIN



21 and 55 MA crossover



The chart above shows the S&P 500 along with a 10-‐day moving average of the TRIN. As we can see, the overbought area lies between 0.75 and 0.95, while the oversold area lies above 1.5. Both times when the indicator surpassed 1.5, a significant bottom appeared in the S&P. If we look at the right edge of the chart, we will see the indicator making a higher low (bearish) while the S&P was trying to find resistance.



From the top, NYSE Index, NYSE Arms Index, NYSE 4-‐day moving average, NYSE 10-‐day moving average, during 2002–2004. Overbought/Oversold levels are clearly marked on the three indicators, with the 4-‐day moving average providing the best signals.

Pitfalls of TRIN

1. TRIN is bounded for up days and unbounded for down days. The index could only go from 1 to zero in the bullish direction, while it can go to infinity in the bearish direction.

2. The equation is not consistent. Advancing issue with declining volume on one side, while declining

issues with advancing volume in the other side. As a result, TRIN will not identify strong up days or strong down days properly.



Appendix C

Time Cycles Analysis (to be added) (IFTA Required CFTe I Reading Material)



Appendix D

Point and Figure Techniques (to be added) (IFTA Required CFTe I Reading Material)



Appendix E

Primer on ICHIMOKU (IFTA Required CFTe II Reading Material)

Yukitoshi Higashino, MFTA

NTAA Director Nippon Technical Anlaysts Association (NTAA)

Preface

“Ichimoku Kinko Hyo”, commonly referred to as just “Ichimoku”, is a technical analysis method developed by Goichi Hosoda (1898–1982), a Japanese financial market journalist, through his many years of research in financial markets. Even 30 years after Hosoda’s death, Ichimoku is still widely used by traders and investors as an effective tool for analyzing markets and trade in Japan. Although Ichimoku is becoming more popular among an increasing number of traders and investors around the world, it does not seem to be used as widely and as effectively as it is in Japan. The causes of this are multifold. First, Ichimoku is an integrated set of multifaceted market analysis principles and techniques, including price projection, time projection, and wave analysis, among others. The wide variety of techniques and concepts included in the Ichimoku theory make it highly challenging to fully master. And obviously, a language barrier exists. Japanese is a tricky language for many Westerners (on a side note, in my humble opinion, with its simple pronunciation system it can be a very friendly language, making it one of the best choices when deciding to learn a new language). Japanese vocabulary and grammatical structure are very different from English, making translation from Japanese into English quite difficult. It is an especially challenging task to find the right English translations of many Japanese words used in the original Ichimoku theory. Unless one has a good understanding of the theory, it is practically impossible to adequately translate Ichimoku educational materials into English. Using NTAA’s educational material as the base, I have prepared this primer on Ichimoku, with the aim of effectively introducing Ichimoku to English-‐speaking learners. To make this primer “study-‐friendly”, I have made an attempt to use plain English words instead of being “loyal” to the Japanese words in the original theory. Ichimoku theory puritans may say that the original theory has been outrageously simplified in this work and that a lot of important things are missing. They may even say that such oversimplified Ichimoku is not real Ichimoku. There is an element of truth in such a criticism. To be very clear, this is just a primer on Ichimoku and not comprehensive educational material describing all the tenets of the theory. Learners should treat this work as such. Nevertheless, I believe this document will push the interested in the correct direction and hopefully inspire people to seek out all its more complex aspects. I hope this primer helps my IFTA colleagues learn the very basics of this unique technical analytical method developed in Japan.



Introduction To know the next market direction, one only needs to know which side—buyers or sellers—is winning or losing. The market moves in the direction of the break in equilibrium between the buyers and sellers. The chart developed by Hosoda allows one to instantly grasp the equilibrium state of the market. This is why it was named “Ichimoku Kinko Hyo”, which literally means “One Glance Equilibrium Chart” in Japanese. The three basic principles of the Ichimoku theory are “time”, “wave structure”, and “price level”. In Ichimoku, analysis is focused on the underlying “powers” in the market. Overpriced stocks fall, and underpriced stocks rise. No market continues rising or falling infinitely. Stock prices often rise when the economy is in bad shape and fall when the economy is in good shape. This is a common economic phenomenon that reflects movements of money in the system. Ichimoku is a method for rationally gauging the state of the financial markets that fluctuate, reflecting the underlying powers. The market can only move or stay flat. When it moves, it can only rise or fall. It is as simple as this. But many traders/ investors fail to make money, frequently because they make the process of market analysis overly complicated. Another reason is that their trading/investment process lacks rigor. We should not take action based on subjective market analysis or a wishful projection. We should not act on unverified rumors, nor should we be influenced by the market atmosphere. When we take an action based on a projection, it has to be measurable. We often hear people saying that we should “buy on weakness” or “sell on strength”. In most cases, however, their answers are vague and do not state at exactly what price. Ichimoku provides an objective base for taking trading/investment action. It tells us at what price to buy or sell and when. Projections made with Ichimoku are always measurable. One of the important traits of Ichimoku is its “time” study. Most market players focus on price moves and tend to make light of the time factor. In Ichimoku, while price moves are important, the time factor is more important; without a solid “time” study, one cannot have a true understanding of the markets.



2. Composition of the Ichimoku Chart Ichimoku consists of a candle chart and five lines, as shown in Fig. 1. (1) Conversion line – (highest high + lowest low)/2 in the last nine periods (including the current period) (2) Base line – (highest high + lowest low)/2 in the last 26 periods (including the current period) * Base line and Conversion line are plotted in the current period. (3) Leading Span 1 – (Conversion line + Base line)/2 (4) Leading span 2 – (highest high + lowest low)/2 in the last 52 periods (including the current period) *Leading spans 1 and 2 are plotted 26 periods ahead (including the current period). (5) Lagging-‐span – Current price plotted 26 periods back (including the current period) * It becomes a line that runs parallel to the current price line. (6) Cloud – The space between Leading span 1 and 2



3. The Five Basic Lines and Their Uses/Functions (1) Base line and Conversion line The Conversion line is the midpoint of the high-‐low range in the last nine periods (including the current period), and the Base line is that of the last 26 periods. They may look similar to moving averages but are different. They may be called "moving midpoints". In Ichimoku, midpoints are thought to represent better equilibrium points in the market than moving averages. In moving averages, closing prices are treated as king. Regardless of the volatility or the price swing in a given period, the closing price is the only thing that is counted. That is, even if the price swings vary widely in a period, it is not reflected. Ichimoku dismisses this and instead uses the midpoint indicators, which reflect the whole price range in a given period. When the Conversion line crosses above the Base line, a bullish signal is generated, indicating that one should start looking to buy the market. When the Conversion line crosses below the Base line, it is a bearish crossover, signaling that one should start looking to sell the market. This is the basic rule. When implementing this, one should bear in mind the following points:

(a) The direction of the Base line should be taken as the direction of the market. Even if the Conversion line has crossed above the Base line, it is not really bullish if the Base line fails to turn up. More often than not, a rally not accompanied by an upturn in the Base line ends up short-‐lived. By the same token, even if the Conversion line has crossed below the Base line, it is not really bearish if the Base line keeps trending upward. More often than not, a downswing not accompanied by a downturn in the Base line also ends up short-‐lived.

(b) The Base line often serves as support when the price corrects downward in a bull market. It serves as resistance when the price corrects upward in a bear market.

(c) In a strongly bullish or bearish market, the Conversion line often serves as support or resistance, and that is often enough to terminate any corrective moves.

(2) “Cloud” (Space between Leading span 1 and Leading span 2) The cloud-‐like area formed by the Leading span 1 and the Leading span 2 is called the “Cloud” (“kumo” in Japanese). Following are the principal points of the Cloud:

(a) The Cloud is used to determine the market direction. When the price is above the Cloud, it is judged that the market is in a longer term bull market. When the price is below the Cloud, it is judged that the market is in a longer term bear market.

(b) The Cloud serves as longer term support in a bull market and longer term resistance in a bear market. A break through the Cloud signals a change in the longer term market trend. A break above the Cloud signals that the longer term trend has turned from bearish to bullish. A break below the Cloud signals that the longer term trend has turned from bullish to bearish.

(c) The degree of thickness of the Cloud indicates the degree of strength of the support or resistance it provides. When the Cloud is thin, it is weak as a support/resistance zone. The price can break through it with relative ease. When the Cloud is thick, it serves as a strong support/resistance zone. In a bull market, down corrections often stop in the Cloud. In a bear market, upward corrections often stop in the Cloud.

(d) Changes in the shape of the Cloud provide useful insights into what is happening in the market. As the result of the two lines constituting the Cloud (the Leading span 1 and the Leading span 2) interacting



with each other in various ways (e.g., approaching each other, diverging, crossing, moving in parallel to each other), the shape of the Cloud changes constantly. For instance, it is observed in many markets that when the Cloud “twists”, as the two lines constituting the Cloud (the Leading span 1 and the Leading span 2) cross each other, a trend change takes place at relatively high frequencies. So is the case when the Base line and the Leading span 2 approach each other. There are many other interesting observations, but discussing them at length here would not fit to the purpose of this primer. Readers of this primer are encouraged to make your own discoveries by observing the changing shapes of the Ichimoku Cloud in the markets you trade in or analyze.

(3) Lagging span The lagging span is drawn by plotting the current closing price 26 periods back. Much information can be obtained from the relationships between the Lagging span and the other four lines. While there are many ways to use the Lagging line, the most common ways to judge the market direction using the Lagging span are as follows: (a) Lagging span vs. Current price (of 26 periods ago) If the Lagging span is above the current price (of 26 periods ago), it is bullish. If the Lagging span is below the current price (of 26 periods ago), it is bearish. (b) Lagging span vs. Cloud If the Lagging span is above the Cloud, the longer term trend is upward. If the Lagging span is below the Cloud, the longer term trend is downward. (4) Three Conditions to Make a Safe Bull (Bear) Call According to the Ichimoku theory, when the following three conditions are in place, one can safely judge that the market is in a bullish (bearish) state. (a) The Conversion line is above (below) the Base line, which is trending up (down) or at least flat. (b) The Lagging span is above (below) the current price (of 26 periods ago). (c) The price is above (below) the Cloud. (5) Typical Bottoming-‐out (or Top-‐forming) Pattern Fig. 2 illustrates a typical bottoming-‐out pattern, with the price starting to rise sharply after hitting the second bottom (C) without falling below the previous low (A). (The horizontal line drawn from the first bottom is called “Border line” in the Ichimoku terminology.)



In terms of Ichimoku, the following are the typical bottoming-‐out patterns. (Markets do not always follow this, so readers should treat it as just a reference example.)

● The second bottom (C) is formed within 26 days of the first bottom (A). ● Within several days of the second bottom (C) forming, the Conversion line crosses above the

Base line, the Lagging span crosses above the current price (of 26 days ago), and the price crosses above the Cloud.

● After the price crosses above the Cloud, the price starts rising at an accelerated rate. The price may correct downward, but it gets supported by the Cloud and resumes the rally within nine days.

● It is ideal if a breakaway gap develops after the price hits the second bottom (C) and even better if consecutive gaps appear.

● Ideally, the price does not fall below the Base line. The reverse applies in the case of a top-‐forming pattern. These are some typical examples.



Fig. 3 is the daily chart of Trendmicro, a Japanese Internet security company, from July to early November 2011.

In September, a secondary low (C) was formed without the price falling below the previous low (A). In early October, the Conversion line crossed above the Base line, and the price crossed above the Cloud (➀). Then, the Base line started trending upward (➁). Subsequently, the Lagging span, which occured in late August, crossed above the current price line (➂). Now, the three conditions have occurred under which one can safely judge that the market is in an uptrend. In mid-‐October, the Lagging span, which occured in early September, crossed above the Cloud, further confirming that the market was in an uptrend (➃). The subsequent rally was strong, and the price was supported by the Conversion line (➄). Fig. 4 is the daily chart of Japan Tobacco, a Japanese tobacco company, from May to early November 2011.



In late July, supported by the Base line, the secondary low (C) was formed without the price falling below the previous low (A). The price crossed above the Cloud, gapping above the upper boundary of the Cloud (➀). This was seen as a breakaway gap—a bullish signal. The price gapped up again, forming successive gaps (➁). This was strongly bullish. The Base line started rising sharply (➂). During the subsequent period, except for the period from late August to early September, the Base line served fairly well as support (on a closing basis). From late August to early September, although the price fell below the Base line, it rebounded immediately as it approached the Cloud. There was no need to be concerned about a possible trend reversal at this stage, since the Cloud started to become thick in early September, indicating that it would provide strong support (➃).



Fig. 5 is the daily chart of Toho Holdings, a Japanese wholesaler of medicine and medical tools and equipment, from June to early November 2011.

The price started rising sharply after forming a higher low at C (higher than the low at A) and breaking above the Cloud. During the rally, the price was supported by the Conversion line. Prior to this, the market hit a temporary high at B. This was because the Lagging span was hitting the Cloud.



4. Waves Structure Principles Hosoda, in his book on Ichimoku, explained his wave theory in detail, spending many pages on this subject alone. While it may be interesting to advanced Ichimoku students, I do not think that discussing it at length is within the scope of this primer, so, I will just briefly explain his wave theory without going into great detail. Hosoda classified the wave patterns that appear in financial markets into a number of groups according to their wave structure, and he gave them unique names. They are designed to help understand price levels, time levels, and the direction of the market. I wave: A single rectilinear or straightish (normally sharp) thrust up or down without notable corrective moves. V wave: A wave consisting of two successive I waves, a sharp thrust up followed by a sharp thrust down, or a sharp thrust down followed by a sharp thrust up. N wave (Fig. 7): An up-‐down-‐up or down-‐up-‐down wave. This is the wave pattern most commonly seen in the market. An uptrend is made up of a series of N waves forming higher highs and higher lows. A downtrend is made up of a series of N waves forming lower lows and lower highs. When the price falls below the previous low, the uptrend terminates. In a downtrend, lower lows and lower highs are formed.



An uptrend terminates when the price falls below the previous low. It is confirmed that the market has hit a top when a lower high is formed. (Fig. 8)

A downtrend terminates when the previous high is broken. It is confirmed that the market has hit a bottom when a higher low is formed. (Fig. 9)



Y wave: A wave pattern characterized by widening price movements (with the price forming higher highs and lower lows), similar to the expanding triangle pattern. Candlestick-‐wise, the engulfing pattern is formed. This is a reversal pattern. P wave: A wave pattern characterized by narrowing price movements (with the price forming lower highs and higher lows), similar to the normal triangle pattern. Candlestick-‐wise, the harami pattern develops. S wave: A wave pattern that appears in the middle of a large (up or down) trend. In an uptrend, a higher low is formed near the second last high. In a downtrend, a lower high is formed near the second last low.



Example: Fig. 11 is a daily chart of the Nikkei Stock Average from June 2010 to March 2011.



The wave from A to B is an "I wave". The wave from B to C is also an “I wave”. The wave from A to C is a “V wave”. The wave from B to E is an “N wave”. The wave from E to J is an “N wave” structured upward. The uptrend would terminate if the price

fell below the low I.



5. Price Projection In Ichimoku, there are six principal projection methods, as shown below in Fig. 12. The first four are the principle ones. .



● N projection – Up: N = C + (B – A) Down: N = C – (A – B) * These two equations are effectively the same, but I show both as I believe this makes it intuitively easier to understand for readers. The same applies to the following: Up: Add the distance of the last upleg to the last low Down: Subtract the distance of the last downleg from the last high ● E projection – Up: E = B + (B – A) Down: E = B – (A – B) Up: Add the distance of the last upleg to the last high Down: Subtract the distance of the last downleg from the last low ● V projection – Up: V = B + (B – C) Down: V = B – (C – B) Up: Add the distance of the last downleg to the last high Down: Subtract the distance of the last upleg from the last low ● NT projection – Up: NT = C + (C – A) Down: NT = C – (A – C) Up: Add the distance between the last two lows to the last low. Down: Subtract the distance between the last two highs from the last high



● Y projection (to be used in Y waves) – Y = B + (A – C) Add the distance between the last two lows to the last high ● P projection (to be used in P waves) – P = B + (A – C) Add the distance between the last two highs to the last low



● S projection (to be used in S waves) – S = A Up: The level of the second last high itself Down: The level of the second last low itself To project higherdegree targets, using the four principle projection methods (N, V, E and NT projection), whole number multiples of the distances used above (i.e., distances between previous highs and lows) are used. When the market is about to make a big move up, those distances typically are multiplied by four to project targets (and added to or subtracted from the pivot point). According to the original Ichimoku theory, to calculate the target prices for indices, closing prices should be used; to calculate the target prices for individual stocks, intraday highs and lows should be used. Readers are reminded, however, that in the Ichimoku theory, the time factor is more important than the price factor. One should avoid being excessively obsessed with the price targets. Let me show a couple of examples. Fig. 14 is the daily chart of Toyota, Japan’s largest car manufacturer, from October 2011 into 2012. It hit the first bottom at 2,330 (A), followed by an intermediate top at 2,690 (B). The secondary bottom was formed at 2,472 (C).



Although one cannot confirm that the secondary bottom was formed at C before the price takes out the high B, one can start calculating the targets assuming that the low C would hold. ● N projection: The targets can be calculated by adding the distance of the previous upleg (from A to B), or its whole number multiples, to the low at C.

N1 = C + (B – A) = 2,472 + (2,690 – 2,330) = 2,832 N2 = C + (B – A) x 2 = 2,472 + (2,690 – 2,330) x 2 = 3,192 N3 = C + (B – A) x 3 = 2,472 + (2,690 – 2,330) x 3 = 3,552

● E projection: The targets can be calculated by adding the distance of the previous upleg (from A to B), or its whole-‐number multiples, to the high at B.

E1 = B + (B – A) = 2,690 + (2,690 – 2,330) = 3,050 E2 = B + (B – A) x 2 = 2,690 + (2,690 – 2,330) x 2 = 3,410 E3 = B + (B – A) x 3 = 2,690 + (2,690 – 2,330) x 3 = 3,770

● V projection: The targets can be calculated by adding the distance of the previous downleg (from B to C), or its whole-‐number multiples, to the high at B.

V1 = B + (B – C) = 2,690 + (2,690 – 2,472) = 2,908 V2 = B + (B – C) x 2 = 2,690 + (2,690 – 2,472) x 2 = 3,126 V3 = B + (B – C) x 3 = 2,690 + (2,690 – 2,472) x 3 = 3,344

● NT projection: The targets can be calculated by adding the distance of the previous downleg (from A to C), or its whole-‐number multiples, to the low at C.

V1 = C + (C – A) = 2,472 + (2,472 – 2,330) = 2,614 V2 = C + (C – A) x 2 = 2,472 + (2,472 – 2,330) x 2 = 2,756 V3 = C + (C – A) x 3 = 2,472 + (2,472 – 2,330) x 3 = 2,898

The NT projection is not displayed on the chart, as it was not adequate to use this projection method in this particular case.



Fig. 15 is a daily chart of Sojitsu, an integrated Japanese trading company, from October 2011 into 2012. It hit the first low at 114 (A) and an intermediate top at 131 (B9), followed by a secondary low at 116 (C). Then it rallied and formed an intermediate top at 138 (D), followed by a brief dip that terminated at 129 (E).

I will not show all the target values projected by all the projection methods discussed above, only the ones that looked relevant in this particular case. The target prices projected by the E projection method using the first low (A) and the first intermediate high (B) are: E1 = B + (B – A) = 131 + (131 – 114) = 148 E2 = B + (B – A) x 2 = 131 + (131 – 114) x 2 = 165 E3 = B + (B – A) x 3 = 131 + (131 – 114) x 3 = 182 The target prices projected by the V projection method using the first intermediate high (B) and the secondary low (C) are: V1 = B + (B – C) = 131 + (131 – 116) = 146 V2 = B + (B – C) x 2 = 131 + (131 – 116) x 2 = 161 V3 = B + (B -‐ C) x 3 = 131 + (131 -‐ 116) x 3 = 176



The targets projected by the E projection method using the second low (C) and the second intermediate high (D) are: E1 = D + (D – C) = 138 + (138 – 116) = 160 E2 = D + (D – C) x 2 = 138 + (138 – 116) x 2 = 182 E3 = D + (D – C) x 3 = 138 + (138 – 116) x 3 = 204 The targets projected by the N projection method using the second low (C), second intermediate high (D), and third low (E) are: N1 = E + (D – C) = 129 + (138 – 116) = 151 N2 = E + (D – C) x 2 = 129 + (138 – 116) x 2 = 173 N3 = E + (D – C) x 3 = 129 + (138 – 116) x 3 = 195 One should be alert for cluster areas of projected target prices. In this particular case, one can see that there are cluster zones at 146–151 and 160–165.



Fig. 16 is a daily chart of Nippon Kayaku, a diversified chemical company based in Japan, from September to December 2012.

I am including this to show how the price projection must be done together with the time projection. The first target price projected by the N method using the first high at 829 (A), the first intermediate low at 732 (B), and the secondary high at 803 (C) was 706 (C – (A – B)). Actually, the market hit bottom when it approached the said target price at 710. It took place during a projected time window for a trend reversal. There were 26 trading days between the first high (A) and the second low (B). The time zone centering on the day 26 trading days after the second top (C) was the projected time window. The actual bottom was just one day off. I will discuss time projection in more detail in the next section.



6. Time Projection One striking characteristic of the Ichimoku theory is the degree of importance it places on the time factor. Hosoda taught, “It is not that time merely passes as prices fluctuate in the market. Time influences the market. The market is dictated by time.” ➀ Reversal Dates a) Reversal In principle, projected “Reversal dates” are the dates on which the market is projected to “reverse” directions at relatively high probabilities. b) Acceleration The market does not always “reverse” on a Reversal date, however. In a strongly (up or down) trending market, the existing move sometimes simply “accelerates”, instead of “reverses”, on a reversal date. This happens more often in a downtrending market, than in an uptrending market. Suppose there is a market that has been moderately declining into a Reversal date. If it cannot reverse direction during that time window, oftentimes it starts falling sharply. c) Extension Comparatively speaking, this does not happen as often in an uptrending market as in a downtrending market. In an uptrending market, the market sometimes reverses directions after the projected Reversal date, with a delay, due to a phenomenon called “extension” (of a reversal time window). Apart from the reversal and acceleration phenomena, volatility tends to rise on Reversal dates. According to the Ichimoku theory, “acceleration” and “extension” are caused by the interaction of the Base line, Conversion line, and Lagging line. ➁ Reversal date projection Ichimoku calculates “Reversal dates” in the following two ways. These two methods can be used separately or simultaneously. a) “Basic number”-‐based projection b) “Time parity”-‐based projection



➂ “Basic number”-‐based projection Reversal dates are projected by adding what are called the “Basic numbers” in the Ichimoku theory (e.g., 9, 17, 26) to the dates on which the market reversed direction in the past into the future. Fig. 17 illustrates this.



Following are the “Basic numbers” to be used with daily data according to the original Ichimoku theory. After many years of research, Hosoda concluded that these were the most useful default parameters. (Fig. 18) “Basic numbers” to be used with daily data Basic number Comments 9 Useful for calling intermediate tops/bottoms

17 Useful for calling intermediate tops/bottoms 26 Useful in up markets 33 Particularly useful in down markets 42 Very important in both up and down markets 51 – 65 More useful in up markets than in down markets 76 More useful in up markets than in down markets 129 More useful in up markets than in down markets 172 More useful in up markets than in down markets

Some Ichimoku researchers claim that they have found that 5, 13, and 21 should be added as Basic numbers when dealing with weekly data. Advanced Ichimoku practitioners use the Basic numbers in conjunction with the wave analysis in accordance with the wave structure principles discussedearlie, which helps gauge which Basic numbers are likely to be most effective. ➃ “Time parity”-‐based projection In this method, Reversal dates are projected by adding the same time distance (the number of days) between two key dates in the past (on which the market reversed direction in the past) to the pivot date (a key date on which the market hit a major top or bottom) from which to project into the future. This takes advantage of the phenomenon that the market often reverses direction when the same amount of time has passed from a key reversal date in the past as the amount of time between past major events in the markets.



Fig. 19 illustrates this. (1) Add the time distance (the number of the days) between the high C and the low D to the date of the low D into the future (2) Add the time distance (the number of the days) between the low B and the low D to the date of the low D into the future (3) Add the time distance (the number of the days) between the high A and the low D to the date of the low D into the future (4) Add the time distance (the number of the days) between the high A and the high C to the date of the low D into the future



Fig. 20 is a daily chart of the Nikkei Stock Average in 2011. The Basic numbers (9, 17, 26, 33, 42, 51) are counted from the top A, bottom B, and the top C, to show how the market behaved on the projected dates. Also, it is shown how Time parity-‐based projections were made using the dates of the same major market events (top A, bottom B, and top C). The Nikkei hit an intermediate top near 9 days (a Basic number) after the top A and started plunging into a major low B, which was projected by the Basic number 17. Near the point 51 days (a Basic number) after the top A, an intermediate top was formed. And the Nikkei hit the major top C 79 days (close to a Basic number 77) after the major low B. Time parity-‐based Reversal date projections were conducted in the following manners:

● There were 95 trading days between the top A (February 21) and the top C (July 8). Adding this

number of days (95) to the date of the top C, a Reversal date was projected at November 25.

● There were 79 trading days between the low B and the top C. Adding this number of days (79) to the date of the top C, a Reversal date was projected at November 1.



Fig. 21 shows what actually happened subsequently:

● On October 28 (Fri), just two trading days off from the projected Reversal date of November 1

(Tue), the market hit a considerable intermediate top (E).

● On November 25, the exact projected Reversal date, the Nikkei hit a major low (F).



Fig. 22 is a daily chart of Nikkei Stock Average. The basic numbers are counted from the date of the low C. The market hit a considerable intermediate top D 9 days (a Basic number) after the low C, a considerable low E at 17 days (a Basic number) after the low C, an intermediate top F 26 days (a Basic number) after the said low, and terminated consolidation at G 33 days (a Basic number) after the said low. The time zones projected with the Basic numbers 42 and 51 also corresponded with interesting market actions. The circled numbers are the number of days between the dates of notable highs and lows hit during the period. One would notice that the Time parity-‐based projection worked well to call market turns. Also, the one would notice that the numbers are close to the Basic numbers. To be sure, separately run Basic number-‐based projection and Time parity-‐based projection often converge. The above may or may not be enough to show why Hosoda and many dedicated Ichimoku practitioners believe “time influences the market, and the market is dictated by time."

We will never be able to win in the market as long as we attempt to follow rumors or unfounded expectations in the market, thinking that this is the way to make money. It is imperative to try to find unknown market drivers, rather than chasing known ones. We should not think about the market based on news or other factors that are already known. It should be the other way round. We should evaluate, and make a judgment on, publicly known factors based on how the market is behaving. At the end of a major bull market, the market is



full of positive news and stories. At the end of a major bear market, negative news and stories abound. When the market stops reacting to such positive or negative news or stories, it is the very moment when we should enter the market, of course, from the other side of the other players in the market. We have to do it swiftly and decisively. If we rely on our judgment alone, we will feel uneasy at the decisive moment; oftentimes past failures prevent us from focusing on the present. This prevents us from what we have to do as professional market players. Ichimoku is a great tool to help us focus on the present, develop a flair for playing the market, and do what we must as a professional trader/investor. Created for IFTA colleagues based on the educational material of Nippon Technical Analysts Association (NTAA).

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