TechnicalAnalysis&ETFs

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Paul Baiocchi, Moderator ETF Analyst, IndexUniverse Tom Dorsey, Presenter President & Founding Member Dorsey, Wright & Associates Technical Analysis & ETFs: Generating Higher Returns in all Markets

description

use of technical analysis in asset allocation and risk management for ETFs

Transcript of TechnicalAnalysis&ETFs

Page 1: TechnicalAnalysis&ETFs

Paul Baiocchi, ModeratorETF Analyst, IndexUniverse

Tom Dorsey, PresenterPresident & Founding MemberDorsey, Wright & Associates

Technical Analysis & ETFs:  Generating Higher Returns in all Markets

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ETFs Across Every Major Asset Class … Now What? ETFs Across Every Major Asset Class … Now What? With 1,300 ETFs also comes the need to 

choose among them and determine a manner in which to use them 

together

For Advisor Use Only. Not For Use With The Public.

Page 3: TechnicalAnalysis&ETFs

HistoryETFs had their genesis in 1989 with Index Participation Shares, an S&P 500 proxy that traded on the American Stock Exchange and the Philadelphia Stock Exchange. This product, however, was short‐lived after a lawsuit by the Chicago Mercantile Exchange was successful in stopping sales in the United States.

WIKIPEDIA

WHERE DID IT ALL BEGIN?

“Spiders” Debut 1993 and it’s off to the racesOptions on XAU Indexes began trading in 1983.

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ETF World Circa 2000:  30 ETFs

ETF World Circa 2012:  approx. 1,300 ETFs

The investment lights of the world have been turned on …

For Advisor Use Only. Not For Use With The Public.

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For Broker / Advisor Use Only. Not For Use With The Public.

The Dow has experienced 8 major “structural” markets, each lasting an 

average of 14 years.

Must be able to navigate through both Bull and Bear 

markets.

For Advisor Use Only. Not For Use With The Public.

12+ years (so far…)

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A Game Plan Based on Supply and Demand We all understand the basic 

forces of supply and demand. 

The same forces that affect prices in the supermarket also affect prices in the stock market.

Stocks, sectors, and asset classes move in and out of favor just like produce in the supermarket.

For Broker / Advisor Use Only. Not For Use With The Public.

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64 64 6463 63 63 63 6362 62 62 62 6261 61 6160

59 5958 58 5857 57 5756 56 5655 55 55

54 54 5453 53 5352 52 5251 51 51 5150 50 50 50 5049 49 49 49 49

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45 45 45 45 4544 44 44 44 44 44 4443 43 43 43 43 43 43 43 4342 42 42 42 42 42 42 42 42 42 42 4241 41 41 41 41 41 41 41 41 41 41 41 4140 40 40 40 40 40 40 40 40 40 40 40 4039 39 39 39 39 39 39 39 39 39 39 39 3938 38 38 38 38 38 38 38 38

37 37 37 37 3736 36 3635

Depicts the battle between supply &

demand

Dates back to the late 1800’s

Original Point & Figure ChartOriginal Point & Figure Chart

For Broker / Advisor Use Only. Not For Use With The Public.

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Double Top Double Bottom

45 O 45 X XO X O X OO X O X OO X O OO X X S

40 O X 40 X OO X X OO X X OO X X OO X X O

35 O B 35 X OO X X X O X O X X O X O X X O O X

30 30

Point & Figure Method: The Most Basic Patterns

For Broker / Advisor Use Only. Not For Use With The Public.

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Quiz Question: Who’s in Control?

Knowing nothing about this security….

Does the chart suggest demand, or supply, is controlling the price

movement?

What would you do? For Broker / Advisor Use Only. Not For Use With The Public.

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“How Did So Many Get it Wrong”New York Times- December 31st 2000

“How can so many who are paid so much to scrutinize companies have blown it so spectacularly for their investor customers?”

Anthony Noto at Goldman, Sachs sums the situation up quite well. Article suggests he remained positive on the internet stocks he followed until after they lost 98% of their value during the 52 week period.

“Our research is driven by fundamental analysis and is not influenced by anything else, Mr. Noto said. He went on to explain that the companies he follows had their stock prices drop last spring not because their operations were failing, but because market psychology had changed. He downgraded the stocks much later because only then had it become clear through his research that the companies results were deteriorating. In hindsight, he said we should have lowered our ratings sooner. We regret that.”

Citigroup (C): 2008 - 2009

For Broker / Advisor Use Only. Not For Use With The Public.

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• All major sports have a ranking system.  The Point & Figure Relative Strength tool is the ranking system we use for ETF’s.

• Daily Calculation:

Stock / ETF X 100    =        RSMarket Index                       Reading

• This reading is plotted on a Point & Figure chart which then tells us whether we can expect that stock or ETF to outperform or underperform the base index.

Relative Strength Staying on the PathRelative Strength Staying on the Path

For Broker / Advisor Use Only. Not For Use With The Public.

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Stock vs. Market Relative StrengthApple (AAPL)

vs.S&P Equal Weighted Index (SPXEWI)

Stock vs. Market Relative StrengthApple (AAPL)

vs.S&P Equal Weighted Index (SPXEWI)

Relative Strength Basics:  Stock RS

• This relative strength chart is on a Point & Figure Buy Signal 

and in a column of X’s

• AAPL has positive long term and short term RS versus the 

broad market.

• It has been on a buy signal since March 10th, 2004…         

(to 11/7/11)

• AAPL   =     + 2788.22%• SPXEWI  =     + 38.36%

For Financial Professional Use Only. Not For Use With The Public.

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With Positive RS vs. Healthcare Sector… (7/2/97 – 3/1/01)

MDT: + 119.27 %

DWAHEAL: + 62.31 %

With Negative RS vs. Healthcare Sector… (3/1/01 – 1/31/2011)

MDT: - 22.11%

DWAHEAL: + 123.91%

Peer Relative StrengthMedtronic (MDT)

vs.The DWA Healthcare Sector (DWAHEAL)

Peer Relative StrengthMedtronic (MDT)

vs.The DWA Healthcare Sector (DWAHEAL)

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SML gave buy signal versus SPX on 2/18/2000

to suggest Small Cap Stocks should outperform

Large Cap stocks.

Since 2/18/2000…

SML: + 100.65%

SPX: - 6.31%

What lost decade?

Buy Signal = Favors Small Caps

Sell Signal = Favors Large Caps

* Returns thru 11/7/11

For Financial Professional Use Only. Not For Use With The Public.

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Curry Onions Steak Baking SodaShrimp White Sugar Salt Vanilla ExtractBlack Pepper Grated Carrots Cinnamon Baking PowderButter Chopped Pecans Cheese CapersCroutons Tomatoes Asparagus Dry MustardCelery Basil Chicken CabbageLettuce Red Pepper Mushrooms Snap PeasTomato Sauce Nutmeg Rice VinegarHeavy Cream Garlic Salt Beets BaconSquash Ground Beef Parsley Sweet PotatoOysters Eggplant Milk Lasagna NoodlesLemon Juice Yeast Chives PotatoesFlour Salmon Apples SpinachTurkey Pork Shank Pineapple Mint LeafAlmonds Cauliflower Honey Corn SyrupLobster Eggs Feta Cheese Wasabi PowderSausage Ginger Eggs Vegetable Oil     

ETFs in the Pantry = IngredientsETFs in the Pantry = Ingredients

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Ingredients For ?Ingredients For ?Curry Onions Steak Baking SodaShrimp White Sugar Salt Vanilla ExtractBlack Pepper Grated Carrots Cinnamon Baking PowderButter Chopped Pecans Cheese CapersCroutons Tomatoes Asparagus Dry MustardCelery Basil Chicken CabbageLettuce Red Pepper Mushrooms Snap PeasTomato Sauce Nutmeg Rice VinegarHeavy Cream Garlic Salt Beets BaconSquash Ground Beef Parsley Sweet PotatoOysters Eggplant Milk Lasagna NoodlesLemon Juice Yeast Chives PotatoesFlour Salmon Apples SpinachTurkey Pork Shank Pineapple Mint LeafAlmonds Cauliflower Honey Corn SyrupLobster Eggs Feta Cheese Wasabi PowderSausage Ginger Eggs Vegetable Oil     

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1. Preheat oven to 350 degrees F (175 degrees C). Grease and flour a 9x13 inch pan. 2. In a large bowl, beat together eggs, oil, white sugar and 2 teaspoons vanilla. Mix in 

flour, baking soda, baking powder, salt and cinnamon. Stir in carrots. Fold in pecans. Pour into prepared pan. 

3. Bake in the preheated oven for 40 to 50 minutes, or until a toothpick inserted into the center of the cake comes out clean. Let cool in pan for 10 minutes, then turn out onto a wire rack and cool completely.

4. To Make Frosting: In a medium bowl, combine butter, cream cheese, confectioners' sugar and 1 teaspoon vanilla. Beat until the mixture is smooth and creamy. Stir in chopped pecans. Frost the cooled cake. 

Directions for Carrot Cake

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RS Screening Sieve (Top 5 Rank on a Relative Strength Matrix)

All Sector Funds from First Trust

(25 ETFs)

Weekly Monitoring

(DWA Website subscription)For Example

Purposes only

Example:  First Trust Focus 5 Model

Example:  First Trust Focus 5 Model

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For Internal Use Only. Not19

Focus Buying on the top of the RS 

Matrix

Avoid those at the bottom of the RS Matrix

Best Ranking

Worst Ranking

PowerShares ETF Line‐Up

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Universe of Over   1500 Names

Relative Strength Arm Wrestling Match

Current PDP Allocations

Ranked Strongest to Weakest

PowerShares DWA Technical Leaders Portfolio (PDP)

PowerShares DWA Technical Leaders Portfolio (PDP)

100 Holdings, 65% Mid Cap

Largest Sector Weighting in Industrials, Consumer 

Cyclicals, and Technology

FOR BROKER USE ONLY. NOT FOR USE WITH THE PUBLIC

Source:  www.invescopowershares.com

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RS Matrix Application: Buying Germany

RS Matrix Application: Buying Germany

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For  Financial Professional Use Only. Not For Use With The Public.

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WWW.DORSEYWRIGHT.COM <-> WWW.DIF.PT

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Order placedOn 13-Jan-2012 at 8:37:43 AM (GMT)You placed order to buy 195 MRCG:xetr shares @ 76.900 limit G.T.C. .Front office order id: 135126700Account: 63000 400624

Order placedOn 13-Jan-2012 at 8:24:44 AM (GMT)You placed order to sell 63 PUMG:xetr shares @ 225.850 limit G.T.C. .Front office order id: 135125824Account: 63000 400624

Notification Received, Ordered PlacedNotification Received, Ordered Placed

A seamless transaction through the use of Technology:  This is the Future!

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REPLACING ONE COUNTRY WITH ANOTHER

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For  Financial Professional Use Only. Not For Use With The Public.

Page 28: TechnicalAnalysis&ETFs

Finding Leadership: Relative Strength

Finding Leadership: Relative Strength

Large Losers Most Trades Large Winners

In What Works On Wall Street, Jim O’Shaughnessy found that relative strength was a factor in all 10 of the top performing strategies. He also found that the worst strategy in his 

testing was buying the stocks with the worst relative strength. 

For Advisor Use Only. Not For Use With The Public.

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Building a Business … And a Brand 

Mean Variance Optimization

Rinse … Wash … Rebalance …

Source:  wealthfront.com

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Question:  

What was the cumulative return of this Strategic Allocation Approach since 12/31/1999 with annual rebalancing?

(For perspective, Money Market gained 30.4% during this time.)

A. + 0%, or lessB. +30%C. +60%D. +150%, or more

Strategic Allocation Report Card

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December 31, 1999 - December 31, 2011

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2000 - 2011

Money Int'l Int'l Int'l Fixed Int'l Fixed

Commod. Market Commod. Equities Equities Commod. Equities Commod. Income Equities Commod. Income Commod.

14.39% 3.33% 18.42% 40.83% 20.91% 21.44% 26.65% 17.24% 2.05% 33.79% 25.19% 4.07% 117.43%

Money Fixed Foreign US Int'l US Int'l Money US US Strategic

Market Income Currency Equities Commod. Equities Equities Equities Market Equities Equities DWA6040 Allocation

5.91% 1.81% 9.75% 27.37% 12.47% 16.62% 13.34% 12.63% 1.33% 23.89% 14.18% 0.62% 30.54%

Fixed Foreign Fixed Strategic Strategic Strategic Strategic Foreign Foreign Strategic Strategic Money Money

Income Currency Income Allocation Allocation Allocation Allocation Currency Currency Allocation Allocation Market Market

4.18% -5.33% 2.37% 24.24% 11.10% 7.30% 12.93% 7.62% -10.06% 22.14% 10.36% 0.05% 30.40%

Money US US Strategic US Foreign

DWA6040 DWA6040 Market DWA6040 Equities Equities Commod. Allocation DWA6040 Commod. DWA6040 Equities Currency

-4.07% -6.82% 1.58% 15.26% 9.84% 3.65% 9.19% 6.25% -23.01% 20.07% 8.92% -0.14% 27.97%

Strategic Strategic Strategic Foreign Foreign Money Money Int'l Foreign Fixed

Allocation Allocation Allocation Currency Currency Market DWA6040 Market Commod. DWA6040 Equities Currency Income

-4.58% -8.70% -7.72% 14.93% 6.27% 3.01% 7.79% 4.36% -27.05% 14.37% 8.69% -1.63% 15.91%

Foreign US Foreign Strategic Foreign Foreign Strategic Int'l

Currency Equities DWA6040 Commod. DWA6040 DWA6040 Currency DWA6040 Allocation Currency Currency Allocation Equities

-6.65% -11.77% -13.13% 11.32% 5.32% -1.96% 6.93% 3.61% -28.89% 8.93% 5.86% -4.67% 12.96%

US Int'l Money Money Fixed Money US US Money Fixed

Equities Commod. Equities Market Market Income Market Equities Equities Market Income Commod. DWA6040

-8.03% -17.18% -14.95% 0.98% 1.40% -2.04% 4.74% 3.47% -37.81% 0.21% 2.14% -9.20% -0.41%

Int'l Int'l US Fixed Fixed Foreign Fixed Fixed Int'l Fixed Money Int'l US

Equities Equities Equities Income Income Currency Income Income Equities Income Market Equities Equities

-15.31% -19.73% -22.53% -0.67% -0.39% -7.99% -0.70% 2.74% -43.48% -0.48% 0.16% -16.07% -6.09%

Legend:

Tactical Allocation InventoryStrategic Allocation Inventory

Weighting

Money Market DWA Money Market (MNYMKT) Vanguard Total Stock Market ETF (VTI)* 26.70%

Fixed Income Vanguard Total Bond Fund (BND) Vanguard MSCI EAFE ETF (VEA) 19.40%

Foreign Currency DWA Foreign Currency Index (DWAFXI) Vanguard MSCI Emerging Markets ETF (VWO) 10.40%

Commodity Greenhaven Commodity Fund (GCC) Vanguard REIT Index ETF (VNQ)* 7.30%

International Equities SPDR MSCI ACWIsm ex-US ETF (CWI)iPath Dow Jones-UBS Commodity Index ETN (DJP)

6.20%

US Equities iShares S&P 1500 Index (ISI) Vanguard Total Bond Market ETF (BND) 30.00%

DWA 6040 Index (DWA6040) represents a daily rebalanced index of 60% S&P 500 Index (SPX) and 40% Vanguard Total Bond Index (BND)

* Prior to 2002, EUSA was substituted for VTI for hypothetical returns, and IYR was substituted for VNQ

December 31, 1999 - December 31, 2011

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2000 - 2011

Money Int'l Int'l Int'l Fixed Int'l Fixed

Commod. Market Commod. Equities Equities Commod. Equities Commod. Income Equities Commod. Income Commod.

14.39% 3.33% 18.42% 40.83% 20.91% 21.44% 26.65% 17.24% 2.05% 33.79% 25.19% 4.07% 117.43%

Money Fixed Foreign US Int'l US Int'l Money US US StrategicMarket Income Currency Equities Commod. Equities Equities Equities Market Equities Equities DWA6040 Allocation

5.91% 1.81% 9.75% 27.37% 12.47% 16.62% 13.34% 12.63% 1.33% 23.89% 14.18% 0.62% 30.54%

Fixed Foreign Fixed Strategic Strategic Strategic Strategic Foreign Foreign Strategic Strategic Money Money

Income Currency Income Allocation Allocation Allocation Allocation Currency Currency Allocation Allocation Market Market

4.18% -5.33% 2.37% 24.24% 11.10% 7.30% 12.93% 7.62% -10.06% 22.14% 10.36% 0.05% 30.40%

Money US US Strategic US Foreign

DWA6040 DWA6040 Market DWA6040 Equities Equities Commod. Allocation DWA6040 Commod. DWA6040 Equities Currency

-4.07% -6.82% 1.58% 15.26% 9.84% 3.65% 9.19% 6.25% -23.01% 20.07% 8.92% -0.14% 27.97%

Strategic Strategic Strategic Foreign Foreign Money Money Int'l Foreign Fixed

Allocation Allocation Allocation Currency Currency Market DWA6040 Market Commod. DWA6040 Equities Currency Income

-4.58% -8.70% -7.72% 14.93% 6.27% 3.01% 7.79% 4.36% -27.05% 14.37% 8.69% -1.63% 15.91%

Foreign US Foreign Strategic Foreign Foreign Strategic Int'l

Currency Equities DWA6040 Commod. DWA6040 DWA6040 Currency DWA6040 Allocation Currency Currency Allocation Equities

-6.65% -11.77% -13.13% 11.32% 5.32% -1.96% 6.93% 3.61% -28.89% 8.93% 5.86% -4.67% 12.96%

US Int'l Money Money Fixed Money US US Money Fixed

Equities Commod. Equities Market Market Income Market Equities Equities Market Income Commod. DWA6040

-8.03% -17.18% -14.95% 0.98% 1.40% -2.04% 4.74% 3.47% -37.81% 0.21% 2.14% -9.20% -0.41%

Int'l Int'l US Fixed Fixed Foreign Fixed Fixed Int'l Fixed Money Int'l US

Equities Equities Equities Income Income Currency Income Income Equities Income Market Equities Equities

-15.31% -19.73% -22.53% -0.67% -0.39% -7.99% -0.70% 2.74% -43.48% -0.48% 0.16% -16.07% -6.09%

Legend:

Tactical Allocation InventoryStrategic Allocation Inventory

Weighting

Money Market DWA Money Market (MNYMKT) Vanguard Total Stock Market ETF (VTI)* 26.70%

Fixed Income Vanguard Total Bond Fund (BND) Vanguard MSCI EAFE ETF (VEA) 19.40%

Foreign Currency DWA Foreign Currency Index (DWAFXI) Vanguard MSCI Emerging Markets ETF (VWO) 10.40%

Commodity Greenhaven Commodity Fund (GCC) Vanguard REIT Index ETF (VNQ)* 7.30%

International Equities SPDR MSCI ACWIsm ex-US ETF (CWI)iPath Dow Jones-UBS Commodity Index ETN (DJP)

6.20%

US Equities iShares S&P 1500 Index (ISI) Vanguard Total Bond Market ETF (BND) 30.00%

DWA 6040 Index (DWA6040) represents a daily rebalanced index of 60% S&P 500 Index (SPX) and 40% Vanguard Total Bond Index (BND)

* Prior to 2002, EUSA was substituted for VTI for hypothetical returns, and IYR was substituted for VNQ

Strategic Allocation and Money Market have identical returns since 12/31/1999

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iShares International Model:80/20 Rule at Work

iShares International Model:80/20 Rule at Work

The majority of the trades in the iShares International Model were marginal versus the benchmark. However, notice the big winners to the right. Perhaps more importantly, the portfolio did not experience any big losers.

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For  Financial Professional Use Only. Not For Use With The Public.

Education is not the filling of apail, but the lighting of a fire.

William Butler Yeats

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Have a VisionHave a Vision

For  Financial Professional Use Only. Not For Use With The Public.

Page 35: TechnicalAnalysis&ETFs

"Imagination will often carry us to worlds that never were. But without it, we go nowhere." 

~ Carl Sagan  Astronomer and Author 

To: Thomas, Mitch, SamanthaFrom: DadSubj:  Vision

All through your lives I've told you to DARE TO DREAM. Imagination is another term for dreaming. It's also called vision. You know well, vision is what carried my company 25 years thus far. Imagine what you might do in this world. Think of your wildest dreams, and then make them happen. Mitch you have shifted gears giving up a great position at one of the most prestigious hotels in the world to follow your dream of culinary arts. As I write this you are getting ready to head to the subway for a grueling day in the kitchen with your instructors. But by fitting this piece into your dream puzzle the picture of your future becomes a little more clear and within reach. Thomas you have found your passion in the Billiards Industry. How will you change the world and your industry now that you clearly know your direction? Samantha you are slowly but surely beginning to focus on exactly what your passion is. You will shortly find a way to get someone to pay for you to live your passion of travel. To this day I imagine, dream, and think of what can be. It’s never left me since I was a kid. I surround myself with people like Watson, Tammy, Sue, Jay, and the rest of the DWA crew. They keep me thinking, and imagining. Surround yourselves with these kinds of people. We live in the jungle of entrepreneurship, which means you must have vision, imagination and drive to do something special or you will end up on someone's dinner plate. Oh and keep the "F" word active in your vocabulary, FUN. Dad

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"People don't want to buy a quarter‐inch drill. They want a quarter‐inch hole!“

‐ Theodore Levitt 

For  Financial Professional Use Only. Not For Use With The Public.

VS.

The Hole vs. The DrillThe Hole vs. The Drill

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Paul Baiocchi, ModeratorETF Analyst, IndexUniverse

Tom Dorsey, PresenterPresident & Founding MemberDorsey, Wright & Associates

Technical Analysis & ETFs:  Generating Higher Returns in all Markets