3 creative approaches to market analysis
One of the joys of blogging about trading is the
opportunity to discover interesting people doing worthwhile research on the
markets. Many times these researchers labor in relative obscurity, undiscovered
by the majority of traders. What sustains them is a love for their work and a
conviction that they have discovered important truths. They are not writing to
attract thousands of hits and banner ads. They write to share their work within
a larger community of traders and make their mark upon the field.
In this article, I’d like to single out three
such creative sources of market insight.
The first is the work of the late George Lindsay,
who first published his research on market timing in his newsletters. Later,
his articles appeared in a publication from
Investors
Intelligence called “The Encyclopedia of Stock Market Techniques”. After
Lindsay’s passing, Investors Intelligence collated his articles and issued them
as a bound set. It is a treasure trove of meticulous market insight–all the
more impressive because the research was conducted long before computerized
analysis was the norm.
The foundation of Lindsay’s approach is that
there are stable relationships governing the timing of market turning points and
recurring price pattern formations that appear in the major indices. His best
known pattern is the “Three
Peaks and a Domed House“: a complex series of highs and lows that typically
covers over a year of trading action. Less known, but perhaps every bit as
important, is his observation that market rises and declines tend to fall into
fixed durations, alternating between short and longer cycles. He also found a
common structure to market cycles in which there is an equivalence between the
time it takes for one part of the cycle to transpire and the timing of the next
part.
It is most unfortunate that Lindsay did not leave
behind a book to cement his contributions to the trading world. Fortunately,
Carl Futia, a blogger, has
picked up the Lindsay work and posts frequently on the research. See, for
instance, Futia’s
recent
Lindsay posts and his very interesting original work on
Box Theory
and
staircases.
Futia notes that many self-made market researchers have had their day in the
sun, only to be eclipsed later. Once they are found to have feet of clay, their
methods–as well as their reputations–may be consigned to the scrap heap.
That’s too bad, because, in many cases, very careful observation and insight
went into the original work. Even the best theories can be misapplied. Futia
is performing a real service in keeping the Lindsay flame alive.
A second creative line of market research is
Terry Laundry’s T-Theory. This approach
gained publicity when it was mentioned by Marty Schwartz in his “Pit Bull”
book. The essence of Laundry’s work is that there is an equivalence between the
time it takes markets to decline and the time it takes them to rise. The key to
this concept is that declines are measured from momentum peaks, and not from
ultimate price highs. This equivalence occurs over multiple time frames and
allows for an anticipation of market cycles. Here, for example, is
a graphic that
illustrates the market’s current large T formation. He also applies T-Theory to
interest rate markets. The site includes
an
introduction to T-Theory written in 1997 and many updated examples that
require some thought and analysis. To the best of my knowledge, T-Theory was
developed independently of Lindsay’s work, but there are interesting and
promising areas of overlap for market timers.
Finally we have
research from Down Under,
conducted by Tom Henderson. His Camron site is quite large, and
this map will prove helpful
for exploration. There are some
excellent observations regarding commercial vs. non-commercial traders, the
importance of volume analysis and the “bid-ask count”, and the fragmentation
(and de-fragmentation) of trade data. I also like the work on
price targets and
control zones. The
insight that pre-opening sessions offer information about the coming day’s trade
is important, as is the recognition that it is crucial to track the behavior of
the market’s largest participants by watching for
tell-tale signs. I believe
there are some important conceptual overlaps between Futia’s boxes and
Henderson’s control zones: approaches that, to my knowledge, have developed
independently. Henderson has withdrawn some of the pages from his site; I hope
he’ll learn from Lindsay’s example and create a vehicle that will allow his work
to outlive him. Laundry has created a foundation for perpetuating his work.
I’m sure there are many more creative researchers
and sites that I am not aware of, and I hope readers will alert me to those, so
that I can do my small part to provide the exposure their work deserves. Some
of the best market insights can be found outside the media limelight.
Brett N. Steenbarger, Ph.D. is
Associate Clinical Professor of Psychiatry and Behavioral Sciences at SUNY
Upstate Medical University in Syracuse, NY and author of
The Psychology of Trading (Wiley, 2003). As Director of Trader
Development for Kingstree Trading, LLC in Chicago, he has mentored numerous
professional traders and coordinated a training program for traders. An active
trader of the stock indexes, Brett utilizes statistically-based pattern
recognition for intraday trading. Brett does not offer commercial services to
traders, but maintains an archive of articles and a trading blog at
www.brettsteenbarger.com and a
blog of market analytics at
www.traderfeed.blogspot.com. His book, Enhancing Trader Performance,
is due for publication this fall (Wiley).