Technical Analysis : Power Tools for Active Investors

by Appel, Gerald

• ISBN13: 9780131479029
• ISBN10: 0131479024
• Edition: 1st
• Format: Hardcover
• Copyright: 2005-01-01
• Publisher: FT Press

Summary

In this book, one of the world's most respected technical analysts offers a complete course in forecasting future market behaviour through cyclical, trend, momentum and volume signals. What's more, unlike most technical analysis books, Gerald Appel's Technical Analysis offers step-by-step instructions virtually any investor can use to achieve breakthrough success in the market. Appel illuminates a wide range of strategies and timing models, demystifying even advanced technical analysis the first time. Among the models he covers: NASDAQ/NYSE Relative Strength, 3-5 Year Treasury Notes, Triple Momentum, Seasonality, Breadth-Thrust Impulse, and models based on the revolutionary MACD techniques he personally invented.

Table of Contents

Foreword	1	(2)
Acknowledgments	3	(4)
Introduction	7	(212)
1 The No-Frills Investment Strategy	11	(16)
Part 1: Picking the Right Investment Vehicles	11	(1)
Risk: Reward Comparisons Between More Volatile and Less Volatile Equity Mutual Fund Portfolios	12	(2)
Gain Pain Ratios	13	(1)
Drawdown: The Measure of Ultimate Risk	14	(2)
The End Result: Less Is More	16	(1)
Changing Your Bets While the Race Is Still Underway	17	(1)
Relative Strength Investing	18	(4)
Testing the Relative Strength Investment Strategy: A 14-Year Performance Record of Relative Strength Investing	19	(2)
Results of Quarterly Reranking and Quarterly Rebalancing (1990-2003)	21	(1)
Buy-and-Hold Results: The Standard & Poor's 500 Benchmark	21	(1)
Increasing the Risk: Maintaining a Portfolio of Somewhat More Aggressive Mutual Funds	22	(2)
Observations	23	(1)
Upping the Ante: The Effects of Applying the Concepts of Relative Strength Selection to a Still More Volatile Portfolio of Mutual Funds	24	(2)
General Observations	25	(1)
A Quick Review of Relative Strength Investing	26	(1)
Summing Up	26	(1)
2 Two Quick-and-Dirty Stock Market Mood Indicators	27	(16)
Identifying High- and Low-Risk Investment Climates	27	(1)
The Nasdaq New York Stock Exchange Index Relative Strength Indicator	28	(2)
The Maintenance and Interpretation of the Nasdaq NYSE Index Relative Strength Indicator	30	(5)
Observations	33	(2)
Measuring the Market Mood with the Intermediate Monetary Filter	35	(1)
The Monetary Model	36	(4)
The Ingredients	36	(1)
The Calculation and Rules of the Intermediate Monetary Filter	37	(3)
Observations	40	(1)
Combining the Two Indicators	40	(2)
Point and Counterpoint	40	(1)
Observations	41	(1)
A Final Long-Term Statistic	41	(1)
Summing Up	42	(1)
3 Moving Averages and Rates of Change: Tracking Trend and Momentum	43	(22)
The Purpose of Moving Averages	43	(5)
The Intermediate-Term Moving Average	45	(1)
The Long-Term 200-Day Moving Average	45	(1)
Using Weekly-Based Longer-Term Moving Averages	46	(1)
Moving Averages and Very Long-Term Moving Averages	47	(1)
Moving Averages: Myths and Misconceptions	48	(1)
Using Moving Averages to Identify the Four Stages of the Market Cycle	49	(3)
Stage 1	50	(1)
Patterns of Moving Averages During Stage 1	50	(1)
Stage 2	50	(1)
Patterns of Moving Averages During Stage 2 Advances	50	(1)
Stage 3	51	(1)
Patterns of Moving Averages During Stage 3 Distribution Periods	51	(1)
Stage 4	51	(1)
The Rate of Change Indicator: How to Measure and Analyze the Momentum of the Stock Market	52	(6)
The Concept and Maintenance of the Rate of Change Indicator	52	(1)
Constructing Rate of Change Measurements	53	(2)
Bull Market and Bear Market Rate of Change Patterns	55	(1)
Adjusting Overbought and Oversold Rate of Change Levels for Market Trend	56	(1)
Looking Deeper into Levels of the Rate of Change Indicator	57	(1)
The Triple Momentum Nasdaq Index Trading Model	58	(5)
Maintenance Procedure	59	(3)
Notes Regarding Research Structure	62	(1)
Rate of Change Patterns and the Four Stages of the Stock Market Cycle	63	(2)
4 More Than Just Pretty Pictures: Power Tool Chart Patterns	65	(24)
The Concept of Synergy	65	(2)
Powerful Chart Formations	67	(2)
Example 1	68	(1)
Example 2	68	(1)
Example 3	69	(1)
The Wedge Formation: Times to Accumulate and Times to Distribute Stocks	69	(2)
The Wedge Formation	70	(1)
Declining Wedge Formations	70	(1)
Appropriate Strategies	71	(1)
Synergy in Chart Patterns	71	(1)
Head and Shoulder Formations	72	(5)
Using the Head and Shoulder Formation to Establish Downside Price Objectives	73	(2)
At Market Bottoms, the Inverse Head and Shoulder Formation	75	(1)
Confirmation by Measures of Market Momentum	75	(1)
Volume Spikes Are Very Bullish If the Stock Market Has Been in Decline	76	(1)
The Selling Climax	76	(1)
Support and Resistance Levels	77	(4)
Support Zones	77	(1)
Support Zones	78	(1)
Resistance Zones	79	(1)
Example: The 1999-2003 Stock Market Climate (Chart 4.4)	79	(1)
Market Downtrends	80	(1)
Major Trend Synergy in Action	80	(1)
Tricks with Trendlines	81	(2)
Inverse Trendline Support and Resistance Zones	82	(1)
Channel Support and Resistance	83	(2)
Early Warnings Provided by Channel Patterns	83	(1)
Extended Channel Support	84	(1)
Rising Resistance Zones	84	(1)
False Breakouts and Breakdowns: Key Market Patterns	85	(4)
A Significant Sell Signal	85	(1)
A Significant Buy Signal	86	(1)
The Key	86	(3)
5 Political, Seasonal, and Time Cycles: Riding the Tides of Market Wave Movements	89	(28)
Calendar-Based Cycles in the Stock Market	90	(5)
Days of the Month	90	(1)
Pre-Holiday Pattern	90	(1)
The Best and Worst Months of the Year	90	(2)
The Best Six-Month Period, the Worst Six-Month Period	92	(1)
Evaluating the Tabulations	92	(1)
The Presidential Stock Market Cycle	93	(1)
Comments	94	(1)
Time Cycles: Four Days to Four Years	95	(2)
Example of Market Cycles: The 53-Day Market Cycle	95	(2)
Segments of Market Cycles	97	(2)
The Significance of Segmentation	98	(1)
Distinguishing Bullish Cyclical Patterns from Bearish Patterns	98	(1)
Lest We Forget the Concept of Synergy...	99	(1)
Lengths of Market Cycles	99	(3)
The Very Significant and Regular Four-Year Market Cycle	100	(1)
An Intermediate Market Cycle with a Confirming Indicator	101	(1)
How the Confirming Indicator Helps the Cause	102	(2)
The August-September Cycle	102	(1)
The October-November Cycle	103	(1)
The November to Early January Market Cycle	103	(1)
The January-March Cycle	103	(1)
The 18-Month Market Cycle with a Rate of Change Confirming Indicator	104	(3)
Synergy Between Rates of Change and Cyclical Patterns	104	(1)
Enter the Rate of Change Indicator	105	(1)
For Future Readers of This Work	105	(1)
Day Trading with Short-Term Cycles	106	(1)
T-Formation: The Ultimate Cyclical Power Tool?	107	(8)
The Construction of T-Formations	108	(1)
Area 1	108	(1)
Area 2	109	(1)
Area 3	109	(1)
Area 4	110	(1)
Further Examples of T-Formations, Including the Application of Synergy	110	(1)
T-Formations and Mirror Patterns of Stock Movement	111	(2)
T-Formations and Longer-Term Time Periods	113	(1)
Supplemental Indicators	114	(1)
One Final Set of T-Formations	114	(1)
In Summary	115	(2)
Seasonal and Calendar Influences on the Stock Market	115	(1)
Time Cycles	115	(1)
T-Formations	115	(2)
6 Bottom Fishing, Top Spotting, Staying the Course: Power Tools That Combine Momentum Oscillators with Market Breadth Measurements for Improved Market Timing	117	(30)
A Quick Review of Where We Have Been	117	(1)
The "Internal" as Opposed to the "External" Stock Market	118	(1)
Measures of Market Breadth	119	(8)
New Highs and New Lows	119	(8)
New High New Low Confirmations of Price Trends in the Stock Market	120	(1)
Positive and Negative Confirmations, 1995-2004	120	(2)
New Lows at a Developing Stock Market Bottom	122	(1)
Creating a New High New Low Indicator to Keep You in the Stock Market When the Odds Heavily Favor the Stock Market Investor	123	(1)
Method of Interpretation	124	(2)
The Application of the New High (New Highs + New Lows) Indicator to the Nasdaq Composite	126	(1)
Pre-Bear Market Comparisons	127	(1)
The New York Stock Exchange Advance-Decline Line	127	(3)
Relating to Advance-Decline Breadth Data	127	(1)
General Observations	128	(1)
Chart 6.4: The Advance-Decline Line Between 2002 and 2004	129	(1)
The 21-Day Rate of Change of the Advance-Decline Line	130	(1)
Overbought Levels	130	(1)
Oversold Levels	130	(1)
Breadth Patterns at Bull Market Highs	130	(3)
1997-2000: A Period of Breadth Transition	130	(2)
A Change in Tone	132	(1)
A Major Negative Breadth Divergence Followed	132	(1)
Using a Somewhat More Sensitive Rate of Change Measure of the Advance-Decline Line	133	(1)
The Ten-Day Rate of Change Indicator	133	(1)
The Weekly Impulse Continuation Signal	134	(3)
But First, an Introduction to the Exponential Moving Average	134	(1)
The Smoothing Constant of Exponential Averages	134	(1)
Example 1	135	(1)
Example 2	135	(1)
Example 3	135	(1)
Stabilizing the Exponential Average	136	(1)
Some Special Qualities of Exponential Moving Averages	136	(1)
The Weekly Impulse Signal	137	(5)
The Required Items of Data Each Week	137	(2)
Buy and Sell Signals	139	(2)
General Concept of the Weekly Breadth Impulse Signal	141	(1)
Final Comments	142	(1)
The Daily-Based Breadth Impulse Signal	142	(5)
The Construction and Maintenance of the Daily-Based Breadth Impulse Signal	143	(1)
The Performance Record of the Daily Breadth Impulse Signal	144	(1)
The Application of the Daily-Based Breadth Impulse Signal to Trading the Nasdaq Composite Index	145	(1)
Caveat	146	(1)
7 Volume Extremes, Volatility, and VIX: Recognizing Climactic Levels and Buying Opportunities at Market Low Points	147	(18)
Market Tops: Calm Before the Storm; Market Bottoms: Storm Before the Calm	148	(1)
TRIN: An All-Purpose Market Mood Indicator	148	(5)
The Data Required to Compute TRIN	149	(1)
Calculating TRIN	149	(1)
Interpreting TRIN Levels	150	(1)
TRIN as a Bottom Finding Tool	151	(2)
The Volatility Index (VIX) and Significant Stock Market Buying Zones	153	(3)
The Volatility Index	154	(1)
Theoretical Pricing of Options	154	(1)
Implied Volatility	155	(1)
Ranges of VIX	155	(1)
Bullish Vibes from VIX	156	(1)
Summing Up	156	(1)
The Major Reversal Volatility Model	156	(9)
Calculating the Major Reversal Volatility Model	157	(1)
Major Market-Reversal Buy Signals	157	(6)
The 1970-1979 Decade	158	(1)
The 1979-1989 Decade	159	(1)
The 1989-1999 Decade	160	(1)
Post-1999: Mixed Results	161	(2)
The Ideal Scenario	163	(2)
8 Advanced Moving Average Convergence-Divergence (MACD): The Ultimate Market Timing Indicator?	165	(36)
Scope of Discussion	166	(1)
The Basic Construction of the Moving Average Convergence-Divergence Indicator	166	(5)
Basic Concepts	167	(1)
Trend Confirmation	168	(1)
The Signal Line	169	(1)
Very Important Supplementary Buy and Sell Rules	170	(1)
Rationale for Supplementary Rules	170	(1)
Using Divergences to Recognize the Most Reliable Signals	171	(2)
Additional Examples	172	(1)
Improving MACD Signals by Using Different MACD Combinations for Buying and Selling	173	(8)
Two MACD Combinations Are Often Better Than One	174	(1)
MACD During Strong Market Uptrends	175	(1)
MACD During Market Downtrends	176	(1)
Modifying MACD Rules to Secure the Most from Strong Market Advances	177	(3)
Reviewing Chart 8.9	178	(1)
Market Entry Supported by Positive Divergence	178	(1)
Moving Averages, MACD Patterns Confirm Advance	179	(1)
Initial Sell Signal Not Reinforced by Any Negative Divergence	179	(1)
Secondary Sell Signal Confirmed by Negative Divergence	179	(1)
Use Moving Average as Back-Up Stop Signal	179	(1)
The Stop-Loss When Trades Prove Unsuccessful	180	(1)
Synergy: MACD Confirmed by Other Technical Tools	181	(4)
MACD Patterns Confirmed by Cyclical Studies	182	(1)
When the MACD Does Not Provide the Most Timely Signals	183	(1)
Money Management with the MACD (and Other Indicators)	184	(1)
An MACD Configuration That Suggests More Active Selling	185	(1)
MACD Through the Years: Long Term, Short Term, and Intraday	185	(5)
The Start of a Bull Market	186	(1)
An Example of the MACD Stop-Loss Signal in Action	187	(1)
MACD Employed for Day-Trading Purposes	187	(1)
MACD and Major Market Trends	188	(2)
The Amazing Ability of the MACD to Identify Significant Market Low Points Following Severe Stock Market Declines	190	(4)
MACD Patterns and Significant Market Bottoms	191	(2)
Initial Rally at Start of Year	193	(1)
Brief Decline and Well-Timed Market Re-Entry	193	(1)
Rally and Topping Formation	193	(1)
Waterfall Decline, and Then Bottoming Process	193	(1)
Final Shakeout and Recovery	194	(1)
MACD and the Four Stages of the Market Cycle	194	(1)
Reviewing Rules and Procedures Associated with the MACD Indicator	195	(1)
Creating and Maintaining Your MACD Indicator	195	(1)
Buy Signals	195	(1)
Prerequisite	196	(1)
Sell Signals	196	(1)
Converting the Daily Breadth Thrust Model into an Intermediate Entry	196	(5)
Buy Signals	197	(1)
Sell Signals	197	(1)
Providing That...	197	(1)
Summary of Results	198	(1)
MACD Filtered Breadth Thrust Applied to the Nasdaq Composite Index	198	(3)
9 Moving Average Trading Channels: Using Yesterday's Action to Call Tomorrow's Turns	201	(18)
The Basic Ingredients of the Moving Average Trading Channel	202	(2)
Creating the Channel	203	(1)
What Length of Offset Should Be Used?	203	(1)
Moving Average Trading Channels in Operation	204	(5)
Area A: The Chart Opens with a Market Downtrend	205	(1)
Area B: The First Recovery Rally	205	(1)
Area X: The Technical Picture Improves	206	(1)
Area D: The Upper Trading Band Is Reached	206	(1)
Area E: Prices Retrace to the Center Channel	206	(1)
Area F: Improving Market Momentum Confirmed	207	(1)
Bullish Indications	207	(1)
Area G: The Center Line of the Moving Average Trading Channel	207	(1)
Area H: Warning Signs	207	(1)
Area I to J: One Final Attempt That Fails	207	(1)
The Basic Concept	208	(1)
The Evolution of Phases Within the Moving Average Trading Channel	209	(3)
A Classic Topping Formation to End a Major Bull Market	209	(1)
Chart 9.2: The Ingredients	210	(1)
January 2000: The Bull Market in Nasdaq Moves Along Steadily	210	(1)
Area E: The Fun and Games of the Bull Market Come to an End	210	(1)
Area F: Trend Reversal Is Confirmed and Completed	211	(1)
The Development of a Bottom Formation	212	(1)
Moving Average Channels and the Major Trend	212	(4)
1996-1998: Strong Bullish Upthrust	213	(1)
The First Correction Stops at the Center Channel Line	213	(1)
Resurgence of Market Advance	214	(1)
Technical Warnings Develop	214	(1)
The Top Formation Moves Along	214	(1)
Major Downtrend Gets Seriously Underway	214	(1)
Patterns Suggest a Phasing-Out of Long Positions	215	(1)
Significant Downturn Is Confirmed	215	(1)
How to Construct a Price Moving Average Differential Oscillator	216	(1)
A Review of the Key Rules Associated with Moving Average Trading Band Trading	217	(2)
10 Putting It All Together: Organizing Your Market Strategies	219	(10)
The First Step: Define the Major Trend and Major Term Cycles of the Stock Market	219	(1)
The Second Step: Check Out Market Mood Indicators and Seasonal Cycles	220	(1)
The Third Step: Establish the Direction and Strength of the Current Intermediate Trend and Try to Project the Time and Place of the Next Intermediate-Term Reversal Area	221	(1)
The Fourth Step: Fine-Tune Your Intermediate-Term Studies with Studies Based on Shorter-Term Daily-or Even Hourly-Market Readings	222	(1)
Remember Our Favorite Mutual Fund Selection Strategy!	222	(1)
Lessons I Have Learned During 40 Years as a Trader	223	(1)
Recommended Reading and Resources	224	(5)
Charting Resources	224	(1)
Sources for Research	225	(1)
Books Relating to Technical Analysis	225	(1)
Investment Newsletters	226	(3)
Index	229

Excerpts

Introduction Introduction This book,Technical Analysis, is meant for every investor who has been hurt trusting his brokerage firm, trusting his friendly mutual fund manager, or trusting the latest hot guru. It is meant for every investor who has ever wished for the skills required to deal with an increasingly volatile and uncertain stock market. It is meant for every investor willing to take responsibility for the outcome of his own investments. It is meant for every investor ready to take at least some of the time and to put forth at least some of the effort required for the quest. The stock market tends to condition investors to make the wrong decisions at the wrong times. For instance, the stock market explosion of the late 1920s convinced investors that the only path for stocks was up, and that the prospects of stocks rising indefinitely justified even the high levels of margin leverage that could be employed at the time. Investors plowed in, the stock market collapsed, and, thereafter, the public remained fearful of stocks for 20 years, although the stock market actually reached its lows during 1931 and 1932. In the mid-1990s, the Standard & Poor's 500 Index was king and index mutual funds were the royal coach. Between 1996 and 1998, huge inflows of capital were injected into Standard & Poor's 500-based index mutual funds, such as those sponsored by Vanguard. The largest inflows took place just before a serious intermediate market decline in mid-1998. The market advance that followed that decline was headed not by the Standard & Poor's 500 sector of the stock market, but by speculative areas of the Nasdaq Composite: technology sectors (Internet issues and the like) that, in some cases, sold for hundreds of dollars per share, even though many companies had no earnings whatsoever. And then came the crash, in March of 2000. The Nasdaq Composite ultimately declined by more than 77%. So, investors returned to the sanctity of total return, value, earnings, and dividends, not the worst strategy during the bear market that took place between 2000 and 2002, but definitely not the best of strategies when the new bull market more clearly emerged during the spring of 2003. The play returned to technology and the Internet, with growth back in and total return back out. (During the first nine months of 2004, however, technology issues once again lost market leadership to value- and income-oriented market sectors.) The point, of course, is that the typical investor follows and does not lead trends, is late rather than early, and is a crowd-follower rather than a self-director. According to Dalbar, Inc., a financial services research firm, the average equity fund investor realized an annualized return of 5.32% between 1984 and 2000, while the Standard & Poor's 500 Index rose at a rate of 16.3% per annum. Matters become even worse when comparisons are updated through July 2003. The average investor was ahead by only 2.6% per year for the 1984-2003 period, compared to annualized returns of 12.2% for the Standard & Poor's 500 Index. This book has been prepared to help investors achieve better than average performance--considerably better, we believe. The structure ofTechnical Analysishas been designed to provide information and investment tools, some of which can be put to work immediately, by both sophisticated and relatively unsophisticated stock market investors. I will share with you, right at the start, my favorite techniques for picking mutual funds and ETFs (securities that trade on the stock exchange and act similarly to market index mutual funds but provide greater investment flexibility at lower ongoing internal management fees, though, possibly, with some initial commission expense, which is often involved with mutual funds as well). We