Most of you are not going to like this

What do Finn and his team tell us does work? Fundamentals, fundamentals, fundamentals. As they look at scores of managers each year, the common thread for success is how they incorporate some set of fundamental analysis patterns into their systems. This is consistent with work done by Dr. Gary Hirst, one of my favorite analysts and fund managers. In 1991, he began to look at technical analysis. He spent huge sums on computers and programming, analyzing a variety of technical analysis systems. Let me quote him on the results of his research: "I had heard about technical analysis and chart patterns, and looking at this stuff I would say, what kind of voodoo is this? I was very, very skeptical that technical analysis had value. So I used the computers to check it out, and what I learned was that there was, in fact, no useful reality there. Statistically and mathematically all these tools -- stochastics, RSI, chart patterns, Elliot Wave, and so on -- just don't work. If you code any of these rigorously into a computer and test them they produce no statistical basis for making money; they're just wishful thinking. But I did find one thing that worked. In fact almost all technical analysis can be reduced to this one thing, though most people don't realize it: the distributions of returns are not normal; they are skewed and have "fat tails." In other words, markets do produce profitable trends. Sure, I found things that work over the short term, systems that work for five or ten years but then fail miserably. Everything you made, you gave back. Over the long term, trends are where the money is."

Been incorporating fundamentals into my methodology for a few years now. Use them a lot but I always use TA for entry, exit and risk management. I go top down with market to group to stock. I do lots of relative strength stuff. Also, use sentiment indicators quite a bit for support. I think trading breakouts or breakdowns has grown very difficult the past couple of years but trading around the TA stops of others is working more than it used to. It seems EVERYONE is using TA these days and looking at trees instead of forest. There are services advertised on TV for TA, billion $ hedge funds use TA and computer modeling, CNBC is TA centric now, joe sixpack uses TA, all I hear is TA TA TA. I actually use mostly weekly charts for decisionmaking and daily/hourly for tactics. Weekly charts and volume are great for supply and demand and they don't "lie" as much as daily and ST charts. I've found the indexes very difficult to trade in certain shorter time frames when they used to be relatively easy until perhaps a few years ago. Trade around stops of others, control risk/reward, buy stocks/sectors in strong weekly uptrends on pullbacks and short the opposite. Especially when you can identify the fundamental reasons for the moves, monitor psychology to some degree and control risk....my methodology as of now.

I am probably in minority here, but your post is relevant.

One question: does Gary Hirst make this list ?

"They're called hedgehogs and fat cats, and sometimes much worse than that. We present them simply as “traders,” though in truth most are technically considered portfolio managers. There’s one word, however, that definitively describes each of the securities-industry standouts who make up this year’s Trader Monthly 100: flush.

You needed at least $75 million in 2007 income to make the cut. Five of the forces of nature on the pages that follow cleared 10 figures. One, John Paulson, made, at minimum, a staggering $3 billion, more income banked in one year than any trader — maybe any human being — ever. Paulson wasn’t alone. Smart subprime and related bets produced windfalls for a slew of other top traders, including Phil Falcone, Richard Perry and John Burbank..."


(Source/ full article here: http://www.traderdai...cle/16812.html)

Edited by beta, 11 May 2008 - 02:15 AM.

The scientists lack the princinples of supply and demand, the economists lack the principles of the science. Most of the technical tools used by the economists are not even scientificly accurate. Most of them then constantly dismiss each others' work and refuse to understand either domain. People who live exclusively in either domain willl loose money in trading. Almost all of the successful "quants" are capable of understanding the basics about the underlying economics before they could build a matematical model for trading the specific environment. This is very important.

There is only two technicality to the PURE price charts, the seasonality or cycles and the underlying exponential trend;

1) Take the natural log of the prices
2) Filter out the dominant cyclicalities
3) Extend the underlying trend (there is your fat tail!)
4) Observe the changes in the intensity and variation of the cycles.
5) Add the cycles back with their varying magnitudes (there is your price entries and exits).
6) Take the exponential of the prices to get back to the actual prices.

The ONLY possible timing tool of the markets is the cycles and there is the scientific theory about how to process the information in signal appropriately. The underlying trend is only useful if one is capable of removing the dominant cycles from the price first. Otherwise, the information about the trend is as accurate as noise. Even after a successful price decomposition model to analyze the seasonality and the underlying trend, the trades will fail if the systems do not observe the changes in the cycles and the trend.

How do we describe a cycle? It is the mean price behaviour once the prices are filtered by a mean such as a moving average. But the moving averages will also average in time so they lag the prices by their half span. There is an uncertainty associated about 50% of the most recent cycles. This is the scientific fact about the moving averages, or any other fit. Here's an example;

Here's an example of the above 38-40 cyclical pattern;

A line in the LOG SPACE is actually an exponential curve in linear space. Extending this underlying trend or line largely depends on the fundamentals, NOT technicals. A line can not tell us it is time to turn. The longer data we have the better we can understand the longer term cycles, but unfortunately the data will eventually be limited and all we can do is to extend this underlying trend AND there you must ask the question whether it is the prudent thing to do, only the analytical understanding of the supply and demand can aswer this question. This is why I never post my actual price projections into the future, but only what's happening so far with simple lines to suggest, it already involves 50% uncertainty with the latest cycles anyway...

BTW, most of the fixed indicators such as the stochastics, RSI, chart patterns are only valid within the trend of the same character. Once the character of the markets change, the trades will start to fail. For example, the stochastics oscillators which try to capture the price cycles will fail, if they are not tuned with the dominant cycles. This is because the price cycles change with the trend. The cycles that work during the uptrends will not work during the downtrends. The cycles are simply the results of the balance in between the supply and demand of the trends, the volume analysis is another tool...

Specific to the equities though, one can get a lot of clues about extending the trend by observing the following in the following order;

1) The diffusion of the liquidity into the markets, or the breadth (advancers/declines, new highs vs lows etc).
2) The inflation vs growth effects or the sector leadership which mostly makes the economic cycles.
3) The volatility or the actual price cycles which will change with the liquidity and leadership or 1 and 2.
4) The volume analysis.

Each sector cycle will exert different price cycle behaviour over the composite indices, so the trends dominated by the commodity heavy issues such as the energy and materials sectors will be inflationary and these trends will have a different character than the trends dominated by the growth oriented issues such as the tech and industrials. The disinflationary trends will have the financials and utilities as their sector leaders, these are transitionary sectors where the money will hide during the trend changes and their leadership usually signal the changes of the economic cycles.

I look at the volume as a confirmation and the last because the smart money usually moves ahead of the other investors that make up most of the volume. If we are not familiar with the price behaviour, we never met the smart money of that market probably! When the volume comes, it will be usually too late to take a position due to the unfavorable prices...

BTW, observing the other markets generally help (commodities, bonds, currencies) except when they don't. Their cross correlation analysis is a broader discussion and not everything that correlate with each other mean something or predictive...

So, the technicals do work since everything is a piece of information to process, but it really depends how one extracts the technicals out of the prices or observes the markets. The simple tools only work within the trend. Most of the successful traders will know in advance the conditions that will "break" their technical observations and they will close their positions, the better traders will take the hedging positions in advance. In other words, the best traders usually have a contingency plan to their trades and they don't play it simply with the odds since the odds are only meaningful to the past, not future. Why? Because the markets hardly follow the Gaussian price distributions, especially during the trend changes. For example we wouldn't be able to take a stop loss during the crashes, if we are trying to go long, but we could simply hedge with the puts. If one is managing a mutual fund or a retirement account where the derivatives are generally prohibited, one could go long the sector and short the weakest issues in the sector during the trending markets and do the opposite during the trend change expectations OR simply take trades in the sectors with the opposing economic cycles...

These are all from my personal experience through a lot of pain while searching for the truth...

OH. MY. GAWD ! How long did it take you to write that ? I applaud you for your thoughfulness, diligence, and ultimate typers cramp that must have resulted.

Oh gawd, how many times does it have to be said... TIMEFRAME TIMEFRAME TIMEFRAME.... Sure it's easy to look back from 2003 and say long term fundamentals blah blah blah... What were those folks saying int 2001-2002? It's all about style. If you don't mind having your portfolio of wealth raked over the coals for a few years during these bear markets, then fundamentals are great. How about the 90s? What were your energy bulls thinking then with oil at $10 a barrel? That it seemed like it would never end. And so here they are today, on the other side of the cycle, not unlike the dotcom bulls in 1999-2000. So if you're really a fundamental bull today, what should you be buying? Not oil, I can assure you of that.. Networks baby, what goes around, comes around.... Me? I'm just trading this trash....

OH. MY. GAWD !

How long did it take you to write that ?

I applaud you for your thoughfulness, diligence, and ultimate typers cramp that must have resulted.

Well you did kind of take a swing at the knees of most traders

Thanks for the post arbman. I enjoyed reading your thoughts.

Oh gawd, how many times does it have to be said...

TIMEFRAME TIMEFRAME TIMEFRAME....

Sure it's easy to look back from 2003 and say long term fundamentals blah blah blah...

What were those folks saying int 2001-2002?

It's all about style. If you don't mind having your portfolio of wealth raked over the coals for a few years during these bear markets, then fundamentals are great.

How about the 90s? What were your energy bulls thinking then with oil at $10 a barrel?

That it seemed like it would never end.

And so here they are today, on the other side of the cycle, not unlike the dotcom bulls in 1999-2000.

So if you're really a fundamental bull today, what should you be buying?

Not oil, I can assure you of that..

Networks baby, what goes around, comes around....

Me? I'm just trading this trash....

Agree Semi about time frames--completely!

Most here are shorting term. Timeframes are in context with each other. Each time frame is affected by the next larger time frame--the macro trend rules. I think the biggest pictures are completely driven by top down fundamentals. It's the shorter time frames that TA and supply/demand relationships come into play. JMO.....

Volume tells the tale... right now you look at that oil contract and USO, there's lots of volume. At the top of the parabola, the volume dies.... then accelerates off the top.

http://bigcharts.mar...&mocktick=1.gif

Volume still building, your first clue the top is in? ... expected smaller volume, then a big volume acceleration off the top... Any kind of sideways consolidation move this week, on any volume is bullish.


Right here, if I use the 1999 weekly YHOO chart as a guide, I would say we're about 4 weeks away from the top on the oil group... Oil contract somewhere over $150... probably $16X. $113 USO.

Edited by SemiBizz, 11 May 2008 - 01:23 PM.