Contents For
DEC1991

"Stopping" A System by John Sweeney
ARTICLE SYNOPSIS ...""Stopping"" A System
by John Sweeney
Once you get hold of an idea, it's often tough to get rid of it, especially if it shows no promise
whatever. It tugs at the back of the mindwhat was it about the original insight? What was valid? What
was bogus? I hate to admit that my subconscious could have produced a bummer. Closing last month's
Settlement, I mused, ""Reasonable progress, but what next? Could something simple work profitably?""
My first thought on returning to the subject and reviewing Figures 1a and 1b was that the losses were
pretty big. Those needed to be reduced in size, if not n...
BY: John Sweeney

Assessing Risk In An Equity Portfolio by JeanOlivier Fraisse, C.F.A.
ARTICLE SYNOPSIS ...Assessing Risk In An Equity Portfolio
by JeanOlivier Fraisse, C.F.A.
Portfolio management is a balancing act  enhancing returns by systematically investing in the most
promising assets while simultaneously limiting the variance of returns (that is, risk). What is the nature of
investment risk in an equity portfolio and how is it measured?
When considering an asset for inclusion in a portfolio, most investors will focus on the asset's expected
total return and on the variance of returns. While high expected returns are desirable, a large variance
implies a wide dispersion of returns, and th...
BY: JeanOlivier Fraisse, C.F.A.

Candlesticks And Preserving Capital by Gary S. Wagner and Bradley L. Matheny
ARTICLE SYNOPSIS ...Candlesticks And Preserving Capital
by Gary S. Wagner and Bradley L. Matheny
Candlestick analysis, the Japanese charting method introduced by Steve Nison to Western technicians
only a few years ago, has been slowly gaining acceptance to help the technician make profitable trading
decisions. As candlesticks become more common among Western technicians, an amalgam of
candlesticks and traditional Western analytical rules will emerge. An important but often overlooked
trading rule that may benefit is the use of protective stoploss techniques to preserve capital and
encourage sound money manageme...
BY: Gary S. Wagner and Bradley L. Matheny

Combining P/E Ratio With Earnings Growth Rates by Pamela H. Brown and William G.S. Brown
ARTICLE SYNOPSIS ...Combining P/E Ratio With Earnings Growth
Rates
by Pamela H. Brown and William G.S. Brown
The price/earnings (P/E) ratio is widely used in fundamental stock analysis. It serves to normalize
earnings so that stocks with widely varying earnings may be compared reasonably. The P/E ratio of a
market index such as the Standard & Poor's 500 composite stock price index typically remains within
certain boundaries. When investors are pessimistic and the market seems to have nowhere to go but
down, the market P/E will be near 7. When confidence is high and investors view the market as having
no place to...
BY: Pamela H. Brown and William G.S. Brown

Comparing The CRB With Bonds by Jim Bianco, C.M.T.
ARTICLE SYNOPSIS ...Comparing The CRB With Bonds
by Jim Bianco, C.M.T.
The Commodity Research Bureau (CRB) price index and the bond market have frequently been
compared in the past because of their interrelated natures. The CRB is considered to be an indicator of
inflation, and changes in the rate of inflation can affect investors' desire to hold bonds. The index, which
tracks 21 commodities, is weighted toward agricultural products (about 62%), and because of its
emphasis on agriculture, some investors tend to disregard it  an error, because the index serves as an
excellent proxy for commodity inflation.
To d...
BY: Jim Bianco, C.M.T.

Fidelity's Philip Erlanger by Thom Hartle
ARTICLE SYNOPSIS ...Fidelity's Philip Erlanger by Thom Hartle
Fidelity Management and Research Co.'s senior technical analyst Philip Erlanger is a major force
behind one of the most successful managedfund companies in the country. He arrived at technical
analysis in a roundabout way starting as a stock broker for Reynolds Securities in the 1970s, getting
interested in computers along the way even before the I BM PC revolutionized the industry and working as
an analyst for Advest before coming to Fidelity, where he analyzes industry groups stocks and the market
looking at junk bonds and currencies. STOCKS & COMM...
BY: Thom HartleSUBJECT: Interview

Fitting a Trendline by Least Squares by Arthur A. Merrill, C.M.T.
ARTICLE SYNOPSIS ...Fitting A Trendline By Least Squares
by Arthur A. Merrill, C.M.T.
Usually, trendlines are drawn through tops or bottoms. They are also drawn through the center of
prices by a lagged moving average or by eye (Figure 1). A straight line through the center of a price
channel, if the scale is logarithmic, will give you the percentage growth or decline rate.
If the straight line is drawn by eye, it is subject to debate. This question can be resolved by a
mathematically calculated line called ""least squares"" (Figure 2). The deviations of the points from the line
are marked A, B, C, D and E in Fi...
BY: Least Squares by Arthur A. Merrill, C.M.T.

Letters To S&C
ARTICLE SYNOPSIS ...LETTERS TO S&C
PARAMETRIC CONTROL AND SAMPLE SIZE
Editor,
""Stopping a system"" by John Sweeney (Settlement, December 1991) may have suggested a misleading
lesson to your readers. John introduced what appeared to be a very normal response concerning the
system he was analyzing. Profits were too small, so he decided to introduce stops to improve the results.
In fact, his change improved the system's profitability fivefold.
What John did was add a new parameter without deleting an old one or increasing the sample size. When
parameters are added to a process, freedom, in a statistical sense,...
BY: Technical Analysis, Inc.

Market Fuel And Technical Analysis by D. Earl Essig
ARTICLE SYNOPSIS ...Market Fuel And Technical Analysis
by D. Earl Essig
When traders hunt for the Holy Grail of commodity trading in futures and options, obvious clues to
market direction are often overlooked. One such oversight generally occurs in analyzing price patterns as
related to volume and open interest. Definitions may also differ from trader to trader, causing further
confusion. Here, both definition and situation can be clarified and summarized to make the task of
detecting market direction easier.
SOME BASIC DEFINITIONS
Total volume: The amount of contracts traded on any given day of all listed mon...
BY: D. Earl Essig

OnLine Data Addiction by Van K. Tharp, Ph.D.
ARTICLE SYNOPSIS ...OnLine Data Addiction
by Van K. Tharp, Ph.D.
One of the most useful tools for the modern trader is the online quote monitor, which gives the trader
a minutebyminute picture of what is going on in the market. It allows the trader to position a trade much
more advantageously than someone who does not have such access. Thus, it can theoretically save or
make a trader thousands of dollars. In many cases, however, the online computer can also be a trader's
worst enemy. Find out if having a quote screen in front of you is beneficial or harmful to you by
answering ""true"" or ""false"" to these...
BY: Van K. Tharp, Ph.D.
BY: Technical Analysis, Inc.

SIDEBAR: BUYS AND SELLS
ARTICLE SYNOPSIS ...BUYS AND SELLS
In Figure 3a, the greatest buying opportunity occurs when price action becomes strong at a time that
many are doubters. Depicted are indicators of both price strength and investor sentiment. Relative and
absolute strength are indicators of price. When Merrill's relative strength line is rising, its stock price is
outperforming the market. When Merrill's absolute strength line is rising, then Merrill's stock is behaving
better than it typically does, given Merrill's beta and the current market action. (Beta measures a stock's
sensitivity to the direction of the market.) Points P...
BY: Technical Analysis, Inc.

SIDEBAR: FIGURING THE NUMBER OF PERIODS IN AN ANNUITY
ARTICLE SYNOPSIS ...FIGURING THE NUMBER OF PERIODS IN
AN ANNUITY
Often, investors anticipate a need for a given amount of funds at some future date. One way to guarantee
that such funds will be available is to put aside a series of payments at predetermined intervals, known as
an annuity. When the payments are made at the beginning of the period, the' series is known as an
annuity due. When made at the end of the period, as assumed here, the series is an ordinary annuity.
The value of an ordinary annuity is the sum to which the payments would accumulate, assuming that all
are invested at some fixed compound int...
BY: Technical Analysis, Inc.

SIDEBAR: MEASURING ASSOCIATION BETWEEN RETURNS ON TWO ASSETS
ARTICLE SYNOPSIS ...MEASURING ASSOCIATION BETWEEN
RETURNS ON TWO ASSETS
The covariance between the total returns on two assets X and Y is defined as the average over the entire
period of the products consisting of asset X's return in a given subperiod less its average return for the
whole period, multiplied by asset Y's subperiod return less its average return. Specifically:...
BY: Technical Analysis, Inc.

SIDEBAR: SHORT INTEREST AND LEVEL OF PAIN
ARTICLE SYNOPSIS ...SHORT INTEREST AND LEVEL OF PAIN
Generally, short interest is a monthly statistic presented on a currentmonth versus previousmonth basis.
Viewing one or two months of short interest data is, unfortunately, a tantalizing but less than satisfying
experience. To appreciate short interest data, it is necessary to gather as much historical information as
possible, including price and volume as well as short interest data. The objective is to determine which
stocks and groups have been most ""wrongfully"" shorted  that is, the degree that price has advanced
against established short positions. S...
BY: Technical Analysis, Inc.

SIDEBAR: UNDERSTANDING STANDARD MATHEMATICAL SYMBOLS
ARTICLE SYNOPSIS ...UNDERSTANDING STANDARD
MATHEMATICAL SYMBOLS
It is inevitable that today's technician will encounter steps to calculating an indicator that uses standard
mathematical symbols that appear to be beyond simple arithmetic. In reality, these symbols are simply
shorthand notation for no more than basic arithmetic. The following is a guide and interpretation to
mathematical symbols commonly seen in STOCKS & COMMODITIES.
By convention, the first few lowercase letters of the Roman alphabet (a, b, c) are used to denote constant
terms or coefficients. A constant is simply a value that does not change. F...
BY: Technical Analysis, Inc.

The Essence Of Dow Theory: Confirmation And Divergence by Richard L. Evans
ARTICLE SYNOPSIS ...The Essence Of Dow Theory: Confirmation And
Divergence
by Richard L. Evans
The Dow theory tenet that the Dow Jones Industrials and Dow Jones Transports must ""confirm"" one
another is listed perfunctorily in most Dow theory discussions, but confirmations and divergences are the
gist of Dow theory. In an article in the July 1991 STOCKS & COMMODITIES, I discussed some nuances of
Dow theory divergence and nonconfirmation. Briefly, Dow theory says that both the industrial and the
transportation averages must confirm to have forecasting implications. Any signal on the part of one
index without con...
BY: Richard L. Evans

Trading The Eclipse Cycle by Hans Hannula, Ph.D., C.T.A.
ARTICLE SYNOPSIS ...Trading The Eclipse Cycle
by Hans Hannula, Ph.D., C.T.A.
The ancients saw eclipses of the sun and moon as something mysterious and magical. The high priest
of the day controlled the masses by telling them: ""Look out, there is an eclipse coming. Do as I say to
avoid its ill effects."" The modernday equivalent, the modern stock market adviser, advises the trading
and investing masses much the same way: ""Look out, there is an eclipse coming. Trade and invest as I
say to avoid its ill effects.""
And sometimes there is an effect. Look at the Dow Jones Industrial Average (DJIA) for August 6, 19...
BY: Hans Hannula, Ph.D., RSA, CTA

V.9:12 (482485) SIDEBAR: Explaining r by Jim Bianco, C.M.T.
ARTICLE SYNOPSIS ...EXPLAINING r
Correlation analysis measures the degree of relationship between two variables. The correlation coefficient r is one popular
statistical index for this purpose. The values for r range between +1 to 1; a +1 reading indicates that the two variables are
perfectly correlated, while a 1 reading indicates a perfect inverse relationship. An r of 0 indicates that the two variables have
no correlation. The correlation coefficient r measures the relationship between two variables that are believed to be linear.
For instance, a straight line is used to describe the relationship if the two...
BY: Jim Bianco, C.M.T.SUBJECT: Trading Techniques