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johnpaulca
11,296 posts
msg #74479
Ignore johnpaulca
5/16/2009 10:33:51 PM

Source: Amateur Investors

During the past 110 years the US has gone through a series of Economic Cycles which has been reflected in the stock market. Once again if we compare the Historical PE Ratio to the Inflation Adjusted Chart of the S&P Composite a few things standout. First each Cyclical Bear Market has not bottomed until the PE Ratio has dropped below a value of 7 (green line). This occurred in 1982, 1932 and even further back in 1921. Currently the PE Ratio is around 15 so if history repeats itself then it would have to drop back to around 7 before a bottom would occur. Meanwhile if we compare the charts of the "3" previous Cyclical Bear Markets to the most recent one the overall pattern looks similar to that of 1968-1982 and 1906-1921. Both of these Cyclical Bear Markets were drawn out affairs in which the S&P Composite took the form of an elongated ABC type corrective pattern that lasted from 14 to 15 years.

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Furthermore when you breakdown the 1906-1921 and 1966-1982 time periods what's amazing is that after completing their "B" Waves it took 9 years for both of them to complete their elongated "C" Waves. Now if we look at the current Cyclical Bear Market a similar ABC type corrective pattern appears to be developing as the "B" Wave completed in late 2007. If we see a similar pattern evolve for Wave "C" then it will elongate out and could take several more years to complete like occurred back in 1968-1982 and 1906-1921. Meanwhile also notice the S&P Composite is still well within its longer term upward channel and its entirely possible it may eventually drop back to the bottom of its channel before a Bear Market bottom occurs.

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Meanwhile if we compare the 1968-1982 time period to the current pattern it appears we are basically in the same spot as we were in the mid 1970's in which the S&P Composite had a decent rally from 1975 through the early part of 1976 (points D to E) before going through an extended downtrend which finally bottomed in 1982 (points E to F) as the "C" Wave ended. Keep in mind these are Inflation Adjusted Charts so the non Adjusted Inflation Charts will look somewhat different when you compare the two.

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johnpaulca
11,296 posts
msg #74633
Ignore johnpaulca
5/21/2009 9:18:04 AM

Source: Toni Hansen

Question: I have read some of your articles, as well as those from other professional traders, that talk about trading without using any indicators like stochastics or the MACD. Don't indicators make it easier to determine what is going to happen next in a security? I look forward to your response!


Answer: Your question, in one form or another, is one that I find myself asked more and more often over the course of this past year.


To begin with, let's first look at what an indicator is. According to Investopedia.com, "In the context of technical analysis, an indicator is a mathematical calculation based on a security's price and/or volume. The result is used to predict future prices." What this means is that indicators are constructed using price and/or volume data. This data is then plotted onto a chart and will theoretically provide visual signals or clues that can be used to enter or exit a security in a manner designed to maximize gains and/or limit losses.



Before the advent of online trading and charting platforms, the application of indicators to securities was rather cumbersome. When I first began trading, these were still in their infancy. With only a handful or two of widely followed indicators to choose from, I found it best to stick to some of the basics, such as simple moving averages and Fibonacci retracement and extension levels. As a new trader, these levels provided added confirmation for my positions. What I quickly realized, however, is that indicators are not entirely reliable.



Remember that the key part of the definition of an indicator is the use of "price" and/or "volume" as the building blocks of any indicator? Well, unless you are well-versed in price analysis and volume analysis to begin with, it can be quite confusing to know just which indicator you can rely on and when. Some of them, such as moving averages, work best in trending markets where the security is moving either higher or lower. Oscillators on the other hand, such as stochastics, are best suited to a more range bound or choppy trading environment. If a trader is relying purely on the indicator for an entry or exit trigger, they will likely be wrong more often than not and will be hit particularly hard as the market is shifting from one stage to the next.



Over time I began to shy away from using indicators on my charts. Although I never used many to begin with, I found that by starting to focus more upon the pure price and volume action, particularly price, I was able to form a clearer picture of what levels would most easily hold versus those that would break in a security. I also began to see patterns in the market more clearly than ever before. In the past, the indicators often caused me to hesitate when they seemed at odds with what I was beginning to feel instinctively. By removing the indicators, I also began to remove that self-doubt and it helped me build confidence in my abilities first as an analyst and then as a trader.



The lack of indicators also meant a lack of clutter. Indicators can be rather distracting at times. It often amuses me when I attend an expo and am wandering around checking out the latest charting platforms, or even just when a prospective client sends me a screenshot of one of their trades. Often they are so overpowered by indicator upon indicator that I cannot even discern the underlying price action. Or else the price action is so compacted from highs to lows and spread out across the screen that it is impossible to view the momentum of each price move compared to previous price action. Without the ability to view these movements it becomes virtually impossible read the price action alone.



Despite my seemingly unenthusiastic view of indicators, I do believe that they still have their place in technical analysis and can be valuable tools for analyzing price action. They can still be particularly useful for newer traders when used correctly. Just as chart provide a visual representation of the tape, or trading activity, indicators can also help a trader visualize the underlying price action and support and resistance levels resulting from it. It is important to keep in mind, however, that indicators should be used as merely additional tools for confirming your overall bias. They can serve as either a pro or a con on your position, giving it more weight or signaling a potential problem. I would urge against any strategy, however, that relies solely upon the indicators or a basket of indicators for direction. While they may work for a period of time, when the market shifts, strategies built upon indicators alone will begin to fail unless major adjustments are made.



I attribute questions such as yours to the fact that there are now so many indicators that have been developed in the search for the elusive Holy Grail of indicators that it is now quite difficult for those entering the markets to know where to begin. There is a huge pressure by others to add indicators to one's charts and yet there is also a strong yearning for simplicity. The emerging realization that there are so many professional traders that have proven consistent over the years without using a plethora of indicators is a huge relief to those just now starting from scratch. It makes the quest for success just a little bit less daunting.



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