Need Trading Guidance? Try This
KST Revisited
by Christopher Narcouzi
You know there's a trend out there -- but is it too late to get in on it? Here's a look at Martin J. Pring's KST indicator, which can give valuable trading insight into trend maturity.
Since most trading errors are made when you trade against the main trend, the direction and maturity of the main market trend is most important. Even if you trade in the direction of the main trend, you still need to have some idea about when the trend will mature (since trading in the final phase will increase your risk and lower your odds of success). The KST indicator, developed by Martin Pring, can give you a perspective on the main trend and its maturity.
MARKET CYCLE MODEL
Before delving into the KST indicator, it's necessary to understand Pring's market cycle model. Generally, it is possible to identify three trends in a market: the primary trend, the intermediate trend, and the short-term trend. The short-term trend can last from three to six weeks, the intermediate trend can last from six weeks to nine months, and the primary trend can last anywhere from nine months to two years. Pring states, "It is of the utmost importance to position assets in the direction of the main trend" -- in other words, "Trade with the trend."
In his works Market Momentum and Introduction To Technical Analysis, Pring states that the primary trend revolves around the so-called four-year business cycle. In Figure 1, the green line represents the primary trend, the black line represents the intermediate trend, and the red line represents the short-term trend. A to B represent a bull market and B to C represent a bear market. A primary trend usually lasts 12 to 18 months but on rare occasions can be as short as six months or as long as three years. Bull trends (A to B) are usually longer than bear trends (B to C), since stocks can fall on their own weight.
FIGURE 1: All markets go through various stages, and identifying these stages can have an effect on your returns.
In Figure 1, AD, EF, and GB represent intermediate rallies. DE and
FG represent intermediate declines or corrections. BI, HK, and JC represent
intermediate declines. IH and KJ represent intermediate rallies. The intermediate
rally seen in AD, during the bull market AB, presents the opportunity to
make a larger profit than the intermediate rally IH in bear market BC.
This is because during AD you are trading in the direction of the main
trend AB, and during IH you are trading against the main trend BC. This
goes to show that trading against the main trend results in less profit
and can even lead to a loss. As a rule, only go long during AB and go short
during BC, provided that the main trend is not in its terminal phase.
If you are a long-term investor, then the best time to buy a stock is between A and D, after either the first or second short-term uptrend represented by the red line. However, if you buy the stock after the second short-term rally between G and B, your risk will increase and your odds for success are less. During the downtrend between B and C, you would apply the same technique for shorting stocks.
...Continued in the August 2001 issue of Technical Analysis of STOCKS & COMMODITIES
Christopher Narcouzi is a systems programmer and Unix system administrator with 18 years' experience in data processing and a B.S. in computer science. He uses a sector investing strategy along with intermarket analysis, economy timing, and candlestick charts. He can be reached at chnarcouz@mediaone.net.
Excerpted from an article originally published in the August 2001 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2001, Technical Analysis, Inc.
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