January 2009 Letters To The Editor
The editors of S&C invite readers to submit their opinions and information on subjects relating to technical analysis and this magazine. This column is our means of communication with our readers. Is there something you would like to know more (or less) about? Tell us about it. Without a source of new ideas and subjects coming from our readers, this magazine would not exist.
Address your correspondence to: Editor, Stocks & Commodities, 4757 California Ave. SW, Seattle, WA 98116-4499, or E-mail to editor@traders.com. All letters become the property of Technical Analysis, Inc. Letter-writers must include their full name and address for verification. Letters may be edited for length or clarity. The opinions expressed in this column do not necessarily represent those of the magazine. —Editor
Corona Charts and Metastock
Editor,
John Ehlers presented a most interesting discussion of corona charts (“Corona Charts,” November 2008, Stocks & Commodities) and I note that while the code for TradeStation and a few other programs appear in your Traders’ Tips section of that issue and also on your website, a version suitable for MetaStock Eod is notably missing. Is this because the software is unsuitable for the task, or just not available?
—Trevor T. Bestow, Roleystone, Western Australia
The Traders’ Tips section contains code submitted by the software developers. If the MetaStock code is missing, it means that the code was not submitted by Equis. I recommend you visit the MetaStock users forum and ask other users if they have been able to recreate the code in MetaStock.—Editor
Corona Charts and Tradestation
Editor,
Regarding the TradeStation code given with John Ehlers’s article “Corona Charts”: When I copied the EasyLanguage code for the four corona charts into PowerEditor in TradeStation 2000i, they each failed to verify, indicating that the problem was Rgb. Is Rgb a function that needs to be installed in order to use the indicators in TradeStation 2000i?
—Grover Ericksen
“Rgb” is a color value you can specify in EasyLanguage. Please check with TradeStation directly if you are still having problems with it.—Editor
The Key To Trend-Following
Editor,
Donald W. Pendergast’s article (“The Keys To Trend-Following,” November 2008) was interesting and informative but I was surprised by the extremely low maximum drawdowns (Mdds) reported in his Figure 1, backtested results.
I reported on the use of trend-following on Select mutual funds in my Stocks & Commodities January 2005 article, “A One Rank Screening Technique For Mutual Funds.” A key conclusion from that study was that such a trading method (the author used a 10-week/40-week Moa) can reduce Mdds by a factor of 2 (roughly). As the buy & hold for the 14 Selects the author studied, a significant number have an Mdd range from -29% (Fidsx) to -60.9% (Fwrcx). I would have anticipated a trading Mdd ranging from, roughly, Mdd -15% to -30%. In fact, his results range from “none” to -0.13% to the largest at -17.75% (Fsagx trade 2).
As I believe those values to be far too low (it would be very nice if they were true!), I studied four of his funds over essentially the same conditions. I did, however, use a similar Moa of 50/200 days, as I do not have weekly software. Here is my maximum Mdd found during the buy period compared to his data:
Fnarx, second trade
Pendergast Mdd = -0.43%
Brown Mdd = -20.2% (from 5/10/2006 to 10/3/2006)
Fbiox, fourth trade
Pendergast Mdd = -2.96%
Brown Mdd = -17.8% (from 2/27/2006 to 5/23/2006)
Fshox, first trade
Pendergast Mdd = None
Brown Mdd = -18.5% (from 4/19/2006 to 6/13/2006)
Fsutx, first trade
Pendergast Mdd = -0.45%
Brown Mdd = -9.5% (from 10/3/2005 to 10/20/2005)
My Mdd may be off slightly as my Moa is slightly different from his (daily instead of weekly), but I believe his Mdds to be incorrect as one does have to suffer through daily Mdds. Further, I don’t understand how an Mdd can ever be “none” for any equity mutual fund. There is inevitably a down price over even short trading periods.
A small complaint is that Pendergast didn’t give the exact trading dates so it was difficult to replicate his results, and that there was no April 6, 2007, trading day (I used April 5, 2007). Hopefully I am not overlooking something in my analysis.
—Norman J. Brown
Donald Pendergast replies:
First off, thanks for reading the article; I am pleased that you found it to be interesting and informative. The drawdown figure is the maximum drawdown from the initial entry price. Here’s an example: Fnarx trade 2: Date in: May 19, 2003 at 9.905. The lowest price subsequent to entry was 9.8623 on July 16, 2003, a drawdown of approximately 0.433%.
Also, regarding Mdds; am I correct to assume you mean “peak to valley maximum drawdown”? I deal with an aspect of that statistic in the article as well, comparing the maximum amount of profit attained by the fund with the actual closed out gain/loss%. Many funds, like the wireless sector fund, gave back a great deal of their open profits, which is why I used that particular ratio (AverageMaxProfit/ AverageTrade) to alert traders that taking early or partial profits may be beneficial, depending on their personal temperaments.
Another Key
Editor,
I found Donald Pendergast’s article in the November 2008 issue of S&C very interesting. Could I find out the formula of the Ema 10/40 trading system and the software used?
—Ugo Sabadini, Italy
Donald Pendergast replies:
The formula is in the article: Buy on the first daily close after a weekly 10-40- Ema cross to the upside. Sell on the first daily close after a weekly 10-40 Ema cross to the downside. Here’s the MetaStock code for the 10-40 Ema crosses only:
ENTRY Signal:
Cross( Mov( C,10,E), Mov( C,40,E))
EXIT Signal:
Cross(Mov(C,40,E),Mov(C,10,E))
Kondratieff Waves
Editor,
I read the recent article by Koos van der Merwe, “My Kondratieff Wave” (November 2008, Stocks & Commodities), and found it most interesting. I noticed the Elliott wave chart of the Standard & Poor’s 500 projects the C wave down to about 800. The author also indicated that a failure of this level, which roughly corresponds to the 2003 lows, would suggest a high probability of a depression-like scenario developing. I believe that to be correct as well.
In the last couple weeks, no doubt some time after your article was written, we tested the 840 level twice on the S&P 500, and it has held and bounced from there.
I am curious to read your present ideas on whether you see a probability that the C wave is complete and if so, would you consider that a new cycle will begin. What is your expectation after the C wave completes?
—C. Douglas Walters
Koos van der Merwe replies:
A wave C can fall in a five-wave impulse pattern, or a three-wave Abc pattern, the latter usually if the wave B is above the wave 5, which is the case with the monthly S&P 500 chart. According the S&P 500 chart, therefore, the C wave could well be a flat — that is, it won’t fall much lower.
However, the count for the Dow Jones Industrial Average (Djia) suggests a different picture. The C wave has only completed a wave A down, suggesting a wave B up before a final wave C down. Either way, I am expecting a move up between now and April–May, then a further down into October 2009, hopefully the bottom of the C wave. I only see the end to the recession in 2011–12, that end being the low of a wave 2 in a new bull market. In other words, from October 2009, the S&P will rise in a wave I, then fall back in a wave II by October 2010–11. I do not believe there will be a depression. The S&P 500 wave count does not see that.
Do remember that my forecast can change on a dime. Political and other events will change it. Hope this helps.
More Waves
Editor,
I read the article “My Kondratieff Wave” in the November 2008 issue of Stocks & Commodities, and I have to ask: How can you say we’re through with winter, and that winter and spring were only three years and we’re already into summer? It seems like we’re still squarely in winter with deflation and debt still needing to be washed out of the system. It’s the shortest spring and winter on record. How do you make that determination?
—James Davies
Koos van der Merwe replies:
My Elliott wave count shows that the major C wave is bottoming over the coming weeks, probably as President Barack Obama settles in. This means that the bear market will be over, because the C wave is followed by a wave 1 up. However, this does not mean that the recession is over, because a wave 2 can be a 72% retracement of wave 1. The wave 2 bottom could be, and I believe it will be, only in October 2009, which is when the recession low will occur. It will take another six months after that low before the “experts” on Cnbc announce that the recession is over. I am not an economist. I am a chartist, and I read my charts. This is what they are telling me.