Technical Analysis: Power Tools for Active Investors

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Unlike most technical analysis books, Gerald Appel's Practical Power Tools! offers step-by-step instructions virtually any investor can use to achieve breakthrough success in the market. Appel illuminates a wide range of strategies and timing models, demystifying even advanced technical analysis.

Q: "How do you make the study of technical analysis more practical for your students?"

A practical guide- This is simply the most practical, step-by-step guide to profiting from technical analysis.  Students can learn the best tools for making money and cutting losses.  These instructios are simple, specific, and focused on actual strategies.

Q:  "What kind of models do you present in your technical analysis classes?"

 Resourceful and useful models- Apple illuminates a wide range of stratefies and timing models.  Amonst the models he covers are NASDAQ/NYSE Relative Strength, 3-5 Year Treasury Notes, Triple Momentum, Seasonality, Breadth-Thrust Impulse, and models based on revolutionary MACD techniques.

Q:  "How do you offer your students a more in-depth look at techniques in technical analysis?"

 Techniques for all technical analysts- Apple covers many techniques for short, intermediate, and long-term investors.  Many of these techniques have never before been published!  He covers momentum and trend of price movement, time and calendar cycles, predictive chart patterns, relative strength, analysis of internal vs. external markets, market breadth, moving averages, trading channels, overbought/oversold indicators, Trin, VIX, major term buy signals, major term sell signals, moving average trading channels, stock market synergy, and much more.

 

Q:  "How important is real-world experience in investments, trading, and analysis?"

From an expert- Gerald Appel has over 30 years of technical analysis experience and is the leader in technical analysis publications.  He is legendary for his experience in technical analysis and market timing, including the creation of MACD (Moving Average Convergence/Divergence), used for models presented in this new text.  Appel shares his observations in each chapter, illuminating what his real-world experience has taught him.

 

Q:  "How do you demonstrate how theories in market analysis can be put to use?"

Concepts into action- This text offers a complete course in forecasting future market behavior through cyclical, trend, momentum, and volume signals.  This practical, hands-on, and detailed text shows exactly how those methods are used to help technical analysts achieve breakthrough success in the market and make a profit!

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Description

• Copyright 2005
• Edition: 1st

• Book
• ISBN-10: 0-13-147902-4
• ISBN-13: 978-0-13-147902-9

Unlike most technical analysis books, Gerald Appel's Practical Power Tools! offers step-by-step instructions virtually any investor can use to achieve breakthrough success in the market. Appel illuminates a wide range of strategies and timing models, demystifying even advanced technical analysis the first time. Among the models he covers: NASDAQ/NYSE Relative Strength, 3-5 Year Treasury Notes, Triple Momentum, Seasonality, Breadth-Thrust Impulse, and models based on the revolutionary MACD techniques he personally invented. Appel covers momentum and trend of price movement, time and calendar cycles, predictive chart patterns, relative strength, analysis of internal vs. external markets, market breadth, moving averages, trading channels, overbought/oversold indicators, Trin, VIX, major term buy signals, major term sell signals, moving average trading channels, stock market synergy, and much more. He presents techniques for short-, intermediate-, and long-term investors, and even for mutual fund investors.

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Sample Content

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The No-Frills Investment Strategy

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Table of Contents

Foreword.

Acknowledgments.

Introduction.

The No-Frills Investment Strategy.

Picking the Right Investment Vehicles.

      Risk: Reward Comparisons Between More Volatile and Less Volatile Equity Mutual Fund Portfolios

      Gain/Pain Ratios

      Drawdown: The Measure of Ultimate Risk

      The End Result: Less Is More

      Changing Your Bets While the Race Is Still Underway

      Relative Strength Investing

    Testing the Relative Strength Investment Strategy: A 14-Year Performance Record of Relative Strength Investing

     Results of Quarterly Reranking and Quarterly Rebalancing (1990-2003)

      Buy-and-Hold Results: The Standard & Poor's 500 Benchmark

      Increasing the Risk: Maintaining a Portfolio of Somewhat More Aggressive Mutual Funds

      Observations

      Upping the Ante: The Effects of Applying the Concepts of       Relative Strength Selection to a Still More Volatile Portfolio of Mutual Funds

      General Observations

      A Quick Review of Relative Strength Investing

      Summing Up

Two Quick-and-Dirty Stock Market Mood Indicators.

    Identifying High- and Low-Risk Investment Climates

    The Nasdaq/New York Stock Exchange Index Relative Strength Indicator

    The Maintenance and Interpretation of the Nasdaq/NYSE Index Relative Strength Indicator

    Observations

    Measuring the Market Mood with the Intermediate Monetary Filter

    The Monetary Model

    The Ingredients

    The Calculation and Rules of the Intermediate Monetary Filter

    Observations

    Combining the Two Indicators

    Point and Counterpoint

    Observations

    A Final Long-Term Statistic

    Summing Up

Moving Averages and Rates of Change: Tracking Trend and Momentum.

    The Purpose of Moving Averages

    The Intermediate-Term Moving Average

    The Long-Term 200-Day Moving Average

    Using Weekly-Based Longer-Term Moving Averages

    Moving Averages and Very Long-Term Moving Averages

    Moving Averages: Myths and Misconceptions

    Using Moving Averages to Identify the Four Stages of the Market Cycle

    Stage 1

    Patterns of Moving Averages During Stage 1

    Stage 2

    Patterns of Moving Averages During Stage 2 Advances

    Stage 3

    Patterns of Moving Averages During Stage 3 Distribution Periods

    Stage 4

    The Rate of Change Indicator: How to Measure and Analyze the Momentum of the Stock Market

    The Concept and Maintenance of the Rate of Change Indicator

    Constructing Rate of Change Measurements

    Bull Market and Bear Market Rate of Change Patterns

    Adjusting Overbought and Oversold Rate of Change Levels for Market Trend

    Looking Deeper into Levels of the Rate of Change Indicator

    The Triple Momentum Nasdaq Index Trading Model

    Maintenance Procedure

    Notes Regarding Research Structure

    Rate of Change Patterns and the Four Stages of the Stock Market Cycle

More Than Just Pretty Pictures: Power Tool Chart Patterns.

    The Concept of Synergy

    Powerful Chart Formations

    Example 1

    Example 2

    Example 3

    The Wedge Formation: Times to Accumulate and Times to Distribute Stocks

    The Wedge Formation

    Declining Wedge Formations

    Appropriate Strategies

    Synergy in Chart Patterns

    Head and Shoulder Formations

    Using the Head and Shoulder Formation to Establish Downside Price Objectives

    At Market Bottoms, the Inverse Head and Shoulder Formation

    Confirmation by Measures of Market Momentum

    Volume Spikes Are Very Bullish If the Stock Market Has Been in Decline

    The Selling Climax

    Support and Resistance Levels

    Support Zones

    Support Zones

    Resistance Zones

    Example: The 1999-2003 Stock Market Climate (Chart 4.4)

    Market Downtrends

    Major Trend Synergy in Action

    Tricks with Trendlines

    Inverse Trendline Support and Resistance Zones

    Channel Support and Resistance

    Early Warnings Provided by Channel Patterns

    Extended Channel Support

    Rising Resistance Zones

    False Breakouts and Breakdowns: Key Market Patterns

    A Significant Sell Signal

    A Significant Buy Signal

    The Key

Political, Seasonal, and Time Cycles: Riding the Tides of Market Wave Movements.

    Calendar-Based Cycles in the Stock Market

    Days of the Month

    Pre-Holiday Pattern

    The Best and Worst Months of the Year

    The Best Six-Month Period, the Worst Six-Month Period

    Evaluating the Tabulations

    The Presidential Stock Market Cycle

    Comments

    Time Cycles: Four Days to Four Years

    Example of Market Cycles: The 53-Day Market Cycle

    Segments of Market Cycles

    The Significance of Segmentation

    Distinguishing Bullish Cyclical Patterns from Bearish Patterns

    Lest We Forget the Concept of Synergy...

    Lengths of Market Cycles

    The Very Significant and Regular Four-Year Market Cycle

    An Intermediate Market Cycle with a Confirming Indicator

    How the Confirming Indicator Helps the Cause

    The August-September Cycle

    The October-November Cycle

    The November to Early January Market Cycle

    The January-March Cycle

      The 18-Month Market Cycle with a Rate of Change Confirming Indicator

      Synergy Between Rates of Change and Cyclical Patterns

      Enter the Rate of Change Indicator

      For Future Readers of This Work

      Day Trading with Short-Term Cycles

      T-Formation: The Ultimate Cyclical Power Tool?

      The Construction of T-Formations

      Area 1

      Area 2

      Area 3

      Area 4

      Further Examples of T-Formations, Including the Application of Synergy

      T-Formations and Mirror Patterns of Stock Movement

      T-Formations and Longer-Term Time Periods

      Supplemental Indicators

      One Final Set of T-Formations

      In Summary

      Seasonal and Calendar Influences on the Stock Market

      Time Cycles

      T-Formations

Bottom Fishing, Top Spotting, Staying the Course: Power Tools That Combine Momentum Oscillators with Market Breadth Measurements for Improved Market Timing.

      A Quick Review of Where We Have Been

      The "Internal" as Opposed to the "External" Stock Market

      Measures of Market Breadth

    New Highs and New Lows

    New High/New Low Confirmations of Price Trends in the Stock Market

    Positive and Negative Confirmations, 1995-2004

    New Lows at a Developing Stock Market Bottom

    Creating a New High/New Low Indicator to Keep You in the Stock Market When the Odds Heavily Favor the Stock Market Investor

    Method of Interpretation

    The Application of the New High/(New Highs + New Lows) Indicator to the Nasdaq Composite

    Pre-Bear Market Comparisons

      The New York Stock Exchange Advance-Decline Line

      Relating to Advance-Decline Breadth Data

      General Observations

      Chart 6.4: The Advance-Decline Line Between 2002 and 2004

      The 21-Day Rate of Change of the Advance-Decline Line

    Overbought Levels

    Oversold Levels

      Breadth Patterns at Bull Market Highs 1997-2000: A Period of Breadth Transition

      A Change in Tone

      A Major Negative Breadth Divergence Followed

      Using a Somewhat More Sensitive Rate of Change Measure of the Advance-Decline Line

      The Ten-Day Rate of Change Indicator

      The Weekly Impulse Continuation Signal

      But First, an Introduction to the Exponential Moving Average

      The Smoothing Constant of Exponential Averages

      Example 1

      Example 2

      Example 3

      Stabilizing the Exponential Average

      Some Special Qualities of Exponential Moving Averages

      The Weekly Impulse Signal

The Required Items of Data Each Week

      Buy and Sell Signals

      General Concept of the Weekly Breadth Impulse Signal

      Final Comments

      The Daily-Based Breadth Impulse Signal

      The Construction and Maintenance of the Daily-Based Breadth Impulse Signal

      The Performance Record of the Daily Breadth Impulse Signal

      The Application of the Daily-Based Breadth Impulse Signal to Trading the Nasdaq Composite Index

      Caveat

Volume Extremes, Volatility, and VIX: Recognizing Climactic Levels and Buying Opportunities at Market Low Points.

      Market Tops: Calm Before the Storm; Market Bottoms: Storm Before the Calm

      TRIN: An All-Purpose Market Mood Indicator

      The Data Required to Compute TRIN

      Calculating TRIN

      Interpreting TRIN Levels

      TRIN as a Bottom Finding Tool

      The Volatility Index (VIX) and Significant Stock Market Buying Zones

      The Volatility Index

      Theoretical Pricing of Options

      Implied Volatility

      Ranges of VIX

      Bullish Vibes from VIX

      Summing Up

      The Major Reversal Volatility Model

      Calculating the Major Reversal Volatility Model

      Major Market-Reversal Buy Signals

    The 1970-1979 Decade

    The 1979-1989 Decade

    The 1989-1999 Decade

    Post-1999: Mixed Results

      The Ideal Scenario

Advanced Moving Average Convergence-Divergence (MACD): The Ultimate Market Timing Indicator?

      Scope of Discussion

      The Basic Construction of the Moving Average Convergence-Divergence Indicator

      Basic Concepts

      Trend Confirmation

      The Signal Line

      Very Important Supplementary Buy and Sell Rules

      Rationale for Supplementary Rules

      Using Divergences to Recognize the Most Reliable Signals

      Additional Examples

      Improving MACD Signals by Using Different MACD Combinations for Buying and Selling

      Two MACD Combinations Are Often Better Than One

      MACD During Strong Market Uptrends

      MACD During Market Downtrends

      Modifying MACD Rules to Secure the Most from Strong Market Advances

    Reviewing Chart 8.9

    Market Entry Supported by Positive Divergence

    Moving Averages, MACD Patterns Confirm Advance

    Initial Sell Signal Not Reinforced by Any Negative Divergence

    Secondary Sell Signal Confirmed by Negative Divergence

    Use Moving Average as Back-Up Stop Signal

      The Stop-Loss When Trades Prove Unsuccessful

      Synergy: MACD Confirmed by Other Technical Tools

      MACD Patterns Confirmed by Cyclical Studies

      When the MACD Does Not Provide the Most Timely Signals

      Money Management with the MACD (and Other Indicators)

      An MACD Configuration That Suggests More Active Selling

      MACD Through the Years: Long Term, Short Term, and Intraday

      The Start of a Bull Market

      An Example of the MACD Stop-Loss Signal in Action

      MACD Employed for Day-Trading Purposes

      MACD and Major Market Trends

      The Amazing Ability of the MACD to Identify Significant Market Low Points Following Severe Stock Market Declines

      MACD Patterns and Significant Market Bottoms

      Initial Rally at Start of Year

      Brief Decline and Well-Timed Market Re-Entry

      Rally and Topping Formation

      Waterfall Decline, and Then Bottoming Process

      Final Shakeout and Recovery

      MACD and the Four Stages of the Market Cycle

      Reviewing Rules and Procedures Associated with the MACD Indicator

      Creating and Maintaining Your MACD Indicator

      Buy Signals

      Prerequisite

      Sell Signals

      Converting the Daily Breadth Thrust Model into an Intermediate Entry

      Buy Signals

      Sell Signals

      Providing That...

      Summary of Results

      MACD Filtered Breadth Thrust Applied to the Nasdaq Composite Index

Moving Average Trading Channels: Using Yesterday's Action to Call Tomorrow's Turns.

    The Basic Ingredients of the Moving Average Trading Channel

    Creating the Channel

    What Length of Offset Should Be Used?

    Moving Average Trading Channels in Operation

    Area A: The Chart Opens with a Market Downtrend

    Area B: The First Recovery Rally

    Area X: The Technical Picture Improves

    Area D: The Upper Trading Band Is Reached

    Area E: Prices Retrace to the Center Channel

    Area F: Improving Market Momentum Confirmed

    Bullish Indications

    Area G: The Center Line of the Moving Average Trading Channel

    Area H: Warning Signs

    Area I to J: One Final Attempt That Fails

    The Basic Concept

    The Evolution of Phases Within the Moving Average Trading Channel

    A Classic Topping Formation to End a Major Bull Market

    Chart 9.2: The Ingredients

    January 2000: The Bull Market in Nasdaq Moves Along Steadily

    Area E: The Fun and Games of the Bull Market Come to an End

    Area F: Trend Reversal Is Confirmed and Completed

    The Development of a Bottom Formation

    Moving Average Channels and the Major Trend

    1996-1998: Strong Bullish Upthrust

    The First Correction Stops at the Center Channel Line

    Resurgence of Market Advance

    Technical Warnings Develop

    The Top Formation Moves Along

    Major Downtrend Gets Seriously Underway

    Patterns Suggest a Phasing-Out of Long Positions

    Significant Downturn Is Confirmed

    How to Construct a Price/Moving Average Differential Oscillator

    A Review of the Key Rules Associated with Moving Average Trading Band Trading

Putting It All Together: Organizing Your Market Strategies.

    The First Step: Define the Major Trend and Major Term Cycles of the Stock Market

    The Second Step: Check Out Market Mood Indicators and Seasonal Cycles

    The Third Step: Establish the Direction and Strength of the Current Intermediate Trend and Try to Project the Time and Place of the Next Intermediate-Term Reversal Area

    The Fourth Step: Fine-Tune Your Intermediate-Term Studies with Studies Based on Shorter-Term Daily-or Even Hourly-Market Readings

    Remember Our Favorite Mutual Fund Selection Strategy!

    Lessons I Have Learned During 40 Years as a Trader

    Recommended Reading and Resources

    Charting Resources

    Sources for Research

    Books Relating to Technical Analysis

    Investment Newsletters

Index.

Foreword

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Index

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Introduction

This book, Technical Analysis , is meant for every investor who has been hurt trusting his brokerage firm, trusting his friendly mutual fund manager, or trusting the latest hot guru. It is meant for every investor who has ever wished for the skills required to deal with an increasingly volatile and uncertain stock market. It is meant for every investor willing to take responsibility for the outcome of his own investments. It is meant for every investor ready to take at least some of the time and to put forth at least some of the effort required for the quest.

The stock market tends to condition investors to make the wrong decisions at the wrong times. For instance, the stock market explosion of the late 1920s convinced investors that the only path for stocks was up, and that the prospects of stocks rising indefinitely justified even the high levels of margin leverage that could be employed at the time.

Investors plowed in, the stock market collapsed, and, thereafter, the public remained fearful of stocks for 20 years, although the stock market actually reached its lows during 1931 and 1932. In the mid-1990s, the Standard & Poor's 500 Index was king and index mutual funds were the royal coach. Between 1996 and 1998, huge inflows of capital were injected into Standard & Poor's 500–based index mutual funds, such as those sponsored by Vanguard. The largest inflows took place just before a serious intermediate market decline in mid-1998. The market advance that followed that decline was headed not by the Standard & Poor's 500 sector of the stock market, but by speculative areas of the Nasdaq Composite: technology sectors (Internet issues and the like) that, in some cases, sold for hundreds of dollars per share, even though many companies had no earnings whatsoever. And then came the crash, in March of 2000. The Nasdaq Composite ultimately declined by more than 77%.

So, investors returned to the sanctity of total return, value, earnings, and dividends, not the worst strategy during the bear market that took place between 2000 and 2002, but definitely not the best of strategies when the new bull market more clearly emerged during the spring of 2003. The play returned to technology and the Internet, with growth back in and total return back out. (During the first nine months of 2004, however, technology issues once again lost market leadership to value- and income-oriented market sectors.)

The point, of course, is that the typical investor follows and does not lead trends, is late rather than early, and is a crowd-follower rather than a self-director. According to Dalbar, Inc., a financial services research firm, the average equity fund investor realized an annualized return of 5.32% between 1984 and 2000, while the Standard & Poor's 500 Index rose at a rate of 16.3% per annum. Matters become even worse when comparisons are updated through July 2003. The average investor was ahead by only 2.6% per year for the 1984–2003 period, compared to annualized returns of 12.2% for the Standard & Poor's 500 Index.

This book has been prepared to help investors achieve better than average performance—considerably better, we believe.

The structure of Technical Analysis has been designed to provide information and investment tools, some of which can be put to work immediately, by both sophisticated and relatively unsophisticated stock market investors. I will share with you, right at the start, my favorite techniques for picking mutual funds and ETFs (securities that trade on the stock exchange and act similarly to market index mutual funds but provide greater investment flexibility at lower ongoing internal management fees, though, possibly, with some initial commission expense, which is often involved with mutual funds as well).

We move from there to some of the basic tools stock market technicians use to track and predict market behavior. A certain amount of statistical calculations is required in applying some of the "practical power tools" you will be learning—nothing truly complex. I have placed a strong emphasis on the "practical" in "practical power tools." The KISS (Keep It Simple, Stupid) principle is observed throughout the book—at least, to the best of my ability.

For example, in Chapter 1, "The No-Frills Investment Strategy," I show you two indicators that, together, should require no more than five or ten minutes for you to post and maintain each week—that's right, each week, not each day. These have a fine history of helping investors discriminate between favorable and unfavorable market climates. Nothing in the stock market can ever be guaranteed for the future, of course, but you will see how powerful these two simple indicators have been during more than three decades of stock market history in supplementing your selections for market investment with straightforward but surprisingly effective market-timing strategies.

Even if you go no further, you will have already acquired a useful arsenal of tools for improved investment results. By this time, you might well have become ready for additional, more involved technical tools that I have found over the decades to be more than useful in my own investment decisions. These include, for example, T-formations, special time-based patterns of market movement that frequently provide advance notice of when market turning points are likely to occur. In a subsequent chapter, you learn about the application of moving average trading channels, a technique for employing certain patterns of past market behavior to predict likely patterns for the future.

Finally, you get my personal take on Moving Average Convergence-Divergence (MACD), an indicator that I invented in the late 1970s and, since then, has become one of the most widely followed of market-forecasting tools employed by technical analysts, private and professional. You will learn how to maintain the MACD indicator and how to interpret it for time frames ranging from 15 minutes (for day trading) to many years (for long-term investing).

Each of these indicators alone can be quite powerful, particularly as you develop the facility for combining various elements of your trading strategy for disciplined decision-making, higher returns, and less risk. Synergy helps the cause. I will show you many ways to achieve this synergy.

All in all, Technical Analysis is about the best stock-market timing tools that I have learned in nearly 40 years of studying, trading in, and writing about the stock market. These are real tools, practical tools, tools that my staff and I employ every day in tracking the stock market and investing our own and our clients' capital. These are tools that you, yourself, can begin to employ almost immediately.

There will be some additional interesting side trips and excursions along the way, but I think that we will conclude the description of our itinerary at this point. The time has come to begin the journey....

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