IFTA CFTe Syllabus

Certified
Financial Technician (CFTe) I & II Syllabus & Reading Material

(For exams taken from 1 October, 2014 onward)
Certified Financial Technician (CFTe)
Syllabus for CFTe Level I & Level II

Document Change History

Revision Date
22 August 2014
25 June 2014
29 May 2014
20 May 2014
Summary of Changes
Page 17. Corrected the chapter numbers (3-5) on reading material for V. Jeremy Du Plessis:
The Definitive Guide to Point and Figure
Page 87. Added Appendix D: Point and Figure Techniques (IFTA Required CFTe I Reading
Material)

Page 17. Updated #3: Required additional IFTA reading material (see Appendices)

Page 18. Added to XI. Charles D. Kirkpatrick, Julie R. Dahlquist: Technical Analysis: The
Complete Resource for Financial Markets Technicians: Chapter 9. Temporal Patterns and
Cycles and Chapter 19. Cycles.
Page 10. Updated Outline of Topics Item 21.
Page 17. Added VI. Yukitoshi Higashino, MFTA: Primer on ICHIMOKU (Appendix E) (IFTA
Required CFTe II Reading Material)
Page 17./ Page 18. Moved XII. David Linton: Cloud Charts: Trading Success with the Ichimoku
Technique [Hardcover] from IFTA Required CFTe II Readiing Material (Page 17) to IFTA
Recommended (Additional) CFTe II Reading Material (Page 18)
Page 95. Added Appendix E: VI. Yukitoshi Higashino, MFTA: Primer on ICHIMOKU ) (IFTA
Required CFTe II Reading Material)
11 March 2014
Page 46: Added: Appendix B: Breadth Analysis (IFTA Required CFTe I Reading Material)

Page 20. Added: Appendix A: The Elliott Wave Principle (EWP) (IFTA Required CFTe I
Reading Material)
Last updated: 22.08.14 11:22 AM
Page 1 of 124
Certified Financial Technician (CFTe) I & II Syllabus & Reading Material

Outline of Topics

1
HISTORY OF TECHNICAL ANALYSIS.............................................................................................................3
PHILOSOPHY OF TECHNICAL ANALYSIS AND MARKETS ...........................................................................3
CHART CONSTRUCTION ...............................................................................................................................3
DOW THEORY................................................................................................................................................3
CONCEPTS OF TREND ...................................................................................................................................4
CLASSICAL BAR CHART PATTERNS..............................................................................................................4
SHORT TERM PRICE PATTERNS ...................................................................................................................5
POINT AND FIGURES CHARTING ..................................................................................................................5
CANDLE STICK CHARTING ............................................................................................................................6
10
ICHIMOKU CHARTS.......................................................................................................................................6
11
OTHER CHARTING METHODS ......................................................................................................................6
12
MARKET PROFILE..........................................................................................................................................6
13
ELLIOTT WAVE THEORY ...............................................................................................................................7
14
BASIC ELEMENTS OF GANN THEORY ..........................................................................................................7
15
BASIC QUANTITATIVE TECHNIQUES............................................................................................................7
16
MOVING AVERAGES......................................................................................................................................8
17
OSCILLATORS AND CONTRARY OPINION ...................................................................................................8
18
RELATIVE STRENGTH ....................................................................................................................................8
19
TIME CYCLES .................................................................................................................................................9
20
VOLUME AND STOCK MARKET INDICATORS..............................................................................................9
21
OTHER TECHNICAL IDEAS .......................................................................................................................... 10
22
TECHNICAL SYSTEMS ................................................................................................................................. 10
23
ACADEMIC FINDINGS ON TA ...................................................................................................................... 10
24
SENTIMENT AND CONTRARY OPINION..................................................................................................... 10
25
BEHAVIORAL FINANCE & INVESTMENT PSYCHOLOGY ............................................................................. 11
26
ETHICS .......................................................................................................................................................... 11
Page 2 of 124

Outline of Topics (continued)
1
History of Technical Analysis
Early days: Dow, Schabaker, Wykoff
Major Publications
Philosophy of Technical Analysis and Markets
Technical versus Fundamental Forecasting
Technical Approach to Trading and Investing
What is a trend and how are they identified?
Supply and Demand
Assumptions of Technical Analysis
Random Walk Theory, Fat Tails, Proportion of Scale
Market Efficiency, Prediction of the Future
Criticism of Technical Analysis
Financial Markets and the Business Cycles
Chart Construction
Types of Charts: Line, Bar, Candle, Point and Figures
Construction of Charts
Arithmetic or Logarithmic Scale
Volume, Open Interest
Time Frame
Dow Theory
Basic Ideas
Closing Prices and Lines
Primary Trend, Secondary Trend, Minor Trend
Concept of Confirmation
Importance of Volume
The Dow Theorys Defects

Page 3 of 124


5
Concepts of Trend
Definition of Trend
Directions of Trend
Support and Resistance
Trendlines and Channels
Major Trendlines
Fan Principles
Strength of a trend
Percentage Retracements
Consolidations and Corrections
Breakouts
Speed Lines
Unconventional Trendlines
Internal Trendlines
Regression
How does psychology impact trends
Classical Bar Chart Patterns
Basics
Psychology and Patterns
Reversal and Continuation Patterns
Patterns and Volume
Patterns and Price Objectives / measured moves
Head and Shoulder Patterns (normal and reversed)
Double Tops and Bottoms
Triple Tops and Bottoms
Rounding tops and bottoms
Saucers and Spikes
Triangles (symmetrical, ascending, descending)
Diamond Tops
Page 4 of 124


Broadening Formation
Flags and Pennants
Wedge Formation
Rectangle Formation
Gaps
Short Term Price Patterns
Basics and Pattern construction
Gaps
Spike (wide range bar, low range bar)
Dead cat bounce
Island reversal
Reversal Days Run Days
Thrust Days
Two-bar or three-bar patterns
Point and Figures Charting
Basics
Chart Construction: Time and Volume Omitted
Box Count
Box Size and Reversal Filter
Price Patterns: Breakouts, Double Tops, Triple Tops
Support and Resistance
Trendlines
Measuring Techniques and Price Objectives
Point and Figures and Relative Strength
Point and Figures and other Technical Indicators

Page 5 of 124

9
Candle Stick Charting
Basics
Chart Construction
Bullish Reversal Patterns (i.e. Hammer, Engulfing Patterns, Harami ...)
Bearish Reversal Patterns (i.e. Hanging Man, Engulfing Pattern, Dark Cloud pattern ...)
Bullish Continuation Patters (i.e. separating Lines, upside Tasuki gap, ...)
Bearish Continuation Patterns (i.e. separating line, three line strike ...)
Candle Patterns and Filters

10
Ichimoku Charts
Basics
Chart and Cloud Construction
Turning Line
Standard Line
Span 1
Span 2
Lagging Line
Interpretation of clouds

11
12
Other Charting Methods (Kagai Charts, Renko Charts and Three Line Break Charts are included in the
CFTe Level II reading material section. The rest of the reading material in this section will be added later.)
Equivolume
Swing charts
Kagi Charts
Renko Charts
Three Line Break Charts
Heikin Ashi Charts
Drummond Geometry
Market Profile
Basics, Construction and graphics
Market Profile organizing Principles
Page 6 of 124


Range Development and Profile Patterns: Normal day, Trend day, neutral day, non trend day,
double distribution day
TPO
Point of Control
Value Area

13
Elliott Wave Theory
Basics and History
Principles of Wave Counting
Corrective Waves
Rule of Alternation
Channelling
Wave 4
Fibonacci Numbers, Ratios and Retracements
Fibonacci Time Targets

14
Basic Elements of Gann Theory (reading material to be added later)
Basics and History
Gann Fan Lines
Fibonacci numbers and Gann lines
Gann Two-Day Swing Method

15
Basic Quantitative Techniques (reading material to be added later)
Mean, Variance, Skewness
Frequency and Probability
Basic Time Series Concepts
Random Walk Theory
Yield Math Concepts
Time Value of Money / Present Value Concept
Compounding
Page 7 of 124

Performance Measurement
Test procedures

16
Moving Averages
Different Types of Moving Averages (Simple, Weighted, Exponential, Geometric, Triangular ...)
Moving Average Envelopes
Moving Average crossovers
Bollinger Bands
Bollinger Bands and Bandwidth
Moving Averages and Cycles
Estimating the Length of a Moving Average
Adaptive Moving Average

17
Oscillators and Contrary Opinion
Principles of Oscillation
Oscillator usage and Trend
Measuring Momentum
Rate of Change
Double Moving Averages
Commodity Channel Index
Relative Strength Index
Stochastics
Williams %R
Directional Movement Indicator
Parabolics
Moving Average Convergence/Divergence (indicator and histogram)

18
Relative Strength
Basics
Ratios, Spreads, Rankings,
Relative Strength Levy
Page 8 of 124

Comparative Relative Strength
Relative Performance
How to Interpret Relative Strength Charts

19
Time Cycles
Basics
Cycle Concept
Amplitude, Length, Phase, Harmonicity, Synchronicity
Detrending
Dominant Cycles
Cycles and Trends
Left and Right Translation
How to Estimate Cycles
Seasonalities
Stock Market Cycles
Fourier Analysis
Maximum Entrophy Spectral Analysis

20
Volume and Stock Market Indicators
Measuring Volume and Open Interest
Volume and Chart Patterns
Volume Signals
On Balance Volume
Volume Accumulator
Measuring Market Breadth
Comparing Market Averages
Advance-Decline Line and Divergence
Different Time frames
McClellan Oscillator
New Highs Versus New Lows
Upside versus Downside Volume
Page 9 of 124

Arms Index
TRIN and TICK
Equivolume Charting

21
Other technical Ideas (*reading material to be added later)
CoT Data Filtering*
Trend indicators
Volatility Indicators
Range / Momentum Indicators
Cyclical Indicators
Hurst Exponent*
DeMark Indicators = fixed Pattern systems

22
Technical Systems
Construction
Typical elements
Proper testing
Evaluation
Optimisation
Typical systems

23
Academic findings on TA
Testing procedures
Testing objectives
Efficient Market Hypotheses

24
Sentiment and Contrary Opinion
Principle of contrarian Opinion
Crowd Behaviour and the Concept of Contrary Opinion
Investor Sentiment readings
Investor Intelligence Numbers
Page 10 of 124

Commitments of Trades Report
Net Traders Positions
Open Interest in Options
Put/Call Ratios
Polls
Insiders
Investors Psychology Individual and Group

25
Behavioural Finance & Investment psychology (reading material to be added later)
Prospect Theory
Typical Behavioural Effects
Single Investors Behaviour

26
Ethic (reading material to be added later)
Page 11 of 124

CFTe Level I
Reading Material

CORE READING MATERIAL:

I. Edwards, Robert D. and Magee, John, Technical Analysis of Stock Trends, 9th (or current) Edition (2001-2008),
John Magee Inc., Chicago Illinois 2001, ISBN 1-57444-292-9

Chapters:

1. The Technical Approach to Trading and Investing
2. Charts
3. The Dow Theory
4. The Dow Theory in Practice
5. The Dow Theorys Defects
6. Important Reversal Patterns
7. Important Reversal Patterns Continued
8. Important Reversal Patterns The Triangles
9. Important Reversal Patterns Continued
10. Other Reversal Phenomena
11. Consolidation Formations
12. Gaps
13. Support and Resistance
14. Trendlines and Channels
15. Major Trendlines
16. Technical Analysis of Commodity Charts
17. A Summary of Some Concluding Comments
17.2 Advancements in Investment Technology
18. The Tactical Problem
18.1 Strategies and Tactics for the Long-Term Investor
20. The Kind of Stocks we Want: The Speculators View Point
20.1 The Kind of Stocks we Want: The Long-Term Investors View Point
23. Choosing and Managing High-Risk Stocks: Tulip Stocks, Internet Sector and Speculative Frenzies
24. The Probable Moves of Your Stocks
25. Two Touchy Questions
27. Stop Orders
28. What is a Bottom - What is a Top?
29. Trendlines in Action
30. Use of Support and Resistance
Page 12 of 124

CFTe Level I (Continued)
Reading Material

33. Tactical Review of Chart Action
34. A Quick Summation of Tactical Methods
36. Automated Trendlines: The Moving Average
38. Balanced and Diversified
39. Trial and Error
40. How Much Capital to Use in Trading
41. Application of Capital in Practice
42. Portfolio Risk Management
43. Stick to Your Guns

II. Murphy, John J.: Technical Analysis of the Financial Markets, New York Institute of Finance, New York, NY,
1999, ISBN 0-7352-0066-1

Chapters:

1. Philosophy of Technical Analysis
2. Dow Theory
3. Chart Construction
4. Basic Concepts of Trend
7. Volume and Open Interest
14. Time Cycles
III. Pring, Martin J.: Technical Analysis Explained, 4th (or current) Edition, McGraw Hill Book Company, New York,
NY, 2001, ISBN 0-07-138193-7

Chapters:

2. Financial Markets and the Business Cycle
4. Typical Parameters for Intermediate Trends
12. Individual Momentum Indicators II
16. The Concept of Relative Strength
18. Price: The Major Averages
20. Time: Longer-Term Cycles
22. General Principles
26. Sentiment Indicators

Page 13 of 124


Reading Material

IV. Le Beau Charles, Lucas David: Technical Traders Guide to Computer Analysis of the Futures Market

Chapters:

1. System Building
2. Technical Studies
4. Day Trading

V. Nison Steve: Candlestick Charting Techniques, Second Edition

Chapters:

1. Introduction
2. A historical background
3. Constructing the candlestick lines
4. Reversal patterns
5. Stars
6. More Reversal Patterns
7. Continuation Patterns
8. The Magic Doji
9. Putting it all Together

VI. Du Plessis Jeremy: The Definitive Guide to Point and Figure

Chapters:

1. Introduction to Point and Figure Charts
2. Characteristics and Construction
3. Understanding Point and Figure Charts
4. Projecting Price Targets
5. Analysing Point and Figure Charts
Page 14 of 124

Reading Material

Required additional IFTA reading material (see Appendices):

1. Elliott Wave Theory (Appendix A)
2. Breadth Indicators (Appendix B)
3. Time Cycles Analysis (Appendix C: additional reading material to be added. Note: The questions on the
exam for this topic will be pulled from Murphy, John J. recommended reading listed above. )
4. Point and Figure Techniques (Appendix D)

RECOMMEDED (ADDITIONAL) READING:

VII: Elder, Alexander Dr.: Trading for a Living, Psychology, Trading Tactics, Money Management

Chapters:

1. Individual Psychology
2. Mass Psychology
3. Classical Chart Analysis
4. Computerized Technical Analysis
5. The Neglected Essentials
6. Stock Market Indicators
7. Psychological Indicators
10. Risk Management

Page 15 of 124

CFTe Level II
Reading Material

Core Readings

I. Edwards, Robert and Magee, John, Technical Analysis of Stock Trends, 9th Edition

II. Martin J. Pring: Technical Analysis Explained

Chapters:

1. The Market Cycle model
2. Financial Markets and the Business Cycle
16. The concept of Relative Strength
18. Price: The Major Averages
19 Price: Group Rotation
20. Time: Longer-Term Cycles

III. Le Beau Charles, Lucas David: Technical Traders Guide to Computer Analysis of the Futures Market

Chapters:

1. System Building
2. Technical Studies
4. Day Trading

IV. Steve Nison: Beyond Candlesticks: New Japanese Charting Techniques Revealed (Wiley Finance, Nov 10,
1994)

Chapters:

2. The Basics
3. Patterns
4. Candles and the Overall Technical Picture
5. How the Japanese use Moving Averages
6. Three-Line Break Charts
7. Renko Charts
8. Kagi Charts
Page 16 of 124


CFTe Level II (Continued)
Reading Material

V. Jeremy Du Plessis: The Definitive Guide to Point and Figure

Chapters:

1. Introduction to Point and Figure Charts
2. Characteristics and Construction
3. Understanding Point and Figure Charts
4. Projecting Price Targets
5. Analysing Point and Figure Charts

VI. Yukitoshi Higashino, MFTA: Primer on ICHIMOKU (Appendix E)

VII. J. Peter Steidlmayer and Steven B. Hawkins: SteidlMayer On Markets. Trading with Market Profile. Second
Editon

Chapters:

6. Understanding Market Profile
7. Liquidity Data Bank, On Floor information, and Volume @ Time
8. The Steidlmayer Theory of Markets
9. The Steidlmayer Distribution
10. The You
11. Anatomy of a trade
12. Profile of a Successful Trader
13. Trading, Technology, and the Future

VIII. Howard B. Bandy: Quantitative Trading Systems, Practical Methods for Design, Testing, and Validation

IX. Brian Millard: Future Trends from Past Cycles

Chapters:

3. How Prices Move (I)
4. How Prices Move (II)
6. Cycles and the Market
8. Properties of Moving Averages
9. Averages as Proxies for Trends
10. Trend Turning Points (I)
11. Trend Turning Points (II)
Page 17 of 124


12. Trend Turning Points (III)
13. Cycles and Sum of Cycles
14. Bringing it all Together

Reading Material

X. A.J. Frost, Robert R. Prechter: Elliott Wave Principle: Key To Market Behavior

Chapters:

1. The Broad Concept
2. Guidelines of the Wave Formation
3. Historical and Mathematical Background of the Wave Principle
4. Ratio Analysis and Fibonacci Time Sequence.

XI. Charles D. Kirkpatrick, Julie R. Dahlquist: Technical Analysis: The Complete Resource for Financial Markets
Technicians

Chapters:

3. History of Technical Analysis
4. The Technical Analysis Controversy
5. An overview of Markets
7. Sentiment
8. Measuring Market Strength
9. Temporal Patterns and Cycles
10. Flow of Funds
13. Breakouts, Stops, and Retracements
18. Confirmation
19. Cycles
21. Selection of Markets and Issues: Trading and Investing
22. System Testing and Management

Page 18 of 124


Reading Material

RECOMMEDED (ADDITIONAL) READING:

XII. David Linton: Cloud Charts: Trading Success with the Ichimoku Technique [Hardcover]

Chapters:

8 . Cloud Chart Construction
9. Interpreting Cloud Charts
10. Multiple Time Frame Analysis
11. Japanese Patterns Techniques
12. Clouds Charts with other techniques
13. Ichimoku indicator techniques
14. Back-testing and Cloud Trading Strategies
15. Cloud Market Breadth analysis
16. Conclusion

Notice to CFTe II Candidates: IFTA will supply additional reading material for the CFTe II on: Quantitative
Analysis, and Behavioral Finance. This material, along with reading material highlighted above (if applicable),
will be posted in the Appendices by 30 June 2014.
Page 19 of 124


Appendix A

The Elliott Wave Principle (EWP)
(IFTA Required CFTe I Reading Material)

Mohamed ElSaiid, CFTe, MFTA
Egyptian Society of Technical Analysts (ESTA)

Introduction

In this chapter, the Elliott Wave Principle is introduced to the candidate. The general form and essential
concepts of the Elliott Wave structureand role, as well as the psychology and characteristics underlying the
theory. Additionally, the chapter explains the relationship of the Elliott Wave Principle with the Dow Theory and
classical approach in technical analysis.

The chapter is partially designed in study guide format, offering various visual organizers, in an effort to help
the reader connect the related concepts offered in the material and ultimately increasing comprehension of the
basic principles of the EWP.

Part One: The Elliott Wave Principle; historical background and basic tenants

The Elliott Wave Principle (EWP) or Elliott Wave Theory (EWT) is a technical analysis approach developed by
Ralph Nelson Elliott (R.N. Elliott) in the early 1900s that was primarily intended to describe or explain the action
of the market index, namely; the Dow Jones Index (DJI).

Prior to his works and findings on the EWP, R. N. Elliott was an accountant working for railways and a
restaurant. During the early 1930sand while recuperating from a severe illness, he became interested in the
Dow Theory. The various development of market phases as viewed via Dow Theory piqued his interest.
Specifically, he became interested in categorizing the time-frames of the observed market trends.

Through his meticulous research, R. N. Elliott measured the movements in the DJI and identified specific
relationships between these movements later termed as waves. The relations between these waves varied
from a size and time-related one, to a structure and role-related one. With respect to wave-role, R. N. Elliott
contended that there were two types of waves; waves that move in the main trend direction, and waves that
move against the main trend direction. R. N. Elliott organized his observations and findings and developed the
EWP. R.N. Elliott initially introduced the EWP through a publication titled The Wave Principle in 1938. This was
followed by a more detailed book; Natures Laws: The Secret of the Universe in 1946, just before his death in
1948.

Over the years since his death, several followers and pioneering practitioners of the EWP continued to promote
the wave principle by offering publications and newsletters to the investors and the financial community. Of
those followers were, Charles Collins, publisher of the book "Wave Principle", Hamilton Bolton, who was
accredited for introducing the EWP to a wide readership in the mid 1900s, and finally A.J. Frost and Robert R.
Prechter who co-authored Elliott Wave Principle in 1978; a book which is regarded by many EW practitioners
to be the best available description and validation of the EWP to date.

Page 20 of 124

The general form and basic tenants of the Elliott Wave Principle

The Five Wave Pattern
Elliott Wave patterns take the form of five waves of a specific pattern. Three of these waves (labeled 1, 3
and 5), cause the development of the overall directional movement of prices. They are separated by two
interruptions against the trend direction (labeled 2 and 4) which, in turn, cause the fluctuation that is
naturally observed in the price action. In other words, waves 1, 3 and 5 describe the main direction of the
move, while waves two and four are seen as pauses. Each of these five waves play a critical role in the
construction of the waves and the overall description of the movement.

Figure 1: the basic five wave EW Pattern sequence
Page 21 of 124

The Complete EW Cycle
The EWP contends that the progression of the five-wave pattern completes a single wave of a larger degree
which ultimately builds the directional move. Following this progression, a three wave pattern develops to
partially counteract this directional move. These three waves act as an interruption to the progression and
complete the formation of a single EW cycle, consisting of eight waves.
This idealized complete EW cycle, consists of two fundamentally distinct structures or modes. These two modes
are referred to as the motive mode and the corrective mode. In this idealized cycle, the (five-wave) motive
modes are always denoted by the numbers (1, 2, 3, 4 and 5). Meanwhile, the (three-wave)
corrective modes are always denoted by the letters (A, B, C). The concept of wave modes will be later
discussed in details in part three.
Figure 2: the complete idealized eight wave EW cycle
Page 22 of 124

Wave degrees
Initially, R.N. Elliott recognized nine different degrees of waves. They ranged from degrees as small as ripples
on an hourly chart to the largest wave degree he could assume existed from the data that was available to him
at the time. Since, as the theory implies, the degree progression in both directions is infinite, both A.J. Frost and
Robert R. Prechter have suggested six additional wave degrees, of which three were of larger degree than the
initial nine, while the remaining three were of lesser degree. Both Frost and Prechter have been accredited for
standardizing the original labeling scheme, initially added by R.N. Elliott. In addition to that, they have
suggested a general-but-more-detailed framework of the various wave degrees with respect to the range of
span or duration of each degree. This addition, suggested that the most adequate or relevant time-frame chart
for each wave degree would appear visibly. This is deemed as a very important aspect in EWP application, as it
represents common grounds for EW practitioners when applying the EWT in practical life; imagine counting a
wave degree without knowing what the minimum and maximum durations of this wave are, as well as what
time-frame charts to use to chart this wave degree.

Table 1: The initial nine- degree waves of the EWP
Table 1 depicts the nomenclature of the initial nine EW degrees, with each wave degree following a unique
labeling process. The maximum and minimum durations as well as the corresponding proposed time-frame
chart for each wave degree are also offered as guidelines to aid in charting the waves.
The rationale behind the overriding (5-3) structure
Page 23 of 124

It is consistently observed in all price actions that progression in either direction always takes the form of
fluctuations (meaning that there are actions in the opposite direction as part of the entire move). EWP adds
that since a one-wave occurrence does not allow fluctuation (action in the opposite direction), the minimum
requirement for achieving fluctuation is three waves. Three waves in two opposite directions do not allow
progress. Hence, to achieve a net progress or development in one direction over the other (i.e. the interrupting
three waves), the main trend must contain at least a five-wave structure.
Part Two: Wave personality: characteristics and psychology of the E-Waves
Wave personality offers an in-depth focus on the aspect of crowd psychology and behavior of the market
participants. The EWP attempts to offer a framework that enhances our understanding of the market action
and behavior that was initially introduced and discussed in the classical approach of technical analysis.
The personality of each wave in the Elliott Wave sequence plays an integral part in the reflection of the mass
psychology it embodies. As such, EW Analysts assume that each wave has its own mark or "signature" which
generally reflects the psychology of that phase under observation. Thus, understanding how and why the
waves develop is key to the application of the EWP.
The characteristics which will be described are in reference to the idealized form of the EW cycle previously
presented in figure 2.
Characteristics of Wave(s) 1:
Commonly, during the bottom (start) of waves 1, the accompanied news is generally bad, the period
often exhibits the occurrences of recession (during intermediate wave degrees), or even depression
and war (during large wave degrees).

At this point and given that the input information on the current economic situation does not look
good, fundamental analysts continue to lower their earnings estimates.

Quite commonly, waves 1 are formed as a part of the bottoming phase or more generally, during
periods of disbelief and thus, tend to demonstrate deeper corrective movement in wave 2.

Wave 1, the rebound from a preceding bear trend, is constructive and offers a more structured
rebound from undervalued price levels. This move often displays a subtle increase in volume and is
relatively supported by market breadth.

The short interest level peaks as the majority of market participants believe that the overall trend is to
the downside. Investors view the rally as a last chance to sell and get out.

When waves 1 rise from either large bases formed by the previous correction, or from extreme
compression. They appear as dynamic and dramatic, and the result is that only moderate retraced is
seen in wave 2.
Page 24 of 124

Waves 2 act so as to interrupt the progress and the directional move of prices. They tend to heavily
retrace (but not extend beyond) wave 1, especially, since they themselves occur mostly during the
periods of disbelief, prior to the market-up phase.

More often than not, news and fundamentals tend to be worse during the end (bottom) of wave 2
when compared to the beginning (bottom) of wave 1.

Systematically, during wave 2, investors are convinced that the bear market is proceeding once more
following the termination of wave 1, or what they had perceived to be another counter trend rally.

Waves 2 are often associated with downside non-confirmations. This usually takes the shape of a
weakening downside momentum and breadth. Adding to this, waves 2 are often accompanied by
low volume and volatility, indicating a drying up of selling pressure. It is not uncommon for waves 2
to take more time in formation compared to their preceding waves 1.
Waves 3 are strong and broad; the trend at this point is unmistakable. Waves 3 occur and are
confirmed during the start of what the classic approach highlight as the mark-up phase.

Turnaround fundamentals stories begin to flow in the financial arena, causing an investor confidence
re-build.

Waves 3 usually generate the greatest volume and price movement, as they most often extended
beyond their normal limits, with respect to both time and distance.

During waves 3, successful classical pattern-breakouts are commonly observed; multi-continuation
gaps, volume expansions, exceptional breadth (since almost all share prices and market sectors
participate), as well as major Dow Theory trend confirmations and runaway price movement, which
create large gains in the market, depending on the wave degree.

Corrections in waves 3 are usually weak and short-lived as those who bet on buying pull-backs suffer
the likelihood of missing the move.
In principle, the occurrence of wave 4 implies that the best part of the growth phase which was
evident in wave 3 has ended.

Page 25 of 124

More often than not, waves 4 appear as a form of a sideways interruption. They develop as part of
the building of a base for the final fifth wave move. In part, wave 4 is seen as the public
participation phase as termed by the classical approach (Dow Theory).

Lagging stocks build their tops and begin declining during this wave, since only the strength of wave
3 is thought to have pulled them along for the upside participation. This initial deterioration in the
market sets the stage for breadth divergences, non-confirmations and subtle signs of weakness during
the fifth wave.
Specifically, in stocks, waves 5 are always less dynamic than waves 3 in terms of breadth. With the
exception of fifth wave extensions (which will be discussed in part three), they usually display a weaker
momentum as well.

As a general feature, volumes in waves 5 tend to be less when compared to wave 3 volumes.

During advancing waves 5, optimism runs extremely high as further public participation emerges,
despite a narrowing of breadth. Nevertheless, market action does improve relative to prior corrective
wave rallies.

Commonly, during the top (end) of wave 5, the accompanied news is positive, implying that
prosperity and peace are guaranteed forever as arrogant complacency becomes evident in the
financial community and financial news.
Characteristics of Wave(s) A:
During "A" waves of bear markets; the investment world is generally convinced that this reaction is just
a pullback pursuant to the next leg of advance. The public surges to the buy side despite the first valid
technically damaging cracks in trend patterns of individual stocks.

The "A" waves set the tone for the waves that follow. A five-wave A indicates a start of a directional
or trending mode, while a three-wave A indicates that a flat or sideways mode will likely follow.
Characteristics of Wave(s) B:
"B" waves are phonies. They are sucker plays, bull traps, speculators' paradise, orgies of oddlotter
mentality or expressions of dumb institutional complacency (or both).

They are often accompanied by an emotional advance of narrow list of stocks, which would be evident
through non-confirming signs of TA-breadth and momentum indications.

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B waves are often unconfirmed by all/broader market indices and are almost always expected to be
completely retraced by the following wave C.
Characteristics of Wave(s) C:
"C" waves inherit most of the characteristics and properties of third waves in the sense that they are
persistent and broad.

In the case of bearish "C" waves:

o They are usually devastating in their destruction.
o There is virtually no place to hide except cash.
o The false impression that the bull trend is back on track which was held throughout its
preceding waves A and B tend to fade away, as fear and occasionally multiple panic
phases take over.
o Fundamentals ultimately collapse in response of the market action.

In the case of bullish "C" waves:

o They are constructive and often render sizable gains or returns in waves of larger degrees.
o They usually give a fake indication that the bull trend is back to stay.

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Part Three: Aspects and structure of the Elliott Wave Principle

Figure 3: Modal (structure) map of the EWP

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The EWP is comprised of three key aspects, namely; pattern, ratio and time.

Pattern:

The aspect of pattern (or structure) is regarded as the most important one of the three aspects. This aspect
describes and categorizes the various structures of the underlying waves, which ultimately add up to form a
larger hierarchy of structure.

Ratio:

The aspect of ratio describes the relationship between the lengths of the waves of same and/or different
degrees.

Time:

The aspect of time describes the relationship between the durations of the E-waves and E-cycles of same and/or
different degrees.

In this chapter, we will focus exclusively on the aspect of pattern (or structure).

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Wave Function (role)

According to the EWP, each wave has a role or function. This function is determined only by the relationship of
that wave to the wave of one larger degree. As such, when a wave is termed as actionary, this means that this
wave is responsible for the progression and development of the wave of one larger degree. Accordingly, this
wave moves in the same direction and helps in building the wave of one larger degree. Conversely, when a
wave is termed as reactionary, this means that this wave is responsible for the interruption and regression of
the wave of one larger degree. Accordingly, this wave moves in the opposite direction and partially tears down
the progress of the wave of one larger degree.

Figure 4: Wave function

Wave Mode (structure)

In addition to the wave function, R.N. Elliott identified and differentiated between two fundamental types of
waves with respect to their shape or structure, which he referred to as the mode. With respect to wave
structure or mode, R.N. Elliott categorized the waves into motive waves and corrective waves. It is the
fundamental distinction between those two that shapes the back bone of the EWP.

Motive waves

Definition:

Motive waves are responsible for the progress and development of the overriding trend. They must always
exist as a five-wave structure and adhere to the following rules:

1. Wave 2 does not extend beyond the start of wave 1.
2. Wave 4 does not extend beyond the start of wave 3.
3. Wave 3 always travels beyond wave 1.
4. Wave 3 is never the shortest of the motive waves 1, 3 and 5.
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5. Waves 2 and 4 must be corrective in structure.

These rules define the structure of the motive waves and ensure its purpose--that is the progress and
development of the overriding trend.

It is understood from the EWP that any structure failing to adhere to any one of the above rules is automatically
identified (in mode) as a corrective structure, even if it takes the form of a five-wave structure.

Types and characteristics of motive waves:

There are two different types of motive waves, namely; Impulses (or Impulse waves) and Diagonals (or
Diagonal waves).

Impulses

Impulses are types of motive waves that always exist as a five-wave structure. These five-wave structures must
adhere to the primal rules of the motive waves. In addition to that, the following extra rules are exclusive to
Impulses:

1. End of wave 4 does not overlap with end of wave 1.
2. Waves 1, 3 and 5 of an impulse wave must be motive in structure.
3. Extensions (to be discussed shortly) can never exist in all three waves; 1, 3 and 5 at once.

It is worth noting that waves 3 can only exist as Impulses.

Structural or modal characteristics of impulses:
Extension:

Extensions are defined as--and are primarily the cause of an extra stretch or elongation of the impulse waves
(with respect to time, length or both). Naturally, as a result of this stretch, subdivisions exist in abundance.
Extensions are a very common modal characteristic of impulse waves and generally occur during one of the
three actionary waves (1, 3, and 5) as they develop.

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Figure 5:
Types of extensions in impulse waves of bull and bear markets

Truncation:

Truncation is another characteristic of impulses in which wave 5 fails to exceed the end of wave 3. In that
sense, truncations only occur in impulse waves 5, and are generally perceived as a sign of weakness in the
market. Truncations imply that although the market was able to develop into a 5-wave structure, this
development was not associated with enough momentum to drive the market beyond the end of its preceding
wave 3. Moreover, a truncation generally implies a sharp wave to follow in the opposite direction.

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Figure 6: Bull and Bear market impulse truncations

Diagonals

Diagonals are types of motive waves that always form as a five-wave structure. Diagonals must adhere to the
primal (overriding) rules of the motive waves. However, these motive waves can never exist as middle motive
waves i.e. motive wave 3. Moreover, unlike impulses, an overlap between waves 1 and 4 is accepted and
is considered as a characteristic of such types of motive waves.
Diagonals are identified as two rising (or falling) semi converging lines, or in less common cases diverging
lines. Thus, it is important not to assume that this EW pattern will always resemble a classical wedge formation.
Despite sharing almost similar psychology, their structures are not always identical.

There are two types of diagonals, namely; Leading and Ending Diagonals.

Leading Diagonals
As the name implies, Leading Diagonals appear as motive waves that initiate the build and development of a
new trend (a larger degree wave). They can appear only as wave 1 of a five-wave motive structure, or appear
as wave A of an ABC Zigzag corrective development. Leading Diagonals are five-wave structures whereby
waves 1, 3 and 5 are subdivided into five motive waves, while waves 2 and 4 are corrective in structure.
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Figure 7: Converging and diverging Leading Diagonals

Ending Diagonals
As the name implies, Ending Diagonals appear as motive waves that terminate the build and development of an
existing trend (a larger degree wave). An Ending Diagonal can appear only as motive wave 5 or appear as
wave C of an ABC corrective development.
Being a member of the motive structures (or modes), the five waves of the Ending Diagonals strictly adhere to
the primal (overriding) rules of the motive waves. However, the subdivisions of some of these five waves are
somewhat different from the subdivisions of all other types of motive structures. Each wave of the five Ending
Diagonal waves is subdivided into three waves (i.e. including waves 1, 3 and 5). In other words, all its
subdivisions are corrective in structure.
It is worth noting that waves 1, 3 and 5 in Ending Diagonals are corrective in structure and actionary in
function (or role). Meanwhile, waves 2 and 4 are both corrective in structure and reactionary in function
(or role).

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Figure 8: Converging and diverging Ending Diagonals

Corrective waves

Definition:

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Corrective waves appear in--and are exclusively responsible for all counter trend interruptions. In that sense,
corrective structures primarily function as reactionary waves. However, they may also exist (in special cases) as
actionary waves (for example: during waves 1, 3 and 5 of an ending diagonal). Corrective waves are
primarily structured in the form of three waves or a more complex variation thereof. The fundamental
difference between motive and corrective waves is that the latter will always break one or more of the cardinal
rules of the motive wave. Thus, any five-wave structure that breaks any of the motive wave rules is corrective.

The reason as to why they are called corrective is that being the sole driver for all counter trend interruptions
corrective waves accomplish only a partial retracement, or "correction," of the progress achieved by any
preceding motive wave. As for why corrective waves tend to cause only partial retracement, is that movements
against trends of one larger degree appear as a struggle. This is primarily caused due to the overriding force of
the larger degree trend which prevents counter trend movements to fully develop as motive structures. A
byproduct of this situation is that corrective structures tend to be less identifiable and more varied than their
motive counterparts.

Types and characteristics of corrective waves:

Corrective structures appear in two types, sharp and sideways. Sharp corrective structures are manifested
through Zigzags, while, sideways structures are represented through Flats and Triangles.

Sharp corrective structures:

Zigzags

Zigzags represent the most common form of the EW corrective pattern. They exist as a three-wave structure.
The three waves are denoted by the letters A, B and C respectively. Wave B will never terminate
beyond the start of wave A and wave C will travel beyond the end of wave A.

In zigzags, the function of wave A is actionary because it helps build the wave of one larger degree (either
wave 2 or 4). Meanwhile its structure is motive (can either an impulse or a leading diagonal), thus it is
subdivided into five waves and adheres to the motive wave rules. Wave, B on the other hand acts as a
reactionary wave, since it interrupts the progress of the wave of one larger degree (either wave 2 or 4),
while its structure is corrective. Finally, wave C is actionary because it helps build the wave of one larger
degree (either wave 2 or 4). Meanwhile its structure is motive (can either an impulse or an ending
diagonal), thus it is subdivided into five waves and adheres to the motive wave rules. As such, Zigzags are
commonly known by EW practitioners as 5-3-5s.

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Figure 9: Bull and bear market Zigzags

Sideways corrective structures:

In general, sideways corrective structures generally occur due to a stronger trend of one larger degree as well
as a lack of countertrend pressure, relative to Zigzags. There are two types of sideways corrective structures,
namely; Flats and Triangles.

Flats

Flats represent another form of the EW corrective pattern, where as the name implies they represent a
sideways transition to the overriding direction (unlike Zigzags). Similar to Zigzags, they also exist as a three-
wave structure, where each wave is labeled by the letters A, B and C respectively. However, Flats offers
a variation from Zigzags in that wave A does not hold enough momentum to develop as a five wave structure
as does wave A of a Zigzag. Instead, wave A of a flat structure develops into three waves. As a result, wave
B of a Flat structure does not suffer the same pressure which causes it to partially retrace wave A as does
wave B of a Zigzag. Its worth noting that wave A of a Flat structure is both actionary and corrective, wave
B is both reactionary and corrective, and wave C is actionary and motive. As such, Flats are commonly
known as 3-3-5s.

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Types and characteristics of Flats:

Regular Flats

In regular Flats, wave B terminates at or near the start of its preceding wave A, while, wave C terminates
at, near or faintly beyond wave B.

Expanded Flats

Expanded Flats are regarded as the most commonly recurring type of Flat formation. In this type, wave B
terminates beyond the start of its preceding wave A, while, wave C terminates beyond the start of wave
B (i.e. the end of wave A).
Running Flats

Running Flats are rare when compared to the former two Flat types already discussed. In this running Flat,
wave B terminates beyond the start of its preceding wave A (similar to expanded flats). However, wave
C fails to match the length of wave B. It is implied by this formation that the momentum of overriding
trend is significantly strong to the extent that it forces the corrective pattern to tilt in its direction.

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Figure 10: Bull and bear market Flat types
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Triangles

EW Triangles are yet another type of sideways corrective structures. They are similar to EW Flat corrections, in
the sense that they reflect a form of temporary balance of forces (buyers and sellers). This is also synonymous
to the interpretations of the classical approach of sideway corrections. However, unlike the Triangles in the
classical approach, EW Triangles always act as continuation patterns (or wave degrees) to the larger degree
trend or wave.
EW Triangles consist of 5 overlapping waves, in which each wave subdivides into three waves (five threes).
Since they are corrective, they are labeled in letters as follows: (A, B, C, D, and E) respectively.
EW Triangles can be categorized into; Contracting and Expanding Triangles. There are three types of
Contracting Triangles; Symmetrical, Ascending and Descending, while there is only one type of Expanding
Triangles. Expanding Triangles are also referred to as Reverse Symmetrical Triangles. In general, they are
corrective patterns that tend to precede the final move in the direction of the major trend.
Contracting Triangles
In Contracting Triangles:
1.
2.
3.
Wave C never moves beyond the end of wave A.

Wave D never moves beyond the end of wave B.
Wave E never moves beyond the end of wave C.
Expanding Triangles
In Expanding Triangles:
1.
2.
3.
Wave C always move beyond the end of wave A.

Wave D always move beyond the end of wave B.
Wave E always move beyond the end of wave C.

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Figure 11: Bull and bear market EW Triangle types

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Running Triangles:
Running Triangles are a very common case in contracting EW Triangles in which wave B exceeds the start of
wave A.

Figure
11: Bull and bear market EW Running Triangle types

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One final point with regards to the subject of wave function and wave mode: It is implied from the EWP that
motive structures are always actionary. Whereas, corrective structures are mostly reactionary, but can also be
actionary in role or function.

Part Four: Comparing the EWP to the Dow principle and the classical approach
(relationships and similarities)
According to the Dow Theorys tenants, there are three main trend-frames; the major (primary), the
intermediate and the minor trends. The Dow Theory focuses more specifically on the primary trends. The
theory states that waves or trends have three phases. They are termed as the accumulation phase, the public
participation phase and the distribution phase. The EWP elaborated and expanded on this concept by initially
introducing nine various trend (wave) degrees, each with a specified range of durations as previously presented
in part I.
Followers of the Dow Theory whom were later accredited for developing the classical approach managed to
affirm, complement and expand Dows three phases of the market trend. Some suggested that an idealized
form of a complete bull/bear succession will likely involve six phases. Three of which constitute the bull tranche
of the succession, and are recognized as the accumulation the mark-up and the public participation
phases respectively. In addition, three phases would make up the bear tranche of the succession and are
termed as the distribution, the panic and the discouraged selling phases respectively. Advocates of the
classic approach added that the discouraged selling and accumulation phases (which constitute market
bottoms) occur during a period of disbelief in which the irrational crowd psychology is caught on the wrong
side of the market. Meanwhile, the mark-up and fear driven-major panic phases occur during a period of
belief in which the irrational crowd psychology is caught on the right side of the market. And finally, the
public participation and distribution phases (which constitute market tops) occur during a period of euphoria
and extreme optimism in which the irrational crowd psychology is again caught on the wrong side of the
market.
When trying to relate the concepts offered through the Dow and classic approach to the EWP, we find that the
classic approachs three bull market phases and three bear market phases seems quite compatible to the EWPs
idea of a five wave bull market advance followed by a three wave bear market decline.
Finally, both the Dow Theory and the EWP made reference to volume, breadth and indices confirmations
through their tenants and guidelines respectively. The Dow Theory tenants explained that volume and breadth
act as a confirmation to the sustainability of the overriding trend. While the EWP further emphasized on this
matter and explained the importance of volume, breadth and indices confirmations during advancing motive
waves. While, characterizing corrective and ending waves to be more likely associated with divergences and
non-confirmations from volume, breadth and other market indices.
As such there is little doubt that the EWP was largely influenced by Dow Theory and can be regarded as some
form of extension to the Dow Theory, in which the EWP validates much of Dow Theory and may be regarded as
an extension thereof.
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Figure 12: Relationships and Similarities Between the EWP Dow/Classic Approach
Figure 12 depicts a complete EW cycle superimposed over the idealized six phases of complete bull/bear
succession of the Dow/classic approach. As observed, the wave sequence 1 through 5 share similar
characteristics, psychology and seem to fit quite well within the accumulation, mark-up and public participation
phases, as does wave sequence A through C when compared to the following three phases.
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Part Five: Summary and Conclusion
Unlike the Point and Figure approach in technical analysis which functions under the assumption that the
market action contains unnecessary noise, the EWP indirectly implies that market action does not contain noise.
The EWP contends that market action even at the smallest of time frames adheres to a predefined structured
framework of patterns that is of fractal nature. These patters collectively collaborate to ultimately build a larger
degree structure/trend and so on.
Moreover, through the interpretations of the social mood, crowd psychology and characteristics of each wave,
EWP offers an extended and more detailed explanation of the Dow Theory with regards to understanding the
market behavior and action.
On the other hand, the EWT has been criticized for its complexity and the many variations to the general
(idealized) form of the theory. The issue that at times causes the theory to offer multiple scenarios at various
junctures as the wave progresses in practical life, and thus, sometimes fails to support implementing an
investment-decision process based on its findings.
In his book, Evidence-Based Technical Analysis, David Aronson wrote:
The Elliott Wave Principle, as popularly practiced, is not a legitimate theory, but a story, and a compelling one that
is eloquently told by Robert Prechter. The account is especially persuasive because EWP has the seemingly
remarkable ability to fit any segment of market history down to its most minute fluctuations. I contend this is
made possible by the method's loosely defined rules and the ability to postulate a large number of nested waves of
varying magnitude. This gives the Elliott analyst the same freedom and flexibility that allowed pre-Copernican
astronomers to explain all observed planet movements even though their underlying theory of an Earth-centered
universe was wrong.
Nevertheless, proper implementation of the EW analysis in conjunction with other tools and approaches of TA
generally offers a better understanding of market action. While other tools and approaches of TA can aid the
EWP in narrowing down the expected scenarios, thus reducing the limitations of the EWP.
Quoting John J. Murphy:
The key is to view EWT as a partial answer to the puzzle of market forecasting.
Reference material
In its entirety, the material expressed in this chapter is a simplified reproduction and tribute to the exclusive
pioneering works of the Frost and Prechter on the EWP and the combined thoughts of Murphy and other
authors on the subject.
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Appendix B

Breadth Analysis

Tamar Gamal, CFTe, CETA

Introduction

What is a market (stock market)?

A market is a place where both buyers and sellers exist to trade.
Similar to any market, a stock market is a place where both buyers and sellers trade all kinds of listed
securities.
What is technical analysis?

Technical analysis (TA) is the study of market action (in terms of price and volume), primarily through
the use of charts, for the purpose of forecasting future price trends.
Foundations, premise, and concepts in TA
Market action discounts everything.

Prices move in trends (and trends persist).
History repeats itself.

Types of TA Indicators

Indicators that are calculated based on price.

Moving averages and MACD.

Momentum oscillators RSI, CCI, and stochastic.

Indicators that are calculated based on volume.

On-balance volume OBV.

Demand index DI.
Volume zone oscillator VZO.
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Indicators that are calculated based on advancing and declining issues.

Advance-decline line
McClellan oscillator
Market thrust index

History of Breadth Analysis

Colonel Leonard P. Ayres, of Cleveland Trust Company, is generally credited with being the first to count the
advancing and declining issues. In 1926, he produced his first work, which he called making the count of the
market. However, 25 years earlier, Charles H. Dow, of Dow Theory fame, commented in his June 23, 1900,
editorial in the Wall Street Journal about the number of advances and declines thusly, Of these 174 stocks, 107
advanced, 47 declined, and 20 stood still. However, it is widely accepted that Colonel Ayres and his associate,
James F. Hughes, popularized the concept that is widely used today.

When it comes to breadth analysis, as we know it today, Gregory L. Morris gets most of the credit for explaining,
discussing and categorizing a large variety of indicators based on market breadth data. In his book Market
Breadth Indicators, Gregory L. Morris discussed clearly every form of market breadth known to man, from
basic to advanced applications, with hundreds of chart examples and valuable statistical results.

What Is Stock Market Breadth?

Breadth analysis is one of the most valuable aspects in technical analysis. Breadth introduces a new dimension
to analysis, where it reveals the true strength or weakness of the targeted market. Such dimension is not
attainable from the standard price 8/volume chart. Market breadth indicators are sometimes referred to as
broad market indicators, since they do not refer to individual stocks. Breadth is more related to indices, large or
small capitalization, price or capital weighted, all are the same in breadth analysis.

Stock market breadth is a tally of how many stocks rose versus declined in value. Unlike the Dow Jones
Industrial Average or EGX (30) Index, which follows just 30 stocks, stock market breadth is a more inclusive
ratio, taking almost all stocks traded on an exchange into account, rather than concentrating on just a few key
stocks.

Stock market breadth gives the investor a much larger overview of the market's overall trend. If more issues
close higher today than yesterday, stock market breadth is said to be positive. If more issues close lower, stock
market breadth is considered to be negative. Stock market breadth is often a key component of the technical
analyst's arsenal of market indicators.

Types of Breadth Indicators

Indicators that are calculated based on advancing and declining issues.
A/D line
McClellan oscillator
McClellan summation index
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Indicators that are calculated based on volume.
Indicators that are calculated based on both A/D issues and volume.
Market thrust index

Thrust oscillator

Indicators that are calculated based on highs/lows.
Up/down volume oscillator

New hi/new lo oscillator

Indicators that are calculated based on moving averages.
% of stocks above/below certain moving average

There are many ways and techniques that use or combine all three groups; their aim is to identify the overall
health of the target market, in terms of trend analysis, for the sole purpose of forecasting trend reversals.
Moreover, breadth analysis can also be applied to any sector in the market or to a specific industry group, as
long as there is a way to determine their constituents and the components mentioned above.

These indicators use different data than open, high, low, close, and volume. They are obviously related to prive
movements but use other data:

Number of stocks that advanced
Number of stocks that declined
Number of stocks that were unchanged
Total advancing volume
Total declining volume
Total unchanged volume
New 52-week high (how many stocks made new highs)
New 52-week low (how many stocks made new lows)

These data concern the overall market situation and not a particular stock.

For example, during a day on the NYSE, we can have the following information.
Number of stocks that rose: 1,243 (30%)
Number of stocks that declined: 2,756 (67%)
Number of unchanged stocks: 117 (3%)
Advancing volume: 954,856,870
Declining volume: 2,051,149,098
Unchanged volume: 49,848,916
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This means that the 1,243 stocks that rose during the day had total volume of 954,856,870, while the 2,756
stocks that declined had total volume of 2,051,149,098, and so on.
Important signals are triggered when the market is continuing to make higher highs but market breadth
indicators are not confirming. This means that the rise is not confirmed by the overall market, as more and
more stocks are failing to confirm the market rise, which is obviously a signal of a potential reversal.

Advance-Decline Line

The advance-decline line is perhaps the most commonly known and used market breadth indicator of all time.
Probably because of its simple calculation and application, the advance-decline line has stood the test of time. It
is a long- term indicator that shows the general trend of a certain market.

Advance-decline formula:

AD Line = Advancing Issue Declining Issues.

The difference is added cumulatively to show it as a trend-following indicator that provides valuable
information every day the market trades. There are many variations of the advance-decline line, such as A/D
ratio or smoothed versions of the advance-decline line itself.

In his book Opportunity Investing, Gerald Appel discussed using a 10-day moving average of the advance-decline
line along with negative/positive divergence with respect to the S&P 500 index to spot trend reversals.

On the other hand, Stan Weinstein and his colleague Justin Mamis preferred using the 10-day moving average
of the advance-decline line as the signal for a 30-day moving average of the same difference, as discussed in his
book Secrets for Profiting in Bull and Bear Markets.

However, Gregory Morris, in his book Market Breadth Indicators, stated that he preferred to use a 21-day moving
average for most of his work.

Using raw or smoothed versions of the advance-decline line is primarily dependent on the market under study;
choppy markets will require a certain degree of smoothing, while other developed markets, with huge numbers
of issues traded every day, will require far less or no smoothing to begin with. Time is also an important factor
here; peaks may require a certain degree of smoothing due to the rapid changes in the advance-decline
difference, while bottoms may not due to the dull environment that surrounds them.

Calculation of A/D line

A/D Line = (# of Advancing Stocks # of Declining Stocks) + Previous Period's A/D Line Value

Example:
Day 1, Advancing stocks= 35, Declining stocks= 25,
A/D Line= (35 25) + 0 = 10

A/D Line= (45 25) + 10 = 30

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A/D Line= (50 17) + 30 = 63

A/D Line= (25 43) + 63 = 45

A/D Line= (65 5) + 45 = 105

Plotting the A/D values

The drawback of this calculation is that with time, the numbers of shares and companies increase in the
stock market, especially with the new IPOs that appear from time to time. This will obviously change the
A-D line values with time and can distort the results.
Another way to calculate the A-D line to overcome this problem is to take a ratio by dividing advancing
issues by declining issues: AI/DI. Obviously, the results will also be accumulated as in the first calculation.

Another way to calculate the A-D ratio is to take the difference between advancing and declining stocks
and divide by the total of advances plus declines.

A-D ratio = (A-D) / (A+D) *100

Using A/D line
Zero crossovers
Crossing above/below zero levels can be useful, but dont expect this to happen regularly, A/D is a
cumulative/medium to long-term indicator, and the way it is calculated will not allow oscillating
around the zero line often.
Divergences
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This is where the A/D is most useful, when NOT confirming price action, the A/D is of great
importance. A rising market with a declining A/D line reflects that though the market is making new
highs, nonetheless, lesser stocks are following this uptrend every day, indicating that the current
uptrend may reverse soon. A declining market with a rising A/D line reflects that though the market
is declining, the number of stocks that are following that decline is getting lesser every day.

General trend analysis

This is where you get to apply support/resistance, breakouts, trendlines and other classical
techniques on the A/D line.

The red line (upper part of chart) represents the A/D line for the Egyptian market. The black line (lower part of
chart) is the EGX (30) Index. In the above chart, A/D is confirming EGX (30) uptrend. Both EGX (30) and A/D line
are forming higher lows higher highs formation.

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A/D line (red line / upper part of chart) confirming EGX (30) (black line lower part of chart uptrend in the period
from 20042007.

EGX (30) upper panel and A/D line lower panel.
Failure to confirm the EGX (30) higher lows/higher highs during Aug Nov 2009 was the first sign of weakness
(-ve divergence); during late October, the A/D line broke below previous support levels. This was another sign
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of weakness (S/R breakouts); later during 2010, the A/D line failed to confirm any of EGX (30) higher
highs/higher lows.

A/D line failed to confirm EGX (30) breakout, followed by breaking below previous support levels, was enough
of a signal to forecast the very sharp decline that followed. Later, after few months and only few weeks before
Jan 25 2011, again the A/D closed below previous support levels, indicating that market conditions are far from
healthy.

A/D line failure to confirm EGX (30) breakout during Jan 2012, followed by breaking below previous support,
was another good example of how the A/D is a leading indicator that marks medium to long-term potential
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moves. The A/D line upside breakout during Aug 2012 was a good example of A/D confirming the EGX (30) move
that went to nearly the 6,000 level a few weeks later.

NSYE A/D line upper panel and NY Composite lower panel.
Again, a good example of -ve divergences on the A/D line that lead to significant declines later during Nov 2007
to Feb 2008.

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S&P
A-D line

The above chart shows the S&P 500 along with an A-D line for the NYSE data. As we can see, during March
2003, the A-D line was rising along with the S&P 500. During May of the same year, the A-D line broke its
resistance before the S&P. The A-D line was a leading indicator for the S&P 500 in some cases, and in other
cases was moving along with the S&P (coincident). At the right edge of the chart, during end of April 2004, the
A-D line was showing some weakness, forming lower highs formation, and broke a support, which was not
confirmed yet by the S&P 500.

NASDAQ
A-D line
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The NASDAQ index along with its A-D line. As we can see, the A-D line rose during March 2003, confirming the
market strength. At the end of April 2004, the A-D line witnessed lower highs formation and violated a support,
which was not confirmed yet by the NASDAQ.

McClellan Oscillator

The McClellan oscillator is a breadth oscillator created by Sherman and Marian McClellan in 1969. The McClellan
oscillator uses the daily advancing minus declining stocks by smoothing them with two different exponential
moving averages and then taking the difference between them. It is a short/medium-term indicator that shows
the general trend of a certain market.

The idea about the indicator came when both Sherman and his wife, Marian, discovered that when the stock
market declined sharply, both moving averages 19 and 39 EMA of breadth data reached very low levels. During
a strong upward move, both moving averages were reaching very high levels. They discovered that when both
moving averages went to oversold levels, this was a good time to buy, even before a crossover occurred
between both moving averages. By the same token, when the market moved sharply to the upside and both
moving averages reached overbought levels and then began to decline, this was a signal to sell.

Calculation of McClellan oscillator
1.
Calculate the daily difference between advancing stocks and declining stocks.

2. Calculate a 19-day exponential moving average of the difference between advancing stocks
and declining stocks.

3. Calculate a 39-day exponential moving average of the difference between advancing stocks
and declining stocks.

4. Take the difference between 19-day EMA and 39 days EMA.

The McClellan oscillator thus consists of one line that moves above and below a zero level. Obviously,
crossovers between the two moving averages coincide with zero-level violations. The idea of the McClellan
oscillator sounds a lot like the MACD.

Using the McClellan oscillator
Zero crossovers
When the McClellan crosses zero to the upside it means that the 19-day EMA broke the 39-day
EMA to the upside. A violation of zero to the downside coincides with the 19-day EMA
breaking the 39-day EMA downwards. (Of course, we are using moving averages of A-D.) The
zero crossover technique is not recommended, as it leads to many whipsaws. However,
usually positive values in the oscillator are seen as bullish, while negative values are seen as
bearish.

Divergences
The McClellan oscillator can track divergences with price action. Usually, when the price of the
market gauge is still rising and the McClellan declines, it is considered a negative divergence.
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Positive divergences can occur too. We recommend waiting for a price confirmation after such
divergences, as they may not always lead to profitable moves. False divergences can occur
sometimes, so waiting for confirmation is required. Obviously, divergences that occur in the
same direction of the major trend are more significant.

Overbought and oversold

The McClellan oscillator is very useful when it reaches overbought levels and then begins to
turn down, or reaches oversold levels and turns up afterward. As we know, it is an unbounded
oscillator, so overbought and oversold zones can be detected by visual inspection. Usually for
the NYSE the +200 and -200 levels serve as strong overbought and oversold levels. These are
not fixed levels, however, as each market has a different number of stocks and volatility often
changes in the stock market, so OB/OS levels change.

EGX (30) (upper panel) and McClellan oscillator (lower panel) during 20082010.
+ve and ve divergences occurred during the 2-year period, and most of them were successful. The McClellan
oscillator is a very short-term indicator that must be confirmed along with price action and is better used in the
direction of the upper degree trend.
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Most signals were successful, and divergences and zero-crossovers are shown on the chart above. All signals
were applied in the same direction as the upper degree trend.

S&P 500 (upper panel) and McClellan oscillator (lower panel) during 20122013.
Most divergences were successful. Another way to confirm divergences is to wait for a cross above/below the
zero line (marked by a circle) and will still be leading and early.

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Overbought signals are another advantage when using the McClellan oscillator. Visual inspection is the best
technique for marking such levels, and one should understand that such levels will change over time and will
need some adjustments.

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Oversold signals are another advantage when using the McClellan oscillator. Visual inspection is the best
technique for marking such levels, and one should understand that such levels will change over time and will
need some adjustments.

McClellan Summation Index

This indicator is also created by the McClellan's. The Summation Index is a cumulative function of the McClellan
oscillator. It is more smoothed than the normal McClellan oscillator.

Calculation of McClellan Summation Index
1.
Calculate todays McClellan oscillator value.

2. Add each previous value of the McClellan oscillator to the cumulative total.

McClellan Summation Index shows the real trend of the McClellan oscillator. It is more of a medium to long-
term indicator that will show the true strength/weakness of the market on a longer timeframe. Caution is
needed when using the Summation Index because signals are usually leading, but sometimes the lead time is a
bit longer than expected. Summation Index signals have very high credibility, but the issue of the lead time
sometimes becomes very confusing; this is where the discipline is needed and highly appreciated.

Using McClellan Summation Index
Zero-crossovers
Usually, when the Summation index is moving above zero and rising, it tells us that money is
entering the market. When it is declining and going below zero, it indicates that money is
leaving the market. It is a breadth measure that shows us the bigger picture. Sometimes the
zero line will act as support/resistance.
Divergences
Unlike the McClellan, the Summation Index is a smoothed indicator, and it gives us early
signals of potential strength or weakness. Divergences are very significant when they appear.
Divergences on the Summation index are rarely false.

Breaking below/above previous support/resistance levels is also a good technique when using
the McClellan Summation Index. Moreover, the general trend of the Summation Index is of
great importance. Swings are not common within this indicator and hence, once you point out
a change in the indicator direction, it is quite possible that the change will continue in the new
direction.
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EGX (30) (upper panel) and McClellan Summation Index (lower panel) during 20122013.
Zero-line crossovers are marked with a blue circle; most of the signals were successful. Sometimes the zero line
acts as resistance, as marked on the extreme left of the chart.

S&P 500 (upper panel) and McClellan Summation Index (lower panel) during 20122013.
Zero line acting as support, marked with a blue circle; most of the divergences were successful and are
followed by significant tradable moves.

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Positive divergences are marked with blue line arrow; breaking of the previous resistance is also marked with a
blue line and a circle around the breakout day. Both signals are of high credibility and are rarely false.

The chart above shows multiple combinations of signals, a zero-line resistance marked with a blue circle at the
extreme left side. That was followed by a significant decline. At the beginning of 2009, a triple +ve divergence
showed that there is strength in the market, and a significant rise followed. Later in Sep 2009, a new ve
divergence signal occurred, marking the end of the current uptrend.
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Market Thrust Index and Thrust Oscillator

The market thrust index was created by Tushar Chande in 1993. It is a medium-term indicator that shows the
general trend of a certain market and a technical indicator that plots changes in the value of the advancing
issues and declining issues, with respect to their volume.

First, Chande explained the problems of the TRIN and why it obscures the picture sometimes.

As we know, TRIN = (AI/DI) / (AV/DV)
Which means that TRIN = (AI*DV) / (DI*AV)
As Chande explains in his book "Because the index multiplies AI by DV and DI by AV, it can produce unusual
effects in mixed markets, this is, when AI>DI but AV<DV, or AI<DI but AV>DV. It is intuitively contradictory to
have the index driven by the product of AI*DV (and DI*AV) rather than AI*AV (and DI*DV)." Tushar S. Chande
and Stanley Kroll, The New Technical Trader.

Note: AI: Advancing Issues

DI: Declining Issues

AV: Advancing Volume

DV: Declining Volume

Chande used some examples to show how the TRIN can lead to misleading results when a strong one-sided up
or down action occurs:

Day
AI
AV
DI
DV
TRIN
1
1000
1,000,000
100
100,000
1
2
100
100,000
1000
1,000,000
1
3
1000
1,000,000
100
200,000
2
4
100
200,000
1000
1,000,000
0.5

Day 1 is a strong up day, while day 2 is a strong down day. TRIN shows both days as neutral.
Day 3 is also a strong up day, but TRIN shows it as a bearish day because the average volume in declining stocks
is greater than the average volume in advancing stocks. So, declining stocks took more than their share of
volume, hence a bearish TRIN, despite that AI is much bigger than DI and AV is greater than DV.
Day 4 is a bearish day, but TRIN shows it very bullish. Why? Because on a relative basis, advancing stocks had a
bigger % of volume than that of declining stocks. (200,000 for 100 advancing stocks versus 1 million for 1,000
declining stocks).

This means that we can have bullish days with bearish TRIN values and vice versa.
The thrust oscillator, as Chande explains, fixes this problem by using advancing and declining issues in one side
of the equation and advancing and declining volume in the other side. "The thrust, or power of the move, is
measured by the number of stocks and the volume going into those stocks. For example if 5 stocks advanced on
100 shares, the thrust is 500; next, if 7 stocks advanced on 90 shares, the thrust is 630. Thus, we would say there
was greater market thrust the second day." Tushar S. Chande and Stanley Kroll, The New Technical Trader.

Calculation of market thrust index
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MT = (AI*AV DI*DV) / 1000,000

Next, we add the MT value of today to the cumulative total of previous days.
The MT line is accumulated exactly like the A-D line.

Using market thrust index

Zero crossovers
Crossing above/below zero levels can be useful, but dont expect this to happen regularly, like
the A/D line. Market thrust (MT) is a cumulative/medium to long-term indicator, and the way it
is calculated will not allow oscillating around the zero line often.

Divergences
Like the A/D line or the McClellan Summation Index, the MT index will signal +ve/-ve
divergences that, once correctly recognized and applied, will provide the technician with great
value.

This is where you get to apply, support/resistance, breakouts, trendlines and other classical
techniques on the A/D line.

EGX (30) (upper panel) and market thrust index (MT) (lower panel) during 20062009.
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The chart shows how the MT is a trend-following indicator and hence, general trend analysis such as trend
analysis/breakouts can be easily applied.

The chart shows how the MT is a trend-following indicator and hence, general trend analysis like trend
analysis/breakouts can be easily applied.

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The +positive divergence that occurred in early 2012 suggested that, despite the recent declines, the market is
building strength and an upward move is quite possible. EGX (30) rallied to the 5,500 level during the next few
weeks.

A clear resistance breakout that, if added to the prior example of positive divergence (both happened at nearly
the same time), will provide enough evidence that EGX (30) may reverse direction to the upside. EGX (30)
rallied from 4,000 to 5,500 over the next few weeks.

Calculation of thrust oscillator
TO = (AI*AV DI*DV) / (AI*AV + DI*DV) * 100

This indicator is also created by the Tushar Chande. The thrust oscillator consists of one line that moves above
and below a zero level. It is more famous than market thrust index, and it fixed some of the TRIN (Arms Index)
problems. The TO is bounded between +100 and -100.

The thrust oscillator has two main advantages over TRIN:

First, it is bounded both to the downside and the upside. As we know, the TRIN is bounded for up days and
unbounded for down days. Second, the TO identifies clearly strong upward markets and strong downward
markets as it uses advancing issues and advancing volume in one part of the equation, and uses declining issues
and volume in the other part. So it is more consistent by providing normalized volume flows.

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Using thrust oscillator

Zero crossovers
The zero-crossover technique is not recommended, as it leads to many whipsaws. However,
usually positive values in the oscillator are seen as bullish, while negative values are seen as
bearish.

Divergences
The thrust oscillator can track divergences with price action. We recommend waiting for a
price confirmation after such divergences, as they may not always lead to profitable moves.
False divergences can occur sometimes, so waiting for confirmation is required. Obviously,
divergences that occur in the same direction of the major trend are more significant.

Tracking OB/OS levels on the thrust oscillator can provide useful insights on current market
conditions. OB/OS near +/- 100 are the most important.

EGX (30) (upper panel) and thrust oscillator (TO) (lower panel) during 20082010.
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The S&P along with the TO and the third chart shows a 10-day moving average of the TO. As we can
see, the 10-day moving average is more smoothed and gives clearer signals. Overbought and oversold
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levels are clearer in the moving average. The TO, despite its high volatility, gives good signals when it
approaches +100 and -100 and then turns quickly to the other side.

New High-New Low Oscillator

The new high-new low (NH-NL) oscillator is one of the leading breadth indicators that are used to hint of
potential strength or weakness in the market. It is a medium-term indicator that shows the general strength of
a certain market. Usually, when an uptrend is underway, more stocks reach new highs (new 52-week high).
During a downtrend, more stocks reach new lows. We use this information to construct an indicator that is
considered one of the important breadth measures.

Calculation of NH-NL oscillator

The NH-NL oscillator is calculated by taking the difference between stocks making new 52-week highs and
stocks that make new 52-week lows. It is a very simple calculation, but it is very significant, as it gives us early
warnings.

Using the NH-NL oscillator
Zero crossovers
Divergences

EGX (30) (upper panel) and NH-NL oscillator (lower panel) during 20082013.
OB/OS extremes are marked above with a small blue circle. Most of those levels are marked either medium-
term highs or lows.

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NYSE NH-NL index during 20082012. Two extreme values marked the 2009 and 2012 major lows.

Upside-Downside Volume

The Up Volume/Down Volume Line is a very simple indicator that is constructed by plotting the daily difference
between the upside volume and the downside volume of the total issues for a specific market index.

Upside Volume is the advancing volume (AV) that accompanies advancing issues in a certain day. Downside
Volume is the declining volume (DV) that accompanies declining issues in a certain day. Using the analogy that
volume precedes price, the Up Volume/Down Volume Line, should be used in the same manner as the Advance
Decline line, divergences and trend lines are most valuable when using such indicator.

Further derivatives or smoothing will help reduce noise, provided that the raw plot is not clear enough. Some
technicians like to smooth the data by using a 10-day or 20-day moving average; others use two different
moving averages and trade on crossovers between these two averages.

Calculation of Up/Dn Volume
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1.
Calculate the daily volume of advancing stocks.
2.
Calculate the daily volume of declining stocks.
3.
Calculate advancingdeclining and then smooth the outcome with 10/20-day moving average.
Using Up/Dn Volume
Zero Crossovers

Divergences

EGX (30) (upper panel) and Up/Dn Volume (lower panel) during Aug 2012Aug 2013.
Several signals marked above, divergences, zero crossovers, zero line acting as support, S/R breakouts.

Using a certain moving average as a breadth indicator

Combining moving averages with breadth indicators is not a new idea. Several pioneers in the field used moving
averages in many different ways to enhance most breadth indicators. Some used them to smooth choppy
breadth indicators; others used them to construct a signal line for the main breadth indicator, for the purpose
of timing adjustment.

A new technique can be applied using a long-term moving average; for example, a 50-day moving average,
where we calculate the number of stocks above/below the moving average and plot a cumulative line that
represents the difference. Such a line will oscillate around the 50% line, with a maximum boundary of 100% and
minimum boundary of 0%. Naturally, when the line value is close to zero, the market is oversold and we should
be looking for rebounds and vice versa for the 100% line.

The psychology behind such a method is quite simple; the numbers provided reflect the underlying psychology
of the market participants: high percentages of stocks above a certain moving average at first sight reflect
bullishness and strong buyers controlling that specific market. But from the contrary point of view, those high
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numbers may have more of a bearish implication than a bullish one once they start decreasing. In other words,
the buyers may be running out of steam and the current bullish picture may change soon. Another way to study
such figures is to monitor their extreme values. Regardless of the ways and techniques used to evaluate such
figures, it must be implemented with conventional techniques such as trend analysis and support/resistance
concept for the sake of discipline and proper application of technical analysis.

It is quite essential at this stage to clarify that breadth analysis generally does not provide buy/sell signals. The
main aim of breadth analysis is to provide a broad view of current market strength or a preliminary setup that
will help to properly forecast and identify trend reversals. During a bull/bear market, the majority of stocks will
follow the underlying trend; any deviation from such behavior will provide a valuable insight.

Nonetheless, the main driver for buy/sell signals is still and will always be price action and other conventional
techniques such as support/resistance, price patterns and momentum concept.

EGX (30) (upper panel) and Up / Dn Volume (lower panel) during 20092010.

Using a 50-day moving average
50% crossover
The 50% line is the balance zone; crossing above/below it provides additional useful information. Prior
to the cross, it is already clear that The Indicator is rising, showing that there is a flow of liquidity into
the market under study, as more stocks are joining the underlying rise. Such information, as valuable as
it is, does not indicate that the liquidity going into the market is greater than the liquidity going out of
the market. Once By the time The Indicator crosses above the 50% line, it is clear beyond a doubt,
that the number of stocks above the moving average is greater than the number of stocks below it.
Accordingly, it is quite safe to assume that the liquidity going in is greater than that going out of the
market. After all, a bull market will take many, if not most, stocks with it.

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Dow Jones Industrial Average (DJI) - Daily Chart (Oct 2007 to Oct 2008)

From the chart above, applying the previous tactic without properly identifying the underlying price trend will
be quite confusing and will generate a lot of whipsaws. The Indicator crossed above/below the 50% line
several times. All the highlighted crosses caused whipsaws and much confusion.

A better tactic is to identify the underlying medium-term trend first, then use the 50% zone in that context.
From October 2007 through October 2008, The DJI medium-term trend was bearish; if we applied the same
crosses, but in the direction of the underlying medium-term trend, all the crosses below will represent a good
setup for selling, while the crosses above will be completely ignored. Accordingly, it is quite essential to use
The Indicator in the same direction as the underlying medium-term trend.

During uptrend
Once the underlying medium-term trend is properly identified, The Indicator will be used to provide a setup
for buying only, while other contradicting setups will be completely ignored.

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EURO STOXX Index (STOXX50E) Daily Chart (Mar 2005 to Feb 2006)
From the chart example above, The Indicator crossed below the 50% line twice (labels 1 and 3), and both sell
setups were ignored because the medium-term uptrend was intact. The Indicator crossed above the 50% line
twice (labels 2 and 4), and both buy setups constitute a valid uptrend setup and were taken into account for the
sake of the medium-term uptrend.

During downtrend
Again, the underlying medium-term trend must be properly identified. The Indicator will be used to provide a
setup for selling only, while other contradicting setups will be completely ignored.

EURO STOXX Index (STOXX50E) Daily Chart (Oct 2007 to Oct 2008)
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From the chart above, The Indicator crossed above the 50% line two times (labels 2 and 4), and both buy
setups were ignored because the medium-term downtrend was intact. The Indicator crossed below the 50%
line three times (labels 1, 3 and 5), and all sell setups were taken into account for the sake of the medium-term
downtrend. It is worth noting that setup number 6, where The Indicator rebounded off the 50% line without
crossing above it first, may be used as a valid sell setup.

During sideways trend

Again, the underlying medium-term trend must be properly identified. The Indicator will be completely
ignored during sideways trends. The Indicator idea depends on moving in the same direction as the upper
degree trend (medium-term trend). Sideways trend is always a nondirectional move, and therefore, it is not
possible to ignore certain setups and put into action the remaining ones.

Dow Jones Industrial Average (DJI) Daily Chart (Jan 1979 to Dec 1979)
From the chart above, during sideway trends, The Indicator behavior will not permit for a proper buy/sell
setup to put into action.

Divergences
Divergence is valuable tool in the technical analysis arsenal. Identifying divergence between price action
and indicators reveals hidden strength or weakness within the underlying trend. Positive divergence
indicates hidden strength when in a bearish situation, while negative divergence reveals weakness during
bullish circumstances. Applying divergence analysis on breadth indicators can be quite valuable once the
underlying medium-term trend is properly identified.
A positive divergence between The Indicator and price action is set once the index under study is
forming a lower low formation, during which The Indicator is simply rising or forming higher lows. Such
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behavior indicates that, while being in a bearish situation with respect to price action lower low, the
flow of liquidity is still building up into the market under study, sas more stocks are rising above the
moving average.
A negative divergence between The Indicator and price action is set once the index under study is
forming a higher high formation, during which The Indicator is simply declining or forming lower highs.
Such behavior indicates that, while being in a bullish situation with respect to price action higher high,
the flow of liquidity is going out of the market under study, as more stocks are declining below the moving
average.

EGX (30) (upper panel) and % above 50-day moving average (lower panel) during 20092010.
The chart above marks two divergences (-ve and +); both signals triggered significant rallies within the next few
weeks.

Extreme overbought/oversold

The Indicator is very useful when it reaches overbought levels and then begins to turn down, or
reaches oversold levels and turns up afterward. As we know, it is a bounded oscillator between 0 and
100, so overbought and oversold zones can be easily marked. Usually, the zone from 80 to 100 zone is
considered overbought and from 0 to 20 is considered oversold. After all, if 20% or less of the stocks
are above the selected moving average, this is considered an extreme oversold situation, and the
market must be declining for quite some time. On the other hand, if 80% or more of the stocks are
above the selected moving average, this is considered an extreme overbought situation, and the
market must be rising for some time. The most important thing to understand and expect is that The
Indicator may and will stay within this oversold/overbought zones for some time without triggering
any reversals, and any action must be accompanied and confirmed by price action.

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Overbought zone is marked in red; the indicator can stay for a while within the overbought zone, but once it
breaks below the zone and the price action confirms such a move, prices will most probably decline for a while.

Oversold zone marked in green. Every time the indicator reaches the 0 to 20 zone and breaks above the 20 level
to upside once more, a significant market rally follows.

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Advantages and limitations of breadth analysis
Using types of data other than price and volume provides a deeper overview for market strength, so
different from the standard price chart.
Breadth analysis is concerned only with major indices, sectors, or industry groups.
Breadth treats each stock the same, regardless of price, number of shares or even volume.
It is usually a leading type of analysis, which provides valuable information for the purpose of
forecasting trend reversals.
Breadth analysis is flexible enough to allow for several techniques and strategies, which is very
essential due to market alternations.
Being leading has its own limitations for providing signals too early, but this can be adjusted by
enforcing conventional technical analysis methodology such as support/resistance, momentum
concept and market psychology.
Most of market breadth indicators are better used in the smoothed form rather than the raw form,
which some may consider a minor limitation.
Breadth data seems to be inconsistent among the data providers. In emerging markets it is even hard
to acquire breadth data.
Breadth analysis recent developments

Breadth analysis has undergone many developments over the past few years. From smoothing raw data to
original equation adjustment, all done for a better plot. A good example is the McClellan Summation Index,
created by Sherman and Marian McClellan. In the early 1990s, James R. Miekka came up with a modification to
the McClellan formula that is today used by the McClellans and most of the other purists in the field. While this
modification does not affect the McClellan oscillator, it does have a significant effect on the Summation Index,
where it is possible that the Summation Index levels will remain the same no matter the when calculation
began.
In his book Technical Analysis Explained, Martin J. Pring discussed the diffusion indicators and the positive trend
criteria, where he scratched the idea of a new type of breadth indicator that utilizes a classic price-based
indicator in a very different wayas a breadth indicator. That will be the aim of the remaining part of this
research paper.

Conclusion
Breadth analysis is a very complex job that requires a lot of time and effort. Breadth indicators are leading
indicators that will give early signals; such signals must be treated as setup, while the actual signal must be
triggered from the price action itself. There are hundreds of breadth indicators; make sure you know few of
them that meet your trading objectives and discipline.
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Appendix B (Continued)

Breadth Analysis

Arms Index TRIN

Saleh Nasser, CMT
Egyptian Society of Technical Analysts

The Arms Index was invented by Richard Arms in the 1960s and was originally presented in an article in Barron's
in 1967. Later, this indicator gained popularity and was publicized in many channels by the name of TRIN (Short
Term Trading Index). It can be used in daily as well as intraday charts.

Calculation of TRIN

The logic of the calculation is to see whether or not advancing stocks are gaining more volume than declining
stocks. In a strong upward market, advancing stocks should gain more than their share of the volume. During a
declining market, declining stocks gain more than their share of the volume. What does this mean?

The calculation is as follows:

(A/D)/(AV/DV)

where A= advancing issues

D= declining issues

AV = total volume of advancing issues

DV= total volume of declining issues

We divide the ratio of advancing to declining stocks by the ratio of advancing to declining volume. So if A/D is
bigger than AV/DV, the ratio of advancing to declining stocks is bigger than the ratio of advancing to declining
volume, which means that volume is biased to declining stocks. On the other hand, if A/D is smaller than AV/DV
it means that the ratio of advancing to declining stocks (numerator) is smaller than the ratio of advancing to
declining volume (denominator). Volume in this case is biased to the upsidemore volume with advancing
stocks.

For example, if 50 stocks rose and 35 declined, the volume of advancing stocks (the 50 stocks) is 1.5 million,
while volume of declining stocks is 500,000.
Then TRIN is: (50/35)/(1,500,000/500,000) = 1.428 / 3 = 0.476
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The result is 0.476, which means that the ratio of advancing to declining volume is much bigger than the ratio of
advancing to declining stocks. Then, more volume is accompanying advancing stocks than declining stocks.
Obviously, this is bullish.

In this example, we have more stocks going up than down and more upward volume than downward volume.

Let us look at another example:

If advancing stocks = 55
Declining stocks = 48
Advancing volume = 987,000
Declining volume = 970,000

TRIN = (55/48) / (987,000/970,000) = 1.14 / 1.017 = 1.12

The result is 1.12, which is considered a bit bearish. If we only look at the raw numbers, we will get a bullish
feeling: more advancing than declining stocks and more advancing than declining volume. However, the TRIN
tells us that volume is beginning to be biased to the downside (i.e., ratio of advancing to declining stocks is
higher than ratio of advancing to declining volume).

A third example:

Advancing stocks = 75
Declining stocks = 60
Advancing volume = 650,000
Declining volume = 1,000,000

TRIN = (75/60) / (650,000/1,000,000) = 1.25/0.65 = 1.92

As we can see, despite that the number of advancing stocks was greater than the number of declining stocks,
declining volume was higher than advancing volume. The result (1.92) tells us that declining stocks obtained
over 90% more than their share of the volume.

A result of 1 means that both advancing and declining stocks are getting their fair share of volume. A TRIN
above 1 means that declining stocks are getting more than their share of volume, which is bearish, while a TRIN
below 1 tells us that advancing stocks are getting more than their share of volume (bullish).

The Arms Index, or TRIN, moves in the opposite direction of prices. Rising TRIN is bearish, while falling TRIN is
bullish. Some technicians like to invert the scale so that rises and declines in the TRIN match those of prices;
however, Richard Arms recommended using the TRIN as is without inverting the scale. It is up to the technician
whether to invert the scale or not, but it must be understood that if the scale is not inverted, then a rise in the
TRIN will be bearish, and vice versa.

The Arms Index has its pitfalls. We will explain these pitfalls as we go through the thrust oscillator. For now, we
will look at how do we use this indicator, showing some examples.

Using the Arms Index
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1- Using the raw indicator as overbought and oversold

Richard Arms explained in his book Trading Without Fear that the TRIN usually stays between 0.75 and 1.15
about 70% of the time. He mentioned that readings below 0.5 and above 1.75 are very rare; thus, they constitute
important overbought and oversold levels.

Values below 0.5 are overbought
Values above 1.75 are oversold.

So when using the raw indicator, pay special attention to the two extreme numbers (0.5 and 1.75).

One of the pitfalls is that bullish numbers are limited, while bearish numbers have no limit. The index could only
go from 1 to zero in the bullish direction, while it can go to infinity in the bearish direction. This means that we
can see values of 2, 3, or even higher. For this reason, we recommend that technicians define by themselves the
levels that they see crucial as overbought and oversold. We should not just stick on the numbers defined by
Arms to define overbought and oversold. Let the chart tell you where the real overbought and oversold levels
are.

The chart above shows the S&P along with the TRIN. We have defined 1.75 and 0.5 as oversold and overbought.
As we can see, values that spiked sharply above 1.75 served as good buying opportunities. The major trend was
up; this is why low numbers did not serve as strong overbought areas. Many times, the TRIN declined
temporarily below 0.5 and rose, but the market continued its rise without witnessing a significant decline.

2- Using a moving average of the TRIN

A 10-day moving average is usually used to define overbought and oversold levels. Using a moving average of
the TRIN has the advantage of reducing the noise of the raw data. Overbought and oversold levels will be
altered to 0.7 and 1.2, respectively. Obviously, these levels can also be altered.

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NASDAQ
10 days MA TRIN

The chart above shows the NASDAQ along with a 10-day moving average of the TRIN. The scale on the left
belongs to NASDAQ, while the one on the right belongs to the TRIN. As we can see, signals are easier to detect
than those triggered by using the raw indicator. Overbought and oversold levels are placed at around 0.7 and
1.2, respectively. Note that when the TRIN violated 0.7 to the downside, it coincided with a short-term top. A
break above 1.21.3 also signalled a bottom. The indicator, however, sometimes stays in the oversold area for
longer periods of time.

In his book Technical Analysis of the Financial Markets, Murphy mentioned that we can use a double crossover
method. He advised using 21-day and 55-day moving averages of the TRIN. Using two moving average
crossovers with an oscillator has the pitfall of generating whipsaws.
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21 and 55 MA
crossover
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The chart above shows the S&P 500 along with a 10-day moving average of the TRIN. As we can see, the
overbought area lies between 0.75 and 0.95, while the oversold area lies above 1.5. Both times when the
indicator surpassed 1.5, a significant bottom appeared in the S&P.
If we look at the right edge of the chart, we will see the indicator making a higher low (bearish) while the S&P
was trying to find resistance.

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From the top, NYSE Index, NYSE Arms Index, NYSE 4-day moving average, NYSE 10-day moving average, during
20022004. Overbought/Oversold levels are clearly marked on the three indicators, with the 4-day moving
average providing the best signals.

Pitfalls of TRIN
1.
TRIN is bounded for up days and unbounded for down days. The index could only go from 1 to zero in
the bullish direction, while it can go to infinity in the bearish direction.
2.
The equation is not consistent. Advancing issue with declining volume on one side, while declining
issues with advancing volume in the other side. As a result, TRIN will not identify strong up days or
strong down days properly.
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Appendix C

Time Cycles Analysis (to be added)

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Appendix D

Point and Figure Techniques
(IFTA Required CFTe II Reading Material)

Mohamed, Younis, CETA, CFTe

"If you had to go to a desert island and were only allowed to take one investment tool with you, then it should
be the Point and Figure chart. With these words Robin Griffiths described Point and Figure as the best
investment tool.

27 Throughout last century, analysts plied in the definition and description of Point and Figure charts. They
competed in order to come out with the best definition. Actually all definitions and descriptions were
based on the understanding and the way of using of the analysts themselves. Just to mention few of
these:
28
Tom Dorsey stated that:The Point and Figure methodology is just a logical, organized way of
recording the relationship between supply and Demand.
Jeremy Du Plessis descried Point and Figure as the voice of the market and he continued, All other
charts having time-scales must move forward as time passes, whether the price is changing or not.
When the market is quiet, Point and Figure charts do not move. When the market is busy and the price
is moving up and down, Point and Figure charts show that movement.

In other words Point and Figure charting could be outlined as*:

An irregular time series price filtration system

This definition has mainly three parts:
1) Irregular time series
2) Price filtration
3) System
1) Irregular Time Series

We all use Line and Bar and Candlesticks charts which fall under the umbrella of the regular time series charting
and defined as a sequence of price data points in successive order, occurring in uniform time intervals.
But what we are going to discuss, falls under another kind of umbrellas called the irregular time series charting.

*Authors point of view

Irregular time series charting defined as a price charting that does not take time into consideration. It does
not plot price against time as all other techniques do. Instead it plots price against changes in direction. In case
of Point and Figure we plot a column of Xs as the price rises and a column of Os as the price falls.
Point and Figure is the most famous irregular time series charting which pulls the spotlight from its other family
members like:
Kagi charts Japanese
Three Line Break TLB charts
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A
B
2) Price filtration

We already use price filtration in the regular time series charting. The weekly chart for example is a
kind of filtration. It filters all the volatility and noise of the five working days and merges them into
only one bar or candle.

In Point and Figure P&F we use many types of filtration, but the most important are:
Box size which filters the price by ignoring any movement below certain amplitude chosen in advance.

Box Reversal filters moves against the direction of the current column or prevailing trend.

3) System

System is: A set of interacting or interdependent components forming an integrated whole. This definition is
fully in line with P&F charting.
In P&F there are three main components that should be interacting harmoniously in order to get the right
output or the right chart.

These components are:
1) Input Variables
2) Box Size
3) Box Reversal

Figure 1: Point and Figure Components

Any change in one of the components may force us to make a change in one of the other components or both
of them in order to get a suitable/perfect output or chart. It means that it is always required to search for
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homogeneity of this system. Sometimes I borrow a proverb and make some changes in order to explain this
issue: Dont wait for a perfect chart. Take the chart and make it perfect. This kind of flexibility made me fall in
love with P&F methodology.

P&F History

The origin of point and figure charts is unknown, but we know they were used at the time of Charles Dow
around the late nineteenth century. Some have though that "point" came from the direction of the entries on
the chart, pointing either up or down, but more likely "point" refers to the location of the price plot, which at
first was just a pencil-point mark. "Figure" comes from the ability to figure from the points the target price.

It does not really matter where and how it got its name, because the method we know today is called the Point
and Figure method and the charts we draw and analyze are called Point and Figure charts.

Some of the first point and figure charts were constructed by taking a piece of graph paper and recording the
price of the stock in each box. For instance, if a stock was trading at $50, then the figure 50 would be written in
one square. If the stock then traded up to $51 the next day, a 51 would be written. If the stock began to fall in
price, the chartist would move over a column and begin recording the figures 50, 49, 48, and so forth (EARLY
POINT AND FIGURE CHART). Over the years, the point and figure methodology has developed, and now the
prices are put on the vertical axis and the numbers or figures have been replaced with Xs and Os (MODERN
POINT AND FIGURE CHART). Simply stated, Xs stand for demand and are always moving up the chart, while Os
stand for supply and are always moving down the chart. Here are the basic tenets of a point and figure chart;
see EARLY POINT AND FIGURE CHART and MODERN POINT AND FIGURE CHART.

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Figure 2: Early Point and Figure Chart
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Figure 3: Modern Point and Figure Chart

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Point and Figure Construction
Input Variables
As the definition, Point and figure charting is a system and every system has its inputs and outputs. To
construct a Point and Figure chart, we should first know our inputs. Are they tick-by-tick data prices or hourly or
daily or even weekly or monthly prices? Do we use the open, high, low, close and volume to construct this kind
of chart?
Actually inputs can be tick-by-tick prices which is preferred or it can be any end-of-interval time frame. It
depends on the analysts point of view. But what you should know that when you choose a higher time frame
interval, you are making a kind of filtration. Yes, we mentioned before that weekly chart is kind of a filtration for
the daily chart.
After selecting the time frame interval, it is the time to choose between two methods:
1) Close only method which neglects all inputs except the close price of the selected time frame interval
2) High and Low method which uses only high and low of the selected time frame interval
It is clear now that in Point and Figure charting, there is no need for the Open price and Volume. Maybe in
future, analysts would find a way to take advantage of them.
P&F charting does not take volume (as a separate entity) into account and accordingly, does not record or
graph it. P&F claims that volume is usually reflected in the number of prices changes shown on the chart. In
other words, if the volume is sufficient to cause a significant movement in price, this movement will be clearly
reflected on the P&F chart. New P&F software programs graph volume but still without clear benefits.

Box Size

As we mentioned before, modern Point and figure charts constructed of column of Xs which represents a
sequential upward move and Column of Os which represents a sequential downward move.
Xs and Os called boxes. Each box is given a sensitivity value before the chart is constructed depending on the
degree of filtration that analyst needs. This is called the box size. It may be 1 point, 1/2 a point, or it may even be
50 points.

In other words Box Size Refers to the minimal vertical unit distance movement allowed in order for an actual
change in a prices value to be charted.
Prior to the use of computers, Point and Figure analysts arbitrarily changed the size of the box at certain key
levels to cater for large rises and falls. For example, they may use a box size of 0.5 when the price is below 50,
then 1 when the price is between 50 and 100 and so on. There were no strict rules, but the attempt was to
change the sensitivity of the chart as the price increased or decreased. This method does, however, create a
number of problems:
- It is too arbitrary.
- The changes in box size are not smooth, but happen suddenly at specific levels.
- Construction becomes much more difficult because box sizes are changing. This is especially so when plotting
at the change-over level.
- It is doubtful that trend lines across the change-over point are valid because of the step change in the box size.
- Counts (Targets) are difficult to work out because the box values change halfway through the count.

It was in fact a sensible attempt at a log scaled chart without getting too deeply into complex mathematics. The
advent of personal computers for Technical Analysis has, however, allowed the construction of genuine log
scaled Point and Figure charts.

Box Reversal
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Also known as Reversal Amount or Reversal and refers to the minimum number of boxes required In order to
move from an existing column to a new one in a reverse direction
Traditionally the reversal has been 1-box, 3-box or 5-box, where to record a change in direction the price must
reverse by either the value of 1-box, 3 boxes or 5- boxes.
1-box charts provide the detail of the price action and are vital for understanding the demand and supply forces
involved. 3-box charts provide more of a summary of the price action, without showing the detail that the 1 -
box charts show, and are vital for assessing the short, medium and long-term trend. Finally, 5-box charts show
the main long-term trend with none of the detail shown in 3-box charts.

3-box reversal charts are very different from 1-box charts. The main difference is in the unique asymmetric filter
used in the 3-box reversal. 3-box charts consider the value of 3 boxes when a reversal is being determined, but
the value of 1 box when a continuation of trend is being determined. This gives greater weighting to the
prevailing column and hence the trend.
1-box charts apply the same filter to the price in both directions so we can consider it as a symmetric filter. In
other words, you add a box to an existing column if it has moved in the same direction as the column, but you
also add a box to a reversal column if it has reversed by the box size.

Changing among different box reversals considered to be as a changing in time horizon. The time horizon
changes when you change the sensitivity of the chart. When analysts raise the sensitivity from 5-box reversal to
3-box reversal, they are looking for a shorter time horizon and vice versa.

There is no time scale in P&F charting but we should differentiate between time scale and time horizon.
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The figure above illustrates the full process to get the P&F chart. First of all analyst should select between tick-
by-tick prices which is preferred or any end-of-interval time frame 1 minute, 5 minutes, half an hour, daily or
even weekly price input then analyst should select between Hi/Lo Method or Close Only method depending on
the degree of filtration needed.
I usually prefer Hi/Lo Method when determining supports and resistances is important at certain stage. But
Close Only Method is more important when breaking confirmation is needed at other stages.
Depending on Time Horizon needed and instrument Volatility we select the suitable box size and box reversal. If
you are facing a volatility issue it will be better to decide Box Size first but if the time horizon is your aim so lets
start with Box Reversal. These factors are totally tied with input variables. As we mentioned before its a system
and all factors are subject to be homogenously tuned in order to get the suitable and perfect chart.

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Appendix E

Primer on ICHIMOKU
(IFTA Required CFTe II Reading Material)

Yukitoshi Higashino, MFTA
NTAA Director
Nippon Technical Anlaysts Association (NTAA)

Preface

Ichimoku Kinko Hyo, commonly referred to as just Ichimoku, is a technical analysis method developed by
Goichi Hosoda (18981982), a Japanese financial market journalist, through his many years of research in
financial markets. Even 30 years after Hosodas death, Ichimoku is still widely used by traders and investors as
an effective tool for analyzing markets and trade in Japan. Although Ichimoku is becoming more popular
among an increasing number of traders and investors around the world, it does not seem to be used as widely
and as effectively as it is in Japan. The causes of this are multifold. First, Ichimoku is an integrated set of
multifaceted market analysis principles and techniques, including price projection, time projection, and wave
analysis, among others. The wide variety of techniques and concepts included in the Ichimoku theory make it
highly challenging to fully master. And obviously, a language barrier exists. Japanese is a tricky language for
many Westerners (on a side note, in my humble opinion, with its simple pronunciation system it can be a very
friendly language, making it one of the best choices when deciding to learn a new language). Japanese
vocabulary and grammatical structure are very different from English, making translation from Japanese into
English quite difficult. It is an especially challenging task to find the right English translations of many Japanese
words used in the original Ichimoku theory. Unless one has a good understanding of the theory, it is practically
impossible to adequately translate Ichimoku educational materials into English.

Using NTAAs educational material as the base, I have prepared this primer on Ichimoku, with the aim of
effectively introducing Ichimoku to English-speaking learners. To make this primer study-friendly, I have
made an attempt to use plain English words instead of being loyal to the Japanese words in the original
theory. Ichimoku theory puritans may say that the original theory has been outrageously simplified in this work
and that a lot of important things are missing. They may even say that such oversimplified Ichimoku is not real
Ichimoku. There is an element of truth in such a criticism. To be very clear, this is just a primer on Ichimoku and
not comprehensive educational material describing all the tenets of the theory. Learners should treat this work
as such. Nevertheless, I believe this document will push the interested in the correct direction and hopefully
inspire people to seek out all its more complex aspects.

I hope this primer helps my IFTA colleagues learn the very basics of this unique technical analytical method
developed in Japan.

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Introduction

To know the next market direction, one only needs to know which sidebuyers or sellersis winning or losing.
The market moves in the direction of the break in equilibrium between the buyers and sellers. The chart
developed by Hosoda allows one to instantly grasp the equilibrium state of the market. This is why it was
named Ichimoku Kinko Hyo, which literally means One Glance Equilibrium Chart in Japanese.

The three basic principles of the Ichimoku theory are time, wave structure, and price level.

In Ichimoku, analysis is focused on the underlying powers in the market. Overpriced stocks fall, and
underpriced stocks rise. No market continues rising or falling infinitely. Stock prices often rise when the
economy is in bad shape and fall when the economy is in good shape. This is a common economic phenomenon
that reflects movements of money in the system. Ichimoku is a method for rationally gauging the state of the
financial markets that fluctuate, reflecting the underlying powers.

The market can only move or stay flat. When it moves, it can only rise or fall. It is as simple as this. But many
traders/ investors fail to make money, frequently because they make the process of market analysis overly
complicated. Another reason is that their trading/investment process lacks rigor. We should not take action
based on subjective market analysis or a wishful projection. We should not act on unverified rumors, nor should
we be influenced by the market atmosphere. When we take an action based on a projection, it has to be
measurable. We often hear people saying that we should buy on weakness or sell on strength. In most
cases, however, their answers are vague and do not state at exactly what price. Ichimoku provides an objective
base for taking trading/investment action. It tells us at what price to buy or sell and when. Projections made
with Ichimoku are always measurable.

One of the important traits of Ichimoku is its time study. Most market players focus on price moves and tend
to make light of the time factor. In Ichimoku, while price moves are important, the time factor is more
important; without a solid time study, one cannot have a true understanding of the markets.

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2. Composition of the Ichimoku Chart

Ichimoku consists of a candle chart and five lines, as shown in Fig. 1.
(1) Conversion line (highest high + lowest low)/2 in the last nine periods (including the current period)
(2) Base line (highest high + lowest low)/2 in the last 26 periods (including the current period)
* Base line and Conversion line are plotted in the current period.
(3) Leading Span 1 (Conversion line + Base line)/2
(4) Leading span 2 (highest high + lowest low)/2 in the last 52 periods (including the current period)
*Leading spans 1 and 2 are plotted 26 periods ahead (including the current period).
(5) Lagging-span Current price plotted 26 periods back (including the current period)
* It becomes a line that runs parallel to the current price line.
(6) Cloud The space between Leading span 1 and 2

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3. The Five Basic Lines and Their Uses/Functions

(1) Base line and Conversion line
The Conversion line is the midpoint of the high-low range in the last nine periods (including the current period),
and the Base line is that of the last 26 periods. They may look similar to moving averages but are different. They
may be called "moving midpoints". In Ichimoku, midpoints are thought to represent better equilibrium points in
the market than moving averages. In moving averages, closing prices are treated as king. Regardless of the
volatility or the price swing in a given period, the closing price is the only thing that is counted. That is, even if
the price swings vary widely in a period, it is not reflected. Ichimoku dismisses this and instead uses the
midpoint indicators, which reflect the whole price range in a given period.

When the Conversion line crosses above the Base line, a bullish signal is generated, indicating that one should
start looking to buy the market. When the Conversion line crosses below the Base line, it is a bearish crossover,
signaling that one should start looking to sell the market. This is the basic rule.

When implementing this, one should bear in mind the following points:

(a)
The direction of the Base line should be taken as the direction of the market. Even if the
Conversion line has crossed above the Base line, it is not really bullish if the Base line fails to
turn up. More often than not, a rally not accompanied by an upturn in the Base line ends up
short-lived. By the same token, even if the Conversion line has crossed below the Base line, it is
not really bearish if the Base line keeps trending upward. More often than not, a downswing
not accompanied by a downturn in the Base line also ends up short-lived.
(b)
The Base line often serves as support when the price corrects downward in a bull market. It
serves as resistance when the price corrects upward in a bear market.
(c)
In a strongly bullish or bearish market, the Conversion line often serves as support or
resistance, and that is often enough to terminate any corrective moves.

(2) Cloud (Space between Leading span 1 and Leading span 2)
The cloud-like area formed by the Leading span 1 and the Leading span 2 is called the Cloud (kumo in
Japanese).

Following are the principal points of the Cloud:

(a) The Cloud is used to determine the market direction. When the price is above the Cloud, it is judged
that the market is in a longer term bull market. When the price is below the Cloud, it is judged that the
market is in a longer term bear market.
(b) The Cloud serves as longer term support in a bull market and longer term resistance in a bear market. A
break through the Cloud signals a change in the longer term market trend. A break above the Cloud
signals that the longer term trend has turned from bearish to bullish. A break below the Cloud signals
that the longer term trend has turned from bullish to bearish.
(c) The degree of thickness of the Cloud indicates the degree of strength of the support or resistance it
provides. When the Cloud is thin, it is weak as a support/resistance zone. The price can break through it
with relative ease. When the Cloud is thick, it serves as a strong support/resistance zone. In a bull
market, down corrections often stop in the Cloud. In a bear market, upward corrections often stop in
the Cloud.
(d) Changes in the shape of the Cloud provide useful insights into what is happening in the market. As the
result of the two lines constituting the Cloud (the Leading span 1 and the Leading span 2) interacting
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with each other in various ways (e.g., approaching each other, diverging, crossing, moving in parallel to
each other), the shape of the Cloud changes constantly. For instance, it is observed in many markets
that when the Cloud twists, as the two lines constituting the Cloud (the Leading span 1 and the
Leading span 2) cross each other, a trend change takes place at relatively high frequencies. So is the
case when the Base line and the Leading span 2 approach each other. There are many other interesting
observations, but discussing them at length here would not fit to the purpose of this primer. Readers
of this primer are encouraged to make your own discoveries by observing the changing shapes of the
Ichimoku Cloud in the markets you trade in or analyze.

(3) Lagging span
The lagging span is drawn by plotting the current closing price 26 periods back.

Much information can be obtained from the relationships between the Lagging span and the other four lines.
While there are many ways to use the Lagging line, the most common ways to judge the market direction using
the Lagging span are as follows:

(a) Lagging span vs. Current price (of 26 periods ago)
If the Lagging span is above the current price (of 26 periods ago), it is bullish. If the Lagging span is below the
current price (of 26 periods ago), it is bearish.

(b) Lagging span vs. Cloud
If the Lagging span is above the Cloud, the longer term trend is upward. If the Lagging span is below the Cloud,
the longer term trend is downward.

(4) Three Conditions to Make a Safe Bull (Bear) Call
According to the Ichimoku theory, when the following three conditions are in place, one can safely judge that
the market is in a bullish (bearish) state.

(a) The Conversion line is above (below) the Base line, which is trending up (down) or at least flat.

(b) The Lagging span is above (below) the current price (of 26 periods ago).

(c) The price is above (below) the Cloud.

(5) Typical Bottoming-out (or Top-forming) Pattern
Fig. 2 illustrates a typical bottoming-out pattern, with the price starting to rise sharply after hitting the second
bottom (C) without falling below the previous low (A). (The horizontal line drawn from the first bottom is called
Border line in the Ichimoku terminology.)

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In terms of Ichimoku, the following are the typical bottoming-out patterns. (Markets do not always follow this,
so readers should treat it as just a reference example.)

The second bottom (C) is formed within 26 days of the first bottom (A).
Within several days of the second bottom (C) forming, the Conversion line crosses above the
Base line, the Lagging span crosses above the current price (of 26 days ago), and the price crosses
above the Cloud.
After the price crosses above the Cloud, the price starts rising at an accelerated rate. The price
may correct downward, but it gets supported by the Cloud and resumes the rally within nine days.
It is ideal if a breakaway gap develops after the price hits the second bottom (C) and even
better if consecutive gaps appear.
Ideally, the price does not fall below the Base line.

The reverse applies in the case of a top-forming pattern. These are some typical examples.

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Fig. 3 is the daily chart of Trendmicro, a Japanese Internet security company, from July to early November 2011.

In September, a secondary low (C) was formed without the price falling below the previous low (A).

In early October, the Conversion line crossed above the Base line, and the price crossed above the Cloud ().

Then, the Base line started trending upward ().

Subsequently, the Lagging span, which occured in late August, crossed above the current price line (). Now,
the three conditions have occurred under which one can safely judge that the market is in an uptrend.

In mid-October, the Lagging span, which occured in early September, crossed above the Cloud, further
confirming that the market was in an uptrend ().

The subsequent rally was strong, and the price was supported by the Conversion line ().

Fig. 4 is the daily chart of Japan Tobacco, a Japanese tobacco company, from May to early November 2011.

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In late July, supported by the Base line, the secondary low (C) was formed without the price falling below the
previous low (A).

The price crossed above the Cloud, gapping above the upper boundary of the Cloud (). This was seen as a
breakaway gapa bullish signal.

The price gapped up again, forming successive gaps (). This was strongly bullish.

The Base line started rising sharply ().

During the subsequent period, except for the period from late August to early September, the Base line served
fairly well as support (on a closing basis).

From late August to early September, although the price fell below the Base line, it rebounded immediately as it
approached the Cloud. There was no need to be concerned about a possible trend reversal at this stage, since
the Cloud started to become thick in early September, indicating that it would provide strong support ().

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Fig. 5 is the daily chart of Toho Holdings, a Japanese wholesaler of medicine and medical tools and equipment,
from June to early November 2011.

The price started rising sharply after forming a higher low at C (higher than the low at A) and breaking above
the Cloud. During the rally, the price was supported by the Conversion line.

Prior to this, the market hit a temporary high at B. This was because the Lagging span was hitting the Cloud.

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4. Waves Structure Principles

Hosoda, in his book on Ichimoku, explained his wave theory in detail, spending many pages on this subject
alone. While it may be interesting to advanced Ichimoku students, I do not think that discussing it at length is
within the scope of this primer, so, I will just briefly explain his wave theory without going into great detail.

Hosoda classified the wave patterns that appear in financial markets into a number of groups according to their
wave structure, and he gave them unique names. They are designed to help understand price levels, time levels,
and the direction of the market.

I wave: A single rectilinear or straightish (normally sharp) thrust up or down without notable corrective moves.

V wave: A wave consisting of two successive I waves, a sharp thrust up followed by a sharp thrust down, or a
sharp thrust down followed by a sharp thrust up.

N wave (Fig. 7): An up-down-up or down-up-down wave. This is the wave pattern most commonly seen in the
market.

An uptrend is made up of a series of N waves forming higher highs and higher lows. A downtrend is made up of
a series of N waves forming lower lows and lower highs.

When the price falls below the previous low, the uptrend terminates. In a downtrend, lower lows and lower
highs are formed.

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An uptrend terminates when the price falls below the previous low. It is confirmed that the market has hit a top
when a lower high is formed. (Fig. 8)

A downtrend terminates when the previous high is broken. It is confirmed that the market has hit a bottom
when a higher low is formed. (Fig. 9)
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Y wave: A wave pattern characterized by widening price movements (with the price forming higher highs and
lower lows), similar to the expanding triangle pattern. Candlestick-wise, the engulfing pattern is formed. This is
a reversal pattern.

P wave: A wave pattern characterized by narrowing price movements (with the price forming lower highs and
higher lows), similar to the normal triangle pattern. Candlestick-wise, the harami pattern develops.

S wave: A wave pattern that appears in the middle of a large (up or down) trend. In an uptrend, a higher low is
formed near the second last high. In a downtrend, a lower high is formed near the second last low.
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Example:

Fig. 11 is a daily chart of the Nikkei Stock Average from June 2010 to March 2011.

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The wave from A to B is an "I wave".
The wave from B to C is also an I wave.
The wave from A to C is a V wave.
The wave from B to E is an N wave.
The wave from E to J is an N wave structured upward. The uptrend would terminate if the price
fell below the low I.

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5. Price Projection

In Ichimoku, there are six principal projection methods, as shown below in Fig. 12. The first four are the principle
ones. .

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N projection Up: N = C + (B A) Down: N = C (A B)

* These two equations are effectively the same, but I show both as I believe this makes it intuitively
easier to understand for readers. The same applies to the following:
Up: Add the distance of the last upleg to the last low
Down: Subtract the distance of the last downleg from the last high
E projection Up: E = B + (B A) Down: E = B (A B)
Up: Add the distance of the last upleg to the last high
Down: Subtract the distance of the last downleg from the last low
V projection Up: V = B + (B C) Down: V = B (C B)

Up: Add the distance of the last downleg to the last high
Down: Subtract the distance of the last upleg from the last low
NT projection Up: NT = C + (C A) Down: NT = C (A C)
Up: Add the distance between the last two lows to the last low.
Down: Subtract the distance between the last two highs from the last high
Page 110 of 124


Y projection (to be used in Y waves) Y = B + (A C)

Add the distance between the last two lows to the last high
P projection (to be used in P waves) P = B + (A C)
Add the distance between the last two highs to the last low
Page 111 of 124

S projection (to be used in S waves) S = A

Up: The level of the second last high itself

Down: The level of the second last low itself

To project higherdegree targets, using the four principle projection methods (N, V, E and NT projection), whole
number multiples of the distances used above (i.e., distances between previous highs and lows) are used.
When the market is about to make a big move up, those distances typically are multiplied by four to project
targets (and added to or subtracted from the pivot point).

According to the original Ichimoku theory, to calculate the target prices for indices, closing prices should be
used; to calculate the target prices for individual stocks, intraday highs and lows should be used.

Readers are reminded, however, that in the Ichimoku theory, the time factor is more important than the price
factor. One should avoid being excessively obsessed with the price targets.

Let me show a couple of examples.

Fig. 14 is the daily chart of Toyota, Japans largest car manufacturer, from October 2011 into 2012. It hit the first
bottom at 2,330 (A), followed by an intermediate top at 2,690 (B). The secondary bottom was formed at 2,472
(C).

Page 112 of 124


Although one cannot confirm that the secondary bottom was formed at C before the price takes out the high B,
one can start calculating the targets assuming that the low C would hold.

N projection: The targets can be calculated by adding the distance of the previous upleg (from A to B),

or its whole number multiples, to the low at C.
N1 = C + (B A)
= 2,472 + (2,690 2,330)
= 2,832
N2 = C + (B A) x 2
= 2,472 + (2,690 2,330) x 2
= 3,192
N3 = C + (B A) x 3
= 2,472 + (2,690 2,330) x 3
= 3,552

E projection: The targets can be calculated by adding the distance of the previous upleg (from A to B),

or its whole-number multiples, to the high at B.
E1 = B + (B A)
= 2,690 + (2,690 2,330)
= 3,050
E2 = B + (B A) x 2
= 2,690 + (2,690 2,330) x 2
= 3,410
E3 = B + (B A) x 3
= 2,690 + (2,690 2,330) x 3
= 3,770

V projection: The targets can be calculated by adding the distance of the previous downleg (from B to

C), or its whole-number multiples, to the high at B.
V1 = B + (B C)
= 2,690 + (2,690 2,472)
= 2,908
V2 = B + (B C) x 2

= 2,690 + (2,690 2,472) x 2
= 3,126
V3 = B + (B C) x 3

= 2,690 + (2,690 2,472) x 3
= 3,344

NT projection: The targets can be calculated by adding the distance of the previous downleg (from A to

C), or its whole-number multiples, to the low at C.
V1 = C + (C A)
= 2,472 + (2,472 2,330)
= 2,614
V2 = C + (C A) x 2
= 2,472 + (2,472 2,330) x 2
= 2,756
V3 = C + (C A) x 3
= 2,472 + (2,472 2,330) x 3
= 2,898

The NT projection is not displayed on the chart, as it was not adequate to use this projection method in this
particular case.

Page 113 of 124


Fig. 15 is a daily chart of Sojitsu, an integrated Japanese trading company, from October 2011 into 2012. It hit the
first low at 114 (A) and an intermediate top at 131 (B9), followed by a secondary low at 116 (C). Then it rallied and
formed an intermediate top at 138 (D), followed by a brief dip that terminated at 129 (E).

I will not show all the target values projected by all the projection methods discussed above, only the ones that
looked relevant in this particular case.

The target prices projected by the E projection method using the first low (A) and the first intermediate high (B)
are:
E1 = B + (B A)
= 131 + (131 114)
= 148
E2 = B + (B A) x 2
= 131 + (131 114) x 2
= 165
E3 = B + (B A) x 3
= 131 + (131 114) x 3
= 182

The target prices projected by the V projection method using the first intermediate high (B) and the secondary
low (C) are:
V1 = B + (B C)
= 131 + (131 116)
= 146
V2 = B + (B C) x 2

= 131 + (131 116) x 2
= 161
V3 = B + (B - C) x 3

= 131 + (131 - 116) x 3
= 176
Page 114 of 124


The targets projected by the E projection method using the second low (C) and the second intermediate high
(D) are:
E1 = D + (D C)
= 138 + (138 116)
= 160
E2 = D + (D C) x 2

= 138 + (138 116) x 2 = 182
E3 = D + (D C) x 3

= 138 + (138 116) x 3 = 204

The targets projected by the N projection method using the second low (C), second intermediate high (D), and
third low (E) are:
N1 = E + (D C)
= 129 + (138 116)
= 151
N2 = E + (D C) x 2

= 129 + (138 116) x 2 = 173
N3 = E + (D C) x 3

= 129 + (138 116) x 3 = 195

One should be alert for cluster areas of projected target prices. In this particular case, one can see that there
are cluster zones at 146151 and 160165.

Page 115 of 124

Fig. 16 is a daily chart of Nippon Kayaku, a diversified chemical company based in Japan, from September to
December 2012.

I am including this to show how the price projection must be done together with the time projection.

The first target price projected by the N method using the first high at 829 (A), the first intermediate low at 732
(B), and the secondary high at 803 (C) was 706 (C (A B)). Actually, the market hit bottom when it
approached the said target price at 710. It took place during a projected time window for a trend reversal. There
were 26 trading days between the first high (A) and the second low (B). The time zone centering on the day 26
trading days after the second top (C) was the projected time window. The actual bottom was just one day off.

I will discuss time projection in more detail in the next section.

Page 116 of 124


6. Time Projection

One striking characteristic of the Ichimoku theory is the degree of importance it places on the time factor.
Hosoda taught, It is not that time merely passes as prices fluctuate in the market. Time influences the market.
The market is dictated by time.

Reversal Dates
a) Reversal
In principle, projected Reversal dates are the dates on which the market is projected to reverse directions
at relatively high probabilities.

b) Acceleration
The market does not always reverse on a Reversal date, however. In a strongly (up or down) trending
market, the existing move sometimes simply accelerates, instead of reverses, on a reversal date. This
happens more often in a downtrending market, than in an uptrending market. Suppose there is a market that
has been moderately declining into a Reversal date. If it cannot reverse direction during that time window,
oftentimes it starts falling sharply.

c) Extension
Comparatively speaking, this does not happen as often in an uptrending market as in a downtrending market.
In an uptrending market, the market sometimes reverses directions after the projected Reversal date, with a
delay, due to a phenomenon called extension (of a reversal time window).

Apart from the reversal and acceleration phenomena, volatility tends to rise on Reversal dates.

According to the Ichimoku theory, acceleration and extension are caused by the interaction of the Base
line, Conversion line, and Lagging line.

Reversal date projection
Ichimoku calculates Reversal dates in the following two ways. These two methods can be used separately or
simultaneously.

a) Basic number-based projection
b) Time parity-based projection
Page 117 of 124


Basic number-based projection
Reversal dates are projected by adding what are called the Basic numbers in the Ichimoku theory (e.g., 9, 17,
26) to the dates on which the market reversed direction in the past into the future. Fig. 17 illustrates this.

Page 118 of 124

Following are the Basic numbers to be used with daily data according to the original Ichimoku theory. After
many years of research, Hosoda concluded that these were the most useful default parameters.

(Fig. 18) Basic numbers to be used with daily data
Basic number
Comments
9
Useful for calling intermediate tops/bottoms
17
Useful for calling intermediate tops/bottoms
26
Useful in up markets
33
Particularly useful in down markets
42
Very important in both up and down markets
51

65
More useful in up markets than in down markets
76
129
172

Some Ichimoku researchers claim that they have found that 5, 13, and 21 should be added as Basic numbers
when dealing with weekly data.

Advanced Ichimoku practitioners use the Basic numbers in conjunction with the wave analysis in accordance
with the wave structure principles discussedearlie, which helps gauge which Basic numbers are likely to be
most effective.

Time parity-based projection
In this method, Reversal dates are projected by adding the same time distance (the number of days) between
two key dates in the past (on which the market reversed direction in the past) to the pivot date (a key date on
which the market hit a major top or bottom) from which to project into the future. This takes advantage of the
phenomenon that the market often reverses direction when the same amount of time has passed from a key
reversal date in the past as the amount of time between past major events in the markets.

Page 119 of 124


Fig. 19 illustrates this.
(1) Add the time distance (the number of the days) between the high C and the low D to the date of the low D
into the future
(2) Add the time distance (the number of the days) between the low B and the low D to the date of the low D
into the future
(3) Add the time distance (the number of the days) between the high A and the low D to the date of the low D
into the future
(4) Add the time distance (the number of the days) between the high A and the high C to the date of the low D
into the future

Page 120 of 124

Fig. 20 is a daily chart of the Nikkei Stock Average in 2011. The Basic numbers (9, 17, 26, 33, 42, 51) are counted
from the top A, bottom B, and the top C, to show how the market behaved on the projected dates. Also, it is
shown how Time parity-based projections were made using the dates of the same major market events (top A,
bottom B, and top C).

The Nikkei hit an intermediate top near 9 days (a Basic number) after the top A and started plunging into a
major low B, which was projected by the Basic number 17. Near the point 51 days (a Basic number) after the top
A, an intermediate top was formed. And the Nikkei hit the major top C 79 days (close to a Basic number 77)
after the major low B.
Time parity-based Reversal date projections were conducted in the following manners:

There were 95 trading days between the top A (February 21) and the top C (July 8). Adding this
number of days (95) to the date of the top C, a Reversal date was projected at November 25.
There were 79 trading days between the low B and the top C. Adding this number of days (79)
to the date of the top C, a Reversal date was projected at November 1.
Page 121 of 124

Fig. 21 shows what actually happened subsequently:

On October 28 (Fri), just two trading days off from the projected Reversal date of November 1
(Tue), the market hit a considerable intermediate top (E).
On November 25, the exact projected Reversal date, the Nikkei hit a major low (F).
Page 122 of 124

Fig. 22 is a daily chart of Nikkei Stock Average. The basic numbers are counted from the date of the low C. The
market hit a considerable intermediate top D 9 days (a Basic number) after the low C, a considerable low E at 17
days (a Basic number) after the low C, an intermediate top F 26 days (a Basic number) after the said low, and
terminated consolidation at G 33 days (a Basic number) after the said low. The time zones projected with the
Basic numbers 42 and 51 also corresponded with interesting market actions.

The circled numbers are the number of days between the dates of notable highs and lows hit during the period.
One would notice that the Time parity-based projection worked well to call market turns. Also, the one would
notice that the numbers are close to the Basic numbers. To be sure, separately run Basic number-based
projection and Time parity-based projection often converge.

The above may or may not be enough to show why Hosoda and many dedicated Ichimoku practitioners believe
time influences the market, and the market is dictated by time."

We will never be able to win in the market as long as we attempt to follow rumors or unfounded expectations
in the market, thinking that this is the way to make money. It is imperative to try to find unknown market
drivers, rather than chasing known ones. We should not think about the market based on news or other factors
that are already known. It should be the other way round. We should evaluate, and make a judgment on,
publicly known factors based on how the market is behaving. At the end of a major bull market, the market is
Page 123 of 124

full of positive news and stories. At the end of a major bear market, negative news and stories abound. When
the market stops reacting to such positive or negative news or stories, it is the very moment when we should
enter the market, of course, from the other side of the other players in the market. We have to do it swiftly and
decisively. If we rely on our judgment alone, we will feel uneasy at the decisive moment; oftentimes past
failures prevent us from focusing on the present. This prevents us from what we have to do as professional
market players. Ichimoku is a great tool to help us focus on the present, develop a flair for playing the market,
and do what we must as a professional trader/investor.

Created for IFTA colleagues based on the educational material of Nippon Technical Analysts Association (NTAA).

Page 124 of 124

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Financial Technician (CFTe) I & II Syllabus & Reading Material

Last updated: 22.08.14 11:22 AM

Certified Financial Technician (CFTe) I & II Syllabus & Reading Material

HISTORY OF TECHNICAL ANALYSIS.............................................................................................................3

PHILOSOPHY OF TECHNICAL ANALYSIS AND MARKETS ...........................................................................3

CHART CONSTRUCTION ...............................................................................................................................3

CONCEPTS OF TREND ...................................................................................................................................4

CLASSICAL BAR CHART PATTERNS..............................................................................................................4

SHORT TERM PRICE PATTERNS ...................................................................................................................5

POINT AND FIGURES CHARTING ..................................................................................................................5

CANDLE STICK CHARTING ............................................................................................................................6

OTHER CHARTING METHODS ......................................................................................................................6

ELLIOTT WAVE THEORY ...............................................................................................................................7

BASIC ELEMENTS OF GANN THEORY ..........................................................................................................7

BASIC QUANTITATIVE TECHNIQUES............................................................................................................7

OSCILLATORS AND CONTRARY OPINION ...................................................................................................8

RELATIVE STRENGTH ....................................................................................................................................8

TIME CYCLES .................................................................................................................................................9

VOLUME AND STOCK MARKET INDICATORS..............................................................................................9

OTHER TECHNICAL IDEAS .......................................................................................................................... 10

TECHNICAL SYSTEMS ................................................................................................................................. 10

ACADEMIC FINDINGS ON TA ...................................................................................................................... 10

SENTIMENT AND CONTRARY OPINION..................................................................................................... 10

BEHAVIORAL FINANCE & INVESTMENT PSYCHOLOGY ............................................................................. 11

Last updated: 22.08.14 11:22 AM

Certified Financial Technician (CFTe) I & II Syllabus & Reading Material

History of Technical Analysis

Early days: Dow, Schabaker, Wykoff

Philosophy of Technical Analysis and Markets

Technical versus Fundamental Forecasting

Technical Approach to Trading and Investing

What is a trend and how are they identified?

Supply and Demand

Assumptions of Technical Analysis

Random Walk Theory, Fat Tails, Proportion of Scale

Market Efficiency, Prediction of the Future

Criticism of Technical Analysis

Financial Markets and the Business Cycles

Types of Charts: Line, Bar, Candle, Point and Figures

Arithmetic or Logarithmic Scale

Volume, Open Interest

Closing Prices and Lines

Primary Trend, Secondary Trend, Minor Trend

The Dow Theorys Defects

Certified Financial Technician (CFTe) I & II Syllabus & Reading Material

Support and Resistance

Trendlines and Channels

Consolidations and Corrections

How does psychology impact trends

Classical Bar Chart Patterns

Psychology and Patterns

Reversal and Continuation Patterns

Patterns and Volume

Patterns and Price Objectives / measured moves

Head and Shoulder Patterns (normal and reversed)

Double Tops and Bottoms

Triple Tops and Bottoms

Rounding tops and bottoms

Saucers and Spikes

Triangles (symmetrical, ascending, descending)

Last updated: 22.08.14 11:22 AM

Certified Financial Technician (CFTe) I & II Syllabus & Reading Material