TUTORIALS IN APPLIED

TECHNICAL ANALYSIS
A publication of Guppytraders.com Pty Ltd ACN 089 941 560
Ph 08 89710106 Fax 08 89710130 Box 1438 Katherine NT Australia 0851
http://www.guppytraders.com e-mail [email protected]
The Australian Internet Trading Weekly
Weekly for Monday July 3, 2000 Based on Thursdays Close 26 pages
With contributions from T Compton and A Gibbs

CONTENTS
Section 1 A STAIRWAY TO PROFIT
Section 2 PROBABILITY TRADING
Section 3 MONITORING BRIEFS
Section 4 IDENTIFYING A TRADE WITH MACD_H
Section 5 THE SWISS ROLL PORTFOLIO APPROACH - BUILDING THE POOL
Section 6 IS THIS TECHNICAL ANALYSIS?
Section 7 IMPORTING TEXT DATA FILES INTO EZY CHART
Section 8 READERS QUESTIONS - TLS AND THE COUNT BACK LINE
Section 10 TRADING STYLES - SUPPORT AND RESISTANCE
Section 11 NEWSLETTER MARKET OUTLOOK
Section 12 NEWSLETTER NOTICES AND EVENTS
Section 13 SAMPLE PORTFOLIO PERFORMANCE

A STAIRWAY TO PROFIT
Taking profits should be easy but it is the area where traders can make the most serious errors.
While any profit is better than no profit, the objective is to take the best profit that is consistent with the
risk in the trade. The risk is always identified before the trade is opened. The risk may change as the trade
develops but good trade planning should already have solutions for this.
We used the sample Duketon Goldfields (DGN) trade as a derivative of the price of gold, and on
the basis if an up sloping trend line which incorporated an up sloping triangle. These were bullish signals
within the existing price activity of DGN. With DGN we placed an effective and valid trend line, shown
as A. Even though we are trading DGN as a derivative of the gold price, the trend is stronger with DGN.
Any close below the DGN trend line that followed a dip below the gold price support level would signal
an immediate exit. The trading plan called for an exit at $0.60.
The exit target was based on the double top that had developed with DGN in March. The double
top is a reversal pattern, and DGN did fall after this. As the new trend develops we look for prices to
pause around the same level again as they strike some resistance. It is the double top that makes this a
valid target. A single price spike through to $0.60 is not strong evidence to use as a target for future rises.
As the price action for DGN developed we observed two up sloping triangles develop. This is a
bullish signal and we used them to lift the targets for DGN and set the original target as a stop loss level.
Rather than placing an order in line at $0.60 we sat back a watched the price development for moves
above $0.60. The balance of probabilities in this trade changed as price action developed.

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The first triangle provided a target of $0.56. This is calculated by measuring the base of the triangle. This
is $0.08 high with a peak at $0.48. The value of the base is projected upwards giving a first target of
$0.56. This is a minor target on the way to the major price target at $0.60 based on the double top.
An unusual event happened with this development. Once prices reached $0.55 they pulled back
and tested the trend line. The bounced off it and then began to develop another up sloping triangle. using
the main trend line as the sloping base. This second triangle was nearly the same height as the first. This
was $0.07 high. This is an unusual situation and suggests a continuation of the strong trend. This starts
the development of a step-like trend pattern where prices rise, then move sideways back to the main
trend, then rise again. This is a powerful bullish pattern.
The rise in each step is used to set the next price target. The cumulative rises can be used to set
higher price targets. In practice I find that that this style of trend can be traded by using the height of each
step as a stop loss target in the trend, and the height of two steps as a trading target. The targets are
moved upwards by the value of two steps as long as the price rises remain steady and consistent with the
previous rises. With DGN this set a target at $0.70
If you are climbing a set of stairs it is OK while each step appears the same distance from the
other. A missing step is dangerous. The missing step with DGN is shown by the rapid price gap between
$0.57 and $0.68. Although this price rise delivers the target exit price based on a $0.15 rise it also shows
a break in the step pattern.
For tutorial purposes we take an exit at $0.75 on the close. You do not need intraday screens to
make this possible. Simply checking the price action several times during the day using a quote of request
screen will give you an idea of how price is performing. We do suggest that you do monitor all your open
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positions regularly, particularly trades which are expected to have a high level of volatility. Traders acting
on the end of day signal still would pickup good returns at $0.68. The returns for the sample portfolio are
66% on the trade, or $13,500. Similar trading opportunities existed in other gold stocks and our objective
is not to give you stock tips but to show you how trading techniques are applied in current market
conditions.

TRADING METHODS

STEP AND STAIRWAY TRADES

These are a chart pattern that forms above a strong up trend. The pattern starts with a sharp rise over several days
above the trend line. Over the next few days, or weeks, price move between the trend line and the initial high. This creates an
up sloping triangle that uses the main trend line as its sloping base. The next breakout in the pattern usually starts as the
triangle pattern is almost competed. It is a sharp rise over a day, or several days. It usually confirms the price projection
targets of the first triangle. Again prices drop back from the high, testing the trend line,. and the high point of this second
move. A new, small up sloping triangle develops. This is the second step in the stair case.
The height of the next step is projected from the new triangle. Additionally, the combined height of the first two
steps is projected upwards to set a major target. In a strong trend there many be 4 or 6 steps, or more that develop to complete
the staircase. After each step the first target is the height on the most recent triangle. the upper target is the combined height of
the two most recent triangles.
The pattern finishes when the step pattern is disrupted by a gap pattern. This is like a missing step in the sequence
and signals the top of the pattern. This is an exit signal. Another exit signal is when the step failed to move upwards in a
continuation of pattern. This signals traders to take the best exit possible, and this is usually confirmed by closes below the
major trend line.

PROBABILITY TRADING
Trading is about the balance of probability. It is not about prediction. Last week we dropped the
AML sample because we believed the balance of probability was weighted towards the bears. The main
reason for this was the down sloping triangle. We did note that an upwards break from this pattern would
still confirm our original trading targets with the first potential exit at $0.74 and the second major target at
$0.78. During the last week prices did break above this down sloping triangle and they rapidly reached the
target at $0.74. Looking at the 14 day RSI suggest that prices have a good chance of running through to
the original target of $0.78.
We got out of this trade because of the down sloping triangle. A trader who entered AML at the
same time would look for an upside break equal to the distance of the base of the triangle. He would use
standard triangle projection techniques to set the target price at $0.78. Additionally he would use entirely
different stop loss conditions using the bottom of the triangle as a support level.
There are two important issues here. the first is just why we made the exit decision and the second
is to decide if the exit decision was wrong. The primary reason for the exit decision with AML last week
was the development of the down sloping triangle and the failure of AML to move in reaction to the gold
price. The trade was originally taken as a way to trade rises in gold. The trade failed in both these
conditions.
Using other technical indicators also confirmed the probability of a price downturn. The RSI
showed a fast rise from over sold and then developed a down sloping trend that mirrored the down
sloping trend in prices. This is shown at B and B1. This is a confirmation signal. It confirms the direction
of the downtrend. Although this will eventually reverse it is a low probability outcomes in this situation.
The probability of a continued downtrend is demonstrated in area A and A1. Here is a duplicate of
the same price and RSI relationship. In this instance the high probability outcome developed as expected.
This is the key to effective trading decisions. A combination of the chart and RSI patterns in area

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A gave around an 80% probability that a downtrend would develop. This is not a hard figure. It is based
on observation of the consistent relationship between this RSI and price confirmation pattern.

The first closes below the down sloping triangle quickly led to a rapid decline. When we see a
repeat of this pattern in area B then we can expect that 8 times out of 10 the downtrend will continue.
The balance of probability is against the development of an up trend. We could wait for the first close
below the down sloping triangle baseline, or we can act in anticipation of it. We acted in anticipation
because the other features in our trading plan were also signalling the increasing probability of a bearish
outcome.
For eight trades out of ten in this situation we will be correct in our anticipation of the trend
development Two times out of ten we will be wrong, and prices will break upwards. AML developed as
one of the two times out of ten events.
Can we trade this? We can, but it is a high risk strategy. Reverse the probabilities to get the
answer. Taking a long side trade in a down sloping triangle with a confirming RSI pattern will succeed two
times out of ten. Just what are you going to do for the other eight trades that move downwards? If you
trading discipline is very strong, and your trade execution is excellent you will be able to get out most
times at or near your stop loss level. But this stop loss exit has to be consistently executed in eight out of
ten trades. Its a big ask for most traders.
If you believe in technical analysis, charting and trading is about prediction then you are reading
the wrong newsletter. We build our trading plans and approaches around the balance of probabilities a
shown by charting and technical indicators. As the summary trading results will show next week we get
around 30% of the trades wrong. Our returns of over 111% have come from 7 months of trading since
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July 1, 1999 by maximising the winners and limiting the losses. They have not come from accurate
prediction. We say 7 months of trading because for the last few months the portfolio has been ‘flat’.
There have been few sample trades because we believed the market was near a top and that this increased
the risk of all trading strategies Our focus in this period was on developing and testing the trading
strategies that would work once the market started to recover again. Now we are reaping the profits of
this strategy.
Just a final note in passing. A reader recently suggested that we were using old charts and making
some retrospective adjustments. Using these techniques we would have retained the AML trade and
booked a good profit to the sample portfolio results. Our analysis notes are prepared during the week and
are based on the chart up to the date shown on the chart display. Our purpose is to show you how to
trade, not what to trade. The sample portfolios are a way of keeping track of the success, or failure, or
these trading techniques. They show you how the results of trading are improved by good money
management and trading stop loss discipline. Next week we will carry a full summary of the sample trades
taken over the past 6 months.

SUBJECT SUMMARY
PREDICTION OR FORECAST?
Chart analysis is often confused with predicting or forecasting the market. This confusion is enhanced by those who
confuse trading and investing. Chart analysis uses the action of price and volume to clearly show how the market has behaved.
For traders, the past pattern of behaviour helps to identify market situations that have a high probability of a specific action.
The trading approach requires the trader to develop a plan to cope with the probability, or when that probability does not
eventuate.
When we cross the road we pause at the kerb, check right, left and right, then cross. The curb tells us changed
conditions ahead, but it tells us nothing about the actual events on the road. We prepare to behave in a particular way
depending on what the road reveals. Here the trader prepares to act one way if certain conditions are met, and another way if
different conditions are met.
Forecasting uses the higher probability situations in an attempt to project future price action and acts in anticipation
of this. It straddles the boundary between trading and investing. Here we stand at the traffic lights, stepping out confidently
when the walk sign flashes. Sometimes we get wiped out as a car crashes through the walk signal, but most times the signal
is reliable. When we see the signal we can forecast the action for a selected period of time. Here traders act when the event
occurs.
Prediction is a different beast altogether. It carries a high level of certainty about the occurrence of events at a specific
time. Some Gann and Elliott wave analysts make quite specific predictions. This is like saying that I know there is a set of
traffic lights at the end of the block, and that at 10.38 am the signal will be flashing walk. This leaves little room for
probability, although there are times when such predictions match the co-incident events. This means the predictions come
true. Separating the co-incidence for accurate predictive ability is difficult. The tendency with prediction is for traders, or
investors to act in anticipation of the event.

MONITORING BRIEFS
Every open trade deserves a few minutes of our time every day. We want these trades to give us
money so the least we can do in return is give them some of our time. The excuse that you do not have
enough time to do this is a self defeating attitude that will prevent you from becoming a profitable
investor, or a profitable trader. The sample portfolios used in the newsletter have shown some useful
returns in the last twelve months and cover both the bull market and the more recent bearish downturn. In
total these have included just a handful of open trades at any time. It takes just a few minutes day to
check the performance of 5 or 6 open trades. Lack of time is a poor excuse. Successful trading does not
require hundreds of trades during the year. It does require careful monitoring of each of the 20 or 30 trades
taken in a 12 month period.

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 The sample SRO trade has not generated any signal that requires action in accordance with the
trading plan. The sample SRP turnover trade has traded only 55% of the target volume so no action is
required.

The sample long term NAB trade shows price action still consistent with the straight edge trend
line in both daily and weekly time frames. Traders need to resist the temptation to fiddle with this trade
or to take early profits. The objective is to capture the broad trend. The trade is still consistent with the 3
long term moving averages. No exit is yet signalled but as the trade develops and we see the first signs of
trend weakness we will examine several strategies designed to lock in profits and reduce the risk to trading
capital.
Monitoring open trades is this simple. It is a profitable habit worth developing.

SUBJECT SUMMARY
PORTFOLIO MANAGEMENT AND REVIEW
Each trade is an island. It should stand alone, contributing profits, or small losses to the overall level of trading
capital. When traders consider positions in a portfolio context there is a tendency to sell the best performing stocks to help
compensate for the losses being incurred with the weaker portfolio stocks. It is better trading practice to cut the weakest and
continue to ride the profits with the strongest. Traditionally, Christmas and the end of the financial year are good times for a
portfolio reassessment, but any time when you will be away from the markets for more than a few days also demands a
portfolio review. A trading review involves closing those positions which could turn nasty while you are away. A portfolio
review means taking a solid look at the poor performing stocks you have fallen in love with. Despite the personal pain, some
do have to be put down.

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IDENTIFYING A TRADE WITH MACD_H
The MACD Histogram (MACD H) is used to identify a breakout in price with a high probability
that the price will continue in the direction of the breakout.

The actual histogram shows the difference between a shorter-term exponential moving average and
a longer-term exponential moving average. The difference is shown as a histogram that ranges above and

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below a zero line. The histogram can be used as either a lagging or leading indicator. When using the
MACD as a lagging indicator a buy signal is generated when the histogram crosses above zero and a sell
signal is issued when the histogram crosses below zero. Short-term retracements can also be anticipated
when the histogram changes direction. Under certain circumstances these retracements can offer good
places to take partial profits, especially after a sharp rally.

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 The daily chart of CBA is in an up trend. If we trade both the long and short sides of the
market, the MACD over this time period would have generated 4 winning trades and 5 losing trades.
Further observation shows that 4 out of the 5 losing trades were generated from taking short position
based on signals from the MACD Histogram. All four winning trades were from trading with the up
trend. In order to filter these losing trades it is important to analyse the weekly trend with the MACD H.
A signal from the daily chart should coincide with the direction of the weekly trend or it will almost
always be a false signal.
The chart shows the weekly graph of CBA. Note that the weekly chart shows a strong up-trend
over the period analysed and the MACD H remains above zero. Therefore by using the weekly chart as a
filter the results from trading the daily MACD become 4 winning trades and one losing trade as no short
positions would have been taken over this period.
In summary the signals from the daily chart need to be checked with the weekly chart for
verification. If the daily chart shows a buy signal but the weekly MACD H is below zero the signal
should be critically examined, as it may be a false signal.

INDICATOR BUILDER
MACD (Moving Average, Convergence, Divergence) Histogram
The MACD plots the average of two averages as a solid line. The signal line smoothes the first line by applying another
moving average to the data in the first line. The MACD Histogram plots the difference between the MACD and signal lines.
Bullish is plotted above zero, and bearish below zero. The slope of the MACD histogram shows the dominant market group
and when it moves in the same direction as prices, the trend is confirmed. Metastock formula is MACD()-Mov(MACD(),9,E).
This appears as a line. Select properties and display as a histogram. Save as a template for later use.

THE SWISS ROLL PORTFOLIO - BUILDING THE POOL

Last week we started to consider some ways to build better portfolio returns by retaining a
core of ‘good’ stocks and taking trading profits from them. We called this the Swiss roll approach because
the good bit, the jam, is twisted into a curve that repeats throughout the roll. A vertical cross section of a
Swiss roll shows both desirable and undesirable sections. If you want a lot of jam how much you get
depends on just where you cut. Closing out a portfolio carries the same type of vertical risk. In good
markets many positions will be profitable. In a properly diversified portfolio in any market some stocks
will be good and some will be performing poorly. The diversified portfolio more closely resembles the
Swiss roll diagram where any vertical cut will collect some jam, but not a lot.
We can get more jam out of this diversified pattern of rises and falls if we slice it horizontally
through the return horizon, even if the overall portfolio return is slightly upwards as it should be in a
rising market. By careful cutting we can select slices which have more jam than others. In effectively
managing an investment style portfolio the objective is to keep the integrity of the risk in the portfolio
while picking out the jam. This does not require exact timing as in trading. It does require a willingness to
act when necessary.
In an investment or superannuation style portfolio the search starts with yield, followed by
soundness, then trending activity, and last of all by volatility. We actively seek the volatility because it
provides the trading part of the investment strategy. Despite pages of tables, this is not an easy search
because these tables are either available only in printed form, or to subscribers only. In all cases we start
with a list of the top 100 companies.
The top 100 could include all those i n Martins Roths annual book, the Top 100 stocks, or they
can be taken from the top 100 ASX listing. We have used the top 100 listing provided by Huntlys in
printed format. These are stocks which can be considered ‘sound.’
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 The next step is to select those stocks which have the highest dividend yield. These figures are
available from Shares Magazine. These tables are supposed to be available in an Excel format, but we were
unable to find these on the Shares web site. The objective of this search is to create a portfolio pool of 10
stocks selected first on membership of the top 100 and second in order of dividend yield.
If we choose to select stocks purely on the basis of dividend yield then few of the candidates
also appear in to top 100 stocks. These are listed in Shares magazine. This may turn out to be a better
and deeper pool for the strategy being considered. We will compare outcomes over the next few weeks.
The selection pool from the top 100 A better selection pool based on
yield

This pool is the ‘jam’ in the Swiss roll. Because the list covers stocks from many areas we do
achieve a diversification in terms of exposure to different areas in the market. The pool is not diversified
in the sense that the dividend yield is in the higher levels. This is designed to supplement any poor price
performance.
These two factors form the base pool from which the portfolio candidates are selected. Our
objective is to have no more than 5 open positions at any one time. As one of the candidates fails to
perform it is dropped from the portfolio and replaced with the best performer from the remaining 5 in the
pool. The total number of shares included in the pool remain constant, although the membership of the
pool may change. The objective is to trade quality shares while having a reserve of quality shares to
draw upon as replacements.
The initial selection of 5 candidates is based on trending activity and the volatility of the stock.
This involves two different factors. We do not automatically select stocks in a strong up trend as we
need to determine the probability of this trend continuing. For this we apply technical indicators such as
the multiple moving average and the ADX group of indicators. The best outcome is to select stocks where
the trend is established, but still young.
The final selection filter is volatility. In this portfolio construction volatility is a desirable feature.
Instead of trying to reduce volatility we recognise that trends do not continue for ever. The objective is to
keep the portfolio exposed to ‘sound’ stocks but to take advantage of the normal highs and lows in the
sub trends in these stocks. We do not want stocks that move rapidly up and down, but stocks which have
a reasonable degree of price activity provide a useful capital addition to the portfolio performance.
We look more closely at how these selection producers are applied next week. The objective of
this portfolio structure is to capture dividend yield and to lock in capital gains so that the portfolio
increases in real cash terms over the selected period. We want to turn potential profits into real profits,

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and reduce the theoretical draw downs. While the value of the portfolio will fluctuate we want to take a
horizontal slice off the top, capture these profits, and put them to one side. It is a trading approach on a
long term basis using stocks which are normally considered as stable investment candidates. It is the
reverse of the standard portfolio review which crystallises losses on losers but fails to take profits on
winners.

TRADERS’ GLOSSARY
Swiss Roll portfolio management
Annual portfolio reviews focus on weeding out the poor performers in the portfolio. This magnifies the loss in a
portfolio, and reduces the impact of profits. Poor performing stocks should be cut as soon as they fall behind rather than when
they have reached the bottom. Additionally, because these reviews are done annually, or semi-annually, they take a vertical
slice through the risk profile of the portfolio. This does not allow the investors to take full advantage of the profits that have
been available in the previous 6 or 12 months.
The Swiss roll approach recognises that in any portfolio some stocks will be performing better than others at any
given point in time. This performance often moves in long waves, reaching towards the top of trends and then falling to the
bottom. Any vertical cross section captures both good and bad performance.
The Swiss roll approach cuts the risk profile horizontally at multiple time points rather than vertically at a single, or
just a few time points. The result is that profits are captured fully from each stock in the portfolio. Losses are cut quickly and
have a reduced impact on destroying portfolio performance. Entry into new positions is based on trend breaks, or tend
continuation and reserves are selected from a pool of potential candidates which have desirable features such as high dividend
yields.
The Swiss roll approach retains the integrity of the portfolio and its general risk profile while collecting profits and
cutting losses.

IS THIS TECHNICAL ANALYSIS?

We are on several brokerage mailing lists. Increasingly the monthly investment news includes one or two
technical analysis reports. Many of these are based on some type of cycle analysis and some seem to
believe that cyclic and technical analysis are the same. These reports are prepared in good faith but often
their technical analysis skills are questionable. There is a danger in accepting these reports at face value in
the same way that there is a danger in accepting ‘fundamental’ based brokerage recommendations without
further research and analysis.
AMP has appeared on a number of brokerage recommendation lists. Some have included it as a
technical buy. The chart shown in one brokerage report shows the AMP share price compared to the All
Ordinaries performance. This chart is duplicated using the Compare function in Ezy Charts. To make this
function work effectively you must ensure that the two data files are the same length. Because AMP
listed in mid 1998 and we want to compare it with the XAO we must adjust the display length of the
chart. By using the configure menu and setting the number of units displayed to 104 we do have two chart
extracts of equal length. In most cases a standard display length of 260 units will be ok for most stocks
that have been trading for several years.
The first chart is used as the reference chart. We bring up XAO, and then change the display to
weekly. The select Indicator from the file menu, select Compare and choose Store Base Data.
Next open a new chart, in this case AMP. We want to compare the AMP performance to the
XAO in per centage terms. First change the AMP chart to a weekly display. Select Indicator from the file
menu, then Compare, then As Percentage Return. The initial display will show a straight line, a single line
chart, and a bar chart in the background. We do not need to bar chart, so delete this by selecting
OPTIONS and then Hide Chart.
The horizontal line is the consistent value of the All Ords. The remaining line is the value of AMP
when compared to the All Ords performance. The scale, unfortunately, is the old price scale for AMP
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rather than the percentage scale. If it was a percentage scale then the Compare function also acts as a
quick Beta calculation. It can still be used in this way, but it does require some additional calculation. The
chart as shown is used as the basis of the brokerage technical analysis. This is a problem because the chart
display shows a financial performance relationship that has nothing to do with charting, technical
analysis, or cycle analysis.

AMP and the XAO

Compare chart Higher return
Weekly

All Ords
Lower return

AMP price

Note line distortion is due to

image compression for the
newsletter.

The brokerage recommendation of AMP as a low risk out performer is based on:
* Positive global sentiment for insurers
* A positive phase is underway as the downtrend band has been broken on the upside.
(they seem to ignore the possibility that this may be due to falling XAO performance rather than an
increase in AMP performance)
* GIO and CGH have improved so AMP should also improve because it has a higher sector
weighting. (This explanation fails to explain why AMP, with its higher sector weighting, has not
performed better in the past)
The real concern with this type of analysis is that it pretends to be technical analysis and gives
real technical analysis a bad name. It makes use of a financial chart to support some woolly conclusions
based on broad fundamental analysis. Traders, and investors, need to verify this type of so-called
technical analysis against their own charts. Do not assume that because the original analysis came from a
big name brokerage that it is always correct.
A quick chart analysis of AMP provides a quite different picture. The dominant feature is the
primary downtrend. This is likely to provide a resistance level for any immediate rally or price rise. The
secondary downtrend was broken late in 1999, but the breakout failed to establish a new up trend. Instead
the stock moved into a broad sideways consolidation band. Trading opportunities do exist between the
bottom and the top of the band. Investors using technical analysis are likely to take trading style

p12 30/06/2000
positions while waiting for a new up trend to develop with a substantial price move above the top of the
consolidation band and beyond the primary downtrend.

AMP
AMP Insurance
Weekly bar chart
Compressed

Primary downtrend

Secondary
downtrend

Consolidation
band

Being the best of a bad lot is not a reason for investing or trading. Being the worst of a bad lot is
even less reason for investment decisions. Good technical analysis keeps traders and investors out of
poorly performing stocks.

INDICATOR BUILDER
USING COMPARE
Open the first chart. Then use the FILE menu to select the second chart. Ezy Chart users should select the
OVERLAY CHART box on the right hand side of the chart selection dialog. Metastock users just open a new window, then
shift to tile windows display.
Ezy Chart users have a comparison chart immediately. Metastock users should select and drag the second chart onto
the first stock window to get the same comparative display.

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IMPORTING TEXT DATA FILES INTO EZYCHART V4
Many readers are now collecting reliable, cheap, and free data in text format. This can be imported
into EzyChart V4 using the text important function. Just Data has provided us with the steps that apply
with their Bohdi FreeWay program that collects free text data from the web. The steps used are similar
for all text based imports into Ezy Chart. We provide this information as a service to readers who have
been asking about how they can import text data into Ezy Charts.

Bodhi FreeWay and EzyChart Version 4.02+

What will be different?

1. You will be required to import a text file into EzyChart after each download.
2. Some of the Bodhi FreeWay features will not work with an imported database. Features like automatic
deletion of expired stocks, the ability to apply reconstructions, editing of individual day files & renaming
of codes. These will not work due to Bodhi FreeWay being unable to access the EzyChart *.pce files.

Changes when setting up Bodhi FreeWay V2.1.0.3:

1. Bodhi FreeWay Version 2.1.0.3 now contains an EzyChart Daily option. This format creates an
Update.0 file every time you download. This file is put into a c:\mydata\ec\daily directory, as default.
If you download a month of information all that information is contained in the one file. This file is over
written each time you do a Catchup so it is important that you import the file into EzyChart as
soon as possible after it is created. This applies to ALL text imported files.

Importing the Update.* file into EzyChart V4.02+:

1. Open EzyChart.

2. Go to File>Import Data to…>Default Data Directory. This will load the text file into the default
data directory. EzyChart gives you the ability to create up to 10 different directories. To find out what
your default directory is or to add more directories, go to Edit>Configure EzyChart.
3. Navigate to your c:\mydata\ec\daily directory. If necessary, change the List files of type dialog

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box so it reads
All Files (*.*).

4. Select the Update.0 file.

5. Press OK. The data will now be imported.
6. If an Existing Data dialog box appears, select Yes.
7. If a Continue dialog box appears, select No.
These instructions need to be followed every time you catchup using Bodhi FreeWay.

SUBJECT SUMMARY

DATA CHOICE
Data is at the core of every charting system. Ten years ago data was expensive, difficult to get, and restricted. The
industry model was that suppliers used a proprietary data format and they sold charting software that used just that format. Sell
the software and capture the client for your data supply was their approach. Or, sell the data, and capture your client for your
charting package. The best known of these was CompuTrac and it was the first charting program I purchased - over $2,000 at
the time with data at over $1,500 a year.
In Share Trading, and again in Chart Trading, I suggested that when selecting a data supplier or charting software
that one of the important factors to consider was the freedom to choose. I have not changed my opinion. The old business
model used by CompuTrac collapsed and open platform data standards, such as Metastock, and other direct text or ASSCI
formats became readily available.
The charting package is always separate from the data supply. This gives the user the freedom to find the best price,
the most accurate data, the best mix of data for his trading needs and to then match this with the best charting program that
suits his requirements.
We support open data platforms and open platform charting packages. Just like the market, money flows to the best
product and the best data suppliers.

READERS QUESTIONS - TLS AND THE COUNT BACK LINE

Although the count back line calculation uses three significant days, it is not a 3 day indictor.
Sometimes it may be several days between the first day in the CBL calculation and the last day.
Additionally, once the CBL level is set, particularly when used to monitor an up trend break, there may
be considerable delay before an entry signal is generated. Because the CBL is designed to identify a change
from downtrend to up trend it is frequently used with stocks that go onto extended consolidation or
bottom patterns.
With TLS we see how the CBL ignores the price action as it develops in a consolidation pattern
over the last 8 weeks. The calculation point for the CBL is shown by the large *. This is the most recent
lowest low in the existing downtrend. Using this point the CBL breakout level is at $6.98. We do not get
confirmation of a new up trend until there is a close above $6.98. This is important for other reasons.
A quick glance at the chart shows an apparent up trend rally at point A and a downtrend collapse
at point B. If the downtrend shown as B were valid then we could use the point ** to start constructing a
CBL line for the new up trend. This would be incorrect. The false CBL line is plotted as shown, and it
delivers no useful trading signals. The reason for this goes back to the core feature of the correctly
constructed CBL line.
For a new up trend to be confirmed there must be a close above the CBL line shown as $6.98.
With TLS this does not happened. The rise shown as A does not qualify as a new trend because it does
not close above the $6.98 level. This means the downtrend at B is just a normal reaction to the failed rally
at A. This means it is not a new downtrend, so there is no need to make a new CBL calculation.
The CBL definition of a new up trend is when there is a close above the CBL line. Once this
p15 30/06/2000
happens we switch to using the CBL calculation as an entry tool to using the CBL as a stop loss tool in
the new up trend.

TLS
Telstra
Daily bar
chart
7.51

B
6.98

A False CBL

* **

It may take several more weeks before TLS creates either a close above the CBL line, or a close
below the original calculation level marked with an *. A close above $6.98 means we immediately use the
new high as a starting point for a CBL trailing stop loss calculation. A close below the most recent low in
May means that the CBL entry calculation is made from the new low.
Until either of these conditions occurs the current CBL calculation as shown remains in place
based on the May low. The CBL is useful is discounting the meaningless sideways rally and retreat
activity typical of many consolidation period or mid trend pauses.

INDICATOR REVISION
Count Back Line (CBL) construction - long side - buy low, sell high
The CBL is a short term resistance or support line calculated, in a falling trend, by counting back two higher highs,
and then projecting a horizontal line to the right. A close above this resistance line suggests the intermediate down trend has
changed. Closes above or below the line are used to fine tune entry and exit points.
To reduce whipsaws the technique is used when a trend break has been signalled initially by a trend line break.

TRADING STYLES - SUPPORT AND RESISTANCE

Support and resistance concepts are amongst the simplest of all charting and technical indicators
and amongst the most profitable. They provide the starting point for the development of triangles and
other patterns. They provide accurate price targets, and a good way of setting stop loss levels. Placing
p16 30/06/2000
them correctly can enhance trading results and trade planning.

These levels develop in response to a balance of supply and demand of shares at particular price
levels. A support level is created when buyers consistently enter the market because they believe the
stock is attractively priced. Markets are creatures of crowd behaviour, and it is notable that the crowd
tends to behave consistently. Support levels show up time and again at around the same price. A support
levels forms when the demand from buyers is steady.

A resistance level is created by sellers. The sellers have many reasons for selling, but they often
come together at a single price. As buyers bid up prices the sellers begin to get nervous. They worry that
prices will not go higher. As soon as prices reach their target level they sell, either to lock in a profit, or
because they fear price will fall. There are many reasons, but they are all reflected in an excess of sellers at
a particular price level.

This theory can be seen in action in two places. The first is on a chart. The second is on a depth of
market screen and we will return to this later. On a chart these support and resistance levels show up as a
series of price extremes at a single level. In constructing a support or resistance line, we look for the low
points of price action. Unlike a trend line, we need at least 3 or 4 data points before we can start talking
about a support level. The more times that prices move back to the support level, and then bounce away
from it, the stronger the support level. The comments below relate to support levels, but they apply
equally to resistance levels.

Support level
A

A support level is not perfect. There will be times when prices do dip below the support level as
shown at point A. Is this a break of the support area? In deciding the answer it is important to consider
the closing price. A close below the support line is more significant than just an intra day dip below the
support level. If the close is also part of a developing downtrend move then the trader may attach more
significance to it.

Support levels do appear over time as part of current price action. They are difficult to use at the
time as we cannot confirm them until they have developed. This looks like a catch 22 situation and an
exercise in retrospective charting. However, the nature of support and resistance in the market provides
extra assistance. Support levels tend to persist over time. The support level of a few months ago is still a
support level now. A support level of a year ago acts as a support level for today. Support levels are
very persistent, working over many years. This allows the trader to take a single point on todays chart
and verify that it has a high probability of working as a support level.

p17 30/06/2000
 Support level

B Months or years A

The old support level is clearly established at point B. The trader projects this support level into the
future as the stock falls.

As soon as prices hit the old support line the trader is prepared for prices to start a rebound. He
p18 30/06/2000
uses the old behaviour of prices as a high probability point for current behaviour. By projecting the
support level into the future we have a good idea of where prices are likely to pause on support. When
this is verified by just a single point, or perhaps two or three points, then the trader can take action with a
high level of confidence. By using old support levels we can act in anticipation of prices respecting these
levels in the future.

These are powerful forces in the market because they represent points where all shareholders make
significant financial decisions about profit and loss. When a stock splits or undergoes a capital
reconstruction, the support levels remain valid. When a split take place all the data prior to the split is
adjusted so the last closing price equals the new opening price of the stock after the split. This has the
effect of compressing all the pre split data.

Looking at the chart prior to the split the trader establishes support levels based on the price
action. After the split these same levels exist, but they are now expressed in terms of the new price
structure. The support levels can be drawn with confidence and traders can act upon them. This split
data has been adjusted manually as splits are currently not automatically adjusted by the OTS data
supply.

Some charting programs have automatic support and resistance lines. I find these of doubtful
value. Support lines are a significant feature of price activity. On any chart there tend to be just a few of

p19 30/06/2000
them, not the multitude often shown by the automatic features. The most useful support lines are those
which are easily seen. This is a robust charting tool. It is not designed to be fine tuned. If we use support
levels as a trading point then we are looking for a high probability outcomes. This is not created by
temporary support levels that appear over a few days in mid trend. In judging the position of support in
the current price action we should always look at price action over 12 months, or more. A weekly chart
helps to confirm the placement of support levels as does a point and figure chart.

ORI
Orica
Weekly
Automatic support and resistance lines

This is the dominant and

valid support line

CONSTRUCTION RULES
* Support/resistance lines are placed on price extremes
* The more times the line acts as a reaction point, the stronger the support/ resistance level
* The line should capture more than 80% of the price extremes at the same level.

APPLICATION
* Look for prices to bounce off the support line.
* Intra day dips are not significant as long as there are just a few in comparison to the overall price

p20 30/06/2000
activity at the support level.
* A close below the support level is a danger signal, particularly if it is part of a developing
downtrend that has dropped prices to this level.
* A single close below the support level that is part of daily volatility and not part of a developing
trend is a warning signal that the support level is weakening.
* Support levels are persistent over time.
* Old support levels are used to position and verify new support levels.
* When a stock splits and the data is adjusted for the split, the support levels on the chart remain
valid.

Support and resistance form the basis of many successful trading strategies Support helps to define entry
points in a downtrend. Resistance helps set profit targets. In channel trading where the upper and lower
limits of price activity are defined by support and resistance lines many profitable trades exist from
buying on support and selling on resistance Traders do not let the simplicity of the concepts blind them
to the profits available from the correct application of these techniques.

SUBJECT SUMMARY
Support

A support level is created when the supply of stock runs into a wall of demand. Every time selling pressure approaches a
particular level it is supported by buyers who have a more positive view of the stocks future. This temporarily halts the price
decline. In a positive sense, when all the buyers at that level have bought, the price has nowhere to go but up as buyers have
to bid higher to get the stock. In a negative sense, when buyers will only bid for stock at lower levels, sellers have to lower
their ask to move their stock. With such a shortage of buyers, the price falls to new lows.
Resistance

A resistance level is created when the demand for stock runs into a solid block of supply of that stock. Every time
buying pressure approaches a particular level it is overwhelmed by sellers, which temporarily halts the price advance. In a
positive sense, when all the sellers at that level have sold, the price has nowhere to go but up as buyers have to bid higher to
get the stock. In a negative sense, when sellers start to unload stock at lower levels, buyers do not have to bid as high to get
the stock. With such oversupply of sellers, the price falls to new lows.
As prices progress, these lines change character. Once broken on the upside, the old resistance level often acts as a
new support level. This is because many people have bought at this level, and they all make similar profit and loss
calculations.
Resistance levels help to set profit targets in short and long term time frames.

TAX, THE TRADER AND THE ACCOUNTANT

This sounds like the beginning of a good joke, but too often it is a combination for an expensive
headache. Many traders end up with a shoe box of contract notes which they hand to their accountant.
Others are more organised. They use portfolio management software which is often no better than a
computerised shoebox.Portfolio software tends to be designed for the user - the trader - and doesn't
compile the report structure required by your accountant. In both cases the accountant has to reorganise
the data into a format that makes accounting sense and sense to the ATO. Getting your reports into the
correct format costs your accountant time and costs you additional fees. Tony Compton, author of
Shares, Derivatives and Taxation has the following suggestions to save time and fees.
Keeping Your Accounting Costs Down
Your accountant's time does not come cheaply. With the increased workload resulting from the new tax
system, the laws of supply and demand make it obvious that his hourly charge out rates will rise. You can
help minimise your costs by providing your trading details in a form which he can quickly transfer to the

p21 30/06/2000
financial statements he prepares for you.

What Does Your Accountant Need:

The information your accountant will need will depend on whether you are trading or investing. If you are
investing, the sale of shares will give rise to a capital gains tax event. As this newsletter is aimed at traders
we do not discuss this here. A trader buys and sells shares just as a merchant buys and sells his wares.
This results in ordinary income against which he claims his allowable deductions. Your accountant will
need to prepare a Trading, Profit and Loss Statement when drawing up your financial statements.

The Trading Statement component of these accounts is made up as follows:

Sales xxx

Less Cost of Goods Sold

Opening Stock xxx
Purchases xxx
Brokerage and Duty xxx
-----
xxx
Closing Stock xxx
-----
Cost of Goods Sold xxx
----
Gross Profit xxx
----

The sales, purchases and brokerage and duty figures will be obtained from your contract notes. If you
prepare a summary of these you will help keep your accounting costs down. There is little to be achieved
in handing a "shoebox" full of contract notes and asking your accountant to collate them for you. It will be
more cost effective for you to summarise them for him.

An Example:
A spreadsheet in the following format will enable your accountant to check your figures if he feels a need
to.

His job will be made easier if you sort the contract notes into date order so that they correlate with the
order in which they are entered into your trade summary.
Providing the information on a closed sales basis will not be enough. Your open positions will need to be
accounted for. The above format will meet this need.
As regular newsletter readers know we do not normally discuss our personal trades. The end of
the tax year does raise an interesting issue. On Thursday we closed a very large trade at a 35% profit. It
will have some unfortunate tax consequences. We closed the trade because it had hit our price targets and
met our sell conditions. On Friday the price dropped over $0.30. Had we delayed in selling because of
tax reasons we would have eliminated both our 1999/2000 tax problem and the profit from the trade. Tax
is an important issue, but working with the market to maximise trading returns is also important. You
cannot trade while you look over your shoulder at the tax man. It is better to trade well and employ a
p22 30/06/2000
good accountant to handle the taxation issues.

SUBJECT SUMMARY
TRADE PLANNING
We often think of a trade plan as a set exercise completed before the trade is opened. We do plan at this stage. We use
our preferred entry price to calculate the risk in the trade, and the potential reward. We assemble the indicators and conditions
we intend using toe enter the trade, and later to exit it. Once the trade is entered it must be managed. Sometimes this means
tracking the progress to make sure it stays within our planned limits. At other times it means changing some parts of the plan
to take into account new events. A trading plan is flexible and constantly under development.

NEWSLETTER OUTLOOK
The statistical analysis suggests that July is a strong month and over the last two weeks
we have identified a number of trading opportunities based on stocks recovering from downtrends. As
anticipated, the last three trading days in June developed some useful rallies. The focus remains on trading
the early rallies that precede the trends in many stocks, particularly those that have fallen from great
heights. This uses the recovery in many Dot.com stocks as a trading opportunity. Rather than trying to
identify early trends the strategies are based on target trading and reentry on price weakness.The long
term objective is to move fully into the market in October in anticipation of a November/December rise.
Each week we make a choice about the material we include and the subjects we cover. The
selection is based on our outlook for the current and coming market. Our objective is to illustrate effective
trading strategies that readers can apply to current market conditions. We do not identify recommended

p23 30/06/2000
individual stocks. We identify opportunities and appropriate trading methods for them. Our outlook is
not a forecast. It is a probability framework. Use it as just one part of the other information you are
reading about the market. Our summary outlook will be included each week.

NEWSLETTER NOTICES
GST AND THE NEWSLETTER
The price of the newsletter will lift by an average of 9.5% after July 1. Unlike manufactured
goods, the newsletter is an original product that has no previous supply chain and it has not been subject
to any tax in the past. Some magazines, such as Shares, will send you a bill for the additional GST.
Others, such as Fortune, will reduce the period of the subscription by the amount equivalent to the GST.
This is the method we propose to use because it causes the least disruption to you as a reader. For
readers who subscribe on 29/6/2000 this means the GST component is equivalent to 5 issues. For those
subscribing in March it is equal to 3 issues, and 2 issues for subscriptions ending on December 2000.
Your subscription expiry date will be adjusted to reflect the GST component and you will be advised by
email of the end of your subscription period as normal.
NT ASIAN BUSINESS EXPO
Each year the NT Government and the Department of Asian Trade Relations and Industry host
the NT Expo. It is designed to establish and reinforce trading links between the NT and Asia, most of
which is closer to Darwin than Sydney. Guppytraders.com has been invited to take up a stand for this 3
day event. The first day of the event, Friday July 14, is designed as a trade day to facilitate business
contacts. We have a number of Trade Day passes which give free entry for July 14. If you are in Darwin
and would like a free pass please fax us on 89710130 and we will mail them to you. Please make sure you
include your mailing address on the fax. Remember, these business passes are only valid for Friday July
14. We are stand number 119 in the Perron Pavilion.
NO PRESSURE TO TRADE
In the last week I had a visit from an institutional merchant bank trader who had dreams of
becoming a private trader. He confirmed that in institutional trading there is always pressure to trade.
Dealers are not able to sit back and wait for the best trading situations to develop. They are expected to
trade every day, and several times a day. This leads to scalping positions for just a small return. It also
leads to missing out on many long term trades with substantial profits. This visitor felt that he could
improve his performance considerably by trading for himself in a situation where there was no daily
pressure to trade.
As private traders we have a considerable advantage. We do not have to trade. We can, and should,
sit to one side of the market until the conditions are right, or match our preferred trading approach. This is
a major advantage. Patience is hard to develop, but it is a very profitable skill.
DATA RELIABILITY, EZY CAST AND EZY CHARTS
Data reliability is at the core of every trading decision. These days we can usually safely assume
that the data we pay for is accurate. Another aspect of data reliability is the supply of data. Traders
expect that once the data collection system is set up that that data can be collected with absolute
reliability.
Personal experience and feedback from readers and users is indicating there are still problems with
the Ezy Cast data delivery platform when it comes to updating Ezy Chart data. On Tuesday my copy of
Ezy Cast refused to update Ezy Chart data because it was a “Foreign Format: General Operation
Failure.” The Ezy Cast update available from the OTS web site did not install correctly even though I
p24 30/06/2000
followed the exact instructions supplied by OTS support. To correctly install this update you must
download the update to your hard drive. Then log off the Internet, find the download and double click it.
This will then update your Ezy Cast. Before downloading the replacement data make sure that the
EzyChart synchronisation date is set to the date of the last successful Ezy Chart update. Then, in the
same dialog box, make sure the update date is also set to the same date as the last successful Ezy Chart
update. When these two dates are correct you can successfully download the corrected data. You may
still get some ID errors, but these are apparently unimportant.
The Ezy Cast data delivery product was developed by OTS. Although it carries the name Ezy it
has not been developed by the programmers of Ezy Charts. I do want to emphasise that Ezy Charts does
not have problems. The current problems with OTS data for Ezy Charts seem to be created by the way
Ezy Cast is handling the data import in Ezy Charts. Also please note that Metastock users of EzyCast
are not experiencing any problems with data updates. Data import here is fast and reliable.
TRADING WORKSHOPS
This is a new workshop structure where we ask the audience to set the agenda for the workshop.
When you register we ask you to nominate your preferred stocks and indicators that you want to know
more about. We will use these to show you how to trade and how to use the indicators more effectively.
This will be applied to current, up to date, data. We believe that if we are talking about trading methods
then we should also be prepared to prove to you how those methods apply with real, current data. Places
are limited in these workshops so everybody has an opportunity to ask questions and have them
properly answered. We do recommend early booking.

TUTORIAL PORTFOLIO 1 - MONEY MANAGEMENT

Starting cash position $100,000 - no brokerage or slippage 2% of risk = $2,000
STOCK SRO
Newsletter date entered 19/6
Cost of entry $20,000
Number purchased 125,000
Entry price .16
2% stop loss .14
Current closing price .15
Exit price
Trading comment Parabolic trend reversal

STOCK DGN
Newsletter date entered 19/6
Cost of entry $20,250
Number purchased 45,000
Entry price .45
2% stop loss .41
Current closing price .52
Exit price .75
Trading comment Target trade based on continued upward gold price using DGN as a leveraged derivative of
the gold price.

SUMMARY MONEY MANAGEMENT

Sold DGN for 66% profit or $13,500. Overall profit to date since July 1, 1999 $111,167 or 111.2% return on trade equity.
Profit 98/99 = 102% return on trade equity. Profit 97/98 = 94% return on trade equity. Profit 96/97 = 66.5% return on trade
equity.

TUTORIAL PORTFOLIO 2 - TRADING BLUE CHIPS

Starting cash position $50,000 - no brokerage or slippage 2% of risk = $1,000
STOCK SRP
Newsletter date entered 8/5
Cost of entry $20,680
p25 30/06/2000
Number purchased 4,000
Entry price 5.17
2% stop loss 4.67
Current closing price 4.66
Exit price
Trading comment Managed with turnover analysis. Exit when turnover reaches towards 100%. Significant
figure 140,000,000 calculated from March 2000 low using a weekly chart
STOCK NAB
Newsletter date entered 8/5
Cost of entry $19,932.50
Number purchased 850
Entry price 23.45
2% stop loss 21.10
Current closing price 27.43
Exit price
Trading comment Long term trend trade. Use weekly signals with daily execution.
SUMMARY BLUE CHIPS
Overall profit to date since July 1, 1999 = 57% or $28,489 return on trade equity. Profit 98/99 = 72% return on trade equity.
Profit 97/98 = 52% return on trade equity.
SUMMARY ASEAN MARKETS
Although we do not include these examples in this newsletter as they are now all carried on asiastockwatch.com we provide
this updated summary for readers.

Profit of trade 1 $4,200 or 20%. Profit on trade 2 $1,260 or 12% Overall realised profit to date since July 1, 1999 = $41,263
or 68.7% return on trade equity. Profit July,1998/ June, 1999 = 54% return on trade equity. Profit July 1997/ June, 1998 =
66% return on trade equity. (Nominal trading capital, $60,000. Profits are not added to capital. Stop loss equals 2% or
$1,200. No Brokerage costs)

GST
From July 1 2000, GST will become payable on all advance payments for the newsletter. Like most other magazine
publishers, guppytraders.com will charge this tax on issues collected after that date. We will send you a payment advice with
several options in June/July 2000. The most likely option to collect payment will be to bring forward the end date of your
prepaid period by between 1 to 3 issues. In July we will supply all readers with an amended tax invoice showing the GST
details.
DISCLAIMER AND COPYRIGHT
Guppytraders.com (ACN 089 941 560) Pty Ltd is not a licensed investment advisor. These analysis notes are based on our
experience of applying technical analysis to the market and are designed to be used as a tutorial showing how technical
analysis can be applied to a chart example based on recent trading data. This newsletter is a tool to assist you in your
personal judgment. It is not designed to replace your Licensed Financial Consultant or your Stockbroker. It has been prepared
without regard to any particular person's investment objectives, financial situation and particular needs. This information is of
a general nature only so you should seek advice from your broker or other investment advisors as appropriate before taking any
action. The decision to trade and the method of trading is for the reader alone to decide. The author and publisher expressly
disclaim all and any liability to any person, whether the purchase of this publication or not, in respect of anything and of the
consequences of any thing done or omitted to be done by any such person in reliance, whether whole or partial, upon the
whole or any part of the contents of this publication.
The information contained in this newsletter is for the sole use of trial and prepaid readers. It cannot be circulated to
other readers without the permission of the author. Stocks held by the author are marked* and are not to be taken as a trading
recommendation.

p26 30/06/2000