NEW

 The Van Tharp Institute Introduces the 2nd Edition of the Peak Performance Home Study Course!

It has been nearly fifteen years since I made any significant changes to the Peak Performance Home Study Course. During that time, I have researched and learned a lot more about important topics for trader peak performance, and I want to share this knowledge with you. I have spent much of last year working on a new edition of the course. Today, we are introducing the new 2nd Edition of the Peak Performance Course.

Feature

Market Type for the Australian Market

by

Van K. Tharp, Ph.D.

When you have a trading system, you should always know how it performs under various market conditions.  We’ve now settled on a market type measure that uses the 20 day ATR (as a percentage of the close) in comparison with its historic mean and standard deviation to measure volatility.  We’re now using the following guidelines:

•  Normal: Average ATR% plus or minus 0.5 standard deviations.

•  Quiet: Anything less than a 0.5 standard deviation below the mean.

•  Volatile: 0.5 to three standard deviations above the mean.

•  Very Volatile: Anything greater than three standard deviations above the mean.

For the Australian market, I used the Yahoo! data for the Australian All Ordinaries index (^AORD).  Yahoo! has 6,310 days worth of this data going back to August 3, 1984.  For the 200 day market type, I was able to use 6,110 days worth of data.

The mean ATR% for those 6,110 days was 1.02 and the standard deviation was 0.66.  This is quite similar to our U.S. data for nearly 15,000 days of data in which the mean is 1.30 and the standard deviation is 0.72.

The following table shows the distribution of our 6110 days in these four categories.

The next table shows the average percent change in the All Ordinaries index during each of the four volatility-based market types.

Notice that the more volatile the market, the more likely the price is to go down, just like the U.S. market.  Similarly, the more quiet the market, the more likely the price is to go up (with both normal and quiet days being generally up days).

Let’s look at what happens to the market the next day after a given market classification.  Here we are asking the question, “If the markets are highly volatile on March 3^rd, what is the average percent gain on the following day (i.e., March 4^th) regardless of the market type that day?”  This data is shown in the next table.

Unlike the U.S. market, we cannot expect the day following very volatile markets to be up.

Now let’s combine our five market types (defined last week) with our four volatility types and see what we can expect.  In this case we are using the 100 day SQN™ on the daily percent change to determine market direction.  By the way, some of you have asked and I’m simply looking at the daily percent changes in the index and calculating an SQN based upon that (rather than R-multiples).

What’s a little bit different about the Australian markets is that strong bear markets occur most often under normal volatility conditions, even though very volatile conditions are only likely to be strong bear markets.  Bull markets, however, still occur primarily in normal or quiet markets.

Let’s look at our total market type and the average percent gain/loss that is likely to occur under each market type condition.  This is shown in the next table.  There are no real surprises here.

The data are pretty much as expected except for the volatile strong bull percentage change being down.  However, this only represents 5 days or 0.08% of the total days.

Some History

Now let’s look at the last year’s worth of data on market type.  I’m going to use the 100 day SQN to determine market type, but I’ll show you the 200, 50, and 25 day SQNs as well.  Remember that I use the following SQN ranges to determine the market direction, so you can translate the other SQN days to market types.

The data as of Friday’s close is exactly the same as the U.S. data for the S&P 500.The 200 day is bearish, the 100 day is bullish, the 50 day is neutral, and the 25 day is bearish. The market type in the last two columns is based upon the 100 day SQN.

Click here to view chart on-line

I'll be looking at up to ten other markets.  Next week we’ll look at the German DAX index. When I’ve completed the ten markets, I’ll report on all ten once each month, probably on the 3^rd week of the month.

All of this work was done using the XLQ add-on to Excel with the help of Leo van Rijswijk, the developer of XLQ.

About Van Tharp: Trading coach, and author, Dr. Van K. Tharp is widely recognized for his best-selling books and his outstanding Peak Performance Home Study program - a highly regarded classic that is suitable for all levels of traders and investors. You can learn more about Van Tharp at www.iitm.com. 

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Trading Tip

Three Ways to Look at Gold

by
D.R. Barton, Jr.

Since ancient times, the properties and scarcity of gold have made it a central tool in the financial world. This is no less true today.

Gold is called many things: a fear gauge, the only true store of value, etc. But we have seen in the last year that many of the old notions and relationships don’t always hold. We’re going to go over several indicators and relationships that may help us understand gold’s direction in the near and intermediate term.

Gold ran up above the $1,000 per ounce level again in February, giving the gold bugs and fan boys fuel for “gold will rule the world” talk. It has pulled back and then attacked that level once more in June. So let’s look at a few things that might give us some insight into gold’s next move.

Gold’s Trend – Still Intact

Here’s a gold chart in a weekly time frame.

From the chart, it is clear that we are still making longer-term, lower highs. This trend line is not far away and breaking the trend line is not the real bottom line. The trend line can be broken without making significant new highs. The real issue is gold making new highs and staying above $1,000 per ounce for a significant period. Until that type of breakout, one has to buy significant pullbacks in order to have a lower risk trade.

Gold Stocks – Less Healthy than the Metal

There are plenty of analysts who pay attention to the relationship between gold and the gold miners. Let’s look at the same chart. 

Gold stocks have been strong in the near term (versus the February ‘09 gold highs, for example), but since the early 2008 highs, gold stocks are much weaker than the metal.

Gold Stocks – Less Healthy than the Metal Quantitatively As Well

The percentage moves of gold and the gold stocks are also a telling picture.

Gold stocks took a bigger down move versus the March 2008 highs, and you can see that they’re still 27% off those highs.

Gold, over the very long term, is a good place to have money as an inflation hedge and an economic crisis hedge. But from a trading and investing perspective, prudence would dictate that buying when gold is within 10% of its all-time highs most likely is not the best place to jump in. Buy your hedges on pullbacks, and, as a trader or investor, believe the breakout only when it’s confirmed.

Great Trading!
D. R. 

About D.R. Barton, Jr.:  A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena.  He is a regularly featured guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on SmartMoney.com and Financial Advisor magazine. You may contact D.R. at  "drbarton" at "iitm.com".  

Q&A

How Do You Measure Percent Change?

Q: Thank you very much for your recent posts on market type. This is amazing stuff! I've applied the revised definition to my trading systems.

The systems have become much more robust (and profitable). Though I've got one question regarding your statistics. You wrote about historic percent change for the various market types (SQN100). Did you measure open to close percent change or close to close percent change? I can't reproduce it as I don't have S&P data going back that far. Thanks for your feedback.

Frank

A: The S&P data that I have is taken from Yahoo!. However, I couldn't do the stats that I do without help from Leo (from XLQ).

The change is the close to close change. However, we do measure the range in the ATR%, which is over 20 days.

Van

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