Monday, August 22, 2011

Dickson and Knudsen, Mastering Market Timing

Given the recent market volatility and the conflicting calls over whether we are carving out a short-term market bottom within an ongoing primary uptrend that began in 2009 or whether the market is rolling over, I was hesitant to review Mastering Market Timing: Using the Works of L. M. Lowry and R. D. Wyckoff to Identify Key Market Turning Points by Richard A. Dickson and Tracy L. Knudsen (FT Press, 2011). But then I decided that perhaps this is indeed the best time to share this work, written by two senior vice presidents at Lowry Research.

First of all, it’s important to note that the authors focus on major market tops and bottoms. Although they accept the notion that market patterns are fractal in nature, they acknowledge that “the probabilities of wrong timing are likely greater on a short-term basis when brief periods of market volatility can upset the most thorough analysis.” (p. 193) They analyze the tops of the 1966-1969, 1970-1973, 1975-1976, 1980-1981, and 2003-2007 bull markets and the bottoms of the 1968-1970, 1973-1974, 1981-1982, 2000-2003, and 2007-2009 bear markets.

Starting with Wyckoff’s models of market tops and market bottoms, they add Lowry’s proprietary indicators--the buying power and selling pressure indexes—to help quantify Wyckoff’s insights. Their calculation takes into consideration daily up/down volume, total volume, points gained, and points lost. Add to the mix the concept of 90% up and down days, introduced by Paul Desmond (the current principal at Lowry Research), and you have the basic ingredients for making major market calls. By the way, I should note in passing as the authors do that a 90% up or down day must include both price and volume; that is, a 90% up day occurs when up volume is 90% or more of the total up and down volume and points gained is 90% or more of the total points gained plus points lost for the session. (p. 25) Desmond’s 2002 Dow Award-winning paper is available online.

To give a sense of the authors’ work, here’s a marked-up chart of the final phase of the 2007 DJIA market top which includes Wyckoff, Lowry, and Desmond notations.

In the second part of the book the authors introduce additional tools for identifying market tops and bottoms: point and figure charts, the NYSE advance-decline line, and the percentage of NYSE issues trading above their 30-week moving average.

Mastering Market Timing will be valuable to anyone wanting to learn more about Wyckoff’s method. Since the Lowry indicators are proprietary, investors will have to be creative in coming up with something that approximates the buying power and selling pressure indexes. In the final analysis, will investors who read this book become better forecasters? I don’t know, but I consider it a boon to have so many charts of market turning points collected in one book.

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