Monday, September 04, 2006

Three Creative Sources of Market Insight

One of the joys of blogging about trading is the opportunity to discover interesting people doing worthwhile research on the markets. Many times these researchers labor in relative obscurity, undiscovered by the majority of traders. What sustains them is a love for their work and a conviction that they have discovered important truths. They are not writing to attract thousands of hits and banner ads. They write to share their work within a larger community of traders and make their mark upon the field.

In this article, I'd like to single out three such creative sources of market insight.

The first is the work of the late George Lindsay, who first published his research on market timing in his newsletters. Later, his articles appeared in a publication from Investors Intelligence called "The Encyclopedia of Stock Market Techniques". After Lindsay's passing, Investors Intelligence collated his articles and issued them as a bound set. It is a treasure trove of meticulous market insight--all the more impressive because the research was conducted long before computerized analysis was the norm.

The foundation of Lindsay's approach is that there are stable relationships governing the timing of market turning points and recurring price pattern formations that appear in the major indices. His best known pattern is the "Three Peaks and a Domed House": a complex series of highs and lows that typically covers over a year of trading action. Less known, but perhaps every bit as important, is his observation that market rises and declines tend to fall into fixed durations, alternating between short and longer cycles. He also found a common structure to market cycles in which there is an equivalence between the time it takes for one part of the cycle to transpire and the timing of the next part.

It is most unfortunate that Lindsay did not leave behind a book to cement his contributions to the trading world. Fortunately, Carl Futia, a blogger, has picked up the Lindsay work and posts frequently on the research. See, for instance, Futia's recent Lindsay posts and his very interesting original work on Box Theory and staircases. Futia notes that many self-made market researchers have had their day in the sun, only to be eclipsed later. Once they are found to have feet of clay, their methods--as well as their reputations--may be consigned to the scrap heap. That's too bad, because, in many cases, very careful observation and insight went into the original work. Even the best theories can be misapplied. Futia is performing a real service in keeping the Lindsay flame alive.

A second creative line of market research is Terry Laundry's T-Theory. This approach gained publicity when it was mentioned by Marty Schwartz in his "Pit Bull" book. The essence of Laundry's work is that there is an equivalence between the time it takes markets to decline and the time it takes them to rise. The key to this concept is that declines are measured from momentum peaks, and not from ultimate price highs. This equivalence occurs over multiple time frames and allows for an anticipation of market cycles. Here, for example, is a graphic that illustrates the market's current large T formation. He also applies T-Theory to interest rate markets. The site includes an introduction to T-Theory written in 1997 and many updated examples that require some thought and analysis. To the best of my knowledge, T-Theory was developed independently of Lindsay's work, but there are interesting and promising areas of overlap for market timers.

Finally we have research from Down Under, conducted by Tom Henderson. His Camron site is quite large, and this map will prove helpful for exploration. There are some excellent observations regarding commercial vs. non-commercial traders, the importance of volume analysis and the "bid-ask count", and the fragmentation (and de-fragmentation) of trade data. I also like the work on price targets and control zones. The insight that pre-opening sessions offer information about the coming day's trade is important, as is the recognition that it is crucial to track the behavior of the market's largest participants by watching for tell-tale signs. I believe there are some important conceptual overlaps between Futia's boxes and Henderson's control zones: approaches that, to my knowledge, have developed independently. Henderson has withdrawn some of the pages from his site; I hope he'll learn from Lindsay's example and create a vehicle that will allow his work to outlive him. Laundry has created a foundation for perpetuating his work.

I'm sure there are many more creative researchers and sites that I am not aware of, and I hope readers will alert me to those, so that I can do my small part to provide the exposure their work deserves. Some of the best market insights can be found outside the media limelight.