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Power Tools for Traders

Gerald Appel

I wrote Technical Analysis to give beginning as well as experienced investors a collection of useful observations regarding the stock market. I also wanted to offer forecasting tools so readers could make their own informed decisions as to the likely direction of stock prices, rather than relying on stock brokers, mutual fund managers and the financial and general news media.

Research has indicated that the average mutual fund investor, for example, is generally late in responding to changing trends in the stock market -- selling most heavily as serious market declines are approaching their end and buying most heavily near significant market tops.

As a result, the typical investor fails to match the performance of investors who simply buy and hold individual stocks or mutual funds through both favorable and unfavorable market periods -- a strategy that has its own considerable risks and drawbacks.

Investors receive little help in this regard from either mutual fund managers or their stockbrokers, who tend, also, to offer lots of buy recommendations but few recommendations to sell.

Technical Analysis provides that help. The culmination of 40 years of personal study, research and investment in the stock market and 30 years of actual management of client capital, this book is a means of sharing with financial professionals and personal investors some of the most useful techniques and strategies for market-timing for investment purposes that I have learned and developed over the years.

Short Term and Long Term

In this book, readers learn strategies that they can apply for both long-term investment and short-term market trading. Sections of the book relating to market time cycles -- that appear to repeat with surprising regularity -- show readers how to identify and act upon the powerful four-year stock market cycle (bear market bottoms tend to be spaced at four-year intervals), how to use seasonal tendencies (almost all net market gains take place within certain six-month periods of the year), and even how to recognize and make effective use of shorter-term market cycles that last as long as weeks or as short as several days.

Sections of this book deal with market breadth, which is a measure of the internal strength of the stock market compared with popular market indices such as the S&P 500 index, which are subject to excessive over-weighting influence of relatively few large companies. Readers are shown how to identify "true market strength," which market indicators are useful in this regard and how to post and interpret daily and weekly readings.

The book also shows how to recognize certain predictive patterns of stock price behavior, which are present in stock charts and which, by their nature, provide clues as to likely price movement in the days, weeks, months and even years ahead. Wedges, head-and-shoulder patterns, T-formations and selling climaxes may seem, by their names, to be somewhat arcane, but they won't be after readers have taken the time to study this book.

The best times to buy in the market, of course, are when longer-term waves and shorter-term waves are simultaneously reaching the lows of their cycle and when the typical investor is pessimistic, more apt to sell in panic than to recognize the opportunities in price weaknesses taking place.

There are two significant market indicators. One of these is MACD, or the moving average convergence-divergence indicator, that I developed 30 years ago. The other is the moving average trading channel, which is a way of viewing patterns of price movement within "trading channels" that can help investors accurately forecast forthcoming market action (over the long term and short term, depending on the trading band constructed). Technical Analysis devotes a full chapter to each of these technical techniques. Investors will read and learn what I am often requested to present at lectures and seminars that attendees pay hundreds of dollars to attend.

Technical Analysis was prepared largely to assist investors in accurately deciding when to buy and when to sell, most often by careful observation of the patterns and actions of the stock market. The largest portion of this book is devoted to these ends.

However, I also included a useful and significant section that describes an extremely powerful way to select mutual funds for purchase (as well as for sale) on the basis of not only technical tools but also the volatility (risk level) and relative performance of each fund compared with those the total mutual fund universe.

The methodology employed, which does not require continuous short-term trading, is similar to strategies that my firm employs to select mutual funds for clients and similar to strategies employed by some of the most successful market letters and money managers in the country. Investors will learn everything necessary to apply the techniques involved in their own portfolio without recourse to money managers.

Although I cannot, of course, guarantee that the techniques for market-timing and for the selection of mutual funds will work as well in the future as in the past, I do believe that readers of this book will find tools such as the Nasdaq/New York Stock Exchange relative strength indicator, the intermediate monetary filter and the triple momentum Nasdaq Index trading model to be not only interesting but also practical.