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98

For most . wits, see Humplirey Nail, The Art -i ntr.irv Thiiibiie (Cxi-u iTinterr Cal.hrell OH 1 m who is credited witii having fir* f. Tiuulated the conceft. and E Earl 7, .tr.-ip Inion (H«b. Pasadena, 19B3)

TheEuUish OisensuE IE ap-.#ict.f»bbett-Ha**,Pas8riena,i3fcalJ.-d et Sentiment biee:: IE pubhAed in lEenEUE, TjuEas Oitv.MO " E Earl H»bb. "Contrary iTinion," Teclinical AnalyEiE 1* & CfcinioditieE (AiiguEt )

E 14-5 biteirtelation .f tiie EuUirl, ConEi Rulllstl

V«j-»«; : > 1» 1 sbould be «<1. elorK with Cie<=tuucal analysis, to det«>-mlne the top.

favor the continuation of nny *± aafstrend in the price. ps-ices au-e not in aui uptrend. BubsequenC is in-

1«:««! - 11 « . unless bottOMn-------

d. that case. esT>ect m»3om-ity cannot be riel>C »« *

- - - ol any 1 1 1

downtrend in the price, tf prlcea are not in a downtrend. subtsequent action 1 in-detew-minate. umess a t<>r» seenos to have ----- hiehs to

S..urce E EarlHa.bb.Contrjrv:tinion.Pasa.lena,OA - . )

The principle of confrary opinion does not require that trades only be entered in the direction opposite to the current price movement. Within the normal range, the contrarian will take a position in the direction of the trend Frequently, the Bullish Consensus will begin increasing prior to the price turning higher, indicating that the attitude of the trader is becoming bullish. It is considered significant when the index changes 10° in a 2-week period. Once the Bullish Consensus reaches 90% during an upward move, or 20So during a bear move, the market is considered overbought or oversold, and the contrarian loolcs for a

convenient point to exit fran the current trade. Positions are not reversed until prices show that they are not continuing in the original direction This could be identified using a moving average Remembering Schabackers advice, the occasion of a general news release that moves the market further in the direction of the general opinion would be an opportune moment to enter a contrary trade; specific news that fails to move prices would be a good indication of an exhausted trend when the consensus is overbought or oversold. A tjpical contrarian situation identified by Hadadj is given in Figure 14-6.

R. Earl Hadadj said: "The principle of contrarj opinion, by definition, worics I00°o of the time. The problem is getting an accurate consensus."" Timeliness is a problem with this index; if 60 to 70 market letters are reviewed, read and weighted to form an index, the results may be outdated before they can be used. The theory of contrarj opinion also emphasized its use as a timing device for entering trades at an opportune moment and for filtering out the ambiguous trades; the theory is not readily applicable to exiting a position unless the reverse consensus occurs Because a consensus does not have to switch uniformly from bullish to bearish, it is not alwajs prudent to wait for an



opposite confirmation before exiting a trade.

Commitment of Traders Sentiment Index

The reported positions of traders, published in the CFTCs Commitment of Traders Report, may be considered a recording of maiket opinion into categories. By combining

the idea behind the stochastic calculation with a method originally developed by Curtis Arnold, you can create an index:

Commitment of Traders Index=

current net-minimum net maximum ntt-minimum net

where: Net = Commercial net position (number of contraas) minus the total combined net position of

large speculators and small traders

Maximum = Greatest net difference that occurred during the comparison period Minimum = Smallest net difference that occurred during the comparison period

The intent of the Commitment of Traders Index is to rank the current spread between the commercial and speculative positions within the contest of the historic range. There seems to be uniform agreement the commercials are the group that ddermines the direction of prices. A shift in the position of the commercials should be closely watdied



Put-Call Ratios

The ratio of put option volume to call option volume, called the put-call ratio, is the major sentiment index for listed options. It too is used for its contrary value. The interprdation of extreme levels of the put-call ratios (in particular, the index option) points out a problem that may reflect on the proper use of all contrary indicatcrs.

Prior to 1986, the maricet was considered readj for an upturn when the total put volume exceeded 65"» of the total call volume. Similarly, when the put volume fell to of the call volume it was a bearish indication. In the volatile maricets of 1986 and 1987 these levels proved to he far too close, and as McMillan said, "Not surprisingly, the put-call ratios fell into some disfavor at that point." This could easily hsppen with a contrary indicator, or any indicatoi that rarely reaches its extreme values. Because contrarj opinion is a valuable addition to analysis, use of these indicators now focuses on relative highs and lows. This can be accomplished by smoothing the ratio using a standard moving average or momentum indicator (a simple difference over ndajs). \ien the ratio moves over 65" and turns down it is time to sell. Such an spproach gives up a timing edge but greatly reduces risk and increases reliability

FIBONACa AND HUMAN BEHAVIOR

Even though we may not understand the cause underljing a particula phenomenon, we can, by observation, predict the phenomenons recurrence.

R.N. Elliott"

History is a record of great achievement in the face of disbelief as ediibited by the explorations of Columbus, Magellan, Marco Polo; the science of da Vinci, Galileo, Copemicus., and the philosophy of Socrates and other men now known to be great. We are more observant today and less apt to condemn those who delve into areas atill unlcnown. Of these, ashologj is the most popular, with a very large following, particularly in Asia. Its acceptance may be partly because of its shong basis in phjsical phenomena. It attenpts to classify personality and behavioral traits based on positions of planets and stars at the time of birth, and to predict the actions of groups based on the relationships of planets, moons, and comets to one another. The science of phjsics confirms that the positions of oui moon and planets, the energj given off, and the gravitational phenomenon are directly responsible for phjsical occurrences of tides and weather-should they not have a measurable effect on behavior? This will be considered in the following sections.

Let us look first at the fascinating subject of sj-mmetrj in nature. Science is familiar with the sj-mmehic shspes of crjstalline substances, snowflakes, the spherical planets, and the human body. The periodicity of the universe-sun spots, eclipses, and other Cjclic phenomena-is also understood, but its bearing on human behavior is not yet known. Work in biorhjthms is only at the point of being a curiosity; the relationship of behavior to nonbiological functions, such as plandarj positions, is too abstract.

In 1904, Arthur H. Church wrote about phyllotaxis, the leaf arrangement of plants, showing its relationship to a mathematical series based on the works of Leonardo Pisano (Fibonacci). This mathematical series of numbers has been athibuted the quality of representing human behavior. Exanples have been given that sppear to be more than interesting coincidences."

It is not certain how Fibonacci conceived his summation series. His greatest woric Liber Abad, written in the earlypart of the thirteenth century, was not published until 1857." It contained a description of a situation involving the reproduction of rabbits in which the following two conditions hold: Every month each pair produces a new pair, which, from the second month on become productive; deaths do not occur. This becomes the famous Fibonacci summation series

I, 2, 3, 5, 8,13, 21, 34, 55, 89,144....

(more currently written I, I, 2, 3, - . .). It can be easily seen that each element of the series is the sum of the two previous enfries

Those who have studied the life of Fibonacci often attribute the series to his observations of the Great Pjramid



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