+ (4) + (6)
Combining the three periods (2), (4), and (6), which have strong upward biases, gives con-sistently positive results. Even if the newly elected party fails to deliver on their campaignpromises, traders could have already converted those marketing gimmicks into stock mar-ket profits.
NAUAWNE
® articles by Adam White, “The Eight-Year Presidential Election Pattern,” Technical Analysis of Stocks & Commodities (November 1994); Arthur A. Merrill, “The Presidential Election Cycle,” Technical Analysis of Stocks &Commodities (March 1992); and Michael J. Carr, “Get out the vote and into stocks,” Futures (February 1996), allshow very similar results for the 4-year election pattern. -
ee
TABLE 14-3. The Presidential Election Cycle, ~—1912-1992, Based on the Percentage Returns -of the Dow Jones Industrial Averages
Preelection year (1.0%Election year 7.0Postelection year 47Midterm year 23Average year “6.3% .
nrSource: Adam Whice.344 BEHAVIORAL TECHNIQUES
aTABLE 14-4 Election Year Analysis for Years in Which the Stock Market Began the Yearwithin 8% of the Previous Two-Year Highs
 
 
1 2, First 3. 4. 5 6. ElectionPrevious 2 weeks Primaries Preconvention Preelection to year-end 7.Year Year (1-10) (10-83) (83-161) (161-195) (195-253) (I) + (3) + (5)1936 41.82 2.76 4.64 1191 0.62 5.85 20.521944 19.45 1.63 —.84 9.27 —.86 3.14 14.041952 16.15 1.60 -2.82 8.02 -2.49 5.47 15.101956 27.25 ~-1L78 5.42 3.16 6.65 2.38 3.761960 8.48 249 5.75 2.94 -7.13 8.49 8.951964 18.89 1.79 444 3.03 2.52 0.06 4.881968 20.03 0.26 0.10 1.44 439 4.25 5.951972 10,82 L4l 3.39 5.30 -1.78 4.88 11Ls91980 12.31 2.26 5.42 1857 7.66 28.491984 17,53 127 -5.01 427 0.63 6171992 26.30 0.80 -2.72 2.14 5.87 8.82Average 19,9} 0.86 0.44 637 4.43 1h66
 
 
Sources Michael Carr, Logical information Machines.
COMMITMENT OF TRADERS REPORT
Drawing from more than 20 years of experience in analyzing the CFTC’s Commitment ofTraders Report, William L. Jiler described a supplementary approach to identifying a majortrend in his 2985 CRB Commodity Yearbook.® With his usual thoroughness and clarity, Jilerpresents material that had previously been unsuccessfully interpreted.
Originally released the 11th day of each month (biweekly since 1992), the Commitmentof Traders Report summarizes the positions of reporting and nonreporting traders as of thelast day of the previous month. Reported positions are those exceeding a minimum leveldetermined for each futures market (e.g., 750,000 bushels for corn, 500,000 for soybeans,500 contracts for 30-year Treasury bonds, and 300 contracts for the S&P 500). The reportsubdivides the open interest into positions held by hedgers (commercials) and speculators.By subtracting the reported positions from the total open interest, the total positions of smallhedgers and speculators can be found. For grain reports (Figure 14-2), positions are furtherdivided into o/d crop and other positions, which include new crop and intercrop spreading.
To analyze the shifts in position, Jiler has compiled tables of norma patterns, similar toa seasonal study (Figure 14-3). When the open interest of one group is significantly greaterthan their normal holdings, they express a definite opinion ofthe direction of the market. Bytracking these changes for many years and observing the corresponding price changes, Jilerconcludes that the large traders have the best forecasting record, with the large hedger betterthan the large speculator. The smail traders were notably worse. Guidelines were stated as:
The most bullish configuration would show large hedgers heavily net long morethan normal, large speculators clearly net long, small traders heavily net shortmore than seasonal. The shades of bullishness are varied all the way to the mostbearish configuration, which would have these groups in opposite positions—large hedgers heavily net short, and so forth. There are two caution flags when an-alyzing deviations from normal. Be wary of positions that are more than 40% fromtheir long-term average and disregard deviations of less than 5%.
? william L. Jiler, “Analysis of the CFTC Commitments of Traders Reports Can Help You Forecast Futures Prices,”1985 CRB Commodity Year Book (Commodity Research Bureau, Jersey City, NJ, 1985)COMMITMENT OF- XADERS REPORT 345
 
 
FIGURE 14-2 Commitment of Traders Report.
 
BOYREANS - CHICAGO BOARD OF TRADECOMMITMENTS OF TRADERS IN ALL FUTURE COMBINED AND INDICATED FUTURES.REPORTABLE POSITIONS:NOMREPORTARLEPOSITIONS:
13,810 41, 060 217, 420 140, 3900 174. 290 184. 90046.275 33.075 37, 420 105.483 128.700 149. 30 132.3909.280 "7.070 6S 11.798 117480 24.710 22.443. 32.340
CHANGED IN COMPITHENTE FROM JAWARY 31. 1905 :9.240 15/973 10,280 10,260 14,560 -44,770 25.400 -10.919: -29..990
PERCENT OF OPEN INTEREST REPRESENTED BY EACH CATEGORY OF TRADERS:
aa 00 a GN oR a 3x4 ine wt v1 ase 4h aS 7 30a3 3
4 124 as #2) 208 208 493
MUMBER OF TRADERS IN EACH CATEGORY
32 22 33 ™ 41 100a2 23 2 Es 39 388 3 3 * 6 2CONCENTRATION RATIOS. .PERCENT OF OPEN INTEREST MELD BY The INDICATED NUMBER OF LAAGERT TRADERS: 3¥ GROSS POSITION : 3Y NET POSITION@ OR LESS TRADERS TRADERS. 8 OR LEGG TRADERSsHoeT: LONG; BMORTBa ae 233tot 2022a me
 
FIGURE 14-3 _Jiler’s normal trader positions.
 
SOYBEANS CHICAGO (Gyr-avg.~ 1978, 79.80,81,83,84) -
Small Traders
Large Speculators
Large Hedgers
2513 2710 249 23/6 20°4 18 1 152913 2710 24] 14 28 12 26 9 23) 14 28Jan. | Fee. | MAR.| APR.| May [JUNE | JULY | AUG. {SEPT OCT. | Nov. | DEC. -
 
i346 BEHAVIORAL TECHNIQUES
 
This result is confirmed by Curtis Arnold,’° who compared positions of large and smallspeculators with commefcials for a 1-year period spanning 1983-1984. Arnold shows (Fig-ure 14-4) that the position of commercials and small speculators tend to be'opposite, withthe commercials positioned to profit from the subsequent price move.
Over a wider group of 36 markets from 1983 to 1989, a study conducted by BullishReview" showed that a large weighting of long or short positions held by commercialhedgers correctly forecasts significant market moves 67% of the time. In retrospect it seemslikely that a large commercial trader, bank, investment house, or other institution wouldtake a longer-term view of the market, setting positions to take advantage, or avoid the risk,of a potential price move. Because of their size, institutions are not likely to change theirpositions on minor market variations. Analysts should be aware, however, that a qualifiedbeager, one that is registered with the CFTC to set large positions due to their ongoing riskof holding physicals, may also take large speculative positions under the same umbrella.
OPINION AND CONTRARY OPINION
Market sentiment seems to be a driving force in the market, yet it is very difficult to measureand even harder to deliver those results in a timely fashion. For that reason, analysts oftensubstitute a combination of volume, open interest, and price for true sentiment, hopingthat the recorded actions of traders closely relate to what they are thinking. Opinion, how-ever, weighs on the marketplace and governs future actions in the same way the high vol-ume may not move prices today, but provides a platform for a potentially large price move.Public opinion is also fast to change. A prolonged bull market in stocks may show a grad-ual increase in bullish sentiment; however, the collapse of a bank, an increase in rates by theCentral Bank, a sharp downturn in the economy of another region, or a single sharp drop inthe stock index could quickly change the public’s opinion. Oddly enough, sentiment indica-tors are most popular for trading in the direction opposite to the unified public opinion.
*° Curtis Amold, “Tracking ‘Big Money’ May Tip Off Trend Changes,” Futures (February 1985).1” Steve Briese, “Tracking the big foot,” Futures (March. 1994).
 
FIGURE 14-4 Arnold’s trader position study.
 
/
Monthly closing prices
 
Small speculators ___
 OPINION AND CONTRARY OPINION 347
 
Contrary Opinion’?
The contrarian lies somewhere between the fundamentalist and the technician, basingactions on the behavior of crowds, in this case the market participants. The contrarian seesthe end of a bull market occurring when everyone is bullish. Once all long positions havebeen set, there is diminishing influence by the bulls; moreover, opportunities always lie inthe reverse direction from crowd thinking.
Contrary opinion alone is not meant to signal a new entry into a position; it only iden-tifies situations that qualify. It lacks the timing. It is more of a filter than a trading system, ameans of avoiding risk and finding an opportunity. Consider the patterns that appear inevery prolonged bull or bear move. First, there is a place where the direction is generallyaccepted as the major trend. After that, traders wait for a reversal to enter in the directionof the trend at a more favorable price. These price corrections become smaller or even dis-appear when everyone wants to buy a lower open or sell a higher open until you have theultimate blow-off and a reversal of a major bull or bear market. The dynamic end of a pro-longed move is generally credited to the entrance of the public; when the masses are unan-imously convinced that prices are going higher, who is left to buy?
The other important ingredient for a contrarian is that all the facts cannot be known.The widely accepted belief that “prices will go higher” must be based on presumptions; ifthe final figures were out, the market would adjust to the proper level. This idea is olderthan The Art of Contrary Thinking. In 1930, Schabacker discussed cashing out of a longposition if the market rallied on news that was general rather than specific.
The practical application of the theory of contrary opinion is the Bullish Consensus?and the Market Sentiment Index, created from a poll of market letters prepared by theresearch departments of brokerage firms and professional advisors. In the Bullish Consen-sus (see Figure 14-5), these opinions are weighted according to the estimated circulationof these letters until a final index value is determined. .
Sum of (each source x its relative weight x opinion)
Bullish Consensus = —Sum of (each source x its relative weight x bullish opinion)
The value of the Bullish Consensus will range from 0 to 100%, indicating an increasinglybullish attitude. Because of the bullish tendency of the novice trader, and the long-termupward bias of the stock market, the neutral consensus point is 55%. The normal range isconsidered from 30 to 80%, although each market must be individually evaluated.Hadady also devised a simple mathematical way of displaying the bullishness of the
market." Using the formula below, he shows that when 80% of traders are bullish, then theaverage buyer will hold only “4 the number of contracts as the average seller. This leads toa precipitous drop in prices once a decline begins.- 20% TXN, - 1 xN,80% T 4where 7 =the number of traders in the market .
N, = average number of contracts held by a single bullish trader
N, = average number of contracts held by a single bearish trader
 
" For the most definitive works, see Humphrey Neill, The Art of Contrary Thinking (Caxton Printers, Caldwell,OH, 1960), who is credited with having first formulated the concept, and R. Earl Hadady, Contrary Opinion(Hadady, Pasadena, CA, 1983).
3 The Bullish Consensus is a product of Sibbett-Hadady, Pasadena, CA; a Market Sentiment Index is published i inConsensus, Kansas City, MO.
*R. Earl Hadady, “Contrary Opinion,” Technical Analysis of Stocks & Commodities (August 1988).348 BEHAVIORAL TECHNIQUES
 
 
FIGURE 14-5 Interpretation of the Bullish Consensus.
 
BullishConsensusPercentage
100 An important downtrend in the price is
imminent.
s
Indeterminate area—an importantdowntrend in the price could start in thisarea, The change in trend in the Market30 Vane Consensus should be used, along with
technical analysis, to determine the top.
Odds favor the continuation of any existing70 uptrend in the price. If prices are not in anuptrend, subsequent action is in-determinate, unless a bottom seems tohave formed. In that case, expect new lowsbecause the majority cannot be right at abottom.
Odds are even for the price to move ineither direction. Do not take a position. 55percent is the norm or equilibrium point,due to the normal bullish bias of the public.
 
“ Odds favor the continuation of any existingdowntrend in the price. If prices are not ina downtrend, subsequent action is in-‘ determinate, unless a top seems to have30 formed. In that case, expect new highs tobe made because the majority cannot be
right at a top. \
Co Indeterminate area—an important up-trend in the price could start in this area.The change in trend in the Market VaneConsensus should be used, along with
0 technical analysis, to determine thebottom,
A major uptrend in the price is imminent.
 
Source: R. Earl Hadady, Contrary Opinion (Pasadena, CA: Hadady, 1983).
The principle of contrary opinion does not require that trades only be entered in thedirection opposite to the current price movement. Within the normal range, the contrarianwill take a position in the direction of the trend. Frequently, the Bullish Consensus willbegin increasing prior to the price turning higher, indicating that the attitude of the traderis becoming bullish. It is considered significant when the index changes 10% in a 2-weekperiod. Once the Bullish Consensus reaches 90% during an upward move, or 20% during abear move, the market is considered overbought or oversold, and the contrarian looks for aOPINION AND CG.4TRARY OPINION 349
 
convenient point to exit from the current trade. Positions are not reversed until prices showthat they are not continuing in the original direction. This could be identified using a mov-ing average. Remembering Schabacker’s advice, the occasion of a general news release thatmoves the market further in the direction of the general opinion would be an opportunemoment to enter a contrary trade; specific news that fails to move prices would be a goodindication of an exhausted trend when the consensus is overbought or oversold. A typicalcontrarian situation identified by Hadady is given in Figure 14-6.
R. Earl Hadady said: “The principle of contrary opinion, by definition, works 100% of thetime. The problem is getting an accurate consensus.”"* Timeliness is a problem with thisindex; if 60 to 70 market letters are reviewed, read, and weighted to form an index, the resultsmay be outdated before they can be used. The theory of contrary opinion also emphasized itsuse as a timing device for entering trades at an opportune moment and for filtering out theambiguous trades; the theory is not readily applicable to exiting a position unless the reverseconsensus occurs. Because a consensus does not have to switch uniformly from bullish tobearish, it is not always prudent to wait for an opposite confirmation before exiting a trade.
Commitment of Traders Sentiment Index'*
The reported positions of traders, published in the CFTC'’s Commitment of TradersReport, may be considered a recording of market opinion into categories. By combining
+5 George Angell, “Thinking Contrarily," Commodities (November 1976).16 Stephen E. Briese, “Commitment of Traders as a sentiment index,” Technical Analysis of Stocks & Commodities(May 1990).
 
FIGURE 14-6 Typical contrarian situation—wheat, 1978.
 
  
 
HC WHEAT
wie rt osEpa PearSome
 
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SCALE FoR BAR CHART
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contenene
   
" Aze27 6 12 20.27 3 1007 ay 1 ws ee a8 8 ae a12 20 way ery get et ane ae
bccn wa’1978
 350 BEHAVIORAL TECHNIQUES
 
the idea behind the stochastic calculation with a method originally developed by CurtisArnold, you can create an index:current net — minimum netCommitment of Traders Index = —-_————_maximum net — minimum netwhere: Net = Commercial net position (number of contracts) minus the total com.bined net position of large speculators and small tradersMaximum = Greatest net difference that occurred during the comparison periodMinimum = Smallest net difference that occurred during the comparison period
The intent of the Commitment of Traders Index is to rank the current spread between thecommercial and speculative positions within the context of the historic range. There seemsto be uniform agreement the commercials are the group that determines the direction ofprices. A shift in the position of the commercials should be closely watched.
Put-Call Ratios
The ratio of put option volume to call option volume, called the put-call ratio, is the majorsentiment index for listed options. It too is used for its contrary value. The interpretation‘of extreme levels of the put-call ratios (in particular, the index option) points out a prob-lem that may reflect on the proper use of all contrary indicators.’”
‘Prior to 1986, the market was considered ready for an upturn when the total put volumeexceeded 65% of the total call volume. Similarly, when the put volume fell to 35% of the callvolume it was a bearish indication. In the volatile markets of 1986 and 1987 these levelsproved to be far too close, and as McMillan said, “Not surprisingly, the put-call ratios fell intosome disfavor at that point.” This could easily happen with a contrary indicator, or any indi-cator that rarely reaches its extreme values. Because contrary opinion is a valuable addition toanalysis, use of these indicators now focuses on relative highs and lows. This can be accom-plished by smoothing the ratio using a standard moving average or momentum indicator (asimple difference over n-days). When the ratio moves over 65% and turns down it is time tosell. Such an approach gives up a timing edge but greatly reduces risk and increases reliability.
FIBONACCI AND HUMAN BEHAVIOR
Even though we may not understand the cause underlying a particular phenomenon, wecan, by observation, predict the pbenomenon’s recurrence.
RN. Elliott’®
History is a record of great achievement in the face of disbelief, as exhibited by the explo-rations of Columbus, Magellan, Marco Polo; the science of da Vinci, Galileo, Copernicus;and the philosophy of Socrates and other men now known to be great. We are more obser-vant today and less apt to condemn those.who delve into areas still unknown. Of these,astrology is the most popular, with a very large following, particularly in Asia. Its accep-tance may be partly because of its strong basis in physical phenomena. It attempts to clas-sify personality and behavioral traits based on positions. of planets and stars at the time ofbirth, and to predict the actions of groups based on the relationships of planets, moons,and comets to one another. The science of physics confifms that the positions of our moonand planets, the energy given off, and the gravitational phenomenon are directly responsi-ble for physical occurrences of tides and weather—should they not have a measurableeffect on behavior? This will be considered in the following sections,
»” Lawrence G. McMillan, “Put-Call Ratios,” Technical Analysis of Stocks & Commodities (October 1995).**R.N. Elliott, Nature's Law: The Secret of the Universe Elliott, New York, 1946 p. 4).FIBONACCI AND HUMAN BEHAVIOR 351
 
Let us look first at the fascinating subject of symmetry in nature. Science is familiarwith the symmetric shapes of crystalline substances, snowflakes, the spherical planets, andthe human body. The periodicity of the universe—sun spots, eclipses, and other cyclic phe-nomena—is also understood, but its bearing on human behavior is not yet known. Workin biorhythms is only at the point of being a curiosity; the relationship of behavior to non-biological functions, such as planetary 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 attributed the quality of rep-resenting human behavior. Examples have been given that appear to be more than “inter-esting coincidences.”
It is not certain how Fibonacci conceived his summation series. His greatest work,Liber Abaci, written in the early part of the thirteenth century, was not published until1857.74 It contained a description of a situation involving the reproduction of rabbits inwhich 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 becomesthe famous Fibonacci summation series
1, 2, 3, 5, 8, 13, 21, 34, 95, 89, 144, ...
(more currently written 1, 1, 2, 3, .. .). It can be easily seen that each element of the seriesis the sum of the two previous entries.
Those who have studied the life of Fibonacci often attribute the series to his observa-tions of the Great Pyramid of Giza. This pyramid, dating from a preliterary, prehieroglyphicera, contains many features said to have been observed by Fibonacci. In the geometry of apyramid there are 5 surfaces and 8 edges, for a total of 13 surfaces and edges; there are 3edges visible from any one side. More specifically, the Great Pyramid of Giza is 5,813 incheshigh (5-8-13, and the inch is the standard Egyptian unit of measure); and the ratio of theelevation to the base is .618.” The coincidence of this ratio is that it is the same as the ratiothat is approached by any two consecutive Fibonacci numbers; for example,
2 3 5 893 7 667, 3 = 600, g = 625, Lees sag 7 618It is also true that the ratio of one side to a diagonal of a regular pentagon is .618.
Another phenomenon of the pyramid is that the total of the 4 edges of the base, mea-sured in inches, is 36,524.22, which is exactly 100 times the length of the solar year. Thispermits interpretations of the Fibonacci summation series to be applied to time.
The Greeks showed a great fascination for the ratios of the Fibonacci series, noting thatwhile F,/F,4, = .618, the-reverse F,, .,/F, = 1.618 was even more amazing. They expressedthese relationships as golden sections and appear to have used them in the proportions ofsuch works as the Parthenon, the sculpture of Phidias, and classic vases. Leonardo da Vinciconsciously employed the ratio in his art. It has always been a curiosity that the great math-ematician, Pythagoras, left behind a symbol of a triangle of Fibonacci proportions with thewords “The Secret of the Universe” inscribed below.
29 AH. Church, On the Relation of Phyllotaxis to Mechanical Laws (Williams and Newgate, London, 1904)9 In the appendices to Jay Hambridge, Dynamic Symmetry: The Greek Vase (Yale University Press, New Haven,CT, 1931, pp. 141-161), there is a full discussion of the evolution of this number series within science and math-matics, together with further references. .
2 I] Liber Abaci di Leonardo Pisano (Baldassare Boncompagni, Rome, Italy, 1857). :
2 Jay Hambridge, Dynamic Symmetry, The Greek Vase (Yale University Press, New Haven, CT, 1931, pp. 27-38).352 BEHAVIORAL TECHNIQUES
 
Church, in his work in phyllotaxis, studied the sunflower, noting that one of normalsize (5 to 6 inches) has a total of 89 curves, 55 in one direction and 34 in another, Inobserving sunflowers of other sizes, he found that the total curves are Fibonacci numbers(up to 144) with the two previous numbers in the series describing the distribution ofcurves. The chambered nautilus is considered a natural representation of a golden spiral,based on the proportions of the Fibonacci ratio (see Figure 14-7) in which the logarithmicspiral passes diagonally through opposite corners of successive squares, such as DE, EG,GJ, and so forth. Nature also shows that the genealogical pattern of a beehive, and the stem(growth) structure of the Sneezewort (Achillea ptarmica) are perfect duplicates of theFibonacci series.
Up to now, aspects of the Fibonacci series have been intriguing, but here it goes a stepbeyond. The numbers in the series represent frequent or coincidental occurrences:
The human body has five major projections; both arms and legs have three sections;there are five fingers and toes, each with three sections (except the thumb and greattoe). There are also five senses.
In music an octave means eight, with 8 white keys and 5 black, totaling 13.
There are three primary colors. .
The United States had 13 original states and 13 is an unlucky number.
The legal age is 21 and the highest salute in the army is a 21-gun salute.
The human emotional cycle has been determined at 33 to 36 days by Dr. R.B. Hersey.”
The wholesale price index of all commodities is shown to have peaks of 50 to 55 yearsaccording to the Kondratieff wave: 1815 after the war of 1812, 1865 after the Civil War,1920 after the World War I, and about 1975... .
3 RN, Elliott, Nature’s Law (p. 55). Elliott quotes other human’emotional relationships.
* Cycles January 1976, p. 21); see also The Kondratieff Wave: The Future of America Until 1981 and Beyond(Well, New York, 1974), which is based on the theory developed by the Russian economist early in this century.
x
 
FIGURE 14-7 The golden spiral, also the Jogarithmic spiral, is a perfect representation of thechambered nautilus.
 
Chambered nautilus Logarithmic, or “golden” spiral
 
 
Source: Robert Fischer, Fibonacci Appiications and Strategies for Traders (John Wiley & Sons, 1993, p. 9). Originalsource: H.E, Huntley, The Divine Proportion (Dover, New York, 1970, pp. iv, 101). Reprinted with permission,ELLIOTT’S WAVE PRINCIPLE 353
 
These examples are not meant to prove anything in the strict sense, but to open anarea that may not have previously been considered. Human behavior is not yet