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
$49.99, 192 pages
With a title like “Mastering Market Timing,” authors Richard Dickson and Tracy Knudsen set the reader’s expectations at a high level. The use of such loaded words as “market timing” has virtually become verboten over the last several years following the mutual fund timing scandals, various market meltdowns and less than stellar returns of many market timing practitioners. This work almost seems like a throwback to the heady days of the 1990s when every other investment book presented the latest system or algorithm designed to deliver double-digit returns in perpetuity. (As for risk, who had time to work about such things?) To their credit, however, the authors present their trading methods in a very level-headed manner with a minimum of hyperbole.
As is evident from the subtitle, “Mastering Market Timing” incorporates the works of two legendary traders and market technicians from more than 50 years ago: L.M. Lowry and R.D. Wyckoff. Their approaches are detailed by the authors, who then use their methods to analyze major market moves, both bear and bull, over the last 30+ years. Both Lowry and Wyckoff have had numerous books written about their market philosophies, so details are kept to a minimum. For those readers not familiar with their works, a brief synopsis is helpful. L.M. Lowry developed indicators known as Selling Pressure and Buying Power. Both of these incorporate the use of market volume combined with a measure of demand (advancing/declining issues). When plotted against an index, divergences are used to identify potential turning points in the market. R.D. Wyckoff used similar methods in his approach, which he called Law of Supply and Demand. He also used volume analysis to identify market extremes. Wyckoff also made use of several chart patterns that attempted to explain the various stages of a market top or bottom. These included variations of support/resistance zones, head and shoulders patterns, and basic trendlines.
The bulk of the book uses Lowry and Wyckoff’s analysis of historical market tops and bottoms. The authors make use of abundant charts (on several indexes), which allow the reader to grasp the concepts with ease. It is helpful that they break out the analysis of market bottoms from market tops, because they tend to behave differently, and the indicators used must be interpreted in a slightly different manner. A brief introduction to point and figure (P&F) charts is presented, as Wyckoff used P&F analysis in his work. If the reader is interested in details on the P&F method, they will not be found here, but there are numerous books on the subject. Essentially, the P&F charts included are merely different illustrations of the same chart patterns previously discussed – namely, head and shoulders and support/resistance lines.
To supplement Lowry and Wyckoff, the authors make use of a few additional technical indicators to provide confirmation on market turning points. NYSE advance/decline (A/D) lines are used, as are simple moving averages. The discussion on A/D lines is actually quite detailed and novel given the less extensive coverage of the other indicators. Dickson and Knudsen point out that there is often quite a lag between an A/D divergence and a market top, but they go on to offer an explanation for this well-known occurrence. The authors hypothesize that the divergences are often because of the inclusion of “non-operating company” issues in the NYSE A/D calculation. Non-operating companies include closed-end bond funds, preferred stocks and ADRs. By including these interest-rate-sensitive issues, the resulting indicator becomes more bond-like, and thus often will lead the equity-based markets.
The authors devote two chapters to the analysis of the unique market top of 2000, because many traditional indicators (including the ones presented) failed to timely identify that particular market turning point. Much of this analysis has been put forth already in numerous books, and their explanations often seemed forced and almost apologetic. As any market technician is aware of, indicators work until they don’t. The difficult market conditions of 2000/2001 were no exception, and the authors should not have to justify a missed signal to the extent they did.
“Mastering Market Timing” is a narrowly focused book in that it draws extensively on the work of just two market analysts: Lowry and Wyckoff. However, the interpretation of the voluminous charts and tables can be applied to just about any technical market indicator. In this sense, the book is a rewarding read as it presents the works of two legendary market participants, and serves to reinforce solid quantitative and qualitative technical market analysis.
Bruce C. Greig, CFA, CAIA, CMT, is the Portfolio Manager for Altin Holdings, LLC. Greig has bachelor’s degrees in statistics and mathematics, and a master’s degree in finance, all from the University of Michigan.