From the September 01, 2012 issue of Futures Magazine • Subscribe!

Mastering Market Timing

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
Pearson Education Inc., 2012
(First Printing FT Press, July 2011)
206 pages, $44.99

Richard D. Wyckoff and Lyman M. Lowry are acknowledged widely to be influential technical analysts. Both studied the U.S. stock market using Dow Jones Industrial Average daily prices and volumes. Each created a method that he believed could anticipate or identify major stock market tops and bottoms. Authors Richard Dickson and Tracy Knudsen explain both methods, combine them, then apply the combination to two periods in the market: 1966 through 1982, and 2000 to the present.

Wyckoff began on Wall Street as a 15-year-old runner in 1888. At 25, he opened his own brokerage house. From these experiences, he learned to analyze stock price fluctuations using price and volume relationships. 

In time, Wyckoff codified three basic “laws:” The Law of Supply and Demand, The Law of Cause and Effect and The Law of Effort vs. Result. The book explains there is not necessarily a seller for every buyer in the stock market. Why?  Because “…the buyer and seller involved in every trade have different objectives, thereby causing Supply/Demand imbalances.” 

The second law posits that Cause (building a base) determines the degree of the Effect (resulting price action). Simply put, the authors write, “the bigger the base, the bigger the rally.”

The third, The Law of Effort and Result has effort as volume and price as result. The interaction of both is a critically important input for successful technical analysis, as many of us already know. Wyckoff used these three laws to avoid bear markets, and to time entries into the beginnings of major bull markets.

Lowry began as a trust officer for a Florida bank in 1925. In 1933, disappointed with current stock market analyses, he opened his own Wall Street research firm.  It became The Lowry Research Corporation in 1938, for which co-author Knudsen now works.

Believing in the fundamental economic axiom of supply and demand, Lowry developed a method based on four calculations using daily data:

  • Total points gained for all stock closing higher;
  • Total volume for all stocks closing higher;
  • Total points losses for all stocks closing lower;
  • Total volume for all stocks closing lower. 

With these four calculations, Lowry invented two indexes: Buying Power and Selling Pressure. He devised an ever-evolving set of rules to establish them as reliable guides to market timing.

The authors have combined these two analytical approaches to create better ways to identify major market tops and bottoms. Because their writing style is economic, this is a dense book that needs disciplined study to learn the lessons it offers.

Readers will need the charts ready at hand because the charts in this book are small. The FT Press provides color versions of the charts on www.ftpress.com that will be most helpful. Readers also may want to save time when studying these charts by compiling a 21-term glossary of acronyms from the book’s index to help them interpret them.

Be advised that, like most if not all technical analytical tools, these may not always work. However, because we live in interesting times, now frequently re-defined as “the new normal” that are ruling our expectations, the lessons of this book should be useful even for short-term traders. 

Those of us who lived through the secular bear market of 1966-1982 and the market from 2000 to the present may wish we had had this book then. Those who are new to the hectic majesty of markets may save themselves from some serious mistakes misreading the stock market if they consult this book. 

Desmond MacRae is a New York-based free-lance writer specializing in banking, finance and investments. (desmondmacrae@nyc.rr.com)

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