BullBear Trading: Stock and Financial Market Technical Analysis

Source: http://www.optionetics.com/market/articles/19861/print

Analytical Toolbox: Speaking with Andrew Cardwell, Part I

Clare White, CMT, Optionetics.com
July 18, 2008

Although I haven’t used the Relative Strength Index [RSI] as a primary tool when displaying charts, expect it to appear more frequently as I become more clear about the indicator reliability and techniques used by Andrew Cardwell. The market action in the past two weeks has really underscored the value of Mr. Cardwell’s work. It also seems a perfect time to share some of his history and insights. For starters, a comment of his that has already become a favorite for me follows:

“Today’s technicals help write tomorrow’s headlines.”

The “no bounce” or “delayed bounce” this bear has offered makes us search for clues as to what’s next. Rather than looking back at what’s typical or checking out the latest headlines, consider really focusing on what the charts are telling you.

Updated Bio

Andrew Cardwell, president of Cardwell Financial Group, Inc., began his trading career in 1978 as a broker with McCormick Commodities. In 1981, Andrew left the brokerage business to devote his time to the study of technical analysis and to develop a trading program and model around the Relative Strength Index. Today, he provides consultation and commentary for his RSI Course students and his Cardwell Private Client Group.

Andrew Cardwell has taught his proprietary RSI Basic and RSI EDGE Courses to individual traders, brokers, money managers and technical analysts from around the globe. More than 70% of his course students have been referrals and he has course students in 27 countries. As a very respected and sought-after lecturer, he has presented at some of most prestigious worldwide financial conferences. From 1990 to 1993, he provided weekly market commentary for the Financial News Network and has also appeared on CNBC, providing opinions based on his RSI experience. His articles have been published in Futures magazine and by Knight-Ridder News Service. He was featured in the Commodity Traders Consumer Reports “Trader Profile” series where Bruce Babcock referred to him as ''the world''s leading authority on the RSI''. Andrew Cardwell can be reached at cardwellRSI@hotmail.com

Trader Insights

While it’s impossible to summarize 30 years of trading experience in a couple of brief interviews, getting a glimpse of that experience is still worth pursuing. Regardless of the markets you trade or the number of years you’ve been trading them, you can likely benefit from Mr. Cardwell’s insights (see the Analytical Toolbox article from last week: Cardwell Techniques with RSI).

Q: What prompted you to leave the brokerage business?

AC: When I was a broker, I noticed one of my boss’s clients doing very well. I was talking to him one day and asked him about his success. He told me about Welles Wilder’s article on RSI that appeared in the June 1978 Commodities magazine (now Futures). He was using worksheets from the article for three pork-related commodities markets he followed since he was in the cash pork business.

After that conversation I began to calculate the RSI value too using Wilder’s methods. I would plot it by hand for a variety of markets including pork-bellies and hogs, soybeans, wheat, gold and silver gold, then went into currencies and financials. After monitoring the charts with RSI, I got tired of using house recommendations which were counter to mine and defending my position.

RSI worked for the client who was trading hogs and pork bellies which were very thin and volatile. When I began to plot it, I saw the same clear and consistent patterns. I thought if it works on pork-bellies it will work on anything. So I started with pork-bellies and hogs, moved on to soybeans and wheat, and then started moving to gold and silver.

By the time I went into the financials I was such a technician and chartist that I would look at the bond futures focused on price targets only. If it cleared one target I would just focus the next. Eventually I’d have to turn around to ask, “Did we make a lot of money on that?” Their response was “What do you mean?” Since bonds traded in 32nds, I only then realized that if we get in at this price and get out here, we must have made good money. I tell you that because I wasn’t concerned with how much money was made in a trade. I was focused on following the patterns I saw.

When I started doing this there was another guy in the office using aTI-59 calculator. I could update 10 charts faster with a plain calculator, pencil and paper then before he could calculate 3 or 4 because he had to keep replacing a magnetic strip. That’s why I consider computers a black box and continue to plot certain things by hand.

Q: Why did you choose the RSI for your primary technical tool?

AC: I started using RSI because it satisfied a few different market measures I believed to be key: Price, Momentum, Time & Sentiment [PRIMOTIS]. That’s the input that I really wanted to track.

Sentiment: When thinking about Sentiment you’re thinking about the psychology of bulls and bears. Since the RSI is scaled between 0 and 100 it would give you a graphic representation of sentiment. When RSI is in the upper portion of the chart most people are bullish and when it’s in the lower portion of the chart, most people are bearish. This concept is what evolved into my “RSI Range Rules.”

Price: In terms of Price, I focus primarily on the closing price since I believe it is more important than any other value during the day, including the open. As the market closes, if a trader is holding a position, they have to decide whether to hold or get out of the position. If he’s not in and wants to be in, he has to decide whether to enter now or wait for another day. That’s an important decision for all traders to make at the end of the day.

Even more importantly, the close is the price upon which your account is balanced at the end of the day. You could buy on a rally in the morning and still be underwater at the close. Or feel like a genius if the stock continues to rally. If you want to see the importance of the closing price, draw a line on close, connecting the closes.

It’s like drawing a one day moving average and can be used as an indicator by itself. Just draw a line and you can more easily see a lower low. You can see higher bottoms and higher highs. I call it a Line on Close [LOC]. You can see the line rising or falling. One of the charts I use in my basic course has a bar chart on top and an LOC below it. If you look at the bar chart there’s a lot of activity and a lot of noise. If you look at the LOC it’s usually very smooth and will give you objective information about direction.

Time: For Time, I wanted something I could reference, so when using RSI I’m looking at the value today compared to yesterday or where it is today compared to last week. That took me into the Cardwell weekly charts I plotted as well. Plotting only one day during the week let the market tell me what it wanted to during just those two days (from Thu to Thu or Fri to Fri).

I wasn’t looking at the weekly change, just two closes a week a part, allowing the volatility or noise to occur during the other two or three market days. I would see where it closed because many times I would have a target on a price and it wouldn’t get there by the close. And the next day it closed well above my target price confirming I was in tune with what the market was telling me. If it was breaking down I’d see what the RSI was doing.

Q: How long it took you to feel you could really rely on the info you received from the RSI?

AC: I saw early on that RSI seemed to be more specific; the patterns seemed to be cleaner and you could apply them to different times. In terms of picking one momentum tool over the other, you can look at volume too. When the market is moving up and volume is increasing it’s a good thing. If it’s moving up and volume is drying up then it’s getting into thin air because there are not many people committed to it.

So I looked at volume studies and I looked at momentum studies and they were all basically the same thing. But RSI had the cleanest patterns and was the most consistent. When I tried to apply Range Rules to Stochastics or ROC, they weren’t as smooth or as consistent as RSI was and then seeing how well one customer was doing with it really made me ask why.

Once using the RSI, I started seeing more and more consistency. The more markets I started to plot, the more confident I became because I saw the same tendencies appear over and over again in all of these different markets and even using different time periods When a range developed, it helped identify which way the trend was truly going, I could then look for other indications to confirm that there was a transition happening.

It didn’t matter whether it was a short-term 1, 5, 30, 60-min chart or even a daily or weekly chart, I even look at monthly charts and when I notice a monthly range shift then I know something big is coming up. It works in all time intervals and all markets whether its stocks, the cash market, futures, ETFs…

When I participated in the Telerate conferences with other traders and technicians, I got to know George Lane who I considered a very good friend of mine and greatly respected. We used to talk about the information provided by Stochastics and RSI and it really stood out when it was the same – both were clear.

Speaking with George confirmed for me I was on the right track. I met him at my first conference in 1987 I was 33 and here he is in his early 70’s. He had already been in the markets for 35-40 years. I’m always willing to learn from elders because if you take the time to listen you can learn. When someone is telling you something there telling it to you for a reason. They want to save you the anguish of going out on your own and being a danger or hazard to yourself, creating your own nightmares. George was a big influence on me and I’m sure many others. Those of us who knew him really miss him.

One time I asked him if he had it to do all over again, what he would do differently. He said, “I would do exactly what you did. I would learn one indicator upside down, inside out and backwards. I would also learn a markets personality (yes each market does have its own personality), maybe 5 or 6, but know the personality of the market. Know your indicator so you could know when the market was acting normally or abnormally.” So that and the value of understanding a market’s personality were two things George really confirmed for me.

Q: As you mentioned to me before, “today’s technicals write tomorrow’s headlines”, can you expand on that?

AC: The more I developed my understanding of markets and charts, the more I could see traders fighting things. They would move from indicator to indicator, read newspapers, and talk to other traders. They do not make their own decisions because they don’t know what the market was telling them and basically didn’t have a trading plan going in (just as a sports team without a game plan is doomed from the start).

I focused on the RSI and saw that it was reliable in uptrends, downtrends, with different markets and in all time frames and saw this over the last thirty years and it’s still showing the same things today. I found I could usually identify higher probability trades by noting a trend change checking my Range Rules and then confirming things with RSI patterns and other technical tools. While most people can state, “the trend is your friend” most don’t truly understand or follow it.

Nobody truly knows what the market will do, we can however work in a world of probabilities. I identify and apply stops, and move them up when a position moves favorably hitting different price targets along the way. Don’t read into the market anything more than what’s actually there. Read your charts not the newspaper and let the market tell you what it wants to do (not what you want it to do).

Q: How long has your current method of analysis been in place?

AC: I haven’t found anything in over thirty years of work that can hold a candle to what RSI can do. I saw the run-up in the late 70s and early 80s in gold, I saw the fall off (mini crash) in stocks in ’87, I saw the run up in oil over the last 2 years. When I taught my Advanced RSI Edge course 5 years ago, we were looking at a major top in the dollar, a low in the euro and gold, and the stock market had just experienced its dot-com blow-off. Nothing moves straight up or down … you obtain signals along the way if you’re just willing to listen to them.

When looking at stocks I use the Dow Jones Industrial Average as my primary index since it includes widely held securities that affect so many portfolios. Using the stocks that make-up the index, the weakest ones begin to fall off when the markets gets overextended. When the stronger ones fall off, you know that the index is turning over. Last summer I noticed the major widely held stocks weren’t getting the push up in momentum they needed and knew things were changing.

You don’t have to just look at the markets your trading, you can look at other securities to get information about the market you trade (e.g. XAU with Gold) or you can look at component stocks. For instance you can look at bank or mortgage stocks to get a sense of what may be happening in XLF ahead of time. When the weekly bank charts were topping out at 60 along with the daily charts, you might then look for signs of similar action in the ETF.

Over a long period of time, I have been able to use the RSI to understand the markets. I didn’t buy my first computer until early 1987 and while I wasn’t familiar with computers I was able to generate bar charts, moving averages, and the RSI. While I use chart packages now, I still use the computer to generate an RSI value and plot daily and weekly charts by hand for the Dow, bonds, gold, the euro, and dollar index by hand. By doing this you can see things differently and don’t have to fire up computer to check out a situation for the market.

Thank you.

Coming Up

Next week, we’ll address Mr. Cardwell’s earlier comment about not having a trading plan. Throughout the years he has come to find that usually there are about 10 really good trades each year and of those 3 or 4 are exceptional. In his words, “It’s not the quantity of the decisions that make you money, it’s the quality. Quantity means you’re putting money at risk all the time.”

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