005v. 2701 (28-35) Identifying And Timing With The Special K, Part 2 By Martin J. Pring

Stocks & Commodities V. 27:01 (28-35): Identifying And Timing With The Special K, Part 2 by Martin J. Pring INDICATORS

Major Trend Reversals And Short-Term Moves

Identifying And Timing With The Special K Part 2 In part 1, you were introduced to the Special K indicator and its application on the weekly and daily charts. In part 2, we will show you how Special K can be used to identify major trend reversals and for timing pro trend short-term moves. by Martin J. Pring

are not apparent from the summed cyclicality of the Special K. Let’s see how the Special K can be used to identify major trend reversals and to time pro trend short-term moves.

IDENTIFYING MAJOR TREND REVERSALS EARLY

The following techniques will help better time primary trend I mentioned in part 1, my favorite method of reversals: displaying the Special K uses a calculation (see 1 Observing trendline breaks, such as that in late 2006 in sidebar) based on daily data and exclusively Figure 1. incorporating simple moving averages like that displayed in Figure 1. As you can see from this chart, the 2 Identifying a reversal in a series of rising or falling movements in the daily KST and the Special K are similar. The peaks and troughs. For example, the end of the bull daily KST shows overbought and oversold conditions, which market in November 2007 was signaled this way. Copyright (c) Technical Analysis Inc.

As

Stocks & Commodities V. 27:01 (28-35): Identifying And Timing With The Special K, Part 2 by Martin J. Pring 1600 1550 1500 1450

3 Observing the crossovers of the Special K’s smoothing. In this case, I typically use a 100-day smoothing of a 100-day simple moving average, as shown in Figure 1. The series of declining peaks and troughs was still in force in midSeptember 2008 as this article was written. Note that the 100/100 smoothing is not offered as the perfect solution but more as a smoothing that appears to work fairly consistently. In Figure 1, the green and red arrows show two such crossovers.

USING THE SPECIAL K TO TIME PRO TREND SHORT-

1400

S&P Composite

1350 1300 1250 1235.8 1200 1150 1100

Special K 250 200

Lower peaks and troughs signaled

150 100 50 0 -50

Daily KST

-100 50 0 -50 S O N D 2005 M A M J J A S O N D 2005 M A M J J A S O N D 2007 M A M J J A S O N D 2008 M A M J J A S

FIGURE 1: IDENTIFYING MAJOR TREND REVERSALS EARLY. Here in the S&P 500 Composite you see that the movements in the daily KST and Special K are similar. The daily KST shows overbought and oversold conditions, which are not apparent from the summed cyclicality of the Special K.

255 TERM TRADES 250 CRB Composite 245 The Special K can also be used in con240 235 junction with the daily short-term KST. 230 225 The latter can be interpreted as any other 220 smoothed oscillator with overbought/ 215 210 oversold readings, moving average cross205 200 overs, divergences, and so forth. 195 The Special K, on the other hand, is 190 185 more of a primary trend swing indicator, 180 as it usually experiences rising peaks 200 Special K and troughs during a primary bull mar150 100 ket and falling ones in a bear trend. As a 50 result, the Special K is normally plotted 0 with three or more years of data so that -50 -100 the most recent primary trend cycles are Daily KST A B KST is overbought -150 placed in perspective. 50 If we also plot the regular KST under0 neath, we derive two benefits. First, we -50 can use the KST’s gyrations to help idenM A M J J A S O N D 2001 M A M J J A S O N D 2002 M A M J J A S O N D 2003 M A tify short-term reversals in the Special K. FIGURE 2: TIMING PRO TREND SHORT-TERM TRADES. Here in the CRB Composite you can see the If the KST is overbought and reversing as Special K and the KST plotted. The Special K is a primary trend swing indicator that identifies short-term in May 2000 (Figure 2), it is more likely reversals. The KST acts as a confirming tool. to result in an imminent reversal in the trajectory of the Special K. gences develop when the KST declines but the dominant When the KST reverses to the upside and there is little or no longer-term cycles used in the Special K calculation propel it Special K response, chances are that the bearish intermediate- upward. A good example developed in November 2002 and and long-term forces are dominating. Under such circum- January 2003, as can be seen by the green arrows. stances, the Special K will most likely register a new low, The idea of rising peaks and troughs for the Special K is thereby confirming that the main trend remains bearish. especially important. For example, look at the purple arrows Several examples of this phenomenon are flagged by the at points A and B. For the KST, that shows a lower low in red arrows in Figure 2. The most glaring discrepancy devel- November 2002, and for the Special K, a higher trough — if oped in the August–September 2001 period when the KST you can call it that — at B. experienced a gentle rally, but the Special K continued in its Finally, there is another way in which short-term movedecline with no sign of strength whatsoever. Bullish diver- ments can help decide whether a specific short-term KST buy Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:01 (28-35): Identifying And Timing With The Special K, Part 2 by Martin J. Pring SPECIAL K AND MA FORMULA FOR METASTOCK WEEKLY p1:=Input(“Enter MA Value”,1,500,52); p2:=Input(“Enter MA Value”,1,500,26); (Mov(ROC(C,4,%),4, E)*1)+(Mov(ROC(C,5,%),5, E) *2)+(Mov(ROC(C,6,%),6, E)*3)+(Mov(ROC(C,8,%),6, E)*5)+ (Mov(ROC(C,10,%),10,E)*1)+((Mov(ROC(C,13,%),13,E)*2)+ (Mov(ROC(C,15,%),15,E)*3)+(Mov(ROC(C,20,%),20,E)*4)*1)+ ((Mov(ROC(C,39,%),26,E)*1)+(Mov(ROC(C,52,%),26,E)*2)+ (Mov(ROC(C,78,%),26,E)*3)+(Mov(ROC(C,104,%),39,E)*4)*1); Mov(Mov((Mov(ROC(C,4,%),4, E)*1)+(Mov(ROC(C,5,%),5, E)*2)+ (Mov(ROC(C,6,%),6, E)*3)+(Mov(ROC(C,8,%),6, E)*5)+ (Mov(ROC(C,10,%),10,E)*1)+((Mov(ROC(C,13,%),13,E)*2)+ (Mov(ROC(C,15,%),15,E)*3)+(Mov(ROC(C,20,%),20,E)*4)*1)+ ((Mov(ROC(C,39,%),26,E)*1)+(Mov(ROC(C,52,%),26,E)*2)+ (Mov(ROC(C,78,%),26,E)*3)+(Mov(ROC(C,104,%),39,E)*4)*1),p1,S),p2,S); zero:=0; zero;

SPECIAL K AND MA FORMULA FOR METASTOCK DAILY p1:= Input(“Enter First MA Time Span”,1,500,100); p2:= Input(“Enter First MA Time Span”,1,500,100); (Mov(ROC(C,10,%),10,S)*1)+(Mov(ROC(C,15,%),10,S)*2)+ (Mov(ROC(C,20,%),10,S)*3)+(Mov(ROC(C,30,%),15,S)*4)+ Mov(ROC(C,50,%),50,S)*1+(Mov(ROC(C,65,%),65,S)*2)+ (Mov(ROC(C,75,%),75,S)*3)+(Mov(ROC(C,100,%),100,S)*4)+ (Mov(ROC(C,195,%),130,S)*1)+(Mov(ROC(C,265,%),130,S)*2)+ (Mov(ROC(C,390,%),130,S)*3)+(Mov(ROC(C,530,%),195,S)*4); Mov(Mov((Mov(ROC(C,10,%),10,S)*1)+(Mov(ROC(C,15,%),10,S)*2)+ (Mov(ROC(C,20,%),10,S)*3)+(Mov(ROC(C,30,%),15,S)*4)+ Mov(ROC(C,50,%),50,S)*1+(Mov(ROC(C,65,%),65,S)*2)+ (Mov(ROC(C,75,%),75,S)*3)+(Mov(ROC(C,100,%),100,S)*4)+ (Mov(ROC(C,195,%),130,S)*1)+(Mov(ROC(C,265,%),130,S)*2)+ (Mov(ROC(C,390,%),130,S)*3)+(Mov(ROC(C,530,%),195,S)*4),p1,S),p2,S);

or sell signal is going to work. Note the horizontal line marking the short-term low in the Special K in May 2001. When the indicator violates this level, it signals that a new low in the price itself is likely. In the case of the May 2001 example, the Special K took out its low just about two weeks before the CRB itself did. The reverse situation developed at point B, where the Special K moved to a new high. In this case, there was no lead by the momentum indicator as the price broke out more or less simultaneously with it.

THE SPECIAL K AND RELATIVE ACTION On occasion, we see markets experience long-term linear upor downtrends; examples would include Japan in the 1980s or the US in the 1990s. Such trends do not lend themselves to momentum interpretation because oscillators, whose calculation assume a normal four-year business cycle, peak prematurely and trigger several false sell signals prior to the ultimate secular turning point. Because the calculation of the Special K assumes the cyclicality of the four-year business cycle, it too suffers from this weakness during linear up- or downtrends. However, the Special K does lend itself to trends in relative action. While market averages, such as the S&P, might

SPECIAL K FORMULA FOR WEEKLY CHARTS ROC Time EMA of Weight Total Span ROC 4 5 6 8 10 13 15 20 39 52 78 104 Special K

4 5 6 8 10 13 15 20 26 26 26 39

x x x x x x x x x x x x

1 2 3 4 1 2 3 4 1 2 3 4

4 10 18 32 10 26 45 80 26 52 78 156 537

SPECIAL K FORMULA FOR DAILY CHARTS ROC Time SMA of Weight Total Span ROC 10 15 20 30 50 65 75 100 195 265 390 530 Special K

10 10 10 15 50 65 75 100 130 130 130 195

x x x x x x x x x x x x

1 2 3 4 1 2 3 4 1 2 3 4

10 20 30 60 50 130 225 400 130 260 390 780 2485

SIDEBAR FIGURE 1

zero:=0; zero;

zero:=0;

See how the Special K can be used to identify major trend reversals and to time pro trend short-term moves. experience a persistent linear uptrend, individual sectors are continually rotating leadership roles. For example, between 1998 and 2000, tech stocks performed admirably, but financials were not so strong. In such situations, indicators such as the Special K are able to isolate emerging new leadership at a relatively early stage. In this respect, Figure 3 features the relative strength line for the S&P Financials, an early leading sector. When the line is rising, it means that the financials are outperforming the S&P and vice versa. One of the exchange traded funds (ETFs) for this sector is the XLF. You can examine the longterm cyclical swings in the KST in the bottom panel and the Special K in the center. The arrows point to Special K moving average crossovers, which often occur simultaneously or close to trendline violations. As you can see, the cyclicality of this series consistently offered good signals in this 15-year period. Figure 4 features the relative action of the S&P Materials,

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Stocks & Commodities V. 27:01 (28-35): Identifying And Timing With The Special K, Part 2 by Martin J. Pring

S&P Financials (XLF) relative to S&P 0.30

see the same thing develop almost a year later at point Y.

0.25 0.227

IT’S SPECIAL

0.20

Although this new indicator has a lot of benefits, it is certainly not the end-all and be-all. Each security has its own unique set of market participants, and collectively, they have their own characteristics, as reflected in the price action. ConLong-term KST sequently, with any indicator it is impor200 tant to see what kind of characteristics 100 have manifested in the past. Are Special 0 -100 K moving average crossovers consis-200 -300 tent? Does the indicator offer extended 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 trends of rising or falling peaks and FIGURE 3: SPECIAL K AND RELATIVE ACTION. The Special K moving average crossovers often occur at troughs? Have such reversals offered rethe same time or close to trendline violations. Note the long-term cyclical swings in the Special K and KST in liable signals? the S&P Financials. If you can satisfy yourself that a set of a sector that does well at the end of the cycle and therefore is specific characteristics work consistently, then go with the moving (in relative terms) in the opposite direction to the Special K. If not, recognize this weakness and use it with another Financials most of the time. If you compare Figures 3 and 4, market or security. you will see that the Financials sector was declining in 2007– Martin J. Pring is the president of Pring Research and 08, whereas Materials was advancing. The character of the Special K for Materials is also slightly chairman of Pring Turner Capital, a money management different in that it is subject to strong intermediate swings firm. He is the author of several books, including the classic within the 2003–05 primary Special K bear market and the Technical Analysis Explained and Introduction to Technical 2005–08 bull market. I have drawn some bullish and bearish Analysis, a workbook/CD-ROM tutorial. He may be reached trendlines and their respective violations for the relative at Pring.com. strength line itself. Note how the bearish dominant intermediate- and long-term cycles pressured the Special K lower SUGGESTED READING when the KST was rising at point X. This was negative until Narcouzi, Christopher [2001]. “KST Revisited,” Technical Analysis of STOCKS & COMMODITIES , Volume 19: August. all three series violated down trendlines in October 2005. We Pring, Martin J. [2008] “The Special K,” Technical Analysis of STOCKS & COM0.21 MODITIES , Volume 26: December. 0.20 S&P Materials relative to S&P _____ [2004]. “Do Price Patterns Really 0.19 Work?” Technical Analysis of STOCKS 0.18 0.175 & COMMODITIES, Volume 22: April. 0.17 _____ [1992]. “Identifying Trends With 0.16 The KST Indicator,” Technical Analy0.15 sis of STOCKS & COMMODITIES Vol0.14 ume 10: October. 0.13 _____ [2003]. Introducing The KST, DVD, 0.12 Pring.com. Special K 500 450 _____ [1992]. “K ST And Relative 400 350 Strength,”Technical Analysis of 300 STOCKS & COMMODITIES, Volume 19: 250 200 November. 150 100 _____ [1997]. Martin Pring’s Introduc50 0 tion To Technical Analysis, McGraw-50 Daily KST Hill. Y X 50 _____ [2002]. Technical Analysis Ex0 plained: The Successful Investor’s -50 Guide To Spotting Investment Trends S O N D 2003 A M J J A S O N D 2004 A M J J A S O N D 2005 A M J J A S O N D 2006 A M J J A S O N D 2007 A M J J A S O N D 2008 A M J J A S And Turning Points, 4th ed., McGrawHill. FIGURE 4: CYCLES IN THE MARKETS. Here you see that the S&P Materials sector is subject to strong 400 300 200 100 0 -100 -200 -300 -400 -500

Special K

S&C

intermediate swings within bull and bear markets.

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