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A Software Solution to
Intermarket Analysis
A review of VantagePoint 6.3
from Market Technologies
Like a child at
Christmas, traders enter the market with high hopes and great
expectations. Among their first tasks is to find the “best” method
to trade and they may spend anywhere from six months to as much as
five years in pursuit. Armed with little more than hope and a dream,
they scan the literature, attend seminars, buy a truckload of books
and then either choose a charting program or, for the more
technically advanced, create a system that they believe suits their
desired trading style.
During your first
year, if you are lucky, you come to the grim realization that
back-testing produces great results, especially if you fall into the
curve-fitting trap. But try such a system in real time with real
money and you usually get slaughtered. Indicators such as the
zigzag, available in most charting programs work extremely well in
back-tests, but those who use them to trade in real-time often watch
helplessly as the latest reversal signal disappears and a new one
forms in the same direction. Black box systems that provide little,
if any, indication how signals are generated are another trap that
become just one more expensive, how-not-to lesson.
Somewhere between
year one and year three it begins to dawn on you that there is no
such thing as the Holy Grail. With this epiphany comes a dramatic
change in the trader’s focus. By this time the „get-rich-quick“
crowd has become discouraged by the compounding costs of buying
trading products, only to realize that they fail to do the trick as
trading losses mount. Those with gambling addictions who saw trading
as another way to feed their habit migrate back to online gambling
sites or the casinos in search of easier money. They represent the
trading dropouts. The survivors have passed the first major test,
and from this group will ultimately emerge the professional traders,
analysts and market wizards.
The
Intermarket Analysis Realization
In 1991, John J. Murphy’s book, Intermarket Technical Analysis, was
published. It was the first book to detail the impact that different
asset classes exerted upon one another with a myriad of examples.
Murphy’s next book on the topic in 2004, simply entitled Intermarket
Analysis, discussed how he discovered the interplay between the four
asset classes of stocks, bonds, commodities and currencies and what
had changed since his first book. Although it would take a decade
and the Asian flu to bring the world of traders and analysts around
to his way of thinking, the discovery was to make a sizeable impact
on the way professional traders looked at markets.
A pioneer software
developer, Louis Mendelsohn, recognized intermarket relationships in
the late 1980s and began looking at ways to incorporate them into a
software application. In 1991 he first made VantagePoint available
to clients. The program used a series of intermarket inputs combined
with neural networks to produce trading signals. By 2004, version
6.2 produced trading signals for 46 separate markets. In September
2005, version 6.3 was released increasing the number of markets
covered to 90.
How
VantagePoint Works
Each market utilizes five separate neural networks to make
forecasts. A neural network is a software program that is designed
to function like the human brain and has the ability to "learn" from
past signals by comparing patterns. This means that, as intermarket
relationships or markets change, the program updates formulas.
Because markets are in a constant state of flux, this quality is
critical to any successful trading system. When you realize the
degree of complexity involved when adding intermarket relationships
to a trading system, it is easy to see the importance of utilizing a
neural network or a similar dynamic approach to insure the program’s
long-term effectiveness and success.
VantagePoint offers
the trader a number of new indicators that, unlike the lagging
indicators that are prevalent in most trading programs, are instead
designed to be leading indicators.
Figure 1 show the
program charts the S&P500 Index on VantagePoint version 6.3. The
predicted 5-day moving average (blue) line in the main graph above,
predicted 5-day (cyan), predicted 10day moving average (magenta)
difference lines and the Predicted Neural Index (navy blue) in the
lower subgraph use proprietary inputs from the following
intermarkets (see figure 2).
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The
specific weighting and methodologies utilized by the neural
network function to produce the signals are not public
knowledge, but the fact that all these markets play a role
in determining the direction of the S&P Index should be of
interest to all traders.
Signals on
the chart above are interpreted in a manner similar to a
moving average crossover and a momentum oscillator. (Note: A
number of VP indicators are not shown.) When the 5-day
predicted moving average crosses above the 5-day standard
moving average, a buy is indicated if the signal is
confirmed by positive values of the Predicted Neural Index
and 5-day and 10-day predicted moving average differences
(see green arrows).
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When the
predicted moving average crosses below the standard moving
average, the predicted 5-day and 10-day difference signals
are negative and the Predicted Neural Index is zero, it’s a
sell or exit signal. When an oscillator (lower sub-graph of
Figure 1) reaches an upper extreme, it signals an overbought
condition. At the lowest extremes, the security or issue is
oversold. Divergence, a powerful use of oscillators, works
equally well in the case of the cyan and magenta lines
above. |
How does
the Program Perform?
Based upon out-of-sample research, the average percent accuracy for
all 46 VantagePoint version 6.2 financial and commodity market
modules for the Neural Index was 74.44%, with a low of 69.5% for the
coffee (KC) market module to a high of 84.3% for the feeder cattle
(FC) market module.
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The
reported accuracies of the Neural Index signals for key
financial markets using VantagePoint Version 6.2 include:
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Dow Jones Industrial
Average (DJIA)
S&P 500 (SP)
Nasdaq Composite
Index (COMP)
Diamonds (DIA)
Spyders (SPY)
Qubes (QQQQ) |
70.2%
74.6%
72.5%
73.0%
73.0%
70.1% |
The
preceding values were calculated on out-of-sample data with
predicted values from October 15, 2003, through October 14,
2004, according to VantagePoint Software.
Of the 90
markets offered in Version 6.3, new markets include the
Continuous Commodity Index (formerly known as the CRB
Index), DAX Index, Russell 2000 Index and EuroStoxx 50
Index. For a full list of markets available in version 6.3
and complete description of functionality, please go to
http://www.marketforecasting.com.
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Matt Blackman is
a technical trader, author, reviewer, keynote speaker and regular
contributor to several industry publications. He is an affiliate
member of the Market Technicians’ Association and Canadian Society
of Technical Analysts.
Contact
Matt Blackman. |
