I can trace my interesting in financial forecasting to a very specific event: the January 17, 1999, board meeting of the Intuition Network (the non-profit organization of which I am president).  After the meeting ended, at my home in San Rafael, California, my friend and fellow board member H. Dean Brown took me aside and told me that he wanted to share with me his work in stock market prediction. 

Dean had developed a simple momentum system for stock picking that had been working beautifully during the bull market.  His portfolio had been rising at a rate of about 40% a year, and he wanted to share his technique with me.  Up until that time, I had very little interest in the market -- and was satisfied letting other people manage my money.  But, because of that conversation, I changed my mind. 

I became a student of Dean Brown's system.  At the same time, I transferred all of my investment accounts from my high-commission, Smith Barney broker (Gary Markoff, for whom I continue to have great respect), to Ameritrade.  I figured that if I were to properly understand Dean Brown's momentum system, I would have to have a comprehensive overview of the whole field of financial forecasting.  To do that, I began subscribing to various publications, most importantly Technical Analysis of Stocks and Commodities.  At the same time, I had the insight to reserve the web domain for ForecastingSystems.com, without any clear idea as to what I might do with that piece of virtual real estate. 

My background prior to this time was as a parapsychologist (PhD, U. C., Berkeley, 1980) and a licensed psychologist.  At one time, I taught statistics at John F. Kennedy University in Orinda, California.  Of course, I have also been well-known through my work on radio and television.  As a parapsychologist, I had come to learn about the power of neural networks through a fascinating experimental study conducted  by Dean Radin.  So, my interest was peaked when I saw an ad by BioComp Systems in TASC. 

I was especially impressed when the president of the company, Carl Cook, answered the phone when I called.  I liked the idea of a free trial period, so I signed up and began the unfamiliar process of learning to work with neural networks. 

In those heady, bull-market days, my early results were phenomenal.  My stock accounts were soaring using Dean Brown's momentum system; and my futures trading account, based on the neural networks, had actually grown from $50,000 to over $300,000 in just a few months.  That was when I decided to become certified by the National Futures Association as a Commodity Trading Advisor. 

Shortly thereafter, the markets experienced what I now refer to as a "phase transition."  We went from the strongest bull markets in history to one of the strongest bear markets.  Not only did I find myself giving money back to the market, but I also quickly discovered that the trading systems that were developed under bull market conditions simply did not pertain to a bear market.  Furthermore, with regard to the neural networks, it seemed as if a period of time was required to have sufficient bear market data to begin training new systems. 

I was very fortunate, at that time, to have learned about the long-term analysis of Richard Russell and his Dow Theory Letters.  It gave me the insight to appreciate, once the bear market began in mid-2000, that this was going to be a long-term process.  Realizing that, in October 2000, when the S&P was still at about 1200, I sold all of my equities and converted our investment accounts into cash.  My wife and I also saw this as a good time to cash out of our California real estate.  We sold our home in San Rafael, California, and were able to purchase both a house in Summerlin, Nevada, and an office building in Las Vegas (where we are able to benefit from the fact that Nevada has no state personal or corporate income tax).  I now work from an office in our new home which is pictured below: 

 

The room with the shutters is my office where I am writing this letter right now.  Since moving to Nevada in March of 2001, I have been quietly studying the markets and watching my trading systems.  In the meantime, it was quite a job just moving our household and the training/consulting business, TMI,US, that my wife and I own.  During the past year and a half, our real estate has continued to increase in value, and our cash accounts are now worth much more -- in relationship to the stock market -- than they were before. 

It was approximately last June, when it dawned on me that the neural network systems -- and some other forecasting systems -- were now back in synch with the market.  Since then, I have been watching them on a daily basis.  I feel very encouraged at this point that we are entering into a period in which the type of forecasting with which I am familiar will, once again, begin to produce signficant payoffs.  And, at the same time, I am endeavoring to expand my own knowledge base regarding the markets and their many, fascinating human corollaries. 

Some people wonder why, given my strong public interest in matters spiritual, I have such a devotion to the financial markets.  The truth is that I do not separate the spiritual from the secular in my life.  I have come to think of the economy as the muscle, blood and bones of the social body.  I consider the human body to be a sacred vessel of the spirit, and I hold the same regard for our social body.  In future letters, I expect that I will have much to say about such issues as karma and soul as they pertain to the financial markets.  And, of course, I'm sure I'll have much to refer to in the field of parapsychology, consciousness research and intuition. 

The interesting thing to me about this Letter is just how it came about.  It seems to be something of an unconscious process for me.  On Sunday, October 13, I simply felt inspired to expand this website that had been sitting dormant for years.  For the past week, I have been writing the Letter, adding articles, and putting in a discussion area.  I have been working at an almost feverish pace -- foregoing my normal habits of exercise, recreation and entertainment.  I am motivated by a deep feeling that this is a right and proper thing for me to be doing.  It satisfies my need at the moment to harness my energies and my intellect.  But, to be honest, I do not yet have a clear picture where all of this is leading. 

The practical part of my mind would like to see a business plan, with clear goals and objectives -- and definitely an understanding of how to achieve financial remuneration for the many hours that I am devoting to this project.  (I am sure that at some point my talented wife, Janelle Barlow, will begin asking me some questions along those lines.)  But, for the time being, I am acting upon a deep intuition.  It feels as if I am being "guided" by some force or instinct beyond my conscious mind.  And, for now, I am willing to trust that. 

Jeffrey 

After reporting yesterday that declines minus advances served as a robust, daily leading indicator for for the S&P500 futures contract, it dawned on me that the price change of the contract should work equally well.  In other words, if the contract drops in price on Monday, it should rise in price on Wednesday.  When I checked it out, I found a strong relationship -- as shown, for the year 2002, below: 

 

The type of chart shown above is readily produced by BioComp Profit Pro's "Chart It" function.  The three graphs always follow the same pattern.  The top graph shows the daily bars for the back-adjusted S&P contract.  The green and red dots are the buy and sell signals.  The yellow oscillator in the center is the trading signal (in this instance, the daily price change times minus one).  The red bars at the bottom show one's profit or equity from trading a single contract.  The green line at the top of the red bars represents the equity from closed trades only. 

Interestingly, I discovered that this particular relationship really began at about the same time as the bear market itself.  This is shown in the following image that goes back to January 1997: 

 

One can see from the chart above that until early 2000, the relationship was what I had conventionally expected, i.e., that the the current price direction was the best predictor of future price movements.  Clearly a phase shift occurred at about that time, with regard to this particular indicator. 

Next, I looked at another potential leading indicator, the 8 period RSI of the S&P contract price.  RSI (or "relative strength index) is a momentum indicator developed by J. Welles Wilder, Jr., a leading technical analyst.  As the chart  below shows, this particular indicator also experienced a phase shift, only it occurred about a year before the price change phase shift: 

 

Interestingly, to me, some leading indicators have worked consistently throughout this entire period -- the "R" oscillator developed by the legendary trader, Larry Williams, as well as a Bollinger Band indicator.  The following two charts show consistently strong results since 1997: 

 

WinPctR is the designation in BioComp Profit for the William R indicator (based on the daily high and low of the traded security -- the S&P futures contract).  The variable is comparing the high and low, for any given day, with the highest high and lowest low over the last N days.  In this case, I have arbitrarily selected 8 days. 

The chart below shows the strongest relationship I believe I have found to date of a single, daily leading indicator and the S&P Contract price changes.  The indicator, designated in BioComp Profit as WinPctB, computer the percent Bollinger Band.  In other words, the fraction that the price value is relative to +/- two standard deviations from the mean over the last N bars.  In this case, I arbitrarily assigned 8 to be the number of bars. 

 

I think it is fascinating to notice the "phase shift" that has occurred with different indicators at different times.  These shifts, in my view, can signify major changes in market psychology and direction.  The classic example of this has been called the "Top Out Parade" by Richard Russell, author of the Dow Theory Letters.  Russell observed that the present bear market did not begin all at once with the dramatic Nasdaq exhaustion peak in March 2000.  Rather that event was both preceded and followed by a parade of top outs in different indicators.  Here's the parade: 

Nirvana OmniTrader Composite Technical Forecast for the S&P 500 Futures Contract: 
Short-term, aggresssive strategy: down 

Volatility Breakout System, Daily, for S&P Futures Contract:  
Buy stop order filled Thursday at 877.00 
Sell limit order for Friday set at 888.50, filled.