GOODMAN'S KEY INDICATORS FOR INVESTMENT SUCCESS|
GPS: The Goodman
Price/Volume Stock Selection System
Monday, January 3, 2005
last -- Fred develops a technical trading method for individual stocks.
sure to check the Frequently
Asked Questions page for the latest insights on GPS.
excited to announce a breakthrough that extends my technical methods of market
timing into new ground -- the selection of individual stocks. It's based on a
modern adaptation of the nearly forgotten technique of Price/Volume Charting
-- originated a half century ago by Benjamin Crocker (for background, you
can read more about Price/Volume Charting by clicking
Charting is a very effective method of generating short-term market timing signals,
yet the technique has been passed by in the computer age because it requires labor-intensive
personal interpretation of visually complicated charts. It's hard enough to apply
it to a handful of market indices every day (believe me, I know -- I've
been doing it for years). So applying it to hundreds or even thousands of individual
stocks has always seemed like an impossible dream. Until now.
years of research I am now ready to introduce the Goodman Price/Volume Stock
Selection System -- or GPS for short. Starting immediately, I will
be using it for my investment management clients. I will also report on GPS in
every edition of my online newsletter, Technical Excellence. I have
started three model portfolios as of the last market day of 2004 -- one
based on the stocks in the S&P
100 Index, another based on the
stocks in the NASDAQ 100 Index, and a third that
combines the first two portfolios with my market timing strategies. As time
goes by, I may decide to make GPS the focus of a separate publication with a separate
I have a great deal of confidence in GPS. I have been successfully "paper-trading"
it for the last six months, and have rigorously backtested it back to mid-2001
to observe how it behaves in both bull markets and bear markets (for more information
on my backtesting methodology, click
here). Note that the backtested performance figures given here are based
on trading at the closing price on the day trading signals are given, assume no
commissions or other transaction costs, and we ignore the receipt of dividends.
Past performance and backtests are not guarantees of future returns.
- Based on my backtest, selecting
stocks to buy and sell from among the 100 that make up the S&P 100 Index
(OEX), GPS beat the benchmark index overall and in every individual period,
with generally slightly lower risk (annualized volatility).
inception on July 2, 2002, GPS returned 33% cumulatively (not including dividends),
compared to a loss of 9% by the index. In the bear market period through
the bottom of October 9, 2002, GPS barely edged out the benchmark, losing 37%
cumulatively compared to a loss of 38%. In the bull market period starting
on the October 9, 2002 bottom, GPS far outpaced the benchmark, returning 109%
cumulatively compared to 46%.
- Similar overall results were obtained
by buying and selling the 100 stocks that make up the NASDAQ 100 Index (NDX).
Again, GPS beat the benchmark index overall and in every individual period, with
generally slightly lower risk.
inception on July 2, 2002, GPS returned 42% cumulatively (not including dividends),
compared to a loss of 11% by the index. In the bear market period through
the bottom of October 7, 2002, GPS beat the benchmark, losing 41% cumulatively
compared to a loss of 56%. In the bull market period starting on the October
7, 2002 bottom, GPS outpaced the benchmark, returning 140% cumulatively compared
DOES GPS WORK? GPS is based on Price/Volume Charting, which is
a systematic discipline for identifying bullish and bearish trading patterns.
Most traders already have intuitions about how prices and volume interact. For
example, we have all experienced "wash-outs" or "blow-offs"
where markets reverse on high volume. And we've seen "fake-outs" where
markets make seemingly significant moves but on suspiciously low volume. And when
markets don't move at all, but volume is high, we call it "churning."
Benjamin Crocker built these intuitions into a formal market timing methodology
by tracking how price/volume relationships evolve through time. By plotting price
on one chart axis and volume on the other -- and then connecting the plot-points
through time -- Crocker learned that clockwise patterns were bullish and counter-clockwise
patterns were bearish.
sounds simple -- but a typical Crocker Price/Volume Chart is a tangle of overlapping
lines and loops, as readers of my daily reports know. Crocker developed numerous
subtle rules for discerning price/volume patterns out of his tangled charts, and
interpreting them as market timing signals. Crocker's rules take both time and
artistry. With training, you can manage to do it for a handful of market indices
every day. But there aren't enough hours in a day to apply the technique to hundreds
of individual stocks, and it's too complex and too subtle to program a computer
to do it for you.
my challenge has been to simplify Crocker's complex and tangled charts into simple
linear charts, and apply a set of rules so unambiguous that even a computer could
determine buy and sell signals. Achieving this has depended on two techniques
-- vector analysis and pattern recognition. While vector analysis
has its origins in the work of mathematicians who lived nearly 400 years ago,
pattern recognition is a relatively new technique, developed since computers have
become fast enough to handle the large number of calculations required.
analysis was essential to the first step -- converting Crocker charts into simple
linear charts. Readers have already seen the results in the form of what I have
called the Goodman Price/Volume Indicator, or GPVI -- which I have
been applying to several stock indices
since March in my daily reports. The Indicator takes the temporally restricted
vectors used by Crocker in charting price and volume and creates a series of daily
data points which may be charted without creating the crisscrossing lines that
make Crocker charts so difficult to read.
readers of my daily reports know, the charts of the Goodman Price/Volume Indicator
are useful in and of themselves. But to create a system for automatically analyzing
hundreds of stocks every day, we need a method by which a computer can analyze
them without even physically drawing charts. And that's where pattern recognition
comes in. I knew at the outset that I didn't want to study the price or volume
of the stock in question directly, since those were already used in the calculation
of the Goodman Price/Volume Indicator itself. Instead I focused on analyzing patterns
in the indicator itself.
started with the idea that I wanted to identify an "upside breakout"
by the GPVI -- but what characteristics constitute such an event? One thought
was to study the slope of the indicator to find accelerations in its rate of ascent.
A change in slope can also be looked at as the net change over time --
the more the indicator advances in the least amount of time, the greater the slope
will be. Another useful descriptor is the length of time spent in a trading
range before a breakout occurs. Yet another important characteristic is the
upward move required before the indicator can be considered to be in a
ideas as the core, I set about to determine the parameters upon which decisions
could be made concerning each of them. It turned out that four such parameters
were required. With those parameters, I am able to transform the Goodman Price/Volume
Indicator into an oscillator that swings back and forth between ever-changing
upper and lower trigger levels. We buy a stock when the oscillator exceeds the
upper trigger level and close it out when it drops below the lower trigger level.
The trigger levels move
in response to parameters of time and distance mentioned above. Of course the
trigger levels will vary from stock to stock depending upon the characteristics
of its GPVI. And they will vary across time as the price/volume patterns of the
market evolve. The determination and method for evolution of the parameters was
achieved by optimizing against several years of past data. For more information
on the parameters, see the section on backtesting methodology
below. And for a detailed look at how GPS has adapted traditional Crocker
Price/Volume Charting, review the case-history of Apple Computer, below,
by clicking here.
STOCKS WITH GPS
There are any number of ways to put a stock selection system like GPS into action.
My preference is for a simple, transparent approach that lets me any my readers
easily evaluate the effectiveness of the system. So I have established three model
portfolios as of the last market day of 2004, one
based on the stocks in the S&P 100 Index, another
based on the stocks in the NASDAQ 100 Index, and a third that
combines the first two portfolios with my market timing strategies. When GPS
gives a buy signal, we will buy. When it gives a sell signal we will close a position
out (GPS does not currently support short-selling). On any day on which there
is a GPS buy or sell signal for any stock in either portfolio, I will announce
it the following morning in my report. Of course if I take a vacation day -- I
typically take about 15 days off each year -- I'll cover any GPS signals in the
reconstitute the portfolios every six months as I re-optimize the parameters of
the GPS system. For more information on re-optimization, see the section on backtesting
In addition, I will overlay
a simple trading discipline on stocks once they are selected as buys by GPS. Any
stock is automatically sold if its shows a loss after 30 days from the time it
drops back below the upper trigger.
detail -- there may be times when the GPS system recommends a trade that I don't
want to make. Sometimes when there is big news on a stock, there will be a big
price/volume move that gets the system's attention -- but I still want to use
my judgment to evaluate that news and see if I really want to buy. For example,
this happened a couple months ago with the stock of Chiron, which fell
dramatically on high volume because of the controversy concerning its tainted
flu vaccines. The GPS system said "buy" -- but I would certainly have
intervened in that case, judging the stock to be fundamentally "broken"
by such catastrophic news. Such things will be rare, but part of the art of trading
is being ready for them and responding appropriately. Remember, because I say
it over and over -- no technical system is a "Holy Grail," nor an end
in itself. There's no substitute for good human judgment.
the web I'll update a running scorecard for both portfolios, and all their positions.
New positions will enter the portfolios in approximately equal weights. I'll report
each position's gain or loss versus its buy price, and the running overall gain
or loss in the portfolios. We will assume that the portfolios are always 100%
invested in stocks (that is, they will carry no cash balances at any time).
The GPS technique has been
refined using optimization of test parameters on past stock price data.
have had considerable criticism heaped on them -- and rightly so -- for being
used to "data mine" or "curve fit" past results. When one
tightly fits an equation to past data it almost always ceases to fit new
data quite quickly. To make my testing as robust as possible to markets as they
evolve in real time, I have used techniques documented in the excellent book
Design, Testing and Optimization of Treading Systems by Robert
ideal technique is to optimize parameters based on one set of data, and then test
it on an entirely independent set of data. To do this, I collected price
and volume data for the six years from July 1998 through June 2004 for both the
NASDAQ 100 and the S&P 100. I studied the data in seven overlapping, three-year
segments, the first being July 1, 1998 to June 29, 2001 and the last being July
1, 2001 to June 30, 2004. I determined optimized parameters for each three-year
segment, and tested each of them on the following six-month segment --
which, of course, was data that had not been included in the optimization. I will
adhere to this technique going forward -- that is, I will re-optimize the parameters
every six months based on the past three years.
that my backtests are based on trading at the closing price on the day trading
signals are given, assume no commissions or other transaction costs, and ignore
the receipt of dividends. Past performance and backtests are not guarantees of
THE CASE OF APPLE Apple
Computer in 2004 was a relatively easy stock to chart using Benjamin Crocker's
original Price/Volume Charting techniques. That's because it continued to advance
all year without much of a retracement, so the chart remained relatively uncluttered.
But even at that, it is still nearly impossible to find the most important buy
and sell signals that occurred on low volume. One important feature does stand
out -- the many high volume thrusts, all of which were followed by higher prices.
Apple Computer (AAPL)|
2004 through November 24th
looking at this hopelessly cluttered chart would be attracted by the obvious high
volume advances. But to study the finer features of price and volume action it
is necessary to redraw the chart with fewer days. But on doing so, the prior reference
points are lost. Nevertheless, there is value in doing so -- let's look at the
first five months in detail so we can see how Price/Volume Charting forms the
underpinnings for the new GPS system.
is only when one takes a closer look that the real value of the Crocker charts
becomes clear. In February 2004, as shown in the chart below, Apple made a breakout
move a few days after the first trading day of the month (green marker). It advanced
almost 10% before giving it all back. However, on the way down it completed a
clockwise basic buy
loop which I have colored in pink. Following the completed and confirmed
buy loop (confirmation requires that the line crossed in completing the loop must
not be re-crossed the next day), Apple went on to make the first of several high
volume thrusts completed during the year.
have identified the day the thrust was made in red on the chart below, since it
occurred on the last day of the month. In the chart above, it appears as the lowest
pink marker. Also in the chart above I marked a much bigger volume thrust with
a second pink marker above it. That same thrust on around 27 million shares can
be seen in detail in the chart below.
Apple Computer (AAPL)|
marker repeats the last day from the chart directly above, the one with the red
marker. Immediately following the high volume thrust, a second thrust was made
on even greater volume. As always, it is the low volume moves that are significant
in that they alert one to the possibility of an upcoming high volume advance.
In March a counterclockwise
continuation buy loop followed a thrust and was itself followed by another
Apple Computer (AAPL)|
upturn was followed by yet another one, even bigger than the last. However, Apple
turned around, produced a sell loop and made a 50% retracement of its gain from
22 to 28 over the previous two months.
Apple Computer (AAPL)|
bullish low volume pattern followed, this time what Crocker referred to as a
Apple Computer (AAPL)|
final month that we'll cover, we can see that Apple made another major high volume
thrust and broke out above 33, only half the way to the new highs it was destined
to make later in the year.
Apple Computer (AAPL)|
illustrates both the value and the difficulty of using Crocker charts for trading
individual stocks. Now let's take another look at the Apple chart, but this time
using the Goodman Price/Volume Indicator, below. A buy signal is represented by
an upside breakout by the indicator (the blue line), above a previous high. The
high reached on April 30, 2004 was exceeded at the end of May, and that would
have been a very profitable trade if one had held on to it, since Apple advanced
from 26 to 68.44 since then.
also that there was a change in the chart in late November. After the peak at
68.44 on November 29, the stock started consolidating. The stock action looks
worse than the GPVI, which continued to make higher highs and higher lows. I'll
discuss this divergence in more detail momentarily.
Apple Computer (AAPL) Goodman Price/Volume Indicator|
January 2004 through December 31, 2004
can see above, a GPVI chart is far more readable than a Crocker chart. But
that still leaves the problem that one must plot hundreds of charts and study
them daily. And it leaves the additional problem of subjective interpretation.
So my next step was to
transform the GPVI into an oscillator -- a chart that swings between bullish and
bearish extremes. I've called that the Goodman Price/Volume Oscillator,
or GPVO. Buy signals occur when the GPVO exceeds a computer-generated upper
trigger level. Sell signals -- which tell you when to close out the previous
buy trade -- occur when the oscillator drops below the lower trigger
level. In the chart below I have labeled April 30, 2004 for comparison to
the chart above. I selected that date because it marked the first buy signal after
a close-out signal. I have also highlighted (pink marker) the February buy loop
from the Crocker chart near the beginning of this report.
let's return to that divergence between the stock and the GPVI after the stock's
top at 69.44 on November 29. Note in the chart below that the Oscillator
produced a clear sell signal for Apple on the very day of the top -- November
29. You couldn't have gotten that signal by eye from the stock, nor from the GPVI.
But the pattern recognition technology behind the GPVO nailed it to the very day.
Of course I'm not saying we'll hit every turning point in every stock perfectly
-- and when we do get it right, it usually won't be on the very day. But it's
nice to know that this kind of accuracy is possible.
Apple Computer (AAPL) Goodman Price/Volume Oscillator|
January 2004 through December 31, 2004
Goodman, CFP, is a fee-only Certified Financial Planner based in Los Angeles.
You can send him your questions and comments via e-mail at Fred@MarketMonograph.com.
E-mail sent to Fred may be edited for clarity and brevity and published on this
web site, and may include your name unless you request anonymity or specify not
for publication. The charts and commentary represent what Fred thinks about
the market and what he is thinking of doing for his own account and for accounts
he manages at the time of writing. Fred, his clients, or his family may have positions
or may make trades in securities mentioned in these commentaries. There
is no guarantee that you will profit from trading as discussed herein. You may
lose money and Fred assumes no responsibility for what you do or do not do with
this information. Copyright ©
2009 Fred Goodman. All rights reserved.
For information purposes only, offered as a periodical
of general circulation; not to be deemed to be recommendations for buying or selling
specific securities or to constitute personalized investment advice. Derived from
sources believed to be reliable, but no warranty is made as to accuracy.