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Michael S. Jenkins on Trading
In a recent interview with Michael S. Jenkins, we asked what makes him one of the best traders today. He gave us his background on how he got started trading, his philosophy on trading, how he goes about a trade and more. (This interview with Michael S. Jenkins was conducted in 1995.)
Background
I have always been interested in the stock market beginning as early as 9 years of age. I started investigating stocks, saving money and trading. Graduated from college in 1971 with degrees in Economics and business. I then went on to get a Masters in Business and become a Certificated Public Account. After that, I started off working in a bank trust department as a portfolio manager investing for widows and orphans with typical prudent man investing fundamentals. After a number of years in a very large bank trust department, I had fairly good success and was hired by a major mutual fund complex. I ran that complex for about 10 years period running three different funds. My claim to fame was that on a number of funds I was up 50-55 percent per year for a number of years. That placed me in the top ten of all mutual fund managers in the country.
Current Occupation
After 8-10 years with that mutual fund complex, I then became a private trader in New York city to privately trade my own money and to work for some specialists firms. I trade the specialist’s firms capital on a proprietary basis. I have been doing that for about 12 years and about 11 years ago I started the Stock Cycle Forecast newsletter and hot wire service. since I do professionally trade cycles in my work and I have all this work done, I incorporate it in a newsletter for the general public. I also recently published two books that I have written on the stock market. One is called the “Geometry of Stock Market Profits A Guide to Professional Trading for a Living.” This is about my proprietary techniques, primarily how I view the Gann methods, where they come from, and the geometry of time and price. A book I recently published is called “Chart Reading for Professional Traders.”
It is about chart reading, and what you can learn from looking at charts. The interesting thing I do that is a little bit different than most technicians is that I do a great deal of work with circular arcs, using arcs, circles and parabolics, to describe the emotions of the market, to forecast the market. Many people use trend lines, oscillators and cycles, but only the Circular Arc Techniques can specifically define an area as being a high, or a low. As you know, many cycles techniques, people can predict a turning point but they don’t know if it is a high or a low. Whereas if we have a we can measure that. What I do with the Gann techniques is I plot out cycles from these major highs and lows, and when we get these cyclical turns I am looking to see if we have had an emotional exhaustion of a move that has gone in a normal expected maximum duration.
Let’s say in the past year it has always been a pretty good trade that once the S&P futures go 1200 to 1400 basis in a straight line there has always been a significant correction over several days of a 400 to 500 basis counter move. So if we had a big runaway move in the market and suddenly the S&P is up 1200 to 1400 basis, under normal circumstances we would be looking for a change in direction based on the measured move principle. However, we would also tie in that change in direction with a cycle time period that was coming out and also perhaps numbers, trend lines, and angles. That’s basically the philosophy behind it. There is a lot more details where these numbers come from and whether we are taking them from a Gann octagon chart or using the roots of numbers for previous highs and lows. But basically the concept is that there is a cyclical time period that goes in a measured move direction and once it reaches that normal measured move ,as exemplified in the past several days or weeks of average trading, we want to be prepared to fade the trend and look for a different direction.
General Stock Market
This same type of an analysis also works well in the general stock market. A lot of people are looking for an end to the current bull market and I am one of those people. We can apply the same type of analysis to the long term periods in history. As you know W.D. Gann popularized the decennial pattern (the 10 year cycle of looking back 10 years ago, 20 years ago, 30 years ago, 40 years ago, etc.) and finding what those particular years did and what quarter of the calendar the highs and low fell in. So if you observed 10 different observations of each 10 year period and you found that 8 or 9 out of 10 had a high in the first quarter, we would then make an estimate that this would probably happen this year and within that 10 year cycle the dominate cycles would be 10 years, 20 years, 60 years. Note that a 10 year cycle can be considered a “measured” vector distance of calendar time.
In addition to the 10 year cycle there are two of the master cycles not publicized that I find very useful. The 100 year cycle and one cycle that the Hindus practiced using astrological techniques for several thousand years and based all their cycles and numbers on 120 years. So, if we look back say 100 years ago we are talking about a market this coming year in 1995 that will look like 1895. If we go back 120 years we are going to find a market that is going to look like 1875. A1though there was a rally during the year in both years, they basically lead to bear markets the following two years.
This is basically where I am coming to that with the end of the current rally we will start a bear market and it will probably last 2 years or so as we last saw in 1973-1974. One other interesting thing I might note this year in particular is the interesting influence of cycles that Gann used that weren’t publicized very much. Gann was well known to use the number 7 and it was a biblical thing, since there were 7 days in a week and the number 7 comes out in a lot of the Gann material, but in 1994 we are seeing harmonics of 7 years that are very similar to the stock market going all the way back 100 years or more.
For instance 7 years ago was 1987, 7 years before that 1980, 7 years before that was 1973, and 7 years before that was 1966, and 7 years before that was 1959. You take these all the way back into 1840 and you will find an interesting thing in that almost every single case the top was made basically this year and the following year was pretty hard down, certainly the first half of the following year was a very significant correction. So that type of cycle research based on the 7 year harmonics shows that after this top in the next month or so we should have a very major correction in the first part of 1995 and similar to 1980 which was 14 years ago there is a very similar pattern to what we have seen in the stock market this year. 1980 had a top at the end of January, early February like we had in 1994.
There was a major breakdown with the Hunt brother’s financial panic which ended on the last day of March, which is what we have this year. A major rally started from the end of April that was basically led by inflation themes, metals, mining, coppers and oil stocks. The market rallied up into the Fall of 1980 with the Ronald Regan election and right around election day there was a big election celebration rally and that was the high. The oil stocks posted their lifetime highs for several years at that point. So far this year the various groups that we see rotating around are following that theme almost perfectly and many of the short term cycles I follow are indicting some type of major top probably in the middle of November this year. I am using a date of around the 10th of November and if that turns out to be the high we might have a little plunge and then another attempt to rally back in the first week in December. I think after that we are looking at 3 to 6 months of very hard down and then we will get a significant bounce after that.
Historical Data Sources
There are several books published by Dow Jones Irwin. This book publisher produced a handbook on the Dow Jones Averages from 1895 that gives you the daily high, low and close. I also have some rare charts that I have accumulated in the past 20 to 30 years, such as the old Axe Houghton Industrial Stock Average. I have a chart of it that goes back to the 1850s. I also have some rare charts from Securities Research Corporation in Boston that puts out a 20 year chart each year.
I was fortunate that when I started out in the early 70’s I called up a number of these publishers. They were throwing out all of their old past charts that went back 40 or 50 years. I asked them and they just gave them to me. It is hard finding good legitimate data that’s clean that goes back past the 1920’s and the early turn of the century. If you can find some, it is very valuable specially on 120 year cycles, 180 year cycles. The data from the early 1800s is very similar to what we are dealing with now, the 180 years in particular, 1820 ish era.
Daily Data
It is not absolutely necessary to use daily data because when you are doing longer term projections cycles expand and contract so there is no such thing as a 10 year cycle that’s exactly 10 years. In the natural world cycles can be 9 1/2 years, to 10 1/2 years and be termed a 10 year cycle. What’s important in looking at the data is the wave or the shape. There is actually a form, shape and pattern to it. We call this pattern recognition. Like Elliott Wave’s where you are counting waves. For example if you can count five waves to a movement, then the movement is complete. So in actually doing a broad stroke interpretation, you don’t have to have real detailed data. You can use monthly, quarterly data or even a chart of yearly highs and lows can be helpful. I do have daily data in my long term files so I can do percentages. When you get down to detail work, I rely on hourly charts.
Once I have made a determination that say a 10 year or a 100 year cycle is the operative cycle and I am looking for some kind of major high or low coming up at that point I throw away the big scheme. I might point out and it is very important, that most people who get caught up in cycle forecasting don’t realize that using cycles and forecasting has nothing at all to do with trading. When we are trading, we are making money, we are trying to make a living off of capital gains. What the cycle and the forecast is used for is that it sets up our strategy.
If we are looking for a top in the market we build a scenario of probabilities and we say we look for this approximate date with approximate time because we think there is a cycle coming due and with that as a back drop we set up our of fading the market, maybe of getting out of our longs, or maybe getting a little defensive but not just blindly shorting the market or buying lots of puts saying the market is going to crash here. So we develop a working scenario of what we think the cycle is going to do and then when we actually pull the trigger and make the trade, this is based on solid technical analysis, especially with an hourly chart.
Here we want to use simple technical tools like looking for a signal reversal bar. For instance on a bar chart if you are in an up trend and each bar has a higher high and a lower low at the final high bar the bar after that will have a lower top and when it breaks the low of the high bar you get a technical sell signal. At least at that point you have objective evidence that a sell signal has been generated and if you have a cycle that has also come out and is calling for a top, it is legitimate at that time to put on a short using the high of that move as your stop out point. So to really define these cycles we look for the footprints of the energies that are manifested in the market. I use an hourly chart on the Dow Jones, the OEX and S&P to do that.
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Forecasting
My primary forecasting tool is the Dow Jones. I use it because it is widely disseminated around the world where people watch it every day and it has great emotional impact with the masses as a whole and so it is very good for forecasting. When I get a major sell signal on the Dow I then go to the other tools I’m going to use to exploit it, whether it is the OEX, S&P or just stocks in general and then fine tune those charts. I use an hourly chart and I also start the count with very detailed Fibonacci numbers. Many traders don’t realize most movements in the market run anywhere from 10 to 13 hours most of the time occasionally long moves will run 21 hours or 34 hours in one direction. Once you get a turn on a hourly chart, and it is a valid reversal, it is good for 2,3, or 4 days at a time. But once you break a 3 day trend you might go three weeks at time. Once you get a signal reversal on an hourly chart, it is the first sign that you could be going for 3 or 6 weeks or even 3 months in a primary direction.
One of the key fundamental truths that I have used all my life in trading and this is a direct quote from W.D. Gann too (and a lot of people don’t pick up on it) is that the primary cycle in the market, and in stocks in particular, is based on the year having 52 weeks. You can divide the 52 weeks of the year into eights and sixteenths so: 52 divided by 8 is basically 6 1/2 weeks and 52 weeks divided by 16 is 3 1/4 weeks. You can take any stock chart, and 90% of the time if you find the high or the low, you can count over 3 1/4 weeks and you will find the next high or low. It works like clockwork. Once we get a buy or a sell signal in stocks and we are going long or short the particular issue the fundamental unit will be 3 1/4 weeks.
If it is still going in the same direction after 3 1/4 weeks, it will go 6 1/2 weeks. These bigger term movements are basically the 3 1/4 and 6 1/2 week cycles all chained together. Those are fundamental units that are greatly over looked with people that are trading stocks. There is no such things, in my opinion, as a 4 week cycle, or a 5 week cycle, or a 10 week cycle. The 10 week cycle is basically the 3 1/4 week and the 6 1/2, it is really 9 3/4. In the stock market as a whole most of the big movements will run 6 1/2 weeks (45 days), or what Gann called 7 times 7 or 49 days. You often will have a panicky breakdown that will go 7 weeks maybe 9 weeks. However, most of the big moves that we have seen in the last 30 years especially big breaks in the market once there is enough momentum on the tape to declare a breakdown has occurred, usually go 6 1/2 to 7 weeks.
Computer Trading
My office has about six different computers that I use doing various scan routines. We use, Metastock, DollarLink, Data Broadcasting, etc. At one time or another, I have tried them all. I must say one thing about the use of computers in trading, it is a great tool and it can really help you out but I find that a lot of traders get lazy and rely too much on the computer’s screens and the chart approximations. It is very easy to draw a 15 minute chart or an hourly chart of some S&Ps or a daily chart on some stocks with the computer and every other day when you redraw the chart the computer changes the scale, changes the trend line and your arcs. It is very difficult for a human being to keep track of what he is looking at using a computer.
So I insist in my work when I am doing my forecasts is to maintain a hand drawn hourly chart. The hourly chart I draw on the Dow Jones I have on one continuous long piece of paper that I have done for 10 to 15 years now. This way your time and price axis is always the same. If you have a big move in the markets maybe your chart will have to glue 3 or 4 pieces of paper up the side of a wall or something, but at least there is a continuity there which helps you have trend lines going back a long way. One of the reasons that I do that and most people don’t even remotely realize how powerful these long term cycles are is that hourly counts going back into the thousands of hours are very accurate. For instance in the stock market everybody knows the Fibonacci number series 3, 5, 8, 13, 21, 34 etc. and often people will use an hourly chart and will count their 21 or 34 hours and some will count out to 89 hours or even 144 hours. I rely on the long term counts, for instance the number 1.618 Fibonacci ratio.
I will move the decimal point and use 1618 hours or 1382 hours. Now these go out even a full year or more and when they come out they are always good for a movement of over 100 points in the Dow Jones Industrials Average and they are almost always accurate within 2 or 3 hours of the turning point after a whole year or more. It would interest people to know in August of 1982 at the bear market low when the Dow Jones closed at 770 up to the August of 1987 top it was almost exactly 7700 trading hours. That’s more than just a coincidence. You would not even know that unless you keep detailed hourly counts. I do that on my computer studies and hourly charts that I keep by hand. I always maintain hourly charts of 3000 hours from a top of 3000 or 4000 hours or 5000 hours.
These are valuable and unless you have some backup charts that you are maintaining by hand it is very hard to keep track of it on the computer. I do use the computer to sort through a database of 3000 stocks to get some ideas of rotation or what groups are going in and out of favor. I do use standard indicators like Bollinger Bands, Stochastics, Oscillators, Moving Averages even though I think that they are worthless for trading purposes, because they miss the point. They are an approximation only. Where as if you do a detailed cyclical approach that I use you can get very precise. But never the less these are good filters to at least start an analysis of some data. Breaking through the Bollinger Bands which are basically standard deviations above the moving average, at least when you start breaking through those standard deviations you know there’s something going on there other than just random chance and that there is a good indication of cyclic activity at work. We should focus our attention on those groups of stocks that are breaking out or breaking down and then work on more detailed circular arcs, measured move theory and cycles.
Systematic Approach
This is a systematic approach to trading the markets and when really applied the way that Gann did it, believing that time and price are the same thing, it can yield unbelievable results. In the recent book that I wrote; “Chart Reading for Professional Traders.” I give kind of a guide to S&P trading for a living. You take an S&P chart, or bonds, corn, or wheat, or any other commodity. On a tick by tick chart throughout the day you put these little circular arcs on them. What I mean by a curricular arc is, let’s say when you have the opening bulge where in the first 20 or 30 minutes of trading the S&P goes down and then they suddenly zoom up a 100 basis and that whole movement is done in 1/2 hour or so.
Once we have that measured, move from the low to the high we can draw a little circle around it putting the center of the circle on the low and drawing an arc up to the high and swinging that arc down. Where that arc goes maximum down will define for us early in the day an exact turning point sometime in the afternoon. Frequently it will come out around 2:00 or 2:30 where the turn is. It will usually be accurate within 2-3 minutes and it will be a major move of 100 basis or more for the S&P trader. So having knowledge of circular arcs and these minute measured moves which can be drawn on the charts to see it is to believe it. They are there and they work all the time. These circular arcs work because time and price are the same thing when measured in “vector distances.” All points on an arc are the same time and price vector. Breaking away from an arc signifies a change and we trade that change.
Cycles and Astrology
When I left the fundamental world of the bank trust departments being a CPA and doing fundamental research, I found out that I really wasn’t making money doing that. I became a CPA solely to be able to read the annual reports and decipher them even down to the footnotes. I thought that was the road to riches. I was sadly disappointed. Then I got into technical analysis and cycles in particular. In the process of studying cycles I basically “reinvented the wheel.” I studied everything there was. I took a look at astrology and I was introduced to the W.D. Gann course.
I found out that Gann lived and breathed numerology and astrology and he thought that they were two separate things and that energies that ruled the emotions of the people were emanating from the planets. This was astrology in practice. As the planets moved they did create emotions on this earth, but he also felt numerology was something separate and apart from the astrological cycles and that there were also set number cycles where every 49 days, 50 days, or 100 days or 1000 days you would have very precise cycles that had nothing to do with real world astrological formations. There were two different worlds looking at charting and forecasting and often the number one question I’m asked is should I keep my charts on a trading day basis or a commodity he was currently looking at and once he equated that number to the planet in the sky it was a simple process for him to look in an ephemeris which shows you were the planets are located every year and forecast out the next 6 – 9 months out into the future.
He could then plot the longitudes to the planet, convert them to the numbers and say this is where the particular stock is going to go to. If you take that approach you will get some very good broad based projections. They are not very detailed and there is a lot of slippage along the way. There are some difficulties in defining exactly what planet may be doing it. Gann often used a combination of 4 or 5 different planets and averaged them together. It is a fact that if you look at the final highs and final lows of the stock market’s history if you find the numbers that they gravitate to on those final highs and lows can easily be converted into a number where there is a well know planetary occurrence going on, like a solar eclipse where two big planets are making a conjunction or a position and the degree of longitude where they are positioned in the sky can easily be converted into the price levels that they hit on that day. That is, in essence, what is behind the whole W.D. Gann method.
This is how W.D. Gann did most of his yearly forecasts. In his yearly forecasts he would often use the heliocentric pattern, the Sun centered where planets only go around the Sun on direction all the time, and so a planet like Saturn is bullish or bearish depending on what section of the Zodiac that it is in. That would be a bull move and then it would change to another sign that would be a bear move so he would draw a stick figure on his charts like a little teepee where it would go straight up, the planet would change signs and then it would go straight down. Now superimposed on that system he would use the Earth centered system. Now viewing the planted from the earth we have this apparent retrograde motion where the planets go both backwards and forwards so then there are almost always three different positions where the planet will be at the same point.
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Let’s say there is a conjunction between Jupiter and Saturn. The planets will be coming around and conjunct at one point and then they will pass each other, but one of the plan ets might go retrograde, then it will go backwards again and catch up with the other planets and conjunct it a the second time and pass it and then when it stops going retrograde and goes forward again it will reverse and go back and go through it a third time. Ninety percent of the time it only does it three times. Gann found this to be the cause of triple tops, triple bottoms and head and shoulder patterns where the planet would make a conjunction on say the left shoulder of the pattern, go back through it where the head of the pattern was and then the right shoulder would be the third conjunction.
On the Heliocentric sun centered when you would just have the straight up pattern to the top and the straight down. But the left and right shoulders on the head and shoulder pattern would be these retrograde movements that would go back and forth. In the Gann course, his basic rule is you can buy at double or triple bottoms but on the fourth time it almost always goes through. This rule was based on the principle that these conjunctions and oppositions where the planets came backwards and forwards would only occur three times during a retrograde motion and then they would be gone and you would not see them again.
Master Time Factor
I have some opinions about what Gann’s master time factor is that I don’t won’t to express in public. Their have been some books and course around that some people said the master time factor was basically a 60 year cycle, which is worth noting in that for 3000 years from 2000 BC on, astrologers have always known the seven primary planets that are visible with the naked eye in the ancient world and the seven planets that the days of the week are named after. That all seven of these return approximately to the same position in the sky every sixty years. So if you are doing astrological forecasting this would give rise to a master cycle of about sixty years.
So a lot of people put great store in forecasting a primary harmonic to the 60 year pattern. Unfortunately as with any astrological type forecast, even though they may return 60 years you can get opposite results at 60 year intervals. For instance 60 years ago a lot of people are bullish for this next year because it was 1934 and you still had a big upsurge in 1935, 1936 and 1937, before you had the big top. That still shows an ongoing bull market. But if you go back another 60 years from that and 120 years then we are back into 1874 and 1875 and instead of 2 more years up, you have 2 1/2 years straight down. The same 60 year harmonic but exactly backwards. It is kind of like the Elliott Wave principle where cycles often alternate. One is in one direction and the other is in the opposite direction.
Now I would be more inclined to believe that instead of watching 1935, 1936 and 1937 being straight up the next several years were going to have the alternation of that or a cycle inversion here in the next month and instead of being a major low as it was in 1934 it turns out to be a high and the next 2 1/2 years are down as 1875, 1876 and 1877 was.