Dear Walter:

Congratulations on writing such a great book, I have gained perspective from reading your excellent book.

I have a question regarding the Breakaway Momentum Since 1945 Table (Table 8-1, page 114). The table shows the 20 times breakaway momentum has occurred since World War II (an average of once every 3.5 years).

What happened in the 18 years between January 6, 1992 and March 23, 2009? According to this table, breakaway momentum didn't occur in these 18 years. Based on the SPX index chart, great bull market occurred in 1995, 1998, 2003. Are you saying that no Breakaway Momentum signals were generated at these important junctures in the market, or the list is an incomplete display?

Thanks for your time and effort in answering my question.

Best wishes,

H. Zhu

Thanks for the clarification, Walter!

So while this signal is good at controlling type 1 errors (false positive), it is nevertheless susceptible to type 2 errors (false negatives). Is this due to the choice of a relatively high threshold of A/D ratio (1.97)? In other words, had one chosen a lower A/D threshold, there could have been a ratio enabling you to catch all the new bull market while generating more false signals?

Could you shed some light on why you choose an A/D ratio of 1.97? Was it a matter of optimization so that you look at the available data and chose to set the threshold at such a level so that virtually every breakaway momentum signal (according to the definition based on the A/D ratio) heralds a bull market, or was there some kind of hypothesis-testing involved? If the former is true (i.e., it is the result of optimization/curve-fitting based on past data), since you came up with this concept in the 1970s, I assume that you used data up to that point to come with this A/D ratio of 1.97. If that's the case, wouldn't you say that the system's subsequent "failure" to herald the 1995, 1998, and 2003 bull markets a direct result of a potential shortcoming of systems based on curve-fitting to past data?

I am particularly interested in this concept because as a trader, one of my primary objectives is to never miss the beginning a new bull market (there aren't many in a trader's whole career after all, It is like 2 new bull markets in a decade). I have been following Lowry's 90% up volume day, William O'Neil's follow through day and other timing systems for years. In a way, the concept behind these systems is very similar to your breakaway momentum concept (i.e., there is a strong momentum at the beginning of every major move), although they are on a smaller scale (these are based on one day's strength). One of the interesting characteristics of these systems keying off more flimsy evidence of market turns is that they will never miss an important move, at the cost of having quite a few false signals (type 1 error). So, I guess is a matter of balancing type 1 and type 2 errors - the holy grail system, which doesn't have false positives nor false negatives, doesn't exist.

There is a lot of juice in your book. Some of the concepts I have been using for a while (e.g., watch the new high list for buy candidate when indexes may be turning up after having had a major correction), thus they serve as good confirmation/validation for my method. Other concepts (like bull market extension and the consequences) are new and I am rapidly incorporating them into my overall understanding of market movements, thus these help me gain perspective - which is vital to long-term repeatable success in the market. All in all, thank you very much for doing such an excellent service to the trading community!

Thank you, Walter. That explains it. And thanks for the recommended reading, I'll check that one out.

Kind Regards,

H. Zhu