How Richard Lees Combines Physics Into His Technical Analysis

01/23/2009 11:19 am EST

Focus: STRATEGIES

Jim Wyckoff

Senior Market Analyst, TradingEducation.com

Stock market and options trader Richard Lees has combined physics, pattern recognition, and technical analysis to form several new “pH-Indicators” to guide him in trading.

Lees is a money manager and president of Richard Lees Capital Management in the Studio City area of Los Angeles. He is a featured speaker at the Telerate Seminars 20th annual Technical Analysis Group (TAG 20) conference here this weekend.

“I began to trade the markets in 1982 when, after my father died, managing family money arose literally from a life-and-death situation as my responsibility in the family. So the enterprise has, from day one, left me with little patience for hypothetical market methods,” said Lees.

He has studied technicals, fundamentals, and systems trading that combined them both. “Eventually, I felt my own way to what worked in real time and with real money,” he said.

After some valuable additional encouragement from one of the “wizards” in Jack Schwager’s book, Market Wizards, Lees developed an entirely new set of indicators.

“The indicator set, which is what I’m introducing for the first time in public at TAG 20 in Las Vegas, is called The pH-Indicators. And they are elastic, or what I like to call liquid oscillators. They do not reach what conventional oscillators call “overbought” and “oversold,” but rather establish trend points, which give signals, although in all timeframes. I use them on everything from intermediate signals on the stock market to daytrading.”

Lees said three proprietary indicators are literally enough for him to review the stock market.

“One is pH-F, my fundamental indicator, and keys off the S&P earnings yield rather than its price-earnings ratio. This has kept me on the right side of the bull market of the 1990s.

“Second is pH-L, my Liquidity Indicator, which sits at the heart on my work. It is a simple, but I think elegant, way I’ve found to connect what the Federal Reserve is doing in the real economy with how the stock market is valuing that real economy.

“Last is pH-I, my Market Internals indicator, which gives me everything technical I need to know about market action in one indicator. It’s kind of an updated version of TRIN, and it was formed at least in part because of my simultaneous admiration for and disappointment in TRIN. I would emphasize that I consider Richard Arms one of the true brilliant men in technical analysis, and I’ve long admired his work. It’s just that I found what I consider a more immediate and fast­changing indicator which I believe is more suited to the electronic markets of today and tomorrow.”

Lees said he then combines what these indicators are telling him about the market to produce an Overall Market-pH number, which is also the percentage he will be invested at any given time in the market. (i.e., if the Overall Market-pH is 9.3, he wants to be 93% in the market with his stock picks.)

Then he uses a 21-point screen he developed for picking stocks, which essentially identifies “a key data signature that I’ve found over the years (that) selects value just before it’s about to become growth.”

“I’m effectively always in the market then, but at different levels of commitment. I believe in stock picking, not mutual fund investing, as I believe money managers should be paid for picking stocks, not other money managers.”

By Jim Wyckoff of TraderPlanet.com

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