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Figures 8 and 9, are plots of the В±3 sigma limits at sensitivities of 0.05 and 0.10. The exponentially smoothed index is between the sigma limits, which act as dynamic channel lines.

There are several important features to note on these charts: At the lower sensitivity (Figure 8), the upper and lower sigma limits will move parallel to each other while a trend is in effect and will not deviate significantly during minor market moves. (This is the reason that stochastics flatten out).

When the sigma limits pinch together, as at points A, B, C and D in Figure 8, it means the market is making a significant move one direction or the other. It is up to the individual to use all the technical analysis techniques at his/her disposal plus common sense to determine which way the market will break. After a three-month run-up of 25% it is not too hard to guess that it might be a top or, conversely, after a two-month correction of 10% that a bottom has been established.

At the lower sensitivity, the upper and lower sigma limits will

move parallel to each other while a trend is in effect and will not deviate significantly during minor market moves.

Another slightly more analytical technique is to watch which sigma limit turns first. As a general

empirical, but not infallible, rule at market tops the upper sigma limit will turn down before the lower limit and at market bottoms the lower sigma limit will turn up while the upper limit is still moving down, causing the pinching effect.

Sensitivity can be varied depending on personal investment strategies. At sensitivities of 0.10 or greater the chances of being knee-jerked are increased. Figure 9 at a sensitivity of 0.10 shows the pinching effect on minor market moves (points A and B).

Figure 10 is a magnified view of Figure 9 showing the pinching of sigma limits at the August 25, 1987 market top. At this sensitivity, the effect lags the top by five days.

Bill Mason, (503) 625-5384 is a retired engineering manager from Tektronix, Inc. with a background in math and physics. He is currently president, engineer, chief cook and bottle washer for SASI Software Corp.

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