Stocks & Commodities V. 26:12 (44-48): The Special K, Part1 by Martin J.

Pring
INDICATORS

Trends, Triggers, And Reversals

The Special K
Part 1

This indicator points you in the

direction of the primary trend,
triggers short-term buy & sell
signals, and signals reversals in
the primary trend at an early stage.
In part 1, we look at how to identify
the direction of the primary trend.

by Martin J. Pring

ecently, I had the op-

R portunity of cowriting
a new technical book
with my friend and
partner, Assad Hamzeh, specifi-
cally aimed at Middle Eastern mar-
kets. As so often happens during
such projects, I came up with what
I believe to be a logical extension
of the KST, an indicator that I
originally introduced in a series of
Technical Analysis of STOCKS &
C OMMODITIES articles in the
1990s.

THE THREE TRENDS

Price at any given time is deter-
mined by the interaction of nu-
merous time cycles. Figure 1 fea-
tures three of the most widely rec-
ognized ones. The thick green line
represents the primary trend, com-
monly known as bull and bear
markets. The bull and bear mar-
kets last on average between nine
months to two years each and re-
volve around the four-year busi-
ness cycle. Markets rarely move
in straight lines, so the primary
trend is interrupted by intermedi-
ate price movements that average
between six weeks and nine
months. This trend is represented
by the blue line. Finally, the red
SCOTT ANDERSON

dashed line flags short-term price

movements that average between
three to six weeks. The KST for-
mulas I devised were an attempt to
Copyright (c) Technical Analysis Inc.
Stocks & Commodities V. 26:12 (44-48): The Special K, Part1 by Martin J. Pring
Market Cycle Model

Short-term trend
2–6 weeks
represent these three trends in the downside during a bear
the form of smoothed momen- market and slightly to the upside
tum indicators. in a bull phase.
If you refer back to Figure 1, Intermediate trend There are two implications for
it’s fairly obvious that the most 6 weeks – 9 months this. First, if the long-term KST
bullish short-term rallies de- were in a clear-cut declining
velop in the lefthand part of the Primary trend mode, it would be reasonable to
diagram when the primary trend 9 months – 2 years expect the short-term KST to peak
is bullish. Similarly, the short- out from the upper level of the
term trends with the greatest FIGURE 1: MARKET CYCLE MODEL. Here you see the primary trend, bearish trading zone and vice
downside magnitude occur on intermediate trend, and short-term price movement. versa. Second, if you can see that
the righthand side during the the KST has moved well beyond
primary bear market. These are all pro trend moves. One of the norm of the recent trading range, then the odds of a primary
the most common mistakes made by short-term traders trend reversal have increased.
(who trade a span of two to four weeks) is trading against the Such a signal was triggered at point A in early 2003, when
main (primary) trend. We all know that a rising tide lifts all the KST exceeded the upper area of the bear market trading
boats, but we do not always put this adage into practice. range. The dashed vertical arrows show bear market short-
That’s because short-term signals that run counter to the term KST reversals that took place after the indicator fell
primary trend often turn out to be whipsaws or downright below zero. These were contratrend signals, and with the
unprofitable. exception of the late 2001 example, they were not followed
The “Special K” indicator is designed to help in this by much of a rally.
respect. Essentially, it does three things. First, it points the Contrast that to the solid green arrows, which indicate the
direction of the primary trend (nine months to two years). pro trend signals — that is, buy signals in a bull market. For
Second, it triggers short-term buy & sell signals within that the most part, they are far more profitable than the contratrend
context, which means it’s less likely that a countercyclical signals. The final point to note is that zero crossovers by the
trade will be executed. And third, it’s capable of signaling intermediate KST often confirm a primary trend change, as
reversals in the primary trend at a relatively early stage. you can see from the small red and green arrows.
That’s a brief look at how this KST arrangement is inter-
THE KST preted. But there is an alternative way to display that informa-
Before we take a closer look at the Special K and see how tion, and it’s done by combining these three series into one
it is interpreted, I would return to the KST (which is short for indicator — the Special K.
“know sure thing”) and the
idea of the three trends fea- 1700
tured in Figure 1. One of the MSCI World Stock Index 1600
1500
ways in which I have found 1400
1300
the KST to be useful is to re-
1200
produce the short-, intermedi- 1100
ate-, and long-term trends in a 1000
stacked format as in Figure 2. 900
By looking at the long-term 800
KST, we get some perspective
A 700
as to the direction and matu- Short-term KST
rity of the primary trend. The 50

green and red waves reflect 0

these bull and bear market -50

-100
trends as signaled by the di- Intermediate KST
100
rection of the long-term se- 50
ries. Obviously, there is a bit 0
-50
of poetic license going on, as
Long-term KST -100
the KST reversed slightly to -150
300
the downside in 2005. How- 200
100
ever, one of the key points is 0
PRING.COM

-100
to show you that the trading -200

2000 2001 2002 2003 2004 2005 2006 2007 2008

range of the short-term KST
(the red and green dashed par- FIGURE 2: THE KST. Stacking the short-term, intermediate-term, and short-term price movements gives you some
allel lines) shifts slightly to perspective as to the direction and maturity of the primary trend.
Copyright (c) Technical Analysis Inc.
 Stocks & Commodities V. 26:12 (44-48): The Special K, Part1 by Martin J. Pring
250

200

150
Dow Jones AIG Commodity Index ■ The weekly Special K
The first, as in Figure 3, compares
100 the Special K to the long-term
KST. This variation combines each
of the indicators featured in Figure
2. If there is some long-term, pri-
500
400
mary trend cyclicality, it will show
300 Special K up in both the Special K and the
200
100 long-term KST. The latter is plot-
0
ted in the bottom panel to offer
-100
-200 some smoothed perspective be-
-300
cause the Special K is often jagged.
300 The dashed brown arrows indicate
Long-term KST
200
that the Special K typically turns
100
0 ahead of the KST, thereby offering
-100 an early bird warning that the pri-
-200
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 mary trend may be in the process
of changing. The jagged action by
FIGURE 3: SPECIAL K VS. LONG-TERM KST. Here you see five instances where the Special K trendline is broken.
Four out of the five were timely. the Special K does come with a
key advantage, and that is the abil-
THE SPECIAL K ity to construct meaningful trendlines.
The Special K gives us true summed Five turning points, where Special K trendline breaks have been
cyclicality as the short-, intermediate-, confirmed by Dow Jones AIG violations, appear on the chart.
and long-term indicators are all com- Four were timely but the fifth, in 2004, resulted in a false break.
bined into one all-encompassing se- It’s also possible to use crossovers of the dashed smoothing
ries. The calculation is made by add- line as an indication of when the Special K may have reversed.
ing the short-term KST formula to that This signal line is a 26-week simple moving average of a 52-
of the intermediate- and long-term week simple moving average of the Special K itself. These are
series. The formula is presented in the highlighted in Figure 4 by the vertical solid green and red
sidebar. There are two arrangements, arrows. The orange ellipses show that not all is perfect since the
depending on whether we are consid- indicator occasionally triggers whipsaw crossovers.
ering daily or weekly data. Note also that because we are dealing in a summed rate of
change concept, the confluence of
250 short-, intermediate-, and long-term
KST turning points means that the
200
final peak and trough for the Special
Dow Jones AIG Commodity Index K usually coincides with that of the
150
price it is monitoring. However, in
some cases the indicator turns pre-
100 maturely and sets up a divergence
with the price. Two negative diver-
gences are flagged in Figure 4 by the
dashed red arrows. These discrepan-
500
Special K
400
cies develop because the calculation
300 of the indicator assumes a normal
200
100 range for the four-year cycle.
0 If this is extended in any mean-
-100
-200
-300
Long-term KST The Special K gives us
300
200
true summed cyclicality
100
0
as the short-,
-100
-200
intermediate-, and long-
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 term indicators are
FIGURE 4: USING CROSSOVERS. The crossovers are identified by the vertical solid green and red arrows. The combined.
negative divergences are flagged by the dashed red arrows.

Copyright (c) Technical Analysis Inc.

 Stocks & Commodities V. 26:12 (44-48): The Special K, Part1 by Martin J. Pring
SPECIAL K AND MA METASTOCK FORMULA WEEKLY SPECIAL K FORMULA FOR WEEKLY CHARTS
p1:=Input(“Enter MA Value”,1,500,52); ROC Time EMA of
p2:=Input(“Enter MA Value”,1,500,26); Weight Total
Span ROC
4 4 x 1 4
(Mov(ROC(C,4,%),4, E)*1)+(Mov(ROC(C,5,%),5, E) 5 5 x 2 10
*2)+(Mov(ROC(C,6,%),6, E)*3)+(Mov(ROC(C,8,%),6, E)*5)+ 6 6 x 3 18
(Mov(ROC(C,10,%),10,E)*1)+((Mov(ROC(C,13,%),13,E)*2)+ 8 8 x 4 32
10 10 x 1 10
(Mov(ROC(C,15,%),15,E)*3)+(Mov(ROC(C,20,%),20,E)*4)*1)+
13 13 x 2 26
((Mov(ROC(C,39,%),26,E)*1)+(Mov(ROC(C,52,%),26,E)*2)+
15 15 x 3 45
(Mov(ROC(C,78,%),26,E)*3)+(Mov(ROC(C,104,%),39,E)*4)*1);
20 20 x 4 80
39 26 x 1 26
Mov(Mov((Mov(ROC(C,4,%),4, E)*1)+(Mov(ROC(C,5,%),5, E)*2)+ 52 26 x 2 52
(Mov(ROC(C,6,%),6, E)*3)+(Mov(ROC(C,8,%),6, E)*5)+ 78 26 x 3 78
(Mov(ROC(C,10,%),10,E)*1)+((Mov(ROC(C,13,%),13,E)*2)+ 104 39 x 4 156
(Mov(ROC(C,15,%),15,E)*3)+(Mov(ROC(C,20,%),20,E)*4)*1)+ Special K 537
((Mov(ROC(C,39,%),26,E)*1)+(Mov(ROC(C,52,%),26,E)*2)+
(Mov(ROC(C,78,%),26,E)*3)+(Mov(ROC(C,104,%),39,E)*4)*1),p1,S),p2,S); SPECIAL K FORMULA FOR DAILY CHARTS
ROC Time SMA of
zero:=0; Weight Total
Span ROC
zero; 10 10 x 1 10
15 10 x 2 20
SPECIAL K AND MA FORMULA FOR METASTOCK DAILY 20 10 x 3 30
p1:= Input(“Enter First MA Time Span”,1,500,100); 30 15 x 4 60
p2:= Input(“Enter First MA Time Span”,1,500,100); 50 50 x 1 50
65 65 x 2 130
(Mov(ROC(C,10,%),10,S)*1)+(Mov(ROC(C,15,%),10,S)*2)+ 75 75 x 3 225
(Mov(ROC(C,20,%),10,S)*3)+(Mov(ROC(C,30,%),15,S)*4)+ 100 100 x 4 400
Mov(ROC(C,50,%),50,S)*1+(Mov(ROC(C,65,%),65,S)*2)+ 195 130 x 1 130
(Mov(ROC(C,75,%),75,S)*3)+(Mov(ROC(C,100,%),100,S)*4)+ 265 130 x 2 260
(Mov(ROC(C,195,%),130,S)*1)+(Mov(ROC(C,265,%),130,S)*2)+ 390 130 x 3 390
(Mov(ROC(C,390,%),130,S)*3)+(Mov(ROC(C,530,%),195,S)*4); 530 195 x 4 780
Special K 2485
Mov(Mov((Mov(ROC(C,10,%),10,S)*1)+(Mov(ROC(C,15,%),10,S)*2)+ SIDEBAR FIGURE 1
(Mov(ROC(C,20,%),10,S)*3)+(Mov(ROC(C,30,%),15,S)*4)+
Mov(ROC(C,50,%),50,S)*1+(Mov(ROC(C,65,%),65,S)*2)+
zero:=0;
(Mov(ROC(C,75,%),75,S)*3)+(Mov(ROC(C,100,%),100,S)*4)+
zero;
(Mov(ROC(C,195,%),130,S)*1)+(Mov(ROC(C,265,%),130,S)*2)+
zero:=0;
(Mov(ROC(C,390,%),130,S)*3)+(Mov(ROC(C,530,%),195,S)*4),p1,S),p2,S);

1600
ingful way, any longer-term mo-
1550 mentum indicator will peak or
1500 trough prematurely.
1450

1400

S&P Composite 1350

■ The daily Special K
1300 My favorite method of display-
1250 ing the Special K uses a calcula-
1200 tion based on daily data and ex-
1150 clusively incorporating simple
1100 moving averages (MAs) (Figure
5). In this instance, the formula
Special K
250 (see sidebar) assumes the same
Lower peaks and
troughs signaled
200 time frames as those plotted on
150
100
the weekly chart. The difference?
50 A simple MA is substituted for
0 the exponential moving average
Daily KST -50
(EMA) and the parameters are
-100
50 multiplied by 5 to simulate the
0
weeks. This approach is not an
exact simulation because some
-50
weeks only contain four trading
S O N D 2005 M A M J J A S O N D 2006 M A M J J A S O N D 2007 M A M J J A S O N D 2008 M A M J J A S
days due to holidays, but this does
FIGURE 5: DAILY SPECIAL K ARRANGEMENT. Here you see the movements in the daily KST and those in the not appear to unduly affect its
Special K are very close. accuracy.
Copyright (c) Technical Analysis Inc.
Stocks & Commodities V. 26:12 (44-48): The Special K, Part1 by Martin J. Pring
If you compare movements in the daily KST in the bottom
window with those of the Special K, you will see that they are
very close indeed. The reason for including the daily KST is to
show overbought and oversold conditions because these are
not apparent from the summed cyclicality of the Special K.
The Special K can be used in two broad ways, identifying
major trend reversals and timing pro trend short-term moves.
These will be discussed in part 2 of this series. Stay tuned!
Martin J. Pring is the president of Pring Research and chairman
of Pring Turner Capital, a money management firm. He is the
author of several books, including the classic Technical Analy-
sis Explained and Introduction to Technical Analysis, a work-
book/CD-ROM tutorial. He may be reached at Pring.com.
Either Special K template referred to in this article can be
plotted for free at Pring.com (under KST charting) for any
Yahoo symbol.
Copyright (c) Technical Analysis Inc.
SUGGESTED READING
Narcouzi, Christopher [2001]. “KST Revisited,” Technical Analy-
sis of STOCKS & COMMODITIES, Volume 19: August.
Pring, Martin J. [2004]. “Do Price Patterns Really Work?”
Technical Analysis of STOCKS & COMMODITIES, Volume 22:
April.
_____ [1992]. “Identifying Trends With The KST Indicator,”
Techni-
cal Analysis of STOCKS & COMMODITIES, Volume 10:
October.
_____ [2003]. Introducing The KST, DVD, Pring.com.
_____ [1992]. “KST And Relative Strength,” Technical Analy-
sis of STOCKS & COMMODITIES, Volume 19: November.
_____ [1997]. Martin Pring’s Introduction To Technical
Analysis, McGraw-Hill.
_____ [2002]. Technical Analysis Explained: The Successful
Investor’s Guide To Spotting Investment Trends And Turn-
ing Points, 4th ed., McGraw-Hill. S&C