Larry Williams' Inner Circle Workshop Trading Method.pdf

Welcome to the Inner Circle Workshop

This is my personal opportunity to teach you the best of what I have learned

over the last 37 years and, hopefully, jump start your trading and learning. I'm looking

forward to it.

Larry Williams

MARKET ADDAGE #1—Charts don't move the Markets... Markets move the

charts.

Despite what you have read, heard or have come to believe, by and large it is my experience that

technical analysis (chart reading), is not an effective investment strategy. Its usage is limited to

timing our entry and exits into and out of trades.

Thus I want to begin this workshop with revealing to you what does work, what does set up

major market up and downswings. I have isolated the major "fundamental" conditions seen at

this significant market turning point over the last 30+ years. These conditions set the stage for

market moves that technical analysis can "time". Without these conditions we are destined to a

life of perplexity and confusion. With these conditional set ups we will be working with the

major causes of market movements.

The "SET UP" criteria you will learn:

1. HOW TO DETERMINE FUNDAMENTAL UNDER AND OVER

VALUATION

2. GET IN PHASE WITH THE POWERS THAT MAKE THE MARKETS

3. THE "END OF THE TREND" INDICATOR

4. THE PINCH AND THE PAUNCH TOP AND BOTTOM INDICATOR

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5. HOW TO FADE THE USUALLY WRONG PUBLIC

6. HOW TO SUPERCHARGE SEASONAL TRADING STRATEGIES

7. THE OPEN INTEREST "PLAY" I'VE BEEN USING SINCE 1970

8. THE SECRET MESSAGE OF SPREADS...PRICE PREMIUMS

IT'S ALL ABOUT SYNERGISIM- While it is true that many major highs and lows are •

correctly "called" by any one of these tools, the best plays come from a cluster of at least 4 of

these Set Up tools being present. I'm a team player, I want at least 4 members of my team .

present when I venture out to bag major highs and lows.

L) HOW TO DETERMINE FUNDAMENTAL UNDER AND OVER

VALUATION

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Technicians have bandied about the concept of overbought and oversold since the first chart was

drawn, but what they looked at was only price action. Indeed, the DJIA has been overbought

since 1983! All bull markets are "overbought", all bear markets seriously "oversold". ""'•" •/•;•

In 1998, while searching for a better way to determine value, a novel thought crossed my mind.

Value in stocks is measured by P/E ratios, dividends and the like, things not available to us as

commodity traders.

" - ; i •'•--'.

What is value is the notion I wrestled with most of 1997 and 1998. How could I determine if

Wheat was overvalued? And, would that same measurement work for Pork Bellies or Cotton?

What is value, and how do we measure it?

History and most major religions teach us there is an ultimate storehouse of value.. ..Gold. •••'•• ; ,

This got me to thinking, why not compare the price of all commodities to this ultimate

storehouse to see if major undervalued and overvalued zones vs. gold could be isolated.

The search began with a study of spreads and almost at once I knew I was on the track of

something very good.

The evolution of this idea can now be stated quite simply;

Divide the price of any commodity by the price of Gold (this shows the spread relationship) and

multiply this by 100 to normalize. Then construct either a 2 week or 2 period exponential

average of this spread. Also construct a 22-week average or 22 period exponential of the spread.

It does not make much difference which mathematical formula you us. Finally, subtract the 2

period average from the 22 period average. The resulting product, the Preliminary Valuation

Index (PVT), is clearly shows high and low levels of valuation that are not present in any

technical indicators I know.

UNDERSTANDING WHAT YOU ARE LOOKING FOR... Initially, I was not able to isolate a

"be all, end all" number that represented +/-values for all commodities. My next step was tc z?

the same thing with this index I do with the Commercial and Public Sentiment Index. By th j_

mean I then constructed essentially a %R indicator. The math is to take the current weeks

reading and subtract from that the lowest reading of the last three years. That amount is then

divided by an amount arrived at my subtracting the lowest reading of the last three years from

the highest reading of the last three years.

'•-..-•'

:..;*,

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•

What we have accomplished is the construction of an index we can use to measure overvalued

and undervalued zones across the board for all markets. All one needs is a long-term weekly

chart of the commodity under question and the Williams Valuation Index (WVI).TM.

I simply draw a line across the extreme readings found at major market highs and lows. As a~

example, using the Genesis Charting Software we see that most all major highs have come wiih

the index in the 75 area while most major lows are indicated by a reading in the 15 area. You are

free to "move" these zones around a bit, but generally speaking you will see these are the

readings associated with major highs, 75% or higher and major lows, under 15%.

NOTE: Some times the index will be a little early, and yes, sometimes it may not even be in the

major high/low zones. Since we are using a combination of our tools of the trade, don't let this

bother you. Plus, we still need to determine our entry levels. Suffice it to say, though, that once

an overvalued or undervalued zone is indicated, we need to be alert. Big game is near, get your

guns ready.

Also note, this is does not work at all like a technical oscillator. As I will show in the seminar

there are numerous times a market is flat or even declining, yet the Valuation Index

clearly—and correctly—tells us the market is over valued. The opposite is equally true.

Now let's look at some examples. The first is Wheat and I'm presenting charts covering the last

30 years, 1968 to 1999. Just this index alone alerted us to most all major highs and lows in this

market. This is remarkable consistency.

See Pages 1 Through 4

Cotton has little in common with Wheat, but the same thing can be seen in the WVI Again, most

all-major highs appear with our index in the 75% area and lows in the 15% area. Additional

long-term charts are shown for your understanding and persona "track record" of the major

commodities.

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Seepages

Pork Bellies or Platinum all show the same relationship to Gold as the next charts demonstrate.

I'm also showing here most all major markets with my WVI tm for your study and historical

records.

See Pages 6 Through 22

SO HOW DO WE MEASURE OVERVALUED AND UNDERVALUED IN GOLD???

Obviously, we can't spread Gold vs. Gold, so what are we do to? My answer to this is to

construct the same measurement, but spreading Gold against Treasury Bonds. As I will show

when we discuss Will Go, there is a very strong and powerful correlation between these two

markets.

ee Pages 23 Through 2

CONCERNING THE CURRENCIES—Currencies do well with the WVI, but perhaps do

better spreading against the Dollar Index. The next charts show each of the major commodities'

against both Gold and the Dollar Index. I'll let you choose.

See Pages 25 Through 30

2.) GET IN PHASE WITH THE POWERS THAT MAKE THE MARKETS

CLEARING UP ON THE COMMERCIALS

Many, many analysts have passed by this treasure house of market forecasting techniques. I was

first introduced to the concept by Bill Meehan in the late 1960's, so I guess it's safe to say I have

more experience with this tool than any other current analyst.

There are several critical points I need to share with you about this index, to begin let's

talk about the index itself. First of all it is constructed of just the large hedger activity as released

by the Commodity Futures Trading Commission and can be garnered every other week (in the

old days it came only once a month). On their web site at • HYPERLINK

http:/AVWW.CFTC.GOV • WWW.CFTC.GOV* , there is a bar there that says "Commitment of

Traders", click on it for the data. This is the only data I use from the CFTC, I do not use the

large traders, (funds and trend followers), or small traders.

I construct the index by taking the highest value of the net difference between long and short

positions for the current reporting period. Then subtract from the lowest such reading of the last

three years, this value is then divided by the difference between the highest and lowest readings

of the last three years. This normalizes their activity.

Keep in mind the Commercials are the ultimate trend enders. They are not top and bottom

pickers, they accumulate and distribute. As such they are usually early. Also the mere fact thev

are or have just become net long or short may not have great meaning. This is not like a lignx *?

switch that is on or off, bullish or bearish.

There are three important ways to use this index.

L Extremely high/low readings

2. 12 month high/low readings

3. The Crouch (rollovers/rollups)

A) EXTREMELY HIGH/LOW READINGS—There do appear to be absolute levels that aic

found at major market highs and lows. Certainly any reading greater than 75% is bullish and ...

than 25% bearish.

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-....,-

B) 12 MONTH HIGHS AND LOWS—What I'm looking for here are readings that are higher

than all values for the last 12 months, that's bullish. Readings lower than all postings for the last

12 months are bearish. In both instances this is irrespective of the % or absolute raw value

reading.

See Pages 31 Through 35

C) THE "CROUCH" WITH THE COMMERCIALS

AN OVERVIEW OF COMMERCIAL ACTIVITY— For the last 25 years I've been talking

and writing about how this group of traders sets the tone for most all market activity. Nothing

has changed. The markets were set up by these people, brokers and, to facilitate business. The

exchanges are not there to accommodate speculation, they serve a commercial purpose and we

speculators are a mere pawn, and useful one, in the grand scale of things. ..

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Traders have taken the wrong view of Commercial activity. It is not a light switch that is on or

off. What does matter is a very high level of buying/selling over the last 12 months. That's the

initial set up. We can measure this by taking the 3-year high and low of Commercial activity

and dividing that into the current reading minus the 3-year low. That's the COT index you'll

see in most chart books and the Genesis software.

In this fashion we can watch the pendulum of Commercial activity to see when it has reached an

extreme. It will surely move from one extended reading to another, to the opposite side, from

bullish to bearish, and in the process will go from positive to negative. This change in direction

from bullish to less bullish is not bearish, nor is a change from + to -.

Indeed, it is often a positive sign, indicating the move is underway. You need not worry about

this and in fact can use the roll over as a sign the move has begun! The examples prove my

See Pages 36Through41

'The long and short of Commercial activity is that a 12-month high/low in their buying/sellinr ::

a signal for a trend reversal. These people do not try to buy tops and bottoms they accumulate

and distribute. My final point is that when they are diametrically opposed to the public maj<»

moves usually develop, i.e., if the public is excessively bearish while the Commercials are

heavily long prices will rally.

point. The roll over is an early indication the trend move has begun, not that it is over!

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