Newsletter ,
 Stinson,

Can you please take a quick look and fwd it to Sam
Smith (wsmith2@enron.com)

Vince


---------------------- Forwarded by Vince J Kaminski/HOU/ECT on 05/07/2001=
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09:59 AM ---------------------------


VKaminski@aol.com on 05/06/2001 07:59:33 PM
To: vkamins@enron.com
cc: =20
Subject: Newsletter


A reminder: this column serves two objectives. The firstis introduction of =
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new members of the Research Group, and of the associates andsummer interns =
=20
rotating through the group. The second objective is to reviewinteresting =
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publications related to energy markets, quantitative finance andother topic=
s =20
of interest to the Enron audience. I have run out of the newmembers to =20
introduce and it=01,s time to some real work.=20

Today=01,s column is devoted to the issue of technicalanalysis. Financial =
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economists tend to dismiss technical analysis (chartism) asvoodoo science. =
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Over the last few years, however, a significant amount ofevidence that =20
technical analysis works at least in some markets. A paperpublished recentl=
y =20
by Carol Osler of Federal Reserve Bank of New York (CurrencyOrders and =20
Exchange-Rate Dynamics: Explaining the Success of Technical Analysis)review=
s =20
two cases in which technical analysis proved quite successful inoffering =
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useful predictions in the foreign currency markets. The firstprediction is =
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that trends tend to be reversed at identifiable support orresistance levels=
. =20
The second is that if a support or resistance level isbreached, trends tend=
 =20
to accelerate.=20

The explanation of this success can be found, according toCarol Osler, in=
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the =20
microstructure of the F/X market: take-profit and stop-lossorders tend to =
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cluster around certain typical levels (like exchange rate endingin a=20
specific =20
market at 00 or 50 level). For example, the author found thatthat roughly =
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2.8% of all stop-loss buy orders are triggered when the rate hitsa round =
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number, while 10.5% of take profit sales orders are triggered. Thisasymmetr=
y =20
explains the success of the first prediction of technical analysis. Asecond=
 =20
asymmetry is related to clustering of orders just above and just belowround=
 =20
numbers ending in 50 and 00. Stop-loss buy orders are infrequent at=20
ratesjust =20
below these levels, and cluster above these levels. Stop-loss sell =20
orders,however, cluster just below 00 and 50 levels a relatively scarce at =
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rates justabove these levels. =20

The question remains, why conditional orders tend tocluster at certain =20
levels. One possibility is cognitive advantage tradersderive from managing =
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large volume of information using simplified rules.Another possibility is =
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that they follow recommendations of technical analysisin managing their =20
books. In this case, technical analysis becomes aself-fulfilling prophecy.=
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Please, contact us for thecopy of the paper if this caught your attention.
 - wjk0506.doc
stinson.gibner@enron.com