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CONTENTS BONUS ISSUE 2014, Volume 32 Number 4
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of Stocks & Commodities™ (ISSN 0738-3355) is published monthly with a Bonus Issue in March for $89.99 per year by Technical Analysis, Inc., 4757 California Ave. S.W., Seattle, WA 98116-4499. Periodicals
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The Traders’
The Traders’ Magazine
MagazineTMTM
W
EDITORIAL
EDITORIAL
editor@traders.com
editor@traders.com
O
Editor in Chief Jack K. Hutson
Editor
EditorinJayanthi
Chief Jack K. Hutson
Gopalakrishnan
Editor Jayanthi Gopalakrishnan nce again we got a reminder of just
hoever said thethe markets don’t throw
Managing Editor Elizabeth M.S. Flynn
Production
ProductionManager
Manager Karen
KarenE.E.Wasserman
Wasserman how sensitive financial markets
Art
Art Director
Director Christine
ChristineMorrison
Morrison us unexpected surprises? After
are. We saw a major selloff in the Japanese all, isn’t that
Graphic
GraphicDesigner
Designer Wayne
SharonShaw
Yamanaka what makes the markets what
markets, which — as expected — triggered they are? Yeta
when things are going smoothly, many seem
Editorial
Staff Intern
Writer Emilie
Dennis Rommel
D. Peterson
Technical Writer
Webmaster Han J.David
Kim Penn
domino effect on markets throughout the
Staff Writers Dennis D. Peterson, Bruce Faber
Contributing Editors John Ehlers,
to forgetAdd
world. that disappointing
reality and instead dwellnumbers
earnings in hope.
Webmaster
Anthony Han J.Ph.D.
W. Warren, Kim That
from US corporations and you have culprits
feeling of hope is one of the a situa-
ContributingWriters
Contributing
Anthony
EditorsDon
W. Warren,
John Ehlers,
Bright, KevinBulkowski,
Thomas Lund,
that
tionmakes
that justusgot blind
worse.to what really
So what goes off
started on inas
Martin Pring, Barbara Ph.D.
Star, Markos Katsanos
Contributing Writers Don Bright, Thomas Bulkowski, the financial markets. If only
a strong year ended up correcting, and rather we could take
arapidly.
magic pill that admit
wouldthat make that feeling of
Martin Pring, Adrienne Toghraie
OFFICE OF THE Publisher
I must although correc-
Publisher Jack K. Hutson
hope disappear! But that wouldn’t be realistic,
tions are healthy for any market, when you have a 2% drop, it gets you thinking.
wouldPriorit?to the Federal Reserve’s FOMC meeting, I usually take a look at the yield
OFFICE OF THE PUBLISHER
Industrial Engineer Jason K. Hutson
Publisher Jack K. Hutson
Project Engineer Sean M. Moore
Credit Manager Linda Eades Gardner
Controller Mary K. Hutson
curve.
In lateAtJanuary
present,2014, the market
it’s looking a littleshowed
flat, and offgiven
its power.
that theAnybody
generalwho is in the
consensus
Industrial Engineer Jason K. Hutson
Project Engineer Sean M. Moore
business
is that the Fed is going to tighten at their January 31st meeting, I am concernedif
of mentoring or educating traders was showered with emails asking
Accounting Advertising Sales
Assistants Jane Leonard this
that was the start
the yield curve ofmaythe long-awaited
be heading in correction.
the directionBut let’s be
of being realisticAnd
inverted. — nobody
if that
Controller Mary4757 California Ave. S.W.
K. Hutson
Seattle, WA 98116-4499 knows
were to happen, that would not be a good sign for the US economy. I’m not it
the answer to that question. It all depends on how much of a correction
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But before
reason to gaingetting
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Is A Turn Approaching?
yond the normal use of an oscillator and enters the Moving average =
n
realm of cycle theory.
First, a note here: Cycle theory always uses the or:
“trough to trough” measure to calculate the timeline Detrending price oscillator (DPO) =
of a cycle. Peak to peak is never used. This approach Close – Moving average [(n / 2) + 1] days ago
provides a more accurate determination of the length
of the cycle. Thus, a four- or six-year cycle is trough The purpose of using a detrending indicator is to re-
to trough with one peak between the two troughs move the uptrend or downtrend to reveal the underly-
(Figure 1). ing cycle within those trends. Cycles expose patterns
Peaks are not used, as they tend to have more vari- in price that are not as easily seen in trends.
ants than troughs. Cycle periods are averages, which The new automated orders used by the institutions
DAVID GOLDING
are not precise. A four-year cycle will not always be have significantly altered tops and bottoms. The
exactly four years. head & shoulders top, as an example, rarely forms
nowadays. However, the detrending indicator identi-
fies the extreme deviation even without the typical
by Martha Stokes price pattern.
Bonus Issue 2014 • Technical Analysis of Stocks & Commodities • 13
TC2000
Figure 2: weekly chart of the dow jones industrial average. Here you see the detrending indicator with an eight-period setting. What it does extremely well is identify topping
and bottoming conditions before the top or bottom commences. The detrending indicator forms lower cyclical highs with failed peaks and lower troughs just before a top commences.
evident by the failed peaks and the lower troughs. The extreme has a higher trough cycle pattern indicating the conclusion
trough on the detrending cycle in 2008 precedes the final low of the downtrend. A reverberating cycle occurs in this index
of 2009. The lowest low of the bear market for the NASDAQ also, similar to the DJIA between June 2009 and March 2010.
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A weaker peak occurs in June 2010 and a trough in September of Apple Inc. (AAPL) in Figure 4, you see how a cycle can
2012, followed by a peak in December. Then the cycle reverber- change dynamics and how extreme patterns reverberate and
ates again, losing all peak and trough patterns until late 2011. can eventually return the cycle.
During reverberation periods, the cycle lost its timeline. In 2008 after an extended peak pattern, AAPL formed an
extreme trough, followed by an extreme peak, which is typical
They exist in equities when an extreme trough forms. The extreme peak was followed
The detrending indicator works well on stocks, providing by another extreme trough. In 2009, the cycle has a reverbera-
valuable information in shorter time frames. On the chart tion. Reverberations simply mean the cycle has been disrupted.
FIGURE 5: MCDONALD’S CYCLES. The cycles were not disrupted even though it developed a few extended peaks and troughs. The trough to trough of the cycle shortened considerably
during the extreme peaks and troughs.
Extreme peaks and troughs reverberate similarly to the after- setting. DIS has a consistent daily cyclical pattern with an ex-
effects of an earthquake. Reverberating cycles do not form tended trough in August 2011; then the cycle quickly returns
defined peaks or troughs. Whenever a reverberation occurs, it to its normal pattern. The deepest trough precedes the final low
indicates a disrupted cycle. in October, where the trough is shallow.
Then in 2010, the cycle resumes but
with more sharply defined peaks and
troughs than before, with steeper peaks
and shallower troughs.
A trader needs to watch these sharper
cycles to see if lower peaks and lower Come visit one of the most popular trading
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will shift to a topping formation. chat rooms for Breakout Trading.
McDonald’s Corp. (MCD) had a dif-
ferent reaction to the 2008 stock market
collapse (Figure 5). MCD cycles were
not disrupted even though a few extended Breakout Trading Bull Flags
peaks and troughs developed. What did
happen is the trough to trough of the cycle
shortened considerably during the ex-
treme peaks and troughs. Now it is starting Momentum Stocks Pivot Points
to lengthen that trough-to-trough cycle.
However, it is still a shorter time frame
than pre-2008. This analysis can help a
trader during volatile market conditions. Swing Trading Key Reversals
It allows traders to anticipate the shorter
cycle trough to trough and allow for the
steeper peaks and shallower troughs.
The detrending indicator for analysis Home of Dan Zanger, world record holder for
of stock or index cycles is best used on parlaying $10,775 into $18 million in 18 months!
a longer-term scale. Meanwhile, daily
charts can reveal patterns to assist in Home of T
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identifying the lows of bottoms and the
highs of tops.
Figure 6 shows Walt Disney Company
(DIS) on a daily chart with a five-period
Bonus Issue 2014 • Technical Analysis of Stocks & Commodities • 17
FIGURE 7: DAILY CHART OF GENERAL ELECTRIC WITH A FIVE-PERIOD DETRENDING INDICATOR. The detrending indicator has an extended trough prior to the bottom low in
October. The cycle reverberates in November and then resumes a trough-to-peak cycle.
In the chart of General Electric (GE) in Figure 7, the detrending indicator has
an extended trough prior to the bottom low in October. The cycle reverberates in
November and then resumes a trough-to-peak cycle. Detrending indicators detrend
a trending stock or index, so they work best in moderately trending and velocity
market conditions.
Cycles, exposed
The detrending indicator works for uptrends and downtrends, but it is not as useful
in sideways market conditions. The detrending indicator exposes the cycle within a
trend. Cycle patterns can be studied to find extreme peaks, extreme troughs, extended
peaks or troughs, reverberations in cycles, and other deviations of normal cycle pat-
®
terns. The detrending indicator shows when a cycle has shifted its timeline, whether
it is shorter or longer, and any deviations that move in opposition to price.
Deviations in a cyclical pattern, especially extreme or truncated troughs or peaks,
are an early warning to traders.
As with all sophisticated indicators, the detrending oscillator requires skill and
NeuroShell Trader practice to interpret properly. To use this indicator correctly, traders should study charts
of stocks and indexes before attempting to employ it in their trading analysis.
Intelligent Power
Martha Stokes, CMT, is a lecturer and author of cycle evolution theory. She is a
technical analyst for TechiTrader stock market trading courses, workshops, and
virtual classes. In addition, she writes several educational newsletters for active
traders. To learn more, visit technitrader.com or www.marthastokes.com.
Further reading
Stokes, Martha [2013]. “Balancing Your Indicators,” Technical Analysis of Stocks
& Commodities, Volume 31: Bonus Issue.
[2012]. “Riding The Velocity Express,” Technical Analysis of Stocks &
Commodities, Volume 30: May.
Winner 12 years in a row! [2010]. “Volume: The Forgotten Oscillator,” Technical Analysis of Stocks
& Commodities, Volume 28: July.
www.NeuroShell.com ‡TC2000 (Worden Brothers)
‡See Editorial Resource Index
301.662.7950
18 • Bonus Issue 2014 • Technical Analysis of Stocks & Commodities
A Trading Method For The Long Haul
You can apply this model to any time frame on any equity. 3. You only take long positions in stocks that have recently
S
Yes, it’s a dirt-simple model, and you don’t need to know a
ometimes even a picture-perfect trade setup fails to thing about algorithmic trading, neural networks, or high-level
deliver profits and may even result in a loss. But when mathematics to implement such a strategy — one that can also
you see a convergence of daily chart price dynamics be used on 60-minute, daily, or weekly charts, depending on
like the one I’ll demonstrate here, the case for a long trade how frequently you want to trade. Here are the basic tools
becomes fairly compelling. In Figure 1, you get a closer look you’ll need in order to scan for potential trade candidates:
at an interesting and attractive long swing entry setup in UGI 1. A scanning/screening feature such as TradeStation’s
Corp. (UGI). RadarScreen.
If you are a new or struggling trader and still need help in
sorting out your ideal trading strategy, consider whether this 2. A list of liquid, large- and mid-cap stocks (or even
kind of trading model makes sense to you: small-caps, if you love volatility) with an average
50-day trading volume of one million shares. The
1. You only take long positions when the dominant S&P 500/400 component stocks are perfect for such
long-term trend is up — as defined by a 200-period a strategy.
exponential moving average (EMA).
3. Access to a fundamental screening service such as
2. You take long positions only when they have completed Investor’s Business Daily’s screen center, Zacks.com,
a proportional pullback/correction against the dominant MidnightTrader.com, or a similar service that can easily
long-term trend. help you filter the earnings winners from the losers.
RSI (2)
RSI
TradeStation
Average true range
Figure 1: UGI Corp. (UGI). UGI shares may be setting up for a bullish reversal; a break back above 38.42 may be the catalyst to bring buyers back into this stock.
4. You need some time each evening to do a bit of scan- Most days, you’ll get a handful of high-quality stocks that
ning/screening, earnings research, and the like, plus pass all of these screens, so you’ll need to do some additional
some time each morning to enter/exit or adjust your screening:
trading positions.
1. Choose those stocks with the highest four-week
Using a program such as TradeStation, you’ll want to be look- comparative relative strength vs. the .SPX
ing for stocks with these characteristics: 2. Choose from industry groups that are also far out-
n A two-period RSI reading below 5.00 (Figure 2) performing the .SPX
n Trading above its 200-period EMA 3. Diversify across sectors and/or industry groups to
avoid over-concentration of risk.
n An average daily volume of one million shares
or greater You also need to consider just how many stocks you want
n It must have beaten its most recent quarterly earn- to hold in your portfolio at any given time; in the January
ings estimates and ideally have a strong history of 2011 issue of Stocks & Commodities, my article “Making
positive earnings surprises over the past eight to A Good System Great” shared my research on how adjusting
10 quarters the total number of stocks in a portfolio — and how rapidly
new positions could be added — made a huge difference in
n The stock’s beta should also be greater than 1.00
the profitability of a basic, long-only trading system based on
(meaning that it is more volatile than the S&P 500
pullbacks. Extensive testing revealed that a four- to six-stock
index [.SPX]). TradeStation RadarScreen
Figure 2: RSI SCREEN. UGI’s two-day RSI reading is at a minuscule 2.03, nearly as low as it can possibly go.
Inflation-Adjusted
Market Returns
Does inflation explain why markets are higher in dollar
value and why they seem to be worth less in purchasing
value? Here’s a detailed look.
S
by Ron McEwan
Figure 2: monthly closing price for THE S&p 500. Here you see the S&P 500 vs. inflation-adjusted prices going as far back as 1871.
first column is the date field. The second is the monthly clos- monthly closing prices to the data series that was adjusted
ing price for the security series being adjusted for inflation, for inflation over the same time period.
which in this case is the S&P 500 index. The next column is
the monthly CPI figure. In the fourth column, the return for Is there a spread?
the month-to-month CPI is calculated as: The chart in Figure 2 examines the
monthly closing price for the S&P 500
(This month’s CPI minus last month’s CPI) divided by
index going back to 1871. The chart in
[(This month’s CPI plus last month’s CPI) divided by 2]
Figure 3 covers the period of the 1929
The equivalent formula in the Excel spreadsheet would be: market crash. It appears that inflation
kept up with market performance when
=((C3-C2)/((C3+C2)/2))
the markets went up and down.
The cumulative rate of inflation is calculated in the next column
by entering “1” in cell E3, and in cell E4, the formula:
E3*(1+D4)
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Copy this formula down to the end of your data series. The
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FIGURE 4: THE SPREAD. On this chart of the S&P 500 index and its inflation-adjusted price, you will notice that as the markets are moving higher, inflation appears to be
eroding the value of the move.
In the chart in Figure 4 you can see more closely that while
the markets are attempting to regain their previous highs,
inflation appears to be eroding the value of this move.
Noisy indicators The current spread between real market prices and infla-
delay your analysis tion-adjusted prices should be viewed as ominous. How this
discrepancy eventually resolves itself may not be welcome to
long-term investors. How much did prices really move since
September 2012? This is something you should be aware of.
Jurik Research
Listening To
The Market
Are there ways that investors can listen to what the market
may be trying to tell us?
Danish Kapur
We
End-of-day data 27
are pleased to present purpose. Just because a service or product Stock brokerages 27
the Technical Analysis of is not listed does not necessarily mean Futures brokerages 28
Stocks & Commodities that the product does not have features
magazine 2014 Readers’ Choice Awards germane to the category. In addition, Forex brokerages 28
(RCA). Each year, we put before our readers some categories are divided by cost so Institutional trading platforms 28
a ballot of products and services related to that the comparisons can be made on a Professional trading platforms 29
technical analysis and trading. The follow- more level playing field. Online analytical platforms 29
ing pages present the products and services The winners in the Readers’ Choice
you and your peers chose this year as your Awards are almost always the dominant Standalone analytical software, $1,000+ 30
favorites. players in their niche, and rightfully so. Standalone analytical software, $500–$1,000 30
The Readers’ Choice Awards begins each You may have special needs for your Standalone analytical software, $500 and less 30
year with a list of products gathered by the trading, however, so you should keep in Software plug-ins 31
editors of Stocks & Commodities, with mind those products that are not the big
space for write-in votes (given that our list names in the category of your interest A.I. software (expert, neural) 31
doesn’t claim to be complete). Then, to find before you make your final decision. Portfolio management software 32
out what our readers find to be the most use- The RCA is designed to be an aid for Option analysis software 32
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Options trading systems 33
most useful from various categories by going rently available to use for your trading and
to our website, Traders.com, and filling out investing. With that in mind, we think Stock trading systems 33
the survey there. After that, we compile the you’ll find the Readers’ Choice a terrific Trading centers / schools / training 33
results, just in time for the Bonus Issue you guide to products and services that you’ll Technical analysis websites 34
hold in your hands. be interested in.
Favorite S&C article 34
Products are categorized by their primary
eSignal, an Interactive
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Winner Swing Trading With Three Indicators Donald Pendergast December 2013
Favorite S&C Article
from 2013
Indicator Rules For Swing Trading
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Subscribers can revisit past articles online in the archives at our website, www.traders.com. If you are not a subscriber, you can
purchase individual articles from the Stocks & Commodities online store at http://store.traders.com.
Accumulation — An addition to a trader’s original market position. statistical data as related to time.
The first of three distinct phases in a major trend in which investors Directional Movement Index (DMI) — Developed by J. Welles Wilder,
are buying. DMI measures market trend.
Adverse Excursion — The loss attributable to price movement against Discretionary Trader — A trading style that uses personal judgment to
the position in any one trade. evaluate an indicator’s signals.
Astrophysical Cycle — Any earthly cycle, such as a market cycle, Drawdown — The reduction in account equity as a result of a trade or
that has been scientifically related to the physics of the planetary series of trades.
system. Exchange-Traded Funds (ETFs) — Collections of stocks that are bought
Beta (Coefficient) — A measure of the market/nondiversifiable risk and sold as a package on an exchange.
associated with any given security in the market. A ratio of an Exponential Moving Average — A variation of the moving average,
individual stock’s historical returns to the historical returns of the EMA places more weight on the most recent closing price. The
the stock market. If a stock increased in value by 12% while the formula for calculating EMA is: EMA = (Today’s closing price *
market increased by 10%, the stock's beta would be 1.2. k) + (Yesterday’s moving average * (1-k)), where k = 2/(n+1); n =
Breakout — The point when the market price moves out of the trend no. of periods.
channel. Frequency — The number of complete cycles observed per time period
Channel — In charting, a price channel contains prices throughout (i.e., cycles per year).
a trend. There are three basic ways to draw channels: parallel, Oscillator — Technical indicator used to identify overbought and oversold
rounded, and channels that connect lows (bear trend) or highs price regions. An indicator that detrends data, such as price.
(bull trend). Relative Strength — A comparison of the price performance of a stock
Correction — Any price reaction within the market leading to an to a market index such as the Standard & Poor's 500 stock index.
adjustment by as much as one-third to two-thirds of the previous Stochastic Oscillator — An overbought/oversold indicator that compares
gain. today’s price to a preset window of high and low prices. This data
Cycle — A variation where a point of observation returns to its is then transformed into a range between zero and 100 and then
origin. smoothed.
Detrend — To remove the general drift, tendency, or bent of a set of
It’s hard to believe it has been more It’s basically impossible for most
than 10 years since our last Stocks individual traders to trade the news, Chart patterns and volume
& Commodities interview. Do you which for the most part is old informa-
still mainly use chart patterns and tion by the time it’s published. How
are the best tools available
volume to trade? do you know if, say, it’s too late to to the retail and independent
A lot has changed since that interview buy, or the move is part of some sort professional trader.
10 years ago, but I still use the same of a pump and dump operation? You
techniques — chart patterns, price, and look at the charts.
volume — to trade, which continue to be trendlines because they have become
very effective. For momentum and swing What other indicators or factors help more popular. For example, bounces off
trades, those techniques are the lifeblood you determine when to trade? Do you the shorter-term 10- and 21-day moving
in this type of trading environment, espe- use cycles, oscillators, trendlines, sup- averages (MAs) can be powerful. Longer-
cially for the active Jesse Livermore–type port/resistance, and so on? term MAs like the 100- or 150-day also
trader. For the longer-term investor or I do like one custom oscillator in par- work quite well. The 200-day MA hasn’t
mutual fund, it’s completely different. ticular that uses market breadth advance- been as effective as it used to be, as more
But for those who don’t have the where- decline data to give me a heads-up on traders use the 150-day one.
withal to hire a huge staff, count how trend strength and potential reversals. There are all kinds of cycles; Octo-
many trucks are leaving the factory, and Daily bars are important, and the length ber to March, the summer cycle, the
pore over sales reports and hundreds of of the run is important. Is the stock com- August to September time frame. There
pages of financial records, there really is ing out of a short-term correction? Has are monthly cycles during which 401k
no other way. The average Joe just can’t it been running for a few weeks or a few money is invested on the first of the
hope to do what institutions do. Chart months? Is it becoming exhausted? Has month. But there are so many cycles that
patterns and volume are the best tools the market been moving up for two to by the time you combine them all with
available to the retail and independent four weeks on falling volume, which is moving averages and other indicators, it
professional trader. a warning sign? can get pretty confusing. Just decipher-
Institutions build the price patterns Support and resistance are important, ing all that information is a massive job.
with their buying habits and I just wait as are snapbacks. Moving average lines I don’t find cycles to be as effective as
to trade them based on some catalyst. have more precedent these days than they were eight to 10 years ago.
36 • Bonus Issue 2014 • Technical Analysis of Stocks & Commodities
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movement? Our first inclination would be that it wouldn’t this article, I would like to share one of the easiest financial
be possible, but let’s give it the benefit of the doubt. Here’s astrology tools that any trader can try to implement for the sake
an easy financial astrology tool you can use to judge for of seeing whether there is any correlation between astrology
yourself. and the financial markets.
F
inancial astrology, or market timing by planetary astrology like retrograde, declination, and conjunction, which
movements, is a topic that gives traders complex and are terms most market participants have never heard of, I will
mixed feelings. On one hand, it is viewed as a difficult keep it simple and only show the examples that have to do
topic to comprehend and perceived as something that with ingress.
has nothing to do with what goes on in the markets. On the When we think of the term ingress, we naturally think of it
other hand, it is worshipped by some traders as an accurate as meaning a place to enter. In the field of planetary science,
42 • Bonus Issue 2014 • Technical Analysis of Stocks & Commodities
TRADING TECHNIQUES
Netdania.com
ity is greatly shaped according
to this zodiac sign, so is your
life, according to some cultures’ Figure 1: dow jones industrial average. The Uranus ingress date of May 28, 2010 served as a base for the market
beliefs (less so in others). But to advance over time.
the zodiac signs go beyond
influencing our personal lives.
Studies have shown that stocks
and forex pairs also have a subtle
interaction with these zodiac
signs. I know what you’re think-
ing — it’s hard to believe, but
stick with me.
‡Netdania.com
FIGURE 4: INGRESS POINT AS SUPPORT & RESISTANCE. Notice how the euro stayed close to the ingress level. But once
it exceeded more than 25 pips below the ingress, there was a significant drop.
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TOP 10 VIEWED LINKS
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rich, with different be included, so software is not always 1. ScanExpert Divergence Software, Inc.
pa ck ages of fe r i ng listed by developer.
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Software packages for each of these the category link, or use the search feature These are the 10 software listings viewed most often on the
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