Technically Speaking, September 2023

Hello readers, and welcome to another edition of Technically Speaking!

You know what’s new? Local CMT Chapter meetings!! It has been a while since we’ve had the chance to get back to consistent in-person events, and I am happy to report that you can soon expect an event near you! This is coming to you from Seattle, and we just had the first in-person chapter meeting in three years! The Godfather of Technical Analysis, Ralph Acampora, kicked off a successful Puget Sound Chapter meeting in association with StockCharts and the CMT Association.

If you have yet to hear a presentation made by Ralph, I highly recommend you rummage through the plethora of content on the CMT website and listen to this man’s wisdom, genius, and passion. Of the numerous questions I asked him (and they were a lot), I missed asking him what he had for lunch that day because he was on fire! I have never taken for granted what the association founders did for the study of technical analysis, but hearing stories of their challenges makes you all the more gracious for what we have.

The CMT Association means more to me than it may seem. I had never been part of such a welcoming, friendly, and gracious community. It gave me a sense of structure and network that enhanced my perception easily tenfold, and I will be forever grateful for it (which is also why you’ll find me volunteering for everything!)

One of my key takeaways from Ralph’s presentation was his slide on the Ten Commandments for Buy and Sell. Technicians often encounter retailers who need help understanding market entry and exit points when considering their portfolios. This checklist was the best logical flow of questions that one could answer and arrive at an answer for themselves. (Flip the questions, and you will get the ten commandments for a ‘sell’ signal).

You are welcome.

Well, the market has been a delightful game of musical chairs if you are a short-term trader, what with the Dollar index rallying to its supply zone of 105 and crude oil approaching 93.50. The implication of the former is that a continued rally could add to the seasonally weak period of the stock market that we are experiencing right now, and a rally in the latter could push sectors like Energy right on top (with the SPX representing a paltry 5% of this sector). The good news is that if you’ve got a global outlook, India and Japan have registered new all-time highs.

I will leave you with some moments from the recently concluded in-person event in Seattle.

P.S. The StockCharts office is AMAZING!!

Until we meet again,

Rashmi Bhatnagar

Editor

What's Inside...

Letter from the Chief Executive Officer

Alvin Kressler

Role of the Sponsor/Reference in the Membership Process

In the past, the Association prided itself on our long-standing tradition...

Professional Membership Application

Alvin Kressler

Guidance for Professional Membership Application

Professional Membership (Member) is reserved for individuals who are currently, or were previously, employed...

Reasons to Care About the Percentage of Stocks Above Their 200-Day Moving Averages

Louis Spector, CMT

Recently on CNBC, a CMT charter holder explained that his distrust of our current rally in the S&P 500(SPX)...

A Look Under the Hood of U.S. Equity Markets

Anthony F. Esposito, CMT

Generally speaking, although the conversations and debates persist, the U.S. Stock Market seems to have calmed down...

Reversal Bars: Springs and Upthrusts: 4-2

Stewart Taylor, CMT

CMT Association’s Market Insights features timely technical analysis of current...

High Yield Signal Does Not Align with Long-Term Bearish Outcomes

Chris Ciovacco

Joel Pannikot

Reminiscing the 2023 CMT Asia Roadshow, and what came out of it.

In 2019, the year after I joined...

Letter from the Chief Executive Officer

Role of the Sponsor/Reference in the Membership Process

In the past, the Association prided itself on our long-standing tradition of having members serve as “sponsors” for incoming members. This concept held significant importance when our membership primarily included individuals from similar professional backgrounds, such as sell-side equity and fixed income analysts and traders in developed markets.

However, times change, and so must we. As the diversity of our candidates burgeons in volume, depth, and geographical span, it becomes evident that our earlier model needs a refresh. Over the last decade, our CMT program candidates per exam cycle have burgeoned from 500-600 to a remarkable 1,200. The definition of a sponsor, once unified, has now branched out into multiple interpretations.

With this communication and the impending updates to our Admissions policy, we aim to rejuvenate the expectations for both applicants and sponsors/references. Here’s the exciting change:

We are transitioning from “sponsorship” to the more apt term, “letter of reference.” But let’s be clear: this change is not about downscaling but about amplifying its value in our admissions process. As our community grows and diversifies, this shift ensures that we continue to emphasize the qualities and qualifications of our candidates.

Why this pivot in terminology?

While both sponsorship and reference letters are strong endorsements, they possess distinct flavors:

Purpose:
- Sponsorship Letter: Historically denoted financial or other forms of backing for an event, individual, or cause.
- Reference Letter: A testament to an individual’s character, qualifications, or abilities. Perfect for establishing credibility.
Content:
- Sponsorship Letter: Primarily deals with the specifics of sponsorship – financials, purpose, and terms.
- Reference Letter: Delves into the individual’s qualities, professional accomplishments, and relationship with the referrer.
Sender & Recipient Dynamics:
- Sponsorship Letter: Often sent to organizations or event managers.
- Reference Letter: Authored by someone intimately familiar with the applicant, ensuring a deeper insight into their capabilities.
Tone & Structure:
- Sponsorship Letter: Typically, more formal.
- Reference Letter: Personal and centered around the individual’s attributes.

In essence, while sponsorships highlight support for a cause, reference letters emphasize the individual’s merit. And it’s the latter, the attributes that a reference letter brings out, that we are keen on emphasizing when assessing the suitability of a candidate for our esteemed membership.

In the following sections, you’ll find a breakdown of the new reference form, accessible through the CMT Association’s Submittable platform once you agree to be a reference and sent as part of the candidate’s application process in completing their form. Note: unless shared by you, the candidate won’t view this form. It’s designed for our eyes, ensuring candid feedback and insights.

Together, let’s usher in this fresh phase of clarity, purpose, and growth for our Association.

Sincerely,

Alvin Kressler

Chief Executive Officer

sponsorship/reference form

Membership Sponsor/Reference Questionnaire

First Name (Given Name)

Last Name (Family Name)

e-mail address:

Phone number:

Sponsor’s/Reference’s Organization or Affiliation (i.e. the name of the company you work for)

Relationship to Applicant (familial, work, social, etc., how do you know the applicant)

How long have you known the Applicant?

Discuss the applicant’s work in financial services: this is not intended for you to put the applicant through a weeks long process (or multi months) of providing their research and work for you to review and assess to determine if that’s “how I would do it or not”. But should entail discussions with the applicant around TA and how the applicant uses TA in their work.

Personal evaluation or comments: this is your opportunity to provide your assessment of the person and their qualities and how they would add value to the community.

Do you believe that the applicant would make a good addition to the CMT Association?

Yes
No – if your answer to this question is “No” you should have a conversation with the applicant and you should clearly state the reason behind the “No” assessment in your Personal evaluation or comments section above.

Contributor(s)

Alvin Kressler

Alvin Kressler was the Executive Director & CEO of the CMT Association from 2015-2024. Alvin was instrumental in establishing a partnership between CMT Association and with CFA Institute. Alvin was previously Director of Research and Corporate Access at Bloomberg Tradebook. Before joining...

Professional Membership Application

Guidance for Professional Membership Application

Professional Membership (Member) is reserved for individuals who are currently, or were previously, employed in a professional capacity that relates to the field of Finance and who comply with the Association’s Code of Ethics. You must be a Professional Member to apply for and use the CMT designation.

To qualify for Professional Member status, you must have attained a minimum of three (3) years of Approved Professional Work Experience prior to applying for membership. Approved professional work experience is defined as someone who:

Has worked professionally in a job role that relates to the field of Finance, including financial management, corporate finance, investment banking, accounting, audit, advisory services, research and analysis, banking, insurance, and other roles.
Supervises, oversees, or manages individuals or teams who practice such activities.
Teaches, trains, or coaches such activities.
Publicizes such activities as a member of the media.

Work may be either full-time or part-time, but prospective members must have received compensation for their services. For example, managing personal investments or those of family and/or friends’ investments (without compensation) does not constitute Approved Professional Work Experience, nor does volunteer activity.

You are not required to have technical analysis related work experience to apply for Member status.

While the CMT Association has grown and evolved over the years, our mission – our “reason for being” – has not changed. Definitely, without question, we exist to promote the use of Technical Analysis. That is why the Association was originally formed and is the key reason we have remained relevant all these years.

But, our mission is not only to promote the use of Technical Analysis. There are two additional components, or facets, to our mission that are extremely important to understanding why we exist and what we aim to accomplish as a group.

We aim to attract and retain a membership of professionals devoting their efforts to using and expanding the field of technical analysis and sharing their body of knowledge with their fellow members.

We will establish, maintain, and encourage the highest standards of professional competence and ethics among technical analysts.

These three items – promote TA, have professional members, and maintain ethical standards – compose our mission statement. Importantly, the mission statement not only explains who we are and what we are about, but it also does a good job of defining what we do not aim to be.

Because computers have made it easy to perform Technical Analysis by instantly plotting indicators on the screen, Technical Analysis has become an extremely popular tool among individual investors, or “retail” investors, over the past 30 years or so. These are people who do not have careers in finance and typically manage their own pools of capital to augment other sources of income.

The CMT Association does not aim to be a source of educational content and networking opportunities for non-professional investors. Per our mission statement, we intentionally focus on serving financial professionals to help them successfully use Technical Analysis in their careers.

That being said, many people who are just learning about Technical Analysis for the first time may be thinking about a career in Finance because of their interest in TA and trading. Often, we are asked by CMT Program candidates how they may qualify for membership if they do not have the required minimum of three years of work experience in Finance. As they sometimes explain, the very reason they are pursuing the designation is to land a decent job in Finance. So, how can they attain job experience if they need the CMT designation to do so? It appears to be a similar conundrum as credit card companies requiring you to have a good credit history before they issue you a card, but without a card you cannot obtain a good credit history.

Like a post-graduate degree from a university (e.g., an MBA), a professional designation can certainly elevate one’s attractiveness to employers. Keeping in mind the well-defined mission of the CMT Association, our requirement that members have a minimum amount of professional financial work experience is necessary and we must be uncompromising in its application. The CMT designation proves to employers that you possess a thorough knowledge of Technical Analysis concepts and have a competent ability to apply them. But, it cannot be the only requirement of membership in the Association.

The unfortunate truth for CMT candidates who have yet to get a job in Finance is that you will need to wait to apply for membership until you can satisfy the work requirement. But remember, this does not require you have a job in trading or investing per se. Your work experience just has to be related to the field of Finance in some capacity. Alternatively, Affiliate Member status gets you access to the CMT Association’s educational programming, ethics awareness, and helps you build your network of TA professionals, but does not require work experience.

Sincerely,

Alvin Kressler

Chief Executive Officer

Contributor(s)

Alvin Kressler

Reasons to Care About the Percentage of Stocks Above Their 200-Day Moving Averages

Recently on CNBC, a CMT charter holder explained that his distrust of our current rally in the S&P 500(SPX) from the October 2022 low is partly because “The percentage of stocks above their 200-day moving averages on the New York Stock Exchange(%>200smaNYSE) has yet to exceed 75%; 11 months into a new bull market, we’ve never not seen this threshold exceeded.” This idea that bull markets are confirmed with a reading of greater than 75% within 11 months will be the start of our investigation.

Note, this calculation is not standardized. The value of this indicator has different values for the same date on different platforms. This study uses data from Stockcharts.com. Their calculation includes common stocks only with stock prices adjusted for splits, other events, and for dividends.

THE DATA

The CMT charter holder on CNBC told us that there has not been a bull market without the percentage of NYSE stocks above their 200-day moving averages (%>200smasNYSE) exceeding 75% within 11 months, 231 trading days, from a major low. To investigate, we must define a bull market. Though disliked for being the arbitrary definition it is, one common definition is when price rises at least 20% from a low.

Below is Chart 1 and Table 1 summarizing Chart 1. The bottom panel of the chart shows the percentage of NYSE common stocks above their 200-day moving averages(%>200smaNYSE). The 75% level is marked with a horizontal line, and the indicator itself is colored green when greater than 75%.

The top panel is the price of the S&P 500 ETF, SPY. The green and red slanted lines drawn through price highlight price swings of more than 20%. The colored vertical lines, using the benefit of hindsight, mark the date of price bottoms after declines of 20% or more. The gray shading represents 11 months, 231 trading days, from those colored vertical lines which mark major price bottoms. The green arrows point out when the indicator in the bottom panel crosses above 75% for the first time after a major price low.

Chart 1: Advances of more than 20% from a low since 2002. All have seen %>200smaNYSE >75% within 11 months from the low except for the 2018 low. 6 trading days left until we miss the 11 month window from the October 2022 low.

The vertical lines in the top panel of the chart show all 6 of the market bottoms, since 2002, after declines of more than 20%. The green vertical lines show the 4 of 6 market bottoms where the indicator exceeded 75% within 11 months of the bottom. The red vertical line, price bottom 4 on 12/26/2018, was a bottom after a 20% decline when the indicator did not exceed 75% in 11 months. The indicator came close with a 72.82% reading, just shy of the 75% threshold. A few months later, we had the 2020 Covid plunge. The vertical lines in orange show us our current position relative to the 10/13/2022 potential market bottom. The indicator has yet to reach 75%, corroborating what the CMT charter holder on CNBC told us. Time is ticking. As of writing this, we are just 6 trading days shy of our 11-month window, and the indicator is very unlikely to blast higher from the low 50s to more than 75% in just 6 trading days. The only other instance of this happening was price bottom 4 in 2018 ahead of the Covid plunge. Without more historical data, it is difficult to infer anything other than caution is warranted until we see the indicator exceed 75%. As table 1 below shows, after the signal, there is an additional average gain of 66%.

Table 1 below is color coded to match the vertical lines on the chart, which mark the major price lows. It shows all 6 advances for reference, though the summary statistics only include the 4 price bottoms where the indicator flashed the signal by exceeding 75% within 11 months:

On average, the price bottom to the signal took 5.9 months with a price rise of 37.8%.
On average, the signal to the top before a 20% decline took an additional 41.8 months with an additional a price rise of 66%.
On average, the price bottom after a decline of 20% or greater to a price top before decline of 20% or greater took 47.7 months with a price rise of 125.6%.

Table 1: All 5, potentially 6, major market lows since 2002.

THEORETICAL TO PRACTICAL

The above stats are interesting. So what? Who cares? How can this study help us manage, grow, and protect assets? How can this help us make market calls?

Can this indicator function as the basis of a stand-alone investment strategy? What if we buy SPY when %>200smaNYSE crosses above 75% and then go flat when the indicator crosses below 30%?

Chart 2 below presents our strategy visually. Table 2 below shows our strategy beats buy & hold. With its small sample size of 5 since 2002, It has a 100% win rate. The strategy has a total gain 305.49%, a maximum drawdown of 13.19%, and has only been invested 59% percent of the time. Less time invested and smaller drawdowns significantly reduce risk. Buy and hold has a total gain of 289.58% over the same time period with a maximum drawdown of 47.71%. Caution, these results do not consider reinvesting dividends, fees, taxes, or anything else which will affect net returns.

Chart 2: Buy SPY when %>200smaNYSE >75%. Go flat when %>200smaNYSE <30%

Table 2: Strategy outperforms buy & hold

Can this indicator help us assess the health of the S&P 500? Might using the indicator in conjunction with a 200-day moving average be a reliable way to maintain conviction after price closes below the 200-day average and still prevent large losses?

Chart 3 below shows price from the 2002 low into the 2008 bear market. Had we stayed invested or had a bullish market call until the indicator fell below 30% in August 2007, see the red and green arrows, we would not have been whipsawed by a close below the 200-day. The exit signal was timely and prevented a large loss.

Chart 3: SPY from 02-08. Closes below 200-day moving average did not foreshadow larger market declines unless accompanied by %>200samNYSE < 30%

Chart 4 below shows the run from the 2009 low to the 2018 high. It was trickier than the run from the 2002 low. Had we been solely relying on the indicator, we would have made a bullish call in the middle of 2009 (green arrow), stayed bullish through 2010 despite the moving average whipsaw, and turned skeptical (red arrow) after a 12.5% decline in the middle of 2011 and avoided an additional 8% decline. We would have turned bullish again in early 2012 (green arrow), not been whipsawed in 2012 and 2013, and then turned skeptical in 2014 (red arrow) ahead of a 15% correction. The green arrow in the middle of 2016 would have turned us bullish, and we would have stayed bullish until late 2018 (red arrow) after a 10% decline but before an additional 11% decline.

Chart 4: SPY from 09-19. Timely market calls & whipsaw protection

CONCLUSION

While we never rely on one indicator, this indicator has proven to be very powerful in the past. More testing needs to be done with regards to using this indicator as part of an investment strategy, but the preliminary findings are strong. There is also an impressive case to make for using it as part of a suite of indicators for market calls/commentary. We demonstrated how when used in conjunction with a 200-day moving average, this indicator helps avoid moving average whipsaws, stay invested and bullish while others would have turned bearish with price closing below its 200-day moving average, and has been very accurate at offering both bullish and skeptical market calls. Crossing above 75% has generally signaled more strength ahead, with average gain of an additional 66% over an average of 41.8 months. Closing below 30% has generally signaled more weakness ahead.

Contributor(s)

Louis Spector, CMT

Louis J. Spector, is an analytical thinker. He enjoys pursuing ambitious goals through dedication, continuing education, and a positive mental attitude. Louis currently works for a boutique wealth management firm in Bergen County New Jersey as the Chief Technical Strategist. There he...

A Look Under the Hood of U.S. Equity Markets

Generally speaking, although the conversations and debates persist, the U.S. Stock Market seems to have calmed down to some degree over the past few months.

Most market “experts” believe that the financial stress/environment which led to the unwinding of Silicon Valley Bank, First Republic and Signature Bank is well contained and being handled expertly by the market, its participants and its regulators. Additionally, S&P 500 earnings expectations are still relatively optimistic with a current P/E and Forward P/E of 18.50 and 18.75, respectively. Geopolitical risks seem to go totally unaccounted for, inflation (YoY CPI) is currently under control at 5% (side eye) and the unemployment rate in the U.S. is only 3.50%. Also often highlighted is the fact that the S&P 500 Index is about 20% off the 2022 low. What could be wrong?

Well let’s focus on this last point. The US Stock Market is rallying and holding well above the 2022 lows. This could only mean that we have seen the worst of this Bear Market and better times are ahead. Well, maybe not.

Let’s look at what’s under the hood. What is really driving price? Is this a market where the average stock is recovering and performing or is this a shallow price recovery as far as market breadth. Are we seeing higher overall prices being produced from the success of only a few names, while most stocks continue to struggle?

To start, let’s look at three broad indexes which generally encompass Technology (Nasdaq), Large-Cap U.S. Equities (S&P 500) and Small Cap Equities (Russell 2000). What we see is that on a year to date basis, technology has massively outperformed both large and small cap equities in general. The chart below shows the Nasdaq (QQQ.US) up 22% with the S&P 500 (SPY.US) up only 9% and the Russell 2000 (IWM.US) up only 1%. This is not typical for a market that is truly recovering from a Bear market low. We should want to see money flowing into the Small Cap names as a sign that market participants believe there will be an economic recovery, lower rates and higher growth in the future. This is not at all what we are seeing.

To go a step further, what is driving our broader market (S&P 500) even 9% higher on a year-to-date basis? Is it all technology names or is it a concentrated few that, because of index construction and weightings, have been able to disguise a weak market as a strong, emerging bull? An easy way to assess how healthy breadth is for the S&P 500 universe is to compare the performance of the cap weighted index (SPY.US) versus the equal weight index (RSP.US). By taking this angle we can easily see to what degree all stocks are improving versus just the largest of the large caps. The chart below shows a significant underperformance by the equal weight basket. The SPY.US is up 10% year to date while the RSP.US is up only 3%. To go a step further, the top three names by cap weight in the SPY.US are Apple, Microsoft and Amazon. These three stocks alone account for almost 20% of the S&P 500 and are all individually up 30% year-to-date. Think about that, three names out of 500 account for 20% of the index move and these same three names are outperforming the overall market by approximately 10x.

Be careful when reading the headlines or defining true market health as measured by potentially skewed data and indexes. For the U.S. equities markets to truly enter into the next bull market we will need more than the chosen few to rally and show demand outweighs supply.

Anthony F. Esposito is Director of U.S. Equity Execution at Scotia Capital (USA) Inc.

Contributor(s)

Anthony F. Esposito, CMT

Anthony Esposito is a Director of US Equities at ScotiaBank in NY. He was an NYSE Floor Broker, Buy-Side Trader/Analyst for a large Single Family Office, and Risk Trader. He has completed the distinguished Chartered Market Technician Program, receiving the CMT designation,...

Reversal Bars: Springs and Upthrusts: 4-2

CMT Association’s Market Insights features timely technical analysis of current global markets by veteran CMT charterholders. Each post appears on www.tradingview.com/u/CMT_Association/ in an effort to explain process, tools, and the responsible practice of technical analysis. Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.

Reversal Bars: Springs and Upthrusts: 4-2 by CMT_Association on TradingView.com

In part one (4-1, linked) we outlined the base characteristics of spring and upthrust patterns. In part two we examine two charts that have the potential to develop the behavior, and describe why they are candidates. The two examples use daily perspective charts but the patterns are fractal and translate well to all time frames.

Many popular published strategies center around buying and selling breakouts of prior swing points or patterns and consequently is the first approach that most new technical traders attempt to implement. But failed breakouts are common, and when they fail, they often fail violently. The rapid reversal creates panic among the weak hands who entered in response to the breakout. The panic often results in significant slippage on both entry and exit when poorly placed stops are elected.

Early in my trading career I made a concerted effort to trade breakouts. Ultimately the losses convinced me that, despite what the books said, buying and selling initial breakouts was a very bad idea. Eventually I discovered Richard Wyckoff, Richard Shabacker and John Hill and began to understand why.

I flipped the script and began to develop trading strategies around failed breakouts (my favorite trades) and that entered into legitimate breakouts only after the breakout was confirmed.

Since my trading style is not constrained, I can cycle through hundreds of charts (equity, income, commodities) and time frames looking for setups and situations that fit my pre-established risk-reward parameters. Just as it is “always five o’clock somewhere,” there is also always a trade setup somewhere. You just need to put forth the effort to find it.

As I cycle through the charts that I trade, I simply monitor for markets that, after extended trends, are testing a prior high or low, or that have developed a trading range in the vicinity of an important high or low. In other words, markets that are at critical junctures in their trend where the short-term behaviors are more likely to generate signal as opposed to noise. I am also cognizant of momentum divergences, countable threes, channels, sentiment and other nonprimary factors that might strengthen my view or influence the size of the trade.

Those markets go on my “list” and I begin actively monitoring them for behavior. Note that I often monitor in one perspective lower (IE from daily to hourly) than the perspective I am trading. 10-year Treasuries and the Citi equity charts offer solid examples of charts that would go on my watch list.

One final point: In my work, market behavior is much more important to trading than my fundamental opinion. This is particularly at potential trend inflection points in daily, weekly, and monthly perspectives. Don’t get me wrong, I dig it when both my fundamental and technical reads are in sync, but I typically default specific trades to behavior rather than outlook, particularly in the daily and lower perspectives.

The U.S. ten-year Treasury offers a good example of a market that would go on my list. It has described a long uptrend (in yield), there are multiple momentum divergences, the bigger pattern has unfolded in three distinct advances (labeled 1X, 2X & 3X), rates are in a seasonally bullish (rates falling) period. The news/sentiment around rates is almost uniformly bearish.

Note that the market briefly traded above the prior pivot (by 2 basis points) and then traded modestly lower. The small failure generated some selling, but the weakness has not developed the kind of follow-through (for instance a break of the uptrend along the lows of the test) that would convince me the testing process was complete.

Additionally, while I maintain the view that the long-term trend in rates has changed and that over time, they will be generally higher, there are several fundamental relationships that I monitor that may make it possible for rates to fall for several weeks/months before rising next year.

CITI Daily and Weekly:

Citi is also on my watch list. Following a long decline (see weekly) and after absorbing the supply along the downtrend line via a lateral trading range, it has now retreated into a good support zone and is quite oversold. Because of the trading range dynamics, it’s my suspicion is that it will move closer to 32 before producing a tradable spring. However, I am open to the idea that this smaller range may present a terminal spring and will be alert for setups to take advantage if it does so.

And finally, many of the topics and techniques discussed in this post are part of the CMT Associations Chartered Market Technician’s curriculum.

Contributor(s)

Stewart Taylor, CMT

Stewart Taylor is a Vice President, Portfolio Manager and a Senior Fixed Income Trader for the Investment Grade Fixed Income team at Eaton Vance Management in Boston, Massachusetts. He is also co-portfolio manager of the Eaton Vance Short Term Real Return Fund...

High Yield Signal Does Not Align with Long-Term Bearish Outcomes

HIGH YIELD FLIPS CLOUD SCRIPT

The weekly Ichimoku Cloud chart below for the SPDR Bloomberg High Yield Bond ETF (JNK) shows a trend that rolled over in early 2022, formed a base in 2H 2022, and resumed an uptrend in 2023. Ichimoku Clouds look complex, but they are easy to understand. For the purposes of this discussion, the weekly trend is down when the “Bearish Odds Increase” conditions are in play and the weekly trend is up when the “Bullish Odds Increase” conditions are met (key bottom of image).

BULLISH TURN JULY 2023

The look of the JNK chart below checks all the bullish boxes (green > price, price > red, blue > red, price > cloud, and cloud flips from red to green). The weekly close on July 21, 2023, was the first time all the bullish boxes could be checked since November 19, 2021, which speaks to increasing confidence about future economic and market outcomes. The fact that price, green, blue, and red are all above the cloud speaks to the strength of the trend and margin of safety.

RARE BULLISH FLIP

As shown in the chart below, a bullish move that sees price push back above a red cloud has only occurred two previous times in JNK’s history. We will examine the two previous cases to see what we can learn about risk and reward in 2023.

SENTIMENT IMPROVES AFTER GFC

Like many asset classes, high yield bonds were hit hard during the 2008 global financial crisis (GFC). Economic confidence began to improve in 2009, allowing JNK to check all the bullish boxes on September 18, 2009, which is similar to what occurred on July 21, 2023. The fact that price, green, blue, and red are all above the cloud speaks to the strength of the trend and margin of safety.

Since an improving weekly trend in high yield bonds speaks to decreasing concerns about a recession and bond defaults, we would expect risk assets to see improved performance after JNK completes a bearish to bullish flip. The SPDR S&P 500 ETF (SPY) gained 124% between September 18, 2009, and July 17, 2015. There were a significant number of normal and to be expected countertrend moves (give backs & corrections) between points A and B on the chart below, reminding us of the importance of maintaining realistic expectations about how markets operate in the real world.

2016: ECONOMIC FEAR SUBSIDES

Risk assets suffered significant drawdowns between mid-2015 and Q1 2016. Following the 2016 lows, increasing confidence in the credit markets was evident on August 12, 2016, when JNK was able to check all the bullish boxes, indicative of a much-improved weekly trend. The fact that price, green, blue, and red are all above the cloud speaks to the strength of the trend and margin of safety.

When the conviction of buyers is greater than the conviction of sellers in the high yield bond market, it speaks to confidence about future economic outcomes. 2016 was no exception with SPY gaining an additional 35% between August 12, 2016 and January 26, 2018.

QQQ AND XLK AFTER JNK’S TREND FLIPPED

In each of the three cases below, JNK dropped below a red cloud while checking all the bearish boxes and then pushed back above a red cloud and checked all the bullish boxes:

Case 1: September 18, 2009

Case 2: August 12, 2016

Case 3: July 21, 2023

As shown in the table below, in the historical cases that featured significant drawdowns in risk assets followed by a significant recovery in JNK (cases 1 and 2), risk assets performed in a satisfying manner for those who endured normal volatility along the way.

HIGH YIELD REMAINS IN AN UPTREND

The more traditional JNK chart below with the 10, 20, and 40-week moving averages shows confidence in the high yield market remains on firmer footing relative to the vulnerable look in early 2022. If the September 2023 chart morphs into a look similar to early 2022, concerns about the sustainability of the rally would increase. That may happen very soon, but it hasn’t happened yet.

KNOW YOUR TIMEFRAME

The timeframe of this analysis is important. It says little about whether the next 5% move in SPY is up or down. The analysis is helpful for investors with a long-term time horizon (years rather than days, weeks, or months).

SKEPTICISM IS PART OF THE HISTORICAL SCRIPT

While confidence had improved by the time the JNK signals were generated in 2009 and 2016, there was still a very healthy does of skepticism in both cases. In September 2009 market participants had the painful GFC fresh in their minds and not many would have guessed SPY would return 124% over the next 5-6 years. In the 2016 case, investors were dealing with uncertainty related to growth, interest rates, and the November elections, and yet SPY tacked on an additional 35% over the next 1.5 years. Thus, if you are skeptical today, that aligns with the 2009 and 2016 cases.

MORAL OF THE STORY

In JNKs relatively short history, the signal generated on July 21, 2023, has only occurred two previous times, September 18, 2009 and August 12, 2016; in both cases the market’s final low was in place and investors who withstood normal market volatility were rewarded with satisfying returns. In the 2009 case, SPY gained an additional 124% over the next 2,228 calendar days. In the 2016 case, SPY gained an additional 35% over the next 532 calendar days. The returns for XLK and QQQ were constructive as well, simply telling us to keep an open mind about much better than expected outcomes in the next one to five years, which aligns with a recent QQQ signal, demographics, and long-term stock market trends.

Contributor(s)

Chris Ciovacco

Chris Ciovacco is the founder and CEO of Ciovacco Capital Management (CCM), an independent money management firm serving individual investors nationwide. Chris has worked on Wall Street and been studying markets intently for over 23 years. He is a recognized expert in...

Reminiscing the 2023 CMT Asia Roadshow, and what came out of it.

In 2019, the year after I joined CMT Association, Asia became our largest region by test-takers—talk about timing! I had my suitcase practically zipped up to dive headfirst into these exciting markets, but COVID-19 had other plans. Let’s just say, our collective ‘worst-case scenario’ got an upgrade.

We rolled with the punches, moving exams and summits online and building a bustling virtual community on Discord. Still, we all learned no emoji can replace a warm handshake or a heartfelt hug. So, when 2022 let us switch our Zoom backgrounds for actual, physical ones, it felt like the world took its first deep breath in ages.

Cue the grand 50th anniversary of CMT Association, celebrated with as much style as a Wall Street power suit. That’s when JC Parets, CMT, floated his idea he and his team were toying with: why not explore these vibrant Asian markets up close and film it all for posterity? That was music to my ears, as it was just the opportunity I was looking for, to reconnect with our members in Asia in person.

The list of countries evolved based on JC’s vision, resources, and our member presence. We eventually decided to start from Singapore and work our way north, through the financial capitals of Malaysia, Vietnam, Thailand, Philippines, Taiwan, Hong Kong and Tokyo. (Later, we had to cancel our Taiwan visit, but that is another story)

Why Asia?

Embarking on a tour of these seven Asian financial hubs offers an unparalleled opportunity to observe the fascinating diversity in trading behaviors and approaches to technical analysis. From the cutting-edge fintech-driven algorithms in Singapore and Hong Kong to the traditional nuances of Ichimoku charts in Japan, each market serves as a unique laboratory. Malaysia and the Philippines provide invaluable insights into emerging market dynamics, while Thailand and Vietnam offer a window into how markets adapt as they mature. It’s not just about understanding numbers; it’s about capturing the very pulse of regional trading philosophies, thereby enriching your own approach to the financial markets. Call it a grand tour for your portfolio and your mind.

The inimitable legend Jim Rogers was our first meeting of this trip, and he set the theme for our journey. He reminded us to look out for not only what made people different, but what made people the same.

Here’s a whirlwind tour through the histories of financial markets and technical analysis in those countries. Hold onto your seat!

Before we get going – the Discord links for each country room are open to everyone. Please feel free to share them. Everyone who joins our Discord server will need to #register once to prove you are not a robot!

Singapore (Click here for the direct link to the Singapore room on our Discord server)

Singapore is the quintessential Asian financial hub, home to the Singapore Exchange (SGX) which was founded in 1999. Although a relatively young exchange, Singapore has quickly become a global leader in foreign exchange and derivatives trading. Technical analysis is no stranger here, given the heavy trading volumes and international participation. Hedge funds, institutions, and individual traders alike use an array of technical tools to chart their courses.

Able volunteers like Jake Chow, CMT and Isaac Lim, CMT along with Prof Lenz Tan from Singapore Institute of Management, our Academic Partner, hosted a stellar member meeting at the SIM Campus.

Malaysia (Click here for the direct link to the dedicated Malaysia room on our Discord server)

The Kuala Lumpur Stock Exchange, now known as Bursa Malaysia, was established in 1960. It’s known for its diverse array of listings, including the famous palm oil futures. Technical analysis has seen increasing interest, especially in the commodities and equities segments. After all, when trading palm oil futures, it’s not just “a slippery slope.”

Jeff Toh, CMT helped to coordinate a brilliant, packed agenda at the Bursa Malaysia auditorium. In the afternoon before our member meeting, we also had lunch with leaders from the 3 universities in Malaysia that participate in our Academic Partner Program. Taylor’s University, Asia Pacific University and Monash University, Malaysia. After India, Malaysia has the most CMT Academic Partners in Asia.

Vietnam (Click here for the direct link to the dedicated Vietnam room on our Discord server)

Vietnam’s Ho Chi Minh Stock Exchange came to life in 2000, a rather late bloomer. But don’t let its youthfulness deceive you; it’s a market that’s rapidly coming of age. With a growing middle class, retail participation is also on the rise. Technical analysis is in its nascent stage but gaining momentum, particularly among a young, tech-savvy population that does not shy from diving into digital currencies and other frontier investments.

Duc Toan Mai, CMT, was our host extraordinaire at the member meeting held at WeWork in Ho Chi Minh City. It was delightful that Toan, your latest CMT in Vietnam was joined by Khang Diep, CMT, our first. The Vietnamese market poses its unique challenges, particularly with respect to navigating regulatory changes. But these are offset by the incredible potential for the adoption of technical analysis in both retail and institutional sectors. In fact, Steve Strazza, Sean McLaughlin and I unanimously believe that Vietnam has the strongest growth potential among ASEAN economies in the medium to long term.

Thailand (Click here for the direct link to the dedicated Thailand room on our Discord server)

[imageR] The Stock Exchange of Thailand (SET) has been around since 1975 and has evolved into a regional investment hub. Technical analysis is no stranger to this market, as numerous local seminars and trading courses would attest. An old adage says, “In Bangkok’s traffic and markets, always watch for signals!” — and this couldn’t be more true.

Pongpat Khamchoo, CMT, hosted a delightful lunch for Bangkok CMTs. He then spoke at our member meeting in the Bloomberg Bangkok office event where attendees were treated to a sneak peek into emerging quantitative tools [imageL] making their way into mainstream analysis. We also heard from Li Zhao, CMT, who provided keen insights into the integration of technical and fundamental analysis in the Thai market.

[imageR] That evening, it was a pleasant surprise to be with young Mukmirin Sirinwan as she got the mail informing her that he had passed her Level 1 exam!

The Thai financial landscape also presents a blend of opportunities and challenges. Regulatory frameworks are ever evolving, but the culture of education and openness to new trading philosophies marks Thailand as a fertile ground for the growth of technical analysis.

A visit to the brilliant Rajadamnern Muay Thai Stadium also left a mark! #notapunnyquote

Philippines (Click here for the direct link to the dedicated Philippines room on our Discord server)

The Philippine Stock Exchange (PSE) has roots going back to 1927. Despite being periodically disrupted by political turmoil, the market has shown resilience. Technical analysis is growing in use, particularly among independent retail traders trying to maneuver through the market’s frequent volatility.

The inimitable Nikki Yu, CMT, ensured a packed agenda for the entire day we got in the Philippines, and worked with Col Financial to host our member meeting as well. The next day we were also invited to visit the Philippine Stock Exchange, and I am looking forward to a strong partnership with them going forward.

Hong Kong (Click here for the direct link to the dedicated Hong Kong room on our Discord server)

The Hong Kong Stock Exchange (HKEX) is a venerable institution dating back to 1891. Given Hong Kong’s status as a global financial center, technical analysis has been deeply ingrained in trading strategies for decades. If markets had Michelin stars, HKEX would be a three-star destination for technical analysts.

Ananda Bhaumik, CMT and Andy Chen, CMT went all out to ensure a packed house at the prestigious Eaton Club right next to the Bank of China. Ananda and I also visited CFA Institute’s Asia headquarters in HK where Scott Lee, CFA and Nick Pollard, CFA were delighted to hear of the progress we have been making.

I also met with the delightful Joanne Murphy, then outgoing APAC Head of CAIA, who also appreciates the natural synergy of the discipline of technical analysis in the space of alternative investments.

Japan (Click here for the direct link to the dedicated Japan room on our Discord server)

Finally, the Tokyo Stock Exchange (TSE), founded in 1878, is the granddaddy of Asian financial markets. Japan has its own traditional form of technical analysis called “Ichimoku Kinko Hyo,” which could be loosely translated to “one look equilibrium chart.” It’s almost poetic, isn’t it?

Akira Homma, CMT ensured that the attendees of our chapter meeting were a mix of candidates, members as well as key industry participants as well as senior leaders of other top global credentialing organizations like CFA and CAIA. This has laid the foundation for a deeper ongoing relationship with these fine organisations.

There you have it—a quick round-the-world ticket through the history of financial markets and technical analysis in these fascinating Asian countries.

Conclusion? – No… a beginning!

This trip opened my eyes to the gargantuan opportunity we have before us to make a difference to the industry through the advocacy of technical analysis the CMT way.

Regulators and Exchanges in all these countries are keen to engage in meaningful ways. Employers in each of these countries too were open minded to understanding why their learning and development practices should include technical analysis for all front office roles. Academic institutions everywhere are looking for support in including technical analysis in their curriculum. The media needs the right voices speaking out loud. Fellow organisations committed to raising the standard of practice in the financial services industry have a responsibility to work together, and dual charter-holding CMTs can be strong engines of change in this effort.

My big takeaway from this trip is that members of the CMT community can make a difference not matter what the age of their markets, or even their careers is.

Each of us can start wherever we are, and the sky is the limit.

Contributor(s)

Joel Pannikot

Joel Pannikot (pronounced as Punny-Quote) is the Managing Director of Chartered Market Technician Private Limited and serves as the Head of the Asia-Pacific region for the CMT Association. In this role, he is committed to advancing the field of technical analysis through...