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JOURNAL OF
TECHNICAL ANALYSIS

Issue 70, Spring 2020
Issue 70, Spring 2020

Editorial Board

Eric Grasinger, CFA, CMT

Managing Director, Portfolio Manager, Glenmade

Bruce Greig CFA, CMT, CIPM, CAIA

Director of Research, Q3 Asset Management

Jerome Hartl, CMT

Vice President, Investments, Wedbush Securities

Ryan Hysmith DBA, CMT

Assistant Professor of Finance, Freed-Hardeman University

Cynthia A. Kase, CMT, MFTA

President, Kase & Co. Inc.

Sergio Santamaria, CMT, CFA

University of Arkansas

Paul Wankmueller

Senior Global Futures & Options Market Analyst, Intercontinental Exchange
CMT Association, Inc. 25 Broadway, Suite 10-036, New York, New York 10004
www.cmtassociation.org Published by Chartered Market Technician Association, LLC ISSN 2378-7295 (Print) ISSN 2378-7341 (Online)

The Journal of Technical Analysis is published by the Chartered Market Technicians Association, LLC, 25 Broadway, Suite 10-036, New York, NY 10004.New York, NY 10006. Its purpose is to promote the investigation and analysis of the price and volume activities of the world’s financial markets. The Journal of Technical Analysis is distributed to individuals (both academic and practicitioner) and libraries in the United States, Canada, and several other countries in Europe and Asia. Journal of Technical Analysis is copyrighted by the CMT Association and registered with the Library of Congress. All rights are reserved.

Table of Contents

JOTA Issue 70, Spring 2020

Letter from the Editor

by Sergio Santamaria, CMT, CFA
Sergio Santamaria, CMT, CFA

As the new chair of the Editorial Committee, it is an immense pleasure to present the 70th issue of the Journal of Technical Analysis (JOTA). Continuing the exceptional work accomplished by prior editorial teams, the new JOTA  editorial  board  will focus on producing a journal that advances the knowledge and understanding of the practice of technical analysis through the publication of well-crafted, high-quality papers in all areas of technical analysis and behavioral finance. While former MTA members were the natural audience when the journal was released in 1978, nowadays the readership reaches far beyond the CMT Association and includes both practitioners and academics worldwide. This special edition contains the four most recent Charles H. Dow Award winning papers. First, Charles Bilello and Michael A. Gayed, previous winners in 2014 with “An Intermarket Approach to Beta Rotation: The Strategy, Signal and Power of Utilities,” discuss how a low volatility equity market environment

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Leverage for the Long Run

A Systematic Approach to Managing Risk and Magnifying Returns in Stocks

by Charlie Bilello, CMT and Michael Gayed, CFA
Charlie Bilello, CMT
About the Author | Charlie Bilello, CMT

Charlie Bilello, who holds the Chartered Market Technician (CMT) designation, is the Director of Research at Pension Partners, LLC, where he is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors, an institutional investment research firm. Previously, Charlie held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms, giving him unique insights into portfolio construction and asset allocation.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. In addition to his CMT designation, Charlie also holds the Certified Public Accountant (CPA) certificate.

Michael Gayed, CFA
About the Author | Michael Gayed, CFA

Michael A. Gayed is Portfolio Manager at Toroso Investments, an investment management company specializing in ETF focused research, investment strategies and services designed for financial advisors, RIAs, family offices and investment managers.

Prior to Toroso Investments, Michael was the Co-Portfolio Manager and Chief Investment Strategist at Pension Partners, LLC, an investment advisor managing mutual funds and separate accounts.

He is the co-author of four award-winning research papers on market anomalies and investing. Michael is an active contributor to MarketWatch and has been interviewed on CNBC, Bloomberg, and Fox Business, as well as the Wall Street Journal Live for his unique approach to interpreting market movements. His analysis has also been featured by Marc Faber of the Gloom, Boom and Doom Report.

Michael earned his Bachelor of Science degree with a double major in Finance & Management at NYU Stern School of Business.  Michael became a CFA Charterholder in 2008 and is a two-time winner of the Charles H. Dow Award (2014, 2016).

Abstract  Using leverage to magnify performance is an idea that has enticed investors and traders throughout history. The critical question of when to employ leverage and when to reduce risk, though, is not often addressed. We establish that volatility is the enemy of leverage and that streaks in performance tend to be beneficial to using margin. The conditions under which higher returns would be achieved from using leverage, then, are low volatility environments that are more likely to experience consecutive positive returns. We find that Moving Averages are an effective way to identify such environments in a systematic fashion. When the broad U.S. equity market is above its Moving Average, stocks tend to exhibit lower than average volatility going forward, higher daily average performance, and longer streaks of positive returns. When below its Moving Average, the opposite tends to be true, as volatility tends to rise, average daily returns are lower,

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Finding Consistent Trends with Strong Momentum

RSI for Trend-Following and Momentum Strategies

by Arthur Hill, CMT
Arthur Hill, CMT
About the Author | Arthur Hill, CMT

Arthur Hill, who holds the Chartered Market Technician (CMT) designation, is the Chief Technical Strategist at Trend Investor Pro. He takes a quantitative approach to trading using rule-based strategies that are tested in different market environments.

Arthur has written a book defining his process, Define the Trend and Trade the Trend. This book shows beginner and intermediate level chartists how to determine trend direction and find low-risk entry points within that trend. He has been featured in Stocks & Commodities Magazine, the CMT Association Webcasts, the Benzinga Premarket Prep and the Financial Sense News Hour, and been quoted in other financial publications.

Arthur received a B.S. in Political Science and Russian Studies from the University of Houston, and an MBA (Finance) from City University Business School in London. He is an active member of the CMT Association. When not immersed in the markets, he enjoys family outings, tennis and scuba diving.

Abstract Investors and traders typically use the Relative Strength Index (RSI) to identify turning points in security prices. This strategy, however, discounts the true nature of the indicator and limits its potential. An RSI breakdown reveals that its power lies in its ability to identify consistent uptrends with strong momentum. Some practitioners use RSI ranges to identify existing trends and RSI extremes to signal momentum shifts. These approaches, however, do not quantify how long RSI should hold its range, how regularly RSI should reach a momentum milestone and, most importantly, if RSI range and momentum indications have predictive value. The goal of this paper is to systematically test RSI range and momentum signals using stocks in the S&P 500. Moreover, this paper will show that the RSI range alone is inadequate because it does not always capture upside momentum. The RSI range measures trend consistency well, but a momentum component is needed

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Forecasting a Volatility Tsunami

by Andrew Thrasher, CMT
Andrew Thrasher, CMT
About the Author | Andrew Thrasher, CMT

Andrew Thrasher, CMT is a Portfolio Manager with Financial Enhancement Group, LLC, a wealth management firm in Indianapolis, Indiana that works with high net-worth families and corporate pension plans. Mr. Thrasher manages one tactical strategy, co-manages five asset allocations strategies, and one alternative strategy.  Mr. Thrasher is also the founder of Thrasher Analytics, LLC, an independent research company that focuses on volatility timing and technical analysis of the financial markets. 

His analysis has been referenced in pieces written for CNBC, MarketWatch, Bloomberg, Fox Business, ValueWalk, Yahoo! Finance, and U.S. News. Andrew is also a featured contributor to Investing.com, See It Market, and Yahoo! Finance.

Andrew was the 2017 Charles H. Dow Award winner for his research paper, Forecasting a Volatility Tsunami. He holds a Series 65 securities license. He has a bachelor’s degree in Financial Counseling and Planning from Purdue University and resides in the Indianapolis area along with his wife, Abby, and their dog, Brooke.

Abstract The empirical aim of this paper is motivated by the anecdotal belief among the professional and non-professional investment community that a “low” reading in the CBOE Volatility Index (VIX) or large decline alone are ample reasons to believe that volatility will spike in the near future. While the Volatility Index can be a useful tool for investors and traders, it is often misinterpreted and poorly used. This paper will demonstrate that the dispersion of the Volatility Index acts as a better predictor of its future VIX spikes. Introduction According to the United Kingdom’s National Oceanography Centre, tsunami waves can be as much as 125 miles in length and have resulted in some of the deadliest natural disasters in history. Fortunately, scientists have discovered warning signs of these massive waves, which are believed to be caused by shifts in the earth’s tectonic plates. One of the visible signs of a forthcoming tsunami is the

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The Virtual Crowd

Measuring the Depth of Investor Sentiment with Normalized Relative Volume

by Jason Meshnick, CMT
Jason Meshnick, CMT
About the Author | Jason Meshnick, CMT

Jason Meshnick, CMT, is the Director of Product Management at Markit Digital, a division of IHS Markit. There, he creates well-known market analytics including the CNN Business Fear & Greed Index. His past career included work as a principal trader, market maker, and hedger. He was once an active participant in Sports Car Club of America racing but spends more time these days on two wheels, racing bicycles in his hometown of Boulder, Colorado.

Abstract Before Facebook, Twitter, and Snapchat, there was the New York Stock Exchange. The 20th Century NYSE trading floor was one of the world’s most important early social networks. Social networks and social media-based investing have become commonplace today. Many investment strategies even seek to use investor sentiment from these platforms to determine the future direction of a security’s price. While a generation of investors thinks that this is new, investors have been actively managing money using market sentiment for decades. This paper introduces a unique and innovative indicator that measures the depth of sentiment of today’s virtual crowd of traders and investors for a security using readily available trading volume. It is called Normalized Relative Volume (NRV) and will help active managers generate alpha through security selection and portfolio weighting. The 20th Century NYSE floor was structured as an auction market that brought buyers and sellers together to determine the fair

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Making the Most of Panic

Exploring The Value Of Combining Price & Supply/Demand Indicators

by Christopher Diodato, CMT, CFA | 2019 Charles H. Dow Award Winner
Christopher Diodato, CMT, CFA | 2019 Charles H. Dow Award Winner
About the Author | Christopher Diodato, CMT, CFA | 2019 Charles H. Dow Award Winner

Chris Diodato became a student of technical analysis at a young age, enrolling in the CMT program during his freshman year of college. Since then, he attained his CMT and CFA charters and worked in various research and portfolio management roles. Currently, Chris is the Senior Portfolio Manager at Cantilever Wealth Management in Pittsburgh, PA where he leads the development and implementation of cutting-edge investment offerings. He maintains a holistic investment philosophy, incorporating technical, fundamental, and quantitative methods in his work and is always hungry to learn more about financial markets. He is especially appreciative of his mentors, family, and friends who have supported him on his journey to become a financial professional.

Since the dawn of investing, practitioners understood the value of contrarianism. All too often, emotions, not fundamentals, become the driving force in stock and cause dislocations. Extremes in sentiment – whether that be excessive optimism or pessimism – have been associated with market dislocations such as the housing bubble, Bitcoin’s behavior in 2017, and the stock market crash of 1987 (known as Black Monday). For those willing to buck the herded animal spirits associated with investors’ mentality during extreme events, there are profits, and often very large profits, to be had. Technical analysts, many of whom are contrarian by nature, understand this and have endeavored to identify periods of panic and capitulation in an effort to buy securities at deeply discounted prices. In the Far East, candlestick charting tried to identify panic over three-hundred years ago. In the early 1900s, Richard Wyckoff had helped coin the phrase “selling climax” while

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Ranked Asset Allocation Model

by Gioele Giordano, CSTA, CFTe | 2018 Charles H. Dow Award Winner
Gioele Giordano, CSTA, CFTe | 2018 Charles H. Dow Award Winner
About the Author | Gioele Giordano, CSTA, CFTe | 2018 Charles H. Dow Award Winner

Gioele Giordano is a student at the University of Modena and Reggio Emilia at the Department of Economics Marco Biagi. Gioele served as Financial Analyst for Market Risk Management s.r.l (MRM), a leading firm in independent financial advisory for institutional and private clients, based in Milan. As an analyst, he wrote reports on the main asset classes and developed quantitative investment models. Gioele holds the Certified Financial Technician (CFTe) designation, he is a member of the Italian Society of Technical Analysis (SIAT), and at 21 he won the SIAT Technical Analyst Award (2016). Gioele is the 2018 Charles H. Dow Award winner for his paper, “Ranked Asset Allocation Models.” 

Abstract Passive management over the last years has attracted greater attention than active management. Bloomberg reports that, only in the first half of 2017, flows out of active into passive funds reached nearly $500 billion compared to almost $300 billion in 2016. This migration, encouraged by the spread of ETFs, concerns not only retail investors but also institutions and financial advisers. This paper aims to demonstrate how the allocation of a portfolio designed for passive management can represent the foundation of an actively managed portfolio through a non-discretionary quantitative strategy that can outperform the market. ETFs can be seen as one of the most successful financial innovations in the last decades: they have allowed investors to diversify their investments in more affordable ways.1 Once the asset classes and ETFs have been selected, the investor has to choose between active or passive portfolio management. Some academics argue that investors should adopt passive management

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Quantamentals

Combining Technical and Fundamental Analysis in a Quantitative Framework for Better Investment Results

by Christopher Cain, CMT and Laurence Connors
Christopher Cain, CMT
About the Author | Christopher Cain, CMT

Christopher Cain, CMT, is the U.S. Quantitative Equity Strategist for Bloomberg Intelligence, a division of Bloomberg LP, and is based in New York, NY. Christopher provides analysis and tactical strategy on equity factor investing and other quantitative, model-driven equity market topics.

He is the 2020 Charles H. Dow Award-Winning author of “Quantamentals – Combining Technical and Fundamental Analysis in a Quantitative Framework for Better Investment Results”.

Prior to joining Bloomberg, he was a quantitative analyst focused on building alpha generating trading strategies for institutional investors. He is also a former fixed income market maker, managing a 500MM trading book consisting of cash rates products (US Treasuries, US Agencies and SSA Bonds) and US Interest Rate derivatives.

Christopher is passionate about systematic/quantitative investing, equity factor modeling, trading system design and testing, Python programming and behavioral finance. He holds a bachelor’s of science degree in Finance from The Pennsylvania State University and holds the Chartered Market Technician designation.

Laurence Connors
About the Author | Laurence Connors

Laurence Connors is Chairman of The Connors Group (TCG), and the principal executive officer of Connors Research LLC. TCG is a financial markets information company that publishes daily commentary and insight concerning the financial markets and has twice received an award by the Entrex Private Company Index for being one of the 10 fastest growing private companies.

He has over 30 years of experience working in the financial markets industry. He started his career in 1982 at Merrill Lynch as an Investment Advisor, and later moved on to become a Vice President with Donaldson, Lufkin, Jenrette (DLJ), where he worked with the Investment Services Group from October 1990 to March 1994.

Mr. Connors is widely regarded as one of the leading educators in the financial markets industry. He has authored over 20 books on market strategies and volatility trading, including Short-Term Trading Strategies That Work, and Street Smarts (with Linda Raschke). Street Smarts was selected by Technical Analysis of Stocks and Commodities magazine as one of “The Classics” for trading books written in the 20th century.  His most recent book The Alpha Formula: Beat the Market with Significantly Less Risk (with Chris Cain, CMT) is now available.

Mr. Connors has been featured and quoted in the Wall Street Journal, New York Times, Barron’s, Bloomberg TV & Radio, Bloomberg Magazine, Dow Jones Newswire, Yahoo Finance, E-Trade Financial Daily, Technical Analysis of Stocks and Commodities, and many others. Mr. Connors has also been a featured speaker at a number of major investment conferences over the past two decades.

Abstract Fundamental and Technical analysis are often thought of as separate, competing ideologies. We regard this world view as short-sighted. Our research shows that combining fundamental and technical analysis in a quantitative, rules-based framework leads to greatly improved performance. Furthermore, combining known factors whether of the fundamental or technical variety offers significant benefits and leads to market-beating performance over the last 16+ years. Introduction Factor investing has taken the investment management industry by storm. In this paper, we show that traditional factor investing can be greatly enhanced by combining factors in an intelligent way. More specifically, combining fundamental factors with technical factors leads to large increases in performance. These different disciplines, fundamental and technical analysis, have rarely been combined throughout history. Fundamental investors often view technical analysis with a large degree of skepticism. Technicians are often of the opinion that “price is the only thing that pays.” Technicians believe that making investment decisions based

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