Hello Readers and welcome to a brand-new Issue of Technical Insights in a brand-new year!
As 2021 begins, renewed hopes and aspirations engulf the world that slowly moves towards normalcy after it was exposed to the systematic risk of an unprecedented kind. So what is it that is giving people hope?
Is it the phenomenal Bull market rally that has been witnessed? Is it the news of vaccination hitting the shelves? Or is it just the change from ‘0’ to ‘1’ in the digits of the year? Whatever it may be, hope is a powerful catalyst. It compels us to believe and work towards a better tomorrow irrespective of what the present scenario is.
As an analyst, I hope that I never take the market for granted. I hope to remain humble in my approach towards my charts and listen to what they have to say. I hope to understand the emotions that govern the chart and hence the price.
As the market continues its gravity-defying move, varied perspectives and valuable insights have been collated to analyse this meteoric rise. Gautam Shah has highlighted how one could read indicators at current levels and how the approach must be tweaked according to market conditions. Kush Ghodasara has used simple concepts of Technical Analysis to arrive at long-term investment ideas. Wishing you a joyful and profitable New Year.
Until next time, think Technical!
The RSI Study & 2020by Gautam Shah, CMT, CFTe, MSTA
The Technical Analyst community loves the RSI and swears by it (including yours truly). A lot of times...
Invest and don't Trade in this Company!by Kush Ghodasara, CMT, CFP
Indian social media has been buzzing with stock market memes for the last 8 months since the market has been the sole bright spot in 2020. But one thing hasn’t changed – the narrative around...
Behind the scenes: CMT India's Unsung heroes plus a brand-new communication and networking platformby Joel Pannikot
A significant part of my work at the CMT Association is geared towards its strategic objectives. This gives me the opportunity to work shoulder to shoulder with volunteer leaders from the CMT India...
System Review: TradeTronby Vishal Mehta, CMT
SEBI allowed algorithmic trading only in 2008, but now algorithm controls nearly a third of all trades in Indian exchanges. This shows power & adoption of algorithmic trading in India. Early days...
The Year That Was: Approach Indian Equities This Way Going Aheadby Milan Vaishnav, CMT, MSTA
The year 2020 has seen a roller coaster ride for the equities, as an asset class. This has been a global phenomenon as the global markets saw a sharp meltdown in the first quarter of the calendar...
The Technical Analyst community loves the RSI and swears by it (including yours truly). A lot of times the results from this one study is a collective takeaway of multiple other technical tools. This has made it the “go-to” indicator for a lot of technicians worldwide. However, there are times when the indicator is forced to adjust to the happenings at the market place, which these days and particularly in 2020 are more and more historic and out-of-the-box. Hence, do not get fooled by the RSI in believing in a market top or a bottom in the traditional sense. We say this in the context of the downtrend seen early this year and the massive uptrend seen thereafter.
Notice how the RSI study was forced to adjust to the vertical moves both on the way up and way down this year. The market had either just made lower lows (Mar ’20) or higher highs (recently) and therefore the breathing space has been limited. In this environment the RSI had generated divergences very early on and if one went by the same a lot of the opportunities would have been missed. Refer to Chart 1, where the daily RSI of the Nifty saw multiple hits at the overbought line leading to negative divergence. This played out in the period of Aug-Oct ’20. However, in Nov ’20 the entire divergence set-up got negated as it registered a new multi-month high. The point being made here is, in very strong uptrends (with shallow corrections) one should ignore the divergence that develops at “par levels”. One should be prepared to see historic readings before trying to hunt for a possible top. Notice the reading of 81 on the daily 14-RSI recently, which was also a 3-year high. By following this rule, one would have been able to ride the run-up without bothering much about the indicator.
The exact same thing was seen in Mar ’20 as the RSI gave early indications of bottoming out but the indices kept falling. It was only after a historic reading of 13 that was seen in late March ’20 did the markets actually attempt to bottom out.
The same concept could have been used in the year 2007 where a similar massive bull run was seen. It was also seen in the 2003 rally where the Nifty had doubled in a period of 10 months. Charts attached. In all other periods, the traditional textbook approach worked well.
To conclude, while the RSI is a wonderful technical tool to comprehend trends, it is important to understand the “pitch” or the prevailing market behaviour before we use the traditional methods of analysis. Extreme market behaviour (which are only going to be more common going forward) require new age filtering techniques to help ride trends. What we ignore on the studies is now more important than what we see.
Indian social media has been buzzing with stock market memes for the last 8 months since the market has been the sole bright spot in 2020. But one thing hasn’t changed – the narrative around one of the oldest companies in the market, owing to a relatively subdued performance. Yes, you have guessed it right, it’s ITC and for me ITC stands for “Invest and dont Trade in this Company (ITC).”
For many months the negative outlook towards ITC has remained constant stating that it is a laggard and is unable to sustain above 210. By now, investors have lost patience in the stock. But I would like to reiterate that it’s the right time to trust this stock.
I have taken into consideration the monthly chart of ITC because this stock has always been a good asset as an investment and we have a good amount of price history to anaylse.
Following are the points which are attracting my attention to invest at this level.
- Long term support line: If we stretch a support line from 2004 lows to the recent lows then we will notice ( green arrows) that the line has been validated by price as a support on more than 9 occasions in 16 years. The last three lows on the same support line makes it a good candidate for an entry at current levels.
- RSI channel: General practitioner avoids drawing support lines on indicators but i have noticed that breakout on indicators are much stronger signs. We can see here that RSI has broken out from a 3-year downside channel, alluding to a buy signal.
- MACD: While a lagging indicator, MACD generates accurate signals and is about to give a bullish crossover confirmation. Though it is early to say, factors support the crossover.
- Double bottom pattern: One of the most trusted reversal patterns, a double bottom has recently taken shape on the charts exactly at the 16-year support line.
- Bottoms: 158
- Neckline: 210
- Difference: 52
Target based on double bottom is adding the difference to the neckline of the pattern, i.e., 210+52= 262.
For short term investors, 262 is the target based on the double bottom pattern. But for long-term investors this is just the beginning. I believe for a long term investment we should consider at least 6-years of historical data; which is why I have considered 72 months SMA (Red line ) for analysis and found out that it has worked well for investment purposes. Currently, the stock is trading below the moving average which by strict rules we should avoid. But considering the above short term signs of reversal, an investor can buy 50% at current levels and add on at 245 which is a nitrogen booster level because it will give a breakout over the 3-year resistance line and simultaneously over the 72 months SMA.
In conclusion, a long term investor could consider buying the stock at current levels with a Stop Loss of 160 while a medium term investor could buy the stock for a target of 258 with a SL of 186.*
As can be seen from the above analysis, these are all concepts that we’ve in the CMT curriculum. The level of application of these concepts is limited only by your own imagination!
I just wish we get good memes of ITC in 2021 😉 !
*The analysis above is for educational purpose only and does not constitute a trade recommendation.
A significant part of my work at the CMT Association is geared towards its strategic objectives. This gives me the opportunity to work shoulder to shoulder with volunteer leaders from the CMT India community. These wonderful individuals go above and beyond, giving their time, expertise and enthusiasm to enable the growth of the association in India. Going forward, I wish to use my corner of Technical Insights to recognise these hitherto unsung heroes. My hope is that they serve as role models in the community, inspiring other CMT charter holders, candidates and market professionals in general to become leaders in thought and action, helping to elevate the dialogue around technical analysis in the Indian Financial Services Industry.
Since this is the first of the series, I will start with 3 such heroes. This is not to take away from the other volunteer leaders who also continue to play their part in the growth of CMT India’s footprint. Future columns will feature one stellar contributor each month.
Milan Vaishnav, CMT, MSTA
Milan is a member of the volunteer team focused on engaging with regulators. He has also been the most prolific contributor to Technical Insights. What is striking about him, however, is not only his ability to create insightful technical analysis content, but his selfless willingness to step aside and share the limelight with his fellow members of the association.
Through his diligent volunteering efforts over the past couple of years, Milan has emerged as a natural leader, and a go-to career mentor for candidates and young charter holders.
Rashmi Shastry, CMT
That you are reading this newsletter means you have been impacted by Rashmi’s work. Rashmi, a member of the team working on our Media efforts, has distinguished herself as the editor of Technical Insights. She was a motive force behind its launch, and has helped the publication find its voice. Every month she makes sure that the content for the newsletter is curated, proof-read, and published on time. This work takes discipline, rigor, and eye for detail, and above all, a desire to make a meaningful contribution to technical analysts, and the financial services industry at large.
Rashmi’s work as a volunteer has received appreciation from the global CMT community. She has now joined All Star Charts as a Technical Analyst. I am confident this young lady will go a long way.
Mohit Handa, CMT
While each of the 3 heroes featured here have made significant contributions, Mohit takes being unsung to a whole new level. Always shying away from the limelight, Mohit has gone above and beyond in his contributions to CMT India’s growth efforts. If you participated in the 2020 India Virtual Summit, or views the recordings of the sessions in our video archives, you will see Mohit’s impact. All the graphics across social media, the video introductions, and all other interfaces were crafted and customised by him. In the run-up to the Summit, Mohit spent hours each night, after his normal workday helping make the Summit look better. After the Summit, Mohit continued to be a driver of development for the association. He has been responsible for crafting the Discord server for CMT India. More about the Discord Server below!
Mohit’s diligent work at the Summit was praised by Mark Galasiewski of Elliott Wave International, and the two of them struck off a cordial friendship. The global CMT team also finds his innovative use of Discord for the CMT Association very useful, and is keen to see its adoption in India. If it achieves the desired traction, it could provide a global platform for member networking.
Other recent highlights from CMT India:
- December 2020 Internship Challenge: The volunteer team focusing on Academia along with what we fondly call the SWAT team, executed our first Internship Challenge. This competition across schools in our Academic Partner Program saw 200+ students participate to win one of 5 coveted internship positions with the CMT Association in India this summer. See the winners of the challenge on social media. The Challenge was chaired by Rohit Mandhotra, CMT.
- Trading Challenge: the Academia, Membership and SWAT teams will also be executing a technical analysis based trading challenge in January and February. CMT Program Candidates and Academic Partner Program students will be able to participate. It promises to be an exciting event. This challenge will be chaired by Anuraag Saboo, CMT.
- Broker Dealer training program: The volunteer leader team working with Employers executed a series of training sessions for over 300+ employees of a leading domestic sell-side firm with a strong institutional and retail presence. The training sessions were hosted by Anindya Banerjee, CMT and Prasenjit Biswas, CMT. The first of 5 session was conducted by Akshay Chinchalkar, CMT and the rest were done by Vishal Mehta, CMT
Other than the currently impossible in-person events, networking is usually a patchwork of whatsapp groups. These as usually unstructured spaces where communication happens at random, and all members’ phone numbers are exposed. Further, whatsapp allows a group size of only 256, and the active CMT India community is already twice this size. Discord addresses these problems, and further provides a host of benefits. It also gives us the opportunity to created structured spaces like job boards, candidate study networks, student challenge sections and more. The volunteer leader team working with Membership, led by Mohit, is in charge of this effort.
I am super excited about the contributions of these unsung heroes, and the potential these and other members hold for the growth of the Association.
Here’s to a great 2021!
SEBI allowed algorithmic trading only in 2008, but now algorithm controls nearly a third of all trades in Indian exchanges. This shows power & adoption of algorithmic trading in India. Early days of algorithmic trading was mainly dominated by Institutional players like Buy Side traders and Sell Side Brokers and Prop trading desk. Most of the algos were geared towards Cash and Carry Arbitrage, Delta Neutral Strategies, Cash arbitrage and most of this were co located in NSE premises.
Retail Algo Trading: India is well known for our knowledge base and software developers globally., we have seen Zerodha, Fyers etc setup their discount broking in Bangalore which also known as mini–Silicon Valley. With discount brokers coming in place and keeping trading cost very low meant there could opportunity for retail traders to benefit from this ever-expanding algorithmic eco system.
ECOSYSTEM FOR ALGO TRADERS
Let us think in terms of who contributes to the algo ecosystem:
1) Brokers: Online brokers starting from Zerodha, Fyers, Mastertrust,etc. have provided their api to their clients.
2) Strategy Developers/traders: Strategy Developers or traders would build their trading system on programming language like java, VBA, python etc
3) Investors: Traders are always hunting for new strategies and park their money and generate Alpha for their money.
Tradetron: Algo but No Algo
Tradetron is algo trading platform geared towards retail algo trading community. The product has now built an entire ecosystem for algo traders. Starting with Paper trading account to have 15 Indian brokers, 2 International brokers, 9 Forex brokers. Connecting to NSE, MCX & NASDA it is built on Open architecture and hence can connect to any brokers with their REST API.
As strategy developer the best part is that we don’t need to learn complicated coding languages. That is TradeTron’s USP. You can fire Options orders on technical parameters like RSI, Bollinger Bands etc. Once you have robust strategies you can put them up in the marketplace for traders to subscribe to.
For traders looking for new ideas and new strategies tradetron marketplace helps you to do exactly the same. It helps you find strategies based on criteria like exchanges, instruments, style of algo and capital required. You can subscribe to the strategies and paper trade for a while before you go live. This also helps you build confidence in the strategy. You can play around with leverage so if you are comfortable with risk then you can increase or decrease leverage with the click of a button and provide module to discuss with strategy developers.
TYPES OF EXECUTION
You can execute transactions in a paper trading account (virtual trading),
One click Trade where you will be notified by phone or email to execute the trade by logging in website or fully automated.
What can Tradetron not do?
Tradetron is algo trading execution portal but that does not mean it need not be supervised. After putting on live deployment you want to keep track if all the execution are happening mainly because it has many dependencies like data vendors, broker API, clients own margin and system itself etc.
“Give a man a fish and you feed him for a day. Teach him to fish and you feed him for life” seems to be TradeTron’s motto. TradeTron’s team imparts continuous education every Friday. There is one new strategy discussed and how you can do it yourself.
The Year That Was: Approach Indian Equities This Way Going Ahead
The year 2020 has seen a roller coaster ride for the equities, as an asset class. This has been a global phenomenon as the global markets saw a sharp meltdown in the first quarter of the calendar year and saw an equally phenomenal pullback over the recent months. It was in the same year, i.e., 2020 that the NIFTY saw its low point below 7511, fall of over 4919 points from the high of 12430 in a span of just two months. On the other hand, the past few months have seen the NIFTY rising over 6489 points from that low point of 7511. This speaks volumes of the kind of moves and volatility that we have witnessed in 2020.
There is no disputing to the fact that the equity markets, in general, are stepping into 2021 with yet another risk-on setup firmly in place.
The monthly charts tell this story in a much better way. There has been a strong breakout following the up move witnessed in December. One can gauge the buoyancy of the undercurrent from the fact that NIFTY has ended with gains in seven out of previous eight months. The month that saw a negative ending was just that of 139 points. Following the recent strong move over the previous month, the NIFTY has dragged its supports much higher to 12800 levels. In the event of the markets slipping into any kind of consolidation, the zone of 12800-12850 should pose itself as an important support zone.
Apart from the expectations of macroeconomic recovery, the weakness in the Dollar has been the primary reason of massive FII inflows that are seen in the emerging markets in general and India in particular. The Dollar Index (DXY) is presently at its multi-quarter low. In fact, much of the answer to the risk-on setup lines in the following chart.
The above Relative Rotation Graph (RRG) compares different asset classes against VBINX – Vanguard Balanced Index Fund. As on 23rd October 2020, the equities, represented by ITOT (iShares Core S&P Total US Stock Market ETF) ended entered the weakening quadrant. This would have meant end of strong relative performance of equities as an asset class. On the other hand, the safer assets like Treasuries, High Yield Bond and Dollar had entered the improving quadrant.
However, in just a short span of time, this picture has completely reversed as under:
By the time, the year 2020 drew to a close, the equities, represented by ITOT has strongly rotated and rolled back inside the leading quadrant. On the other hand, all other safer assets like the Dollar Index, US Treasury Bond, Investment Grade Corp Bonds, etc. have taken a plunge while giving up its relative momentum midway and have moved inside the lagging quadrant. The above picture has just got stronger in the favor of equities at present date.
Going ahead from here, picking right stocks will be the key. To lend a go risk-reward ratio to your portfolio, Investors will need to focus on two types of stocks. Good quality stocks which have relatively underperformed the broader markets over the past quarter, and defensive stocks. The good quality and liquid midcap stocks, the stocks which have relatively underperformed over the past quarter and defensive pockets like FMCG, Consumption, Pharma and IT stocks are showing strong relative strength and are expected to relatively outperform the broader markets.
The above chart positions the Indian markets vis-à-vis the global peers when benchmarked against MSCI World Index.
The Indian markets, circled in blue, lies comfortably inside the leading quadrant although it appears to be somewhat paring its relative momentum. The ones circled in black are the other Asian markets, among which, the Hang Seng appears to be particularly weak. Shanghai Composite index is also rotating in the south-west direction along with S&P5oo index. This indicates that the Indian markets are set to relatively outperform the US, Chinese and the Hong Kong markets given the present setup, at least in the near-term.
New Educational Content This Month
June 29, 2022
The Institutional Use of Technical Strategies
Presenter(s): Brennan Basnicki, CFA, CMT
June 15, 2022
How You Can Benefit from Little Known Seasonal and Cyclical Patterns
Presenter(s): Dimitri Speck
May 11, 2022
Clearing Away the Clutter
Presenter(s): Greg Schnell, CMT, MFTA