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Technical Insights – November 2020

Hello Readers!  

Wishing all of you a prosperous and healthy Diwali in advance. May this festival light up your lives, both personally and professionally! 

The recently concluded CMT 2020 India Virtual Summit was a great successWorld class speakers graced us with their virtual presenceand I can confidently say that there are decades of learnings in the recordings of these sessions that any analyst would benefit from immensely! A big thank you to all the Speakers and participants for making this Summit a memorable one. For all those who missed it, we have compiled some session descriptions and have dedicated this edition of the Newsletter to the Summit. There’s GOLD in these sessions, so do make sure that you go through them before the online video recordings expire on November 16, 2020!   

If you had already registered for the Summit, log back in to your digital event guide to access the recordings. If you hadn’t registered for the Summit, you can register to view the recordings here https://cmtassociation.org/events/2020-india-regional-summit/

As a market participant, there are certain concepts that you learn through personal, rigorous study and certain concepts that you learn by simply being a part of the system. I recently came across interesting analogies in Sanskrit and found it quite relevant to us. 

Markata Kishor Nyayam: (Baby monkey principle/law) 

You must’ve noticed that the mother monkey moves swiftly from one branch to another while the baby monkey hangs on with a tight grip so as to not fall. Here, the baby focuses on the grip, while the mother focuses on movement alone.  

Marjaala Kishor Nyayam: (Baby cat principle/law) 

A mother cat carries its kitten in its mouth to move them to safety or to a different location. Here, the onus lies on the mother to make sure that she doesn’t drop or hurt the kitten while holding on to it with a delicate balance of grip and care. The kitten surrenders itself to the mother. 

As traders and analysts we spend countless hours understanding various aspects of the market by holding on to it with a tight grip, as it swings from bull cycles to bear cycles, just like a baby monkey holds on to its mother. There are also times when we understand concepts by being part of the market where the market guides us and helps us, just like a mother cat doesOne cannot always be as tenacious as a baby monkey or as laid back as a kitten. It is a combination of these two approaches that leads to a fulfilling understanding of a subject. 

In order to improve our trade, it is imperative to revisit the involuntary errors we make and work towards overcoming them together: 

  1. I will refrain from saying “I told you so” (this one is particularly difficult in our field) 
  2. I will not compare my Chapter 8 to someone else’s Chapter 20  
  3. I will not blame the market for my errors (this is just convenient. Why would the market single you out?)  
  4. will exit the trade once it has triggered my stop loss; not average it (aren’t all of us guilty of this at some point?) 
  5. I will identify patterns on charts without forcing them (if I just tweak the lines a little, I can make it look like a triangle…maybe) 
  6. I will focus on being unbiased (My way or the highway really doesn’t work here) 

These are some of my New Year resolutions. I figured I might as well get an early start. You are free to borrow and build on them! 

 

Until the next time,  

Rashmi Shastry, CMT

What's Inside...

Musings from the 2020 India Virtual Summit

by Joel Pannikot

1 intense learning experience over 2 days, with 22.5 hours of rich learning, brought together by a team of 20 committed volunteers and a staff of 8. This was our way of Navigating the...

Market Outlook - November 2020

by Prasenjit Biswas, CMT

Market Outlook – November 2020  The Context:  Post COVID-19 meltdown, the rally from March’20 lows have been one of the most powerful...

Learning from the Legend - A note on Steve Nison's session

by Milan Vaishnav, CMT, MSTA & Steve Nison, CMT

Candlesticks charts are one of the staple tools in any technician’s toolbox. Most technical analysts use candles in their analysis. However, it is almost alarming to...

The Global InterMarket Stage

by Rashmi Shastry, CMT & Aksel Kibar, CMT & Gina Martin Adams, CMT, CFA & JC Parets, CMT

The CMT India Virtual Summit 2020 was a 2-day technical analysis extravaganza that comprised of speakers and participants from across the globe. This was the second edition of the Annual CMT Summit...

Long Term Trends

by Deep Shah, CMT & Tyler Wood & Robert Dombrower, CMT & Gautam Shah, CMT, CFTe, MSTA

This discussion was hosted by Deep Shah, CMT and moderated by Tyler Wood, MD, CMT Association, with two highly experienced analysts who have spent over 15+ years in the...

Outsourcing opportunities for Technical Research in India

by Raunaq Murarka, CMT & Craig W. Johnson, CMT, CFA & S.V. Balachander, CFA

I had the opportunity to host Craig Johnson and S.V. Balachander on the topic of “Outsourcing opportunities for Technical Research in India”. Craig W. Johnson,...

Making Your Research Relevant

by Ashish Kyal, CMT & Mukul Pal

The CMT 2020 India Virtual Summit was a fabulous experience for me as a Host and as a Speaker as well. Technology has ensured the virtual experiences are as amazing as actual physical sessions. CMT...

Quantitative Finance Masterclass

by Sumoy Goswami, CMT & Prodipta Ghosh

This session was not meant to illustrate how quantitative systems are developed, but it dealt with how a quantitative analyst could use Technical Analysis (TA) to his advantage. The presentation...

The Investment Manager's View

by Anindya Banerjee, CMT, CFTe, CCRA & Vaibhav Sanghavi & Anil Ghelani, CFA & Sunil Beri

We are going through unprecedented times in Financial markets. Covid has struck far and wide the tragedy is not in terms of over a million lives lost but also deep scars that it has left on millions...

Surfing the Elliott Wave

by Mohit Handa, CMT & Mark Galasiewski

One could argue that the technical analysis community in India is disproportionately fond of Elliott Wave Analysis. One of the most sought after  sessions in CMT India Summit 2020 was from Mark...

Trend Following and Money Management

by Jay Thakkar, CMT & Atul Suri & Dave Lundgren, CMT, CFA

David Lundgren and Atul Suri’s session on trend following system was quite incredible and insightful. Both are practitioners and masters of trend following Both Dave and Atul have an experience of...

Musings from the 2020 India Virtual Summit

Musings from the 2020 India Virtual Summit

1 intense learning experience over 2 days, with 22.5 hours of rich learning, brought together by a team of 20 committed volunteers and a staff of 8. This was our way of Navigating the Unthinkable

After the success of the 2019 India Summit on 11/23 (Fibonacci day) at the Taj Land’s End, Mumbai, we were extremely comfortable with the idea of putting up a similar event in 2020. We had already decided the date 10/10/2020 for  its beautiful resonance. The event management team was all set, the media relationships, the sponsor partnerships and all the ancillaries were in place. We had comfortably decided that we could start preparing as early as April, after our New York Symposium. Then the global pandemic happened. 

Looking back, it was a fun exercise to not only contemplate the “if”s of taking the Summit virtual, but also to try our best to replicate an in-person experience. The Digital Event Guide we eventually invested in helped us achieve this end. Through the guide, we were able to create a virtual space for people to interact, network, access the sessions like they would rooms in a physical space. It also helped us start and end each session with clockwork precision.

We also got lucky, because as people got more used to the world of webinars, more speakers who would otherwise have been inaccessible or would not have travelled to Mumbai, agreed to come on board. 

The end result of it all was a memorable, first-of-its-kind virtual experience that the speakers, audience, sponsors and supporters all loved. This would not have been possible without the brilliant executive staff of the CMT Association, who gave it their all working from New York, and on day of the Summit, waking up as early as 2am to ensure that all the logistics in India worked well. 

Credit is also due to the volunteer leaders of the CMT Association in India, many of whom have authored articles in this edition of the newsletter. This is their association, and they have put in the blood, sweat and toil to bring it to where it is today. 

Finally, a parting thought.

The day after the Summit, I was basking in the afterglow of the event, receiving and enjoying the congratulatory messages that were flowing in. Then, in the middle of the day, there was a massive, unprecedented 4-hour power outage across Mumbai. The only thing I could do is to say a prayer of thanks, realising that while we might have been able to launch the sessions from New York as well, our Mumbai-based participants (probably over 25% of the total attendee and speaker strength) would not have been able to attend. Navigating the Unthinkable would have taken on a whole new meaning.

In her editorial, Rashmi wrote eloquently about the principles of the baby monkey and the baby cat. It takes a combination of these two extremes to Navigate the Unthinkable. 

Wish you a happy festive season with both. 

Contributor(s)

Joel Pannikot

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Market Outlook - November 2020

Market Outlook - November 2020

Market Outlook – November 2020 

The Context: 

Post COVID-19 meltdown, the rally from March’20 lows have been one of the most powerful recoveries in recent times. Growing skepticism seen on the street; was met with a more resilient market! If one looks at the extreme points during this phase, in just a matter of seven months Nifty50 has rallied 60% so far. 

Given the context of the market, it is natural to question the sustainability of this ongoing medium-term up trend and the possible next course of price action. Further, the US election results this Month is adding more to the apprehensions in our minds, if not to the data. In such timestaking a systematic approach in our analysis, using technical tools and statistical observations brings clarity in forming a market view. It would help to look at the possible outcomes under a probabilistic umbrella. 

What is Current Structure? 

  1. Technical Setup: This ongoing rally from the 7511 lows has seen two intermediate reactions. The 1st counter trend move came in shortly after the start of the recovery in the month of May’20, where Nifty50 corrected from 9889 to 8806. This was followed by a rally up to 11794 and a correction in Sept’20 till 10790, which subsequently led to 12000 levels in Oct’20Based on these interim turning points, Nifty50 seems to be trading in a Rising Channel (Figure-1). The projected Channel support is currently positioned at around 11450-11400 levels, while the upper supply line seems to be placed at about 12700-12800, depending on the timing. 

Further, if we focus on the recent price action, it appears that there is a ranging activity. 12000 is acting as a resistance, with the 50% retracement (between 11790 & 12025) level of this move coming in at 11400 levels as a supportFor better understanding, a peek in to the EQUAL WEIGHTED Nifty50 (Nifty50 EQL) Index, reveals that 12070 is posing as a resistance and 11700 a support.  

 

2. TBI Sentiment: The TRUE BREADTH INDEX(TBI), which measures market sentiment, is currently positive. The last bullish inflection was seen on 1stOct when Nifty50 was at 11417 and the signal is still activePresently, the TBI plot is in the “Deteriorating Net trend” quadrant which indicates moderate bullishnessThe undertone is not yet negative, however it is subject to changes that could take place during the next few weeks (Refer Fig-1 & Fig-2). 

 3. Statistical Possibility: Figure-3a shows the distribution of historic Trend lengths in either direction before a 3% contra-trend move was seen. The price range encompassing 70% of the dataset (a proxy of 1SD), goes to -8% on the down side, and +9% on the upper side.  In layman’s language, we can say at 84% confidence level that Nifty50 can fall up to 8% from its last swing high and go up as high as 9% from a low, before a 3% contra-trend move can interject. 

This observation leads into a rough equation that from the last swing high of 12000 levels, we may see 11050 on the lower side before any meaningful rally can come in. Similarly, on the upside, if we consider 11500 as a hypothetical base, we can easily go up to 12550 levels before any correction extending at least 3% sets in. 

 Ahead of the US Presidential Elections, it would be important to take a note of some statistical facts. Firstly, both the 5-year and a short-term 3-months correlation between S&P500 & DJIA with Nifty50 stand at 0.4 and 0.3, respectively, which is statistically insignificant in general.  

Secondly, a study on the month range of Nifty is done to ascertain volatility aspects (Figure-3b). Normally, the monthly range of Nifty is at around 11% (Monthly High-Low). Interestingly, even during the US Election months our markets did not deviate drastically from this normal. Data shows that during the last 5 out of the 6 US Election monthsNifty traded within a range of 11%, except for Nov 2008. In 2008, the average monthly range was 25%. 

 

Summary/Conclusion: 

Currently, in the broader Up TrendNifty is in a consolidative phase and hence may not find traction till it trades below 12000As long as TBI Sentiment data remains bullish, any positive trigger leading to a breakout above 12050 levels can propel Nifty much higherBased on the Channel principles and Statistical parameters 12500+ levels look plausible. Unless the lower end of the Channel is breached and the trend changes, bulls will be resilient. 

In case of any negative surprise from the global markets and with TBI turning Negative, Nifty could close below the Channel’s lower end of 11400This may breed further weakness inviting profit booking from the longer time frame participants and forced liquidation from the short-term players (who are stuck on the long side at 11900-12000 levels). Again, the probabilistic downside could be to the tune of 11000 or it could even re-test its previous intermediate bottom of 10800. 

 

Contributor(s)

Prasenjit Biswas, CMT

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Learning from the Legend - A note on Steve Nison's session

Learning from the Legend - A note on Steve Nison's session

Candlesticks charts are one of the staple tools in any technician’s toolbox. Most technical analysts use candles in their analysis. However, it is almost alarming to see how many analysts either wrongly interpret the candles or use it in an incorrect way. 

Under “Learning from the Legend” series, Steve Nison presented a profoundly insightful session on “Correctly Using Candlesticks”. Steve, who is the CEO and Founder of Candlecharts.com was one of the first to reveal candlesticks to the western world. With career spanning over 30 years, Steve has authored three books on candlestick charting which have been translated into more than 15 languages. 

Steve began the session by highlighting the benefits of using candlesticks and went on to explain the construction of a candle, while wonderfully illustrating how a candle packs in more information as compared to a bar chart and how it aids in understanding and deciphering the psychology of the market participants. 

Steve added tremendous value to the session by emphasizing on the importance of viewing candles within the Market’s context. He also pointed out using examples how failing to read the candles in the market’s context can not only lead to misinterpretation of the candle but also to the wrong application of the tool. 

One interesting example he shared was that of “Engulfing Candles”. For example whenever a Bearish Engulfing candle emerges on the chart, we expect a potentially bearish outcome by default, without examining the prior market trend that existed before the formation of such bearish engulfing candle. Steve pointed out that just like it applies to any other formationthe prior market trend should be checked in order to understand the impact of the candlestick pattern. For a valid bearish engulfing patternthe formation should appear following an uptrend. If there is no existence of a prior uptrend, or if the bearish engulfing candle has emerged following a downtrend, it may not be valid. Such a pattern may not be potentially bearish and in fact, can have a different implication. 

He highlighted the “value” of education in the process and presented many interesting examples that involved interpreting gaps, using gaps to identify supports and resistances, and interpreting candles correctly with long lower or upper shadowsHe also highlighted the importance of applying confirmation concepts on the candles by applying western classical concepts of defining range, supports, resistance and breakouts. 

The session was followed by several questions which were related to the timeframe that Nison uses on his charts. Other questions related to methods of applying candlesticks in day-to-day trading and interpretations of different formations on the charts. 

Contributor(s)

Milan Vaishnav, CMT, MSTA

Steve Nison, CMT

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The Global InterMarket Stage

The Global InterMarket Stage

The CMT India Virtual Summit 2020 was a 2-day technical analysis extravaganza that comprised of speakers and participants from across the globe. This was the second edition of the Annual CMT Summit in India and had to be shifted to virtual platform due to the ongoing pandemic. The CMT Association did a fantastic job of providing a real-world feel to the Summit as evidenced by the use of the Digital Guide, whereby participants were to assemble in different rooms to attend different sessions, as we would’ve done had this event not been virtual. This was a brand new experience for many of us, and was convenient and flexible since we had several sessions that overlapped each other.  

had the honor of hosting not only one, but three brilliant international speakers. I was extremely keen on being a part of this session since my process of analysis is similar to that of these speakers and I was interested in improving my understanding based on the gems of information shared by them 

“The longer there is no earthquake in an earthquake-prone zone, the higher the magnitude of the next earthquake” – Aksel is the MD of Tech Charts. Aksel showed examples of Sensex and Nifty50 emphasizing that the more technical levels you have overlapping each other, the more significant the level becomes. He also made excellent points about reversal patterns and their placement in the trend. As analysts we tend to add more indicators to our screens in order to arrive at a conclusion. Aksel’s charts are evidence that simplicity works just as well and sometimes helps clear out the noise. He believes in observing the price and identifying classical chart patterns by focusing on areas of consolidation and clean breakouts. Aksel made excellent points about market sentiment near breakouts and how they can assist in forming a better view. He discussed prominent global indices and explained the classical chart patterns on them. For a trader looking to simplifying his chart analysis, one must not miss this.


“The reality of history would suggest that Bull markets last for an incredibly long period of time.”
– Gina Martin Adams is the Chief Equity Strategist at Bloomberg Intelligence.

For anyone looking for a methodology to go about a research that encompasses both technical and fundamental aspects, this is just the session for you. Gina seamlessly merges the two controversial ends of research and does a thorough job of arriving at a wholesome view of the market. She shared an interesting Global Equity Scorecard that ranked all major regions of the world on several parameters through a quantitative process. One of the most incredible charts that she shared was that of the historical US Bull markets and mentioned how on an average bull markets lasted for 18 years over the last century. It helps put in perspective the question: How long can a Bull cycle last? I found the scorecards format depiction of indicators in her charts particularly helpful as they indicated the major trend based on a cursory glance. She signed off with broad themes that could grow in the next five years.

“Bad things happen below the 200-DMA” – JC Parets is the Founder of All Star Charts
JC is known for his shrewd inter-market analysis and began his talk with a comparison of stocks and bonds. A perfect top-down analysis approach. A lot of JC’s work revolves around relative strength, and rightly so. It is the simplest way of allocating resources across asset-classes. JC’s charts are simple, clean and clutter-free. Just like Aksel, he looks for classical technical analysis patterns and signals in order to determine the trend. Comparing the Emerging market chart relatively to S&P500, he alluded to the chart supporting the idea that we could witness an outperformance in the emerging markets going forward. He shared his sectoral views in the Indian market and moved on to discuss stock specific ideas as well. One of the most striking features about JC’s approach is the comparison of varied symbols, indices and stocks and how he brings them together beautifully to arrive at a conclusion. There is so much to learn in terms of how he goes about his process and he makes it look like a lot of fun! That is quite rare in this field.

Contributor(s)

Rashmi Shastry, CMT

Aksel Kibar, CMT

Gina Martin Adams, CMT, CFA

JC Parets, CMT

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Long Term Trends

Long Term Trends

This discussion was hosted by Deep Shah, CMT and moderated by Tyler Wood, MD, CMT Association, with two highly experienced analysts who have spent over 15+ years in the marketRob Dombrower, CMT and Gautam Shah, CMT. 

You will be surprised to know that Rob holds a BA (hon) in English Literature and Music from Binghamton University and a Major in Music (Opera Performance, Theory) from Boston University. Rob relates that it was the discipline he had developed in music that had helped him succeed in portfolio management services. He works as a VP and Senior Portfolio Specialist at Jackson National Asset Management. Gautam is a CMT, CFTe and MSTA and is the founder and chief strategist at Goldilocks Premium Research. He was introduced to financial markets early in his career by his father who made him analyse financial information such as financial statements, technical analysis, sales trading, mutual funds, etcGautam realised that he grasped technical analysis with greater ease compared to all the other subjects he had been exposed to 

During the session, we learnt that Rob believes fundamental analysis and quantitative analysis is not enough to create a model. In his opinion one should also include technical analysis which helps the analyst understand any asset in a 3dimensional manner. When asked on how he uses technical analysis for long term investment, Rob mentioned that he has a visual of the chart in multiple timeframes which helps him collaborate the view from fundamental technical perspectives.  

Gautam tends to follow a simple and holistic approach where he brings different studies together and analyses them from various angles before setting up the trade. He advises market participants to look for creating wealth by investing in the market with longterm view. While trading can help one make money, investments lead to wealth creation. One can ride a good multi-week and multi-month price trend and reap the benefits of a secular trend. 

This session busted the myth that Technical Analysis is limited to identifying short term trends alone and proved that this subject can be used extensively for long term investment analysis as well.

Contributor(s)

Deep Shah, CMT

Tyler Wood

Robert Dombrower, CMT

Gautam Shah, CMT, CFTe, MSTA

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Outsourcing opportunities for Technical Research in India

Outsourcing opportunities for Technical Research in India

I had the opportunity to host Craig Johnson and S.V. Balachander on the topic of “Outsourcing opportunities for Technical Research in India”. Craig W. Johnson, CMT, CFA is a Managing Director and Senior Technical Research Analyst currently directing Piper Sandler’s technical research group. He outsources his technical research to JMN Investments Pvt Ltd which was founded by S.V. Balachander, CFA.  

It was an interesting session where both of them shared the experience of their 10+ years-long professional relationship. Craig said that he gets a lot of help from outsourcing his work where various reports, some of which are ad-hoc in nature, are prepared by the Technical Research team at JMN Investment Pvt Ltd before he reaches his office in the morning. There is a time difference of almost 11 hours between Minneapolis (USA) and Chennai (India) which gives a lot of flexibility to Craig and his team.  

The whole idea came into existence because every day, Craig conducted a morning meeting which started at 6.30 AM, for which, he used to wake up at 3 am to discuss the tickers sent out to him by the team in London. We also learned that this solution seemed economical since Craig was able to bring down his cost and time investment by 60-70% by outsourcing his research to India; all while waking up at a more normal time in the morning!  

Bala on the other hand shared his experience on how he hires some of the finest talents, trains them over timeand has enough backup both in terms of human as well as other resources which ensures smooth functioning on their end. Low employee turnover further deepens the understanding and consistency within the firm. They also happened to share a story where even during the floods that hit Chennai in 2015, JMN was fully functioning!  

Hiring in India has become comparatively easy as many students are now pursuing the CMT program which reduces Bala’s stress of training them in the foundations of technical analysis. One couldn’t help but notice how often the word “quality” was used in this conversation, which gives us good indication that when it comes to managing serious money and when you have around 1000 + institutional clients all over the globe, quality is of paramount importance.  In this case, hiring CMT Charter holders or candidates ticks all the right boxes. 

Contributor(s)

Raunaq Murarka, CMT

Craig Johnson, CMT, CFA

Craig W. Johnson, CMT, CFA

S.V. Balachander, CFA

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Making Your Research Relevant

Making Your Research Relevant

The CMT 2020 India Virtual Summit was a fabulous experience for me as a Host and as a Speaker as well. Technology has ensured the virtual experiences are as amazing as actual physical sessions. CMT Summit clearly eliminated the boundary of physicality and it is a paradigm shift on how one can garner true knowledge from renowned speakers from the industry online. The flow of the session was seamless, very well organized and with lots to take away in just two days.  

As a speaker for the session titled “Making your research relevant”, I thoroughly enjoyed speaking with Mukul Pal. It is a happy coincidence that I have known Mukul personally for more than a decade and we got the opportunity to present together.

We had a very interesting discussion where I shared my experience as to how I evolved from Elliott wave to a more discretionary space of Neo wave and Time Cycles as a practitioner or trader and eventually also into Mentoring and Training to writing a Book – Effective Trading in Financial Markets using Technical Analysis which has been endorsed by Robert Prechter, Ernest P. Chan, Mark Galasiewski and many more.

Mukul evolved towards systematic, Machine Learning, Algorithmic part and talked about his journey. We both started from Elliott waves and even though the path looks diverged but it essentially is for the very same goal and purpose.

Q from Manessh Sharma- In commodities trading, does Elliot waves work well in spot commodities market? this is for Ashish Kyal
Answer: Yes, In commodities Elliott wave works extremely well and has to be applied on spot prices. In case spot charts are unavailable the same can be applied on Futures chart as well. It works like magic at times!

Contributor(s)

Ashish Kyal, CMT

Mukul Pal

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Quantitative Finance Masterclass

Quantitative Finance Masterclass

This session was not meant to illustrate how quantitative systems are developed, but it dealt with how a quantitative analyst could use Technical Analysis (TA) to his advantage. The presentation started with an introduction to quantitative approach & TA and was sub-divided into several smaller topics like Building a simple strategy & backtesting the right way, insights in technical indicators, a bit of Machine Learning (ML), quantitative chart reading & automatic identification of chart patterns.
Quantitative Analysis starts with a testable hypothesis. But testing a hypothesis is possible only when its rules are objectively defined. There are some statistical approaches to hypothesis testing like Bootstrapping (or Monte Carlo Simulation, etc), which are extensively used by the practicing quants to get their hypothesis verified. 
QuantInsti has developed a online cloud based application called Blueshift (blueshift.quantinsti.com) for practising the principles of quantitative trading. It’s a free application & anybody can test their algorithm on this Python based platform. Blueshift was used to illustrate the next few points.
A simple trading strategy as follows was selected to demonstrate the principles of quantitative trading. 
  1. Long all stocks whose prices are greater than their 100 day average AND RSI(20) was greater than 30.
  2. If either of the conditions are not satisfied, long exit signal is triggered.
  3. This rule was tested for a period ranging from January 2016 till October 2020 for a selected stock of universe in Nifty50.
Blueshift is based on Python and has a graphical user interface (GUI) wherefrom traders with no experience in coding may also compile their quantitative strategies. This feature was used to test the strategy described above.
In the Blueshift platform, there are four main components in coding any strategy:
  1. Definition of the Universe: In general, it is important to select the universe of stocks carefully, but for this purpose, randomly selected bluechip stocks in Nifty 50 (eg. HDFC, ICICI Bank, Sun Pharma etc) was just perfect. 
  2. Definition of Alpha: Momentum indicators RSI (20) and also 100 day average was the choice of tools.
  3. Definition of the Trading Rule: The long entry & exit signals are already defined above. Asset allocation is taken care of in this part of the interface. For the present case, each signal is allotted 10% of the capital.
  4. Order of Precedence: In this particular scenario, the two conditions (Price>100 DMA AND RSI(20)>30) had to be met simultaneously. These two conditions are independent of each other. (Sometimes, conditions are dependent, eg, we may create a list of stocks according to ascending or descending orders of certain variables & in those cases, conditions will be dependent on one another)
 
Any backtest result, by default, should be looked upon with apprehension. There are many biases that may still obscure the final decision (of acceptance or rejection). Two most important of them are Look Ahead Bias (By using data that were not available when the incident/trading signal occurred in the past) & Survivorship Bias (A tendency to overlook the losers & gain a false sense of confidence by looking at the winning stocks/strategies those ‘survived’ over time). The equity curve simulation in Blueshift may not overcome Survivorship Bias, but it was free from Look Ahead Bias. 
If a backtest result does not show profit, nobody will be interested to trade that system. But how should we react if a test result shows profit? This profit may be either because of luck or it may be because of merit of the system. It is the duty of an analyst to ensure that the profit shown in backtest is not a random outcome of chance factor but indeed because of the merit of the system. There are various statistical parameters to expedite this decision, one of them being Sharpe Ratio that measures the amount of return (over risk free rate) per unit of risk (while Risk is a measure of standard deviation of return). Along with the backtest result and associated equity curve, Blueshift application also returns the Sharpe ratio & several other statistical parameters to decide the probability that the profit shown in the backtest was not due to mere luck but indeed because of the merit of the system. Greater is the Sharpe Ratio, more is this probability. 
Once backtesting is done, Optimization of parameters comes. Optimization is a compromise and is a source of great dilemma for the analyst. It is a common trap to end up with data-mining & curve fitting in order to improve a strategy. Consequently, it was sanely advised to avoid optimization in variables and rather start with a new hypothesis/assumption in case the backtesting result was not satisfactory. 
The presentation then moved towards Technical Indicators. A Fourier Transformation of time series analysis was used on Jupyter notebook in Python to combine two series with differing length, amplitude & direction of trend to reveal the basic characteristics of technical indicators as a generic group. It was revealed that, barring a few too short cycles, most of the indicators & oscillators were capturing the same periodicity in price. The indicators tended be show further concurrency with longer cycles in the time series.
On a concluding note, Machine Learning (ML) was taken up to reveal patterns in prices. Algorithms in ML do not require a hypothesis in pricing inefficiencies to start with. They look for consistency in a large sample size of ‘training’ data & try to capture the islands of predictability in ‘test’ data. The model tends to attain more accuracy with trial-&-error approach. Quite predictably, the initial results with ML were not at par, but there is big room for improvements. We learnt that almost all classical TA patterns could be deciphered through algos & were pleasantly surprised with a few real life cases of Head & Shoulder patterns that the model could successfully point out, one example being the decline in Nifty 50 in Aug of 2015.      
Overall, it was a very informative session & the audience enjoyed every bit of the presentation. It was also very enthralling for the audience to have a real-life experience of modern algorithmic approach to trading. CMT Association once again extends its heartiest thanks & gratitude to Sri Prodipta Ghosh for all the hard work he has put up towards the Summit.

Contributor(s)

Sumoy Goswami, CMT

Prodipta Ghosh

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The Investment Manager's View

The Investment Manager's View

We are going through unprecedented times in Financial markets. Covid has struck far and wide the tragedy is not in terms of over a million lives lost but also deep scars that it has left on millions of families worldwide. From business to governments to households, none have been spared. However, as we all know, during the times of greatest chaos lay the biggest opportunities. With that objective in mind in the CMT India Summit, we were fortunate to have a panel of experts from the financial industry. 

The discussion was wide ranging and touched upon some of the following key topics:

  1. – Policy action and its impact on asset prices
  2. – Sectoral churn that may happen as economy stabilises
  3. –  The rise of passive funds in India
  4. –  How AIFs (Alternative Investment Funds) are adding value
  5. –  The growing popularity of ESG investing
  6. –  The relative theme of EM markets v/s US markets
  7. –   Impact of average inflation targeting from US Fed on the emerging markets

 

Key highlights of the panel discussion:

– Mr. Vaibhav Sanghavi pointed out that globally, the combined fiscal stimulus and monetary stimulus has been to the tune of $ 20 trillion this year. An unprecedented crisis is being tackled in an equally unprecedented way. Easy money will keep financial assets juiced up. This may continue to baffle several investors, as asset multiples defy the economic outlook. While commenting on sectoral churn in Indian equity markets, Mr. Sanghavi said that as the economy stabilises, we could see money flow move out of the so called “safe havens” like IT, Pharma and staples towards cyclicals like banking and consumer discretionary. He sees immense scope for AIFs to do well in India in both relative return category as well as in the absolute return category. AIFs have the advantage of not only using leverage or shorting stocks to offer attractive risk-adjusted returns but also operating under a variety of strategies which are as low risk as debt and also as risky as leveraged equity. ESG, or Environmental, Social, and Corporate Governance refers to the three central factors in measuring the sustainability and societal impact of an investment in a company or business. In the ESG space, Mr. Sanghavi sees immense scope as the ESG is a sustainable approach of running a business, where all stakeholders are taken into confidence. He sees businesses with high ESG rankings to have lower tail risks. He therefore sees ESG investing to offer strong alpha going forward. 

– Mr. Sunil Beri observed that the recovery in the credit markets has been patchy as high grade paper has continued to outperform the low grade paper, as speculators crowd into those issues where the Fed seems to have offered explicit support. He also opined that as long as liquidity remains the driver of global asset reflation, US equity markets will continue to outperform the Emerging markets. The falling spread between real interest rates between US and EMs and contracting spread of real GDP growth will maintain the outperformance in the US market. He does not see Fed being able to engineer sustainable inflation and also sees volatility in currency markets to remain high.

–  Mr. Anil Ghelani sees passive investing, which is investing in ETFs and mutual funds that mirror a benchmark, to gain traction. With active funds in the large cap space in India finding it difficult to generate alpha, investor’s allocation towards passive funds will rise. However he is of the opinion that active investing has immense scope in the mid and small cap space and also in thematic areas. While talking about ESG investing, Mr. Ghelani sees it as a core part of the investment selection framework. ESG is being widely used by most asset managers as it offers a comprehensive matrix of measuring the quality of the businesses.

Contributor(s)

Anindya Banerjee, CMT, CFTe, CCRA

Vaibhav Sanghavi

Anil Ghelani, CFA

Sunil Beri

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Surfing the Elliott Wave

Surfing the Elliott Wave

One could argue that the technical analysis community in India is disproportionately fond of Elliott Wave Analysis. One of the most sought after  sessions in CMT India Summit 2020 was from Mark Galasiewski from the Elliot Wave International. Mark provided tremendous details on how the socio-nomic mood corresponded with various wave patterns. Mark elaborated on how India, Chinese, Pakistan, South Korean and many Asian markets were witnessing events which reflected the mood of the markets and how key events unfolded after major wave patterns completed. One of the questions asked was where to begin a wave count to which he replied that, it’s advisable to look backward to as much as data possible to gather insights over wave patterns. He added that for BSE Sensex, he looks at data going back to 1980 and also considers wave patterns which would have occurred prior to that.

Given the short time that was available to Mark for Q&A, he very kindly offered to answer all the questions that were posed to him for this article in Technical Insights. The responses follow below. 

Questions and comments from the CMT India 2020 Session (Surfing the Elliott Wave with Mark Galasiewski):

Abhisek Bahinipati: Which wave is India’s stock market tracing out presently and how long will it take to reach the end of the fifth wave in the Supercycle? What would the tentative target be in the Sensex?

Tejo Kongara: When and at what level do you think Primary wave 5 (circled) for Indian stocks will end?

MG: The Supercycle advance that began in India in the late 1960s or late 1970s will continue for decades more—and that’s so far away from now that picking targets at this point is impractical. But the Cycle wave III advance that began in 2003 may end as early as several years from now. In April 2009, I gave CNBC TV-18 and the Economic Times a target for the end of Cycle wave III of Sensex 100,000 by 2024. It’s possible that the current Primary wave 5 (circled) up (of Cycle wave III), which began in March 2020, will reach the target level by the end of 2024, but even if it takes a few years longer, I think we’ll still be able to call it a successful Elliott wave forecast. Few people could even imagine a bull market in early 2009.

If I’m going to be wrong about the long-term wave count, it will probably be because I underestimated the potential for Cycle wave III to extend. If the bull market from March 2020 were to accelerate its rate of advance compared to the bull market from 2008 to 2018, then we could consider the possibility that the 2020 lows represent the end of Intermediate wave (2) down of Primary wave 3 (circled) up—and therefore that the advance from the March 2020 lows is wave (3) of 3 (circled) of III. But, for now, the current Primary wave 5 (circled) up count should be functional for a while.

Mahesh Awate: How useful is the Wave Principle for individual stock investing?

MG: Indexes typically reflect crowd behavior better, but individual stocks can show clear long-term patterns.

Wave analysis of the major indexes can also add value to the selection and timing of trades in individual stocks. For example, if your Elliott wave count shows that the Nifty is putting in a significant bottom, then you could identify the market sector showing the best relative strength and then perhaps select individual stocks showing the best relative strength within that sector, because growth stocks that show the best relative strength in the wake of a correction often outperform during the subsequent bull market.

Anindya Banerjee: U.S. stocks have outperformed emerging market stocks since 2010, which went hand in hand with the U.S. dollar appreciating against emerging market currencies. Are both those trends coming to an end?

MG: The Bloomberg-JP Morgan Asia Dollar Index of ex-Yen Asia currencies offers the clearest long-term pattern of any emerging market currency index I know of. It has also ebbed and flowed with emerging markets stocks in U.S. dollar terms since its start in 1994. The currency index completed a declining pattern from 2011 to March 2020 and has since advanced impulsively with emerging market stocks, so emerging Asia stocks and currencies are likely to continue advancing together for the next few years.

As to whether emerging market stocks will begin to outperform U.S. stocks, the ratio between the Vanguard FTSE Emerging Markets ETF (NYSE: VWO) and the SPDR S&P 500 ETF (NYSE: SPY) is testing a downtrend line drawn from its 2010 high as I write now in early November 2020. If it can sustain a rise above the line, then emerging markets may enjoy a period of relative outperformance versus U.S. stocks, in line with the uptrend in the Asia Dollar Index.

Argho Chatterjee: How do you know that an event which occurs near a stock market bottom is significant from a social mood perspective? For example, how can you say that North Korea’s nuclear test in January 2016 was significant and another event which occurred around that time was not?

MG: In general, the largest or most dramatic events are most likely to be a result of aggregate social mood. Nuclear tests are rare, and bold, so North Korea’s test in January 2016 was clearly socionomic. But less spectacular news can also provide valuable indications of sentiment. For example, here’s what I wrote in the February 5, 2016 issue of Asian-Pacific Financial Forecast about the end of the correction that year in emerging markets:

Perhaps the best indication of sentiment at the end of the correction came from this year’s World Economic Forum in Davos, Switzerland. Reuters reported on January 20 that “more than a trillion dollars of investment flows has fled emerging markets over the past 18 months but the exodus may not even be halfway done, as once-booming economies appear trapped in a slow-bleeding cycle of weak growth and investment.” The report added that “investment returns across the sector are unlikely to recover soon, many fear.”

 

The MSCI Emerging Markets Index bottomed the next day…. January 2016 should mark the lows for the decade in the index.

 

The bearish consensus toward emerging markets among the world’s richest and most influential at Davos evidenced extreme negative sentiment, and January 21, 2016 did indeed mark the decade low in the MSCI Emerging Markets Index. But remember that the pessimistic news article was only valuable from a socionomic perspective because it was published toward the end of the clear three-wave decline from 2011 to 2016 in the MSCI Emerging Markets Index. If that same news article had appeared much earlier in the EM bear market, it might at best have marked an intermediate-term low, or it might have appeared at a peak or in the middle of a sharp selloff—which would have made it useless to traders and investors by itself. Therefore, socionomic indicators should be considered like any other sentiment indicators—that is, as secondary evidence to support the primary indicator, which is the Elliott wave pattern itself.

 

Nipun Madan: If Primary wave 5 (circled) up has begun in the Nifty, then is the risk of a terrorist or other violent attack now much lower than during the correction?

MG: Not necessarily! Social mood tends to remain negative in the early months or years of a bull market. For example, the Kargil war broke out 10 months after the 1998 low in Pakistani stocks. And the 2010 Pune bombing occurred just days after the 2010 low in the Nifty. But the larger up trend should bode well for peaceful times.

Sandeep Narang: I’m new to Elliott wave, does it work in short time frame as well? I see it working well in a longer time frame.

Sandeep Srivastava: Does Elliott wave apply to intraday?

MG: Yes, the Wave Principle applies at all timeframes.

Sanjiv Tandon: Since you mentioned Reliance Industries, is it in a fifth-wave blow-off run?

MG: At its September 2020 high, Reliance probably completed wave 1 of (3) of 5 (circled) up. For more information, and to see the long-term wave count from 1991, see the October 2020 Asian-Pacific Financial Forecast.

Sandeep Yerra:                Socionomically, is there a difference between a recovery after a violent event and a recovery after a pandemic?

MG: No. The nature of the negative mood manifestation—whether mass violence, a pandemic, or any other—may influence which individual stocks or even sectors lead the new bull market—think infotech and health care since the March 2020 lows—but it should have little to no influence on the broad-market indexes themselves. Most likely, the negative mood manifestation is simply a natural expression of extreme negative mood toward the end of a corrective pattern.

For example, my chart of the MSCI Emerging Markets Index indicating the periods when SARS, Swine Flu and Covid-19 went viral should make clear that Covid-19 was a manifestation of the latter stages of an endogenous correction across emerging markets from 2018 to 2020—or even from 2007 to 2020. The apparent recovery since the March 2020 lows is also part of the endogenous pattern in the stock index.

By the way, India’s stock market this year also offers excellent evidence to support the idea that stock market movements are endogenous. India’s 24% GDP decline in the second quarter of 2020 was its worst on record and by far the largest among major world economies. And yet Indian stocks year-to-date in 2020 have in U.S. dollar terms ranked in the top third of 93 global stock markets monitored by Bloomberg. Therefore, something other than news or economic fundamentals drives stock market trends. We at Elliott Wave International believe that driving force to be natural waves of social mood.

Gulshan Badlani: What is your view on the USD/INR?

MG: Currently, the USD/INR is testing support at an uptrend line drawn from its 1980 low. If it can register a monthly close below 70, then the rupee may have begun a multi-year strengthening trend. Until then, the rupee’s long-term weakening trend remains intact.

Venkatachalam Subramaniam: Does the Wave Principle capture Reserve Bank of India intervention in the rupee as well? Such interventions are very unpredictable and catch traders unaware.

MG: It’s best to view central bank announcements like any other news. In all asset classes, news can create very short-term exogenous shocks, after which the market eventually returns to its endogenous path. In real time, you can only do your best to parse the signal from the noise.

Contributor(s)

Mohit Handa, CMT

Mark Galasiewski

Mark Galasiewski

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Trend Following and Money Management

Trend Following and Money Management

  • David Lundgren and Atul Suri’s session on trend following system was quite incredible and insightful. Both are practitioners and masters of trend following
  • Both Dave and Atul have an experience of almost 3 decades and they follow multi asset class analysis to get a holistic view and then trade/invest where the trend is established and confirmed.
  • They started the session with their journey in equity markets and discussed how they started their career as technicians. They also shared how they chose Technical Analysis as a subject to analyze markets and how effective it is. Of the various books they read, the one that inspired them most was: ED SEYKOTA’s principles of trend following.
  • They discussed how trend following is extremely helpful in timing the market and trades well in terms of entry and exit points. Atul’s mantra is find, ride and exit
  • Dave explained how the process of stock identification is different when it comes to Value managers and Trend Followers. He explained how change in fundamentals is the catalyst that unlocks undervalued and overvalued situations and that the trend change is the signal for it, hence technically it helps to enter the correct stock at the correct time when the momentum is strong and once the momentum weakens it signals an exit

Contributor(s)

Jay Thakkar, CMT

Atul Suri

Dave Lundgren, CMT, CFA

Dave Lundgren, CMT, CFA

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New Educational Content This Month

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