public

Technical Insights, October 2020

Welcome, Readers, to the second edition of Technical Insights, for October 2020.  
 
Change is Constant.  
 
This statement is a fun oxymoron but change is not easy to keep up with. Humans have evolved exponentially since the beginning of time and this can be attributed to one very important factor-Adaptability. Since change is constant, only those who adapt, will survive. Consider this, if the stock market is a whole world of its own, all the stocks are like people in it. Stocks react much like the people around us. Some are stable, some are temperamental, some are active, and some are passive, and so on. Stocks have different personalities because they reflect their traders’ traits. Treat them as your friends and recognize their traits in order to comprehend their trends.  
 
Understanding this universe leads to effective analysis.  Market participants take some time to build their systems and strategies in order to be on the right side of the market more often than not. Most people learn through trial and error over a considerable period. While experience is a very important aspect in the market, one cannot wait for things to happen to experience all kinds of scenarios. For that matter, one wouldn’t hope for a market to crash, just to learn how to react to it better! Therefore, it is a smart move to learn from those who have been a part of the market for longer and have spent more time honing their own skills. Just like books, human beings themselves are a source of immense knowledge!  
 
The pandemic took over our lives for a better part of the year. It has given us time to pause and reflect on our actions and goals. These trying times are opportunities to enhance our existing skill set. A new normal is waiting for us at the horizon, and we must be prepared for it. In keeping with the idea of learning from experiences of others, the CMT Association is hosting the second edition of the Annual (now Virtual) Summit on 10 and 11 of October. Speakers from across the globe will share their views, strategies, tips and tricks, to help you befriend stocks quickly. 
 
I have had the good fortune of listening to sessions by some of these speakers before, and I guarantee you, you are in for a treat! Various styles of trading and analysis will be showcased by individuals currently placed at the helm of their organizations: tactfully maneuvering in times of distress and sharing their ideas with other enthusiasts. This is a Technical Analyst’s Annual Extravaganza and must not be missed! What’s more, we have the Bull of Dalal Street, Rakesh Jhunjhunwala joining us as well! Hope to see you guys online at the Summit, until then, do take care of yourselves and think Technical! 
 
Regards, 
 
Rashmi Shastry, CMT  
 
Editor

What's Inside...

Gold & Silver: Is the rally over?

by Milan Vaishnav, CMT, MSTA

Gold and Silver have spent the past several weeks cooling off from their respective highs, following robust up moves over the past couple of months. The month of September saw Gold (XAUUSD) shed $...

The Technical Analysis Ecosystem

by Joel Pannikot

In his book, Outliers, Malcolm Gladwell posits that no one achieves any measure of success in isolation. Any meaningful achievement is the result of not only individual merit, but also a supportive...

Nifty Outlook – Time Cycles Synchronization with Neo Wave Patterns for Accurate Reversals

by Ashish Kyal, CMT

J. M. Hurst suggested that there are certain standard cycles which are universal and can be applied on any asset classes. Many cycle analysts often complain that cycles vanish without giving prior...

Algo Trading – The Origin Story

by Sovit Manjani, CMT

Algo has become the new buzz word in recent times but if we think about it, we as humans have been following Algos since the time of Ramayana and Mahabharata or even before that. For example, we...

CMT Notice Board

by Rashmi Shastry, CMT

CMT Notice Board  1. Aayush Munjal  The Chart Report India was released in the last week of September. It is an email report that is prepared by curating the best technical analysis...

Bank Nifty underperformance on the cards

by Jay Thakkar, CMT

Across the globe, equity markets have bounced back smartly from their March lows. The US Dollar Index peaked on March 23, 2020 and most of the Global Equities and Commodities bottomed out on or after...

From Summit to Summit

by Raunaq Murarka, CMT & Deep Shah, CMT

In late 2019 the CMT Association announced the inaugural India Summit, a one–day conference, which was to be held in...

Gold & Silver: Is the rally over?

Gold & Silver: Is the rally over?

Gold and Silver have spent the past several weeks cooling off from their respective highs, following robust up moves over the past couple of months. The month of September saw Gold (XAUUSD) shed $ 81.91 (4.16%) and Silver (XAGUSD) shed $4.87 (17.34%) . 
 
The coming month will be crucial as we approach the US Presidential elections. Markets across asset classes will remain volatile, with the emerging markets reacting to the moves in the US Dollar Index which was weak, but has been staging a technical pullback. 
 
 
 
On the long term monthly charts, both Gold and Silver appear structurally bullish. After trading sideways for nearly 3 years, Gold broke out of a 3-year long ascending triangle formation. Silver too, traded sideways for nearly 4 years before it staged a breakout. Presently, both the precious metals are trading above their 10-, and 40- Period Moving Averages and above their respective long term trendlines. Silver has historically underperformed Gold. The outperformance of Silver against Gold has been sporadic and short-lived while the under-performance has remained much longer. 
 
 
The above Chart shows RS line of Silver against Gold. Briefly at the beginning of this decade, Silver relatively outperformed Gold. Post that, it has witnessed prolonged periods of underperformance against the yellow metal. Currently, the RS line of Silver against Gold has broken out of a 4-yr falling channel. It has also penetrated the 50-period MA which has been acting almost as a proxy trend line to its Relative Strength. 
 
Normally, precious metals and equities are not positively correlated. However, this time, both asset classes staged a strong rally. The rally in Gold and Silver had more to do with the weakening US Dollar Index which has seen a few of its worst weeks in the recent history. 
 
The recent technical pullback in the US Dollar Index has caused some retracement in Gold and Silver over the past couple of weeks. Any continued pullback or strength in the Dollar Index will continue to weigh heavily on the prices of the precious metals.  
 
Going forward, while prices will remain sensitive to any impending pullback in the Dollar Index, any negative impact will be cushioned by uncertainties heading into the US Presidential elections. This would lead to cooling off of the current risk-on environment in the equities and increasing preference towards the less risky assets. 
 
 
In the RRG chart above weekly close May 29, 2020, ITOT, iShares Core S&P Total US Stock Market ETF had just entered the improving quadrant. It marked an end of under-performance of Equities and hinted towards a potential onset of risk-on setup which actually transpired over the next months. The second half of the chart shows the placement of ITOT, which represents equities as an asset class, to have completed most of its rotation. It is in the leading quadrant but appears to be paring its momentum.  
 
GSG – iShares S&P GSCI Commodities Indexed Trust, which represents Commodities as an asset class, stays firm in the improving quadrant and is seen rotating towards the leading quadrant. This setup is likely to provide resilience to the Gold and Silver prices over the immediate short term. 
 
Historically, Gold and Silver have performed well before the US Presidential elections and for 12-18 months after the elections. Gold is trading above its crucial long-term trend line support of $1800 and Silver is above its long-term pattern support of $20.50-21. Gold’s RSI is in the overbought territory above 70, indicating strong ongoing uptrend; Silver’s RSI appears stable well above the 50 levels.  
 
The coming weeks will see both these precious metals consolidating in a broad range with upward bias. Any upsides will see levels of 1980 and 2010 being tested in the case of Gold and 26 and 27.85 being tested in the case of Silver.  The outlook for both these precious metals would be neutral to mildly bullish for the coming month.

Contributor(s)

Milan Vaishnav, CMT, MSTA

Back to top
The Technical Analysis Ecosystem

The Technical Analysis Ecosystem

In his book, Outliers, Malcolm Gladwell posits that no one achieves any measure of success in isolation. Any meaningful achievement is the result of not only individual merit, but also a supportive ecosystem that makes such merit possible and indeed visible. 
 
Sachin Tendulkar did not become Sachin Tendulkar purely because of his batting skill. He went to Shardashram, a school with a deeply ingrained cricket culture, where he was noticed by the legendary coach Ramakant Achrekar. His brother Ajit Tendulkar ferried him from practice to practice and match to match, giving him the opportunity to get his 10000 hours of deliberate practice. And all this before he emerged on the world stage. The point of this example is not to diminish the inherent talent of the great batsman. It was to illustrate two things. One, that a supportive ecosystem is essential for inherent value to be polished and noticed. Two, that Indians will take any opportunity to quote a cricket story. 
 
I view technical analysis through this lens as well. For technical analysis to gain its rightful place in the world of investment management, there needs to be a deeper understanding of its value in each pillar of its ecosystem. What are the pillars of the technical analysis ecosystem? I would argue there are four such pillars. 
 
The first is the employer. Typically, the front office business side of any financial services organisation understands technical analysis and its value, albeit to varying degrees. Roles such as analysts, traders, portfolio managers, and even salespeople, client advisors, wealth managers, all need to understand technical analysis. Even if for no other reason that to protect yourself from market risk, if you manage money, or advise people on managing their money, you need technical analysis. However, do the enablers of these roles understand the value of the discipline enough? I mean the HR departments of organisations, particularly Learning and Development, and Recruitment. 
 
The second pillar is academia. While the industry places comparable value on technical and fundamental analysis, this balance is skewed far against technical analysis in courses that aim to prepare students for these roles. In a self-perpetuating cycle, academics have shied from researching technical analysis, and therefore taught lesser of it, leading to future academics researching lesser. With the emergence of advanced computing though, there is now an increased interest in exploring huge datasets that can give insights into the behaviour of markets, the cornerstone of technical analysis. 
 
The third pillar is the regulator. They are tasked with the responsibility to protect the investor from market risk and malpractice. To do so, the regulator needs to ensure that financial market participants who deal directly with the markets, or deal with customers in order to advise them on the markets, are able to recognise market risk and react to it. This is possible when the regulator has a deeper understanding of the behavioural underpinnings of markets, irrespective of region or asset class. 
 
The final pillar is the media. This is an overlooked one. As they invite “experts” to opine on the markets and on investment opportunities for their audience, they have a responsibility to ensure the credibility of the advice shared on their platforms. Whether print, digital or broadcast, the reach of media houses is significant, and their very scale lends them credibility. With this power, comes the responsibility to ensure that they are able to critically analyse the information they disseminate, and tell the real expert from the fake. 
 
This is a subject matter I think in depth about. There is much to be done with each pillar of this ecosystem to create an environment where technical analysis, done right, becomes an essential career skill. I will touch upon these in subsequent editions of Technical Insights. 
 
Volunteer leaders of the CMT Association has been engaging with each of these four pillars, to build an ecosystem conductive to the growth of technical analysis. One major stride in this direction is also the 2020 India Virtual Summit, which brings together speakers and audience members from all parts of the ecosystem, to have a meaningful dialogue. Over 20 knowledge sessions, spread over 4 blocks of 3 hours each in 2 days of 1 giant celebration of this discipline, the Summit has something for everyone. 
 
I hope you can be there, so that together we can elevate the discourse around this discipline. 
 
See you at the Summit.
 
Picture credits: The Noun Project

Contributor(s)

Joel Pannikot

Back to top
Nifty Outlook – Time Cycles Synchronization with Neo Wave Patterns for Accurate Reversals

Nifty Outlook – Time Cycles Synchronization with Neo Wave Patterns for Accurate Reversals

J. M. Hurst suggested that there are certain standard cycles which are universal and can be applied on any asset classes. Many cycle analysts often complain that cycles vanish without giving prior indication. The major reason for this is the interaction of different cycles of varying magnitude. The subject might seem complicated but it is no different than Elliott wave principle. Both Time Cycles and Elliott wave principle revolve around the Fractal nature of the markets. Elliott wave suggests smaller waves combine together to form bigger wave movements and similarly smaller Time frame cycles interact with bigger cycles which in turn result into price movement of varying magnitude. At every degree of Price and Time the patterns are repeatable and these repeating patterns can be exploited to enhance the trading accuracy if only one is aware of show it functions in coherence.
FLD – Future Line of Demarcation is an important Time tool that helps to project price targets, support and resistance points and to understand the underlying trend. It is the most interesting aspect of Hurst’s Time cycles where Time can be used to forecast the Price and if the Elliott wave / Neo wave patterns are synchronized together it can be one of the best tools for market forecasting.
A future line of demarcation is plotted once the cyclicality of the underlying asset is known. Nifty is following a 55 days Cycle which is obtained by doing rigorous phasing analysis. Post that an FLD can be plotted by shifting the closing prices ahead of time by the factor of Cycle Period / 2 + 1.
Intersection of price with respect to itself which is phase shifted is one of the best time tools for price prediction founded by Hurst. The important part of Hurst Cycle is that if you know that major as well as smaller degree cycles are citing towards probable bottom or top then you can save yourself from entering a wrong trade. In the market “when not to trade” is the key to success.
Following is the Nifty daily chart displaying the application of FLD (red) along with Neo wave, to help determine crucial reversal areas and target points.

Nifty chart with Future Line of Demarcation and Neo wave pattern

As can be seen on the chart the intersection of FLD along with Prices usually happens during the midway of the cycle. Targets are derived by measuring the distance from the lows till the FLD intersection and then projecting it on the upside. We can clearly see that the move from 7511 intersected with the FLD near 9660 and this gave an upside target of 11809. The top made by Nifty on 31st August 2020 was near 11794 which was extremely close to the target levels. This clearly showcases the play of these advanced time concepts which can help in deriving the targets.
Interestingly, the selloff seen post 31st August 2020 intersected the same FLD in midway and the downside targets were achieved near 10790 in just 3 days of time post intersection, now a level of support.
Neo wave pattern – Given the above scientific way of deriving price and time targets if the same conforms by Neo wave patterns it is really a thrilling experience. Neo wave suggests that the rise post the low near 7511 has been in the form of intermediate degree wave (b) and this wave (b) is broken down into double corrective pattern. The second correction post wave x is an Extracting triangle as long as wave e remains smaller than wave c. This gives 11550 as an important level to keep a watch on upside, following which 11794 will come into play.
The combination of Hurst’s Time cycle – FLD along with Neo wave pattern suggests that prices are at an important juncture and it simply showcases that these advanced Technical analysis methods that seem complicated on the face of it are actually a very systematic and scientific way to derive price and time targets. Understand that markets do not pay much heed to news or events but move in a systematic fashion of Elliott wave and Time cycles.

Contributor(s)

Ashish Kyal, CMT

Back to top
Algo Trading – The Origin Story

Algo Trading – The Origin Story

Algo has become the new buzz word in recent times but if we think about it, we as humans have been following Algos since the time of Ramayana and Mahabharata or even before that. For example, we bathe each day, is this not an Algo? When I was young, I had to follow a schedule before going to bed at night, namely: change into a night suit, pack my school bag for the next day, and make sure my uniform was ready. Next day morning a similar schedule was followed to get ready for school. Technically, you’ve been following algorithms without even realizing it! The definition of an algorithm is a set of well-defined instructions carried out in a sequence to solve a problem. Aren’t most of us following an Algo each day for many many years?
In trading, the known history of automated trading systems dates back to 1949 to the Legendary Trader Richard Donchian. He traded majorly in commodities with a simple but effective rule which was later known as the 4-week rule or the Donchian Channel. As per this rule a buy signal is generated when the price closes above the 4-week High or a 20-day High and a sell signal is generated when the price closes below the 4-week Low or a 20-day Low. Along with this he added another rule of 5-day SMA Crossing the 20-day SMA from below. He was an extremely successful trader and is regarded as the Father of Trend Following.
Many other Traders adopted his methods during the 70’s and 80’s in the likes of Market Wizards Ed Seykota, Richard Dennis and William Eckhardt. ED Seykota improvised the system by using an Exponential Moving Average instead of a Simple Moving Average. In 1970 he pioneered a computerised Trading System for futures market using early punched card computers.
In 1983 Richard Dennis and William Eckhardt conducted a real-life experiment and published an advertisement in the newspapers to hire traders. They hired 13 people from diversified backgrounds and trained them for 2 weeks with similar rules as described by Richard Donchian. They also added Money Management rules and Average True Range based Position Size rules to build the famous Turtle Trading System. These 13 Traders were called the Turtle Traders. In the period of 4 and a half years i.e. from 1984 to 1988, the Turtles generated an average annual compound rate of return of 80%, which by no means can be attributed to pure luck.

This scientific experiment exposed many myths in the Markets. Some of the new truths that surfaced were:
1) Technical Price Based Analysis does work
2) Trading can be taught and one does not need to be a born Trader
3) Mechanical Evidence-Based Trading can be used to achieve better Risk Adjusted Returns
4) One doesn’t need to predict the direction of the market or security to make money
Application of Algo trading was permitted in India in 2008. It has strengthened its roots since then, averaging about 9% across cash and derivative market in terms of percent of total turnover in 2010 to about 65% in 2020. Brokers have been investing heavily in software spends for Algos. API’s (Application Programming Interface) are also in place for retail clients. Indian markets are now flooded with sophisticated Applications and Platforms which allow back-testing capabilities, paper trading abilities and seamless order execution to multiple accounts with multiple brokers. There are events and seminars organized for Algo Trading aspirants such as Algo Convention (www.algoconvention.com) to promote the use and acceptance of algorithms in trading which is attended by thousands of people across the globe.
An example of Trades executed based on the Turtle Trading system:

Software used: Amibroker

Contributor(s)

Sovit Manjani, CMT

Back to top
CMT Notice Board

CMT Notice Board

CMT Notice Board 

1. Aayush Munjal 

The Chart Report India was released in the last week of September. It is an email report that is prepared by curating the best technical analysis content, from the smartest technical analysts. It includes a Daily Summary, Chart of the Day, Quote of the Day, Top links, and Top 10 Tweets. This is an attempt to build a community of technical analysts and readers, cutting out the noise on twitter and blogs and distilling the best content into a short daily digest for market enthusiasts.

https://thechartreport.com/India   

 

2. Ashish Kyal 

Ashish will be releasing his first book: Effective Trading in Financial Markets Using Technical Analysis 

This book is a comprehensive guide to effective trading in the financial markets through the application of technical analysis. 

 https://trivedikyal.com/ 

 

3. Sovit Manjani 

Dravyanti’s Algo Convention 2020 (4th edition) is the annual conference for Algo traders, Enthusiasts, and market participants. Eminent speakers from India and abroad participate and share their knowledge over three-days of informative sessions. For those with the slightest interest in Algorithms, this would be a good place to start. 

 https://www.algoconvention.com/ 

Contributor(s)

Rashmi Shastry, CMT

Back to top
Bank Nifty underperformance on the cards

Bank Nifty underperformance on the cards

Across the globe, equity markets have bounced back smartly from their March lows. The US Dollar Index peaked on March 23, 2020 and most of the Global Equities and Commodities bottomed out on or after March 23, 2020. The US Dollar Index correction is one of the strongest reasons for a bounce back in the Equity Markets and Bullions. The fall so far in the US Dollar Index appears Impulsive on the way down which indicates that it has entered into a long term bear market. There is a high probability that Global Equities and Commodities will continue their Bull Run in the medium to long term. However, based on the recent bounce back since March 23, 2020 it is unlikely that every sector will participate in the bull-run. One such sector is Bank Nifty which is likely to relatively underperform the Nifty. Following are the reasons why:

  • The Rise since March 24, 2020 appears to be a corrective move in Bank Nifty whereas the rise in Nifty indicates that there is a greater likelihood of a new life time high. Below are the Elliott wave counts on both the Indices.

Above is the Monthly Chart of Nifty Spot

Above is the weekly chart of Nifty Bank Spot

Based on Elliott Wave Analysis, Nifty has completed wave 4, while wave 5 up is pending. Wave 4 retraced exactly 61.8% of wave 3 whereas wave 2 retraced between 38.2%-50% of wave 1 of the same degree. The guideline pertaining to alternation applies to these wave counts perfectly, i.e. wave 2 correction is sideways whereas wave 4 is sharp. Hence, the probability of an impulse move from March 24, 2020 lows is quite high in Nifty. This indicates a best case scenario where until the swing high of 9889 isn’t breached the ongoing correction is in wave IV of 5 up. Worst case scenario is if Nifty breaches 9889 swing high, it may end up forming a symmetrical triangle in its wave 4 without while holding on to the low of 7511 before it finally takes off for wave 5 up. In both these scenarios it is less likely that Nifty will breach its March lows of 7511.

On the Contrary, Bank Nifty seems to have bounced back in its corrective wave since March lows. As per Elliott wave Analysis, it appears to have bounced in a double zigzag W-X-Y wave structure so far and it has risen in an upward sloping parallel channel. It doesn’t appear to be forming any sort of triangle going forward; hence once this bounce back is complete there is a high probability that Bank Nifty may break its March 27, 2020 lows.

  • Nifty and Bank Nifty index composites play a role in the current trend. Many sectors/stocks within Nifty have claimed new all-time highs. Stocks such as Reliance industries, Jubilant Foodworks, Dr Reddys, Naukri and sectors such as FMCG, PHARMA and IT have made a strong come back since March lows. On the contrary, none of the stocks in Bank Nifty have clocked new all-time highs. In the past, Bank Nifty outperformed Nifty several times providing greater returns than Nifty: one of the major reasons being the strong bull market in the Private sector banks. But now, since March lows, none of the Private sector banks have formed an impulse wave. This suggests that the bounce is corrective which will eventually lead to another down wave, breaching the March lows. The current wave structure does not a positive view on Bank Nifty. The PSU banks have already been in a bear market since 2008 lows and now the private sector banks too have given up their long term impulsive upward wave structure.

Nifty and Bank Nifty are the benchmark indices in Indian market and generally move in sync. However, based on the above observations i.e. their individual wave structure as well as the wave structures of their compositions, it appears that Nifty will continue to outperform the Bank Nifty going forward. There is a greater likelihood that Bank Nifty will breach its March lows whereas there is higher probability that Nifty will mark a new all-time high.

Software used: MetaStock

Contributor(s)

Jay Thakkar, CMT

Back to top
From Summit to Summit

From Summit to Summit

Ilate 2019 the CMT Association announced the inaugural India Summit, a oneday conference, which was to be held in Mumbai. When we began the pursuit of our CMT charterwe dreamed of attending the Annual Symposium in New York. We read books written by Steve Nison, Martin Pringand John Bollinger. The idea of watching them live in a conference was simply exhilarating. We knew we had to capitalize on the opportunity presented by the Summit. 

On 23rd November 2019 we attended the 1st India Summit organised by the CMT Association. Not many people get a chance to meet the founder of an organisation you’re a part of, but we did! 

We were fortunate to hear the origin story from Ralph Acampora about how he and a group of people started the CMT Association (formerly known as the MTA). The energy and exuberance he emanated was simply amazing. 

 

One of the most renowned studies in the field of relative strength is RRG Charts and Julius de Kempenaer – the founder of the indicator- presented a beautiful explanation of the same. 

Martin Pring’s books are a part of every technical analyst’s book collection and his explanation of intermarket analysis helped us fill a lot of conceptual gaps.

Two power packed performances by Atul Suri and JC Parets took us on a rollercoaster market trend ride.

Not limiting to equities, we got a chance to learn how Saurabh Bhatia, a fixed income fund manager at DSP Mutual Fund, uses Technical Analysis to make investment decisions. Usha Prabhu, a retired Director of FX Trading at Standard Chartered Bank spoke about her expertise

Shrikesh Pabari of Credit Suisse provided us with insights on how trades are executed on an institutional level. 

The post event wind-down on the rooftop was definitely the highlight of the day! We got to interact with the best in the business on a personal level and we expanded our market network overnight. 

 

2020 will be remembered as the year of learning. We have consciously or subconsciously learnt many things that we may never have had the time for, if not for this forced break. CMT Association has made great efforts to conduct a Virtual Summit where some of the world’s most experienced professionals will share their knowledge and experience. The Summit is divided into diverse categories of knowledge like basic / advanced technical analysis, relative strength, Elliot and neo waves, breadth and momentum studies, algorithmic trading, intermarket analysis, overall economic scenarios and of course CANDLESTICKS! Attendees such as HRs, Teachers, Regulators, Media Houses, Quant Analysts, Technical Analysts, Traders, Freshers and CMT candidates will each have something to look forward to and an opportunity to build a good network.  

After attending the 2019 Summit, we have a much better understanding of the market, because market experts were sharing their invaluable inputs. They shared their experiences and approaches of how they maneuvered the market and became successful. This is something one can’t find in books or videos online. 

We have a line-up of brilliant speakers such as Steve Nison, JC ParetsAksel KibarGautam Shah, Gina Martin Adams, Vivek Bajaj, Ashish KyalAnindya Bannerjee and many more! We also have a legend like Rakesh Jhunjhunwala joining us, and he needs no introduction. His session is sure to ignite the fire of investing in all our minds. 

Summing up, 24 hours of your weekend will be invested in gaining knowledge from the experts, networking with some of the best minds in this field and ideas that can change your approach towards the market. There’s something for everyone! 

 

Contributor(s)

Raunaq Murarka, CMT

Deep Shah, CMT

Back to top

New Educational Content This Month

Back to top