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 Ecosystemby 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 Reversalsby 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 Storyby 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 Boardby 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 content, from...
Bank Nifty underperformance on the cardsby 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 Summitby 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 Mumbai. When we began the pursuit...
Picture credits: The Noun Project
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.
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
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.
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.
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.
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
In late 2019 the CMT Association announced the inaugural India Summit, a one–day conference, which was to be held in Mumbai. When we began the pursuit of our CMT charter, we dreamed of attending the Annual Symposium in New York. We read books written by Steve Nison, Martin Pring, and 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 Parets, Aksel Kibar, Gautam Shah, Gina Martin Adams, Vivek Bajaj, Ashish Kyal, Anindya 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!
New Educational Content This Month
April 14, 2021
Rotate, Don’t Retreat
Presenter(s): Sam Stovall, CFP
March 30, 2021
Relative Strength in Context of Cross-Asset Analysis
Presenter(s): Richard Ross, CMT
March 24, 2021
Interest Rate Volatility
Presenter(s): Paul Winghart