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Technically Speaking, April 2010

Letter from the Editor

In this month’s newsletter, we take a look at several recent research papers on technical analysis. The field has been well studied by the academic community, and in many cases, the studies really do support our approaches. For example, relative strength has been the subject of a number of research papers. Academics prefer the term “momentum” to relative strength, but reading through any of the papers you will quickly see the underlying concepts are the same. The idea that momentum persists in stock prices has become so well documented that it is now acknowledged as a known anomaly of the Efficient Market Hypothesis. Many of the common indicators can be thought of as derivative of relative strength, and in fact Richard Tortoriello demonstrated the effectiveness of Wilder’s RSI in his book Quantitative Strategies for Achieving Alpha. The academic community could prove to be a valuable source of trading ideas for the motivated technician. Math can appear to be a hurdle – while we as technicians tend to look at winning percentages

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What's Inside...

Technical Analysis and the News

by Michael Carr, CMT

Noted technical analyst Andrew Cardwell is fond of saying that technical analysis writes tomorrow’s headlines. In his experience, and the experience of many others, price trends tend to start long...

Technical Analysis is an Economic Research Topic

by Michael Carr, CMT

A recent working paper published the Federal Reserve Bank of St Louis offers an academic look at technical analysis rules. This is not the first time that the field has been reviewed by...

Technical Analysis and FRED

by Michael Carr, CMT

Technical tools work on any freely traded market and more and more we are seeing the techniques of technical analysis applied to economic data. While most technicians have a ready source of market...

Letter from the 2010 Symposium Chairperson

by Jeffery E. Lay, CMT

On behalf of the Board of Directors of the Market Technicians Association, I want to personally encourage you to attend the 2010 Annual Symposium in New York City. This year’s event will be held at...

US Government Sources of Data

by Michael Carr, CMT

In addition to the Federal Reserve, several other government web sites offer useful economic data. Bureau of Labor Statistics offers details on unemployment, productivity, earnings, and inflation...

Is It Real, or Is It Randomized?: A Financial Turing Test

by Jasmina Hasanhodzic & Andrew W. Lo, PhD & Emanuele Viola

Editor’s note: One argument against technical analysis cited within the academic community is that technicians can not tell the difference between actual price charts and random data. This...

US Stock Market Returns – What is in Store?

by Dr Prieur du Plessis

Editor’s Note: Is this technical analysis? In this article, the author uses the past to develop an opinion on the future. The data is based on market action (price in the P/E ratio is derived from...

MTA Announcements

Spring 2010 CMT Registration – Level 3 Closes in 1 Week! Registration for the CMT Level 3 Exam closes on Friday, April 9th. Sign up today to ensure your preferred time, date, and location!...

Technical Analysis and the News

Technical Analysis and the News

Noted technical analyst Andrew Cardwell is fond of saying that technical analysis writes tomorrow’s headlines. In his experience, and the experience of many others, price trends tend to start long before the news which explains the underlying fundamentals is understood.

Unfortunately, the media needs to fit the news to the price action. The headlines on a web site or CNBC need to explain today’s market action in terms of the latest news story. So we see that healthcare stocks rally after Congress passes the final legislation. This clearly conflicts with one of the premises of technical analysis which is that market action discounts everything.

John Murphy, CMT, cited that as one the three principles that technical analysis relies on as fundamental truths. The other premises are that prices move in trends and history repeats itself. As Murphy writes in his classic book, Technical Analysis of the Futures Markets, “The technician believes that

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Not a member? Join the CMT Association and unlock access to hundreds of hours of written and video technical analysis content, including the Journal of Technical Analysis and the Video Archives. Learn more about Membership here.

Contributor(s)

Michael Carr, CMT

Michael Carr, CMT

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Technical Analysis is an Economic Research Topic

Technical Analysis is an Economic Research Topic

A recent working paper published the Federal Reserve Bank of St Louis offers an academic look at technical analysis rules. This is not the first time that the field has been reviewed by non-practitioners. While many technicians feel that the academic community takes a dim view of technical analysis, that is not really consistent with a close reading of some of those papers.

The current paper, “Out-of-Sample Equity Premium Prediction: Economic Fundamentals vs. Moving-Average Rules” by Christopher J. Neely, David E. Rapach, Jun Tu and Guofu Zhou (Working Paper 2010-008A, http://research.stlouisfed.org/wp/2010/2010-008.pdf) includes a short summary of some previous work:

Technical analysis dates at least to 1700 and was popularized in the late nineteenth and early twentieth centuries by the “Dow Theory” of Charles Dow and William Peter Hamilton. Despite its popularity, academic economists have traditionally been quite skeptical of the value of technical analysis (e.g., Malkiel, 2007), because its success

To view this content you must be an active member of the CMT Association.
Not a member? Join the CMT Association and unlock access to hundreds of hours of written and video technical analysis content, including the Journal of Technical Analysis and the Video Archives. Learn more about Membership here.

Contributor(s)

Michael Carr, CMT

Michael Carr, CMT

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Technical Analysis and FRED

Technical Analysis and FRED

Technical tools work on any freely traded market and more and more we are seeing the techniques of technical analysis applied to economic data. While most technicians have a ready source of market data for stock market and futures prices, not all have embraced the use of economic data or identified sources for that data. One of the best, and fairly comprehensive data source is the Federal Reserve. In particular, the St. Louis Fed maintains FRED® (Federal Reserve Economic Data), a database of 20,478 U.S. economic time series. At their web site (http://research.stlouisfed.org/fred2/), you can download data into Microsoft Excel and view charts of the data series. A recent enhancement allows you to easily compare multiple data series on a single graph.

Using this site offers a quick tool to examine different data series. For example, we can look at the widely understood relationship between interest rates and inflation. The textbooks

To view this content you must be an active member of the CMT Association.
Not a member? Join the CMT Association and unlock access to hundreds of hours of written and video technical analysis content, including the Journal of Technical Analysis and the Video Archives. Learn more about Membership here.

Contributor(s)

Michael Carr, CMT

Michael Carr, CMT

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Letter from the 2010 Symposium Chairperson

Letter from the 2010 Symposium Chairperson

On behalf of the Board of Directors of the Market Technicians Association, I want to personally encourage you to attend the 2010 Annual Symposium in New York City. This year’s event will be held at the prestigious Hudson Theatre in the Millennium Hotel, Times Square from Thursday May 20th – Friday May 21st. Our theme,  Global Strategy & Tactics: Risk Management Solutions for the Institutional Investor, represents an overarching thesis for two full days of ground breaking thought leadership in the field of technical analysis.

Our keynote speakers this year include Mary Ann Bartels, John Bollinger, Jeremy du Plessis, Mark Fisher, and Larry Williams. Presentations from these leading voices in the technical community form the core of the entire event. Their thoughts on topics ranging from breadth to volatility, trading to investing, and asset class specifics to global inter-market analysis represent cutting edge ideas useful for navigating today’s markets.

Between these fine

To view this content you must be an active member of the CMT Association.
Not a member? Join the CMT Association and unlock access to hundreds of hours of written and video technical analysis content, including the Journal of Technical Analysis and the Video Archives. Learn more about Membership here.

Contributor(s)

Jeffery E. Lay, CMT

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US Government Sources of Data

US Government Sources of Data

In addition to the Federal Reserve, several other government web sites offer useful economic data.

  • Bureau of Labor Statistics offers details on unemployment, productivity, earnings, and inflation among other topics. http://www.bls.gov/
  • Bureau of Economic Analysis compiles GDP and its components. http://www.bea.gov/
  • Census Bureau provides diverse economic data series including durable goods and new home sales. http://www.census.gov/cgi-bin/briefroom/BriefRm
  • USDA Economic Research Service has information that will be useful to commodities traders and those researching the agricultural sector of the economy. http://www.ers.usda.gov/
  • US Energy Information Administration has detailed statistics on oil, gas, electricity, and other energy sources that could help researchers spot economic trends and assist traders in these areas. http://www.eia.doe.gov/
  • Internal Revenue Service files show the tax rate changes over time. http://www.irs.gov/taxstats/article/0,,id=188060,00.html

Editor’s note: Because the MTA is growing in many countries around the world, we realize that there are a large number of non-US based technicians reading Technically Speaking. We would like to provide sources for this type

To view this content you must be an active member of the CMT Association.
Not a member? Join the CMT Association and unlock access to hundreds of hours of written and video technical analysis content, including the Journal of Technical Analysis and the Video Archives. Learn more about Membership here.

Contributor(s)

Michael Carr, CMT

Michael Carr, CMT

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Is It Real, or Is It Randomized?: A Financial Turing Test

Is It Real, or Is It Randomized?: A Financial Turing Test

Editor’s note: One argument against technical analysis cited within the academic community is that technicians can not tell the difference between actual price charts and random data. This inability has been well documented in several studies and popularized in Burton Malkiel’s A Random Walk Down Wall Street. In this research paper, the authors take a different approach. They test the same idea but find that participants can tell the difference between real and random data. This paper may be an important step in the acceptance of technical analysis by academia and serves as a model in its simplicity to demonstrate the utility of our work.

The abstract reads:

We construct a financial “Turing test” to determine whether human subjects can differentiate between actual vs. randomized financial returns. The experiment consists of an online videogame (http://arora.ccs.neu.edu) where players are challenged to distinguish actual financial market returns from random temporal permutations of

To view this content you must be an active member of the CMT Association.
Not a member? Join the CMT Association and unlock access to hundreds of hours of written and video technical analysis content, including the Journal of Technical Analysis and the Video Archives. Learn more about Membership here.

Contributor(s)

Andrew W. Lo, PhD

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US Stock Market Returns – What is in Store?

US Stock Market Returns – What is in Store?

Editor’s Note: Is this technical analysis? In this article, the author uses the past to develop an opinion on the future. The data is based on market action (price in the P/E ratio is derived from market movement). We would like your opinions on whether or not this fits into the field of technical analysis. Please email us editor@mta.org and we will print as many responses as possible in an upcoming issue of Technically Speaking.

Surging stock markets since the lows of March 2009 have caught most investors by surprise, especially as new pieces of the economics puzzle are not always rosy and do not quite seem to support an overly bullish case. In short, investors are increasingly struggling to make sense of the most likely direction of stock prices.

Are we perhaps nearing the end of a cyclical bull phase in a structural bull market? Or will strong earnings growth ensure

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Not a member? Join the CMT Association and unlock access to hundreds of hours of written and video technical analysis content, including the Journal of Technical Analysis and the Video Archives. Learn more about Membership here.

Contributor(s)

Dr Prieur du Plessis

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MTA Announcements

MTA Announcements

Spring 2010 CMT Registration – Level 3 Closes in 1 Week!

Registration for the CMT Level 3 Exam closes on Friday, April 9th. Sign up today to ensure your preferred time, date, and location! Contact Marie Penza, on the CMT Program and/or if you are having trouble scheduling your exam with Prometric. For detailed instructions on how you can register online, please click here.

MTA May Symposium – Over 100 Registrants Already!

With over 100 of your colleagues and fellow MTA members already registered, this year’s MTA Annual Symposium is shaping up to be an excellent opportunity to further your networking while expanding your education of technical analysis. Sign up today to join this growing list of attendees which is on pace to be one of the highest attended events in recent MTA history!

To register online, click here. Alternatively, you can register over the phone by calling

To view this content you must be an active member of the CMT Association.
Not a member? Join the CMT Association and unlock access to hundreds of hours of written and video technical analysis content, including the Journal of Technical Analysis and the Video Archives. Learn more about Membership here.

New Educational Content This Month

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