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Technically Speaking, April 2012

LETTER FROM THE EDITOR

This issue starts with an update on the CMT Program. The recent addition of Bob Johnson to the Program is a step toward making a great program even better. The rest of the issue is a collection of insights from practitioners in the field. Classic chart patterns still form the core of the discipline, but the patterns are being used in a number of different ways and the articles that follow will show just a small sample of the type of work technicians are doing today. Please let us know what you think about Technically Speaking by sending an email to editor@mta.org. Sincerely, Michael Carr

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What's Inside...

BOB JOHNSON ON THE CMT PROGRAM

by Michael Carr, CMT & Robert Johnson, CFA

Recently the MTA hired Robert Johnson, Ph.D., CFA, CAIA, in a consulting capacity as Director, CMT Studies. This position was specifically created to enhance the professionalism of the CMT Program...

DOW 20,000

by Mukul Pal

Proportion is mathematical. This is why Elliott beautifully illustrates the proportional structures on markets. In this update we question some Elliott assumptions and highlight some observations on...

TWO BASIC PRICE ACTION SETUPS

by Manuel Amunategui

To most of us, price-action trading is closely related to technical analysis and stock charts. But to a subset of traders, it goes much further than the technical versus fundamental issue, it is...

ARE PRECIOUS METALS FLASHING A BUY?

by Matt Blackman, CMT

Since bottoming in Q4-11, a number of stocks have been exhibiting some interesting stock patterns according to trader Dan Zanger. Market leaders include well-known stocks like Apple (AAPL), Priceline...

INTERVIEW WITH MATT BLACKMAN

by Matt Blackman, CMT & Amber Hestla-Barnhart

How would you describe your job? As a full-time freelance trading, finance and global markets writer, my job has two major components. First, find major market related events and trends that have the...

MARKET TIMING USING THE VIX

by Laurence Connors

The following was transcribed and edited from TraderTalk, a free, live, interactive workshop conducted for TradingMarkets members by Larry Connors. It originally appeared at http://go.mta.org/274 and...

HOW MARKETS REALLY WORK: A QUANTITATIVE GUIDE TO STOCK MARKET BEHAVIOR BY LAURENCE A. CONNORS WITH CESAR ALVAREZ AND CONNORS RESEARCH

by Michael Carr, CMT

In reading this book, I was struck by a similarity between the work of Connors and Alvarez and the original work of Ben Graham and David Dodd in their classic book, Security Analysis. Graham and Dodd...

A BULL MARKET IN THE UK

by Amber Hestla-Barnhart & Michael Carr, CMT

Sovereign debt problems have dominated the news around the world. The issues are complex and seem to be influenced by immediate political concerns, short-term factors, and long-term economic trends....

ENTHUSIASTIC RESPONSE TO HALF DAY LECTURE PROGRAM AT PACE UNIVERSITY

by Lawrence Laterza

On March 23rd Phil Roth and I had the pleasure of staging a half day lecture program on the campus of PaceUniversity, just blocks away from the heart of the financial district in downtown New York...

BACK TO THE DRAWING BOARD: SEARCHING FOR THE TREND’S END

by Scott Hathaway, CFTe

For my 3rd and final article in this series I would like to present some geometric perspectives of a potential top in the NASDAQ 100, specifically relating current price to previous important points...

MTAEF SPRING 2012 AUCTION

by J. Cody Tafel, CMT, CAIA

The Market Technicians Association Educational Foundation (MTAEF) will hold an auction this May to raise funds for the mission of identifying and supporting educational programs in the field of...

BOB JOHNSON ON THE CMT PROGRAM

BOB JOHNSON ON THE CMT PROGRAM

Recently the MTA hired Robert Johnson, Ph.D., CFA, CAIA, in a consulting capacity as Director, CMT Studies. This position was specifically created to enhance the professionalism of the CMT Program and Dr. Johnson seems tailor made to fill the new position.

He brings the skills and experience to the position that will be needed to bring the CMT Program to the next level. His education-related experience includes working with psychometric experts to identify and apply the  best practices in testing and distance learning. His finance-related experience includes a Ph.D. in investments and professional certifications in the field.

In a recent conversation, Bob explained that he has just started reading the required books and reviewing the test materials but his first impression is favorable. He noted that what is missing from the Program is appropriate pedagogy (a term defined below). Bob has years of experience

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Contributor(s)

Michael Carr, CMT

Michael Carr, CMT

Robert Johnson, CFA

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DOW 20,000

DOW 20,000

Proportion is mathematical. This is why Elliott beautifully illustrates the proportional structures on markets. In this update we question some Elliott assumptions and highlight some observations on Dow Jones Industrial and overall market structure.

Fig. 1: This is a classic five wave structure from 1789 to 1990. The 1990 highs seemed like a top, but markets continued to extend more than a decade after the respective high well into 2000.

Fig. 2: Elliott Wave structures give 2000 top a high importance. This somewhere rests on the super cycle fourth wave low at 1982. If that low is assumed to be in 1975 and not in 1982, the count would change. This would suggest that

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Contributor(s)

Mukul Pal

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TWO BASIC PRICE ACTION SETUPS

TWO BASIC PRICE ACTION SETUPS

To most of us, price-action trading is closely related to technical analysis and stock charts. But to a subset of traders, it goes much further than the technical versus fundamental issue, it is about raw price. The rational is that a methodology that only uses price (avoiding indicators and optimization), is as fast as can be and effortlessly transferable to any market. Yet for me, watching price action is first and foremost about simplicity.

This article is a brief look at two simple and short-term setups. These can be incorporated into existing systems or used on their own in strong markets. By using a simple candlestick chart and monitoring market conditions and price patterns, we can easily find high-probability trades. As these setups only trade with the trend, the first part of the article discusses how to determine market trend and strength, and the second part digs into each strategy.

MARKET BEARINGS

Unlike

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Contributor(s)

Manuel Amunategui

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ARE PRECIOUS METALS FLASHING A BUY?

ARE PRECIOUS METALS FLASHING A BUY?

Since bottoming in Q4-11, a number of stocks have been exhibiting some interesting stock patterns according to trader Dan Zanger. Market leaders include well-known stocks like Apple (AAPL), Priceline (PCLN), Las Vegas Sands (LVS), Lululemon (LULU) and Mastercard (MA) as well as some lesserknown names like Under Armour (UA), Fossil Inc (FOSL) and Linkedin (LNKD). Even some of the previously beaten up financials and housing stocks are showing signs of life again he says.

“After stocks bottomed last fall, many have been slowly but surely grinding higher and they appear to have transitioned from a choppy trading range to climbing that proverbial wall of worry once again. Picking bottoms is difficult because in the early stages, rallies are punctuated by volatile drops as bulls and bears fight for dominance. But from that uncertainty comes the foundation of the next recovery and new powerful rallies to trade,” Zanger says.

Sitting at his trading

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Contributor(s)

Matt Blackman, CMT

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INTERVIEW WITH MATT BLACKMAN

INTERVIEW WITH MATT BLACKMAN

How would you describe your job?

As a full-time freelance trading, finance and global markets writer, my job has two major components. First, find major market related events and trends that have the potential to impact markets and trading results and two, find technicians, traders, authors, software developers and market professionals that have a view, product or service that will interest traders and active investors and then help that individual/ company get their message out to the market via the financial and trading media.

What led you to look at futures markets instead of stocks or another tradable?

I track all of the five asset classes – stocks, futures, bonds, currencies and real estate. Markets ebb and flow so it is useful to be able to move between asset classes. For example, since 2000 US indexes such as the S&P500 are basically flat but many commodities (gold and silver for example) are way

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Contributor(s)

Matt Blackman, CMT

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MARKET TIMING USING THE VIX

MARKET TIMING USING THE VIX

The following was transcribed and edited from TraderTalk, a free, live, interactive workshop conducted for TradingMarkets members by Larry Connors. It originally appeared at http://go.mta.org/274 and is reprinted here with permission.

What Is The VIX?

In my opinion, the VIX is the best market-timing indicator available for short-term traders today. The VIX is, simply, a measurement of the implied volatility of the at-the-money OEX Index Options. High VIX readings usually occur after markets experience sharp sell-offs, when fear is rampant and sharp reversals to the upside tend to occur. Low VIX readings (as we are seeing now) usually occur when the market rises. This is a signal that there is complacency in the market and a sell-off is near.

Why Does The VIX Work?

These four rules will help you understand why VIX signals work:

  1. All volatility is mean-reverting. This simply means that periods of low volatility will be followed by periods of high volatility,

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Contributor(s)

Larry Connors

Laurence Connors

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HOW MARKETS REALLY WORK: A QUANTITATIVE GUIDE TO STOCK MARKET BEHAVIOR BY LAURENCE A. CONNORS WITH CESAR ALVAREZ AND CONNORS RESEARCH

HOW MARKETS REALLY WORK: A QUANTITATIVE GUIDE TO STOCK MARKET BEHAVIOR BY LAURENCE A. CONNORS WITH CESAR ALVAREZ AND CONNORS RESEARCH

In reading this book, I was struck by a similarity between the work of Connors and Alvarez and the original work of Ben Graham and David Dodd in their classic book, Security Analysis. Graham and Dodd defined the concept of investment to be completely different from the concept of speculation. An investment, according to the founding fathers of fundamental analysis, is a financial operation that is based upon thorough analysis, a margin of safety and a reasonable expectation of a satisfactory return. A speculation is a financial operation that lacks those principles. Connors and Alvarez have shown that short term trading can be considered an investment strategy rather than a risky speculation. They do this by delivering a thorough analysis of the techniques, showing a margin of safety is possible with correct entries and risk management strategies and showing that the disciplined

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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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A BULL MARKET IN THE UK

A BULL MARKET IN THE UK

Sovereign debt problems have dominated the news around the world. The issues are complex and seem to be influenced by immediate political concerns, short-term factors, and long-term economic trends. Fortunately traders can take positions without having to fully understand the news events.

This is especially useful when Greece is repeatedly pushing against the edge of disaster and no one beyond the immediate circle of participants could understand the full details of the problem. Although only large bond holders, central banks and politicians are involved in negotiations, countless analysts are expressing opinions on what caused the problems and what must be done to fix the financial system. Despite the dire news, global stock markets have been moving higher. This has surprised many of the analysts who think that the debt crisis should lead to a sustained market crash.

Traders actually aren’t surprised that stocks can go up despite daily headlines forecasting the end

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Contributor(s)

Michael Carr, CMT

Michael Carr, CMT

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ENTHUSIASTIC RESPONSE TO HALF DAY LECTURE PROGRAM AT PACE UNIVERSITY

ENTHUSIASTIC RESPONSE TO HALF DAY LECTURE PROGRAM AT PACE UNIVERSITY

On March 23rd Phil Roth and I had the pleasure of staging a half day lecture program on the campus of PaceUniversity, just blocks away from the heart of the financial district in downtown New York City. The response exceeded all expectations, both in numbers and in the level of enthusiasm of those who attended.

The event was organized on campus by Bernardo Feitosa, an MTA student member, in conjunction with PratibhaRajbhandari, president of the Pace Graduate Student Finance Club. Representatives from six different student business clubs on campus were among the attendees. Typically, events of this nature at Pace are considered successful if they attract 30 to 40 students. Initially, we were very pleased to be on a pace for 50 to 60 attendees. However, the final 48 hours saw a surge in last minute responses
that caused the presentation to be relocated to a larger room which accommodated 85.

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BACK TO THE DRAWING BOARD: SEARCHING FOR THE TREND’S END

BACK TO THE DRAWING BOARD: SEARCHING FOR THE TREND’S END

For my 3rd and final article in this series I would like to present some geometric perspectives of a potential top in the NASDAQ 100, specifically relating current price to previous important points to see if they are harmonic, in keeping with one of the series’ themes. Lines, levels and circles will provide future harmonic areas for potential reversals as well.

I will introduce several approaches to do so: a ‘Fractional Harmonic’ approach to Speed Resistance Lines, multiple angle views of a vector circle, and a geometric fan based on a very special angle: 19.47 degrees. (See Appendix I for a detailed description)

The first chart shows that all major points (and many minor points) after the major low of ’02 are harmonically related to this unique angle and its resulting fan, as seen through a 72d (pentagonal) perspective:

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Contributor(s)

Scott Hathaway, CFTe

Scott Hathaway, CFTe

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MTAEF SPRING 2012 AUCTION

MTAEF SPRING 2012 AUCTION

The Market Technicians Association Educational Foundation (MTAEF) will hold an auction this May to raise funds for the mission of identifying and supporting educational programs in the field of technical analysis.The auction will run from May 1-11, and gives participants the opportunity to take a renowned technician to lunch. We are excited to have several new participants in the auction this year.

This is a great chance to get access to some of the top market minds, and the format of taking the expert to lunch or a 45 minute phone call will enable bidders to participate regardless of geographic location. More details on the auction are coming soon. We wish you the best of luck in your bidding and thank you sincerely for supporting a great cause.

The MTAEF Spring 2012 Auction Participants include:

  • Rick Bensignor – New York, NY
  • Marc Chaikin – Philadelphia, PA
  • Jeff Cooper – Malibu, CA
  • Tony Crescenzi – Orange County,

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Contributor(s)

J. Cody Tafel, CMT, CAIA

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New Educational Content This Month

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