Guess what? It’s 3D time!
It’s been a two-year consolidation and now we have a breakout! #cmtsymposiumbasebreakout
After two years of going online, we’re happy to share with you that we’re going offline again. The CMT Symposium will be a hybrid event in April 2022, and we’re all ready for it. So, brush up your social skills and make sure the bottom half of your clothes match the top half—since you’re finally meeting people in flesh and bones.
The CMT Association has been working tirelessly to get to this point of organizing an event in the post pandemic world. And we look forward to you attending this special event as we get back to some form of normalcy again. Gotta do a mental revision of what it was like to be at a conference. I’m just hoping I don’t blurt out “Is my audio and video all right?” to someone standing right in front of me.
This is going to be my first time attending the conference, so I am definitely counting down the days. Technical Analysis is a field where there are as many methods of analysis as there are people. Every brain thinks and acts differently and that’s the beauty of it. Such conferences are like learning bootcamps where you are exposed to multiple perspectives that aid in better understanding of any given product. I know I’m carrying my notepad everywhere.
So, what’s been happening in our world recently? Rates are rising, bonds are falling, and Commodities, Stocks and Crypto are jiving. Which means they’re moving around in their designated area; save for some exceptions. The first quarter is behind us and we saw the value areas of the market outperform the growth areas. Developing/Emerging markets have dominated the list of the top ten performers over the last quarter with developed economies accumulating at the bottom of the pile. Several markets are in a sideways range, waiting to find future direction. In the midst of all this has been the rates. The one asset class with a clear direction. Yields are rising, and bonds are falling. This is being observed across the globe. Sure, we saw the yield curve invert briefly, but we’ve also seen that such an inversion does not translate to doomsday instantly. It is only a sign of caution and not a confirmation of a selloff. Essentially, the market is in a transitory phase. There’s a phrase that’s been used too often.
In this messy market environment, we have some blogs that can help you identify the market direction, when to take profits, current market scenarios and a note on Algo Trading.
The Symposium fever is here, and I’m looking forward to meeting and interacting with the great minds of the beautiful world of technical analysis. It’s going to be intense, but a lot of fun.
Hope to see you at the symposium, online or offline.
Until next time, Think Technical!
Rashmi Bhatnagar, CMT
President's Letterby Brett Villaume, CMT, CAIA
Your CMT Board of Directors serves to govern the Association’s business affairs, including overseeing our financial and operational performance, and helps to set the long-term strategic initiatives...
How much profit are traders leaving on the table?by Ryan Hysmith DBA, CMT
We studied over 20,000 trades to measure the average time between return extremes over the life of a trade. From all that data and research, see what stands out. Traders hate leaving money on the...
History shows S&P 500 has never feared a rates "liftoff"by Akshay Chinchalkar, CMT, EPAT
The Federal Reserve hiked the Fed Funds rate by 25 bps to 0.5% in March — the first hike since end of 2018 — with the recent minutes sending a rather clear message that fighting inflation...
Markets Environments: Participation > Labelsby William A. Delwiche, CMT, CFA
It’s easy to get fixated on percentages when discussing and labeling market moves, especially when those moves are to the downside. The S&P 500 can be 9.99% below its peak and its crickets...
Fill the Gap Episode 16 with JC Parets, CMT: CMT Association's Official Podcastby Tyler Wood & Dave Lundgren, CMT, CFA & JC Parets, CMT
Summary: This month’s guest on Fill the Gap is a household name in the field of technical analysis – one of the most widely read market commentators of this generation and a role model to...
CMT Association Newsletterby Marie Penza
Membership The CMT Association would like to congratulate the following members on their new positions: Joseph Farrell, CFA, CMT, Principal, Quantitative Technical Analyst at Eight Capital Siddharth...
Technical Analysis & Algo Trading: The Perfect Matchby Deep Shah
Algorithmic trading or Algo-trading, in simple words, means automated trading which involves placing a set of rules with the help of computer programming languages such as Python, R-Program, Java,...
Breadth Study on the Indian Marketby Raj Sharma
Nifty 500 has spent the past two quarters consolidating in a range while remaining in a primary uptrend. It’s crucial for us to know if the market move is back by broader participation or if...
Hindsight 2020: Explaining the 2022 Symposium to my 2020 selfby Joel Pannikot
There is this hilarious series of videos that YouTuber comedian Julie Nolke has created, where she imagines explaining the pandemic to her past self, in a world that for two years kept spiraling...
Job postings on Discordby Joel Pannikot
Late last month we received a call for applications for the role of Portfolio analyst at FSC Wealth Advisors, LLC, based in the New York Metropolitan Area, inviting CMT charter holders to apply. We...
We studied over 20,000 trades to measure the average time between return extremes over the life of a trade. From all that data and research, see what stands out.
Traders hate leaving money on the table. But, how do you know when to exit a position? How much profit do you give up by closing a trade early? What if a winning trade goes against you because you held out for more profit?
These are real scenarios traders face every day, and this article gives you valuable context for making those decisions.
We examined over 20,000 options trades to see how long it takes for winners to turn into losers, losers to turn into winners, and the length of time between position extremes.
We know no one has a crystal ball and hindsight is 20/20. The next time you consider your position management decisions, we hope this research gives you actionable context as you weigh the possibilities. Let’s dig in.
Position Types and Market Conditions
We studied more than 20,000 options trades on eight different strategies over six months. The market had been in a steady uptrend, so traders held mostly bullish positions during the period studied.
Most positions were short duration, with the average trade open for 5.4 days.
After the extended uptrend, markets became choppy, providing ideal conditions to study swings in position value.
The Magnitude of Position Value Swings
A position’s final P&L only tells part of the story. Position returns can vary widely before exiting the trade.
Two metrics describe these position swings.
- Maximum favorable excursion (MFE) is the highest profit reached at any point while the position is open.
- Maximum adverse excursion (MAE) is the largest unrealized loss during a position’s duration.
MFE tells the trader how much profit they “left on the table.” MAE quantifies how the position performed relative to its largest drawdown.
During the period studied, traders missed out on the most upside while trading iron butterflies, long calls, and long puts.
Interestingly, iron butterflies also had the highest MAE. This can probably be attributed to short at-the-money contracts’ gamma exposure.
Trying to capture all the missed profit and catch every market move for each position is a fool’s errand and unrealistic. Still, smart adjustments to strategy decisions and personal trading rules could enable traders to capture a few dollars of lost profit to produce more powerful compounding.
For example, traders could adjust profit targets depending on days until expiration, implement trailing stops once a profit target is reached, or adjust all of these parameters and more based on current market conditions.
Timing of Position Profitability
We can go one step further and analyze the time between profit extremes.
Why? Understanding the time between position extremes gives you insight into position duration and trade management.
For example, knowing that iron condors had a longer average time between their max profit and loss can help you adjust exit criteria or give you more confidence when being patient with your exits.
There is high variability in the time between a position’s maximum and minimum profit. The average iron condor was open 9.1 days and the average days between max profit and max loss was 5.4 days. So, swings in position value relative to the time the position was open are significant.
How This Impacts Your Trading
From all that data and research, here’s what stands out.
Some strategies have much higher favorable and adverse excursions (e.g., iron butterfly, long calls, and long puts). If you know your strategy’s typical return profile, you can make more informed trading decisions.
For example, if you trade iron condors, you have to consider their return profile looks different than trading put credit spreads. An iron condor’s neutral profile means two sides of the trade are in play. So, the time between a position’s maximum and minimum return can be longer than a one-sided trade like a put credit spread or call credit spread.
Meanwhile, the variability between position highs and lows is smaller for iron condors than any of the eight strategies tested.
The point is not to extol the virtues of the iron condor but to demonstrate that strategies have their own unique return profiles.
Can a position turn around? You bet. It goes both ways, though. There’s often a two or three-day difference between the position’s highest and lowest unrealized returns on short-duration trades.
Understanding the variability of your favorite strategy’s returns gives you unique insight into your management decisions and can help remove emotional decision-making from your trading.
The Federal Reserve hiked the Fed Funds rate by 25 bps to 0.5% in March — the first hike since end of 2018 — with the recent minutes sending a rather clear message that fighting inflation was a priority and that Quantitative Tightening would be undertaken at a maximum pace of $95 bln each month starting as early as May. The most recent evidence — the FAO food price index jumped the most over in March to a new record, Peru and Sri Lanka are witnessing social unrest due to food crises — is increasingly pointing to price pressures going truly global and that means the world’s central banks, including the Fed, will have to tighten monetary policy and at the same time hope that growth suffers a “soft landing”. How they will pull this off is anyone’s guess, really.
The big question in investors’ minds is: Can global equities survive central bankers’ “policy tightening”, at the centerpiece of which of course, lies the US Federal Reserve?
American equities have been in correction mode since Oct 2021 as it became obvious that inflation was anything but “transitory”; the added uncertainty from Russia’s invasion of Ukraine hasn’t exactly helped the bull case for obvious reasons and now the Fed’s latest minutes have left no doubt in anyone’s mind that more and bigger hikes are on their way. What does that mean for the S&P 500 going forward? What does history tell us about how the SPX has done when the Fed has tightened policy?
So we ran a 30-year backtest to gauge the SPX’s performance 12 months out considering the first Fed hike after being in status quo mode for atleast 12 months before such a hike. The results are interesting:
|Prior Fed Funds Rate||Reset To||SPX Start||SPX End||SPX Return 12m Fwd In % (Close Only)||Largest Peak To Trough Drawdown In % (Close Only)|
Looks encouraging for SPX bulls, doesn’t it? Yes, but when was the last time you had inflationary pressures like you have now? Warrants a think.
It’s easy to get fixated on percentages when discussing and labeling market moves, especially when those moves are to the downside. The S&P 500 can be 9.99% below its peak and its crickets – cross the 10% threshold and it’s a “Correction” – cross the 20% threshold and banner headlines announce a “Bear Market.”
There are plenty of problems with this approach. A market environment that has the S&P 500 down 9.9% from its peak is likely not materially different from one that has the index down 10.1%. The same can be said on either side of the bear market threshold. Problems go beyond the arbitrariness of the specific thresholds. The questions it raises reflect its lack of utility for everyone except headline writers. Is a market that is on its way to, but has not yet achieved a 20% peak to trough decline in a bear market, or is it still a bull market? And what happens after it enters bear market territory but nudges higher so that the peak to trough decline is now less than the 20% threshold? Is this still a bear market?
Pundits can wrestle with these questions. Historians can come in after the fact and put dates on market cycles (in the same way that dates are put on economic cycles) after peaks and troughs are clearly established. When trying to identify and operate within a market environment in real time, we don’t have those luxuries.
So how can we proceed?
Rather than looking at thresholds, I choose to look at participation when it comes to identifying market environments. Specifically, if more stocks (across the NYSE & NASDAQ) are consistently making new 52-week highs than lows, that seems like a bull market. If we are seeing more new lows than new highs, that is bear market behavior. All of the net gains in the indexes (looking particularly at the S&P 500 and the Value Line Geometric Index) over the past 2+ decades have come when our net new high A/D line has been trending high. In other words, when new 52-week highs have persistently outnumbered new 52-week lows. This isn’t rocket science, it’s a reality that index-level strength will struggle to persist if more stocks are moving lower and making new lows than moving higher and making new highs.
This dynamic has been playing out in recent months. Go back to early 2021 and the number of stocks making new highs started to wane and new low lists were expanding. Until November, however, news highs still outnumbered new lows. That changed in the final six weeks of 2021 and new lows began to outnumber new highs. The S&P 500 managed to hold up for a time and made a new high on the first trading day of 2022. It’s been underwater the year since then. From early January to late March, we experienced 57 consecutive days of more stocks making new lows than new highs. By the time the conventional questions about bear markets were being asked in late-February and early-March, we were already in the longest consecutive stretch of more lows than highs since the financial crisis (in 2008/2009).
That streak has since ended. We could start a new streak of more new lows than news highs. In which case I would conclude that the bear market remains intact (this, in fact, is what happened in late-2008/early-2009). Alternatively, we could begin to accumulate more new highs and the net new high A/D line, which has been moving lower since November, could turn higher. In either case, we can listen to the market, lean on the data and let the evidence write the headlines.
Summary: This month’s guest on Fill the Gap is a household name in the field of technical analysis – one of the most widely read market commentators of this generation and a role model to aspiring financial professionals around the globe. JC Parets, CMT is what you might call “an All-Star.” He has spent years within the community learning from the men and women of Wall St who discovered, engineered and created the tools and methods we use today.
When he is not crushing grapes at Chateau Fibonacci or watching the Miami Dolphins crush rivals, JC and his many colleagues at All-Star Charts are ripping through thousands of charts to see the markets from every perspective. Their comprehensive cross-asset multi-timeframe perspective is at the forefront of what JC brings to the interview this month.
In the April episode of Fill the Gap, JC will discuss the emerging data sources made available on-chain and how DeFi terminology is the only difference between these new market internals and the data we’ve seen from traditional equity and futures exchanges for decades.
To kick off this month’s episode, we’ve brought the architect of the annual CMT Symposium for the past decade – Bill Kelleher, CMT, CFA who shares a bit about this year’s phenomenal conference, the impact this member community had on his own career, and some fond memories of a young JC Parets discussing the early days of FinTwit with Wall St. legends at the Symposium in 2013.
Enjoy episode #16 with our special guest JC Parets, CMT!
New Educational Content This Month
June 29, 2022
The Institutional Use of Technical Strategies
Presenter(s): Brennan Basnicki, CFA, CMT
June 15, 2022
How You Can Benefit from Little Known Seasonal and Cyclical Patterns
Presenter(s): Dimitri Speck
May 11, 2022
Clearing Away the Clutter
Presenter(s): Greg Schnell, CMT, MFTA