Over the past year, we have been trying to capture the new bull trend as it starts. It has been a difficult bull market to get a rope on. Technicians use technical tools to diagnose the market trends. The real problem is the shifting sands under every trend are sending indicators to extremes or muting them because of the speed of the corrections. 

S&P 500

Lets look at the S&P 500. For all the trends in the last 5 years, this last year has literally been a rodeo ride. Each time the market started to look like it was ready to go higher, it quickly reversed. Now we have a higher high and a higher low in place. Significant events have taken the banking index down multiples of standard deviations in two weeks to new 52-week lows, but we rallied the indexes. If we ignore the Covid lows, banks are at 6-year lows. The $SPX dropped a few percentage points and didn’t even make a lower low on the weekly. 

Trend followers have been washed out with all the choppy price action. $SPX made 7% in two weeks in the end of March to go from unchanged on the year to up 7 % for the quarter. There have been sectors outperforming, but on a week in, week out basis, it has been a random event each week.

When all the technical evidence lines up that the markets are ready to drop to new lows, the market magically reverses higher.

Where are we in the opinion cycle? 

There have been the bull market technicians that called the bull market low a few times in 2022. 

-Perhaps you’ve heard that we are entering the blow off top. We’re going much higher.
-The bears are calling this ‘popping the everything balloon’ in the monumental topping of a debt frenzy.
=Same blow off discussion for both. The timing is different – one party thinks it has already occurred.

That’s a wide dispersion of opinion. But debt is definitely stressed here.

The yield curve inversion
It’s hard to imagine that the most extreme readings on the yield curve inversion in the last 40 years, won’t create a larger problem. It is a tough backdrop to get courageous. Looking at 2000 and 2007 suggests protecting capital.

How close to this topping process will create problems? It’s hard to expect the worst inversion on the chart to be a solid backdrop for the bull thesis after a 14-year run. 

Trade with conviction. Only take the best setups. Really?

The Fed Funds Rate

The top chart is an arithmetic scale of the Fed Funds Rate. The Fed hasn’t updated their own database (FRED), so this chart is still missing the last ¼-point increase.

The second panel is a momentum indicator, the PPO. Notice how the swings are getting wilder every time? The range on the oscillator continues to stretch more extreme. From 2010 to 2018 it took 8 years for the oscillator to go from one extreme to the other. This time it took one year. The PPO does not look stable. 

The third panel is the 12-month rate of change.   Is this the backdrop to take the best setups?

Will it take a long time to rope the bull and ride it in this market? My best advice is to protect capital. Risk happens fast as we saw with banks. Correlation in a weak market goes to one. Nothing wrong with waiting for a better market. 

We’ll see you in New York!

Chart 2

When the overall market shows a bearish trend, candlestick scans will find the best bearish trade setups. The DKNG chart demonstrates a logical short trade when witnessing the Doji signals at the 200-day moving average. This immediately reveals investor indecision at that level. The following bearish engulfing signal demonstrates that the bears are taking control. The gap down through the T line, with stochastics curling down, indicates not only a downtrend, but the gap down reveals a powerful potential downtrend.

This visual information provides traders with the opportunity to short DKNG or buy puts. For investors holding positions for longer term, this allows for establishing strategies such as writing calls against the position to offset the pullback.

Out of the 50 or 60 candlestick signals, you only need to learn the 12 Major signals, six longs, and six shorts. The ‘12 major signals’ produce the strongest reversal indications, and they are the signals that occur the most often. The other candlestick signals do not occur often enough to spend mental time and energy learning and remembering them.

Additionally, the Japanese rice traders not only provided the visual graphic formations that identified high-probability price reversals, they also explained what investor sentiment was doing to create the reversal signals and patterns. This combination allows investors to analyze price movements with the same insights as an investor with 50 years of investment experience.

Candlestick signals and patterns not only illustrate when a new trend is starting, they also illustrate the strength of the new trend. A clear trend indicator is the T line. The T line acts as a natural support level of human nature. Applied in conjunction with candlestick signals and patterns, which are the graphic depiction of investor sentiment, you have one of the most effective and accurate trend analysis combinations.

The T-line rule has extremely high probability results. Candlestick logic is applied. If the candlestick signals are the graphic depiction of what is occurring in human nature and the T line acts like a natural support and resistance level of human nature, this combination produces an extremely high probability trend analysis result. If you see a candlestick buy signal and a close above the T line, you can stay long until you see a candlestick sell signal and a close back below the T line. The same analysis is on the short side. If you see a candlestick sell signal and a close below the T line, you can stay short until you see a candlestick buy signal and close above the T line.

What is most investors’ major downfall? Our own emotions! Candlestick analysis dramatically reduces our emotional decision-making. Suppose candlestick analysis is the graphic depiction of human nature, which is usually wrong when it comes to investing; then logic says to analyze what the charts are showing and do the opposite of what you think is the correct trade. Have you ever wondered, when everybody else is panic selling at the bottom, who is buying? Or when everybody is exuberantly buying at the top, who is selling? It is smart money!

You can turn your investment perspectives around 180°. Witnessing a candlestick buy signal in the oversold condition reveals where the smart money is buying. Witnessing a candlestick sell signal in the overbought condition reveals where the smart money is selling. Candlestick charts allow you to participate with smart money. Doing what the charts reveal takes the emotions out of your trading.

Candlestick signals utilize confirming indicators, such as moving averages and especially the T line, for correct trade entry. Witnessing a bullish candlestick signal that would be supporting at a moving average level that everybody else is watching enhances the probabilities that the bullish trade is confirming.

The candlestick investor has the advantage of seeing immediately what investor sentiment is doing at the technical levels other investors are using, Bollinger bands, Fibonacci retracement levels, trend line support, and resistance levels. Or if an investor has a successful chart trading system, adding candlesticks to the chart will improve the visual analysis dramatically.

The Japanese rice traders identified the graphics that illustrate when trend reversals occur. Where do most people buy? They buy exuberantly at the top! Where do most people sell? They panic sell at the bottom.

Knowing these aspects of human nature, the graphics provided by candlestick signals give great clarity as to when it is time to buy and when it is time to sell. Remember that the graphics work just as well on intraday trading charts as on daily, weekly, and monthly charts. 

Candlestick signals and patterns produce expected results. The signals have been produced from centuries of observed price movements of human nature. Logic dictates that if they did not produce high-probability results, we would not be looking at them today.

Stephen W. Bigalow owner and operator of www.candlestickforum.com. His 45 years of investment trading, with heavy emphasis on candlestick analysis, provides a learning forum of candlestick analysis. He consults for money managers and hedge fund managers for improving market and positioning timing. Stockbroker: Kidder Peabody, Cowen, Oppenheimer. & Company. He holds a business and economics degree from Cornell University. Published: “Profitable Candlestick Trading”, “High Profit Candlestick Patterns”, and “Candlestick Profits, Eliminating Emotions”.

The CMT Association is celebrating its 50th anniversary this year! To mark this important event, George Schade and Karen Benefield along with Ralph Acampora have written a book highlighting the history of the association and its journey thus far. 

I had the opportunity to interview Karen for the same, and here are some excerpts from the chat:

Rashmi: Could you tell us about the association’s founders and what brought them together? What is the birth story of the CMT Association?

Karen: The association has many people to thank for their early involvement.  These include senior mentors, Bob Farrell & Alan Shaw; 3 original founders John Brooks, John Greeley & Ralph Acampora along with the original 13 other charter members. The story starts with a chance meeting between John Brooks and Ralph while they were standing in line for their point and figure charts.

R: What were some challenges the association faced in its early days?

K: I think the main challenge the association faced early on is still a challenge today. That is that technical analysis is still not widely accepted even today like fundamental analysis.  All one has to do is look at most business school offerings and there are still very few classes taught in technical analysis at the classroom level.

R: What led to the Annual seminars, and how have they changed over the years?

K: Technicians wanted to get together and listen to speakers that they had only heard about and never had the opportunity to meet in person.  The best way to carry this out was to hold seminars in different locations in the U.S. and over time attract people of all interests. They were smaller in nature and the organization was more like a club in the early days. What we call today the annual Symposium, originated as the annual seminar.

R: This is where I’m personally invested – what is the origin story of the first edition of Technically Speaking? How did the market participants receive it?

K: Since shortly after its inception, the association has published the Technically Speaking monthly newsletter. The goal was to inform membership of association activities, personal accomplishments and matters of professional interest.  When Michael Carr was Editor, he took the newsletter into the digital age. Distribution was digital. But before the internet, the newsletter was a leading publisher of research. It delivered novel ideas every month, along with news from the organization. For members outside of New York City, this mailing could be their only regular contact with peers.  The newsletter continues to serve as a valuable resource for short research pieces and continues to serve as a way for new and experienced professionals to gain exposure to a wide audience for their work. It has served this purpose for decades and will be serving as a forum for cutting edge ideas decades from now.

R: What was the tipping point of introducing the Chartered Market Technician Credential? 

K: Technicians wanted to be treated as equal as fundamental analysts. The association wanted to design and establish a professional certification program that would provide the highest level of education. A related objective was to expand the education and advancement of the discipline of technical analysis.

R: What is the significance of The Library at Baruch College in the context of the CMT Association?

K: The Library at Baruch College is part of the Technical Analysis Educational Foundation, established by the MTA in 1993. The collection includes nearly 5,000 publications that constitute a significant portion of the body of knowledge of technical analysis. The holdings consist of books, historical texts, journals, investment advisory letters, recordings, electronic and digital media, chart books, and photographs. The collection includes books by the earliest generation of analysts and writers in this country who formulated and expanded the field of technical analysis as well as the books of leading modern technicians.  The collection also contains possibly the finest collection of books and writings dealing with the cyclicality of financial markets, physical sciences, human cultural activities, weather, biological rhythms, planetary activity, and natural phenomena. These publications, originally compiled by the Foundation for the Study of Cycles, present the findings of extensive research going back decades. Through its partnership with Baruch College, the collection is available to members, academics, and researchers. The collection benefits both professionals and new entrants to technical analysis and preserves the literature of the field. 

R: As a market participant, what have been the most significant changes you have noticed in the adoption of technical analysis today?

K: Technical analysis is more often highlighted in the media today than in the past.  All too often when technical analysis is covered in the media, the media still doesn’t give it the respect that it deserves.  Too often the host cuts off the technician and flashes up a chart.  This comes across as disjointed.

R: Why did the MTA become the CMT Association?

K: The MTA was changed to the CMT Association to better align from a marketing and professional standpoint.  We are charterholders just like CFA’s but on the technical side not the fundamental side. It made sense to change our name to better reflect the credential of our members.

R: What was the inspiration behind writing this book?

K: Apparently, George & Ralph knew we were going to write a book from the beginning.  I on the other hand thought I volunteered to help with a brochure that was going to be similar to a brochure given out at our 25th Symposium. The inspiration has been to document to the best of our ability for current and future members the who, what, when, where and why which defines our association.  We are 50 years old and a lot of our early members are no longer with us. The three of us have been very adamant about documenting the correct history and to verify the facts which gets harder with time.  It is important to us to document the history, people and achievements of our organization because there have been many.  

R: Having reflected on the history of the CMT Association, what is something that stayed with you or surprised you about the association/founders?

K: I was very fortunate to have had the opportunity to interview many of the Legends. Every person I asked to interview for our book said yes.  I was very humbled in getting the opportunity to interview such a wonderful group of technicians. There are several things that will stay with me, having had the great pleasure to contribute to this history book.  First, all of the technicians I interviewed are among the great technicians and are people that I have admired my entire career.  More important is that they are all fantastic people and very humble.  George drafted a fantastic outline from the beginning, which allowed me to start my interviews immediately. Without George’s draft there would be no history book.  Without Ralph there would be no CMT Association.  As is often said in our industry, I have stood on the shoulders of two giants, and I had the best view in the house! 

Thanks to everyone that contributed to our history book!