Technically Speaking, April 2024

Head & Shoulders, Cup & Handle, Hanging Man, Shooting Star, Island Reversal, Bullish Belt Hold, etc. are perfect examples of ‘how to make a subject interesting.’ You must credit the learned people in our complicated field to make the subject fascinating. These pattern names piqued my interest, and I’m sure I’m not alone!

But an interest can only take you so far. The remainder of the job is done by diving deep into the subject. For someone like me, however, who likes to know the downsides of every situation, technical analysis gave me the tools to calculate my risk. After all, any activity that results directly in the money reserve moving higher or lower involves stress. But there’s a solution for that in the form of risk management, which is Technical Analysis’ biggest strength. It’s our lifeboat when we tread troubled waters.

One of the most challenging times as a market participant is when the market is in a trading range. Now, this is where things become interesting. As a trader, one must decide whether this is their playing field (depending on experience, of course). Certain people excel at range-bound trading, and others look for swing moves. While these are learnings that we identify only after spending considerable time in the market, these learning can only be achieved if approached with the attention that they demand. When life is a mess, sitting back, observing, planning, and executing makes sense. Similarly, sitting back and observing until you feel like joining the party again is essential when the market is in a mess.

The beauty of this field is that we learn things about our temperament, psyche, approach, and reactions much faster than in any other field because these make up our arsenal. We often start with the idea of defeating the market. But over time, we learn that the phrase frequently appearing in technical analysis books is there to teach us its worth—’The trend is your friend‘.

Until we meet again, Think Technically!

Rashmi Bhatnagar, CMT

Editor

What's Inside...

Market Anomaly Analysis

Gordon Scott, CMT

Puts Over Dividends

Sometimes markets move in ways that are the opposite of normal operating procedure. At such times, when...

Commodities Time to Shine

Dash, CMT, CFP

The Beanpot Trap

Jack Hughes, CMT, CTA

The Beanpot Trap is a Proprietary Sentiment Indicator using a novel approach to Predictive Behavioral Analysis. The Market’s participant’s collective...

RRG analysis

C. Theodore Hicks II, CFP, CKA, CMT

Inflation Sensitive

Courtesy of Optuma

Our first chart for today...

A Great Beginning: Reflections on Our First CMT Mumbai City Community

Aditya Iyer, CMT

As the newly appointed leader of CMT Mumbai City Community, I am deeply grateful for the trust and...

Market Anomaly Analysis

Puts Over Dividends

Sometimes markets move in ways that are the opposite of normal operating procedure. At such times, when something seems abnormal, it usually spells opportunity because something, somewhere, has to break, and one of the two diverging lines on a chart must soon snap back into place. Today’s newsletter features three such examples.

In the first example, you ask yourself, “What kind of a crazy investment world do you have to live in to see a day where you can make significantly more money selling puts than collecting dividends?” The answer, apparently, is the one we live in now, with interest rates on bonds that outstrip the dividend yield of most stocks on a regular basis.

The chart below compares the Cboe Put Write Index (PUT) with iShares’ Select Dividend ETF (DVY). The former is an index built from a hypothetical portfolio of short-term T-bills and one-month-expiry, at-the-money put options sold on SPX. The latter is an ETF made up of solid dividend paying stocks like Altria (MO), Verizon (VZ) and Pfizer (PFE).

You can see from this chart that these two benchmarks have been close companions, holding better than a 90 percent correlation over the past decade, right up until last year. Except for the highly uncertain times immediately following the Covid pandemic, these two financial instruments have not strayed far from each other.

The wide divergence that has grown over the last twelve months likely has to do with higher interest rates, and the decreased demand investors are showing for dividend stocks. However, it presents a curious case study for answering a single question: how long can this divergence remain before stocks start paying higher dividends, or option traders start demanding to pay lower premiums?

VIX Signaling Worry

When shrewd investors and traders see divergences like the one between put-option prices and dividend stocks, it makes them wonder when the divergence might reverse itself, because that would signal a great opportunity.

Like the divergence between the SPDR S&P 500 ETF (SPY) and Volatility Shares’ -1x Short VIX Futures ETF (SVIX). These securities should mimic each other, because SVIX is an inverted version of the Cboe Volatility Index (VIX). Since the VIX and SPY are often inversely correlated, SVIX should have a positive correlation to each other. In fact they do, at least most of the time. And when they don’t, you should pay attention (see chart below)

Spoiler alert: this kind of divergence is usually bearish.

Losing the Appetite

Usually the Russell 2000 moves in, roughly, the same direction as the S&P 500 and the Nasdaq 100. Usually the SPDR Utility Index ETF (XLU) does not outperform them. Usually investors tend to be okay with taking on a reasonable amount of risk. That’s how things usually go–until all of a sudden, they don’t go that way anymore.

The chart below compares iShares’ Russell 2000 Index ETF (IWM) with SPY and with XLU. The appearance of this comparison should be enough to make any investor take a pause and consider what is going to give on this chart.

If IWM is a good proxy for the “Risk On” trade, and XLU is a good proxy for the “Risk Off” trade, then why is SPY still rising at a time when XLU is rising and IWM is falling?

All three of these charts suggest that investors might be ready to stop paying top dollar for high-growth opportunities. The savvy trader or investor will want to keep a close watch on these trends.

Contributor(s)

Gordon Scott, CMT

Gordon Scott, who holds the Chartered Market Technician (CMT) designation, is a former managing director of the CMT Association, where he oversaw all aspects of the CMT Program from developing the body of knowledge to exam grading. Previously, Gordon spent over 10...

Commodities Time to Shine

We continue to watch bond prices fall and the major stock market indices move sideways.

What about the third asset class – commodities?

The $CRB Index, which tracks about 19 different commodities, has consolidated for about two years until recently. Some commodities in this basket have also begun to show relative strength compared to other asset classes.

(If you are new to relative strength, or ratio analysis, check out one of my previous blog posts: https://dashcharts.wordpress.com/2024/02/18/relative-strength-ratio-analysis/ )

I believe ratio analysis is integral in spotting some of these early trends. If we know one thing about the commodity markets – it’s that they TREND!

Let’s start with gold.

I wrote about gold a month ago, where I outlined its relative strength: https://dashcharts.wordpress.com/2024/03/10/can-gold-outperform/

Gold continues to impress. Analyzing a long-term weekly chart, I drew Fibonacci Retracement levels from 2011 highs to 2015 lows.

Notice how gold completed a decade-long basing pattern, consolidated for four years, and has recently broken through its 138.2% Fibonacci resistance level. It is currently hovering right below its next level, the 161.8% around $2445. This trend has space to develop.

Enough about absolute performance.

On a relative basis, gold broke out of its 13-year long basing pattern compared to bonds.

Are you surprised to see gold has actually been outperforming bonds since 2020?

Let’s take a look at gold relative to stocks – specifically, the $NASDAQ Composite.

At the start of April, gold broke through its relative resistance line and has been outperforming Tech as well.

Now time to analyze gold’s sister metal – silver.

Gold and silver tend to be highly correlated, but silver has a larger beta; it can be more volatile. Silver typically outperforms when metals begin to trend.

Zooming out to a long-term weekly chart again, this is the resistance zone I have been watching in silver.

Take note of how the market has repeatedly stressed the importance of that zone. Silver touched that level multiple times and gapped down below it in 2013, tested it with a few early breakouts in 2020, and seemingly now, breaking out once again.

Here is silver relative to bonds – at decade-long resistance!

Are we making the bet that silver breaks out relative to bonds just like gold did?

You can also see that silver is on its way to approaching its resistance zone relative to the $NASDAQ.

How long before sister silver steps in and takes the lead?

Let’s pivot from the precious metals and discuss another commodity – oil.

Oil has seen quite a move off of the 2020 lows and has consolidated for roughly two years, finding support at 2011 lows.

It’s amazing how much the market loves this level. I’ve lost track of how many times this zone has been touched!

That 14-year long zone isn’t the only level that grabs my attention.

The recent consolidation after the steep 2020 move seems to be forming a possible pennant (bullish continuation) pattern. I use the term “possible” because the pattern is not complete until we see a confirmed breakout – which is typically a percentage move (1-3%) through support or resistance of the pattern.

The move from 2020 lows to 2021 highs is called the “flag pole” of the possible pennant, and this measured move, added to the breakout level, becomes the new target price.

Using this simple math, we could see an upwards move placing oil at over $200/barrel if price decides to break through resistance of the triangle portion of the pattern.

Now I’ve just highlighted a few today in detail, but there are many more to watch.

For example, look at coffee’s valid descending trendline resistance breakout.

It seems as though we are in the very early innings of this ball game. You may want to grab those peanuts and cracker-jacks!

Contributor(s)

Dash, CMT, CFP

Dash found Chartered Market Technician (CMT) Association two years ago when looking for a deeper knowledge and study of technical analysis. Dash posts weekly chart analysis at Dash-Charts.com.

The Beanpot Trap

The Beanpot Trap is a Proprietary Sentiment Indicator using a novel approach to Predictive Behavioral Analysis. The Market’s participant’s collective behavior is identified (proprietary supply and demand) which generates detectable behavioral patterns that are accurately forecasted for price direction. If you know why
a factor works you should know with high probability when the factor should work! Throughout the years, covered market highs and lows leading to Bull and Bear Cyclical and Secular markets have been called in the PowerPlay utilizing the Beanpot Trap.

Definition of a Trap: the trap usually occurs in a very oversold or overbought condition. The market that is highlighted in the PowerPlay should move higher for a few days or weeks in an oversold condition or moves lower for a few days or weeks in an overbought condition, while Proprietary Capital Flow– Supply/Sellers or Demand/Buyers enters the marketplace. Trade is always in great shape above this new demand in an uptrend or it is always in great shape below this new supply in a downtrend; however, if trade takes out the proprietary demand/buyers in an
uptrend or proprietary supply/sellers in a down trend, the structure of the markets have changed leading to profound negative outcomes to the existing trend. If the demand/buyers get taken out, a long squeeze (much lower prices) should follow and if the supply/sellers get taken out, a short squeeze (much higher prices) should follow. It’s trapping the weak longs or weak shorts into a situation where they must dump their positions…a squeeze play should manifest leading to additional selling and buying by other market participants.

The Delayed Whistled Trap is a Proprietary Sentiment Trap Indicator but the outcome of the Trap that has been activated is delayed. We have mentioned the following scenario numerous times in the PowerPlay. Often times the influence of a Trap is seen immediately, as weak shorts or weak longs are forced to exit their positions and a flash move in a direction occurs and at times the directional move is more subtle. If a demand area get taken out in an overbought region but price fails to immediately move lower, the next supply area to enter the market place should now be most important (the Tell) as the bears should add supply and the question that follows should be…should this added supply keep weighing on the market or should the bulls push through and take back control of the market…we have witnessed that many market tops should experience this subtle developed pattern…we call this sentiment indicator a Delayed Whistled Trap.

The SP 500 Model Portfolio of Stocks SP 500 Model Portfolio of Stocks is a sentiment Indictor consisting of 20 Large Cap Stocks. If an X is displayed on our SPX Chart on a low day, the X denotes that at least 13 out of 20 stocks that day are in accumulation/demand mode or if an X is displayed at a high day, the X denotes distribution/supply mode, two XX’s denotes that at least 20 Stocks in a two day period cumulative are experiencing accumulation/demand or distribution/supply or three XXX’s denotes that 25 stocks in a three day period cumulative, are experiencing an accumulation/demand or distribution/supply day. This indicator allows you to see buyers and sellers entering and exiting the marketplace, a commercial footprint. Strong directional moves are likely to follow.

Contributor(s)

Jack Hughes, CMT, CTA

Jack Hughes is the owner and founder of Beanpot Financial Services, Inc. of Boston, MA. Previously, he was a member of the Chicago Mercantile Exchange from 1987-1995 where he owned his own Floor Brokerage operation executing client orders on the floor of the Chicago Mercantile Exchange...

RRG analysis

Inflation Sensitive

Courtesy of Optuma

Our first chart for today is a weekly Relative Rotation Graph. If you have been reading these pages for long, you are familiar with the RRGs. For newer readers, you can find an Investopedia article on RRGs here.

The RRG above shows the eleven main sectors of the S&P 500 with the S&P 500 itself being the comparison index. I’ve also added a commodity index. In particular, this RRG confirms what we discussed in yesterday’s article: commodities and energy have indeed gained a lot of strength. Both (DJCI and XLE) are in the “Improving” (blue) quadrant and both have nice long tails indicating strong momentum. This RRG gives us a clue as to where we should investigate next.

Commodities

Courtesy of Optuma

Given the strength of commodities and energy, we should investigate opportunities in those spaces. Chart 2 is a weekly RRG for a number of different commodity related ETFs. Notice the vast majority of them have strong tails with a northwest heading. That is what we want to see.

We will examine two options; FCG and COPX.

Natural Gas

Courtesy of Optuma

Here we have a weekly candle chart for a natural gas related ETF, FCG. A close examination of this chart shows that FCG got hot and moved higher nine weeks in a row resulting in a minor breakout from a multi-year base. Then, on April 11th, it began to cool off. (Sorry, I could not resist the temptation to add a heating related pun.)

The most recent candle represents the current week, so only one day of trading. But notice that Monday’s trading took the ETF back to these multi-year highs. For swing traders, one could enter here and use last week’s lows as their stop. If commodities are going to remain strong, this recovery from a pullback could offer a relatively low-risk entry.

Copper Miners

Courtesy of Optuma

Our final chart for today is a daily candle chart for a copper miners ETF, COPX. If we were to look at a weekly chart, we would see a similar multi-year basing formation for COPX. Personally, I like the looks of FCG’s base more than COPX, but both are attractive. One reason I like FCG’s chart a little more is that it sports a 200-day moving average that has been curling up a bit longer; whereas COPX’s 200-day has only recently turned up due to the massive rally that we’ve seen in copper recently. So, COPX may be due for a bit of consolidation.

Based on the RRGs that we examined, it appears that active traders need to be looking for opportunities in the energy and commodity spaces. Part of our macro-thesis is that we are quite possibly in a secular bear market that is just experiencing a cyclical bull phase. The fact that inflation is not going away contributes to this thesis. Note that this thesis does not have to be correct in order for these trades to work. However, if inflation is not going away, then it stands to reason that inflation sensitive sectors might do well. We just need to wait for the proper low-risk set-ups. In my view, FCG’s set up is a bit cleaner.

Contributor(s)

C. Theodore Hicks II, CFP, CKA, CMT

Ted Hicks is the Founder, CEO & Chief Investment Officer of Hicks & Associates Wealth Management, an SEC registered investment advisor. Hicks’ rules-based asset management approach is focused on minimizing drawdowns while seeking to maximize gains. You can follow him on Twitter or LinkedIn.

A Great Beginning: Reflections on Our First CMT Mumbai City Community

As the newly appointed leader of CMT Mumbai City Community, I am deeply grateful for the trust and opportunity given to me. It brings me immense joy to look back on our first successful event, which not only marked the start of our journey together but also set a high bar for our future endeavors as a community.

The atmosphere was buzzing with enthusiastic participation and a collective eagerness to learn and grow together. A special mention to Akshay Chinchalkar, whose expertise and insights on using Python for financial analysis made the session incredibly enriching.

Akshay’s talk focused on the practical implementation of Python in backtesting trading strategies, covering topics such as:

– Testing a Long-Only RSI Strategy on Nifty 50: Offering a hands-on approach to quantitative trading.

– Utilizing Jupyter IDE for Coding: Showcasing the ease and efficiency of coding in a notebook environment.

– Leveraging Python Libraries: Demonstrating the power of using tools like Pandas, Numpy, and Matplotlib for data manipulation and visualization.

– Accessing Data through Yahoo Finance: Highlighting the effortless process of obtaining and using historical market data.

Participants were particularly impressed by the simplicity of accessing extensive historical data through Yahoo Finance and the ease of executing complex codes in Jupyter Notebook. The demo showed that with just a few lines of code, one can perform intricate analyses like calculating average wins and losses, hit ratio, and maximum drawdown. Additionally, visualizing data such as equity curves and maximum drawdowns was made effortless with Matplotlib, proving the usefulness of Python in making complex data understandable with minimal coding.

This event not only enhanced our technical skills but also reinforced the user-friendly nature of Python, which greatly reduces the learning curve for traders looking to incorporate programming into their strategies.

I would also like to express my gratitude to Joel Pannikot for his unwavering support and guidance, without which the execution of this event would not have been possible.

Looking ahead, we are excited to continue this momentum with more engaging and educational sessions, building a strong community that supports each other’s professional growth. Let’s keep this enthusiasm alive and push the limits of what we can achieve as a team. Here’s to many more successful events and our collective advancement in the ever-evolving field of market technical analysis!

Together, let’s navigate through the complex world of financial markets armed with knowledge, camaraderie, and the powerful tools of technical analysis.

Contributor(s)

Aditya Iyer, CMT

Aditya Iyer, CMT Co-Founder & CEO of NeoTrader has wide experience in creating and trading with various technical analysis-based strategies for both systematic and discretionary trading. Aditya has been associated with the financial markets for the past 10 years with robust experience in...