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Technically Speaking, August 2013

LETTER FROM THE EDITOR

We are starting this month’s newsletter with an article that challenges the traditional models used to explain market prices. Dr. Ben Hunt argues that just as the heliocentric model of the solar system replaced a geocentric model over time, long-held beliefs about markets need to be reexamined and updated to reflect new knowledge. Fortunately, Dr. Hunt points out that there is a market theory which lays the groundwork for a new understanding of market:

“Technical analysis is, at its heart, behavioral analysis, and as such is prime real estate to build a new investment paradigm that incorporates game theoretic behaviors.”

This is a thought-provoking piece that is followed by a practical example of how the MTA Educational Foundation is working to further this goal. We then have practical examples of how the theory of technical analysis is applied in the real world. I hope you are a part of the theoretical and practical changes that are occurring in the financial community. If you would like to share your thoughts on those

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What's Inside...

THE MUSIC OF THE SPHERES AND THE ALCHEMY OF FINANCE

by Ben Hunt

“You say that we go round the sun. If we went round the moon it would not make a pennyworth of difference to me or to my work.” – Sherlock Holmes (from “A Study in Scarlet” by Arthur Conan...

MTAEF CONTINUES BUILDING ON SUCCESSES IN THE ACADEMIC COMMUNITY

by J. Cody Tafel, CMT, CAIA & Michael Carr, CMT

The MTA Educational Foundation has been working to create and fund educational programs in the field of technical analysis since 1993. In recent years, the MTAEF has been developing a complete course...

NAVIGATING THE DOW GEOMETRICALLY USING ‘EARTH-MEASUREMENT’

by Scott Hathaway, CFTe

INTRODUCTION Geometry: ‘Geo’ means Earth and ‘metry’ refers to measurement. I find this very profound; the word for the world of angles, shapes and associated ratios and formulas actually...

INTERVIEW WITH PHIL ROTH, CMT

by Phil Roth, CMT & Amber Hestla-Barnhart

What led you to look at the particular markets you specialize in? The first market I focused on was equities. My first technical job, starting in 1967, was an assistant to Bob Farrell, who ran the...

A TECHNICAL GUIDE FOR DOMESTIC ETF PORTFOLIOS

by Jonathan Beck

Editor’s note: This is an example of an analysis that applies the theory of technical analysis to create an action plan. The thought process Jonathan applies to portfolio management is easy to...

BOOK REVIEWS

by Michael Carr, CMT

Shareholder Yield: A Better Approach to Yield Investing by Mebane Faber, CAIA, CMT Technical analysis involves identifying changes in the market. Generally technicians focus on price action but...

THE TECHNICAL TAKE: A WEEKLY TECHNICAL PERSPECTIVE

by Robert Dombrower

Editor’s note: This is an extract of an internal, weekly macro technical research report written solely to address the concerns of the Quantitative Strategies Group (QSG) at ICC Capital Management...

CHART OF THE MONTH

CHART PROVIDED BY SRC The NASDAQ 100 could be undervalued by some measures. Over the past ten years, the index has provided investors with a total  return of 9.6% while earnings have risen by an...

THE MUSIC OF THE SPHERES AND THE ALCHEMY OF FINANCE

THE MUSIC OF THE SPHERES AND THE ALCHEMY OF FINANCE

“You say that we go round the sun. If we went round the moon it would not make a pennyworth of difference to me or to my work.” – Sherlock Holmes (from “A Study in Scarlet” by Arthur Conan Doyle)

“It doesn’t matter if the cat is black or white, as long as it catches mice.” – Deng Xiaoping

“I could float off this floor like a soap bubble if I wish to. I do not wish to, because the Party does not wish it. You must get rid of those nineteenth century ideas about the laws of Nature. We make the laws of Nature.” – O’Brien (from “1984” by George Orwell)

A few million years ago – the blink of an eye in evolutionary terms – our ancestors were roaming around some African savannah in a small band. We are still that social hunter-gatherer, for better or worse, with all the advantages

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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)

Ben Hunt

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MTAEF CONTINUES BUILDING ON SUCCESSES IN THE ACADEMIC COMMUNITY

MTAEF CONTINUES BUILDING ON SUCCESSES IN THE ACADEMIC COMMUNITY

The MTA Educational Foundation has been working to create and fund educational programs in the field of technical analysis since 1993. In recent years, the MTAEF has been developing a complete course that explains the theory and practice of technical analysis. The curriculum that has been developed is now used by several colleges and universities.

In 2009, the Foundation established an annual award in memory of Mike Epstein. Each year, the award is presented to the person who best exemplifies Mike’s goals for long-term sponsorship of technical analysis in academia and in practice.

The most recent recipients of the Mike Epstein Award were Julie Dahlquist, Ph.D., CMT, and Charles D. Kirkpatrick II, CMT.  Dahlquist and Kirkpatrick are co-authors of Technical Analysis: The Complete Resource for Financial Market Technicians. Their book has been one of the readings in the CMT program for several years and is now a part of the curriculum the

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)

J. Cody Tafel, CMT, CAIA

Michael Carr, CMT

Michael Carr, CMT

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NAVIGATING THE DOW GEOMETRICALLY USING ‘EARTH-MEASUREMENT’

NAVIGATING THE DOW GEOMETRICALLY USING ‘EARTH-MEASUREMENT’

INTRODUCTION

Geometry: ‘Geo’ means Earth and ‘metry’ refers to measurement. I find this very profound; the word for the world of angles, shapes and associated ratios and formulas actually refers to the measurement of the Earth.

What better field to borrow ideas for geometry from than the science of navigation, which rests upon a basic element of Earth-measurement, the nautical mile (‘NM’), which is simply formulated using two special and related numbers (360 and 60)? The Earth is divided into 360o vertically by longitude, while horizontally by latitude, with each degree further divided into 60 minutes. An individual minute of latitude, and of longitude at the Earth’s equator, is defined as one nautical mile and is quite literally 1/60 of
1o of the equator.

Therefore the Earth’s circumference of 360o measured along the equator is 21,600 nautical miles:

360o x 60’ = 21,600’ = 21,600 NM.

When applied to mass human decision making, which is

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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)

Scott Hathaway, CFTe

Scott Hathaway, CFTe

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INTERVIEW WITH PHIL ROTH, CMT

INTERVIEW WITH PHIL ROTH, CMT

What led you to look at the particular markets you specialize in?

The first market I focused on was equities. My first technical job, starting in 1967, was an assistant to Bob Farrell, who ran the technical department at Merrill Lynch. This job was my first opportunity in research after a year in a training program at ML. This was fortunate since I had been interested in stocks since my early teens. I worked in a German bakery for 8 years, starting as a “pfanneputze” in 1955, (the kid who cleaned the pans and mopped the floor) and becoming a baker. All the bakers, starting with the boss, were interested in the stock market and that’s all we talked about.  And the boss kept meticulous charts. The boss also traded commodities, so commodities were my secondary interest. I retired in 2012 after 46 years in the business.

Do you look at any

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)

Philip J. Roth, CMT

Phil Roth, CMT

A TECHNICAL GUIDE FOR DOMESTIC ETF PORTFOLIOS

A TECHNICAL GUIDE FOR DOMESTIC ETF PORTFOLIOS

Editor’s note: This is an example of an analysis that applies the theory of technical analysis to create an action plan. The thought process Jonathan applies to portfolio management is easy to follow and instructive.

In this report the goal of our sector allocation will be to tactically outperform the S&P 500 on a relative basis.1 We will adjust our portfolio weightings by maneuvering into leading sectors and shying away from the losers, at least from a technical perspective assuming a 3-6 month timeframe.

My objective is to uncover the intermediate and long-term technical drivers while at the same time providing the tactical guidance required to navigate the ever- changing market conditions.

As of July 1, 2013, I see several critical factors in the market.

It is interesting how the 5/23/13 negative outside day pattern marked a price high for the S&P 500. The subsequent 6/20/13 downside gap and the 6/21/13 negative outside week

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)

Jonathan Beck

BOOK REVIEWS

BOOK REVIEWS

Shareholder Yield: A Better Approach to Yield Investing by Mebane Faber, CAIA, CMT
Technical analysis involves identifying changes in the market. Generally technicians focus on price action but fundamental data can also be plotted on charts and fundamental indicators, just like technical  indicators, can change over time. Elsewhere in this issue, Phil Roth points out that a P/E ratio is an important technical indicator since it is driven by psychology. Faber expands on the idea that traditional  fundamental indicators are also technical indicators and focuses his attention initially on dividend yields. 

In Shareholder Yield, Faber identifies that the importance of dividends has changed over time. He notes that,  “due to legal, tax, and structural changes in the US markets, dividend payments have become a less  prominent method by which companies return cash to shareholders. Dividend payments are only one use of a company’s

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

THE TECHNICAL TAKE: A WEEKLY TECHNICAL PERSPECTIVE

THE TECHNICAL TAKE: A WEEKLY TECHNICAL PERSPECTIVE

Editor’s note: This is an extract of an internal, weekly macro technical research report written solely to address the concerns of the Quantitative Strategies Group (QSG) at ICC Capital Management Company. The topics and layout are designed specifically for the needs of QSG in terms of content and formatting. This report was prepared on July 26, 2013 and opinions expressed in this report may have changed since then.

Report Summary

  • Markets ended higher last week as earnings season got under way as the Tech’s rattled while the Financials emboldened. The long term VIX trace has once again tested long term horizontal support in the low teens.
  • The S&P 500 Weekly Candlestick (7/26/13) seems to have trouble consolidating which confounds the bear camp time and again seemingly, and we too have been calling for caution as the 24 week cycle shown above looked as though an inversion was in progress, yet with the latest

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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)

Robert Dombrower

CHART OF THE MONTH

CHART OF THE MONTH

CHART PROVIDED BY SRC
The NASDAQ 100 could be undervalued by some measures. Over the past ten years, the index has provided investors with a total  return of 9.6% while earnings have risen by an average of 19.1% a year. A similar picture can be seen in the NASDAQ Composite where earnings have grown at an average of 14.1% a year while prices gained 8.1% a year.

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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.

New Educational Content This Month

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