Technically Speaking, August 2022

Unpredictability makes human beings uncomfortable. It is the element of unknown/unpleasant surprises that often throws us off our game. You must’ve noticed different types of people around you. Some who react to everything, some who react to nothing, and some who have learnt to react in a manner that’s better for them.

We would obviously be delighted if we knew how the market was panning out in order to prepare accordingly. But thank God for small mercies, we can’t see the future! What we can work on, however, is how we react to the developing trends.

Technical Analysis in that regard focuses on risk management. It hardly matters where the market is headed, you must have a risk management strategy in place. When you think about it, TA is really about your reaction to the price. Sure, we look out for the highest probability scenarios that could play out, but nobody can say with certainty what will happen next. It is therefore extremely important that our emotions remain neutral in times of changing market sentiment.

Market sentiment is a funny thing though. It moves in a unique fashion and generally takes people by surprise. But if you’re keeping track of all your parameters, you should be able to see signs early on. Since the beginning of the year, the market has been in a downward spiral in one form or another. There were bouts of strength coming through, but those were lone fighters that were holding their fort.

But in the month gone by, we saw Global market indices making higher highs and higher lows as the market witnessed a recovery. Even Small caps are now joining the move! This has come after weeks and months of diminishing momentum and strength. This has also come on the back of the correction in the greenback. So, obviously it feels like people are out on a celebration again! There are more mentions now of breakouts, breadth improvement, relative strength, and an increased market participation to back that up.

In my process that I follow, I noticed that I was suddenly using bullish terminology in my research notes. That was a minor signal for me. Look out for these signs and you’ll find that you have little warning bells too! But keep in mind, these are minor changes in the trend. It’s not a bull market yet.

Trends change little by little and then all at once. If you can track the ‘little by little’ part of it, then the market is your playground. If you haven’t reached that stage yet, keep working on it! Contrary to popular belief, this is not rocket science.

Thankfully for us, the market gives us an opportunity to learn every single day! Let’s take advantage of that!

Until we read again, Think Technical!

Rashmi Bhatnagar, CMT

Editor

What's Inside...

President's Letter

The Board of Directors is actively working to strengthen our governance by developing and supporting the various committees we have,...

Read More

What The Mets Can Teach Us About Chart Analog’s

On August 5th of 1986 the New York Mets record was a dominant 69-34.  That was the best record in...

Read More

Using Relative Price Charts to Navigate the Ups and Downs of the Stock Market

Will growth stocks reverse their recent bout of underperformance and resume their upward trend that has been in place since the...

Read More

Crude Oil: A Classical Look At Signficance of 40-Week MA; Technical Look At Crude For The Near Term

The calendar year 2022 has been particularly volatile for global Energy prices. The price of Brent Crude, Nymex Crude, Natural...

Read More

The Downside Risk in Energy

Energy futures are beginning to crack under pressure.

Crude oil and gasoline are breaking down to their lowest levels since...

Read More

Rotational Momentum: Simple, Effective

When studying financial planning curriculum in the wealth management area, little attention gets paid to the merits of technical analysis....

Read More

The CMT Investment Challenge, and how you can participate

Registrations are already open for CMT Association’s first global Investment Challenge

This 2-month virtual investment management challenge is for...

Read More

President's Letter

The Board of Directors is actively working to strengthen our governance by developing and supporting the various committees we have, as well as creating new committees to focus on important oversight responsibilities. In this month’s President’s Letter, I am calling on all CMT members to consider serving on a Committee of the Association.

Before you read on any further, let me explain what serving on a committee entails. Committees are established to further the aims of the Association. Their formation and governance is described in Article 8 of the CMT Association Bylaws.

Committees generally consist of 4-8 members who are CMT Association members, but not necessarily CMT Charterholders. Committees typically meet virtually, either periodically or whenever there is committee work to be done, and some committees have a structure that involves more email communications. There is a committee chair, appointed by the President, who leads the committee members and organizes activities.

The workload can vary but should not exceed an hour or two per week. Some committees only meet quarterly, or even less frequently, as their responsibilities may involve concentrated efforts regarding a certain event (e.g., the Seminar Committee).

The Association is currently seeking committee members for the Ethics & Standards Committee, the Annual Awards Committee, and a newly created Diversity & Inclusion Committee.

  • The Ethics & Standards Committee is responsible for reviewing and formally addressing violations of the CMT Association’s Code of Ethics, which applies to Members and CMT Program candidates. The committee reviews reported violations, documents and summarizes the circumstances of the violation, and then presents to the Board of Directors a recommendation for disciplinary action. Serving on the Ethics & Standards Committee is an extremely important role that demands objectivity and professionalism at the highest levels. The time commitment may be “lumpy”, in that the committee may not meet for a very long time, but then need to have several one-hour-long meetings within a short period of time.
  • Our Annual Awards Committee is responsible for managing the CMT’s Annual Awards Program, which includes the Annual Award, the Memorial Award, and the Service Award (the Charles H. Dow Award is managed by a separate Dow Award Committee). It meets less frequently than most committees, but nevertheless requires a time commitment that includes meeting several times per year as well as frequent email communications.
  • Our newly formed Diversity & Inclusion Committee serves to promote racial, ethnic, and gender diversity among our membership, the Board of Directors, Staff members, sponsors, our vendors, as well as within the field of Technical Analysis and, even more broadly, among all Financial Professionals worldwide. Committee members may expect to meet quarterly and spend time working on projects that are decided upon by the committee.

If you live in a more remote location and do not get many opportunities to network with fellow technicians, you might consider serving on a committee as it is a great way to get to know other CMT members. Furthermore, serving on a committee is viewed as a demonstration of volunteerism and commitment to the Association that the Governance Committee takes into account when evaluating possible Director candidates during the annual board refreshment process. If you are interested in serving on a committee or have questions about it, please send an email to admin@cmtassociation.org.

Lastly, I want to recognize and thank Marie Penza, Director of Member Services, who retired in July after 18 years with the CMT Association. The majority of you reading this letter have likely interacted with Marie over the years. She was a tremendous asset to the Association and I personally benefited from her hard work and dedication. Thank you Marie!

Contributor(s)

Brett Villaume, CMT, CAIA

Brett Villaume, CMT, CAIA, is Past President of the CMT Association, having served on the Board of Directors since from 2014 to 2023. Additionally, Brett is a Wealth Advisor at Dogpatch Capital, a registered investment advisor in San Francisco, CA. From 2015...

What The Mets Can Teach Us About Chart Analog’s

On August 5th of 1986 the New York Mets record was a dominant 69-34.  That was the best record in baseball at the time and with a lineup that included the likes of Darryl Strawberry, Keith Hernandez, Gary Carter, and Dwight Gooden, World Series expectations were in the air. 

The team would ultimately meet those expectations (thank you Bill Buckner!) and Mets fans are still not sure if Jesse Orosco’s glove ever actually landed after he closed out the Mets second World Series championship. 

Fast forward to August 5th of 2022 and the Mets are 67-38.  While this isn’t the best record in baseball, they’ve done this without their best pitcher, and arguably the best pitcher in baseball, Jacob deGrom.  With a roster that also includes Pete Alonso, Francisco Lindor, Max Scherzer, and Edwin Diaz, World Series expectations are once again in the air.  Sentiment today goes something like:

“Hey, the last time the Mets were this good through their first ~100 games the team went on to win the World Series!  We’re going to win it again this year!”

What’s this have to do with the S&P 500? 

Well in 1962 and 1970 the S&P 500 closed the first half of the year down -23.48% and -21.01% respectively.  The index then went on to rip higher in July, gaining 6.36% in July of 1962 and 7.33% in July of 1970.

Fast forward to calendar year 2022 and we have a team with nearly the exact same record.  The S&P 500 was down -19.97% through the first half of the year.  The index then went on to rip higher in July, gaining a whopping 9.11%.

Overlaying the year-to-date growth of $100,000 for 1962, 1970, and 2022 (through August 4th) illustrate their price action similarities (and note the Mets colors of course!):

Now, chart analogs bait all the clicks as there’s intrigue when history rhymes and there’s a mysterious attraction about the possibility of the analog continuing.  For example, both June of 1962 and 1970 went on to record as the lowest monthly closes the S&P 500 would record over the forward 1-year period.  1-year following June of 1962, and June of 1970, the S&P 500 returned a gaudy 26.70% and 35.73%, respectively. 

Naturally, many market participants are wondering if 2022’s analog to 1970 and 1962 will be more of the same into June of 2023 with stocks being off to the races to the upside.  Sentiment today goes something like:

“Hey, the last two times the S&P 500 got crushed the first half of the year, and then ripped higher in July, the bottom was in and it was off to the races higher!”. 

Now, to that we’d say…if only it was that easy! 

Let’s use the Mets again as an example.  In 1986 they had the best record in baseball on August 5th.  They were the overwhelming favorites to win the World Series virtually the entire season. 

But here in 2022, the Mets don’t even have the best record in the National League!  They haven’t been the favorite to win the World Series even once this year.  In other words, there are threats that exist today for the Mets that didn’t exist in 1986.

The same is true for the S&P 500, the threats today are different than 1962 and 1970’s.  What was happening then, fundamentally, simply has no relevance or impact to what’s happening now in 2022.  We can think of rampant inflation as the Dodgers, higher interest rates as the Astros, and Federal Reserve tightening as the Yankees.  These threats serve to make it a coin flip as to whether the Mets win the World Series, or whether the S&P 500 gains double digits over the forward year, not a guaranteed slam dunk like the price action analog would suggest.  No, the small sample past can’t be used to consistently predict the future. 

So, let the Mets teach us that chart analogs are interesting, but not predictive about what lies ahead.  Analog’s, and knowing your market history, do serve to illustrate the fact that anything is possible.  Sure, the Mets can win the world series this year and yes, the S&P 500 can finish June of 2023 at ~5,000.  But it sure as heck won’t be attributed to anything that happened in 1962, 1970, or 1986.

So, the next time you see a chart analog, view it as a tool to manage your bias to maintain a completely dispassionate approach re: what lies ahead.  This will allow you to exercise maniacal discipline with adhering to your long-term investing plan, and that generally is predictive of what lies ahead for your portfolio. 

Contributor(s)

Steve Deppe, CMT

Steve Deppe is a Chartered Market Technician® (CMT) and is a member of the CMT Association.  He is also a member of the American Association of Professional Technical Analysts (AAPTA). Steve is passionate about technical analysis and its role in helping investors...

Crude Oil: A Classical Look At Signficance of 40-Week MA; Technical Look At Crude For The Near Term

The calendar year 2022 has been particularly volatile for global Energy prices. The price of Brent Crude, Nymex Crude, Natural Gas, Heating Oil, and Gasoline prices have been all over the place during this year. The most important trigger for upheaval in the price was the geopolitical tension; the war between Russia and Ukraine, which saw the prices of Crude Oil testing the highs near $ 140 levels.

The most volatile among all energy prices was that of Natural Gas; this saw a peak YTD gain of close to 145%, which was subsequently pared to 42% by the end of June 2022. As of the week ending August 05, 2022, Natural Gas has posted YTD gains of 98.92%.  

Crude Oil has stayed similarly volatile just like its peers. As evident from the Relative Comparison chart of energy prices, Crude Oil; both Brent and Nymex, have posted yearly gains of 22.37% and 19.29% respectively as of the week ended August 05, 2022. As mentioned, they were no exception when it came to volatility; both the variants of Crude Oil saw the peak YTD gains at 63% and 62.48% respectively during the current calendar year.

Let’s keep this technical note focused on Crude Oil. A study of weekly technical charts points out that the uptrend the commodity has enjoyed may well have been disrupted by a few technical developments.

Let us apply a simple, basic, and classical concept of Moving Averages to understand this. Traditionally, 10-, and 40-Period Simple Moving Averages have worked well with Crude Oil. Simple crossovers of these moving averages have helped us identify the ongoing trend and its reversal at every important juncture.

The weekly chart of Brent Crude Oil shows how the 40-Period Simple Moving Average has been historically significant for Crude. It was in October 2020 that the 10-Period Weekly MA crossed above the slower 40-Week MA. The price of crude was below the 40-Week MA; subsequently, the price of Brent crude also crossed above the 40-Week MA in November 2020.

The crossing of the 10-Week MA above 40; and subsequently the crossing of the Crude price over the 40-Week MA has been significant from a technical standpoint. The price of Brent Crude was around $41 when it crossed above the 40-Week MA. From that price point to the most recent high of $137 in March 2022, the price appreciation was over 218%.

The importance of the 40-Week MA for the Brent price was also highlighted on the other two occasions where it halted for support; first in August 2021 and then in December 2021 after a short-lived violation. In both instances, Crude rallied by over 34% and 83% after bouncing off the 40-Week MA.

That being said, what happened as of the week ending Friday, August 05, 2022, warrants our attention. It was after 20 months that the Brent Crude price violated the 40-Week MA and closed below that said MA. At present, the 40-Week MA is placed at 99.40.

From a technical perspective, this has dragged the resistance point for the Brent crude lower to $99-50-100 levels. This technical development has not only disrupted the rally that Brent had been enjoying over the many quarters, but it has also pushed Crude into an intermediate or a secondary trend for the near term. So long as the Brent crude prices rules below the 40-Week MA, no uptrend is likely unless triggered by any external events.

Over the immediate near term, the price behavior of Crude vis-à-vis the levels of 40-Week MA would influence the trend over the coming weeks.

Contributor(s)

Milan Vaishnav, CMT, MSTA

Milan Vaishnav is the founder of ChartWizard FZE,  Gemstone Equity Research & Advisory Services, and works as an Independent Technical Research Analyst. With a career spanning over 18 years in the Indian Capital Markets, Milan’s primary responsibilities include consulting in Portfolio/Funds Management...

The Downside Risk in Energy

Energy futures are beginning to crack under pressure.

Crude oil and gasoline are breaking down to their lowest levels since February. And heating oil isn’t far behind, as it’s challenging the lower bounds of a similar distribution pattern.

It appears that the bears have finally come for energy.

Let’s take a look at the energy sector and the implications these breakdowns carry for energy-related stocks.

Here’s a chart of the Energy Sector ETF $XLE:

When it comes to XLE, 80 is the level to track. It coincides with a shelf of former highs and an area of overwhelming supply. If it’s below those former highs, the energy sector represents downside risk and opportunity cost.

These are two things we do our best to avoid.

Remember, when we buy stocks, ETFs, or commodities, we prefer to buy high and sell higher. The idea is to buy on the way up and participate in a trending market.

As long as the energy sector is trading below 80, the trend in energy stocks is sideways at best. This is even more evident when we drill down to the industry groups. 

Here’s a chart of the Oil Services ETF $OIH, the Explorers & Producers ETF $XOP, and Oil Refiners ETF $CRAK:

All three ETFs are chopping around their respective highs from last year after peaking in June. OIH and CRAK have resolved below their 2021 highs, while XOP continues to find support at this key level. 

However we look at it, the tactical trend for these industry groups is sideways with a downward tilt.

Support has turned into resistance for OIH at 245. XOP is down more than 25% from its year-to-date highs. And CRAK has fallen back into its former range.

These aren’t bull market stats.

And when we consider the recent action from crude oil and gasoline futures, it’s hard to imagine energy stocks are going to repair this damage anytime soon. 

In other words, we wouldn’t expect energy stocks to break back out while energy futures are breaking down.

With the path of least resistance leading lower for top commodity contracts, we have to imagine related stocks will come under increased selling pressure.

And as long as XLE is below critical resistance levels, we must approach energy stocks cautiously.

On the flip side, if we start to see OIH, CRAK, and XLE catch higher and absorb overhead supply, then we’re probably talking about failed breakdowns in crude and gasoline.

Under this scenario, rates are probably rising as commodities and cyclical market areas get back into gear.

That’s not what’s happening today, though. For now, energy represents downside risks. And with the recent breakdowns in crude and gasoline, those risks are only elevated.

Contributor(s)

Ian Culley

Ian Culley is an investment analyst and Head of FICC at All Star Charts, focusing on Fixed income, Commodities, and Currencies. He began trading futures and forex in 2016, learning many hard lessons firsthand. In search of community and further study, he...

Rotational Momentum: Simple, Effective

When studying financial planning curriculum in the wealth management area, little attention gets paid to the merits of technical analysis. It may be dismissed as ‘reading tea leaves’ or disregarded altogether. After all, who needs technical analysis when stock markets move straight up and volatility is on permanent vacation? 

 

Fortunately, we know otherwise and likely have the data and experience to prove it. 

 

As a CMT and CFP® professional, I strive to balance risk and reward when selecting investments for me and my clients. Over the years, I’ve found success blending strategic asset allocation with technical analysis. Structured properly, it can allow an entire portfolio to shift based on prevailing market conditions. But first, how do we define success? 

 

Success results from a method that’s easy to explain; has history behind it; is fairly easy to implement and monitor (despite being counterintuitive at times); and clients can maintain the blended approach through multiple market cycles. Understanding a strategy’s drawbacks is crucial: A winning strategy in the long-term is pointless if you don’t stick around long enough to reap the benefits. 

 

Enter rotational momentum, specifically the monthly ranking of broad asset classes by the average of their 3, 6 and 12-month total returns. Armed with this information, select the top 2 for tactical ownership in the following month. Repeat monthly. No predictions, no emotions, just potential action.

 

Broad asset classes include US Stocks, Foreign Stocks, Commodities, Global Bonds and Global REITs. Adding a risk-off proxy like T-Bills or Short-Term Treasuries rounds out the lineup—essential, as these tend to gain relative strength during stock market volatility (inflation notwithstanding).

 

Benefits to rotational momentum include the potential to profit in trending markets and mitigate large losses in protracted bear markets. We should all be familiar with the law of large losses and how crucial it is to portfolio management. Assuming markets trend, gains can be infrequent, but sizable, and potentially long-term.

 

Negatives include adding a holding only to have it immediately fall in ranking or selling a holding only to repurchase it in the next month. Whipsaws are frustrating but come with the territory, since we never know how long outperformance will last. Losses may be frequent, but small and manageable. If paired with strategic asset allocation, underperformance can be an opportune time for systematic rebalancing, since return streams can vary. 

 

Rank aside, a deeper dive can direct you to areas inside an asset class that are holding up better than others. For example, most bond proxies ranked below US Stocks coming into 2022. However, even within the Global Bond space, short-term TIPs and other high-quality, low duration bonds ranked higher than intermediate and long-term bonds, suggesting these areas could outperform.

 

As of July 31, Commodities and T-Bills occupy the top 2 slots. While Commodities gave back much of their relative performance since peaking in June, they have ranked #1 or #2 (suggesting high relative strength) since March 2021—long-term gains, indeed. Interestingly, US stocks fell out of the top 2 slots on December 31 and have yet to return.

 

Interested in learning more? I first read about momentum strategies in Mebane Faber’s work for the CMT curriculum several years ago. I recommend reading The Ivy Portfolio, the book he and Eric Richardson wrote in 2009, as it delves into all the details on this rotational strategy and others designed to minimize bear market losses. Also, Brian Livingston’s 2018 book, Muscular Portfolios, outlines how to use two types of trailing momentum analysis for tactical exposure in easily managed portfolios.

Contributor(s)

Edwin Retter, CMT, CFP

Edwin Retter, CMT, CFP® is a financial planner and founder of Retter Capital Management, a registered investment advisory firm in Melbourne, Florida. He assists families in managing wealth and provides technical analysis and guidance to other financial advisers. Prior to establishing his...

The CMT Investment Challenge, and how you can participate

Registrations are already open for CMT Association’s first global Investment Challenge

This 2-month virtual investment management challenge is for CMT Program candidates and students of institutes in our Academic Partner Program. Students of institutes in the Student Managed Investment Fund Consortium are also participating in this challenge. This challenge will be held twice a year, between our June and December exam cycles.

CMT charter holders can volunteer for special roles in this challenge. Read on to learn more…

Optuma has built the technology platform for the challenge, and Discord is its communication platform.

The key rules of this challenge are based on those of real-world mutual fund houses.

  • Security Universe: S&P 500
  • Long only; Minimum holding period: 2 days
  • Minimum allocation: 2% | Maximum allocation: 20%
  • Top prize: Best Risk-adjusted returns

Why are we doing this?

  • Practicum: The aim of this challenge is to give students of technical analysis an opportunity to put what they learn into practice in a real-world context. 
  • Mentoring: It is an opportunity for aspiring technicians to learn from veterans and refine their process. The top 3 performers from each week will earn access to a mentoring session with veteran CMTs. This session will be webcast live on Discord for the benefit of all participants.
  • Recruitment opportunity: The top 7 performers of the pilot challenge we ran in India in February 2021 were interviewed for the role of fund manager at a proprietary fund management desk. This year we already have 6 firms who have expressed keen interest in engaging with the top performers of this year’s challenge.

What can you do?

  • Participate: If you are a CMT candidate, visit the Investment Challenge page on our website, and follow the steps. 
  • Mentor: If you are a CMT charter holder, reach out to me (joel@cmtassociation.org) and I will be happy to schedule you for one of the weekly mentoring session with our top performers.
  • Connect: If you run or are working at a firm where technical analysis matters, connect us with your recruitment team to learn how you can access the top performers from the challenge.
  • Engage: Join participants on Discord and chat with them about the markets as they win some, and lose some. Help them with your context so that they can get better each week.  

 

Remember!

CMT Association is the world’s foremost credentialing and advocacy body for technical analysis. Earning the CMT demonstrates mastery of a core body of knowledge of investment risk in portfolio management. Our continued commitment to the global members of the CMT Association and prospective new members creates a multitude of continuing education opportunities.

The Investment Challenge is an opportunity for us to underscore this commitment with a deep learning experience for future professionals, while helping them engage with the industry. Our community was build on the foundations of camaraderie and support. This is one more opportunity for us to further our mission. 

Contributor(s)

Joel Pannikot

Joel Pannikot (pronounced as Punny-Quote) is the Managing Director of Chartered Market Technician Private Limited and serves as the Head of the Asia-Pacific region for the CMT Association. In this role, he is committed to advancing the field of technical analysis through...