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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

by Brett Villaume, CMT, CAIA

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...

What The Mets Can Teach Us About Chart Analog’s

by Steve Deppe, CMT

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...

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

by Matthew Fox, CMT

Will growth stocks reverse their recent bout of underperformance and resume their upward trend that has been in place since the Great Financial Crisis, or is value set for a sustainable period...

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

by Milan Vaishnav, CMT, MSTA

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...

The Downside Risk in Energy

by Ian Culley, CMT

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...

Rotational Momentum: Simple, Effective

by Edwin Retter, CMT, CFP

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...

The CMT Investment Challenge, and how you can participate

by Joel Pannikot

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...

President's Letter

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

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)

Brett Villaume

Brett Villaume, CMT, CAIA

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What The Mets Can Teach Us About Chart Analog’s

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 - 2022

Steve Deppe, CMT

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

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 Great Financial Crisis, or is value set for a sustainable period of outperformance?
I have no idea. But analyzing relative price charts could give investors a big clue as to when growth stocks may break from their current inflection point, and in which direction.

The above chart measures the relative price performance of the Nasdaq 100 versus the S&P 500. When this ratio chart is moving up, it’s telling you that the tech-heavy Nasdaq is outperforming the S&P 500. 

This 30+ year chart maps out the relative strength of technology stocks from the roll-out of the world wide web, through the dot-com bubble, to today’s era of remote work. 

It appears to be in a solid long-term uptrend that has a much more gradual rising slope than the tail-end of its dot-com boom years, suggesting that the current uptrend is more sustainable.

The recent damage to growth stocks relative to the broader market has been minor when you zoom out as much as we have in the chart above, with just a two-year period of sideways consolidation.

But don’t fool yourself; look underneath the hood and you will find that the reversal that started in February 2021 has crushed sentiment, with some widely-owned issues falling upwards of 80% from their peak. 

Trends can correct via price (see the unwinding of the dot-com bubble), and/or time, both of which are happening right now.

What I find most interesting about the relative price performance of the Nasdaq 100 to the S&P 500 is that it stopped dead in its tracks at the same level of the March 2000 dot-com bubble peak. 

That means that technically, this trend has been basing sideways for about 20 years, and the implications are big if it can decisively break out and set fresh new highs. At new highs, all overhead supply has been cleared and the path of minimal resistance tends to be up.

“The bigger the base, the bigger the space,” as many technical analysts like to say. 

To give you an idea of how powerful big base breakouts can be, let’s look at a long-term chart of Microsoft. 

Like the Nasdaq, Microsoft developed a 15+ year base before testing its dot-com era highs. We all know what happened next after it decisively broke higher: it didn’t look back. 

As to whether the Nasdaq will break upwards or downwards relative to the S&P 500 after two years of consolidation, I’m looking at another relative price chart for clues: Apple versus the S&P 500.

 

Just last week Apple broke out to fresh relative highs against the broader market, and given that the company is the biggest in the world and makes up more than 13% of the Nasdaq 100, that bodes well for a bullish breakout of the Nasdaq relative to the S&P 500. If Apple can hold on to its recent strength into year-end, I think growth stocks will find their footing relative to value stocks sooner than later.

As to when the Nasdaq may break upwards or downwards relative to the S&P 500 after two years of consolidation, I’m looking at one more relative price chart for clues: The ProShares UltraPro QQQ ETF (TQQQ) versus the Nasdaq 100. TQQQ is a 3X leveraged Nasdaq ETF that is popular with traders.

 

Relative to the Nasdaq 100, the TQQQ ETF has been making a series of higher highs and higher lows since its inception. If that trend continues and its recent low isn’t violated, I’d take it as an early sign that the trend remains higher and a breakout for the Nasdaq relative to the S&P 500 is imminent.

Of course, the Nasdaq’s relative price performance to the S&P 500 could instead be putting in a massive double top before it decisively trends lower. If that were the case, it would give an all-clear sign to value investors who have been waiting 10+ years for the growth vs. value trade to finally reverse. 

Whichever way the trend breaks, investors would do themselves well by following relative price charts to better identify outperformers and monitor inflection points that may signal a change of trend is imminent. 

Contributor(s)

Matthew Fox, CMT - 2022

Matthew Fox, CMT

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

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, CMT, MSTA

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The Downside Risk in Energy

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

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)

Ian Culley, CMT - 2022

Ian Culley, CMT

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Rotational Momentum: Simple, Effective

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

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)

Edwin Retter, CMT, CFP - 2022

Edwin Retter, CMT, CFP

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The CMT Investment Challenge, and how you can participate

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:

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)

Joel Pannikot

Joel Pannikot

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New Educational Content This Month

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