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Technically Speaking, December 2011

LETTER FROM THE EDITOR

This month, we have tried to collect examples of thought provoking analysis techniques. Several members have contributed their unique perspectives and our hope is that others can benefit from the ideas they share. This issue is focused on the practical aspects of technical analysis. As a group technicians tend to focus on obtaining practical results in the markets. Being right is secondary to making money. That means the analysis presented may be outdated by the time you read this. They are still valuable examples of the analytical process. We’ve been using this new format for several months and would appreciate any feedback you have. The goal of Technically Speaking has always been to offer interesting information about technical analysis and the MTA, but over time the format has changed. Please let us know what we can do to deliver content that meets your needs by sending an email to editor@mta.org. Sincerely, Mike Carr, CMT

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What's Inside...

TOWARDS PROVING THE VALIDITY OF TECHNICAL ANALYSIS

by George Rahal

From where does the theoretical stance against technical analysis come?  Although often paired against it, fundamental analysis attempts neither to prove nor disprove technical theory. On the...

A GAME OF TELEPHONE

by Carson Dahlberg, CMT

“I had the story, bit by bit, from various people, and, as generally happens in such cases, each time it was a different story”. – Edith Wharton, Ethan Frome (1911) This line pretty much sums...

WHICH INDICATOR WILL WORK FOR YOU?

Editor’s note: ChartFilter Newsletter originally published this article. To choose which technical indicators work best for you, we suggest following some key steps to develop a technical analysis...

TRIFECTA: STOCK, OPTION, IMPLIEDS

by Kirk Northington, CMT

Editor’s note: This article is reprinted as an example of a well-defined and insightful style of technical analysis. The chart is an integral part of the analysis and should be viewed in full size...

INTERVIEW WITH AJAY G. JANI, CMT

by Ajay G. Jani, CMT & Amber Hestla-Barnhart

How would you describe your job? I manage an emerging markets focused Global Macro fund which invests in all liquid asset classes (interest rates, credit, currency and equity) on a directional basis....

IF HISTORY TENDS TO REPEAT ITSELF, THEN EGYPTIAN STOCK MARKET INDEX IS LOOKING FOR A BOTTOM

by Ramy Rashad, CMT

It’s our job as technical analysts to search for repetitive patterns in the charts. Who lied to you and told you that TA is all about H&S and trend lines? Technical analysis’s most basic...

MAJOR CATALYSTS AHEAD TO TRIGGER NEXT BREAKOUT IN GOLD MARKET

by Jordan Roy-Byrne, CMT

In bull markets, corrections and consolidations are needed to periodically cleanse the market of extreme optimism and an overbought condition. After a market has strong run it inevitably reaches a...

TECHNICALLY URANIUM

by Merv Burak, CMT

BASIC NOTES Uranium Companies: There are very few pure uranium companies. Most companies, especially the small exploration type, are active in more than the uranium industry. This blog makes no...

ETHICS CORNER: DEFINING PROFESSIONALISM

by Michael Carr, CMT

Technical analysis is a profession, but it is also an activity that is undertaken by many nonprofessionals. Professionals are experts who practice in accordance with well-defined standards. The...

TOWARDS PROVING THE VALIDITY OF TECHNICAL ANALYSIS

TOWARDS PROVING THE VALIDITY OF TECHNICAL ANALYSIS

From where does the theoretical stance against technical analysis come?  Although often paired against it, fundamental analysis attempts neither to prove nor disprove technical theory. On the other hand, according to the efficient market hypothesis, only previously unknown material information, once publicly available, can alter the price of a stock. Therefore, predicting future prices by means of past prices, technical analysis, is impossible. An experiment by which to disprove this conclusion is the subject of this essay.

Through an example, let us first discuss the traditional treatment of benchmarks[1] and alpha. The S&P 500 is comprised of ten sectors and 500 stocks. For an actively managed portfolio benchmarked against the S&P 500, in order to outperform the benchmark, the portfolio manager has two tools at his or her disposal: security selection and sector weighing. As of November 2011, IBM has an index weight of 1.73% and GE has a 1.62% weight;

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)

George Rahal

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A GAME OF TELEPHONE

A GAME OF TELEPHONE

“I had the story, bit by bit, from various people, and, as generally happens in such cases, each time it was a different story”. – Edith Wharton, Ethan Frome (1911)

This line pretty much sums up the reason for the markets’ volatility. One market that is definitely painted by this is the EURUSD. Since volatility is the order of the day (and it really is every day) let’s take a look at Volatility Based Technical Analysis (VBTA) to see if we can see to make sense of it – cause the news isn’t helping a whole lot.

This is the EURUSD cross. The main thing to focus on here is that the range of support or resistance is dependent on the amount of noise in the market. If you are doing multi

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)

Carson Dahlberg, CMT

Carson Dahlberg, CMT

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WHICH INDICATOR WILL WORK FOR YOU?

WHICH INDICATOR WILL WORK FOR YOU?

Editor’s note: ChartFilter Newsletter originally published this article.

To choose which technical indicators work best for you, we suggest following some key steps to develop a technical analysis checklist.

We can assume that traders have at least one common goal: To make profit.

Traders have various levels of expertise, different experiences, risk levels and general market exposure and therefore different investment goals. This is why traders will have different criteria in their checklists and why something may work for one but not another. Part of understanding which indicators will work for you is to think about why you would be willing to either buy or sell a stock. You can do this by creating your own technical checklist.

Setting up a system

This system will comprise of the following elements: a technical checklist for each buy or sell decision; a fundamental checklist for each buy or sell decision; and a set of rules.

Setting up a

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.

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TRIFECTA: STOCK, OPTION, IMPLIEDS

TRIFECTA: STOCK, OPTION, IMPLIEDS

Editor’s note: This article is reprinted as an example of a well-defined and insightful style of technical analysis. The chart is an integral part of the analysis and should be viewed in full size at http://go.mta.org/175

This morning (11/15/11) the stars lined up for IBM. A form of triangulation is to simultaneously perform Volatility-Based Technical Analysis on three important time series. Strap on your thinking cap.

  1. IBM underlying equity
  2. IBM $190 call option, expiring 12/17/2011
  3. VXIBM, which is the IBM VIX Index; proxy for implied volatility

Below are three side-by-side 30 minute charts of the above. The bottom indicator in each chart shows the MetaSwing Extremus
indicator which is a volatility-based momentum indicator. Plotted next to each is the distribution histogram of the recent reading of the Overbought (red) line. The upper end of this indicator construct is unbounded and rises with the volatility of the short term move.

In the price pane of each chart

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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)

Kirk Northington, CMT

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INTERVIEW WITH AJAY G. JANI, CMT

INTERVIEW WITH AJAY G. JANI, CMT

How would you describe your job?

I manage an emerging markets focused Global Macro fund which invests in all liquid asset classes (interest rates, credit, currency and equity) on a directional basis. I also manage an emerging markets equity trading fund, and help develop ideas to better hedge our firm’s distressed credit portfolios.

What led you to look at the particular markets you specialize in instead of another tradable?

I studied International Economics as an undergraduate, and spent a year abroad in Hong Kong as part of my curriculum. After school I worked for a large asset management firm, focusing on the US fixed income market. I worked with very smart people and learned a lot. The experience gave me a good base in finance but it wasn’t my true calling. I went to Columbia Business School to earn an M.B.A. and during my summer internship at a large investment bank; I

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)

Ajay G. Jani, CMT

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IF HISTORY TENDS TO REPEAT ITSELF, THEN EGYPTIAN STOCK MARKET INDEX IS LOOKING FOR A BOTTOM

IF HISTORY TENDS TO REPEAT ITSELF, THEN EGYPTIAN STOCK MARKET INDEX IS LOOKING FOR A BOTTOM

It’s our job as technical analysts to search for repetitive patterns in the charts. Who lied to you and told you that TA is all about H&S and trend lines? Technical analysis’s most basic concept is that “History tends to repeat itself over and over.” Of course, recurring patterns may not be identical, but knowing that a certain manifestation is being repeated could help make a difference. In our unstoppable search, we found something and would love to share with you, the Egyptian Exchange EGX 30 Index. A current market quote can be found at http://go.mta.org/177

Relative Strength Index (RSI):

Taking out the Red Resistance Line in 2009 was the first real signal of a rally that would see the market reach a level of nearly 7,700. A thrust up over this line, which

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)

Ramy Rashad, CMT

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MAJOR CATALYSTS AHEAD TO TRIGGER NEXT BREAKOUT IN GOLD MARKET

MAJOR CATALYSTS AHEAD TO TRIGGER NEXT BREAKOUT IN GOLD MARKET

In bull markets, corrections and consolidations are needed to periodically cleanse the market of extreme optimism and an overbought condition. After a market has strong run it inevitably reaches a point of resistance. This is where there are more buyers than sellers. A market can correct in two ways. Either it declines and retraces much of the preceding gains relatively quickly or a market will consolidate near its highs for a long period of time. The first correction is a function of price while the second, time. The correction or consolidation ends when a fundamental catalyst emerges which triggers greater demand that overwhelms current supply.

The consolidation has endured due to a working off of the overbought condition from 2009-2010 gains as well as the lack of a real catalyst. The Fed, though accommodative has been on hold while emerging markets turned their focus to inflation. European bond markets were in

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)

Jordan Roy-Byrne, CMT

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TECHNICALLY URANIUM

TECHNICALLY URANIUM

BASIC NOTES

Uranium Companies: There are very few pure uranium companies. Most companies, especially the small exploration type, are active in more than the uranium industry. This blog makes no attempt to gauge the percentage of a company’s activity that is related to the finding, mining or processing of uranium. They all do, however, have some uranium activities (to the best of our review).

Merv’s Uranium Indices: I have developed two Uranium Indices. They each have the same component stocks but are calculated using different methodologies. My weekly Index is based upon the average weekly performance of the component stocks. My daily Index is based upon the daily average of the component stocks open, high, low and close prices along with the daily average volume of all component stocks.

Merv’s Daily Uranium Index, Market Data

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)

Merv Burak, CMT

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ETHICS CORNER: DEFINING PROFESSIONALISM

ETHICS CORNER: DEFINING PROFESSIONALISM

Technical analysis is a profession, but it is also an activity that is undertaken by many nonprofessionals. Professionals are experts who practice in accordance with well-defined standards.

The MTA’s Code of Ethics is one of the defining factors that separate the professional from the nonprofessional. To explain why the Code of Ethics is so important, we will step back and consider what it means to be a professional.

Numerous definitions of the term professional are offered. All revolve around the central idea of someone with specialized knowledge who makes a living in the field. For example, doctors and lawyers are considered to be professionals with very specialized areas of knowledge. This definition offers a simple way to distinguish those who are professionals, but more detailed definitions are also available.

Bloomberg News recently featured an op-ed that defined what makes the military a profession. The key part of the article read:

The 1957

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

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New Educational Content This Month

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