The Hong Kong Chapter of the CMT Association and Bloomberg presented “Macro Outlook with Technical Analysis – 2021” at their December 7, 2020 meeting.
There were three speakers.
- Darryl Guppy (https://www.guppytraders.com/), author, speaker, frequent guest on CNBC Asia who is also known for his Guppy Multiple Moving Average and Count Back Line. Darryl trades his own capital and has the unique experience of trading both Western and mainland Chinese markets. He is also a Mandarin speaker.
- Lee Zhao, CMT, CAIA and Emily Chan, CMT both from Bloomberg. Lee oversees the North Asia business relating to charts, technical analysis and data visualization. His market insights are featured on Bloomberg and he currently serves as Hong Kong Chapter Co-Chair and Admissions Committee member of the CMT Association. Emily specializes in corporate, commodities and education partnerships in Bloomberg. She is a CMT charterholder as well as a part time University lecturer.
The theme of Darryl’s presentation was “Trade what you see, not what you believe.”
There is a gap between the fundamentals and reality, as evidenced by new market highs amidst headlines of high unemployment and closed businesses. He illustrated this “irrationality” by showing a chart that tracked the rise of the Dow with a rise of COVID-19 cases when logically the relationship should have been inverted – higher the cases, lower the Dow.
While this sort of disconnect between market activity and fundamental activity has always existed, COVID-19 in 2020 has made this apparent disconnect starker.
To tackle these markets, Guppy says he is constantly looking for “three islands of rationality in a sea of irrationality” – time, volatility and statistical rationality.
The first method is to watch the crowds and the chart patterns they form. Social media and the influx of new traders has resulted in many using, what Guppy calls, “suspect TA.” They interpret chart patterns incorrectly. He explains his concept using two chart patterns, out of a half a dozen of his favourite chart patterns, the Cup and Handle and the Triangle, both of which are common but incorrectly interpreted by a vast majority of the market participants.
Guppy says such mis-interpretation creates irrational market behaviour. To avoid acting irrationally along with the majority of the crowd, Guppy is looking for patterns that adhere to the ideal template as far as practicable.
In the case of the C&H pattern, Guppy is willing to wait for the handle to form before measuring the breakout target, along with the time spent and the regularity of the price action in the belly of the pattern.
In the case of the triangle – the upward sloping triangle to be precise – there are three things that need to exist.
- a well-tested resistance level,
- an upward sloping trend line with a good anchor point and two or three successful tests, and
- a base which has three to five days of activity where the price is moving in the same direction.
By waiting for a pattern to conform to the ideal pattern, that is, waiting for time to form the pattern, one can create an island of rationality which provides for better trade targets and risk management.
As for rationalizing volatility, Guppy uses the Count Back line concept (https://www.guppytraders.com/cbl-info). Because volatility is the key to placing stops, Guppy finds his Count Back Line approach, one of the two methods he uses, more effective because it is not based on a set calculation like the ATR thus acting like a self-adjusting volatility trigger.
By rationalizing volatility, Guppy says, we give ourselves another way to trade in a market where fundamentals don’t provide a reliable guide. So the focus is trading what one sees, not what one believes.
The third island of rationality that Guppy uses is what he calls statistical rationality. He says there are enduring statistical relationships that persist in the market, as found in average daily range relationships (not ATR) which he uses to trade foreign currency and commodities in combination with Guppy Multiple Moving Average (https://www.guppytraders.com/gmma-info). The 5 average range is a simple calculation. If the move is 100, 110, 90, 80 and 130 pips for 5 days, then the 5-day average is 102 pips. As per Guppy, there is an 85% probability that the next day’s price move will achieve 75% of the value of this average range. Since the direction is not certain, Guppy uses GMMA to confirm the probable direction.
Lee’s presentation related to visualizing technical and fundamental data on the same chart. He presented evidence that better market timing can be achieved visualizing technical and fundamental data on the same chart during transition phases from a bear to a bull market and vice versa. His material was based on his contribution to the latest edition of the “Hong Kong Chartbook” on Bloomberg.
Quoting Ralph Acampora, “Price is a fact and value is an estimate,” Lee showed a chart which overlaid a long term 144-month simple moving average on the Hang Seng Index (HSI) book value. He pointed out how the book value line has acted as the support for the HSI since 1993 and the combination of the SMA and the book value line had correctly indicated the market bottom in HSI in 2003, 2011 and in March 2020.
Explaining his choice of 144 SMA, Lee went on to illustrate how subjective patterns look perfect in hindsight compared to objective indicators and used a custom indicator channel on the HSI from 1965 to 2020 and a Gartley pattern that called a bottom in 1982 and in March 2020 on the HSI to illustrate his point.
That is why, Lee argued, indicators or quantitative analysis is more popular among institutions.
Going back to the theme of combining technical and fundamental data, Lee added quarterly GDP data and the monthly retail sales value in the middle panel of the previous RSI chart showing how RSI signals can be backed up by data showing a recovering macro economy.
He further illustrated this with a chart that combined the RSI chart with import and export data and the drop in the price of Cathay Pacific airline with the rise of COVID cases in Hong Kong.
He cautioned, however, that while creativity is good, there is a need for a boundary or else we would have charts, as seen by him, which compared a rise in worldwide COVID cases with Bitcoin’s rise.
Lee then pointed out that while there is no set formula as to what type of fundamental data should be combined with technical indicators, sensible combinations always provide an insight. He illustrated this with a template that they use in Bloomberg (Bloomberg users – G BBTA 2018) for tracking global equity markets.
Emily Chan spoke about effectively communicating the key themes of the 2021 outlook using the data visualization tools available in Bloomberg.
The three themes she identified were:
- Together or apart
- Winners and losers, and
- Value and growth
Emily illustrated the first theme using a line chart of the ratio of Copper to Gold. The importance of this ratio lies in the fact that historically, the ratio has had a direct correlation with the yield of U.S. Treasuries with a declining ratio – lower Copper price relative to Gold – signaling a less inflationary environment and vice versa. She pointed out that the ratio has been at all time highs since the beginning of 2020, led by a rise of Copper prices in Shanghai since March 2020. The market viewed this as indicative of confidence from investors and manufacturers towards economic recovery. She further illustrated her point using import data for Copper (into China) and a seasonality chart of Copper prices.
Looking ahead, Emily felt that the price of commodities and Treasuries would depend largely on government actions and policies. To keep a tab on this, she suggested using the Bloomberg function READ to see what the terminal users are reading. The most read news for the last thirty days from 7 Nov to 7 Dec 2020, for instance, has been those that related to vaccines and virus.
The second theme of winners and losers was illustrated using the RRG function – Relative Rotation Graphs. Emily put up a RRG chart of the sub-indices of the Hang Seng Index. While the technology sector was in the leading quadrant – top right – in August 2020, by the beginning of December 2020 it showed flagging momentum giving up its position to sectors related to manufacturing such as materials and industrials effectively confirming the manufacturing revival indicated by the rising Copper-Gold ratio.
Emily illustrated the third theme of value versus growth using a custom index she created on Bloomberg consisting of the 100 growth stocks in terms of EPS in Hong Kong. She compared this index with the level of the Hang Seng Index (https://www.hsi.com.hk/eng), the benchmark index of Hong Kong big market cap stocks. Starting from March 2020, an increasing divergence was noted where the price of growth stocks led the ones of value. After a brief drop in August 2020, the momentum of growth stocks started to pick up again, leading to a record high. To see supporting factors, Emily used the Bloomberg function FTW (Factors To Watch) which showed value factors had an average of negative 70% year-to-date return compared to growth factors which showed a plus 11% year-to-date return.
To confirm this, Emily used the news sentiment / analytics function which analyses news to arrive at a score for sentiments. By screening out the companies with the most positive news, one could see sentiments were positive for cyclical and growth stocks. However, she pointed out that the sustainability of the current premium enjoyed by the growth stocks over value is a function of government stimulus and central bank policy.
