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Technically Speaking, January 2015

LETTER FROM THE EDITOR

Many publications are dedicating January issues to a look at the year that was or a forecast for the year that is to be. We decided to ignore time and in this issue of Technically Speaking we review timeless techniques.

Gaps, for example, have been a part of charts for hundreds of years and will always be visible on charts. This month, we review the Dow Award-winning paper written by Julie R. Dahlquist, PH.D., CMT and Richard J. Bauer, JR., PH.D., that explains how to trade gaps.

Relative strength (RS) is also a technique that has worked for decades and is likely to continue providing useful trade signals in the future. John Lewis, CMT, from Dorsey Wright & Associates, expands on how RS can be applied to generate profits. Looking a little bit ahead, Tom Dorsey, co-founder of Dorsey Wright & Associates, will have more insights into successful strategies at the MTA Symposium in March.

Bloomberg recently highlighted a useful application of the relative strength index (RSI) in Bloomberg Briefs and a summary of that information is presented here. Andrew Thrasher, CMT, then explains how copper has been replaced by semis in the modern economy as a stock market indicator.

While trend lines have been useful in the past and will be useful in the future, Greg Schnell, CMT, demonstrates that they can be applied incorrectly. In an article that does provide a specific forecast for 2015, Mark Ungewitter uses timeless techniques like the Dow/Gold ratio, cycles, market breadth and the Coppock Curve to look at the stock market.

Although we try to provide articles that will interest everyone, if we aren’t featuring a topic you find interesting, please let us know what you’d like to see more of by emailing us at editor@mta.org.

Sincerely,
Michael Carr

What's Inside...

ANALYZING GAPS FOR PROFITABLE TRADING STRATEGIES

by Julie Dahlquist, Ph.D., CMT & Richard J. Bauer, Jr. Ph.D., CFA, CMT

Editor’s note: This is a brief abstract of the 2013 Charles H. Dow Award winning paper. Gaps have attracted the attention of market technicians since the earliest days of stock charting. A gap up...

RELATIVE STRENGTH AND PORTFOLIO MANAGEMENT

by John Lewis, CMT

Editors’ note: This paper was originally published as a white paper by Dorsey Wright & Associates Money Management.  It was republished here as an introduction to the type of work done by...

BLOOMBERG BRIEF HIGHLIGHTS RSI

by Paul Ciana, CMT

In the December 23 issue of Bloomberg Brief Technical Strategies, Bloomberg analyst Paul Ciana, CMT, offered insights into how RSI can be used to identify long-term trends in the stock market. In...

DR. COPPER HAS BEEN REPLACED

by Andrew Thrasher, CMT

Editor’s note: Intermarket relationships are important but they can change over time. It is important to consider the reason a relationship exists and to watch for changes in economic fundamentals...

TREND LINE BREAKS - THE DIFFERENCE IN THE DISPLAY MAKES THE TIMING CRITICAL

by Greg Schnell, CMT, MFTA

Editor’s note: This was originally posted at the StockCharts.com Chart Watchers blog on December 20, 2014 and is reprinted here with permission. Technicians are a serious bunch. When we get a trend...

DAVID BLAKE, CMT

by David Blake, CMT & Amber Hestla-Barnhart

How would you describe your job? I work for a small research firm called Computrade Systems in Atlanta, GA that provides a web-based research product for retail and professional money managers. The...

THE YEAR AHEAD – 2015

by Mark Ungewitter

Editor’s note: This was originally published at SeekingAlpha.com by Mark Ungewitter, a Vice President at Charter Trust Company. The entire presentation, including Mark’s outlook for bonds, gold,...

CHART OF THE MONTH

StockCharts.com has created an indicator called the StockCharts Technical Ranking (SCTR) created by John Murphy.  The SCTR indicator has been in use for the last 7 years so the value of the data...

APPENDIX: ADDITIONAL TEST DETAILS FROM RELATIVE STRENGTH AND PORTFOLIO MANAGEMENT

by John Lewis, CMT

...

ANALYZING GAPS FOR PROFITABLE TRADING STRATEGIES

ANALYZING GAPS FOR PROFITABLE TRADING STRATEGIES

Editor’s note: This is a brief abstract of the 2013 Charles H. Dow Award winning paper. Gaps have attracted the attention of market technicians since the earliest days of stock charting. A gap up occurs when today’s low is greater than yesterday’s high (See Gap A in Figure 1). A gap down occurs when today’s high is lower than yesterday’s low (See Gap B in Figure 1.). A gap creates a hole in a daily price bar chart. This gap is called a “window” when using candlestick charts. A gap up is referred to as a “rising window” and is considered a bullish signal. A “falling window,” which is a gap down, gives a bearish signal. (Nison, 2001). It is easy to understand why early technicians noticed gaps; gaps are conspicuous on a stock chart. However, technicians did not just pay attention because they were easy to spot. Because gaps show that

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)

Julie Dahlquist, Ph.D., CMT

Richard J. Bauer, Jr. Ph.D., CFA, CMT

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RELATIVE STRENGTH AND PORTFOLIO MANAGEMENT

RELATIVE STRENGTH AND PORTFOLIO MANAGEMENT

Editors’ note: This paper was originally published as a white paper by Dorsey Wright & Associates Money Management.  It was republished here as an introduction to the type of work done by Dorsey Wright & Associates. Tom Dorsey cofounded Dorsey, Wright & Associates in 1987 and continues to serve as President. He is scheduled to make a presentation at the 2015 MTA Symposium. Numerous academic and practitioner studies have shown relative strength—also known in academia as “momentum”—to be a robust factor that leads to outperformance. However, much of the academic research has been handicapped by testing methodologies that are not at all similar to the way that portfolios are managed in the real world. This white paper discusses our improved testing process, which incorporates two elements that are unique: 1) a continuous portfolio testing protocol that manages portfolios the way they are managed in the real world, and 2) a Monte

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)

John Lewis

John Lewis, CMT

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BLOOMBERG BRIEF HIGHLIGHTS RSI

BLOOMBERG BRIEF HIGHLIGHTS RSI

In the December 23 issue of Bloomberg Brief Technical Strategies, Bloomberg analyst Paul Ciana, CMT, offered insights into how RSI can be used to identify long-term trends in the stock market. In S&P 500’s Second Longest Overbought Streak Ended in October, Ciana updated his study on RSI. “In our May 1 edition, we discussed the strength and length of the S&P 500’s uptrend by looking at the consistent positive momentum displayed by RSI. Analysis showed the 14-week RSI had remained above 50 for 74 consecutive weeks, the fifth longest in history since the 1920s.” RSI finally fell below 50 in October after 97 weeks in bullish territory. Ciana found “Return analysis after long periods of time in which RSI remained above 50 suggested, on average, a future downside correction of 4.76%.” In October, after RSI finally broke below 50 the S&P 500 fell as much as 4.48%. In the past, it took an

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)

Paul Ciana, CMT

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DR. COPPER HAS BEEN REPLACED

DR. COPPER HAS BEEN REPLACED

Editor’s note: Intermarket relationships are important but they can change over time. It is important to consider the reason a relationship exists and to watch for changes in economic fundamentals that could highlight times when a breakdown in correlations could occur. In this article, Andrew Thrasher addresses the historic relationship between copper and the stock market and explains what’s changed in recent years. There used to be a belief on Wall Street that copper had a Ph.D. in economics since it was often used as a barometer for the economy and often the market. Traders would look for divergences between the copper and the equity markets for signs of potential danger. If Dr. Copper began to weaken it was believed that the stock market would soon follow. While this may have been the case at one point I would argue it no longer is today or has been for a few

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)

Andrew Thrasher

Andrew Thrasher, CMT

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TREND LINE BREAKS - THE DIFFERENCE IN THE DISPLAY MAKES THE TIMING CRITICAL

TREND LINE BREAKS - THE DIFFERENCE IN THE DISPLAY MAKES THE TIMING CRITICAL

Editor’s note: This was originally posted at the StockCharts.com Chart Watchers blog on December 20, 2014 and is reprinted here with permission. Technicians are a serious bunch. When we get a trend line break to the upside or downside, it is very critical for us. It is our trigger. However, the way the data is displayed is very important as well. Here is a chart of 4 related subjects on a performance chart which shows the movement in % terms. They rise and fall together over time but the percentage change is different. A one-to-one fit? No. The components are the Emerging Markets ETF (EEM), the Emerging Markets Currency ETF (CEW), Brent Crude Oil ($BRENT) and the Hang Seng Index for Hong Kong ($HSI). They have reasons to be correlated. Crude Oil is one of the world’s largest commodities and is used in every country. The Currency ETF of Emerging Markets is

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)

Greg Schnell

Greg Schnell, CMT, MFTA

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DAVID BLAKE, CMT

DAVID BLAKE, CMT

How would you describe your job? I work for a small research firm called Computrade Systems in Atlanta, GA that provides a web-based research product for retail and professional money managers. The research is centered around technical analysis and includes quant models that formulate opinions and recommendations on individual stocks as well as generating studies for Industry Group Analysis and ETFs. I do analysis on individual stocks and write two weekly commentary articles and a monthly overview of the stock market. The weekly market letter on our Market Edge website summarizes the weekly market action and concentrates on different momentum and sentiment indicators to project probable market scenarios. These publications are released through clearing firms and on-line brokerage firms. I also write a weekly article for Schwab’s active traders which includes a short piece on educating investors on how technical analysis can help in their outlook of the market. What led you

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)

David Blake, CMT

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THE YEAR AHEAD – 2015

THE YEAR AHEAD – 2015

Editor’s note: This was originally published at SeekingAlpha.com by Mark Ungewitter, a Vice President at Charter Trust Company. The entire presentation, including Mark’s outlook for bonds, gold, oil and global equities can be downloaded here. The opinions expressed herein are those of the author. Nothing contained in this communication should be construed as investment advice. The Year Ahead – 2015 In the spirit of year-end prognostication, here’s my annual review of secular trends and behavioral tendencies that are likely to influence key markets in 2015… US Equities From a behavioral perspective, US equities entered a secular bull market in 2013, “breaking out” above their 13-year range, and doing so in grand style. The equity breakout was corroborated by a reversal in the Dow/Gold ratio which, in April 2013, posted its first higher high since 1999. The equity bull market is arguably stretched in terms of price, time and valuation… but we haven’t yet witnessed a classic

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)

Mark Ungewitter

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CHART OF THE MONTH

CHART OF THE MONTH

StockCharts.com has created an indicator called the StockCharts Technical Ranking (SCTR) created by John Murphy.  The SCTR indicator has been in use for the last 7 years so the value of the data is really starting to show through now. The SCTR ranks the price action (no fundamental analysis) of the stock or ETF against a peer group. One of the most interesting charts using the SCTR right now is Wal-Mart. When the price action in Wal-Mart is worse than the majority (below 50%) of its peers, we are in a strong bull market. Looking at the chart below, when Wal-Mart became a top performing stock shown by the SCTR, it was a good indicator for being defensive. When Wal-Mart starts to under-perform relative to the Large Cap peer group, it is a great time to be bullish. As we can see in the chart, Wal-Mart recently fired off a signal

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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APPENDIX: ADDITIONAL TEST DETAILS FROM RELATIVE STRENGTH AND PORTFOLIO MANAGEMENT

APPENDIX: ADDITIONAL TEST DETAILS FROM RELATIVE STRENGTH AND PORTFOLIO MANAGEMENT

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)

John Lewis

John Lewis, CMT

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New Educational Content This Month

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