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Technically Speaking, January 2022

Happy New Year, dear readers!

Here’s wishing you a year full of learning and accomplishments.

So how was 2021? Was it anything at all like 2020? I hardly doubt that a year like 2020 will make its way to us that quickly!  I feel like the year you had would be dependent on your trading style. If you’re a trend follower, then opportunities came in instalments. If you’re a range-bound trader, then the past year must’ve been a delight! But regardless of the type of trader you are, the year 2021 definitely imparted a lot of lessons!

As we enter a new market year, we look forward to the teachings of the year 2022 as well. Sure enough, the pandemic is still around, but for how long? Nobody knows. It’s like asking a technical analyst how long the trend will last. Nobody has the answer. You just do what you do with the information you have today.

So, what is it that the market is saying today? Well, interest rates are certainly holding up. What that means is that financials are probably doing well in that environment. Rising interest rates translate to rising equities and commodities. Stocks and commodities are probably doing well there too. What else? Precious metals haven’t been up to anything really, so at this point who knows what will happen there. We’re seeing breakouts coming through in several sectors from regional banks to materials to chemicals. The Indian market has seen complete domination on behalf of the Information Technology Sector that has been the most consistently bullish sector all of last year. And what’s more? It doesn’t seem like it’s in the mood to grind to a halt.

Markets are doing well in pockets, and that may as well be the theme going forward. We’re way past that point where the market has to recover from a shock event like the 2020 crash. We may not see front-line indices putting up their best performances but we may see stock-specific moves dominate the year ahead.

So, what is one to do in such a market? As a kid, I used to play a game called Wiggly Worms. There was a big flat red apple with tiny holes in it that housed tiny worms with coloured tails. As you’d start the game, the tiny worms would come out of their homes one by one, at random, and you’d have to pull them out. The person who pulled out the greatest number of (same coloured tail) worms in under a minute won.

The point is, that we might be in a Wiggly Worm market. Different trades (worms) will jump out at you at different points in time. If they suit you, you pull them out. If they don’t, you place them back in. When the market as a whole is going up, it’s easy to make money because of the bullish mood. But we may be in a market whereby relative strength will play an even bigger role than it has in the past. My plan is to take each trade as it comes rather than waiting for the combo offer deal.

In this month’s edition, we bring to you comprehensive Options strategies, a book review, and reminiscence of the MTA among others.

We’ll meet again next month. Until then, Think Technical!

Rashmi Bhatnagar, CMT

Editor

What's Inside...

President's Letter

by Brett Villaume, CMT, CAIA

As we begin the new year, the Board of Directors and Staff have initiated the annual strategic planning process. The CMT Association’s fiscal year begins July 1st, so the next few months are prime...

Tail Risk Pricing Post-Pandemic

by Ryan Hysmith DBA, CMT

The Pandemic Crash was the fastest drop in history from all-time highs to correction territory. Hedged traders were not totally immune to the panic, but their portfolios were more stable and better...

Reminiscing the early days of the CMT Association

by Walter Deemer

What was the TA world like in the earliest days of the Market Technicians Association? Not at all like the world we enjoy today! Read on; we’ve come a long way… The MTA started out as an informal...

Capitalizing on New Year Short-Covering Opportunities

by Matthew Timpane, CMT

For the last few years, one of the things we love to look at is tax-related short-covering opportunities as we enter the New Year. It’s a play on the old “Dogs of the Dow” theory, where you buy...

[Options] My Favorite Strategies: Bullish Risk Reversals

by Sean McLaughlin

Ok, so perhaps there’s some recency bias here as the most recent bullish Risk Reversals I’ve put on have worked. Really though, all that has done is remind me that I should probably do more of...

Stacking Credentials: A CPA’s Perspective on Pairing the CPA with CMT Designation - Part 1 of 2

by John Letizia II, CPA, CMT, CFTe

Using anecdotal evidence from CMT Association sponsored events, LinkedIn, Bloomberg, and other sources, it seems that CMTs who also hold the CPA designation are extremely rare. The combination for me...

Book review - Day Trading the Dow Mini: A Practical Guide for Market Participation by Brad E. Stych

by Jim Erdmier, CMT

Brad Stych’s “Day Trading the Dow Mini” is a complete trading guide. Many books published today simply dive into technical analysis, fundamental analysis, or trading psychology. One thing I...

Global Ex. US Return: A Challenging Year for Passive Management

by Shane Murphy

2021 highlighted the momentum-like nature of market cap weighted indices. Despite all the chop we saw from the average stock in the US, an index like the S&P 500 was able to stay above its 50-day...

Applications for New Association Directors

by Salma Abdulla, CFA, CMT

The Governance Committee of the CMT Association Board of Directors is now accepting applications for new Directors for the fiscal year commencing July 1, 2022. The Board is seeking to build a...

January 2022 CMT Newsletter

by Marie Penza

Membership The CMT Association would like to congratulate the following members on their new positions: Pawandeep S Bhatia, Management at Electrum Portfolio Managers   Updating Your...

Updates from the Eastern Hemisphere

by Joel Pannikot

Wish you all a happy new year! The new year dawns on a new world where new waves of a global pandemic are slowly turning endemic. This is a world where we have gone from webinar fatigue to coming to...

President's Letter

President's Letter

As we begin the new year, the Board of Directors and Staff have initiated the annual strategic planning process. The CMT Association’s fiscal year begins July 1st, so the next few months are prime time to discuss anything and everything having to do with how the Association is managed, including who serves on the Board. Speaking of which… The Board nomination window is now open for CMT members to submit proposed candidates for Director at Large positions for FY 2023. Please see the article in this month’s Technically Speaking written by Governance Committee Chair Salma Abdulla that explains Director qualifications and how to nominate someone. Member nominations are the source of new Board candidates to fill vacancies created through term limits, attrition, and strategic additions. So, we take nominations very seriously and highly appreciate your submissions. Per our Bylaws, the Governance Committee is responsible for overseeing the board refreshment process, which includes conducting

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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Tail Risk Pricing Post-Pandemic

Tail Risk Pricing Post-Pandemic

The Pandemic Crash was the fastest drop in history from all-time highs to correction territory. Hedged traders were not totally immune to the panic, but their portfolios were more stable and better prepared to capitalize on the subsequent rally than those without portfolio protection. VIX hedging strategies or buying deep-out-of-the-money (OTM) put options (i.e., “unit puts”) were incredibly effective during the Pandemic Crash. However, today’s pricing of VIX options and OTM puts has dramatically reduced the same strategies’ price efficiency and downside protection. Traders talk about VIX and SPX tail risk pricing being astronomically high compared to before the pandemic. How significant is this price change? What has happened to the price of downside protection? We studied almost two decades of deep-OTM SPX put option pricing data to get the answers. Hedging Tail Risk with OTM Puts  A unit put is a far out-of-the-money put contract with Greeks that do not follow the uniform patterns of

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)

Ryan-Hysmith

Ryan Hysmith DBA, CMT

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Reminiscing the early days of the CMT Association

Reminiscing the early days of the CMT Association

What was the TA world like in the earliest days of the Market Technicians Association? Not at all like the world we enjoy today! Read on; we’ve come a long way…

The MTA started out as an informal group of market technicians in 1970 and 1971. Ralph Acampora and the late John Brooks then spearheaded a move to create a more formal, more professional organization. The result: The Market Technicians Association of New York, founded in 1973. In its’ earliest years, it had two key objectives: the professionalism of technical analysis and the sharing of knowledge among technicians. Now taken for granted, they were far from it back then.

PROFESSIONALISM

As part of the formal creation of the MTA, in 1972 John Schulz wrote the MTA Principles and Policy, which articulates the reasons why we created the MTA superbly well. Parts of that Principles and Policy statement follow, but I strongly urge you to read the whole document. You can access it here: https://www.walterdeemer.com/weassert.htm

The Association asserts, in sum, that the technical analysis of stock price movements and of the supply-demand relationships underlying them is a valid, indeed an indispensable, element in the formulation of a “reasonable basis” for investment decisions.

The Association dedicates itself to the widest possible dissemination and acceptance of these principles and to promote the highest achievable standards of professional conduct, effort, and scholarship among its members in all areas within the purview of technical analysis.

Schulz even mentioned behavioral analysis — long before it became widely recognized:

The tendency of price trends to persist and of investors’ behavioral patterns to recur enables the technical analyst to recognize and anticipate potentially favorable or unfavorable investment environments. Indeed, the recognition of extremes in investor psychology is one of the technical market analyst’s unique contributions to the field of investment techniques.

And that marked the very beginning of the long, hard road that ultimately led us to the CMT Association and the CMT program, which have played such important roles in making technical analysis an accepted professional field.

SHARING OF KNOWLEDGE

Before the MTA came along, the prevailing modus operandi among technical analysts was “Well, I’ve discovered the Holy Grail — and I’m darned if I’m going to let the whole world in on it.” Technicians making public presentations (and even private ones to me, as a buy-side analyst) thus all too often described the methodology behind their amazing indicator or trading system as “proprietary” or “my work” and left their audience with just the end result. I cannot emphasize strongly enough the huge amount of technical analysis that was kept behind curtains in those days; we were all pretty much on our own.

The MTA changed all that. It strongly and actively encouraged the sharing of research in monthly meetings, an annual seminar, and a monthly newsletter and quarterly journal. As a result, technicians found themselves working with an ever-expanding body of knowledge.

So the next time someone greets you as a market technician with respect, not scorn, and the next time you learn all the details about a new analytical technique, think about what things were like in the pre-MTA world. It hasn’t always been like this.

 

Contributor(s)

Walter Deemer - 2022

Walter Deemer

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Capitalizing on New Year Short-Covering Opportunities

Capitalizing on New Year Short-Covering Opportunities

For the last few years, one of the things we love to look at is tax-related short-covering opportunities as we enter the New Year. It’s a play on the old “Dogs of the Dow” theory, where you buy the highest dividend-yielding companies relative to their stock price that is presumed to be near the bottom of their business cycle. Instead, we’re looking for companies where shorts who have big gains will wait until just after the New Year to cover their positions so they can wait a year to recognize the profits. This might allow us to identify stocks with an increased chance at an early-year short-covering rally. As a firm that focuses on long premium options strategies, these are the kind of risk/reward scenarios we look for to maximize our potential gains from taking on the added leveraged risk. We’ve run this study since 2018, and the data points towards

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)

Matthew Timpane, CMT - 2022

Matthew Timpane, CMT

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[Options] My Favorite Strategies: Bullish Risk Reversals

[Options] My Favorite Strategies: Bullish Risk Reversals

Ok, so perhaps there’s some recency bias here as the most recent bullish Risk Reversals I’ve put on have worked. Really though, all that has done is remind me that I should probably do more of these trades. In a nutshell, a bullish Risk Reversal is a trade where we short naked puts and use those proceeds to pay for long calls. That’s right, the market pays me to get long! The trade is put on for a small net credit (ideally), and the short-term goal is to ride an increase in the value of the calls which will allow us to sell a portion of them and use those proceeds to buy-to-close all the naked short puts. This then leaves us long the remaining portion of our calls for free! The calls could eventually reverse on us and go to zero, but we’ll still keep the credit we received when we originally put

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)

Sean McLaughlin - 2022

Sean McLaughlin

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Stacking Credentials: A CPA’s Perspective on Pairing the CPA with CMT Designation - Part 1 of 2

Stacking Credentials: A CPA’s Perspective on Pairing the CPA with CMT Designation - Part 1 of 2

Using anecdotal evidence from CMT Association sponsored events, LinkedIn, Bloomberg, and other sources, it seems that CMTs who also hold the CPA designation are extremely rare. The combination for me is attributed purely to my non-traditional career progression. A decade ago, I worked in the M&A tax group at a Big 4 accounting firm. Due to family circumstances, I pivoted my accounting/tax career to trading and ultimately combined my knowledge of accounting with my passion for the equity markets in sell-side research. Most of my sell-side colleagues hold a CFA and/or an MBA with few CPAs or PhDs and even fewer CMTs. I can generally categorize my peers into four categories: 1) some view technical analysis as “voodoo;” 2) some only believe stocks underperform their thesis for unspecified technical reasons when there was no news accompanying an adverse move; 3) some possess a cursory understanding of technical analysis but do not know how to apply it; and 4) some utilize it in the background with little to no public broadcast. All of these categories surprise me, since there is an All-American Institutional Investor category for technical analysis.

The basis of technical analysis is fundamental. Central to Dow Theory is the concept that Dow’s industrial and railroad averages should confirm a move because there is an economic rationale that goods provided and sold to customers should suggest that those goods were transported and delivered. Outside of the meme stock price action this year, companies on their way to bankruptcy generally do not trade in uptrends.

With the advent of intraday and tick charts, digitalization, and automation, the application of technical analysis has flourished greatly since the time of Charles Dow. Nevertheless, the core tenets that Dow postulated in his writings remain at the root of our application. Today some investors use technicals almost exclusively, and with quantitative investing, there is an element of technical analysis necessary in writing many algorithms. Technical analysis has become so encompassing that on a sliding scale from 0 to 100, the integration of technicals with fundamentals could sit anywhere on the scale, with the optimal spot likely in the middle.

CPAs are expected to exhibit professional skepticism which is immeasurable, but essentially requires CPAs to be inquisitive, question reasonableness, and test procedures. This is essentially the scientific method which technicians routinely employ. Furthermore, CPAs are instructed to practice conservatism which essentially instructs an accountant to avoid overstating revenue/assets and understating expenses/liabilities. While applied differently, technicians also exhibit conservatism. We know that most of the indicators in our toolbox are conservative. We look for divergences as a signal not necessarily to go long or short but as an indication potentially to move to cash, which is conservative. Does that mean we may miss a favorable move? Yes, of course! However, we are willing to accept it, because capital preservation in a time of uncertainty might better align with our risk profile.

As a CPA, I know that financial statements are reasonable estimates of a company’s financial position, operations, and funds flow; however, financial statements can be restated or reformatted in a way that negates comparability with competitors. Each company can select its own accounting methodology for various line items, which makes even a comparison of the same line item between two companies in the same sector with roughly the same attributes, difficult. Simply put, despite the time and cost of preparation and the Regulation G requirement to reconcile a non-GAAP measure to a GAAP measure, financial statements of companies are not necessarily comparable and oftentimes are determined using assumptions within defined parameters. In short, accounting is as much an art as a science.

I believe that there should be a fusion of the two methodologies – because they are complementary and not incompatible. Marrying the two disciplines enables an analyst to provide a holistic view of not just the company/sector, but the reasonableness of the assumptions – particularly entries, target prices, and valuation. Simply put, it is an alternative path to arrive at the same place – alpha generation.

Using the keep it simple approach, fundamental analysts can utilize technical analysis in the following ways:

  • Time rating changes
  • Determine relative strength and rank a coverage universe
  • Provide clients with perspective during market sell-offs and offer reasonable reversal levels
  • Adequately explain day-to-day market gyrations especially when there is no news
  • Identify confluences as a reasonable check to fundamental target prices
  • Offer clients actionable ideas to generate alpha

In an age when information is widely disseminated, the marriage of fundamental and technical analysis provides a value-added service. Technical analysis typically can be much more objective than fundamental analysis. For example, when drawing support and resistance lines, it is clear where a pivot high or low occurred; they are measurable and objective. Shares, units, or contracts actually traded at a particular level also are measurable. Yes, there are subjective elements to technical analysis and this subjectivity oftentimes causes the skeptics to discredit the entire discipline. But I advocate, especially when dealing with fundamentalists, to keep the approach purely factual and objective. Yes, point out a head and shoulders pattern when you see it but do not lead with it. Instead, lead with the facts and be sure the analysis is understandable to non-technicians. Over time, this approach should bode well for the integration of the two disciplines.

In Part 2, I will highlight the practical reason for the overlay of technical analysis with fundamental analysis.

Contributor(s)

John Letizia

John Letizia II, CPA, CMT, CFTe

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Book review - Day Trading the Dow Mini: A Practical Guide for Market Participation by Brad E. Stych

Book review - Day Trading the Dow Mini: A Practical Guide for Market Participation by Brad E. Stych

Brad Stych’s “Day Trading the Dow Mini” is a complete trading guide. Many books published today simply dive into technical analysis, fundamental analysis, or trading psychology. One thing I really liked seeing in this book was that it opened with information that is imperative to anyone looking to become a trader. The book first goes over the fundamentals of day trading and then delves into goal setting, what’s required for trading success, and choosing a trading style. The chapter on style is especially important, in my view, because choosing a suitable style for the trader is often overlooked and not given much thought. He even discusses how we need to consider our stage in life when figuring out our trading style.

Having established the prerequisites for successful trading, Brad then dives into more technical matters. Here again, he leaves no stone unturned. He discusses technology and what a trader needs to be aware of, whether it is internet connectivity or the mechanics of a trading platform. Many specific and actionable trading methods and set-ups are discussed for much of the book. One thing I really liked was the “Review” at the end of each chapter. Asking readers to reflect on key concepts, in my experience, is a great way to make sure things “stick.”

There are several chapters that are truly unique to this work. One of them showed a month of trading in the markets from Brad’s point of view. This is a very effective way to demonstrate all of the concepts that the book covered prior to that. In this chapter, he shows charts and talks through them. It really reinforces everything up to that point.

Another unique chapter goes into more detail on how traders actually learn. Brad discusses several different learning methods, from experimentation to imitation. Having read many trading books, this was new and enlightening information to come across for me.

Whether you are a brand new trader or someone who has traded for some time and is looking to expand your trading methods and techniques, “Day Trading the Dow Mini” is a good place to start.

Day Trading the Dow Mini: A Practical Guide for Market Participation (Third Edition)
by Brad E Stych, PhD, CMT
Brightstar Training LLC, 462 pages. $124.95
(Available only from the publisher at brightstartraining.com)

Contributor(s)

Jim Erdmier, CMT - 2022

Jim Erdmier, CMT

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Global Ex. US Return: A Challenging Year for Passive Management

Global Ex. US Return: A Challenging Year for Passive Management

2021 highlighted the momentum-like nature of market cap weighted indices. Despite all the chop we saw from the average stock in the US, an index like the S&P 500 was able to stay above its 50-day moving average 91% of the time. Talk about strength of trend! 2021 was a very difficult year for investors seeking passive exposure to global ex. US equities. It’s easy to point to the monster returns achieved from the major US stock market averages, but around the globe other markets struggled to keep pace. In a passive world, it can feel as if market capitalization is all that matters. Majority of indices are constructed in a way that benefit from a type of momentum due to market cap weighting i.e., A company appreciates in value, simultaneously increasing its market cap, resulting in a larger index weighting and increased influence on the direction of said index.

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)

Shane Murphy

Shane Murphy

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Applications for New Association Directors

Applications for New Association Directors

The Governance Committee of the CMT Association Board of Directors is now accepting applications for new Directors for the fiscal year commencing July 1, 2022. The Board is seeking to build a pipeline of future leaders by identifying members who can help move the Association forward. Directors-at-Large serve a three-year term. In addition to the skills necessary to fulfill the obligations of the role and the desire to serve in a volunteer capacity to help further the mission of the CMT Association, applicants/nominees should exhibit the following characteristics: PASSIONATE Have a passion for technical analysis and furthering the mission of the CMT Association POSITIVE Encourage a positive and collaborative debate and discussion with a diverse group of volunteer leaders PRESENT Able to participate in regular conference calls, serve on various committees, as well as attend the Annual Symposium and other events during the year PROACTIVE Be an active participant in discussions, bringing past experiences from inside and outside the

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)

Salma Abdulla, CFA, CMT

Salma Abdulla, CFA, CMT

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January 2022 CMT Newsletter

January 2022 CMT Newsletter

Membership The CMT Association would like to congratulate the following members on their new positions: Pawandeep S Bhatia, Management at Electrum Portfolio Managers   Updating Your Profile Please take a few minutes to login to the website and update your profile information; if you are a CMT candidate, be sure to include your telephone number in case Prometric needs to contact you about your exam appointment.   To update your profile, login to the CMT website and under My CMT select My Account.  On the following page, under My Account select Edit My Information.   Your cooperation is greatly appreciated!   CMT   Don’t forget to take advantage of early registration which will close on February 14th.  The Level I & II exams will take place June 2-12, 2022, and Level III will take place on June 9, 2022.   Before registering for the exam, please make sure that your record contains the same name as your Legal ID.  If the names do not match,

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)

Marie Penza - 2022

Marie Penza

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Updates from the Eastern Hemisphere

Updates from the Eastern Hemisphere

Wish you all a happy new year! The new year dawns on a new world where new waves of a global pandemic are slowly turning endemic. This is a world where we have gone from webinar fatigue to coming to terms with a hybrid life, part virtual, part real. This new world brings CMT Association tremendous opportunity. Reflecting on 2021, and looking forward to 2022, I want to use this article to keep our members abreast with the developments on our eastern frontier. APAC Development Committee: In early 2021, the board of directors set up a sub-committee to support our development in the Asia-Pacific region. The current members of this committee are Jamie Coutts (Chairperson), Akira Homma, Akshay Chinchalkar, Ananda Bhaumik and Jigar Mehta 2021 Asia Pacific Summit – October 2,3: This inaugural regional summit built on the successes of Summits in India, the Americas and Europe. It was a success with over 1000

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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