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Technically Speaking, June 2015

LETTER FROM THE EDITOR

Technical analysis has always been focused on the application of knowledge. In the early editions of Edwards and Magee’s Technical Analysis of Stock Trends, they focused on how to trade chart patterns. But these pioneers of the field also included a theory explaining why the pattern should work.  While applying the ideas of technical analysis is still the important consideration to practitioners, many academic researchers are working to uncover why the techniques work. In this month’s newsletter, we provide articles highlighting both the application of technical analysis and the research that technical analysis is stimulating in the academic community.  This month’s newsletter also includes a summary of Tom Dorsey’s presentation at the Annual Symposium. The Symposium truly does provide a year’s worth of ideas and we will be presenting summaries of those ideas in the months ahead. Videos of this year’s presentations and the previous four years are available at http://symposium.mta.org/ and can be viewed at anytime. As always, we welcome your feedback. Please let us know what you think of Technically Speaking, the MTA magazine, by emailing

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What's Inside...

RELATIVE STRENGTH: A CORNERSTONE OF TECHNICAL ANALYSIS

by Tom Dorsey & Michael Carr, CMT

Tom Dorsey opened the 2015 Annual Symposium with a presentation on the process that helped him build a $6 billion asset management firm. The complete presentation is available at the MTA’s...

YOUR TRADING CHARTS WORK BETTER WHEN MARKETS GET FROTHY

by Edward J. Zychowicz, Ph.D, CFA, CMT

Editor’s note: In an article by Oliver Renick, Bloomberg recently featured the work of Dr. Edward J. Zychowicz which demonstrated the value of technical analysis. The original article is available...

BETA ROTATION INDEX LAUNCHED BY S&P DOW JONES INDICES BASED ON 2014 DOW AWARD- WINNING PAPER

The Charles H. Dow Award is presented annually for outstanding research in technical analysis. The 2014 winners, Michael Gayed, CFA, and Charles Bilello, J.D., CPA, CMT, demonstrated research can be...

INTERVIEW WITH PASCAL ZINGG, CFTe, CMT, CAIA

by Amber Hestla-Barnhart & Pascal Zingg, CMT, CFTe, CAIA

How would you describe your job? I am working as a Technical Strategist in the Private Banking & Wealth Management division of Credit Suisse. My main task is to deliver a technical view on all...

WHEN DO STOP-LOSS RULES STOP LOSSES?

by Kathryn Kaminski, PhD, CAIA & Andrew W. Lo, PhD

Editor’s note: This article is an extract of a paper originally published at the MIT web site. All references and additional support for the ideas tested can be found in the...

AUGUST 1914: WHEN GLOBAL STOCK MARKETS CLOSED

by Dr. Bryan Taylor

On June 28, 1914, Austrian Archduke Franz Ferdinand was assassinated in Sarajevo. This event led to a month of failed diplomatic maneuvering between Austria-Hungary, Germany, France, Russia, and...

ACROSS WORLD CURRENCIES

by Paul Ciana, CMT

Editor’s note: This article was originally published in the May 21 issue of Bloomberg Brief: Technical Strategies. Below is an extract of that article. In Bloomberg Briefs, Paul Ciana, CMT,...

ETHICS CORNER: PROFESSIONAL CONDUCT STATEMENTS

Every year, members are required to complete a Professional Conduct Statement (PCS) when they renew their membership. Prospective members and affiliates are also required to complete the PCS. This...

CHART OF THE MONTH

by Alex Cole

Editor’s note: This article was originally published in the May 21 issue of Bloomberg Brief: Technical Strategies. Below is an extract of that article. Alex Cole has put together a screen to show...

RELATIVE STRENGTH: A CORNERSTONE OF TECHNICAL ANALYSIS

RELATIVE STRENGTH: A CORNERSTONE OF TECHNICAL ANALYSIS

Tom Dorsey opened the 2015 Annual Symposium with a presentation on the process that helped him build a $6 billion asset management firm. The complete presentation is available at the MTA’s Knowledge Base, the web’s free repository for everything related to technical analysis.

Tom explained how Dorsey Wright and Associates (DWA) has always focused on the price of a security because it is the ultimate measure of supply and demand in the marketplace. DWA used tools including relative strength and point and figure charting to cut through the clutter of day-to-day market action. These simple tools help identify meaningful patterns in daily share price movements. The same tools, with the same rule set, can be applied at the country, sector, or individual share level, and across a variety of asset classes.

His epiphany, the realization that supply and demand are all that matter for stock picking, came from the book How to

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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)

Thomas J Dorsey

Tom Dorsey

Michael Carr, CMT

Michael Carr, CMT

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YOUR TRADING CHARTS WORK BETTER WHEN MARKETS GET FROTHY

YOUR TRADING CHARTS WORK BETTER WHEN MARKETS GET FROTHY

Editor’s note: In an article by Oliver Renick, Bloomberg recently featured the work of Dr. Edward J. Zychowicz which demonstrated the value of technical analysis. The original article is available at Bloomberg.com.

The Bloomberg article began with an oft-repeated criticism of technical analysis:

“To critics, technical analysis is snake oil, purporting to find order in markets when none exists. New research says using charts as the basis for trading decisions actually works — when investors are at their least rational.

In a study titled “Sentiment and the Effectiveness of Technical Analysis,” researchers found that hedge funds that leaned on technical analysis beat their peers by an average of 5.3 percent per year during stretches when investor optimism was elevated. One reason: price momentum overwhelms influences like earnings and the economy in times of market euphoria.”

The study has been accepted for publication in the Journal of Financial and

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)

Edward J. Zychowicz, Ph.D, CFA, CMT

BETA ROTATION INDEX LAUNCHED BY S&P DOW JONES INDICES BASED ON 2014 DOW AWARD- WINNING PAPER

BETA ROTATION INDEX LAUNCHED BY S&P DOW JONES INDICES BASED ON 2014 DOW AWARD- WINNING PAPER

The Charles H. Dow Award is presented annually for outstanding research in technical analysis. The 2014 winners, Michael Gayed, CFA, and Charles Bilello, J.D., CPA, CMT, demonstrated research can be put to practical use. They have used the analysis presented in their paper to manage mutual funds and separately managed accounts. They have now created an index to track the results of their analysis.

Pension Partners, LLC, recently announced the launch of the Beta Rotation Index (Ticker: BETAEQ), using the strategy outlined in their 2014 Charles H. Dow Award winning paper “An Intermarket Approach to Beta Rotation.” Pension Partners developed the index in partnership with S&P Dow Jones Indices LLC and the index will be independently calculated by S&P Dow Jones Indices.

The Beta Rotation Index is a total return index that measures the hypothetical performance of an equity rotation strategy. Using the signaling power of Utilities outlined in the Dow Award-winning

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.

INTERVIEW WITH PASCAL ZINGG, CFTe, CMT, CAIA

INTERVIEW WITH PASCAL ZINGG, CFTe, CMT, CAIA

How would you describe your job?

I am working as a Technical Strategist in the Private Banking & Wealth Management division of Credit Suisse. My main task is to deliver a technical view on all asset classes to the Credit Suisse Investment Committee. Furthermore, I publish regularly technical views in various Credit Suisse Investment Strategy publications and I also communicate the technical views directly to Credit Suisse clients and relationship mangers through presentations or conference calls.

What led you to look at the particular markets you specialize in?

One of the main advantages of Technical Analysis is that you can apply it to basically all asset classes. So I analyze Equities, Fixed Income, Commodities and Forex on a regular basis.

Do you look at any fundamental or economic inputs to develop your opinions?

I deliver a pure technical view to the Credit Suisse Investment Committee. The Investment Committee then defines the so-called “house view”, 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)

Pascal Zingg, CMT, CFTe, CAIA

WHEN DO STOP-LOSS RULES STOP LOSSES?

WHEN DO STOP-LOSS RULES STOP LOSSES?

Editor’s note: This article is an extract of a paper originally published at the MIT web site. All references and additional support for the ideas tested can be found in the original.

Abstract

Stop-loss rules—predetermined policies that reduce a portfolio’s exposure after reaching a certain threshold of cumulative losses—are commonly used by retail and institutional investors to manage the risks of their investments, but have also been viewed with some skepticism by critics who question their efficacy. In this paper, we develop a simple framework for measuring the impact of stop-loss rules on the expected return and volatility of an arbitrary portfolio strategy, and derive conditions under which stop-loss rules add or subtract value to that portfolio strategy. We show that under the Random Walk Hypothesis, simple 0/1 stop-loss rules always decrease a strategy’s expected return, but in the presence of momentum, stop-loss rules can add value. To illustrate the practical relevance

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)

Kathryn Kaminski, PhD, CAIA

Andrew W. Lo, PhD

AUGUST 1914: WHEN GLOBAL STOCK MARKETS CLOSED

AUGUST 1914: WHEN GLOBAL STOCK MARKETS CLOSED

On June 28, 1914, Austrian Archduke Franz Ferdinand was assassinated in Sarajevo. This event led to a month of failed diplomatic maneuvering between Austria-Hungary, Germany, France, Russia, and Britain which ended with the onset of the Great War, as it was originally called.

Austria-Hungary declared war on Serbia on July 28, causing Germany and Russia to mobilize their armies on July 30.  When Russia offered to negotiate rather than demobilize their army, Germany declared war on Russia on August 1.  Germany declared war on France on August 3, and when Germany attacked Belgium on August 4, England declared war on Germany. Europe was at war, and millions would die in the battles that followed.

The impact on global stock markets was immediate: the closure of every major European exchange and many of the exchanges outside of Europe. Although no one would have predicted this result at the beginning of July 1914, by

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)

Dr. Bryan Taylor

ACROSS WORLD CURRENCIES

ACROSS WORLD CURRENCIES

Editor’s note: This article was originally published in the May 21 issue of Bloomberg Brief: Technical Strategies. Below is an extract of that article.

In Bloomberg Briefs, Paul Ciana, CMT, demonstrated the value of charting a commodity in multiple currencies. He wrote, “The chart above displays five charts of the continuous front month wheat future that trades on the Chicago Board of Trade. The top panel is wheat priced in U.S. dollars. The second panel is wheat priced in euros, followed by Australian dollars in the third and Indian rupees in the bottom panel. Each chart has the 50-day (magenta), 100-day (green) and 200-day (blue) simple moving average applied.”

Based on the chart, he believes wheat futures face significant resistance at the moving averages. The exception is wheat priced in rupees but

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

ETHICS CORNER: PROFESSIONAL CONDUCT STATEMENTS

ETHICS CORNER: PROFESSIONAL CONDUCT STATEMENTS

Every year, members are required to complete a Professional Conduct Statement (PCS) when they renew their membership. Prospective members and affiliates are also required to complete the PCS. This document has been the source of many questions to the Ethics and Standards Committee. In this article, we review the PCS and address some of the most frequently asked questions.

In general terms, the PCS asks if your professional conduct has been the subject of a complaint with the past few years.  Specifically, the question you must answer is:

Has your professional or business conduct (a) been complained about, or (b) been the subject of a proceeding of any nature (with or without or without hearing), to, in, or by [any regulator] or other quasi-judicial body, or any professional or business organization:

    1. Within the past 12 months?
    2. Within the past 5 years?

Answering “yes” to either of these questions will not necessarily

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.

CHART OF THE MONTH

CHART OF THE MONTH

Editor’s note: This article was originally published in the May 21 issue of Bloomberg Brief: Technical Strategies. Below is an extract of that article.

Alex Cole has put together a screen to show the trend of major currencies, sovereign yields, commodities and global stock market averages. Based on the charts, he concludes:

  • The dollar held support while the British pound extended its breakout.
  • Most major sovereign yields are testing resistance or breaking out.
  • The euro-zone bonds lead the way, having broken out of a downward channel.
  • Crude oil futures are trying to maintain their rally.
  • The S&P 500 is barely holding at all-time highs.

Alex Cole is a technical analysis specialist in Bloomberg’s analytics department. He can be contacted at ACole9@Bloomberg.net.

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)

Alex Cole

Alex Cole

New Educational Content This Month

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