As human beings, what sets us apart is our emotional quotient. It is a part of us that allows us to perceive things in ways that are unique to one another. This is also why we have multiple interpretations of the same chart based on time horizon, risk profiles, and goals. There are optimists, pessimists as well as realists. And somewhere, these tendencies play out in our job responsibilities as well. But regardless of personality traits, there are ways and means that help us find common ground. As market participants, that comes in the form of risk management.
We know that trades could go either in our favor or against it. In my journey, I’ve realized that no matter how prepared I was for failure, the moment it hits you, it hits you hard. But over time, I have come to understand that my next steps at that point were most important from the perspective of recovery. Those failures can be converted into successes with introspection and a planned approach. Far too often, though, the curiosity within peaks when we do something wrong and is left in the background, fighting for attention when we do something right. If success is what we chase, we must approach the rights and the wrongs with the same level of curiosity. And while that is true for the market, it also stands true for life in general!
I recently had a conversation where someone expected me to justify technical analysis as a study and explain why it applies to all asset classes when the economic drivers are vastly different. As an equity market participant, I asked him if he had any view on natural gas, Ethereum, or the stock market of Lithuania. He promptly thought I was straying and quickly denied it while ‘attempting’ to bring me back to the discussion at hand. I responded by saying, “That’s why technical analysis’. It allows me to study anything that has a price. I can look at the Dollar Index and identify whether the stock/commodity market conditions would be positive or negative. I can look at the rate of change of interest rates and gauge if that’s a headwind or a tailwind. In my curious moments, I can also take a trip down the covariance and correlation routes to look for patterns. So technical analysis gives me a starting point; from then on, it’s my treasure hunt!
The market at present is murky again. With banks and financials flirting with crucial support zones, tech and growth stocks hold the leaderboard. DXY has remained range-bound, but it is the volatility in the bond market that has the market spooked. Bond market volatility ($MOVE) is typically accompanied by stock market volatility ($VIX), which is currently absent. So one or the other has got to play catch up. Which one will it be? Only time will tell. But in the meantime, other areas of the market are outperforming, which ought to attract attention. We never know the future, but we can position ourselves with all our information and look out for developing trends.
If you’re in the market for an excellent two-day information camp in technical analysis, your timing couldn’t get better! The CMT Association is proud to host the 50th Symposium in New York from April 26-28. I guarantee you, you’ll make memories and contacts that last a lifetime! This is your chance, take it! You can read more about it here.
I will see you again next month as we inch closer to the Symposium.
Until then, Think Technical!
Disclaimer: No part of this write-up was developed using ChatGPT. (Do you think you could tell the difference if it was, though? Just curious)
President's Letterby Brett Villaume, CMT, CAIA
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Bearish and Bullish Momentum Rangesby Andrew Thrasher, CMT
Momentum indicators are widely used by most technicians. There’s a wide variety of applications of momentum. Some look at high-low ranges, closing values only, various lookback periods, smoothed...
Commodities and Bonds at Crossroadsby Bhagyashree Urdhwareshe, CMT
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Accurate Trade Analysis with candlestick chartsby Stephen W. Bigalow
Candlestick charts reveal some very powerful truisms. The chart graphics are based upon the most consistent investment indicator in the world – human nature. Another investment truism is that if...
Steven Carl Leuthold Memoriam
Steven Carl Leuthold, Age 85, a dynamic and respected CMT Association Member with over 50 years of service to the investment industry, passed away peacefully at his home in Carlsbad, California, on...
Momentum indicators are widely used by most technicians. There’s a wide variety of applications of momentum. Some look at high-low ranges, closing values only, various lookback periods, smoothed values with the inclusion of moving averages. How they are used also varies. Some traders look for extremes in momentum as signs for potential mean-reversion. Others seek divergences, such as with momentum making a lower-high as price makes a high-high. However, one topic regarding momentum indicators that doesn’t get as much attention are ranges. The range that a momentum indicator – and for this post’s purposes we’ll be using the 14-period Relative Strength Index (RSI) – can tell us a lot about what’s going on in the market’s price action.
Ranges can be viewed in various timeframes; my focus today is looking at the weekly chart of the S&P 500 and the 14-week RSI. The focus isn’t on the “overbought” or “oversold” levels of 70 and 30. Instead, we’re more interested in when RSI rises above 60 or falls below 40. Strong momentum often begets continued strength, so when we see momentum staying elevated (outside of extreme levels like getting north of 80 back in January 2018), that’s historically been bullish for price continuing to rise. The opposite has also been true, when RSI is weak, hitting levels under 40, then price is deemed to be in a bearish range and price activity often finds itself in a down trend.
Below is an example using the weekly chart of the S&P 500 since 2000. Let’s unpack what can be learned from this chart:
- First let’s look at the major bear markets that began in 2000 and 2007. Notice as those down trends developed, the weekly RSI was unable to produce a reading above 60. It wasn’t until the down trends had ended and price began to show strength that we got the first break above 60.
- This doesn’t just apply to major bear markets. When RSI goes from under 40 to above 60, historically price action has appreciated further. I’ve plotted green arrows when this has occurred. Each move above 60 after being under 40, the shift from a possible bearish range to a potential new bullish range has been a positive sign for the Index.
We can take this concept of ranges a step further and look at a more systematic approach to identifying when the S&P 500 is in a bullish or bearish range based on its 14-week RSI. The chart below goes back to 1980 and turns green when the RSI has spent 3 of the last 4 weeks above 60 and turns red when the opposite occurs, spending 3 of the last 4 weeks under 40. To assist in identifying the ranges we’re looking for when it’s been above or below the noted levels for at least a few weeks rather than just a single week that pierces the threshold and immediately moves away (as we saw in August 2004 and June 2010).
Looking at the far right of the chart, we can see this metric is one that bulls still have left unchecked with regards to the rebound in equities that began in October 2022. Currently the 14-week RSI still hasn’t been able to breach 60 which leaves us still in a bearish range.
By taking a systematic approach to identifying the ranges of momentum, we can run a simple back test to see how the market has performed when in these ranges. The chart below shows difference in performance of when the market is in bullish range (orange line) vs. when in a bearish range (blue line). This isn’t intended to be a trading signal but to provide insight into the condition of the market, based on whether the range momentum finds itself in. And of course… It’s important to note this is not a recommendation to buy or sell and past performance is not indicative of future returns.
By taking a step back and looking at longer-term charts such as the weekly chart examples used above, we can evaluate the ranges of momentum and work towards identifying what kind of market environment we may find ourselves in. The analyst can also play around with different thresholds. 60/40 are the ones I used today but are by no means the only options available and other technicians may find other thresholds for range identification useful.
Candlestick charts reveal some very powerful truisms. The chart graphics are based upon the most consistent investment indicator in the world – human nature. Another investment truism is that if something does not work, it does not stay around very long. Candlestick analysis has been in existence for hundreds of years. Japanese rice traders have identified signals and patterns that produce high-probability results based on investor sentiment.
As an investor, whether a trader or a money/hedge fund manager, applying the common sense expected results of candlestick signals and patterns significantly improve the ability to evaluate trend movement much more accurately. Candlestick signals and patterns are not conjecture. They indicate the actual decisions occurring between the bulls and the bears.
The logic is simple! Candlestick analysis is the graphic depiction of everybody buying and selling during a specific time frame. It is not delegated to any specific trading market or entity. It is a graphic depiction of human nature. Anything that involves investor fear and greed, which is all trading entities, market indexes, ETFs, stocks, commodities, currencies, and tulip bulbs, can be evaluated with much greater accuracy using candlestick analysis.
Investors can gain a considerable advantage by utilizing candlestick information to put ‘all the stars in alignment!’ First, the candlestick visuals will indicate reversals and the direction of the overall market trends. If the market reveals an uptrend, simple candlestick scanning techniques will reveal which sectors show the most vital signals. The same scanning techniques can then reveal which individual stocks demonstrate the most substantial upside potential in that sector. The same process can be used for identifying the strongest bearish sectors and bearish stock positions, in those sectors, in a market downtrend.
At point “A”, identifying the candlestick buy signal, with stochastics showing oversold conditions, would warrant scanning for the sectors demonstrating the most robust bullish candlestick charts. The next step would be scanning for the individual stocks in those sectors, demonstrating the most vital bullish candlestick signals. This process implies that the sector is being bought across the board by numerous buyers.
At point “B”, witnessing candlestick sell signals at the 200-day moving average indicates that this is where the sellers are taking control at a detectable resistance level. Sell signals at the resistance level and a close back below the T line is a decisive probability factors that a downtrend is about to start.
Steven Carl Leuthold, Age 85, a dynamic and respected CMT Association Member with over 50 years of service to the investment industry, passed away peacefully at his home in Carlsbad, California, on March 7, 2023.
Steve became a nationally respected investment strategist, known for his contrarian nature and unpretentious style, which was poles apart from his manicured peers on Wall Street who donned three-piece suits and flashy accessories. He explored a variety of prospects before carving out his niche on (off) Wall Street.
Our thoughts remain with his family during this difficult time.
New Educational Content This Month
November 22, 2023
Utilizing Trend & Mean Reversion in Breadth Studies to Gauge Market Conditions
Presenter(s): Victor Riesco
November 18, 2023
Beating the Bench
Presenter(s): Scott Brown, CMT
October 25, 2023
Equity Risk & Potential – Q4, ’24 & Beyond
Presenter(s): Timothy Hayes, CMT