Technically Speaking, May 2022

Welcome Readers to a brand-new edition of Technically Speaking.

Well guess what? I just attended my first CMT Symposium, and it was phenomenal!

Here’s a little history about me. I began my CMT journey in late 2014. By October 2016, I had completed all three levels and got in line to apply for my charter. After gaining the right work experience, I received my charter in February 2020. The only reason for this little timeline here is to say that it’s basically been about 8 years since I’ve been pining to go to a CMT Symposium! When I realized that I could potentially make it to the event in 2022, I was ecstatic!

It was two days of like-minded people talking markets and sharing perspectives. We’ve all known of each other through Twitter or LinkedIn or working together, but this was the first time I met a lot of folks.

But, I’m here to share the single most important thing that I learnt from the Symposium. The CMT Community is possibly the nicest group of people I’ve come across. In a world where everyone is guarding their trade secrets (spoiler alert: they don’t exist), the people I met were more than willing to share and learn from one another regardless of their experience.

A testament to this is Ralph Acampora sitting in the front row, listening intently to every speaker that took to stage! One conversation with the Godfather of TA and you realize just how easy we have it these days. I was lucky to have had a half an hour one-on-one chat with Ralph about his journey, early days at the CMT Association, the market as he sees it etc. The CMT Association has fought several battles for survival, but we still have a long way to go! And as Ralph says it, the responsibility is now in the hands of the technical analysts today. We have the stage; we just have to use it!

While WFH has its own benefits, it is a whole different feeling meeting people in person. There is a certain charm in having a face-to-face conversation and nothing can replace that. And it adds a certain dimension to your work that only comes when you meet people in flesh and bones. Safe to say I had a great time at the Symposium and certainly made some great friends!

I’m going to go ahead and share some pictures from the symposium that are very close to my heart. To all those who attended the event, thank you for making it a success! To all those tuning in from their homes, we hope you enjoyed the content and will be back the next time!

Until then, Think Technical!

Rashmi Bhatnagar, CMT

Editor

What's Inside...

President's Letter

Brett Villaume

During one of the conversations I had at the 2022 CMT Annual Symposium, I was reminded that there are quite...

May 2022 CMT Newsletter

Membership

The CMT Association would like to congratulate the following member on their new positions:

Keith C. Applegate, CMT, HNW...

My First Symposium

Louis Spector, CMT

This year’s 49^th Annual Symposium was incredible. For many, attending in person might be a challenge. That said, I can...

2 Takeaways from the 2022 CMT Symposium

Larry Thompson, CPA

As a student of the markets and on the verge of my CMT level one exam, I was pumped to...

What can the ES one-day straddle and Average True Range tell us about short-term market expectations?

Matt Nygaard, CMT

For those of you who day trade or swing trade, it is helpful to get a gauge on the market’s...

Road Ahead for Equities, Gold and Dollar Index: Technology Stocks May See Relative Outperformance

Milan Vaishnav, CMT, MSTA

The year 2022 has not been particularly kind to equities in general; more particularly to the technology stocks. Almost all...

Crude Oil: Will War & Inflation concerns push prices beyond $200?

Jigar Mehta, CMT

Well, Crude price has been all over the place in the last couple of years. In the year 2020 we...

Ichimoku - At A Glance

Bhagyashree Urdhwareshe, CMT

Ichimoku Kinko Hyo is a popular trend following Japanese system developed by Goichi Hosoda in the late 1930s. He used...

ICYMI: Sunil Garg, CMT Presentation to CFA Society Hong Kong

Brett Villaume

On April 27th, Mr. Sunil Garg, CMT, former Head of International Equity Research at J.P. Morgan, presented to the CFA...

President's Letter

During one of the conversations I had at the 2022 CMT Annual Symposium, I was reminded that there are quite a few Members and CMT Program candidates who are living in more remote areas of the world. These people may feel a bit “out there on their own” compared to those of us living in large metropolitan areas. If you don’t live in a big city, it’s difficult to meet fellow technicians and get together to share ideas.

Now that the COVID-19 pandemic is subsiding, local CMT chapter meetings are beginning to reconvene in-person (or “in 3D”) in certain parts of the world. And of course, there was the hybrid in-person/online 2022 Symposium that brought together over 100 people in Washington DC.

But for those members living in rural or remote areas, what options do they have to build their professional networks?

It is especially hard for CMT Program candidates who live in rural or remote areas to find sponsors for membership, connect with other candidates to form study groups, and to build their professional networks with the hope of landing a job in the industry.

While there is no perfect solution, here are some ideas to broaden your network.

Attend one of our larger conferences, like the Annual Symposium that just took place. I must have made at least two dozen new contacts during the networking breaks, lunches, and the dinner reception. The people I met ranged in their experience levels from seasoned professional with decades of experience to CMT Level 1 candidates. This was our first major event since the pandemic began more than two years ago, but the CMT Association plans to offer more in-person conferences in the near future. I highly encourage you to consider making a journey to attend such a large-format event and build your network.
Connect via LinkedIn by searching for CMTs in your area. Steps: click “My Network”, then under Manage my network, click “Connections”, then click on “Search with filters”. Then click “All Filters” and under the filter “Connections of”, click the “+ Add a Connection” and type in “CMT Association”. Then click “Show Results”. You can further refine the search by adding a location to the search filters. I don’t recommended making connections this way by spamming people – only introduce yourself to people who you think would enjoy knowing you. A quick note accompanying your request that explains who you are and why you are looking to connect goes a long way.
Connect to the CMT Association’s Discord Server. I am by no means an expert, but I’m quite impressed with the Discord app’s ability to bring people together virtually and share information. On Discord you can: participate in open discussions with members and CMT Program candidates on a variety of topics; sign up for India chapter meeting events; learn about and participate in our Academic Partner Program offerings; learn about volunteer opportunities; and learn about what is going on with the CMT Association globally. Currently the only chapter running meetings through Discord is India, but we are considering launching it for other regions. For more information, contact Joel Pannikot (joel@cmtassociation.org).
Ask a CMT Association member for referrals. You never know until you ask! I am routinely surprised about how small the world seems when it comes to who knows whom within the TA community. If you are acquaintances with someone in your area – even just one person – ask who else they know that’s also into technical analysis. I have seen local CMT Chapters form essentially through this process of two people connecting and then asking, “who else is there in our area???” Technicians are amazingly passionate about their craft and that results in a strong sense of community among CMT Members, Affiliates and CMT Program candidates.
Volunteer to serve on a committee. Living in a remote location does not prevent you from joining one of the committees of the Association. Even if you are not a CMT charter holder, you may consider joining a committee in order to get to know people better and help promote the CMT Association. If you are interested, feel free to reach out to me at bvillaume@gmail.com.

Building a network doesn’t happen overnight, but I think some of these suggestions will help you develop relationships with fellow technicians and benefit your professional development.

Contributor(s)

Brett Villaume

Brett Villaume is Past President of the CMT Association, having served on the Board of Directors from 2014 to 2023. Additionally, Brett is a Financial Advisor at Equitable Advisors, LLC (member FINRA/SIPC) based in San Francisco, California. Brett previously served as Director...

My First Symposium

This year’s 49^th Annual Symposium was incredible. For many, attending in person might be a challenge. That said, I can tell you the reward is more than worth the effort. Being a first-year attendee, I was nervous. That nervousness was completely unfounded. The association’s members were friendly and welcoming. I did not run into any egos too large to shake hands and engage in spirited conversation. This was true from our inspiring founder Ralph Acampora, to our esteemed president Brett Villaume, to the Ubiquitous Tyler Wood, to the forward-thinking Joel Pannikot, to the model CEO and educator Mathew Verdouw of Optuma.

The symposium began perfectly. John Bollinger gave us a history lesson. He outlined 12 market technicians, their contributions to our discipline, and how to learn more about them. This incredibly practical and thoughtful presentation reminded us that only through studying history can we truly hope to develop an informed perspective. Up next was Jim Bianco. He offered his take on current intermarket relationships. Following that was Buff Dormeier preaching his gospel, volume. Before lunch, the 2022 Dow Award was presented to Alex Spiroglou. After lunch, Ralph Acampora and Frank Teixeira took to the stage. Ralph reminded us to keep it simple by saying, “I don’t own the MACD or the RSI. I own price.” Next up, we heard from the CMTa’s president; Brett Villaume discussed the current state of the association and its exciting future. To finish day 1, John Roque and George Noble shared their view that a regime shift is likely underway. Day 1 was incredible. We even heard from technicians using the f-word, fundamentals.

Day 2, like day 1, was packed with educational content designed to expand our perspectives. We learned more about quantitative analysis, and even discussed machine learning (ML). Dr. Chan’s insight that, currently, ML is most valuable for improving our own strategies is extremely impactful. Next up was Helene Meisler. She remined us how far the technical toolkit has come since the 1980s. She humbled us with the powerful idea that our current technology affords us many opportunities, but that same technology may also be limiting if we neglect the basics. To finish the morning, we listened to the inimitable Jeff Hirsch share his perspective on this year’s price action and cycles. After lunch, we listened to an experienced panel of institutional technicians share their perspective on the markets and discuss their own evolutions as technicians. After that, the distinguished David Lundgren recorded

a live episode of his Fill the Gap Podcast. The closing piece of this year’s symposium was just as appropriate as its opening piece. The final panel, which included domestic and international technicians, discussed the current state of markets and asset classes around the globe. JC Parets was the perfect choice for panel. His broad and informed perspective is second-to-none.

The 49^th annual symposium was information rich. It brought together aspiring and established charter holders from around the world. For me, the highlight was taking a picture with our founder Ralph Acampora. I will cherish this picture forever. It symbolizes the power of pursuing your dreams. Next year is the 50^th annual symposium, and I encourage you to do everything you can to attend it. Hope to see you there.

Contributor(s)

Louis Spector, CMT

Louis J. Spector, is an analytical thinker. He enjoys pursuing ambitious goals through dedication, continuing education, and a positive mental attitude. Louis currently works for a boutique wealth management firm in Bergen County New Jersey as the Chief Technical Strategist. There he...

2 Takeaways from the 2022 CMT Symposium

As a student of the markets and on the verge of my CMT level one exam, I was pumped to attend the 49^th CMT Symposium. The old saying, “drinking through a fire hose” never seemed more relevant. It’s been about a week since the conference and now that I’ve had time to reflect, here are two of my key takeaways.

Keep it simple. Whether it was 2020 Charles H. Dow Award Winner, Christopher Cain, who builds quantitative models in his search for alpha or the great Helene Meisler who prefers chart paper and a sharp Ticonderoga #2, this refrain was echoed in every talk. Keep it simple. Yes, the boring old verbiage we’ve heard countless times, keep it simple. After studying my notes and seeing this written down on every page it hit me, why would every speaker take time to remind us to keep it simple? It must matter, and a lot of people must struggle with it.

One of the most captivating speakers, John Roque, presented Paul Slovic’s study on expert horse-race handicappers. The study found that as the amount of available information increases, accuracy remains stable, and confidence rises sharply, but judgment policies exhibit more random error. In other words, as we receive more information, our confidence grows, yet our judgement becomes more volatile. This can be deadly to an investor, especially when we have limitless amounts of information at our fingertips. If you are unable to differentiate between the information you need and the noise, it will be a long uphill battle.

Dr. Ernest Chan similarly presented insights on machine learning, where one of the main drivers of errors is overfitting, or when too many factors (variables or inputs) are added into a model, thus hindering it from functioning accurately. In layman’s terms, “information overload.” So not only do humans not function best with a plethora of information, the super computers also struggle. Every presentation that mentioned technical indicators gave a similar message, to find a few indicators you like and master them, as many of them are derivatives of price anyways. Ralph Acampora said it best, “I own Price, not RSI or MACD.” So, keep it simple. When things get complicated, weed out the noise and focus on what matters to your process.

Be Systematic where you can. James Clear, Author of the #1 NYT bestseller Atomic Habits is quoted as saying, “You do not rise to the level of your goals. You fall to the level of your systems.” We all have great intentions when entering a position, but once that order is placed we often become the weakest link in our trading system. We get a big winner and greed creeps in. A trade starts working against us and panic ensues. Implementing a more systematic approach to trading allows for less avoidable mistakes based on human biases. Many of the speakers hit on this point and discussed systematic ways they decrease reliance on themselves. This may sound simple, but we often confuse simplicity with ease. The hard part is knowing thyself, taking time to reflect on your trades and understand where a systematic approach could be added. Whether it’s not getting out until X happens, because you often take profits too soon, or not getting in until Y happens, because you often jump the gun, understanding your own biases is crucial to developing a winning system. So, go on a hike, cook your favorite meal, or whatever it is you do for self-reflection and find ways to implement systems to catch you when inevitable animal spirits creeps in.

“While you are following any set of rules and policies, follow them to the letter. It is the only way they can help you.”

– Edwards & Magee, 1966

Contributor(s)

Larry Thompson, CPA

Larry has been a student of the markets over the past decade. It started as a teenager collecting and reading his grandfather’s stock newsletter subscriptions, which eventually led to technical analysis. He currently works as an Assistant Controller for an international agriculture...

What can the ES one-day straddle and Average True Range tell us about short-term market expectations?

For those of you who day trade or swing trade, it is helpful to get a gauge on the market’s expectations for price movement. I’ll share a simple method that I use for my own trading, and I’ll provide some additional thoughts to consider when you plan your trading day.

We’ll start with the inputs, and we’ll use the e-mini S&P (ES) product. Since the CME has listed ES options for every trading day, it is easy to get the one-day straddle price. I prefer to use the next day extrinsic straddle price (at-the-money straddle price minus any in-the-money premium) on the 5pm CST market open. The Average True Range is widely available on charting platforms, and I use the 5-day ATR to get the price action over the past trading week. The daily ATR is the high/low range but adds any gaps from the previous closing price. We will use the ATR/straddle ratio for the following analysis, and we will assume that the 5-day ATR would be the following day range.

The logic behind the ATR/straddle ratio is very straight forward. We’ll use an example with an ES closing price of 4200, the ES 4200 straddle is worth $50, and the ATR is 120 for a 2.4 ratio. If the ATR is 120 over the next trading day, and the ATR is evenly distributed around 4200, the 4140 low and 4260 high levels would allow the owner of the straddle to exit the trade outside of the straddle price range, and the trade would be profitable. If the ES 4200 straddle was $100 and the ratio was 1.1, the 4140-4260 range would be inside the straddle range and a short straddle position would be profitable.

With these two scenarios, the outcomes change if the ATR range is distributed directionally away from the closing price. Let’s say ES opened at 4200 and then it moved the entire ATR distance for a 4080 or 4320 print. The long straddle for $50 would be profitable, while the short strangle at 100 would be a losing trade. Empirically, an ATR/straddle ratio over 2 favors a long straddle position since an ATR range equally distributed around the prior closing price is profitable, and a ratio of less than 1 favors a short straddle position because movement of the entire ATR range away from the prior closing price would still be profitable. Option premium decay is a major benefit for a short strangle, so the ratio us usually greater than 1. For my own use and based on my observations, a ratio less than 1.25 favors a short straddle, between 1.25-2.25 is neutral, and greater than 2.25 favors long straddles.

Another way to look at the ratio is that the market is expecting a decrease in ATR with the ratio over 2 and an increase in ATR if the ratio in closer to 1. For example, the day before a scheduled data release or before a market holiday may have a reduced expected range and the ratio may be higher for that reason. Also keep in mind that there are several ways to manage an option position, and the profits or losses from the straddle would change based on the position management process. The goal of this analysis is to use the information from the ATR/straddle ratio along with these considerations to gain an edge while examining the markets.

Below is a four-hour chart of ES from May 5^th. On May 4^th, ES made a strong rally towards the 4303-resistance level after the FOMC announcement. At 5pm on May 4th, the at-the-money 4290 straddle was $48.25, and the five-day ATR was 125 which is a 2.59 ATR/straddle ratio. If ATR remains at 125 through the next session, a long straddle position has good odds of being profitable. The market is also expecting ATR to drop significantly following the major FOMC event, and the rally calmed the market’s nerves. For the “art” portion of the analysis, it is clear that 4303 is a significant resistance level for ES as it has been tested multiple times recently, and a breakout or failure could see a decent move from that level. With this information, a trader could buy the straddle with the expectation of ATR maintaining its level, or a trader could reduce some short gamma exposure in their option portfolio since the ATR/straddle ratio is skewed towards a large than expected market move. On May 5^th, ES made a very steep decline, and the 5-day ATR jumped to 141.

Like every technical analysis methodology or trading tool, the ATR/straddle ratio analysis doesn’t work every time, and no one could have predicted the magnitude of the ES price move on May 5^th. However, the ATR/straddle ratio did provide some valuable information on May 4^th about market range expectations for the next trading day. I hope that you can apply some of these ideas to your own trading plan.

Contributor(s)

Matt Nygaard, CMT

Matt is an Independent Derivatives Trader focusing on US futures and options, and he publishes market research for a small group of traders and for his own use. Matt has been a CMT since 2016, and he is Co-Chair of the CMT Association Chicago Chapter. Matt has...

Road Ahead for Equities, Gold and Dollar Index: Technology Stocks May See Relative Outperformance

The year 2022 has not been particularly kind to equities in general; more particularly to the technology stocks. Almost all global equity markets marked their peaks in or around October 2021; since then, they have either seen a corrective retracement or broad consolidation on the long-term charts. Looking at the Year-To-Date (YTD), it is only Singapore’s Straits Times Index that has returned a positive return of 6.86%. The FTSE Index stays flat with a negative return of 0.16%. All other global equity indexes have given negative returns with the German DAX being the worst performer with negative returns of 16.97% on a YTD basis.

Let us narrow our focus on the US Markets. All the three key indices; the Dow, S&P500, and the NASDAQ have shown negative returns on YTD basis. While the Dow (DJI) and the S&P500 (SPX) have given negative returns of (-6.90%) and (-10.35%) respectively, the Nasdaq Composite has remained the worst performing index as it returned a negative return of -18.11% as evident from the Relative Comparison Chart below.

The FOMC came up with an expected rate hike of 50-bps on May 04, 2022. The Fed has tried to play a balancing act by raising the interest rate on the expected lines. As per the Fed, the present rate hike is exactly what it feels is just enough to stem the inflation and not big enough to invite recessionary pressures on the economy. The markets rose not just because it had already discounted the 50-bps hike, but it gave a big thumbs-up to the Fed Chairman Jerome Powell making clear that despite the rate hikes that are lined up as scheduled, they are not looking at a single rate hike of as high as 75-bps.

With the equities having been battered over the past several months, perhaps they may now sigh a bit of a relief and see some relief rally. Within this, the technology sector which has been battered the most is likely to put up a resilient show and strongly improve its relative performance against the broader S&P500 index.

The all-tech Index NASDAQ Composite Index (COMPX) is likely to go into a phase of relative outperformance against the broader markets. A strong bullish divergence of the RSI is seen against the price; the most recent low point of 12202 may well act as an immediate support/bottom for the Index for the near term. In any case, from a technical standpoint, if the zone of 11800-12200 is defended, the NASDAQ may be in not only for a good technical pullback but also a good relative outperformance against the broader S&P500 index as well.

The Relative Strength line (RS Line) of Nasdaq against the S&P500 index rests at a multi-year pattern support. Also, when benchmarked against the S&P500 Index, the NASDAQ has rolled inside the improving quadrant of the Relative Rotation Graph (RRG) while sharply improving its relative momentum against the benchmark.

The rate hikes had its obvious effect on the Dollar Index (DXY). The Dollar Index tested its 27-month high as marked by its most recent high point at 103.93 which marks a strong Double Top resistance. This strength in the Dollar Index had, in turn, its obvious effect on the Gold (XAUUSD) price which retraced sharply from its 20-month high point near 2070 while marking a classical Double Top resistance for itself. Moving ahead from here, given the oversold nature of the Dollar Index, it is likely to show some retracement/consolidation in a defined range. Gold, during this time, may once again see some upward momentum with the levels of 2070 acting as key resistance levels.

From the sectoral standpoint, apart from the Utilities, Real Estate, Materials, Energy, Industrials, Staples, etc., that are already in the leading quadrant, the Technology, Consumer Discretionary, Communication, and the Retail groups are showing good improvement in their relative momentum against the broader S&P500 Index. It is only the XLF, the financial sector that is likely to continue underperforming the benchmark.

Broadly speaking, the coming week may see the battered technology stocks begin their phase of relative outperformance, the Dollar Index taking a breather and the Gold trying to play some catchup again after sharp retracement from its key resistance points.

Contributor(s)

Milan Vaishnav, CMT, MSTA

Milan Vaishnav is the founder of ChartWizard FZE, Gemstone Equity Research & Advisory Services, and works as an Independent Technical Research Analyst. With a career spanning over 18 years in the Indian Capital Markets, Milan’s primary responsibilities include consulting in Portfolio/Funds Management...

Crude Oil: Will War & Inflation concerns push prices beyond $200?

Well, Crude price has been all over the place in the last couple of years. In the year 2020 we saw a major crash with negative rates on WTI Crude. Fast forward now to current Russia-Ukraine War where we saw WTI Crude test the highs near $129 which is about $20 away from the highs made in 2008. In the meantime, Brent Crude touched $138 which is nearly $10 away from the previous life time highs.

Current Market scenario is quite dynamic where every day we see new updates on the China Lockdown, OPEC+ supply outlook or any development on the War. This has actually opened up a range of scenarios and it is crucial to remain objective rather than follow the crowd.

To understand the broader picture, we are looking at a Log Scale monthly chart of Brent Crude Oil. At times just by switching from arithmetic scale to a Log scale, many things clear out. Below we have shown the Elliott wave theory application with Channeling technique which indicates that the breakout has just come through.

Brent Crude Oil (Log Scale) Monthly chart:

As we know, technical analysis is all about probabilities and based on the use of various technical tools we try to arrive at the higher probable scenario. Thus, we are showing 2 high likelihood paths and key levels which will give vital clues to gauge the major trend and objective outlook.

Scenario 1 – Bullish – High Probability:

Channels and Fibonacci: It is imperative to look at the channeling technique which is an integral part of Elliott wave analysis. Here prices are intact in an upward rising channel since the year of 1960. The low made in the beginning of 2020 tested the channel support and resumed the major uptrend. The entire corrective move started in 2008, tested the 61.8% Golden ratio of the prior rise from $10.50 to $147.50 levels. Moreover, post that, prices broke out from the downward sloping red channel which suggests the next bull run is underway.

Elliott wave pattern: The channelized nature of up move since the year of 1960 suggest that Complex correction pattern is under formation (W)-(X)-(Y)-(X)-(Z). From the lows made in 2020, prices are in intermediate wave (Z). This wave (Z) is likely to move higher towards the channel resistance level, if the prices manage to surpass the key resistance zone of $145-150 with strong momentum, then next key level can be expected near $210 level where 78.6% of the prior rise is placed. This possibility will remain alive as long as $90-85 zone is protected on the downside.

Scenario 2 – Bearish – Low probability:

As discussed, it is important to keep the other possibility in the loop to avoid any kind of surprises. From here on, if prices struggle to take out the zone of $145-150 levels, then it will increase the probability of a Double Top formation where we might see the ongoing rally fizzle out near all-time highs. Keep in mind there is no indication of a Double Top pattern yet, but just a probability which we are not ruling out.

In this case, we will expect prices to retrace around 61.8% of the entire rise seen from the lows made in the year of 2020 which comes close to $67-62 levels.

In a nutshell, the price structure on the Log scale monthly chart indicates that a bullish breakout is being witnessed from the downward sloping red channel. In case of a bullish scenario prices are likely to test $145 followed by $210 levels whereas an alternate scenario will lead price towards the support of $67-62. Surprising times are ahead definitely!

Contributor(s)

Jigar Mehta, CMT

Jigar Mehta, CMT,CFTe is founder of Sitaram Investments LLC in UAE. Prior to starting his own company, he has worked with Family offices where he has managed funds. He has also worked with many renowned research firms and held the key designation. He...

Ichimoku - At A Glance

Ichimoku Kinko Hyo is a popular trend following Japanese system developed by Goichi Hosoda in the late 1930s. He used and tested the system over next 20 years before publishing it in 1969.

Balance and harmony symbolize the universal energy and is its natural state. Markets as a collective representation of human emotions (greed and fear) tend to be cyclical. They move away from and back towards the state of balance or equilibrium. This perspective of equilibrium forms the basis of ichimoku. Interaction of current price with Equilibrium, balance and the mean are at the core of this system.

Ichimoku provides a perspective of strength and direction of the trend, support – resistance zones, volatility and momentum – all in one chart.

Average of the highest high and the lowest low of a specific time period is used as the basis for calculations and plotted ahead or projected back by time shifting the component lines.

Ichimoku can be used in different time frames (Intraday to long term) and in different financial markets (including crypto). Using it in conjunction with other Japanese charting tools like Heikin Ashi or Kagi, can provide deeper insights.

Components of Ichimoku

Tenkan Sen (TS) or Conversion Line: Average of the highest high and lowest low over last 9 bars, short term equilibrium
Kijun Sen (KS) or Base Line: Average of the highest high and lowest low over last 26 bars bars, medium term equilibrium
Chikou Span (CS) or Lagging span: Current closing price plotted 26 bars back
Senkou Span A (Leading Span A): Average of TS and KS plotted 26 periods ahead
Senkou Span B (Leading Span B): Average of the highest high and lowest low over last 52 bars and plotted 26 bars ahead

Kumo (cloud) – It is the shaded area between Span A and Span B

Initial settings (9-26-52) were based on the old Japanese 6 days trading week.

Ideal Bullish Trend

Price > TS > KS > Kumo and CS > Price, Future Kumo is green (future Span A > Span B)

Ideal Bearish trend

Price < TS < KS < Kumo and CS < Price, Future Kumo is red (future Span A < Span B)

Key Points

TS and KS
- Price moving along upward sloping TS and KS indicates strength and momentum and also low volatility. Generally, 1st leg of pullback is till TS and 2nd leg till KS
- KS can be used as a low-risk entry point as well as stoploss
- When TS and KS run very close together or as one-line, short term and medium-term trend has aligned. It is generally followed by a strong move and breakout/breakdown in case of flat line
- TS and KS crossovers occurring after significant time gap may indicate trend reversal

CS is a navigator pointing towards the direction of the trend
- Price below CS is bullish
- When CS crosses below the price, consolidation or potential trend reversal is indicated depending on where it occurred
- When CS reaches price bars, flat lines or Kumo, current price will be at or nearing resistance
- CS represents prior closing prices. Hence turning points of CS provide clear levels of support and resistance
- When CS crosses above the price or Kumo, price has overcome the resistance and is considered bullish
Kumo is the most important part of Ichimoku and represents a powerful long-term support and resistance zone
- Kumo below the price provides support and above it acts as resistance
- Kumo expands and contracts based on the volatility
- Widening Kumo indicates weakness in the trend while thin Kumo shows the strength in the trend
- Thin Kumo offers least resistance and price and CS find it easier to penetrate
- When price, TS and KS are inside the Kumo, generally sideways action is expected.
Flat Lines of KS and Span A and B are important pain points. They form significant support/resistance levels. When there are no new highs or lows within a specific time period, the lines will become flat. They are the midpoint of a trendless price situation or price equilibrium. As the price always seeks to return to the equilibrium, flat lines become a strong price magnet. When a flat line turns up or down, the trend has resumed.

$SHOP – Shopify

$AMZN – Amazon (Heikin Ashi Candles)

Conclusion

Ichimoku is a comprehensive system which may seem complicated at first. But it can become an important part of the trading toolkit once we understand the logic.

Contributor(s)

Bhagyashree Urdhwareshe, CMT

Bhagyashree Urdhwareshe, CMT has been active in trading and technical analysis of Indian stock market since 2007 and US Market since 2015, trading derivatives and equities. She owned a software development firm Sunsoft Technologies in India that successfully executed several software development...

ICYMI: Sunil Garg, CMT Presentation to CFA Society Hong Kong

On April 27th, Mr. Sunil Garg, CMT, former Head of International Equity Research at J.P. Morgan, presented to the CFA Society of Hong Kong on a webinar that was co-hosted with the CMT Association. Sunil has been a markets professional for over 25 years with experience in both Developed and Emerging Markets.

His lecture, entitled “Time(ing) is Everything – Combining Fundamental and Technical Analysis”, was not another fundamentals vs. technicals debate. Instead, Sunil provided a unique perspective of using the two investment philosophies together.

Sunil argued that fundamental analysis is critical and is the bedrock of investing. Fundamentals include macro analysis, industry analysis, and company analysis, and then ultimately gets down to valuation based on the sum of discounted cash flows.

But, valuing an asset in theory is easy. In reality, it is extremely difficult. No matter how good a forecaster you are, your DCF estimate is very likely to be off.

Ultimately demand and supply will reflect all estimates of future values. Technicals study prices, which incorporates the expectations of fundamentals. They are not mutually exclusive. Fundamentals drive price, and technicals just reflect the fundamentals.

Bridging the divide between fundamentals and technical can be done by reverse engineering. When fundamentals and technicals are at odds, usually people say the price is wrong and there should be some price correction to match the estimated fundamental value. The underlying assumption is that fundamental value is always right and the stock can be mispriced. But what if you took the opposite approach?

Instead, one could take the approach that the price is right, and you then challenge the fundamentals by asking, what is price telling me about the fundamentals? Walking backward from price can expose fundamental conditions that have yet to be incorporated into valuation estimates.

Sunil presented a few case studies where the price trend had clearly signaled changing fundamentals to demonstrate the effectiveness of the reverse engineering approach.

I have heard many “fusion analysis” presentations over the years, which argued for using a combined fundamental and technical approach, and I have even presented myself on the subject to my local CFA Society in San Francisco. But I found Sunil’s presentation to be among the best arguments I have heard for using both to achieve superior investment performance.

A recording of the presentation is available to CMT Members and Affiliates here.