Hello Readers, and welcome to another edition of Technically Speaking.
In case you were wondering, the CMT APAC Summit 2022 was a success!!
We were all in Mumbai in the first week of November and the energy and excitement were palpable. People were thrilled to be meeting each other in person again. I had been working alongside quite a few CMT charter holders for close to three years, and met them only a couple of weeks back! Covid turned our lives around, but another year around the sun seems to have done the trick. Now that we are all back to our respective geographical locations, I have a question for you: How often do you reach out to market technicians from a different part of the world? We live in a world dominated by social media, so mode of communication is really a problem only if you make it one.
I have been lucky to be in a position where I have interacted with people across the globe, thanks to my job. I do realize that not many are in that position. But guess what? The CMT community does not care about your designation! And if anything, the recently concluded APAC Summit proved just that. I am repeating myself here, but you won’t find a more supportive professional community. All you have to do is reach out. We often focus on ‘what’s the worse that could happen’. Just imagine what were to be if we began approaching challenges/people with- ‘what’s the best that could happen?’ Same situation, different end of the spectrum but a stark transformation in approach and confidence; and all it takes is replacing a few words. Give your mind the right thoughts to obsess about and watch the magic unfold. One big advantage of expanding the horizon of your interactions is how quickly your notions take a hit. We are after all a product of our surroundings. With those surroundings come inherent biases. These biases are stubborn, let me tell you. It takes deliberate, conscious effort to steer clear from them. And the easiest way to do that is to talk to people, preferably from the other side of the world.
Speaking of the world, how has the market been treating you lately? Did the US Dollar rolling over catch you off guard? Did you ride the Dow30 ripper move we got to witness since October? There are divergences in the market that are playing at out the moment such as Energy (XLE) vs Crude oil, India’s outperformance vs global indices. How do you think these will resolve? Over the past few weeks, we saw 90% global indices climb above their 50-day moving averages (all when the DXY and rates halted). A sustained breadth confirmation over a three-month time period will do more to confirm this trend going forward. Financials too are catching a bid. Nifty Bank is trading at an all-time high. Talk about leadership coming through! While these are all signs to watch out for, the market sure has a lot of ground to cover to prove its bullishness. And we’ll just have to wait for the weight of the evidence to point us to the right direction.
In the meantime, here are some memories from the APAC Summit 2022. Images and videos will be available soon, so watch out for that!
Until next time,
President's Letterby Brett Villaume, CMT, CAIA
On page 1 of the CMT Association’s Constitution, our Mission statement is written (Article 2: Purposes). The Mission has three parts — strategic goals, really — which are equal in...
What Is a ‘Breadth Thrust’ and What Are the Risks?by Drew Wells, CMT, CIMA
The Technical Analysis community has a nearly endless number of loose definitions for what specifically constitutes a “Breadth Thrust.” While Technicians almost universally understand this term,...
The Bullish Case for Goldby David Keller, CMT
While gold has not done much in 2022 in terms of absolute returns, the SPDR Gold Shares (GLD) has indeed outperformed the SPDR S&P 500 (SPY) by about 11% year-to-date. Why has gold not done...
The Bull Case for Stocksby Austin Harrison, CFA, CMT
I don’t know which direction the stock market – or any other asset class – is headed next. No one does for sure. But whether your portfolio is prepared for impending doom or positioned for...
Spotlight on the Board | Gina Martin Adams, CMT, with Rashmi Bhatnagar, CMTby Gina Martin Adams, CMT, CFA & Rashmi Bhatnagar, CMT
The Technical Analysis community has a nearly endless number of loose definitions for what specifically constitutes a “Breadth Thrust.” While Technicians almost universally understand this term, it might confuse many investors about what this development is and how it can be utilized. To start, we need to go over what we mean by “breadth” before we dive into the Breadth Thrust development.
Put simply, “breadth” is either the number or percentage of index components or basket of assets per the user’s choice that are meet some type of specified criteria. For example, a commonly quoted breadth metric for the S&P 500 is the percentage of stocks trading above their 200-day moving average. It’s important to note that while the definition of breadth itself is quite specific, many financial news pundits will often refer to breadth as simply good or bad without providing any real context on what is measured.
“Breadth Thrusts” are technical developments whereby a certain number or percentage of index components or assets move from one reading to another (usually two opposite extremes) within a specified period. Notice that the operative descriptor here is “within a specified time period.” While many market technicians in the past have their own namesake breadth thrust indicators specifically defined in both conditions in the timeframe, investors can utilize any number of criteria to create their own thrust indicator to suit their preferred timeframe and risk tolerance.
Before diving into the test results, first, we must provide some context around market breadth. As an example, generally speaking, very high readings such as 80%, 90%+ above a moving average are often interpreted by investors as bullish. Paradoxically, very low readings such as 20% and 10% are often interpreted as “so bad; it’s good,” or a “washout” condition. However, these readings are often little more than data points when not presented in both historical context and the direction of the prevailing trend.
Historically, how has the market behaved when a breadth thrust has occurred? What happens if a breadth thrust occurs when the prevailing market trend is down? Or when the prevailing market trend is up? Utilizing specialized software, these are all valid questions that we can provide some degree of historical context around.
We will be looking at the S&P 500 as the universe. The conditions will be defined as the percentage of components in the S&P 500 that are trading above their 20-day (one-month) moving average. The “thrust” will be defined as readings moving from below the 20% mark to above the 80% mark within one month of trading. The primary market trend will be determined by whether the 200-day moving average of the index has a higher or lower value than the prior trading day—a higher value defines an uptrend, while a lower value describes a downtrend.
S&P 500 – 20 Day Breadth Thrust
For the S&P 500, there were 85 instances since 1982 where the percentage of S&P 500 components trading above their 20-day moving average moved from below 20% to above 80% within one month of trading for a median gain in the S&P 500 of 3.45%, with a 66.67%-win rate over the following quarter. Note that returns at the 20th percentile are coming in at a modest loss of -2.46%. It’s worth noting that median gains in the index have tended to peak 61 trading days out at 3.86% on an improved 70.24%-win rate over the following quarter. The green arrows in the chart represent the 20-day breadth occurrences; note that throughout various market cycles, breadth thrusts have occurred in both rising and declining markets.
*Data as of the close of business 10/10/22 via Optuma
S&P 500 – 20 Day Breadth Thrust in an Uptrend
There were 56 instances since 1982 where the percentage of S&P 500 components trading above their 20-day moving average moved from below 20% to above 80% within one month of trading while the S&P 500’s 200-day moving average was up for a median gain in the S&P 500 of 3.45% with a 71.43%-win rate over the following quarter. Note the 20th percentile returns coming in at a loss of -1.48%, the smallest 20th percentile loss of all three tests. It’s worth noting that median gains have tended to peak 59 trading days out at 3.91% on an improved 75.00%-win rate over the following quarter.
*Data as of the close of business 10/10/22 via Optuma
S&P 500 – 20 Day Breadth Thrust in a Downtrend
There were 29 instances since 1982 where the percentage of S&P 500 components trading above their 20-day moving average moved from below 20% to above 80% within one month of trading while the S&P 500’s 200-day moving average was down for a median gain in the S&P 500 of 3.72% with a 57.17%-win rate over the following quarter. Note the 20th percentile returns coming in at a loss of -4.54%, the deepest 20th percentile loss of all three tests. It’s worth noting that median gains have tended to peak 38 trading days out at 4.24% on an improved 79.31%-win rate.
Bringing It All Together
While many investors will point to the fact that a Breadth Thrust is often a carte blanche positive development, adjusting for the long-term trend has historically suggested otherwise. Note that when a 20-day breadth thrust has occurred in a downtrend, 20th percentile losses came in a -4.54% vs. -1.48% while in an uptrend, compared to -2.46% 20th percentile losses for all occurrences since 1982. Additionally, win rates for a 20-day breadth thrust in a downtrend were much lower at 57.14% vs. 71.43% in an uptrend, despite very similar median gains.
This is not to say that investors should never attempt to utilize a breadth thrust in a downtrend as a signal. In fact, the highest median gain across the three tests was a 20-day breadth thrust in a downtrend at 38 trading days post-signal for a median gain of 4.24%. Rather, this work is suggestive that not all breadth thrusts are created equal.
*Further work on this topic can be done on other breadth metrics, which may be more specific to the individual time frame of the investor.
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While gold has not done much in 2022 in terms of absolute returns, the SPDR Gold Shares (GLD) has indeed outperformed the SPDR S&P 500 (SPY) by about 11% year-to-date. Why has gold not done better as a safe haven? It’s all about the U.S. dollar.
First, let’s review gold’s role as a “safe haven” during bear market phases.
While gold has struggled in absolute terms, it has handily outperformed the S&P 500 Index ($SPX) year-to-date. GLD is down about 4% in 2022, while SPY is down 15% over the same time period.
If you had informed me at the end of 2021 that 2022 was going to be a raging bear market for stocks due to concerns about inflation, I would have told you that one of the surest bets would be gold. Gold is often considered one of the best inflation hedges around. So why has gold not been a better safe haven while equities have been in a consistent bear market phase in 2022? Quite simply, the strength in the U.S. Dollar Index ($USD) has prevented gold from fulfilling this traditional role.
Every month in 2022, the $USD has made a new high for the year… until October. The $USD has now made a pattern of lower highs and lower lows over the last six to eight weeks, indicating a potential change in trend. The relative strength index (RSI) for the $USD has now dipped below the 40 level for the second time in 2022. This move below RSI 40 may indicate a “change of character” from a bullish primary trend to a bearish primary trend. This short-term weakness in $USD has provided space for risk assets like equities and commodities to reverse their recent downtrends and push to the upside. Further weakness in $USD would allow risk assets, including commodities, to push higher.
For now, I’m watching the 105 level for $USD. That represents a 38.2% retracement of the May 2021-September 2022 uptrend and would be a reasonable downside objective given the recent weakness.
So what’s next for gold?
As the RSI for $USD has dipped below 40, indicating a new bearish phase is likely, the RSI for gold has pushed above the 60 level after spending most of 2022 below this level. That suggests a bullish primary trend as upside momentum has expanded.
The next upside target for GLD, using Fibonacci retracements, would be around $167, which is just 1.5% above Friday’s close. The 200-day moving average lies just above that level as well. If those resistance levels are violated, we could see further upside to the 61.8% retracement level to around $177.
In terms of spot gold, that would suggest resistance in the $1800 range, with the next upside target around $1900/oz.
2022, up until October, has been all about rising interest rates, a stronger dollar, and falling risk assets. If the seasonal tendencies hold up going into year-end, we may be facing a bullish run with gold in the driver’s seat!
Want to digest this article in video format? Head over to my YouTube channel.
New Educational Content This Month
October 19, 2022
New Horizons on the Relative Strength Index
Presenter(s): Sofien Kaabar, CFA
October 12, 2022
Are The Streets Still Smart? Evaluating Swing Trading Strategies in Modern Markets
Presenter(s): Davide Pandini, PhD, CMT, MFTA, CSTA
September 14, 2022
Candlestick Analysis, Enhancing Portfolio Management Returns
Presenter(s): Stephen W. Bigalow