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Technically Speaking, October 2015

LETTER FROM THE EDITOR

In recent issues, we have been highlighting content from the Annual Symposium. As I noted last month, “That meeting lasts just a few days but it truly does provide months’ worth of ideas for attendees.” In this month’s issue of Technically Speaking we highlight how local Chapter meetings can also provide ideas to improve your analysis.  The Denver Chapter recently hosted a meeting on back testing and the discussion included best practices related to data. A summary of that presentation kicks off this month’s issue. In researching this topic further, I discovered the value of using data free from pre-inclusion bias. Testing by Cesar Alvarez is included in this issue to quantify that problem. As Cesar notes, “People often write about systems they have developed using the current Nasdaq 100 or S&P500 stocks and have tested back for 5 to 10 years. Looking at this table shows that one should completely ignore those results. The difference between the two results is scary. Using the current list would make one think that they had a great system but actuality it was much worse.”  Histest results are included in the article. This month’s also issue also includes some quantified data about the best time of day to trade ETFs along with some articles making a convincing bearish case for U.S. stocks. For those wondering where to turn in a bear market, the answer could be in preferred stocks as data from Global Financial Data shows in another article.  We hope you find some valuable information in this month’s magazine.  Please send any comments on Technically Speaking to editor@mta.org.

Sincerely,
Michael Carr

What's Inside...

INTRODUCTION TO BACK TESTING

by Matt Radtke

Editor’s note: Matt Radtke made a presentation to the Denver Chapter of the MTA on September 23. In this presentation, Matt provides an introduction to back testing trading strategies. Back testing...

HOW MUCH DOES NOT HAVING SURVIVORSHIP FREE DATA CHANGE TEST RESULTS?

by Cesar Alvarez

Editor’s note: In his presentation to the Denver Chapter, Matt Radtke stressed the importance of using data free from survivorship bias. Cesar Alvarez has quantified this problem in this blog post...

RALPH ACAMPORA, CMT HONORED BY STA

The Security Traders Associaton (STA) recently honored Ralph Acampora, CMT, with the 2015 Dictum Meum Pactum Award. The Dictum Meum Pactum Award was established in 2002 to recognize individuals whose...

CAREFUL TRADING ETFS MOO AND MOC

by Phil Mackintosh

Editor’s note: this was originally published by KCG and is reprinted here with permission. Market on Close (MOC) ETF trading can cause volume shocks that disconnect ETFs from net asset value (NAV)....

BLOOMBERG BRIEF HIGHLIGHTS: CLASSIC CHART PATTERN CARRIES OMINOUS IMPLICATIONS FOR S&P 500

Editor’s note: This article was originally published in the September 24 issue of Bloomberg Brief: Technical Strategies. Below is an extract of that article. In “S&P 500 Chart Waves a Pennant...

VOLATILITY AND TRADING: RE-DEFINING SUPPORT AND RESISTANCE

by Kirk Northington, CMT

Editor’s note: This article was originally published at The Educated Analyst, an education blog maintained by Market Analyst. Volatility Makes the World Go Around Volatility is the most important...

JOE GRANVILLE’S INDICATORS POINT TO A POSSIBLE BEAR MARKET

by Dr. Jerry Blythe, MD

Editor’s note: Jerry Blythe was a friend of Joe Granville’s who computerized many of Joe’s indicators and sent a report to Joe on a nightly basis for many years. This made it possible to...

CHART OF THE MONTH: SOCIAL MEDIA SENTIMENT

Studying Sentiment On StockTwits During A 10% Correction by Stefan Cheplick Editor’s note: this was originally published on August 29, 2015 at The StockTwits Blog and is reposted with...

HOW SOCIAL MEDIA CAN MEASURE VOLATILITY AND FEAR IN THE STOCK MARKET

by Stocktwits

Editor’s note: sentiment analysis has long been a part of technical analysis. They have also been a subject of near constant change. In the 1960’s, odd-lot purchases might have provided a useful...

HOW STOCK MARKET SENTIMENT LOOKS IN VOLATILE TIMES

by MKTSTK For The Stockwits Blog

Editor’s note: this was originally published on August 29, 2015 at The StockTwits Blog and is reposted with permission. After seeing the results of our last sentiment stock screener we wanted to...

RESEARCH UPDATE: IS SMART BETA DUMB?

by Mukul Pal

Editor’s note: this paper was originally published at the Social Science Research Network and an electronic copy is available at SSRN. It is republished here with permission. Abstract: The question...

ETHICS CORNER: EVALUATING INVESTMENT MANAGERS

Editor’s note: this case study is adapted from Lawton, Ethics in Practice. The full text is available at the CFA Institute web site. This and all ethics study material has been licensed for use by...

PREFERRED STOCKS IN A RISING INTEREST RATE ENVIRONMENT

by Pierre Gendreau

Editor’s note: this article was originally published at the Global Financial Data blog and is reprinted here with permission. Even though the Fed is not due to raise interest rates for a few years...

PREFERRED PHASES & CYCLES®: THE RELIEF RALLY WAS WELCOME, BUT LATE-AUGUST LOWS ARE LIKELY TO BE RE-TESTED

by David Tippin, PhD & Ron Meisels

Editor’s note: This was originally published on September 21, 2015 and is republished here with permission. After a multi-year advance the breakdown of the prolonged trading range in the S&P...

INTRODUCTION TO BACK TESTING

INTRODUCTION TO BACK TESTING

Editor’s note: Matt Radtke made a presentation to the Denver Chapter of the MTA on September 23. In this presentation, Matt provides an introduction to back testing trading strategies. Back testing is the process of applying a set of rules to historical data with the goal of assessing the strategy’s effectiveness.  Of course, it’s important to remember the standard caveat that past performance is not a guarantee of future results.  While back testing will not precisely forecast the future it does provide a means of discovering reasonable expectations.  To produce valid back test results, it is essential to use a quantified approach. A back test begins by defining a set of quantified rules for ranking, entering, exiting, and managing each trade. The process then applies those rules consistently to all members of your trading universe, as that universe existed at the time of the trade.  Back tests can range from relatively simple to

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Contributor(s)

Matt Radtke

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HOW MUCH DOES NOT HAVING SURVIVORSHIP FREE DATA CHANGE TEST RESULTS?

HOW MUCH DOES NOT HAVING SURVIVORSHIP FREE DATA CHANGE TEST RESULTS?

Editor’s note: In his presentation to the Denver Chapter, Matt Radtke stressed the importance of using data free from survivorship bias. Cesar Alvarez has quantified this problem in this blog post which was originally published at Alvarez Quant Trading in February 2014. It is reprinted here with permission. Over the last month several people have asked me how important it is to have survivorship-free data. For any researcher this is an important question to understand how the different data can change your results. We will be exploring three potential data issues: as traded prices, delisted stocks (survivorship-bias), and historical index constituents (pre-inclusion bias). My data source is CSI Data, which includes delisted stocks and as traded prices. Unfortunately they are no longer selling this package to individuals. Norgate Investor Services supplies delisted stocks and as-traded pricing. I welcome comments from people that have on the quality of their data and customer service. General

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Contributor(s)

Cesar Alvarez

Cesar Alvarez

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RALPH ACAMPORA, CMT HONORED BY STA

RALPH ACAMPORA, CMT HONORED BY STA

The Security Traders Associaton (STA) recently honored Ralph Acampora, CMT, with the 2015 Dictum Meum Pactum Award. The Dictum Meum Pactum Award was established in 2002 to recognize individuals whose contributions to the industry, their firms, STA and their communities are consistent with the ideals that STA has supported since its inception. “Dictum meum pactum” is a Latin phrase meaning “my word is my bond.” This phrase has been the motto of the London Stock Exchange since 1801 and symbolizes the trust traders place in each other. Ralph is a pioneer in the development of market analytics and has a global reputation as a market historian and a technical analyst, providing unique insights on market timing and related investment strategy issues. Ralph was previously the New York Institute of Finance’s Director of Technical Analysis Studies. Ralph Acampora taught at the institute for nearly 40 years. Before joining NYIF, he was Director of Technical

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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.

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CAREFUL TRADING ETFS MOO AND MOC

CAREFUL TRADING ETFS MOO AND MOC

Editor’s note: this was originally published by KCG and is reprinted here with permission. Market on Close (MOC) ETF trading can cause volume shocks that disconnect ETFs from net asset value (NAV). Illiquid and high beta ETFs seem most at risk of mispricing in MOC. This creates tracking errors that make ETF PMs look bad too. Crib Sheet: ETFs depend on arbitrageurs to hold their price at fair value (NAV). And arbitrageurs depend on having a cheap and reliable hedge to offset risks. The close is one time that arbitrageurs can’t hedge. This makes market making in ETFs in MOC more risky. Data shows that disconnects from NAV in the MOC are common, but they are typically pretty small for most US ETFs, most of the time. This is good news for investors. It indicates that the markets are surprisingly efficient despite the lack of riskless arbitrage. However, disconnects do occur, mostly in less-liquid ETFs 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.

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BLOOMBERG BRIEF HIGHLIGHTS: CLASSIC CHART PATTERN CARRIES OMINOUS IMPLICATIONS FOR S&P 500

BLOOMBERG BRIEF HIGHLIGHTS: CLASSIC CHART PATTERN CARRIES OMINOUS IMPLICATIONS FOR S&P 500

Editor’s note: This article was originally published in the September 24 issue of Bloomberg Brief: Technical Strategies. Below is an extract of that article. In “S&P 500 Chart Waves a Pennant for a Move Closer to October 2014 Lows,” Anthony Bosco, CMT, A Bloomberg Technical Analysis Application Specialist, explained a pennant formation suggests a target for the S&P 500 of 1830, a level that coincides with the low of October 2014. The projection is based on the height of the pennant. The S&P 500’s current bearish pennant is 130 points wide. Projecting down 130 points from the break of the lower trend line takes us to 1830. Source: Bloomberg. To see a live version of this chart on the Bloomberg terminal run G BBTA 1265. Breadth measures are shown in the bottom two panels of the chart and confirm the bearish outlook. The percentage of stocks above their 10-day moving average moved from less

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.

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VOLATILITY AND TRADING: RE-DEFINING SUPPORT AND RESISTANCE

VOLATILITY AND TRADING: RE-DEFINING SUPPORT AND RESISTANCE

Editor’s note: This article was originally published at The Educated Analyst, an education blog maintained by Market Analyst. Volatility Makes the World Go Around Volatility is the most important technical measurement we can make as analysts. We are all familiar with the old saying, ‘money makes the world go around’. I now believe ‘volatility makes the world go around’. By my estimate I think this to be true beginning about 20 years ago. This owes mostly to the radical expansion of securitization which began in the 1990’s. What does volatility have to do with Support and Resistance? You’re about to see. Strap on your thinking cap, this is likely to be conceptually new for you. First let’s take a quick look at what we covered in the first article, which shed needed light on why volatility is so important. For an in-depth definition of Big Money see the Lagniappe section at the end of this

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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)

Kirk Northington, CMT

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JOE GRANVILLE’S INDICATORS POINT TO A POSSIBLE BEAR MARKET

JOE GRANVILLE’S INDICATORS POINT TO A POSSIBLE BEAR MARKET

Editor’s note: Jerry Blythe was a friend of Joe Granville’s who computerized many of Joe’s indicators and sent a report to Joe on a nightly basis for many years. This made it possible to objectively analyze the numbers. Jerry has continued to run the numbers and has noticed a similarity between the current market and the bear markets of 1929 and 2008. Joe Granville understood the stock market and applied his understanding to create indicators that allowed others to see the market as he did. The tool or indicator Joe made famous is On Balance Volume (OBV), a visualization of buying and selling pressures. If for example prices are rising while OBV is falling, that’s a sign of distribution and that large interests are getting out of positions. Joe might have said that’s an indication Wall Street is setting up individual investors on Main Street to be left holding the bag

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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)

Dr. Jerry Blythe, MD

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CHART OF THE MONTH: SOCIAL MEDIA SENTIMENT

CHART OF THE MONTH: SOCIAL MEDIA SENTIMENT

Studying Sentiment On StockTwits During A 10% Correction by Stefan Cheplick Editor’s note: this was originally published on August 29, 2015 at The StockTwits Blog and is reposted with permission. This week was anything but ordinary: from last Friday to Monday morning S&P 500 futures declined nearly 10% in one of the swiftest declines possible short of a crash. The fire swept through as quickly as it started; however, prices ended up making a near full recovery. To give you some idea of how extreme this all was, we counted the number of Bullish and Bearish messages for the cashtag $SPY (the largest S&P 500 ETF) over the last week. Then we plotted the price of the nearest S&P 500 futures contract against the net sentiment level (i.e. Bullish minus Bearish messages). As you can see in the chart below, sentiment turned negative for the broader stock market. In some instances it was very

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.

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HOW SOCIAL MEDIA CAN MEASURE VOLATILITY AND FEAR IN THE STOCK MARKET

HOW SOCIAL MEDIA CAN MEASURE VOLATILITY AND FEAR IN THE STOCK MARKET

Editor’s note: sentiment analysis has long been a part of technical analysis. They have also been a subject of near constant change. In the 1960’s, odd-lot purchases might have provided a useful indication of sentiment but with high frequency trading odd-lot purchases no longer provide meaningful insights .Last month, we covered how news can be used to analyze market sentiment. This month we turn our attention to how social media can be used to analyze sentiment. Social media can now offer meaningful insights into sentiment. In the next two articles we provide some details on this tool. This article was originally published at The StockTwits Tumbler and is reposted here with permission. Last month we teamed up with MKTSTK to answer the question “What time of day are investors most bullish?” The results were fascinating, and they inspired us to dive even deeper into the StockTwits dataset.  What other unique correlations

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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.

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HOW STOCK MARKET SENTIMENT LOOKS IN VOLATILE TIMES

HOW STOCK MARKET SENTIMENT LOOKS IN VOLATILE TIMES

Editor’s note: this was originally published on August 29, 2015 at The StockTwits Blog and is reposted with permission. After seeing the results of our last sentiment stock screener we wanted to extend the results to include this week’s startling action. It was characterized by extremes in both price and sentiment. The Dow and S&P 500 suffered their first 10% corrections in several years. But what’s equally startling is how sentiment changed for individual stocks. Take a look: 1.  Group RR: Rising Sentiment + Rising Prices This group is led by coal mining and processing firm Arch Coal ($ACI) which saw its stock price soar 107% on an extremely Bullish sentiment imbalance. The stock has been beat down of late as commodity prices and China’s economic prospects have sagged, but it seems to have caught a serious bid. Inovio Pharmaceuticals ($INO) had one of the most imbalanced sentiment pictures for the week, with fully

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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.

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RESEARCH UPDATE: IS SMART BETA DUMB?

RESEARCH UPDATE: IS SMART BETA DUMB?

Editor’s note: this paper was originally published at the Social Science Research Network and an electronic copy is available at SSRN. It is republished here with permission. Abstract: The question of beta vs. smart beta has evoked a lot of debate. Investment businesses have thrived on both sides of the question. The smart beta has carved a new business for itself calling the beta dumb, justifying the need for smart beta solutions and advocating a need for moving away from the popular benchmarks that are constructed on market capitalization methodology. The smart beta is built on the premise that popular cap-weighted benchmarks are wrong and inefficient. Even smart beta itself has come under attack. But there has been limited work explaining smart beta and beta together. The debate has added to the list of other debates like; efficient-inefficient markets, random-nonrandom behavior, bell curve or power law etc. On one side researchers

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)

Mukul Pal

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ETHICS CORNER: EVALUATING INVESTMENT MANAGERS

ETHICS CORNER: EVALUATING INVESTMENT MANAGERS

Editor’s note: this case study is adapted from Lawton, Ethics in Practice. The full text is available at the CFA Institute web site. This and all ethics study material has been licensed for use by the MTA and is used here under the terms if that license.  It is presented here as an example of the ethics challenges MTA members could face. Ethics extend beyond the markets to all aspects of the investment profession. Case Study: River City Pension Fund Case Facts Jack Aldred was reviewing his notes in preparation for an Investment Commission meeting when his manager, River City Treasurer Barbara Castel, stepped into his office. “The meeting is in two hours,” she said. “I want to know what you’re planning to say about Northwest Capital.” Aldred is the Chief Investment Officer of the River City Pension Fund, a mature defined benefit pension plan for municipal employees. He accepted this appointment six months

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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.

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PREFERRED STOCKS IN A RISING INTEREST RATE ENVIRONMENT

PREFERRED STOCKS IN A RISING INTEREST RATE ENVIRONMENT

Editor’s note: this article was originally published at the Global Financial Data blog and is reprinted here with permission. Even though the Fed is not due to raise interest rates for a few years (2016 per the latest numbers that I’ve seen lately).  People are still looking and preparing for this to happen. What asset classes will be affected positively and negatively? In the graph attached, I wanted to show the inverse correlation between preferred stocks and interests rates. with the recent move in rates, the price performance of preferred stocks has been negative. Please look at this long-term graph and see for yourself.

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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)

Pierre Gendreau

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PREFERRED PHASES & CYCLES®: THE RELIEF RALLY WAS WELCOME, BUT LATE-AUGUST LOWS ARE LIKELY TO BE RE-TESTED

PREFERRED PHASES & CYCLES®: THE RELIEF RALLY WAS WELCOME, BUT LATE-AUGUST LOWS ARE LIKELY TO BE RE-TESTED

Editor’s note: This was originally published on September 21, 2015 and is republished here with permission. After a multi-year advance the breakdown of the prolonged trading range in the S&P 500 and the volatile plunge into the late-August low changed the “feel” of the markets for most participants. As we move past Labor Day – and enter the historically important September/October period – three facts stand out. First, as our recent Market Comments detailed, the interpretation of the August 24th low as a “selling climax” is strongly supported by numerous technical and sentiment indicators that reached extreme levels as the stampede out of stocks accelerated. As further confirmation, the Investors Intelligence survey of investment adviser sentiment shows that the percentage of bullish advisers has now sunk to its lowest level (25.7%) since the bull market started. Second, the current corrective move is best interpreted as “Leg 4” of an ongoing bull market. Substantial

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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)

David Tippin, PhD

Ron Meisels

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New Educational Content This Month

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