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Technically Speaking, September 2011

LETTER FROM THE EDITOR

In this month’s newsletter, we discuss ethics in two of our articles. There isn’t any reason except professionalism for this. Members of the MTA strictly follow the Code of Ethics, and concerns are rarely brought before the Ethics Committee. Even rarer is the need for the Ethics Committee to take any action. Ethics articles will simply be featured as a reminder of the professionalism and high standards of the Market Technicians Association. Membership in the MTA and earning the CMT designation demonstrate that research and opinions are based on facts and are supportable. As professionals, CMTs have studied the body of knowledge that defines technical analysis and are committed to delivering information that is based on the body of knowledge. Many members of the MTA complete their own research and help advance the profession.  We hope that you’ll find these ethics articles as interesting as the rest of the topics we cover. If you have ideas for articles you’d like to see, please let us know with an email to editor@mta.org. Sincerely, Mike Carr,

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What's Inside...

DEATH CROSS MAKES THE NEWS, AND LOUISE YAMADA PRESENTS THE PATTERN FAIRLY

by Michael Carr, CMT

All too often analysts overstate their case for a bull or bear market, but in a recent interview, Louise Yamada, CMT presented an ethical and balanced delivery. Technical analysts seem to be the most...

ANALYZING GAPS FOR PROFITABLE TRADING STRATEGIES WITH JULIE R. DAHLQUIST, PH.D., CMT AND RICHARD D. BAUER, JR., PH.D. CFA, CMT

by Michael Carr, CMT

The winners of the 2011 Dow Award presented a summary of their paper in a June 8, 2011 web cast. The video may be viewed here: http://go.mta.org/82 A gap is seen on a chart when the opening price is...

GEORGE LINDSAY AND THE ART OF TECHNICAL ANALYSIS: TRADING SYSTEMS OF A MARKET MASTER BY ED CARLSON, CMT

by Michael Carr, CMT

This newly released book (FT Press, 2011) should be the model other authors use to present ideas of the masters in technical analysis. Ed begins with a review of the life of George Lindsay. The short...

ETHICS CORNER

by Michael Carr, CMT

This is the first of what will be a series of case studies related to the MTA Code of Ethics. This one is brief, and seemingly simple, but we want to present the general idea behind the case study....

TECHNICALLY SPEAKING INTERVIEWS MAZHAR RASOOL, CMT

by Mazhar Rasool, CMT & Amber Hestla-Barnhart

How would you describe your job? I have been trading my own money since 1992. At some times, I have worked as a trader with a few local companies. What led you to look at the particular markets you...

TRADING IN PAKISTAN

by Michael Carr, CMT

After reading this month’s interview questions, I was decided to research Pakistan and the stock exchange in that country. The first thing I realized is that the news media really does only focus...

THIS TIME IS DIFFERENT

by Michael Carr, CMT

Many traders cite those four words as the most expensive phrase in the English language. When investors become overly euphoric, they find new ways to justify high stock market valuations because this...

DEATH CROSS MAKES THE NEWS, AND LOUISE YAMADA PRESENTS THE PATTERN FAIRLY

DEATH CROSS MAKES THE NEWS, AND LOUISE YAMADA PRESENTS THE PATTERN FAIRLY

All too often analysts overstate their case for a bull or bear market, but in a recent interview, Louise Yamada, CMT presented an ethical and balanced delivery.

Technical analysts seem to be the most widely quoted when they can speak in ominous sounding terms. Technicians are providing analysis of the current market action, and news most often focuses on the negatives in any area. That reality may explain why negative ideas seem to be more broadly covered in the markets. The Hindenburg Omen, as one example, always seems to get ample press coverage, as does any forecast of a large price decline. The death cross is another example of a headline grabbing term in technical analysis. The death cross refers to a sell signal that occurs whenever the 50-day moving average crosses below the 200-day moving average. It can occur in any market, but most news coverage focuses on the stock

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)

Michael Carr, CMT

Michael Carr, CMT

ANALYZING GAPS FOR PROFITABLE TRADING STRATEGIES WITH JULIE R. DAHLQUIST, PH.D., CMT AND RICHARD D. BAUER, JR., PH.D. CFA, CMT

ANALYZING GAPS FOR PROFITABLE TRADING STRATEGIES WITH JULIE R. DAHLQUIST, PH.D., CMT AND RICHARD D. BAUER, JR., PH.D. CFA, CMT

The winners of the 2011 Dow Award presented a summary of their paper in a June 8, 2011 web cast. The video may be viewed here: http://go.mta.org/82

A gap is seen on a chart when the opening price is some distance from the previous day’s market action, or as Julie noted, a gap represents a hole in the trading. In candlestick terminology, gaps are referred to as windows. Gaps can be as small as a penny, or may be significantly larger. Julie and Richard offered a slide to illustrate the definition of a gap.

In their research, they analyzed the stocks in the Russell 3000 index from the beginning of 2006 through the end of 2010, a total of more than 1250 trading days. They found that gaps occur on a significant number of days, with at least one stock gapping up on about 92% of the trading days and at least

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)

Michael Carr, CMT

Michael Carr, CMT

GEORGE LINDSAY AND THE ART OF TECHNICAL ANALYSIS: TRADING SYSTEMS OF A MARKET MASTER BY ED CARLSON, CMT

GEORGE LINDSAY AND THE ART OF TECHNICAL ANALYSIS: TRADING SYSTEMS OF A MARKET MASTER BY ED CARLSON, CMT

This newly released book (FT Press, 2011) should be the model other authors use to present ideas of the masters in technical analysis. Ed begins with a review of the life of George Lindsay.

The short biographical section is a valuable addition to the book, and demonstrates why biographies are a basic building block in the study of history. To understand the ideas and actions of great people throughout time, historians have long used biographical background to gain insight into their thinking. This technique has been neglected in technical analysis and Ed is the first that I’ve seen who adapts this strategy for his overview of Lindsay’s techniques.

With the thoroughly researched, but brief, story of Lindsay’s life, Ed allows the reader to understand the thinking that went into the techniques and analysis that Lindsay provided. Lindsay had an interest and talent in art. This may help explain how he could observe

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)

Michael Carr, CMT

Michael Carr, CMT

ETHICS CORNER

ETHICS CORNER

This is the first of what will be a series of case studies related to the MTA Code of Ethics. This one is brief, and seemingly simple, but we want to present the general idea behind the case study. If you have any questions you’d like to see specifically addressed, please email them to editor@mta.org.

QUESTION: A CMT candidate is completing his MBA program and took a job with a company that cleans office buildings in the evening. While emptying trash cans in the office of the CEO of a well known investment bank, he sees a draft press release indicating that a large software company will be buying the stock of a small technology consulting firm at a 75% premium to the current market price. The deal will be announced one week after his trashy discovery. The candidate immediately buys call options on the stock of the small firm 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)

Michael Carr, CMT

Michael Carr, CMT

TECHNICALLY SPEAKING INTERVIEWS MAZHAR RASOOL, CMT

TECHNICALLY SPEAKING INTERVIEWS MAZHAR RASOOL, CMT

How would you describe your job?

I have been trading my own money since 1992. At some times, I have worked as a trader with a few local companies.

What led you to look at the particular markets you specialize in as opposed to another tradable?

TREND, is my basic requirement in a market to trade. I switch from currencies to commodities to Pakistani stocks depending on the trend.

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

Since I am a short term trader I do not look at the fundamental side of analysis to decide on an entry. But I am watchful of releases of major economic data and I avoid trading before or immediately after these releases.

What technique do you rely on the most? Can you describe this tool?

The approach that I have used for over ten years now is based on failed breakouts from formations and TD

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)

Mazhar Rasool, CMT

TRADING IN PAKISTAN

TRADING IN PAKISTAN

After reading this month’s interview questions, I was decided to research Pakistan and the stock exchange in that country.

The first thing I realized is that the news media really does only focus on the bad. Pakistan is thriving and is not a center of warfare. There is certainly some violence in that region of the world, and in the country. That is no different than what is seen elsewhere. Crime is always featured in the news, and the everyday lives of the majority are rarely, if ever mentioned. This seems to be true in Pakistan.

Pakistan is a predominantly agricultural country, with over 65% of its population living in rural areas. Its major industries are textiles, leather and food processing. Since 2001, considerable direct foreign investment and remittances have bolstered Pakistan’s foreign exchange reserves, stimulating high growth rates.

Economically, Pakistan is often considered to be a frontier market, which means that is

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)

Michael Carr, CMT

Michael Carr, CMT

THIS TIME IS DIFFERENT

THIS TIME IS DIFFERENT

Many traders cite those four words as the most expensive phrase in the English language. When investors become overly euphoric, they find new ways to justify high stock market valuations because this time is different and therefore the old tools which point to a possible bubble must be wrong. Believing that this time is different allows them to ignore the signs that a disaster is possible.

It was just a little more than a decade ago when everyone knew it was different this time because of the internet. Price-to-earnings ratios didn’t matter because companies didn’t need earnings, some argued. Growing companies could be valued with a new P/E ratio, and the price-to-eyeballs ratio found its way into investment analysis. In the end, many relearned the truth that revenue is needed in order to pay the bills and allow a company to continue operating.

Economists Carmen Reinhart and Kenneth Rogoff have documented the

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)

Michael Carr, CMT

Michael Carr, CMT

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