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Technically Speaking, September 2022

There are not a lot of fields where every day brings a brand-new learning opportunity. When I began my journey in the market, I found it refreshing that I could use the lessons learnt the previous day, in my analysis the next day. The turnaround time was pretty quick and that seemed like quite a blessing!  

But sometimes, when you’re new and when you start feeling invincible in the market (a few good trades), the market puts you in your place. I remember that in one of my initial trades, I had made a loss on one particular position, let’s call it stock A. For reference, there were 3000 other stocks that I could pick for my next trade. But I wanted to prove something to myself (youngsters and their misguided ideas) so I resolved to recover my loss through the same stock. I wanted to get my money back from the same trade that took it. Ah, ego. The things it makes us do!

No points for guessing that I had no such dramatic turnaround from the same stock. Because like it or not, you have to admit that you were wrong, or that the analysis was wrong. The market is never wrong. So, if you’re going to listen to your ego, there are better, probably more fulfilling ways, to lose money.

Why am I sharing this with you? It was one of the first lessons the market taught me. And it has stayed with me all these years. ‘The market is always right.’

So, if the S&P 500 is finding it hard to move past 4100-4200, and the Dollar Index is gaining strength, and countries like Chile, Turkey and India are making new highs, the market is right. All we have to do is go with the weight of the evidence and focus on those areas of the market where the levels/signals are clear.

But what’s all this about lessons learnt and teachable moments? Well, Teachers Day is celebrated in India on September 5, and Internationally on October 5. In the spirit of learning from each other’s mistakes, this edition has been dedicated to lessons learnt in the market. While it’s a great trait to learn from your own mistakes, its even better to learn from others’ mistakes. You couldn’t possibly go through all of life’s lessons through personal experiences!

On a personal front, it’s been a year since I’ve taken over the duties of the Editor for Technically Speaking. In celebration, we have something new for you this time around, so go on and read the rest of the Newsletter.

If you’d like to reach out, you can write to me at editor@cmtassociation.org.

Until next time, Think Technical!

Rashmi Bhatnagar, CMT

Editor

What's Inside...

President's Letter

by Brett Villaume, CMT, CAIA

What is it about being right that makes you have to prove yourself over and over again? I’m not talking about myself here! No, what I’m wondering is, why do we technicians apparently always have...

The Most Important Lesson in Technical Analysis

by Tyler Wood, CMT

In August of 2011 I moved to Greenwich Village Manhattan and took a job with the Market Technicians Association, now CMT Association®. It was less than a month after I started that Ralph Acampora,...

Money management returns enhanced with candlestick analysis

by Stephen W. Bigalow

Money managers and hedge fund managers have been overlooking a very informative price trend analysis tool, candlestick analysis. Candlestick analysis is a price/trend evaluation hybrid, a positive...

Adapting to Change

by Frank Cappelleri, CMT, CFA

I have spent nearly all of my 25-year Wall Street career working on a trading desk.  While the incessant, deafening screaming largely has been replaced by sophisticated technology, human nature...

“Bad Stocks” - How to Invest During Bear Markets Part Two

by Tea Muratovic

Navigating the new market environment hasn’t been easy so far. Inflation, quantitative tightening, sudden spikes in rates and a pandemic have left their mark. But is there still a way to preserve...

Fitness Alpha for Active Investors

by Phil Pearlman

We are all competing with pros on the other side of every trade, so we benefit from every bit of extra edge we can get. *** If you can keep your head when all about...

Spotlight on the Board - With Brett Villaume, CMT

by Brett Villaume, CMT, CAIA & Rashmi Bhatnagar, CMT

...

President's Letter

President's Letter

What is it about being right that makes you have to prove yourself over and over again? I’m not talking about myself here! No, what I’m wondering is, why do we technicians apparently always have defend the reputation of our craft? It seems like the old saying “no good deed goes unpunished” applies to Technical Analysis very well. If you deliver a vague and loosely defined guestimate (think, intrinsic value estimate based on discounted cash flow analysis), people will continue to accept excuses for why you were wrong no matter how many times you miss the mark. But as soon as you approach anything near what resembles precision in your estimates, and especially if it’s decided by the herd that you might be right, it’s to the dungeon you go along with Socrates and Galileo. Ok, maybe I’m being overly dramatic here. But it seems like there’s a disconnect between how precise technical

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)

Brett Villaume

Brett Villaume, CMT, CAIA

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The Most Important Lesson in Technical Analysis

The Most Important Lesson in Technical Analysis

In August of 2011 I moved to Greenwich Village Manhattan and took a job with the Market Technicians Association, now CMT Association®. It was less than a month after I started that Ralph Acampora, CMT Phil Roth, CMT and Bruce Kamich, CMT came to the office at 65 Broadway. We assembled in the conference room which housed a library of technical analysis books, newsletters, and was covered on two walls with hand drawn charts of the Dow Averages.

I had just finished my MBA from Indiana University’s Kelley School of Business. Like most Universities around the world, my studies were firmly grounded in fundamental views of investing. I studied managerial accounting, operations & supply chain management, corporate finance and a broad array of business and product management subjects. What I didn’t know was how markets actually worked. Technical analysis was only mentioned favorably once during a quantitate finance course. We covered a lot of statistics and some concepts like regression analysis. That professor mentioned off-hand in one lecture that there was a whole field of research known as technical analysis which could be an area for our own further study.

Seeing the passion and expertise of the early members of the MTA got me excited to learn this new vocabulary and dig into the vast array of tools used to better understand charts. I must admit my own skepticism of classical pattern recognition at first. “Flags, Pennants, Head and Shoulders, Cup & Handle formations…” all sounded a bit suspect given how thoroughly steeped I was in accounting-based valuation measures. But the basic concept of price trends and the varying methods of confirmation or divergence made sense mathematically. I was blown away by the permutations and many parameters available to just moving averages; simple, exponential, multiple period moving averages and the interplay that unveiled so much about price action.

From there, the concept of momentum really drew me in. As a complete novice, I didn’t get much beyond Welles Wilder’s RSI before thinking I had cracked the code of all financial markets! (The hubris of 20-something MBAs is really the 8th wonder of the world.) But I distinctly remember wanting to show Ralph that I knew something about the subject to become a closer part of the community.

He was showing us some of his slides from the New York Institute of Finance lectures he had given for more than 40 years, and I pointed out an overbought RSI on the chart and said, “hey, there’s a sell signal!”

Remember, we had only just met, but Ralph has an endearing spirit that makes everyone feel as though you’ve been a part of his family for years. He smiled graciously and came over to the edge of the conference table and half sitting, he told a personal story to help educate our little non-profit staff. He began:

“In October 1969 I took my second job on Wall St. working with Alan Shaw at Harris, Upham & Co. One of the reasons I was hired was because I was very efficient and knowledgeable in plotting and interpreting point and figure charts. I was responsible for maintaining a huge library of stock charts along with walls of daily stock market indicators. Alan’s chart room was the envy of all other firms on Wall Street.

The Director of Research at the time was Ralph Rotnem who would regularly poke his head into the chart room, stare at the wall chart for a brief time and then continue on his way without saying anything to me. One day, I stopped him and asked: “Mr. Rotnem, what are you staring at when you peak into the chart room?” And Rotnem said: ”I am just looking at the colors!” So, I prodded further: “Colors?”

Whenever the market indicators went into oversold territory, we plotted them in green and whenever the market went into overbought territory we plotted it in red. Rotnem continued by saying: “If I see lots of green, then I know we are in trouble and if I see lots of red, then I know the market is really bullish! Obviously, this reading was counter-intuitive to the basic reading of all charts in Western markets. Seeing my confusion, he continued…

Oversold is like a beach-ball under water – when you let your hand go, the ball pops……but, if the ball stays under water after you take your hand off of it…you have a seriously troubled beach ball – the market is in trouble!”

This anecdote from Ralph profoundly changed my thinking about all technical indicators. The point is that technical analysis is mathematical, objective, and scientific but understanding the information, interpreting the data, and taking responsible actions as an investor requires an analyst to view the context of each signal. If investing is both Art and Science, then the art comes from experience in applying the tools. Perhaps leaning too heavily on the mathematical aspects is why the broad majority of quant hedge funds suffer massive losses every time the market has a major regime shift.

Now, when I see overbought signals in a persistent uptrend, I know that the market is exhibiting bullish enthusiasm, but see the same overbought signal as price approaches important resistance areas as a sign of caution and potential trend exhaustion. Context matters.

The lesson went even deeper. Because Ralph exposed his own learning curve with this discipline, he absolved me of my embarrassment. Traders must remove the stigma from early mistakes. Mistakes are how we learn. And yet, surrounding yourself with veteran practitioners is a great accelerator to understanding technical analysis – certainly much less costly than trial and error in isolation. Trading can be a lonely pursuit, but the CMT Association provides a community that is collegial, supportive, and full of the absolute experts in this field. For that, I am grateful to be a Member and CMT charterholder.

Contributor(s)

Tyler Wood, CMT - 2022

Tyler Wood, CMT

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Money management returns enhanced with candlestick analysis

Money management returns enhanced with candlestick analysis

Money managers and hedge fund managers have been overlooking a very informative price trend analysis tool, candlestick analysis. Candlestick analysis is a price/trend evaluation hybrid, a positive blend utilizing fundamental analysis in conjunction with technical analysis. The presumption is candlestick analysis is purely in the technical analysis category. This misconception is based upon the lack of understanding of how candlestick signals and patterns are created. Money managers, not utilizing candlestick analysis to augment their portfolio returns are disregarding an inherent price movement truism. Fundamental research is constantly influenced by investor sentiment. Candlestick chart evaluation is merely the graphic depiction of human nature/investor sentiment. Candlestick signals and patterns are developed based upon fundamental influenced decision-making. It can be assumed that the vast majority of investment decisions are made based upon fundamental criteria. (90% of all investment transactions based upon fundamental research, 10% based upon technical decision-making?)  The candlestick formations are developed by 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)

Stephen W. Bigalow - 2022

Stephen W. Bigalow

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Adapting to Change

I have spent nearly all of my 25-year Wall Street career working on a trading desk.  While the incessant, deafening screaming largely has been replaced by sophisticated technology, human nature has remained a constant.

 

I clearly remember my first day as a summer intern in 1995. I was among two-dozen college students accepted to work at a top brokerage firm.  Upon receiving our IDs, we walked wide-eyed into a vast auditorium and were given our orders:  work hard and learn as much as you can in the most exhilarating environment you will ever witness.

 

From there, we were off to our assigned departments, which were scattered all over the mid-town Manhattan skyscraper. I would be working for the domestic equity sales trading desk, and I was excited to get started.

 

I vividly recall getting off the elevator that first day, opening the shiny glass doors and hearing the roaring crowd.  The only experience I could relate it to was a professional sporting event.  The big difference was that the clamor never died down on the desk. It was unceasing.

 

I had just finished my sophomore year in college and had gotten used to being around people all day… or so I thought.   When I needed to focus, I simply gathered my books and found a quiet, calm setting to work.  And then it was back to the fun and craziness of dorm life.

 

The “old school’ trading floor offered no such outlet.

 

My heart raced, and nervous adrenaline pumped through my veins. A trading assistant, Marly, led me to my spot on the desk.  Phones rang piercingly all around me, and they never seemed to stop. 

 

Marly was speaking a mile a minute, explaining what would be expected of me, but I only digested about 10% of it.  The whole experience already was overwhelming.

 

Soon after showing me to my space, Marly magically lit up my phone turret with a few clicks of her fingers.  The turret instantly erupted with all sorts of sparkling lights and blaring sounds. She then cranked the volume level louder and louder… Marly was thrilled. I was not.

 

I spent the next few hours meeting 20 senior sales traders. My main job was to answer the phone as quickly as humanly possible, yell for whoever the client asked for and to KEEP yelling until they acknowledged me.  For an admitted introvert, this was exceedingly beyond my comfort zone.

 

The worst headache of my life quickly ensued, which lasted for what seemed like an eternity. That was the longest day of my life, and I never wanted to go back.

 

But I did… every day for 10 weeks, commuting two-plus hours each way to and from upstate New York… and it ended up being the best summer of my life. In fact, I was offered to come back the next year, which I quickly accepted.

 

That summer also was my first true experience “inside” the financial markets.  The internet boom was just beginning, and the 1995 (never-ending) uptrend was in the early stages.

 

Wanting desperately to learn, I asked everyone I met their thoughts, and nearly all of them doubted the market’s longevity.  As one veteran sales trader smugly stated as the S&P 500 went up seemingly every day, “this is ridiculous.”  The market had other ideas, of course, advancing for another four and a half years before the bubble burst.

 

Since then, I, too, have thought that various trading environments were “ridiculous.”  But as every technician can attest, the market never cares what we “think.” 

 

Through it all, I’ve learned that adapting to change is much more fruitful than resisting it.  That’s true for the financial markets, and, more importantly, it’s true for life.

Contributor(s)

Frank Cappelleri, CMT, CFA - 2022

Frank Cappelleri, CMT, CFA

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“Bad Stocks” - How to Invest During Bear Markets Part Two

“Bad Stocks” - How to Invest During Bear Markets Part Two

Navigating the new market environment hasn’t been easy so far. Inflation, quantitative tightening, sudden spikes in rates and a pandemic have left their mark. But is there still a way to preserve capital and to identify trading opportunities?  The principle stays the same: when choosing the “right” stock, focus on quality. In other words, choose the companies that have a real competitive advantage, rock-solid balance sheets and are not overleveraged. Moreover, build your positions over time and remember that no one can predict exactly when the market is going to hit the bottom!  The stock market decline during the first half of the year was driven by the much faster than expected rise in interest rates by central banks. The question remains, will the decline continue during the second half, and will corporate earnings decrease under the recession pressure? “Bad” Stocks Demand for alcohol and tobacco is among the most inelastic of all.

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)

Tea Muratovic - 2022

Tea Muratovic

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Fitness Alpha for Active Investors

Fitness Alpha for Active Investors

We are all competing with pros on the other side of every trade, so we benefit from every bit of extra edge we can get. *** If you can keep your head when all about you        Are losing theirs and blaming it on you…    Rudyard Kipling As active investors, there are things we can’t control. Most notably, we can’t control asset prices. They rise and fall without consulting us first. Then, there are things we can control.  We can control our systems and the knowledge we attain. We can control how we manage risk. We can control the quality of the analysis we perform. We can also control specific intrapersonal performance factors like stress tolerance, self-control, focus, and the like.  These are internal processes.  They relate to our mental and physical state as our mind and body comprise the seat of our decision making and buy, sell, and hold behaviors. These internal performance factors usually improve with experience, but there are also

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)

Phil Pearlman - 2022

Phil Pearlman

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Spotlight on the Board - With Brett Villaume, CMT

Spotlight on the Board - With Brett Villaume, CMT

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)

Brett Villaume

Brett Villaume, CMT, CAIA

Rashmi Shastry

Rashmi Bhatnagar, CMT

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New Educational Content This Month

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