-
MARKET TECHNICIAN
THE SOCIETY OF TECHNICAL ANALYSTSA professional network for
technical analysts
THE JOURNAL OF THE STA
ISSUE 73 NOVEMBER 2012
IN THIS ISSUE
M. Pring Whither the secular trend for global
equities?.............................................1
D. Valcu Heikin-Ashi Trends made
simple.................................................................4
G. Bender Technical analysis on the VIX
.........................................................................8
D. Watts Bytes and pieces
...............................................................................................9
STA Diploma results
....................................................................................................................................7
-
FOR YOUR DIARY
TUESDAY 13th NovemberCross market dynamics for year end and 2013
The US dollar bull market.................... Shyam Devani, Senior
Technical Strategist, Citigroup Global Markets
TUESDAY 11th DecemberTactical allocation to gold
.........Charles Morris, HSBC Investment Management
TUESDAY 8th JanuaryPanel Discussion on the outlook for 2013
At the IFTA AGM in Singapore, it was decided to host the 2014
conference in
London. This is a tremendous opportunity for the STA to promote
the ideas and
concepts of technical analysis to the financial community both
in the UK and
further afield. We would encourage members to get involved with
the planning
of this event. If you have any ideas about speakers (based
anywhere in the
world) or venues please contact Katie Abberton at:
[email protected].
The dates for next year's monthly meeting are listed on page 7.
We are always
on the look out for new speakers for the monthly meetings. If
you hear
someone give a talk that you think would be of interest to the
membership or
know someone that has been doing some interesting research,
please contact
Murray Gunn at: [email protected].
THE SOCIETY OF TECHNICAL ANALYSTSwww.sta-uk.org
COPY DEADLINE FOR THE NEXT ISSUE
DECEMBER 2012
-
MARKET TECHNICIANJournal of the Society of Technical
Analysts
1
Since 1900 the US has seen threecompleted secular bull markets
andthree bears. We are currently in thetwelfth year in the fourth
bear, leavinganother six years or so to make theaverage of 18.6
years. Some of thesebears, like the 1966 and 1982experience, were
really trading rangesand look fairly benign on a long-termchart.
However, the most realistic way tojudge them is to adjust equity
prices forchanges in the cost of living. After all, ifprices double
and so does the CPI, thatmeans that the investment only breakseven.
Before we take a closer look atthat point I would like to draw
yourattention to Chart 1,which compares theS&P to the MSCI
World Stock Index. The closeness of the two seriesdemonstrates that
these long-termtrends are a global affair and that in alllikelihood
my US-based comments arejust as relevant to the UK and Europe. Itis
disputable whether some countries,such as India and Thailand,
haveescaped the secular bear but we willleave that discussion for
another time.
Chart 2 gets to the heart of the problem.It compares CPI
adjusted (real) stockprices to a measure of crowd psychology.First,
take a look at the top series andyou will see the secular bears
quiteclearly. In inflation-adjusted terms, atthe beginning of
September 2012 theinflation-adjusted S&P Composite
wasapproximately 30% below its March2000 high. The fundamentalists
amongyou may be appalled that I referred tothe Shiller P/E ratio as
a measure ofcrowd psychology, but that is what itreally is. Were
investors pessimisticwhen they choose to buy stocks at a 40+P/E
ratio in 2000? No, they wereincredibly optimistic, otherwise why
payhistorically high valuations. By the sametoken, why did the P/E
fall to around the7.5 level during the course of previoussecular
bear markets? Surely it wasbecause investors were scared stiff
andwere only willing to buy stocks if theywere presented with a
bargain. Thus, Ithink we can conclude that valuationmeasures are
really sentiment indicators.Secular trends then are driven by
double-decade oscillations in sentiment, asoptimism (22.5 plus
readings on theShiller P/E), gradually swings the otherway until
the pendulum reaches anextreme of pessimism (7.5). You can seethat
it is only when this psychological
Whither the secular trendfor global equities?By Martin Pring
Many in the financial press have only recently recognised that
stock priceshave lost ground since the year 2000, labelling the
period since then as theLost Decade. This weak performance should
have come as no surprise ashistory shows that since the early
nineteenth century US equities havealternated between secular bull
and bear markets, almost like clockwork.
Chart 1: S&P versus the MSCI World Index 1961-2012
Source: Pring Turner.com
Chart 2: Deflated stock prices versus Shiller P/E Ratio
Source: Pring Turner.com
www.sta-uk.orgISSUE 73 NOVEMBER 2012
-
2
MARKET TECHNICIANJournal of the Society of Technical
Analysts
has essentially gone flat, therebyreflecting the current
structural malaise.
These basic distortions also feed backinto the psychological
aspects Idiscussed earlier. If you refer back toChart 2 again, you
will see that secularbulls experience very little in the way
ofrecessions, but each of the previoussecular bears experienced
between fourand six. They developed very close toeach other,
thereby having the effect ofgradually ratcheting up the
pessimism,so necessary as a foundation for the next
movement has run full course that thefoundation for a new
secular bull marketis in place.
Changes in sentiment are not limited toearnings, as we see
dividend yieldsswing from 3% at peaks to 6-7% atsecular lows.
Similarly, replacementvalue (the Tobin Q ratio) traversesbetween
$1.10 and 30c. Currently theP/E ratio is around 20, the yield at
2.3%and the Tobin Q at 80c. Based on thesemeasurements we are
clearly somedistance from a secular low.
Swings in psychology may be thethermometer by which we
monitorsecular trends but structural problemsreflect its symptoms.
A lot of businesscycles, but certainly not all, end wheninventories
are built up due to risingsales. Then sales fall and
inventorylevels, which are stickier, become bloatedand a process of
liquidation takes place.This feeds back into the rest of theeconomy
and a recession takes place.Within a couple of quarters
adjustmentsare made and the system is ready for anew recovery with
not that much harmdone. Equity prices respond to suchdownturns of
course, by experiencing aprimary bear market. Secular bearmarkets,
on the other hand, have theirroots in structural problems.
Forexample, an emerging industry is veryprofitable to begin with
and as a resultgradually attracts more and moreinvestors until the
industry finds itself ina state of chronic overcapacity. In
theearly nineteenth century it was canals. Inthe subsequent US
secular cycle it wasrailroads and so forth. The problem, isthat
these structural excesses take a long time to work off unlike a
simpleinventory dump. That is just half of theproblem because
governments, beinggovernments, feel they have to help.Inevitably
policy mistakes compound thesituation. In 1929, the US car
industryhad the capacity to manufacture 6.4million cars yet the
best- selling year was4.5million. This was bad enough whenthe
economy turned down butcompetitive devaluations and tariffs
justcompounded the problem. Since 2000 wehave had the tech boom and
the housingbubble. The policy mistake this time is to run up in
Federal debt from $6 trillion to 16 trillion since 2000 and topush
short-term interest rates toartificially low levels. Central
bankers
around the world have been acting likedrug addicts, as they take
larger andlarger doses of easy money but thepositive business
activity effect has beensmaller and smaller. The eventual
debtwithdrawal process, I believe, will extendthe secular bear
market in equities. Byway of demonstrating the difference
ineconomic conditions between a secularbull and bear please look at
Chart 3,which features the ECRI Weekly LeadingEconomic Indicator.
It was flat during the1966-1982 secular bear, rose sharply inthe
ensuing secular bull and since 2000
ISSUE 73 NOVEMBER 2012www.sta-uk.org
Chart 3: ECRI Weekly leading indicator 1967-2012
Source: Pring Turner.com
Chart 4: Deflated US stock prices vs US commodity prices
(1830-2012)
Source: Pring Turner.com
-
3
MARKET TECHNICIANJournal of the Society of Technical
Analysts
secular bull. So far the 2000-20?? Bearhas only experienced two
recessions,which implies that we have some moreissues to work
through.
There is one final third leg to thispsychological/structural
stool and that isthe role of unstable commodities.Unstable usually
means on the upsidebut sharply declining commodities canalso wreak
havoc on equities, thoughgenerally for much shorter periods. Youcan
see this in Chart 4, where the greenarrows indicate that when
commoditiesare falling gently or experiencing atrading range, such
an environment isusually long-term bullish for stocks. Thepink
shaded areas indicate when pricesare rising at a fairly fast clip,
equityprices adjusted for inflation experiencea secular bear
market. The period in theelipse around 1929 is there to remind
usthat sharp moves in commodity prices ineither direction are
disruptive. Since2001, industrial commodities haveexperienced a new
secular bull market.Is it not surprising, therefore, that asecular
bear market for equities startedaround the same time.
To underscore this point, Chart 5 showsmy attempt at identifying
secularreversals in commodity prices by dividinga 60-month by a
360-month closing priceand plotting the result as an oscillator.
Asyou can see, each time the commodity-derived oscillator has
reversed to thedownside, this has resulted in a majorlong-term
buying opportunity for equities.The oscillator is still rising and
so is thelong-term risk for the stock market.
It seems to me that commodity pricesmay be in the early stages
of a newprimary bull market, or more realistically,another up leg
in the secular bull market.Notice how the 18-month ROC in Chart
6has started to hook up from an extremelyoversold level. The arrows
show when thisseries has reversed in the past a newprimary bull
market has almost alwaysbeen underway. With central banksaround the
world expanding their balancesheets at an unprecedented rate, it is
notdifficult to connect the dots so that lots ofthis money ends up
in the commoditypits. Do not forget that initially the stockmarket
likes rising commodity prices, sowe may well see the current bull
marketextend for the balance of the year.However, at some point the
commodityrally gets out of hand and that is the time
to expect an abrupt reversal in equityprices and the start of a
new downwardleg in the secular bear. Prices do notnecessarily have
to take out the 2009lows but the environment may besufficiently
unnerving to feel that they will.
Martin Pring is president of Pring.com, aneducational website,
and chairman ofPring Turner Capital Group, a moneymanagement firm.
Perhaps best knownfor his book Technical Analysis Explained,he has
authored over 20 investmentbooks, the latest of which, Investing
in
the Second Lost Decade, is co-authoredwith partners Joe Turner
and Tom Kopas.
In March of this year Dow Jones Indexespublished the Dow Jones
Pring BusinessCycle Index (DJPRING) based on his sixstage business
cycle methodology. An ETF (AdvisorShares Pring TurnerBusiness Cycle
ETF) using the similartechniques is currently in registrationand is
likely to be released around year-end. The proposed symbol is
DBIZ.
www.sta-uk.orgISSUE 73 NOVEMBER 2012
Chart 5: Deflated US stock prices vs US commodity momentum
(1830-2012)
Source: Pring Turner.com
Chart 6: US commodity price 1919-2012
Source: Pring Turner.com
CPI Adjustd S&P Composite
US Commodity Prices
-
4
MARKET TECHNICIANJournal of the Society of Technical
Analysts
ISSUE 73 NOVEMBER 2012www.sta-uk.org
This article introduces a lesser-knownJapanese trend technique,
heikin-ashi,which acts as a price filter and revealstrends,
consolidations, and reversals in aclear way.
Heikin-ashi basics
Heikin-ashi is a simple price filteringtechnique based on
modified Open-High-Low-Close (OHLC) prices. The formulasused to
generate the new prices are:
haClose =
haOpen =
haHigh = Max(H, haOpen, haClose)
haLow= Min(L, haOpen, haClose)
The main element, the secret, ishaOpen which starts at the
mid-point ofthe previous heikin-ashi candle bodyand helps filter
out price noise. Figure 1shows the FTSE 100 both with dailyJapanese
candles and heikin-ashi(modified) candles.
The interpretation at a glance of anyheikin-ashi chart is based
on threesimple patterns as described below:
It is easy to understand that whitecandles are associated with
uptrendswhile filled candles identify shorter andlonger downtrends.
The start of 2012 isa typical consolidation period with doji-like
candles small bodies with bothupper and lower shadows appearing
onthe heikin-ashi chart.
These three patterns suggest thefollowing set of entry/exit
rules based oncandle colour:
Enter long (cover short) when heikin-ashi candle colour changes
from solidto white
Exit long (enter short) when heikin-ashi candle colour changes
fromwhite to solid.
A doji-like heikin-ashi candle is a sign oftrend reversal but
also the start of aconsolidation period. How can we
Trends and reversals are always an important focus for both
traders andinvestors. Errors are expensive and there is always the
temptation to steal atleast one bar in order to trigger a buy or
sell signal before the rest of themarket. In recent years there has
been a revival of basic techniques andstrategies such as trend
analysis, Point and Figure charts, and the Wickoffmethod to
identify turning points in the markets. The introduction of
Japanesecandles opened the door to other trend techniques and price
representations(Ichimoku charts, Renko, Kagi, 3-line charts).
Heikin-Ashi Trendsmade simpleA different perspective on trends
and reversals
By Dan Valcu CFTe
Figure 1: FTSE 100 index is displayed using Japanese candles
(upper pane) and heikin-ashi candles (lower pane).
Figure 1a: Whipsaws during consolidations such as at the
beginning of 2012 can bereduced by applying a 7-day simple moving
average of the regular close to the heikin-ashi chart (lower
pane).
(O + H + L+ C)
4(previous haOpen + previous haClose)
2
-
MARKET TECHNICIANJournal of the Society of Technical
Analysts
5www.sta-uk.org
ISSUE 73 NOVEMBER 2012
average SMA(SMA(3),3) (dotted line).HaDelta has been dropped and
trendchanges are better indicated by crossingsof the two
averages.
Heikin-ashi vs. Japanesecandlestick patterns
Currently there are over one hundreddocumented candlestick
patterns. Thelack of consistent definitions and the different way
the patterns areinterpreted mean there is a high degreeof
subjectivity when using them to trade.Traders need precise
techniques and anyquantification of the candlestick patternsbrings
an edge in trading.
Since heikin-ashi is based on precisedefinitions and
measurements, it can beused either to confirm candlestick
patternsor to eliminate their use completely.
manage to reduce the risk of whipsawswhen such candles occur on
a chart?One simple method is to attach anaverage to the heikin-ashi
candle chartand filter out the entry/exit signals thatmay be
generated by the strategiesbased on colour change indicated
above.
Figure 1a shows in the lower pane a 7-day simple moving average
of theregular close plotted on top of heikin-ashi candles.
The consolidation in the beginning of2012 has now a positive
bias becausethe close values of heikin-ashi candles(haClose) are
above the simple averagewith the exception of the last candle.The
addition of an average brings upanother set of entry/exit rules
based onhaClose above or below the average:
Enter long (cover short) when heikin-ashi close (haClose)
crosses abovethe moving average
Exit long (enter short) when heikin-ashi close (haClose) crosses
belowthe moving average
It is worth mentioning that heikin-ashi isnot a mechanical
trading instrument; it is a technique that can be
easilyincorporated into a discretionary tradingsystem.
Quantification of heikin-ashicandles
The original Japanese technique consistsonly of heikin-ashi
candles as describedin the previous section. One additionaland
logical step to pursue is to make thetechnique more suitable to the
Westernway of thinking i.e. to quantify themodified candles and
generate atechnical indicator.
As a result, a new very simple indicator,haDelta, is defined as
the differencebetween haClose and haOpen.
Figure 2 shows the FTSE 100 displayedwith heikin-ashi candles
(upper pane)and haDelta in the lower pane.
The big advantage of using haDelta is itscapacity to generate
advance signals.Since haDelta is a momentum indicator,it is also
used to pinpoint divergencesand oversold/overbought levels.
SMA(3)is the 3-bar simple average of haDelta
and helps to smooth the raw indicator.
The basic signal of this combination isthe crossing of haDelta
above its movingaverage (Long) or below it (Sell). SincehaDelta is
in many cases noisy, traderscan choose SMA(3) to
add/reducepositions when the average turnspositive or negative.
When the averagehovers around zero, the FTSE 100 istaken to be in a
consolidation mode.
The big advantage of using haDelta andits 3-bar simple average
SMA(3) is thatit gives an early indication of possibletrend
reversals. On the other hand,these Buy/Sell triggers can
generatenoise. Some of this noise can beremoved by smoothing the
SMA(3) withanother 3-bar simple average.
Figure 2a shows in the lower subchartSMA(3) together with its
3-bar simple
Figure 2: The daily heikin-ashi chart for FTSE 100 is enhanced
with the addition ofhaDelta and its short moving average
SMA(3).
Figure 2a: A part of the noise generated by haDelta and its
short moving averageSMA(3) can be removed by additional smoothing
of SMA(3).
-
6 ISSUE 73 NOVEMBER 2012www.sta-uk.org
MARKET TECHNICIANJournal of the Society of Technical
Analysts
Two candlestick formations are obviouson Figure 3 above: A
distinct bullishengulfing pattern in early October and adebatable
bearish pattern which may betranslated by some (but not the
author)as an evening star. Luckily, heikin-ashidoes not rely on
interpreting patterns.The clear cut signals given by thecrossings
of haDelta and SMA(3) removethe need for candlestick pattern
input.
Heikin-ashi with othertechniques
As with any other technical analysistechnique, heikin-ashi is
most effectivewhen combined with other indicators.Purists may use
only heikin-ashi in bothformats but additional confirmationsimprove
trading results.
Japanese candlestick patterns arealready used with more precise
indicatorsto remove the degree of subjectivitygenerated by their
translation andinterpretation. Bollinger bands,Stochastics and the
Relative StrengthIndex are some examples of studies usedfrequently
with candle patterns.
In Figure 2 we have seen how earliersignals are triggered by
joining heikin-ashicharts with haDelta. Since heikin-ashifocuses on
trends and reversals, it may beused with other techniques to
confirmrelevant support/resistance levels.
Figure 4 shows The FTSE 100 withIchimoku and heikin-ashi
charts.
Notice that the trend change in mid-December coincides with
cloud supporton the Ichimoku chart. The uptrend on
the FTSE-100 which started in earlyOctober took a breather when
itencountered the resistance offered bySenkou Span B. This pause
translates asa short consolidation on the heikin-ashichart waiting
for the next step. A hesitantmoment linked to price support
occurredduring the last week of November whenheikin-ashi indicated
a reversal while theprice slightly penetrated the bottom ofthe
cloud.
Traders can add heikin-ashi to confirmsignals they get from
other indicators.The final goal is to obtain more accurateand less
riskier trading signals.
Conclusions
Heikin-ashi is a simple, low-entry costtechnique to filter out
short term pricefluctuations and reveal trends,consolidations, and
reversals. It usesonly three candle patterns with simplerules
(sequences of white and darkmodified candles and doji-like candles
aspotential reversal points). The mainadvantage is haDelta which
offers, inmany cases, advance signals.
This technique, both in its original visualformat and more
recent quantifiableform, is far from a mechanical
tradinginstrument. Purists can use heikin-ashicharts with haDelta.
Traders may addtechnical indicators and other techniquesto confirm
trading signals. Since nocombination is perfect, rigorous risk
andcapital management system shouldensure that any failure
translates intosmall losses.
A very important aspect of using heikin-ashi is to confirm
Japanese candlestickpatterns or to remove them altogetherfrom
trading, according to each traderspreference.
Heikin-ashi can be used with anyfinancial instrument in any time
frame.Best results are achieved withinstruments which,
historically, displayclear trends and display similar trendson
heikin-ashi charts in two or eventhree time frames.
Dan Valcu, CFTe is General Manager ofEducofin Ltd and serves on
the Board ofthe International Federation of TechnicalAnalysis
(IFTA). He is also the author of Heikin-Ashi: How to Trade
WithoutCandlestick Patterns published inSeptember 2011
(www.educofin.com).
Figure 3: haDelta and its short average confirm candlestick
patterns
Figure 4: Heikin-ashi can be used to confirm support/resistance
levels when used withtechnical indicators or trend analysis.
-
MARKET TECHNICIANJournal of the Society of Technical
Analysts
7www.sta-uk.org
ISSUE 73 NOVEMBER 2012
DISTINCTIONAndrew Bailey
Ali Chohan
Qinfeng Li
David Murphy
Chitralekha Nandi
Katrina Oldham
Shelley Pilgrim
Harry Tchilinguirian
Anne-Laure Tremblay
PASSGisle AanerudRukes AhmedMahmoud Ali JaffalWael AllamGeorge
AmiradakisTom ArgentieriSundeep AthwalDvyratn BakshiStefano
BasurtoJean-Paul BeveraggiRobert BewellChee Phiew ChanMuhammad
SaqibChughtaiMark DevineChrysis DimitriouYannick DjoumessiDaniel
DoolingAnthony EdwardsChristos EfthymiouMaria EleftheriouRicky
EllisStavros FlangofasAntrea FotiouRowan GallagherMusa
HaddadIoannis HasikosThomas HeathwoodTom HicksThomas HoneRaza
HussainIfjal HussainDavid HutchisonMartha JenkinsKerli JuhkamFaiga
KarimNick KarvounisTsoken KefasMarkus KoflerMichael Kopanakis
Georgios KoufouNuno LampreiaTheodosios LazarakosStuart LeaHon
Cheung LeeSylwester MajewskiAngela MillerPaul MonkGabriel
MooresInigo MoraledaManpreet NahalLuke O'BrienGuy O'LearyRobin Luc
OppenheimBill O'RahillyGriff OwensDarius PanaskoSokratis PanayiEmma
ParkerRoshan PatelJayesh PatelMaurizio PietriniJack PollardDavid
PriceJohn ProsserSammy QuintanaNicolas RiantNiall RiordanAlex
RowlesDanny RyanCharlotte RycraftAiko-Malte SauerNiral ShuklaPaul
SillsArne SolvangMichail TsaousellisJonathan AraujoValenteYuanheng
ZhangIoannis Zittis
STA Diploma Results April 2012
STA Diploma Course 2013
For the seventeenth year running the Society ofTechnical
Analysts is holding its annual Diplomacourse.
This series of lectures prepares students for the STADiploma, an
internationally recognised two-stagequalification. The first stage
is a 2 hour multiplechoice Foundation Exam. Passing this exam is a
prerequisite for taking the Diploma exam, which isa 3 hour written
examination. The Diploma coursepackage includes an option for
taking the FoundationExam for those who have not yet passed the
firstlevel. STA candidates, having successfully passedboth
Foundation and Diploma exams are eligible toreceive the IFTA CFTe
certificate on payment of anaccreditation fee of $50.
The course consists of 12 Wednesday eveningsstarting on
Wednesday 9 January 2013, followedby a half-day Exam Preparation
Session on Thursday11 April 2013. The Diploma Exam will be held
onWednesday 24 April 2013. Students who haveNOT yet passed the
Foundation Exam will sit thisexam in March 2013 (date to be
confirmed).
The lecturers are leading practitioners in their fieldworking
for institutions such as UBS, Credit Suisse,JP Morgan, Commerzbank
and Bloomberg andinclude several well-known published authors.
Early booking rate of 2,900 for the whole course;2,600 for those
who have already passed theFoundation Exam.
For more information please visit or contactthe STA office on
0845 003 9549.
2013 Meetings:
TUESDAY 8th January
TUESDAY 19th February
TUESDAY 12th March
WEDNESDAY 9th April
TUESDAY 14th May
TUESDAY 11th June
TUESDAY 9th July SUMMER PARTY
TUESDAY 10th September
TUESDAY 8th October
TUESDAY 12th November
TUESDAY 10th December CHRISTMAS PARTY
STA Meetings 2013 DatesBritish Bankers AssociationPinners Hall,
105 108 Old Broad Street, London EC2N 1EX
-
8 ISSUE 73 NOVEMBER 2012www.sta-uk.org
MARKET TECHNICIANJournal of the Society of Technical
Analysts
micro concerns facing the U.S. equitymarkets (for example, the
eurozonecrisis, Presidential elections and fiscalcliff). Many
analysts claimed, from asentiment standpoint, that this was asignal
of excess complacency andindicated a bearish outlook for themarket.
However, the VIX cannot beanalysed in a vacuum and volatilitybottom
pickers were penalised. Thereality was that the spread between
theVIX, which is calculated from theforward-looking implied
volatility ofoptions prices, and realised volatility,which is
calculated from the actual closeto close volatility of past prices,
was at a5 month high (see Figure 1). At thesame time, the VIX
futures curve, whichreflects the markets expectation ofvolatility
at specific points in the future,was in a steep contango. A
contangocurve exists when the price of spot andnear-term contracts
is at a discount tomid- and far-term contracts. Rememberthe VIX
Index that is often quoted isonly a snapshot of the spot or cash
VIX.It has to be viewed in context of theentire futures curve and
its relationshipto realised volatility.
Given these two facts, the spreadbetween implied (VIX) and
realizedvolatility and the steep contango of thefutures curve,
market sentiment wasactually anything but complacent. To point, the
VIX fell 27% and the S&P500 rose 4.4% from February 15th
toMarch 15th.
It can be helpful to analyse the price of the spot VIX relative
to support andresistance levels. As figure 1, highlights,the
16-13.50 zone has offered significantsupport since late 2007.
However, becareful applying classic methods ofidentifying
resistance as spikes causedby market sell-offs can be more akin
tocatching a falling knife than selling anovervalued stock. Yes,
the VIX willeventually revert to a mean; mean-reverting strategies
are some of themost popular amongst volatility traders.But timing
that reversion can be costlyas it is in any product that can
havesevere demand imbalances in the shortterm. In addition, like
any other form oftechnical analysis, framing your work inspecific,
and ideally multiple, timeframes is extremely important. Youcannot
identify a mean to revert to if youdo not identify a specific time
frame.
The VIX is known by some as the FearIndex due to its negative
correlation tothe S&P 500. As stocks go lower, optiontraders
pay up to hedge the marketsexpectations of short-term volatility
andpremiums tend to increase. But thoseexpectations will not
increase foreverbecause of the mean reverting nature
ofvolatility.
Technicians can and do apply movingaverages, trend lines and
oscillators tothe VIX. I argue, however, that doing sowithout
understanding the nuances ofthe VIX puts a technicians analysis
atperil. For example, in February 2012there were numerous reports
statingthat the VIX was technically oversoldand too low considering
the macro and
The VIX is a statistic calculated from a weighted blend of
prices of S&P 500Index options and it measures the markets
expectation of volatility over arolling 30-day period. The
popularity of the VIX franchise has grownexponentially with the
introduction of VIX futures in 2004, VIX options in 2006,volatility
related exchange traded products as, for example, VXX, and
VIXbenchmarks such as the Apple and Gold VIX. Since the VIX was
firstintroduced on the Chicago Board Options Exchange in the early
1990s,technical analysts, whether they trade options or not, have
charted it and usedit as a sentiment indicator. Given that the VIX
is a mean reverting statisticwith unique properties, which make it
different to other supply and demanddriven assets such as equities
and commodities, should technicians performtechnical analysis on
it? If so, what nuances of the VIX must be taken intoaccount?
Figure 1
Technical analysis onthe VIXBy Greg Bender
Source: Bloomberg
-
Bytes andPiecesWhere to Start?
If you are a new member of the STAand need charting software
withminimal costs, then here is one ofthe cheapest and most
effectiveoptions:
Programs: Gannalyst took some$250,000 to develop and is now free
(for a donation), See http://www.gannalyst.com. It rivalsMetastock
in its ease of use.
To start your security database withnearly ten years of stock
data inMetastock format check out this site:
http://www.optiontradingtips.com/resources/histor ica l
-data/ftse100.html
Then you need an update service Yahoo provides free data, and
QuoteDownloader V3 is also free (or asmall donation) if you install
theMicrosoft .Net Framework. OtherwiseMLDownloader is available for
a fee.
http://www.trading-tools.com/
That has hopefully got you set up fora very small outlay.
Data Services
Data services filter and checkincoming data so there are no
morenasty spikes on your charts. Hencesometimes it pays to get a
dataservice. Northgate and Qdata are inthe UK and provide Metastock
formatdata whereas EODdata have aworldwide database available.
http://www.premiumdata.net/
http://www.q-data.co.uk/
http://www.eoddata.com
Real-time Data
Livecharts provide free of charge realtime stock market charts
and quotes,setup for the daytrader. They alsohave an App for your
mobile phone but the quotes can also be obtainedfrom their
website.
For the App, go to http://www.livecharts.mobi or
http://www.livecharts.co.uk
D. Watts
MARKET TECHNICIANJournal of the Society of Technical
Analysts
9
Technical analysis is especially valuablewhen charting the
relative strength ofone security versus another. Investorscan
perform relative strength analysis togenerate pairs trading ideas
where abullish position is taken in one securityand a bearish
position is taken inanother. Pairs trading in equities, forexample,
can be difficult and costly toexecute. Investors will often
expresstheir views in the options market to take advantage of lower
net margins/premiums, increased leverage and pre-defined risk to
premiums paid (assumingonly long positions are used).
VIXbenchmarks, like the Gold VIX and GoldMiners VIX, can be a
valuable input intothis trading strategy.
For example, suppose an investorbelieves that gold miners
areundervalued relative to the yellow metaland a bullish trend line
break of theminer/metal ratio confirms this belief(see Figure 2).
On September 5th, thespread between the Gold Miner VIX, aproxy for
the price of short term optionson the Market Vectors Gold Miners
ETF(GDX) and the Gold VIX, a proxy foroptions on GLD, the SPDR Gold
Trust,was at 14, down from a three-monthhigh of 21 points and below
a mean of15.4. This ratio of volatility benchmarksnot only provides
information about a shift in relative sentiment andexpectations for
future volatility, but can
also guide the investor when choosingoptions strategies. If an
investor decidesthat there is risk to being long volatilityin the
bearish GLD leg of this pairs trade,then put spreads may offer more
edgethan the purchase of outright puts. If aninvestor thinks that
implied volatility hasfound a floor in the bullish GDX leg of
thepairs trade, then purchasing outrightcalls may offer more
edge.
Technical and volatility analysis cancomplement each other as
long as thenuances of statistics like the VIX aretaken into
account. The concept ofvolatility as an asset class continues
togain momentum making volatilitybenchmarks more accessible. This
isgood news for technical analysts whowant to add new tools to
their sentimentand timing toolbelts.
Greg is a derivatives execution consultantfor Bloomberg
Tradebook, Bloombergselectronic agency broker. He is based inNew
York and responsible for the coverageof buy-side and sell-side
clients globallythat trade the listed derivatives markets.
DISCLAIMERClick on the following link for theBloomberg Tradebook
Disclaimer:http://www.bloombergtradebook.com/pdfs/disclaimer.pdf
[email protected]
www.sta-uk.orgISSUE 73 NOVEMBER 2012
Figure 2
Source: Bloomberg
-
NETWORKING
Please keep the articles coming in the success of the
Journaldepends on its authors, and we would like to thank all those
whohave supported us with their high standard of work. The aim is
tomake the Journal a valuable showcase for members research aswell
as to inform and entertain readers.
The Society is not responsible for any material published in The
MarketTechnician and publication of any material or expression of
opinions does notnecessarily imply that the Society agrees with
them. The Society is notauthorised to conduct investment business
and does not provide investmentadvice or recommendations.
Articles are published without responsibility on the part of the
Society, the editoror authors for loss occasioned by any person
acting or refraining from action asa result of any view expressed
therein.
CHAIRMAN
Deborah
Owen...................................................................................................editor@irc100.com
VICE-CHAIRMAN
Axel Rudolph
......................................................................axel.rudolph@commerzbank.com
TREASURER
Simon
Warren..................................................................................................warrens@bupa.com
PROGRAMME ORGANISATION
Murray
Gunn.......................................................................................murray.gunn@hsbcib.com
Mark Tennyson-d'Eyncourt
............................................................deynvest@hotmail.co.uk
LIBRARY
John Douce:
.......................................................................................................jdmjd@tiscali.co.uk
EDUCATION
Axel Rudolph
......................................................................axel.rudolph@commerzbank.com
Guido Riolo
.........................................................................................guidoriolo@bloomberg.net
Murray
Gunn.......................................................................................murray.gunn@hsbcib.com
Nicholas
Kennedy...............................................................nicholasjkennedy@ntlworld.com
IFTA LIAISON
Deborah
Owen...................................................................................................editor@irc100.com
MARKETING
Karen Jones
..........................................................................karen.jones@commerzbank.com
MEMBERSHIP
Charles
Newsome...................................................Charles.Newsome@investecwin.co.uk
Simon
Warren..................................................................................................warrens@bupa.com
REGIONAL CHAPTERS
SCOTLAND: Alasdair McKinnon
.........................................................AMcKinnon@sit.co.uk
IRELAND: Robert
Reid.................................................................robertreid64@gmail.com
COMPANY SECRETARY
Mark Tennyson-dEyncourt
............................................................deynvest@hotmail.co.uk
STA JOURNAL
Editor, Deborah
Owen...................................................................................editor@irc100.com
WEBSITE
David
Watts.......................................................................................................DWattsUK@aol.com
Simon
Warren..................................................................................................warrens@bupa.com
Deborah
Owen...................................................................................................editor@irc100.com