Current Affairs #1: A Grexit Lurks

Current Affairs: June 29th – 4th of July. This posting is part of a series called “Current Affairs.” Current Affairs will be posted on the first day in the sub-title with updates periodically ending on or before the final date.

 

Monday, June 29th, 2015

Depending on who you ask, the markets were “slammed” today. While this is true, it’s not the story. The story is the way in which the market reacted, not necessarily the reacting itself. It was surprised. It was shocked. It was afraid. Let’s take a look at the VIX rising as much as 39% from Friday’s close.

 

$Volatility Index - INDX
$Volatility Index – INDX

 

Ticker symbol “XIV” is an ETF that rises when volatility remains calm and falls when it spikes. Examining the price action of XIV, you can see investors were completely caught off guard from Friday’s close. This ETF has not fallen as much as this in one day – down more than 17% today – since early 2013.

 

 

XIV
VelocityShares Daily Inverse VIX Short Term ETN

 

How’s that for a Monday morning for you?

 

Tuesday, June 30th, 2015

 

Virtually all of the major markets acted in concert today. All of them opened at the highs or very near the highs and then slowly drifted lower, some diving to new lows before recovering. At the end of the day, most of the indices were relatively flat though slightly up. Volatility as viewed through the Volatility Index opened at the lows of the day (participants were happy the markets didn’t lose ground at the open), before rising to new highs while finally ending the day lower, between the open and the high.

 

SPY_20150630

Markets behaved very similarly today, June 30th, 2015.

Markets behaved very similarly today, June 30th, 2015.

 

All of this action doesn’t signal much to the technician except that there is cause for a pause. And maybe expectations have shifted downward somewhat because if this were truly a passing fancy, participants would expect the markets to quickly recover over an incident that “shouldn’t affect US markets much” anyway. Normally when you see small-bodied candles that hover around the lows of a large bearish candle, consolidation is the most likely outcome. Given the violent nature of the volatility index, consolidation – or worse – may be more likely than recovery in the short term.

 

Thursday, July 2nd, 2015

 

Markets ended the (short) week mixed. After the jolt they experienced on Monday, markets have remain relatively stable, although have not recovered their losses. Depending on who you ask, the Greek vote will have dire consequences or none at all for US markets. The word on the street is that a “no” referendum vote will signal the exit of Greece from the Eurozone. However, when analyzing markets from a technical perspective, it is not possible or advisable to predict geo-political events for even if predicted correctly, may not cause the coincident predicted reaction from markets as there is always the possibility that events and conditions are “priced in,” and one attempts to become a predictor of both events and their consequences, which is greater than the scope a technician reigns over.

 

 

Grexit humour..

Grexit humour..

 

The Volatility Indicator jumped around all week, and in true jumping fashion, finished the week a perfect long-wicked doji, or “spinning top” classification candlestick. Spinning tops signify short-term agreement, whether about price or in this case, volatility; they may also signal indecision, or humorously, agreement about shared indecision. The famous Charles Bulkowski has measured their performance, here labeled “Rickshaw Man.” Depending on where they occur, they may also indicate stability in addition to indecision. For example, a spinning top candle after a large move may indicate stability as the (hypothetical) price would have been able to hold after the advance. However, a spinning top as an “island” or part of a bigger pattern may be reason for indecision. Let’s take a look at this weeks action…

 

Weekly VIX chart for week of June 29th - July 2nd, 2015

Weekly VIX chart for week of June 29th – July 2nd, 2015

 

You can see from the above chart a virtually perfect spinning top/”doji” right above the 200-week SMA. It remains to be seen whether this is a stepping stone to a greater spike in volatility (and lower prices for markets), or an evening star: a high marked by a doji peak, and likely recovered market prices.

 

What happens when Greece votes no?

 

What happens when...

What happens when…

Markets are Oceans

This post is part of our series: Modern Dow Theory – Part 1B

 

“The Dow Theory is the granddaddy of all technical market studies. Although it is frequently criticized for being “too late,” and occasionally derided (particularly in the early stages of a Bear Market) by those who rebel at accepting its verdicts, it is known by name to nearly everyone who has had any association with the stock market, and respected by most. Many who heed it in greater or lesser degree in determining their investment policies never realize that it is purely and simply “technical.” It is built upon and concerned with nothing but the action of the stock market itself (as expressed in certain “averages”), deriving nothing from the business statistics on which the fundamentalists depend.”

 

- Robert D. Edwards & John Magee, Technical Analysis of Stock Trends, 9th ed., Chapter Three; The Dow Theory

 

In the previous blog update, we talked about the broad overview and Dow Theory’s beginnings. In this posting, we will ride through the history and the backstory that made this indicator famous, and how they are connected to modern Technical Analysis today.

 

 

More often than not, stocks move together like "schools of fish"

More often than not, stocks move together like “Schools of fish.”

Dow Theory is one of the First Four Principles of Technical Analysis. It is number 4 on our list of the First Principles of Technical Analysis. It deals in what the market as a whole is telling you, and what are the strongest and weakest averages. Dow Theory indicates to the technician the overall market trend, and therefore dictates the types of positions that are the most likely to succeed, as well as signals when the positions should be managed for risk. The concept behind it includes the element of time and trend: that as time passes, company stock will tend to decline when all financial markets decline, and the same stock will tend to rise when markets rise. Charles Dow originally noted that the stocks of the market move together like schools of fish, and this is why his theory can be so valuable. Additionally, it is helpful to understand the strongest and weakest sectors of the market, as the stocks that make up a sector also generally move together. Dow Theory was originally created simply as a “barometer” of market conditions, as they revealed themselves in the averages; it was not initially designed as a predictor of market movement.* As mentioned in the opening quotation, Dow Theory is purely technical; it requires an examination of the flow of the broad market exclusive of other indicators. As stocks move together like fish, the market as a whole can be thought of as the ocean that contains these fish, and both our ocean and financial markets have their own ebbs and flows.

 

 

Dow originally explained his thoughts on the market in the editorials he wrote for The Wall Street Journal. His collected editorials were taken up and published by his successor, and in 1902 William P. Hamilton organized and outlined more than 25 years of market commentary into what is today known as “Dow Theory.” Continuing the aquatic” market theme, Dow Theory conveys further analogies such as the use of waves, major, secondary, and minor trends, peaks/troughs (as of waves), market movements that are described as tides that rise and fall, the raising/lowering of all boats, and trends and cycles that consistently continue somewhat similar to the patterns of the ocean that are generally consistent over time.

 

 

A market can be thought of as an analogy for an ocean

A market can be thought of as an analogy for an ocean

 

The next posting will describe the importance of peak-and-trough analysis and the concepts of high and low “water marks.”

 

*To be clear, Dow Theory does not aim to predict markets. It’s purpose is to reveal the current trend.

 

Modern Dow Theory: Part 1A

This blog posting is part of a three-part series that unveils modern Dow Theory by explaining its genesis, evolution, and permutations while identifying competing ideas and controversial findings. The series will conclude by giving the reader a sense of the direction Modern Dow Theory is headed and how it can be applied practically with examples.

 

 

A lot of academic attention has gone into, and continues to go into, Modern Portfolio Theory, or MPT, and perhaps rightly so. As part of the CMT exams, MPT is a critical aspect for a student studying technical analysis and any acolyte who hopes to one day manage large swaths of the wealthy’s wealth.

 

Trend Analysis

DOW THEORY ON THE MOVE

Modern Portfolio Theory, while not contrary to Technical Analysis, is on the opposite wave length of the study. On one hand, you have the rigidity and exacting science of MPT, while on the other you have the creative and playful “artful science” that is open to vast differences of interpretation otherwise known as Technical Analysis. Nevertheless, MPT plays an important role both to MBA students and apprentices and masters of the markets. Though it is perhaps worth highlighting that the “T” of “MPT” stands for “theory.” While theory has several definitions, the theories in which I am relaying for the purpose of this article are actionable theories:

 

Ideas used to account for a situation or justify a course of action.” -Merriam Webster

 

In any conversation in which discussions of theories dealing with financial markets take place, it always worth mentioning what is in my opinion the Primal Theory of markets, otherwise known as Dow Theory. Without Dow Theory, no basis or justification for investment could ever be made except for mere chance. Long considered the foundation of Technical Analysis, Dow Theory was discovered by the Father of market analysis himself, none other than Charles Dow.

 

PRIMAL, adj. – “of, relating to, or denoting the needs, fears, or behavior that are postulated (especially in Freudian theory) to form the origins of emotional life.” -Google Dictionary

 

 

Dow Theory has its origins in price history charting, utilizing a method of analysis known simply as “peak and trough analysis.” It is this simple method of measuring the a trend that made Mr. Dow famous, and together with Edward Jones, they published analysis and market insights for 20 years on Wall Street through the company they co-founded: Dow, Jones, & Company.

 

 

Handy Brain

The herd moves in unison

 

In today’s conversation, Dow Theory is often referred to as “dated,” or “an old indicator.” In the next posting, you will see why Dow Theory is more modern and relevant than it has ever been, and how being on the wrong side can cost you for many years, even decades. It must be remembered that both Dow and his business partner, Edward Jones, were committed to provide truly unbiased, objective market analysis that average Americans could take to the bank with them. It is in this spirit that Technical Analysis was born and which it remains, making itself available to anyone with the grit and passion to utilize it advantageously and attain greater degrees of financial freedom.

Can Technical Analysis Be Used to Analyze Cryptocurrencies? (Bitcoin, Litecoin, Peercoin, et. al)

Novelty bitcoin image

Pile of novelty Bitcoins

 

With the swift and steady rise of cryptocurrencies, most notably Bitcoin, it is little wonder that the media and professional investors are taking note. The media has aggressively increased its coverage on Bitcoin during and since November 2013 when the price of Bitcoin rocketed nearly five-fold from $200 to over $1,000. Since November, the price has fluctuated between over $1,100 and roughly $500. Bitcoin can currently be purchased for approximately $800 at the time of this writing, though I always laugh when I read prices quoted at publishing date months, weeks, and even days later (Since they are always so far off the mark from the current trading price). By the time you are reading this in the future, it is highly likely that Bitcoin will be worth well over $800 or far less than $800, which brings me to my next point and question:

 

Can Technical Analysis be applied to analyzing crytocurrencies for decision-making criteria, broad market assessment, and forecasting?

 

To answer this question, we will need to first return to the basic fundamentals of Technical Analysis (pardon the pun). It may not be obvious that Technical Analysis can only be applied to instruments that meet certain requirements, and it may also not be obvious that cryptocurrencies may fall outside of those requirements. In order to analyze crytocurrencies, we will first need to define the basic market requirements for applying Technical Analysis as defined by Dahlquist and Kirkpatrick in their work Technical Analysis, the Complete Resource for Financial Market Technicians.

 

The four types of markets are given as follows:

 

Direct Search – this market requires a buyer and a seller to “seek” each other out. Examples of this type of market include the “Classifieds” section of a newspaper, or the popular online direct search website Craigslist.org.

 

It is possible for digital currency buyers and sellers to employ a “search and seek” method to their transactions whereby they collectively or individually introduce themselves and attempt to negotiate a transaction with other willing participants. This is often done through email or by messages on various cryptocurrency forums, and trust is often based on the reputation (quantified by certain sites or otherwise) of each party.

 

Brokered Market – this type of market is facilitated by brokers who bring buyers and sellers together. The largest example of a brokered market is the real estate market. These brokers usually get a commission for their services.

 

These types of markets exist for cryptocurrencies, most notably the site www.localbitcoins.com, based out of Finland, offers a direct search market for those that wish to buy and sell digital currency both online and in person. The site can match your location by your IP address and shows you all local users who are either buying or selling Bitcoins for cash. For online transactions, currency is stored in an Escrow account until payment has settled, and for this reason the vendor is considered a brokered market bringing two or more parties together to facilitate a transaction.

 

Dealer Market - the dealer market is characterized by dealers who offer bid prices to potential sellers and ask prices to potential buyers of their wares. The dealer market differs from a brokered market because the dealer is actively buying goods himself/herself. Examples of a dealer market include pawn shops and the Nasdaq.

 

Dealer markets also exist for cryptocurrencies, most notably exchanges such as BTC-e (https://btc-e.com/) and Bitstamp (https://www.bitstamp.net/). In these exchanges, the vendor assumes the liability for a certain number of coins and offers to buy and sell them out of their inventory at a bid/ask spread based on users’ orders and market flow.

 

Auction Market – the most freely traded of all markets, the auction market is characterized by a central meeting place in which buyers and sellers simultaneously interact with each other. The meeting place can be physical or over the Internet. Not surprisingly, the NYSE offers both. It is the ultimate auction market. Ebay is another example of an online-only auction market.

 

The Auction Market would likely be a first for Bitcoin and other Cryptocurrencies, having no known prior auctions for the currency. However, with the Fed ready to sell it’s haul of seized Bitcoins from former underground wares site Silk Road, we could see a first-ever Bitcoin auction in the very near future.

 

Market Requirements

 

Markets must meet certain characteristic requirements before technical analysis can be applied. In order to apply technical analysis one needs previously recorded price data. Data on volume, the number of transactions that took place on a given day or at a given price, is helpful but not required. Below are the characteristics that are required to apply technical analysis, according to Dahlquist and Kirkpatrick:[1]

 

Easy access – low barriers to entry and exit that allow people to come and go freely

 

Currently, all one needs to buy a Bitcoin is a bank account with ample funds and access to the internet to access digital coinwallets such as Coinbase.

 

Fungibility –any “good” or investment must have identical “counterparts” that are always equal in price and what they represent. One share of Wal-Mart is identical to the millions of other shares of Wal-Mart, for example.

 

One Bitcoin is always one Bitcoin, and can be sub-divided by up to 8 decimal spaces, making the currency easily added, subtracted, and standardized.

 

Sufficient liquidity – this allows transactions to take place freely and continuously so that buying and selling can take place anytime the market is open

 

While liquidity was not always present in cryptocurrency exchanges, especially some of the smaller obscure exchanges, there is sufficient liquidity on the largest global exchanges and transactions occur in real-time often every few seconds with ample volume.

 

Continuous trading – in the sense that the market is open consistently, day after day, as opposed to intermittently or sporadically – for example auction house auctions. (auction items typically lack fungibility as well)

 

The Cryptocurrency marketplace never closes, ever. It is open for business 24/7/365 without failure. In the recent past certain exchanges (most notably Mt.Gox) have been hacked and their servers shut-down temporarily, however in these cases trading has fluidly and easily moved to any of the other numerous exchanges and business vendors that exist.

 

Conclusion

 

Based on the above fundamentals of Technical Analysis and the corresponding cryptocurrency responses to the various requirements, Market Tech Lab concludes that digital currencies such as Bitcoin are suitable to be analyzed by Technical Analysis using normal and traditional methods of study. Some smaller cryptocurrencies may not have sufficient history or liquidity at this time, however may meet these requirements in the future. One thing is clear – Bitcoin and Technical Analysis are a match made in Heaven.

 

Bitcoins and Bitcoin Logo


[1] Dahlquist, Kirkpatrick p.56

Avoiding Common Pitfalls During Your CMT Exams (Levels I, II & III)

We hope all the Chartered Market  Technicians have been preparing diligently prior to the upcoming CMT exams. As a reminder for those taking their exams and those looking on from the sidelines, the upcoming CMT exam dates are October 17th, 18th, and 19th for the Level I & II exams, and October 18th for the Level III exam. There are several important things you should remember prior to your exams, all of which are spelled out in our ‘How to Prepare’ posting with tips that will help you ace your CMT exams. You may also want to visit the posting: 10 Best Ways to Maximize Time and Effort Before the CMT Exams.

 

 

Avoid Pitfalls
           ~ Avoid pitfalls in your exams. ~Avoid pitfalls in the markets.

 

Remember to avoid the common pitfalls that plague most CMT candidates, such as the following:

 

Level 1

 

  • Insufficiently familiarizing oneself with suggested readings
  • Bypassing the MTA Code of Ethics in favor of assigned textbooks

 

Level 2

 

  • Failing to meet the required whole understanding of Technical Analysis
  • Not understanding the construction of multiple indicators
  • Not understanding the interpretation of the indicators
  • Confusing similar terms, most prominently RSI with Relative Strength
  • Failing to review or recall material covered on the Level 1 CMT exam

 

Level 3

 

  • Inability to generate lucid essay responses that support a technical opinion
  • Failing to integrate multiple technical tools into essay responses
  • Failing to replicate the high standards and style of research reports generated by accredited CMT’s
  • Failing to review or recall material covered on the Level 1 and 2 CMT exams

 

Level 3 Detailed Pitfalls

 

For the Level 3 Exam, candidates often do not clearly state an opinion when an opinion is required by the question. In turn, candidates lose points as there is less or no opinion to defend. It should be noted that there is more than one potential interpretation and candidates shall be granted points for a multitude of opinions over multiple questions.

 

Additionally, Level 3 candidates may chose to ignore all aspects of the presented chart and/or indicators as they fail to demonstrate an ability to apply more than one aspect of Technical Analysis. A standard example occurs when candidates frequently ignore other factors presented when explaining Elliott Wave Counts only, leaving out oscillators, support and resistance, and moving averages.

 

The essay responses for Level 3 Candidates should be consistently at the top level of professionalism as expected of a CMT charter holder. It must be determined by the Accreditation Committee of the MTA that a candidate has the ability to professionally create technical opinions in such a way as to elevate the status of the whole CMT program general.

 

Level 3 candidates should also be prepared to analyze and discuss ALL types of charts covered on the Level 3 reading and all prior reading covered in the Level 1 and 2 exams. Candidates who are not familiar with all of the chart types will have a more difficult time gaining points in their responses.

 

Summary

 

If you will be taking your CMT exam soon, please carefully review the above information. You may also want to review the posts we pointed to at the beginning of our blog posting today, if you are still unsure on the best ways to prepare leading into your exams. Lastly, no matter what level you are taking, we suggest you give yourself at least 5 hours a day to review every day the week prior to your exam. Eat well and stick to a regular sleeping schedule where possible. Finally, take a deep breath and dive in.

 

Registration Extended

The MTA has announced today that registration for the Level I & II exams Exams has been extended for an additional two weeks. For candidates who were either thinking about enrolling or who otherwise missed the registration, the new registration deadline is October 8th, 2013. To register, please visit the CMT Program page on the MTA’s website here.

 

The CMT Exams occur once every six months, typically in late October/early November and late April/early May. Please contact us if you have any questions about the exams, registration, or for assistance as you prepare.

 

Registration Extended

Registration Extended