STA Journal

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

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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 the“Lost 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


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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


Chart 4: Deflated US stock prices vs US commodity prices (1830-2012)


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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.


Chart 5: Deflated US stock prices vs US commodity momentum (1830-2012)


Chart 6: US commodity price 1919-2012


CPI Adjustd S&P Composite

US Commodity Prices

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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)

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5www.sta-uk.org


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 generate‘noise’. 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


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 trader’spreference.

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.


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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


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 market’s 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 to“catching 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 market’sexpectations 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 technician’s 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 market’s 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


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 of“volatility 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, Bloomberg’selectronic 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]


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


MARKETING

Karen Jones ..........................................................................karen.jones@commerzbank.com

MEMBERSHIP

Charles Newsome...................................................Charles.Newsome@investecwin.co.uk


REGIONAL CHAPTERS

SCOTLAND: Alasdair McKinnon .........................................................AMcKinnon@sit.co.uk

IRELAND: Robert Reid.................................................................robertreid64@gmail.com

COMPANY SECRETARY

Mark Tennyson-d’Eyncourt ............................................................deynvest@hotmail.co.uk

STA JOURNAL

Editor, Deborah Owen...................................................................................editor@irc100.com

WEBSITE

David Watts.......................................................................................................DWattsUK@aol.com



STA Journal

Documents

Transcript of STA Journal