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ISSUE 73 NOVEMBER 2012

THE SOCIETY OF TECHNICAL ANALYSTS


A professional network for technical analysts

MARKET TECHNICIAN
THE JOURNAL OF THE STA

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

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: info@sta-uk.org.
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: murraygunn@waveprincipleletters.com.

FOR YOUR DIARY


TUESDAY 13th November
Cross market dynamics for year end and 2013 The US dollar bull market
....................

Shyam Devani, Senior Technical Strategist, Citigroup Global Markets

TUESDAY 11th December


Tactical allocation to gold .........Charles Morris, HSBC Investment Management
TUESDAY 8th January
Panel Discussion on the outlook for 2013

THE SOCIETY OF TECHNICAL ANALYSTS


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COPY DEADLINE FOR THE NEXT ISSUE


DECEMBER 2012

MARKET TECHNICIAN
Journal of the Society of Technical Analysts

Whither the secular trend


for global equities?
By Martin Pring
Many in the financial press have only recently recognised that stock prices
have lost ground since the year 2000, labelling the period since then as the
Lost Decade. This weak performance should have come as no surprise as
history shows that since the early nineteenth century US equities have
alternated 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

Since 1900 the US has seen three


completed secular bull markets and
three bears. We are currently in the
twelfth year in the fourth bear, leaving
another six years or so to make the
average of 18.6 years. Some of these
bears, like the 1966 and 1982
experience, were really trading ranges
and look fairly benign on a long-term
chart. However, the most realistic way to
judge them is to adjust equity prices for
changes in the cost of living. After all, if
prices double and so does the CPI, that
means that the investment only breaks
even. Before we take a closer look at
that point I would like to draw your
attention to Chart 1,which compares the
S&P to the MSCI World Stock Index.
The closeness of the two series
demonstrates that these long-term
trends are a global affair and that in all
likelihood my US-based comments are
just as relevant to the UK and Europe. It
is disputable whether some countries,
such as India and Thailand, have
escaped the secular bear but we will
leave that discussion for another time.
Chart 2 gets to the heart of the problem.
It compares CPI adjusted (real) stock
prices to a measure of crowd psychology.
First, take a look at the top series and
you will see the secular bears quite
clearly. In inflation-adjusted terms, at
the beginning of September 2012 the
inflation-adjusted S&P Composite was
approximately 30% below its March
2000 high. The fundamentalists among
you may be appalled that I referred to
the Shiller P/E ratio as a measure of
crowd psychology, but that is what it
really is. Were investors pessimistic
when they choose to buy stocks at a 40+
P/E ratio in 2000? No, they were
incredibly optimistic, otherwise why pay
historically high valuations. By the same
token, why did the P/E fall to around the
7.5 level during the course of previous
secular bear markets? Surely it was
because investors were scared stiff and
were only willing to buy stocks if they
were presented with a bargain. Thus, I
think we can conclude that valuation
measures are really sentiment indicators.
Secular trends then are driven by doubledecade oscillations in sentiment, as
optimism (22.5 plus readings on the
Shiller P/E), gradually swings the other
way until the pendulum reaches an
extreme of pessimism (7.5). You can see
that it is only when this psychological

Source: Pring Turner.com

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ISSUE 73 NOVEMBER 2012

MARKET TECHNICIAN
Journal of the Society of Technical Analysts

movement has run full course that the


foundation for a new secular bull market
is in place.

Chart 3: ECRI Weekly leading indicator 1967-2012

Changes in sentiment are not limited to


earnings, as we see dividend yields
swing from 3% at peaks to 6-7% at
secular lows. Similarly, replacement
value (the Tobin Q ratio) traverses
between $1.10 and 30c. Currently the
P/E ratio is around 20, the yield at 2.3%
and the Tobin Q at 80c. Based on these
measurements we are clearly some
distance from a secular low.
Swings in psychology may be the
thermometer by which we monitor
secular trends but structural problems
reflect its symptoms. A lot of business
cycles, but certainly not all, end when
inventories are built up due to rising
sales. Then sales fall and inventory
levels, which are stickier, become bloated
and a process of liquidation takes place.
This feeds back into the rest of the
economy and a recession takes place.
Within a couple of quarters adjustments
are made and the system is ready for a
new recovery with not that much harm
done. Equity prices respond to such
downturns of course, by experiencing a
primary bear market. Secular bear
markets, on the other hand, have their
roots in structural problems. For
example, an emerging industry is very
profitable to begin with and as a result
gradually attracts more and more
investors until the industry finds itself in
a state of chronic overcapacity. In the
early nineteenth century it was canals. In
the subsequent US secular cycle it was
railroads and so forth. The problem, is
that these structural excesses take a
long time to work off unlike a simple
inventory dump. That is just half of the
problem because governments, being
governments, feel they have to help.
Inevitably policy mistakes compound the
situation. In 1929, the US car industry
had the capacity to manufacture 6.4
million cars yet the best- selling year was
4.5million. This was bad enough when
the
economy
turned
down
but
competitive devaluations and tariffs just
compounded the problem. Since 2000 we
have had the tech boom and the housing
bubble. The policy mistake this time is
to run up in Federal debt from
$6 trillion to 16 trillion since 2000 and to
push short-term interest rates to
artificially low levels. Central bankers

ISSUE 73 NOVEMBER 2012

Source: Pring Turner.com

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

Source: Pring Turner.com

around the world have been acting like


drug addicts, as they take larger and
larger doses of easy money but the
positive business activity effect has been
smaller and smaller. The eventual debt
withdrawal process, I believe, will extend
the secular bear market in equities. By
way of demonstrating the difference in
economic conditions between a secular
bull and bear please look at Chart 3,
which features the ECRI Weekly Leading
Economic Indicator. It was flat during the
1966-1982 secular bear, rose sharply in
the ensuing secular bull and since 2000

has essentially gone flat, thereby


reflecting the current structural malaise.
These basic distortions also feed back
into the psychological aspects I
discussed earlier. If you refer back to
Chart 2 again, you will see that secular
bulls experience very little in the way of
recessions, but each of the previous
secular bears experienced between four
and six. They developed very close to
each other, thereby having the effect of
gradually ratcheting up the pessimism,
so necessary as a foundation for the next

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MARKET TECHNICIAN
Journal of the Society of Technical Analysts

secular bull. So far the 2000-20?? Bear


has only experienced two recessions,
which implies that we have some more
issues to work through.
There is one final third leg to this
psychological/structural stool and that is
the role of unstable commodities.
Unstable usually means on the upside
but sharply declining commodities can
also wreak havoc on equities, though
generally for much shorter periods. You
can see this in Chart 4, where the green
arrows indicate that when commodities
are falling gently or experiencing a
trading range, such an environment is
usually long-term bullish for stocks. The
pink shaded areas indicate when prices
are rising at a fairly fast clip, equity
prices adjusted for inflation experience
a secular bear market. The period in the
elipse around 1929 is there to remind us
that sharp moves in commodity prices in
either direction are disruptive. Since
2001, industrial commodities have
experienced a new secular bull market.
Is it not surprising, therefore, that a
secular bear market for equities started
around the same time.
To underscore this point, Chart 5 shows
my attempt at identifying secular
reversals in commodity prices by dividing
a 60-month by a 360-month closing price
and plotting the result as an oscillator. As
you can see, each time the commodityderived oscillator has reversed to the
downside, this has resulted in a major
long-term buying opportunity for equities.
The oscillator is still rising and so is the
long-term risk for the stock market.
It seems to me that commodity prices
may be in the early stages of a new
primary bull market, or more realistically,
another up leg in the secular bull market.
Notice how the 18-month ROC in Chart 6
has started to hook up from an extremely
oversold level. The arrows show when this
series has reversed in the past a new
primary bull market has almost always
been underway. With central banks
around the world expanding their balance
sheets at an unprecedented rate, it is not
difficult to connect the dots so that lots of
this money ends up in the commodity
pits. Do not forget that initially the stock
market likes rising commodity prices, so
we may well see the current bull market
extend for the balance of the year.
However, at some point the commodity
rally gets out of hand and that is the time

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to expect an abrupt reversal in equity


prices and the start of a new downward
leg in the secular bear. Prices do not
necessarily have to take out the 2009
lows but the environment may be
sufficiently unnerving to feel that they will.
Martin Pring is president of Pring.com, an
educational website, and chairman of
Pring Turner Capital Group, a money
management firm. Perhaps best known
for his book Technical Analysis Explained,
he has authored over 20 investment
books, the latest of which, Investing in

the Second Lost Decade, is co-authored


with partners Joe Turner and Tom Kopas.
In March of this year Dow Jones Indexes
published the Dow Jones Pring Business
Cycle Index (DJPRING) based on his six
stage business cycle methodology.
An ETF (AdvisorShares Pring Turner
Business Cycle ETF) using the similar
techniques is currently in registration
and is likely to be released around yearend. The proposed symbol is DBIZ.

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

CPI Adjustd S&P Composite

Source: Pring Turner.com

Chart 6: US commodity price 1919-2012

US Commodity Prices

Source: Pring Turner.com

ISSUE 73 NOVEMBER 2012

MARKET TECHNICIAN
Journal of the Society of Technical Analysts

Heikin-Ashi Trends
made simple
A different perspective on trends and reversals
By Dan Valcu CFTe
Trends and reversals are always an important focus for both traders and
investors. Errors are expensive and there is always the temptation to steal at
least one bar in order to trigger a buy or sell signal before the rest of the
market. In recent years there has been a revival of basic techniques and
strategies such as trend analysis, Point and Figure charts, and the Wickoff
method to identify turning points in the markets. The introduction of Japanese
candles opened the door to other trend techniques and price representations
(Ichimoku charts, Renko, Kagi, 3-line charts).

Figure 1: FTSE 100 index is displayed using Japanese candles (upper pane) and heikinashi candles (lower pane).

This article introduces a lesser-known


Japanese trend technique, heikin-ashi,
which acts as a price filter and reveals
trends, consolidations, and reversals in a
clear way.

Heikin-ashi basics
Heikin-ashi is a simple price filtering
technique based on modified Open-HighLow-Close (OHLC) prices. The formulas
used to generate the new prices are:
haClose =
haOpen =

(O + H + L+ C)
4
(previous haOpen + previous haClose)
2

haHigh = Max(H, haOpen, haClose)


haLow= Min(L, haOpen, haClose)
The main element, the secret, is
haOpen which starts at the mid-point of
the previous heikin-ashi candle body
and helps filter out price noise. Figure 1
shows the FTSE 100 both with daily
Japanese candles and heikin-ashi
(modified) candles.
The interpretation at a glance of any
heikin-ashi chart is based on three
simple patterns as described below:

Figure 1a: Whipsaws during consolidations such as at the beginning of 2012 can be
reduced by applying a 7-day simple moving average of the regular close to the
heikin-ashi chart (lower pane).

It is easy to understand that white


candles are associated with uptrends
while filled candles identify shorter and
longer downtrends. The start of 2012 is
a typical consolidation period with dojilike candles small bodies with both
upper and lower shadows appearing on
the heikin-ashi chart.
These three patterns suggest the
following set of entry/exit rules based on
candle colour:

Enter long (cover short) when heikinashi candle colour changes from solid
to white

Exit long (enter short) when heikinashi candle colour changes from
white to solid.

A doji-like heikin-ashi candle is a sign of


trend reversal but also the start of a
consolidation period. How can we

ISSUE 73 NOVEMBER 2012

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MARKET TECHNICIAN
Journal of the Society of Technical Analysts

manage to reduce the risk of whipsaws


when such candles occur on a chart?
One simple method is to attach an
average to the heikin-ashi candle chart
and filter out the entry/exit signals that
may be generated by the strategies
based on colour change indicated above.

Figure 2: The daily heikin-ashi chart for FTSE 100 is enhanced with the addition of
haDelta and its short moving average SMA(3).

Figure 1a shows in the lower pane a


7-day simple moving average of the
regular close plotted on top of heikinashi candles.
The consolidation in the beginning of
2012 has now a positive bias because
the close values of heikin-ashi candles
(haClose) are above the simple average
with the exception of the last candle.
The addition of an average brings up
another set of entry/exit rules based on
haClose above or below the average:

Enter long (cover short) when heikinashi close (haClose) crosses above
the moving average

Exit long (enter short) when heikinashi close (haClose) crosses below
the moving average

Figure 2a: A part of the noise generated by haDelta and its short moving average
SMA(3) can be removed by additional smoothing of SMA(3).

It is worth mentioning that heikin-ashi is


not a mechanical trading instrument;
it is a technique that can be easily
incorporated into a discretionary trading
system.

Quantification of heikin-ashi
candles
The original Japanese technique consists
only of heikin-ashi candles as described
in the previous section. One additional
and logical step to pursue is to make the
technique more suitable to the Western
way of thinking i.e. to quantify the
modified candles and generate a
technical indicator.
As a result, a new very simple indicator,
haDelta, is defined as the difference
between haClose and haOpen.
Figure 2 shows the FTSE 100 displayed
with heikin-ashi candles (upper pane)
and haDelta in the lower pane.
The big advantage of using haDelta is its
capacity to generate advance signals.
Since haDelta is a momentum indicator,
it is also used to pinpoint divergences
and oversold/overbought levels. SMA(3)
is the 3-bar simple average of haDelta

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and helps to smooth the raw indicator.


The basic signal of this combination is
the crossing of haDelta above its moving
average (Long) or below it (Sell). Since
haDelta is in many cases noisy, traders
can choose SMA(3) to add/reduce
positions when the average turns
positive or negative. When the average
hovers around zero, the FTSE 100 is
taken to be in a consolidation mode.
The big advantage of using haDelta and
its 3-bar simple average SMA(3) is that
it gives an early indication of possible
trend reversals. On the other hand,
these Buy/Sell triggers can generate
noise. Some of this noise can be
removed by smoothing the SMA(3) with
another 3-bar simple average.
Figure 2a shows in the lower subchart
SMA(3) together with its 3-bar simple

average SMA(SMA(3),3) (dotted line).


HaDelta has been dropped and trend
changes are better indicated by crossings
of the two averages.

Heikin-ashi vs. Japanese


candlestick patterns
Currently there are over one hundred
documented candlestick patterns. The
lack of consistent definitions and
the different way the patterns are
interpreted mean there is a high degree
of subjectivity when using them to trade.
Traders need precise techniques and any
quantification of the candlestick patterns
brings an edge in trading.
Since heikin-ashi is based on precise
definitions and measurements, it can be
used either to confirm candlestick patterns
or to eliminate their use completely.

ISSUE 73 NOVEMBER 2012

MARKET TECHNICIAN
Journal of the Society of Technical Analysts

Figure 3: haDelta and its short average confirm candlestick patterns

the FTSE-100 which started in early


October took a breather when it
encountered the resistance offered by
Senkou Span B. This pause translates as
a short consolidation on the heikin-ashi
chart waiting for the next step. A hesitant
moment linked to price support occurred
during the last week of November when
heikin-ashi indicated a reversal while the
price slightly penetrated the bottom of
the cloud.
Traders can add heikin-ashi to confirm
signals they get from other indicators.
The final goal is to obtain more accurate
and less riskier trading signals.

Conclusions

Figure 4: Heikin-ashi can be used to confirm support/resistance levels when used with
technical indicators or trend analysis.

Heikin-ashi is a simple, low-entry cost


technique to filter out short term price
fluctuations
and
reveal
trends,
consolidations, and reversals. It uses
only three candle patterns with simple
rules (sequences of white and dark
modified candles and doji-like candles as
potential reversal points). The main
advantage is haDelta which offers, in
many cases, advance signals.
This technique, both in its original visual
format and more recent quantifiable
form, is far from a mechanical trading
instrument. Purists can use heikin-ashi
charts with haDelta. Traders may add
technical indicators and other techniques
to confirm trading signals. Since no
combination is perfect, rigorous risk and
capital management system should
ensure that any failure translates into
small losses.

Two candlestick formations are obvious


on Figure 3 above: A distinct bullish
engulfing pattern in early October and a
debatable bearish pattern which may be
translated by some (but not the author)
as an evening star. Luckily, heikin-ashi
does not rely on interpreting patterns.
The clear cut signals given by the
crossings of haDelta and SMA(3) remove
the need for candlestick pattern input.

Heikin-ashi with other


techniques
As with any other technical analysis
technique, heikin-ashi is most effective
when combined with other indicators.
Purists may use only heikin-ashi in both
formats but additional confirmations
improve trading results.

ISSUE 73 NOVEMBER 2012

Japanese candlestick patterns are


already used with more precise indicators
to remove the degree of subjectivity
generated by their translation and
interpretation.
Bollinger
bands,
Stochastics and the Relative Strength
Index are some examples of studies used
frequently with candle patterns.
In Figure 2 we have seen how earlier
signals are triggered by joining heikin-ashi
charts with haDelta. Since heikin-ashi
focuses on trends and reversals, it may be
used with other techniques to confirm
relevant support/resistance levels.
Figure 4 shows The FTSE 100 with
Ichimoku and heikin-ashi charts.
Notice that the trend change in midDecember coincides with cloud support
on the Ichimoku chart. The uptrend on

A very important aspect of using heikinashi is to confirm Japanese candlestick


patterns or to remove them altogether
from trading, according to each traders
preference.
Heikin-ashi can be used with any
financial instrument in any time frame.
Best
results
are
achieved
with
instruments which, historically, display
clear trends and display similar trends
on heikin-ashi charts in two or even
three time frames.
Dan Valcu, CFTe is General Manager of
Educofin Ltd and serves on the Board of
the International Federation of Technical
Analysis (IFTA). He is also the author
of Heikin-Ashi: How to Trade Without
Candlestick Patterns published in
September 2011 (www.educofin.com).

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MARKET TECHNICIAN
Journal of the Society of Technical Analysts

STA Diploma Results


April 2012
DISTINCTION
Andrew Bailey

Katrina Oldham

Ali Chohan

Shelley Pilgrim

Qinfeng Li

Harry Tchilinguirian

David Murphy

Anne-Laure Tremblay

Chitralekha Nandi

PASS
Gisle Aanerud
Rukes Ahmed
Mahmoud Ali Jaffal
Wael Allam
George Amiradakis
Tom Argentieri
Sundeep Athwal
Dvyratn Bakshi
Stefano Basurto
Jean-Paul Beveraggi
Robert Bewell
Chee Phiew Chan
Muhammad Saqib
Chughtai
Mark Devine
Chrysis Dimitriou
Yannick Djoumessi
Daniel Dooling
Anthony Edwards
Christos Efthymiou
Maria Eleftheriou
Ricky Ellis
Stavros Flangofas
Antrea Fotiou
Rowan Gallagher
Musa Haddad
Ioannis Hasikos
Thomas Heathwood
Tom Hicks
Thomas Hone
Raza Hussain
Ifjal Hussain
David Hutchison
Martha Jenkins
Kerli Juhkam
Faiga Karim
Nick Karvounis
Tsoken Kefas
Markus Kofler
Michael Kopanakis

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Georgios Koufou
Nuno Lampreia
Theodosios Lazarakos
Stuart Lea
Hon Cheung Lee
Sylwester Majewski
Angela Miller
Paul Monk
Gabriel Moores
Inigo Moraleda
Manpreet Nahal
Luke O'Brien
Guy O'Leary
Robin Luc Oppenheim
Bill O'Rahilly
Griff Owens
Darius Panasko
Sokratis Panayi
Emma Parker
Roshan Patel
Jayesh Patel
Maurizio Pietrini
Jack Pollard
David Price
John Prosser
Sammy Quintana
Nicolas Riant
Niall Riordan
Alex Rowles
Danny Ryan
Charlotte Rycraft
Aiko-Malte Sauer
Niral Shukla
Paul Sills
Arne Solvang
Michail Tsaousellis
Jonathan Araujo
Valente
Yuanheng Zhang
Ioannis Zittis

STA Diploma Course 2013


For the seventeenth year running the Society of
Technical Analysts is holding its annual Diploma
course.
This series of lectures prepares students for the STA
Diploma, an internationally recognised two-stage
qualification. The first stage is a 2 hour multiple
choice Foundation Exam. Passing this exam is a
prerequisite for taking the Diploma exam, which is
a 3 hour written examination. The Diploma course
package includes an option for taking the Foundation
Exam for those who have not yet passed the first
level. STA candidates, having successfully passed
both Foundation and Diploma exams are eligible to
receive the IFTA CFTe certificate on payment of an
accreditation fee of $50.
The course consists of 12 Wednesday evenings
starting on Wednesday 9 January 2013, followed
by a half-day Exam Preparation Session on Thursday
11 April 2013. The Diploma Exam will be held on
Wednesday 24 April 2013. Students who have
NOT yet passed the Foundation Exam will sit this
exam in March 2013 (date to be confirmed).
The lecturers are leading practitioners in their field
working for institutions such as UBS, Credit Suisse,
JP Morgan, Commerzbank and Bloomberg and
include several well-known published authors.
Early booking rate of 2,900 for the whole course;
2,600 for those who have already passed the
Foundation Exam.
For more information please visit or contact
the STA office on 0845 003 9549.

STA Meetings 2013 Dates


British Bankers Association
Pinners Hall, 105 108 Old Broad Street, London EC2N 1EX

TUESDAY 8th January

TUESDAY 9th July


SUMMER PARTY

TUESDAY 19th February

TUESDAY 10th September

TUESDAY 12th March

TUESDAY 8th October

WEDNESDAY 9th April

TUESDAY 12th November

TUESDAY 14th May

TUESDAY 10th December


CHRISTMAS PARTY

2013 Meetings:

TUESDAY 11th June

ISSUE 73 NOVEMBER 2012

MARKET TECHNICIAN
Journal of the Society of Technical Analysts

Technical analysis on
the VIX
By Greg Bender
The VIX is a statistic calculated from a weighted blend of prices of S&P 500
Index options and it measures the markets expectation of volatility over a
rolling 30-day period. The popularity of the VIX franchise has grown
exponentially with the introduction of VIX futures in 2004, VIX options in 2006,
volatility related exchange traded products as, for example, VXX, and VIX
benchmarks such as the Apple and Gold VIX. Since the VIX was first
introduced on the Chicago Board Options Exchange in the early 1990s,
technical analysts, whether they trade options or not, have charted it and used
it as a sentiment indicator. Given that the VIX is a mean reverting statistic
with unique properties, which make it different to other supply and demand
driven assets such as equities and commodities, should technicians perform
technical analysis on it? If so, what nuances of the VIX must be taken into
account?

The VIX is known by some as the Fear


Index due to its negative correlation to
the S&P 500. As stocks go lower, option
traders pay up to hedge the markets
expectations of short-term volatility and
premiums tend to increase. But those
expectations will not increase forever
because of the mean reverting nature of
volatility.

Technicians can and do apply moving


averages, trend lines and oscillators to
the VIX. I argue, however, that doing so
without understanding the nuances of
the VIX puts a technicians analysis at
peril. For example, in February 2012
there were numerous reports stating
that the VIX was technically oversold
and too low considering the macro and

Figure 1

Source: Bloomberg

ISSUE 73 NOVEMBER 2012

micro concerns facing the U.S. equity


markets (for example, the eurozone
crisis, Presidential elections and fiscal
cliff). Many analysts claimed, from a
sentiment standpoint, that this was a
signal of excess complacency and
indicated a bearish outlook for the
market. However, the VIX cannot be
analysed in a vacuum and volatility
bottom pickers were penalised. The
reality was that the spread between the
VIX, which is calculated from the
forward-looking implied volatility of
options prices, and realised volatility,
which is calculated from the actual close
to close volatility of past prices, was at a
5 month high (see Figure 1). At the
same time, the VIX futures curve, which
reflects the markets expectation of
volatility at specific points in the future,
was in a steep contango. A contango
curve exists when the price of spot and
near-term contracts is at a discount to
mid- and far-term contracts. Remember
the VIX Index that is often quoted is
only a snapshot of the spot or cash VIX.
It has to be viewed in context of the
entire futures curve and its relationship
to realised volatility.
Given these two facts, the spread
between implied (VIX) and realized
volatility and the steep contango of the
futures curve, market sentiment was
actually anything but complacent.
To point, the VIX fell 27% and the S&P
500 rose 4.4% from February 15th to
March 15th.
It can be helpful to analyse the price of
the spot VIX relative to support and
resistance levels. As figure 1, highlights,
the 16-13.50 zone has offered significant
support since late 2007. However, be
careful applying classic methods of
identifying resistance as spikes caused
by market sell-offs can be more akin to
catching a falling knife than selling an
overvalued stock. Yes, the VIX will
eventually revert to a mean; meanreverting strategies are some of the
most popular amongst volatility traders.
But timing that reversion can be costly
as it is in any product that can have
severe demand imbalances in the short
term. In addition, like any other form of
technical analysis, framing your work in
specific, and ideally multiple, time
frames is extremely important. You
cannot identify a mean to revert to if you
do not identify a specific time frame.

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MARKET TECHNICIAN
Journal of the Society of Technical Analysts

Bytes and
Pieces

Figure 2

Where to Start?
If you are a new member of the STA
and need charting software with
minimal costs, then here is one of
the cheapest and most effective
options:
Programs: Gannalyst took some
$250,000 to develop and is now
free (for a donation), See http://
www.gannalyst.com.
It
rivals
Metastock in its ease of use.
To start your security database with
nearly ten years of stock data in
Metastock format check out this site:
http://www.optiontradingtips.
com/resources/historicaldata/ftse100.html
Source: Bloomberg

Technical analysis is especially valuable


when charting the relative strength of
one security versus another. Investors
can perform relative strength analysis to
generate pairs trading ideas where a
bullish position is taken in one security
and a bearish position is taken in
another. Pairs trading in equities, for
example, can be difficult and costly to
execute. Investors will often express
their views in the options market to
take advantage of lower net margins/
premiums, increased leverage and predefined risk to premiums paid (assuming
only long positions are used). VIX
benchmarks, like the Gold VIX and Gold
Miners VIX, can be a valuable input into
this trading strategy.
For example, suppose an investor
believes
that
gold
miners
are
undervalued relative to the yellow metal
and a bullish trend line break of the
miner/metal ratio confirms this belief
(see Figure 2). On September 5th, the
spread between the Gold Miner VIX, a
proxy for the price of short term options
on the Market Vectors Gold Miners ETF
(GDX) and the Gold VIX, a proxy for
options on GLD, the SPDR Gold Trust,
was at 14, down from a three-month
high of 21 points and below a mean of
15.4. This ratio of volatility benchmarks
not only provides information about
a shift in relative sentiment and
expectations for future volatility, but can

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also guide the investor when choosing


options strategies. If an investor decides
that there is risk to being long volatility
in the bearish GLD leg of this pairs trade,
then put spreads may offer more edge
than the purchase of outright puts. If an
investor thinks that implied volatility has
found a floor in the bullish GDX leg of the
pairs trade, then purchasing outright
calls may offer more edge.
Technical and volatility analysis can
complement each other as long as the
nuances of statistics like the VIX are
taken into account. The concept of
volatility as an asset class continues to
gain momentum making volatility
benchmarks more accessible. This is
good news for technical analysts who
want to add new tools to their sentiment
and timing toolbelts.
Greg is a derivatives execution consultant
for Bloomberg Tradebook, Bloombergs
electronic agency broker. He is based in
New York and responsible for the coverage
of buy-side and sell-side clients globally
that trade the listed derivatives markets.
DISCLAIMER
Click on the following link for the
Bloomberg Tradebook Disclaimer:
http://www.bloombergtradebook.com/
pdfs/disclaimer.pdf

Then you need an update service


Yahoo provides free data, and Quote
Downloader V3 is also free (or a
small donation) if you install the
Microsoft .Net Framework. Otherwise
MLDownloader is available for a fee.
http://www.trading-tools.com/
That has hopefully got you set up for
a very small outlay.

Data Services
Data services filter and check
incoming data so there are no more
nasty spikes on your charts. Hence
sometimes it pays to get a data
service. Northgate and Qdata are in
the UK and provide Metastock format
data whereas EODdata have a
worldwide database available.
http://www.premiumdata.net/
http://www.q-data.co.uk/
http://www.eoddata.com

Real-time Data
Livecharts provide free of charge real
time stock market charts and quotes,
setup for the daytrader. They also
have an App for your mobile phone
but the quotes can also be obtained
from their website.
For the App, go to http://www.
livecharts.mobi or http://www.
livecharts.co.uk
D. Watts

gbender1@bloomberg.net
ISSUE 73 NOVEMBER 2012

NETWORKING
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

Please keep the articles coming in the success of the Journal


depends on its authors, and we would like to thank all those who
have supported us with their high standard of work. The aim is to
make the Journal a valuable showcase for members research as
well as to inform and entertain readers.

The Society is not responsible for any material published in The Market
Technician and publication of any material or expression of opinions does not
necessarily imply that the Society agrees with them. The Society is not
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Articles are published without responsibility on the part of the Society, the editor
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