CONTENTS. Letter from the President - 01 Editor s note - 02

Transcription

1 November 2014

2 CONTENTS Letter from the President - 01 Editor s note - 02 Analysis of Market phases using 50, 200 SMA part 3 by Ananth Madhav - 03 Understanding Market Profile by Pit Trader 06 The Harmonic Trading Patterns by Jay Purohit, Part Price action tips that will help you become a better swing trader by Rajat Dutta 14 New Thinking in Technical Analysis Book review by Sahil Vijay 17 Past and Present Events 20 Future Events Updates 20 This newsletter is produced by the Association of Technical Market Analysts. All comments and editorial material do not necessarily reflect the organization's opinion nor does it constitute an endorsement by the Association of Technical Market Analysts or any of its officers, of any products or services mentioned. Sources are believed to be reliable at time of publication, but not guaranteed. The Association of Technical Market Analysts and its officers, assume no responsibility for errors or omissions. NOVEMBER 2014

3 LETTER FROM THE PRESIDENT Dear Colleagues, Professionalism & Professional Standards are two of the core principles on which ATMA stands. To me, a common-sense meaning of professionalism is a set of attributes that inspires trust, confidence & dependability. If anyone can depend on us then we are a professional. The trust that we will deliver the highest standards of conduct is what makes one a professional. In this context, the importance of the Code of Ethics & the Annual Professional Conduct Statement that each and every member of ATMA subscribes to can be undermined to nothing. Even though ATMA is and will remain a self-regulatory body, the desire express in a membership of the ATMA to adhere to these standards is value for public, our clients, partners, employees or associates. If there are any violations any one notices of the Code of Ethics or of the Professional Conduct Statement, one may write to secretary@atma-india.net & ATMA shall act within its constitution & bye-laws to address such communications. Recognition for Technical Analysis as a full-fledged independent body of market analysis rests much on our adherence to professional standards and ethics. I solicit, formation of a Volunteer Committee comprising of well known names in Technical Analysis in India to create a structured advocacy plan for Technical Analysis so as sound and square representations can be made to regulatory bodies for seeking exemption from licensing exams as the eventual goal, starting from a formal recognition of Technical Analysis. Sincerely, Sushil Kedia NOVEMBER ATMASPHERE

4 EDITOR S NOTE In this issue - 1. Ananth Madhav brings us towards the climax in the explanation of market phases using moving averages, in his final article of the series Analysis of Market Phases using 50 and 200 SMA. 2. Alex a.k.a Pit trader continues the explanation of the concept of Market Profile. 3. Jay Purohit continues his portrayal of the ever effective harmonic patterns for trading reversals and finding price targets. 4. Rajat Dutta brings the second part of his article that explains the other 5 tips to become better in swing trading. 5. Sahil Vijay presents a great review of the book, New thinking in Technical Analysis. ATMAsphere is your platform to learn & to teach. In fact, when you teach you learn better by handling curiosities of younger minds. So do write out to me sending in your articles and we can all learn from each other. We await your feedback on ATMASphere. Please let us know what we can do to deliver content that meets your needs by sending an to editor@atma-india.net. You can also subscribe to ATMASphere completely free by clicking here. Sincerely, Gunjan Duaa. 2 ATMASPHERE NOVEMBER 2014

5 Analysis of Market Phases using 50, 200 SMA Part 3 Continued from last Article. Bear Phase: This phase can be summarized as Price < 50 SMA & 200 SMA and 50 SMA > 200 SMA. Investors and Traders decide to liquidate their holdings. Selling is more evident as Price makes new lows and 50 SMA starts sloping down. We have Price close less than both 50 SMA and 200 SMA but 50 SMA will be greater than 200 SMA. Price goes below 200 SMA, which is widely followed by Institutions, indicating sharp change in the sentiment. Portfolio Managers and Other Professional Investors are convinced that they have to sell their holdings. As Price breaks previous swing lows Professional Traders take short positions. Markets fall thrice faster than the speed they go up. When Price stays below 200 SMA for sustained period of time it s widely known as BEAR MARKET and hence the same name for this Phase. NOVEMBER ATMASPHERE

6 In this phase, Selling Pressure is so strong and buyers are so sporadic that prices are either decline sharply or consolidate at lower levels after a drop. Professional Traders are usually a happy lot during this phase as Price movement usually is unidirectional and swift. Both 50 and 200 SMA slopes down. Occasional Pull backs to 50 SMA is seen, which get quickly Sold into. Accelerating Volume and powerful negative momentum are the main characteristics of this phase. Capitulation: Price < 50 SMA & 200 SMA and 50 SMA < 200 SMA. Complete lack of Demand and Excessive Supply is seen in this phase. 4 ATMASPHERE NOVEMBER 2014

7 Ananth Madhav, A CMT aspirant, is a full time trader having 6 years of experience, teaches Technical Analysis. One can reach him on ananthmadhav@live.com NOVEMBER ATMASPHERE

8 Understanding Market Profile Using market profile to execute strategy 1.Gap open: This indicates imbalance. Mainly there are 2 types of gaps Large gap above/below previous day s entire range due to overnight News flow and / or high-volume on open. Such gaps are continuation gaps and price tends to trade in the direction of the gap. It is prudent to execute momentum strategy Small gap. Usually it tends to have less volume on open and / or no overnight news. Such type of gap will likely to fill. Open in context of previous value area: 1.2 If open above/below previous days value area and also above/below previous day's range (remember entire range means previous day s high and low of the day, value area means 70% of previous day s overall range as we discussed in previous articles here). Such type of open is sign of market imbalance, which often produce high risk reward trades. You can execute various momentum strategies (Quick recap: Market profile is not the system itself but provides a framework to execute your own strategies and trading systems) If market open above previous days value high/value low but within previous day s range it indicates marginal market imbalance. Price often will return to developing value area of present day. Here it is prudent to execute mean reversion strategies. 1.3 Market opens within previous days value area and previous day s range. It indicates price may oscillate within present day s developing value area and then in later part of the session may break out. Since stops are usually near it produces low risk reward trades. 2 open in context of previous day's close 2.1 Scenario: previous close at upper range of that specific day. This is an indication of short covering or longer term buyers. Now if today's opening price sustain above previous days close, and value area. Then previous day s rally is valid with longer term buyers. Previous day s high or value area high act as support. One can execute momentum strategy. if open was quickly rejected, then it is an indication of previous day's rally was short covering 2.2 Reverse is true if previous day s close was at lower end of that particular day s range. Here is the flow chart: ( Marketprofile chart above is created in MarketDelta and flow chart is created in MindJet mine manager tool) 6 ATMASPHERE NOVEMBER 2014

9 Hi, I often go with nick name Pit Trader. I trade Index futures and options. I currently live in Toronto, Canada. I use Multicharts and R.I am a programmer myself,and use my own trading systems based on statistical models and Market profile. You can follow me on NOVEMBER ATMASPHERE

10 The Harmonic Trading Patterns In last article, we discussed about Introduction of Harmonic Patterns, Fibonacci Ratios and AB=CD Pattern, which is the only four point structure. In this article, we will discuss Bat and Gartley Pattern. Before going to start 5 point structure harmonic patterns, one needs to know following concepts of harmonic patterns: The midpoint (B): As harmonic patterns are 5 point structure pattern, the midpoint (B) is significant for determining the pattern. Distinguishing ALL points within pattern: Distinguishing ALL points within 5-point price structures by examining each Fibonacci calculation to validate the proper alignment that for each harmonic pattern. Potential Reversal Zone (PRZ): PRZ is a point where two or more Fibonacci calculations congregate at a defined price level. It is not an exact level; it is a zone where reversals are likely. It acts as a support and resistance based on harmonic pattern. Alignment of Fibonacci ratios defines the pattern: Harmonic pattern emphasizes the important of the different Fibonacci ratios at different price structure. BAT PATTERN The Bat pattern is an M and W shaped 5 point corrective structure found in well-established support levels. This is one of the most precise harmonic patterns discovered by Mr. Scott Carney in The pattern incorporates the 88.60% retracement of the major impulse wave (XA), as the defining element in the Potential Reversal Zone (PRZ). Below are the elements of Bat pattern: Point B should be either 38.20% or 50% retracement of XA Point C can end at any of the retracement levels in between 38.20% to 88.60% of AB Point D must be 88.60% retracement of XA and can be any of the retracement levels in between % to % of BC In this pattern, all corrective moves end within the range of impulse (XA). The broader trend remains intact in Bat Pattern as the last leg (Point D) cannot overlap 88.60% of XA, which gives a cushion to take positions based on the pattern to trend following traders as well. It is an incredibly accurate pattern and requires a smaller stop loss than most patterns. Thus, it is probably the most accurate pattern in the entire Harmonic Trading arsenal. This is how Bat Pattern looks like : 8 ATMASPHERE NOVEMBER 2014

11 Now let s take few examples of Bat Pattern: Example 1: Bullish Bat Pattern completed in daily chart of BPCL on February 25, Below is the updated daily chart of BPCL. We have witnessed sharp rally in the stock post completion of Bullish Bat Pattern. Above is the daily chart of BPCL. Here, after rallying from to 420 (XA), Stock price initially has made the low of (point B), which is 38.20% retracement level of the rally XA and then stock rallied precisely up to 61.80% of AB ( ), which is placed at (point C). After that stock fell all the way to levels, which is precisely 88.60% retracement level of the impulse XA and also coincides with % retracement level of BC ( ). Thus it fulfilled all the criteria of Bullish Bat Pattern. NOVEMBER ATMASPHERE

12 Example 2 :Bearish Bat Pattern completed in weekly chart of Bank of India on January 18, Here, after the sharp fall from 408 to (XA), stock price has retraced precisely upto38.20% retracement of XA and has made the high of (point B) and then counter again corrected upto88.60% retracement level of AB, which is placed at level (point C). After that stock rose to 393 levels, which is precisely 88.60% retracement level of the impulse XA and near to261.80% retracement level of BC ( ). Thus, it fulfilled all the criteria of Bearish Bat Pattern. GARTLEY PATTERN The Gartley Pattern is the best known and one of the oldest harmonic patterns. It was outlined by Mr. H.M. Gartley in his book Profits in the Stock Market, published in The Gartley pattern is a controversial pattern as the book did not discuss specific Fibonacci retracements and people used a variety of Fibonacci numbers at the B and D points. Although the general structure has been outlined previously, it was not until The Harmonic Trader was released in 1999 that the exact rules for specific retracements of the B point at a and the D point at a were to be assigned to the pattern. Gartley Pattern is similar to Bat Pattern in appearance, but not in measurement. Point B has a larger and precise retracement of XA of 61.80% and the extension of the BC wave into D should note me more than %. Below are the elements of Gartleypattern : 10 ATMASPHERE NOVEMBER 2014

13 Point B must be 61.80% retracement of XA Point C can end at any of the retracement levels in between 38.20% to 88.60% of AB Point D must be 78.60% retracement of XA and can be any of the retracement levels in between 113% to % of BC Equivalent AB=CD is most common within Gartley pattern. Like Bat pattern, in this pattern also all corrective moves end within the range of impulse (XA) and the broader trend remains intact. This is how Gartley Pattern looks like : Above is the weekly chart of Andhra Bank. Here, after the up move from to (XA), counter has retraced precisely up to 61.80% retracement of XA and has made the low of (point B) and then stock rallied to (point C), which is exactly 61.80% of AB. After that stock fell to levels, which is precisely 78.60% retracement level of the impulse XA and also near161.80% retracement level of BC ( ). Apart from that, 100% projection of AB from Point C is also placed at levels. Thus it fulfilled all the criteria of Bullish Gartley Pattern. Equivalent Bullish AB=CD is also visible within Gartley pattern. Now let s take few examples of GartleyPattern : Example 3: Bullish Gartley Pattern completed in weekly chart of Andhra Bank on August 17, 2012 NOVEMBER ATMASPHERE

14 Above is the updated weekly chart of Andhra Bank. We have witnessed sharp rally in the stock post completion of Bullish Gartley Pattern. Example 4: Bearish Gartley Pattern completed in daily chart of Banknifty (spot) On April 18, In the above daily chart of Banknifty (spot), after the sharp fall from to 9845 (XA), Index has retraced precisely up to 61.80% retracement of XA and has made the high of (point B) and then index again corrected upto70.70% retracement level of AB, which is placed at level (point C). After that index rose to levels, which is precisely 78.60% retracement level of the impulse XA and just above 127% retracement level of BC ( ). Thus, it fulfilled all the criteria of Bearish Gartley Pattern. 12 ATMASPHERE NOVEMBER 2014

15 About Me : Jay Purohit is MBA in Finance from Mumbai University. He is a Market Analyst with an insightful experience of 5 years in Technical Research and Option Strategies. He has experience in team handling and dealing with Institutional and retail clients. He has a keen eye in finding trading opportunities using harmonic patterns. His Technical analysis proficiency also includes Wolfe Wave theory, Super Trend, RSI, Trend termination and continuation pattern identification. He can be reached at jaypurohit1988@yahoo. You can also follow him on Above is the updated daily chart of Banknifty (spot). We have witnessed straight fall in the stock post completion of Bearish Gartley Pattern. In the next part of the series, we will discuss about Butterfly and Crab Pattern. NOVEMBER ATMASPHERE

16 5 Price Action Tips that will help you become a Better swing trader. I had shared 5 tips on price action for Swing Trading in the August edition. Now let me Share 5 more price actions in the article. # Tip 1: Learn the 50% rule. # Tip2: The Gap & Trap Price Pattern. All gaps are important "tells" on any stock chart. But, there is one type of gap that is especially important when analyzing price action (and pinpointing reversals). This is called a gap and trap. This is a stock that gaps down at the open but then closes the day above the opening price. It is easier to see this on a chart. How can you tell if a candle is significant? Easy. Look to see how far it has moved into the prior days range. If it moves at least 50% into the prior days range, then it is significant. And, it is especially significant if it closes at least 50% into the prior days range. This usually shows up on the stock chart as a piercing candlestick pattern or an engulfing candlestick pattern. All of the important reversals in this stock happened only after a candle moved at least 50% into the prior days range (some moved much more than 50%). This concept is so powerful that I am suspicious of buying any pullback unless it moves at least 50% into the prior days range. You can probably see what is happening here. The stock gaps down at the open. Everyone thinks this stock is going to tank. But it doesn't! Buyers come in and move this stock right back up. You can look at one of these candles and almost see all of the confused faces on other stock traders. 14 ATMASPHERE NOVEMBER 2014

17 # Tip3: Location of the price trend. You have heard the saying, "The trend is your friend." I say, "The beginning of a trend is your friend!" That is because some of the best moves occur at the very beginning of a trend. # Tip 4: Consecutive up days and consecutive down days A Stock will reverse its direction after consecutive up days or down days. So, it pays to keep this in mind, when you are looking to buy or short a stock. Here is an example: This stock broke out (horizontal line) from a double bottom (circled). A new trend has begun. So, you want to buy this stock on the first pullback (arrow) after the breakout. You should always look to short a stock after consecutive up days. And, you should look to buy a stock after consecutive down days. This is counter intuitive for new traders because they tend to associate a stock going down as "bad" (meaning sell) and a stock going up as "good" (meaning buy). In fact, it is just the opposite. NOVEMBER ATMASPHERE

18 # Tip 5: Measure the depth of a swing How far does a stock move into the prior swing? More than halfway or less? The answer to these questions is important because it can determine the future direction of the stock. Let me give you an example: So, there you have it. These price action tips and tricks will make you money in the stock market. You can use this information to make your own trading strategies and systems. Best of all, once you master this art, you will never have to rely on technical indicators again to make trading decisions. They won't be necessary. The price action moved about halfway down (arrow) into the prior swing (dotted line). This is good. If it retraced more than that, you may want to question the validity of the move. This is because a stock in a strong trend should not retrace more than halfway into a prior swing. It should encounter buying pressure sooner than the half way mark. And many times stocks will reverse right at the halfway mark. Rajat Dutta is a system designer & a fund manager for Moneyrizing Wealth Management Company. He is a trader since His Specialty is trading micro trend with a focus on analyzing and trading Stock s, Options & Commodities. He can reached on Twitter & Rajat@moneyrizing.com 16 ATMASPHERE NOVEMBER 2014

19 Technicians of today s world. In the first chapter he explains Swing trading, one of the most important way of trading for everyone, from a short term trader to an Investor. He shares Linda Bradford's work on the principles, the types of trades and the trade management. In the second Chapter Rick explains the Intermarket Analysis principles by John Murphy. This principle has been there for a couple of decades but has gained its importance in the last few years and is used by a number of technicians worldwide. This book presents an overview of the concept, which can be further explored through other books of John Murphy. New Thinking in Technical Analysis Book Review Technical Analysis is an art, which is practiced for nearly a century but with The passage of time, new ideas came in and those added to the basic structure of the subject. New people started exploring new ways to take trades and a new thinking in technical analysis came into existence. Classical Technical analysis mixed with the new concepts became the new mantra. The subject was evolving into something bigger, with important concepts such as Risk management and Statistics were now becoming a part of Technical Analysis. This book explores The new thinking in Technical Analysis and explains in detail some of the key concepts for the modern market technician. Rick Bensignor, in his book, shares different models by some of the great The third chapter is one which is very close to my own trading and one which is explained in very few books. Using moving averages on Point and Figure charts. Kenneth Towers explain this concept in detail from construction to its final use. Anyone, who wants to use point and figure, must know this concept to get an edge in the trading. The book goes on to explain about market profile and the concepts of Thomas De Mark. Market profile makes this book special, it s a new way to trade and it increases the accuracy of the trade. It uses Price and Volume concepts to find out places of Equilibrium and Disequilibrium. Thomas Demarks Oscillators and TD range Expansion too are explained in the sixth chapter. Cycle studies on smaller and longer time frames, tips to attain success, guidelines to find price extremes and explained quite well by the concept of Peter Eliades. Chapter 9, explains a concept that is used by many traders but most doesn t know much about it. Using, Vix on Options is one concept that every trader uses or wants to use but doesn t know how to do it. Lawrence McMillan provides an overview of trading based on Volatility and then explains how to trade volatility and the benefits associated with those. NOVEMBER ATMASPHERE

20 The final three chapters are about the concept, which is known to all but most traders don t care much about the concept, and that leads to the downfall of most of them. The concept of Sentiment and Risk is explained by the writer using the work of three legends of market..bernie Schaeffer, Larry Williams and Cortney Smith. The author has given three chapters on these because he understands the importance of the whole and wants the reader to understand the same. Investor sentiments, the rules, the pitfalls and to go against the crowd are some of the things the author shares. The author also explains risk management in the last chapter, he gives the rules to put stop losses, the fractions, the amount of capital to be invested and the discipline to be maintained while trading and after it. To Conclude, I earnestly request every successful and budding trader to read this book and to keep this in his/her library. The book magnificently outlines all the ingredients to build our emotional and intellectual capital to make a living in this chaotic world of financial jargon. Sahil Vijay, CMT is in the financial markets for the last nine years and currently working as a Treasury Analyst with Capital Bank. A Banker by profession he looks after Investments and takes trading decision in Debt, Equity and Foreign Exchange markets. He uses Elliot Wave Theory, Gann Studies, Bollinger Bands, Fibonacci Analysis and Momentum Oscillators like RSI to drive confluence points in various markets to establish low risk high yield set ups, he also include inter market analysis and global indices in his study to draw better understanding of the under currents in global financial markets. 18 ATMASPHERE NOVEMBER 2014

21 World's FIRST E-Library of Technical Analysis The R. N. Elliott ATMA E-library of Technical Analysis Inaugurated on 6 th October 2012, at the hands of Mr. Robert Prechter, Jr. the world s first E-library for Technical Analysts continues to grow. A world that is short on time to travel, you can check-out books, return them as now you have the E-Library that you could access for ethically obtained, copyright respecting readings using any of your favorite devices: Whether based on windows, apple, android, kindle or even nook! As a well rounded professional you surely wish to read on negotiation techniques, VBA programming, Statistics, business biographies, investment classics and a whole host of subjects. Yes, the R.N. Elliott ATMA E-library of Technical Analysis regularly stocks up on varied titles that take care of holistic professional interests of Technical Analysts! Some of the latest e-book additions in the Library: Access E-books as well as audio-books on Technical Analysis, Trading Strategies, Quantitative Finance, and Back-testing, Algorithmic Trading, Investment Psychology, Hedge Funds, Behavioral Finance & lots more! ATMA Members & Affiliates, except for the student affiliates, can access the library 24X7 by just logging into ATMA s website. In case you still don t have your PIN No., please feel free to contact ATMA Office and enjoy reading! Accessible on your favorite Gadget! NOVEMBER ATMASPHERE

22 PAST EVENTS UPDATES CHAPTER DATE SPEAKER TOPIC FUTURE EVENTS UPDATES CHAPTER DATE SPEAKER TOPIC Delhi Dr Sanjay Sinha Elliot& Fibonacci Understanding The Eternal Relationship Mumbai Mr. Mitesh Thacker New Moving Averages That Can Help Improve Your Trading Results Bengaluru Mr. Krishna Rao P S Using Trendlines and Fibonacci Mumbai Mr.Atul Suri Trading for a Living Mumbai Mr. Ambareesh Baliga Delhi Mr. Sachin Aggarwal The Games Promoters Play - In the market as well as in the financial accounts Stock Markets, Charts and Profit Making 20 ATMASPHERE NOVEMBER 2014

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