OCTOBER 2014 ATMASPHERE 1

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2 CONTENTS Letter from the President - 03 Editor s note - 04 Analysis of Market phases using 50, 200 SMA part 2 by Ananth Madhav - 05 Understanding Market Profile by Pit Trader 08 The Harmonic Trading Patterns by Jay Purohit- 11 Dow Series Paper review of 2003 The Janus Factor by Gary Anderson, Reviewed by Claudia Mincucci 14 The Master Swing Trader Book review by Sahil Vijay- 18 Past and Present Events 21 Future Events Updates 21 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. ATMASPHERE 2

3 LETTER FROM THE PRESIDENT Dear Colleagues, Greetings of the Festive Season! May the Light from the Lamps brighten our minds, work-desks, account balances through the year ahead. ATMAsphere is slowly beginning to witness contributions from diverse authors & on invigorating subjects of our interest. Here's the latest issue. Do read, discuss & expand on the collective learning through appropriate forums. Sincerely, Sushil Kedia ATMASPHERE 3

4 EDITOR S NOTE In this issue - 1. Ananth Madhav continues the explanation of market phases using moving averages, in his second 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 shares the ever effective harmonic patterns for trading reversals and finding price targets. 4. Claudia Mincucci presents yet another brilliant review of the MTA s Dow Award winning paper of 2003 The Janus factor 5. Sahil Vijay presents a great review of the book on one the most important topics for a trader who wants to build wealth The Master Swing Trader by Alan Farley. 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. ATMASPHERE 4

5 Analysis of Market Phases using 50, 200 SMA Part 2 A brief recap of the last article. The article was about defining market phases using 50 SMA and 200 SMA. The two daily moving averages which when crossover signifies the change in trend and the continuation explains the bullish phase. In the last article we discussed about Accumulation phase (Price Close > 50 SMA & 50 SMA < 200 SMA) BULLISH PHASE: In Bullish Phase Price Close > 50 SMA and 50 SMA > 200 SMA.Both the SMA s slope up in this phase. Series of Higher Highs and Higher Lows are often seen during this trend. In this phase, Buyers out number Sellers or in other words demand exceeds supply. Buy and Hold strategies usually make more money during kind of trending move. Distance between 50 SMA and 200 SMA tells the strength of the bullishness. Price can sometimes dip below 50 SMA and take support at 200 SMA and bounce back above 50 SMA. Often that can be a good entry point into the ongoing trend. Let s look at few chart examples. The following is Nifty Spot Chart. CNX AUTO, CNX IT, CNX PHARMA are the Indices which are trading above the 50 & 200 SMA currently. Tactically, in this phase one can enter in long positions, when price dips below 50 SMA and bounces back above it. No strategy should be used alone so one can initiate longs by adding filter of price volume breakouts, Break of previous Swing Highs, 52 Week Highs / New Highs (the list if not exhaustive). ATMASPHERE 5

6 The following is AURO PHARMA chart. One can see that in the Price move from Rs 200 to 1000, both 50 and 200 SMAs were sloping up, maintaining constant distance between them. Distance between 50 SMA & 200 SMA reduces. Prices donot make New Highs or Higher Highs in this Phase. 50 SMA & 200 SMA become flat. Volume decreases when compared to Bull phase. Divergence on momentum Indicators like RSI is seen. EUPHORIA / END OF BULL PHASE: Euphoria is the Phase where Retail Investors participate in large numbers. Often this would be the end of Bull Cycle and Entry and one of the main reasons why retail investors make huge losses on their Investments. Profit Booking part / full should be the main tactic, or tightening the Stop losses on Investments should be done in this phase. WARNING PHASE: End of Bull phase and Warning phase overlap each other. Close < 50 SMA, 50 SMA > 200 SMA. An astute Investor should know when to reduce his long positions or Exit his/her Investments. 50 SMA will be sloping down, where as 200 SMA can be flat. Start of Warning Phase can be sometimes violent with overnight Bad News, ATMASPHERE 6

7 Huge gap downs. Prices can dip below both 50 SMA, 200 SMA within 2-3 sessions. Long term Trend lines break often Signaling Trend Change. I will continue this article in the next issue. One of the main difference between Warning phase and Bull phase is that when Prices dip below 50 SMA in Bull phase, within short period of time price jumps back above 50 SMA. In Warning phase prices dip below 50 SMA and they don t Jump above 50 SMA. Even if price Jumps it will fall below 50 SMA within a short period of time. Lower Highs are seen in this phase. A good trading tactic can be to short if price fails to cross over the 50 day SMA. 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 ATMASPHERE 7

8 Understanding Market Profile Implementation of value area in auction market theory in previous article we have seen that how to calculate value area If you remember value area is 70% of the total range of the day, high of that value area is called value high and low of that value area is called value low Centre of that value area is called POC (point of control). In this article we will go further and explore how to use value area in order to make informed trading decision. Auction market theory distinguishes market activity in two major parts. 1. Responsive activity 2. Initiative activity Responsive Activity In above chart, price open above previous day's entire range. Then during the first 30 minutes of open price tried to probe previous day s high and got strong responsive activity and pushed price back in current opening range. Such responsive activity near important ATMASPHERE 8

9 reference levels during opening session is called as open test drive. It's a common occurrence during price discovery where market participants may test previous established support or resistance. Confirmation of such support/resistance generates extra confidence and provide good risk reward entry points. Initiative Activity In above chart price open within value area, which is a sign of acceptance of previous established value. Usually when market open within previous value area it tend to rotate within that range, so it is not a good idea to execute trend following systems in such open types. Here in above chart as shown by arrow as auction matured and when market participants thought that fair price is higher, auction witnessed initiative activity and pushed prices up. ATMASPHERE 9

10 To summarize responsive activity is always above or below previous days value area and initiative activity is always within previous day s value area. Based on common occurrence and observation traders created lot of setups but everything revolves around these 2 key concepts of a responsive and initiative activity. Side note: In practice, initiative and responsive activity based on candle chart is little difficult to observe. That's where nowadays foot print charts are getting popular. As homework you can search this on google/youtube. 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 ATMASPHERE 10

11 The Harmonic Trading Patterns Primary Derived Ratios : = Square root of the ( ) = Fourth root of or Square root of ( ) 1.13 = Fourth root of or Square root of 1.27 ( ) 1.27 = Square root of ( ) Harmonic Trading is a methodology that utilizes the recognition of specific price patterns and the alignment of exact Fibonacci ratios to determine highly probable reversal points in the financial markets. We are very well familiar with Fibonacci ratios. These ratios are found in nature, human body, plants, DNA, solar system, art, architecture, music, and even in the stock market. Fibonacci retracement is a very common tool among technical traders and is based on Fibonacci sequence discovered in the thirteenth century by Leonardo de Fibonacci de Pisa. Most of us (technical analyst) use retracement levels to find out resistance and support or we can say entry and exit levels. Harmonic Patterns take price patterns to the next level by using Fibonacci numbers to define precise turning points. When these turning points are identified correctly, trades are executed at a price level where the cycle is changing. Since Fibonacci Retracements play a critical role in the formation of harmonic patterns, understanding of these ratios is a must. Primary Ratios : (Directly derived from the Fibonacci Number Sequence) = Primary Ratio = Primary Projection Other Ratios : 0.50 = = ( ) or = Square root of 0.50 ( ) 1.41 = Square root of 2 ( ) 2.00 = (1+1) 2.24 = Square root of 5 ( ) = 314 = Pi ( ) = ( ) Harmonic Patterns are nothing but M type and W type patterns which are one of the most unswerving patterns, if identified properly. The real beauty of these patterns are that these enables us to enter with the trend in a high probability reversal zone with minimal ATMASPHERE 11

12 risk. It provides immaculate trade setups with good risk reward ratio. The only thing one needs to understand is that it s a rules-based method which requires discipline. Harmonic patterns provide an excellent structure for consistent, successful trading. There are few Fibonacci ratios which are commonly used while identifying harmonic pattern. These are 38.20%, 61.80%, 78.60%, 88.60%, 50%, 113%, 127%, 141%, %, 200%, 224%, %. There are many types of harmonic patterns and we will start with AB=CD pattern. Ideally,the pattern where the C point retrace to either a or works much better than that of others. This is how AB=CD looks alike : AB=CD Pattern AB=CD is a four point structure and the only pattern with this type of structure (others are five point structure). It is a price structure where each price leg is equivalent. The Fibonacci numbers in the pattern must occur at specific points. The initial price segment is partially retraced and followed by equidistant move for the completion of pull back. The reciprocal ratio of the C point retracement of the AB leg usually indicates which BC projection is utilized to define the Potential Reversal Zone (PRZ). The reciprocal ratios that complement the AB=CD structure are as follows: C Point Retracement BC Projection 38.20% 224% or % 50% 200% 61.80% % 70.70% 141% 78.60% % 88.60% 113% ATMASPHERE 12

13 In Eg 1; after a sharp fall from 153 to (AB), Allahabad Bank retraced upto 61.80% at (C Point) and then stock fell to levels (D Point) which is precisely % reciprocal of BC. Thus, we have observed the formation of Bullish AB=CD pattern in Allahabad Bank on October 30, 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 In Eg 2; After the sharp rise from to (AB), Andhra Bank retraced precisely up to 61.80% at (C Point) and then stock rose to levels (D Point) which is % reciprocal of BC. Thus, we have observed the formation of Bearish AB=CD pattern on March 13, In the next part of the series, we will discuss about Bat and Gartley Patterns. ATMASPHERE 13

14 Winner of Charles H. Dow Award The Janus Factor By Gary Anderson Author base this model in the concepts of feedback and relative strength to portray the market as a system of capital flows. As the best companies seek feedback continuously and in the process convert information into long-term success, market does. There are two sorts of feedback, positive and negative. A market trending is an example of positive feedback. When traders respond to market events with a trend-following behavior, they are closing a feedback loop. Positive feedback produces a trend. And each feedback results in an accelerating trend continues until some limit of the system is reached. Negative-feedback systems are stable systems with values fluctuating within a narrow range. When negative feedback drives, traders s response may be characterized by contrarian thinking and price action tends to be choppy or corrective. A New Model of Relative Strength The sum of the offensive benchmark s daily returns (flat-to-rising days) over some period of time (i.e. 100 days) is divided into the sum of the target s returns for the same days and over the same period A score above 100 indicates that the stock is stronger than target s cumulative and exceeds the offensive benchmark. The sum of the defensive benchmark s returns on negative-return days is divided into the sum of the target s returns for the same days. A result of 110 in this case indicates that the target is ten percent weaker than the defensive benchmark, or its loss is greater than market performance. A matrix, in which the vertical axis displays offensive performance and the horizontal axis shows defensive performance, serve to graphic offensive and defensive performances of each stock. Each target within the universe is compared separately to both offensive and defensive benchmarks. In Figure 5, a target marked with an asterisk has out-performed the benchmark both offensively and defensively. The Benchmark Equivalence Line (BEL) represents the universe s average performance of all possible combinations of offense and defense. As periods of market decline stress stocks ability to defend against loss. When the broad market is rising the probability of opportunity-loss is greatest. Two benchmarks are required, one to measure offensive performance on flat-to-rising days and the other to measure defensive performance on declining days. ATMASPHERE 14

15 During periods of positive feedback, the flow of capital goes from weak targets SE of the BEL to stronger targets NW of the BEL As the universe expands, the strongest stocks push well into the NW quadrant. Figure 7 shows the 200-stock universe in March 2000, near the end of that expansion phase. During periods of negative feedback, capital flow across the BEL is reversed. Traders buy only once stocks are considered cheap, and profits, when they come, are taken quickly on rallies. Negative- feedback periods produce a southeasterly flow of capital and cause the universe to contract. As a result, stocks contracts around the benchmark and arrange themselves along the BEL Relative strength differences (NW-SE) are small and eclipsed by differences based on volatility (SWNE). Figure 6 and 8 Red Shift General rule is the most profitable opportunities consistently come from targets furthest from the BEL. During bullish expansions, stocks furthest from the BEL book the strongest gains. At bearish expansions the best short profits are from the weakest stocks. The Spread The Spread is calculated as the difference in forward performance of relatively strong vs.relatively weak targets. To make the comparison, all targets NW of the BEL on day d are identified, as well as all targets SE of the BEL. Then the average performance for each set of stocks on the following day (d+1) is calculated, and the difference between the two averages is determined. Daily spreads are cumulated to create The Spread. ATMASPHERE 15

16 As shown in Figure 9, periods during which The Spread rises (shaded) indicate an expanding universe driven by positive feedback. Testing The Spread The Spread is used to determine whether the universe of 200 stocks is expanding or contracting. If The Spread rises long positions are selected from relatively strong stocks and short positions are selected from relatively weak stocks. Positions are reversed when The Spread falls (universe contracts). The net percentage change (close to close) is cumulated. Choosing only the strongest and the weakest ten percent of the universe. The back-test was made assuming stock sets were incremented by ten-percent from 10% until 50%. First set posted a gain of 404% with a maximum draw-down of 14%. Over the same period (4.3 years), the 200-stock average gained 69%, with a maximum draw-down of 39%. Unshaded areas bracket periods during which The Spread fell, the universe contracted, and traders were risk-averse and contrarian. Traders may use The Spread not only to identify profitable trending periods but to avoid difficult markets as well. Indeed, these indications are consistent enough to support reliable trading rules. 1.When The Spread is rising, and relative-strength leaders are advancing, buy the strongest stocks and groups; 2.When The Spread is rising, and relative-strength laggards are declining, sell or sell short the weakest stocks and groups; 3.After a decline, if The Spread is falling and relative-strength laggards are advancing, buy the weakest stocks and groups. The best overall performance came from the set of stocks (10%) nearest the two relative-strength extremes of the universe. This result is consistent with the Red Shift phenomenon discussed above. Postscript Markets make sense. Price series are not chaotic. At bottom it is hope and fear, measured by the rhythms of expansion and contraction in a process as relentless and as natural as breathing or the beating of a heart. This paper is available to the public and it could be found at or JOURNAL of Technical Analysis Summer-Fall 2003 Issue 60 ATMASPHERE 16

17 Claudia Mincucci is a trader since 2008.Her speciality is trading micro trends with a focus on analyzing and trading Stocks, Options, FX, ETFs on a daily basis on the US and Canadian Stock Indices. She is a graduate from the University of Buenos Aires, where she studied Accounting and Business Administration. She is pursuing her CMT designation and currently lives in Montreal, Canada. She can be contacted at cmqcca@yahoo.ca. ATMASPHERE 17

18 component because it helps to exhibit how one can study the state of the market and from there to predict the future state of it and explains the types of trading to nurture budding aspirants of technical analysis and enlighten the existing practitioners. In some books the authors explain the complex stuff from the start, but the novice gets lost and sometimes quit the path before even the start of the journey. The author builds base and explains almost all the technical tools and studies in the first part of the book. THE MASTER SWING TRADER ALAN FARLEY Book Review The second part is titled THE 7 BELLS. In this part the author moves towards the next step, where one gets ready to know how to spot the opportunity. The reader now knows most of the technical tools and knows how to use them, now he finds out how to use these tools in different market scenarios to find opportunities to accomplish the goal to make money. This book is a must for in every technical analyst and market participant s library, especially for people who want to trade the directional trend of the markets to make money out of it. The term is Swing trading and that is what the book focuses on. It s a step by The 7 bells are interesting and a must for every trader to know and step approach towards making a system based on directional trading. The best part of the book is that it not only explains the way understand. Dip Trip, Coiled spring, Finger finder, Hole in the wall, rd to trade directionally using technical analysis studies but it helps one Power spike, Bear hug and 3 watch are the seven strategies that overcome to problems regarding the thought process in the final chapters. author present to sharpen ones trading skills and to become a better trader. The book is divided into three parts. The first one is titled GATEWAY TO SHORT TERM TRADING. In this the author explains the various terms regarding the trading activity. How to prepare, what to expect and how to approach the trading game. This I think is an essential The third part of the book explains how to make a trade. The reader now knows most of the things that will bring him towards the final step. This part explains the entry and exit scenarios and how to master ones mind and tools that traders can use to maximize ones reward and minimize losses. The aim of every trader should be to ATMASPHERE 18

19 master a strategy technically and mentally so that he can be in a state of mind to make the most out of the capital one has by lowering the probability of false trades and a mind which can accept all the market situations. All in all, this is a magnificent book which focuses on the art of swing trading. The best part is that it covers everything from A to Z that one requires to trade directionally and is explained in a way that everyone can understand it well. 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. ATMASPHERE 19

20 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! ATMASPHERE 20

21 PAST EVENTS UPDATES CHAPTER DATE SPEAKER TOPIC FUTURE EVENTS UPDATES CHAPTER DATE SPEAKER TOPIC Delhi DR C K NARAYAN Structuring Technical Analysis to work for you Delhi Mr. Sachin Aggarwal Stock Markets, Charts and Profit Making Delhi Dr Sanjay Sinha Elliot& Fibonacci Understanding The Eternal Relationship Bengaluru Mr. Krishna Rao P S Using Trendlines and Fibonacci Mumbai Mr.Atul Suri Trading for a Living Mumbai Mr. Ambareesh Baliga The Games Promoters Play - In the market as well as in the financial accounts ATMASPHERE 21

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