ATMASphere_July_2014

CONTENTS Letter from the President - Page 3 Editor’s note - Page 4 Discipline in trading by Sumeet Jain - Page 5 Measuring Trades with Volume by Ananth Madhav – Page 6 Intraday Trading with Cups by Rajat Dutta – Page 9 Dow Award Paper Review – Using Style Index Momentum to Generate Alpha by Claudia Mincucci – Page 11 Book Review - Fibonacci Analysis by Sahil Vijay- Page 14 Past Events Update– Page 17 Past WEBathon Updates – Page 18This newsletter is produced by the Association of Technical Market Analysts. All comments and editorial material do not necessarily reflect the organization'sopinion 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 noresponsibility for errors or omissions.JULY 2014 ATMASPHERE | 2

LETTER FROM THE PRESIDENTDear Colleagues,It’s a delight to place before our membership as well as anyone interested in the field of Financial Technical Analysis, yetanother excellent issue of ATMAsphere. The sense of inspiration with which the knowledgeable share their knowledgewith anyone interested continues very well.At a point in time, where new highs are sprouting up in almost every important equity index in the world, a sense of rejoice brings with it asense of complacence too. Professionals, who are committed full time to markets, seldom stray from the path of continued self learning.ATMA Chapters are in the process of being re-vamped. New chapters are in the process of coming up and existing chapters will achieve betterfine-tuning.The urge to constantly better ourselves keeps us continuously open to solicit quality executives. Any recommendations for young professionalswith a minimum experience of one year and up to three years, from the fields of communications, event management, web-mastering, clientservicingmay be forwarded to careers@atma-india.netSincerely,Sushil KediaJULY 2014 ATMASPHERE | 3

EDITOR’S NOTEIn this issue -1. Sumeet Jain explains the role of discipline in the life of a trader in his article – Discipline in Trading.2. Ananth Madhav portrays the objective of volume in trading in his piece – Measuring trades with volumes.3. Rajat Dutta illustrates two trading setups for the short term trader in his first article - Intraday Trading with Cups.4. Claudia Mincucci gives another great review of the Dow Award winning paper of 2008 about Style Index Momentum to generate Alpha byTibbs, Eakins and De Shurko5. Sahil Vijay gives a review on one of the most interesting and useful books for any trader – Fibonacci Analysis by Constance Brown.We await your feedback on ATMASphere. Please let us know what we can do to deliver content that meets your needs by sending an email toeditor@atma-india.net. You can also subscribe to ATMASphere completely free by clicking here.Sincerely,Gunjan Duaa.JULY 2014 ATMASPHERE | 4

Discipline in TradingOxford dictionary explains discipline as: “The practice of trainingpeople to obey rules or a code of behavior, using punishment tocorrect disobedience”. We are going to discuss the same, but only inthe context of Trading, trading in the stock, commodities and forexmarkets. The parts of the above definition we need to focus on are“Obey Rules” or “Code of Behavior”, “Punishments” and inculcating ahabit of obedience instead of using punishment to correctdisobedience.Trading demands discipline. Without which one may not survive themarkets, as in not able to trade another day. A trader has to bedecisive and rely on certain traits, about him; certain market factorsare it charts or any other rules he follows and be consistent to makemoney. He cannot afford to give way to emotions and takeunacceptable trading losses. The most important factor as manywould say is having a Trading plan. What I would like to point out is,having a trading plan is not enough. Sticking to the trading plan ismore important. One can recall here the words we needed to focusfrom the definition, Code of Behavior and Obey Rules.A trading plan is nothing but a set of rules, for some it’s a set oflevels, price targets, stoploss, etc. Call it by any name, does notmatter. They are a set of rules and one must militantly stick to them.The two biggest enemies that a trader has are Greed and fear. Theyare with him all the time. They follow him everywhere. They aremore potent when he is in front of the screen. If a position is yet tobe taken, greed can make a trader take a position, which was notmeant to be taken in the first place. If fear is more emphatic in themind then he will be frozen and unable to take up a new position.Sounds confusing, isn’t it? Militantly sticking to the trading plan,keeping emotions out of one’s mind would be helpful in suchsituations. One cannot imagine what happens to a trader who givesway to emotions and trades. An inexperienced or better to use theword-undisciplined trader at times is reluctant (greedy) or afraid(fearful) to take a loss, gives birth to another emotion called Hope.Hope seldom works in the stock market. Sitting in anticipation thatthe level will come again is a worst thing a trader can do. Similar is inthe case of booking profits. After these examples I think its clear whyI emphasized on the sentence: “Militantly stick to the rules”. A bigmarket wizard has said: Having no position is also a strategy. Thereare times when one should sit out and wait for proper entry.To sum it all up, one must stick to all the rules. Avoid trading onhunches. Make an initial position only when you are supposed to,book a profit or a loss at a level, which was pre-decided, whichevercomes first. At times having no position is also a strategy. If oneexercises the disciplinary actions outlined above, he/she has an edgeand has greatly enhanced the likelihood of being successful.Sumeet Jain, CMT is currently working as asell side analyst at Asit C Mehta InvestmentIntermediates catering to both institutionaland retail clients. He has more than 8 yearsof market experience and has been a activecontributor on both print and electronic media. He can be reached atsumeetsj@gmail.comJULY 2014 ATMASPHERE | 5

Measuring trades with VolumeI am taking a detour from trading system to discuss something verybasic, which is price and volume relationship. Volume is a measure ofhow much of a given financial asset has been traded in a given periodof time. It is a very powerful tool, but it’s often overlooked because itis such a simple indicator.Is it volume which causes price change, or does price cause volumechange- the hen or the egg, which comes first??- H M Gartely, profitsin the Stock Market.The stock market adage that “volume precedes price “is really morethan just an adage or a memorable saying. In fact volume is adetermining factor in market strength and trend direction.Today with the development of sophisticated software’s along withmore readily available market data, traders can access informationthat was previously in the exclusive realm of BIG traders.Volume generally precedes the price.When price and volume are analyzed in combination we get 6relationship patterns.Expanding volume with price moving Higher or LowerContracting volume with price moving Higher or LowerSteady volume with price moving Higher or LowerExpanding Volume with Price moving Higher or Lower:When the market is in an uptrend (characterized by higher highsAnd higher lows) or in a downtrend (Characterized by lower highs andlower lows), we see conviction among traders which displays itself asexpanding volume in the direction of the trend.Volume analysis provides a trader with a clear and focused view ofthe collective behavior of financial market participants.Volume is an essential component of every price move and pattern.A major strength of volume analysis is its ability to track the tradingactivity of the largest market participants. That is mutual funds, largehedge funds, and institutional players. These big players oftenintentionally camouflage their positions. By using volume analysis atrader has the ability to recognize their volume patterns and uncovertheir footpaths. The most common method for plotting volume is thestandard bar plot. These days’ volume bars are colored making iteasy for the traders. Days which close higher than the previous daysare colored Green and days which close below the previous days arecolored RED.JULY 2014 ATMASPHERE | 6

Contracting Volume with Price moving Higher or Lower: WhenVolume contracts as the Price moves higher; the volume pattern isnot confirming the price trend. This means that the conviction behindthe trend is not strong. The absence of new entrants decreases theodds that existing trend will continue, a reversal is possibleConsistent Volume with price moving Higher or Lower: Pricemovement with a consistent volume pattern shows buyers andsellers are in agreement and that the trend should continue.JULY 2014 ATMASPHERE | 7

To be continued (In the next issue will discuss continuation patternsand the role volume plays in them)Ananth Madhav, A CMT aspirant, is a full timetrader having 6 years of experience, teachesTA .You can reach him onananthmadhav@live.comJULY 2014 ATMASPHERE | 8

INTRA DAY TRADING WITH CUPSGAP UP/DOWN REVERSAL Long and shortGaps are common and in a trending market they occur on a regularbasis. The first strategy which I am going to discuss is the GapUp/down strategy for long and short trades. Usually when a gaphappens market stays above the low of the first 2 candles and thenmove towards the gap up trend, if after a while market stalls a littleand makes a cup type reversal on the up or downside, that is the firstsign of a temporary reversal, the trade will come when the pricebreaks the low made of the first candle.In the chart of Nifty on 18 th of July, the index made a gap down andthen started reversing after making a cup low, from there thebreakout of the day’s high was a buy signal with a target of theprevious day’s close that got fulfilled during the day.In the same chart market gapped up on July 21 st and made aconsolidation cup pattern and finally broke down below the low, thatwas a sell signal for a target of previous day’s close, although pricedid not reach that level, but went close to that point.Gap plays are for experienced traders only, a stop and reversestrategy need to be used if the trade goes against your trend. Thesetrades are difficult to master; one should wait until one has alreadysuccessfully mastered breakout trading.TWO DAY HIGH PATTERN AFTER CUP BREAKOUTThis pattern too involve a cup formation , the difference is that it isnot about gaps , in this pattern we have to first look at previous day’shigh or low , after that we have to see the consolidation , if theconsolidation takes the form of a cup , then we can buy or sell at thebreak of previous days hi or low , this is a very reliable pattern , thetarget for the move usually is the depth of the cup from high to lowbut traders can use different strategies for target.JULY 2014 ATMASPHERE | 9

Rajat Dutta is a system designer and a fundmanager for Moneyrizing Wealth ManagementCompany. He is a trader since 2000. Hisspeciality is trading micro trends with a focuson analyzing and trading Stocks, Option andcommodities. He can be reached atrajat@moneyrizing.comOne thing that one should keep in mind is that these are intraday patternsbut the accuracy and targets are dependent on the longer term trend, Inthe first chart we see that bank nifty consolidated in a cup formation andthen gave a buy call above previous day’s high, the target for that movewas achieved but the next signal which was a sell signal, gave a sell butwasn’t able to achieved the target fully because the trend was up..Becauseof that we have to see if the pattern break is towards the trend or againstit, that very thing plays a crucial role in the accuracy of the pattern. Traderswith lower risk appetite should trade the pattern only when it is with thetrend, trading against the trend is usually more riskier but sometimes verybeneficialJULY 2014 ATMASPHERE | 10

Dow Award 2008 - Using Style IndexMomentum to Generate AlphaBy Samuel L. Tibbs, Ph.D., CFA , Stanley G. Eakins,Ph.D. William DeShurko, CFPStyle Index Data and Portfolio StructureData from January 1969 to December 2005 (monthly)Authors examine momentum across a broad range of economic andmarket conditions.Indexes analyzed are:This research examines momentum on Russell style indexes toexploit style momentum by incorporating relative style indexperformance into tactical allocation strategies.The investment style is a set of expectations on equities for longtermperformance potential. Usually ETF and founds are “style'structured and aids investors to decide for a specific type of marketexposure.Several studies show that stocks selected on size and book-to-marketratio exhibit momentum as strong as that in individual stocks andindustries.However, constructing such portfolios can be costly, significantlyeroding returns.Style indexes avoid concerns about firm size, fundamentals, andshort-sale constraints and provide low transaction costs.Russell 2000 Growth (Value) for Small-Cap Growth (Value),Russell Mid-Cap Growth (Value) for Mid-Cap Growth (Value)And the Russell Top 200 Growths (Value) for Large-Cap Growth(Value).Data covers 37 years, but the results cover a 34-year period due tothe 36-month formation period performance.Searching for momentum, data is analyzed in various formationperiods to rank each indexes based on their return over that periodof time.Then for each index held, returns are calculated for various holdingperiods.The top (bottom) ranked portfolio would consist of the style indexesselected, and held in 6 month increments, through time based on thehighest (lowest) performance in the 24-month formation period.JULY 2014 ATMASPHERE | 11

Profitability of Various Style Index Momentum StrategiesStrategy of buying the top performing index and shorting the bottomperforming index.Results are generally positive and statistically significant, especiallyfor the shorter holding periods.The 12,1 portfolio was the highest performer for the 34 year period,but not always the top performer.However, the top performing strategy was consistently a mediumtermmomentum with prior performance in the 8 to 1 4 monthrange.Based on these results, the paper focuses on portfolios composed ofone style index with a 12 month formation and 1 month holdingperiod.Performance of 12, 1 Style Index Momentum PortfoliosExhibit 3 reports the annualized results for six 12,1 portfolios, Long-Short 12,1 portfolio, the six Russell indexes used to build thoseportfolios, and other indexes for comparison.Authors found the Long-Short 12,1 portfolio has an annualized returnof 9.25% and a Beta estimate of -0.01.The top 12, 1 also outperforms all of the Russell style indexes andother indexes on return, Sharpe ratio, Treynor ratio, and Jensen’salpha.More importantly, on a risk-adjusted basis this strategy providesexcess returns on a risk-adjusted basis as well.On an annualized return basis the returns for the periods analyzedvary from 3.08% to 13.71%, depending on the period analyzed andaveraged 9.25%.Excluding the two largest return periods from ’72 to ’80 the Long-Short portfolio still returns an annualized 5.08%.On an individual calendar year basis, the worst Long-Short portfolioreturn was -20.35% in 2000 and the best was 50.11% in 1999.JULY 2014 ATMASPHERE | 12

The top and bottom positions are held for an average of 5.65 and6.10 months, respectively.ConclusionStyle index momentum is particularly interesting since it provides adiversified, low-cost trading strategy to exploit it.Such style index momentum trading strategies have outperformedon both a raw and risk-adjusted return basis, with the long minusshort portfolio generating an average 9.25% annual return over the34-year period analyzed.Although the excess returns vary, they are robust through time.This paper is available to the public and it could be found athttp://www.mta.org/eweb/docs/pdfs/2008DowAwardWinner.pdfClaudia Mincucci is a trader since 2008.Herspecialty is trading micro trends with a focus onanalyzing and trading Stocks, Options, FX, ETFson a daily basis on the US and Canadian StockIndices.She is a graduate from the University of BuenosAires, where she studied Accounting and Business Administration.Average Holding PeriodShe is pursuing her CMT designation and currently lives in Montreal,Canada. She can be contacted at cmqcca@yahoo.ca.To evaluate the momentum persistence, the portfolio was analyzedon a monthly basis and rebalancing was only required about twice ayear.JULY 2014 ATMASPHERE | 13

BOOK REVIEWBOOK: Fibonacci AnalysisAUTHOR: Constance (Connie) Brownentry and exit points for proper risk management and to withstandwhipsaws.The book elegantly depicts how price targets whether inexpansionary or otherwise market conditions can easily beestablished with the use of proper Fibonacci analysis. The bookdepicts how Fibonacci analysis can be used to project price targets,establish support and resistance zones to better entry and exit levelsfor better risk management, a trader working primarily on the basisof this remarkable analytical tool can set his whole trading platform.The book remarkably depicts dramatic clarification on howconfluence zones, derived from shorter time horizons that appearmultiple times, may have long horizon implications for a market withthe help of real time examples. It feels like flowing with the rhythmof the markets.The book is an eye opener and raises the dimensions to whichFibonacci Analysis can be applied to technical analysis. ConstanceBrown magnificently portrays how Fibonacci analysis can be used tocreate support, resistance, and expansion price targets. The book is alandmark in the field of technical analysis. The book FibonacciAnalysis goes into far greater detail on the correct use of creatingconfluence zones by overlapping Fibonacci ratios. The targets areused for market entry, exit, and risk management.Professionals from all fields make use of Fibonacci analysis andtechnicians apply these tools since long. But the way, Constancebrown derives these ratios and further the way confluence zones aredeveloped from various levels takes the Fibonacci analysis to newerheights. In fact, a whole trading system can easily be developedprimarily based on Fibonacci analysis. The price pivots from whom todraw these ratios and to establish confluence zones to establish allimportant support and resistance zones go a long way in creatingThe book is a gift of god to traders and analysts. Connie brownbeautifully depicts the use of gaps in the analysis, swing traders canbe hugely benefitted from the range selection methods depicted inthe book. Constance brown reveals the proper way of taking theprice pivots for pin point accuracy. The spike reversals are to beignored. The book reiterates the importance of taking proper pricelevels and the confluence zones derived from them. The marketsrespect these crucial confluence zones in the past as well as in thefuture so they become of utmost import for any analyst and trader.The book explains how to use Fibonacci analysis to different marketconditions such as all time highs, expansionary market phase, fastmoving markets and stocks, where sharp corrective reversal are mostprobably going to take support and much more.JULY 2014 ATMASPHERE | 14

This masterly work of Constance brown shows the years of hard workand learning put into by her and selfless contribution from her to thefield of technical analysis as she has not kept anything to her andgave the magnificent analytical tool to generations to come. Thisbook is a must read and implement for every trader and analyst andaspirant of technical analysis.Sahil Vijay, CMT is in the financial markets forthe last nine years and currently working as aTreasury Analyst with Capital Bank. A Bankerby profession he is looking after Investmentand takes trading decision in Debt, Equity andForeign Exchange markets. He uses ElliotWave Theory, Gann Studies, Bollinger Bands,Fibonacci Analysis and Momentum Oscillatorslike RSI to drive confluence points in various markets to establishlow risk –high yield set ups, he also include inter market analysisand global indices in my study to draw better understanding of theunder currents in global financial markets.JULY 2014 ATMASPHERE | 15

World's FIRST E-Library of Technical AnalysisThe R. N. Elliott ATMA E-library of Technical AnalysisInaugurated on 6 th October 2012, at the hands of Mr. RobertPrechter, Jr. the world’s first E-library for Technical Analysts continuesto 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 forethically obtained, copyright respecting readings using any of yourfavorite devices: Whether based on windows, apple, android, kindleor even nook!As a well rounded professional you surely wish to read onnegotiation techniques, VBA programming, Statistics,business biographies, investment classics and a whole hostof subjects. Yes, the R.N. Elliott ATMA E-library of TechnicalAnalysis regularly stocks up on varied titles that take care ofholistic 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, TradingStrategies, Quantitative Finance, and Back-testing, AlgorithmicTrading, Investment Psychology, Hedge Funds, Behavioral Finance &lots more!ATMA Members & Affiliates, except for the studentaffiliates, can access the library 24X7 by just logging intoATMA’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!JULY 2014 ATMASPHERE | 16

PAST EVENTS’ UPDATESMr. Rajandran Chapter :Date:06-07-2014BangaloreTopic: Amibroker AFL Coding.1. Understanding AFL ProgrammingConcepts2. Creating Simple Scanners andExploration3. How to create Custom and compositeIndicators4. What is system trading?5. How to create a Trading System usingAFL6. How to create Multi timeframeindicators in Amibroker.Mr. Parag Parikh Chapter :Date:21-07-2014MumbaiTopic: Designing, Testing and AutomatingTrading SystemsSub-Points:1. Understanding stock market behaviour.2. Why do smart people make big moneymistakes?3. How mental shortcuts frame your error.4. Greed can become your graveyard assomeone is always waiting to exploityour greed.Mr.Sunil Minglani Chapter :DelhiDate:26-07-2014Topic: Trailor of the new Bull MarketSub-Points:1. Is the new bull market started?2. Life expectancy of this uptrend.3. Current Technical setup(PatternAnalysis).4. Approx targets for this move.5. Sector analysis.6. Selected stocks which can lead thebalance move.7. Open discussion.JULY 2014 ATMASPHERE | 17

FUTURE EVENT UPDATEDr C.K. Narayan Chapter : Mumbai Date:23-08-2014Topic: Trailor of the new Bull MarketSub-Points:1. Different aspects of Technical Analysis.2. Usage of Analysis Form.3. Shortcomings and solutions for technical analysis.4. Future of Technical Analysis.5. What should one do with Technical analysis in the coming years?JULY 2014 ATMASPHERE | 18

PAST WEBATHON SERIES UPDATESDr. Musa KaiserMs. Sonia DhallWEBathonSession 8Date: 01-07-2014Topic: Technical Analysis of FundamentalsSummary:1. The Session will cover how simple TA can beapplied to Fundamental Ratios. Any techniqueis useful only if it can tell us something aboutthe likely future of the Market with a highdegree of confidence. We will demonstrateexactly this point by applying it to the Nifty.WEBathonSesison 9Date: 08-07-2014Topic: Day Trading – An Approach toConsistencySub-Points:1. Types Of Day Trading2. Important Factor - Cost3. Daily Bread Butter4. Alpha FactorA Strategy To Day Trade For BeginnersMr. Rishi KohliWEBathonSession 10Date: 24-07-2014Topic: Combining Options with TechnicalAnalysis for Profitable Swing TradingSub-points:1. Why Use Options for Swing Trading -How different from Stock or Futures?2. Continuation and Reversal Patterns3. What Options Strategies to use forDifferent Patterns4. Trading Options based on signals fromcommon technical indicators like RSI,MACD and Bollinger Bands Advantage ofUsing Options for Trend FollowingJULY 2014 ATMASPHERE | 19

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Benefits of Membership with the ATMAApply for your ATMA Membership Today!JULY 2014 ATMASPHERE | 21

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