Technical Analysis of Stocks Commodities TASC JANUARY 2021
Technical Analysis of Stocks Commodities TASC JANUARY 2021
SHORT-TERM
PATTERNS
Which work best? 8
GOLD MOMENTUM
STRATEGY
International evidence 18
MANAGING TRADING
FEAR AND STRESS
Understanding the biological
processes 20
INTERVIEW
Kyle Crystal 32
QUICK-SCAN
n Target Rich Trades 38
JANUARY 2021
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CONTENTS JANUARY 2021, VOLUME 39 NUMBER 1
7 Algo Q&A
by Kevin J. Davey
The Traders’ MagazineTM Got a question about system or algo
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EDITORIAL
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Editor in Chief Jack K. Hutson 8 A Fresh Look At TIPS
Production Manager Karen E. Wasserman Short-Term Patterns
Art Director Christine Morrison by Perry J. Kaufman experience in formulating and
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Contributing Editors John Ehlers, patterns, but do you know which short, global macro and long-only
Anthony W. Warren, PhD. work best? These test results may for single managed accounts as
Contributing Writers Thomas Bulkowski, Martin Pring, help you find out. well as fund structures. Stocks &
Barbara Star, Markos Katsanos, Leslie N. Masonson,
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TREND DIRECTION AND PROBABILITY: MORE ON TREND DIRECTION AND homepage at www.traders.com under
THE BULL BEAR INDEX PROBABILITY: THE BULL BEAR INDEX “Readers’ Choice Awards—Historical
Editor, Editor, Winners.” We hope this helps.
I thoroughly I’m writing about the article in the No-
e nj oye d M i k e vember 2020 issue, “Trend Direction
Siroky’s article on And Probability: The Bull Bear Index,”
the “Bull Bear In- by Mike Siroky. I would like to pursue
dex” in the Novem- using his technique.
ber 2020 issue of I was wondering if there is coding
Technical Analy- available for this indicator so I can use
sis of Stocks & it on my trading platform?
Commodities and I would like to use Thanks a lot for your help.
it in my own trading. Antonio
However, I don’t understand how to
set up the Excel formula for the t.dist Editor: We asked a platform developer On a related note, we’d like subscrib-
function in Excel; perhaps you could about possible implementation on a ers to this magazine to know that voting
persuade Dr. Siroky to provide the trading platform, and they offered the in our annual Readers’ Choice survey is
Excel code. following thought. now underway! Results of this survey are
Thank you. One way to implement it could be used to determine the next set of Readers’
Tony for motivated readers to download and Choice Award recipients. Recipients of
use a third-party library such AlgLib, the awards will be revealed in our Bonus
Author Mike Siroky replies: MathNet, or MetaNumerics to imple- Issue of Technical Analysis of Stocks &
Here is the Excel command for the ment the “student’s distribution” used Commodities magazine, to be published
cumulative t-distribution: in the calculation of the technique. in February.
You first need the difference between Maybe someone reading this will Voting ends December 31, 2020. Visit
high and low probability normalized also have some suggestions or thoughts our website at www.traders.com to cast
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Type into a blank box: the product from other users and try trading systems, money
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6 • January 2021 • Technical Analysis of Stocks & Commodities
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Algo Q&A
ALGORITHMIC TRADING
Have a question about system or algo trading? Kevin J. Davey has over 25 years
of system trading experience. Davey is a full-time trader, and he also teaches
and consults via his Strategy Factory online workshop (https://kjtradingsystems.
com). He is the author of several bestselling trading books, including Building
Winning Algorithmic Trading Systems and Introduction To Algo Trading. Send
your questions or topic suggestions to Kevin Davey at kdavey@kjtradingsystems.
com. Selected questions will appear in a future issue of S&C.
Kevin J. Davey
CLOSING TIME(S) Confused yet? Maybe an example after 5:00 pm—when the exchange
I have a gold algo, and I was calculat- will help. determines the settlement price—the
ing values today after the close at 5 pm Here is how the data is presented in daily bar closing price will “jump” to
and got an entry signal. But at 6 pm, TradeStation: reflect the settlement price.
the closing price had changed signifi-
cantly, making my signal invalid. What XX minute bars: Closing price is For some markets (like the mini S&P),
went wrong? always the last price traded. So, with a this difference is usually minor. But for
Based on your question, I would guess 1440-minute bar, the closing price will markets like gold and crude oil, the dif-
that you have fallen victim to the “last be the last price traded at 5:00 pm ference can be huge.
vs. settlement closing price” issue. Let Figure 1 shows an example—the
me explain it, and I’ll give you some Daily bars: Closing price during the
workarounds. day will be the last price traded. But, Continued on page 17
Back in the old days, all futures and
commodities were traded in pits, via
open outcry. There was no electronic
market, and there were limited trading
hours—not the near 24-hour markets
we enjoy today.
To further confuse the issue, many
markets closed at different times of the
day. Gold, for example, closed at 1:30 pm.
The exchange then determined the settle-
ment (closing) price for the day based on
the last minute or two of trading. That is
TRADESTATION
the price you’d see on your daily equity
brokerage statements.
When markets transitioned away from FIGURE 1: GOLD, LAST PRICE TRADED VS. DAILY SETTLEMENT PRICE. The 1440-minute bar close is the
pit trading, the market hours expanded last price traded, while the daily bar close is the daily settlement price.
(gold now closes at 5:00 pm), but the
settlement price time fix did not. Gold
still has a settlement price calculated at
1:30 pm, even though the market is open
until 5:00 pm. For reference, you can find
a list of settlement times for the CME
futures exchange here: https://www.
cmegroup.com/market-data/settlements/
settlements-details.html
This means we have two possible
closing prices: the last price traded at
5:00 pm, and the settlement price of
around 1:30 pm. This creates an issue
of how the data is presented to the user.
Is the closing price shown the last price FIGURE 2: DIFFERENCE IN LAST PRICE TRADED VS. SETTLEMENT PRICE. The price of gold plummeted
traded, or the settlement price? And does in the last few hours of the trading day, after the settlement time. This causes the 1440-minute and daily bars
this even matter? to be dramatically different.
A Fresh Look At
Short-Term Patterns
You may be familiar with some of the most popular • Key reversals, a higher high followed by a lower
short-term patterns, but do you know which work close. We sell the lower close. The opposite for
best? These test results may help you find out. buy signals.
I
• Island reversals, a gap higher followed by a lower
have always liked short-term price patterns. close, but not filling the gap. We sell the lower
The simplest, such as an island reversal, close. The opposite for buy signals.
seem intuitively correct. The best study of • Outside days, a higher high and a lower low, but
chart patterns I’ve seen is by Thomas Bulkowski, the close in the upper or lower 25% of the range.
who ranked the three top bullish patterns as We buy if upper, sell if lower.
follows: • Wide-ranging days, the same as outside days,
but the true range must exceed 1.5 × 20-day
1. Upward breakout of a rectangular top (this is average true range.
the same as a breakout above a horizontal re- • Compression, the most recent 3 days must each
sistance line) have a true range smaller than the 4th previous
2. Upward breakout from a falling wedge day. We buy a breakout above the highest high
3. Upward breakout from an ascending triangle of the last 3 days and sell a breakout below the
lowest low of the past 3 days.
and the three best bearish patterns as: • Gap openings, must be larger than 0.5 × 20-day
ATR. We buy or sell the close of the gap day in
1. Descending scallop (a series of failed attempts the direction of the opening gap.
at recovery)
2. Downward breakout of a symmetric triangle in All of these require no more than three days to
a downtrend identify and generate a trading signal. That fits my
3. Downward breakout of a broadening top idea of instant gratification.
by Perry J. Kaufman
January 2021 • Technical Analysis of Stocks & Commodities • 9
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FIGURE 1: KEY REVERSAL PATTERN. In this example, cumulative returns following
a key reversal day are shown.
FIGURE 4: KEY REVERSAL BULL. Key reversal bull moves (top) and summary
(bottom).
FIGURE 2: KEY REVERSAL PATTERN. The same data from Figure 1 is shown
graphically here, cumulative returns following a key reversal day. FIGURE 5: KEY REVERSAL BEAR. Key reversal bear moves (top) and summary
(bottom).
Peak returns for TSLA occur on the second close after enter-
ing a key reversal upward. But then, TSLA has been in a strong
uptrend, so we would expect the upside to be more profitable
than the downside. SPY shows no gains at all, for either the
upward (bull) or downward (bear) reversal.
What if we filter these reversals with a trend, taking the
reversal only in the direction of the trend? To avoid massive
FIGURE 3: TREND FILTER. Cumulative returns using a key reversal plus a trend testing, we will only look at the 80-day moving average, which
filter. I consider representative of a macrotrend strategy. Figure 3
shows the results.
shocks, and market confusion. While the trend does not seem to change the returns of TSLA
The position size is always $10,000 divided by the closing except to make days 3, 4, and 5 similar, it drops the number of
price. That will come close to making each trade equal risk so bull trades from 54 to 32, a reduction of 40%. That makes the
that a trade taken in 2020 at a high price will not overwhelm profits per trade 40% larger, a significant benefit. The trend
a trade taken in 2000 at a lower price. improved the downward reversals but not by enough to make
In addition to the results of these patterns, I will also apply them an interesting trade.
an 80-day moving average trend filter, typical of a macrotrend
system. We will buy only when the moving average is up and A broader view of the key reversal
sell when it is down. When we look at our set of 3 ETFs and 5 stocks, we see a pat-
tern that is different for ETFs and stocks. Because the ETFs
Example are an index, the results are muted compared to stocks. QQQ
Let’s look at the first pattern, a key reversal, applied to SPY and IWM are more volatile than SPY and show gains on days
and TSLA, two extremes. Because the SPY is the cap-weighted 3 and 4 for upward moves. Our selected stocks perform much
average of 500 stocks, it will always be less volatile than an better on those days. This can be seen in Figure 4 and in the
individual active stock such as TSLA. The table in Figure 1 averages in the lower section.
separates the upward reversals (“bull moves”) from the down- The lower table clearly shows that the stock returns increase
ward ones (“bear moves”). The numbers are the cumulative and peak on day 4. The equity index ETFs have small, positive
profits and losses from the entry on the close of the day of the returns on days 3 and 4.
reversal. Figure 2 shows the same returns on a chart. The bear market scenario is different, as seen in Figure 5.
10 • January 2021 • Technical Analysis of Stocks & Commodities
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FIGURE 6: KEY REVERSAL. Key reversal results using an 80-day moving average
trend filter.
FIGURE 8: 3-DAY COMPRESSION. (Top to bottom): Bull moves with and without a
trend filter; bear moves with and without a trend filter.
Island reversal
The island reversal is more specific than the key reversal; there-
fore, it has only a few trades per year. That would be fine if it
produces more consistent or more profitable returns. Figure 7
shows the summary of bull and bear island reversals, with and
without the trend filter.
Unlike the key reversal, this pattern shows profits for the
index markets. For stocks, WMT and TSLA were profitable for
FIGURE 7: ISLAND REVERSALS. (Top to bottom): Bull moves without and with a upward moves without the trend, but the averages reflect large
trend filter; bear moves without and with a trend filter. losses from AAPL. An island reversal in the index markets
would indicate a broad economic event.
Again, stocks outperform the index markets, but this time all but
GE and TSLA are negative, with the least negative being day 1 Compression
and day 2. We can guess that the upward bias of the stock market The 3-day compression represents a market that is consolidat-
makes it difficult to profit from moves to the downside. ing, and the trading signal is a breakout of the high or low of
those 3 days. The highs and lows of the 3 days do not have to be
Adding a trend filter inside the larger range of the 4th day back, only the true ranges
Normally, trading only in the direction of a macrotrend will must be smaller. It is interesting because it seems to identify
improve returns. It will also reduce the number of trades. Con- more frequent and more reliable moves to the upside when
tinuing with the key reversal example, but only showing the compared to the previous patterns. Toby Crabel referenced
summary, the results of the bull moves (up) are similar to the this as one of the best patterns for intraday trading. Results are
results without a trend filter, but using the trend filter (Figure shown in Figure 8. This formation does not work well with a
6) reduces the number of trades by about 37%, which makes trend filter. AAPL and TSLA had strong returns when taking
the profits per trade that much bigger and reduces the time in upward breakouts.
the market. Less time in the market means less risk.
Outside day
An outside day indicates volatility, a much more active day. In
our test, we go long if the close is in the upper 25% of the range.
All of these require no more We sell short if the close is in the lower 25% of the range.
than three days to identify Figure 9 shows the four summary results. Bull moves, that
is, upward breakouts, are profitable for both index ETFs and
and generate a trading stocks, with all markets net positive after 4 days. Breakouts to
signal. That fits my idea of the downside posted losses everywhere.
instant gratification. Adding a trend filter gave results similar to the key reversal.
The net returns were slightly lower but the reduction in the
number of trades made the profits per trade higher.
12 • January 2021 • Technical Analysis of Stocks & Commodities
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FIGURE 9: OUTSIDE DAY BREAKOUT. Outside day (top to bottom) upward breakout FIGURE 11: GAP OPENING. Gap opening (top to bottom) upward with and without
with and without a trend filter; downward breakouts with and without a trend filter. a trend filter; downward with and without a trend filter.
The Class certified by the Court is defined as all persons or entities who either:
a. purchased a CBT December 2011 Contract or a CBT March 2012 Contract after October 31, 2011 except that purchases of
CBT March 2012 Contracts made after December 14, 2011 qualify for inclusion in the Class only to the extent they were made
in liquidation of a short position in the CBT March 2012 Contract (whether an outright short position or as part of a spread
position) which was sold between November 1 and December 14, 2011 inclusive; or
b. sold put options or purchased call options on the CBT December 2011 Contract or on the CBT March 2012 Contract after
October 31, 2011 except that sales of put options or purchases of call options on the CBT March 2012 Contracts made after
December 14, 2011 qualify for inclusion in the Class only to the extent they were made in liquidation of a position in the CBT
March 2012 Contract (whether an outright position or as part of a spread position) which was initiated between November 1 and
December 14, 2011 inclusive.
Excluded from the Class are Cargill, Inc., the Defendants and any parent, subsidiary, affiliate or agent of any Defendant.
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Continued from Previous Page
Algo Q&A
end;
In
the December 2019 issue of Technical Analy- This assumes that a trader can estimate the returns of the
sis of Stocks & Commodities, an article by stock index and gold bullion a few minutes before the end
Robert Tang proposed a yearly-based gold of the six-month period, and that based on the performance
momentum strategy as follows: If the S&P of the stock index and gold bullion, the trader buys the best
GOLD DRAGON: HELLORF ZCOOL/EURO CONTINENT: HARVEPINA
500 index performed better than gold in the performer at the close of the last day of the sixth month. This
current year, then in the next year, invest in the process is repeated every six months.
S&P 500; but if gold performed better, then
the next year, invest in gold. Broadening the opportunities:
(For his article, Tang used S&P 500 index data from Yahoo An international look
Finance and gold spot price from TheBalance.com. He further For this article, we will apply the gold momentum strategy
COLLAGE: CHRISTINE MORRISON
tested his strategy using SPY and GLD ETFs from 2006 to (GMS) semi-annually to several stock market indexes in in-
2018, which showed similar results as for the index data.) dustrialized countries, as well as to some well-known world
Then, in the May 2020 issue of Technical Analysis of indexes, in addition to the S&P 500 index.
Stocks & Commodities, in my article “Variations On The The stock indexes we will use are: Britain’s FTSE 100,
Gold Momentum Strategy,” I applied Tang’s gold momentum France’s CAC 40, Germany’s DAX30, Switzerland’s SMI,
18 • January 2021 • Technical Analysis of Stocks & Commodities
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TRADING STRATEGIES
Spain’s IBEX, Netherland’s AEX, Japan’s TOPIX, and the Annual Returns and Standard Deviation (%) 1992–2019
S&P 500. The well-known indexes we will use are Dow Country Index Gold GMS
Jones’s Euro Stoxx 50, MSCI’s Emerging Market, MSCI’s France
Return 7.06 7.49 8.07
EAFE, and Dow Jones’ World Index. The index data are 22.00 13.52 14.08
Stnd. Deviation
10.60 7.49 11.75
taken from Thomson Reuters’ DataStream from 1992 to 2019.
Return
Germany
Stnd. Deviation 21.28 13.52 17.24
The London gold bullion prices are taken from the Federal Return 2.80 5.60 6.86
with a risk factor of 13.52%. Over this period, the gold return
has approximately the same return as the CAC 40 but has Worldwide index results
lower risk. However, if this trader followed the semi-annual In the table in Figure 2, we present the risk-return trade-off
GMS, this trader would have made an annual average return for various world indexes and the semi-annual GMS.
of 8.07% with an annual standard deviation of 14.08%. The As we can see from Figure 2, if a trader follows the EMH
risk-return trade-off for this trader using the semi-annual and buys and holds the DJ Euro Stoxx 50 in euro currency,
GMS would be better than that of the CAC 40, with higher her average annual return over the 1992 to 2019 period would
return and lower risk. have been 7.11% with a measure of risk of 18.80%. Investing
For Germany, we reach a similar conclusion: The B&H in gold in euros would have generated an annual average
strategy has an annual average return of 10.60% with an an- return of 7.49 % and a risk of 13.52%. However, if this trader
nual standard deviation of 21.28%, all in local currency, the switched every six months between the index and gold bul-
euro. Meanwhile, the semi-annual GMS for Germany has lion index, this trader would have made an annual average
higher return (11.75%) and lower risk (17.24 %) than the B&H of 12.38 % and a risk measure of 15.16%. The semi-annual
strategy for the DAX30 index.
The conclusion is the same for the Netherlands, Spain,
Switzerland, Japan, and the UK, in that a trader following the Continued on page 37
semi-annual GMS could beat the B&H strategy, all in local
currency. The gain is very high for the Netherlands, Japan,
and the UK.
It should be noted that the annual average returns and the Looking at the S&P 500 index
annual standard deviation of returns are estimated from semi-
annual returns. The estimations are as follows:
test results, we see a very
significant improvement in the
Annual average = (1 + semi-annual average)2 - 1 risk-return trade-off.
Annual standard deviation = s emi-annual standard deviation
* SQRT(2)
January 2021 • Technical Analysis of Stocks & Commodities • 19
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Have No Fear
F
the belief in the imminence of the danger in all cases that
ear is the one universal emotion that torpedoes many is important.
traders’ accounts. Unmanaged fear is the reason When it comes to trading, fear can arise as we debate whether
traders will often eventually quit trading. Fear is the to enter, stay in, or exit a position. The idea of trading losses is
underlying cause of many mistakes and countless always very real, and for many of us it is often uppermost in
unforced errors traders will make. Fear permeates our minds. We come to trading with the plan to make profits
our conscious and subconscious mind. and to take money out of the market on a consistent basis. If
All humans have an amygdala, which is thought to be the we are very good at it and very lucky, the hope is that not only
brain’s emotion center that governs our fear response. Thus, will we make money but also become rich in the process. For
we may not be able to dispose of all fear, but we can learn to many, that plan never comes to fruition, and one reason for
manage it intelligently so that it does not overwhelm us and that is the handicap that fear exposes.
thereby sink our trading accounts. It is therefore essential that if we are to not only stay in this
trading game but also prosper, we must come to terms with the
RYZHI/SHUTTERSTOCK
What is fear? idea of fear and its role in our lives. We must learn to manage
Fear can be defined as an unpleasant emotional feeling it and minimize its harmful expressions if we want to attain
triggered by the perception of danger (in our case, trading optimum trading results.
20 • January 2021 • Technical Analysis of Stocks & Commodities
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TRADING PSYCHOLOGY
STEVE MOORE MARY ANNE & CARLEY GARNER KEITH FITZ-GERALD HARRY BOXER JON MARKMAN LOUIS NAVELLIER
Committee to PAMELA ADEN DeCarley Trading Fitz-Gerald Group TheTechTrader.com Tech Trend Trader, Growth Investor,
Unleash Prosperity The Aden Forecast The Power Elite, and Breakthrough Stocks,
Strategic Advantage and Accelerated Profits
L
by Leslie N. Masonson
Midcap ETF background
ong-term and intermediate-term investors are The midcap ETF arena contains stocks with a market cap of
always looking for areas of the market that offer between $2 billion to $10 billion, but can be further divided
consistent price performance with normal risk into three types: basic or “plain-vanilla,” growth, and value.
parameters. Market experts always try to pick next Interestingly, midcaps deliver the best characteristics of the
year’s winning category, but with limited success. capitalization sizes by offering higher growth rates than large-
One group of stocks that has seen market-beating caps, coupled with less volatility than small-caps.
performance over the past decade and intermediate periods SPDR S&P Midcap 400 (MDY) was the first midcap
has been midcap growth stocks. Here is a look at a handful ETF offered on May 5, 1995, followed by iShares Core S&P
of ETFs in that category to consider. Midcap’s birth on May 22, 2000. Next up were the triplets—
iShares Russell IWP, IRS, and IWS on July 17, 2001. Based
The midcap space on their early start, these five ETFs have amassed the most
KENG MERRY DIGITAL CRAFT/SHUTTERSTOCK
Investing in midcap stocks, as well as midcap equity ETFs AUM, in addition to Vanguard Midcap (VO) in second place
and mutual funds, is often overlooked not only by the aver- with a later starting date of January 26, 2004.
age investor, but also sometimes by the mainstream financial To gain a broad perspective on two midcap key data points,
press. On the other hand, small-cap vehicles, and especially refer to Figure 2, which provides a list of the largest midcap
large-caps, have attracted most of the attention of retail and ETFs based on assets under management (AUM). The top 10
professional investors. Surprisingly, these “middle-of-the- midcap ETFs are listed in AUM order accompanied by their
road” midcaps have been very good performers among the multiyear performance, and type. A first glance at the table
24 • January 2021 • Technical Analysis of Stocks & Commodities
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WHY TRADE ETFS?
indicates a wide variance in performance Total Return Ticker ETF Name Y-T-D 1 Year 3 Years 5 Years 10 Years
among these ETFs. But a closer look over 10 years
iShares Morningstar Mid-Cap
the past one, five, and ten years shows that 308.30% JKH
Growth ETF
28.51% 37.33% 20.73% 17.10% 15.07%
the worst performers have consistently iShare Morningstar Small-Cap
been the value EFTs followed by the basic 255.90% JKK
Growth ETF
19.59% 27.90% 13.96% 14.05% 13.54%
I retained JKH, NUMG, VOT, IWP, and iShares Russell Midcap IWR 4.4% 8.9% 11.3% $20.7 Basic
FNY as the top growth performers. Figure SPDR S&P Midcap 400 Trust MDY -1.6% 7.3% 10.1% $14.9 Basic
3 contains the names and tickers of the six iShares Russell Midcap Growth IWP 22.8% 14.4% 14.1% $13.3 Growth
reviewed ETFs. Note that I added Invesco iShares Russell Midcap Value IWS -7.3% 5.2% 9.2% $9.8 Value
S&P Midcap Momentum ETF (XMMO), a Vanguard Midcap Value VOE -8.1% 5.2% 9.8% $9.3 Value
broad-based ETF, from the “basic” grouping Vanguard Midcap Growth VOT 21.9% 13.3% 13.3% $8.5 Growth
to the mix because of its strong performance
iShares S&P Mid-cap Growth IJK 8.4% 9.3% 11.4% $6.8 Growth
over three years.
In summary, this article focuses on growth iShares S&P Mid-cap Value IJJ -12.4% 4.7% 8.9% $4.4 Value
ETFs that are the “best” in their category S&P 500 ETF Trust SPY 9.5% 11.6% 12.9% $280.9 N.A.
over a decade. SPDR DJ Ind, Average ETF Trust DIA -0.25% 11.0% 11.6% $22.4 N.A.
FIGURE 2: TOP 10 MIDCAP ETFS BY AUM. The growth category has clobbered not only the value ETFs
Midcap growth ETFs and the plain-vanilla basic ETFs over multiple timeframes, but also the S&P 500 and Dow Jones Industrial
Average. IWP, VOT, and IJK had the best performance.
For additional
transparency pur- ETF Name Ticker
poses, I’ve provid- iShares Morningstar Mid-Cap
ed a performance Growth ETF
JKH
comparison of the Nuveen ESG Mid-Cap Growth ETF NUMG
Midcaps deliver the best
top three ETFs iShares Russell Mid-Cap Growth characteristics of the
in each midcap ETF
IWP
capitalization sizes by
category in Fig- Vanguard Mid-Cap Growth ETF VOT
ure 4. As you First Trust Mid Cap Growth Alpha-
offering higher growth rates
can observe, the DEX Fund
FNY
than large-caps, coupled
best growth ETFs Invesco S&P MidCap Momentum
ETF
XMMO with less volatility than
vastly outperform FIGURE 3: MIDCAP GROWTH ETFS. Six growth small-caps.
the others in the ETFs evaluated in this article are shown with their
group. Data for names and ticker symbols.
the analysis of the
ETFs in this col- Performance JKH NUMG IWP VOT FNY XMMO VO IWR IWS VOE NUMV
Period
umn was provided
Year-to-Date 28.51% 26.68% 18.78% 18.51% 16.49% 14.80% 4.10% 1.88% -9.14% -9.77% -13.03%
by ETFAction.
com, a platform 1 Year 37.33% 33.78% 26.43% 25.27% 22.56% 20.69% 10.00% 7.85% -4.12% -4.74% -8.36%
that I reviewed 3 Year 20.73% 18.83% 16.70% 15.67% 14.14% 20.90% 8.87% 7.86% 1.85% 1.97% 1.33%
in the May 2020 5 Year 17.10% 15.04% 13.87% 14.04% 18.63% 10.03% 9.62% 5.92% 5.96% N.A.
issue of this maga- 10 Year 15.07% 14.44% 13.67% 14.43% 12.00% 11.62% 9.54% 10.09% N.A.
zine. Previously, Type of ETF Growth Growth Growth Growth Growth Basic Basic Basic Value Value Value
I used data from FIGURE 4: MIDCAP PERFORMERS OF ALL TYPES. Here, the best performers among the basic, value, and growth ETFs are compared.
XTF.com for writ- Clearly, there is no contest that growth performance has been exceptional.
All six of these ETFs had their Nuveen ESG Midcap Growth (NUMG)
NUMG has the lowest AUM in the category at $206 mil-
largest sector percentage lion, as it is not a pure midcap growth play. NUMG tracks
positions in information an index composed of midcap US companies with growth
technology. characteristics that meet specific “environmental, social, and
governance” (ESG) criteria (which is a set of standards used
as metrics in the socially conscious investing arena). Its 0.40%
26 • January 2021 • Technical Analysis of Stocks & Commodities
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expense ratio is second highest, while VOT JKH NUMG IWP FNY followed by industrials (12–17%).
XMMO
its 0.36% yield is the lowest along DLR ZM SNAP IDXX ENPH The fourth most invested sector was
GNRC
with its 25,000 daily trading volume, DXCM SQ TWLO DOCU DAR consumer discretionary (10–11%)
MPWR
none of which are very impressive LULU MELI SPLK LULU INSP with FNY at 14.6% and NUMG at
SEDG
numbers. Its limited 58 portfolio VEEV TWLO CPRT VEEV CHWY
5.6% as the two outliers in either
QDEL
DOCU LULU MTD ALGN GNRC SAM
holdings constitute a concentrated SBAC DOCU SNSS CSGP SAM
direction.
ENPH
portfolio compared to the 342 hold- CMG IDXX PAYC CMG FRPT MASIFor XMMO, the top 10 of its 77
ings of IWP and about 160 for VOT TWLO SNAP CBRE ORLY WMS holdings consisted of 29.5% of its
CRL
and JKH. Performance-wise it is in CNC VEEV XYL KLAC TXG portfolio. FNY had the lowest con-
CGNX
third place with the third-highest IDXX WDAY ZBRA TWLO SAIL centration in its top 10 at 8.4% with
MOH
cash inflows. iShares ESG Screened FIGURE 6: TOP 10 HOLDINGS FOR MIDCAP GROWTH ETFS. 225 holdings. NUMG had 27.8% of
S&P Midcap ETF (XJH) is the lat- Shown here are the top 10 symbols in each of the six ETFs
its 59 holdings in its top 10. IWP,
evaluated. In general, the largest sector holding is in information
est midcap launch on September VOT, and JKH had 12.3%, 14.3%,
technology, followed by healthcare, industrials, and then consumer
22, 2020 and will compete directly discretionary. and 18.2% of their portfolios in their
with NUMG. top-10 holdings. Figure 6 provides
the top 10 tickers in each of the six ETFs evaluated. Notice
First Trust Mid Cap Growth AlphaDEX (FNY) that Twilo, Inc. (TWTO) was represented in four portfolios,
FNY entered the category on April 18, 2011 gathering $436 while Lulelemon Athletica Inc. (LULU) and Veeva Systems
million in assets. It tracks a tiered, enhanced, equal-weighted Inc. (VEEV) were purchased in three.
index of midcap growth stocks selected from the Nasdaq US VOT invested about 1.4% in each of its top 10. IWP had
MidCap Growth Index. This index is reconstituted and rebal- about 1.2% in its top 10. JKH had 3% in Zoom Video Com-
anced quarterly. Eligible stocks are ranked on growth factors munications, Inc. (ZM), 2.3% in Square, Inc. (SQ), and about
including three-, six- and 12-month price appreciation, sales- 1.5% in each of the other eight positions. NUMH had 3.4% in
to-price and one-year sales growth, and additionally on value Twilio, Inc. (TWLO); 3% in Splunk, Inc. (SPLK); and 2.6%
factors including book value to price, cash flow to price and in Copart, Inc. (CPRT), Mettier-Toledo International Inc.
return on assets. All stocks are ranked on the sum of ranks (MTD), ANSYS, Inc. (ANSS), and Paycom Software, Inc.
for the growth factors and, separately, all stocks are ranked (PAYC); and 2.3% in Xylem Inc. (XYL) and Zebra Technolo-
on the sum of ranks for the value factors. A stock must have gies Corporation (ZBRA).
data for all growth and/or value factors to receive a rank for FNY had about 0.90% to 0.77% in its top 10 from high
that style. to low. Lastly, XMMO had 4% to 3% in its top four ETFs—
It has the second-lowest FactSet scores and the highest GNRC, MPWR, SEDG, and QDEL—and about 2.45% in the
expense ratio at 0.70%. Annual yield of 0.66% is third highest remaining six holdings.
and its 63,000 daily volume is low, but reasonable. Performance-
wise it came in dead last for three years at 14.1%, and next to Conclusion
last for one year at 22.6%. Its portfolio size of 225 places it Based on a review of the key characteristics of the six midcap
midrange. Its alpha is 5.00 and beta is 1.05. growth ETFs evaluated here, I’ve concluded that for investors,
JKH just edges out XMMO on the basis of higher FactSet
Invesco S&P Midcap Momentum ETF (XMMO) scores, better long-term performance (March 2, 2005 through
XMMO, born in March 2005, was included from the plain
vanilla category because of its top three-year performance Continued on page 39
record of 20.9%, beating all the others in the growth category.
Unfortunately, its more recent one-year performance of 20.7%
was the weakest of the six. Its FactSet efficiency and tradability
scores are strong at 91 and 95%, respectively, but its fit score The “efficiency” [rating]
was the lowest at 70. XMMO tracks an index of S&P 400 focuses on whether the ETF
midcap stocks based on momentum and weighted by market
cap and momentum.
delivers on its promises
Its expense ratio of 0.34% and 85,000 trading volume without undue risk or cost,
places it midrange while its annual yield of 0.49% places it “tradability” means ability
in the bottom quartile. The portfolio is fairly concentrated to obtain a fair market price,
with 77 issues.
and “fit” assesses how the
Sector breakdowns and holdings portfolio measures up to its
All six of these ETFs had their largest sector percentage posi- stated objective.
tions in information technology (most in the 25% area) with
JKH the outlier at 42%, followed by healthcare (20–24%), and
January 2021 • Technical Analysis of Stocks & Commodities • 27
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Candlesticks And Cryptos
T
of the structures relating to cryptocurrencies—a still new and
wo of the most important success factors for a developing field of investing.
trader are their ability to assess and recognize
risks, and their ability to evaluate and control Buy low, sell high
their impulses. Both require separate types It sounds simple, but you will be surprised. Note that “buying
of skills, but there are some matches. at a low price” doesn’t mean buying really bad coins. You
In the trading process, you will encounter should only buy low prices in coins that have a proven history
many opportunities to take risks. Of course, of good results but that were perhaps hit by a falling market.
most of them are not worth considering, but from time to That way, you can know that not only is your coin falling but
time you will find in the market something that you want to most likely, all the coins and tokens are falling. When the
WIT OLSZEWSKI/SHUTTERSTOCK
become a part of. market recovers, your coin will also recover (most likely).
If you are new to the world of cryptography, it is best to Selling high is also a struggle. Most people tend to want to
start your portfolio with the purchase of bitcoin (BTC). This wait “just a little longer” to see how far the top goes. Bad idea.
is a common way to get your feet wet, as well as a great way If you made a satisfactory return on your investment, pull it
to understand how cryptocurrencies are moving. Almost out and convert it into fiat. Do not be too greedy.
28 • January 2021 • Technical Analysis of Stocks & Commodities
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CRYPTOCURRENCIES
Reading charts
Before we get into the technical
analysis of it, I would just like to first
make sure you understand how to read
basic candlestick charts. So this will
be just a brief reminder rather than
a full review.
Candlestick charts are made up of
multiple bands of green or red (or any
two different colors, but using green
and red is usually the default setting).
Green indicates that the price of a coin
has risen since the last period the bar
represents. The red bars represent the
TRADINGVIEW
price which has declined since the
last period.
In trading terms, the main body FIGURE 1: CUP WITH HANDLE. In this pattern, the candles drop significantly for a long time, only to start a quick
of the candle is called the real body. climb up immediately after the second ascent. This means a possible continued increase in value.
On green candles, the base of the real
body is sometimes called the open-
ing price (the price at the beginning
of the reference for this period) and
the top of the real body is called the
closing price (price at the end of the
period). For red candles, this process
is the opposite: The upper part is the
opening price, and the lower part is
the closing price. Any lines emerging
from real bodies are called shadows
or wicks. The upper part of the wick
represents the highest price that the
coin was bought during this period,
and the lower part of the real body rep-
resents the lowest price that the coin
FIGURE 2: MEASURED UPWARD MOVEMENT. Candles begin to rise, stop to rest (where they move sideways),
was bought during this period. Wicks and then continue to rise upward. The fact that the asset has been moving sideways for a considerable time makes
are rarely taken seriously, as they are it more optimistic than the average upward pattern.
often considered anomalies.
that interest you.
Technical analysis Market capitalization is the price of asset X, the number
There are many technical analysis tools to help you become a of existing assets. The greater the market capitalization, the
successful trader on your journey. Technical analysis allows more effort will be required for the asset to grow in value.
people to make informed forecasts regarding the future market This is a more important factor to check than just the price
based on its history. Many traders and investors argue that it is of a coin. For example, newcomers could think that Ripple
technical analysis that separates traders from standard players has many opportunities for growth as they looked at its price
because technical analysis allows people to make knowledge- on July 13, 2018 of just $0.40, but the market capitalization
based decisions rather than impulse-based decisions. is $17,291,808,853, which is huge. This means that price
Several different types of technical analysis can be used fluctuations in Ripple are slower than for coins and tokens
to facilitate your transactions, and although more advanced with lower market capitalization.
methods are not needed, some basic information should not Thanks to this characteristic, traders love to find coins with
be ignored. low market capitalization. A market cap shows the rarity of
People will think that technical analysis is about observing coins. This is why some developers prefer to regularly “burn”
patterns in charts. And that’s certainly a big part of it, since their coins to increase the price.
technical analysts were, after all, the original chartists. But
the term technical analysis also covers a lot more. One of the Bullish chart patterns
most basic things you can do that involves technical analysis It is well known that applying technical analysis patterns to
is to look at the market capitalization of the coins and tokens cryptocurrencies is extremely difficult and temperamental, but
January 2021 • Technical Analysis of Stocks & Commodities • 29
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Bearish chart patterns
The following patterns, as a rule,
are the exact opposite of the bullish
patterns:
this does not mean that we should completely ignore patterns. Three downward points: In this pattern, candles rise, fall,
Although I found that these types of patterns are not execut- rise again, lower again, perform one last rise, and then fall
able, this does not mean that they are unreliable. further than previously.
Here are some bullish charts you will encounter. With most
exchanges you will be able to notice these patterns quickly, Finally
given that their interface is simple and intuitive: If you’ve come this far with building
your theoretical knowledge of the
Cup with handle: This is the place where the candles on the markets, congratulate yourself. It’s
chart drop significantly for a long time, only to start a quick not easy, and it’s even more difficult to
climb up, immediately after the second ascent. This means a follow and apply to live trading than it
possible continued increase in value. is in textbooks.
My goal for this article has been to
Measured upward movement: Candles begin to rise, stop to simply point out a little of what’s in-
rest (where they move sideways), and then continue to rise. The volved and to offer a few things you can apply to your trading in
fact that the asset has been moving sideways for a consider- cryptocurrencies. Also, developing the right thought processes
able time makes it more optimistic than the average upward that go into trading is important to anyone’s dream of making
pattern. If an asset grows without interruption, it could be a a career out of cryptocurrency trading. Trading can be a dif-
sign of market manipulation or crowds. The fact that investors ficult process, but it becomes easier the more you do it.
stopped for a moment and continued to invest is a sign of a
high-quality coin or token. Azeez Mustapha is an analyst at Instaforex Companies Group
and a blogger at Advfn.com, and as well as a freelance author
Three points of rising: This is when candles rise, then lower, for trading magazines. He is a trading signals provider at some
rise again, lower, and finally rise for the last time (this time websites. He can be reached via email at azeez. mustapha@
higher than the previous times). During each lift, candles move analytics.instaforex.com.
higher than the previous lift. Even though each accompanying
fall is usually regarded as bad behavior, subsequent ascents Further reading
continue to rise higher. Mustapha, Azeez [2020]. “A Nondirectional Trading Strategy
For Cryptocurrencies, Part 1,” Technical Analysis of Stocks
& Commodities, Volume 38: February.
[2020]. “A Nondirectional Trading Strategy For Cryp-
tocurrencies, Part 2,” Technical Analysis of Stocks &
One of the most basic things you Commodities, Volume 38: April.
can do is to look at the market [2019]. “Spotting Imbalances In Novel Markets,”
Technical Analysis of Stocks & Commodities, Volume
capitalization of the coins and 37: September.
tokens that interest you.
FIGURE 1: EXAMPLE OF THREE CORRECTIVE STRUCTURES. This chart displays the three simple corrective structures found within Elliott wave theory: the zigzag,
flat, and triangle. The bar charts below each line chart above offer some real-life examples of the patterns.
FIGURE 1: TARGET RICH TRADES FOR EASTMAN CHEMICAL. As seen on the daily chart of Eastman Chemical, Target Rich Trades automatically displays both
longer-term and current price trends, support and resistance levels, and buy and sell zones.
SIDEWAYS STOCKS: AN OPPORTUNITY are trading. Ideally, you will want to price chart along with implied volatility
TO USE CALENDAR SPREADS? focus on heavily traded, highly liquid (black line). Note that the stock price has
A number of stocks that I am following options with tight bid/ask spreads. support around $28.42 and resistance
seem to spend a lot of time going side- • Changes in implied volatility can around $38.50.
ways and trading in a range. Is there a have a profound impact on a calendar Figure 2 displays the history of implied
low-risk way to profit from that scenario spread once the trade is entered. A volatility (IV) for 90+ day options on
using options? rise in volatility will typically help UBER. Current IV is not necessar-
A calendar spread can offer a trader a calendar spread and a decline in ily “high” nor “low” compared to its
the opportunity to make money even volatility will typically hurt a calen- historical range. In recent years it has
when a stock “goes nowhere.” Likewise, dar spread. As a result, it is typically been as low as low the 40s and spiked
if properly positioned, it can offer a preferable—though certainly not to 140% during the COVID-19 selloff
significant rate of return and a relatively in early 2020. It currently stands in the
low dollar risk. As with most option mid 50s.
strategies, the key is to understand what A calendar spread Our example trade involves:
“makes it tick.” can offer a trader the
A standard at or near-the-money put opportunity to make • Buying 1 Jan15 2021 put @ $3.33
calendar spread involves buying a put money even when a (with 112 days left until expiration)
option with a strike price near the current • Selling 1 Nov06 2020 put @ $2.25
price of the underlying stock in a further- stock “goes nowhere.” (with 42 days left until expiration)
out expiration month and simultaneously
selling another put option at the same required—to enter a calendar spread The particulars appear in Figure 3 and
strike price in a closer expiration month. when implied volatility is on the low the risk curves in Figure 4.
The basic premise of a calendar spread is end of the historical range. Some key things to note:
that the shorter-term option will experi-
ence time decay and lose time value at Example trade • This trade costs $108 to enter on a
a much faster rate than the longer-dated For our example trade we will use ticker 1-lot. This is the maximum risk on
option. But there are a few important UBER. Figure 1 displays an UBER the trade.
things to consider before entering an
at-the-money calendar spread:
OPTIONSANALYSIS.COM
gain $1.94 in value each day due
solely to the passage of time—that
is, each day, the shorter-term option
will lose roughly $3.60 in value and
the longer-term option will lose only FIGURE 2: IMPLIED VOLATILITY. Shown here is an example of implied volatility on 90+-day UBER op-
roughly $1.70 in value. Since we are tions.
Position management
From a risk standpoint, the key consid-
eration is what to do if price exceeds the
breakeven points. There is no correct
answer. The choices are:
FIGURE 4: RISK CURVES. This graph shows the risk curves for the example put calendar spread on UBER
• Exit as soon as a breakeven price stock.
is violated
• Exit as soon as a support or resistance resistance or breakeven points price. You could simply exercise
price is violated • One other technical—but impor- your long call to offset, but more
• Establish a wider “uncle” point in or- tant—consideration is to remember typically a trader will want to exit
der to give price some opportunity to that if the short put is in-the-money the position prior to getting involved
work its way back into the profit range at expiration, you will be required to in exercise.
if it only temporarily pierces support/ buy 100 shares of stock at the strike Continued on page 45
January 2021 • Technical Analysis of Stocks & Commodities • 41
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FUTURES FOR YOU
INSIDE THE FUTURES WORLD
Want to find out how the futures markets really work? Carley Garner is the se-
nior strategist for DeCarley Trading, a division of Zaner, where she also works
as a broker. She has written five books on futures and options trading, with the
latest being Trading Commodity Options...With Creativity (July 2020), as well as
A Trader’s First Book On Commodities (third edition, October 2017) and Higher
Probability Commodity Trading (July 2016). Garner also authors widely distributed
e-newsletters; for a free subscription, visit www.DeCarleyTrading.com. To submit
a question, email her at [email protected] or via www.DeCarleyTrad-
ing.com. Selected questions will appear in a future issue of S&C. Carley Garner
THE QUALITY OF FILLS amply liquid to enable a trader to get is volatile, thinly traded, or both, it is
Does the commodity brokerage make filled if the market merely reaches the possible a working stop order cannot be
a difference in the quality of the fill? noted price. For example, if a corn trader filled at a reasonable price (as determined
Also, why aren’t orders always filled works an order to sell a March contract by the protection points). In this situa-
as expected? at $4.10 (a dime higher than the current tion, stop orders go unfilled and become
The biggest lesson new traders learn price of $4.00), the trader desires to go limit orders. While this sounds like a
is there are no free lunches. Moreso, the short corn at $4.10 or higher if the market luxury because it can reduce slippage
commodity markets are not charities. rallies to the noted price. It is unlikely on most occasions, it can also go the
Orders will only be filled if there is a she will receive a fill higher than a price opposite way. In late October, the S&P
willing and able market participant to of $4.10 but she is only owed a fill if the 500 gapped lower by 20.00 points from a
take the other side of the trade at the price prints one tick above $4.10. If the Friday close to the Sunday night reopen.
desired price. The market does not owe futures market reaches precisely $4.10 One of our brokerage clients had a sell
any of us anything, not even liquidity stop working at a price on the lower end
or fair pricing. of the gap. Sadly, the CME exchange’s
Additionally, in the United States, Orders will only be filled protection functionality resulted in that
brokerage firms do not play a role in if there is a willing and order not being filled; instead, it became
making markets. Instead, they merely a limit order to sell at the previous stop
connect retail traders to a centralized able market participant price, which was never filled at all. This
exchange via trading platforms, a trading to take the other side of was particularly painful because the
desk, or an individual full-service broker. the trade at the desired S&P 500 futures proceeded to collapse
Trades are sent for execution through the price. 100 points ($5,000 per contract) in the
proper chain directly to the exchange’s session. Luckily, this was a stop order
trade-matching software (or open outcry to enter a short trade, not one to protect
pit in rare cases). Accordingly, aside from and drops, the trader might or might not a long trade. It is a little easier to stom-
minimal differences in software and receive a fill on the order. Whether or ach missing out on a big profit than it is
connection speeds, there is no difference not the order was filled would depend dealing with a failed stop-loss order and
in fill quality when entering an order on the number of orders from buyers at sitting on a large loss.
into a trading platform at one brokerage that price and time. This makes sense, For options traders, the issue of get-
versus another. In other words, a trader since the exchange cannot force another ting orders filled at an agreeable price
who experienced slippage on a stop-loss trader to accept the trade at the price you is more of a challenge. This is because
order, or who wasn’t filled on a limit order desire; the transaction can only take place options are not traded as fluidly as futures
they believed should have been, would if both traders are inclined to execute at contracts are. Thus, the lighter liquidity
have had the same experience if they that price and time. means fewer parties to take the other
were using any other brokerage. Thus, Something to be aware of regarding side of trades resulting in wider bid/ask
switching shops isn’t going to make the stop orders (which is an order to buy or spreads and the necessity to accept price
difference they are hoping for. sell a futures contract if the price gets slippage to get an order filled. In normal
For futures traders, fill quality is less of worse): The CME Group exchanges market conditions and in a reasonably
an issue. For instance, technically, a limit have a system referred to as “protection liquid commodity market, the slippage
order is one that buys or sells a futures functionality for market and stop orders.” from the price needed to execute and one
contract at a better price than the current This program defines protection points that a trader might deem fair is minimal.
market price. An order is only owed a representing prices the exchange deems But on occasion, volatility arises, causing
fill if the futures price trades through it, to be unacceptable slippage for a stop
but on many occasions, the markets are order (or market order). If the market Continued on page 45
42 • January 2021 • Technical Analysis of Stocks & Commodities
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Sideways Markets
In
by Ken Calhoun to note that standard moving averages least one day, and sell once price action
won’t be nearly as useful in this type of has pulled back off of resistance for at
nontrending markets, it can market as they are in trending markets, least a day.
be frustrating to get stopped since moving averages will appear in
out when trends do not con- Step-by-step action plan
tinue in your favor. Here’s how you can start using this
The S&P 500 index has been in a This strategy gives strategy:
sideways consolidation from Septem- you clarity on exactly
ber through November 2020, as seen where to enter and Step 1: After a sustained downtrend
in Figure 1 (SPY). In this situation, where to exit, without of at least 10 days, look for a techni-
you may find it more successful to buy cal pivot signal, such as the hammer
pivots off of support levels and sell into the guesswork. seen on September 21 in Figure 1,
resistance. and enter your position.
the middle of the trading range, as seen
When price action cycles by the blue and red 50 and 100 SMA Step 2: Set your exit target at just
up and down (simple moving average) lines, illustrated beneath the prior high; which is $360
Sideways markets are always difficult to in Figure 1. Developing a trading plan in this example.
trade. From a technical analysis perspec- designed to capitalize on price action in
eSIGNAL
FIGURE 1: BUYING SUPPORT, SELLING RESISTANCE (SPY). This shows an example of buying off of obvious support levels within the channel.
bulltrendcases( 0 ),
beartrendcases( 0 ),
cday( 0 ),
F TRADESTATION: JANUARY 2021 TRADERS’ TIPS CODE comphigh( 0 ),
In his article in this issue, “A Fresh Look At Short-Term Pat- complow( 0 ),
outsidebull( false ),
terns,” author Perry Kaufman introduces some test methods outsidebear( false ),
to analyze various short-term price patterns to determine how ratio( 0 ),
they work with various stocks and ETFs. The analysis includes ndays( 0 ),
adate( " " ),
results with and without a trend filter. The trend filter used size( 0 ),
is an 80-period simple moving average and the article also back1( 0 ),
provided the criteria for the various patterns used to determine back2( 0 ),
back3( 0 ),
if an entry is triggered. back4( 0 );
Shown here is the indicator code based on the author’s
work. A simple Plot statement was added to indicate that arrays:
bullreturns[6]( 0 ),
the code was running, but the code is designed to export the bearreturns[6]( 0 ),
results to a text file. bulltrendreturns[6]( 0 ),
beartrendreturns[6]( 0 );
Indicator: TASC JAN 2021
inputs:
trendper( 0 ),
usekeyreversal( false ),
useislandreversal( false ),
usecompression( 0 ),
usegaps( 0 ),
useoutsideday( false ),
usewiderangingday( 0 ),
forecast( 5 ),
investment( 10000 );
variables:
trend( 0 ),
pattern( " " ),
bullcases( 0 ),
bearcases( 0 ),
compression( false ),
gap( false ),
outsideday( false ),
widerangingday( false ),
bullpattern( false ),
bearpattern( false ), FIGURE 1: TRADESTATION. Shown here is a TradeStation daily chart of SPY with the indicator applied. The plot is
bulltrend( false ),
used to indicate that the code is running and does not plot a significant number in terms of the article content. The code
beartrend( false ),
is designed to export information to a file.
outsidebear = high > high[1] and low < low[1] if trend > trend[1] then
and close < 0.25 * (high - low ) + low; begin
bulltrend = true;
ratio = 0; bulltrendcases = bulltrendcases + 1;
end;
if usewiderangingday <> 0 then end;
begin end;
ratio = truerange / avgtruerange( 20 );
end; //================================================
// accumulated profits over next 5 days
// bearcases outside day //================================================
if outsidebear and if ndays > 1 then
( ratio = 0 begin
or ratio > usewiderangingday ) then if bullpattern then
begin begin
ndays = 1; bullreturns[ndays] = bullreturns[ndays] +
bearcases = bearcases + 1; size * ( close - close[ndays-1] );
bearpattern = true; end;
size = investment / close;
if bearpattern then
if trend < trend[1] then begin
begin bearreturns[ndays] = bearreturns[ndays] +
beartrend = true; size * ( close[ndays-1] - close );
beartrendcases = beartrendcases + 1; end;
end;
end if bulltrend then
// bullcases outside day begin
else if outsidebull bulltrendreturns[ndays] =
and (ratio = 0 bulltrendreturns[ndays] +
or ratio > usewiderangingday) then size * ( close - close[ndays-1] );
begin end;
ndays = 1;
bullcases = bullcases + 1; if beartrend then
bullpattern = true; begin
size = investment / close; beartrendreturns[ndays] =
beartrendreturns[ndays] +
if trend > trend[1] then size * ( close[ndays-1] - close );
begin end;
bulltrend = true; end;
bulltrendcases = bulltrendcases + 1;
end; if ndays > 0 then
end; begin
end; ndays = ndays + 1;
end;
//================================================
// Gap opening with profits in direction of the gap //================================================
//================================================ // summary
if usegaps > 0 and ndays = 0 then //================================================
begin if lastbaronchartex then
pattern = "Gap Opening"; begin
ratio = ( open - close[1] )/avgtruerange( 20 )[1]; adate = ELdatetostring( Date );
bullcases+bearcases:8:0,
",",
bullcases:8:0, ",",
Bullreturns[2]:8:0, ",",
Bullreturns[3]:8:0, ",",
Bullreturns[4]:8:0, ",",
Bullreturns[5]:8:0, ",",
Bullreturns[6]:8:0, ",",
bearcases:5:0, ",",
Bearreturns[2]:8:0, ",",
Bearreturns[3]:8:0, ",",
Bearreturns[4]:8:0, ",",
Bearreturns[5]:8:0, ",",
Bearreturns[6]:8:0, ",,",
FIGURE 2: THINKORSWIM. Here is an example of the study. The returns calculation from 1 to 5 days for bullish key reversals is shown
bulltrendcases+beartr
endcases:5:0, ",", in the upper pane with bearish key reversal returns in the lower pane. Log scale is enabled for the price pane to view the price moves
bulltrendcases:5:0, ",", more distinctly.
Bulltrendreturns[2]:8:0,
",",
Bulltrendreturns[3]:8:0, ",",
Bulltrendreturns[4]:8:0, ",",
Bulltrendreturns[5]:8:0, ",",
Bulltrendreturns[6]:8:0, ",",
beartrendcases:5:0, ",", F THINKORSWIM: JANUARY 2021 TRADERS’ TIPS CODE
Beartrendreturns[2]:8:0, ",",
Beartrendreturns[3]:8:0, ",",
We have put together a study based on the article in this issue
Beartrendreturns[4]:8:0, ",", “A Fresh Look At Short-Term Patterns (With And Without A
Beartrendreturns[5]:8:0, ",", Trend Filter)” by Perry Kaufman.
Beartrendreturns[6]:8:0 );
end;
We built the study referenced by using our proprietary
scripting language, thinkscript. To ease the loading process,
//================================================ simply click on http://tos.mx/pnEzI0G or enter it into the ad-
// end of trade
//================================================
dress into setup → open shared item from within thinkor-
if ndays > 6 then swim, then choose view thinkScript study and name it “Re-
begin turnsCalculationForPricePatterns” or whatever you like so
bullpattern = false;
bearpattern = false;
you can identify it. You can then add the study to your charts
bulltrend = false; from the edit studies menu from within the charts tab.
beartrend = false; The example chart shown in Figure 2 is the returns cal-
ndays = 0;
end;
culation from 1 to 5 days for bullish key reversals (upper
pane) and bearish key reversals (lower pane). Also, log scale
Plot1( Close ); // dummy plot to show code is running is enabled for the price pane to see the price moves more
distinctly. The price pattern to be used, its direction, whether
To download the EasyLanguage code for TradeStation or not to apply the trend filter, and investment size are all
10, please visit our TradeStation and EasyLanguage support configurable via inputs. Please see Perry Kaufman’s article
forum. The files for this article can be found here: https:// for more information on how to read the study.
community.tradestation.com/discussions/Topic.aspx?Topic_ —thinkorswim
ID=190289. A division of TD Ameritrade, Inc.
A sample chart is shown in Figure 1. www.thinkorswim.com
This article is for informational purposes. No type of
trading or investment recommendation, advice, or strategy
is being made, given, or in any manner provided by TradeS-
tation Securities or its affiliates.
—Chris Imhof
TradeStation Securities, Inc.
F WEALTH-LAB: JANUARY 2021 TRADERS’ TIPS CODE
www.TradeStation.com The Wealth-Lab strategy code for the short-term pattern
scanner described by Perry Kaufman in his article in this
var cdlIslandReversal()
F THE ZORRO PROJECT: JANUARY 2021 {
if(priceLow(0) > priceHigh(1) && priceClose(0) < priceOpen(0))
TRADERS’ TIPS CODE return -100; // sell
Japanese traders developed candlestick charts and if(priceLow(1) < priceHigh(0) && priceClose(0) > priceOpen(0))
candlestick patterns in the 17th century. Some traders believe return 100; // buy
else return 0;
that those patterns are still valid today. But since the 21st- }
century financial markets are quite different from the Kyoto
rice market of 300 years ago, new patterns were invented. In var cdlOutsideDay()
Compression - Bullish
TR1 = TRUERANGE();
Compression = (TR1[4] > TR1[3]) and (TR1[4]
> TR1[2]) and (TR1[4] > TR1[1]);
CompHigh = HIGHESTHIGH(BARS=4);
Compression and CLOSE() CrossesAbove
CompHigh
Compression - Bearish
TR1 = TRUERANGE();
Compression = (TR1[4] > TR1[3]) and (TR1[4]
> TR1[2]) and (TR1[4] > TR1[1]);
CompLow = LOWESTLOW(BARS=4);
Compression and CLOSE() CrossesBelow
CompLow
Testing
Optuma has a Signal Testing module that can
run these formulas over any timeframe and
universe of stocks with a couple of clicks,
giving the results in seconds. The results
show the average percentage returns, and
other statistics (including 20th/80th per-
centiles, standard deviation, and a Monte
Carlo simulation).
Here are two example tests since Janu-
ary 2000 on the three ETFs and five stocks
used in the article.
Opening gap—Bullish
Figure 7 shows 1,502 total signals showing
performance 5 days before and 10 days after FIGURE 9: OPTUMA. This chart displays sample test results for the bearish compression pattern with a trend
filter.
F TRADERSSTUDIO:
JANUARY 2021
TRADERS’ TIPS CODE
The importable TradersStudio files based
on Perry Kaufman’s article in this issue,
“A Fresh Look At Short-Term Patterns
(With And Without A Trend Filter),” can
be obtained on request via email to info@
TradersEdgeSystems.com. The code is also
available on this magazine’s website at Trad-
ers.com in the Traders’ Tips section.
Code for the short-term patterns in the FIGURE 11: TRADERSSTUDIO. Equity curve for BullGap and BearGap trading 100 shares per trade of the
article is included in the system file ST_ NASDAQ 100 without the trend filter.
Patterns_Sys both with and without the
trend filter depending on the input param-
eters. All of the patterns are coded on one
file so if all of the buy and sell rules for the
patterns are uncommented then the back-
test will run all the patterns in one run. To
test each pattern individually, simply com-
ment out all the other patterns not of cur-
rent interest. The way I have supplied the
code is with all but the BullGap and Bear-
Gap patterns commented out. Hence, the
only one that will run on a backtest is the
gap patterns. Figure 11 shows the equity
curve of the BullGap and BearGap trading
100 shares per trade of the NASDAQ 100
list of stocks from 2000 to 2014 with the
trend filter turned off. Figure 12 shows the
equity curve for the same set except that
the trend filter was turned on. The trend
filter did not improve the returns.
—Richard Denning
[email protected] FIGURE 12: TRADERSSTUDIO. Equity curve for BullGap and BearGap trading 100 shares per trade of the
for TradersStudio NASDAQ 100 with the trend filter.
OSOBA/FEAR
Continued from page 22
We can choose to think the
riods of stress or fear. We can reactivate our prefrontal cortex
thoughts that will maximize
by staying present and reminding ourselves that the fear we our potential for right action
feel is simply a chemical process happening deep inside our when we trade.
brain. And we can control that chemical process through the
thoughts that we allow ourselves to think.
Stella Osoba is a financial writer and trader. She has earned FURTHER READING
the Charted Market Technician designation and has writ- Watts, Dickson G. [1880]. Speculation As A Fine Art And
ten for several financial websites and publications. She is Thoughts On Life.
a frequent contributor to this magazine and to the Traders. Livermore, Jesse [1940]. How To Trade In Stocks.
com Advantage online publication. She may be reached via
email at [email protected].
56 • January 2021 • Technical Analysis of Stocks & Commodities
https://libta.org
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T
rading liquidity is often over- very high volumes. The greatest number three-year period. Thus, all numbers in
looked as a key technical of dots indicates the greatest activity; this column have an equal dollar value.
measurement in the analysis futures with one or no dots show little Columns indicating percent margin
and selection of commodity activity and are therefore less desirable and effective percent margin provide
futures. The following explains how to for speculators. a helpful comparison for traders who
read the futures liquidity chart pub- Courtesy of CBOT wish to place their margin money ef-
lished by Technical Analysis of Stocks ficiently. The effective percent margin
& Commodities every month. is determined by dividing the margin
value ($) by the three-year price range of
Commodity futures contract dollar value, and then multiply-
The futures liquidity chart shown be- ing by one hundred.
low is intended to rank publicly traded
futures contracts in order of liquidity. Stocks
Relative contract liquidity is indicated Trading liquidity has a significant ef-
by the number of dots on the right-hand fect on the change in price of a secu-
side of the chart. rity. Theoretically, trading activity can
This liquidity ranking is produced by serve as a proxy for trading liquidity
multiplying contract point value times All futures listed are weighted equally and equals the total volume for a given
the maximum conceivable price motion under “contracts to trade for equal dol- period expressed as a percentage of the
(based on the past three years’ historical lar profit.” This is done by multiplying total number of shares outstanding. This
data) times the contract’s open interest contract value times the maximum pos- value can be thought of as the turnover
times a factor (usually 1 to 4) for low or sible change in price observed in the last rate of a firm’s shares outstanding.
The information in Traders’ Resource is the most accurate at the time of posting and is subject to change. Because the vendors posting to Traders’ Resource are responsible for their own listing, Technical Analysis, Inc. declines any and all
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BASKET TRADING: A LOW-VARIANCE long or short, or inverse, positions. makes them “tick.”
APPROACH TO SCALING UP YOUR The objective of basket trading is to Index arbitrage is one form of basket
TRADING BUSINESS get the greatest return on capital (ROC) trading, by using stocks against futures,
Markets won’t always go up. during your designated timeframes, but there are many ways to harvest
Besides the directional outcomes, there but it must be on a risk-adjusted basis anomalies staying within equity instru-
are also many inside days and choppy as well. ments only.
sessions to endure or to participate in, A basket can be as simple as three When comparing the DJIA with the
if you have the knowhow and the tools. stocks, or it can be a large group of S&P 500 (SPX), the DJIA closely tracks
In my work, my goal is not only to assist hundreds of symbols. As with any di- the SPX over the long sample, showing
traders with naked single-stock trading, versification, the number of instruments that the benefits of 30 symbols rivals that
but also encourage traders to explore deployed may have a diminishing effect of 500. I am not suggesting that you have
any additional strategies, methods, and on the benefit of diversification at some to construct baskets of hundreds of differ-
techniques, so that they can broaden point. It’s been debated as to what the ent stocks (although some traders do), but
their toolchest. optimal number of instruments should just that grouping stocks “normalizes”
As I’ve discussed before in this col- be, but historically, an amount on the outcomes, and provides that balance
umn, basket trading is one of the methods order of 20 to 30 different instruments in contrast to the selection of a single
traders can employ to go beyond naked has been regarded as an approximate stock. ETFs are statistically muted, as
stock trading. Both basket trading and level of diversification for a portfolio. they are comprised of several symbols,
hedged trading in general offer many but again, take some time to research
benefits for career-minded traders. Most and understand the composition.
don’t go back to naked trading once
Baskets can be Most investors are already familiar
they’ve learned to incorporate hedges. deployed and hedged with having a basket of stocks, which
Basket trading is essentially trading with ETFs or they can they regard as their portfolio. This goal
a group of stocks simultaneously to be traded against other of having a portfolio is usually to select
potentially reduce the risk and lower a group of noncorrelated stocks from
the variance of the total capital that is
baskets to further multiple industries and sectors. The
utilized, whether that capital is your own reduce risk. purpose is to smooth out the returns and
or whether you are using leverage. If you benefit from the overall performance of
are leveraged, it’s even more important The Dow Jones Industrial Average the group. Stock-specific news, earnings,
to lower the risk per idea, as well as your (DJIA) is comprised of 30 stocks which and events will not make or break the
total exposure to the market. do change from time to time as we saw entire portfolio. We do find though that
Baskets can be deployed and hedged with the changes this past August. It is in significant market moves, the cor-
with ETFs or they can be traded against weighted by stock price, so when AAPL relations increase as the market begins
other baskets to further reduce risk. had a 4:1 split, the index was rebalanced to act as one. During the market crash
Spreading capital over many instruments with other symbols. Apple dropped from in March 2020, most equity portfolios
along with a variety of strategies em- the most heavily weighted stock of the were seriously declining.
ployed can increase your staying power 30 stocks in the DJIA to 17th place. Index The trading of baskets is similar, but
by reducing noise, buying you more time, managers replaced XOM, PFE, and RTX with shortened timeframes. In addition,
and ultimately, these factors can increase with CRM, AMGN, and HON. most investors don’t have hedges on, nor
the probability of success. You can see from this how meaning- are short, but rather they are striving
I’ll reflect for a moment on probability. ful it is to have knowledge about what to diversify and reduce correlations. A
I’m not talking about hedging trades as symbols push and pull at the index and basket trader could have exploited the
an afterthought or done simply because at its tracking ETFs. (ETFs that track market correction rather than be a pas-
you read that hedging is a good idea, but indexes include the DIA and SPY). If sive victim of it.
rather because you are acting intention- you are going to trade ETFs, you should A basket within the same sector or
ally and with analytics to support any understand their composition and what same industry can allow a trader to
60 • January 2021 • Technical Analysis of Stocks & Commodities
https://libta.org
Trading Perspectives
take advantage of macro fine. Other reports offered
influences, technical, and include streaks, RSI-2
relative strength observa- period, price performance,
tions, while reducing the and a seasonality almanac
impact of adversity from (a sample report is shown
a single stock or its lack in Figure 2). With this,
of performance. It is fairly the user can dial in the
hard to pick one stock out seasonal signals as well
of 500 to earn a living on, as price, volume, events,
versus having a probabi- stocks, or ETFs.
listic approach to picking Additional diversifica-
25 longs and 25 shorts tion can come from trad-
and earning your keep on ing various strategies, and
the relative performance trading over a variety of
between long and short timeframes.
dollars. Many market partici-
If you want to reduce pants can gain a false
FIGURE 1: SAMPLE REPORT FROM WWW.HEDGEDTRADING.COM
market and macro influ- sense of security through
ences simultaneously, then outsized returns in a
going long a few symbols momentum market. The
in a peer group and short goal of career traders is to
a few symbols in the same look at the long sample of
group is one approach. The what works in all markets
idea is to have favorable and most of the time,
odds for each long selec- while protecting their
tion (meaning, likely to capital and reducing risk
move up), and favorable of ruin.
odds for each short selec- There are a variety of
tion (meaning likely to methods to position-size
move down). And if this your baskets, and traders
could be made compound- usually start with capital-
able day after day, then balancing long dollars
this is not only a good against short dollars. This
starting point but also doesn’t account for the
one stepping-stone on a instruments’ volatility, so
path to a scalable potential FIGURE 2: SEASONALITY ALMANAC traders can use ATR (av-
trading career. erage true range) or ATR
I’ll illustrate how we approach this. could try to select some long ideas and as a percentage of price, or a blend of
Figure 1 shows an example report from some short ideas that all have favor- beta and historical volatility. Regardless
our dashboard, which is a free resource able odds of moving up or down. If the of your chosen method, the key is to
we offer at www.hedgedtrading.com. SYMBOL/SPY relationship moves up, use a systematic approach so that you
With this information, we are seeking that means the symbol would outperform don’t have the problem of a loss on one
to gain insights into the performance the SPY on a relative basis. Since the symbol that wipes out the gains from
of each symbol in the S&P 500 index common symbol is the SPY that every ten symbols.
against the tracking ETF itself. other symbol is also ratioed with, and On the subject of executing the bas-
The dashboard works by analyzing that relationship has had the event (of kets, various platforms have the ability
signals generated and reporting the the percent penetration of the Bollinger to perform a wave, or you could buy at
subsequent average performance. In this Bands), then you could drop the SPY the open using market or limit orders
example, the widely used %B indicator from the equation and go long some (we prefer limit orders, but that might
is shown and reports the subsequent symbols against short some symbols. mean you miss some trades). If you
average performance for the 10 days The SPY could be utilized for any buy during the day, you must account
after the signal was generated for all the capital-balancing offset or for protection for slippage. You also need to account
same events or signals in the lookback against drift, and to use only when valid for hedging all at once versus hedging
period. Other reports on the website show and with defined parameters. in increments. More on this subject in
three-day performance. Some traders will simply trade a sym- a future issue!
Using this type of information, you bol against the SPY, which is perfectly
January 2021 • Technical Analysis of Stocks & Commodities • 61
https://libta.org
The following selection of book descriptions represents a sampling of recent tween 2010 and 2020, leading fund manager
book releases in the investing field. Books described here may be from some of Terry Smith delights in debunking the many
the major book publishers as well as some independent book publishers. These myths of investing—and making the case for
are not critical reviews or editorial evaluations, but rather a brief look at the book simply buying the best companies.
marketplace to help keep readers up to date on new or recent book offerings. Smith not only reveals what these high-
quality companies really look like and where
Unknown Market How I Invest My to find them, but also why you should avoid
Wizards: The Best Money: Finance Ex- companies that abuse the English language;
Traders You've perts Reveal How how most share buybacks actually destroy
Never Heard Of They Save, Spend, value; what investors can learn from the Tour
(376 pages, £30 And Invest (192 de France; why ETFs are much riskier than
for hardback, £15 pages, £18.99 for most realize; how ESG investors often end
for eBook, Novem- paperback, £14.49 up with investments that are far from green
ber 2020, ISBN for eBook, Novem- or ethical; his ten golden rules for investment,
9780857198693– ber 2020, ISBN and much, much more.
9780857198709) 9780857198082 – The result is an enjoyable and eye-opening
by Jack D. Schwa- 978 0 8 5719 8 0 9 9) tour through some of the most important
ger, published by Harriman-House. Unknown by Joshua Brown and Brian Portnoy, topics in the world of investing—as well as
Market Wizards continues in the three- published by Harriman-House. The world a collection of practical insights on how to
decade tradition of the hugely popular Market of investing normally sees experts telling make your money work for you.
Wizards series, interviewing exceptionally us the ‘right’ way to manage our money. Harriman-house.com
successful traders to learn how they achieved But how often do these experts pull back
their extraordinary performance results. the curtain and tell us how they invest their The VIX Trader’s
The twist in Unknown Market Wizards own money? How I Invest My Money seeks Handbook: The
is that the featured traders are individu- to do just that. History, Patterns,
als trading their own accounts. They are In this collection, 25 financial experts And Strategies
unknown to the investment world. Despite share how they navigate markets with their Eve ry Vo l a t i l -
their anonymity, these traders have achieved own capital. In this honest rendering of how ity Trader Needs
performance records that rival, if not surpass, they invest, save, spend, give, and borrow, To Know (206
the best professional managers. this group of portfolio managers, financial pages, £50 for
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turned an initial account of $2,500 into $50 perts detail the ‘how’ and the ‘why’ of their for eBook, Octo-
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a trader who made tens of millions using face and the aspirations they hold. Some- sell Rhoads, published by Harriman-House.
a unique approach that employed neither times raw, always revealing, these stories Russell Rhoads is an expert on VIX, the Cboe
fundamental nor technical analysis, and detail the indelible relationship between our Volatility Index. He takes a deep dive into
a promising junior tennis player in the UK money and our values. all things associated with volatility indexes
who abandoned his quest for a professional Harriman-house.com and related trading vehicles, beginning
sporting career for trading and generated with an explanation of what VIX is, how it
a nine-year track record with an average Investing For is calculated, and why it behaves the way
annual return just under 300%. Growth: How To it does in various market environments. It
World-renowned author and trading expert Make Money By also explains the various methods of getting
Jack D. Schwager is the guide. His trade- Only Buying The exposure to volatility through listed markets.
mark knowledgeable and sensitive interview Best Companies The focus then moves on to demonstrate how
style encourages the Wizards to reveal the In The World—An traders take advantage of various scenarios
fascinating details of their training, experi- Anthology Of In- using futures, options, or exchange-traded
ence, tactics, strategies, and their best and vestment Writing, products (ETPs) linked to the performance
worst trades. There are dashes of humour 2010–20 (320 pages, of VIX.
and revelations about the human side of £24.99 for hardback, Finally, a review is presented of volatility
trading throughout. £18.99 for eBook, October 2020, ISBN events that shook the markets, including the
The result is an engrossing new col- 9780857199010–9780857199027) by Terry 1987 crash, Great Financial Crisis, 2010 flash
lection of trading wisdom, brimming with Smith, published by Harriman-House. Some crash, and the 2020 pandemic.
insights that can help all traders improve people love to make successful investing Harriman-house.com
their outcomes. seem more complicated than it really is. In this
Harriman-house.com anthology of essays and letters written be-
62 • January 2021 • Technical Analysis of Stocks & Commodities
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