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 CONTENTS DECEMBER 2022, VOLUME 40 NUMBER 13

6 Explore Your Options offer research and consulting

by Jay Kaeppel services, providing multiple
The Traders’ MagazineTM Got a question about options? reports throughout the week with
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EDITORIAL
editor@traders.com 8 Short-Term Continuation TIPS
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by Barbara Star, PhD Commodities contributing writer
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 Explore Your Options
GOT A QUESTION ABOUT OPTIONS?
Jay Kaeppel has over three decades of experience in the options markets. He
was a head trader for a CTA firm, an options trading software developer,
and was a portfolio manager for an investment management firm. He is
presently Senior Research Analyst for Sentimentrader.com. He is the author
of several books, including The Four Biggest Mistakes In Option Trading;
The Option Trader’s Guide To Probability, Volatility, And Timing; and
Seasonal Stock Market Trends. Send your questions or topic suggestions
to Jay Kaeppel at jay@sentimentrader.com. Selected questions will appear
in a future issue of S&C.
Jay Kaeppel

SHORT-TERM CREDIT SPREADS in seven days. Let’s consider two • Selling the Oct14 AAPL 132 put
I am interested in selling short-term potential spreads, with AAPL trading @ $0.77
credit spreads to generate income. at $140.15 a share. • Buying the Oct14 AAPL 131 put
But there are so many potential The first spread (Figures 1 and 2) @ $0.64
choices regarding which spread to involves:
choose. Are there any guidelines for The second spread (Figures 3 and
selecting the best spread? 4) involves going further out-of-the-
Yes and no. There are potential There are potential money and:
guidelines that a trader can apply, guidelines that a
but there is no such thing as “the best trader can apply, but • Selling the Oct14 AAPL 128 put
spread.” In most cases, it is best to there is no such thing @ $0.36
consider a couple of potential trades as “the best spread.” • Buying the Oct14 AAPL 127 put
and then compare the key factors. @ $0.30
Probably the three key factors to
consider are:

• How long until expiration

• Potential return

OPTIONSANALYSIS.COM
• Potential return versus the
potential risk

Ultimately, each trader must de- FIGURE 1: PUT CREDIT SPREAD, EXAMPLE 1. The first spread example sells the Oct14 AAPL 132
cide which trade is “the best” in put @ $0.77 and buys the Oct14 AAPL 131 put @ $0.64, with AAPL stock trading at $140.15/share.
each given circumstance. While the
choice is somewhat subjective, it is
essential to understand your goals in
terms of reward and your ability to
withstand risks.
The best way to illustrate the
tradeoffs is with an example that
compares the tradeoffs between two
potential trades.

Example using AAPL

Let’s assume a trader believes Apple
Inc. (AAPL) will not decline much
over the next week. To exploit this
opinion, the trader can sell an out- FIGURE 2: RISK CURVES, PUT CREDIT SPREAD, EXAMPLE 1. Shown here are the risk curves
of-the-money put spread that expires for the 132–131 put credit spread from Figure 1.
6 • December 2022 • Technical Analysis of Stocks & Commodities
 Explore Your Options
Figure 2 displays the risk curves
for the 132–131 put credit spread,
and Figure 4 shows the risk curves
for the 128–127 put credit spread,
both trading a 1-lot.
Now let’s consider the tradeoffs
between the two positions. The
values for the key variables appear
in Figure 5. FIGURE 3: PUT CREDIT SPREAD, EXAMPLE 2. The second spread example sells a further out-
of-the-money put, also with AAPL trading at $140.15/share as in example 1.
The key tradeoffs:

• Both trades have only seven cal-

endar days left until expiration.
This means that the greek values
of vega and theta are less critical
than they might be if there were
more time until expiration. Vega
indicates the expected $ change
in the position’s value if implied
volatility rises one point. Theta
indicates the expected $ in the
position’s value based solely on
the passage of one day. These two
factors only apply to the amount
of time premium built into the FIGURE 4: RISK CURVES, PUT CREDIT SPREAD, EXAMPLE 2. Shown here are the risk curves
for the 128–127 put credit spread from Figure 3.
options. In seven days, the options
will all expire, and there will be
no time premium left in their price
(that is, they will either expire
worthless if they are out-of-the-
money at expiration or will expire
worth exactly their intrinsic value
if they expire in-the-money.) The
bottom line is that whatever influ-
ence time and volatility have on
these options, that influence will
vanish by expiration.
• Because the 132–131 spread has a FIGURE 5: COMPARING KEY VALUES OF THE TWO EXAMPLE SPREADS. You can consider
the tradeoffs between these two potential positions by comparing key variables, as shown here.
higher delta and a larger gamma, We can see that the 128–127 spread has a higher probability of profit but the 132–131 spread can
price changes for AAPL will generate more profit.
significantly impact the value of
this spread more than the 128–127. generate a profit.
This makes sense since the 132 • The breakeven price at expiration While the choice is
short strike is closer to the cur- for the 128–117 spread is $127.94.
somewhat subjective,
rent price of AAPL than the 128 This means that AAPL stock
short strike. can fall −8.7% in the next week, it is essential to
• The breakeven price for the and this trade can still generate understand your goals
132–131 spread at expiration is a profit. in terms of reward
$131.87. This means that AAPL and your ability to
stock can fall −5.9% in the next withstand risks.
week, and this trade can still Continued on page 27
December 2022 • Technical Analysis of Stocks & Commodities • 7
ROY WIEMANN
 INDICATORS

Opportunities For Profit Within The Trend

Short-Term Continuation
And Reversal Signals
Combining two classic oscillators, the directional indicators that make up Welles Wilder’s directional
movement oscillator and the commodity channel movement index (DMI), which is available on most
index, and adding a few twists described here can technical analysis charting sites. The foundation of
help you more easily recognize price continuations the DMI is formed by the plus directional indica-
and reversals that take place within a trend. tor (+DI) and a minus directional indicator (−DI).

F
They reflect buying and selling pressure and provide
inding a trend and sticking with it is the goal information about the positive or negative direction
of many traders. But even in strongly trend- of price movement over a period of time. The math-
ing markets, minor price retracements and ematical formulation behind the construction of the
consolidations occur that can shake them DI indicators can be found in Wilder’s book, New
out of a trade. Despite creating trading pitfalls, those Concepts In Technical Trading Systems, as well as
temporary movements also offer entry, exit, and con- on several internet sites.
tinuation opportunities. The ability to recognize when A plus or positive DI indicates upward price move-
price fluctuations begin and end can prevent the loss ment while a minus or negative DI indicates declining
of unrealized profits and is the focus of this article. price movement. The directional indicators are in-
Among the technical tools available to traders, tended to identify trend rather than pinpoint price tops
momentum oscillators are geared to reflect the ebb and bottoms. Potential changes in trend are signaled
and flow of price movements. This article describes when the lines intersect and one of the DIs rises above
the use of two oscillators, the directional movement the other. During sideways or choppy price action the
(DMI) oscillator and the commodity channel index lines crisscross each other several times.
(CCI), to help recognize those price continuations
and reversals that take place within a trend. The DMI Make a few changes
oscillator shows both the short-term trend direction Most charting packages present the +DI and −DI
and trend continuation points while the CCI identifies as separate lines within the same panel. To make it
the potential reversals within the trend. easier to follow, I converted the indicators to an oscil-
lator format by subtracting the −DI from the +DI and
The DMI oscillator changing the line style to display it as a histogram
The DMI oscillator is one of my favorite indicators. In that moves above and below a zero line.
prior articles I have included the DMI oscillator as the The zero line of the oscillator represents the point
basis of a stochastic indicator and, more recently, as a at which the +DI and the −DI intersect and the place
directional filter for a swing trading method. In this where potential changes in trend occur. A DMI os-
article it will serve two purposes: to identify whether cillator above zero indicates prices are trending up.
buyers or sellers are in control of price direction and A DMI oscillator below the zero line and falling
to signal points of entry within a trend. means that selling pressure is dominating and price
The DMI oscillator is derived from two of the is trending down.

by Barbara Star, PhD

December 2022 • Technical Analysis of Stocks & Commodities • 9
 The bar chart of Tyson Foods in
Figure 1 illustrates the difference
in appearance between the usual
line display of the plus and minus
directional indicators and the DMI
oscillator conversion. The DMI os-
cillator in the lower panel clarifies
trend direction better as it remains
above its zero line during the brief
pullback in April and below its zero
line during a choppy price decline
in May.
Displaying the DI indicators

METASTOCK
as an oscillator in a histogram
format does not alter the values of FIGURE 1: TYSON FOODS (TSN) WITH ORIGINAL DMI AND DMI OSCILLATOR. This daily bar chart
the underlying components or the illustrates the difference between the way the plus and minus directional indicators are plotted in most
point at which they intersect. For charting programs (upper panel under price) and the DMI oscillator (lower panel).
me it is a visual preference that
makes analysis faster, easier, and
less confusing.
And, to more clearly see the
peaks and valleys within the indi-
cator movements, I outline the his-
togram with a one-period moving
average. I also changed the usual
lookback period from 14 to 10.
Color the price bars. My pre-
ferred method for viewing short-
term trend direction is to color the
price bars so they correspond to the
color of the DMI oscillator. A gray
price bar appears if the oscillator
FIGURE 2: TYSON FOODS WITH COLOR-ADJUSTED PRICE BARS. Changing the color of the price bars
value registers zero, which means so they correspond with the colors of the DMI oscillator makes it easier to identify changes in trend.
it is neither above nor below the
zero line.
Using the same Tyson Foods chart, Figure 2 shows Continuation signals
that coloring the price bars to match the DMI oscillator Regardless of whether it is above or below the zero line,
direction helps identify the directional bias and also filters the DMI oscillator also fluctuates as it reacts to the more
out some of the minor green price retracement bars that minor price pullbacks and consolidations that form within
appear during the May decline in Figure 1. the short-term trend. Brief pullbacks within the trend or
breakouts from consolidations provide excellent opportuni-
ties for trend traders to remain in a trade, add to positions,
or to hop aboard as price then continues in the direction
of an already-existing trend.
The ability to recognize when The round colored symbols shown on the daily price
price fluctuations begin and chart of Costco in Figure 3 are based on DMI oscillator
end can prevent the loss of fluctuations that signal the end of minor pullbacks and
unrealized profits and is the the beginning of potential continuations of the prevailing
focus of this article. short-term trend.
Blue circles appear under the price bar when the DMI
oscillator is both above its zero line and also above an
10 • December 2022 • Technical Analysis of Stocks & Commodities
 +100 level as overbought and values
below the −100 level as oversold.
The default lookback period used
in many software packages is 14
or 20, but in this article it has been
shortened to 13.

Reversal signals
The CCI often signals a reversal to
the downside when it moves beyond
its +100 level and then at some point
comes back to cross below the +100
level. It marks the beginning of a
pullback and sometimes a longer-
FIGURE 3: COSTCO (COST) WITH CONTINUATION SIGNALS. The circles point out the start of continua- term downside trend reversal and,
tion moves that took place following the price pullbacks within the trend on the daily chart of Costco during in this article, will be identified
the mid-March to mid-May 2022 daily timeframe. with a magenta-colored diamond
shape above the price bar.
The CCI signals a reversal to the
upside when it moves below its −100
level and then at some point comes
back to cross above the −100 level.
It signifies the beginning of a minor
countertrend rally and sometimes
a longer-term upside trend reversal
and is identified by a dark green
diamond under the price bar.
To illustrate the reversal points on
the CCI indicator as they appear on
price, a daily price chart of Public
Storage in Figure 4 includes the CCI
in a separate panel under the price
FIGURE 4: PUBLIC STORAGE (PSA) WITH REVERSAL SIGNALS. Reversal signals are based on the
commodity channel index (CCI). The diamond shapes on the price chart correspond to the arrows shown chart along with the DMI oscillator
on the CCI in the upper panel. They signal the beginning of countertrend price retracements. location of the diamonds on price.
However, on subsequent charts,
18-period simple moving average in an uptrend. Dark red the CCI indicator will not appear and only the diamond
circles appear above the price bar in a downtrend when shapes on the price bars will be displayed.
the DMI oscillator is both below its zero line and below The sidebar “Code For Indicators In MetaStock Formula
the 18-period moving average. Language” contains the formulas for all the indicators
used in this article.
The commodity channel index (CCI)
The CCI, developed by Donald Lambert, provides informa- Trading the signals
tion about the amount of spread or variability that exists Some traders may wish to trade with the trend and only
between the current price in relation to its average price. display the continuation signals on their charts while others
Unlike other oscillators whose movements are limited by
a scale of zero to 100, the CCI is considered an unbounded
oscillator that moves above and below a zero line without Momentum oscillators are
upper or lower limits. However, Lambert suggested des- geared to reflect the ebb and
ignating the plus 100 and minus 100 levels as thresholds, flow of price movements.
which tend to encompass 70–80% of price action. Over
time, traders have come to interpret CCI values above the
December 2022 • Technical Analysis of Stocks & Commodities • 11
 downside by using a simple strategy
based on the signals. For example,
during uptrends, blue circles serve
as potential entry alerts. Enter a
trade after price moves above the
high of the continuation blue circle
signal bar and exit when a reversal
diamond signal appears. A stop-
loss under the low of the signal bar
would help control initial risk.
By the same token, during down-
trends, enter following the dark red
continuation signal with an initial
stop-loss above the high of the
FIGURE 5: ENPHASE ENERGY (ENPH) WITH CONTINUATION AND REVERSAL SIGNALS. You can signal bar. Exit either at a green
combine both signals for more trading opportunities with continuation entries and reversal exits. A 20-period reversal signal or when price hits
simple moving average was added here to provide a visual layer of directional support & resistance. the stop-loss.
Unfortunately, not all markets
move up and down in well-defined
waves. The SPY ETF in Figure 6
gives a more realistic picture of
price shifts as it moved up into
November 2021 and then consoli-
dated in a sideways range through
most of December before making a
nominal new high that broke down
sharply in January to begin the 2022
bear market decline.
As might be expected, continua-
tion signals that worked well dur-
ing the trending periods produced
some false signals during the con-
FIGURE 6: SPY ETF UP, SIDEWAYS, AND DOWN. The daily chart of the S&P 500 ETF (SPY) from October
2021 to early February 2022 shows the continuation and reversal signals traders would have encountered solidation. However, the diamond
during the runup to the December high and the initial decline into a bear market. reversal signals that appeared near
or at the highs and lows of both
may prefer mean-reversion trades or actual trend reversals the trends and consolidation periods produced good exit
and only place the diamond shapes of the reversal signals points. Those signals along with the color changes of the
on their charts. DMI oscillator and the price bars produced gains during
Placing both the continuation and reversal signals on a the uptrend and prevented losses during the downtrend.
chart as in Figures 5 and 6 does create a more cluttered-
looking chart, but observing the interplay between the A few observations
two signals offers a broader perspective that opens new Realizing that everything becomes clearer in hindsight, I
trading avenues. will share some observations and a few tips that may help
For example, the solar energy company Enphase made prevent untimely entries or exits. For instance, because the
an impressive move of more than 100 points during the DMI oscillator rarely crosses its zero line at the exact tops
two-month period from October through November 2021 and bottoms of price, it may help to add a moving average
only to give it all back during the following two months. or trendlines to the price chart as in Figures 5 and 6 that
(See Figure 5.) aid in identifying trend changes.
While investors may not have been happy to see their Near the end of a trend, usually just prior to the DMI
profits disappear, shorter-term traders were given ample oscillator shift from green to red or from red to green,
profitable trading opportunities both to the upside and the price often fails to follow through beyond a single bar
12 • December 2022 • Technical Analysis of Stocks & Commodities
Specialized
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 price moves often produce shallow pullbacks that trigger a
reversal signal. Price may not have the necessary momen-
The directional indicators tum to reach the projected target desired by countertrend
are intended to identify trend traders. Those who favor a reversion to the mean strategy
rather than pinpoint price tops could manage risk once a trade is in progress by maintain-
and bottoms. ing a trailing stop-loss. But those using the reversal signals
for actual trend reversal trade entries might use a more
conservative entry by also waiting for the DMI histogram
after generating a continuation signal. Because it may be to cross its zero line and change color.
difficult to gauge where that will happen, maintaining a Tightening stops when the reversal signal occurs or exit-
stop-loss is especially important. ing when the price bars change color following a reversal
By the same token, don’t assume deep retracements will signal can help prevent major losses.
occur with every reversal signal. Long or strong trending Sometimes a reversal signal does not appear at the point

CODE FOR INDICATORS, IN METASTOCK FORMULA LANGUAGE

• DMI oscillator formula Click the “color” tab and select red or a color of your
choice.
In the formula builder, paste the following: In the same expert advisor, select the “symbols” tab
to create the following signals:
PDI(10)-MDI(10)
• DMI oscillator continuation signals
• Formula for DMI oscillator above or below zero
Up-trending signals:
In the formula builder, paste the following code as a C>Mov(C,18,S)AND When(PDI(10)-MDI(10)>0)AND
single formula: When(L>Ref(L,-1)AND When(Ref(L,-1)<Ref(L,-2)))

If(Fml("DMI Oscillator")>=0,Fml("DMI Oscillator"),0); Click the “graphic” tab and select the circular dot and
If(Fml("DMI Oscillator")<=0,Fml("DMI Oscillator"),0); the color blue.

Once it is plotted on a chart, change the line style to Down-trending signals:

“histogram.” C<Mov(C,18,S)AND When(PDI(10)-MDI(10)<0)AND
When(H<Ref(H,-1)AND When(Ref(H,-1)>Ref(H,-2)))
Select colors for histogram bars:
Click on the histogram above the zero line and select Click the “graphic” tab and select the circular dot and
a color for the DMI indicator above zero. the color dark red.
Click on histogram below the zero line and select a
color for the DMI indicator below zero. • CCI reversal signals

Select colors for price bars: CCI Top:

To color the price bars, create an expert advisor. Select (CCI(13)<=100)AND When(Ref(CCI(13),-1)>100)AND
the “highlight” tab and paste in the following code: When(Ref(CCI(13),-2)>100)

DMI above zero: Click the “graphic” tab and select “diamond” and the
(PDI(10)-(MDI(10)))>0 color magenta.

Click the “color” tab and select green or a color of your CCI bottom:
choice. (CCI(13)>=-100)AND When(Ref(CCI(13),-1)<-100)AND
When(Ref(CCI(13),-2)<-100)
DMI below zero:
(PDI(10)-(MDI(10)))<0 Click the “graphic” tab and select “diamond” and the
color dark green.

14 • December 2022 • Technical Analysis of Stocks & Commodities

where price begins a deeper retracement. Often this is the of the financial markets. She can be reached at 818 224-
result of a divergence between price and the indicator that 4070 or star4070@aol.com.
has already occurred at the time the price high or low is
made. The price chart of the SPY in Figure 6 during No- The code given in this article is available in the Article
vember 2021 provides a very good example of the need Code section of our website, Traders.com.
to check for divergences.
See our Traders’ Tips section beginning on page 48 for
A versatile combination implementation of Barbara Star’s technique in various
The pairing of the DMI oscillator and the CCI offers technical analysis programs and trading platforms. Ac-
multiple avenues for several types of trades. Colored price companying program code can be found in the Traders’
bars and the DMI oscillator make it easy for trend traders Tips area at Traders.com.
to discern changes in short-term trends. Those wishing
to add to existing positions, as well as traders waiting Further reading
for a pullback after a trend has begun, would find the Wilder, J. Welles [1978]. New Concepts In Technical
continuation signals useful. Meanwhile, reversal signals Trading Systems, Trend Research.
offer short-term rallies for countertrend traders as well Star, Barbara [2013]. “The DMI Stochastic,” Technical
as for swing traders looking for longer-term moves using Analysis of Stocks & Commodities, Volume 31:
the interplay between continuation and reversal signals. January.
[2020]. “Swing Trade With The Gann Hi-Lo Activa-
Barbara Star, PhD, is a contributing writer to Techni- tor,” Technical Analysis of Stocks & Commodities,
cal Analysis of Stocks & Commodities magazine. She Volume 38: October.
trades part-time and provides individual instruction and ‡ MetaStock
consultation to those interested in the technical analysis ‡See Editorial Resource Index

2023 Readers’ Choice Awards

Winners will be announced in the
Bonus Issue, available February 2023.

If you are a current subscriber, go to

Traders.com and log in to vote.

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Become one today! Call 1-206-938-0570
or go to Traders.com to subscribe.

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December 2022 • Technical Analysis of Stocks & Commodities • 15

 Selling Option Puts To Generate Income

DIY Annuity: Guaranteed

Monthly Retirement Income
Here is an example of a way that retiree-investors could to a screen are incompatible. And unlike with annuities
sell puts to generate income. from insurance companies, we retain future flexibility
in controlling and growing our principle. We choose the
by Lawrence Smith State Street ETF ticker (SPY), which tracks S&P 500

E
index like a glove with great liquidity.
very day, 10,000 fellow baby boomers retire With the timeframe (monthly) and the trading vehicle
in the US. This trend is expected to continue (SPY) selected, the last variable to choose has the great-
until 2030. If there is a low interest rate envi- est impact on our success or failure. Which put should
ronment, it’s difficult to find safe retirement we select to sell to generate premium income? Looking
income-generating securities. FDIC-insured down the mathematically elegant strike prices of our
bank CDs pay just pennies. Once-powerful discount broker option matrix chain, we have many puts
municipal bonds, because of their exemption from federal to choose from.
taxes, have been offering meager yields. And the payouts My wife and I are loss averse. With no disrespect to
from very safe US Treasuries have been very disappoint- Black, Scholes, and Merton, or the Economics Nobel
ing. As an alternative, my retired wife and I began selling Prize Committee that celebrated their partial-differen-
monthly cash-secured puts using “the spiders.” In this tial-equation options pricing formula, our put selection
article, I’ll explain our technique. process is anchored more in the Richard Thaler’s camp
and his “invisible hand, wave,” a clear slap on the wrist
KATA KARI/SHUTTERSTOCK

Doing it yourself of Adam Smith’s famous hand. In 2017, Thaler’s research

As retirees, our paramount goal is monthly income with was also awarded by that same Economics Noble Prize
attention paid to safety, low fees, and ease of trade main- Committee.
tenance. Traveling to bug grandkids and being tethered Here is an example of how this trade works to the re-
16 • December 2022 • Technical Analysis of Stocks & Commodities
 OPTIONS TRADING

tiree’s advantage. Say the SPY

price is $425. Using the dis-
count broker’s tools, pull up the
option matrix chains (Figure 1)
and adjust the expiration date
to about 30 days in the future.
Drop down the matrix chain
to between $5.00 and $10.00
below the current selling price
to select a strike price (Figure
2). The strike price is the price
at which the shares would be
“put to” or sold to the investor

TD AMERITRADE (NOW SCHWAB)

if exercised. Puts closer to the
current price are more likely
to be exercised, but they pay
higher premiums. The investor
weighs the tradeoffs. FIGURE 1: OPTIONS MATRIX. Viewing the options chain for SPY, adjust the expiration date to about 30
Who are the crazy people days in the future.
on the other side of this trade?
Who pays to buy puts at a particular strike price in the
future? Nervous professional money managers. Profes-
sional money managers nervous to keep their clients happy
who bought SPY above the current price are scared the
future price of SPY will drop. They bid some amount of
premium in hopes of buying insurance in the form of a
put. For example, someone (perhaps one of those nervous
professionals) bid $397 for a put at the $420 strike.
The retired couple is happy to purchase this wonderful
broadly diversified index at a discount compared to the FIGURE 2: OPTIONS MATRIX, ZOOMED IN. For the strategy, select a strike
recent market price. They see the bid of $397 reported price that’s between $5 and $10 below the current market price for SPY.
on the discount broker’s matrix chain from prospective
buyers corresponding to the strike price of $420. In our example, we are using one options contract. One
If the investor-retirees accept this premium, they enter contract covers 100 shares. For an account with $450,000,
a sell-to-open put order at the strike price of $420, for 10 contracts would be used, covering 1,000 shares.
30 days in the future. The strike price is the price at Monthly income to the retirees would be $3,795.
which the option contract is triggered. The retirees are Once the contract is in place, no matter what happens in
obligated, until expiration, to do what they would love the market, the investor-retirees keep the $379 premium
to do—purchase 100 shares of the SPY for only $420. as guaranteed income. Over the life of the contract, 30
For this obligation, the retirees are paid a premium of days, only three things can happen:
$395 today. The contract is in force, and binding, for a
specific timeframe, after which it expires. In our example, 1. The market goes up. If the price for SPY is above
that’s about 30 days. the earlier price (in our example, that was $425),
Until the expiration date, the brokerage will freeze
$42,000 of the retirees’ cash. Hence the name “cash-
secured put.” The brokerage guarantees the $397 premium This is a simple introduction to
payment to the seller and guarantees shares to the buyer, selling cash-secured-puts as
if triggered. The cash cannot be accidentally spent; the a tool to generate guaranteed
retirees are protected that their cash is “secured.”
retirement income.
This strategy is the same regardless of whether you have
saved $45,000, $450,000, or $4.5 million for retirement.
December 2022 • Technical Analysis of Stocks & Commodities • 17
 the nervous professional money manager (the put
buyer) most likely will let the insurance expire.
Their fear has dissipated. The professional money
manager calls their client saying, “I’m a genius;
I managed your account well. Shares are above
$425.” The option expires, the frozen funds of the
retirees are freed, and they can do it all over again
next month.

STOCKCHARTS.COM
2. The market remains basically flat. The nervous
professional money manager (the put buyer) can
sell shares in the market near $425. They are not
likely to put the shares to the retirees at only $420. FIGURE 3: FEBRUARY 2020 MINI-CRASH. In February 2020 the market
dropped at the start of the pandemic. The price of SPY did not recover
The professional money manager calls their client above costs until June 2020.
saying, “I am a genius; I managed your account
well. The market is flat.” The option expires, the no matter what happens.
frozen funds are freed, and the retirees are freed Once the 30 days pass, the contract expires, and the
to do it all over again next month. retirees are free to repeat the process the following
3. The market goes down. Now say the price for SPY month. Repeating creates income in multiple months.
goes below $420. The nervous professional money Selling options has a time decay element. This is much
manager (the buyer of the put insurance) now “puts” like your homeowner’s insurance. After a year it will
the shares to the retirees at the agreed-upon strike expire. Hopefully, your house did not burn down. The
price of $420. The retirees “buy” 100 shares, and the insurance company keeps your premium, and the policy
retirees keep the $379 premium. This reduces the expires. Then you renew for another year. In a fashion, the
retirees’ cost basis to only $416.21. The brokerage investor (the retirees in this example) are in the insurance
guarantees the delivery of the shares to the retirees. business—selling puts and calls to other investors (I refer
This happens automatically, freeing the retirees to to them as the nervous professional money managers),
travel with no trade maintenance needed. The ner- creating annuity-type retirement income all while the
vous professional money manager calls their client principle grows.
saying, “I am a genius; I managed your account well. The risk becomes the hold time. If the market drops
Shares dropped, but we sold at $420.” dramatically, as wonderful as the SPY is, it may take some
time for the price to recover. In that case, the retirees
Now the retirees own 100 shares of SPY that were simply hold during that time. They enjoy their premiums
“put” to them at the low cost basis of $416.21. When the and a 1.35% dividend. But they may have to hold for an
premiums are attractive, as reported on the brokerage’s unknown amount of time before the premium is above
matrix chain, the retiree will go out 30 days and sell-to- their costs again.
open a covered call for a strike price well above their
cost basis, earning another premium of approximately Market downturns: What happens in
$379. This call obligates the retirees, over the next 30 the strategy?
days, to do what they would love to do—sell the SPY In the market drop of February 2020, puts sold before
shares at a strike price well above their costs. If “called the pandemic’s “crashette” were put to the seller. The
away” at the higher price, the retirees’ principle grows. price of the SPY did not recover above costs until June
The retirees keep the covered call’s premium as income 2020 (see Figure 3). In our example, for 90 days during
March, April, and May, the retirees simply held the shares
put to them. Once price recovered, then they could sell-
If the investor-retirees to-open a covered call and start the monthly process all
accept this premium, they over again. No losses occur in this strategy, even after
dramatic drops in the market, as long as the investor has
enter a sell-to-open put order time to hold and wait for the market to recover.
at the strike price for 30 days During a downturn, idle cash in all accounts becomes
in the future. extremely valuable. The cash could be used to sell puts
at the new lows, which will enjoy heightened premium.
18 • December 2022 • Technical Analysis of Stocks & Commodities
(Volatility is the premium’s
multiplier). Or the cash
could be used to buy SPY
shares at the new lows and
hold till the market recovers.
Looking over 100 years of
market history tells us the
market has recovered from
mini-crashes 100% of the
time and then moved to new
highs (Figure 4).

Using retirement
accounts
My wife and I sell cash-
secured puts and occasion-
ally covered calls in cash
accounts, Roth IRA ac- FIGURE 4: 100-YEAR STOCK MARKET CHART. Over 100 years of market history, the market has recovered
counts, and traditional IRA from mini-crashes 100% of the time and then moved to new highs.
accounts. There are no tax
consequences for trades inside an IRA. However, any Lawrence Smith, a longtime S&C subscriber, was a
funds removed from IRAs follow the normal taxation FINRA licensed stockbroker for many years with a na-
rules. For accounts opened in five years after the age of tional discount broker. Later he joined a large private
59.5, retirees do not pay the 10% penalty for early with- Midwestern insurance company helping businesses
drawal. Moneys withdrawn from a traditional IRA are offer ERISA qualified retirements plans to employees.
taxed as ordinary income. Most brokerages have easy He retired early and now studies Python animation pro-
online links allowing users to transfer funds to their graming looking for the holy grail. He may be reached
checking account at their local bank while the broker- at Mr.Lawrence.Smith@att.net.
age withholds taxes to send directly to the IRS and to
the user’s respective state for states with an income tax. Further reading
Of course, for retirees over 59.5, with accounts open for Thaler, Richard H., and Cass R. Sunstein [2009]. Nudge:
more than five years, any withdrawals from a Roth IRA Improving Decisions About Health, Wealth, And
are 100% tax free, baby! Happiness, Penguin Group.
Lovelady, Michael [2013]. Visual Quantitative Finance:
Do your homework before beginning A New Look At Option Pricing, Risk Management,
This is a simple introduction to selling cash-secured-puts And Structured Securities, Pearson Education Inc.,
as a tool to generate guaranteed retirement income. It FT Press.
is meant as a conversation starter with your financial
advisors. Retirees are encouraged to study fully and ‡TD Ameritrade (Now Schwab), ‡StockCharts.com
make several practice trades using 3×5 index cards with ‡See Editorial Resource Index
no cash at risk. Options are not for all investors. Your
broker will help you learn more and ensure you fully
understand all disclosures before your account is ap-
proved and set up for basic nonlevered options trading.
Before embarking on any new investment ideas, check
for any tax rule changes as well. The retirees keep the
We taught our adult children to make these trades, covered call’s premium
and we gave them a durable power-of-attorney in case as income no matter
we become hospitalized or incapacitated. And unlike what happens.
with annuities, upon our deaths, the kids will inherit our
principle—not an insurance company.
December 2022 • Technical Analysis of Stocks & Commodities • 19
 From Rice Traders To Today’s Hedge Fund Managers

Locating Trade Opportunities

With Candlestick Analysis
As a testament to the power of candlestick chart analy- price movement. Candlestick signals and patterns are not
sis, you can use candlestick scanning techniques to conjecture; they indicate the actual decisions occurring
help reveal which sectors or securities are showing the between the market bulls and bears.
strongest signals. The logic is simple: Candlestick analysis is the graphic
depiction of everybody buying and selling during a given
by Stephen W. Bigalow timeframe. It is not relegated to any specific market

C
or entity; it is the graphic depiction of human nature.
andlestick charts reveal some very powerful Anything that involves investor fear and greed—which
truisms. This is because the candlesticks are is in fact all trading entities, including market indexes,
based on the most consistent investing indicator ETFs, stocks, commodities, currencies, tulip bulbs, or
in the world—human nature. One investment what have you—can be evaluated with much greater
truism is that if something does not work, it does accuracy using candlestick analysis.
not stay around very long. Candlestick analysis Investors can gain a huge advantage utilizing candle-
has been in existence for hundreds of years. Japanese rice stick information to put “the stars in alignment.” First,
traders long ago identified signals and patterns that give the candlestick visuals can indicate reversals and/or
high-probability indications of investor sentiment. the direction of the overall market trends. If the market
Investors, including traders and money managers or is exhibiting an uptrend, simple candlestick scanning
hedge fund managers, can improve their ability to evalu- techniques will reveal which sectors are showing the
EAMES/SHUTTERSTOCK

ate trend movement much more accurately by applying strongest signals. The same scanning techniques can
the common-sense method of using candlestick signals then reveal which individual stocks are demonstrating
and patterns to anticipate the most probable outcomes for the strongest upside potential in that sector. The same
20 • December 2022 • Technical Analysis of Stocks & Commodities
 CANDLESTICK CORNER

CQG
FIGURE 1: CANDLESTICK CHART WITH CONFIRMING INDICATIONS. FIGURE 2: BEARISH TRADE SETUP. A potential short trade setup is
On this chart of the Dow Jones Industrial Average (DJIA), the stochastic revealed on this chart of DKNG following the appearance of the doji candle
oscillator is indicating oversold conditions at the points labeled “A,” serv- signal at the 200-day moving average (suggesting investor indecision)
ing to confirm the candlestick buy signals. Then at point B, a cross of the and then a bearish engulfing signal. The gap down through the T-line in
200-day moving average serves to confirm the candlestick sell signals, conjunction with stochastics curling down indicates a strong possibility of
along with a close back below the T-line. This combination is suggesting a forthcoming downtrend.
there’s a strong likelihood that a downtrend may begin.
curling down, indicating not just a downtrend but possibly
process can be used for identifying the strongest bearish a very strong downtrend, especially given the gap down.
sectors and bearish stock positions in those sectors in a This visual information could provide traders with the
market downtrend. opportunity to short DKNG or to buy puts. For inves-
tors who are holding positions for a longer-term period,
Reading the chart it allows for establishing strategies such as writing calls
See Figure 1. At point A you see stochastics showing against the position to offset the pullback.
oversold conditions. The identification of candlestick
buy signals together with the stochastics indicator would Honing in on investor sentiment
warrant scanning for the sectors that are demonstrating through candlestick signals
the strongest bullish candlestick charts. Identifying the Out of the 50 or 60 candlestick signals, you only need
strongest sectors supports the implication that the sector to learn the 12 major signals—six longs and six shorts.
is being bought across the board by numerous buyers. (These signals are the doji, the bullish and bearish en-
The next step would be scanning for individual stocks in gulfing signals, the hanging man, the shooting star, the
those sectors that are demonstrating the strongest bullish hammer, the inverted hammer, the bullish and bearish
candlestick signals. harami, the dark cloud, the piercing pattern, and the
At point B you see some candlestick sell signals at kicker signal.)
the 200-day moving average. It indicates this is where These 12 major signals produce the strongest reversal
the sellers are taking control. It’s an obvious observable indications and they are the signals that occur most
resistance level. Sell signals at the resistance level plus a often. The other candlestick signals do not occur often
close back below the T-line indicates a strong probability enough to spend mental time and energy to learn and
that a downtrend is about to start. remember them.
When the overall market starts showing a bearish trend,
candlestick scanning software can help to find the best
bearish trade setups.
The chart of DKNG in Figure 2 demonstrates a logical Anything that involves investor
short trade. You can see the doji candle signals at the 200- fear and greed can be evaluated
day moving average. This suggests investor indecision at with much greater accuracy
that level. The bearish engulfing signal that follows is a using candlestick analysis.
clear demonstration that the bears are taking control. You
can see the gap down through the T-line, with stochastics
December 2022 • Technical Analysis of Stocks & Commodities • 21
 Notice of Class Action Settlements

If you transacted in Euroyen-Based Derivatives1 from January 1, 2006 through

June 30, 2011, inclusive, then your rights will be affected and you may be entitled to a
benefit. This Notice is only a summary of the Settlements and is subject to the terms of the
Settlement Agreements2 and other relevant documents (available as set forth below).
The purpose of this Notice is to inform you of your rights in inclusive. Excluded from the Settlement Class are (i) the Defendants and
connection with three separate proposed settlements with Settling any parent, subsidiary, affiliate or agent of any Defendant or any
Defendants Barclays Bank PLC, Barclays Capital Inc., and Barclays co-conspirator whether or not named as a Defendant; and (ii) the United
PLC (collectively, “Barclays”), Nex International Limited (f/k/a ICAP States Government.
plc) and ICAP Europe Limited (collectively, “ICAP”), and TP ICAP plc Contact your brokerage firm to see if you purchased, sold, held,
(f/k/a Tullett Prebon plc and n/k/a TP ICAP Finance plc) (“Tullett traded, or otherwise had any interest in Euroyen-Based Derivatives. If
Prebon”) in the actions titled Laydon v. Mizuho Bank Ltd., et al., No. you are not sure whether you are included, you can get more information,
12-cv-3419 (GBD) (S.D.N.Y.) (the “Laydon Action”), which is currently including the Settlement Agreements, Mailed Notice, Plan of Allocation,
on appeal, and Fund Liquidation Holdings LLC as assignee and Proof of Claim and Release, and other important documents, at
successor-in-interest to Sonterra Capital Master Fund, Ltd., et al. v. www.EuroyenSettlement.com (“Settlement Website”) or by calling
UBS AG, et al., No. 15-cv-5844 (GBD) (S.D.N.Y.) (the “Sonterra toll-free 1-866-217-4453.
Action”). The separate settlements with Barclays, ICAP, and Tullett
Prebon (the “Settlements”) are not settlements with any other Defendant What Is This Litigation About?
and thus are not dispositive of any of Plaintiffs’ claims against the Plaintiff alleges that each Defendant, from January 1, 2006 through
remaining Defendants. June 30, 2011, inclusive, manipulated or aided and abetted the
The Settlements have been proposed to resolve class action lawsuits manipulation of Yen-LIBOR, Euroyen TIBOR, and the prices of
with these Settling Defendants concerning the alleged manipulation of the Euroyen-Based Derivatives. Defendants allegedly did so by using
London Interbank Offered Rate for Japanese Yen (“Yen-LIBOR”) and the several means of manipulation. For example, panel banks that made the
Euroyen Tokyo Interbank Offered Rate (“Euroyen TIBOR”) from January daily Yen-LIBOR and/or Euroyen TIBOR submissions to the British
1, 2006 through June 30, 2011, inclusive. The Settlements will provide an Bankers’ Association and Japanese Bankers Association respectively
additional $22,500,000 to pay claims from persons who transacted in (collectively, “Contributor Bank Defendants”), such as the Settling
Euroyen-Based Derivatives from January 1, 2006 through June 30, 2011, Defendants, allegedly falsely reported their cost of borrowing in order to
inclusive. If you qualify, you may send in a Proof of Claim and Release financially benefit their Euroyen-Based Derivatives positions.
form to potentially get benefits. Or you can exclude yourself from the Contributor Bank Defendants also allegedly requested that other
Settlements, or object to any part of them. Contributor Bank Defendants make false Yen-LIBOR and Euroyen
TIBOR submissions on their behalf to benefit their Euroyen-Based
If you timely submitted a Proof of Claim and Release pursuant to Derivatives positions.
any of the Prior Class Notices in this matter (defined below), then you
do not have to submit a new Proof of Claim and Release to Plaintiff further alleges that inter-dealer brokers, intermediaries
participate in these Settlements with the Settling Defendants. The between buyers and sellers in the money markets and derivatives markets
Prior Class Notices are: (i) the June 22, 2016 Notice (“2016 Notice”) (the “Broker Defendants”), had knowledge of, and provided substantial
related to the $58 million settlements with Defendants R.P. Martin assistance to, the Contributor Bank Defendants’ foregoing alleged
Holdings Limited, Martin Brokers (UK) Ltd., Citigroup Inc., Citibank, manipulations of Euroyen-Based Derivatives. For example, Contributor
N.A., Citibank Japan Ltd., Citigroup Global Markets Japan Inc., Bank Defendants allegedly used the Broker Defendants to manipulate
HSBC Holdings plc, and HSBC Bank plc; (ii) the August 3, 2017 Yen-LIBOR, Euroyen TIBOR, and the prices of Euroyen-Based
Notice, amended September 14, 2017 (the “2017 Notice”) related to Derivatives by disseminating false “Suggested LIBORs”, publishing
the $148 million settlements with Defendants Deutsche Bank AG, DB false market rates on broker screens, and publishing false bids and offers
Group Services (UK) Ltd., JPMorgan Chase & Co., JPMorgan Chase into the market.
Bank, National Association, and J.P. Morgan Securities plc; (iii) the Plaintiff has asserted legal claims under various theories, including
March 8, 2018 Notice (“2018 Notice”) related to the $30 million federal antitrust law, the Commodity Exchange Act, the Racketeering
settlement with The Bank of Tokyo-Mitsubishi UFJ, Ltd. and Mitsubishi Influenced and Corrupt Organizations Act, and common law.
UFJ Trust and Banking Corporation; or (iv) the September 11, 2019
Notice (the “2019 Notice”) related to the $39,250,000 settlement with The Settling Defendants have consistently and vigorously denied
Mizuho Bank, Ltd., Mizuho Corporate Bank, Ltd., and Mizuho Trust & Plaintiff’s allegations. The Settling Defendants entered into the
Banking Co., Ltd., The Norinchukin Bank, and Sumitomo Mitsui Settlement Agreements with Plaintiff, despite each believing that it is not
Banking Corporation, and the $31,750,000 settlement with The Bank of liable for the claims asserted against it, to avoid the further expense,
Yokohama, Ltd., Shinkin Central Bank, The Shoko Chukin Bank, Ltd., inconvenience, and distraction of burdensome and protracted litigation,
Sumitomo Mitsui Trust Bank, Ltd., and Resona Bank, Ltd. thereby putting this controversy to rest and avoiding the risks inherent in
complex litigation.
The United States District Court for the Southern District of New
York (500 Pearl St., New York, NY 10007-1312) authorized this Notice. What Do the Settlements Provide?
Before any money is paid, the Court will hold a Fairness Hearing to Under the Settlements, Barclays agreed to pay $17,750,000, ICAP
decide whether to approve the Settlements. agreed to pay $2,375,000, and Tullett Prebon agreed to pay $2,375,000
into Settlement Funds. If the Court approves the Settlements, potential
Who Is Included? members of the Settlement Class who qualify and have sent or will send
You are a member of the “Settlement Class” if you purchased, valid Proof of Claim and Release forms may receive a share of the
sold, held, traded, or otherwise had any interest in Euroyen-Based Settlement Funds after they are reduced by the payment of certain
Derivatives at any time from January 1, 2006 through June 30, 2011, expenses. The Settlement Agreements, available at the Settlement
Continued on Next Page

1 “Euroyen-Based Derivatives” means (i) a Euroyen TIBOR futures contract on the Chicago Mercantile Exchange (“CME”); (ii) a Euroyen TIBOR futures contract on
the Tokyo Financial Exchange, Inc. (“TFX”), Singapore Exchange (“SGX”), or London International Financial Futures and Options Exchange (“LIFFE”) entered into by
a U.S. Person, or by a Person from or through a location within the U.S.; (iii) a Japanese Yen currency futures contract on the CME; (iv) a Yen-LIBOR- and/or Euroyen
TIBOR-based interest rate swap entered into by a U.S. Person, or by a Person from or through a location within the U.S.; (v) an option on a Yen-LIBOR and/or a Euroyen
TIBOR-based interest rate swap (“swaption”) entered into by a U.S. Person, or by a Person from or through a location within the U.S.; (vi) a Japanese Yen currency
forward agreement entered into by a U.S. Person, or by a Person from or through a location within the U.S.; and/or (vii) a Yen-LIBOR- and/or Euroyen TIBOR-based
forward rate agreement entered into by a U.S. Person, or by a Person from or through a location within the U.S.
2 The “Settlement Agreements” mean the Stipulation and Agreement of Settlement with Barclays entered into on July 22, 2022, the Stipulation and Agreement of
Settlement with ICAP entered into on July 20, 2022, and the Stipulation and Agreement of Settlement with Tullett Prebon entered into on July 20, 2022.
Continued from Previous Page
Website, describe all of the details about the proposed Settlements.
The exact amount each qualifying Settling Class Member will receive
from the Settlement Funds cannot be calculated until (1) the Court
approves the Settlements; (2) certain amounts identified in the full
Settlement Agreements are deducted from the Settlement Funds; and
(3) the number of participating Settling Class Members and the Candlestick signals were
amount of their claims are determined. In addition, each Settling
Class Member’s share of the Settlement Funds will vary depending on
developed over centuries of
the information the Settling Class Member provides on their Proof of observed price movements.
Claim and Release form.
The number of claimants who send in claims varies widely from
case to case. If less than 100% of the Settlement Class sends in a Proof
of Claim and Release form, you could get more money.
The Japanese rice traders who developed candlestick
Under the Settlements, members of the Settlement Class will
release the Settling Defendants from all claims relating to conduct charts not only designed the visual graphic formations to
alleged or which could have been alleged in the Laydon Action and help identify high-probability price reversals, they also
the Sonterra Action or which could have been alleged concerning
any Euroyen-Based Derivatives. The full terms of the release can be provided explanations for the investor sentiment behind
found in the Mailed Notice or the Settlement Agreements available at the reversal signals and candlestick patterns. Having this
www.EuroyenSettlement.com or by calling 1-866-217-4453.
information allows investors to analyze price movements
How Do You Ask For a Payment? with the same insights as an investor with 50 years of
If you are a member of the Settlement Class, you may seek to
participate in the Settlements by submitting a Proof of Claim and investment experience.
Release to the Settlement Administrator at the address provided on the
The T-line as a trend indicator
Settlement Website postmarked no later than April 28, 2023. You may
obtain a Proof of Claim and Release on the Settlement Website or by
calling the toll-free number referenced above. If you are a member of Candlestick signals and patterns not only illustrate when a
the Settlement Class but do not timely file a Proof of Claim and
Release, you will still be bound by the releases set forth in the new trend is starting, they also can illustrate the strength
Settlement Agreements if the Court enters an order approving the of the new trend. A very powerful trend indicator is the
T-line, seen in Figures 1 and 2. The T-line acts as natural
Settlement Agreements.
Any member of the Settlement Class that previously submitted a
Proof of Claim and Release in connection with the 2016 Notice, 2017 support & resistance levels, since its very foundation is
Notice, 2018 Notice, or 2019 Notice does not have to submit a new the human nature behind price action. When you use
Proof of Claim and Release to participate in these Settlements
with the Settling Defendants and will be subject to and bound by the the T-line in conjunction with candlestick signals and
releases set forth in the Settlement Agreements with the Settling patterns, you will have one of the most powerful and
Defendants, unless such member submits a timely and valid request
for exclusion, explained below.
accurate trend analysis combinations.
The T-line rule can be simply stated like this: If you
What Are Your Other Options?
All requests to be excluded from the Settlements must be made
see a candlestick buy signal and a close above the T-line,
in accordance with the instructions set forth in the Settlement Notice you can stay long until you see a candlestick sell signal
and must be postmarked to the Settlement Administrator no later than
February 7, 2023. The Settlement Notice, available at the Settlement
and a close back below the T-line. You use the same
Website, explains how to exclude yourself or object. All requests for analysis on the short side: If you see a candlestick sell
exclusion must comply with the requirements set forth in the
Settlement Notice to be honored. If you exclude yourself from the
signal and a close below the T-line, you can stay short
Settlement Class, you will not be bound by the Settlement until you see a candlestick buy signal and a close above
Agreements and can independently pursue claims at your own the T-line.
expense. However, if you exclude yourself, you will not be eligible to
share in the Net Settlement Funds or otherwise participate in the
Settlements. What the smart money is doing
The Court will hold a Fairness Hearing in these cases on What is a major downfall of most investors? It’s their
March 14, 2023, to consider whether to approve the Settlements and a
request by the lawyers representing all members of the Settlement own emotions. Candlestick analysis helps to dramatically
Class (Lowey Dannenberg, P.C.) for an award of attorneys’ fees of no reduce the role our emotions play in our decision-making.
more than twenty percent (20%), or $4,500,000, of the Settlement
Funds for investigating the facts, litigating the case, and negotiating Have you ever wondered who is buying when everybody
the Settlements; an award for unreimbursed litigation costs and else is panic-selling at the bottom? Or who is selling
expenses in the amount of no more than $250,000; and an award to
replenish the litigation fund created to reimburse their costs and when everybody else is exuberantly buying at the top?
expenses in the amount of no more than $500,000. The lawyers for the It’s the smart money!
Settlement Class may also seek additional reimbursement of fees,
costs, and expenses in connection with services provided after the Here’s something to ponder: If candlestick formations
Fairness Hearing. These payments will also be deducted from the are the graphic depiction of human nature, and since our
Settlement Funds before any distributions are made to the Settlement
Class.
emotions that stem from human nature are generally not
You may ask to appear at the Fairness Hearing, but you do not
a very good guide to timing our investments, wouldn’t
have to. For more information, call toll-free 1-866-217-4453 or visit logic suggest analyzing what the charts are showing and
the website www.EuroyenSettlement.com.

Continued on page 41
December 2022 • Technical Analysis of Stocks & Commodities • 23
 The “Crypto Summer” Two-Year Pattern

Cryptocurrencies And
Seasonality: Crypto Summer
Part 1

Did you know a pattern exists in cryptocurrencies where days or up to a couple weeks. These traders are known
two years of a bear market are often followed by two as swing traders. The traders who hold their trades for
years of a bull market? This is a type of seasonality the longest periods are called position traders. They hold
that you can profit by, both on the short and long side. their trades for several weeks or months or longer.
Here is what to look for to help spot the crypto summer Position traders have special tools to back up their
pattern. analysis. One such tool is the use of seasonality.

by Azeez Mustapha Seasonality in cryptocurrency

T
Cryptocurrency price action has a seasonal tendency.
he success of a trader is very dependent on This means there is usually a pattern of recurrence at
his or her trading psychology. Some traders specific times, over and over. A time series is said to be
like to always have their hands busy. Others seasonal if there are predictable changes to the data at
are passive in their trading style for a good regular intervals. Seasonality refers to any predictable
part of the time. The trader becomes profit- variation or pattern that recurs or repeats over a period
able when good psychology is backed up by of time. For example, in agriculture, blueberries and
good analysis. blackberries are known for peak production during the
Some traders can only hold trades for a few minutes or summer every year.
ZOLOTOVEK/SHUTTERSTOCK

hours. These traders are known as scalpers. Other traders

are comfortable holding the trade for the day. They are The “crypto summer” effect
referred to as intraday or day traders. There are traders Occasionally, we have heard reports of price surges in
who can be very patient and will hold trades for several the crypto market. This type of period is referred to
24 • December 2022 • Technical Analysis of Stocks & Commodities
 CRYPTOCURRENCY TRADING

TRADINGVIEW
FIGURE 1: CRYPTO SUMMER 2020 IN RIPPLE COIN. This chart shows Ripple Coin on a weekly timeframe for an entire crypto summer year, 2020.
A bullish sign appeared in January. It took months of accumulation before it actually rose. You can see a bullish move towards the latter part of the
year.

as “crypto summer.” A crypto summer is a protracted halving on Bitcoin (BTC) price in 2016.
rise in price that lasts for several weeks or months. The
crypto summer tends to occur for two consecutive years Fundamentals
within a four-year period. The years 2012, 2016, and Fundamentals also affect the rise and fall in the price of
2020 were periods of crypto summer. The duration runs cryptos. By examining the economic, social, and political
for two years. This means the crypto summer of 2016 factors that might impact currency prices, fundamental
lasts until 2017. analysis is a technique used to predict changes in the
Figure 1 is an example of the effect of crypto summer crypto market.
on Ripple Coin during the year 2020. The chart shows However, according to studies, seasonality has a more
Ripple Coin on a weekly timeframe for an entire “crypto substantial effect on the crypto market than do fundamen-
summer” year. This is an example of a trade that bagged tals. Positive news can facilitate the rise of prices in the
over 100% profit. The entry of the trade was after a bullish market during a crypto summer. Negative news has been
sign in January. It took months of accumulation before studied to have a temporary and negligible effect on the
Ripple actually rose. A sufficient area was left below increase in price during periods of crypto summer.
the January bullish move to give allowance in case of a An example was the release of the major news of one
bearish motion. The bullish move was seen towards the of the greatest crypto hacks on August 2, 2016. The New
latter part of the year. York Times published an article titled “Bitcoin Plunges
After Hacking of Exchange in Hong Kong.’ It was ex-
Bitcoin halving plained that, “before the hacking was made public, that
Other factors can contribute to the crypto summer effect. number of Bitcoins would have been worth about $72
One such factor is Bitcoin halving. This is a significant
factor that aids the rise in price during crypto summers.
Bitcoin halving is the process of halving the mining re-
wards after each set of 210,000 blocks has been mined. A crypto summer is a
A Bitcoin halving would reduce the number of new coins protracted rise in price
available by halving the rewards for mining Bitcoin as that lasts for several
more blocks are mined. If demand is still high, prices weeks or months.
will increase as a result.
The chart in Figure 2 shows the impact of Bitcoin
December 2022 • Technical Analysis of Stocks & Commodities • 25
 FIGURE 2: CRYPTO SUMMER 2016 IN BITCOIN. Fundamentals also affect the rise and fall in the price of cryptos, though not as much as the crypto
summer effect. In this chart you can see the impact of Bitcoin halving on Bitcoin (BTC) price in 2016. And despite very bad news headlines in August
2016, the chart shows little effect from it. A trade held from mid-2016 till June 2017 was successful.

FIGURE 3: CRYPTO SUMMER 2017 IN ETHEREUM. The process of Bitcoin halving during crypto summers also affects other cryptocurrencies. The
trade shown on this chart had a profit of over 250% in Ethereum in 2017. The trade was entered upon the bullish breakout in the first quarter of the year.
There was sufficient allowance below for all the candles formed in the first quarter of the year.

million. Now that the currency has slumped, the figure

is closer to $65 million.”
Thus, even with that negative news release, which was
Cryptocurrency a shocking event that was trending, the year was still very
price action has a bullish. This is due to the strength of seasonal influence
seasonal tendency. in long-term trading. This is why position traders buy or
sell and then forget. They are patient through the series
of waves in the market. The chart in Figure 2 of BTC’s
26 • December 2022 • Technical Analysis of Stocks & Commodities
rise in 2016 shows the minute effect of the fundamental
news in August.
Figure 2 is a chart of Bitcoin on a daily timeframe for The trader becomes
a crypto summer period. It shows an example of a trade profitable when good
with a profit of 300%. The entry of the trade was after a
bullish breakout in the early part of the year. The bullish
psychology is backed up
breakout was a sign. The trade was held from mid-2016 by good analysis.
till June 2017.

Bitcoin halving’s effect on other cryptocurriencies year of the crypto summer.

The process of Bitcoin halving during crypto summers When used correctly, knowledge of recurring rises in
also affects other cryptocurrencies. Figure 3 is an example the price of cryptocurrencies at specific times can be a
of Ethereum during the 2017 crypto summer. goldmine for position traders.
The trade shown on this chart had a profit of over
250% in Ethereum in 2017. The trade was entered upon Azeez Mustapha is an analyst at Instaforex Companies
the bullish breakout in the first quarter of the year. There Group and a blogger at Advfn.com, and as well as a
was sufficient allowance below for all the candles formed freelance author for various trading publications. He
in the first quarter of the year. There was a profit of over is a trading signals provider at some websites. He can
250% on the last day of the year. be reached via email at azeez.mustapha@analytics.
instaforex.com.
Crypto summer’s entry and exit strategy
Position traders can plan ahead to take advantage of ‡TradingView
a crypto summer. Following a bullish sign in the first ‡See Editorial Resource Index
year of the crypto summer, a trader can buy the top 20
cryptocurrencies, with a cushion in case of a bearish
movement. The trader can target 100% to 200% profit
from the amount risked. The trade should be closed at
the end of the first year or the middle/end of the second

Explore Your Options

KAEPPEL/OPTIONS
Continued from page 7

In other words, the 128–127 spread

has a much higher probability of
profit. The tradeoff is that the 132–131
spread can generate a profit of 14.94%
in one week versus 6.48% for the
128–127 spread.
Figure 6 displays the risk curves
for both trades at expiration.
The critical decision for a trader is
whether to emphasize maximizing FIGURE 6: RISK CURVES FOR BOTH PUT CREDIT SPREAD EXAMPLES. Shown here are the risk
return or minimizing risk. As I said, curves for both of the example trades at expiration. The trader could consider whether they want to
maximize return or minimize risk for their trade based on their confidence that the chosen trade will
there is no “best trade.” Much of this expire with the stock price above the option trade’s breakeven price.
decision will be based on the trader’s
confidence in their belief that their stock price above the option trade’s
chosen trade will expire with the breakeven price.
December 2022 • Technical Analysis of Stocks & Commodities • 27
 INTERVIEW

Technician, ETF Portfolio Manager, Speaker, And Educator

A Conversation With
Katie Stockton
Katie Stockton, CMT, is founder and managing partner of Fairlead
Strategies, LLC (FairleadStrategies.com), an independent research firm
and investment advisor founded in 2018. The firm uses technical analysis
as its main tool to discern the stock market’s health and to select and
recommend investments to individual and institutional clients. Through
the firm, Stockton and her team offer research and consulting services,
providing multiple reports throughout the week on market conditions and
to provide their current buy and sell recommendations. A free 30-day
trial is available by contacting info@fairleadstrategies.com.
Stockton has 25 years of experience in technical analysis and market
research at various firms including MKM Partners as chief market techni-
cian for nine years, and BTIG as chief technical strategist for four years.
Before that work experience, she provided technical analysis as part of
teams at Morgan Stanley and Wit Soundview.
In 2001, at a young age, she received her CMT (Chartered Market
Technician) designation, and from 2012 to 2016 was a vice president of
the CMT Association.
Since March 2022, Stockton has been the portfolio manager and sub- That’s what we’re trying
advisor of the Fairlead Tactical Sector ETF (TACK), which invests in a to help people do —
select grouping of 14 SPDR ETFs representing equity sectors, treasuries understanding that a
(short-term and long-term), and gold, depending on the overall market systematic approach
assessment.
Stockton frequently appears on financial news networks including
is where you can really
CNBC, Fox Business News, and Bloomberg TV, as well as on podcasts derive value from technical
and internet interviews. She is also a frequent speaker at industry events analysis in particular.
and conferences. She is a graduate of the University of Richmond with
a bachelor of science degree in business administration (BSBA) and is
a member of the business school’s executive advisory council. She is also a member of her church’s endowment
investment committee.
Stocks & Commodities contributing writer and ETF columnist Leslie N. Masonson spoke with Katie Stockton
on September 9, 2022 to discuss her market experience, technical market approach, and research reports.

Katie, did you have any But when I came to the University have said. Can you describe your
interest, knowledge, or of Richmond, I actually intended on reaction at the time to the course
stock market investing being a political science major. So no contents, as well as your reaction
ex p o s u r e p r i o r t o intention to focus on finance. to the presentation you heard in the
entering the University course by well-known technician
ZAKHARCHUK/SHUTTERSTOCK

of Richmond? While at the university, you audited Ralph Acampora?

No, I really didn’t. I was interested a graduate-level technical analysis I was very fortunate to have had
in math primarily. I definitely have a course, where you developed a access to technical analysis as a
“left brain”—a math nerd if you will. passion for the subject matter, you discipline through that course, which
28 • December 2022 • Technical Analysis of Stocks & Commodities
was at the time offered by I believe Dorsey, Wright helped
only 12 universities in the US. At me land my first job, which
University of Richmond, not being was in San Francisco with Technical indicators can
a huge university, it was just good one of their clients, and help keep us honest in
luck that there was a professor there that job was essentially terms of what we’re seeing
who had an interest in the subject hand-charting point-and- in the markets.
and brought it to the undergraduate figure. So I was off on
business school. With that course, the right path soon after
I gained exposure to experts in the college.
field including Ralph Acampora, who designation, and it’s been something
is really legendary. I consider him to In 2002, you passed Level III of the that I’m very proud of. It has, I think,
be the father of technical analysis and CMT exam at quite an early age enhanced the professional status of
also very inspirational. He’s a very compared to others on the CMT what we’re doing.
good speaker. He stood in front of our roster. Why did you decide to pursue
class and picked up the Wall Street that designation when you did? Later in your career, you were
Journal and ripped it in half, saying, The CMT designation is a cre- the chief strategist and chief
“You don’t need this anymore.” Of dential that I think any publishing technician at BTIG and MKM
course, with that, he had our atten- technical analyst should have, and I Partners, respectively, for a total of
tion. I was inspired by his talk and knew about that very early on, having 13 years before founding Fairlead
his introduction of the subject. passed Level I with the coursework Strategies, LLC in 2018. What
that I was able to access at Univer- were your responsibilities at those
Then you applied for and accepted sity of Richmond. So, with the final two firms?
an internship with Dorsey, Wright & exam for that course that I audited, At both BTIG and MKM Partners,
Associates, LLC, which is also based we actually received the Level I I was part of their research team
in Richmond. Tom Dorsey, the point- certification. I knew that I wanted to publishing technical analysis. It was a
and-figure guru, was in charge. ultimately complete the Level II and strategist role in that I was primarily
How did that learning experience Level III, and I did so in 2002, as you focused on markets from a top-down
and exposure to technical analysis mentioned. I was young on average at perspective, but also did a lot of
propel your career in the direction the time based on the CMT designa- bottom-up work to support that. We
of technical analysis? tions that had been awarded. And I were publishing frequently, primarily
Again, I feel very fortunate to have would say it was just being set on the on US equities, looking at measures
had access to another legendary path so early by the university, and like the S&P 500. We imparted
technical analyst in Tom Dorsey. I also, having my first job as a techni- opinions in our research, a written
worked for his company for about cal analyst, I knew it was something product, consistently and enhanced
two years as an intern during college, I wanted to pursue. that research with consulting. We had
and that experience inspired me to The other reason that happened a lot of interaction with the clients,
make a career out of it. I was inspired in 2002 is actually market-related. which were all institutions—mostly
by the methodology, and just given I lost my job in part because of the hedge funds and asset managers—
my math-oriented way of thinking, bear market cycle that had impacted who were trying to integrate technical
to me, price-based analysis really so many companies between 2000 analysis in their own processes.
resonated with the way that I think and 2002. I found myself with six
about the market. And Tom Dorsey months of time to look for a job. And What did you learn over those 13
himself is an inspirational figure. I I spent a lot of that time studying for years that helped you?
hit the ground running there, and the CMT program and drafting a A whole lot! I’d say the most
Tom showed me the benefit of be- paper for the Level III requirement, important takeaway I had was how
ing very close to the markets. Every which at that time was an original clients were able to leverage technical
day I was hand-charting point-and- research paper. I was awarded the analysis, and primarily that was in
figures, and I realized that was the terms of risk management. It really
best way to understand the move- helped me to understand how clients
ments in any given security. It was were using charts, and it helped me
eye-opening. learn the best ways I could help them,
December 2022 • Technical Analysis of Stocks & Commodities • 29
 understanding of the major beyond that, we also have consulting
indices like the S&P 500 services at different levels, filling the
We are trend followers. and their directional bias needs of the clients.
We want to always have is essential. And technical There’s not one recipe that can be
momentum indicators on analysis can help us stay on applied to all because everybody
our side. the right side of the prevail- has different needs. The consulting
ing trends on the market is something that helps us stay close
level. It can also help us to the markets. We do regular project
identify sector rotation and work for some consulting clients and
and that put me in a position where I relative strength opportunities to build that can be in the form of scans of the
could start Fairlead Strategies. on the returns of the broader market market, filters for different opportuni-
by leveraging sector performance. ties, regular chartbooks, or coverage
What factors resulted in your Beyond that, of course, we try to of various securities that they have
decision to found your own firm? find the best stocks within those an interest in per their watchlist. So,
There were some regulatory sectors, which can also be achieved it really runs the gamut in terms of
changes, in part coming out of the by understanding technical indica- what we can offer clients as a way to
UK, that were changing the nature tors and relative strength. We’ve help them, most importantly helping
of sell-side research. I felt that the developed a discipline that uses them apply technical analysis to what
research products were almost being indicators that are mathematically they’re doing on a systematic basis.
commoditized, and with that, they based and derivations of price. We
wouldn’t command the same level apply these indicators across multiple What is your firm’s target market
of pricing that they had historically. I timeframes, starting with the major and how are you marketing to
also felt that there was a need to bring indices, and then drilling down into them?
the research to a wider audience—not the sectors of the market, and then the Really, we don’t have a specific
just limiting it to institutions, but also stocks that comprise those sectors. target market. As mentioned, we like
including retail investors. By “retail,” While we have a top-down ap- to bring our research to retail inves-
I mean individuals, and also, financial proach, to support that, we are also tors, and for that reason, we tried to
advisors and independent RIAs. doing a lot of bottom-up work. And create a price point that was appeal-
I felt that there was a big demand for us, that means looking at the S&P ing to everyone. Our client base has
from that faction for technical analy- 500 constituents every week and see- an institutional foundation, but the
sis. And where institutional clients ing if there’s anything structurally growth has been primarily from high-
may be overserviced, I felt that retail changing underneath the surface of net-worth individuals, a lot of retired
clients may be underserviced. We the major indices. individuals, in fact, who are interested
wanted to bring technical analysis to in trading their own accounts. We also
a different audience, a bigger audi- What types of research and services have big growth in terms of invest-
ence, and also, navigate the regula- do you provide your clients? ment advisors, both independents and
tory changes that were underway at We’re very prolific in terms of our with the wirehouses. They tend to be
the time. written content. We have several very interested in technical analysis.
reports that we publish on a regular So our growth has been very strong
That’s terrific. In a nutshell, please basis. In fact, it’s about eight reports in that arena.
explain your step-by-step top-down per week that we’re publishing for our In terms of marketing, we don’t
approach to the market. clients. And while they’re primarily have a true marketing plan. We’re
My approach to the market has US equity-focused, we also have still a small company so we are very
developed over the course of my coverage of cryptocurrencies for one, busy publishing research, and to the
career, such that now I have a very and we provide coverage of what we extent that we have opportunities to
well-defined methodology. I do con- consider to be macro technical inputs, be vocal in the media, we try to take
sider myself top-down in orientation, things like treasury yields and gold those because that helps build our
and that means that I believe that any prices, crude oil prices, the dollar. brand awareness.
given move in a stock is really largely Anything that influences equities is
driven by the market and by that featured in our research. The written What are your responsibilities at
stock’s sector. I think that to have an product is fairly robust. Above and the firm?
30 • December 2022 • Technical Analysis of Stocks & Commodities
 I’m the founder and managing
partner of Fairlead Strategies and the
chief compliance officer. But above
all, I’m an analyst. I really consider
myself to be a technical analyst more
than a business person, and I spend
a lot of time writing the research,
navigating markets, looking at charts.
It’s really where my passion lies.

I know that you use support,

resistance, Fibonacci levels, MACD,
stochastics, and moving averages
in your work. Do you use any other
indicators?
I do. Those are my primary tools,
and I enhance them also with the
cloud model, which is also known

CQG
as ichimoku charting. It’s a great FIGURE 1: ICHIMOKU CLOUD CHARTING. This weekly bar chart of agriculture ETF DBA demon-
strates plotting an ichimoku cloud, along with a 40-week moving average. Seen here, the price of
gauge of support and resistance in DBA is above secondary support with an MACD that is almost reversing upward. The price is just
prevailing trends. I also use third- below a breakout of the cloud, which is a positive indication of a potential further price advance.
party relative strength indicators, in
addition to countertrend indicators
designed to gauge trend exhaustion. at its downtrending 200-day moving be helpful as a basic visual guide.
average in August, but that precision
You say you use ichimoku clouds is somewhat rare. So we prefer to have How much do you incorporate
on your charts. What value do they a view of support and resistance that seasonality and market cycles in
provide? shows it as a cushion as opposed to your work?
Using ichimoku clouds provides an a precise point. And that is offered I find work on seasonality and
innovative way to visualize where a by the cloud model. It also has an cycles very interesting. It’s not a big
chart might have support or resistance. interesting forward-looking shift part of our process, but we like to have
And support and resistance, to us, is that can give us a sense of what the an awareness of any kind of seasonal
one of the most important takeaways trend may look like in the coming influences or market cycles that are
from a chart because it’s where you months if you’re looking at it on a relevant at the current moment. For
get the sense of what the risk-reward weekly bar chart, and we find value example, September tends to be the
profile is of that security. in that as well. worst month for risk assets. And that’s
The ichimoku clouds are based on something we’re keeping in the front
price. The model uses lookbacks at Can you demonstrate for us the of our minds as we speak here in Sep-
different midpoints of price spreads, value of using that? tember. But it’s not something that we
and that’s the derivation of it. It creates See Figure 1. This weekly bar chart would let sway us in terms of anything
a wide band that you can reference, of DBA shows the cloud model as to counter our indicators. We always
and that band is more accurate as previously acting as resistance in defer to our momentum gauges, our
support and resistance than a precise 2019, and more recently acting as sup- overbought/oversold gauges, support
level is. port. When price is above the cloud, and resistance, before we would let
If you think about all of the market you can consider the ETF to be in an any seasonal inputs or cyclical inputs
participants out there, support would uptrend, and when it’s below the cloud, affect our judgment. We are more
rarely ever be precise because the it can be a downtrend. I believe it’s a systematic in our approach.
market’s memory will vary for dif- good gauge of support and resistance
ferent participants. Now, sometimes too, except when a sideways trading I believe that you don’t use point-
we do see precision. A good example range unfolds. There are nuances to it, and- figure charts much anymore.
would be the S&P 500 pivoting right as with any indicator, but we find it to That surprises me because the
December 2022 • Technical Analysis of Stocks & Commodities • 31
 and bearishness. AAII ing that doesn’t give the audience a
stands for American As- good sense of our methodology. In
Every day I was hand- sociation of Individual that regard, our appearances on TV
charting point-and-figures, Investors, and that is just and in other media really only provide
and I realized that was the one of several inputs that a snapshot of what we’re doing on a
best way to understand the we take from a market daily basis.
sentiment perspective. I We find that the best way to explain
movements in any given
would say we give more our methodology and our services is
security. It was eye-opening. weight to readings from through offering trial subscriptions to
the Cboe Volatility Index, our research. We offer a free 30-day
for one, to understand not trial. Through that, investors can get
NYSE bullish percentage as well how people are thinking, but rather an understanding of how we approach
as the number of New York Stock how people are positioning. That’s the markets, as well as receive our
Exchange stocks above their 50- something that we can derive from current market views.
day simple moving average and the transactional gauges.
the number of new highs versus The sector-focused actively man-
new lows provide very useful What are your primary market aged Fairlead Tactical Sector ETF
information at market extremes, data and charting platforms that (TACK) debuted on March 22,
a place where you look for price you use? 2022, and captured $70 million in
reversals. Do you agree that point- Our primary market data source is assets under management by May
and-figure charts are valuable in Bloomberg, and that’s where we’re 20, 2022. The assets doubled by the
those circumstances? doing our analysis primarily. We also end of September 2022. The ETF’s
I do. I think point-and-figure charts use CQG, which is another charting strategy is to combine the elements
are extremely valuable, and not even software that allows for very robust of trend following, relative strength,
just in those circumstances, but in screening and filtering, and they have and price momentum using a rules-
terms of identifying strong uptrends very clean charts that we use for pub- based approach to help select the
and strong downtrends, as well as lishing. We’ve started to find other most favorable ETFs available from
in identifying breakouts and break- services like TradingView, as one a select universe of State Street
downs. I don’t use point-and-figure example, which also has great charts ETFs, correct?
charts anymore on a regular basis, that are very accessible in terms of Yes, that’s exactly right. TACK
in part because I found them hard their cost and very robust in terms started trading on March 23rd and
to put in front of a new client and of the indicators that are available. it has grown nicely since then. It
explain them. When you sit down We’re happy to have more choices does hold a systematic technical
and show someone a piece of paper being developed with the technology strategy.
that’s covered in Xs and Os, there’s platforms that are out there.
a bigger learning curve to impart, es- The universe of ETFs for TACK
pecially to someone who isn’t abreast I noticed in the past year or so draws from the 11 Select Sector
of technical analysis. We found in the you’ve been appearing more often SPDRs as well as SPDR Gold (GLD)
early part of our career that the bar on a number of the financial news and SPTL and SPTS (the long-term
charts were a bit more digestible for channels, being interviewed in and short-term SPDR treasury
the clients we were talking to. webcasts, speaking at industry ETFs), with the fund typically
events, and having a very public holding five to eight positions in the
What investor polls do you look at to image. Has that exposure increased portfolio at a time. How often has
determine market sentiment? your client base and overall that portfolio been adjusted since
We do like to look at market sen- visibility? inception?
timent. However, we prefer looking Definitely. As I mentioned earlier, We rebalance the TACK portfo-
at it from a transactional perspec- media exposure is helpful since we lio on a monthly basis. It’s the first
tive, as opposed to looking at the don’t have a big marketing team or trading day of each month where we
investor polls. We do have, as one sales force. Appearing in the media make our changes. And we do that
of our market internal measures, the gives us the opportunity to offer our because we want to capture month-
AAII data. It’s a poll of bullishness views on the market. Of course, do- end data for our analysis. It’s a very
32 • December 2022 • Technical Analysis of Stocks & Commodities
long-term strategy, and its orientation same, being vocal about TACK and its I’ve been receiving your three
is towards monthly bar chart data. So holdings, making sure that people are research reports on your 30-day
we wait until month-end to rebalance. aware of why we’re making changes, free trial over the past few weeks,
Because its inception was in March, and communicating with the TACK and I’d like to say that I’m very
we now have six rebalances under investors. impressed with your concise and
our belt in terms of that monthly clear analysis. Do these reports
change. We have seen a couple of As a portfolio manager, what represent your typical offerings to
months where the portfolio stayed investment mistakes do you try to subscribers?
static month over month, and that is avoid? Thank you, Les, for that compli-
because the indicators and the model I think being emotional, letting ment on our research reports. Yes,
did not shift enough to dictate any your emotions cloud your judgment. those reports are part of what we
repositioning. Technical analysis by its nature is offer our subscribers. We have three
mathematical, and it helps take away regular research reports that come
Before launching TACK, did you some of the emotions that are involved with our equity subscription. Those
check out the competing sector in trading or investing. And I think three reports are titled “Starting
strategy ETFs? If so, did that in any when a lot of us make a bad decision, Line,” “Fairlead Tactics,” and “Sector
way change your assessment of the that decision is because emotions are Deep Dive.”
feasibility of going forward? clouding our judgment. Thankfully, We also publish our Idea Gen-
Absolutely. We, of course, reviewed technical indicators can help keep us erator newsletter and it comes with
the competitive landscape for any honest in terms of what we’re seeing in the equity subscription also. This
kind of ETF that could be perceived the markets. You can’t argue against newsletter, as its name implies, is
as a comparable strategy to what we an uptrend or a downtrend based on a designed to help with idea genera-
developed. We haven’t yet found a moving average or the so-called mov- tion for investments and trades. The
truly comparable strategy. There’s ing average convergence-divergence newsletter is separate from our other
always a difference, something (MACD) indicator. It’s when you research titles.
that’s differentiated from the TACK have a feeling about something that So collectively, it’s four research
strategy. In general, we feel we have sometimes works against you. products rolled into one subscription,
a differentiated strategy, not only in and that is a very typical offering to
that it is driven by technical analy- What are your most important our subscribers.
sis, but also because it is systematic, rules to follow when experiencing Additionally, we produce cryp-
and it has not only that sector focus, a protracted bear market? tocurrency research that can be ac-
but also the ability to move into the First and foremost, I don’t advocate cessed via a separate subscription,
risk-off categories in an innovative countertrend positions. We are trend and we produce cannabis research
fashion. followers. We want to always have that also can be accessed sepa-
momentum indicators on our side, rately.
As the ETF’s portfolio manager and in a prolonged bear market cycle, Our consulting services include
and subadvisor, and considering those indicators are generally unfa- access to all the components of the
the fund’s infancy and competitors, vorable. We would always let the long equity subscription.
how are you able to grow the assets term inform the short term, meaning
so rapidly and what are your plans that if the long-term trend is lower, Let’s change direction for a moment
going forward to continue your we are less inclined to put on short- and discuss more general topics.
success? term countertrend positions. They In 2003, I authored a book titled
Well, as mentioned before pertain- can certainly be lucrative, but they’re All About Market Timing where I
ing to our research service, we don’t very difficult to capture because presented evidence of the viability
have a predetermined marketing they are usually very short-lived and of market timing and the usefulness
strategy. But the exposure that we somewhat fast and furious. of avoiding bear market losses and
have in the media has brought at- pain. I wondered where you come
tention to the TACK ETF, and that’s down on the buy-and-hold versus
helped create this organic growth that market timing debate for long-term
we’ve seen since the fund’s inception. investors?
And we expect to do more of the I’m a big proponent of market
December 2022 • Technical Analysis of Stocks & Commodities • 33
 coming more challeng- that you’re taking by putting on any
ing compared to 10 to 20 given position or making any given
Using ichimoku clouds years ago, or do you think recommendation.
provides an innovative way to the market has always Second, the importance of support
visualize where a chart might been challenging? Is and resistance levels to that end. They
have support or resistance. market analysis becom- are a big part of our discipline. Just
ing harder in today’s to have that eye towards risk man-
markets? agement, I think, is really key. And
The discipline of tech- I think it’s something that everyone
timing. I think it used to have a bad nical analysis has not evolved that struggles with collectively.
reputation. But now, with so much much because these are mathemati- I’d say the final thing we’ve learned
access to information and charts cal gauges and cycles. Most of the would be the benefit of trend fol-
available, it’s being embraced by tools that we use have been around lowing. We are not by our nature
market participants in a way that it for decades, and so, in that sense, the countertrend investors. We prefer to
wasn’t 10 or 20 years ago. Buy-and- discipline itself hasn’t gotten harder. have the trends on our side. With our
hold strategies, long-term, tend to But, of course, just as with any kind experience, we found that uptrends
create a situation in which you’re of analysis, you have to morph with tend to continue, and downtrends tend
riding out major bear markets. And the times. As one example, we have to continue. They’re often there for
to me, if you can simply minimize found that volume analysis isn’t quite a reason. For example, if there is a
the drawdowns associated with those as valuable as it was in the earlier long-term uptrend in a given stock,
major bear markets, you’re putting stages of my career, probably associ- then the market is rewarding that
yourself in a much better position to ated with all of the different invest- stock because it looks to have strong
succeed in investing. ment products available to market fundamental prospects. Trends, es-
I think the key is for long-term participants these days...derivatives, pecially long-term trends, are often
investors to make sure they’re not for example. driven by fundamental factors and by
getting too caught up in the short- So we’ve had to adapt in certain macro factors, and we respect those
term noise. That is exactly what we’re environments. We also feel that as likely to continue.
trying to offer with the TACK ETF. there has been a bit of time compres-
We use data that’s monthly or even sion, where moves that used to take Who have your mentors been over
quarterly in order to understand the three years now feel like they can the years?
prevailing trends. When those pre- take three months, and so on. This Well, certainly Tom Dorsey in
vailing trends shift over a long-term means that we’ve had to focus a bit the early stage of my career when I
timeframe, that’s when we consider more short-term at times to navigate was at his firm as an intern. He was
it prudent to reduce exposure. And market volatility. I wouldn’t say it’s very inspirational, and the decisive-
by reducing that exposure, you’re harder, but I would say that we are ness that he could take away from a
not missing any upside during a bear constantly forced to adapt to the cur- point-and-figure chart was something
market, and you can put yourself in rent environment. that I really admired. And of course,
a better position to get that exposure having Ralph Acampora standing in
back at a time that’s more prosper- You’ve been following the markets front of my University of Richmond
ous. A frequent argument for the for nearly 25 years. What are the class was an inspiration too, and he
buy-and-hold strategy is that missing three most important investment has really helped guide me over the
the best 30, 40, 50 days is detrimental lessons you’ve learned? course of my career through being
to performance. However, we found I think the first one would be having involved in the CMT Association, and
in our studies that those best days a discipline, and we get that through otherwise, he’s been a great mentor
actually come during bear market our technical methodology. The disci- and resource for me.
cycles. So, if you miss the best days pline is what keeps you from getting Two others who have helped me
and the worst days, you put yourself too emotional in your investing and in shape my methodology and my dis-
in a much better position in terms of your trading, but also, it’s important cipline are Mike Hurley, who was my
historical returns. for defined risk—not only to under- first boss when I started working as
stand what the potential reward might a publishing technical analyst, and
Do you find that the market is be- be of something, but what is the risk Rick Bensignor, who I worked under
34 • December 2022 • Technical Analysis of Stocks & Commodities
at Morgan Stanley. A lot of what matter of putting in the
they taught me is the “stuff” of my work.
methodology today. Collectively, it’s four
You provide compli- research products rolled
Why do you think many investors mentary sessions on into one subscription.
fail to succeed in the markets? your market approach
I think it’s the lack of a systematic to CMT Association
approach. This is something that students and others.
we’re trying to help a lot of our clients You also speak at various industry And it’s something that we really
with. When they’re consuming a lot conferences. I assume you derive haven’t seen since 2008, and that’s
of information—and that could be a great deal of satisfaction from why I think so many people are strug-
news headlines, technical research, these activities? gling with it in terms of analysis and
fundamental research, macro re- Yes, and it’s an honor to be consid- trying to call a market bottom because
search, or quantitative inputs—it can ered an expert in the field of techni- it’s not just a correction. Corrections
be a dizzying amount of information. cal analysis. To the extent that I can tend to end abruptly and quickly with
This is where having a systematic impart what I’m doing or inspire a big volatility spike, but bear market
approach can help you to navigate anyone, especially young people, to cycles do not do that. The good news
all of the information out there. It’s implement the discipline or to even is that, by my measures, there is still
hard to do because you have to stick build a career around it, that to me is a secular bull trend intact. For one,
to a certain methodology, and to such an honor and something I hope I’m using the monthly cloud model,
craft that methodology takes a lot to do more of when I am less busy and that informs us that the primary
of work. That’s what we’re trying to than I am now. trend from a decade-long perspective
help people do—understanding that is still higher behind the US equity
that systematic approach is where you Do you have any plans to bring market. So we are hopeful that the
can really derive value from technical another ETF to the market with an cyclical bear trend will culminate
analysis in particular. It can help you appropriate sponsor? If so, can you in the coming months and give us a
navigate all of the information that’s provide any details? long-term buying opportunity.
being thrown at you. We have no plans right now for
another product. At this time, we’re I want to thank you on behalf of
Do you think the average investor or focused on TACK. our readers for taking time from
trader should use ETFs instead of your busy schedule to offer your
trying to pick stocks? There is now In the future, do you expect to write succinct and incisive commentary
a universe of 3,000 ETFs available, a book on your investing approach, on the value of technical analysis of
so that provides a wide array of experience, and observations for the the markets. I wish you well going
choices, and ETFs can offer the benefit of investors who may lack forward.
investor diversification. the knowledge to use a systematic,
I think it’s wonderful that we have rules-based approach? Leslie N. Masonson is president of
so many ETFs at our disposal because It’s something I would love to do. Cash Management Resources, a fi-
it allows us to trade thematically and When I can find more time in my life, nancial consulting firm that focuses
to get that inherent diversification. I’ll certainly consider it. I have a busy on ETF strategies. He is an active
But I think it really depends on the home front with kids and their sched- ETF and Nasdaq futures trader,
person. It depends how much work ules. So when my schedule allows, it’s and the author of Buy—Don’t Hold:
they’re willing to put into their analy- something that I’d consider. Investing with ETFs Using Relative
sis. If they do fundamental research Strength To Increase Returns With
and get to know companies well, that As we speak here in early Septem- Less Risk; and All About Market
certainly puts them in a great position ber 2022, and seeing the current Timing, as well as Day Trading On
to leverage trends on the individual markets, do you believe we are in a The Edge. He can be reached at
stock level. I think if people are will- cyclical bear market in the context lesmasonson@yahoo.com or 845
ing to put in some effort, then they of a secular bull market? 323-7276.
certainly can use individual stocks I do, and that’s how I’ve been refer-
to build on their returns. It’s just a ring to it, as a cyclical bear market.
December 2022 • Technical Analysis of Stocks & Commodities • 35
 Rank, Rebalance, Repeat

A Simple Rotation Strategy

With Sector ETFs
Here is a portfolio rebalancing technique that’s simple Proposed rotation strategy
enough for an individual trader to perform on a monthly For our portfolio construction strategy, we consider
basis. the nine SPDR ETFs: Consumer Discretionary (XLY),
Financial (XLF), Materials (XLB), Consumer Staples
by Yi Hui Yang and Eugene Pinsky, PhD (XLP), Health Care (XLV), Utilities (XLU), Industrial

In
(XLI), Technology (XLK), and Energy (XLE). Collec-
recent years, sector ETFs have been widely tively, these ETFs comprise most stocks of the S&P 500.
used to provide diversification and in port- The data we used for the analysis is daily prices for the
folio construction. Portfolio managers who years 2001–2020 from Yahoo Finance.
chose to use a sector-based strategy to gain Our rotation strategy is to construct an equally weighted
a performance edge may have a different portfolio using some of the ETFs. Despite the simplicity
focus. Some may invest in business cycles of equal weight strategies, in general they are known
while others may target a particular industry. Sector to give stable performance for all periods, are easy to
rebalancing is performed by portfolio managers, and implement, and are often difficult to outperform (as
this may involve extensive analysis. Such extensive Peter Schanbacher demonstrated in a 2014 article in
analysis may be challenging for individual investors to Analysis of Economics And Finance, listed at the end
do themselves. In this article, we will discuss a simple of this article).
sector rotation strategy that in our tests outperformed Our strategy considers equal weight investing in the
the S&P 500 and that could be easily implemented by middle performers among the nine ETFs. Unlike the
any self-directed investor. strategy presented in a 2018 article in this magazine by
The simple strategy we will consider here is to construct Marisa Yang, which suggested investing in the single
portfolios from nine sector ETFs that represent major middle performer ETF, here, we consider investing in
sectors of the S&P 500. The portfolio is rebalanced the group of k middle ETFs.
every month by choosing the middle three ETFs based The rotation strategy we tested is as follows:
on price returns from the previous month.
Our analysis shows that such a rotation strategy using  n the last trading day of each month, we rank sector
O
PHOTON PHOTO/SHUTTERSTOCK

the three middle performers and rebalancing monthly ETFs based on their percentage price appreciation for
outperforms the S&P 500 both by total return, risk, and that month. We then buy the middle-ranked one, three,
maximum drawdown. five, or seven sectors (equally weighted) and own them
This simple rotation strategy can be implemented by a for the next month.
self-directed investor without any additional tools.
36 • December 2022 • Technical Analysis of Stocks & Commodities
 TRADING TECHNIQUES

These middle-ranked Performance Ratios (2001–2020)

sectors are considered Final Portfolio Avg Risk-
Portfolio Avg Return Volatility Sharpe Ratio MaxDD
the “mid-momentum” Value* Adj Return
sectors. (We will re- Mid-1 ETF 432 7.60% 6.14% 19.15% 0.32 56.52%

fer to the number Mid-3 ETF 739 10.52% 9.03% 15.46% 0.58 45.81%

of middle perform- Mid-5 ETF 618 9.54% 8.06% 14.46% 0.56 40.22%

ers to be included Mid-7 ETF 510 8.49% 7.03% 14.83% 0.47 44.83%

in the portfolio as Equal-Weight 460 7.92% 6.47% 14.92% 0.43 49.12%

mid-1, mid-3, mid-5, FIGURE 1A: PERFORMANCE METRICS FOR THE VARIOUS PORTFOLIO STRATEGIES, REBALANCED MONTHLY.
and mid-7). We then This shows a comparison of the overall performance for the portfolio strategies under consideration. Each portfolio
was constructed according to a monthly ranking of the nine sector ETFs, investing in either one, three, five, or seven
computed the annual- sectors, respectively. These portfolios are compared to a portfolio that includes all nine sectors (equally weighted) and
ized return, volatil- also to the benchmark S&P 500 index. (*Assumes the portfolio starts with $100 in 2001)
ity, Sharpe ratio, and
maximum drawdown Performance Ratios (2001–2020)
(MaxDD) for each Strategy Rebal Freq Avg RA Return Ann RA Return Volatility Sharpe Ratio MaxDD
portfolio for the in- S&P 500 (SPY) 7.43% 5.98% 15.11% 0.40 50.78%
vestment period. For 1-M 7.60% 6.14% 19.15% 0.32 56.52%
comparison, we also Mid-1 ETF 3-M 6.98% 5.53% 19.21% 0.29 50.52%
noted the same per- 6-M 8.91% 7.44% 15.76% 0.47 51.92%
formance metrics for 1-M 10.52% 9.03% 15.46% 0.58 45.81%
a monthly rebalanced Mid-3 ETF 3-M 8.18% 6.72% 15.73% 0.43 41.39%
equal-weighted port- 6-M 7.57% 6.12% 13.96% 0.44 40.63%
folio that holds all 1-M 9.54% 8.06% 14.46% 0.56 40.22%
nine sector ETFs at Mid-5 ETF 3-M 8.08% 6.63% 15.09% 0.44 40.49%
all times, and we also 6-M 7.23% 5.79% 14.12% 0.41 43.78%
include the same per- 1-M 8.49% 7.03% 14.83% 0.47 44.83%
formance metrics for Mid-7 ETF 3-M 8.01% 6.55% 14.79% 0.44 46.53%
the S&P 500 (SPY), 6-M 7.53% 6.08% 14.56% 0.42 46.60%
used as the market 1-M 7.92% 6.47% 14.92% 0.43 49.12%
benchmark. Equal-Weight 3-M 7.96% 6.50% 14.86% 0.44 48.74%
Through our analy- 6-M 7.86% 6.40% 14.75% 0.43 48.51%
sis, we found that the FIGURE 1B: PERFORMANCE METRICS FOR THE VARIOUS PORTFOLIO STRATEGIES, WITH VARIOUS REBAL-
optimal k is 3, and ANCING FREQUENCIES. As in Figure 1a, this shows a comparison of the overall performance for the different portfolio
the optimal rebal- strategies (that is, the mid-1 through mid-7 portfolio plus the nine-sector equal-weight portfolio plus the S&P 500
ance frequency is one benchmark), this time also showing performance metrics resulting from rebalancing frequencies of one, three, and six
month. months. The rebalancing frequency of one month achieved the best results.

Our results are sum-

marized in the table in Figure 1a. And for comparison, annual volatility at 19.15% and MaxDD of 56.52%. This
a table showing performance ratios for three different was expected since that strategy only invested in a single
rebalance frequencies is shown in Figure 1b. sector at a time. Adding more ETFs to the portfolio
seems to be the solution for it. We can see that portfolios
The middle three performers
gave the best results
See Figure 2. You can see that all of the example port-
folios tested here—that is, the portfolios made up of the We will discuss a simple sector
middle one, three, five and seven performers (referred rotation strategy that in our tests
to as the mid-1, mid-3, mid-5, and mid-7 portfolio), plus outperformed the S&P 500 and
the portfolio containing all nine sector ETFs—all out- that could be easily implemented
performed the SPY in terms of annualized return. by any self-directed investor.
The single-ETF portfolio (mid-1), however, under-
performed in all of the other metrics; it had the largest
December 2022 • Technical Analysis of Stocks & Commodities • 37
 investing in three, five,
or seven ETFs at a time
(mid-3, mid-5, mid-7)
have significantly lower
volatility, and they all
outperformed the single-
ETF portfolio (mid-1) on
all metrics.
Adding more ETFs,
however, did not always
result in better perfor-
mance, not to mention
it also will add com-
plexity and transaction
costs, especially for a
self-directed investor.
The table in Figure FIGURE 2: WHICH PORTFOLIO GAVE THE BEST PERFORMANCE? Shown here is the hypothetical growth in
1a shows that invest- portfolio value from 2001–2020 for the portfolio strategies under consideration in Figure 1a. You can see that the
ing in the middle three “middle” performers—that is, the “mid-momentum” portfolios labeled mid-1, mid-3, mid-5, and mid-7—gave the best
performers is probably results. And among those, analysis showed that the mid-3 strategy performed the best, with the optimal rebalanc-
ing frequency at 1 month. (Uses $100 as the starting value for each portfolio; taxes and transaction cost were not
your best shot. It gave considered)
an annualized return of
9.03%, outperforming the S&P by more than 300 basis nine sectors also outperformed the SPY on all metrics.
points (bps). In terms of total portfolio value, after 20 So that strategy could be a good alternative for inves-
years, the three-ETF portfolio would hypothetically tors who value simplicity, as they can simply rebalance
grow from a $100 starting value to $739, whereas the the nine sectors at the beginning of each period without
buy-and-hold strategy for S&P 500 will only grow to having to compute and rank their performance.
$419. This means that even after adjusting for transaction
costs, this strategy is still superior to passive investing How did the strategy invest
in the index. In terms of tax implications, this strategy in economic cycles?
is most attractive for deferred-tax accounts. In general, the performance of sectors is largely tied to the
In terms of the maximum drawdown, although the economic cycle. In other words, some sectors generally
mid-3 strategy is not as good as the mid-5 and mid-7, it’s perform well and other sectors perform poorly during
still better than the nine-sector equal-weight portfolio certain points of the economic cycle. For example, inves-
and better than the S&P benchmark. In addition, both tors turn to sectors like Consumer Staples (XLP), Health
the mid-5 and mid-7 strategies had lower average return, Care (XLV), and Utilities (XLU) to outperform during
with the mid-5 about 100 bps lower and the mid-7 more an economic recession. These sectors are defensively
than 200 bps lower. On the other hand, investing in a oriented (generally referred as “defensive sectors”). On
single ETF gave an almost 300 bps lower average return, the other hand, sectors like Consumer Discretionary
a much higher risk, and a higher MaxDD than the other (XLY), Financial (XLF), and Materials (XLB) are the
three strategies with more ETFs. economically sensitive areas, which investors can use to
It can be noted that the equal-weight strategy with all outperform during phases of economic expansion.
In the following section, we will take a closer look at
what we found was the best-performing strategy (that
is, the approach of using the three middle performers,
Our strategy considers equal or “mid-3” strategy) and see if it was able to capitalize
weight investing in the on the economic cycle just by investing in the middle
middle performers among three performing sectors. First, we labeled each monthly
the nine ETFs. period from 2001 to 2020 as either a “contraction” or
“expansion” according to the “business cycle reference
dates” provided by the National Bureau Of Economic
38 • December 2022 • Technical Analysis of Stocks & Commodities
NATIONAL BUREAU OF ECONOMIC RESEARCH

From To Economic Phase Portfolio Composition Frequency Relative Frequency

Jan 2001 Nov 2001 Contraction Defensive Sensitive Cyclical Contraction Expansion Contraction Expansion
Dec 2001 Dec 2007 Expansion 1 1 1 11 75 35.48% 35.89%
Jan 2008 Jun 2009 Contraction 3 0 0 0 2 0.00% 0.96%
Jul 2009 Jan 2020 Expansion 2 1 0 3 15 9.68% 7.18%
Feb 2020 Apr 2020 Contraction 2 0 1 4 21 12.90% 10.05%
May 2020 Dec 2020 Expansion 1 2 0 4 18 12.90% 8.61%
FIGURE 3: US BUSINESS CYCLE EXPAN- 1 0 2 3 19 9.68% 9.09%
SION AND CONTRACTION. Using data from 0 3 0 0 2 0.00% 0.96%
the National Bureau Of Economic Research, 0 2 1 4 25 12.90% 11.96%
each monthly period from 2001 to 2020 is
0 1 2 2 31 6.45% 14.83%
labeled as either a “contractionary” or “expan-
sionary” period. This information could then be 0 0 3 0 1 0.00% 0.48%
used to examine whether the best-performing Total 31 209 100.00% 100.00%
portfolio strategy—that is, the “mid-3”—tends FIGURE 4: 10 POSSIBLE COMPOSITIONS OF SUPER SECTORS, AND HOW OFTEN THE
to capitalize on the economic cycle. COMBINATIONS APPEARED IN THE MID-3 PORTFOLIO DURING 2001–2020 TEST PERIOD.
The best-performing rotation strategy from the tests—that is, the “mid-3” portfolio—invested in
all three “super sectors” for the largest number of periods during both recession and expansion
Research. (See Figure 3.) phases (35.48% and 35.89% relative frequencies). The mid-3 strategy invested in a single super
sector less than 3% of the time, regardless of the economic phase, which means that for most of
Each of the nine sectors is then the time it provided diversification across the three super sectors.
classified into one of the three super
sectors—defensive, sensitive, or cycli-
cal: 31 months (22.58% relative frequency) of the economic
contraction phases, the strategy has invested in two
Defensive: Consumer Staples (XLP), Health Care or more defensive ETFs, versus 38 out of 209 months
(XLV), Utilities (XLU) (18.18% relative frequency) during economic expansion.
Sensitive: Industrial (XLI), Technology (XLK), On the other hand, the relative frequency of the strategy
and Energy (XLE) owning two or more sensitive or cyclical ETFs during
Cyclical: Consumer Discretionary (XLY), periods of economic contraction is 41.94% versus 45.93%
Financial (XLF), Materials (XLB) during periods of economic expansion. Moreover, the
relative frequency of owning at least two cyclical sectors
as described by Morningstar (in “Morningstar Stock is 16.13% during economic contraction versus 24.40%
Sector Structure on Australian Stock Market).” Sectors during economic expansion. Interestingly, our proposed
falling under the “defensive” super sector are the least strategy has invested in a single super sector less than
economically sensitive areas; the “cyclical” sectors are 3% of the time (five months out of 20 years), regardless
industries that generally flow with the overall economy; of the economic phases. This means that our proposed
and the “sensitive” sectors fall in between defensive strategy almost always provides some level of diversifi-
and cyclical. cation across the three super sectors.
Since the strategy invests in the middle three perform-
ers, there are 10 possible compositions of super sectors Conclusion
for each period, as illustrated in the table in Figure 4. For In this study, we showed that monthly reconstruction
example, the three selected ETFs could be all from the of an equal-weighted portfolio using the middle three
same super sector, or each from a different super sector, best-performing ETFs gives a simple strategy that
and so forth. We then count the occurrence and compute
the relative frequency for each composition for the time
horizon, grouped by economic phase (contraction or
expansion). The results are summarized in Figure 4. Our proposed strategy almost
In the table, we can see that our proposed rotation always provides some level of
strategy—that is, the “mid-3” strategy—has invested in diversification across the three
all three super sectors for the largest number of periods super sectors.
during both recession and expansion phases (35.48%
and 35.89% relative frequencies). For seven out of the
December 2022 • Technical Analysis of Stocks & Commodities • 39
 outperforms both the S&P 500 index and other equal- ture,” https://www.morningstar.com/content/dam/
weighted sector ETF portfolios. The proposed strategy marketing/apac/au/pdfs/Legal/StockSectorStruc-
can be implemented by any self-directed investor without ture_Factsheet.pdf
any additional tools. It would be especially attractive for National Bureau Of Economic Research, “US Business
tax-deferred and retirement accounts. Cycle Expansion And Contraction,” https://www.nber.
org/research/data/us-business-cycle-expansions-and-
Yi Hui Yang recently graduated from the Metropolitan contractions
College of Boston University with a master’s degree in Schanbacher, Peter [2014]. “Combining Portfolio Mod-
applied data analytics. els,” Analysis Of Economics And Finance, Vol. 15,
Eugene Pinsksy, PhD, is an Associate Professor of No. 2, pp 433-455.
the Practice in the computer science department at the Yang, Marisa [2018]. “Capitalizing On Sector Rotation
Metropolitan College of Boston University. Strategies,” Technical Analysis of Stocks & Com-
modities, Volume 36, February.
Further reading Weiner, Scott M., and Christopher Grove, et al. [2021].. The
Aniket, Ullal [2013]. ETF Investment Strategies: Best Complete Guide To ETF Portfolio Management: The
Practices From Leading Experts On Constructing A Essential Toolkit For Practitioners, McGraw-Hill.
Winning ETF Portfolio, McGraw-Hill.
Morningstar [2011.] “Morningstar Stock Sector Struc-

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40 • December 2022 • Technical Analysis of Stocks & Commodities

BIGALOW/CANDLESTICK ANALYSIS
Continued from page 23
It’s important to utilize
confirming indicators with
doing the opposite? candlestick signals to help
However, I can also turn that around 180 degrees and
determine correct trade entry.
give you a different perspective. Looking at it from the
opposite standpoint shows why candlestick signals are
effective.
Seeing a candlestick buy signal in an oversold condition visuals work just as well on intraday charts as they do
is revealing where the smart money is buying. Seeing on a daily, weekly, and monthly charts.
a candlestick sell signal in the overbought condition Candlestick signals and patterns produce reliable re-
reveals where the smart money is selling. Candlestick sults. Candlestick signals were developed over centuries
charts allow you to participate in what the smart money of observed price movements. Returning to the truism
is doing. stated at the beginning of this article: Logic dictates that
And following the charts helps to take the emotions if candlestick signals did not produce good results for
out of your trading. investors and traders, we wouldn’t still be using them
today.
Confirming indicators with candlesticks
It’s important to utilize confirming indicators with Stephen W. Bigalow is the owner and operator of www.
candlestick signals to help determine correct trade entry. candlestickforum.com, which provides a learning forum
For example, we can use moving averages and especially on candlestick analysis. He has 45 years of trading and
the T-line with candlestick signals. When you see a investing experience, with heavy emphasis on candlestick
bullish candlestick signal at a moving average level that analysis. He consults with money managers and hedge
everybody is watching, it enhances the probabilities that fund managers for improving market timing and posi-
a bullish trade is being confirmed. tion timing. He holds a business and economics degree
The candlestick investor has the advantage of seeing from Cornell University.
immediately what investor sentiment is doing at technical
levels that other investors are using, such as Bollinger Further reading
Bands, Fibonacci retracement levels, or trendline support Bigalow, Stephen W. [2011]. Profitable Candlestick
& resistance levels. Or, if an investor has a successful Trading, John Wiley & Sons.
chart trading system, adding candlesticks to the chart [2011]. Candlestick Profits: Eliminating Emotions
will improve the visual analysis dramatically. With Candlestick Analysis, Profit Publishing.
[2005]. High Profit Candlestick Patterns, Profit
A lasting legacy Publishing.
Japanese rice traders of the 18th century developed [2011]. “Trading Commodities With Candlesticks,”
the candlestick graphics that can illustrate when trend Technical Analysis of Stocks & Commodities,
reversals are occurring. Because candlestick graphics Volume 29: Bonus Issue.
depict human nature, the visuals provided by candlestick ‡CQG
signals give great clarity as to when it is time to buy and ‡See Editorial Resource Index
when it is time to sell. Keep in mind that the candlestick

December 2022 • Technical Analysis of Stocks & Commodities • 41

 MARKET RAP
THE WORLD OF RETAIL TRADING
Emilio Tomasini is an adjunct professor of corporate finance at the
University of Bologna in Italy and is a professional trader. He has au-
dited over 5,000 accounts of traders during 13 years of a real-money
trading competition, giving him unique insights into what helps a retail
trader to succeed. He has expertise in technical analysis and trading
Emilio Tomasini
system design. In this column, he shares his sometimes “unserious”
thoughts on serious topics in finance. In his writings, he hopes to help the retail trader better understand the leap
from unprofitable to profitable trader, firmly believing that the right answers can come only if the right questions
are asked. At his website at www.emiliotomasini.com, he offers some of his expertise in a free video course.

SHOULD WE GIVE UP ON THE must reflect current market experi- consider whether patterns or models
HEAD-AND-SHOULDERS PATTERN? ences, is classic technical analysis can be tested with statistical rules.
The head-and-shoulders pattern is a really applicable any longer? Rather In the book Evidence Based Tech-
classic, renowned price pattern that than try to answer such a sweeping nical Analysis by David Aronson,
technicians traditionally look for on question and make generalizations for published by John Wiley & Sons in
the chart. For many years it has been such a complicated and wide-ranging 2006, and a book I strongly recom-
considered a useful pattern to spot. topic, I’ll skip that slippery question. mend, Aronson shows how difficult
But is this chart pattern still relevant Instead, I’ll consider a smaller topic: it is to identify a head-and-shoulders
on today’s price charts? And was it Are there some aspects of classic pattern on the chart. It seems that
ever really useful? technical analysis that no longer this pattern’s identification relies
In case you think my questioning of work (or never worked) and should more on artistic interpretation than
it is heresy, remember that technical be abandoned? More specifically we
analysis is an empirical interpretation might consider: Do some chart pat- Continued on page 45
of charts. Technical analysis was born terns observed long
long before the mass introduction of ago still occur in a Uptrend Downtrend
1, 2 Higher highs 5, 6 Lower highs
the personal PC and before freely marketplace that has 3, 4 Higher lows
5
7, 8 Lower lows
available data became commonplace. been transformed by
It doesn’t matter for this discussion modern technology? 2
whether you consider that technical Whenever the word 7
6
analysis got its start in Japan in the “experience” is used, I 1

17th century with candlestick charts, tend to next think to- 4

8

or in Europe in the 16th century, or at ward a second world:

some other point in history; there is the world of science. 3
simply not a lot of written evidence In science, we use
from those earlier centuries to allow observations, and we FIGURE 1: TREND. Simply stated, an uptrend is a series of higher
us to pin it down exactly. But we can look for evidence. highs and higher lows; a downtrend is a series of lower highs and
lower lows.
probably agree that technical analy- We conduct experi-
sis, in and of itself, is a methodological ments and observe the Congestion
approach that derives its existence results. In technical 1, 2, 3 Highs same level
from the market’s experience. analysis, we should 4, 5 Lows same level
Given the historical roots of tech- also want to have evi- 1 2 3
nical analysis going back centuries, dence that something
and given the definition that analysis works before we use
it, because we want
our analysis methods
Technical analysis is an to reflect the actual
empirical interpretation experiences in the 4 5
of charts. current markets. And FIGURE 2: CONGESTION. Congestion on a price chart is a horizontal
we should therefore movement where the highs (lows) are at or near the same level.
42 • December 2022 • Technical Analysis of Stocks & Commodities
 Algo Q&A
ALGORITHMIC TRADING
Have a question about system or algo trading? Kevin J. Davey has over
30 years of system trading experience. Kevin is a full time trader, and also
teaches and consults via his Strategy Factory® online workshop (https://
kjtradingsystems.com). He is the author of 5 bestselling trading books, in-
cluding “Building Winning Algorithmic Trading Systems” and his latest
book “Algo Trading Cheat Codes.” 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

LOCKING IN PROFITS tempting to any algo trader to close discretionary actions.

While monitoring automated strat- the position and possibly re-enter It is impossible to say if this is a
egies I am very tempted to lock in later. good idea for you, as we are all differ-
profit if I see a specific strategy has In that particular case, trading ent traders. If it was me, for example,
accumulated some. Do you also ex- against the algo would have been a I know it would be a bad idea, since
perience this and is it wise to do? good decision (monetarily, at least), my discretionary trading track record
This is a great question, one faced as that was basically the peak price of is far from stellar.
by most algo traders at some time or oil in that time period. But doing this Therefore, it is hard to say if this
another. Open profits are tempting to was a 100% terrible decision when “algo strategy overruling” will be
cash in, and if one times it correctly, you consider the backtest. By over- better for you.
they can re-enter at a better price and ruling the algo, you are temporarily If you are set on this course, I’d
then be in sync again with their algo. tossing all your backtesting away (at suggest two things:
A true win/win! least in part), and your real money
Of course, a few times I’ve suc- results will depend a lot more on your 1. Keep a detailed log of your
cumbed to the profit temptation and discretionary overrides of your
done this, but I’ve never felt good algo strategy, and after 30–50
about it afterwards. Here is why.
My guess is it would trades, compare your discretion-
Remember, when you spend count- be hard to consistently ary/algo results to your 100%
less hours testing and developing a beat a pure algo algo backtest results. Do your
trading algo, in the end you really rely backtest over a long discretionary decisions make
on one measure to judge the “good- period of time with your trading better, or worse? Is
ness” of the algo. That is the backtest. discretionary decisions.
A profitable backtest, when created Continued on page 45
correctly, gives you confidence to
trade it live. Studies have shown that
profitable backtests are more likely to
be profitable going forward, although
it is by no means a guarantee.
The temptation to overrule your
algo can be enormous. One such
situation is with what I call a “wind-
fall profit.” A good example of this
occurred in March 2022. At the
open Sunday night March 6th, crude
oil skyrocketed due to the Russia-
Ukraine war (see Figure 1).
If you were long before the open,
TRADESTATION

you received a windfall profit of

around $13,000 per contract. A huge
amount! It would have been very FIGURE 1: CRUDE OIL. Crude oil skyrockets in the first few minutes of Sunday night trading.
December 2022 • Technical Analysis of Stocks & Commodities • 43
 TRADING ON MOMENTUM

Trading A Sequence Of Entries

Day Trading Whole-Number

Ladders
Climbing the ladder of trading suc- Constructing your ladder spaced exactly $1 apart. To figure out
cess may be made easier by laddering of trades the right spacing, look at the average
your trades. Find out how. Like rungs in a ladder, your sequence range during the last five days and
of trades should be spaced evenly, as divide the range by 4. In this example,
by Ken Calhoun seen in the chart of Direxion Daily the range = $43–$39 = $4 range; 4/4

S
Small Cap Bear 3X Shares (TZA) = $1 ladders. We would use much
caling in to winning trades, or in Figure 1, which has four entries smaller ladders for lower-priced in-
using a sequence of entries, is struments. For example, a $20 stock
a valuable trading technique with average range of $1 would use
you can use for both day and Like rungs in a ladder, ladders spaced ($20/4) = $0.25 apart.
swing trading. The two goals are: 1. your sequence of Note that simple whole numbers are
to leverage for more profit in strong- trades should be fine for most stocks and ETFs in the
trending charts, and 2. to provide spaced evenly. range of $40 to $80 per share.
reentries after stops. Continued on page 47

eSIGNAL

FIGURE 1: TRADING A SEQUENCE OF ENTRIES. Here’s an example of scaling in above each whole number on a chart of Direxion Daily Small Cap
Bear 3X Shares (TZA). Ideally with this laddering technique, the multiple entries will be spaced evenly. After your second entry, you can use a trailing
stop at breakeven.
44 • December 2022 • Technical Analysis of Stocks & Commodities
 MARKET RAP
TOMASINI/MARKET RAP pattern is “usually” a A Head & Shoulder or a congestion false breakout?
Continued from page 42 trend termination pat-
tern, but on occasion,
it can also be a trend
on strict rules. continuation pattern.
Moreover, the head-and-shoulders I found this assertion
pattern, when clearly defined, does confusing. That’s like
not prove itself profitable on stock saying, tomorrow it
and currency charts. could rain or it could
I would even add a more definitive be sunny. How is that
blow to this pattern. I will declare this useful? FIGURE 3: HEAD-AND-SHOULDERS PATTERN, OR A CONGESTION
pattern useless through a different We as technicians WITH A FALSE BREAKOUT? Hard to say, isn’t it? The so-called
perspective. In my trading methodol- would do well to con- head-and-shoulders pattern could just as easily be a congestion
area and the false start of a breakout.
ogy, the status of the current market sider: Are charts the
can only be one of two choices: trend manifestation of some
or congestion. An uptrend is given divine perfection, or can we presume technical analysis for decades. I’ve
by at least two higher highs and two that perfection does not belong to written before in this column about
higher lows. A downtrend is given the world of financial markets? If the importance of countering some
by at least two lower highs and two the latter statement is true, then we of the ideas and even myths that ex-
lower lows. (See Figure 1.) Congestion are forced to admit that our beloved ist that have at times given technical
is given by at least two highs and two head-and-shoulders pattern exists analysis a bad rap. I question things
lows at the same level (see Figure 2). only in our mind. because I don’t want all the useful
It’s nothing more, nothing less. I do not want to disregard a pattern aspects of the discipline to be over-
But price charts are also full of that has practically been a herald of shadowed by what does not work. And
noise. They are not drawn by tidy technical analysis itself. However, it when we give weight to something
architects who love well-ordered would be more beneficial to ourselves without good evidence that it indeed
patterns. On a real-world price chart, and to our profession if we acknowl- works, we are giving carte blanche to
you can have many false starts. You edged that there’s no proof of this all the technical analysis opponents.
can have bull and bear traps. So how pattern’s usefulness in forecasting Therefore, sometimes it’s important
do you know if a head-and-shoulder price. Unless you have some scien- to reexamine something, even if it’s
pattern isn’t really a congestion tific support that something actually something that worked in the past or
area with a bull trap (Figure 3)? Or works, it’s not reliable. Take care not perhaps was given more importance
simply a congestion area that took a to attribute forecasting properties to than it should have been given in the
wrong turn? something that hasn’t earned it in first place.
Three decades ago I remember today’s modern markets.
reading that a head-and-shoulders I say this from being in the field of

Algo Q&A
DAVEY/ALGO example, I’ve tested the “windfall saying that, as I know overriding
Continued from page 43 profit” approach and it did not signals has never turned out well
improve overall performance. for me.
In the end, it is your money, and
the extra psychological stress and There is no right answer here, as your mental well being, that is at stake
market watching involved with each trader must ultimately do what while trading. As long as you verify
these discretionary overrides they feel is correct. My guess is it your approach through real time
worth it to you? would be hard to consistently beat a performance testing, the right answer
2. If you can codify what you are pure algo backtest over a long period will be what works best for you.
doing with overriding, then back- of time with discretionary decisions.
test it. See how it does. As an But, I definitely could be biased in
December 2022 • Technical Analysis of Stocks & Commodities • 45
 Futures For You
INSIDE THE FUTURES WORLD
Want to find out how the futures markets really work? Carley Garner is
the senior 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 Creativ-
ity (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 info@carleygarnertrading.com or via www.DeCarleyTrading.com.
Selected questions will appear in a future issue of S&C.
Carley Garner

OVERNIGHT TRADING at 1 pm; if you’ve done the math you a significant news event often sees a
Do all commodities trade overnight? realize a trader in California would reopening process full of volatility
Is that an advantage or disadvan- need to be up at 12:30 am to witness and pain as traders react to fresh
tage? the sugar open. information.
Most, but not all, futures markets Now that we have established that There are negative aspects to
trade around the clock. Because most futures markets trade through- overnight trading access; I’ll start
the CME Group exchange started out the night while most people are by saying, more market access isn’t
as four separate exchanges, it is no sleeping, let’s talk about whether this always desirable. If you’ve ever had
surprise each division has a differ- is a positive or negative for market a commodity trading spouse, you
ent idea of when markets should be participants. The most glaring ad- know what 23-hour market access
open for trading. There are a few vantage of overnight trading is it can do to a marriage. All kidding
exceptions, but energies, interest provides traders of all sizes, types, aside, there are real drawbacks to free
rates, currencies, stock indices, and and purposes (hedging or speculat- and open markets at nearly all times
precious metals listed on the CME ing) the ability to react to events that from Sunday night to Friday night.
trade between 5 pm Central through The meat futures complex traded in
4 pm Central on the following day; overnight sessions for a brief period
or 23 hours each day starting from If you’ve ever had a but vast complaints were made by
Sunday evening and closing for the commodity trading farmers and ranchers relying on
weekend on Friday with a pause spouse, you know what price stability to hedge their input
between 4 pm and 5 pm. 23-hour market access and output prices claiming market
The meats (hogs and cattle) do can do to a marriage. manipulation and unnecessary
not trade overnight; they trade from volatility. In my view, these griev-
8:30 am Central to 1:05 pm. The ances were not unfounded. Overnight
grains (corn, wheat, soybeans, and occur beyond normal trading hours. trading sessions experience far less
byproducts) trade overnight starting For example, sometimes there are trading volume than the traditional
at 7 pm Central through 1:15 pm significant developments overseas day session. This opens the door to
the next day, but with a 45-minute that require action taking; waiting dramatic price swings if large and/
pause between 7:45 am and 8:30 for the following morning market or consistent orders are entered into
am. Finally, the softs (cocoa, sugar, opening would be undesirable. Some the marketplace and there is not
coffee, orange juice, cotton) trade notable examples are the Russian enough liquidity for the orders to
on the ICE Exchange rather than the invasion of Ukraine and the US be absorbed in a civilized manner.
CME Group and have open and clos- Presidential elections. The inability This phenomenon is exacerbated by
ing hours that vary widely. The one to take action to react to events in algorithmic trading systems running
consistency is they all have odd and real-time is frustrating for many wild while human traders are try-
inconvenient schedules for US trad- traders and can lead to emotional ing to get some rest. Those market
ers, particularly those on the West decision-making when the market participants attempting to uphold
coast. For example, the sugar market finally opens for trading. Worse, a the tradition of sleeping through the
opens at 3:30 am Eastern and closes market that was closed at the time of night might wake up to devastated
46 • December 2022 • Technical Analysis of Stocks & Commodities
 Futures For You
hedge or speculative accounts despite between the bid and ask for the in-
no fundamental changes to the com- strument. Widening bid/ask spreads, Overnight markets are
modity in question. a direct result of low liquidity, causes thinner and subject to
I regret to report, throughout my losses to be exaggerated and account larger moves than the
time in the brokerage industry I’ve balances to be drawn down further
more active regular
seen more trading accounts force- than what would be the case in an
liquidated by risk management in environment with more market session.
overnight trading than during day participation (such as day session
session trading. This is because over- trading). Adding salt to the wound of $5,000. While using all $25,000 of
night markets are thinner and subject frequent overnight account blow-ups the account toward margin might
to larger moves than the more active is the majority of the time, much of appear to be the most efficient use
regular session. Further, I suspect the troublesome overnight move is of capital, it is also a near guarantee
market participants are more prone retraced or completely reversed as of an adverse outcome. Instead of
to react emotionally rather than day session trading resumes at higher looking at unused capital in a trad-
rationally to overnight moves; for liquidity levels. ing account as a drag on potential
instance, they might be interrupting The tendency for overnight peril gains, it should be considered an
their sleep to monitor positions or the is another argument for overfunding insurance policy against being pre-
larger price swings resulting from an account; this means utilizing a maturely forced out of positions at
lower volume could deliver a larger small percentage of the account bal- undesirable prices; specifically in the
psychological blow. Additionally, for ance toward marginable positions. overnight session when chaos often
those trading options spreads with For instance, if you have $25,000 in runs amok.
open-ended risk, or outright naked your trading account, it is probably
short options, there is an additional a good idea to work toward keeping
disadvantage: ballooning spreads the margin requirement closer to

CALHOUN/MOMENTUM WHY THIS TECHNIQUE WORKS

Continued from page 44 The main reason that this can be The main reason
an effective strategy is because it that this can be an
gives you many opportunities to get effective strategy is
STEP-BY-STEP ACTION PLAN a profitable entry. We’ve all been
Here’s how you can start using this shaken out of trades; by creating
because it gives you
strategy: a sequence, we’re diversifying our many opportunities to
entry strategy. And by using smaller get a profitable entry.
Step 1: Calculate the ladder interval share size, you minimize the cost of
to use by dividing the average range initial stop-outs.
by 4 (for example a $30 stock with Ken Calhoun moderates a popular
average range of $2 would use en- TRADE MANAGEMENT TIPS live trading room for active traders.
tries spaced ($2/4) = $0.50 apart. Share size should be equal in each He is the founder of TradeMastery.
trade entry of the ladder. After your com, an interactive webinar site
Step 2: Set buy-stop entries at each second entry, trail stops at breakeven. for active traders, and is a UCLA
interval (for example, $30, $30.50, As always, this pattern works best alumnus.
$31, $31.50) when trading charts that are trending
up and are wide-range charts with
Step 3: Trail breakeven stops as clean, non-choppy price action.
price action continues.
December 2022 • Technical Analysis of Stocks & Commodities • 47
 The focus of Traders’ • 
Traders.com  S&C Magazine 
Tips this month is Bar- Traders’ Tips
bara Star’s article in
this issue, “Short-Term At Traders.com you can also right-click on any
Continuation And Re- chart to open it in a new tab or window and view
versal Signals.” Here, the chart at a much larger size.
we present the De-
cember 2022 Traders’ The Traders’ Tips section is provided to help readers
Tips code with pos- implement a selected technique from an article in this
sible implementations in various software. issue or another recent issue. The entries here are
The code for the following Traders’ Tips selections contributed by software developers or programmers
is posted here: for software that is capable of customization.

Plot1( DMIOsc, "DMI Osc" );

F TRADESTATION: DECEMBER 2022 TRADERS’ TIPS CODE if DMIOsc > 0 then
In her article in this issue, “Short-Term Continuation And SetPlotColor(1, AboveZeroColor )
Reversal Signals,” author Barbara Star describes modifica- else if DMIOsc < 0 then
tions to the classic directional movement indicator (DMI) SetPlotColor(1, BelowZeroColor )
and commodity channel index (CCI) that can aid in more else
SetPlotColor(1, ZeroColor );
easily identifying price reversals and continuations in a trend.
Traditionally, the DMI is comprised of two lines: a plus line Plot2( DMIOsc, "DMI Osc", DMIOscColor );
(+DI) and negative line (−DI).
In her article, Star creates a DMI oscillator by subtracting Indicator: DMI Continuation Signals and CCI Reversal
−DI from +DI. Historically, the DMI uses a default length of Signals
// TASC DEC 2022
14. In the article, this has been shortened to 10. The CCI has // DMI Continuation Signals and CCI Reversal Signals
also been adjusted in the article to use a length of 13 instead // Barbara Star
of the usual 14 or 20. The DMI oscillator PaintBar colors
the price bars so they match the color of the DMI oscilla- inputs:
tor. Here, CCI reversal signals are plotted with crosses (plus CCILength( 13 ),
DMILength( 10 ),
signs) as opposed to the diamond shapes used by the author. AvgLength( 18 ),
Indicator: DMI Oscillator
// TASC DEC 2022
// DMI Oscillator
// Barbara Star

inputs:
DMILength( 10 ),
DMIOscColor( DarkGray ),
AboveZeroColor( DarkGreen ),
BelowZeroColor( Red ),
ZeroColor( DarkGray );

variables:
ReturnValue( 0 ),
oDMIPlus( 0 ),
oDMIMinus( 0 ),
oDMI( 0 ),
oADX( 0 ),
oADXR( 0 ),
oVolty( 0 ),
DMIOsc( 0 );

ReturnValue = DirMovement( High, Low,

Close, DMILength,
oDMIPlus, oDMIMinus, oDMI, oADX,
oADXR, oVolty ); FIGURE 1: TRADESTATION. Here, a daily chart of Costco (symbol COST) for a portion of 2022 is shown
DMIOsc = oDMIPlus - oDMIMinus; with the indicators and PaintBar applied.

48 • December 2022 • Technical Analysis of Stocks & Commodities

 MarkerOffset( 4 ), inputs:
UpTrendColor( Blue ), DMILength( 10 ),
DownTrendColor( DarkRed ), AboveZeroColor( DarkGreen ),
CCITopColor( Magenta ), BelowZeroColor( Red ),
CCIBottomColor( DarkGreen ); ZeroColor( DarkGray );

variables: variables:
ReturnValue( 0 ), ReturnValue( 0 ),
oDMIPlus( 0 ), oDMIPlus( 0 ),
oDMIMinus( 0 ), oDMIMinus( 0 ),
oDMI( 0 ), oDMI( 0 ),
oADX( 0 ), oADX( 0 ),
oADXR( 0 ), oADXR( 0 ),
oVolty( 0 ), oVolty( 0 ),
DMIOsc( 0 ), DMIOsc( 0 );
CCIValue( 0 ),
Avg( 0 ), ReturnValue = DirMovement( High, Low, Close, DMI-
intrabarpersist PlotOffset( 0 ); Length,
oDMIPlus, oDMIMinus, oDMI, oADX, oADXR, oVolty );
once DMIOsc = oDMIPlus - oDMIMinus;
begin
PlotOffset = (MinMove / PriceScale) * MarkerOffset; PlotPaintBar( High, Low, Open, Close, "DMI Osc" );
end;
if DMIOsc > 0 then
Avg = Average( Close, AvgLength ); begin
CCIValue = CCI( CCILength ); SetPlotColor( 1, AboveZeroColor );
ReturnValue = DirMovement( High, Low, Close, DMI- SetPlotColor( 2, AboveZeroColor );
Length, SetPlotColor( 3, AboveZeroColor );
oDMIPlus, oDMIMinus, oDMI, oADX, oADXR, oVolty ); SetPlotColor( 4, AboveZeroColor );
DMIOsc = oDMIPlus - oDMIMinus; end
else if DMIOsc < 0 then
if Close > Avg begin
and DMIOsc > 0 SetPlotColor( 1, BelowZeroColor );
and Low > L[1] SetPlotColor( 2, BelowZeroColor );
and L[1] < L[2] then SetPlotColor( 3, BelowZeroColor );
Plot1( Low - PlotOffset, "Up Trend", UpTrendColor ) SetPlotColor( 4, BelowZeroColor );
else end
NoPlot(1); else
begin
if Close < Avg SetPlotColor( 1, ZeroColor );
and DMIOsc < 0 SetPlotColor( 2, ZeroColor );
and High < High[1] SetPlotColor( 3, ZeroColor );
and High[1] > High[2] then SetPlotColor( 4, ZeroColor );
Plot2( High + PlotOffset, "Down Trend", DownTrend- end;
Color )
else A sample chart is shown in Figure 1.
NoPlot(2); This article is for informational purposes. No type of
if CCIValue <= 100 trading or investment recommendation, advice, or strategy
and CCIValue[1] > 100 is being made, given, or in any manner provided by TradeS-
and CCIValue[2] > 100 then tation Securities or its affiliates.
Plot3( High + PlotOffset, "CCI Top", CCITopColor ) —John Robinson
else TradeStation Securities, Inc.
NoPlot( 3 ); www.TradeStation.com
if CCIValue >= -100
and CCIValue[1] < -100
and CCIValue[2] < -100 then
Plot4( Low - PlotOffset, "CCI Bottom", CCIBottomColor
)
else F WEALTH-LAB: DECEMBER 2022 TRADERS’ TIPS CODE
NoPlot( 4 ); With Wealth-Lab 8 it couldn’t be easier to plot the difference
between the +DI and −DI indicators as an oscillator, as Bar-
PaintBar: DMI Oscillator bara Star describes in her article in this issue, “Short-Term
// TASC DEC 2022
// DMI Oscillator PaintBar Continuation And Reversal Signals.” Simply drag and drop
// Barbara Star the MathIndOpInd indicator (in the Transformers group) onto

December 2022 • Technical Analysis of Stocks & Commodities • 49

 a chart, choosing DI+ as the first and DI− as
the second indicator and choosing “subtract”
as the operation. Finally, set the plot style to
“HistogramTwoColor.” Voilà!
To demonstrate the application of indica-
tors (see Figure 2) from Star’s article, we’ve
coded the system she describes in the article
for shorter-term traders in a simplified way:

Long entry: Buy at market next bar on DMI

continuation signal for uptrends
Long exit: Sell at market next bar on CCI
top signal
Short entry: Short at market next bar on
DMI continuation signal for downtrends FIGURE 2: WEALTH-LAB. This demonstrates example trades taken by the trading system applied to a
Short exit: Cover at market next bar on CCI chart of SPY in Wealth-Lab 8.
bottom signal

using System;
using WealthLab.Backtest;
using WealthLab.Core;
using WealthLab.Indicators;

namespace WealthScript1
{
public class TASC202212 : UserStrat-
egyBase
{
TimeSeries diOsc, sma;
CCI cci;
bool _shortTrades;

public TASC202212()
{
AddParameter("Short trades?",
ParameterType.Int32, 0, 0, 1, 1);
}

public override void
Initialize(BarHistory bars)
{
/* The DMI oscillator */
diOsc = DIPlus.Series(bars, 10) -
DIMinus.Series(bars, 10);
sma = SMA.Series(bars.Close, 18);
PlotTimeSeries( diOsc, "DI Oscilla-
tor", "DI", WLColor.DarkGreen, PlotStyle. FIGURE 3: NINJATRADER. The short-term continuation and reversal indicator is displayed on a daily
HistogramTwoColor); chart pf ENPH from October 2021 to January 2022.

cci = CCI.Series(bars, 13);

Green : diOsc[i] == 0 ? WLColor.Gray : WLColor.Red);
PlotTimeSeries( cci, "CCI", "CCI");
DrawHorzLine(+100, WLColor.Blue, 1, LineStyle.
/* DMI Continuation signals */
Dashed, "CCI");
bool dmiUp = bars.Close[i] > sma[i] && diOsc[i] > 0
DrawHorzLine(-100, WLColor.Red, 1, LineStyle.
&& ConsecUp.Series(bars.Low, 1)[i] == 2;
Dashed, "CCI");
bool dmiDown = bars.Close[i] < sma[i] && diOsc[i]
PlotTimeSeries( sma, "SMA", "Price", WLColor.
< 0 && ConsecDown.Series(bars.High, 1)[i] == 2;
Black);
if (dmiUp) DrawDot( i, bars.Low[i] * 0.99, WLCol-
_shortTrades = Parameters[0].AsInt == 0 ? false :
or.Blue, 3, "Price");
true;
else
}
if (dmiDown) DrawDot( i, bars.High[i] * 1.01,
WLColor.DarkRed, 3, "Price");
public override void Execute(BarHistory bars, int i)
{
/* CCI Reversal signals */
/* Color the price bars */
bool cciTop = cci[i] <= 100 && cci[i - 1] > 100 &&
SetBarColor( bars, i, diOsc[i] > 0 ? WLColor.
cci[i - 2] > 100;

50 • December 2022 • Technical Analysis of Stocks & Commodities

 bool cciBottom = cci[i] >= -100 && cci[i - 1] < -100 selecting the ShortTermContinuationAndReversal file. You
&& cci[i - 2] < -100; can review the indicator’s source code in NinjaTrader 7 by
if (cciTop) DrawBarAnnotation( TextShape.Ar-
selecting the menu Tools → Edit NinjaScript → Indicator
rowDown, i, true, WLColor.Magenta, 20);
else from within the control center window and selecting the
if (cciBottom) DrawBarAnnotation( TextShape. ShortTermContinuationAndReversal file.
ArrowUp, i, false, WLColor.DarkGreen, 20); NinjaScript uses compiled DLLs that run native, not in-
terpreted, to provide you with the highest performance pos-
if (_shortTrades)
sible.
{
if (! HasOpenPosition (bars, PositionType. A sample NinjaTrader chart displaying the indicator is
Short)) shown in Figure 3.
{ —Emily Christoph
if (dmiDown) PlaceTrade( bars, Transaction- NinjaTrader, LLC
Type.Short, OrderType.Market); www.ninjatrader.com
}
else
if(cciBottom) PlaceTrade( bars, Transaction-
Type.Cover, OrderType.Market);
}
F TRADINGVIEW: DECEMBER 2022 TRADERS’ TIPS CODE
if (! HasOpenPosition (bars, PositionType.Long)) Here is the TradingView Pine Script code implementing the
{
indicators described in this issue’s article “Short-Term Con-
if(dmiUp) PlaceTrade( bars, TransactionType.
Buy, OrderType.Market); tinuation And Reversal Signals” by Barbara Star:
}
else // TASC Issue: December 2022 - Vol. 40, Issue 13
if(cciTop) PlaceTrade( bars, TransactionType. // Article: Short-Term Continuation And Reversal Signals
Sell, OrderType.Market); // Article By: Barbara Star
} // Language: TradingView's Pine Script™ v5
} // Provided By: PineCoders, for tradingview.com
}
//@version=5
—Gene Geren (Eugene) string title = 'TASC 2022.12' +
'Short-Term Continuation And Reversal Signals'
Wealth-Lab team
string stitle = 'TASC 2022.12'
www.wealth-lab.com indicator(title, stitle, false)

// Constant variables:
string XP0 = shape.arrowdown, string XP5 = shape.flag
string XP1 = shape.arrowup , string XP6 = shape.square
string XP2 = shape.circle , string XP7 = shape.triangle-
F NINJATRADER: DECEMBER 2022 TRADERS’ TIPS CODE down
In “Short-Term Continuation And Reversal Signals” by Barbara string XP3 = shape.cross , string XP8 = shape.triangle-
Star in this issue, the short-term continuation and reversal up
signals indicator she describes has been made available for string XP4 = shape.diamond , string XP9 = shape.xcross
string LTOP= location.top , string LABAR = location.
download at the following links for NinjaTrader 8 and for abovebar
NinjaTrader 7: string LBOT= location.bottom, string LBBAR = location.
belowbar
NinjaTrader 8: ninjatrader.com/SC/December- string SZ = size.tiny , string LDASH = line.style_
2022SCNT8.zip dashed
NinjaTrader 7: ninjatrader.com/SC/December- PH = plot.style_histogram
2022SCNT7.zip color CGRAY = #555522

Once the file is downloaded, you can import the indicator // Input panel groups, titles and inline references:
into NinjaTrader 8 from within the control center by select- string g00 = 'Input Options:'
ing Tools → Import → NinjaScript Add-On and then select- string g01 = 'Style Options:'
string it0 = 'Continuity Signals:'
ing the downloaded file for NinjaTrader 8. To import into string it1 = 'CCI Signals:     '
NinjaTrader 7, from within the control center window, select string it2 = 'Oscillator Mode:'
the menu File → Utilities → Import NinjaScript and select string it3 = 'DMI Colors:     '
the downloaded file. string it4 = 'DMI Multiplier:   '
You can review the indicator source code in NinjaTrader string MD0 = 'DMI', string MD2 = 'Dual'
string MD1 = 'CCI', string MD3 = 'Overlay'
8 by selecting the menu New → NinjaScript Editor → In-
dicators folder from within the control center window and // Input options:

December 2022 • Technical Analysis of Stocks & Commodities • 51

 bool cciBot = (not cciLTm100) and
cciLTm100[1] and cciLTm100[2]
bool useDMI = mode == MD0 or mode ==
MD2
bool useCCI = mode == MD1 or mode ==
MD2
bool isOverlay = mode == MD3

// Color variation:
color colDMI = switch
    dmiGT0 => colDMIUp
    dmiLT0 => colDMIDo
    => CGRAY
color colCCI = switch
    cciGTp100 => colCCITop
    cciLTm100 => colCCIBot
    => CGRAY

// Output:
showDMI = useDMI ? display.all : dis-
play.none
showCCI = useCCI ? display.all : dis-
FIGURE 4: TRADINGVIEW. This chart demonstrates the indicator described in Barbara Star’s article in play.none
this issue for short-term continuation and reversal signals. showLVL = isOverlay ? display.none :
display.all
showOverlay = isOverlay ? display.all :
string mode = input.string(MD2, it2, display.none
[MD0, MD1, MD2, MD3], group=g00)
float DMIMult = input.float(1.0, it4, step=0.25, group=g00) // Oscillator signals:
int diLength = input.int(10, 'DMI Length:', group=g00) plotshape(conUpTrend, it0, shapeCon, LBOT, colConUp-
int maLength = input.int(18, 'MA Length:', group=g00) Trend,
int cciLength = input.int(13, 'CCI Length:', group=g00) size=SZ, display=showLVL)
plotshape(conDoTrend, it0, shapeCon, LTOP, colConDo-
// Style options: Trend,
color colDMIUp = input.color(#22AA22,it3,'',it3,g01) size=SZ, display=showLVL)
color colDMIDo = input.color(#AA2222,'','',it3,g01) plotshape(cciTop, it1, shapeCCI, LTOP, colCCITop,
string shapeCon = input.string(XP2, it0, size=SZ, display=showLVL)
[XP0,XP1,XP2,XP3,XP4,XP5,XP6,XP7,XP8,XP9],'',it0, plotshape(cciBot, it1, shapeCCI, LBOT, colCCIBot,
g01) size=SZ, display=showLVL)
color colConUpTrend = input.color(#5188FF,'','',it0,g01) // Overlaid signals:
color colConDoTrend = input.color(#771515,'','',it0,g01) plotshape(conUpTrend, it0, shapeCon, LBBAR, col-
string shapeCCI = input.string(XP4, it1, ConUpTrend,
[XP0,XP1,XP2,XP3,XP4,XP5,XP6,XP7,XP8,XP9],'',it1, size=SZ, display=showOverlay)
g01) plotshape(conDoTrend, it0, shapeCon, LABAR, colCon-
color colCCITop = input.color(#BB00FF,'','',it1,g01) DoTrend,
color colCCIBot = input.color(#FFBB00,'','',it1,g01) size=SZ, display=showOverlay)
plotshape(cciTop, it1, shapeCCI, LABAR, colCCITop,
// Indicators: size=SZ, display=showOverlay)
float ma = ta.sma(close, maLength) plotshape(cciBot, it1, shapeCCI, LBBAR, colCCIBot,
[dp, dm, _] = ta.dmi(diLength, 1) size=SZ, display=showOverlay)
float DMI = dp - dm
float mDMI = DMIMult * DMI // Plots:
float CCI = ta.cci(close, cciLength) plot(mDMI, 'DMI Histogram', colDMI, 4, PH,
float uCCI = CCI > +100.0 ? CCI : na display=showDMI)
float lCCI = CCI < -100.0 ? CCI : na plot(mDMI, 'DMI', CGRAY, display=showDMI)
plot(uCCI, 'CCI+', colCCI, 2, PH, false,+100,
// Boolean Signals: display=showCCI)
bool pGTma = close > ma, bool pLTma = close < ma plot(lCCI, 'CCI-', colCCI, 2, PH, false,-100,
bool cciGTp100 = CCI > 100 , bool cciLTm100 = CCI < display=showCCI)
-100 plot(CCI, 'CCI', #BBFFFF, 2, display=showCCI)
bool dmiGT0 = DMI > 0 , bool dmiLT0 = DMI < 0 hline(0, 'LVL0', CGRAY, display=showLVL)
bool risingL = low > low[1] and low[1] > low[2]
bool falingH = high < high[1] and high[1] < high[2] if useCCI
bool conUpTrend = pGTma and dmiGT0 and risingL     var line l1 = line.new(bar_index, +100, bar_index+1,
bool conDoTrend = pLTma and dmiLT0 and falingH +100,
bool cciTop = (not cciGTp100) and cciGTp100[1] and      xloc.bar_index, extend.both, CGRAY, LDASH)
cciGTp100[2]     var line l2 = line.new(bar_index, -100, bar_index+1,

52 • December 2022 • Technical Analysis of Stocks & Commodities

-100,
     xloc.bar_index, extend.both, CGRAY,
LDASH)
    line.set_x1(l1, bar_index), line.set_x2(l1,
bar_index+1)
    line.set_x1(l2, bar_index), line.set_x2(l2,
bar_index+1)
    linefill.new(l1, l2, color.new(CGRAY, 90))

barcolor(colDMI, editable=false,
title='barcolor')

The indicator is available on TradingView

from the PineCodersTASC account at trad-
ingview.com/u/PineCodersTASC/#published-
scripts.
An example chart is shown in Figure 4.
—PineCoders, for TradingView
www.TradingView.com

FIGURE 5: NEUROSHELL TRADER. This NeuroShell Trader chart shows the DMI and CCI indicators,
reversal signals, and continuation signals on for Tyson Foods.
F NEUROSHELL TRADER: DECEM-
BER 2022 TRADERS’ TIPS CODE
In “Short-Term Continuation And Reversal Sig- BUY LONG CONDITIONS: [All of which must be true]
nals” in this issue, Barbara Star presents a way to use the A>=B(CCI(High,Low,Close,13,0.015),-100)
DMI oscillator. Her technique can be easily implemented in A<B(Lag(CCI(High,Low,Close,13,0.015),1),-100)
NeuroShell Trader by combining some of NeuroShell Trader’s A<B(Lag(CCI(High,Low,Close,13,0.015),2),-100)
800+ indicators. To implement the oscillator, select “new
SELL LONG CONDITIONS: [All of which must be true]
indicator” from the insert menu, use the indicator wizard to A<=B(CCI(High,Low,Close,13,0.015),100)
create the indicator. A>B(Lag(CCI(High,Low,Close,13,0.015),1),100)
To change its bar coloring above and below zero, as Star A>B(Lag(CCI(High,Low,Close,13,0.015),2),100)
discusses in her article, simply select the indicator on the
chart, choose “selected indicator” from the format menu, Note that Wilder’s PlusDI and MinusDI indicators are in-
and then choose the coloration options on the multi-colored cluded in the Advanced Indicator Set 2 Add-on.
options tab. Users of NeuroShell Trader can go to the Stocks & Com-
modities section of the NeuroShell Trader free technical
Divide( Avg1-Avg2( Close, 20, 40), Avg( Close, 40) ) support website to download a copy of this or any previous
Traders’ Tips.
To implement the DMI oscillator continuation signals as —Ward Systems Group, Inc.
a trading system in NeuroShell Trader, select “new strategy” sales@wardsystems.com
from the insert menu and use the trading strategy wizard to www.neuroshell.com
create the following strategy:
BUY LONG CONDITIONS: [All of which must be true]
A>B(Close,Avg(Close,18)) ®
A>B(PlusDI(High,Low,Close,10),MinusDI(High,Low,Cl
ose,10))
A>B(Low,Lag(Low,1)) F OPTUMA: DECEMBER 2022 TRADERS’ TIPS CODE
A<B(Lag(Low,1),Lag(Low,2)) Here are the formulas to implement the techniques described
by Barbara Star in her article in this issue, “Short-Term Con-
SELL LONG CONDITIONS: [All of which must be true] tinuation And Reversal Signals,” in Optuma.
A<B(Close,Avg(Close,18))
A<B(PlusDI(High,Low,Close,10),MinusDI(High,Low,Cl Formula for DMI oscillator above or below zero:
ose,10)) ADX(BARS=10).DMPlus - ADX(BARS=10).DMMinus
A<B(High,Lag(High,1))
A>B(Lag(High,1),Lag(High,2)) Bar colours:
Set the default colour to red and use this for the custom
To implement the CCI reversal signals as a trading sys- colour:
tem, select “new strategy” from the insert menu and use the ADX(BARS=10).DMPlus - ADX(BARS=10).DMMinus > 0
trading strategy wizard to create the following strategy:
December 2022 • Technical Analysis of Stocks & Commodities • 53
 DMI oscillator continuation signals
Up-trending signals in the Show Bar tool set
to blue circle symbol:

DMO=ADX(BARS=10).DMPlus -
ADX(BARS=10).DMMinus;
CLOSE()>MA(BARS=18, CALC=Close) and
DMO>0 and LOW()>LOW()[1] and LOW()
[1]<LOW()[2]

Down-trending signals in the Show Bar tool

set to red circle symbol:

DMO=ADX(BARS=10).DMPlus -
ADX(BARS=10).DMMinus;
CLOSE()<MA(BARS=18, CALC=Close) and
DMO<0 and HIGH()<HIGH()[1] and HIGH()
[1]>HIGH()[2]
FIGURE 6: OPTUMA. This sample chart implements Barbara Star’s technique for displaying the DMI
CCI reversal signals oscillator with example signals on a daily chart of SPY.
CCI top in the Show Bar tool set to blue
diamond symbol:

CCI(BARS=13) CrossesBelow 100 and

CCI(BARS=13)[2]>100

CCI bottom in the Show Bar tool set to green

diamond symbol:

CCI(BARS=13) CrossesAbove -100 and

CCI(BARS=13)[2]<-100

—support@optuma.com
Optuma.com

F AIQ: DECEMBER 2022 TRADERS’

TIPS CODE
The importable AIQ EDS file based on
Barbara Star’s article in this issue, “Short-Term FIGURE 7: AIQ. The color bar setup in the charts module is demonstrated.
Continuation And Reversal Signals,” can be
obtained on request via email to info@Trader-
sEdgeSystems.com. The code is also available
on this magazine’s website at Traders.com in
the Traders’ Tips section.
Code for the author’s color study is set up
in the AIQ EDS code file. Figure 7 shows
the color studies set up in the charts module.
Figure 8 shows the color studies on a chart of
Apple, Inc. (AAPL). The black bars are poten-
tial entry points in the downtrend.
! Short-Term Continuation And Reversal
Signals
! Author: Barbara Star, TASC Dec 2022
! Coded by: Richard Denning, 10/21/2022
FIGURE 8: AIQ. This shows an example of the color studies applied to a chart of Apple, Inc. (AAPL) with
C is [close]. a DMI histogram and an 18-bar simple moving average.
H is [high].
L is [low].
H1 is valresult(H,1). GreenDMI if [DirMov] > 0.
H2 is valresult(H,2). RedDMI if [DirMov] < 0.
L1 is valresult(L,1).
L2 is valresult(L,2). StartOfDownTrend if C < simpleavg(C,18) and [DirMov] <

54 • December 2022 • Technical Analysis of Stocks & Commodities

 for additional indicators if you wish.
If you need assistance with creating
or using the indicators and/or template,
our friendly technical support staff will
be happy to help via phone or via live
chat through our website.
—Genesis Financial Data
Tech support 719 884-0245
www.TradeNavigator.com

FIGURE 9: TRADE NAVIGATOR. This chart demonstrates using the “SC Short-Term Continuation And Reversal
Signals” template in Trade Navigator based on the techniques described in Barbara Star’s article in this issue.

0 and H < H1 and H1 > H2. functions: CCI Bottom, CCI Top,
Statement of Ownership, Management, and Circulation
(All Periodicals Publications Except Requester Publications)

StartOfUpTrend if C >= DMIabove0, DMIbelow0, DMId-

1. Publication Title 2. Publication Number 3. Filing Date

Technical Analysis of Stocks & Commodities 7 2 6 _ 8 3 0 11 October

October 2022

simpleavg(C,18) and [DirMov] >= 0

4. Issue Frequency 5. Number of Issues Published Annually 6. Annual Subscription Price

owntrend sig, DMIuptrend sig, and

Monthly
Monthlywith
witha aBonus
BonusIssue in March
Issue in March 13 $89.99

and L > L1 and L1 < L2.

7. Complete Mailing Address of Known Office of Publication (Not printer) (Street, city, county, state, and ZIP+4 ®) Contact Person
Jack K. Hutson
4757 California Ave. SW, Seattle, WA 98116-4499

DMIOsc.
4757 California Ave. SW, Seattle, WA 98116-4499 Telephone (Include area code)
(206) 938-0570
8. Complete Mailing Address of Headquarters or General Business Office of Publisher (Not printer)

4757
4757 California
California Ave.Seattle,
Ave. SW, SW, WA Seattle, WA 98116-4499
98116-4499
GreenTrend if C >= simpleavg(C,18) 9. Full Names and Complete Mailing Addresses of Publisher, Editor, and Managing Editor (Do not leave blank)

Template
Publisher (Name and complete mailing address)

and [DirMov] >= 0. Jack

JackK.K.
Hutson, 47574757
Hutson, California Ave. SW,
California Seattle,
Ave. SW,WA 98116-4499
Seattle, WA 98116-4499
RedTrend if C < simpleavg(C,18) The template we have added to
Editor (Name and complete mailing address)

Karen
KarenWasserman,
Wasserman,4757 California
4757 Ave. SW,
California Seattle,
Ave. WA 98116-4499
SW, Seattle, WA 98116-4499
and [DirMov] < 0.
the library allows you to modify
Managing Editor (Name and complete mailing address)

your chart with a prebuilt indicator

10. Owner (Do not leave blank. If the publication is owned by a corporation, give the name and address of the corporation immediately followed by the

—Richard Denning
names and addresses of all stockholders owning or holding 1 percent or more of the total amount of stock. If not owned by a corporation, give the
names and addresses of the individual owners. If owned by a partnership or other unincorporated firm, give its name and address as well as those of

package and settings. To access the

each individual owner. If the publication is published by a nonprofit organization, give its name and address.)
Full Name Complete Mailing Address

info@TradersEdgeSystems.com Technical Analysis, Inc. 4757 California Ave. SW

template, open the charting pull-

Jack K. Hutson Seattle, WA 98116-4499

for AIQ Systems

down menu, select the templates
command, then on the sub-menu that
11. Known Bondholders, Mortgagees, and Other Security Holders Owning or Holding 1 Percent or More of Total Amount of Bonds, Mortgages, or
Other Securities. If none, check box ✔ None
Full Name Complete Mailing Address

opens, select the “SC Short-Term

Continuation And Reversal Signals”
template. If you are prompted with, 12. Tax Status (For completion by nonprofit organizations authorized to mail at nonprofit rates) (Check one)

“Save the current chart settings

The purpose, function, and nonprofit status of this organization and the exempt status for federal income tax purposes:
Has Not Changed During Preceding 12 Months
Has Changed During Preceding 12 Months (Publisher must submit explanation of change with this statement)
PS Form 3526, July 2014 [Page 1 of 4 (see instructions page 4)] PSN: 7530-01-000-9931

as template?” your answer will

PRIVACY NOTICE: See our privacy policy on www.usps.com.

13. Publication Title 14. Issue Date for Circulation Data Below

F TRADE NAVIGATOR: DECEMBER Technical Analysis of Stocks & Commodities October 2022
October 2022

depend on whether or not you’ve 15. Extent and Nature of Circulation Average No. Copies No. Copies of Single

2022 TRADERS’ TIPS CODE Monthly with a Bonus Issue in March Each Issue During Issue Published

made any changes to your current

Preceding 12 Months Nearest to Filing Date

We have created a special file to make

a. Total Number of Copies (Net press run)
21,055
21,055 19,000
19,000

chart template that you would like 17,881 13,598

(1) Mailed Outside-County Paid Subscriptions Stated on PS Form 3541 (Include paid 17,881 13,598
distribution above nominal rate, advertiser’s proof copies, and exchange copies)

it easy to download the library in Trade

b. Paid

00 00
Mailed In-County Paid Subscriptions Stated on PS Form 3541 (Include paid

to keep. If you choose “no,” these

Circulation (2)
(By Mail distribution above nominal rate, advertiser’s proof copies, and exchange copies)
and

Navigator that is based on Barbara Star’s 2,437 5,368

Outside Paid Distribution Outside the Mails Including Sales Through Dealers and Carriers,
the Mail) (3)
Street Vendors, Counter Sales, and Other Paid Distribution Outside USPS® 2,437 5,368

changes will be discarded; a “yes” 00 00

article in this issue, “Short-Term Con-
Paid Distribution by Other Classes of Mail Through the USPS
(4)
(e.g., First-Class Mail®)

choice will save the changes into

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20,318
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19,000

tinuation And Reversal Signals.” 00 00

d. Free or (1) Free or Nominal Rate Outside-County Copies included on PS Form 3541

the prior template on your chart

Nominal
Rate
00 00

The file name is “SC202212.”

Distribution (2) Free or Nominal Rate In-County Copies Included on PS Form 3541
(By Mail
and
220 00
before switching to the “SC Short-
Outside Free or Nominal Rate Copies Mailed at Other Classes Through the USPS
(3) 220
the Mail) (e.g., First-Class Mail)

To install this library into Trade

(4) Free or Nominal Rate Distribution Outside the Mail (Carriers or other means)
00 00

Term Continuation And Reversal 220 00

e. Total Free or Nominal Rate Distribution (Sum of 15d (1), (2), (3) and (4)) 220

Navigator, click on Trade Navigator’s 20,161 24,000

Signals” template.
f. Total Distribution (Sum of 15c and 15e)
20,161 24,000

file dropdown menu, then select update 894 00

g. Copies not Distributed (See Instructions to Publishers #4 (page #3)) 894

21,055 24,000
data. Next, select download special file,
h. Total (Sum of 15f and g) 21,055 24,000

Adding the indicators to your

96.49% 100%
i. Percent Paid
(15c divided by 15f times 100) 96.49% 100%

then erase the word “upgrade” and type

* If you are claiming electronic copies, go to line 16 on page 3. If you are not claiming electronic copies, skip to line 17 on page 3.

chart Statement of Ownership, Management, and Circulation

in “SC202212,” then click the start but- (All Periodicals Publications Except Requester Publications)

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16. Electronic Copy Circulation Average No. Copies No. Copies of Single

ton. When prompted to upgrade, click

Each Issue During Issue Published
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chart by opening the charting drop- 7,605 7,029

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to chart” command, then, on the

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99.21% 100%
100%

Your library will now download.

PS Form 3526, July 2014 (Page 2 of 4)

indicators tab, find your named

✔ I certify that 50% of all my distributed copies (electronic and print) are paid above a nominal price.

This library contains a template

17. Publication of Statement of Ownership

indicator, select it, then click on the

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named “SC Short-Term Continuation

Dec 2022
in the ________________________ issue of this publication.

add button. Repeat this procedure

18. Signature and Title of Editor, Publisher, Business Manager, or Owner Date

And Reversal Signals,” and seven

11 October 2022

I certify that all information furnished on this form is true and complete. I understand that anyone who furnishes false or misleading information on this form
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(including civil penalties).

December 2022 • Technical Analysis of Stocks & Commodities • 55

 Trading Perspectives
FRIESEN
Continued from page 62

October 18, 2022, open

to close.

Seasonality in
symbols
Seasonality is a third area
that can offer trade ideas
and trading edges.
For the seasonality
strategy demonstrated
here, I selected symbols
with odds of over 50 for
the long side (or using
the same principle, odds
of over 50 for short
performance). Note that
unlike in our dashboard,
our web screener presents
the odds in a format of
FIGURE 8: SEASONALITY, LONGS AND SHORTS. Seen here are example results from trading symbols open to
0–100, with 50 being close that were based on seasonality data pertaining to the first Friday of October.
the dividing element, so
odds less than 50 could
be considered short. close) orders. their trading style. With this type
Figure 7 shows the symbols it came Seasonality data in StockOdds can of approach, the trader or investor
up with for both long and short can- be viewed up to a year in advance, could choose any stock or ETF as
didates based on seasonality history which provides users plenty of time a predictor and curate subsequent
for the first Friday of October. to prepare for upcoming events. long and short ideas for a variety of
Figure 8 shows the performance Having seasonality history helps timeframes. This facilitates high-pro-
of the longs and shorts combined in you prepare. And preparedness is duction strategies and also facilitates
equal capital traded from the open powerful when it comes to trading. putting on swing trades.
using OPG (market on open) orders We are privileged to be in a field
to the close using MOC (market on Using high-production that is rarely boring and always
strategies challenges us to pursue kaizen, or
The tools and concepts I’ve discussed a continual state of improvement.
Remember it is about here can provide traders with signifi- I hope that these ideas and tools
relative performance cant advantages in helping them to can help you to improve your own
between long dollars locate symbols for going long and approach to trading.
and short dollars. short each day and the next day, or
for longer timeframes depending on

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December 2022 • Technical Analysis of Stocks & Commodities • 57

 FUTURES LIQUIDITY

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.

Trading Liquidity: Futures

Contracts to
Effective
Commodity Futures Exchange % Margin Trade for Equal Relative Contract Liquidity
% Margin
Dollar Profit
S&P 500 E-Mini (Dec ’22) CME 5.7 13 2 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>>
10-Year T-Note (Dec ’22) CBOT 2 7.3 5 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>
Ultra T-Bond (Dec ’22) CBOT 5.6 5.9 1 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>
5-Year T-Note (Dec ’22) CBOT 1.5 8.4 8 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
30-Year T-Bond (Dec ’22) CBOT 3.5 5.7 2 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
Ultra 10-Year T-Note (Dec ’22) CBOT 2.6 6.6 3 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Russell 2000 E-Mini (Dec ’22) CME 3.4 7.2 2 •••••••••••••••••••••••••••••••••••••••••••••••••
2-Year T-Note (Dec ’22) CBOT 0.6 7 9 •••••••••••••••••••••••••••••••••••••••••••••
Crude Oil WTI (Dec ’22) NYMEX 9.7 6.6 1 ••••••••••••••••••••••••••••••••••••••••••
Nasdaq 100 E-Mini (Dec ’22) CME 7 16.2 1 ••••••••••••••••••••••••••••••••••••••
Euro FX (Dec ’22) CME 2.3 9.9 5 ••••••••••••••••••••
3-Month Eurodollar (Dec ’22) CME 0.3 6.6 12 ••••••••••••••••••
Gold (Dec ’22) COMEX 3.8 14.5 3 ••••••••••••••••
3-Month SOFR (Mar ’23) CME 0.3 6.8 12 •••••••••••••••
Soybean (Jan ’23) CBOT 3.5 8.3 3 ••••••••••••
Corn (Dec ’22) CBOT 8 14.2 8 •••••••••••
Japanese Yen (Dec ’22) CME 3.6 7.8 4 •••••••••••
Soybean Meal (Dec ’22) CBOT 1.2 3.8 2 •••••••••
Gasoline RBOB (Dec ’22) NYMEX 8.9 10.4 2 ••••••
ULSD NY Harbor (Dec ’22) NYMEX 9 10.7 1 ••••••
Dow Futures Mini (Dec ’22) CBOT 8.3 19.1 2 •••••
Silver (Dec ’22) COMEX 9.7 17 3 •••••
30-Day Fed Funds (Nov ’22) CBOT 0.2 5.3 10 ••••
British Pound (Dec ’22) CME 3.9 16.2 9 ••••
Natural Gas (Dec ’22) NYMEX 18.7 24.4 3 ••••
High Grade Copper (Dec ’22) COMEX 6.5 13.6 4 •••
Wheat (Dec ’22) CBOT 8.7 12.3 5 •••
Australian Dollar (Dec ’22) CME 3.1 12.3 9 ••
Coffee (Dec ’22) ICE/US 14.2 28.4 4 ••
Cotton #2 (Dec ’22) ICE/US 12.6 12.4 4 ••
Crude Oil Brent (F) (Dec ’22) NYMEX 8.8 10.6 2 ••
Live Cattle (Dec ’22) CME 2.9 6.1 5 •• CBOT Chicago Board of Trade, Division of CME
Sugar #11 (Mar ’23) ICE/US 7.3 14.6 15 •• CFE CBOE Futures Exchange
Canadian Dollar (Dec ’22) CME 1.8 13.4 15 • CME Chicago Mercantile Exchange
Cocoa (Dec ’22) ICE/US 6.9 20.8 20 • COMEX Commodity Exchange, Inc. CME Group
Hard Red Wheat (Dec ’22) KCBT 7.8 13.8 6 • ICE-EU Intercontinental Exchange-Futures - Europe
Lean Hogs (Dec ’22) CME 5.4 9.4 7 • ICE-US Intercontinental Exchange-Futures - US
Mexican Peso (Dec ’22) CME 5.7 25 26 • KCBT Kansas City Board of Trade
New Zealand Dollar (Dec ’22) CME 2.7 9 9 • MGEX Minneapolis Grain Exchange
Platinum (Jan ’23) NYMEX 6.7 14.4 7 • NYMEX New York Mercantile Exchange

U.S. Dollar Index (Dec ’22) ICE/US 2 10.2 7 •
2212
Aluminum (Jan ’23) COMEX 7.9 10.8 4
Trading Liquidity: Futures is a reference chart for speculators. It compares markets “Relative Contract Liquidity” places commodities in descending order according to
according to their per-contract potential for profit and how easily contracts can be bought how easily all of their contracts can be traded. Commodities at the top of the list are easi-
or sold (i.e., trading liquidity). Each is a proportional measure and is meaningful only est to buy and sell; commodities at the bottom of the list are the most difficult. “Relative
when compared to others in the same column. Contract Liquidity” is the number of contracts to trade times total open interest times a
The number in the “Contracts to Trade for Equal Dollar Profit” column shows how volume factor, which is the greater of:
many contracts of one commodity must be traded to obtain the same potential return In volume
as another commodity. Contracts to Trade = (Tick $ value) x (3-year Maximum Price 1 or exp –2
In 5000
Excursion).

58 • December 2022 • Technical Analysis of Stocks & Commodities

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money market funds and equity funds. A mix of bond funds ing. For more information on specific products and services, try checking store.
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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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December 2022 • Technical Analysis of Stocks & Commodities • 59

 Trading Perspectives

SOME PERSPECTIVES ON THE EQUITIES WORLD

Rob Friesen is a professional trader and president & COO of Bright Trading
(www.stocktrading.com), a proprietary trading firm hosting independent
trader/members, an online trading school, and utilizing the StockOdds
database (www.mystockodds.com). This column shares his thoughts and
outlooks on trading, locating opportunity, probabilistic outcome, and
maintaining perspective throughout industry changes. He can be reached
at robfriesen@brighttrading.pro or via stocktrading.com.
Rob Friesen

SYMPATHY, STREAKS, be most affected? moved, the direction it moved, and

& SEASONALITY For many stocks that maintain then checking our database for other
This month, I’m going to talk about high average volumes, if there is a symbols that showed correlation in
three areas that can provide traders catalyst or news element affecting the past to this type of movement.
with useful insights and potential them, it will most likely show up Based on historical information,
trading edges when searching for in the premarket activity. The price what symbols are most likely to
trade opportunities. The three areas action before the core session can give have either corresponding moves or
are: sympathy moves in different you a picture of where it is likely to inverse moves? Figure 2 shows the
symbols; multiday streaks that have open. That doesn’t tell you where it
occurred in symbols along with that will go next, or what will move in
symbol’s likely subsequent behav- sympathy with it. However, over time,
ior; and the seasonal effects seen by watching these movements, you
in some symbols (and that could be can become familiar with some of
seen again). the relationships that tend to journey
These are three areas that we have together most often.

SYMPATHY TRADER
worked to develop in our database and I find it interesting that over the
software to help traders more easily last 44 stock-related events, whenever
locate trading opportunities based on Apple Inc. (AAPL) was down −1.50%
these three concepts. to −2.00% premarket, there were FIGURE 1: SYMPATHY MOVEMENTS. AAPL
traded lower premarket on October 7, 2022, giv-
other stock symbols that could have ing the trader an opportunity to look for potential
Sympathy symbols been traded that tend to move in the trades in sympathy symbols.
First, I’ll look at the concept of same (or inverse) direction as AAPL.
sympathy trading. We all know that In these cases, AAPL, a stock with
close-to-open gaps mean more than a high average volume, was serving
a flat, boring, unchanged opening as a strong predictor of symbols that
event. But do you know how to quan- tend to move in sympathy with it.
tify it? If you saw an opening gap in AAPL moved first, and certain other
ETFs like SPY, QQQ, IWM, USO, symbols responded. When AAPL
XLE, TLT, GLD, or in stocks like dropped, those stocks followed. Some
AAPL, MSFT, UNH or PG, would of these stocks are not necessarily
you know what other symbols would stocks that a trader would otherwise
have considered trading, but with the
consistent response seen on some
The trader or investor of them to AAPL’s movement, the
could choose any stock trader may have considered some
or ETF as a predictor on the list. FIGURE 2: SCAN FOR SYMPATHY SYMBOLS.
and curate subsequent An example is shown in Figure 1. After AAPL traded lower premarket on October
long and short ideas for On October 7, 2022, AAPL traded 7, 2022, we can look for symbols likely to have
corresponding moves that day. The sample
a variety of timeframes. lower premarket. We can quantify scan results seen here are based on 44 previ-
the move by measuring how much it ous events.

60 • December 2022 • Technical Analysis of Stocks & Commodities

 Trading Perspectives
symbols that our scan produced for
this example.
An opportunity to favorably trade
some of the not-so-obvious symbols
that tend to move in sympathy with
more well-known stocks can be
a worthwhile pursuit. Watching
these types of relationships (that is,

STOCKODDS
sympathy moves) play out over time
can help you become familiar with FIGURE 3: STREAKS IN SYMBOLS. Here, the StockOdds web screener identifies stocks that have
them. And whenever you are more streaked up or down on a close-to-close basis for a given number of days.
informed, your edges increase.

Streaks in symbols
Another area that traders and inves-
tors can plumb for trade opportunities
is streaks. A streak is the quantity of
directional days on a close-to-close
basis. Traders will look for stocks
or ETFs that are streaking up or
down.
But it’s also helpful to know what FIGURE 4: PERFORMANCE METRICS FOR STREAKS. Once symbols are identified that qualify
is most likely to happen after a for the screen for streaks from Figure 3, we can examine the performance metrics to help determine
the likelihood of what the symbol may do next (based on what it has tended to do in the past.) This
streak. shows a small sample of the results from the web screener for close-to-close streaks.
Often, traders are lulled into the
trap of thinking that because a stock
has gone up so much, it must come
down, or conversely, if it has dropped
by a lot, it must go back up. (This is
when traders tend to start bottom
fishing.) But instead of guessing at
what it might do, is there a way you
can quantify the probabilities of what
it might do?
Again, we find it helpful to look at
past behavior to develop probabilities
as to what may occur in the next
timeframe. We use our database
(StockOdds) to look at likelihoods.
Figure 3 shows an example of this
exercise. We want to look for cases
where a symbol has streaked in a
direction for a given quantity of days
on a close-to-close basis. Then, when FIGURE 5: WHAT MOVEMENT IS LIKELY FOLLOWING THE STREAK? This example was curated
we find symbols that fit this criteria, on October 17, 2022 for trading open-to-close the next day on October 18. Green represents longs
and orange are the shorts. The “average performance” metric serves to suggest the direction the
we want to examine the statistics and symbol will move next.
metrics for the resulting symbols,
such as those shown in Figure 4. We
want to look at the likelihood of what You can become familiar with some of the relation-
the symbol may do next based on what ships that tend to journey together most often.
it has tended to do in the past.
December 2022 • Technical Analysis of Stocks & Commodities • 61
 Trading Perspectives
The example in Figure 4 shows was curated on October 17, 2022 for
You could short a gap results from a scan run for trading on trading open-to-close the next day
October 18, 2022 from open-to-close. on October 18.
up and wait to see if We want to look at the likelihood of The most important element from
you are getting traction a symbol being up (down) for the this table to consider would be “avg
on a gap fill, or you subsequent timeframe selected. The perf.” If this number is positive, and
could buy a gap down “events” column gives the number if there are many events, then there
and see if your basket of times in our selected lookback is a likelihood that the symbol will
starts to rally up. period (which in this example is 2,000 move up after this most recent streak.
days) that the symbol has had the If the “avg perf” is negative, then there
same quantity of daily is a likelihood the symbol may move
moves directionally. lower the next day.
The “avg perf” (average One way to use these ideas might be
performance) column to put on short trades while hedging
and the other metrics long with SPY. Or you could put on
in other columns show long trades while hedging short with
the averages over the SPY, or you could do both longs and
number of events that shorts simultaneously. Alternatively,
occurred. Each screen you could short a gap up and wait to
run is based on the filters see if you are getting traction on a
selected. gap fill, or you could buy a gap down
You can see how and see if your basket starts to rally
running this type of up. Hedge when you can’t watch the
screen can reveal that screen or need to step away from
two stocks both having your computer.
a streak of five days up Here’s another way you could
could have completely the information. You could create
opposite probabilities powerful IF-THEN statements to
for the next timeframe. capitalize on each symbol’s behavior
Figure 5 shows ex- if the price action agrees with the
ample results from our expected “average performance” for
database after search- that day. This really is combining
ing for symbols with human capital with a statistical
FIGURE 6: RESULTS OF THE LONG AND SHORT STREAKS the largest number of approach; it’s the “art and science”
BASKETS. The example here is from October 18, 2022, open
to close. streaks. This example of what we get to do every day in this
amazing field.
How did those streaks perform?
+0.20% combined rate of change
untouched from open to close.
“Untouched” is the baseline you want
to pursue, as it is merely statistical.
Through additional techniques, the
returns can be increased over this
baseline. Most importantly, remember
it is about relative performance
between long dollars and short
dollars.
Figure 6 shows the results of the
long and short streaks baskets for
FIGURE 7: SEASONALITY. The seasonality almanac suggests some long and short symbols based
on historical data pertaining to the first Friday of October. Continued on page 56
62 • December 2022 • Technical Analysis of Stocks & Commodities
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