One-on-One With Ralph Acampora

Ralph at an MTA Seminar in 1980

Last week I had the honor of interviewing one of the most legendary Technical Analysts that you’ll ever meet. Ralph Acampora is a pioneer that helped open doors for the next generation of technicians like myself. I’m not really sure where technicians as a group would be today without guys like him. And for that we are grateful.

In this 3-part series, Ralph shares stories about how he came up in the business, what it was like to chart before computers, how he’s feeling about today’s markets, and what’s up next.

I hope you guys enjoy this as much as I did:

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Part 1

JC – Before we start digging into the current market environment, why don’t you tell us a little bit about how you got interested in technical analysis in the first place?

Ralph – Well I graduated college as a history major. I spent a couple of years at a Catholic seminary. I came very close to getting a masters in theology. So you can see I have a lot of background in finance (laughs). And then, long story short, I had a very serious automobile accident that changed my whole life around. After I left the hospital, everyone said “what are you going to do with your life?”. I said, “I don’t know I’d like to get into finance”. I was lucky enough to get a job as a junior fundamental analyst but was also spending half my day plotting charts. And then they sent me to school at the New York Institute of Finance where I’ve been teaching at now for 42 years. I love doing that and it’s where I met the great Alan Shaw, who is my mentor and a wonderful friend. So that’s how it started, I was lucky enough to stumble into it. Now it’s my goal in life to get more and more college professors to teach the subject on campus.

JC – That’s a great story Ralph. Now, in my experience I’ve seen a lot of people dismiss technical analysis. And in most of these cases, the poor souls don’t even know what it is. So how would you explain technical analysis to a client or to journalists or individuals who aren’t familiar with it?

Ralph – Well when I first came into the business with Alan Shaw, his mentor was Ralph Rotnem. No one knows the name but you know his stuff. Mr. Rotnem was the original statistician for many many years on Wall Street. The headline indicator, you heard of that right?

JC – Sure

Ralph – That’s Mr. Rotnem. The year end rally, summer rally, presidential cycle, that was him. The guy was phenomenal.

JC – Wow

Ralph – The first day on the job he grabbed me and takes me into the conference room and draws a big circle on the board. He says, “You want to explain the need for technical analysis along with fundamental analysis?” In the middle of the circle he writes out the letters GM, General Motors, and split the circle in half. On the top part of the circle he said, “General Motors is a company”, and he starts to write in that part of the circle: the P/E multiple, management, product, competition….”these are all the things that represent General Motors”. He said most people think it’s all they have to know. “But there’s a part two to General Motors”, and in the bottom half of the circle he wrote the word “Stock”. Stock of GM is the price, the volume, psychology, and time. You put them all together and you have fusion analysis. I think that’s the best way to explain it to people. You need both, one is not more important than the other. I tell people that for the P/E multiple – half the formula is technical, the P. Price is a fact, earnings are an estimate. You restate the earnings. You never restate a chart.

JC – That’s a great point. So then is this more of an art or a science?

Ralph – I think it’s both. The word science, I looked it up in the dictionary many many years ago. It’s a body of knowledge with its own language and its rules. Guess what? We technicians have our own language and we have our own set of rules. So we are a Science. But the interpretation is where the art form comes in. I look at it as doctors would look at an x-ray. I mean they’re all obviously well educated in their science of medicine, but when it comes to interpreting an x-ray – that’s the art form I think. That’s how I compare us with science.

JC – I think that makes a lot of sense. Now, I’m sure you’ve seen this as well, but throughout my short career it’s been pretty easy to notice the growing number of fundamental analysts out there just throwing a lot of that work out the window and focusing more on price action. Why do you think that is?

Ralph- Yes, Well, here’s where my age comes in and the fact that I’ve met many older technicians over the years. When you have a major crisis in the market like the crash of 1929 and people were scurrying around saying, “Gee whatever we’re using (fundamental analysis) didn’t work so we have to look for something else. Technical analysis became very popular after the crash of 1929. I don’t know if you are aware of that.

JC – I wasn’t around

Ralph – It was people like (Ralph Nelson) Elliott and (John) Magee who started writing the book. Go to the MTA library and you’ll see the original book that Mr. Rotnem gave to me to give to the library. So technical analysis became very popular after the major crisis. It also happened in 1973-74 when we had a major break in the market. Technical analysis became very popular then. People like myself that started the association were able to get more and more people interested. Most recently with the break in ’07, ’08, ’09 in the market, people are scurrying around scratching their heads looking for other things to help them. And I think the advent of the computer, with everyone sitting in front of a screen now, and god bless the machine, it runs the numbers. And what does it give you back? Pictures. So everyone has a chart in front of them. That’s the good news; the bad news is they don’t know what they’re looking at. That’s where the education comes in. I’m teaching a class, for example, in Chicago in November for the school (NYIF) and I’ll eventually do virtual classes because I’ll be able to get to more people that way. And the demand is out there for it.

JC – What did you guys do before computers? I was talking about this the other day with David Keller over at Fidelity. He’s been a technician since 2000 or so, and I’ve been around since last decade as well. Before computers charted, what was it like?

Ralph – When you get a chance go to the MTA office on 61 Broadway.

JC – I’ve been there.

Ralph – Have you been to the conference room?

JC – I have not.

Ralph – Go into the conference room and you will see a wall chart that’s 8ft high and 16ft long. I found it and was part of my wall room library of charts when I was at Kidder Peabody in the 1980s and you will see what was done. You’ll see the Dow averages and the oscillators plotted everyday for a 14 year period and you’ll also see the book, the binder, with all the data we had to use. What I stress to everyone is that years ago we were called chartists and rightly so because, #1 we had to collect the data every day. I found the data in Barron’s, or WSJ, or Forbes Magazine. We had to scurry around for the data, collect the data. #2 we had to calculate the data. #3 we had to plot the data. And #4 we analyzed the data. So the first 3 steps are all done by computers today. The plotting is probably the best part of the task because if you keep plotting charts everyday you get a feel that you don’t get with the computer. Something inside me says the old way is a little bit better.

JC – Do you still plot your own charts?

Ralph – No but I do something akin to that. I created a spread sheet with all my numbers in it, my support my resistance levels for everything. You name it, I most likely have it on my spread sheet which is hooked up to my Thompson Reuters system. So my spreadsheet is updating as we speak. If any of the support or resistance levels are broken, guess what I have to do? I have to go back and look at the chart, I update it. The machine is not telling me what trend it’s in. The machine is not dictating where the support or resistance levels are. All the machine is telling me is that I better look at Walmart – it’s doing something important and I love that. So nothing moves JC, nothing moves without me looking at it. And that’s awesome.

JC – Would you like to share your method with us? Do you have a fixed strategy as to how you view the markets? And has that changed throughout your career?

Ralph – First of all, when I look at the markets, all the years that I’ve been in Wall Street I was never a trader so therefore I don’t do the daily stuff that is so prevalent on TV. It’s literally in nanoseconds. To me that’s a lot of noise. I know some people do it and they’re very good at it but that’s not what I do. When I approach the market I approach it from an investor’s long term point of view. I’ve always done that and I continue to do that. Having said that, so what do I do for the long term? I look at Dow Theory. The oldest theory in technical analysis. And not that it dictates what I do, but it gives me a backdrop. “Are we in a rally in a bear market?”, or whatever it says. So I take that, and then as I said to you before, I have my spread sheet, and the old gentleman that I mentioned before Ralph Rotnem, he put his arm around me one day and he said, “Never fight Papa Dow”. So the first things I look at are those 30 Dow stocks. The whole is equal to the sum of the parts. If most of those 30 Dow stocks look good, guess what? I’m pretty optimistic about the market. I look at them on a daily, weekly, and monthly basis so I get a short to medium long-term feel of what they’re doing. So as I do that I start looking at sectors. Of coarse the S&P has 10 sectors and under these sectors they have about 125 or so individual groups that are extremely important. This is all price data that I’m looking at. Then of coarse I’ll bring in the volume statistics and bring in my favorite oscillators. I like RSI and MACD – they work well for me. I look at them again, on a daily, weekly and monthly. That’s the start of what I do.

And then of course with the advent of ETFs, I do an awful lot of work on ETFs because you get a very broad view of what’s going on. I could look at the DAX, for example, because you get to look around the world and get your global, your international. And of course in the words of the famous John Murphy, your “Intermarket analysis”. What a brilliant phrase he came up with in his book talking about the things other than equities that affect stocks, but that you can use the tenets of technical analysis on: commodities charts, currencies, fixed income, etc etc. So I don’t think I do anything super different than most people. I have my own little proprietary way of looking at relative performance, realizing that the most powerful money in the industry, in our business, are the portfolio managers. They’re the ones with the big heavy bats – when they swing at something, they want to not only make money for their clients, they want to outperform. So there’s a combination of price and relative and that combination only comes out to 9 pictures. That’s my whole thing. Those 9 pictures dictate where I’m going to want to be on a price and relative basis.

Click Here For Part 2

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We’ll continue our one-on-one with Ralph Acampora later this week. In the next part of the series, Ralph shares his thoughts on US Equities, Gold, Oil, and the Bond Market. He is teaching a one day Technical Analysis class in New York City on November 14th. To learn more, visit http://www.nyif.com/ralphisback.html.

 

Stocktoberfest Last Weekend In October

I am pleased to announce that I will be speaking at this year’s Stocktoberfest in Coronado, CA on October 25-26. The topic will be “Technical Analysis for Today’s Markets”, where we’ll be going over some intermarket analysis, momentum, seasonality, and sector rotation. I couldn’t be more excited and would love for you to join me and other investors/entrepreneurs for a couple of days talking shop, cocktails, and cigars.

For readers of Allstarcharts, they’re giving a special $50 discount off the general admission price. Just head over to the website to register (http://stocktwits.com/stocktoberfest) and enter the code AllStar2012.

I hope to see you guys there. Can’t wait!

 

Also See:

Stocktoberfest – A Black Swan Financial Event…In a Good Way! (HowardLindzon)

Putting This Stock Market Rally Into Perspective

The good folks over at Chartoftheday.com have a good one out this morning. Like them, I think it’s constructive to compare today’s market to other times throughout history and see if maybe we can learn something. The chart below plots our current bull market with every rally the past 111 years that got started after a 30% decline (i.e. a major bear market). Each dot represents a major bull market as measured by the Dow Jones Industrial Average:

Notice how the rally that began in March of 2009, as quick and dirty as it’s been, is actually still well below average in both duration and magnitude.

Look at the monster in 1942 plotted on the upper right hand corner.

 

Source:

Stock Market Rallies – Dow Since 1900 (Chartoftheday)

Tags: $DIA $DJIA

Talking Homebuilders on Google Hangout

Reuters put together a Google Hangout this afternoon hosted by Phil Pearlman. A couple of money managers and I jumped in and gave our takes on the market. Phil asked me about the Homebuilders and I basically told him that the trade came and went. I think it’s time to look elsewhere short-term. The bigger picture, however, still looks constructive.

Here’s the video:


 

$XHB $PHM $DHI $HD

The QQQs Better Hold This Support

From False Moves Come Fast Moves In The Opposite Direction

We can’t forget about this notion. It happens way too often. So when the potential setup appears, all these bells and whistles start going off in my head. And whether I’m acting on it or not, the idea itself either scares the hell out of me or makes my mouth water. I guess it depends on how we’re positioned at the time.

Today, I think we have a fairly clear line in the sand for the Nasdaq100 (or $QQQ) right around 67.50-68. I’m not saying the index gets crushed from here, but it sure as hell better hold on to those support levels. After getting up to this resistance at the end of March, the QQQs corrected a sharp 12% in just two months. Then in late August, we hung around this level for a couple of weeks and then broke out to new 12-year highs. But it’s gotta hang on:

Here’s what I see that makes me think: an RSI that did not make new highs when price just did. Take a look at the overbought readings back in February and March, and then look at the weak attempt during the recent “breakout” in price. On a shorter-term time frame, RSI made 3 consecutive lower highs over the last month as prices made 3 consecutive higher highs. That makes me uncomfortable.

So sure, prices could bounce off this support (former resistance) around 67.50-68 and go on to make new highs with RSI also confirming. In that case, “Remain calm, all is well” (as Kevin Bacon once said). But if it doesn’t, then this false move could turn into a fast move to the downside and it could get ugly. So at the very least, I think it’s definitely worth watching and respecting.

 

Tags: $QQQ $NQ_F $ND_F

Markets Are Usually “Middling” Around

I grabbed this one from my good friend Josh Brown. When he first posted it back in May, I remember thinking to myself how true this was. Not sure I agree with the, “bottoms are an event” part, but the rest is dead on:

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Tops are a process, Bottoms are an event and Middles are a mother%&cker.

Because when you’re not at a top or at a bottom, but somewhere in the middle, you spend the bulk of your time worrying about which one of those two you’re closer to.

Market-timers don’t live long, its a horrible existence.  My friend JC likes to say picking tops and bottoms is the most expensive job on Wall Street.

A lot of the media’s time and attention is spent discussing whether or not something is bottoming (housing, stocks, consumer confidence, ratings, etc) or topping (tech stocks, valuations, bond prices, sentiment).  It’s great conversation but not helpful.

Because most of the time things are not bottoming or topping.  They are middle-ing.  They are churning or they are trending.  Most of the time, there is no inflection point at hand – these are rare occurrences.  So to focus on them to such a great degree is probably a distraction and definitely a waste of time.  And energy and emotion.

Think about the middle.

So true JB

 

Source:

Tops, Bottoms, and Middles (TheReformedBroker)

About that Underperformance in the Dow Transports

In case you hadn’t heard, the Dow Jones Industrial Average is back to levels not seen since 2007. But the big news over in my neck of the woods is coming from the Dow Jones Transportation Average, which is sitting near multi-month lows. This lack of confirmation drives the Dow Theorists crazy. However, looking at recent history, our research shows that short-term divergences in these two averages are normal. Look back and check out how many times we’ve seen one get ahead of the other, only for the laggard to then play catch-up:

So while this divergence may stand out to some of us shorter-term players, I don’t think it really means much in the big picture. In fact, according to Bespoke, peaks and troughs in the performance spread between these two averages haven’t been bullish or bearish for the future direction of the market. Take a look at the rolling six-month ratio for $DJIA:$TRAN:

I realize that the lack of short-term confirmation from the transports makes for nice headlines and scares the crap out of people. But the math says otherwise. History’s worst case scenario here is a likely reversal in relative performance, meaning that soon the Transports should start to outperform the Industrials. But that doesn’t necessarily mean that the absolute value for the Dow Industrials needs to decline. It is also possible that the Transports just go up faster.

My conclusion is that the underperformance in the Dow Jones Transportation average is fairly meaningless. So to get bearish in US equities, I would look for other reasons besides this one data point.

 

Sources:

The Plight of the Transports (Bespoke)

Dow Theory Warning Sign: Transports Crushed This Week (WSJ)

Tags: $IYT $TRAN $DJIA $DIA

Charts Don’t Lie, People Do

I came across an interesting blog post this week that reminded me a lot about why I became a technician in the first place. I hit that fork in the road early in my career when I realized that I didn’t know a damn thing about making money in the market. “OK JC, we gotta learn something”, I told myself. So do I go the route of fundamental analysis and force myself to believe that the data we’re analyzing is the truth? Or do we study pure price action, where no one can argue the data is incorrect or false in any way?

If xyz closed at $12, then guess what? It’s worth 12. Why do I know that? Because buyers and sellers world wide took all of the known information available and concluded that it was worth 12. That’s what one side paid for it and another side sold it for. So I don’t want to hear about your cash flows and multiples and all that nonsense that means absolutely nothing when it comes to managing risk. Besides, all of that “fundamental” analysis is done using numbers that you can’t fully trust anyway. Who knows if they’re right? No one, and that’s a problem.

The post that reminded me of this dilemma came from The Zikomo Letter. Zikomo means “Thank You” in Africa, which I think is appropriate because I am, and we all should be, “Thankful” for this friendly reminder about which data we can fully trust and not trust. Here are a few gems I pulled from the post:

“Let us start with company-provided information. If the history of public corporations tells you anything, it is that anything a corporation tells you should be treated as a lie. Sometimes it is deliberately misleading, sometimes it obscures the truth, and sometimes it just lies to your face. If you do not believe me, then I point you to some of those who were caught: Enron and Lehman Bros stick in the mind, but the list is long.

Do not kid yourself that these are the rogues in an otherwise healthy bunch: every public corporation twists and tortures their information to meet their objectives. In a previous life I was a company auditor, and I can attest that there is plenty of scope for maneuver within the law.

…Just as pertinent are the revisions. Fundamental data is often revised. Corporations restate their earnings. GDP and employment figures are adjusted materially months later. If data can be revised long after the fact, it makes little sense to base investment decisions on the originally announced variable.

…Every computer programmer knows that if you input garbage, you output garage. Doing analysis based on discounted cash flows, or price/earnings multiples or supply/demand components is all well and good, but if you cannot trust the data, you cannot trust the output it produces.

…I use fundamental analysis every day. It can be an important part of the trading process. However, I treat all fundamental data with a strong pinch of cynicism, a healthy sense of skepticism and a highly-refined BS Detector. When placing my own money at risk, I think it is better to see the world as it is, rather than how I might want it to be.”

I think it was a great post and finishes up on an important note. It’s not that this fundamental data is completely irrelevant. It’s just that you need to be careful how much validity you give something that you can’t fully trust. Price however is pure. No lies. No BS. If xyz is at 12, then guess what ladies and gentlemen? It’s worth 12. Period.

Go check out the post in full at The Zikomo Letter

 

About That Correction In Crude Oil

We’ve had quite the sell-off in Crude prices this week. Three days and 7% lower so far. But how long is this going to last? And was that it?

Taking a look at the chart below, it appears to me like we’re probably in store for more of a sideways boring market than anything else. And that’s OK considering we just saw a 30% rally in a couple of months. Corrections are normal and necessary. I wouldn’t force anything here on either side, long or short. Wednesday’s selling ended right at the 38.2% Fibonacci retracement from the June lows up to last week’s highs. This area also represents former resistance and consolidation that took place in July and early August. So it looks to me like some pretty decent support:

The problem I see is that flat 200 day moving average (red line) that we’ve had in this market for over a year. If you want a range-bound market, here you go. But it’s not for me. We’re looking elsewhere for time being.

 

Tags: $CL_F $USO

Relative Strength Is Telling Us To Stay Long

Sometimes we look at the major averages and can’t come up any strong conclusions about the short-term direction. There isn’t always a brilliant setup in terms of risk/reward. And that’s OK, there isn’t supposed to be. I see people constantly driving themselves nuts trying to decide whether to go long or short the S&P. But if you don’t know, chill out a bit and take a quick look under the hood.

We like to look at the components of the stock market to see what kind of information we can gather. If the market has rallied hard, and one might call it “overbought”, we want to see if the defensive names are showing some signs of a rally or bottom in terms of relative strength.Typically if the S&Ps are going to roll over and correct, you’ll find the defensive names rallying relative to the rest of the market. But we’re not seeing that strength yet in Utilities, Staples, or Healthcare – sectors that would outperform during a correction. In fact, we see weakness and zero signs of a bottom:

The bearish divergences that showed up in early summer helped with our bullish conviction on the overall market. If the stock market today was about to correct, we would expect to see the opposite occurring – but we don’t. $XLU $XLP & $XLV relative to the $SPY are showing oversold readings (bearish characteristics), new lows relative to $SPY (bearish characteristics) and no bullish divergences, just confirmations of downtrends (bearish characteristics). This is a good thing for the stock market.

Now turning it over to the more offensive sectors like Financials, Tech and Energy, we’re seeing bullish confirmations:

After the bullish divergences this summer, we now see overbought readings in RSI and multi-month highs in relative strength. All good things that tell us to stay in.

Sure, some may say that we’re overbought in the market – and we might be. But remember – that’s a good thing. This means there is clear evidence of an extreme amount of buyers. Is that such a bad thing?

So until we start seeing some divergences, we don’t see any reason to get bearish stocks as an asset class.

 

Tags: $XLU $XLP $XLV $XLF $XLE $XLK $SPY

Will Gold and Silver Smash Through All-Time Highs?

Long time readers of this site know that we’ve consistently maintained a bullish bias when analyzing precious metals. The Dow/Gold ratio in particular is one of the more intriguing long-term charts that we look at. But today I would like to point to some recent comments made by Citi Technical Analyst Tom Fitzpatrick.

From King World News:

“You can still have corrections and track sideways occasionally, but to us the trend is solid.  The pattern is quite clear, and we still believe this $1,791 area is really quite critical in terms of the next leg higher for gold, as well as the $37.48 level on silver.

When we get a weekly close through both of those critical levels, we anticipate that will give us an acceleration which will take us up toward the targets on gold to the $2,055 area (see chart below), and silver back to the old highs near $50.  However, on a longer-term basis we believe we have a setup here which suggests that gold could continue to go higher for some time to come.

We’ve always been of the view, and are still of the view that gold is first and foremost a hard currency more so than it is a commodity.  So the building blocks are there for gold to continue to go higher, not just against the dollar but against all of the other paper currencies as well.

Given the dynamics that we have in the background, the similarities that we to the 70s, we would argue the combination of the similarities, and the major difference which is the money printing being exercised by all of the developed world’s central banks, we can see gold continue to follow a trend equal in magnitude to what we saw in the 70s.

Ignoring the final move, which was caused by a Russian invasion of Afghanistan, we need to get to $3,400 just to replicate the core move seen in the 70s.  We don’t see that, at the end of the day, as a particularly aggressive call.

When it comes to silver, if we see the moves we are looking for in terms of the next leg of the metals, which is $2,050 for gold and $50 for silver, then you are looking at a gold/silver ratio of around 41.  This suggests the classic trade for silver to the upside as the ‘poor man’s gold.’

When gold breaks above $1,790, many people will feel they have missed the boat, and they will go to silver instead.  So silver should outperform gold.  People have to remember that we are only at the midpoint of the gold/silver ratio of the last 45 years.  So it is not inconceivable that we could still go lower in terms of that ratio.

If we see gold move to the $3,400 level, it is not inconceivable that we may see silver closer to $100.  Investors have to remember that at the end of the 70s the gold price doubled in a mere five or six weeks.  If 3 to 5 years down the line we see that the base policy of the developed world is to continue printing money, then the gloves are off in terms of what levels gold and silver could actually go to.”

I can’t really disagree with any of this stuff. Most of what he says has been exactly how I’ve felt for years. The trend here is higher and has been for a long time. I don’t see any reason why we wouldn’t continue to give the bulls the benefit of the doubt in the precious metals space. And this goes for both absolute performance as well as relative to equities. I think it’s important to recognize and be cognizant of both of these ongoing trends.

 

Source:

Gold & Silver Will Smash Through All-Time Highs (KWN)

Tags: $GLD $SLV $GC_F $SI_F