Chart Summit India Recap: Part II
Dhwani Patel is the Co-Founder of Marketfeds Analytics LLP. Her presentation focused on how she uses RSI and Fibonacci in her analysis, particularly when it comes to finding entry and exit points for trades.
In addition to identifying divergences and overbought/oversold readings, she also uses RSI for determining whether or not a security is in an uptrend or downtrend, using the 60 and 40 levels, respectively as thresholds.
Here is an example of a negative divergence that Dhwani shared.
Notice how she uses a Wilder's Moving Average to smooth out her RSI line. Dhwani explains that Welles Wilder created both of these indicators as well as making many other contributions to the world of Technical Analysis.
Then she used the Nifty rallying off its March lows as an example of the kind of positive momentum divergences she looks for.
Next is Gautam Shah, CMT and Founder & Chief Strategist of Goldilocks Premium Research. If you're going to watch any presentation you may want to make it this one as Gautam recently won "Technical Analyst of the Year" for the 2020 Technical Analyst Awards. Big congrats! Check out all the winners and finalists here.
Gautam's presentation was on relative strength, not to be confused with the Relative Strength Index, or RSI which Dhwani discussed and we covered above. He briefly explained the difference and pointed out that relative strength is simply the study of the relationship of any one asset vs another. In his words, it gives you a "look at where the money may or may not be flowing," which as you know is very important in order to generate alpha.
Gautam emphasized the fact that you can use traditional technical analysis on relative or ratio charts in the same way you do on absolute price charts, which I thought was a great point. Then he gave some of the following examples of how he finds value in identifying relative strength with these charts.
- To see what stocks or sectors are outperforming or underperforming their benchmarks
- For help with pair trading or to confirm a trade bias
- To identify confirmations or divergences in the absolute price action
Speaking of using relative strength to identify outperformance and spot divergences from price, here is a great example that Gautam shared. This is a bar chart of HDFC Bank along with a line chart of its relative strength vs the Nifty.
Gautam explains that ever since late 2014, HDFC has been trending consistently higher relative to the broader market. If you caught this relative trend and bought the stock you would have done pretty well, as price had just about tripled at its highs earlier this year.
He then goes on to point out that something very interesting happened for the first time in 6-years in February. HDFC made a lower high on a relative basis, diverging from its absolute price chart and giving what Gautam called a "clear warning bell" of things to come. HDFC subsequently collapsed about 40% during February/March 2020.
Although, Gautam explains that the even better signal was the fact that HDFC had been one of the stronger stocks in the Nifty so its lack of confirmation at February's highs was actually a major cautionary signal for the broader market. This certainly turned out to be true.
Ashish Patel, CMT and Forex Manager/Prop trader at MNC gave a great presentation on the basics of Elliot Wave Theory.
This is a topic that I want to learn more about and admittedly do not understand as well as I probably should, so I found a lot of value in Ashish's ability to break it down into a very simple and comprehendible manner.
He started by explaining that the reason waves are somewhat predictable and repetitive all boils down to human behavior, the cornerstone of Technical Analysis itself. For this reason, the theory works best in markets where mass psychology is most present. I thought this was a great point and would even argue that it's true for all areas of Technical Analysis.
Now for some wave knowledge. First, he provided a little background and explained some intricacies of the theory, such as the wave count becoming more reliable as the timeframe under analysis lengthens.
After walking through the basics of Motive (5 waves) and Corrective (3 waves) Phases, he discussed some of the Elliot Wave chart patterns, such as starting and ending diagonals. Here are examples of each in his chart below.
The ending diagonal pattern tends to be the termination point of a larger pattern and gets fully retraced, often in violent fashion. Meanwhile, a starting or "leading" diagonal occurs at the beginning of a major new trend and is not fully retraced.
Ashish then went on to show how he used the ending diagonal pattern which he identified in the Nifty to help him turn bearish near the highs earlier this year.
This was some impressive and timely analysis to say the least as the entire pattern was fully retraced and then some when markets collapsed in record fashion in February and March.
The next presentation we'll cover was by Sovit Manjani, CMT and Co-Founder of Dravyaniti Consulting LLP. Sovit walked through his investment strategy, the "Fortitude Trading System," which is a long-only system-based strategy focused on relative strength and market volatility.
At its core, the strategy aims to take advantage of market leaders in periods of low volatility, and exits positions either when they are no longer exhibiting relative strength, or the overall market experiences heightened volatility. In Sovit's words, he wants to be invested in times "when the market is dull."
Sovit went on to share some examples of how he analyzes relative strength using ratio charts as well as the RSI indicator of those ratios. Here is a triple pane chart of Tata Motors, the Nifty, and Tata relative to the Nifty, in that order.
As you can see and Sovit pointed out, the ratio chart shows a clear trend of long-term underperformance from Tata Motors, particularly from 2017 on. Sovit said he uses these relative strength trends to "keep us out of those stocks that are not trending or which are weak." It's hard to argue with that logic.
Similar to Gautam, Sovit finds his edge by identifying and betting on relative strength. I thought this was an interesting parallel between the two presentations and really enjoyed seeing it from different perspectives as ratio analysis and relative strength are tools I rely on heavily in my process as well.
Now for one of my personal favorite subjects, Market Breadth. Akshay Chinchalkar, CMT and Bloomberg's Head of Technical Analysis for Asia and the Middle East gave a master's class on the topic. His presentation is a must-watch!
He started by explaining that breadth indicators are used to assess the health of a group of related stocks, whether it be an index, sector or entire market, and that this is usually done by measuring the groups' "participation in a trend." Of course, this can be done in a number of ways, such as looking at the percentage of stocks making new highs, the Advance/Decline line, or the New High/Low ratio among others.
Akshay refers to divergences or deterioration in breadth indicators as "signs that the prevailing trend is maturing" which I thought was an astute way to look at it. Other Breadth specialists echo similar sentiments as these kinds of divergences can tell us when a trend is losing steam but don't give much insight as to whether or not it is likely to correct through time or price, as well as how long that might take.
Let's take a look at one of his breadth indicators and walk through how he is currently using it to assess the health of the NSE 200, shown in the top pane below.
In the bottom pane Akshay has the percentage of NSE 200 stocks above their 50-day moving average.
During structural bull markets, like the one India was in from 2012-2017, the indicator reading tends to spike above the 90% level at its extremes. These high readings are a positive and something Akshay explains is a characteristic of bull market environments. In his own words, "overbought in a rising market is not a sign of weakness, it is a sign of traditional strength."
Now notice how this 90% spike at extremes "has not been the case since the first meaningful correction that occurred in Q1 of '18." Even as the index went on to make incremental new highs from 2018-2020, the reading could never surpass 90%. This kind of breadth action is typical during what Akshay refers to as a "Bull to Bear Range Shift," which is what he believes the market is undergoing right now.
Not only did the market crash this year, but it really went nowhere for 2-years since the first warning sign at the January 2018 highs. So if you paid attention to this indicator and got out of the market, the only thing you would've missed out on were some big losses.
One last thing to note about the chart is that extreme readings in both directions tend to "kick-off" new bull or bear markets. Akshay believes that similar to the reading just under 100% from 2012 which sparked the latest structural bull market, the recent record low reading of 0% could very well be "kicking off" a fresh bear. Only time will tell.
Last but not least I want to highlight some things from Alok Bramhe, CMT and FX Interbank Trader at SBM Bank India Ltd.
Alok started off his presentation by reminding everyone that Technical Analysis and trend following can be applied to basically any market, not just equities. In Alok's case he uses technicals on the Currency Markets.
He went on to provide some helpful trading tips such as learning to become comfortable dealing with probabilities and uncertainty as well as the importance of knowing yourself as a trader and "coming to a strategy that resonates with your personality." For Alok, that strategy is Dow Theory, most of which revolves around the notion that prices move in trends.
Alok's process begins with identifying the trend for the timeframe in question. He uses moving averages, trend lines, oscillators, and the swing low/swing high method in order to do this. Here is a chart he shared in order to illustrate how he uses oscillators to determine the underlying trend, in this case the RSI-14.
Alok is more or less pointing out that when the market was in a sideways trend its RSI remained between the range of 28 to 68, never achieving an overbought reading above 70. It was not until the oscillators range improved to a high of 80 and floor of only 38 and we started seeing overbought readings (and no oversold readings) that price had finally transitioned into an uptrend.
He calls this an "RSI Range Shift" and I thought this was a valuable perspective, particularly because it is similar to how we use RSI to determine whether momentum is in a bearish or bullish regime at All Star Charts.
That's all I got! I wish I could cover more as there was so much great content, but it's all available for free at ChartSummit.com/India, so go check it out. I promise it will be well worth the time.
-Strazza