november 2014 november 2014/atmaspher… · the harmonic trading patterns by jay purohit, part 2-08...

November 2014

NOVEMBER 2014

CONTENTS

Letter from the President - 01

Editor’s note - 02

Analysis of Market phases using 50, 200 SMA part 3 by Ananth Madhav - 03

Understanding Market Profile by Pit Trader – 06

The Harmonic Trading Patterns by Jay Purohit, Part 2- 08

5 Price action tips that will help you become a better swing trader by Rajat Dutta – 14

New Thinking in Technical Analysis – Book review by Sahil Vijay – 17

Past and Present Events – 20

Future Events’ Updates – 20

This newsletter is produced by the Association of Technical Market Analysts. All comments and editorial material do not necessarily reflect the organization's opinion nor

does it constitute an endorsement by the Association of Technical Market Analysts or any of its officers, of any products or services mentioned. Sources are believed to be

reliable at time of publication, but not guaranteed. The Association of Technical Market Analysts and its officers, assume no responsibility for errors or omissions.

NOVEMBER 2014 1 | ATMASPHERE

LETTER FROM THE PRESIDENT

Dear Colleagues,

Professionalism & Professional Standards are two of the core principles on which ATMA stands. To me, a common-sense meaning

of professionalism is a set of attributes that inspires trust, confidence & dependability. If anyone can depend on us then we are a

professional. The trust that we will deliver the highest standards of conduct is what makes one a professional. In this context, the importance of the Code

of Ethics & the Annual Professional Conduct Statement that each and every member of ATMA subscribes to can be undermined to nothing. Even though

ATMA is and will remain a self-regulatory body, the desire express in a membership of the ATMA to adhere to these standards is value for public, our

clients, partners, employees or associates. If there are any violations any one notices of the Code of Ethics or of the Professional Conduct Statement, one

may write to [email protected] & ATMA shall act within its constitution & bye-laws to address such communications.

Recognition for Technical Analysis as a full-fledged independent body of market analysis rests much on our adherence to professional standards and

ethics. I solicit, formation of a Volunteer Committee comprising of well known names in Technical Analysis in India to create a structured advocacy plan

for Technical Analysis so as sound and square representations can be made to regulatory bodies for seeking exemption from licensing exams as the

eventual goal, starting from a formal recognition of Technical Analysis.

Sincerely,

Sushil Kedia

mailto:[email protected]

2 | ATMASPHERE NOVEMBER 2014

EDITOR’S NOTE

In this issue -

1. Ananth Madhav brings us towards the climax in the explanation of market phases using moving averages, in his final article of the series – Analysis of

Market Phases using 50 and 200 SMA.

2. Alex a.k.a Pit trader continues the explanation of the concept of Market Profile.

3. Jay Purohit continues his portrayal of the ever effective harmonic patterns for trading reversals and finding price targets.

4. Rajat Dutta brings the second part of his article that explains the other 5 tips to become better in swing trading.

5. Sahil Vijay presents a great review of the book, New thinking in Technical Analysis.

ATMAsphere is your platform to learn & to teach. In fact, when you teach you learn better by handling curiosities of younger minds. So do write out to

me sending in your articles and we can all learn from each other. We await your feedback on ATMASphere. Please let us know what we can do to deliver

content that meets your needs by sending an email to [email protected]. You can also subscribe to ATMASphere completely free by clicking here.

Sincerely,

Gunjan Duaa.

mailto:[email protected]://www.atma-india.net/20120312540/atma-monthly-newsletters.html


Analysis of Market Phases using 50, 200 SMA

Part 3

Continued from last Article.

Bear Phase: This phase can be summarized as Price < 50 SMA & 200 SMA

and 50 SMA > 200 SMA.

Investors and Traders decide to liquidate their holdings. Selling is more

evident as Price makes new lows and 50 SMA starts sloping down. We

have Price close less than both 50 SMA and 200 SMA but 50 SMA will be

greater than 200 SMA. Price goes below 200 SMA, which is widely followed

by Institutions, indicating sharp change in the sentiment. Portfolio

Managers and Other Professional Investors are convinced that they have to

sell their holdings. As Price breaks previous swing lows Professional Traders

take short positions. Markets fall thrice faster than the speed they go up.

When Price stays below 200 SMA for sustained period of time it’s widely known as BEAR MARKET and hence the same name for this Phase.


Capitulation: Price < 50 SMA & 200 SMA and 50 SMA < 200 SMA.

Complete lack of Demand and Excessive Supply is seen in this phase.

In this phase, Selling Pressure is so strong and buyers are so sporadic that

prices are either decline sharply or consolidate at lower levels after a drop.

Professional Traders are usually a happy lot during this phase as Price

movement usually is unidirectional and swift . Both 50 and 200 SMA slopes

down. Occasional Pull backs to 50 SMA is seen, which get quickly Sold into

. Accelerating Volume and powerful negative momentum are the main

characteristics of this phase.


Ananth Madhav , A CMT aspirant , is a full time trader having 6 years

of experience , teaches Technical Analysis . One can reach him on

[email protected]



Understanding Market Profile

Using market profile to execute strategy

1.Gap open: This indicates imbalance. Mainly there are 2 types of gaps

1.1.1 Large gap above/below previous day’s entire range due to overnight News flow and / or high-volume on open. Such gaps are

continuation gaps and price tends to trade in the direction of the

gap. It is prudent to execute momentum strategy.

1.1.2 Small gap. Usually it tends to have less volume on open and /

or no overnight news. Such type of gap will likely to fill.

Open in context of previous value area:

1.2 If open above/below previous days value area and also

above/below previous day's range (remember entire range means

previous day’s high and low of the day, value area means 70% of previous day’s overall range as we discussed in previous articles here). Such type of open is sign of market imbalance, which often

produce high risk reward trades. You can execute various

momentum strategies (Quick recap: Market profile is not the system

itself but provides a framework to execute your own strategies and

trading systems)

1.2.1 If market open above previous days value high/value low but

within previous day’s range it indicates marginal market imbalance. Price often will return to developing value area of present day. Here

it is prudent to execute mean reversion strategies.

1.3 Market opens within previous days value area and previous day’s range. It indicates price may oscillate within present day’s developing value area and then in later part of the session may break

out. Since stops are usually near it produces low risk reward trades.

2 open in context of previous day's close

2.1 Scenario: previous close at upper range of that specific day. This

is an indication of short covering or longer term buyers.

Now if today's opening price sustain above previous days close, and

value area. Then previous day’s rally is valid with longer term buyers. Previous day’s high or value area high act as support. One can execute momentum strategy.

if open was quickly rejected, then it is an indication of previous day's

rally was short covering

2.2 Reverse is true if previous day’s close was at lower end of that particular day’s range.

Here is the flow chart:

( Marketprofile chart above is created in MarketDelta and flow chart

is created in MindJet mine manager tool)

../../../THAPAR/Desktop/ATMAsphere/ATMAsphere%20Nov/pit%20trader/ATMA%20Use%20of%20market%20profile%20to%20execute%20strategy.docx#execute_momentum_strategy


Hi, I often go with nick name Pit Trader.

I trade Index futures and options. I currently live in Toronto, Canada.

I use Multicharts and R.I am a programmer myself ,and use my own

trading systems based on statistical models and Market profile.

You can follow me on twitter @NarcissisTrader.


The Harmonic Trading Patterns

In last article, we discussed about Introduction of Harmonic Patterns, Fibonacci

Ratios and AB=CD Pattern, which is the only four point structure. In this article,

we will discuss Bat and Gartley Pattern. Before going to start 5 point structure

harmonic patterns, one needs to know following concepts of harmonic

patterns:

The midpoint (B): As harmonic patterns are 5 point structure

pattern, the midpoint (B) is significant for determining the pattern.

Distinguishing ALL points within pattern: Distinguishing ALL points

within 5-point price structures by examining each Fibonacci

calculation to validate the proper alignment that for each harmonic

pattern.

Potential Reversal Zone (PRZ): PRZ is a point where two or more

Fibonacci calculations congregate at a defined price level. It is not

an exact level; it is a zone where reversals are likely. It acts as a

support and resistance based on harmonic pattern.

Alignment of Fibonacci ratios defines the pattern: Harmonic

pattern emphasizes the important of the different Fibonacci ratios

at different price structure.

BAT PATTERN

The Bat pattern is an ‘M’ and ‘W’ shaped 5 point corrective structure found in well-established support levels. This is one of the most precise harmonic

patterns discovered by Mr. Scott Carney in 2001. The pattern incorporates

the 88.60% retracement of the major impulse wave (XA), as the defining

element in the Potential Reversal Zone (PRZ). Below are the elements of

Bat pattern:

Point B should be either 38.20% or 50% retracement of XA

Point C can end at any of the retracement levels in between

38.20% to 88.60% of AB

Point D must be 88.60% retracement of XA and can be any of the

retracement levels in between 161.80% to 261.80% of BC

In this pattern, all corrective moves end within the range of impulse (XA).

The broader trend remains intact in Bat Pattern as the last leg (Point D)

cannot overlap 88.60% of XA, which gives a cushion to take positions based

on the pattern to trend following traders as well. It is an incredibly accurate

pattern and requires a smaller stop loss than most patterns. Thus, it is

probably the most accurate pattern in the entire Harmonic Trading arsenal.

This is how Bat Pattern looks like :


Now let’s take few examples of Bat Pattern:

Example 1: Bullish Bat Pattern completed in daily chart of BPCL on February 25,

2011.

Above is the daily chart of BPCL. Here, after rallying from 244.20 to 420 (XA),

Stock price initially has made the low of 344.35 (point B), which is 38.20%

retracement level of the rally XA and then stock rallied precisely up to 61.80%

of ‘AB’ (420 - 344.35), which is placed at 392.50 (point C). After that stock fell all the way to 264.80 levels, which is precisely 88.60% retracement level of the

impulse ‘XA’ and also coincides with 261.80% retracement level of ‘BC’ (344.35 – 392.50). Thus it fulfilled all the criteria of ‘Bullish Bat Pattern’.

Below is the updated daily chart of BPCL. We have witnessed sharp rally in the

stock post completion of Bullish Bat Pattern.


Example 2 :Bearish Bat Pattern completed in weekly chart of Bank of India on

January 18, 2013.

Here, after the sharp fall from 408 to 253.33 (XA), stock price has retraced

precisely upto38.20% retracement of XA and has made the high of 314.80

(point B) and then counter again corrected upto88.60% retracement level of

‘AB’, which is placed at 263.10 level (point C). After that stock rose to 393 levels, which is precisely 88.60% retracement level of the impulse ‘XA’ and near to261.80% retracement level of ‘BC’ (314.80 – 263.10). Thus, it fulfilled all the criteria of ‘Bearish Bat Pattern’.

GARTLEY PATTERN

The Gartley Pattern is the best known and one of the oldest harmonic

patterns. It was outlined by Mr. H.M. Gartley in his book ‘Profits in the Stock Market’, published in 1935. The Gartley pattern is a controversial pattern as the book did not discuss specific Fibonacci retracements and

people used a variety of Fibonacci numbers at the B and D points. Although

the general structure has been outlined previously, it was not until The

Harmonic Trader was released in 1999 that the exact rules for specific

retracements of the B point at a 0.618 and the D point at a 0.786 were to

be assigned to the pattern.

Gartley Pattern is similar to Bat Pattern in appearance, but not in

measurement. Point B has a larger and precise retracement of XA of

61.80% and the extension of the BC wave into D should note me more than

161.80%. Below are the elements of Gartleypattern :


Point B must be 61.80% retracement of XA

Point C can end at any of the retracement levels in between

38.20% to 88.60% of AB

Point D must be 78.60% retracement of XA and can be any of the

retracement levels in between 113% to 161.80% of BC

Equivalent AB=CD is most common within Gartley pattern.

Like Bat pattern, in this pattern also all corrective moves end within the

range of impulse (XA) and the broader trend remains intact.

This is how Gartley Pattern looks like :

Now let’s take few examples of GartleyPattern :

Example 3: Bullish Gartley Pattern completed in weekly chart of Andhra Bank on

August 17, 2012

Above is the weekly chart of Andhra Bank. Here, after the up move from 76.50 to

138.45 (XA), counter has retraced precisely up to 61.80% retracement of XA and

has made the low of 100.35 (point B) and then stock rallied to 124.70 (point C),

which is exactly 61.80% of ‘AB’. After that stock fell to 87.60 levels, which is precisely 78.60% retracement level of the impulse ‘XA’ and also near161.80% retracement level of ‘BC’ (110.35 – 124.70). Apart from that, 100% projection of ‘AB’ from ‘Point C’ is also placed at 86.60 levels. Thus it fulfilled all the criteria of ‘Bullish Gartley Pattern’. Equivalent Bullish AB=CD is also visible within Gartley pattern.


Above is the updated weekly chart of Andhra Bank. We have witnessed sharp

rally in the stock post completion of Bullish Gartley Pattern.

Example 4: Bearish Gartley Pattern completed in daily chart of Banknifty (spot)

On April 18, 2012.

In the above daily chart of Banknifty (spot), after the sharp fall from 10912 to

9845 (XA), Index has retraced precisely up to 61.80% retracement of XA and

has made the high of 10503 (point B) and then index again corrected

upto70.70% retracement level of ‘AB’, which is placed at 10060 level (point C). After that index rose to 10646 levels, which is precisely 78.60% retracement

level of the impulse ‘XA’ and just above 127% retracement level of ‘BC’ (10503 - 10060). Thus, it fulfilled all the criteria of ‘Bearish Gartley Pattern’.


Above is the updated daily chart of Banknifty (spot). We have witnessed

straight fall in the stock post completion of Bearish Gartley Pattern.

In the next part of the series, we will discuss about Butterfly and Crab Pattern.

About Me :

Jay Purohit is MBA in Finance from Mumbai University. He is a Market Analyst

with an insightful experience of 5 years in Technical Research and Option

Strategies. He has experience in team handling and dealing with Institutional and

retail clients. He has a keen eye in finding trading opportunities using harmonic

patterns. His Technical analysis proficiency also includes Wolfe Wave theory, Super

Trend, RSI, Trend termination and continuation pattern identification.

He can be reached at jaypurohit1988@yahoo. You can also follow him on twitter

@purohitjay


5 Price Action Tips that will help you become a

Better swing trader.

I had shared 5 tips on price action for Swing Trading in the August edition.

Now let me Share 5 more price actions in the article.

# Tip 1: Learn the 50% rule.

How can you tell if a candle is significant? Easy.

Look to see how far it has moved into the prior days range. If it moves at

least 50% into the prior days range, then it is significant. And, it is especially

significant if it closes at least 50% into the prior days range. This usually shows up on the stock chart as a piercing candlestick pattern or an

engulfing candlestick pattern.

All of the important reversals in this stock happened only after a candle moved at least 50% into the prior days range (some moved much more

than 50%).

This concept is so powerful that I am suspicious of buying any

pullback unless it moves at least 50% into the prior days range.

# Tip2: The Gap & Trap Price Pattern.

All gaps are important "tells" on any stock chart. But, there is one type of

gap that is especially important when analyzing price action (and

pinpointing reversals). This is called a gap and trap. This is a stock that gaps

down at the open but then closes the day above the opening price. It is

easier to see this on a chart.

You can probably see what is happening here. The stock gaps down at the

open. Everyone thinks this stock is going to tank. But it doesn't! Buyers

come in and move this stock right back up. You can look at one of these

candles and almost see all of the confused faces on other stock traders.


# Tip3: Location of the price trend.

You have heard the saying, "The trend is your friend." I say, "The

beginning of a trend is your friend!" That is because some of the best

moves occur at the very beginning of a trend.

This stock broke out (horizontal line) from a double bottom (circled). A new

trend has begun. So, you want to buy this stock on the first pullback

(arrow) after the breakout.

# Tip 4: Consecutive up days and consecutive down days

A Stock will reverse its direction after consecutive up days or down days.

So, it pays to keep this in mind, when you are looking to buy or short a

stock. Here is an example:

You should always look to short a stock after consecutive up days. And, you

should look to buy a stock after consecutive down days. This is counter

intuitive for new traders because they tend to associate a stock going

down as "bad" (meaning sell) and a stock going up as "good" (meaning

buy). In fact, it is just the opposite.


# Tip 5: Measure the depth of a swing

How far does a stock move into the prior swing? More than halfway or

less? The answer to these questions is important because it can determine

the future direction of the stock. Let me give you an example:

The price action moved about halfway down (arrow) into the prior swing

(dotted line). This is good. If it retraced more than that, you may want to

question the validity of the move. This is because a stock in a strong trend

should not retrace more than halfway into a prior swing. It should

encounter buying pressure sooner than the half way mark. And many times

stocks will reverse right at the halfway mark.

So, there you have it. These price action tips and tricks will make you

money in the stock market.

You can use this information to make your own trading strategies and

systems. Best of all, once you master this art, you will never have to rely

on technical indicators again to make trading decisions.

They won't be necessary.

Rajat Dutta is a system designer & a fund manager for Moneyrizing Wealth Management Company. He is a trader since 1998. His Specialty is

trading micro trend with a focus on analyzing and trading Stock’s, Options & Commodities. He can reached on Twitter Handle @Moneyrizing & email:

[email protected]



New Thinking in Technical Analysis

Book Review

Technical Analysis is an art, which is practiced for nearly a century

but with

The passage of time, new ideas came in and those added to the basic

structure of the subject. New people started exploring new ways to

take trades and a new thinking in technical analysis came into

existence. Classical Technical analysis mixed with the new concepts

became the new mantra. The subject was evolving into something

bigger, with important concepts such as Risk management and

Statistics were now becoming a part of Technical Analysis.

This book explores The new thinking in Technical Analysis and

explains in detail some of the key concepts for the modern market

technician.

Rick Bensignor, in his book, shares different models by some of the

great

Technicians of today’s world. In the first chapter he explains Swing trading, one of the most important way of trading for everyone,

from a short term trader to an Investor. He shares Linda Bradford's

work on the principles, the types of trades and the trade

management.

In the second Chapter Rick explains the Intermarket Analysis

principles by John Murphy. This principle has been there for a couple

of decades but has gained its importance in the last few years and is

used by a number of technicians worldwide. This book presents an

overview of the concept, which can be further explored through

other books of John Murphy.

The third chapter is one which is very close to my own trading and

one which is explained in very few books. Using moving averages on

Point and Figure charts. Kenneth Towers explain this concept in

detail from construction to its final use. Anyone, who wants to use

point and figure, must know this concept to get an edge in the

trading.

The book goes on to explain about market profile and the concepts

of Thomas De Mark. Market profile makes this book special, it’s a new way to trade and it increases the accuracy of the trade. It uses

Price and Volume concepts to find out places of Equilibrium and

Disequilibrium. Thomas Demarks Oscillators and TD range Expansion

too are explained in the sixth chapter. Cycle studies on smaller and

longer time frames, tips to attain success, guidelines to find price

extremes and explained quite well by the concept of Peter Eliades.

Chapter 9, explains a concept that is used by many traders but most

doesn’t know much about it. Using, Vix on Options is one concept that every trader uses or wants to use but doesn’t know how to do it. Lawrence McMillan provides an overview of trading based on

Volatility and then explains how to trade volatility and the benefits

associated with those.


The final three chapters are about the concept, which is known to all

but most traders don’t care much about the concept, and that leads to the downfall of most of them. The concept of Sentiment and Risk

is explained by the writer using the work of three legends of

market..Bernie Schaeffer, Larry Williams and Cortney Smith. The

author has given three chapters on these because he understands

the importance of the whole and wants the reader to understand

the same. Investor sentiments, the rules, the pitfalls and to go

against the crowd are some of the things the author shares. The

author also explains risk management in the last chapter, he gives

the rules to put stop losses, the fractions, the amount of capital to

be invested and the discipline to be maintained while trading and

after it.

To Conclude, I earnestly request every successful and budding trader

to read this book and to keep this in his/her library. The book

magnificently outlines all the ingredients to build our emotional and

intellectual capital to make a living in this chaotic world of financial

jargon.

Sahil Vijay, CMT is in the financial markets for the last nine years and

currently working as a Treasury Analyst with Capital Bank. A Banker

by profession he looks after Investments and takes trading decision

in Debt, Equity and Foreign Exchange markets. He uses Elliot Wave

Theory, Gann Studies, Bollinger Bands, Fibonacci Analysis and

Momentum Oscillators like RSI to drive confluence points in various

markets to establish low risk –high yield set ups, he also include inter market analysis and global indices in his study to draw better

understanding of the under currents in global financial markets.


Accessible on your favorite Gadget!

World's FIRST E-Library of Technical Analysis

Some of the latest e-book additions in the Library:

As a well rounded professional you surely wish to read on

negotiation techniques, VBA programming, Statistics,

business biographies, investment classics and a whole host

of subjects. Yes, the R.N. Elliott ATMA E-library of Technical

Analysis regularly stocks up on varied titles that take care of

holistic professional interests of Technical Analysts!

The R. N. Elliott ATMA E-library of Technical Analysis

Inaugurated on 6th

October 2012, at the hands of Mr. Robert

Prechter, Jr. the world’s first E-library for Technical Analysts continues to grow.

A world that is short on time to travel, you can check-out books,

return them as now you have the E-Library that you could access for

ethically obtained, copyright respecting readings using any of your

favorite devices: Whether based on windows, apple, android, kindle

or even nook!

Access E-books as well as audio-books on Technical Analysis, Trading

Strategies, Quantitative Finance, and Back-testing, Algorithmic

Trading, Investment Psychology, Hedge Funds, Behavioral Finance &

lots more!

ATMA Members & Affiliates, except for the student

affiliates, can access the library 24X7 by just logging into

ATMA’s website. In case you still don’t have your PIN No. , please feel free to contact ATMA Office and enjoy reading!


PAST EVENTS’ UPDATES

CHAPTER DATE SPEAKER TOPIC

Delhi 31-08-2014 Dr Sanjay Sinha Elliot& Fibonacci –

Understanding The

Eternal Relationship

Bengaluru 07-09-2014 Mr. Krishna Rao

P S

Using Trendlines and

Fibonacci

Mumbai 20-09-2014 Mr.Atul Suri Trading for a Living

Mumbai 08-10-2014 Mr. Ambareesh

Baliga

The Games Promoters

Play - In the market as

well as in the financial

accounts

Delhi 02-11-2014

Mr. Sachin

Aggarwal

Stock Markets, Charts

and Profit Making

FUTURE EVENTS’ UPDATES

CHAPTER DATE SPEAKER TOPIC

Mumbai 06.12.2014 Mr. Mitesh

Thacker

New Moving Averages

That Can Help Improve

Your Trading Results

http://atma-india.net/component/option,com_eventbooking/Itemid,129/event_id,346/task,view_event/http://atma-india.net/component/option,com_eventbooking/Itemid,129/event_id,346/task,view_event/http://atma-india.net/component/option,com_eventbooking/Itemid,129/event_id,346/task,view_event/http://atma-india.net/component/option,com_eventbooking/Itemid,129/event_id,346/task,view_event/


http://go.mta.org/cmt


Benefits of Membership with the ATMA

Apply for your ATMA Membership Today!

http://www.atma-india.net/why-become-atma-member.htmlhttp://www.atma-india.net/steps-for-becoming-an-atma-member.htmlhttp://www.atma-india.net/steps-for-becoming-an-atma-member.html

november 2014 november 2014/atmaspher… · the harmonic trading patterns by jay purohit, part 2-08...

Documents