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A Professional Journal Published by the International Federation of Technical Analysts 2013 Edition IFTA Journal A Professional Journal Published by The International Federation of Technical Analysts 2013 Edition 2013 13 Inside this Issue 6 The Implied Volatility Projection Range (IVPR); Extending the Statistical and Visual Capability of the VIX 13 Psychological Barriers in Asian Equity Markets 20 Regime-Switching Trading Bands Using A Historical Simulation Approach In the business world, the rearview mirror is always clearer than the windshield. —Warren Buffett The Future of Technical Analysis has arrived. Discover a whole new world of possibilities at www.mav7.com/ifta IFTA JOURNAL 2013 EDITION Letter From the Editor By Rolf Wetzer, Ph.D............................................................................................................................5 Articles EDITORIAL Rolf Wetzer, Ph.D. (SAMT) The Implied Volatility Projection Range (IVPR); Extending the Statistical and Visual Capability Editor, and Chair of the Editorial Committee of the VIX [email protected] By Mohamed El Saiid, CFTe, MFTA.................................................................................................... 6 Aurélia Gerber (SAMT) [email protected] Psychological Barriers in Asian Equity Markets Editor By Shawn Lim, CFTe, MSTA, and Bryan Lim....................................................................................13 Ralf Böckel, CFA (VTAD) [email protected] Editor MFTA.Papers Michael Samerski Regime-Switching Trading Bands Using A Historical Simulation Approach [email protected] Editor By Ka Ying Timothy Fong, CFTe, MFTA............................................................................................ 20 Mark Brownlow, CFTe (ATAA) Using a Volatility Adjusted Stop Loss (VASL) to Enhance Trading Returns [email protected] Editor By Edward Rowson, CFTe, MFTA...................................................................................................... 28 Send your queries about advertising Momentum Indicators: An Empirical Analysis of the Concept of Divergences information and rates to [email protected] By Stephan Belser, CFTe, MFTA.........................................................................................................35 Wagner.Award.Paper Momentum Success Factors By Gary Antonacci.................................................................................................................................45 Educational Heikin-Ashi: A Better Technique to Trends in Noisy Markets By Dan Valcu, CFTe............................................................................................................................54 Book.Review About cover photo: Abstract Waves—Photo by piccerella Mastering Market Timing, Using the Works of L.M. Lowry and R.D. Wyckoff to Identify Key Market Turning Points By Richard A. Dickson and Tracy L. Knudsen Reviewed by Regina Meani, CFTe....................................................................................................60 Author Profiles..................................................................................................................................61 IFTA Board of Directors.................................................................................................................. 62 IFTA Journal is published yearly by The International Association of Technical Analysts. 9707 Key West Avenue, Suite 100, Rockville, MD 20850 USA. © 2012 The International Federation of Technical Analysts. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying for public or private use, or by any information storage or retrieval system, without prior permission of the publisher. IFTA.ORG PAGE 3 IFTA2013 26TH ANNUAL CONFERENCE San Francisco Check the website for updates: www.ifta.org IFTA JOURNAL 2013 EDITION IFTA2013 Letter From the Editor TH By Rolf Wetzer, Ph.D. 26 ANNUAL CONFERENCE Dear IFTA Colleagues and Friends: In all our writings and teaching on technical analysis, we never forget to quote our mantra— history repeats itself. If we go back 100 years and look at the Dow Jones Industrial Index, it seems that this is a good assumption. In 1912, the first quarter started with an upsurge. In Spring, the market went sideways, spiced with good volatility. In Summer, the market rose to a new high. Does this sound familiar? In all our writings The International Federation of Technical Analysts’ (IFTA) Journal is traditionally international, both in its contributions and teaching on and techniques described. This year, the Journal has four separate sections. In the first section, two articles were submitted by IFTA colleagues from the technical analysis, Egyptian Society of Technical Analysts (ESTA) and the Society of Technical Analysts (STA). ESTA’s contribution covers volatility bands based on the VIX Index. STA offers we never forget to information on a strict testing procedure for psychological barriers in Asian stock markets; as our 2012 Annual Conference will be in Singapore, this article might offer quote our mantra— additional insight into some of the Conference topics. In the second section, there are three papers from our Master of Financial Technical history repeats itself. Analysis (MFTA) program. One of the authors, Stephan Belser, MFTA, was awarded the John Brooks Memorial Award for 2011. Congratulations! This year, aside from our own MFTA material, we are happy to publish a paper from another organisation. With the permission of the National Association of Active Investment Managers (NAAIM), we have included a paper by Gary Antonacci, winner of the NAAIM Wagner Award 2012. We hope that you find this paper informative. We conclude with contributions from two of IFTA’s current Board members. Dan Valcu, CFTe, IFTA’s Membership Director and Vice President of Europe, has written an article on a Japanese charting technique. IFTA’s former Journal Editor and Director, Regina Meani, CFTe, contributed a book review. Again, like IFTA itself, the Journal is truly international. I would like to thank the authors for their contributions. And, not only do Journal articles come from all over the globe, our editors do too. I would like to thank Aurélia Gerber, Ralf Böckel, Michael Samerski and Mark Brownlow for their help in editing this Journal. Last but not least, I would like to thank Linda Bernetich and Jon Benjamin for the layout and their effort in putting the Journal together. We are now in the fifth year of a financial crisis. In 1912, the year ended with a drawdown. Hopefully, as good market technicians, we should be prepared this time. IFTA.ORG PAGE 5 IFTA JOURNAL 2013 EDITION The Implied Volatility Projection Range (IVPR); Extending the Statistical and Visual Capability of the VIX By Mohamed El Saiid, CFTe, MFTA 1. Abstract SPX and the VIX movements. According to Whaley, the latter This paper proposes a new method for extending the feature is brought about by portfolio insurance. statistical and visual capability of the Chicago Board Options Exchange (CBOE) market volatility index (VIX) over the S&P 500 To support Whaley’s argument, we have performed a series (SPX). The paper subsequently provides several visual examples of linear correlation tests between the SPX and the VIX over of the proposed method and discusses its implications and uses 5,520 daily closing values (from January 1990 to December 2011). over the chart from a technical standpoint. Finally, the paper The first correlation test performed was conditional exclusively discusses implementing the same methodology on other implied on positive SPX returns. The second test was conditional volatility-based indices over their corresponding/underlying only on negative SPX returns. The third to seventh tests were equity market indices. The methodology proposed in this conditional on achieving returns greater than +/-0.50%, paper will be referred to hence forth as the “Implied Volatility +/-1.00%, +/-2.00%, +/-3.00% and +/-4.00% in the SPX. The Projection Range” or “IVPR”. outcomes of these tests were then compared to a final non- conditional correlation test between the SPX and the VIX and 2. Introduction the results are shown in table 1. 2.1.The.VIX.definition Table 1: Non-conditional vs. conditional correlation results between The Chicago Board Options Exchange (CBOE) market the SPX and the VIX volatility index (VIX) is a forward-looking index of the expected Correlation.. return volatility of the S&P 500 index (SPX) over the next 30 Correlation.test. CoefficientR) .( days. This forward-looking feature is implied from the at- Non-conditional.correlation -0.70 the-money SPX option prices. As such, the VIX measures the volatility that investors expect to see, rather than what has Conditional.Correlation.Tests been recently realized.1 Positive SPX returns correl. -0.46 The VIX estimates the expected volatility by averaging the Negative SPX returns correl. -0.60 weighted prices of the SPX puts and calls over a wide range of strike prices.2 In that respect and as opposed to equity Greater than +/-0.5% SPX returns correl. -0.76 market indices which are comprised of stocks, the VIX index Greater than +/-1% SPX returns correl. -0.79 is comprised of options, where each option price is intended to Greater than +/-2% SPX returns correl. -0.82 reflect the market’s expectation of future volatility.3 Greater than +/-3% SPX returns correl. -0.84 The VIX was initially developed by Prof. Robert E. Whaley in 1993 and is a registered
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