OCTOBER 2014 ATMASPHERE | 1

CONTENTS

Letter from the President - 03

Editor’s note - 04

Analysis of Market phases using 50, 200 SMA part 2 by Ananth Madhav - 05

Understanding Market Profile by Pit Trader – 08

The Harmonic Trading Patterns by Jay Purohit- 11

Dow Series Paper review of 2003 – The Janus Factor by Gary Anderson, Reviewed by Claudia Mincucci – 14

The Master Swing Trader – Book review by Sahil Vijay- 18

Past and Present Events – 21

Future Events’ Updates – 21

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.

OCTOBER 2014 ATMASPHERE | 2

LETTER FROM THE PRESIDENT

Dear Colleagues,

Greetings of the Festive Season! May the Light from the Lamps brighten our minds, work-desks, account balances through the year ahead.

ATMAsphere is slowly beginning to witness contributions from diverse authors & on invigorating subjects of our interest. Here's the latest issue. Do read,

discuss & expand on the collective learning through appropriate forums.

Sincerely,

Sushil Kedia

OCTOBER 2014 ATMASPHERE | 3

EDITOR’S NOTE

In this issue -

1. Ananth Madhav continues the explanation of market phases using moving averages, in his second 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 shares the ever effective harmonic patterns for trading reversals and finding price targets.

4. Claudia Mincucci presents yet another brilliant review of the MTA’s Dow Award winning paper of 2003 – The Janus factor

5. Sahil Vijay presents a great review of the book on one the most important topics for a trader who wants to build wealth –The Master Swing Trader by Alan

Farley.

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 editor@atma-

india.net. You can also subscribe to ATMASphere completely free by clicking here.

Sincerely,

Gunjan Duaa.

OCTOBER 2014 ATMASPHERE | 4

ATMASPHERE | 5 OCTOBER 2014

Analysis of Market Phases using 50, 200 SMA

Part 2

A brief recap of the last article. The article was about defining

market phases using 50 SMA and 200 SMA. The two daily moving

averages which when crossover signifies the change in trend and the

continuation explains the bullish phase.

In the last article we discussed about Accumulation phase (Price

Close > 50 SMA & 50 SMA < 200 SMA)

BULLISH PHASE: In Bullish Phase Price Close > 50 SMA and 50 SMA >

200 SMA .Both the SMA’s slope up in this phase. Series of Higher

Highs and Higher Lows are often seen during this trend.

In this phase, Buyers out number Sellers or in other words demand

exceeds supply. Buy and Hold strategies usually make more money

during kind of trending move. Distance between 50 SMA and 200

SMA tells the strength of the bullishness. Price can sometimes dip

below 50 SMA and take support at 200 SMA and bounce back above

50 SMA. Often that can be a good entry point into the ongoing trend.

Let’s look at few chart examples. The following is Nifty Spot Chart.

CNX AUTO, CNX IT, CNX PHARMA are the Indices which are trading

above the 50 & 200 SMA currently.

Tactically, in this phase one can enter in long positions, when price

dips below 50 SMA and bounces back above it. No strategy should

be used alone so one can initiate longs by adding filter of price

volume breakouts, Break of previous Swing Highs , 52 Week Highs /

New Highs (the list if not exhaustive).

ATMASPHERE | 6 OCTOBER 2014

The following is AURO PHARMA chart. One can see that in the Price

move from Rs 200 to 1000, both 50 and 200 SMAs were sloping up ,

maintaining constant distance between them .

EUPHORIA / END OF BULL PHASE: Euphoria is the Phase where

Retail Investors participate in large numbers. Often this would be the

end of Bull Cycle and Entry and one of the main reasons why retail

investors make huge losses on their Investments. Profit Booking part

/ full should be the main tactic, or tightening the Stop losses on

Investments should be done in this phase.

Distance between 50 SMA & 200 SMA reduces. Prices donot make

New Highs or Higher Highs in this Phase . 50 SMA & 200 SMA

become flat . Volume decreases when compared to Bull phase .

Divergence on momentum Indicators like RSI is seen .

WARNING PHASE: End of Bull phase and Warning phase overlap

each other. Close < 50 SMA, 50 SMA > 200 SMA. An astute Investor

should know when to reduce his long positions or Exit his/her

Investments.

50 SMA will be sloping down , where as 200 SMA can be flat . Start of

Warning Phase can be sometimes violent with overnight Bad News,

ATMASPHERE | 7 OCTOBER 2014

Huge gap downs. Prices can dip below both 50 SMA, 200 SMA within

2 - 3 sessions. Long term Trend lines break often Signaling Trend

Change .

One of the main difference between Warning phase and Bull phase

is that when Prices dip below 50 SMA in Bull phase, within short

period of time price jumps back above 50 SMA . In Warning phase

prices dip below 50 SMA and they don’t Jump above 50 SMA. Even if

price Jumps it will fall below 50 SMA within a short period of time.

Lower Highs are seen in this phase. A good trading tactic can be to

short if price fails to cross over the 50 day SMA.

I will continue this article in the next issue.

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

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

ananthmadhav@live.com

ATMASPHERE | 8 OCTOBER 2014

Understanding Market Profile

Implementation of value area in auction market theory

in previous article we have seen that how to calculate value area If

you remember value area is 70% of the total range of the day, high

of that value area is called value high and low of that value area is

called value low Centre of that value area is called POC (point of

control). In this article we will go further and explore how to use

value area in order to make informed trading decision.

Auction market theory distinguishes market activity in two major

parts.

1. Responsive activity

2. Initiative activity

Responsive Activity

In above chart, price open above previous day's entire range. Then

during the first 30 minutes of open price tried to probe previous

day’s high and got strong responsive activity and pushed price back

in current opening range. Such responsive activity near important

ATMASPHERE | 9 OCTOBER 2014

reference levels during opening session is called as open test drive.

It's a common occurrence during price discovery where market

participants may test previous established support or resistance.

Confirmation of such support/resistance generates extra confidence

and provide good risk reward entry points.

Initiative Activity

In above chart price open within value area, which is a sign of

acceptance of previous established value. Usually when market open

within previous value area it tend to rotate within that range, so it is

not a good idea to execute trend following systems in such open

types.

Here in above chart as shown by arrow as auction matured and

when market participants thought that fair price is higher, auction

witnessed initiative activity and pushed prices up.

ATMASPHERE | 10 OCTOBER 2014

To summarize responsive activity is always above or below previous

days value area and initiative activity is always within previous day’s

value area.

Based on common occurrence and observation traders created lot of

setups but everything revolves around these 2 key concepts of a

responsive and initiative activity.

Side note: In practice, initiative and responsive activity based on

candle chart is little difficult to observe. That's where nowadays foot

print charts are getting popular. As homework you can search this on

google/Youtube.

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.

Hi, I often go with nick name Pit Trader.

ATMASPHERE | 11 OCTOBER 2014

The Harmonic Trading Patterns

Harmonic Trading is a methodology that utilizes the recognition of

specific price patterns and the alignment of exact Fibonacci ratios to

determine highly probable reversal points in the financial markets. We

are very well familiar with Fibonacci ratios. These ratios are found in

nature, human body, plants, DNA, solar system, art, architecture, music,

and even in the stock market. Fibonacci retracement is a very common

tool among technical traders and is based on Fibonacci sequence

discovered in the thirteenth century by Leonardo de Fibonacci de Pisa.

Most of us (technical analyst) use retracement levels to find out

resistance and support or we can say entry and exit levels. Harmonic

Patterns take price patterns to the next level by using Fibonacci

numbers to define precise turning points. When these turning points

are identified correctly, trades are executed at a price level where

the cycle is changing. Since Fibonacci Retracements play a critical

role in the formation of harmonic patterns, understanding of these

ratios is a must.

Primary Ratios :

(Directly derived from the Fibonacci Number Sequence)

0.618 = Primary Ratio

1.618 = Primary Projection

Primary Derived Ratios :

0.786 = Square root of the 0.618 ( )

0.886 = Fourth root of 0.618 or Square root of 0.786 ( )

1.13 = Fourth root of 1.618 or Square root of 1.27 ( )

1.27 = Square root of 1.618 ( )

Other Ratios :

0.382 = (1-0.618) or

0.50 =

0.707 = Square root of 0.50 ( )

1.41 = Square root of 2 ( )

2.00 = (1+1)

2.24 = Square root of 5 ( )

261.8 =

314 = Pi ( )

361.8 = (1+261.8)

Harmonic Patterns are nothing but ‘M’ type and ‘W’ type

patterns which are one of the most unswerving patterns, if identified

properly. The real beauty of these patterns are that these enables us to

enter with the trend in a high probability reversal zone with minimal

ATMASPHERE | 12 OCTOBER 2014

risk. It provides immaculate trade setups with good risk reward ratio.

The only thing one needs to understand is that it’s a rules-based method

which requires discipline. Harmonic patterns provide an excellent

structure for consistent, successful trading. There are few Fibonacci

ratios which are commonly used while identifying harmonic pattern.

These are 38.20%, 61.80%, 78.60%, 88.60%, 50%, 113%, 127%, 141%,

161.80%, 200%, 224%, 261.80%. There are many types of harmonic

patterns and we will start with AB=CD pattern.

AB=CD Pattern

AB=CD is a four point structure and the only pattern with this type of

structure (others are five point structure). It is a price structure where

each price leg is equivalent. The Fibonacci numbers in the pattern must

occur at specific points. The initial price segment is partially retraced

and followed by equidistant move for the completion of pull back. The

reciprocal ratio of the C point retracement of the AB leg usually

indicates which BC projection is utilized to define the Potential Reversal

Zone (PRZ). The reciprocal ratios that complement the AB=CD structure

are as follows:

Ideally,the pattern where the C point retrace to either a 0.618 or 0.786 works

much better than that of others. This is how AB=CD looks alike :

C Point Retracement BC Projection

38.20% 224% or 261.80% 50% 200%

61.80% 161.80% 70.70% 141% 78.60% 127.20% 88.60% 113%

ATMASPHERE | 13 OCTOBER 2014

In Eg 1; after a sharp fall from 153 to 134.85 (AB), Allahabad Bank retraced

upto 61.80% at 145.60 (C Point) and then stock fell to 128.70 levels (D Point)

which is precisely 161.80% reciprocal of BC. Thus, we have observed the

formation of Bullish AB=CD pattern in Allahabad Bank on October 30, 2014.

In Eg 2; After the sharp rise from 115.05 to 131.70 (AB), Andhra Bank retraced

precisely up to 61.80% at 121.55 (C Point) and then stock rose to 138.45 levels (D

Point) which is 161.80% reciprocal of BC. Thus, we have observed the formation of

Bearish AB=CD pattern on March 13, 2012.

In the next part of the series, we will discuss about Bat and Gartley Patterns.

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

ATMASPHERE | 14 OCTOBER 2014

Winner of Charles H. Dow Award 2003 - The Janus Factor

By Gary Anderson

Author base this model in the concepts of feedback and relative

strength to portray the market as a system of capital flows.

As the best companies seek feedback continuously and in the

process convert information into long-term success, market does.

There are two sorts of feedback, positive and negative.

A market trending is an example of positive feedback.

When traders respond to market events with a trend-following

behavior, they are closing a feedback loop.

Positive feedback produces a trend.

And each feedback results in an accelerating trend continues until

some limit of the system is reached.

Negative-feedback systems are stable systems with values

fluctuating within a narrow range.

When negative feedback drives, traders’s response may be

characterized by ‘contrarian’ thinking and price action tends to be

choppy or corrective.

A New Model of Relative Strength

The sum of the offensive benchmark’s daily returns (flat-to-rising

days) over some period of time (i.e. 100 days) is divided into the sum

of the target’s returns for the same days and over the same period

A score above 100 indicates that the stock is stronger than target’s

cumulative and exceeds the offensive benchmark.

The sum of the defensive benchmark’s returns on negative-return

days is divided into the sum of the target’s returns for the same

days.

A result of 110 in this case indicates that the target is ten percent

weaker than the defensive benchmark, or its loss is greater than

market performance.

A matrix, in which the vertical axis displays offensive performance

and the horizontal axis shows defensive performance, serve to

graphic offensive and defensive performances of each stock.

Each target within the universe is compared separately to both

offensive and defensive benchmarks.

In Figure 5, a target marked with an asterisk has out-performed the

benchmark both offensively and defensively.

The Benchmark Equivalence Line (BEL) represents the universe’s

average performance of all possible combinations of offense and

defense.

As periods of market decline stress stocks ability to defend against

loss.

When the broad market is rising the probability of opportunity-loss is

greatest.

Two benchmarks are required, one to measure offensive

performance on flat-to-rising days and the other to measure

defensive performance on declining days.

ATMASPHERE | 15 OCTOBER 2014

During periods of positive feedback, the flow of capital goes from

weak targets SE of the BEL to stronger targets NW of the BEL

As the universe expands, the strongest stocks push well into the NW

quadrant.

Figure 7 shows the 200-stock universe in March 2000, near the end

of that expansion phase.

During periods of negative feedback, capital flow across the BEL is

reversed.

Traders buy only once stocks are considered cheap, and profits,

when they come, are taken quickly on rallies.

Negative- feedback periods produce a southeasterly flow of capital

and cause the universe to contract.

As a result, stocks contracts around the benchmark and arrange

themselves along the BEL

Relative strength differences (NW-SE) are small and eclipsed by

differences based on volatility (SWNE).

Figure 6 and 8

Red Shift

General rule is “the most profitable opportunities consistently come

from targets furthest from the BEL”. During bullish expansions, stocks furthest from the BEL book the

strongest gains.

At bearish expansions the best short profits are from the weakest

stocks.

The Spread

The Spread is calculated as the difference in forward performance of

relatively strong vs .relatively weak targets.

To make the comparison, all targets NW of the BEL on day d are

identified, as well as all targets SE of the BEL.

Then the average performance for each set of stocks on the

following day (d+1) is calculated, and the difference between the

two averages is determined.

Daily spreads are cumulated to create The Spread.

ATMASPHERE | 16 OCTOBER 2014

As shown in Figure 9, periods during which The Spread rises (shaded)

indicate an expanding universe driven by positive feedback.

Unshaded areas bracket periods during which The Spread fell, the

universe contracted, and traders were risk-averse and contrarian.

Traders may use The Spread not only to identify profitable trending

periods but to avoid difficult markets as well.

Indeed, these indications are consistent enough to support reliable

trading rules.

1 .When The Spread is rising, and relative-strength leaders are

advancing, buy the strongest stocks and groups;

2 .When The Spread is rising, and relative-strength laggards are

declining, sell or sell short the weakest stocks and groups;

3 .After a decline, if The Spread is falling and relative-strength

laggards are advancing, buy the weakest stocks and groups.

Testing The Spread

The Spread is used to determine whether the universe of 200 stocks

is expanding or contracting.

If The Spread rises long positions are selected from relatively strong

stocks and short positions are selected from relatively weak stocks.

Positions are reversed when The Spread falls (universe contracts).

The net percentage change (close to close) is cumulated.

Choosing only the strongest and the weakest ten percent of the

universe.

The back-test was made assuming stock sets were incremented by

ten-percent from 10% until 50%.

First set posted a gain of 404% with a maximum draw-down of 14%.

Over the same period (4.3 years), the 200-stock average gained 69%,

with a maximum draw-down of 39%.

The best overall performance came from the set of stocks (10%)

nearest the two relative-strength extremes of the universe.

This result is consistent with the “Red Shift” phenomenon discussed

above.

Postscript

Markets make sense. Price series are not chaotic.

At bottom it is hope and fear, measured by the rhythms of expansion

and contraction in a process as relentless and as natural as breathing

or the beating of a heart.

This paper is available to the public and it could be found at

http://www.mta.org/eweb/docs/2003DowAward.pdf , or JOURNAL

of Technical Analysis • Summer-Fall 2003 • Issue 60

ATMASPHERE | 17 OCTOBER 2014

She is pursuing her CMT designation and currently lives in Montreal,

Canada. She can be contacted at cmqcca@yahoo.ca.

She is a graduate from the University of Buenos Aires , where she

studied Accounting and Business Administration.

Claudia Mincucci is a trader since 2008.Her speciality is trading micro

trends with a focus on analyzing and trading Stocks, Options, FX,

ETFs on a daily basis on the US and Canadian Stock Indices.

ATMASPHERE | 18 OCTOBER 2014

component because it helps to exhibit how one can study the state

of the market and from there to predict the future state of it and

explains the types of trading to nurture budding aspirants of

technical analysis and enlighten the existing practitioners. In some

books the authors explain the complex stuff from the start, but the

novice gets lost and sometimes quit the path before even the start

of the journey. The author builds base and explains almost all the

technical tools and studies in the first part of the book.

THE MASTER SWING TRADER – ALAN FARLEY

Book Review

This book is a must for in every technical analyst and market

participant’s library, especially for people who want to trade the

directional trend of the markets to make money out of it. The term is

Swing trading and that is what the book focuses on. It’s a step by

step approach towards making a system based on directional

trading. The best part of the book is that it not only explains the way

The second part is titled THE 7 BELLS. In this part the author moves

towards the next step, where one gets ready to know how to spot

the opportunity. The reader now knows most of the technical tools

and knows how to use them, now he finds out how to use these

tools in different market scenarios to find opportunities to

accomplish the goal to make money.

The 7 bells are interesting and a must for every trader to know and

understand. Dip Trip, Coiled spring, Finger finder, Hole in the wall, rd

to trade directionally using technical analysis studies but it helps one Power spike, Bear hug and 3 watch are the seven strategies that

overcome to problems regarding the thought process in the final

chapters .

The book is divided into three parts. The first one is titled GATEWAY

TO SHORT TERM TRADING. In this the author explains the various

terms regarding the trading activity. How to prepare, what to expect

and how to approach the trading game. This I think is an essential

author present to sharpen ones trading skills and to become a better

trader.

The third part of the book explains how to make a trade. The reader

now knows most of the things that will bring him towards the final

step. This part explains the entry and exit scenarios and how to

master ones mind and tools that traders can use to maximize ones

reward and minimize losses. The aim of every trader should be to

ATMASPHERE | 19 OCTOBER 2014

master a strategy technically and mentally so that he can be in a

state of mind to make the most out of the capital one has by

lowering the probability of false trades and a mind which can accept

all the market situations.

All in all, this is a magnificent book which focuses on the art of

swing trading. The best part is that it covers everything from A to Z

that one requires to trade directionally and is explained in a way

that everyone can understand it well.

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.

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!

Accessible on your favorite Gadget!

OCTOBER 2014 ATMASPHERE | 20

World's FIRST E-Library of Technical Analysis 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!

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

ATMASPHERE | 21 OCTOBER 2014

PAST EVENTS’ UPDATES FUTURE EVENTS’ UPDATES

CHAPTER DATE SPEAKER TOPIC

Delhi 02-11-2014 Mr. Sachin

Aggarwal

Stock Markets,

Charts and Profit

Making

CHAPTER DATE SPEAKER TOPIC

Delhi 23-08-2014 DR C K NARAYAN Structuring

Technical Analysis

to work for you

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

ATMASPHERE | 22 OCTOBER 2014

OCTOBER 2014 ATMASPHERE | 23

ATMASPHERE | 24 OCTOBER 2014

Benefits of Membership with the ATMA

Apply for your ATMA Membership Today!

ATMASPHERE | 25 OCTOBER 2014