CNW INVESTMENT CLUB:

Market Awareness

Nick Fosco

Feb 27, 2016

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Nick’s Bio:

• Opened first broker account 1979, after joining an investment club. Have

been actively self-managing my accounts since.

Founded CNW-Burbs Trading club March 2010

• Goal: Learn through knowledge sharing.

• Motto: The more I teach the more I learn.

• Created CNW Investment & Trading Course Sept. 2012

• Course taught live nine times.

• Now offered via ‘On Demand’ recordings.

• Corporate World

• 23 yrs (Project Design Management)

• 10 yrs (Business Product Management)

• Degrees: MSEE & MBA

• email: fosconick@gmail.com

• LinkedIn: https://www.linkedin.com/in/nickfosco 5

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https://www.tastytrade.com/tt/learn/market-awareness

HOW IS MARKET AWARENESS DEFINED?

Market Awareness / Tape Reading / Price Action

- Assess market conditions by:

- Stock Index Futures (/ES, /NQ, /TF, /YM).

- Bonds, Commodities, Currency futures.

- Volatility (a.k.a. market fear), VIX and /VX

- Liquidity

- Implied Volatility (IV) rank

- Binary events

- Price movements.

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ARE THERE ANY TOOLS AND RULES?

Tastytrade says:

- Markets are random and tools are useless.

- Market opinion is at best 50/50 guess.

- Price extreme is an ‘intuitive’ guess.

- Requires multiple years of market study.

Nick says:

- Use Technical Analysis to help point the way.

- Implied Volatility, Trend, Momentum,

Support/Resistance, Cycles/Waves, Fractals.

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Remembering the Technical Analysis Tools

1) Trends

2) Momentum

3) Support & Resistance

4) Cycles or Waves

5) Fractals

‘Too Many SeRious CoW Farmers’

WHY USE TECHNICAL ANALYSIS?

• What do all technical indicators have in common? • Are derived from historical price data.

• Are by definition ‘lagging’ indications of market data.

• Why use TA if it is a ‘Lagging’ market indication? • Markets are not rational.

• Provides insight into ‘current’ investor’s view.

• Help identify short & long term market direction.

• T A helps identify Price Patterns for different timeframes.

• Lagging is only true for the time frame under analysis.

• TA is ‘leading’ indication for higher timeframes.

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About Technical Indicators

A well-trained eye will be able to see the wave structure as well as

chart formations without the use of technical indicators. However,

there are many times when indicators can serve as a crutch for the

eye and aid in picking out patterns or adding overall structure to the

price data. Looking at the patterns that the waves form is an

OBJECTIVE technique with which hard and fast rule-sets can be

applied. Bar Chart formations are SUBECTIVE, in that it is easier for

the human eye to see what it wants to see or erringly note a bull flag

when the market is still in the middle of a trading range.

There is no such thing as a right or wrong technical indicator or

parameter setting for an oscillator or moving average. Understand

that there is little statistical edge in any of these tools as their main

purpose is to highlight patterns. As a rule of thumb, it is better to use

fewer rather than more indicators. Source: Linda B. Raschke; Professional Trading Techniques; Copyright 2012 LBRGroup, Inc. (See Session 3 materials)

IMPLIED VOLATILITY

http://www.investopedia.com/terms/i/iv.asp

IV is the estimated volatility of a security's price. In general,

implied volatility increases when the market is bearish. This is

due to the common belief that bearish markets are more risky than

bullish markets.

People buy Put options in SPX to protect their positions

because they believe market will go down. Thus people ‘FEAR’

that the market will drop. VIX also known as FEAR index.

Complacency VIX < 15

Fear VIX > 15

VIX INDEX

Weighted average of all S&P 500 option prices.

Represents S&P 500 index annualized percentage move.

Example: VIX = 15; S&P move of +/- 15% over 1 year.

Expected probably of 68%. (1 Standard Deviation)

A 1 SD Daily 1% predicted S&P move is:

VIX @ 19 correlates to SPX daily movement of 1 %.

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VIX & SPX

VIX FUTURES (/VX)

Contango or Backwardation?

Contango: Future value higher than current value.

Market pricing in higher volatility in future.

Backwardation: Future value lower than current value.

Market pricing in more stability in future.

Downward Trends

Lower Swing Highs

Lower Swing Lows

Trends: Direction and Support/Resistance

Upward Trends

Higher Swing Highs

Higher Swing Lows

Minor Trends Within Major Trends

Horizontal: Support & Resistance Levels

Look Left, then UP for Resistance & DOWN for Support

SUPPORT LEVELS

RESISTANCE LEVELS

Consolidation Levels / Channels

Tight VS. Wide Ranges

Tight

Range Wide

Range

Moving Averages: (Trend and S/R)

Slope of MA provides trend direction.

Used as price support/resistance.

Very widely used by many traders and thus self-fulfilling

Popular MAs; 8, 10, 20, 50, 200

Two Moving Averages

Stacking of MAs = Price Direction.

Difference between MAs = Price Momentum.

Rate of Change: How fast/slow prices are moving.

Momentum Indicators

Oscillators

RSI, MACD & STOCHASTICS are most popular.

Calculated based on price action.

Show short term momentum.

MACD & Stochastic help identify trend reversals.

MACD combines several moving averages.

Market momentum is best determine when analyzed in

multiple timeframes. (i.e. Month, Week, Day)

** Momentum moves before price does **

MACD

Description

The MACD is a momentum indicator used to show

the relationship between two moving averages.

MACD fast line is the difference between two

exponential moving averages.

Default EMAs are 12 and 26 periods.

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12 EMA

26 EMA

MACD Fast

MACD Average

12 EMA is BELOW 26 EMA MACD Fast is BELOW Zero Line

MACD Zero

Line

MACD Anatomy

OBSERVED PRICE PATTERN VS. ELLIOT WAVE

• The Basic price pattern consists of:

• Three main moves and three pull backs.

• A retest of the third move’s high/low.

• Trend Reversal: A pull-back that fails to make a new high/low.

38.2%

50%

61.8%

0%

100%

161.8%

261.8%

2ndary

Target

Tertiary

Target

Initial

Impulse

Move

38.2% - Expected

50% - Most Likely

61.8% - Reversal ?

Retest

Lower

Low

Pull-back

(Lower High)

Trend

Reversal

Elliot Wave

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a

b

c

Retrace 1

Retrace 2

Retrace 3

MACD & Wave Structure

Start at MACD cross

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3 test

Start at MACD cross

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3 test

FRACTAL PATTERN ANALYSIS HTTPS://EN.WIKIPEDIA.ORG/WIKI/FRACTAL

Repeating pattern independent of scale.

Waves within Waves.

Replication of patterns is known as self-similar.

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Elliot Waves & Fractals Levels

From R.N. Elliott's essay, "The Basis of the Wave Principle," October 1940

Multiple Time Frames

OBJECTIVE TREND ANALYSIS

Answer the following three questions:

Which way is the MACD crossed?

Crossed Up => Up Trend

Crossed Down => Down Trend

How long has the MACD been crossed?

In terms if wave count.

Wave 1 => Early in Trend

Wave 3 => Late in Trend

Test => Choppy Sideways

In Trend or Counter Trend?

In-Trend: Month, Week and Day trend aligned.

Counter Trend: Daily opposite of Weekly or Monthly.

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Example: SPY

Example: QQQ

Example: DIA

Example: IWM

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