JAMES HELLIWELL: Yeah, so as much is used to cover up the chart.
JAMIE MCDONALD: Who, Andy Bullet?
JAMES MCDONALD: Yeah. Yeah, he's one of his favorite [inaudible].
JAMIE MCDONALD: Cheers, Roger. Thank you very much.
ROGER HIRST: Anything important going on?
JAMIE MCDONALD: Yeah, I'll Finish this off.
ROGER HIRST: There we go. Oh, no, there we go. Shop around. That's yours there.
JAMES HELLIWELL: Cheers.
JAMIE MCDONALD: Cheers.
ROGER HIRST: Cheers.
JAMIE MCDONALD: So where do we get to? We've got basic message which is, chart should be part of your idea generation, part of getting a good idea on the paper. But what are the classic mistakes that retail investors make when they look at charts?
ROGER HIRST: Probably the extremes, either going too long when they think something sold off, or taking profits too early when something is rallying at a thought.
JAMES HELLIWELL: It's the whole falling nice thing, isn't it? They try and pick bottoms and sell tops.
JAMIE MCDONALD: On big moves, the temptation is to make quick money, basically. So when you see 10% falls, it's like, well, it's going to bounce.
JAMES HELLIWELL: It's emotional trading, isn't it? So I think that's what retail do best, particularly compared to institutions. They trade emotively, more so than professionals, I think, a lot of the time. Of course there's going to be exceptions, but because something's gone down, they're kind of anchored to where it was before, and therefore, let's go-- loading up without having done your homework or without having considered the fundamentals of the drivers.
JAMIE MCDONALD: So you just maybe me think, actually does that mean that if a stock or if an asset is particularly retail-heavy or retail-influenced, it's going to have more volatility and be more emotive?
JAMES HELLIWELL: Take ARK, for example, or some of the constituents in the ARKK ETF, like Tesla, or whichever stock you care to pick right from there-- highly volatile. NIO as well as another related company that all the retail crowd were really enamored by.
JAMIE MCDONALD: Peloton.
JAMES HELLIWELL: Peloton as well.
JAMIE MCDONALD: So talk about that.
JAMES HELLIWELL: So when you have the, sort of, the blow off top or the bubble kind of pops, the buying it all the way down because it's fallen 20%, below 30%.
ROGER HIRST: But equally with Tesla, all the fundamental analysts were going, it's overpriced. It's overpriced. And all the retail said, well, we'll buy some more. And it kept on going. And it was basically expensive. And the fundamental guy said, it's getting more expensive. Retail kept buying it. And the retail were right. The retail on the way up nailed it.
JAMES HELLIWELL: There are pros on the other side who were still shorting the thing.
ROGER HIRST: Because of that whole thing, which is, fundamentally, something which is expensive doesn't mean it's going to sell off. If there's momentum behind it, which you can get from the chart, the momentum keeps going. It can be expensive, more expensive, yet even more expensive. And, in reverse, this is that thing we were talking about earlier from Morgan Stanley, which is, something that's oversold is great. You go, it's oversold. I want to buy it. And so all the sort of fundamental guys may go, it's cheap now. I'm going to buy. It but some of the biggest sell offs happen from an oversold situation. And that's the thing where, you look at these charts and if you just use a chart because you think that's the only thing that you need to inform yourself at that point, you might be wrong. If you just use fundamentals, you might be wrong. What you want is a combination of-- oh, this is expensive but it's got this momentum. There's this new trend forming. I can see that on the chart. I'm going to go with this trend, not with the so-called experts on the fundamental basis who are saying it's either expensive or cheap.
JAMES HELLIWELL: Yeah, that's why you see so many retracements in bear markets in particular, yeah.
JAMIE MCDONALD: What do you mean? Wait, say again.
JAMES HELLIWELL: Well we-- I mentioned Fibonacci earlier, that's one of the reasons to use it. You're looking for those retracements after there has been a big sell off. And maybe you're getting some fundamental buyers initially or you're getting the speculators come in trying to pick a bottom and-- for a horrible term-- and you get that initial retracement and half of the market is probably trapped in that position. They've been facing the drawdown. And what the majority of emotive traders are thinking is, I'm probably going to try and get out on this rally. And then if you get the break low of the retest, of the low, should that go? Which, obviously, in the bear market it will generally do and lead to lower lows, that's when you can see some real capitulation and that's when Sensor everybody pukes and bleeds out. And then that's probably where you get the low.
ROGER HIRST: And there's actually a great example of that very recently, which is that, Raoul always talks about the GMI crash pattern which is the market basically has a three wave move. It sells off a bit, rebounds normally 50 to 62% Fibonacci retracement.
JAMES HELLIWELL: Fifth level, yeah.
ROGER HIRST: And then it sells off. Now from 2015 to pretty much the last six months, you had the sell offs and then they just went straight back up again. And most of the technical guys kind of looking at these sort of emotional levels to sell going, gets 50, start selling some there. And it went through to 62, start selling some there. And it went on and on. But now, you've got the retail emotional players into the market. You're starting to see these balances occur again. And historically you always saw this. I think Japan in 1989 sold off retraced 50 to 62%. I think even ahead of Lehman, the first bounce was one of those, and then Lehman happened and it collapsed all the way through.
So you can see that there's-- these things are telling you there's a change in the underlying regime because straight down, straight up, that's a bit weird. But straight down and then it gets to 50% and rolls over, you're going, the regime is changing once more, it's becoming more of an emotional thing. So that's how you use things like the Fibonacci as well. And these patterns become so important.
JAMES HELLIWELL: And those levels to me are telling me the point at which I'm probably wrong. If it exceeds something like 50% or 62%, you know this is more than a correction, this is probably a continuation of the--
ROGER HIRST: Yeah. And I said this back in 2020 on one of the first or early daily briefings. I sort of said, this is not my view. I don't have very strong views, I don't want to be right or wrong, but so this is a market where you've got to think that potentially the S&P might get to 4,000-- it was still in the 3,000s at the time-- because it had broken through that 62% retracement, was going back to what was the all-time high, and you had to conceptually think, OK, if it's that easy for it to bounce back, there's something else underpinning this, which was, as we know, central bank liquidities and fiscal stimulus.
But the chart was giving that information as, my first target, overcome the first target, overcome the second target, I don't want to be bearish anymore.
JAMES HELLIWELL: You're probably wrong. Probably. The probability is higher, greater that this is a continuation rather than you expect in the--
JAMIE MCDONALD: I mean this goes back, I mean this goes back to what we were saying earlier, is that every one of these tools that you're using, bottom up analysis, top down analysis, charts-- it's just trying to tip the probability more and more in your favor.
ROGER HIRST: The charts and the price history is giving you a guide to validate or invalidate your thesis. And you can say, OK, get to this point and it's gone up to this point and I was bearish, I'm probably wrong at that point, and vise versa. And the charts can help as well. I got it terribly wrong on that whole abenomics thing. Is that I got people along the market, but I also got people out after less than 50% of the total return of that initial move, because I just thought, it's up 50%, I've got to get out. And that was a ridiculous thing to do. When I should have seen the chart and gone, wow, the momentum here, that chart breakout is something quite special and just go with it. But I didn't. I used my biases to ignore the chart.
JAMES HELLIWELL: It's human nature, right? It's human nature.
ROGER HIRST: Yeah, exactly. And the charts can help with that, they can hopefully give you guidance to this chart is telling me that my instinct is probably incorrect. I know putting my bias on Japan means I want to take profits because it will roll over. Maybe this time it won't, because there's clear momentum in that trend.
JAMES HELLIWELL: And that's what some of the legends of mechanical trading-- Jerry Parker, around the platform, or the former Turtles, that's what they did so well, was they were able to eliminate or remove themselves from the process, certainly in terms of involving their emotions in the decision making. It completely eliminates that.
JAMIE MCDONALD: Jason Shapiro was someone else who did that too. He was just so disciplined in the way that he had his stock losses and his limits, that he just took any kind of subjectivity out of it, so to speak, and that just means that you're not being pulled. That's the other thing is that, price can pull you in certain directions, you know? And that's what you need to do in order to stay disciplined is just not let price affect you when you've got a game plan.
ROGER HIRST: Yeah, and look, I think when you sort combine this, again, it goes back to this combination of stuff which is, the price in itself can really kind of push you into the wrong corner. But if you look at it versus the history, combine it with the fundamentals, that chart, again, just the simplicity of being able to look at that chart and say, OK, something interesting is happening here. You can get that from valuation. When people think of valuation, they actually think of a chart of valuation anyway.
JAMES HELLIWELL: Except it's all relative. [chuckles] Clue's in the ratio.
JAMIE MCDONALD: But I tell you something else that used to happen, particularly-- I mean, I was only looking at stocks, but particularly mid-cap, mid-cappy type stocks. When you saw price moves on high volume, it was an extra red flag to tell you something was going on because then you knew that the shareholder base was potentially changing. So if you had a stock that was perceived as a growth stock, and they've reported less than expected revenues for whatever reason, and you saw big volumes, even though they're only down 2% or 3%, you start to feel, OK, I think there's perhaps shareholder based changing here. And then it's another indicator that maybe it's not going to perform for a while because there's going to be this changing of the guard.
JAMES HELLIWELL: That's an interesting one. I think--
JAMIE MCDONALD: Maybe it doesn't work in other asset classes.
JAMES HELLIWELL: Yeah, to what extent do you think volume, clearly in that respect, it is useful. But I think its importance just in my observation over the past 10, 15 years that I've been around, compared to maybe where it was 20 or 30 years ago, I think its significance is diminishing. It's not perhaps as insightful as
[interposing voices]
JAMIE MCDONALD: We retreat to the sell side and they'd be like, oh, growth funds are selling the stock now. And you just knew that that was the beginning of a wave. It wasn't something that was going to happen for one or two days.
ROGER HIRST: And you can see that. We talked about China and there's that period where China came in, commodities went up, and the volume in commodities went up as well, because it wasn't just the corporates and the trading houses playing. It was the financial institutions and hedge funds getting involved, picking that volume up. These were another pick up in volume, which is actually now the ETFs and the passive funds getting heavily involved. And that picked up volume again. So it's that combination of you kind of going, OK, this is no longer the mean reversion of commodities, this is actually a breakout in commodities and a different type of player has got involved. Because you're comparing price and then a volume chart, so two types of charts together to help that jigsaw get put together better.
JAMES HELLIWELL: First to my point as I was making on volume, you just identified that, Roger is, ETFs and ETF flows are probably now skewing volume because a lot of it is a passive flow rather than an active decision, taking in large caps. But also, mentioning hedge funds, how many of them are trading on exchange rather than what goes in dark pools or off exchange? So in terms of what we see on that bar, for the volume on the day--
JAMIE MCDONALD: It's actually not the real picture.
JAMES HELLIWELL: What is actually representing, ultimately, when you've got that?
JAMIE MCDONALD: That's a good point.
JAMES HELLIWELL: I think those are a couple of the ways that are probably-- a couple of things that have distorted volume. But you make a valid point, I think, about how you can--
ROGER HIRST: I think volume really matters when you-- let's go back to those big selloffs. If you see a big sell off, and there's no volume on the down spike, you probably want to be a bit cautious. What you want to see is capitulation volume where everybody goes, get me out of here. And that's a contrarian indicator. It's a big down movement in price and a big volume that goes with it. And ideally, the big volume is on the down bit, not the rebound, but you know that that's basically people just getting out. So it gives you a little bit more confidence that maybe that is the bottom. You're not looking at valuation, you're looking at the emotion. You're looking at the price chart and the volume chart together.
JAMES HELLIWELL: I'll tell you one place where that really does work still for me-- crypto. If you're looking at volume as it goes through the exchange or any of the venues in crypto, particularly when there's a lot of emotion, and 9 times out of 10 there is a heck of a lot of volatility. When you can see the capitulation there, it's such an emotional market. It's almost one of the pure traders markets still like Futures were probably in the 80s.
JAMIE MCDONALD: So the fundamentals are still trying to find themselves a bit, aren't they?
JAMES HELLIWELL: Yeah, exactly. And that's why it has different drivers, which we've discussed in the past. And, yeah, with price action on sentiment it really is like a sexy market.
JAMIE MCDONALD: Does that beg the question that the charts work better in some asset classes versus others?
ROGER HIRST: No, I think the charts work well across asset class. Dave Floyd has pretty much every asset class, Peter Brant, there just going, look, this is a fantastic chart on this commodity, this stock, this currency. What you're seeing is you see different epochs within each asset class, but the charts are a guide. I mean, at the end of the day, close your eyes, you don't see whether it's dollar, yen or whether it's copper. You see a chart and you'll have a view. Now, as you said at the very beginning, it doesn't tell you what's going to happen, but you can have a view. So I think charts are as important in absolutely every asset class. They're important now in crypto because it's the easiest way to understand the price history, even if it doesn't give you any clues about what's going to be the future price movement.
JAMES HELLIWELL: And the crowd that certainly looks at technicals will believe us, so.
JAMIE MCDONALD: So, hang on, let's think about this. So we know that charts are, by themselves, not a predictor of the future, so be careful about using them in that fashion. They are very powerful when used with fundamentals, but they can also tell you when your fundamental view is wrong. So keep an eye on ranges. What else we got?
ROGER HIRST: I mean they can actually be a bit of a-- they can give you a false sense of security, so you always have to test your thesis. Otherwise if you just blindly follow a chart that's broken out, you might go, oh, there's a momentum there. You've got to constantly test it and that allows you to think, OK, where's my stocks? Where's my profits on that based on that breakout?
JAMIE MCDONALD: Yeah. Be careful with the more retail orientated stocks because volatile price moves there can either just emotionally bring you into buying or selling, when actually you just need to remain disciplined.
ROGER HIRST: That's I think, that's a key point, discipline. Charts can help you have discipline because you can say to yourself, right, I'm going to get in/out here. And I remember, this is when doing something for Tudor, the hedge fund. Our London office had given them a trade on European banks. I was in the US at the time. I was in the office and the traders came out and said, right, there's the chart. Your guys have got us into this. You put on this chart where our stop loss is and where we take profits. And I had to draw two little lines, handed it back to the traders, and they put that into the system. That was the discipline. That was his discipline, the way of saying, look, anything. I get into, I need to where I'm going to get out for profit or loss. And that's discipline that's so key with charts.
JAMES HELLIWELL: Where am I right? Where am I wrong?
JAMIE MCDONALD: Yeah.
ROGER HIRST: Yeah.
JAMES HELLIWELL: So I guess in short, they're there to serve you to help inform your view and your decision making, but not ultimately to make a decision for you in terms of saying, buy or sell.
ROGER HIRST: And the speed with which you can look at so many different things through charts. You can save so much time because, look at 50 charts and you've got a decent picture of what's going on.
JAMES HELLIWELL: Try following the fundamentals of 50 different markets every day, it's--
JAMIE MCDONALD: Oh, yeah. No thanks. [chuckles]
ROGER HIRST: Look at 50 company accounts, you're never going to get through to that.
JAMIE MCDONALD: No.