JAMIE MCDONALD: Oh hey. I'm just-- I'm chatting to Roger about charts.
JAMES HELLIWELL: Oh yeah.
JAMIE MCDONALD: There was a guy I used to work with called Andy Billet, probably one of the better traders I ever got to trade with. And he always used to have this catchphrase which was, a chart looks great until it doesn't, which is something that I used to think about and think, throw away line. But the more I thought about it, the more it made sense because I-- there's so many occasions where I've looked at the graph of whatever it is. It could be an index, gold, stocks, and you think, it's bottoming out. It's bouncing off a level. I know it's going to work.
And then you can put a piece of paper over that last month to remove it, and its just gone straight down. So how did you use charts? Because I mean, they're always a great starting point for me, a great filter. This could be the start of an idea. And then you go on to other angles to approach the trading idea from. But I mean, how did you use them?
ROGER HIRST: I mean, what you basically said there is that charts-- there's so much information you can get from a chart. From just one look at a chart, you've got price history, you've got potentially important levels and inflection points. And that old phrase, what is it, a picture tells thousand words or whatever, it does. I mean, I know it's a cliche. But if someone said to me, OK, what do you think of when you think about bonds, or bond yields? I'll need to look at that chart. And then I can at least have an opinion.
And we talk. The way we talk in financial markets is really in the world of charts. Because we always say, the yield is at its lowest it's been for 50 years. And that's basically a chart pattern, or at least a history from the charts. So charts just tell you so much in such a short amount of time.
JAMIE MCDONALD: Yeah, because they don't just cover price, are they? I mean, they can do yields, they can do price, they can do valuations. So [inaudible] valuation charts for stocks all the time and see if they're trading in ranges. How do you use them?
JAMES HELLIWELL: I guess it's a combination. I guess if you're looking at equity fundamentals, you might look at relative to history, stocks on history, or relative to the sectors. You were probably doing quite a lot. But as Roger says, if you weren't necessarily around in the 1930s or 40s, as Roger was, then it very quickly gives you a snapshot.
Particularly myself, having been around maybe 10 or 15 years doing this, it gives you that frame of reference for what took place and how history often doesn't repeat, it often rhymes. So when things move through in cycles, moves through cycles, and to some extent, I guess, technical analysis is often labeled as being somewhat self-fulfilling.
I imagine that ultimately, we're all. Human if we're all looking at the same chart or a similar market at the same time, then it also gives you a take on sentiment as well and the psychology of the masses, the mass market.
JAMIE MCDONALD: So but do you think you can make money-- I suppose people have done. I mean, people have made money just by looking at charts. But then there's certain periods when it works and certain periods when it doesn't. But as you say, it's like, you've got to know when something is trading off of emotion because then you can try and predict what's next.
JAMES HELLIWELL: I started my career as a super hardcore technician. And I thought that the--
JAMIE MCDONALD: You're doing Fibonacci head and shoulders?
JAMES HELLIWELL: I still use Fibonacci in some indicators now, sparingly. But Fibonacci is one of the ones that I do use [inaudible] self-fulfilling. But it gives you a hard price level you can react off. But I was very much looking at things from the perspective of, can you program a set of rules that are based on price action alone? It takes a charge or eliminates your emotional and psychological side of things. So it distances you from the trading and the decision making.
And can you follow something mechanically rules based to basically trade any market volatility in any asset class? And the reason I'm sitting here today not on a desert island is because clearly that isn't the answer.
JAMIE MCDONALD: Well, there are. I mean, there are--
[interposing voices]
ROGER HIRST: Yeah, I mean because the thing about charts is that they give you very, very clear points where you can build trades around them. So certain people will use charts and say, OK, if this pattern is broken, then the chances are that there's going to be a new trend forming. And that trend is something which we can try and play. But at the same time, it doesn't tell you it's going to work, as we heard from Peter Brandt. The chart doesn't define the trade-- doesn't define the direction.
What it can do is give you management tools. And you can say, if that breaks, I want to play that break. But I also that this could be a false break. It could be 50-50. So I've got my get out level, and I've got my profit levels, based on that chart. So all the time, what you're doing with charts is you're trying to see if a pattern emerges, and if a pattern is broken or inflection point is broken, there's a new pattern emerge from that.
But the chart doesn't guarantee that. A head and shoulders doesn't mean you're going to get a reversal. But if it starts to formulate and starts the process, kind of the price action starts to follow the classic head and shoulders formation and how it pans out, you can build your trades around that.
JAMES HELLIWELL: There's been a few examples over the years, [inaudible] I'm sure you can think of some where there's been various failed.
ROGER HIRST: Absolutely. I mean, the one that nearly killed me was 2015-2016. The S&P had a classic set up. It looked like 2000-2001. And it looked like 2007-2008. It was a head and shoulders formation. And in 2016, it broke the neckline. And I always say, there but for the grace of God go I. Because I would have told all my clients to get maximum short. And I think I was either skiing. I was out that week. I was somewhere. So I didn't get a chance to ring everybody and say, get max short.
And by the time I got back, that break of the neckline had reversed, broken back up through, and the market didn't really look back for another three or four years after that. It went all the way up to 2018.
JAMIE MCDONALD: Can you remember why that was?
ROGER HIRST: Basically what happened was that we'd gone through this period where you'd had a profits recession, industrial recession globally, because of the commodity bust. And it felt like this was going to turn into a real recession, a proper recession of GDP in the US.
JAMES HELLIWELL: ISN was below 50 I think as well.
ROGER HIRST: Exactly. Yeah, and a lot of that stuff went through. But then and the fed kept on trying to raise rates. They tried to in 2015. And China did a mini devaluation. And the fed went, oh, OK. We won't. And this was a sort of constant sort of cat and mouse was being played. Anyway, it looked like things were going to get horribly messy in 2016. But China came out where they went masses of credit into the market. If we hadn't been looking at Brexit vote coming up and the election at the end of the year, we'd have noticed that commodity stocks had started to turn early in 2016 as this kind of credit, Chinese credit, started leading the way.
And then there was a G20 accord in Shanghai when everyone got together and sort of said nudge, nudge, wink, wink, we're going to support, we're going to stabilize the dollar here. And this dollar was stabilized. And suddenly, everything just shot off again. And the market just went to the moon.
JAMES HELLIWELL: So a chart can save your bacon then sometimes.
ROGER HIRST: Well, if you see a chart and you put the trade on that doesn't work, what you should have with those charts is say, OK, when it breaks back above the neckline, I'm out.
JAMIE MCDONALD: But how about this? What if I try and pick up something you both said? So if you go through enough charts, let's say-- because there's people out there, I can't remember, is it Mark Ritchie. He says, you can look through like 200 charts in a day. But he'll only just pick out five, ones that really look interesting. And then trade those using tight stop losses. And sit and try and play those patterns.
And then if he's filtered ones that seem like they've got the right setup and then does rules based trading, is that how people can make money out just out of trading charts?
JAMES HELLIWELL: I imagine so. Yes.
JAMIE MCDONALD: I mean, if you filter enough that you just tilt the probability-- because that's-- I mean, that's what we're doing with investing, isn't it? We're trying to tilt investing as much as we can in our own direction.
ROGER HIRST: You're filtering trade. So some of the best macro traders, best macro investors, will start up exactly like Mark Ritchie, which will be looking through hundreds of charts per day and you look for a chart, which looks interesting, which is breaking something. Then you can go to the fundamentals. And this is one of the key elements that I always think of is that charts are part of a picture. But you need to bring in fundamentals as well. And if you bring those two together, and you see something breaking out, and you go, I wonder why that's breaking out, I'll go have a look at that.
And then if you find the fundamentals match up with the technicals, you've got a much more powerful concept, much more powerful idea. You still have to have all the stocks, et cetera. But you put those two together. And that's what these macro guys nearly always do is find something interesting that looks like it's breaking out, will get momentum. But check the fundamental story behind it as well.
JAMIE MCDONALD: Find the reason, right?
ROGER HIRST: Yeah.
JAMIE MCDONALD: Yeah. But what I was thinking is you mentioned if you do it the other way around, and that's sometimes what I used to do, is try and find a story that I like the sound of. And then think, OK, what's the best play on that theme, whether it is electric vehicles or something? Just make it up. And then you look-- then you start to look for a chart. How do you use, or how have you used a chart, to do exit and entry and get that timing right?
Because if you think about it, if a stock is trading at-- I always use stocks. Sorry. It's just my background. If you use a stock that's trading at 65 and a month later, it's still trading at 65, if you've just been timing it right and buying it on dips and selling peaks, then you've made money. So how do you use charts to sort of ease in and ease out of positions?
ROGER HIRST: So I think in terms of an entry point, I think there's two ways to look at that. One is a short term stuff, which people are often using these momentum indicators for. Are you looking for a big structural change?
JAMIE MCDONALD: What are some of those momentum indicators?
ROGER HIRST: So you'd have things like RSI, Relative Strength Indicators, stuff like that. People use Bollinger Bands. But I think that's for those people who are looking much more technically at it as in you're using charts for technical analysis and trading. But you can use charts for identifying major opportunities, which is not a precise entry or exit point, but it's a time where you can go, something is happening here. And here's an example of--
JAMES HELLIWELL: Are we talking idea generation, basically?
ROGER HIRST: Basically it works with that. Exactly.
JAMES HELLIWELL: You could start with a chart.
ROGER HIRST: So in 2010-11, everybody was pro emerging markets because of China, which we've talked about. And that, that whole sort of mental set was, emerging markets are going to outperform. Now generally, what happens with emerging markets is they outperform when the dollar is on the back foot or it's weaker. And there's a setup where there was a kind of a ratio between the S&P and emerging markets, which was forming a reverse head and shoulders. So the S&P had been underperforming emerging markets.
It was starting to break out. And at the same time, this was when I was at Deutsche Bank. All the strategists were going, the dollar is going to start a bull run. If the dollar starts a bull run, you expect emerging markets to underperform. So I went out to all my clients saying, you need to start getting longer in developed markets versus emerging markets. And nearly everybody said, no, no. This is a bull market in emerging markets.
And this head and shoulders, reverse head and shoulders, played out. The S&P broke out versus the emerging markets. And by 2022, that play was still very much the main game in town. And then there's another very similar example to that about the right-- around about the same time, which we talked about in the market drivers section, which was Abenomics. And Abenomics, there wasn't quite a reverse head and shoulders on the Nikkei because of the tsunami in Fukushima disaster had just kind of bent that out of shape.
But I think it was dollar yen. There was something like a reverse head and shoulders. And Abe comes out and says, we're going to do something you've never seen before. And then you look at the chart and there's this little sort of reversal pattern going on. And you think, OK. Something completely new. This is a paradigm shift coming out of Japan with a technical setup that looks interesting.
Now you wouldn't have traded just a technical setup. But the two together means, OK, this could be interesting. And again, at the time, all the macro guys said, Japan is always going to fail. But there was a setup. So the chart was giving you some information, that something different might be happening. And then something different did happen. You put those together. And as I say, it's not a timing tool. But in the decision making process of, is this potentially a big structural shift? Yes. It was. And it helps to find those.
JAMES HELLIWELL: [inaudible] Can you imagine without that context that the chart provides possibly trying to enter a trade and make a decision without ever having looked at a chart? Because I know that again, there are some true fundamentalist fundamentalists who claim that charts are useless and I don't look at them. But how many-- you're missing so much information. Just describe that.
JAMIE MCDONALD: But just go into that. If your job-- I mean, again, it depends what kind of investor or trader you are. But if you're looking for opportunities, for investment opportunities, or trading opportunities, and you've got a lot of things to go through, you do need some kind of filter system. And going back to one of the first points you made, it just gets you so far so quickly. As you say, a picture paints thousand words. But I know just by looking at a chart what the history of that asset has been and what the perception of that has been.
But there's a lot of things baked into what a chart is. It's not just valuation. It's emotions. It's sentiment. There's a lot of other things that--
JAMES HELLIWELL: [inaudible] giving you, right? It's like trying to trade without looking at the order book.
ROGER HIRST: Yeah. Yeah.
JAMES HELLIWELL: How do you know?
ROGER HIRST: And another example of that was gold in 2012-2013, which was another big shift that-- and it's actually this is an example where it didn't work for me. So I thought it would work. This is 2012-2013. Gold had rocked it off. It has made a new all time high. But then it stagnated. It came down a few times and it sort of-- there's this level, specific level, which it kept bouncing off.
JAMIE MCDONALD: Yeah, [inaudible] 1,700, 1,800 or something.
ROGER HIRST: I think it could have been somewhere around there. Yeah. And when we looked at it, we thought, OK, it could potentially break down through here through this sort of support forming. Now the first time that I tried this trade, it didn't work. It bounced and it bounced for a nearly a year. But it came-- I think it was the third or fourth test, 2013.
So there's a couple of setups here. Firstly, there was now a very, very clear support level. And everyone who's long above there was going to be offside if it broke down. So that's where you're thinking there could be an inflection point. So this looks like an inflection point. People were talking that there was going to be discussions around tapering the bond purchases. So the fed was going to start tapering. So there's this big macro story where we'd had four years of QE.
JAMES HELLIWELL: Lots of stimulus.
ROGER HIRST: Lots and lots of stimulus.
JAMES HELLIWELL: And now it's going to be taken away.
ROGER HIRST: But this was now going to slow down. It wasn't actually slowing down. But they were going to talk about it slowing down. The gold price had been coming down, bounced around here. And then the third bit, which is sort of more fundamental, was that volatility in the gold market at that time when you looked on the charts was at an all time low.
So you thought, OK, big inflection point. There's a macro story building up here in terms of taper. We didn't know it was going to be a taper tantrum, but tapering. I can buy puts on gold here. And it gives me this opportunity where this might be a 10 to 20 bagger if it breaks. But because I failed last time, I'm going to do it through options, which limits my costs, or limits my risk. But I know that if this all works together, the macro story, a technical story, and then that sort of optionality with it. And sure enough, it broke. And we saw $300 or $400 to the downside on gold.
JAMES HELLIWELL: So the fact, you were looking at options for a couple of reasons. But you mentioned volatility in the gold market was quite low. So that as I understand it is basically the richness of the main determinant of the cost of an option.
ROGER HIRST: Yeah.
JAMIE MCDONALD: Yeah.
ROGER HIRST: And so that's how you can use these things where you've got charts and fundamentals together. And for me, it's always been there. It's you put those two together. And these are those big structural changes where I'm using charts not for a technical story. It's not technical analysis really at this stage. But it is looking for the inflection points. And the great thing about charts and inflection points is that the market never prices an inflection point properly.
So that volatility in gold was as if the gold price was just going go sideways forever. And so we used to always do this all the time. We look for these big inflection points, we look if there's an instrument to play it cheaply. And then we go, right. The risk reward if this breaks, and if there's a fundamental story behind it, is really, really exciting. So that's why we always use them. So that was a combination of charts, but not really technical analysis.
JAMIE MCDONALD: Yeah. Well, I remember another style of charts that I used to look at, which I actually probably found more informative was not just the first derivative charts, which is basically just price. But it was like the relative chart. So I don't know. If you're looking at an energy stock relative to the price of oil, that was always a very interesting chart to look at because it was like, well, how--
JAMES HELLIWELL: Gold miners, right? Relative--
JAMIE MCDONALD: The gold mine is relative to gold is another one. So--
ROGER HIRST: My favorite on that has always been the dollar index versus the ratio of the S&P versus MSCI Emerging Markets. Basically--
JAMIE MCDONALD: Give me a second there.
ROGER HIRST: It's basically, it's when the dollar is going down, so dollar is going down, emerging markets are outperforming the S&P. So the ratio is going down. The S&P is underperforming. When the dollar is going up, the S&P is outperforming. It's perfect basically over the last 20 years. The two are over a very, very big macro scale. The same chart.
And so you know when you say to yourself, OK, I don't necessarily know if the dollar is going up or down. But the dollar does go up. I know based on this price history, this relationship between these two assets, or this ratio on this asset. Then I think that emerging markets will underperform. So you can think to yourself, OK, here's the trade to do.
JAMES HELLIWELL: I guess there's a point on second derivative thinking as well, which is what you were doing rather than just going, oh, right, OK. Stimulus responses.
ROGER HIRST: But do you know what? These-- most of-- this is something Raoul always say that often these charts, you could give to a small child and they'd go, well, if that happens, that happens. And that's how it kind of works. And yet you get these strategies that go, oh no, and they overthink it. And the chart just goes, no, no. That will happen if that happens. There is a good chance that that will happen.
Now what we're always looking for is when that breaks, and that relationship breaks down. But the chart will be able to tell people. It'll say, it's now breaking down. That relationship no longer works.
JAMES HELLIWELL: I think-- sorry, Jamie. Just while I'm on it. Top of mind, one of the I think examples that I've thought of where there has occasionally been divergence, which has worked out, and it hasn't been coincident necessarily unless I've completely overlooked it, is charting flows. So you could look at ETF flows or inflows compared to say, gold. So I would look at the gold ETF versus the net inflows.
And you can week on week sometimes find some divergence, which could potentially support, or put pressure on the ETF or the spot price. So that's one example. And it's probably another way that I have applied charting beyond simply looking at the price of given asset. It's looking at flows. You can obviously look at fundamentals as well as we mentioned earlier.
ROGER HIRST: I mean, Julian Brigdon has regularly brought this up with his review of ARKK because he says, look. The ARKK price has collapsed. But the shares outstanding, which is effectively the demand for the underlying fund, has been going up. And he's saying, OK, this could be them putting the bottom in. Or it could be a lot of people getting trapped in because they've been conditioned to think that the stock only really goes up into these big dips. They get long, and it just carries on going.
So therefore, that tells you that there's now even more risk to the downside if, for instance, the relationship between tech stocks and yields continues, yields go up, tech stocks go down.
So if your fundamental view is, we're going to see yields going a lot higher, you go, well, there's a lot of problems with some of these tech areas where retail has got back long again.
JAMES HELLIWELL: You can see the pain points in price as well where it's getting painful for the mass consensus, and you see the psychology in the chart, sentiment ultimately rules.
JAMIE MCDONALD: Yeah. And the options market can tell you a lot as well about how people are positioned.
JAMES HELLIWELL: How did you interpret that in the past? It's not something I've used a great deal.
JAMIE MCDONALD: You might have to help me--
ROGER HIRST: Trading on the spot?
JAMES HELLIWELL: Yeah. Tell us about the options [inaudible].
[interposing voices]
JAMES HELLIWELL: So you're looking at skewing things.
ROGER HIRST: Yeah.
JAMIE MCDONALD: But what's the-- who produces the report which tells you what the outstanding options market balance is? is it Chicago Board of Trade, CBOT?
ROGER HIRST: Yeah, so they have the derivatives positioning. So it's positioning in options but also--
JAMIE MCDONALD: [inaudible]
ROGER HIRST: Yeah, CFTC.
[interposing voices]
ROGER HIRST: And actually sometimes better in futures in that-- again, if we look back at the beginning of 2021, a lot of people going, oh this is really bearish for the dollar now because x, y, and z is happening. But actually, you saw that, yes, people getting negative fundamentally on the dollar. But everybody was already short the dollar massively long the euro at the beginning of 2021.
So again, you could look at that chart, positioning chart, and say, that positioning is a little bit extreme. So I everyone is now bullish the euro and bearish the dollar. But that's where people already are. So you can step back and go, I've got to be careful here based on that chart.
JAMES HELLIWELL: It's part of a weekly process. I used to pull off a report across asset, you look at some of the macro data, look at various indicators, which were predominantly priced based in the context of a range. And then at the bottom, the final sheet, which you would always look at on a Monday morning, was the CFTC positioning for currencies and commodities. And all we were looking to do there, simply put, is highlight if any given currency or commodity, particularly if it was a dollar or a major cross, was at a 52 week extreme high or low.
So chances are nine times out of 10 within a week or two, a couple of weeks, it's going to begin to revert at least to the mean of the 52 week range.
JAMIE MCDONALD: It's not going to hang around there for much longer.
JAMES HELLIWELL: I was always looking for the 52 week extremes in CFTC.
ROGER HIRST: And that also can help-- those sorts of patterns also help to tell when something really unusual is happening. So for instance, go to 2008. And I was at Morgan Stanley at the time. And there was a guy who had this-- the European strategist had this indicator of overbought and oversold. And their indicator got so incredibly, insanely oversold, that one interpretation was, this is going to bounce immediately. Or the other interpretation, which turned out to be the right one, was something is broken.
JAMIE MCDONALD: Yeah, right.
ROGER HIRST: And Lehman blew just after that. So again, what you're doing is it's broken the range. And it was broken by so far. It was a complete step change that by looking at that chart, one of the interpretations that was valid was to say something really unusual is happening here because we've never seen this happen before. It normally adjusts.
JAMES HELLIWELL: I always say at the famous words, this time is different.
ROGER HIRST: Yeah, this time is different. So anyway, let's just hold that for a moment. I'm going to get myself another beer and then we'll crack on with some more of this.
JAMIE MCDONALD: All right. Yeah. Classic Roger always finishing ahead of us.