My Method.

“In financial markets, there are certain price levels that are more important and significant than others with regards to the amounts of supply and demand that exists at these levels.  In addition, prices of securities are always trending.  They are always doing one of three things…either going up, going down or staying the same as time progresses.  BHT utilizes a common sense and simple methodology to identify these levels and trends.  An understanding of these levels and trends will add Alpha to almost any investment process“.

-Mark Putrino, CMT

 

The Goal of BHT is to Contribute to and Enhance your Investment Process.

  • In financial markets, there are certain price levels that are more significant than others with regards to the amount of supply and demand that exists at them.
  • In financial markets, prices are always doing one of three things.  They are either going up, going down, or staying the same.
  • BHT utilizes a process and methodology that has been developed over twenty years in order to identify these levels and trends.
  • BHT does not utilize many of the traditional Technical Analysis Techniques such as Fibonacci Retracements or Elliot Waves. 
  • BHT questions and doubts the validity of many of these traditional Technical Analysis Techniques and believes that they are in the realm of Bigfoot and UFOs.
  • The BHT philosophy is based on experience, common sense, and logic.  The founder spent almost two decades trading very illiquid securities and this background gave him the ability to understand how to identify these levels and trends.
  • Knowing what and where these levels and trends are will add Alpha to almost any investment process.
  • The dynamics that cause supply and demand levels and trends to exist in markets are an extraordinary phenomenon.  The fact that the markets have ‘memories’ and that levels that were important in the sometimes distant past continue to be relevant in the present is truly amazing.  How can this be?  At the different times when the prices were at these same levels interest rates were at different levels, as were oil prices and economic expectations.  The study of levels and trends in the market is actually a study of mass psychology. 

 

An Amazing Phenomenon

If you really think about support and resistance levels in the Benchmark Indices such as the NASDAQ and S&P 500 it is an extraordinary phenomenon.  The fact that the markets have ‘memories’ and that prior levels of importance in the past continue to be relevant in the present is a truly amazing and astonishing phenomenon.  How can this be?  At the different times when the prices of the Indices were at these same levels interest rates were at different levels, as were oil prices, economic expectations, and just about everything else.  And the individual stocks that make up the index were all at different prices.  It is important to understand that charts are actually a graphical study of mass psychology. 

There are literally hundreds of millions of investors and tens of thousands of stocks and somehow, we act like a bee hive or ant colony.  Individually we think we make our own decisions but somehow most of us become part of the crowd.  When an ant colony decides to move from one location to another, it’s not like they have a meeting and make a group decision.  Each ant only knows what the ants in its immediate vicinity are doing.  The individual ants don’t know what is going on.  They are merely following the actions and signals of their neighbors.  Yet somehow the aggregated actions of hundreds of thousands of ants take on a group knowledge or think and the colony knows how to move. 

Humans show signs of group behavior and examples can be seen almost everywhere.  In Grand Central Station in NYC everyday commuters crowd into the first and second cars of the train and fight for seats.  People get angry and argue and complain to the conductors.  But this is only because the are following their herd instincts.   If they thought rationally they would realize that if they walked around the crowd and up another fifty yards or so to the other end of the train they would see that the cars are empty are there are plenty of seats.

There are also examples in fashion.  You may think you have a nice tie on.  But why do you think it is nice?  Is it due to rational analysis?  No.  It is herd behavior.  In two or three hundred years from now (if we still have a civilization) people will think that our current fashions are as ridiculous as we think they were two or three hundred years ago.  And why do sports fans of the same teams form an instant bond when they meet?   It is not due to rational analysis.  When you see someone wearing the shirt of your favorite team, on some level you probably feel some kind of instant attraction to that person.   This too is due to the fact that you are susceptible to your inner herd instincts.  Knowledge of this fact will not only help you become a better trader or investor.  It will change the way that you look at different aspects of life and society.

 

Profiting from these Dynamics

An awareness of these dynmaics will benefit almost any investment process. 

Here is a look at the NASDAQ Biotech ETF...IBB...through 2016.  No rational person would argue that there are not certain price levels that are more important than others.  The IBBs sold off down to the levels around $245-$250 five times in this time period.  Each time the rallied significantly.  In August and September, they rallied up to the $300 level three times.  Each time they sold off. 

BHT clients were able to profit from this because the importance of this level was recognized in April of 2016 after they rallied in March.   They went long in June and November.

 

This is Crude Oil from August of 2015 through November of 2016.  You do not need to be a Market Guru to see that the $51 level is important.  In this time period Oil rallied up to this level three times and each time that it did, there was a significant selloff after.  Considering the size of this market it is amazing that a level would be so clearly defined.  But it is. 

BHT clients were able to profit off of this dynamic because the importance of this level became clear in June of 2016 and they went short October of 2016 when it appeared as though Oil would roll over again.

 

It is also clear that prices move in trends. 

BHT clients were able to profit from Oil’s clearly defined downtrend break in February of 2016.  Here is what was on the Blog on February 23rd 2016:

February 23rd, 2016 - We could finally be seeing a break in Oils downtrend.  Over the past few weeks it has held the psychologically important $30 level.  I'm not saying that it is going to rally.  Maybe it will.  But it seems like it isn't going lower in the near term.  Remember...trend lines aren't mysterious or magical.  When used correctly they are graphical pictures that illustrate how the forces of supply and demand change as time progresses.  Here we see how the forces of supply dominated the market since September and this has driven prices down.  The break of the downtrend line over the past few days could mean that these dynamics are changing...meaning that the forces of demand are about to take control...or at the very least become equalized with the supply forces.

 

A look at the US Dollar Index from October 2014 through October 2016 shows the importance of the $93-94 level.  On seven separate occasions in this time period the index sold off down to the $93-94 level and each time that it did, a significant rally followed.  It is also interesting to notice that it turned over and went lower after rallying to the 100 level in March and November of 2015.  How can this be?  How can a market this large turn at such nice precise round levels?  Anyone who thinks that markets are random or are driven by fundamentals would argue that this is impossible and couldn’t happen, but a look at the chart shows that indeed it does. 

BHT clients profited in May and June of 2016 by going long the US Dollar.

 

Here we see the XLKs…the Technology Sector ETF SPDR.  It is clear that there is resistance at the $48 level and support at the $46 level. 

BHT clients were able to profit from this dynamic by going long in mid-November and taking profits at the end of November.

 

Understanding these supply and demand dynamics doesn’t just benefit short-term traders.  It also benefits long-term buy and hold strategies.  For example, this was on the BHT Blog on November 6th, 2016.  It lead a BHT client to underweight Consumer Staples and overweight Financials just before the post-election rally in Financials occurred.  This particular Portfolio Manager has a fundamentally driven style and was thinking about making these changes in his portfolio.  Seeing the BHT charts and analysis caused him ‘pull the trigger’.  He is glad he did because the day after Financials began what is one of their biggest one month gains in history while Staples were flat over that time.

November 6th, 2016 - Consumer Staples – Long Term – The XLPs have broken short-term support around the $52 level.  Long-term they are testing the uptrend that began back in 2009.  This is very important to consider because it is rare to see such well-defined trends over such a long timeframe.  This is a monthly logarithmic chart.  It is important to understand that trend lines aren’t mysterious or magical.  They are just a graphical representation of the forces of supply and demand.  Prices are always doing one of three things…going up, going down, or staying the same.  A well-drawn trend line illustrates this.

 

Summary:

  • In financial markets, there are certain price levels that are more significant than others with regards to the amount of supply and demand that exists at them.
  • In financial markets, prices are always doing one of three things. They are either going up, going down, or staying the same.
  • BHT utilizes a process and methodology that has been developed over twenty years in order to identify these levels and trends.
  • BHT does not utilize many of the traditional Technical Analysis Techniques such as Fibonacci Retracements or Elliot Waves. 
  • BHT questions and doubts the validity of many of these techniques and believes they belong in the realm of Bigfoot and UFOs.
  • The BHT philosophy is based on experience, common sense, and logic.  The founder spent almost two decades trading very illiquid securities and this background gave him the ability to understand how to identify these levels and trends.
  • Knowing what and where these levels and trends are will add Alpha to almost any investment process.
  • BHT’s goal is to contribute to and enhance your research and investment process.

 

Bulls Head Trading Analysis, LLC was founded by Mark Putrino, CMT.

Mark has nearly two decades of experience in the institutional investment management industry as a professional securities trader.  Before founding Bulls Head, he spent more than 15 years as the Head Trader at three different institutional hedge fund and money management groups, all of which exceed or exceeded more than $1 billion dollars in managed assets.  His experience also includes trading directly for two of the best money managers in the history of the industry, Mario Gabelli and Steven A. Cohen.   

Mark is a member of the Market Technicians Association and has held the Chartered Market's Technician Certification (CMT) since 2002.  He earned a Master’s Degree in Finance at New York University, and a Bachelors in Economics at the University of Connecticut.