What You Need To Know About Technical Analysis with Chartered Market Technician Cory Mitchell

Given the plethora of Technical Analysis indicators and tools available today, we are often left wondering if certain technical indicators work better for certain asset classes. To find out, we reached out to Cory Mitchell, a Chartered Market Technician (CMT) and member of the Canadian Society of Technical Analysts. I’ve been following Cory’s astute analysis of the forex markets for a few months now and will continue to do so going forward. Check out the interview below:

Biography: After graduating with a business degree Cory Mitchell worked for two of Canada’s largest proprietary trading firms, specializing in global equities, as well as trading the forex market independently. He is now a partner and head of training at a proprietary trading firm in Canada, specializing in equity day trading strategies. Cory Mitchell has been a fulltime trader for 6 years and continues to trade on a daily basis.

Cory is also the founder of Vantage Point Trading, a website dedicated to providing free analysis and education for traders of all levels. He is a member of the Canadian Society of Technical Analysts as well as the Market Technicians Association and holds the Chartered Market Technician (CMT) designation. With hundreds of publications, Cory is a regular freelance contributor to Investopedia (Forbes Digital) and Stock & Commodities Magazine, as well as numerous respected websites including being one of the Currency Experts with ForexPros.

Q: Mr. Mitchell, what are some of the technical indicators that you most frequently utilize when assessing a currency pair or equity index? Do some indicators work better on certain asset classes compared to others?

A: I am a firm believer in keeping things as simple as possible. Thus my trading methods are extremely lean in terms of technical indicators. The main tools I use are trendlines and horizontal support and resistance lines. Since I primarily short-term trade, I continually update my charts with new lines to reflect the real-time movement. Basically, I am trading in the direction of a trendline, until it breaks. At that point I will exit positions and wait. If a horizontal support/resistance is broken after the trendline has been broken then I will re-enter in the opposite direction as the market has indicated a reversal. Using the horizontal lines in conjunction with the trendlines also lets me know when we have moved from trending to ranging or from a ranging to a trending market environment.

I day trade the stock market, but swing trade the currency markets – with trades lasting anywhere from several minutes when major levels are broken to several weeks. With currencies I will also refer to an ATR (average true range) indicator for the currency pair which allows me to examine where on average the currency pair is likely to stall based on its daily movement tendencies. This combined with support and resistance levels (swing highs, lows, consolidation areas) provides daily insight. It should be remembered that this is an average, and will fluctuate continually. It is an additional resource, but not an entry or exit criteria in and of itself.

In regards to stocks, a Daily Average Range (I day trade stocks, so I only want movement from open to close to be factored, close to open does not matter to me) statistic is also looked at when trading the stock several or more days in a row. This once again gives insight into the parameters the stock is generally trading within. When the statistic begins to deviate from the levels that were being traded prior, it indicates the strategy may need to be altered to accommodate, or the stock should be dropped from trading altogether as circumstances are changing from when trading within the stock begin.

The indicators work well within currency and stock markets, although each stock or currency pair will take on its own dynamic. Some currency pairs for example, namely those not involving the USD are more “ranging” and thus trendlines become less significant (or are used within a larger price range). In other currency pairs which are much more trending, such as the EUR/USD, all these tools are used with great frequency.

Q: What is your outlook for the S&P 500 going forward?

A: Chart patterns, trendlines and horizontal support/resistance levels give price targets which I will use to bias one side of the market. Currently (written on March 20) we are in a short-term uptrend from swing lows in early February. The resulting trendline provides us with a guideline for the direction of the market and potential reversal points.

Based on what has unfolded over recent months, a price target is just below 1200 for the S&P 500. A brief pullback is expected before this target is hit. 1150 will now act as support along with the trendline about 10 points below this and additional support at 1125. A drop much below 1150 again would warn of some weakness and that the breakout higher may have been false (a “bull trap”). A further target on the upside is at 1250.

I only trade on “technicals” so that I am not swayed by my own opinions; price is the only thing guiding my trades. Thus, while my own opinion is that I do not like the fundamental picture of the economy I will stay on the bull side of the market until my indicators dictate an alternative should be adopted.

The chart below shows the S&P 500 with horizontal support lines. The upper blue line is the current trendlines based on February swing lows through to current price action. The lower two blue lines are Speed Lines and indicate potential trendlines, or in other words, if in the future the trendline need to be redrawn these may be how it will look. Movement below one trendline indicates movement to the next or the next horizontal support level. Speed Lines provide a visual context for possible future pullbacks, but are generally not used for trading decisions since the other methods provide all the entry and exit criteria needed.

Q: With regards to the ever increasing likelihood of the Canadian Dollar hitting parity with the US Dollar, do you have any contrarian thoughts on this pair? While the general viewpoint of most market commentators calls for a decline in the US Dollar, I have heard a few technical analysts (primarily the Elliot Wave practitioners again) call for a secular uptrend in the US Dollar, once again do you or do you not concur with this view and why?

A: Ultimately I am a trader, so I will only speak of what I currently see unfolding on the charts. The USD/CAD just broke below support at 1.0200 and is currently in a choppy downtrend. This continues to indicate a downward bias for the USD. The pair closed on March 19 (I am now writing this on the weekend) below 1.0200, and if the pair stays below this level the next support is 1.00, or parity. A drop below that would likely test 0.98-0.97.

For me to become bullish on the USD against the CAD it would need to get above 1.08. Until that occurs the price is indicating a downtrend. Movement above 1.08 would be the first sign of a potential reversal, but there is additional resistance all the way up through (just below) 1.12. Right at this moment I see no reason to be buying into lower lows. If a real reversal of large magnitude does occur, there will ample profit opportunity; bottom picking can be a costly endeavor.

Q: Are there any contrarian technical signs that you are seeing in the markets (be it in particular sectors, indexes, commodities or currencies), Mr. Mitchell, that you think mainstream investors are overlooking?

A: The relationship between the USD and stock market has gained a lot of attention recently – dollar up, stock market down or vice versa. While this has worked over recent history, it is not reliable over the long term. In fact the opposite is what should theoretically occur. A strong dollar is traditionally good for stocks as it keeps commodity prices tame, which keeps inflation low and thus bond prices high (interest rates low) and stock prices high (relatively speaking).

This is not necessarily a contradictory indicator, but I know there are traders who are starting to rely on this relationship. When the relationship breaks down it may be detrimental to those who have placed their faith in it. So, investors may benefit from not accepting the media’s belief in this relationship.

This is exactly the type of thing which draws people in, because it is made to sound like a sure thing. Normally by the time a strategy reaches the public and people feel good about trading based on it, it breaks down. All I am saying is to be careful. This is not a long-term relationship. Exploit it when it works, but back off when it breaks down.

Q: Can you please highlight one currency pair that you believe to be overbought and due for a correction and one currency pair that you believe to be oversold and due for a bounce and what are the reasons that bring you to this conclusion?

A: “Overbought” and “oversold” can give the wrong impression, but I do have two trade ideas in currency pairs which a lot of traders and investors may overlook.

First, one that may be a good short: If a 5 year chart of the AUD/CAD is pulled up we see a ranging type movement, albeit in large swings. From this view it appears that the cycle top may have been put in and the pair will again drift towards the lower part of the range; .85 would be a conservative target with the pair currently trading near 0.93. More aggressive targets on the downside include 0.80 and the swing lows which occurred towards the end of 2009. If we move to looking a 1 year chart we can see a viable entry point. A legitimate break below 0.92 would take out the most recent swing low in price and indicate further selling - providing evidence of a re-test of the lower levels within the range.

A chart can be seen on (you can easily check out different time frames there, which I feel is important with this trade to see the overall dynamic) Yahoo Finance.

As for a currency pair which I think could bounce, well, so many went through massive moves towards the end of 2009. So nothing is on my radar particularly at the moment, although I do keep my eye on the GBP/JPY simply because from a trader’s perspective it can be quite volatile. I will not venture to say it is oversold, or even that I am looking to buy the pair. Rather, I have a couple price points in mind, which would begin to interest me in this regard if those price points were to be reached.

In a currency that moves this much, there is no need to jump the gun trying to make an extra few pips, far better to exhibit patience since trending moves generally cover hundreds, even thousands, of pips.

So right now if someone were to trade this, there is trendline in place to guide us in shorting. If that trendline is broken it would be our first indication of a potential reversal. So right now I would need to see a reversal above 144 (a ways away as the pair currently trades around 136). If this were to occur, I would expect to see a retest of swings high in around 162-163. A break above that level is likely to retrace a large amount of the fall witnessed in 2009; a likely target being between 180 and 190.

So this is more of a wait and see play. I don’t recommend fighting the trend at this time, but is worth looking at due to the massive pip potential if something transpires to drive the value of the Pound higher relative to the Yen.

Q: Are there any particular commodities that are showing particularly good or bad technical indications that you might want to highlight? If not, Sir, what would be your technical thoughts on gold/silver?

A: Gold and silver are both at “uninteresting” prices for me at the moment – meaning their current levels don’t warrant high probability trending possibilities. SLV and GLD are easily accessible trading vehicles via ETFs for the average investor to partake in the silver and gold markets respectively. The chart below shows SLV (silver) has outperformed gold.

While this chart is in a percentage scale, we can see that gold and silver are both quickly approaching support levels after the March 19 decline. If support at 16.50 is broken, in the case of SLV, then a further pullback is likely to occur. The current trend is down but a break back above 17.50 would provide indications of an upside move.

GLD is also approaching former swing lows on the daily chart. From a trader’s perspective, SLV is more attractive because of its volatility relative to price. From an investor’s perspective, neither warrants investment right at this time. My opinion would be that it is better to wait for signs of renewed strength; in terms of SLV the level mentioned above, and in terms of GLD a move above 112.50 would warrant a second look and a rise above 114.75 would indicate to me a re-test of the December highs.

Q: Lastly, Mr. Mitchell, can you please highlight your highest conviction investment idea at the moment? Can you please go into detail about the reasons that make this your best idea?

A: My trading style is not anticipatory, rather it is reactive…always based on what price is actually doing rather than what I believe it should do. Therefore I can only show what is currently working. Autos have been the strongest sector this year. If the market does continue higher, it is logical to invest in places which are leading the market higher. The following chart looks at the S&P 500 along with several comparisons including the Dow Jones US Autos.

Thus, I would continue to look at autos although they did pull back a fair bit this last week. Find a sector tracker tool and invest in leading stocks, in leading sectors when the S&P 500 is making new highs.

Thank You Mr. Mitchell!

Tagged as: Canadian dollar, Canadian Society of Technical Analysts, Chartered Market Technician (CMT), Cory Mitchell, Dow Jones US Autos, forex, gold, japanese yen, s&p 500, silver, technical analysis, trading, us dollar