The MTS Technical Overlay Program (TOP)

The MTS Technical Overlay Program (TOP) represents a natural step in the evolution of the company’s services since its inception in 1989.  It incorporates Peter Beuttell’s 30 years of experience in asset management and investment research, employing a blend of trend, pattern, momentum, volume and other techniques, some proprietary, to provide fund managers and traders with an instant technical view on market indices, sectors, stocks, bonds, currencies and commodities.

It is intended to act as your own desk-top Technical Analyst, and in essence answers the question for the user “Is this a good point to buy (or sell)?”.

Using our extensive experience, refined by mathematical testing, we have calibrated the TOP model to recognise at what phase an investment is in its cycle.  Whilst the idealised cycle below assumes a long-term sideways path, the combination of techniques also adjusts to longer-term secular trends.
The diagram below illustrates this idealised cycle, and the ratings are those originally used in the Relative Performance Monitor sector and stock service (see Appendix below for desciptions):

    BUY - immediate action
    Buy - medium-term outperformer
    BOTTOM-FISHING BUY - late stages of a downtrend/bottoming phase.            
    TAKE PROFITS - losing momentum in an uptrend/near resistance
    REDUCE - early stages of a downtrend/topping phase
    Sell - medium-term underperformer
    SELL - immediate action.

There are three chart/investment timeframes, selected by our clients:

    Longer - greater than 13 weeks
    Medium - 6 to 13 weeks
    Short - up to 6 weeks.

Plus:

    Relative to market index (greater than 13 weeks)
    Relative to sector (greater than 13 weeks)

The design of these models treats Medium as a microcosm of Longer, and Short as a microcosm of Medium.  However, it is very important to remember that the behaviour of prices in one timeframe will very much be dictated by the trend in the next higher one, and particularly by the longer-term trend.  So, for example, whilst a high Short-term score with a high Longer-term score signals a strong BUY, a high Short-term score with low (negative) Longer-term score does not automatically signal to buy for a bounce.  It is safer to view it as “wait to SELL”, although trading accounts may well take a more aggressive view.

However, instead of the previous 7 Buy-Sell rankings, we have moved over to a +10 to -10 scale, which allows a precise ordering of the attractiveness of each stock and sector in our regional research universes.  The following provides a brief overview of the inputs to the different areas of analysis which contribute to the scores.  A more detailed explanation is available within each research document, via the “Help?” window.

Trend is determined by moving averages and their strength, being the 50- and 200-day m.a.’s in the case of the Longer timeframe.  New highs and lows for the trend also contribute.

Momentum is defined as point-to-point percentage change.  The indicators for Longer are 13-week, smoothed 21-day and 13-day % change.  Points are gained or lost depending on whether the momentum trends are confirming the price (or relative trend), or if there is divergence of the indicator trend from the price trend, warning of a reversal.  (Divergence occurs when price makes a higher high or lower low, but the indicator does not).

Volume accumulators and ratios are used in a similar way to momentum - to confirm price or relative trends, or produce warning signals when the volume trend diverges from the price trend.

Support and Resistance is identified in bands, and points are awarded or deducted depending on whether a stock is in relation to its bands.

Targets and associated stop-loss levels are provided by Point & Figure charts.

The above represents the bare bones of the system.  However, we have spent over two years analysing how previous recommendations were arrived at, and ways of enabling a computer to recognise features in a chart that a brain sees in milliseconds.  Each area of analysis utilizes a number of different factors to recognise and weight these features, not all of which appear on the actual chart pages.

Appendix

The characteristics of each category listed above are as follows:

BUY:  These names will usually have broken up through a major downtrend, often completing a base formation, and will be producing momentum readings which are also in an uptrend.  The 200-day moving average (m.a.) will almost always be rising.  They are expected to outperform on a 3-6 month view, but may occasionally be over-extended on the upside in the short term, with the risk of a brief correction.

Buy:  These stocks will have much in common with BUY Candidates, but will often be further advanced within their uptrends on either an intermediate or longer-term basis.  They are expected to outperform on a 3-6 month view, although there is a greater risk that they will correct from existing levels to provide a better opportunity to buy.

BOTTOM-FISHING BUY:  The major ingredient in this category is bullish momentum divergence (i.e. the price relative is making new lows, but momentum is making higher lows), and often the stock will be within 10% of a long-term support area.  However, it must be remembered that the major trend is usually still down, so this is a higher risk recommendation.

TAKE PROFITS:  This is close to being the opposite of Bottom-Fishing Buy, and reductions are recommended in large positions at the very least.  The stock will often be medium-term overbought with bearish momentum divergence visible, and quite some way above its rising 200-day average, as well as being close to trend or trading resistance.  The risks will be of a 10% set-back or worse, probably that the stock represents “dead money” on a three-month view, and possibly that a top is forming.

REDUCE:  This category signals risk of immediate underperformance, but where there has not been conclusive enough technical damage to warrant a SELL rating.  Very often the stock will have been consolidating in a potential top area, or in a downtrend which could be about to resume.

Sell:  These stocks are expected to underperform on a 3-6 month view, but they are usually further advanced in intermediate or longer-term downtrends, and are below ideal levels at which to rate them SELL or REDUCE.  A better opportunity to exit may therefore occur once the shorter-term oversold condition has unwound.

SELL:  These stocks will usually have broken down through a major uptrend, completing a top formation, and will be producing momentum readings which are also in a downtrend.  The 200-day m.a. will almost always be falling.  They may occasionally be over-extended on the downside in the short term, with the potential for a brief rally.

Avoid:  Just as Buy is mirrored by Sell, we view Avoid as the the opposite of Hold. These stocks will almost always have a falling 200-day m.a., and be in well-established downtrends. They will often be either too oversold for a negative rating, or have started to produce minor bullish signals. The key factor in this rating is that we expect any bounce to be a bear market rally, so to rate them as a Hold could be sending an unintended message that the stock will be at least an in-line performer.