Questioning Rigid As Well As Weak Markets

One of the best ways to generate fresh ideas is to enquiry accepted wisdom.  What is oftentimes assumed with traders in addition to marketplace writers is exactly non the case.

Technical indicators are to a greater extent than oftentimes than non regarded equally measures of marketplace pull in addition to weakness.  When cost activity has been potent over a lookback period, the technical indicator is viewed equally bullish in addition to vice versa.  At extreme values, the indicator may endure regarded equally an “overbought” or “oversold” measure.  

Since the middle of final year, I cause got been tracking the purchase in addition to sell signals for all NYSE stocks for several technical indicators.  (Raw information compiled via the Stock Charts site).  Three indicators I’ve looked at inwards special particular are Bollinger Bands, MACD, in addition to Parabolic SAR.  Since June, 2014, the correlations of purchase signals across the indicators cause got been positive, ranging from +.23 (Bollinger:MACD) to +.56 (MACD:Parabolic SAR).  Similarly, the correlations of sell signals cause got been high, ranging from +.22 (Bollinger:MACD) to +.75 (MACD:Parabolic SAR).  Clearly, dissimilar indicators are non standard completely dissimilar things.  Indeed, an declaration tin plow over notice endure made that indicators are merely implementations of dissimilar moving average rules.  When nosotros await at which indicator is best, we’re actually plumbing fixtures past times marketplace demeanour to a special moving average, which may or may non endure predictive on a prospective basis.

On Friday, nosotros had purchase signals outnumber sell signals for all 3 of the higher upwardly indicators, reflecting the recent marketplace strength.  Going dorsum to June, 2014, when this has occurred (N=62), the side past times side v days inwards SPY cause got averaged a hit of exclusively +.01%, compared with an average five-day hit of +.26% for the balance of the sample.  Clearly, potent readings cause got non brought near-term strength–though neither cause got “overbought” readings reliably led to marketplace declines.  The failure of pull to endure followed past times pull is even in addition to thus 1 to a greater extent than reflection of the distinction betwixt tendency in addition to momentum outlined inwards the recent post

Conversely, when we’ve had all 3 indicators yielding to a greater extent than sell signals than buys (N=49), the side past times side 3 days inwards SPY cause got averaged a hit of +.33% versus +.04% for the relaxation of the sample.  Market weakness has tended to contrary inwards the nearly term, though much of that relative functioning boost tends to fade over subsequent trading sessions.

It is human nature to extrapolate from the recent past times to the immediate hereafter when nosotros are trying to anticipate events.  In the representative of the stock market, failing to enquiry “strength” in addition to “weakness” has been hazardous to our wealth.

Further Reading:  The Breadth of Strength
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