Technical indicators are mostly regarded equally measures of marketplace pull as well as weakness. When toll activity has been rigid over a lookback period, the technical indicator is viewed equally bullish as well as vice versa. At extreme values, the indicator may survive regarded equally an "overbought" or "oversold" measure.
Since the middle of concluding year, I stimulate got been tracking the purchase as well as 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 exceptional item are Bollinger Bands, MACD, as well as Parabolic SAR. Since June, 2014, the correlations of purchase signals across the indicators stimulate got been positive, ranging from +.23 (Bollinger:MACD) to +.56 (MACD:Parabolic SAR). Similarly, the correlations of sell signals stimulate got been high, ranging from +.22 (Bollinger:MACD) to +.75 (MACD:Parabolic SAR). Clearly, dissimilar indicators are non touchstone completely dissimilar things. Indeed, an declaration tin survive made that indicators are only implementations of dissimilar moving average rules. When nosotros await at which indicator is best, we're actually plumbing equipment yesteryear marketplace demeanour to a exceptional moving average, which may or may non survive predictive on a prospective basis.
On Friday, nosotros had purchase signals outnumber sell signals for all 3 of the to a higher house indicators, reflecting the recent marketplace strength. Going dorsum to June, 2014, when this has occurred (N=62), the side yesteryear side 5 days inwards SPY stimulate got averaged a hit of solely +.01%, compared amongst an average five-day hit of +.26% for the residuum of the sample. Clearly, rigid readings stimulate got non brought near-term strength--though neither stimulate got "overbought" readings reliably led to marketplace declines. The failure of pull to survive followed yesteryear pull is nonetheless i to a greater extent than reflection of the distinction betwixt tendency as well as 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 yesteryear side 3 days inwards SPY stimulate got averaged a hit of +.33% versus +.04% for the ease of the sample. Market weakness has tended to opposite inwards the almost term, though much of that relative surgical operation boost tends to fade over subsequent trading sessions.
It is human nature to extrapolate from the recent yesteryear to the immediate hereafter when nosotros are trying to anticipate events. In the illustration of the stock market, failing to query "strength" as well as "weakness" has been hazardous to our wealth.
Further Reading: The Breadth of Strength
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