Breaking down the most (and least) reliable quantifying technical analysts indicators
Technical analysis tools are standard in just about any stock charting software, including MACD, RSI, and moving averages, for example. Have you ever wondered how these tools stack up against one another? Which one is the best at finding the outperforming stocks? This week, I try to answer this question by testing these indicators over the past few years. I also list stocks recently signaling for the best performing indicators.
The Evaluated Indicators
Below are some of the indicators I evaluated. Different traders use these indicators differently and/or in combination with other indicators. I am testing the indicators in a standalone manner, and taking a very basic approach to what I call a “buy” signal.
- Relative Strength Indicator: The Relative Strength Indicator (RSI) is an oscillator that ranges from zero to 100. A low number reading suggests a stock is oversold and ready to bounce. A typical “buy” level for this indicator is 30. Because stocks can stay oversold for an extended period, the “buy” signal is defined as when the RSI goes from below 30 to above 30. In other words, it was oversold and is now heading upward.
- Moving Average Convergence/Divergence: The Moving Average Convergence/Divergence (MACD) is calculated using the difference in two different moving averages for a stock. A moving average of that difference is then used and called the signal line. A common “buy” signal is generated when the MACD crosses above that signal line.
- Golden Cross: A golden cross is when a shorter-term moving average crosses above a longer-term moving average. In the analysis below, I used a 50- and 200-day moving average.
- Moving Average Crossover: This is simply looking at the stock price crossing above a certain moving average. I compared returns after the price crossed above the 50- and 200-day moving averages.
- Bollinger Bands: This method uses a given moving average, and then bands are placed two standard deviations above and below said moving average. When the stock price touches the lower band, it is often considered oversold and a bounce in the stock price is expected.
- Moving Average Pullbacks: For a stock on the rise, some traders might wait for a pullback to enter the position. One popular way to define a pullback (which is then a “buy” signal) is when the stock falls within range of a rising moving average. I considered pullbacks to the 50- and 200-day moving average.
Quantifying the Indicators
For the study below, I looked at optionable stocks and went back about three years to find the number of times a stock signaled for each indicator. The table below shows the average and median stock returns over the next month of trading after a signal, and the percentage of time the return was positive and beat the S&P 500 Index (SPX).
I bolded the best two data points in each column and marked the two worst ones in red. A quick glance shows stocks crossing above their 50-day moving average performed well over the next month. That indicator showed an average return of 2.2%, with 55.6% of the returns positive. The Golden Cross indicator also performed well, signaling stocks most likely to be positive over the next month at 57.6%. Based on this study, those were the best two technical indicators of the bunch. The Bollinger Bands indicator, meanwhile, was the worst performing indicator by every metric.
This next table is like the one above, except it considers signals over just the past 12 months. Indicators can perform differently in different trading environments, so this tells us what has and has not worked more recently. Those two indicators I mentioned above as the best performers – the 50-day moving average crossover and the Golden Cross -- also performed the best most recently.
Stocks pulling back to their 200-day moving average performed the worst over the next month by every metric, except the percentage that beat the SPX. The worst indicator by that metric was the RSI.
Recent Individual Signals
The analysis above shows crossovers of the 50-day moving average and Golden Cross to be the best technical indicators over the last 12 months. Below is a list of stocks that have signaled since the beginning of last week. Based on the analysis above, these stocks have a higher chance of bullish returns over the next month of trading.
