Indicator of the Week: Which Technical Indicators Work Best?

As far as technical indicators go, the Relative Strength Indicator (RSI) and 200-day moving average have performed well

Senior Quantitative Analyst
May 27, 2015 at 6:45 AM
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Have you ever considered the different technical indicators (e.g., MACD, RSI, Bollinger Bands) and wondered which ones work the best? I'll try to answer that this week by looking at how these indicators have performed over the past few years for stocks that trade in the S&P 500 Index (SPX). Also, I'll show a list of stocks that have recently signaled for the best-performing indicators. 

The Indicators I Evaluate: Below are some of the indicators that I looked at. Keep in mind that different traders use these indicators differently. That could be a reason no one tries to quantify their performance. I am taking a very basic approach to what I call a buy signal.

  • RSI: The RSI (Relative Strength Indicator) 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 of time, 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. 
  • MACD: The MACD (Moving Average Convergence/Divergence) 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-day 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: These use a moving average, and then bands are placed two standard deviations above and below the 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 to within a range of a rising moving average. I consider pullbacks to the 50-day and 200-day moving averages.

Quantified Data Since 2012: Going back to 2012 and looking at the stocks currently in the SPX, I determined when buy signals occurred (as defined above), and then found the stock's return over the next month (21 trading days, to be specific). The table below summarizes the returns for each signal.

Stocks pulling back to their 200-day moving average showed the best short-term returns, averaging a gain of 2.65%. Also, 69.3% of the returns were positive. The next best technical signals were the Bollinger Bands and the RSI. Both of those signals generated returns of over 2% over the next month, and at least 60% of the signals were positive. 

 Technical Analysis Indicators Since 2012

Returns by Year: These technical indicators fall in and out of favor, so I broke down the returns by year. The table below shows the average return following the signals, for each year since 2012. As you can see, the 50-day moving average crossover was the best signal in 2012, but so far in 2015 it has been the worst. The RSI was the best signal in 2014 and has continued to be the best so far this year. The 200-day moving average pullback, which has been the best overall since 2012 (see above), has been very consistent. The worst average return for that indicator came in 2012, averaging a gain of 1.63% over the next month of trading. 

 Average One-Month Return After Buy Signal

Recent RSI & 200-Day Moving Average Pullback Signals: The analysis above shows the RSI and 200-day moving average pullbacks have been the best signals as of late. A list of recent signals might be a pretty good starting point to evaluate some short-term trade ideas.


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