Indicator of the Week: 20 Stocks Flashing the Best Buy Signals

The two best SPX buy signals in the last year have been Bollinger Bands and 50-day moving average crossovers

Senior Quantitative Analyst
Jan 25, 2017 at 7:06 AM
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Certain technical analysis tools are standard in pretty much any stock charting software -- Moving Average Convergence/Divergence (MACD), Relative Strength Index (RSI), and moving averages, for example. Have you ever wondered how these tools stack up against each other? Which one is the best? This week, I try to answer this question by testing the indicators on S&P 500 Index (SPX) stocks over the past five years. I also list the stocks recently signaling, based on the best performing indicators. 

The Indicators I Evaluated: Below are some of the indicators that I looked at. Different traders use these indicators differently and/or in combination with other indicators. Perhaps that is why no one else tries to quantify their performance. I am taking a very basic approach to what I call a buy signal.

  • RSI:  The 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 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 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 50- and 20- day moving averages.

  • Bollinger Bands: These use a moving average, and then bands are placed two standard deviations above and below it. 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 considered pullbacks to the 50-day and 200-day moving averages.

Quantifying Indicator Performance the Past Five Years: I went back to 2012 and considered SPX stocks. I found the number of times the stocks signaled for each indicator, as well as their return over the next month of trading (specifically, 21 trading days). The table below summarizes the returns for each indicator:

technical indicators jan 24

The best indicator over the past five years was a stock pulling back to its 200-day moving average. Over the next month of trading, stocks averaged a gain of 1.91%, and were positive 62% of the time. The next best signal (by average return and percent positive) was Bollinger Bands. The worst indicator, at least over the past five years, was the Golden Cross -- that is, when a stock's 50-day moving average crosses over its 200-day trendline.

Technical analysis indicators move in and out of favor. Different indicators will work better or worse in different time frames and environments. The table below shows how these indicators have been doing over the past 12 months. Interestingly, a pullback to the 200-day moving average, which was the best indicator in the table above, is actually one of the worst indicators over the last year. The average return and percent positive rank sixth and seventh, respectively, out of the eight indicators listed. The best indicator since 2016 has been the Bollinger Bands. That indicator ranked first in both average return over the next month and percent positive. A stock crossing over its 50-day moving average has also been a very good indicator recently. The 2.15% average return ranks third on the list below, and the percent positive of 61.3% ranks second. 

technical indicators last year jan 24

If you're looking for some short-term trade ideas, the tables below might be a starting point. These are S&P 500 stocks that signaled over the last couple of weeks, falling below their bottom Bollinger Band or crossing above their 50-day moving average. Over the past year, these have been pretty good buy signals for stocks:

bollinger bands crossovers jan 24

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