The Best Stock Buy Signals for Technicians

The Relative Strength Index (RSI) has been a useful tool lately

Senior Quantitative Analyst
May 8, 2019 at 7:14 AM
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Have you ever thought about the myriad of technical indicators and wondered which ones work the best? Any standard charting software supports various indicators like the Moving Average Convergence/Divergence (MACD), Relative Strength Index (RSI), Bollinger Bands, and probably a lot more. This week I’ll quantify which indicators have worked the best and worst over the past few years.

I have done these studies in the past, but environments change, and these indicators fall in an out of favor. It might be a good time to see which signals have most recently been outperforming. Also, I show a list of stocks that have recently signaled for the best performing indicators. 

Technical Indicators 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, the buy signal is defined as when the RSI goes from below 30 to above 30. In other words, it was oversold and 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 200-day moving average.
  • 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 average.

Quantifying the Results of Technical Indicators

For the study below, I looked at the current list of optionable stocks since 2016 and found each time a stock signaled for each indicator. The table shows the average and median stock return over the next month of trading after a signal and the percentage of time the return was positive.

I bolded the best two data points in each column and colored the worst two in red. Eyeballing the table, the RSI has been a reliable indicator over the past few years. Also, stocks pulling back to their 50-day moving average and lower Bollinger Band have also performed well.

The 200-day moving average hasn’t worked well for market technicians. Stocks crossing the moving average or pulling back to it were least likely to be positive. Returns after a Golden Cross also showed underperformance.

Technical Analysis Indicators 2016

This next table is like the one above, except it only considers signals over the past 12 months. The indicators can perform differently in different trading environments, so this tells us what has and has not worked more recently.

The RSI indicator has been even better more recently than in the table above, so that’s definitely one to monitor. Interestingly, the Golden Cross indicator, which was one of the worst indicators in the table above, has performed extremely well more recently. Over the past year, stocks have been positive most often after a Golden Cross compared to any of the other signals. By every metric below, the MACD has been the worst technical indicator over the past year.

Technical Analyis Indicators 12 Months

Recent Individual Signals

The analysis above shows the RSI and Golden Cross to be the best technical indicators over the last 12 months. Below is a list of stocks that have signaled over the past week by one of those two indicators. I’m showing stocks that have been positive over the past year to limit the size of the table and disregard stocks that have poor looking charts, which I wouldn’t consider anyway.

RSI Golden Cross Signals


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