In this discussion I'll look at SPY, the exchange-traded fund that tracks the S&P 500 and that is always one of the most-traded issues in the markets. At the end of the piece, I present tables showing the net gain and loss for the technical indicators I've been using.
Which indicator did best? It was a surprise.
The decline from late April was, first and foremost, driven by news and policy surprises, driven by fear that the euro zone was on the verge of collapse.
It was a horrible environment for tech-oriented traders. Technical analysis works best when many traders are making decisions based on many reasons. News and policy tends to produce whipsaws and bad signals.
Here's the outline of what has happened in the past month. SPY is a good exemplar of the broad market, although the time events occurred may vary by a few days when discussing other issues, and the magnitude of highs and lows may differ.
SPY hit a swing high on April 26. At that time the parabolic sar and Person's Proprietary signal were in bull phase, the second day for the psar and the fifth for the pps.
The macd for the sixth straight day was hovering right on the zero line, an extreme neutral position. The stochastic was dropping through overbought territory toward the 80 line.
SPY was trading well above the 20-day moving average.
All in all, it was an optimistic picture. True, the average directional index and pulled below 20, meaning there was no meaningful trend, up or down. But a low adx reading wasn't unusual for SPY. The recent 17% rise beginning Feb. 5 had seen the adx above 30 for 12 calendar days, but for most of the rise, the adx was in the 20s.
Also, the price withdrew from the April 26 swing high, and stocks that day traced a three-quarter percent decline intra-day, suggesting the move was one of exhaustion.
And so it proved to be. The next day, stocks gapped downward and continued to fall for most of the day, tracing a 2.5% decline intra-day. The tech signals confirmed the move: The psar and pps moved to bear phase, the macd turned bearish and the stochastic sliced through the neutral zone like butter down to below the 20-line, a bearish sign.
It would have been possible, on April 27, to exit with a profit for trades that had entered prior to April 14. But, technical traders would have followed the signals, meaning that they entered the day before the swing high, and they would have gotten out pretty much at the same price as they entered.
So far so good. The signals kept traders out of trouble. Theoretically, the bull positions were sold and traders entered bear positions.
On May 6 the markets experienced a "flash panic", when computer trading systems were unable to find buyers and the price of SPY that day traced an 11% decline intra-day, although it closed only 3% below the open.
The flash panic had no impact on the signals.
On May 10 SPY gapped up by 4% at the open, and the macd, although still well below the zero line, began moving higher, an action that often signals the beginning of an uptrend.
The psar continued in bear phase until May 11. The next day, it moved to bull phase, as did the pps.
But the pps on May 12 moved back into bull phase, and then on May 14 it whipsawed back to bear phase, while the psar remained in bull phase throughout. That disconnect remained in place until May 21, when SPY hit what may be a swing low, and then traced a 4% rise intra-day. The macd also began to move back down on May 14.
At that point, on May 21, the psar perversely moved into bear mode, agreeing at last with the pps.
Bottom line is that the parabolic sar kept traders away from massive losses on SPY until after the flash panic of May 6, which broke the psar, an analytical tool that uses intra-day lows in its calculation.
Person's Proprietary Signal produced losses, mainly through the May 12/14 whipsaw.
The macd kept the trader entirely out of trouble, forcing an exit on April 27 after an entry on Feb. 17, assuming that the trader required that the zero line be pierced by a least 0.2 before the signal would be considered as valid.
The stochastic would have also forced an exit on April 27 and kept the trader in bear mode thereafter.
The 20-day moving average, with a rule saying that an open and close below the moving average triggers a phase change, would have gotten the trader out of bull phase on May 4, and it remains in bear phase to this day.
In the tables below, I use the day's opening price for the theoretical trade, except for the moving average, which uses the closing price. The 5/24 item in each table shows the gain or loss as of today's opening.
Parabolic SAR Phase Switches
- 4/23, bull, $120.94
- 4/27, bear $120.65, -0.2%
- 5/12, bull, $116.29, +3.6%
- 5/21, bear, $105.91, -8.9%
- 5/24, ----, $108.52, -3.1%
- Net loss: -8.6%
Person's Proprietary Signal Phase Switches
- 4/20, bull, $120.56
- 4/27, bear, $120.65, +0.1%
- 5/12, bull, $116.29, +3.6%
- 5/14, bear, $115.12, -1.0%
- 5/24, ----, $108.52, +5.7%
- Net gain: +8.4%
MACD Phase Switches (0.2 point threshold)
- 2/l7, bull, $110.27
- 4/27, bear, $120.65, +9.4%
- 5/24, ----, $115.12, +4.6%
- Net gain: +14.0%
20-day Moving Average (signal means no straddle)
- 2/17, bull, $110.26
- 4/28, bear, $119.38, +8.3%
- 4/29, bull, $120.86, -1.2%
- 5/4, bear, $117.52, -2.8%
- 5/24, ----, $115.12, +2.0%
- Net gain: +6.3%
Abbreviations:
psar - Parabolic Stop and Reverse
adx - Average Directional Index
pps - Person's Proprietary Signal
ma20 - 20-day moving average
macd - Moving Average Convergence-Divergence
sto - Fast Stochastic
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