- Ability to see in one number the recent (2-3 months) performance of a security
- Quickly spot strong or weak markets, with a different approach from classic momentum – as past performance is already available on the dashboard.
- Must include some reversion to the mean logic, so that the indicator is not completely oblivious to overextended markets
- Only use simple indicators
- Spotting the trend : Slope of SMA 50, 200 – Probably the most straightforward way to determine the direction of a trend
- Tracking the change in momentum : Wilder’s RSI, Using the speed of recent rise / decline rather than the classic rules.
- Trend Quality : Distance from SMA 50, 200 : 0-10% above or below shows a healthy trend, 10% or more above / below shows potential overextension, reversion to the mean should be expected. I”m using a normal distribution to avoid treshold effects.
- Strength & Reversals : Full stochastics indicator, using the classic rules (above 80 : strength, leaving 80 : sell off coming, below 20 : weakness, leaving 20 : rebound coming)
Results – Performance analysis
The analysis suggests some predictive power on the SP-500, which can probably be extended to other developed markets indexes / sectors. However it doesn’t imply anything for developing markets / commodities / bonds.
I’ll do more testing as time allows.