Technical Score

Use

  1. Ability to see in one number the recent (2-3 months)  performance of a security
  2. Quickly spot strong or weak markets, with a different approach from classic momentum – as past performance is already available on the dashboard.

Logic

  1. Must include some reversion to the mean logic, so that the indicator is not completely oblivious to overextended markets
  2. Only use simple indicators

Components

  1. Spotting the trend : Slope of SMA  50, 200 – Probably the most straightforward way to determine the direction of a trend
  2. Tracking the change in momentum : Wilder’s RSI,  Using the speed of recent rise / decline rather than the classic rules.
  3. 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.
  4. 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.

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