The S&P 500. Forewarned is Forearmed. Learn How to differentiate what are good stocks buy signals from speculative ones.
As someone who has been creating Technical Studies and mentoring thousands of professional traders for decades, creating technical analysis based code for stocks is far more difficult than for Futures or FX. That explains why there is very little original thought that goes into Technical Analysis based commentaries on individual stocks.
The problem is that it is incredibly difficult to create analysis and code that is sufficiently rare that a signal can be acted upon without any doubt. In any overall Bear market nearly all stocks will say that they are oversold by traditional measurements, which prompts in-depth fundamental analysis to try and different between different assets. I know that this is still a very haphazard and scatter gun approach.
No, the answer lies in in creating code that understands any stocks relationship with itself over multiple timeframes that goes up to annual data. Only then can relationships and patterns be created that have rarity, and allowing for risk assessment in relationship to Price and Time. Once that has been created it allows for the mentoring of situational awareness. Forewarned is Forearmed.
The last meaningful market correction was back at the beginning of last year, so in order to provide some context to the next correction whenever it comes it is worth returning to the the S&P 500 and seeing how many calls to action to buy there actually was. It is no use having too many calls to action as that opens up the lottery of deciding which ones are the best. Likelhood is by the time you have worked that out the stock has already moved.
The chart below has the Range Relativity Study applied. Black lines represent weekly range, blue monthly, pink quarterly, brown semi annual and red annual. These values are fixed at the beginning of each relevant period and therefore provide a forward set of reference points. The chart is of Exxon Mobil (XOM) and you can see that in the past couple of weeks price has reached its annual downside target (Red line).
Whilst this is useful information in its own right it is wholly insufficient in understanding whether this represents a buy point for this stock. What is required is an understanding of Price and Time that quantifies whether it is overextended across multiple time frames when reaching that support.
This requires that the weekly limit of range is beyond the Monthly, Quarterly and Semi Annual limit of range. At present that is not true as the current weekly black line is not below the current monthly blue line. Therefore Exxon is not overextended in relationship to itself.
However, when stocks were collapsing at the beginning of last year there were stocks within the S&P 500 that were. One example is Boeing (BA). At the lows of the year weekly (black) was below monthly (blue), quarterly (pink) and semi annual (brown), whilst approaching the annual support point (red).
Superficially and with hindsight this looks like a storming buy point as the stock rallied 20% in just a month. However, many stocks were behaving in a similar way and so it is necessary to add code that confirms when the reversal is true. The premise is simply that price has to close above the Weekly High Pivot which is marked by the arrow under the bar.
The signal now has more power, but what if we had a scenario whereby we were not close to annual support? Would we ignore the signal to buy? In some instances stocks have not existed long enough in order for this value to be computed anyway. The Priceline Group (PCLN) is one such stock and as the chart shows also produced a powerful buy signal but only at semi annual support.
The final piece of the jigsaw involves any stock buy signal being qualified either by the ability for it to build support based on its own momentum, or being close to a previous weekly or monthly support point. This is quantified by the studies, Energy and Expansion. They qualify what are true supports and resistances and are black and blue lines respectively. Returning to Priceline the application of Energy shows that when the stock got overextended it was moving directly into a monthly support created way back in April 2015.
In contrast Boeing was below its monthly support thus invalidating the buy instruction. There were simply easier stocks to invest in.
In fact out of the entire S&P 500 only 9 stocks provided calls to action, so the goal of creating quality in manageable quantity is achieved. It also means that in more normal market conditions signals remain extremely rare. This is the only one ever to appear in Microsoft since 2009 in the summer of last year.
Some professional Investors are more aggressive and use the code simply for opportunities to buy stocks that they need to have an exposure to for portfolio purposes. Amazon provided such as opportunity last year but was not at support.
Here are the 9 stocks that were calls to action. Stocks buy Signals where red arrow is highlighted on charts:
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