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Selling and Buying Signals


Trend reversals can be construed as selling and buying signals. Trendlines and moving averages generate inferior signals.


Trend reversal signals

The use of selling and buying signals varies among the strategies:

Real estate funds IYR and VNQ, all bond funds with LEAPs (except TBT, which is leveraged and inverse), and stocks with the longest price histories were analyzed with TRENDS.BAS on 3/6/17 after changing the thresholds:

trends2050

A 30 box threshold was optimum for IYR but not for VNQ. The results for IYR are more credible because IYR has a longer price history. The average uptrend for stocks was about three times the threshold for all thresholds.

The bond fund results were inconclusive, so the test was repeated using lower thresholds. The average uptrend was about three times the threshold for thresholds of 7 and 10 boxes, but only about two times for a 15 box threshold. For IEF, a 10 box threshold was much better than a 7 box threshold:

trends715

I recommend a 30 box threshold (+35% or -26%) for IYR, VNQ, and stocks. In my experience this has been profitable, the holding period frequently has been long enough to receive the favorable tax treatment accorded long-term gains, and annual transaction costs have been low.

I recommend a 10 box threshold (+10.5% or -9.5%) for IEF. I have not had enough experience with IEF to justify this threshold.

Trendline signals

Some chart analysts use trendlines to make forecasts. This is unwise because trendlines are constructed directly from charts, which are mostly noise.

Moving average signals

Intersections between two moving averages deserve consideration because moving averages filter out some of the noise. A sell signal results when a moving average falls below a longer-term moving average. A buy signal results when a moving average rises above a longer-term moving average.

Moving averages have a tendency to produce premature sell signals. They converge and sometimes cross when a stock rests. Trend reversal signals are better because resting periods have no effect.

These are charts of stocks with strong uptrends at the start of 2008, a weak year, and the start of 2013, a strong year. Prices are blue, uptrends are orange, 50 day moving averages are red, and 200 day moving averages are green:

MDR
CME
MON
GME
CMI
PII
LB
MWE
MDVN
ALXN