Forum Archive Index - June 2002

[Phaedrus <Phaedrus@techemail.com>]

Adam,
      With regard to this stock you said "the RSI and Stochastic are all 
screaming sell........I don't think these indicators allow stocks to run."

 Firstly, you are misinterpreting both indicators. They are not screaming Sell 
- they are not giving Sell signals at all. The Stochastic oscillator is not 
even above the "Oversold" level, let alone penetrating it from above to give a 
Sell signal. The RSI is above the "OverSold" level, but is yet to give a Sell 
signal by penetrating it from above.

 Secondly, you are using the wrong indicators. RSI and Stochastic are both 
momentum oscillators, and as such are best suited to stocks that are in a 
trading range. As you rightly observed, FUN is now in an uptrend. Trending 
stocks are monitored by trend indicators. If you use oscillators on stocks that 
are trending up, you will almost always get flicked out prematurely. You are 
right, these indicators do not allow stocks to run - that is what Trend 
Indicators are for.
 In actual fact, the RSI signalled a Sell about a year ago, and has not 
signalled a Buy since, so you would not even be in this stock using RSI 
signals. It is the same story with the Stochastic Oscillator. This signalled a 
Sell a couple of months ago, and has not signalled a Buy since. Using these two 
indicators would ensure that you missed out totally on the current uptrend.
 
 Andrew's suggestion to "Back test to see which indicators work best with each 
individual stock" is not a good one in this instance. The reason is that this 
stock has changed its character, in that it has spent the majority of its time 
in a trading range, but is now in a strong uptrend. Backtesting will only 
select indicators best suited for the extended trading ranges of the past. In 
fact, backtesting identifies Sto as the best indicator with this stock, giving 
an annual return of 11%, with RSI the next best, with an annual return of 6%. 
These figures should be compared with a Buy/Hold annual gain of 35%.

 So, what should you be doing? Firstly, is this stock in an uptrend? Yes, of 
course - that is quite obvious from a quick glance at the chart. There are 
technical methods of detecting trends, should you want them. The "Trend Ribbon" 
at the bottom of the chart is derived from the ADXR component of the DMI 
system, and clearly marks when the stock is trending. Since it is trending, the 
trend is monitored by the use of Trend Indicators. There are many - my 
favourites include Trendlines, DMI, parabolic SAR and moving averages. Just as 
Oscillators are all but useless in a trend, trend indicators are worse than 
useless in the absence of a trend. Therefore, signals derived from the DMI, for 
example, must be ignored unless or until the stock is trending. Notice how it 
gives a string of useless losing signals unless a trend is evident. Backtesting 
this indicator shows a loss of 10% pa! Regardless of this, DMI is one of the 
best trend indicators, and it would be an excellent choice for you to use to 
signal an exit from this trade. Ignore your oscillators - it is inappropriate 
to use them here.

 If a stock is trending, use trend indicators. It's that simple.

             Regards,
                        Phaedrus.

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