Forum Archive Index - June 2002

[Phyllis Bergquist <phyl@clear.net.nz>]

Hi Phaedrus.
Could I ask you to repeat your instructions for sending charts on the
Internet.    I earmarked it for a weekend instruction class for myself (!)
but somehow deleted it.    I really NEED to learn how to make quick send
charts - sorry to be asking you to repeat.    TVM   Phyllis.....    PS
Just really enjoyed yr remarks on trending and non trending indicators.
Also TVM.....
----- Original Message -----
From: "Phaedrus" <Phaedrus@techemail.com>
To: <Sharechat@sharechat.co.nz>
Sent: Saturday, June 08, 2002 3:37 PM
Subject: [sharechat] ASX:FUN


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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