LONDON, 17 February 2003 — After three disastrous equity years it might seem that fundamental analysis alone is not producing accurate results but needs to be supplemented by technical research. Markets are not only reacting due to fundamental changes, price behavior is also touched by the emotions and expectations that have dominated recent market development.
The Relative Strength Index (RSI) is a popular oscillator. A non-trending indicator, the RSI measures the momentum of a security to determine whether it is in an overbought or oversold condition. The RSI oscillates between 0 and 100.
A reading above 70 warns investors of an overbought condition or downward trend, while readings below 30 indicate an oversold condition or upward trend.
Divergences occur when the price reaches a new high or low that is not confirmed by a new high or low in the RSI, although prices are usually correct and move in the direction of the RSI. For example, the MSCI-World Index and its 14-day RSI showed that a bullish divergence occurred between mid-September and mid-October of 2003, as prices were falling while the RSI was rising. Prices subsequently recovered and tended upward. The currently oversold condition in the MSCI, as the limit of 30 is touched, indicates a buy-signal.
The Moving Average Convergence/Divergence (MACD) is a trend-following momentum indicator that shows the difference between a 26-day and a 12-day exponential moving average. A 9-day exponential moving average, called the “signal” or “trigger” line is plotted on top of the MACD to show buy/sell opportunities.
There are two popular ways to use the MACD: Crossovers and divergences. The basic MACD trading rule is to sell when the MACD falls below its red trigger line. Similarly, a buy signal occurs when the MACD rises above its trigger line.
An indication that an end to the current trend may be near occurs when the MACD diverges from the security. A bearish or bullish divergence occurs when the MACD is making new lows or highs while prices fail to reach them.
The MACD is a trend-following indicator. When a significant trend developed, such as in mid-September 1998 and beginning of October 1998, the MACD was able to capture the majority of the move. When the trend was short-lived, such as in March 2001, the MACD proved unprofitable. For such a case, an MACD calculated on a daily basis could improve results.
What is the reading from MACD for the World Equity market today? On a weekly basis both lines are on an upward trend, still indicating a buy signal, but we can observe that we are losing momentum, because the difference between the MACD and the MACD-Trigger is reduced, and the index might shortly give a selling signal. Daily figures should clarify the situation. The daily MACD is clearly on a downward trend, and the momentum has become more negative recently, which indicates an even stronger sell signal.
Moving Averages (MAV) are the most widely used trending tools. For medium term analysis these are analyzed along with 10-week and 30-week moving averages. The purpose of MAVs is to smooth out market noises and to define the actual market direction.
A buy signal is generated when the short-term MAV cuts above the longer-term MAV, which happened recently for the MSCI, giving us a clear buy-signal. A sell signal occurs when the short-term MAV is beneath the longer-term MAV.
In summary, technical indicators are sending mixed signals for the World equity market, suggesting a neutral stance on equities. This is also our actual investment policy, which takes into account the geopolitical environment, macroeconomic factors and valuation.
(The information contained herein is for information only and should not be construed as an offer or a solicitation to purchase, subscribe, sell or redeem any investments. While Clariden Bank uses reasonable efforts to obtain information from sources which it believes to be reliable, Clariden Bank makes no representation or warranty as to the accuracy, reliability or completeness of the information)
