These Are The 5 Most Popular Indicators… But They Have Problems

This week, I want to start by looking at charts that many other traders are looking at. It’s surprising to me, but many traders look at standard indicators. This is true even for professional investors. It’s bizarre for one important reason, but I’ll get to that in a moment.

A few years ago, Bloomberg offered insights into which indicators were the most popular on their platform. While subscribers have access to hundreds of tools, the most popular are:

1. Moving Average (MA)
2. RSI
4. Bollinger Bands
5. Stochastics

I charted all of these indicators below. The period of the MA wasn’t specified, so I used a 200-day MA in the chart below.

Overall, this chart is bullish.

SPDR S&P 500 ETF (NYSE: SPY) is above its 200-day MA — bullish.
The indicator directly below the price is RSI, and its reading is bullish.
The price action is along the upper Bollinger Band, which we’ll look at closer in a minute.
MACD and stochastics are also bullish.

But honestly, there isn’t really a need to look at all of these indicators… and that’s because they all tend to offer signals at the same time. And yet traders tend to use these similar indicators as additional confirmation that the market is bullish or bearish.

Why You Don’t Need All Of These Indicators

Traders using these indicators don’t seem to realize they are all calculated in similar ways. Prices are smoothed and the formula evaluated based on how far the price is from its recent average behavior. They all look slightly different because the formulas vary, but there is little new information in the combination of indicators.

Starting with stochastics, at the bottom of the chart, the indicator generally tracks the price action. This indicator is overbought. But that doesn’t tell us anything since it can remain overbought or oversold for weeks at a time.

MACD is bullish. Crossovers tend to be useful, but the most recent signal was over a week ago, and there is no actionable information at Friday’s close.

RSI is interesting because it rarely provides signals. This chart shows 10 months of history and the indicator never gave a formal “buy” signal. There was a “sell” signal in August when RSI fell below 70, but it has been silent since then.

(To be honest, I never understood the popularity of RSI because its signals are so rare and there is no assurance that a “buy” signal will follow a “sell” signal.)

The 200-day MA can be useful, but, like MACD, we are so removed from the crossover that the current status of the indicator is not actionable.

Bollinger Bands do have the potential to be useful. But I believe they need a more detailed look. The next chart shows the Bollinger PercentB in the center and Bollinger Bandwidth at the bottom.

PercentB shows where the close is relative to the bands. Readings above 100 indicate the close is above the upper band. Breaks back below 100 tend to be associated with pullbacks or consolidations. That’s where we are now.

Bandwidth illustrates the idea that volatility moves from high to low and low to high. Increases in Bandwidth are associated with sharp price moves. A break above the horizontal blue line is likely to be accompanied by a large price move.

Combined, these two indicators tell me we should expect a decline in SPY over the next few weeks. This is confirmed by my indicators.

What My Indicators Are Saying

I developed my own indicators because in my experience, standard indicators like RSI and MACD simply can’t be used to generate consistent profits.

My Income Trader Volatility (ITV) indicator (red line) is moving higher and could cross above its MA (blue line) this week. ITV is similar to VIX in that it rises as prices fall. If ITV crosses above its MA, a decline in price is likely.

Our last chart this week shows my Profit Amplifier Momentum (PAM), which shows a bearish divergence. PAM is shown on the daily chart of SPY below.

PAM is designed as a short-term indicator. It failed to make a new high as prices moved up. This pattern is often followed by falling prices.

My indicators are bearish. This is a reversal from last week but consistent with the popular Bollinger Bands indicators. There could still be some residual upside momentum, but this rally, in my opinion, is nearing its end.

Action To Take

Just because the rally is possibly coming to an end, it doesn’t mean we can’t keep profiting. My followers and I go where the evidence leads and search out short-term trades that let us make money while staying cautious.

I’m not interested in getting caught up with irrational enthusiasm or overwhelming pessimism in this market. I’m not going to chase trades in hopes of making big-time gains, either. Instead, I’ll stick to my time-tested strategies that work in any market and pay my readers and me with immediate income — week in, week out.

Best of all, one of the strategies I use works like an “insurance” policy — protecting us, while still giving us the chance to profit.

Want to learn more? Go here now…