Back to Basics: Market sentiment via 2-line EMA on S&P500

S&P 500

One of the most, if not THE most, important theme in trading is identifying if we’re in a bull or bear market. It’s easier to “ride with the wave” than to fight against it. While there are an abundance of work, studies, theories, or whatever, on calling out market sentiments, I feel that the most useful way of doing it would be ones that stick to the facts. And the only fact we can be certain of in the market is the price.

So here’s the idea (definitely not original) for guessing market sentiment.

1. Bull market = 50 dma > 200 dma for S&P 500.
2. Bear market = 50 dma < 200 dma for S&P 500.

As with any indicator, this is not a law. It’s just a signal to give you a piece of information for you to intrepret based on the fundamentals and maybe other technical analysis tools.

Using new MA algorithm to rewrite old indicators

Seeing that many indicators use a MA for calculation. It may be possible to use new MA algorithm to improve on their calculation.

For example, the RS in RSI is something like RS = EMA(up days) / EMA(down days). We could change it to RS = HMA(up days) / HMA(down days). Since HMA is much faster, the resulting H-RSI may be faster too. This can be useful in day trading strategies.

More work needs to be done to test this idea.

New moving average

I downloaded Hull Moving Average, Adaptive Moving Average, and a Kalmann Filter today.

In the figure, the blue/red is HMA(8), cyan is AMA(10), yellow is EMA(9) as comparison.

Notice that HMA is super fast and follows the price closely. AMA lags more but does a good job of smoothing outt the noise. EMA is as usual and very laggy.

A strategy I’m thinking of is to use 3 different MA’s instead of only EMA to improve the previously discussed 3EMA crossover strategy. The problem with the 3 EMA crossover strategy is that EMA lags too much, so it’s not good for day trading so reaction time is the key to catching / exiting the waves.

Maybe using the HMA as the fast MA, AMA as the base, and something else to verify the trend can work. As I’ve said before, remember to use something to filter out the whipsaws. But don’t use something laggy as it would defeat the whole purpose of a fast indicator.

Also, HMA can be used as a proxy to smooth out some inputs. i.e. RSI(HMA(close, 8), 14) or HMA(RSI(close, 14), 8).

Trending and Ranging indicators

RSI and MACD makes them appropriate for trending markets. For directionless, chopping markets, you need to use Stochastics and Wm%R.

from g034