Investtech Research: Support and resistance are important indicators

Published 6 November 2023

Previous Investtech research based on data from the period 2008-2020 showed that when the stock price was significantly above support and lacked resistance, a period followed that on average resulted in excess return compared to the rest of the market. The same analyses have now been conducted using data from the period 2020-2022. The results are consistent. They indicate that such signals during the period 2020-2022, on average, have led to significant excess return compared to the rest of the market. We observe that the corresponding sell signals, where the stock price is significantly below resistance and lacks support, on average, resulted in negative excess return vs benchmark. This is also consistent with previous findings. These signals are considered important, and it is assumed that they can be applied in trading strategies involving listed stocks.

We have previously examined the price movements that followed buy signals defined as situations where the stock price is above support and lacks resistance in Investtech's price charts. The universe included listed stocks in Norway, Sweden, Denmark, and Finland. Based on signals from the period 2008-2020, we concluded that such buy signals, on average, outperformed the market.

As a follow-up to this research, we have examined the same types of signals identified in the period 2020-2022. This article summarizes the new results and compares them with the previous ones to assess their consistency and validity.

Buy Signals: Stocks above support and lacking resistance

The chart below shows average price development following buy signals when the stock price is above support and lacks resistance. The signals are triggered on day 0, and we have examined the development up to day 66. Only days when the stock exchange is open are included, so 66 days correspond to approximately three months. The thick blue line illustrates how stocks with buy signals performed. The shaded area represents the standard deviation of the calculations. The narrow blue line shows how the benchmark index performed during the same period when measuring the development of the stocks with buy signals.

Figure 1: Nordic markets combined. Return from stocks with buy signals identified in Investtech's medium-term price charts. Thick blue line represents the signal stocks, thin blue line represents benchmark. Nordic markets 2020-2022.

The figure illustrates that buy signals outperform benchmark, and excess return increases steadily during the first 66 days after the signal date. After 66 days, stocks with buy signals, on average, have increased by 4.9 per cent, while the reference index has risen by 3.1 per cent.

The table below shows annualised return and excess return based on the 66-day figures for each of the Nordic countries, as well as a weighted average for the Nordic markets combined.

pp = percentage points

Overall, stocks with buy signals outperformed benchmark by an annualised excess return of 7.8 percentage points in the period following the signals. For the period 2008-2020, the corresponding figure was 10.1 percentage points better than benchmark.

Sell Signals: Stocks below resistance and lacking support

The chart below shows the performance of stocks that are below a resistance level and lack support.

 

Figure 2: Nordic markets combined. Return following sell signals from stocks significantly below resistance and lacking support identified in Investtech's medium-term price charts. Thick red line represents the signal stocks, thin red line represents benchmark. Nordic markets 2020-2022.

The figure illustrates that stocks below resistance and lacking support clearly underperform compared to the rest of the market. They show a relatively neutral development in the first 3 months, while benchmark increases by 4 per cent during the same period. The table below shows the annualised return for stocks with such sell signals.

It is evident that stocks significantly below resistance and lacking support have, on average, significantly underperformed vs benchmark during the same period. On average, such sell signals resulted in an annualised negative excess return of 15.1 percentage points. For the period 2008-2020, these sell signals led to a negative excess return of 7.1 percentage points.

Summary

Buy signals from stocks above support and lacking resistance in the period 2020-2022 have, on average, outperformed the rest of the market. The difference is considered significant, with an annualised excess return for the signal stocks of 7.8 percentage points.

Sell signals from stocks below resistance and lacking support in the period 2020-2022 have, on average, performed weaker than the rest of the market. The difference is considered significant, with an annualised negative excess return for the signal stocks of 15.1 percentage points.

These results confirm and reinforce the findings from earlier research on similar signals from the period 2008-2020.

Such signals are considered important, and we believe that they can be applied in trading strategies involving listed stocks.

Keywords: h_Res,h_Sup.