Signals from double top and double bottom formations, Oslo Stock Exchange 1996-2014

Research results from Investtech, 6 February 2015
Published in English on 13 February 2015. Norwegian original here >>

Stocks with long term buy signals from double bottom formations rose on average by 11.3 per cent in the following three months. Stocks with sell signals from long term double top formations fell on average by 1.1 per cent the next three months. This is shown in a research report from Investtech based on 19 years of data from the Oslo Stock Exchange.

A double top formation is a top formation which marks the end of a rising period. The formation consists of two tops of approximately the same width and height, see figure 1. The formation of a double top mirrors increasing pessimism among investors and signals the beginning of a falling trend. Double top formations are especially useful in predicting long term market trend reversals, but are also used in the shorter term.

There is an opposite version of this formation; the double bottom formation, see figure 2. This is a bottom formation which marks the end of a falling period. A double bottom formation signals increasing optimism among investors and the start of a rising trend.

In technical analysis terminology, a break down from a double top formation triggers a sell signal. Similarly a break upwards from a double bottom formation triggers a buy signal.

Investtech’s Head of Research Mr. Linløkken has studied the price movements that have followed such buy and sell signals on Norway’s Oslo Stock Exchange in a period of 19 years, from 1996 to 2014.

Investtech’s computers identified 153 buy signals and 143 sell signals in this period.

Figure 3: Price development after buy and sell signals from double bottom and double top formations on the Oslo Stock Exchange identified by Investtech’s automatic algorithms in long term price charts. Click the image for bigger version.

The chart shows average price development 66 days after buy signals from double bottom formations and sell signals from double top formations. The signals are triggered on day 0. Only days when the exchange is open are included, so 66 days equal approximately 3 months. Buy signals are the blue line and the sell signals are the red one. The shaded areas show the standard deviation for these calculations. The black line is the benchmark index.

On average, stocks with buy signals rose by 11.3 % in 3 months, whereas stocks with sell signals fell by 1.1 %.

These statistics are based on a relatively small number of data points. The results from the Swedish Stockholm Stock Exchange point in the same direction, but are clearer for sell signals and less clear for buy signals. This shows that further studies are required.

Read the complete research report here for more results and details.

Keywords: Buy signal,Double bottom,Double top,Oslo Stock Exchange,Sell signal,statistics.