Investtech Research: Trend signals remain reliable

Published 18 August 2023

Previous research, based on data from the period 2008-2020, showed that buy signals from trends on average gave 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. Buy signals from trends in the period 2020 - 2022 have, on average, provided strong excess return compared to the rest of the market.

Trends are one of the most central elements within technical analysis. They are visual and intuitive, describing the direction in which a stock or the market is moving. An upward trend indicates persistent and increasing optimism among investors, often as a result of a stream of positive news around the stock. According to technical analysis theory, it is a buy signal when the price is in a rising trend, breaks upwards from a rising trend, and breaks upwards from a horizontal trend. A break downwards from a rising trend is also considered a buy signal, but less strong than when the price is within the trend.

We have previously observed the price movements that have followed buy signals from trends in Investtech's price charts for the Norwegian, Swedish, Danish, and Finnish stock exchanges. Based on signals from the period 2008 - 2020, we concluded that buy signals from trends, on average, gave excess return compared to the rest of the market.

As a follow-up to this research, we have now examined trend signals in medium-term charts for the period 2020 - 2022.

Stocks in rising trends

The chart below shows average price development following buy signals from rising trends identified in Investtech’s medium term price charts in the Nordic markets. The signals are triggered on day 0. Only days when the exchange is open are included, so 66 days equal approximately three months. The thick blue line shows the development of buy signal stocks. The shaded areas are the standard deviation of the calculations. The thin blue line shows benchmark development in the same period as the buy signal stocks.

We observe that stocks in a rising trend (buy signal) have risen in the following period. The increase has been quite steady throughout the three-month period, and it has been significantly better than benchmark. After 66 days, the stocks with buy signals have on average increased by 5.6 percent, while bencmark has on average risen by 3.5 percent in the same period. This results in an average excess return of 2.0 percentage points after 66 days.

Converted into annualized figures, the buy signals have on average provided 8.9 percentage points excess return vs benchmark. For the period 2008-2020, the corresponding figure was 6.5 percentage points. The table below shows annualised returns based on the 66-day figures for each of the Nordic countries, as well as a weighted average for the Nordic region.

pp = percentage points, i.e. the arithmetic difference of the percentage returns. Annualised figures are calculated by repeating the 66-day figures for one year, assuming an average year has 252 stock exchange days.

Buying stocks in a rising trend is considered to be a good strategy.

Other buy signals from trends

Similar analyses were performed for the other buy signals based on trends, i.e., when the stock price breaks upwards from a rising trend, breaks downwards from a rising trend, or breaks upwards from a horizontal trend. These signals have also on average given positive excess return. The research results show that in the period 2020-2022, these signals yielded an average annualised excess return of 8.4 percentage points, 3.3 percentage points, and 19.1 percentage points, respectively.

Summary

Buy signals from trends in the period 2020-2022 have on average exhibited a significantly stronger performance than the rest of the market over the next three months.

Buy signals from trends can be useful signals in a trading strategy for the Nordic market.

Keywords: h_THorBrU,h_TR,h_TRBrD,h_TRBrU.