Multi-input Improvement of One-day Performance Indicator

Stock market forecast can be built using different technical indicators. The relative change between the closing prices of two consequent days can be called one-day performance indicator (ODP indicator). The interpretation of ODP indicator chart is very simple - an uptrend starts after a big positive value of ODP indicator (the chart has been presented in the recent post). It works by a simple scheme: input₁ → output.

However, a closer look at ODP indicator chart reveals also a typical pattern before starting uptrend - it fluctuates while moving down and then it has a big positive value. So that the more informative scheme would be in case of using n days of ODP indicator signals: (input₁, input₂, . . input_n) → output. It reminds candlesticks pattern chart. A candlestick figure consists of Real Body and Upper and Lower Shadows. The Real Body size is proportional to the difference between opening and closing prices of one day. Since it is no a big difference between closing prices of previous day and opening price of the next day, there is a similarity between Real Body and ODP indicator.



Considering this uptrend case, it is important to notice that there could be many other ODP indicator patterns. Investors could analyze these multi-day patterns on charts (in the same way as candlesticks pattern is used as a tool to predict future prices) or by using an automatic statistical method to map the correlation (input₁, input₂, . . input_n) → output. Evidently, one of the simple and powerful statistical methods that could be used for this purpose is Neural Network.

© Alex Shmatov. Published with permission of the copyright owner. Further reproduction strictly prohibited without permission.

One-day Stock Market Performance Can Be an Indicator

According to Efficient Markets approach, news and other publicly available information are incorporated into the price of a stock. One of the available news factors is a state of the stock market itself - bullish, bearish, or neutral. The state can be the same or it can evolve. A state change results the re-evaluation of price with a certain time delay. So any stock market movement causes a certain reaction of investors. If the market suddenly plunges, investors may start panicking, selling, and dragging the market even faster. If stock market prices are increasing without fluctuations for long, investors become confident to invest. As a result, if more money inflows, demand pushes prices up.

In the same way, one-day stock market performance can impact the emotions of investors. Therefore, it can be considered as a kind of indicator. The chart below shows how a big one-day positive performance can push the market up (callout 1..5):




The chart represents the curve of S&P-500 index values for period from October 2008 to April 2009 (blue line) and the curve of one-day performance (red line). The performance calculated using formula:

P₁ = 100% * (C₂ - C₁) / C₁

where C₂ - current day closing price, C₁ - previous day closing price.

© Alex Shmatov. Published with permission of the copyright owner. Further reproduction strictly prohibited without permission.