Modified RSI: A Great Technical Analysis Tool

At Amigobulls, we believe in Fundamentals rather than charting. However for all the chartists out there, our today’s discussion is something you would love. Developed in collaboration with one of the most acclaimed minds from the world of technical analysis, our technical analysis algorithm has delivered outperforming results, beating the broad S&P 500 index by 8.7% over the last decade in terms of returns over six months. These kind of returns have been fuelled by picks like Apple Inc., which was picked up by the algorithm for 81 weeks. The algorithm picked Apple between 2004-2012, a period which saw the stock gain close to a whopping 5000%. The chart below displays Apple stock price movement with a highlight of the period from 2004-2012. The stock has returned average 6 month returns of 24%, outperforming the S&P 500 index with a success rate of 73%.

Apple stock price movement

Apple Stock Gains
Source: Apple stock chart by Amigobulls

Technical analysis strategy at Amigobulls

At a time when the world is flooded with trading strategies, the strength/weakness of a strategy lies in its performance. Even before we analyse the performance of our strategy, let’s look into how we pick our technical picks. We call our technical strategy as ‘Modified RSI (Relative Strength Index)’ which picks out stocks after analysing weekly price movements over the preceding 26 weeks.

The strategy classifies the last 26 weeks into periods of upward/downward movements in the market index (S&P 500 in this case). Following this classification, we evaluate the stock movements separately for the periods of upward and downward weeks. Using periods of upward movement in index we find the highest advancing stocks in times of upward movements which we call growth stocks. Looking into the periods of downward movement in the index we find the stocks which gained most/experienced least fall in the broadly falling market. This set is called the defensive stocks. The top 50 stocks from the growth and defensive lists are shortlisted and common stocks from the two lists are the output of our trading strategy. They form our technical picks, which can be seen here. You can also read our complete technical stock picking strategy on our modified RSI algorithm page.

The holding period of our picks is 6 months and the table below represents the performance of the strategy, when back tested over the last decade.

Technical analysis performance

The strength of our Technical strategy can be seen from the above performance. The picks from the week ended July 10, 2013 outperformed the S&P 500 by a huge 79%, which is plotted in the chart below.

technical analysis superior perfomance

The top 5 stocks, based on the number of times the stock was picked, were Apple (NASDAQ:AAPL), CF Industries Holdings (NYSE:CF), Tesoro Corporation (NYSE:TSO), AK Steel Holding (NYSE:AKS) and Akamai (NASDAQ:AKAM). Their performance is summarized in the table below.

Most picked stock No. of times picked* No. of beats (over S&P 500) No. of negative returns (compared to S&P 500) Average beat % Average return %**
AAPL 81 59 22 24.34 24.62
CF 75 64 11 52.77 47.87
TSO 63 39 24 8.24 10.22
AKS 55 33 22 11.17 10.81
AKAM 50 39 11 27.74 36.71

*Number of times picked in the last decade, ** average return calculated over 6 month period

The modified RSI tool is a great tool to use as a technical analyst. However it is not a fool proof method to beat the market every single time.  Anyone claiming to have found a fool proof method to outperform the market every single time is either testing his luck to the extreme or is blatantly lying. Without resorting to either, we have found that the algorithm has beaten the broad market with a success rate close to 70% over the last decade.

On a closing note we restate our technical picks are optimized to perform best with a six month holding period.  Interested in our latest technical picks? You can view our latest technical picks here. If a chartist is not what you are, then head over to our stock picks based on fundamental analysis. You make a choice, we provide it. Happy Investing!!

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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