sector and market adjusted TA

Discussion in 'Technical Analysis' started by man, Dec 20, 2002.

  1. man


    There are IMO always three components in one stocks price:

    1. overall market
    2. sector
    3. company

    All technical analysis usually takes place on stock price only, disregarding sector- and marketmoves. One of my strategies is pairsTrading and there we analyze spreads and their behaviour. Now I consider to use that kind of thinking in single stock trading as well. Thus I want to run analysis on a time series build by the stock relative to its sector and the overall market.

    I have not done that before and I will start with very simple concepts in it, but I wonder if anyone here already did that.

    My idea about the market is that at most times it is efficient, meaning that it is not profitably predictable, but at times this efficiency gets distorted, opening up opportunity for trading. Now they are different methods to find these inefficiency points and I want to find our if a crossSectionalMarket-Analysis can help detecting them.

    Any concepts, experiencies, ideas?
  2. maxpi


    Let us know if you find anything.

    I have had the question of the sector's influence on my list of things to check out for a long time, never got to it yet. I had thought in terms of some tech analysis on sector index funds as input to the tech analysis on an individual issue in the sector. Maybe just simply charting the difference between % moves on the sector and the issue would work as a start on generating a strategy.

  3. I did several days worth of pairs testing using a stock and it's corresponding ETF. I stuck to the more liquid ETF's. I tested using stocks making up a low percentage of the ETF, and then tried out a few that were the largest components.

    While I did find a few cases where the system worked well, I could not find one system that worked well across 3-4 sectors. For example, I'd find one that worked well with a bio stock and BBH, but did poorly with a oil serv stock and OIH. I gave up for awhile. I might go back.

    I was looking at both divergent and convergent strategies, but only based on price. I've seen comments on using volume as a setup. I'd guess you might look for a stock with a significant increase in volume compared to the sector as a whole.

    Good luck with it. If I come across anything worth sharing I'll PM you (or maybe post).
  4. man


    thanks for posting,
    It is funny, that this subject does no attract more attention - although I like it that way. I will get into this and will come back to both of you with some results.

    I see your points. Did you check the pairstrading thread in the strategy corner? might be interesting, although it is mostly about two stocks against each other and not agaist a basket of stocks.

  5. I've read through the Pairs trading thread over in Strategy Trading. That's likely where I came across the 'volume divergence' comment. I'd like to look into that next.

    I've traded pairs on the intraday, 1, 2, or more day timeframe basis. I would wait for a spread spike out past 2 std deviations on the 5 minute to put on the pair. Then I would put on a second leg if the spread went on past a third deviation. I would attempt to capture the profit when the spread returned to center. It might be fifteen minutes: It might be a week. I believe this is a common method.

    Often I would make money on the second leg, and sometimes on the first, though not nearly as often (I don't have my stats here with me). If the spread kept going 'out' I would start taking each leg off.

    The problem I found was that I would get a number of small winners, and then a big loser, which ran against my trading mentality (losers small, winners big). Also, in a short covering rally your short stock didn't seem to act as a good hedge. These concerns, along with what seemed a small return on a lot of invested capital and others, has kept me from going all out with pairs. The old saying about your strategy must match your temperament surely fits me.

    I've traded divergent pairs on a daily timeframe with minor success. The result has always seemed more like luck than trading.

    The market/sector/stock concept had struck me as well. I've looked at the market ETF's, sector ETF's, and single stock pair combos for a bit. I can't seem to find a 'system' that works across several pairs. I don't doubt there's likely one. I just haven't found it yet.

    A key for me is finding a setup to alert you to the switch being thrown from convergent to divergent (or the other way). Then looking to an event to trigger the trades. I've been using a setup as my trigger. I need a bit more fine-tuning.

    Good luck in yours..
  6. maxpi


    Evan Fundamental analysis is done differently from one sector to the next. Breaking things up by the different stock price fundamental valuation methods might be a better way to screen issues than by sector.

    For ex: co's in a hot industry but without much in the way of sales yet (Biotech) are valued a lot differently than WalMart. This could affect the TA.

  7. man


    actually that's the key point to pairs trading. when to bet on conversion and when to bet on divergence. we started using a very similar concept like yours on daily data a year ago, but we found diminishing edge at the end of the nineties. so we changed the stratgey and started trading it a couple of weeks ago. since then we are satisfied with the results. still all this is daily data. we are now moving towards intrday pairs trading. I am especially interested in very similar pairs, like fnm - fre. using normal technology we could not make this pair profitable on daily data so far. maybe intraday is better.

  8. nitro


    I think you mean convergence.

  9. man


    right. thanks.

  10. TG


    I've been looking at this for many months now and have found a fairly simple, but effective way to trade them. I have a pair in three sectors; bios, software and semis. I come into each day with no bias, that helps. Opinions can get you slaughtered, especially in the Bio sector. I note the divergence that occurs during the first half of the trading day and then trade the balance of the day expecting, and generally getting(80%) of the time convergence in my pairs as the day goes on. My pairs required a lot of study over a long time but I'm happy with the results.
    #10     Dec 28, 2002