Why more stock-market volatility makes technical analysis more relevant
Technical indicators measuring short-term momentum of the stock market are finally relevant again and that’s good news for active managers, according to chart watchers and market technicians.
After all, choosing when to buy and sell is what distinguishes active managers from passive ones.
However, last year’s uninterrupted gains with virtually no volatility made many technical indicators irrelevant, with the market stubbornly climbing as indicators triggering sell signals multiple times last year turned out to be false.
“Technical analysis last year was good as a trend-following tool and not much as a risk-management tool,” said Katie Stockton, founder and managing partner at Fairlead Strategies, LLC, a research firm.
The S&P 500 SPX, +0.26% gained 19% in 2017 in what will go down as one of the most quiescent periods for equity bourses in history. The momentum was so strong during last year that the market remained in what technical analysts define as “overbought” conditions for about five straight months until eventually tumbling into correction territory—defined as a drop of at least 10% from a recent peak—on Feb. 8. The term “overbought” refers to what market technicians refer to as extreme price moves higher.
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