Lagging Indicators Affirm Bearish Part For Progress | The Conscious Investor

I’ve discovered that novice traders consider technical evaluation as pretty homogeneous. On the finish of the day, technical indicators are simply mainly analyzing value patterns, proper?

Technical evaluation is definitely comprised of a reasonably numerous set of instruments to assist traders perceive investor sentiment by analyzing value and quantity traits. Whereas the frequent thread for technical evaluation is a give attention to the markets themselves (by way of value and quantity) versus elements that always affect market exercise (for instance, basic or macroeconomic evaluation), it seems that there are numerous alternative ways to quantify investor sentiment by way of charts.

On this article, we’ll discuss two foremost classes of technical indicators, how main and lagging indicators symbolize totally different approaches to cost evaluation, and the way we will apply these ideas to the present chart of Apple Inc. (AAPL).

Main vs. Lagging Indicators

I prefer to classify technical indicators into normal buckets: main indicators, that are designed to anticipate a change in development, and lagging indicators, that are extra confirmational and inform you when a development has truly reversed.

These two classes remind me of the broader labels of development vs. worth investing.  Progress traders have a tendency to purchase robust firms within the hope that they are going to proceed to develop earnings over time. Worth traders, however, are likely to spend money on firms buying and selling for lower than what they’re value based mostly on some valuation evaluation.

There is not essentially a “proper” or “mistaken” approach to make investments, however there are totally different intervals the place development or worth approaches will are usually extra profitable. The identical could be mentioned for the various kinds of technical indicators, and, for a lot of traders, a steadiness of main and lagging traders might be one of the best strategy.

I are likely to favor lagging indicators in my very own technical work, though I do make use of some main indicators as nicely. One indicator specifically, the Relative Power Index (RSI), combines each main and lagging capabilities to assist outline the development and acknowledge development shifts.

RSI as a Main and Lagging Indicator

Towards the top of a bullish section, the value will typically proceed greater, whereas a momentum indicator like RSI truly rotates decrease. This means a scarcity of upside momentum and signifies that the uptrend could also be nearing its finish. That is the place RSI can assist anticipate potential turning factors, because the sign happens whereas the present development remains to be in place.

Let’s overview the chart of Apple going into its July excessive.

Notice the constant uptrend that started in January, offering a sudden reversal from a bearish This fall 2022. When AAPL made one other new excessive in late June, the RSI spiked as much as nearly 80. Throughout subsequent value highs in mid- and late-July, the RSI peaked round 70 and 65, respectively.

This “bearish momentum divergence” urged that whereas the value of Apple was nonetheless going greater, the bullish momentum propelling the value motion was starting to dissipate. Certain sufficient, AAPL gapped down beneath its 50-day shifting common quickly after, starting a bearish section which will nonetheless be in place as we speak.

RSI may also be used as a lagging or trend-following indicator, designed extra to validate a possible value reversal you’ve got already noticed. Discover how, in the course of the first half of 2023, the RSI remained within the 40 to 80 vary? This vary is extra attribute of a bullish development than a bearish development.

Now have a look at how your complete vary of the RSI pushed decrease beginning in August, with the RSI now rotating between 20 and 60. This shift to a extra bearish vary may have helped a savvy investor rotate to extra defensive positioning.

Outlook for AAPL

For the reason that July peak, Apple has now entered a downtrend comprised of decrease highs and decrease lows. The RSI grew to become oversold in the course of the August low, however was not oversold on the September low. Now we’re observing a bullish momentum divergence, offering a number one indicator of a possible change in development.

Contemplating the burden of the proof, I am seeing the value in a clearly outlined downtrend channel. The low in September got here at a confluence of assist, simply above the 200-day shifting common and proper across the 38.2% Fibonacci degree. Now the inventory is giving a second try at pushing above the 50-day shifting common, after an unsuccessful try in late August.

Whereas the RSI divergence tells me to be prepared for a reversal, the clearly outlined downtrend in value on weak momentum compels me to stay on the sidelines. A break beneath that confluence of assist round $168-170 would validate the bearish thesis and recommend additional draw back into year-end 2023. 

As a trend-follower, I’ve at all times felt that my foremost targets are threefold:

1. Outline the development
2. Comply with that development
3. Anticipate when the development is exhausted

By combining each main and lagging technical indicators into your toolkit, you’ll be greatest ready for altering market environments and development reversals!

RR#6,

Dave

P.S. Able to improve your funding course of? Try my free behavioral investing course!

David Keller, CMT

Chief Market Strategist

StockCharts.com

Disclaimer: This weblog is for academic functions solely and shouldn’t be construed as monetary recommendation. The concepts and methods ought to by no means be used with out first assessing your personal private and monetary state of affairs, or with out consulting a monetary skilled.

The writer doesn’t have a place in talked about securities on the time of publication. Any opinions expressed herein are solely these of the writer and don’t in any manner symbolize the views or opinions of another individual or entity.