Myth Busting: Market Style!

19 May

I have been very lacking in producing educational content. I know a lot of you follow for my analysis, some others for my indicators and some others for my educational content. While I have been getting back in the groove of posting for the later 2, I have neglected those interested in educational content.

So voila, here we are with an educational post! In this post, I want to dispel and or validate some market conjecture based on actual research and my own observations, from indicators, to chart patterns to different market theories. The post will be formatted in the great MYTH BUSTER format!

Hope you enjoy!

Myth #1: All indicators are interchangeable and one indicator can be used for any type of equity.

You all likely have seen, whether on tradingview or other sites, the magical indicators that “work in all markets!”. And you tell yourself, “oh wow, too good to be true, right?!” And the fact is, it is too good to be true. This is a myth and is absolutely false. No one indicator will be cross compatible for multiple different equity types. No one indicator will be sufficient even within the same equity types (i.e. just because RSI works for MSFT doesn’t mean it will work for NVDA).

You can actually objectively view this for yourself if you apply my ATREE indicator. Just as a quick explanation, the ATREE indicator uses MFI, Stochastics, RSI and Z-Score to determine sentiment. It will also provide you with back-test results as to how effective it is at gauging sentiment based on these individuals technical. If we look at ATREE for NVDA:



Pay attention to the backtest results on the right side of the screen. These provide the raw success rate of its sentiment estimations. For NVDA, we can see that Stochastics can predict sentiment roughly 76% of the time on the daily timeframe. However, if we flip on over to MSFT



We see that Z-Score is actually much more effective at determining sentiment than RSI, Stochastics or MFI. This is just an example, but to show you another one, let’s take the Ichimoku cloud with buy and sell signals and put it on MSFT:



We can see, it nailed the buy but pretty hit or miss for the sell. I wouldn’t say this is a great indicator to use for MSFT shorting. However, if we flip on over to SPY with the same indicator:


Its been a bit more on point.

Understanding unique individual ticker intricacies is my whole shebang. I produce models to predict sentiment. If you are part of my community you know there are 4 commonly used models that we employ, from LSTM, to ARIMA, to Eucledian Distance models to Momentum Technical Models. Not all are equal for all stocks. For example, we will reference momentum for tickers like NVDA, but Eucledian distance is better for tickers like SPY. How do you figure this out? Backtesting! I’ve said it in other educational ideas and I saw it again, you always need to backtest your strategy!

Myth #1 Verdict:

So, are all indicators good for all markets?
NO! This is BUSTED!



Myth #2: Trendlines and chart patterns are helpful and pivotal for trading stocks

There tends to two schools of thought to this. Train 1 is that trendlines are pivotal for trading and making assumptions. Train 2 of thought is that they are not helpful and quite frankly useless. However, in mainstream trading theory and teachings, trendlines are a often cited and often taught method of market determination. But are they useful?

Well, it depends. Trendlines can give us context, without trendlines we would have no context and would just be trading random candles on a blank space. The degree of efficacy of these trendlines can depend on things like:

a) The duration of the trend,
b) The skill of the chartist,
c) The number of tests of the trendline,
d) The overall economic climate that a stock is in.

Obviously, I personally found trendlines problematic, hence my resorting to computer modelling. However, in my years of experience and my maturity in the market, I reapproached the trendline theory as supplemental to modelling and have made some relevant observations, which I will discuss below.

The first point is that not all tickers are created equal. Sound familiar? Yeah this was the basis of Myth #1 about technical indicators. The truth is, it applies to trendlines, too. Let’s take a look at DUO, a small cap stock:



DUO recently did, arguably, a dead cat bounce and produced this pennant you see in the chart above. Now DUO is small cap, low volume stock that barely moves. Suddenly, we have this pennant out of nowhere and with no major catalyst. So what happened?



Nothing, it ended up selling into EOD multiple times.

Let’s take a look at NVDA:



NVDA broke down from a major trendline around April 3rd. This would signal a short. And indeed, it was a short, for a short duration of time. It mostly was rangy and stagnant. But it did sell. This trendline was from January of 2024 and ended in April of 2024, a relatively long and stable trendline. NVDA is also a large cap stock with huge amounts of liquidity and volume, So we can expect follow through on major trendlines.

Trendlines have also been pivotal for intra-day trading. Let’s look back at NVDA (since its my daily go to for day trading):



During open, on the 1 minute chart, we could see NVDA forming a pennant. Based on the modelled data we had two potential price targets, a bull target of 957 and a bear target of 929. What NVDA does with this pennant (breakout or breakdown) can help us ascertain which target price is correct.

What happened?



NVDA broke down, and then it travelled all the way down to that 929 target:



So it would seem that chart patterns are indeed useful. However, they are not overly helpful with indicating target price, As well, they are only useful when the stock has high volume, good liquidity and is heavily traded. The efficacy of trendlines and chart patterns likely comes from volume of traders who are looking at similar trendlines. In order for trendlines to influence a stock movement, you need volume from traders who are paying attention to the same thing in order to move it. This is why penny stocks and low float, small cap stocks do not respect trendlines and patterns in the same way.

Verdict for Myth #2?

CONFIRMED!



Myth #3: Market theories such as Elliot Wave Theory (EWT) and Efficient Market Theory are applicable to all tickers and the market as a whole?

If you are a trader, likely you subscribe to one market theory or another. If you are investor, its likely you subscribe to modern portfolio management theory (which emphasizes diversification). If you are a day or swing trader, perhaps you subscribe to the Efficient Market Hypothesis or EWT.

These all remain “theories” because they have yet to prove valid or invalid in research. However, aside from the investor mindset of diversification, no one theory of the market works for all tickers. In fact, some research has come out about EWT specifically and has indicated that it can be useful in predicting some markets (such as the S&P); however, the results are not generalizable to others (specifically Crypto and some individual tickers).

The same can be said about the efficient market theory/hypothesis and many others that have been researched, disproven in some circumstances and proven in others.
So, what is the verdict here?

This is BUSTED. Market theories, aside from an investor mindsight, are not generalizable to all equities, instruments and markets. This is semi based on my own observations but mostly from academic research I have reviewed on this topic (hence why I have no beautiful charts to display for this myth).



And the last myth I will cover in this post:

Myth #4: Diversification is pivotal for day traders

The wisdom here is that, you need to diversify for day trading. You need to identify setups on whatever stock has those setups and play whichever stock confirms best to your setup. The truth is, this is rarely necessary. In fact, sticking to a handful of routine stocks can be advantageous, as you will grow to learn the intricacies of the particular stocks you are trading routinely.

I go through phases but right now, 99% of the time I am trading NVDA. This works for me because there is usually always a setup available on large cap stocks. Let’s review some of the setups I have taken on NVDA:





You can see NVDA loves its morning triangles, and I love them too!
You can absolutely get back with trading one ticker, provided that it has good volatility and movement. In times of economic stability (i.e. currently), its best to avoid the indices as a day trading candidate as they tend to move slower and more purposefully.

So what is the verdict of Myth #4?



Thanks for reading everyone!

I may do more of these myth buster posts, they’re fun to research and find examples and really reflect on what I have learned as a trader. Feel free to submit any myths you live by in the comments and I can look into them for maybe a future post!

Safe trades as always!