Market Pulse: Signals for a potential stock market bottom
On Fridays we focus on education and in-depth learning. We guide you through strategies and show you how you can use the platform's features and tools to become an even better investor. Learn to think and act systematically. With the right knowledge and a systematic approach, you lay the foundation for long-term success.
Today we will look at:
- 10-Day Advance/Decline: OMX
- 1m Count of Daily Changes Exceeding +/-2%: OMXSPI
- # of 4-Week Lows: OMX
- % of Equities With RSI(14) above 50: OMX
- % of stocks advance 5% or more within 5 days: OMX
- Up Issue Ratio: OMX
- 5-Day Volume: OMX
- Amihud Liquidity, 10d MA: OMX
- Amihud Liquidity: OMX Constituents Above 90 Percentile
- Hui-Heubel Liquidity Ratio: OMX Constituents Above 90 Percentile
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Why concentrated signals don't work like RSI – and why they're harder to analyze
Many people start their journey in the stock market with technical indicators such as RSI. It is easy to understand: when the RSI is above 70 it is “overbought”, below 30 it is “oversold”. But the problem is that the RSI often reacts to completely random movements in the market. It oscillates almost constantly between its extremes, which means that you receive signals almost constantly – even when the market is actually only moving sideways.
Concentrated signals work differently. Here we are talking about movements that occur over a few days – sometimes just one – and that are so powerful that they stand out from the noise. Examples could be a sharp rise of 5–10% over a couple of days, or a series of extremely negative days that could indicate capitulation. These types of signals try to capture behavior that is not random, but rather signs of a shift in sentiment, a trend break, or an overreaction.
But there is a catch.
Because these signals occur so rarely, it is difficult to evaluate them statistically. We get a very low number of observations, which means that a few isolated events can greatly affect the result. It becomes difficult to backtest in a meaningful way – especially if you only use data from a few years or a single market.
Moreover, these signals often require context. A sharp move can mean something completely different depending on whether it occurs in a bullish or bearish climate, after an interest rate announcement or in connection with a profit warning. When analysis starts to depend on context, subjectivity also increases – which defeats the very point of systematic strategies based on objective rules.
So while concentrated signals can be interesting to follow, you should be aware of their limitations. They don’t work like RSI or other indicators that constantly generate new levels and “signals.” And that’s why they’re also harder to use in a systematic and statistically robust way.
Summary: No indicator is right alone – but together they provide a better basis for decision-making
After going through several technical and economic indicators, it is important to remember one thing: no indicator is perfect. All have their flaws, can give false signals and – perhaps most importantly – they do not force the market to do anything. The stock market does what it wants, regardless of what an RSI, an MA cross or a macro index shows.
That is why we do not use a single indicator, but a basket of signals. By combining several different perspectives – trend, sentiment, macro, positioning and seasonal patterns – we reduce the risk of making decisions based on noise or a temporary deviation. The overall assessment from this basket right now is clear: we do not have strong signals for a bottom on the Stockholm Stock Exchange at the moment.
Sure, sentiment can swing quickly – an unexpected statement from the White House or a new message from central banks can change the conditions overnight. But those types of events cannot be systematically acted upon in advance. We focus on what can actually be analyzed – not on trying to guess the next headline.
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