Since the first article of this blog (Technical Analysis for intraday stocks trading? FORGET IT!), i’m pointing to the fact that there is a lot of cross correlation between stocks and between stocks and the future index. That’s not new to anyone and even those who are starting at the quantitative trading/analysis come to realize this on their own. But, is there some way we can explore that pattern and extract some alpha?
A lot of research already have been done trying to find out how to predict the stocks market returns. On a daily time frame, both trend-following and mean-reversal trading strategies applied to single stocks can’t sustain a stable Sharpe ratio across the time, making us believe that even if the random walk hypotesis is wrong, we still can’t find a model that precisely describe how the prices moves. But, as discussed in my previous article (Technical Analysis for intraday stocks trading? FORGET IT!), the relationship between the stock’s future index and the stocks individualy allow us to gather some Alpha.
The objective of this second part will be to continue the line of reasoning initiated in the first part, exclusively dealing with the relationship between the future index (IND) and the Bovespa Index (IBOV) and how the players that win in the arbitrage between these two markets make me discredit of the use of technical analysis for stocks in the intraday tiume frame.
Probably the first contact with the financial market of most Brazilian investors was through technical analysis. I started there myself. Introductory stock exchange courses with emphasis on graphical analysis are the most abundant in the market as well as books and discussion forums on the subject. In Youtube, it is enough to search by the name of some technical indicator that will appear diverse tutorials explaining how to use it, as well as the parameters in which one must calibrate it to obtain the greater profitability. In addition, practical examples are always presented where such an indicator seems to perfectly predict the future.