Forecasting Stock Index Direction: Comparison of MACD and

RSI, Case Study on SET50 Index

ARTITH

PASIPHOL

MASTER OF SCIENCE PROGRAM IN FINANCE

(INTERNATIONAL PROGRAM)
FACULTY OF COMMERCE AND ACCOUNTANCY
THAMMASAT UNIVERSITY, BANGKOK, THAILAND
MAY 2009

Forecasting Stock Index Direction: Comparison of MACD and

RSI, Case Study on SET50 Index

ARTITH

PASIPHOL

MASTER OF SCIENCE PROGRAM IN FINANCE

(INTERNATIONAL PROGRAM)
FACULTY OF COMMERCE AND ACCOUNTANCY
THAMMASAT UNIVERSITY, BANGKOK, THAILAND
MAY 2009

Forecasting Stock Index Direction: Comparison of MACD and

RSI, Case Study on SET50 Index

Artith Pasiphol

An Independent Study
Submitted in Partial Fulfillment of the Requirements
for the Degree of Master of Science (Finance)

Master of Science Program in Finance

(International Program)
Faculty of Commerce and Accountancy
Thammasat University, Bangkok, Thailand
May 2009

Thammasat University
Faculty of Commerce and Accountancy
An Independent Study

By

Artith Pasiphol
Forecasting Stock Index Direction: Comparison of MACD and RSI, Case Study on
SET50 Index

has been approved as a partial fulfillment of the requirements

for the Degree of Master of Science (Finance)
On May, 2009

Advisor:

(Assoc. Prof. Dr. Chaiyuth Punyasavatsut)

Forecasting Stock Index Direction: Comparison of MACD and RSI,

Case Study on SET50 Index

I. INTRODUCTION

In recent days, investing in stock market is one of the most popular asset allocation
channels. So many investors especially speculators try to construct trading strategies in order
to gain abnormal return. One of the popular ways is to predict the market return by using a
minimizing forecast error method. In most cases, the accuracy is measured by the estimates
deviations from the observed values.
Based on various trading strategies created by investors, trading by the forecast may
not be enough to fulfilled investors objective of beating the market return, trading guided by
an accurate prediction of the market direction is also significant in developing the trading
strategy. Investors used the market direction forecast models combined with the trading
strategies to generate a better trading outcome.
From the Efficient Market Hypothesis (EMH) Theory, the securities prices and
returns should not be affected by the historical data such as the past price so any kind of
technical analysis cant be used in order to generate abnormal return. However, the studies
such as Keane (1986), Rozeff (2006) argued that the EMH may not hold in the real world due
to the irrational of people. Several financial behavior anomalies (eg. Overconfident) occurred
and rejected the EMH. These are some of the studies that argued the EMH theory may not
hold in the real world.
The claim, EMH theory may not hold in the real world, implies that information
related to stock prices may not cause the prices to change or may use some times for prices to
move to the level they should be. Recent published information does not fully impact on the
prices at once. There are still some lag times for prices to move to the appropriate level.

From the belief of the stock market efficiency, investors try to create trading tools
based on the historical statistic information, such as historical prices and returns, and use
them as trading guides. Mostly used in the aspect of market timing in order to take an action
in the right time. The method of using these trading tools based on historical data is widely
called the technical analysis.
With such a creation and developing of the technical analysis tools times by times,
each technical analysis tool nowadays has a particular way of calculation and have their own
formulas. They are widely used by investors since it requires no economic and financial
knowledge from the investors, just plug the data in the formula and the outcome is shown
easily. Moreover, even well-educated investors also use the technical analysis as a tool to
invest since those tools are widely accepted in both trading and statistical aspects.
Two of the most widely use technical indicators are the Relative Strength Index
(RSI) and the Moving Average Convergence Divergence (MACD). They are used to
determine the market-timing signal whether to buy or sell stocks in the right time. Moreover,
there are studies such as Ready (2002) and Brock, Lakonishok, and LeBaron (1992) claimed
that using these kinds of indicators can generate abnormal return.
This study will examine the prediction power of the technical indicators on
Thailands stock market, comparing between two technical indicators, the RSI and the MACD.
Furthermore, the paper will test separately on both overall and each market periods (eg. Bear,
bull, and sideway period). Then, the practical trading based on the technical indicators will
be tested.
In the study, the reader will see that MACD and RSI have prediction power on the
market index. In additional, the study also finds that estimating both indicators by separate
the ranges of value into regimes is more prefer to the use all data estimation. Moreover, the
estimation equation on the MACD and RSI can be used to setup trading strategies or trading
model and gain abnormal return from the investment.

II. LITERATURE REVIEW

Predictability of the Return

Several studies found considerable evidence showing that stock returns are somewhat
predictable. With using fundamental and economic variables which will be stated in the
following paragraphs, the returns can be considerably accurate.
There are many studies tried to investigate the relationship between fundamental
variables and the stock returns. Studies such as Basu (1977), Fama and French (1992),
Lakonishkov, Shleifer and Vishny (1994) claimed that financial variables such as earning
yield, book to market ratio, and size tend to have prediction power on the stock returns. They
found that earning yield and book to market ratio have positive relationship to stock returns
while size has negative relationship to the returns.
Moreover, the study of Lo and MacKinlay (1985) also found that the stock prices do
not follow the random walk, which implied that stock prices movement do have some pattern
and can be predicted then.
Some studies claimed that macroeconomic variables also have relationship and
prediction power to the stock returns. Fama and French (1988), Chris Bilson, Tim Brailsford
and Vince Hooper (1999), and Campbell (1987) were examples of the studies which argued
that macroeconomic variables such as interest rate, inflation, yield spread between short and
long term government bond, money supply, and lagged returns have some prediction power to
the stock returns.

Forecasting Index Return

Many studies tried to forecast index return and the market direction. Several method
were used from a simple linear regression to such complex methods such as probabilistic
neural networks.
Studies such as Nyberg (2008), Leung, Daouk, and Chen (2006, 2001), Ebeid and
Bedeir (2004), and Wdowinski and Zglinska-Pietrzak (2005) claimed that such methods as

Probit, Logit, Probabilistic Neural Networks, ARCH, and GARCH model have prediction
power to the market return and the direction of it. Trading rules and strategies constructed
based on the mentioned model were proved to generate some excess returns.

Technical Analysis and the Abnormal Return

Trading Strategies had been created and developed times by times. These strategies
usually have trading rules as conditions to make buy or sell transactions. Generally, the
trading rules are based on three different factors. Those factors are fundamental variables,
economic variables, and technical analysis variables.
For the technical analysis trading strategies, many studies claimed that investing by
using the trading rules on technical analysis can generate abnormal return. The example of
these studies are Lai and Lau (2005), Terence and Wang (2008), Ready (2002), and Brock,
Lakonishok, and LeBaron (1992). They found that using trading rules based on technical
analysis variables such as MACD, RSI, and moving average outperform the buy and hold
approach significantly and they also have prediction power to the returns.
Moreover, Bennett and Sias (2001) found that a technical analysis data like money
flow (different between each periods trading volumes on stock prices) has an ability to
predict returns and gain abnormal return compare to buy and hold trading.

III. THEORETICAL FRAMEWORKS

Efficient Market Hypothesis

In finance, the efficient-market hypothesis (EMH) asserts that financial markets are
"informationally efficient", or that prices on traded assets, e.g., stocks, bonds, or property,
already reflect all known information so abnormal return cant be generate with only such a
kind of information. There are three forms of the efficiency, weak form, semi-strong form,
and strong form.

Weak form efficiency states that excess returns cannot be earned by using investment
strategies based on historical share prices. So, any technical analysis cant give any abnormal
return because prices already reflect the historical data.
Semi-strong form efficiency claims that share prices have already adjusted to publicly
available new information, such that no excess returns can be earned by trading on that
information. This implies that both fundamental and technical analysis will not generate
excess return.
Strong form efficiency states that prices reflect all kinds of information, public and
private, such that no one can earn excess return.
Moving Average Convergence Divergence (MACD)
MACD is one of the simplest and most reliable indicators available. It uses moving
average line, which are lagging indicators, to include some trend-following characteristics.
These lagging indicators are turned into a momentum oscillator by subtracting the longer
moving average from the shorter moving average. The resulting plot forms a line that
oscillates above and below zero, without any upper or lower limits. Mathematically, MACD
can be calculated by the exponential moving average (EMA), which defined as: *

Where EMAt is the exponential moving average at time t, Pt is the value of the index
at time t, n is the number of periods for EMA. For the number of periods, 12 and 26-day
EMAs are the most commonly used for short and long period EMAs.
Commonly, MACD has 2 ways to determine the bullish or bearish signal, which are
the divergence and moving average crossover. The divergence will occurs when share price
is in down trend but the MACD itself stop the down trend movement and start to increase.

This is called the bullish divergence. For bearish divergence, MACD will start to make a
down trend while price is still in up trend.
For the moving average crossover, it will occur when the MACD move across its 9day EMA, or the signal line. The bullish moving average crossover occurs when MACD
cross up the signal line and the bearish moving average crossover occurs when MACD cross
down the signal line.

Relative Strength Index (RSI)

RSI is an extremely useful and popular momentum oscillator. It compares the
magnitude of a stock's recent gains to the magnitude of its recent losses and turns that
information into a number that ranges from 0 to 100. The RSI is defined as: *

Where RSIt is the relative strength index at time t, Pt is the price at time t, n is the
number of RSI periods.The stock will be consider to be over bought when RSI reach 70 and
oversold when RSI goes down to 30. The stock will be bullish when RSI is above 50 and
bearish when RSI is below 50.
Moreover, RSI can give buying and selling signal to investors through the moving
average crossover. When RSI value cross it moving average value, which widely used of 14day moving average, the buying signal will occurs if it crossing up and selling signal for
crossing down.

* The MACD and RSI formulas are from Technical analysis and the London stock
exchange: testing the MACD and RSI rules using the FT30

IV. METHODOLOGY

Variables
This studys independent variables set will contain of three variables. The first one is
the value of the MACD on each period (MACDt). The second one is the value of the RSI on
each period (RSIt). These first two variables are the main input or independent variables in
this study since this study want to find the predictability of these two variables. However,
MACDt and RSIt will not be on a same equation since the study is to compare them.
Another input variable used in this study is the Thailands 1-month T-Bill rate
(TBILLt). For the interest rate usage, short term rate is more prefer than long term rate
because the investment horizon can be very short (one week). So, using long term rate may
not appropriate in this study. Moreover, Treasury Bill rate should be in this study rather than
the rates such as LIBOR and BIBOR because it is the rate that every kind of investors can
invest in.
For the output or dependent variable, the variable used in this study is a dummy
variable called Direction (Dt). This variable will indicate whether the market return will be
positive or not in the next period. If the market return will be positive in the next period, this
dummy variable equals to one and zero on the other hand.
Table 1 below shows the summary of the variables mentioned in the previous
paragraph that are used in this study.

[See Table 1]

Estimation Model
This study will use Binary Choice Logit Model as an estimation method. The Binary
Choice model is appropriate to use when the dependent variable that can has only two binary
value (in this case 0 or 1). The general form of the model is:

P (Yi = 1 Xi)

F (Xi )

Where Y is the dependent variable which has binary value of either 0 or 1. P is the
probability that Y equals to one. X is the explanatory variables used in the model and F (.) is a
non linear function. In this case, the Binary Logit Estimation, F (.) is the cumulative density
function of the logistic distribution.
In this study, there will be two models the try to forecast the direction of the index
with different explanatory factors, the MACD and RSI. Then, with the set of variables on
[Table 1], we will get the following equation form for both MACD and RSI cases:

MACD Case
=

D MACD, t

F ( + 0 TBILL t + + n TBILL t-n + 1 MACD t + + 2 MACD t-m)

RSI Case
D RSI, t

F ( + 0 TBILLt + + n TBILL t-n + 1 RSI t + + 2 RSI t-j)

Where j, m, n are the number(s) of lagged term(s) of the Relative Strength Index,
Moving Average Convergence Divergence, and Thailands 1-month T-Bill rate respectively.
Since MACD and RSI are oscillating value which swing up and down on their
medium value (0 and 50 respectively), so, different ranges of these values can be implied to
different market environments. For example, when RSI is low or in the bearish period, there
is higher probability to get the negative return in the next period. However, if the indicator
finds the bottom in bearish period, the market will be rebounded with considerable returns.
As well as MACD, it reacts to the market the same way as RSI does.
So, not only estimate the model by using whole data set, this study will also classify
MACD and RSI into 3 regimes, Regime 1,2, and 3. Regime 1 represents the period that the
market has positive return momentum. The positive return momentum implies that the
market return did consecutive positive average return periods. Regime 2 implies the period
that market return has a negative return momentum. For Regime 3, the market cant be

determined whether it is outperforming or underperforming since there is not any significant

sign that neither positive nor negative momentum can dominate the sign of each other.
Table 2 below shows the condition which separate the market periods. This study
categorizes each period by using the value of MACD and RSI. The market will be
determined to be in Regime 1 when MACD value is more than 15, Regime 2 if the MACD
value is less than -15, and the range between -15 and 15 will be classified as Regime 3.
For RSI case, Regime 1 will be represented when RSI value is over 60, Regime 2
when RSI value is below 40 and the value of RSI between 40 and 60 will be determined as
Regime 3.

[See Table 2]

As a result, the study will do the estimations by using both all data and separated
regimes data. Therefore, the study will have 8 equations, 4 equations for each case which will
contains the equation on all data and the three regimes tests.
After doing estimation, we will determine the accuracy by checking the percentage of
the good estimates on total estimates and see how much predicting power both models have.
This study will compare both models on regime 1, 2, and 3. The critical level of the
probability used to separate the value of 0 or 1 on the dependent variable is at 0.5. This
means that if the probability value is higher than 0.5, the model will indicate the dependent
variable as 1, vise versa.

Application: Practical Trading

In this study, the practical trading will be an investment in SET 50 Index Future
series S50H09, which firstly traded on the beginning of January 2009 to the end of March
2009. Since the underlying asset of SET50 Index Future is the SET50 itself, the future should
have high correlation with the index. We try to support this belief by calculating the
correlation between SET50 Index and the SET50 Index Future (the most recent series) from

28 April 2006 (The first trading day of the Index Future) to the end of year 2008 by using
Microsoft Excel Program, It shows that SET50 Index and SET50 Index Future has very high
correlation of 0.9986. Moreover, graph in Figure 1 below also shows that SET50 and SET50
Future almost have the same movement over times.

[See Figure 1]

Since these two indices have very high correlation, both indices should be
representatives of each other. This means the model should applicable on SET50 future as
well. This study will make a practical trading on SET50 Future based on the estimated
models and see whether the model can generate profit or not.
The trading rule in this practical trading is, when the model estimates that the return
in the next period will be positive (negative), we will open a long (short) position on SET50
Index future. The holding period will last until the model predict a negative (positive) return
on the index. Then, we will close the long (short) position and start to open a short (long)
position on the opening price.
The practical trading period will be the trading by using data from out of sample data
from the first quarter of the year 2009, trading the S50H09 series from the first to the last
trading day. After the trading period has passed, we will see whether the trading can make
profit.

V. DATA

The data in this study are the weekly SET50 data from year 2001 to the end of year
2008, including the index (to calculate the market return), and technical indicators (MACD,
RSI) data. Moreover, the interest rate will be represented by weekly Thailands 1-month Tbill rate. For the sources of the data, SET50 data will be collected from APEX work station

10

and REUTER real-time program which provides the index history from the beginning of the
observation period and its technical indicators. For the 1-month Thailands T-Bill rate, the
source of the data is from www.thaibma.or.th
SET50 is an index constructed by a set of 50 biggest market capitalizations with
trading liquidity and forms them to be an index. Practically, SET50 can be used to capture
the market movement rather than the SET itself because the SET index has some stocks that
have no liquidity and the prices didnt change due to the lack of liquidity. These stocks can
make an error for real market movement. Meanwhile, for SET50, it is guaranteed that stocks
in SET50 have high liquidity and market capitalizations, and can dominate the movement of
the market. Since SET50 has some significant domination power on SET, it can be a
representative of the market.
The T-Bill rates, in business cycles aspect, can be the indicator of the turning point of
the business cycle. Low T-Bill rates may be a signal of the future business expansion and
increase the economic activities, which usually leads to the rise of the stock market and the
returns. On the other hand, high T-Bill rates may indicate the future of business and
economic recession and leads to the down trend of the stock market. So, the T-Bill rates can
be thought as an indicator of the future economic environments which then, indirectly, have
some power to forecast the stock returns.
For the type of the data set, weekly data is used in this paper. The daily data isnt
appropriate for this study since the daily return direction change too rapid and there will be
too many lag terms. For the longer term data such as monthly data, it will make the study to
have inadequate number of the data. So, in this case, weekly data seems to be the most
appropriate term of the data used in the study.

11

VI. EMPIRICAL RESULT

Model Estimating Result

As mentioned in the Methodology part, this study uses the Binary Choice Logit
Estimation Model to model the dependent variable D, which represents the direction of the
market return in the next period. Table 3.1 to 3.4 below show the estimation result of the
MACD case.

[See Table 3.1 - 3.4]

For MACD case, the estimate results indicate that the T-Bill rates have negative
relationship with the probability of the positive return in the next period. This can be implied
that the lower the T-Bill rate, the higher probability of the positive return in the next period.
This supports the economic rationale mentioned in the data part. However, it still cant be
concluded from the results about the relationship between the lagged terms of the T-Bill rate
and the next period positive income probability.
For the MACD variable, it tends to has a negative relation to the probability of the
positive return in the next period. All of the coefficients on the MACDt variable have negative
signs. This means the lower the MACD value for each study period, the higher chance that
the market will generate a positive return in the next period.
For the RSI case, Table 4.1 to 4.4 below represent the estimating results from
performing a Binary Logit Estimation Model.

[See Table 4.1 - 4.4]

The RSI variable, as well as the MACD, has negative relationship to the probability
of the positive market return next period, so, it implies that market will has higher chance to
get positive return next period when the value of RSI is lower.

12

For the significance of the RSI, compare to MACD, the RSI have less significant
level than the MACD. This may because the RSI is more likely to be a shorter term of
indicator than the MACD. So, the RSI value swing more rapid than MACD value and make
the data to have higher standard error. The standard errors results in the test tend to support
this thinking. The standard errors of the RSI variable are higher than those of the MACD
variable, compared to their own coefficients.
For the T-Bill variable in the RSI case, the results of the variable tend to have the
same relationship to the probability of the positive return on the next period as the MACD
case does. This also supports the economic rationale in the data part.
In summary, from Table 3.1 to 3.4 and Table 4.1 to 4.4, the estimating equations from
operating a Binary Choice Logit for both MACD and RSI case on every regime as well as the
total data are:

MACD: All Data

D MACD, t

F (0.6645 18.5204 TBILL t 0.122 MACD t + 0.3084 MACD t-1 0.1969

MACD t-2)

MACD: Regime 1
D MACD, t

F (1.3378 884.3618 TBILL t + 867.9566 TBILL t-1 0.0388 MACD t)

MACD: Regime 2
D MACD, t

F (-31.1492 - 315.8872 TBILL t +558.5507 TBILL t-1 + 5569.488 TBILL t-2

- 5892.1660 TBILL t-3 1.4742 MACD t + 2.9574 MACD t-1
1.8440 MACD t-2)

MACD: Regime 3
D MACD, t

F (0.9729 26.9502 TBILL t - 0.3232 MACD t + 0.5327 MACD t-1

0.3108 MACD t-2)

13

RSI: All Data

D RSI, t

F (0.8154 16.6699 TBILLt 0.0149 RSI t + 0.0289RSI t-1 + 0.0011RSI t-2

- 0.0197 RSI t-3)

RSI: Regime 1
D RSI, t

F (1.6385 36.0135 TBILLt 0.0226 RSI t + 0.04627 RSI t-1 + 0.0055 RSI t-2
- 0.0411RSI t-3)

RSI: Regime 2
D RSI, t

F (1.6967 18.2166 TBILLt 0.0379 RSI t)

RSI: Regime 3
D RSI, t

F (-0.1541 103.7943 TBILLt + 131.0649 TBILL t-1 + 21.9 TBILL t-2

- 2.053 TBILL t-3 - 0.0029 RSI t + 0.032 RSI t-1 + 0.0028 RSI t-2 - 0.0206 RSI t-3)

Accuracy is one of the most important concerns in performing any forecasts. Any
model is not accepted if the model accuracy has not been satisfied. In order to check the
accuracy of the model in this study, we do the statistic classification for each model. Table 5
and Table 6 are the results of the accuracy checking on the models.

[See Table 5 and Table 6]

From Table 5 and 6, in the left most column, Actual Value = 1 means numbers of
periods that the actual value of the dependent variable (Direction dummy variable) equals to 1
or the period that market return will be positive in the next period. As well as Actual Value

14

= 0, this phrase represent the numbers of the periods that the actual value of the direction
variable turn to 0 or the period that the market will not generate positive return in the next
period. The phrases True when Actual = 1 and True when Actual = 0 indicate the
numbers of the correct prediction of the models when the actual value of the direction
variable equals to 1 and 0 respectively. For example, if a set of data has Actual Value = 1
for 10 times and True when Actual = 1 for 7 times, it implies that this set f the data has 10
observations that indicate the positive return next period and there are 7 periods out of 10
periods that the model predict correctly.
The MACD model gives the highest accuracy on regime 2 (83.33%). However, it
still cannot be conclude properly because the observations on this regime are inadequate. In
the future, more observations in regime 2 can be collected and may have the accuracy result
of the MACD in regime 2 clearer.
For the RSI model, the most accuracy period is regime 1 (61.31%). Regime 2 gives
the lowest overall accuracy among tests (55.43%).
Within the MACD and RSI model, comparing the accuracy on using the whole data
to the separate regimes, MACDs separate regime method has more accuracy than the whole
data test (56.45% for all data test and 56.90% for the least accurate regime) while all data test
in RSI case is the second best (58.88%) among the regimes.

[See Table 7]

Table 7 above provides an accuracy comparison on the MACD and RSI models. RSI
beats MACD on all data test (58.88% on RSI and 56.45% on MACD) and regime 1 (61.31%
on RSI and 56.90% on MACD) while MACD beats RSI on regime 2 (83.33% on MACD and
55.43% on RSI) and regime 3 (61.51% on MACD and 56.59% on RSI). Anyway, as
mentioned earlier, regime 2 on the MACD case may not consistent due to the lack of
observations.

15

From the results of the test, MACD is better than RSI in long-term while RSI is better
than MACD in short-term. This is because of RSI itself use shorter average period of return
to compute so it more suitable for short-term.
Moreover, RSI outperformed in bullish period but underperformed in sideway period
(the bearish period is undecided since the lacking of observations). This is because SET50
Index has only short consecutive of bullish period while has long consecutive of sideway
period. So RSI is better on bullish but worse on sideway.

The Practice Trading

As mentioned earlier, SET50 index has high correlation with SET50 Index Future.
So, this study will try to apply the estimated models to do practical trading in the SET50
Index Future. The series of SET50 Index Future that this study will apply to trade is the
S50H09, which firstly trade on 05/01/09 and end on 30/03/09.
Since this study data is weekly data but S50H09 data is daily. So, for simplicity, we
rearrange S50H09 to be weekly data and dont concern about daily possible call margin or
force close. The mark-to-market will also be done weekly as well.
For S50H09 trading, the initial margin is THB 50,000, the maintenance margin is
THB 35,000 and the force close margin is THB 15,000. The commission fee is THB 450 per
contract plus 7% VAT. , which means the real cost of opening or closing a contract equals
THB 481.5.
We will determine the long or short position when the models estimate that there will
be a positive or negative return on SET50 Index on the next period. The positions and the
results of trading S50H09 are in Table 8 and Table 9.

[See Table 8 and Table 9]

16

For Table 8 and Table 9, MACD Regimes and MACD All Data mean the trading
of S50H09 by using the separate regime model and using all data model of the MACD
respectively. As well as RSI Regimes and RSI All Data, they mean the same as MACD
but using RSI model. Money Invest is the total money invested in the trading period. Each
trading scheme may not have an equal value of Money Invest since there may be a call
margin or force close.
From the trading results Table 8 and Table 9, trading by the separated regimes
method give higher return than the all data method (36.32% to -27.39% for MACD and
31.84% to -27.39% in RSI). We can see that for the overall data method, both MACD and
RSI models recommend to open a long position and hold until the last trading day. This is
because in the overall data model for MACD and RSI, they estimate majority of the data to
get a positive return in the next period. Moreover, they were used to test the very short-term
investment. So, in this case (short-term investment), using separated periods method tends to
outperform. However, if we do a long-term trading, overall data method may outperform
instead.
Notice that separated regimes method for MACD gives the highest return of 36.32%.
However, it has one major issue that the series of S50H09 is all in the MACD regime 2 which
is the regime that has too few observations. So, the recommendation of open a short position
and hold until the last trading day may be just a coincidence. To make this clearer, we need
more data on regime 2 of MACD case which expected to be found quite often in 2009 and
2010.
From the trading results, in a short-term trading like one series of SET50 Index future
trading, using a separate regime trading model outperform the all data model and can generate
significant amount of return (36.32% on MACD and 31.84% on RSI). Comparing to the
market, the SET50, it had a 3-month return of -11.74% (the index dropped from 340.13 to
300.20 by the first quarter of 2009). However, in an aspect of the consistency of the model,
investors should use RSI separated periods method to do the practice trading in S50H09

17

rather than MACD separated periods method even though MACD can generate more return.
But the model is suspect to be inconsistent yet because of the lacking of observations.

18

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Brian J. Bushee, Jana Smith Raedy (2005). Factors Affecting the Implementability of
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Campbell, J. (1987). Stock returns and the term structure. Journal of Financial Economics 18,
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Fama, E., & French, K. (1988a). Permanent and temporary components of stock prices.
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Fama, E., & French, K. (1992). The cross-section of expected stock returns.
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20

TABLE & FIGURE (In order of appearances)

Table 1
Summary of the input and output variables used in the study.

MACD t

Independent Variables
Moving Average Convergence Divergence Variable

The value of the Moving Average Convergence Divergence of the SET50

index in period t.
RSI t

Relative Strength Index Variable

The vaue of the Relative Strength Index of the SET50 Index in period t.
TBILL t

Treasury Bill Variable

Thailand's 1-month Treasury Bill Rate in period t.

Dt

Dependent Variable
Direction Dummy Variable

Probabilities estimated by the model that the SET50 return will be positive in
the next period.

Table 2
The separate conditions of three market regimes, using MACD and RSI as key categorized
factors.
MACD Case

RSI Case

Regime 1

when MACDt > 15

when RSIt > 60

Regime 2

when MACDt < -15

when RSIt < 40

Regime 3

when -15 MACDt -15

when 40 RSIt 60

21

Figure 1
A graph shows a comparison of the movement of SET50 Index and SET50 Index Future
(From 24 April 2006 to 30 December 2009).

800

700

600

SET50

500

SET50 Future

400

300

200
14/12/2005 02/07/2006 18/01/2007 06/08/2007 22/02/2008 09/09/2008 28/03/2009

Table 3.1
An estimate result of the model using Binary Logit Estimation on the whole observations data,
MACD case.

Coefficient
P - Value
MACD t
-0.1220
0.1620
MACD t-1
0.3084
0.0630
MACD t-2
-0.1969
0.0280
TBILL t
-18.5204
0.0400
Constant
0.6645
0.0100
Log likelihood
-279.0505
2
Pseudo R
0.0169

22

Table 3.2
An estimate result of the model using Binary Logit Estimation on Regime 1, MACD case.

Coefficient
P - Value
MACD t
-0.0388
0.0760
TBILL t
-884.3618
0.0860
TBILL t-1
867.9566
0.0940
Constant
1.3378
0.0880
Log likelihood
-76.8058
Pseudo R2
0.0415

Table 3.3
An estimate result of the model using Binary Logit Estimation on Regime 2, MACD case.

MACD t
MACD t-1
MACD t-2
TBILL t
TBILL t-1
TBILL t-2
TBILL t-3
Constant
Log likelihood
Pseudo R2

Coefficient
P - Value
-1.4742
0.0610
2.9574
0.0550
-1.8440
0.0520
-315.8872
0.5920
588.5507
0.3400
5569.4880
0.1170
-5892.1660
0.1130
-31.1492
0.0870
0.4721
-10.9423

Table 3.4
An estimate result of the model using Binary Logit Estimation on Regime 3, MACD case.

MACD t
MACD t-1
MACD t-2
TBILL t
Constant
Log likelihood
Pseudo R2

Coefficient
P - Value
-0.3232
0.0240
0.5327
0.0400
-0.3108
0.0260
-26.9502
0.0150
0.9729
0.0030
0.0514
-173.2923

23

Table 4.1
An estimate result of the model using Binary Logit Estimation on the whole observations data,
RSI case.

Coefficient
P - Value
RSI t
-0.0149
0.2420
RSI t-1
0.0289
0.0820
RSI t-2
0.0011
0.9490
RSI t-3
-0.0197
0.1190
TBILL t
-16.6699
0.0620
Constant
0.8154
0.1000
Log likelihood
-279.6790
Pseudo R2
0.0147

Table 4.2
An estimate result of the model using Binary Logit Estimation on Regime 1, RSI case.

Coefficient
P - Value
RSI t
-0.0226
0.5110
RSI t-1
0.0462
0.1620
RSI t-2
0.0055
0.8660
RSI t-3
-0.0411
0.0870
TBILL t
-36.0135
0.0380
Constant
1.6385
0.3750
Log likelihood
-90.4766
2
Pseudo R
0.0454

Table 4.3
An estimate result of the model using Binary Logit Estimation on Regime 2, RSI case.

Coefficient
P - Value
RSI t
-0.0379
0.2480
TBILL t
-18.2166
0.3580
Constant
1.6967
0.1870
Log likelihood
0.0145
Pseudo R2

-62.8420

24

Table 4.4
An estimate result of the model using Binary Logit Estimation on Regime 3, RSI case.

Coefficient
P - Value
RSI t
-0.0029
0.9250
RSI t-1
0.0320
0.1840
RSI t-2
0.0028
0.9090
RSI t-3
-0.0206
0.3110
TBILL t
-103.7943
0.6270
TBILL t-1
131.0649
0.5470
TBILL t-2
21.9000
0.9300
TBILL t-3
-2.0530
0.9930
Constant
-0.1541
0.9200
Log likelihood
0.0188
Pseudo R2
-122.4764

25

Table 5
The accuracy of the estimating model on the in-sample data, the case of all data, bullish
period, sideway period, and bearish period tests on the MACD model.

All Data

Regime 1

Regime 2

Regime 3

Actual Value = 1

287

74

13

180

Actual Value =0

124

42

17

85

True when Actual = 1

164

43

11

111

True when Actual = 0

68

23

14

52

56.45%

56.90%

83.33%

61.51%

Overall Accuracy

Table 6
The accuracy of the estimating model on the in-sample data, the case of all data, bullish
period, sideway period, and bearish period tests on the RSI model.

All Data

Regime 1

Regime 2

Regime 3

Actual = 1

285

81

49

143

Actual = 0

126

56

43

39

True when Actual = 1

168

50

27

83

True when Actual = 0

74

34

24

20

58.88%

61.31%

55.43%

56.59%

Overall Acuracy

Table 7
Comparison of the accuracy of the estimation on MACD and RSI, separated by the correct
prediction on a specific actual result and overall accuracy.

Correct prediction when actual = 1

Correct prediction when actual = 0
Overall Accuracy

RSI
Regime
Regime
Regime
All
1
2
3
58.95%
61.73%
55.10%
58.04%
58.73%
60.71%
55.81%
51.28%
58.88%
61.31%
55.43%
56.59%

26

MACD
Regime Regime Regime
All
1
2
3
57.14% 58.11% 84.62% 61.67%
54.84% 54.76% 82.35% 63.41%
56.45% 56.90% 83.33% 61.51%

Table 8
Weekly position taking in SET50 Index Future, series of S50H09 with amount of money
invested, amount left when the trading period is over, and the 3-month return. The case of the
MACD model.

MACD Periods
Date

MACD All Data

position

Date

position

09/01/2009

short

09/01/2009

long

16/01/2009

short

16/01/2009

long

23/01/2009

short

23/01/2009

long

30/01/2009

short

30/01/2009

long

06/02/2009

short

06/02/2009

long

13/02/2009

short

13/02/2009

long

20/02/2009

short

20/02/2009

long

27/02/2009

short

27/02/2009

long

06/03/2009

short

06/03/2009

long

13/03/2009

short

13/03/2009

long

20/03/2009

short

20/03/2009

long

30/03/2009

close

30/03/2009

close

Money Invest

Money Invest

THB 50,481.50

THB 73,981.50

Money when Close

Money when Close

THB 68,818.50

THB 53,718.50

3-month Return

3-month Return

36.32%

-27.39%

27

Table 9
Weekly position taking in SET50 Index Future, series of S50H09 with amount of money
invested, amount left when the trading period is over, and the 3-month return. The case of the
RSI model.

RSI All Data

RSI Periods
Date

Date

position

position

09/01/2009

short

09/01/2009

long

16/01/2009

short

16/01/2009

long

23/01/2009

short

23/01/2009

long

30/01/2009

short

30/01/2009

long

06/02/2009

short

06/02/2009

long

13/02/2009

long

13/02/2009

long

20/02/2009

long

20/02/2009

long

27/02/2009

short

27/02/2009

long

06/03/2009

long

06/03/2009

long

13/03/2009

long

13/03/2009

long

20/03/2009

long

20/03/2009

long

30/03/2009

close

30/03/2009

close

Money Invest

Money Invest

THB 50,481.50

THB 73,981.50

Money when Close

Money when Close

THB 66,555.50

THB 53,718.50

3-month Return

3-month Return

31.84%

-27.39%

28