Rainbow Charts Indices Technical Analysis & Rainbow Charts Trading Signals

Developed by Mel Widner

This is a indices trend following indicator, similar to the moving averages - it's drawn using a 2 period simple moving average. Moving average is then smoothed to create a total of ten moving averages. First moving average is the basis, then the next moving average is calculated using the first one, the third is then calculated using the second one and so on. This forms a rainbow shape of the indices trend, each moving average is applied with a different colors so as to look as a rainbow.

Indices Technical Analysis and How to Generate Trading Signals

Bullish Indices Trading Trend/ Upwards Stock Indices Trading Trend

When the indices trend in the stock indices market is Upward/bullish trend, then the rainbow will be moving upwards, the least smoothed line will be at the top of the indicator, this is the red line and the major smoothed line will be at the bottom of the indicator, this is the violet line.

Bearish Market/Downward Indices Trading Trend

When the indices trend is a bearish downward then the rainbow charts will be heading downward, the major smoothed line (Violet) will be at the bottom and the least smoothed line (Red) will be at the top.

Indices Trend Continuation Signal

As the indices trend continues in one direction up or down, the rainbow charts follow the price closely. The more the price moves away from the rainbow chart the more the indices trend is likely to continue, this is considered as a indices trend continuation signal. The indicator lines will also continue to expand its width; this is also another indices trend continuation signal.

Indices Trend Reversal Signal

When price starts moving towards the rainbow charts then this is seen as a indices trend reversal signal. The width of the indicator lines also contracts signifying a indices trend reversal signal. The reversal Signal is confirmed when the price penetrates through all the rainbow charts and the direction of the rainbow charts also reverses in their respective direction.