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The responsiveness of VIDYA and its vulnerability to instabilities was severely tested during the severe market correction of October 1987 (Figure 4). The narrowing of the variance between the two dynamic averages signaled a possible market top in September, confirmed in early November as the two averages crossed over. The lightly smoothed VIDYAS tracks the market tightly and the heavily smoothed VIDYAL responds rapidly as well. In comparison, the equivalent long exponential average glances over the extreme price changes. Note the slight instability caused by the market volatility when the short average dipped below the market low in early December.

The quantitative results are now easier to interpret, as we have a good feel for the smoothing behavior of these dynamic averages. Now look at RAVI. A buy is signaled when RAVI turns positive from negative territory and a sell occurs when RAVI goes negative from positive ground, which is the same as the short VIDYA crosses over or under the long VIDYA (Figure 5).

The results of long trades using RAVI over a test period of January 1980 to July 1991 are in Figure 6.The total point gain is approximately 207 points (with one open trade) using this strategy. If trade 9 were closed on July 12, 1991, the gain would be approximately 265 S&P 500 points. For comparison, the same moving average crossover strategy using the equivalent exponential moving averages with smoothing constants of 0.15 and 0.078 (same as the k values for VIDYAS and VIDYAL) produced a gain of just 122 S&P 500 points with five long trades (see Figure 7). If the currently open trade for the exponential averages were closed on July 12, 1991, the gain would be 159 S&P 500 points.

The MACD indicator is composed of the difference between two exponential moving averages with smoothing constants of 0.15 and 0.077. A moving average of the difference with a smoothing constant of 0.2 is used as a trigger line. I tested the profitability of MACD over the same test period using MetaStock software. The MACD indicator produced 20 trades and a gain of 205 S&P 500 points (Figure 8).

Currently, there are no open trades with MACD, since it issued a sell signal on May 17, 1991. Trades with TurboMACD over the same period are summarized in Figure 9. In total, there were 25 long trades, with a gain of approximately 218 points in all.