Rainbow Charts Indices Analysis and Rainbow Charts Trading Signals

Developed by Mel Widner

This is a 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 trend, each moving average is applied with a different colors so as to look as a rainbow.

Indices Analysis & How to Generate Trading Signals

Bullish Indices Trading Trend/ Upwards Trend

When the trend in the 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 Trend

When the 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.

Trend Continuation Signal

As the 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 trend is likely to continue, this is considered as a trend continuation signal. The indicator lines will also continue to expand its width; this is also another trend continuation signal.

Trend Reversal Signal

When stock price starts moving towards the rainbow charts then this is seen as a trend reversal signal. The width of the indicator lines also contracts signifying a 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.