The NYSE Reversal Indicator uses the advance/decline ratio with a stochastics overlay. The bottom half of the chart is the weekly candles of the S&P. The chart itself goes back two years. Some folks have criticized me for posting this chart in the past saying that it isn’t 100% accurate – but if it was, as some think it must be, then I wouldn’t be posting it – I’d save it all for myself and make an ungodly sum of money off of it. But it isn’t perfect and there is always a level of error that you can expect from it. But overall, it is fairly accurate, and when the indicator hits certain extremes on the stochastics, it is often a good time to start hedging positions that are going against the direction of the indicators, or start loading up on short or long positions in-line with the direction that the indicator itself is pointing to.

Remember, the extremes are where you are wanting to pay the closest attention to, particularly where the %K & %D lines cross (i.e the red and green lines). This is typically where we begin to see changes in the behavior of the market – not always but quite often enough, to warrant our attention. What this tool is best for, in terms of what I use it for, is market timing and position building. When there is a crossover at one of the extremes that goes against the positions in my portfolio, I, often times, look to take profits in those positions or at least hedge against them.

Below, you will see an interesting development that doesn’t occur all that often, and that is when the indicator starts showing signs of reversing direction before hitting the traditional extremes of the stochastics. Should this happen, it is a very bearish signal to get out of long positions and go cash or short. Over the past two years we haven’t seen one fully come to fruition. The last time such a scenerio played out was at the very end of 2007 which ultimately ushered in the great sell-off of 2008 through March of 2009. So this is well worth watching right now.

Here is the NYSE Reversal Indicator.