Thank God for the weekend – it couldn’t have come soon enough for the bears (meaning myself!). I’m all cash as I sold out of all my positions prior to yesterday’s close since the market on both the index and futures, managed to break through the 1100 mark. I’m not really sure how high the bulls can take it from here, but I do know that for now, I’m not going to be standing in their way, like I had been this past week.

With that said, let’s look at the NYSE Reversal indicator that I publish each week. We are quickly approaching that area of where we start to see some changes in the behavior of the market – not yet – but we are getting close. Ultimately, this favors the bears…but don’t jump the gun, let the market come to you (I know the consequences first hand!).

The 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

Here is the NYSE Reversal Indicator.