We had three significant reversals on the daily charts last week, which, frankly, makes trading much more difficult when holding positions over night and allows for undisciplined traders to get beat up pretty good on both sides of the trade. These are the times where you don’t want to be forcing your trades upon the market – because you’ll lose the great majority of the time. Instead, let the market provide you with those opportunities, and when they occur pounce on them. Most importantly, don’t stubbornly hang on to positions that are not responding well to the market action and instead dump them at the first opportunity you get. Being light and nimble and most importantly securing your profits is by far the best approach to trading this market in the short term.

For those of you who are not familiar with this chart, here’s quick tutorial…

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.

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