It’s another week where instead of answering questions, the market only creates more questions. For the third straight week, the market has put in another doji candle on the weekly charts, with a bearish tilt to them. Some may say this is a topping pattern to the rally that began back in March ’09. I’m not quite about that, or at least, if it is a topping pattern, we are in the very early stages of it. At this point, I am of the camp that the market will ultimately push higher yet again, and the fuss about QE2 may already be priced into stocks considering the attention it has been receiving of late. 

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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