Very similar to the reading we got last week, the NYSE Reversal Indicator shows that a pullback is in the cards in the near future, but it is not quite ready to make it official. I personally look for the Green and Red lines (to keep it simple) to cross and start moving downward. However, that has yet to happen. Very good chance though we see that happen this week – especially if we see any further selling in the markets like we did yesterday. I am still unhedged in my portfolio, but nowhere near as committed as I was earlier last week (at one point I was about 116% long). Apple (AAPL) reports on Monday, and if they disappoint, I don’t doubt one bit that we’ll see sustained selling hit the markets.

I recommend, that you become very cautious about over committing to the long side, and instead start using any rally, to tighten stop-losses in order to preserve the majority of your profit, or to take profits all together.

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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