The market has been all over the place of late, and the NYSE Reversal Indicator is showing exactly as much. There hasn’t been, for the better part of this year any concrete direction that the market is taking and as a result, we get a few good weeks in one direction before quickly reversing course in the opposite direction. While the NYSE reversal indicator is reversing this past week to the downside, I would say that is mere noise until we hit an extreme on the indicator in one direction or the other. Reversals at this stage, either up or down, typically are head-fakes or false warnings, and usually likes to go back in the original direction it was taking before the mid-stream reversal, like the one we are seeing below.

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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