The week’s early rally off-set for the most part the selling the market saw in the latter part of the week, namely Thursday and Friday. What I would like to see the bears do at this point, and to a large extent has been unsuccessful at, is to see MULTIPLE days where we go down and stay down, and keeping the boot on the bull’s neck throughout the entire trading session. I haven’t been all that crazy about the slack the bears have been giving them to rally almost every time in the afternoon. Heading into September, which has been historically the worst month for stocks, we could see a lot more selling, if we could break through some critical price levels on the S&P, namely 1069 and 1056 for starters.

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.