Here’s an update on the NYSE Reversal indicator. Much has changed since the last time I posted this indicator. Being short, one thing that that has me concerned is the reversal seen below before hitting the bottom of the range. It doesn’t happen often, but when it does, I become concerned that it could be indicating a head fake against the current direction of the market. The last time we saw one of these was September of last year (coincidence?) in which the market rallied a bit but then resumed with two more weeks of selling of about 50 points on the S&P before finally gaining its footing. As a result, I plan on staying in my short positions that I am currently in as the risk/reward remains heavily in my favor, considering how close we are to the game-changer 1130 level on on the S&P, and how over-bought this market is. 

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.