This past week’s market action was indicative of what tends to happen in the market once the NYSE Reversal Indicator starts heading south, and that is indecision and a willingness by the bulls to start taking profits. This week was as flat as you could possibly have in a market. There was no significant selling, in fact every trading session ended in an indecisive doji candle. Despite the reversal warning that we got last week, I think the market is responding rather well to it in the sense that we have yet to see any major selling hit the market, and when it does, it is quickly bought up by the bulls.
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.