NYSE Reversal Indicator
The bulls took a beating last week, and the NYSE Reverseal Indicator clearly shows as much. In fact, the picture doesn't get any better. Historically when %K and %D lines cross to the downside (explained below), within a matter of a week or two, we get significant and sustained pressures. Only once or twice in the past couple of years has this not occurred, so its warning signal that it is giving us right now, should no doubt be heeded. I scaled out of my long positions on Thursday and Friday, and only kept TICC in the portfolio. Based on how it was able to break through numerous signifcant levels of support last week was amazing, and I believe that there is still more room for the bears to run. It is really incredible how fast market conditions can suddenly change, but when it does, you need to be nimble enough to make your portfolio reflect that.
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.