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NYSE Reversal Indicator

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August 28, 2010 – Comments (0)

Last week has to go down as one of the craziest trading weeks of the year. There was a lot of money gained and lost, and depending on what side of the trade you were on, you either cursed the market or embraced it. If you remained on the sidelines, then you probably were smarter than everyone else! All kidding aside, the market had a lot of opportunities, last week to take advantage of, and while I wasn't fully short on the market last week (on average 55-60% most of the time), I do feel that I did quite well.

However, I was disappointed in the market behavior that we didn't go lower than what we did. In my opinion, the market should have closed the week 30-40 points lower on the S&P than what it did. But give credit to the bulls they fought back against every sell-off to keep the markets from completely plummeting. This was definitely the case on Friday. As a result, I am a bit concerned that the S&P was unable to push below that 1040 on multiple occasions and stay there. So I'll be watching next week for whether the market wants to make a bottom for the time being.

In regards to the NYSE Reversal Indicator below, you can plainly see that the opportunity for further selling is definitely there, whether the bears take advantage of that or not is a mystery. I do believe that they will, as yesterday's rally did very little to change that from a technical perspecitve.

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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