If you were wondering if the markets are getting overheated, the answer is YES. A reading of “3” on the Key Reversal Indicator (KRI) is indicative that there needs to be a reversion sometime in the near future. Over the past several months, there have only been a handful of times that the level has reached 3 and even fewer that have approached 4.
While markets can continue to move higher, there is often a corrective action that will follow a 3 or 4 reading for this indicator. We have designed this indicator to bring in several factors in order to gauge breadth, sentiment, price and trend. A 4 or 5 on either either side is where our level of conviction regarding a quick reversal of trend is highest. At this point, there does appear to be froth building again and while any corrective action may be met with BTD (Buy-The-Dip) investors, it will still be healthy to bring markets back to equilibrium.
The Spearman Indicator is also showing a very signal as it is well above the levels that suggest a turning point is near. Using this and the KRI can help to provide counter-trend signals to help alert to the need to buy protection or tighten stops. Depending on how fast the change occurs will usually tell us if it simply corrective action or a change of trend.
