With a choppy market environment, it is easy (too easy) to get whipsawed if you are trading with a short-term time-frame. By short we are talking about daily swings rather than intra-day. By combining a formula that includes items such as the Spearman Indicator, advancing and declining issues and volume-at-price algorithms we can better tune into when there is a condition that is pointing toward a key reversal of a trend.
Of course this is not fool-prof, but it does provide a better understanding of when a market (in this case the S&P 500 and Russell 2000) are approaching inflection points that may provide an entry for a contra-trend trade.
This are still in the “beta” stage as we are testing the accuracy and effectiveness of the indicators.
Below you will see the updated Market Trend Indicator, Key Reversal Indicator (KRI) and a history of the KRI set against the S&P 500 index.
What we have found is that when the readings come in with a “oversold” level that is well off the neutral measure, there is often a good opportunity to either initiate a contra-trend trade, however the most successful is with an extreme oversold condition.
We recently hosted a webinar on these indicators, click below for the replay
Where are we now (8/5/12)? According to the indicators, the overheating conditions for markets are rising. It is in an uptrend, so there is still some room for further upside, although the recent choppy action lends itself for only limited moves beyond neutral before a reversal occurs.
When looking at the dial/gauge, the grey arrow is the day before, the red is the current. Note that it is starting to move toward overheating.
(Click on each to enlarge)
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