Thank god markets are emotional, how else would we get fantastic over bought and under bought prices. The only trick for the investor is to know when prices are considered to be within a period 'irrational exuberance'. Some use RSI and Stochastic, others use sentiment readings of confidence, option call put ratios and standard deviations from a long term moving average. Many of these tools have false readings and hence a combination is preferred when forming an opinion and unfortunately that normally end in a confused state of mind for the investor.

It is amazing what you can calculate when you keep it simple stupid. The best tool we could find was simply taking a fast moving average away from a slow moving in percentage terms. The indicator you see below requires explanation of the color coding.

vExUp (Dark Blue): Very Extended upwards trend
ExUp (Blue): Extend upwards trend.
Up (Green): Up trend.
Test (Gray): Trend in test mode.
Dwn (Red): Down trend.
ExDwn (Purple): Extended downwards trend.
vExDwn (Dark Purple): Very extended downwards trend.

Changes in color give adequate warning to you when price action requires your close attention. The dotted blue lines highlight when price will begin to test the trend, or as we call it entering the 'trend testing zone'.

Interpretation Points:

1) If the immediate presentation of indicator shows NO RED then the trend is bullish. This is inclusive of the indicator pulling back as far to the lower dotted blue line. 2) If the immediate presentation of indicator shows NO GREEN then the trend is bearish. This is inclusive of the indicator pulling back as far to the upper dotted blue line. 3) Changes in color require your attention to price action. 4) The more infrequent the appearance of an extended color the more likely that the reading is significant.

On this chart I have circled on the indicator were it has changed color, I have also circled on price where they match up. As you can see taking a position in the market at wrong time proves to be unwise.

I should make you aware that you best financial decisions will be born while the indicator is in a test mode or gray.

Currently, the SP500 is in a 'extended up' period of price action (blue), price are so high you need an oxygen mask. The most recent five times before price fell anywhere between 3% to 16%. But as we all know many of those was before the Jackson Hole speech by USA Fed Chairman Ben Bernanke. So we will have to see what Mr Market has in store for us. Going short may not be the solution, buying puts (just like everyone else has on the SPY) maybe the best course of action.

Of course we cant wait until we see gray again, our holiday plans rely on it(ha).

Readtheticker

My website: www.readtheticker.com
My blog: http://www.readtheticker.com/Pages/Blog1.aspx

We are financial market enthusiast using methods expressed by the Gann, Hurst and Wyckoff with a few of our own proprietary tools. Readtheticker.com provides online stock and index charts with commentary. We are not brokers, bankers, financial planners, hedge fund traders or investment advisors, we are private investors

Disclaimer: The material is presented for educational purposes only and may contain errors or omissions and are subject to change without notice. Readtheticker.com (or 'RTT') members and or associates are NOT responsible for any actions you may take on any comments, advice,annotations or advertisement presented in this content. This material is not presented to be a recommendation to buy or sell any financial instrument (including but not limited to stocks, forex, options, bonds or futures, on any exchange in the world) or as 'investment advice'. Readtheticker.com members may have a position in any company or security mentioned herein.

Only logged in users are allowed to post comments. Register/ Log in

The Market Oracle is a FREE Financial Markets Forecasting & Analysis web-site.
(c) 2005-2024 MarketOracle.co.uk (Market Oracle Ltd) - Market Oracle Ltd asserts copyright on all articles authored by our editorial team and all comments posted. Any and all information provided within the web-site, is for general information purposes only and Market Oracle Ltd do not warrant the accuracy, timeliness or suitability of any information provided on this site. nor is or shall be deemed to constitute, financial or any other advice or recommendation by us. and are also not meant to be investment advice or solicitation or recommendation to establish market positions. We do not give investment advice and our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to enter into a market position either stock, option, futures contract, bonds, commodity or any other financial instrument at any time. We recommend that independent professional advice is obtained before you make any investment or trading decisions. By using this site you agree to this sites Terms of Use. From time to time we promote or endorse certain products / services that we believe are worthy of your time and attention. In return for that endorsement and only in the cases where you purchase directly though us may we be compensated by the producers of those products.