From a market standpoint, we didn’t move much last week, but on a day-to-day basis the whipsaws the market experienced was something to marvel at. Examining the market as a whole, there still really isn’t much reason to be bearish on this market, and after Friday’s decent rally, there still seems to be a lot of bullish momentum left in this market to propel it even higher – at least in short-term. As for the NYSE Reversal indicator below, we are at the peak of the range, indicating that this rally is starting to mature, but there is no stochastics cross over yet, and as a result I wouldn’t start taking profits too quickly. There very well could be a good week or two still before we see any significant pullback in the market.

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.