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New Update: The Best Stock Market Indicator Ever?

  • Written by Syndicated Publisher 1 Comment1 Comment Comments
    February 28, 2012

    The $OEXA200R (the percentage of S&P 100 stocks above their 200 DMA) is a technical indicator available on StockCharts.com that can be used to forecast conservative entry and exit points for the stock market.

    The OEXA is used to find the “sweet spot” time period in the market when you have the best chance of making money. See Is This the Best Stock Market Indicator Ever? for a discussion of this technical tool.

    The chart below is current through the February 24 close.

     

     

    Click to View

     

    After a major S&P correction, the conditions for safe re-entry into the market are when:

       a) $OEXA200R rises above 65%.

    And two of the following three also occur:

       b) RSI rises over 50.
    c) MACD cross (black line rises above red line).
    d) Slow STO (black line) rises over 50.

    Interpretation:

    The market is tradable.

    OEXA200R remained well above 65% all week and closed at 86%.

    Of the three secondary indicators:

    • RSI is above 50 and positive.
    • MACD has crossed and is positive.
    • Slow STO is above 50 and is positive.

    Commentary

    The OEXA200R remains in healthy, tradable territory. There will be occasional expected pullbacks, but at 86% it is still giving us a green light. When it eventually drops to 65% the next chess move will be to exit all long positions, sit on the sidelines with your cash and watch and wait for some clarity before proceeding.

    If at that point the OEXA200R treads water at the 65% line, wait a bit and look for a rebound indicating it’s safe to resume trading. However, at some point it will inevitably drop below 65% and stay there. How to proceed in that situation depends on the overall trend of the market, the macro-picture. During the cyclical bull of 2003 to 2007, the market was still safely tradable with OEXA200R in the 50% to 65% zone because there was enough upwelling lift in the S&P to minimize the chance of a sharp, significant market downturn.

    However, we can by no means confidently compare our present situation to that of 2003 – 2007. There is no strong, steady wind pointing the market weathervane in one direction, it is being buffeted by swirls and gusts in unpredictable ways. To better understand this, take a look at the charts below, in particular the overall trend of the OEXA200R during the 2003 – 2007 cyclical bull compared to the trend from 2007 to present.

     

     

     

     

    The S&P chart indicates that for the past three years we have not had a steady upwelling trend in the market comparable to 2003 – 2007. Absent that underlying support, the OEXA200R has undergone significant gyrations since 2007 and is ominously exhibiting a trend of lower highs. The MACD for OEXA200R has also been trending lower overall. Since 2007, every time the OEXA200R has stumbled below the 65% line it has not regained its balance, but fallen flat on its face, followed by a sharp S&P downturn. For that reason, trading the 50% to 65% zone in our current situation is going to be difficult – doable, but with considerable risk.

    In my opinion, the most significant indicator of where we stand today is the fact that the market is above both its 140 year historical trend line and the trend line for the secular bear that began in 2000. These are the macro-forces that will gravitationally pull the market back into equilibrium at some point in the near future. The rest – Greece, Iran, our current bull surge – are just secondary buffeting cross winds within the larger gathering storm.

    Many will disagree and argue that “This time it’s different”. But throughout history that has been the refrain of those believing they have finally figured out a way to defy gravity in the financial markets. And the historical ground is littered with the wreckage of their failed flying machines.

    The bottom line: I estimate that by August / September the OEXA200R will have fallen to the 65% line, and will keep falling.


    NoteStockcharts.com offers free access to the $OEXA200R indicator on a daily and weekly basis. The monthly view requires a subscription.

     

    (c) John F. Carlucci

    John F. Carlucci is a regular contributor to Advisor Perspectives and the author of “Ashes to Riches: How to Profit Spectacularly during the Economic Collapse of 2012 to 2022”, published by Endeavour Press Ltd., and also available on Amazon.com.

     

    Images: Flickr (licence attribution)

    About The Author

    My original dshort.com website was launched in February 2005 using a domain name based on my real name, Doug Short. I’m a formerly retired first wave boomer with a Ph.D. in English from Duke. Now my website has been acquired byAdvisor Perspectives, where I have been appointed the Vice President of Research.

    My first career was a faculty position at North Carolina State University, where I achieved the rank of Full Professor in 1983. During the early ’80s I got hooked on academic uses of microcomputers for research and instruction. In 1983, I co-directed the Sixth International Conference on Computers and the Humanities. An IBM executive who attended the conference made me a job offer I couldn’t refuse.

    Thus began my new career as a Higher Education Consultant for IBM — an ambassador for Information Technology to major universities around the country. After 12 years with Big Blue, I grew tired of the constant travel and left for a series of IT management positions in the Research Triangle area of North Carolina. I concluded my IT career managing the group responsible for email and research databases at GlaxoSmithKline until my retirement in 2006.

    Contrary to what many visitors assume based on my last name, I’m not a bearish short seller. It’s true that some of my content has been a bit pessimistic in recent years. But I believe this is a result of economic realities and not a personal bias. For the record, my efforts to educate others about bear markets date from November 2007, as this Motley Fool article attests.
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