How the Summation Index can keep you on the right side of the trade.

Last weekend I showed NYMO closed for four consecutive days below its lower bollinger band and that after past similar occasions ALL setups let to a bounce and subsequent lower price. In addition, I forecasted the bounce would top in the SPX2457-2478 zone. See here. So far the market is following the exact same script as the S&P500 topped yesterday at SPX2475 and is now pretty much back to where it was on Friday: 2440s…. While others were promising the moon, I let the weight of the evidence of ALL charts (price, breadth, SMAs, etc) tell what will transpire most likely next.

Why? Please remember it’s all about the probability of possibilities. While Elliot Wave Theories provide us with all the possibilities, it is up to the forecaster/analysts to determine the probability for each possibility, which can only be accurately done by analyzing ALL chart types available. Clearly the NYMO analyses was correct.

Therefore, and as promised, I wanted to share another breadth-based indicator I use to determine these likelihoods. It is the Summation Index of the S&P500: the SPXSI. It is simple the daily cumulative tally of the S&P500’s McClellan Oscillator (MO). Among other charts, it helped my premium members to already exit/reduce long exposure on Monday August 7, when the S&P500 was trading at 2480, as it already gave a sell/short signal on Friday August 4: the SPXSI dropped below its (blue) exponential moving average (EMA) . See chart below. It has remained on sell/short since; even despite the past 3 days.




Why did it give a sell/short signal already that early? Because market breadth had been negative 4 out of the 6 days prior. Rallies on predominantly negative market breadth are not sustainable and often coincide with 5th of 5th wave rallies, which are weak/narrow (few stocks only) and not with the start of a new Bull. Namely, Bull markets start with breadth spikes. See for example the late-June and mid-November 2016 buy signals (start of major 3 and intermediate-iii; the SPXSI line moves back above its blue EMA), as well as the mid-February 2017 buy-signal.

Of course no one single indicator is perfect and should not be relied on only, as the SPXSI gave for example a sell signal from late-December though early-February, while the S&P500 moved higher. This boils again down to the “weight of evidence” approach.

Bottom line: the SPXSI already gave a sell signal 2 weeks ago and by acting upon it could have avoided a lot of headaches, which it sure did for my premium members. Right now the SPXSI remains on a sell as obviously market breadth remains negative. Preferably I am now expecting a shorter term bounce and then further lows to around SPX2400 before the next, larger, bounce happens.

But, please remember that we’re dealing with what is IMHO a major-4 correction, and 4th waves, especially at this degree, are the most difficult to forecast as investor sentiment is simple what I’d call “confused”. Hence, while on one day a nuclear war seems inevitable, the next day our economic growth is through the roof. But, instead of trying to trade “the news”, please ONLY trade using the price charts and accompanying indicators. All the answers you seek are in those charts, nowhere else. News=Noise. It is then up to forecasters/analysts to only listen and interpret all of them as carefully and accurate as possible. Those who rely on it will then reap the benefits 🙂

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  1. Pingback: S&P500 Weekly charts’ upside target reached, but how do prior corrections compare to now? | INTELLIGENT INVESTING

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