We all look for that one indicator that can foretell and nail all the market’s tops and bottoms. Unfortunately that holy grail does not exist. Some get close, but not even all the time. So what is working now, may not be working when the markets’ environments change. As a trader and analyst one has to recognize this and adapt accordingly. So which indicator is working these days?
One of the indicators of late that has worked well is the NDXMO, which is short for “McClellan Oscillator for the NASDAQ100 (NDX100).” See below.
What we can observe is that each time the NDXMO reached over 60 it marked either an immediate top or the NDX topped out a few days later (blue vertical lines). Sometimes the declines were large (January, March, June, October and November), sometimes smaller. So why did these declines happen? Because when the NDXMO in the recent market environment reaches that high, it means many stocks advanced. When that many stocks have advanced, all that’s left is for some of them -if not all- to decline.
Late November the NDXMO reached >80 twice and the current decline ensued (dotted red line). The indicator failed to mark the late-September high (although its Full Stochastic Oscillator -FTSO- did give a sell) because it never got even above 40. However, it did mean there was serious negative divergence with the late August high.
In addition, the NDXMO didn’t close >60 in April and late-January, both of which were significant tops (orange dotted lines); especially the latter. But in January we already had he earlier >60 peak and this second peak was once again negatively diverging (less stocks were advancing while price was moving higher). Nonetheless, negative divergences are not always the best indicator for a top, as they can continue to persist for some time.
What about bottom picking? Well, when we apply the FSTO we can see that each time it gave a buy cross and moved back above 20, a trade-able bottom was in place. That works too.
So what’s next? Well, as long as this indicators works, it works. Simple. It’s done a remarkable job in 2018 and for now there’s no evidence at hand to tell me it has stopped working*. Now making trading decisions based on any one particular indicator or technique is, however and IMHO, not the best approach. One should apply “the weight of the evidence” method and look at many different indicators and techniques to come to the most likely outcome. My premium members benefit from this approach tremendously as so far I’ve been able to forecast 5 out of 6 target zones correctly over the past month.
Currently, the NDXMO has thus aided greatly in my analysis and market forecasting for my premium members. Given that the US markets are in a Bear market, overbought conditions (marked by high MO levels) often result in sharp reversals as selling is the dominant and driving force. I call it “the markets are on SOS: Sell on Strength” Trade Safe.
Founder and President Intelligent Investing, LLC
Vice President NorthPost Partners, LP