The S&P 500 is showing some weakness this week. Will this morph into a full-blown sell off?
Here’s a look at an indicator that’s been spot on – percentR. percentR is a momentum indicator that can be used to determine entry and exit points.
Never heard of it? That’s because you won’t read about this indicator on CNBC, MarketWatch or Bloomberg. That’s is a good thing. Just recall how many charts and indicators the media has used in recent months to warn of a major crash (too much media coverage spoils any good indicator).
The chart below (published in the July 9 edition of the Profit Radar Report) shows the recent correlation between percentR and the S&P 500 (^GSPC).
There are different ways to use percentR. I like to use it to help confirm a change of trend. Here’s how that works:
Allow me to ease into the explanation with a practical application, an excerpt taken from the June 18 Profit Radar Report:
“percentR doesn’t tell us how far this rally will go, but it may help us determine when it’s over. A failed low-risk entry would signal a change in character of this rally leg, as every low-risk entry since May has been bought.”
An initial percentR dip below 80 is called a ‘bullish low-risk entry’.
The arrows mark all bullish low-risk entries since February. There have been eight bullish low-risk entries.
Six of them (black arrows) marked a short-term low. One (red arrow) was a false alarm and one (dashed area) turned into a failed low-risk entry and (slightly) lower prices.
What is a failed low-risk entry? When the S&P 500 closes below the level (daily low) that triggered the low-risk entry (dashed red box).
In other words, an S&P 500 (SPY) close below Tuesday’s low at 1,959.46 (bold green line) would be a failed bullish low-risk entry and the initial sign of a change of trend.
The 1,959 area seems significant, because it is compounded by the 20-day SMA (1,959) and a long-term Fibonacci support/resistance level (1,955).
Therefore, a close below 1,959 – 1,955 would be a warning signal.
There are a number of reasons why the S&P 500 should correct, but as long as it doesn’t close below 1,959 – 1955, they don’t matter.
However, one 'wild card' needs to be watched carefully, even if the S&P 500 closes below 1,955. This 'wild card' is obvious to everyone, but recognized by few. It also predicted the most recent 100+ S&P rally.
Here is more fascinating details about this must watch wild card:
Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.
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