One Technical Indicator Points To Potential Further Market Downside

Posted by Bigtrends on November 9, 2012 8:22 AM

The 200 Day Moving Average Says Buckle Up One Technical Indicator Points To Potential Further Market Downside There are many tools technical traders use to look for confirmation of moves, trends and reversals for option trading.  One I use is the percentage of stocks that are trading over their 200 day Simple moving Average (SMA). The chart below shows this for the last 9 years with the area chart behind it being the S&P 500 Index (SPY) (SPX) for comparison. Notice first that the two are very highly correlated.  But also notice that the bottoms in the market have occurred when the percentage of stocks over their 200 day SMA has shrunk to at least 45%.  This was the level in the relatively calm 2004 to 2007 period. Since then it has been much lower with the 4 bottoms coming at levels of 1, 26, and 8 before the 45 in June.  At a level of 60.80 today this implies there is room for a lot more downside for option trading. One indicator, one view, but not a favorable one. Courtesy of Greg Harmon, http://dragonflycap.com/

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