CT,
It's so easy, but in its simplicity lies its true beauty.
Here's how:
First, simply keep a running sum of the advances for the most recent 25 days. When I calculate the 25 day sum on Monday, I'll be dropping off the number from 26 days ago. This gives you an on balance sum of the most recent 25 days. Do the same for the declines as a separate 25 day sum.
When the difference between these two numbers is still negative, the tide is still going out (or the tide of stocks is moving lower) and stocks generally decline with the tide. When the difference between these numbers turns positive, the tide is coming in (or the tide is moving higher) and stocks generally rise with the tide.
Here's how the recent July, the 1987 and 1929 tops were signaled: When the numbers were still positive and the DOW was making newer highs on a rally but the positive number was lower (a divergence), a big sell off was imminent (within a week or so). When the numbers finally turned negative, the drop was a day or two away. This is what happened this past July and in 1987 and in 1929. The data is available somewhere, check it out.
Just the reverse for finding bottoms that had been working lower.
The nice thing about this indicator is that you never mistake a major top or bottom for a little rally in a down trend or downward correction in an up trend. This is probably the biggest mistake investors make when trading these markets, and this system eliminates the risk of making a wrong decision about the general trend.
If you have any questions about what I posted here, just ask.
GZ |
