Figure 1 is a weekly chart of the S&P500 and the indicator is shown in the lower panel. This week's value isn't reflected in the indicator until Friday's close, but if the markets closed right now the indicator would be at the extreme zone. If you had been so smart to only "buy" the S&P500 during those times when the indicator was extreme, then you would get those trades seen in figure 1. Winning trades are in green; the losing trades are noted by the red trend line.

Since the March, 2009 low, the indicator has been at or in the extreme zone 6 times. If you bet long on the S&P500 when the indicator was extreme, these 6 trades resulted in 3 losses (-4.99%, -2.24%, -0.78%) and 3 wins (1.06%, 0.35%, 0.04%). The winning trades essentially were multi-week trading ranges for the S&P500. During the past 12 months when the indicator was in the extreme zone, the S&P500 either went down or side ways.

Figure 1. S&P500/ weekly

For a more comprehensive look at this indicator and how stocks under perform when the indicator is extreme, I refer you to the following articles:

"Developing A Trading Strategy (Part 2)"

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By Guy Lerner

http://thetechnicaltakedotcom.blogspot.com/

Guy M. Lerner, MD is the founder of ARL Advisers, LLC and managing partner of ARL Investment Partners, L.P. Dr. Lerner utilizes a research driven approach to determine those factors which lead to sustainable moves in the markets. He has developed many proprietary tools and trading models in his quest to outperform. Over the past four years, Lerner has shared his innovative approach with the readers of RealMoney.com and TheStreet.com as a featured columnist. He has been a regular guest on the Money Man Radio Show, DEX-TV, routinely published in the some of the most widely-read financial publications and has been a marquee speaker at financial seminars around the world.

© 2010 Copyright Guy Lerner - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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