Today we have a special guest blogger, Price Headley of Big Trends. Price is a Traders Hall of Fame inductee and is a regular contributor on CNBC, Fox News and Bloomberg Television, and in a variety of print and online financial news outlets. Today Price will share some of his insight on a few indicators he looks for to signal a possible market reversal. Be sure to comment with your thoughts and check out Prices' new Coaching Kit at BigTrends.
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In our 20 years plus of option trading and educating investors, there are certain factors that we’ve seen time and again can help foretell when the market is on the verge of a trend momentum switch. As part of our complimentary Coaching Kit, we are highlighting how to pinpoint market reversals – part of the Coaching Kit includes a comprehensive Market Timing course that you can use to build on today’s article.
Beyond our innovative technical analysis indicators, we also utilize sentiment and volatility based measures that can often give us the “early warning” that something may be amiss in the markets.
The first of these is the CBOE Volatility Index (VIX), which I’ve been analyzing and utilizing since the early 1990s. The VIX measures in the implied volatility of S&P 500 Index (SPX) options — this is a factor that is basically human-controlled and has swings based on supply and demand for options. To a large measure, it measures the “fear factor” in the market among option traders.
In recent years, VIX movements higher have tended to indicate that something is not quite right in the stock market and that large-scale selling may be imminent. For example, take a look at the following chart of the VIX and SPX from 2010:
VIX & SPX Daily Chart with Bollinger Band
In the above chart, you can see that the VIX (green) moved above its Top Bollinger Band (aqua bands) in April, before the market topped out. There was even another early warning about a week earlier where the VIX breached its Top Band but closed below it! Another bigger seismic move in the VIX followed at the beginning of May. The result: the stock market (SPX in yellow) dropped nearly 20% in the two months following this VIX move!
There are two other sentiment & volatility measures that we utilize to find the big market trends early on. One of these is Put/Call Ratios. These measure the trading (mostly among the public) of option puts and calls. We’ve designed unique indicators to track both the CBOE Equity-Only Put/Call Ratio and the ISE Inverse Call/Put Ratio. We will often see a suspicious spike in these measures before the market makes a big move — and on the inverse, there are times when these become contrarian indicators and tell us that the current trend will continue! Much more is available on this in the coaching kit.
Finally, a third broad-based measure we utilize to determine whether a market trend shift is imminent or will continue and/or strengthen — let’s call this sentiment, media & surveys. This is more of a contrarian (going against the prevailing wisdom) indicator in many cases — we’ve seen countless examples of mass media panic at times of huge market bottoms and “buy stocks now” type articles when a bearish trend occurs, for example. Remember how many articles there were about “easy money in real estate” right before the bottom dropped out of that market? We’ve seen that time and again and recognize when bubbles will burst.
Even “fading” (going against) some of the online touts such as Jim Cramer can be utilized by the knowledgeable trader. And we know how to trade the reaction to news events, which is MORE important usually than the news event itself. Another example is investor sentiment surveys, such as the prominent one by Investor’s Intelligence. This measure of bulls/bears will often provide very good short-term contrarian signals for the markets when it reaches extremes.
Keep an eye on the VIX, Put/Call Ratios, and Media Sentiment/Investor Surveys and you can often see whether the current market trend is due for a huge imminent reversal or whether you can ride the trend higher for further profits. For more in depth instruction on the tools and methods that I use check out our free BigTrends Coaching Kit available here.
Trade Well,
Price Headley
Big Trends
James, you could take your story and put just about any traders name in front of it. I think it's a universal experience.
Never beat yourself up about a trade, especially when you made money. If you think it was a mistake just ask yourself, did I learn from it and never repeat it. I trade futures and options only, lots of markets (>35) with lots of data but (no CEO's, no brokers, no ratings agencies). My advice is simplify, simplify, simplify. Find out what type of trader you are(see previous articles and vids from Adam, excellent), find your patterns/indicators, test them and re-test them. For me, I'm not sure that 2-3 times over 10 yrs is enough data points to be confident, you want to confirm your system many times over a long time frame and in many different market conditions.
Good luck
I agree with most of all the above,but I only mentioned the cup and handle for one reason being the first time I heard of this pattern it did exactly as the person told me,but aftr=er tha fact I always when looking at charts look for one again to see if what he said holds true or not.
I think in the last 10 yr's Ive only seen mabe 2-3 of them and I wasn't even sure if it was a true cup n handle patter anyweay??
I obviously am not a chart man by far,I look at them often ,but dont really no what Im looking for ,so I brought up the subject because the 3-5 day chart sort of looked like the full cup had formed and next thing we have a small spike up ri9ght afterwards.
I am a very pacient man concidering I have add hd,Its not easy to be pacient when u have a disprder as this,but over and over I learn the hard way that pacience is the key many times ,you have to know when to hold for the maximum profit or close to it and know when to fold em to,so Kenny says anyways.lol
I did a stupid thing back when we were near the high opf the year,I had a gut feeling we were going down and I sold at 39.25 ,only to be faked pout aND REBOUGHT AT THE SAME PRICE ALMOST,i THINK i MADE 2.40 AFTER COMMISSION,WHat an embarressing move that was,now I have to pay taxes on the profit and I wouldnt of mined that if I had got out waited for the lo0w a couple or so weeks back at 28.?? and rebought it to ride it up again,GREED thats all I caN SAY,i SHOULD OF NOT CHANGED MY ORIGANAL PLANS ,ONCE U MAKE EM STICK TO EM,i LEARNED THAT THE HARD WAY ALSO. LOL jIM
Ari is right about much of his comment, and John, the trend is your friend.
Chili
Ari is right about much of his comment.
Chili
Are the Options Put/Call ratios on your website?
How about the Media Sentiment/Investor Surveys ?
What are the current readings?
3 best signs for me are PRICE, PRICE, PRICE.
My only interest is to identify the point of entry, then relax and let the market do all the work, it will let you know if you're right or wrong.
Predictive trading, attempting to pick tops/bottoms, reversals etc. is fraught with danger.
Sentiment is defined as: 1. A thought, view, or attitude, especially one based mainly on emotion instead of reason:
I'm not sure that this is a great basis for successful trading.
You seriously can't be using Cramer as an example of anything more than cheap entertainment, that's what he's hired for.
Ari,
Agreed.
Adam
The cup shouldn't be a V shape because the softer U indicates consolidating near the support, and the V doesn't. It doesn't have to be perfectly smooth, but it can't be a V.
A trend should exist beforehand and not too long in the tooth (cup and handle is a continuation pattern, so a trend must exist before).. The re-tracement in the handle shouldn't be too great..
The Trend is Your Friend until the End.
Ben will never run out of money. Sooner or later he might grow tired of printing it.
Don't buy vxx ,tza, faz unless you wanna lose your money .wait till ben runs out of QE dollars
I agree with the comments against contrarian signals. The MACD has been flat on the SPX since October; talk about divergence... Yet, the markets keep heading up up up. Marketclub has been green on the SPX since mid September, both monthly and weekly. I'm not getting out until that weekly triangle goes red.
I couldn't agree with Lance more. Let the market determine the trend ...that is what MC is so good at...wait for the chart to set up for you. Don't get impatient.
Good stuff. Is the tea cup half full or half empty?
Becareful using the third metric: contrarian sentiment. One of the biggest mistakes that traders make is "trying to catch a falling knife". That is they try and time bottoms (or sell tops) by being the contrarian.
Everything you do should be based on mathematics and without subjective emotion. Charts are mathematical equations. Contrarian sentiment is not.
Rather than try and time a market reversal like the examples given above, "Remember how many articles there were about “easy money in real estate” right before the bottom dropped out of that market? We’ve seen that time and again and recognize when bubbles will burst.", or try and time bubbles bursting (no one knows when a bubble will burst), it is better to establish the trend first. If the market does reverse, using an objective trend analysis tool like Market Club will allow you to enter the trade in plenty of time on a strong uptrend, or strong downtrend signal. So you can still nail good profits and lower your risk by waiting for a dominant group (either bulls or bears) to emerge first as manifested in the trend. Trying to be the contrarian (i.e. buy bottoms and sell tops or time bubbles) is a losers game over the long run.
Jan asked about the VIX. Consider VXZ. VXZ is a VIX variation. VXZ will chart in Yahoo Finance. It is based on the mid-term futures and so it smoothes out some of the volatility seen in the VIX. The nice thing about VXZ is that you can also see volume on it whereas the VIX you can't.
I am not much of a chart person,but right now the 3 day chart sort of resembles a cup with the handle forming as I right this,I wonder ,does a cup and handle always hold true for a move up,or upward trendand does the cup and handle formation have to be a smooth form to be concidered one cause the one I'm refereing to is somewhat jagged but also tAKING THE SHAPE OF ONE?? tHANKS mUCH ,jIM m. fL.
Very interesting indicators! Where the VIX & SPX daily charts can be found