The 2 Indicators I Trust Most Are Signaling A Reversal

The SPDR S&P 500 ETF (NYSE: SPY) is about 4.4% off its high, and concerns are mounting. One reason for concern is that SPY traded at its all-time high about two weeks ago.

The sudden decline is alarming to new traders. Many of them seemed to believe stocks always go up.

But you and I know better. Prices go down as well as up, and that means we aren’t surprised by declines. It also means we should apply time-tested tools to understand the risks associated with the current market.

That’s why this week, I decided to focus on the two indicators I know best. That’s because I have designed and tested them extensively myself.

What My Indicators Are Telling Us

The chart below shows SPY with my Income Trader Volatility (ITV) indicator. ITV is similar to VIX in that it rises as prices fall. At the close last week, ITV moved above its moving average (the dashed line in the bottom portion of the chart).

This is the third time the indicator moved above its MA since the start of the year. Previous signals were quickly reversed. This one may be signaling that additional downside is likely.

To quantify the risk in the current market, I added Fibonacci retracement levels to the price of SPY. The downside price target based on this technique is about 18% below SPY’s high.

Some traders attribute mystical powers to Fibonacci numbers.

I don’t.

I add them to charts simply because many traders watch Fibonacci levels. I’ve noted before that these numbers are important solely because they are easy to draw on charts and are widely followed by technical traders, including traders at the largest hedge funds.

It’s interesting to note the 38.2% retracement of the market’s one-year advance coincides precisely with last autumn’s lows. This is a support level based on the price action and the Fibonacci retracement. It shows that there is significant risk in the market.

My Profit Amplifier Momentum (PAM) indicator confirms this risk. PAM is shown on the daily chart of SPY below.

PAM has been weak for some time, creating a bearish divergence with the price action. It turned bearish last week.

Action To Take

PAM is designed as a short-term indicator. ITV is a longer-term indicator. Both are bearish, and so is the price action.

I don’t expect the stock market to fall straight down. There will be back and forth action but the primary trend appears to have shifted from up to down.

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