How to Spot the Next Tradable Rally

I’m a Bear… but not a Perma-Bear. Someday I will become a Bull again. But above all else, I am a Trader. Consequently, while being a Bear, I still look for and trade rallies from the long side.

The forces are gathering for a just such a tradable rally. On signs of strength I will start to ease out of my shorts and start easing into some small long positions.

Patience around these levels is absolutely paramount. One more cathartic rinse downwards to trigger stops and to clear out the last weak longs is still possible. Only a close above 1260, quickly followed by a clsoe above 1270 on the S&P 500 can unleash a short covering squeeze.

Below are just some of the indicators that I’m currently watching:

When the percent of stocks above their 50 day simple moving average rises above 80%, a tradable top in the S&P 500 (SPX, grey) quickly follows.

When the percent of stocks above their 50 day simple moving average falls below 20%, a tradable bottom in the S&P 500 quickly follows. This is a reliable signal as long as equities are in an uptrend, as defined by the index being above it’s 200 day simple moving average.

When the percent of stocks above their 50 day simple moving average falls below 10%, a tradable bottom in the S&P 500 quickly follows. This is a reliable signal as long as volatility as measured by the VIX (bottom, grey) has spiked to 30.

Buy signals that result in the greatest return are those accompanied by at least a 100% increase in the VIX from its previous level.

When the percent of stocks above their 200 day simple moving average rises above 80%, a tradable top in the S&P 500 (SPX, grey) quickly follows. This one works particularly well when there is a divergence. For example, if the S&P 500 continues to rise, but the percent of stocks above their 200 day simple moving average starts to drop, exit long positions or go short on the first sign of weakness in equities.

When the percent of stocks above their 200 day simple moving average falls below 20% or 10%, a tradable bottom in the S&P 500 quickly follows. This is a reliable signal as long as volatility as measured by the VIX (bottom, grey) has spiked to 30.

Obviously relying on a number of very different indicators will increase the quality of your signals. Use one or two in isolation at your own risk.