High-Probability, Mean-Reversion Indicator: Short-Term Reprieve Looks Imminent

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Includes: DBA, DIA, EEM, EFA, EWJ, EWY, EWZ, FXI, GDX, GLD, IBB, IWM, IYR, OIH, QLD, QQQ, RTH, SDS, SLV, SMH, SPY, SSO, TBT, TNA, TZA, USO, VXX, XL, XLB, XLE, XLF, XLI, XLU, XLV, XLY
by: Andrew Crowder

It was another day of sideways trading. The market was able to hold gains for yet another day which was impressive given the short-term overbought extremes, strong overhead resistance and yesterday's huge upside gap.

I am still leaning towards a close of the upside from yesterday which would bring SPY down to $117.25, DIA down to $112.21 and QQQ down to $54.66. I would expect that this occurs over the next 2-3 days, but Mr. Market always has a way of playing games with what should be obvious price levels.

I found an interesting nugget from Jason Goepfert of Sentimentrader.com today. "According to Bloomberg , at least 500 more stocks last traded on an uptick than a downtick on each session during the past week. The 5-day average of the closing reading is now over +900. While the S&P 500 was trading below its 200-day moving average, this has only happened 3 other times (10/16/01, 11/28/08 and 3/18/09). All three saw the S&P drop at least -3% during the next 2 sessions, though there was nothing consistent about them after that."

A 3% drop would certainly close the gap that I have mentioned over the past couple of days and would be highly beneficial to our current trades in the High-Probability, Mean-Reversion Strategy and the Theta Driver Options Strategy.


(Click to enlarge)

Disclosure: I am short QQQ, SPY, DIA.