A very helpful index to predict what the Dow Jones is going to do is the Smart Money Flow Index. Just follow the smart money and the Dow Jones will correct itself to the smart money index. The only problem I have is that this SMFI index is not free of charge...
The Smart Money Flow Index SMFI has long been one of the best kept secrets of Wall Street. Everybody knows the importance of a closing price and other last hour indicators like the Closing Tick, which we publish daily on our portal.
The Smart Money Flow Index is therefore calculated according to a special formula by taking the action of the Dow in two time periods: the first 30 minutes and the last hour. The first 30 minutes represent emotional buying, driven by greed and fear of the crowd based on good and bad news. There is also a lot of buying on market orders and short covering at the opening. Smart money waits until the end and they very often test the market before by shorting heavily just to see how the market reacts. Then they move in the big way.
These heavy hitters also have the best possible information available to them and they do have the edge on all the other market participants. It is a clear buy signal if the Dow falls to a new low which is not confirmed by the SMFI. But whenever the Dow makes a high which is not confirmed by the SMFI there is trouble ahead (Chart below). Watching this indicator is like being on a plane and see the pilots jumping off with parachutes. This magnificent indicator has called every major top and bottom.
Another index is the SMI index. The basic formula for SMI is:
Today's SMI reading = yesterday's SMI - opening gain or loss + last hour change
For example, the SMI closed yesterday at 10000. During the first 30 minutes of today's trading, the DJIA has gained a total of 100 points. During the final hour, the DJIA has lost 80 points. So, today's SMI is 10000 - 100 + -80 = 9820.
So basically, when you see people buy at the opening and sell into the close, you should become bearish.
Here's my own fabricated Smart Money Index. Entirely free of charge. This Smart Money Index is a leading indicator for what the Dow Jones will do after a few months time.
What I did is look at the average, opening and the closing prices of the Dow Jones historical numbers and compared them to the previous close. The Dow Jones historical prices can be found here: stooq.com/q/d/?s=^dji
SMI = previous closing price - (opening price- previous close) + (closing price - average price)
Correlation Economics: SMI Index
As you can see, the bubble in 2000 can be predicted with my formula. And the bottom of 2009 can also be predicted. In 2014, we see that the red curve is flattening out while the blue curve is still going straight upwards, which means we are in bubble territory now.
I can't get enough of this Smart Money Index, so I made one for the NASDAQ.
As you can see, the NASDAQ bubble of 2000 is very visible here. The smart money was leaving the NASDAQ years before the bubble burst. Today, we also see that the smart money has already left the building (red chart going down).
Let's do the same for gold.
I have the feeling that the Smart Money Index for gold isn't that useful to predict the gold price. But when looking at the chart I see that gold is pretty flat at this moment. I don't expect any large moves yet.
So follow the Smart Money!