Contributor Since 2009
It is often said that market timing is impossible. However, you can easily perceive some regular patterns of correlation between changes in graphs of stock indices and various technical indicators, and using them may provide some advantage when deciding to enter and exit positions with more advantage than just buying and holding forever. I suggest this approach to help decisions about adjustments to long term investments not specifically as a guide for short term trading. For example, go to the following link at stockcharts.com and look at the longer term summation index and the shorter term McClellan oscillator, both of which are breadth indicators. They are extremely helpful in sensing when corrections are likely due or over. stockcharts.com/h-sc/ui?s=$NYA&p=D&a...
When the slope of the summation index is upward, the market will continue to rally, with pauses and dips along the way. The indicator typically moves 600-1000 points up before any change of trend is possible. An absolute level above +1000 is considered overbought. When the slope is changing from upward to sideways, it's an early warning of a possible correction (sometimes it takes several days before the downturn becomes apparent). When the slope is downward the market index will keep dropping until the summation index reverses upward. Downtrends typically involve 500-1200 point moves. An absolute level of -500 or lower has indicated stock index bottoms in the last several years. One might theorize that a complete move up or down does not occur until the summation index has gone from an absolute level of -500 to +1000 or higher, but that approach misses many significant swings in between and also doesn't guarantee buying at the long term bottom and selling at the top.
In conjunction with the summation index use the RSI(14) indicator for the price of the index itself, or for the stock index (or for any security or index for that matter) to sense when a top or bottom is forming and the intermediate term trend is likely to reverse. An rsi of 30 or less has been a good warning of a forming bottom, and rsi of 70 or higher a time to become defensive. Typically wait until the slope of the rsi has reversed to confirm a likely change in direction. Currently the NYSE rsi has touched 30 but is still falling, but the summation index has gone down only about 200 points and hasn't yet stopped going down. Incidentally, all stock indices tend to move in the same general direction together, so it really doesn't matter if you're looking at the NYSE summation index but you are interested in investing in SPY.
The McClellan oscillator is very also very helpful to indicate tops and bottoms but in a shorter term time frame compared to the summation index, as well as to forewarn a change in trend of the summation index itself. There tends to be a 1.5-2 week cycle in this indicator. A level of -65 or less is an early warning of a bottom forming. A level of -100 is extreme. A level of +75 is an early warning of an approaching top and 100 is an extreme. The most important thing, however, is that a move from plus territory to below the zero line indicates a change of trend to downward, and a move up from negative territory to above the zero line indicates a new rally. A rally up from negative territory into positive territory usually requires a day or two with a strong advance/decline ratio followed by a day or two of mediocre A/D with a VIX not rising higher than the previous high.
You can also help anticipate possible short term reversals based on the level of the SPX VIX index and its stochastic. VIX has typically indicated a bottom at a level of 20 or higher, and a top at a level of 12 or lower. You can also use rsi and a 14-day stochastic indicator on the VIX index itself to identify likely short term tops and bottoms (below 20 a possible bottom forming, above 70 a possible top forming in the index). Note that short term dips tend to have spike bottoms lasting only one to three days while short term tops often last several days while VIX subsides and the level of the McClellan oscillator peters out.
As of this writing the VIX is in potential topping territory at 21, having touched 23 intraday on 12/12/15. Its rsi is at 72.48 and its 14/3/3 stochastic has %K at 92 and %D ay 85, topping levels. The stock indices price could go lower or sideways until the summation index rolls over and the McClellan oscillator has a sharp up day into positive territory. It appears the market is likely to set up for a year end rally within the next several trading days. There is short term support for SPY in the 196-200 level. There is a trading gap at 192 near the previous low. The 50-day moving average is rising and a hair above 200. The 200-day moving average is at 193.71. With daily rsi at 38 and downtrending one expects near term weakness until all indicators discussed above have completed bottoming patterns. I'd be shocked if the average fell much below its previous low at about 182 in this particular short term descent, but considering the overbought very long term indicators (weekly rsi downtrending from near 70 to 58.9), and considering what has happened to energy related stocks it's possible.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.