Courtesy of Doug Short.
The $OEXA200R (the percentage of S&P 100 stocks above their 200 DMA) is a technical indicator available on StockCharts.com that can be used to forecast conservative entry and exit points for the stock market.
The OEXA is used to find the “sweet spot” time period in the market when you have the best chance of making money. See Is This the Best Stock Market Indicator Ever? for a discussion of this technical tool.
The charts below are current through this past week’s close.
Daily OEXA200R past 12 months
Monthly OEXA200R since April 2007
Interpretation:
The OEXA200R closed out the week down 7 points at 80%.
Of the three secondary indicators:
- RSI is above 50 and positive.
- MACD has crossed and is positive (black line above red).
- Slow STO (black line) is above 50 and is positive.
Commentary
The OEXA200R hit a high of 89% on Tuesday only to drop to 80% after the pathetic unemployment news on Friday (a 6% drop on Friday alone). The two secondary indicators, MACD and Slow STO, are edging toward flipping from positive to negative. They’re the “canaries in the coal mine” that forewarn a possible major drop by the primary indicator OEXA200R. The OEXA200R at 65% is the sell signal. We’re not there yet and are probably due for another rebound before the down trend really takes hold. The take-away is that the foundational secondary indicators are starting to decay, they’re the first warnings of softness in the primary OEXA200R, which itself is the early warning indicator of a precipitous general market drop. We’re still in tradable territory and should remain there until early summer when Operation Twist ends. However, we’re probably at the top of the mountain that we’ve been climbing since December so from here forward expect an overall level to downward path.
Background on How I Use This Indicator
Following a major market correction, the conditions for safe re-entry are when:
 a) Daily $OEXA200R rises above 65%.
And two of the following three also occur:
 b) RSI rises over 50.
 c) MACD cross (black line rises above red line).
 d) Slow STO (black line) rises over 50.
When Daily OEXA200R drops to 65% it is taken as the conservative signal to exit all long positions, sit on the sidelines with your cash and wait for some clarity before proceeding. If the OEXA200R treads water at the 65% line, wait and watch for a rebound indicating it’s safe to resume trading.
However, at some point it will inevitably drop below 65% and remain there. How to proceed in that situation depends on the overall trend of the market, the macro-picture. During the cyclical bull of 2003 to 2007, the market was still safely tradable with OEXA200R in the 50% to 65% zone because there was enough upwelling lift in the S&P at that time to minimize the chance of a sharp, significant market downturn.
The problem is that we can by no means confidently compare our present situation to that of 2003 ? 2007. There is no strong, steady wind pointing the market weathervane in one direction, it is being buffeted by swirls and gusts in unpredictable ways. To better understand this, take a look at the charts below, in particular the overall trend of the OEXA200R during the 2003 ? 2007 cyclical bull compared to the trend from 2007 to present.
The S&P chart indicates that for the past three years we have not had a steady upwelling trend in the market comparable to 2003 ? 2007. Absent that underlying support, the OEXA200R has undergone significant gyrations since 2007 and is ominously exhibiting a trend of lower highs. The MACD for OEXA200R has also been trending lower overall. Notice that S&P volume has experienced a steady decline since 2009, another classic Bear indicator.
Since 2007, every time the OEXA200R has stumbled below the 65% line it has not regained its balance, but fallen flat on its face, followed by a sharp S&P downturn. For that reason, trading the 50% to 65% zone in our current situation is going to be difficult ? doable, but with considerable risk. If the OEXA200R drops below the 50% line that is the signal to exit all long positions immediately in expectation of a serious, imminent market decline.
In my opinion, the most significant indicator of where we stand today is the fact that the market is above both its 140 year historical trend line and the trend line for the secular bear that began in 2000. These are the macro-forces that will gravitationally pull the market back into equilibrium at some point in the near future, likely beginning in late 2012 to 2013. Add to that any number of catalytic events which could exacerbate such a correction: An Israeli ? Iran ? U.S. conflict with $200 oil, the next chapter in the Euro-crisis, etc. QE has been a countervailing force to recent market corrections but, realistically, Fed Chair Bernanke can only feed the market so many cans of QE Red Bull before it eventually crashes.
The bottom line: I estimate that by August / September the OEXA200R will have fallen to the 65% line, and will keep falling. How far? QE might save the day once again, temporarily. But in light of the factors mentioned above, it should come as no surprise if we end up experiencing a market event worse than that of 2008 ? 2009. Luckily, OEXA200R should give us ample advance warning of the next major correction. Stay tuned!
Note: Stockcharts.com offers free access to the $OEXA200R indicator on a daily and weekly basis. The monthly view requires a subscription.
(c) John F. Carlucci
John F. Carlucci is a regular contributor to Advisor Perspectives and the author of “Ashes to Riches: How to Profit Spectacularly during the Economic Collapse of 2012 to 2022”, published by Endeavour Press Ltd., and also available on Amazon.com
