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 73%.
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 dropped again on news that the Euro zombie has reawakened from its brief slumber. It is impossible to imagine how this turns out well over there and, by association, for us. Prepare for the “Perfect Storm of 2012”: the end of Operation Twist, slow-mo Euro zone asphyxiation and disintegration, an Israeli ? Iran conflict and oil spike. As the storm gathers later this year, Mr. Bernanke will surely reach for the QE cardiac defibrillator one more time. It will be short term good news for the market. But like telling the same joke over and over, you get diminishing returns with each repeat. In the end, his valiant efforts are no substitute for fundamental, pro-growth government policies to facilitate solid economic recovery.
Which brings us to the secondary indicators. Slow STO has flipped from positive to negative. RSI is getting close to dropping below 50 and going negative. While not sell signals themselves, they’re the “canaries in the coal mine” that will precede a major drop by the primary indicator OEXA200R. The actual sell signal is when OEXA200R drops to 65%. We’re not there yet and are probably due for another good rebound before the down trend really takes hold once Operation Twist ends. 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. However, even with softening indicators we’re still in tradable territory and can expect to make a few more bucks on at least one more rebound. We’re probably at the top of the mountain that we’ve been climbing since December and from here forward can expect an overall jaggedly horizontal to downward path.
Background on How I Use This Indicator
The OEXA200R is a valuable metric used to accurately assess the state of the market in order to make profitable trading decisions. That is, whether we are in a bull, a bear or transitioning from one to the other, as well as market volatility and risk within each of those situations. Historically, it has also given traders a clear early warning signal of impending serious market downturns and later safe re-entry points. While not intended as a day trading tool per se it can certainly be used as background information by day or highly speculative traders. Simply put, the OEXA200R gives traders the ability to identify the most opportune conditions within which to execute their various long, short or hold strategies.
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.
The market is considered safely tradable as long as OEXA200R remains above 65%. Volatility and risk for long traders are relatively low. The trend is on their side.
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. Volatility and risk increase substantially. Since 2007, this has been a ‘tipping point’ condition presaging a major market drop.
If the OEXA200R does not rebound but remains below 65%, how to proceed 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 five 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 economic situation is going to be volatile and ambiguous at best. Since there will be much more downside than upside potential it will be especially risky for long traders. With 90 day puts you’ll sleep like a baby, with 90 day calls you’re going to spend many restless hours staring at the bedroom ceiling.
If the OEXA200R drops below the 50% line we regain clarity as to the market’s direction. That will be the unambiguous signal to exit any remaining long positions immediately in expectation of a serious, imminent market decline. Conversely, it will also be the clear signal to go short to take advantage of that sharp 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 world events which could exacerbate such a correction. 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 however we want to trade it. 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
