My New Market Indicator – The OVI Index

Hi Everyone 

If you’ve been trading what you see, you’ll have been trading bull flags recently.  

However, last night’s action was pretty severe to the downside with a 20 point drop in the last hour.  Do be careful as significant market action often occurs during the last hour of trading.  This came with a false breakout so we may have our downturn upon us. 

The question is … how can you tell what’s going to happen next in the markets in order to focus on the right direction?  

Well, no-one can tell for sure, but I’ve been developing something that’s turning out to be rather special. 

I’ve been developing a new market indicator called … The OVI Index.

Ok so what does this indicator do, why is it so special and when is it going to be available? 

First, the OVI measures the flow of money, not price.  It does this by creating an oscillator derived from option volatility, volume and open interest.  Other indicators like moving averages, MACD, RSI, Stochastics, Gann, Elliott, Fibonacci etc, are all derived from price.  In my book, price and price pattern are the best indicator of price, so these other indicators must be inferior. 

The OVI is special because it does not lag the market.  This is huge!  Other oscillators like MACD, Stochastics, moving averages and RSI are smoothed by way of averaging several days of data.  This creates a lagging effect, which means often the indicators will signify something only after the market has made its move. This is all very well in theory but not so good in practice where we need something more immediate.  

Third, the basic OVI for the S&P will be available in the next few weeks.  My Private Webinar Club will have VIP access to the OVI for individual stocks as well. 

In the meantime, here’s a sneak preview for the S&P!  

The first chart shows the OVI below the zero line up to March 2009.  This is bearish.  However, notice how as the market reaches a low, the OVI is starting to climb.  This, in conjunction with the two dojis signifies that a change in market direction is a distinct possibility as I suggested in my blog on Sunday 8 March 2009.  This turned out to be the low and the market duly turned there and then!  

So, it’s fair to say even I didn’t realize the power of the OVI at that point as it was in development. 

The next chart is even better.  It shows the false breakout of 11 June which I also wrote about around that time.  What made that false breakout interesting was that (a) it came after a protacted flag pattern that wasn’t going anywhere; (b) the bar itself had a long tail sticking out while it closed near the low of the day; and most importantly (c) the OVI was diverging. 

By this I mean that while the S&P was struggling to make a new high until the day of the false breakout on 11 June, the OVI was making lower highs, suggesting that a flag failure could result in a downturn.  This is exactly what happened. 

So far so good … well, how’s about another example: 

Earnings season started in earnest on 13 July when Goldman Sachs announced.  Their bullish announcement halted the market’s downward retracement and sent it sky-rocketing upwards.  I have to say I don’t really understand why the markets are flying high but the OVI is telling me something again! 

Once again the OVI is divergent with the market.  The market forms a great looking bear flag right up to 10 July and it looks for all the world that the bear flag will go down with earnings. 

But the OVI is pointing upwards strongly, suggesting that the bear flag may not break to the downside.  Goldman Sachs announces earnings on the 13th, the market turns up big time alongside the OVI which powers into positive territory within 2 days.  From here it’s a matter of finding great bull flags.

So the OVI is going to help us with two main areas of trading.  

First, with trading flags and having a sense of whether flags are going to follow through or turn the other way.

And second, the OVI is going to help us devise a safe reversal strategy. 

You can’t see it from the above charts as they’re a few days old, but right now the OVI is pointing downwards having peaked on 16 September.  In of itself this tells us to be wary of going long, and interestingly the market has moved sideways with a couple of false-looking breakouts.  Time will tell if it develops into a proper bearish signal for the markets, but the OVI has already given us a faint warning sign.  

Till next time!

All the best


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