Monday, October 24, 2016 11:59:15 AM
BY ART HILL Mean-reverting with Breadth Indicators
Mean-reversion is my preferred method of short-term trading. This means I define the bigger trend and look for short-term counter-trend moves. The idea is that short-term pullbacks will revert back to the mean of the bigger uptrend. A mean-reversion strategy can be applied to breadth indicators for broad market timing. The breadth indicators above imply that the broad market environment is bullish. This means I can use short-term breadth indicators to look for short-term oversold conditions. The chart below shows the %Above 20-day EMA for four major indexes. A move below 30% triggers a short-term oversold signal and this occurred the second week of October. The indicators bounced last week and this means they are in the midst of an oversold bounce. In other words, the short-term trend is turning up.
Mean-reversion is my preferred method of short-term trading. This means I define the bigger trend and look for short-term counter-trend moves. The idea is that short-term pullbacks will revert back to the mean of the bigger uptrend. A mean-reversion strategy can be applied to breadth indicators for broad market timing. The breadth indicators above imply that the broad market environment is bullish. This means I can use short-term breadth indicators to look for short-term oversold conditions. The chart below shows the %Above 20-day EMA for four major indexes. A move below 30% triggers a short-term oversold signal and this occurred the second week of October. The indicators bounced last week and this means they are in the midst of an oversold bounce. In other words, the short-term trend is turning up.
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