Investing in a liquidity-driven market is pleasant as long as stocks are moving higher. But such a puffed-up market can turn quickly, and when it does, it’s tough to distinguish whether prices will recover and grind to another high or free fall like they did in April 2010 and May 2011.
There’s one indicator in particular that helps a ton in distinguishing correction-like drops that find support and lead to new recovery highs from the kind of declines that morph into meltdowns.
Simple but Effective
The indicator I’m referring to is the Williams Percent R (Percent Range). If you’re looking for some complex algorithm, you might be offended by the simplicity (and accuracy) Percent R brings to the table.
Percent R is a basic momentum indicator that uses recent prices and volume to measure on overbought or oversold condition. Readings are illustrated on a scale from 0-100. Two simple Percent R constellations produce either a bullish or bearish low-risk entry.
As of late, bullish low-risk entries have been of particular interest. A bullish low-risk entry is triggered when Percent R drops from an overbought condition (a reading above 80) into neutral territory (from 80 to 20).
Knowing When to Get In
A bullish low-risk entry is a buying opportunity as long as Percent R parameters (explained in the ETF Profit Strategy Newsletter) aren’t broken. A picture is worth more than a thousand words, so lets take a look at a chart.
The chart below shows the Dow Jones Industrial Average (DJI) plotted against Percent R (we’ll talk about the two trend lines in a moment).
Every time Percent R for the DJIA dropped below 80 without falling further, the DJIA went on to higher highs (vertical yellow arrows). However, when the Percent R bullish low-risk entry failed (tilted downward yellow arrows) stocks fell further, often significantly.
To increase the predictability of Percent R, the ETF Profit Strategy Newsletter uses trend lines and moving averages. Note how the most recent low-risk entries coincided with trend line support and closes above the 20-day SMA.
To further maximize the usefulness of Percent R, the ETF Profit Strategy Newsletter monitors Percent R for all major indexes, like the S&P 500, Nasdaq, Nasdaq-100 (NASDAQ:QQQ) and iShares Russell 2000 (NYSE:IWM).
The performance of many asset classes is related to each other. Commodities like gold (NYSE:GLD) and silver (NYSE:SLV) tend to move along with the euro. Due to a weak euro the Newsletter has been forecasting lower prices for gold since 2011.
Long-term U.S. Treasuries (NYSE:TLT) on the other hand have an inverse relationship to stocks. The March 11 ETF Profit Strategy update looked at 30-year Treasuries and stated that:
After 6+ months of back and forth, 30-year Treasuries have arrived at important support at 139.23 (114.50 for TLT). A break below support would unlock more down side potential. Lower 30-year T-bond prices would likely translate into higher equities. The weakness in 30-year Treasuries translated into rallying (at least temporarily) stocks.
The DJIA is very close to important near-term support. The picture for the S&P and Nasdaq is just slightly different. We’ve learned that a break below support in a market fluffed up by liquidity can result in fast and furious declines.
On the other hand, the trend remains up for as long as support is maintained. However you slice and dice it, the market’s performance at support levels is crucial. Knowing important support levels is vital to successful investing and percentR helps to pin down these important support levels.
This article appears in ETF Guide.