Friday, January 11, 2008
To spice things up, I decided to add the "SPX Barometer", a mechanical trading system. The premise behind the strategy is that whether the SPX moves up, down, or sideways, it goes through overbought (high pressure) and oversold (low pressure) cycles. Therefore, the system takes into account only the overbought/oversold nature of the market, with no consideration of price action.
The rules could not be simpler: buy when buying pressure increases (the trigger line crosses above the 5 day moving average), and sell when it decreases (the trigger line crosses below the moving average). Or, for a more conservative approach, buy when the trigger line crosses above the oversold line, and sell when it drops below the overbought line (this is the approach that will be followed here). As a rule of thumb, readings over 36 are overbought, and below 16 -- oversold. Due to FusionChart limitations, only one overbought/oversold level will be marked at a time on the chart
The absolute levels of the signal tracking line are irrelevant and have been removed; the line is included simply to show when the system is right or wrong, and by how much.
Since the data will be updated after the close, it is best to consider this as a reference tool.
It should be noted also, that the SPX Barometer is not related to the Gravity dates, but the two complement each other, and could be used together.