S&P 500 Chart Analysis

+20% on the S&P 500 in two months

This week's SBV chart example is a continuation of the example of September 26, 2008. In this week's example, we use the same settings that were previously used by showing the consistency of our trading system over the long period of time.

This week's SBV chart example is based on the 60-day SBV(20) S&P 500 chart.

Chart 1. Relationship between the SBV oscillator and index reversal points. S&P 500 index. 60-day view. 1 bar = 1 hour. SBV(20)

Signal Level 1: If the SBV runs above plus 20% or falls below minus 20% and reverses its trend without reaching 33%, use 20% as the signal line.

Signal Level 2: If the SBV runs above plus 33% or falls below minus 33%, use 33% as the signal line.

1. Once the SBV indicator has declined below a negative signal level (the indicator will now show red), we enter a short position (if we are not already short);

2. Once the SBV indicator advances above a negative signal level (after having been below that level), we will enter a long position (the indicator still shows red);

3. Once the SBV indicator rallies above a positive signal level (the indicator will now show green), we enter a long position (if we are not already long);

4. Once the SBV indicator declines below a positive signal level (after having been above that level), we will enter a short position (the indicator still shows green);

5. Additional Stop Loss Rule - If the SBV had fallen into negative territory and has begun to rise without, but has not yet reached the signal line, close the short position when the SBV is back in positive territory, and stay in cash until a new buy signal appears. Do the opposite for a long position.

Table 1: Trades based on the   5-rule (additional stop-loss rule) system.

* Explanation of September 18, 2008 signal
** Explanation of November 21, 2008 signal

Explanation of September 18, 2008 signal

In our Market outlook on September 17, 2008 we wrote:

"We will repeat for those who use a 60-day SBV(20) simple trading system what we mentioned on January 23rd of 2008: we recommend that you lower the negative level from minus 20% to minus 60-70% after such a strong Selling volume accumulation - there is no need to wait until the SBV runs to the minus 30-20% level for confirmation of the recovery."

This is one way to improve the system. When the market has moved in one direction for a prolonged period of time and the accumulation of Selling or Buying volume grows very significantly, it is reasonable to expect a sharper and a stronger reversal than usual. In this case it could be too late to close a position when the SBV has crossed the 20% level. This helped to spot the exact bottom of the crash in January and March of 2008, as it did on September 19, 2008.

Explanation of November 21, 2008 signal

In our Market Outlook on November 20, 2008 we stated:

"There has been a large area where bearish volume accumulation (red SBV) has been very intense. This area extends from November 6, 2008 until now and points to the possibility of a strong recovery. Something that we have mentioned before, in the case of large volume accumulation to the index and downside supported by big volume surges, it could be enough to have 10-20% SBV rise to confirm the higher odds of a recovery. Since a recovery movement could be sharp and strong, waiting until the SBV rises to minus 30 or minus 20% may prove to be too late."

The same principle that was applied on September 18, 2008 (see above) could be applied on November 21, 2001 when the SBD began to move upward.

Note: The 20% level for the SBV indicator was determined in relation to the prevailing market conditions at the time that the trading examples were selected. In order to establish the optimal critical levels for the SBV indicator, traders should consider the current market situation and review the history of prior volume surges, including their magnitude (i.e., the level that the SBV indicator reached).

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