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This Indicator Is Pointing to a Stock Market Reversal

By Jeff Clark
Thursday, November 21, 2013

One of the stock market's most reliable indicators just flashed a "sell" signal.
Last Friday, the S&P 500 closed above its upper Bollinger Band. Bollinger Bands measure the most probable trading range for a stock or index. So whenever the S&P 500 trades above its Bollinger Bands, it indicates the market is overbought – and likely to reverse lower.
On Monday, the index closed back inside its Bollinger Bands. It confirmed the reversal by closing lower again on Tuesday. So we now have a broad stock market sell signal and the first sign that at least a short-term top may be in place.
Here's a look at the S&P 500 plotted along with its Bollinger Bands...
The red circles on the chart show each time this year the S&P 500 has closed outside of its Bollinger Band. Three of the four previous sell signals over the past year kicked off short-term declines that brought the index down to its lower Bollinger Band. Similar action this time around would have the index test support near the 1,740 level.
Of course, there's a chance that the market ignores the sell signal and continues higher anyway – as it did following the sell signal in October.
A look at the 60-minute chart of the S&P 500 may give us a better idea of what to expect...
The blue lines on the chart show a rising-channel formation, with higher highs and higher lows. As long as the S&P 500 remained inside this pattern, the bulls were in control and the odds favored a continued move higher. But yesterday, the chart broke down.
With the S&P 500 now trading below support, the bears have a chance to make a move.
Aggressive traders should use any bounces back up toward the former support line – which should now act as resistance – as an opportunity to put on low-risk short sales. The downside target for the S&P 500 is the lower Bollinger Band, currently around 1,744.
Traders can stop out of short positions for a small loss on a move back above 1,795.
Best regards and good trading,
Jeff Clark

Further Reading:

"Short-selling is an important strategy for any portfolio," Jeff explains. "Stocks move up and down. If you're only investing on the up moves, you're only taking advantage of half the opportunities." Get all the tools you need to make money on short trades here and here.
Jeff says it's time to pull out the "pain chart" and gauge your proper exposure to the stock market. Learn how to use "the easiest investment system ever" – and what it says you should buy today – right here.

In The Daily Crux
Market Notes
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Insurance stocks are quietly booming... MetLife, Progressive, and Chubb are all sitting at multiyear highs.
Market Watch
Symbol Price
S&P 500 1781.37 -0.4% +28.4%
Oil (USO) 33.63 -0.3% +5.3%
Gold (GLD) 120.12 -2.3% -28.2%
Silver (SLV) 19.14 -2.4% -40.4%
U.S. Dollar 81.01 +0.4% +0.1%
Euro 1.34 -1.0% +4.6%
Volatility (^VIX) 13.40 +0.1% -11.1%
Gold Stocks (^HUI) 214.83 -3.3% -52.2%
10-Year Yield 2.79 +3.0% +68.1%

World ETFs
Symbol Price
Israel (ISL) 16.57 +1.2% +35.6%
Japan (EWJ) 12.12 +0.0% +34.2%
USA (SPY) 178.47 -0.3% +31.0%
China (FXI) 39.57 -0.8% +12.5%
Taiwan (EWT) 13.99 -0.9% +11.3%
Russia (TRF) 15.31 -0.8% +11.2%
S. Korea (EWY) 63.66 -1.3% +9.8%
Canada (EWC) 29.51 +0.1% +8.3%
Singapore (EWS) 13.61 -0.7% +8.2%
India (IFN) 20.09 -1.5% +3.8%
S. Africa (EZA) 63.57 -0.4% -0.1%
Lat.America (ILF) 38.56 -0.8% -4.4%

Sector ETFs
Symbol Price
Alt. Energy (PBW) 6.32 -0.8% +78.2%
Biotech (PBE) 35.59 +0.3% +56.0%
Media (PBS) 24.37 -0.5% +54.4%
Defense (PPA) 29.28 -0.4% +49.3%
Transportation (IYT) 126.94 -0.3% +45.0%
Retail (PMR) 34.59 -1.1% +41.0%
Health Care (IYH) 113.96 +0.3% +39.6%
Industrials (IYJ) 96.01 -0.4% +39.3%
Consumer Svcs (IYC) 116.36 -0.5% +39.0%
Financials (IYF) 77.28 -0.3% +34.6%
Semis (PSI) 17.41 +0.1% +31.7%
Big Tech (QQQQ) 82.70 -0.2% +31.5%
Software (PSJ) 33.75 -0.2% +28.7%
Water (PHO) 25.00 -0.4% +28.6%
Construction (PKB) 20.82 -0.4% +28.2%
Telecom (IYZ) 28.43 -0.8% +26.4%
Nanotech (PXN) 6.87 +0.2% +24.3%
Basic Mat (IYM) 77.69 +0.7% +21.1%
Insurance (PIC) 19.01 +0.1% +18.3%
Utilities (XLU) 38.60 -1.1% +17.0%
Real Estate (IYR) 63.34 -0.9% +4.8%

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