An Update on the Spearman Indicator – Caution Prevails

November 21, 2011 2:25 pm

The Spearman Indicator is just one of the excellent tools that you should have in your kit to determine those times that markets may be ready to see a directional change in trend.

Notice that it has showed a divergence recently that led to a series of lower readings. For now, the indicator is saying that negative returns are a higher probability for a while for the S&P 500 Index. Until it reverses course and begins to trend higher, proceed with caution.

 

The Spearman Indicator, also known as the Spearman Coefficient, at the bottom of the chart is derived from an analysis of the correlation between an actual price series and a sorted list of the same series.  The result is a comparison of the volatility of a security with an efficient price trend.  A breakdown in the correlation of price changes will result in a reversal of the oscillator, signaling a trading opportunity.  A value of -80 implies persistent negative trading.  When this reverses upward, the correlation is breaking down, signaling a chance in the underlying directional bias.  When the oscillator crosses above -80 that may be interpreted as a buy signal.  When it crosses below 80, that’s a sell signal.

 

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