"Early bear phase signals can help you get out of the market before it turns down. This indicator tells you how.
There are many ways to identify the trend of a financial market, the most common being the 200-day ( ). When price is trending down below the 200-day , the market is believed to be in a bear phase. If the market is trending up above the 200-day , it is considered to be in a bull phase.
Since every indicator fails at times, I wanted to find other indicators to confirm a trend. In my quest for another indicator to determine the trend for the financial markets, I found the Cboe Volatility Index ( ) to be a good indicator of the market direction. The is calculated from the weighted average of the implied volatilities of various options on the Standard & Poor’s 500 index .
J. Welles Wilder’s can also give an indication of the financial market trends; that is, when the market is in a bull phase, the narrows, and when it is in a bear phase, the expands. The normalized indicator ( ) is based on this behavior.
Normalized indicator ( )
(Atr) varies depending on time. But how do we determine the phase of the financial market with Atr? Perhaps some type of ratio could give us a clue. A ratio presents a relationship of a quantity with respect to another. I did some research based on a ratio of the 64-day and the end-of-day value of equity indexes such as the Standard & Poor’s 500 (Spx) . I selected the 64-day period since it is close to the average number of trading days in a quarter. The ratio of the 64-day and closing price does discount variations in the and gives a single number that can be used to compare of an instrument across many decades. I call this ratio the normalized indicator.
I found an interesting correlation between and cycles of major equity market indexes. The formula for the is:
= 64 - Day /End-of-day price * 100
The gave advanced signals before the cyclical bear phase of SPX commenced in October 2000 and was almost on the spot with the bull phase that began in 2003 and the current secular bear market cycle, which started in November 2007."
Includes options to show inverse and change the ATR length and smoothing.
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