To let you see exactly what you’re missing, shown below is our last night’s post, in its entirety. Read it, enjoy, and follow up by revisiting SpikeTrade.com

What would be a sign of a correction?

Hello SpikeTraders,

Thanks to two Members who suggested “Trading false breakouts” as a topic for my next Password class. I already began thinking how to structure it – a big task, to make it both practical and clear.

The S&P hit a new lifetime high today. At some point this rally will end – and financial media will declare a correction once the market is down 10%. That may be ok for journalists, but too late for traders who need to make practical decisions in their accounts. I’d like to share a tool that I’m watching. But first, let’s take a look at our charts…

While the stock market is officially open 9:30 am to 4 pm Monday through Friday, stock index futures trade almost nonstop from 6 pm Sunday through 4:15 pm Friday (all times New York).  Even if you don’t trade futures, it makes sense to keep an eye on them when you analyze markets.

Today, before the stock market opened, S&P futures stabbed down 19 points from Monday’s close before reversing and rising 20 points above Monday’s close.  They sold off a bit and ended the day up 12 points (see inset B).  With so much volatility you’d expect to see more New Highs – but instead we got something opposite.  The New Highs declined, New Lows expanded, and bearish divergences broadened in all four lookback windows that we track.

Looking at the daily look-back windows, both the monthly and the quarterly show more New Lows than New Highs (see inset B).  They are still in their neutral zones, but New Lows predominate.  Only the yearly look-back window maintains its bullish readings.

And that is the indicator I watch to help me time a correction.  Once there are more New Lows than New Highs in that window, I’ll take that as very serious evidence that the market is entering correction territory.  A caveat: no indicator is 100% perfect, which is why risk control and money management remain essential.

Where to find those numbers?  In SpikeTrade of course, but you don’t have to wait for our nightly letter.  This page in Barchart updates the numbers you see in inset B throughout the day.  They are 20 minutes delayed, but timely enough for broad market analysis.

Stay tuned and best wishes,

Alex