by Michael Arold
One of my favorite “risk-on” market signals is flashing “risk off”.
A reliable indicator for me in recent years has been the McClellan Oscillator. Readings above +/-80 were followed by short-term reversal of market direction.
The following chart displays the signals: Successful bull signals are market with green circles; bearish points are market in red. Black are failed signals.
In the past 3 years, 17 out of 19 events had been successful, a “win” rate of 89%.
Yesterday, McClellan closed above 80 again, so I’m expecting the market to decline at least 3% from here, which is what he has done historically.
I will focus on the Russel 2000 (^rut) small cap index, since it is the cleanest way to trade risk on/off events.
The idea is to benefit from mean reversion characteristics and therefore close the trade when prices pull back to the 20 day moving average.
Note how taking the opposite position would have been a profitable strategy when the index was trading at the channel boundaries in recent months.
One of the issues will be timing. I hope that prices will not move too much pre-market. Otherwise, risk/reward will lose its appeal.
