If you have not learned about this tool yet, bookmark this article so you can come back to it at some point in the future. For those who have already learned about it, let's make sure we understand it correctly. I will use a couple example to help illustrate my points.


What is the Market Forecast?
The Market Forecast is a proprietary technical indicator/oscillator which is found on the strategies page of the toolbox. As you look at this indicator you'll notice it has three different colored signal lines, and is plotted on a scale of 0-100. It's very similar to a stochastic indicator.


Why is the Market Forecast Helpful?

Just as a stochastic is helpful for identifying points where a stocks trend is overbought/oversold, the Market Forecast helps us identify when the overall market is overbought/oversold. A very helpful feature is the fact that there are three signal lines. I classify them as a daily, weekly and monthly time cycles. For example I treat the red line as the daily indicator. If I want to supplement daily market trends (which I don't) I would use the red line to determine when the market is perhaps overbought or oversold. If I wanted to supplement weekly trends (still not interested) I would use the blue line for confirmation, and finally if I wanted the monthly (overall) trend of the market (which I might) I would use the green line. Each line should be treated individually since each will likely give a conflicting signal in comparison to another time frame. For instance...the market being in an overall uptrend the green line has been pegged in the overbought territory (which is part of being in an uptrend) while occasionally when the market has a down day, you will see the red & blue lines move up and down a little more frequently.


How Do I Interpret it?

I would strongly encourage that this indicator is used to supplement your analysis of the market rather than determine your analysis of the overall market. As we have watched the market continue this lovely trend over the last several months, the green line has warned us that the market is overbought. See below...
What has most traders up in arms about this tool lately is the fact that the green line has crossed out of this reversal zone for the first time since August. Here is what the tool shows as of today...

Based on the fact that the green line retreated from the overbought zone means its time to get bearish right!!! Sell it all!!! Look out below!!! In reality the biggest problem I would have with the Forecast signal is that the market is not confirming it. You'd think if this signal was such a bearish event the market would have at least gone down more, broken support, etc. It never happened. This moment right here reminds me of this picture of a young lady...

Do you all recognize this picture? Sure, there are two pictures here. One of an old woman, one of a young lady. If you had not seen this before, as I mentioned "young lady" you might have noticed the young lady right away without seeing the old woman. Since many were so scared of the market being bearish last week, they might have been so focused on looking for anything bearish that this might have caused them to misinterpret the validity of the trading signal on the Forecast?


To wrap up this post you can see that this tool does not literally Forecast what the market will do tomorrow. What it does do is tell you what is likely to happen soon and does a great job of re-confirming what the market has already done. As you use this tool, make sure it supplements what you see on the chart of the major market averages. Next time you get a bearish signal on the Forecast, make sure it correlates to a bearish signal on the charts.

Posted by Option Addict on 12/05/2006 at 11:54 AM | Permalink