Peak & Valley Indicator
We love leading indicators, and we know you love them too. Today we introduce our Peak & Valley Probability Index. The index is a probabilistic gauge of how close we are to a peak or trough in the broad market.
We have observed that when this indicator crosses 0.75, it could indicate that the S&P 500 is overbought and could see upcoming downside. On the other hand, when the indicator drops below -0.75, this indicates that the S&P is oversold and could see some upside.
The index is built on a risk-adjusted and time-adjusted calculation of the size of the recent market moves. Essentially, we looked at how the S&P historically reacts after trending upwards for a certain period of time and vice versa when trending downwards. This indicator is based on past months of data about technical moves in the S&P 500.
As shown on the 2nd chart above, the index has proven to be successful and will be especially helpful when used alongside other indicators like the TLI.