Forecasting the S&P 500; Dusting off the crystal ball

Posted Aug 19th 2009 5:15PM by Wade Hansen
Filed under: Forecasts, ETF Investing, S and P 500

If you are like just about every other stock investor out there, you are asking yourself the question, "Can the market keep going up, or am I going to have to suffer through another decline?"

Well, while there is no sure fire way to know exactly if and when the stock market is going to turn around, there are some tools available -- semi-cloudy crystal balls, if you will -- that can give you a heads up when a turnaround may be just around the corner.

Let me show you one of my favorites: the NYSE Bullish Percent Index.

The NYSE Bullish Percent Index (let's call it the BP index) is a point-and-figure chart that derives its value from the point-and-figure charts of the 500 stocks that comprise the S&P 500. Here's how it works:

If an increasing number of stocks on the New York Stock Exchange (NYSE) are showing buy signals on their point-and-figure charts, the BP index will be moving higher in a column of Xs.
If an increasing number of stocks on the NYSE are showing sell signals on their point-and-figure charts, the BP index will be moving lower in a column of Os.

If you're interested, learn more about how the NYSE Bullish Percent Index works.

It looks like the BP index is in a column of Xs right now, but it is well above the 70 level, and any time the BP index is above 70, the chances for a reversal increase.

Check out a larger version of the chart for a better look.

Looking at this fabulous tool, if you see the BP index reverse into a column of Os and you want to take advantage of a potential move lower, you may want to consider investing in the ProShares Short S&P 500 ETF (NYSE: SH) or in the ProShares UltraShort S&P 500 ETF (NYSE: SDS) if you're really gunning for potentially large returns. Just remember that there is always added risk that comes with the added leverage you get in these "ultra" ETFs.

Of course, if the BP index doesn't reverse into a column of Os, you can always buy the SPDR S&P 500 ETF (NYSE: SPY).

Wade Hansen owns SPY and is an analyst for Learning Markets

Tags: nyse, sds, sh, spy