Financial Trend Forecaster

Updated 8/13/2010

The NYSE Rate of Change (ROC) chart is very helpful in getting the "big picture" view quickly. The old saying "a picture is worth a thousand words" is very applicable to this chart. Once you understand how to read the ROC chart you can easily spot the direction of the market which makes it easy for you to know whether you want to be invested in the market or not.

The NYSE Rate of Change (ROC) chart shows the annual rate of return along the left axis and the years since 1990 along the bottom.

Since this chart shows the rate of return rather than the current price it is much easier to see performance, we don't have to guess if we are up or down from last year. If we are below the zero line... we are down, if we are above the zero line... we are up. The key is to exit positions while we are in positive territory (with a gain) rather than waiting until we have a loss and then we can reenter when we get a buy signal.

The red line is the 12 month moving average. As with most moving averages a buy signal is generated as the index crosses above the moving average and a sell signal is generated as the index crosses below the moving average.  (See Current Analysis Below)

Another helpful way to use this chart is to look at the slope of the red moving average line. If the slope is down the market is trending down if the slope is up the market is moving up. And obviously if the line is basically flat the market is not trending at all. 

Just because this chart is not moving higher does not mean we should sell.  In the period from May 2005 - May 2007 the red moving average line was basically flat, although it had a bit of wiggle, but it was still flat at around 12% rate of return so holding during that period would have produced returns above the long term average. 

If you are looking for big gains, the best buy signals come from a movement from below the 0% line. This allows you to capture the greatest up move.

Note: While viewing this chart we must remember that it represents the rate of return we would have earned if we had been holding the entire NYSE for the previous 12 months. Which can be achieved through the use of an index fund.

Current Analysis:

The NYSE ROC is down about 45 points over the last month for a monthly loss of -1/2%.

The gain over the last year has dropped from a 19.14% annual gain to an annual gain of only 6.47%. 

Two months ago (in June) we told you the ROC issued a sell signal..

The NYSE ROC does not issue sell signals very often so it is imperative to pay attention when it does. 

Last month I said, "We only have six of these major sell signals since 1990 so this is a big event.  Extreme caution is warranted. If we are lucky we will enter into a "whipsaw" pattern like the period from 2004 through 2007 or 1992 through 1994 where the market churned out near 10% annual gains. A much worse scenario would be a steady deterioration like 2000-2003 where rates of return steadily erroded piling up loss after loss".

We are entering a critical period and it looks like the NYSE could be rolling over right here preparing for a big drop.

For more information on the precarious position of the markets see:

Stocks Setting up for Big Slide

and
8 Technical Indicators Point Down from Here

For more information see the NASDAQ ROC Chart

Tim McMahon, Editor
Financial Trend Forecaster

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Disclaimer:

At Financial Trend Forecaster we are not registered investment advisors and do not provide any individualized advice. Past performance is not necessarily indicative of future performance and future accuracy and profitable results cannot be guaranteed.

Note: We are a  compensated affiliate of Elliottwave International and Casey Research, meaning we may receive a commission if you use our links to their site.

We issued a buy signal in March '03 catching the absolute lowest risk entry point and a sell signal in October 07 before the big drop! Don't miss our next Signal! Subscribe to our Free monthly E-zine.
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