The OVI Tips Its Hat

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There's an old expression in trading that says exactly what traders strive to learn and discern any which way they can, which is, "Let the market tip its hat ." ?The meaning is essentially "Let the market show you where it's going".

It's a nice little saying, but when I started in this game, how on earth could I tell where the market was likely to go as a novice trader?

Well, time and experience certainly contribute to one’s market knowledge and instinct, but I dare say even the majority of experienced investors and traders still have no real idea where the market is likely to go next. And even if you happened to “know” one time or another, that is, get lucky on a few profitable trades, how do you know if you’re right and not just lucky? This is crucial information, because if you’re a trader, you can’t afford to be wrong too many times or you won’t be trading anymore.

What we as traders want and need to be very successful in the trading world is a way for us to see if the market is indeed tipping its hat at any given time, and, just as important, which direction its hat is tipping. If you had such a way of seeing what the market is going to do before it does, and which direction it’s going to, you could do quite well as a trader, couldn’t you?

Now, a word of caution: nobody is perfect and no one system is fool proof 100% of the time. That’s just the world we live in.

However, as so many of my students have confirmed, the OVI does give us a rather unfair advantage over our peers. It’s not bragging…okay, maybe just a little bit, but the bottom line is that the proof is in the pudding. And OVI pudding makes for some quite delicious trades.

And as such, I think the saying should be updated to "Let the OVI tip its hat,” because this is exactly what it does. ?But don’t believe me; believe the market charts; they never lie!

Below are just a few examples where the OVI has done just that, and where profits were there for the taking. And while we're at it, look out for one of these symbols of the OVI tipping its hat on the charts:

SPY

OVI turns negative at the beginning of April and forms bear flags.

AAPL

You know all about this ... from early December the OVI turned positive heralding a move of over $260, and then in early May it turned negative immediately preceding a bear flag that was worth $20+.

AMZN

Formed a bear flag with a negative OVI, it broke down yesterday (Wednesday).

BAC

Over the last 14 months you could have just traded BAC and you'd be hundreds of percent up!  The chart is only looking at this year.

NFLX

Lots of opportunities in 2011, and more in 2012 as well.

QQQ

The OVI turned negative in early April ... and we're down plenty since then.

RIMM

OVI was negative for most of 2011 and 2012 ... and the stock duly obliged by trending downwards.

There are dozens more examples - but the key is to remember to be fussy and stick to the obvious opportunities where the OVI and the chart pattern are in sync.  ?When that happens, place the trade and take your profits…

Oh, and don’t forget to tip your hat as you do.

Remember, Plan your Trade and Trade your Plan!

-Guy Cohen

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