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I know that no one can predict the market. But, I believe that one can form an educated opinion about the market’s future directional bias.
Before trading vertical credit spreads, I would like to form an opinion about the short-term (i.e., 30-45 days) directional bias (i.e., bullish, sideways, or bearish) of the S&P 500.
To form the opinion, I can use one or more indicators. To start, I’ll use moving averages. For trend confirmation, I’ll use Ichimoku charts. And, I am looking for a third indicator to further confirm the trend. I looked at Bollinger bands, Keltner channels, regression channels, and parabolic SARs.
You are absolutely right! Often, I make things unnecessarily complicated. I'll try hard to make things simple.
By the way, as a proxy for the S&P 500 (for market direction, not for trading), does it make a difference whether I use the SPY, the SPX, or the ES?
Dr. T
Good question. SPX will be more of a direct sentiment correlation, since it's an index option. However if you're going to use that, for your purposes you'll need to tinker with some of the math behind the scene's to get a correct correlation for your RSI. 2) The SPX is an option only security, therefore you're tracking RSI with a derivative to gauge your sentiment of a derivative. See the issue...
SPY is an ETF, and will have variance in tracking (tracking error) but will be very small. Since this is something that can be bought in shares, RSI will give a better indication of sentiment. But remember it's NOT a 1:1 correlation, there are (and I may be off I haven't looked at the whole makeup in a while) like 4 or so positions +/- than the actual index.
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