Market Timing Methodology

Dr. Schiller’s market timing system relies in part on the market’s overbought/oversold condition. When the market reaches extremes in either direction, Schiller looks for opportunities to trade against the recent move, though generally trading with the larger trend. For example, in uptrending markets which have become oversold short term, Schiller looks for buying opportunities. The McClellan Oscillator is the primary gauge Schiller uses to determine the market’s overbought/oversold condition. A reading above +100 is the threshold for overbought. Readings of -100 qualify as oversold. Of course, overbought markets can become more overbought. Accordingly, as of April 2012, we have seen the oscillator reach extremes of +300. On the flip side, the oscillator has reached oversold extremes below the -400 level (August 2011).

Support and resistance levels are also a key component in Schiller’s analysis, whether positioning for the intermediate term or buying in the futures market for a day trade. Accordingly, Schiller has turned the study of gaps into a science. He utilizes this most important element in his trading on a daily basis. The basic premise is that gaps tend to get filled, and, once a gap is filled, a retracement pattern is complete and the market typically moves in the opposite direction. The presence of an overhead gap typically suggests the likelihood of a return to that level. The top of the gap is generally cited as resistance. A move above the top of a gap may convert that gap to short-term support and point higher – perhaps to the next overhead gap. On the other hand, a failure by an index or stock to get through the gap or to move above the gap, especially on a closing basis, adds to the significance of the gap as resistance, at least for the near term. As for downside gaps, the converse applies. That is, the presence of a downside gap typically suggests the likelihood of a return to that level. The bottom of the gap is generally cited as support. A move below the bottom of the gap may convert that gap to short-term resistance and point lower – perhaps to the next downside gap. On the other hand, a failure by an index or stock to get through the gap or to move below the gap, especially on a closing basis, adds to the significance of the gap as support, at least for the near term.

Schiller also relies on sentiment as a "contrary indicator." Accordingly, he watches put-call ratios, overall advisor and investor sentiment, and the volatility index (VIX). When sentiment reaches extremes, Schiller looks for moves in the opposite direction. The VIX has been one of his most useful indicators in calling turns of significance over the past several years.

Schiller’s Short-Term Consensus Hotline provides recommendations utilizing a variety of time horizons and risk parameters. For the risk averse, Schiller offers mutual fund switching for the short term to intermediate term. For those seeking aggressive trading strategies, but with a focus on hedging and risk management, his index options reports provide recommendations in SPY, QQQQ, IWM and DIA options. Equity option recommendations are provided as well. Finally, his futures trading section, updated several times a day by phone and email, is his most speculative and short term. In this futures section, Schiller recommends specific trades, generally in the S&P Futures (E-Mini Contract), the Mini-Nasdaq 100, the Mini Dow, or in the S&P E-Mini Options.

For those subscribers who would like personal consultation and continuous access to Schiller’s analysis, a limited number of brokerage accounts are currently available through optionsXpress and Interactive Brokers.