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A Brief Historical Overview

As you know, the last 5 years have been anything but tame in S&P futures. The market has survived two severe declines, one in 1987 and another in 1990, making new all-time highs after each sharp decline. The trend has continued persistently higher with the exception of these two major corrections. The market has trekked doggedly higher, climbing a wall of worry after worry, refusing to give in to bearish fundamental after bearish fundamental. There seems to be no individual fundamental which will drive prices persistently lower.

Yet, my study of my DSI back to 1987 has revealed some extremely interesting results which I'd like to share with you. But before doing so a brief statement regarding the relationship between daily sentiment and price is in order.

Simply stated, high sentiment (i.e., about 90 percent bullish or higher) tends to signal tops, whereas low sentiment (i.e., about 15 percent or lower) tends to signal market bottoms. We're not talking here about long-term topsтАФwe're only talking about shorter-term tops and botВэtoms, some lasting a few weeks, others a few days or less.

Sentiment is no more a perfect indicator than is any other market indiВэcator. It has its shortcomings, but it also has its strong points, the most important of which is that it tends to be a leading indicator rather than a lagging indicator. Astute traders would rather have one reliable leading indicaВэtor than 1000 semireliable or questionable lagging indicators. It's one thing to

know 2 days after the fact what should have been done. It's far more meaningful to know what must be done a day, 2 days, or even 2 hours ahead of time.

A DSI Day-Trading Application

As an example of how the DSI relates to short-term price swings in S&P futures, consider the listing in Figure 19-1. This list shows DSI readings of 90 percent or more (top expected) and 10 percent or less (bottom expected) by market, and the price change for the next several trading sessions. Take a few minutes to evaluate this list. What are your concluВэsions about extreme DSI readings and short-term price swings?