The Spearman Study is a lower oscillating indicator that ranges from -100 to 100. This figure is really a correlation coefficient used to determine oversold and overbought conditions in a particular market. The coefficient is the correlation between the historic list of prices and a sorted list of the same prices. More importantly to the trading community however, the zero line is considered the trigger point when a trade could be put on.
The settings of this study are up to the discretion of the individual trader but normally the correlation coefficient is over a 10-day period, paired with a 3 period SMA. The 3 period SMA is used for a relative value in order to determine a if a turning point is upon us in the coefficient. Moreover, the relative state of being overbought or oversold is normally a value of plus or minus 80, but again this value is not set in stone.
The two charts below include the new study with the SPX. Courtesy of Bloomberg and Thinkorswim.
Fundamentals tend to drive the market in the long run, but trading and the short-term future of the stock market tend to be a function of emotion and shortsighted thought. The Spearman Study is another great indicator one can glance at to gain prospective of perhaps a turn in the market.
