Our signal of the day is on the mighty Amazon.com. As we can see in the chart, AMZN has had two tough sessions in a row, dropping from over $1000 all the way down to $950 at one point to the test the 50 SMA. It has rebounded a bit from Friday’s lows but it lost an additional 1.38% during today’s session. While this decline has caused some to look cockeyed at AMZN, this is a classic reversion to mean setup.
Reversion to mean setups are widely used by millions of traders and investors. The M in RTM is the mean, which is an average based on the closing price of a stock over a certain period of time, most commonly the 50 and 200 period Simple Moving Averages (SMA’s). Those averages generally show us the overall value of a company. But smaller issues can cause price fluctuations in time periods smaller than those which create moves away from the average. But historically, we tend to see stock’s revert back to their means. That’s why many trader’s mouths start to water when they see strong trending stocks start to pullback. They are counting on the reversion move, which they can profit nicely from. The moving averages on AMZN are obviously hugely bullish and we are looking for a move back to the upside.
This signal was fired by the ACT EOD strategy which can be found in the ACT 2.0 plug-in. ACT 2.0 is based on technology called Digital Signal Processing, or DSP. ACT uses DSP to process market data and find new trading cycles. ACT uses DSP Powered indicators starting with Market Mode Indicator (MMI), which identifies the personality, or mode, of the market. The MMI determines when a market is in a cycle or trending. Once the market mode is identified, we can look for good cycle trades following along with the mode. ACT shows you both short and long term cycles. The Spectrum Indicator shows you the strength and stability of the strongest market cycle, and ACT’s Heatmap shows a overall view of the market cycles that are currently in play. ACT also uses an OptiSmooth Filter which reduces the lag that is inherent in most other smoothing indicators. If AMZN follows along with ACT, we could see a short term move back into the high $990’s or even a $1,000.
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