Enter the Rate of Change Indicator

The rate of change indicator certainly proved its worth between 1995 and 2004. For starters, in its patterns of movement, the indicator clearly reflected the A-B wave sequences that took place during this period. Rate of change measurements frequently provide advance notice of market reversals, reversing direction before rather than after or even simultaneously with the trend of stock prices. As a general rule, rate of change indicators peak approximately 50-65% into a market upswing. The area at which these indicators turn down is an area in which it is probably too late for buying, possibly a touch early for selling; this is an area during which it might be appropriate to prepare for the next downside move.
As you can see, every cyclical peak that took place between 1995-2000 was presaged by a negative divergence, with prices rising to new highs, the rate of change indicator turning down to reflect diminishing upside price momentum. This characteristic, in reverse, was also present during the market declines of 2000-2002, with cyclical market lows characterized by advance positive divergences and the rate of change indicator reversing to the upside as prices moved toward their final lows. The 50-day rate of change indicator provided a fine notice of market rallies that developed in late 2001 and 2002.
Investors received clear notice of market recoveries that took place based upon the 18-month cycle, notice provided by the cyclical lengths and by the action of the 50-day rate of change indicator.