How To Time The Market? Stochastics Rulez!

What if there was an indicator signaling a market turn ahead of time instead after the fact?
How about "Sell into strength and buy into weakness"?
Sounds impossible and a fools play?

Actually, applying an extra ordinary market filter is the way to go. Utilizing a stochastic crossover strategy in an unconventional setup yields a 60+% probability of a reversal signal. In a "long only" play, the win rate even jumps close to 85%. What is to follow is all about compounding and risk management.

Updated chart
The Stochastic Crossover System is another trouvé of Kevin McGrath. He developed this particular market filter using simple crossover/crossunder behaviors through several iterations on StrataSearch. The filter is designed for the daily SPX chart and generates buy/sell signals for SSO and SDS, two leveraged Exchange Traded Funds. Kevin finally added a 3% trailing stop to provide some form of hazard insurance.
NB! The trailing stop is not included in the charts and neither in the studies provided with this posting.

The strategy is based on the crossings of a stochastics %D(5,1,5) with a stochastics %D(5,1,10):
- Go long when %D(5,1,5) crosses below %D(5,1,10).
- Go short when the reverse happens.
Just to be clear: both the long and the short are executed against the short term market trend!
So it is crucial to put the 3% trailing in place on all trades. No exceptions!

Because the long and short signals generated by Kevin's original setup are rather unconventional and prone to cause confusion, I choose to "mirror" the stochastics (see middle pane indicator below, values are multiplied by -1). So in the inverted indicator at the cross of the green D5 line above the red D10 line a long signal is issued, reflected in the color change of the dotted line from red to green. A short signal happens when D5 crosses below D10. Up and down arrows are user selectable for better entry/exit indication (default: off, to keep the chart tidy).

Long and short signals as well as market positions are reflected in the price graph too (see coloring and arrows). The strategy comes as "long-short-stop-and-reverse". Entries and exits are executed at next day's market open. Processing the signals at the close should yield similar results.

Updated chart

Going long: buy SSO & sell SDS
When in the middle pane at the End of the Day (EOD) the green D5 line has crossed above the red D10 line buy SSO at the open of the next day and sell any holdings of SDS at the same time.
Immediately after buying SSO, put the 3% trailing stop in place!

Going short: buy SDS & sell SSO
When in the middle pane at the End of the Day (EOD) the green D5 line crosses below the red D10 line buy SDS at the open of the next day and sell any holdings of SSO at the same time.
Immediately after buying SDS, put the 3% trailing stop in place!

Long only
Should one not want to enter the short plays, there is a "LONG ONLY" setting in the Equity study.  The chart below compares both the "LONG & SHORT" and the "LONG ONLY" versions.
Entries for SSO are executed like above, exits happen on the short signals or on triggering the trailing stop.

Updated chart
Chart setup
For "live" or "paper" trading, the Equity study is obsolete. It is best to switch it off, because the code is quite resource intensive. Without the Equity study, the StochasticCrossover indicator and the price pane study will work fine.
NB! Be sure to load the suite on a chart of SPX as the strategy is designed and backtested by Kevin for usage on SPX and not SSO. Besides on SPX the signals are better too.

Acknowledgment goes to Aurelia for pointing at the source on StockFetcher and his contribution by developing the thinkscript. Thanks mr. T!

The code is available for copy/paste in the comment section below. Please post remarks or suggestions and enjoy the StochasticCrossoverStrategy.

Trade safe and prosperous!

TNA & TZA on RUT. Notice the high Sharpe and Sortino ratio's. No info for DD due to unknown error.
[Update October 14, 2013: Thanks to a modification provided by Jocelyn Boily from the  TOS_thinkscript Group on Yahoo! the limitations for painting the Equity study on 5+ years SPX charts no longer apply. Charts will be updated over the next days. Thanks for your help, Jocelyn!]
[Update October 16, 2013: Charts are updated. Chart for TNA & TZA on RUT is added. Minor update to plot code for PocketPL.]