US stocks are nothing if not extremely volatile.

Yesterday, Wall Street was on steroids on the news that the Treasury Department was placing toxic mortgage twins Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) under conservatorship. Traders gave the Dow its biggest rally in a month. This morning, the index is down over 100 points on worries over the health of Lehman Brothers (NYSE:LEH).

If you’re going to trade in such a volatile market, you need reliable indicators, says Jeff Clark in The Growth Stock Wire. Jeff says the following three are the most useful…

1) The action in Merrill Lynch shares (NYSE:MER)

MER is Wall Street’s version of the canary in the coalmine. The action in MER is a terrific indicator of the strength or weakness of the short-term market direction. If MER is rallying while the market continues to sell off, then the odds favor a reversal to a market rally later in the day. If the market is rallying but MER is steadily clicking lower, then the stock market will likely head lower as well.

2) The S&P 500 20-day exponential moving average (EMA) line

Second, the S&P 500 rarely moves more than 30 points away from its 20-day exponential moving average (EMA) line. The line acts as a magnet. And if the S&P rallies too far above the 20-day EMA, traders can bet on a correction. If the S&P is too far below the line, traders should bet on a rally.

3) The bullish percent index (BPI)

A BPI measures the percentage of stocks in any given sector trading with bullish “point and figure” chart patterns. Now, point and figure charting is a science all to itself. So we won’t delve into that here.

Suffice it to say, whenever the bullish percent index for a sector drops below 20, it’s oversold and due for a bit of a bounce. If the BPI rallies above 80, it’s overbought and traders should be on the lookout for a correction.

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