Thursday, 12 August 2010

12:46 BST - Equity Options Put/Call Ratio and Percent of S&P stocks above the 50ma

Here's how the daily CPCE chart looks after yesterday's decline (updated from 7 August):

CPCE Daily:

You can see that we're still stuck just below the blue dotted line. The 5ma has crossed above the 10ma, which is good for the bearish case, but we need more. We need to clear the blue dotted line and get above the red dotted midline of that upward channel (which I first sketched in on 25 June). 

At the moment, the moving averages of the CPCE remain in a similar configuration as when we saw the grind up in the markets in August/October 2009 (the green highlighted area). That's why I think its important that we get above and away from the blue dotted line. Otherwise, the risk is that price just does what it did then.

Though the CPCE chart isn't yet confirming the bearish case, the failure of the Mcclellan Oscillator when re-testing the upward red line and its failure to get above the downward blue line, plus yesterday's drop below  zero should provide encouragement for the bear case. 

And here's something else that may be supporting that case:

Percent of S&P 500 stocks above the 50ma:

I use a 13ma with this because I've found that when the line crosses above or below, its usually a decent signal to buy or sell. Of course, its not 100% reliable, nothing is. But, it has caught some major moves at a reasonably early stage, as you can see from most of the red (sell signals) and green (buy signals) lines.

Currently, the line has crossed below the 13ma (it actually crossed marginally on Tuesday, prior to yesterday's steep decline). Generally, staying short while the line has been below the 13ma has been a good trade. Obviously, at such an early stage, there is the risk of being whipsawed, but that's trading.

If we see the 13ma really get going to the downside with price staying below it,  past behaviour suggests that it ought to be reasonably  safe to look to price action, elliott wave counts or whatever technical analysis you use, to enter or add to shorts. Worth keeping an eye on.