Friday, 20 August 2010

9:45 BST - Equity Options Put/Call Ratio and Percent of S&P 500 Stocks Above the 50ma

Here's an update of these two charts which I last posted on 12 August (you can read that post here):

CPCE Daily:

On 12 August, the moving averages of this ratio we stuck below the blue dotted line in a similar configuration to what we saw during the grind up in the market in August to October 2009 (see the green highlighted areas). The risk was that we would see the same thing happen again unless the moving averages started to get above the blue dotted line. A good sign for the bear case at that stage was a possible triple bottom in the 5ma and higher lows being formed in the 10ma.

Finally, as you can see from the chart above, we have seen the moving averages break above the dotted blue line and also above the mid-line of the red dotted upward channel. An upward channel in these moving averages is bearish for the market.

We're now headed towards the overbought zone, but you can see from the peaks in these moving averages during 2008, that they can get to the top end of the zone before the market bottoms. Obviously, that's not to say they will - market lows have occurred with these averages about where we are now. So, as ever, we need to be on alert for a possible market bottom. If you were looking at this chart alone for trading, it would take the form of a turn down in the 5ma and a flattening out in the 10ma which might be a warning that the 5ma is about to cross back below the 10ma, which is potentially bullish (but as with any signal, whipsaws occur).

Ideally, I would like to see the moving averages get to the top end of the red channel. If we're in 3rd waves down at multiple degrees as some of my counts suggest, this shouldn't be difficult to attain and we could well exceed the upper line of the channel.

The McClellan Oscillator in the bottom pane couldn't break the downtrend line on the recent rally in price. That rally enabled it to backtest the zero line from below and it was firmly rejected.

The only potential worry from this Oscillator is that while price moved below the 12 Aug low yesterday, the Oscillator did not - its still hgher than it was on 12 August. Having said that, the lows in price of 12 Aug and yesterday are not that far apart, so this possible bullish divergence may not be too great a concern. and may work itself off  if we push down further today. Also, other technical indicators don't show the same divergence at the moment. Just looking at two, the RSI is below its 12 August level and the MACD histogram bar for yesterday is lower then the bar formed on 12 August so these don't confirm the possible bullish sign showing in the McClellan Oscillator.

Still, this is something to keep an eye on, especially if this divergence starts to get confirmation from other technical indicators.

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

As explained in the previous post, when this line crosses below its 13ma, its usually a good bearish signal. On this occassion, its worked pretty well again, with the cross occurring on 10 August, which was the day before the steep decline on 11 August.

With the rally into 17 August, we saw the line turn up, which was a potentially bullish sign - see the previous occassions when this happened above the buy zone, as marked on the chart. But you'll notice that in those cases, the low that gave the final bullish signal was a second low above the buy zone, not the first low.

So, we probably now have to be more on alert for a possible turn around in this line given that we did, yesterday, make a lower low than the low on 12 August. For the bear case, we don't want to see the line turn up from here. However, generally, while we're below the 13ma, the risk is weighted to the downside, so I wouldn't take a turn up in this line below the 13ma as a buy signal (without other indicators confirming) unless we actually cross back above the 13ma. Perhaps it would be a sign to tighten stops on shorts and/or to take a little bit of profit.