Thursday, 23 September 2010

12:06 BST - SPX Update: Equity Put/Call Ratio, Percent of Stocks above the 50ma and the 60 min time and price chart - lining up for sell signals

The CBOE Equity Put/Call ratio is once again, on the verge of giving a sell signal by the 5ma moving above the 10ma. There hasn't yet been a cross of the 5ma above the 10ma - they closed yesterday at the same level - exactly as they did on 10 September (see my post of 12 September). Then, no signal came as the 5ma dropped below the 10ma and they both stayed below the blue dotted line. Here's the updated chart:

CBOE Equity Put/Call ratio:

As I've mentioned before and reiterated in the 12 September post, we may get the cross of the 5ma above the 10ma and that can be taken as a sell signal, but while these moving averges are below the blue dotted line, there is always a higher risk of false signals, so trade management must take that into account.

There are however, features that might provide some support for a sell signal here. 

First, while the market has risen, the moving averages have stayed within the pink channel, which is presently a smaller downward channel (bullish for the market) within a larger upward channel (bearish for the market). The pink channel looks like a bull flag which should break to the upside (which is bearish for the market). The black channel was broken, but that may just need to be re-drawn. Importantly, so far, the red channel remains intact.

Second, the 5ma has formed a double bottom - you'll see that the 5ma made a triple bottom in early August (see the last vertical red dotted line marking the 9 August market high) and we then saw quite a substantial decline in the market.

Third, there is good divergence in the McLellan Oscillator which made a lower high while the market moved to a higher high. We didn't have this on 10 September (you'll see that we did have such divergence coupled with a cross of the 5ma above the 10ma at the 9 August market high).

If the market has topped, we should see the 5ma cross above 10ma and both should move emphatically above the pink channel and the blue dotted line and, preferably above the mid-line of the red channel. If one or other of these does not happen, it should be considered as a warning that any down move may not be sustainable.

The S&P 500 percent of stocks above their 50ma was in an area where it could have signalled a market top when I last posted it on 12 September, but, as mentioned in that post, there was no sell signal at that time and the risk remained to the upside. 

Since then, it moved up further along with the 13ma (and the market). Its now close to giving a sell signal, but hasn't yet done so. Its reached the overbought area where market tops have occurred previously and has truned down, but hasn't yet crossed down through the 13ma:

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

Whereas on 12 September this was telling me to be on the lookout for a potential market top, I think it may now be saying to be on high alert. 

Of course, there's nothing wrong taking trades in anticipation of a sell signal being given here, based on other analysis (eg elliott wave counts or other technical indicators), as long as risk is managed appropriately - its feasible that this indicator could move up again and make a lower high, while the market moves up to a higher high - that has certainly happened at previous market tops. 

If you were only trading off this indicator however, you'd wait for the cross and,  in general, once it falls below the 13ma in this area, its been a fairly reliable sell signal. So, something to keep a close eye on.

The 60 min time and price chart that I last posted on 21 September is aligning well with the potential sell signals referred to above:

SPX 60 min time and price chart:

You can see we're right at one of the time cycle lines so, while not guaranteed, there should be a good chance of a turn around the area of this line. Certainly, the longer term time cycle posted on 15 September would be consistent with a turn here and what we're seeing in the internals and indicators suggests that the turn should be down. 

However, none of these cycles can be precise turning points on every occasion, so more upside remains feasible and a turn down right now shouldn't be considered as guaranteed. Price action needs to be watched closely because sometimes, all you get is a brief pause in the prior trend and the market then continues in its original direction  (currently up) into the next cycle line.

So, looking at price action, it does seem to be behaving like it may now be struggling to make further upside to the next price level at about 1156. Once it fell below the current price level yesterday, it wasn't able to get back above it. 

It also fell below the midline of the channel (the construction of which is explained in the earlier post). Its the first time its done that since the big rally that got it into the upper part of the channel on 1 September. Obviously, this may be a false breakdown, so a quick recovery back into the upper half of the channel would potentially be bullish and we'd have to be thinking that the next price level up may be on the cards. 

However, if it fails to recover the upper half of the channel, that's going to look bearish and will suggest that the lower line of the channel may be reached and that will then open up the possibility of a breakdown out of the channel altogether.

You'll see that I've added some red dotted horizontal lines to the chart. These are Gann based price levels assuming a top at 1148.59. The first one has already been reached (it coincided with prior peaks in the market so was bound to provide support).  The lower ones may be the initial targets to watch for if we have topped and areas where price may pause. If we're only correcting an overall uptrend these levels may mark potential turning points for such a correction. If we're now entering a larger downtrend, these levels should only provide temporary support.

As for the technical indicators, while the bearish divergences did manifest themselves in lower prices yesterday, I really want to see more bearish moves in these indicators to have confidence that we will be seeing at least a reasonable pullback in the market.

The RSI needs to break the 50 level and get to oversold with price declining. The CCI needs to get to below zero and towards the -100 level with price declining. The MACD needs to fall below zero with price declining. The stochastic has reached oversold, but without too much of a sell-off in the market. If we see a market decline today, I'd like to see this indicator fall further into oversold without recovering above the oversold line.

So, the way things are lining up suggests that a top for the rally from the August low may be very near, if not already in at 1148.56. This is consistent with the wave counts, even on the overall bullish case (see yesterday's end of day update). Now we just need price to confirm with follow through to the last two day's bearish candles with a significant deline that takes out some meaningful price levels  to the downside (the ones I'm watching for the moment are set out in that end of day update).