Saturday, 9 October 2010

12:04 BST - Update on the CBOE Options Equity Put/Call ratio, S&P 500 Stocks above their 50ma and NYSE Tick

The 5ma and 10ma on the $CPCE chart have given a sell signal by the 5ma crossing above the 10ma. However, you can see that for the past month or so, they've been stuck below the blue dotted line and as you can see from the two areas highlighted in green, when this has happened in the past, there have been false signals given while the market grinds higher - I've mentioned this problem in previous posts, most recently on 23 September - see here:

CBOE Equity Put/Call Ratio:

As at the time of that last post, with the market continuing to move up, we've seen the moving averages of the CPCE stay within the downward pink channel (a downward channel is bullish for the market). However, its interesting that they haven't actually moved down within the channel, but instead have moved sideways. Also, there are higher lows in both moving averages within this sideways movement. I consider both of these points as potentially bearish for the market.

As I've said before, there's nothing wrong taking a position on the moving average cross, but with the prevalence of false signals given whilst below the blue dotted line, its imperative to manage the trade with that risk in mind.

What I'm looking for is a clear break of these moving averages above the pink channel and above the blue dotted line while price falls. This would be bearish for the market. 

If any such price fall is sustainable, rallies should not result in the moving averages of the CPCE coming back significantly into the pink channel. 

On the other hand, if all we see is these moving averages move up to touch the upper line of the pink channel and then come back down again, that's only going to validate the channel further and would suggest more upside in the markets. As long as we stay in the pink channel, that is bullish for the markets.

I've re-drawn the black channel from last time.  It remains a tentative channel until I see more action in these moving averages. If they (and in particular the 10ma) can stay above the lower black line, that would be bearish for the market.

In the lower window you can see that there is significant bearish divergence between price and the McClellan Oscillator, not only since mid September, but also between the August and the October highs - I've drawn a red channel based on the latter divergence. 

To me, this indicates some serious underlying weakness in the market.  Of course, this could be negated with just one big push up in the Oscillator, but its certainly suggesting caution on the long side for the moment. A break of the small bear flag that I've marked in green may be a bad sign for the uptrend in the market.

The S&P500 Percent of Stocks above their 50ma has been lingering in the area where it has previously given good sell signals:

We did get a sell signal (the index moved below its 13ma) shortly after my last post on this, (see the last red vertical line) but it was quickly reversed, as I recall, the very next day (in fact, the futures reversed up overnight and so unless you had intra day data on this index, you wouldn't have taken a trade based on the signal).

At the moment, there's no sell signal, but there was divergence between this index and the market on Friday. It failed to make a new high while the market did. Its also notable that the technical indicators for this index are also showing bearish divergence against its recent push up.

So, this one is something I'm going to be watching closely.

The NYSE Tick is also showing bearish divergence in relation to market action:

The new highs we saw on Friday did produce a move up in the 13ma of the Tick, but its significantly below where it was at the August and September highs. Again, this suggests to me underlying weakness, so caution on the long side for the time being, unless it can start making new highs with the market.