Saturday, 7 August 2010

15:47 BST SPX and Options Equity Put/Call Ratio Update - Is the position the same as Aug-Oct 2009 with new highs in store?

Despite the recovery yesterday afternoon, its still difficult to feel completely confident on the long side in this market, and this, despite the fact that the trend is obviously up. 

In my view, there are contiuing warning signs of a potential top. approaching Of course, these may work themselves off in time, in which case, it will certainly be more comfortable to be in a long position, but until then, I remain cautious on the long side. 

Here's what I'm looking at.

Looking at this updated CPCE chart (last posted on 3 Aug), you can see that, it continues to struggle to get back above the blue dotted line, just as it did during the grind up in the market in Aug - Oct 2009 - see the green highlighted areas on the chart:

Equity Options Put/Call Ratio:

You can see that after this period SPX went on to make new highs. Perhaps this is what may be in store this time around also. The two areas of price action do look rather similar. But when I look at the daily chart of the SPX (last posted on 1 Aug), most of the indicators seem to be telling a different story - at least for now:

SPX Daily with picthforks:

Firstly, look at the CCI (144). In the August - October 2009 period, it was above the buy zone of 100 and pretty much stuck there. Look at it now - it can't get above zero.

Secondly, look at the MACD histogram. In the 2009 period highlighted, there was no marked negative divergence betwen it and price. Look at it now - the negative divergence is obvious. Although the MACD itself looks bullish, the divergence in the histogram suggests to me some underlying weakness. This is similar to what happened just before the April 2010 top when the histogram was diverging against price but the MACD itself was rising. 

Thirdly, look at the RSI (14). Its above 50, but the level that implies bullishness is actually 66.67. It can't seem to get to that level despite the significant rally we've seen off the July low. Look at what it did during the two main pullbacks in the rally from March 2009 - see the green circles on the RSI. It fell below 50 on each of those pullbacks, but did not fall to the level that implies bearishness, 33.33. That suggested to me that those pullbacks were against the larger trend. Once those pullbacks were complete, you can see how quickly the RSI moved up  and back to the bullish level. So, now, the failure of the RSI to reach 66.67 on this current rally (despite how far we've come from the July low) should suggest that the rally is a pullback against the larger trend. That's how I read it anyway, so until it can get above 66.67, I have to remain cautious on long trades.

So, while the behaviour of the CPCE is similar to its behaviour during the August to October 2009 move up, I'm not yet convinced that it means we have significantly more upside to go, and possibly new highs as occurred then. Neither the bearish case nor the bullish case is sealed at the moment, as far as I can see.

While looking at this chart, you can see that price continues to struggle at the lower line of the blue fork. Its touched the median line of the dark green fork twice since it started to rally from the July low, but this latest push up has so far failed to get to that median line. That suggests weakness for the moment. Against this, there have been bullish crosses of 3 of the moving averages and we closed above the 200ma thanks to the late push up on Friday. So, these signals are mixed.

I think caution is required on both sides with these conflicting signals as well as the outright bullish, near term bullish, near term bearish and outright bearish elliott wave counts that can be made from the price action.


13:56 BST - SPX 60 min Counts Page updated

I've updated the 60 min counts page. I've relabelled Options 1 and 2 in the light of the Dow's action this week, taking out its 21 June high. Please use the menu button above or click here.