Sunday, 12 September 2010

11:39 BST - S&P 500 percent of stock above the 50ma and CBOE Equit Options Put/Call Ratio could be approaching sell signals

The S&P 500 percent of stocks above their 50 day ma gave a good buy signal on 31 August when it crossed back above its 13 ma  which, as I said in the post of 20 August, is what was needed for a buy signal.  Its is now in the area where it and the market topped out in early August:

S&P 500 percent of stocks above 50ma:

The line hasn't turned down yet, but its has the potential to double top here. However, the sell signal won't officially come until it crosses back below the 13ma. At the moment, that's still rising. While its above the 13ma, the risk is to the upside and there's alot of room for the line to move up into the area between the red lines if things get really bullish.

So, for the moment, this chart is telling me just to be on the look out for a potential top. In my view, it would be more favourable to the bear case if this line tops out under the red zone rather than pushing back into it. It generally seems to get into that zone in strong uptrends. Once it falls back, if the bearish case is playing out, I'd like to see it get down into the green zone before it turns back up. On the last decline into the end of August, it turned up above that zone which suggested that things were not quite bearish enough for a sustained market decline at that stage.

The CBOE Equity Options Put/Call Ratio is on the verge of giving a sell signal with the 5 and 10 day moving averages turning up. They haven't quite crossed yet - they closed at the same price on Friday:

CBOE Equity Options Put/Call Ratio:

Also, while they're below that blue dotted line, there's always the risk that they just chop around over and under it and criss-crossing each other while the market chops upwards like that August/October 2009 period highlighted in green, to which I've referred in earlier posts on this chart. So, while the 5ma may cross above the 10ma giving a sell signal, its important to realise that the signal could be quickly reversed, so trades taken on this signal while the averages are below the blue dotted line need to be managed accordingly.

You'll see that since I last posted this chart on 20 August (see here) I've added two channels to the red one that I originally drew on the chart back in June (see the 25 June post).

If the moving averages were to start moving up within the steeper black channel, that would suggest an acceleration in the market to the downside (an upward sloping channel is bearish for the market). Really, however, for the bear case, it would be more than satisfactory for the averages  (particularly the 10ma) to stay within the upper half of the red channel.

The downward sloping pink channel (which is bullish for the market) may be just be a normal downward swing in an overall uptrend, but its something to watch. If it becomes the dominant channel and leads these moving averages down and out of the black and/or red channels, that's going to suggest that the markets are in a sustainable uptrend.

At the moment, the pink channel looks like a bear flag that should break to the upside, which would be bearish for the market. But I don't think anything can be take for granted at this stage. The markets are clearly poised to move in either direction, even though a near term top may be in at Friday's high or not too far away (see Friday's end of day update showing the elliott wave counts for the bearish case and the update to which it refers for the elliott wave counts for the bullish case - both suggest a top of some sort should be in or near). The way it drops and to what level should give some clue as to whether its the bullish or bearish case that's playing out.

On this chart, if the next pullback in the market results in a convincing break above the pink channel which is not reversed, the bearish case will stand a good chance. Ideally, I'd like to see the next pullback in the market push the averages above the mid line of the red channel and for them to stay above that mid line. 

If, on the next pullback in the market, the pink channel isn't broken significantly to the upside or any such break is quickly reversed and the moving averages just continue trending down, then that's going to favour the bullish case for the market.