Non Believers Beware. Charts Say Important Bottom Is In Place.
trading-ideas.com
By Joe Duarte - Publisher and Editor, Joe-Duarte.Com
joe-duarte.com Oct 11, 2002 6:45:00 PM Sentiment Summary
The CBOE Put/Call ratio gave a reading of 0.97 on 10-10, a reasonably high reading, and one that rose from its prior reading despite a nice market rally. This is a good sign for the short term. Under normal circumstances a series of high numbers on this ratio, such as what we have seen would be enough to rally the markets, but that has not been the case lately, until the last few days, and begins to confirm our impression that as investors give up on the significance of indicators, they will start to work again.
But this is not the time to jump up and down and celebrate. This is a very delicate time for this market. Investors should watch this indicator closely in the next few days. If it drops rapidly as the market rallies, it could be telling us that the rally has no staying power. The CBOE Put/Call ratio gave two readings below 0.60 on 8-19 and 8-22. These two relatively low readings suggested that the market was slightly overbought, and correctly predicted the sell off that began on 8-23, which led to the huge sell off on 9-3, after which the market stabilized only to fail again on 9-12. Readings below 0.5 are of concern, but not as serious as readings below 0.40. The recent major market bottom, July 24th, was nicely predicted by the large ratio of 1.14 on 7-19. There had been some good readings prior to the 7-19 reading including the 1.08 readings on 7-2 and 7-8. These followed the 1.27 reading on 6-21, and other high readings such as 1.15 on 6-14 and 1.08 on 5-28.
The CBOE P/C ratio for indexes was 1.72 on 10-10, its 22nd bullish reading in a row after a bearish reading of 0.89 on 9-10 which correctly signaled the market‘s fall in mid September. The low reading on 9-10 ended the bullish reading streak of this indicator at 35 out of the last 37 days, and suggested some short term uncertainty in this market was possible. Readings below 0.9 suggest too much bullish sentiment, just as readings above 2 are usually required to mark major bottoms. The index did fall below 1.0 on 8-11, but did recover over the next few days. If the market sells off, we want to see this indicator give very high readings, especially if there are readings over 2.0. This indicator was also bullish for 75 out of 77 days prior to 12-17, as the market made a nice recovery off of the September bottom.
The VIX and VXN indexes checked in with readings of 46.29 and 62.82 respectively on 10-10. These are high enough to trigger a short term rally, and should be watched carefully for the speed at which they fall. It would be ideal to get a nice rally on 10-11 and to have VIX and VXN stay above 40 and 60, as that would show that the non believer ratio is still high. If VIX closes above 40 and VXN above 60, it often suggests that a trading bottom is near, or that volatility is on the rise. In the last few weeks, high readings on VIX and VXN have led to high levels of volatility, but have not marked a bottom. The VIX reading above 50 on 7-23 was a sign that true fear had arrived, and that a market bottom was near. On 7-24 we had the nearly 500 point up move on the Dow. The September 2001 bottom gave us a reading of 57 on VIX also marking a significant market bottom. A fall below 20 on VIX and 40 on VXN would be very negative, especially if the market rallies.
Newsletter writers are increasingly more bearish, for the reporting week of 10-4, as polled by Investor‘s Intelligence. This is encouraging, as newsletter writers have yet to throw in the towel. In contrast to the newsletter writers, the futures traders polled by Market Vane have stayed bearish for months, although their bearishness receded during the past month.
Chart Courtesy of StockCharts.com
Technical Summary
The S&P 500 held above 775 and powered its way above 800. If the market holds and the up trend can reassert itself it could take the index to the 869-882 area. Key long term support remains at 775, the July 23, 2002 lows. And this is the really important place to watch, for a break below 775 would be a death blow for this market and could set off true panic selling. Nasdaq also bounced as it also held above its recent lows. The small stocks are likely to move along with the markets, but may get a little help if the dollar remains steady.
Of course there are charts included with the link above. Interested readers can follow the put to call ratios at a number of sites. I like this one because it has a chart too:
vtoreport.com
RtS |
