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mortiz

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Reply with quote  #1 
Despite numerous potential divergences and plenty of oversold indicators, several analysis tools are not suggesting a high probability of a price bottom in place supporting a sustainable up move.

First, some options indicators.  The weekly OCC smallest equity options retail trader Buy-To-Open (BTO) Put-Call (PC) ratio is not exhibiting extreme concern the past few weeks despite substantial price deterioration.



The weekly OCC total retail (all transaction sizes) equity options BTO PC ratios remain in the complacent zone... despite the SPX weekly close now 8% lower than the November 2008 price low, the retail BTO PC ratio is parked at 0.80, far less than one would expect to accompany an important price low. 



The composite retail-firm (market makers not included) daily equity option PC ratio for all options exchanges. Note when higher PC ratio lows accompany lower price highs, the potential for severe price deterioration has followed such patterns during the current bear market.



A useful indicator to monitor is the level of participation of market maker ETF options volume (relative to total ETF options volume) for the more active ETFs.  The next chart tracks the market maker total volume percentage for the QQQQ, SPY, DIA, and IWM ETFs. I hope to expand the number of ETFs comprising this indicator soon, but haven't collated all the data yet, so this snapshot only includes the four aforementioned ETFs.

The 5 day MA (blue curve) of the market maker volume percentage just bounced from the black dashed support trend line, which over the past several months, has coincided with the beginning of noticeable price degradation.



The next chart updates the IBD Put-Call premium data point IBD publishes daily. IBD doesn't define exactly how the value is derived, but I have tracked this data for several years and does exhibit interesting characteristics.

During the 2002-03 bottoming process, this indicator diverged with price, and could be in the process of forming a similar divergence now, but until proven otherwise, the blue curve is declining again which leads to lower prices.



Next is the options volume-volatility "power" indicator which compares detrended a series options volume with its corresponding detrended volatility index, in this example, the OEX-VXO series.  The value of 100 is neutral, with the current value at 105. When the power indicator is significantly above 100 (higher than 150) denoting a high level of defensive posturing, a coinciding price low often occurs.  Conversely, power values well under 100 (60 to 75 level) often accompany price tops, particularly in bear markets.



Not all trader psychological indicators are in the complacent zone, next is variant of the Rydex money market assets as a percentage of selected Rydex equity assets, which exceeded 33% Friday, a relatively high percentage for recent years.  The current level of concern with Rydex players may be signaling a short term stabilization in prices, we'll see.



The QQQQ-NDX liquidity premium indicator is another of the few bright points for the bullish case, getting closer to its bullish level.



However, not all liquidity premium series are not in their bullish zones, one being the DIA-Dow liquidity premium variant.



NYSE member daily short selling activity has been extremely high the past couple of weeks. Given the members are often right in their bets of future price action, this high level of short volume is not a good sign for the coming weeks.



Another indicator potentially supporting the bullish case is the performance of the unweighted NYA average relative to the weighted NYA average. The unweighted NYA is well above its November 2008 low while the traditional weighted NYA is struggling to find support at its late 2008 low.  When these two NYA variants disagree, it is the unweighted version that often proves to signal the direction of prices. 



The NYSE Eliades TRIN variant is reaching extreme oversold levels.  When it rolls over, it often has a stabilizing effect on price, although when it reaches an extreme like the current level, it often turns out to be the initial level where a later divergence with price is formed...



A CLX (climax indicator) update for the Dow, in this case the Dow CLX McClellan Oscillator (MCO). The Dow CLX MCO continues its lower high-lower low pattern refusing to post a bullish divergence with price.



If the Dow CLX McClellan Summation index (McSum) can remain above its November 2008 low, it would achieve a longer term divergence providing the basis for price to initiate a sustainable advance. The current Dow CLX McSum value is 150 points higher than its late 2008 low, thus has room for carving out an important divergence with price.



The NDX CLX MCO variant is also refusing to exhibit a bullish divergence with price, and is only a few points from violating its November 2008 level, which would be a bearish signal if that low were penetrated.



This last chart is included only because of curiosity on my part of the long term Dow daily volatility indicator status.  Since implied volatility indices (VIX, etc) only go back to 1986, constructing longer term volatility comparisons require the derivation of index price volatilities.

Note the long term Dow price volatility indicator (100 day MA) has challenged its early 1930s extremes.  In the 112+ years of daily Dow data, the volatility high recently posted was only nominally exceeded in 1932, a truly historic event we have just witnessed. 

The arbitrary support trend line drawn across the Dow log chart 1932 and 1982 lows is currently in the Dow 3500 zone... let's hope that level isn't tested before this bear runs its course.



FWIW

Randy

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EstimatedProphet

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Reply with quote  #2 
Great work as always Mortiz!  I think the highest odds are for a waterfall event, and I find your work helpful in determining that probability.  A few conversations I had this week with fellow market participants surprised me at how bullish they were for this to be THE low right here.  So again, your data helps gauge that for me.  Take care!
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Fishrman

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Reply with quote  #3 
Great post! I have been reading the posts on this site for about a week and really enjoyed this one. I agree, I see more downside on the SPX to around the 600 level. Where did you get the data to build your models/indicators? Thanks for the analysis and keep up the great work!
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doc

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Reply with quote  #4 
Superb work Randy. Definitely gives me pause as some of my work supports an IT low sometime early this week. The options data is unbelievable! The only thing I can think of is that sometimes the options data peaks a week after the bottom, so if we see a huge spike in the next two weeks, then we are OK. A big drop early this week might prompt the first wave of put buying followed next week by "sell the rally" mentality if they get scared enough. We'll see. I take it that the options data feed you get is real time with no "2 week delay" as in some data reporting (COT maybe?). Thanks again for a wonderful post.

Doc
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mortiz

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Reply with quote  #5 
Aaron/Fishrman/Doc,

Thanks for the comments!

To address some of the questions: 

Data Sources/Models: I have been a student of the market for 30+ years (it is a hobby, my day job is an engineer), collecting/deriving data myself and with collaborators, and accessing data sets from many sources over the years.  Some of the models used are from my own experimentation, others from several members of TW, and based upon the work of many of the famous names in the business.  The depth of the data base collected over the years is very deep and would require pages of explanation (sorry for the lame details).

Options Data "Age": the weekly OCC BTO data is published every weekend, so that data covers the week just ended.  All the other data is acquired after the close of each trading day... and requires a significant amount of effort to scrape and process it daily. Up until the past couple of years, the member shorting data was always delayed two weeks, now it can accessed with no delay (next day) from the NYSE web site.

As far as what to expect Doc, you are exactly correct that, particularly for the smallest options traders, the peak of their BTO PC ratio often occurs the week after a bottom.  What has been stunning for me over the past few weeks is the absence of fear in many of the trader/investor fingerprints I monitor, despite the obvious deterioration in price and internals.

Perhaps the next week or two will send many to seek cover in the tall grass, much like last fall's price collapse succeeded in forcing.  Until then for equities, my strategy is cash and bear positions.

FWIW

Randy

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