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mortiz

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Reply with quote  #1 

The weekly Options Clearing Corp (OCC) data has shown an interesting confluence of equity options indicators over the past two weeks for all three reported trading classes: retail customers, brokerage firms, and market makers.  In addition, the OCC breaks down the type of transactions for each class of trader to include buy-to-open (BTO) volume and premiums of puts and calls, sell-to-open (STO) volume and premiums for puts and calls, as well as the closing position's volume and premiums for the BTO and STO traffic.

 

Despite the price strength over the past two weeks, almost every ratio permutation one can imagine using this data is at, or close to levels typically coinciding with important price bottoms since 2003. The behavior of the market makers over the past two weeks has been particularly astonishing.  One usually equates the market makers with the "smart money" in equity (and index) trading, since they are charged to ensure an orderly market in addition to trading their own accounts.

 

The OCC only reports market maker volume and premiums for the closing of BTO and STO call and put contract positions, thus the visibility to motivations of the market makers is not as complete as the activities of retail customers and brokerage firms.

 

Last week, the market maker position closing BTO volume call-put ratio was the lowest, 0.60, in the 6+ years of data available to the public from the OCC.  One's knee-jerk reaction to such a low BTO call-put ratio would be a bearish omen, but recall this volume is the closing of BTO call and put positions.

 

To illustrate the correlation of price versus market maker closing BTO call-put volume ratios, the first chart's blue curve is a 4-week SMA of the data, currently at 1.31.  There have been three other occurrences over the past six years when the market maker single week volume ratio was below 1.00:

 

2-24-06: 0.60

9-20-02: 0.89

9-21-01: 0.96

4-15-05: 0.99

 

The week ending 10-14-05 was close at 1.01.  In each case other than the 9-20-02 example under 1.00, prices important bottoms coincided with the "sub-1.00" ratios.  In the 2002 example, the very important October 2002 price bottom unfolded within a couple weeks.  Each 4-week MA event at or below 1.30 is circled in green.

 

 

Next is the market maker equity options closing BTO call-put premium ratio which achieved its lowest reading last week since March 2003.

 

 

Many other OCC BTO and STO volume and premium call-put ratios related to retail customer and brokerage firm activities are also at levels usually coinciding with price bottoms, but being at a vacation home with only a dial-up modem, the reader will have to trust the author as to their current configurations.

 

It is likely the market is within a couple of weeks of establishing an important price bottom, based upon what has historically transpired with respect to activities in the equity options exchanges.

 

FWIW

 

Randy

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jmicou

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Reply with quote  #2 
An ISEE indicator as a work in progress.

regards,

Johnny


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doc

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Reply with quote  #3 

Randy,

 

Great innovative work as usual and thanks for sharing. In the first chart regarding MM's,  I noted that the lows in the closing BTOCPVR4MA's generally coincided with a  2 or more month downward move in the sp500 and that final low was usually within 1-2 weeks of the indicator low.

 

This last low in the closing BTOCPVR4MA is during an UP move in the sp500. There is a Hurst 10 wk cycle low due in about 2.5 wks so maybe at worst we get a sideways consolidation in the sp500 and possibly still an uptrend. Based on your analysis, that suggests the move out of this low could be rather robust--maybe a wave 3 of 3 of 3 like in EW terms that I hear from time to time? (I am not an Elliotician sp?). That's good for the bulls.

 

The only concerning thing on your chart is that we also recently had two consequtive readings in the closing BTOCPVR4MA of 2.00 or more for the first time since Jan 2004 and back that this marked the onset of an 8 month zigzag down to the Aug 04 lows. What is your take regarding these recent high spikes?

 

Best,

 

Doc

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mortiz

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Reply with quote  #4 

Thank you to all for your feedback.  The additional supporting sentiment data points by Jerkstore and Johnny are other events to be considered.  As we are all aware, sentiment can be a tricky discipline (particularly when assessing complacency), but I am a firm believer in its utility, thus my willingness to devote time to the study of sentiment in conjunction with other tools.

 

With respect to Doc's typical, valuable questions, due to the relatively short period of time the OCC options data is available, there is really no precedent to the market maker behavior currently in play with respect to price action, i.e. price is more in a congestion zone rather than a climatic sell-off conclusion.  In most past examples of market maker call-put extremes, the extremes come in clusters of longer duration than two weeks, thus more work may be needed over the next couple of weeks before the price bottoming is complete.

 

In addition, the market maker lower extremes were precluded by historically high values in early January, 2006.  When the January 2006 high extremes occurred, I conducted a little research in the configuration of the internals at other overbought extremes.  What I found, was most of the overbought extremes took place in the 2000/2001 time frame, which transpired in a major price topping "sentiment range"... more about sentiment ranges at the end of the message.

 

What I found in the internals world at the market maker call-put extreme high in January 2004, was both the NYSE common only and composite AD McSums were over +1000, a rather overbought level and followed a strong price uptrend over the prior nine months.  In addition, the ratio-adjusted volume McSums were nominally lagging the breadth McSums at the time.  Normally, bulls like to see "strong" volume indicators stronger than "strong" breadth indicators during a price uptrend.

 

In contrast, volume was leading breadth at the January 2006 high posting in market maker call-put ratios, resulting in range bound prices over the past 10 to 12 weeks.  What is unprecedented, is the current state of internals indicators as measured by the AD and volume McSums accompanied by extreme lows in the BTO-STO OCC options ratios. All of the broad-based indices' McSums I am aware of remain above zero following their corrective phases over the past many weeks, which I believe is a key component of the bullish case.

 

The refusal of the McSums to journey below the zero line during the price chop is a testimonial to the relentless bid under the market.  Add to that, there are many sentiment tools (see recent posts by Jerkstore and others) suggesting many traders are betting a top is in place, which is added fuel to drive this market higher.

 

To keep the wall of worry in place for folks like me, I have noticed an alarming divergence over the past week or so between a new 52 week high in the Dow, while the NDX was around 5% lower than its most recent 52-week high.  I allow more credibility to new 52-week highs in the SPX when NDX is off 5% or more from its 52 week high, but when such divergences unfold, the near term is not profitable for the bulls in most cases, time will tell.

 

I plan to keep a close eye on Aire's cycle work as well as the behavior in the internals over the next couple of weeks for further clues to determine if we are approaching a "melt-up" phase.  Regardless if a couple more weeks of chop are in the works before a robust rally,  the table is being set for a potential upside surprise IMHO.  As always, we will let the market decide and act upon what it is telling us.

 

FWIW 

 

Randy

 

Sentiment "Ranges"

 

For most options related indicators, there are three "ranges" of ratio levels dependent on what type of price cycle we are in.  Again, my various options data only goes back to the mid-1980s, so the sample space is somewhat limited. But with the limited data I have, the three sentiment level ranges are:

 

1) The "middle" of price uptrends with moderate levels

2) Major Tops with extreme levels (only one good example, 2000-2001)

3) Bear Markets with extreme levels opposite of major tops

 

There are other sentiment indicators with a long history: member-public shorting, sentiment surveys, and volatility that confirm the changing ranges in sentiment values.  One might say implied volatilities are only recorded from 1986, but one can apply actual volatility techniques to price data going back to 1896 providing verification of the "three ranges" theory.

 

We are currently in the middle of price uptrends (IMHO), but signs are emerging the current range is rising, but not yet to levels of major price tops.

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mortiz

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Reply with quote  #5 

After plumbing in last week's OCC BTO/STO data for retail customers, market makers, and brokerage houses, there is little change in the numbers, making this the third consecutive week of bullish postings, particularly by the market makers.  As discussed earlier in this thread, pattern extremes as observed over the past three weeks usually require three to six weeks to play out.

 

Therefore, one to three weeks max of continued extremes in this data will likely result in upside fireworks.  There will undoubtedly be continued intra-week volatility if the options players' recent behavior continues, but it is part of the bottoming process.

 

There are several mixed signs in the internals of the large and small/mid cap indices, with a lot of congestive chop about the zero line in the small/mid cap MCOs (resulting in the McSum ledges being formed in many indicator variants).  MCO congestion about the zero line often resolves in a downward movement of the MCO, but with the dichotomy between the large and small/mid cap indices, an upside break cannot be ruled out.

 

Another week or two of consolidation/correction may be in play, but IMHO, the setup foundation is being laid for a powerful upmove in the next couple of weeks. Bearishness is building and perhaps a downside near term fake out with divergences in the internals will be the catalyst for completing the formation of what I feel will be an important bottom.

 

FWIW

 

Randy

 

 

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traderpaul

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Reply with quote  #6 
If you look at the chart closely you will find that all the previous buy signals came after a good decline.....Is the sideways action good enough for the buy signal? Time will tell....
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mortiz

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Reply with quote  #7 

Paul,

 

Your observation of a pending correction/consolidation is consistent with my short term expectations, based upon the current price related indicators, short term sentiment, and the feeble performance of many internals indicators over the past few weeks.  The market maker indicator can chop around at its current levels for up to six weeks before a rally unfolds.

 

There is one "unmarked" instance of price consolidation when the market makers indicator was close to its lower range in July 2003.  However, the market maker indicator had not posted the extremely high spikes prior to the 2003 example, thus the high probability of near term problems for the bulls IMHO.

 

What is encouraging for the longer term bullish case is the OCC equity options BTO/STO data for retail customers and firms is also in the territory where rallies typically unfold within a couple of weeks.  Based upon the growing pessimism in the equity options pits (all six exchanges) while price moves laterally, a severe decline in prices, more than 5%, will probably not be necessary to bring the bears out in spades setting up a bottom.

 

Thanks for your feedback.

 

FWIW

 

Randy

 

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