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mortiz

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Reply with quote  #1 

With both sentiment and momentum indicators, there is potential good news for the bulls, but at the same time, the downside work is not likely over.

 

First sentiment, the CBOE only total (equity and index) options call-put ratio 10 day EMA, currently a 0.91.  The current ratio is at its lowest level since December 1994 when the ratio reached 0.90.  Of course, the current ratio could go lower, but it is at historic lows and would have to be rated very bullish.

 

 

The QQQQ-QQV options "power" indicator is well into buy signal territory, only needing to roll over for triggering a buy.  This indicator measures the daily Q4 total options volume (puts and calls) against its 50 day MA and the daily QQV volatility index against it 50 day MA.  Both the SPX-VIX power indicator (posted in a Johnny Micou thread) and the OEX-VXO power indicator are flashing strong buy signals.  When all three series are in sync, a rally of some degree is a high probability.

 

 

The weekly OCC version of the ISEE index, ie the retail customer only buy-to-open (BTO) call-put ratio for all six exchanges is at levels suggesting the bear side of the market may be overdone in the shorter term. This broader based "ISEE index" is lower than the October 2005 low, and closing in on the April 2005 low.

 

 

The next indicator is another of the homegrown variety measuring the RUT ETF (IWM) volume and IWM options volume against their respective 50 day moving averages.  The IWM options historical data is limited, but in the history of the available data, an extreme has been reached usually coinciding with price bottoms of some degree.  This indicator has to roll over to trigger a buy signal, not yet accomplished.

 

 

 

The OCC weekly BTO call-put ratio of the smallest equity options traders (1 to 10 contracts per transaction) is at its lower range over the past year, right at its lower band.  This guage is not yet strongly bullish, but can be rated moderately bullish.

 

 

The market makers closing of BTO call-put volume ratio has finally reached levels that have accompanied price bottoms in the past.  Other market maker options related indicators have been in the bullish zone for a few weeks, but the volume indicator was a hold out until last week.

 

 

With large traders moving in and out of some Rydex dynamic bull and bear funds, the Rydex asset flows in some of the more established funds were giving deceivingly bullish overtones going into the price top a couple weeks ago.  One Rydex asset flow indicator that has been reliable over the past couple of years is group of small cap, mid cap, large cap, and Dow percentage of bear fund assets (of the total assets).  Last week, this indicator achieved levels that have accompanied price bottoms over the past couple of years, however, this indicator has yet to roll over.

 

 

Now a brief look at some warning signs for the bullish case via momentum indicators.  The first is what used to be called the Eliades "New TRIN" which is different the open TRIN or the ARMs index.  I have found this TRIN variant is one of the more effective versions for indices such as the NYA, Russell averages, and many other sub-indices.

 

This New TRIN measure is for the Russell 3000 (actually a little more than 2900 issues currently), aka RUA.  The RUA New TRIN reached 1.84 on Friday, well above the 1.70 threshold that has served as a warning sign over the past couple of years more trouble lies ahead for the bullish case.

 

There are two distinct bearish implications going forward when this indicator reaches such extremes, the first is a retest of the current low over the following one to two weeks of the extreme.  The second implication being a nominally lower price low 2 to 4 months down the road.  This same pattern of lower lows in the intermediate term shows up in MCOs as well.

 

 

The last chart was an eye-opener for me last week, and is a by-product of a collaborative project with Tom McClellan.  The following interpretation of the indicator are mine alone, and not necessarily that of McClellan Financial Publications.

 

The indicator is the $ weighted up-down ($UD) volume MCO of all the common stocks traded on the NYSE.  Our data only goes back to late 2001, but over those 54 months, this indicator has only gone below -100 three times, in January 2003, March 2004, and last week.  Last week's posting was -107, the lowest reading in our limited data history.

 

What will follow this latest reading remains to be seen, but in the two prior extremes, a limited price bounce followed immediately with final low in the 2003 event coming six weeks later in March 2003, with the 2004 event getting its eventual low two weeks later.  In 2004, a NYA lower low then transpired in May, and was retested in August.

 

 

In summary, some positive sentiment indications have arisen over the past couple of weeks, but technical internals damage has been endured, which will likely have influences on prices going forward.  It is likely, at a minimum, a retest of the recent lows will be coming in the next couple of weeks, and a breach of the recent lows is a high probability over the next few months.

 

There are historical precedents of MCO extremes accompanying the scenario in the previous paragraph, a study I hope to address in a post over Memorial Day weekend.

 

FWIW

 

Randy

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Sigue_Lideres

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Reply with quote  #2 

Randy,

 

If you're half as good at your day job as you are with this hobby of yours, then i hope you are as well-appreciated there as you are here. 

 

Do you study the COT data at all? As of the latest report date (tuesday, i think), the small specs were in buy-the-dip mode. Some more astute students of sentiment than i recently made the observation that the COT numbers were a standout amongst sentiment data in warning of the recent pullback.

 

I did some buying on Friday (healthcare and bonds), but still "net short and nervous".

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jmicou

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Reply with quote  #3 
Randy,

Excellent thread, as usual. As to the last chart, it seems to represent an initiation thrust to the downside if near the top of a price range and a capitulation thrust (if such a phrase exists) if it is near the bottom of a price range. The latter reflecting the final wash out phase with a momentum low before the price low (bottom) is found. The former reflecting an IT change of direction after a major momentum thrust in the opposite direction setting up a more complex price bottom that takes time to form with likely retests of the low. The former, unlike the latter, would indicate a significant reflex rally with a lower high to set the momentum and price patterns in motion.

Thanks for posting these.

regards,
Johnny

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jmicou

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Reply with quote  #4 
Click here for chart and comments.
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mortiz

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Reply with quote  #5 

Tim: Thanks for the feedback; as far as the COT data, due to limited available time, I rely on the McClellan Letter(s) and other folks (jmicou for one) who post COT updates on TW.  With line COT data line-in-the-sand being Tuesday of each week, but not reported until Friday, it is difficult to know how the small traders reacted to the price plunge last Wednesday. 

 

One friend who follows the NDX e-mini COT data pointed out the warning sign a couple of weeks ago, and sure enough, the indicator worked this time around.  Jason Goepfert also conducted a study over the weekend on the small specs COT data, conclusion was bottom fishing.

 

One problem I see in the very near term, is everybody and their brother appear to be expecting a reflex rally right here.  We all know how one-sided expectations are usually rewarded.

 

Johnny: normally, high extreme MCO postings are initiation thrusts, but it often is a good idea to look at the MCO low reading prior to a potential thrust, May 2004 being a good example.  Extreme low MCOs followed immediately by extreme high MCO numbers often turn out not to be initiation thrusts, but intermediate term exhaustion points.

 

Conversely, extreme MCO lows are typically capitulation events with respect to momentum lows in the internals, an event we likely saw last week.  However, in the near term, lower price lows are often posted shortly thereafter with the MCO diverging positively, then the prices rally in a more meaningful manner.

 

Negative MCO extremes such as last week's normally have negative connotations down the road as well, usually two to four months, with lower price lows. 

 

Whether the major trend has indeed changed, I think it is too early to definitively declare we are going into a major bear leg down.  Damage has been inflicted upon the bullish case over the past few weeks, but damage has been inflicted before over the past three years, and the market recovered after the cleansing process concluded.  Can the bull recover once again?  I don't know, but will try to correctly the interpret the underpinnings going forward and adjust accordingly, the market is always right.

 

Anyway, your scenario would be consistent with what I have tried to articulate, it will be interesting to see how it all plays out.  Thanks for the feedback and the additional chart link Johnny.

 

FWIW

 

Randy

 

 

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jmicou

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Reply with quote  #6 
Randy,

Thanks for the response. From looking at the indicators, it seems that given the patterns of last week, one has to look at other time frames before 2003. The Nasdaq breaking down below the LT chart lines back to 2002 does not bode well. Was it a false break, or was it the real thing? The rest of the indices will follow its lead over time.

As far as COT, the NDX Mini Small Spec. OI% Short positions as of May 9th were at levels in Nov. 04 and Nov. 05. Not a great timing tool, but usually a good heads up.

regards,

Johnny

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da_cheif

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Reply with quote  #7 

good market students are rare...welcome to the club.....u r one of the few....the proud.........snort

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