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mortiz

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Reply with quote  #1 
Friday's trading action, according to my bookkeeping, resulted in the most negative DOW climax indicator (CLX) posting in the past twelve years at -28... tying another -28 value in late July of 2007.  The NDX CLX reached -74, tying it for the sixth most negative value over the past twelve years.  Let's take a look at what negative CLX extremes result in going forward, first the DOW CLX extremes since early 2003.

The blue circles on the SPX red curve designate the the price when CLX values of -24 or less were posted.  Note in some cases, the extreme negative CLX values kicked off additional price deterioration while in other cases designated a price bottom... so no definitive trend other than extremes occurring with a couple of days following a price high typically resulted in much more price damage.



Due to the extreme price ranges of the NDX index values over the past decade, a few charts will zoom in on different time periods when the NDX CLX was -70 or less, first the 1997-98 time frame.  In the fall of 1997, an extreme NDX CLX value occurred at first of a double bottom price bottom.  In the fall of 1998, the late August leg down was kicked off by an extreme, followed by another extreme right at a price low.



During the NDX topping period in 2000, despite the volatility in price at that time, only produced a NDX CLX negative extreme right at the mid-April low, and interestingly, followed by another extreme the following day in spite of a nearly 10% price run up... which was short lived due to very sparse participation in that two day reflex rally. 



Next is the 2001-2002 time frame where several NDX CLX negative extremes were generated while the NDX, on balance, relentlessly ground lower. Most of the CLX extremes in this time frame came in clusters of multiple extremes and except for a couple of occurrences, resulted in a feeble, short-lived rally... a prime example of oversold signals do not always signal an important price low.



The NDX CLX action from 2003 to the present has also included several negative extremes, most of which were clusters of two or more negative extremes.  As in other time frames, negative extremes following a price high kicked off further price damage.  One could point out the most recent CLX extreme unfolded after a hefty NDX decline, but note the NDX is dealing with a sign of the bear price pattern, thus the current extreme may not coincide "the low"... so maybe we need to look at some other tools for clues of determining what this current extreme may be saying.



In another thread, Fib discusses the continuing conflicts in the market, and the options data is flashing several conflicting signals.

First the daily all-exchange equity options put call (PC) ratio... this is not just the CBOE equity options PC ratio... remember, the CBOE accounts for less than 30% of the equity options volume, and is not telling the same story as the all-exchange equity PC ratio.  Note the all-exchange equity PC ratio is in its extreme zone as well.  We want to see this indicator roll over before a buy signal is generated, and it has not rolled yet.



A look at the weekly OCC equity options PC ratio (all transaction types, all players, all exchanges) shows quite an extreme just like the daily data. The OCC equity options data includes ETFs, so the blue curve in the below chart is the PC ratio without ETFs while charcoal colored curve is the PC ratio with ETFs excluded. The PC ratio that includes ETFs is near 8-year highs while the PC ratio without ETF volume included is at its highest level over the eight year history of this data.



The OCC classifies the weekly options data into three groups, the market makers, retail traders, and brokerage firms.  The brokerage firm equity PC ratios last week were very abnormal.... first the buy-to-open (BTO) PC ratio for the firms.

Surprisingly, the brokerage firms' PC ratios are often elevated right at price bottoms... check out the action from last week, their PC ratio is nearly 3.0, by far the highest PC ratio this groups has generated in eight years.  The firms are often busy in writing options as well, thus their strategies can often result in high PC ratios when prices are rallying.



The next chart is the brokerage firm BTO PC ratio minus their sell-to-open (STO) PC ratio.  "Most" of the time, high extremes of this indicator coincide with price lows, and again this tool has hit an eight year high.  However, a buy signal is generated when the indicator rolls over... not yet.



This next options indicator is a fly in the ointment for the bullish case, the smallest equity options player (1 to 10 contracts per transaction) BTO PC ratio... not much panic here.  This group has not posted a high PC ratio since last August... and their volume numbers have been rather heavy, so the reason is not light trading by these retail players.



Rydex data "ain't what it use to be" as far as a reliable fear and greed tool, although the Rydex money market assets as a percentage of total assets still appears to have some value for evaluating investor psychology... this tool remains in neutral territory, no flight to safety yet.



The introduction of several leveraged and inverse ETFs have siphoned money from the Rydex funds as a trading vehicle, but regardless, the percentage of assets parked in inverse bear funds is not exactly at levels one would expect at important price bottoms... but a lot of weight is not given to this indicator these days.



Many are familiar with Jason Goepfert's Liquidity Premium (LP) indicator comparing an index's daily volume against the index's associated ETF daily volume.  When Jason first developed the LP tool, Tom McClellan "reversed engineered" the Goepfert LP recipe and derived a variant which I think is better than Jason's for identifying too much complacency. Like Jason's LP variant, Tom's LP recipe is neutral currently, far from the zone where panic usually takes place.



Next is the daily SDOT short sale data provided by the NYSE.  This indicator is simply the short sale volume percentage of total sell volume as reported daily by the NYSE.  The data is the total daily short sale volume for all market players, and is not necessarily data one wants to fade.... except when it reaches high extremes and rolls over for a few days... not there yet.  Short selling increased with a vengeance last Wednesday, with Friday's percentage at nearly 43.5% of sell volume.



One curiosity of this latest market decline has been the relative strength of the very smallest cap stocks (smaller cap than the RUT constituents) and the bond CEFs and preferred stocks traded on the NYSE... first the NanoCap AD MCO measuring the AD plurality changes in acceleration, one of the few groups of stocks whose AD MCO hasn't fallen apart over the past few days... although one more hard down day would do it.  The NanoCaps are the fourth quartile of the 4000 US common stock issues contained in the various Russell indices.



The often maligned bond CEFs and preferred stocks traded on the NYSE are considered to be the pollutant non-operating company issues traded on the NYSE which skews the composite AD numbers.  This collective group of interest rate sensitive issues has a very important story to tell with respect to liquidity.  The next chart is the AD MCO of these 1100+ issues traded on the NYSE.  This AD MCO is currently at +77 and one could conclude is responsible for the composite NYSE AD line not falling into the tank.



I am not convinced the final bottom has been reached yet (seems to be a lot of bottom fishing) in this current decline, and will likely require additional work in forming what could be an important bottom.  The market is troubled by something it collectively sees on the horizon, I have an idea what may be contributing to that concern, but those thoughts are for another type of message board.  However, progress has been made in purging the excesses in complacency, and a tradeable bottom may not be too far off.

FWIW

Randy
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fib_1618

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Reply with quote  #2 
Nicely done post Randy...thanks for taking the time and effort in putting it together.

Fib


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mortiz

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Reply with quote  #3 
This past week has added additional foundation blocks to the notion an important price bottom is getting closer.... many potential divergences are showing up everywhere, a 68 year high in the NYSE Open TRIN value which reached 1.70 last week, and trader psychology numbers are starting to exhibit a level of fear not seen since the March and August 2007 price lows.

One encouraging example for the bulls is the weekly OCC smallest equity options traders (1 to 10 contracts per transaction) Buy-To-Open (BTO) PC ratio, having finally started to move higher after showing little fear over the past couple of months, reaching its highest level since the week ending August 17, 2007.




FWIW

Randy
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