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mortiz

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Reply with quote  #1 

After Friday's large cap price debacle, there are some options indicators suggesting a near term relief rally is highly probable.  There are several complacency indicators voting more work is needed before a solid IT bottom is in place, likely in two to three weeks at the 40 week cycle low.

 

The options volume-volatility "power" indicators for the OEX-VXO, SPX-VIX, and Q4-QQV series are all in sync by reaching oversold levels, and when these indicators roll over, a short term price bottom is typically in, or very close.  All power series indicators have yet to roll over, but will likely do so early next week.

 

First is the OEX-VXO power indicator, the least oversold.

 

 

The SPX-VIX volume-volatility power indicator is at its upper historical range.

 

 

The Q4-QQV power indicator is at an all-time high for its limited history.  When all three of these options volume-volatility indicators are in sync at high levels, a rally of some magnitude follows shortly thereafter.  Buy signals are generated after the power curve rolls over.

 

 

The next indicator compares Q4 options (puts and calls) volume and Q4 ETF volume versus their respective 50 day SMAs.  When volume in both of these derivatives are far higher than their MAs, short (or longer) term price rallies typically follow.  The indicator is at a multi-year high.

 

 

A few usually reliable indicators are still at levels of complacency where prices have had difficulty in generating sustained uptrends over the past couple of years, suggesting more consolidating or corrective work is needed over the next few weeks. 

 

The below chart is the equity options put-call ratio for all six options exchanges.  The blue curve is a put-call volume as a percentage of put and call open interest ratio, while the black curve is the straight volume put-call ratio.  The open interest-put call volume ratio variant adjusts its range between bull and bear markets.  Both curves will need to work their way higher before a sustainable rally can unfold, unless the market is headed for a major, bubble-like top where these indicators would continue lower while prices continue higher.

 

 

The SPY-SPX liquidity premium (LP) indicator, concept originated by Jason Goepfert, is in its neutral zone currently, but Friday, the single day ETF volume-underlying index component volume LP posting was the highest observed since early October 2005.  A few more days of readings like Friday's, would put this indicator into the buy alert zone.

 

 

The Q4-NDX ETF-underlying index component volume LP indicator is closer than the SPX-SPY in achieving its buy alert level.  Friday's single day reading of the NDX-Q4 LP was the highest since June 2002, indicating a rush to the safety of ETFs by Q4 and NDX component traders.  The LP is a moving average of daily values, thus Friday's excessive posting is not obvious in the LP indicator itself.

 

 

 

Friday's action was accompanied by a fair level of panic in the bull camp which will likely result in a reflex rally soon.  However, a few more days of nervousness by the bulls and shorting into any ensuing rally by the bears will be needed, before prices can rally in a sustainable fashion.

 

There are many reasons suggesting this bull run from the 2003 lows is not yet completed, namely liquidity.  The NYSE common stock and composite cumulative AD lines achieved all-time highs recently, coinciding with recovery price highs.  Since the mid-1940s, AD line highs coinciding with price highs have not led to a 10% or more price correction, therefore, the probability is low a deep correction will unfold in the coming weeks.

 

In addition, the unweighted averages and small cap prices were not hit nearly as hard as the weighted and large cap averages on Friday, suggesting OPEX was likely a factor in Friday's popular averages' collapse.  Since the first of the year, the small caps have been exhibiting noticeably stronger relative strength over the mid and large caps, suggesting accumulation in selected sectors is taking place under the radar screen.

 

One other plus with respect to sentiment Friday was the non-financial media's focus on the market decline.  Even the small radio stations in the "rural" area where I live were reporting incessantly on Friday's decline in the popular averages....

 

FWIW

 

Randy

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jmicou

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Reply with quote  #2 
Randy,

Hope you post when you see the turn. The longer term Q's LP chart is something I almost requested you post. Thanks.

regards,

Johnny

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fib_1618

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Reply with quote  #3 
Quote:
Friday's action was accompanied by a fair level of panic in the bull camp which will likely result in a reflex rally soon. However, a few more days of nervousness by the bulls and shorting into any ensuing rally by the bears will be needed, before prices can rally in a sustainable fashion.

Adding another observation to your conclusions comes with the chart shown below. Since the summer of 2003, the implied volatility (or premium cost factor) of SPX options (as referenced by the volatility index {VIX}), and when applied with a Bollinger Band using a 89 day simple moving average (SMA) over this same time period, highly suggests that at least a poke (if not an all out violation) above the upper band will be needed before we'll probably see a bottom of significance given its past history in this regard when the VIX moves above the SMA as it did on Friday....and this would fit in quite nicely with the overall exercise of your post.

Thanks for the update.

Fib








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Rightfield

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Reply with quote  #4 

Thanks you Mortiz for the update.

Just adding the VXN LT chart using the same  Bollinger Band with a 89 day simple moving average method as Fib used on the VIX ...looking back to 1995, only three times( fall 1998, spring 2000, and fall 2001) have we had the VXN stray with a standard deviation above the upper bands as much as it did last Friday....I find that a little astounding, considering that the Naz just recently made a four year high with it's uptrend  still intact .

 

http://stockcharts.com/def/servlet/SC.web?c=$VXN,uu[w,a]dcclynay[d19980121,20060121][pd89,2][i]&pref=G

 

RF


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fib_1618

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Reply with quote  #5 
Yes, it is rather astounding, isn't it?

Now, the question is...is the cup half empty or half full?

Fib




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"As for it being different this time, it is different every time. The question is in what way, and to what extent" - Tom McClellan

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"What we see depends mainly on what we look for" - John Lubbock

"The eye sees only what the mind is ready to comprehend" - Henri Bergson

“Answers are easy; it’s asking the right questions which is hard” - Dr. Who - 1977

"You know the very powerful and the very stupid have one thing in common - they don't alter their views to fit the facts, they alter the facts to fit their views (which can be uncomfortable if you happen to be one of the facts that needs altering)" - Dr. Who - 1977

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mss

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Reply with quote  #6 
Very nice thread going here. Some may find my second chart in thread above (indicator update) with the SPX/VXO suggested forcast.
mss
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mortiz

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Reply with quote  #7 

Fib/RF/Scott/Johnny,

 

Thanks for pointing out the additional/most interesting data points regarding the abnormal volatility Friday (on a recent, relative basis).

 

Your observations motivated a check on the magnitude of total options volume (puts and calls) on Friday (1-20-06):

 

SPX Options Volume: all-time high volume (from 11 years of data)

 

Q4 Options Volume: 2nd highest volume behind 4-15-05 (~4 years data)

 

Total CBOE (Equity & Index) Volume: all-time high (12 years data)

 

OEX volume was heavy, but a ways down the list on all-time high volume.  The official "all six exchanges" volume isn't released by the OCC until Monday, but I won't be surprised if its volume is a record breaker as well.

 

An "astounding day" indeed in many respects... the action definitely drew the attention of the option traders!

 

Randy

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jmicou

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Reply with quote  #8 
With all of this option volume and volatility, some may find the ISEE chart of interest. The 10 MA tends to highlight the movement:

regards,
Johnny

ISEE web address: http://www.iseoptions.com/marketplace/statistics/sentiment_index.asp


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doc

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Reply with quote  #9 

Very nice thread, indeed. Thanks to all for an interesting discussion, especially Randy for a great review and kickoff. To expand on Fib's vix and RF's vxn idea, I took a look at a 50 day ma (since many follow the 50 and indexes frequently respect it) with 3 and 4 S.D. lines and found for the vxn, that the 3 SD line has only been touched to the upside 3 times since this bull rally began 2003.

 

August 2004--Hurst's 1st 80 week low

April 2005----Hurst's next 40 week low

Friday-------??Hurst's 2nd 80 week low (fits with the recent samples of 80 week cycles, though airedale felt it came 1/3/06 based on recent shortening of the smaller cycles--don't know if he has changed his analysis after Friday's action.)

 

The only breaches of the 4 SD line are the last 2 above.

 

A tradeable bottom should be near unless we have entered a bear market and the top is in, and much TA would suggest that that hasn't happened yet.

 

 

http://stockcharts.com/c-sc/sc?symbol=$VXN&period=DAILY&years=2&months=10&days=0&id=t49489973049&r=9712

 

 

Doc

 

My chart posted then reverted back to default settings, wiping out my indicators. I'll try again:

 

 

http://stockcharts.com/h-sc/ui?symbol=$VXN&period=DAILY&years=2&months=10&days=0&id=p40854569245

 

At the time of this edit, the chart is good to go.

 

By the way, the vxn also touched the 3 SD line in Oct 2005, a 10 week cycle low.

 

Doc

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jmicou

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Reply with quote  #10 
Doc,

I expanded on your chart. Here are the results; however, I would like to add one observation, the 50,3 BB upper touch highlighted in purple seemed to come at the end of a downward market from Jan. 04 to Aug. 04 before making a lower low, then kicking off a the rally beginning in Aug. 04. That is also the highest level the 200,3 BB reached since the 02 area highlighted.

One other observation, all other VXN spikes came after months of downward pressure on the market and could be viewed as capitulation at the end of selling. This begs the question of the recent volatility spike as measured by the VXN reflective of the greater use of options in general. In addition, if you look at the ISEE chart, it does not reflect lopsided put buying.

regards,

jmicou


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jmicou

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Reply with quote  #11 
There was another time that the BB 50,0 and 200,3 reached or exceded the levels seen last Friday. See chart.

regards,
jmicou


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jmicou

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Reply with quote  #12 
Another chart:

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doc

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Reply with quote  #13 

Johnny,

 

Excellent observations, and thanks for expanding. The 200, 3.0 BB is interesting, indeed. Whether a double bottom or lower low is made or not (as in Oct 2005--I'd overlooked it in my original post), a significant down move here would set new standards for this indicator IMHO...

 

Then again, we know better than to rely on any single indicator .

 

Doc

 

Edit: a significant down move here would set new contemporary standards for this indicator IMHO...

 

I knew I should have looked back to the crashes, lol.

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jmicou

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Reply with quote  #14 
VIX

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bln

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Reply with quote  #15 
Extreme levels of short sales by the small sized retail crowd on friday with continued heavy selling yesterday. If history is a guide we should see the expected pop soon..



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mortiz

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Reply with quote  #16 

bln,

 

Welcome aboard and thanks for taking the time to post the odd lot update.

 

The odd lot short sales are a data point I don't follow as closely as I should, and when it speaks, it is prudent to listen.

 

Randy

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mortiz

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Reply with quote  #17 

Johnny,

 

If you see this, the options volume-volatility power indicators all rolled over as of Tuesday's close (two of the three rolled Monday) thus triggering short term buy signals.

 

The Q4-NDX liquidity premium (LP) indicator rolled over nominally at Wednesday's close, but fell about five points short of the zone where solid bottoms typically take place... close enough (?), we'll find out soon enough.

 

The SPY-SPX LP indicator has yet to achieve levels typically associated with solid price bottoms, but went into slightly positive territory (neutral) at Wednesday's close.  Interestingly, this is the first time the SPY-SPX LP indicator has been above the zero line since early November 2005.

 

I remembered this morning you asked for an update on these indicators when they generated buy triggers, so that is where we are today.

 

Randy

 

 

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jmicou

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Reply with quote  #18 
Randy,

Thanks!

Johnny

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Reply with quote  #19 

doc, just saw your post. re the nominal 80 and 40 wk cycles,

last 3 samples of the 80 wk cycle are 9/01 to 3/03 77 wks, 3/03 to 8/04 74 wks, 8/04 to 1/03 73 wks. avg = 74.66 wks. nominal 40 wk cycle = 37.3 wks. Hurst commonality phasing model (locating cyclic troughs of a majority of stocks) points to 1/03 as the nominal 80, 40, 20, 10, 5 wk nest of cyclic lows also.  the first 5 wk cycle off the 1/03 low, which bottomed last wk, shows bullish right translation on unweighted and broad indexes, plus on ad/dc lines.

 

been away from this board for a bit, getting caught up. must say, some of the best independent, thoughtful T/A is being done here. the market breadth work and analysis of unweighted averages is terrific.

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