Mixed Signals = Trading Range

Sat, 27 Jun 2009 11:49:52 +0000

This is the weekly summary from Larry McMillan, the options strategist. See the short video Broad Market Indicators for how the following indicators are used.

SPX 26 June 2009

Two weeks ago, $SPX had apparently broken out over 940 on the upside. However, that proved to be a false breakout, and a setback took the index down to support near 880 (it bottomed at 888 the other day). Thus, both support and resistance have been reinforced, leaving the index in a trading range.

Equity Only Put-Call Ratio 6-26-09

Weighted Put-Call Ratio 6-27-09

As might be expected, the technical indicators are mixed inside the range. The equity-only put-call ratios remain on sell signals. They continue to rise and — from Figures 2 & 3 — you can see that they have a lot of room in which to rise. This doesn’t necessarily mean they are forecasting a huge market decline, though. As we’ve noted before, in 2003 the ratios rose substantially while the general market slowly drifted only slightly lower.

Market breadth has been one of the better indicators in this market — especially the buy signals. The breadth oscillators become officially oversold during this market decline. Then, this week — as of Wednesday’s close — moved to buy signals.

VIX up to 6-27-09

Volatility indices appeared to give sell signals in mid-June — the apparent breakout over the downtrend line and the 20-day moving average. But they proved to be false, as $VIX has declined to its lows. In fact, the breakdown of $VIX to new yearly lows today establishes a new bullish downtrend and thus places $VIX on a buy signal.

In summary, the indicators are mixed, with $VIX and market breadth having quickly swung from bearish to bullish, leaving the equity-only put-call ratios and the $VIX futures premium as sell signals. All of these are valid indicators with good track records. Since they are at odds, it seems to say that the trading range environment will persist.

Trading Range Market

Fri, 22 May 2009 20:08:32 +0000

This is from the Option Strategist

SPX Showing Support and Resistance

The equity-only put-call ratios have flirted with sell signals,

but only the standard ratio has a confirmed sell signal — and even it’s a bit shaky (see Figure 2). Meanwhile, the weighted ratio has moved lower and established new lows. Thus, it remains on its previous buy signal and has not generated a confirmed sell signal.

Standard Put Call Ratio

Weighted Put Call Ratio

Market breadth had finally worked off its overbought condition and generated sell signals last week. However, breadth expanded greatly on Monday’s rally, so those sell signals were briefly canceled out before reinstating themselves today. The rally is mature now, so there is a greater chance that the current sell signal will precede a broader market decline.

Volatility indices ($VIX and $VXO) continue to decline, in general, and that means they remain on buy signals. Much has been made on CNBC of the rise in $VIX since yesterday morning’s lows, but as you can see from the chart in Figure 4, $VIX is still clearly in a downtrend. $VIX would have to rise above 34, in our opinion, to break the bullish downtrend and potentially generate a sell signal for the broad market.

VIX

In summary, $SPX continues to trade within the range 880-940. It appears that resistance at the top of that range is quite formidable, but downside support could be vulnerable.

So we can buy at 880 and sell at 940.

Trade Naked » Market Decline

Mixed Signals = Trading Range

Trading Range Market