Time to Buy or Sell?

By: Stock Barometer | Tue, Aug 19, 2014
Print Email

8/19/2014 7:58:15 AM

Good morning Traders,

For years (14 now) we have advised on several of the same indicators, which gives us a good historic perspective. One thing we know is true, is that markets never sell off when everyone expects. How can we measure this expectation?

This is our morning note to clients. Feel free to reference it, use our images or quote it in your publications.

5-Day QQQ Put/Call Ratio Chart

As you can see in this chart, the level of PUT buying on the QQQ is the most we've seen this year. This 'protection' is most often misplaced. And the mechanism (like shorting the market) causes the market to rise (or be relatively strong) as the market rises.

Why are traders so bearish? In this chart of the SPY and QQQ RSI, you can see the sell off in 2000 - if you traded through it, many people were wiped out. Why? Because the were programmed that markets don't sell off. The rally ending the 90's was dramatic. I recall it very well. We're not quite there yet. And it's never the same story. This decade it's about the Fed and Stimulus. But if you look at the price action from the 2009 bottom, you almost get a nose bleed.

SPY versus QQQ Relative Strength Chart

As the Qs make newer highs, breadth isn't playing along. While it's too call that a bearish divergence in the current move, we already have one with the last two peaks. This reminds me of 2011, except that the price action is upward, not sideways. Note - before the 2011 sell off, the market was MAKING NEW HIGHS! The market sucked in traders and took them down. That's what the market does...

NASDAQ Cumulative Breadth Chart

We've been talking about the tick lately as I've been doing some work on cumulative tick indicators. Unfortunately I can't find a good formula for doing a cumulative measure on the tick. This remains the best view - tick lows on a 5 and 13 day moving average. The sell pressure is low - which is a sign of how aggressive (or not) trading programs are getting.

Tick Chart

And finally, one of the reasons markets don't behave exactly the same as before is that there are new tools to trade and they gain more and more popularity. This trading of the VIX which started back in 2006 and trading hundreds of contracts a day is now trading millions of contracts in a day! It's periodic influence on the market (or signal given) can be seen now as more and more hedge their portfolios with Vix options, which are very fast moving. So when this indicator rises, traders are betting that the VIX is going to fall. And the more bullish traders get, the more bearish the next move will likely be. Ok, the issue is that you have conflicting indicators. The QQQ pcr is overly bearish (maybe hedging) and this is overly bullish, so that tends to make the market more neutral here going into expiration.

VIX Put/Call Ratio and Open Interest Chart

At the end of the day, we need to add a long/short stock service to take advantage of some crazy potential moves about to come in the market. We'll have more on that later.




Stock Barometer

Author: Stock Barometer


Stock Barometer is completely independent. We have never and will not ever accept compensation from any company whose stock we recommend.

Our goal is to make you money. We offer you the tools and information to do so and leave it to you, the individual investor, to apply them in the best way possible.

Important Disclosure: Futures, Options, Mutual Fund, ETF and Equity trading have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in these markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to buy/sell Futures, Options, Mutual Funds or Equities. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this Web site. The past performance of any trading system or methodology is not necessarily indicative of future results.

Performance results are hypothetical. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under- or over-compensated for the impact, if any, of certain market factors, such as a lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.

Investment Research Group and all individuals affiliated with Investment Research Group assume no responsibilities for your trading and investment results.

Investment Research Group (IRG), as a publisher of a financial newsletter of general and regular circulation, cannot tender individual investment advice. Only a registered broker or investment adviser may advise you individually on the suitability and performance of your portfolio or specific investments.

In making any investment decision, you will rely solely on your own review and examination of the fact and records relating to such investments. Past performance of our recommendations is not an indication of future performance. The publisher shall have no liability of whatever nature in respect of any claims, damages, loss, or expense arising out of or in connection with the reliance by you on the contents of our Web site, any promotion, published material, alert, or update.

For a complete understanding of the risks associated with trading, see our Risk Disclosure.

Copyright © 2004-2017 Investment Research Group, Inc.
d/b/a www.Stockbarometer.com. All Rights Reserved.

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com