Tuesday, April 28, 2009

OEX Put/Call Ratio Hits an Extreme

Just a quick post tonight......

Today the OEX put/call ratio was 1.53. This is a very high reading. This ratio is best used as a non contrary indicator (it is a "smart money" gauge), and it has pinpointed some significant turns during this bear market. The only 2 trading days this year where the ratio exceeded today's were January 27th and January 7th. Both of those basically marked tradable tops and were horrible times to initiate or hold bullish trades.

Also, SMH, the semiconductor holders index ETF, closed below the 20 day moving average today. That may be a leading sign of where the Nasdaq is headed in short order.

Because of the implied weakness in the S&P 500 right now in addition to the technical set-up and the above mentioned OEX data, I may suggest re-entering a bearish trade tomorrow. This will be a little bit different type of trade because the exit would not be a strictly short-term exit. When the markets are in a strong, tight trend of some duration like they are now, small counter trend moves will be enough to trigger short-term extremes. That will almost undoubtedly leave the bigger portion of potential downside on the table if exited strictly with the signals I normally use.

For new traders (or those with little short-term trading experience), if getting stopped out a few times in a row (though with only a small net loss the last few trades in our case) affects you psychologically enough to scare you out of entering the next trade, then the market has done its job on you, and you will often miss a move you "knew" was coming. That is not the end of the world because you don't need to catch every move, but sometimes it leads to "chasing" a move already well under way by the time boldness re-surfaces. Wider stops with a little longer time frame can be one solution. Another is to do what I've suggested the last few trades, which is quickly reduce risk after entry, but be willing to keep getting back in until you catch a large/sharp move in your direction.

Expect a new trade suggestion tomorrow.


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