Wednesday, June 17, 2009

More Supporting Evidence of Topping

Click on Charts to Enlarge

The top chart is the VIX with some trendlines in green, a 20 day moving average in blue, and a 63 day Time Series Forecast in red. The VIX has now closed above the down trendline from March. It has remained above the TSF 63 on a closing basis since the last week of May. Now it has made its 3rd consecutive close above the 20 day MA, which many watch. It only barely closed above that average 1 day (March 30) during the rally since March.

The VIX is the commonly followed "fear gauge" which really measures premiums on the market value of options. When fear is high or increasing, traders will be willing to pay more in premium to make sure they have put protection. Typically a rising VIX reflects a falling market, and more demand for put options, and thus higher premiums. The fact that the VIX appears to be turning up after a long downtrend is supporting evidence that the market may be leveling off on this rally.

The lower of the 2 charts is the equity put/call ratio which is a good contrary indicator. I had posted a month or so ago about looking for a moving average cross-over and for the averages to turn up to help confirm a shifting sentiment in the options market that has been a good slightly lagging indicator of the ends of bear market rallies the last year or so. Yesterday's spike in the ratio (relative to recent readings) basically broke the down trendlines since January. Again, this could be intrepretted as a shift toward more fear in the options market and potential for future declines.

On a different note, the short-term model that I use for blog trades got solidly oversold Monday, yet failed to rebound Tuesday. Then today, there were further declines before a modest rally attempt. This type of failure to rebound from oversold conditions is often an indication of a shift in trend from the prevailing trend. Particularly if stocks continue down tomorrow or even into Friday, that would be a big hint, that this rally is in all likelihood over.


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