Equity Put/Call Averages and US Dollar Index

Click on Chart to Enlarge

The chart above I have shown several times in the past. It is simply a 21 and 34 day moving average of the daily equity only put/call ratio which is a good contrary indicator to follow. The way I use the chart above is pretty simple. When the shorter-term average crosses above the longer average and they point upward, that could be thought of as a "sell signal" for the market. Almost always I have found that this particular set-up occurs after a intermediate term high has been made. That is it tends to lag price a bit. That makes sense because the equity only options have a solid history of being reactionary rather than precautionary.

As of Thursday's data, the averages had crossed and both pointed up. They have flattened back out a bit the last 2 sessions. Based on some other data it seems that a reasonable expectation would be for at least another marginal push to new highs before an intermediate term top. Personally I have a rule of thumb that I don't try to catch "the last wave" so to speak when the table is set in the opposite direction. However, I do tend to take every opportunity at catching the first move in a new trend because they tend to be explosive with very high reward/risk ratios.

Click on Chart to Enlarge

This chart is a weekly chart of the US Dollar index as of last week's close. I have circled a few similar candlesticks in past data. It is a type of hammer candlestick with a long tail and a small real body that closes in the upper quarter of the range. It is not the textbook hammer candle because of the little upper shadow, but with a close above the open in the upper part of the range, it probably makes little difference. I like these candles on weekly charts for attempting trend reversal trades (particularly bottoming trades).

The MACD above is about as oversold as it has ever gotten, and is starting to flatten out indicating waning momentum. The EUO trade from Friday is a bullish dollar fund and has a similar nice hammer candle. While I realize most people following the blog may not be too into currencies, the valuation of the dollar means everything in terms of the mending of our economy and reduction of debt.

Maintain the current stop on EUO until there is some sense of direction this week. Despite the solid gains in stocks today, the dollar gained. This may be a hint at underlying buying interest in the dollar, so it would not be surprising to see further gains this week without a substantial retracement of the move off last week's low.