Thursday, May 29, 2014

Early Signs of Complacency

A couple notable (in my opinion) technical signals of market sentiment have occurred recently.

Recently the VIX closed below its lower daily bollinger band.  While not a cause for immediate selling, this gives us some indication that shorter term volatility is possibly out of balance, and so depending on your time frame of trading you can use that information to adjust stops or make exits or exit plan contingencies.

Also, the VIX/VXV ratio recently closed below its 126 day lower bollinger band.  Again this mostly indicates a strong market that has some room to move up left in it.  Prior signals have occurred 1-2 months before the major corrections of 1+ month duration in stocks.

The 5 day average of the total put/call ratio has been neutral for some time with respect to its bollinger bands, but over the last week, it has moved sharply lower and close to its lower bollinger band.  If it moves outside the lower band, then that has been an excellent signal in the past to sell positions near the top of a major leg up in stocks, and await a new intermediate term buying signal.

So to sum my analysis of these real money sentiment measures, stocks likely will move somewhat higher for at least a few weeks.  If you are long, use this information simply to determine stop adjustments and plan ahead for possible exits on your positions if/when the market moves higher and we see an appropriate signal.

No comments:

Post a Comment