Further Signs of Excessive Complacency From Put/Call Ratios 1-15-17

As of Friday's close,there are further signs of a stretched or imbalanced condition in the put/call ratios which suggest that stocks may be within days of an intermediate high.  The table below shows when there is a "sell" signal from the total put/call ratio while the equity put/call ratio is at a longer term complacency imbalance.  I have removed clusters and we are left with some notable tops in recent years.

Click on Stats to Enlarge

I have looked at the data from a few angles including:

• total put/call "sell" while SPY closes above bollinger bands = BEARISH
• total put/call "sell" while equity put/call ratio is imbalanced = BEARISH
• total put/call "sell" while MACD daily and weekly are UP and SPY closes UP = BEARISH
• total put/call "sell" at a 52 week high = BEARISH

The total put/call "sell" is a 5 day average that is more than 1 standard dev. below the 20 day average.

Also recently there has been a cluster of days where the VIX rises while SPY also rises.  I have looked at the in conjunction with a relatively low VIX/VXV ratio and it is mildly bearish over the next few weeks on average.

Also, I have a "gap indicator" which factors into account cumulative gap direction and relative size and over the last week it reached to an extreme level indicating possible "exhaustion".  I filtered that condition with times when price closed above the bollinger band, and the result is also moderately bearish looking out to about 1 month and then results are typical after that.

Also I looked an example of extreme price momentum in SPY, where the daily and weekly MACD are both positive and in an UP position with no bearish divergence and price has closed above the upper bollinger band on SPY for 2 consecutive days.  Removing the 2018 instances from the last couple weeks, there were not many instances but 3 out of 5 showed sizeable pullbacks of greater than 2.5% over the next 2 weeks.  The negative skew didn't last longer than a couple weeks, but possibly this extreme momentum puts stocks at a spot of probable near term "profit-taking".

So in summary, on a long term basis stocks have historic levels of complacency and indication that the investment crowd is very "one-sided" in the bullish camp, creating a condition of long term risk for stock prices.

On an intermediate term basis, I put the most weight on the put/call ratio studies mentioned above based on personal experience.  And currently, this real money gauge is suggesting a negative skew to forward market prices for several weeks or months.

And in conjunction we have some signs from VIX, gaps, and price momentum, that stocks could be near to a shorter intermediate term correction when comparing to past similar data.

Looking at price cycles currently active in the market, SPY is currently near a peak of the upward portion and from my most recent analysis, the currently active cycles will be creating a downward pressure for several weeks. 

Pete

SPY Is Testing the 50 Day Moving Average Again

Click on Chart of S&P 500 to Enlarge

In a recent post in July called Testing 50 Day Moving Average, I briefly discussed a not uncommon instance of price action where the S&P 500 had consolidated at the 50 day moving average and had touched it several times in a row or in a cluster without much directional price movement.  Since that post we saw a similar thing happen in August and we are seeing it happen again now.

Refer back to that post to get the idea of what to expect.  Basically they often resolve with a sizable gap.  And we are indicated to gap down this morning to near the bottom of the recent short term range.  I would expect a move to new corrective lows based on this type of price action.  But as occurred in August, it could be an exhaustion type of move for the correction if the uptrend is to persist.

Also just to rehash the price logic situation a bit here, unless SPY is below 162.95 by Thursday of this week, then the price logic would still suggest an upwards trend.  That doesn't mean a high can't have been made and support won't be broken, but it does give us an indication that the market psychology did not tip the scales to downward coming off the recent high.  And it could very well be an indication that the uptrend will continue as we reach the seasonally strong portion of the annual stock cycle from November to April.

So if prices move to new highs, I would suggest having a breakout buy strategy in the works with stops already thought out.

Some Fibonacci Ratios to Consider

Click on Charts to Enlarge

The chart directly above is the S&P 500 cash ($SPX). Most of the notes on the chart I have mentioned at some point in prior posts, but I thought I'd bring them all together.

The most important thing I wanted to point out is that the advance from the July lows to today is an almost perfect golden ratio relative to the March to June advance. For those who don't track Fibonacci relationships much or have never seen them "work" this won't mean anything. I have looked at so many charts and seen so many "harmonic" relationships in corrections, that I have no doubt what so ever that these ratios show up in various ways in stock prices. The especially interesting thing here is that the perfect 0.618 relationship of the March-June advance projected up from the July low, almost pinpoints the top of the gap down on 10/6/08. It is at times amazing how the relative sizes of various moves relate to create Fibonacci relationships between key psychological points in the market. Even more amazing is that a basically exact 161.8% (inverse of 0.618) extension of the January closing high to the March closing low coincides exactly at the level of that gap down as well (see chart below).

This really struck home this February when I saw a somewhat similar thing occur. Without going into the details, there were gaps in the decline last November that were at precise locations dividing the decline into Fibonacci based sections. Then the exact middle of that leg down became the apex of a contracting type pattern at 875.75ish on the S&P. I was then able to use the projection of the % decline of that November leg down, down from the apex in conjunction with another specific type of harmonic pattern to project 650-670 as the next likely bottoming range for the S&P. It bottomed at 666 and I posted a blog trade on the day of the low. The point of this is that when these things start to come together, it is possible to go on trading runs like shooting fish in a barrel, which was basically how it went from January through March of this year.

So, this all could be a waste of time and the market could go up forever or just make a muck out of anything I've talked about, but the Fibonacci ratios relative to the position of the gap are a fact regardless of what happens here, because it is all based on past price data. There is also an interesting breakdown of the July-present advance if a top happens here. I have basically put the info on the chart, but won't go into much on that, because I am just speculating on a top here.

In any case, I feel that the market is talking Fibonacci language and I'm listening.

Click on Chart to Enlarge

Gaps and Bases - SYMC and AAN

Click on Chart to Enlarge

The chart above is AAN. It has earnings tomorrow I believe. I wanted to post a few charts looking at how to interpret gaps and factor that into your analysis. AAN shows a couple decent size gap ups off the Nov low, with the first never being filled and the second one acting as support on the subsequent declines. Then in April there was a huge volume gap up which has been acting as support on the recent pullback. The decline after that gap makes a double bottom kind of base if you are familiar with Investor's Business Daily names for bases. Big gaps like this should either not be filled during a stock's run, or they should at least act as a support area. So look at the charts for the notes, but this could be a possible breakout play to buy the stock. However, any move below the recent low should negate some positives of the pattern.

Click on Chart to Enlarge

The chart above is SYMC, Symantec. This chart shows a monster volume gap down in May which looks to be a breakaway gap down. Gaps of that size and volume will typically not be completely filled on a subsequent rally. However, an ideal shorting opportunity can occur when price moves up into the gap area with an ABC type of correction. A stop would go 1 penny above the high in May. Also, as per IBD suggestions for shorting, first and foremost you want to see the market in the early stages of a correction to consider shorting. That is debateable right now, so it may be worth waiting for how IBD suggests entering, which is on a large volume (volume > 50 day MA) close back below the 50 day MA and then put a stop no more than about 7% above your entry.


Other stocks with pretty good looking breakaway gap downs are GRMN and WAG. So anyone interested could look further into those charts if interested in shorting.


This weekend I went through the charts of all 500 S&P 500 stocks to try to gauge whether this recent rally is an exhaustive type of move or a breakout type of move. I didn't come to a solid conclusion, but I found quite a few stocks that look set up for major longer term reversal from a pattern analysis. On the other hand, there are many stocks breaking out above recent highs on heavy volume. They are well extended from any type of longer term low risk buy point or from any type of major basing pattern. So while strength is strength, I don't know how long it will last.


There seems to be a major disparity right now in view points on the market. From reading comments on a bunch of blogs, there seems to be such a panic among bears and even several who decided to go long the last couple days, that this may be a last major shakeout of bears before a major decline. There are both Mega Bears or Mega Bulls right now, and the synthesis of the psychologies makes for a very uncertain consensus in the retail trader's mind from my take on it.

What Might Happen Today.....

The VIX rose by more than 20% yesterday. When this has happened it has consistently led to short-term market rallies with the peak gain coming around 4 days later.

In looking back at the past instances of these VIX spikes over the last year, I have seen a tendency for the markets to gap up the next day, which occurred today. However, it was far from smooth sailing after the open. In several instances the markets fell hard during the day to actually undercut the prior day's low significantly, and then stage a very large rebound before the close to end up in positive territory.

SPY is appoaching yesterday's low as I type, so we are halfway into that pattern again. I would be more inclined to try to pick a bottom reversal today than on most days. I would follow the 15, 30, and 60 min charts today to look for a hammer reversal type of candlestick occurring on heavy volume after the markets break yesterday's lows.

Also, I have mentioned several times on this blog that filling and reversal at key gaps is a key part of my methodology for selecting good trade entry points at short-term extremes. The large gap up at 79.50ish from the day after the Nov 21 bottom is not yet filled. I would be surprised at this juncture if buying interest does not come in when that gap is filled.

I may suggest re-entry to the recently stopped out BGU trade if things shape up well today.

Pete

Follow Up on Gaps and Short-term Status

Click Chart to Enlarge

I made a post a few weeks ago about looking at gaps on price charts. The summary is that most significant gaps are retraced (meaning price comes back to the gap point) relatively soon. Also, there should be some expectation of pause or reversal at/around significant gaps.

The chart above shows a chart of SPY (S&P 500 ETF) and shows that the massive gap from last Friday has been retraced now. That coincided with short-term oversold conditions on the model I follow. So far it has led to a little bounce in prices which I would expect.

Now the thing to look for is if this gap holds the next couple days. The short-term model is currently nearing overbought peaks that marked reversal points the last couple weeks. No doubt news about "the bailout" will trump most other factors, but I will be looking to recommend a double inverse ETF trade if the model actually reaches overbought territory.

Realize that SPY has a long way to go before moving above the last short-term overbought high which was last Friday. If it gets overbought before that high is breached, my inclination is to stay bearish for at least one more move lower in the markets.