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Thursday, June 12, 2008

 

on the sentiment front


i follow a few explicit sentiment indicators, but the one i put the most stock in is certainly the ISEE put/call data. i track moving averages of the all securities index going back to its 2002 inception, scanning for overbought/oversold indications.

one can clearly see the overbought position of sentiment in the last week of april -- this is about the time i initiated a short financials via SKF. the deterioration in internals that i noted was ongoing in may, even in leadership sectors, moved me short the broader market june 4. this timeframe was also characterized by a clear non-confirmation in the ISEE may 19, and the market has really proceed downward apace since.

today we're seeing a bounce higher from short-term oversold levels. quantitative edges has noted the depth of the mcclellan oscillator; dr. steenbarger has seen his volatility envelope indicators move to oversold as well.

but i'd be careful about jumping back in just now. for one, 5- and 10-day ratios to the 50-day of ISEE will generally move to something like 80% before substantial buying opportunities arise -- in fact i also watch the 5dma of these ratios to cut some noise (seen here). large overbought peaks like were seen in the last week of april usually lead to lower prices in a multimonth window, often significantly lower; and we are nowhere near seeing oversold lows in option sentiment, much less a positive divergence of higher lows unconfirmed by lower lows in price.

in some respects, may 19 looks like a mirror of mid-march, with the opposite implication.

i suggested back in january (too early) that the market could set up, with the help of a retest showing improved 250-day lows, for a long rally. two cases were cited of new price lows being made several months on.

both these cases were characterized by an improper test of the price low, but their fault resulted not in sudden lower lows -- indeed, in both cases a hefty 15% bounce materialized -- but simply an impermanence of the bottom several months later. as a trader, the signal will be long past by then and all this of little concern. but it does especially point out the need to be nimble, especially in going short on anticipation of the first retest of 1380 -- watch those 20-days and fear them!

but it's worth noting, i think, that the aaii sentiment data was not nearly so negative at these junctures as it is now. this not only has some major technical qualities of a nascent durable low, but also the sentiment component. as such, i'd expect at least one retest over the coming three months -- and then a long, strong rally -- one that flies in the face of my every current expectation....


we are not exactly several months on -- and both relapses were characterized by triple-tops where price repeatedly refused to move on. we haven't seen that yet (though, of course, we don't have to -- this is just two anecdotes). so a material attempt at new highs may yet follow even if the rally effectively ended at s&p 1440. (along with an overbought peak in aaii's bull ratio.)

but probably not quite yet -- i suspect that today's action is a trap, just perhaps in advance of a more substantial bounce from lower levels. no market goes straight down, and in fact grinding declines are often characterized by opening (interday) gaps up which are later filled by intraday trade. bottom-forming, on the other hand, is often characterized by the prevalence of interday gaps down and intraday gains.

moreover, a series of 90% down days for the component baskets of the nasdaq 100 (four, including yesterday, since may 7) and the s&p 500 reinforces the view that liquidation is incipient at the top of the range (over NDX 1970). the bottom of the range, and where the last five 90% upside days in the NDX have sparked from (the most recent being april 16), is at or below NDX 1790. it will be interesting to see if, first, we get back there -- and, second, if buying conviction in the form of 90% upside days begins to materialize again there.

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