Thursday, January 1, 2009

Short Term Over Bought

Figure 1 is a daily chart of the S&P Deposit Receipts (symbol: SPY), and the composite indicator in the bottom panel is an oscillator constructed from the following data: 1) $VIX; 2) Put Call ratio; 3) NYSE advance decline; 4) NYSE volume.

Figure 1. SPY/ short term oscillator

The indicator value is in over bought territory. The vertical purple bars highlight the previous 9 over bought readings going back to April, 2008. As you can see, 8 out of these 9 over bought readings led to either an intermediate term top or sideways movement in prices. The lone exception is the vertical bar with an oval on it; this occurred in July, 2008. Of interest, this is the one over bought reading associated with a significant up thrust in price - in other words, the 5 bar moving average of price actually closed outside the upper trading band (see red arrows). This kind of price action is noteworthy and exceptional. But this was the only such occurrence in the past 8 months.

In general, I am not a big fan of oscillators as they tend to fail in trending markets (i.e., over bought becomes more over bought). It is my belief that a significant upside move should be accompanied by a significant up thrust in price. This has yet to occur with the SPY on this current rally off the November lows.

Figure 2 is a daily chart of the Power Shares QQQQ Trust (symbol: QQQQ); the indicator in the bottom panel is constructed from the following data: 1) $VXN; 2) put call ratio; 3) NASDAQ advance decline; 4) NASDAQ volume. Currently the indicator is only heading towards over bought, but past over bought readings over the past 8 months generally have not led to higher prices. A recent price thrust is noted with the oval.

Figure 2. QQQQ/ short term oscillator

The bottom line: we have a short term over bought market within the context of a bear market. The market has lifted over the past 2 days on non-existent volume. The sentiment picture has been discussed. In the absence of overwhelming price action and breadth, my over all impression is that rallies are better selling opportunities.

Lastly, I will continue to watch the key price levels as the various ETF proxies seem to be trading around these areas of buying and selling producing choppy trading conditions. It would be nice to have a move above (or below) the key support (resistance) areas that is also a significant up (or down) thrust.


Anonymous said...

Fantastic blog! This is a real find. I did have one question - can you discuss the Rydex ratio at this point? I saw an old post you did on it and from the data I've seen it should be an interesting post right now. Thanks again and keep up the amazing research!

Guy M. Lerner said...

Thanks for the feedback.

The Rydex asset data seems to change depending upon the market cycle we are in and therefore making it difficult to follow. Should we follow the bulls? Or fade them? Like most secondary data (non-price) it goes through a spell where it just doesn't work anymore. The last 8 months or so (something like that) has been that way for the Rydex data. Nonetheless, I will post some charts regarding the Rydex data next week, and I will also give you some insight as to why the Rydex Asset data may now be the smart money and not the dumb money.