Why a Rally on Thursday Could Be a Selling Opportunity
By
Rennie on Thursday, June 18th, 2009 at 3:23 am
The Nasdaq held up relatively well in choppy trading Wednesday, pushing the NDX/SPX ratio to a new high. Speculators remain the primary participants in this tape since the market’s upside breakout on June 1st. That happens to be the exact day that the Nasdaq/NYSE Volume Ratio broke out to its highest level of the year. It hasn’t looked back since, suggesting speculators aren’t giving up despite the S&P having given back all of the breakout gains.
The CBOE equity put/call ratio spiked higher Wednesday, closing at its highest level since March at .88 as nearly 9 puts traded for every 10 calls. More often than not, a spike in the equity put/call ratio is not a generally positive development. It suggest a spark of fear, and there’s usually some follow-through from the initial spark. One effective way to play this trend is to first identify a true spike – in this case I used 25% above the 10-day moving average – and then sell into any reflexive bounce. The table below highlights the last thirty instances in which the S&P500 closed higher immediately following a session in which the CBOE equity put/call ratio spiked more than 25% above its 10-day moving average…
Equity Put/Call Ratio 25% >10-day Avg, SPX Up Next Day
01/13/09… Lower S&P close one session later
01/08/09… Lower S&P close one session later
11/07/08… Lower S&P close one session later
09/16/08… Lower S&P close one session later
09/10/08… Lower S&P close three sessions later
01/09/08… Lower S&P close two sessions later
12/05/07… no lower SPX close next 1-3 sessions
10/17/07… Lower S&P close one session later
07/25/07… Lower S&P close one session later
07/19/07… Lower S&P close one session later
03/29/07… Lower S&P close one session later
02/28/07… Lower S&P close one session later
10/04/06… Lower S&P close two sessions later
04/27/06… Lower S&P close two sessions later
12/28/05… Lower S&P close one session later
12/21/05… Lower S&P close three sessions later
11/16/05… no lower SPX close next 1-3 sessions
10/14/05… Lower S&P close two sessions later
08/29/05… Lower S&P close one session later
06/17/05… Lower S&P close one session later
06/01/05… Lower S&P close two sessions later
04/18/05… Lower S&P close two sessions later
04/07/05… Lower S&P close one session later
04/04/05… no lower SPX close next 1-3 sessions
03/17/05… Lower S&P close one session later
02/25/05… Lower S&P close one session later
02/10/05… no lower SPX close next 1-3 sessions
01/10/05… Lower S&P close one session later
08/09/04… Lower S&P close three sessions later
07/07/04… Lower S&P close one session later
06/30/04… Lower S&P close one session later
In 26 out of the last 30 occurrences, or 87% of the time, the S&P posted a subsequently lower close (below the setup day’s close) within the next three days, significantly above the 68% at-any-time odds for a lower S&P close within three days. This setup would go into effect only on a higher S&P close Thursday.
Why a Rally on Thursday Could Be a Selling Opportunity
By Rennie on Thursday, June 18th, 2009 at 3:23 amThe Nasdaq held up relatively well in choppy trading Wednesday, pushing the NDX/SPX ratio to a new high. Speculators remain the primary participants in this tape since the market’s upside breakout on June 1st. That happens to be the exact day that the Nasdaq/NYSE Volume Ratio broke out to its highest level of the year. It hasn’t looked back since, suggesting speculators aren’t giving up despite the S&P having given back all of the breakout gains.
The CBOE equity put/call ratio spiked higher Wednesday, closing at its highest level since March at .88 as nearly 9 puts traded for every 10 calls. More often than not, a spike in the equity put/call ratio is not a generally positive development. It suggest a spark of fear, and there’s usually some follow-through from the initial spark. One effective way to play this trend is to first identify a true spike – in this case I used 25% above the 10-day moving average – and then sell into any reflexive bounce. The table below highlights the last thirty instances in which the S&P500 closed higher immediately following a session in which the CBOE equity put/call ratio spiked more than 25% above its 10-day moving average…
Equity Put/Call Ratio 25% >10-day Avg, SPX Up Next Day
01/13/09… Lower S&P close one session later
01/08/09… Lower S&P close one session later
11/07/08… Lower S&P close one session later
09/16/08… Lower S&P close one session later
09/10/08… Lower S&P close three sessions later
01/09/08… Lower S&P close two sessions later
12/05/07… no lower SPX close next 1-3 sessions
10/17/07… Lower S&P close one session later
07/25/07… Lower S&P close one session later
07/19/07… Lower S&P close one session later
03/29/07… Lower S&P close one session later
02/28/07… Lower S&P close one session later
10/04/06… Lower S&P close two sessions later
04/27/06… Lower S&P close two sessions later
12/28/05… Lower S&P close one session later
12/21/05… Lower S&P close three sessions later
11/16/05… no lower SPX close next 1-3 sessions
10/14/05… Lower S&P close two sessions later
08/29/05… Lower S&P close one session later
06/17/05… Lower S&P close one session later
06/01/05… Lower S&P close two sessions later
04/18/05… Lower S&P close two sessions later
04/07/05… Lower S&P close one session later
04/04/05… no lower SPX close next 1-3 sessions
03/17/05… Lower S&P close one session later
02/25/05… Lower S&P close one session later
02/10/05… no lower SPX close next 1-3 sessions
01/10/05… Lower S&P close one session later
08/09/04… Lower S&P close three sessions later
07/07/04… Lower S&P close one session later
06/30/04… Lower S&P close one session later
In 26 out of the last 30 occurrences, or 87% of the time, the S&P posted a subsequently lower close (below the setup day’s close) within the next three days, significantly above the 68% at-any-time odds for a lower S&P close within three days. This setup would go into effect only on a higher S&P close Thursday.