In this video recorded on June 17th at The TradersExpo Dalls, Larry McMillan discusses the predictive power of the put-call ratio indicator and predicts the rally at the end of June 2011. Larry also talks about the rare CBOE equity only put-call ratio signal and the total put-call ratio and what they mean for the market.
The market’s still-overbought condition, coupled with some negative news regarding financial problems in Italy, resulted in a severe down day yesterday – a true “90% down day,” as it turned out. A late-day rally seemed to ease things a bit, but overnight the situation has been exacerbated, and S&P futures are down another 6 points in Globex trading (they were actually down 23 at one point, but positive inflation news out of England brought the markets back a great deal).
The stock market continued its bullish explosion this week. $SPX broke through its previous down trend line last Friday, and has now overcome the late-May high. All that remains is a test of the post-2009 highs at 1370.
Equity-only put-call ratios turned bullish when they peaked and began to fall. These are intermediate-term buy signals.
Market breadth has been very strong during the rally. Breadth indicators remain on buy signals, but are now very overbought.
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The week leading up to the Fourth of July holiday was a “perfect storm” of bullish activity, or at least it turned out that way. There were several technical, seasonal, and even some fundamental factors at work. There was an oversold condition, month-end window dressing, first-of-the-money seasonal factor, pre-holiday bullish seasonal patterns, and even some help from Europe (delaying the Greek credit crisis). Add it all together and it was one of the strongest weeks in recent memory.
Friday wound up one of the strongest weeks in stock market history. It was a perfect storm of events, topped off by a pre-holiday, thin trading session on the first day of the month. There are now some fairly extreme overbought conditions in the breadth oscillators. However, as we’ve explained before, these are actually bullish conditions for the new upside breakout. Of course, in the very short term, the market needs to slow down a bit and regroup.
A huge stock market rally developed this week, due to a number of factors. The S&P500 Index ($SPX) entered the week in a downtrend. Depending on how you look at things, it might still be in a downtrend (see Figure 1, blue line). But it did overcome resistance at 1300 (last week's high) and 1310, so that is a positive development.
Put-call ratios have reached extreme levels, but have stubbornly been refusing to give confirmed buy signals.
The S&P 500 Index is trying to reverse its downtrend, and appears that it has at least partially done so.
The downtrending 20-day moving average of SPX SPX +0.73% is at about 1297, and the highs of last week were at 1298. So a close above that level would change the SPX chart from bearish to neutral. A close above 1310 would turn it bullish.
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If the current rally levels hold, it will improve the $SPX chart to neutral, removing the "bearish" designation that we have had on it for weeks. In fact, if $SPX can close above 1310, we would upgrade our classification of the chart to bullish.
The rally is being backed by technicals that are turning bullish, too. $VIX is now at 17.41, below the 17.70 level that we said would constitute a buy signal for that index, too. As with $SPX, this move in $VIX breaks the bearish trend that was in place.
Weekly put option sales have been added to the analyses in The Strategy Zone (SZ) and in the Option Work Bench (OWB).
Subscribers to The Daily Strategist that follow our weekly SPY sales, are up +18% in five months, in the ongoing position that we are running in that newsletter.