The trend of the $SPX chart is clearly bullish: higher highs and higher lows, with all significant moving averages trending upward. There should now be some support near 3150, which was a minor double top prior to the latest move to new highs. Below that, the December lows at 3070 provide stronger support.
Equity-only put-call ratios are arguably our most bearish indicators at the moment. Both are on sell signals now.
This article was originally published in The Option Strategist Newsletter Volume 4, No. 9 on May 11, 1995.
We have written about the usefulness of the equity and index put-call ratios in attempting to predict the direction of the stock market. The ratios are useful in that we can see when "too many" puts or calls are being bought and interpret them in a contrarian manner. For example, if "too many" puts are being bought, then speculators are bearish and, by contrarian thinking, we should be bullish. The main problem with any contrary indicator is in determining what is actually making up the data.
Overbought conditions proved to be more than the positive charts of $SPX and $VIX could handle, and there was a sharp, but short-lived correction this past week. That correction ripped right through the first support level at 3090 on the $SPX chart. However, support held at 3070 near an area (3065- 3070) that had previously been support, so it is now reinforced.
John Bollinger has done a lot of work discussing the ramifications of the width of Bollinger Bands. In short, if the Bands are too close together (too compressed), then volatility is “too low,” and the market is due for an explosive move – probably to the downside. Conversely, if the Bands are quite far apart, then volatility has gotten “too large” and a contraction in volatility – and probably a stock market rally – is at hand.
Stocks continue to move higher without much interruption. A very slight pullback last week triggered a couple of sell signals, but those were quickly obliterated by another strong rally this week. The market remains overbought, but "overbought does not mean sell."
$SPX traded and closed at new all-time highs on the last three days. It has now done so 13 times since October 28th. The upward trend is strong, and moving averages are rising quickly along with the Index. There is sup
This article was originally published in The Option Strategist Newsletter Volume 14, No. 17 on September 9, 2005.
In our last issue, we discussed the general concepts of leverage: trading stocks on margin, trading futures, and options – either long or naked. The most important point that was made is that leverage is neither inherently good nor bad, for it is within your control. If you want less of it, then boost your investment to reduce the leverage; if you want the maximum amount of it, fine – but be aware of the increased risk and reward percentages that accompany high leverage.