Yesterday, the market gaped up and rallied strongly. It consolidated in a tight range near the days high for the balance of the day. This gap was actually a buy set up on the a daily chart and the rally quickly went to resistance at the prior pivot high. The should be no surprise todays price action would be muted. The market still has a bullish bias buy with another advance to a resistance level it could rest or pullback.
While the bullish bias was correct for yesterday, it was not so easy to find an entry for trades. The market gaped up a lot, and went on to trade higher very quickly without giving the pullback that would have been preferred. Those who were swing trading got the entire move in a testament to getting in on the beginning of a move. There will be many novices that watched yesterdays rally and waited until near the end ‘to be sure’ before buying getting them little gain for their risk or perhaps even losing. This is why having a plan to follow and actually learning how to trade is better than emotion.
Several economic reports came out yesterday and today which all fell into the disappointment column. The ISM number reported yesterday for July was not as good as June falling .7 but did beat expectations.
Retail stocks are down the most at the time of this writing today perhaps in line with the Factory Orders report , consumer spending, and the Pending Home Sales Index report. Pending home sales sank 2.6% in June. This was the lowest on record back to 2001and 19% down from June 2009 the National Association of Realtors announced. The report provides a near term sales activity measure as there is usually a one or two month lag between a sales contract and closing.
The commerce department reported Americans were saving more, shopping less, and not getting pay hikes for more work. Their report showed more evidence of stalled spending. Incomes were flat overall as was spending for the third consecutive month.
Factory orders dropped 1.2 percent in June to a seasonally adjusted $406.4 billion, the Commerce Department also said. It was the second consecutive decline after nine straight months of gains.
A question came about from yesterdays comment about China’s and Europe’s market rally. Europe rallied on some economic strength and China rallied on some numbers showing they could be moderating. Europe is clearly in the same quagmire we are but worse and economic strength is a very good thing ; whereas China is considered to be a slam dunk for growth but the concern there is overheating which could bring inflation which also has currency implications. They need to grow to help the global recovery but the government cannot let it get out of control. Just like the markets themselves economies can have ‘too much of a good thing’, and we always pay later.
Reuters reported an interesting tidbit. They wrote that unemployment rates for June in metro areas have fallen by half of the year ago levels. That is perhaps good news, but they also said unemployment is still over 10% in 1/3 of them. The chart above shows unemployment for the US over the dates shown.
After the dour economic reports it is no surprise that the market did not just continue to rush upwards and spent the morning pulling back. But more to the point it was at resistance after a strong run up. Not the time to buy, but rather a time to sell or sell some for intraday traders. And perhaps sell some for swing traders. The bias remains bullish for now.
The Put Call ratio is a market sentiment indicator. It is a mid term ‘sentiment’ indicator that uses option trading as its basis. Basically people buying calls are bullish, and people buying puts are bearish. Finding out how these two groups of traders compare is what the Put Call Ratio does.
Two places it can be found is on Stockcharts.com or CBOE.com, the Chicago Board Options Exchange website that actually puts the Put Call ratio ratio together. The CBOE site is rather complex with lots of things going on, but may also be interesting to many traders and investors with all the information they report and provide.
Each day, the CBOE adds together all of the call and put options that are traded on all individual equities, as well as indices like the OEX, or S&P 100 and calculates the ratio as:: Volume of put option contracts / volume of call option contracts.
On days when the major averages perform strongly, the number of calls bought typically far outweighs the number of puts. On these days, greed prevails and the put/call ratio may be very low – perhaps in the neighborhood of 0.70.
On days of big market weakness, however, fear prevails and the number of puts purchased is generally greater than calls – possibly reaching 1.10. While 1.0 might seem to be a neutral reading, there are more calls than puts bought over time. This coincides with the overall history of people generally being more bullish than bearish, and that far more traders and investors play the long side than short. As such, a reading of around 0.85 is about “normal” on this indicator.
The put/call ratio works well in conjunction with overbought/oversold indicators such as the McClellan Oscillator that was already covered this week in a prior article. When you begin to see consistently extreme readings across several different measures, it is a good sign that a market reversal may be on the horizon. Never trust just one indicator by itself as you can be misled.
Traders can recognize these signals and incorporate them into their trading plan. Using the put/call ratio as a contrarian tool can help you avoid getting swept up in the prevailing sentiment, which often leads to buying when the market is high and selling when it is low.
Values that could be considered extended for the Total Put Call ratio are: .7 to 1.05. Approaching and exceeding these ranges can signal a reversal.
Trade with a plan.