Technical indicators are firing off signals all over the place.
One day, we get a CBOE Volatility Index (VIX) buy signal and the S&P 500 rallies 60 points. That leads to overbought conditions on a few other indicators, and a stock market sell-off the next day. Then, some other indicator triggers a “buy.” And, yet another indicator waits one day and triggers a “sell.”
That explains basically how the market behaved last week. So, if you don’t like how the market is behaving today, just wait until tomorrow.
In periods like this, where the stock market is flip-flopping all over the place, there aren’t too many indicators that will give reliable, short-term trading signals. The action is just too inconsistent.
But, the CBOE Put/Call ratio (CPC) seems to have a pretty good track record this year. And, it says we should be looking for a bounce from here. Take a look…
This chart shows the total volume of put options traded divided by the total number of call options. It’s best used as a contrary indicator. In other words, when there’s a lot more volume in call options, investor sentiment is too bullish. From a contrary standpoint, that’s a bearish indicator.
On the other hand, when there’s a lot more volume in put options – signaling traders are getting scared – that tends to be a bullish indicator.
The red arrows on the chart point to the times where the CPC was quite low – meaning traders were overly bullish. From a contrary standpoint, that should lead to a market decline.
The blue arrows point to times when traders were overly bearish. That condition often precedes short-term market rallies.
Here’s how the S&P 500 responded to those signals…
The CPC signal didn’t always mark the absolute point for a reversal higher or lower. But, it was usually within one or two days of marking a decline (the red arrows) or a bounce (blue arrows).
Last Thursday, the CPC jumped to 1.31 – meaning there was a lot more volume in put options than in calls. That’s at a level which often coincides with at least a short-term low in the stock market.
This doesn’t mean we’re out of the woods and the S&P 500 is ready to mount a sustainable, intermediate-term rally back to new highs. We probably have to suffer through some more back-and-forth action before the market is ready for that.
But, we could certainly see a brief two- or three-day bounce in stock prices get started right away.
Best regards and good trading,
Jeff Clark
Reader Mailbag
In today’s mailbag, one Delta Report subscriber responds to Thursday’s Market Minute, with a story of their “goat”…
I went for the $5,000 trip…
I bought NVDA (Nvidia) at $15. Of course, I felt like I had better than 50/50 odds. I got the goat when I sold a $50 call option while the stock was in the low $40s. I thought the stock was stalling and I went for a little option contract payment. Before expiration day, NVDA’s financial report came out and their stock jumped more than $20 overnight. I immediately bought the call option back at opening of the next day and for a steep price, but my reasons for selling the call had vanished. I didn’t do my homework and if I had, I would have never sold the call option to begin with.
I took the “$2,000” when I felt I had a good run and the stock began to bounce back and forth between $180 and $190. I sold my shares for $186 and only monitored the stock to see if I could buy back in at a lower price, but was very happy when I walked away.
At that point in time, and even today, I feel NVDA will only go up, but I am HAPPY.
I avoided a second goat: Even when an analyst was suggesting to buy NVDA on September 9, 2018 for $280, I sat comfortably knowing I was done with the trade and had moved on to a new trade. Today, the stock price closed at $239.53.
I feel that reading your work has given me the knowledge to make better decisions in the market and most definitely given me confidence using options. Thank you.
– Michael
Can you think of a time when you “got the goat?” Or are you more concerned with the current back-and-forth action in the market?
And as always, if you have any other trading questions, stories, or suggestions, submit them here.