Saturday, March 7, 2009

Where's the FEAR?? Part 2: Charts and Analysis By Tom Bowley

While I acknowledge that market bottoms can be carved out without extreme pessimism, this type of pessimism usually does form during emotional markets. I would certainly be much more confident about trading a rebound in the market if the pessimism reaches an extreme level first. On the S&P 500 chart below, I've highlighted recent market bottoms, the 5 day moving average of the equity only put call ratio at that time, and the subsequent gains realized off of the panic bottom. It's important to note that the average equity only put call ratio reading since the CBOE began providing the data in 2003 is .67. The average since September 1, 2008 is .79, much higher due to the increased fear overall. From these numbers, you can see that any move of the 5 day moving average above .90 should be respected.


DeltaMark said...

Would it make sense that we have already seen capitulation a few times in this bear market and its just statistically improbable to get another "crash" this deep in the bear and this far below the 200 day moving average? I guess anything is possible as this bear is making history every day. But i have heard numerous people say that they expect the selling to just exhaust itself. IMO the panic we saw in oct and nov last year was mostly long selling as over leveraged hedge funds were caught and forced to liquidate. Howeverm this decline is brought on mostly by short sellers pushing stocks down due to absence of buyers.

Stewie said...

delta: ANYTHING can happen in the market. That's where most people makes their mistake sin trading is b/c they assume that something will not happen. You could have made the same good argument you are making right now at DOW 10000. Right? I am talking to smart traders who predicted and traded this whole move down perfectly are calling for DOW 3000. Go figure...who knows? just gotta take it one day at a time and trade the patterns that print infront of your eyes.

Cliffynator said...

Hey Stewie, I'm still just a newbie myself. But I could see Dow 3000, if you draw a support line from early 1999, touching the lows in '02-'03, and continue to intersect with our current path. Granted, there are several consolidation points along the way, but I'd say anything is possible! I'm actually thinking that if it DOES go that far, it'll get to about 3300-3400.
But there is one thing of which I feel sure, and that is that when we bounce up, it'll be fierce! Look at every trend in the whole history of the Dow or S&P, and you'll see that everytime there was a drop as severe as now, the recovery shot up at the same angle.
I expect it to happen, so now I'm just wondering who will try to take credit for it.

Blog Archive