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Sunday, March 15, 2009


Pullback likely soon

Here's the updated $CPC Put/Call ratio (10-day EMA) chart, with the SPX (S&P 500) chart for comparison:

You can see that the 10-day EMA is almost at a 52-week low, at a level that has preceded selloffs, not huge rallies. There's way too much call buying (usually a good contrary indicator) for us to be comfortable thinking that the market will have a huge rally from here.

Here's the updated NYMO chart, with the SPX chart for comparison:

It has room to go still higher, but it's starting to get extended on a historical basis. From this chart over the past 8 years, you can see that NYMO has rarely moved much higher:

However, the market is in unusually oversold territory now on a weekly or monthly basis, so we should be seeing higher spikes on bear market rallies, just as we saw in early November and early January. We still have a ways to go to get to those levels.

Here's a chart of the Nasdaq vs. the SPX over the last 8 years:

You can see that all the significant lows in both the Nasdaq and SPX have come after spikes down in the Nasdaq/SPX ratio, where the Nasdaq had been underperforming the SPX. Now, this ratio has spiked up, to a multi-year high, which has been a sell indicator in the past, not a buy indicator.

On the one hand, you could say it's different this time, as the recent Nasdaq outperformance has more to do with the collapse of the financial sector, which is much more heavily represented in the SPX than the NDX. Whereas the Nasdaq used to be where the speculative stocks were, now the financials are really the speculative stocks. You could also say the ratio has much more room to the upside, since it was much higher during the tech bubble 10 years ago, and last fall could have been the significant low, with last week's low just a retest.

On the other hand, this indicator when combined with the others above make it hard for us to be convinced that we're in for a huge rally from here. The daily price charts and some other indicators make us think there's a lot more upside potential, but these indicators give us pause.

Here's one of the daily price charts that indicate there's a lot more upside potential, the NYSE Summation Index (cumulative NYMO):

NYSI is coming off an extremely negative level, and has lots of room to move on the upside. However, it also has room to move on the downside if NYMO turns around.

In the very short term, there's a bearish rising wedge on the 60-minute chart, and PPO is at a level that has preceded strong selloffs in recent months:

Maybe, because the market is so oversold on the longer timeframes, the next pullback won't be so sharp, and it will continue much higher after resetting some of these indicators. However, for the time being, we're comfortable being short here and adding on any strength early in the week. Whether the next pullback results in new lows or just a shallower correction, we plan on covering shorts and getting back long for what we expect to be a strong intermediate-term rally.

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