Sunday, February 7, 2010

Fear Not Yet At An Extreme


The equity only put/call ratio (CPCE) is an excellent way to gauge greed and fear in the market. In general when the CPCE reaches into the 1.0 to 1.1 zone and the 10MA of the CPCE reaches the 0.85 to 0.90, the level of fear is commensurate with at least a short term bottom. Friday, the CPCE broke out above an important downtrend line confirming the correction that began on January 20. The PPO of the CPCE has yet to break out, but it appears it may break out soon. Prior important bottoms occured when the PPO reached the 20 to 30 zone, but at least above 15, which it has yet failed to do.

We can conclude from the above that although the level of fear has risen recently, it has not yet reached a level that would support an end to the correction. We should be able to pinpoint the end of the correction when the CPCE approaches prior extreme levels.

A rally of 1 to 5 days should occur next week. Traders should be cautious about entering new long positions as the rally could end without warning. The best stance would be to wait for new short setups toward the end of the rally with the view that the next leg of the correction will follow soon. The expected completion of the correction is the end of February to the first of March.

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