LOW PUT/CALL RATIO IS A POTENTIALLY NEGATIVE SIGN FOR THE STOCK MARKET -- POINT & FIGURE CHARTS OF THE MAJOR MARKET INDEXES -- THE SECOND EDITION OF THE VISUAL INVESTOR IS MY NEWEST AND MY FAVORITE BOOK -- I'LL BE ON BLOOMBERG TONIGHT AT 5:10 NYT
LOW PUT-CALL RATIO IS NEGATIVE SIGN ... One of things that worries me about the current market is the unusually low reading in the CBOE Put/Call Ratio (CPC). The red line in Chart 1 is a 5-day moving average of the CPC which smooths out its daily trend. The put/call ratio is a contrary indicator. In other words, a high put/call ratio shows too much pessimism and often coincides with market bounces. High CPC readings last March and November (down arrows) led to bounces in the S&P 500 (green line). Low CPC readings during October 2007 and May 2008 (up arrows) led to drops in the S&P. At present, the CPC is trading near the lowest levels of the last two years. Given its track record as a contrary indicator, that's a potentially bearish reading for the stock market.
Chart 1
A LOOK AT SOME POINT & FIGURE CHARTS ... It's been awhile since we've shown point & figure charts of the major market indexes. So let's do that today. One of the things that I like best about p&f charts is their simplicity. Alternate X and O columns are shown. The X column represents rising prices, while the O column shows falling prices. A buy signal is given when the last X column exceeds a previous X column. A sell signal is given when the last O column falls below a previous O column. We can vary the sensitivity of the chart by adjusting the size of each box. Smaller box sizes are suitable for shorter-term signals, while bigger boxes are better for more important signals. I've chosen 2% box sizes for the three indexes shown below. After failing three times to exceed overhead resistance at 8940, Chart 2 shows the Dow Industrials on a short-term sell signal. Chart 3 shows the S&P 500 in the same condition. It would have to close at 881 or higher to reverse that sell signal. Chart 4 shows the Nasdaq Composite Index in a slightly more positive position. It recently exceeded a previous X column, but has since fallen back below the breakout point. The fact that the Nasdaq is pulling back from its falling resistance (red) line is also worrisome. [P&F down trendlines are drawn at a 45 degree angle from a prior resistance peak]. An upside break of a down trendline is usually an important part of a market upturn. So far, those resistance lines have held.
Chart 2
Chart 3
Chart 4
BLOOMBERG TV TONIGHT ... I'm doing an interview on Bloomberg TV this evening at approximately 5:10 (NYT). We'll be talking about the same things you've been reading about on this site which is the fact that the market remains under pressure with the few bright spots in gold, health care, and corporate bonds. Part of the reason for my appearance is to help promote my new book, the "Second Edition of the Visual Investor". Chip Anderson mentioned the book in last week's Chartwatchers Newsletter. I hope you'll consider reading it. I'm especially proud of it.
Chart 5
SECOND EDITION OF THE VISUAL INVESTOR... The first edition of the Visual Investor was published in 1996. I said then, and repeated it again this time, that this is my favorite book because it was written for the general public and covers only those areas of chartwork that I personally find most useful. What I have spelled out in this new edition is how I go about blending traditional charting techniques with intermarket principles. I also explain which indicators I find most useful in my market work. If you've been reading my messages, you probably already know what they are. The book, however, pulls them all together and puts things in their proper order and perspective. I also believe that the new book will answer many of the e-mail questions that I get on a daily basis. The book was written during the early stages of the market meltdown during the first half of 2008. And it shows all of the warning signals very clearly. I use the term "visual analysis" to make the approach more user-friendly, especially for those readers who are intimidated by "technical analysis". And I tried very hard to make the book readable and understandable. If you can tell "up" from "down", you shouldn't have any trouble understanding visual analysis. [You'd be surprised how many Wall Streeters can't do that]. I'll have more to say about specific parts of the book in the days ahead. In the meantime, you can read more about it in the Online Bookstore. I hope you like it.
