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Don’t get excited about the bullish reversal we saw last week. Below you see the Bullish Percentage Index. The pattern we are seeing us much like that in July, slightly after the birth of the bear market. Perhaps this time is a real bullish reversal, but I would hold off buying stock at the moment.
The Momentum Factor ETF (MTUM) gives us insight into the performance of stocks with high upward momentum. Clearly, the trend not upward but sideways or possibly downward. The moving averages have separated, the short-term line falling below. Also, the pattern here is much different from that of early July. In comparison, this current pattern seems to predict a lagging upward momentum in the market.
Volatility has started to even out after a spike. This does not mean that people are gaining more confidence in the market. It mealy means that the market does not appear as chaotic now as it did in late August. Volatility is still high relative to our recent bull market. Still, at any time, volatility can spike to its high levels last month. In the market, we often see spontaneous spikes in volatility followed by more spontaneous spikes in volatility, implying that they are dependent. That is, a spike in volatility is now more likely as a result of our past spike in volatility.
Options-based Market Analysis
Here we see the put/call ratio for index options. Clearly, the bias is toward puts. This bias is becoming stronger as more professional traders hedge against downside risk – i.e., a market crash, correction, or lasting bear market.
The put/call ratio on equities, characteristically under 1.0, representing a general bullish bias of non-professional traders, is now starting to head toward 1.0. This means that even the average-Joe options trader is taking on a bearish viewpoint:
Aggregating these two charts will give us a broader view of the put/call ratio. It can show us whether the professional investors’ bearish tilt overpowers the non-professionals’ bullish tilt. We see a clear preference for put options, a phenomenon that began in early August and is only fiercer today:
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But just looking at this chart, I can see another common pattern – one that goes hand-in-hand with gaps: the evening star. This is a very bearish pattern, as it represents a failed attempt at investors trying to “buy the dip.” It’s likely the market will fall on Tuesday.
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