Put/Call Ratio, Volatility Index (VIX), and 50 Day Moving Average ~ market folly

Monday, December 22, 2008

Put/Call Ratio, Volatility Index (VIX), and 50 Day Moving Average

Over on his blog, Stewie has pointed out that the put/call ratio has leveled off and implies a level of comfort from the bulls.

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But, we are also seeing a decline in volatility (VIX). Typically, such a move triggers a rise in stocks. But, instead, you have a market which is basically churning sideways.

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So, the combination of a declining put/call ratio, a declining VIX, and sideways market action could actually be a bad sign for the bulls. Not to mention, you've got the end of a year, the holidays, and typically light volume in the markets. Lastly, don't forget that we're also trading right around an area of resistance as many stocks and indexes run right into their 50 day moving averages.

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We've noted that as everything trades up into their 50 day moving averages and overall levels of technical resistance, we think it sets the market up for another leg down. And, as always, we would love to be proved wrong by some catalyst or spike above resistance with volume. But, until we see that, we will continue to await the next drop. Overall, we think this is a very key point in the markets. We are in an overall downtrend, and have seen a counter-trend rally up into resistance. If the market can break through, it could really change the game up. We are weighted slightly to the short-side as it is our inclination that resistance will hold. We would normally be more heavily weighted to the short side here, but we don't feel comfortable "anticipating" a move due to the circumstances (holidays, light volume, new administration, & crazy market in general). Instead, we'll wait for miss market to tip her hand, and then play in that direction.

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