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Friday, July 17, 2020

Extremely low put/call ratio 7/17

The test of the June high continued all week with no resolution.

Monday gapped up and tested above the June high, but reversed sharply in the afternoon.  SPX rallied back strongly on Tuesday.  However the last three days saw a tight range and no break out above the June high.  We will have to wait until next week to find out if this is a double top or a bullish cup and handle pattern.

The Monday reversal in QQQ was much more dramatic than SPX.  The high flying big cap stocks took a hit.  Notice QQQ has not made up the ground it lost in that sell off like SPX did.  If profit taking continues in the high flyers SPX will go lower. 

The green count jumped up to overbought levels on Wed. and SPX made no further progress.  The short term indicator in the bottom panel is still showing significant divergence from the June high.

The all company advance/decline line is showing a slight divergence.  Every internal I have looked at shows some negative divergence.

This chart shows the 10 DMA of the put/call ratio (blue line).  That line getting this low is usually associated with a sizable pullback.  All prior instances since 2009 have seen pullbacks.  The occurrence in late 2010 took a few months.  Most of the signals make a short term top within a few weeks.   This signal was at the June high so it has already been over a month.   Excessive optimism seems really odd in our current situation.  The fundamentals are not good, so why all the optimism?

There are technical reasons the market might turn down from here.  Divergences do not mean anything until price confirms them.  If the market breaks out above the June high on Monday all is probably well.  If the market turns down instead, I think we can expect a sizable pullback.  SPX would have a double top lower high pattern which sometimes leads to big declines (i.e. late 2018).  I think the resolution should happen early next week.

Peace and good health to all.  Have a great weekend.


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.