Tuesday, September 29, 2009

Last day of the month...where is the start of a 3?

Where is the start of that (iii)? Heck any 3? Tomorrow should give us a clear indication of where we are. If there is not a sharp decisive drop, I will have to reevaluate the count and where (ii) has peaked or whether (ii) is a more complex correction, or even if P2 itself has peaked. But for now, there is not more to do than wait.
Here is a chart that I haven't posted in a long time. I came upon it when I was comparing ratios of random indexes to see what I could see. Note what happens when the 30ma crosses the 50ma from the top (the blue lines). This is a hard one to think about. The ratio of the index put/call ratio to the equity put/call ratio, what does that tell you? If you think you know, feel free to write in the comments about it.
BPSPX:CPC of course still has not crossed...but it close. I suspect a cross in the next few days.

Again tomorrow is key, if we do not get the decisive decline, then there is probably something suspect about my current count.


Anonymous said...

The mayority of people think that we are near a bear leg and they take their defense for their equities whith the index put/call.
Congratulations for your excellent blogs.
There are a mass media says all people is bullish, but I don't believe it.
J. from Spain.

Michael said...

The indexes like SPX, SPY, DJX, DIA, RUT, and NDX are used to protect against downside risk due to long exposure in equities.

Per the Chart $CPCI:$CPCE notice:

1. On the CBOE Options Index Put/Call Ratio $CPCI, there is a high volume of puts compared to calls. This is bearish.

2. On the CBOE Options Equity Put/Call Ratio $CPCE, there is a low put volume compared to call volume. This is bullish.

By managing Delta (i.e, TOS Monitor page) in your portfolio, neutralize your risk exposure such that if the market goes up you make money and if the market goes down you make money. Options were designed to mitigate risk exposure. So your portfolio at the close of market each day looks just "Mini Me" version of the market makers inventory. It's flat - has near zero bullish risk and near zero bearish risk.

Also, regardless of EW count, there are some big earnings coming up on some bullish names: AAPL, GOOG, BAC, C, GS, JPM, and GE to name a few. So the hedge would be to buy limited risk bearish spreads on the indexes to negate the on going pump up implied volatility (Vega) on these equities queued for earnings.

Pokerden said...

If that is the case, the equity options should have more puts as people would be hedging their equity positions equally.
Everything you wrote is correct though. So is it a case where the $CPCI reflects more skilled buyers?

Michael said...

Yes, I think the indexes represented by the $CPCI reflect non-retail traders.

But in terms of position dissection, I question how accurate raw put and call counts are?

For example, consider these valid synthetic relationships:

A long underlying (+U) Stock position is equal to a long at-the-money Call (+C) and a short at-the-money Put (-P)

+U = + C -P ---> Bullish

A short underlying (-U) Stock position is equal to a short at-the-money Call (-C) and long at-the-money Put (+P)

-U = -C +P ---> Bearish

A long Put (+P) position is equal to the same strike long Call (+C) and short Stock (-U)

+P = +C -U ---> Bearish

A short Put (-P) is equal to the same strike short Call (-C) and long Stock (+U)

-P = -C +U ----> Bullish

Likewise, solving for the remaining +C and -C,

+C = +U +P ----> Bullish

-C = -U -P ---> Bearish