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Friday, May 15, 2009

The VIX , CPC and Trader Sentiment

Notice the Rate of Change (ROC) indicator. Constantly lower and lower yet the lows are higher and higher. Essentially it is stuffed into a corner. The CCI is also similar. RSI shows a 4 month positive divergence confirmed by the MACD and even more positive divergence the past week(s). Its also at long term trendline support. Strange market divergence as of late. VIX made some new lows and markets were a long ways from their highs.

So something is amiss. Either the market is going way up again or traders have become fearless even on this 50 point SPX decline. I opt for the latter. The fact that the CPC was .78 much of today yet the market kept sinking is a sign that option traders are now on the wrong side of the bet. So what does this mean? It means traders are complacent. It means the market will have to WAKE THEM UP to the realities of the world.

(EWI mentioned the CPC today - and its a great theme for today along with the VIX - they didn't mention that - and its gonna look like I'm aping their stuff - oh well - sometimes things standout that you get the same conclusion at the same time - such is how EW works. I wish I had mentioned this is my update prior to when their update came out)

Daily bullish sentiment was at 88% at the 930 SPX top and had rivaled the Oct 2007 top (hat tip EWI for that stat). That bullishness needs to be worked off. The only thing that can do that is a persistent decline.

Traders have not yet had that "point of recognition" moment just yet. The VIX and CPC confirms that hasn't yet happened. Probably since the market is still above "unbreakable" 875 support as if it is some kind of magic layer or something!

The put/call ratio (CPC) is like a wind at the market's back. It powers the direction of the market's moves until the wind becomes stale and the sails of the market start to tatter. The wind (calls) blows harder and harder and the market's sails are are so tattered (buyers are exhausted) that it cannot move anymore even with lots of traders blowing the wind. The ocean current then starts to take the market backwards and traders keep blowing more wind (call heavy) trying to get the ship moving upstream again. Well it just don't work and eventually the traders figure out they had better jump on board and ride the ship downstream (puts).

Eventually as the market decline wears on all the traders "get it" and jump on board the ship riding the puts downstream. The weight of the traders in a put heavy mode keeps the ship moving downstream until eventually it reaches the bottom of the stream and catches a small wind. The ship stalls and traders jump off and start blowing wind and the ship moves upstream again. These cycles can last a long time depending on what wave and degree your talking about. Then they repeat. This rally the calls have been heavy a long time and powered the market for a long time because there were lots of buyers and little sellers as P2 predicted (volume).

Well the market is at a point where the wind was blowing hard and the ship is drifting backwards. Sooner or later the traders will have their "point of recognition" (usually a big gap down) and this is when they realize they needs to start to jump on board the ship. This is what works off excess bullish sentiment. It works at the bottom in reverse. No more sellers the market goes up. No more get the idea now.

It doesn't mean this market is heading to new lows just yet. At some point bullishness will be worked off. This point will be the end of the (X) wave in a valid ABC corrective pattern. That's how EW theory works in a nutshell. How low it goes depends on how stubborn the traders are. Real fear and doubt must occur in a "dose" to some significant degree to allow the process to reverse.

You count a valid ABC correction and appropriate sentiment indicators are "worked off" and there you have your X wave bottom. That's what we do. That's why I do Elliott waves above all else. Above the "news" above the whatever. Its sentiment. That's what makes the markets work. Stay Tuned.


  1. Eloquently put

  2. Who knew stock market analysis could be so poetic :) Thanks for your great site!

  3. please update charts and thoughts for faz and or srs

  4. Another way of putting it is that the dollar was technically oversold for too long. This prompted a huge influx of funds into emerging markets, junk bonds, and other forms of risky assets.

    Something else to look at is USDJPY on the weekly charts. I prefer viewing it on this time frame through slow stochs b/c of the choppiness and side-ways channel its been in for a while.

    You will see that it remains OVERBOUGHT Weekly but is OVERSOLD on the Daily. Interesting divergence, no?

  5. Hey Dano -- Looks like you answered my question in your earlier post regarding the VIX. Must have read my mind or I should have read your latest before posting. In either case, I guess too many have simply forgotten that we are still in bear territory and will be for quite a while! Thanks again ... flyfar

  6. Hey Dan,

    What ticker do you use for the daily bullish sentiment of the market? So far, I only know of $bpnya.

    How do I find the bullish sentiment indicator that EWI uses?

  7. Tri not sure offhand. I use $BPSPX. It peaked at 74.8, higher than the 2007 top. Its only down to 67.6 so far

  8. great note. versatile, roc does not get discussed as much.
    thank you

  9. that kenney guy sucks, he is always thinking he is the king, let me tell you, the king cant count to save his life, let alone a few followers, and his sidekick ass kisssin shanky. lol.

  10. I second that, Kenny is a bully and a baby and his counts are so off it's ridiculous. Bookmark removed--site dropped.

    And thank you, Daneric, for your objective work.

  11. Guys there is only 1 TA person and EW person I listen to and that is Kenny so knock it off. If it wasn't for him, I wouldn't know jack crap about TA. And I don't know that much so I am grateful to him for his sharing and teaching. His charts are the best bar none on stockcharts public lists.

    Kenny is one of the very few people who can count and understands the very micro nuances of EW therory. I can talk about off-the-wall wave stuff and only he can grasp it and probably vice versa.

    And he was the first to outright call P2. And that includes EWI. Pretty ok in my book.

  12. agreed. there's do d without k, and no k without d. and none of you without prechter :p

  13. Dan..

    Loved the "tattered sail" metaphor in your post.

    But is there something objective that's leading you to favor the bearish count at this point (perhaps institutional acc./dist. trend) ?

    After all, you have pointed out the sentiment indicators (esp. VIX) are actually showing bullish divergence with market direction. Any other time, these readings would lead one to continue accumulation.

  14. Fuzzy Joe, i'll be pondering that one all weekend.

    Main thing I think is that I think its too complacent. VIX woke up a bit today and its cornered like a rat in cage for many months and wants to break upwards.

  15. vix 33 is not low when you look at historical values of 10 and 15.
    also vix moves like an skf. 5-10% in a day. we could see vix at 45 in one week, potentially coming week.
    i see both nasdaq and vix to catch-up with spx and dj. oil also showed a strong signal of being bearish.
    if we end may below apr 30 spx value, that is a monthly decline and would be quite significant. if we end 2009 lower than 2008 that will tell us that we are in 4 of p1 and march lows were end of 3 of p1 with 5 of p1 coming in aug sept.
    not to worry about vix perma bears.
    thanks daneric for your charts

  16. Amazing market analysis.
    You relate current VIX, CPC and SPY in a coherent interpretation. It makes sense, really like the "complacent" term.
    i have in my watchlist many stocks that i follow. For me wednesday was a key day, the down volume that i saw was big and the volume in the up thursday day was 25%, 30%.
    On friday oil, steel and carbon stocks sold off.
    Thanks and keep up the good work.