A market within a trading range with high volatility offers little in the way predictability other than playing the extreme moves of the range.
This past week saw a penetration of the August lows on an intraday basis. For now, the SPX is back in the range of 1120-1220 or so.Unless you’re skilled, quick and lucky at picking the buy and sell points then it’s just best to wait for some trend to develop.
Trading options is difficult enough but with the wind in your face makes for dire consequences if wrong. While we cannot predict the future using technical tools can certainly give a hint to momentum and direction.
I like to look at sentiment indicators regularly, and some of the best predictors are the tallies of bullish/bearish attitudes. There are many out there and most say the same thing but depend on the timeframe.
We look for extreme readings and then go the other way (contrarian indicator). Recently we saw the investors intelligence peg a multiyear low in bullish sentiment while the bears were near a high.
This sentiment indicator takes much longer to turn than most others and could be considered a reliable one. The AAII is another indication of sentiment which seems to change directions as often as the wind in Chicago.
Lately this indicator has been flashing rather mixed signs but overall seems to be working as a good contrarian indicator.
If this doesn’t motivate you, then I don’t know what will.
The VIX is another indicator you’ll see me talk and chart about frequently. Currently the VIX is elevated and continues to show the fear associated with investing in equities (see chart below).
Put/call ratios have been high for some time now reflecting the purchase of put options (a high VIX also implies option prices are expensive for they are being chased).
Finally we look at short interest, which recently clocked in at the highest levels since early 2009. Naturally, it’s tough to look at the raw numbers on short interest as they reflect arbitrage and hedging but when the trend is rising then we take notice.
Bearish conditions can persist much longer than anyone expect. Bear market moves tend to be vicious, nasty and quick – and end with a good capitulatory move (like last Tuesday). I’m not saying the move down is over – but as the range exists the opportunity is there to trade it.