Before The Bell

Is It Going To Go Down?

Friday, July 1, 2005 8:30 am ET

by David Yu

The past 2 days' market action seemed to indicate that the market is going to continue its downturn. In addition, 6 out of the past 8 Fridays were all down days.

While the market may be in a long-term downtrend, it may not be ready to go down just yet. For one thing, yesterday's market action seemed to be another FOMC effect. Although the market had reacted negatively to each of the past 3 FOMC meeting announcements, it had bounced back every time.

This crude oil chart shows the cyclical commodity trend indicator, Commodity Channel Index (CCI), had just turned negative. It had been staying over 100 since it moved above 0 in May. The last time it fell below 0 after staying over 100 for a while was in March (black vertical dotted line). That marked the beginning of crude's downtrend, and it fell from almost $60 to $48. As a result of that, the market did put a little rally together (blue trendline).

And then, there's the CBOE Total Put/Call Ratios. The negative market action yesterday had actually lowered the ratio. This means there were more call options (right to Buy) than puts (right to Sell). This indicates continued bullish sentiment among options traders. This bullish sentiment is also shown in the new downtrend channel after it reached the recent "oversold" level of 1.02.

This ratio has an inverse correlation with the market. A good example would be the recent QQQQ trade. I began to establish short positions after this ratio hit 0.68 and started rising. I took the profit when it reached 1.02. Right now, this ratio, at 0.77, is not in the "overbought" area where it warrants any major selling activities yet.

Looking at these "non-confirmation" indicators, and others that are not shown here, I'm wondering whether the market is ready to go down just yet.

email: david_3011 @ yahoo.com

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