Thursday Update
Fear Factor
8/4/2005
by David Yu
I wrote Once is Not Enough after the Dow dropped 55 points on 7/25/2005. In that article I mentioned that the fear factor would not come into play until there’s a larger down day or a few more down days like that strung together. One Sentiment Oscillator that I use may validate today being one of the larger down days that has finally brought fear into the market.
Let's look at FEAR.
Chart 2 is one of the my Sentiment Oscillators. It's similar to the one I've shown you before except that Wilshire 5000 is used as the index here, instead of S&P. Wilshire 5000 covers more than 6000 companies headquartered in the U.S.
This oscillator compares the market's performance to the option traders’ total Put (sell) to Call (buy) option ratio (Symbol: CPC). When the market's bullish and there's little fear, this oscillator is on the rise as the market outperforms the Sell-to-Buy ratio. And, in order for this oscillator to rise, the faster 9-day simple moving average (MA) must first pull ahead of the slower 21-day MA. However, when the 9-day MA (blue line) crosses below the slower 21-day MA (red line), it signals the imminent market decline. You can see each of the yellow highlighted spot, where the fast MA crossed below the slow MA, marked the short-term top of the Wilshire 5000 index in the lower pane of the chart.
And, after almost 2 weeks of uncertainty, today's action finally brought the 9-day MA convincingly below the 21-day MA. There's no question about the completion of this market top because the FEAR factor has finally returned. The only question is how extensive this decline is going to be.
Chart 1
In addition, ever since I posted this chart (Chart 3) on one of the Internet trade forum, I've been keeping an eye on the gaps. These "round-trip" gaps occurred, of course, on 7/7, the day of the London Bombing. I thought the fact that these 2 gaps were never filled was most peculiar. Chart 3 was the chart I posted on Wednesday 7/27/2005. I'll write up more details on Sunday when I have more time. For now, you can look up today's VIX chart for yourself and see what happened.
Chart 2
If there's any reservation about my analysis, it's the NASDAQ's large 3.59% "Unchanged Volume" today, according to Wall Street Journal's data. That shows hesitation, which is not all that fearful. However, I've been keeping 2 sets of data. The data according to Yahoo Finance was only 2.11% unchanged.
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