VIX , Put Call Ratio and other Sentiment Indicators.

Back in 2004,  I was getting whipped in the market even though I had the best indicators, so I used to go into the market looking at the setups and then immediately they would reverse back and I would be getting stopped out. 


I was utterly depressed at my methods and was banging my head against the walls as trade after trade kept on losing. At that point in time, I had pleasure of meeting Linda Raschke in Chicago and amazing she is, she readily lent her experience to me. 


She in her short advice, asked me look at market sentiment before putting my money in. She advised me to look at strategies that work in bearish markets and choppy markets. So I asked her what she meant by market sentiments, I told her that market was choppy doing what its suppose to do. She advised me to look at what institutions are thinking. In her words, "What are elephants doing? " " What are big boys at Fidelity doing?" She asked me look for that myself. 


So I started looking for and came across VIX and VXN as fear indices. So I started doing some research on how to use this to my benefit. So I studied this in little more detail and saw the usual range is  15 to 45. I was also using my Moving averages chart and I found amazingly that when VIX crossed 150 day MA, the market went into correction. 


Since then I have been collecting that data and plotting 150day MA by myself to get my perspective on the market. This thing has saved me a whole lot of money. 


The first wave of 2008, I completely survived but when VIX was at 45-50 level, I started treading into the market  to get my head handed back to me.  So I learnt the lesson, that one should not tread the shark infested water till VIX comes down below 150 day MA.

Recently, this indicator is having some issues. I think this is due to propagation of weekly options. Since VIX does not account for puts and calls in weeklies, hence its not giving the early warnings. However I believe there will be some adjustments made to this Index. I will keep on monitoring this signal as it might be little late but will still indicate what is going on.


Next article would be how I use Put call ratio in conjunction with VIX to understand the situations

Mentor Club

Since some of you know that I have been asked by a close friend of mine to teach his son how to trade. He is a complete newbie and I have never taught anyone like this. The only people I have taught like this are the prep Math and basic Physics student during my University days. Most of the time, I am talking to someone who has done bit of trading themselves or using some advisory service. So this should be fun exercise. 


As I am setting up the material, I am thinking  of helping some of you folks who have been asking me for one on one help, I am setting up a Mentor Club to help some of you folks out.


The goal here is to become self-reliant and help others.
(Principle of life to follow: What goes around comes around to help you (or destroy you))

This is what I am planning:

 - General understanding of markets

 - Understanding what is going on currently. 

 - Use of basic tools on hand to figure out action plan(s) 

   This might be broken down into more detailed session after the monthly performance review.. 

 - Going over the basic mindset.. how psychology affects your plan.

 - Designing a solid trading plan around your mindset with very specific rules

 - Monthly review of your trades to fine tune your execution skills and performance improvement. 

If interested, please e-mail me on marketing1977@gmail.com.


Also I plan on taking on 7 or 8 members initially. 

Word from my mentor: Trade well, turn off the talking heads, and read your charts.

Market conditions and Bullish Percent Indices

I have been talking a whole lot of investors since past couple of weeks and everyone is just talking about “What is market up to?”

Some say there is bull market somewhere? Follow up Question is Where??

Some say this is bear market? Follow up Question is “What to short?”

Some say this is sideways market? Again what is channeling and how should I trade.

Some of you guys know my view, that I am bearish since past couple of days. I have also lost money hand over fist trying to fight bull, bear and sideways market.  So I have been doing lot of introspection on what is going on with my thought process and my mind.

I was positioned with SPY puts to take advantage of this decline (three times) but next day I took some profits and bailed out as I was psychologically weak and was afraid that market will turn back and tear me up.

I referred to my article back in last year “ End of the Trend “ to get some basic perspective on why I keep on becoming psychologically weak  and give up my profits. 

I reviewed 3 rules to that I usually look at and was not following them (admission is first step of resolving mistakes)

1)      Higher High and Higher Low and Higher Closing Highs– Bull market. (check weekly chart and daily chart to get confirmation)

2)      Lower Highs and Lower Close and Lower Closing Lows – Bear Market (Check weekly chart and daily chart to get confirmation

3)      If it’s not 1 and 2 then it’s a congestion market.

Also I have been in discussions with “Isitpossible” (I think his name is Yogesh) at mysavingsplan.weebly.com on  $BPNYA as a market indicator. He has done fantastic job developing a tool to find out which ETFs are worth trading based on market conditions. His market conditions tool is Bullish percent Index of NYSE ($BPNYA). His research shows that using the 30 EMA of $BPNYA, will keep you in trend with market and average losses are reduced to 4% over history of last 30-40 years.

Market Indices such as the Dow  30 or S&P500 indices are the most readily available barometers for market conditions. However the can go up one day, down one day and chop 

around for days as we have been seeing in past couple of months and can fool you around. 

As these indices have some weighting, there might be few components moving up heavily and giving a false sense of rising markets.

What is more beneficial is to have an understanding of the underlying strength/breadth of these market trends as they show exactly what is going on underneath these indices.

  

So what is $BPNYA

 It is a market indicator developed by Abe W. Cohen in 1955 called the New York Stock Exchange Bullish Percent Index. It is relative level of market breadth. Abe was an early pioneer of Point & Figure (P&F) stock charts. The stock prices on P&F charts gives you a  map of the relationship between demand (buyers) and supply (sellers). The advantage of P&F charts is that these supply/demand imbalances are clear and easy to identify: if demand outstrips supply, a P&F bull signal (X) is generated and if supply outstrips demand a F&;F bear signal (O) is generated.

 

Abe Cohen took the logical leap that by calculating the percentage of bull signals amongst the constituent stocks of the NYSE index, he would have an accurate picture of the supply/demand relationship for the market as a whole.

For example, if there were 2000 stocks in the NYSE index and 1000 of them were on bull signals, then the Bullish % would be reading 50%.

As it turned out, not only did the NYSE Bullish % identify periods when the bulls were in the  driving seat i.e. the best time to buy stocks, but it also proved to be a one of the best contrary indicators for calling intermediate market tops and bottoms.

Abe Cohen’s original strategy for the bullish percentage was to be bullish on readings above 52% and bearish below 48%. However, as time went by, and the back history of breadth data built up, improved applications of this indicator were introduced. Earl Blumenthal’s book “Chart for Profit”, published in 1975,  introduced a series of rules to be applied to the point &  figure chart of the NYSE Bullish % or the “Bullish Bearish index” as he referred to it. The rules were further refined by Mike Burke in 1982.

I haven't studied these rules or read these books yet (hard to find them too)  but to keep it simple I follow the 10 day SMA of this $BPNYA as pointed out by CKbergin last year. 

How is $BPNYA calcualted

Bull signals and Bear Signals for this Bullish percent index are generated using following method

Stock Price	Price Movement	3 x Price Movement
0 to 5	$0.25	$0.75
5 to 20	$0.5	$1.5
20 to 100	$1.00	$3.00
100 to 200	$2.00	$6.00
200 +	$4.00	$12.00

One can adjust for the volatility of the stock this 3x movement to 4x, 5x or anything one choose. Abe chose 3x.

Lets take an example of BIDU

BIDU is trading at 123 and is trend is bearish..

Now for P&F chart to call this as Bull move, the stock will have to move $6 upwards.

Similarly lets take example of SIMG which is trading at 6.22 and is in bearish trend.

Now for P& F chart to call this as Bull move, the stock will have to move $1.5 upward from its given price.

Similar for JVA , which is in the bull move,  the stock has to reverse 1.5 downwards to be called in bearish trend.

Now since $BPNYA, measures the number of NYSE stocks which are in bullish trend.

When 70 % of the stocks are having a bullish trend, historically this means that there is lot of froth building up in the market and every TOM, DICK, HARRY stock is flying higher without proper fundamentals behind it.  Hence markets have seen heavy reversals once it reaches the 70+ zones.

Now during these 70+ zones, there might be lot of rotation going on, there might be some new stocks entering bullish mode and some leaving the bullish mode and getting bearish.  Hence you might see some weeks to months before there is a heavy reversal resulting into market corrections.

Even during market corrections, there might be new guys becoming bullish and trading those bullish guys can make you profits (JVA, VRUS etc recent example). Even during market corrections, there might be some sectors may be still bullish on their Bullish percent indices. (OILS - 42% and Restaurants - 68% are the current ones more info at the end of the article on this).  But for most of the investors, its better to go with the overall market mood and remain bearish till the signal reverses back to Bullish mode.  Usually , when the $BPNYA signal reverses, the names that will lead the market will be from these already Bullish Percent Indices and eventually new names will join the procession upwards.

Dorsey Wright in the current generation is a big proponent of using P&F chart.  His firm calculates lots of these data on everyday basis and provides very good information on various Bullish percent indices including Sector Bullish percent Indices. The names Oils and Restaurants I indicated above are from his service (I am a subscriber to this service).  

Here are some of the names from OIL sector

CGV, CLB, CPX, ETE, MIND, PTEN, RES, UDRL, XTXI

Here are some of the names from Restaurant sector

AFCE, BBRG, BNHN, DPZ, EAT, KKD, MRD

These are some of the names but as the sector starts catching up some stream, there might be some new stocks in the same sector turning bullish  but trading those names when they start turning bullish is very profitable. 

ETFs of interest this week. 

SGG, PCY, IEF, PALL, EMB, SHY, IEI, BND, BSV, TLT, FXF, UNG, FXY ICN, MUB, BZF

Next week, I will post on how I use VIX, Put Call ratios etc as another side of this market indicator coin. 

Markets in Correction

Even though markets are in correction, I keep on trying to stick some of the trades. I am not having good luck with any of these.

You can see in the performance spreadsheet that since past 1 month, mostly all the trades have been negative and there are these drawdowns. I am not worried about it as I know that once the tide comes through, it will lift all the boats.

Keep on trying and stay in the game with very very small positions. Since the sentiments have now changed, (80% bears vs 20% bulls from 80% bulls to 20% bears), I am expecting a rally anytime next week.

Keep the powder dry and wait for the setups.