This is Our Path to a Technical Rally.
Dear Trader,
As you guys saw yesterday after the FOMC announcement, it turned into a real gut check for the market.
The reaction was a rollercoaster – we had a crazy knee-jerk rip higher right at 2 PM, as traders were assuming a slowdown and dovish moves forward from the Fed.
Then we saw a huge shake-out as Powell started speaking – sending the market right down the drain.
I knew it was time to get you prepared for the onslaught of market moves this shockwave was going to bring your portfolio.
When I sat down and started looking at my charts, I saw a move from the Equity Put Call Ratio (EQPCR) that was so drastic that I’m still making sense of it.
One thing I know for sure, the reading of the EQPCR feels like Christmas morning right now, and the bears have come out to play.
If you tack on the momentum shift we’re seeing in the Market Breadth, we are starting to see a path out of this bear market – but we’re not there yet.
First thing’s first, look at the jump we saw in the EQPCR
Real quick reminder on why the put/call ratio is one of the most important sentiment indicators you should be watching.
The EQPCR is the put volume divided by the call volume traded on just the equities at the CBOE.
This chart has been a tease over the last couple of months, shooting up into the 0.8 range just to drop back down, leaving us with a market that’s still in denial.
Regardless of what the market is doing – as a whole – the sentiment for the market was still bullish… even amidst a technical bear market.
When it goes above 1.0, the math is telling you that more people are short the market than not.
In the rare instances – 39 in the last 20 years, to be precise – where this ratio goes above 1.0, traders tend to lose their minds a bit. When we see that happen, it is followed by them going out and buying protection – hedging their bets.
What it boils down to is, this is the first real indication that people are starting to get afraid… and it took Uncle Jerome to get them there.
It has been over a month since the last time we saw the EQPCR hit levels anywhere near the 1.14 reading we got yesterday. This dosen’t mean much in the short term, other than the rally is going to be coming to a halt sooner than most people will want.
What about the long-term outlook?
What does it mean for the market as a whole – more importantly, for your approach to trading this whipsaw market?
Do you think we are at the market bottom now that there have been two readings above 1.0 on the EQPCR?
Not even close, additional readings above 1.0 are just the first step – and the most painful for investors to get through.
Looking at past market bottoms, we need to see five or six readings above 1.0 on the EQPCR before we hit the floor. Depending on how stubborn investors are with their trades, we could even see as many as 10 readings above 1.0 this time around…
Along with that, I like to look for the 20-day moving average on the EQPCR to be around 0.85. This tells me that even when there is bullish movement happening in the market, it won’t be significant enough to stop the market’s slide to the bottom.
These times where the EQPCR is above 1.0 as a momentary blip in the market are what we call a “tradable bottom.” There is still noise in the market and traders haven’t quite thrown their hands up and said they’re done.
There’s a different indicator that caught my eye today, as well, and it will be the true deciding factor for if a bottom is a tradable bottom or if we really can’t go any lower.
The Market Breadth is something that I introduced to you several weeks ago, and how this acts will be your guide for the market bottom.
This is step two for when we can start to have a bullish outlook on the market again.
I expect the Market Breadth to hit 40 tomorrow.
It has already rolled over. Even though it will typically want to jump from one extreme to the next, it fell short this time. This indicates a shift in momentum that will likely carry us all the way down to a reading of 20…
If it keeps going and we ring that bullish bell of a single-digit reading, that is a tradable bottom.
What I’m about to tell you next is something I hate to admit, but I’m a no-B.S. kinda guy, and you all know that.
I missed the single-digit reading last time. I also promised it wouldn’t happen again…
I will be watching it closely, as this can quickly turn into a breeding ground for bullish trading – at least for a period of time.
We’re going to wait for all of the stars to align and we simultaneously get more readings above 1.0 on the EQPCE and hit a single-digit reading on the Market Breadth. That is when we’re going to throw money on the market like it’s nobody’s business and buy up shares of everything we can get our hands on.
Why wouldn’t you? At that point, the market has no place to go but up…
We’ll be in the midst of a rally that’s going to take off and even carry us to the end of the year.
We’re not there yet, so don’t jump the gun.
I’ll be right here with you to show you exactly how to trade that transitional market – and nobody can trade a transitional market like I can.
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November 03 2022
