Tuesday, July 27, 2010

Fireworks?



The chart above is that of the put/call ratio plotted against the SPX. Note the latest divergence that developed between the two (highlighted by the arrows). It seems that while the market has rallied, bears have added to shorts or bulls are not very confident in the rally. A reason for this behaviour might be the 200 DMA (green in the chart below):

In my experience this kind of divergence leads to fireworks in the next few days. The most recent case is highlighted by the yellow box on the first chart.

For Tuesday, I do not rule out a minor correction (about 10 points), but that would be a buying opportunity. If I were to make a wild guess, I would say that on Tuesday the market opens with a big gap down, but rallies right from the open.

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