Out @ 1182.5

The initial bottom looked very good but it failed which leads me to expect a trend day down.

Long @1185.5

Still Looking to Buy

I still think the market is ready to rally for a few days. Looking at the put/call ratio, I think there were too many bulls agreeing that it was time to buy yesterday since the ratio spiked big time and closed that way:

These bulls will be shaken out today and the path will be clear for a rally. Luckily, I did not join the bullish crowd yesterday as the market seemed too expensive above 1191.

But I am ready to go long today. Depending on where the market opens, I will either buy earlier (after an initial sell off) or after the lunch. A level that looks good is 1186 ES, just under the overnight low (until now, at least).

Ready to Go Long

The put/call ratio has spiked nicely indicating prevailing bearishness at Friday's close:

Still, the market did not make new lows after the lunch on Friday, a positive development.

Since we are in an uptrend and the ratio is currently oversold considering recent previous cases, I think a buy signal has been given. I am ready to go long today after some initial weakness. My preferred entry is on marginal new lows, around 1091 ES. The Retail Sales report may change all that and I will try to adapt.

I think the market is going to rally for the next few days. I do not know whether it will succeed to reach new highs or not but we are in an uptrend and I do not want to be left behind.

One of my indications to take eventual profits will be the 5 day ema of the put/call ratio reaching the red horizontal line again:

Something Is Rotten in the State of (Denmark) China

Media exuberance over China continues unabated,

while the Chinese economy flounders.

Leading Indicators for China

Luckily, the US is around:

Leading Indicators for USA

The unknown unknowns are the most dangerous and China is becoming one. 2011 should be fun to trade!

Market Outlook

The futures sold off hard before the European open. However the European traders are trying to take advantage of the discounted prices and have bid the markets higher.

Meanwhile, the put/call ratio is still close to overbought, suggesting it is not the time to buy for a move to higher highs:

Until I see a reading close to 1 for the ratio, I expect the markets to head lower. However, I would not be surprised by a market attempt to rally from here, as it has already corrected about 25 SPX points, the average correction since September.

Timing the Correction

One of my main timing tools is the 5 day EMA of the put/call ratio. Unlike the simple put/call ratio, it is most useful for the intermediate term time frame. Here is a chart from the beginning of the bull market in March 2009:

5 day put/call EMA is black, SPX is purple

I drew horizontal lines that represent overbought and oversold levels since March 2009. They are different in bull and bear markets. The big drop (the scale is inverted) in the black series in June 2010 reached a level associated with oversold conditions only in bear markets (other instances not shown on this chart).

Since the EMA has reached the red horizontal line, a correction for the SPX is in order. During the recent bull this worked with accuracy.

For tactical moves, I use the simple put/call ratio:

I said yesterday that I expected the ratio to spike up and then start falling again along with the market. The spike has occurred. For the ones looking to go short, today would be a great time. However, the market is already down as I am writing this and today is Veterans' Day. This is why waiting for tomorrow would be tactically better in my opinion.

In order to go short I would like to see the market closer to 1220. Nevertheless, even if I sell, I will use small size since timing tops in a bull leg is more like a guessing game.