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ISE Sentiment: Turbulence Ahead For The Market at Trader’s Narrative

Over the next few months and even till the end of the year, I’d be willing to “forecast” that we will close higher, but for the next few days and weeks, the market may be heading into some kind of a short term top or choppy trading.

I was looking over some different indicators to take the pulse of the market when I noticed that according to the ISE Sentiment there are too many calls being bought compared to puts right now.

In fact, the ratio is at levels which have in the past marked market tops. As you may recall from the last time I talked about the ISEE data, it only measures opening long customer transactions on International Securities Exchange. Which makes the data very useful, especially considering the growing volume of options traded on the ISE.

Take a look at the graph below which compares the S&P 500 to the ISEE sentiment data. As you’ll notice, when the 10 day moving average rises too much (too many calls bought to open, compared to puts) the market has a hard time powering ahead. It either swoons or enters into a sideways range.

There’s no magic to the number 10 by the way. Any short term moving average would smooth out the data and show you the same thing (more or less).

On Friday, the market was jolted down quite harshly. Although the move printed a wide range candle on index charts, it did not result in any sort of oversold readings. So the market certainly has room to the downside. And you have to remember that a bull market never makes it easy. It bucks at every chance to try and throw you off.

If we do see some general market weakness though, I’d really be wary of the soft sectors like the financials. The banks and brokers will most probably get the brunt of any serious selling since they are already very weak relative to the market.

Click to Enlarge Graph:
ise sentiment july 2007.png

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12 Responses to “ISE Sentiment: Turbulence Ahead For The Market”  

  1. 1 Bill Luby

    Good stuff, Babak.

    FYI, I thought you might be interested to know that I posted a rebuttal of sorts at VIX and More:



  2. 2 Jimmy

    good call Babak on your last few topics concerning market health. most of my short to medium term indicators have been stretched too overbought for some time. been long but got out late last week. like to see some healthy 5-10% correction in the stock market. long term the stock market is fundamentally bullish but i like to see technical indicators move back down to bullish levels too.

  3. 3 Babak

    Bill, you could be right. I did enjoy your analysis and counter view. We’ll see in a little bit as it shakes out.

    Jimmy, thanks. To be honest, this market is driving me crazy. It vascilates so much and there are so many cross currents. You either have to have a short term view and jump in and out or a very long term view and just let it be.

  4. 4 Jimmy

    Babak, has the New 52 Week Low 5DMA Ratio reached a bullish level for the NYSE and Nasdaq?

    also with the NYSE down volume vs. the up volume at a 13 to 1 ratio, we could see a correction bottom very soon.

  5. 5 Babak

    Jimmy, I’m not really sure what you mean by the “New 52 week low….”. Can you clarify?

  6. 6 Jimmy

    oops wrong wording, it’s the New Lows Percentage chart based on the calculated…

    (new lows / (new lows new highs))

    i believe that’s it.

  7. 7 Jimmy

    also i believe it’s a 5 dma of the calculation.

  8. 8 Babak

    Jimmy, I wrote about that indicator today. Check out this post.

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