I can’t say there are a lot of easy decisions to be made in stock indexes at the moment. I have an opinion of what’s going to happen in the next 6 – 8 months but what we “think” really doesn’t matter, it’s all about the setup. As of now most the charts I’m tracking are bearish, the problem is they could rally for 1-2 weeks and still be at attractive areas to short.
Rather than try and predict what’s going to come of tomorrow’s employment data, I’d rather just look at levels. One of the most interesting charts I’ve been reviewing is the put/call ratio of all optionable products against $SPY. When this reading gets above 1.0 it tends to trigger a short covering rally that lasts somewhere near 10 days. The last time we saw this signal $SPY rallied closer to 30 days, but the most recent example was also a 10 day rally. This is where we found the recent high in $SPY at $194.58. With this symmetry in time I know that if this high is taken out I’m going to need to be more patient and look for something like that 30 day rally as opposed to 10.
Another interesting chart is a comparison of $USD/$JPY against $SPY. This currency pair tends to move with $SPY and after seeing such a sharp decline in the currency pair I think the same will unfold in $SPY. The thing I don’t know is do we need to see this equity rally to better match the pair? Or are we poised to roll back over immediately catching up with what $USD/$JPY has shown us this week? I don’t know the answer, but I do know that keeping an eye on these two charts should help me have an edge as I start looking for new positions.