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To Test Or Not To Test

10/22/2014 6:10:54 AM

Good morning Traders,

As the market moves off this bottom, there remains a level of fear that suggests the rally will continue.

Put/Call Ratio Chart

Note above the action we got around the 08 top...

Below we show our inverted forecast because we remain in Buy Mode. So our next target top would be around turkey day. That's normal seasonal action.

SPY 2014 Forecast Model

What comes next year is more worrisome. We'll start putting together our forecast for 2015 as we get into December.

Options traders on the VIX are betting heavily for the VIX to drop. Sometimes this crowding behavior can trigger a retest.

VIX Put/Call Raio and Open Interest

Our measure below shows when the individual has moved back into the market, which usually occurs at tops. We're no where near there now. That's bullish as well.

Equity to Index Option Volume Ratio

Supporting the bullish scenario is the rate of change on sentiment from the AAII. Going back to 2001, it doesn't get this low, that often.

AAII Sentiment rate of Change

In the short term, the breadth and volume ratios have spiked back up towards highs. That suggests that markets may correct internally as they set up the next advance, which should take us to at least test previous highs. We'll use any internal corrective action to position in some CALL options.



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