Market Internals Analysis

7/29/2019 Market Internals Analysis

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SentimentSentiment

InternalInternal

IndicatorsIndicators1


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Disclaimer

It should not be assumed that the methods, techniques, or indicators presented in this book and seminar will beprofitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples in

this book and seminar are for educational purposes only. This is not a solicitation of any order to buy or sell.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS.

UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL

TRADING. ALSO, SINCE THE TRADES IN THIS BOOK and SEMINAR HAVE NOT ACTUALLY BEEN

EXECUTED, THE RESULTS WE STATE MAY HAVE UNDER OR OVER COMPENSATED FOR THE IMPACT,

IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING

PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE

BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS

LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.

The authors and publisher assume no responsibilities for actions taken by readers. The authors and publisher are not

providing investment advice. The authors and publisher do not make any claims, promises, or guarantees that any

suggestions, systems, trading strategies, or information will result in a profit, loss, or any other desired result. All

readers and seminar attendees assume all risk, including but not limited to the risk of trading losses.

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Copyright 1994-2007 by Pristine Capital Holdings, Inc. All rights reserved. Printed in the United States of America.

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the publisher.

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Table of Contents

IntroductionWhat moves stocks?

Why use Market I nternals

Ways of I nterpretation

H istor ical Levels and Time Frames

Course Goals & How to Use

Breadth I ndicatorsDefini tion, Importance and

I nterpretation in Short and LongTerm Time Frames

Advancing Stocks and Volume

Ratios, New Highs, New Lows

TRIN, McClellan Osci l lator ,

Advancing Stock Ratio and more

I ntra-Day I nternals

Sentiment I ndicatorsDetermining when the crowd is too

bull ish or bearish

Equi ty, Total and OEX P/C Ratios

Volatil ity I ndex (VIX and VXN)

Bulls vs. Bears Sentiment Surveys

TICK

TRIN

Trading relative strength and weaknessSector L ists

Reversal Times

Advanced TI CK Analysis

Advanced TRI N Analysis

Advancing minus Declining StocksAdvancing minus Declining Volume.

Total Put/Call Ratio 3


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Market Internals Analysis

What Moves This Whale and How Market I nternals Time Entr ies?

Bonds

Commodities

Currencies

Stocks

Sector

strength and

weakness

Compelling

Technical

Pattern

Market I nternals

Enter per

Trading Plan

Manage inbetween

Advance-Decline, Volume,

etc.

Bull-Bear %, Put-Call , etc.

I nter-Market Analysis

The stock market acts as a discounting barometer

that reads fundamentals, technicals, and thebeliefs of participants all over the wor ld.

Reversal Times

Sector Analysis

TPMs

TPMsBreadth

Sentiment

Inter-market

4


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5

Why Use Market I nternals?

Market I nternals provide an objective comparison between the current market

environment and the past based on histor ical references.

Market I nternals act as gauges that provide us a bias based on what the market

is actually doing, rather than relying on others opinions.

Similar to a pilot using an airplane's instruments, internals give early warning

signals of possible or imminent danger at extremes.

Market I nternals give us the confidence to hold existing positions, despite pricesbeing extended short-term.


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Getting The Most F rom This Short Course

6

I t is imperative that you understand how to interpret the internal s patterns, then

review historical levels as well as cur rent ones to gain a working perspective.

I nternals are not a magical black box. They form dif ferent patterns in different

market environments, which I wil l show you. They also lead market turns.

I wil l show you how to use this information to determine market turning points

when multiple internals are in alignment.


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Methods of I nterpreting I ndicators

7

By first reviewing historic extreme levels of an indicator, we can determine

tr igger levels that may guide us to turning points in the current market.

Points of observation in reviewing I ndicators:

Trend and support and resistance

H istorical extremes

Speed that an indicator moves between extremes

The patterns formed at overbought or oversold levels

Divergences between price and the I ndicator


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Bell Curve and Extremes

A bell curve is a plot of normal

distr ibution of a given data set.

To create our alert levels for any

Market I nternal, we wil l encompass

about 85 - 95% of the data s range.

Top and bottom lines aler t

extremes.

Normal

Distribution

Alert Areas

Alert Areas

Extremes Extremes

Extremes

Extremes

8


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Market I nternals Analysis

9

Histor ical Extremesare based on the internal s prior reversal areas, not the

market s price data.

Alert areas are where the indicator reversed over an extended period of time.

Then compare those alert areas to the market for tradable events.

Jul Aug Sep Oct Nov Dec 2003 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2004 Feb Mar Apr May Jun Jul Aug Sep Oct

0.865

0.870

0.875

0.880

0.885

0.890

0.895

0.9000.905

0.910

0.915

0.920

0.925

0.930

0.935

0.940

0.945

0.950

0.955

0.960

0.965

0.970

0.975

0.980

0.985

0.9900.995

1.000

1.005

1.010

1.015

1.020

1.025

1.030

1.035

1.040

1.045

1.050

1.055

1.060

1.065

1.070

1.0751.080

1.085

1.090

1.095

1.100Moving Average (1.01979)(CLose - 10-MA)

9


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8

ptember

15 22 29 6

October

13 20 27 3 10

November

17 24 1 8

December

15 22 29 5

2004

12 20 26 2 9

February

17 23 1

March

8 15 22 29 5

April

12

2.2

2.1

2.0

1.91.8

1.7

1.6

1.5

1.4

1.3

1.2

1.1

1.0

0.9

0.8

0.7

980

990

1000

1010

1020

1030

1040

1050

1060

1070

1080

1090

1100

1110

1120

1130

1140

1150

1160

1170

The speed that an indicator moves between extremes- A sharp, fast move

from one extreme level to the other (A) indicates strength in that direction.

How it became overbought can actually suggest higher prices and vice versa.

AA

A

10


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13 20 27 3 10 17

November

24 1 8 15

December

22 29 5 12

2004

20 26 2 9 17

February

23 1 8

March

15 22 29 5

April

12 19 26 3 10

May

17 24 1 7

June

14 21 28 6

July

12 19 26 2 9

August

16 23 30 7 13 20

September

27 4 11

October

-250

-240

-230-220

-210-200

-190

-180-170

-160-150

-140-130

-120

-110-100

-90-80

-70

-60-50

-40-30

-20

-100

1020

30

4050

60

70

8090

100

110120

130140

150

160170

180190

200

210220

230McClellan Oscillator (44.7479), McClellan Oscillator (44.7479)

Basing atextreme

The patterns formed at OB/OS levels:

Basing at an OB/OS levels indicates strong market breadth.

Consolidation often occurs after a sharp move between extremes.

A V-type reversal after a move between extremes indicates weak market breadth.

V-typereversalOverbought (OB)

Oversold (OS)

11


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Divergencesbetween market new lows and indicator lows (higher

lows) indicates internal market strength in a downtrend and vice versa.

st

14 21 28 5 11 18

September

25 2 9

October

16 23 30 6 13

November

20 27 4 11 18

December

26 2 8

2001

16 22 29 5 12

February

20 26 5 12

March

19 26 2 9

April

16 23 30 7

May

14 21 29 4

June

11 18 25 2 9

July

16 23 30 6

Augus

-250

-200

-150

-100

-50

0

50

100

150

200

250

300

350

1050

1100

1150

1200

1250

1300

1350

1400

1450

1500

1550

Bullish

Divergence

A

A

B

B

12

Bearish

Divergence


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Course Goals

13

By understanding how to interpret the internals patterns and noting their

historical levels as well as current ones, we can gain a working perspective.

Realize that internals are not a magical black box. They form dif ferent patterns

in dif ferent market environments and trigger levels can change.

My goal is to objectively show you how to use this information when multiple

internals are in al ignment, with pr ice always being the final reason to trade.

Roll up your sleeves and get motivated as the end journey wil l be well worth it!


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SentimentSentiment

AnalysisAnalysis


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Sentiment Analysis

15

Breadth indicatorsfocus on market data to show buying/sel l ing pressure as it

relates to historical reference points.

Sentiment indicatorsfocuses on traders expectations or beliefs about the future

of the market whether bull ish or bearish.

Based on contrary opinion, the r isk of a market pul lback is high when the

major ity are in bul l ish agreement.

When the majori ty are in bearish agreement, odds are for an advance since

most have already placed their bearish trade, and few sellers are left.

At extremes in sentiment, our bias wil l be to act in the opposite direction whenother internals and price suggests.


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Sentiment Analysis

16

Put-Call Ratios tell us whether people are bull ish or bearish in the option

market. We wil l focus on:

Equity P/C RATIO

Total P/C RATIO

OEX P/C RATI O

Volatil ity I ndex (VI X and VXN)

The Market Vane Survey

I nvestors I ntel l igence Survey

American Association of I ndividual I nvestors Survey


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Put/CallPut/Call

RatiosRatios


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Sentiment Analysis

18

Option traders who believe an equi ty or index wi l l decline buy puts (r ight to

sellstock) to profi t from a decline or hedge against long exposure, Bearish.

Option traders who believe an equity or index wi l l r ise wil l buy calls (r ight to

buystock) to profi t f rom an advance or hedge against short exposure, Bullish.

Dividing the total volume of puts into the total volume of calls traded gives a

put to call ratio and pr ior extreme reference points of sentiment.

Thehigher the levelof a P/C Ratio, the morebearishtraders are; think

bull ish equities.

Thelower the level, the morebullishtraders are; thinkbearish equi ties. At

extremes, odds of a market reversal increase.


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Sentiment Analysis

19

Put Volume / Call Volume = Put/Call Ratio 326,048 / 376,267 = .86653

April May June July August

200000

250000

300000

350000

400000

450000

500000

550000

600000

650000

700000

750000

326,048


300000

350000

400000

450000

500000

550000

600000

650000

700000

750000

800000

850000900000

950000

1000000

1050000

376,267


0.45

0.50

0.55

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.30

.86653

Put / Call Ratio

Put Volume Call Volume

Bearish Bets Bull ish Bets

Charting the Put Call Ratio


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Sentiment Analysis

20

The Equity Put/Call Ratio is the total volume ofputsdivided by the

volume ofcallstraded on the CBOE on individual equi ties alone.

The Total Put/Call Ratio is the total volume ofputsdivided by the

volume ofcallstraded on the CBOE on individual equities and indices.

TheEquity and Total Put/Call Ratiosare contrarian indicators. These

traders tend to be wrong at turning points and are the dumb money.

TheOEX Put/Cal l Ratiois Not a contrarian indicator . Traders buying

these options tend to be correct and are considered the smart money.


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Sentiment Analysis

P/C Ratios have high and low extremes, but they can also trend.

Dur ing bul l ish markets, ratios tend to trend lower;bearish markets higher.

Using a price channel around the ratios works well for locating extremes

as the market environment changes from bul l ish to bearish and vice versa.

By inverting the Equity and Total P/C Ratios (dumb money), their high

and low extremes should be in alignment with highs and lows in the market.

The OEX Ratio (smart money) is not inverted.

21


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Sentiment Analysis

1995 1997 1998 1999 2000 2001 2002 2003 2004

1.201.151.101.051.000.95

0.900.850.800.750.700.65

0.600.550.500.450.400.35

Put/Call Ratios wil ltrend upward in a bul l ish marketanddownward in a bearish one.

For this reason, using high and low price envelopes wil l track extremes better .

2000 was a peak high for the market and Total

Put/Call Ratio (both reached extreme optimism)

Uptren

d

MarketDown

Excessive Pessimism

Excessive Optimism

Scale I nverted

Marke

tUp

Scale I nverted

22


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Understanding Envelopes

23

Percentage envelopes around a moving

average trend with prices, as well as provide

extremes based on histor ical price movements

MA

%%

%

%


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Sentiment Analysis

Apr May Jun Jul Aug Sep Oct Nov

1.2

1.1

1.0

0.9

0.8

0.7

0.6

0.5


1.3

1.2

1.1

1.0

0.90.8

0.7

0.6


0.5

1.0

1.5

2.0

2.5

At (A), was an indication ofvery extreme bearish sentiment.

Equi ty P/C Ratio

Total P/C Ratio

OEX P/C Ratio

Bull ish levels are .9 to 1.0;bearish levels are .55 to .45

Bull ish levels are 1.05 to 1.15;

bearish levels are .7 to .6

Bull ish levels are .6 to .8;

bearish levels are 1.8 to 2.0

Scale I nverted

Scale I nverted

(A)

(A)

24


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Sentiment Analysis

04 Mar Apr May Jun Jul Aug Sep Oct No

0.90

0.85

0.80

0.75

0.70

0.65

0.60

0.55

0.500.45


1.151.10

1.051.000.95

0.900.850.80

0.750.70

0.650.60


0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

Equi ty P/C Ratio 5-MA

Total P/C Ratio 5-MA

OEX P/C Ratio 5-MA

Scale I nverted

Scale I nverted

A 5-per iod moving average wil l

be used to smooth the weekly

movements of all P/C Ratios.

A 10 and 20 % envelope around

a 100-per iod MA (not shown) of the5-MA wil l track extremes.

The ratios are not in alignment.

The dumb money traders are

bul l ish and the smart money

traders are as well .

10%

10%

20%

20%

25


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Sentiment Analysis

April May June July August September Nove

0.7

0.8

0.91.0

1.1

1.2

1.3

1.4

1.5

1.6

1.151.10

1.051.000.950.900.850.800.750.700.650.60

0.90

0.85

0.80

0.75

0.70

0.65

0.60

0.55

0.500.45

1060

1070

1080

1090

1100

1110

1120

1130

1140

1150

Equity P/C Ratio 5-MA


OEX P/C Ratio 5-MA

Scale I nver ted

Scale I nver ted

Smart M oney buying puts

Dumb M oney buying call s

Put/Call Ratios act like

market sentiment oscil lators.

I n downtrend markets, sell

signals wil l have better odds.

I n uptrend markets, buy

signals wil l have better odds.

I n a sideways trending

market, buy and sell signalstypical ly have similar odds.

At the August breakdown

all P/C Ratios are aligned.

Dumb M oney buying call s

Smart M oney buying calls

Dumb Money buying puts

Dumb Money buying puts

S&P 500

26

S i A i


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Sentiment Analysis

A M J J A S O N D 2004 A M J J A S O N

0.80

0.75

0.70

0.65

0.60

0.55

0.50

0.45

A M J J A S O N D 2004 A M J J A S O N

1.00

0.95

0.90

0.85

0.80

0.75

0.70

0.65

0.60

A M J J A S O N D 2004 A M J J A S O

0.8

0.9

1.0

1.1

1.2

1.3

1.4

A 21-per iod MA wil l be used to

smooth the monthly movements of

all P/C Ratios.

A 10 and 20 % envelope around

a 200-per iod MA (not shown) ofthe 21-MA wil l be used to track

sentiment extremes.

The trend of the bands are an

indication of overall sentiment.



OEX P/C Ratio 21-MA

Scale I nverted

Scale I nverted

27

Not aligned

S i A l i


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Sentiment Analysis

S O N D 2001 A M J J A S N D 2002 A M J J A S O N D 2003 A M J

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

0.9

0.8

0.7

0.6

0.5

0.4

0.80

0.75

0.70

0.65

0.60

0.55

0.50

0.45

0.40

0.35

800

900

1000

1100

1200

1300

1400

1500

BearMarket

Transition

BullM

arket

An extreme low (A) in the

Equi ty and Total P/C ratios

was a signal of capitulation.

A first time move to the

upper extr eme in over two

years in the Total P/C Ratio

was a sign of strength (B).

At (C), OEX traders were

betting on a decline whi le the

dumb money was not.



OEX P/C Ratio 21-MA

Scale I nverted

Scale I nverted

S&P 500

(A)

(B)

(C)

28

S ti t A l i


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Sentiment Analysis

A M J J A S O N D 2003 A M J J A S O N D 2004 A M J J A S O N

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.00

0.95

0.90

0.85

0.80

0.75

0.70

0.65

0.60

0.80

0.75

0.70

0.65

0.60

0.55

0.50

750

800

850

900

950

1000

1050

11001150 Once the market moved into a

bul l phase in 2003, the 21-day

Equity and Total P/C Ratios did

not move to lower extremes.

The break of a P/C trendl ine

signals a change in sentiment.

I n 2004, option traders turned

(A) bearish. OEX traders were

bul l ish. Smart or Dumb money?

Bull markets are supported

by bearish sentiment.



OEX P/C Ratio 21-MA

Scale Inverted

Scale Inverted

S&P 500

29

A

A

A

S ti t A l i


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Sentiment Analysis

30

The Equity and Total P/C Ratios are used as contrarian indicators and the

OEX P/C Ratio is not. I t is best when all are in alignment.

Daily extremes can be an early signal of a market turn.

The trend of the Put/Call Ratio suggests a market s bul l ish or bearish bias.

Buy & sell signals wil l have greater signi f icance dependent on market trend.

Aler ts are given when a P/C Ratio moves from one extreme to the other.

A f irst time move to an extreme, after an extended trend, can signal change.

Put/Call Ratios are an excellent sentiment and market timing internal, butmust be used with other internals and price pattern conf irmation.

S ti t A l i


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Sentiment Analysis

31

The Chicago Board Options Exchange http: //www.cboe.com reports the

daily closing Put/Call for the Equi ty and Total Ratio each day. You can

request to be e-mai led each day s closing values at the site.

The intra-day Put/Cal l Ratio values can be seen at the site as well . They are

updated every half hour . http://www.cboe.com/data/I ntraDayVol.aspx

A r ising market with a r ising Put/Call Ratio (more puts) is bul l ish, and

suggests a continuation of the uptrend. A fall ing market with a fall ing put/cal l

ratio (more calls) is bearish, and suggests a continuation of the downtrend.

H istor ical data -http://www.cboe.com/data/PutCallRatio.aspx
http://www.cboe.com/data/PutCallRatio.aspxhttp://www.cboe.com/data/PutCallRatio.aspx


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VolatilityVolatility

IndicesIndices

Sentiment Analysis


33/63

33

The VIX, and VXN measure traders expectations of future volatil i ty, or lack thereof,

by measur ing options activity in the S& P-500 and the Nasdaq.

When traders become fearful , many go to the options market to purchase puts (r ight

to sell stock). Part of option pricing includes expected volatil i ty, which increases with

uncertainty (e.g., pending news like earnings, Fed announcements, a fall ing market).

When expectations are for higher volatil i ty in the market, which is ref lective of a

bearish view, the VIX r ises(expansion in r isk premium).

When expectations are for lower volatil i ty in the market, which is ref lective of a

bul l ish view, the VI X falls(contraction in r isk premium).

Sentiment Analysis

Volati l i ty Index (VIX)

Sentiment Analysis


34/63

34

The VI X is an I NVERSE indicator, which means thathigh readings of volatil i ty(i.e.,

excess market bear ishness) suggests thinkbullishequi ty trades; andlow readings of

volatility(i .e., excess market bull ishness) suggests thinkbearishequity trades.

We wil l also display the VIX as an oscil lator with an inverted scale, so oversold

readings wil l show at the bottom of the chart, and vice versa.

L ike all oscil lators, the tr iggers are determined by applying normal technical analysis

to it, conf irmed by a reversal in price of the market.

Sentiment Analysis

Volati l i ty Index (VIX)

VIX High VIX Low

Sentiment Analysis


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Sentiment Analysis

35990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 200410

15

20

25

30

35

40

45

10

15

20

25

30

35

40

45

50

500

1000

1500

Old VXO - OEX

New VIX - S& P 500

S&P 500The VI X and the VXO track

each other almost identical ly. The

values are slightly dif ferent.

A fall ing Volatil ity I ndex is

generally associated with a rising

market, and vice versa.

Dur ing the late 1990s, the

opposite actually occur red.

While levels change over time,

upward moves do indicate traders

expectations for higher volatil i ty.

LTCM

Sentiment Analysis


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Sentiment Analysis

The Volatil i ty Index forms Support and Resistance Levels.

Candle Language of VIX Suggests Possible Market Direction.

Doji corresponded

with market bottom.

COG COG

COG36

Sentiment Analysis


37/63

Sentiment Analysis

We gain valuable information from the trend

of theVolatil i ty I ndex;however, it may not be

ashelpful in determining turning points.

VIXdown,M

arketupBuy Signal

The VIX is interpreted like everything

in the Market:SupplyandDemand!

37

Sentiment Analysis


38/63

Sentiment Analysis

Retest suggests reversal

While there wasn t price support here, theVIX suggested a possible reversal any day.

38

VIX.X

S& P 500VIX indicated complacency

during the market sel l off .

Sentiment Analysis


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Sentiment Analysis

39

Breakdown

VIX did Not

confirm

VIX did Not Breakout

Prior VIX high reference point

Opposite Patterns

Confirm

Using the VI X or VXN:

The VI X conf irms an

index s move when i t is

forms an inverse pattern.

Non-conf irmation of a

breakdown by the VI X

breaking out (A) suggests

complacency and

continuation of the

index s prior move.

Prior highs or lows in

the VIX show potential

turning points (B).LL(B)

Opposite PatternsConfirm

(B)

(A)

(A)

Sentiment Analysis


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Sentiment Analysis

40November 2004 February March April May June July August September

1300

1350

1400

1450

1500

1550

0.90

0.95

1.00

1.05

0.85

0.90

0.95

1.00

1.05

1.10

20

25

30VXN and 10-MA

VXN divided by its 10-MA

(1.0 it where the close andthe 10-MA are equal)

10-MA of VXN divided by its 10-MA

NASDAQ 100

10-MA

C / MOV(C,10,S)

VXN Oscil lator provides a

historical reference of the ratiobetween the VXN and its 10-MA.

Sentiment Analysis


41/63

Sentiment Analysis

41

Historical overbought

level for the VXN is

between.97 and .94.

H istor ical oversold is

between1.02 and 1.05.

Historical overbought

level for the VI X is

between.95 and .92.

H istor ical oversold is

between1.03 and 1.06.

April May June July August September October Novemb

1.08

1.071.06

1.05

1.04

1.03

1.02

1.01

1.00

0.99

0.98

0.97

0.96

0.95

0.94

0.93

0.92

0.91

0.90

0.89

April May June July August September October Novembe

1.09

1.08

1.07

1.06

1.05

1.04

1.03

1.02

1.01

1.00

0.99

0.98

0.97

0.96

0.95

0.94

0.93

0.92

0.91

0.90

0.89

S&P VIX Oscil lator (I nverted Scale)

Nasdaq VXN Oscil lator (I nverted Scale)

Sentiment Analysis


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Sentiment Analysis

42

The VXN reversal

patterns wil l be used as

a guide to conf irm

reversal patterns in the

NDX.

Use the VXNOscil lator with other

sentiment gauges to

determine extremes insentiment.

The VIX wil l be used

in the same way.ctober November 2004 FebruaryMarch April May June July August September Octob

1300

1350

1400

1450

1500

1550

1.05

1.00

0.95

0.90

181920

2122232425262728293031

VXN

VXN Oscil lator I nverted

NDX

10-MA

Sentiment Analysis


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Se e ys s

43

3

May

10 17 24 1

June

7 14 21 28 6

July

12 19 26 2 9

August

16 23 30

1.081.07

1.06

1.05

1.04

1.03

1.02

1.01

1.00

0.990.98

0.97

0.96

0.95

0.94

0.93

0.92

VI X Oscil lator I nverted

DOW MINI Futures

The Oscil lator gives warning signals

to pr ice turning points

Overbought

Oversold

Sentiment Analysis


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y

44

The VIX and VXN indicators typical ly move inverse to markets.

The VIX and VXN candle patterns should be opposite to the markets.

When the VIX or VXN do not confirm its index s downward movement, it

suggests complacency and lower prices.

Prior highs and lows in the VIX and VXN wil l be used as potential market

reversal areas.

The VIX Oscil lator is used in conjunction with VIX patterns and is especial ly

useful dur ing times of reduced volati l i ty when the VIX is trending.

The VIX and VXN Oscil lator can be inverted in M etastock to align markethighs and lows with oscil lator highs and lows.

REVIEW


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BullishBullish--

BearishBearish

SentimentSentiment

Sentiment Analysis


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y

46

Contrarian opinion is based on the premise that when the majori ty of

people agree on anything, they are generally wrong at extremes.

Based on contrary opinion, the market is considered overbought

when the majority are in agreement, and is l ikely to run out of buyers.

I t is considered oversold when the majori ty are in agreement, and

likely to run out of sellers.

Sentiment Surveys help us to determine what the majority are doing,

then we act in the opposite direction when price suggests to.

Sentiment Analysis


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y

This type of sentiment analysis is less timely than the others discussed; however, theyare powerful indicators of a probable reversal when in alignment with other internals.

47

Sentiment Analysis


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481987 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

0.3

0.40.5

0.6

0.7

0.8

0.20.30.40.5

0.60.7

0.80.9

10

20

30

40

50

60

10

20

30

40

50

60

70

AAI I SurveyThe American Association of I ndividual I nvestors poll their membershipto determine if they are bull ish, bearish or neutral. Since investors tend to change their

opinions more quickly, this survey tends to be more timely. www.aaii.com

The survey is followed by calculating the ratio of bul ls to the total, Bulls / (Bulls + Bears).

Because of the more erratic movements in this survey, a 4-week MA is used of the ratio.% Bulls

% Bears

Bul l Ratio

4-Week MA

Sentiment Analysis
http://www.aaii.com/http://www.aaii.com/


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492002 2003 2004

0.4

0.5

0.6

0.7

0.8

0.3

0.4

0.5

0.6

0.7

0.8

0.9

10

20

30

40

50

20

30

40

50

60

70AAI I Survey H istor ical Extremes

Bullish levels for % Bul ls are

32% and 22%. Extreme bearish

levels are 55% and 65%.

Bul l ish levels for % Bears are

38% and 44%. Bearish levels are

20% and 14%.

Bull ish levels for the Bull Ratio

are .46% and .36%. Bearish levels

are .70% and .80%.

Bull ish levels for the 4-week

moving average of the Bull Ratio

are .51% and .43%. Bearish levels

are .70% and .78%.

% Bulls

% Bears

Bul l Ratio

4-Week MA

Sentiment Analysis


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69 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04

0.2

0.3

0.40.5

0.6

0.7

0.8

0.9

10

20

30

40

50

60

70

20

30

40

50

60

70

80

I nvestors I ntel l igence Survey-The survey is done bywww.Chartcraftt.comand polls130 investment news letters to determine whether they are bul l ish, bearish or neutral.

Newsletter writers tend to change their bul l ish opinions more slowly to bearish than

actual investors, making this indicator less timely than the AAI I Survey.

The survey is followed by calculating the ratio of bul ls to the total, Bulls / (Bulls + Bears)

% Bulls

% Bears

Bul l Ratio

50

Sentiment Analysis
http://www.chartcraftt.com/http://www.chartcraftt.com/


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512002 2003 2004

0.400.45

0.50

0.55

0.60

0.65

0.700.75

0.80

15

20

25

30

35

40

30

3540

45

50

55

60

I nvestors I ntel l igence Survey H istor ical Extremes

% Bulls

% Bears

Bul l Ratio

Bul l ish levels for % Bul ls are

36% and 30%. Extreme bearish

levels are 52% and 58%.

Bul l ish levels for % Bears are

42% and 52%. Bearish levels are

27% and 17%.

Bul l ish levels for the Bull Ratio

are .52% and .43%. Bearish

levels are .66% and .75%.

Sentiment Analysis


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521982 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 200415

20

25

30

35

40

45

50

55

60

65

70

75

80

85

90

Market Vane % Bull ish SurveyThe Survey is done by poll ing the buy and sel lrecommendations of market advisors and commodity trading advisors relative to a

particular market.

These advisors change their bul l ish opinions more slowly to bearish than actual

investors, making the timeliness of this indicator less than that of the AAI I Survey.

The survey is followed by viewing its raw weekly data.

Sentiment Analysis


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53

Histor ical ExtremesMarket Vane % Bull ish

Bul l ish levels for %

Bull ish are 35% and 25%

Bearish levels for %

Bull ish are 60% and 70%

Sentiment Analysis


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542001 2002 2003 2004

20

30

40

50

60

70

0.4

0.50.6

0.7

0.4

0.5

0.6

0.7

0.8

O

800

900

1000

1100

1200

1300

1400

1500

PP

P

P

P

O

O

O OO

PO

P

P

P P

S& P 500 and Signals

I nvestors I ntell igence Bull ish % Ratio

Market Vane % Bul li sh

4-Week MA of AAI I Bul li sh % Ratio

The AAI I Bul li sh % Ratio

acts as an oscil lator wi th more

frequent readings. Individual

investors jump in and out of

the market much faster .

The I nvestors I ntel l igence

Bul l ish % Ratio is not as fast,

but wil l give more frequent

signals than M arket Vane.

Market Vane Bull ish %

tends to change very slowly.

Advisors try to stay with the

trend as long as possible.

Sentiment Analysis


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55

I n August 2004, individualinvestors became excessively

bearish as the S& P 500 made

a new low on the year.

The I nvestors I ntel l igence

and the Market Vane Bul l ish

signals are less frequent.

The S& P rall ied near ly 6%

from the signal.

A M J J A S O N D 2004 M A M J J A S O

30

3540

45

50

55

60

65

70

0.55

0.60

0.65

0.70

0.75

0.45

0.500.55

0.600.65

0.70

0.750.80

0.850.90

O

900

950

1000

1050

1100

1150

O

I nvestors I ntell igence Bull ish % Ratio

Market Vane % Bul li sh

4-Week MA of AAI I Bul li sh % Ratio

S& P 500

Sentiment Analysis


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56

Jul Aug Sep Oct Nov Dec

0.8

0.7

0.6

0.5

0.800.750.700.650.600.55

0.500.45


1.0

0.9

0.8

0.7

1.000.950.90

0.850.800.75

0.700.65


0.70.80.9

1.01.1

1.2

1.3

1.4

0.9

1.0

1.1

1.2

1.3


1.071.061.051.041.031.021.011.000.990.980.97

0.960.950.940.930.92


1.08

1.071.061.051.041.031.021.011.000.990.980.970.96

0.950.940.930.920.91

O N D 2004 M A M J J A S O N D 2

50

55

60

65

70

0.60

0.65

0.70

0.5

0.6

0.7

0.8


1060

1070

1080

1090

1100

1110

1120

11301140

1150

1160

1170

1180

1190

1200

Weekly

21-Day Equi ty P/C

5-Day Equity P/C

21-Day Total P/C

5-Day Total P/C

21-Day OEX P/C

5-Day OEX P/C

AAII

Market Vane

I nvestors Intell igence

S& P 500

By the end of November 2004, only the 21-day OEX

P/C Ratio had notmoved to an extreme reading.

While other sentiments gauges indicated risk of a

correction was likely, the market moved sideways.

NYSE VI X Oscill ator Nasdaq VXN Oscillator

Sentiment Analysis


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VIX

VI X Oscil lator

AAII

Market Vane

I nvestors I ntel l igence

Sentiment was bearish,

which is bul l ish!

06-19-06

57

Sentiment Analysis


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58

Quote, The expected low just might be the low for the year.

I 'm speculating on the potential for the low of the year of

course, but the internals are coming into bull ish alignment

now. H istory tel ls us that the odds are good and that's all we

can look for. I t is what it is. Don' t over think it.

The 06-19-06 CTOW was ti tled.

The Worst I s Over!

Sentiment Analysis


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On 4-29-07, short and intermediate breadthgauges are overbought and/or diverging.

Short sentiment gauges are indicating r ising r isk.

Long-term sentiment is stil l bul l ish.

S& P 50006-19-0659

Sentiment Analysis


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60

Anything that acts as a barometer for suggesting that the bul ls or bears have

already committed themselves ful ly, and that a reversal is at hand because of

historical extremes. Fun examples:F riends and Family Indicator Brother-in-law and fr iends call you for

advice to buy after 300% run; mortgaging house to plow into market; quitting

day job to trade, etc.

Shoe Shiner I ndicator When the lowest level professions are becoming

traders and investors

Media asking when Nasdaq (after historic ral ly over 5,000) wil l surpassDOW; or when they suggest total l iquidation

Your favori te Contrarian analyst/f r iend suggests buy or sel l

F lipping condos for a living

Other Sentiment I ndicators


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Concluding Thoughts


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62

Market I nternals provide an objective comparison between the

cur rent market environment and the past based on historical extremes.

Market I nternal gauges should be read in combination with each

other. One gauge alone may be misleading.

Market I nternals guide our bias BullishBearishNeutral. This

stops us from projecting our own bias that may be based on wishes, fear

or greed at the moment.

While price is King and what we trade. Consider Market I nternals as

the Queen, and as we know, the Queen often controls the King!

Concluding Thoughts


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At this point, you have the pertinent information that makes

sentiment internals valuable. I t s up to you to work with the

mater ial and now make it yours, with your own trading style.

With this information on sentiment internals, you don t need to be

reliant on any market analyst in order to come to your ownobjective conclusions about market timing.

Define an opportunity where the odds are in your favor, then have

the discipline to follow your trading and money management rules.

63

I n closing, we at Pr istine wish you great success!

Market Internals Analysis

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