US Stocks Review: Upside Reaction Continues
Eric De Groot | Oct 21, 2014 07:21AM ET
While fear towards US equities have receded during the light volume rally from the 10/15 low, it lingers in the periphery as long as the 21-day put/call premium ratio (put/call(E)) holds above 1. As of 10/20, it stands at 1.06 (chart 1). Fear, amplified by volatility, which, in turn, is driven by economic instability created by enormous debt burdens throughout the Western economies, can be transient (temporary) or persistent (lingering for months). Disciplined investors must respect the latter by viewing this rally as an upside reaction within downtrend of a cause building phase until the message of the market confirms a bullish interpretation.
Heavy volume 'tests' of support (green lines), indications of expanding downside force, raise the probability that they'll be tested again (chart 2). The force behind the reactionary rally and cycles will help traders 'time' these retests. If previous support acts as resistance as volume contracts significantly, it suggests waning upside force and vulnerability. Vulnerable rallies often reverse around important transition cycles (chart 3).
The NYSE Composite stands at 10327 as of 10/20. Resistance zones for the NYSE Composite are 10130-10150 - broken to the upside on light volume, 10400-10500, and 10600 (chart 3). We will be watching volume, REV(E), and the movement of leverage (equity DI) as the rally challenges these zones.
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