June 29, 2009 - SP500 - Place Your Bets

Well we've had an interesting week. Following the post on June 23rd, bulls lost steam at the 950 level and the S&P500 fell - but to a very strong convergence of the 50day and 200day moving averages. There was support at these levels as we bounced off 890, however, not on the volume that I would have liked to see.


Volume is below average and even though the MACD has ticked up, it is still in a bearish pattern.
Now, let's take a look at a daily chart for SPY, which is the ETF that tracks the S&P500 on a one-to-one (non-leveraged) basis. The chart of SPY clearly shows the same price movements as the S&P500 and the 50day and 200day moving averages converge at the right side of the chart. (click on the chart for a larger view)


At the bottom portion of the chart the Call and Put option volumes are plotted. Notice anything interesting at the right side?
A very distinct spike is visible right before the place of convergence of the averages. A vertical line has been drawn to align the top of the call volume spike with that of the price chart.
At this point a lot of call options are exchanging hands. Buyers of the Calls are betting that the S&P500 will bounce off the averages and the sellers are taking the reverse side. The wheel spins... but who's placing these bets? Which side are the pros taking and which side are the sheep on?

Option volume is another important technical indicators that signals market sentiment and possible shifts. Even though volume alone does not tell us which way the tide will go, it does tell us that the market is taking sides and that there is a tide coming.......