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Market Internals are Weak

15 Mar 2021 ‚óŹ 02:37 PM

There are many angles to look at the market and this is one of them. Sometimes heavy call selling results in a short-term bottom, but sometimes there is a prolonged period where call open interest remains elevated over put open interest and that is usually a medium-term correction in markets that last for weeks. The chart below is starting to look like that. As of Friday 48k more calls were outstanding than puts. Meaning option sellers are confident that the upside is limited.

The high Call OI also means that the Put/Call ratio itself is getting oversold, so I do read into record Call OI as a contrarian signal at times, but we do not have a bottom till we have one so you have to wait for an oversold reading on momentum and swing indicators as well. The PCR chart below is already in oversold territory based on history.

The highlight of the day from Jan to date however is the weak market internals meaning that the rally is being accompanied by weaker and weaker breadth. Each new high is seeing a lower A/D ratio. The chart below shows the 40-day Advance/Decline ratio of stocks on the BSE [where more are listed], and this made a lower top into the FEB market high, very similar to what happened in Sept.

The 20-day A/D ratio shows a 2nd negative divergence from top to top from December onward. The rally in the midcap indices, therefore, is feeble. Here I am looking at market-wide breadth and not a handful of stocks. The conclusion is that most stocks that were moving up are not doing so anymore and the rally has become weak. Never a good sign of market health. As of now, this signals a correction first to shake out the weakness into the red zone below where the A/D gets oversold and then we get a rally. That is ideal unless the market decides otherwise.

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